[March 18, 2013]

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

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.)

KEY RATING DRIVERS

THG's ratings reflect adequate operating subsidiary capitalization, and Fitch's belief that THG's operating subsidiaries internal capital formation is likely to marginally improve over the intermediate term. GAAP operating leverage (net premium written to shareholders' equity) was 1.63x and net leverage was 4.60x at Dec. 31, 2012.

Operating leverage has increased significantly over the last three years nearer to maximum credit sector factor guidelines for the current rating level due largely to acquisitions and limited growth in shareholders' equity. The score for U.S. subsidiaries on Fitch's Prism capital model was 'adequate' at year-end 2011 and the financial leverage ratio (FLR) was 26.8% at year-end 2012.

Profitability has declined over the last three years due to above average catastrophe related losses and competitive market conditions. THG's calendar-year combined ratio was 104.8% in 2012 from 105.1% in 2011. Catastrophe losses impacted the combined ratio by 8.7 points in 2012 and 10.0 points in 2011.

Underwriting losses and declining investment yields promoted a significant decline in profitability. THG's net income return on GAAP equity was 2.2% in 2012 and 1.5% in 2011.

Growth in commercial lines has primarily been through renewal rights transactions and acquisitions where THG has focused on smaller, easy-to-integrate acquisitions. THG's 2011 acquisition of Chaucer Holdings plc (Chaucer) represented a significantly larger diversification effort. Fitch also notes the uncertainty tied to ultimately meeting return objectives for the transaction given the cyclical and competitive nature of Chaucer's business.

THG's future profit potential is buoyed by a hardening premium rate environment across most U.. property/casualty market segments. Recently, THG has experienced an improving price environment in commercial lines overall and has increased rates in auto, especially commercial auto, in response to higher loss trends.

A more balanced U.S. risk appetite and shifts in the company's geographic mix from traditional northeast markets and from a product perspective towards more specialty commercial lines also positions the company for improved profitability over the intermediate term.

RATING SENSITIVITIES

Key ratings triggers that could lead to a downgrade include: a material and sustained deterioration in the Prism score and/or material increases in GAAP operating leverage from current levels; GAAP operating EBIT coverage below 5x and maintenance of parent company cash and investments less than 2x annual interest expense; a further material deterioration in underwriting or operating performance relative to peers; and a material deterioration in THG's reserve adequacy, particularly regarding Chaucer.

Key ratings triggers that could lead to an upgrade include underwriting results and consolidated profitability comparable to higher rated peer companies and industry averages; improvement in the Prism score to 'strong'; and maintenance of the run-rate holding company financial leverage ratio below 25%.

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

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. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Jan. 11, 2013).

Applicable Criteria and Related Research

Insurance Rating Methodology - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm rpt_id=698731

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 (News - Alert) 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.

[ Back To Insurance Technology's Homepage ]