While the reserve hike nearly doubled the level of the Boston-based insurer's pollution reserves, fourth-quarter net income increased 30 percent to $565 million from $435 million in 2003.

Liberty's net income for the year jumped 46.3 percent, increasing to $1.2 billion from $851 million in 2003 in spite of $697 million in net pre-tax catastrophe losses in the third quarter.

The 2003 result had been adversely impacted by a third-quarter action to boost pre-tax reserves related to asbestos losses $331 million, and prior-year reserve charges totaling close to $400 million for non-asbestos claims, including California workers' compensation claims.

The 2003 asbestos charge, which brought asbestos reserves above the $1 billion level, was one in a string of small reserve charges (averaging $250 million each) over a period of five years.

The 2004 pollution pre-tax charge?$316 million on a net basis ($327 million, gross)?brought year-end net pollution reserves to $553 million, up from $287 million held at the beginning of the year.

During a conference call, executives did not report any unusual claims activity that prompted the pollution reserving action. In fact, Corporate Actuary Robert Muleski reported some favorable trends, including declines in newly reported claims.

The actuary also described annual claim-by-claim internal review processes by a dedicated unit of claims and legal professionals that have been in place for 25 years.

"In 2004, we?engaged an independent consultant to give a fresh look at our exposure in this area and to offer a look at our practices," he said. He added that when the consultant indicated reserves above Liberty's carried levels, the insurer decided to conservatively book $50 million more "to recognize inherent uncertainty in establishing pollution reserves."

"We believe we fully addressed reserve needs in this area," he said.

Turning from reserving to pricing, Mr. Kelly painted a picture of unsound trends in the marketplace.

"Generally we would say it's a rational market, but we are seeing?finally?some behaviors that make us recall 1997 and 1998. And we are going to have to?walk away from business in commercial lines," he said during the conference call.

He gave a particular example of a large national account, for which a competitor priced the excess workers' compensation component with a price 30 percent below Liberty's and set fees for services 35-40 percent lower. "We're never happy to lose a large piece of business. But irrational competition is starting to show its ugly head," he said.

When asked by an analyst to describe the competitor, Mr. Kelly responded, "In large national account business, there are a handful of household names" participating in the market.

The excess workers' comp pricing mistake "won't emerge for four, five, six years. So it's very easy for underwriters to do irrational things." But the degree of irrationality in this instance is surprising at this stage of the cycle, he said

"There's much more aggressive pricing than one would have expected given the comments [being reported] out in the industry."

Mr. Kelly also said that in other areas of the market, "some moderation of price increases" was becoming apparent, but that it was not "too disturbing," unlike the concerning large account situation.

"On an account of that nature and that size, to see behavior such as we saw, that is indicative that the price discipline the industry is talking about goes by the boards very quickly when the situation arises? Although it's a one-off case, the canary has sort of dropped dead in the cage," he said.

He went on to respond to a question about the length of the cycle offering little optimism. "We all talk about SARBOX [Sarbanes-Oxley corporate governance rules] and closer scrutiny and all that. [But] humans will misbehave when they can."

Mr. Kelly also commented on two areas where significant price declines are becoming evident?in property and directors and officers, seemingly seeing less problem arising from the property declines.

"When one makes allowance for catastrophe losses, property results are still strong. So there is room for price reductions," he said, noting that adequate returns are still achievable in spite of them.

In the D&O area, on the other hand, he said that 15 percent price declines "just don't make a lot of sense," given the level of litigation.

While Mr. Kelly was bearish on pricing trends, he said he remains bullish on mergers and acquisitions?in the industry and for Liberty.

"The North American market is a mature market?Consolidation is going to happen. It's clear," he said.

"We have been a very aggressive acquirer. We view it as a core competency at this stage," he said, noting, however, that he was a little bit concerned about what prices will be for target companies. He noted a particular example in which a Japanese company paid six-times book value?multiples of what Liberty was willing to offer for an Asian book of business.

During the conference call, Chief Financial Officer Dennis Langwell reported that strong net written premium growth for 2004 was driven by M&A activity.

Liberty net premiums grew nearly 20 percent, or $2.8 billion, to $17.3 billion in 2004, he said, noting that $1.3 billion of the jump related to acquisitions (including $977 million from the Prudential Financial acquisition announced in 2003).

For the year, the overall combined ratio improved to 102.9, compared to 104.5 in 2003.

During the conference call, executives were also asked about asbestos reserves, which were not increased in 2004 as they had been in 2003.

"Nothing has happened since then that has led us to question our reserves," Mr. Kelly said. Still, he said that Liberty Mutual would do another ground-up study this year. "But at this stage, there's nothing that we see that would lead us to believe there will be an increase or decrease for asbestos," he said.