Fitch Rates Liberty Mutual’s New Debt ‘BBB-‘; Affirms Ratings

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) Issuer Default Rating (IDR) at 'BBB' and LMG's operating subsidiaries' (collectively referred to as Liberty Mutual) Insurer Financial Strength (IFS) ratings at 'A-'. (A full list of rating actions follows at the end of this release.) Fitch has also assigned a 'BBB-' rating to LMG's $600 million 5.00% senior unsecured debt due 2021. The Rating Outlook for all ratings is Stable.

The proceeds of the new debt offer are anticipated to be used for funding LMG's previously announced tender offer for its 7.50% senior notes due 2036 and general corporate purposes. The net effect on financial leverage is minimal. Proforma non-equity credit adjusted debt-to-capital ratio is 25.1% at March 31, 2011 compared to stated non-equity credit adjusted debt to capital ratio of 24.6% at March 31, 2011.

The affirmation of LMG's operating subsidiary ratings are based on the established and sustainable positions in its chosen markets, benefits derived from the company's multiple distribution channels, adequate core underwriting earnings, and good liquidity profile. Fitch also recognizes LMG's improvement in statutory surplus levels and notes that recent accident year reserve estimates continue to develop favorably.

As of March 31, 2011 pre-tax operating income was $441 million or up 13.7% over prior period primarily driven by higher net investment income. Liberty Mutual reported a GAAP combined ratio of 102.5% as of March 31, 2011 that included 8.5 percentage points from catastrophes. The catastrophe losses due to Australia, New Zealand, and Japan totaled approximately $288 million in aggregate. While not reflected in first quarter 2011 results the company did announce that storm and tornado activity in April 2011 is expected to cause after tax catastrophe losses of $350 - $450 million.

Within Fitch's rating rationale are multiple key rating drivers. If Liberty Mutual were to materially deviate from any of these items, especially for an extended period, the ratings could be affected either positively or negatively.

The following is a list of key rating drivers that could lead to an upgrade:

--A narrowing or elimination of underwriting margin gap relative to peers;

--An improvement in the company's quality of surplus in particular the elimination of finite reinsurance and to a lesser extent surplus notes while maintaining or improving balance sheet strength metrics.

The following is a list of key rating drivers that could lead to a downgrade:

--Failure to sustain operating earnings-based coverage in the 4 times (x) - 7x range;

--Failure to maintain tangible financial leverage below 30% over the long term;

--Another large acquisition in the near term especially if the balance sheet was weakened through increased financial leverage;

Fitch has assigned the following rating:

Liberty Mutual Group, Inc.

--$600 million 5.00% senior unsecured notes due 2021 BBB-.

Fitch has affirmed the following ratings with a Stable Outlook:

Liberty Mutual Group, Inc.

--IDR at 'BBB';

--$187 million 7.25% notes due 2012 at 'BBB-';

--$260 million 8% notes due 2013 at 'BBB-';

--$180 million 7.3% notes due 2014 at 'BBB-';

--$500 million 5.75% notes due 2014 at 'BBB-';

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

--$24 million 7.5% notes due 2036 at 'BBB-';

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

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

--$1.25 billion 10.75% junior subordinated notes due 2088 at 'BB'.

Liberty Mutual Insurance Co.

--IDR at 'BBB+';

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

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

--$435 million 7.697% surplus notes due 2097 at 'BBB'.

Ohio Casualty Corporation

--IDR at 'BBB';

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

Safeco Corporation

--IDR at 'BBB';

--$16.7 million 7.25% notes due 2012 at 'BBB-'.

Fitch has affirmed the following ratings:

Liberty Mutual Group, Inc.

--Short-term IDR at 'F2';

--$400 million Commercial Paper program at 'F2'.

Fitch has affirmed the IFS ratings of the following members of Liberty Mutual Inter-company Insurance Pool (LMIC Pool) at 'A-' with a Stable Outlook:

--Liberty Mutual Insurance Company

--Liberty Mutual Fire Insurance Company

--Employers Insurance Company of Wausau

--Liberty Insurance Corporation

--Wausau Business Insurance Company

--Wausau Underwriters Insurance Company

--LM Insurance Corporation

--The First Liberty Insurance Corporation

--LM General Insurance Company

--Liberty Mutual Personal Insurance Company

--Liberty Personal Insurance Company

--Liberty Lloyds of Texas Insurance Company

--Liberty Surplus Insurance Corporation

--Wausau General Insurance Company

--Liberty Mutual Mid-Atlantic Insurance Company

--Insurance Company of Illinois

Fitch has affirmed the IFS ratings of the following companies that participate in a 100% quota share with the LMIC Pool at

'A-' with a Stable Outlook:

--Liberty County Mutual Insurance Company

--LM Property and Casualty Insurance Company

--Bridgefield Casualty Insurance Company

--Bridgefield Employers Insurance Company

--Liberty Insurance Underwriters Inc.

Fitch has affirmed the IFS ratings of the following members of Peerless Insurance Inter-company Insurance Pool (Peerless Pool) at 'A-' and with a Stable Outlook:

--Peerless Insurance Company

--Peerless Indemnity Insurance Company

--America First Insurance Company

--America First Lloyd'sInsurance Company

--Colorado Casualty Ins Company

--Consolidated Insurance Company

--Excelsior Insurance Company

--Golden Eagle Ins Corporation

--Hawkeye-Security Insurance Company

--Indiana Insurance Company

--Mid-America Fire & Casualty

--The Midwestern Indemnity Company

--Montgomery Mutual Insurance Company

--The Netherlands Insurance Company

--National Insurance Association

--The Ohio Casualty Insurance Company

--West American Insurance Company

--American Fire and Casualty Company

--Ohio Security Insurance Company

--Safeco Insurance Company of Illinois

--American Economy Insurance Company

--American States Insurance Company

--American States Preferred Insurance Company

--Safeco Insurance Company of Indiana

--Safeco National Insurance Company

--Safeco Insurance Company of Oregon

--American States Lloyds Insurance Company

--Safeco Lloyds Insurance Company

--First National Insurance Company of America

--General Insurance Company of America

--Safeco Insurance Company of America

--Safeco Surplus Lines Insurance Company

--American States Insurance Company of Texas

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

--Liberty Northwest Insurance Company

--North Pacific Insurance Company

--Oregon Automobile Insurance Company

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (March 31, 2011);

--'Non-Life Insurance Rating Methodology' (March 31, 2011);

--'Fitch's Approach to Rating Insurance Groups' (Dec 14, 2010);

--'Equity Credit for Hybrids & Other Capital Securities - Amended' (Dec. 29, 2010);

--'Short-Term Ratings for Corporate Finance' (Nov. 2, 2010);

--'Insurance Industry: Global Notching Methodology' (March 31, 2011).

Applicable Criteria and Related Research:

Non-Life Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=604366

Fitch's Approach to Rating Insurance Groups

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=586765

Equity Credit for Hybrids & Other Capital Securities - Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614266

Short-Term Ratings Criteria for Corporate Finance ??? Amended

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=568726

Insurance Industry: Global Notching Methodology and Recovery Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=614265

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

Source: Fitch Ratings