|[September 27, 2013]
Fitch Affirms The Hanover Insurance Group's Ratings; Outlook Stable
CHICAGO --(Business Wire)--
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,
excluding unrealized gains on fixed income securities) was 1.97x and net
leverage was 5.15x at June 30, 2013.
Operating leverage has increased significantly over the last three years
nearer to maximum sector credit 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 2012 and the financial leverage ratio (FLR)
was 28.6% at June 30, 2013.
Profitability declined over the last three years primarily due to above
average catastrophe related losses. THG's calendar-year combined ratio
averaged 103.5% for 2010 - 2012 with an average 8.1 points in
For the first six months of 2013, THG reported a calendar-year combined
ratio of 97.6%, with 3.7 points in catastrophe losses. The underwriting
gain for six months improved to $53 million, from an underwriting loss
of $21 million for the first six months of 2012. THG's annualized GAAP
net income return on equity improved to 10.2%, compared to 2.4% for the
full year 2012.
GAAP operating EBIT coverage improved to 5.1x for six months 2013.
Parent company cash and investments was $212 million, net of unsettled
transactions at June 30, 2012.
THG's future profit potential is buoyed by a hardening premium rate
environment across most U.S. 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 morebalanced 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.
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 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
results and consolidated profitability sustained at levels 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';
--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'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Aug. 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
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CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
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