S&P Affirms Liberty Mutual Group’s Ratings; Outlook Revised to Stable

December 6, 2012

Standard & Poor’s Rating Services has affirmed its ‘BBB-‘ counterparty credit and senior debt ratings on Liberty Mutual Group Inc. as well as its ‘A-‘ counterparty credit and financial strength ratings on Liberty’s operating companies. At the same time, S&P revised its outlook for the ratings to stable from positive.

“The revised outlook reflects our view that Liberty still needs significant work to improve its commercial insurance segment performance, particularly in workers’ compensation, which has hurt overall operating results,” explained credit analyst Tracy Dolin.

S&P noted that for the first nine months of 2012, “Liberty’s commercial insurance segment produced a combined ratio (excluding catastrophes and prior-year development) of 107.0 percent compared with 106.8 percent during the same period in 2011. We recognize that management’s strategies to improve performance within commercial lines, including enhanced use of predictive modeling, increasing rates significantly, allowing retentions to drop on underperforming accounts, and expanding its domestic personal and international insurance businesses.”

S&P also said it views “the declining proportion of workers’ compensation premiums relative to the overall book as a significant step in the right direction,” which it expects will “comprise about 11 percent of net premiums written in 2012, down from 18.5 percent in 2008.”

Nonetheless, S&P added that it expects “Liberty’s reserve profile to change more gradually. Accordingly, we expect workers’ compensation to represent more than 30 percent of the company’s total reserves, which still is above industry averages, and still poses some risks in terms of potential reserve volatility during the next few years.”

S&P explained that the “ratings affirmation reflects Liberty’s leading position in the U.S. property/casualty insurance market and selected international markets. The ratings also reflect the group’s strong and well-diversified business mix by product and geographic region. Liberty benefits from strong investments and very strong liquidity, as well as favorable expense differentiation.”

As partial offsetting factors S&P cited “Liberty’s weak underwriting results in commercial lines (mainly related to workers’ compensation), susceptibility to potential prior-year adverse reserve development, and its limited financial flexibility stemming from its relatively low fixed-charge coverage.”

The report also, indicated that as the company shifts its business allocation, S&P expects “its prospective earnings to become more diversified. We anticipate that this will support better operating performance,” S&P said. “Nonetheless, it may take a few years for the reserve profile to change. In the interim, the company remains susceptible to prior-year reserve development, particularly in workers’ compensation.

“We could raise the ratings during the next 24 months if Liberty’s performance compares favorably to the industry overall and if management’s efforts to improve commercial operations (particularly workers’ compensation) gain momentum.

“We also expect Liberty to continue to enhance its risk management practices as its risk profile changes, maintain its strong competitive position, and demonstrate capital adequacy above the rating level.

However, S&P also said: “We could lower the ratings during the next 24 months 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); if its workers’ compensation line performs worse than the industry and peers; if its strong enterprise risk management capabilities deteriorate; if material adverse reserve development ensues; or if its capital adequacy declines below the rating level.”

Source: Standard & Poor’s

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