Fitch Sees No Ratings Change, ‘Modest Benefit’ for Liberty Mutual in State Auto Buy

Fitch Ratings said it does not expect Liberty Mutual Holding Co. Inc.’s ratings to be impacted by its planned acquisition of State Auto Group for an estimated $1 billion of cash consideration.

“Given the relative size of the two organizations on a standalone basis, State Auto should provide a modest benefit to Liberty’s already favorable business profile,” the ratings from commented.

Fitch currently maintains an ‘A-‘ Insurer Financial Strength rating on Liberty Mutual and its operating subsidiaries. Liberty is the fifth-largest property/casualty (P/C) insurer in the U.S. based on direct premiums written. Fitch said it has a “strong competitive position in its diverse target markets,” maintaining a top-10 market position in nearly every major line of business in the U.S. non-life industry.

In addition to its significant presence in the U.S., the company writes a large amount of business around the world. On a consolidated basis, Liberty Mutual reported nearly $41 billion of net written premiums in 2020.

Ohio-based State Auto was the 48th largest U.S. P/C insurer in 2020. The acquisition will add State Auto’s approximately $2.3 billion of statutory premiums to Liberty Mutual, increasing its book of business by less than 6%.

Liberty offers products through multiple distribution channels, including through exclusive agents, on a direct basis as well through the independent agent channel. The acquisition of State Auto is expected to strengthen Liberty Mutual’s position in the independent agency distribution channel, through both retail agencies and wholesale brokers, making it the second largest carrier in the independent agency system upon closing in 2022.

Liberty Mutual today distributes Safeco Insurance personal auto, homeowners and specialty products, and Liberty Mutual small business insurance through more than 10,000 independent agencies countrywide. According to State Auto, it has approximately 3,400 independent agencies across 33 states.

Fitch said it expects Liberty Mutual to remain “well-diversified from a product, target market and distribution channel perspective.”

Liberty’s first quarter 2021 pro-forma financial leverage, was 28.1%, including the maturity of $330 million of debt that matured at June 1, 2021. Fitch’s expects Liberty’s financial leverage will remain below 30%. State Auto reported over $1.3 billion in statutory surplus at year end 2020 and maintained a modest amount of debt, with $122 million of Federal Home Loan Bank borrowings and subordinated notes outstanding, with the nearest maturity date of 2030.

Fitch said State Auto’s financial performance in recent years was “consistent with Liberty Mutual’s rating sensitivities” with a five-year average combined ratio of 104.5 and has a “generally favorable reserving history, reporting strong amounts of reserve releases in each of the past four calendar years.”

Fitch added that “successful integration of State Auto into Liberty Mutual’s operations, leading to modestly stronger overall operating performance and debt servicing capabilities could lead to future positive movements in the ratings” of Liberty Mutual.

The transaction has been approved by the State Auto Financial board of directors, as well as the State Auto Mutual board of directors.

The deal is expected to close in 2022, pending State Auto Mutual member approval, State Auto Financial shareholder approval, receipt of required regulatory approvals and other customary closing conditions.

“State Auto Group’s capabilities and product expertise are an ideal complement to Liberty Mutual’s domestic personal lines and small commercial business, and we welcome 2,000 talented associates to our family,” said Liberty Mutual Chairman and Chief Executive Officer David Long. said in announcing the proposed deal earlier this month.