Fitch Revises Liberty Mutual's Rating Outlook to Positive; Affirms Ratings
KEY RATING DRIVERS
The Positive Outlook is due to Liberty Mutual's gradual improvement in operating performance, which has historically lagged higher-rated peers. Liberty Mutual traditionally generates weaker underwriting results relative to peers; however, this differential has moderately narrowed in recent years. LMG is currently meeting several upgrade triggers. Fitch would likely upgrade the ratings given the following: positive operating performance continues, LMG's financial leverage ratio falls below 28%, and the company maintains a 'Strong' Prism score.
The affirmation of LMG's ratings are based on the company's established and sustainable positions in its chosen markets, benefits derived from the company's multiple distribution channels, adequate capitalization and financial performance.
Underwriting results have improved materially over the past three years, with LMG reporting a 98.9% consolidated GAAP combined ratio for the first half of 2016 and a 97.8% combined ratio for full-year 2015 and 2014. LMG also reported $110 million and $309 million of favorable reserve development in first half 2016 and for full-year 2015, respectively, benefiting from greatly reduced exposure to the poorly performing workers' compensation line of business.
LMG scored 'Strong' in Fitch's Prism model in 2014; however, the 2015 Prism score has not yet been finalized. Statutory policyholders' surplus fell 3% at year-end 2015 due largely to net unrealized capital losses, with the company also deconsolidating Venezuelan operations in third quarter 2015. Surplus grew 4% at first quarter 2016 over year-end 2015, and through the first six months of 2016 stated consolidated GAAP equity grew 10% to $21.2 billion driven primarily by unrealized bond gains.
LMG's reported net income through first half 2016 of $408 million, down from $530 million for the prior year period as realized investment losses and impairments on energy investments in the second quarter of 2016 totalled $220 million on a pretax basis. On a normalized basis excluding the investment losses, earnings would have been largely unchanged as catastrophe losses increased modestly to 8.6% of earned premiums as opposed to 8.1% in the prior year period. LMG also reported net realized losses of $39 million on derivative contracts and from the sale of energy-related fixed-income investments in the first quarter of 2016.
LMG's capital position provides an adequate cushion against the operational and financial risks the company faces, but capital ratios are less favorable relative to peers. LMG's ratio of GAAP net property/casualty written premium to shareholders equity was higher than peers at 1.8x at year end 2015, up slightly from the 1.7x reported for the prior year.
LMG's financial leverage ratio at June 30, 2016 was 29.9%, up from 28.2% at year-end 2015 due to the issuance of EUR750 million of senior notes during the second quarter of 2016. Fitch's expectation is that financial leverage will remain between 25% - 30%, and should drop modestly at the close of third quarter 2016 as $249 million of senior notes will come due in August 2016. GAAP fixed charge coverage was 4.4x at first half 2016, relatively unchanged from the 4.3x reported at first half 2015.
Key rating triggers that could lead to an upgrade include:
--Maintenance of improved performance in underwriting results with a combined ratio of approximately 100% or better on both an accident and calendar year basis;
--A sustained Prism score of 'Strong' category or higher.
--Financial leverage ratio sustained below 28%.
--Continued favorable reserve development and stability in reserve position.
Key rating triggers that could result in a return to Stable Outlook include:
--A return to accident year underwriting losses;
--Material weakening in the company's current reserve position, potentially indicated by a unfavorable reserve development greater than 5% of prior year equity;
--Failure to maintain a fixed charge coverage ratio of 5.0x;
--A large acquisition that unfavourably changes the operating profile or is financed in a manner that adds balance sheet risk through a financial leverage ratio of 35% or higher.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Liberty Mutual Group, Inc.
--Long-Term IDR at 'BBB'; Outlook revised to Positive from Stable;
--$249 million 6.7% notes due 2016 at 'BBB-';
--$600 million 5.0% notes due 2021 at 'BBB-';
--$750 million 4.95% notes due 2022 at 'BBB-';
--$1 billion 4.25% notes due 2023 at 'BBB-';
--EUR750 million 2.75% notes due 2026 at 'BBB-'
--$3 million 7.625% notes due 2028 at 'BBB-';
--$231 million 7% notes due 2034 at 'BBB-';
--$471 million 6.5% notes due 2035 at 'BBB-';
--$19 million 7.5% notes due 2036 at 'BBB-';
--$750 million 6.5% notes due 2042 at 'BBB-';
--$1,050 million 4.85% notes due 2044 at 'BBB-';
--$300 million 7% junior subordinated notes due 2067 at 'BB';
--$700 million 7.8% junior subordinated notes due 2087 at 'BB';
--$193 million 10.75% junior subordinated notes due 2088 at 'BB'.
Liberty Mutual Group, Inc.
--Short-Term IDR at 'F2';
--Commercial Paper at 'F2'.
Liberty Mutual Insurance Co.
--Long-Term IDR at 'BBB+'; Outlook revised to Positive from Stable;
--$140 million 8.5% surplus notes due 2025 at 'BBB';
--$227 million 7.875% surplus notes due 2026 at 'BBB';
--$260 million 7.697% surplus notes due 2097 at 'BBB'.
Ohio Casualty Corporation
--IDR at 'BBB'; Outlook revised to Positive from Stable;
Fitch has affirmed the IFS of the members of Liberty Mutual Second Amended and Restated Intercompany Reinsurance Agreement at 'A-' with a Positive Outlook:
--America First Insurance Company
--America First Lloyd's Insurance Company
--American Economy Insurance Company
--American Fire and Casualty Company
--American States Insurance Company
--American States Insurance Company of Texas
--American States Lloyds Insurance Company
--American States Preferred Insurance Company
--Colorado Casualty Ins. Company
--Consolidated Insurance Company
--Employers Insurance Company of Wausau
--Excelsior Insurance Company
--First National Insurance Company of America
--General Insurance Company of America
--Golden Eagle Ins. Corporation
--Hawkeye-Security Insurance Company
--Indiana Insurance Company
--Insurance Company of Illinois
--Liberty County Mutual Insurance Company
--Liberty Insurance Corporation
--Liberty Insurance Underwriters Inc.
--Liberty Lloyds of Texas Insurance Company
--Liberty Mutual Fire Insurance Company
--Liberty Mutual Insurance Company
--Liberty Mutual Mid-Atlantic Insurance Company
--Liberty Mutual Personal Insurance Company
--Liberty Personal Insurance Company
--Liberty Surplus Insurance Corporation
--LM General Insurance Company
--LM Insurance Corporation
--LM Property and Casualty Insurance Company
--Mid-American Fire & Casualty Company
--Montgomery Mutual Insurance Company
--National Insurance Association
--Ohio Security Insurance Company
--Peerless Indemnity Insurance Company
--Peerless Insurance Company
--Safeco Insurance Company of America
--Safeco Insurance Company of Illinois
--Safeco Insurance Company of Indiana
--Safeco Insurance Company of Oregon
--Safeco Lloyds Insurance Company
--Safeco National Insurance Company
--Safeco Surplus Lines Insurance Company
--The First Liberty Insurance Corporation
--The Midwestern Indemnity Company
--The Netherlands Insurance Company
--The Ohio Casualty Insurance Company
--Wausau Business Insurance Company
--Wausau General Insurance Company
--Wausau Underwriters Insurance Company
--West American Insurance Company
Fitch has affirmed the IFS of the following companies that participate in a 100% quota share at 'A-' with a Positive Outlook:
--Liberty Northwest Insurance Corporation
--North Pacific Insurance Company
--Oregon Automobile Insurance Company