Fitch Ratings has affirmed the 'A' (Strong) Insurer Financial Strength (IFS) rating of
Fitch has also affirmed THG's senior unsecured notes at 'BBB'. The Rating Outlook is Stable.
KEY RATING DRIVERS
Overall underwriting results improved in 2020 with lower non-catastrophe current accident year losses, primarily in commercial and personal auto lines with the overall GAAP calendar year combined ratio improving to 94.4% in 2020 from 95.6% in the prior year. Current accident year catastrophes were higher in 2020 at 6.7 percentage points of earned premiums, compared with 4.4 points in 2019. Underlying accident-year (AY) loss ratios, excluding current accident year catastrophes and modest pandemic-related incurred losses, improved to 56.4% in 2020 from 60.2% the prior year, primarily due to more favorable automobile experience associated with lower claims frequency.
Although capital formation has been relatively modest in recent years due to return of capital to shareholders through dividends and share repurchase, capital sufficiently supports the company's business profile. Shareholders' equity grew just 10.0% in 2020, up from average annual growth of 0.5% from YE 2015 to YE 2019. The financial leverage ratio (FLR) modestly increased to 21.8% at YE 2020 up from 19.3% in at YE 2019, but remains within rating sensitivities.
Statutory operating leverage (net premiums written to policyholders' surplus) remains higher than that of peer companies, but has declined to 1.8x in 2020, largely due to strong surplus growth during the year. At YE 2020, GAAP operating leverage was down to approximately 1.4x.
Additional balance sheet strengths include THG's high-quality, liquid investment portfolio that provides ample liquidity to cover its insurance reserves. Fitch believes THG's reserves are sufficient with recent favorable experience, primarily in commercial lines. The risky asset ratio of 38% at YE 2020 was lower than industry average.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A shift to sustained underwriting losses;
Material adverse reserve development;
An increase in run-rate FLR to 28% or greater;
Deterioration in run-rate GAAP operating interest coverage to 5x or lower;
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Improvement in statutory net leverage to 4.3x or better;
Maintaining a Prism score of 'Strong';
Sustaining GAAP operating interest coverage at 10x or better.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
RATING ACTIONSENTITY/DEBT RATING PRIOR
Citizens Insurance Company of America Ins Fin Str A Affirmed A
Hanover Insurance Company (The) Ins Fin Str A Affirmed A
The Hanover Insurance Group, Inc. LTIDR BBB + Affirmed BBB+
senior unsecured
LT BBB Affirmed BBB
junior subordinated
LT BB+ Affirmed BB+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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