MOODY'S AFFIRMS LIBERTY MUTUAL'S RATINGS; CHANGES OUTLOOK TO STABLE
Approximately $2.6 billion of Long-Term Debt Affected.
New York, May 02, 2006 -- Moody's Investors Service has affirmed the long-term ratings of
Liberty Mutual Group Inc. (LMGI) (senior unsecured debt at Baa3)
and its subsidiaries (including Liberty Mutual Insurance Company and its
pooled affiliates - insurance financial strength at A2, and
surplus notes at Baa2). Moody's has also changed the outlook
on the company's long-term ratings to stable from negative.
Liberty Mutual Group Inc.'s Prime-2 rating for commercial
paper and Moody's performance rating on Lloyd's Syndicate
4472 both continue to carry stable outlooks. Moody's most
recent rating action on Liberty Mutual was on February 16, 2005,
when the rating agency confirmed the company's long-term
ratings and changed the outlook to negative.
According to Moody's, the rating affirmations and restoration of
the stable outlook are based on Liberty Mutual's improved core operating
earnings performance, as well as commensurate improvement in the
group's operational leverage and risk-adjusted capitalization measures.
Additionally, Moody's believes that uncertainties with respect to
integration risks associated with acquisitions made in recent years,
and with respect to adequacy of the group's loss reserve profile have
declined. The rating agency added that earnings and dividend capacity
measures relative to interest expense remain strong.
With respect to Liberty Mutual's reserve position, Moody's
noted that additions to reserves in recent years in both core and discontinued
business lines have largely mitigated prior concerns. The rating
agency noted that although net reserve development could continue to emerge
in the coming years, the company should be able to absorb future
volatility with modest disruption to earnings, in part reflecting
further available limits provided by existing reinsurance programs.
In Moody's view, growth in capital and reduced reserve uncertainty
in recent years have contributed to an improving risk-adjusted
capital profile for the group.
Despite these positive trends and improvements on key profitability and
operational leverage measures, Moody's continues to be generally
concerned about the group's above-average gross underwriting leverage
and historically below-average core operating profitability relative
to peers. While Liberty's financial leverage profile is generally
more conservative than its similarly rated peers, Moody's believes
that, as a mutual company without ready access to public equity
markets, Liberty has somewhat less debt capacity in comparison to
with many of its publicly traded peers. The rating affirmations
reflect an expectation of continued improvements in these areas.
According to Alan Murray, lead analyst at Moody's on Liberty
Mutual Group: "since experiencing the adverse impact of the
previous industry downcycle during the late 1990s, Liberty Mutual
has taken numerous steps to restore its balance sheet strength,
to tighten operational controls and strength management information,
to improve its financial disclosure to public company standards,
and to focus on profitability and internal capital generation".
Moody's further noted that catastrophe losses significantly dampened
the group's operating earnings in 2005, but that a combination
of capital raising in early 2005 and earnings diversity in non-catastrophe-prone
business lines enabled Liberty to strengthen its capital position over
the course of the year. Murray added: "Despite challenges
in previous years associated with the integration of a series of acquisitions,
Liberty Mutual has positioned itself as one of the leading providers of
commercial and personal lines insurance in the US, with access to
multiple distribution channels, and with a growing international
Moody's current ratings reflect the expectation that financial leverage,
adjusted for lease and under-funded pension obligations,
will remain below 35% of total capital, that GAAP pre-tax
earnings coverage of interest expense will exceed 4x, and that risk-adjusted
capitalization will continue to improve over the coming year. In
order to avoid negative pressure on the rating, Liberty will have
to achieve pre-tax operating returns on premium in excess of 5%
in the near term, while maintaining gross underwriting leverage
of approximately 6x or below, and annual reserve development of
less that 5% of policyholders' surplus.
The following ratings were affirmed with a stable outlook:
Liberty Mutual Group Inc. -- senior unsecured debt at Baa3;
Debt originally issued by Liberty Mutual Capital Corporation (which was
subsequently merged into LMGI) -- guaranteed senior unsecured debt
at Baa1 (based on a guarantee from Liberty Mutual Insurance Company);
Liberty Mutual Insurance Company -- surplus notes at Baa2.
Liberty Mutual Insurance Company and its rated affiliated intercompany
pool members -- insurance financial strength at A2, including:
- Bridgefield Casualty Insurance Company
- Bridgefield Employers Insurance Company
- Colorado Casualty Insurance Company
- Employers Insurance of Wausau
- First Liberty Insurance Corporation
- Golden Eagle Insurance Corporation
- Liberty Insurance Company of America
- Liberty Insurance Corporation
- Liberty Insurance Underwriters, Inc.
- Liberty Mutual Fire Insurance Company
- Liberty Mutual Insurance Company
- Liberty Personal Insurance Company
- Liberty Surplus Insurance Corporation
- LM Insurance Corporation
- LM Property & Casualty Insurance Company
- Merchants and Businessmen's Insurance Company
- Montgomery Indemnity Company
- Montgomery Mutual Insurance Company
- Wausau Business Insurance Company
- Wausau General Insurance Company
- Wausau Underwriters Insurance Company.
Liberty Mutual Group Inc. (LMGI), based in Boston,
is a mutual holding company that provides personal and commercial insurance
products both domestically and internationally. On a GAAP basis,
for the full year 2005, the group reported net income of $1.0
billion on earned premiums of $17.6 billion and a combined
ratio of 105.7%. As of December 31, 2005,
LMGI reported consolidated GAAP policyholders' equity of $8.9
billion and total assets of $78.8 billion.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to repay senior policyholder claims and obligations.
For more information, visit our website at www.moodys.com/insurance.
Financial Institutions Group
Moody's Investors Service
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service