Fitch Affirms Ratings of Hanover Insurance Group

Published: Thu 11 Feb 2010

Thomas Kristoffersen

Yesterday, Fitch Ratings affirmed the ratings of The Hanover Insurance Group (THG). THG received an Issuer Default Rating (IDR) of "BBB," an outstanding senior debt issues rating of "BBB-," and an Insurer Financial Strength (IFS) rating of "A-" for all of the company's operating subsidiaries. Fitch, an international ratings agency for the world's credit markets, gave the insurer a Rating Outlook of "Stable."

Wednesday's affirmation is the result of the insurer's consistent underwriting performance, solid liquidity and capital positions at both the parent holding company and insurance subsidiary levels, sufficient loss reserves, and conservative portfolio of investments.

For 2009, operating leverage, as indicated by net premiums written to policyholder surplus, was 1.5 times. Fitch regards THG's investment portfolio as liquid and of superior quality, with 98 percent of the portfolio in fixed-income securities and cash and no exposure to subprime-mortgage-backed or Alt-A securities, credit derivatives, or collateralized debt. On December 31, 2009, THG's investment portfolio stood in a net unrealized gain position, and the gross unrealized loss dropped to $95 million from $334 million at the end of the previous year. Equity credit adjusted (ECA) leverage was 11 percent on December 31, 2009.

THG earned net income of $197 million in 2009, a substantial increase from 2008, during which it reported $98 million in net realized investment losses and $64 million in discontinued-operations losses. The property/casualty portion of after-tax operating income dropped by almost 11 percent to $157.5 million in 2009, which mostly reflects the higher pension expenses resulting from the recently sold life insurance business and lower underwriting results. The underwriting combined ratio improved slightly to 98.2 percent from 98 percent in 2008. This decrease was mostly attributable to suffering personal lines results and a drop in favorable prior-period loss reserve development, which was counteracted by lower losses related to catastrophes.

Going forward, the unfavorable economic environment and competitive market climate will continue to challenge THG's profitability. As a regional insurance company, THG will also probably maintain a larger expense ratio than the industry average.

Fitch pointed out changes in THG's business mix and risk profile that may result in a less unpredictable underwriting performance in the future. In personal lines, the insurer has decreased its geographic dependence on four key states, and commercial lines operations have slowly moved the product mix toward additional specialty lines.