Approximately $6 billion of debt and hybrid securities affected.
New York, March 09, 2009 -- 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, respectively, following the company's
announcement of its results of operations for the fourth quarter and full
year 2008. The outlook on all long-term ratings remains
negative. The rating outlook for Liberty Mutual's commercial paper
program, rated Prime-2, remains stable, based
on a guarantee provided by Liberty Mutual Insurance Company (LMIC),
whose issuer credit rating is Baa1.
Liberty Mutual Group, Inc. reported pre-tax income
in 2008 of $1.3 billion, net of realized capital losses
of $330 million. The group's combined ratio of 99.9%
included approximately 6.4% of catastrophe losses --
well above average, given the severity of hurricane losses in the
third quarter -- as well as 3.9% of favorable reserve
development, a level that Moody's does not expect will recur.
Hybrid-adjusted financial leverage as of December 31, 2008
was 37.3%. Accumulated other comprehensive losses
were $2.56 billion as of year-end 2008, as
compared with accumulated other comprehensive income of $745 million
at the prior year-end, the decline primarily reflecting unrealized
mark-to-market investment losses and underfunded pension
liabilities. Because much of the unrealized mark-to-market
investment loss position is associated with investment-grade municipal,
corporate and highly-rated structured positions, Moody's
believes that the ultimate economic loss potential in these positions
is likely to be significantly less than current market values suggest.
Moody's said the ratings affirmation of Liberty Mutual is based
on its strong market position in both commercial and personal lines insurance
in the USA and its diversified international operations, on the
breadth of its product and distribution platform, and on its strong
investment profile and overall sound profitability. These strengths
are, however, tempered by the insurance group's substantial
operational and financial leverage following the cash and debt-financed
Safeco acquisition in September 2008, by generally below-average
underwriting margins relative to peers, by exposure to catastrophes
losses in its property segment and to claim and reserve volatility in
the group's casualty lines, and by operational risks associated
with the group's active acquisition strategy.
Moody's noted that, as a mutual organization, Liberty
Mutual does not have direct access to equity capital markets for its capital
funding. "Therefore, the company relies on internal retained
capital and on debt financing for its acquisition funding and other capital
needs", commented Senior Credit Officer Alan Murray, "which,
in turn, constrains its financial flexibility and results in its
being a more leveraged enterprise." This consideration is magnified
not only by its catastrophe and reserve risks, but also by continued
investment market stress. Moody's added, however,
that -- in addition to internal liquidity at its insurance operating
subsidiaries -- the holding company, Liberty Mutual Group,
Inc. does have access to undrawn credit and repo facilities,
in addition to available borrowings from the Federal Home Loan Bank of
Moody's stated that the continuation of the negative outlook for all long-term
ratings reflects continued strain on Liberty Mutual's financial flexibility
and capital adequacy measures that have resulted from the significant
use of debt and internal cash resources to finance the Safeco acquisition,
as well as by increased leverage to tangible capital as a result of the
company's substantial acquisition-related goodwill. Mr.
Murray added, "These key financial measures remain at or near
our tolerance levels for the current rating." Specifically,
the rating agency continues to expect that Liberty Mutual will --
during the course of 2009 -- make steady progress in de-leveraging
its balance sheet and operations through internal earnings and capital
generation. However, a continuation of the company's
current operational leverage (e.g. gross underwriting leverage
near 7x, adjusted for certain reinsurance balances) and financial
leverage (near 35%), without meaningful de-leveraging
on both measures through 2009 would likely result in a downgrade of the
company's long-term ratings. Also included in Moody's
expectations for Liberty Mutual's current rating is net income in
2009 of at least $1 billion, without significant reliance
on further reserve releases, and maintenance of GAAP equity above
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;
- Safeco Corporation: senior unsecured debt at Baa2.
Insurance financial strength ratings at A2 for other members of the Liberty
Mutual and affiliated intercompany pool, including the following:
- American Economy Insurance Co.
- American Fire & Casualty Company
- American States Preferred Insurance Co.
- American States Insurance Co.
- Avomark Insurance Company
- Employers Insurance of Wausau
- First Liberty Insurance Corporation
- First National Insurance Co. of America
- General Insurance Co. of America
- Insurance Company of Illinois
- 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
- Safeco Insurance Co. of America
- Safeco Insurance Co. of Illinois
- Safeco National Insurance Co.
- 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
Moody's most recent rating action on Liberty Mutual was on November 12,
2008, when Moody's assigned a Baa2 rating (negative outlook) to
senior notes of Liberty Mutual Group Inc. issued in an exchange
offer for senior notes of Safeco Corporation and Ohio Casualty Corporation.
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. On a GAAP basis, the group reported
net earned premiums for the full year 2008 of $25.5 billion
(including only fourth quarter premiums for Safeco) and net income of
$1.1 billion. As of December 31, 2008,
LMGI reported consolidated GAAP assets of $104.3 billion
and policyholders' equity of $10.2 billion.
The principal methodology used in rating Liberty Mutual Group, Inc.
and its principal subsidiaries are Moody's Global Rating Methodology for
Property and Casualty Insurers, which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies subdirectory. Other methodologies and factors that
may have been considered in the process of rating Liberty Mutual can also
be found in the Credit Policy & Methodologies directory.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay 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
Moody's affirms Liberty Mutual's ratings; continues negative outlook
Financial Institutions Group
Moody's Investors Service