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A.M. Best Affirms Ratings of The Hanover Insurance Group, Inc. and Its Subsidiaries

THG | May 17, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of A (Excellent) and issuer credit ratings (ICR) of “a” of the subsidiaries of the parent holding company, The Hanover Insurance Group, Inc. (THG) [NYSE: THG], collectively referred to as The Hanover Insurance Group Property and Casualty Companies (The Hanover). Additionally, A.M. Best has affirmed the ICR of “bbb” and all existing debt ratings of THG. The outlook for all ratings is stable. The above named companies are headquartered in Worcester, MA. (Please see below for a detailed listing of the companies and ratings.)

The ratings reflect The Hanover’s solid risk-adjusted capitalization, stemming from generally favorable operating earnings in years with milder weather patterns. Despite catastrophes and other weather-related underwriting losses in recent years and periodic dividend payments to THG—with the exception of 2012—The Hanover has somewhat limited the reduction to its surplus base over the past five years through solid net investment income. In addition, the ratings reflect the group’s sound business profile and diversified product offerings, especially in the commercial and specialty segments of its book of business. Further, the subsidiaries of the parent company also benefit from the moderate financial leverage and financial flexibility at THG. Partially offsetting these positive rating factors are The Hanover’s comparatively high underwriting leverage, somewhat elevated—but improving—expense structure and pressure on underwriting results caused by significant weather-related losses, as witnessed especially in 2011 and 2012 when it posted a combined ratio of 106% and 109%, respectively, and net underwriting losses of approximately $573 million over the last two years. However, The Hanover has undertaken measures to counter this trend, including underwriting initiatives such as rate actions and reductions in exposure concentrations.

Although The Hanover’s underlying book of business, excluding catastrophe results, continues to perform reasonably well, negative rating pressure could result from a continued deterioration in overall underwriting performance (which includes catastrophe and other weather-related losses) and/or a decline in overall risk-adjusted capitalization levels.

A restoration of positive underwriting performance and favorable operating performance coupled with increased levels of risk-adjusted capitalization that is sustained over a period of time could result in potential future positive movement in the ratings.

In July 2011, THG acquired Chaucer Holdings PLC (Chaucer) (United Kingdom), a leading specialist insurance group and the holding company of Syndicate 1084’s managing agent, Chaucer Syndicates Limited, which has further diversified the organization’s book of business both in terms of product offerings and geographic spread. The acquisition of Chaucer also has given THG a global platform with which to create marketing and cross-selling opportunities for its entire range of businesses, which is well balanced between personal, commercial and specialty lines. THG benefited from this diversification in 2012 as The Hanover’s negative operating results during the past year were offset by Chaucer’s favorable results, allowing THG to post positive pre-tax earnings for the year.

The FSR of A (Excellent) and ICRs of “a” have been affirmed for the following subsidiaries of The Hanover Insurance Group, Inc.:

AIX Specialty Insurance Company
Allmerica Financial Alliance Insurance Company
Allmerica Financial Benefit Insurance Company
Campmed Casualty & Indemnity Company, Inc.
Citizens Insurance Company of America
Citizens Insurance Company of Ohio
Citizens Insurance Company of the Midwest
Citizens Insurance Company of Illinois
The Hanover American Insurance Company
The Hanover Insurance Company
The Hanover Lloyd’s Insurance Company
The Hanover New Jersey Insurance Company
Massachusetts Bay Insurance Company
NOVA Casualty Company
Professionals Direct Insurance Company
Verlan Fire Insurance Company

The following debt ratings have been affirmed:

The Hanover Insurance Group, Inc.—

-- “bbb” on $200 million 7.5% senior unsecured fixed rate notes, due 2020

-- “bbb” on $300 million 6.375% senior unsecured fixed rate notes, due 2021

-- “bbb” on $199.5 million 7.625% senior unsecured debentures, due 2025 (of which $120.9 million remains outstanding)

-- “bb+” on $166 million 8.207% subordinated deferrable debentures, due 2027 (of which $59.7 million remains outstanding)

-- “bb+” on $175 million 6.350% subordinated debentures, due 2053

The following indicative ratings under the shelf registration have been affirmed:

The Hanover Insurance Group, Inc.—

-- “bbb” on senior unsecured debt

-- “bb+” on subordinated debt

-- “bb+” on preferred stock

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.