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

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 is Stable. A full list of ratings follows at the end of this press release.

KEY RATING DRIVERS

THG's ratings reflect adequate capitalization of U.S. operating subsidiaries, and Fitch's belief that its 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 2012. U.S. statutory surplus increased by 20% in 2013, with improved operating results and no dividends paid to the holding company.

Fitch believes THG's consolidated capitalization adequately supports the company's risk profile. However, operating leverage has increased significantly over the last three years, largely due to acquisitions and limited growth in shareholders' equity. GAAP operating leverage (shareholders' equity excludes unrealized gains on fixed-income securities) was 1.83x and net leverage was 4.85x at Dec. 31, 2013. The financial leverage ratio (FLR) was 26.6% at year-end 2013.

THG reported a 2013 combined ratio of 97.1%, with 3.1 points in catastrophe losses. This result marks improvement from an average combined ratio of 103.5% for 2010 - 2012 with an average 8.1 points in catastrophe losses. The underwriting gain for 2013 was $131 million, versus an underwriting loss of $202 million for 2012. Return on equity improved to 9.7% and operating EBIT coverage improved to 6.0x for 2013. Parent company cash and investments was $122 million, net of unsettled transactions.

THG's future profit potential is buoyed by hardening premium rates and mix changes. THG has experienced an improving price environment in both commercial and personal lines in recent periods. A more balanced U.S. risk appetite, shifts in the company's geographic mix from traditional northeast markets and exposure management efforts, coupled with a shift from a product perspective toward more specialty commercial lines also position the company for improved profitability over the intermediate term.

RATING SENSITIVITIES

Key ratings triggers that could lead to a downgrade include: a material and sustained deterioration in the Prism score and/or GAAP operating leverage (excluding FAS 115) at or above 2.2x; GAAP operating EBIT coverage sustained below 5x combined with maintenance of parent company cash and investments less than 2x annual interest expense; a material deterioration in underwriting or operating performance relative to peers; and a material deterioration in THG's reserve adequacy.

Key ratings triggers that could lead to an upgrade include underwriting and consolidated profitability sustained at levels comparable to higher rated companies and industry averages; improvement in the Prism score to 'strong'; and maintenance of run-rate FLR below 25%.

Fitch affirms the following ratings with a Stable 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-'.

Additional information is available at 'www.fitchratings.com'.