Liberty Mutual Affirmed

Fitch Ratings affirmed the “A-” insurer financial strength ratings on the members of the Liberty Mutual inter-company pool and revised the rating outlook on pool members to stable from negative. Additionally, Fitch assigned Peerless Ins. Co. inter-company pool members “A-” rating with a stable rating outlook. Liberty Mutual Group Inc. is rated as follows with a stable rating outlook: Long-term rating”BBB-“; Senior unsecured notes “BBB-“; $600 million commercial paper program “F2.” Additionally, Fitch upgraded the ratings on Liberty Mutual Insurance Company’s surplus notes to “BBB” from “BBB-” and affirmed and subsequently withdrawn the “BBB” long-term and “F2” short-term ratings on Liberty Mutual Capital Corp. since that entity merged into LMG.

Fitch’s decision to revise the rating outlook on Liberty Mutual pool reflects recent improvements in the entity’s profitability and risk-based capitalization. Additionally, the revision reflects Fitch’s heightened comfort with the overall organization’s loss reserve adequacy on its ongoing business.

Fitch’s upgrade of its ratings on LMIC’s surplus notes reflects a revision in the notching between Liberty Mutual pool’s and Peerless pool’s insurer financial strength ratings and Fitch’s ratings on the overall organization’s various debt instruments.

LMG’s profitability improved in recent years due to modest improvements in underwriting results and strong operating cash flow that has boosted investment income. The company’s risk-based capital ratio and operating leverage ratios have improved in recent years due in large part to the company’s improving profitability.

Despite these improvements, Fitch continues to believe that LMG’s underwriting results continue to lag those of the overall industry and those of peer companies with similarly strong competitive positions. Additionally, Fitch continues to believe that the quality of LMIC’s statutory capital is adversely affected by the company’s use of retroactive reinsurance.

Fitch believes that LMG is exposed to potentially unfavorable reserve development, primarily asbestos-related development. At year-end 2004, the company’s net asbestos reserve survival ratio was only 6.5 times, compared with a 10.4x average for a proxy group of companies with significant asbestos exposure and Fitch’s adequacy guideline survival ratio of 17.5x. Fitch estimates the after-tax effect on capital of additional reserves required for LMG’s year-end 2004 survival ratios to equate to 10.4x and 17.5x at $430 million and $1.2 billion, respectively.

Prime Receives “B”

Prime Holdings Insurance Services Inc. announced that its property and casualty insurance subsidiary, The Prime Insurance Syndicate Inc., was notified that as of July 15, 2005, Prime received an increased A.M. Best’s rating of “B” with a stable outlook in Financial Size Category V. In the notification, Best stated Prime’s capitalization, “improved in 2004 due to dramatically improved operating performance and a capital contribution.”

“Prime has been working diligently over the last several years to further streamline production, claims handling and other operations to improve the bottom line and grow surplus organically,” stated Ted B. Paulsen, Prime’s chief operating officer. “We are thrilled that our efforts are literally paying off at the bottom line and that our improved performance is being recognized by the industry.”

Prime, a Prime Holdings Insurance Services Inc. company, is an excess and surplus lines insurance company serving over 42 U.S. states and territories with its own capacity and the remaining states with its authority from Lloyd’s of London.

W.R. Berkley Corp. Revised

Standard & Poor’s ratings services revised its outlook on W.R. Berkley Corp. and BER’s operating companies (collectively referred to as Berkley) to stable from negative. S&P also said that it assigned its “BBB-” rating to BER’s proposed $200 million subordinated 40-year debenture issue to Berkley Capital Trust II and the trust preferred securities with identical terms issued by Berkley Capital Trust II. In addition, S&P affirmed its “BBB+” counterparty credit rating on BER and its “A+” counterparty credit and financial strength ratings on Berkley.

BER intends to use the net proceeds to redeem on or after Dec. 15, 2006, in whole or in part, its 8.197 percent junior subordinated debentures due 2045, with any remaining amount used for general corporate purposes.

Also, there is modest potential that given prior-year reserve additions in the past three years and the long-tail profile of BER’s business, the profitability of the recently booked business might not be as strong as currently reported.

American Re Assigned ‘AA-‘

Fitch Ratings assigned an “AA-” insurer financial strength rating to American Reinsurance Company. The rating outlook is stable. Fitch’s rating on AmRe reflects its view that the company is a core subsidiary of Munich Reinsurance Company, under which AmRe’s rating benefits from financial and operational links with Munich Re.

On July 19, Fitch downgraded Munich Re’s insurer financial strength to “AA-” from “AA” and revised the company’s rating outlook to stable from negative. Fitch’s rating actions followed Munich Re’s announcement that AmRe, its wholly owned subsidiary, would record a net $1.4 billion charge for adverse prior-accident year reserve development in the second quarter of 2005. Related announcements that Fitch believes support its use of a group rating methodology include the following: Munich Re will inject $1.1 billion of new capital into American Re; Munich Re will convert $1.6 billion of debt owed by AmRe into equity; Munich Re increases the variable quota-share reinsurance program under which it assumes business from AmRe; Munich Re plans to assume AmRe’s reserves for accident years 2001 and prior through a loss portfolio transfer.

Fitch views AmRe as an important platform for the Munich Re organization to pursue reinsurance operations in the large U.S. reinsurance market. In 2004, approximately 24 percent of Munich Re’s gross reinsurance premiums written were derived from the U.S.

AmRe’s recent operating results have been poor. The company’s calendar year combined ratio on a U.S. statutory basis averaged 144 percent between 2000 and 2004 and one year average reserve development has averaged 38 percent of beginning of the year surplus during that same time period.

At year-end 2004, Fitch viewed AmRe’s loss ratios for several accident years during the problematic 1997-2001 time period, as being lower than those of peers. After recording the net $1.4 billion charge, Fitch generally believes that Am Re’s accident year loss ratios will more closely approximate those of peers.

Allianz and Fireman’s Fund Affirmed

A.M. Best Co. affirmed the financial strength rating of “A” (excellent) and assigned issuer credit ratings of “a” to Allianz Insurance Group of Burbank, Calif., which consists of Allianz Global Risks US Ins. Co. and its wholly-owned subsidiary, Allianz Underwriters Ins. Co. (Allianz Underwriters). All have a stable outlook.

Best also affirmed the FSR of “A” (excellent) of Fireman’s Fund Ins. Co. of Novato, Calif., and its intercompany pool participants and reinsured affiliates. This rating outlook has been revised to stable from negative.

The Allianz U.S. ratings reflect the solid stand-alone capitalization, explicit parental support provided by its ultimate parent, Allianz A.G. of Munich, Germany, its solid business franchise and improved current and future earnings capabilities in its core industrial risk market.

Offsetting these positive rating factors is the historically poor underwriting performance and sizable portion of the surplus of Allianz U.S. represented by affiliated securities, primarily its 100 percent ownership in Fireman’s Fund, a separately managed operating unit. As a result, the surplus of Allianz U.S. is subject to volatility caused by Fireman’s Fund’s own operating results.

Somewhat mitigating this last concern is the significant improvement in Fireman’s Fund’s results and solid earnings from the Allianz U.S. operations. The latter significantly benefits from investment earnings thrown off from sizable loss reserves related to discontinued operations.

Given the challenges encountered by Fireman’s Fund in the past, this parental commitment is paramount to the group’s current ratings, which take into consideration both past and future support. The ratings also consider the increase in surplus over the last two years from better overall operating earnings and capital gains, as well as continued improvement in earnings during 2005.

Topics USA Profit Loss Excess Surplus Reinsurance Allianz