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Global Credit Research - 20 Apr 2011
New York, April 20, 2011 -- Moody's Investors Service has affirmed the ratings of The Hanover Insurance
Group (NYSE: THG, "The Hanover"; senior debt at Baa3)
and Hanover Insurance Company (insurance financial strength (IFS) at A3)
following the company's announcement that it has reached a definitive
agreement to acquire 100% of Chaucer Holdings, plc.
(London: CHU, Chaucer) for approximately $510 million.
Chaucer is a leading specialist Lloyd's insurance group, which
manages syndicates 1084 and 1176 and together they underwrite a diversified
book of specialty insurance and reinsurance including global marine,
energy, non-marine and aviation risks as well as UK motor
and nuclear. The transaction is subject to shareholder and various
regulatory approvals. The outlook on the ratings is stable.
Moody's analyst Pano Karambelas said, "The affirmation
of the ratings reflects our view that the acquisition, though meaningfully-sized,
is manageable for Hanover, and provides additional geographic and
line of business diversification to Hanover's existing U.S.
platform along with enhanced product and underwriting capabilities."
Over the medium term, Moody's expects the transaction may
enhance Hanover's brand with its largest agents, particularly
related to larger, more complex accounts.
The benefits of the transaction are offset by heightened exposure to earnings
volatility from "shock losses" arising from globally dispersed
natural or non-elemental perils, given Chaucer's "London
market" line-of-business profile. Chaucer estimated
its 1Q11 pre-tax catastrophe losses as approximately 16%
of its year-end 2010 shareholders' equity, or,
3% of Hanover's pro forma year-end 2010 shareholders'
equity, reflecting a very active quarter for worldwide catastrophes,
including the Australian floods, the New Zealand earthquake,
and the Tohoku earthquake. Further, Hanover's limited
experience in the Lloyd's market heightens the potential for integration
risk, in particular, oversight of Chaucer's risk management
and underwriting processes, though Moody's expects Chaucer
will retain its senior operational staff following the acquisition.
Hanover plans to fund the acquisition with cash on hand as well as $250
million of new senior notes, which it plans to issue prior to the
close of the transaction. The funding of the transaction increases
the company's financial leverage to nearly 29% on a pro forma
basis as of year-end 2010 from 24%, which is within
Moody's expectations for the ratings. At year-end
2010, the company had holding company cash of $448 million
and dividend capacity for 2011 of $174 million without prior regulatory
approval. Following the acquisition, Moody's expects
the company to maintain adequate liquidity at the holding company.
The stable outlook reflects our expectation that Hanover will implement
enhanced risk management oversight of Chaucer and focus on integrating
the operations. Hanover has been active over the past two years
including its acquisition of the standard commercial lines business of
OneBeacon Insurance Group in late 2009. Moody's expects that
Hanover will reduce the pace of meaningfully-sized acquisitions
over the medium term.
The rating agency said the following could lead to an upgrade of Hanover's
ratings: (1) continued strengthening of risk-adjusted capitalization
(as measured in part by gross underwriting leverage consistently below
3.0 times), (2) EBIT coverage of interest consistently greater
than 7x, and (3) successful integration of recent acquisitions,
including the Chaucer acquisition. The following could lead to
a downgrade of Hanover's ratings: (1) adjusted debt-to-capital
ratio above 35%, (2) EBIT coverage of interest less than
4x, (3) annual decline in shareholders' equity exceeding 10%,
including the impact of losses from Chaucer.
The following ratings were affirmed with a stable outlook:
Hanover Insurance Company -- insurance financial strength at A3;
The Hanover Insurance Group -- senior debt at Baa3; junior subordinated
debt at Ba1(hyb).
Hanover is among the top 30 property and casualty insurers in the United
States, offering P&C insurance products to individuals and business
owners through a targeted network of independent agents. For 2010,
THG reported premium revenues of $2.8 billion and net income
of $155 million. As of December 31, 2010, shareholders'
equity was approximately $2.5 billion.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to punctually pay senior policyholder claims and
obligations. For more information, please visit our website
The principal methodologies used in this rating are Moody's Global Rating
Methodology for Property and Casualty Insurers, published in May
Please see ratings tab on the issuer/entity page on www.moodys.com
for the last Credit Rating Action and the rating history.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
MD - Insurance
Financial Institutions Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Hanover's ratings on Chaucer acquisition; outlook stable
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