Rating Firms Like Liberty's Proposed Ohio Casualty Deal

Rating firms gave a tentative stamp of approval to last week's news that Liberty Mutual planned to purchase Ohio Casualty Corp. for $2.7 billion.

Liberty Mutual said it agreed to pay cash to acquire OCAS common stock for $44 a share, take the firm private, and assume responsibility for repayment of OCAS outstanding debt.

Moody's said it was considering OCAS for a positive upgrade, while Standard & Poor's Ratings Services said it had placed OCAS on CreditWatch, but with positive implications.

Mark Rouck, an analyst at Fitch Ratings in New York, said his company has “affirmed” the ratings of Boston-based Liberty Mutual, which is a private company, but “revised” its rating outlook from positive to stable.

“As we look at it, Liberty has been an active acquirer,” he said, adding that his firm believes the insurer's “underwriting leverage will go up and financial leverage could go up moderately on a temporary basis.”

“From a strategic sense, the transaction makes sense and is a good fit with the agency markets segment of Liberty Mutual,” he concluded.

Moody's said it placed the debt ratings (senior at Baa3) of OCAS and the A3 insurance financial strength ratings of its operating subsidiaries “on review for possible upgrade.”

S&P said that when the deal closes, it expects to end its credit watch and raise financial strength ratings one notch to “A,” aligning the OCAS ratings with those of Liberty Mutual.

Moody's noted that OCAS's common stock ratings had been on positive outlook prior its latest rating action. It gives Liberty Mutual a financial strength rating of A2, a long-term issuer rating of Baa1, and surplus notes rated Baa2, all with a stable outlook.

In its upcoming review, Moody's said it will focus on several items, including Liberty Mutual's plans for incorporating and integrating OCAS within its organization and additional operational flexibility, if any, provided to OCAS as a result of the deal.

Moody's also said it will look at what resources of Liberty Mutual will be available to OCAS in times of stress, and the collective credit profile of any Liberty Mutual subsidiaries with which it is pooled.

Moody's said its current ratings on OCAS reflect:

o The group's established regional presence, particularly in niche markets for contractors.

o Solid risk-adjusted capitalization due to good reserve strength and historically modest exposure to peak natural catastrophe perils.

o Lower debt leverage than similarly rated peers.

o Ample provisions for liquidity.

It said these credit strengths are tempered by the following factors:

o A relatively high expense structure, which makes it difficult for the company to compete with larger competitors on price alone.

o Weak product strength in its personal lines offerings.

o Potential exposure to litigiousness in the construction industry.

o Persistently unprofitable workers' compensation business.

Standard & Poor's credit analyst Taoufik Gharib noted the purchase price for OCAS is a 32 percent premium over OCAS's May 4 closing price (the last benchmark before the deal was announced) and about 1.7-times OCAS's book value.

OCAS will become part of Liberty Mutual's Agency Markets group–one of four primary business units within Liberty Mutual. OCAS will increase the direct premium volume of Agency Markets by about 25 percent to $7.5 billion.

Agency Markets contributed 28 percent of Liberty Mutual's 2006 net premiums written of $20.6 billion.

OCAS's 2006 net premium volume of $1.4 billion was about 7 percent of that of Liberty Mutual, S&P noted.

“Liberty Mutual has an established record of successfully integrating acquired companies, and our expectation is that OCAS will prove no different,” Mr. Gharib added.

S&P said it believes the deal will benefit OCAS because it will become part of a significantly larger enterprise that currently has a stronger business and financial profile.