Hanover Insurance Group Rates Positive Outlook, Say S&P

June 1, 2006

Standard & Poor’s Ratings Services has revised its outlook on Hanover Insurance Group Inc. and its operating company subsidiaries to positive from stable.

At the same time, Standard & Poor’s affirmed its ‘BB+’ counterparty credit and senior unsecured debt ratings, and affirmed its ‘B+’ preferred stock rating on THG.

Standard & Poor’s also affirmed its ‘BBB+’ counterparty credit and financial strength ratings on Hanover Insurance Co., Citizens Insurance Co. of America (MI), Hanover Lloyd’s Insurance Co., and Massachusetts Bay Insurance Co.

“The positive outlook reflects improving core underwriting results, a changing business mix with better growth prospects, and stronger capitalization,” explained Standard & Poor’s credit analyst John Iten.

Iten said the ratings reflect the group’s relatively low financial leverage, the disposal of THG’s runoff variable products business, and the strong capitalization of the P/C operations.

Partly offsetting the positive factors is THG’s modest fixed charge coverage in 2005, the relatively high geographic concentration of P/C operations in states that have historically been challenging for personal lines writers, a lack of premium growth during the recent hard market, and an increased expense structure that is laying the groundwork for profitable growth but is uncompetitive at the current volume of business, according to Standard &Poor’s. In addition, underwriting performance has lagged that of many of its competitors, particularly other personal lines writers.

In December 2005, THG sold its primary runoff life affiliate Allmerica Financial Life Insurance & Annuity Co. (AFLIAC). This sale removes the guaranteed minimum death benefit-exposed business that has been Standard & Poor’s primary concern on the life side and leaves THG with a much smaller, more stable block of runoff life liabilities–along with its core property casualty operations.

Standard & Poor’s said it expects Hanover’s underwriting performance to improve in 2006, reflecting primarily a return to more normal catastrophe loss experience. Hanover’s 2005 combined ratio again trailed the P/C industry average but this difference is expected to narrow in 2006 assuming a more normal level of catastrophe losses.

Net premium written is expected to grow at a mid-single-digit rate, driven by an increase in policy count in personal lines and continued growth in commercial lines.

Excluding the impact of catastrophes and prior year loss development, Standard & Poor’s expects the combined ratio to be flat or slightly better than in 2005.

The remaining runoff life operations should not have a material impact on earnings in 2006.

Hanover’s capital adequacy should improve further in 2006 because THG’s cash requirements should be fully met from the life operations and cash on hand at the holding company. This allows Hanover to grow its surplus. Financial leverage should remain at or less than 21% in 2006, while GAAP fixed-charge coverage should improve from about 2.2x in 2005 to 4x-5x in 2006.

The outlook period for these ratings is 12-24 months. Should the company perform in line with expectations, the ratings on THG and Hanover might be raised within this time frame. Otherwise, the ratings are likely to remain at their current levels and the outlook revised to stable.

Source: Standard & Poor’s
Complete ratings information is available to subscribers of at www.ratingsdirect.com.

Topics Trends Property Casualty Pricing Trends

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