Liberty Hikes Asbestos Reserves $331 Million

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

And both reserve hikes came as discussions continued on asbestos reform in the nation's 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, Liberty's chair and chief executive officer, during a conference call Friday.

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 company's 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 company's total asbestos reserve now stands at $1.2 billion, they said.

Mr. Muleski reviewed a slide displayed on the firm's Web site, comparing Liberty's additions with other commercial insurers, such as The Hartford and Travelers Property Casualty. While Liberty's 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.

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 year's combined ratio, while last year's increase ($148 million), added only 1.7 points.

Following Liberty's 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 & Poor's 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 also said that, by year end, it expects Liberty Mutual's combined ratio to improve to 104 or 105, compared with 108 in 2002.