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 at the beginning of the year.

During a conference call last week, 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.

Turning from reserving to pricing, Chairman and Chief Executive Edmund Kelly painted a somewhat disturbing picture of trends in the market. “Generally we would say its a rational market, but we are seeing finally some behaviors that make us recall 1997 and 1998, and we are going to have towalk 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' comp component 30 percent below Liberty and set fees for services 35-to-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.

An excess workers' comp pricing mistake “won't emerge for four, five, six years, so it's very easy for underwriters to do irrational things,” he added. However, 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 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 arisesAlthough 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 [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 liability, with property cuts less of a problem. “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 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 marketConsolidation 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 added noting, however, he is 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. Net premiums grew nearly 20 percent?$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.

For the fourth quarter, Liberty Mutual reported net income of $565 million, up 30 percent from $435 million for fourth-quarter 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 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.

Reproduced from National Underwriter Edition, March 4, 2005. Copyright 2005 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.