Liberty Mutual Lowered
Fitch Ratings lowered its insurer financial strength ratings on companies participating in the Liberty Mutual inter-company pool to "A-" from "A" and its rating on Liberty Mutual Insurance Co.'s surplus notes to "BBB-" from "BBB+." In addition, Fitch has lowered its long-term issuer and senior debt ratings on Liberty Mutual Capital Corp. to "BBB" from "A-." The rating on its commercial paper is unchanged at "F2." The rating outlook is negative.
The rating action is based on concerns as to the quality of the company's reported surplus, as well as concerns about Liberty Mutual's reserve adequacy for asbestos related claims and for its workers' compensation and general liability lines of business.
On a group basis at year-end 2002, Liberty Mutual reported statutory surplus of $5.2 billion. This included $1.2 billion of special surplus funds from retroactive reinsurance contracts. Under these contracts the company ceded $2.1 billion of reserves and paid $940 million in premiums. Though Liberty Mutual's retroactive reinsurance contracts do appear to transfer risk with respect to future reserve development, Fitch believes that the contracts also include a financing mechanism that will result in a material decline in future investment income.
Liberty Mutual's reported year-end 2002 surplus included $1.2 billion of surplus notes and Fitch considers the company's GAAP basis debt-to-capital ratio (excluding FAS 115) of approximately 25 percent is comparable to broader industry averages and peers.
The negative rating outlook reflects Fitch's belief that Liberty Mutual remains potentially exposed to adverse reserve development in workers' compensation and general liability lines, and to adverse development from asbestos related claims. Fitch recognizes that a portion of non-asbestos-related adverse development could accrue to the retroactive reinsurance contracts.
National Indemnity Affirmed
Fitch affirmed the "AAA" insurer financial strength ratings of the National Indemnity Co. and the six associated members of the National Indemnity Group (National Indemnity). The rating outlook is stable.
The ratings reflect National Indemnity's enormous capital base, excellent reinsurance market position, solid liquidity profile, low operating leverage and underwriting discipline. Offsetting these positives is National Indemnity's high investment risk associated with its large equity allocation and the volatile nature of the group's high-level catastrophe excess-of-loss reinsurance product line.
National Indemnity reported a pre-tax (GAAP) underwriting gain of $534 million at year-end 2002 versus underwriting losses of $647 million in 2001. The vast majority of the gain in 2002 stemmed from National Indemnity's Catastrophe & Individual Risk Unit, which saw significant opportunities after the events of Sept. 11, 2001.
National Indemnity's non-catastrophe reinsurance business also continues to be an attractive product line due to the anticipated extended claim payment period that allows for large future investment income. National Indemnity's high operating earnings in this line of business is a product of historically small underwriting losses offset by the large amounts of investment income on National Indemnity's substantial invested asset base.
National Indemnity estimates its maximum after-tax exposure to a single catastrophic event to be $3.25 billion. While material, with well over $20 billion in policyholders' surplus, National Indemnity could easily absorb such a loss. Further, this type of loss may even be a boon to National Indemnity's business if industry pricing significantly increases and causes a "flight to quality" that would benefit only the most highly capitalized competitors. Fitch believes recent experience in National Indemnity's Catastrophe & Individual Risk segment is evidence of this phenomenon.
S&P Cuts Swiss Re
Standard & Poor's Ratings Services lowered its long-term counterparty credit and insurer financial strength ratings on Zurich-based global reinsurer Swiss Reinsurance Co. and related core subsidiaries of the Swiss Re group to "AA" from "AA+." The outlook is stable.
The action reflects the slower than expected recovery in Swiss Re's earnings and the impact this may have on the group's ability to fully replenish capital during the current hard phase of the cycle. Nevertheless, the ratings remain underpinned by Swiss Re's very strong business position, superior management team, and very strong financial flexibility (defined as the ability to source capital relative to requirements).
The stable outlook is based on S&P's expectation that the group will maintain or improve its business position in the life reinsurance market over the longer term as it exports the roll out of a well-established and successful business model into new territories.
It is expected that there will be further improvement in the combined ratios of the property/casualty and financial services business groups to the target levels of 100 percent and 95 percent, respectively, for 2003. S&P's considers this prospective performance to be strong, but not yet consistent with a rating in the "AA" range at the current stage in the cycle. However, this is partly mitigated by continued very strong and stable profitability from the life and health business group.
