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Building on a very successful 2002, Liberty Mutual had an even better 2003, growing both revenue and earnings. More important, and boding well for the company’s future, we continued to strengthen our balance sheet and, as well as growing organically, we acquired more businesses, both in the U.S. and overseas. For the year, Liberty Mutual Group reported worldwide revenue of $16.6 billion, up from $14.3 billion in 2002, with cash flow from operations totaling $2.7 billion. Net income was $851 million in 2003, compared to $508 million in 2002, while pre-tax operating income was $405 million, a decrease of $87 million from 2002. Policyholders’ equity increased $934 million to $7.4 billion in 2003, while consolidated assets totaled $64.4 billion at year-end. These financial results reflect the strengthening of our reserves for asbestos liability by $331 million. This strengthening was a result of a comprehensive “ground-up” study of our asbestos exposures. While $331 million is a large number in absolute terms, it is small relative to the reserve additions made by some competitors. This is because we have taken a conservative approach to reserving over the years, and because we have more limited exposure to the larger asbestos claims. The combination of organic growth and acquisitions has made Liberty Mutual the fifth-largest property and casualty insurer in the United States and the second-largest U.S.-based international property and casualty insurer, with operations in 17 foreign countries. As for our operating businesses, each of our four business units — Personal Market, Commercial Markets, Regional Agency Markets and Liberty International — had strong results, thanks to strict, disciplined underwriting and adequate pricing. We expect the market conditions that support these prices to continue in 2004, and we will hold the line on underwriting standards and prices when market conditions do change, as they inevitably will. As always, our goal is to provide the best price based on quality of service and cost of risk. Nothing represents better our long-term commitment to lowering the cost of risk and providing service to our policyholders than the Liberty Mutual Research Institute in Hopkinton, Mass. Renamed and significantly expanded in 2003, the Institute is now in its 50th year researching the cause and prevention of workplace injuries, and ways to achieve safe and sustained return-to-work for injured or disabled workers. We expanded the Institute to accommodate its ever-growing research program and provide more capacity for the hundreds of visitors who come to the Institute each year to observe our work and collaborate on research projects. Hopkinton is also the site of a new, 14,000-square-foot Claims Training Center where, in an interactive environment, our personal auto and home claims adjusters experience thorough, hands-on appraisal training. Our investment in this training facility, combined with the acquisition of Prudential Financial’s property and casualty lines of insurance and the success of the Personal Market’s multi-channel distribution strategy, symbolize our commitment to personal insurance. We achieved this growth in personal lines alongside our historic commitment to workers compensation and our growing commercial property, auto and liability lines. Commercial Markets had a very strong year, whether it be our national accounts, which saw significant growth, Wausau, where we continue to broaden our middle-market broker channel, or our re-underwritten surety portfolio. That said, we remain quite concerned about the high rate of increase in medical costs in workers compensation. Rising costs, combined with increasingly expansive interpretations of workers compensation law, mean that the workers compensation system is in some cases a pre-paid, lifetime medical plan for some workers. This is not sustainable over the long term, and it is an issue we will increasingly address in various states. Our Regional Agency Markets (RAM) business, a group of seven locally branded regional insurers and two specialty insurers, com-pleted the integration of the $1 billion OneBeacon book of business in 2003. RAM, which sells personal and commercial insurance exclusively through independent agents, has nearly doubled in size in less than five years. And today, it’s an important and growing member of the Liberty Mutual family, contributing significantly to both revenue and earnings growth. Liberty International, which has averaged 2.5 acquisitions and 19 percent net premium growth per year since 1998, continued to grow both organically and through acquisitions. In Spain, we acquired Met Life’s personal auto business in 2004, and our three recent Spanish acquisitions now make us the country’s second-largest direct auto writer. We also acquired Winterthur’s insurance operations in Portugal, marking our entry into that southern European nation. On the other side of the world, Liberty Mutual became the first foreign property and casualty insurance company in western China when we started doing business in Chongqing, a city of 31 million people. This development, combined with the honor of hosting a luncheon for Chinese Premier Wen Jiabao in Boston, is a significant milestone for our company, and we look forward to a long and mutually beneficial relationship with China and its people. The combination of organic growth and acquisitions has made Liberty Mutual the fifth-largest property and casualty insurer in the United States and the second-largest U.S.-based international property and casualty insurer, with operations in 17 foreign countries. Signifying how much our company has changed, 44 percent of our consolidated revenue in 2003 came from businesses we were not even in ten years ago. While proud of our strong financial and competitive position, we’re well aware that challenges persist. On the investment front, we continue to face ever-lower interest rates, putting downward pressure on investment income, despite very strong cash flow. Among other things, this translates into lower discount rates used for pricing our products, so we need higher prices than would be the “more normal” case. To improve overall investment results and to provide a hedge against inevitable higher future inflation, we continue to develop disciplined investment programs in the higher-yield areas of the market. The activity in the industry and the level of attention paid to asbestos reserve increases has increased the financial market’s interest in Liberty Mutual. We welcome this interest, but we were somewhat concerned to find the degree to which the market lacked an understanding of our company. This deficiency led to investment spreads in our outstanding surplus notes vastly in excess of what was economically appropriate when compared to our performance and that of our competitors. To address this issue, we have increased our communication with the investment community — a somewhat unusual act for a mutual company — and hired a director of investor relations. By focusing more resources on financial communications, we’re strengthening our ties to the financial community and improving how we work with capital market participants. Over time, we will be more comfortable in this new world. Our employees’ knowledge and understanding of our business, their willingness to learn from each other, their ability to adjust to a changing and competitive environment and, most of all, their commitment to our policyholders and customers, put us in the enviable position we maintain today. It is with extraordinary pride that I thank them for their efforts. Our success at both the strategic and tactical levels is a direct result of the efforts of our 38,000 employees worldwide. Simply put, we predicate our business model on the goal of ensuring that, when a person in any part or level of the company picks up the phone and says, “Liberty Mutual. How can I help you?”, they both mean it, and have the skills and technology to do it. Our employees’ knowledge and understanding of our business, their willingness to learn from each other, their ability to adjust to a changing and competitive environment and, most of all, their commitment to our policyholders and customers, put us in the enviable position we maintain today. It is with extraordinary pride that I thank them for their efforts. As always, I also thank you, our customers and policyholders, for your business over the past year. I also thank our Board of Directors and our 29 Advisory Boards for their collective experience and advice, which keep us focused on serving you.
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