S&P Affirms Liberty Mutual, Affiliates Ratings; Revises Outlook to Positive

October 7, 2011

Standard & Poor’s Ratings Services has revised its outlook on Liberty Mutual Group (LGMI, and the members of the Liberty Mutual Intercompany Pool, the Peerless Intercompany Pool, and other rated insurance affiliates (collectively, Liberty) to positive from stable.

S&P also affirmed its ‘BBB-‘ long-term counterparty credit and senior unsecured debt ratings and its ‘BB’ junior subordinated debt rating on LMGI, as well as its ‘A-‘ long-term counterparty credit and insurer financial strength ratings on Liberty, and its ‘BBB’ surplus notes rating on Liberty Mutual Insurance Co. In addition S&P affirmed the ‘A-2′ short-term counterparty credit and commercial paper ratings on LMGI.

“The outlook revision reflects our view that LMGI’s results improved in 2010, and that the first six months of 2011 performance compares favorably with peers’ and the P/C industry’s,” explained credit analyst Birgitte Arendal.

S&P also noted that “catastrophe volatility has reduced the industry’s overall operating results, and said it believes and expects Liberty’s “workers’ compensation book to exert moderate downward pressure on operating profitability. However, S&P also indicated that it expects “other lines of business to perform substantially better, with a combined ratio of less than 100 percent. Strong net investment income remains a significant source of earnings for Liberty.”

The rating affirmations “reflect our view of Liberty’s leading market presence in the U.S. and select international markets, and its well-diversified business mix by product and geographic region,” said the report. “The ratings also reflect our view of the group’s strong investments, very strong liquidity, and favorable expense differentiation.”

Concerning the positive outlook, S&P noted that “management has been shifting its business allocation, and its earnings streams are more diversified. We expect this to support better operating performance prospectively.”

S&P said the positive outlook reflects its “view that if Liberty continues to improve its operating performance during the next two years, including management’s efforts to improve workers’ compensation earnings, we could raise our holding company and operating company ratings by one notch.

“We also expect Liberty to perform similarly to the industry overall, and better excluding workers’ compensation, to continue to enhance its risk management and ECM practices, to maintain its strong competitive position, and demonstrate capital adequacy above the rating level.”

However, S&P also indicated that the ratings “could come under pressure if Liberty’s overall operating performance deteriorates significantly with a combined ratio of more than 110 percent, including three to four percentage points of normalized catastrophe losses, and workers’ compensation profitability declines with performance worse than the industry’s and peers’. In addition, if its strong enterprise risk management capabilities deteriorate, or if its capital adequacy declines below the rating level, we could lower the ratings.”

Source: Standard & Poor’s

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