S&P Lowers Liberty Mutual Ratings, Removes from CreditWatch

December 21, 2001

Standard & Poor’s announced that it had lowered its rating on Liberty Mutual Insurance Co. and most of its operating entities – for the most part from double-‘A’-minus to single-‘A’-plus – and has removed them from CreditWatch.

The ratings were placed on CreditWatch on Sept. 20, 2001, because of concerns about the consolidated organization’s earnings and capital, partly related to Liberty’s potential exposure to losses stemming from the WTC disaster.

Standard & Poor’s indicated that it had recently met with Liberty’s management to review the assumptions and methodology used in assessing its WTC exposure and to discuss the progress the company has made in the areas of profitability and capital management.

The review led S&P to state that, “Liberty’s analysis of its potential WTC exposure is reasonably conservative, and a material revision above the $300 million after-tax estimate is unlikely. Conversely, the expected improvements in profitability have been slower than originally anticipated, largely because of adverse development in loss reserves. Standard & Poor’s believes these less-than-favorable trends in prior accident years’ loss reserves could retard some of the progress the company has made in the area of pricing. As a result, the company’s ability to generate an adequate return relative to the risks it assumes and, ultimately, improve the capital adequacy of the organization could take longer than expected.”

S&P noted the following factors in its analysis: Weaker-than-expected underwriting results; strong albeit weaker capitalization; the sale of LFC subsidiaries, including Keyport Life Insurance Co. and related entities and its asset management businesses for almost $2.1 billion in net proceeds, and its generally improving business prospects.

“Liberty is the eighth largest property/casualty insurer in the U.S., with close to two-thirds of its business coming from the sale of commercial insurance products, workers’ compensation being the primary commercial line of business,” said S&P’s announcement. “After several years of restructuring the organization, the company is in a position, assuming no remaining legacy issues (i.e., loss reserves), to capitalize on the improving rate environment in the U.S. commercial lines market. Standard & Poor’s believes it will take Liberty a few more years of favorable price increases before its can achieve a level of profitability consistent with the risk it assumes.”

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