TEXT-Fitch affirms The Hanover Insurance Group ratings

Fri Sep 7, 2012 12:59pm EDT

Sept 7 - 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.) THG's ratings reflect adequate operating subsidiary capitalization and Fitch's belief that THG's operating subsidiaries will continue to generate reasonable internal capital over the intermediate term. GAAP operating leverage was estimated at 1.69x and net leverage was 4.42x at June 30, 2012. In recent years, THG has focused more rigorously on exposure management and rate adequacy. Fitch believes these changes reflect a more balanced risk appetite and position the company for improved profitability and underwriting stability over the intermediate term. The company may be challenged, however, to pare back expense levels following investments in technology and process improvements designed to drive growth. THG has successfully increased prices in homeowners insurance over the last two years and is experiencing an improving price environment in commercial lines. Importantly, THG is adjusting its pricing for a higher expectation of the weather impact. In the first six months of 2012 THG's calendar year combined ratio decreased to 101% from 107.6% for the same period in 2011, and compared to 105.1% and 100.6% for the full year 2011 and 2010, respectively. Catastrophe losses have been higher than normal for the past three years, impacting the combined ratio by 5.5 points in the first six months of 2012 and 10.0 points and 5.6 points for the full year 2011 and 2010, respectively. Growth in commercial lines has primarily been through renewal rights transactions and acquisitions where THG has focused on smaller, easy-to-integrate acquisitions. However, in 2011 THG's acquisition of Chaucer Holdings plc (Chaucer), at approximately $493 million, represented a significantly larger diversification effort. While the acquisition advances THG's specialty strategy and provides scale and diversification benefits, Fitch notes the uncertainty tied to entering a new market outside of the U.S. and ultimately meeting return objectives for the transaction given the cyclical and competitive nature of Chaucer's business. In addition, several credit factors deteriorated moderately post-closing, including an increase in financial leverage. Key ratings triggers that could lead to an upgrade include: underwriting and investment performance comparable to higher rated companies; moderate improvement in GAAP operating leverage and net leverage; and maintaining run rate holding company financial leverage ratio (FLR) below 25%. Key ratings triggers that could lead to a downgrade include: a material deterioration in THG's reserve adequacy, particularly regarding Chaucer; a material deterioration in underwriting or investment performance of the combined organization relative to peers; and GAAP operating leverage greater than 2.0x and net leverage greater than 4.75x for the combined organization. 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 --IFS at 'A-'. Citizens Insurance Company of America --IFS at 'A-'.

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