CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to The Hanover Insurance Group's (NYSE: THG) new issue of $375 million 4.5% senior notes due April 15, 2026. The rating is equivalent to the ratings on THG's existing senior debt outstanding. Proceeds from the offering will be used primarily to redeem THG's outstanding 7.50% notes due 2020 and 6.375% notes due 2021.
The 'A-' Insurer Financial Strength (IFS) rating for The Hanover Insurance Company, THG's principal operating subsidiary is unchanged. The Rating Outlook is Positive. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
THG reported a GAAP combined ratio of 95.7% for 2015 versus 96.9% in the prior year. This continued a record of profitability expansion since 2012, due to improved pricing and business mix changes in the U.S., as well as the consistently solid and growing contribution from Chaucer Holdings PLC. Net income return on equity and operating EBIT coverage 2015 also continued to improve to 11.7% and 7.7x, respectively.
THG's ratings reflect adequate capitalization of U.S. operating subsidiaries and Fitch's belief that THG's recent operating performance trend is sustainable. In addition, GAAP operating leverage and net leverage declined modestly in 2015 to 1.7x and 4.6x, respectively, at year end. The financial leverage ratio (FLR) was 22.2% at Dec. 31, 2015.
Future earnings will continue to be affected by volatility tied to changes in catastrophe related losses. 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.
The succession plans following CEO Fred Eppinger's announced resignation in 2016 is also an uncertainty.
RATING SENSITIVITIES
Detail Key rating triggers that could lead to an upgrade of THG's ratings over the next six to 12 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.
FULL LIST OF RATING ACTIONS
Fitch assigns the following rating:
The Hanover Insurance Group
--$375 million 4.5% senior notes due 2026 'BBB-'.
Fitch currently rates THG as follows:
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-'.
The Rating Outlook is Positive.
Date of relevant rating committee: Oct. 9, 2015.
Additional information is available on www.fitchratings.com
Applicable Criteria
Insurance Rating Methodology (pub. 16 Sep 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002070
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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.