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

^{Published on Wednesday, February 25th 2009 at 8:36 GMT, Last Modified on 2009-02-25 08:37:13 by Market Wire}  

CHICAGO--([ BUSINESS WIRE ])--Fitch Ratings affirms all ratings for The Hanover Insurance Group, Inc. (NYSE: THG) as follows:

-- Long-term Issuer Default Rating (IDR) at 'BBB';

-- Senior debt rating at 'BBB-'.

At the same time, the 'BB+' rating on AFC Capital Trust I's outstanding $300 million of trust preferred securities due 2037 has been affirmed. Fitch has also affirmed the 'A-' Insurer Financial Strength ratings (IFS) of THG's property/casualty insurance subsidiaries. A full rating list is shown below. The Rating Outlook is Stable.

THG's ratings are based on the company's improved underwriting results; recent favorable reserve development; strong capital and liquidity position at both the insurance subsidiary and parent holding company levels; and conservative investment portfolio. In addition, Fitch views favorably the recent completion of the sale of THG's remaining life company, which will allow management to focus squarely on its core property/casualty operations.

THG's property/casualty subsidiaries had solid underwriting results in 2008 posting a calendar year combined ratio of 98.7% which included $170 million of catastrophe losses partially offset by $154 million of prior year favorable reserve development. Fitch believes that consistent favorable underwriting performance relative to similarly rated peers that leads to continued improvement in capitalization would put positive pressure on THG's ratings.

Fitch views THG's investment portfolio as high-quality and liquid with 98% of the portfolio in cash and fixed income securities. The company's portfolio is dominated by agency mortgage-backed securities, municipal and corporate bonds, and at year-end 2008 had a weighted average credit rating of 'A+'. THG's investment portfolio remains supportive of the company's current ratings under stress test scenarios where Fitch assumes credit related losses on the company's fixed income portfolio and asset valuation losses on the company's very modest equity portfolio.

THG's GAAP shareholders' equity declined by 18% in 2008 to $1.9 billion due to a change in net unrealized investment losses of approximately $282 million; a change in pension related benefits of $83 million; and a net loss from discontinued operations of $64 million, principally caused by the company's sale of its remaining life subsidiary, First Allmerica Financial Life Insurance Company that closed on Jan. 2, 2009. The reduction in shareholders equity led to an increase in THG's reported equity adjusted debt-to-total capital ratio to approximately 18.5%, which is within guidelines for the current rating.

The following ratings have been affirmed:

The Hanover Insurance Group

-- IDR at 'BBB';

-- 7.625% senior unsecured notes due 2025 at 'BBB-'.

AFC Capital Trust I

-- 8.207% trust preferred securities due 2037 at 'BB+'.

The following IFS ratings have been affirmed:

The Hanover Insurance Company

Citizens Insurance Company of America

-- IFS at 'A-'.

The Outlook is Stable.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ 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.