A.M. Best Downgrades Ratings for Liberty Mutual

March 11, 2003

A.M. Best Co. has downgraded the financial strength rating to A (Excellent) from A+ (Superior) of Liberty Mutual Insurance Companies (Liberty Mutual) (Boston).

A.M. Best has also downgraded the financial strength rating to A (Excellent) from A+ (Superior) of Liberty Northwest Group (Portland, Ore.). The financial strength rating of A (Excellent) of Liberty Insurance Holdings (Keene, N.H.) has been affirmed. Additionally, A.M. Best has assigned an “a-” rating for senior debt issued by Liberty Mutual Capital Corporation and a “bbb+” rating for surplus notes issued by Liberty Mutual Insurance Company. All of these ratings have a negative outlook.

The rating actions reflect Liberty Mutual’s deterioration in capitalization and, despite significant improvement in 2002, weak operating returns in recent years. Statutory surplus has declined considerably over the last few years, largely driven by unrealized losses from the bearish equity markets; adverse loss reserve development related to the rising medical inflation and increased asbestos claim trends affecting the industry; and in 2001, the impact of the World Trade Center catastrophe. Given the reserve charges, the group’s operating returns have been below historical profitability levels over the same time frame.

A.M. Best continues to have concerns regarding reserve adequacy, particularly on older workers’ compensation and asbestos claims and the potential for adverse development to dampen underwriting profitability going forward. Capitalization remains exposed to potential unrealized investment losses or adverse loss reserve development, which could lead to downward rating pressure. Accordingly, the rating outlook is negative at this time.

Due to the increased diversification of Liberty Mutual’s operations and hard market conditions, A.M. Best does anticipate that the group’s current business will prove to be more profitable over the next few years. With the strong premium rate increases across all lines in 2002, cash flow has also improved considerably across all business units, and policyholder retention remains strong.

Additionally, while reported statutory surplus has declined, it does not reflect approximately $1.1 billion of unrealized investment gains on the group’s investment portfolio of fixed income securities. However, this is considered in A.M. Best’s evaluation of capitalization.

As the nation’s ninth-largest private passenger automobile insurance writer, the largest private-sector workers’ compensation writer and a significant international writer, Liberty Mutual maintains a highly diversified franchise, which is enhanced by its well-regarded service reputation, strong customer retention and multi-channel distribution strategy. In addition, Liberty Mutual’s risk management services and strategic alliances with managed care networks provide a significant competitive advantage and a superior market profile.

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