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Announcement:

Moody's affirms Hanover's ratings on Chaucer acquisition; outlook stable

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 at www.moodys.com/insurance.

The principal methodologies used in this rating are Moody's Global Rating Methodology for Property and Casualty Insurers, published in May 2010.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last Credit Rating Action and the rating history.

New York
Pano Karambelas
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
MD - Insurance
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Hanover's ratings on Chaucer acquisition; outlook stable
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