November 30, 2012 / 9:05 PM / 5 years ago

TEXT - S&P revises Liberty Mutual Insurance Group outlook

Overview
     -- In our view it will take longer to turn around Liberty's commercial 
insurance business that has hurt overall operating performance. 
     -- We are affirming our ratings on Liberty and revising the outlook to 
stable from positive.
     -- Liberty's reserve profile will change more gradually than its business 
mix.

Rating Action
On Nov. 30, 2012, Standard & Poor's Rating Services affirmed its 'BBB-' 
counterparty credit and senior debt ratings on Liberty Mutual Group Inc. 
(Liberty) and affirmed its 'A-' counterparty credit and financial strength 
ratings on Liberty's operating companies. At the same time, we revised the 
outlook to stable from positive.

Rationale
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. 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% 
compared with 106.8% 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. We view the 
declining proportion of workers' compensation premiums relative to the overall 
book as a significant step in the right direction--we expect it to comprise 
about 11% of net premiums written in 2012, down from 18.5% in 2008. 
Nonetheless, we expect Liberty's reserve profile to change more gradually. 
Accordingly, we expect workers' compensation to represent more than 30% 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.

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. Partially 
mitigating these favorable factors are 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.

Outlook
The outlook is stable. As the company shifts its business allocation, we 
expect its prospective earnings to become more diversified. We anticipate that 
this will support better operating performance. 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 expect Liberty's overall net premium growth to be in the mid-single digits 
in 2012 and 2013, led by rate increases in its domestic personal lines and 
commercial lines, as well as new business generation within its international 
segment. This will be somewhat offset by lower renewal retention levels within 
Liberty's domestic commercial business as the company focuses on underwriting 
discipline, particularly improving profitability in its workers' compensation 
segment.

For 2012, we expect a GAAP (generally accepted accounting principles) 
calendar-year combined ratio of about 104%-105%, including catastrophe losses 
during the first nine months of 2012, losses from super storm Sandy, and a 
normal level of catastrophe losses for the remainder of the year. In full-year 
2012 and 2013 we expect a return on revenue of 4%-6%. In 2013, we expect a 
GAAP combined ratio of about 101%-104%, including four to five percentage 
points of normalized catastrophe losses. We also expect Liberty's capital 
adequacy to remain strong for the next couple of years. We expect consolidated 
financial leverage of about 25% to remain moderate and fixed-charge coverage 
of about 5x for full-year 2012.

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, 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% (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.

Related Criteria And Research
     -- For The U.S. Property/Casualty Industry, Making Workers' Compensation 
Profitable May Be Mission Impossible, Jan. 23, 2012
     -- Interactive Ratings Methodology, April 22, 2009

Ratings List
Ratings Affirmed

Liberty Mutual Group Inc.
 Senior Unsecured                       BBB-               
 Junior Subordinated                    BB                 
 Commercial Paper                       A-2                

Liberty Mutual Insurance Co.
 Subordinated                           BBB                

Ohio Casualty Corp.
 Senior Unsecured                       BBB-               

Ratings Affirmed; Outlook Action
                                        To                 From
Liberty Mutual Group Inc.
 Counterparty Credit Rating             BBB-/Stable/--     BBB-/Positive/--

America First Insurance Co.
West American Insurance Co.
Wausau Underwriters Insurance Co.
Wausau General Insurance Co.
Wausau Business Insurance Co.
Safeco National Insurance Co.
Safeco Insurance Co. of IL
Safeco Insurance Co. of America
Peerless Insurance Co.
Peerless Indemnity Insurance Co.
Ohio Security Insurance Co.
Ohio Casualty Insurance Co.
Netherlands Insurance Co.
Montgomery Mutual Insurance Co.
Midwestern Indemnity Co.
Liberty Surplus Insurance Corp.
Liberty Personal Insurance Co.
Liberty Mutual Mid-Atlantic Insurance Co.
Liberty Mutual Fire Insurance Co.
Liberty Insurance Underwriters Inc.
Liberty Insurance Corp.
LM Property & Casualty Insurance Co.
LM Insurance Corp.
Indiana Insurance Co.
Hawkeye-Security Insurance Co.
Golden Eagle Insurance Corp.
General Insurance Co. of America
First National Insurance Co. of America
First Liberty Insurance Corp.
Excelsior Insurance Co.
Employers Insurance Co. of Wausau
Consolidated Insurance Co.
Colorado Casualty Insurance Co.
Bridgefield Employers Insurance Co.
Bridgefield Casualty Insurance Co.
American States Preferred Insurance Co.
American States Insurance Co.
American Fire & Casualty Co.
American Economy Insurance Co.
 Counterparty Credit Rating
  Local Currency                        A-/Stable/--       A-/Positive/--

America First Insurance Co.
West American Insurance Co.
Wausau Underwriters Insurance Co.
Wausau General Insurance Co.
Wausau Business Insurance Co.
Safeco National Insurance Co.
Safeco Insurance Co. of IL
Safeco Insurance Co. of America
Peerless Insurance Co.
Peerless Indemnity Insurance Co.
Oregon Automobile Insurance Co.
Ohio Security Insurance Co.
Ohio Casualty Insurance Co.
North Pacific Insurance Co.
Netherlands Insurance Co.
Montgomery Mutual Insurance Co.
Midwestern Indemnity Co.
Liberty Surplus Insurance Corp.
Liberty Personal Insurance Co.
Liberty Northwest Insurance Corp.
Liberty Mutual Mid-Atlantic Insurance Co.
Liberty Mutual Insurance Europe Ltd.
Liberty Mutual Insurance Co.
Liberty Mutual Fire Insurance Co.
Liberty Life Assurance Co. of Boston
Liberty Insurance Underwriters Inc.
Liberty Insurance Corp.
LM Property & Casualty Insurance Co.
LM Insurance Corp.
Indiana Insurance Co.
Hawkeye-Security Insurance Co.
Golden Eagle Insurance Corp.
General Insurance Co. of America
First National Insurance Co. of America
First Liberty Insurance Corp.
Excelsior Insurance Co.
Employers Insurance Co. of Wausau
Consolidated Insurance Co.
Colorado Casualty Insurance Co.
Bridgefield Employers Insurance Co.
Bridgefield Casualty Insurance Co.
American States Preferred Insurance Co.
American States Insurance Co.
American Fire & Casualty Co.
American Economy Insurance Co.
 Financial Strength Rating
  Local Currency                        A-/Stable/--       A-/Positive/--

Liberty Mutual Insurance Co.
 Counterparty Credit Rating
  Local Currency                        A-/Stable/A-2      A-/Positive/A-2

Ohio Casualty Corp.
 Counterparty Credit Rating
  Local Currency                        BBB-/Stable/--     BBB-/Positive/--

Safeco Corp.
 Counterparty Credit Rating
  Local Currency                        BBB-/Stable/A-3    BBB-/Positive/A-3

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