Liberty Mutual’s recently-announced plans to buy Ironshore Inc. from Fosun International for $3 billion earned generally positive responses from A.M. Best, Standard & Poor’s and Fitch Ratings.

A.M. Best said that the credit ratings for Liberty Mutual and its subsidiaries remain unchanged following announcement of its acquisition plans.

“The modest size of the transaction along with Ironshore’s historical profitability, limits [Liberty Mutual’s] execution and integration risks associated with the pending acquisition,” A.M. Best said, also noting that “the proposed transaction will not be subjected to any financing conditions.”

Meanwhile, AM. Best played under review with developing implications the A [Excellent] financial strength rating and the “a” long-term issuer credit ratings for Ironshore Inc. and its subsidiaries, following the acquisition news.

“A.M. Best views this transaction positively for Ironshore’s ratings, as it will resolve any potential concerns associated with the credit profile and financial leverage position of its current parent, Fosun,” the ratings agency said. “However, should the transaction not be completed as planned and Ironshore remains exposed to these financial pressures, negative ratings actions could occur, depending on the exact circumstances surrounding the desolation of the pending acquisition agreement. ”

Fitch Seees More Benefits Than Risk

Following the M&A news, Fitch Ratings affirmed Liberty Mutual’s long-term issuer default rating at ‘BBB.’ Fitch also affirmed the insurer financial strength ratings of Liberty Mutual’s operating subsidiaries at ‘A-.’ Additionally, Fitch said the rating outlook for all ratings remains positive.

Fitch noted that the M&A deal “poses near-term execution and integration risks that are somewhat mitigated by [Liberty Mutual’s] past acquisition experience,” and that “Ironshore’s large market presence in U.S. excess & surplus (E&S) lines and history of positive underwriting performance will meaningfully expand [Liberty Mutual’s] specialty segment.”

Fitch said that Liberty’s position in the E&S market will jump from 29^th to 7^th on a pro forma basis once its acquisition of Ironshore closes, an estimate based on 2015 direct premiums written. It added that Ironshore’s five year-average combined ratio of 92.2 “should contribute to Liberty Mutual’s improving operating performance.”

On the other hand, Fitch said that Liberty Mutual’s “balance sheet quality and capital strength” should dip a bit due to a post-merger jump in goodwill and debt.

“Given the $3 billion purchase price, which equates to 1.45x Ironshore’s tangible book value at year-end 2016, the amount of goodwill generated will be roughly $930 million,” Fitch said. “This will add to [Liberty Mutual’s] already sizeable third quarter 2016 goodwill balance of $4.9 billion.”

Fitch added that financial leverage should increase modestly, due to its believe that “most of the purchase funds will come from the sale of certain holding company investments and current holding company cash.”

Fitch said it expects financial leverage to stay below 35 percent and then decline after the purchase. While the deal is “a slight credit negative” in the short term due to “execution and integration” challenges typical for most acquisitions, a successful post-M&A climate at the combined company and a focus on reducing financial leverage would help Liberty Mutual with its longer-term positive credit and rating prospects, Fitch said.

Standard & Poor’s Sees Both Companies Favorably

Standard & Poor’s affirmed its ‘BBB’ long-term counterparty credit rating for Liberty Mutual and assigned a stable outlook, following its announced plans to buy Ironshore. S&P has also affirmed its ‘BBB’ long-term counterparty credit ratings for Ironshore and its subsidiaries, and removed them from CreditWatch Negative.

One reason for the move: S&P agreed that Ironshore could boost Liberty Mutual’s position in the U.S. E&S market. Also, the ratings agency noted that Ironshore’s management team would remain with few departures expected, and that the deal would produce “moderate expense savings.”

“We view Ironshore as strategically important to Liberty Mutual group following closing,” Standard & Poor’s said. But S&P also noted that Ironshore’s status as a new subsidiary could create added risks for Liberty Mutual, particularly the first two years after acquisition, and considering the fact that Ironshore was acquired by Fosun less than two years ago.

Sources: A&M Best, Fitch Ratings, Standard & Poor’s