Fitch Affirms Liberty Mutual's IFS Rating; Outlook Stable

Saratoga Investment

14/05/2020 02:27

(The following statement was released by the rating agency)


Fitch Ratings-Chicago-May 13: 

Fitch Ratings has affirmed Liberty Mutual Group, Inc.'s (LMG) insurance 
operating subsidiaries' Insurer Financial Strength (IFS) Ratings at 'A-' 
(Strong). The Outlook is Stable. A full list of rating actions follows at the 
end of this release.

Key Rating Drivers

The rating actions noted above are based on Fitch's current assessment of the 
impact of the coronavirus pandemic, including its economic impact, under a set 
of ratings assumptions described below. These assumptions were used by Fitch to 
develop pro forma financial metrics for LMG that Fitch compared with both 
ratings guidelines defined in its criteria, and relative to previously 
established rating sensitivities for LMG.

Fitch's rating affirmation reflects capitalization that Fitch views as adequate 
for the current rating category, but weaker than that of peers, which constrains 
the rating. The rating also reflects the company's underlying financial 
performance, which has generally improved relative to higher rated peers in 
recent years, and a favorable business profile as one of the largest and most 
diversified insurers in the U.S. property/casualty industry.

Fitch's overall assessment of capitalization and leverage under the pro forma 
analysis remains in line with previously established rating sensitivities. Pro 
forma 2019 GAAP equity declines of approximately 12.0% under our rating-case 
assumptions, with pro forma financial leverage increasing to 29.8%, up from 
27.0% in 2018, remains within our rating sensitivities.

LMG's capitalization is considered 'Strong', as measured by Fitch's Prism 
capital model, based on year-end 2018 results. Prism results for 2019 will be 
available in summer 2020. Rating case stresses are likely to bring pro forma 
2019 Prism results into the 'Adequate' category, but Fitch does not expect LMG's 
Prism score to deteriorate below a high level within 'Adequate', consistent with 
the current rating category.

LMG's financial flexibility is adequate for the rating and LMG has long 
displayed an ability to access the debt capital market to raise funds to finance 
operations and acquisitions. The company reported that, as of April 2020, it has 
access to over $6.0 billion of liquidity, not including $1.4 billion of cash on 
hand.

Underwriting performance has been generally stable in recent years. LMG expects 
a 1Q20 combined ratio of 97%, including some COVID-19 related losses. The 
company expects its 2Q20 and 3Q20 results to include a more meaningful impact 
from COVID-19. An increase in the reported combined ratio to break-even or a 
modest underwriting loss over the near-term would remain within current rating 
sensitivities.

Fitch views LMG's business profile as favorable, as it is a well-diversified 
company from a product, target market and distribution-channel perspective. LMG 
is the third-largest property/casualty insurer in the U.S. based on premiums 
written and maintains a strong competitive position in its diverse target 
markets. Companies with a favorable business profile can achieve ratings near 
the high-end of Fitch's rating scale; however, LMG is limited by its weak 
capitalization.

Key Assumptions

Assumptions for Coronavirus Impact (Rating Case)

Fitch used the following key assumptions, which are designed to identify areas 
of vulnerability, in support of the pro forma ratings analysis discussed above:

--Decline in key stock market indices by 35% relative to January 1, 2020.

--Increase in two-year cumulative high-yield bond default rate to 16%, applied 
to current non-investment grade assets, as well as 12% of 'BBB' assets.

--Both upward and downward pressure on interest rates, with spreads widening 
(including high yield by 400bps) coupled with notable declines in government 
rates.

--For the non-life and reinsurance sectors, a negative impact on the 
industry-level accident year loss ratio from coronavirus-related claims at 3.5 
percentage points (pp), partially offset by a favorable impact from the auto 
line averaging 1.5pp.

RATING SENSITIVITIES

The ratings remain sensitive to any material change in Fitch's rating case 
assumptions with respect to the coronavirus pandemic. Periodic updates to our 
assumptions are possible given the rapid pace of changes in government actions 
in response to the pandemic, and the pace with which new information is 
available on the medical aspects of the outbreak. An indication of how ratings 
would be expected to be impacted under a set of stress-case assumptions is 
included at the end of this section to help frame sensitivities to a severe 
downside scenario.

Factors that could, individually or collectively, lead to negative rating 
action/upgrade:

--A material adverse change in Fitch's ratings assumptions with respect to the 
coronavirus impact

--An accident-year combined ratio above 106% for a sustained period

--Prism score deteriorates and fails to remain comfortably within 'Adequate'

--Material weakening in the company's reserve position, potentially indicated by 
a unfavorable reserve development greater than 5% of prior-year equity

--Failure to maintain a fixed-charge coverage ratio of 5.0x

--A large acquisition that unfavorably changes the operating profile or is 
financed in a manner that adds balance-sheet risk, causing sustained financial 
leverage above 30%.

Factors that could, individually or collectively, lead to positive rating 
action/downgrade:

--A material positive change in Fitch's ratings assumptions with respect to the 
coronavirus impact

--Sustained accident-year combined ratio profitability

--A sustained Prism score of 'Strong' or higher

--Financial leverage ratio sustained below 28%

--Favorable reserve development and stability in reserve position

Stress Case Sensitivity Analysis

Fitch's stress case assumes a 60% stock market decline, two-year cumulative 
high-yield bond default rate of 22%, high-yield bond spreads widening by 600bps 
and more prolonged declines in government rates, heightened pressure on capital 
markets access, an adverse non-life industry-level loss ratio impact of 7pp for 
coronavirus claims, partially offset by a favorable 2pp for auto.

The implied rating impact under the stress case would be a downgrade by no more 
than one notch.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions issuers have a 
best-case rating upgrade scenario (defined as the 99th percentile of rating 
transitions, measured in a positive direction) of three notches over a 
three-year rating horizon; and a worst-case rating downgrade scenario (defined 
as the 99th percentile of rating transitions, measured in a negative direction) 
of four notches over three years. The complete span of best- and worst-case 
scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. 
Best- and worst-case scenario credit ratings are based on historical 
performance. For more information about the methodology used to determine 
sector-specific best- and worst-case scenario credit ratings, visit 
https://www.fitchratings.com/site/re/10111579.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the 
Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance, if present, is a score of 3. This 
means ESG issues are credit-neutral or have only a minimal credit impact on the 
entity(ies), either due to their nature or to the way in which they are being 
managed by the entity(ies). For more information on Fitch's ESG Relevance 
Scores, visit www.fitchratings.com/esg.

Ohio Security Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Mutual Mid-Atlantic Insurance Company; Insurer Financial Strength; 
Affirmed; A-; RO:Sta

LM General Insurance Company; Insurer Financial Strength; Affirmed; A-; RO:Sta

Wausau General Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

SAFECO Insurance Company of America; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Wausau Business Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Wausau Underwriters Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

American Fire and Casualty Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Employers Insurance Company of Wausau; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Montgomery Mutual Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

West American Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Golden Eagle Insurance Corporation; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

LM Insurance Corporation; Insurer Financial Strength; Affirmed; A-; RO:Sta

First Liberty Insurance Corporation (The); Insurer Financial Strength; Affirmed; 
A-; RO:Sta

Peerless Insurance Company; Insurer Financial Strength; Affirmed; A-; RO:Sta

Colorado Casualty Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Insurance Underwriters Inc.; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

American States Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Safeco Insurance Company of Indiana; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Peerless Indemnity Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Safeco Lloyds Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

American States Lloyds Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

American States Insurance Company of Texas; Insurer Financial Strength; 
Affirmed; A-; RO:Sta

Insurance Company of Illinois; Insurer Financial Strength; Affirmed; A-; RO:Sta

LM Property and Casualty Insurance Company; Insurer Financial Strength; 
Affirmed; A-; RO:Sta

SAFECO National Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

SAFECO Surplus Lines Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

First National Insurance Company of America; Insurer Financial Strength; 
Affirmed; A-; RO:Sta

Liberty Mutual Personal Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

General Insurance Company of America; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

American States Preferred Insurance Company; Insurer Financial Strength; 
Affirmed; A-; RO:Sta

Indiana Insurance Company; Insurer Financial Strength; Affirmed; A-; RO:Sta

Netherlands Insurance Company (The); Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Lloyds of Texas Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

Liberty County Mutual Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

Liberty Northwest Insurance Corporation; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

Liberty Mutual Group, Inc.; Long Term Issuer Default Rating; Affirmed; BBB; 
RO:Sta

----senior unsecured; Long Term Rating; Affirmed; BBB-

----junior subordinated; Long Term Rating; Affirmed; BB

SAFECO Insurance Company of Illinois; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

North Pacific Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Mutual Finance Europe DAC

----senior unsecured; Long Term Rating; Affirmed; BBB-

American Economy Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Hawkeye-Security Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Oregon Automobile Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Excelsior Insurance Company; Insurer Financial Strength; Affirmed; A-; RO:Sta

Midwestern Indemnity Company (The); Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Personal Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Surplus Insurance Corporation; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Insurance Corporation; Insurer Financial Strength; Affirmed; A-; RO:Sta

Liberty Mutual Fire Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Liberty Mutual Insurance Company; Long Term Issuer Default Rating; Affirmed; 
BBB+; RO:Sta

; Insurer Financial Strength; Affirmed; A-; RO:Sta

----subordinated; Long Term Rating; Affirmed; BBB

National Insurance Association; Insurer Financial Strength; Affirmed; A-; RO:Sta

Ohio Casualty Insurance Company (The); Insurer Financial Strength; Affirmed; A-; 
RO:Sta

Mid-American Fire  Insurer Financial Strength; Affirmed; A-; RO:Sta

Consolidated Insurance Company; Insurer Financial Strength; Affirmed; A-; RO:Sta

Safeco Insurance Company of Oregon; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

America First Insurance Company; Insurer Financial Strength; Affirmed; A-; 
RO:Sta

America First Lloyd's Insurance Company; Insurer Financial Strength; Affirmed; 
A-; RO:Sta

Contacts: 

Primary Rating Analyst

Christopher Grimes, CFA

Director

+1 312 368 3263

Fitch Ratings, Inc.

One North Wacker Drive 

Chicago 60606

Primary Rating Analyst

Gerald Glombicki, CPA, ARM

Director

+1 312 606 2354

Fitch Ratings, Inc.

One North Wacker Drive 

Chicago 60606

Secondary Rating Analyst

Gerald Glombicki, CPA, ARM

Director

+1 312 606 2354

Secondary Rating Analyst

Christopher Grimes, CFA

Director

+1 312 368 3263

Committee Chairperson

Julie Burke, CFA, CPA

Managing Director

+1 312 368 3158

 

Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: 
elizabeth.fogerty@thefitchgroup.com; Hannah James, New York, Tel: +1 646 582 
4947, Email: hannah.james@thefitchgroup.com.

Additional information is available on www.fitchratings.com

Applicable Criteria 

Insurance Rating Criteria (pub. 02 Mar 2020) (including rating assumption 
sensitivity)

https://www.fitchratings.com/site/re/10112692

Applicable Model 

Numbers in parentheses accompanying applicable model(s) contain hyperlinks to 
criteria providing description of model(s).

Third-party Model

02 March 2020-https://www.fitchratings.com/site/re/969155

Prism U.S. Non-Life Insurance Capital Model, v1.2.1

1-https://www.fitchratings.com/site/re/969155

Reserve Adequacy and Volatility Estimator Model, v1.1.0

1-https://www.fitchratings.com/site/re/969155

Additional Disclosures 

Dodd-Frank Rating Information Disclosure Form 

https://www.fitchratings.com/site/dodd-frank-disclosure/10121051

Solicitation Status 

https://www.fitchratings.com/site/pr/10121051#solicitation

Endorsement Status

https://www.fitchratings.com/site/pr/10121051#endorsement_status

Endorsement Policy 

https://www.fitchratings.com/regulatory

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