Liberty Mutual Q1 Profit Falls 31% to $318M Amid Investment Losses

By | May 3, 2013

Boston-based Liberty Mutual reported Thursday its net income fell 30.7 percent to $318 million for its 2013 first quarter, compared to $459 million income reported during the prior year first quarter.

The company’s quarterly underwriting and operating results both improved from prior year. But financial results were pushed down by realized investment losses which the company said would reverse during the remainder of the year.

The insurer reported net realized losses of $197 million primarily stemming from impairment losses due to the Venezuelan currency devaluation. South America’s fourth-largest economy devalued its currency by a third in February amid a financial tumult. The company holds more than $1 billion worth of fixed maturity investment assets issued by the government of Venezuela.

Looking at underwriting results, net written premiums for the first quarter were $8.593 billion, an increase of $515 million or 6.4 percent compared to one year ago. The combined ratio for the quarter was 98.3 percent, improving 2.6 points from 100.9 percent during the prior year quarter.

Catastrophe losses for the first quarter declined 42 percent to $207 million, compared to $359 million one year ago.

Net investment income for the first quarter fell 14.6 percent to $736 million, compared to $862 million recorded one year ago.

Total revenues for the first quarter rose 3 percent to $9.145 billion, compared to $8.881 billion one year ago. Pre-tax operating income for the first quarter was up 13.7 percent to $656 million compared to the prior year quarter.

“I think it’s fair to say that we are reasonably pleased with our progress, though net income for the first quarter was $318 million. That’s down $141 million year-over-year. However that’s primarily due to realized losses coming from the Venezuelan currency devaluation, and I think much of this will reverse over the remainder of the year,” CEO David Long said during an earnings conference call.

“The operational results however did improve. Pre-tax operational income increased $79 million to $656 million in the quarter and that’s despite a $126 million drop in investment income,” Long said.

As for growth, Long said, “we are continuing to grow where we see profitable opportunities and we are strategically reducing exposures that are unlikely to be profitable in the near term.”

“That said, we did grow premiums 6.4 percent for the quarter — that’s a little over 8 percent if you exclude the impact of FX. And that growth came primarily in personal lines and global specialty. And this growth was obtained despite a reduction in workers’ comp exposure year-over-year of almost 30 percent,” Long said.

“Our decision to grow where we can do so profitably, and to raise prices or contract in underperforming lines is gaining traction as evidenced by a 2.6 point reduction in combined ratio to 98.3 percent,” he said.

“This pricing, profitability, and selective growth momentum should continue for the foreseeable future as we adhere to the same disciplined strategy.”

Personal Insurance

The personal insurance lines generated $356 million in pre-tax operating income for the first quarter, with a 93.1 combined ratio, Long said. Both the pre-tax operating income and the combined ratio were about flat compared to the same period last year.

In personal insurance, overall net written premiums for the quarter rose 12.4 percent to $3.541 billion ($2.192 billion for private passenger auto; $1.238 billion for homeowners and other; and $111 million for individual life), compared to $3.150 billion during the same period last year ($1.979 billion for private passenger auto; $1.090 billion for homeowners and other; and $81 million for individual life).

For private passenger auto, the increase in net written premiums reflects growth in auto policies in-force as well as rate increases. Liberty Mutual said private passenger auto rate increases were 6.6 percent for the quarter. Retention stayed at 83.5 percent, same as it was a year ago. New businesses were up 23 percent over last year.

For homeowners and other, the net written premiums increase reflects 6.6 percent growth in homeowners policies in-force year-over-year as well as rate increases.

In property lines, “we still got north of 10 percent in rate level in the quarter and still feel that the industry is underpriced in this line,” CEO Long said, adding that retention remained steady at 85.1 and the new business was up almost 9 percent.

Commercial Insurance

Turning to commercial insurance lines, pre-tax operating income more than doubled to almost $230 million compared to the same period last year, CEO Long said. He said the increase was essentially due to some lower catastrophe losses and more importantly due to the company’s workers’ compensation strategy.

Overall, commercial insurance net written premiums fell 9.9 percent to $2.301 billion, compared to $2.555 billion a year ago.

In commercial lines, net written premiums for the “workers compensation- voluntary” segment fell 24.7 percent to $776 million, compared to $1.031 billion during the prior year first quarter. “Workers compensation – involuntary” net written premiums rose 26.9 percent to $33 million. Commercial multiple-peril net written premiums fell 6.9 percent to $483 million and commercial auto net written premiums declined 5 percent to $342 million. General liability net written premiums were down 3.5 percent to $263 million.

The total combined ratio for commercial lines was 101.6 percent, improving from 109.5 percent one year ago.

Regarding commercial lines pricing, “we continue to see price increases across every line of business led by comp and property,” Long said.

“In total, we had 9.3 points of rate across the business in the first quarter compared to 6.6 in the first quarter of 2012. And we are shedding businesses where we can’t get the rate needed to be profitable and we will continue to do so.”

In workers’ comp, rate increases were 9.9 in the first quarter but were significantly higher in the middle market, he said.

Long said commercial insurance exposures were down 18 percent year-over-year when taking out the impact of rate increases. The primary driver of this lowered exposure is workers’ compensation, he said.

“We have pretty much the same outlook on every line of business, which is if we can’t get the price that we want, then we are prepared not to write it. I think compared to our competitors, we had a disproportionate share of standalone workers’ compensation and a disproportionate share of workers’ compensation in our mix of business. And it’s still the most underperforming line in commercial lines,” Long said. “The strategy on comp is causing us to lose some other lines of business along with it.”

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