Press Release - MAY 30, 2019
AM Best Affirms Credit Ratings of Liberty Mutual Holding Company Inc. and Its Subsidiaries
FOR IMMEDIATE RELEASE
OLDWICK - MAY 30, 2019
Concurrently, AM Best has affirmed the Long-Term ICRs of “bbb” of LMHC and Liberty Mutual Group, Inc. (LMGI) (Boston, MA), a wholly owned subsidiary of LMHC, as well as the Long-Term Issue Credit Ratings (Long-Term IR) of LMGI. The outlook of these Credit Ratings (ratings) is stable. (See link below for a detailed listing of the companies and ratings.)
AM Best also has assigned a Long-Term IR of “bbb” to LMGI’s $1 billion of 4.569% senior unsecured notes due 2029. Proceeds were used to redeem $270 million of LMGI’s 5.00% senior unsecured notes due 2021, $277 million of its 4.95% senior unsecured notes due 2022 and $453 million of its 4.25% senior unsecured notes due 2023. Additionally, AM Best has assigned a Long-Term IR of “bb+” to LMGI’s EUR 500 million of 3.625% junior subordinated notes due 2059 (first call May 23, 2024). The outlook assigned to these ratings is stable.
LMGI used the net proceeds to repay the $300 million outstanding on its 6.324% (original coupon interest rate 7%) Series B junior subordinated notes due 2067 and to repurchase $196 million of LMGI’s $700 million of 7.80% Series A junior subordinated notes due 2087 (par value call date March 15, 2037), pursuant to LMGI’s tender offer for these securities, which expires June 6, 2019.
Assuming these transactions are completed as contemplated above, Liberty Mutual’s financial leverage will be unchanged while interest coverage should improve modestly due to the lower coupon rate on the new junior subordinated notes versus the existing coupon rates on the junior unsecured notes that LMGI plans to redeem. LMGI’s maturity profile also will be extended.
The FSR of A (Excellent) and the Long-Term ICR of “a” of Ironshore Europe Designated Activity Company, a member of Liberty Mutual, are unchanged by these actions and remain under review with negative implications. AM Best expects these ratings to remain under review until the completion of AM Best’s assessment following the company’s expected acquisition by Hamilton Insurance Group, Ltd.
The ratings of Liberty Mutual’s other members reflect the group’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile, and appropriate enterprise risk management (ERM).
The Liberty Mutual rating unit’s statutory surplus rose by approximately $2.3 billion, or 13%, in 2018, driven by near break-even underwriting results and solid investment income that more than offset $1.7 billion of unrealized investment losses during the period. These results reflect significant improvement from 2017, when surplus declined by roughly $2.1 billion, or 11%, driven by underwriting losses stemming from unusually high natural catastrophe activity during the period, as well as a write-down of deferred tax assets that was related to U.S. tax reform.
Liberty Mutual’s risk-adjusted capitalization has consistently exceeded the threshold for the very strong categorization, as measured by Best’s Capital Adequacy Ratio (BCAR). The group’s balance sheet benefits from the use of a comprehensive reinsurance program with highly rated reinsurers, as well as financial flexibility achieved through its ultimate parent, LMHC, which has access to the capital markets. Membership in the Federal Home Loan Bank affords additional borrowing capability. Loss reserve development was favorable in the 2018 calendar year but has occasionally been modestly unfavorable. Liberty Mutual maintains an elevated level of high-risk assets versus its personal insurance peers, which is driven by a high level of affiliated investment leverage.
AM Best views Liberty Mutual’s operating performance as adequate, characterized by relatively strong investment income and generally solid underwriting performance. While the group’s operating performance deteriorated sharply in 2017, largely due to catastrophe losses stemming from Hurricanes Harvey, Irma and Maria, as well as wildfires in the fourth quarter, the group’s results rebounded in 2018, as catastrophe losses returned to normalized levels. Despite occasional variability in underwriting performance, the Liberty Mutual rating unit has reported positive statutory operating income in seven of the past 10 calendar years. The usually solid results reflect the group’s sustainable competitive advantages achieved through multiple distribution capabilities, as well as the extensive utilization of technology and value-added services. Liberty Mutual’s underwriting performance, nevertheless, continues to trail the personal lines industry benchmark slightly when viewed on a five- and 10-year average basis.
Liberty Mutual’s business profile is viewed as a favorable rating factor. The group has a strong, diversified business profile that serves to protect its earnings stream. Liberty Mutual is engaged principally in
underwriting virtually all lines of personal and commercial property/casualty (P/C) business and ranks as the third-largest P/C insurance group in the United States, and fifth-largest P/C insurer globally, based on direct written premium at year-end 2018. Additionally, the group is highly diversified by product and geography with approximately 54% of net written premiums derived from personal lines and 46% derived from commercial lines. The broader Liberty enterprise currently operates in 30 countries and economies around the globe, although roughly 80% of its premium is generated in the U.S. Domestic direct written premiums (DWP) are diversified with the largest state, California, accounting for only 11% of DWP.
Liberty Mutual continues to benefit from its name recognition, customer service, technological advantages, strategic alliances in managed care, and breadth of its products and value-added services. Insurance products and services are distributed primarily through independent agents and a direct sales force. The direct sales force affords Liberty Mutual with a significant competitive expense advantage relative to its peers, while also enhancing the group’s overall franchise value.
Liberty Mutual’s risk management practices are appropriately comprehensive and sophisticated given the size and complexity of the organization and fully support the recommended ratings. The group has an extensive ERM program in place that is proven and demonstrable. Managing risk is a core competency of the group and integrated throughout its worldwide operations.
LMHC’s rating is supported by adjusted and unadjusted financial leverage that is consistently maintained below 30%, run rate interest coverage of between 4.0x-5.0x and solid liquidity measures.
A complete listing of Liberty Mutual Holding Company Inc.’s and its subsidiaries’ FSRs, Long-Term ICRs and Long-Term IRs also is available.
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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