Fitch Affirms Liberty Mutual at 'BBB' & IFS at 'A-'; Outlook Stable

Business Wire

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) IDR at 'BBB'. Additionally, Fitch has affirmed LMG's insurance operating subsidiaries' (collectively referred to as Liberty Mutual) IFS ratings at 'A-'. The Rating Outlook is Stable for all ratings. (A full list of rating actions follows at the end of this release.)

KEY RATING DRIVERS

LMG's ratings are based on the company's established and sustainable positions in its chosen markets, benefits derived from the company's multiple distribution channels, adequate capitalization and financial performance.

LMG's consolidated GAAP calendar year combined ratio for 2013 was 99.8%, an improvement over the previous year's 104.8%. The results benefited from lower catastrophe losses improving personal insurance segment results and less adverse reserve development. While adverse reserve development was less it was still negative mainly due to $278 million increase in asbestos and environmental reserves.

Over the past several years, the unfavorable margin in underwriting results between LMG and those of its peers have reduced particularly on an accident year basis. However, LMG's underwriting results still lag those of higher rated peers particularly in good underwriting years such as 2013. For example, despite Liberty's almost five percentage point (pp) improvement in GAAP calendar year combined ratio last year the peer average improved by seven pp and was 92.8% for 2013.

Fitch believes that LMG's capital position provides an adequate cushion against the operational and financial risks the company faces. That said, metrics are weaker than most companies of its size and scale. In 2013, LMG's ratio of GAAP net written premium to adjusted shareholders equity was considerably higher than peers at 1.8x but an improvement over prior years 2.0x.

LMG's Prism score was 'Adequate' based on year-end 2012 financials. Fitch anticipates that full year 2013 results will remain in the 'Adequate' range. In particular, LMG's Prism results are adversely impacted by higher operating and reserve leverage. Favorably helping LMG's available capital in 2013 will be the $725 million reduction in finite insurance. However, Fitch notes that this will likely not offset the elevated existing leverage metrics. An improvement under this measure of capital could be a catalyst for future positive rating pressure.

LMG's financial leverage ratio at Dec. 31, 2013 was 27.1%, down from 28.9% at the prior year-end. GAAP fixed charge coverage also significantly improved to 6.4x at for 2013 compared to 1.9x in the prior year. Fitch's long term expectation for GAAP fixed charge coverage is 5.0x.

As of Dec. 31, 2013 LMG had a net monetary equity of $700 million related to Venezuelan operations. This is subject to devaluation risk given current macroeconomic instability and delays in the implementation of policies address rising inflation and distortions in the foreign exchange market, as well as the deterioration in Venezuela's external accounts. Fitch currently rates Venezuela's long-term foreign and local currency IDRs 'B' with a Negative Outlook. Fitch rates Venezuela's Country Ceiling 'B'.

Under a stressed scenario where the entire Venezuelan balance is written off, financial leverage would increase to 27.9% from 27.1% and GAAP operating leverage would increase to 1.92x from 1.85x. Overall, Latin America accounted for $3.8 billion out of $35.2 billion in GAAP net written premium in 2013 and Venezuela was approximately $2.0 billion in net written premium.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade include:

--Improved performance in underwriting results with a combined ratio of approximately 103% or better on both an accident and calendar year basis;

--A sustained improvement in Prism score to 'Strong' category or higher.

--Financial leverage ratio below 25%.

Key rating triggers that could lead to downgrade include:

--A return to accident year underwriting results that trail large multi-line peers by significant margin;

--Material weakening in LMG's current reserve position, as measured by a return to a period of multiple years of unfavorable reserve development greater than 5% of prior year equity;

--Failure to achieve a fixed charge coverage ratio of 5.0x over several years.

--Another large acquisition in the near term, especially if the balance sheet was weakened through increased financial leverage of 35% or higher.

Fitch has assigned a 'BBB-' to the following debt issues:

Liberty Mutual Group, Inc.

--$600 million 4.25% notes due 2024;

Fitch has also affirmed the following ratings:

Liberty Mutual Group, Inc.

--IDR at 'BBB'; Outlook Stable;

--$104 million 7.3% notes due 2014 at 'BBB-';

--$249 million 6.7% notes due 2016 at 'BBB-';

--$600 million 5.0% notes due 2021 at 'BBB-';

--$750 million 4.95% notes due 2022 at 'BBB-';

--$1 billion 4.25% notes due 2023 at 'BBB-';

--$3 million 7.625% notes due 2028 at 'BBB-';

--$231 million 7% notes due 2034 at 'BBB-';

--$471 million 6.5% notes due 2035 at 'BBB-';

--$19 million 7.5% notes due 2036 at 'BBB-';

--$750 million 6.5% notes due 2042 at 'BBB-';

--$300 million 7% junior subordinated notes due 2067 at 'BB';

--$700 million 7.8% junior subordinated notes due 2087 at 'BB';

--$255 million 10.75% junior subordinated notes due 2088 at 'BB';

--Short term IDR at 'F2';

--Commercial paper at 'F2'.

Liberty Mutual Insurance Co.

--IDR at 'BBB+' Outlook Stable;

--$140 million 8.5% surplus notes due 2025 at 'BBB';

--$227 million 7.875% surplus notes due 2026 at 'BBB';

--$260 million 7.697% surplus notes due 2097 at 'BBB'.

Ohio Casualty Corporation

--IDR at 'BBB'; Outlook Stable;

--$20.4 million 7.3% notes due 2014 at 'BBB-'.

Fitch has affirmed the IFS of the members of Liberty Mutual Second Amended and Restated Intercompany Reinsurance Agreement at 'A-' with a Stable Outlook:

--America First Insurance Company;

--America First Lloyd's Insurance Company;

--American Economy Insurance Company;

--American Fire and Casualty Company;

--American States Insurance Company;

--American States Insurance Company of Texas;

--American States Lloyds Insurance Company;

--American States Preferred Insurance Company;

--Bridgefield Casualty Insurance Company;

--Bridgefield Employers Insurance Company;

--Colorado Casualty Ins. Company;

--Consolidated Insurance Company;

--Employers Insurance Company of Wausau;

--Excelsior Insurance Company;

--First National Insurance Company of America;

--General Insurance Company of America;

--Golden Eagle Ins. Corporation;

--Hawkeye-Security Insurance Company;

--Indiana Insurance Company;

--Insurance Company of Illinois;

--Liberty County Mutual Insurance Company;

--Liberty Insurance Corporation;

--Liberty Insurance Underwriters Inc.;

--Liberty Lloyds of Texas Insurance Company;

--Liberty Mutual Fire Insurance Company;

--Liberty Mutual Insurance Company;

--Liberty Mutual Mid-Atlantic Insurance Company;

--Liberty Mutual Personal Insurance Company;

--Liberty Personal Insurance Company;

--Liberty Surplus Insurance Corporation;

--LM General Insurance Company;

--LM Insurance Corporation;

--LM Property and Casualty Insurance Company;

--Mid-American Fire & Casualty;

--Montgomery Mutual Insurance Company;

--National Insurance Association;

--Ohio Security Insurance Company;

--Peerless Indemnity Insurance Company;

--Peerless Insurance Company;

--Safeco Insurance Company of America;

--Safeco Insurance Company of Illinois;

--Safeco Insurance Company of Indiana;

--Safeco Insurance Company of Oregon;

--Safeco Lloyds Insurance Company;

--Safeco National Insurance Company;

--Safeco Surplus Lines Insurance Company;

--The First Liberty Insurance Corporation;

--The Midwestern Indemnity Company;

--The Netherlands Insurance Company;

--The Ohio Casualty Insurance Company;

--Wausau Business Insurance Company;

--Wausau General Insurance Company;

--Wausau Underwriters Insurance Company;

--West American Insurance Company.

Fitch has affirmed the IFS of the following companies that participate in a 100% quota share at 'A-' with a Stable Outlook:

--Liberty Northwest Insurance Company;

--North Pacific Insurance Company;

--Oregon Automobile Insurance Company.

Additional information is available at 'www.fitchratings.com'.

THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826435

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Contact:
Fitch Ratings
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Gerald B. Glombicki, CPA
Director
+1-312-606-2354
Fitch Ratings, Inc., 70 W. Madison Street, Chicago, IL 60602
or
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Director
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or
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Managing Director
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