S&P Lowers Liberty Mutual to ‘A’; Removes from CreditWatch

May 5, 2003

Standard & Poor’s Ratings Services announced that it has lowered its counterparty credit and financial strength ratings on Boston-based Liberty Mutual Insurance Co. and related entities to ‘A’ from ‘A+’ and removed them from CreditWatch, where they were placed on April 4, 2003.

S&P also said it had lowered the rating on Liberty Mutual’s surplus notes to ‘BBB+’ from ‘A-‘ and affirmed the group’s ‘A-1’ commercial paper rating. It also indicated that the outlook on the ratings 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,” stated S&P credit analyst John Iten. The bulletin noted, however, that it had also considered an “improvement in market fundamentals, which is driving higher earnings that should translate into stronger capitalization for the organization.”

S&P said “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%. 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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