Fitch Affirms Liberty Mutual’s Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) Issuer Default Rating (IDR) at 'BBB'. Additionally, Fitch has affirmed the Insurer Financial Strength (IFS) ratings of LMG's insurance operating subsidiaries' (collectively referred to as Liberty Mutual) 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

Fitch's affirmation follows LMG's announcement that it will deconsolidate its Venezuelan subsidiaries and offer the operations for sale. LMG reported a $690 million impairment in the third quarter of 2015 related to the write-down of the investment in the previously consolidated Venezuela operations to fair value and the write-off of related intercompany balances. The Venezuelan operations have been operating in a hyperinflationary economy since 2010 with restrictive foreign exchange controls that have had a significant impact on LMG's consolidated results.

The company determined that foreign exchange control regulation changes made by the Venezuelan government in 2015 have not reduced uncertainty with regards to foreign exchange mechanisms in Venezuela going forward. Effective Sept. 30, 2015 the company determined it appropriate to deconsolidate the Venezuela operations, and have classified the Venezuelan operations as discontinued operations and held for sale.

On Nov. 29, 2015 LMG entered into a stock purchase agreement for the sale of the Venezuelan operations and will continue to operate the business with the classification of discontinued operations on the company's consolidated financial statements until the parties receive regulatory approval for the transaction.

LMG's ratings also continue to be 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 through 9 months 2015 was 98.5%, down from 99.1% during the prior year period. Results in 2015 improved despite a modest increase in catastrophe losses, representing 6.4% of earned premium, up from 6.2% in 2014.

Liberty Mutual traditionally generates weaker underwriting results relative to higher rated peers, but this differential has moderately narrowed in recent years, particularly on an accident year basis.

LMG's underwriting results also benefited from modestly improved reserve experience during the year as adverse development related to asbestos and environmental reserves declined to $4 million through the first nine months of 2015, down from $113 in the prior year. Across all other lines LMG reported reserve releases of $173 million an increase over the prior year favorable development of $35 million.

Net income for LMG through the first nine months of 2015 declined to $103 million, down from approximately $1.2 billion for the prior year, largely as a result of the deconsolidation of the Venezuela business and energy investment related losses.

Total equity at LMG decreased by 6.0% from year-end 2014 to $19.1 billion at Sept. 30, 2015. LMG's capital position provides an adequate cushion against the operational and financial risks the company faces, but capital ratios are less favorable relative to peers. LMG's ratio of GAAP net property/casualty written premium to shareholders equity was higher than peers on a trailing 12-month basis at 1.8x, equal to the prior year-end ratio.

Liberty Mutual's Prism score was 'Strong' based on year-end 2014 financials, and Fitch anticipates that full-year 2015 are likely to modestly decline, largely as a result of Liberty Mutual's 6.3% reported decrease in statutory policyholders surplus to $18.0 billion at Sept. 30, 2015. A sustained improvement under this measure of capital could be a catalyst for future positive rating actions.

LMG's financial leverage ratio at Sept. 30, 2015 was 29.0%, up from 28.4% at the prior year-end. GAAP fixed charge coverage declined to 5.3x through the first nine months of 2015, down from compared to 9.1x at the prior year-end.

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 103% or better on both an accident and calendar year basis;

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

--Financial leverage ratio below 25%.

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

Key rating triggers that could lead to a downgrade include:

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

--Material weakening in the company's current reserve position, potentially indicated by a period of multiple years of 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 through a financial leverage ratio of 35% or higher.

FULL LIST OF RATING ACTIONS

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';

--$193 million 10.75% junior subordinated notes due 2088 at 'BB'.

Liberty Mutual Group, Inc.

--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.

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 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-' with a Stable 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. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=997251

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=997251

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Fitch Ratings, Inc.

Primary Analyst

Christopher A. Grimes, CFA

Director

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Fitch Ratings, Inc.

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Chicago, IL 60602

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Gerald B. Glombicki, CPA

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Source: Fitch Ratings