Hanover Insurance Group offers stability in the P&C subgroup

Dan Bruzzo, CFA | February 12, 2021

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.

Hanover Insurance Group (THG) is an older, conservative operator in the P&C space, with a highly traditional suite of insurance products. The credit offers a stable exposure to the industry with mid-BBB ratings and good spread compensation relative to its risk profile. The 10-year notes still hit the key 2.0% yield bogey, despite recent tightening across the segment.

Graph 1. THG vs BBB/A P&C Comps

Source: Amherst Pierpont, Bloomberg/TRACE Indications

Bond recommendation

THG 2.50% 9/01/30 @ +90/87 10-year (CUFF); G+93; 2.01%; $104.13
Issuer: Hanover Insurance Group (THG)
CUSIP: 410867AG0
Amount outstanding: $300 million
Rating: Baa2/BBB/BBBu
Global Deal

Company overview

• THG is a very stable, conservative P&C operator, with a very basic suite of personal and commercial (40/60) P&C lines, distributed via independent agents with long-standing relationships with the company. Products include auto, property, workers’ comp (WC), professional liability, marine, aviation and others. THG generates just over $5 billion in annual gross premiums written. As is the case with most P&C underwriters with catastrophe loss exposures, THG is susceptible to operating profit volatility from year-to-year, but offsets those concerns with very conservative capital maintenance, and very safe, stable investment portfolio holdings.
• The most significant recent credit event for the company occurred in 2019, when THG completed the last sale of the bulk of its overseas operations, which were distributed via the collective sales of the Chaucer Insurance Company and SLE Holdings to China Reinsurance Group. Most of the operations were in Ireland and Australia. The deal(s) had first emerged in the first half of 2018. Total proceeds were $865 million. International assets dropped from about 30% to 0.5%.
• Strategically, THG is a very old, conservative P&C operator, offering very traditional products in commercial and personal policies with its long-established national footprint, with core concentrations in Massachusetts, New York and Michigan. The expansion into international markets and Lloyds related specialty lines appears to have been a bit of a short-term experiment (~3 yrs), and management seems to have backed away from those aspirations, opting instead for more organic growth strategies.
• Although THG conceded some operating diversity, the transactions helped jettison some of the riskier business lines, and helped shore up capital and liquidity (addition by subtraction in some cases). Following the announcement of the sale back in 2018, Moody’s revised the outlook on their rating to positive, and then eventually raised the senior unsecured rating to Baa2 from Baa3, and took the outlook back to stable. Fitch also viewed the sale positively for capitalization and operating performance, but left the rating unchanged at BBB with a stable outlook. S&P took more of a “wait and see” approach on the sale. Initially they placed THG on review for possible downgrade when sale was initially announced, but a month later changed their mind, presumably after management convinced them that enough of the proceeds would be used to help maintain strong capital levels. At that point, they affirmed the BBB rating and later assigned a stable outlook.
• M&A risk appears minimal for THG, based on past acquisition activity from management. THG’s last purchase was very small strategic bolt-on acquisition back in 2017. The company has only made four deals total since the financial crisis – all relatively small, and several of which were shipped back out in the sale of their overseas businesses. So while management has partially earmarked a portion of the Chaucer proceeds for “expansion,” we believe growth that will more likely come from a combination of organic efforts and smaller, bolt-on strategic deals.

THG has a solid liquidity profile with $121 million in cash on the balance sheet, no debt maturities until 2025, and their entire $200 million credit facility available through 2024. The 10-year debt launch in August of last year was utilized to fully redeem the remaining high-coupon THG 6.35% ‘53s in the capital structure.