Fitch Revises Liberty Mutual's Outlook to Positive; Affirms Ratings.

CHICAGO -- Fitch Ratings has affirmed the following ratings:

Liberty Mutual Group Inc.'s (LMG)

--Issuer Default Rating (IDR) at 'BBB';

--Senior Unsecured Notes at 'BBB-';

--$600 million commercial paper program at 'F2'.

Liberty Mutual Insurance Company's (LMIC)

--IDR at 'BBB+';

--Surplus Notes at 'BBB'.

Members of the Liberty Mutual Inter-company Pool (LMIC Pool)

--Insurer Financial Strength (IFS) at 'A-'.

Members of the Peerless Insurance Company Inter-company Pool (Peerless Pool)

--IFS at 'A-'.

The Rating Outlook on the ratings has been revised to Positive from Stable.

Fitch's decision to revise its Rating Outlook reflects continued improvements in LMG's profitability and Fitch's heightened comfort with the company's capital adequacy.

Fitch believes that these positive trends partially offset the agency's concerns about LMG's profitability and quality of capital, which in recent years, have constrained LMG's ratings relative to those of competitors with similarly strong competitive positions.

Fitch attributes LMG's favorable profitability trends to improvements in underwriting results and solid operating cash flow that has boosted investment income. Through the first six months of 2006 LMG reported a 95.3% combined ratio which Fitch views as higher than many of LMG's peers, but supportive of a rating upgrade if sustained on a run-rate basis.

LMG's risk-based capital ratio and operating leverage ratios have improved in recent years due in large part to the company's improving profitability. Fitch notes that the company's combined statutory surplus increased by $2.7 billion between year-end 2003 and year-end 2005. Although a portion of this increase was funded by holding company debt issues that were subsequently injected into operating companies as surplus, the majority represents growth in retained earnings.

Fitch continues to believe that LMG is exposed to potential adverse reserve development from asbestos-related claims. However, the agency believes that such development is more likely to be a moderate drag on the company's earnings than a significant strain on capital.

At year-end 2005, the company's net asbestos reserve survival ratio, adjusted to incorporate the effect of claims subject to structured settlements and buyout agreements, was 9.9 times (x). Fitch estimates that LMG's net asbestos reserves would have to increase by roughly $600 million (pre-tax) to meet the agency's benchmark for adequacy.

Fitch notes that at year-end 2005, the Liberty Mutual organization's combined statutory surplus included $1.2 billion of special surplus funds, the vast majority of which was derived from retroactive reinsurance. Fitch believes that the economic risk transferred from retroactive reinsurance is often limited and thus believes that the quality of surplus derived from retroactive reinsurance is often comparatively low.

As a result, Fitch has historically 'stress-tested' LMG's statutory surplus by reducing the surplus benefit derived from retroactive reinsurance. These stress tests have also incorporated the effect of potential asbestos-related reserve development on surplus. Fitch views the results of these stress tests as becoming less of a rating concern given LMG's strong surplus formation in recent years and generally improving capitalization.

LMG utilizes a reasonable amount of financial leverage. At June 30, 2006 the company's ratio of debt to capital (GAAP basis) was approximately 23%. LMG's subsidiaries' can pay $783 million of dividends in 2006, or 4x Fitch's estimate of the annual cash required to fund the company's interest payments.

LMG's operating earnings-based interest coverage has improved in recent years, reaching 9.4 through the second quarter 2006. The company'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.

As part of its recent review, Fitch has assigned ratings to certain members of the Liberty Mutual Group that cede 100 percent of their underwriting results to members of LMIC Pool or Peerless Pool (see full rating list below).

Fitch has affirmed the following ratings with a Positive Outlook:

Liberty Mutual Group, Inc.

--Issuer Default Rating (IDR) at 'BBB';

--$600 million Commercial Paper Program at 'F2';

--5.75% Senior Notes due 2014 at 'BBB-';

--6.7% Senior Notes due 2016 at 'BBB-';

--7.00% Senior Notes due 2034 at 'BBB-' ;

--6.50% Senior Notes due 2035 at 'BBB-';

--7.5% Senior Notes due 2036 at 'BBB-'.

Liberty Mutual Insurance Co.

--IDR at 'BBB+';

--8.20% Surplus Notes due 2007 at 'BBB';

--8.50% Surplus Notes due 2025 at 'BBB';

--7.875% Surplus Notes due 2026 at 'BBB';

--7.697% Surplus Notes due 2097 at 'BBB'.

Liberty Mutual Inter-company Pool Members:

Liberty Mutual Insurance Co

--Insurer financial strength (IFS) at 'A-'.

Employers Ins. Co. of Wausau

--Insurer financial strength at 'A-'.

Liberty Mutual Fire Ins. Co.

--Insurer financial strength at 'A-'.

Liberty Insurance Corp.

--Insurer financial strength at 'A-'.

Wausau Business Ins. Co.

--Insurer financial strength at 'A-'.

Wausau General Insurance Co.

--Insurer financial strength at 'A-'.

Wausau Underwriters Ins. Co.

--Insurer financial strength at 'A-'.

LM Insurance Co.

--Insurer financial strength at 'A-'.

The First Liberty Insurance Co.

--Insurer financial strength at 'A-'.

Peerless Inter-Company Pool Members:

Peerless Insurance Co.

--Insurer financial strength at 'A-'.

Peerless Indemnity Co.

--Insurer financial strength at 'A-'.

Golden Eagle Insurance Co.

--Insurer financial strength at 'A-'.

Indiana Insurance Co.

--Insurer financial strength at 'A-'.

The Netherlands Insurance Co.

--Insurer financial strength at 'A-'.

Montgomery Mutual Insurance Co.

--Insurer financial strength at 'A-'.

The following insurers were assigned an IFS rating of 'A-' with a Positive Outlook:

Liberty Lloyds of Texas Insurance Company

Liberty County Mutual Insurance Company

Liberty Insurance Underwriters, Inc.

Bridgefield Employers Insurance Company

LM Property and Casualty Insurance Company

LM General Insurance Company

LM Personal Insurance Company

National Insurance Association

Mid-America Fire & Casualty Company

Globe American Casualty Company

American Ambassador Casualty Company

Hawkeye Security Company

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.