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Liberty Mutual net income nosedives on energy investment losses

Liberty Mutual net income nosedives on energy investment losses

Liberty Mutual Holding Co. Inc. on Thursday reported significantly lower net income in the second quarter of 2016, as it dropped 94.1% from the prior-year quarter to $15 million due to energy investment and catastrophe losses.

“I was actually hoping that many of you hadn't had the opportunity to look at the quarterly results, but good morning anyway,” Liberty Mutual Chairman and CEO David Long said at the start of the company's earnings conference call on Thursday morning.

The two primary drivers of the significantly lower net income were negative results from private equity partnership income and impairment losses in direct investments in energy exploration, Mr. Long said.

Pretax losses from energy were $220 million in the quarter, including $110 million in impairments, resulting in total realized investment losses of $95 million versus a gain of $241 million last year, Mr. Long said in a statement accompanying the earnings report.

“The thing that jumped out the most was the energy losses they reported,” said Chris Grimes, director of insurance for Fitch Ratings Inc. in Chicago. “Overall, results were fairly strong and consistent with improvements they've seen in prior years. Underwriting results were about flat with the prior year, but really the energy losses that they took were the driver of the decline in net income.”

The mutual insurer has taken steps to significantly reduce future energy investment commitments, lowering its unfunded energy commitments by $1.4 billion since the end of the first quarter, Mr. Long said.

Liberty Mutual has lowered the unfunded commitment by converting obligations to drill above certain price levels to annual options, which will allow the company to decide whether to participate in exploration and allow for more flexibility in its capital commitments, Executive Vice President and Chief Investment Officer Neeti Bhalla said during the earnings call.

“The change in prices really continues to be the biggest driver of impairments,” she said. “As we look forward, you would need a sustained price recovery of about $50 (per barrel) in order to feel comfortable that we wouldn't have any more impairments. Barring that, we continue to expect continued impairments although at a smaller rate.”

Catastrophes this year that contributed to the insurer's losses include the wildfires in Canada, the earthquake in Ecuador, severe storms in the United States and Cyclone Winston in Fiji and the South Pacific, according to the report.

“We have drastically reduced coastal exposure,” Mr. Long said. “For the most part now our biggest exposures are severe storms rather than hurricane exposure. We would expect much higher frequency of severe losses now. Cat losses are basically an accumulation of severe storm losses rather than any major catastrophes. We think our pricing is actually pretty good and we're comfortable with the risk we're taking on the severe storm side.”

Despite the catastrophe losses, the company's combined ratio improved to 101.4% from 102.6% in 2015's second quarter, according to the report.

“Liberty Mutual's cat losses in the first half of 2016 did not increase by a significant margin relative to 2015 results unlike some of their peers that also have significant homeowners' exposure,” Mr. Grimes said. “The majority of U.S. cat losses so far this year have been related to severe storm and given their exposure to severe storm risk, Liberty Mutual was fortunate that cat losses did not have a larger impact on first half results.”

Net written premiums increased 1.2% to $9.02 billion in the second quarter of 2016, according to the report.

Net income for the first half of 2016 dropped 23.0% to $408 million compared with the same period last year. Net written premiums rose 0.8% to $17.8 billion in the first half of this year, according to the report. The combined ratio for the half improved to 98.9% from 99.9% in last year's first half.


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