Liberty Mutual Profit Falls 8.7% on Private Equity (Update1)

By Erik Holm
Bloomberg News
July 28, 2009

July 28 (Bloomberg) -- Liberty Mutual Group Inc., the policyholder-owned insurer that purchased Safeco Corp. last year, said profit fell for the second straight quarter on the decline in the value of private equity investments.

Second-quarter net income of $274 million dropped 8.7 percent from $300 million in the same period a year earlier, the Boston-based insurer said today in a statement.

American International Group Inc., MetLife Inc. and Chubb Corp. have suffered from losses in so-called alternative assets such as buyout and hedge funds. Liberty Mutual and Chubb are among the firms that report changes in such limited partnership holdings on a delay when data isn't immediately available, meaning some of the results that count toward second-quarter earnings occurred in the three months ended March 31.

"The company's investments in limited partnerships and limited liability companies are long-term in nature and highly illiquid," Liberty Mutual said in a presentation on its Web site. "The company believes these investments offer the potential for superior long-term returns and are appropriate in the overall context of a diversified portfolio."

The private equity loss of $20 million compares with a profit of $58 million in the same period a year earlier. Excluding the alternative assets and realized investment losses, the firm earned $427 million before taxes, a 22 percent increase from a year earlier.

Goldman Sachs, Citigroup

Liberty Mutual Chief Executive Officer Edmund "Ted" Kelly has been dumping shares of financial firms to guard capital after spending more than $6 billion buying Seattle-based Safeco in September. The insurer cut holdings of Citigroup Inc. and Goldman Sachs Group Inc. in the first quarter by more than half, and sold shares of Bank of America Corp. and General Electric Co. last year.

Results for the quarter include revenue from Safeco, the auto, home and business insurer that sells policies through agents. The deal was the insurance industry's biggest transaction since St. Paul Cos. and Travelers Property Casualty Corp. combined in a $17.9 billion merger in 2004 to form the company now called Travelers Cos.

Policy sales excluding Safeco slipped about 12 percent to $5.55 billion. The rates charged for U.S. commercial insurance, Liberty Mutual's biggest business, declined 4.9 percent in the second quarter, according to the Council of Insurance Agents and Brokers. Rates have dropped every period since 2004 as insurers compete for business and insurance buyers scale back costs amid the recession.

Catastrophe Costs

Catastrophes cost the insurer $253 million compared with $313 million in the year-earlier period, when a higher-than- average frequency of tornadoes contributed to a record first half for twisters in the U.S. Incidents of severe weather in the U.S. fell by at least 39 percent in the second quarter, according to preliminary data compiled by the National Weather Service.

Policyholders' equity, a measure of assets minus liabilities, rose to $11.8 billion as of June 30, from $10.4 billion three months prior.

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