Best Downgrades Liberty Mutual

Best also said it has assigned an "A-" rating for senior debt issued by Liberty Mutual Capital Corp. and a "triple-B-plus" rating for surplus notes issued by Liberty Mutual Insurance.

Best announced additional rating action to one of Liberty's subsidiaries, Liberty Northwest Group, in Portland, Ore., downgrading its financial strength rating to "A" (Excellent) from "A+" (Superior).

The financial strength rating of Liberty Insurance Holdings, in Keene, N.H., at "A" (Excellent) was not changed, the rating agency said.

All of these ratings have a negative outlook, Best added.

Best also lowered the financial strength rating of Liberty Life Assurance Company of Boston to "A-" (Excellent) from "A" (Excellent), adding that the outlook is stable.

Best said in a statement that "the rating actions reflect Liberty Mutual's deterioration in capitalization and, despite significant improvement in 2002, weak operating returns in recent years."

Best said the company's statutory surplus has declined considerably over the last few years, causing reserve charges that have affected profitability. The reasons cited for the charges were losses in the equity markets, reserve losses from rising medical inflation, and increased asbestos claim trends. The World Trade Center attack of 9/11 also impacted the company's performance.

Best added that it "continues to have concerns regarding reserve adequacy, particularly on older workers' compensation and asbestos claims, and the potential for adverse development to dampen underwriting profitability going forward.

"Capitalization remains exposed to potential unrealized investment losses or adverse loss reserve development, which could lead to downward rating pressure. Accordingly, the rating outlook is negative at this time," said Best.

Best, however, did say that it felt the company's diversification plans and the hard market conditions would, in the long term, point to profitability for the company. It added that its "superior" business profile puts it at a "competitive advantage."

In a statement, John Cusolito, vice president of corporate communications for Liberty Mutual said, "While not completely surprised given A.M. Best's generally negative view of the commercial property-casualty industry, we are very disappointed with their rating decision. Their announcement, however, does not diminish any of our optimism. Our current underwriting performance is excellent and we have strong cash flow. Also, we have a very strong capital position, adequate reserves and more than sufficient liquidity to serve our policyholders."