Liberty Mutual Responds to S&P's Rating Downgrade to 'A-'

September 26, 2008

Boston-based Liberty Mutual Group is not pleased by Standard & Poor's announcement that it was lowering the Company's financial strength rating from 'A' to 'A-' with a stable outlook, following Liberty's completion of its acquisition of Safeco.

In a bulletin on its web site (www.libertymutualgroup.com), the Company called the action a "both a surprise and disservice to Liberty Mutual and our policyholders." The bulletin also noted that S&P's rating action was in "contradiction of prior announcements."

The reference was to S&P's reaction to the April announcement of the merger, when it had placed Liberty's ratings on CreditWatch with negative implications. According to the bulletin, S&P said in that announcement that it "expected to affirm Liberty's ratings if its capitalization was not materially below what is required for the current rating and were satisfied with Liberty's integration efforts of Safeco."

In addition, Liberty pointed out that S&P had indicated on July 23rd that it "expected to affirm Liberty's ratings 'if capital and earnings remain strong;' but could lower ratings, 'if pro forma capital and earnings were materially below the appropriate level for the rating.'"

Liberty then pointed out that its reported pre-tax operating income was nearly $900 million in the first six months of 2008, which was "approximately 3 percent higher than the same period in 2007. In addition, Liberty said its "pro forma capital adequacy using Standard & Poor's published criteria indicates Liberty's capital is adequate to maintain our 'A' rating."

Liberty also took a swipe at S&P by referring to recent criticisms of its actions, and those of Moody's Investors Service, for acting too precipitately (or conversely for being to slow) in the current financial crisis (mostly centered on AIG and Lehman Bros.). Citing the "turbulence and uncertainty in today's financial and credit markets," Liberty said it had "focused a negative spotlight" on S&P's rating process. "As a result," said the bulletin, "one would have hoped that now more than ever Standard & Poor's would have recognized its fiduciary obligation to act in a consistent, coherent and accurate manner. Unfortunately, they have not."

As an example Liberty cited S&P's use of "return on revenue" as a "meaningful measure of relative profitability, versus return on capital." The bulletin charged that this "ignores the relative risks associated with the different sources of revenue in different companies, and the capital required to support the revenues."

In addition Liberty cited S&P's reference to aggressive pricing, which, it said, "ignores the "Strong" rating from Standard and Poor's based upon its own detailed review of Liberty's underwriting risk management controls, issued only seven months ago. In fact, Liberty has produced a superior five-year average return on capital."

Liberty strongly maintained that it "has adequate capital for the 'A' rating and an Enterprise Risk Management process that is rated "Strong" (top 15 percent) based upon Standard and Poor's own detailed 'Level 2 Review.'" It also pointed out that S&P's "reference to a statutory combined ratio of 105 percent does not reflect international operations and, as a result, is not representative of worldwide underwriting results."

Liberty ended its response with a telling observation on the current state of the capital markets. It noted that S&P states "that reduced ability to access the capital markets is behind the downgrade, a criterion that in this environment would lead to downgrading the entire industry."

Source: Liberty Mutual Group