According to the rating agency's press release, the key rating drivers were as follows:
The Hanover Insurance Group, Inc. (THG) has a moderate business profile, with competitive advantages in the U.S. independent agency space, and USD 4.6 billion in net written premium (NWP) in 2020. The company's business risk profile has a material exposure to regional natural catastrophes, but the inherent volatility was reduced somewhat from changes in property risk aggregations with an expanding geographic profile and shifts in business mix. Product diversification is moderate, with a focus on short-tail lines.
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. U.S. subsidiaries' Prism capital model score was 'Strong' based on 2019 data. Prism results for 2020 will be available later in 2021.
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.
The full information on the rating action is available here.
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