Fitch Affirms The Hanover Insurance Group's Ratings; Outlook to Positive

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 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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
Fitch Ratings, Inc.
+1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Mark E. Rouck, CFA
Senior Director
+1-312-368-2085
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
Fitch Ratings, Inc.
+1-312-368-3191
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
James B. Auden, CFA
Managing Director
+1-312-368-3146
or
Committee Chairperson
Mark E. Rouck, CFA
Senior Director
+1-312-368-2085
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: alyssa.castelli@fitchratings.com
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com