Best Revises Liberty Mutual Holding and Subs Outlook to Stable

June 17, 2011

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength ratings (FSR) of ‘A’ (Excellent) and issuer credit ratings (ICR) of “a” of Liberty Mutual Insurance Companies and Peerless Insurance Company Pool and their members, as well as the UK-based Liberty Mutual Insurance Europe Limited (LMIE) and Liberty Life Assurance Company of Boston. All of the company’s are operating subsidiaries of the ultimate parent company, Liberty Mutual Holding Company Inc. (LMHC).

Best has also revised the outlook to stable from negative and affirmed the ICR of “bbb” for LMHC and Liberty Mutual Group, Inc. (LMGI), as well as all debt ratings of LMGI. In addition, Best has upgraded LMGI’s short-term debt rating to AMB-2 from AMB-3. Best also said it has withdrawn the ICR of “bbb” for The Ohio Casualty Corporation and Safeco Corporation at management’s request. All of the companies are domiciled in Boston, Mass., except where specified.

The ratings of Liberty Mutual reflect its “solid capitalization, favorable operating performance, dominant market profile and strong brand name recognition, as the group ranked was the third-largest insurer in the United States at year-end 2010 based on net premiums written,” Best explained.

The ratings further acknowledge the group’s “sustainable competitive advantages of its multiple distribution channels, active risk management of its catastrophe exposures and solid product and geographic diversification. Furthermore, Liberty Mutual’s enterprise risk management program has served as a competitive advantage in navigating through the financial, economic and catastrophic events of the past three years.”

As partial offsetting factors Best cited “its relatively high underwriting leverage measures and the modest deterioration in its operating results in recent years, driven largely by weakened underwriting results and lower investment gains.”

Best said the ratings of the PIC Pool “recognize its sound capitalization, favorable operating performance and strong regional market presence. The ratings further acknowledge the sustainable competitive advantages of the pool’s strong independent agency relationships, as well as management’s solid risk mitigation and geographic and product diversification strategies.

“The PIC Pool, which consists mainly of the Liberty Mutual Agency Corporation’s (LMAC) strategic business unit, provides the platform for Liberty Mutual to enhance its ongoing efforts to penetrate small commercial and personal markets through independent agents throughout the United States. The pool’s market presence has developed through a number of acquisitions, which have provided it with strong regional brand name recognition, market expertise, increased utilization of its independent agency force, as well as improved geographic spread and product diversification.”

Partial offsetting factors relevant to the PIC Pool include its “elevated underwriting leverage measures, a relatively high underwriting expense ratio and lower investment income in recent years. Furthermore, while policyholder surplus grew significantly in 2009 and the pool’s risk-adjusted capitalization improved considerably, surplus declined close to 30 percent in 2010, due to a $2.8 billion intercompany dividend payment to its parent, Liberty Mutual Insurance Company, prior to the postponed LMAC initial public offering.”

Best also noted that the ratings of Liberty Mutual and the PIC Pool “consider the financial flexibility provided by LMHC, which maintains financial leverage that is in line with its current ratings, as well as additional liquidity through its access to capital markets and lines of credit. Additionally, LMHC benefits from the solid operating performance of its global operations.

“The ratings of LMIE recognize its solid capitalization, strong operating performance and brand recognition achieved as a strategic member of the established global franchise led by its parent, Liberty Mutual Insurance Company.

“The ratings of Liberty Life acknowledge its established business profile in the individual and group markets, improved operating earnings and strong risk-adjusted capital position. Moreover, the ratings also reflect Liberty Mutual’s explicit support and its commitment to maintain favorable capital levels at Liberty Life.

Partially offsetting these positive rating factors include Liberty Life’s volatile operating earnings trends over the last few years and a belief that attaining profitability objectives in each of its businesses over the near term will be challenging, particularly given the competitive nature of the individual life and group disability income markets and the current low interest rate environment.”

A complete listing of Liberty Mutual Holding Company Inc. and its subsidiaries’ FSRs, ICRs and debt ratings is available.

Source: A.M. Best

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