S&P Raises Liberty Mutual’s Ratings; Outlook Revised to Stable on NICO Deal

July 21, 2014

Standard & Poor’s Ratings Services announced that it has raised its ratings on Liberty Mutual Insurance Co. to ‘A/A-1’ from ‘A-/A-2’, as well as its ratings on parent company Liberty Mutual Group Inc. to ‘BBB’ from ‘BBB-‘, and its ratings on all of the group’s other companies by one notch. At the same time S&P revised the outlook on all of the companies to stable from positive.

“Liberty Mutual has entered into an agreement with National Indemnity Co. (NICO), a subsidiary of Berkshire Hathaway Inc.),” S&P explained. Under the agreement, NICO will provide adverse development coverage for all of Liberty Mutual Insurance’s U.S. workers’ compensation and asbestos and environmental (A&E) liabilities, with an aggregate limit of $6.5 billion.

S&P noted: “At the closing–effective retroactively from Jan. 1, 2014–Liberty Mutual Insurance ceded about $3.3 billion of existing liabilities under a reinsurance agreement. NICO will provide roughly $3.2 billion of additional aggregate adverse development coverage. Liberty Mutual Insurance paid NICO consideration of about $3.0 billion and the reinsurance recoverable from NICO is fully collateralized.”

Credit analyst Tracy Dolin said: “In our view, this agreement covers Liberty Mutual’s potentially volatile U.S. A&E liabilities and largely mitigates potential risks from future adverse reserve developments. We also believe this will reduce potential earnings volatility and significantly lowers required capital per our capital model, improving our view of its capital and earnings profile.”

S&P said the stable outlook “reflects our expectation that Liberty Mutual will maintain at least ‘A’ capital adequacy per our capital model in 2014-2016. We also expect the group’s operating performance to be commensurate with the property/casualty industry averages. We do not expect any material adverse reserve development outside the scope of the ADC reference reserves (such as other lines of business or upcoming accident years).”

Dolin said, however, that we could “lower the ratings over the next 12 to 24 months if, contrary to our expectations, capital adequacy declines below the ‘A’ level, management does not execute its stated strategic initiatives, or the group’s enterprise risk management framework does not develop in tandem with its risk profile. We believe there is limited upside potential for any rating upgrade over the next 12 to 24 months in light of our view of the group’s prospective operating performance relative to higher rated peers.”

Source: Standard & Poor’s

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