|[March 18, 2013]
Fitch Affirms The Hanover Insurance Group's Ratings; Outlook Stable
CHICAGO --(Business Wire)--
Fitch Ratings has affirmed the 'A-' Insurer Financial Strength (IFS)
rating of The Hanover Insurance Company, the principal operating
subsidiary of The Hanover Insurance Group (NYSE: THG). Fitch has also
affirmed the following ratings for THG:
--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable. (A full rating list follows at the end of
this press release.)
KEY RATING DRIVERS
THG's ratings reflect adequate operating subsidiary capitalization, and
Fitch's belief that THG's operating subsidiaries internal capital
formation is likely to marginally improve over the intermediate term.
GAAP operating leverage (net premium written to shareholders' equity)
was 1.63x and net leverage was 4.60x at Dec. 31, 2012.
Operating leverage has increased significantly over the last three years
nearer to maximum credit sector factor guidelines for the current rating
level due largely to acquisitions and limited growth in shareholders'
equity. The score for U.S. subsidiaries on Fitch's Prism capital model
was 'adequate' at year-end 2011 and the financial leverage ratio (FLR)
was 26.8% at year-end 2012.
Profitability has declined over the last three years due to above
average catastrophe related losses and competitive market conditions.
THG's calendar-year combined ratio was 104.8% in 2012 from 105.1% in
2011. Catastrophe losses impacted the combined ratio by 8.7 points in
2012 and 10.0 points in 2011.
Underwriting losses and declining investment yields promoted a
significant decline in profitability. THG's net income return on GAAP
equity was 2.2% in 2012 and 1.5% in 2011.
Growth in commercial lines has primarily been through renewal rights
transactions and acquisitions where THG has focused on smaller,
easy-to-integrate acquisitions. THG's 2011 acquisition of Chaucer
Holdings plc (Chaucer) represented a significantly larger
diversification effort. Fitch also notes the uncertainty tied to
ultimately meeting return objectives for the transaction given the
cyclical and competitive nature of Chaucer's business.
THG's future profit potential is buoyed by a hardening premium rate
environment across most U.. property/casualty market segments.
Recently, THG has experienced an improving price environment in
commercial lines overall and has increased rates in auto, especially
commercial auto, in response to higher loss trends.
A more balanced U.S. risk appetite and shifts in the company's
geographic mix from traditional northeast markets and from a product
perspective towards more specialty commercial lines also positions the
company for improved profitability over the intermediate term.
Key ratings triggers that could lead to a downgrade include: a material
and sustained deterioration in the Prism score and/or material increases
in GAAP operating leverage from current levels; GAAP operating EBIT
coverage below 5x and maintenance of parent company cash and investments
less than 2x annual interest expense; a further material deterioration
in underwriting or operating performance relative to peers; and a
material deterioration in THG's reserve adequacy, particularly regarding
Key ratings triggers that could lead to an upgrade include underwriting
results and consolidated profitability comparable to higher rated peer
companies and industry averages; improvement in the Prism score to
'strong'; and maintenance of the run-rate holding company financial
leverage ratio below 25%.
Fitch affirms the following ratings with a Stable Outlook:
The Hanover Insurance Group
--IDR at 'BBB';
--7.5% senior notes due 2020 'BBB-';
--6.375% senior unsecured notes due 2021 at 'BBB-';
--7.625% senior unsecured notes due 2025 at 'BBB-';
--8.207% junior subordinated debentures due 2027 at 'BB'.
The Hanover Insurance Company
Citizens Insurance Company of America
--IFS at 'A-'.
Additional information is available at 'www.fitchratings.com'.
The issuer did not participate in the rating process, or provide
additional information, beyond the issuer's available public disclosure.
The ratings above were unsolicited and have been provided by Fitch as a
service to investors.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research
Insurance Rating Methodology - Amended
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