Rating Roundup: Liberty/Safeco, CAPCO, Service

Fitch Ratings has downgraded the long-term Issuer Default Ratings (IDRs) and Insurer Financial Strength (IFS) ratings of Liberty Mutual Group, Inc. (LMG) and Safeco Corp. (SAF) as follows: LMG–Long-term IDR to ‘BBB’ from ‘BBB+’; –IFS to ‘A-‘ from ‘A’. SAF–IDR to ‘BBB’ from ‘A+’; –IFS to ‘A-‘ from ‘AA’. The Rating Outlook is Negative. Fitch has also removed LMG’s and SAF’s ratings from Rating Watch Negative. “Fitch’s rating actions follows today’s close of LMG’s acquisition of SAF for $6.2 billion in cash,” said the bulletin. “The actions reflect Fitch’s concerns about the post-acquisition capitalization of LMG’s and SAF’s operating companies, integration and execution risk derived from the acquisition, first half 2008 premium growth that Fitch views as generally higher than that of peers, and moderately higher consolidated financial leverage resulting from financing the transaction. Fitch’s understanding is that LMG financed the transaction with $5 billion of internal funds; much of which the agency believes was, or will ultimately be, funded by liquidating assets at operating company subsidiaries, and $1.2 billion of external funds which was raised when LMG completed a debt offering in May 2008.” Fitch said its “initial pro forma analysis indicates that combined LMG and SAF entities’ Prism score (a key component of Fitch’s assessment of capital adequacy) is in the ‘A-‘/ ‘BBB+’ range. Key factors impacting this analysis are the effect of anticipated sale of LMG operating company invested assets to fund the acquisition and the relative size of the two organizations, both from a capital and premium base perspective. Additionally, while the combined entities’ pro-forma Prism score benefited from enhanced diversification, the effect of the invested asset sales more than offset the enhanced diversification benefit.”

Standard & Poor’s Ratings Services has placed its ‘A+’ counterparty credit and financial strength ratings on Customer Asset Protection Co. (CAPCO) on CreditWatch with negative implications. S&P said the “rating action follows the announcement by Lehman Brothers Holdings Inc. (Lehman) that it filed a petition under Chapter 11 of the U.S. bankruptcy code. However, the decision to place the ratings on CAPCO on CreditWatch reflects other concerns besides the challenges confronting Lehman.” S&P noted that it had revised its outlook on CAPCO to negative on March 26, 2008, “because of the potential for deterioration in the credit quality and risk-management capabilities of CAPCO’s members.” The rating agency noted that “CAPCO provides excess SIPC (Securities Investors Protection Corp.) coverage for its members, which are broker/dealers. Broker/dealers are regulated entities, where customer assets are required to be segregated from the firm’s assets and may not be used in the ongoing business of the firm or affected by a broker/dealer’s own trading losses or own subprime-related losses.” Credit analyst James Brender explained: “Lehman’s bankruptcy filing by itself will not create an excess SIPC claim.” S&P also noted that SIPC has announced “that it appears all customer cash, stocks, and other securities are accounted for, and SIPC does not anticipate initiating a liquidation proceeding against Lehman’s U.S broker/dealers. Lehman is the holding company for three broker dealers that are members of CAPCO. None of those brokers have filed for bankruptcy protection, but Lehman Brothers International (Europe) was placed under administration by its regulator.”

A.M. Best Co. has upgraded the financial strength rating to ‘A-‘ (Excellent) from ‘B++’ (Good) and issuer credit rating to “a-” from “bbb+” of New Jersey-based The Service Insurance Company (SIC), and has revised the outlook on the ratings to stable from positive.” Best said the “rating upgrades reflect SIC’s excellent risk-adjusted capitalization, improving operating profitability and conservative balance sheet. The ratings also reflect SIC’s niche surety underwriting expertise, successful expansion into a neighboring state and management’s conservative stance with regard to attaining personal and spousal indemnity and the utilization of collateral when appropriate. Partially offsetting these strengths are SIC’s narrow product and geographic spread of risk and its reliance on third-party reinsurance.”