Liberty Mutual Holding Company Inc. and LMHC Massachusetts Holdings Inc

OFFERING MEMORANDUM

Liberty Mutual Group Inc. €750,000,000 2.75% Senior Notes due 2026 Irrevocably and Unconditionally Guaranteed by Liberty Mutual Holding Company Inc. and LMHC Massachusetts Holdings Inc. Liberty Mutual Group Inc. (“Liberty Mutual”) is offering €750,000,000 aggregate principal amount of its 2.75% Senior Notes due 2026 (the “Notes”). Liberty Mutual will pay interest on the Notes on May 4 of each year, beginning on May 4, 2017. The Notes will mature on May 4, 2026. Liberty Mutual may, at its option, redeem the Notes, in whole or in part, at any time at the “make-whole” redemption price described in this Offering Memorandum. In addition, Liberty Mutual may redeem the Notes in whole, but not in part, at any time at a price equal to 100% of the principal amount of the Notes, together with accrued and unpaid interest on the Notes to be redeemed to the date of redemption, in the event of certain developments affecting U.S. taxation as described under “Description of Notes—Redemption for Tax Reasons.” The Notes will be Liberty Mutual’s unsecured senior obligations and will rank equally in right of payment with all of its existing and future unsecured senior indebtedness. The Notes will be irrevocably and unconditionally guaranteed by each of Liberty Mutual Holding Company Inc. (“LMHC”) and LMHC Massachusetts Holdings Inc. (“Massachusetts Holdings”). The guarantees (the “Guarantees”) will be the unsecured senior obligations of both LMHC and Massachusetts Holdings and will rank equally in right of payment with all of their respective existing and future unsecured senior indebtedness. The Notes are expected to be assigned a rating of Baa2 by Moody’s Investor Service, Inc. and BBB by Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension, reduction or withdrawal at any time by the relevant rating agency. A revision, suspension, reduction or withdrawal of a rating may adversely affect the market price of the Notes. There is currently no public market for the Notes. Application has been made to the Irish Stock Exchange plc for the approval of these listing particulars for the Notes and for the Notes to be admitted to the Official List and trading on the Global Exchange Market, which is the exchange regulated market of the Irish Stock Exchange plc. This Offering Memorandum constitutes listing particulars for the purposes of listing on the Irish Stock Exchange plc’s Official List and trading on its Global Exchange Market. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments. Investment in the Notes involves risks. See “Risk Factors” beginning on page 17.

Offering Price for the Notes: 99.277%, plus accrued interest, if any, from May 4, 2016.

The offer and sale of the Notes have not been, and the Notes will not be, registered under the Securities Act of 1933, as amended (the “Securities Act”), or the securities laws of any other jurisdiction. Offers and sales of the Notes will be made only to qualified institutional buyers in reliance on Rule 144A under the Securities Act and certain non-U.S. persons in transactions outside the United States in reliance on Regulation S under the Securities Act. Prospective purchasers that are qualified institutional buyers are hereby notified that the seller of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For details about eligible offerees, deemed representations and agreements by investors and transfer restrictions, see “Notice to Investors.”

The Managers expect to deliver the Notes to purchasers through the facilities of Clearstream Banking, société anonyme (“Clearstream”), and Euroclear Bank, S.A./N.V. (“Euroclear”), on or about May 4, 2016, which is the fifth business day following the date of this Offering Memorandum. Joint Book-Running Managers Citigroup Deutsche Bank Joint Lead Managers BofA Merrill Lynch HSBC Wells Fargo Securities Barclays BMO Credit Goldman Sachs J.P. Morgan Lloyds Bank MUFG US Bancorp Capital Suisse International Markets Co-Managers BNY Mellon Capital Markets EMEA Ltd. The Royal Bank of Scotland The Williams Capital Group, L.P. April 27, 2016 TABLE OF CONTENTS

Important Information About This Offering Memorandum ...... ii Notice To Prospective Investors in the European Economic Area ...... iii Notice to United Kingdom Residents Only ...... iv Stabilization ...... iv Presentation of Financial Information ...... iv Cautionary Notice Regarding Forward-Looking Information ...... iv Available Information ...... v Summary ...... 1 Risk Factors ...... 17 Use of Proceeds ...... 44 Capitalization ...... 45 Business ...... 46 Selected Consolidated Financial Data ...... 75 Management’s Discussion and Analysis of Financial Condition and Results of Operations ...... 77 Management ...... 169 Certain Relationships and Related Party Transactions ...... 173 Description of Notes ...... 174 Certain U.S. Federal Income Tax Considerations ...... 190 Certain European Union Tax Considerations ...... 193 Notice to Investors ...... 194 Plan of Distribution ...... 196 Legal Matters ...... 200 Independent Registered Public Accounting Firm ...... 200 Listing and General Information ...... 201 Index to Consolidated Financial Statements ...... F-1

We are responsible for the information contained in this Offering Memorandum. We have not, and the managers identified under “Plan of Distribution” (the “Managers”) have not, authorized anyone to provide you with any other information and neither we nor the Managers take any responsibility for other information others may give you. If you receive any unauthorized information, you must not rely on it. Neither we nor the Managers are making or will make an offer to sell the Notes in any jurisdiction where the offer or sale is not permitted or would require the registration or qualification of such Notes under the laws of such jurisdiction. The information contained in this Offering Memorandum may be accurate only as of the date indicated on the front cover regardless of time of delivery of this Offering Memorandum or of any sale of the Notes. Our business, financial condition, results of operations and prospects may have changed since that date.

The Managers expect to deliver the Notes to purchasers on or about the date specified on the cover of this Offering Memorandum. See “Plan of Distribution.”

i IMPORTANT INFORMATION ABOUT THIS OFFERING MEMORANDUM

Unless the context otherwise requires, references in this Offering Memorandum to “Liberty Mutual” or “LMGI” refer to Liberty Mutual Group Inc. on a stand-alone, non-consolidated basis. References to the “Company,” “we,” “us,” and “our” are to Liberty Mutual Group Inc. together with its subsidiaries. References to “including” mean “including, but not limited to.”

The offer and sale of the Notes have not been, and the Notes will not be, registered under the Securities Act or the securities laws of any other jurisdiction. Liberty Mutual is offering the Notes in reliance on exemptions from registration under the Securities Act for offers and sales of securities that do not involve a public offering. Liberty Mutual is not, and the Managers of the Notes are not, making an offer to sell the Notes in any state or other jurisdiction where the offer or sale is not permitted or would require the registration or qualification of such Notes under the laws of such jurisdiction. You should inform yourself about and comply with any restrictions as to the offering of the Notes and the distribution of this Offering Memorandum.

If you purchase the Notes, you will be deemed to have made acknowledgements, representations, warranties and agreements intended to restrict the resale or other transfer of the Notes, as set forth under “Notice to Investors” in this Offering Memorandum. The Notes are subject to restrictions on transferability and resale and may not be transferred or sold except as permitted under the Securities Act and applicable state securities laws or pursuant to registration or exemption under the Securities Act and applicable state securities laws. You should understand that you might be required to bear the financial risks of your investment in the Notes for an indefinite period of time. See “Plan of Distribution” and “Notice to Investors.”

Liberty Mutual has submitted this Offering Memorandum to a limited number of prospective investors to assist them in their consideration of whether to invest in the Notes. See “Notice to Investors.” Liberty Mutual has not authorized its use for any other purpose. This Offering Memorandum is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire securities. This Offering Memorandum may not be copied or reproduced in whole or in part. This Offering Memorandum may not be distributed or retransmitted electronically or otherwise, in whole or in part, nor may its contents be disclosed, except to the prospective investors to whom it is provided and to any person retained to advise an investor with respect to its purchase. By accepting delivery of this Offering Memorandum, you agree to all of these restrictions. Notwithstanding anything to the contrary contained in this Offering Memorandum, Liberty Mutual, the Managers and each prospective investor (and each of their respective employees, representatives or other agents, as applicable) may disclose to any and all persons, without limitation of any kind, the tax treatment and any facts that may be relevant to the tax structure of the transaction, provided, however, that no party (and none of their respective employees, representatives or other agents, as applicable) shall disclose any information that is not necessary to understanding the tax treatment and tax structure of the transaction (including the identity of any party and any information that could lead another to determine the identity of any party). This authorization of tax disclosure is retroactively effective to the commencement of the first discussions between the offeror and the prospective purchaser regarding the transactions contemplated herein.

This Offering Memorandum is based on information provided by the Company and by other sources that the Company believes are reliable. This Offering Memorandum summarizes certain documents and other information, and Liberty Mutual refers you to them for a more complete understanding of the summary contained in this Offering Memorandum. The Managers make no representation or warranty, express or implied, as to the accuracy or completeness of the information contained in this Offering Memorandum. Nothing contained in this Offering Memorandum is, or shall be, relied upon as, a promise or representation of the Managers as to the past or future. The Managers cannot assure you that this information is accurate, truthful or complete. In making an investment decision, you must rely on your own examination of the Company and the terms of this offering and the Notes, including the merits and risks involved.

ii Any information sourced from third parties contained in this Offering Memorandum has been accurately reproduced and, as far as Liberty Mutual is aware and is able to ascertain from information published by that third party, no facts have been omitted which would render the reproduced information inaccurate or misleading.

Prospective investors are hereby offered the opportunity, prior to purchasing any Notes, to ask questions and receive answers concerning the Company and the terms of this offering and the Notes and to obtain from Liberty Mutual additional information, to the extent that the Company possesses the information or can acquire it without unreasonable effort or expense, that is necessary to verify the accuracy, truthfulness and completeness of the information contained in this Offering Memorandum.

Liberty Mutual is not making any representation to any purchaser of the Notes regarding the legality of an investment in the Notes by the purchaser under any legal investment or similar laws or regulations. You should not consider any information in this Offering Memorandum to be legal, business or tax advice. You should consult your own attorney, business advisor and tax advisor for legal, business and tax advice regarding an investment in the Notes.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission or any other U.S. regulatory authority has approved or disapproved the Notes nor have any of the foregoing authorities passed upon or endorsed the merits of this offering or the accuracy or adequacy of this Offering Memorandum. Any representation to the contrary is a criminal offense.

References in this Offering Memorandum to “$” and “U.S. dollars” are to the currency of the United States. References to “€” and “euro” in this Offering Memorandum are to the currency of the member states of the European Monetary Union that have adopted or that adopt the single currency in accordance with the treaty establishing the European Community, as amended by the Treaty on European Union.

Liberty Mutual reserves the right to withdraw this offering of the Notes at any time. Liberty Mutual and the Managers also reserve the right to reject any offer to purchase the Notes in whole or in part for any reason and to allocate to any prospective investor less than the full amount of Notes sought by such investor.

The distribution of this Offering Memorandum and the offering and sale of the Notes in certain jurisdictions may be restricted by law. Liberty Mutual and the Managers require persons into whose possession this Offering Memorandum comes to inform themselves about and to observe any such restrictions. This Offering Memorandum does not constitute an offer of, or an invitation to purchase, any of the Notes in any jurisdiction in which such offer or invitation would be unlawful.

NOTICE TO PROSPECTIVE INVESTORS IN THE EUROPEAN ECONOMIC AREA

This Offering Memorandum has been prepared on the basis that any offer of the Notes in any Member State of the European Economic Area (the “EEA”) that has implemented the Prospectus Directive (each, a “Relevant Member State”) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to produce a prospectus for offers of Notes. Accordingly, any person making or intending to make any offer in that Relevant Member State of the Notes which are the subject of the offering contemplated by this Offering Memorandum may only do so in circumstances in which no obligation arises for Liberty Mutual or any of the Managers to produce a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. Neither Liberty Mutual nor the Managers have authorized, nor do Liberty Mutual or they authorize, the making of any offer of Notes in circumstances in which an obligation arises for Liberty Mutual or the Managers to publish or supplement a prospectus for such offer. “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including by Directive 2010/73/EU, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State.

iii NOTICE TO UNITED KINGDOM RESIDENTS ONLY

THIS COMMUNICATION IS ONLY BEING DISTRIBUTED TO AND IS ONLY DIRECTED AT (I) PERSONS WHO ARE OUTSIDE THE UNITED KINGDOM OR (II) INVESTMENT PROFESSIONALS FALLING WITHIN ARTICLE 19(5) OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 (FINANCIAL PROMOTION) ORDER 2005 (THE “ORDER”) OR (III) HIGH NET WORTH COMPANIES, AND OTHER PERSONS TO WHOM IT MAY LAWFULLY BE COMMUNICATED, FALLING WITHIN ARTICLE 49(2)(A) TO (D) OF THE ORDER (ALL SUCH PERSONS TOGETHER BEING REFERRED TO AS “RELEVANT PERSONS”). THE NOTES ARE ONLY AVAILABLE TO, AND ANY INVITATION, OFFER OR AGREEMENT TO SUBSCRIBE, PURCHASE OR OTHERWISE ACQUIRE SUCH NOTES WILL BE ENGAGED IN ONLY WITH, RELEVANT PERSONS. ANY PERSON WHO IS NOT A RELEVANT PERSON SHOULD NOT ACT OR RELY ON THIS DOCUMENT OR ANY OF ITS CONTENTS.

STABILIZATION

In connection with the issue of the Notes, Citigroup Global Markets Limited (the “Stabilizing Manager”) (or persons acting on behalf of the Stabilizing Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Manager (or persons acting on behalf of the Stabilizing Manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilization action or over-allotment must be conducted in accordance with all applicable laws and rules.

PRESENTATION OF FINANCIAL INFORMATION

The financial information contained in this Offering Memorandum was derived from the Company’s Consolidated Financial Statements as of December 31, 2015 and 2014 and for each of the years in the three-year period ended December 31, 2015 prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and audited by Ernst & Young LLP, the Company’s independent registered public accounting firm.

CAUTIONARY NOTICE REGARDING FORWARD-LOOKING INFORMATION

This Offering Memorandum contains forward-looking statements that are intended to enhance the reader’s ability to assess the future financial and business performance of the Company. Forward-looking statements include statements that represent the Company’s beliefs concerning future operations, strategies, financial results or other developments and contain words and phrases such as “may,” “expects,” “should,” “believes,” “anticipates,” “estimates,” “intends” or similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control or are subject to change, actual results could be materially different.

Some of the factors that could cause actual results to differ include: the occurrence of catastrophic events (including terrorist acts, hurricanes, hail, tornadoes, snowfall and winter conditions); inadequacy of loss reserves; adverse developments involving asbestos, environmental or toxic tort claims and litigation; adverse developments in the cost, availability or ability to collect reinsurance; disruptions to the Company’s relationships with its independent agents and brokers; financial disruption or a prolonged economic downturn; the performance of the Company’s investment portfolios; a rise in interest rates; risks inherent in the Company’s alternative investments in private limited

iv partnerships (“LP”), limited liability companies (“LLC”), commercial mortgages and natural resource working interests; difficulty in valuing certain of the Company’s investments; subjectivity in the determination of the amount of impairments taken on the Company’s investments; unfavorable outcomes from litigation and other legal proceedings, including the effects of emerging claim and coverage issues and investigations by state and federal authorities; the Company’s exposure to credit risk in certain of its business operations; terrorist acts; the Company’s inability to obtain price increases or maintain market share due to competition or otherwise; inadequacy of the Company’s pricing models; changes to insurance laws and regulations; changes in the amount of statutory capital that the Company must hold to maintain its financial strength and credit ratings; regulatory restrictions on the Company’s ability to change its methods of marketing and underwriting in certain areas; assessments for guaranty funds and mandatory pooling arrangements; a downgrade in the Company’s claims-paying and financial strength ratings; the ability of the Company’s subsidiaries to pay dividends to the Company; inflation, including inflation in medical costs and automobile and home repair costs; the cyclicality of the property and casualty insurance industry; political, legal, operational and other risks faced by the Company’s international business; potentially high severity losses involving the Company’s surety products; underwriting limitations that could, with respect to our surety products, affect our ability to compete; loss or significant restriction on the Company’s ability to use credit scoring in the pricing and underwriting of personal lines policies; inadequacy of the Company’s controls to ensure compliance with legal and regulatory standards; changes in federal or state tax laws; risks arising out of the Company’s securities lending program; the Company’s utilization of information technology systems and its implementation of technology innovations; difficulties with technology or data security; insufficiency of the Company’s business continuity plan in the event of a disaster; the Company’s ability to successfully integrate operations, personnel and technology from its acquisitions; insufficiency of the Company’s enterprise risk management models and modeling techniques; and changing climate conditions. The Company’s forward-looking statements speak only as of the date of this report or as of the date they are made and should be regarded solely as the Company’s current plans, estimates and beliefs. For a detailed discussion of these and other cautionary statements, visit the Company’s Investor Relations website at www.libertymutualgroup.com/investors.

Consequently, such forward-looking statements should be regarded solely as the Company’s current plans, estimates and beliefs. Except as required under the federal securities laws, Liberty Mutual does not intend, and does not undertake, any obligation to update any forward-looking statements to reflect future events or circumstances after the date of such statements.

You should review carefully the section captioned “Risk Factors” in this Offering Memorandum for a more complete discussion of the risks of an investment in the Notes.

AVAILABLE INFORMATION

Liberty Mutual is not subject to the information requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, does not file reports, proxy statements and other information with the SEC. Liberty Mutual has agreed that, for so long as Liberty Mutual is not subject to the informational requirements of the Exchange Act, it will make available, upon request, to any holder and any prospective purchaser of the Notes the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act in order to permit compliance with Rule 144A in connection with resales of the Notes.

Any request for information should be directed to The Bank of New York Mellon, 500 Ross Street, 12th Floor, Pittsburgh, Pennsylvania 15262, in its capacity as Fiscal Agent or to Liberty Mutual Group Inc., 175 Berkeley Street, Boston, Massachusetts 02116, Attn: Director of Investor Relations (telephone (617) 357-9500).

Liberty Mutual or any of its affiliates may, from time to time, make material information regarding the Company available to the public via an internet site with an address of www.libertymutualgroup.com/investors (or any successor site). Information contained on the Company’s website does not constitute part of this Offering Memorandum. Any such information disseminated to the public via such internet site after the consummation of the issuance of the Notes shall be deemed to have been furnished to the holders of the Notes.

v SUMMARY

This summary highlights selected information from this Offering Memorandum. It does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements appearing elsewhere in this Offering Memorandum.

Liberty Mutual is a Massachusetts stock holding company that principally does business through its wholly owned subsidiaries: Liberty Mutual Insurance Company (“LMIC”), a Massachusetts stock insurance company; Liberty Mutual Fire Insurance Company (“LMFIC”), a Wisconsin stock insurance company; Employers Insurance Company of Wausau (“EICOW”), a Wisconsin stock insurance company; Liberty Mutual Personal Insurance Company (“LMPIC”), a Massachusetts stock insurance company; and other subsidiaries. All of the issued and outstanding shares of Liberty Mutual are owned by Massachusetts Holdings, a Massachusetts stock holding company; and all of the issued and outstanding shares of Massachusetts Holdings are owned by LMHC, a Massachusetts mutual holding company whose members are the policyholders of LMIC, LMFIC, EICOW and LMPIC. References to “Insurance Subsidiaries” refer to LMIC, LMFIC, EICOW, LMPIC and Liberty Mutual’s other insurance subsidiaries and affiliates authorized to transact business in one or more jurisdictions within the United States.

Organizational Structure The following chart shows the organizational structure of LMHC, Massachusetts Holdings, Liberty Mutual and their material direct subsidiaries:

Liberty Mutual Holding Company Inc. (“LMHC”) (Guarantor)

LMHC Massachusetts Holdings Inc. (“Massachusetts Holdings”) (Guarantor)

Liberty Mutual Group Inc. (“Liberty Mutual”) (Issuer)

Direct Insurance Subsidiaries Non-Insurance Subsidiaries Liberty Mutual Insurance Company Liberty Corporate Services LLC Liberty Mutual Fire Insurance Company Employers Insurance Company of Wausau Liberty Mutual Personal Insurance Company

1 $121.7 billion in consolidated assets and $102.4 billion in consolidated liabilities. The Company had 2015 consolidated revenues of $37.6 billion. The Company currently ranks 78th on the Fortune 100 list of largest corporations in the United States based on 2014 revenue (as published by Fortune Magazine).

The Company is organized in a mutual holding company structure. The three principal reorganized companies of the group, LMIC, LMFIC and EICOW, are separate stock insurance companies under the indirect ownership of LMHC. This structure provides the Company with better capital market access and greater strategic flexibility to pursue acquisitions and alliances, while aligning its legal structure with its operating structure and preserving mutuality.

The Company offers a wide range of insurance products and services, including private passenger automobile, homeowners, specialty insurance, commercial multiple-peril, workers compensation, global specialty reinsurance, commercial automobile, general liability, commercial property, group disability and group life, individual life and accident and health (“A&H”), surety and inland marine.

The Company’s consolidated net written premium (“NWP”) by line of business is set forth in the table below:

Overview—Consolidated Consolidated NWP by significant line of business was as follows:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Private passenger automobile ...... $12,375 $12,226 $11,718 Homeowners ...... 5,759 5,573 4,905 Specialty insurance ...... 3,152 3,205 2,685 Commercial multiple-peril ...... 1,965 1,958 2,204 Workers compensation—Voluntary ...... 1,954 2,078 2,479 Workers compensation—Involuntary ...... 107 114 138 Commercial automobile ...... 1,722 1,718 1,673 Group disability and group life ...... 1,429 1,215 1,095 General liability ...... 1,365 1,353 1,366 Global specialty reinsurance ...... 1,116 1,141 1,167 Surety ...... 811 757 752 Commercial property ...... 792 858 871 Individual life and A&H ...... 552 665 640 Global specialty inland marine ...... 451 442 614 Other1 ...... 983 1,029 853 Total NWP2 ...... $34,533 $34,332 $33,160

1 Primarily includes NWP from allied lines and domestic inland marine. 2 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business.

The Company’s business is supported by diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company also distributes products and services through independent agents and brokers, employer and affinity marketing alliances, direct response call centers and the internet. The Company believes that giving potential customers access to multi-channel distribution is both a strategic and operational strength of the Company.

2 Functionally, the Company conducts its business through four strategic business units (“SBUs”): Personal Insurance, Commercial Insurance, Liberty International and Global Specialty. Each SBU operates independently of the others and has dedicated sales, underwriting, claims, actuarial, financial and certain information technology resources. Management believes this structure allows each SBU to execute its business and acquisition strategy without impacting or disrupting the operations of the Company’s other business units.

On June 10, 2014, the Company consolidated its existing Group Benefits, A&H, and Individual Life operations, previously included in the Commercial Insurance, Global Specialty, and Personal Insurance SBUs, respectively, into a new market segment in Commercial Insurance called Liberty Mutual Benefits. All prior periods have been restated to reflect the new market segment.

The Company’s NWP by business unit is set forth in the table below:

NWP by Business Unit

Years Ended December 31, 2015 2014 2013 (dollars in millions) Personal Insurance ...... $16,807 $15,952 $14,934 Commercial Insurance ...... 9,077 9,032 9,081 Liberty International ...... 3,444 4,009 3,958 Global Specialty ...... 4,923 5,120 5,016 Corporate and Other ...... 282 219 171 Total NWP ...... $34,533 $34,332 $33,160

Personal Insurance. Personal Insurance is the fifth largest writer of personal lines property and casualty insurance in the United States, based on 2015 direct written premium based on information collected by SNL. Personal Insurance sells automobile, homeowners and other types of property and casualty insurance coverage to individuals in the United States. Personal Insurance comprises two segments: Personal Lines and Safeco. Personal Lines products are distributed through approximately 2,200 licensed captive sales representatives, more than 600 licensed telesales counselors, third-party producers and the Internet. Personal Lines’ largest source of new business is through its more than 20,000 sponsored affinity groups (including employers, professional and alumni associations, credit unions, and other partnerships). Safeco products are distributed nationally through independent agents.

Commercial Insurance. Commercial Insurance, as a standalone SBU, is the seventh largest writer of commercial lines property and casualty insurance in the United States, based on 2015 direct written premium based on information collected by SNL. Commercial Insurance offers a wide array of property-casualty, group benefits and life insurance coverages through independent agents, brokers, benefit consultants, captive agents, and bank partners throughout the United States. Commercial Insurance is organized into the following four market segments: (1) Business Insurance; (2) National Insurance; (3) Liberty Mutual Benefits; and (4) Other Commercial Insurance. Business Insurance serves small and middle market customers through a regional operating model that combines local underwriting, market knowledge and service with the scale advantages of a national company. National Insurance provides commercial lines products and services, including third-party administration, to large businesses. Liberty Mutual Benefits provides short and long-term disability, accident, health and group life insurance to mid-sized and large businesses, as well as life and annuity products to individuals in the United States. Other Commercial Insurance primarily consists of internal reinsurance and

3 assumed business from state-based workers compensation involuntary market pools. The Company is also a servicing carrier for state-based workers compensation involuntary market pools.

Liberty International. Liberty International sells property, casualty, health and life insurance products and services to individuals and businesses in four market segments: (1) Latin America and Iberia, including Brazil, Colombia, Chile, Ecuador, Spain and Portugal; (2) Emerging Europe, including Turkey, Poland and Ireland; (3) Asia, including Thailand, Singapore, Hong Kong, Vietnam and Malaysia (as a result of the Uni.Asia General Insurance Berhad (“Uni.Asia”) acquisition in July 2014); and (4) Large Emerging Markets, including Russia, China and India. Private passenger automobile insurance is the single largest line of business.

Global Specialty. Global Specialty comprises a wide array of products and services offered through three market segments: Liberty Specialty Markets (“LSM”), Liberty International Underwriters (“LIU”) and Liberty Mutual Surety (“LM Surety”). LSM provides a wide range of product capabilities and capacity for specialty markets worldwide and is organized into three business segments: Specialty, Commercial and Reinsurance. LIU sells inland marine and specialty commercial insurance worldwide through offices in Asia, Australia, the Middle East, North America and Latin America. LM Surety is a leading provider of global contract and commercial surety bonds to businesses of all sizes (based on information from the Surety & Fidelity Association of America, the Canadian Surety Federation, the Pan American Surety Association and the International Credit Insurance & Surety Association).

Subsequent Events On January 14, 2016, the Company completed the acquisition of Compan˜ia de Seguros Generales Penta Security S.A., the fourth largest non-life insurer in Chile. Compan˜ia de Seguros Generales Penta Security S.A. had approximately $160 million of net written premium in 2015.

On February 17, 2016, the Company announced plans to combine its Personal Insurance and Liberty International SBUs to form a new strategic business unit which will be named Global Consumer Markets. This combination represents an opportunity to blend the complementary strengths of these two operations. The local expertise we have in growth markets outside the U.S. coupled with our strong and scalable U.S. personal lines capabilities put us in a unique position to take maximum advantage of opportunities to grow our business globally. The former Personal Insurance and Liberty International SBUs will now be divisions of Global Consumer Markets and known as U.S. Consumer Markets and International Consumer Markets, respectively.

Other Developments On December 18, 2015, the Company entered into an agreement to sell its Polish operations to a member of the AXA Group.

Effective September 30, 2015, the Company determined it was appropriate to deconsolidate the Venezuelan operations and recognized an impairment charge of $690 million. Concurrent with this decision, the Company has classified the Venezuelan operations (a net loss of $219 million for the nine months ended September 30, 2015) and the related impairment charge as discontinued operations. Subsequent to deconsolidation, the Company accounts for its ongoing investment in the Venezuela operation on the cost basis. All prior periods have been adjusted to reflect this change. For further discussion see the Venezula section in Management’s Discussion and Analysis.

On July 23, 2015, the Company sold its Quinn-direct branded private motor book in Great Britain to Chaucer Insurance Services Ltd. The Company will now focus on the Republic of Ireland market and plans to

4 transfer the customer management of its Northern Ireland policies on renewal to Hughes Insurance Services Limited. Costs associated with this restructuring are included in the Consolidated Financial Statements.

Effective July 2, 2015, LMIC renewed its $1 billion repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

On July 1, 2015, the Company completed the acquisition of Hughes Insurance, an independent insurance broker in Northern Ireland. Hughes Insurance offers motor, van, household, small-to-medium-enterprise commercial insurance and travel insurance with £60 million in gross written premium for the financial year ended March 31, 2014, making it the independent insurance broker with the largest amount of gross written premium in Northern Ireland for that year. Hughes Insurance has been reflected in the Consolidated Financial Statements since the second quarter of 2014.

On July 24, 2014 and October 28, 2014, Liberty Mutual Group Inc. (“LMGI”) issued $750 million and $300 million of Senior Notes due 2044 (the “2044 Notes”), respectively. Interest is payable semi-annually at a fixed rate of 4.85%. The 2044 Notes mature on August 1, 2044.

On July 17, 2014, the Company entered into a reinsurance transaction with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., on a combined aggregate excess of loss agreement (the “NICO Reinsurance Transaction”) for substantially all of the Company’s U.S. workers compensation (pre-2014 accident year) and asbestos and environmental (“A&E”) liabilities, attaching at approximately $12.5 billion of combined aggregate reserves, with an aggregate limit of $6.5 billion and sublimits of $3.1 billion for A&E liabilities and approximately $4.5 billion for certain workers compensation liabilities. At the closing of the NICO Reinsurance Transaction, but effective as of January 1, 2014, the Company ceded approximately $3.3 billion of existing liabilities under this retroactive reinsurance agreement. NICO will provide approximately $3.2 billion of additional aggregate adverse development cover. The Company paid NICO total consideration of approximately $3.0 billion. In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014. With respect to the ceded A&E business, NICO has been given authority to handle claims, subject to the Company’s oversight and control. With respect to the ceded workers compensation business, the Company will continue to handle claims. The NICO Reinsurance Transaction is accounted for as retroactive reinsurance in the Consolidated Financial Statements and resulted in a pre- tax loss of $128 million as of the effective date.

On July 16, 2014, the Company purchased from Uni.Asia Capital Sdn Bhd its 68.09% stake in Uni.Asia, a Malaysia property-casualty insurer, for approximately $118 million. On September 8, 2014, the Company purchased 18,679,881 ordinary shares representing an additional 18.68% stake in Uni.Asia through a mandatory tender offer for approximately $32 million. As a result of these actions, the Company now owns 86.77% of Uni.Asia.

On July 8, 2014, the Company acquired a Mexico surety company Primero Fianzas from Grupo Valores Operativos Monterrey, a private investor group. The parties have not disclosed the financial terms of the transaction. Primero Fianzas had $33 million of gross written premium in 2013.

On June 10, 2014, the Company consolidated its existing Group Benefits, A&H, and Individual Life operations into a new market segment in Commercial Insurance called Liberty Mutual Benefits.

On April 1, 2014, the Company sold Summit Holding Southeast, Inc., a mono-line workers compensation company based in Florida, and its related companies (together, “Summit”), to American Financial Group. The

5 results of Summit are presented as discontinued operations in the accompanying Consolidated Statements of Income and are no longer included with Commercial Insurance.

On February 21, 2014, Liberty International Argentina Holdings S.A. and Liberty Risk Services Argentina S.A. (together, the “Argentina operations”) were sold by Liberty International Latin America Holdings LLC and Liberty UK and Europe Holdings Limited to LAFO S LLC and LAFT S LLC resulting in a net loss of $77 million. The results of the Argentina operations are presented as discontinued operations in the accompanying Consolidated Statements of Income and are no longer included with Liberty International.

Competitive Strengths The Company believes that its competitive strengths include: • Well-diversified business mix. The Company is well diversified with distinct SBUs, each of which contributes a substantial share of revenue and pre-tax operating income (“PTOI”) to the Company. Moreover, the Company’s exposure to a single distribution channel, geographic region or line of business has been significantly reduced as a result of the Company’s diversification efforts over the last ten years. In part, the Company’s desire to improve the organization’s spread of risk has led to a fundamental shift in the Company’s mix of business. In 2000, workers compensation constituted 23% of the Company’s NWP. By December 2015, this line of business had decreased to 6% of NWP. • Business unit structure. The Company operates through four distinct SBUs. Each of the SBUs operates independently of the others and has dedicated sales, underwriting, claims, actuarial, financial and certain information technology resources. This structure allows each business unit to execute its business strategy independently of the other business units and without impacting or disrupting the other business units’ operations. • Established multi-channel distribution system. The Company has diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company also distributes products and services through independent agents and brokers, employer and affinity marketing alliances, direct response call centers and the internet. The Company believes that giving potential customers access to multi-channel distribution is both a strategic and operational strength of the Company. • Financial strength. The financial strength ratings from the major public rating agencies are important indicators of an insurance company’s financial condition and stability and are increasingly important factors to many existing and potential customers in the selection of an insurer. As such, the Company believes that it has a competitive advantage from its interactive financial strength ratings of “A” (“Excellent,” the third highest of 16 ratings) (stable outlook) from A.M. Best Company, Inc. (“A.M. Best”), “A2” (“Good,” the sixth highest of 21 ratings) (stable outlook) from Moody’s Investor Service, Inc. (“Moody’s”), and “A” (“Strong,” the sixth highest of 22 ratings) (stable outlook) from Standard and Poor’s Ratings Services, a division of The McGraw Hill Companies, Inc. (“Standard & Poor’s” or “S&P”). For additional information about the Company’s ratings, including risks relating thereto, see “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company may not maintain favorable financial strength ratings, which could adversely affect its ability to conduct business.” • History of successful acquisitions and dispositions. The Company is an opportunistic acquirer of property and casualty insurance companies and has a track record of successful integration. The Company’s substantial growth has resulted largely from strategic acquisitions. Additionally, the Company has successfully exited or de-emphasized businesses which no longer fit within its strategic focus or risk appetite, such as the Company’s sale of Summit, a mono-line workers compensation company based in Florida and its related companies in April 2014. See “Risk Factors—Risk Factors

6 Relating to the Company’s Business and the Insurance Industry—Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences.” • Experienced management team with proven track record. The Company has a talented and experienced management team consisting of the chief executive officer and those reporting directly to him, who have an average of over 21 years of experience in the property and casualty industry and over 19 years of experience with the Company.

Strategic Focus The Company’s strategic objectives are to continue to grow revenues, cash flow, earnings and equity and to enhance its position as a premier global property and casualty insurer while also improving its financial strength ratings. The key elements of this strategy are: • Disciplined underwriting. The Company intends to utilize disciplined underwriting controls to ensure that profitability remains at the forefront of its business strategy. The Company will utilize sophisticated underwriting strategies and pricing models to enable superior risk selection and appropriate pricing for underwritten risks. • Leverage scale, capital and technology to provide high quality and high value insurance products and services. As one of the ten largest property and casualty insurance companies in the United States based on 2015 NWP (based on information collected by the National Association of Insurance Commissioners (“NAIC”)), the Company intends to leverage its skill, scale and capital base to provide high quality, high value insurance products and services. Additionally, the Company will continue to invest in technology to improve customer service, distribution, product features, breadth of product offerings and efficiency. • Enhance financial strength ratings. Interactive financial strength ratings issued by major rating organizations such as A.M. Best, Standard & Poor’s and Moody’s have become an increasingly important factor in establishing the competitive position of insurance companies. The Company is committed to disciplined underwriting, earnings growth and capital generation in order to sustain and enhance its financial strength ratings, which it believes create a competitive advantage in retaining and attracting new business. • Leverage and opportunistically expand diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company intends to continue to expand its multi-channel distribution capabilities, which it believes are both strategic and operational strengths of the Company. • Selectively pursue strategic acquisitions and divest non-core and non-performing business lines. The Company intends to continue to grow selectively through acquisitions. Additionally, the Company intends to exit businesses and markets that no longer meet its financial or strategic objectives, such as the sale of Summit, a mono-line workers compensation company based in Florida in April 2014.

7 Summary of the Offering

The following is a brief summary of certain terms of this offering. For a more complete description of the terms of the Notes, see “Description of Notes” in this Offering Memorandum.

Issuer: ...... Liberty Mutual Group Inc.

Notes Offered: ...... €750,000,000 aggregate principal amount of 2.75% Senior Notes due 2026.

Maturity: ...... May4,2026.

Issue Price: ...... 99.277% of the principal amount per Note, plus accrued interest, if any, from May 4, 2016.

Interest Payment Dates: ...... 2.75% per annum, payable annually on May 4 of each year, beginning May 4, 2017.

Guarantors: ...... Liberty Mutual Holding Company Inc. and LMHC Massachusetts Holdings Inc.

Guarantees: ...... TheNotes will be irrevocably and unconditionally guaranteed as to the payment of principal and interest and other amounts payable under the Notes by each of the Guarantors.

Ranking: ...... TheNotes constitute unsecured senior obligations of Liberty Mutual and the Guarantees constitute unsecured senior obligations of Massachusetts Holdings and LMHC, respectively. The Notes will rank equally in right of payment with all of Liberty Mutual’s existing and future unsecured senior indebtedness. The Guarantees will rank equally in right of payment with all of the existing and future unsecured senior indebtedness of Massachusetts Holdings and LMHC, respectively. The only significant asset of Massachusetts Holdings and LMHC, respectively, is the capital stock of their respective subsidiaries. The Notes will not be guaranteed by any subsidiary of Liberty Mutual. For more information, see “Description of Notes—Ranking of the Notes and the Guarantees” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Years Ended December 31, 2015 and 2014— Liquidity and Capital Resources.” On a pro forma basis as of December 31, 2015, as adjusted to give effect to the sale of the Notes, but excluding the debt of Liberty Mutual’s subsidiaries, Liberty Mutual would have had $5.968 billion of outstanding senior indebtedness, none of which is secured. See “Capitalization” for additional information. As of December 31, 2015, debt, unpaid claims and claim adjustment expense on property and casualty contracts and future policy benefits on life contracts of Liberty Mutual’s subsidiaries, to which the Notes will be structurally subordinated, was approximately $59.5 billion.

Payment of Additional Amounts: ...... Wewill pay additional amounts on the notes to each holder that is not a United States person (as defined under “Description of the Notes—

8 Payment of Additional Amounts”) in respect of withholding or deduction for any present or future tax, assessment or other governmental charge imposed by the United States or a taxing authority in the United States, subject to the terms and limitations set forth under “Description of the Notes—Payment of Additional Amounts” in this Offering Memorandum.

Optional Redemption: ...... Liberty Mutual may redeem the Notes, in whole or in part, at any time at the “make-whole” redemption price described under “Description of Notes—Optional Redemption.”

Redemption for Tax Reasons: ...... Liberty Mutual may redeem, in whole, but not in part, the Notes in the event of certain changes in the tax laws of the United States that could require Liberty Mutual to pay additional amounts as described under “Description of Notes—Payment of Additional Amounts.” The redemption price would be equal to 100% of the principal amount of the Notes, together with accrued and unpaid interest on the Notes to be redeemed to the date of redemption. See “Description of Notes— Redemption for Tax Reasons.”

Mandatory Redemption: ...... None.

Use of Proceeds: ...... Liberty Mutual expects to receive approximately €744,577,500 in proceeds, before underwriting discounts and other expenses, from the sale of the Notes. Liberty Mutual intends to use the net proceeds for general corporate purposes, which may include capital contributions to one or more of Liberty Mutual’s subsidiaries to permit further business growth.

Form and Denomination: ...... TheNotes will be issued in the form of one or more fully registered global notes and will be deposited with a common depositary for, and in respect of interests held through, Euroclear and Clearstream. Except as described under “Description of Notes—Certificated Notes,” owners of beneficial interests in the Notes will not be entitled to have Notes registered in their names, will not receive or be entitled to receive Notes in definitive form and will not be considered to be holders of Notes under the Fiscal Agency Agreement. The Notes will be issued in minimum denominations of €100,000 and in integral multiples of €1,000 in excess thereof.

Governing Law: ...... TheNotes will be governed by New York law.

Covenants: ...... TheFiscal Agency Agreement under which the Notes will be issued contains covenants for the benefit of holders of the Notes, which will restrict Liberty Mutual’s ability to: • create liens on the capital stock of its Significant Subsidiaries (as defined herein) to secure other indebtedness; and

9 • consolidate, merge or transfer all or substantially all of its assets. The covenants described above are subject to important exceptions and qualifications that are described under “Description of Notes— Covenants.”

Transfer Restrictions: ...... TheNotes have not been registered under the Securities Act or the securities laws of any other jurisdiction. Unless they are registered, the Notes may be offered and resold only in transactions that are exempt from registration under the Securities Act and the securities laws of any other jurisdiction. See “Notice to Investors.”

Risk Factors: ...... Youshould carefully consider the information set forth in the section entitled “Risk Factors” and the other information included in this Offering Memorandum in deciding whether to purchase the Notes.

Listing: ...... There is currently no public market for the Notes. Application has been made to the Irish Stock Exchange plc for the approval of listing particulars for the Notes and for the Notes to be admitted to the Official List and trading on the Global Exchange Market, which is the exchange regulated market of the Irish Stock Exchange plc. The Global Exchange Market is not a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments.

Clearance and Settlement: ...... TheNotes will be cleared through Euroclear and Clearstream.

Fiscal Agent: ...... TheBank of New York Mellon.

Paying Agent: ...... TheBank of New York Mellon, London Branch.

ISIN: ...... Rule 144A: XS1403494534 Regulation S: XS1403499848

Common Code: ...... Rule 144A: 140349453 Regulation S: 140349984

10 Summary of Historical Consolidated Financial Data

Liberty Mutual

The Liberty Mutual selected consolidated historical financial and other data as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 have been derived from the Audited Consolidated Financial Statements of LMGI, which are included elsewhere in this Offering Memorandum along with the Auditor’s Report of Independent Registered Public Accounting Firm thereon. Historical results are not necessarily indicative of future results.

Years Ended December 31, 2015 2014 2013 (dollars in millions) Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,064 6,735 6,257 Other expenses ...... 5,378 5,340 5,144 Total claims, benefits and expenses ...... 35,643 35,111 34,229 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non-controlling interest ...... 1,973 2,576 2,116 Income tax expense ...... 526 747 515 Consolidated net income from continuing operations ...... 1,447 1,829 1,601 Discontinued operations (net of income tax expense) ...... (909) (35) 170 Consolidated net income ...... 538 1,794 1,771 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to LMGI ...... $ 518 $ 1,818 $ 1,754 Total combined ratio1 ...... 97.8% 97.8% 99.9%

1 The combined ratio, expressed as a percentage, is a measure of underwriting profitability. This measure should only be used in conjunction with, and not in lieu of, underwriting income and may not be comparable to other performance measures used by the Company’s competitors. The combined ratio is computed as the sum of the following property and casualty ratios: (1) the ratio of claims and claim adjustment expense less managed care income to earned premium; (2) the ratio of insurance operating costs plus amortization of deferred policy acquisition costs less third-party administration income and fee income (primarily related to the Company’s involuntary market servicing carrier operations) and installment charges to earned premium; and (3) the ratio of policyholder dividends to earned premium. Provisions for uncollectible premium and

11 reinsurance are not reflected in the combined ratio calculation unless they are related to an asbestos and environmental commutation and certain other run off businesses.

As of December 31, 2015 2014 (dollars in millions) Balance sheet data: Total investments ...... $ 73,983 $ 74,128 Reinsurance recoverables ...... 13,575 13,979 Total assets ...... 121,700 124,287 Unpaid claims and claim adjustment expense reserves ...... 58,585 59,000 Total long-term debt ...... 6,982 7,232 Total liabilities ...... 102,447 103,983 Total equity ...... 19,253 20,304

As of and for the Years Ended December 31, 2015 2014 2013 (dollars in millions) Other selected financial information: Cash flow from continuing operations ...... $ 3,548 $ 632 $ 3,620 Statutory surplus ...... $18,687 $19,180 $17,508

12 The Guarantors

LMHC The LMHC selected consolidated historical financial and other data as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 have been derived from the Audited Consolidated Financial Statements of LMHC, which are included elsewhere in this Offering Memorandum along with the Auditor’s Report of Independent Registered Public Accounting Firm thereon.

Years Ended December 31, 2015 2014 2013 (dollars in millions) Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,070 6,742 6,265 Other expenses ...... 5,378 5,340 5,144 Total claims, benefits and expenses ...... 35,649 35,118 34,237 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non- controlling interest ...... 1,967 2,569 2,108 Income tax expense ...... 524 744 510 Consolidated net income from continuing operations ...... 1,443 1,825 1,598 Discontinued operations (net of income tax expense) ...... (909) (35) 170 Consolidated net income ...... 534 1,790 1,768 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to LMHC ...... $ 514 $ 1,814 $ 1,751 Total combined ratio1 ...... 97.8% 97.8% 99.9%

13 As of December 31, 2015 2014 (dollars in millions) Balance sheet data: Total investments ...... $ 73,983 $ 74,128 Reinsurance recoverables ...... 13,575 13,979 Total assets ...... 121,707 124,293 Unpaid claims and claim adjustment expense reserves ...... 58,585 59,000 Total long-term debt ...... 6,982 7,232 Total liabilities ...... 102,466 104,002 Total equity ...... 19,241 20,291

As of and for the Years Ended December 31, 2015 2014 2013 (dollars in millions) Other selected financial information: Cash flow from continuing operations ...... $ 3,543 $ 630 $ 3,611 Statutory surplus ...... $18,687 $19,180 $17,508

14 Massachusetts Holdings The Massachusetts Holdings selected consolidated historical financial and other data as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 have been derived from the Audited Consolidated Financial Statements of Massachusetts Holdings, which are included elsewhere in this Offering Memorandum along with the Auditor’s Report of Independent Registered Public Accounting Firm thereon.

Years Ended December 31, 2015 2014 2013 (dollars in millions) Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,064 6,735 6,257 Other expenses ...... 5,378 5,340 5,144 Total claims, benefits and expenses ...... 35,643 35,111 34,229 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non- controlling interest ...... 1,973 2,576 2,116 Income tax expense ...... 526 747 515 Consolidated net income from continuing operations ...... 1,447 1,829 1,601 Discontinued operations (net of income tax expense) ...... (909) (35) 170 Consolidated net income ...... 538 1,794 1,771 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to Massachusetts Holdings ...... $ 518 $ 1,818 $ 1,754 Total combined ratio1 ...... 97.8% 97.8% 99.9%

15 As of December 31, 2015 2014 (dollars in millions) Balance sheet data: Total investments ...... $ 73,983 $ 74,128 Reinsurance recoverables ...... 13,575 13,979 Total assets ...... 121,700 124,287 Unpaid claims and claim adjustment expense reserves ...... 58,585 59,000 Total long-term debt ...... 6,982 7,232 Total liabilities ...... 102,447 103,983 Total equity ...... 19,253 20,304

16 RISK FACTORS

Before you decide to purchase any Notes, you should consider the following factors that could adversely affect our future results. They should be considered in connection with evaluating forward-looking statements, and are otherwise made by, or on behalf of, us, because these factors could cause actual results and conditions to differ materially from those projected in any forward-looking statements. This section does not describe all risks applicable to the Company, the Company’s industry or its business and it is intended only as a summary of certain material factors.

Risk Factors Relating to the Company’s Business and the Insurance Industry Unpredictable catastrophic events could adversely affect the Company’s results of operations, financial condition or liquidity. The Company’s insurance operations expose it to claims arising out of catastrophes. Catastrophes can be caused by various natural events, including hurricanes, windstorms, earthquakes, hail, severe winter weather, wildfires and volcanic eruptions. Catastrophes can also be man-made, such as terrorist acts (including those involving nuclear, biological, chemical or radiological events), riots, oil spills, utility outages, or consequences of war or political instability. In the United States, the geographic distribution of the Company’s business subjects it to catastrophe exposures, including hurricanes from Maine through Texas; tornadoes throughout the Central States and Southeast; earthquakes in California, the New Madrid region and the Pacific Northwest; and wildfires, particularly in California and the Southwest. In addition, the Company’s international operations subject it to a variety of world-wide catastrophe exposures.

The incidence and severity of catastrophes are inherently unpredictable. Some scientists believe that in recent years, changing climate conditions have added to the unpredictability and frequency of natural disasters (including hurricanes, tornadoes, hail, other storms and fires) in certain parts of the world and created additional uncertainty as to future trends and exposures. It is possible that the frequency and severity of natural and man- made catastrophic events could increase. The catastrophe modeling tools that the Company uses to help manage certain of its catastrophe exposures are based on assumptions, judgments and data entry that are subject to error and may produce estimates that are materially different from actual results. Changing climate conditions could cause the Company’s catastrophe models to be even less predictive, thus limiting the Company’s ability to effectively manage those exposures.

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Where the Company has geographic concentrations of policyholders, a single catastrophe or destructive weather trend affecting a region may significantly impact the Company’s financial condition and results of operations. States have from time to time passed legislation, and regulators have taken action, that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas or mandating that insurers participate in residual market mechanisms. Participation in residual market mechanisms has resulted in, and may continue to result in, significant losses or assessments to insurers, including the Company, and, in certain states, those losses or assessments may not be commensurate with the Company’s catastrophe exposure in those states. If the Company’s competitors leave those states having residual market mechanisms, remaining insurers, including the Company, may be subject to significant increases in losses or assessments following a catastrophe. In addition, following catastrophes, there are sometimes legislative initiatives and court decisions that seek to expand insurance coverage for catastrophe claims beyond the original intent of the policies. Also, the Company’s ability to increase pricing to the extent necessary to offset rising costs of catastrophes, particularly in the Company’s personal lines, requires approval of the regulatory authorities of certain states. The Company’s ability or willingness to manage its catastrophe exposure by raising prices, modifying underwriting terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the evolving political environment and changes in the general economic climate. The Company

17 also may choose for strategic purposes, such as improving its access to other underwriting opportunities, to write business in catastrophe-prone areas that it might not otherwise write.

There are also risks that affect the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability to access portions of the affected areas, the complexity of factors contributing to the losses, legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include: determining whether damage was caused by flooding versus wind, evaluating general liability and pollution exposures, estimating additional living expenses, estimating the impact of demand surge, infrastructure disruption, fraud, the effect of mold damage, business interruption costs, and reinsurance collectability. The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to the Company in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge and additional information becomes available.

Catastrophe losses could have a material adverse effect on the Company’s results of operations for any fiscal quarter or year and may materially harm its financial position, which in turn could adversely affect its financial strength and claims-paying ratings and could impair its ability to raise capital on acceptable terms or at all. Also, as a result of the Company’s exposure to catastrophe losses or actual losses following a catastrophe, rating agencies may further increase their capital requirements, which may require the Company to raise capital to maintain its ratings or, if unsuccessful, suffer an adverse effect on its ratings. A ratings downgrade could hurt the Company’s ability to compete effectively or attract new business. In addition, catastrophic events could cause the Company to exhaust its available reinsurance limits and could adversely affect the cost and availability of reinsurance. Such events can also affect the credit of the Company’s reinsurers. Catastrophic events could also adversely affect the credit of the issuers of securities, such as states or municipalities, in which the Company has invested, which could have a material adverse effect on the Company’s results of operations, financial position or liquidity.

In addition to catastrophe losses, the accumulation and development of losses from smaller weather-related events in any fiscal quarter or year could have a material adverse effect on the Company’s results of operations, financial condition or liquidity in those periods.

Because of the risks set forth above, catastrophes and the accumulation of losses from smaller weather- related events could have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

The Company’s claims and claim adjustment expense reserves may be inadequate to cover its ultimate liability for unpaid claims and claim adjustment expenses, and as a result any inadequacy could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. The Company’s success depends in part on its ability to accurately assess the risks associated with the businesses and individuals that it insures. The Company is required to maintain adequate reserves to cover its estimated ultimate liabilities for unpaid claims and claim adjustment expenses (“loss reserves” or “unpaid claims and claim adjustment expenses”). Reserves for these liabilities are typically composed of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported (“IBNR”) reserves. Loss reserves do not represent an exact calculation of liability. Case reserves represent reserves established for reported claims. IBNR reserves include a reserve for unreported claims, future claims payments in excess of case reserves on recorded open claims, additional claims payments on closed claims, claims that have been reported but not recorded and the cost of claims that have been incurred but have not yet been reported to the Company to arrive at management’s best estimate. IBNR reserves represent management estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date. In arriving at management’s best estimate, management utilizes actuarial indications in conjunction with their knowledge and judgment about operational and environmental conditions. Consideration is given to any limitations in the actuarial methodologies and assumptions that may not be completely reflective

18 of future loss emergence as well as to historical development on immature years and the historical movement of unpaid claims and claim adjustment expense estimates as these years typically mature. Loss reserve estimates are refined periodically as experience develops and claims are reported and settled. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserve determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more the ultimate settlement can vary. Establishing an appropriate level of loss reserves is an inherently uncertain process. Because of this uncertainty, it is possible that the Company’s loss reserves at any given time could prove inadequate.

If in the future the Company determines that its loss reserves are insufficient to cover its actual unpaid claims and claim adjustment expenses, it would have to add to its loss reserves, which could have a material adverse effect on its results of operations, financial condition or liquidity.

The Company’s business could be harmed because its potential exposure for asbestos and environmental claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves. The Company has exposure to A&E claims that emanate principally from general liability policies written prior to the mid-1980s. Asbestos claims relate primarily to injuries asserted by those who allegedly came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up cost obligations, particularly as mandated by federal and state environmental protection agencies. The process of establishing loss reserves for A&E claims is subject to greater uncertainty than the establishment of loss reserves for liabilities relating to other types of insurance claims. If the Company has not established adequate loss reserves to cover current and future A&E claims, it could have a material adverse effect on its results of operations, financial condition or liquidity.

The Company estimates its net A&E loss reserves based upon numerous factors, including the facts surrounding reported cases and exposures to claims, such as policy limits and deductibles, current law, past and projected claim activity and past settlement values for similar claims, reinsurance coverage as well as analysis of industry studies and events, such as recent settlements and asbestos-related bankruptcies. Several factors make it difficult to establish A&E loss reserves, including: (i) the lack of available and reliable historical claims data as an indicator of future loss development; (ii) the long waiting periods between exposure and manifestation of bodily injury or property damage; (iii) the difficulty in identifying the source of A&E contamination; (iv) the difficulty in properly allocating liability for asbestos or environmental damage; (v) the uncertainty as to the number and identity of insureds with potential exposure; (vi) the cost to resolve claims; and (vii) the collectability of reinsurance.

The uncertainties associated with establishing loss reserves for A&E claims and claim adjustment expenses are compounded by the differing, and at times inconsistent, court rulings on A&E coverage issues involving: (i) differing interpretations of various insurance policy provisions and whether A&E losses are, or were ever intended to be, covered; (ii) when the loss occurred and what policies provide coverage; (iii) whether there is an insured obligation to defend; (iv) whether a compensable loss or injury has occurred; (v) whether lung cancer claims can be attributable to A&E; (vi) how policy limits are determined; (vii) how policy exclusions are applied and interpreted; (viii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities; (ix) whether clean-up costs are covered as insured property damage; and (x) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products or completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

As a result of the significant uncertainty inherent in determining a company’s A&E liabilities and establishing related reserves, the amount of reserves required to adequately fund the Company’s A&E claims cannot be accurately estimated using conventional reserving methodologies based on historical data and trends.

19 As a result, the use of conventional reserving methodologies frequently has to be supplemented by subjective considerations, including managerial judgment. Thus, the ultimate amount of the Company’s A&E exposures may vary materially from the reserves currently recorded and could exceed the currently recorded reserves. This could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. For more information about A&E claims, see “Business—Significant Developments—Reinsurance of Asbestos, Environmental and Workers Compensation Liabilities,” “Business—Legal Proceedings,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and Litigation,” “Environmental Claims and Litigation” and “Uncertainty Regarding Adequacy of A&E Reserves.”

The Company may not be able to successfully alleviate risk through reinsurance arrangements. Additionally, it may be unable to collect all amounts due from its reinsurers under its reinsurance arrangements. The Company attempts to limit its risk of loss through reinsurance arrangements, such as excess of loss and catastrophe coverage, and through customized coverages such as that provided by NICO relating to the Company’s A&E and workers compensation liabilities. See “Business—Significant Developments—Reinsurance of Asbestos, Environmental and Workers Compensation Liabilities.” The availability and cost of reinsurance protection is subject to market conditions, which are outside of the Company’s control. In addition, the coverage under the Company’s existing and future reinsurance contracts may be inadequate to cover the Company’s liabilities. As a result, the Company may not be able to successfully alleviate risk through these arrangements, which could have a material adverse effect on its results of operations, financial condition or liquidity. In particular, the hardening of the reinsurance market in past years has led to increased prices or less favorable terms during the renewal of some of the Company’s reinsurance programs.

The Company is not relieved of its obligation to its policyholders by purchasing reinsurance. Accordingly, it is subject to credit risk with respect to its reinsurance if a reinsurer is unable to pay amounts owed to the Company as a result of a deterioration in the reinsurer’s financial condition or if the reinsurer simply is unwilling to pay due to a dispute or other factors beyond the Company’s control. In the past, certain reinsurers have ceased writing business and entered into run-off. Some of the Company’s reinsurance claims may be disputed by the reinsurers, and the Company may ultimately receive partial or no payment. This is a particular risk in the case of claims that relate to insurance policies written many years ago, including those relating to A&E claims. The ability of reinsurers to transfer their risks to other, less creditworthy reinsurers may adversely affect the Company’s ability to collect amounts due to the Company.

Included in reinsurance recoverables are certain amounts related to structured settlements. Structured settlements comprise annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers compensation claims constitute a significant portion. In cases where the Company did not receive a release from the claimant, the structured settlement is included in reinsurance recoverables as the Company retains the contingent liability to the claimant. If the life insurance company fails to make the required annuity payments, the Company would be required to make such payments.

Many reinsurance companies and life insurance companies have been negatively affected by deteriorating financial and economic conditions, including the unprecedented financial market disruption in 2008 and 2009. A number of these companies, including some with which the Company conducts business, were downgraded by various rating agencies. One or more of the Company’s reinsurers could be significantly adversely affected by future significant loss events.

Because of the risks set forth above, the Company may not be able to collect all amounts due to it from reinsurers, and reinsurance coverage may not be available to the Company in the future at commercially reasonable rates or at all. In addition, life insurance companies may fail to make required annuity payments. As a result, there could be a material adverse effect on the Company’s results of operations, financial condition or liquidity.

20 Disruptions to the Company’s relationships with its independent agents and brokers could materially adversely affect it. Other than in the Personal Lines segment of its Personal Insurance SBU, the Company markets substantially all of its insurance products through independent agents and brokers. Independent agents and brokers may sell the Company’s competitors’ products and may stop selling the Company’s products altogether. Many insurers offer products similar to those of the Company. In choosing an insurance carrier, the Company’s independent agents and brokers may consider ease of doing business, reputation, price of product, customer service, claims handling and the insurer’s compensation structure. The Company may be unable to compete with insurers that adopt more aggressive pricing policies or more generous compensation structures, offer a broader array of products, or have extensive promotional and advertising campaigns. Loss of the business provided through independent agents and brokers could have a material adverse effect on the Company’s future business volume and results of operations.

During or following a period of financial market disruption or economic downturn, the Company’s business could be materially and adversely affected. Over the past several years, worldwide financial markets have experienced significant disruptions and, during a portion of this period, the United States and many other economies experienced a prolonged economic downturn, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. While economic conditions have generally improved, there is continued uncertainty regarding the duration and strength of the economic recovery. Even if growth continues, it may be at a slow rate for an extended period of time, and other economic conditions, such as employment rates, may continue to be weak. In addition, while inflation has recently been limited and that trend may continue, it is possible that steps taken by the federal government to stabilize financial markets and improve economic conditions could lead to an inflationary environment. Furthermore, financial markets may again experience significant and prolonged disruption.

Economic uncertainty has been exacerbated in recent years by the increased potential for default by one or more European sovereign debt issuers, the potential partial or complete dissolution of the Eurozone and its common currency, and the negative impact of such events on global financial institutions and capital markets generally. Actions or inactions of European governments may affect these actual or perceived risks. In 2011, one rating agency downgraded the long-term debt credit rating of the United States from AAA. Future actions or inactions of the U.S. government, including a failure to increase the government debt limit or a shutdown of the federal government, could increase the actual or perceived risk that the United States may not ultimately pay its obligations when due and may disrupt financial markets.

If economic conditions deteriorate, or if financial markets experience significant disruption, that could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. Several of the risk factors discussed in this Offering Memorandum identify risks that result from, or are exacerbated by, an economic slowdown or financial disruption. These include risks discussed in this Offering Memorandum related to the Company’s investment portfolio, reinsurance arrangements, other credit exposures, estimates of claims and claim adjustment expense reserves, emerging claim and coverage issues, the competitive environment, regulatory developments and the impact of rating agency actions.

Many of these risks could materialize, and the Company’s financial results could be negatively affected, even after the end of an economic downturn or financial disruption. During or following an economic downturn, lower levels of economic activity could reduce (and historically have reduced) exposure changes at renewal, which generally results in decreased premiums. They also could adversely affect (and historically have adversely affected) audit premium adjustments, policy endorsements and mid-term cancellations after policies are written, which could adversely affect the Company’s written premiums. In addition, because earned premiums lag written premiums, the Company’s results can be adversely affected after general economic conditions have improved.

21 An inflationary environment (which may follow government efforts to stabilize the economy) may also, as discussed in this Offering Memorandum, adversely affect the Company’s loss costs and could adversely affect the valuation of its investment portfolio. Finally, as a result of the financial market disruptions over the past several years, the Company may, as discussed in this Offering Memorandum, face increased regulation.

The Company’s investment portfolio may suffer reduced returns or material losses. Investment returns are an important part of the Company’s overall profitability and investment values can materially impact equity.

The Company’s investment portfolio may be adversely affected by changes in interest rates. If the market value of the Company’s fixed maturity portfolio decreases, the Company may realize losses if it deems the value of its fixed income portfolio to be other-than-temporarily impaired.

The Company’s investment-grade bond portfolio is invested, in substantial part, in obligations of states, municipalities, and political subdivisions (collectively referred to as the municipal bond portfolio). Notwithstanding the relatively low historical rates of default on many of these obligations, the occurrence of a major economic downturn, widening credit spreads, budgetary deficits, or other events that adversely affect the issuers or guarantors of these securities could cause the value of the Company’s fixed maturity securities portfolio and the Company’s net income to decline and the default rate of the Company’s fixed maturity securities portfolio to increase.

Supplementing the Company’s broadly based portfolio of investment-grade bonds, the Company invests in additional asset types with the objective of further enhancing the portfolio’s diversification and expected returns. These additional asset types include commercial mortgages and other real estate financing investments, non-investment-grade bonds, private equity, direct investments in natural resources and common and preferred stock.

During or following an economic downturn or period of financial market disruption, the Company’s investment portfolio could be subject to higher risk. The value of the Company’s investment portfolio is subject to the risk that certain investments may default or become impaired due to a deterioration in the financial condition of one or more issuers of the securities held in the portfolio. Such defaults and impairments could reduce the Company’s net investment income and result in realized investment losses. In 2008 and 2009, worldwide financial markets experienced significant disruptions and the United States and many other economies experienced a prolonged economic downturn, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. The financial market volatility and the resulting negative economic impact could recur and it is possible that it may be prolonged, which could adversely affect the Company’s current investment portfolio, make it difficult to determine the value of certain assets in the Company’s portfolio or make it difficult for the Company to purchase suitable investments that meet its risk and return criteria. These factors could cause the Company to realize less than expected returns on invested assets, sell investments for a loss, or write off or write down investments, any of which could have a material adverse effect on the Company’s results of operations or financial condition.

With economic uncertainty, the credit quality and ratings of securities in the Company’s portfolio could be adversely affected. The NAIC could potentially apply a lower class code on a security than was originally assigned, which could adversely affect statutory surplus because securities with NAIC class codes 3 through 6 are required to be carried at lower of amortized cost or fair market value for statutory accounting purposes as compared to securities with NAIC class codes of 1 or 2 that are carried at amortized cost.

Because of the risks set forth above, the value of the Company’s investment portfolio could decrease, the Company could experience reduced net investment income, and the Company could incur realized investment losses, which could have a material adverse effect on its results of operations, financial condition or liquidity.

22 Interest rates may rise or decline, resulting in a change in the carrying value of the Company’s investments or a reduction in its liquidity. Interest rates are currently at historically low levels. Changes in interest rates (inclusive of credit spreads) affect the carrying value of the Company’s investment-grade bonds and returns on the Company’s investment-grade bonds and short-term investments. A decline in interest rates reduces the returns available on new investments, thereby negatively impacting the Company’s net investment income. Conversely, rising interest rates reduce the market value of existing investments in investment-grade bonds. During periods of declining market interest rates, the Company would be forced to reinvest the cash it receives as interest or return of principal on its investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of fixed income securities could also decide to prepay their obligations in order to borrow at lower market rates, which would increase the percentage of the Company’s portfolio that the Company would have to reinvest in lower-yielding investments of comparable credit quality or in lower quality investments offering similar yields. In the event that the Company incurs debt on which interest is tied to a floating interest rate, a rise in interest rates could increase the interest expense associated with such debt, resulting in a reduction to the Company’s liquidity.

The Company is subject to the types of risks inherent in making alternative investments in private limited partnerships, limited liability companies, commercial mortgages and natural resource working interests. The Company’s investments include investments in private limited partnerships, limited liability companies, commercial mortgages and natural resource working interests. The Company’s investments in these entities are long-term in nature and highly illiquid.

With respect to investments in private limited partnerships, limited liability companies and natural resource working interests, the amount and timing of income from these entities tends to be variable as a result of the performance and investment stage of the underlying investments. The timing of distributions from these entities, which depend on particular events relating to the underlying investments as well as the entities’ schedules for making distributions and their need for cash, can be difficult to predict. As a result, the amount of income that the Company records from these investments can vary substantially from quarter to quarter. In addition, general volatility in the capital markets and the dislocation of the credit markets may reduce investment income from these types of investments. As of December 31, 2015, the Company had unfunded commitments in private equity partnerships of $1.354 billion, natural resources of $2.440 billion, real estate of $320 million and other of $1.057 billion.

The majority of energy commitments are subject to contractual price floors. If certain price targets are not met, the Company is not required to fund these investments until pricing improves. Due to current market conditions, energy prices would need to increase significantly in order for these commitments to become callable.

In addition, the Company has committed to invest in the successor fund of an existing private equity energy fund in an amount not to exceed the lesser of (i) 40% of the capital commitment of such fund and (ii) $600 million, which obligation attaches only if such fund has raised commitments of at least $1 billion, including the Company’s commitment, by August 1, 2020 and the contractual obligations with the fund manager have not been previously terminated.

With respect to investments in commercial mortgages, the amount and timing of distributions tends to be more consistent than the investments discussed above, however they can vary depending on the interest rate environment. If the trend is toward falling interest rates, then the return on investments in commercial mortgages may decrease as a result of prepayments. While in a period of rising interest rates or a worsening economy, returns on mortgage investments may be affected by an increase in defaults. As of December 31, 2015, the Company had unfunded commitments in commercial mortgages of $58 million.

23 With respect to investments in private limited partnerships and limited liability companies, the Company is also subject to the risks arising from the fact that the determination of the fair value of these types of investments is inherently subjective. The general partner of each of these partnerships generally reports the change in the fair value of the interests in the partnership on a one quarter lag because of the nature of the underlying assets or liabilities. Since these partnerships’ underlying investments consist primarily of assets or liabilities for which there are no quoted prices in active markets for the same or similar assets, the valuation of interests in these partnerships is subject to a higher level of subjectivity than substantially all of the Company’s other investments. Each of these general partners is required to determine fair value by the price obtainable for the sale of the interest at the time of determination. Valuations based on unobservable inputs are subject to greater scrutiny and reconsideration from one reporting period to the next, and therefore the changes in the fair value of these investments may be subject to significant fluctuations which could lead to significant decreases in their fair value from one reporting period to the next. Since the Company records its investments in these various entities under the equity method of accounting, any decreases in the valuation of these investments would negatively affect its results of operations.

The valuation of the Company’s investments includes methodologies, estimations and assumptions that are subject to differing interpretations and could result in changes to investment valuations that may have a material adverse effect on the Company’s results of operations, financial condition or liquidity. Fixed maturity, equity and short-term investments, which are reported at fair value on the balance sheet, represented the majority of the Company’s total cash and invested assets as of December 31, 2015. As required under accounting rules, the Company has categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1); the next priority to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including (i) quoted prices (a) for similar assets or liabilities other than quoted prices in Level 1 or (b) in markets that are not active or (ii) other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets or liabilities (Level 2); and the lowest priority to unobservable inputs supported by little or no market activity and that reflect the reporting entity’s own assumptions about the exit price, including assumptions that market participants might use in pricing the asset or liability (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. At December 31, 2015, approximately 7.7% and 90.5% of these securities represented Level 1 and Level 2, respectively. The Company generally uses a combination of independent pricing services and broker quotes to price its investment securities. However, prices provided by independent pricing services and independent broker quotes can vary widely even for the same security. To the extent that the Company is incorrect in its determination of fair value of its investment securities or its determination that a decline in their value is other- than-temporary, the Company may realize losses that never actually materialize or may fail to recognize losses within the appropriate period.

Rapidly changing and unprecedented credit and equity market conditions could increase the difficulty in valuing certain of the Company’s securities and materially impact the valuation of securities as reported within the Company’s financial statements and the period-to-period changes in value could vary significantly. Decreases in value may result in an increase in non-cash other-than-temporary impairment charges and may have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

The determination of the amount of impairments taken on the Company’s investments has a degree of subjectivity and could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. The determination of the amount of impairments taken on the Company’s investments is based on the Company’s periodic evaluation and assessment of its investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in impairments as such

24 evaluations are revised. There can be no assurance that management has accurately assessed the level of impairments reflected in the Company’s financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.

The Company reviews fixed maturity securities, equity securities and other investments for impairment on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations, including: (a) the extent of the decline in fair value below book value, (b) the duration of the decline, (c) significant adverse changes in the financial condition or near-term prospects for the investment or issuer, (d) significant changes in the business climate or credit ratings of the issuer, (e) general market conditions and volatility, (f) industry factors, and (g) the past impairment of the security holding or the issuer. For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates impairments into credit loss and non-credit loss components. The determination of the credit loss component of the impairment charge is based on the Company’s best estimate of the present value of the cash flows to be collected from the fixed maturity security compared to its amortized cost, and it is reported as part of net realized gains (losses). The non-credit component, the residual difference between the credit impairment component and the fair value, is recognized in other comprehensive income. The factors considered in making an evaluation for credit versus non-credit other-than- temporary impairment include the following: (a) failure of the issuer of the security to make scheduled interest or principal payments (including the payment structure of the fixed maturity security and the likelihood the issuer will be able to make payments that increase in the future), (b) performance indicators of the underlying assets in the security (including default and delinquency rates), (c) vintage, (d) geographic concentration, (e) impact of foreign exchange rates on foreign currency denominated securities, and (f) industry analyst reports, sector credit ratings and volatility of the security’s fair value. In addition, the Company’s accounting policy for other-than- temporary impairment recognition requires an other-than-temporary impairment charge be recorded when it is determined the security will be sold or it is more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis (all fixed maturity securities and certain preferred equity securities) or the Company does not have the intent and ability to hold certain equity securities for a period of time that is sufficient to allow for any anticipated recovery in fair value. Realized losses or impairments may have a material adverse effect on the Company’s results of operations, financial condition, or liquidity.

The Company may suffer losses from unfavorable outcomes from litigation and other legal proceedings, which may have a material adverse effect on its results of operations, financial condition or liquidity and the effects of emerging claim and coverage issues on its business are uncertain. In the ordinary course of business, the Company is subject to litigation and other legal proceedings as part of the claims process, the outcomes of which are uncertain. The Company maintains reserves for these legal proceedings as part of its reserves for unpaid claims and claim adjustment expenses. The Company also maintains separate reserves for legal proceedings that are not related to the claims process. In the event of an unfavorable outcome in one or more legal matters, the Company’s ultimate liability may be in excess of amounts the Company has currently reserved for, and such additional amounts may have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect the Company’s business by either extending coverage beyond the Company’s underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include: • judicial expansion of policy coverage and the impact of new theories of liability; • plaintiffs targeting property and casualty insurers, including the Company, in purported class action litigation relating to claims-handling and other practices; • claims relating to construction defects, which often present complex coverage and damage valuation questions;

25 • the assertion of “public nuisance” theories of liability, pursuant to which plaintiffs seek to recover money spent to administer public health care programs or to abate hazards to public health and safety; and • claims relating to unanticipated consequences of current or new technologies.

In some instances, these emerging issues may not become apparent for some time after the Company has issued the affected insurance policies. As a result, the full extent of liability under the Company’s insurance policies may not be known for many years after the policies are issued.

In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on the Company’s business.

The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could harm the Company’s business and have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

The Company is exposed to credit risk in certain of its business operations. In addition to exposure to credit risk related to its investment portfolio, reinsurance recoverables and surety insurance operations discussed elsewhere in this Offering Memorandum, the Company is exposed to credit risk in several other areas of its business operations, including credit risk relating to policyholders and independent agencies.

A portion of the Company’s commercial business is written with large deductible insurance policies. Under some commercial insurance contracts with deductible features, the Company is obligated to pay the claimant the full amount of the claim. The Company is subsequently reimbursed by the contract holder for the deductible amount, and is subject to credit risk until such reimbursement is made. Additionally, retrospectively rated policies are also used, primarily for workers compensation coverage, whereby the ultimate premium is determined based on actual loss activity. Although the retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it does introduce credit risk to the Company. The Company’s results of operations could be adversely affected if a significant portion of such contract holders failed to reimburse the Company for the deductible amount or the retrospectively rated policyholders failed to pay additional premiums owed.

The Company is exposed to credit risk in its surety operations, where it guarantees to a third party that the Company’s customer will satisfy certain performance obligations (for example, a construction contract) or certain financial obligations. If the Company’s customer defaults, the Company may suffer losses and be unable to be reimbursed by that customer. In addition, in accordance with industry practice, multiple insurers participate as co-sureties on large surety bonds and the co-surety obligations under these arrangements are typically joint and several. In that context, the Company is exposed to credit risk with respect to its co-sureties.

In accordance with industry practice, when customers purchase insurance policies from the Company through independent agents and brokers, the premiums relating to those policies are often paid to the agents and brokers for payment to the Company. In most jurisdictions, the premiums will be deemed to have been paid to the Company whether or not they are actually received by the Company. Consequently, the Company assumes a degree of credit risk associated with amounts due from independent agents and brokers.

To a large degree, the credit risk the Company faces is a function of the economy. Accordingly, the Company faces a greater risk in an economic downturn. While the Company attempts to manage the risks discussed above through underwriting and investment guidelines, collateral requirements and other oversight mechanisms, the Company’s efforts may not be successful. For example, collateral obtained may subsequently have little or no value. As a result, the Company’s exposure to the above credit risks could have a material adverse effect on its results of operations, financial condition or liquidity.

26 Terrorist acts could have a material adverse effect on the Company’s business, results of operations, financial condition or liquidity, and the Company’s ability to reinsure or manage such risk is limited. The Terrorism Risk Insurance Program (the “Program”) established under the Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Acts of 2007 and 2015 (collectively, the “Terrorism Acts”) generally requires all commercial property and casualty insurers writing business in the United States to make terrorism coverage available to commercial policyholders and provides a federal backstop for certified terrorist acts, which result in losses above insurance company deductible amounts. The Terrorism Acts directly apply to the Company’s U.S. property and casualty insurance business. For a loss to be covered under the Program, the loss must meet certain aggregate industry loss minimums and must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of the Treasury. In calendar year 2015, on eligible lines of business, participating insurers are entitled to receive reimbursement for “certified” acts of terrorism from the federal government for 85% of paid losses in excess of the insurer’s deductible, provided the aggregate industry losses exceed $100 million to a maximum industry loss of $100 billion. Beginning on January 1, 2016: (1) the amount of reimbursement from the federal government decreases by one percentage point each calendar year, until it equals 80%; and (2) the aggregate industry loss minimum increases by $20 million each calendar year, until it equals $200 million. The deductible for any calendar year is equal to 20% of an insurer’s and its affiliates’ direct premiums earned for covered lines for the preceding calendar year. The Company estimates that the amount that it will have to pay in the context of a “certified” act of terrorism, before the federal backstop under the Program becomes available, is $1.5 billion for 2016. Certain lines of business that the Company writes, including commercial automobile, professional liability (excluding directors and officers), surety, burglary and theft, and farmowners multiple-peril are exempted from coverage under the Program. In the case of a war declared by Congress, only workers compensation losses are covered by the Program. The U.S. Secretary of the Treasury may “certify,” for coverage under the Program, acts of terrorism committed by any individual(s), foreign or domestic. Damage outside the United States is not covered except in limited circumstances. The Program will remain in effect until December 31, 2020. There can be no assurance that it will be extended beyond that date. In the event that the Program is not extended beyond December 31, 2020 and in the absence of a private reinsurance market for terrorism reinsurance, the Company may be required to accept financial responsibility for losses that it would not otherwise insure unless state insurance departments allow for the non-renewal of business with significant terrorism risk exposure or the exclusion of coverage for terrorism risks under policy renewals. Because the interpretation of the Program is untested, there is substantial uncertainty as to how it will be applied to specific circumstances. It is also possible that future legislative action could change the Program. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company’s own reinsurance program, future losses from acts of terrorism, particularly “unconventional” acts of terrorism involving nuclear, biological, chemical or radiological events, could have a material adverse effect on the Company’s results of operations, financial condition or liquidity in future periods.

Independent of limitations on coverage under the Program, the occurrence of one or more terrorist attacks in the geographic areas the Company serves could result in substantially higher claims under its insurance policies than it has anticipated. Private sector catastrophe reinsurance is extremely limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. Accordingly, the effects of a terrorist attack in the geographic areas the Company serves may result in claims and related losses for which it does not have adequate reinsurance. This would likely cause the Company to increase its loss reserves. Further, the continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened security measures and military action in response to these threats and attacks, may cause significant volatility in global financial markets, disruptions to commerce and reduced economic activity. These consequences could have an adverse effect on the value of the assets in the Company’s investment portfolio. The continued threat of terrorism also could result in increased reinsurance prices and potentially cause the Company to retain more risk than it otherwise would retain if it were able to obtain reinsurance at lower prices. Terrorist attacks also could disrupt the Company’s operation centers and business capabilities generally. As a result, it is possible that any, or a combination of all, of these factors may have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

27 The property and casualty insurance industry is highly competitive, and the Company may not be able to compete effectively in the future. The property and casualty insurance industry is highly competitive and has, from time to time, experienced severe price competition. The Company competes with both domestic insurers, including both national insurers and regional insurers, and foreign insurers. Overall, competition is increasing in all of our businesses, including as a result of increased price transparency. The competitive environment in which the Company operates could be affected by current general economic conditions, which could reduce the volume of business available to the Company as well as to its competitors. In addition, the competitive environment could be affected by changes in customer preferences, such as a possible increase in customer focus on price over other competitive criteria. Over time, this increased focus on price may provide a relative advantage to carriers that have more efficient cost structures and that are better able to accurately estimate, and price for, claims and claim adjustment expenses. Furthermore, some competitors may have greater financial, marketing or management resources than the Company, or have longer-term business relationships with customers, which may be a significant competitive advantage. If we are not able to operate with a competitive cost structure or accurately estimate and price for claims and claim adjustment expenses, the Company’s underwriting margins could be adversely affected over time.

A number of the Company’s competitors may offer products at prices and on terms that are not consistent with the Company’s economic standards in an effort to maintain their business or write new business. The Company’s competitive position is based not only on its ability to profitably price its business, but also on product features and quality, scale, customer service, financial strength, claims-paying ratings, credit ratings, e- business capabilities, name recognition and agent compensation. The Company may have difficulty in continuing to compete successfully on any of these bases in the future.

In addition, the advent of driverless cars and technologies that facilitate ride sharing could materially alter the way automobile insurance is marketed, priced and underwritten.

The Company’s underwriting results are dependent on its ability to match rate to risk. If the Company’s pricing models fail to price risks accurately, its profitability may be adversely affected. The profitability of the Company’s property and casualty business substantially depends on the extent to which its actual claims experience is consistent with the assumptions it uses in pricing its policies. The Company uses automated underwriting tools for many of its property and casualty products, as well as tiered pricing structures to match its premium rates to the risks it insures. If the Company expands its appetite into different markets and products, it will write more policies in markets and geographical areas where it has less data specific to these new markets and accordingly may be more susceptible to error in its models or claims adjustment. If the Company fails to appropriately price the risks it insures, if it fails to change its pricing model to reflect its current experience, or if its claims experience is more frequent or severe than its underlying risk assumptions, its profit margins may be negatively affected. To the extent the Company has overpriced risks, new-business growth and retention of its existing business may be adversely affected.

The Company’s businesses are heavily regulated, and changes in regulation may reduce its profitability and limit its growth. The Company is extensively regulated and supervised in the jurisdictions in which it conducts business. This regulatory system is generally designed to protect the interests of policyholders and not necessarily the interests of insurers and investors. This system addresses, among other things: • licensing companies and agents to transact business and authorizing lines of business; • calculating the value of assets to determine compliance with statutory requirements; • mandating certain insurance benefits;

28 • regulating certain premium rates; • reviewing and approving policy forms; • regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements; • establishing statutory capital and surplus requirements; • approving changes in control of insurance companies; • restricting the payment of dividends and other transactions between affiliates; • establishing assessments and surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements; • requiring insurers to dividend to policyholders any excess profits; • regulating the types, amounts and valuation of investments; and • regulating a variety of other financial and non-financial components of an insurer’s business.

In recent years, the state insurance regulatory framework has come under increased scrutiny, and some state legislatures have considered or enacted laws and state insurance departments have adopted regulations that may alter or increase state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators continually reexamine existing laws and regulations, specifically focusing on modifications to statutory accounting principles, holding company regulations, interpretations of existing laws and the development of new laws and regulations. The NAIC has undertaken a Solvency Modernization Initiative focused on updating the solvency regulatory framework, including capital requirements, governance, risk management, accounting and financial reporting, group supervision and reinsurance.

In a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations. For example, insurance regulators may choose to restrict the ability of Insurance Subsidiaries to make payments to their parent companies or reject rate increases due to the economic environment.

The Company’s ability to change its rates in response to competition or to increased costs depends, in part, on whether the applicable state insurance rate regulation laws require the prior approval of a rate increase by or notification to the applicable insurance regulators either before or after a rate increase is imposed.

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase the Company’s direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on its financial condition and results of operations. If there were to be changes to statutory or regulatory requirements, the Company may be unable to fully comply with or maintain all required insurance licenses and approvals. Regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals. If the Company does not have all requisite licenses and approvals or does not comply with applicable statutory and regulatory requirements, the regulatory authorities could preclude or temporarily suspend the Company from carrying on some or all of its insurance activities or monetarily penalize it, which could have a material adverse effect on its results of operations, financial condition or liquidity. The Company cannot predict with certainty the effect any proposed or future legislation or regulatory initiatives may have on the conduct of its business.

While the U.S. federal government has not historically regulated the insurance business, in 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) established a Federal Insurance Office (the “FIO”) within the U.S. Department of the Treasury. The FIO has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers. In

29 December 2013, the FIO released a report recommending ways to modernize and improve the system of insurance regulation in the United States. While the report did not recommend full federal regulation of insurance, it did suggest an expanded federal role in some circumstances. In addition, the report suggested that Congress should consider direct federal involvement to fill regulatory gaps identified in the report, should those gaps persist, for example, by considering either establishing a federal coordinating body or a direct regulator of select aspects of the industry, such as large complex institutions or institutions that seek a federal charter, if a law is passed to allow a federal charter. It is not clear as to the extent, if any, the report will lead to regulatory changes or how any such changes would impact the Company. Further, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of nonbank financial services holding companies, including insurance companies, if they are designated by a two-thirds vote of the Financial Stability Oversight Council (the “FSOC”) as systemically important financial institutions (“SIFI”). To date, the FSOC has not designated the Company as a non-bank SIFI. However, the FSOC may conclude in the future that the Company is a SIFI. If the Company were designated as a SIFI, the Federal Reserve’s supervisory authority would include the ability to impose heightened financial regulation and could impact requirements regarding the Company’s capital, liquidity and leverage as well as its business and investment conduct. As a result of the foregoing, the Dodd-Frank Act, or other additional federal regulation that is adopted in the future, could impose significant burdens on the Company, including impacting the ways in which it conducts its business, increasing compliance costs and duplicating state regulation, and could result in a competitive disadvantage, particularly relative to smaller insurers that may not be subject to the same level of regulation.

Even if the Company is not subject to additional regulation by the federal government, significant financial sector regulatory reform, including the Dodd-Frank Act, could have a significant impact on the Company. For example, regulatory reform could have an unexpected impact on the Company’s rights as a creditor or on its competitive position. In addition, even if the Company is not designated as a SIFI, regulations imposed by the Federal Reserve on designated non-bank SIFIs could affect other regulators’ approaches toward regulations, which could affect the Company. In particular, the Dodd-Frank Act authorizes assessments to pay for the resolution of systemically important financial institutions that have become insolvent. The Company (as a financial company with more than $50 billion in assets) could be assessed, and, although any such assessment is required to be risk weighted (that is, riskier firms pay more), such costs could be material to the Company and are not currently estimable.

Other potential changes in U.S. federal legislation, regulation and administrative policies, such as the potential repeal of the McCarran-Ferguson Act and potential changes in federal taxation, could also significantly adversely affect the insurance industry, including the Company.

Insurance laws or regulations that are adopted or amended, in addition to changes in federal statutes, may be more restrictive than current laws or regulations and may result in lower revenues or higher costs of compliance and thus could have a material adverse effect on the Company’s results of operations and limit its growth.

The amount of statutory capital that the Company has and must hold to maintain its financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of the Company’s control. Accounting standards and statutory capital and reserve requirements for the Insurance Subsidiaries are prescribed by the applicable insurance regulators and the NAIC. Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for insurance companies. The RBC formula for property and casualty companies adjusts statutory surplus levels for certain underwriting, asset, credit and off-balance sheet risks.

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors—the amount of statutory income or losses generated by Insurance Subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of additional capital Insurance Subsidiaries

30 must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in the Company’s investment portfolio, the value of certain derivative instruments, changes in interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. Most of these factors are outside of the Company’s control. The Company’s financial strength ratings are significantly influenced by the Insurance Subsidiaries’ statutory surplus amounts and RBC ratios. Due to all of these factors, projecting statutory capital and the related RBC ratios is complex.

Changes to methods of marketing and underwriting in certain areas are subject to state-imposed restrictions. The Company’s ability to change its methods of marketing and underwriting in certain areas, such as in California and in the coastal areas of Florida and New York, are subject to state-imposed restrictions. These restrictions include restrictions on the use of named storm deductibles, restrictions on the use of underwriting guidelines that use an insured’s geographic area as a factor, restrictions on exiting certain lines of business based on geographic or other considerations without notice to or approval by the state insurance department and restrictions on the ability to write private passenger automobile insurance unless an insurer also writes homeowners coverage in the state. As a result, it may be more difficult for the Company to significantly reduce its exposure in these areas.

Mandated market mechanisms may require the Company to underwrite policies with a higher risk of loss and assessments and other surcharges for guaranty funds, and second-injury funds may reduce its profitability. The Company is often required to participate directly or indirectly in mandatory shared market mechanisms as a condition of its licenses to do business in certain states. These markets, which are commonly referred to as “residual markets” or “involuntary markets,” generally consist of risks considered to be undesirable from a standard or routine underwriting perspective. Underwriting performance related to assigned risk plans, a form of mandated market mechanism is typically adverse and, as a result, the Company is required to underwrite some policies with a higher risk of loss than it would normally accept.

Each state dictates the level of insurance coverage that is mandatorily assigned to participating insurers within these markets. Typically, the amount of involuntary policies the Company is obligated to write in a given year is based on its historical market share of all voluntary policies written within that state for particular lines of business. Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment has occurred (based on future premiums for property and casualty insurance lines of business). The related asset is limited to the amount that is determined based on future premium collections or policy surcharges from policies in force. Current assessments are expected to be paid out over the next five years, while premium tax offsets are expected to be realized within one year.

In addition, virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. These guaranty funds are funded by assessments. The effect of these assessments or changes in them could reduce the Company’s profitability in any given period or limit its ability to grow its business. The Company cannot predict the impact, if any, that these matters may have on its financial condition, results of operations or liquidity or on the property and casualty insurance industry.

The Company may not maintain favorable financial strength ratings, which could adversely affect its ability to conduct business. The Company may not maintain favorable financial strength ratings, which could adversely affect its ability to conduct business. Third party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers and reinsurers. These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of the criteria relate to general

31 economic conditions and other circumstances outside the rated company’s control. These financial strength ratings are used by policyholders, as well as independent agents and brokers, as an important means of assessing the suitability of insurers as business counterparties and have become an increasingly important factor in establishing the competitive position of insurance companies. These financial strength ratings do not refer to the Company’s ability to meet non-insurance obligations and are not a recommendation to purchase or discontinue any policy issued by the Company or to buy, hold or sell its securities. The principal Insurance Subsidiaries’ current financial strength ratings are “A” (“Excellent,” the third highest of 16 ratings) (stable outlook) from A.M. Best, “A2” (“Good,” the sixth highest of 21 ratings) (stable outlook) from Moody’s and “A” (“Strong,” the sixth highest of 22 ratings) (stable outlook) from S&P (except that LMPIC is not rated by Moody’s or S&P). Periodically, the rating agencies evaluate the Company to confirm that it continues to meet the criteria of the ratings previously assigned to it. A downgrade or withdrawal of the Company’s financial strength ratings could limit or prevent the Insurance Subsidiaries from writing new insurance policies or renewing existing insurance policies, which would have a material adverse effect on its results of operations, financial condition or liquidity.

The Insurance Subsidiaries are also parties to an intercompany reinsurance pooling arrangement that allows them to obtain a uniform rating from A.M. Best. If one or a few of the Insurance Subsidiaries experience a deterioration in its financial condition, the uniform rating of the entire pool could suffer a downgrade.

In reaction to any difficulties that may arise in the insurance industry or financial markets, it is possible that the external rating agencies: (1) could heighten the level of scrutiny that they apply to insurance institutions; (2) could increase the frequency and scope of their reviews; and (3) could adjust upward the capital and other requirements employed in their models for maintenance of certain rating levels.

The Company cannot predict what actions rating agencies may take, or what actions it may take in response to the actions of rating agencies, which could adversely affect the Company’s business. As with other companies in the financial services industry, the Company’s ratings could be downgraded at any time and without any notices by any rating agency, which could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. These ratings reflect the agencies’ opinions as to the financial strength, operating performance and ability to meet obligations to policyholders of the Insurance Subsidiaries, but are not ratings of the Notes offered hereby.

The Company is a holding company with no direct operations, and the Insurance Subsidiaries’ ability to pay dividends to it is restricted by law. As a holding company with no direct operations and whose only significant assets are the capital stock of its subsidiaries, the Company relies on dividends and other permitted payments from its subsidiaries to pay its expenses. The Company’s subsidiaries may not be able to generate cash flow sufficient to pay a dividend or distribute funds to it. In addition, applicable state laws that regulate the payment of dividends by the Insurance Subsidiaries could prohibit such dividends or distributions. Under the insurance laws of the jurisdictions in which the Insurance Subsidiaries are domiciled or commercially domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. The Company believes that its cash balances, cash flows from operations and cash flows from investments are adequate to meet expected cash requirements for the foreseeable future on both a holding company and operating subsidiary level. However, if the Insurance Subsidiaries cannot pay dividends in future periods, the Company may have difficulty paying principal and interest on its debt obligations and meeting its holding company expenses. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

32 Inflation, including repair costs and medical inflation, could have a material adverse effect on the Company’s results. Historically, massive government spending aimed at spurring the economy has been followed by increased inflation. The effects of inflation could cause the severity of claims from catastrophes or other events to rise in the future. The Company’s reserves for claims and claim adjustment expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as repair costs, medical expenses and litigation costs. To the extent that actual inflation increases significantly more than such assumptions, the Company may be required to increase its loss reserves with a corresponding reduction in its net income in the period in which the deficiency is identified.

Cyclicality of the property and casualty insurance industry may cause fluctuations in the Company’s results of operations, financial condition or liquidity. The property and casualty insurance business is cyclical in nature and has historically been characterized by periods of intense price competition, which could have an adverse effect on the Company’s results of operations and financial condition. Periods of intense price competition historically have alternated with periods when shortages of underwriting capacity have permitted attractive premium levels. Any significant decrease in the premium rates the Company can charge for property and casualty insurance would adversely affect its results.

Factors that affect loss cost trends in automobile underwriting include inflation in the cost of automobile repairs, medical care, litigation of liability claims, improved automobile safety features, legislative changes and general economic conditions. Factors that affect loss costs trends in property underwriting include inflation in the cost of building materials and labor costs and demand caused by weather-related catastrophes. Factors that affect loss cost trends in workers compensation underwriting include inflation in the cost of medical care, litigation of liability claims and general economic conditions. Property and casualty insurers, including the Company, are often unable to increase premium rates until sometime after the costs associated with the coverage have increased, primarily as a result of state insurance regulation and laws. Therefore, in a period of increasing loss costs, profit margins decline.

The Company expects to continue to experience the effects of this cyclicality which, during down periods, could have a material adverse effect on its results of operations, financial condition or liquidity.

The Company’s international business faces political, legal, operational and other risks that could adversely affect its results of operations. The Company’s international operations face political, legal, operational and other risks not encountered in the Company’s U.S. operations. The Company faces the risk of discriminatory regulation, nationalization or expropriation of assets, price controls and exchange controls or other restrictions that could prevent the Company from transferring funds from these operations out of the countries in which they operate or converting local currencies it holds into U.S. dollars or other currencies. For example, the operating environment in Venezuela is particularly challenging, with high inflation, political instability, governmental restrictions in the form of currency exchange, price and margin controls and the possibility of government actions such as further devaluations, business occupations and intervention or expropriation of assets. The foreign exchange controls in Venezuela limit our Venezuela business’s ability to repatriate funds. In addition, the Company relies on local sales forces in these countries and may encounter labor problems resulting from workers associations and trade unions in some countries. Also, in some markets, the Company has invested as part of a joint venture with a local counterparty. Because the Company’s governance rights may be limited, it may not have control over the ability of the joint venture to make certain decisions or mitigate risks it faces, and significant disagreements with a joint venture counterparty may adversely affect the Company’s investment.

The Company’s foreign insurance operations generally write policies denominated in local currencies and in large part invest in local currencies. Although investing in local currencies limits the effect of currency exchange

33 rate fluctuation on local operating results, fluctuations in such rates affect the translation of these results into the Company’s financial statements and could have a material adverse effect on the Company’s business, financial condition or results of operations.

The European Union’s executive body, the European Commission, is implementing new capital adequacy and risk management regulations called Solvency II that would apply to the Company’s businesses in the European Union beginning January 1, 2016. Under Solvency II, the direct or indirect parent of a European Union subsidiary (including a U.S. parent company) could be subject to certain Solvency II requirements if the regulator determines that the subsidiary’s capital position is dependent on an affiliated or parent company and the affiliated or parent company is not already subject to regulations deemed equivalent to Solvency II.

In addition, regulators in countries where the Company has operations are working with the International Association of Insurance Supervisors (“IAIS”) (and in the United States, with the NAIC) to develop a Common Framework for the Supervision of Internationally Active Insurance Groups (“ComFrame”), which is intended to establish a set of international supervisory requirements focusing on the effective group-wide supervision of internationally active insurance groups (“IAIGs”). In 2013, the IAIS announced that it will be developing a first- ever risk-based global insurance capital standard by 2016. Full implementation is scheduled to begin in 2019. It will be included as part of ComFrame, applying to IAIGs. Under the IAIS definition, the Company would be identified as an IAIG. It is not yet known what impact a global insurance capital standard included as part of ComFrame would have on the Company.

The IAIS is also working with the Financial Stability Board created by the G-20 and is developing basic capital requirements for insurance companies that pose a systemic risk to the global economy, known as “global systemically important insurers” (“G-SIIs”). In 2013, the Financial Stability Board named the insurers that are designated as G-SIIs and the Company was not one of them. It is possible, however, that the Financial Stability Board may in the future conclude that the Company is a G-SII. Designation as a G-SII could result in heightened financial regulation and could impact requirements regarding the Company’s liquidity and leverage as well as its business and investment conduct.

Furthermore, the Company’s international businesses are focused on emerging markets, which can be subject to severe economic and financial disruptions, including significant devaluations of their currencies and low or negative growth rates in economies. For example, the Venezuela government implemented changes to their currency exchange systems in 2015 and the impact of that action on the Company appears in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—For the years ended December 31, 2015 and 2014.”

The Company’s surety products expose it to potentially high severity losses. The Company provides surety products through its LM Surety operating unit, a part of its Global Specialty SBU. The majority of its surety obligations are performance based guarantees. This business exposes the Company to infrequent, but potentially high severity, losses. The Company has customers with bonded exposure in excess of $100 million. The deterioration of one or more of these large customers could have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

The Company’s ability to compete effectively with respect to certain surety products is dependent on the underwriting limitations assigned to several of the Insurance Subsidiaries. LM Surety’s ability to attract large contract business depends on the underwriting limitations assigned to several of the Insurance Subsidiaries. Federal law requires a contractor awarded a federal construction contract to supply a surety bond issued by a company holding a U.S. Treasury Department certificate of authority. Upon review of each company’s financial information, the Treasury Department determines the underwriting limitation for each company. The underwriting limitation represents 10% of the company’s paid-in capital and surplus less

34 certain deductions. Pursuant to Treasury Department regulations, a company may not issue a single bond that exceeds its underwriting limitation absent co-insurance or reinsurance for the amount in excess of its underwriting limitation. A surety carrier that writes business through a company with a high underwriting limitation has a competitive advantage in the surety marketplace. A company with a high underwriting limitation can write large surety bonds on its own financial strength without the need for co-insurance or reinsurance. Agents and surety bond customers view a high underwriting limitation as a sign of financial strength and stability when assessing a potential surety relationship. If the Insurance Subsidiaries were no longer qualified for U.S. Treasury Department certificates of authority or if their underwriting limitations were substantially reduced, that could have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

Loss of or significant restriction on the use of credit scoring, education and occupation data in the pricing and underwriting of the Company’s products could reduce its future profitability. The Company uses credit scoring, education and occupation data as factors in pricing decisions where permitted under state law. Some consumer groups and regulators have questioned whether the use of credit scoring, education and occupation data unfairly discriminates against lower-income, minority and elderly consumers and are calling for the prohibition of or restriction on the use of such factors in underwriting and pricing. Enactment in a large number of states of laws or regulations that significantly curtail the use of credit scoring, education or occupation data in the underwriting process could reduce the Company’s future profitability.

The Company could be adversely affected if its controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective. The Company’s business is highly dependent on the Company’s ability to engage on a daily basis in a large number of insurance underwriting, claim processing and investment activities, many of which are highly complex. These activities often are subject to internal guidelines and policies, as well as legal and regulatory standards. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. If the Company’s controls are not effective, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to the Company’s reputation.

Potential changes in federal or state tax laws could adversely affect the Company’s business, results of operations, financial condition or liquidity. The Company’s investment portfolio has benefited from tax exemptions and certain other tax laws, including those governing dividends-received deductions and tax credits. Whether in connection with crisis management, deficit reduction, or various types of fundamental tax reform, federal and state tax legislation could be enacted that would result in higher taxes on insurance companies and their policyholders, lessen or eliminate some or all of the tax advantages currently benefiting the Company, and adversely affect the value of its investment portfolio.

The Company’s participation in a securities lending program subjects it to potential liquidity and other risks. The Company has engaged in securities lending activities from which it generates net investment income from the lending of certain of its investments to other institutions. The Company generally obtains cash or securities collateral from borrowers of these securities in an amount equal to at least 102% of the fair value of the loaned securities plus accrued interest, which is obtained at the inception of a loan and maintained at a level greater than or equal to 102% for the duration of the loan. At December 31, 2015, the Company had no loans outstanding where it had accepted at the inception of the loan collateral less than 102% of the fair value of such loaned securities. This collateral is held by a third-party custodian, and the Company has the right to access the collateral only in the event that the institution borrowing the Company’s securities is in default under the lending

35 agreement. The loaned securities remain the Company’s recorded asset. The Company does not recognize the receipt of securities collateral held by the third-party custodian or the obligation to return the securities collateral; however, the Company does recognize the receipt of cash collateral and the corresponding obligation to return the cash collateral. The cash collateral is held in a segregated account with the agent bank and is re-invested according to preset reinvestment guidelines.

Returns of loaned securities by the third parties would require the Company to return any collateral associated with such loaned securities. In some cases, the maturity of the securities held as invested collateral (i.e., securities that the Company has purchased with cash received from the third parties) may exceed the term of the related securities on loan and the estimated fair value may fall below the amount of cash received as collateral and invested. If the Company is required to return significant amounts of cash collateral on short notice and it is forced to sell securities to meet the return obligation, the Company may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than the Company otherwise would have been able to realize under normal market conditions, or both. In addition, under stressful capital market and economic conditions, such as those conditions the Company experienced during 2008 and 2009, liquidity broadly deteriorates, which may further restrict the Company’s ability to loan securities and to meet its obligations under these transactions. If the Company decreases the amount of its securities lending activities over time, the amount of investment income generated by these activities will also likely decline.

The Company’s business success and profitability depend, in part, on effective utilization of information technology systems and its implementation of technology innovations. The Company depends on information technology systems for conducting business and processing insurance claims. Critical elements of the Company’s business operations are dependent on the continued maintenance and availability of these existing technology systems. The Company’s continued long-term success requires that it remain innovative and select strategic technology initiatives, in a cost and resource efficient manner, to drive down overall expenses and improve the value to the business.

The Company engages in a variety of technology system development projects. These types of strategic initiatives are long-term in nature and may be affected by a variety of unknown business and technology related factors. As a result, the potential associated expenses relating to these projects may adversely impact the Company’s expense ratios if they exceed its current estimates. Further, the technology system development process may not deliver the benefits and efficiencies that the Company expected during the initial stages of the projects.

The Company relies on a variety of software license agreements with third party vendors. The Company expects to continue to rely on agreements with such third party vendors for the provision of necessary software and information technology services.

The Company’s ability to provide competitive services to agents and brokers, as well as new and existing policyholders, in a cost effective manner and its ability to implement strategic initiatives could be adversely affected by an increase in costs for these projects. The Company may not be able to meet its information technology requirements in a manner or on terms and conditions, including costs, as favorable as those it has previously received, which could have a material adverse effect on its operations, financial condition or liquidity.

If the Company experiences difficulties with technology or data security, its ability to conduct its business could be negatively affected. While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. The Company uses computer systems, including its automated underwriting platforms, to store, retrieve, evaluate and utilize customer and company data and information. The

36 Company’s information technology and telecommunications systems, in turn, interface with and rely upon third-party information networks and systems. The Company’s business is highly dependent on the availability, speed and reliability of these networks and systems to perform necessary business functions, such as providing new-business quotes, processing new and renewal business, making changes to existing policies, filing and paying claims, and providing customer support.

The Company’s information technology systems and the networks on which the Company relies may be vulnerable to physical or electronic intrusions, viruses or other attacks, programming errors and similar disruptions, particularly in light of the growing frequency and sophistication of malicious efforts to infiltrate private computer networks. A shut-down of, or inability to access, one or more of the Company’s facilities, a power outage or a disruption of one or more of these information technology, telecommunications or other systems or networks could significantly impair the Company’s ability to perform those functions on a timely basis, which could hurt the Company’s business and the Company’s relationships with its policyholders, agents and brokers. Computer viruses, hackers and other external hazards could expose the Company’s data systems and confidential data relating to the Company and its business partners and clients.

Furthermore, certain of the Company’s businesses are subject to compliance with regulations enacted by U.S. federal and state governments, the European Union or other jurisdictions or enacted by various regulatory organizations or exchanges relating to the privacy of the information of clients, employees or others. A misuse or mishandling of confidential or proprietary information being sent to or received from an employee or third party could result in legal liability, regulatory action and reputational harm. Third parties to whom the Company outsources certain of its functions, including but not limited to third party administrators, are also subject to cyber-breaches of confidential information, along with the other risks outlined above.

These increased risks, and expanding regulatory requirements regarding data security, could expose the Company to data loss, disruption of service, monetary and reputational damage, litigation and significant increases in compliance costs. As a result, the Company’s ability to conduct its business and its results of operations might be adversely affected.

In the event of a disaster, the Company’s business continuity plan may not be sufficient, which could have a material adverse effect on the Company’s results of operations, financial condition or liquidity. The Company’s infrastructure supports a combination of local and remote recovery solutions for business resumption in the event of a disaster. In the event of either the destruction of any of the Company’s office buildings or the inability to access any of those buildings, the Company’s business recovery plan provides for the Company’s employees to perform their work functions by remote access from an employee’s home or by relocation of employees to the Company’s other offices. However, in the event of a full scale local or regional disaster, the Company’s business recovery plan may be inadequate, and the Company’s employees, including sales representatives, may be unable to carry out their work, which could have a material adverse effect on the Company’s results of operations, financial condition or liquidity.

Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences. The Company will selectively investigate and pursue acquisition opportunities if it believes that such opportunity is consistent with the Company’s long-term objectives and that the potential rewards of the acquisition exceed the risks. The process of integrating an acquired company or business can be complex and costly, however, and may create unforeseen operating difficulties and expenditures. For example, acquisitions may present significant risks, including: • the potential disruption of the Company’s ongoing business; • the reduction in cash available for operations and other uses and the potential dilutive issuance of equity securities or the incurrence of debt;

37 • the ineffective integration of underwriting, claims handling and actuarial practices and systems; • the increase in the inherent uncertainty of reserve estimates for a period of time, until stable trends re-establish themselves within the combined organization, as past trends (that were a function of past products, past claims handling procedures, past claims departments and past legal and other experts) may not repeat themselves; • the diversion of management time and resources to acquisition integration challenges; • the loss of key employees; and • the cultural challenges associated with integrating employees.

There is no guarantee that any businesses acquired in the future will be successfully integrated, and the ineffective integration of the Company’s businesses and processes may result in substantial costs or delays and adversely affect the Company’s ability to compete. Also, the acquired business may not perform as projected, and any cost savings and other synergies anticipated from the acquisition may not materialize.

The Company is subject to a variety of modeling risks that could have a material adverse impact on its business results; in the absence of an industry standard for catastrophe modeling, the Company’s estimates may not be comparable to other insurance companies. Property and casualty business is exposed to many risks. These risks are a function of the environments within which the Company operates. Certain exposures can be correlated with other exposures, and an event or a series of events can impact multiple areas of the Company simultaneously and have a material effect on the Company’s results of operations, financial position and liquidity. These exposures require an entity-wide view of risk and an understanding of the potential impact on all areas of the Company.

The Company relies on complex financial models, including computer models and modeling techniques, which have been developed internally or by third parties to provide information on items such as historical loss costs and pricing, trends in claims severity and frequency, the effects of certain catastrophe losses, investment performance and portfolio risk. For example, the Company estimates a probable maximum loss for certain catastrophe exposures using models and other tools that require assumptions around several variables to model the event and its potential impact. Inadequacies in the models and modeling techniques that the Company uses or faulty assumptions or granularity of data could lead to actual losses being materially higher than the Company anticipated based on its analysis of the modeled scenarios. As a result, the Company could experience unexpectedly high losses through concentrated risk in certain geographic areas, could make ineffective or inefficient reinsurance purchases, and could suffer unnecessary investment losses. While the models and modeling techniques that the Company uses are relatively sophisticated, the value of the quantitative market risk information they generate is limited by the limitations of the modeling process. The Company believes that financial and computer modeling techniques alone do not provide a reliable method of monitoring and controlling market risk. Therefore, such modeling techniques do not substitute for the experience or judgment of the Company’s senior management.

There is no industry standard for the modeling of catastrophe risk. As a result, the Company’s estimates may not be comparable to those of other insurance companies.

The Company cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on the Company’s business. Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world. In response to this belief, a number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions, which some believe may be chief contributors to

38 global climate change. The Company cannot predict the impact that changing climate conditions, if any, will have on its results of operations or financial condition. Moreover, the Company cannot predict how legal, regulatory and social responses to concerns about global climate change will impact the Company’s business.

Risk Factors Relating to the Notes As holding companies, Liberty Mutual, Massachusetts Holdings and LMHC will depend on their subsidiaries for funds to meet their payment obligations under the Notes or the Guarantees. As holding companies, Liberty Mutual, Massachusetts Holdings and LMHC conduct substantially all of their operations through their subsidiaries. This means that Liberty Mutual, Massachusetts Holdings and LMHC depend on dividends, distributions, loans or other payments of funds from these entities to meet their obligations under the Notes or the Guarantees. The direct material subsidiaries of Liberty Mutual are LMIC, LMFIC, EICOW and Liberty Corporate Services LLC (“LCS”). LMIC, LMFIC and EICOW are Insurance Subsidiaries. LCS is not an Insurance Subsidiary. The subsidiaries are separate and distinct legal entities and have no obligation to pay interest or principal due on the Notes or to make funds available to Liberty Mutual for that purpose, whether in the form of loans, dividends or other distributions.

In addition, the ability of the Insurance Subsidiaries to pay dividends is restricted under applicable insurance laws and regulations and, in some states, dividends may only be paid from unassigned surplus. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, an insurer may make an ordinary dividend payment if its surplus as regards policyholders, following such dividend, is reasonable in relation to its outstanding liabilities and adequate to its financial needs and does not exceed the insurer’s unassigned surplus. However, no insurer may pay an extraordinary dividend without the approval or non-disapproval of the domiciliary insurance regulatory authority. Under the insurance laws of Massachusetts, the domiciliary state of LMIC, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as regards policyholders as of the preceding December 31 or the insurer’s net income for the 12-month period ending on the preceding December 31. Therefore, LMIC could pay a maximum of $1.531 billion in dividends to Liberty Mutual in 2016 without regulatory approval. Under the insurance laws of Wisconsin, the domiciliary state of LMFIC and EICOW, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends paid within the preceding 12 months, exceeds the lesser of (a) 10% of the insurer’s surplus as regards policyholders as of the preceding December 31 or (b) the greater of (1) the insurer’s net income for the preceding calendar year, minus realized capital gains for that calendar year, or (2) the aggregate of the insurer’s net income for the three preceding calendar years minus realized capital gains for those calendar years and minus dividends paid within the first two of the preceding three calendar years. Therefore, without regulatory approval, LMFIC could pay a maximum of $139 million in dividends to Liberty Mutual in 2016 and EICOW could pay a maximum of $151 million in dividends to Liberty Mutual in 2016. Changes in the extraordinary dividend regulation of the domiciliary states of LMIC, LMFIC and EICOW could negatively affect Liberty Mutual’s ability to pay principal and interest on the Notes, as could a redomestication, merger or consolidation of LMIC, LMFIC or EICOW to a different domiciliary state.

The amount of dividends that can be paid to Liberty Mutual by an Insurance Subsidiary without regulatory approval is based on such Insurance Subsidiary’s earnings and surplus determined on a statutory accounting basis, which can differ materially from earnings and surplus reported on a GAAP basis. Restrictions on the Insurance Subsidiaries’ ability to pay dividends or to make other cash payments to Liberty Mutual in the future may materially affect its ability to pay principal and interest on the Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Holding Company Liquidity and Capital Resources” and Note 12 of the Audited Consolidated Financial Statements.

Since LCS is not an Insurance Subsidiary, there are no state insurance law restrictions on the amount of dividends it could pay to Liberty Mutual. There can be no assurance, however, that the future financial condition and results of operations of the subsidiaries of LCS will be adequate to enable LCS to pay Liberty Mutual dividends in the future.

39 Because of Liberty Mutual’s, Massachusetts Holdings’ and LMHC’s holding company structure, the Notes and the Guarantees will be subordinated to the claims of creditors and policyholders of the subsidiaries of Liberty Mutual. In addition to the provisions discussed above, because Liberty Mutual and the Guarantors are holding companies that conduct all of their operations through their subsidiaries, holders of the Notes will have a junior position against the assets of subsidiaries of Liberty Mutual to claims of creditors of Liberty Mutual’s subsidiaries, including policyholders, trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders, holders of surplus notes and any preferred stockholders. Therefore, if one of Liberty Mutual’s subsidiaries were to become insolvent or be liquidated, such subsidiary might not, following payment by such subsidiary of its liabilities, have sufficient remaining assets to make payments to Liberty Mutual as a shareholder or otherwise and Liberty Mutual may not have sufficient assets to make payments benefiting any of the Guarantors. In the event of a default by one of Liberty Mutual’s subsidiaries under any credit arrangement or other indebtedness, its creditors could accelerate such debt, prior to such subsidiary distributing amounts to Liberty Mutual that it could have used to make payments on the Notes. In addition, if Liberty Mutual caused a subsidiary to pay a dividend to it to make payment on the Notes, and such dividend were determined to have been made in breach of the relevant corporate or fraudulent transfer laws, holders of the Notes could be required to return the payment to such subsidiary or one of its creditors, as applicable.

See Note 7 of the Audited Consolidated Financial Statements as to the Company’s debt outstanding as of December 31, 2015. Liberty Mutual’s subsidiaries will be able to incur substantial additional indebtedness in the future, which would be structurally senior to the Notes.

Payments on the Notes and the Guarantees will be effectively subordinated to claims of Liberty Mutual’s, Massachusetts Holdings’ and LMHC’s future secured creditors. The Notes represent unsecured obligations of Liberty Mutual and will rank equally with all of its other unsecured senior indebtedness. The Guarantees will be the respective unsecured senior obligations of the Guarantors and will rank equally in right of payment with all of the Guarantors’ respective other unsecured senior indebtedness from time to time outstanding. Accordingly, Liberty Mutual’s future secured creditors, if any, and the Guarantors’ future secured creditors, if any, will have claims that are superior to the claims of holders of the Notes to the extent of the value of the assets securing such other indebtedness. In the event of any distribution or payment of Liberty Mutual’s or any of the Guarantors’ assets in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, Liberty Mutual’s or the Guarantors’, as applicable, secured creditors will have a superior claim to those assets that constitute their collateral. If any of the foregoing events occur, neither Liberty Mutual nor the Guarantors can assure holders of the Notes that there will be sufficient assets to pay amounts due on the Notes. Holders of the Notes will participate ratably with all holders of Liberty Mutual’s unsecured senior indebtedness, and with all of Liberty Mutual’s other general senior creditors, based upon the respective amounts owed to each holder or creditor, in Liberty Mutual’s remaining assets. As a result, holders of the Notes may receive less, ratably, than Liberty Mutual’s secured creditors, if any. Liberty Mutual, LMHC and Massachusetts Holdings currently have no secured debt.

The Fiscal Agency Agreement that governs the Notes does not restrict the ability of Liberty Mutual or its subsidiaries to incur additional indebtedness. The Fiscal Agency Agreement that governs the Notes does not restrict the ability of Liberty Mutual or its subsidiaries to incur additional indebtedness. The degree to which Liberty Mutual or its subsidiaries incurs additional debt could have important consequences to holders of the Notes, including: • the need for additional cash requirements in order to support the payment of interest on outstanding indebtedness; • increased vulnerability to adverse changes in general economic and industry conditions; and

40 • depending on the level of the outstanding debt, the ability of Liberty Mutual or its subsidiaries to obtain additional financing for working capital, capital expenditures, general corporate and other purposes may be limited.

The ability of Liberty Mutual to make payments of principal and interest on its indebtedness depends upon its future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting its operations, many of which are beyond its control. If Liberty Mutual is unable to generate sufficient cash flow from operations in the future to service its debt, it may be required, among other things, to seek additional debt or equity financing, to refinance or restructure all or a portion of its indebtedness, including the Notes, to sell selected assets or to reduce or delay planned capital expenditures or operating expenditures. Such measures might not be sufficient to enable Liberty Mutual to service its debt. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all.

The Fiscal Agency Agreement under which the Notes will be issued contains only limited protection for holders of the Notes in the event the Company is involved in a highly leveraged transaction, reorganization, restructuring, merger or similar transaction in the future. The Fiscal Agency Agreement under which the Notes will be issued may not sufficiently protect holders of the Notes in the event the Company is involved in a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Fiscal Agency Agreement does not contain: • any restrictions on the ability of Liberty Mutual’s subsidiaries to issue securities that would be senior to the common stock of the subsidiaries held by Liberty Mutual; • any provision restricting Liberty Mutual or any of its subsidiaries from purchasing or redeeming capital stock; • any financial ratios or specified level of net worth to which Liberty Mutual or its subsidiaries must adhere; • any restrictions on Liberty Mutual’s ability to contribute its assets to the Insurance Subsidiaries; or • any restrictions on disposition of stock of any of Liberty Mutual’s subsidiaries or the transfer of all or substantially all of the properties and assets of any of its subsidiaries.

Changes in Liberty Mutual’s long-term debt ratings may adversely affect the value of the Notes. Long-term debt ratings, such as those of the Notes, are limited in scope and do not address all material risks relating to an investment in the Notes, but rather reflect only the view of each rating agency at the time the rating is issued. An explanation of the significance of such rating may be obtained from such rating agency. There can be no assurance that such ratings will remain in effect for any given period of time or that such ratings will not be lowered, suspended or withdrawn entirely by the rating agencies, if, in each rating agency’s judgment, circumstances so warrant. Actual or anticipated changes or downgrades in credit ratings, including any announcement that such ratings are under review for a downgrade, could have an adverse effect on the market value of the Notes, Liberty Mutual’s ability to obtain additional financing and on Liberty Mutual’s corporate borrowing costs.

The absence of a public market for the Notes and the legal restrictions on their transfer may limit the liquidity of your investment. There is currently no public market for the Notes. Application has been made to the Irish Stock Exchange plc for the approval of listing particulars for the Notes and for the Notes to be admitted to the Official List and trading on the Global Exchange Market (which is the exchange regulated market of the Irish Stock Exchange

41 plc). The Managers have advised Liberty Mutual that they intend to make a market in the Notes, but the Managers are not obligated to do so, and any such market-making may be discontinued at any time in the sole discretion of the Managers without notice. Accordingly, Liberty Mutual cannot assure you as to the liquidity of any market for the Notes, your ability to resell any of your Notes or the price at which you may be able to resell your Notes. On any market for the Notes, the Notes could trade at prices that might be lower than their initial offering price as a result of many factors, including prevailing interest rates, the Company’s operating results and the market for similar securities.

The Notes have not been and will not be registered under the Securities Act and may not be resold by investors except under the limited circumstances described under “Notice to Investors.” These transfer restrictions may further limit the development or liquidity of any market for the Notes and may have a negative impact on the trading price of the Notes.

An investment in the Notes by a purchaser whose home currency is not the euro entails significant risks. All payments of interest on and the principal of the Notes and any redemption price for the Notes will be made in euro. An investment in the Notes by a purchaser whose home currency is not the euro entails significant risks. These risks include the possibility of significant changes in rates of exchange between the holder’s home currency and the euro and the possibility of the imposition or subsequent modification of foreign exchange controls. These risks generally depend on factors over which Liberty Mutual has no control, such as economic, financial and political events (including the potential exit by Greece or any other country from the euro) and the supply of and demand for the relevant currencies. In the past, rates of exchange between the euro and certain currencies have been highly volatile, and each holder should be aware that volatility may occur in the future. Fluctuations in any particular exchange rate that have occurred in the past, however, are not necessarily indicative of fluctuations in the rate that may occur during the term of the Notes. Depreciation of the euro against the holder’s home currency would result in a decrease in the effective yield of the Notes below its coupon rate and could result in a loss to the holder.

The Notes permit Liberty Mutual to make payments in U.S. dollars if Liberty Mutual is unable to obtain euro. If the euro is unavailable to Liberty Mutual due to the imposition of exchange controls or other circumstances beyond Liberty Mutual’s control or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the Notes will be made in U.S. dollars until the euro is again available to Liberty Mutual or so used. In such circumstances, the amount payable on any date in euro will be converted into U.S. dollars on the basis described under “Description of Notes—Issuance in Euro; Payment on the Notes.” Any payment in respect of the Notes so made in U.S. dollars will not constitute an event of default under the Notes or the Fiscal Agency Agreement governing the Notes. Investors will be subject to foreign exchange risks as to payment of principal and interest that may have important economic and tax consequences for them.

In a lawsuit for payment on the Notes, an investor may bear currency exchange risk. The Fiscal Agency Agreement and the Notes will be governed by the laws of the State of New York. Under New York law, a New York state court rendering a judgment on the Notes would be required to render the judgment in euro. However, the judgment would be converted into U.S. dollars at the exchange rate prevailing on the date of entry of the judgment. Consequently, in a lawsuit for payment on the Notes, investors would bear currency exchange risk until a New York state court judgment is entered, which could be a significant amount of time. A federal court sitting in New York with diversity jurisdiction over a dispute arising in connection with the Notes would apply New York law.

In courts outside of New York, investors may not be able to obtain a judgment in a currency other than U.S. dollars. For example, a judgment for money in an action based on the Notes in many other U.S. federal or state

42 courts ordinarily would be enforced in the United States only in U.S. dollars. The date used to determine the rate of conversion of euro into U.S. dollars would depend upon various factors, including which court renders the judgment and when the judgment is rendered.

Credit ratings may not reflect all risks, are not recommendations to buy or hold securities and may be subject to revision, suspension or withdrawal at any time. The Notes are expected to be assigned a rating of Baa2 by Moody’s and BBB by Standard and Poor’s. One or more other independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to the structure, market, additional risk factors discussed herein and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal by the rating agency at any time. No assurance can be given that a credit rating will remain constant for any given period of time or that a credit rating will not be lowered or withdrawn entirely by the credit rating agency if, in its judgment, circumstances in the future so warrant. A suspension, reduction or withdrawal at any time of the credit rating assigned to the relevant Notes by one or more of the credit rating agencies may adversely affect the cost and terms and conditions of our financing and could adversely affect the value and trading of such Notes.

Moody’s is not established in the EU and has not applied for registration under Regulation (EU) No. 1060/2009 (the “CRA Regulation”). However, in the application by Moody’s for the registration of its EU- based entities under the CRA Regulation, it sought authorization to endorse the credit ratings of its non-EU entities through Moody’s Investors Service Ltd. or Moody’s Deutschland GmbH, which are established in the EU. Standard & Poor’s is not established in the EU and is not registered in accordance with the CRA Regulation. However, it has confirmed that any ratings issued by it that are endorsed in the EU will be clearly identified as such.

The Notes will be issued in minimum denominations of €100,000 and in integral multiples of €1,000 in excess thereof. The Notes will be issued in minimum denominations of €100,000 and in integral multiples of €1,000 in excess thereof. It is possible that the Notes may be traded in amounts that are not integral multiples of €100,000. If Notes are issued in certificated form in the future (as described under “Description of Notes—Book Entry Clearance and Settlement—Certificated Notes”), a holder who, as a result of trading such amounts, holds a principal amount of Notes that is less than €100,000 in its account with the relevant clearing system may not receive a Note in certificated form in respect of such holding and would need to purchase a principal amount of Notes such that its holding amounts to €100,000. If Notes are issued in certificated form, holders should be aware that definitive Notes that have a denomination that is not an integral multiple of €100,000 may be illiquid and difficult to trade.

43 USE OF PROCEEDS

Liberty Mutual expects to receive approximately €744,577,500 in proceeds, before underwriting discounts and other expenses, from the sale of the Notes.

Liberty Mutual intends to use the net proceeds for general corporate purposes, which may include capital contributions to one or more of Liberty Mutual’s subsidiaries to permit further business growth.

44 CAPITALIZATION

The following table sets forth, as of December 31, 2015, (1) Liberty Mutual’s actual capitalization and (2) Liberty Mutual’s capitalization as adjusted to give effect to the sale of the Notes. This table should be read in conjunction with Liberty Mutual’s Consolidated Financial Statements and the related notes included elsewhere in this Offering Memorandum.

As of December 31, 2015 Actual As Adjusted (dollars in millions) Current maturities of long-term debt1 ...... $ 249 $ 249 7.00% Junior Subordinated Notes, due 20672 ...... 300 300 5.00% Notes, due 2021 ...... 600 600 4.95% Notes, due 2022 ...... 750 750 4.25% Notes, due 2023 ...... 1,000 1,000 8.50% Surplus Notes, due 2025 ...... 140 140 2.75% Senior Notes, due 2026 ...... — 848 7.875% Surplus Notes, due 2026 ...... 227 227 7.625% Notes, due 2028 ...... 3 3 3.91%—4.25% Federal Home Loan Bank Borrowings, due 2032 ...... 300 300 7.00% Notes, due 2034 ...... 231 231 6.50% Notes, due 2035 ...... 471 471 7.50% Notes, due 2036 ...... 19 19 7.80% Junior Subordinated Notes, due 20873 ...... 700 700 10.75% Junior Subordinated Notes, due 20884 ...... 193 193 6.50% Notes, due 2042 ...... 750 750 4.850% Notes due 2044 ...... 1,050 1,050 7.697% Surplus Notes, due 2097 ...... 260 260 Subtotal ...... 6,994 7,842 Unamortized discount ...... (12) (12) Total long-term debt ...... 6,982 7,830 Unassigned equity ...... 20,676 20,676 Accumulated other comprehensive income ...... (1,521) (1,521) Non-controlling interest ...... 98 98 Total equity ...... 19,253 19,253 Total capitalization ...... $26,484 $27,332

1 2015 includes $249 million of 6.70% Notes due August 15, 2016 2 The par value call date and final fixed rate interest payment date is March 15, 2017, subject to certain requirements. 3 The par value call date and final fixed rate interest payment date is March 15, 2037, subject to certain requirements. 4 The par value call date and final fixed rate interest payment date is June 15, 2038, subject to certain requirements.

45 BUSINESS

Company Overview The Company is a diversified international group of insurance companies and the fifth largest property and casualty insurer, the fifth largest personal lines writer and the fifth largest commercial lines writer in the United States, based on 2015 direct written premium based on information collected by SNL. Also, the Company is the sixth largest property and casualty insurer worldwide, based on 2015 gross written premium reported in publicly available company disclosure. As of December 31, 2015, the Company had $121.7 billion in consolidated assets and $102.4 billion in consolidated liabilities. The Company had 2015 consolidated revenues of $37.6 billion. The Company currently ranks 78th on the Fortune 100 list of largest corporations in the United States based on 2014 revenue (as published by Fortune Magazine). The Company operates in 30 countries and economies around the globe.

The Company’s consolidated NWP by line of business is set forth in the table below:

Overview—Consolidated Consolidated NWP by significant line of business was as follows:

Years Ended December 31, $ in Millions 2015 2014 2013 (dollars in millions) Private passenger automobile ...... $12,375 $12,226 $11,718 Homeowners ...... 5,759 5,573 4,905 Specialty insurance ...... 3,152 3,205 2,685 Commercial multiple-peril ...... 1,965 1,958 2,204 Workers compensation—Voluntary ...... 1,954 2,078 2,479 Workers compensation—Involuntary ...... 107 114 138 Commercial automobile ...... 1,722 1,718 1,673 Group disability and group life ...... 1,429 1,215 1,095 General liability ...... 1,365 1,353 1,366 Global specialty reinsurance ...... 1,116 1,141 1,167 Surety ...... 811 757 752 Commercial property ...... 792 858 871 Individual life and A&H ...... 552 665 640 Global specialty inland marine ...... 451 442 614 Other1 ...... 983 1,029 853 Total NWP2 ...... $34,533 $34,332 $33,160

1 Primarily includes NWP from allied lines and domestic inland marine. 2 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business.

46 The Company’s business is supported by diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company also distributes products and services through independent agents and brokers, employer and affinity marketing alliances, direct response call centers and the internet. The Company believes that giving potential customers access to multi-channel distribution is both a strategic and operational strength of the Company.

Functionally, the Company conducts its business through four SBUs: Personal Insurance, Commercial Insurance, Liberty International and Global Specialty. Each SBU operates independently of the others and has dedicated sales, underwriting, claims, actuarial, financial and certain information technology resources. Management believes this structure allows each SBU to execute its business and acquisition strategy without impacting or disrupting the operations of the Company’s other business units.

On June 10, 2014, the Company consolidated its existing Group Benefits, A&H and Individual Life operations, previously included in the Commercial Insurance, Global Specialty, and Personal Insurance SBUs, respectively, into a new market segment in Commercial Insurance called Liberty Mutual Benefits. All prior periods have been restated to reflect the new market segment.

The Company’s NWP by business unit is set forth in the table below:

NWP by Business Unit

Commercial Insurance. Commercial Insurance, as a standalone SBU, is the seventh largest writer of commercial lines property and casualty insurance in the United States, based on 2015 direct written premium based on information collected by SNL. Commercial Insurance offers a wide array of property-casualty, group benefits and life insurance coverages through independent agents, brokers, benefit consultants, captive agents, and bank partners throughout the United States. Commercial Insurance is organized into the following four market segments: (1) Business Insurance; (2) National Insurance; (3) Liberty Mutual Benefits; and (4) Other Commercial Insurance. Business Insurance serves small and middle market customers through a regional operating model that combines local underwriting, market knowledge, and service with the scale advantages of a national company. National Insurance provides commercial lines products and services, including third-party

47 administration, to large businesses. Liberty Mutual Benefits provides short and long-term disability, accident, health and group life insurance to mid-sized and large businesses, as well as life and annuity products to individuals in the United States. Other Commercial Insurance primarily consists of internal reinsurance and assumed business from state-based workers compensation involuntary market pools. The Company is also a servicing carrier for state-based workers compensation involuntary market pools.

Liberty International. Liberty International sells property, casualty, health and life insurance products and services to individuals and businesses in four market segments: (1) Latin America and Iberia, including Brazil, Colombia, Chile, Ecuador, Spain and Portugal; (2) Emerging Europe, including Turkey, Poland, and Ireland; (3) Asia, including Thailand, Singapore, Hong Kong, Vietnam and Malaysia (as a result of the Uni.Asia acquisition in July 2014); and (4) Large Emerging Markets, including Russia, China and India. Private passenger automobile insurance is the single largest line of business.

Global Specialty. Global Specialty comprises a wide array of products and services offered through three market segments: LSM, LIU, and LM Surety. LSM provides a wide range of product capabilities and capacity for specialty markets worldwide and is organized into three business segments: Specialty, Commercial and Reinsurance. LIU sells inland marine and specialty commercial insurance worldwide through offices in Asia, Australia, the Middle East, North America and Latin America. LM Surety is a leading provider of global contract and commercial surety bonds to businesses of all sizes (based on information from the Surety & Fidelity Association of America, the Canadian Surety Federation, the Pan American Surety Association and the International Credit Insurance & Surety Association).

Competitive Strengths The Company believes that its competitive strengths include: • Well-diversified business mix. The Company is well diversified with distinct SBUs, each of which contributes a substantial share of revenue and PTOI to the Company. Moreover, the Company’s exposure to a single distribution channel, geographic region or line of business has been significantly reduced as a result of the Company’s diversification efforts over the last ten years. In part, the Company’s desire to improve the organization’s spread of risk has led to a fundamental shift in the Company’s mix of business. In 2000, workers compensation constituted 23% of the Company’s NWP. By December 2015, this line of business had decreased to 6% of NWP. • Business unit structure. The Company operates through four distinct SBUs. Each of the SBUs operates independently of the others and has dedicated sales, underwriting, claims, actuarial, financial and certain information technology resources. This structure allows each business unit to execute its business strategy independently of the other business units and without impacting or disrupting the other business units’ operations. • Established multi-channel distribution system. The Company has diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company also distributes products and services through independent agents and brokers, employer and affinity marketing alliances, direct response call centers and the internet. The Company believes that giving potential customers access to multi-channel distribution is both a strategic and operational strength of the Company. • Financial strength. The financial strength ratings from the major public rating agencies are important indicators of an insurance company’s financial condition and stability and are increasingly important factors to many existing and potential customers in the selection of an insurer. As such, the Company believes that it has a competitive advantage from its interactive financial strength ratings of “A” (“Excellent,” the third highest of 16 ratings) (stable outlook) from A.M. Best, “A2” (“Good,” the sixth highest of 21 ratings) (stable outlook) from Moody’s and “A” (“Strong,” the sixth highest of 22 ratings) (stable outlook) from S&P. For additional information about the Company’s ratings, including risks relating thereto, see “Risk Factors—Risk Factors Relating to the Company’s Business and the

48 Insurance Industry—The Company may not maintain favorable financial strength ratings, which could adversely affect its ability to conduct business.” • History of successful acquisitions and dispositions. The Company is an opportunistic acquirer of property and casualty insurance companies and has a track record of successful integration. The Company’s substantial growth has resulted largely from strategic acquisitions. Additionally, the Company has successfully exited or de-emphasized businesses which no longer fit within its strategic focus or risk appetite, such as the Company’s sale of Summit, a mono-line workers compensation company based in Florida in April 2014. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences.” • Experienced management team with proven track record. The Company has a talented and experienced management team consisting of the chief executive officer and those reporting directly to him, who have an average of over 21 years of experience in the property and casualty industry and over 19 years of experience with the Company.

Strategic Focus The Company’s strategic objectives are to continue to grow revenues, cash flow, earnings and equity and to enhance its position as a premier global property and casualty insurer while also improving its financial strength ratings. The key elements of this strategy are: • Disciplined underwriting. The Company intends to utilize disciplined underwriting controls to ensure that profitability remains at the forefront of its business strategy. The Company will utilize sophisticated underwriting strategies and pricing models to enable superior risk selection and appropriate pricing for risks underwritten. • Leverage scale, capital and technology to provide high quality and high value insurance products and services. As one of the ten largest property and casualty insurance companies in the United States based on 2015 NWP (based on information collected by the NAIC), the Company intends to leverage its skill, scale and capital base to provide high quality, high value insurance products and services. Additionally, the Company will continue to invest in technology to improve customer service, distribution, product features, breadth of product offerings and efficiency. • Enhance financial strength ratings. Interactive financial strength ratings issued by major rating organizations such as A.M. Best, Standard & Poor’s and Moody’s have become an increasingly important factor in establishing the competitive position of insurance companies. The Company is committed to disciplined underwriting, earnings growth and capital generation in order to sustain and enhance its financial strength ratings, which it believes create a competitive advantage in retaining and attracting new business. • Leverage and opportunistically expand diversified and well-established multi-channel distribution capabilities. In addition to direct sales distribution, the Company intends to continue to expand its multi-channel distribution capabilities, which it believes are both strategic and operational strengths of the Company. • Selectively pursue strategic acquisitions and divest non-core and non-performing business lines. The Company intends to continue to grow selectively through acquisitions. Additionally, the Company intends to exit businesses and markets that no longer meet its financial or strategic objectives, such as the sale of Summit in April 2014.

Business Segments The Company’s principal businesses are conducted through its subsidiaries and affiliates in the business of property and casualty insurance. The Company conducts its business through four SBUs: Personal Insurance, Commercial Insurance, Liberty International and Global Specialty.

49 (1) Personal Insurance Overview Personal Insurance is the fifth largest writer of personal lines property and casualty insurance in the United States, based on 2015 direct written premium based on information collected by SNL. Personal Insurance comprises two segments: Personal Lines and Safeco. Personal Lines products are distributed through approximately 2,200 licensed captive sales representatives, more than 600 licensed telesales counselors, third- party producers and the Internet. Personal Lines’ largest source of new business is through its more than 20,000 sponsored affinity groups (including employers, professional and alumni associations, credit unions, and other partnerships). Safeco products are distributed nationally through independent agents.

The following table sets forth NWP for Personal Insurance by market segment for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Personal Lines ...... $ 9,395 $ 8,953 $ 8,384 Safeco ...... 7,412 6,999 6,550 Total NWP ...... $16,807 $15,952 $14,934

Products Personal Insurance focuses primarily on U.S. private passenger automobile and homeowners insurance. Additionally, Personal Insurance sells personal liability (umbrella) and other products.

Private Passenger Automobile. Private passenger automobile insurance provides coverage for liability to others for both bodily injury and property damage and for physical damage to an insured’s own vehicle from collision and various other perils. In addition, some states require policies to provide what is frequently referred to as no-fault coverage whereby policyholders recover medical and related expenses from their own insurance company, regardless of fault, and their right to commence litigation to recover for pain and suffering is restricted.

Homeowners and Other. Homeowners insurance provides protection against losses to dwellings and contents from a wide variety of perils, as well as coverage for liability arising from ownership or occupancy. The Company provides homeowners insurance for dwellings, condominiums and rental property contents. The Company also provides personal liability (umbrella) coverage and coverage for personal watercraft and personal articles such as jewelry and fine art.

Selected Product Information. The accompanying table sets forth NWP for Personal Insurance by product line for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Private passenger automobile ...... $10,097 $ 9,614 $ 9,120 Homeowners and other ...... 6,710 6,338 5,814 Total NWP ...... $16,807 $15,952 $14,934

Distribution Personal Insurance comprises two segments: Personal Lines and Safeco. Safeco products are distributed nationally through independent agents. Personal Lines products are distributed through multiple distribution

50 channels in order to respond to changing customer preferences. The major channels include a captive sales force, telesales counselors, third-party producers, and the Internet. The captive sales force consists of approximately 2,200 licensed sales representatives located in approximately 300 offices throughout the United States, and the direct response channel consists of more than 600 licensed telesales counselors located in three call centers.

The captive sales force and direct response channels’ primary market is the membership of its more than 20,000 sponsored affinity groups (such as employers, professional and alumni associations, credit unions, and other partnerships). A significant portion of Personal Insurance growth over the past several years has been derived from its affinity marketing programs distributed through both its captive sales force and telesales counselors.

Personal Insurance is authorized to sell various types of personal property and casualty insurance.

(2) Commercial Insurance Overview Commercial Insurance offers a wide array of property-casualty, group benefits and life insurance coverages through independent agents, brokers, benefit consultants, captive agents, and bank partners throughout the United States. Commercial Insurance is organized into the following four market segments: (1) Business Insurance; (2) National Insurance; (3) Liberty Mutual Benefits; and (4) Other Commercial Insurance. Business Insurance serves small and middle market customers through a regional operating model that combines local underwriting, market knowledge, and service with the scale advantages of a national company. National Insurance provides commercial lines products and services, including third-party administration, to large businesses. Liberty Mutual Benefits provides short and long-term disability, accident, health and group life insurance to mid-sized and large businesses, as well as life and annuity products to individuals in the United States. Other Commercial Insurance primarily consists of internal reinsurance and assumed business from state-based workers compensation involuntary market pools. The Company is also a servicing carrier for state-based workers compensation involuntary market pools.

The following table sets forth NWP for Commercial Insurance by market segment for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Business Insurance ...... $5,143 $5,195 $5,315 National Insurance ...... 2,091 2,135 2,189 Liberty Mutual Benefits ...... 1,679 1,538 1,399 Other Commercial Insurance ...... 164 164 178 Total NWP ...... $9,077 $9,032 $9,081

Products Commercial Insurance coverages include commercial multiple-peril, workers compensation, commercial automobile, general liability (including product liability), group disability and group life, commercial property, individual life, and a variety of other coverages. In addition, Commercial Insurance offers claims management, loss control and risk information services. Commercial Insurance is also a servicing carrier for workers compensation involuntary market pools.

The principal insurance products in Commercial Insurance are: Commercial Multiple-Peril. Commercial multiple-peril insurance packages two or more insurance products to provide coverage for businesses against various property and liability risk exposures.

51 Workers Compensation. Workers compensation insurance provides coverage for employers for specified benefits payable under state or federal law for workplace injuries to employees. There are typically four types of benefits payable under workers compensation policies: medical benefits, disability benefits, death benefits and vocational rehabilitation benefits. The Company emphasizes loss control strategies and managed care cost containment strategies, which involve employers, employees and care providers in a cooperative effort focused on the employee’s successful return to work.

Commercial Automobile. Commercial automobile insurance provides coverage for businesses against losses incurred from personal bodily injury, bodily injury to third parties, property damage to an insured’s vehicle and property damage to other vehicles and other property resulting from the ownership, maintenance or use of automobiles and trucks in a business.

General Liability. General liability insurance provides coverage for liability exposures, including bodily injury and property damage arising from products sold and general business operations.

Group Disability and Group Life. Group disability insurance provides benefits to group policyholders unable to work due to disease or accidental injury. Group life insurance provides benefits upon the death of a member of the group.

Commercial Property. Commercial property insurance provides coverage for businesses against exposure to various risks, including fire, marine, allied lines, equipment breakdown, earthquake and business interruption.

Individual Life. Individual life provides life insurance and annuities for individuals and also issues structured settlement contracts and administers separate account contracts.

Selected Product Information. The Company offers the following types of products for its workers compensation, commercial automobile and general liability lines: • guaranteed cost insurance products, in which policy premium is fixed for the period of coverage and does not vary as a result of the insured’s loss experience; • large deductible plans, in which a policyholder is responsible for reimbursing the insurer for claim payments made up to the deductible level; and • retrospectively rated policies, in which fees or premiums are adjusted based on the actual loss experience of the insured during the policy period.

Large deductible plans and retrospectively rated policies reduce the insurance risk to the Company since the customer retains a portion of the risk. Under a large deductible plan, an insurer provides additional coverage over the deductible amount, which generates fewer premiums than “first-dollar” coverage.

Additionally, the Company offers service programs where the Company receives fees, rather than premiums, for providing claims management, loss control and risk information services to customers under service agreements. The Company also participates in state involuntary market pools servicing workers compensation policies as a servicing carrier and pool participant. The Company services approximately 24% of the total workers compensation involuntary market (based on 2015 premium in-force and our analysis of publicly available sources).

52 The accompanying table sets forth NWP for Commercial Insurance by product line for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Commercial multiple-peril ...... $2,069 $2,026 $2,017 Workers compensation—Voluntary ...... 1,810 1,896 2,230 Workers compensation—Involuntary ...... 107 114 138 Commercial automobile ...... 1,475 1,452 1,423 General liability ...... 1,209 1,226 1,091 Group disability and group life ...... 1,240 1,000 885 Commercial property ...... 728 780 783 Individual life and A&H ...... 439 538 514 Total NWP ...... $9,077 $9,032 $9,081

Distribution Commercial Insurance distributes its insurance products and services through independent agents, brokers, benefit consultants, captive agents, and bank partners. There are approximately 5,700 active P&C independent agents and brokers in 12,100 locations.

(3) Liberty International Overview Liberty International sells property, casualty, health and life insurance products and services to individuals and businesses in four market segments: (1) Latin America and Iberia, including Brazil, Colombia, Chile, Ecuador, Spain and Portugal; (2) Emerging Europe, including Turkey, Poland, and Ireland; (3) Asia, including Thailand, Singapore, Hong Kong, Vietnam and Malaysia (as a result of the Uni.Asia acquisition in July 2014); and (4) Large Emerging Markets, including Russia, China and India. Other includes internal reinsurance. Private passenger automobile insurance is the single largest line of business. Since its inception in 1994, Liberty International has grown substantially and now has total NWP of $3.444 billion for the year ended December 31, 2015.

The following table sets forth NWP for Liberty International by market segment for the periods indicated:

Years Ended December 31, Change ex Change ex 2015 2014 foreign exchange1 2014 2013 foreign exchange1 (dollars in millions) Latin America and Iberia ...... $2,277 $2,822 3.9% $2,822 $2,904 2.4% Asia ...... 493 447 16.9 447 383 19.9 Emerging Europe ...... 409 509 (5.2) 509 458 10.8 Large Emerging Markets ...... 234 230 16.8 230 213 14.6 Other ...... 31 1 NM 1 — NM Total NWP ...... $3,444 $4,009 5.7% $4,009 $3,958 5.8%

1 Determined by assuming constant foreign exchange rates between periods. NM=Not meaningful.

Products Liberty International’s businesses provide personal lines coverage, primarily private passenger automobile, homeowners and life insurance to individuals, as well as commercial packages and workers compensation insurance to small and medium commercial enterprises.

53 Selected Product Information. The accompanying table sets forth NWP for Liberty International by product line for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Private passenger automobile ...... $2,188 $2,555 $2,552 Commercial automobile ...... 226 260 244 Homeowners ...... 183 233 223 Life and health ...... 301 342 327 Commercial property ...... 52 67 72 Other1 ...... 494 552 540 Total NWP ...... $3,444 $4,009 $3,958

1 Premium related to other personal and commercial lines including personal accident, bonds, workers compensation, small and medium enterprise and marine and cargo lines of business.

Distribution Liberty International’s businesses’ products are primarily distributed through independent agents. Liberty International also markets these products through brokers, financial institutions, affinity groups and direct response marketing.

(4) Global Specialty Overview Global Specialty comprises a wide variety of products and services offered through three market segments: LSM, LIU and LM Surety. LSM provides a wide range of product capabilities and capacity for specialty markets worldwide and is organized into three business segments: Specialty, Commercial and Reinsurance. LIU sells inland marine and specialty commercial insurance worldwide through offices in Asia, Australia, the Middle East, North America and Latin America. LM Surety is a leading provider of global contract and commercial surety bonds to businesses of all sizes (based on information from the Surety & Fidelity Association of America, the Canadian Surety Federation, the Pan American Surety Association and the International Credit Insurance & Surety Association). Other primarily consists of internal reinsurance.

The following table sets forth NWP for Global Specialty by market segment for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) LSM ...... $2,614 $2,715 $2,622 LIU...... 1,381 1,533 1,586 LM Surety ...... 761 748 743 Other ...... 167 124 65 Total NWP ...... $4,923 $5,120 $5,016 Total NWP change ...... (3.8%) 2.1% Foreignexchangeeffectongrowth...... (3.6) 0.5 NWP growth excluding foreign exchange1 ...... (0.2%) 1.6%

1 Determined by assuming constant foreign exchange rate between periods.

54 Products Global Specialty provides a variety of specialty insurance products including marine, energy, construction, aviation, property, casualty, excess casualty, directors and officers, errors and omissions, environmental impairment liability, commercial automobile, railroad, trade credit, excess and surplus property, crisis management, contingent lines as well as reinsurance programs to domestic and foreign insurance and reinsurance companies including multi-line marine, property, casualty and specialty reinsurance. Additionally, Global Specialty provides contract and commercial surety bond products as well as inland marine products that provide protection coverage for lost or damaged wireless devices.

Selected Product Information. The accompanying table sets forth NWP for Global Specialty by product line for the periods indicated:

Years Ended December 31, 2015 2014 2013 (dollars in millions) Specialty insurance ...... $2,580 $2,780 $2,483 Reinsurance ...... 1,116 1,141 1,167 Surety ...... 776 757 752 Inland marine ...... 451 442 614 Total NWP ...... $4,923 $5,120 $5,016

Distribution Global Specialty commercial insurance and reinsurance products are distributed through the independent agent and broker distribution channel.

(5) Corporate and Other Corporate and Other includes the following significant items: • Certain internal discontinued operations composed of: asbestos, environmental, and toxic tort exposures, the run-off of certain Commercial Insurance business, the run-off of the California workers compensation business of Golden Eagle Insurance Corporation and certain distribution channels related to Prudential Property and Casualty Insurance Company, Prudential General Insurance Company and Prudential Commercial Insurance Company and Liberty Re annuity business. • Cessions related to certain retroactive reinsurance agreements, including the NICO Reinsurance Transaction. • Effective January 1, 2014, until termination on December 31, 2014, Corporate and Commercial Insurance novated their voluntary and involuntary reinsurance treaties that applied to certain pre-2013 workers compensation claims and entered into two new agreements including: (1) certain pre-2014 voluntary workers compensation claims and, (2) certain pre-2014 involuntary workers compensation claims. • Effective January 1, 2015, Corporate and Commercial Insurance entered into a new agreement including certain pre-2014 voluntary and involuntary workers compensation claims. The covered business materially aligns with the workers compensation business covered by the retroactive reinsurance agreement defined as the NICO Reinsurance Transaction. • Interest expense on the Company’s outstanding debt. • Certain risks of its SBUs that the Company reinsures as part of its risk management program, and risks on Personal Insurance homeowners business covered by an externally ceded homeowners quota share reinsurance treaty.

55 • The Company reports its written premium on workers compensation contracts on the “booked as billed” method. Commercial Insurance reports workers compensation written premium on the “booked at inception” method. Corporate and Other results reflect the difference between these two methods. • The Company discounts the long-term indemnity portion of its settled unpaid workers compensation claims at risk-free discount rates. Commercial Insurance reports its discount based on statutory discount rates. Corporate and Other results reflect the difference between the statutory and risk-free rate. • Costs associated with certain long-term compensation plans and other corporate costs not fully allocated to the SBUs. • For presentation in this Offering Memorandum, property and casualty operations’ investment income is allocated to the business units based on planned ordinary investment income returns by investment category. The difference between allocated net investment income and actual net investment income is included in Corporate and Other. • Income related to LP, LLC and other equity method investments. • Fee and other revenues include revenues from certain wholly owned non-insurance subsidiaries, primarily Liberty Energy. Liberty Energy generates revenue from the production and sale of oil and gas and related LP, LLC and other equity method investments.

Pricing and Underwriting Personal Insurance. The Company’s success in personal lines is built on sound strategy and effective execution. The strategy encompasses targeted prospecting (such as affinity marketing), effective risk selection, use of multiple price tiers through multivariate pricing algorithms and effective loss cost and expense management.

For automobile insurance, overall price is primarily a function of the expected frequency of accidents and the costs associated with medical care, automobile repair and replacement and litigation associated with liability claims. The Company endeavors to appropriately price its products according to risk with a margin for profits.

For property coverages, overall price is primarily a function of expected frequency of occurrence of covered perils and the cost to repair or replace damaged or lost property. The main underwriting requirements are for the dwelling to be fully insured, be adequately maintained and have adequate fire protection. The incidence of natural catastrophes is included in pricing based on long-term patterns and advanced modeling techniques. Most homeowners policies have a provision for an automatic escalation of policy limits to cover inflation in underlying replacement costs. The premiums for such policies are automatically adjusted to reflect these increased limits.

The Company uses traditional rating variables, where legally permissible, such as loss history, driving record, annual mileage, car year and make as well as many other factors. In addition to the more traditional rating variables, the Company offers premier pricing discounts and also uses insurance scores to develop multi-tier pricing plans for both automobile and homeowners insurance. Tier plans are adapted to individual state regulatory requirements. The Company believes tier based pricing allows it to offer more competitive rates to customers who have been the most profitable for the Company.

Commercial Insurance. While commercial insurance lines are generally not as highly regulated as personal insurance lines, certain regulatory principles and practices are applicable for both. The pricing of these products takes into consideration the expected frequency and severity of losses, the costs of providing the necessary coverage, including the cost of administering policy benefits, sales and other administrative and overhead costs and a margin for profit. Modifications from standard rates can be substantial depending on the size of the risk and its characteristics. Most states require detailed data for commercial insurance lines to support any rate or form filing change and, depending on the coverage, jurisdiction and justification involved, changing rates can be a

56 lengthy process. The Company continually reviews the adequacy of commercial insurance rates in various states to evaluate whether the profit potential offered by the approved rates is acceptable.

Liberty International. There is generally less regulation of pricing or policy forms in the markets, countries and classes of business in which Liberty International operates. Liberty International prices its products on a country-by-country basis according to the differing risk characteristics of each country with a margin for profit. Prices are derived from numerous variables similar to those applicable to U.S. policies. However, only a low proportion of loss is generally related to medical and litigation cost associated with liability claims. Certain of the markets in which Liberty International writes business are subject to natural catastrophes, primarily earthquakes and floods, and these exposures are included in pricing based on long-term patterns and comprehensive modeling techniques.

Global Specialty. For Global Specialty’s commercial insurance and reinsurance business, pricing takes into consideration the expected frequency and severity of losses, the costs of providing the necessary coverage, including the cost of administering policy benefits, sales and other administrative and overhead costs and a margin for profit. Global Specialty continually reviews the adequacy of its rates by individual product class to evaluate whether the return on capital potential offered by those rates is acceptable.

Terrorism Acts. In order for a loss to be covered under the Program (“subject losses”), the loss must meet certain aggregate industry loss minimums and must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of the Treasury. The annual aggregate industry loss minimum is $100 million through 2015. Beginning on January 1, 2016, the aggregate industry loss minimum increases by $20 million each calendar year until it equals $200 million. The Terrorism Acts generally require that all commercial property casualty insurers licensed in the United States participate in the Program. Under the Program, for the 2015 calendar year, a participating insurer is entitled to be reimbursed by the U.S. government for 85% of subject losses, after an insurer deductible, subject to an annual cap. Beginning on January 1, 2016, the amount of reimbursement from the federal government decreases by one percentage point each calendar year, until it reaches 80%. The deductible for any calendar year is equal to 20% of the insurer’s direct earned premiums for covered lines for the preceding calendar year. The Company’s estimated deductible under the Program is $1.5 billion for 2016. An annual aggregate cap provides that the U.S. government will not reimburse any insurer for any part of subject insurance industry losses in excess of $100 billion. Once the insurance industry losses on covered lines of business have reached the $100 billion aggregate during a program year, any insurer that has satisfied its annual deductible under the Program will not be liable to pay its portion of any industry loss in excess of $100 billion.

Catastrophe Exposure. The Company continually monitors its exposure to sources of aggregate risk, such as natural peril catastrophic loss, and attempts to mitigate such exposure. The Company uses sophisticated computer modeling techniques to analyze underwriting risks of business in hurricane and earthquake-prone areas. The Company relies upon this analysis to make underwriting decisions designed to manage its exposure on catastrophe-exposed business. See also “—Reinsurance.”

Claim Management Virtually all of the Company’s claims in the United States are handled by its staff of claims adjusters. The Company employs diverse professionals, including nurses, claims adjusters, attorneys, appraisers, investigators and system specialists, and training, management and support personnel. Approved external service providers, such as independent adjusters, appraisers, investigators and attorneys are available for use as appropriate.

The claims staff is organized with separate operating units devoted to Personal Insurance, Commercial Insurance, Liberty International and Global Specialty business units. In the event of a catastrophe, there is flexibility to have the claims staff of one SBU assist the claims staff of another SBU. For example, following the 2010 earthquake in Chile, claims adjusters from Personal Insurance traveled to Chile to assist with some of the more complex claims, and other claims adjusters from Personal Insurance handled less complex Chile claims

57 remotely from an office in the United States. This structure permits the Company to maintain the economies of scale of a large, established company while retaining the ability to respond promptly to the needs of each business unit’s customers, brokers, agents and underwriters.

Reserves for Claims and Claim Adjustment Expenses The Company establishes reserves for payment of claims and claim adjustment expenses that arise from the policies issued. As required by applicable accounting rules, no reserves are established until a loss, including a loss from a catastrophe, occurs. The Company’s reserves are segmented into three major categories: reserves for reported claims (estimates made by claims adjusters); IBNR reserves representing reserves for unreported claims and supplemental reserves for reported claims; and reserves for the costs to settle claims. The Company establishes its reserves net of salvage and subrogation by line of business or coverage and year in which losses occur.

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

As information develops that varies from past experience, provides additional data, or augments data that previously was not considered sufficient for use in determining reserves, changes in the Company’s estimate of ultimate liabilities may be required. The effects of these changes are reflected in current operating results.

Catastrophes are an inherent risk of the property-casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and financial position. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and financial position of the Company. Catastrophe losses incurred during the years ended December 31, 2015, 2014, and 2013 were $1.820 billion, $1.609 billion, and 1.269 billion, respectively.

Activity in property and casualty unpaid claims and claim adjustment expenses of the Company is summarized as follows:

2015 2014 2013 (dollars in millions) Balance as of January 1 ...... $49,970 $52,207 $51,318 Less: unpaid reinsurance recoverables1 ...... 10,256 10,957 11,113 Net balance as of January 1 ...... 39,714 41,250 40,205 Balance attributable to acquisitions and dispositions2 .... (67) (900) — Incurred attributable to: Current year ...... 21,454 21,203 21,257 Prior years3 ...... (162) 47 399 Discount accretion attributable to prior years ...... 79 109 117 Total incurred ...... 21,371 21,359 21,773 Paid attributable to: Current year ...... 11,559 11,491 10,617 Prior years ...... 9,457 9,987 10,351 Total paid ...... 21,016 21,478 20,968 Amortization of deferred retroactive reinsurance gain4 ...34339 Net adjustment due to foreign exchange ...... (573) (521) (99) Add: unpaid reinsurance recoverables1 ...... 9,891 10,256 10,957 Balance as of December 31 ...... $49,323 $49,970 $52,207

58 1 In addition to the unpaid reinsurance recoverable balances noted above, and as a result of retroactive reinsurance agreements, the Company has recorded retroactive reinsurance recoverable balances of $3.000 billion, $3.015 billion, and $106 million as of December 31, 2015, 2014, and 2013, respectively. 2 The balance attributable to acquisitions and dispositions primarily represents the disposition of the Argentina operations and Summit, partially offset by the Uni.Asia acquisition. 3 Does not include increases (decreases) in allowance related to reinsurance recoverables due to prior year development of $21 million, ($9) million, and ($98) million as of December 31, 2015, 2014, and 2013, respectively. 4 The increase in deferred gain amortization during the year ended December 31, 2013, was due to the commutation of four workers compensation excess of loss retroactive reinsurance agreements.

In 2013, incurred attributable to prior years, excluding asbestos and environmental and amortization of deferred retroactive gain, is primarily attributable to personal automobile and surety lines of business. The personal automobile unfavorable development is driven by worse than expected severity in bodily injury claims. Unfavorable development in surety is due to greater than expected severity in prior year claims.

The Company discounts the long-term indemnity portion of workers compensation claims at risk-free discount rates determined by reference to the U.S. Treasury yield curve. The weighted average discount rates were 5.2%, 5.4%, and 5.2% for 2015, 2014, and 2013, respectively. The held discounted reserves on these unpaid workers compensation claims, net of all reinsurance, as of December 31, 2015, 2014, and 2013 were $1.763 billion, $1.842 billion, and 2.227 billion, respectively.

For certain commercial lines of insurance, the Company offers experience-rated insurance contracts whereby the ultimate premium is dependent upon the claims incurred. As of December 31, 2015 and 2014, the Company held $3.613 billion and $3.632 billion, respectively, of unpaid claims and claim adjustment expenses related to experience-rated contracts. Premiums receivable included accrued retrospective and unbilled audit premiums of $448 million and $514 million as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015, 2014, and 2013, the Company recognized an increase (decrease) of premium income of $40 million, ($2) million, and $216 million, respectively, relating to prior years.

Unpaid claims and claim adjustment expenses are recorded net of anticipated salvage and subrogation of $1.286 billion and $1.279 billion as of December 31, 2015 and 2014, respectively.

As of December 31, 2015 and 2014, the reserve for unpaid claim reserves was reduced by $5.564 billion and $5.535 billion, respectively, for large dollar deductibles. Large dollar deductibles billed and recoverable were $163 million and $190 million as of December 31, 2015 and 2014, respectively.

Relating to future policy benefits, the discounting of disability claims is based on the 1987 Group Long-Term-Disability Table at annual discount rates of 2.5% to 7.0% in 2015 and 2014, respectively. Unpaid disability claims as of December 31, 2015 and 2014 include liabilities at discounted values of $1.765 billion and $1.587 billion, respectively.

The establishment of appropriate reserves is an inherently uncertain process, and there can be no assurance that ultimate losses will not materially exceed the Company’s loss reserves and have a material adverse effect on

59 the Company’s business, financial condition or results of operations. However, on the basis of (i) current legal interpretations and political, economic and social conditions; (ii) the Company’s internal procedures, which analyze the Company’s experience with similar cases and historical trends, such as reserving patterns, claims payments, pending levels of unpaid claims and product mix; and (iii) management’s judgments of the relevant factors regarding reserve requirements for claims relating to A&E policies, the Company believes that adequate provision has been made for the Company’s loss reserves. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves,” “—The Company’s claims and claim adjustment expense reserves may be inadequate to cover its ultimate liability for unpaid claims and claim adjustment expenses, and as a result any inadequacy could have a material adverse effect on the Company’s results of operations, financial condition or liquidity” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Asbestos Claims and Litigation,” “—Environmental Claims and Litigation” and “—Uncertainty Regarding Adequacy of A&E Reserves.”

The Schedule of Loss Reserve Development illustrates the change over time of statutory loss and defense and cost containment (formerly allocated loss adjustment expense) reserves established for property and casualty claims and claim adjustment expenses at the end of various calendar years. The first line shows the reserves as originally reported at the end of the stated year and has been restated to reflect domestic property and casualty acquisitions during the period presented. The second section, reading down, shows the cumulative amounts paid as of the end of successive years with respect to that reserve liability. The third section, reading down, shows re-estimates of the original recorded reserve as of the end of each successive year which is the result of the Company’s expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The fourth section compares the latest re-estimated reserve to the reserve amount as originally established and indicates whether or not the original recorded amount was adequate or inadequate to cover the estimated costs of unsettled claims. The last section shows the effect of net reserve re-estimates on calendar year operations by accident year.

The Schedule of Loss Reserve Development shows domestic property and casualty unpaid claims and claim adjustment expenses excluding adjusting and other (formerly unallocated loss adjustment) expenses, gross of tabular or other discount. As a result, loss activity associated with the Global Specialty and Liberty International business written in non-domestic, non-branch companies, accounting for 16% in 2015 of total company unpaid claims and claim adjustment expenses, net of reinsurance are not contemplated in the analysis. The table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Additionally, the table should not be used to forecast future patterns.

60 Schedule of Loss Reserve Development (in thousands) 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Original Reserves ...... 28,298,826 29,841,064 31,021,328 30,796,590 30,925,017 31,505,694 32,747,513 33,361,648 33,179,730 33,243,787 Cumulative Paid Loss and Loss Expenses One Year Later ...... 6,792,346 7,031,095 7,690,975 7,559,929 7,816,406 7,743,093 8,391,053 8,063,610 7,839,468 Two Years Later ...... 11,027,076 11,426,295 12,554,567 12,416,921 12,717,351 12,780,776 13,450,140 12,916,906 Three Years Later ...... 14,016,919 14,700,746 15,988,835 15,821,668 16,148,068 16,316,334 16,842,337 Four Years Later ...... 16,291,756 17,022,115 18,368,961 18,153,656 18,558,975 18,723,124 Five Years Later ...... 17,953,424 18,644,695 20,009,933 19,883,902 20,248,053 Six Years Later ...... 19,163,233 19,827,625 21,346,335 21,200,757 Seven Years Later ...... 20,103,423 20,896,008 22,449,884 Eight Years Later ...... 21,004,742 21,853,065 Nine Years Later ...... 21,857,747 Liabilities Re-estimated One Year Later ...... 28,157,700 28,916,023 30,581,645 30,563,165 31,185,375 31,663,086 33,604,274 33,346,812 33,012,419 Two Years Later ...... 27,519,604 28,834,066 30,380,344 30,831,787 31,343,881 32,401,733 33,437,653 33,168,389 Three Years Later ...... 27,988,112 28,826,097 30,770,180 30,934,082 32,018,642 32,383,748 33,357,899

61 Four Years Later ...... 27,999,830 29,220,425 30,993,484 31,454,344 32,004,022 32,458,455 Five Years Later ...... 28,452,306 29,389,674 31,419,921 31,576,335 32,088,424 Six Years Later ...... 28,557,022 29,640,238 31,643,579 31,650,894 Seven Years Later ...... 28,794,970 29,881,184 31,709,031 Eight Years Later ...... 29,045,423 29,945,011 Nine Years Later ...... 29,091,959 Deficiency (Redundancy) Net of Reinsurance ...... 793,133 103,947 687,703 854,304 1,163,407 952,761 610,386 (193,259) (167,311)

Effect of Net Reserve Re-estimates on Calendar Year Operations 2007 2008 2009 2010 2011 2012 2013 2014 2015 Prior ...... 236,694 (395,255) 619,774 41,261 453,816 68,476 233,548 273,466 25,355 2006 ...... (377,820) (242,841) (151,266) (29,543) (1,340) 36,240 4,400 (23,013) 21,181 2007 ...... (286,945) (550,465) (19,687) (58,148) 64,533 12,616 (9,507) 17,291 2008 ...... (357,726) (193,332) (4,492) 54,055 175,873 (17,288) 1,625 2009 ...... (32,124) (121,214) (121,009) 93,825 (101,667) 9,107 2010 ...... (8,264) 56,211 154,499 (136,611) 9,843 2011 ...... (1,114) 63,886 (3,365) (9,695) 2012 ...... 118,114 (148,636) (154,461) 2013 ...... 151,785 (98,669) 2014 ...... 11,112 Totals ...... (141,126) (925,041) (439,683) (233,425) 260,358 157,392 856,761 (14,836) (167,311) For the years ended December 31, 2013 through 2015, the Company recognized approximately $675 million of incurred losses and defense and cost containment expenses attributable to prior years. This unfavorable incurred development was primarily due to unfavorable loss trends leading to private passenger automobile reserve increases and the results of the Company’s 2013 and 2014 asbestos studies, partially offset by favorable trends leading to reserve decreases in commercial multiple-peril.

Asbestos & Environmental Reserve Reviews In the third quarter of 2015, the Company completed a review of asbestos, environmental and miscellaneous toxic tort unpaid loss and allocated loss adjustment expenses (“ALAE”) claim liabilities. The review resulted in no change to reserves as they make a reasonable provision for all unpaid losses and loss adjustment expenses.

In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded asbestos and environmental unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. Asbestos and environmental unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 million including: $83 million of asbestos reserves, primarily associated with increased defense costs, and $28 million of pollution reserves before consideration of the NICO Reinsurance Transaction.

Net asbestos losses and defense and cost containment expenses paid during the years ended December 31, 2015, 2014, and 2013 were $243 million, $169 million, and $128 million, respectively. The Company incurred $7 million, $89 million, and $236 million of asbestos losses and defense and cost containment expenses before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively.

Net environmental losses and defense and cost containment expenses paid during the years ended December 31, 2015, 2014, and 2013 were $37 million, $52 million, and $47 million, respectively. The Company incurred zero, $28 million, and $61 million of environmental losses and defense and cost containment expenses before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively.

Reinsurance General Consistent with industry practice, the Company reinsures a portion of the insurance risk it underwrites. Reinsurance is intended to limit the effect of large risks or catastrophes on the Company’s earnings and capital. The Company pays reinsurance premiums to reinsurers, and in exchange the reinsurers agree to pay the Company a portion of the losses the Company pays when the conditions of the reinsurance contracts are satisfied (often the reinsurers agree to pay when the losses paid by the Company exceed a specified amount). Reinsurance does not relieve the Insurance Subsidiaries of their primary liability and, as such, failure of reinsurers to honor their obligations could result in losses to the Company.

The Company purchases reinsurance in a variety of forms, including: • treaty reinsurance (including catastrophe reinsurance), in which reinsurance is provided for a specific type or category of risk; and

62 • facultative reinsurance contracts, which provide reinsurance for losses associated with an individual policy or policyholder, and which are generally negotiated policy by policy.

The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The Company’s monitoring procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where appropriate and regularly monitoring the financial condition and ratings of its reinsurers. Even though the Company holds collateral under certain reinsurance agreements to limit credit risk, there is still a risk that the collateral may be insufficient or may fail to provide adequate protection.

SBU Reinsurance In 2013, the Company began centralizing certain external reinsurance purchases for its various business units at the Corporate level. As part of that program, Corporate provides internal reinsurance to the business units for certain risks and classes of business. The Company then purchases external treaty reinsurance protections as needed to protect the enterprise from those exposures, including but not limited to property, professional, marine, war and terrorism, energy, third party motor, aviation and injury lines. These purchases replaced various market quota share and excess of loss treaties previously purchased directly by the individual business units.

The following table summarizes the Company’s reinsurance recoverables by Standard & Poor’s rating as of December 31, 2015:

Distribution of Reinsurance Recoverables by Standard & Poor’s Rating1 As of December 31, 2015 (dollars in millions)

Gross Collateral Net % of Total Net Recoverables2 Held3 Recoverables4 Recoverables Rated Entities5,6 AAA ...... $ — $ — $ — 0% AA+, AA, AA– ...... 5,354 3,327 2,405 27% A+,A,A– ...... 3,365 312 3,095 34% BBB+, BBB, BBB– ...... 3 — 3 0% BB+ or Below ...... 1 — 1 0% Subtotal ...... $ 8,723 $3,639 $5,504 61% Pools & Associations State-mandated involuntary pools and associations7 ..... $ 2,599 $ — $2,599 29% Voluntary ...... 277 93 244 3% Subtotal ...... $ 2,876 $ 93 $2,843 32% Non-Rated Entities8 Captives & fronting companies ...... $ 1,576 $1,801 $ 166 2% Other ...... 531 380 469 5% Subtotal ...... $ 2,107 $2,181 $ 635 7% Grand Total ...... $13,706 $5,913 $8,982 100%

1 Standard & Poor’s ratings are as of December 31, 2015. 2 Gross recoverables are defined as paid and unpaid claims and claim adjustment expense including IBNR and before both bad debt reserve set aside for potential uncollectible reinsurance and consideration of collateral. 3 Collateral refers to letters of credit, trust accounts, and funds held against outstanding and potential future claims and claim adjustment expenses related to reinsurance recoverable balances.

63 4 Net recoverables are defined as the difference between the amount of gross recoverables and collateral held for each reinsurer. If the collateral held for a reinsurer is greater than the gross recoverable, net recoverables are reported as $0. 5 The rating of Nationwide Indemnity Co. (“NIC”) is determined for the purposes of this table to equal the rating of its parent, Nationwide Mutual Insurance Co. Nationwide Mutual has guaranteed the timely payment and performance of the obligations of NIC under the reinsurance agreements, dated December 31, 1998, between NIC and EICOW and certain of its affiliated property and casualty companies. 6 The rating of Vantage Casualty Insurance Company is determined for the purposes of this table to equal the rating of Prudential Insurance Company of America, the principal operating insurance company of the parent, Prudential Financial Inc. Pursuant to a guaranty agreement dated October 31, 2003, Prudential Financial Inc. has guaranteed the complete and timely payment and performance of the obligations of Vantage Casualty Insurance Company pursuant to two reinsurance agreements between Vantage Casualty Insurance Company and certain companies acquired by Liberty Mutual Group from subsidiaries of Prudential Financial, Inc. 7 The reinsurance recoverables from state mandated involuntary market pools and associations represent servicing carrier business. As a servicing carrier, the Company retains no direct underwriting risk but instead cedes 100% of the involuntary market premium and losses back to the pool. Payment of losses is shared among the pool participants in proportion to their pool participation. Credit risk with respect to this servicing carrier business is the composite of the cumulative creditworthiness of all participants in the respective pools. 8 Reinsurers not rated by Standard & Poor’s.

The Company believes its reinsurance recoverables are from high quality reinsurers. As shown in the preceding table, approximately 93% of net recoverables are with reinsurers rated A– or better by Standard & Poor’s when including involuntary and voluntary pools and associations.

The following table summarizes the Company’s largest reinsurers (aggregated by Reinsurer group) and their balances as of December 31, 2015:

Top 15 Reinsurance Recoverables by Group As of December 31, 2015

Gross Collateral Net Reinsurance Groups1 Recoverables2 Held3 Recoverables4 (dollars in millions) 1 Berkshire Hathaway Insurance Group ...... $ 3,085 $2,585 $ 501 2 Nationwide Group ...... 1,595 — 1,594 3 Swiss Re Group ...... 1,154 522 966 4 UPINSCO ...... 486 549 — 5 Everest Re Group ...... 474 207 279 6 Munich Re Group ...... 404 32 382 7 Contractors Reinsurance S.A ...... 237 283 — 8 CUMIS Insurance Society Group...... 216 — 216 9 AEGIS Group ...... 215 244 — 10 Lloyd’s of London ...... 210 — 210 11 Alleghany Corp ...... 204 — 204 12 Exchange Indemnity Company ...... 190 99 93 13 Chubb Group of Insurance Companies ...... 168 65 103 14 W.R. Berkley Group ...... 129 1 129 15 Hannover Re Group ...... 125 4 122 State Mandated Involuntary pools and associations5 ...... 2,599 — 2,599 Voluntary pools and associations ...... 277 93 244 All Other ...... 1,938 1,229 1,340 Total Reinsurance Recoverables ...... $13,706 $5,913 $8,982

64 1 Reinsurance Groups are defined as all reinsurance subsidiaries owned by a common parent. 2 Gross recoverables are defined as paid and unpaid claims and claim adjustment expense including IBNR and before both bad debt reserve set aside for potential uncollectible reinsurance and consideration of collateral. 3 Collateral refers to letters of credit, trust accounts, and funds held against outstanding and potential future claims and claim adjustment expenses related to reinsurance recoverable balances. 4 Net recoverables are defined as the difference between the amount of gross recoverables and collateral held for each reinsurer. If the collateral held for a reinsurer is greater than the gross recoverable, net recoverables are reported as $0. 5 The reinsurance recoverables from state mandated involuntary market pools and associations represent servicing carrier business. As a servicing carrier, the Company retains no direct underwriting risk but instead cedes 100% of the involuntary market premium and losses back to the pool. Payment of losses is shared among the pool participants in proportion to their pool participation. Credit risk with respect to this servicing carrier business is the composite of the cumulative creditworthiness of all participants in their respective pools.

Corporate Reinsurance

In 2000, 2001 and 2002, the Company entered into several retroactive reinsurance treaties covering its workers compensation business, other than for the involuntary market, for the years 1980-1999. Coverage is provided primarily for losses over $500 thousand up to $10 million per occurrence, subject to aggregate retentions and limits. During 2013, the Company commuted four workers compensation excess of loss retroactive reinsurance agreements. The commutations, which represented the complete and final settlement and discharge of all the present and future obligations between the parties arising out of the agreements, resulted in a gain to the Company of $227 million, net of tax.

In 2014, the Company entered into the NICO Reinsurance Transaction with NICO, a subsidiary of Berkshire Hathaway Inc., on a combined aggregate excess of loss agreement for substantially all of the Company’s U.S. workers compensation (pre-2014 accident year) and A&E liabilities, attaching at approximately $12.5 billion of combined aggregate reserves, with an aggregate limit of $6.5 billion and sublimits of $3.1 billion for A&E liabilities and $4.5 billion for certain workers compensation liabilities. At the closing of the NICO Reinsurance Transaction, but effective as of January 1, 2014, the Company ceded approximately $3.3 billion of existing liabilities under this retroactive reinsurance agreement. NICO will provide approximately $3.2 billion of additional aggregate adverse development cover. The Company paid NICO total consideration of approximately $3.0 billion. In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014.

Quota Share. At the end of 2015, 2014 and 2013, the Company purchased quota share treaties for 2.5% of its Personal Insurance homeowners multiple-peril exposure. Occurrence limits for this treaty apply above the 1:100 loss level for hurricane and 1:250 for earthquake.

Working Layer Reinsurance. The Company purchases facultative and treaty reinsurance protection on a per risk, per policy, per loss and/or per occurrence basis. Treaty coverage is provided on an excess of loss basis for portions of the Company’s property, professional, marine, war and terrorism, energy, third party motor and aviation portfolios and on a quota share basis for injury lines. These treaties replace various quota share and excess of loss treaties purchased by the individual SBUs.

65 Catastrophe Reinsurance. The Company uses catastrophe reinsurance as one means of controlling the losses associated with a single large event. The Company purchases reinsurance coverage for Personal Insurance and Commercial Insurance and certain U.S. exposure for Global Specialty that provides significant reinsurance protection in excess of $1.3 billion in all geographic locations in the United States, Canada and the Caribbean. Portions of this coverage are available on a multi-year basis, and portions can also act to decrease the $1.3 billion per event retention.

The Company purchases reinsurance coverage for the property books written by Liberty International and certain parts of Global Specialty to protect against international catastrophe. The two main international catastrophe treaties attach at $50 million and provide extensive protection to above the 1:100 loss level.

The Company purchases workers compensation catastrophe reinsurance for Commercial Insurance and some Global Specialty U.S. exposures that provides significant reinsurance protection in excess of $335 million per occurrence, including terrorism and/or losses for a single event at a single insured location in excess of $75 million. These contracts generally exclude nuclear, biological and chemical terrorism losses.

Given the volume of the Company’s property, liability, and workers compensation business, and the retentions, co-participations and limits purchased, it is possible that a major event could exhaust the Company’s reinsurance and have a material adverse effect on the Company’s business, financial condition or results of operations.

Florida Hurricane Catastrophe Fund. The Company participates in the Florida Hurricane Catastrophe Fund (“FHCF”), a state-mandated catastrophe fund that provides reimbursement to insurers for a portion of their Florida hurricane losses. FHCF resources may be insufficient to meet the obligations of FHCF. Limits, premium and reimbursements from FHCF apply on a per company basis. If losses fall disproportionately on one insurance entity within the Company, recovery from FHCF could be less than anticipated. On June 1, 2015, the Company renewed coverage for 90% of approximately $83 million excess of $28 million. Recoveries from FHCF inure to the sole benefit of the Company. If the Company fails to recover as anticipated from FHCF there could be an adverse effect on the Company’s business, financial condition or results of operations.

Competition The property and casualty insurance industry is a highly competitive industry globally. At the end of 2014 there were approximately 3,000 property and casualty insurance companies in the United States based on information collected by NAIC. Many of these companies offer property and casualty insurance products similar to those marketed by the Company. In addition, a substantial amount of commercial risks, particularly for larger companies, is covered by self-insurance, risk-purchasing groups, risk-retention groups or captive insurance companies.

The Company competes principally on the basis of its brand recognition, distribution strength, service, underwriting or risk selection, customer focus, use of technology to improve customer service, product features, breadth and quality of product offerings and efficiency.

The Company believes that financial strength ratings from the major public rating agencies are important indicators of an insurance company’s financial condition and stability and are therefore important factors in the selection by many potential customers of an insurer. See below under “—Ratings” and “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The property and casualty insurance industry is highly competitive, and the Company may not be able to compete effectively in the future.”

66 Ratings An insurance company’s financial strength ratings are an increasingly important factor in establishing its competitive position in the insurance marketplace. Ratings are important in maintaining public confidence in the stability of the Company and its ability to market its insurance products. Rating agencies continually review the financial performance and condition of insurers, including the Company. Although rating methods may vary, the ratings are based upon a comprehensive analysis of an insurer on both a quantitative and qualitative basis, as well as a thorough understanding of the insurer’s strategy and future direction.

As an insurer with a highly diversified business mix, the Company continues to be rated as a strong insurer in the property and casualty insurance industry. The principal insurance entities that participate in the “Liberty Mutual Insurance Companies” pool, including LMIC, LMFIC and EICOW, have a current interactive financial strength rating and outlook as set forth in the chart below:

Rating Agency Rating Rank of Rating Outlook A.M. Best ...... A Third highest out of 16 ratings Stable Standard & Poor’s ...... A Sixth highest out of 22 ratings Stable Moody’s ...... A2 Sixth highest out of 21 ratings Stable

On October 8, 2015, A.M. Best affirmed the issuer credit and financial strength ratings of the Company, maintaining a stable outlook. On December 23, 2015, Moody’s issued a credit opinion affirming the debt and insurance financial strength ratings of the Company, maintaining a stable outlook. On December 24, 2015, S&P issued a full credit analysis on the Company, affirming the issuer credit and financial strength ratings while maintaining a stable outlook.

Mutual Holding Company Structure A number of aspects of Liberty Mutual’s structure and its relationship with LMHC, Massachusetts Holdings, LMIC and LMFIC are governed by Massachusetts law relating to the reorganization of mutual insurance companies, by the terms of the Plans of Reorganization of LMIC and LMFIC (the “LMIC and LMFIC Plans of Reorganization”) approved by the Massachusetts Commissioner and the orders issued by the Massachusetts Commissioner at the time of the reorganization (the “Massachusetts Commissioner’s Orders”). The Company’s relationship with EICOW is governed by the order issued by the Wisconsin Commissioner of Insurance at the time of EICOW’s reorganization (the “Wisconsin Commissioner’s Order”). For additional information, see “—Regulation—Relationship with LMHC, Massachusetts Holdings, LMIC, LMFIC, EICOW and LMPIC.”

Liberty Mutual’s principal predecessor company, LMIC, has been in the insurance business since 1912. In 2001, LMIC reorganized into a stock insurance company as part of an overall conversion to a mutual holding company structure. LMIC formed LMHC as its ultimate parent. Additionally, as part of its reorganization, LMIC formed (i) Massachusetts Holdings which is a direct, wholly owned subsidiary of LMHC and (ii) Liberty Mutual which is a direct wholly owned subsidiary of Massachusetts Holdings and the direct parent of LMIC. In 2001, Employers Insurance of Wausau A Mutual Company reorganized into a stock insurance company named EICOW as part of an overall conversion to a mutual holding company structure. EICOW formed as its direct parent Employers Insurance of Wausau Mutual Holding Company, a Wisconsin mutual holding company (“EIOW MHC”). In 2002, the final step in a series of reorganization transactions was completed in which (a) EIOW MHC merged with LMHC, with LMHC as the surviving entity, and EICOW became a wholly owned stock subsidiary of Liberty Mutual and (b) LMFIC reorganized from a Massachusetts mutual insurance company to a Massachusetts stock insurance company and LMFIC became a wholly owned stock subsidiary of Liberty Mutual. In 2005, LMFIC transferred its domicile from Massachusetts, becoming a Wisconsin stock insurance company.

In 2006, LMPIC reorganized into a stock insurance company and became a wholly owned stock subsidiary of Liberty Mutual, pursuant to the LMPIC Plan of Reorganization (together with the LMIC and LMFIC Plans of Reorganization, the “Plans of Reorganization”). In 2010, LMPIC issued its first policies since becoming a subsidiary of Liberty Mutual.

67 Liberty Mutual has engaged in significant acquisitions of insurance companies, and may engage in similar transactions in the future. Any such transactions will likely require the approval of insurance regulatory authorities. In connection with any such regulatory approval process, regulators may require Liberty Mutual or its affiliates to agree to limitations on conduct of their business and financial activities, including limitations on product offerings and marketing practices, employee matters and dividend payments.

The Company reorganized to a mutual holding company structure to provide its subsidiaries with better capital market access and greater strategic flexibility to pursue acquisitions and alliances, while aligning its legal structure with its operating structure and preserving mutuality. The Company continues to evaluate the optimal use of the mutual holding company structure, including the most appropriate place for holding assets and liabilities. In the future, subject to compliance with insurance regulations, assets and liabilities may be transferred from the Insurance Subsidiaries to Liberty Mutual, Massachusetts Holdings or LMHC. As a result of the reorganization, LMHC is the ultimate owner of 100% of the outstanding stock of LMIC, LMFIC, EICOW and LMPIC. The reorganization provides the Company with the ability to issue up to 49% of its equity securities, or debt securities convertible by their terms into equity securities, of Massachusetts Holdings, Liberty Mutual, LMIC, LMFIC, EICOW and LMPIC to persons other than LMHC. Except for the securities of these entities, the Company may sell all or any part of the securities of its various entities subject to standard SEC and, if applicable, insurance regulations. See “—Regulation—Stock Offerings.”

While their policies remain in force, current and future policyholders of LMIC, LMFIC, EICOW and LMPIC have the right to vote at annual meetings of LMHC and to elect the Board of Directors of LMHC. Policyholders of the Insurance Subsidiaries other than LMIC, LMFIC, EICOW and LMPIC do not have membership interests in LMHC.

Regulation Relationship with LMHC, Massachusetts Holdings, LMIC, LMFIC, EICOW and LMPIC Because of Liberty Mutual’s relationship with LMHC, Massachusetts Holdings, LMIC, LMFIC, EICOW and LMPIC, it is subject to regulation by both the Massachusetts and Wisconsin Commissioners. The extent of such regulation is articulated in Massachusetts law, the Plans of Reorganization, the Massachusetts Commissioner’s Orders and the Wisconsin Commissioner’s Order. The provisions of the Plans of Reorganization are substantially identical insofar as they impose regulatory requirements on Liberty Mutual.

Pursuant to the Plans of Reorganization: • If any company controlled by LMHC declares a dividend to Liberty Mutual, Liberty Mutual may not waive its right to receive such dividend. • Liberty Mutual must submit to the personal jurisdiction of the Massachusetts courts and agree not to assert that the venue of any action, suit or proceeding brought against it in such courts is improper.

Stock Offerings Pursuant to Massachusetts law, the Plans of Reorganization and the Wisconsin Commissioner’s Order, any stock offering by LMIC, LMFIC, EICOW, LMPIC, Massachusetts Holdings or Liberty Mutual is subject to a number of conditions:

Liberty Mutual may issue shares of equity securities, or debt securities convertible by their terms into equity securities, to persons other than LMHC and its intermediate stock holding companies, but subject to the limitation that LMHC must at all times beneficially own, either directly or indirectly through one or more intermediate stock holding companies, at least 51% of the equity value of LMIC, LMFIC, EICOW and LMPIC on a fully diluted basis. Any initial offering is subject to the Massachusetts Commissioner’s approval.

68 If Liberty Mutual conducts an initial public offering or initial private equity placement or initial issuance of voting stock or securities convertible into voting stock, it must cause each eligible person to receive stock purchase rights in connection with such initial offering, unless a committee of LMHC’s Board of Directors consisting of its outside directors determines that a stock purchase rights offering would not be in the best interests of LMHC’s members and the Massachusetts Commissioner approves such determination.

Except for the securities of Massachusetts Holdings, Liberty Mutual, LMIC, LMFIC, EICOW and LMPIC, the Company may sell all or any part of the securities of its various entities subject to standard SEC and, if applicable, insurance regulations.

Although the Company has no current plans for the issuance or sale of stock to the public, the Company continually evaluates the capital markets and the desirability of having publicly registered equity as currency for greater strategic flexibility. In addition, the Company has instituted procedures and time lines that substantially emulate the requirements of a public company so as to facilitate any such transition to the public markets if it were to determine this would be an appropriate strategic step.

Demutualization Pursuant to Massachusetts law, LMHC may convert into a Massachusetts stock corporation pursuant to a plan of conversion. Such plan is subject to approval by the Massachusetts Commissioner and by a vote of not less than two-thirds of the members of LMHC. In exchange for their equity rights in LMHC, such plan must provide for consideration to the members equal, in the aggregate, to the value of the entire capital and surplus of LMHC. In the event of such conversion, the funds distributed to members of LMHC would not be available to meet payment obligations under the Notes. Historically, mutual companies have usually replenished the amounts distributed to members by raising funds through an initial public offering of stock by the converted company.

The Company has no current plans to effect a demutualization.

General Regulation The Insurance Subsidiaries are subject to regulation and supervision by state and foreign insurance regulators in their states of domicile and in all jurisdictions in which they are licensed to do business. The extent of such regulation varies, but most jurisdictions have laws and regulations governing the financial aspects of insurers, including standards of solvency, reserves, reinsurance, capital adequacy and the business conduct of insurers.

In addition, statutes and regulations usually require the licensing of insurers and their agents, the approval of policy forms and related materials and, for certain lines of insurance, the approval of rates. State statutes and regulations also prescribe the permitted types and concentrations of investments by insurers. The primary purpose of this insurance industry regulation is to protect policyholders, not security holders. Insurance companies are required to file detailed annual statements with insurance regulatory authorities in each of the jurisdictions in which they do business, and their operations and accounts are subject to periodic examination by such authorities. Regulators have discretionary authority, in connection with the continued licensing of insurance companies, to limit or prohibit the ability to issue new policies if, in their judgment, the regulators determine that an insurer is not maintaining minimum statutory surplus or capital or if the further transaction of business will be detrimental to its policyholders.

Holding Company Regulation Liberty Mutual and its Insurance Subsidiaries are subject to regulation under the insurance holding company laws of the states in which the Insurance Subsidiaries are domiciled. These laws vary from jurisdiction to jurisdiction, but generally require an insurance holding company (and insurers that are subsidiaries of insurance

69 holding companies) to register with state regulatory authorities and to file certain reports with those authorities, including information concerning their capital structure, ownership, financial condition, certain intercompany transactions and general business operations. Generally, under these laws, transactions between the Insurance Subsidiaries and their affiliates must be fair and reasonable and certain of these transactions must be filed for prior approval from the state regulatory authority. The insurance holding company laws and regulations of the states of domicile of the Insurance Subsidiaries also restrict the ability of any person to acquire control (where control is generally presumed to exist if one person owns 10% or more of the outstanding voting securities of another person) of an insurance company without prior approval of the insurance regulator.

In addition, the ability of the Insurance Subsidiaries to pay dividends is restricted under applicable insurance law and regulations and, in some states, dividends may only be paid from unassigned surplus. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, an insurer may make an ordinary dividend payment if its surplus as regards policyholders, following such dividend, is reasonable in relation to its outstanding liabilities and adequate to its financial needs and does not exceed the insurer’s unassigned surplus. However, no insurer may pay an extraordinary dividend without the approval or non-disapproval of the domiciliary insurance regulatory authority. Under the insurance laws of Massachusetts, the domiciliary state of LMIC, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or the insurer’s net income for the 12-month period ending on the preceding December 31. Therefore, without regulatory approval, LMIC could pay a maximum of $1.531 billion in dividends to Liberty Mutual in 2016. Under the insurance laws of Wisconsin, the domiciliary state of LMFIC and EICOW, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends paid within the preceding 12 months, exceeds the lesser of (a) 10% of the insurer’s surplus as regards policyholders as of the preceding December 31 or (b) the greater of (1) the insurer’s net income for the preceding calendar year, minus realized capital gains for that calendar year, or (2) the aggregate of the insurer’s net income for the three preceding calendar years minus realized capital gains for those calendar years and minus dividends paid within the first two of the preceding three calendar years. Therefore, without regulatory approval, LMFIC could pay a maximum of $139 million in dividends to Liberty Mutual in 2016 and EICOW could pay a maximum of $151 million in dividends to Liberty Mutual in 2016.

The NAIC has adopted an Own Risk and Solvency Assessment model act that will require insurers to measure and share with regulators their internal assessment of their enterprise risk management process and the capital needs for the entire holding company group, including non-Insurance Subsidiaries. Another development is the introduction of supervisory colleges into the U.S. regulatory framework. A supervisory college is a forum of the regulators having jurisdictional authority over a holding company’s various insurance subsidiaries, including foreign insurance subsidiaries, convened to meet with the insurer’s executive management, to evaluate the insurer from both a group-wide and legal-entity basis. Some of the items evaluated are the insurer’s business strategies, enterprise risk management and corporate governance. As the lead regulator for the Company, the Massachusetts Commissioner conducts the supervisory colleges for the Company.

Annual Reports and Financial Statements Each of the Insurance Subsidiaries is required to file detailed annual statements and audited financial statements (pooled financial statements), prepared in accordance with prescribed statutory accounting rules promulgated by the NAIC, with regulatory officials in each of the jurisdictions in which it does business. As part of their routine regulatory oversight process, state insurance departments conduct periodic detailed examinations, generally once every five years, of the books, records, accounts and operations of insurance companies domiciled in their states. These examinations are conducted under guidelines promulgated by the NAIC. LMIC’s, LMFIC’s and EICOW’s last issued state examination was as of December 31, 2013. Such examinations did not result in any material findings. In addition, LMHC is required to prepare and file with the Massachusetts Commissioner annual and quarterly GAAP financial statements. The Massachusetts Commissioner has authority to examine and audit LMHC’s financial condition and, in that connection, is entitled to access to the Company’s books, records and other documents and to its personnel, as necessary for the examination.

70 Financial Tests The NAIC utilizes a set of financial relationships, or “tests”, known as the Insurance Regulatory Information System (“IRIS”), a tool in the early identification of companies that may require attention by insurance regulatory authorities. Insurance companies submit their annual statements to the NAIC, which in turn analyzes the data contained in the filing. IRIS consists of thirteen ratios. Generally, an insurance company will become subject to heightened regulatory scrutiny if it falls outside the “usual range” on four or more of the ratios. A company would then have an opportunity to explain the unusual results, as well as develop a strategy to produce results that would be within the usual range in future years. Based on the 2015 annual statements, Liberty Mutual did not have any Insurance Subsidiaries with four or more ratios falling outside the usual range. The Company is not aware of any regulators currently subjecting any of the Insurance Subsidiaries to heightened scrutiny based on IRIS ratios.

Risk-Based Capital Requirements The NAIC has adopted risk-based capital requirements for insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks associated with asset quality, asset and liability matching and other business factors. The risk-based capital formula measures (i) underwriting risk, which is the risk of errors in pricing and reserves, (ii) asset risk, which is the risk of asset default for fixed income securities and loss in market value for equity assets, (iii) credit risk, which is primarily the risk of losses from unrecoverable reinsurance and (iv) off-balance sheet risk, which is primarily the risk created by excessive growth. The capital requirements for each risk category are determined by applying specified factors to assets, premiums, reserves and other items, with higher factors for items with greater underlying risk and lower factors for items with less risk. The formula is used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized companies for the purpose of initiating corrective company action or regulatory action. As of December 31, 2015 (i) all of the Insurance Subsidiaries exceeded the levels of authorized control level risk-based capital, as defined by the NAIC, that would require company action or regulatory action, (ii) LMIC’s risk-based capital ratio was 497%, (iii) LMFIC’s risk-based capital ratio was 518%, and (iv) EICOW’s risk-based capital ratio was 512%.

Involuntary Market As a condition of its license to do business in various states, each of Liberty Mutual’s property and casualty Insurance Subsidiaries is required to participate in property and casualty involuntary market mechanisms or pooling arrangements which provide various insurance coverages to individuals or entities that otherwise are unable to purchase such coverage voluntarily from private insurers. In addition, some states require automobile insurers to participate in reinsurance pools for claims that exceed a certain amount. An insurer’s participation in such involuntary markets or pooling mechanisms is generally in amounts related to the proportion of such insurer’s direct writings for the type of coverage written by the specific pooling mechanism in the applicable state.

Most states compel the purchase of workers compensation and commercial automobile insurance; therefore, states have developed involuntary market mechanisms to provide required coverages to those who, because of their accident records or other factors, cannot find insurers who will insure them voluntarily. For workers compensation, the pooling in most states is generally in the form of a reinsurance facility with servicing carriers being paid a fee to provide certain underwriting, claims and administrative services. The National Council on Compensation Insurance provides services for calculating member pooling of losses and expenses in a majority of the states, with the remainder of the states having their own independent servicing plans.

The three most common types of involuntary market mechanisms for providing commercial automobile insurance are assigned risk plans, reinsurance facilities and joint underwriting associations. Additionally, another pooling mechanism, a Commercial Automobile Insurance Plan, uses a limited number of servicing carriers to handle assignments from other insurers and such servicing carrier is paid a fee by the insurer who otherwise

71 would be assigned the responsibility of handling the commercial automobile policy and paying claims. Commercial insurance is also subject to pooled insurance on a small scale for commercial properties insured through the various Fair Access to Insurance Requirements Plans (“FAIR Plans”), which exist in most states.

In the personal lines market, the involuntary market mechanisms for providing automobile insurance are generally assigned risk plans, reinsurance facilities and joint underwriting associations similar in structure to the commercial lines automobile pooling mechanisms. Property insurance in the personal lines market is also subject to pooled insurance through the various FAIR Plans.

These mechanisms are designed so that insurers will share in the costs of insuring those who cannot obtain insurance in the voluntary market. In some years, significant attention has been given to the insurance rates being charged in the involuntary market. In response to the consumer perception that insurance is too expensive and unaffordable, some regulators have compelled the involuntary market mechanism in their states to operate with inadequate rates or at a deficit, thereby exposing participating insurers to losses or assessments arising out of such deficit. Although the amount of future losses or assessments from commercial and personal lines involuntary market mechanisms and pooling arrangements cannot be foreseen with certainty, the Company does not expect such future losses or assessments to have a material adverse effect on its financial position, results of operations or liquidity.

Assessments Against Insurers Under the insurance guaranty fund laws existing in each state and the District of Columbia, licensed insurers can be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws provide for annual limits on the assessments and for an offset against state premium taxes. These premium tax offsets must be spread over future periods ranging from three to twenty years. These assessments typically are not made for several years after an insurer fails and depend upon the final outcome of liquidation or rehabilitation proceedings. While the Company cannot accurately determine the amount or timing of any future assessments, the Company has established reserves that it considers adequate for assessments with respect to insurance companies currently subject to insolvency proceedings. See Note 11 of the Audited Consolidated Financial Statements as to the Company’s accrued liabilities for guaranty fund and other insurance-related assessments as of December 31, 2015.

Regulation of Investments The Insurance Subsidiaries are subject to state laws and regulations that require diversification of their investment portfolios and limit the amounts of investments in certain asset categories, such as below-investment- grade fixed-income securities, real estate, equity investments and derivatives. Failure to comply with these requirements and limitations could cause affected investments to be treated as non-admitted assets for purposes of measuring statutory surplus and, in some instances, could require the divestiture of such non-qualifying investments.

Federal Insurance Regulatory Initiatives From time to time, there have been various attempts to regulate insurance at the federal level. Currently, the federal government does not directly regulate the business of insurance. However, federal legislation and administrative policies in several areas can significantly affect insurance companies. These areas include securities regulation, privacy and taxation.

While the U.S. federal government has not historically regulated the insurance business, in 2010 the Dodd-Frank Act established the FIO within the U.S. Department of the Treasury. The FIO has limited regulatory authority and is empowered to gather data and information regarding the insurance industry and insurers. In December 2013, the FIO released a report recommending ways to modernize and improve the system of

72 insurance regulation in the United States. While the report did not recommend full federal regulation of insurance, it did suggest an expanded federal role in some circumstances. In addition, the report suggested that Congress should consider direct federal involvement to fill regulatory gaps identified in the report, should those gaps persist, for example, by considering either establishing a federal coordinating body or a direct regulator of select aspects of the industry, such as large complex institutions or institutions that seek a federal charter, if a law is passed to allow a federal charter. It is not clear as to the extent, if any, the report will lead to regulatory changes or how any such changes would impact the Company. Further, the Dodd-Frank Act gives the Federal Reserve supervisory authority over a number of non-bank financial services holding companies, including insurance companies, if they are designated by a two-thirds vote of the FSOC as a SIFI. To date, the FSOC has not designated the Company as a non-bank SIFI. However, the FSOC may conclude in the future that the Company is a SIFI. If the Company were designated as a SIFI, the Federal Reserve’s supervisory authority could include the ability to impose heightened financial regulation and could impact requirements regarding the Company’s capital, liquidity and leverage as well as its business and investment conduct. As a result of the foregoing, the Dodd-Frank Act, or other additional federal regulation that is adopted in the future, could impose significant burdens on the Company, including impacting the ways in which it conducts its business, increasing compliance costs and duplicating state regulation, and could result in a competitive disadvantage, particularly relative to smaller insurers that may not be subject to the same level of regulation.

International Regulatory Initiatives The European Union’s executive body, the European Commission, is implementing new capital adequacy and risk management regulations called Solvency II that would apply to the Company’s businesses in the European Union beginning January 1, 2016. Under Solvency II, the direct or indirect parent of a European Union subsidiary (including a U.S. parent company) could be subject to certain Solvency II requirements if the regulator determines that the subsidiary’s capital position is dependent on an affiliated or parent company and the affiliated or parent company is not already subject to regulations deemed equivalent to Solvency II.

In addition, regulators in countries where the Company has operations are working with the IAIS (and in the United States, with the NAIC) to develop a ComFrame, which is intended to establish a set of international supervisory requirements focusing on the effective group-wide supervision of IAIGs. In 2013, the IAIS announced that it will be developing a first-ever risk-based global insurance capital standard by 2016. Full implementation is scheduled to begin in 2019. It will be included as part of ComFrame, applying to IAIGs. Under the IAIS definition, the Company would be identified as an IAIG. It is not yet known what impact a global insurance capital standard included as part of ComFrame would have on the Company.

73 In 2013, the Financial Stability Board named the insurers that are designated as G-SIIs and the Company was not one of them. It is possible, however, that the Financial Stability Board may in the future conclude that the Company is a G-SII. Designation as a G-SII could result in heightened financial regulation and could impact requirements regarding the Company’s liquidity and leverage as well as its business and investment conduct.

Legal Proceedings The Insurance Subsidiaries are defendants in actions arising out of their insurance operations and are from time to time involved as parties in various governmental and administrative proceedings against them. There can be no assurance that any litigation will not have a material adverse effect on the Company in the future.

The Company has been in coverage litigation with Kentile Floors, Inc. (“Kentile”), a former manufacturer of floor tile products, some of which contained asbestos, since 2008. In November 1992, Kentile filed a voluntary petition for bankruptcy relief under Chapter 11 (Reorganization) of the Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York, and Metex Manufacturing Corporation (“Metex”) emerged from the Chapter 11 Bankruptcy proceeding as the “Reorganized Debtor.” On November 9, 2012, Metex filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York, staying all coverage litigation with LMIC and all other insurance carriers.

Prior to the most recent bankruptcy filing, Metex reached agreement with each of Kentile’s insurance carriers (the “Settlement Agreements”). On June 19, 2014, the Bankruptcy Court confirmed Metex’s proposed Plan of Reorganization, under which each of the Settlement Agreements is approved. The U.S. District Court subsequently affirmed the Kentile confirmation order, and the Company’s obligations with respect to Kentile became fully finalized as of September 3, 2014. The Company issued its first payment of $33.75 million to the bankruptcy trust on October 1, 2014; a final payment of $25 million is due no later than October 1, 2017.

Properties The Company owns its principal office complex, located at 175 Berkeley Street, Boston, Massachusetts. The Company’s real estate consists of special purpose buildings and office properties occupied by both the Company and outside tenants. The Company leases certain office facilities and equipment. The Company believes that such owned and leased properties are suitable and adequate for current business operations.

Employees As of December 31, 2015, the Company employed more than 50,000 people. No U.S. employee of the Company is represented by a labor union. The Company believes that its employee relations are generally excellent.

74 SELECTED CONSOLIDATED FINANCIAL DATA

The summary data shown below should be read in conjunction with the Consolidated Financial Statements and related notes, beginning on page F-1, as well as with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated historical financial and other data as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 have been derived from the Audited Consolidated Financial Statements of LMGI, which are included elsewhere in this Offering Memorandum along with the Auditors’ Report of Independent Registered Public Accounting Firm thereon.

75 As of December 31, 2015 2014 (dollars in millions) Balance sheet data: Total investments ...... $ 73,983 $ 74,128 Reinsurance recoverables ...... 13,575 13,979 Total assets ...... 121,700 124,287 Unpaid claims and claim adjustment expense reserves ...... 58,585 59,000 Total long-term debt ...... 6,982 7,232 Total liabilities ...... 102,447 103,983 Total equity ...... 19,253 20,304

76 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion provides an assessment of the consolidated financial position and results of operations for LMGI for the periods indicated. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with, and is qualified in its entirety by reference to, LMGI’s Audited Consolidated Financial Statements as of December 31, 2015 and 2014, and for each of the three years in the period ended December 31, 2015, which are included elsewhere in this Offering Memorandum.

YEARS ENDED DECEMBER 31, 2015 AND 2014 Executive Summary The following highlights do not address all of the matters covered in the other sections of Management’s Discussion & Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to the investing public. This summary should be read in conjunction with the other sections of Management’s Discussion & Analysis of Financial Condition and Results of Operations and the Company’s 2015 Audited Consolidated Financial Statements.

Year Ended December 31, 2015—Consolidated Results of Operations Years Ended December 31, 2015 2014 (dollars in millions) NWP ...... $34,533 $34,332 PTOI before partnerships, LLC and other equity method (loss) income ...... 2,032 2,069 Partnerships, LLC and other equity method (loss) income ...... (34) 641 Net realized losses ...... (24) (100) Consolidated net income from continuing operations ...... 1,447 1,829 Discontinued operations, net of tax ...... (909) (35) Net income attributable to LMGI ...... $ 518 $ 1,818 Cash flow provided by operations ...... $ 3,548 $ 632

Years Ended December 31, 2015 2014 (dollars in millions) Combined ratio before catastrophes1 and net incurred losses attributable to prior years2 ...... 93.0% 92.7% Combined ratio ...... 97.8% 97.8%

As of December 31, 2015 2014 (dollars in millions) Total equity ...... $19,253 $20,304

77 Subsequent Events On January 14, 2016, the Company completed the acquisition of Compan˜ia de Seguros Generales Penta Security S.A., the fourth largest non-life insurer in Chile. Compan˜ia de Seguros Generales Penta Security S.A. had approximately $160 million of net written premium in 2015.

Consolidated Results of Operations The Company has identified consolidated PTOI, PTOI before partnerships, LLC and other equity method income, and net operating income as non-GAAP financial measures. PTOI is defined by the Company as pre-tax income excluding net realized gains, loss on extinguishment of debt, extraordinary items, discontinued operations, integration and other acquisition and realignment related costs and cumulative effects of changes in accounting principles. PTOI before partnerships, LLC and other equity method income is defined as PTOI excluding LP and LLC results recognized on the equity method and revenue and expenses from the production and sale of oil and gas. Net operating income is defined as net income excluding the after-tax impact of net realized gains and discontinued operations. PTOI before partnerships, LLC and other equity method income, PTOI, and net operating income are considered by the Company to be appropriate indicators of underwriting and operating results and are consistent with the way the Company internally evaluates performance. Net realized gains and partnership, LLC and other equity method results are significantly impacted by both discretionary and economic factors and are not necessarily indicative of operating results, and the timing and amount of integration and other acquisition and realignment related costs and the extinguishment of debt are not connected to the management of the insurance and underwriting aspects of the Company’s business. Income taxes are significantly impacted by permanent differences. References to NWP represent the amount of premium recorded for policies issued during a fiscal period including audits, retrospectively rated premium related to loss sensitive policies, and assumed premium, less ceded premium. Assumed and ceded reinsurance premiums include premium adjustments for reinstatement of coverage when a loss has used some portion of the reinsurance provided, generally under catastrophe treaties (“reinstatement premium”). In addition, the majority of workers compensation premium is adjusted to the “booked as billed” method through the Corporate and Other segment. The Company believes that NWP is a performance measure useful to investors as it generally reflects current trends in the Company’s sale of its insurance products.

The Company’s discussions related to net income are presented on an after-tax GAAP basis. All other discussions are presented on a pre-tax GAAP basis, unless otherwise noted.

On December 18, 2015, the Company entered into an agreement to sell its Polish operations to a member of the AXA Group.

78 On July 23, 2015, the Company sold its Quinn-direct branded private motor book in Great Britain to Chaucer Insurance Services Ltd. The Company will now focus on the Republic of Ireland market and plans to transfer the customer management of its Northern Ireland policies on renewal to Hughes Insurance Services Limited. Costs associated with this restructuring are included in the Consolidated Financial Statements.

Effective July 2, 2015, LMIC renewed its $1 billion repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

On July 24, 2014 and October 28, 2014, LMGI issued $750 million and $300 million of the 2044 Notes, respectively. Interest is payable semi-annually at a fixed rate of 4.85%. The 2044 Notes mature on August 1, 2044.

On July 17, 2014, the Company entered into a reinsurance transaction with NICO, a subsidiary of Berkshire Hathaway Inc., on a combined aggregate excess of loss agreement for substantially all of the Company’s U.S. workers compensation (pre-2014 accident year) and asbestos and environmental liabilities, attaching at approximately $12.5 billion of combined aggregate reserves, with an aggregate limit of $6.5 billion and sublimits of $3.1 billion for A&E liabilities and approximately $4.5 billion for certain workers compensation liabilities. At the closing of the NICO Reinsurance Transaction, but effective as of January 1, 2014, the Company ceded approximately $3.3 billion of existing liabilities under this retroactive reinsurance agreement. NICO will provide approximately $3.2 billion of additional aggregate adverse development cover. The Company paid NICO total consideration of approximately $3.0 billion. In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014. With respect to the ceded A&E business, NICO has been given authority to handle claims, subject to the Company’s oversight and control. With respect to the ceded workers compensation business, the Company will continue to handle claims. The NICO Reinsurance Transaction is accounted for as retroactive reinsurance in the Consolidated Financial Statements and resulted in a pre-tax loss of $128 million as of the effective date, which was included in the third quarter 2014 results. For further discussion see the Reinsurance Recoverables section.

On June 10, 2014, the Company consolidated its existing Group Benefits, A&H, and Individual Life operations into a new market segment in Commercial Insurance called Liberty Mutual Benefits.

79 On April 1, 2014, the Company sold Summit to American Financial Group. The results of Summit are presented as discontinued operations in the accompanying Consolidated Statements of Income and are no longer included with Commercial Insurance.

Venezuela Since 2010 the Company’s operations in Venezuela have been operating in a hyperinflationary economy with restrictive foreign exchange controls.

On February 10, 2015, the Venezuelan government published changes to its foreign exchange controls, which now maintains a three-tiered system. The new exchange controls retained the CENCOEX, or “official” rate; however, the new exchange controls merged SICAD II into SICAD I, now referred to as SICAD. Additionally, the new exchange controls established the Marginal Foreign Exchange System (“SIMADI”), which is intended to be a free floating rate. As of September 30, 2015, the exchange rate of bolivars per U.S. dollar for CENCOEX, SICAD and SIMADI was 6.3, 13.5, and 198, respectively. The Company used the SICAD rate, consistent with promulgated guidance, to remeasure the Venezuelan operations’ financial statements.

These three mechanisms have become increasingly restrictive and illiquid over time. The Company believes that significant uncertainty continues to exist regarding the foreign exchange mechanisms in Venezuela, including the nature of transactions that are eligible to flow through CENCOEX, SICAD or SIMADI, how any such mechanisms will operate in the future, as well as the availability of U.S. dollars under each mechanism.

The evolving conditions in Venezuela, including the increasingly restrictive exchange control regulations and other factors, significantly impact our control over the Venezuelan operations. As a result of these factors, which we believe to be other-than-temporary, we concluded that effective September 30, 2015, we do not meet the accounting criteria for control over the Venezuelan operations, and therefore have deconsolidated these operations in the accompanying financial statements and offered them for sale. As a result of deconsolidating, the Company recognized an impairment charge of approximately $690 million which includes the write down of the investment in the previously consolidated Venezuelan operations to fair value and the write-off of related intercompany balances. The Company’s Venezuelan operations are classified as discontinued operations in the Consolidated Financial Statements.

Strategic Business Units Overview The Company’s four SBUs are as follows: • Personal Insurance includes all domestic personal lines business. Products are distributed through separately managed distribution channels under the Liberty Mutual Insurance and Safeco Insurance brands. • Commercial Insurance offers a wide array of property-casualty, group benefits, and life insurance coverages through independent agents, brokers, benefit consultants, captive agents, and bank partners throughout the United States. Commercial Insurance is organized into the following four market segments: Business Insurance, National Insurance, Liberty Mutual Benefits, and Other Commercial Insurance. • Liberty International sells property, casualty, health and life insurance products and services to individuals and businesses in four market segments: Latin America and Iberia, Emerging Europe, Asia, and Large Emerging Markets, including Russia, China and India.

80 • Global Specialty comprises a wide array of products and services offered through three market segments: LSM, LIU, and LM Surety.

(1) NWP—Consolidated Consolidated NWP by significant line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Private passenger automobile ...... $12,375 $12,226 Homeowners ...... 5,759 5,573 Specialty insurance ...... 3,152 3,205 Commercial multiple-peril ...... 1,965 1,958 Workers compensation—Voluntary ...... 1,954 2,078 Workers compensation—Involuntary ...... 107 114 Commercial automobile ...... 1,722 1,718 Group disability and group life ...... 1,429 1,215 General liability ...... 1,365 1,353 Global specialty reinsurance ...... 1,116 1,141 Surety ...... 811 757 Commercial property ...... 792 858 Individual life and A&H ...... 552 665 Global specialty inland marine ...... 451 442 Other1 ...... 983 1,029 Total NWP2 ...... $34,533 $34,332

1 Primarily includes NWP from allied lines and domestic inland marine. 2 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business.

NWP for the year ended December 31, 2015 was $34.533 billion, an increase of $201 million over the same period in 2014.

Significant changes by major line of business include: • Private passenger automobile NWP increased $149 million. The increase reflects rate and model year increases, a greater proportion of twelve-month versus six-month policies, and to a lesser extent, growth in policies in-force in Personal Insurance, along with growth in Liberty International primarily driven by Brazil and Malaysia (acquired in the third quarter of 2014). This was partially offset by the strengthening of the U.S. dollar and the exit from the personal insurance market in Great Britain. • Homeowners NWP increased $186 million. The increase reflects rate and coverage increases as well as growth in homeowners policies in-force in Personal Insurance, partially offset by the strengthening of the U.S. dollar. • Workers compensation—Voluntary NWP decreased $124 million. The decrease was primarily driven by exposure reductions, partially offset by rate increases and improved retention. • Group disability and group life NWP increased $214 million. The increase reflects strong new business sales as well as additional coverages sold to existing customers. • Commercial property NWP decreased $66 million. The decrease was primarily driven by continued competitive market pressures. • Individual life and A&H NWP decreased $113 million. The decrease was primarily driven by lower life-contingent structured settlement sales.

81 • Specialty insurance NWP decreased $53 million. The decrease reflects re-underwriting and pricing actions, competitive market conditions, and foreign exchange impact due to the strengthening of the U.S. dollar.

More detailed explanations of the changes in NWP by line of business are included in the related discussion of financial results for each segment.

Consolidated NWP by SBU was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Personal Insurance ...... $16,807 $15,952 Commercial Insurance ...... 9,077 9,032 Liberty International ...... 3,444 4,009 Global Specialty ...... 4,923 5,120 Corporate and Other ...... 282 219 Total NWP ...... $34,533 $34,332 Total NWP change ...... 0.6% Foreign exchange effect on NWP change ...... (3.0) NWP change excluding foreign exchange1 ...... 3.6%

1 Determined by assuming constant foreign exchange rates between periods.

Major drivers of NWP growth were as follows:

Years Ended December 31, $ Points 2015 2014 Change Attribution (dollars in millions) Total NWP1 ...... $34,533 $34,332 $ 201 0.6 Components of Growth: Domestic personal automobile ...... 10,187 9,671 516 1.4 Domestic homeowners ...... 5,723 5,480 243 0.7 Homeowners quota share ...... (147) (140) (7) — Total domestic homeowners ...... 5,576 5,340 236 0.7 International local businesses (ex. foreign exchange)2 ...... 4,237 4,009 228 0.7 Specialty insurance (ex. foreign exchange)2 ...... 3,267 3,205 62 0.2 Global specialty reinsurance (ex. foreign exchange)2 ...... 1,166 1,141 25 0.1 Global specialty inland marine (ex. foreign exchange)2 ...... 471 442 29 0.1 Domestic workers compensation ...... 1,948 2,057 (109) (0.3) Domestic individual life and A&H ...... 439 538 (99) (0.3) Domestic group disability and group life ...... 1,241 1,000 241 0.7 Surety ...... 811 757 54 0.2 Foreign exchange2 ...... (1,018) — (1,018) (3.0) Other commercial lines ...... 6,208 6,172 36 0.1 Total NWP ...... $34,533 $34,332 $ 201 0.6

1 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business. 2 Determined by assuming constant foreign exchange rates between periods.

82 Consolidated NWP by geographic distribution channels was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) U.S...... $28,394 $27,502 International1 ...... 6,139 6,830 Total NWP ...... $34,533 $34,332

1 Excludes domestically written business in Global Specialty’s LIU market segment.

(2) Results of Operations—Consolidated Consolidated GAAP revenues, the major components of PTOI and a reconciliation of PTOI to net income were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $37,617 $37,721 PTOI before catastrophes, net incurred losses attributable to prior years, and partnerships, LLC and other equity method (loss) income ...... $ 3,547 $ 3,714 Catastrophes1 ...... (1,824) (1,606) Net incurred losses attributable to prior years: Asbestos & environmental2 ...... (4) (113) All other3,4 ...... 313 74 PTOI before partnerships, LLC and other equity method (loss) income ...... 2,032 2,069 Partnerships, LLC and other equity method (loss) income5 ...... (34) 641 PTOI ...... 1,998 2,710 Net realized losses ...... (24) (100) Loss on extinguishment of debt ...... (1) (34) Pre-tax income ...... 1,973 2,576 Income tax expense ...... 526 747 Consolidated net income from continuing operations ...... 1,447 1,829 Discontinued operations, net of tax ...... (909) (35) Consolidated net income ...... 538 1,794 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) Net income attributable to LMGI ...... $ 518 $ 1,818 Cash flow provided by operations ...... $ 3,548 $ 632

83 4 Net of earned premium and reinstatement premium attributable to prior years of $38 million and $8 million for the years ended December 31, 2015 and 2014, respectively. Net of amortization of deferred gains on retroactive reinsurance of $3 million for the years ended December 31, 2015 and 2014, respectively. 5 Partnerships, LLC and other equity method (loss) income includes LP, LLC and other equity method (loss) income within net investment income in the accompanying Consolidated Statements of Income and revenue and expenses from the production and sale of oil and gas.

PTOI for the year ended December 31, 2015 was $1.998 billion, a decrease of $712 million from the same period in 2014. The decrease reflects partnerships, LLC, and other equity method losses versus income in the prior year primarily due to energy related investments and significant IPO activity in 2014 that did not recur, increases in catastrophe losses and higher expenses primarily due to advertising, information technology, and employee related costs. These were partially offset by favorable net incurred losses attributable to prior years primarily driven by Global Specialty, a decrease in current accident year losses across all casualty lines in Commercial Insurance and a loss related to the NICO Reinsurance Transaction (including a reduction to the initial loss on the transaction due to a cession of A&E loss development).

Revenues for the year ended December 31, 2015 were $37.617 billion, a decrease of $104 million from the same period in 2014. The major components of revenues are net premium earned, net investment income, net realized losses, and fee and other revenues.

Net premium earned for the year ended December 31, 2015 was $33.884 billion, an increase of $436 million over the same period in 2014. The change primarily reflects the impact of premium earned associated with the changes in NWP and foreign exchange losses due to the strengthening of the U.S. dollar.

Net investment income for the year ended December 31, 2015 was $2.650 billion, a decrease of $449 million from the same period in 2014. The decrease reflects losses in the energy sector, lower valuation changes primarily due to prior year IPO activity that did not recur and lower yields on investments.

Net realized losses for the year ended December 31, 2015 were $24 million, a decrease of $76 million from the same period in 2014. The year to date losses in 2015 and 2014 primarily reflect impairments of direct investments in oil and gas wells of $259 million and $128 million, respectively, partially offset by gains recognized on equity and fixed maturities sales, and derivatives in 2015. The derivatives gains in 2015 were related to two new economic hedges in 2015 for an oil commodity swap and euro forward.

Fee and other revenues for the year ended December 31, 2015 were $1.107 billion, a decrease of $167 million from the same period in 2014. The decrease primarily reflects lower oil and gas revenues and lower third-party administrator fee income and commissions from servicing carrier operations, partially offset by higher fees associated with life policies and group disability business.

Claims, benefits and expenses for the year ended December 31, 2015 were $35.643 billion, an increase of $532 million over the same period in 2014. The increase was driven by higher catastrophe losses, expenses related to advertising, information technology, and employee related costs, as well as, depreciation, depletion, and amortization expenses related to Liberty Energy, and losses and expenses consistent with business growth. These increases were partially offset by favorable incurred losses attributable to prior years driven by Global Specialty and the strengthening of the U.S. dollar. The year benefitted from a decrease in current accident year losses across all casualty lines in Commercial Insurance and a loss related to the NICO Reinsurance Transaction (including a reduction to the initial loss on the transaction due to a cession of A&E loss development) in 2014 which did not recur.

Income tax expense on continuing operations for the year ended December 31, 2015 was $526 million, a decrease of $221 million from the same periods in 2014. The Company’s effective tax rate on continuing operations for the year ended December 31, 2015 was 27%, compared to 29% for the same period in 2014. The

84 decrease in the effective tax rate for the year ended December 31, 2015 from 2014 is primarily due to lower pre-tax income. The Company’s effective tax rate on continuing operations differs from the U.S. Federal statutory rate of 35% principally due to tax-exempt investment income.

Consolidated net income from continuing operations for the year ended December 31, 2015 was $1.447 billion, a decrease of $382 million from the same period in 2014.

Discontinued operations, net of tax for the year ended December 31, 2015 were ($909) million, versus ($35) million in the same period in 2014. The current year reflects the Venezuelan operations, while the prior year also includes Summit and the Argentina operations.

Net income attributable to LMGI for the year ended December 31, 2015 was $518 million, a decrease of $1.300 billion from the same period in 2014.

Cash flow provided by operations for the year ended December 31, 2015 was $3.548 billion, versus $632 million in the same period in 2014. The increase was primarily driven by the funding of the NICO Reinsurance Transaction in 2014 that did not recur.

Consolidated combined ratios were as follows: Years Ended December 31, 2015 2014 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 61.3% 61.7% Underwriting expense ratio ...... 31.6 31.0 Dividend ratio ...... 0.1 — Subtotal ...... 93.0 92.7 Catastrophes1 ...... 5.7 5.0 Net incurred losses attributable to prior years: Asbestos & environmental ...... — 0.3 All other2,3 ...... (0.9) (0.2) Total combined ratio4 ...... 97.8% 97.8%

1 2015 catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Australia, Cyclone Niklas, Chile earthquake and Chile floods. 2014 catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Ireland floods, Hurricane Odile and Hailstorm Ela. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 The year ended December 31, 2015 includes a one-time benefit of $91 million due to a reduction in the estimated prior years’ liability for state assessments related to workers compensation. 3 Net of earned premium and reinstatement premium attributable to prior years and amortization of deferred gains on retroactive reinsurance. 4 The combined ratio, expressed as a percentage, is a measure of underwriting profitability. This measure should only be used in conjunction with, and not in lieu of, underwriting income and may not be comparable to other performance measures used by the Company’s competitors. The combined ratio is computed as the sum of the following property and casualty ratios: the ratio of claims and claim adjustment expense less managed care income to earned premium; the ratio to earned premium of insurance operating costs plus amortization of deferred policy acquisition costs less third-party administration income and fee income (primarily related to the Company’s involuntary market servicing carrier operations) and installment charges; and the ratio of policyholder dividends to earned premium. Provisions for uncollectible premium and reinsurance are not included in the combined ratio unless related to an asbestos and environmental commutation and certain other run off.

85 The consolidated combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2015 was 93.0%, an increase of 0.3 points over the same period in 2014. The increase in the underwriting expense ratio was primarily driven by higher employee related costs, advertising expenses, and investments in technology. The decrease in the claims and claim adjustment expense ratio was primarily driven by improved current accident year losses across all casualty lines of business in Commercial Insurance, partially offset by higher current accident year non-catastrophe auto physical damage losses in Personal Insurance.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2015 was 97.8%, no change over the same period in 2014. The total combined ratio reflects the changes in the combined ratio previously discussed, favorable net incurred losses attributable to prior years and higher catastrophe losses. The year benefitted from a reduction in the first quarter in the estimated liability for state assessments related to workers compensation and a loss related to the NICO Reinsurance Transaction (including a reduction to the initial loss on the transaction due to a cession of A&E loss development) in 2014 which did not recur.

Results of Operations By Segment—Years Ended December 31, 2015 and 2014 Personal Insurance (1) NWP—Personal Insurance Personal Insurance NWP by market segment was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Personal Lines ...... $ 9,395 $ 8,953 Safeco ...... 7,412 6,999 Total NWP ...... $16,807 $15,952

Personal Insurance NWP by line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Private passenger automobile ...... $10,097 $ 9,614 Homeowners and other ...... 6,710 6,338 Total NWP ...... $16,807 $15,952

NWP for the year ended December 31, 2015 was $16.807 billion, an increase of $855 million over the same period in 2014.

Private passenger automobile NWP for the year ended December 31, 2015 was $10.097 billion, an increase of $483 million over the same period in 2014. The growth reflects a 4.7% increase in average written premiums (resulting from rate and model year increases), a greater proportion of twelve-month versus six-month policies, and to a lesser extent, growth in policies in-force of 0.8% as compared to December 31, 2014.

Homeowners and other NWP for the year ended December 31, 2015 was $6.710 billion, an increase of $372 million over the same period in 2014. The growth reflects a 4.0% increase in homeowners average written premiums (resulting from rate and coverage changes), ceded premium related to an internal reinsurance treaty in 2014 that did not recur and growth in homeowners policies in-force of 0.9% as compared to December 31, 2014.

86 (2) Results of Operations—Personal Insurance Personal Insurance revenues and the major components of PTOI were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $17,036 $16,124 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 2,773 $ 2,698 Catastrophes1 ...... (1,406) (977) Net incurred losses attributable to prior years ...... (1) (47) PTOI ...... $ 1,366 $ 1,674

PTOI for the year ended December 31, 2015 was $1.366 billion, a decrease of $308 million from the same period in 2014. The decrease was driven by higher catastrophe losses due to the non-recurrence of an internal reinsurance treaty previously mentioned, an increase in current accident year non-catastrophe auto physical damage losses due to an increase in severity, and a higher expense ratio driven by advertising, partially offset by unfavorable net incurred losses attributable to prior years in auto liability in 2014 that did not recur. The year was also positively impacted by profit margin on growth in earned premium.

Revenues for the year ended December 31, 2015 were $17.036 billion, an increase of $912 million over the same period in 2014. The major components of revenues are net premium earned and net investment income.

Net premium earned for the year ended December 31, 2015 was $16.294 billion, an increase of $862 million over the same period in 2014. The increase reflects the premium earned associated with the changes in NWP previously discussed.

Net investment income for the year ended December 31, 2015 was $616 million, an increase of $47 million over the same period in 2014. The increase was driven by a higher invested asset base, partially offset by a lower investment yield.

Claims, benefits and expenses for the year ended December 31, 2015 were $15.670 billion, an increase of $1.220 billion over the same period in 2014. The increase reflects the claims, benefits, and expenses associated with the changes in PTOI previously discussed.

Personal Insurance combined ratios were as follows:

Years Ended December 31, 2015 2014 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 60.5% 60.3% Underwriting expense ratio ...... 25.6 25.2 Subtotal ...... 86.1 85.5 Catastrophes1 ...... 8.7 6.3 Net incurred losses attributable to prior years ...... — 0.3 Total combined ratio ...... 94.8% 92.1%

87 The Personal Insurance combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2015 was 86.1%, an increase of 0.6 points over the same period in 2014. The increase was driven by higher current accident year non-catastrophe auto physical damage losses. The year also reflects higher advertising expenses but was positively impacted by claim adjustment expenses growing at a slower rate than premiums earned.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2015 was 94.8%, an increase of 2.7 points over the same period in 2014. The increase was driven by higher catastrophe losses and the changes in the combined ratio previously discussed. The increase was partially offset by unfavorable net incurred losses attributable to prior years in auto liability in 2014 that did not recur.

Commercial Insurance (1) NWP—Commercial Insurance Commercial Insurance NWP by market segment was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Business Insurance ...... $5,143 $5,195 National Insurance ...... 2,091 2,135 Liberty Mutual Benefits ...... 1,679 1,538 Other Commercial Insurance ...... 164 164 Total NWP ...... $9,077 $9,032

Commercial Insurance NWP by line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Commercial multiple-peril ...... $2,069 $2,026 Workers compensation—Voluntary ...... 1,810 1,896 Workers compensation—Involuntary ...... 107 114 Commercial automobile ...... 1,475 1,452 General liability ...... 1,209 1,226 Group disability and group life ...... 1,240 1,000 Commercial property ...... 728 780 Individual life and A&H ...... 439 538 Total NWP ...... $9,077 $9,032

NWP for the year ended December 31, 2015 was $9.077 billion, an increase of $45 million over the same period in 2014. The increase was driven by higher group disability and group life premium due to strong new business sales, rate increases across most casualty lines of business and an increase in premium related to audits and retrospectively rated contracts. The increase was partially offset by lower life-contingent structured settlement sales, a decrease in general liability and property premium due to continued competitive market pressures, lower voluntary workers compensation premium as lost business, despite improved retention levels, continues to outpace new writings and lower involuntary workers compensation premium assumed from state pools due to decreased market share.

88 (2) Results of Operations—Commercial Insurance Commercial Insurance revenues and the major components of PTOI were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $11,187 $11,106 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 1,227 $ 1,279 Catastrophes1 ...... (302) (325) Net incurred losses attributable to prior years2,3 ...... 140 76 PTOI ...... $ 1,065 $ 1,030

1 Catastrophes include all current accident year catastrophe losses. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 The year ended December 31, 2015 includes a one-time benefit of $91 million due to a reduction in the estimated prior years’ liability for state assessments related to workers compensation. 3 Net of earned premium and reinstatement premium attributable to prior years of $39 million and $16 million for the years ended December 31, 2015 and 2014, respectively. Net of amortization of deferred gains on assumed retroactive reinsurance of $1 million and $2 million for the years ended December 31, 2015 and 2014, respectively.

PTOI for the year ended December 31, 2015 was $1.065 billion, an increase of $35 million over the same period in 2014. The increase was driven by improved current accident year losses across all casualty lines of business, lower catastrophe losses and a reduction in the estimated prior years’ liability for state assessments related to workers compensation. The increase was partially offset by favorable development on prior accident year catastrophe losses in 2014 that did not recur, lower third-party administrator fee income and servicing carrier commission revenue and higher expense related to variable compensation, information technology and employee salary and benefits. The year ended December 31, 2015 further reflects adverse prior accident year development in commercial auto predominately related to the 2012 and prior accident years, entirely offset by favorable development in the commercial multiple-peril, general liability, and property lines of business.

Revenues for the year ended December 31, 2015 were $11.187 billion, an increase of $81 million over the same period in 2014. The major components of revenues are net premium earned, net investment income, net realized losses, and fee and other revenues.

Net premium earned for the year ended December 31, 2015 was $9.117 billion, an increase of $61 million over the same period in 2014. The increase was driven by growth in Liberty Mutual Benefits and some casualty lines as well as higher earned but not reported premium, partially offset by decreases in workers compensation and commercial property as a result of declining NWP over the prior twelve months.

Net investment income for the year ended December 31, 2015 was $1.551 billion, an increase of $27 million over the same period in 2014. The increase was driven primarily by higher invested assets in Liberty Mutual Benefits, partially offset by a lower investment yield.

Net realized losses for the year ended December 31, 2015 were $35 million, an increase of $27 million over the same period in 2014. The increase was primarily driven by technology impairments during 2015.

Fee and other revenues for the year ended December 31, 2015 were $554 million, an increase of $20 million over the same period in 2014. The increase reflects higher fees associated with life and group disability, partially offset by lower third-party administrator fee income and lower commission revenue from servicing carrier operations. As a servicing carrier, the Company receives fee income for performing certain underwriting, claims and administrative services for all participating involuntary pool members.

89 Claims, benefits and expenses for the year ended December 31, 2015 were $10.157 billion, an increase of $73 million over the same period in 2014. The increase was driven by business growth in Liberty Mutual Benefits, favorable development on prior accident year catastrophe losses during 2014 that did not recur, higher employee salary and benefits expense and higher variable compensation. The increase was partially offset by improved current accident year losses across all casualty lines of business, a reduction in the estimated prior years’ liability for state assessments related to workers compensation and lower catastrophe losses. The year ended December 31, 2015 further reflects adverse prior accident year development in commercial auto predominately related to the 2012 and prior accident years, entirely offset by favorable development in the commercial multiple-peril, general liability, and property lines of business.

Commercial Insurance combined ratios were as follows:

Years Ended December 31, 2015 2014 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 61.5% 63.0% Underwriting expense ratio ...... 35.1 33.3 Dividend ratio ...... 0.1 0.1 Subtotal ...... 96.7 96.4 Catastrophes1 ...... 4.1 4.4 Net incurred losses attributable to prior years2,3 ...... (1.9) (1.0) Total combined ratio ...... 98.9% 99.8%

The Commercial Insurance combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2015 was 96.7%, an increase of 0.3 points over the same period in 2014. The increase was driven by a higher expense ratio due to a decline in property and casualty earned premium, higher employee salary and benefits expense and higher variable compensation expense, partially offset by a decrease in the claims and claim adjustment expense ratio due to improved current accident year losses across all casualty lines of business.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2015 was 98.9%, a decrease of 0.9 points from the same period in 2014. The decrease was impacted by lower current accident year catastrophe losses and favorable net incurred losses attributable to prior years as a result of a reduction in the estimated liability for state assessments related to workers compensation. The decrease was partially offset by the combined ratio increase previously discussed and favorable development on prior accident year catastrophe losses in 2014 that did not recur.

90 Liberty International (1) NWP—Liberty International Liberty International NWP by market segment was as follows:

Years Ended December 31, Change ex. 2015 2014 foreign exchange1 (dollars in millions) Latin America and Iberia ...... $2,277 $2,822 3.9% Asia ...... 493 447 16.9 Emerging Europe ...... 409 509 (5.2) Large Emerging Markets ...... 234 230 16.8 Other ...... 31 1 NM Total NWP ...... $3,444 $4,009 5.7%

1 Determined by assuming constant foreign exchange rates between periods. NM = Not Meaningful.

Liberty International NWP by line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Private passenger automobile ...... $2,188 $2,555 Commercial automobile ...... 226 260 Homeowners ...... 183 233 Life and health ...... 301 342 Commercial property ...... 52 67 Other1 ...... 494 552 Total NWP ...... $3,444 $4,009

1 Premium related to other personal and commercial lines including personal accident, bonds, workers compensation, small and medium enterprise and marine and cargo lines of business.

NWP for the year ended December 31, 2015 was $3.444 billion, a decrease of $565 million from the same period in 2014. The decrease reflects the significant negative impact of foreign exchange driven by the strengthening of the U.S. dollar and the exit from the personal insurance market in Great Britain, partially offset by organic growth in commercial and private passenger auto in Colombia. The year was further impacted by organic growth in Brazil and Spain due to an increase in private passenger business, internal reinsurance program changes and the acquisition of Malaysia in the third quarter of 2014. Further discussion of the Malaysia acquisition and the Great Britain transaction can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Consolidated Results of Operations—Notable Recent Developments—Other Events”.

91 (2) Results of Operations—Liberty International Liberty International revenues and the major components of pre-tax operating loss were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $3,801 $ 4,317 Mature operations and other1 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 86 $ 68 Emerging operations2 pre-tax operating loss before catastrophes and net incurred losses attributable to prior years ...... (124) (129) Catastrophes3 ...... (13) (9) Net incurred losses attributable to prior years ...... 2 48 Pre-tax operating loss ...... ($ 49) ($ 22)

1 Mature operations include Latin America and Iberia, and Asia. Other includes internal reinsurance and home office expenses. 2 Emerging operations include Emerging Europe and Large Emerging Markets. 3 2015 catastrophes include all current accident year catastrophe losses for severe storms in the U.K., Chile earthquake and Chile floods. 2014 catastrophes include all current accident year catastrophe losses for the U.K. and Ireland floods. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums.

Pre-tax operating loss for the year ended December 31, 2015 was $49 million, an increase of $27 million over the same period in 2014. The increase was driven by several developments in Ireland, including restructuring costs (primarily during the second quarter of 2015) and higher overall current year claim losses (including U.K. severe storms) partially offset by releases of a contingent liability, insurance pool reserve and other reserves in 2015. Additionally, the year was negatively impacted by foreign exchange losses due to continued strengthening of the U.S. dollar, and large flood losses in India, partially offset by the exit of unprofitable middle market business in Brazil, lower auto frequency in Russia, and income from internal reinsurance. The decrease was further impacted by large losses in Chile and less favorable net incurred losses attributable to prior years, partially offset by the addition of Malaysia (acquired in the third quarter of 2014).

Revenues for the year ended December 31, 2015 were $3.801 billion, a decrease of $516 million from the same period in 2014. The primary components of revenues are net premium earned, net investment income and net realized investment gains.

Net premium earned for the year ended December 31, 2015 was $3.412 billion, a decrease of $524 million from the same period in 2014. The decrease was primarily due to lower premium earned associated with the lower NWP primarily driven by foreign exchange due to the strengthening of the U.S. dollar, partially offset by organic growth in certain operations as previously discussed.

Net investment income for the year ended December 31, 2015 was $255 million, a decrease of $25 million from the same period in 2014. The decrease was primarily due to the strengthening of the U.S. dollar, partially offset by higher interest rates in Brazil.

Net realized investment gains for the year ended December 31, 2015 were $34 million, an increase of $23 million over the same period in 2014. The increase was primarily driven by a sale of an equity investment holding in Spain.

Claims, benefits and expenses for the year ended December 31, 2015 were $3.816 billion, a decrease of $512 million from the same period in 2014. The decrease was primarily driven by the strengthening of the U.S.

92 dollar, partially offset by organic growth in Brazil. The year was further negatively impacted by large losses in Chile, restructuring costs in Ireland, less favorable net incurred losses attributable to prior years, and the addition of Malaysia (acquired in the third quarter of 2014).

Liberty International combined ratios were as follows:

Years Ended December 31, 2015 2014 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 65.4% 66.1% Underwriting expense ratio ...... 42.9 41.9 Subtotal ...... 108.3 108.0 Catastrophes1 ...... 0.4 0.2 Net incurred losses attributable to prior years ...... (0.1) (1.3) Total combined ratio ...... 108.6% 106.9%

1 2015 catastrophes include all current accident year catastrophe losses for severe storms in the U.K., Chile earthquake and Chile floods. 2014 catastrophes include all current accident year catastrophe losses for the U.K. and Ireland floods. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums.

The Liberty International combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2015 was 108.3%, an increase of 0.3 points over the same period in 2014. The decrease in the claims and claim adjustment expense ratio was due to the reserve release of an insurance pool in Ireland. The 1.0 point increase in the underwriting expense ratio was due to restructuring costs in Ireland.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2015 was 108.6%, an increase of 1.7 points over the same period in 2014. The increase was impacted by the changes in the combined ratio previously discussed, catastrophe losses related to the U.K. severe storms and the Chile earthquake, and less favorable net incurred losses attributable to prior years.

Global Specialty (1) NWP—Global Specialty Global Specialty NWP by market segment was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) LSM...... $2,614 $2,715 LIU...... 1,381 1,533 LM Surety ...... 761 748 Other ...... 167 124 Total NWP ...... $4,923 $5,120 Total NWP change ...... (3.8%) Foreign exchange effect on NWP change ...... (3.6) NWP change excluding foreign exchange1 ...... (0.2%)

1 Determined by assuming constant foreign exchange rates between periods.

93 Global Specialty NWP by line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Specialty insurance ...... $2,580 $2,780 Reinsurance ...... 1,116 1,141 Surety ...... 776 757 Inland marine ...... 451 442 Total NWP ...... $4,923 $5,120

NWP for the year ended December 31, 2015 was $4.923 billion, a decrease of $197 million from the same period in 2014. The decrease reflects re-underwriting and pricing actions for selective products in specialty insurance, competitive market conditions and foreign exchange impact due to the strengthening of the U.S. dollar, partially offset by inland marine and LSM selective products business growth. The decrease was also partially offset by international growth (including Primero Fianzas acquisition in July 2014) as well as other reinsurance program changes within LIU and LSM.

(2) Results of Operations—Global Specialty Global Specialty revenues and the major components of PTOI were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $5,227 $5,183 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 572 $ 660 Catastrophes1 ...... (106) (51) Net incurred losses attributable to prior years2 ...... 137 (72) PTOI ...... $ 603 $ 537

1 2015 catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Australia as well as Cyclone Niklas. 2014 catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. floods, Hurricane Odile and Hailstorm Ela. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 Net of earned premium and reinstatement premium attributable to prior years of ($1) million and $10 million for the years ended December 31, 2015 and 2014, respectively.

PTOI for the year ended December 31, 2015 was $603 million, an increase of $66 million over the same period in 2014. The increase reflects favorable net incurred losses attributable to prior years primarily within LM Surety as well as LSM favorable net current year loss activity. The increase was partially offset by higher catastrophe losses, unfavorable net current year loss activity within LM Surety, higher underwriting expenses due to investments in technology and additional employee related costs across the Global Specialty segments as well as the impact of foreign exchange due to the strengthening of the U.S. dollar.

Revenues for the year ended December 31, 2015 were $5.227 billion, an increase of $44 million over the same period in 2014. The major components of revenues are net premium earned and net investment income.

Net premium earned for the year ended December 31, 2015 was $4.865 billion, respectively, an increase of $30 million over the same period in 2014. The increase reflects the earnings on NWP growth in prior periods partially offset by the foreign exchange impact due to the strengthening of the U.S. dollar.

94 Net investment income for the year ended December 31, 2015 was $342 million, an increase of $6 million over the same period in 2014.

Claims, benefits and expenses for the year ended December 31, 2015 were $4.622 billion, a decrease of $24 million from the same period in 2014. The decrease reflects favorable incurred losses attributable to prior years primarily within LM Surety as well as favorable current year loss activity in LSM, partially offset by higher catastrophe losses, unfavorable net current year loss activity within LM Surety and higher underwriting expenses due to investments in technology and additional employee related costs across the Global Specialty segments.

Global Specialty combined ratios were as follows:

Years Ended December 31, 2015 2014 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 60.0% 59.1% Underwriting expense ratio ...... 34.5 33.3 Dividend ratio ...... 0.2 0.2 Subtotal ...... 94.7 92.6 Catastrophes1 ...... 2.2 1.0 Net incurred losses attributable to prior years2 ...... (2.9) 1.5 Total combined ratio ...... 94.0% 95.1%

The Global Specialty combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2015 was 94.7%, an increase of 2.1 points over the same period in 2014. The increase in the claims and claim adjustment expense ratio reflects unfavorable net current year loss activity within LM Surety, partially offset by LSM favorable net current year loss activity. The increase in the underwriting expense ratio was primarily due to investments in technology and additional employee related costs. The year was further impacted by the increased weighting of LM Surety relative to the total SBU, which operates at a higher expense ratio consistent with this line of business. Though no impact to the combined ratio, the claims and claim adjustment expense and underwriting expense ratios in the inland marine line of business reflect unfavorable current year loss activity materially offset by lower underwriting expenses due to a change of terms and conditions.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2015 was 94.0%, a decrease of 1.1 points from the same period in 2014. The decrease reflects favorable net incurred losses attributable to prior years driven primarily by favorable loss emergence from LM Surety, partially offset by the increases in the combined ratio mentioned above and higher catastrophe losses.

95 Corporate and Other

(1) Overview—Corporate and Other Corporate and Other includes the following significant items: • Certain internal discontinued operations composed of: asbestos, environmental, and toxic tort exposures, the run-off of certain Commercial Insurance business, the run-off of the California workers compensation business of Golden Eagle Insurance Corporation and certain distribution channels related to Prudential Property and Casualty Insurance Company, Prudential General Insurance Company and Prudential Commercial Insurance Company and Liberty Re annuity business. • Cessions related to certain retroactive reinsurance agreements, including the NICO Reinsurance Transaction, which is described further in “Reinsurance Recoverables.” • Effective January 1, 2014 until termination on December 31, 2014, Corporate and Commercial Insurance novated their voluntary and involuntary reinsurance treaties that applied to certain pre-2013 workers compensation claims and entered into two new agreements including: (1) certain pre-2014 voluntary workers compensation claims and, (2) certain pre-2014 involuntary workers compensation claims. • Effective January 1, 2015, Corporate and Commercial Insurance entered into a new agreement including certain pre-2014 voluntary and involuntary workers compensation claims. The covered business materially aligns with the workers compensation business covered by the retroactive reinsurance agreement defined as the NICO Reinsurance Transaction, which is described further in “Reinsurance Recoverables.” • Interest expense on the Company’s outstanding debt. • Certain risks of its SBUs that the Company reinsures as part of its risk management program and risks on Personal Insurance homeowners business covered by an externally ceded homeowners quota share reinsurance treaty. • The Company reports its written premium on workers compensation contracts on the “booked as billed” method. Commercial Insurance reports workers compensation written premium on the “booked at inception” method. Corporate and Other results reflect the difference between these two methods. • The Company discounts the long-term indemnity portion of its settled unpaid workers compensation claims at risk-free discount rates. Commercial Insurance reports its discount based on statutory discount rates. Corporate and Other results reflect the difference between the statutory and risk-free rate. • Costs associated with certain long-term compensation plans and other corporate costs not fully allocated to the SBUs. • For presentation in this Offering Memorandum, property and casualty operations’ investment income is allocated to the business units based on planned ordinary investment income returns by investment category. The difference between allocated net investment income and actual net investment income is included in Corporate and Other. • Income related to LP, LLC and other equity method investments. • Fee and other revenues include revenues from certain wholly owned non-insurance subsidiaries, primarily Liberty Energy. Liberty Energy generates revenue from the production and sale of oil and gas and related LP, LLC and other equity method investments.

96 Corporate and Other NWP by line of business was as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Reinsurance, net ...... $278 $152 Workers compensation—Voluntary1 ...... 22 67 Other ...... (18) — Total NWP ...... $282 $219

1 Booked as billed adjustment.

NWP for the year ended December 31, 2015 was $282 million, an increase of $63 million over the same period in 2014. The increase was impacted by less workers compensation exposure impacting the booked as billed adjustment. The increase was further impacted by program changes related to the centralization of external reinsurance purchasing resulting in lower external reinsurance costs, along with higher internal reinsurance premiums.

(2) Results of Operations—Corporate and Other Corporate and Other revenues and the major components of pre-tax operating loss were as follows:

Years Ended December 31, 2015 2014 (dollars in millions) Revenues ...... $366 $991 Pre-tax operating loss before catastrophes, net incurred losses attributable to prior years, and partnerships, LLC and other equity method (loss) income ...... ($987) ($862) Catastrophes1 ...... 3 (244) Net incurred losses attributable to prior years: —Asbestos & environmental2 ...... (4) (113) —All other3 ...... 35 69 Pre-tax operating loss before partnerships, LLC and other equity method (loss) income ...... (953) (1,150) Partnerships, LLC and other equity method (loss) income4 ...... (34) 641 Pre-tax operating loss ...... ($987) ($509)

1 2015 catastrophes include all current accident year catastrophe losses for severe storms in the U.S., Chile earthquake and Chile floods. 2014 catastrophes include all current accident year catastrophe losses for severe storms in the U.S. and Hailstorm Ela. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 Gross of the NICO Reinsurance Transaction. 3 Net of earned premium attributable to prior years of zero and ($18) million for the years ended December 31, 2015 and 2014, respectively. Net of amortization of deferred gains on retroactive reinsurance of $2 million for the years ended December 31, 2015 and 2014, respectively. 4 Partnerships, LLC and other equity method (loss) income includes LP, LLC and other equity method (loss) income within net investment income in the accompanying Consolidated Statements of Income and revenue and expenses from the production and sale of oil and gas.

Pre-tax operating loss for the year ended December 31, 2015 was $987 million, an increase of $478 million over the same period in 2014. The increase reflects partnerships, LLC, and other equity method losses versus income in the prior year (including further decreases in oil and gas production operating income and lower

97 valuation changes) and lower net investment income, partially offset by favorable results in 2015 versus losses in 2014 related to a certain internal reinsurance program and less unfavorable annuity reserve development. The year was further impacted by additional unfavorable results in 2014 that did not recur related to the NICO Reinsurance Transaction, net of the cession of unfavorable A&E development, partially offset by a write-off of certain prepaid assets.

Revenues for the year ended December 31, 2015 were $366 million, a decrease of $625 million from the same period in 2014. The major components of revenues are net premium earned, net investment income (driven by LP, LLC and other equity method investments), net realized losses, and fee and other revenues.

Net premium earned for the year ended December 31, 2015 was $196 million, an increase of $7 million over the same period in 2014.

Net investment (loss) income for the year ended December 31, 2015 was $(114) million, versus $390 million in the same period in 2014. The decrease was primarily a result of losses in the energy sector versus income in the prior year. In addition, the decrease reflects lower valuation changes primarily due to prior year IPO activity that did not recur and a lower average invested asset base in Corporate due to funding the NICO Reinsurance Transaction.

Net realized losses for the year ended December 31, 2015 were $25 million, a decrease of $78 million from the same period in 2014. The losses in 2015 and 2014 primarily reflect impairments of direct investments in oil and gas wells of $259 million and $128 million, respectively, partially offset by gains recognized on equity and fixed maturity sales, and derivatives in 2015. The derivatives gains in 2015 were related to two new economic hedges in 2015 for an oil commodity swap and euro forward.

Fee and other revenues for the year ended December 31, 2015 were $309 million, a decrease of $206 million from the same period in 2014. The decrease was primarily driven by lower oil and gas revenues as a result of lower prices.

Claims, benefits and expenses for the year ended December 31, 2015 were $1.378 billion, a decrease of $225 million from the same period in 2014. The change reflects favorable results in 2015 versus losses in 2014 related to a certain internal reinsurance program and less unfavorable annuity reserve development. The decrease was partially offset by reinsurance program growth resulting from the centralization of external reinsurance purchasing and higher depreciation, depletion, and amortization expenses related to Liberty Energy. The year was further impacted by unfavorable results in 2014 that did not recur, including losses related to the NICO Reinsurance Transaction, net of the cession of unfavorable A&E development, partially offset by a write-off of certain prepaid assets and higher interest expense.

Asbestos Claims and Litigation The Company believes that the property and casualty insurance industry has suffered from an unfavorable litigation environment, resulting in an expansion of insurance obligations far beyond the intent of the contracting parties. The relevant policies generally were issued prior to 1986 when asbestos exclusions were widely recognized. Although the Company is currently experiencing a decrease in the number of asbestos lawsuits filed against the Company’s policyholders, the Company remains involved in coverage litigation with a number of policyholders, some of whom have filed for bankruptcy and some of whom have asserted that all or a portion of their asbestos-related claims are not subject to aggregate limits on coverage as described generally in the next paragraph. Accordingly, there remains a high degree of uncertainty for the Company with respect to future exposure from asbestos claims.

Some policyholders have asserted that their claims for asbestos-related insurance are not subject to aggregate limits on coverage and that each individual bodily injury claim should be treated as a separate occurrence under the policy. The Company expects these trends to continue. It is difficult to predict whether

98 policyholders will be successful on one or both issues or whether the Company will be successful in asserting its defenses. To the extent either of these issues are resolved in the policyholders’ favor, the Company’s coverage obligations under the policies at issue would be materially increased. Accordingly, it is difficult to predict the ultimate size of the claims for coverage not subject to aggregate limits. In addition, proceedings have been launched in a few jurisdictions directly against insurers, including the Company, challenging insurers’ conduct in respect of asbestos claims, including in some cases with respect to previous settlements. Particularly in light of jurisdictional issues, it is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves.” Because each policyholder presents different liability and coverage issues, the Company generally evaluates the exposure presented on a policyholder basis. In the course of this evaluation the Company considers: the specific nature of the allegations contained within the lawsuit; available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; the role of any asbestos-related bankruptcies and applicable coverage defenses or determinations, if any, including the determination as to whether or not the asbestos claims are products/ completed operation claims subject to an aggregate limit and the available coverage, if any, for those claims. Once the gross ultimate exposure for indemnity and related claim adjustment expense is determined for each policyholder by each policy year, the Company calculates a ceded reinsurance projection based on any applicable facultative and treaty reinsurance, as well as past ceded experience. Adjustments to the ceded projections also occur due to actual ceded claim collection experience. Conventional actuarial methods are not utilized to establish asbestos reserves. In the third quarter of 2015, the Company completed a review of asbestos, environmental and miscellaneous toxic tort unpaid loss and ALAE claim liabilities. The review resulted in no change to reserves as they make a reasonable provision for all unpaid losses and loss adjustment expenses. In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded A&E unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. A&E unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 million, including: $83 million of asbestos reserves, primarily associated with increased defense costs, and $28 million of pollution reserves. The Company’s financial exposure to Tier I and Tier II major asbestos defendants (which the Company defines as asbestos manufacturers and producers in litigation) is limited to one policyholder, which is subject to a structured settlement agreement where the Company’s financial obligations are fixed. The Company has been in coverage litigation with Kentile, a former manufacturer of floor tile products, some of which contained asbestos, since 2008. In November 1992, Kentile filed a voluntary petition for bankruptcy relief under Chapter 11 (Reorganization) of the Bankruptcy Code in the U.S. Bankruptcy Court for

99 the Southern District of New York, and Metex emerged from the Chapter 11 Bankruptcy proceeding as the “Reorganized Debtor.” On November 9, 2012, Metex filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York, staying all coverage litigation with LMIC and all other insurance carriers. Prior to the most recent bankruptcy filing, Metex reached agreement with each of Kentile’s insurance carriers. On June 19, 2014, the Bankruptcy Court confirmed Metex’s proposed Plan of Reorganization, under which each of the Settlement Agreements is approved. The U.S. District Court subsequently affirmed the Kentile confirmation order, and the Company’s obligations with respect to Kentile became fully finalized as of September 3, 2014. The Company issued its first payment of $33.75 million to the bankruptcy trust on October 1, 2014; a final payment of $25 million is due no later than October 1, 2017. In the opinion of management, outside of the current bankruptcy process, the outcome of these pending matters would be difficult to predict and an adverse outcome could have a material adverse effect on the Company’s business, financial condition, and results of operations. As of December 31, 2015 and 2014, the Company’s unpaid claims and claim adjustment expense reserves, net of associated reinsurance recoverables, included $952 million and $1.225 billion respectively, for asbestos and environmental-related claims before consideration of the NICO Reinsurance Transaction. Net asbestos losses paid in 2015, 2014, and 2013 were $243 million, $169 million, and $128 million, respectively. The Company incurred $7 million, $89 million, and $236 million, of asbestos reserves before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves” and “—Uncertainty Regarding Adequacy of A&E Reserves” below. Upon their de-affiliation from the Nationwide Group and affiliation with LMIC, EICOW, Wausau Business Insurance Company, Wausau General Insurance Company and Wausau Underwriters Insurance Company entered into ceded reinsurance contracts whereby NIC assumed full responsibility for obligations on certain policies with effective dates prior to January 1, 1986, including all A&E exposures. The reinsurance recoverable is guaranteed by Nationwide Mutual Insurance Company. As of December 31, 2015, the net reinsurance recoverable from NIC relating to asbestos losses was $1.273 billion. In addition to the previously referenced reinsurance recoverable from NIC, the Company has significant ceded reinsurance exposure to a number of other reinsurers. The Company has established an allowance against a portion of its A&E related reinsurance recoverables. As of December 31, 2015, the allowance relating to reinsurance on unpaid asbestos losses was $21 million. The Company believes this allowance reflects current adverse reinsurer positions and their effect on future liabilities.

Environmental Claims and Litigation The Company continues to receive claims from policyholders arising out of the alleged disposal of hazardous substances. Environmental claims are primarily due to various legislative and regulatory efforts aimed at environmental remediation. The discussion of environmental claims in this section does not include toxic torts. For instance, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), enacted in 1980 and later amended, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute obligates responsible parties to develop and implement remediation plans or reimburse the costs of remediation. The law also allows for the recovery of natural resources damages from liable parties. Liability under CERCLA may be joint and several with other responsible parties. The Company has been and continues to be involved in coverage litigation pertaining to environmental claims. The Company believes that several court decisions have interpreted the insurance coverage to be broader

100 than the original intent of the insurers and policyholders. These decisions generally pertain to insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction.

The Company establishes reserves for environmental claims on a claim-by-claim basis where coverage is not in dispute. In addition to claim-by-claim reserves, the Company carries an aggregate bulk reserve for all environmental claims that are in a coverage dispute until the dispute is resolved. This bulk reserve covers adverse development on “covered” claims, reserves for claims in which coverage is disputed and future unreported claims. The bulk reserve is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. At December 31, 2015, approximately 48% of the net environmental reserve (approximately $126 million) was carried in a bulk reserve. The balance, approximately 52% of the net environmental reserves (approximately $136 million), consists of case reserves for known claims not in dispute. At December 31, 2014, approximately 52% of the net environmental reserve (approximately $155 million) was carried in a bulk reserve. The balance, approximately 48% of the net environmental reserves (approximately $145 million), consists of case reserves for known claims not in dispute.

In cases involving coverage disputes, the Company seeks the broadest terms possible when entering into settlements. This can be on a policyholder-by-policyholder basis or on a claim-by-claim basis. In some cases, the settlement between the Company and the policyholder extinguishes any obligation the Company may have under any policy issued to the policyholder for past, present and future environmental liabilities. This form of settlement is commonly referred to as a “buy-back” of policies or coverage “buyout” for future environmental liability. In addition, many of the agreements have also extinguished any insurance obligation that the Company may have for other claims, including asbestos and other cumulative injury claims. Provisions of these agreements also typically include appropriate indemnities and hold harmless provisions to protect the Company. The Company’s general purpose in executing these agreements is to reduce and fix the Company’s potential environmental exposure and eliminate the risks presented by coverage litigation with the policyholder and related costs.

In establishing environmental reserves, the Company evaluates the exposure presented by each policyholder and the anticipated cost of resolution, if any, for each policyholder. In the course of this analysis, the Company considers the probable liability, available coverage, relevant judicial interpretations and historical value of similar exposures. In addition, the Company considers the many variables presented, such as the nature of the alleged activities of the policyholder at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of the environmental harm and the corresponding remedy at each site; the nature of governmental enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between the Company and the policyholder, including the role of any umbrella or excess insurance the Company has issued to the policyholder; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. The Company does not rely exclusively on conventional actuarial techniques to estimate these reserves. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves,” “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s claims and claim adjustment expense reserves may be inadequate to cover its ultimate liability for unpaid claims and claim adjustment expenses, and as a result any inadequacy could have a material adverse effect on the Company’s results of operations, financial condition or liquidity” and “—Uncertainty Regarding Adequacy of A&E Reserves.”

The duration of the Company’s investigation and review of any claims and the amount of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company, vary significantly and are dependent upon a number of factors. These factors include the cooperation of the policyholder in providing claim

101 information, the pace of underlying litigation or claim processes and the willingness of the policyholder to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Based upon the Company’s experience in resolving these claims, the duration may vary from several months to several years.

At December 31, 2015 and 2014, the number of policyholders with pending coverage litigation disputes pertaining to environmental claims was 54 and 53, respectively. During 2015, there were 17 newly initiated coverage disputes with the Company, while in 2014 there were 11. The Company’s review of policyholders tendering claims for the first time has indicated that they are lower in severity. More specifically, policyholders are smaller in size and have fewer sites. In addition, site analysis and clean-up technologies are improving, which is resulting in greater efficiency and lower costs.

In the third quarter of 2015, the Company performed a comprehensive internal review of its environmental reserves, resulting in no change to reserves.

As of December 31, 2015 and 2014, the Company’s unpaid claims and claim adjustment expense reserves, net of associated reinsurance recoverables, included $263 million and $300 million, respectively, for environmental-related claims.

Net environmental losses paid in 2015, 2014 and 2013 were $37 million, $52 million, and $47 million, respectively. The Company incurred zero, $28 million, and $61 million of environmental reserves before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively.

Uncertainty Regarding Adequacy of A&E Reserves As a result of the processes and procedures described above, the Company believes that the carried reserves for A&E claims as of December 31, 2015 were appropriate based upon known facts and current law. However, the process of establishing reserves for A&E claims is subject to greater uncertainty than the establishment of reserves for liabilities relating to other types of insurance claims. The uncertainties surrounding the resolution of all of these claims continue, and it is presently not possible to estimate the ultimate exposure for A&E claims and related litigation. As a result, the reserves are subject to revision as new information becomes available. The continuing uncertainties include the lack of available and reliable historical claims data as an indicator of future loss development, the long waiting periods between exposure and manifestation of bodily injury or property damage, the difficulty in identifying the source of A&E contamination, the risks and lack of predictability inherent in major litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos litigation defendants, a further increase or decrease in the nature and volume of asbestos claims which cannot now be anticipated, the application and exhaustion of coverage limits, the resolution or adjudication of some disputes pertaining to the amount of available coverage for A&E claims in a manner inconsistent with the Company’s previous assessment of these claims, the number and outcome of direct actions against the Company and future developments pertaining to the Company’s ability to recover reinsurance for A&E claims. It is also not possible to predict changes in the legal, economic, regulatory and legislative environments and their impact on the future development of A&E claims. This development also will be affected by future court decisions and interpretations. The uncertainties associated with establishing reserves for A&E claims and claim adjustment expenses are compounded by the differing, and at times inconsistent, court rulings on A&E coverage issues involving: (i) the differing interpretations of various insurance policy provisions and whether A&E losses are, or were ever intended to be, covered; (ii) when the loss occurred and what policies provide coverage; (iii) whether there is an insurer obligation to defend; (iv) whether a compensable loss or injury has occurred; (v) whether lung cancer claims can be attributable to A&E; (vi) how policy limits are determined; (vii) how policy exclusions are applied and interpreted; (viii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities; (ix) whether clean-up costs are covered as insured property damage and (x) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products or completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. It is also difficult to predict the ultimate outcome of large coverage disputes until

102 settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with, but not limited to, policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure to A&E claims and related litigation is very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves.”

Because of the uncertainties set forth above, additional liabilities may arise for amounts in excess of the current related reserves. In addition, the Company’s estimate of ultimate claims and claim adjustment expenses may change. These additional liabilities or increases in estimates, or a range of either, cannot now be reasonably estimated and could result in income statement charges that could be material to the Company’s operating results and financial condition in future periods. Furthermore, the NICO Reinsurance Transaction should be material to the Company’s ultimate exposure for A&E claims and related litigation. See “Business—Significant Developments—Reinsurance of Asbestos, Environmental and Workers Compensation Liabilities” for more information regarding the NICO Reinsurance Transaction.

Market Outlook Personal Insurance anticipates continued competitive pressures with modest rate increases in the private passenger automobile market. In the homeowners market, Personal Insurance anticipates low to mid single digit rate increases for most competitors occurring in most states. Personal Insurance will continue to maintain pricing discipline as part of a long-term strategy centered around profitable growth. For all lines, Personal Insurance will preserve the quality of its book of business by continuing to invest in pricing tools and marketing analytics, growing its multi-channel distribution capabilities, and developing its market leading affinity marketing program to obtain a larger market share.

Commercial Insurance expects rate to range from slightly negative to low, single-digit increases across most commercial lines of business, as it continues to focus on profitability while competing in a marketplace that has seen price competition in property lines and is beginning to experience price softening in most other major lines of business.

Liberty International anticipates that competitive market conditions will continue in all regions for its businesses.

Global Specialty anticipates moderate growth in the United States and Asia Pacific regions, however, inconsistent global economic growth will impact demand due to lagging activity in construction activity and a weak Eurozone. There is continued excess capacity and rate firming in loss-making lines and reductions in profitable segments. Global Specialty will continue to focus on long-term profitability and strategically focus on expanding our business globally.

Investments General The Company’s investment strategy seeks long-term returns through disciplined security selection, portfolio diversity and an integrated approach to risk management. The Company selects and monitors investments to balance the goals of safety, stability, liquidity, growth and after-tax total return with its need to comply with regulatory investment requirements. A relatively safe and stable income stream is achieved by maintaining a broadly based portfolio of investment grade bonds. These holdings are supplemented by investments in additional asset types with the objective of further enhancing the portfolio’s diversification and expected returns. These additional asset types include commercial mortgages and other real estate financing investments, non-investment grade bonds, including leveraged loans, common and preferred stock, private equity and direct investments in natural resource ventures. Risk management is accomplished through asset liability management (including both interest rate risk and foreign currency risk), diversification, credit limits and a careful analytical review of each investment decision.

103 The Company’s investment policy and strategy are reviewed and approved by the Investment Committee of LMHC’s Board of Directors, which meets on a regular basis to review and consider investment activities, tactics and new investment classes. In addition, the Company predominantly uses a subsidiary investment adviser for managing and administering the investment portfolios of its domestic and foreign insurance operations.

Invested Assets (including cash and cash equivalents) The following table summarizes the Company’s invested assets by asset category as of December 31, 2015 and 2014:

As of December 31, 2015 As of December 31, 2014 Carrying %of Carrying %of Value Total Value Total (dollars in millions) Fixed maturities, available for sale, at fair value . . . $62,794 80.3% $63,176 80.9% Equity securities, available for sale, at fair value . . 2,909 3.7 3,145 4.0 LP, LLC and other equity method investments .... 5,023 6.4 4,752 6.1 Commercial mortgage loans ...... 2,317 3.0 1,808 2.3 Short-term investments ...... 272 0.3 626 0.8 Other investments ...... 668 0.9 621 0.8 Cash and cash equivalents ...... 4,227 5.4 4,003 5.1 Total invested assets ...... $78,210 100.0% $78,131 100.0%

Total invested assets as of December 31, 2015 were $78.210 billion, an increase of $79 million or 0.1% over December 31, 2014. The increase reflects new commercial mortgage loan investments, net contributions to LP, LLC, & other equity investments, and purchases of fixed maturity investments made throughout the year, partially offset by the unfavorable impact of rising treasury rates, widening spreads, and the strengthening U.S. dollar.

Fixed maturities as of December 31, 2015 were $62.794 billion, a decrease of $382 million or 0.6% from December 31, 2014. The decrease reflects the unfavorable impact of rising treasury rates, widening spreads and the strengthening U.S. dollar, partially offset by purchases of fixed maturities made throughout the year. As of December 31, 2015, included in fixed maturities are commitments to purchase various residential mortgage- backed securities at a cost and fair value of $42 million, and various corporate and municipal securities at a cost and fair value of $23 million.

Equity securities as of December 31, 2015 were $2.909 billion ($2.571 billion common stock and $338 million preferred stock) versus $3.145 billion as of December 31, 2014 ($2.790 billion common stock and $355 million preferred stock), a decrease of $236 million or 7.5% from December 31, 2014. Of the $2.571 billion of common stock at December 31, 2015, $483 million relates to securities associated with non-guaranteed unit linked products where the policyholder bears the investment risk. The decrease in total equity securities was primarily due to sales and negative market performance.

LP, LLC and other equity method investments as of December 31, 2015 were $5.023 billion, an increase of $271 million or 5.7% over December 31, 2014. The increase primarily reflects net contributions and valuation changes. These investments consist of traditional private equity partnerships of $2.291 billion, natural resources partnerships of $700 million ($507 million related to energy investments), real estate partnerships of $530 million, other partnerships of $1.222 billion, and other equity method investments of $280 million ($279 million of which is related to natural resources). The Company’s investments in LP, LLC and other equity method investments are long-term in nature. The Company believes these investments offer the potential for superior long-term returns and are appropriate in the overall context of a diversified portfolio.

104 Commercial mortgage loans as of December 31, 2015 were $2.317 billion (net of $11 million of loan loss reserves or 0.5% of the outstanding loan portfolio), an increase of $509 million or 28.2% over December 31, 2014. The increase primarily reflects $718 million in funding and a decrease of $3 million to the loan loss reserve, partially offset by $212 million in principal reductions. The entire commercial loan portfolio is U.S.- based. The number of loans in the portfolio increased from 4,509 at December 31, 2014 to 4,763 at December 31, 2015.

Short-term investments as of December 31, 2015 were $272 million, a decrease of $354 million or 56.5% from December 31, 2014. The decrease reflects sales and maturities of short-term holdings across the Company’s international operations.

Other investments as of December 31, 2015 were $668 million, an increase of $47 million or 7.6% over December 31, 2014. The increase was primarily related to purchases and valuation gains on investments.

Cash and cash equivalents as of December 31, 2015 were $4.227 billion, an increase of $224 million or 5.6% over December 31, 2014. The increase was primarily related to increases in operational cash and the maturity of short term investments in the Company’s international portfolio.

Regarding fair value measurements, as of December 31, 2015, excluding other assets, the Company reflected $5.157 billion (7.7%) as level 1 (quoted prices in active markets) primarily consisting of U.S. Treasuries and common equity securities. The majority of the Company’s invested assets are reported as level 2 (quoted prices from other observable inputs). As of December 31, 2015, the Company reported $60.260 billion (90.5%) as level 2, consisting primarily of fixed maturity securities. Finally, the Company reported $1.170 billion (1.8%) as level 3 (unobservable inputs), primarily consisting of international and privately held securities for which a market price is not readily observable.

As of December 31, 2015, the Company had unfunded commitments in traditional private equity partnerships, natural resources, real estate, and other of $1.354 billion, $2.440 billion ($2.410 billion of which is related to energy investments), $378 million, and $1.057 billion, respectively. Unfunded energy investment commitments as of December 31, 2015 were $2.410 billion, of which, $749 million and $1.661 billion are related to natural resources partnerships and direct investments in oil and gas wells, respectively. The majority of energy commitments are subject to contractual price floors. If certain price targets are not met, the Company is not required to fund these investments until pricing improves. Due to current market conditions, energy prices would need to increase significantly in order for these commitments to become callable.

As of December 31, 2015, no single issuer, excluding U.S. Treasuries, agency securities and mortgage- backed securities, accounted for more than 0.6% of invested assets. As of December 31, 2015, investments in the energy sector accounted for $3.000 billion or 3.8% of total invested assets. These investments consist of investment grade bonds of $2.081 billion, bonds that were rated below investment grade of $239 million, publicly traded equity securities of $160 million, and natural resources partnerships and other equity method investments of $520 million. In addition, the Company has direct investments in oil and gas wells of $1.527 billion which are included in other assets on the Consolidated Balance Sheets.

105 The following tables summarize the Company’s available for sale portfolio by security type as of December 31, 2015 and 2014:

As of December 31, 2015 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (dollars in millions) U.S. government and agency securities ...... $ 3,182 $ 142 ($ 12) $ 3,312 Residential MBS1 ...... 7,224 185 (29) 7,380 Commercial MBS ...... 1,592 20 (16) 1,596 Other MBS and ABS2 ...... 3,051 57 (15) 3,093 U.S. state and municipal ...... 13,553 666 (54) 14,165 Corporate and other ...... 28,749 991 (694) 29,046 Foreign government securities ...... 4,042 197 (37) 4,202 Total fixed maturities ...... 61,393 2,258 (857) 62,794 Common stock ...... 2,193 488 (110) 2,571 Preferred stock ...... 378 14 (54) 338 Total equity securities ...... 2,571 502 (164) 2,909 Total securities available for sale ...... $63,964 $2,760 ($1,021) $65,703

1 Mortgage-backed securities (“MBS”) 2 Asset-backed securities (“ABS”)

As of December 31, 2014 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (dollars in millions) U.S. government and agency securities ...... $ 2,943 $ 192 ($ 10) $ 3,125 Residential MBS ...... 7,921 281 (24) 8,178 Commercial MBS ...... 1,483 36 (9) 1,510 Other MBS and ABS ...... 2,855 76 (14) 2,917 U.S. state and municipal ...... 13,020 962 (18) 13,964 Corporate and other ...... 26,977 1,663 (146) 28,494 Foreign government securities ...... 4,752 260 (24) 4,988 Total fixed maturities ...... 59,951 3,470 (245) 63,176 Common stock ...... 2,210 638 (58) 2,790 Preferred stock ...... 393 20 (58) 355 Total equity securities ...... 2,603 658 (116) 3,145 Total securities available for sale ...... $62,554 $4,128 ($ 361) $66,321

106 The following table summarizes the Company’s mortgage and asset-backed fixed maturity portfolio by credit quality1 as of December 31, 2015:

As of December 31, 2015 Bor %of AAA AA A BBB BB Lower Total Total (dollars in millions) SBA loans ...... $ 2,121 $— $— $— $— $— $ 2,121 17.6% GNMA residential mortgage ...... 3,050 3 — — — — 3,053 25.3 FNMA residential mortgage ...... 2,035 ————— 2,035 16.8 FHLMC residential mortgage ...... 2,019 ————— 2,019 16.7 Non-agency residential mortgage ...... 28713162182732.3 Commercial MBS ...... 1,498 68 8 22 — — 1,596 13.2 Non-mortgage ABS ...... 548 — 62 352 3 7 972 8.1 Total ...... $11,299 $ 78 $ 71 $377 $ 19 $225 $12,069 100.0% % of Total ...... 93.6% 0.6% 0.6% 3.1% 0.2% 1.9% 100.0%

1 For purposes of this disclosure, credit quality is primarily based upon average credit ratings.

Approximately 76% of the Company’s mortgage and asset-backed fixed maturity portfolio is explicitly backed by the U.S. government (SBA and GNMA) or by government-sponsored entities (FNMA and FHLMC). Approximately 94% of the holdings are rated AAA. The commercial mortgage-backed securities portfolio is well diversified and of high quality with approximately 94% rated AAA.

The following table summarizes the Company’s allocation of fixed maturities by credit quality1 as of December 31, 2015 and 2014:

As of December 31, 2015 As of December 31, 2014 Fair %of Fair %of Value Total Value Total (dollars in millions) AAA...... $19,777 31.5% $20,987 33.2% AA+, AA, AA- ...... 11,459 18.2 10,982 17.4 A+,A,A-...... 14,620 23.3 15,660 24.8 BBB+, BBB, BBB- ...... 13,474 21.5 11,909 18.9 Total investment grade ...... 59,330 94.5 59,538 94.3 BB+, BB, BB- ...... 1,585 2.5 1,476 2.3 B+,B,B-...... 1,448 2.3 1,605 2.5 CCC or lower ...... 431 0.7 557 0.9 Total below-investment grade ...... 3,464 5.5 3,638 5.7 Total fixed maturities ...... $62,794 100.0% $63,176 100.0%

1 For purposes of this disclosure, credit quality is primarily based upon average credit ratings.

The Company’s allocation to investment grade (fixed maturities with an average credit rating of BBB- or higher) securities was approximately 94% at December 31, 2015, slightly higher than December 31, 2014. The Company’s allocation to below-investment grade (fixed maturities with an average credit rating below BBB-) securities was approximately 6% at December 31, 2015, slightly lower than December 31, 2014. The Company’s holdings of below investment grade securities primarily consist of an actively managed diversified portfolio of high yield securities and leveraged loans within the domestic insurance portfolios and investments in emerging

107 market sovereign and corporate debt primarily in support of the Company’s international insurance operations. Overall, the average credit quality rating stands at A+ as of December 31, 2015.

The following table summarizes available for sale fixed maturity securities by contractual maturity at December 31, 2015 and 2014. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Due to the potential for prepayment on MBS and ABS, they are not categorized by contractual maturity:

As of December 31, 2015 As of December 31, 2014 Fair %of Fair %of Value Total Value Total (dollars in millions) One year or less ...... $ 3,515 5.6% $ 3,460 5.5% Over one year through five years ...... 16,298 26.0 17,009 26.9 Over five years through ten years ...... 17,255 27.5 17,327 27.4 Over ten years ...... 13,657 21.7 12,775 20.2 MBSandABS...... 12,069 19.2 12,605 20.0 Total fixed maturities ...... $62,794 100.0% $63,176 100.0%

During 2015, after taking into consideration changes in investment opportunities and its view of the current and prospective business and economic environment, the Company has made only minor adjustments to the average duration of its investment portfolio.

Net Investment Income The following table summarizes the Company’s net investment income for the years ended December 31, 2015 and 2014:

Years Ended December 31, 2015 20141 (dollars in millions) Taxable interest income ...... $2,080 $2,109 Tax-exempt interest income ...... 374 399 Dividends ...... 65 74 LP, LLC and other equity method income ...... 153 574 Commercial mortgage loans ...... 112 93 Other investment income ...... 26 12 Gross investment income ...... 2,810 3,261 Investment expenses2 ...... (160) (148) Net investment income ...... $2,650 $3,113

1 The above table contains net investment income attributable to discontinued operations related to Summit and the Argentina operations of $14 million for the year ended December 31, 2014. 2 Fees paid to external managers are included within the components of gross investment income.

Net investment income for the year ended December 31, 2015 was $2.650 billion, a decrease of $463 million from the same period in 2014. The decrease was primarily a result of lower changes in valuations in the energy sector and lower valuation changes primarily due to prior year IPO activity that did not recur.

108 Net Realized Gains (Losses) The following tables summarize the Company’s net realized gains (losses) for the years ended December 31, 2015 and 2014:

Change in Sales & Derivatives Dispositions Impairments Value Total (dollars in millions) Year Ended December 31, 2015: Fixed Maturities ...... $107 ($ 62) $— $ 45 Equities ...... 259 (48) — 211 Other ...... (13) (300) 33 (280) Total ...... $353 ($ 410) $ 33 ($ 24) Year Ended December 31, 2014: Fixed Maturities ...... $ 91 ($ 33) $— $ 58 Equities ...... 70 (12) — 58 Other ...... (9) (207) — (216) Total ...... $152 ($ 252) $— ($ 100)

Years Ended December 31, 2015 2014 (dollars in millions) Fixed maturities: Gross realized gains ...... $ 180 $ 153 Gross realized losses ...... (135) (95) Equities: Gross realized gains ...... 342 138 Gross realized losses ...... (131) (80) Other: Gross realized gains ...... 67 48 Gross realized losses ...... (347) (264) Total net realized losses ...... ($ 24) ($100)

109 The following table summarizes the Company’s gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015 and that are not deemed to be other-than-temporarily impaired:

Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses (dollars in millions) U.S. government and agency securities ...... ($ 8) $ 1,304 ($ 4) $ 245 Residential MBS ...... (21) 2,445 (8) 364 Commercial MBS ...... (13) 737 (3) 122 Other MBS and ABS ...... (11) 1,280 (4) 166 U.S. state and municipal ...... (47) 1,647 (7) 142 Corporate and other ...... (510) 10,543 (184) 1,027 Foreign government securities ...... (22) 911 (15) 298 Total fixed maturities ...... (632) 18,867 (225) 2,364 Common stock ...... (98) 653 (12) 33 Preferred stock ...... (1) 4 (53) 254 Total equities ...... (99) 657 (65) 287 Total ...... ($731) $19,524 ($ 290) $2,651

Unrealized losses increased from $361 million as of December 31, 2014 to $1.021 billion as of December 31, 2015 primarily due to the unfavorable impact of widening spreads and rising treasury rates. Unrealized losses less than 12 months increased from $150 million at December 31, 2014 to $731 million as of December 31, 2015. Unrealized losses 12 months or longer increased from $211 million as of December 31, 2014 to $290 million as of December 31, 2015. Of the $12 million of unrealized losses 12 months or longer on common stock, $2 million relates to securities associated with non-guaranteed unit linked products where the policyholder bears the investment risk. As of December 31, 2015, there were 922 securities that were in an unrealized loss position for 12 months or longer. The Company monitors the difference between the amortized cost and estimated fair value of debt securities to ascertain whether declines in value are temporary in nature. The Company currently does not have the intent to sell these securities and has determined it is not more likely than not that it would be required to sell these fixed maturity securities before they recover their fair value.

If the Company believes a decline in the value (including foreign exchange rate changes) of a particular investment is temporary, the decline is recorded as an unrealized loss in policyholders’ equity. If the decline is believed to be other-than-temporary and the Company believes that it will not be able to collect all cash flows due on its fixed maturity securities, then the carrying value of the investment is written down to the expected cash flow amount and a realized loss is recorded as a credit impairment. A non-credit impairment loss is recognized in other comprehensive income, net of applicable taxes, as the difference between expected cash flows and fair value. The Company has concluded that the gross unrealized losses of fixed maturity securities as of December 31, 2015 are temporary.

For equity securities, if the decline is believed to be other-than-temporary, the carrying value of the investment is written down to fair value and a realized loss is recorded. The gross unrealized losses recorded on equity securities at December 31, 2015 resulted primarily from decreases in quoted fair values from the dates that certain investment securities were acquired as opposed to fundamental changes in the issuer’s financial performance and near-term financial prospects. The Company has concluded that the gross unrealized losses of equity securities as of December 31, 2015 are temporary.

110 Liquidity and Capital Resources General The liquidity requirements of the Insurance Subsidiaries are met primarily by funds generated from operations, asset maturities and income received on investments. Cash provided from these sources is used primarily for claims, claim adjustment expenses and operating expenses (underwriting and corporate benefit costs). There are certain cash outflows such as catastrophes and continued settlements of asbestos reserves that are unpredictable in nature and could create increased liquidity needs. The Company believes that the Insurance Subsidiaries’ future business liquidity needs will be met from all the above sources. Net cash flows are generally invested in marketable securities while keeping a certain amount in cash and short-term investments to meet unpredictable cash obligations. The Company monitors the duration of these investments, and purchases and sales are executed with the objective of having adequate cash available to satisfy its maturing liabilities. As the Company’s investment strategy focuses on overall asset and liability durations, and not specific cash flows, asset sales may be required to satisfy obligations or rebalance asset portfolios. The Company’s invested assets as of December 31, 2015 (including cash and cash equivalents) totaled $78.210 billion. Debt outstanding as of December 31, 2015 and 2014 was as follows: Current maturities of long-term debt: As of December 31, 2015 2014 (dollars in millions) Current maturities of long-term debt1 ...... $249 $—

1 2015 includes $249 million of 6.70% Notes due 8/15/2016. Long-term debt: As of December 31, 2015 2014 (dollars in millions) 6.70% Notes, due 2016 ...... $ — $ 249 7.00% Junior Subordinated notes, due 20671 ...... 300 300 5.00% Notes, due 2021 ...... 600 600 4.95% Notes, due 2022 ...... 750 750 4.25% Notes, due 2023 ...... 1,000 1,000 8.50% Surplus notes, due 2025 ...... 140 140 7.875% Surplus notes, due 2026 ...... 227 227 7.625% Notes, due 2028 ...... 3 3 3.91%-4.25% Federal Home Loan Bank Borrowings, due 2032 ...... 300 300 7.00% Notes, due 2034 ...... 231 231 6.50% Notes, due 2035 ...... 471 471 7.50% Notes, due 2036 ...... 19 19 7.80% Junior Subordinated notes, due 20872 ...... 700 700 10.75% Junior Subordinated notes, due 20883 ...... 193 196 6.50% Notes, due 2042 ...... 750 750 4.85% Notes, due 2044 ...... 1,050 1,050 7.697% Surplus notes, due 2097 ...... 260 260 Subtotal ...... 6,994 7,246 Unamortized discount ...... (12) (14) Total long-term debt ...... $6,982 $7,232

111 1 The par value call date and final fixed rate interest payment date is March 15, 2017, subject to certain requirements. 2 The par value call date and final fixed rate interest payment date is March 15, 2037, subject to certain requirements. 3 The par value call date and final fixed rate interest payment date is June 15, 2038, subject to certain requirements.

As part of its overall capital strategy, the Company previously announced that it may issue, repurchase or exchange debt depending on market conditions. Debt repurchases may be executed through open market or other appropriate transactions. The Company continues to evaluate market conditions and may periodically effect transactions in its debt, subject to applicable limitations.

Debt Transactions and In-force Credit Facilities Effective December 21, 2015, LMIC renewed its $1 billion repurchase agreement for a two-year period, which terminates December 21, 2017. To date, no funds have been borrowed under the facility.

During the year ended December 31, 2015, the Company repurchased $3 million of the 10.75% Junior Subordinated notes due 2088 compared to repurchases of $59 million in 2014. Pre-tax losses of $1 million were recorded on these transactions for the year ended December 31, 2015 compared to pre-tax losses of $34 million in 2014 and are included in loss on extinguishment of debt in the accompanying Consolidated Statements of Income.

Effective July 2, 2015, LMIC renewed its $1 billion repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

On April 8, 2015, LMGI increased its commercial paper program from $750 million to $1 billion. There was no commercial paper outstanding at December 31, 2015.

On March 5, 2015, LMGI amended and restated its unsecured revolving credit facility from $750 million to $1 billion with an expiration date of March 5 , 2020. This facility backs the Company’s commercial paper program that is guaranteed by LMIC. To date, no funds have been borrowed under the facility.

On December 31, 2014, Berkeley/St. James Real Estate LLC paid off its five-year mortgage loan in the amount of $47 million. The mortgage loan was originally $50 million with a maturity date of January 1, 2015.

On July 24, 2014 and October 31, 2014, LMGI issued $750 million and $300 million, respectively, of the 2044 Notes. Interest is payable semi-annually at a fixed rate of 4.85%. The 2044 Notes mature on August 1, 2044.

LMIC, Peerless Insurance Company (“PIC”), Liberty Life Assurance Company of Boston (“LLAC”), LMFIC and EICOW are members of the Federal Home Loan Bank. On March 21, 2012, LMFIC borrowed $150 million at a rate of 3.91% with a maturity date of March 22, 2032. On March 23, 2012 and April 2, 2012, LMIC borrowed $127 million at a rate of 4.24% with a maturity date of March 23, 2032 and $23 million at a rate of 4.25% with a maturity date of April 2, 2032, respectively. As of December 31, 2015, all of the outstanding Federal Home Loan Bank borrowings are fully collateralized.

On January 20, 2012, LMGI entered into two interest rate swap transactions having a notional amount of $300 million with respect to LMGI’s $300 million 7.00% Junior Subordinated Notes due 2067. Pursuant to the terms of the swap agreements, commencing on March 15, 2017 and effective through March 15, 2037, LMGI has agreed with the counterparties to pay a fixed rate of interest on the notional amount and the counterparties have agreed to pay a floating rate of interest on the notional amount.

112 Interest Expense Consolidated interest expense for the year ended December 31, 2015 was $438 million, an increase of $19 million over the same period in 2014. The increase in interest expense reflects the new debt issuances in 2014, partially offset by debt repurchases and maturities.

Holding Company Liquidity and Capital Resources The Company conducts substantially all of its operations through its wholly owned insurance and service company subsidiaries, and therefore is primarily dependent on dividends, distributions, loans or other payments of funds from these entities to meet its current and future obligations. However, the subsidiaries are separate and distinct legal entities and have no obligation to make funds available to the Company, whether in the form of loans, dividends or other distributions. As of December 31, 2015, the Company, through its downstream subsidiary LMGI, had $6.313 billion of debt outstanding, excluding discount.

The insurance subsidiaries’ ability to pay dividends on preferred or common stock is restricted under applicable insurance laws and regulations and may be paid only from unassigned surplus. Under the insurance laws of the domiciliary states of the insurance subsidiaries, an insurer may make an ordinary dividend payment if its surplus as regards policyholders, following such dividend, is reasonable in relation to its outstanding liabilities, is adequate to meet its financial needs, and does not exceed the insurer’s unassigned surplus. However, no insurer may pay an extraordinary dividend without the approval or non-disapproval of the domiciliary insurance regulatory authority. Insurance subsidiaries owned directly by LMGI are LMIC, LMPIC, LMFIC and EICOW. Under the insurance laws of Massachusetts, the domiciliary state of LMIC and LMPIC, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or the insurer’s net income for the 12-month period ending on the preceding December 31. Under the insurance laws of Wisconsin, the domiciliary state of LMFIC and EICOW, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends paid within the preceding 12 months, exceeds the lesser of (a) 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or (b) the greater of (1) the insurer’s net income for the preceding calendar year, minus realized capital gains for that calendar year, or (2) the aggregate of the insurer’s net income for the three preceding calendar years minus realized capital gains for those calendar years and minus dividends paid within the first two of the preceding three calendar years. Changes in the extraordinary dividend regulation of the domiciliary states of LMIC, LMFIC and EICOW could negatively affect LMGI’s ability to pay principal and interest on its debt, as could a redomestication or merger of LMIC, LMPIC, LMFIC or EICOW to a different domiciliary state.

The authorized control level risk-based capital (as of December 31, 2015) and 2016 available dividend capacity prior to needing regulatory approval for LMIC, LMFIC and EICOW were as follows: Dividend Dividends RBC Ratio1 Capacity2 Paid3 2015 2014 2016 2015 (dollars in millions) RBC Ratios and Dividend Capacity LMIC ...... 497% 514% $1,531 $ 65 LMFIC ...... 518% 485% $ 139 $ 15 EICOW ...... 512% 467% $ 151 $—

1 Authorized control level risk-based capital as defined by the NAIC. 2 Represents the estimated maximum allowable dividend without prior regulatory approval in the state of domicile. 3 Dividends paid represent amounts paid during the year ended December 31, 2015. Available dividend capacity as of December 31, 2015 is calculated as 2016 dividend capacity less dividends paid for the preceding 12 months.

113 As of December 31, 2015, LMGI also has access to the following sources of funding: • A management services agreement with LMIC pursuant to which LMGI is entitled to collect certain costs plus a management fee for services rendered by LMGI employees. • Investment management agreements with affiliated entities pursuant to which an LMGI subsidiary investment advisor is entitled to recover annual expenses for investment management services performed by its employees. • LCS, which through its subsidiaries collects fees and other revenues, primarily for claims administration and agency services rendered for affiliated and non-affiliated entities. For the year ended December 31, 2015, LCS recorded $307 million in pre-tax income. • Approximately $80 million of annual dividends related to non-redeemable perpetual preferred stock issuances by LMIC and LMFIC.

Statutory Surplus Statutory surplus as regards policyholders for the combined operations of LMIC and its U.S affiliates, including international branches, was $18.687 billion and $19.180 billion at December 31, 2015 and December 31, 2014, respectively. The decrease in surplus primarily reflects affiliated unrealized losses of $1.577 billion, a reduction to other changes in surplus of $485 million and unaffiliated unrealized losses of $464 million, partially offset by net income of $2.033 billion (the sum of earnings from the Company’s 56 domestic property- casualty insurance companies and dividends from subsidiaries). Other changes in surplus is primarily driven by goodwill amortization expense, non-admitted assets, foreign exchange and dividends to stockholders, partially offset by non-admitted goodwill and net deferred tax assets.

Critical Accounting Policies Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates include (1) unpaid claims and claim adjustment expense reserves, including asbestos and environmental liability reserves and loss sensitive premium attributable to prior years, (2) reinsurance recoverables and associated uncollectible allowance, (3) fair value determination and other-than-temporary impairments of the investment portfolio and direct working interests in oil and gas properties, (4) recoverability of deferred acquisition costs, (5) valuation of goodwill and intangible assets, (6) deferred income tax valuation allowance, and (7) pension and postretirement benefit obligations.

While the amounts included in the accompanying Consolidated Financial Statements reflect management’s best estimates and assumptions, these amounts ultimately could vary.

Adoption of New Accounting Standards Effective January 1, 2015, the Company elected to adopt the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, (Topic 205 and Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU modifies the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Also, this update requires additional financial statement disclosures about discontinued operations, as well as disposals of individually significant components of an entity that do not qualify for discontinued operations presentation. This ASU was effective for all disposals (or classifications as held for sale) of components of an entity that occurred within annual and interim periods beginning on or after December 15,

114 2014 and for all businesses that, on acquisition, were classified as held for sale that also occurred within interim and annual periods beginning on or after December 15, 2014. For further discussion of what the Company has included in discontinued operations in the Consolidated Statements of Income, see the Consolidated Results of Operations section.

Effective January 1, 2015, the Company elected to adopt the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), providing accounting guidance regarding the presentation of an unrecognized tax benefit. The new guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent tax carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. There was no material impact on the Company’s financial statements as a result of this accounting guidance.

Effective January 1, 2014, the Company elected to adopt the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects (“ASU 2014-01”). This guidance, as codified in Accounting Standards Codification (“ASC”) 323, Investments—Equity Method and Joint Ventures, allows entities that invest in certain qualified affordable housing projects through limited liability entities the option to account for these investments using the proportional amortization method if certain conditions are met. Under the proportional amortization method, the entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense or benefit. The impact of adoption was not material to the Company’s results of operations and financial position.

The Company has not adopted any other accounting standards through the fourth quarter of 2015.

Future Adoption of New Accounting Standards The Company will adopt the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This ASU was issued to clarify the principles for recognizing revenue, however, insurance contracts and financial instrument transactions are not within the scope of this guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of ASU 2014-09 is expected to have on the Company’s financial statements.

The Company will adopt the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”). This guidance is aimed at asset managers, all reporting entities involved with limited partnerships or similar entities will have to re-evaluate these entities for consolidation and revise their documentation. In some cases, consolidation conclusions will change. In other cases, reporting entities will need to provide additional disclosures about entities that currently aren’t considered VIEs but will be considered VIEs under the new guidance when they have a variable interest in those VIEs. Regardless of whether conclusions change or additional disclosure requirements are triggered, reporting entities will need to re-evaluate limited partnerships or similar entities for consolidation and revise their documentation. ASU 2015-02 is effective for public business entities for fiscal years, for interim periods within those fiscal years, beginning after

115 December 15, 2015. For all other entities, ASU 2015-02 is effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. The adoption of ASU 2015-02 is not expected to have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures on variable interest entities will likely be required.

The Company will adopt the FASB issued ASU 2015-03, Interest – Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This guidance requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of this standard, debt issuance costs were required to be presented in the balance sheet as an asset. ASU 2015-03 should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect period-specific effects of applying the new guidance. ASU 2015-03 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, this ASU is effective for fiscal years beginning after December 31, 2015, and for interim periods within fiscal years beginning after December 31, 2016. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial statements.

The Company will adopt the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (“ASU 2015-09”). The amendments apply to all insurance entities that issue short-duration contracts as defined in ASC 944, Financial Services – Insurance. The disclosures required by this ASU are aimed at providing the users of the financial statements with more transparent information about initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims. The new disclosures will require the accumulation and reporting of new and different groupings of data by insurers for U.S. GAAP reporting from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments of this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. The adoption of ASU 2015-09 will not have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures will likely be required.

The Company will adopt the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This guidance requires equity investments (excluding those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, ASU 2016-01 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-01 is expected to have a material impact on the Company’s financial statements.

The Company will adopt FASB issued ASU 2016-02, Leases (Topic 842): Section A – Leases, Section B – Conforming Amendments Related to Leases and Section C – Background Information and Basis for Conclusions (“ASU 2016-02”). ASU 2016-02 intends to improve financial reporting about leasing transactions. The new standard affects all entities that lease assets such as real estate, airplanes and manufacturing equipment. ASU 2016-02 will require entities that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for public business entities for fiscal years, and interim period within those fiscal years, beginning after December 15, 2018. For all other entities, ASU 2016-02 is effective for fiscal years, beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact the adoption of ASU 2016-02 is expected to have on the Company’s financial statements.

There are no other accounting standards not yet adopted by the Company that are expected to have an impact on its financial position or results of operations.

116 Venezuela Deconsolidation and Discontinued Operations The evolving conditions in Venezuela, including the increasingly restrictive exchange control regulations and other factors, significantly impact our control over the Venezuelan operations. As a result of these factors, which we believe to be other-than-temporary, we concluded that effective September 30, 2015, we do not meet the accounting criteria for control over the Venezuelan operations, and therefore have deconsolidated these operations in the accompanying financial statements. As a result of deconsolidating, the Company recognized an impairment charge of approximately $690 million which includes the write down of the investment in the previously consolidated Venezuelan operations to fair value and the write-off of related intercompany balances.

The Company’s Venezuelan operations are classified as discontinued operations in the Consolidated Financial Statements. For further detail, see the Consolidated Results of Operations section.

Unpaid Claims and Claim Adjustment Expenses Reserves for property-casualty unpaid claims and claim adjustment expenses were $49.323 billion and $49.970 billion as of December 31, 2015 and December 31, 2014, respectively.

Property-casualty insurance unpaid claims and claim adjustment expenses represent the Company’s best estimate of amounts necessary to settle all outstanding claims, including claims that are incurred but not reported as of the reporting date. The Company’s reserve projections are based primarily on detailed analysis of the facts in each case, experience with similar cases and various historical development patterns. Consideration is given to such historical patterns as field reserving trends and claims settlement practices, loss payments, pending levels of unpaid claims and product mix, as well as court decisions, economic conditions and public attitudes. All of these factors can affect the estimation of reserves.

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

As information develops that varies from past experience, provides additional data, or in some cases, augments data that previously was not considered sufficient for use in determining reserves, changes in the Company’s estimate of ultimate liabilities may be required. The effects of these changes are reflected in current operating results.

Asbestos and Environmental The Company’s A&E reserves for unpaid claims and claim adjustment expenses, net of reinsurance before NICO and including uncollectible reinsurance, were $952 million and $1.225 billion as of December 31, 2015 and December 31, 2014, respectively.

In the third quarter of 2015, the Company completed a review of asbestos, environmental and miscellaneous toxic tort unpaid loss and ALAE claim liabilities. The review resulted in no change to reserves as they make a reasonable provision for all unpaid losses and loss adjustment expenses.

117 claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. A&E unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 million including: $83 million of asbestos reserves, primarily associated with increased defense costs, and $28 million of pollution reserves.

All A&E claims against policies issued prior to 1986 by EICOW and its affiliates are 100% ceded to Nationwide Indemnity Company and guaranteed by Nationwide Mutual Insurance Company. In addition, the Company acquired PruPac in 2003 and any increase in A&E reserves is reinsured by Vantage Casualty Insurance Company and guaranteed by Prudential Financial, Inc.

The estimation of asbestos claims and associated liabilities and the analysis of environmental claims considered prevailing applicable law and certain inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability, and the risks inherent in major litigation and other uncertainties; the Company believes that in future periods it is possible that the outcome of the continued uncertainties regarding A&E related claims could result in a liability that differs from current reserves by an amount that could be material to the Company’s future operating results and financial condition.

Reinsurance Recoverables The Company reported reinsurance recoverables of $13.575 billion and $13.979 billion at December 31, 2015 and December 31, 2014, respectively, net of allowance for doubtful accounts of $131 million and $149 million, respectively. Included in these balances are $486 million and $548 million of paid recoverables and $13.220 billion and $13.580 billion of unpaid recoverables (including retroactive reinsurance), respectively.

Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured business. The Company evaluates and monitors the financial condition of its reinsurers under voluntary reinsurance arrangements to minimize its exposure to significant losses from reinsurer insolvencies. The Company reports its reinsurance recoverables net of an allowance for estimated uncollectible reinsurance recoverables. The allowance is based upon the Company’s ongoing review of amounts outstanding, length of collection periods, changes in reinsurer credit standing and other relevant factors. Accordingly, the establishment of reinsurance recoverables and the related allowance for uncollectible reinsurance recoverables is also an inherently uncertain process involving estimates. Changes in these estimates could result in additional charges to the Consolidated Statements of Income.

In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014.

118 The NICO Reinsurance Transaction is accounted for as retroactive reinsurance in the Consolidated Financial Statements.

The following table displays the impact of the NICO Reinsurance Transaction in the Consolidated Statements of Income (amounts in millions):

Years Ended December 31, Amounts ceded under NICO Reinsurance Transaction 2015 2014 Unrecognized reinsurance benefit related to original transaction loss at the beginning of the period ...... $ 43 $128 A&E unfavorable loss development ...... 5 111 Workers compensation favorable loss development ...... (21) (26) Total amounts ceded under NICO Reinsurance Transaction ...... (16) 85 Retroactive reinsurance reductions/(benefits) recognized into income ...... 16 (85) Pre-tax impact of unrecognized deferred retroactive reinsurance benefit ...... — — Unrecognized reinsurance benefit related to original transaction loss at the end of the period ...... $ 59 $ 43

Once the aggregate of workers compensation and A&E development exceeds the original pre-tax loss of $128 million, deferred gains will be recorded. Deferred gains are subsequently amortized into earnings over the period when underlying claims are settled.

The Company’s reinsurance recoverables from Nationwide Indemnity Company have been fully guaranteed by its parent, Nationwide Mutual Insurance Company, which has a financial strength rating of A+ from Standard & Poor’s and A+ from A.M. Best. The reinsurance recoverables from state mandated involuntary pools and associations primarily represent the Company’s servicing carrier business. As a servicing carrier, the Company retains no direct underwriting risk but instead cedes 100% of the involuntary market premium and losses back to the pool. Payment of losses is shared by the pool participants in proportion to their pool participation. Reinsurer credit risk with respect to any such involuntary pool or association is a function of the creditworthiness of all the pool participants.

Approximately 96% and 93% of the Company’s reinsurance recoverable balance, net of collateral held and including voluntary and involuntary pools and associations, was from reinsurers rated A- or better from A.M. Best and Standard & Poor’s, respectively, at December 31, 2015. Collateral held against outstanding gross reinsurance recoverable balances was $5.913 billion and $6.632 billion at December 31, 2015 and December 31, 2014, respectively.

The remaining 4% and 7% of the Company’s net reinsurance recoverable balance is well diversified. No single reinsurer rated B++ or below by A.M. Best or below A- by Standard & Poor’s accounts for more than 2% of GAAP equity. In addition, the average net reinsurance recoverable balance from individual reinsurers rated below A- or not rated by A.M. Best and Standard & Poor’s was approximately $1 million as of December 31, 2015.

The Company has an aggregate stop loss program covering substantially all of Commercial Insurance’s voluntary workers compensation business from the fourth quarter 2000 through the fourth quarter 2002 accident year periods. A significant portion of the consideration was retained on a “funds held” basis and interest is credited on the balance at an average rate of 8.5% annually. Under the contract, losses in excess of a specified loss ratio are reinsured up to a maximum loss ratio and were accounted for as prospective reinsurance at inception. However, due to a material contract change at the January 1, 2002 renewal, any premium and loss activity subsequent to December 31, 2001 is accounted for as retroactive reinsurance for coverage provided from the fourth quarter 2000 through the fourth quarter 2001 covered accident year periods.

119 The above aggregate stop loss program resulted in deferred gains that are amortized into income using the effective interest method over the estimated settlement period.

As of December 31, 2015, and 2014, deferred gains were $7 million and $8 million, respectively, and are included in other liabilities within the accompanying Consolidated Balance Sheets. Interest credited to the funds held balances for the years ended December 31, 2015 and 2014 was $2 million for both years. Deferred gain amortization was $2 million and $1 million for the years ended December 31, 2015 and 2014, respectively. Reinsurance recoverables related to these transactions, including experience related profit accruals, were $55 million and $64 million as of December 31, 2015 and 2014, respectively.

Impairment Losses on Investments If the Company believes a decline in the value (including foreign exchange rate changes) of a particular investment is temporary, the decline is recorded as an unrealized loss in policyholders’ equity. If the decline is believed to be other-than-temporary, and the Company believes that it will not be able to collect all cash flows due on its fixed maturity securities, then the carrying value of the investment is written down to the expected cash flow amount and a realized loss is recorded as a credit impairment. A non-credit impairment loss is recognized in other comprehensive income, net of applicable taxes as the difference between expected cash flow and fair value.

The Company reviews fixed maturity securities, equity securities and other investments for impairment on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including, but not limited to: (a) the extent of the decline in fair value below book value, (b) the duration of the decline, (c) significant adverse changes in the financial condition or near term prospects of the investment or issuer, (d) significant change in the business climate or credit ratings of the issuer, (e) general market conditions and volatility, (f) industry factors, and (g) the past impairment of the security holding or the issuer. For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates impairments into credit loss and non-credit loss components. The determination of the credit loss component of the impairment charge is based on the Company’s best estimate of the present value of the cash flows expected to be collected from the fixed maturity security compared to its amortized cost and is reported as part of net realized gains. The non-credit component, the residual difference between the credit impairment component and the fair value, is recognized in other comprehensive income. The factors considered in making an evaluation for credit versus non-credit other-than-temporary impairment include the following: (a) failure of the issuer of the security to make scheduled interest or principal payments (including the payment structure of the fixed maturity security and the likelihood the issuer will be able to make payments that increase in the future), (b) performance indicators of the underlying assets in the security (including default and delinquency rates), (c) vintage, (d) geographic concentration, (e) impact of foreign exchange rates on foreign currency denominated securities and (f) industry analyst reports, sector credit ratings, and volatility of the security’s fair value. In addition, the Company’s accounting policy for other-than-temporary impairment recognition requires an other-than-temporary impairment charge be recorded when it is determined the security will be sold or it is more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis (all fixed maturity securities and certain preferred equity securities) or the Company does not have the intent and ability to hold certain equity securities for a period of time that is sufficient to allow for any anticipated recovery in fair value.

120 of December 31, 2015, the Company has determined that it was the primary beneficiary of two VIEs in the low- income housing tax credit sector, and as such, these VIEs were consolidated in the Company’s financial statements. The carrying value of assets and liabilities and the Company’s maximum exposure to loss of the consolidated VIEs as of December 31, 2015 and December 31, 2014 were immaterial to the Company.

The Company has variable interests in VIEs for which it is not the primary beneficiary and accounts for these VIEs under the equity method in accordance with ASC 323, Investments—Equity Method and Joint Ventures. The VIEs are principally private equity limited partnerships in which the Company has invested as a passive limited partner. The partnerships were deemed to be VIEs because the equity holders as a group lack the power to direct the activities that most significantly impact the respective entity’s economic performance. The VIEs generate variability primarily from investment portfolio performance and that variability is passed to equity holders. The net carrying value of non-consolidated VIEs in which the Company has a variable interest was $1.719 billion and $1.826 billion as of December 31, 2015 and 2014, respectively and the Company’s maximum exposure to loss was $2.487 billion and $2.603 billion as of December 31, 2015 and 2014, respectively. The assets are included in other investments in the accompanying consolidated balance sheets. Maximum exposure to loss includes the carrying value and unfunded commitment of the VIE. There is no recourse provision to the general credit of the Company for any VIE beyond the full amount of the Company’s loss exposure.

Deferred Acquisition Costs Total deferred acquisition costs were $3.164 billion and $3.001 billion as of December 31, 2015 and December 31, 2014, respectively. Deferred acquisition costs are costs that are directly related to the acquisition or renewal of insurance contracts. All other acquisition related costs, including market research, training, administration, unsuccessful acquisition or renewal efforts, and product development, are charged to expense as incurred. Deferred acquisition costs are reviewed annually for recoverability. Investment income is considered in the recoverability assessment. For short-duration insurance contracts, acquisition costs include commissions, underwriting expenses, and premium taxes and assessments. For long-duration insurance contracts, these costs include first year commissions in excess of annual renewal commissions and variable sales and underwriting expenses.

Goodwill Goodwill assets were $4.758 billion and $4.834 billion as of December 31, 2015, and December 31, 2014, respectively. Goodwill is tested for impairment at least annually using either a qualitative or a quantitative process. Election of the approach can be made at the reporting unit level. The Company has determined that each of its SBUs is a reporting unit. The reporting unit has the option to skip the qualitative test and move directly to completion of the quantitative process.

The qualitative approach can be used to evaluate if there are any indicators of impairment. Through this process, the reporting unit must determine if there is indication that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If it is determined that there is an indication of potential impairment, the reporting unit must complete the quantitative process. The quantitative approach is a two-step process. The first step is performed to identify potential impairment and, if necessary, the second step is performed for the purpose of measuring the amount of impairment, if any. Impairment is recognized only if the carrying amount is not recoverable from the discounted cash flows using a “market” rate and is measured as the difference between the carrying amount and the implied fair value. Other changes in the carrying amount of goodwill are primarily caused by foreign currency translation adjustments and acquisitions.

In August 31, 2015, the Company utilized a qualitative test in accordance with its accounting policy for all reporting units except for Liberty International, for which a quantitative test was being utilized due to the Venezuelan deconsolidation recognized during the year. There were no goodwill impairments recognized in 2015 or 2014.

121 Deferred Income Taxes The net deferred tax asset was $788 million and $569 million as of December 31, 2015 and December 31, 2014, net of a valuation allowance of $106 million and $138 million, respectively. Prior period amounts have been restated to reflect the 2015 adoption of ASU 2014-01 related to qualified affordable housing projects. The net increase in the Company’s net deferred income tax asset is primarily due to changes in net unrealized gains and losses on investments offset by the utilization of net operating losses. The decrease in the valuation allowance is primarily due to currency translation and revised income projections for certain foreign subsidiaries. Management believes it is more likely than not that the Company’s net deferred income tax asset will be realized based upon the Company’s ability and the likelihood of generating future taxable income.

The income tax provision is calculated under the liability method. Deferred income tax assets and liabilities are recorded based upon the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are net unrealized capital gains and losses on investments, insurance loss reserves, unearned premiums, deferred policy acquisition costs, employee benefits, net operating losses, intangibles, and fixed assets.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in millions):

Balance at December 31, 2014 ...... $182 Additions based on tax positions related to current year ...... 42 Additions for tax positions of prior years ...... 191 Reductions for tax positions of prior years ...... (152) Settlements ...... (3) Translation ...... (11) Balance at December 31, 2015 ...... $249

Included in the tabular roll forward of unrecognized tax benefits is interest and penalties in the amount of $34 million and $51 million as of December 31, 2015 and December 31, 2014, respectively.

Included in the balance at December 31, 2015, is $62 million related to tax positions that would impact the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in Federal, state, and foreign income tax expense. For the years ended December 31, 2015 and 2014, the Company recognized ($30) million and ($36) million of interest and penalties, respectively. The Company had $31 million and $59 million of interest and penalties accrued as of December 31, 2015 and December 31, 2014, respectively.

The IRS has completed its review of the Company’s United States Federal income tax returns through the 2007 tax year and is currently reviewing income tax returns for the 2008 through 2011 tax years. Any adjustments that may result from the IRS examinations of these income tax returns are not expected to have a material impact on the financial position, liquidity, or results of operations of the Company.

The Company believes that the range of reasonably possible changes to the balance of unrecognized tax benefits could decrease by $0 to $210 million within the next twelve months as a result of potential settlements with the IRS for prior years.

122 Pension and Postretirement Benefit Obligations The Company sponsors non-contributory defined benefit pension plans (the “Plans”) covering substantially all U.S. and Canadian employees. The benefits and eligibility are based on age, years of service, and the employee’s final average compensation, as more fully described in the Plans. Some foreign subsidiaries also sponsor defined benefit pension plans. In 2014, the Company added a new cash balance benefit formula for all eligible U.S. employees and froze credited service under the plan’s final average pay formula.

The Company sponsors non-qualified supplemental pension plans for selected highly compensated employees to restore the pension benefits they would be entitled to under the Company’s U.S. tax qualified, defined benefit pension plan had it not been for limits imposed by the Internal Revenue Code. The supplemental plans are unfunded.

The Company also provides certain postretirement healthcare and life insurance benefits covering substantially all U.S. and Canadian employees. In 2014, the Company’s U.S. postretirement medical and dental cost sharing arrangement changed to a defined contribution model with an annual dollar contribution amount based on age and years of eligible credited service. Life insurance benefits are based on a participant’s final compensation subject to the plan maximum. The postretirement plan is unfunded.

On an annual basis, the Company reviews the discount rate assumption used to determine the benefit obligations and the composition of various yield curves to ensure that the assumed discount rate reflects the Company’s best estimate of the rate of return inherent in a portfolio of high-quality debt instruments that would provide the cash flows necessary to settle the Company’s projected benefit payments. The discount rate assumption used to determine the benefit obligations was based on a yield curve approach where the cash flows related to the benefit plans’ liability stream were discounted at an interest rate specifically applicable to the timing of the cash flows. Prior to December 31, 2015, the process calculated the present value of these cash flows and determined the weighted average discount rate that produced the same present value of the future cash flows. The Company examines the portfolio of bonds taken into account for the yield curve determination in order to confirm the portfolio would provide the cash flows necessary to settle the Company’s projected benefit payments. Effective December 31, 2015, the discount rate assumption used to determine the benefit obligations is based on the yield curve where the cash flows related to the benefit plans’ liability stream are discounted using spot rates specifically applicable to the timing of the cash flows of each Plan. The spot rate change, which is accounted for as a change in estimate, has no impact on the pension benefit obligation as of December 31, 2015 or net periodic benefit costs recorded for the year.

In choosing the expected long-term rate of return on plan assets, the Company’s Retirement Board considered the historical returns of equity and fixed income markets in conjunction with current economic and financial market conditions.

123 YEARS ENDED DECEMBER 31, 2014 AND 2013 Executive Summary The following highlights do not address all of the matters covered in the other sections of Management’s Discussion & Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to the investing public. This summary should be read in conjunction with the other sections of Management’s Discussion & Analysis of Financial Condition and Results of Operations.

Year Ended December 31, 2014—Consolidated Results of Operations • Revenues for the year ended December 31, 2014 were $37.721 billion, an increase of $1.165 billion or 3.2% over the same period in 2013. • NWP for the year ended December 31, 2014 was $34.332 billion, an increase of $1.172 billion or 3.5% over the same period in 2013. • PTOI for the year ended December 31, 2014 was $2.710 billion, an increase of $631 million or 30.4% over the same period in 2013. • Catastrophe losses for the year ended December 31, 2014 were $1.606 billion, an increase of $344 million or 27.3% over the same period in 2013. • Discontinued operations, net of tax for the year ended December 31, 2014 were a loss of $35 million versus a gain of $170 million in the same period in 2013. • Net income attributable to LMGI for the year ended December 31, 2014 was $1.818 billion, an increase of $64 million or 3.6% over the same period in 2013. • During the year, the Company entered into the NICO Reinsurance Transaction with NICO. The NICO Reinsurance Transaction is accounted for as retroactive reinsurance in the Company’s GAAP Consolidated Financial Statements and resulted in a pre-tax loss of $128 million as of the effective date, which was included in the third quarter results. Subsequent to the effective date, the Company recorded $85 million of net A&E and workers compensation adverse development. Since the cumulative claims and claim adjustment expenses ceded (including the $85 million of adverse prior year development) have not exceeded the consideration paid, the Company was able to recognize $85 million of retroactive reinsurance benefit. See the Consolidated Results of Operations Section for additional details of the transaction. • The consolidated combined ratio before catastrophes1 and net incurred losses attributable to prior years2 for the year ended December 31, 2014 was 92.7%, an improvement of 2.4 points over the same period in 2013. Including the impact of catastrophes and net incurred losses attributable to prior years, the Company’s combined ratio for the year ended December 31, 2014 improved 2.1 points to 97.8%. • Cash flow provided by continuing operations for the year ended December 31, 2014 was $632 million, a decrease of $2.988 billion or 82.5% from the same period in 2013. The decrease reflects approximately $3.0 billion total consideration paid to fund the NICO Reinsurance Transaction.

124 Financial Condition as of December 31, 2014 • Total assets were $124.287 billion as of December 31, 2014, an increase of $3.004 billion or 2.5% over December 31, 2013. • Total equity was $20.304 billion as of December 31, 2014, an increase of $1.275 billion or 6.7% over December 31, 2013.

Consolidated Results of Operations The Company has identified consolidated PTOI and PTOI before partnerships, LLC and other equity method income as non-GAAP financial measures. PTOI is defined by the Company as pre-tax income excluding net realized gains, loss on extinguishment of debt, extraordinary items, discontinued operations, integration and other acquisition and realignment related costs and cumulative effects of changes in accounting principles. PTOI before partnerships, LLC and other equity method income is defined as PTOI excluding LP, LLC and other equity investment results recognized on the equity method and revenue and expenses from the production and sale of oil and gas. PTOI before partnerships, LLC and other equity method income and PTOI are considered by the Company to be appropriate indicators of underwriting and operating results and are consistent with the way the Company internally evaluates performance. Net realized gains and partnership, LLC and other equity method results are significantly impacted by both discretionary and economic factors and are not necessarily indicative of operating results, and the timing and amount of integration and other acquisition and realignment related costs and the extinguishment of debt are not connected to the management of the insurance and underwriting aspects of the Company’s business. Income taxes are significantly impacted by permanent differences. References to NWP represent the amount of premium recorded for policies issued during a fiscal period including audits, retrospectively rated premium related to loss sensitive policies, and assumed premium, less ceded premium. Assumed and ceded reinsurance premiums include premium adjustments for reinstatement of coverage when a loss has used some portion of the reinsurance provided, generally under catastrophe treaties (“reinstatement premium”). In addition, the majority of workers compensation premium is adjusted to the “booked as billed” method through the Corporate and Other segment. The Company believes that NWP is a performance measure useful to investors as it generally reflects current trends in the Company’s sale of its insurance products.

The Company’s discussions related to net income are presented on an after-tax GAAP basis. All other discussions are presented on a pre-tax GAAP basis, unless otherwise noted.

On July 17, 2014, the Company entered into the NICO Reinsurance Transaction with NICO, a subsidiary of Berkshire Hathaway Inc., on a combined aggregate excess of loss agreement for substantially all of the Company’s U.S. workers compensation (pre-2014 accident year) and A&E liabilities, attaching at approximately $12.5 billion of combined aggregate reserves, with an aggregate limit of $6.5 billion and sublimits of $3.1 billion for A&E liabilities and approximately $4.5 billion for certain workers compensation liabilities. At the closing of the NICO Reinsurance Transaction, but effective as of January 1, 2014, the Company ceded approximately $3.3 billion of existing liabilities under this retroactive reinsurance agreement. NICO will provide approximately $3.2 billion of additional aggregate adverse development cover. The Company paid NICO total consideration of approximately $3.0 billion. In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014. With respect to the ceded A&E business, NICO has been given authority to handle claims, subject to the Company’s oversight and control. With respect to the ceded workers compensation business, the Company will continue to handle claims. The NICO Reinsurance Transaction is accounted for as retroactive

125 reinsurance in the Company’s GAAP Consolidated Financial Statements and resulted in a pre-tax loss of $128 million as of the effective date, which was included in the third quarter results. Subsequent to the effective date, the Company recorded $85 million of net A&E and workers compensation adverse development. Since the cumulative claims and claim adjustment expenses ceded (including the $85 million of adverse prior year development) have not exceeded the consideration paid, the Company was able to recognize $85 million of retroactive reinsurance benefit. Once the aggregate of workers compensation and A&E development exceeds the original pre-tax loss, deferred gains will be recorded. Deferred gains are subsequently amortized into earnings over the period when underlying claims are settled.

On July 16, 2014, the Company purchased from Uni.Asia Capital Sdn Bhd its 68.09% stake in Uni.Asia for approximately $118 million. On September 8, 2014, the Company purchased 18,679,881 ordinary shares representing an additional 18.68% stake in Uni.Asia through a mandatory tender offer for approximately $32 million. As a result of these actions, the Company now owns 86.77% of Uni.Asia.

On June 12, 2014, the Company announced an agreement to purchase Hughes Insurance (the “Hughes Insurance Agreement”) in a transaction, which closed on July 1, 2015. Hughes Insurance offers motor, van, household, small-to-medium-enterprise commercial insurance and travel insurance with £60 million in gross written premium for the financial year ended March 31, 2014, making it the independent insurance broker with the largest amount of gross written premium in Northern Ireland for that year. Hughes Insurance has been reflected in the Consolidated Financial Statements since 2014.

On June 10, 2014, the Company consolidated its existing Group Benefits, A&H, and Individual Life operations into a new market segment in Commercial Insurance called Liberty Mutual Benefits. All prior periods have been restated to reflect the new market segment.

On April 1, 2014, the Company sold Summit to American Financial Group. The results of Summit are presented as Discontinued Operations on the accompanying Consolidated Statements of Income and are no longer included with Commercial Insurance. All prior periods have been restated to reflect the sale.

On February 21, 2014, the Argentina operations were sold by Liberty International Latin America Holdings LLC and Liberty UK and Europe Holdings Limited to LAFO S LLC and LAFT S LLC resulting in a net loss of $77 million. The results of the Argentina operations are presented as Discontinued Operations on the accompanying Consolidated Statements of Income and are no longer included with Liberty International. All prior periods have been restated to reflect the sale.

Since 2010 the Company’s Venezuela operations have met the requirements of hyperinflationary accounting whereby the reporting currency, the U.S. dollar, is the functional currency and the remeasurement of monetary assets and liabilities is recognized through the Consolidated Statements of Income.

In February 2013, the Finance Minister in Venezuela announced the devaluation of the VEF by 32% to VEF 6.3:1 from VEF 4.3:1 and the elimination of the Sistema de Transacciones con Titulos en Moneda Extranjera (SITME) rate.

In January 2014, the Venezuela government issued Exchange Agreement No. 25, which required the use of a secondary exchange auction system referred to as SICAD I that will be applied prospectively to certain transactions that previously were subject to the official rate. The National Center for Foreign Trade will be responsible for determining the sectors that will be allowed to buy U.S. dollars through the SICAD I auction. As SICAD I is an auction process, VEF to U.S. dollar fluctuated between January 31, 2014 (11.36:1) and December 31, 2014 (12.00:1).

126 On February 10, 2015, the Venezuelan government published changes to its foreign exchange controls, which now maintains a three-tiered system. The new exchange controls retained the CENCOEX, or “official” rate; however, the new exchange controls merged SICAD II into SICAD I, now referred to as SICAD. Additionally, the new exchange controls established the Marginal Foreign Exchange System (“SIMADI”), which is intended to be a free floating rate. As of September 30, 2015, the exchange rate of bolivars per U.S. dollar for CENCOEX, SICAD and SIMADI was 6.3, 13.5, and 198, respectively. The Company used the SICAD rate, consistent with promulgated guidance, to remeasure the Venezuelan operation’s financial statements.

Effective September 30, 2015, the Company determined it was appropriate to deconsolidate the Venezuelan subsidiaries and offer the Venezuelan operations for sale. The Company’s Venezuelan operations are classified as discontinued operations on the Company’s Consolidated Financial Statements. All prior periods have been revised to conform to this presentation.

127 (1) NWP—Consolidated Consolidated NWP by significant line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Private passenger automobile ...... $12,226 $11,718 Homeowners ...... 5,573 4,905 Specialty insurance ...... 3,205 2,685 Commercial multiple-peril ...... 1,958 2,204 Workers compensation—Voluntary ...... 2,078 2,479 Workers compensation—Involuntary ...... 114 138 Commercial automobile ...... 1,718 1,673 General liability ...... 1,353 1,366 Group disability and group life ...... 1,215 1,095 Global specialty reinsurance ...... 1,141 1,167 Commercial property ...... 858 871 Surety ...... 757 752 Individual life and A&H ...... 665 640 Global specialty inland marine ...... 442 614 Other1 ...... 1,029 853 Total NWP2 ...... $34,332 $33,160

1 Primarily includes NWP from allied lines and domestic inland marine. 2 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business.

Consolidated NWP by SBU was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Personal Insurance ...... $15,952 $14,934 Commercial Insurance ...... 9,032 9,081 Liberty International ...... 4,009 3,958 Global Specialty ...... 5,120 5,016 Corporate and Other ...... 219 171 Total NWP ...... $34,332 $33,160 Total NWP change ...... 3.5% Foreign exchange effect on NWP change ...... (0.5) NWP change excluding foreign exchange1 ...... 4.0%

1 Determined by assuming constant foreign exchange rates between periods.

128 Major drivers of NWP growth were as follows:

Years Ended December 31, $ Points 2014 2013 Change Attribution (dollars in millions) Total NWP1 ...... $34,332 $33,160 $1,172 3.5 Components of Growth: Domestic personal automobile ...... 9,671 9,166 505 1.5 Domestic homeowners ...... 5,480 4,960 520 1.6 Homeowners quota share ...... (140) (278) 138 0.4 Total domestic homeowners ...... 5,340 4,682 658 2.0 International local businesses (ex. foreign exchange)2 ...... 4,185 3,958 227 0.7 Specialty insurance (ex. foreign exchange)2 ...... 3,190 2,712 478 1.4 Global specialty reinsurance (ex. foreign exchange)2 ...... 1,135 1,167 (32) (0.1) Global specialty inland marine (ex. foreign exchange)2 ...... 440 614 (174) (0.5) Domestic workers compensation ...... 2,057 2,458 (401) (1.2) Domestic individual life and A&H ...... 538 513 25 0.1 Domestic group disability and group life ...... 1,000 895 105 0.3 Surety ...... 757 752 5 — Foreign exchange2 ...... (159) — (159) (0.5) Other commercial lines ...... 6,178 6,243 (65) (0.2) Total NWP ...... $34,332 $33,160 $1,172 3.5

1 NWP associated with internal reinsurance has been re-allocated to the appropriate lines of business. 2 Determined by assuming constant foreign exchange rates between periods.

Consolidated NWP by geographic distribution channels was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) U.S...... $27,502 $26,557 International1 ...... 6,830 6,603 Total NWP ...... $34,332 $33,160

1 Excludes domestically written business in Global Specialty’s LIU market segment.

NWP for the year ended December 31, 2014 was $34.332 billion, an increase of $1.172 billion over the same period in 2013. Significant changes by major line of business include:

• Private passenger automobile NWP increased $508 million. The increase primarily reflects rate and model year increases in Personal Insurance and growth in Liberty International due in part to acquisitions during the year. The year was further impacted by in-force growth in Personal Insurance.

• Homeowners NWP increased $668 million. The increase primarily reflects growth of policies in-force, rate and coverage increases in Personal Insurance, along with a reduction in premium ceded under a homeowners quota share treaty.

• Specialty insurance NWP increased $520 million. The increase primarily reflects new business growth and lower reinsurance ceded.

129 • Workers compensation—Voluntary NWP decreased $401 million. The decrease was due to exposure reductions partially offset by rate increases. • Global specialty inland marine NWP decreased $172 million. The decrease primarily reflects program changes.

More detailed explanations of the changes in NWP by line of business are included in the related discussion of financial results for each segment.

(2) Results of Operations—Consolidated Consolidated GAAP revenues, the major components of PTOI and a reconciliation of PTOI to net income were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $37,721 $36,556 PTOI before catastrophes, net incurred losses attributable to prior years, and partnerships, LLC and other equity method income ...... $ 3,714 $ 3,045 Catastrophes1 ...... (1,606) (1,262) Net incurred losses attributable to prior years: Asbestos & environmental ...... (113) (288) All other2 ...... 74 102 PTOI before partnerships, LLC and other equity method income ...... 2,069 1,597 Partnerships, LLC and other equity method income3 ...... 641 482 PTOI ...... 2,710 2,079 Net realized (losses) gains ...... (100) 248 Loss on extinguishment of debt ...... (34) (211) Pre-tax income ...... 2,576 2,116 Income tax expense ...... 747 515 Consolidated net income from continuing operations ...... 1,829 1,601 Discontinued operations, net of tax ...... (35) 170 Consolidated net income ...... 1,794 1,771 Less: Net (loss) income attributable to non-controlling interest ...... (24) 17 Net income attributable to LMGI ...... $ 1,818 $ 1,754 Cash flow provided by continuing operations ...... $ 632 $ 3,620

1 Catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Ireland floods, Hailstorm Ela, Cyclone Oswald, Central European floods, Alberta floods, German hailstorm, Hurricane Odile and Typhoon Fitow. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 Net of earned premium and reinstatement premium attributable to prior years of $8 million and $216 million for the years ended December 31, 2014 and 2013, respectively. Net of amortization of deferred gains on retroactive reinsurance of $3 million and $339 million for the years ended December 31, 2014 and 2013, respectively. Net of the impact of the NICO Reinsurance Transaction including the original loss of $128 million offset by the subsequent benefit of $85 million. 3 Partnerships, LLC and other equity method income includes LP, LLC and other equity method income within net investment income in the accompanying Consolidated Statements of Income and revenue and expenses from the production and sale of oil and gas.

130 PTOI for the year ended December 31, 2014 was $2.710 billion, an increase $631 million over the same period in 2013. The increase primarily reflects Personal Insurance premium growth, improved underwriting results in Commercial Insurance excluding catastrophes and net incurred losses attributable to prior years and more favorable net incurred losses attributable to prior years and lower valuation losses in other equity method investments, partially offset by higher current accident year catastrophe losses and higher depreciation, depletion, and amortization expenses related to Liberty Energy.

Revenues for the year ended December 31, 2014 were $37.721 billion, an increase of $1.165 billion over the same period in 2013. The major components of revenues are net premium earned, net investment income, net realized (losses) gains, and fee and other revenues.

Net premium earned for the year ended December 31, 2014 was $33.448 billion, an increase of $1.283 billion over the same period in 2013. The increase primarily reflects the premium earned associated with the changes in NWP previously discussed.

Net investment income for the year ended December 31, 2014 was $3.099 billion, an increase of $84 million over the same period in 2013. The increase was driven by lower valuation losses in other equity method investments. Additionally, the period reflects an increase in private equity IPO activity and strong financial performance in the underlying investments which was partially offset by a reduction in taxable and tax-exempt interest income due to lower investment yields.

Net realized (losses) gains for the year ended December 31, 2014 were ($100) million versus $248 million in the same period in 2013. The increase in net realized losses relates to impairments of direct investments in oil and gas wells of $128 million and equity gains recognized in 2013 that did not recur in 2014.

Fee and other revenues for the year ended December 31, 2014 were $1.274 billion, an increase of $146 million over the same period in 2013. The increase primarily reflects higher oil and gas revenues and fees associated with single premium whole policies, as well as servicing revenues due to higher third-party administrator fee income and higher commission revenue from service carrier operations.

Claims, benefits and expenses for the year ended December 31, 2014 were $35.111 billion, an increase of $882 million over the same period in 2013. The increase reflects losses and expenses consistent with business growth and higher current accident year catastrophe losses. Operating costs as a percentage of earned premium increased primarily driven by Liberty Energy activity (including production costs, depreciation, depletion and amortization).

Loss on extinguishment of debt for the year ended December 31, 2014 was $34 million, a decrease of $177 million from the same period in 2013. Fifty-nine million of debt at an interest rate of 10.75% was repurchased during the year, $1.050 billion of senior debt was issued with an interest rate of 4.85% and $390 million of debt matured.

Income tax expense on continuing operations for the year ended December 31, 2014 was $747 million, an increase of $232 million over the same period in 2013. The Company’s effective tax rate on continuing operations for the year ended December 31, 2014 was 29% compared to 24% for the same period in 2013. The increase in the effective tax rate for the year ended December 31, 2014 over 2013 was primarily due to greater pre-tax income in 2014, partially offset by a $60 million tax benefit related to the settlement of the 2002-2005 IRS exam. The Company’s effective tax rate on continuing operations differs from the U.S. Federal statutory rate of 35% principally due to tax-exempt investment income and settlement of the IRS exam.

Discontinued operations, net of tax for the year ended December 31, 2014 were a loss of $35 million, versus a gain of $170 million in the same period in 2013.

131 Net income attributable to LMGI for the year ended December 31, 2014 was $1.818 billion, an increase of $64 million over the same period in 2013.

Cash flow provided by continuing operations for the year ended December 31, 2014 was $632 million, a decrease of $2.988 billion from the same period in 2013. The decrease reflects funding of the NICO Reinsurance Transaction.

Consolidated combined ratios were as follows:

Years Ended December 31, 2014 2013 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 61.7% 64.2% Underwriting expense ratio ...... 31.0 30.8 Dividend ratio ...... — 0.1 Subtotal ...... 92.7 95.1 Catastrophes1 ...... 5.0 4.1 Net incurred losses attributable to prior years: Asbestos & environmental ...... 0.3 1.0 All other2 ...... (0.2) (0.3) Total combined ratio3 ...... 97.8% 99.9%

1 Catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Ireland floods, Hailstorm Ela, Cyclone Oswald, Central European floods, Alberta floods, German hailstorm, Hurricane Odile and Typhoon Fitow. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 Net of earned premium and reinstatement premium attributable to prior years and amortization of deferred gains on retroactive reinsurance. Net of the impact of the NICO Reinsurance Transaction. 3 The combined ratio, expressed as a percentage, is a measure of underwriting profitability. This measure should only be used in conjunction with, and not in lieu of, underwriting income and may not be comparable to other performance measures used by the Company’s competitors. The combined ratio is computed as the sum of the following property and casualty ratios: the ratio of claims and claim adjustment expense less managed care income to earned premium; the ratio to earned premium of insurance operating costs plus amortization of deferred policy acquisition costs less third-party administration income and fee income (primarily related to the Company’s involuntary market servicing carrier operations) and installment charges; and the ratio of policyholder dividends to earned premium. Provisions for uncollectible premium and reinsurance are not included in the combined ratio unless related to an asbestos and environmental commutation and certain other run-off.

The consolidated combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2014 was 92.7%, an improvement of 2.4 points over the same period in 2013. The change reflects a decrease in the claims and claim adjustment expense ratio primarily due to improvement in current accident year loss ratios in Commercial Insurance.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2014 was 97.8%, an improvement of 2.1 points over the same period in 2013. The change reflects the changes in the combined ratio previously discussed as well as favorable net incurred losses attributable to prior years, partially offset by higher catastrophe losses.

132 Results of Operations By Segment—Years Ended December 31, 2014 and 2013 Personal Insurance (1) NWP—Personal Insurance Personal Insurance NWP by market segment was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Personal Lines ...... $ 8,953 $ 8,384 Safeco ...... 6,999 6,550 Total NWP ...... $15,952 $14,934

Personal Insurance NWP by line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Private passenger automobile ...... $ 9,614 $ 9,120 Homeowners and other ...... 6,338 5,814 Total NWP ...... $15,952 $14,934

NWP for the year ended December 31, 2014 was $15.952 billion, an increase of $1.018 billion over the same period in 2013.

Private passenger automobile NWP for the year ended December 31, 2014 was $9.614 billion, an increase of $494 million over the same period in 2013. The increase reflects 0.7% growth in auto policies in-force as compared to December 31, 2013 as well as rate and model year increases.

Homeowners and other NWP for the year ended December 31, 2014 was $6.338 billion, an increase of $524 million over the same period in 2013. The increase reflects 1.7% growth in homeowners policies in-force as compared to December 31, 2013 as well as rate and coverage increases.

(2) Results of Operations—Personal Insurance Personal Insurance revenues and the major components of PTOI were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $16,124 $14,869 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 2,698 $ 2,380 Catastrophes1 ...... (977) (801) Net incurred losses attributable to prior years ...... (47) (248) PTOI ...... $ 1,674 $ 1,331

PTOI for the year ended December 31, 2014 was $1.674 billion, an increase of $343 million over the same period in 2013. The increase reflects growth in earned premium, lower net incurred losses attributable to prior

133 years, and a lower expense ratio. PTOI was also impacted by higher current accident year catastrophe losses due to a change in terms for an internal reinsurance treaty which covers severe storm catastrophe losses. The attachment point for the internal reinsurance treaty increased from $825 million in 2013 to $945 million in 2014.

Revenues for the year ended December 31, 2014 were $16.124 billion, an increase of $1.255 billion over the same period in 2013. The major components of revenues are net premium earned and net investment income.

Net premium earned for the year ended December 31, 2014 was $15.432 billion, an increase of $1.240 billion over the same period in 2013. The increase reflects the premium earned associated with the changes in NWP previously discussed.

Net investment income for the year ended December 31, 2014 was $569 million, an increase of $9 million over the same period in 2013. The increase was driven by a higher invested asset base partially offset by a lower investment yield.

Claims, benefits and expenses for the year ended December 31, 2014 were $14.450 billion, an increase of $912 million over the same period in 2013. The increase reflects increased catastrophes and business growth, partially offset by a decrease in incurred losses attributable to prior years.

Personal Insurance combined ratios were as follows:

Years Ended December 31, 2014 2013 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 60.3% 60.7% Underwriting expense ratio ...... 25.2 25.9 Subtotal ...... 85.5 86.6 Catastrophes1 ...... 6.3 5.6 Net incurred losses attributable to prior years ...... 0.3 1.7 Total combined ratio ...... 92.1% 93.9%

The Personal Insurance combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2014 was 85.5%, a decrease of 1.1 points from the same period in 2013. The decrease in the claims and claim adjustment expense ratio primarily reflects favorable loss experience in the homeowners line of business and claim adjustment expenses growing at a slower rate than premiums earned. The decrease in the underwriting expense ratio was driven by premium earned growing at a faster rate than overall expenses.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2014 was 92.1%, a decrease of 1.8 points from the same period in 2013. In addition to the changes in the combined ratio previously discussed, the year was impacted by a decrease in net incurred losses attributable to prior years. The decrease was partially offset by higher current accident year catastrophe losses due to an increase in the attachment point for an internal reinsurance treaty which covers severe storm catastrophe losses.

134 Commercial Insurance (1) NWP—Commercial Insurance Commercial Insurance NWP by market segment was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Business Insurance ...... $5,195 $5,315 National Insurance ...... 2,135 2,189 Liberty Mutual Benefits ...... 1,538 1,399 Other Commercial Insurance ...... 164 178 Total NWP ...... $9,032 $9,081

Commercial Insurance NWP by line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Commercial multiple-peril ...... $2,026 $2,017 Workers compensation—Voluntary ...... 1,896 2,230 Workers compensation—Involuntary ...... 114 138 Commercial automobile ...... 1,452 1,423 General liability ...... 1,226 1,091 Group disability and group life ...... 1,000 885 Commercial property ...... 780 783 Individual life and A&H ...... 538 514 Total NWP ...... $9,032 $9,081

NWP for the year ended December 31, 2014 was $9.032 billion, a decrease of $49 million from the same period in 2013. The decrease reflects lower workers compensation premiums due to exposure reductions partially offset by rate increases, new business growth, strong retention and rate increases across all other property-casualty lines of business as well as higher group benefits and structured settlement sales in individual life.

(2) Results of Operations—Commercial Insurance Commercial Insurance revenues and the major components of PTOI were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $11,106 $11,303 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 1,279 $ 889 Catastrophes1 ...... (325) (252) Net incurred losses attributable to prior years2 ...... 76 110 PTOI ...... $ 1,030 $ 747

135 2 Net of earned premium attributable to prior years of $16 million and ($10) million for the years ended December 31, 2014 and 2013, respectively. Net of amortization of deferred gains on assumed retroactive reinsurance of $2 million for the years ended December 31, 2014 and 2013, respectively.

PTOI for the year ended December 31, 2014 was $1.030 billion, an increase of $283 million over the same period in 2013. The increase was driven by decreased current accident year losses across most casualty lines of business, lower property losses and lower variable compensation costs. These items were partially offset by lower net investment income, higher current accident year catastrophe losses, less favorable development of prior accident year losses and higher information technology expenditures.

Revenues for the year ended December 31, 2014 were $11.106 billion, a decrease of $197 million from the same period in 2013. The major components of revenues are net premium earned, net investment income, net realized (losses) gains, and fee and other revenues.

Net premium earned for the year ended December 31, 2014 was $9.056 billion, a decrease of $208 million from the same period in 2013. The decrease reflects a decrease in NWP during the last half of 2013 primarily due to a decline in workers compensation premium, as well as the premium earned associated with the changes in NWP previously discussed.

Net investment income for the year ended December 31, 2014 was $1.524 billion, a decrease of $27 million from the same period in 2013. The decrease was primarily driven by lower investment yields.

Net realized (losses) gains for the year ended December 31, 2014 were ($8) million, versus $9 million in the same period in 2013.

Fee and other revenues for the year ended December 31, 2014 were $534 million, an increase of $55 million over the same period in 2013. The increase reflects fees associated with single premium whole life policies as well as higher third-party administrator fee income and higher commission revenue from servicing carrier operations. As a servicing carrier, the Company receives fee income for performing certain underwriting, claims and administrative services for all participating involuntary pool members.

Claims, benefits and expenses for the year ended December 31, 2014 were $10.084 billion, a decrease of $463 million from the same period in 2013. The decrease was driven by lower current accident year losses across most casualty lines of business, lower property losses, lower variable compensation costs and a more profitable business mix. These items were partially offset by an increase in growth-related expenses in Liberty Mutual Benefits, higher current accident year catastrophe losses, less favorable development of prior accident year losses and higher information technology expenditures.

136 Commercial Insurance combined ratios were as follows:

Years Ended December 31, 2014 2013 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 63.0% 69.4% Underwriting expense ratio ...... 33.3 32.7 Dividend ratio ...... 0.1 0.2 Subtotal ...... 96.4 102.3 Catastrophes1 ...... 4.4 3.2 Net incurred losses attributable to prior years2 ...... (1.0) (1.4) Total combined ratio ...... 99.8% 104.1%

The Commercial Insurance combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2014 was 96.4%, a decrease of 5.9 points from the same period in 2013. The decrease was driven by lower claims and claim adjustment expenses due to decreased current accident year losses across most casualty lines of business and lower property losses. The decrease was partially offset by higher underwriting expense ratio due to lower earned premium and higher information technology expenditures, partially offset by lower variable compensation costs.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2014 was 99.8%, a decrease of 4.3 points from the same period in 2013. The decrease reflects the improvements previously discussed, partially offset by higher current year catastrophe losses and less favorable development of prior accident year losses.

Liberty International (1) NWP—Liberty International Liberty International NWP by market segment was as follows:

Years Ended December 31, Change ex. 2014 2013 foreign exchange1 (dollars in millions) Latin America and Iberia ...... $2,822 $2,904 2.4% Emerging Europe ...... 509 458 10.8 Asia ...... 447 383 19.9 Large Emerging Markets ...... 230 213 14.6 Other ...... 1 — NM Total NWP ...... $4,009 $3,958 5.8%

1 Determined by assuming constant foreign exchange rates between periods.

137 Liberty International NWP by line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Private passenger automobile ...... $2,555 $2,552 Commercial automobile ...... 260 244 Homeowners ...... 233 223 Life and health ...... 342 327 Commercial property ...... 67 72 Other1 ...... 552 540 Total NWP ...... $4,009 $3,958

1 Premium related to other personal and commercial lines including personal accident, bonds, workers compensation, small and medium enterprise and marine and cargo lines of business.

NWP for the year ended December 31, 2014 was $4.009 billion, an increase of $51 million over the same period in 2013. Excluding the negative impact of foreign exchange driven by the strengthening of the U.S. dollar, the change reflects local currency growth across all segments including Latin America and Iberia due to an increase in private passenger auto business in Brazil, Emerging Europe driven by the Hughes Insurance Agreement in Ireland, Asia driven by the acquisition of Malaysia in the third quarter, and expansion in Large Emerging Markets. Further discussion of the Hughes Insurance Agreement and the Malaysia acquisition can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Consolidated Results of Operations—Notable Recent Developments—Other Events”.

(2) Results of Operations—Liberty International Liberty International revenues and the major components of pre-tax operating loss were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $4,317 $4,178 Mature operations and other1 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 68 $ 49 Emerging operations2 pre-tax operating loss before catastrophes and net incurred losses attributable to prior years ...... (129) (109) Catastrophes3 ...... (9) — Net incurred losses attributable to prior years ...... 48 29 Pre-tax operating loss ...... ($ 22) ($ 31)

1 Mature operations include Latin America and Iberia, and Asia. Other includes internal reinsurance and home office expenses. 2 Emerging operations include Emerging Europe and Large Emerging Markets. 3 Catastrophes include all current accident year catastrophe losses for the U.K. and Ireland floods. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums.

Pre-tax operating loss for the year ended December 31, 2014 was $22 million, a decrease of $9 million from the same period in 2013. The decrease reflects favorable private passenger auto severity in Brazil due to enhanced fraud controls and cost containment efforts, offset by unfavorable reserve development in Ireland as a

138 result of a change in discount rate used for future cost of care reserves and catastrophe losses due to the U.K. and Ireland floods which occurred in the first quarter of 2014.

Revenues for the year ended December 31, 2014 were $4.317 billion, an increase of $139 million over the same period in 2013. The primary components of revenues are net premium earned, net investment income and net realized investment gains.

Net premium earned for the year ended December 31, 2014 was $3.936 billion, an increase of $121 million over the same period in 2013. The increase reflects the premium earned associated with the local currency growth in NWP previously discussed, partially offset by the strengthening of the U.S. dollar.

Net investment income for the year ended December 31, 2014 was $280 million, an increase of $7 million over the same period in 2013.

Net realized investment gains for the year ended December 31, 2014 were $11 million, an increase of $2 million over the same period in 2013.

Claims, benefits and expenses for the year ended December 31, 2014 were $4.328 billion, an increase of $128 million over the same period in 2013. The increase reflects the acquisition of Malaysia, higher costs consistent with business growth in non-mature operations and unfavorable reserve development in Ireland as a result of a change in discount rate used for future cost of care reserves, and higher catastrophe losses due to the U.K. and Ireland floods, partially offset by favorable incurred losses attributable to prior years primarily driven by private passenger auto severity in Brazil.

Liberty International combined ratios were as follows:

Years Ended December 31, 2014 2013 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 66.1% 65.6% Underwriting expense ratio ...... 41.9 42.0 Subtotal ...... 108.0 107.6 Catastrophes1 ...... 0.2 — Net incurred losses attributable to prior years ...... (1.3) (0.8) Total combined ratio ...... 106.9% 106.8%

1 Catastrophes include all current accident year catastrophe losses for the U.K. and Ireland floods. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums.

The Liberty International combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2014 was 108.0%, an increase of 0.4 points over the same period in 2013. The increase includes a 0.5 points increase in the claims and claim adjustment expense ratio primarily due to fire and earthquake losses in Chile.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2014 was 106.9%, an increase of 0.1 points over the same period in 2013. The total combined ratio reflects the changes in the combined ratio previously discussed, as well as unfavorable reserve development in Ireland as a result of a change in discount rate used for future cost of care reserves and catastrophe losses related to the U.K. and Ireland floods.

139 Global Specialty (1) NWP—Global Specialty Global Specialty NWP by market segment was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) LSM...... $2,715 $2,622 LIU...... 1,533 1,586 LM Surety ...... 748 743 Other ...... 124 65 Total NWP ...... $5,120 $5,016 Total NWP change ...... 2.1% Foreign exchange effect on NWP change ...... 0.5 NWP change excluding foreign exchange1 ...... 1.6%

1 Determined by assuming constant foreign exchange rates between periods.

Global Specialty NWP by line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Specialty insurance ...... $2,780 $2,483 Reinsurance ...... 1,141 1,167 Surety ...... 757 752 Inland marine ...... 442 614 Total NWP ...... $5,120 $5,016

NWP for the year ended December 31, 2014 was $5.120 billion, an increase of $104 million over the same period in 2013. The increase was driven by growth in specialty insurance primarily driven by Syndicate 4472 due to new business, LMIE and LIU U.S. due to reinsurance program changes and new business partially offset by a decrease in reinsurance due to a competitive market and inland marine due to program changes.

(2) Results of Operations—Global Specialty Global Specialty revenues and the major components of PTOI were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $5,183 $5,127 PTOI before catastrophes and net incurred losses attributable to prior years ...... $ 660 $ 682 Catastrophes1 ...... (51) (102) Net incurred losses attributable to prior years2 ...... (72) (72) PTOI ...... $ 537 $ 508

140 1 Catastrophes include all current accident year catastrophe losses for severe storms in the U.S., U.K. and Ireland floods, Hailstorm Ela, Cyclone Oswald, Central European floods, Alberta floods, German hailstorm, Hurricane Odile and Typhoon Fitow. Catastrophe losses, where applicable, include the impact of accelerated earned catastrophe premiums and earned reinstatement premiums. 2 Net of earned premium and reinstatement premium attributable to prior years of $10 million and $27 million for the years ended December 31, 2014 and 2013, respectively.

PTOI for the year ended December 31, 2014 was $537 million, an increase of $29 million over the same period in 2013. The increase reflects lower catastrophe losses and favorable net investment income, partially offset with higher underwriting expenses.

Revenues for the year ended December 31, 2014 were $5.183 billion, an increase of $56 million over the same period in 2013. The major components of revenues are net premium earned and net investment income.

Net premium earned for the year ended December 31, 2014 was $4.835 billion, an increase of $52 million over the same period in 2013. The increase reflects the previously mentioned growth in NWP.

Net investment income for the year ended December 31, 2014 was $336 million, an increase of $24 million over the same period in 2013. The increase reflects a higher invested asset base partially offset by lower yields.

Claims, benefits and expenses for the year ended December 31, 2014 were $4.646 billion, an increase of $51 million over the same period in 2013. The increase reflects business growth, increased retention and higher underwriting expenses partially offset by favorable current year loss activity. The year was further impacted by favorable catastrophe losses.

Global Specialty combined ratios were as follows:

Years Ended December 31, 2014 2013 Combined ratio before catastrophes and net incurred losses attributable to prior years Claims and claim adjustment expense ratio ...... 59.1% 62.5% Underwriting expense ratio ...... 33.3 29.0 Dividend ratio ...... 0.2 0.2 Subtotal ...... 92.6 91.7 Catastrophes1 ...... 1.0 2.1 Net incurred losses attributable to prior years2 ...... 1.5 1.6 Total combined ratio ...... 95.1% 95.4%

The Global Specialty combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2014 was 92.6%, an increase of 0.9 points over the same period in 2013. The claims and claim adjustment expense and underwriting expense ratios in the inland marine line of business reflect favorable current year loss activity partially offset by higher underwriting expenses due to a change of terms and conditions on a program as well as other program changes. The change was further impacted by favorable Surety current year loss activity partially offset by Syndicate 4472, LMIE and LIU U.S. higher current year loss activity

141 as well as unfavorable underwriting expense due to LSM real estate cost associated with the move to a new building and higher LSM commissions driven by business mix.

Including the impact of catastrophes and net incurred losses attributable to prior years, the total combined ratio for the year ended December 31, 2014 was 95.1%, a decrease of 0.3 points from the same period in 2013. The decrease was primarily driven by favorable catastrophe losses, partially offset with the change to the combined ratio previously discussed.

Corporate and Other (1) Overview—Corporate and Other Corporate and Other includes the following significant items: • Certain internal discontinued operations composed of: asbestos, environmental, and toxic tort exposures, the run-off of certain Commercial Insurance business, the run-off of the California workers compensation business of Golden Eagle Insurance Corporation, and certain distribution channels related to Prudential Property and Casualty Insurance Company, Prudential General Insurance Company and Prudential Commercial Insurance Company and Liberty Re annuity business. • Cessions related to certain retroactive reinsurance agreements, including the NICO Reinsurance Transaction. • Effective January 1, 2014, Corporate and Commercial Insurance novated their voluntary and involuntary reinsurance treaties that applied to certain pre-2013 workers compensation claims and entered into two new agreements including: (1) certain pre-2014 voluntary workers compensation claims and, (2) certain pre-2014 involuntary workers compensation claims. • Interest expense on the Company’s outstanding debt. • Certain risks of its SBUs that the Company reinsures as part of its risk management program, and risks on Personal Insurance homeowners business covered by the externally ceded homeowners quota share reinsurance treaty. • The Company reports its written premium on workers compensation contracts on the “booked as billed” method. Commercial Insurance reports workers compensation written premium on the “booked at inception” method. Corporate and Other results reflect the difference between these two methods. • The Company discounts the long-term indemnity portion of its settled unpaid workers compensation claims at risk-free discount rates. Commercial Insurance reports its discount based on statutory discount rates. Corporate and Other results reflect the difference between the statutory and risk-free rate. • Costs associated with certain long-term compensation plans and other corporate costs not fully allocated to the SBUs. • For presentation in this Offering Memorandum, domestic property and casualty operations’ investment income is allocated to the business units based on planned ordinary investment income returns by investment category. The difference between allocated net investment income and actual net investment income is included in Corporate and Other. • Income related to LP, LLC and other equity method investments. • Fee and other revenues include revenues from certain wholly owned non-insurance subsidiaries, primarily Liberty Energy. Liberty Energy generates revenue from the production and sale of oil and gas and related LP, LLC and other equity method investments. • Certain retroactive reinsurance agreements, most of which were commuted during 2013.

142 Corporate and Other NWP by line of business was as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Reinsurance, net ...... $152 $ 82 Workers compensation—Voluntary1 ...... 67 89 Total NWP ...... $219 $171

1 Booked as billed adjustment.

NWP for the year ended December 31, 2014 was $219 million, an increase of $48 million over the same period in 2013. The increase was driven by a change in terms related to a homeowners quota share treaty covering Personal Insurance homeowners business including a return of premium in the fourth quarter of 2013. The year was partially offset by a decrease in premium related to certain pre-2014 involuntary workers compensation business assumed from Commercial Insurance and the Company’s workers compensation “booked as billed” adjustment.

(2) Results of Operations—Corporate and Other Corporate and Other revenues and the major components of pre-tax operating loss were as follows:

Years Ended December 31, 2014 2013 (dollars in millions) Revenues ...... $991 $1,079 Pre-tax operating loss before catastrophes, net incurred losses attributable to prior years, and partnerships, LLC and other equity method income ...... ($862) ($846) Catastrophes1 ...... (244) (107) Net incurred losses attributable to prior years: Asbestos & environmental ...... (113) (288) All other2 ...... 69 283 Pre-tax operating loss before partnerships, LLC and other equity method income ..... (1,150) (958) Partnerships, LLC and other equity method income3 ...... 641 482 Pre-tax operating loss ...... ($509) ($476)

Pre-tax operating loss for the year ended December 31, 2014 was $509 million, an increase of $33 million over the same period in 2013. The increase was driven by higher depreciation, depletion, and amortization

143 expenses related to Liberty Energy and higher catastrophe losses partially offset by lower valuation losses in other equity method investments, reduced reinsurance costs due to a change in terms and lower employee pension expenses. The year was further impacted by higher unfavorable net incurred losses attributable to prior years (primarily due to the commutation of certain workers compensation retroactive reinsurance agreements in 2013 that did not recur partially offset by lower unfavorable A&E loss development and less certain pre-2014 workers compensation business assumed from Commercial Insurance).

Revenues for the year ended December 31, 2014 were $991 million, a decrease of $88 million from the same period in 2013. The major components of revenues are net premium earned, net investment income, net realized (losses) gains, and fee and other revenues.

Net premium earned for the year ended December 31, 2014 was $189 million, an increase of $78 million over the same period in 2013. The increase was driven by a reduction in ceded premium due to a change in terms on the homeowners quota share treaty covering Personal Insurance homeowners effective December 31, 2013. The increase was partially offset by lower earned but not reported development on certain pre-2014 workers compensation business assumed from Commercial Insurance.

Net investment income for the year ended December 31, 2014 was $390 million, an increase of $71 million over the same period in 2013. The increase was driven by an increase in private equity IPO activity and strong financial performance in the underlying investments in the first nine months of 2014, as well as lower valuation losses in other equity method investments.

Net realized (losses) gains for the year ended December 31, 2014 were ($103) million versus $206 million in the same period in 2013. The increase in net realized losses relates to impairments of direct investments in oil and gas wells of $128 million and equity gains recognized in 2013 that did not recur in 2014.

Fee and other revenues for the year ended December 31, 2014 were $515 million, an increase of $72 million over the same period in 2013. The increase reflects overall higher oil and gas revenues due to increased production.

Claims, benefits and expenses for the year ended December 31, 2014 were $1.603 billion, an increase of $254 million over the same period in 2013. The increase was driven by a lower ceding percentage on the homeowners quota share treaty due to a change in terms, higher depreciation, depletion, and amortization expenses related to Liberty Energy and higher catastrophe losses partially offset by lower employee pension expenses. The increase was further impacted by higher unfavorable net incurred losses attributable to prior years (primarily due to the commutation of certain workers compensation retroactive reinsurance agreements in 2013 that did not recur partially offset by lower unfavorable A&E loss development and less certain pre-2014 workers compensation business assumed from Commercial Insurance).

144 Some policyholders have asserted that their claims for asbestos-related insurance are not subject to aggregate limits on coverage and that each individual bodily injury claim should be treated as a separate occurrence under the policy. The Company expects these trends to continue. It is difficult to predict whether policyholders will be successful on one or both issues or whether the Company will be successful in asserting its defenses. To the extent either of these issues are resolved in the policyholders’ favor, the Company’s coverage obligations under the policies at issue would be materially increased. Accordingly, it is difficult to predict the ultimate size of the claims for coverage not subject to aggregate limits.

In addition, proceedings have been launched in a few jurisdictions directly against insurers, including the Company, challenging insurers’ conduct in respect of asbestos claims, including in some cases with respect to previous settlements. Particularly in light of jurisdictional issues, it is difficult to predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain these actions against insurers based on novel legal theories of liability. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves.”

Because each policyholder presents different liability and coverage issues, the Company generally evaluates the exposure presented on a policyholder basis. In the course of this evaluation the Company considers: the specific nature of the allegations contained within the lawsuit; available insurance coverage, including the role of any umbrella or excess insurance the Company has issued to the policyholder; limits and deductibles; an analysis of the policyholder’s potential liability; the jurisdictions involved; past and anticipated future claim activity and loss development on pending claims; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; the role of any asbestos-related bankruptcies and applicable coverage defenses or determinations, if any, including the determination as to whether or not the asbestos claims are products/ completed operation claims subject to an aggregate limit and the available coverage, if any, for those claims. Once the gross ultimate exposure for indemnity and related claim adjustment expense is determined for each policyholder by each policy year, the Company calculates a ceded reinsurance projection based on any applicable facultative and treaty reinsurance, as well as past ceded experience. Adjustments to the ceded projections also occur due to actual ceded claim collection experience. Conventional actuarial methods are not utilized to establish asbestos reserves.

In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded A&E unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. A&E unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 million including: $83 million of asbestos reserves, primarily associated with increased defense costs, and $28 million of pollution reserves.

The Company’s financial exposure to Tier I and Tier II major asbestos defendants (which the Company defines as asbestos manufacturers and producers in litigation) is limited to one policyholder, which is subject to a structured settlement agreement where the Company’s financial obligations are fixed.

The Company has been in coverage litigation with Kentile, a former manufacturer of floor tile products, some of which contained asbestos, since 2008. In November 1992, Kentile filed a voluntary petition for bankruptcy relief under Chapter 11 (Reorganization) of the Bankruptcy Code in the U.S. Bankruptcy Court for

145 the Southern District of New York, and Metex emerged from the Chapter 11 Bankruptcy proceeding as the “Reorganized Debtor.” On November 9, 2012, Metex filed for bankruptcy protection under Chapter 11 in the U.S. Bankruptcy Court for the Southern District of New York, staying all coverage litigation with LMIC and all other insurance carriers.

Prior to the most recent bankruptcy filing, Metex reached agreement with each of Kentile’s insurance carriers. On June 19, 2014, the Bankruptcy Court confirmed Metex’s proposed Plan of Reorganization, under which each of the Settlement Agreements is approved. The U.S. District Court subsequently affirmed the Kentile confirmation order, and the Company’s obligations with respect to Kentile became fully finalized as of September 3, 2014. The Company issued its first payment of $33.75 million to the bankruptcy trust on October 1, 2014; a final payment of $25 million is due no later than October 1, 2017. In the opinion of management, outside of the current bankruptcy process, the outcome of these pending matters would be difficult to predict and an adverse outcome could have a material adverse effect on the Company’s business, financial condition, and results of operations.

As of December 31, 2014 and 2013, the Company’s unpaid claims and claim adjustment expense reserves, net of associated reinsurance recoverables, included $1.225 billion and $1.329 billion respectively, for asbestos and environmental-related claims.

Net asbestos losses paid in 2014 and 2013 were $169 million and $128 million, respectively. The Company incurred $89 million and $236 million of asbestos reserves, net of change in allowance for doubtful accounts during the years ended December 31, 2014 and 2013, respectively.

See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure for A&E claims and related litigation is unique and very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves” and “—Uncertainty Regarding Adequacy of A&E Reserves” below.

Upon their de-affiliation from the Nationwide Group and affiliation with LMIC, EICOW, Wausau Business Insurance Company, Wausau General Insurance Company and Wausau Underwriters Insurance Company entered into reinsurance contracts whereby NIC assumed full responsibility for obligations on certain policies with effective dates prior to January 1, 1986, including all A&E exposures. The reinsurance recoverable is guaranteed by Nationwide Mutual Insurance Company. As of December 31, 2014, the net reinsurance recoverable from NIC relating to asbestos losses was $1.309 billion.

In addition to the previously referenced reinsurance recoverable from NIC, the Company has significant ceded reinsurance exposure to a number of other reinsurers. The Company has established an allowance against a portion of its A&E related reinsurance recoverables. As of December 31, 2014, the allowance relating to reinsurance on unpaid asbestos losses was $23 million. The Company believes this allowance reflects current adverse reinsurer positions and their effect on future liabilities.

Environmental Claims and Litigation The Company continues to receive claims from policyholders arising out of the alleged disposal of hazardous substances. Environmental claims are primarily due to various legislative and regulatory efforts aimed at environmental remediation. The discussion of environmental claims in this section does not include toxic torts. For instance, CERCLA, enacted in 1980 and later amended, enables private parties as well as federal and state governments to take action with respect to releases and threatened releases of hazardous substances. This federal statute obligates responsible parties to develop and implement remediation plans or reimburse the costs of remediation. The law also allows for the recovery of natural resources damages from liable parties. Liability under CERCLA may be joint and several with other responsible parties.

146 The Company has been and continues to be involved in coverage litigation pertaining to environmental claims. The Company believes that several court decisions have interpreted the insurance coverage to be broader than the original intent of the insurers and policyholders. These decisions generally pertain to insurance policies that were issued by the Company prior to the mid-1970s. These decisions continue to be inconsistent and vary from jurisdiction to jurisdiction.

The Company establishes reserves for environmental claims on a claim-by-claim basis where coverage is not in dispute. In addition to claim-by-claim reserves, the Company carries an aggregate bulk reserve for all environmental claims that are in a coverage dispute until the dispute is resolved. This bulk reserve covers adverse development on “covered” claims, reserves for claims in which coverage is disputed and future unreported claims. The bulk reserve is established and adjusted based upon the aggregate volume of in-process environmental claims and the Company’s experience in resolving those claims. At December 31, 2014, approximately 52% of the net environmental reserve (approximately $155 million) was carried in a bulk reserve. The balance, approximately 48% of the net environmental reserves (approximately $145 million), consists of case reserves for known claims not in dispute. As of December 31, 2013, approximately 54% of the net environmental reserve (approximately $173 million) was carried in a bulk reserve and includes a reserve for losses for which the Company has not received any specific claims as well as for the anticipated costs of litigation relating to these claims. The balance, approximately 46% at December 31, 2013, of the net environmental reserve (approximately $151 million) consists of case reserves for known claims not in dispute.

147 The duration of the Company’s investigation and review of any claims and the amount of time necessary to determine an appropriate estimate, if any, of the value of the claim to the Company, vary significantly and are dependent upon a number of factors. These factors include the cooperation of the policyholder in providing claim information, the pace of underlying litigation or claim processes and the willingness of the policyholder to negotiate, if appropriate, a resolution of any dispute pertaining to these claims. Based upon the Company’s experience in resolving these claims, the duration may vary from several months to several years.

At December 31, 2014 and 2013, the number of policyholders with pending coverage litigation disputes pertaining to environmental claims was 53 and 56, respectively. During 2014, there were 11 newly initiated coverage disputes with the Company, while in 2013 there were 21. The Company’s review of policyholders tendering claims for the first time has indicated that they are lower in severity. More specifically, policyholders are smaller in size and have fewer sites. In addition, site analysis and clean-up technologies are improving, which is resulting in greater efficiency and lower costs.

In the third quarter of 2014, the Company performed a comprehensive internal review of its environmental reserves, resulting in an increase to reserves of $28 million.

As of December 31, 2014 and 2013, the Company’s unpaid claims and claim adjustment expense reserves, net of associated reinsurance recoverables, included $300 million and $324 million, respectively, for environmental-related claims.

Net environmental losses paid in 2014 and 2013 were $52 million and $47 million, respectively. The Company incurred $28 million and $61 million of environmental reserves before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2014 and 2013, respectively.

Uncertainty Regarding Adequacy of A&E Reserves As a result of the processes and procedures described above, the Company believes that the carried reserves for A&E claims as of December 31, 2014 were appropriate based upon known facts and current law. However, the process of establishing reserves for A&E claims is subject to greater uncertainty than the establishment of reserves for liabilities relating to other types of insurance claims. The uncertainties surrounding the resolution of all of these claims continue, and it is presently not possible to estimate the ultimate exposure for A&E claims and related litigation. As a result, the reserves are subject to revision as new information becomes available. The continuing uncertainties include the lack of available and reliable historical claims data as an indicator of future loss development, the long waiting periods between exposure and manifestation of bodily injury or property damage, the difficulty in identifying the source of A&E contamination, the risks and lack of predictability inherent in major litigation, any impact from the bankruptcy protection sought by various asbestos producers and other asbestos litigation defendants, a further increase or decrease in the nature and volume of asbestos claims which cannot now be anticipated, the application and exhaustion of coverage limits, the resolution or adjudication of some disputes pertaining to the amount of available coverage for A&E claims in a manner inconsistent with the Company’s previous assessment of these claims, the number and outcome of direct actions against the Company and future developments pertaining to the Company’s ability to recover reinsurance for A&E claims. It is also not possible to predict changes in the legal, economic, regulatory and legislative environments and their impact on the future development of A&E claims. This development also will be affected by future court decisions and interpretations. The uncertainties associated with establishing reserves for A&E claims and claim adjustment expenses are compounded by the differing, and at times inconsistent, court rulings on A&E coverage issues involving: (i) the differing interpretations of various insurance policy provisions and whether A&E losses are, or were ever intended to be, covered; (ii) when the loss occurred and what policies provide coverage; (iii) whether there is an insurer obligation to defend; (iv) whether a compensable loss or injury has occurred; (v) whether lung cancer claims can be attributable to A&E; (vi) how policy limits are determined;

148 (vii) how policy exclusions are applied and interpreted; (viii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities; (ix) whether clean-up costs are covered as insured property damage and (x) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products or completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. It is also difficult to predict the ultimate outcome of large coverage disputes until settlement negotiations near completion and significant legal questions are resolved or, failing settlement, until the dispute is adjudicated. This is particularly the case with, but not limited to, policyholders in bankruptcy where negotiations often involve a large number of claimants and other parties and require court approval to be effective. See “Risk Factors—Risk Factors Relating to the Company’s Business and the Insurance Industry—The Company’s business could be harmed because its potential exposure to A&E claims and related litigation is very difficult to predict, and the Company’s ultimate liability may exceed its currently recorded loss reserves.”

Investments General The Company’s investment strategy seeks long-term returns through disciplined security selection, portfolio diversity and an integrated approach to risk management. The Company selects and monitors investments to balance the goals of safety, stability, liquidity, growth and after-tax total return with its need to comply with regulatory investment requirements. A relatively safe and stable income stream is achieved by maintaining a broadly based portfolio of investment grade bonds. These holdings are supplemented by investments in additional asset types with the objective of further enhancing the portfolio’s diversification and expected returns. These additional asset types include commercial mortgages and other real estate financing investments, non- investment grade bonds, including leveraged loans, common and preferred stock, private equity and direct investments in natural resource ventures. Risk management is accomplished through asset liability management (including both interest rate risk and foreign currency risk), diversification, credit limits and a careful analytical review of each investment decision.

The Company’s investment policy and strategy are reviewed and approved by the Investment Committee of LMHC’s Board of Directors, which meets on a regular basis to review and consider investment activities, tactics and new investment classes. In addition, the Company predominantly uses a subsidiary investment adviser for managing and administering the investment portfolios of its domestic and foreign insurance operations.

149 Invested Assets (including cash and cash equivalents) The following table summarizes the Company’s invested assets by asset category as of December 31, 2014 and 2013:

As of December 31, 2014 As of December 31, 2013 Carrying %of Carrying %of Value Total Value Total (dollars in millions) Fixed maturities, available for sale, at fair value . . . $63,176 80.9% $62,977 81.7% Equity securities, available for sale, at fair value . . 3,145 4.0 2,952 3.8 LP, LLC and other equity method investments .... 4,752 6.1 4,433 5.8 Commercial mortgage loans ...... 1,808 2.3 1,583 2.1 Short-term investments ...... 626 0.8 393 0.5 Other investments ...... 621 0.8 473 0.6 Cash and cash equivalents ...... 4,003 5.1 4,264 5.5 Total invested assets ...... $78,131 100.0% $77,075 100.0%

Total invested assets as of December 31, 2014 were $78.131 billion, an increase of $1.056 billion or 1.4% over December 31, 2013. The increase reflects new investments and strong market performance in LP and LLC, new commercial mortgage loan investments, and an increase in fixed maturity unrealized gains related to lower treasury yields and spread tightening. This was partially offset by sales of fixed maturities for funding of the NICO Reinsurance Transaction.

Fixed maturities as of December 31, 2014 were $63.176 billion, an increase of $199 million or 0.3% over December 31, 2013. The increase reflects unrealized gains related to lower treasury yields and spread tightening, partially offset by sales of fixed maturities for funding of the NICO Reinsurance Transaction. As of December 31, 2014, included in fixed maturities are commitments to purchase various residential mortgage- backed securities at a cost and fair value of $193 million, and various corporate and municipal securities at a cost and fair value of $27 million.

Equity securities available for sale as of December 31, 2014 were $3.145 billion ($2.790 billion common stock and $355 million preferred stock) versus $2.952 billion as of December 31, 2013 ($2.625 billion common stock and $327 million preferred stock), an increase of $193 million or 6.5% over December 31, 2013. Of the $2.790 billion of common stock at December 31, 2014, $437 million relates to securities associated with non- guaranteed unit linked products where the policyholder bears the investment risk. The increase in total equity securities available for sale was primarily due to strong equity market performance.

Investments in LP, LLC and other equity method investments as of December 31, 2014 were $4.752 billion, an increase of $319 million or 7.2% over December 31, 2013. These investments consist of traditional private equity partnerships of $2.011 billion, natural resources partnerships of $827 million ($590 million related to energy investments), real estate partnerships of $606 million, other partnerships of $1.048 billion, and other equity method investments of $260 million ($258 million of which is related to natural resources). The increase reflects net improved valuations and new investments offset by distributions received. The Company’s investments in LP and LLC are long-term in nature. The Company believes these investments offer the potential for superior long-term returns and are appropriate in the overall context of a diversified portfolio.

Commercial mortgage loans as of December 31, 2014 were $1.808 billion (net of $14 million of loan loss reserves or 0.76% of the outstanding loan portfolio), an increase of $225 million or 14.2% over December 31, 2013. The increase primarily reflects $365 million in funding, partially offset by $142 million in principal reductions. The entire commercial loan portfolio is U.S. based. As of December 31, 2014, the average total loan

150 size was $2 million and the average loan participation size was less than $1 million. The number of loans in the portfolio increased from 4,211 at December 31, 2013 to 4,509 at December 31, 2014. Approximately 85% of the loans are full or partial recourse to borrowers.

Short-term investments as of December 31, 2014 were $626 million, an increase of $233 million or 59.3% over December 31, 2013. The increase reflects additional investments in short-term holdings across the Company’s International operations.

Cash and cash equivalents as of December 31, 2014 were $4.003 billion, a decrease of $261 million or 6.1% from December 31, 2013. The decrease was primarily related to net cash used in investing activities, partially offset by cash flows from operating activities.

As of December 31, 2014, the Company had unfunded commitments in traditional private equity partnerships, natural resources, real estate, and other of $1.355 billion, $2.736 billion ($2.708 billion in energy investments), $837 million, and $799 million, respectively. Unfunded energy investment commitments as of December 31, 2014 were $2.708 billion. Of this, $679 million and $2.029 billion were related to natural resources partnerships and direct investments in oil and gas wells, respectively. The majority of energy commitments were subject to contractual price floors. If certain price targets are not met, the Company is not required to fund these investments until pricing improves.

Regarding fair value measurements, as of December 31, 2014, excluding separate accounts and other assets, the Company reflected $5.120 billion (7.6%) as level 1 (quoted prices in active markets) primarily consisting of U.S. Treasuries and common equity securities. The majority of the Company’s invested assets are reported as level 2 (quoted prices from other observable inputs). As of December 31, 2014 the Company reported $61.287 billion (90.8%) as level 2, consisting primarily of various fixed maturity securities. Finally, the Company reported $1.102 billion (1.6%) as level 3 (unobservable inputs), primarily consisting of international and privately held securities for which a market price is not readily observable.

As of December 31, 2014, no single issuer, excluding U.S. Treasuries, agency securities and mortgage-backed securities, accounted for more than 0.9% of invested assets. As of December 31, 2014, investments in the energy sector accounted for $3.235 billion or 4.1% of total invested assets. These investments consist of investment grade bonds of $2.115 billion, bonds that were rated below investment grade of $280 million, publicly traded equity securities of $177 million, natural resources partnerships of $590 million and other investments of $73 million. In addition, the Company has direct investments in oil and gas wells of $1.636 billion which are included in other assets on the Consolidated Balance Sheets.

151 The following tables summarize the Company’s available for sale portfolio by security type as of December 31, 2014 and 2013:

As of December 31, 2013 Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (dollars in millions) U.S. government and agency securities ...... $ 2,938 $ 161 ($ 28) $ 3,071 Residential MBS ...... 8,404 272 (102) 8,574 Commercial MBS ...... 1,729 22 (34) 1,717 Other MBS and ABS ...... 2,291 63 (48) 2,306 U.S. state and municipal ...... 13,964 680 (283) 14,361 Corporate and other ...... 26,457 1,262 (353) 27,366 Foreign government securities ...... 5,464 174 (56) 5,582 Total fixed maturities ...... 61,247 2,634 (904) 62,977 Common stock ...... 2,122 524 (21) 2,625 Preferred stock ...... 386 18 (77) 327 Total equity securities ...... 2,508 542 (98) 2,952 Total securities available for sale ...... $63,755 $3,176 ($1,002) $65,929

152 The following table summarizes the Company’s mortgage and asset-backed fixed maturity portfolio by credit quality1 as of December 31, 2014:

As of December 31, 2014 Bor %of AAA AA A BBB BB Lower Total Total (dollars in millions) SBA loans ...... $ 2,245 $— $— $— $— $— $ 2,245 17.8% GNMA residential mortgage ...... 3,556 5 — — — — 3,561 28.3 FNMA residential mortgage ...... 2,335 ————— 2,335 18.5 FHLMC residential mortgage ...... 1,959 ————— 1,959 15.5 Non-agency residential mortgage ...... 21 10 4 2 21 265 323 2.6 Commercial MBS ...... 1,423 14 26 47 — — 1,510 12.0 Non-mortgage ABS ...... 418 — 55 188 3 8 672 5.3 Total ...... $11,957 $ 29 $ 85 $237 $ 24 $273 $12,605 100.0% % of Total ...... 94.9% 0.2% 0.7% 1.9% 0.2% 2.1% 100.0%

1 For purposes of this disclosure, credit quality is primarily based upon average credit ratings.

Approximately 80% of the Company’s mortgage and asset-backed fixed maturity portfolio is explicitly backed by the U.S. government (SBA and GNMA) or by government-sponsored entities (FNMA and FHLMC). Approximately 95% of the holdings are rated AAA. The commercial mortgage-backed securities portfolio is well diversified and of high quality with approximately 94% rated AAA.

The following table summarizes the Company’s allocation of fixed maturities by credit quality1 as of December 31, 2014 and 2013:

As of December 31, 2014 As of December 31, 2013 Fair %of Fair %of Value Total Value Total (dollars in millions) AAA...... $20,987 33.2% $21,112 33.6% AA+, AA, AA- ...... 10,982 17.4 11,337 18.0 A+,A,A-...... 15,660 24.8 14,611 23.2 BBB+, BBB, BBB- ...... 11,909 18.9 12,110 19.2 Total investment grade ...... 59,538 94.3 59,170 94.0 BB+, BB, BB- ...... 1,476 2.3 1,562 2.5 B+,B,B-...... 1,605 2.5 1,556 2.4 CCC or lower ...... 557 0.9 689 1.1 Total below-investment grade ...... 3,638 5.7 3,807 6.0 Total fixed maturities ...... $63,176 100.0% $62,977 100.0%

1 For purposes of this disclosure, credit quality is primarily based upon average credit ratings.

The Company’s allocation to investment grade (fixed maturities with an average credit rating of BBB- or higher) securities was approximately 94% at December 31, 2014, slightly higher than December 31, 2013. The Company’s allocation to below-investment grade (fixed maturities with an average credit rating below BBB-) securities was approximately 6% at December 31, 2014, slightly lower than December 31, 2013.

153 The Company’s holdings of below investment grade securities primarily consist of an actively managed diversified portfolio of high yield securities and leveraged loans within the domestic insurance portfolios and investments in emerging market sovereign and corporate debt primarily in support of the Company’s international insurance operations. Overall, the average credit quality rating stands at AA- as of December 31, 2014.

The following table summarizes available for sale fixed maturity securities by contractual maturity at December 31, 2014 and 2013. Actual maturities may differ from contractual maturities because certain securities may be called or prepaid with or without call or prepayment penalties. Due to the potential for prepayment on MBS and ABS, they are not categorized by contractual maturity:

As of December 31, 2014 As of December 31, 2013 Fair %of Fair %of Value Total Value Total (dollars in millions) One year or less ...... $ 3,460 5.5% $ 3,486 5.5% Over one year through five years ...... 17,009 26.9 18,442 29.3 Over five years through ten years ...... 17,327 27.4 16,753 26.6 Over ten years ...... 12,775 20.2 11,699 18.6 MBSandABS...... 12,605 20.0 12,597 20.0 Total fixed maturities ...... $63,176 100.0% $62,977 100.0%

During 2014, after taking into consideration changes in investment opportunities and its view of the current and prospective business and economic environment, the Company has made only minor adjustments to the average duration of its investment portfolio.

Net Investment Income The following table summarizes the Company’s net investment income for the years ended December 31, 2014 and 2013:

Years Ended December 31, 20141 20131 (dollars in millions) Taxable interest income ...... $2,109 $2,148 Tax-exempt interest income ...... 399 443 Dividends ...... 74 65 LP, LLC and other equity method income ...... 574 450 Commercial mortgage loans ...... 93 91 Other investment income ...... 12 13 Gross investment income ...... 3,261 3,210 Investment expenses2 ...... (148) (135) Net investment income ...... $3,113 $3,075

1 The above contains net investment income attributable to discontinued operations related to Summit and the Argentina operations of $14 million and $60 million for the years ended December 31, 2014 and 2013, respectively. 2 Fees paid to external managers are included within the components of gross investment income.

154 Net investment income for the year ended December 31, 2014 was $3.113 billion, an increase of $38 million over the same period in 2013. The increase was driven by lower valuation losses in other equity method investments. Additionally, the period reflects an increase in private equity IPO activity and strong financial performance in the underlying investments which was partially offset by a reduction in taxable and tax-exempt interest income due to lower investment yields.

Net Realized Gains (Losses) The following tables summarize the Company’s net realized gains (losses) for the years ended December 31, 2014 and 2013:

Change in Sales & Derivatives Dispositions Impairments Value Total (dollars in millions) Year Ended December 31, 2014: Fixed Maturities ...... $ 91 ($ 33) $— $ 58 Equities ...... 70 (12) — 58 Other ...... (9) (207) — (216) Total ...... $152 ($ 252) $ — ($ 100) Year Ended December 31, 2013: Fixed Maturities ...... $103 ($ 67) $ — $ 36 Equities ...... 287 (10) — 277 Other ...... (32) (25) (8) (65) Total ...... $358 ($ 102) ($ 8) $ 248

Years Ended December 31, 2014 2013 (dollars in millions) Fixed maturities: Gross realized gains ...... $ 153 $185 Gross realized losses ...... (95) (149) Equities: Gross realized gains ...... 138 329 Gross realized losses ...... (80) (52) Other: Gross realized gains ...... 48 32 Gross realized losses ...... (264) (97) Total net realized (losses) gains ...... ($100) $ 248

155 Net realized (losses) gains for the year ended December 31, 2014 were ($100) million versus $248 million in the same period in 2013. The increase in net realized losses relates to impairments of direct investments in oil and gas wells of $128 million and equity gains recognized in 2013 that did not recur in 2014.

The following table summarizes the Company’s gross unrealized losses and fair value of fixed income and equity securities by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2014 and that are not deemed to be other-than-temporarily impaired:

Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses (dollars in millions) U.S. government and agency securities ...... ($ 1) $ 259 ($ 9) $ 558 Residential MBS ...... (4) 755 (20) 1,229 Commercial MBS ...... (1) 148 (8) 368 Other MBS and ABS ...... (2) 253 (12) 821 U.S. state and municipal ...... (1) 129 (17) 673 Corporate and other ...... (90) 3,387 (56) 1,763 Foreign government securities ...... (4) 372 (20) 617 Total fixed maturities ...... (103) 5,303 (142) 6,029 Common stock ...... (47) 443 (11) 52 Preferred stock ...... — 4 (58) 251 Total equities ...... (47) 447 (69) 303 Total ...... ($150) $5,750 ($ 211) $6,332

Unrealized losses decreased from $1.002 billion as of December 31, 2013 to $361 million as of December 31, 2014 primarily related to a decrease in treasury yields and spread tightening. Unrealized losses less than 12 months decreased from $754 million at December 31, 2013 to $150 million as of December 31, 2014. Unrealized losses 12 months or longer decreased from $248 million as of December 31, 2013 to $211 million as of December 31, 2014. Of the $11 million unrealized losses 12 months or longer on common stock, $2 million relates to securities associated with non-guaranteed unit linked products where the policyholder bears the investment risk. As of December 31, 2014, there were 1,058 securities that were in an unrealized loss position for 12 months or longer. The Company monitors the difference between the amortized cost and estimated fair value of debt securities to ascertain whether declines in value are temporary in nature. The Company currently does not have the intent to sell these securities and has determined it is not more likely than not that it would be required to sell these fixed maturity securities before they recover their fair value.

If the Company believes a decline in the value (including foreign exchange rate changes) of a particular investment is temporary, the decline is recorded as an unrealized loss in policyholders’ equity. If the decline is believed to be other-than-temporary, and the Company believes that it will not be able to collect all cash flows due on its fixed maturity securities, then the carrying value of the investment is written down to the expected cash flow amount and a realized loss is recorded as a credit impairment. A non-credit impairment loss is recognized in other comprehensive income, net of applicable taxes, as the difference between expected cash flows and fair value. The Company has concluded that the remaining gross unrealized losses of fixed maturity securities as of December 31, 2014 are temporary.

156 certain investment securities were acquired as opposed to fundamental changes in the issuer’s financial performance and near-term financial prospects. The Company has concluded that the gross unrealized losses of equity securities as of December 31, 2014 are temporary.

Liquidity and Capital Resources General The liquidity requirements of the Insurance Subsidiaries are met primarily by funds generated from operations, asset maturities and income received on investments. Cash provided from these sources is used primarily for claims, claim adjustment expenses and operating expenses (underwriting and corporate benefit costs). There are certain cash outflows such as catastrophes and continued settlements of asbestos reserves that are unpredictable in nature and could create increased liquidity needs. The Company believes that the Insurance Subsidiaries’ future business liquidity needs will be met from all the above sources.

Net cash flows are generally invested in marketable securities while keeping a certain amount in cash and short-term investments to meet unpredictable cash obligations. The Company monitors the duration of these investments, and purchases and sales are executed with the objective of having adequate cash available to satisfy its maturing liabilities. As the Company’s investment strategy focuses on overall asset and liability durations, and not specific cash flows, asset sales may be required to satisfy obligations or rebalance asset portfolios. The Company’s invested assets as of December 31, 2014 (including cash and cash equivalents) totaled $78.131 billion.

Debt outstanding as of December 31, 2014 and 2013 was as follows: Current maturities of long-term debt:

As of December 31, 2014 2013 (dollars in millions) Current maturities of long-term debt1 ...... $— $343

1 2013 includes $239 million of 5.75% Notes due 3/15/2014 and $104 million of 7.30% Notes due 6/15/2014.

157 Long-term debt:

As of December 31, 2014 2013 (dollars in millions) 5.588% Mortgage loan, due 2015 ...... $ — $ 47 6.70% Notes, due 2016 ...... 249 249 7.00% Junior Subordinated notes, due 20671 ...... 300 300 5.00% Notes, due 2021 ...... 600 600 4.95% Notes, due 2022 ...... 750 750 4.25% Notes, due 2023 ...... 1,000 1,000 8.50% Surplus notes, due 2025 ...... 140 140 7.875% Surplus notes, due 2026 ...... 227 227 7.625% Notes, due 2028 ...... 3 3 3.91%-4.25% Federal Home Loan Bank Borrowings, due 2032 ...... 300 300 7.00% Notes, due 2034 ...... 231 231 6.50% Notes, due 2035 ...... 471 471 7.50% Notes, due 2036 ...... 19 19 7.80% Junior Subordinated notes, due 20872 ...... 700 700 10.75% Junior Subordinated notes, due 20883 ...... 196 255 6.50% Notes, due 2042 ...... 750 750 4.85% Notes, due 2044 ...... 1,050 — 7.697% Surplus notes, due 2097 ...... 260 260 Subtotal ...... 7,246 6,302 Unamortized discount ...... (14) (17) Total long-term debt ...... $7,232 $6,285

1 The par value call date and final fixed rate interest payment date is March 15, 2017, subject to certain requirements. 2 The par value call date and final fixed rate interest payment date is March 15, 2037, subject to certain requirements. 3 The par value call date and final fixed rate interest payment date is June 15, 2038, subject to certain requirements.

As part of its overall capital strategy, the Company previously announced that it may issue, repurchase or exchange debt depending on market conditions. Debt repurchases may be done through open market or other appropriate transactions. The Company continues to evaluate market conditions and may periodically effect transactions in its debt, subject to applicable limitations.

Debt Transactions and In-force Credit Facilities On December 31, 2014, Berkeley/St. James Real Estate LLC paid off its five-year mortgage loan in the amount of $47 million. The mortgage loan was originally $50 million with a maturity date of January 1, 2015.

During the year ended December 31, 2014, the Company repurchased $59 million of the 10.75% Junior Subordinated notes due 2088 compared to repurchases of $365 million in 2013. Pre-tax losses of $34 million were recorded on these transactions for the year ended December 31, 2014 compared to pre-tax losses of $211 million in 2013 and are included in loss on extinguishment of debt in the accompanying Consolidated Statements of Income.

On July 24, 2014 and October 31, 2014, LMGI issued $750 million and $300 million of the 2044 Notes, respectively. Interest is payable semi-annually at a fixed rate of 4.85%. The 2044 Notes mature on August 1, 2044.

158 On July 1, 2014, LMIC entered into a one-year renewable $1 billion repurchase agreement which terminates July 2, 2015 unless renewed. To date, no funds have been borrowed under the facility.

On December 9, 2013, the Company’s five-year $750 million unsecured revolving credit facility was amended and restated to extend to December 10, 2018. This facility backs the Company’s $750 million commercial paper program that is guaranteed by LMIC. As of December 31, 2014, there was no commercial paper or borrowings outstanding on the facility.

On June 18, 2013 and November 5, 2013, LMGI issued $600 million and $400 million of Senior Notes due 2023 (the “2023 Notes”), respectively. Interest is payable semi-annually at a fixed rate of 4.25%. The 2023 Notes mature on June 15, 2023.

On December 20, 2012, LMIC entered into a three-year $1 billion repurchase agreement which terminates on December 20, 2015. As of December 31, 2014, there are no borrowings outstanding on the facility. In connection with the new facility, the Company terminated its $1 billion three-year repurchase agreements dated March 26, 2010.

LMIC, PIC, LLAC, LMFIC and EICOW are members of the FHLB. On March 21, 2012, LMFIC borrowed $150 million at a rate of 3.91% with a maturity date of March 22, 2032. On March 23, 2012 and April 2, 2012, LMIC borrowed $127 million at a rate of 4.24% with a maturity date of March 23, 2032 and $23 million at a rate of 4.25% with a maturity date of April 2, 2032, respectively. As of December 31, 2014, all of the outstanding FHLB borrowings are fully collateralized.

Interest Expense Consolidated interest expense for the year ended December 31, 2014 was $419 million, a decrease of $1 million from the same period in 2013. Interest expense reflects the new debt issuances in 2013 and 2014, offset by debt repurchases and maturities.

As previously discussed, the Company continues to evaluate market conditions and may periodically effect transactions in its debt, subject to applicable limitations. Debt repurchases may be done through open market or other appropriate transactions.

Holding Company Liquidity and Capital Resources The Company conducts substantially all of its operations through its wholly owned insurance and service company subsidiaries, and therefore is primarily dependent on dividends, distributions, loans or other payments of funds from these entities to meet its current and future obligations. However, the subsidiaries are separate and distinct legal entities and have no obligation to make funds available to the Company, whether in the form of loans, dividends or other distributions. As of December 31, 2014, LMGI had $6.316 billion of debt outstanding, excluding discount.

The Insurance Subsidiaries’ ability to pay dividends on preferred or common stock is restricted under applicable insurance laws and regulations and may be paid only from unassigned surplus. Under the insurance laws of the domiciliary states of the Insurance Subsidiaries, an insurer may make an ordinary dividend payment if its surplus as regards policyholders, following such dividend, is reasonable in relation to its outstanding liabilities, is adequate to meet its financial needs, and does not exceed the insurer’s unassigned surplus. However,

159 no insurer may pay an extraordinary dividend without the approval or non-disapproval of the domiciliary insurance regulatory authority. Under the insurance laws of Massachusetts, the domiciliary state of LMIC, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or the insurer’s net income for the 12-month period ending on the preceding December 31. Under the insurance laws of Wisconsin, the domiciliary state of LMFIC and EICOW, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends paid within the preceding 12 months, exceeds the lesser of (a) 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or (b) the greater of (1) the insurer’s net income for the preceding calendar year, minus realized capital gains for that calendar year, or (2) the aggregate of the insurer’s net income for the three preceding calendar years minus realized capital gains for those calendar years and minus dividends paid within the first two of the preceding three calendar years. Changes in the extraordinary dividend regulation of the domiciliary states of LMIC, LMFIC and EICOW could negatively affect LMGI’s ability to pay principal and interest on its debt, as could a redomestication, merger or consolidation of LMIC, LMFIC or EICOW to a different domiciliary state.

The authorized control level risk-based capital (as of December 31, 2014) and 2015 available dividend capacity prior to needing regulatory approval for LMIC, LMFIC and EICOW were as follows:

Dividend Dividends RBC Ratio1 Capacity2 Paid3 2014 2013 2015 2014 (dollars in millions) RBC Ratios and Dividend Capacity LMIC ...... 514% 474% $1,614 $ 65 LMFIC ...... 485% 453% $ 115 $ 27 EICOW ...... 467% 427% $ 112 $—

1 Authorized control level risk-based capital as defined by the NAIC. 2 Represents the estimated maximum allowable dividend without prior regulatory approval in the state of domicile. 3 Dividends paid represent amounts paid during the year ended December 31, 2014. Available dividend capacity as of December 31, 2014 is calculated as 2015 dividend capacity less dividends paid for the preceding 12 months.

As of December 31, 2014, LMGI also has access to the following sources of funding: • A management services agreement with LMIC pursuant to which LMGI is entitled to collect certain costs plus a management fee for services rendered by LMGI employees. • Investment management agreements with affiliated entities pursuant to which an LMGI subsidiary registered investment advisor is entitled to recover annual expenses for investment management services performed by its employees. • LCS, which through its subsidiaries collects fees and other revenues, primarily for claims administration and agency services rendered for affiliated and non-affiliated entities. For the year ended December 31, 2014, LCS recorded $317 million in pre-tax income. • Approximately $80 million of annual dividends related to non-redeemable perpetual preferred stock issuances by LMIC and LMFIC.

Statutory Surplus Statutory surplus as regards policyholders for the combined operations of LMIC and its U.S. affiliates, including international branches, was $19.180 billion and $17.508 billion at December 31, 2014 and December 31, 2013, respectively. The increase in surplus primarily reflects net income of $1.600 billion (the sum

160 of earnings from the Company’s 56 domestic property-casualty insurance companies and dividends from subsidiaries), unaffiliated unrealized gains of $46 million, and an increase to other changes in surplus of $270 million, partially offset by affiliated unrealized losses of $244 million. Other changes in surplus is primarily driven by capital contributions and non-admitted goodwill, partially offset by a decrease in goodwill amortization expense, net deferred tax assets, and dividends to stockholders.

Critical Accounting Policies Critical Accounting Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates include (1) unpaid claims and claim adjustment expense reserves, including A&E liability reserves and loss sensitive premium attributable to prior years, (2) reinsurance recoverables and associated uncollectible allowance, (3) fair value determination and other-than-temporary impairments of the investment portfolio and direct working interests in oil and gas properties, (4) recoverability of deferred acquisition costs, (5) valuation of goodwill and intangible assets, (6) deferred income tax valuation allowance, and (7) pension and postretirement benefit obligations.

While the amounts included in the accompanying Consolidated Financial Statements reflect management’s best estimates and assumptions, these amounts ultimately could vary.

Unpaid Claims and Claim Adjustment Expenses Reserves for property-casualty unpaid claims and claim adjustment expenses were $49.970 billion and $52.207 billion as of December 31, 2014 and December 31, 2013, respectively.

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

Asbestos and Environmental The Company’s A&E reserves for unpaid claims and claim adjustment expenses, net of reinsurance before consideration of the NICO Reinsurance Transaction and including uncollectible reinsurance, were $1.225 billion and $1.329 billion as of December 31, 2014 and December 31, 2013, respectively.

161 In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded A&E unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. A&E unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 million including: $83 million of asbestos reserves, primarily associated with increased defense costs, and $28 million of pollution reserves.

Reinsurance Recoverables The Company reported reinsurance recoverables of $13.979 billion and $11.779 billion at December 31, 2014 and December 31, 2013, respectively, net of allowance for doubtful accounts of $149 million and $163 million, respectively. The increase in reinsurance recoverables is primarily due to the NICO Reinsurance Transaction (see below for additional details). Included in these balances are $548 million and $605 million of paid recoverables and $13.580 billion and $11.337 billion of unpaid recoverables, respectively.

162 In general terms, the covered business includes post December 31, 2013 development on: (1) A&E liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014.

The NICO Reinsurance Transaction is accounted for as retroactive reinsurance in the Company’s GAAP Consolidated Financial Statements.

The following table displays the impact of the NICO Reinsurance Transaction in the Consolidated Statements of Income (amounts in millions):

Year Ended December 31, 2014 Amounts ceded under NICO Reinsurance Transaction Unrecognized reinsurance benefit related to original transaction loss at the beginning of the period ...... $128 A&E unfavorable loss development ...... 111 Workers compensation favorable loss development ...... (26) Total amounts ceded under NICO Reinsurance Transaction ...... 85 Retroactive reinsurance reductions/(benefits) recognized into income ...... (85) Pre-tax impact of unrecognized deferred retroactive reinsurance benefit ...... — Unrecognized reinsurance benefit related to original transaction loss at the end of the period ...... $ 43

During 2014, the Company recorded $85 million of net A&E and workers compensation adverse development. As a result of the NICO Reinsurance Transaction, the Company was able to recognize the full $85 million as a benefit to income. Once the aggregate of workers compensation and A&E development exceeds the original pre-tax loss deferred gains will be recorded. Deferred gains are subsequently amortized into earnings over the period when underlying claims are settled.

Approximately 95% and 93% of the Company’s reinsurance recoverable balance, net of collateral held and including voluntary and involuntary pools and associations, was from reinsurers rated A- or better from A.M. Best and Standard & Poor’s, respectively, at December 31, 2014. Collateral held against outstanding gross reinsurance recoverable balances was $6.632 billion and $4.085 billion at December 31, 2014 and December 31, 2013, respectively.

The remaining 5% and 7% of the Company’s net reinsurance recoverable balance is well diversified. No single reinsurer rated B++ or below by A.M. Best or below A- by Standard & Poor’s accounts for more than 2% of GAAP equity. In addition, the average net reinsurance recoverable balance from individual reinsurers rated below A- or not rated by A.M. Best and Standard & Poor’s was approximately $1 million as of December 31, 2014.

163 The Company has an aggregate stop loss program covering substantially all of Commercial Insurance’s voluntary workers compensation business from the fourth quarter 2000 through the fourth quarter 2002 accident year periods. A significant portion of the consideration was retained on a “funds held” basis and interest is credited on the balance at an average rate of 8.5% annually. Under the contract, losses in excess of a specified loss ratio are reinsured up to a maximum loss ratio and were accounted for as prospective reinsurance at inception. However, due to a material contract change at the January 1, 2002 renewal, any premium and loss activity subsequent to December 31, 2001 is accounted for as retroactive reinsurance for coverage provided from the fourth quarter 2000 through the fourth quarter 2001 covered accident year periods.

During 2013, the Company commuted four workers compensation excess of loss retroactive reinsurance agreements. The commutations, which represented the complete and final settlement and discharge of all the present and future obligations between the parties arising out of the agreements, resulted in a gain to the Company of $227 million, net of tax.

The above aggregate stop loss program and the four commuted reinsurance agreements resulted in deferred gains that are amortized into income using the effective interest method over the estimated settlement period.

As of December 31, 2014, and 2013, deferred gains were $8 million for both periods, and are included in other liabilities within the accompanying Consolidated Balance Sheets. Interest credited to the funds held balances for the years ended December 31, 2014 and 2013 was $2 million and $72 million, respectively. Deferred gain amortization was $1 million and $337 million for the years ended December 31, 2014 and 2013, respectively. Reinsurance recoverables related to these transactions, including experience related profit accruals, were $64 million and $72 million as of December 31, 2014 and 2013, respectively.

On March 6, 2012, the Company entered into two multi-year property catastrophe reinsurance agreements with Mystic III, a Cayman Islands domiciled reinsurer, to provide a total of $275 million of reinsurance coverage for the Company and its affiliates for a U.S. hurricane or earthquake event. The reinsurance agreements are collateralized. Such collateral is provided by Mystic III using proceeds from the issuance of certain catastrophe bonds. The reinsurance agreements provide coverage based on actual reported losses by the Company and its affiliates. The Company has not recorded any recoveries under this program. Mystic III does not have any other reinsurance in force.

Impairment Losses on Investments If the Company believes a decline in the value (including foreign exchange rate changes) of a particular investment is temporary, the decline is recorded as an unrealized loss in policyholders’ equity. If the decline is believed to be “other-than-temporary,” and the Company believes that it will not be able to collect all cash flows due on its fixed maturity securities, then the carrying value of the investment is written down to the expected cash flow amount and a realized loss is recorded as a credit impairment. A non-credit impairment loss is recognized in other comprehensive income, net of applicable taxes as the difference between expected cash flow and fair value.

164 from the fixed maturity security compared to its amortized cost and is reported as part of net realized gains. The non-credit component, the residual difference between the credit impairment component and the fair value, is recognized in other comprehensive income. The factors considered in making an evaluation for credit versus non-credit other-than-temporary impairment include the following: (a) failure of the issuer of the security to make scheduled interest or principal payments (including the payment structure of the fixed maturity security and the likelihood the issuer will be able to make payments that increase in the future), (b) performance indicators of the underlying assets in the security (including default and delinquency rates), (c) vintage, (d) geographic concentration, (e) impact of foreign exchange rates on foreign currency denominated securities and (f) industry analyst reports, sector credit ratings, and volatility of the security’s fair value. In addition, the Company’s accounting policy for other-than-temporary impairment recognition requires an other-than-temporary impairment charge be recorded when it is determined the security will be sold or it is more likely than not that the Company will be required to sell the security before recovery of the security’s amortized cost basis (all fixed maturity securities and certain preferred equity securities) or the Company does not have the intent and ability to hold certain equity securities for a period of time that is sufficient to allow for any anticipated recovery in fair value.

Subsequent to December 31, 2014, the Company has not recognized any additional material other-than- temporary impairments.

Variable Interest Entities The Company invests in limited partnerships and other entities subject to VIE analysis under the VIE subsections of ASC 810, Consolidation. The Company analyzes each investment to determine whether it is a VIE, and if so, whether the Company is the primary beneficiary or a significant interest holder based on a qualitative and quantitative assessment. The Company evaluates the design of the entity, the risks to which the entity was designed to expose the variable interest holder and the extent of the Company’s control of and variable interest in the VIE. As of December 31, 2014, the Company has determined that it is the primary beneficiary of two VIEs in the low-income housing tax credit sector, and as such, these VIEs have been consolidated in the Company’s financial statements. The carrying value of assets and liabilities and the Company’s maximum exposure to loss of the consolidated VIEs as of December 31, 2014 and December 31, 2013 were immaterial to the Company.

The Company has variable interests in VIEs for which it is not the primary beneficiary and accounts for these VIEs under the equity method in accordance with ASC 323, Investments-Equity Method and Joint Ventures. These VIEs are principally private equity limited partnerships in which the Company has invested as a passive limited partner. The partnerships were deemed to be VIEs because the equity holders as a group lack the power to direct the activities that most significantly impact the respective entity’s economic performance. The VIEs generate variability primarily from investment portfolio performance and that variability is passed to equity holders. For these VIEs, the Company absorbs a portion, but not a majority, of this variability. The net carrying value of non-consolidated VIEs in which the Company has a significant variable interest was $373 million and $212 million as of December 31, 2014 and December 31, 2013, respectively, and the Company’s maximum exposure to loss was $665 million and $242 million as of December 31, 2014 and December 31, 2013, respectively. The assets are included in Other investments on the accompanying Consolidated Balance Sheets. Maximum exposure to loss includes the carrying value and unfunded commitment of the VIEs. There is no recourse provision to the general credit of the Company for any VIEs beyond the full amount of the Company’s loss exposure.

Deferred Acquisition Costs Total deferred acquisition costs were $3.001 billion and $2.978 billion as of December 31, 2014 and December 31, 2013, respectively. Deferred acquisition costs are costs that are directly related to the acquisition or renewal of insurance contracts. All other acquisition related costs, including market research, training, administration, unsuccessful acquisition or renewal efforts, and product development, are charged to expense as

165 incurred. Deferred acquisition costs are reviewed annually for recoverability. Investment income is considered in the recoverability assessment. For short-duration insurance contracts, acquisition costs include commissions, underwriting expenses, and premium taxes and assessments. For long-duration insurance contracts, these costs include first year commissions in excess of annual renewal commissions and variable sales and underwriting expenses.

Goodwill Goodwill assets were $4.834 billion and $4.820 billion as of December 31, 2014 and 2013, respectively. Goodwill is tested for impairment at least annually using either a qualitative or a quantitative process. Election of the approach can be made at the reporting unit level. The reporting unit has the option to skip the qualitative test and move directly to completion of the quantitative process. The Company’s SBUs are deemed reporting units.

As of August 31, 2014, the Company utilized a qualitative test in accordance with its accounting policy for all reporting units except for Liberty International, for which a quantitative test was utilized due to the Venezuela devaluation recognized during the year. As a result of the Company’s Liberty Mutual Benefits realignment, the Company performed a relative fair value assessment in order to reallocate the existing goodwill to the SBUs based on June 30, 2014 results. In conjunction with the reallocation, the Company performed a quantitative impairment assessment of goodwill for each of the impacted SBUs. In 2013, the Company utilized a qualitative test in accordance with its accounting policy.

Deferred Income Taxes The net deferred tax asset was $569 million and $1.250 billion as of December 31, 2014 and December 31, 2013, net of a valuation allowance of $138 million and $169 million, respectively. The net decrease in the Company’s net deferred income tax asset is primarily due to changes in net unrealized capital gains and losses on investments and current year utilization of net operating losses offset by changes in employee benefits. The overall decrease in the valuation allowance is primarily due to currency translation and the disposal of Argentina operations. Management believes it is more likely than not that the Company’s net deferred income tax asset will be realized based upon the Company’s ability and the likelihood of generating future taxable income.

166 A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (amounts in millions):

Balance at December 31, 2013 ...... $298 Additions based on tax positions related to current year ...... 7 Additions for tax positions of prior years ...... 54 Reductions for tax positions of prior years ...... (149) Settlements ...... (24) Translation ...... (4) Balance at December 31, 2014 ...... $182

Included in the tabular roll forward of unrecognized tax benefits is interest and penalties in the amount of $51 million and $93 million as of December 31, 2014 and 2013, respectively.

Included in the balance at December 31, 2014, is $77 million related to tax positions that would impact the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in U.S. Federal, state, and foreign income tax expense. For the years ended December 31, 2014 and 2013, the Company recognized ($36) million and ($11) million of interest and penalties, respectively. The Company had $59 million and $95 million of interest and penalties accrued as of December 31, 2014 and December 31, 2013, respectively.

The IRS has completed its review of the Company’s U.S. Federal income tax returns through the 2005 tax year and is currently reviewing income tax returns for the 2006 through 2011 tax years. Any adjustments that may result from the IRS examinations of these income tax returns are not expected to have a material impact on the financial position, liquidity, or results of operations of the Company.

The Company believes that the range of reasonably possible changes to the balance of unrecognized tax benefits could decrease by $0 to $50 million within the next twelve months as a result of the potential settlements with the IRS for the taxable years 2006 through 2007.

Pension and Postretirement Benefit Obligations The Company sponsors the Plans covering substantially all U.S. and Canadian employees. The benefits and eligibility are based on age, years of service, and the employee’s final average compensation, as more fully described in the Plans. Some foreign subsidiaries also sponsor defined benefit pension plans. In 2014, the Company added a new cash balance benefit formula for all eligible U.S. employees and froze credited service under the plan’s final average pay formula.

167 The discount rate assumption used to determine the benefit obligations is based on a yield curve approach where the cash flows related to the benefit plans’ liability stream is discounted at an interest rate specifically applicable to the timing of the cash flows. The process calculates the present value of these cash flows and determines the equivalent single discount rate that produces the same present value of the future cash flows. On an annual basis, the Company reviews the discount rate assumption used to determine the benefit obligations and the composition of various yield curves to ensure that the assumed discount rate reflects the Company’s best estimate of the rate of return inherent in a portfolio of high-quality debt instruments that would provide the cash flows necessary to settle the Company’s projected benefit payments. In choosing the expected long-term rate of return on plan assets, the Company’s Retirement Board considers the historical returns of equity and fixed income markets in conjunction with current economic and financial market conditions.

168 MANAGEMENT

Directors and Executive Officers of Liberty Mutual Set forth below is information regarding Liberty Mutual’s directors and executive officers as of January 1, 2016:

Name Age Position David H. Long 54 Director, Chairman and Chief Executive Officer James F. Kelleher 59 Director, Executive Vice President and Chief Legal Officer Dennis J. Langwell 57 Director, Executive Vice President and Chief Financial Officer Luis Bonell 56 Executive Vice President and President, Liberty International J. Paul Condrin, III 54 Executive Vice President and President, Commercial Insurance Neeti Bhalla 41 Executive Vice President and Chief Investment Officer Christopher L. Peirce 47 Executive Vice President and President, Global Specialty Timothy M. Sweeney 51 Executive Vice President and President, Personal Insurance J. Eric Brosius 58 Executive Vice President and Chief Actuary James M. McGlennon 52 Executive Vice President and Chief Information Officer Melanie J. Foley 44 Executive Vice President, Chief Talent and Enterprise Services Officer Alison B. Erbig 34 Senior Vice President and Comptroller Mark C. Touhey 55 Senior Vice President and Secretary Laurance H.S. Yahia 59 Senior Vice President and Treasurer

Directors of Liberty Mutual David H. Long has been Chairman, President and Chief Executive Officer of LMHC since 2013, has been a director, President and Chief Executive Officer of LMHC since 2011, has been Chairman, President and Chief Executive Officer of Liberty Mutual, LMIC and LMFIC since 2011 and has been a director and President of Liberty Mutual, LMHC, LMIC and LMFIC since 2010. He was President, Liberty International of LMHC, LMIC and LMFIC from 2009 to 2010, and of Liberty Mutual in 2010. He was Executive Vice President and President, Commercial Markets of LMHC, LMIC and LMFIC from 2006 to 2008 and Executive Vice President and Manager, Commercial Markets of LMHC, LMIC and LMFIC from 2005 to 2006. He has held various positions in the Commercial Markets and LMAC SBUs and has been an employee of Liberty Mutual or LMIC since 1985.

James F. Kelleher has been a director of Liberty Mutual and Executive Vice President and Chief Legal Officer of Liberty Mutual, LMHC, LMIC and LMFIC since 2013. He was a director of Liberty Mutual and Senior Vice President and Chief Legal Officer of Liberty Mutual, LMHC, LMIC and LMFIC during part of 2013. He was Senior Vice President and Deputy General Counsel of Liberty Mutual from 2010 to 2012. Prior thereto, he held various positions of authority in the Legal Department of Liberty Mutual and has been an employee of Liberty Mutual or LMIC since 1983.

Dennis J. Langwell has been a director of Liberty Mutual and Executive Vice President and Chief Financial Officer of Liberty Mutual, LMHC, LMIC and LMFIC since 2013. He was a director and Senior Vice President and Chief Financial Officer of Liberty Mutual from 2010 to 2013 and was Vice President and Chief Financial Officer of Liberty Mutual from 2003 to 2009. He was Senior Vice President and Chief Financial Officer of LMHC, LMIC and LMFIC from 2003 to 2013.

Executive Officers of Liberty Mutual David H. Long is Chairman and Chief Executive Officer of Liberty Mutual. See above “—Directors of Liberty Mutual.”

169 Luis Bonell has been Executive Vice President and President, Liberty International of Liberty Mutual, LMHC, LMIC and LMFIC since 2012. He was Executive Vice President, Liberty International and Chief Executive Officer, Liberty International Holdings Inc. from 2010 to 2012. He was Executive Vice President, Liberty International and Chief Operating Officer, Europe from 2007 to 2010 and was President, Liberty Seguros Spain from 2001 to 2007.

J. Paul Condrin, III has been Executive Vice President and President, Commercial Insurance of Liberty Mutual, LMHC, LMIC and LMFIC since 2012. He was Executive Vice President and President, LMAC of Liberty Mutual, LMHC, LMIC and LMFIC from 2011 to 2012. He was Executive Vice President and President, Commercial Markets of LMHC, LMIC and LMFIC from 2009 to 2011 and held that title in Liberty Mutual from 2010 to 2011. He was Executive Vice President and President, Personal Markets of LMHC, LMIC and LMFIC from 2006 to 2008 and Executive Vice President and Manager, Personal Markets of LMHC, LMIC and LMFIC from 2003 to 2006. He was Senior Vice President and Chief Financial Officer of LMHC from 2001 to 2003 and held that title in LMIC from 1997 to 2003.

Neeti Bhalla has been Executive Vice President and Chief Investment Officer of Liberty Mutual, LMHC, LMIC and LMFIC since January 1, 2016. She has been an employee of Liberty Mutual since 2013. Prior to that she was an analyst and managing director at Goldman Sachs from 2000 to 2013.

Christopher L. Peirce has been Executive Vice President and President, Global Specialty of Liberty Mutual, LMHC, LMIC and LMFIC since 2012. He was President, Commercial Markets of Liberty Mutual, LMHC, LMIC and LMFIC from 2011 to 2012. Prior thereto, he held various positions in the Liberty International SBU and Financial Department of LMIC and has been an employee of Liberty Mutual or LMIC since 1995.

Timothy M. Sweeney has been Executive Vice President and President, Personal Insurance of Liberty Mutual, LMHC, LMIC and LMFIC since 2012. He was Executive Vice President and President, Personal Markets of LMHC, LMIC and LMFIC from 2009 to 2012 and held that title in Liberty Mutual from 2010 to 2012. He has held various positions in the Personal Markets, LMAC and Financial Department of LMIC and has been an employee of Liberty Mutual or LMIC since 1993. He is also a director of Blue Cross and Blue Shield of Massachusetts, Inc.

J. Eric Brosius has been Executive Vice President and Chief Actuary of Liberty Mutual, LMHC, LMIC and LMFIC since 2013. He was Senior Vice President and Corporate Actuary of Liberty Mutual, LMHC, LMIC and LMFIC from 2010 to 2013. Prior thereto, he was Senior Vice President and Manager, Domestic Reinsurance of LMIC and has been an employee of Liberty Mutual or LMIC since 1990.

James F. Kelleher is a director, Executive Vice President and Chief Legal Officer of Liberty Mutual. See above “—Directors of Liberty Mutual.”

Dennis J. Langwell is a director, Executive Vice President and Chief Financial Officer of Liberty Mutual. See above “—Directors of Liberty Mutual.”

James M. McGlennon has been Executive Vice President and Chief Information Officer of Liberty Mutual, LMHC, LMIC and LMFIC since 2013. He was Senior Vice President and Chief Information Officer of LMHC from 2009 to 2013, held that title in Liberty Mutual from 2010 to September 12, 2013, and held that title in LMIC and LMFIC from 2008 to 2013. He was Vice President and Chief Information Officer, LMAC from 2007 to 2008. He was Vice President, Information Technology of BellSouth from 2000 to 2007.

Melanie J. Foley has been Executive Vice President and Chief Talent and Enterprise Services Officer of Liberty Mutual, LMHC, LMIC and LMFIC since January 1, 2015. She was Executive Vice President and Chief Human Resources and Administration Officer of Liberty Mutual, LMHC, LMIC and LMFIC from 2013 to January 1, 2015. She was Senior Vice President and Manager, Human Resources and Administration of Liberty

170 Mutual, LMHC, LMIC and LMFIC from 2011 to 2013. Prior thereto, she held various positions in the Personal Markets SBU of Liberty Mutual and has been an employee of Liberty Mutual or LMIC since 1996.

Alison B. Erbig has been Senior Vice President and Comptroller of Liberty Mutual, LMHC, LMIC and LMFIC since April 8, 2015. She has held various positions in the Financial Department of Liberty Mutual, where she has been employed since 2003.

Mark C. Touhey has been Senior Vice President and Secretary of Liberty Mutual, LMHC, LMIC and LMFIC since December 31, 2015. He was Vice President of Liberty Mutual from January 2010 to December 2015, and of LMIC from March 2009 to December 2009. He has held various positions within the Talent and Enterprise Services and Commercial Markets Departments of Liberty Mutual, where he has been an employee since 1994.

Laurance H.S. Yahia has been Senior Vice President and Treasurer of Liberty Mutual, LMHC, LMIC and LMFIC since April 8, 2015. He was Vice President and Treasurer of Liberty Mutual, LMHC, LMIC and LMFIC from 2003 to April 8, 2015.

Directors and Executive Officers of Massachusetts Holdings The directors of Massachusetts Holdings are identical to the directors of Liberty Mutual. The executive officers of Massachusetts Holdings are Messrs. Long, Kelleher, Langwell, Touhey and Yahia. See above “—Directors of Liberty Mutual” or “—Executive Officers of Liberty Mutual.”

Directors and Executive Officers of LMHC Set forth below is information regarding LMHC’s directors as of January 1, 2016:

Name Age Position David H. Long ...... 54 Chairman and Chief Executive Officer Nicholas M. Donofrio ...... 70 Director Francis A. Doyle, III ...... 67 Director John P. Manning ...... 67 Director Thomas J. May ...... 68 Director Myrtle S. Potter ...... 57 Director Ellen A. Rudnick ...... 65 Director Angel A. Ruiz ...... 59 Director Martin P. Slark ...... 61 Director Eric A. Spiegel ...... 58 Director William C. Van Faasen ...... 67 Director Annette M. Verschuren ...... 59 Director

Directors of LMHC Nicholas M. Donofrio has been a director of LMHC since 2009. He is an IBM Fellow and in 2008 retired as Executive Vice President, Innovation and Technology, International Business Machines Corporation, a provider of information technology products and services, where he was employed beginning in 1964. He is also a director of Advanced Micro Devices, Inc., The Bank of New York Mellon Corporation, Delphi Automotive PLC, O’Brien & Gere and Sproxil, Inc.

Francis A. Doyle, III has been a director of LMHC since 2003. He has been President and Chief Executive Officer of Connell Limited Partnership, a diversified manufacturer and supplier, since 2001. He is also a director of Eversource Energy and Tempur-Pedic International Inc.

DavidH.Longis Chairman and Chief Executive Officer of LMHC. See above “—Directors of Liberty Mutual.”

171 John P. Manning has been a director of LMHC since 2007. He has been President and Chief Executive Officer of Boston Capital Corporation, a real estate financing and investment firm, since 1974.

Thomas J. May has been a director of LMHC since 2001 and was a director of LMIC from 1998 to 2001. He has been President and Chief Executive Officer of Northeast Utilities, an electric and gas utility, since 2012, and Chairman thereof since 2013. On February 2, 2015, Northeast Utilities began doing business as Eversource Energy. He was Chairman, President and Chief Executive Officer of NSTAR, an electric and gas utility, from 2002 to 2012. He is also a director of Bank of America Corporation.

Myrtle S. Potter has been a director of LMHC since 2013. Since 2005, she has been Chief Executive Officer of Myrtle Potter and Company, LLC, a private consulting firm specializing in corporate strategy, corporate governance and product commercialization in healthcare. Since 2006, she has also been Chief Executive Officer of Chapman Properties, Inc., which is part of a group of real estate sales, financing and development companies she owns. Since 2009, she has also been Chief Executive Officer of Myrtle Potter Media, Inc., a consumer healthcare company. At Genentech, Inc., a biotechnology company, she was President, Commercial Operations from 2004 to 2005, and was Chief Operating Officer and Executive Vice President, Commercial Operations from 2000 to 2004. She is also a director of Everyday Health, Inc., Insmed Incorporated, Proteus Digital Health, Inc. and Rite Aid Corporation.

Ellen A. Rudnick has been a director of LMHC since 2001 and was a director of LMIC in 2001. She has been Executive Director and Clinical Professor of the Polsky Center for Entrepreneurship at the University of Chicago Booth School of Business since 1999. She was Chairman and Founder of CEO Advisors from 1992 to 2003. She is also a director of First Midwest Bank, Health Management Systems and Patterson Dental Company.

Angel A. Ruiz has been a director of LMHC since 2014. He has been President and Chief Executive Officer of Ericsson Inc., the U.S. subsidiary of Telefonaktiebolaget LM Ericsson, a provider of telecommunications products and services, since 2001.

Martin P. Slark has been a director of LMHC since 2008. He is Vice Chairman and Chief Executive Officer of Molex Incorporated, a manufacturer of electronic components, where he has been employed since 1976. He is also a director of Hub Group, Inc. and Northern Trust Corporation.

Eric A. Spiegel has been a director of LMHC since 2013. Since 2010, he has been President and Chief Executive Officer of Siemens Corporation, the U.S. holding company for Siemens AG, an electronics and electrical engineering company. He was Senior Partner and Managing Partner, Global Energy Chemicals and Power Practice of Booz & Company Inc., a management consulting firm, from 2008 to 2010. He was Managing Director of Booz Allen Hamilton International in Tokyo from 1999 to 2003 and began work at Booz Allen Hamilton Inc. in 1986.

William C. Van Faasen has been a director of LMHC since 2001 and was a director of LMIC in 2001. In 2014, he retired from, and became Chairman Emeritus of, Blue Cross and Blue Shield of Massachusetts, Inc., a health insurer, having served as Chairman from September 2010. He was interim President and Chief Executive Officer of that corporation from March to September 2010, having served as Chairman from 2002 until his retirement in 2007, and was employed there beginning in 1990. He is also a director of Eversource Energy.

Annette M. Verschuren, O.C., has been a director of LMHC since 2007. She has been Chair and Chief Executive Officer of NRStor Incorporated, a venture to commercialize energy storage technologies, since 2012. From 1996 to 2011 she was President, The Home Depot Canada, and from 2006 to 2011 she was President, The Home Depot Asia. From 2003 to 2005 she was also President, EXPO Design Center. The Home Depot Canada, The Home Depot Asia and EXPO Design Center are divisions of The Home Depot, Inc., a home improvement retailer. She is also a director of Air Canada, Canadian Natural Resources Limited and Saputo Inc.

Executive Officers of LMHC The executive officers of LMHC are identical to the executive officers of Liberty Mutual. See above “—Executive Officers of Liberty Mutual.”

172 CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

All of the directors of Liberty Mutual and most of the directors of LMHC hold one or more insurance policies issued by LMIC, LMFIC, EICOW or LMPIC. These policies give policyholders voting rights as members of LMHC. However, in the aggregate such directors who are policyholders hold an insignificant percentage of the aggregate voting rights in LMHC.

173 DESCRIPTION OF NOTES

Liberty Mutual will issue the Notes under a Fiscal Agency Agreement to be dated as of May 4, 2016 (the “Fiscal Agency Agreement”) among Liberty Mutual, as issuer, LMHC and Massachusetts Holdings, as Guarantors, and The Bank of New York Mellon, as Fiscal Agent. The Fiscal Agency Agreement is not qualified under the Trust Indenture Act of 1939, as amended. The Fiscal Agency Agreement provides for the issuance of the Notes and sets forth the duties of the Fiscal Agent. Liberty Mutual may, in the future, issue additional Notes under the Fiscal Agency Agreement. The following description is only a summary of the material provisions of the Fiscal Agency Agreement and the Notes and is qualified in its entirety by reference to the provisions of the Fiscal Agency Agreement and the Notes. Liberty Mutual urges you to read the Fiscal Agency Agreement because it, and not this description, defines the rights of a holder of Notes. A copy of the intended form of the Fiscal Agency Agreement is available upon request from Liberty Mutual.

General The Notes will initially be limited to an aggregate principal amount of €750,000,000. The Notes will be issued in fully registered form only, in denominations of €100,000 and integral multiples of €1,000 in excess thereof. The Notes will bear interest at the applicable annual rate stated on the cover page of this Offering Memorandum. Interest will be payable annually in arrears on May 4 of each year, beginning May 4, 2017. Interest on the Notes will accrue from May 4, 2016, or from the most recent date to which interest has been paid or for which provisions have been made. Interest on the Notes will be paid to holders of record on the April 15 immediately before the applicable interest payment date. The Notes will mature on May 4, 2026. There will be no sinking fund payments for the Notes.

Liberty Mutual may from time to time, without notice to, or the consent of, the holders of the Notes, increase the aggregate outstanding principal amount of the Notes by issuing additional Notes in the future on the same terms and conditions (other than the issue price, the date of issuance, the payment of interest accruing prior to the date of issuance of such additional Notes, in some cases, the first interest payment date or any adjustments deemed necessary by Liberty Mutual to conform to or ensure compliance with the Securities Act (or other applicable securities laws) that are not adverse in any material respect to the holders of outstanding Notes) and with the same ISIN and Common Code numbers as the Notes to be issued on May 4, 2016, and such additional Notes shall be treated as a single series with the Notes; provided that if the additional Notes are not fungible with the Notes for U.S. federal income tax or securities laws purposes, the additional Notes may have separate ISIN and Common Code numbers.

Interest on the Notes will be computed on the basis of the actual number of days in the period for which interest is being calculated and the actual number of days from and including the last date on which interest was paid on the Notes (or May 4, 2016 if no interest has been paid on the Notes), to but excluding the next scheduled interest payment date. This payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the rulebook of the International Capital Market Association. Interest and principal will be payable at the office or agency maintained for such purpose in London (initially the office of the paying agent maintained for such purpose) or, at Liberty Mutual’s option, in the case of payments of interest, by check mailed to the respective addresses of the registered holders or by wire transfer. So long as the Notes are represented by Global Notes, the interest payable on the Notes will be paid to the nominee of the depositary for the Notes, or its registered assigns as the registered holder of such Global Notes, by wire transfer of immediately available funds on each applicable interest payment date.

If any interest payment date, maturity date or redemption date of a Note falls on a day that is not a business day, the required payment of principal, premium, if any, and interest will be made on the next succeeding business day as if made on the date that the payment was due and no interest will accrue on that payment for such period from and after that interest payment date, maturity date or redemption date, as the case may be, to the date of that payment on the next succeeding business day. The term “business day” means any day, other than a Saturday or Sunday, (1) which is not a day on which banking institutions in the City of New York or the City of

174 London are authorized or required by law or executive order to close and (2) on which the Trans-European Automated Real-time Gross Settlement Express Transfer system (the TARGET2 system), or any successor thereto, operates.

So long as any Notes are outstanding and Liberty Mutual is not subject to the reporting requirements of the Exchange Act, Liberty Mutual will furnish to any holder of Notes, or to any prospective purchaser designated by such a holder, upon the request of the holder, the business and financial information concerning Liberty Mutual and the Guarantors called for under paragraph (d)(4) of Rule 144A. Except as otherwise provided in the Fiscal Agency Agreement, during the holding period applicable to non-affiliates referred to in Rule 144(b), Liberty Mutual will not, and will not permit any of its affiliates to, resell any Notes that constitute “restricted securities” under Rule 144 (other than any sale to Liberty Mutual, any of its subsidiaries, the Guarantors or other affiliates) until the securities are freely transferable under Rule 144 or in a transaction registered under the Securities Act, or the Notes are resold in compliance with the provisions of Rule 144(b)(2).

Guarantees Each of the Guarantors will irrevocably and unconditionally guarantee to each holder of Notes and the Fiscal Agent the due and punctual payment of the principal of, and any premium and any interest, and all other payment obligations under the Notes and the Fiscal Agency Agreement, on, those Notes, when and as the same become due and payable, whether at maturity, upon acceleration, redemption or otherwise and the payment and performance of the obligations of Liberty Mutual under the Fiscal Agency Agreement. Each of the Guarantors has: • agreed that its obligations under its Guarantee, upon the occurrence and continuance of an event of default with respect to the Notes will be as if it were principal obligor and not merely surety and will be enforceable irrespective of any invalidity, irregularity or unenforceability of the Notes or the Fiscal Agency Agreement; and • waived its right to require the Fiscal Agent or the holders of Notes to pursue or exhaust their legal or equitable remedies against Liberty Mutual prior to exercising their rights under the Guarantees to the extent permitted by law.

Ranking of the Notes and the Guarantees The Notes will be Liberty Mutual’s unsecured senior obligations and will rank equally in right of payment with all of its other unsecured senior indebtedness from time to time outstanding. The Guarantees will be the respective unsecured senior obligations of the Guarantors and will rank equally in right of payment with all of the Guarantors’ respective other unsecured senior indebtedness from time to time outstanding. Because Liberty Mutual and the Guarantors are holding companies that conduct all of their operations through their subsidiaries, holders of the Notes will have a junior position to claims of creditors of Liberty Mutual’s and the Guarantors’ respective subsidiaries other than Liberty Mutual (but including Liberty Mutual’s subsidiaries), as the case may be, including policyholders, trade creditors, debt holders, secured creditors, taxing authorities, guarantee holders, holders of surplus notes and any preferred stockholders. On a pro forma basis as of December 31, 2015, as adjusted to give effect to the sale of the Notes, but excluding the debt of Liberty Mutual’s subsidiaries, Liberty Mutual would have had $5.968 billion of outstanding senior indebtedness, none of which is secured. See “Capitalization” for additional information. As of December 31, 2015, debt, unpaid claims and claims adjustment expense on property and casualty contracts and future policy benefits on life contracts of Liberty Mutual’s subsidiaries, to which the Notes will be structurally subordinated, was approximately $59.5 billion.

Holding Company Structure Liberty Mutual, LMHC and Massachusetts Holdings are all holding companies with no direct operations, and their only significant assets are the capital stock of their subsidiaries. Liberty Mutual’s ability to satisfy its obligations relies in large part on the dividend paying ability of its subsidiaries. For more information, refer to

175 “Risk Factors—Risk Factors Relating to the Notes.” As holding companies, Liberty Mutual, LMHC and Massachusetts Holdings will depend on their subsidiaries for funds to meet their payment obligations under the Notes or the Guarantees.

Issuance in Euro; Payment on the Notes Initial investors in the Notes will be required to pay for the Notes in euro, and all payments on the Notes will be payable in euro; provided that if on or after the date of this Offering Memorandum the euro is unavailable to Liberty Mutual due to the imposition of exchange controls or other circumstances beyond Liberty Mutual’s control or if the euro is no longer being used by the then member states of the European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public institutions of or within the international banking community, then all payments in respect of the Notes will be made in U.S. dollars until the euro is again available to Liberty Mutual or so used. Under those circumstances, the amount payable on any date in euro will be converted into U.S. dollars at the rate mandated by the U.S. Federal Reserve Board as of the close of business on the second business day prior to the relevant payment date or, in the event the U.S. Federal Reserve Board has not mandated a rate of conversion, on the basis of the most recent U.S. dollar/euro exchange rate published in The Wall Street Journal on or prior to the second business day prior to the relevant payment date. Any payment in respect of the Notes so made in U.S. dollars will not constitute an event of default under the Notes or the Fiscal Agency Agreement. Neither the Fiscal Agent nor the paying agent will have any responsibility for any calculation or conversion in connection with the foregoing.

Investors will be subject to foreign exchange risks as to payments on the Notes that may have important economic and tax consequences to them. See “Risk Factors” in this Offering Memorandum.

Paying Agent and Registrar The Bank of New York Mellon, London Branch will initially act as paying agent and security registrar for the Notes. Upon notice to the Fiscal Agent, Liberty Mutual may change any paying agent or security registrar.

Optional Redemption The Notes may be redeemed in whole at any time or in part from time to time, at Liberty Mutual’s option, at a “make-whole” redemption price equal to the greater of: (1) 100% of the principal amount of the Notes to be redeemed; or (2) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes from the redemption date to the maturity date discounted to the redemption date on an annual basis (ACTUAL/ACTUAL (ICMA)), at the applicable Comparable Government Bond Rate described below plus 40 basis points, for the Notes to be redeemed; plus in the case of either clause (1) or (2), any interest accrued but not paid to the date of redemption. For the avoidance of doubt, any calculation of the remaining scheduled payments of principal and interest pursuant to clause (2) of the preceding sentence shall not include interest accrued as of the applicable redemption date.

“Comparable Government Bond Rate” means, with respect to any redemption date for the Notes, the rate per annum equal to the yield to maturity, expressed as a percentage (rounded to three decimal places, with 0.0005 being rounded upwards), on the third business day prior to the date fixed for redemption, calculated in accordance with customary financial practice in pricing new issues of comparable corporate debt securities paying interest on an annual basis (ACTUAL/ACTUAL (ICMA)) of the Comparable Government Bond (as defined below), calculated using a price for the Comparable Government Bond (expressed as a percentage of its principal amount) equal to the Comparable Government Bond Price for such redemption date. The Comparable

176 Government Bond Rate will be calculated by the Independent Investment Banker and reported to the Fiscal Agent on the third business day preceding the redemption date.

“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, the German government bond (Bundesanleihe) selected by the Independent Investment Banker as having an actual or interpolated maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of euro-denominated corporate debt securities of a comparable maturity to the remaining term of the Notes to be redeemed.

“Comparable Government Bond Price” means, with respect to any redemption date for the Notes, (i) the arithmetic average as determined by the Independent Investment Banker of the Reference Government Bond Dealer Quotations for such redemption date, after excluding the highest and lowest of such Reference Government Bond Dealer Quotations, or (ii) if the Independent Investment Banker obtains fewer than four such Reference Government Bond Dealer Quotations, the arithmetic average of all such quotations.

“Independent Investment Banker” means one of the Reference Government Bond Dealers, as selected by Liberty Mutual.

“Reference Government Bond Dealer” means each of (i) Citigroup Global Markets Limited and Deutsche Bank AG, London Branch or any of their affiliates that are Primary Dealers (as defined below), and their respective successors and (ii) three other primary European government securities dealers (“Primary Dealers”) selected by Liberty Mutual; provided that if any of the foregoing shall cease to be Primary Dealer, Liberty Mutual shall substitute in its place another Primary Dealer.

“Reference Government Bond Dealer Quotations” means, with respect to each Reference Government Bond Dealer and any redemption date, the arithmetic average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Government Bond (expressed in each case as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Government Bond Dealer at 11:00 a.m., Central European Time (CET), on the third business day preceding such redemption date.

Notice of any redemption will be mailed by first-class mail at least 30 days but no more than 60 days before the redemption date to each holder of Notes to be redeemed. If fewer than all of the Notes are being redeemed, the Notes shall be redeemed by lot; provided that if the Notes are represented by one or more global securities, beneficial interests therein will be selected for redemption by Clearstream and Euroclear in accordance with their respective applicable procedures therefor; and provided, further, that no Notes of a principal amount of €100,000 or less will be redeemed in part.

The Notes are also subject to redemption prior to maturity if certain changes in U.S. tax law occur. If such changes occur, the Notes may be redeemed at a redemption price of 100% of their principal amount, plus any interest accrued but not paid to the redemption date. See “—Redemption for Tax Reasons.”

Unless Liberty Mutual defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the Notes or portions of such Notes called for redemption.

Payment of Additional Amounts Liberty Mutual will, subject to the exceptions and limitations set forth below, pay such additional amounts as are necessary in order that the net payment by Liberty Mutual, a Guarantor or a paying agent of the principal, premium and interest with respect to the Notes (including payments under the Guarantees) to each holder that is not a United States person (as defined below), after withholding or deduction for any present or future tax, assessment or other governmental charge imposed by the United States or a taxing authority in the United States,

177 will not be less than the amount as would have been received by such holder had no such withholding or deduction been made; provided, however, that the foregoing obligation to pay additional amounts will not apply: 1. to any tax, assessment or other governmental charge that would not have been imposed but for the holder, or a fiduciary, settlor, beneficiary, member or shareholder of the holder (if the holder is an estate, trust, partnership or corporation) , or a person holding a power over an estate or trust administered by a fiduciary holder, being treated as: a. being or having been present in, or engaged in a trade or business in, the United States or having or having had a permanent establishment in the United States; b. having a current or former connection with the United States (other than a connection arising solely as a result of the ownership of the Notes, the receipt of any payment in respect of the Notes or the enforcement of any rights under the Fiscal Agency Agreement), including being or having been a citizen or resident of the United States; c. being or having been a personal holding company, a passive foreign investment company or a controlled foreign corporation for U.S. federal income tax purposes, a foreign tax exempt organization, or a corporation that has accumulated earnings to avoid U.S. federal income tax; d. being or having been a “10-percent shareholder”, as defined in section 871(h)(3) of the United States Internal Revenue Code of 1986, as amended (the “Code”) or any successor provision, of Liberty Mutual; or e. being a bank receiving payments on an extension of credit made pursuant to a loan agreement entered into in the ordinary course of its trade or business, within the meaning of section 881(c)(3) of the Code or any successor provision; 2. to any holder that is not the sole beneficial owner of the Notes, or a portion of the Notes, or that is a fiduciary, partnership or limited liability company, but only to the extent that the beneficial owner, a beneficiary or settlor with respect to the fiduciary, or a beneficial owner or member of the partnership or limited liability company would not have been entitled to the payment of an additional amount had such beneficial owner, beneficiary, settlor, beneficial owner or member received directly its beneficial or distributive share of the payment; 3. to any tax, assessment or other governmental charge that would not have been imposed but for the failure of the holder or any other person to comply with certification, identification or information reporting requirements concerning the nationality, residence, identity or connection with the United States of the holder or beneficial owner of the Notes, if compliance is required by statute, by regulation of the United States or any taxing authority therein or by an applicable income tax treaty to which the United States is a party as a precondition to exemption from such tax, assessment or other governmental charge and such holder or other person is legally entitled to such exemption; 4. to any tax, assessment or other governmental charge that is imposed otherwise than by withholding from a payment with respect to the Notes by Liberty Mutual, a Guarantor or a paying agent; 5. to any estate, inheritance, gift, sales, excise, transfer, wealth, capital gains or personal property tax or similar tax, assessment or other governmental charge; 6. to any tax, assessment or other governmental charge required to be withheld by any paying agent from any payment of principal, premium or interest with respect to any Note, if such payment can be made without such withholding by at least one other paying agent; 7. to any tax, assessment or other governmental charge that would not have been imposed but for the presentation by the holder of any Note, where presentation is required, for payment on a date more than 30 days after the date on which payment became due and payable or the date on which payment thereof is duly provided for, whichever occurs later;

178 8. to any tax, assessment or other governmental charge required to be withheld or deducted that is imposed on a payment pursuant to Sections 1471 through 1474 of the Code (or any amended or successor version of such Sections), any Treasury regulations promulgated thereunder, or any other official interpretations thereof (collectively, “FATCA”), any agreement (including any intergovernmental agreement) entered into in connection therewith, any law, regulation or other official guidance enacted in any jurisdiction implementing FATCA or an intergovernmental agreement in respect of FATCA; 9. to any tax, assessment or other governmental charge that is imposed solely by reason of a change in law, regulation, or administrative or judicial interpretation that becomes effective more than 15 days after the payment becomes due or is duly provided for, whichever occurs later; 10. to any tax, assessment or other governmental charge imposed by reason of the failure of the beneficial owner to fulfill the statement requirements of Section 871(h) or Section 881(c) of the Code; or 11. in the case of any combination of items (1) through (11).

Except as specifically provided under this heading “—Payment of Additional Amounts,” Liberty Mutual will not be required to pay additional amounts in respect of any tax, assessment or other governmental charge. References in this Offering Memorandum to any payment on the Notes include the related payment of additional amounts, as applicable.

As used under this heading “—Payment of Additional Amounts” and under the heading “—Redemption for Tax Reasons,” the term “United States” means the United States of America, any state thereof, and the District of Columbia, and the term “United States person” means (i) any individual who is a citizen or resident of the United States for U.S. federal income tax purposes, (ii) a corporation, partnership or other entity created or organized in or under the laws of the United States, any state thereof or the District of Columbia (other than a partnership that is not treated as a United States person for U.S. federal income tax purposes), (iii) any estate the income of which is subject to U.S. federal income taxation regardless of its source, or (iv) any trust if a U.S. court can exercise primary supervision over the administration of the trust and one or more United States persons can control all substantial trust decisions, or if a valid election is in place to treat the trust as a United States person.

Redemption for Tax Reasons If, as a result of any change in, or amendment to, the laws (or any regulations or rulings promulgated under the laws) of the United States or any change in, or amendment to, an official position regarding the application or interpretation thereof that is announced or becomes effective on or after the date of this Offering Memorandum, Liberty Mutual becomes or, based upon a written opinion of independent counsel selected by Liberty Mutual, there is substantial probability that Liberty Mutual will become obligated to pay additional amounts as described under the heading “—Payment of Additional Amounts” with respect to the Notes, then Liberty Mutual may at any time at Liberty Mutual’s option redeem the Notes, in whole, but not in part, at a redemption price equal to 100% of their principal amount, plus any interest accrued but not paid to the redemption date, provided that, prior to the publication of any notice of redemption pursuant to this paragraph, Liberty Mutual has delivered to the Fiscal Agent an officers’ certificate stating that it is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to its right so to redeem have occurred, and provided further that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which Liberty Mutual would be obligated to pay such additional amounts if a payment in respect of the Notes were due on such date.

Notice of any redemption will be mailed by first-class mail at least 30 days but no more than 60 days before the redemption date to each holder of Notes to be redeemed.

Unless Liberty Mutual defaults in payment of the redemption price, on and after the redemption date, interest will cease to accrue on the Notes or portions of such Notes called for redemption.

179 Covenants

The Fiscal Agency Agreement contains the covenants described below, among others.

“Indebtedness” shall mean with respect to any person and without duplication (i) all items (excluding items of contingency reserves or of reserves for deferred income taxes) that in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such person as of the date on which Indebtedness is to be determined, (ii) all indebtedness secured by any Lien on, or payable out of the proceeds or production from, any property or asset owned or held by such person, whether or not the indebtedness secured thereby shall have been assumed, (iii) all indebtedness of third parties, including joint ventures and partnerships of which such person is a venturer or general partner, recourse to which may be had against such person, (iv) redemption obligations in respect of mandatorily redeemable preferred stock, (v) all swaps or similar instrument or agreement, or under a foreign currency hedge exchange or similar instrument or agreement, of such person and (vi) all indebtedness and other obligations of others with respect to which such person has become liable by way of a guarantee.

“Lien” means any mortgage, deed of trust, pledge, lien, security interest or other encumbrance (including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof, and any filing or agreement to give a lien or file a financing statement as a debtor under the Uniform Commercial Code or any similar statute, other than to reflect ownership by a third party of property leased to Liberty Mutual, LMIC, LMFIC, EICOW, Liberty Mutual Agency Corporation or LCS (“Significant Subsidiaries” and individually, a “Significant Subsidiary”), under a lease that is not in the nature of a conditional sale or title retention agreement).

Limitation on Liens of Stock of Significant Subsidiaries. As long as any Notes are outstanding, Liberty Mutual will not permit any Significant Subsidiary to, directly or indirectly, create, assume, incur or permit to exist any Indebtedness that is secured by any Lien on the capital stock of a Significant Subsidiary unless Liberty Mutual also secures all of the Notes equally and ratably with such Indebtedness for at least the time period such Indebtedness is so secured.

Consolidation, Merger and Sale of Assets. As long as any Notes are outstanding, Liberty Mutual may not consolidate or merge with or into any other corporation or convey, transfer, lease, sell or assign all or substantially all of its properties or assets to another person unless: • either (1) Liberty Mutual is the continuing corporation or (2) both (a) the successor entity expressly assumes by supplemental fiscal agency agreement the due and punctual payment of the principal of, and premium, if any, and interest on, the Notes and the performance of every other covenant of the Fiscal Agency Agreement on the part of Liberty Mutual and (b) the entity formed by the consolidation or into which Liberty Mutual is merged or the entity that acquires all or substantially all of the properties and assets of Liberty Mutual is a corporation, partnership, limited liability company, trust or similar entity organized and validly existing under the laws of the United States, any State or the District of Columbia; • immediately thereafter, no event of default and no event that, after notice or lapse of time, or both, would become an event of default, shall have happened and be continuing; and • Liberty Mutual has delivered an officer’s certificate and a written legal opinion to the Fiscal Agent stating that the transaction and any supplemental fiscal agency agreement required in connection with the transaction complies with the applicable provisions of the Fiscal Agency Agreement.

Upon any such consolidation, merger, conveyance, transfer, lease, sale or assignment, the successor corporation shall succeed to and be substituted for Liberty Mutual under the Fiscal Agency Agreement. Thereafter, except in the case of a lease, the predecessor corporation shall be relieved of all obligations and covenants under the Fiscal Agency Agreement and the Notes.

180 Events of Default The following are events of default under the Fiscal Agency Agreement with respect to the Notes: (1) default in the payment of any installment of interest on any Notes for 30 days after becoming due and payable; (2) default in the payment of the principal of (or premium, if any) on any Notes when due and payable; (3) default in the performance of, or breach of, any other term, covenant or agreement applicable to the Notes for 60 days after written notice of the failure, requiring Liberty Mutual to remedy the same, is given to Liberty Mutual by the Fiscal Agent or to Liberty Mutual and the Fiscal Agent by the holders of at least 25% in aggregate principal amount of outstanding Notes affected thereby; (4) default under any other series of debt securities or any agreements, indentures or instruments under which any of Liberty Mutual or the Guarantors then has outstanding indebtedness in excess of $25 million in the aggregate which indebtedness, if not already matured in accordance with its terms, has been accelerated and the acceleration has not been rescinded or annulled or the indebtedness has not been discharged within 15 days after notice is given to any of Liberty Mutual or the Guarantors, as applicable, by the Fiscal Agent or to any of Liberty Mutual or the Guarantors, as applicable, and the Fiscal Agent by the holders of at least 25% in aggregate principal amount of outstanding Notes, unless (A) prior to the entry of judgment in favor of the holders of the Notes, the default under that agreement, indenture or instrument is remedied or cured by any of Liberty Mutual or the Guarantors, as applicable, or waived by the holders of the indebtedness, or (B) the default results from an action of the U.S. government or a foreign government that prevents any of Liberty Mutual or the Guarantors, as applicable, from performing their obligations under the agreement, indenture or instrument; or (5) certain events of bankruptcy, insolvency or reorganization with respect to any of Liberty Mutual or the Guarantors occur.

If an event of default occurs and is continuing with respect to the Notes, either the Fiscal Agent or the holders of at least 25% in aggregate principal amount of the outstanding Notes may declare the entire principal amount to be immediately due and payable.

The Fiscal Agent must, within 90 days after a default with respect to the Notes is known to a responsible officer of the Fiscal Agent, give the holders of the Notes notice of the default (the term default to mean the events specified above without grace periods). However, except in the case of a default in the payment of principal, premium or interest, the Fiscal Agent may withhold notice if it in good faith determines that withholding the notice is in the interest of the holders of the Notes.

The holders of a majority in aggregate principal amount of the outstanding Notes have the right, subject to certain limitations, to direct the time, method and place of conducting any proceeding for any remedy available to the Fiscal Agent with respect to their Notes or exercising any trust or power conferred on the Fiscal Agent and to waive certain defaults. The Fiscal Agent will be under no obligation to exercise any of its rights or powers under the Fiscal Agency Agreement at the request of any of the holders of the Notes unless they have offered to the Fiscal Agent reasonable indemnity against the costs, expenses and liabilities that might be incurred by it in compliance with the request.

181 Book-Entry Settlement and Clearance The Global Notes The Notes will be issued in the form of one or more registered notes in global form without interest coupons (the “Global Notes”), as follows: • Notes sold to qualified institutional buyers under Rule 144A will be represented by a Rule 144A Global Note; and • Notes sold in offshore transactions to non-U.S. persons in reliance on Regulation S will be represented by a Regulation S Global Note. During the period that begins on the closing date and ends 40 days after the closing date (the “Distribution Compliance Period”), such Regulation S Global Note will be represented exclusively by the Temporary Regulation S Global Note. After the Distribution Compliance Period, beneficial interests in such Temporary Regulation S Global Note will be exchangeable for beneficial interests in a Permanent Regulation S Global Note, subject to the certification requirements described under “—Exchanges among the Global Notes.” See “Notice to Investors.”

The Global Notes will be deposited with a common depositary for, and in respect of interests held through, Euroclear Bank S.A./ N.V., as operator of Euroclear and Clearstream.

Beneficial interests in the Global Notes may not be exchanged for Notes in physical, certificated form except in the limited circumstances described below under “—Certificated Notes.”

Each Global Note and beneficial interests in each Global Note will be subject to restrictions on transfer as described under “Notice to Investors.” In addition, transfers of beneficial interests in Global Notes will be subject to the applicable rules and procedures of Euroclear, Clearstream and their direct or indirect participants, which may change from time to time.

Exchanges Among the Global Notes Except as set forth below, the Global Notes may be transferred, in whole and not in part, only to Euroclear or Clearstream or their respective nominees. You may hold your interests in the Global Notes through Clearstream or Euroclear, either as a participant in such systems or indirectly through organizations that are participants in such systems. Clearstream and Euroclear will hold interests in the Global Notes on behalf of their respective participating organizations or customers through customers’ securities accounts in Clearstream’s or Euroclear’s names on the books of their respective depositaries. Book-entry interest in the Notes and all transfers relating to the Notes will be reflected in the book-entry records of Clearstream and Euroclear.

During the Distribution Compliance Period, beneficial interests in a Temporary Regulation S Global Note may be transferred only to persons that are not “U.S. persons,” as defined under Regulation S.

Beneficial interests in such Temporary Regulation S Global Note will be exchangeable for beneficial interests in the Permanent Regulation S Global Note only after the Distribution Compliance Period and only upon receipt by the Fiscal Agent of a certification on behalf of the beneficial owner (in the form set forth in the Fiscal Agency Agreement) that such beneficial owner is either (i) not a U.S. person under Regulation S or (ii) a U.S. person who purchased the Notes in a transaction that did not require registration under the Securities Act.

A beneficial interest in a Regulation S Global Note may be transferred to a person who wishes to hold such beneficial interest through the Rule 144A Global Note only upon receipt by the Fiscal Agent of a written certification of the transferee to the effect that such transferee is a qualified institutional buyer within the meaning of Rule 144A under the Securities Act in a transaction meeting the requirements of Rule 144A.

Any beneficial interest in a Regulation S Global Note that is transferred to a person who takes delivery in the form of a beneficial interest in the 144A Global Note will, upon transfer, cease to be represented by a Regulation S

182 Global Note and will become represented by a 144A Global Note and, accordingly, will be subject to the procedures applicable to beneficial interests in a 144A Global Note for as long as it remains such an interest. Any beneficial interest in a 144A Global Note that is transferred to a person who takes delivery in the form of a beneficial interest in a Regulation S Global Note will, upon transfer, cease to be represented by the 144A Global Note and will become represented by a Regulation S Global Note and, accordingly, will be subject to the procedures applicable to beneficial interests in a Regulation S Global Note for as long as it remains such an interest. A beneficial interest in a Global Note that is transferred to a person who takes delivery through another Global Note will, upon transfer, become subject to any transfer restrictions and other procedures applicable to beneficial interests in the other Global Note.

Book-Entry Procedures for the Global Notes Liberty Mutual has obtained the information in this section concerning Euroclear and Clearstream and their book-entry systems and procedures from sources Liberty Mutual believes to be reliable. The description of the clearing systems in this section reflects Liberty Mutual’s understanding of the rules and procedures of Euroclear and Clearstream as they are currently in effect. Those systems could change their rules and procedures at any time.

Global Clearance and Settlement Beneficial interests in the Global Notes will be represented, and transfers of such beneficial interests will be effected, through accounts of financial institutions acting on behalf of beneficial owners as direct or indirect participants in Euroclear or Clearstream. Those beneficial interests will be held in denominations of €100,000 and additional multiples of €1,000 in excess thereof. Investors may hold Notes directly through Euroclear or Clearstream, if they are participants in such systems, or indirectly through organizations that are participants in such systems.

Owners of beneficial interests in the Global Notes will not be entitled to have Notes registered in their names, and will not receive or be entitled to receive physical delivery of Notes in definitive form. Except as provided below, beneficial owners will not be considered the owners or holders of the Notes under the Fiscal Agency Agreement, including for purposes of receiving any reports delivered by Liberty Mutual or the Fiscal Agent pursuant to the Fiscal Agency Agreement. Accordingly, each beneficial owner must rely on the procedures of the clearing systems and, if such person is not a participant of the clearing systems, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the Fiscal Agency Agreement. Under existing industry practices, if Liberty Mutual requests any action of holders or a beneficial owner desires to give or take any action a holder is entitled to give or take under the Fiscal Agency Agreement, the clearing systems would authorize their participants holding the relevant beneficial interests to give or take action and the participants would authorize beneficial owners owning through the participants to give or take such action or would otherwise act upon the instructions of beneficial owners. Conveyance of notices and other communications by the clearing systems to their participants, by the participants to indirect participants and by the participants and indirect participants to beneficial owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in certificated form. These limits and laws may impair the ability to transfer beneficial interests in Global Notes.

Persons that are not Euroclear or Clearstream participants may beneficially own Notes held by the common depositary for Euroclear and Clearstream only through direct or indirect participants in Euroclear and Clearstream. So long as the common depositary for Euroclear and Clearstream is the registered owner of the Global Notes, the common depositary for all purposes will be considered the sole holder of the Notes represented by the Global Notes under the Fiscal Agency Agreement and the Global Notes.

183 Euroclear. Euroclear advises that it was created in 1968 to hold securities for its participants (“Euroclear Participants”) and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Euroclear provides various other services, including securities lending and borrowing, and interfaces with domestic markets in several countries. Euroclear is operated by Euroclear Bank S.A./N.A. (the “Euroclear Operator”), under contract with Euroclear Clearance Systems, S.C., a Belgian cooperative corporation (the “Cooperative”).

All operations are conducted by the Euroclear Operator, and all Euroclear securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries and may include the Managers. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly.

Securities clearance accounts and cash accounts with the Euroclear Operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System, and applicable Belgian law (collectively, the “Terms and Conditions”). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants and has no record of or relationship with persons holding through Euroclear Participants.

Distributions with respect to the Notes held beneficially through Euroclear will be credited to the cash accounts of Euroclear Participants in accordance with the Terms and Conditions, to the extent received by its depositary.

Euroclear further advises that investors that acquire, hold and transfer interests in the Notes by book-entry through accounts with the Euroclear Operator or any other securities intermediary are subject to the laws and contractual provisions governing their relationship with their intermediary, as well as the laws and contractual provisions governing the relationship between such an intermediary and each other intermediary, if any, standing between themselves and the Global Notes.

The Euroclear Operator advises as follows: under Belgian law, investors that are credited with securities on the records of the Euroclear Operator have a co-property right in the fungible pool of interests in securities on deposit with the Euroclear Operator in an amount equal to the amount of interests in securities credited to their accounts. In the event of the insolvency of the Euroclear Operator, Euroclear Participants would have a right under Belgian law to the return of the amount and type of interests in securities credited to their accounts with the Euroclear Operator. If the Euroclear Operator did not have a sufficient amount of interests in securities on deposit of a particular type to cover the claims of all Participants credited with such interests in securities on the Euroclear Operator’s records, all Participants having an amount of interests in securities of such type credited to their accounts with the Euroclear Operator would have the right under Belgian law to the return of their pro rata share of the amount of interests in securities actually on deposit.

Under Belgian law, the Euroclear Operator is required to pass on the benefits of ownership in any interests in securities on deposit with it (such as dividends, voting rights and other entitlements) to any person credited with such interests in securities on its records.

Clearstream. Clearstream advises that it is incorporated under the laws of Luxembourg and licensed as a bank and professional depositary. Clearstream holds securities for its participating organizations (“Clearstream Customers”) and facilitates the clearance and settlement of securities transactions between Clearstream

184 Customers through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. Clearstream provides to Clearstream Customers, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. Clearstream interfaces with domestic securities markets in over 30 countries through established depository and custodial relationships. Clearstream has established an electronic bridge with the Euroclear Operator to facilitate the settlement of trades between Euroclear and Clearstream. As a registered bank in Luxembourg, Clearstream is subject to regulation by the Luxembourg Commission for the Supervision of the Financial Sector (Commission de Surveillance du Secteur Financier). Clearstream Customers are recognized financial institutions around the world, including Managers, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations and may include the Managers. Clearstream’s U.S. customers are limited to securities brokers and dealers and banks. Indirect access to Clearstream is also available to other institutions, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Clearstream Customer, either directly or indirectly.

Distributions with respect to the Notes held through Clearstream will be credited to cash accounts of Clearstream Customers in accordance with its rules and procedures.

Euroclear and Clearstream Arrangements. So long as Euroclear or Clearstream or their nominee or their common depositary is the registered holder of the Global Notes, Euroclear, Clearstream or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Notes for all purposes under the Fiscal Agency Agreement and the Notes. Payments of principal, premium and interest and other amounts in respect of the Global Notes will be made to Euroclear, Clearstream or such nominee, as the case may be, as registered holder thereof. None of Liberty Mutual, the Fiscal Agent, any Manager and any affiliate of any of the above or any person by whom any of the above is controlled (as such term is defined in the Securities Act) will have any responsibility or liability for any records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

Distributions of principal, premium and interest in respect of the Global Notes will be credited in euro to the extent received by Euroclear or Clearstream from the paying agent to the cash accounts of Euroclear or Clearstream customers in accordance with the relevant system’s rules and procedures.

Because Euroclear and Clearstream can only act on behalf of participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in the Global Notes to pledge such interest to persons or entities that do not participate in the relevant clearing system, or otherwise take actions in respect of such interest, may be affected by the lack of a physical certificate in respect of such interest.

Initial Settlement. Liberty Mutual understands that investors that hold their Notes through Euroclear or Clearstream accounts will follow the settlement procedures that are applicable to conventional eurobonds in registered form. Subject to applicable procedures of Euroclear and Clearstream, Notes will be credited to the securities custody accounts of Clearstream and Euroclear participants on the business day following the settlement date against payment, for value on the settlement date.

Secondary Market Trading. Because the purchaser determines the place of delivery, it is important to establish at the time of trading of any Notes where both the purchaser’s and seller’s accounts are located to ensure that settlement can be made on the desired value date.

Liberty Mutual understands that secondary market trading between Euroclear and/or Clearstream participants will occur in the ordinary way following the applicable rules and operating procedures of Euroclear and Clearstream. Secondary market trading will be settled using procedures applicable to conventional eurobonds in registered form.

185 You should be aware that investors will only be able to make and receive deliveries, payments and other communications involving the Notes through Euroclear and Clearstream on days when those systems are open for business. Those systems may not be open for business on days when banks, brokers and other institutions are open for business in the United States.

In addition, because of time-zone differences, there may be problems with completing transactions involving Euroclear and Clearstream on the same business day as in the United States. U.S. investors who wish to transfer their interests in the Notes, or to make or receive a payment or delivery of the Notes, on a particular day, may find that the transactions will not be performed until the next business day in Brussels or Luxembourg, depending on whether Euroclear or Clearstream is used.

Euroclear or Clearstream will credit payments to the cash accounts of Euroclear Participants or Clearstream Customers, as applicable, in accordance with the relevant system’s rules and procedures, to the extent received by its depositary. The Euroclear Operator or Clearstream, as the case may be, will take any other action permitted to be taken by a holder under the Fiscal Agency Agreement on behalf of a Euroclear Participant or Clearstream Customer only in accordance with its relevant rules and procedures.

Euroclear and Clearstream have agreed to the foregoing procedures in order to facilitate transfers of the Notes among participants of Euroclear and Clearstream. However, they are under no obligation to perform or continue to perform those procedures, and they may discontinue those procedures at any time. Neither Liberty Mutual nor the Fiscal Agent nor any of their respective agents will have any responsibility for the performance by Euroclear, Clearstream or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Certificated Notes Notes in physical, certificated form will be issued and delivered to each person that the depositary for the Notes identifies as a beneficial owner of the related notes only if: • the depositary for the Notes notifies Liberty Mutual at any time that it is unwilling or unable to continue as depositary for the Global Notes and a successor depositary is not appointed within 90 days; • Liberty Mutual, at its option, elects to cause the issuance of certificated Notes and notifies the Fiscal Agent of such election; or • certain other events provided in the Fiscal Agency Agreement should occur with respect to the Notes.

Any such certificated Notes issued in exchange for a beneficial interest in a Global Note will be issued in minimum denominations of €100,000 principal amount and multiples of €1,000 in excess thereof. Any such certificated Note issued in exchange for a beneficial interest in the Rule 144A Global Note or the Temporary Regulation S Global Note will bear the restricted legend set forth under “Notice to Investors” and accordingly will be subject to the restrictions on transfer set forth therein. In the case of certificated Notes issued in exchange for beneficial interests in the Temporary Regulation S Global Note, such certificated Notes may be exchanged for certificated Notes that do not bear such restricted legend only after the Distribution Compliance Period, subject to the certification requirements applicable to exchanges of beneficial interests in the Temporary Regulation S Global Note for beneficial interests in the Permanent Regulation S Global Note described under “—Exchanges among the Global Notes.” See “Notice to Investors.”

The Fiscal Agency Agreement Concerning the Fiscal Agent In acting under the Fiscal Agency Agreement and in connection with the Notes, the Fiscal Agent is acting solely as the agent of Liberty Mutual and does not assume any obligation toward or relationship of agency or trust for or with the owners or holders of the Notes, except that any funds held by the Fiscal Agent for payment of principal of or interest on the Notes and as contemplated below under “—Satisfaction and Discharge” shall be

186 held in trust by it and applied as set forth in the Notes but need not be segregated from other funds held by it, except as required by law. For a description of the duties and the immunities and rights of the Fiscal Agent under the Fiscal Agency Agreement, reference is made to the Fiscal Agency Agreement, and the obligations of Fiscal Agent to the holder of any Notes are subject to such immunities and rights.

Satisfaction and Discharge Liberty Mutual may discharge its obligations to pay the principal, premium (if any) and interest on the Notes by depositing funds or obligations issued by the United States in an amount sufficient to provide for the timely payment of principal, premium (if any), interest and all other amounts due under the Notes with the Fiscal Agent, who will hold such funds or obligations in trust for such purposes.

Withholding Holders or beneficial owners of the Notes may, prior to the first interest payment date on which the holder or beneficial owner owns the Notes, be required to provide Liberty Mutual, the Fiscal Agent or the paying agent (or entities through which such beneficial owners hold a beneficial interest in the Notes) with information about themselves that the recipient reasonably identifies as relevant for determining whether Liberty Mutual, the Fiscal Agent or the paying agent, as the case may be, has any tax withholding or information reporting obligations under FATCA or other applicable laws. Liberty Mutual, the Fiscal Agent or the paying agent, as the case may be, is permitted to withhold and pay to the Internal Revenue Service any portion of any payment in respect of the Notes that it reasonably determines is required to be withheld under FATCA or other applicable laws. See “Certain U.S. Federal Income Tax Considerations—FATCA.”

Defeasance The Fiscal Agency Agreement will provide that (A) if applicable, Liberty Mutual will be discharged from any and all obligations in respect of the outstanding Notes, or (B) if applicable, Liberty Mutual may omit to comply with certain restrictive covenants, and that such omission will not be deemed to be an Event of Default under the Fiscal Agency Agreement and the Notes, if in the case of either clause (A) or (B), Liberty Mutual makes an irrevocable deposit with the Fiscal Agent, in trust, of money and/or non-callable German government obligations that will provide money, without reinvestment thereof, in an amount sufficient in the opinion of a nationally recognized firm of independent certified public accountants to pay the principal of, and premium, if any, and each installment of interest, if any, on the outstanding Notes. With respect to clause (B), the obligations under the Fiscal Agency Agreement other than with respect to such covenants and the Events of Default (other than the Event of Default relating to such covenants above) will remain in full force and effect. Such trust may only be established if, among other things, (i) with respect to clause (A), Liberty Mutual has received from, or there has been published by, the Internal Revenue Service a ruling or there has been a change in law, which in the opinion of counsel provides that holders of the outstanding Notes will not recognize gain or loss for U.S. federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to U.S. federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; or, with respect to clause (B), Liberty Mutual has delivered to the Fiscal Agent an opinion of counsel to the effect that the holders of the outstanding Notes will not recognize gain or loss for U.S. federal income tax purposes as a result of such deposit and defeasance and will be subject to U.S. federal income tax on the same amount, in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred; (ii) no Event of Default (or event that with the passing of time or the giving of notice, or both, will constitute an Event of Default) shall have occurred and be continuing; (iii) Liberty Mutual has delivered to the Fiscal Agent an opinion of counsel to the effect that such deposit shall not cause the Fiscal Agent or the trust so created to be subject to the Investment Company Act of 1940; and (iv) certain other customary conditions precedent are satisfied. In the event Liberty Mutual is discharged by virtue of these defeasance provisions, any Guarantors will also be discharged.

187 Modification and Waiver Except as provided in the next two succeeding paragraphs, the Fiscal Agency Agreement, the Guarantees or the Notes may be amended or supplemented with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Notes, and any existing default or compliance with any provision of the Fiscal Agency Agreement, the Guarantees or the Notes may be waived with the consent of the holders of not less than a majority in aggregate principal amount of the outstanding Notes.

Without the consent of each holder affected, an amendment or waiver may not (with respect to any Notes held by a non-consenting holder): • change the stated maturity date of the principal of, or any installment of interest on, any Note, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or extend the time for payment of interest on any Note, or change the place for payment or coin or currency of payment on any Note, or any premium or interest thereon, or impair the right to institute suit for the enforcement of any such payment on or after the stated maturity date; • modify the Guarantees or the provision of the Fiscal Agency Agreement relating to the Guarantees in any way that shall adversely affect the interest of any holder; • reduce the percentage in principal amount of the Notes, the consent of whose holders of outstanding Notes is required for any such supplement or amendment, or the consent of whose holders of outstanding Notes is required for any waiver provided for in the Fiscal Agency Agreement; • reduce the redemption price of the Notes or change the time at which the Notes may or must be redeemed or purchased; • make any change to the abilities of holders to enforce their rights under the Fiscal Agency Agreement or the Notes; • waive a default or Event of Default in the payment of principal of, premium, if any, or interest on the Notes (except a rescission of acceleration of the Notes by the holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration); or • make any change in the provisions of the Fiscal Agency Agreement relating to waivers of past defaults or the rights of holders of the Notes to receive payments of principal of, premium, if any, or interest, or additional interest, if any, on the Notes.

Notwithstanding the foregoing, without the consent of any holder of the Notes, Liberty Mutual, each Guarantor and the Fiscal Agent may amend or supplement the Fiscal Agency Agreement, the Notes and the Guarantees to: • evidence the succession of another corporation to Liberty Mutual and the assumption by any such successor of the covenants of Liberty Mutual contained in the Fiscal Agency Agreement and in the Notes, provided the event giving rise to such succession was otherwise in accordance with the Fiscal Agency Agreement; • add to the covenants of Liberty Mutual for the benefit of the holders or to surrender any right or power herein conferred upon Liberty Mutual; • provide for uncertificated Notes in addition to or in place of certificated Notes in accordance with the provisions of the Fiscal Agency Agreement; • add any additional Events of Default with respect to the Notes; • make any changes that would provide any additional rights or benefits to the holders of Notes or that do not adversely affect the legal rights under the Fiscal Agency Agreement of any such holder of Notes;

188 • provide for the issuance of additional Notes in accordance with the provisions of the Fiscal Agency Agreement; or • to cure any ambiguity, to correct or supplement any provision of the Fiscal Agency Agreement or the Notes that may be defective or inconsistent with any other provision of the Fiscal Agency Agreement or in any Guarantee, or to make any other provisions with respect to matters or questions arising under the Fiscal Agency Agreement, the Notes or the Guarantees, in each case, which shall not be inconsistent with the provisions of the Fiscal Agency Agreement, the Notes or the Guarantees, as the case may be, provided such action shall not adversely affect the interests of the holders of Notes in any material respect.

In connection with any amendment or supplement, the Fiscal Agent will receive an opinion of counsel, upon which it may conclusively rely, stating that such amendment or supplement is authorized or permitted by the terms of the Fiscal Agency Agreement.

Governing Law. The Fiscal Agency Agreement, the Guarantees, and the Notes are to be governed by and construed in accordance with the laws of the State of New York.

The Fiscal Agent. The Fiscal Agent is a New York banking corporation. The Company has other commercial dealings in the ordinary course of business with The Bank of New York Mellon and its affiliates.

189 CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS

The following is a general discussion of certain U.S. federal income tax considerations relating to the purchase, ownership and disposition of the Notes by U.S. Holders (as defined below) and by Non-U.S. Holders (as defined below). This discussion only applies to Notes that are held as capital assets by Holders (as defined below) who purchase the Notes upon their original issuance at their initial offering price. This discussion does not describe all of the tax considerations that may be relevant to Holders in light of their particular circumstances or to Holders subject to special rules, such as individual Non-U.S. Holders who are present in the United States for 183 days or more in a taxable year, certain financial institutions, insurance companies, banks, tax-exempt entities, partnerships or other pass-through entities or investors therein, dealers and traders in securities or persons holding the Notes as part of a hedge, straddle or other integrated transaction. Finally, this discussion does not address the effect of any state, local, foreign or other tax laws or any U.S. federal estate, gift, unearned income Medicare contribution or alternative minimum tax considerations. This discussion is based on the Code, administrative pronouncements, judicial decisions and final, temporary and proposed U.S. Treasury regulations, all as of the date hereof, and all of which are subject to change or differing interpretations, possibly with retroactive effect, so as to result in U.S. federal income tax consequences different from those discussed below. Prospective investors should consult their tax advisors as to the particular tax consequences to them of purchasing, holding and disposing of the Notes. As used in this discussion, the term “U.S. Holder” means a beneficial owner of a Note that is for U.S. federal income tax purposes, a citizen or individual resident of the United States, a corporation (or other entity taxable as a corporation) created or organized in or under the laws of the United States, any state thereof or the District of Columbia, or any other person that is subject to U.S. federal income tax on a net income basis in respect of an investment in the Notes. As used in this discussion, the term “Non-U.S. Holder” means a beneficial owner of a Note that is not a U.S. Holder for U.S. federal income tax purposes and the term “Holders” means U.S. Holders and Non-U.S. Holders.

U.S. Holders Payments of Interest Interest paid on the Notes generally will be taxable to a U.S. Holder as ordinary income at the time it accrues or is received in accordance with the U.S. Holder’s method of accounting for U.S. federal income tax purposes. While it is not anticipated that the Notes will be issued with more than de minimis original issue discount (“OID”), if the Notes are issued with OID in excess of a de minimis amount, a U.S. Holder will be required to include the OID in ordinary income during the term of the Notes on a constant accrual basis, regardless of the U.S. Holder’s method of accounting, and to take foreign currency gain or losses with regard to the OID into account under rules similar to those described below. The remainder of this discussion assumes that the Notes are not issued with OID in excess of a de minimis amount. A U.S. Holder that uses the cash method of accounting for U.S. federal income tax purposes and that receives a payment of interest will be required to include in ordinary income the U.S. dollar value of the euro interest payment determined on the date the payment is received, regardless of whether the payment is in fact converted to U.S. dollars. A U.S. Holder that uses the accrual method of accounting for tax purposes will accrue interest income on a Note in euros and translate the amount accrued into U.S. dollars based on the average exchange rate in effect during the interest accrual period (or portion thereof within the holder’s taxable year), or, at the holder’s election, at the spot rate of exchange on the last day of the accrual period (or the last day of the taxable year within such accrual period if the accrual period spans more than one taxable year), or at the spot rate of exchange on the date of receipt, if that date is within five business days of the last day of the accrual period. A U.S. Holder that makes this election must apply it consistently to all debt instruments from year to year and cannot change the election without the consent of the Internal Revenue Service (the “IRS”). A U.S. Holder who uses the accrual method will recognize foreign currency gain or loss, as the case may be, on the receipt of an interest payment made with respect to a Note if the exchange rate in effect on the date the

190 payment is received differs from the rate applicable to a previous accrual of that interest income. This foreign currency gain or loss will generally be treated as ordinary income or loss and will not be treated as an adjustment to interest income received on the Note.

Sale, Exchange, Retirement or Other Disposition Upon the sale, exchange, retirement or other disposition of a Note, a U.S. Holder generally will recognize gain or loss equal to the difference between the amount realized (less any accrued interest not previously included in the U.S. Holder’s income, which will be taxable as ordinary income) on the sale, exchange, retirement or other disposition and the U.S. Holder’s adjusted tax basis in the Note. A U.S. Holder’s adjusted tax basis in a Note generally will be the U.S. dollar value of the purchase price of that Note on the date of purchase. The amount realized upon the sale, exchange, retirement or other disposition of a Note will be the U.S. dollar value of the currency received calculated at the exchange rate in effect on the date the instrument is sold, exchanged, retired or disposed of. In the case of a Note that is traded on an established securities market, a U.S. Holder who uses the cash method, and if it so elects, a U.S. Holder who uses the accrual method, will determine the U.S. dollar value of the amount realized by translating such amount at the spot rate on the settlement date of the sale. The election available to U.S. Holders who use the accrual method in respect of the purchase and sale of Notes traded on an established securities market must be applied consistently to all debt instruments from year to year and cannot be changed without the consent of the IRS. Subject to the foreign currency rules discussed below, gain or loss realized by a U.S. Holder on a sale or other taxable disposition of a Note generally will be capital gain or loss and will be long-term capital gain or loss if, at the time of such sale or disposition, the Notes have been held for more than one year. Certain non-corporate U.S. Holders (including individuals) may be eligible for preferential rates of taxation in respect of long-term capital gains. The deductibility of capital losses is subject to limitations. Gain or loss recognized by a U.S. Holder on the sale, exchange, retirement or other disposition of a Note generally will be treated as ordinary income or loss to the extent that the gain or loss is attributable to changes in exchange rates during the period in which the U.S. Holder held the Note. This foreign currency gain or loss will not be treated as an adjustment to interest income received on the Notes. In addition, upon the sale, exchange, retirement or other disposition of a Note, a U.S. Holder that uses the accrual method may realize foreign currency gain or loss attributable to amounts received in respect of accrued and unpaid interest. The amount of foreign currency gain or loss realized with respect to principal and accrued interest will, however, be limited to the amount of overall gain or loss realized on the disposition. For a U.S. Holder that uses the accrual method and does not make the election described above, the foreign currency gain or loss may include amounts attributable to changes in exchange rates between the trade date and the settlement date.

Reportable Transactions A U.S. taxpayer that participates in a “reportable transaction” will be required to disclose its participation to the IRS. Under the relevant rules, a U.S. Holder may be required to treat a foreign currency exchange loss from the Notes as a reportable transaction if this loss exceeds the relevant threshold in the regulations ($50,000 in a single taxable year, if the U.S. Holder is an individual or trust, or higher amounts for other non-individual U.S. Holders), and to disclose its investment by filing Form 8886 with the IRS. A penalty in the amount of $10,000 in the case of a natural person and $50,000 in all other cases is generally imposed on any taxpayer that fails to timely file an information return with the IRS with respect to a transaction resulting in a loss that is treated as a reportable transaction. Prospective investors are urged to consult their tax advisors regarding the application of these rules.

Non-U.S. Holders Payments of Interest Subject to the discussions below under “Information Reporting and Backup Withholding” and “FATCA,” payments of interest on the Notes to a Non-U.S. Holder generally will be exempt from U.S. federal income or

191 withholding tax under the portfolio interest exemption provided that (i) the Non-U.S. Holder properly certifies as to its foreign status by providing a properly executed IRS Form W-8BEN or W-8BEN-E (or appropriate substitute form) to the applicable withholding agent, (ii) the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of our stock entitled to vote; and (iii) the Non-U.S. Holder is not a controlled foreign corporation that is related to us actually or constructively through stock ownership. If all of the foregoing requirements are not satisfied, payments of interest generally will be subject to U.S. federal withholding tax at a 30% rate (or a lower applicable treaty rate, provided certain certification requirements are met.

Sale, Exchange, Retirement or Other Disposition Subject to the discussion under “Information Reporting and Backup Withholding” and “FATCA” below, Non-U.S. Holders generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale, exchange, retirement or other disposition of a Note.

Information Reporting and Backup Withholding Information reporting requirements generally apply in connection with payments on the Notes to, and the proceeds from a sale or other disposition of the Notes by, non-corporate U.S. Holders. A U.S. Holder will be subject to backup withholding on these payments if the U.S. Holder fails to provide its taxpayer identification number and comply with certain certification procedures or otherwise establish an exemption from backup withholding. Backup withholding is not an additional tax. Any amount paid as backup withholding will be creditable against the U.S. Holder’s U.S. federal income tax liability, provided that the required information is timely furnished to the IRS. Non-U.S. Holders may be required to comply with applicable certification procedures to establish that they are not U.S. Holders in order to avoid the application of such information reporting requirements and backup withholding.

FATCA Under the U.S. tax rules known as FATCA, a Non-U.S. Holder of the Notes will generally be subject to 30% U.S. withholding tax on payments made on (and, after December 31, 2018, gross proceeds from the sale, exchange, retirement or other taxable disposition of) the Notes if the Non-U.S. Holder (i) is, or holds its Notes through, a foreign financial institution that has not entered into an agreement with the U.S. government to report, on an annual basis, certain information regarding accounts with or interests in the institution held by certain United States persons and by certain non-U.S. entities that are wholly or partially owned by United States persons, or that has been designated as a “nonparticipating foreign financial institution” if it is subject to an intergovernmental agreement between the United States and a foreign country, or (ii) fails to provide certain documentation (usually an IRS Form W-8BEN or W-8BEN-E) containing information about its identity, its FATCA status, and if required, its direct and indirect U.S. owners. The adoption of, or implementation of, an intergovernmental agreement between the United States and an applicable foreign country, or future U.S. Treasury regulations, may modify these requirements. If any taxes were to be deducted or withheld from any payments in respect of the Notes as a result of a beneficial owner or intermediary’s failure to comply with the foregoing rules, no additional amounts will be paid on the Notes as a result of the deduction or withholding of such tax. Prospective investors should consult their own tax advisors on how these rules may apply to their investment in the Notes.

THE U.S. FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON AN INVESTOR’S PARTICULAR SITUATION. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.

192 CERTAIN EUROPEAN TAX CONSIDERATIONS

The Proposed Financial Transactions Tax The European Commission has published a proposal (the “Commission’s Proposal”) for a Directive for a common financial transactions tax (“FTT”) in Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain (the “participating Member States”). However, Estonia has since stated that it will not participate.

The Commission’s Proposal has very broad scope and could, if introduced in its current form, apply to certain dealings in the Notes (including secondary market transactions) in certain circumstances.

Under the Commission’s Proposal, the FTT could apply in certain circumstances to persons both within and outside of the participating Member States. Generally, it would apply to certain dealings in the Notes where at least one party is a financial institution, and at least one party is established in a participating Member State. A financial institution may be, or be deemed to be, “established” in a participating Member State in a broad range of circumstances, including (a) by transacting with a person established in a participating Member State or (b) where the financial instrument which is subject to the dealings is issued in a participating Member State.

The FTT remains subject to negotiation between the participating Member States and the legality of the proposal is uncertain. It may therefore be altered prior to any implementation, the timing of which remains unclear. Additional EU Member States may decide to participate and/or certain of the participating Member States may decide to withdraw.

Prospective holders of the Notes are advised to seek their own professional advice in relation to the FTT.

United Kingdom Provision of Information Requirements The comments below are of a general nature and are based on current United Kingdom (“UK”) tax law as applied in England and Wales and published practice of HM Revenue & Customs (“HMRC”), the UK tax authorities. Such law may be repealed, revoked or modified and such practice may not bind HMRC and/or may change (in each case, possibly with retrospective effect), resulting in UK tax consequences different from those discussed below. The comments below deal only with UK rules relating to information that may need to be provided to HMRC in connection with the Notes. They do not deal with any other UK tax consequences of acquiring, owning or disposing of the Notes. Each prospective investor should seek advice based on its particular circumstances from an independent tax adviser.

Information relating to the Notes may be required to be provided to HMRC in certain circumstances pursuant to certain domestic and international reporting and transparency regimes. This may include (but is not limited to) information relating to the value of the Notes, amounts paid or credited with respect to the Notes, details of the holders or the beneficial owners of the Notes (or the persons for whom the Notes are held), details of the persons who exercise control over entities that are, or are treated as, holders of the Notes, details of the persons to whom payments derived from the Notes are or may be paid and information and documents in connection with transactions relating to the Notes. Information may be required to be provided by, amongst others, the Issuer, the holders of the Notes, persons by or through whom payments derived from the Notes are made or credited or who receive such payments (or who would be entitled to receive such payments if they were made), persons who effect or are a party to transactions relating to the Notes on behalf of others and certain registrars or administrators. Accordingly, in order to enable these requirements to be met, holders of the Notes may be required to provide information to the Company or to other persons. In certain circumstances, the information obtained by HMRC may be exchanged with tax authorities in other countries.

193 NOTICE TO INVESTORS

Because of the following restrictions, you are advised to consult your own legal counsel before making an offer, resale, pledge or other transfer of the Notes.

Each purchaser of Notes will be deemed to have represented and agreed as follows (some of the terms in the following paragraphs have the definitions given in Rule 144A under the Securities Act (“Rule 144A”) and Regulation S under the Securities Act (“Regulation S”)): (1) It is purchasing the Notes for its own account or an account with respect to which it exercises sole investment discretion; and it or the owner of such account is a qualified institutional buyer and is aware that the Managers are selling the Notes to it or to the owner of such account in reliance on Rule 144A or is a Non-U.S. Holder that is outside the United States (or a Non-U.S. Holder that is a dealer or other fiduciary eligible to participate in a Regulation S transaction) and is purchasing the Notes in accordance with Regulation S. (2) The Notes have not been, and will not be, registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as set forth below. (3) For any person other than a Non-U.S. Holder outside the United States, if it should resell or otherwise transfer the Notes within the period prior to the expiration of the holding period applicable to sales of such Notes under Rule 144 under the Securities Act, it will do so only (a) to Liberty Mutual or any subsidiary thereof, (b) to a qualified institutional buyer in compliance with Rule 144A, (c) pursuant to an available exemption from registration provided by Rule 144 under the Securities Act (if available), (d) pursuant to a registration statement which has been declared effective under the Securities Act (and which continues to be effective at the time of such transfer) or (e) outside the United States in compliance with Rule 904 under the Securities Act. (4) If it is a qualified institutional buyer, it understands that the Notes offered in reliance on Rule 144A will be represented by a Rule 144A Global Note. Before any interest in the Rule 144A Global Note may be offered, sold, pledged or otherwise transferred to a person who is not a qualified institutional buyer, the transferee will be required to provide the Fiscal Agent with a written certification (the form of which certification can be obtained from the Fiscal Agent) as to compliance with the transfer restriction referred to above. (5) If it is a Non-U.S. Holder outside the United States, it understands that (a) during the Distribution Compliance Period, beneficial interests in the Regulation S Global Note will be represented only by beneficial interests in the Temporary Regulation S Global Note, (b) during the Distribution Compliance Period, the Temporary Regulation S Global Note may not be exchanged for certificated Notes and (c) beneficial interests in the Temporary Regulation S Global Note will be exchangeable for beneficial interests in the Permanent Regulation S Global Note only after the Distribution Compliance Period and only upon receipt by the Fiscal Agent of a certification on behalf of the beneficial owner that such beneficial owner is either (i) not a U.S. person under Regulation S or (ii) a U.S. person who purchased the Notes in a transaction that did not require registration under the Securities Act. (6) It agrees that it will give to each person to whom it transfers any Note notice of any restrictions on transfer of the Notes. (7) It acknowledges that, prior to any proposed transfer of any Note, it may be required to provide certifications or other documentation relating to the transfer as provided in the Fiscal Agency Agreement governing the Notes. (8) It understands that the Notes will bear a legend substantially to the following effect, unless the Fiscal Agent determines otherwise in accordance with the Fiscal Agency Agreement and in compliance with applicable law.

194 THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION OF THIS SECURITY, THE HOLDER: (1) REPRESENTS THAT (A) IT IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), OR (B) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT; (2) AGREES THAT IT WILL NOT, PRIOR TO EXPIRATION OF THE HOLDING PERIOD APPLICABLE TO SALES OF THIS SECURITY UNDER RULE 144 UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION), RESELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO LIBERTY MUTUAL OR ANY SUBSIDIARY THEREOF, (B) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER) OR (E) OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT; AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IF THE PROPOSED TRANSFEREE IS A PURCHASER WHO IS NOT A QUALIFIED INSTITUTIONAL BUYER OR A U.S. PERSON, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE BANK OF NEW YORK MELLON, AS FISCAL AGENT (OR A SUCCESSOR FISCAL AGENT, AS APPLICABLE), SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. THIS LEGEND WILL BE REMOVED UPON THE EARLIER OF THE TRANSFER OF THIS SECURITY PURSUANT TO CLAUSE 2(D) ABOVE OR UPON ANY TRANSFER OF THIS SECURITY UNDER RULE 144 UNDER THE SECURITIES ACT (OR ANY SUCCESSOR PROVISION). AS USED IN THIS SECURITY, THE TERMS “OFFSHORE TRANSACTION,” “UNITED STATES” AND “U.S. PERSON” HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. (9) It acknowledges that the Notes will not be issuable in certificated form except under the limited circumstances described under “Description of Notes—Book Entry Settlement and Clearance— Certificated Notes.” Any certificated Note issued under such circumstances in exchange for a beneficial interest in the Temporary Regulation S Global Note will bear the same restricted legend borne by the Rule 144A Global Note as set forth above and will be subject to the restrictions on transfer described therein. (10) It understands that no sale, transfer or conveyance of the Notes or any interest in the Notes may be made except in compliance with the restrictions on transfer described under “Description of Notes— Book-Entry Settlement and Clearance.” (11) It is not acquiring the Notes with the assets of, or for or on behalf of, any employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) or any plan, individual retirement account or arrangement that is subject to Section 4975 of the Code or any federal, state, local or non-U.S. law that is similar to such provisions of ERISA or the Code (each, a “Similar Law”), except to the extent that the acquisition and holding of the Notes does not constitute or result in a non-exempt prohibited transaction under ERISA, the Code or any Similar Law. (12) It understands that Liberty Mutual, the Managers, the Fiscal Agent and others will rely upon the truth and accuracy of the foregoing representations and agreements.

195 PLAN OF DISTRIBUTION

Liberty Mutual and the Managers, for whom Citigroup Global Markets Limited and Deutsche Bank AG, London Branch, are acting as representatives (the “Representatives”), will enter into a purchase agreement, to be dated April 27, 2016 with respect to the Notes. Subject to certain conditions, we have agreed to sell to each Manager and each Manager has severally agreed to purchase, at the purchase price specified therein, less certain commissions and expenses, the principal amount of Notes indicated in the following table.

Principal Amount of Managers Notes Citigroup Global Markets Limited ...... €225,000,000 Deutsche Bank AG, London Branch ...... 225,000,000 HSBC Bank plc ...... 32,500,000 Merrill Lynch International ...... 32,500,000 Wells Fargo Securities International Limited ...... 32,500,000 Bank of Montreal, London Branch ...... 22,500,000 Barclays Bank PLC ...... 22,500,000 Credit Suisse Securities (Europe) Limited ...... 22,500,000 Goldman Sachs International ...... 22,500,000 J.P. Morgan Securities plc ...... 22,500,000 Lloyds Bank plc ...... 22,500,000 Mitsubishi UFJ Securities International plc ...... 22,500,000 U.S. Bancorp Investments, Inc ...... 22,500,000 BNY Mellon Capital Markets EMEA Limited ...... 7,500,000 The Royal Bank of Scotland plc ...... 7,500,000 The Williams Capital Group, L.P...... 7,500,000 Total ...... €750,000,000

The Managers are committed to take and pay for all of the Notes being offered, if any are taken. The Notes will initially be offered at the price set forth on the cover page of this Offering Memorandum, plus accrued interest from May 4, 2016. After the Notes are released for sale, the Managers may change the offering price and other selling terms.

The Notes have not been and will not be registered under the Securities Act. Each Manager has agreed that it will only offer or sell the Notes (A) in the United States to qualified institutional buyers in reliance on Rule 144A or (B) outside the United States to non-U.S. persons in offshore transactions in reliance on Regulation S. Terms used in this paragraph have the meanings given them by Rule 144A and Regulation S.

In addition, until 40 days after the period referred to above, an offer or sale of such Notes within the United States by a dealer that is not participating in the offering may violate the registration requirements of the Securities Act.

One or more of the Managers may use affiliates or other appropriately licensed entities for sales of the Notes in jurisdictions in which such Managers are not licensed to make sales.

Liberty Mutual has agreed in the purchase agreement, subject to certain exceptions, that through the date of the issuance of the Notes, neither it, nor the Guarantors or any of their subsidiaries will, without the prior written consent of the Managers, offer, sell, contract to sell or otherwise dispose of any securities issued or guaranteed by any of Liberty Mutual, the Guarantors or certain significant subsidiaries which mature more than a year after the date of the issuance of the Notes and which are substantially similar to the Notes.

196 Liberty Mutual has agreed to indemnify the Managers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the Managers may be required to make in respect of those liabilities. In connection with the issue of the Notes, the Stabilizing Manager (or persons acting on behalf of the Stabilizing Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilizing Manager (or persons acting on behalf of the Stabilizing Manager) will undertake stabilization action. Any stabilization action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilization action or over- allotment must be conducted in accordance with all applicable laws and rules. Some of the Managers and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in their ordinary course of business with us or our affiliates, including as lenders in our various credit arrangements. They have received, or may in the future receive, customary fees and commissions for these transactions. Thomas J. May, a member of the board of directors of Bank of America Corporation, an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated, is a member of the board of directors of LMHC. The Bank of New York Mellon, an affiliate of BNY Mellon Capital Markets EMEA Limited, one of the Managers, will serve as Fiscal Agent, and will initially act as paying agent, securities registrar and transfer agent for the Notes, under the Fiscal Agency Agreement and the Paying Agency Agreement. In addition, in the ordinary course of their business activities, the Managers and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of ours or our affiliates. If any of the Managers or their affiliates have a lending relationship with us, certain of those Managers or their affiliates routinely hedge, and certain other of those Managers or their affiliates may hedge, their credit exposure to us consistent with their customary risk management policies. Typically, these Managers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in our securities, including, potentially, the Notes offered hereby. Any such credit default swaps or short positions could adversely affect future trading prices of the Notes offered hereby. The Managers and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

Canada The Notes may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the Notes must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws. Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this Offering Memorandum (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor. Pursuant to section 3A.3 (or, in the case of securities issued or guaranteed by the government of a non- Canadian jurisdiction, section 3A.4) of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the

197 Purchasing Agents are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.

European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (as defined herein) (each, a “Relevant Member State”), each Manager has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of the Notes which are the subject of the offering contemplated by this Offering Memorandum to the public in that Relevant Member State prior to the publication of a prospectus in relation to the Notes which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive to the extent implemented, except that it may, with effect from and including the Relevant Implementation Date, make an offer of the Notes to the public in that Relevant Member State at any time: (a) to any legal entity which is a qualified investor as defined in the Prospectus Directive if the relevant provision has been implemented; (b) to fewer than 150 natural or legal persons per Relevant Member State (other than qualified investors as defined in the Prospectus Directive, subject to obtaining the prior consent of the relevant dealer or dealers nominated by the issuer for any such offer; or (c) in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes shall require us or any Manager to publish a prospectus pursuant to Article 3 of the Prospectus Directive, or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.

For the purposes of this provision, the expression an “offer to the public,” in relation to any Notes in any Relevant Member State, means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe for the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, and the expression “Prospectus Directive” means Directive 2003/71/EC, as amended, including by Directive 2010/73/EU and includes any relevant implementing measure in the Relevant Member State.

United Kingdom Each Manager has represented and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act (the “FSMA”)) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the issuer or the Guarantors; and (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.

The Netherlands The offer in The Netherlands of the Notes included in this offering is exclusively limited to persons who trade or invest in securities in the conduct of a profession or business (which include banks, stockbrokers, insurance companies, pension funds, other institutional investors and finance companies and treasury departments of large enterprises).

198 Hong Kong The Notes may not be offered or sold by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), or (ii) to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong), and no advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the laws of Hong Kong) other than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong) and any rules made thereunder.

Singapore This Offering Memorandum has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Memorandum and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a relevant person, or any person pursuant to Section 275(1 A), and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Where the Notes are subscribed or purchased under Section 275 by a relevant person which is: (a) a corporation (which is not an accredited investor) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not an accredited investor) whose sole purpose is to hold investments and each beneficiary is an accredited investor, shares, debentures and units of shares and debentures of that corporation or the beneficiaries’ rights and interest in that trust shall not be transferable for 6 months after that corporation or that trust has acquired the Notes under Section 275 except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person, or any person pursuant to Section 275(1 A), and in accordance with the conditions, specified in Section 275 of the SFA; (2) where no consideration is given for the transfer; or (3) by operation of law.

Japan The Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (the Financial Instruments and Exchange Law) and each Manager has agreed that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan), or to others for re-offering or resale, directly or indirectly, in Japan or to a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the Financial Instruments and Exchange Law and any other applicable laws, regulations and ministerial guidelines of Japan.

199 LEGAL MATTERS

The validity of the Notes being offered by Liberty Mutual will be passed upon by Cleary Gottlieb Steen & Hamilton LLP, New York, New York. The validity of the Notes will be passed upon for the Managers by Debevoise & Plimpton LLP, New York, New York and London, England. Debevoise & Plimpton LLP from time to time represents Liberty Mutual in various matters unrelated to this offering.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Consolidated Balance Sheets of Liberty Mutual, as of December 31, 2015 and 2014 and the Consolidated Statements of Income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015, included in this Offering Memorandum have been audited by Ernst & Young LLP, independent public accounting firm registered with the Public Company Accounting Oversight Board, as stated in their report appearing herein.

The Consolidated Balance Sheets of LMHC, as of December 31, 2015 and 2014 and the Consolidated Statements of Income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015, included in this Offering Memorandum have been audited by Ernst & Young LLP, independent public accounting firm registered with the Public Company Accounting Oversight Board, as stated in their report appearing herein.

The Consolidated Balance Sheets of Massachusetts Holdings, as of December 31, 2015 and 2014 and the Consolidated Statements of Income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015, included in this Offering Memorandum have been audited by Ernst & Young LLP, independent public accounting firm registered with the Public Company Accounting Oversight Board, as stated in their report appearing herein.

200 LISTING AND GENERAL INFORMATION

Listing Application has been made to the Irish Stock Exchange plc for the Notes to be admitted to listing on the Official List and to be admitted to trading on the Global Exchange Market in accordance with the rules of that exchange. Notice of any optional redemption, change of control or change in the rate of interest payable on the Notes will be filed in the Companies Announcement Office of the Irish Stock Exchange plc.

For so long as the Notes are listed on the Global Exchange Market and the rules of the Irish Stock Exchange plc require, and for the life of these listing particulars, physical and electronic copies of the following documents may be inspected and obtained at the specified office of the paying agent during normal business hours on any weekday: • the Articles of Organization of Liberty Mutual and each Guarantor; • the Audited Consolidated Financial Statements of the Company and each Guarantor for the two most recent years; and • the Fiscal Agency Agreement (including the Guarantors’ guarantees of the Notes).

Liberty Mutual will maintain a security registrar for as long as any of the Notes are listed on the Global Exchange Market of the Irish Stock Exchange plc. The current paying agent is The Bank of New York Mellon, London Branch. Liberty Mutual reserves the right to vary such appointment and will publish notice of such change of appointment in a newspaper having a general circulation in Ireland (which is expected to be the Irish Times) or on the website of the Irish Stock Exchange plc, at www.ise.ie.

Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the issuer in relation to the Notes and is not itself seeking admission of the Notes to the Official List of the Irish Stock Exchange plc or to trading on the Global Exchange Market of the Irish Stock Exchange plc.

Clearing Information The Notes have been accepted for clearance through the facilities of Clearstream and Euroclear. The securities codes are:

Common Code ISIN Number Rule 144A Global Note ...... 140349453 XS1403494534 Regulation S Global Note ...... 140349984 XS1403499848

The address of Euroclear is Euroclear Bank S.A./N.V., 1 Boulevard du Roi Albert II, B 1210 Brussels, Belgium and the address of Clearstream is Clearstream Banking, 42 Avenue JF Kennedy, L 1855 Luxembourg.

Legal Information Liberty Mutual is a Massachusetts stock holding company that principally does business through its wholly owned subsidiaries: LMIC, LMFIC, EICOW, LMPIC and other subsidiaries. Liberty Mutual has an authorized share capital of 100,000 shares of common stock, par value $0.01 per share, of which 10,191 shares are issued and outstanding. All of the issued and outstanding shares of Liberty Mutual are owned by Massachusetts Holdings.

Liberty Mutual was incorporated on November 28, 2001 under the laws of the Commonwealth of Massachusetts, United States of America. The principal office of Liberty Mutual is located at 175 Berkeley Street, Boston, Massachusetts 02116 and its telephone number is (617) 357-9500. Liberty Mutual’s Federal Employer Identification Number is 04-3583679.

201 Liberty Mutual’s financial year runs from January 1 to December 31.

The creation and issuance of the Notes was authorized by resolutions of Liberty Mutual’s Board of Directors adopted on June 5, 2015.

The rights of Massachusetts Holdings as the shareholder of Liberty Mutual are contained in the articles of organization of Liberty Mutual, and Liberty Mutual will be managed in accordance with those articles and with the provisions of Massachusetts law.

The expenses related to the admission of the Notes to the Global Exchange Market of the Irish Stock Exchange plc are expected to be approximately €6,500.

Board of Directors Each member of Liberty Mutual’s Board of Directors may be reached at the principal office of Liberty Mutual, at 175 Berkeley Street, Boston, Massachusetts 02116. There are no potential conflicts of interest between any duties of Liberty Mutual’s Board of Directors to the Company, and their private interests and/or other duties.

The Guarantors LMHC LMHC is a Massachusetts mutual holding company whose members are the policyholders of LMIC, LMFIC, EICOW and LMPIC. As a mutual company, LMHC does not have authorized share capital.

LMHC was incorporated on November 28, 2001 under the laws of the Commonwealth of Massachusetts, United States of America. The principal office of LMHC is located at 175 Berkeley Street, Boston, Massachusetts 02116 and its telephone number is (617) 357-9500. LMHC’s Federal Employer Identification Number is 04-3583681.

LMHC’s guarantee of the Notes was authorized by resolutions of LMHC’s Board of Directors adopted on May 6, 2015.

The rights of members of LMHC are contained in the articles of organization of LMHC, and LMHC will be managed in accordance with those articles and with the provisions of Massachusetts law.

Each member of LMHC’s Board of Directors may be reached at the principal office of Liberty Mutual, at 175 Berkeley Street, Boston, Massachusetts 02116.

There are no potential conflicts of interest between any duties of LMHC’s Board of Directors to LMHC, and their private interests and/or other duties.

Massachusetts Holdings Massachusetts Holdings is a Massachusetts stock holding company with an authorized share capital of 1,000 shares of common stock, par value $0.01 per share, of which 1,000 shares are issued and outstanding.

Massachusetts Holdings was incorporated on November 28, 2001 under the laws of the Commonwealth of Massachusetts, United States of America. LMHC owns all of the issued and outstanding shares of Massachusetts Holdings. Massachusetts Holdings’ Federal Employer Identification Number is 04-3583680.

The principal office of Massachusetts Holdings is located at 175 Berkeley Street, Boston, Massachusetts 02116 and its telephone number is (617) 357-9500.

202 Massachusetts Holdings’ guarantee of the Notes was authorized by resolutions of Massachusetts Holdings’ Board of Directors adopted on June 5, 2015.

The rights of LMHC as the shareholder of Massachusetts Holdings are contained in the articles of organization of Massachusetts Holdings, and Massachusetts Holdings will be managed in accordance with those articles and with the provisions of Massachusetts law.

Each member of Mass Holdings’ Board of Directors may be reached at the principal office of Liberty Mutual, at 175 Berkeley Street, Boston, Massachusetts 02116.

There are no potential conflicts of interest between any duties of Massachusetts Holdings’ Board of Directors to Massachusetts Holdings, and their private interests and/or other duties.

Significant Change Except as disclosed in this Offering Memorandum, there has been no significant change in the financial or trading position of Liberty Mutual since December 31, 2015, and there has been no material adverse change in the prospects of Liberty Mutual since December 31, 2015.

There has been no significant change in the financial or trading position of LMHC or Massachusetts Holdings since December 31, 2015, and there has been no material adverse change in the prospects of LMHC or Massachusetts Holdings since December 31, 2015.

Litigation Except as disclosed in this Offering Memorandum neither the issuer nor the Guarantors have been involved in any governmental, legal or arbitration proceedings, including such proceedings which are pending or threatened of which the issuer or guarantors are aware, during the last twelve months, which may have, or have had in the recent past, significant effects upon the financial position or profitability of the issuer or the Guarantors.

Responsibility Liberty Mutual accepts responsibility for the information contained in this Offering Memorandum. Liberty Mutual declares that, having taken all reasonable care to ensure that such is the case, the information contained in this Offering Memorandum is, to the best of its knowledge, in accordance with the facts and contains no omissions likely to affect its import.

Notices All notices to noteholders shall be deemed to be duly given if they are filed with the Companies Announcements Office of the Irish Stock Exchange plc.

203 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page Audited Consolidated Financial Statements of Liberty Mutual Group Inc. Report of Independent Registered Public Accounting Firm ...... F-2 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 ...... F-3 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 ...... F-4 Consolidated Balance Sheets as of December 31, 2015 and 2014 ...... F-5 Consolidated Statements of Changes in Total Equity for years ended December 31, 2015, 2014 and 2013 ...... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 ...... F-7

Audited Consolidated Financial Statements of Liberty Mutual Holding Company Inc. Report of Independent Registered Public Accounting Firm ...... F-63 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 ...... F-64 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 ...... F-65 Consolidated Balance Sheets as of December 31, 2015 and 2014 ...... F-66 Consolidated Statements of Changes in Total Equity for years ended December 31, 2015, 2014 and 2013 ..... F-67 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 ...... F-68

Audited Consolidated Financial Statements of LMHC Massachusetts Holdings Inc. Report of Independent Registered Public Accounting Firm ...... F-126 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 ...... F-127 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2015, 2014 and 2013 ...... F-128 Consolidated Balance Sheets as of December 31, 2015 and 2014 ...... F-129 Consolidated Statements of Changes in Total Equity for years ended December 31, 2015, 2014 and 2013 ...... F-130 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 ...... F-131

F-1

Report of Independent Registered Public Accounting Firm

The Board of Directors Liberty Mutual Group Inc.

We have audited the accompanying consolidated balance sheets of Liberty Mutual Group Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Liberty Mutual Group Inc.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Mutual Group Inc. at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

March 3, 2016

F-2 Liberty Mutual Group Inc. Consolidated Statements of Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,064 6,735 6,257 Amortization of deferred policy acquisition costs ...... 4,675 4,660 4,468 Interest expense ...... 438 419 420 Interest credited to policyholders ...... 265 261 256 Total claims, benefits and expenses ...... 35,643 35,111 34,229 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non- controlling interest ...... 1,973 2,576 2,116 Income tax expense ...... 526 747 515 Consolidated net income from continuing operations ...... 1,447 1,829 1,601 Discontinued operations (net of income tax expense of $16, $79, and $77 in 2015, 2014 and 2013 respectively) ...... (909) (35) 170 Consolidated net income ...... 538 1,794 1,771 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to Liberty Mutual Group Inc...... $ 518 $ 1,818 $ 1,754 Net Realized (Losses) Gains Other-than-temporary impairment losses: 2015 2014 2013 Total other-than-temporary impairment losses ...... $ (410) $ (251) $ (101) Change in portion of loss recognized in other comprehensive income ...... — (1) (1) Other-than-temporary impairment losses ...... (410) (252) (102) Other net realized gains ...... 386 152 350 Net realized (losses) gains ...... $ (24) $ (100) $ 248

See accompanying notes to the audited consolidated financial statements.

F-3 Liberty Mutual Group Inc. Consolidated Statements of Comprehensive (Loss) Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Consolidated net income ...... $ 538 $1,794 $ 1,771 Other comprehensive loss, net of taxes: Unrealized (losses) gains on securities ...... (1,278) 808 (1,699) Change in pension and post retirement plans funded status ...... 154 (974) 697 Foreign currency translation and other adjustments ...... (459) (422) (91) Other comprehensive loss, net of taxes ...... (1,583) (588) (1,093) Consolidated comprehensive (loss) income ...... (1,045) 1,206 678 Less: Comprehensive income (loss) attributable to non-controlling interest ...... 15 (29) 16 Comprehensive (loss) income attributable to Liberty Mutual Group Inc...... $(1,060) $1,235 $ 662

See accompanying notes to the audited consolidated financial statements.

F-4 Liberty Mutual Group Inc. Consolidated Balance Sheets (dollars in millions)

December 31, December 31, 2015 2014 Assets: Investments: Fixed maturities, available for sale, at fair value (amortized cost of $61,393 and $59,951) . . . $ 62,794 $ 63,176 Equity securities, available for sale, at fair value (cost of $2,571 and $2,603) ...... 2,909 3,145 Short-term investments ...... 272 626 Commercial mortgage loans ...... 2,317 1,808 Other investments ...... 5,691 5,373 Total investments ...... 73,983 74,128 Cash and cash equivalents ...... 4,227 4,003 Premium and other receivables ...... 10,137 9,919 Reinsurance recoverables ...... 13,575 13,979 Deferred income taxes ...... 788 569 Deferred acquisition costs ...... 3,164 3,001 Goodwill ...... 4,758 4,834 Prepaid reinsurance premiums ...... 1,098 1,192 Other assets ...... 9,970 10,206 Assets held for sale ...... — 2,456 Total assets ...... $121,700 $124,287 Liabilities: Unpaid claims and claim adjustment expenses and future policy benefits: Property and casualty ...... $ 49,323 $ 49,970 Life ...... 9,262 9,030 Other policyholder funds and benefits payable ...... 6,601 5,870 Unearned premiums ...... 16,951 16,855 Funds held under reinsurance treaties ...... 205 210 Current maturities of long-term debt ...... 249 — Long-term debt ...... 6,982 7,232 Other liabilities ...... 12,874 13,223 Liabilities held for sale ...... — 1,593 Total liabilities ...... 102,447 103,983 Equity: Unassigned equity ...... 20,676 20,163 Accumulated other comprehensive income ...... (1,521) 57 Total policyholders’ equity ...... 19,155 20,220 Non-controlling interest ...... 98 84 Total equity ...... 19,253 20,304 Total liabilities and equity ...... $121,700 $124,287

See accompanying notes to the audited consolidated financial statements.

F-5 Liberty Mutual Group Inc. Consolidated Statements of Changes in Total Equity (dollars in millions)

Accumulated Other Total Non- Unassigned Comprehensive Policyholders’ Controlling Total Equity Income (Loss) Equity Interest Equity Balance, January 1, 2013 ...... $16,626 $ 1,707 $18,333 $ 208 $18,541 Comprehensive income (loss) Consolidated net income ...... 1,754 — 1,754 17 1,771 Other comprehensive loss, net of taxes ...... — (1,092) (1,092) (1) (1,093) Total comprehensive income (loss) ...... 1,754 (1,092) 662 16 678 Capital contributions from non-controlling interest . . — — — 1 1 Dividends to non-controlling interest ...... — — — (30) (30) Purchase of subsidiary shares from non-controlling interest ...... (25) 25 — (151) (151) Dividends to stockholders ...... (10) — (10) — (10) Balance, December 31, 2013 ...... $18,345 $ 640 $18,985 $ 44 $19,029 Comprehensive income (loss) Consolidated net income ...... 1,818 — 1,818 (24) 1,794 Other comprehensive loss, net of taxes ...... — (583) (583) (5) (588) Total comprehensive income (loss) ...... 1,818 (583) 1,235 (29) 1,206 Capital contributions from non-controlling interest . . — — — 69 69 Balance, December 31, 2014 ...... $20,163 $ 57 $20,220 $ 84 $20,304 Comprehensive income (loss) Consolidated net income ...... 518 — 518 20 538 Other comprehensive loss, net of taxes ...... — (1,578) (1,578) (5) (1,583) Total comprehensive income (loss) ...... 518 (1,578) (1,060) 15 (1,045) Capital contributions from non-controlling interest . . — — — 1 1 Dividends to non-controlling interest ...... — — — (2) (2) Dividends to stockholders ...... (5) — (5) — (5) Balance, December 31, 2015 ...... $20,676 $(1,521) $19,155 $ 98 $19,253

See accompanying notes to the audited consolidated financial statements.

F-6 Liberty Mutual Group Inc. Consolidated Statements of Cash Flows (dollars in millions)

Years Ended December 31, 2015 2014 2013 Cash flows from operating activities: Consolidated net income ...... $ 538 $ 1,794 $ 1,771 Less—(loss) income from Venezuela discontinued operations, net of tax expense ...... (909) 46 137 Income from operations excluding Venezuela discontinued operations ...... 1,447 1,748 1,634 Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization ...... 889 794 709 Realized losses (gains) (including loss on sale of discontinued operations) ...... 24 175 (248) Undistributed private equity investment gains ...... (86) (572) (567) Premium, other receivables, and reinsurance recoverables ...... (509) (2,937) (738) Deferred acquisition costs ...... (197) (177) (273) Liabilities for insurance reserves ...... 1,959 1,184 2,981 Taxes payable, net of deferred ...... 275 756 396 Other, net ...... (254) (339) (274) Total adjustments ...... 2,101 (1,116) 1,986 Net cash provided by operating activities—excluding Venezuela discontinued operations ...... 3,548 632 3,620 Net cash provided by operating activities—Venezuela discontinued operations ...... 696 607 546 Net cash provided by operating activities ...... 4,244 1,239 4,166 Cash flows from investing activities: Purchases of investments ...... (18,497) (14,442) (18,160) Sales and maturities of investments ...... 15,591 14,330 14,427 Property and equipment purchased, net ...... (905) (863) (1,062) Cash paid for disposals and acquisitions, net of cash on hand ...... — (1,045) (1) Other investing activities ...... (16) 19 (268) Net cash used in investing activities—excluding Venezuela discontinued operations ...... (3,827) (2,001) (5,064) Net cash used in investing activities—Venezuela discontinued operations ...... (70) (105) (133) Net cash used in investing activities ...... (3,897) (2,106) (5,197) Cash flows from financing activities: Net activity in policyholder accounts ...... 578 573 356 Debt financing, net ...... 1 564 140 Net security lending activity and other financing activities ...... (77) (49) 124 Net cash provided by financing activities—excluding Venezuela discontinued operations ...... 502 1,088 620 Net cash provided by (used in) financing activities—Venezuela discontinued operations . . 1 — (179) Net cash provided by financing activities ...... 503 1,088 441 Effect of exchange rate changes on cash—excluding Venezuela discontinued operations ...... 1 20 (5) Effect of exchange rate changes on cash—Venezuela discontinued operations ...... (69) (301) (112) Effect of exchange rate changes on cash ...... (68) (281) (117) Net increase (decrease) in cash and cash equivalents—excluding Venezuela discontinued operations ...... 224 (261) (829) Net increase in cash and cash equivalents—Venezuela discontinued operations ...... 558 201 122 Net increase (decrease) in cash and cash equivalents ...... 782 (60) (707) Cash and cash equivalents, beginning of year—excluding Venezuela discontinued operations ...... 4,003 4,264 5,093 Cash and cash equivalents, end of year—excluding Venezuela discontinued operations ...... $ 4,227 $ 4,003 $ 4,264 Supplemental disclosure of cash flow information: Income taxes paid ...... $ 148 $ 85 $ 155

See accompanying notes to the audited consolidated financial statements.

F-7 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Liberty Mutual Group Inc., entities over which the Company exercises control including majority and wholly owned subsidiaries, and variable interest entities when the Company is deemed the primary beneficiary (collectively “LMGI”, the “Company” or “we”). The minority ownership of consolidated affiliates is represented in equity as non-controlling interest. LMGI is 100% owned by LMHC Massachusetts Holdings Inc. (“LMHC MHI”) and LMHC MHI is 100% owned by Liberty Mutual Holding Company, Inc. (“LMHC”). All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2014 consolidated financial statements to conform with the 2015 presentation.

The accompanying consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates include (1) unpaid claims and claim adjustment expense reserves, including asbestos and environmental liability reserves and loss sensitive premium attributable to prior years, (2) reinsurance recoverables and associated uncollectible allowance, (3) fair value determination and other-than-temporary impairments of the investment portfolio and direct working interests in oil and gas properties, (4) recoverability of deferred acquisition costs, (5) valuation of goodwill and intangible assets, (6) deferred income tax valuation allowance, and (7) pension and postretirement benefit obligations. While the amounts included in the consolidated financial statements reflect management’s best estimates and assumptions, these amounts ultimately could vary.

Effective September 30, 2015, the Company determined it was appropriate to deconsolidate the Venezuelan operations and recognized an impairment charge of $690. Concurrent with this decision, the Company has classified the Venezuelan operations (a net loss of $219 for the nine months ended September 30, 2015) and the related impairment charge as discontinued operations. Subsequent to deconsolidation, the Company accounts for its ongoing investment in the Venezuela operation on the cost basis.

Nature of Operations The Company conducts substantially all of its business through four Strategic Business Units (“SBUs”): Personal Insurance, Commercial Insurance, Global Specialty, and Liberty International. A summary of each SBU follows:

The Company’s Personal Insurance business unit, with $17,036 of revenues in 2015, sells automobile, homeowners and other types of property and casualty insurance coverage to individuals in the United States. Personal Insurance comprises two market segments: Personal Lines and Safeco. Personal Lines products are distributed through approximately 2,200 licensed captive sales representatives, more than 600 licensed telesales counselors, third-party producers and the Internet. Personal Lines’ largest source of new business is through its more than 20,000 sponsored affinity groups (including employers, professional and alumni associations, credit unions, and other partnerships). Safeco products are distributed nationally through independent agents.

The Company’s Commercial Insurance business unit, with $11,187 of revenues in 2015, offers a wide array of property-casualty, group benefits, and life insurance coverages and structured settlement annuities through independent agents, brokers, benefit consultants, captive agents, and bank partners throughout the United States.

F-8 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Commercial Insurance is organized into the following four market segments: Business Insurance; National Insurance; Liberty Mutual Benefits; and Other Commercial Insurance. Business Insurance serves small and middle market customers through a regional operating model that combines local underwriting, market knowledge and service with the scale advantages of a national company. National Insurance provides commercial lines products and services, including third-party administration, to large businesses. Liberty Mutual Benefits provides short and long-term disability, accident, health and group life insurance to mid-sized and large businesses, as well as life and annuity products to individuals in the United States. Other Commercial Insurance primarily consists of internal reinsurance and assumed business from state-based workers compensation involuntary market pools. The Company is also a servicing carrier for state-based workers compensation involuntary market pools.

The Company’s Global Specialty business unit, with $5,227 of revenues in 2015, comprises a wide array of products and services offered through three market segments: Liberty Specialty Markets (“LSM”), Liberty International Underwriters (“LIU”), and Liberty Mutual Surety (“LM Surety”). LSM provides a wide range of product capabilities and capacity for specialty markets worldwide and is organized into three business segments: Specialty, Commercial, and Reinsurance. LIU sells inland marine and specialty commercial insurance worldwide through offices in Asia, Australia, the Middle East, North America and Latin America. LM Surety is a leading provider of global contract and commercial surety bonds to businesses of all sizes. Other primarily consists of internal reinsurance.

The Company’s Liberty International business unit, with $3,801 of revenues in 2015, sells property, casualty, health and life insurance products and services to individuals and businesses in four market segments: Latin America and Iberia, including Brazil, Colombia, Chile, Ecuador, Spain and Portugal; Emerging Europe, including Turkey, Poland, and Ireland; Asia, including Thailand, Singapore, Hong Kong, Vietnam and Malaysia; and Large Emerging Markets, including Russia, China and India. Other includes internal reinsurance. Private passenger automobile insurance is the single largest line of business.

Adoption of New Accounting Standards Effective January 1, 2015, the Company elected to adopt the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which provides accounting guidance regarding the presentation of an unrecognized tax benefit. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent tax carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. There was no material impact on the Company’s financial statements as a result of this accounting guidance.

Effective January 1, 2015, the Company elected to adopt the FASB issued ASU 2014-08, (Topic 205 and Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 modifies the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. Also, ASU 2014-08 requires additional financial

F-9 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) statement disclosures about discontinued operations, as well as disposals of individually significant components of an entity that do not qualify for discontinued operations presentation. ASU 2014-08 was effective for all disposals (or classifications as held for sale) of components of an entity that occurred within annual and interim periods beginning on or after December 15, 2014 and for all businesses that, on acquisition, were classified as held for sale that also occurred within interim and annual periods beginning on or after December 15, 2014. (See Note 2 for further discussion.)

No other accounting standards were adopted in 2015 by the Company.

Future Adoption of New Accounting Standards The Company will adopt the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). ASU 2014-09 was issued to clarify the principles for recognizing revenue, however, insurance contracts and financial instrument transactions are not within the scope of this guidance. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers, which deferred the effective date of ASU 2014-09 by one year. Accordingly, ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of ASU 2014-09 is expected to have on the Company’s financial statements.

The Company will adopt the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”) which amends the guidance for determining whether an entity is a variable interest entity (“VIE”). ASU 2015-02 eliminates the separate consolidation guidance for limited partnerships and with it, the presumption that a general partner should consolidate a limited partnership. In addition, ASU 2015-02 changes the guidance for determining if fee arrangements qualify as variable interests and the effect fee arrangements have on the determination of the primary beneficiary. ASU 2015-02 is effective for public business entities for fiscal years, and for interim periods within those fiscal years beginning after December 15, 2015. For all other entities, ASU 2015-02 is effective for fiscal years beginning after December 31, 2016, and for interim periods within fiscal years beginning after December 15, 2017. The adoption of ASU 2015-02 is not expected to have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures on variable interest entities will likely be required.

The Company will adopt the FASB issued ASU 2015-03, Interest—Imputation of Interest—Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of this standard, debt issuance costs were required to be presented in the balance sheet as an asset. ASU 2015-03 should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect period-specific effects of applying the new guidance, ASU 2015-03 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, ASU 2015-03 is effective for fiscal years beginning after December 31, 2015, and for interim periods within fiscal years beginning after December 31, 2016. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial statements.

F-10 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) in ASC 944, Financial Services – Insurance. The disclosures required by ASU 2015-09 are aimed at providing the users of the financial statements with more transparent information about initial claim estimates and subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims. The new disclosures will require the accumulation and reporting of new and different groupings of data by insurers for U.S. GAAP reporting from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments of ASU 2015-09 are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. The adoption of ASU 2015-09 is not expected to have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures will likely be required.

The Company will adopt the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (excluding those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, ASU 2016-01 is effective for fiscal years, beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-01 is expected to have a material impact on the Company’s financial statements.

The Company will adopt FASB issued ASU 2016-02, Leases (Topic 842): Section A—Leases, Section B— Conforming Amendments Related to Leases and Section C—Background Information and Basis for Conclusions (“ASU 2016-02”). ASU 2016-02 intends to improve financial reporting about leasing transactions. The new standard affects all entities that lease assets such as real estate, airplanes and manufacturing equipment. ASU 2016-02 will require entities that lease assets, referred to as “lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, ASU 2016-02 is effective for fiscal years, beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact the adoption of ASU 2016-02 is expected to have on the Company’s financial statements.

There are no other accounting standards not yet adopted by the Company that are expected to have a material impact.

Investments Fixed maturity securities classified as available for sale are debt securities that have principal payment schedules, are held for indefinite periods of time, and are used as a part of the Company’s capital strategy or sold in response to risk and reward characteristics, liquidity needs or similar economic factors. These securities are reported at fair value with changes in fair values, net of deferred income taxes, reported in accumulated other comprehensive income.

Equity securities classified as available for sale include common equities and non-redeemable preferred stocks and are reported at quoted fair values. Changes in fair values, net of deferred income taxes, are reported in accumulated other comprehensive income.

F-11 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Realized gains and losses on sales of investments are recognized in income using the specific identification method. The Company reviews fixed maturity securities, equity securities, and other investments for impairment on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including, but not limited to, (1) the extent of the decline in fair value below book value, (2) the duration of the decline, (3) significant adverse changes in the financial condition or near term prospects for the investment or issuer, (4) significant changes in the business climate or credit ratings of the issuer, (5) general market conditions and volatility, (6) industry factors, (7) the past impairment of the security holding or the issuer, and (8) changes in foreign exchange.

For fixed maturity securities that the Company does not intend to sell or for which it is more likely than not that the Company would not be required to sell before an anticipated recovery in value, the Company separates impairments into credit loss and non-credit loss components. The determination of the credit loss component of the impairment charge is based on the Company’s best estimate of the present value of the cash flows expected to be collected from the fixed maturity security compared to its amortized cost and is reported as part of net realized gains. The non-credit component, the residual difference between the credit impairment component and the fair value, is recognized in other comprehensive income. The factors considered in making an evaluation of credit versus non-credit other-than-temporary impairments include: (1) failure of the issuer of the security to make scheduled interest or principal payments (including the payment structure of the fixed maturity security and the likelihood the issuer will be able to make payments that increase in the future), (2) performance indicators of the underlying assets in the security (including default and delinquency rates), (3) vintage, (4) geographic concentration, (5) impact of foreign exchange rates on foreign currency denominated securities, and (6) industry analyst reports, sector credit ratings and volatility of the security’s fair value.

For equity securities the Company does not have the intent and ability to hold to recovery, and for fixed maturity securities the Company intends to sell or for which it is more likely than not that the Company will be required to sell before an anticipated recovery in value, the full amount (fair value less amortized cost) of the impairment is included in net realized (losses) gains.

Upon recognizing an other-than-temporary impairment, the new cost basis of the investment is the previous amortized cost basis less the other-than-temporary impairment recognized in net realized gains. The new cost basis is not adjusted for any subsequent recoveries in fair value; however, for fixed maturity securities the difference between the new cost basis and the expected cash flows is accreted to net investment income over the remaining expected life of the investment.

For mortgage-backed fixed maturity securities, the Company recognizes income using a constant effective yield based on anticipated prepayments over the economic life of the security. The mortgage-backed portfolio is accounted for under the retrospective method and prepayment assumptions are based on market expectations. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments and any resulting adjustment is included in net investment income.

Cash equivalents are short-term, highly liquid investments that are both readily convertible into known amounts of cash and so near to maturity that they present insignificant risk of changes in value due to changing interest rates. The Company’s cash equivalents include debt securities purchased with maturities of three months or less at acquisition and are carried at amortized cost, which approximates fair value.

Short-term investments are debt securities with maturities at acquisition between three months and one year, are considered available for sale, and are reported at fair value with changes in fair values, net of deferred income taxes, reported in accumulated other comprehensive income.

F-12 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

All VIEs for which the Company is the primary beneficiary are consolidated into the Company’s financial statements.

Other investments are primarily comprised of limited partnerships and certain other alternative investments, which are reported using the equity method of accounting and, accordingly, the Company’s share of earnings are included in net investment income. Due to the availability of financial statements, other alternative investments and limited partnership investment income is generally recorded on a three-month lag. The Company elects the fair value option on certain other investments and these investments are carried at fair value. Accordingly, changes in fair value are included in net investment income or net realized gains in the accompanying consolidated statements of income. Also included in other investments are equity investments in privately held businesses that are carried at fair value with changes in fair value reported in other comprehensive income.

Commercial mortgage loans are held for investment and stated at amortized cost less an allowance for loan loss for potentially uncollectible amounts.

Derivatives All derivatives are recognized on the balance sheet at fair value and reported as other assets and other liabilities. At the inception of the contract, the Company designates the derivative as (1) a hedge of a fair value of a recognized asset (“fair value hedge”), (2) an economic hedge (“non-designated derivative”), or (3) a cash flow hedge.

The Company entered into oil commodity swaps in 2015 that are classified as economic hedges. Hedge accounting was not applied and changes in fair value were recorded in net realized gains on the consolidated statements of income. These derivatives were not material to the Company’s financial statements.

The Company entered into Euro forward transactions in 2015 that are classified as economic hedges. Hedge accounting was not applied and changes in fair value were recorded in net realized gains on the consolidated statements of income. These derivatives were not material to the Company’s financial statements.

The Company entered into interest rate-lock and swap agreements that are classified as cash flow hedges. The effective portion of the gain or loss on these instruments is reported as a component of other comprehensive income and reclassified into earnings in the same period in which the hedged items affect earnings. The Company’s cash flow hedges are 100% effective and are not material to the financial statements.

The Company owns fixed maturity securities that may have call, put or conversion options embedded. These derivatives are not related to hedging and are not material to the Company’s financial statements.

Securities Lending The Company participates in a securities lending program to generate additional income, whereby certain domestic fixed maturity securities and equity securities are loaned for a short period of time from the Company’s portfolio to qualifying third parties via a lending agent. Terms of the agreement are for borrowers of these securities to provide collateral of at least 102% of the market value of the loaned securities. Acceptable collateral may be in the form of cash or permitted securities as outlined in the securities lending agreement. The market value of the loaned securities is monitored and additional collateral is obtained if the market value of the collateral falls below 102% of the market value of the loaned securities. Under the terms of the securities lending program, the lending agent indemnifies the Company against borrower defaults. The loaned securities remain a

F-13 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) recorded asset of the Company; however, the Company records a liability for the amount of cash collateral held, representing its obligation to return the collateral related to the loaned securities.

Goodwill and Intangible Assets Goodwill is tested for impairment at least annually using either a qualitative or a quantitative process. Election of the approach can be made at the reporting unit level. The Company has determined that each of its SBUs is a reporting unit. The reporting unit has the option to skip the qualitative test and move directly to completion of the quantitative process. The qualitative approach can be used to evaluate if there are any indicators of impairment. Through this process, the reporting unit must determine if there is indication that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If it is determined that there is an indication of potential impairment, the reporting unit must complete the quantitative process. The quantitative approach is a two-step process. The first step is performed to identify potential impairment and, if necessary, the second step is performed for the purpose of measuring the amount of impairment, if any. Impairment is recognized only if the carrying amount is not recoverable from the discounted cash flows using a “market” rate and is measured as the difference between the carrying amount and the implied fair value. Other changes in the carrying amount of goodwill are primarily caused by acquisitions, dispositions, and foreign currency translation adjustments. In 2015, goodwill decreased by $76 driven primarily by foreign currency translation adjustments.

In 2015, the Company utilized a qualitative test in accordance with its accounting policy for all reporting units except for Liberty International, for which a quantitative test was utilized due to the Venezuela deconsolidation recognized during the year. There were no goodwill impairments recognized in 2015 or 2014.

Indefinite-lived intangible assets held by the Company are reviewed for impairment on at least an annual basis using a qualitative process. The classification of the asset as indefinite-lived is reassessed, and an impairment is recognized if the carrying amount of the asset exceeds its fair value.

Intangible assets that have finite useful lives are amortized over their useful lives. The carrying amounts of intangible assets with finite useful lives are reviewed regularly for indicators of impairment in value. Impairment is recognized only if the carrying amount of the intangible asset is not recoverable from its undiscounted cash flows and is measured as the difference between the carrying amount and the fair value of the asset.

The Company has intangible assets included in other assets on the accompanying consolidated balance sheets related to the Safeco and Ohio Casualty Corporation (“Ohio Casualty”) acquisitions that occurred in 2008 and 2007, respectively. As of December 31, 2015, intangible assets related to these acquisitions were as follows: Safeco agency relationship of $316, Ohio Casualty agency relationship of $87, trademarks of $229, state licenses of $82, and other intangibles of $4. As of December 31, 2014, intangible assets related to these acquisitions were as follows: Safeco agency relationship of $358, Ohio Casualty agency relationship of $95, trademarks of $229, state licenses of $82, and other intangibles of $6. The amortization applied to the Safeco agency relationship, Ohio Casualty agency relationship, and other intangible assets is 15 years on the straight-line method, 20 years on the straight-line method, and 10 years using the present value mid-year convention, respectively. The intangible assets above are net of accumulated amortization of $375 and $323 as of December 31, 2015 and 2014, respectively. All other intangible assets are not subject to amortization.

The Company recognized $52, $52 and $52 of amortization expense on intangible assets related to these acquisitions for the years ended December 31, 2015, 2014, and 2013, respectively. Amortization expense is

F-14 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) reflected in operating costs and expenses on the accompanying consolidated statements of income. The Company recognized $0, $0 and $3 impairments on intangible assets related to these acquisitions for the years ended December 31, 2015, 2014 and 2013, respectively. Impairment expense is reflected in realignment expense on the accompanying consolidated statements of income. Estimated amortization expense is expected to be $52, $50, $50, $49 and $49 for the years ended December 31, 2016 through 2020, respectively.

Deferred Acquisition Costs Costs that are directly related to the successful acquisition or renewal of insurance contracts are deferred and amortized over the respective policy terms. All other acquisition related costs, including market research, training, administration, unsuccessful acquisition or renewal efforts, and product development are charged to expense as incurred. For short-duration contracts, acquisition costs include commissions, underwriting expenses and premium taxes. For long-duration insurance contracts, these costs include first year commissions in excess of annual renewal commissions and variable sales and underwriting expenses. Deferred acquisition costs are reviewed annually for recoverability. Investment income is considered in the recoverability assessment.

For short-duration contracts, acquisition costs are amortized in proportion to earned premiums. For traditional long-duration contracts, acquisition costs are amortized over the premium paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For universal life insurance and investment products, acquisition costs are amortized in relation to expected gross profits.

For long-duration contracts, to the extent unrealized gains or losses on fixed income securities carried at fair value would result in an adjustment of estimated gross profits had those gains or losses actually been realized, the related impact on unamortized deferred acquisition costs is recorded net of tax as a change in unrealized gains or losses and included in accumulated other comprehensive income.

Real Estate and Other Fixed Assets The costs of buildings, furniture, and equipment are depreciated, principally on a straight-line basis, over their estimated useful lives (a maximum of 39.5 years for buildings, 10 years for furniture, and 3-5 years for equipment). Expenditures for maintenance and repairs are charged to income as incurred while expenditures for improvements are capitalized and depreciated.

Oil and Gas Properties Oil and gas properties are accounted for using the successful efforts method whereby only costs (including lease acquisition and intangible drilling costs) associated with exploration efforts that result in the discovery of proved reserves are capitalized. Costs of acquiring and exploring unproved oil and gas leases are initially capitalized pending the results of exploration activities. Capitalized costs of producing oil and gas properties are depreciated and depleted on a field-by-field basis. The Company uses the unit-of-production method to deplete its properties and the calculation is based on units of proved developed reserves as estimated by independent petroleum engineers. Significant processing and pipeline assets are depreciated over a fixed period using the straight line method.

The Company records impairment losses on proved oil and gas properties when events and circumstances indicate the properties are impaired and the estimated undiscounted cash flows expected to be generated by those properties are less than the carrying amounts of those assets. Unproved properties are assessed at least annually

F-15 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) to determine whether impairment has occurred. Appropriate adjustments to the costs of unproved properties are made when necessary and are charged to impairment expense. Impairment is assessed on a field-by-field basis. (See Note 10 for further discussion.)

Separate Account Assets and Liabilities Separate accounts represent funds for which investment income and investment gains and losses accrue directly to the policyholders who bear the investment risk. Each account has specific investment objectives and the assets are carried at fair value. The assets of each account are legally segregated and are not subject to claims that arise out of any other business of the Company. The liabilities of these accounts are equal to the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to separate accounts are excluded from the accompanying consolidated statements of income. The fees earned for administrative and contract holder maintenance services performed for these separate accounts are included in fee and other revenues.

Insurance Liabilities and Reserves For short-duration contracts, the Company establishes reserves for unpaid claims and claim adjustment expenses covering events that occurred in 2015 and prior years. These reserves reflect estimates of the total cost of claims reported but not yet paid and the cost of claims not yet reported, as well as the estimated expenses necessary to settle the claims. Reserve estimates are based on past loss experience modified for current claim trends, as well as prevailing social, economic and legal conditions. Final claim payments, however, may ultimately differ from the established reserves, since these payments might not occur for several years. Reserve estimates are continually reviewed and updated, and any resulting adjustments are reflected in current operating results. The Company does not discount reserves other than discounting on the long-term indemnity portion of workers compensation settled claims, the long-term disability portion of group accident and health claims as permitted by insurance regulations in certain states, the long-term portion of certain workers compensation claims of foreign subsidiaries, and specific asbestos structured settlements. Reserves are reduced for estimated amounts of salvage and subrogation and deductibles recoverable from policyholders. The Company discounts the long-term indemnity portion of workers compensation claims at risk-free discount rates determined by reference to the U.S. Treasury yield curve. The weighted average discount rates were 5.2%, 5.4% and 5.2% for 2015, 2014, and 2013, respectively. The held discounted reserves on these unpaid workers compensation claims, net of all reinsurance, as of December 31, 2015, 2014 and 2013 were $1,763, $1,842 and $2,277, respectively.

The discounting of disability claims is based on the 1987 Commissioners Group Disability Table at annual discount rates varying from 2.5% to 7.0% in 2015 and 2014. Unpaid disability claims and claim adjustment expenses as of December 31, 2015 and 2014 include liabilities at discounted values of $1,765 and $1,587, respectively.

For long-duration contracts, measurement of liabilities is based on generally accepted actuarial techniques and requires assumptions about mortality, lapse rates, and assumptions about future returns on related investments. Annuity and structured settlement contracts without significant mortality or morbidity risk are accounted for as investment contracts, whereby the premium received plus interest credited less policyholder withdrawals represents the investment contract liability. The average implied credited interest rates for domestic structured settlement contracts in force were 4.8%, 5.0% and 5.2% for 2015, 2014 and 2013, respectively. Implied credited interest rates for foreign structured settlement contracts in force were between 2.5% and 6.0% for each of the years ending December 31, 2015 and 2014. Credited rates for domestic universal life contracts in force were

F-16 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) between 3.0% and 5.0% in 2015 and 2014. Credited rates for foreign universal life contracts in force were between 0.3% and 6.0% in 2015 and 2014. Liabilities for future policy benefits for traditional life policies have been computed using the net level premium method based upon estimated future investment yields (between 2.5% and 10.3% in 2015 and 2014), mortality assumptions (based on the Company’s experience relative to standard industry mortality tables) and withdrawal assumptions (based on the Company’s experience).

Policyholder Dividends Policyholder dividends are accrued using an estimate of the ultimate amount to be paid in relation to premiums earned based on the related insurance policies.

For domestic property-casualty insurance, certain insurance contracts, primarily workers compensation policies, are issued with dividend plans to be paid subject to approval by the insurer’s board of directors. The premium related to such policies approximated 0.4%, 0.4%, and 1% of domestic property-casualty insurance premiums written for the years ended December 31, 2015, 2014, and 2013, respectively. Additionally, certain jurisdictions impose excess profits taxes, which limit the profitability of particular lines of business, and any excess is returned to the policyholder in the form of a dividend.

For life insurance, dividends to participating policyholders are calculated as the sum of the difference between the assumed mortality, interest and loading, and the actual experience of the Company. As a result of statutory regulations, the major portion of earnings from participating policies inures to the benefit of the participating policyholders and is excluded from consolidated net income and total equity.

Long-Term Incentive and Performance Based Incentive Plans The Company maintains short-term and long-term incentive compensation plans. Long-term plans that vest over the requisite service period and are based upon notional units are accounted for under ASC 718, Compensation— Stock Compensation, using the intrinsic value method. Additionally, the Company provides performance based incentive compensation to the majority of employees meeting the participation requirements of the respective plans. Compensation cost related to these plans is determined in accordance with plan formulas and recorded over the years the employee service is provided.

Revenue Recognition For short-duration insurance contracts, premiums are reported as earned income generally on a pro-rata basis over the terms of the related policies. For retrospectively rated policies and contracts, premium estimates are continually reviewed and updated and any resulting adjustments are reflected in current operating results. For traditional long-duration insurance contracts (including term and whole life contracts and annuities), premiums are earned when due. For loss portfolio transfers, premiums are fully recognized as written and earned at contract inception. For annuities and structured settlements without significant mortality or morbidity risk (investment contracts) and universal life contracts (long-duration contracts with terms that are not fixed or guaranteed), revenues represent investment income earned on the related assets. Universal life and annuity contract revenues also include mortality, surrender, and administrative fees charged to policyholders.

F-17 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) accounted for on a basis consistent with the terms of the reinsured contracts. The accompanying consolidated statements of income reflect premiums, benefits, and settlement expenses net of reinsurance ceded.

Transactions that do not transfer risk are included in other assets or other liabilities. Ceded transactions that transfer risk but are retroactive are included in reinsurance recoverables. The excess of estimated liabilities for claims and claim costs over the consideration paid net of experience adjustments is established as a deferred credit at inception. The deferred amounts are subsequently amortized using the effective interest method over the expected settlement period. The periodic amortization is reflected in the accompanying consolidated statements of income through benefits, claims and claim adjustment expenses. In transactions where the consideration paid exceeds the estimated liabilities for claims and claim costs a loss is recognized. If the adverse development net of experience adjustments exceeds the original loss, deferred gains are recorded. The deferred gains are subsequently recognized into earnings over the expected settlement period of the reserves.

Amounts recoverable from reinsurers include unpaid losses estimated in a manner consistent with the claim liabilities associated with the reinsured business. The Company evaluates reinsurance collectability, and a provision for uncollectible reinsurance is recorded.

Translation of Foreign Currencies The Company translates the financial statements of its foreign operations into U.S. dollars from the functional currency designated for each foreign unit, generally the currency of the primary economic environment in which that operation does its business. Assets and liabilities are translated into U.S. dollars at period-end exchange rates, while income and expenses are translated using average rates for the period. Translation adjustments are recorded as a separate component of accumulated other comprehensive income, net of tax, to the extent applicable. Foreign currency amounts are re-measured to the functional currency, and the resulting foreign exchange gains or losses are reflected in earnings.

The net foreign exchange gains (losses) included in income from continuing operations for the years ended December 31, 2015, 2014, and 2013 were $5, $3, and $(5), respectively.

Income Taxes The income tax provision is calculated under the liability method. The Company recognizes deferred income tax assets and liabilities for the expected future tax effects attributable to temporary differences between the financial statement and tax return basis of assets and liabilities based on enacted tax rates and other provisions of the tax law. The effect of a change in tax laws or rates on deferred tax assets and liabilities is recognized in income in the period in which such change is enacted. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax assets will not be realized. Deferred tax positions are not established for adjustments arising from foreign operations whose earnings are considered to be permanently reinvested.

F-18 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Company accounts for oil and gas sales from its interests in producing wells under the sales method. The sales method requires that the Company recognize revenue based on the amount of natural gas and oil sold to purchasers on its behalf, which may be different from the Company’s entitled production based on its interest in the properties.

Discontinued Operations The Company’s accounting policies listed above apply to both continuing and discontinued operations.

Accumulated Other Comprehensive (Loss) Income Accumulated other comprehensive (loss) income consists principally of unrealized gains and losses on certain investments in debt and equity securities, foreign currency translation adjustments, and pension and postretirement liability adjustments.

The components of accumulated other comprehensive (loss) income, net of related deferred acquisition costs and taxes, for the years ended December 31, 2015, 2014 and 2013 are as follows:

Years Ended December 31, 2015 2014 2013 Unrealized gains on securities ...... $ 819 $2,097 $1,289 Foreign currency translation and other adjustments ...... (825) (371) 46 Pension and post retirement liability funded status(1) ...... (1,515) (1,669) (695) Accumulated other comprehensive (loss) income ...... $(1,521) $ 57 $ 640

(1) Includes $60 for each of the years ended December 31, 2015, 2014, and 2013, due to the recognition of deferred taxes related to the Medicare Part D subsidy.

The following table presents the consolidated other comprehensive (loss) income reclassification adjustments for the years ended December 31, 2015, 2014, and 2013, respectively.

Change in Foreign pension and currency Unrealized post retirement translation and (losses) gains plans funded other on securities status adjustments(1) Total Year ended December 31, 2015 Unrealized change arising during the period ...... $(1,634) $ (2) $(504) $(2,140) Less: Reclassification adjustments included in consolidated net income .... 257 (224) — 33 Total other comprehensive (loss) income, before income tax (benefit) expense . . . (1,891) 222 (504) (2,173) Less: Income tax (benefit) expense ...... (613) 68 (45) (590) Total other comprehensive (loss) income, net of income tax (benefit) expense . . . $(1,278) $ 154 $(459) $(1,583)

(1) Includes $(5) of non-controlling interest.

F-19 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Change in Foreign pension and currency Unrealized post retirement translation and gains on plans funded other securities status adjustments(1) Total Year ended December 31, 2014 Unrealized change arising during the period ...... $1,352 $(1,574) $(473) $(695) Less: Reclassification adjustments included in consolidated net income .... 109 (78) — 31 Total other comprehensive income (loss), before income tax expense (benefit) . . . 1,243 (1,496) (473) (726) Less: Income tax expense (benefit) ...... 435 (522) (51) (138) Total other comprehensive income (loss), net of income tax expense (benefit) . . . $ 808 $ (974) $(422) $(588)

(1) Includes $(5) of non-controlling interest.

Change in Foreign Unrealized pension and currency (losses) gains post retirement translation and on plans funded other securities(2) status adjustments(1) Total Year ended December 31, 2013 Unrealized change arising during the period ...... $(2,352) $ 904 $(100) $(1,548) Less: Reclassification adjustments included in consolidated net income .... 294 (172) — 122 Total other comprehensive (loss) income, before income tax (benefit) expense . . . (2,646) 1,076 (100) (1,670) Less: Income tax (benefit) expense ...... (947) 379 (9) (577) Total other comprehensive (loss) income, net of income tax (benefit) expense . . . $(1,699) $ 697 $ (91) $(1,093)

(1) Includes $(1) of non-controlling interest. (2) Includes $(25) of non-controlling interest.

(2) ACQUISITIONS AND DISPOSITIONS

ACQUISITIONS Hughes Insurance On July 1, 2015, the Company completed the acquisition of Hughes Insurance, an independent insurance broker in Northern Ireland. Hughes Insurance offers motor, van, household, small-to-medium-enterprise commercial insurance and travel insurance. Hughes Insurance has been reflected in the consolidated financial statements since the second quarter of 2014.

Uni.Asia General Insurance Berhad On July 16, 2014, the Company purchased from Uni.Asia Capital Sdn Bhd its 68.09% stake in Uni.Asia General Insurance Berhad (“Uni.Asia”), a Malaysian property-casualty insurer, for approximately $118. On September 8, 2014, the Company purchased 18,679,881 ordinary shares representing an additional 18.68% stake in Uni.Asia through a mandatory tender offer for approximately $32. As a result of these actions, the Company now owns 86.77% of Uni.Asia.

Primero Fianzas On July 8, 2014, the Company acquired a Mexico surety company Primero Fianzas, a wholly owned subsidiary, from Grupo Valores Operativos Monterrey, a private investor group.

F-20 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

DISPOSITIONS Liberty Ubezpieczenia On December 18, 2015, the Company entered into an agreement to sell its Polish operations to a member of the AXA Group.

Venezuela Operations Effective as of September 30, 2015, the Company determined to deconsolidate the Venezuelan subsidiaries and offer the Venezuelan operations for sale.

Since 2010 the Company’s operations in Venezuela have been operating in a hyperinflationary economy with restrictive foreign exchange controls.

These three mechanisms have become increasingly illiquid over time. The Company believes that significant uncertainty continues to exist regarding the foreign exchange mechanisms in Venezuela, including the nature of transactions that are eligible to flow through CENCOEX, SICAD or SIMADI, how any such mechanisms will operate in the future, as well as the availability of U.S. dollars under each mechanism.

The evolving conditions in Venezuela, including the increasingly restrictive exchange control regulations and other factors, significantly impact our control over the Venezuelan operations. As a result of these factors, which we believe to be other-than-temporary, we concluded that effective September 30, 2015, we do not meet the accounting criteria for control over the Venezuelan operations, and therefore have deconsolidated these operations in the accompanying financial statements. As a result of deconsolidating, the Company recognized an impairment charge of approximately $690 which includes the write down of the investment in the previously consolidated Venezuelan operations to fair value and the write-off of related intercompany balances. The Company’s Venezuelan operations are classified as discontinued operations in the consolidated financial statements. All prior periods were restated to reflect this change.

F-21 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table details the major assets and liabilities related to Venezuela, classified as held for sale in the consolidated balance sheet:

As of December 31, 2015 2014 Assets: Cash and cash equivalents ...... $— $ 713 Investments ...... — 924 Premium and other receivables ...... — 410 Reinsurance recoverables ...... — 7 Deferred acquisition costs ...... — 169 Other assets ...... — 233 Total assets held for sale ...... $— $2,456 Liabilities: Unpaid claims and claim adjustment expenses ...... $— $ 418 Unearned premiums ...... — 965 Other liabilities ...... — 210 Total liabilities held for sale ...... $— $1,593

The following table summarizes the amounts related to discontinued operations in the consolidated statements of income:

Years Ended December 31, 2015 2014 2013 Revenues: Premiums earned ...... $1,949 $1,946 $1,884 Net investment income ...... 95 93 133 Fee and other revenues ...... — 85 84 Net realized losses ...... (211) (317) (237) Total revenues ...... $1,833 $1,807 $1,864 Claims, Benefits and Expenses: Benefits, claims and claim adjustment expense ...... $1,351 $ 915 $1,050 Operating costs and expenses ...... 373 505 380 Amortization of deferred policy acquisition costs ...... 303 284 249 Total claims, benefits and expenses ...... $2,027 $1,704 $1,679 (Loss) income before income tax expense ...... $ (194) $ 103 $ 185 Income tax expense ...... 25 57 48 Net (loss) income ...... $ (219) $ 46 $ 137 Net loss on deconsolidation, net of tax ...... $ (662) $ — $ — Impairment of intercompany receivables, net of tax ...... (28) — — (Loss) income on discontinued operations, net of tax ...... $ (909) $ 46 $ 137

F-22 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Summit Holding Southeast, Inc. On April 1, 2014, the Company sold Summit Holding Southeast, Inc., (“Summit”), a mono-line workers compensation company based in Florida, to American Financial Group resulting in a net loss of $4. Accordingly, the results of Summit have been classified as discontinued operations in the consolidated statements of income.

The table below shows the discontinued operating results related to Summit:

Years Ended December 31, 2015 2014 2013 Total revenues ...... $— $148 $624 Income from operations of Summit (net of income tax expense of $0, $22 and $26 in 2015, 2014 and 2013) ...... $— $ 13 $ 47

Liberty International Argentina Holdings S.A. and Liberty Risk Services Argentina S.A. On February 21, 2014, Liberty International Argentina Holdings S.A. and Liberty Risk Services Argentina S.A. (together, the “Argentina operations”) were sold by Liberty International Latin America Holdings LLC and Liberty UK to LAFO S LLC and LAFT S LLC resulting in a net loss of $77. The results of the Argentina operations are presented as discontinued operations in the consolidated statements of income.

The table below shows the discontinued operating results related to Argentina operations:

Years Ended December 31, 2015 2014 2013 Total revenues ...... $— $17 $111 Income (loss) from operations of Argentina (net of income tax expense of $0, $0 and $3 in 2015, 2014 and 2013) ...... $— $ 7 $(14)

(3) INVESTMENTS Components of Net Investment Income

Years Ended December 31, 2015 2014 2013 Taxable interest income ...... $2,080 $2,109 $2,148 Tax-exempt interest income ...... 374 399 443 Dividends ...... 65 74 65 Limited partnerships, limited liability companies and other equity method investments ...... 153 574 450 Commercial mortgage loans ...... 112 93 91 Other investments ...... 26 12 13 Gross investment income ...... 2,810 3,261 3,210 Investment expenses(1) ...... (160) (148) (135) Net investment income(2) ...... $2,650 $3,113 $3,075

(1) Fees paid to external managers are included within the components of gross investment income. (2) The above table contains net investment income attributable to discontinued operations related to Summit and Argentina operations of $0, $14, and $60 for the years ended December 31, 2015, 2014, and 2013, respectively.

F-23 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Components of Net Realized (Losses) Gains

Years Ended December 31, 2015 2014 2013 Fixed maturities Gross realized gains ...... $180 $153 $185 Gross realized losses ...... (135) (95) (149) Equities Gross realized gains ...... 342 138 329 Gross realized losses ...... (131) (80) (52) Other Gross realized gains ...... 67 48 32 Gross realized losses ...... (347) (264) (97) Net realized (losses) gains ...... $ (24) $(100) $ 248

During the years ended December 31, 2015, 2014, and 2013, the Company recorded $(410), $(252), and $(102) of impairment losses, respectively. As of December 31, 2015 and 2014, other-than-temporary impairments recognized through accumulated other comprehensive income were $31 and $31, respectively.

During the years ended December 31, 2015, 2014, and 2013, proceeds from sales of fixed maturities available for sale were $4,466, $4,550 and $3,096, respectively. The gross realized gains (losses) on sales of fixed maturities available for sale totaled $152 and $(73) in 2015, $123 and $(45) in 2014 and $118 and $(26) in 2013. During the years ended December 31, 2015, 2014, and 2013, proceeds from sales of equities available for sale were $1,396, $1,310, and $2,167, respectively. The gross realized gains (losses) on sales of equities available for sale totaled $316 and $(70) in 2015, $110 and $(54) in 2014, and $326 and $(39) in 2013.

Components of Change in Net Unrealized Investment (Losses) Gains

Years Ended December 31, 2015 2014 2013 Fixed maturities ...... $(1,861) $1,449 $(2,923) Equities ...... (238) 62 157 Other ...... (44) 71 4 Adjustments to deferred acquisition costs ...... 252 (339) 116 Net change in unrealized investment (losses) gains ...... (1,891) 1,243 (2,646) Deferred income tax benefit (expense) ...... 613 (435) 947 Net change in unrealized investment (losses) gains, net of tax ...... $(1,278) $ 808 $(1,699)

F-24 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Available for Sale Investments The amortized cost, gross unrealized gains and losses and fair values of available for sale investments as of December 31, 2015 and 2014, are as follows:

Gross Gross Amortized Unrealized Unrealized Fair December 31, 2015 Cost Gains Losses Value U.S. government and agency securities ...... $ 3,182 $ 142 $ (12) $ 3,312 Residential MBS(1) ...... 7,224 185 (29) 7,380 Commercial MBS ...... 1,592 20 (16) 1,596 Other MBS and ABS(2) ...... 3,051 57 (15) 3,093 U.S. state and municipal ...... 13,553 666 (54) 14,165 Corporate and other ...... 28,749 991 (694) 29,046 Foreign government securities ...... 4,042 197 (37) 4,202 Total fixed maturities ...... 61,393 2,258 (857) 62,794 Common stock ...... 2,193 488 (110) 2,571 Preferred stock ...... 378 14 (54) 338 Total equity securities ...... 2,571 502 (164) 2,909 Total securities available for sale ...... $63,964 $2,760 $(1,021) $65,703

(1) Mortgage-backed securities (“MBS”) (2) Asset-backed securities (“ABS”)

Gross Gross Amortized Unrealized Unrealized Fair December 31, 2014 Cost Gains Losses Value U.S. government and agency securities ...... $ 2,943 $ 192 $ (10) $ 3,125 Residential MBS ...... 7,921 281 (24) 8,178 Commercial MBS ...... 1,483 36 (9) 1,510 Other MBS and ABS ...... 2,855 76 (14) 2,917 U.S. state and municipal ...... 13,020 962 (18) 13,964 Corporate and other ...... 26,977 1,663 (146) 28,494 Foreign government securities ...... 4,752 260 (24) 4,988 Total fixed maturities ...... 59,951 3,470 (245) 63,176 Common stock ...... 2,210 638 (58) 2,790 Preferred stock ...... 393 20 (58) 355 Total equity securities ...... 2,603 658 (116) 3,145 Total securities available for sale ...... $62,554 $4,128 $(361) $66,321

Approximately 76% of the Company’s securitized portfolio is explicitly backed by the U.S. government (Government National Mortgage Association “GNMA” and Small Business Association “SBA”) or by government-sponsored entities (Federal Home Loan Mortgage Corporation “FHLMC” and Federal National Mortgage Association “FNMA”). Approximately 94% of the mortgage and asset-backed holdings are rated AAA. The commercial MBS portfolio is well diversified and of high quality with approximately 94% rated AAA.

F-25 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

As of December 31, 2015, no single issuer, excluding U.S. Treasuries, agency securities and MBS, accounted for more than 0.6% of invested assets.

Of the $2,571 and $2,790 of common stock as of December 31, 2015 and 2014, respectively, $483 and $437, respectively, related to securities associated with non-guaranteed unit linked products where the policyholder bears the investment risk.

As of December 31, 2015 and 2014, securities carried at $3,019 and $3,214, respectively, were on deposit with state regulatory authorities as required by law.

As of December 31, 2015 and 2014, the fair values of fixed maturity securities and equity securities loaned were approximately $1,495 and $1,343, respectively. Cash and short-term investments received as collateral in connection with the loaned securities were approximately $1,065 and $996 as of December 31, 2015 and 2014, respectively. Investments other than cash and short-term investments received as collateral in connection with the loaned securities were approximately $487 and $384 as of December 31, 2015 and 2014, respectively.

The amortized cost and fair value of fixed maturities as of December 31, 2015, by contractual maturity are as follows:

Amortized Fair Cost Value Due to mature: One year or less ...... $ 3,480 $ 3,515 Over one year through five years ...... 16,027 16,298 Over five years through ten years ...... 17,134 17,255 Over ten years ...... 12,885 13,657 MBS and ABS of government and corporate agencies . . . 11,867 12,069 Total fixed maturities ...... $61,393 $62,794

Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

F-26 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following tables summarize the gross unrealized losses and fair value of fixed maturity securities and equity securities by the length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015 and 2014 and that are not deemed to be other-than-temporarily impaired.

December 31, 2015 Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses U.S. government and agency securities ...... $ (8) $ 1,304 $ (4) $ 245 Residential MBS ...... (21) 2,445 (8) 364 Commercial MBS ...... (13) 737 (3) 122 Other MBS and ABS ...... (11) 1,280 (4) 166 U.S. state and municipal ...... (47) 1,647 (7) 142 Corporate and other ...... (510) 10,543 (184) 1,027 Foreign government securities ...... (22) 911 (15) 298 Total fixed maturities ...... (632) 18,867 (225) 2,364 Common stock ...... (98) 653 (12) 33 Preferred stock ...... (1) 4 (53) 254 Total equities ...... (99) 657 (65) 287 Total ...... $(731) $19,524 $(290) $2,651

December 31, 2014 Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses U.S. government and agency securities ...... $ (1) $ 259 $ (9) $ 558 Residential MBS ...... (4) 755 (20) 1,229 Commercial MBS ...... (1) 148 (8) 368 Other MBS and ABS ...... (2) 253 (12) 821 U.S. state and municipal ...... (1) 129 (17) 673 Corporate and other ...... (90) 3,387 (56) 1,763 Foreign government securities ...... (4) 372 (20) 617 Total fixed maturities ...... (103) 5,303 (142) 6,029 Common stock ...... (47) 443 (11) 52 Preferred stock ...... — 4 (58) 251 Total equities ...... (47) 447 (69) 303 Total ...... $(150) $5,750 $(211) $6,332

F-27 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Unrealized losses increased from $361 as of December 31, 2014 to $1,021 as of December 31, 2015 primarily related to the unfavorable impact of widening spreads and rising treasury rates. As of December 31, 2015, there were 922 securities that were in an unrealized loss position for 12 months or longer. The Company monitors the difference between the amortized cost and estimated fair value of fixed maturity securities to ascertain whether declines in value are temporary in nature. In addition, the Company also monitors its intent and ability to hold certain equity securities for a period of time that is sufficient to allow for any anticipated recovery in fair value. The Company currently does not have the intent to sell and has determined it is not more likely than not that it would be required to sell these fixed maturity securities before recovery. For equity securities the Company has the intent and ability to hold these securities until recovery.

Variable Interest Entities The Company invests in limited partnerships and other entities subject to VIE analysis under the VIE subsections of ASC 810, Consolidation. The Company analyzes each investment to determine whether it is a VIE, and if so, whether the Company is the primary beneficiary or a significant interest holder based on a qualitative and quantitative assessment. The Company evaluates the design of the entity, the risks to which the entity was designed to expose the variable interest holder and the extent of the Company’s control of and variable interest in the VIE. As of December 31, 2015 and 2014, respectively, the Company has determined that it was the primary beneficiary of two VIEs in the low-income housing tax credit sector, and as such, these VIEs were consolidated in the Company’s financial statements. The carrying value of assets and liabilities, and the Company’s maximum exposure to loss of the consolidated VIEs are immaterial to the Company.

The Company has variable interests in VIEs for which it is not the primary beneficiary and accounts for these VIEs under the equity method in accordance with ASC 323, Investments – Equity Method and Joint Ventures. The VIEs are principally private equity limited partnerships in which the Company has invested as a passive limited partner. The partnerships were deemed to be VIEs because the equity holders as a group lack the power to direct the activities that most significantly impact the respective entity’s economic performance. The VIEs generate variability primarily from investment portfolio performance and that variability is passed to equity holders. The net carrying value of non-consolidated VIEs in which the Company has a variable interest was $1.719 billion and $1.826 billion as of December 31, 2015 and 2014, respectively and the Company’s maximum exposure to loss was $2.487 billion and $2.603 billion as of December 31, 2015 and 2014, respectively. The assets are included in other investments in the accompanying consolidated balance sheets. Maximum exposure to loss includes the carrying value and unfunded commitment of the VIE. There is no recourse provision to the general credit of the Company for any VIE beyond the full amount of the Company’s loss exposure.

LPs, LLCs and Other Equity Method Investments As of December 31, 2015 and 2014, the carrying values of LP, LLC and other equity method investments were $5,023 and $4,752, respectively. These investments consist of traditional private equity partnerships, natural resources partnerships (primarily energy and metals and mining), real estate partnerships, and other partnership funds and equity method investments. The Company’s investments in LPs, LLCs and other equity method investments are long-term in nature. The Company believes these investments offer the potential for superior long-term returns and are appropriate in the overall context of a diversified portfolio.

F-28 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

2014, respectively. Additionally, the Company’s participation in any one commercial mortgage loan acquired does not exceed 49% of the loan value. The number of loans in the portfolio increased from 4,509 as of December 31, 2014, to 4,763 as of December 31, 2015.

(4) DEFERRED ACQUISITION COSTS The following reflects the policy acquisition costs deferred for amortization against future income and related amortization charged to income:

Years Ended December 31, 2015 2014 2013 Balance at beginning of year ...... $ 3,001 $ 2,978 $ 2,605 Balance attributable to dispositions ...... — (17) — Acquisition costs deferred and other ...... 4,838 4,721 4,935 Amortization charged to income(1) ...... (4,675) (4,681) (4,562) Balance at end of year ...... $3,164 $ 3,001 $ 2,978

(1) The above table contains amortization attributable to discontinued operations of $0, $21 and $94 for the years ended December 31, 2015, 2014, and 2013 respectively.

(5) REINSURANCE In the ordinary course of business, the Company assumes reinsurance and also cedes reinsurance to other insurers to reduce overall risk, including exposure to large losses and catastrophic events. The Company is also a member of various involuntary pools and associations and serves as a servicing carrier for residual market organizations.

A summary of reinsurance financial data reflected within the accompanying consolidated statements of income is presented below:

P&C 2015 2014 2013 Written Earned Written Earned Written Earned Direct ...... $35,719 $35,151 $35,920 $35,175 $35,101 $34,356 Assumed ...... 1,687 1,821 1,927 1,945 2,372 2,245 Ceded ...... 4,619 4,827 5,129 5,308 5,836 5,952 Net premiums ...... $32,787 $32,145 $32,718 $31,812 $31,637 $30,649

Life & Annuity 2015 2014 2013 Written Earned Written Earned Written Earned Direct ...... $ 1,838 $ 1,831 $ 1,704 $ 1,726 $ 1,606 $ 1,600 Assumed ...... 2222—— Ceded ...... 94 94 92 92 83 84 Net premiums ...... $ 1,746 $ 1,739 $ 1,614 $ 1,636 $ 1,523 $ 1,516

F-29 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The Company reported reinsurance recoverables of $13,575 and $13,979 as of December 31, 2015 and 2014, respectively, net of allowance for doubtful accounts of $131 and $149, respectively. The following table summarizes the Company’s reinsurance recoverables by reinsurers’ Standard & Poor’s (“S&P”) rating (or the rating of any guarantor) as of December 31, 2015.

Reinsurance Collateral Net S&P Rating Recoverables Held Recoverables(1) AAA ...... $ — $ — $ — AA+, AA, AA- ...... 5,354 3,327 2,405 A+,A,A- ...... 3,365 312 3,095 BBB+, BBB, BBB- ...... 3 — 3 BB+ or below ...... 1 — 1 Involuntary pools ...... 2,599 — 2,599 Voluntary pools ...... 277 93 244 Other(2) ...... 2,107 2,181 635 Gross recoverables(3) ...... $13,706 $5,913 $8,982 Less: allowance ...... 131 Net recoverables ...... $13,575

(1) Net recoverables represent gross recoverables less applicable collateral that can be specifically applied against recoverable balances. (2) Includes $531 and $1,576 of reinsurance recoverables from non-rated reinsurers and captive and program business, respectively. (3) Includes $486 and $13,220 of paid and unpaid reinsurance recoverables, respectively.

The Company remains contingently liable in the event reinsurers are unable to meet their obligations for paid and unpaid reinsurance recoverables and unearned premiums ceded under reinsurance agreements.

The reinsurance recoverables from state mandated involuntary pools and associations primarily represent the Company’s servicing carrier business. As a servicing carrier, the Company retains no direct underwriting risk but instead cedes 100% of the involuntary market premium and losses back to the pool. Payment of losses is shared by the pool participants in proportion to their pool participation. Reinsurer credit risk with respect to any such involuntary pool or association is a function of the creditworthiness of all of the pool participants.

As part of its reinsurance security oversight, the Company has established a Credit Risk Committee (“the Committee”) that meets quarterly to monitor and review the credit quality of the existing reinsurance portfolio, discuss emerging trends in the reinsurance marketplace, and ensure that the current portfolio of reinsurance is in compliance with the Committee’s security standards. The Committee is directly responsible for establishing the rating, collateral, and diversification requirements governing the Company’s purchase and use of reinsurance.

F-30 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) inherently uncertain process involving estimates. Changes in these estimates could result in additional charges to the accompanying consolidated statements of income.

On July 17, 2014, Liberty Mutual Insurance Company (“LMIC”) entered into a reinsurance agreement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc., on a combined aggregate excess of loss agreement for substantially all of the Company’s U.S. workers compensation, asbestos and environmental liabilities (the “NICO Reinsurance Transaction”), attaching at $12,522 of combined aggregate reserves, with an aggregate limit of $6,500 and sublimits of $3,100 for asbestos and environmental liabilities and $4,507 for workers compensation liabilities. At the closing of the NICO Reinsurance Transaction, but effective as of January 1, 2014, the Company ceded $3,320 of existing undiscounted liabilities under this retroactive reinsurance agreement. NICO will provide $3,180 of additional aggregate adverse development cover. The Company paid NICO total consideration of $3,046, and recorded a pre-tax loss of $128 in the third quarter of 2014. With respect to the ceded asbestos and environmental business, NICO has been given authority to handle claims, subject to the Company’s oversight and control. With respect to the ceded workers compensation business, the Company will continue to handle claims.

In general terms, the covered business includes post December 31, 2013 development on: (1) asbestos and environmental liabilities arising under policies of insurance and reinsurance with effective dates prior to January 1, 2005; and (2) workers compensation liabilities arising out of policies on the books of the Company’s Commercial Insurance SBU as of December 31, 2013, as respects injuries or accidents occurring prior to January 1, 2014.

The following table displays the impact of the NICO Reinsurance Transaction subsequent to transaction date in the accompanying consolidated statements of income:

Years Ended December 31, 2015 2014 Amounts ceded under NICO Reinsurance Transaction Unrecognized reinsurance benefit related to original transaction loss at the beginning of the year ...... $ 43 $128 Asbestos and environmental unfavorable loss development ...... 5 111 Workers compensation favorable loss development ...... (21) (26) Total amounts ceded under NICO Reinsurance Transaction ...... (16) 85 Retroactive reinsurance reductions/(benefits) recognized into income ...... 16 (85) Pre-tax impact of unrecognized deferred retroactive reinsurance benefit ...... — — Unrecognized reinsurance benefit related to original transaction loss at the end of the year ...... $ 59 $ 43

Once the aggregate of workers compensation and asbestos and environmental development exceeds the original pre-tax loss of $128, deferred gains will be recorded. Deferred gains are subsequently amortized into earnings over the period when underlying claims are settled.

In addition, the Company has an aggregate reinsurance recoverable from Nationwide Indemnity Company in the amount of $1,590 and $1,682 as of December 31, 2015 and 2014, respectively. The reinsurance recoverable is guaranteed by Nationwide Mutual Insurance Company, which has a financial strength rating of A+ from S&P. Additionally, the Company has significant reinsurance recoverable concentrations with Swiss Re Group, Berkshire Hathaway Insurance Group, Munich Re Group, and Everest Re Group totaling $966, $501, $382, and $279, respectively, as of December 31, 2015, net of offsetting collateral under the contracts.

F-31 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

As of December 31, 2015, and 2014, deferred gains on in force retroactive reinsurance contracts were $7 and $8, respectively, and are included in other liabilities within the accompanying consolidated balance sheets. Interest credited to the funds held balances for the years ended December 31, 2015, 2014, and 2013 was $2, $2, and $72, respectively. Deferred gain amortization was $2, $1, and $337 for the years ended December 31, 2015, 2014, and 2013, respectively. Reinsurance recoverables related to these transactions, including experience related profit accruals, were $55 and $64 as of December 31, 2015 and 2014, respectively.

Catastrophe Exposure The Company writes insurance and reinsurance contracts that cover catastrophic events, both natural and man- made. Although the Company purchases reinsurance to mitigate its exposure to certain catastrophic events, claims from catastrophic events could cause substantial volatility in its financial results for any fiscal year and have a material adverse effect on its financial condition.

On November 26, 2002, the Terrorism Risk Insurance Act of 2002 (“the Terrorism Act”) was enacted into Federal law and established the Terrorism Risk Insurance Program (“the Program”), a temporary Federal program in the Department of the Treasury, that provided for a system of shared public and private compensation for certain insured losses resulting from acts of terrorism or war committed by or on behalf of a foreign interest. The Program was scheduled to terminate on December 31, 2005. In December 2005, the Terrorism Risk Insurance Extension Act of 2005 (“the Terrorism Extension Act”) was enacted into Federal law, reauthorizing the Program through December 31, 2007, while reducing the Federal role under the Program. In December 2007, the Terrorism Risk Insurance Program Reauthorization Act of 2007 was enacted into Federal law, extending coverage to include domestic acts of terrorism and reauthorizing the Program through December 31, 2014. In January 2015, the Terrorism Risk Insurance Program Reauthorization Act of 2015 (“the 2015 Reauthorization”) extends the effectiveness of the Terrorism Act through December 31, 2020, while further reducing the Federal role under the program. The four acts are hereinafter collectively referred to as ‘‘the Acts.’’

F-32 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) starting in 2016 until it reaches $200 in 2020. Under the Program, a participating insurer was entitled through 2015 to be reimbursed by the Federal Government for 85% of subject losses, after an insurer deductible, subject to an annual cap. Under the 2015 Reauthorization, the Federal reimbursement percentage decreases by 1% a year starting in 2016 from the current 85% to 80% in 2020. The 2015 Reauthorization did not change the program cap of $100,000 or the Company’s deductible which remains at 20% of the Company’s prior year earned premium for the covered lines.

The deductible for any calendar year is equal to 20% of the insurer’s direct earned premiums for covered lines for the preceding calendar year. The Company’s estimated deductible under the Program is $1,509 for 2016. The annual cap limits the amount of aggregate subject losses for all participating insurers to $100,000. Once subject losses have reached the $100,000 aggregate during a program year, participating insurers will not be liable under the Program for additional covered terrorism losses for that program year. The Company has had no terrorism- related losses since the Program was established. Because the interpretation of the Acts is untested, there is substantial uncertainty as to how they will be applied to specific circumstances. It is also possible that future legislative action could change the Acts. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in the Company’s own reinsurance program, future losses from acts of terrorism, particularly “unconventional” acts of terrorism involving nuclear, biological, chemical or radiological events, could be material to the Company’s operating results, financial position and/or liquidity in future periods. The Company will continue to manage this type of catastrophic risk by monitoring and controlling terrorism risk aggregations to the best of its ability.

(6) UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES The Company establishes reserves for payment of claims and claim adjustment expenses that arise from the policies issued. As required by applicable accounting rules, no reserves are established until a loss, including a loss from a catastrophe, occurs. The Company’s reserves are segmented into three major categories: reserves for reported claims (estimates made by claims adjusters); incurred but not reported claims reserves (“IBNR”) representing reserves for unreported claims and supplemental reserves for reported claims; and reserves for the costs to settle claims. The Company establishes its reserves net of salvage and subrogation by line of business or coverage and year in which losses occur.

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

F-33 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) both the total amount of insured exposure in an area affected by the event and the severity of the event. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and financial position of the Company. Catastrophe losses incurred during the years ended December 31, 2015, 2014, and 2013 were $1,820, $1,609 and $1,269, respectively.

Activity in property and casualty unpaid claims and claim adjustment expenses of the Company are summarized as follows:

2015 2014 2013 Balance as of January 1 ...... $49,970 $52,207 $51,318 Less: unpaid reinsurance recoverables(1) ...... 10,256 10,957 11,113 Net balance as of January 1 ...... 39,714 41,250 40,205 Balance attributable to acquisitions and dispositions(2) ...... (67) (900) — Incurred attributable to: Current year ...... 21,454 21,203 21,257 Prior years(3) ...... (162) 47 399 Discount accretion attributable to prior years ...... 79 109 117 Total incurred ...... 21,371 21,359 21,773 Paid attributable to: Current year ...... 11,559 11,491 10,617 Prior years ...... 9,457 9,987 10,351 Total paid ...... 21,016 21,478 20,968 Amortization of deferred retroactive reinsurance gain(4) ...... 3 4 339 Net adjustment due to foreign exchange ...... (573) (521) (99) Add: unpaid reinsurance recoverables(1) ...... 9,891 10,256 10,957 Balance as of December 31 ...... $49,323 $49,970 $52,207

(1) In addition to the unpaid reinsurance recoverable balances noted above, and as a result of retroactive reinsurance agreements, the Company has recorded retroactive reinsurance recoverable balances of $3,000, $3,015, and $106 as of December 31, 2015, 2014, and 2013, respectively. (2) The balance attributable to acquisitions and dispositions primarily represents the dispositions of Argentina operations and Summit, partially offset by the Uni.Asia acquisition. (See Note 2 for further discussion.) (3) Does not include increases/(decreases) in allowance related to reinsurance recoverables due to prior year development of $21, $(9), and $(98) as of December 31, 2015, 2014, and 2013, respectively. (4) The increase in deferred gain amortization during the year ended December 31, 2013, was due to the commutation of four workers compensation excess of loss retroactive reinsurance agreements. (See Note 5 for further discussion.)

In 2015, favorable incurred attributable to prior years, excluding asbestos and environmental and amortization of deferred retroactive gain, is primarily attributable to favorable development in the reinsurance line of business due to lower than expected loss development. In 2014, incurred attributable to prior years, excluding asbestos and environmental and amortization of deferred retroactive gain, is primarily attributable to favorable development across various lines of business, partially offset by unfavorable development on the surety line of business due to greater than expected severity in prior year claims. In 2013, incurred attributable to prior years, excluding asbestos and environmental and amortization of deferred retroactive gain, is primarily attributable to personal

F-34 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) automobile and surety lines of business. The personal automobile unfavorable development is driven by worse than expected severity in bodily injury claims. Unfavorable development in surety is due to greater than expected severity in prior year claims.

For certain commercial lines of insurance, the Company offers experience-rated insurance contracts whereby the ultimate premium is dependent upon the claims incurred. As of December 31, 2015 and 2014, the Company held $3,613 and $3,632, respectively, of unpaid claims and claim adjustment expenses related to experience-rated contracts. Premiums receivable included accrued retrospective and unbilled audit premiums of $448 and $514 as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015, 2014, and 2013, the Company recognized an increase (decrease) of premium income of $40, $(2) and $216, respectively, relating to prior years.

Unpaid claims and claim adjustment expenses are recorded net of anticipated salvage and subrogation of $1,286 and $1,279 as of December 31, 2015 and 2014, respectively.

As of December 31, 2015 and 2014, the reserve for unpaid claim reserves was reduced by $5,564 and $5,535, respectively, for large dollar deductibles. Large dollar deductibles billed and recoverable were $163 and $190 as of December 31, 2015 and 2014, respectively.

Asbestos and Environmental Reserves The Company has exposure to asbestos and environmental claims that emanate principally from general liability policies written prior to the mid-1980s. In establishing the Company’s asbestos and environmental reserves, the Company estimates case reserves for anticipated losses and bulk reserves for claim adjustment expenses and IBNR. The Company maintained casualty excess of loss reinsurance during the relevant periods. The reserves, including cessions reported by ceding reinsurers on assumed reinsurance contracts, are reported in unpaid claims and claim adjustment expenses, and ceded reserves are included in reinsurance recoverables on the accompanying consolidated balance sheets.

Upon their de-affiliation from the Nationwide Group and affiliation with the Company, Employers Insurance Company of Wausau (“EICOW”), Wausau Business Insurance Company (“WBIC”), Wausau General Insurance Company (“WGIC”), and Wausau Underwriters Insurance Company (“WUIC”) entered into ceded reinsurance contracts whereby Nationwide Indemnity Company assumed full responsibility for obligations on certain policies with effective dates prior to January 1, 1986, including all asbestos and environmental exposures.

The process of establishing reserves for asbestos and environmental claims is subject to greater uncertainty than the establishment of reserves for liabilities relating to other types of insurance claims. A number of factors contribute to this greater uncertainty surrounding the establishment of asbestos and environmental reserves, including, without limitation: (i) the lack of available and reliable historical claims data as an indicator of future loss development, (ii) the long waiting periods between exposure and manifestation of any bodily injury or property damage, (iii) the difficulty in identifying the source of asbestos or environmental contamination, (iv) the difficulty in properly allocating liability for asbestos or environmental damage, (v) the uncertainty as to the number and identity of insureds with potential exposure, (vi) the cost to resolve claims, and (vii) the collectability of reinsurance.

F-35 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The uncertainties associated with establishing reserves for asbestos and environmental claims and claim adjustment expenses are compounded by the differing, and at times inconsistent, court rulings on environmental and asbestos coverage issues involving: (i) the differing interpretations of various insurance policy provisions and whether asbestos and environmental losses are or were ever intended to be covered, (ii) when the loss occurred and what policies provide coverage, (iii) whether there is an insured obligation to defend, (iv) whether a compensable loss or injury has occurred, (v) how policy limits are determined, (vi) how policy exclusions are applied and interpreted, (vii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities, (viii) whether clean-up costs are covered as insured property damage, and (ix) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. The uncertainties cannot be reasonably estimated, but could have a material impact on the Company’s future operating results and financial condition.

In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded asbestos and environmental unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. Asbestos and environmental unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 including: $83 of asbestos reserves, primarily associated with increased defense costs, and $28 of pollution reserves.

As a result of the significant uncertainty inherent in determining a company’s asbestos and environmental liabilities and establishing related reserves, the amount of reserves required to adequately fund the Company’s asbestos and environmental claims cannot be accurately estimated using conventional reserving methodologies based on historical data and trends. As a result, the use of conventional reserving methodologies frequently has to be supplemented by subjective considerations including managerial judgment. In that regard, the estimation of asbestos claims and associated liabilities and the analysis of environmental claims considered prevailing applicable law and certain inconsistencies of court decisions as to coverage, plaintiffs’ expanded theories of liability, and the risks inherent in major litigation and other uncertainties, the Company believes that in future periods it is possible that the outcome of the continued uncertainties regarding asbestos and environmental related claims could result in an aggregate liability that differs from current reserves and would be covered under the NICO Reinsurance Transaction.

As of December 31, 2015 and 2014, the Company’s unpaid claims and claim adjustment expense reserves, net of associated reinsurance recoverables, included $952 and $1,225 respectively, for asbestos and environmental- related claims before consideration of the NICO Reinsurance Transaction.

F-36 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Net asbestos losses paid in 2015, 2014, and 2013 were $243, $169, and $128, respectively. The Company incurred $7, $89, and $236 of asbestos reserves before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively.

Net environmental losses paid in 2015, 2014, and 2013 were $37, $52, and $47, respectively. The Company incurred $0, $28, and $61 of environmental reserves before consideration of the NICO Reinsurance Transaction, net of change in allowance for doubtful accounts during the years ended December 31, 2015, 2014, and 2013, respectively.

(7) DEBT OUTSTANDING Debt outstanding as of December 31, 2015 and 2014 includes the following:

Current maturities of long-term debt: 2015 2014

Current maturities of long-term debt ...... $ 249 $ —

Long-term debt: 2015 2014

6.70% Notes, due 2016 ...... $ — $ 249 7.00% Junior Subordinated Notes, due 2067(1) ...... 300 300 5.00% Notes, due 2021 ...... 600 600 4.95% Notes, due 2022 ...... 750 750 4.25% Notes, due 2023 ...... 1,000 1,000 8.50% Surplus Notes, due 2025 ...... 140 140 7.875% Surplus Notes, due 2026 ...... 227 227 7.625% Notes, due 2028 ...... 3 3 3.91% – 4.25% Federal Home Loan Bank Borrowings due 2032 ...... 300 300 7.00% Notes, due 2034 ...... 231 231 6.50% Notes, due 2035 ...... 471 471 7.50% Notes, due 2036 ...... 19 19 7.80% Junior Subordinated Notes, due 2087(2) ...... 700 700 10.75% Junior Subordinated Notes, due 2088(3) ...... 193 196 6.50% Notes, due 2042 ...... 750 750 4.85% Notes, due 2044 ...... 1,050 1,050 7.697% Surplus Notes, due 2097 ...... 260 260 6,994 7,246 Unamortized discount ...... (12) (14) Total long-term debt ...... $6,982 $7,232

(1) The par value call date and final fixed rate interest payment date is March 15, 2017, subject to certain requirements. (2) The par value call date and final fixed rate interest payment date is March 15, 2037, subject to certain requirements. (3) The par value call date and final fixed rate interest payment date is June 15, 2038, subject to certain requirements.

F-37 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Debt Transactions and In-Force Credit Facilities Effective December 21, 2015, LMIC renewed its $1,000 repurchase agreement for a two-year period, which terminates December 21, 2017. To date, no funds have been borrowed under the facility.

In 2015, the Company repurchased $3 of the 10.75% Junior Subordinated notes due 2088. Pre-tax loss of $1 was recorded on this transaction and is included in loss on extinguishment of debt in the consolidated statements of income.

Effective July 2, 2015, LMIC renewed its $1,000 repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

The Company issues commercial paper which is guaranteed by LMIC. On April 8, 2015, LMGI increased its commercial paper program from $750 to $1,000. As of December 31, 2015, there was no commercial paper outstanding.

On March 5, 2015, LMGI amended and restated its unsecured revolving credit facility from $750 to $1,000 with an expiration date of March 5, 2020. This facility backs the Company’s commercial paper program. To date, no funds have been borrowed under the facility.

On December 31, 2014, Berkeley/St. James Real Estate LLC paid off its five-year mortgage loan in the amount of $47. The mortgage loan was originally $50 with a maturity date of January 1, 2015.

On July 24, 2014 and October 31, 2014, LMGI issued $750 and $300 of Senior Notes due 2044 (the “2044 Notes”), respectively. Interest is payable semi-annually at a fixed rate of 4.85%. The 2044 Notes mature on August 1, 2044.

LMIC, Peerless Insurance Company (“PIC”), Liberty Life Assurance Company of Boston (“LLAC”), Liberty Mutual Fire Insurance Company (“LMFIC”), and Employers Insurance Company of Wausau (“EICOW”) are members of the Federal Home Loan Bank. On March 21, 2012, LMFIC borrowed $150 at a rate of 3.91% with a maturity date of March 22, 2032. On March 23, 2012 and April 2, 2012, LMIC borrowed $127 at a rate of 4.24% with a maturity date of March 23, 2032 and $23 at a rate of 4.25% with a maturity date of April 2, 2032, respectively. As of December 31, 2015, all of the outstanding Federal Home Loan Bank borrowings are fully collateralized.

On January 20, 2012, LMGI entered into two interest rate swap transactions having a notional amount of $300 with respect to LMGI’s $300 7.00% Junior Subordinated Notes due 2067. Pursuant to the terms of the swap agreements, commencing on March 15, 2017 and effective through March 15, 2037, LMGI has agreed with the counterparties to pay a fixed rate of interest on the notional amount and the counterparties have agreed to pay a floating rate of interest on the notional amount.

Payments of interest and principal of the surplus notes are expressly subordinate to all policyholder claims and other obligations of LMIC. Accordingly, interest and principal payments are contingent upon prior approval of the Commissioner of Insurance of the Commonwealth of Massachusetts.

Capital lease obligations as of December 31, 2015 and 2014 were $2 and $28, respectively and are included in other liabilities in the accompanying consolidated balance sheets. Amortization of the lease obligation was $7 and $28 for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015 the leaseback agreements entered into in 2010 have expired.

F-38 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Interest The Company paid $434, $400, and $431 of interest in 2015, 2014, and 2013, respectively.

(8) INCOME TAXES The components of U.S. Federal, state and foreign income tax expense (benefit) are:

Years ended December 31, 2015 2014 2013 Current tax expense (benefit): U.S. Federal ...... $376 $322 $ 75 U.S. Federal benefit of net operating losses ...... (385) (401) (84) State ...... 3 3 3 Foreign ...... 167 112 131 Total current tax expense ...... 161 36 125 Deferred tax expense (benefit): U.S. Federal ...... 395 707 329 Foreign ...... (30) 4 61 Total deferred tax expense ...... 365 711 390 Total U.S. Federal, state and foreign income tax expense ...... $526 $747 $ 515

A reconciliation of the income tax expense attributable to continuing operations computed at U.S. Federal statutory tax rates to the income tax expense as included in the consolidated statements of income is as follows:

Years ended December 31, 2015 2014 2013 Expected U.S. Federal income tax expense ...... $690 $902 $741 Tax effect of: Nontaxable investment income ...... (107) (122) (131) Change in valuation allowance ...... (6) (2) 3 Goodwill ...... — — (10) Revision to estimates ...... (6) 7 (38) General business credits ...... (18) (5) (33) Audit Settlement ...... (40) (60) — State ...... 333 Foreign ...... 20 22 9 Other ...... (10) 2 (29) Actual income tax expense ...... $526 $747 $515

F-39 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The significant components of the deferred income tax assets and liabilities at December 31 are summarized as follows:

2015 2014 Deferred tax assets: Unpaid claims discount ...... $ 302 $ 361 Unearned premium reserves ...... 979 942 Net operating losses ...... 319 691 Employee benefits ...... 768 881 Credits ...... 439 349 Other accrued expenses ...... 114 124 Other ...... 479 421 3,400 3,769 Less: valuation allowance ...... (106) (138) Total deferred tax assets ...... 3,294 3,631 Deferred tax liabilities: Deferred acquisition costs ...... 842 797 Net unrealized gains ...... 653 1,236 Intangibles ...... 364 356 Depreciation/amortization ...... 343 405 Other ...... 304 268 Total deferred tax liabilities ...... 2,506 3,062 Net deferred tax assets ...... $ 788 $ 569

The overall decrease in the valuation allowance is primarily due to currency translation and revised income projections for certain foreign subsidiaries. Based on the assumption that future levels of income will be achieved, management believes it is more likely than not the remaining net deferred tax assets after valuation allowance will be realized.

The Company’s subsidiaries have foreign tax credit carry forwards of $184, general business credit carry forwards of $102, alternative minimum tax credit carry forwards of $153, and net operating loss carry forwards of $1,031 as of December 31, 2015. The foreign tax credits will begin to expire, if not utilized, in 2019, the general business credits will begin to expire, if not utilized, in 2031, and the alternative minimum tax credits do not expire. The net operating losses available in the U.S. and various non-U.S. tax jurisdictions will begin to expire, if not utilized, as follows:

Year Total 2016 ...... 33 2017 ...... 41 2018 ...... 48 2019 ...... 38 Thereafter ...... 871 Total ...... $1,031

F-40 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The Company has not provided for deferred taxes on unremitted earnings of subsidiaries outside the U.S. where such earnings are permanently reinvested. As of December 31, 2015, unremitted earnings of foreign subsidiaries were $2,434. If these earnings were distributed in the form of dividends or otherwise, the Company would be subject to U.S. income taxes less an adjustment for applicable foreign tax credits. The determination of the amount of the unrecognized deferred tax liability related to the undistributed earnings is not practicable.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance as of December 31, 2013 ...... $298 Additions based on tax positions related to current year ...... 7 Additions for tax positions of prior years ...... 54 Reductions for tax positions of prior years ...... (149) Settlements ...... (24) Translation ...... (4) Balance as of December 31, 2014 ...... $182 Additions based on tax positions related to current year ...... 42 Additions for tax positions of prior years ...... 191 Reductions for tax positions of prior years ...... (152) Settlements ...... (3) Translation ...... (11) Balance as of December 31, 2015 ...... $249

Included in the tabular roll forward of unrecognized tax benefits are interest and penalties in the amount of $34 and $51 as of December 31, 2015 and 2014, respectively.

Included in the balance at December 31, 2015 is $62 related to tax positions that would impact the effective tax rate.

The Company recognizes interest and penalties related to unrecognized tax benefits in U.S. Federal, state, and foreign income tax expense. For the years ended December 31, 2015, 2014, and 2013, the Company recognized approximately $(30), $(36), and $(11) in interest and penalties, respectively. The Company had approximately $31 and $59 of interest and penalties accrued as of December 31, 2015 and 2014, respectively.

The IRS has completed its review of the Company’s U.S. Federal income tax returns through the 2007 tax year and is currently reviewing income tax returns for the 2008 through 2011 tax years. Any adjustments that may result from the IRS examinations of these income tax returns are not expected to have a material impact on the financial position, liquidity, or results of operations of the Company.

The Company believes that the range of reasonably possible changes to the balance of unrecognized tax benefits could decrease by $0 to $210 within the next twelve months as a result of potential settlements with the IRS for prior years.

F-41 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) final average compensation, as more fully described in the Plans. Some foreign subsidiaries also sponsor defined benefit pension plans. In 2013, the Company approved changes to the U.S. pension plan that went into effect on January 1, 2014. Significant changes included the addition of a new cash balance benefit formula for all eligible U.S. employees and the freezing of credited service under the plan’s final average pay formula.

The Company also provides certain healthcare and life insurance benefits (“Postretirement”) covering substantially all U.S. and Canadian employees. In 2014, the Company’s U.S. postretirement medical and dental cost sharing arrangement changed to a defined contribution model with an annual dollar contribution amount based on age and years of eligible credited service. Life insurance benefits are based on a participant’s final compensation subject to the plan maximum. The postretirement plan is unfunded.

Assets of the U.S. tax-qualified, defined benefit pension plans consist primarily of investments held in a master trust with The Bank of New York Mellon. Assets of the plan are invested primarily in fixed income securities and in diversified public equities. As of December 31, 2015 and 2014, no assets of the plans were held in separate accounts of the Company. During 2014, remaining assets formerly held in separate accounts of the Company were transferred to The Bank of New York Mellon.

The Company sponsors defined contribution plans for substantially all U.S. (a 401(k) plan) and Canadian (Retirement Savings Plan and Deferred Profit Sharing Plan) employees who meet eligibility requirements. During 2015, 2014, and 2013, employees could contribute a percentage of their annual compensation on a before and after-tax basis, subject to Federal limitations. Company contributions, a portion of which reflect Company performance, are based on the employee’s contribution amount. In 2015, 2014, and 2013, the Company incurred matching contributions of $138, $128 and $109, respectively, including the supplemental defined contribution plans.

Compensation expense related to the Company’s long-term and short-term incentive compensation plans was $636, $653, and $656 for the years ended December 31, 2015, 2014, and 2013, respectively.

F-42 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table sets forth the assets, obligations, and assumptions associated with the various U.S., Canadian, and certain foreign subsidiary pension and postretirement benefits. The amounts are recognized in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, and accompanying consolidated statements of income for the years ended December 31, 2015, 2014, and 2013.

Pension Supplemental Pension Postretirement 2015 2014 2015 2014 2015 2014 Change in benefit obligations: Benefit obligation at beginning of year ...... $7,216 $ 5,692 $ 400 $ 345 $ 844 $ 736 Service costs ...... 133 104 4 3 19 17 Interest costs ...... 341 312 19 19 39 40 Amendments ...... 1 1 — — — — Settlement ...... — (1) — — — — Actuarial (gains) losses ...... (316) 1,374 9 72 (77) 85 Currency exchange rate change ...... (21) (14) (1) (1) (1) (1) Benefits paid ...... (262) (253) (38) (38) (33) (33) Employee contributions ...... 1 1 1 — — — Benefit obligations at end of year ...... $7,093 $ 7,216 $ 394 $ 400 $ 791 $ 844 Accumulated benefit obligations ...... $6,713 $ 6,735 $ 344 $ 338 $ 791 $ 844 Change in plan assets: Fair value of plan assets at beginning of year ...... $6,091 $ 5,555 $ — $ — $ — $ — Actual return on plan assets ...... 42 342 — — — — Currency exchange rate change ...... (17) (12) — — — — Employer contribution ...... 313 459 — — — — Benefits paid ...... (262) (253) — — — — Settlement ...... — (1) — — — — Other ...... 2 1 — — — — Fair value of plan assets at end of year ...... $6,169 $ 6,091 $ — $ — $ — $ — Funded status of Plan ...... $ (924) $(1,125) $(394) $(400) $(791) $(844)

Pension Supplemental Pension Postretirement 2015 2014 2015 2014 2015 2014 Amounts recognized in the Balance Sheets: Assets ...... $ 10 $ 7 $— $— $— $— Liabilities ...... (934) (1,132) (394) (400) (791) (844) Net liability at end of year ...... $ (924) $(1,125) $(394) $(400) $(791) $(844) Amounts recognized in Accumulated Other Comprehensive Loss (Income): Net loss (gain) ...... $2,375 $ 2,509 $ 213 $ 228 $ (69) $ 12 Prior service costs ...... (11) (14) (11) (13) (77) (87) Net transition asset ...... (1) (1) — — — — Total ...... $2,363 $ 2,494 $ 202 $ 215 $(146) $ (75) Other changes in Plan assets and projected benefit obligation recognized in Other Comprehensive Loss (Income): Net actuarial loss (gain) ...... $ 71 $1,417 $ 8 $ 72 $ (77) $ 85 Currency exchange rate change ...... (5) (3) — — — — Amortization of net actuarial (loss) gain ...... (200) (77) (23) (16) (4) 1 Prior service costs ...... 1 2 — — — — Amortization of prior service cost ...... 2 2 2 2 10 10 Total ...... $ (131) $ 1,341 $ (13) $ 58 $ (71) $ 96

F-43 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The estimated net actuarial loss, prior service cost, and transition obligation for the pension, supplemental pension and postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost during the 2016 fiscal year are $152, $(3), and $0 for pension plans, $20, $(2), and $0 for supplemental pension plans, and $0, $(10), and $0 for postretirement plans.

The net benefit costs for the years ended December 31, 2015, 2014 and 2013, include the following components:

December 31, 2015 Pension Supplemental Pension Postretirement Components of net periodic benefit costs: Service costs ...... $133 $ 4 $ 19 Interest costs ...... 341 19 39 Expected return on plan assets ...... (428) — — Settlement/curtailment loss ...... 2 — — Amortization of unrecognized: Net loss ...... 198 23 4 Prior service cost ...... (2) (2) (10) Net periodic benefit costs ...... $244 $ 44 $ 52

December 31, 2014 Pension Supplemental Pension Postretirement

Components of net periodic benefit costs: Service costs ...... $104 $ 3 $ 17 Interest costs ...... 312 19 40 Expected return on plan assets ...... (386) — — Settlement/curtailment loss ...... — — — Amortization of unrecognized: Net loss (gain) ...... 77 16 (1) Prior service cost ...... (2) (2) (10) Net periodic benefit costs ...... $105 $ 36 $ 46

December 31, 2013 Pension Supplemental Pension Postretirement Components of net periodic benefit costs: Service costs ...... $170 $ 6 $ 24 Interest costs ...... 287 19 42 Expected return on plan assets ...... (348) — — Settlement/curtailment loss ...... — — — Amortization of unrecognized: Net loss ...... 154 20 5 Prior service cost ...... (1) (2) (6) Net periodic benefit costs ...... $262 $ 43 $ 65

F-44 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

The measurement date used to determine pension and other postretirement is December 31, 2015.

Weighted-average actuarial assumptions for benefit obligations are set forth in the following table:

December 31, 2015 2014 Pension Discount rate ...... 5.12% 4.85% Rate of compensation increase ...... 3.80% 4.00% Supplemental Pension Discount rate ...... 4.95% 4.85% Rate of compensation increase ...... 5.02% 5.29% Postretirement Discount rate ...... 5.09% 4.85%

Also, the Company adopted the RP-2014 Mortality table for Annuitants and Non-Annuitants with White Collar adjustment, projected generationally with Scale MP-2015 at December 31, 2015 and Scale MP-2014 at December 31, 2014.

Weighted-average actuarial assumptions for net periodic benefit costs are set forth in the following table:

December 31, 2015 2014 2013 Pension Discount rate ...... 4.85% 5.60% 4.80% Expected return on plan assets ...... 7.00% 6.75% 6.75% Rate of compensation increase ...... 4.00% 3.70% 3.70% Supplemental Pension Discount rate ...... 4.85% 5.60% 4.80% Rate of compensation increase ...... 5.29% 3.90% 3.90% Postretirement Discount rate ...... 4.85% 5.60% 5.03%

The discount rate assumption used to determine the benefit obligations was based on a yield curve approach where the cash flows related to the benefit plans’ liability stream were discounted at an interest rate specifically applicable to the timing of the cash flows. Prior to December 31, 2015, the process calculated the present value of these cash flows and determined the weighted average discount rate that produced the same present value of the future cash flows. Effective December 31, 2015, the discount rate assumption used to determine the benefit obligations is based on the yield curve where the cash flows related to the benefit plans’ liability stream are discounted using spot rates specifically applicable to the timing of the cash flows of each plan. The spot rate

F-45 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) change, which is accounted for as a change in estimate, has no impact on the pension benefit obligation as of December 31, 2015 or net periodic benefit costs recorded for the year.

The weighted-average healthcare cost trend rates are expected to be 7.8% in 2016 graded down to 5.0% in 2027. Healthcare cost trend rate assumptions have a material impact on the postretirement benefit obligation. A one- percentage point change in assumed healthcare cost trend rates would have the following effects:

1% 1% point point increase decrease Effect on Postretirement Benefit Obligation ...... $23 $(19) Effect on total service and interest costs ...... $ 1 $ (1)

Plan Assets The assets of the U.S. pension plan represent approximately 98% of the total Plans’ assets as of December 31, 2015 and 2014 respectively. The Company’s overall investment strategy for the U.S. pension plan’s assets is to achieve a mix of approximately 50% of investments for near-term benefit payments and 50% for long-term growth with a wide diversification of asset types, fund strategies, and fund managers. The U.S. pension plan’s goal is to achieve a total return in the range of 6%-8% annually with sufficient liquidity to meet the benefit needs of the U.S. pension plan.

The U.S. pension plan’s assets are held in a trust and managed by LMIC, a wholly owned subsidiary of the Company and by its subadvisor, Liberty Mutual Group Asset Management, Inc., which is also a wholly owned subsidiary of the Company.

The target allocation for the U.S. pension plan’s assets are 47% bonds, 40% diversified public equities, 10% private equity and real estate investments, and 3% cash and short-term investments.

Fixed maturities include investment grade and high yield bonds and syndicated loans of companies from diversified industries, residential and commercial mortgage backed securities (“RMBS” and “CMBS”), asset backed securities (“ABS”) and collateralized mortgage obligations (“CMO”), U.S. Treasuries and Agencies, U.S. Municipals and Foreign Government securities. Public equities are broadly diversified by geography (U.S. vs International) and capitalization (large cap vs. mid and small cap). Limited partnerships include investments in private equity, real estate and other funds.

The investment strategy for each category of the U.S. pension plan’s assets is as follows:

Fixed maturities — Achieve superior performance against the Barclays Aggregate Bond Index, Bank of America Merrill Lynch High Yield Bond Index, S&P/LSTA Performing Loan Index, and J.P. Morgan Government Bond Index-Emerging Markets Global Diversified over a three to five year period.

Public equities — Achieve superior performance against the MSCI All Country World Index over a three to five year period.

F-46 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Limited partnerships — Achieve long-term returns in excess of liquid equity securities and provide diversification to the U.S. pension plan’s assets. Exposures are diversified by geography, manager, industry, stage and vintage year.

The U.S. pension plan’s assets are administered by the Liberty Mutual Retirement Board who has the fiduciary responsibility for management of the U.S. pension plan’s assets in accordance with the Liberty Mutual Retirement Benefit Plan Investment Policy. This policy has been approved by the Liberty Mutual Retirement Board.

The other assets represent currency hedges, and real estate assets that support foreign pension plans and an insurance company separate account that supports the domestic pension plan.

The following table sets forth by level, within the fair value hierarchy, the Plans’ assets at fair value as of December 31, 2015 and 2014.

Fair Value Measurements as of December 31, 2015 Quoted Prices in Active Markets for Significant Significant Identical Observable Unobservable Assets Inputs Inputs Asset Category Total Level 1(1) Level 2(1) Level 3(1) Cash, cash equivalents and short-term investments(2) ...... $ 42 $ 84 $ (42) $— Fixed maturities: U.S. government and agency securities ...... 180 89 91 — U.S. state and municipal ...... 138 — 138 — RMBS/CMO/ABS/CMBS ...... 726 — 726 — Corporate and other ...... 1,994 — 1,992 2 Foreign government securities ...... 47 — 47 — U.S. large cap equities ...... 747 747 — — U.S. mid and small cap equities ...... 525 525 — — European equities ...... 648 648 — — Asian equities ...... 470 470 — — Other equities ...... 41 41 — — Limited partnerships ...... 436 — — 436 Other assets ...... 175 — 12 163 Total ...... $6,169 $2,604 $2,964 $601

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(53).

F-47 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fair Value Measurements as of December 31, 2014 Quoted Prices in Active Markets Significant Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total Level 1(1) Level 2(1) Level 3(1) Cash, cash equivalents and short-term investments(2) ...... $ 19 $ 102 $ (83) $— Fixed maturities: U.S. government and agency securities ...... 95 75 20 — U.S. state and municipal ...... 131 — 131 — RMBS/CMO/ABS/CMBS ...... 815 — 814 1 Corporate and other ...... 2,164 — 2,164 — Foreign government securities ...... 51 — 51 — U.S. large cap equities ...... 871 871 — — U.S. mid and small cap equities ...... 533 533 — — European equities ...... 527 527 — — Asian equities ...... 395 395 — — Other equities ...... 105 105 — — Limited partnerships ...... 281 — — 281 Other assets ...... 104 — 14 90 Total ...... $6,091 $2,608 $3,111 $372

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(95).

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Balance Actual Return Actual Return Purchases, Transfers Balance January 1, on Plan Assets on Plan Assets Sales, & In/(Out) December 31, 2015 Still Held Sold Settlements of Level 3 2015 Limited partnerships ...... $281 $ 22 $ 16 $117 $— $436 Fixed maturities ...... 1 — — 1 — 2 Other assets ...... 90 (2) 8 67 — 163 Total ...... $372 $ 20 $ 24 $185 $— $601

Balance Actual Return Actual Return Purchases, Transfers Balance January 1, on Plan Assets on Plan Assets Sales, & In/(Out) December 31, 2014 Still Held Sold Settlements of Level 3 2014 Limited partnerships (1) ...... $165 $ 6 $ 14 $ 96 $— $281 Fixed maturities ...... 1 — — (1) 1 1 Other assets (1) ...... 41 (1) — 50 — 90 Total ...... $207 $ 5 $ 14 $145 $ 1 $372

(1) Real Estate investments of $38 were transferred from Limited Partnerships to Other Assets in 2014.

The Plans’ investments in limited partnerships are recorded at the carrying value as reported by the external fund managers, which is believed to approximate the fair value of the investments.

F-48 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Cash Flows Contributions — The Company contributed $313 to the qualified plans, and directly funded $38 to retirees in the supplemental pension plans in 2015. In addition, the Company directly funded $33 to retirees in the postretirement benefit plans in 2015.

The Company expects to contribute approximately $416 to the qualified plans, to directly fund $15 to retirees in the supplemental pension plans, and to directly fund $36 to the postretirement benefit plans.

Expected Future Benefit Payments — The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:

Supplemental Postretirement Pension Pension Plans 2016 ...... 303 15 36 2017 ...... 309 24 38 2018 ...... 336 28 40 2019 ...... 359 32 42 2020 ...... 376 26 44 2021-2025 ...... 2,192 134 241

(10) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value is the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company primarily uses the market approach, which generally utilizes market transaction data for identical or similar instruments.

The hierarchy level assigned to each security in the Company’s available for sale portfolio is based on the Company’s assessment of the transparency and reliability of the inputs used in the valuation of each instrument at the measurement date. The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Securities are classified based on the lowest level of input that is significant to the fair value measurement. The Company recognizes transfers between levels at the end of each reporting period. The three hierarchy levels are defined as follows: • Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access. • Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets or liabilities at the measurement date, quoted prices in markets that are not active, or other inputs that are observable, either directly or indirectly. • Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement and involve management judgment. The unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

F-49 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) instrument is new and not yet established in the marketplace, and other characteristics particular to the financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3.

The Company is responsible for the determination of fair value and the supporting assumptions and methodologies. The Company gains assurance on the overall reasonableness and consistent application of valuation methodologies and inputs and compliance with accounting standards through the execution of various processes and controls designed to ensure that the Company’s assets and liabilities are appropriately valued. For fair values received from third parties or internally estimated, the Company’s processes are designed to determine that the valuation methodologies and inputs are appropriate and consistently applied, the assumptions are reasonable and consistent with the objective of determining fair value, and the fair values are accurately recorded. For example, on a continuing basis, the Company assesses the reasonableness of individual fair values that have stale security prices or that exceed certain thresholds as compared to previous fair values received from valuation service providers or brokers or derived from internal models. The Company performs procedures to understand and assess the methodologies, processes and controls of valuation service providers. In addition, the Company may validate the reasonableness of fair values by comparing information obtained from valuation service providers or brokers to other third party valuation sources for selected securities.

The Company used the following methods and assumptions in estimating the fair value of its financial instruments as well as the general classification of such financial instruments pursuant to the above fair value hierarchy:

Fixed Maturities At each valuation date, the Company uses various valuation techniques to estimate the fair value of its fixed maturities portfolio. The primary method for valuing the Company’s securities is through independent third-party valuation service providers. For positions where valuations are not available from independent third-party valuation service providers, the Company utilizes broker quotes and internal pricing methods to determine fair values. The Company obtains a single non-binding price quote from a broker familiar with the security who, similar to the Company’s valuation service providers, may consider transactions or activity in similar securities, as applicable, among other information. The brokers providing price quotes are generally from the brokerage divisions of leading financial institutions with market making, underwriting and distribution expertise regarding the security subject to valuation. The evaluation and prioritization of these valuation sources is systematic and predetermined resulting in a single quote or price for each financial instrument. The following describes the techniques generally used to determine the fair value of the Company’s fixed maturities by asset class:

U.S. Government and Agency Securities U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal Home Loan Bank, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. As the fair values of the Company’s U.S. Treasury securities are based on unadjusted market prices, they are classified within Level 1. The fair value of U.S. government agency securities is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, reported trades, bids, offers and credit spreads. Accordingly, the fair value of U.S. government agency securities is classified within Level 2.

F-50 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Mortgage-Backed Securities The Company’s portfolio of residential and commercial MBS is originated by both agencies and non-agencies, the majority of which are pass-through securities issued by U.S. government agencies. The fair value of MBS is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, contractual cash flows, prepayment speeds, collateral performance and credit spreads. Accordingly, the fair value of MBS is primarily classified within Level 2.

Asset-Backed Securities ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, credit card receivables, and collateralized loan obligation securities originated by a variety of financial institutions. The fair value of ABS is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, contractual cash flows, prepayment speeds, collateral performance and credit spreads. Accordingly, the fair value of ABS is primarily classified within Level 2.

Municipal Securities The Company’s municipal portfolio is comprised of bonds issued by U.S. domiciled state and municipal entities. The fair value of municipal securities is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, binding broker quotes, issuer ratings, reported trades and credit spreads. Accordingly, the fair value of municipal securities is primarily classified within Level 2.

Corporate Debt and Other Securities Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair value of corporate and other securities is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, new issuances, issuer ratings, reported trades of identical or comparable securities, bids, offers and credit spreads. Accordingly, the fair value of corporate and other securities is primarily classified within Level 2. In the event third-party vendor valuation is not available, prices are determined using non-binding price quotes from a broker familiar with the security. In this instance, the valuation inputs are generally unobservable and the fair value is classified within Level 3.

Foreign Government Securities Foreign government securities include bonds issued or guaranteed by foreign governments. The fair value of foreign government securities is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, binding broker quotes, issuer ratings, reported trades of identical or comparable securities and credit spreads. Accordingly, the fair value of foreign government securities is primarily classified within Level 2. In the event third-party vendor valuation is not available, prices are determined using non-binding price quotes from a broker familiar with the security. In this instance, the valuation inputs are generally unobservable and the fair value is classified within Level 3.

F-51 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Equity Securities Equity securities include common and preferred stocks. Common stocks with fair values based on quoted market prices in active markets are classified within Level 1. Common stocks with fair values determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active are classified within Level 2. The fair value of preferred stock is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active. Accordingly, the fair value of preferred stock is primarily classified within Level 2.

Short-Term Investments The fair value of short-term investments is generally determined using observable market inputs that include quoted prices for identical or similar assets in markets that are not active, benchmark yields, new issuances, issuer ratings, reported trades of identical or comparable securities, bids, offers and credit spreads. Accordingly, the fair value of short-term investments is primarily classified within Level 2 of the fair value hierarchy.

Other Investments Other investments include primarily foreign cash deposits and equity investments in privately held businesses. Cash deposits are primarily valued using quoted prices for similar instruments in active markets; these assets are categorized within Level 2 of the fair value hierarchy. Equity investments in privately held businesses are valued using internal management estimates; they are categorized within Level 3 of the hierarchy. Limited partnership and other equity method investments, which represent the remainder of the other investment balance on the accompanying consolidated balance sheet are not subject to these disclosures and therefore are excluded from the table in this note.

Separate Account Assets Separate account assets, which primarily consist of other limited partnerships and equity securities, are measured based on the methodologies discussed above. The activity in separate account assets is offset by an equal amount for separate account liabilities, which results in a net zero impact for the Company. Separate account assets within Level 3 include other limited partnership interests. Other limited partnership interests are valued giving consideration to the value of the underlying holdings of the partnerships.

Other Assets and Other Liabilities Other assets primarily consist of fixed maturities, short-term investments, and equity securities of captive companies sponsored by the Company. These assets are measured based on the methodology for individual securities as discussed above.

F-52 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions) instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.

Life Insurance Obligations Life insurance obligations include certain variable annuity contracts that provide guaranteed minimum income benefits. These benefits are accounted for as embedded derivatives and are bifurcated from the host contract and carried at fair value. The fair value of these embedded derivatives are computed on a recurring basis using assumptions predominately classified as Level 3 (significant unobservable) inputs. While some inputs are observable in the market, such as risk free rates, volatility and historical equity returns, the underlying future policyholder behavior inputs are highly unobservable. The significant policyholder behavior assumptions include lapse and the underlying annuitization rate.

Assets and Liabilities Measured at Fair Value on a Recurring Basis The following tables summarize the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2015 and 2014:

As of December 31, 2015 Assets, at Fair Value Level 1 Level 2 Level 3 Total U.S. government and agency securities ...... $2,627 $ 685 $ — $ 3,312 Residential MBS ...... — 7,379 1 7,380 Commercial MBS ...... — 1,521 75 1,596 Other MBS and ABS ...... — 3,013 80 3,093 U.S. state and municipal ...... — 13,921 244 14,165 Corporate and other ...... — 28,811 235 29,046 Foreign government securities ...... — 4,192 10 4,202 Total fixed maturities, available for sale ...... 2,627 59,522 645 62,794 Common stock ...... 2,529 — 42 2,571 Preferred stock ...... — 334 4 338 Total equity securities, available for sale ...... 2,529 334 46 2,909 Short-term investments ...... 1 271 — 272 Other investments ...... — 133 479 612 Separate account assets ...... 38 — 64 102 Other assets ...... 6 32 25 63 Total assets ...... $5,201 $60,292 $1,259 $66,752

Liabilities, at Fair Value Life insurance obligations ...... $ — $ — $ (154) $ (154) Other liabilities ...... — (34) — (34) Total liabilities ...... $ — $ (34) $ (154) $ (188)

F-53 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

As of December 31, 2014 Assets, at Fair Value Level 1 Level 2 Level 3 Total U.S. government and agency securities ...... $2,373 $ 730 $ 22 $ 3,125 Residential MBS ...... — 8,177 1 8,178 Commercial MBS ...... — 1,426 84 1,510 Other MBS and ABS ...... — 2,847 70 2,917 U.S. state and municipal ...... — 13,788 176 13,964 Corporate and other ...... — 28,243 251 28,494 Foreign government securities ...... — 4,977 11 4,988 Total fixed maturities, available for sale ...... 2,373 60,188 615 63,176 Common stock ...... 2,746 — 44 2,790 Preferred stock ...... — 353 2 355 Total equity securities, available for sale ...... 2,746 353 46 3,145 Short-term investments ...... — 625 1 626 Other investments ...... — 122 440 562 Separate account assets ...... 40 — 60 100 Other assets ...... 5 26 27 58 Total assets ...... $5,164 $61,314 $1,189 $67,667

Liabilities, at Fair Value Life insurance obligations ...... $ — $ — $ (163) $ (163) Other liabilities ...... — (22) — (22) Total liabilities ...... $ — $ (22) $ (163) $ (185)

The Company did not have significant transfers between Levels 1 and 2 during the years ended December 31, 2015 and 2014.

F-54 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Changes in Level 3 Recurring Fair Value Measurements The following tables summarize the fair values of assets on a recurring basis classified as Level 3 within the fair value hierarchy:

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, (Losses) Gains Sales and in to out of December 31, Assets, at Fair Value 2015 Gains (Losses) Purchases Settlements Maturities Level 3 Level 3 2015 U.S. government and agency securities ...... $ 22 $— $— $— $— $— $— $ (22) $ — Residential MBS ...... 1 — 1 156 — — — (157) 1 Commercial MBS ...... 84 — 2 52 — (28) — (35) 75 Other MBS and ABS ...... 70 — (3) 100 — (4) — (83) 80 U.S. state and municipal ...... 176 — (15) 180 — (6) 47 (138) 244 Corporate and other ...... 251 (4) (6) 155 — (156) 6 (11) 235 Foreign government securities . . 11 (1) — 1 — (1) — — 10 Total fixed maturities ..... 615 (5) (21) 644 — (195) 53 (446) 645 Common stock ...... 44 27 (4) 21 — (36) 1 (11) 42 Preferred stock ...... 2 — — 2 — — — — 4 Total equity securities ..... 46 27 (4) 23 — (36) 1 (11) 46 Short-term investments ...... 1 — — — — (1) — — — Other investments ...... 440 (1) 48 26 — (34) — — 479 Separate account assets ...... 60 6 — — — (2) — — 64 Other assets ...... 27 1 — (3) — — — — 25 Total assets ...... $1,189 $ 28 $ 23 $690 $— $(268) $ 54 $(457) $1,259

Liabilities, at Fair Value Life insurance obligations ...... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154) Total liabilities ...... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154)

F-55 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, Gains Gains Sales and in to out of December 31, Assets, at Fair Value 2014 (Losses) (Losses) Purchases Settlements Maturities Level 3 Level 3 2014 U.S. government and agency securities ...... $ 24 $— $— $— $— $ (2) $— $— $ 22 Residential MBS ...... 11 — 1 38 — — — (49) 1 Commercial MBS ...... 98 — 6 67 — (2) 24 (109) 84 Other MBS and ABS ...... 30 — 1 128 — (3) — (86) 70 U.S. state and municipal ...... 124 — 16 54 — (4) 27 (41) 176 Corporate and other ...... 398 3 — 86 — (172) 5 (69) 251 Foreign government securities . . 3 1 (1) 10 — (2) 11 (11) 11 Total fixed maturities ..... 688 4 23 383 — (185) 67 (365) 615 Common stock ...... 45 — (1) 6 — (1) 1 (6) 44 Preferred stock ...... 2 — — — — — — — 2 Total equity securities ..... 47 — (1) 6 — (1) 1 (6) 46 Short-term investments ...... 5 — — 2 — (5) — (1) 1 Other investments ...... 316 (8) 18 14 — (8) 329 (221) 440 Separate account assets ...... 68 4 — — — (12) — — 60 Other assets ...... 19 10 — (2) — — — — 27 Total assets ...... $1,143 $ 10 $ 40 $403 $— $(211) $397 $(593) $1,189 Liabilities, at Fair Value Life insurance obligations ...... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163) Total liabilities ...... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163)

Transfers into and out of Level 3 were primarily due to changes in the observability of pricing inputs.

There were no material unrealized gains (losses) for the period included in earnings attributable to the fair value relating to assets and liabilities classified as Level 3 that are still held as of December 31, 2015 and 2014.

F-56 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Quantitative Information about Level 3 Fair Value Measurements The following table provides information about the significant unobservable inputs used for recurring fair value measurements for certain material Level 3 assets and liabilities and includes only those instruments for which information about the inputs is reasonably available to the Company. As the input information with respect to certain Level 3 instruments may not be reasonably available to the Company, balances shown below may not equal total amounts reported for such Level 3 assets and liabilities.

Fair Value at December 31, Range 2015 Valuation Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $167 Discounted Cash Flow Discount Rate(a) 22.5% Spread Model Credit Spread(c) 94-699 (502 bps) Comparative Valuation Credit Spread(c) 150-277 (259 bps) Illiquidity Premium(d) 152-211 (201 bps) Index Yield(b) 4.4% Matrix Pricing Credit Spread(c) 120-200 (166 bps) Other invested assets ...... $360 Discounted Cash Flow Discount Rate(a) 10.0%-20.0% (16.0%) Liabilities, at Fair Value Life insurance obligations . . . $154 Discounted Cash Flow Discount rate(a) 0.14%-5.14% Lapse rates(e) 1.0%-12.0% Annuitization take-up rate(f) 0%-21.0%

(a) An increase in the discount rate will lead to a decrease in fair value and vice versa. (b) An increase in yield will lead to a decrease in fair value and vice versa. (c) An increase in the credit spread will lead to a decrease in fair value and vice versa. (d) An increase in the illiquidity premium will lead to a decrease in fair value and vice versa. (e) An increase in the lapse rates will lead to a decrease in fair value and vice versa. (f) An increase in the take-up rate will lead to an increase in fair value and vice versa.

Fair Value at December 31, Range 2014 Valuation Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $189 Discounted Cash Flow Discount Rate(a) 1.6%-22.5% (12.5%) Spread Model Credit Spread(c) 450-946 (925 bps) Comparative Valuation Credit Spread(c) 25-163 (127 bps) Illiquidity Premium(d) 50-250 (222 bps) Index Yield(b) 3.73% Matrix Pricing Credit Spread(c) 109-174 (159 bps) Other invested assets ...... $330 Discounted Cash Flow Discount Rate(a) 10.0%-20.0% (15.0%) Black Scholes Volatility 53.5%-100.0% (80.0%) Liabilities, at Fair Value Life insurance obligations . . . $163 Discounted Cash Flow Lapse rates(e) 1.0%-12.0% Annuitization take-up rate(f) 0%-21.0%

F-57 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fair Value Measurements on a Non-Recurring Basis The Company’s assets measured on a non-recurring basis are primarily related to equity investments in metals and mining projects and direct investments in oil and gas production ventures (Natural Resources). These assets are measured at fair value on a non-recurring basis at time of impairment and are not included in the tables presented above. The Company’s natural resources classified as Level 3 were $314 and $80 as of December 31, 2015 and 2014, respectively. The Company’s limited partnerships classified as Level 3 were $0 and $12 as of December 31, 2015 and 2014, respectively.

The following tables summarize the Company’s impairment charges for assets measured at fair value on a non- recurring basis for the years ended December 31, 2015, 2014, and 2013.

Years ended December 31, 2015 2014 2013 Natural resources ...... $343 $155 $149 Software ...... 41 3 5 Limited Partnerships ...... — 68 — Goodwill ...... — — 1 Intangible ...... — — 3 Total ...... $384 $226 $158

The Company tests for impairment on its natural resource investments by comparing the undiscounted cash flows expected to be generated by a project to the property’s carrying value. When a property’s carrying value is greater than the expected future cash flows, impairment expense is recognized to the extent that the carrying value of the property exceeds its discounted expected cash flows.

In employing the discounted cash flow method described above, key inputs regarding metals and mining investments are project development costs, commodity prices and the discount rate which are based on management’s expectations about outcomes with respect to these variables. The key inputs for oil and gas properties are future oil and/or gas production, commodity prices and the discount rate which are based on management’s expectations about outcomes with respect to these variables.

In 2014, the Company executed a purchase agreement to sell a number of its Limited Partnerships investments which resulted in an impairment loss of $68.

Fair Value Option The Company has elected to apply the fair value option to certain financial instruments in limited circumstances. The fair value option election is made on an instrument by instrument basis. All periodic changes in the fair value of the elected instruments are reflected in the accompanying consolidated statements of income. The impact of the fair value option elections is immaterial to the Company.

F-58 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Financial Instruments Not Carried at Fair Value The fair values and carrying values of the Company’s financial instruments excluded from ASC 820, Fair Value Measurement, as of December 31, 2015 and 2014, are as follows:

2015 2014 Carrying Fair Carrying Fair Value Value Value Value Other investments ...... $5,040 $5,040 $4,794 $4,794 Commercial mortgage loans ...... 2,317 2,368 1,808 1,954 Cash and cash equivalents ...... 4,227 4,227 4,003 4,003 Individual and group annuities ...... 3,418 3,553 2,996 3,208 Debt ...... 7,231 7,807 7,232 8,168

Other investments — Fair values represent the Company’s equity in limited partnership net assets and other equity method investments.

Commercial mortgage loans — The fair values of commercial mortgage loans were estimated using option adjusted valuation discount rates or carrying value for newly acquired loans.

Cash and cash equivalents — The carrying amounts reported in the accompanying consolidated balance sheets for these instruments approximate fair values.

Individual and group annuities — Fair values of liabilities under fixed investment-type insurance contracts are estimated using discounted cash flow calculations at pricing rates as of December 31, 2015 and 2014. Also included are variable investment-type insurance contracts, for which carrying value approximates fair value as of December 31, 2015 and 2014.

Debt — Fair values of commercial paper and short-term borrowings approximate carrying value. Fair values of long-term debt were based upon a tiered approach using the following sources in order of availability (1) quoted prices from Morgan Markets, (2) quoted prices from Bloomberg, or (3) a yield to maturity calculation utilizing Bloomberg prices as of December 31, 2015 and 2014.

The Company has not applied ASC 820 to non-financial assets and liabilities.

(11) COMMITMENTS AND CONTINGENT LIABILITIES Various lawsuits against the Company have arisen in the normal course of business. Contingent liabilities arising from litigation, income taxes, and other matters are not considered material in relation to the financial position of the Company.

The Company leases certain office facilities and equipment under operating leases expiring in various years through 2031. In addition, the Company is party to two land leases expiring in 2025 and 2101. Rental expense was $206, $223 and $214 for the years ended December 31, 2015, 2014 and 2013, respectively. The Company also owns certain office facilities and receives rental income from tenants under operating leases expiring in various years through 2043. Rental income was $32, $40, and $35 for the years ended December 31, 2015, 2014, and 2013, respectively.

F-59 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

Future minimum rental payments and receipts under non-cancelable leases with terms in excess of one year are estimated as follows:

Operating Land Rental Net Lease Leases Leases Income Obligations 2016 ...... $162 $ 1 $ 26 $137 2017 ...... 159 1 26 134 2018 ...... 116 1 19 98 2019 ...... 81 1 15 67 2020 ...... 69 1 14 56 2021 – 2040 ...... 370 19 31 358 2041 – 2060 ...... — 22 — 22 2061 – 2101 ...... — 87 — 87 Total ...... $957 $133 $131 $959

As of December 31, 2015, the Company had unfunded commitments in traditional private equity partnerships, natural resources, real estate, and other of $1,354, $2,440, $378, and $1,057, respectively.

As of December 31, 2015, the Company had commitments to purchase various residential MBS at a cost and fair value of $42, and various corporate and municipal securities at a cost and fair value of $23.

As of December 31, 2015, the Company had $478 of undrawn letters of credit outstanding secured by assets of $597.

Liabilities for guaranty funds and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment has occurred. The liabilities for guaranty fund assessments are based on preceding year premium or multiple years premiums depending upon the state law. Additionally, for those states that have loss- based assessments, liabilities for workers compensation loss based assessments are reserved based on workers compensation loss reserves and workers compensation paid losses. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of other liabilities in the accompanying consolidated balance sheets. As of December 31, 2015 and 2014, the liability balance was $135 and $138, respectively. As of December 31, 2015 and 2014, included in other assets were $4 and $3, respectively, of related assets for premium tax offsets or policy surcharges. The related asset is limited to the amount that is determined based on future premium collections or policy surcharges from policies in force. Current assessments are expected to be paid over one year while loss-based assessments are expected to be paid over a period ranging from one year to the life expectancy of certain workers’ compensation claimants and the recoveries are expected to occur over the same period of time. Premium tax offsets are expected to be realized within one year.

As of December 31, 2015, the Company has reinsurance funds held balances of approximately $65, which are subject to ratings and surplus triggers whereby if any of the Company’s insurance financial strength ratings (with A.M. Best or S&P) fall below the A- category or specified surplus decreases occur, the funds may be required to be placed in trust and invested in assets acceptable to the Company. No funds were held in trust as of December 31, 2015.

F-60 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

(12) POLICYHOLDERS’ EQUITY Statutory Surplus The statutory surplus of the Company’s domestic insurance companies was $18,687 and $19,180 as of December 31, 2015 and 2014, respectively. The Company’s domestic insurance subsidiaries prepare statutory basis financial statements in accordance with the National Association of Insurance Commissioners’ Accounting Practices and Procedures Manual (“NAIC APP”), subject to any deviations prescribed or permitted by the insurance commissioners of the various insurance companies’ states of domicile. The Company does not have any material permitted practices that deviate from the NAIC APP.

Dividends The insurance subsidiaries’ ability to pay dividends is restricted under applicable insurance law and regulations and may only be paid from unassigned surplus. Under the insurance laws of the domiciliary states of the insurance subsidiaries, an insurer may make an ordinary dividend payment if its surplus as regards to policyholders, following such dividend, is reasonable in relation to its outstanding liabilities, is adequate to its financial needs and does not exceed the insurer’s unassigned surplus. However, no insurer may pay an extraordinary dividend without the approval or non-disapproval of the domiciliary insurance regulatory authority. Insurance subsidiaries owned directly by LMGI are LMIC, Liberty Mutual Personal Insurance Company (“LMPICO”), LMFIC and EICOW. Under the insurance laws of Massachusetts, the domiciliary state of LMIC and LMPICO, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends made within the preceding 12 months, exceeds the greater of 10% of the insurer’s surplus as regards policyholders as of the preceding December 31, or the insurer’s net income for the 12-month period ending on the preceding December 31. Under the insurance laws of Wisconsin, the domiciliary state of LMFIC and EICOW, an extraordinary dividend is defined as a dividend whose fair market value, together with other dividends paid within the preceding 12 months, exceeds the lesser of (a) 10% of the insurer’s surplus with regard to policyholders as of the preceding December 31, or (b) the greater of (1) the insurer’s net income for the calendar year preceding the date of the dividend, minus realized capital gains for that calendar year, or (2) the aggregate of the insurer’s net income for the three calendar years preceding the date of the dividend, minus realized capital gains for those calendar years and minus dividends paid within the first two of the preceding three calendar years. Changes in the extraordinary dividend regulation of the domiciliary states of LMIC, LMPICO, LMFIC, and EICOW could negatively affect LMGI’s ability to pay principal and interest on the notes held at LMGI, as could a redomestication or merger of LMIC, LMPICO, LMFIC, or EICOW to a different domiciliary state. The maximum dividend payout in 2016 that may be made prior to regulatory approval is $1,873.

(13) SUBSEQUENT EVENTS On February 17, 2016, the Company announced plans to combine its Personal Insurance and Liberty International strategic business units to form a new strategic business unit which will be named Global Consumer Markets. This combination represents an opportunity to blend the complementary strengths of these two operations. The local expertise we have in growth markets outside the U.S. coupled with our strong and scalable U.S. personal lines capabilities put us in a unique position to take maximum advantage of opportunities to grow our business globally. The former Personal Insurance and Liberty International strategic business units will now be divisions of Global Consumer Markets and known as U.S. Consumer Markets and International Consumer Markets, respectively.

F-61 Liberty Mutual Group Inc. Notes to Consolidated Financial Statements (dollars in millions)

On January 14, 2016, the Company completed the acquisition of Compañia de Seguros Generales Penta Security S.A., the fourth largest non-life insurer in Chile. Compañia de Seguros Generales Penta Security S.A. had approximately $160 of net written premium in 2015.

Management has assessed material subsequent events through March 3, 2016, the date the financial statements were available to be issued.

F-62

Report of Independent Registered Public Accounting Firm

The Board of Directors Liberty Mutual Holding Company Inc.

We have audited the accompanying consolidated balance sheets of Liberty Mutual Holding Company Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Liberty Mutual Holding Company Inc. at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with attestation standards established by the American Institute of Certified Public Accountants and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States), Liberty Mutual Holding Company Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) and our report dated March 3, 2016 expressed an unqualified opinion thereon.

March 3, 2016

F-63 Liberty Mutual Holding Company Inc. Consolidated Statements of Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,070 6,742 6,265 Amortization of deferred policy acquisition costs ...... 4,675 4,660 4,468 Interest expense ...... 438 419 420 Interest credited to policyholders ...... 265 261 256 Total claims, benefits and expenses ...... 35,649 35,118 34,237 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non- controlling interest ...... 1,967 2,569 2,108 Income tax expense ...... 524 744 510 Consolidated net income from continuing operations ...... 1,443 1,825 1,598 Discontinued operations (net of income tax expense of $16, $79 and $77 in 2015, 2014 and 2013 respectively) ...... (909) (35) 170 Consolidated net income ...... 534 1,790 1,768 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to Liberty Mutual Holding Company Inc...... $ 514 $ 1,814 $ 1,751 Net Realized (Losses) Gains Other-than-temporary impairment losses: 2015 2014 2013 Total other-than-temporary impairment losses ...... $ (410) $ (251) $ (101) Change in portion of loss recognized in other comprehensive income ...... — (1) (1) Other-than-temporary impairment losses ...... (410) (252) (102) Other net realized gains ...... 386 152 350 Net realized (losses) gains ...... $ (24) $ (100) $ 248

See accompanying notes to the audited consolidated financial statements.

F-64 Liberty Mutual Holding Company Inc. Consolidated Statements of Comprehensive (Loss) Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Consolidated net income ...... $ 534 $1,790 $ 1,768 Other comprehensive loss, net of taxes: Unrealized (losses) gains on securities ...... (1,278) 808 (1,699) Change in pension and post retirement plans funded status ...... 154 (974) 697 Foreign currency translation and other adjustments ...... (459) (422) (91) Other comprehensive loss, net of taxes ...... (1,583) (588) (1,093) Consolidated comprehensive (loss) income ...... (1,049) 1,202 675 Less: Comprehensive income (loss) attributable to non-controlling interest ...... 15 (29) 16 Comprehensive (loss) income attributable to Liberty Mutual Holding Company Inc...... $(1,064) $1,231 $ 659

See accompanying notes to the audited consolidated financial statements.

F-65 Liberty Mutual Holding Company Inc. Consolidated Balance Sheets (dollars in millions)

December 31, December 31, 2015 2014 Assets: Investments: Fixed maturities, available for sale, at fair value (amortized cost of $61,393 and $59,951) . . . $ 62,794 $ 63,176 Equity securities, available for sale, at fair value (cost of $2,571 and $2,603) ...... 2,909 3,145 Short-term investments ...... 272 626 Commercial mortgage loans ...... 2,317 1,808 Other investments ...... 5,691 5,373 Total investments ...... 73,983 74,128 Cash and cash equivalents ...... 4,227 4,003 Premium and other receivables ...... 10,137 9,919 Reinsurance recoverables ...... 13,575 13,979 Deferred income taxes ...... 795 575 Deferred acquisition costs ...... 3,164 3,001 Goodwill ...... 4,758 4,834 Prepaid reinsurance premiums ...... 1,098 1,192 Other assets ...... 9,970 10,206 Assets held for sale ...... — 2,456 Total assets ...... $121,707 $124,293 Liabilities: Unpaid claims and claim adjustment expenses and future policy benefits: Property and casualty ...... $ 49,323 $ 49,970 Life ...... 9,262 9,030 Other policyholder funds and benefits payable ...... 6,601 5,870 Unearned premiums ...... 16,951 16,855 Funds held under reinsurance treaties ...... 205 210 Current maturities of long-term debt ...... 249 — Long-term debt ...... 6,982 7,232 Other liabilities ...... 12,893 13,242 Liabilities held for sale ...... — 1,593 Total liabilities ...... 102,466 104,002 Equity: Unassigned equity ...... 20,664 20,150 Accumulated other comprehensive income ...... (1,521) 57 Total policyholders’ equity ...... 19,143 20,207 Non-controlling interest ...... 98 84 Total equity ...... 19,241 20,291 Total liabilities and equity ...... $121,707 $124,293

See accompanying notes to the audited consolidated financial statements.

F-66 Liberty Mutual Holding Company Inc. Consolidated Statements of Changes in Total Equity (dollars in millions)

Accumulated Other Total Unassigned Comprehensive Policyholders’ Non-Controlling Total Equity Income (Loss) Equity Interest Equity Balance, January 1, 2013 ...... $16,610 $ 1,707 $18,317 $ 208 $18,525 Comprehensive income (loss) Consolidated net income ...... 1,751 — 1,751 17 1,768 Other comprehensive loss, net of taxes ...... — (1,092) (1,092) (1) (1,093) Total comprehensive income (loss) ...... 1,751 (1,092) 659 16 675 Capital contributions from non-controlling interest .... — — — 1 1 Dividends to non-controlling interest ...... — — — (30) (30) Purchase of subsidiary shares from non-controlling interest ...... (25) 25 — (151) (151) Balance, December 31, 2013 ...... $18,336 $ 640 $18,976 $ 44 $19,020 Comprehensive income (loss) Consolidated net income ...... 1,814 — 1,814 (24) 1,790 Other comprehensive loss, net of taxes ...... — (583) (583) (5) (588) Total comprehensive income (loss) ...... 1,814 (583) 1,231 (29) 1,202 Capital contributions from non-controlling interest .... — — — 69 69 Balance, December 31, 2014 ...... $20,150 $ 57 $20,207 $ 84 $20,291 Comprehensive income (loss) Consolidated net income ...... 514 — 514 20 534 Other comprehensive loss, net of taxes: ...... — (1,578) (1,578) (5) (1,583) Total comprehensive income (loss) ...... 514 (1,578) (1,064) 15 (1,049) Capital contributions from non-controlling interest .... — — — 1 1 Dividends to non-controlling interest ...... — — — (2) (2) Balance, December 31, 2015 ...... $20,664 $(1,521) $19,143 $ 98 $19,241

See accompanying notes to the audited consolidated financial statements.

F-67 Liberty Mutual Holding Company Inc. Consolidated Statements of Cash Flows (dollars in millions)

Years Ended December 31, 2015 2014 2013 Cash flows from operating activities: Consolidated net income ...... $ 534 $ 1,790 $ 1,768 Less—(loss) income from Venezuela discontinued operations, net of tax expense ...... (909) 46 137 Income from operations excluding Venezuela discontinued operations ...... 1,443 1,744 1,631 Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization ...... 889 794 709 Realized losses (gains) (including loss on sale of discontinued operations) ...... 24 175 (248) Undistributed private equity investment gains ...... (86) (572) (567) Premium, other receivables, and reinsurance recoverables ...... (509) (2,937) (738) Deferred acquisition costs ...... (197) (177) (273) Liabilities for insurance reserves ...... 1,959 1,184 2,981 Taxes payable, net of deferred ...... 275 756 396 Other, net ...... (255) (337) (280) Total adjustments ...... 2,100 (1,114) 1,980 Net cash provided by operating activities—excluding Venezuela discontinued operations ...... 3,543 630 3,611 Net cash provided by operating activities—Venezuela discontinued operations ...... 696 607 546 Net cash provided by operating activities ...... 4,239 1,237 4,157 Cash flows from investing activities: Purchases of investments ...... (18,497) (14,442) (18,160) Sales and maturities of investments ...... 15,591 14,330 14,427 Property and equipment purchased, net ...... (905) (863) (1,062) Cash paid for disposals and acquisitions, net of cash on hand ...... — (1,045) (1) Other investing activities ...... (16) 19 (268) Net cash used in investing activities—excluding Venezuela discontinued operations . . . (3,827) (2,001) (5,064) Net cash used in investing activities—Venezuela discontinued operations ...... (70) (105) (133) Net cash used in investing activities ...... (3,897) (2,106) (5,197) Cash flows from financing activities: Net activity in policyholder accounts ...... 578 573 356 Debt financing, net ...... 1 564 140 Net security lending activity and other financing activities ...... (72) (49) 134 Net cash provided by financing activities—excluding Venezuela discontinued operations ...... 507 1,088 630 Net cash provided by (used in) financing activities—Venezuela discontinued operations ...... 1 — (179) Net cash provided by financing activities ...... 508 1,088 451 Effect of exchange rate changes on cash—excluding Venezuela discontinued operations ...... 1 20 (5) Effect of exchange rate changes on cash—Venezuela discontinued operations ...... (69) (301) (112) Effect of exchange rate changes on cash ...... (68) (281) (117) Net increase (decrease) in cash and cash equivalents—excluding Venezuela discontinued operations ...... 224 (263) (828) Net increase in cash and cash equivalents—Venezuela discontinued operations ...... 558 201 122 Net increase (decrease) in cash and cash equivalents ...... 782 (62) (706) Cash and cash equivalents, beginning of year—excluding Venezuela discontinued operations ...... 4,003 4,266 5,094 Cash and cash equivalents, end of year—excluding Venezuela discontinued operations ...... $ 4,227 $ 4,003 $ 4,266 Supplemental disclosure of cash flow information: Income taxes paid ...... $ 148 $ 85 $ 155 See accompanying notes to the audited consolidated financial statements.

F-68 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of Liberty Mutual Holding Company Inc., entities over which the Company exercises control including majority and wholly owned subsidiaries, and variable interest entities when the Company is deemed the primary beneficiary (collectively “LMHC”, the “Company” or “we”). The minority ownership of consolidated affiliates is represented in equity as non- controlling interest. All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2014 consolidated financial statements to conform with the 2015 presentation.

F-69 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Insurance; Liberty Mutual Benefits; and Other Commercial Insurance. Business Insurance serves small and middle market customers through a regional operating model that combines local underwriting, market knowledge and service with the scale advantages of a national company. National Insurance provides commercial lines products and services, including third-party administration, to large businesses. Liberty Mutual Benefits provides short and long-term disability, accident, health and group life insurance to mid-sized and large businesses, as well as life and annuity products to individuals in the United States. Other Commercial Insurance primarily consists of internal reinsurance and assumed business from state-based workers compensation involuntary market pools. The Company is also a servicing carrier for state-based workers compensation involuntary market pools.

Adoption of New Accounting Standards Effective January 1, 2015, the Company elected to adopt the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which provides accounting guidance regarding the presentation of an unrecognized tax benefit. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent tax carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. There was no material impact on the Company’s financial statements as a result of this accounting guidance.

F-70 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) discontinued operations presentation. ASU 2014-08 was effective for all disposals (or classifications as held for sale) of components of an entity that occurred within annual and interim periods beginning on or after December 15, 2014 and for all businesses that, on acquisition, were classified as held for sale that also occurred within interim and annual periods beginning on or after December 15, 2014. (See Note 2 for further discussion.)

No other accounting standards were adopted in 2015 by the Company.

F-71 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims. The new disclosures will require the accumulation and reporting of new and different groupings of data by insurers for U.S. GAAP reporting from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments of ASU 2015-09 are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. The adoption of ASU 2015-09 is not expected to have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures will likely be required.

The Company will adopt the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (excluding those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, ASU 2016-01 is effective for fiscal years, beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-01 is expected to have a material impact on the Company’s financial statements.

There are no other accounting standards not yet adopted by the Company that are expected to have a material impact.

F-72 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including, but not limited to, (1) the extent of the decline in fair value below book value, (2) the duration of the decline, (3) significant adverse changes in the financial condition or near term prospects for the investment or issuer, (4) significant changes in the business climate or credit ratings of the issuer, (5) general market conditions and volatility, (6) industry factors, (7) the past impairment of the security holding or the issuer, and (8) changes in foreign exchange.

F-73 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

All VIEs for which the Company is the primary beneficiary are consolidated into the Company’s financial statements.

Commercial mortgage loans are held for investment and stated at amortized cost less an allowance for loan loss for potentially uncollectible amounts.

F-74 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) program, the lending agent indemnifies the Company against borrower defaults. The loaned securities remain a recorded asset of the Company; however, the Company records a liability for the amount of cash collateral held, representing its obligation to return the collateral related to the loaned securities.

F-75 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) reflected in operating costs and expenses on the accompanying consolidated statements of income. The Company recognized $0, $0 and $3 impairments on intangible assets related to these acquisitions for the years ended December 31, 2015, 2014 and 2013, respectively. Impairment expense is reflected in realignment expense on the accompanying consolidated statements of income. Estimated amortization expense is expected to be $52, $50, $50, $49 and $49 for the years ended December 31, 2016 through 2020, respectively.

F-76 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) to determine whether impairment has occurred. Appropriate adjustments to the costs of unproved properties are made when necessary and are charged to impairment expense. Impairment is assessed on a field-by-field basis. (See Note 10 for further discussion.)

F-77 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) between 3.0% and 5.0% in 2015 and 2014. Credited rates for foreign universal life contracts in force were between 0.3% and 6.0% in 2015 and 2014. Liabilities for future policy benefits for traditional life policies have been computed using the net level premium method based upon estimated future investment yields (between 2.5% and 10.3% in 2015 and 2014), mortality assumptions (based on the Company’s experience relative to standard industry mortality tables) and withdrawal assumptions (based on the Company’s experience).

Policyholder Dividends

Policyholder dividends are accrued using an estimate of the ultimate amount to be paid in relation to premiums earned based on the related insurance policies.

Long-Term Incentive and Performance Based Incentive Plans

The Company maintains short-term and long-term incentive compensation plans. Long-term plans that vest over the requisite service period and are based upon notional units are accounted for under ASC 718, Compensation— Stock Compensation, using the intrinsic value method. Additionally, the Company provides performance based incentive compensation to the majority of employees meeting the participation requirements of the respective plans. Compensation cost related to these plans is determined in accordance with plan formulas and recorded over the years the employee service is provided.

Revenue Recognition

For short-duration insurance contracts, premiums are reported as earned income generally on a pro-rata basis over the terms of the related policies. For retrospectively rated policies and contracts, premium estimates are continually reviewed and updated and any resulting adjustments are reflected in current operating results. For traditional long-duration insurance contracts (including term and whole life contracts and annuities), premiums are earned when due. For loss portfolio transfers, premiums are fully recognized as written and earned at contract inception. For annuities and structured settlements without significant mortality or morbidity risk (investment contracts) and universal life contracts (long-duration contracts with terms that are not fixed or guaranteed), revenues represent investment income earned on the related assets. Universal life and annuity contract revenues also include mortality, surrender, and administrative fees charged to policyholders.

F-78 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Reinsurance All assets and liabilities related to ceded reinsurance contracts are reported on a gross basis in the accompanying consolidated balance sheets. Prospective reinsurance premiums, claims, and claim adjustment expenses are accounted for on a basis consistent with the terms of the reinsured contracts. The accompanying consolidated statements of income reflect premiums, benefits, and settlement expenses net of reinsurance ceded.

The net foreign exchange gains (losses) included in income from continuing operations for the years ended December 31, 2015, 2014, and 2013 were $5, $3, and $(5), respectively.

F-79 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fee and Other Revenues Fee and other revenues primarily consist of revenues from the Company’s energy production operations, universal life cost of insurance and administrative fees, group life administrative service contract fees, and service fees generated from processing business for involuntary assigned risk pools, self-insured customers, and risk retention groups. Service fees are earned on a pro-rata basis over the term of the related policies. The Company accounts for oil and gas sales from its interests in producing wells under the sales method. The sales method requires that the Company recognize revenue based on the amount of natural gas and oil sold to purchasers on its behalf, which may be different from the Company’s entitled production based on its interest in the properties.

Discontinued Operations The Company’s accounting policies listed above apply to both continuing and discontinued operations.

The components of accumulated other comprehensive (loss) income, net of related deferred acquisition costs and taxes, for the years ended December 31, 2015, 2014 and 2013 are as follows:

(1) Includes $60 for each of the years ended December 31, 2015, 2014, and 2013, due to the recognition of deferred taxes related to the Medicare Part D subsidy.

F-80 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table presents the consolidated other comprehensive (loss) income reclassification adjustments for the years ended December 31, 2015, 2014, and 2013, respectively.

(1) Includes $(5) of non-controlling interest.

Change in Foreign pension and currency Unrealized post retirement translation and gains on plans funded other securities status adjustments(1) Total Year ended December 31, 2014 Unrealized change arising during the period ...... $1,352 $(1,574) $(473) $(695) Less: Reclassification adjustments included in consolidated net income ..... 109 (78) — 31 Total other comprehensive income (loss), before income tax expense (benefit) . . . 1,243 (1,496) (473) (726) Less: Income tax expense (benefit) ...... 435 (522) (51) (138) Total other comprehensive income (loss), net of income tax expense (benefit) .... $ 808 $ (974) $(422) $(588)

(1) Includes $(5) of non-controlling interest.

Change in Foreign pension and currency Unrealized post retirement translation and (losses) gains plans funded other on securities(2) status adjustments(1) Total Year ended December 31, 2013 Unrealized change arising during the period ...... $(2,352) $ 904 $(100) $(1,548) Less: Reclassification adjustments included in consolidated net income ..... 294 (172) — 122 Total other comprehensive (loss) income, before income tax (benefit) expense . . . (2,646) 1,076 (100) (1,670) Less: Income tax (benefit) expense ...... (947) 379 (9) (577) Total other comprehensive (loss) income, net of income tax (benefit) expense .... $(1,699) $ 697 $ (91) $(1,093)

(1) Includes $(1) of non-controlling interest. (2) Includes $(25) of non-controlling interest.

F-81 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

(2) ACQUISITIONS AND DISPOSITIONS

Primero Fianzas On July 8, 2014, the Company acquired a Mexico surety company Primero Fianzas, a wholly owned subsidiary, from Grupo Valores Operativos Monterrey, a private investor group.

DISPOSITIONS Liberty Ubezpieczenia On December 18, 2015, the Company entered into an agreement to sell its Polish operations to a member of the AXA Group. Venezuela Operations Effective as of September 30, 2015, the Company determined to deconsolidate the Venezuelan subsidiaries and offer the Venezuelan operations for sale.

Since 2010 the Company’s operations in Venezuela have been operating in a hyperinflationary economy with restrictive foreign exchange controls.

F-82 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The evolving conditions in Venezuela, including the increasingly restrictive exchange control regulations and other factors, significantly impact our control over the Venezuelan operations. As a result of these factors, which we believe to be other-than-temporary, we concluded that effective September 30, 2015, we do not meet the accounting criteria for control over the Venezuelan operations, and therefore have deconsolidated these operations in the accompanying financial statements. As a result of deconsolidating, the Company recognized an impairment charge of approximately $690 which includes the write down of the investment in the previously consolidated Venezuelan operations to fair value and the write-off of related intercompany balances. The Company’s Venezuelan operations are classified as discontinued operations in the consolidated financial statements. All prior periods were restated to reflect this change.

The following table details the major assets and liabilities related to Venezuela, classified as held for sale in the consolidated balance sheet:

F-83 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table summarizes the amounts related to discontinued operations in the consolidated statements of income:

The table below shows the discontinued operating results related to Summit:

F-84 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The table below shows the discontinued operating results related to Argentina operations:

(3) INVESTMENTS Components of Net Investment Income

Components of Net Realized (Losses) Gains

F-85 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Components of Change in Net Unrealized Investment (Losses) Gains

Available for Sale Investments The amortized cost, gross unrealized gains and losses and fair values of available for sale investments as of December 31, 2015 and 2014, are as follows:

(1) Mortgage-backed securities (“MBS”) (2) Asset-backed securities (“ABS”)

F-86 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

As of December 31, 2015, no single issuer, excluding U.S. Treasuries, agency securities and MBS, accounted for more than 0.6% of invested assets.

As of December 31, 2015 and 2014, securities carried at $3,019 and $3,214, respectively, were on deposit with state regulatory authorities as required by law.

F-87 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The amortized cost and fair value of fixed maturities as of December 31, 2015, by contractual maturity are as follows:

Amortized Fair Cost Value Due to mature: One year or less ...... $ 3,480 $ 3,515 Over one year through five years ...... 16,027 16,298 Over five years through ten years ...... 17,134 17,255 Over ten years ...... 12,885 13,657 MBS and ABS of government and corporate agencies .... 11,867 12,069 Total fixed maturities ...... $61,393 $62,794

Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized December 31, 2015 Losses Losses Losses Losses U.S. government and agency securities ..... $ (8) $ 1,304 $ (4) $ 245 Residential MBS ...... (21) 2,445 (8) 364 Commercial MBS ...... (13) 737 (3) 122 Other MBS and ABS ...... (11) 1,280 (4) 166 U.S. state and municipal ...... (47) 1,647 (7) 142 Corporate and other ...... (510) 10,543 (184) 1,027 Foreign government securities ...... (22) 911 (15) 298 Total fixed maturities ...... (632) 18,867 (225) 2,364 Common stock ...... (98) 653 (12) 33 Preferred stock ...... (1) 4 (53) 254 Total equities ...... (99) 657 (65) 287 Total ...... $(731) $19,524 $(290) $2,651

F-88 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized December 31, 2014 Losses Losses Losses Losses U.S. government and agency securities ..... $ (1) $ 259 $ (9) $ 558 Residential MBS ...... (4) 755 (20) 1,229 Commercial MBS ...... (1) 148 (8) 368 Other MBS and ABS ...... (2) 253 (12) 821 U.S. state and municipal ...... (1) 129 (17) 673 Corporate and other ...... (90) 3,387 (56) 1,763 Foreign government securities ...... (4) 372 (20) 617 Total fixed maturities ...... (103) 5,303 (142) 6,029 Common stock ...... (47) 443 (11) 52 Preferred stock ...... — 4 (58) 251 Total equities ...... (47) 447 (69) 303 Total ...... $(150) $5,750 $(211) $6,332

Variable Interest Entities The Company invests in limited partnerships and other entities subject to VIE analysis under the VIE subsections of ASC 810, Consolidation. The Company analyzes each investment to determine whether it is a VIE, and if so, whether the Company is the primary beneficiary or a significant interest holder based on a qualitative and quantitative assessment. The Company evaluates the design of the entity, the risks to which the entity was designed to expose the variable interest holder and the extent of the Company’s control of and variable interest in the VIE. As of December 31, 2015 and 2014, respectively, the Company has determined that it was the primary beneficiary of two VIEs in the low-income housing tax credit sector, and as such, these VIEs were consolidated in the Company’s financial statements. The carrying value of assets and liabilities, and the Company’s maximum exposure to loss of the consolidated VIEs are immaterial to the Company.

F-89 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) holders. The net carrying value of non-consolidated VIEs in which the Company has a variable interest was $1.719 billion and $1.826 billion as of December 31, 2015 and 2014, respectively and the Company’s maximum exposure to loss was $2.487 billion and $2.603 billion as of December 31, 2015 and 2014, respectively. The assets are included in other investments in the accompanying consolidated balance sheets. Maximum exposure to loss includes the carrying value and unfunded commitment of the VIE. There is no recourse provision to the general credit of the Company for any VIE beyond the full amount of the Company’s loss exposure.

Investments in Commercial Mortgage Loans As of December 31, 2015 and 2014, the carrying values of commercial mortgage loans were $2,317 and $1,808, respectively. The carrying values reflect allowances for loan losses of $11 and $14 as of December 31, 2015 and 2014, respectively. Additionally, the Company’s participation in any one commercial mortgage loan acquired does not exceed 49% of the loan value. The number of loans in the portfolio increased from 4,509 as of December 31, 2014, to 4,763 as of December 31, 2015.

(4) DEFERRED ACQUISITION COSTS The following reflects the policy acquisition costs deferred for amortization against future income and related amortization charged to income:

(1) The above table contains amortization attributable to discontinued operations of $0, $21 and $94 for the years ended December 31, 2015, 2014, and 2013 respectively.

F-90 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

A summary of reinsurance financial data reflected within the accompanying consolidated statements of income is presented below:

F-91 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-92 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table displays the impact of the NICO Reinsurance Transaction subsequent to transaction date in the accompanying consolidated statements of income:

F-93 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) claims from catastrophic events could cause substantial volatility in its financial results for any fiscal year and have a material adverse effect on its financial condition.

For a loss to be covered under the Program (subject losses), the loss must meet certain aggregate industry loss minimums and must be the result of an event that is certified as an act of terrorism by the U.S. Secretary of the Treasury. The annual aggregate industry loss minimum is $100 through 2015. The original Program excluded from participation certain of the following types of insurance: Federal crop insurance, private mortgage insurance, financial guaranty insurance, medical malpractice insurance, health or life insurance, flood insurance, and reinsurance. The Terrorism Extension Act exempted from coverage certain additional types of insurance, including commercial automobile, professional liability (other than directors and officers), surety, burglary and theft, and farm-owners multi-peril. In the case of a war declared by Congress, only workers compensation losses are covered by the Acts. The Acts generally require that all commercial property casualty insurers licensed in the United States participate in the Program. The 2015 Reauthorization increases the loss minimum by $20 annually starting in 2016 until it reaches $200 in 2020. Under the Program, a participating insurer was entitled through 2015 to be reimbursed by the Federal Government for 85% of subject losses, after an insurer deductible, subject to an annual cap. Under the 2015 Reauthorization, the Federal reimbursement percentage decreases by 1% a year starting in 2016 from the current 85% to 80% in 2020. The 2015 Reauthorization did not change the program cap of $100,000 or the Company’s deductible which remains at 20% of the Company’s prior year earned premium for the covered lines.

F-94 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

Catastrophes are an inherent risk of the property-casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and financial position. Catastrophe losses are severe losses resulting from natural and man-made events, including risks such as fire, earthquake, windstorm, explosion, terrorism, and other similar events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and financial position of the Company. Catastrophe losses incurred during the years ended December 31, 2015, 2014, and 2013 were $1,820, $1,609 and $1,269, respectively.

F-95 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Activity in property and casualty unpaid claims and claim adjustment expenses of the Company are summarized as follows:

(1) In addition to the unpaid reinsurance recoverable balances noted above, and as a result of retroactive reinsurance agreements, the Company has recorded retroactive reinsurance recoverable balances of $3,000, $3,015, and $106 as of December 31, 2015, 2014, and 2013, respectively. (2) The balance attributable to acquisitions and dispositions primarily represents the dispositions of Argentina operations and Summit, partially offset by the Uni. Asia acquisition. (See Note 2 for further discussion.) (3) Does not include increases/(decreases) in allowance related to reinsurance recoverables due to prior year development of $21, $(9), and $(98) as of December 31, 2015, 2014, and 2013, respectively. (4) The increase in deferred gain amortization during the year ended December 31, 2013, was due to the commutation of four workers compensation excess of loss retroactive reinsurance agreements. (See Note 5 for further discussion.)

F-96 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

For certain commercial lines of insurance, the Company offers experience-rated insurance contracts whereby the ultimate premium is dependent upon the claims incurred. As of December 31, 2015 and 2014, the Company held $3,613 and $3,632, respectively, of unpaid claims and claim adjustment expenses related to experience-rated contracts. Premiums receivable included accrued retrospective and unbilled audit premiums of $448 and $514 as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015, 2014, and 2013, the Company recognized an increase (decrease) of premium income of $40, $(2) and $216, respectively, relating to prior years.

Unpaid claims and claim adjustment expenses are recorded net of anticipated salvage and subrogation of $1,286 and $1,279 as of December 31, 2015 and 2014, respectively.

F-97 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) applied and interpreted, (vii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities, (viii) whether clean-up costs are covered as insured property damage, and (ix) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. The uncertainties cannot be reasonably estimated, but could have a material impact on the Company’s future operating results and financial condition.

In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded asbestos and environmental unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. Asbestos and environmental unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 including: $83 of asbestos reserves, primarily associated with increased defense costs, and $28 of pollution reserves.

F-98 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

(7) DEBT OUTSTANDING Debt outstanding as of December 31, 2015 and 2014 includes the following:

Current maturities of long-term debt: 2015 2014

Current maturities of long-term debt ...... $ 249 $ —

Long-term debt: 2015 2014

F-99 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Effective July 2, 2015, LMIC renewed its $1,000 repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

The Company places commercial paper through a program issued by Liberty Mutual Group Inc. (“LMGI”) and guaranteed by LMIC. On April 8, 2015, LMGI increased its commercial paper program from $750 to $1,000. As of December 31, 2015, there was no commercial paper outstanding.

On December 31, 2014, Berkeley/St. James Real Estate LLC paid off its five-year mortgage loan in the amount of $47. The mortgage loan was originally $50 with a maturity date of January 1, 2015.

Interest The Company paid $434, $400, and $431 of interest in 2015, 2014, and 2013, respectively.

F-100 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

(8) INCOME TAXES The components of U.S. Federal, state and foreign income tax expense (benefit) are:

Years ended December 31, 2015 2014 2013 Current tax expense (benefit): U.S. Federal ...... $374 $320 $ 71 U.S. Federal benefit of net operating losses ...... (385) (401) (84) State ...... 3 3 3 Foreign ...... 167 112 131 Total current tax expense ...... 159 34 121 Deferred tax expense (benefit): U.S. Federal ...... 395 706 328 Foreign ...... (30) 4 61 Total deferred tax expense ...... 365 710 389 Total U.S. Federal, state and foreign income tax expense ...... $524 $744 $ 510

Years ended December 31, 2015 2014 2013 Expected U.S. Federal income tax expense ...... $688 $899 $738 Tax effect of: Nontaxable investment income ...... (107) (122) (131) Change in valuation allowance ...... (6) (2) 3 Goodwill ...... — — (10) Revision to estimates ...... (6) 7 (38) General business credits ...... (18) (5) (33) Audit Settlement ...... (40) (60) — State ...... 3 3 3 Foreign ...... 20 22 9 Other ...... (10) 2 (31) Actual income tax expense ...... $524 $744 $510

F-101 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The significant components of the deferred income tax assets and liabilities at December 31 are summarized as follows:

2015 2014 Deferred tax assets: Unpaid claims discount ...... $ 302 $ 361 Unearned premium reserves ...... 979 942 Net operating losses ...... 319 691 Employee benefits ...... 775 887 Credits ...... 439 349 Other accrued expenses ...... 114 124 Other ...... 479 421 3,407 3,775 Less: valuation allowance ...... (106) (138) Total deferred tax assets ...... 3,301 3,637 Deferred tax liabilities: Deferred acquisition costs ...... 842 797 Net unrealized gains ...... 653 1,236 Intangibles ...... 364 356 Depreciation/amortization ...... 343 405 Other ...... 304 268 Total deferred tax liabilities ...... 2,506 3,062 Net deferred tax assets ...... $ 795 $ 575

Year Total 2016 ...... 33 2017 ...... 41 2018 ...... 48 2019 ...... 38 Thereafter ...... 871 Total ...... $1,031

F-102 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Included in the tabular roll forward of unrecognized tax benefits are interest and penalties in the amount of $34 and $51 as of December 31, 2015 and 2014, respectively.

Included in the balance at December 31, 2015 is $62 related to tax positions that would impact the effective tax rate.

(9) BENEFIT PLANS The Company sponsors non-contributory defined benefit pension plans (“the Plans”) covering substantially all U.S. and Canadian employees. The benefits and eligibility are based on age, years of service, and the employee’s final average compensation, as more fully described in the Plans. Some foreign subsidiaries also sponsor defined

F-103 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) benefit pension plans. In 2013, the Company approved changes to the U.S. pension plan that went into effect on January 1, 2014. Significant changes included the addition of a new cash balance benefit formula for all eligible U.S. employees and the freezing of credited service under the plan’s final average pay formula.

Compensation expense related to the Company’s long-term and short-term incentive compensation plans was $636, $653, and $656 for the years ended December 31, 2015, 2014, and 2013, respectively.

F-104 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-105 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The net benefit costs for the years ended December 31, 2015, 2014 and 2013, include the following components:

F-106 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

December 31, 2014 Pension Supplemental Pension Postretirement Components of net periodic benefit costs: Service costs ...... $104 $ 3 $ 17 Interest costs ...... 312 19 40 Expected return on plan assets ...... (386) — — Settlement/curtailment loss ...... — — — Amortization of unrecognized: Net loss (gain) ...... 77 16 (1) Prior service cost ...... (2) (2) (10) Net periodic benefit costs ...... $105 $ 36 $ 46

The measurement date used to determine pension and other postretirement is December 31, 2015.

Weighted-average actuarial assumptions for benefit obligations are set forth in the following table:

F-107 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Weighted-average actuarial assumptions for net periodic benefit costs are set forth in the following table:

1% 1% point point increase decrease Effect on Postretirement Benefit Obligation ...... $23 $(19) Effect on total service and interest costs ...... $ 1 $ (1)

F-108 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The target allocation for the U.S. pension plan’s assets are 47% bonds, 40% diversified public equities, 10% private equity and real estate investments, and 3% cash and short-term investments.

The investment strategy for each category of the U.S. pension plan’s assets is as follows:

Public equities — Achieve superior performance against the MSCI All Country World Index over a three to five year period.

The other assets represent currency hedges, and real estate assets that support foreign pension plans and an insurance company separate account that supports the domestic pension plan.

F-109 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table sets forth by level, within the fair value hierarchy, the Plans’ assets at fair value as of December 31, 2015 and 2014.

Fair Value Measurements as of December 31, 2015 Quoted Prices in Active Markets Significant Significant for Identical Observable Unobservable Assets Inputs Inputs Asset Category Total Level 1(1) Level 2(1) Level 3(1) Cash, cash equivalents and short-term investments(2) ...... $ 42 $ 84 $ (42) $— Fixed maturities: U.S. government and agency securities ...... 180 89 91 — U.S. state and municipal ...... 138 — 138 — RMBS/CMO/ABS/CMBS ...... 726 — 726 — Corporate and other ...... 1,994 — 1,992 2 Foreign government securities ...... 47 — 47 — U.S. large cap equities ...... 747 747 — — U.S. mid and small cap equities ...... 525 525 — — European equities ...... 648 648 — — Asian equities ...... 470 470 — — Other equities ...... 41 41 — — Limited partnerships ...... 436 — — 436 Other assets ...... 175 — 12 163 Total ...... $6,169 $2,604 $2,964 $601

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(53).

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(95).

F-110 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Balance Actual Return Actual Return Purchases, Transfers Balance January 1, on Plan Assets on Plan Assets Sales, & In/(Out) of December 31, 2015 Still Held Sold Settlements Level 3 2015 Limited partnerships ...... $281 $ 22 $ 16 $117 $— $436 Fixed maturities ...... 1 — — 1 — 2 Other assets ...... 90 (2) 8 67 — 163 Total ...... $372 $ 20 $ 24 $185 $— $601

Balance Actual Return Actual Return Purchases, Transfers Balance January 1, on Plan Assets on Plan Assets Sales, & In/(Out) of December 31, 2014 Still Held Sold Settlements Level 3 2014 Limited partnerships(1) ...... $165 $ 6 $ 14 $ 96 $— $281 Fixed maturities ...... 1 — — (1) 1 1 Other assets(1) ...... 41 (1) — 50 — 90 Total ...... $207 $ 5 $ 14 $145 $ 1 $372

(1) Real Estate investments of $38 were transferred from Limited Partnerships to Other Assets in 2014.

The Plans’ investments in limited partnerships are recorded at the carrying value as reported by the external fund managers, which is believed to approximate the fair value of the investments.

Expected Future Benefit Payments — The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:

Supplemental Postretirement Pension Pension Plans 2016 ...... 303 15 36 2017 ...... 309 24 38 2018 ...... 336 28 40 2019 ...... 359 32 42 2020 ...... 376 26 44 2021-2025 ...... 2,192 134 241

F-111 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions) primarily uses the market approach, which generally utilizes market transaction data for identical or similar instruments.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the financial instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3.

F-112 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-113 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-114 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Additionally, other assets and other liabilities classified within Level 2 represent the Company’s derivatives which can be exchange-traded or traded over-the-counter (“OTC”). OTC derivatives are valued using market transactions and other market evidence whenever possible, including market-based inputs to models, model calibration to market clearing transactions, broker or dealer quotations or alternative pricing sources with reasonable levels of price transparency. When models are used, the selection of a particular model to value an OTC derivative depends on the contractual terms of, and specific risks inherent in the instrument, as well as the availability of pricing information in the market. The Company generally uses similar models to value similar instruments. Valuation models require a variety of inputs, including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs. For OTC derivatives that trade in liquid markets, such as generic forwards, swaps and options, model inputs can generally be corroborated by observable market data by correlation or other means, and model selection does not involve significant management judgment.

F-115 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-116 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The Company did not have significant transfers between Levels 1 and 2 during the years ended December 31, 2015 and 2014.

F-117 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Changes in Level 3 Recurring Fair Value Measurements The following tables summarize the fair values of assets on a recurring basis classified as Level 3 within the fair value hierarchy:

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, (Losses) Gains Sales and in to out of December 31, Assets, at Fair Value 2015 Gains (Losses) Purchases Settlements Maturities Level 3 Level 3 2015 U.S. government and agency securities ...... $ 22 $— $— $— $— $— $— $ (22) $ — Residential MBS ...... 1 — 1 156 — — — (157) 1 Commercial MBS ...... 84 — 2 52 — (28) — (35) 75 Other MBS and ABS ...... 70 — (3) 100 — (4) — (83) 80 U.S. state and municipal ..... 176 — (15) 180 — (6) 47 (138) 244 Corporate and other ...... 251 (4) (6) 155 — (156) 6 (11) 235 Foreign government securities ...... 11 (1) — 1 — (1) — — 10 Total fixed maturities . . . 615 (5) (21) 644 — (195) 53 (446) 645 Common stock ...... 44 27 (4) 21 — (36) 1 (11) 42 Preferred stock ...... 2 — — 2 — — — — 4 Total equity securities . . . 46 27 (4) 23 — (36) 1 (11) 46 Short-term investments ...... 1 — — — — (1) — — — Other investments ...... 440 (1) 48 26 — (34) — — 479 Separate account assets ...... 60 6 — — — (2) — — 64 Other assets ...... 27 1 — (3) — — — — 25 Total assets ...... $1,189 $ 28 $ 23 $690 $— $(268) $ 54 $(457) $1,259 Liabilities, at Fair Value Life insurance obligations .... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154) Total liabilities ...... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154)

F-118 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, Gains Gains Sales and in to out of December 31, Assets, at Fair Value 2014 (Losses) (Losses) Purchases Settlements Maturities Level 3 Level 3 2014 U.S. government and agency securities ...... $ 24 $— $— $— $— $ (2) $— $— $ 22 Residential MBS ...... 11 — 1 38 — — — (49) 1 Commercial MBS ...... 98 — 6 67 — (2) 24 (109) 84 Other MBS and ABS ...... 30 — 1 128 — (3) — (86) 70 U.S. state and municipal ..... 124 — 16 54 — (4) 27 (41) 176 Corporate and other ...... 398 3 — 86 — (172) 5 (69) 251 Foreign government securities ...... 3 1 (1) 10 — (2) 11 (11) 11 Total fixed maturities . . . 688 4 23 383 — (185) 67 (365) 615 Common stock ...... 45 — (1) 6 — (1) 1 (6) 44 Preferred stock ...... 2 — — — — — — — 2 Total equity securities . . . 47 — (1) 6 — (1) 1 (6) 46 Short-term investments ...... 5 — — 2 — (5) — (1) 1 Other investments ...... 316 (8) 18 14 — (8) 329 (221) 440 Separate account assets ...... 68 4 — — — (12) — — 60 Other assets ...... 19 10 — (2) — — — — 27 Total assets ...... $1,143 $ 10 $ 40 $403 $— $(211) $397 $(593) $1,189 Liabilities, at Fair Value Life insurance obligations .... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163) Total liabilities ...... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163)

Transfers into and out of Level 3 were primarily due to changes in the observability of pricing inputs.

F-119 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fair Value at December 31, Valuation Range 2015 Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $167 Discounted Cash Flow Discount Rate (a) 22.5% Spread Model Credit Spread (c) 94-699 (502 bps) Comparative Valuation Credit Spread(c) 150-277 (259 bps) Illiquidity Premium(d) 152-211 (201 bps) Index Yield(b) 4.4% Matrix Pricing Credit Spread (c) 120-200 (166 bps) Other invested assets ...... $360 Discounted Cash Flow Discount Rate (a) 10.0%-20.0% (16.0%) Liabilities, at Fair Value Life insurance obligations .... $154 Discounted Cash Flow Discount rate (a) 0.14%-5.14% Lapse rates (e) 1.0%-12.0% Annuitization take-up rate (f) 0%-21.0%

Fair Value at December 31, Valuation Range 2014 Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $189 Discounted Cash Flow Discount Rate (a) 1.6%-22.5% (12.5%) Spread Model Credit Spread (c) 450-946 (925 bps) Comparative Valuation Credit Spread(c) 25-163 (127 bps) Illiquidity Premium(d) 50-250 (222 bps) Index Yield(b) 3.73% Matrix Pricing Credit Spread (c) 109-174 (159 bps) Other invested assets ...... $330 Discounted Cash Flow Discount Rate (a) 10.0%-20.0% (15.0%) Black Scholes Volatility 53.5%-100.0% (80.0%) Liabilities, at Fair Value Life insurance obligations .... $163 Discounted Cash Flow Lapse rates (e) 1.0%-12.0% Annuitization take-up rate (f) 0%-21.0%

F-120 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following tables summarize the Company’s impairment charges for assets measured at fair value on a non- recurring basis for the years ended December 31, 2015, 2014, and 2013.

In 2014, the Company executed a purchase agreement to sell a number of its Limited Partnerships investments which resulted in an impairment loss of $68.

F-121 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Other investments — Fair values represent the Company’s equity in limited partnership net assets and other equity method investments.

Commercial mortgage loans — The fair values of commercial mortgage loans were estimated using option adjusted valuation discount rates or carrying value for newly acquired loans.

Cash and cash equivalents — The carrying amounts reported in the accompanying consolidated balance sheets for these instruments approximate fair values.

The Company has not applied ASC 820 to non-financial assets and liabilities.

F-122 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Future minimum rental payments and receipts under non-cancelable leases with terms in excess of one year are estimated as follows:

As of December 31, 2015, the Company had unfunded commitments in traditional private equity partnerships, natural resources, real estate, and other of $1,354, $2,440, $378, and $1,057, respectively.

As of December 31, 2015, the Company had $478 of undrawn letters of credit outstanding secured by assets of $597.

F-123 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-124 Liberty Mutual Holding Company Inc. Notes to Consolidated Financial Statements (dollars in millions)

Management has assessed material subsequent events through March 3, 2016, the date the financial statements were available to be issued.

F-125

Report of Independent Registered Public Accounting Firm

The Board of Directors LMHC Massachusetts Holdings Inc.

We have audited the accompanying consolidated balance sheets of LMHC Massachusetts Holdings Inc. as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in total equity, and cash flows for each of the three years in the period ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States) and in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the LMHC Massachusetts Holdings Inc.’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LMHC Massachusetts Holdings Inc. at December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.

March 3, 2016

F-126 LMHC Massachusetts Holdings Inc. Consolidated Statements of Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Revenues Premiums earned ...... $33,884 $33,448 $32,165 Net investment income ...... 2,650 3,099 3,015 Fee and other revenues ...... 1,107 1,274 1,128 Net realized (losses) gains ...... (24) (100) 248 Total revenues ...... 37,617 37,721 36,556 Claims, Benefits and Expenses Benefits, claims and claim adjustment expenses ...... 23,201 23,036 22,828 Operating costs and expenses ...... 7,064 6,735 6,257 Amortization of deferred policy acquisition costs ...... 4,675 4,660 4,468 Interest expense ...... 438 419 420 Interest credited to policyholders ...... 265 261 256 Total claims, benefits and expenses ...... 35,643 35,111 34,229 Loss on extinguishment of debt ...... (1) (34) (211) Income from continuing operations before income tax expense and non- controlling interest ...... 1,973 2,576 2,116 Income tax expense ...... 526 747 515 Consolidated net income from continuing operations ...... 1,447 1,829 1,601 Discontinued operations (net of income tax expense of $16, $79, and $77 in 2015, 2014 and 2013 respectively) ...... (909) (35) 170 Consolidated net income ...... 538 1,794 1,771 Less: Net income (loss) attributable to non-controlling interest ...... 20 (24) 17 Net income attributable to LMHC Massachusetts Holdings Inc...... $ 518 $ 1,818 $ 1,754 Net Realized (Losses) Gains Other-than-temporary impairment losses: 2015 2014 2013 Total other-than-temporary impairment losses ...... $ (410) $ (251) $ (101) Change in portion of loss recognized in other comprehensive income ...... — (1) (1) Other-than-temporary impairment losses ...... (410) (252) (102) Other net realized gains ...... 386 152 350 Net realized (losses) gains ...... $ (24) $ (100) $ 248

See accompanying notes to the audited consolidated financial statements.

F-127 LMHC Massachusetts Holdings Inc. Consolidated Statements of Comprehensive (Loss) Income (dollars in millions)

Years Ended December 31, 2015 2014 2013 Consolidated net income ...... $ 538 $1,794 $ 1,771 Other comprehensive loss, net of taxes: Unrealized (losses) gains on securities ...... (1,278) 808 (1,699) Change in pension and post retirement plans funded status ...... 154 (974) 697 Foreign currency translation and other adjustments ...... (459) (422) (91) Other comprehensive loss, net of taxes ...... (1,583) (588) (1,093) Consolidated comprehensive (loss) income ...... (1,045) 1,206 678 Less: Comprehensive income (loss) attributable to non-controlling interest ...... 15 (29) 16 Comprehensive (loss) income attributable to LMHC Massachusetts Holdings Inc...... $(1,060) $1,235 $ 662

See accompanying notes to the audited consolidated financial statements.

F-128 LMHC Massachusetts Holdings Inc. Consolidated Balance Sheets (dollars in millions)

See accompanying notes to the audited consolidated financial statements.

F-129 LMHC Massachusetts Holdings Inc. Consolidated Statements of Changes in Total Equity (dollars in millions)

Accumulated Other Total Unassigned Comprehensive Policyholders’ Non-Controlling Total Equity Income (Loss) Equity Interest Equity Balance, January 1, 2013 ...... $16,626 $ 1,707 $18,333 $ 208 $18,541 Comprehensive income (loss) Consolidated net income ...... 1,754 — 1,754 17 1,771 Other comprehensive loss, net of taxes ...... — (1,092) (1,092) (1) (1,093) Total comprehensive income (loss) ...... 1,754 (1,092) 662 16 678 Capital contributions from non-controlling interest .... — — — 1 1 Dividends to non-controlling interest ...... — — — (30) (30) Purchase of subsidiary shares from non-controlling interest ...... (25) 25 — (151) (151) Dividends to stockholders ...... (10) — (10) — (10) Balance, December 31, 2013 ...... $18,345 $ 640 $18,985 $ 44 $19,029 Comprehensive income (loss) Consolidated net income ...... 1,818 — 1,818 (24) 1,794 Other comprehensive loss, net of taxes ...... — (583) (583) (5) (588) Total comprehensive income (loss) ...... 1,818 (583) 1,235 (29) 1,206 Capital contributions from non-controlling interest .... — — — 69 69 Balance, December 31, 2014 ...... $20,163 $ 57 $20,220 $ 84 $20,304 Comprehensive income (loss) Consolidated net income ...... 518 — 518 20 538 Other comprehensive loss, net of taxes ...... — (1,578) (1,578) (5) (1,583) Total comprehensive income (loss) ...... 518 (1,578) (1,060) 15 (1,045) Capital contributions from non-controlling interest .... — — — 1 1 Dividends to non-controlling interest ...... — — — (2) (2) Dividends to stockholders ...... (5) — (5) — (5) Balance, December 31, 2015 ...... $20,676 $(1,521) $19,155 $ 98 $19,253

See accompanying notes to the audited consolidated financial statements.

F-130 LMHC Massachusetts Holdings Inc. Consolidated Statements of Cash Flows (dollars in millions) Years Ended December 31, 2015 2014 2013 Cash flows from operating activities: Consolidated net income ...... $ 538 $ 1,794 $ 1,771 Less—(loss) income from Venezuela discontinued operations, net of tax expense ...... (909) 46 137 Income from operations excluding Venezuela discontinued operations ...... 1,447 1,748 1,634 Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization ...... 889 794 709 Realized losses (gains) (including loss on sale of discontinued operations) ...... 24 175 (248) Undistributed private equity investment gains ...... (86) (572) (567) Premium, other receivables, and reinsurance recoverables ...... (509) (2,937) (738) Deferred acquisition costs ...... (197) (177) (273) Liabilities for insurance reserves ...... 1,959 1,184 2,981 Taxes payable, net of deferred ...... 275 756 396 Other, net ...... (254) (339) (274) Total adjustments ...... 2,101 (1,116) 1,986 Net cash provided by operating activities—excluding Venezuela discontinued operations ...... 3,548 632 3,620 Net cash provided by operating activities—Venezuela discontinued operations . . . 696 607 546 Net cash provided by operating activities ...... 4,244 1,239 4,166 Cash flows from investing activities: Purchases of investments ...... (18,497) (14,442) (18,160) Sales and maturities of investments ...... 15,591 14,330 14,427 Property and equipment purchased, net ...... (905) (863) (1,062) Cash paid for disposals and acquisitions, net of cash on hand ...... — (1,045) (1) Other investing activities ...... (16) 19 (268) Net cash used in investing activities—excluding Venezuela discontinued operations ...... (3,827) (2,001) (5,064) Net cash used in investing activities—Venezuela discontinued operations ...... (70) (105) (133) Net cash used in investing activities ...... (3,897) (2,106) (5,197) Cash flows from financing activities: Net activity in policyholder accounts ...... 578 573 356 Debt financing, net ...... 1 564 140 Net security lending activity and other financing activities ...... (77) (49) 124 Net cash provided by financing activities—excluding Venezuela discontinued operations ...... 502 1,088 620 Net cash provided by (used in) financing activities—Venezuela discontinued operations ...... 1 — (179) Net cash provided by financing activities ...... 503 1,088 441 Effect of exchange rate changes on cash—excluding Venezuela discontinued operations ...... 1 20 (5) Effect of exchange rate changes on cash—Venezuela discontinued operations ...... (69) (301) (112) Effect of exchange rate changes on cash ...... (68) (281) (117) Net increase (decrease) in cash and cash equivalents—excluding Venezuela discontinued operations ...... 224 (261) (829) Net increase in cash and cash equivalents—Venezuela discontinued operations . . . 558 201 122 Net increase (decrease) in cash and cash equivalents ...... 782 (60) (707) Cash and cash equivalents, beginning of year—excluding Venezuela discontinued operations .... 4,003 4,264 5,093 Cash and cash equivalents, end of year—excluding Venezuela discontinued operations ...... $ 4,227 $ 4,003 $ 4,264 Supplemental disclosure of cash flow information: Income taxes paid ...... $ 148 $ 85 $ 155 See accompanying notes to the audited consolidated financial statements.

F-131 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of LMHC Massachusetts Holdings Inc., entities over which the Company exercises control including majority and wholly owned subsidiaries, and variable interest entities when the Company is deemed the primary beneficiary (collectively “LMHC MHI”, the “Company” or “we”). The minority ownership of consolidated affiliates is represented in equity as non- controlling interest. LMHC MHI is 100% owned by Liberty Mutual Holding Company, Inc. (“LMHC”). All material intercompany transactions and balances have been eliminated. Certain reclassifications have been made to the 2014 consolidated financial statements to conform with the 2015 presentation.

F-132 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Adoption of New Accounting Standards Effective January 1, 2015, the Company elected to adopt the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which provides accounting guidance regarding the presentation of an unrecognized tax benefit. ASU 2013-11 requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent tax carryforwards are not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require, and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit will be presented in the financial statements as a liability and will not be combined with the related deferred tax asset. There was no material impact on the Company’s financial statements as a result of this accounting guidance.

F-133 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) discontinued operations presentation. ASU 2014-08 was effective for all disposals (or classifications as held for sale) of components of an entity that occurred within annual and interim periods beginning on or after December 15, 2014 and for all businesses that, on acquisition, were classified as held for sale that also occurred within interim and annual periods beginning on or after December 15, 2014. (See Note 2 for further discussion.)

No other accounting standards were adopted in 2015 by the Company.

F-134 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) subsequent adjustments to those estimates, methodologies and judgments in estimating claims, and the timing, frequency and severity of claims. The new disclosures will require the accumulation and reporting of new and different groupings of data by insurers for U.S. GAAP reporting from what is currently captured for U.S. statutory and other reporting purposes. For public business entities, the amendments in ASU 2015-09 are effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. For all other entities, the amendments of ASU 2015-09 are effective for annual periods beginning after December 15, 2016, and interim periods within annual periods beginning after December 15, 2017. The adoption of ASU 2015-09 is not expected to have an effect on the Company’s results of operations and financial position, but changes to the Company’s disclosures will likely be required.

The Company will adopt the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 requires equity investments (excluding those accounted for under the equity method or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income. ASU 2016-01 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. For all other entities, ASU 2016-01 is effective for fiscal years, beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The adoption of ASU 2016-01 is expected to have a material impact on the Company’s financial statements.

There are no other accounting standards not yet adopted by the Company that are expected to have a material impact.

F-135 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including, but not limited to, (1) the extent of the decline in fair value below book value, (2) the duration of the decline, (3) significant adverse changes in the financial condition or near term prospects for the investment or issuer, (4) significant changes in the business climate or credit ratings of the issuer, (5) general market conditions and volatility, (6) industry factors, (7) the past impairment of the security holding or the issuer, and (8) changes in foreign exchange.

F-136 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

All VIEs for which the Company is the primary beneficiary are consolidated into the Company’s financial statements.

Commercial mortgage loans are held for investment and stated at amortized cost less an allowance for loan loss for potentially uncollectible amounts.

F-137 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) program, the lending agent indemnifies the Company against borrower defaults. The loaned securities remain a recorded asset of the Company; however, the Company records a liability for the amount of cash collateral held, representing its obligation to return the collateral related to the loaned securities.

F-138 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) reflected in operating costs and expenses on the accompanying consolidated statements of income. The Company recognized $0, $0 and $3 impairments on intangible assets related to these acquisitions for the years ended December 31, 2015, 2014 and 2013, respectively. Impairment expense is reflected in realignment expense on the accompanying consolidated statements of income. Estimated amortization expense is expected to be $52, $50, $50, $49 and $49 for the years ended December 31, 2016 through 2020, respectively.

F-139 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) to determine whether impairment has occurred. Appropriate adjustments to the costs of unproved properties are made when necessary and are charged to impairment expense. Impairment is assessed on a field-by-field basis. (See Note 10 for further discussion.)

F-140 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) between 3.0% and 5.0% in 2015 and 2014. Credited rates for foreign universal life contracts in force were between 0.3% and 6.0% in 2015 and 2014. Liabilities for future policy benefits for traditional life policies have been computed using the net level premium method based upon estimated future investment yields (between 2.5% and 10.3% in 2015 and 2014), mortality assumptions (based on the Company’s experience relative to standard industry mortality tables) and withdrawal assumptions (based on the Company’s experience).

Policyholder Dividends Policyholder dividends are accrued using an estimate of the ultimate amount to be paid in relation to premiums earned based on the related insurance policies.

F-141 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The net foreign exchange gains (losses) included in income from continuing operations for the years ended December 31, 2015, 2014, and 2013 were $5, $3, and $(5), respectively.

F-142 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Discontinued Operations The Company’s accounting policies listed above apply to both continuing and discontinued operations.

The components of accumulated other comprehensive (loss) income, net of related deferred acquisition costs and taxes, for the years ended December 31, 2015, 2014 and 2013 are as follows:

(1) Includes $60 for each of the years ended December 31, 2015, 2014, and 2013, due to the recognition of deferred taxes related to the Medicare Part D subsidy.

F-143 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table presents the consolidated other comprehensive (loss) income reclassification adjustments for the years ended December 31, 2015, 2014, and 2013, respectively.

(1) Includes $(5) of non-controlling interest.

Change in Foreign pension and currency Unrealized post retirement translation and gains on plans funded other securities status adjustments(1) Total Year ended December 31, 2014 Unrealized change arising during the period ...... $1,352 $(1,574) $(473) $(695) Less: Reclassification adjustments included in consolidated net income ..... 109 (78) — 31 Total other comprehensive income (loss), before income tax expense (benefit) . . . 1,243 (1,496) (473) (726) Less: Income tax expense (benefit) ...... 435 (522) (51) (138) Total other comprehensive income (loss), net of income tax expense (benefit) .... $ 808 $ (974) $(422) $(588)

(1) Includes $(5) of non-controlling interest.

Change in Foreign pension and currency Unrealized post retirement translation and (losses) gains plans funded other on securities(2) status adjustments(1) Total Year ended December 31, 2013 Unrealized change arising during the period ...... $(2,352) $ 904 $(100) $(1,548) Less: Reclassification adjustments included in consolidated net income ..... 294 (172) — 122 Total other comprehensive (loss) income, before income tax (benefit) expense .... (2,646) 1,076 (100) (1,670) Less: Income tax (benefit) expense ...... (947) 379 (9) (577) Total other comprehensive (loss) income, net of income tax (benefit) expense .... $(1,699) $ 697 $ (91) $(1,093)

(1) Includes $(1) of non-controlling interest. (2) Includes $(25) of non-controlling interest.

F-144 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

(2) ACQUISITIONS AND DISPOSITIONS ACQUISITIONS Hughes Insurance On July 1, 2015, the Company completed the acquisition of Hughes Insurance, an independent insurance broker in Northern Ireland. Hughes Insurance offers motor, van, household, small-to-medium-enterprise commercial insurance and travel insurance. Hughes Insurance has been reflected in the consolidated financial statements since the second quarter of 2014.

Primero Fianzas On July 8, 2014, the Company acquired a Mexico surety company Primero Fianzas, a wholly owned subsidiary, from Grupo Valores Operativos Monterrey, a private investor group.

DISPOSITIONS Liberty Ubezpieczenia On December 18, 2015, the Company entered into an agreement to sell its Polish operations to a member of the AXA Group.

Venezuela Operations Effective as of September 30, 2015, the Company determined to deconsolidate the Venezuelan subsidiaries and offer the Venezuelan operations for sale.

Since 2010 the Company’s operations in Venezuela have been operating in a hyperinflationary economy with restrictive foreign exchange controls.

F-145 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The evolving conditions in Venezuela, including the increasingly restrictive exchange control regulations and other factors, significantly impact our control over the Venezuelan operations. As a result of these factors, which we believe to be other-than-temporary, we concluded that effective September 30, 2015, we do not meet the accounting criteria for control over the Venezuelan operations, and therefore have deconsolidated these operations in the accompanying financial statements. As a result of deconsolidating, the Company recognized an impairment charge of approximately $690 which includes the write down of the investment in the previously consolidated Venezuelan operations to fair value and the write-off of related intercompany balances. The Company’s Venezuelan operations are classified as discontinued operations in the consolidated financial statements. All prior periods were restated to reflect this change.

The following table details the major assets and liabilities related to Venezuela, classified as held for sale in the consolidated balance sheet:

F-146 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table summarizes the amounts related to discontinued operations in the consolidated statements of income:

The table below shows the discontinued operating results related to Summit:

F-147 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The table below shows the discontinued operating results related to Argentina operations:

(3) INVESTMENTS Components of Net Investment Income

Components of Net Realized (Losses) Gains

F-148 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Components of Change in Net Unrealized Investment (Losses) Gains

Available for Sale Investments The amortized cost, gross unrealized gains and losses and fair values of available for sale investments as of December 31, 2015 and 2014, are as follows:

(1) Mortgage-backed securities (“MBS”) (2) Asset-backed securities (“ABS”)

F-149 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Approximately 76% of the Company’s securitized portfolio is explicitly backed by the U.S. government (Government National Mortgage Association “GNMA” and Small Business Association “SBA”) or by government- sponsored entities (Federal Home Loan Mortgage Corporation “FHLMC” and Federal National Mortgage Association “FNMA”). Approximately 94% of the mortgage and asset-backed holdings are rated AAA. The commercial MBS portfolio is well diversified and of high quality with approximately 94% rated AAA.

As of December 31, 2015, no single issuer, excluding U.S. Treasuries, agency securities and MBS, accounted for more than 0.6% of invested assets.

As of December 31, 2015 and 2014, securities carried at $3,019 and $3,214, respectively, were on deposit with state regulatory authorities as required by law.

F-150 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The amortized cost and fair value of fixed maturities as of December 31, 2015, by contractual maturity are as follows:

Expected maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

December 31, 2015 Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses U.S. government and agency securities ..... $ (8) $ 1,304 $ (4) $ 245 Residential MBS ...... (21) 2,445 (8) 364 Commercial MBS ...... (13) 737 (3) 122 Other MBS and ABS ...... (11) 1,280 (4) 166 U.S. state and municipal ...... (47) 1,647 (7) 142 Corporate and other ...... (510) 10,543 (184) 1,027 Foreign government securities ...... (22) 911 (15) 298 Total fixed maturities ...... (632) 18,867 (225) 2,364 Common stock ...... (98) 653 (12) 33 Preferred stock ...... (1) 4 (53) 254 Total equities ...... (99) 657 (65) 287 Total ...... $(731) $19,524 $(290) $2,651

F-151 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

December 31, 2014 Less Than 12 Months 12 Months or Longer Fair Value of Fair Value of Investments with Investments with Unrealized Unrealized Unrealized Unrealized Losses Losses Losses Losses U.S. government and agency securities ..... $ (1) $ 259 $ (9) $ 558 Residential MBS ...... (4) 755 (20) 1,229 Commercial MBS ...... (1) 148 (8) 368 Other MBS and ABS ...... (2) 253 (12) 821 U.S. state and municipal ...... (1) 129 (17) 673 Corporate and other ...... (90) 3,387 (56) 1,763 Foreign government securities ...... (4) 372 (20) 617 Total fixed maturities ...... (103) 5,303 (142) 6,029 Common stock ...... (47) 443 (11) 52 Preferred stock ...... — 4 (58) 251 Total equities ...... (47) 447 (69) 303 Total ...... $(150) $5,750 $(211) $6,332

Variable Interest Entities The Company invests in limited partnerships and other entities subject to VIE analysis under the VIE subsections of ASC 810, Consolidation. The Company analyzes each investment to determine whether it is a VIE, and if so, whether the Company is the primary beneficiary or a significant interest holder based on a qualitative and quantitative assessment. The Company evaluates the design of the entity, the risks to which the entity was designed to expose the variable interest holder and the extent of the Company’s control of and variable interest in the VIE. As of December 31, 2015 and 2014, respectively, the Company has determined that it was the primary beneficiary of two VIEs in the low-income housing tax credit sector, and as such, these VIEs were consolidated in the Company’s financial statements. The carrying value of assets and liabilities, and the Company’s maximum exposure to loss of the consolidated VIEs are immaterial to the Company.

F-152 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) generate variability primarily from investment portfolio performance and that variability is passed to equity holders. The net carrying value of non-consolidated VIEs in which the Company has a variable interest was $1.719 billion and $1.826 billion as of December 31, 2015 and 2014, respectively and the Company’s maximum exposure to loss was $2.487 billion and $2.603 billion as of December 31, 2015 and 2014, respectively. The assets are included in other investments in the accompanying consolidated balance sheets. Maximum exposure to loss includes the carrying value and unfunded commitment of the VIE. There is no recourse provision to the general credit of the Company for any VIE beyond the full amount of the Company’s loss exposure.

(4) DEFERRED ACQUISITION COSTS The following reflects the policy acquisition costs deferred for amortization against future income and related amortization charged to income:

(1) The above table contains amortization attributable to discontinued operations of $0, $21 and $94 for the years ended December 31, 2015, 2014, and 2013 respectively.

F-153 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

A summary of reinsurance financial data reflected within the accompanying consolidated statements of income is presented below:

F-154 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-155 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table displays the impact of the NICO Reinsurance Transaction subsequent to transaction date in the accompanying consolidated statements of income:

F-156 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-157 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) radiological events, could be material to the Company’s operating results, financial position and/or liquidity in future periods. The Company will continue to manage this type of catastrophic risk by monitoring and controlling terrorism risk aggregations to the best of its ability.

Establishing loss reserves, including loss reserves for catastrophic events that have occurred, is an estimation process. Many factors can ultimately affect the final settlement of a claim and, therefore, the necessary reserve. Changes in the law, results of litigation, medical costs, the costs of repair materials, and labor rates can all affect ultimate claim costs. In addition, time can be a critical part of reserving determinations since the longer the span between the incidence of a loss and the payment or settlement of the claim, the more variable the ultimate settlement can be. Accordingly, “short-tail” claims, such as property damage claims, tend to be easier to estimate than “long-tail” claims, such as workers compensation or general liability claims.

Catastrophes are an inherent risk of the property-casualty insurance business and have contributed to material period-to-period fluctuations in the Company’s results of operations and financial position. Catastrophe losses are severe losses resulting from natural and man-made events, including risks such as fire, earthquake, windstorm, explosion, terrorism, and other similar events. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in an area affected by the event and the severity of the event. The level of catastrophe losses experienced in any period cannot be predicted and can be material to the results of operations and financial position of the Company. Catastrophe losses incurred during the years ended December 31, 2015, 2014, and 2013 were $1,820, $1,609 and $1,269, respectively.

F-158 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Activity in property and casualty unpaid claims and claim adjustment expenses of the Company are summarized as follows:

F-159 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Premiums receivable included accrued retrospective and unbilled audit premiums of $448 and $514 as of December 31, 2015 and 2014, respectively. For the years ended December 31, 2015, 2014, and 2013, the Company recognized an increase (decrease) of premium income of $40, $(2) and $216, respectively, relating to prior years.

Unpaid claims and claim adjustment expenses are recorded net of anticipated salvage and subrogation of $1,286 and $1,279 as of December 31, 2015 and 2014, respectively.

F-160 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) products/completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim. The uncertainties cannot be reasonably estimated, but could have a material impact on the Company’s future operating results and financial condition.

In the third quarter of 2014, the Company completed asbestos ground-up and aggregate environmental reserve studies. These studies were completed by a multi-disciplinary team of internal claims, legal, reinsurance and actuarial personnel, and included all major business segments of the Company’s direct, assumed, and ceded asbestos and environmental unpaid claim liabilities. As part of the internal review, policyholders with the largest direct asbestos unpaid claim liabilities were individually evaluated using the Company’s proprietary stochastic ground-up model, which is consistent with published actuarial methods of asbestos reserving. Among the factors reviewed in depth by the team of specialists were the type of business, level of exposure, coverage limits, geographic distribution of products, injury type, jurisdiction and legal defenses. Reinsurance recoveries for these policyholders were then separately evaluated by the Company’s reinsurance and actuarial personnel. Asbestos and environmental unpaid claim liabilities for all other policyholders were evaluated using aggregate methods that utilized information and experience specific to these policyholders. The studies resulted in an increase to reserves of $111 including: $83 of asbestos reserves, primarily associated with increased defense costs, and $28 of pollution reserves.

F-161 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

(7) DEBT OUTSTANDING Debt outstanding as of December 31, 2015 and 2014 includes the following:

Current maturities of long-term debt: 2015 2014

Current maturities of long-term debt ...... $ 249 $ —

Long-term debt: 2015 2014

6.70% Notes, due 2016 ...... $ — $ 249 7.00% Junior Subordinated Notes, due 2067(1) ...... 300 300 5.00% Notes, due 2021 ...... 600 600 4.95% Notes, due 2022 ...... 750 750 4.25% Notes, due 2023 ...... 1,000 1,000 8.50% Surplus Notes, due 2025 ...... 140 140 7.875% Surplus Notes, due 2026 ...... 227 227 7.625% Notes, due 2028 ...... 3 3 3.91%—4.25% Federal Home Loan Bank Borrowings due 2032 ...... 300 300 7.00% Notes, due 2034 ...... 231 231 6.50% Notes, due 2035 ...... 471 471 7.50% Notes, due 2036 ...... 19 19 7.80% Junior Subordinated Notes, due 2087(2) ...... 700 700 10.75% Junior Subordinated Notes, due 2088(3) ...... 193 196 6.50% Notes, due 2042 ...... 750 750 4.85% Notes, due 2044 ...... 1,050 1,050 7.697% Surplus Notes, due 2097 ...... 260 260 6,994 7,246 Unamortized discount ...... (12) (14) Total long-term debt ...... $6,982 $7,232

F-162 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Effective July 2, 2015, LMIC renewed its $1,000 repurchase agreement for a two-year period, which terminates July 3, 2017 unless extended. To date, no funds have been borrowed under the facility.

On December 31, 2014, Berkeley/St. James Real Estate LLC paid off its five-year mortgage loan in the amount of $47. The mortgage loan was originally $50 with a maturity date of January 1, 2015.

Interest The Company paid $434, $400, and $431 of interest in 2015, 2014, and 2013, respectively.

F-163 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

(8) INCOME TAXES The components of U.S. Federal, state and foreign income tax expense (benefit) are:

Years ended December 31, 2015 2014 2013 Expected U.S. Federal income tax expense ...... $690 $902 $741 Tax effect of: Nontaxable investment income ...... (107) (122) (131) Change in valuation allowance ...... (6) (2) 3 Goodwill ...... — — (10) Revision to estimates ...... (6) 7 (38) General business credits ...... (18) (5) (33) Audit Settlement ...... (40) (60) — State ...... 3 3 3 Foreign ...... 20 22 9 Other ...... (10) 2 (29) Actual income tax expense ...... $526 $747 $515

F-164 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The significant components of the deferred income tax assets and liabilities at December 31 are summarized as follows:

Year Total 2016 ...... 33 2017 ...... 41 2018 ...... 48 2019 ...... 38 Thereafter ...... 871 Total ...... $1,031

F-165 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

Balance as of December 31, 2013 ...... $298 Additions based on tax positions related to current year . . . 7 Additions for tax positions of prior years ...... 54 Reductions for tax positions of prior years ...... (149) Settlements ...... (24) Translation ...... (4) Balance as of December 31, 2014 ...... $182 Additions based on tax positions related to current year . . . 42 Additions for tax positions of prior years ...... 191 Reductions for tax positions of prior years ...... (152) Settlements ...... (3) Translation ...... (11) Balance as of December 31, 2015 ...... $249

Included in the tabular roll forward of unrecognized tax benefits are interest and penalties in the amount of $34 and $51 as of December 31, 2015 and 2014, respectively.

Included in the balance at December 31, 2015 is $62 related to tax positions that would impact the effective tax rate.

F-166 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions) final average compensation, as more fully described in the Plans. Some foreign subsidiaries also sponsor defined benefit pension plans. In 2013, the Company approved changes to the U.S. pension plan that went into effect on January 1, 2014. Significant changes included the addition of a new cash balance benefit formula for all eligible U.S. employees and the freezing of credited service under the plan’s final average pay formula.

Compensation expense related to the Company’s long-term and short-term incentive compensation plans was $636, $653, and $656 for the years ended December 31, 2015, 2014, and 2013, respectively.

F-167 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-168 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The net benefit costs for the years ended December 31, 2015, 2014 and 2013, include the following components:

F-169 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The measurement date used to determine pension and other postretirement is December 31, 2015.

Weighted-average actuarial assumptions for benefit obligations are set forth in the following table:

F-170 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Weighted-average actuarial assumptions for net periodic benefit costs are set forth in the following table:

1% 1% point point increase decrease Effect on Postretirement Benefit Obligation ...... $23 $(19) Effect on total service and interest costs ...... $ 1 $ (1)

F-171 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The target allocation for the U.S. pension plan’s assets are 47% bonds, 40% diversified public equities, 10% private equity and real estate investments, and 3% cash and short-term investments.

The investment strategy for each category of the U.S. pension plan’s assets is as follows:

Public equities — Achieve superior performance against the MSCI All Country World Index over a three to five year period.

The other assets represent currency hedges, and real estate assets that support foreign pension plans and an insurance company separate account that supports the domestic pension plan.

F-172 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following table sets forth by level, within the fair value hierarchy, the Plans’ assets at fair value as of December 31, 2015 and 2014.

Fair Value Measurements as of December 31, 2015 Quoted Prices in Significant Significant Active Markets Observable Unobservable for Identical Inputs Inputs Asset Category Total Assets Level 1(1) Level 2(1) Level 3(1) Cash, cash equivalents and short-term investments(2) ...... $ 42 $ 84 $ (42) $— Fixed maturities: U.S. government and agency securities ...... 180 89 91 — U.S. state and municipal ...... 138 — 138 — RMBS/CMO/ABS/CMBS ...... 726 — 726 — Corporate and other ...... 1,994 — 1,992 2 Foreign government securities ...... 47 — 47 — U.S. large cap equities ...... 747 747 — — U.S. mid and small cap equities ...... 525 525 — — European equities ...... 648 648 — — Asian equities ...... 470 470 — — Other equities ...... 41 41 — — Limited partnerships ...... 436 — — 436 Other assets ...... 175 — 12 163 Total ...... $6,169 $2,604 $2,964 $601

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(53).

Fair Value Measurements as of December 31, 2014 Quoted Prices in Significant Significant Active Markets Observable Unobservable for Identical Inputs Inputs Asset Category Total Assets Level 1(1) Level 2(1) Level 3(1) Cash, cash equivalents and short-term investments(2) ...... $ 19 $ 102 $ (83) $— Fixed maturities: U.S. government and agency securities ...... 95 75 20 — U.S. state and municipal ...... 131 — 131 — RMBS/CMO/ABS/CMBS ...... 815 — 814 1 Corporate and other ...... 2,164 — 2,164 — Foreign government securities ...... 51 — 51 — U.S. large cap equities ...... 871 871 — — U.S. mid and small cap equities ...... 533 533 — — European equities ...... 527 527 — — Asian equities ...... 395 395 — — Other equities ...... 105 105 — — Limited partnerships ...... 281 — — 281 Other assets ...... 104 — 14 90 Total ...... $6,091 $2,608 $3,111 $372

(1) See Note 10 for descriptions of the three levels of fair value presentation. (2) Cash equivalents in Level 2 are net of investment payables of $(95).

F-173 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Balance Actual Return Actual Return Purchases, Transfers Balance January 1, on Plan Assets on Plan Assets Sales, & In/(Out) December 31, 2014 Still Held Sold Settlements of Level 3 2014 Limited partnerships(1) ...... $165 $ 6 $ 14 $ 96 $— $281 Fixed maturities ...... 1 — — (1) 1 1 Other assets(1) ...... 41 (1) — 50 — 90 Total ...... $207 $ 5 $ 14 $145 $ 1 $372

(1) Real Estate investments of $38 were transferred from Limited Partnerships to Other Assets in 2014.

The Plans’ investments in limited partnerships are recorded at the carrying value as reported by the external fund managers, which is believed to approximate the fair value of the investments.

Expected Future Benefit Payments — The following benefit payments, which reflect expected future service as appropriate, are expected to be paid:

Supplemental Postretirement Pension Pension Plans 2016 ...... 303 15 36 2017 ...... 309 24 38 2018 ...... 336 28 40 2019 ...... 359 32 42 2020 ...... 376 26 44 2021-2025 ...... 2,192 134 241

F-174 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-175 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-176 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-177 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-178 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-179 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The Company did not have significant transfers between Levels 1 and 2 during the years ended December 31, 2015 and 2014.

F-180 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Changes in Level 3 Recurring Fair Value Measurements The following tables summarize the fair values of assets on a recurring basis classified as Level 3 within the fair value hierarchy:

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, (Losses) Gains Sales and in to out of December 31, Assets, at Fair Value 2015 Gains (Losses) Purchases Settlements Maturities Level 3 Level 3 2015 U.S. government and agency securities ...... $ 22 $— $— $— $— $— $— $ (22) $ — Residential MBS ...... 1 — 1 156 — — — (157) 1 Commercial MBS ...... 84 — 2 52 — (28) — (35) 75 Other MBS and ABS ...... 70 — (3) 100 — (4) — (83) 80 U.S. state and municipal ..... 176 — (15) 180 — (6) 47 (138) 244 Corporate and other ...... 251 (4) (6) 155 — (156) 6 (11) 235 Foreign government securities ...... 11 (1) — 1 — (1) — — 10 Total fixed maturities . . . 615 (5) (21) 644 — (195) 53 (446) 645 Common stock ...... 44 27 (4) 21 — (36) 1 (11) 42 Preferred stock ...... 2 — — 2 — — — — 4 Total equity securities . . . 46 27 (4) 23 — (36) 1 (11) 46 Short-term investments ...... 1 — — — — (1) — — — Other investments ...... 440 (1) 48 26 — (34) — — 479 Separate account assets ...... 60 6 — — — (2) — — 64 Other assets ...... 27 1 — (3) — — — — 25 Total assets ...... $1,189 $ 28 $ 23 $690 $— $(268) $ 54 $(457) $1,259 Liabilities, at Fair Value Life insurance obligations .... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154) Total liabilities ...... $ (163) $ (4) $— $ 13 $— $ — $— $ — $ (154)

F-181 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Net Net Balance Realized Unrealized Transfer Transfer Balance January 1, Gains Gains Sales and in to out of December 31, Assets, at Fair Value 2014 (Losses) (Losses) Purchases Settlements Maturities Level 3 Level 3 2014 U.S. government and agency securities ...... $ 24 $— $— $— $— $ (2) $— $— $ 22 Residential MBS ...... 11 — 1 38 — — — (49) 1 Commercial MBS ...... 98 — 6 67 — (2) 24 (109) 84 Other MBS and ABS ...... 30 — 1 128 — (3) — (86) 70 U.S. state and municipal ..... 124 — 16 54 — (4) 27 (41) 176 Corporate and other ...... 398 3 — 86 — (172) 5 (69) 251 Foreign government securities ...... 3 1 (1) 10 — (2) 11 (11) 11 Total fixed maturities . . . 688 4 23 383 — (185) 67 (365) 615 Common stock ...... 45 — (1) 6 — (1) 1 (6) 44 Preferred stock ...... 2 — — — — — — — 2 Total equity securities . . . 47 — (1) 6 — (1) 1 (6) 46 Short-term investments ...... 5 — — 2 — (5) — (1) 1 Other investments ...... 316 (8) 18 14 — (8) 329 (221) 440 Separate account assets ...... 68 4 — — — (12) — — 60 Other assets ...... 19 10 — (2) — — — — 27 Total assets ...... $1,143 $ 10 $ 40 $403 $— $(211) $397 $(593) $1,189 Liabilities, at Fair Value Life insurance obligations .... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163) Total liabilities ...... $ (122) $ (55) $— $ 14 $— $ — $— $ — $ (163)

Transfers into and out of Level 3 were primarily due to changes in the observability of pricing inputs.

F-182 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Fair Value at December 31, Range 2015 Valuation Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $167 Discounted Cash Flow Discount Rate(a) 22.5% Spread Model Credit Spread(c) 94-699 (502 bps) Comparative Valuation Credit Spread(c) 150-277 (259 bps) Illiquidity Premium(d) 152-211 (201 bps) Index Yield(b) 4.4% Matrix Pricing Credit Spread(c) 120-200 (166 bps) Other invested assets ...... $360 Discounted Cash Flow Discount Rate(a) 10.0%-20.0% (16.0%) Liabilities, at Fair Value Life insurance obligations . . $154 Discounted Cash Flow Discount rate(a) 0.14%-5.14% Lapse rates(e) 1.0%-12.0% Annuitization take-up rate(f) 0%-21.0%

Fair Value at December 31, Range 2014 Valuation Technique(s) Unobservable Input(a) (Weighted Average) Assets, at Fair Value Corporate and other ...... $189 Discounted Cash Flow Discount Rate(a) 1.6%-22.5% (12.5%) Spread Model Credit Spread(c) 450-946 (925 bps) Comparative Valuation Credit Spread(c) 25-163 (127 bps) Illiquidity Premium(d) 50-250 (222 bps) Index Yield(b) 3.73% Matrix Pricing Credit Spread(c) 109-174 (159 bps) Other invested assets ...... $330 Discounted Cash Flow Discount Rate(a) 10.0%-20.0% (15.0%) Black Scholes Volatility 53.5%-100.0% (80.0%) Liabilities, at Fair Value Life insurance obligations . . $163 Discounted Cash Flow Lapse rates(e) 1.0%-12.0% Annuitization take-up rate(f) 0%-21.0%

F-183 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

The following tables summarize the Company’s impairment charges for assets measured at fair value on a non- recurring basis for the years ended December 31, 2015, 2014, and 2013.

In 2014, the Company executed a purchase agreement to sell a number of its Limited Partnerships investments which resulted in an impairment loss of $68.

F-184 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Other investments — Fair values represent the Company’s equity in limited partnership net assets and other equity method investments.

Commercial mortgage loans — The fair values of commercial mortgage loans were estimated using option adjusted valuation discount rates or carrying value for newly acquired loans.

Cash and cash equivalents — The carrying amounts reported in the accompanying consolidated balance sheets for these instruments approximate fair values.

The Company has not applied ASC 820 to non-financial assets and liabilities.

F-185 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Future minimum rental payments and receipts under non-cancelable leases with terms in excess of one year are estimated as follows:

As of December 31, 2015, the Company had unfunded commitments in traditional private equity partnerships, natural resources, real estate, and other of $1,354, $2,440, $378, and $1,057, respectively.

As of December 31, 2015, the Company had $478 of undrawn letters of credit outstanding secured by assets of $597.

F-186 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

F-187 LMHC Massachusetts Holdings Inc. Notes to Consolidated Financial Statements (dollars in millions)

Management has assessed material subsequent events through March 3, 2016, the date the financial statements were available to be issued.

F-188 ISSUER Liberty Mutual Group Inc. 175 Berkeley Street Boston, Massachusetts 02116 GUARANTORS Liberty Mutual Holding Company Inc. LMHC Massachusetts Holdings Inc. 175 Berkeley Street 175 Berkeley Street Boston, Massachusetts 02116 Boston, Massachusetts 02116 AUDITORS OF THE ISSUER AND THE GUARANTORS Ernst & Young LLP 200 Clarendon Street Boston, MA 02116 United States of America LEGAL ADVISOR TO THE ISSUER AND THE GUARANTORS as to U.S. Law Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, NY 10006 United States of America LEGAL ADVISOR TO THE MANAGERS as to U.S. Law Debevoise & Plimpton LLP Debevoise & Plimpton LLP 919 Third Avenue 65 Gresham Street New York, NY 10022 London EC2V 7NQ United States of America United Kingdom LEGAL ADVISOR TO FISCAL AGENT as to U.S. Law Emmet, Marvin & Martin, LLP 120 Broadway 32nd Floor New York, NY 10271 United States of America FISCAL AGENT PRINCIPAL PAYING AGENT, REGISTRAR AND TRANSFER AGENT The Bank of New York Mellon The Bank of New York Mellon, London 500 Ross Street, 12th Floor Branch Pittsburgh, Pennsylvania 15262 One Canada Square United States of America London E14 5AL United Kingdom LISTING AGENT Arthur Cox Listing Services Limited Earlsfort Centre Earlsfort Terrace Dublin 2 Ireland JOINT BOOK-RUNNING MANAGERS Citigroup Global Markets Limited Deutsche Bank AG, London Branch Citigroup Centre Winchester House Canada Square 1 Great Winchester Street Canary Wharf London EC2M 2DB London E14 5LB United Kingdom United Kingdom Liberty Mutual Group Inc.

€750,000,000 2.75% Senior Notes due 2026

Irrevocably and Unconditionally Guaranteed by

Liberty Mutual Holding Company Inc. and LMHC Massachusetts Holdings Inc.

OFFERING MEMORANDUM April 27, 2016

Joint Book-Running Managers Citigroup Deutsche Bank Joint Lead Managers

BofA Merrill Lynch HSBC Wells Fargo Securities Barclays BMO Credit Goldman Sachs J.P. Morgan Lloyds Bank MUFG US Bancorp Capital Suisse International Markets Co-Managers

BNY Mellon Capital Markets EMEA Ltd. The Royal Bank of Scotland The Williams Capital Group, L.P.