December 5, 2017

A.M. Best Assigns Debt Rating to Liberty Mutual Notes, Comments on NICO

Oldwick, NJ -(BusinessWire)- A.M. Best has assigned a debt rating of “bbb” to the $750 million 4.850% senior unsecured notes due 2044, issued by Liberty Mutual Group Inc. (LMGI) (Boston, MA). The outlook assigned is stable. The existing ratings of LMGI and its subsidiaries are unchanged.

LMGI intends to use the net proceeds to repay short-term financing in connection with the group’s (LMGI and its subsidiaries) purchase on July 17 of a combined aggregate adverse development cover from National Indemnity Company (NICO), a subsidiary of Berkshire Hathaway Inc. [NYSE: BRK.A and BRK.B].

A.M. Best expects LMGI’s unadjusted and adjusted debt-to-capital ratios (excluding Accumulated Other Comprehensive Income) to be only modestly higher than its ratios of 26% and 20%, respectively, at March 31, 2014, as a result of the notes offering. The company’s financial leverage and coverage ratios are within A.M. Best’s guidelines for LMGI’s current rating and are expected to remain so over the near term.

The NICO reinsurance transaction provides adverse development cover for substantially all of the group’s U.S. workers’ compensation and asbestos and environmental (A&E) liabilities. The cover attaches at approximately $12.5 billion of combined aggregate reserves, with an aggregate limit of $6.5 billion and sublimits of $3.1 billion for A&E liabilities and $4.507 billion for certain workers’ compensation liabilities. At the closing of the transaction, but effective as of January 1, 2014, the group ceded approximately $3.3 billion of existing liabilities to NICO under a retrospective reinsurance agreement. NICO is to provide approximately $3.2 billion of additional aggregate adverse development cover.

NICO has been given authority to handle claims for ceded A&E business subject to the group’ s oversight and control, while ceded workers’ compensation claims will continue to be handled by the group. The total consideration paid to NICO for the combined aggregate adverse reinsurance cover was approximately $3.0 billion. The reinsurance transaction will be accounted for as retroactive reinsurance in the group’s GAAP consolidated financial statements and results in a pretax loss of approximately $130 million, which will be included in third quarter 2014 results.

A.M. Best believes the reinsurance transaction is a positive for LMGI and its subsidiaries as it reduces the uncertainty of the group’s workers’ compensation and legacy A&E liabilities. A.M. Best views the transaction as providing economic benefit and likely enhancing the group’s risk-adjusted capitalization.

Source: BusinessWire

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