Business & Finance
Business and Finance
Business and Finance
Fri, January 14, 2011
Thu, January 13, 2011 Fitch Affirms The Hanover's Ratings; Outlook to Positive
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 has been revised to Positive from Stable for all ratings (full rating list follows the end of the press release).
The Outlook revision reflects THG's solid balance sheet, including improved statutory capitalization, as well as changes in risk profile and business mix in the aftermath of significant hurricane losses in 2005. Fitch believes these changes reflect a more balanced risk appetite and better position the company for profitability and underwriting stability over the long term.
In the last several years, THG has focused more rigorously on exposure management and rate adequacy. In personal lines, the company has reduced its dependence on four core states, reduced its exposure to coastal regions and has successfully managed rate actions in both homeowners and auto insurance. In commercial lines, THG has reduced its exposure to workers' compensation and gradually shifted the product mix toward more specialty lines. For perils in the Northeast, THG filled-in its $200 million in excess of $700 million property catastrophe coverage layer, such that 100% will be covered by reinsurance, and purchased an additional $100 million, extending the overall catastrophe reinsurance tower in the Northeast to $1 billion.
From year-end 2005 to Sept. 30, 2010, statutory net leverage improved to 4.15 times (x) from 4.77x and NAIC risk based capital (RBC) improved to 328% from 268%. Operating leverage at 1.65x at Sept. 30, 2010, was above industry averages, but viewed as reasonable given THG's mix of short-tail business, and supported by holding company cash and investments of $349 million. Additional balance sheet strengths include the company's conservative loss reserve position and high-quality, liquid investment portfolio. THG's investment portfolio was in a net unrealized gain position of $330 million with a gross unrealized of $47 million at Sept. 30, 2010.
THG reported a combined ratio of 101.5% for the nine months ending Sept. 30, 2010, compared to 99.0% for the same period in 2009. The increase was driven by the impact of catastrophes at 6.9 points for the nine months ending Sept. 30, 2010, compared to 4.9 points for the same period in 2009 and an average of 4.5 points over the last four years. Notably, the accident year loss ratio, excluding catastrophes was 62.5% for the nine-month period in 2010, the lowest since 2006.
Factors that could lead to a future upgrade include THG's ability to generate a consistent, modest underwriting profit going forward, while maintaining statutory capitalization and reserve adequacy at current levels, and holding company equity-credit-adjusted leverage below 25%.
Fitch affirms the following ratings with a Positive Outlook:
The Hanover Insurance Group
--IDR at 'BBB';
--7.625% senior unsecured notes due 2025 at 'BBB-';
--7.55% senior notes due March 1, 2020 'BBB-'.
--8.207% junior subordinated debentures due 2027 at 'BB'.
The Hanover Insurance Company
--Insurer Financial Strength (IFS) at 'A-'.
Citizens Insurance Company of America
--IFS at 'A-'.
Additional information is available at '[ www.fitchratings.com ]'
Related Research:
--'Insurance Rating Methodology' (Aug. 16, 2010);
--'Non-Life Insurance Rating Methodology' (March 24, 2010).
Applicable Criteria and Related Research:
Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=547766 ]
Non-Life Insurance Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369 ]
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