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Rating Action:

Moody's affirms Liberty Mutual following Safeco acquisition; outlook negative

23 Sep 2008
Moody's affirms Liberty Mutual following Safeco acquisition; outlook negative

A leading U.S. property/casualty insurance group rated A2 for Insurance Financial Strength; approximately $6.1 billion of debt affected.

New York, September 23, 2008 -- Moody's Investors Service has affirmed the Baa2 senior unsecured debt and A2 insurance financial strength ratings of Liberty Mutual Group Inc. (LMGI) and its subsidiaries following yesterday's announcement of the completion of the company's acquisition of Safeco Corporation (Safeco). In the same action, Moody's has downgraded the insurance financial strength ratings of Safeco's operating subsidiaries to A2 from A1 and the senior debt rating at Safeco Corporation to Baa2 from Baa1 thereby aligning the companies' ratings. The outlook on all long-term ratings remains negative (outlook for Liberty Mutual's commercial paper program, rated Prime-2, remains stable, based on a guarantee provided by Liberty Mutual Insurance Company (LMIC)), consistent with the negative outlook assigned to Liberty Mutual on April 23, 2008 following the company's announcement of a definitive agreement to acquire Safeco Corporation for approximately $6.2 billion, including its outstanding debt of approximately $500 million.

According to Moody's, the affirmation of Liberty Mutual's ratings is based on the completion of the Safeco acquisition, and related financing, in a manner that is consistent with the company's stated plans at the time of announcement, as well as the group's operational and financial performance in the interim, notwithstanding some negative impact from recent hurricanes (e.g. Gustav and Ike) and credit turmoil, which Moody's expects will meaningfully impact third-quarter results for Liberty Mutual and, to a much lesser degree, Safeco.

Moody's views the acquisition of Safeco as a sound strategic move for Liberty Mutual that will further strengthen the group's Agency Markets franchise and its presence in the California and Pacific Northwest regions, as well as in surety, and that will bring further balance between the group's commercial and personal lines operations. Furthermore, Moody's believes that the limited geographic and agency overlap of the two companies' operations should help to both enhance the combined group's operational platform and to mitigate integration risks post-acquisition. With the completion of this acquisition, Liberty Mutual has become the fifth largest property and casualty insurer in the United States, based on premiums written. Moody's added that these positive franchise-related developments will, in its view, be offset over the near-to-intermediate term by financial pressures relating to reduced risk-adjusted capitalization levels at Liberty Mutual and to increased debt service costs to fund the leveraged acquisition.

The downgrade of Safeco's ratings is based on the lower existing ratings and considerably larger size of Liberty Mutual relative to Safeco as well as Liberty Mutual's integration plans. With respect to the insurance financial strength ratings on Safeco's insurance subsidiaries, Moody's expects that these companies will, in the near-term, become part of the Liberty's "Peerless" intercompany reinsurance pool and that, as the centerpiece of the group's Agency Markets operations, these subsidiaries' financial and business profile will continue to support ratings commensurate with Liberty Mutual Insurance Companies' other core operations. In addition, Moody's expects that Liberty Mutual will support the debt obligations of Safeco Corporation in a manner comparable to that of LMGI.

Moody's said that the continuation of the negative outlook for all long-term ratings is based on the decrease in Liberty Mutual's financial flexibility and capital adequacy measures that have resulted from the significant use of internal resources to finance the acquisition, as well as by increased leverage to tangible capital as a result of substantial acquisition-related goodwill intangibles. Specifically, Moody's noted that although Liberty Mutual's capital adequacy, like that of nearly all of its major industry competitors, has strengthened substantially in recent years through earnings and internal capital generation and through capital-raising initiatives, the group's financial flexibility has declined, underwriting leverage has increased and its risk-adjusted capital measures have decreased substantially following the completion of the acquisition.

Moody's noted that although it does not consider LMGI's financial flexibility and capital adequacy position to be incompatible with the group's current long-term ratings, a further weakening of either of these factors could lead to a downgrade of LMIC's and LMGI's long-term ratings. Consequently, Moody's views Liberty Mutual's financial metrics post acquisition to be at the limits for expectations at the current rating level with respect to both capital adequacy and financial flexibility. Significantly, Liberty Mutual, as a mutual organization, does not have direct access to equity capital markets for its capital funding, and therefore relies entirely on internal retained capital and on debt financing for its acquisition funding which, in turn, constrains its financial flexibility and results in its being a more leveraged enterprise.

With respect to Liberty Mutual's notching (i.e. the difference between the group's debt and insurance financial strength ratings), Moody's noted that prospective earnings and cash flow coverage by Liberty Corporate Services (LCS) of LMGI's debt service requirements will likely be reduced, given increased holding company interest costs relating to the acquisition financing, thereby placing incrementally larger debt servicing requirements on dividend flows from LMIC to LMGI. Although Moody's continues to maintain the existing notching, this analytic issue could be reconsidered over time, should coverage levels by LCS diminish significantly.

The following ratings have been affirmed with negative outlooks:

- Liberty Mutual Group, Inc.: guaranteed senior unsecured debt at Baa1 (originally issued by Liberty Mutual Capital Corporation, and subsequently merged into LMGI) based on a guarantee from Liberty Mutual Insurance Company; senior unsecured debt at Baa2; junior subordinated debt at Baa3;

- Liberty Mutual Insurance Company: insurance financial strength at A2; surplus notes at Baa2; long-term issuer credit rating at Baa1;

- Ohio Casualty Corporation: senior unsecured debt at Baa2;

Insurance financial strength ratings at A2 for other members of the Liberty Mutual and affiliated intercompany pool members, including the following:

- American Fire & Casualty Company

- Avomark Insurance Company

- Employers Insurance of Wausau

- First Liberty Insurance Corporation

- Liberty Insurance Company of America

- Liberty Insurance Corporation

- Liberty Insurance Underwriters, Inc.

- Liberty Mutual Fire Insurance Company

- Liberty Mutual Insurance Company

- Liberty Surplus Insurance Corporation

- LM Insurance Corporation

- Ohio Casualty Insurance Company

- Ohio Security Insurance Company

- Wausau Business Insurance Company

- Wausau General Insurance Company

- Wausau Underwriters Insurance Company

- West American Insurance Company

The following rating has been affirmed with a stable outlook:

- Liberty Mutual Group, Inc. -- rating at Prime-2 for commercial paper (guaranteed by Liberty Mutual Insurance Company).

The following ratings have been downgraded by one notch with a negative outlook:

- Safeco Corporation: senior unsecured debt to Baa2 from Baa1, and senior unsecured shelf at to (P)Baa2 from (P)Baa1, subordinate shelf to (P)Baa3 from (P)Baa2, and preferred stock shelf to (P) Ba1 from (P)Baa3; additionally, the shelf ratings will be withdrawn, as the shelf has been de-registered with the SEC.

- American Economy Insurance Co. -- insurance financial strength to A2 from A1;

- American States Preferred Insurance Co. -- insurance financial strength to A2 from A1;

- American States Insurance Co. -- insurance financial strength to A2 from A1;

- First National Insurance Co. of America -- insurance financial strength to A2 from A1;

- General Insurance Co. of America -- insurance financial strength to A2 from A1;

- Insurance Company of Illinois -- insurance financial strength to A2 from A1;

- Safeco Insurance Co. of America -- insurance financial strength to A2 from A1;

- Safeco Insurance Co. of Illinois -- insurance financial strength to A2 from A1; and

- Safeco National Insurance Co. -- insurance financial strength to A2 from A1.

Moody's most recent rating action on Liberty Mutual was on April 23, 2008, when Moody's affirmed Liberty Mutual Group Inc.'s ratings, and changed the outlook to negative, from stable, in connection with the announced definitive agreement to acquire Safeco Corporation and its subsidiaries.

Liberty Mutual Group Inc. (LMGI), based in Boston, is a mutual holding company for a diversified global insurance group that provides personal and commercial insurance products both domestically and internationally. The group was the sixth largest property and casualty insurer in the U.S. based on 2007 direct written premium. On a GAAP basis, for the first six months of 2008, the group reported net earned premiums of $11.9 billion and net income of $660 million. As of June 30, 2008, LMGI reported consolidated GAAP assets of $99.9 billion and policyholders' equity of $12.3 billion. For the first six months of 2008, Safeco Corporation reported net earned premiums of $2.8 billion and net income of $291 million. As of June 30, 2008, the company reported consolidated assets of $12.3 billion and shareholders' equity of $3.4 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.

New York
Alan Murray
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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