S&P's Cuts Liberty Mutual

Standard & Poor's lowered its counterparty credit and financial strength ratings on Boston-based Liberty Mutual Insurance Co. and related entities to "A" from "A+" and removed them from credit watch, where they were placed on April 4.

In addition, the rating on Liberty Mutual's surplus notes was lowered to "BBB+" from "A-" and the 'A-1' commercial paper rating was affirmed. The outlook is negative.

The company's deteriorating capital position, weak operating results and reserve adequacy concerns accounted for the cut, according to S&P's analyst John Iten.

Liberty Mutual's capital adequacy is expected to improve in 2003. Underwriting results should benefit from the improved pricing environment in virtually all lines in 2003, and into 2004. S&P's expects that the statutory combined ratio will fall well below last year's ratio of 108 percent.

Improved earnings should bring capitalization back to a level more supportive of the ratings; however, if earnings expectations are not met and surplus does not improve as expected, the company would be vulnerable to another downgrade. For this reason, the outlook is negative.

AMERCO Subs Downgraded

A.M. Best Co. has downgraded the financial strength ratings to "C" (weak) from "B" (fair) of Ariz.-based Republic Western Insurance Co. and La.-based North American Fire & Casualty Insurance Co.

The companies are all subsidiaries of Reno, Nev.-based AMERCO, which is the parent of Phoenix-based U-Haul International Inc. The companies had a financial strength rating of "B" (fair) and were under review with negative implications largely based on the financial distress of AMERCO.

The downgrade of Republic Western takes into consideration the significant accounting adjustments reported in the first quarter of 2003, their consequential impact on Republic Western's capitalization and the continued financial challenges surrounding its parent, AMERCO.

These factors stem from Republic Western's first quarter accounting charges of approximately $96 million, continued adverse loss reserve development and its adverse impact on policyholders' surplus which Best currently views as vulnerable. Accounting charges taken in the first quarter were spread across various assets held by Republic Western, but were primarily related to the non-admission of receivable balances due from its parent partially caused by the parent's non-investment grade status.

As a result, Republic Western's surplus fell 58 percent from $166 million to roughly $70 million at the end of the first quarter 2003. In the quarter, Republic Western also reported approximately
$8.5 million of unfavorable loss reserve development.

Over the past several years, Republic Western has become increasingly dependent on its parent for capital support. However, given its current status, AMERCO's ability to support its insurance subsidiaries is practically non-existent. Furthermore, Republic Western consented to a supervision order by the Arizona Department of Insurance on May 20, in light of the above circumstances.

The order is intended to circumscribe and closely monitor the situation while Republic Western and its affiliates engage in self-corrective efforts. The negative outlook arises from concerns over the aforementioned factors.

Ace Affirmed, Outlook Neg.

S&P's has assigned its "BBB-" preferred stock rating to Ace Ltd.'s $500 million ($575 million if over-allotment exercised) 7.80 percent cumulative redeemable preferred shares, Series C offering. Ace may redeem these shares any time after May 30, 2008. S&P's also said that it affirmed its "BBB+" counterparty credit and senior debt ratings on Ace. In addition, S&P's affirmed its "A+" counterparty credit and financial strength ratings on the insurance operations that make up the Ace Group. The outlook on all these companies is negative.

Several Ace Group entities will use the proceeds from the offering to reinforce their capital structures, which were weakened because of Ace's fourth-quarter 2002 $2.18 billion gross ($516 million net; $354 million after-tax) asbestos charge and the pervasive impact it had on the Ace organization as a whole.

The negative outlook reflects S&P's belief that Ace's financial leverage will remain at about 20 percent and that its capital adequacy ratio will remain at least 145 percent. Conversely, Ace's near-term earnings potential and financial strength will continue to be burdened by capital-management pressures, sizeable goodwill, and material exposure to credit risk.

To submit information for this department, e-mail: sjones@insurancejournal.com