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Was insurer near bankruptcy? Records suggest not

(Matthew J. Lee/Globe Staff)
By Todd Wallack
Globe Staff / May 4, 2012
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Liberty Mutual’s retired chief executive, Edmund F. “Ted’’ Kelly, recently recalled that the Boston insurance giant was fighting for its life when he first joined as president, in 1992. His successor, David Long, said the mutual was “practically bankrupt’’ at that time.

Liberty Mutual’s rebound from those dark days to become a Fortune 100 company is among the reasons company executives give to justify the nearly $50 million a year that Kelly received in his last four years as chief executive. A review of financial reports, press releases, and news articles from the early 1990s shows executives may have engaged in hyperbole in describing the company as close to bankrupt, but it was clearly facing significant challenges.

Though the company remained profitable in 1991 and 1992, it cut 1,600 jobs, and a bond rating agency twice downgraded its credit.

Meanwhile, Liberty Mutual and other insurers with large workers’ compensation businesses faced skyrocketing medical costs that threatened to swamp earnings, even as many states balked at approving rate increases.

“It was a very tough time,’’ said David Schiff, who wrote an insurance newsletter at the time, Schiff’s Insurance Observer.

Kelly, who became chief executive in 1998, stepped down in June after 13 years. He continues as chairman of the insurer’s board of directors.

Kelly recalled his early years at Liberty Mutual in a speech to Massachusetts Institute of Technology students last week. When he interviewed for the president’s job, he said, then-CEO Gary Countryman told him: “We are in deep trouble. If we don’t do something, the last man out is going to have to turn out the lights.’’ Countryman could not be reached for comment.

Kelly said he decided to take the job because he liked Countryman and relished the challenge of turning the company around. The same week Liberty hired Kelly in March 1992, the company announced it had laid off 420 US workers. About 1,200 workers had previously agreed to retire early.

A month later, the company reported it earned $149 million in 1991, down 9 percent from 1990, and issued a bleak statement about its core worker’s compensation business.

“There is no question that workers compensation is in crisis,’’ Countryman said in a press release. “State regulators have disregarded the underlying data and have refused to allow prices to keep pace with costs.’’

Several other insurers also announced job cuts at the time, pulled out of the workers’ compensation business in some states, or shut down altogether.

In January 1993, Liberty Mutual laid off another 400 workers.

Moody’s Investors Service downgraded the company’s credit rating twice in 1991 and 1992 from a pristine Aaa to a slightly worse Aa3 rating. A.M. Best Co. gradually dropped the rating from A+ in 1987 to A- in 1989, where it remained for a number of years. In 1992, A.M. Best said the company’s A- rating was still considered excellent and praised the company’s “financial strength.’’

But Schiff said that is somewhat misleading because A- was about as low as commercial insurers like Liberty Mutual could go at the time and continue to attract large business customers. He said customers would flee to another carrier if the rating dropped any lower because it raised the possibility that insurers might not be able to pay all future claims. “It’s the lowest it could be,’’ Schiff said.

Liberty Mutual spokesman John Cusolito said the company later learned it faced some $3 billion in legal liability from asbestos and pollution cases, which could have potentially wiped out the company’s net assets. Liberty Mutual gradually set aside enough profits to handle those claims in subsequent years.

Kelly said in his MIT speech that he and other executives quickly turned the situation around. The company began to expand into new lines of insurance and foreign markets, reducing its reliance on the US workers compensation business.

By April 1993, Countryman was more upbeat, saying the company ended 1992 “stronger than ever financially’’ as profits rose by almost half to $217 million and its diversification strategy took flight. Several states also made changes in their workers’ compensation programs that helped insurers.

Today, executives say the company is on a solid footing, with quadruple the annual revenues it generated in 1992, five times the equity, and operations in 27 countries. It now ranks 82d on the Fortune 100 list of largest US companies and is celebrating its 100th anniversary this month.

Todd Wallack can be reached at TWallack@globe.com.

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