CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed Liberty Mutual Group Inc.'s (LMG) Issuer Default Rating (IDR) at 'BBB'. Additionally, Fitch has affirmed LMG's insurance operating subsidiaries' (collectively referred to as Liberty Mutual) Insurer Financial Strength (IFS) ratings at 'A-'. The Rating Outlook is revised to Stable from Positive. (A full list of rating actions follows at the end of this release.)

KEY RATING DRIVERS

LMG's ratings are based on the company's established and sustainable positions in its chosen markets, benefits derived from the company's multiple distribution channels, adequate capitalization and financial performance.

The revision in the Rating Outlook represents a lack of progress in several key credit metrics including combined ratio, capitalization and reserve development since the Positive Outlook was established in December 2011. The potential improvements Fitch anticipated at that time have not materialized. In addition, the company's score on Fitch's capital model Prism is somewhat low for the current rating, at 'Adequate'.

LMG's consolidated GAAP combined ratio for 2012 was 104.7%, an improvement over the previous year's 107.4%, but higher than the prior three year average of 100.4%. The results for the most recent years were negatively impacted by above average catastrophe losses. Hurricane Sandy caused about $1.1 billion in gross losses and $866 million in net losses on a pre-tax basis accounting for 2.7 pp for full year 2012 combined ratio.

Over the past several years, the unfavorable margin in underwriting results between Liberty Mutual and those of its peers have reduced particularly on an accident year basis. However, Liberty Mutual's underwriting results still lag those of higher rated peers.

Fitch believes that LMG's capital position provides an adequate cushion against the operational and financial risks the company faces, but that metrics are weaker than most companies of its size and scale. In 2012, LMG's ratio of GAAP net written premium to adjusted shareholders equity was considerably higher than peers at 2.0x., an increase from 1.9x in 2011. A modest decline in adjusted shareholders equity in 2012 was driven by an increase in the pension liability, and several one-time charges related to debt extinguishment and restructuring charges offset by core operating earnings and realized investment gains.

As noted, Liberty Mutual's Prism score was 'Adequate' based on year-end 2011 financials and Fitch anticipates that full year 2012 results will remain in the 'Adequate' range. In particular, Liberty Mutual's Prism results are adversely impacted by quality of capital and higher operating and reserve leverage and helped by material unrealized capital gains in the bond portfolio. These gains are included in Fitch's base Prism score. Fitch notes that improvement under this measure of capital could be a catalyst for future positive rating pressure. A Prism score of 'Adequate' is viewed as a 'BBB' ratings standard.

LMG's financial leverage ratio at Dec. 31, 2012 was 28.9%, up from 26.6% at the prior year-end. Fitch notes that while earnings based interest coverage improved to 2.2x at year end 2012 up from prior years 1.3x; however, both results remain below Fitch's long term expectation of 5.0x.

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Fitch Affirms Liberty Mutual's Ratings; Outlook Revised to Stable