S&P’s Cuts Liberty Mutual Ratings, Off Watch

May 5, 2003

Standard & Poor’s has lowered its counterparty credit and financial strength ratings on Boston-based Liberty Mutual Insurance Co. (Liberty Mutual) and related entities to ‘A’ from ‘A+’ and removed them from CreditWatch, where they were placed on April 4.
In addition, the rating on Liberty Mutual’s surplus notes was lowered to ‘BBB+’ from ‘A-‘ and the ‘A-1’ commercial paper rating was affirmed. The outlook is negative.

“The ratings actions reflect a significant deterioration in the company’s capital position in the past two years, weak operating results in recent years before 2002, and concerns about reserve adequacy including the potential increase in liability for asbestos exposure,” said Standard & Poor’s credit analyst John Iten. Also a consideration is the improvement in market fundamentals, which is driving higher earnings that should translate into stronger capitalization for the organization.

Liberty Mutual’s capital adequacy is expected to improve in 2003. Underwriting results should benefit from the improved pricing environment in virtually all lines in 2003, and into 2004. Standard & Poor’s expects that the statutory combined ratio will fall well below last year’s ratio of 108 percent. Improved earnings should bring capitalization back to a level more supportive of the ratings; however, if earnings expectations are not met and surplus does not improve as expected, the company would be vulnerable to another downgrade.

For this reason, the outlook is negative.

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