Fitch Affirms The Hanover Insurance Group's Ratings; Outlook Stable

CHICAGO--()--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 list of ratings follows at the end of this press release.

KEY RATING DRIVERS

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 to $1,975 million at June 30, 2014, a 30% increase in 18 months, with improved operating results and no dividends paid to the holding company.

Fitch believes THG's consolidated capitalization adequately supports the company's risk profile. However, operating leverage has increased significantly over the last three years, largely due to acquisitions and limited growth in shareholders' equity. GAAP operating leverage (shareholders' equity excludes unrealized gains on fixed-income securities) was 1.87x and net leverage was 4.87x at June 30, 2014. The financial leverage ratio (FLR) was 25.7% at June 30, 2014.

THG reported a GAAP combined ratio of 97.8% for the first half of 2014 (1H'14) with 4.9 points in catastrophe losses. This result marks continued improvement in the last 18 months, from an average combined ratio of 102.3% for 2009-2012, with an average 7.1 points in catastrophe losses. Return on equity improved to 9.7% and 10.2% for 2013 and 1H'14, respectively. Operating EBIT coverage improved to 6.0x and 5.7x for 2013 and 1H'14, respectively. Parent company cash and investments was $112 million, net of unsettled transactions at June 30, 2014.

Future earnings will continue to be affected by volatility tied to changes in catastrophe related losses. THG is positioned for continued profit improvement over the intermediate term due to premium mix changes, but the benefits from premium rate improvements are waning as competitive forces are leading to a more competitive pricing environment in both commercial and personal lines in recent periods. Product mix changes include a more balanced U.S. risk appetite, shifts in the company's geographic mix from traditional northeast markets and exposure management efforts, coupled with a shift from a product perspective toward more specialty commercial lines.

RATING SENSITIVITIES

Key ratings triggers that could lead to a downgrade include: a material and sustained deterioration in the Prism score and/or GAAP operating leverage (excluding FAS 115) at or above 2.2x; GAAP operating EBIT coverage sustained below 5x combined with maintenance of parent company cash and investments less than 2x annual interest expense; a material deterioration in underwriting or operating performance relative to peers; and a material deterioration in THG's reserve adequacy.

Key ratings triggers that could lead to an upgrade include underwriting and consolidated profitability sustained at levels comparable to higher rated companies and industry averages; improvement in the Prism score to 'strong'; and maintenance of run-rate FLR below 25%.

Fitch affirms the following ratings with a Stable 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=890994

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Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA, +1 312-368-3191
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA, +1 312-368-3146
Managing Director
or
Committee Chairperson
Mark E. Rouck, CFA, +1 312-368-2085
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA, +1 312-368-3191
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA, +1 312-368-3146
Managing Director
or
Committee Chairperson
Mark E. Rouck, CFA, +1 312-368-2085
Senior Director
or
Media Relations:
Brian Bertsch, +1 212-908-0549
brian.bertsch@fitchratings.com