Liberty Mutual Says Deficits `Debase' Dollar; Bond-Holding Durations Cut

Liberty Mutual Holding Co., the second-largest policyholder-owned property-casualty insurer in the U.S., is expanding abroad and shortening the duration of bond holdings on concern that deficit spending and Federal Reserve policies may weaken the dollar.

Liberty Mutual plans to add business in China, India and Latin America as policy sales in the U.S. decline. The Boston- based insurer has been settling for lower yields on its fixed- income portfolio after buying securities with shorter maturities on the expectation inflation will rise.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against six currencies, including the euro, has dropped 4.8 percent in the last six months through yesterday, as the Fed committed to pump $600 billion into the economy, known as quantitative easing. President Barack Obama sent Congress a $3.7 trillion budget this week that projects the federal deficit will exceed $1 trillion for the fourth straight year.

“We are firmly convinced, and have been for a couple of years, that the monetary and fiscal policy will continue to debase the dollar,” said Liberty Mutual Chief Executive Officer Edmund “Ted” Kelly in a conference call today. “So we are positioning our portfolio and our businesses to respond if inflation emerges.”

Bond Durations

The insurer has about $18.9 billion in securities that mature in five years or less, Liberty Mutual said today in a fourth-quarter statement. That compares with $15.2 billion a year earlier. Securities maturing in more than 10 years declined to $12 billion from $15.5 billion.

Policy sales in the U.S. slipped by 2.3 percent to $5.29 billion in the fourth quarter from a year earlier, Liberty Mutual said today. That compares with a 0.8 percent drop to $1.69 billion for international sales. U.S. commercial rates industrywide have fallen each quarter since 2004, and fell 5.4 percent in the three months ended Dec. 31, according to the Council of Insurance Agents & Brokers.

“We see growth opportunities in all markets, but the most significant area of growth will obviously be international,” Kelly said.

Liberty Mutual said in November it was entering a joint venture with Videocon Industries Ltd. to sell personal and commercial coverage in India. The insurer operates in more than 20 countries, including Brazil, Spain and Australia.

Net income for the fourth quarter rose 22 percent to $576 million on gains from private-equity investments. Full-year profit was $1.68 billion, the insurer said in a statement today.

Federal Deficit

The U.S. federal deficit for the current fiscal year is forecast to hit a record $1.6 trillion -- 10.9 percent of gross domestic product.

Liberty Mutual ranks second behind Bloomington, Illinois- based State Farm Mutual Automobile Insurance Co. in property- casualty sales among policyholder-owned carriers in the U.S., according to the National Association of Insurance Commissioners. State Farm hasn’t yet reported 2010 results.

To contact the reporter on this story: Noah Buhayar in New York at nbuhayar@bloomberg.net

To contact the editor responsible for this story: Dan Kraut in New York at dkraut2@bloomberg.net

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