Liberty Mutual Lowered

Fitch Ratings lowered its insurer financial strength ratings on companies participating in the Liberty Mutual inter-company pool to “A-” from “A” and its rating on Liberty Mutual Insurance Co.’s surplus notes to “BBB-” from “BBB+.” In addition, Fitch has lowered its long-term issuer and senior debt ratings on Liberty Mutual Capital Corp. to “BBB” from “A-.” The rating on its commercial paper is unchanged at “F2.” The rating outlook is negative.

The rating action is based on concerns as to the quality of the company’s reported surplus, as well as concerns about Liberty Mutual’s reserve adequacy for asbestos related claims and for its workers’ compensation and general liability lines of business.

On a group basis at year-end 2002, Liberty Mutual reported statutory surplus of $5.2 billion. This included $1.2 billion of special surplus funds from retroactive reinsurance contracts. Under these contracts the company ceded $2.1 billion of reserves and paid $940 million in premiums. Though Liberty Mutual’s retroactive reinsurance contracts do appear to transfer risk with respect to future reserve development, Fitch believes that the contracts also include a financing mechanism that will result in a material decline in future investment income.

Liberty Mutual’s reported year-end 2002 surplus included $1.2 billion of surplus notes and Fitch considers the company’s GAAP basis debt-to-capital ratio (excluding FAS 115) of approximately 25 percent is comparable to broader industry averages and peers.

The negative rating outlook reflects Fitch’s belief that Liberty Mutual remains potentially exposed to adverse reserve development in workers’ compensation and general liability lines, and to adverse development from asbestos related claims. Fitch recognizes that a portion of non-asbestos-related adverse development could accrue to the retroactive reinsurance contracts.