Liberty Mutual Net Falls 92% on Private Equity Loss (Update1)

By Hugh Son
Bloomberg News
May 5, 2009

May 5 (Bloomberg) -- Liberty Mutual Group Inc., the policyholder-owned insurer that purchased Safeco Corp. last year, said first-quarter profit plunged 92 percent on losses tied to private equity investments.

Net income fell to $28 million from $360 million in the year-earlier period, the Boston-based company said today in a statement. The company had a private equity loss of $373 million in the first quarter, compared with a gain of $60 million a year earlier.

"We felt the negative impact of the capital markets," Chief Executive officer Edmund "Ted" Kelly said in the statement.

Liberty Mutual joins American International Group Inc. and Hartford Financial Services Group Inc. in posting losses on so- called alternative assets. The industry's holdings in private equity and hedge funds shrank 10 percent to $44.7 billion last year as firms pared riskier investments amid a global decline in stocks and slowdown in leveraged buyouts, according to the National Association of Insurance Commissioners.

The private equity loss drove a 55 percent drop in net investment income to $337 million.

Book Value

Policyholders' equity, a measure of assets minus liabilities, fell to $10.4 billion from $12.4 billion at the end of last year's first quarter. Gross unrealized losses on investments narrowed to $3.33 billion from $3.56 billion at the end of 2008. The measures, which don't count against earnings, are monitored by regulators and investors.

The company sells bonds in public markets had about $5.8 billion in long-term debt outstanding as of March 31.

The insurer may be downgraded by A.M. Best on "the sizeable deterioration in overall capitalization of Liberty Mutual given the impact of market conditions," the ratings firm said in April.

Kelly sold shares of Bank of America Corp., Wells Fargo & Co. and General Electric Co. last year to reduce the risk of further declines after spending more than $6 billion for Seattle-based Safeco. Kelly is seeking to add customers as competitors including AIG and Hartford are hobbled by investment losses.

The insurer spent 99.5 cents of every premium dollar on claims and expenses, an improvement of 1.2 cents from the year- earlier combined ratio.

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