Moody's affirms Liberty Mutual's ratings; outlook changed to negative
Pending acquisition of Safeco Corporation for approximately $6.2 billion.
New York, April 23, 2008 -- Moody's Investors Service has affirmed the debt and insurance financial
strength ratings of Liberty Mutual Group Inc. (LMGI) and its subsidiaries
following the company's announcement this morning of a definitive agreement
to acquire SAFECO Corporation (NYSE: SAF) for approximately $6.2
billion. The outlook for all of Liberty Mutual's long-term
ratings has been changed to negative, from stable. The outlook
for the company's short-term Prime-2 rating for commercial
paper remains stable, based on a guarantee provided by Liberty Mutual
Insurance Company (LMIC).
According to Moody's, the ratings were affirmed because the acquisition
represents 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.
Upon completion of the transaction, Liberty Mutual will become the
fifth largest property and casualty insurer in the United States.
Moody's added that these positive franchise-related developments
will, in its view, be somewhat offset over the near-to-intermediate
term by incrementally negative financial considerations driven by the
price and funding of the deal.
The rating agency noted that the change to a negative outlook is primarily
driven by the decrease in Liberty Mutual's financial flexibility
and capital adequacy measures that will result from the significant use
of internal resources to finance the acquisition, as well as by
increased leverage to tangible capital that will result by the generation
of substantial goodwill intangibles given the purchase price. 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, as well as through capital-raising initiatives,
the group's underwriting leverage will increase -- and its
risk-adjusted capital measures will decrease -- substantially
following the completion of the acquisition.
Although Moody's currently views Liberty Mutual, like many
of its competitors, as having total capital that is in excess of
current expectations for the group's rating level, the rating
agency believes that at least a portion of this excess capital will be
necessary to help insulate the company from the likely effects of the
current industry-wide down-cycle over the coming years.
Moody's believes that this concern is somewhat tempered by its view
that SAFECO's operations have continued to maintain a strong level
of capital adequacy at the insurance subsidiaries, and that the
combined operation's risk-adjusted capital metrics should
benefit incrementally from a broader diversification of risk. With
respect to financial flexibility, Moody's noted that the proposed
funding for the acquisition, assuming LMGI's issuance of up
to $1.5 billion of hybrid securities and debt, will
result in a heightened financial leverage profile relative to tangible
capital. Moody's noted that although it does not consider
LMGI's pro forma 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 -- or failure to raise
capital externally having significant equity-like character in
a timely manner -- would likely lead to a downgrade of LMIC's
and LMGI's long-term ratings. Consequently,
Moody's views Liberty Mutual's financial metrics, pro
forma for the pending acquisition and inclusive of the company's
plan to raise external capital, to be at the limits for expectations
at the current rating level with respect to both capital adequacy and
Moody's also noted other general risks associated with the pending
acquisition and integrating the acquired operations. Specifically,
the premium being paid relative to SAFECO's prior market value and
book value per share raises questions about future growth rates and expense
efficiencies that may or may not be achievable over the intermediate term,
given prevailing industrywide cycle trends.
Finally, 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 the expected coverage by Liberty
Corporate Services (LCS) of LMGI's debt service requirements --
pro forma for acquisition-related capital raising -- as well
as any potential future debt servicing costs will likely be reduced,
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 outlooks changed
to negative, from stable:
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;
[Ohio Casualty Corporation's shelf registration has been withdrawn,
as have its provisional ratings for senior unsecured debt at (P)Baa2,
subordinated debt at (P)Baa3, and preferred stock at (P)Ba1;
for the same reason, the provisional ratings of the Ohio Casualty
Capital Trusts I and II for preferred securities at (P)Baa3 have also
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).
Moody's most recent rating action on Liberty Mutual was on May 7,
2007, when the rating agency upgraded Liberty Mutual Group Inc.'s
non-guaranteed long-term debt and confirmed its other ratings
on the company 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 full year 2007, the
group reported net earned premiums of $21.9 billion and
net income of $1.5 billion. As of December 31,
2007, LMGI reported consolidated GAAP assets of $94.7
billion and policyholders' equity of $12.4 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.
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service