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

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has upgraded to 'A' from 'A-' the Insurer Financial Strength (IFS) rating of The Hanover Insurance Company, the principal operating subsidiary of The Hanover Insurance Group (NYSE: THG). Fitch has also upgraded the following ratings for THG:

--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';

--Senior unsecured notes to 'BBB' from 'BBB-'.

The Rating Outlook is Stable. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS

The upgrade reflects meeting and progress towards all upgrade triggers set in March 2015. The upgrade assumes no significant changes in strategic direction or risk profile following the recently announced appointment of Joseph Zubretsky as President and CEO.

THG reported a GAAP combined ratio of 95.7% for 2015, with 3.9 points in catastrophe losses. This continued a record of profitability expansion beginning in 2013, due to improved pricing and business mix changes in the U.S., as well as the growing contribution from Chaucer Holdings PLC. Net income return on equity and operating EBIT coverage for 2015 also continued to improve to 11.7% and 7.7x, respectively. For the first three months of 2016 the combined ratio was 95% compared to 97.1% for the same period in 2015.

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 as the recent operating performance trend is sustainable. The score for U.S. subsidiaries on Fitch's Prism capital model was 'adequate' at year-end 2014.

In addition, GAAP operating leverage and net leverage improved modestly to 1.6x and 4.3x, respectively, at Dec. 31, 2015. THG's financial leverage ratio (FLR) was 22.2% at year-end 2015, and on a pro forma basis, there should be no material change following the April 2016 debt issuance, as proceeds were used to redeem higher-cost senior notes due 2020 and 2021.

Future earnings will continue to be affected by volatility tied to changes in catastrophe related loss experience. Overall the benefits from premium rate improvements are waning, and Fitch expects prices to flatten or decline modestly in the near term. Through its strong agency relationships, however, THG's has focused on businesses 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 include improvement in GAAP net leverage (premiums written plus total liabilities less debt less reinsurance recoverable divided by shareholders' equity) of 3.8x or better, sustaining a Prism score of 'strong', and sustaining GAAP operating interest coverage at 10x or better.

Key ratings triggers that could lead to a downgrade include: a shift to underwriting losses, an increase in run-rate FLR to 28% or greater, and GAAP operating interest coverage of 5x or lower.

Fitch upgrades the following ratings with a Stable Outlook:

The Hanover Insurance Group

--IDR to 'BBB+' from 'BBB';

--7.625% senior unsecured notes due 2025 to 'BBB' from 'BBB-';

--4.5% senior unsecured notes due 2026 to 'BBB' from 'BBB-';

--8.207% junior subordinated debentures due 2027 to 'BB+' from 'BB';

--6.35% subordinated debentures due March 30, 2053 to 'BB+' from 'BB'.

The Hanover Insurance Company

Citizens Insurance Company of America

--IFS to 'A' from 'A-'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1005405

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005405

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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160601006486/en/

Fitch Ratings
Primary Analyst
Martha M. Butler, CFA
Senior Director
Fitch Ratings, Inc.
+1-312-368-3191
70 W. Madison St.
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:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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