Fitch Affirms Liberty Mutual's Ratings and Maintains Outlook Following Ironshore Acquisition

CHICAGO--()--Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) Long-Term Issuer Default Rating (IDR) at 'BBB'. Additionally, Fitch has affirmed LMG's insurance operating subsidiaries' (collectively referred to as Liberty Mutual) Insurer Financial Strength (IFS) ratings at 'A-'. The Rating Outlook remains Positive for all ratings. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Fitch's rating actions follow LMG's announcement that the company will acquire 100% of Ironshore Inc. (Ironshore) from Fosun International Limited. The transaction, expected to close in the first half of 2017, poses near-term execution and integration risks that are somewhat mitigated by LMG's past acquisition experience. Ironshore's large market presence in U.S. excess & surplus (E&S) lines and history of positive underwriting performance will meaningfully expand LMG's specialty segment.

Liberty Mutual's Outlook was revised to Positive on Aug. 11, 2016 due to recent improvement in operating performance, which has historically lagged higher-rated peers. Liberty Mutual traditionally generates weaker underwriting results relative to peers, but this differential has moderately narrowed in recent years. LMG is currently meeting several upgrade triggers, and Fitch would likely upgrade the ratings if positive operating performance continues, LMG's financial leverage ratio falls below 28%, and the company maintains its 'Strong' Prism score.

Despite maintaining the Positive Outlook, a ratings upgrade is unlikely until financial ramifications of the transaction are revealed through actual combined reported operating performance. This places the earliest likelihood of an upgrade at early to mid-2018.

The affirmation of 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.

Liberty Mutual will significantly increase its presence in the E&S market once the deal closes, moving from the 29th largest market participant to number seven on a pro forma basis based off of 2015 direct premiums written. Furthermore, Ironshore's reported five-year average combined ratio of 92.2% should contribute to Liberty Mutual's improving operating performance.

Mitigating these factors, LMG's balance sheet quality and capital strength will slightly deteriorate due to an expected increase in goodwill and debt. Given the $3 billion purchase price, which equates to 1.45x Ironshore's tangible book value at year-end 2016, the amount of goodwill generated will be roughly $930 million. This will add to LMG's already sizeable third quarter 2016 goodwill balance of $4.9 billion.

Financial leverage will likely also increase but more modestly, as Fitch believes most of the purchase funds will come from the sale of certain holding company investments and current holding company cash. LMG may issue debt to finance a portion of the deal; however, Fitch expects financial leverage will be maintained below 35% and should gradually decline following the purchase.

While Fitch views the purchase as a slight credit negative in the near-term due to inherent execution and integration risks present with any acquisition, successful execution of the acquisition and a commitment to reducing financial leverage post-acquisition could provide longer-term positive credit benefits to LMG's operating profile and rating prospects.

RATING SENSITIVITIES

Key rating triggers that could lead to an upgrade include:

--Maintenance of improved performance in underwriting results with a combined ratio of approximately 100% or better on both an accident and calendar year basis;

--A sustained Prism score of 'Strong' category or higher.

--Financial leverage ratio sustained below 28%.

--Continued favorable reserve development and stability in reserve position.

Key rating triggers that could result in a return to Stable Outlook include:

--A return to accident year underwriting losses;

--Material weakening in the company's current reserve position, potentially indicated by a unfavorable reserve development greater than 5% of prior year equity;

--Failure to maintain a fixed charge coverage ratio of 5.0x;

--A large acquisition that unfavourably changes the operating profile or is financed in a manner that adds balance sheet risk causing run-rate financial leverage to move to 30%, or peak at 35% or higher whether or not the company subsequently reduces leverage.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Liberty Mutual Group, Inc.

--Long-Term IDR at 'BBB'; Outlook Positive;

--$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-';

--EUR750 million 2.75% notes due 2026 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-';

--$1,050 million 4.85% notes due 2044 at 'BBB-';

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

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

--$176 million 10.75% junior subordinated notes due 2088 at 'BB'.

Liberty Mutual Group, Inc.

--Short-Term IDR at 'F2';

--Commercial Paper Rating at 'F2'.

Liberty Mutual Insurance Co.

--Long-Term IDR at 'BBB+'; Outlook Positive;

--$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

--Long-Term IDR at 'BBB'; Outlook Positive;

Fitch has affirmed the IFS of the members of Liberty Mutual Second Amended and Restated Intercompany Reinsurance Agreement at 'A-'/Positive 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

--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 Company

--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-'/Positive Outlook:

--Liberty Northwest Insurance Corporation

--North Pacific Insurance Company

--Oregon Automobile Insurance Company

Additional information is available at www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 15 Sep 2016)

https://www.fitchratings.com/site/re/887191

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Associate Director
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Chicago, IL 60602
or
Secondary Analyst
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
or
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Managing Director
or
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Contacts

Fitch Ratings
Primary Analyst
Jeremy R. Graczyk, CFA, +1-312-368-3208
Associate Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gerald B. Glombicki, CPA, +1-312-606-2354
Director
or
Committee Chairperson
Keith M. Buckley, CFA, +1-312-368-3211
Managing Director
or
Media Relations, New York
Hannah James, + 1 646-582-4947
hannah.james@fitchratings.com