A.M. Best Says Liberty Mutual Ratings Remain Unchanged

May 23, 2003

A.M. Best Co. said the current financial strength and debt ratings of the Liberty Mutual Insurance Companies (Liberty Mutual) (Boston) remain unchanged following its announcement regarding the acquisition of Prudential Financial Inc.’s U.S. property/casualty operations in 47 states – excluding New Jersey, specialty auto and affinity businesses – for approximately $540 million.

Concurrently, A.M. Best has assigned an indicative rating of “bbb” to $413 million of seller notes to be issued by Liberty Mutual Group, Inc., the direct parent of Liberty Mutual Insurance Company, to Prudential Financial.

On March 7, 2003, A.M. Best downgraded Liberty Mutual’s financial strength rating to A (Excellent) from A+ (Superior). A.M. Best also assigned a senior debt rating of “a-” to Liberty Mutual’s medium term notes, an AMB-1 rating for commercial paper issued by Liberty Mutual Capital Corporation as well as a “bbb+” rating for surplus notes issued by Liberty Mutual Insurance Company.

The acquisition, which gives Liberty Mutual a potential $1.0 billion book of personal auto and homeowners renewals, is consistent with the group’s strategy to diversify its product offerings by efficiently expanding its personal lines segment. With a long-term distribution agreement in place, Liberty Mutual will also have access to Prudential Financial’s captive agency force.

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

However, in recent years, significant reserve charges have weakened overall capitalization and dampened earnings. A.M. Best continues to have concerns regarding reserve adequacy, particularly on older workers’ compensation claims and unfunded asbestos liabilities.

Stability of capitalization remains exposed to potential unrealized investment losses or adverse loss reserve development, which could lead to downward rating pressure. Accordingly, the outlook for all debt and property/casualty financial strength ratings remains negative.

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