While it’s easy to overstate the importance of a given year, it’s clear that 2001, without a doubt, was one of the most significant years in the 90-year history of your company.

Illustrating this statement are three major events, two of which positioned us for sustained growth and profitability, while the other made clear the fundamental importance and critical nature of what we do.

First, I’m pleased to be writing you, for the first time, as members of Liberty Mutual Holding Company Inc. (LMHC). Thanks to your overwhelmingly positive vote, we successfully created LMHC on November 28, 2001.

As a mutual holding company, we now have greater strategic and capital flexibility to pursue growth through consolidations, mergers, acquisitions and alliances. This flexibility is extremely important given today’s rapidly changing, and consolidating, global property and casualty insurance marketplace.

Just as important, we remain a mutual company. Liberty Mutual was founded in 1912 on the fundamental belief that having common goals with its policyholders was the best way to prevent workplace accidents and injuries, and minimize losses when accidents occur. We still believe working together with our policyholders is the best way to do business.

The second event of strategic significance was the sale of Liberty Financial Companies and its asset management, and annuity and bank marketing businesses. This sale allows us to focus our attention and resources on what we do best – provide high-quality property and casualty products and services at competitive prices. Today we have an enviable mix of property and casualty businesses, a good franchise in each business, and a solid platform for future growth and profitability.

Third, the tragic events of September 11 underscored the important role of a financially strong insurance industry in today’s global economy. If there was any good to come from this horrible tragedy, it was that it reaffirmed for us, and we trust for you, the importance of what we do as an insurer and provider of risk management products and services. While no one imagined a catastrophe of such magnitude would ever occur, these situations are what we’re in business to handle. I’m extremely proud of our employees’ immediate and sustained response, as caring human beings and as insurance professionals. Whether it be our claims professionals, who worked around the clock to set up and staff catastrophe units, or our loss prevention experts, who are coordinating the safe clean-up of the World Trade Center site, the tragic event brought out the best in us personally and professionally.

From a financial standpoint, September 11 clearly had a significant negative impact on Liberty Mutual, with that event alone resulting in a pre-tax loss of approximately $500 million. While it is little consolation, we were not alone, with the worldwide property and casualty industry incurring upwards of $40 billion in Sept. 11-related losses.

However, long before September 11, we encountered events that would negatively affect Liberty Mutual’s performance, from Tropical Storm Allison to severely underpriced homeowners insurance and prior years’ reserve increases, to the collapse of an oil rig in the South Atlantic. As a result, our pre-tax operating income fell by $1.3 billion and our surplus by $1.4 billion.

At the business unit level, excluding the events of September 11, our core domestic commercial business was on its way to solid improvement in operating results, and we look to the continuation of that trend in 2002.

In contrast to this improvement in our commercial lines, however, was poor performance in our personal P&C lines, especially homeowners, where we and the industry failed to recognize changing loss trends and adjust rates accordingly. I’m confident that we will turn around this performance in 2002, while continuing to enhance our high customer satisfaction levels, as made evident by our 93 percent homeowners and 92 percent auto retention rates.

In our life insurance business unit, I’m pleased to report that we hit a milestone in 2001, breaking $100 million in premium, and retaining our position as the largest distributor of life insurance through banks.

Within our five-year-old independent agency system, we saw continued operating improvement in our existing companies, which include Peerless Insurance, Indiana Insurance, Colorado Casualty, Summit, Golden Eagle and Montgomery Mutual. At the same time, we entered into an exciting arrangement with OneBeacon, which will expand our book of business by up to $1.0 billion while positioning us as a true national organization of regional companies with operations in 42 states.

In the international arena, we continued to make considerable strides. Despite the impact of September 11 and the challenging economic conditions in Latin America, we experienced strong growth, driven primarily by acquisitions in our local businesses, and strong organic growth for Liberty International Underwriters, our global specialty lines business. Of particular note were: the establishment of a local company presence in Spain, where we bought two companies; an acquisition in Colombia, which made us the second-largest P&C company in that nation; a substantial acquisition in Venezuela, making us the largest provider of insurance in that country; and, capitalizing on a fast-changing situation, the formation of a personal auto insurance company in Argentina.

Clearly, while 2001 was a year in which we fared poorly from a financial perspective, it was a year of considerable achievement at both the corporate and business unit levels.

The events of 2001, both positive and negative, strengthened our company and our dedication to helping people live safer, more secure lives. Our strength comes from both the hard work and professionalism of our employees, and the long-term support of our policyholders and members.

Once again, I wish to express my appreciation for the continued support and guidance of our Board of Directors and 30 Advisory Boards, and for the dedication and commitment of our management team and 35,000 employees worldwide.

Finally, I want to thank you, our customers and policyholders, for the trust and confidence you continue to place in Liberty Mutual as your insurer. At this crossroads, as with many before it, we must preserve the best of our tradition and pursue the most of our potential. We do so on behalf of you – the customers and policyholders we serve, the people we employ and the communities we so proudly support.

Edmund F. Kelly

President, Chairman, and Chief Executive Officer