Best Affirms Liberty Mutual’s Ratings; Ups Outlook

June 18, 2004

A.M. Best Co. announced that it has affirmed the financial strength ratings of “A” (Excellent) of Liberty Mutual Insurance Companies, Liberty Insurance Holdings of Keene, N.H. and Liberty Northwest Group of Portland, Ore., along with the “A-” (Excellent) of Liberty Life Assurance Company of Boston.

Best concurrently affirmed the debt ratings of “bbb” for senior notes of Liberty Mutual Group, Inc. (LMGI), “bbb+” for surplus notes of Liberty Mutual Insurance Company (LMIC) and “a-” for medium-term notes as well as AMB-1 for commercial paper of Liberty Mutual Capital Corporation.

Best also said it has revised the rating to stable from negative for all of Liberty’s P/C companies, and affirmed Liberty Life as stable.

“These rating affirmations reflect Liberty Mutual’s strong global franchise, improved capitalization and underwriting trends and successful risk mitigation and business diversification strategies,” said Best. “As the nation’s eighth-largest property/casualty insurer based on net premiums written, Liberty Mutual’s franchise benefits from its well-regarded service reputation, strong client relationships and effective, low-cost distribution network. The franchise was further enhanced by the acquisition of Prudential Financial, Inc.’s (Newark, NJ) personal lines operations in 2003.”

Best noted that “personal lines business continues to rank high among the group’s top performing underwriting segments. In addition, Liberty Mutual’s extensive unbundled service capabilities, risk management services and strategic alliances with managed care networks provide a significant competitive advantage and a superior market profile

“In 2003, Liberty Mutual’s capitalization improved considerably as net income, unrealized gains and contributed capital combined to increase policyholders’ surplus by almost $1.5 billion. In March 2004, LMGI, the direct parent of LMIC also raised $750 million of new debt, of which the proceeds were used in April 2004 to repay a portion of the group’s existing debt and make capital contributions to the insurance companies. Given the group’s business plan and growth expectations, A.M. Best believes capitalization will remain supportive of the group’s ratings through 2004, which is contemplated in the rating outlook.”

Best’s bulletin then discussed its ongoing “primary rating concern” -“the adequacy of Liberty Mutual’s loss reserves and the potential impact of further adverse loss reserve development on earnings.” It noted that “adverse development of prior accident year loss reserves continued to dampen earnings in 2003 following a comprehensive ‘ground-up’ review of the group’s exposure to asbestos claims that led to an increase in asbestos reserves of $331 million, including a $158 million allowance for uncollectible reinsurance.

“Adverse loss reserve development related to rising medical cost inflation and higher than expected utilization of medical services has impacted the group’s workers’ compensation results over the last few years as well.”

Best sounded a somewhat optimistic note, however, by pointing out that despite the reserve charges, “the group’s operating profitability continues to improve.” The rating agency also said it expects further improvements and has considered the adverse loss reserve developments in assessing Liberty’s capital adequacy.

“Separately, the rating affirmation of Liberty Life recognizes the strong capital guarantee provided by LMIC. Additionally, Liberty Life possesses a conservative investment portfolio consisting of some high credit quality investments. The company maintains fair liquidity and continues to receive both implicit and explicit support from LMIC, the announcement concluded.

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