Fitch: Liberty Mutual's Ratings Unaffected by Reinsurance Agreement with NICO

Liberty Mutual Group's (Liberty Mutual) recently announced adverse development cover with National Indemnity Company (NICO) does not affect the ratings for the company and its subsidiaries, according to Fitch Ratings.

The transaction, which includes Liberty Mutual's U.S. workers compensation, asbestos and environmental (A&E) liabilities, does not affect Liberty Mutual's 'A-' Insurer Financial Strength (IFS) rating and 'BBB-' senior debt issued by Liberty Mutual Group, Inc. The Rating Outlook remains Stable.

Liberty Mutual announced on July 17, 2014 an adverse development cover to transfer up to $6.5 billion of U.S. workers compensation (prior to Jan. 1, 2014) and A&E liabilities (prior to Jan. 1, 2005) to NICO, above an attachment point of $12.5 billion of combined aggregate reserves. Liberty Mutual will pay NICO a reinsurance premium of $3.0 billion for the cover.

Under the cover, Liberty Mutual will cede approximately $3.3 billion of existing liabilities on a retroactive basis, with NICO then providing approximately $3.2 billion of additional aggregate adverse development coverage. Under the agreement, NICO will assume management responsibility for claim settlements related to A&E, while Liberty mutual will continue to manage all workers compensation claims.

The transaction will result in a pre-tax charge for Liberty Mutual of approximately $130 million in third quarter 2014, and will cost Liberty Mutual future lost investment income on the $3.0 billion of ceded premiums. However, the transaction will favorably reduce potential accounting earnings volatility from any future adverse U.S. workers' compensation and A&E reserve development.

The loss reserve cession modestly reduces Liberty Mutual's operating leverage, reducing the Net Leverage ratio from 6.6x at yearend 2013, to approximately 6.5x on a pro-forma basis.

In addition, Fitch conducted a pro-forma analysis of the impact of the transaction on its proprietary capital model, Prism. In its pro-forma analysis, Fitch reduced loss reserve exposures by the amount of the ceded reserves, reduced the reserve volatility factor for the workers compensation line, and removed target capital for A&E exposures. Liberty Mutual's pro-forma Prism score remained at 'Adequate', but the threshold at which Liberty Mutual exceeded the minimum target capital for 'Adequate' improved slightly from 122% to 127%.

Ultimately, Fitch notes that while the NICO transaction offers certain benefits, the degree of any improvement does not meet rating trigger thresholds for an upgrade as described in the last rating action commentary published April 8, 2014.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

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