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Liberty Mutual Suffers Hundreds of Millions in Losses

by Precise Leads

March 13, 2018

Hurricanes and wildfires cut deeply into Liberty Mutual’s net income in 2017, but the insurer remains encouraged by its recent activities.

After suffering significant financial setbacks throughout the year, Liberty Mutual reported a mere $17 million in annual net income at the end of 2017, a substantial drop-off from the $989 million it reaped in 2016. In a prepared statement announcing the results, Liberty Mutual Chairman and CEO David H. Long attributed the steep reduction in net income to catastrophe losses, commercial auto insurance setbacks, and a charge related to the recently passed tax law.

Nevertheless, Long pointed to several positive developments in the fourth quarter. He stressed that net written premiums climbed to $8.9 billion in the quarter, up from the $716 million recorded in the same period a year earlier. Similarly, net income totaled $205 million in Q4, an increase of more than $62 million over the fourth quarter of 2016.

“While the results in 2017 did not meet expectations,” Long said, “we are encouraged by signs of market firming across each of our businesses.”

A ‘Catastrophic’ Quarter

Liberty Mutual sustained a net operating loss of $746 million, a severe turnaround from the $1.124 billion in income it amassed in 2016. Much of that decline stemmed from three devastating hurricanes that hit the southern U. S. and Puerto Rico in the late summer and fall. As a result, Liberty Mutual’s third-quarter 2017 net loss totaled $665 million. It had booked profits of $455 million in Q3 2016.

Liberty Mutual’s financial results also reflect the company’s shift to property and casualty insurance following several notable transactions. In January, it announced its agreement to sell its life insurance division to Lincoln Financial Group for $3.3 billion, a deal expected to close in the second quarter. The company listed the impending sale among discontinued operations, a category that produced $213 million in income last year. In addition, the insurer reported $56 million in acquisition and integration costs last year related to its purchase of specialty lines insurer Ironshore from Fosun International.

In another sign of the insurer’s financial status, Liberty Mutual’s combined ratio — the sum of net claims, commissions, and expenses divided by net earned premium — increased 7.3 points between 2016 and 2017, landing at 105.6%. A combined ratio above 100% indicates that an insurance company is not making making profits on its underwriting. When investment income is taken into account, however, an insurer with a combined ratio above 100% can still be profitable.

Reinsurance Aid

Seeking Alpha notes that Liberty Mutual’s catastrophe losses would have been much worse had it not been for the insurer’s reinsurance program. By ceding more than $1.2 billion of insured losses to its reinsurance providers, the company shaved $3.6 billion from its pre-tax catastrophe loss total in 2017. Because of the hurricanes and wildfires, the insurer reported a nearly $3.4 billion bump up in reinsurance recoverables.

“Reinsurance provisions,” Seeking Alpha contributor Steve Evans wrote, “have played a significant role in helping large primary insurers, like Liberty Mutual, to manage their exposure to the major losses of 2017 and minimize the impact to their balance sheets and shareholders.”

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