Fitch Affirms The Hanover Insurance Group's Ratings; Outlook Positive
--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Positive. A full list of ratings follows at the end of this press release.
KEY RATING DRIVERS
The affirmation reflects progress on all upgrade triggers set in March 2015, but for which Fitch looks for further evidence of sustainability over the next 6 - 12 months. The succession plans following CEO Fred Eppinger's announced resignation in 2016 is also an uncertainty.
THG reported a GAAP combined ratio of 96.7% for the first half of 2015, with 4.5 points in catastrophe losses. This continued the sharp profitability expansion in 2013 and 2014, due to improved exposures and mix in the U.S., as well as the consistently solid and growing contribution from Chaucer Holdings PLC. For comparison, the average combined ratio was 102.3% for 2009 - 2012, with an average 7.1 points in catastrophe losses. Return on equity and operating EBIT coverage for the first six months of 2015 also continued to improve to 12.2% and 7.1x, respectively.
THG's ratings reflect adequate capitalization of U.S. operating subsidiaries, and Fitch's belief that THG's 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 2014.
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. The financial leverage ratio (FLR) was 23% at June 30, 2015.
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.
Key rating triggers that could lead to an upgrade of THG's ratings over the next 6 - 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.
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-'.