Fitch Affirms FSR on Liberty Mutual

July 19, 2005

Fitch Ratings has affirmed the ‘A-‘ insurer financial strength ratings on the members of the Liberty Mutual Inter-company Pool (Liberty Mutual Pool) and has revised the Rating Outlook on pool members to Stable from Negative. Additionally, Fitch has assigned the following ratings:

— Peerless Insurance Company Inter-company Pool (Peerless Pool) members rated ‘A-‘ with a Stable Rating Outlook.

Liberty Mutual Group Inc. (LMG) is rated as follows with a Stable Rating Outlook:

— Long-term rating ‘BBB-‘;

— Senior unsecured notes ‘BBB-‘;

— $600 million commercial paper program ‘F2’.

Additionally, Fitch has upgraded the ratings on Liberty Mutual Insurance Company’s (LMIC) surplus notes to ‘BBB’ from ‘BBB-‘ and has affirmed and subsequently withdrawn the ‘BBB’ long-term and ‘F2′ short-term ratings on Liberty Mutual Capital Corporation since that entity has been merged into LMG.

Fitch’s decision to revise the Rating Outlook on Liberty Mutual Pool reflects recent improvements in the entity’s profitability and risk-based capitalization. Additionally, the revision reflects Fitch’s heightened comfort with the overall organization’s loss reserve adequacy on its ongoing business.

Fitch’s upgrade of its ratings on LMIC’s surplus notes reflects a revision in the notching between Liberty Mutual Pool’s and Peerless Pool’s insurer financial strength ratings and Fitch’s ratings on the overall organization’s various debt instruments.

LMG’s profitability has improved in recent years due to modest improvements in underwriting results and strong operating cash flow that has boosted investment income. The company’s risk-based capital ratio and operating leverage ratios have improved in recent years due in large part to the company’s improving profitability.

Despite these improvements, Fitch continues to believe that LMG’s underwriting results continue to lag those of the overall industry and those of peer companies with similarly strong competitive positions. Additionally, Fitch continues to believe that the quality of LMIC’s statutory capital is adversely affected by the company’s use of retroactive reinsurance.

Fitch believes that LMG is exposed to potentially unfavorable reserve development, primarily asbestos-related development. At year-end 2004, the company’s net asbestos reserve survival ratio was only 6.5 times (x), compared with a 10.4x average for a proxy group of companies with significant asbestos exposure and Fitch’s adequacy guideline survival ratio of 17.5x. Fitch estimates the after-tax effect on capital of additional reserves required for LMG’s year-end 2004 survival ratios to equate to 10.4x and 17.5x at $430 million and $1.2 billion, respectively.

LMG utilizes a moderate amount of financial leverage at March 31, 2005, its ratio of debt to capital (GAAP basis) was approximately 24%. LMG’s subsidiaries’ can pay $1.0 billion of dividends in 2005, or approximately 9.8x Fitch’s estimate of the annual cash required to fund the company’s interest payments.

Operating earnings-based interest coverage has improved in recent years, reaching 10.4x in the first quarter 2005. LMG’s operating earnings-based coverage has been in a range of 4x-7x in recent years, a range that Fitch believes is sustainable over the near term.

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