The financial strength rating of A (Excellent) and the issuer credit ratings (ICR) of “a” for members of Liberty Mutual Insurance Companies (Liberty Mutual), as well as Liberty Mutual Insurance Europe Limited (LMIE) (United Kingdom) and Liberty Life Assurance Company of Boston (Liberty Life) (Dover, NH) are unchanged following the consolidated net losses reported at their ultimate parent company, Liberty Mutual Holding Company Inc. (LMHC) in the third-quarter 2015, according to A.M. Best. Also, the ICRs of “bbb” of LMHC and Liberty Mutual Group, Inc. (LMGI), a wholly owned subsidiary of LMHC, are unchanged, as well as the issue ratings of LMGI. All the above named companies are domiciled in Boston, MA, except where specified. All of the above ratings were affirmed on Oct. 8, 2015.
In the third-quarter 2015, LMHC reported a GAAP consolidated net loss of $427 million largely attributable to its Venezuela subsidiaries, which comprise its largest non-U.S. country operations and accounted for approximately 5 percent of consolidated net writings in 2014. These Venezuela subsidiaries were deconsolidated and placed in discontinued status effective Sept. 30, 2015, and offered for sale. LMHC entered into a stock purchase agreement for sale of these operations on Nov. 29, 2015.
In recent years, the Venezuela subsidiaries operated under increasingly weak economic conditions, government restrictions and currency exchange issues that severely affected LMHC’s ability to control and manage this business. As a result of deconsolidating its Venezuela operations, LMHC recognized an impairment charge approximating $690 million in the third quarter 2015, while also recording $54 million of operating losses in the country. LMHC’s total equity was adversely impacted in the quarter by this charge, as well as sizable unrealized losses related to its fixed-income and equity portfolios, foreign currency translation and lower changes in valuations in the energy sector. While LMHC recorded a third quarter net loss due to these factors, its core property/casualty underwriting operations were solid, reporting a consolidated combined ratio of 95.6 for the quarter and 98.5 for the nine months, though some weakening in net writings (largely due to foreign exchange) and combined ratios was apparent in some of its international markets.
In anticipation of no further Venezuela losses and continued solid underwriting performance, A.M. Best expects that LMHC’s profitability will improve in fourth quarter 2015.
Total equity also will likely improve in the fourth quarter, though decline moderately for the year. Accordingly, the company’s consolidated risk-adjusted capitalization, while anticipated to decline in 2015, should remain supportive of its ratings. In addition, financial leverage and coverage ratios also should remain supportive of the company’s ratings.
The 2015 statutory underwriting and overall operating profitability at Liberty Mutual, the domestic property/casualty operations of LMHC, is anticipated to modestly exceed levels achieved in 2014. However, substantial realized and unrealized capital losses largely related its affiliated investments in the Venezuela operations, energy and other investments, as well other surplus adjustments, will likely result in a moderate decline in its surplus for the year.
In recent quarters, the potential volatility of Liberty Mutual’s higher-risk assets has been evidenced. These higher risk assets include non-investment grade bonds, common stocks, energy and metals & mining operations, as well as other Schedule BA investments, including significant affiliate international insurance companies operating in countries with weak economies and currencies. Some of these investments can potentially experience continued substantial realized and unrealized losses well into 2016. Accordingly, A.M. Best will be closely monitoring developments relating to such investments.
Source: A.M. Best Company
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