MOODY'S CONFIRMS LIBERTY MUTUAL'S RATINGS; OUTLOOK REMAINS NEGATIVE
Approximately $2.1 billion of long-term debt affected.
New York, February 16, 2005 -- Moody's Investors Service has confirmed the long-term ratings of
Liberty Mutual Group Inc. (LMGI) (senior unsecured debt at Baa3)
and of Liberty Mutual Insurance Company and its pooled affiliates (Insurance
Financial Strength at A2, Surplus Notes at Baa2). The long-term
rating on debt issued by Liberty Mutual Capital Corporation -- which
has since been merged into LMGI and remains guaranteed by Liberty Mutual
Insurance Company -- has also been confirmed at Baa1. The
outlook for all of these long-term ratings is negative.
The present rating action concludes a review for possible downgrade that
was initiated on August 13, 2004. The group's short-term
debt ratings were not included in the review.
According to Moody's, the rating confirmations 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 uncertainty with respect to adequacy of the
group's loss reserve profile has declined, and the rating
confirmation also reflects significant growth in the group's capital
funds and retained earnings during 2004. Moody's added that
earnings and dividend capacity measures relative to interest expense remain
With respect to the group's reserve position, however,
Moody's believes that net reserve development could occur in the
coming years, particularly in workers' compensation and other
commercial liability lines, as well as on exposures related to asbestos
and pollution liabilities. That said, Moody's expects
that the company should be able to absorb future volatility with modest
disruption to future earnings, in part reflecting further available
limits provided by existing reinsurance programs. In Moody's
view, growth in capital during 2004 and reduced reserve uncertainty
have contributed to an improving risk-adjusted capital profile
for the group.
The rating agency noted that Liberty's financial leverage profile
is generally more conservative than its similarly rated peers.
However, Moody's believes that, as a mutual company
without ready access to public equity markets, Liberty has less
debt capacity when compared with its publicly traded peers. Moody's
expects consolidated financial leverage to remain below 25% and
that future debt issuance will likely occur at LMGI, rather than
through surplus notes at LMIC.
Despite these positive trends and improvements in 2004 on key profitability
and operational leverage measures, the outlook for these ratings
is negative primarily because of Moody's continued concerns about
the group's above-average gross underwriting leverage and
below-average operating profitability relative to peers.
The rating confirmations reflect an expectation of continued improvements
in these areas; the negative outlook signals that the ratings will
likely be lowered in the event that improvements are not sustained.
Specifically, Moody's noted that Liberty's ability to sustain
pre-tax operating returns on premium above 7%, with
GAAP gross underwriting leverage (adjusted for servicing carrier business)
of 6x or below over the next 12 to 18 months would likely return the rating
outlook to stable. Conversely, pre-tax operating returns
on premium below 5%, gross underwriting leverage above 6.5x,
or adverse reserve development in excess of 5% of GAAP equity would
likely result in a downgrade. The current ratings also continue
to reflect the expectation that financial leverage will remain less than
25% of total capital, that GAAP pre-tax operating
coverage of interest expense will exceed 5x, and that risk-adjusted
capitalization will continue the improvements witnessed during the past
Moody's review also considered the notching between various rating
levels, across Liberty Mutual's capital structure.
Moody's noted that the investment grade rating of LMGI's senior debt considers
its sound liquidity profile, which also benefits from cash flows
from its service operations within Liberty Corporate Services (LCS).
While this feature is an incremental positive, at present,
Moody's does not believe that the additional liquidity from LCS warrants
eliminating the 1-notch distinction between the rating of LMGI's
senior debt and the LMIC surplus notes, because of the still limited
magnitude of these cash flows and because fee revenues under the LCS arrangements
would likely ultimately be correlated with LMIC.
The following ratings were confirmed with a negative outlook:
Liberty Mutual Group Inc. -- senior unsecured debt at Baa3;
Debt issued by Liberty Mutual Capital Corporation (which has been 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
- Merchants and Businessmen's Insurance Company
- Montgomery Indemnity Company
- Montgomery Mutual Insurance Company
- Prudential Property & Casualty Insurance Company
- Wausau Business Insurance Company
- Wausau General Insurance Company
- Wausau Underwriters Insurance Company;
The Liberty Mutual Group is a Boston-based mutual holding company
that provides personal and commercial insurance products both domestically
and internationally. On a GAAP basis, for the first nine
months of 2004, the group reported net income of $680 million
on earned premiums of $12.1 billion and a combined ratio
of 104.5%. As of September 30, 2004,
Liberty reported policyholders' equity of $7.99 billion
and total assets of $71.3 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.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service