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Announcement:

Moody's affirms Liberty Mutual's ratings; continues negative outlook

09 Mar 2009

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 Boston.

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 $10 billion.

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 Company).

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.

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

Moody's affirms Liberty Mutual's ratings; continues negative outlook
No Related Data.
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