Fitch Affirms Liberty Mutual Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) 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 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 the first nine months of 2014 was 98.8%, an improvement over the previous year's 99.5%. Results improved despite an increase in catastrophe losses in 2014, representing 5.9% of earned premium, up from 4.6% in 2013. LMP reported modest adverse reserve development of $26 million, which made a negligible impact on the nine-month 2014 calendar-year combined ratio.

Over the past several years, the unfavorable margin in underwriting results between Liberty Mutual and those of its peers has reduced, particularly on an accident year basis. However, Liberty Mutual's underwriting results still lag those of higher rated peers particularly in good underwriting years such as 2014.

Fitch believes that LMG's capital position provides an adequate cushion against the operational and financial risks the company faces, but that 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 2x.

Liberty Mutual's Prism score was 'Adequate' based on year-end 2013 financials and Fitch anticipates that full-year 2014 results will remain in the 'Adequate' range. In particular, Liberty Mutual's Prism results are affected adversely by higher operating and reserve leverage. An improvement under this measure of capital could be a catalyst for future positive rating pressure. A Prism score of 'Adequate' is viewed as a 'BBB' IFS ratings standard.

Liberty Mutual issued an additional $300 million of 4.850% senior unsecured notes due 2044, in the fourth quarter. The issuance is a continuation of the $750 million of notes issued in July 2014. LMG's pro forma financial leverage ratio at Sept. 30, 2014 was 28%, up from 27.1% at the prior year-end. Annualized GAAP fixed charge coverage also improved to 7.6x for nine-months 2014 compared to 5.6x at the prior year-end. Fitch's long-term expectation for GAAP fixed charge coverage is 5x.

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 the company'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 affirmed the following ratings:

Liberty Mutual Group, Inc.

--IDR at 'BBB' Outlook Stable;

--$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-';

--$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';

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

Fitch has affirmed the following ratings:

Liberty Mutual Group, Inc.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Fitch has affirmed the following ratings:

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'.

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' (Sep. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=950475

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Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gerald B. Glombicki, CPA
Director
+1-312-606-2354
or
Committee Chairperson
Julie A. Burke, CFA, CPA
Managing Director
+1-312-368-3158
or
Media Relations
Brian Bertsch, +1 212-908-0549
New York
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gerald B. Glombicki, CPA
Director
+1-312-606-2354
or
Committee Chairperson
Julie A. Burke, CFA, CPA
Managing Director
+1-312-368-3158
or
Media Relations
Brian Bertsch, +1 212-908-0549
New York
brian.bertsch@fitchratings.com