Liberty Hikes Asbestos Reserves $331 Million

Liberty Mutual announced a $331 million pre-tax increase in its reserves for asbestos recently, a move that didnt bother rating agencies and did little to disturb an improving earnings picture for the Boston-based insurer.

With the charge, which amounted to $215 million after taxes, the group still managed to double its income through nine months, reporting $416 million in net income compared to $207 million for the first nine months of 2002.

The announcement came a day after Northbrook, Ill.-based Allstate had disclosed a $442 million charge for asbestos. (See page 25.)

And both reserve hikes came as discussions continued on asbestos reform in the nations capital,

“We made no assumption at all that there will be asbestos reform. This is based on current legislation and current liability,” said Edmund Kelly, Libertys chair and chief executive officer, during a conference call on Oct. 17.

The analysis of asbestos liability “represents the best and current thinking of the actuarial discipline” supported by claims and legal specialists working through an account-by-account review, he said.

During the conference call, the companys actuary Robert Muleski and other executives went through the details of a ground-up asbestos study, noting that Liberty has been conservative in its reserve estimates over a multiyear period, adding $800 million to asbestos reserves between 1998 and 2002.

The companys total asbestos reserve now stands at $1.2 billion, they said.

Mr. Muleski reviewed a slide displayed on the firms Web site, comparing Libertys additions with other commercial insurers such as The Hartford and Travelers Property Casualty. While Libertys reserve additions averaged roughly $250 million in each of the last four years, Hartford put up $2.6 billion in 2003 and Travelers boosted its asbestos reserves by some $2.9 billion in 2002, the slide showed.

General Counsel Christopher Mansfield also explained that total asbestos losses incurred by Liberty are lower than the totals shown for other insurers, because Liberty, with a history built as a workers compensation insurer, put certain comp-type accumulation clauses in its liability policies to limit its exposures. Liberty also has only a limited exposure to excess losses, Mr. Mansfield said.

In addition to the asbestos reserve strengthening, Liberty Mutual also strengthened prior-year reserves for non-asbestos claims, mostly for California workers comp., by $274 million on a pre-tax basis through the first nine months.

And the firm recorded $70 million in third-quarter catastrophe losses, with $45 million of those related to Hurricane Isabel.

Through nine months, the combined ratio for the group improved only 0.4 points to 106.1 from 106.5 last year. The asbestos boost, however, added 3.2 points to this years combined ratio, while last years increase ($148 million) added only 1.7 points.

Following Libertys announcement, Oldwick, N.J.-based rating agency A.M. Best Co. said that the financial strength rating of “A” (excellent) and various debt ratings of the Liberty Mutual Insurance Companies remained unchanged.

The outlook on the ratings, however, remained negative, Best said, noting that, in recent years, significant reserve charges have weakened Liberty Mutual’s overall capitalization and dampened earnings.

“A.M. Best continues to have concerns regarding reserve adequacy, particularly on older workers’ compensation claims,” the rating firm said in its announcement.

Best also said, “The results of the recently completed asbestos study indicate a reserve that is less than the estimate A.M. Best has already considered in its view of Liberty Mutual’s capitalization.”

In New York, Standard & Poors revised its outlook on Liberty Mutual Insurance Co.s “A” financial strength rating to stable from negative.

Among the factors S&P listed in support of its action was the fact that “the company has made very conservative assumptions with regard to the ultimate collectibility of asbestos reserves ceded to reinsurers, which Standard & Poor’s believes is appropriate given concerns that disputes will arise in coming years between primary insurers who have taken credit for large amounts of ceded losses and their reinsurers.”

During the conference call, Mr. Muleski noted that Liberty took credit for only half of the reinsurance it has available, although the firm will pursue the full amount.

S&P also said that it does not expect Liberty Mutual to “find it necessary to take any additional charges related to its asbestos claims reserves in the foreseeable future.”

S&P added that, by year end, it expects Liberty Mutuals combined ratio to improve to 104 or 105, compared with 108 in 2002.

Separately, several other companies announced reserve additions.

Harleysville Group in Harleysville, Pa., said it expects to report a net loss in the range of $1.15 to $1.17 per share in the third quarter of 2003, partly as a result of a $55 million boost in reserves spread among its workers’ compensation, commercial automobile liability, commercial multiperil and personal automobile liability lines.

Hamilton, Bermuda-based XL Capital Ltd said third-quarter income would be reduced by roughly $160 million after-tax as the firm accounts for higher-than-expected losses in its North American reinsurance operations.

Specialty insurer Markel Corporation in Glen Allen, Va., announced a reserve boost of $105 million—$55 million to cover asbestos and environmental exposures, and another $50 for its Investors Brokered Excess and Surplus Lines unit.


Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, October 24, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.