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 revised to Positive from Stable. A full list of
ratings follows at the end of this press release.
KEY RATING DRIVERS
The revision in Outlook reflects the sharp profitability expansion in
the last two years, due to improved exposures and mix in the U.S., as
well as the consistently solid and growing contribution from Chaucer
Holdings PLC. In addition, GAAP operating leverage and net leverage
stabilized in 2012-2014 to 1.79x and 4.66x, respectively, at Dec. 31,
2014, with improved growth in shareholders' equity, and a financial
leverage ratio (FLR) of 25.2%.
THG reported a GAAP combined ratio of 97.2% for 2014, with 4.7 points in
catastrophe losses. This marks continued improvement in each of the last
two years, compared with an average combined ratio of 102.3% for
2009?2012, with an average 7.1 points in catastrophe losses. Return on
equity and operating EBIT coverage improved to 10.4% and 6.2x,
respectively, for 2014.
THG's ratings reflect adequate capitalization of U.S. operating
subsidiaries, and Fitch's belief that its internal capital formation is
likely to continue to marginally improve. The score for U.S.
subsidiaries on Fitch's Prism capital model was 'adequate' at year-end
2013. U.S. statutory surplus increased 12% to $2.1 billion at Dec. 31,
2014, with continued improved operating results and no dividends paid to
the holding company.
Future earnings will continue to be affected by volatility tied to
changes in catastrophe related losses. THG completed its exposure and
mix management actions in 2014, positioning the company for continued
moderate earnings improvement, primarily in U.S. business over the
intermediate term. Overall the benefits from premium rate improvements
are waning, and Fitch expects price increases to moderate or flatten in
the near term. THG has increasingly focused on business with less
pricing sensitivity and better retention by targeting small commercial
business and through a specific personal lines product launch.
RATING SENSITIVITIES
Key rating triggers that could lead to an upgrade of THG's ratings over
the next 18-24 months include maintaining a combined ratio below 97%;
improving and sustaining GAAP operating interest coverage to 7x or
better, with continued ample subsidiary dividend capacity; modest
improvement in GAAP net leverage (premiums written plus total
liabilities less debt less reinsurance recoverable divided by
shareholders' equity excluding FAS 115) of 4.5x or better; and
maintenance of run-rate FLR below 25%.
Key ratings triggers that could lead to a return to Stable Outlook
include: an acquisition that materially changed THG's operating profile
and/or a shift to significant underwriting losses or weakening in
profitability.
Fitch affirms the following ratings with a Positive Outlook:
The Hanover Insurance Group
--IDR at 'BBB';
--7.5% senior notes due 2020 at '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';
--6.35% subordinated debentures due March 30, 2053 '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.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 4, 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=981695
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