S&P said it is concerned about the "significant decline" in the carrier's "capitalization in 2002, reserve adequacy and financial flexibility." Liberty offers auto, home, life and business insurance.

S&P said Liberty's consolidated surplus declined to $5.2 billion in 2002 from $5.8 billion at year-end 2001. The declines were primarily driven by the company's equity and venture capital portfolios. Reductions in the value of affiliates also contributed to the decline in surplus.

"The deterioration in surplus occurred despite improved underwriting performance," said John Iten, an S&P credit analyst, in a statement. "Last year's result benefited from the improving rate environment, but not to the extent expected because of additional reserve strengthening."

The company strengthened reserves for asbestos exposure by about $300 million in response to loss trends, noted S&P. The company also added about $300 million to non-asbestos reserves in response to tort and medical inflation trends.

Last month, A.M. Best, the Oldwick, N.J.-based insurance rating service, downgraded Liberty's rating from "A (plus)," Superior, to "A," Excellent with a negative outlook.

Best said it took the action in response to the deterioration in capitalization and weak operating returns in recent years.

S&P said it would meet with Liberty's management team in the near future to discuss its concerns. It added that after the meeting it expected the carrier's rating to remain in the "A" range.