As filed with the Securities and Exchange Commission on May 10, 2010

Registration No. 333-

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

LIBERTY MUTUAL AGENCY CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware	6331	51-0290450
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

Liberty Mutual Agency Corporation

175 Berkeley Street

Boston, Massachusetts 02116

Telephone: (617) 357-9500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

Michael J. Fallon

Chief Financial Officer

Liberty Mutual Agency Corporation

175 Berkeley Street

Boston, Massachusetts 02116

Telephone: (617) 357-9500

(Name, address, including zip code and telephone number, including area code, of agent for service)

COPIES TO:


Susan J. Sutherland, Esq. Robert J. Sullivan, Esq. Skadden, Arps, Slate, Meagher & Flom LLP Four Times Square New York, New York 10036 (212) 735-3000 (212) 735-2000 (facsimile)		Richard P. Quinlan, Esq. Senior Vice President & Deputy General Counsel Liberty Mutual Group 175 Berkeley Street Boston, Massachusetts 02116 (617) 357-9500		Richard J. Sandler, Esq. Ethan T. James, Esq. Davis Polk & Wardwell LLP 450 Lexington Avenue New York, New York 10017 (212) 450-4000 (212) 701-5800 (facsimile)

Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer o		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting company o

CALCULATION OF REGISTRATION FEE


(1)	Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933. Includes offering price of shares that the underwriters have the option to purchase pursuant to their over-allotment option.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MAY 10, 2010

PRELIMINARY PROSPECTUS

Shares

Class A Common Stock

$ per share

This is the initial public offering of shares of Class A common stock of Liberty Mutual Agency Corporation. We currently expect the initial public offering price to be between $ and $ per share of Class A common stock.

We have two classes of authorized common stock, Class A common stock, shares of which are offered hereby, and Class B common stock, all shares of which are owned by an indirect subsidiary of Liberty Mutual Holding Company Inc. Holders of Class A common stock generally have identical rights to holders of Class B common stock, except with respect to voting, the election of directors, conversion, certain actions that require the consent of holders of Class B common stock and other protective provisions as described in this prospectus. Holders of Class A common stock are entitled to one vote per share, while holders of Class B common stock are entitled to ten votes per share. Following completion of this offering, Liberty Mutual will beneficially hold all of our outstanding Class B common stock and none of our Class A common stock, representing % of the combined voting power of our outstanding common stock and % of our total equity ownership.

Prior to this offering, there was no public market for our Class A common stock. We intend to apply to have our Class A common stock listed on the New York Stock Exchange under the symbol “LMA.”

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities or insurance commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.


	Per Share	Total

Public Offering Price	$	$
Underwriting Discount	$	$
Net proceeds to us (before expenses)	$	$

We have granted the underwriters a 30-day option to purchase up to an additional shares of our Class A common stock to cover over-allotments.

The underwriters expect to deliver the shares to purchasers on or about , 2010 through the book-entry facilities of The Depository Trust Company.


Citi	BofA Merrill Lynch

The date of this prospectus is , 2010

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. None of Liberty Mutual Agency Corporation, any of its affiliates or the underwriters is making an offer to sell these securities in any jurisdiction where the offer or sale thereof is not permitted. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front of this prospectus.

TABLE OF CONTENTS


Summary			1
Risk Factors			12
Cautionary Statement Concerning Forward-Looking Statements			43
Use of Proceeds			44
Dividend Policy			45
Capitalization			46
Selected Historical Consolidated Financial Data			47
Pro Forma Consolidated Financial Statements			50
Management’s Discussion and Analysis of Financial Condition and Results of Operations			55
Business			145
Regulation			169
Management			174
Ownership of Common Stock			185
Certain Relationships and Related Party Transactions			186
Description of Capital Stock			205
Shares Eligible For Future Sale			215
Certain U.S. Federal Tax Consequences to Non-U.S. Holders			216
Underwriting			219
Legal Matters			225
Experts			225
Where You Can Find More Information			225
Incorporation of Financial Statements by Reference			225
Index to Consolidated Financial Statements			F-1
Ex-23.1
Ex-23.2
Ex-23.3
Ex-99.1
Ex-99.2

The states in which our insurance subsidiaries are domiciled have laws that require regulatory approval for the acquisition of “control” of insurance companies. Under these laws, there exists a presumption of “control” when an acquiring party acquires 10% or more of the voting securities of an insurance company or of a company that controls an insurance company. Therefore, any person acquiring 10% or more of voting control over our common stock would need prior approval of the state insurance regulators of these states, or a determination from such regulators that “control” has not been acquired.

In this prospectus, unless the context requires otherwise: (a) references to the “Company” or “our company,” “we,” “us” or “our” refer to Liberty Mutual Agency Corporation, a Delaware corporation, and its consolidated subsidiaries and controlled affiliates; (b) references to “Liberty Mutual Group” refer to Liberty Mutual Holding Company Inc., a Massachusetts mutual insurance holding company, and its consolidated operations; (c) references to “Liberty Mutual” refer to Liberty Mutual Holding Company Inc. and its consolidated operations, other than the Company; (d) references to “Safeco” refer to Safeco Corporation, previously a publicly-traded insurance holding company, and its subsidiaries, which we acquired on September 22, 2008; and (e) references to “Ohio Casualty” refer to Ohio Casualty Corporation, previously a publicly-traded insurance holding company, and its subsidiaries, which we acquired on August 24, 2007.

Market and Industry Data

This prospectus includes market and industry data and forecasts that we have developed from publicly available information, various industry publications, including reports by A.M. Best Company, Inc. (“A.M. Best”), other published industry sources and our internal data and estimates. Industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. Our internal data, estimates and forecasts are based upon information obtained from our customers, partners, trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources. Market share data provided herein with respect to our company that is described as being based on net written premiums assumes the inclusion of a full year of net written premiums from Safeco in 2008.

SUMMARY

The following summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you need to consider in making an investment decision. You should read this entire prospectus carefully, including the information under “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” and our historical consolidated and pro forma financial statements and the related notes thereto included elsewhere in this prospectus.

Our Company

We are the second largest writer of property and casualty insurance distributed through independent agencies in the United States, and the tenth largest writer of all property and casualty insurance in the United States, in each case based on 2008 net written premiums. We offer a balanced mix of commercial and personal property and casualty insurance coverage to small and mid-size businesses and individuals throughout the United States. We also provide contract and commercial surety bonds on a national basis. We combine a national infrastructure with a regional focus, which enables us to develop and maintain strong relationships with independent agencies and policyholders. In 2009, we produced $10.1 billion of net written premiums through approximately 13,000 independent agencies. These premiums include $4.6 billion and $4.7 billion generated by our Commercial and Personal segments, respectively.

We are currently part of Liberty Mutual Group, the fifth largest property and casualty insurer in the United States, based on 2008 direct written premiums. We have grown significantly both organically and through acquisitions, including the acquisition of Safeco in September 2008 and Ohio Casualty in August 2007. Safeco wrote $5.6 billion of net written premiums in 2007, and Ohio Casualty wrote $1.4 billion of net written premiums in 2006.

After giving pro forma effect to this offering and the transactions for which we have made pro forma adjustments as described under “Pro Forma Consolidated Financial Statements,” we would have had $ billion of total assets and $ billion of stockholders’ equity as of December 31, 2009 and $ billion of revenues and $ million of net income in 2009.

Segments

We provide property and casualty insurance products through our three operating segments: Commercial, Personal and Surety. Each operating segment is led by an experienced management team with a high degree of autonomy to make decisions on key operating matters within established parameters. We believe this decentralized operating philosophy combined with our regional focus allows us to more effectively reach and serve our agents and policyholders. Our national infrastructure creates economies of scale and provides our regional operations with centralized functions, including pricing and underwriting tools, product development and claims management. We believe our regional focus results in better agency and policyholder relationships and, when combined with our national infrastructure, produces superior product design, service, underwriting and claims processing. The managers of our operating segments are eligible to receive incentive-based compensation based on the operating performance of their segment and the overall performance of our company, thereby encouraging cooperation across the entire organization.

The following is a description of our three operating segments:


	•	Commercial: We are the fifth largest writer of commercial lines property and casualty insurance distributed through independent agencies in the United States, based on 2008 net written premiums. We offer insurance coverage for commercial multiple peril, commercial automobile, workers compensation, general liability and other commercial risks to small and mid-size businesses (generally fewer than 150 employees and annual insurance premiums under $150,000). Approximately 95% of our commercial lines accounts have annual premiums of less than $15,000. We have minimal exposure to the highly competitive commercial insurance market segment consisting of accounts with annual insurance premiums in excess of $150,000. Our Commercial segment markets products through eight regional operating units, each with a distinct brand, except for excess casualty products, which are marketed


		under a national brand. Our Commercial segment generated $4.6 billion, or 45% of our total net written premiums, in 2009.


	•	Personal: We are the third largest writer of personal lines property and casualty insurance distributed through independent agencies in the United States, based on 2008 net written premiums. Using the Safeco Insurance brand, we offer insurance coverage to individuals on a national basis for private passenger automobile, homeowners and other personal property and liability risks. We market our personal lines products through eight regions covering geographic territories that are identical to those of our Commercial segment. Our Personal segment generated $4.7 billion, or 46% of our total net written premiums, in 2009.

	•	Surety: We are the second largest writer of surety business in the United States, based on 2008 net written premiums. We utilize the Liberty Mutual Surety brand for large national accounts and the Liberty SuretyFirst brand for regional and individual accounts. Our Surety segment generated $707 million, or 7% of our total net written premiums, in 2009.

In addition to our three operating segments, we also have a fourth segment, Corporate and Other, which reflects the results of external reinsurance, inter-segment reinsurance arrangements, run-off operations, net realized investment gains (losses), unallocated investment income, and interest and other expenses. Our Corporate and Other segment generated $162 million, or 2%, of our total net written premiums in 2009.

We market our products using a co-branding strategy under which each of our operating segment brands is identified as a member of the Liberty Mutual Group. As part of this co-branding strategy, under a trademark license agreement with Liberty Mutual, we have the right to use certain marks containing the words “Liberty Mutual” and the Statue of Liberty design. We believe this co-branding approach leverages the national awareness of the Liberty Mutual brand, while differentiating our products within our target markets.

Distribution

Property and casualty insurance companies generally market their products through one of three distribution systems: independent agents and brokers, exclusive agents or direct to the policyholder. Independent insurance agencies accounted for approximately 50% of property and casualty net written premiums in the United States in 2008, according to A.M. Best. We believe there were approximately 37,500 independent insurance agencies in the United States in 2008.

We distribute substantially all of our insurance products and services through approximately 13,000 independent agencies. These independent agencies are located in approximately 25,000 offices across all 50 states. We believe that our focus on independent agencies eliminates potential channel conflict and enables us to capture a broad base of profitable policyholder relationships over the long-term. To protect the integrity of our franchise we are selective in appointing our agencies. In selecting new independent agencies to distribute our products, we consider each agency’s profitability, financial stability, staff experience and strategic fit with our operating and marketing plans. No single agency produced more than approximately 1.5% of our net written premiums in 2009.

We seek to develop strong partnerships with independent agencies by being a critical part of their success and profitability. We achieve this by, among other things, providing competitive products to meet the needs of agencies and policyholders, displaying a strong service orientation, delivering technology solutions that enable ease of doing business, utilizing profit sharing arrangements that reward agents for profitable underwriting growth and providing consistency in the marketplace. In turn, agencies endeavor to grow profitably with us by distributing our products to those customers who best meet our underwriting criteria. We have established agency advisory councils to solicit input from our agencies on, among other topics, product design and policyholder issues. At December 31, 2009, we believe we ranked as one of the top three carriers in terms of premiums in approximately 50% of our commercial lines agencies and in approximately 30% of our personal lines agencies. We believe this degree of penetration in an agency enables our company to have the best opportunities to write the highest quality business. Based on an industry study of independent insurance agents, the top three insurers represented by an independent agency accounted for approximately 90% of the total premiums produced by that agency in 2008.

Competitive Strengths

We believe the following are our key competitive strengths:


	•	*Strong Agency Relationships Resulting in High Quality Business:* As many of our insurance subsidiaries and controlled affiliates have been in business for over 80 years, we have a deep understanding of our agents’ and policyholders’ needs. Our local reach through our 128 offices in the United States provides our agents with direct access to our regional executives and enables us to work closely with those agents by providing planning, support and training services. Our franchise has been built over many years through these relationships, particularly with our top performing agents. Given our deep and long-standing agency relationships, we believe we have the opportunity to write the highest quality business and the value of our franchise cannot be easily or quickly replicated.

	•	*Localized Knowledge from Multiple Regional Operations with a Highly Efficient National Infrastructure:* We are able to combine the high quality service and responsiveness of a regional carrier with the sophisticated underwriting, product development, claims management capability and capital base of a national carrier. This unique combination enables us to develop and maintain deep, long-lasting relationships with independent agencies and policyholders.

	•	*Well-Diversified and Balanced Business Mix:* Our business is highly diversified and balanced by product, geographic region, agency relationship and customer account. Our Commercial and Personal segments contributed approximately 45% and 46%, respectively, of our 2009 net written premiums. We believe that this diversification enables us to effectively manage through property and casualty pricing cycles and reduces the capital and earnings impact of any single catastrophic event.

	•	*Sophisticated Pricing, Underwriting and Risk Management:* Our pricing, underwriting and risk management strategy emphasizes profitable growth and optimization of our risk-adjusted returns in each of our operating segments, product lines and product offerings. We use proprietary models in conjunction with rigorous analytical review to make pricing and underwriting decisions and to manage risk exposures across geographies, product lines, product offerings and customer segments. Our objective is to achieve (i) underwriting profitability, (ii) disciplined, opportunistic growth and (iii) attractive risk-adjusted returns.

	•	*Superior Financial Strength:* Our capitalization and financial strength create a competitive advantage in retaining and attracting new business. After giving pro forma effect to this offering and the transactions for which we have made pro forma adjustments as described under “Pro Forma Consolidated Financial Statements,” at December 31, 2009 we would have had total assets and stockholders’ equity of $ billion and $ billion, respectively. Furthermore, we believe our reserve position is strong and is bolstered by an indemnification agreement, which we refer to in this prospectus as the “Run-Off Indemnification Agreement,” between us and Liberty Mutual, which provides us with $500 million of coverage for adverse development in legacy run-off liability exposures. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Indemnification Agreement.” We believe our strong balance sheet and the Run-Off Indemnification Agreement will afford us continued future financial flexibility, enabling us to write more desirable business.

	•	*Disciplined Acquisition Strategy and Proven Integration Experience:* We have proven experience in acquiring and successfully integrating property and casualty businesses, including Safeco and Ohio Casualty. We are a disciplined acquirer and have a demonstrated ability to realize significant transaction synergies and accelerate earnings growth.

	•	*Experienced Management Team with a Successful Track Record:* We have a talented and experienced management team led by our Chief Executive Officer and President, Gary Gregg, who has 21 years of service in the property and casualty insurance industry. Our senior management team has worked in the property and casualty insurance industry for an average of 27 years and has an extensive track record of profitably underwriting, growing and acquiring commercial and personal lines businesses.

Strategies

We intend to manage our business by pursuing the following strategies:


	•	*Pursue Profitable Growth While Maintaining Pricing and Underwriting Discipline:* We expect to grow each of our businesses and achieve attractive risk-adjusted returns, while maintaining our underwriting discipline, well-diversified business mix and broad geographic presence. We believe that the key to success across our businesses lies in our disciplined pricing and underwriting and a culture that focuses on management accountability for the profitability of their respective businesses. We historically have been, and will continue to be, a highly disciplined growth organization.

	•	*Attract High Quality Independent Agencies and Strengthen Existing Relationships:* A critical competitive advantage in the property and casualty insurance industry is a loyal, high quality and well managed distribution network that matches the insurer’s products and services with the needs of its policyholders. We believe that our strong agency relationships are the key to success across all of our businesses. It is our objective to be one of the top three insurers within the agencies that distribute our products. We intend to continue strengthening our relationships and building our franchise with top performing agents by providing them with planning, support, training and competitive compensation that supports profitable growth. We also intend to grow our business with our agents by increasing cross-selling efforts, providing comprehensive risk management and insurance solutions for the policyholders served by those agents and delivering a broad array of innovative products and services.

	•	*Focus on Small and Mid-Size Commercial Segment and Personal Lines Customers with Multi-Faceted Insurance Needs:* We seek to leverage our strong independent agency network by targeting small and mid-size commercial accounts and individuals with multi-faceted insurance needs. We believe that many customers prefer to purchase insurance products from trusted independent agents with a presence in their communities. Our unique combination of local expertise and decision-making authority, coupled with the strength of our national platform and strong brands, positions us well to offer agencies the products and services that address policyholders’ needs at competitive prices. We believe this focus provides us with relatively consistent and predictable risk-adjusted returns and enables us to selectively pursue business with favorable underwriting characteristics.

	•	*Leverage Scale, Technical Expertise and State-of-the-Art Underwriting Platforms to Provide Competitive Insurance Products and High Quality Services:* We are the third largest writer of personal lines and the fifth largest writer of commercial lines property and casualty insurance distributed through independent agencies in the United States, and the second largest writer of surety business in the United States, in each case based on 2008 net written premiums. We intend to continue to build on our scale and technical expertise to provide competitive insurance products and high quality services. As a result of our two most recent acquisitions, we are in the process of unifying our existing underwriting platforms in both our Commercial and Personal segments. The implementation of our unified underwriting platforms will allow us to retire our other underwriting platforms and, once fully implemented, we believe it will result in a decrease in our expense ratio. Our organization has the resources and financial flexibility to continue to devote significant efforts toward technology-based innovations and scale-based efficiencies, both of which are key factors for furthering our competitive advantage in the marketplace.

	•	*Capitalize on Fragmentation in the Property and Casualty Insurance Market:* We believe we are well positioned to capitalize on the fragmentation in the property and casualty insurance market by capturing market share. In commercial lines, we believe approximately $78 billion, or 57%, of the industry’s total 2008 net written premiums were written by the approximately 550 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $58 billion, or 43%. In personal lines, we believe approximately $22 billion, or 34%, of the industry’s total 2008 net written premiums were written by the approximately 370 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $43 billion, or 66%. We believe our national infrastructure will provide us with a competitive advantage over regional carriers in capturing market


		share, while our regional focus will provide us with a competitive advantage over larger national carriers.


	•	*Optimize Capital and Leverage Financial Strength:* We focus on maintaining a strong balance sheet that provides us with the flexibility to pursue opportunistic growth. We are committed to disciplined underwriting, earnings growth and capital generation to maintain our financial strength and claims-paying ability ratings. We believe this further enhances our competitive advantage in attracting and retaining profitable business.

	•	*Pursue Accretive Strategic Acquisitions:* We have successfully acquired and integrated businesses to accelerate the growth of our company. We intend to continue our strategy of pursuing economically attractive business combinations and acquisitions. Our market presence and strong balance sheet and cash flow, together with management’s demonstrated acquisition integration experience, create an effective platform for our continued growth through strategic acquisitions. We will selectively pursue accretive strategic acquisitions with a focus on maximizing value for our stockholders.

Ratings

The strength of our balance sheet is reflected in the financial strength ratings of our insurance subsidiaries: “A” with a negative outlook from A.M. Best (“Excellent”, the third highest of 15 ratings), “A2” with a negative outlook from Moody’s Investor Service Inc. (“Moody’s”) (“Good”, the sixth highest of 21 ratings) (negative outlook), and “A−” with a stable outlook from Standard & Poor’s Rating Service (“S&P”) (“Strong”, the seventh highest of 21 ratings). Following our 2008 acquisition of Safeco, S&P downgraded the financial strength ratings of our insurance subsidiaries to ‘A−’ from ‘A,’ and Moody’s revised its outlook to negative. Subsequently, in April 2009, A.M. Best revised its outlook to negative. These financial strength ratings do not refer to our ability to meet non-insurance obligations, and are not a recommendation to purchase or discontinue any policy issued by us or to buy, hold or sell our securities.

Transactions with Liberty Mutual

We have effected several significant transactions since December 31, 2009 and intend to effect several additional significant transactions prior to consummation of this offering. These transactions, which we collectively refer to in this prospectus as the “Transactions,” involve several significant special payments and dividends to Liberty Mutual of cash and invested assets and the issuance of debt, a portion of which will be repaid prior to or immediately following the consummation of this offering. We believe that our capitalization following this offering will enable us to sustain profitable growth and maintain our financial strength ratings. As a result of the Transactions, we will have higher levels of debt and interest expense and lower levels of investment income in future periods.

We also intend to enter into several agreements with Liberty Mutual prior to or substantially concurrently with the consummation of this offering, including the following:


	•	Run-Off Indemnification Agreement. We will pay Liberty Mutual a one-time payment of $125 million and Liberty Mutual will indemnify us for up to $500 million of adverse development related to our run-off reserves in our Corporate and Other segment.

	•	Services Agreement. Liberty Mutual currently provides all of our employees and executives to us under various services agreements. Liberty Mutual will provide interim services to us prior to the transfer to us of the employees and executives dedicated to our business, which is expected to occur on January 1, 2011. In addition, Liberty Mutual will continue to provide important administrative services to us under these agreements and will administer a portion of our run-off liabilities following the offering.

	•	Intercompany Agreement. We will enter into an agreement with Liberty Mutual which will provide for, among other things, mutual indemnification of obligations relating to the business and operations of the other party, information rights, restrictive covenants that will prohibit actions by us without Liberty Mutual’s consent, equity purchase rights, rights of first offer on property and casualty coverage, intellectual property licenses and other matters governing our ongoing relationship with Liberty Mutual.

For additional information about the Transactions and our ongoing agreements with Liberty Mutual, see “Certain Relationships and Related Party Transactions — The Transactions,” “Pro Forma Consolidated Financial Statements” and “Risk Factors — Risks Relating to Our Relationship with Liberty Mutual.”

Ownership by Liberty Mutual

Liberty Mutual Agency Corporation, the issuer of the Class A common stock offered hereby, is currently an indirect, wholly-owned subsidiary of Liberty Mutual Holding Company Inc., a non-public mutual insurance holding company. The initial public offering of our Class A common stock represents an opportunity for Liberty Mutual to enhance its overall financial flexibility by enabling one of its significant business units to access the equity capital markets. Following this offering, Liberty Mutual will indirectly own all of our outstanding Class B common stock, representing % of the combined voting power of our outstanding common stock and % of our total equity ownership. Liberty Mutual will not own any of our outstanding Class A common stock. We intend to sell no more than a 20% equity interest in our company in this offering. Liberty Mutual has advised us that it expects to maintain a controlling interest in our company going forward. See “Description of Capital Stock,” “Ownership of Common Stock” and “Risk Factors — Risks Relating to Our Relationship with Liberty Mutual.”

There is minimal overlap between our business and the other business units of Liberty Mutual. Our Commercial segment predominantly targets small and mid-size commercial customers, while Liberty Mutual’s commercial lines business unit targets larger commercial customers. Our Personal segment distributes only through independent agencies, while Liberty Mutual’s personal lines business unit utilizes entirely different distribution channels. Liberty Mutual does not participate in the surety segment of the United States property and casualty insurance market. Finally, we do not conduct business outside the United States, while Liberty Mutual distributes its products globally.

Risk Factors

There are a number of risks that you should understand before making an investment decision regarding this offering. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. These risks include, but are not limited to:

Risks relating to our business, such as:


	•	claims arising out of unpredictable catastrophic events, including man-made disasters such as acts of terrorism;

	•	our estimates regarding liabilities for unpaid claims and claim adjustment expenses, including our liabilities for asbestos and environmental exposures, which we refer to in this prospectus as “A&E,” and for other run-off liabilities may prove to be materially deficient;

	•	our potential inability to mitigate risk through reinsurance arrangements;

	•	claims arising out of our Surety segment expose us to potentially high severity losses;

	•	our potential inability to maintain a strong network of independent agencies;

	•	the potential for material losses in our investment portfolio;

	•	the potential for ratings downgrades; and

	•	constraints related to our status as a holding company.

Risks relating to our relationship to Liberty Mutual, such as:


	•	our reliance on Liberty Mutual for all employees and executives until January 1, 2011 and for critical services thereafter;


	•	our reliance on Liberty Mutual for the management of our investment portfolio;

	•	differences in the voting power and rights of our Class A and Class B common stock, including the right of Liberty Mutual, as the holder of our Class B common stock, to elect 80% of the members of our board of directors;

	•	Liberty Mutual’s control of us and the relationship of Liberty Mutual with some of our directors and officers may cause conflicts of interest; and

	•	the possibility that Liberty Mutual may in the future compete directly with us and is not restricted from soliciting our employees and management for employment with it.

Corporate Information

Liberty Mutual Agency Corporation is incorporated under the laws of Delaware. We maintain our principal executive office at 175 Berkeley Street, Boston, Massachusetts 02116. Our telephone number is (617) 357-9500.

The Offering


Class A common stock offered by us		shares

Common stock to be outstanding after this offering		shares of Class A common stock

		shares of Class B common stock

Common stock to be beneficially owned by Liberty Mutual after this offering		No shares of Class A common stock

		shares of Class B common stock

Over-allotment option		We have granted the underwriters a 30-day option to purchase up to an additional shares of our Class A common stock to cover over-allotments.

Dividend policy		We intend to pay quarterly cash dividends on all classes of our common stock at an initial rate of $ per share of common stock, commencing in the first quarter of 2011, subject to financial results, declaration by our board of directors and other factors. See “Dividend Policy.”

Use of proceeds		We intend to use the net proceeds of this offering to repay a portion of indebtedness that we owe or will owe to Liberty Mutual. See “Use of Proceeds.”

Voting rights

Class A common stock		One vote per share

Class B common stock		Ten votes per share

Proposed New York Stock Exchange trading symbol		We intend to apply to have our Class A common stock listed on the New York Stock Exchange under the symbol “LMA.”

After completion of this offering, Liberty Mutual will beneficially own all of our outstanding Class B common stock and no shares of our Class A common stock, representing % of the combined voting power of our outstanding common stock and % of our total equity ownership.

Unless otherwise indicated, all references to the number and percentages of shares of common stock outstanding following this offering:


	•	assume we have effected a recapitalization, whereby the then outstanding shares of our common stock, all of which were owned by Liberty Mutual, will be exchanged for shares of Class B common stock and we will create a new class of Class A common stock;

	•	assume the underwriters’ over-allotment option will not be exercised; and

	•	exclude: (i) shares of our Class A common stock that will be reserved for issuance under our benefit plans, and (ii) shares of Class A common stock underlying equity awards to be granted to certain of our officers in connection with this offering.

Summary Consolidated Financial Data

The following tables set forth our summary historical consolidated financial data as of the dates and for the periods indicated. The summary historical consolidated financial data presented below is derived from our audited historical consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These historical results are not necessarily indicative of results in any future period.

Our results of operations for the years ended December 31, 2009, 2008 and 2007 are not directly comparable. We acquired Safeco on September 22, 2008 and Ohio Casualty on August 24, 2007. Each of these acquisitions significantly increased the size of our existing business and expanded the scope of our operations. The financial results of each of these acquired businesses is only included in our consolidated results from and after the respective dates of acquisition. Non-recurring items related to these acquisitions also affect the comparability of our financial results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Factors Affecting Comparability of Financial Information.”

The following tables also include summary pro forma financial data, which give pro forma effect to this offering and the Transactions for which we have made pro forma adjustments as described under “Pro Forma Consolidated Financial Statements.” The pro forma statement of operations data was prepared as if the Transactions and this offering had occurred on January 1, 2009 and the pro forma balance sheet data was prepared as if the Transactions and this offering had occurred on December 31, 2009. The pro forma financial data has been derived from our historical consolidated financial statements and include all adjustments that, in our opinion, are necessary to present fairly the pro forma consolidated financial statements. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable under the circumstances. The pro forma financial data is included for informational purposes only and does not purport to represent what our results of operations or financial condition would have been had the offering and the Transactions actually occurred on the dates indicated, nor does it purport to project the results of our operations or financial condition for any future period or as of any future date.

You should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial Data,” “Pro Forma Consolidated Financial Statements” and our historical consolidated financial statements and related notes included elsewhere in this prospectus, as well as the historical financial statements of Safeco and Ohio Casualty that are incorporated by reference in this prospectus.


										Pro Forma
	Historical									Year Ended
	Year Ended December 31,									December 31,
	2009			2008			2007			2009
	(Dollars in millions, except share data)

Statement of Operations Data
Net written premiums	$	10,148		$	6,704		$	4,407		$

Net premiums earned		9,983			6,913			4,325
Net investment income		910			719			405
Fee and other revenues		97			50			33
Net realized investment losses		(53	)		(407	)		(5	)

Total revenues		10,937			7,275			4,758

Claims and claim adjustment expenses		6,157			4,326			2,601
General and administrative expenses		1,005			777			551
Goodwill impairment(1)		—			973			—
Amortization of deferred policy acquisition costs		2,392			1,664			1,056
Interest expense		4			21			6

Total claims and expenses		9,558			7,761			4,214

Income (loss) before income tax expense		1,379			(486	)		544
Income tax expense		377			78			167

Net income (loss)	$	1,002		$	(564	)	$	377		$

Share Data
Net income (loss) per common share:
Basic	$			$			$			$
Diluted	$			$			$			$
Weighted average common shares outstanding:
Basic
Diluted

Non-GAAP Financial Measure(2)
Pre-tax operating income	$	1,455		$	934		$	599		$
Reconciliation to net income (loss):
Net income (loss)		1,002			(564	)		377
Less: Net realized investment (losses)		(53	)		(407	)		(5	)
Add: Income tax expense		377			78			167
Add: Goodwill impairment(1)		—			973			—
Add: Integration and other acquisition related costs		23			40			50

Pre-tax operating income	$	1,455		$	934		$	599		$

Combined Ratio
Claims and claim adjustment expense ratio(3)		61.7	%		62.6	%		60.1	%
Underwriting expense ratio(4)		31.9	%		33.0	%		35.0	%

Combined ratio(5)		93.6	%		95.6	%		95.1	%

Segment Data
Net written premiums:
Commercial	$	4,590		$	3,975		$	3,039
Personal		4,689			2,122			948
Surety		707			479			312
Corporate and Other		162			128			108

Pre-tax operating income:
Commercial	$	521		$	613		$	500
Personal		429			86			71
Surety		252			156			96
Corporate and Other		253			79			(68	)

Segment combined ratios:
Commercial		97.9	%		94.1	%		92.8	%
Personal		94.8	%		101.1	%		97.1	%
Surety		72.3	%		74.7	%		75.7	%


	Historical						Pro Forma
	As of December 31,						As of December 31,
	2009		2008		2007		2009
	(Dollars in millions)

Balance Sheet Data
Cash and investments	$	22,504	$	20,062	$	11,313	$
Premium and other receivables, net		2,405		2,567		1,438
Goodwill		3,054		3,054		1,345
Other assets		4,423		5,250		2,543

Total assets		32,386		30,933		16,639
Unpaid claims and claim adjustment expenses		12,053		12,651		7,307
Long-term debt		59		82		216
Stockholders’ equity		12,197		10,301		5,465


(1)		Our goodwill asset at December 31, 2009 and 2008 was $3,054 million, largely consisting of purchase price in excess of net assets relating to the Ohio Casualty and Safeco acquisitions. These acquisitions resulted in significant cost synergies and other benefits throughout Liberty Mutual Group. Liberty Mutual Group performed an impairment analysis in the third quarter of 2009 using an income-based approach. Based on that analysis, the fair market value of Liberty Mutual Group’s Agency Markets business unit exceeded its carrying value and thus no impairment was necessary. However, because the legal entities that gave rise to this goodwill are part of our company, when we prepared our carve-out financial statements we were required under GAAP to record the full amount of the historical goodwill on our balance sheet and to test that goodwill for our financial statements at each of our reporting units (i.e., segments), only taking into account the synergies and benefits realized by each of our segments, without regard to synergies and benefits realized elsewhere in the Liberty Mutual Group. We conducted an impairment analysis on each of our segments on this required basis in the fourth quarter of 2008, and determined that the carrying value of the goodwill for our Personal segment exceeded its fair value, and recognized an impairment charge in our Personal segment of $973 million in 2008. However, the carrying value of goodwill recorded in the consolidated financial statements of Liberty Mutual Group was unaffected.

(2)		We consider pre-tax operating income to be a useful supplement to net income (loss), its most comparable GAAP measure, in evaluating our financial performance. We believe that the presentation of pre-tax operating income is valuable because it assists an investor in determining the degree to which our insurance-related revenues, composed primarily of net premiums earned, net investment income and fee and other revenues, have generated operating earnings after meeting our insurance-related obligations, composed primarily of claims and claim adjustment expenses and other operating costs.

(3)		Calculated by dividing claims and claim adjustment expenses by net premiums earned.

(4)		Calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues (which are charged to cover costs incurred as a result of premiums paid in installments) by net premiums earned.

		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses.

(5)		Calculated by adding the claims and claim adjustment expense ratio and the underwriting expense ratio.

RISK FACTORS

You should carefully consider each of the following risks and all of the other information set forth in this prospectus before deciding to invest in our common stock. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected. Accordingly, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.

Risks Relating to Our Business

Unpredictable catastrophic events could adversely affect our results of operations, financial condition or liquidity.

Our insurance operations expose us to claims arising out of catastrophes. Catastrophes can be caused by various natural events, including but not limited to hurricanes, windstorms, earthquakes, hail, severe winter weather, wildfires and volcanic eruptions. Catastrophes can also be man-made, such as terrorist acts (including those involving nuclear, biological, chemical or radiological events), riots, oil spills, utility outages, or consequences of war or political instability. The geographic distribution of our business subjects us to catastrophe exposures, including but not limited to hurricanes from Maine through Texas; tornadoes throughout the Central States and Southeast; earthquakes in California, the New Madrid region and the Pacific Northwest; and wildfires, particularly in California and the Southwest.

The incidence and severity of catastrophes are inherently unpredictable. Some scientists believe that in recent years, changing climate conditions have added to the unpredictability and frequency of natural disasters (including, but not limited to, hurricanes, tornadoes, hail, other storms and fires) in certain parts of the world and created additional uncertainty as to future trends and exposures. It is possible that the frequency and severity of natural and man-made catastrophic events could increase. The catastrophe modeling tools that we use to help manage certain of our catastrophe exposures are based on assumptions, judgments and data entry that are subject to error and may produce estimates that are materially different from actual results. Changing climate conditions could cause our catastrophe models to be even less predictive, thus limiting our ability to effectively manage those exposures. See “— We cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.”

The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event. Where we have geographic concentrations of policyholders, a single catastrophe or destructive weather trend affecting a region may significantly impact our financial condition and results of operations. States have from time to time passed legislation, and regulators have taken action, that has the effect of limiting the ability of insurers to manage catastrophe risk, such as legislation prohibiting insurers from reducing exposures or withdrawing from catastrophe-prone areas or mandating that insurers participate in residual market mechanisms. Participation in residual market mechanisms has resulted in, and may continue to result in, significant claims or assessments to insurers, including us, and, in certain states, those claims or assessments may not be commensurate with our catastrophe exposure in those states. If our competitors leave those states having residual market mechanisms, remaining insurers, including us, may be subject to significant increases in claims or assessments following a catastrophe. In addition, following catastrophes, there are sometimes legislative initiatives and court decisions which seek to expand insurance coverage for catastrophe claims beyond the original intent of the policies. Also, our ability to increase pricing to the extent necessary to offset rising costs of catastrophes, particularly in our Personal segment, requires approval of the regulatory authorities of certain states. Our ability or our willingness to manage our catastrophe exposure by raising prices, modifying underwriting terms or reducing exposure to certain geographies may be limited due to considerations of public policy, the evolving political environment and changes in the general economic climate. We also may choose for strategic purposes, such as improving our access to other underwriting opportunities, to write business in catastrophe-prone areas that we might not otherwise write.

There are also risks that affect the estimation of ultimate costs for catastrophes. For example, the estimation of reserves related to hurricanes can be affected by the inability to access portions of the affected

areas, the complexity of factors contributing to the losses, legal and regulatory uncertainties and the nature of the information available to establish the reserves. Complex factors include, but are not limited to: determining whether damage was caused by flooding versus wind; evaluating general liability and pollution exposures; estimating additional living expenses; estimating the impact of demand surge; infrastructure disruption; fraud; the effect of mold damage; business interruption costs; and reinsurance collectibility. The timing of a catastrophe’s occurrence, such as at or near the end of a reporting period, can also affect the information available to us in estimating reserves for that reporting period. The estimates related to catastrophes are adjusted as actual claims emerge and additional information becomes available.

Catastrophe losses could have a material adverse effect on our results of operations for any fiscal quarter or year and may materially harm our financial position, which in turn could adversely affect our financial strength and claims-paying ratings and could impair our ability to raise capital on acceptable terms or at all. Also, as a result of our exposure to catastrophe losses or following a catastrophe, rating agencies may further increase their capital requirements, which may require us to raise capital to maintain our ratings or adversely affect our ratings. A ratings downgrade could hurt our ability to compete effectively or attract new business. In addition, catastrophic events could cause us to exhaust our available reinsurance limits and could adversely affect the cost and availability of reinsurance. Such events can also affect the credit of our reinsurers. For a discussion of our catastrophe reinsurance coverage, see “Business — Reinsurance Protection and Catastrophe Management.” Catastrophic events could also adversely affect the credit of the issuers of securities, such as states or municipalities, in which we have invested, which could have a material adverse effect on our results of operations, financial position or liquidity.

In addition to catastrophe losses, the accumulation and development of losses from smaller weather-related events in any fiscal quarter or year could have a material adverse effect on our results of operations, financial condition or liquidity in those periods.

Because of the risks set forth above, catastrophes and the accumulation of losses from smaller weather-related events could have a material adverse effect on our results of operations, financial condition or liquidity.

Our claims and claim adjustment expense reserves may be inadequate to cover our ultimate liability for unpaid claims and claim adjustment expenses, and as a result any inadequacy could have a material adverse effect on our results of operations, financial condition or liquidity.

Our success depends in part on our ability to accurately assess the risks associated with the businesses and individuals that we insure. We are required to maintain adequate reserves to cover our estimated ultimate liabilities for unpaid claims and claim adjustment expenses, which we refer to in this prospectus as “loss reserves” or “unpaid claims and claim adjustment expenses.” Reserves for these liabilities are typically composed of (1) case reserves for claims reported and (2) reserves for losses that have occurred but for which claims have not yet been reported, referred to as incurred but not reported, which we refer to in this prospectus as “IBNR reserves.” Loss reserves do not represent an exact calculation of liability. Case reserves represent reserves established for reported claims. IBNR includes a reserve for unreported claims, future claims payments in excess of case reserves on recorded open claims, additional claims payments on closed claims, claims that have been reported but not recorded and the cost of claims that have been incurred but have not yet been reported to us to arrive at management’s best estimate. IBNR reserves represent management estimates, generally utilizing actuarial expertise and projection techniques, at a given accounting date. In arriving at management’s best estimate, management utilizes actuarial indications in conjunction with their knowledge and judgment about operational and environmental conditions. Consideration is given to any limitations in the actuarial methodologies and assumptions that may not be completely reflective of future loss emergence as well as to historical development on immature years, and the historical movement of unpaid claims and claim adjustment expense estimates as these years typically mature. Loss reserve estimates are refined periodically as experience develops and claims are reported and settled. Establishing an appropriate level of loss reserves is an inherently uncertain process. Because of this uncertainty, it is possible that our loss reserves at any given time could prove inadequate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Claims and Claim Adjustment Expenses Reserves” and “Management’s Discussion and Analysis of Financial Condition and Results of

Operations — Critical Accounting Estimates — Risk Factors Inherent in the Estimation of Unpaid Claims and Claim Expenses.”

We had established gross unpaid claims and claim adjustment expense reserves of $12,053 million, $12,651 million and $7,307 million as of December 31, 2009, 2008 and 2007, respectively. If in the future we determine that our loss reserves are insufficient to cover our actual unpaid claims and claim adjustment expenses, we would have to add to our loss reserves, which could have a material adverse effect on our results of operations, financial condition or liquidity.

We may not be able to successfully alleviate risk through reinsurance arrangements. Additionally, we may be unable to collect all amounts due from our reinsurers under our reinsurance arrangements.

We attempt to limit our risk of loss through reinsurance arrangements. The availability and cost of reinsurance protection is subject to market conditions, which are outside of our control. In addition, the coverage under our existing and future reinsurance contracts may be inadequate to cover our liabilities. As a result, we may not be able to successfully alleviate risk through these arrangements, which could have a material adverse effect on our results of operations, financial condition or liquidity. In particular, the hardening of the reinsurance market in past years has led to increased prices or less favorable terms during the renewal of some of our reinsurance programs.

We are not relieved of our obligation to our policyholders by purchasing reinsurance. Accordingly, we are subject to credit risk with respect to our reinsurance if a reinsurer is unable to pay amounts owed to us as a result of a deterioration in its financial condition or if it simply is unwilling to pay due to a dispute or other factors beyond our control. In the past, certain reinsurers have ceased writing business and entered into run-off. Some of our reinsurance claims may be disputed by the reinsurers, and we may ultimately receive partial or no payment. This is a particular risk in the case of claims that relate to insurance policies written many years ago, including those relating to A&E claims. The ability of reinsurers to transfer their risks to other, less creditworthy reinsurers may adversely affect our ability to collect amounts due to us.

Included in reinsurance recoverables are certain amounts related to structured settlements. Structured settlements comprise annuities purchased from various life insurance companies to settle certain personal physical injury claims, of which workers compensation claims constitute a significant portion. In cases where we did not receive a release from the claimant, the structured settlement is included in reinsurance recoverables as we retain the contingent liability to the claimant. If the life insurance company fails to make the required annuity payments, we would be required to make such payments.

Many reinsurance companies and life insurance companies have been negatively affected by deteriorating financial and economic conditions, including the unprecedented financial market disruption in 2008 and 2009. A number of these companies, including those with which we conduct business, have been downgraded or have been placed on negative outlook by various rating agencies.

Because of the risks set forth above, we may not be able to collect all amounts due to us from reinsurers, and reinsurance coverage may not be available to us in the future at commercially reasonable rates or at all. In addition, life insurance companies may fail to make required annuity payments. As a result, it could have a material adverse effect on our results of operations, financial condition or liquidity.

Our Surety segment exposes us to potentially high severity losses.

We provide surety products through our Surety segment. The majority of our surety obligations are performance based guarantees. This business exposes us to infrequent, but potentially high severity, losses. We have customers with bonded exposure in excess of $100 million. The deterioration of one or more of these large customers could have a material adverse effect on our results of operations, financial condition or liquidity. For a description of our surety reinsurance arrangements with Liberty Mutual, see “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Restated Surety Reinsurance Agreement.”

Disruptions to our relationships with our independent agencies could materially adversely affect us.

We market our insurance products through approximately 13,000 independent agencies. Independent agents may sell our competitors’ products and may stop selling our products altogether. The number of traditional independent agencies has decreased due to consolidation from mergers and acquisitions, and independent agencies have increasing leverage with insurers seeking their business. Many insurers offer products similar to ours. In choosing an insurance carrier, our agents may consider ease of doing business, reputation, price of product, customer service, claims handling and the insurer’s compensation structure. We may be unable to compete with insurers that adopt more aggressive pricing policies or more generous compensation structures, offer a broader array of products, or have extensive promotional and advertising campaigns. Loss of the business provided through independent agencies could have a material adverse effect on our future business volume and results of operations.

We rely on internet applications to receive submissions from our agents, and we may increasingly rely on internet applications. In some instances, our agents are required to access separate business platforms to execute the sale of our personal insurance or commercial insurance products. Should internet disruptions occur, or frustration with our business platforms or distribution initiatives develop among our independent agents, the resulting loss of business could have a material adverse effect on our results of operations, financial condition or liquidity.

The persistence of the recent financial crisis or recurrence of a similar crisis could have a material adverse effect on our results of operations, financial condition or liquidity.

Worldwide financial markets recently experienced unprecedented volatility and disruption including, among other things, dislocation in the mortgage and asset-backed securities markets, deleveraging and decreased liquidity generally, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions. These events resulted in extraordinary responses by governments worldwide, including the enactment of the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act in 2009 in the U.S. Certain of the risk factors discussed in this prospectus identify risks that result from, or are exacerbated by, a prolonged economic slowdown or financial disruption. These include risks related to our investment portfolio, financing sources, reinsurance arrangements, other credit exposures, our estimates of claims and claim adjustment expense reserves, emerging claim and coverage issues, the competitive environment, regulatory developments and the impact of rating agency actions. While financial markets have stabilized, there continues to be significant uncertainty regarding the timeline for economic recovery. As such, evolving market conditions may continue to adversely affect our results of operations, financial position or liquidity. In the event that a similar market disruption recurs, it could result in a prolonged economic downturn or recession and have a material adverse effect on our results of operations, financial position or liquidity, and our premiums may be adversely affected by negative exposure changes at renewal, lower payrolls or sales of our policyholders, mid-term cancellations and fewer policy endorsements.

Our investment portfolio may suffer reduced returns or material losses.

Investment returns are an important part of our overall profitability and investment values can materially impact stockholders’ equity.

Investment grade bonds and short-term investments constituted approximately 92.1% of the fair value of our investment portfolio as of December 31, 2009. Our investment portfolio may be adversely affected by changes in interest rates. See — “Interest rates may rise resulting in a decrease in the carrying value of our investments or a reduction in our liquidity”. If the market value of our fixed maturity portfolio decreases, we may realize losses if we deem the value of our fixed income portfolio to be other-than-temporarily-impaired. In 2008, we recorded net realized investment losses of $209 million as a result of impairment losses on fixed maturity and equity investments related to securities deemed to be other than temporarily impaired due to market conditions.

Our investment grade bond portfolio is invested, in substantial part, in obligations of states, municipalities, and political subdivisions (collectively referred to as the municipal bond portfolio). Notwithstanding the

relatively low historical rates of default on many of these obligations, the occurrence of a major economic downturn, widening credit spreads, budgetary deficits, or other events that adversely affect the issuers or guarantors of these securities could cause the value of our fixed maturity securities portfolio and our net income to decline and the default rate of our fixed maturity securities portfolio to increase.

Supplementing our broadly based portfolio of investment grade bonds, we invest in additional asset types with the objective of further enhancing the portfolio’s diversification and expected returns. These additional asset types include commercial mortgages and other real estate financing investments, non-investment grade bonds, and common and preferred stock.

During or following an economic downturn or period of financial market disruption, our investment portfolio could be subject to higher risk. The value of our investment portfolio is subject to the risk that certain investments may default or become impaired due to a deterioration in the financial condition of one or more issuers of the securities held in our portfolio. Such defaults and impairments could reduce our net investment income and result in realized investment losses. In 2008 and 2009, worldwide financial markets experienced significant disruptions and the United States and many other economies experienced a prolonged economic downturn, resulting in heightened credit risk, reduced valuation of investments and decreased economic activity. The financial market volatility and the resulting negative economic impact could continue and it is possible that it may be prolonged, which could adversely affect our current investment portfolio, make it difficult to determine the value of certain assets in our portfolio and/or make it difficult for us to purchase suitable investments that meet our risk and return criteria. These factors could cause us to realize less than expected returns on invested assets, sell investments for a loss or write off or write down investments, any of which could have a material adverse effect on our results of operations or financial condition.

With economic uncertainty, the credit quality and ratings of securities in our portfolio could be adversely affected. The National Association of Insurance Commissioners, which we refer to in this prospectus as the “NAIC,” could potentially apply a lower class code on a security than was originally assigned which could adversely affect statutory surplus because securities with NAIC class codes 3 through 6 are required to be carried at lower of cost or fair market value for statutory accounting purposes as compared to securities with NAIC class codes of 1 or 2 that are carried at amortized cost.

Because of the risks set forth above, the value of our investment portfolio could decrease, we could experience reduced net investment income, and we could incur realized investment losses, which could have a material adverse effect on our results of operations, financial condition or liquidity.

Interest rates may rise resulting in a decrease in the carrying value of our investments or a reduction in our liquidity.

Interest rates are currently at historically low levels. Changes in interest rates (inclusive of credit spreads) affect the carrying value of our investment grade bonds and returns on our investment grade bonds and short-term investments. A decline in interest rates reduces the returns available on new investments, thereby negatively impacting our net investment income. Conversely, rising interest rates reduce the market value of existing investments in investment grade bonds. During periods of declining market interest rates, we would be forced to reinvest the cash we receive as interest or return of principal on our investments in lower-yielding high-grade instruments or in lower-credit instruments to maintain comparable returns. Issuers of fixed income securities could also decide to prepay their obligations in order to borrow at lower market rates, which would increase the percentage of our portfolio that we would have to reinvest in lower-yielding investments of comparable credit quality or in lower quality investments offering similar yields. If interest rates increase, the market value of our fixed rate bond portfolio generally decreases. In the event we incur debt on which interest is tied to a floating interest rate, a rise in interest rates could increase our interest expense associated with such debt, resulting in a reduction to our liquidity.

The valuation of our investments include methodologies, estimations and assumptions which are subject to differing interpretations and could result in changes to investment valuations that may have a material adverse effect on our results of operations, financial condition or liquidity.

Fixed maturity, equity, and short-term investments, which are reported at fair value on the balance sheet, represented the majority of our total cash and invested assets as of December 31, 2009. As required under accounting rules, we have categorized these securities into a three-level hierarchy, based on the priority of the inputs to the respective valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1), the next priority to quoted prices in markets that are not active or inputs that are observable either directly or indirectly, including (i) quoted prices (a) for similar assets or liabilities other than quoted prices in Level 1 or (b) in markets that are not active or (ii) other inputs that can be derived principally from, or corroborated by, observable market data for substantially the full term of the assets or liabilities (Level 2) and the lowest priority to unobservable inputs supported by little or no market activity and that reflect the reporting entity’s own assumptions about the exit price, including assumptions that market participants would use in pricing the asset or liability (Level 3). An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. We generally use a combination of independent pricing services and broker quotes to price our investment securities. At December 31, 2009, approximately 3.7%, 94.8% and 1.5% of these securities represented Level 1, Level 2 and Level 3, respectively. However, prices provided by independent pricing services and independent broker quotes can vary widely even for the same security. To the extent that we are incorrect in our determination of fair value of our investment securities, or our determination that a decline in their value is other-than-temporary, we may realize losses that never actually materialize or may fail to recognize losses within the appropriate period. Rapidly changing and unprecedented credit and equity market conditions could increase the difficulty in valuing certain of our securities and materially impact the valuation of securities as reported within our financial statements and the period-to-period changes in value could vary significantly. Decreases in value may result in an increase in non-cash other-than-temporary-impairment charges, and may have a material adverse effect on our results of operations, financial condition or liquidity.

The determination of the amount of impairments taken on our investments has a degree of subjectivity and could have a material adverse effect on our results of operations, financial condition or liquidity.

The determination of the amount of impairments taken on our investments is based on our periodic evaluation and assessment of our investments and known and inherent risks associated with the various asset classes. Such evaluations and assessments are revised as conditions change and new information becomes available. Management updates its evaluations regularly and reflects changes in impairments as such evaluations are revised. There can be no assurance that our management has accurately assessed the level of impairments reflected in our financial statements. Furthermore, additional impairments may need to be taken in the future. Historical trends may not be indicative of future impairments.

We review fixed maturity, public equity securities, private equity securities and private equity co-investment securities for impairment on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including, but not limited to: (a) the extent of the decline in fair value below book value, (b) the duration of the decline, (c) significant adverse changes in the financial condition or near term prospects for the investment or issuer, (d) significant changes in the business climate or credit ratings of the issuer, (e) general market conditions and volatility, (f) industry factors, and (g) the past impairment of the security holding or the issuer. For fixed maturity securities that we do not intend to sell or for which it is more likely than not that we would not be required to sell before an anticipated recovery in value, we separate impairments into credit loss and non-credit loss components. The determination of the credit loss component of the impairment charge is based on management’s best estimate of the present value of the cash flows to be collected from the debt security compared to its amortized cost, and it is reported as part of net realized gains (losses). The non-credit component, the residual difference between the credit impairment component and the fair value, is recognized in other comprehensive income. The factors considered in making an evaluation for credit versus non-credit other-than-temporary impairment include the following: (a) failure of the issuer of the security to make scheduled interest or principal payments (including the payment structure of the debt security and the likelihood the issuer

will be able to make payments that increase in the future), (b) performance indicators of the underlying assets in the security (including default and delinquency rates), (c) vintage (generally the year that the mortgage or asset back security was originated), (d) geographic concentration, (e) industry analyst reports and sector credit ratings and (f) volatility of the security’s fair value. For non-fixed maturity investments and fixed maturity investments which we intend to sell or for which it is more likely than not that we will be required to sell before an anticipated recovery in value, the full amount (fair value less amortized cost) of the impairment is included in net realized investment gains (losses). Realized losses or impairments may have a material adverse effect on our results of operations, financial condition or liquidity.

Our business could be harmed because our potential exposure for A&E claims and related litigation is unique and very difficult to predict, and our ultimate liability may exceed our currently recorded loss reserves and amounts available under the Run-Off Indemnification Agreement.

We have exposure to A&E claims that emanate principally from general liability policies written prior to the mid-1980s. Asbestos claims relate primarily to injuries asserted by those who allegedly came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up cost obligations, particularly as mandated by federal and state environmental protection agencies. The process of establishing loss reserves for A&E claims is subject to greater uncertainty than the establishment of loss reserves for liabilities relating to other types of insurance claims. If we have not established adequate loss reserves to cover current and future A&E claims, it could have a material adverse effect on our results of operations, financial condition or liquidity.

We estimate our net A&E loss reserves based upon numerous factors, including the facts surrounding reported cases and exposures to claims, such as policy limits and deductibles, current law, past and projected claim activity and past settlement values for similar claims, reinsurance coverage as well as analysis of industry studies and events, such as recent settlements and asbestos-related bankruptcies. Several factors make it difficult to determine future A&E claims activity, including: (i) the lack of available and reliable historical claims data as an indicator of future loss development; (ii) the long waiting periods between exposure and manifestation of bodily injury or property damage; (iii) the difficulty in identifying the source of A&E contamination; (iv) the difficulty in properly allocating liability for asbestos or environmental damage, (v) the uncertainty as to the number and identity of insureds with potential exposure, (vi) the cost to resolve claims, and (vii) the collectability of reinsurance.

The uncertainties associated with establishing loss reserves for A&E claims and claim adjustment expenses are compounded by the differing, and at times inconsistent, court rulings on A&E coverage issues, including: (i) differing interpretations of various insurance policy provisions and whether A&E losses are, or were ever intended to be, covered; (ii) when the loss occurred and what policies provide coverage; (iii) whether there is an insured obligation to defend; (iv) whether a compensable loss or injury has occurred; (v) how policy limits are determined; (vi) how policy exclusions are applied and interpreted; (vii) the impact of entities seeking bankruptcy protection as a result of asbestos-related liabilities; (viii) whether clean-up costs are covered as insured property damage; and (ix) applicable coverage defenses or determinations, if any, including the determination as to whether or not an asbestos claim is a products or completed operation claim subject to an aggregate limit and the available coverage, if any, for that claim.

As a result of the significant uncertainty inherent in determining our A&E liabilities, the amount of reserves required to adequately fund our A&E claims cannot be accurately estimated using conventional reserving methodologies based upon historical data and trends and, as a result, the use of conventional reserving methodologies frequently has to be supplemented by subjective considerations, including management judgment. Thus, the ultimate amount of our A&E exposures may vary materially from the reserves currently recorded and could exceed the currently recorded reserves. This could have a material adverse effect on our results of operations, financial condition or liquidity. For more information about A&E claims, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Unpaid Claims and Claim Adjustment Expense Reserves — Corporate and Other — Run-Off Operations — Asbestos and Environmental Reserves.”

Because the level of uncertainty is high and in order to strengthen our ability and flexibility to advance our strategic goals following our initial public offering, we will enter into a Run-Off Indemnification

Agreement with Liberty Mutual. Under the Run-Off Indemnification Agreement, Liberty Mutual will indemnify us for any adverse development of our reserves for our run-off operations up to $500 million. However, given the high level of uncertainty in estimating our run-off operations, the ultimate liabilities may exceed this $500 million cap. Further, the indemnification provided under the Run-Off Indemnification Agreement is subject to Liberty Mutual’s ability to fulfill its obligations under the agreement. Any adverse development of our net A&E and other indemnified liabilities in excess of the $500 million cap, as well as any bankruptcy or insolvency of, or refusal or inability to make payments under the Run-Off Indemnification Agreement by, Liberty Mutual, could have a material adverse effect on our results of operations, financial condition or liquidity. The Run-Off Indemnification Agreement is described in more detail in “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Indemnification Agreement.” For additional information relating to how we estimate our reserves for unpaid claims and claim adjustment expenses for our run-off liabilities, including our A&E reserves, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates — Claims and Claim Adjustment Expense Reserves — Corporate and Other — Run-Off Operations.”

We may suffer losses from unfavorable outcomes from litigation and other legal proceedings, which may have a material adverse effect on our results of operations, financial condition or liquidity and the effects of emerging claim and coverage issues on our business are uncertain.

In the ordinary course of business, we are subject to litigation and other legal proceedings as part of the claims process, the outcomes of which are uncertain. We maintain reserves for these legal proceedings as part of our reserves for unpaid claims and claim adjustment expenses. We also maintain separate reserves for legal proceedings that are not related to the claims process. In the event of an unfavorable outcome in one or more legal matters, our ultimate liability may be in excess of amounts we have currently reserved for and such additional amounts may have a material adverse effect on our results of operations, financial condition or liquidity. For a description of our material legal proceedings, see “Business — Legal Proceedings.”

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. Examples of emerging claims and coverage issues include, but are not limited to:


	•	claims relating to alleged abuse by clergy;

	•	judicial expansion of policy coverage and the impact of new theories of liability;

	•	plaintiffs targeting property and casualty insurers, including us, in purported class action litigation relating to claims-handling and other practices;

	•	claims relating to construction defects, which often present complex coverage and damage valuation questions;

	•	the assertion of “public nuisance” theories of liability, pursuant to which plaintiffs seek to recover money spent to administer public health care programs or to abate hazards to public health and safety;

	•	claims relating to Chinese drywall, which may involve drywall manufacturers, distributors, installers, contractors, homeowners and others; and

	•	our use of medical bill review vendors.

In some instances, these emerging issues may not become apparent for some time after we have issued the affected insurance policies. As a result, the full extent of liability under our insurance policies may not be known for many years after the policies are issued.

In addition, the potential passage of new legislation designed to expand the right to sue, to remove limitations on recovery, to extend the statutes of limitations or otherwise to repeal or weaken tort reforms could have an adverse impact on our business. In particular, recent shifts in the political landscape could increase the likelihood of the passing of such legislation in a number of states.

The effects of these and other unforeseen emerging claim and coverage issues are extremely hard to predict and could harm our business and have a material adverse effect on our results of operations, financial condition or liquidity.

Industry investigations by governmental authorities may adversely affect our business.

In 2004, a number of affiliated entities engaged in the insurance business, including our company, received subpoenas and other requests from various state Attorneys General and other insurance, governmental and enforcement authorities requesting information regarding broker sales practices, contingent commissions and improper quotations. In 2006, as an affiliate of Liberty Mutual, we were named in a civil action filed by the Connecticut Attorney General — State of Connecticut v. Liberty Mutual Holding Company, Inc., et al., UWY-CV-06-402472-S. The Attorneys General for the States of Illinois and New York filed similar actions against several of our affiliates but we were not named in those actions. The Connecticut complaint contains allegations concerning insurance broker sales practices, contingent commissions and improper quotations. The complaint alleges claims for breach of the Connecticut antitrust act and unfair trade practices act. Two individuals employed by Liberty Mutual and working in completely separate and distinct business units appear to have violated policy by serving their own personal interests by providing Marsh Inc.’s Global Broking Excess Casualty unit with a small number of false quotes. Both are no longer employees of Liberty Mutual. We have never employed the individuals nor did they ever act on behalf of our company. We cooperated with the investigation into these matters and engaged in a dialogue to resolve the claims. We have concluded that Connecticut’s settlement demand was excessive and unreasonable. We continue to pursue dismissal of these cases. Discovery has not yet begun in any of the cases. We cannot predict the impact, if any, that these matters may have on our business, results of operations, financial condition or liquidity.

We are exposed to credit risk in certain of our business operations.

In addition to exposure to credit risk related to our investment portfolio, reinsurance recoverables and surety insurance operations discussed elsewhere in this prospectus, we are exposed to credit risk in several other areas of our business operations, including credit risk relating to policyholders and independent agencies.

Our surety operations involve guaranteeing to a third party that our customer will satisfy certain performance obligations (for example, a construction contract) or certain financial obligations and therefore expose us to credit risk. In accordance with industry practice, when customers purchase surety bonds from us through independent agencies, the premiums relating to those bonds are often paid to the agencies for payment to us. In most jurisdictions, the premiums will be deemed to have been paid to us whether or not they are actually received by us. Consequently, we assume a degree of credit risk associated with amounts due from independent agencies. Also, if our customer defaults, we may suffer losses and be unable to be reimbursed by our customer.

To a large degree, the credit risk we face is a function of the economy. Accordingly, we face a greater risk in an economic downturn. While we attempt to manage the risks discussed above through underwriting and investment guidelines, collateral requirements and other oversight mechanisms, our efforts may not be successful. For example, collateral obtained may subsequently have little or no value. As a result, our exposure to the above credit risks could have a material adverse effect on our results of operations, financial condition or liquidity.

Terrorist acts could have a material adverse effect on our business, results of operations, financial condition or liquidity, and our ability to reinsure or manage such risk is limited.

The Terrorism Risk Insurance Program, which we refer to in this prospectus as the “Program,” established under the Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk Insurance Extension Act of 2005 and the Terrorism Risk Insurance Program Reauthorization Act of 2007 (“Reauthorization Act”), collectively referred to in this prospectus as the “Terrorism Acts,” generally requires all commercial property and casualty insurers writing business in the U.S. to make terrorism coverage available to commercial policyholders and provides a Federal backstop for certified terrorist acts, which result in losses above

individual insurance company deductible amounts. The Terrorism Acts directly apply to our U.S. property and casualty insurance business. In 2010, on eligible lines of business, participating insurers will receive reimbursement from the Federal government for 85% of paid losses in excess of the insurer’s deductible, provided the aggregate industry losses exceed $100 million to a maximum industry loss of $100 billion. The deductible for any calendar year is equal to 20% of an insurer’s and its affiliates’ direct premiums earned for covered lines for the preceding calendar year. We estimate that the amount that we (together with the insurance subsidiaries of Liberty Mutual) will collectively have to pay in the context of a covered loss before the Federal backstop becomes available is $1.757 billion for 2010. If our insurance subsidiaries and controlled affiliates were not affiliates of Liberty Mutual, the amount we would have to pay in 2010 would be $792 million. Certain lines of business that we write, including commercial automobile, professional liability (excluding directors and officers), surety, burglary and theft, and farmowners multiple peril are exempted from coverage under the Terrorism Acts. In the case of a war declared by Congress, only workers compensation losses are covered by the Terrorism Acts. Under the Terrorism Acts, we must include the direct premiums earned of all of our insurance company affiliates, whether or not directly or indirectly owned or controlled by us, in calculating our deductible. This includes the insurance company subsidiaries of Liberty Mutual. Under the terms of the Intercompany Agreement, we and Liberty Mutual will agree that any recovery from the Federal government under the Program to any Liberty Mutual Group affiliated insurers will be allocated to each insurer in the proportion its insured losses (net of collectible reinsurance) bear to its and its affiliates’ aggregate insured losses (net of collectible reinsurance) under the Program. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement — Allocation of Coverage under the Terrorism Acts.” As of the effective date of the Reauthorization Act, December 26, 2007, the U.S. government may “certify,” and the Program will cover, losses caused by any individual, foreign or domestic. Damage outside the U.S. is not covered except in limited circumstances. The Program will remain in effect until December 31, 2014. There can be no assurance that it will be extended beyond that date. In the event that the Program is not extended beyond December 31, 2014 and in the absence of a private reinsurance market for terrorism reinsurance, we may be required to accept financial responsibility for losses that we would not otherwise insure unless state insurance departments allow for the non-renewal of business with significant terrorism risk exposure or the exclusion of coverage for terrorism risks under policy renewals. Because the Terrorism Acts are relatively new and their interpretation is untested, there is substantial uncertainty as to how they will be applied to specific circumstances. It is also possible that future legislative action could change the Terrorism Acts. Further, given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in our own reinsurance program, future losses from acts of terrorism, particularly “unconventional” acts of terrorism involving nuclear, biological, chemical or radiological events, could have a material adverse effect on our results of operations, financial condition or liquidity in future periods. See “Regulation — Terrorism.”

Independent of limitations on coverage under the Program, the occurrence of one or more terrorist attacks in the geographic areas we serve could result in substantially higher claims under our insurance policies than we have anticipated. Private sector catastrophe reinsurance is extremely limited and generally unavailable for terrorism losses caused by attacks with nuclear, biological, chemical or radiological weapons. Accordingly, the effects of a terrorist attack in the geographic areas we serve may result in claims and related losses for which we do not have adequate reinsurance. This would likely cause us to increase our loss reserves. Further, the continued threat of terrorism and the occurrence of terrorist attacks, as well as heightened security measures and military action in response to these threats and attacks, may cause significant volatility in global financial markets, disruptions to commerce and reduced economic activity. These consequences could have an adverse effect on the value of the assets in our investment portfolio. The continued threat of terrorism also could result in increased reinsurance prices and potentially cause us to retain more risk than we otherwise would retain if we were able to obtain reinsurance at lower prices. Terrorist attacks also could disrupt our operation centers and business capabilities generally. As a result, it is possible that any, or a combination of all, of these factors may have a material adverse effect on our results of operations, financial condition or liquidity.

The property and casualty insurance industry is highly competitive and we may not be able to compete effectively in the future.

The property and casualty insurance industry is highly competitive and has, from time to time, experienced severe price competition. We compete with numerous regional insurance companies, including Acuity, Auto-Owners Insurance Group, Cincinnati Financial Corporation, Erie Insurance Group, Hanover Insurance Group, Harleysville Group, Selective Insurance Group, Unitrin, Inc. and W.R. Berkley Corporation, as well as national insurance companies, including The Chubb Corporation, CNA Financial Corporation, Hartford Financial Services Group, Inc., The Travelers Companies, Inc. and Zurich Financial Services Group. Some of these competitors may have greater financial, marketing or management resources than we do and have established long-term and continuing business relationships throughout the insurance industry, which can be a significant competitive advantage for them. In addition, several property and casualty insurers writing commercial lines of business now offer products for alternative forms of risk protection, including large deductible programs and various forms of self-insurance that utilize captive insurance companies and risk retention groups. Continued growth in alternative forms of risk protection could reduce our premium volume. Following the terrorist attack on September 11, 2001, a number of new insurers and reinsurers were formed to compete in our industry, and a number of existing market participants have raised new capital which may enhance their ability to compete.

A number of our competitors may offer products at prices and on terms that are not consistent with our economic standards in an effort to maintain their business or write new business. In particular, the competitive environment has adversely impacted commercial lines rates and retention over the past few years, which have reduced our underwriting margins. If rates and retention in commercial lines continue to decline, it could have a material adverse effect on our results of operations, financial condition or liquidity. Our competitive position is based not only on our ability to profitably price our business, but also on product features and quality, scale, customer service, financial strength, claims-paying ratings, credit ratings, e-business capabilities, name recognition, and agent compensation. We may have difficulty in continuing to compete successfully on any of these bases in the future.

In addition, in our Personal segment, the agencies upon whom we rely compete with direct writers of insurance, who are often able to offer substantial discounts in pricing as compared to our insurance products. If our agents experience increased competition from direct writers of insurance, we in turn could be adversely affected if they are unable to maintain a competitive position in their respective markets. If we are unable to maintain our competitive position, our results of operations, financial condition or liquidity may be adversely affected.

Our underwriting results are dependent on our ability to match rate to risk. If our pricing models fail to price risks accurately, our profitability may be adversely affected.

The profitability of our property and casualty business substantially depends on the extent to which our actual claims experience is consistent with the assumptions we use in pricing our policies. We use automated underwriting tools for the preponderance of our property and casualty products, as well as tiered pricing structures to match our premium rates to the risks we insure. As we expand our appetite into different markets and products, we will write more policies in markets and geographical areas where we have less data specific to these new markets, and accordingly may be more susceptible to error in our models or claims adjustment. If we fail to appropriately price the risks we insure, change our pricing model to reflect our current experience, or our claims experience is more frequent or severe than our underlying risk assumptions, our profit margins may be negatively affected. To the extent we have overpriced risks, new-business growth and retention of our existing business may be adversely affected.

Our businesses are heavily regulated and changes in regulation may reduce our profitability and limit our growth.

We are extensively regulated and supervised in the jurisdictions in which we conduct business. This regulatory system is generally designed to protect the interests of policyholders, and not necessarily the interests of insurers, their stockholders and other investors. This system addresses, among other things:


	•	licensing companies and agents to transact business, and authorizing lines of business;

	•	calculating the value of assets to determine compliance with statutory requirements;

	•	mandating certain insurance benefits;

	•	regulating certain premium rates;

	•	reviewing and approving policy forms;

	•	regulating unfair trade and claims practices, including through the imposition of restrictions on marketing and sales practices, distribution arrangements and payment of inducements;

	•	establishing statutory capital and surplus requirements;

	•	approving changes in control of insurance companies;

	•	restricting the payment of dividends and other transactions between affiliates;

	•	establishing assessments and surcharges for guaranty funds, second-injury funds and other mandatory pooling arrangements;

	•	requiring insurers to dividend to policyholders any excess profits;

	•	regulating the types, amounts and valuation of investments; and

	•	regulating a variety of other financial and non-financial components of an insurer’s business.

In recent years, the state insurance regulatory framework has come under increased federal scrutiny, and some state legislatures have considered or enacted laws that may alter or increase state authority to regulate insurance companies and insurance holding companies. Further, the NAIC and state insurance regulators continually reexamine existing laws and regulations, specifically focusing on modifications to holding company regulations, interpretations of existing laws and the development of new laws and regulations. Currently, the U.S. federal government does not directly regulate the business of insurance. However, federal legislation and administrative policies in several areas can significantly and adversely affect insurance companies. These areas include financial services regulation, securities regulation, privacy, tort reform legislation and taxation. In view of recent events involving certain financial institutions and the financial markets, it is possible that the U.S. federal government will heighten its oversight of insurers. Congress and some federal agencies continue to investigate the current condition of insurance regulation in the United States to determine whether to impose federal regulation or to allow an optional federal charter, similar to the option available to most banks. In addition to an optional federal insurance charter, the President has proposed and the Congress is considering legislation that could affect the regulation of financial institutions, including insurance companies, and financial activities that represent a systemic risk to financial stability or the U.S. economy. The legislation would establish a federal systemic risk regulator to identify large, interconnected financial institutions that would be subject to heightened prudential standards. The proposed legislative changes could affect the capital, liquidity and leverage ratios of a company so designated. The legislation may also require certain financial institutions, including certain large insurance companies, to make payments to the federal government to help capitalize federal funds that would be established to reduce the potential liability of U.S. taxpayers during times of extreme financial stress or economic instability in the United States. Additionally, the legislation would establish a federal insurance office within the U.S. Treasury Department. The director of the office would be empowered to recommend to the federal systemic risk regulator that an insurance company be subject to heightened prudential standards. The legislation may also pre-empt state law in certain instances involving the regulation of reinsurance and other limited insurance matters. In the future,

additional federal regulation may be enacted which could affect the way we conduct our business and could result in higher compliance costs. We cannot predict whether any proposed legislation or regulatory changes will be adopted, or what impact, if any, such proposals or, if enacted, such laws, could have on our results of operations, financial condition or liquidity.

Further, in a time of financial uncertainty or a prolonged economic downturn, regulators may choose to adopt more restrictive insurance laws and regulations. For example, insurance regulators may choose to restrict the ability of insurance subsidiaries to make payments to their parent companies or reject rate increases due to the economic environment.

Our ability to change our rates in response to competition or to increased costs depends, in part, on whether the applicable state insurance rate regulation laws requires the prior approval of a rate increase by or notification to the applicable insurance regulators either before or after a rate increase is imposed. See “Regulation — Rate and Form Approvals.”

Compliance with applicable laws and regulations is time consuming and personnel-intensive, and changes in these laws and regulations may materially increase our direct and indirect compliance and other expenses of doing business, thus having a material adverse effect on our financial condition and results of operations. If there were to be changes to statutory or regulatory requirements, we may be unable to fully comply with or maintain all required insurance licenses and approvals. Regulatory authorities have relatively broad discretion to grant, renew and revoke licenses and approvals. If we do not have all requisite licenses and approvals, or do not comply with applicable statutory and regulatory requirements, the regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our insurance activities or monetarily penalize us, which could have a material adverse effect on our results of operations, financial condition or liquidity. We cannot predict with certainty the effect any proposed or future legislation or regulatory initiatives may have on the conduct of our business. See “Regulation.”

Insurance laws or regulations that are adopted or amended, in addition to changes in federal statutes, including the Gramm-Leach-Bliley Act and the McCarran-Ferguson Act, financial services regulations and federal taxation, may be more restrictive than current laws or regulations and may result in lower revenues or higher costs of compliance and thus could have a material adverse effect on our results of operations and limit our growth.

The amount of statutory capital that we have and must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control.

Accounting standards and statutory capital and reserve requirements for our insurance subsidiaries are prescribed by the applicable insurance regulators and the NAIC. Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital (“RBC”) formulas for insurance companies. The RBC formula for property and casualty companies adjusts statutory surplus levels for certain underwriting, asset, credit and off-balance sheet risks.

In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors — the amount of statutory income or losses generated by our insurance subsidiaries (which itself is sensitive to equity market and credit market conditions), the amount of additional capital our insurance subsidiaries must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in our investment portfolio, the value of certain derivative instruments, changes in interest rates and foreign currency exchange rates, as well as changes to the NAIC RBC formulas. Most of these factors are outside of our control. Our financial strength ratings are significantly influenced by our insurance subsidiaries’ statutory surplus amounts and RBC ratios. Due to all of these factors, projecting statutory capital and the related RBC ratios is complex.

Changes to methods of marketing and underwriting in certain areas are subject to state-imposed restrictions.

Our ability to change our methods of marketing and underwriting in certain areas, such as in California and in the coastal areas of Florida and New York, are subject to state-imposed restrictions. As a result, it may be more difficult for us to significantly reduce our exposure in these areas.

Mandated market mechanisms may require us to underwrite policies with a higher risk of loss and assessments and other surcharges for guaranty funds and second-injury funds may reduce our profitability.

We are often required to participate directly or indirectly in mandatory shared market mechanisms as a condition of our licenses to do business in certain states. These markets, which are commonly referred to as “residual markets” or “involuntary markets,” generally consist of risks considered to be undesirable from a standard or routine underwriting perspective. In 2009, approximately 1% of our net written premiums related to our participation in mandatory shared market mechanisms. Underwriting performance related to assigned risk plans, a form of mandated market mechanism, is typically adverse and, as a result, we are required to underwrite some policies with a higher risk of loss than we would normally accept.

Each state dictates the level of insurance coverage that is mandatorily assigned to participating insurers within these markets. Typically, the amount of involuntary policies we are obligated to write in a given year is based on our historical market share of all voluntary policies written within that state for particular lines of business. Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the entity to pay an imposed or probable assessment has occurred (based on future premiums for property and casualty insurance lines of business). As of December 31, 2009 and 2008, included in other assets were $4 million and $2 million, respectively, of related assets for premium tax offsets or policy surcharges. The related asset is limited to the amount that is determined based on future premium collections or policy surcharges from policies in force. Current assessments are expected to be paid out over the next five years, while premium tax offsets are expected to be realized within one year.

In addition, virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. These guaranty funds are funded by assessments. The liability balance was $31 million as of both December 31, 2009 and 2008. The effect of these assessments or changes in them could reduce our profitability in any given period or limit our ability to grow our business. We cannot predict the impact, if any, that these matters may have on our financial condition, results of operations or liquidity or on the property and casualty insurance industry.

We may not maintain favorable financial strength ratings, which could adversely affect our ability to conduct business.

We may not maintain favorable financial strength ratings, which could adversely affect our ability to conduct business. Third party rating agencies assess and rate the financial strength, including claims-paying ability, of insurers and reinsurers. These ratings are based upon criteria established by the rating agencies and are subject to revision at any time at the sole discretion of the agencies. Some of the criteria relate to general economic conditions and other circumstances outside the rated company’s control. These financial strength ratings are used by policyholders and independent agents as an important means of assessing the suitability of insurers as business counterparties and have become an increasingly important factor in establishing the competitive position of insurance companies. These financial strength ratings do not refer to our ability to meet non-insurance obligations, and are not a recommendation to purchase or discontinue any policy issued by us or to buy, hold or sell our securities. Our insurance subsidiaries’ current financial strength ratings are “A” (“Excellent,” the third highest of 15 ratings)(negative outlook) from A.M. Best, “A2” (“Good”, the sixth highest of 21 ratings) (negative outlook) from Moody’s, and “A−” (“Strong,” the seventh highest of 21 ratings)(stable outlook) from S&P. Periodically, the rating agencies evaluate us to confirm that we continue to meet the criteria of the ratings previously assigned to us. A downgrade or withdrawal of our financial strength ratings could limit

or prevent our insurance subsidiaries from writing new insurance policies or renewing existing insurance policies, which would have a material adverse effect on our results of operations, financial condition or liquidity.

Our insurance subsidiaries and controlled affiliates are also parties to an intercompany reinsurance pooling agreement that allows them to obtain a uniform rating from A.M. Best. If one or a few of the insurance subsidiaries or controlled affiliates experience a deterioration in its financial condition, the uniform rating of the entire pool could suffer a downgrade.

We anticipate that our financial strength ratings will be coupled with the financial strength ratings of Liberty Mutual. See “— Risks Relating to our Relationship with Liberty Mutual — Our financial strength ratings will be dependent upon the financial strength ratings of Liberty Mutual and could be adversely affected in the event that Liberty Mutual’s financial condition deteriorates.”

In view of the difficulties experienced recently by many financial institutions, including our competitors in the insurance industry, it is possible that the external rating agencies: (1) will heighten the level of scrutiny that they apply to such institutions; (2) will increase the frequency and scope of their reviews; and (3) may adjust upward the capital and other requirements employed in their models for maintenance of certain rating levels.

We cannot predict what actions rating agencies may take, or what actions we may take in response to the actions of rating agencies, which could adversely affect our business. As with other companies in the financial services industry, our ratings could be downgraded at any time and without any notices by any rating agency which could have a material adverse effect on our results of operations, financial condition or liquidity.

We are a holding company with no direct operations, and our insurance subsidiaries’ ability to pay dividends to us is restricted by law.

As a holding company with no direct operations and whose only significant assets are the capital stock of our subsidiaries, we rely on dividends and other permitted payments from our subsidiaries to pay our expenses. Our subsidiaries may not be able to generate cash flow sufficient to pay a dividend or distribute funds to us. In addition, applicable state laws that regulate the payment of dividends by our insurance subsidiaries could prohibit such dividends or distributions. Under the insurance laws of the jurisdictions in which our insurance subsidiaries are domiciled or commercially domiciled, an insurer is restricted with respect to the timing or the amount of dividends it may pay without prior approval by regulatory authorities. Generally, our insurance subsidiaries have the ability to pay dividends during any 12-month period, without having to obtain the prior approval of regulatory authorities, in an amount equal to the greater of statutory net income for the preceding year or 10% of statutory surplus as of the end of the preceding year, subject to the availability of unassigned funds. For the first three months of 2010, our insurance subsidiaries declared and paid ordinary and extraordinary dividends to Liberty Mutual Agency Corporation totaling approximately $2.471 billion. As a result of these dividends, our insurance subsidiaries’ capacity to pay ordinary dividends to us for the remainder of 2010 was exhausted and the statutory surplus of our insurance subsidiaries as of March 31, 2010 was $5.091 billion. In connection with a dividend we intend to declare to Liberty Mutual prior to the completion of this offering, we intend to seek regulatory approval for our top-tier insurance subsidiaries to make distributions in an aggregate amount of up to $ million. We believe that our cash balances, cash flows from operations and cash flows from investments are adequate to meet expected cash requirements for the foreseeable future on both a holding company and operating subsidiary level. However, if our insurance subsidiaries cannot pay dividends in future periods, beginning in 2010, we may have difficulty paying dividends on our common stock and meeting our holding company expenses. For additional information relating to insurance regulations governing our operations, see “Regulation.”

Inflation, including repair costs and medical inflation, could have a material adverse effect on our results.

Historically, massive government spending aimed at spurring the economy has been followed by increased inflation. The effects of inflation could cause the severity of claims from catastrophes or other events to rise in the future. Our reserves for claims and claim adjustment expenses includes assumptions about future payments

for settlement of claims and claims handling expenses, such as repair costs, medical expenses and litigation costs. To the extent that actual inflation increases significantly more than such assumptions, we may be required to increase our loss reserves with a corresponding reduction in our net income in the period in which the deficiency is identified.

Cyclicality of the property and casualty insurance industry may cause fluctuations in our results of operations, financial condition or liquidity.

The property and casualty insurance business is cyclical in nature and has historically been characterized by periods of intense price competition, which could have an adverse effect on our results of operations and financial condition. Periods of intense price competition historically have alternated with periods when shortages of underwriting capacity have permitted attractive premium levels. Any significant decrease in the premium rates we can charge for property and casualty insurance would adversely affect our results.

Our Personal and Commercial segments are particularly affected by the cyclicality of loss cost trends. Factors that affect loss cost trends in automobile underwriting include inflation in the cost of automobile repairs, medical care, litigation of liability claims, improved automobile safety features, legislative changes and general economic conditions. Factors that affect loss costs trends in property underwriting include inflation in the cost of building materials and labor costs and demand caused by weather-related catastrophes. Factors that affect loss cost trends in workers compensation underwriting include inflation in the cost of medical care, litigation of liability claims and general economic conditions. Property and casualty insurers, including us, are often unable to increase premium rates until some time after the costs associated with the coverage have increased, primarily as a result of state insurance regulation and laws. Therefore, in a period of increasing loss costs, profit margins decline.

We expect to continue to experience the effects of this cyclicality which, during down periods, could have a material adverse effect on our results of operations, financial condition or liquidity.

Loss of or significant restriction on the use of credit scoring, education and occupation data in the pricing and underwriting of our products could reduce our future profitability.

We use credit scoring, education and occupation data as factors in pricing decisions where permitted under state law. Some consumer groups and regulators have questioned whether the use of credit scoring, education and occupation data unfairly discriminates against lower-income, minority and elderly consumers and are calling for the prohibition of or restriction on the use of such factors in underwriting and pricing. Enactment in a large number of states of laws or regulations that significantly curtail the use of credit scoring, education or occupation data in the underwriting process could reduce our future profitability.

We could be adversely affected if our controls to ensure compliance with guidelines, policies and legal and regulatory standards are not effective.

Our business is highly dependent on our ability to engage on a daily basis in a large number of insurance underwriting, claim processing and investment activities, many of which are highly complex. These activities often are subject to internal guidelines and policies, as well as legal and regulatory standards. A control system, no matter how well designed and operated, can provide only reasonable assurance that the control system’s objectives will be met. If our controls are not effective, it could lead to financial loss, unanticipated risk exposure (including underwriting, credit and investment risk) or damage to our reputation.

Potential changes in federal or state tax laws could adversely affect our business, results of operations, financial condition or liquidity.

Our investment portfolio has benefited from tax exemptions and certain other tax laws, including, but not limited to those governing dividends-received deductions and tax credits. Due in large part to the recent financial crisis that has affected the federal and many state governments, there may be a risk that federal and/or state tax legislation could be enacted that would result in higher taxes on insurance companies and/or their policyholders. Whether in connection with crisis management, deficit reduction, or various types of

fundamental tax reform, federal or state tax legislation could be enacted that would lessen or eliminate some or all of the tax advantages currently benefiting us and could adversely affect the value of our investment portfolio. Such changes could also result in lapses of policies currently held and/or our incurrence of materially higher corporate taxes.

Our participation in a securities lending program subjects us to potential liquidity and other risks.

We have engaged in securities lending activities from which we generate net investment income from the lending of certain of our fixed maturity and short-term investments to other institutions. Our securities lending program is managed by Liberty Mutual, which is responsible for borrower identification and screening, lending activities and collateral management. We generally obtain cash or securities collateral from borrowers of these securities in an amount equal to at least 102% of the fair value of the loaned securities plus accrued interest, which is obtained at the inception of a loan and maintained at a level greater than or equal to 102% for the duration of the loan. At December 31, 2009, we had no loans outstanding where we had accepted at the inception of the loan collateral less than 102% of the fair value of such loaned securities. This collateral is held by a third-party custodian, and we have the right to access the collateral only in the event that the institution borrowing our securities is in default under the lending agreement. The loaned securities remain our recorded asset. Our collateral reinvestment guidelines encourage a risk adverse investment allocation of cash received as collateral for loans. We accept cash as collateral for securities on loan and restrict the manner in which that cash is subsequently invested. We do not recognize the receipt of securities collateral held by the third-party custodian or the obligation to return the securities collateral; however, we do recognize the receipt of cash collateral and the corresponding obligation to return the cash collateral.

Returns of loaned securities by the third parties would require us to return any collateral associated with such loaned securities. In some cases, the maturity of the securities held as invested collateral (i.e., securities that we have purchased with cash received from the third parties) may exceed the term of the related securities on loan and the estimated fair value may fall below the amount of cash received as collateral and invested. If we are required to return significant amounts of cash collateral on short notice and we are forced to sell securities to meet the return obligation, we may have difficulty selling such collateral that is invested in securities in a timely manner, be forced to sell securities in a volatile or illiquid market for less than we otherwise would have been able to realize under normal market conditions, or both. In addition, under stressful capital market and economic conditions, such as those conditions we experienced during 2008 and 2009, liquidity broadly deteriorates, which may further restrict our ability to loan securities. If we decrease the amount of our securities lending activities over time, the amount of investment income generated by these activities will also likely decline.

Our business success and profitability depend, in part, on effective utilization of information technology systems and our implementation of technology innovations.

We depend on information technology systems for conducting business and processing insurance claims. Access to these technology systems, along with the development and support of them, are provided by Liberty Mutual pursuant to the Intercompany Agreement and a services agreement that we will enter into with Liberty Mutual in connection with this offering, which we refer to in this prospectus as the “Services Agreement.” Critical elements of our business operations are dependent on the continued maintenance and availability of these existing technology systems. Our continued long-term success requires that we remain innovative and select strategic technology initiatives, in a cost and resource efficient manner, to drive down overall expenses and improve the value to the business.

As a subsidiary of Liberty Mutual, we have access to a variety of technology system development projects, such as the current creation of a unified underwriting platform by Liberty Mutual. These types of strategic initiatives are long-term in nature and may be affected by a variety of unknown business and technology related factors. As a result, the potential associated chargeback expenses relating to these projects from Liberty Mutual may adversely impact our expense ratios if they exceed our current estimates. Further, the technology system development process may not deliver the benefits and efficiencies that we expected during the initial stages of the projects.

We rely on a variety of software license agreements with third party vendors that are held by Liberty Mutual. Following this offering, we expect to continue to rely on Liberty Mutual and its affiliates and their agreements with such third party vendors for the provision of necessary software and information technology services pursuant to the Intercompany Agreement and the Services Agreement.

In addition, we do not own any of our operating systems or underwriting platforms. Liberty Mutual licenses these systems to us pursuant to the terms of the Intercompany Agreement. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement.”

Liberty Mutual’s agreements with third party vendors pursuant to which we receive certain of our software and technology may not allow us to continue to receive the benefits of such agreements once we are no longer a wholly-owned subsidiary of Liberty Mutual. There is no assurance that we will be able to replace the third party software in a timely manner or on terms and conditions, including cost, as favorable to those we received through Liberty Mutual. Additionally, in the event Liberty Mutual ceases to own more than 50% of the combined voting power of our outstanding common stock, Liberty Mutual also may terminate our operating system and underwriting platform licenses. See “Certain Relationships and Related party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement.” Although we have the right to enter into a transition services agreement with Liberty Mutual for a period of at least 18, but not more than 36, months following termination of these licenses, we will be responsible for any license or other costs associated with continued access to software provided by third party vendors. At the termination of the transition services agreement, Liberty Mutual has agreed to license us the software for our core claims, underwriting, financial reporting and billing systems, including ECLPS. However, Liberty Mutual may terminate these licenses in the event we undergo a change in control or a material change in our business occurs. Even though we will have licenses for these systems and platforms, there is no assurance that these systems and platforms will be able to be maintained at the same levels or at the same costs as they were when we were receiving information technology services directly from Liberty Mutual.

Our ability to provide competitive services to agencies and new and existing policyholders in a cost effective manner and our ability to implement strategic initiatives could be adversely affected by either an increase in costs for these projects or our inability to obtain them from Liberty Mutual. We may not be able to meet our information technology requirements in a manner or on terms and conditions, including costs, as favorable as those we have previously received from Liberty Mutual, which could have a material adverse effect on our operations, financial condition, or liquidity.

If we experience difficulties with technology or data security, our ability to conduct our business could be negatively affected.

Liberty Mutual provides us with technology and data security services under the Services Agreement. While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. We use computer systems, including our automated underwriting platforms, to store, retrieve, evaluate and utilize customer and company data and information. Our information technology and telecommunications systems, in turn, interface with and rely upon third-party information networks and systems. Our business is highly dependent on the availability, speed and reliability of these networks and systems to perform necessary business functions, such as providing new-business quotes, processing new and renewal business, making changes to existing policies, filing and paying claims, and providing customer support.

Our information technology systems and the networks on which we rely may be vulnerable to physical or electronic intrusions, viruses or other attacks, programming errors and similar disruptions. A shut-down of, or inability to, access one or more of our facilities, a power outage or a disruption of one or more of these information technology, telecommunications or other systems or networks could significantly impair our ability to perform those functions on a timely basis, which could hurt our business and our relationships with our agents and policyholders. Computer viruses, hackers and other external hazards could expose our data systems to security breaches. These increased risks, and expanding regulatory requirements regarding data security,

could expose us to data loss, monetary and reputational damage and significant increases in compliance costs. As a result, our ability to conduct our business might be adversely affected.

In the event of a disaster, our business continuity plan may not be sufficient, which could have a material adverse effect on our results of operations, financial condition or liquidity.

Liberty Mutual provides us with business continuity services through the Services Agreement. Our infrastructure supports a combination of local and remote recovery solutions for business resumption in the event of a disaster. In the event of either the destruction of any of our office buildings or the inability to access any of those buildings, our business recovery plan provides for our employees to perform their work functions via a dedicated business recovery site located approximately 50 miles from our main office, by remote access from an employee’s home or by relocation of employees to our other offices. However, in the event of a full scale local or regional disaster, our business recovery plan may be inadequate, and our employees and sales representatives may be unable to carry out their work, which could have a material adverse effect on our results of operations, financial condition or liquidity.

Acquisitions and integration of acquired businesses may result in operating difficulties and other unintended consequences.

We will selectively investigate and pursue acquisition opportunities if we believe that such opportunity is consistent with our long-term objectives and that the potential rewards of the acquisition exceed the risks. The process of integrating an acquired company or business can be complex and costly, however, and may create unforeseen operating difficulties and expenditures. For example, acquisitions may present significant risks, including:


	•	the potential disruption of our ongoing business;

	•	the reduction in cash available for operations and other uses and the potential dilutive issuance of equity securities or the incurrence of debt;

	•	the ineffective integration of underwriting, claims handling and actuarial practices and systems;

	•	the increase in the inherent uncertainty of reserve estimates for a period of time, until stable trends re-establish themselves within the combined organization, as past trends (that were a function of past products, past claims handling procedures, past claims departments and past legal and other experts) may not repeat themselves;

	•	the diversion of management time and resources to acquisition integration challenges;

	•	the loss of key employees; and

	•	the cultural challenges associated with integrating employees.

There is no guarantee that any businesses acquired in the future will be successfully integrated, and the ineffective integration of our businesses and processes may result in substantial costs or delays and adversely affect our ability to compete. Also, the acquired business may not perform as projected, and any cost savings and other synergies anticipated from the acquisition may not materialize.

We are subject to a variety of modeling risks which could have a material adverse impact on our business results; in the absence of an industry standard for catastrophe modeling, our estimates may not be comparable to other insurance companies.

Property and casualty business is exposed to many risks. These risks are a function of the environments within which we operate. Certain exposures can be correlated with other exposures, and an event or a series of events can impact multiple areas of our company simultaneously and have a material effect on our results of operations, financial position and liquidity. These exposures require an entity-wide view of risk and an understanding of the potential impact on all areas of our company.

We rely on complex financial models, including computer models and modeling techniques, which have been developed internally or by third parties to provide information on items such as historical loss costs and pricing, trends in claims severity and frequency, the effects of catastrophe losses, investment performance and portfolio risk. For example, we estimate a probable maximum loss, which we refer to in this prospectus as “PML”, for various catastrophe exposures using models and other tools that require assumptions around several variables to model the event and its potential impact. Inadequacies in the models and modeling techniques that we use and/or faulty assumptions or granularity of data could lead to actual losses being materially higher than we anticipated based on our analysis of the modeled scenarios. As a result, we could experience unexpectedly high losses through concentrated risk in certain geographic areas, we could make ineffective or inefficient reinsurance purchases, and/or suffer unnecessary investment losses. While the models and modeling techniques that we use are relatively sophisticated, the value of the quantitative market risk information they generate is limited by the limitations of the modeling process. We believe that financial and computer modeling techniques alone do not provide a reliable method of monitoring and controlling market risk. Therefore, such modeling techniques do not substitute for the experience or judgment of our senior management.

There is no industry standard for the modeling of catastrophe risk. As a result, our estimates may not be comparable to those of other insurance companies.

We cannot predict the impact that changing climate conditions, including legal, regulatory and social responses thereto, may have on our business.

Various scientists, environmentalists, international organizations, regulators and other commentators believe that global climate change has added, and will continue to add, to the unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, tornadoes, freezes, other storms and fires) in certain parts of the world. In response to this belief, a number of legal and regulatory measures as well as social initiatives have been introduced in an effort to reduce greenhouse gas and other carbon emissions which some believe may be chief contributors to global climate change. We cannot predict the impact that changing climate conditions, if any, will have on our results of operations or our financial condition. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business.

We will incur increased costs as a result of being a public company.

As a public company, we will incur legal, accounting and other expenses that we did not incur as an indirect wholly-owned subsidiary of Liberty Mutual. The Sarbanes-Oxley Act of 2002, as amended, which we refer to in this prospectus as “Sarbanes-Oxley,” particularly Section 404, and related rules of the United States Securities and Exchange Commission, which we refer to in this prospectus as the “SEC,” and the New York Stock Exchange, which we refer to in this prospectus as the “NYSE,” regulate corporate governance practices of public companies. We expect that compliance with these public company requirements will increase our costs and make some activities more time-consuming than they have been in the past when we were wholly-owned by Liberty Mutual. While we have spent considerable time and resources assisting Liberty Mutual in its voluntary efforts to comply in substance with certain requirements similar to those imposed on publicly-traded companies by Sarbanes-Oxley, we will incur all expenses of complying with Sarbanes-Oxley and other federal securities laws ourselves going forward.

Risks Relating to Our Relationship with Liberty Mutual

We have no experience operating as a stand-alone company and immediately following this offering we will not have our own employees or executives until January 1, 2011 and will be solely dependent on the management, personnel and facilities of Liberty Mutual, and will thereafter remain significantly dependent on Liberty Mutual.

Prior to this offering, we were a wholly-owned subsidiary of Liberty Mutual Group. As a wholly-owned subsidiary, we had no employees or executives and relied solely on Liberty Mutual for all necessary services,

including for expertise in all areas of our business and operations. Immediately following this offering, all personnel whose employment is dedicated to our business and operations, including our executive officers, will remain the employees of Liberty Mutual, subject to a planned transfer of certain of those employees and officers to us by January 1, 2011 (the “Agency Corporation Dedicated Employees”). Until Liberty Mutual transfers the Agency Corporation Dedicated Employees to us or we directly hire employees to work for us, we will remain solely dependent upon Liberty Mutual to provide all necessary services for our businesses. Following the transfer, Liberty Mutual employees will continue to provide us with certain accounting and reporting, actuarial, administration, advertising and communications, employee relations and benefits and human resources, information technology, investment management, legal and litigation management, policy administration, payroll processing, purchasing, real estate management, regulatory compliance, reinsurance, administration of our run-off liabilities, risk management, tax, treasury, and other services. Liberty Mutual also provides us with our information technology programs. See “Certain Relationships and Related Party Transactions.” If we are not successful at operating our business under these arrangements, then it may have a material adverse impact on our results of operations, financial condition, or liquidity.

We currently have, and after this offering will continue to have, contractual arrangements which require us to obtain the necessary services above from Liberty Mutual rather than providing those services ourselves or contracting with a third party. We cannot assure you that, after the completion of this offering, these services and arrangements will be sustained at the same level as when we were wholly-owned by Liberty Mutual or that we will obtain the same benefits. Under the Intercompany Agreement, Liberty Mutual has agreed not to terminate these arrangements, without cause, prior to December 31, 2010. Otherwise, Liberty Mutual generally has the right to terminate certain of these arrangements on 90 days notice or at any time after Liberty Mutual no longer owns or controls us. After the termination or expiration of these arrangements, we may not be able to replace these services and arrangements in a timely manner, on terms and conditions, including cost, as favorable as those we have received from Liberty Mutual or that are economically acceptable. See “Certain Relationships and Related Party Transactions.”

In addition, we have benefited from being a subsidiary of a well-financed company and a part of an insurance holding company system led by Liberty Mutual. Following this offering, while we will continue to be a subsidiary of Liberty Mutual, we may gradually lose some benefits of being part of Liberty Mutual. While Liberty Mutual does not currently intend to sell down its position in our common stock following this offering, Liberty Mutual may elect to do so in the future. Accordingly, customers, agents, rating agencies and investors will assess our strengths and weaknesses independently, and this may have a negative effect upon our ability to attract new business and raise additional capital.

Service agreements and other arrangements with Liberty Mutual may not be on arm’s length terms.

Prior to and in connection with the initial public offering, we will have entered into certain contractual arrangements with Liberty Mutual. Because these agreements were made in the context of a parent-subsidiary relationship, we cannot confirm that such terms, such as the price we pay for such services, the standard of care owed by Liberty Mutual and any dispute resolution mechanisms, are as favorable to us as they might have been had we contracted with independent parties. See “Certain Relationships and Related Party Transactions.”

Liberty Mutual’s failure to retain or hire key personnel could reduce our revenues and operational effectiveness.

Prior to Liberty Mutual’s transfer of the Agency Corporation Dedicated Employees to us on January 1, 2011, our performance substantially depends on the expertise, experience and know-how of key management personnel, all of whom are currently employees of Liberty Mutual. Liberty Mutual does not have fixed-term employment agreements with any of these key employees, and the loss of one or more of these key employees could adversely affect our results of operations, financial condition, or liquidity. Our success therefore depends on the ability of Liberty Mutual to retain or hire key personnel. General difficulties in retaining or hiring key personnel could have a material adverse effect on our results of operations, financial condition, or liquidity.

We are highly dependent on Liberty Mutual for investment management services.

We are highly dependent on Liberty Mutual in connection with the management of our investment portfolio. Our investment portfolios are managed pursuant to investment management agreements and cash management agreements, all on a discretionary basis by Liberty Mutual. If we lose our investment relationship with Liberty Mutual, we may not be able to secure an investment manager or managers who will produce returns on our investments similar to those produced by Liberty Mutual in the past, or any positive returns at all. See “Certain Relationships and Related Party Transactions — Investment Management Agreements” and “Certain Relationships and Related Party Transactions — Cash Management Agreement.”

Following this offering, Liberty Mutual will also manage the investment portfolios of other subsidiaries of Liberty Mutual. Liberty Mutual is free, in its sole discretion, to make recommendations to others, or effect transactions on behalf of itself or others which may be the same as or different from those effected on our behalf. In addition, Liberty Mutual may, from time to time, for itself or its client cause, direct or recommend the purchase or sale of securities of the same or different class of the same issuer as securities that Liberty Mutual recommends to us. Liberty Mutual has no affirmative obligation to offer any investment to us, or to inform us of any investment opportunity, before offering such investment or opportunity to other funds or accounts that Liberty Mutual manages or advises or taking advantage of such investment opportunities for its own proprietary accounts. Liberty Mutual may recommend to other clients or for its own account, activities that would compete with or otherwise adversely affect us. Liberty Mutual is under no obligation to make consistent recommendations to, or effect similar transactions for, all or any of its clients. In the event that a determination is made that we and another client of Liberty Mutual should trade in the same investments on the same day, such investments will be allocated between us and other accounts in a manner that Liberty Mutual determines in accordance with its allocation procedures. Circumstances may occur in which an allocation could have adverse effects on us or the other client with respect to the price or size of securities positions obtainable or saleable. For a summary of our investment guidelines, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Investment Portfolio.” There can be no assurance that we will receive investment opportunities of the same quality as those we might receive from an independent investment manager. Because the kinds of investment we can make are already limited to some extent by state insurance regulations, our investment options may therefore be further limited.

Our ability to compete effectively with respect to certain surety products is dependent on our underwriting limitation.

Our Surety segment currently offers surety products through our own insurance subsidiaries as well as through Liberty Mutual. Surety business written by Liberty Mutual on our behalf is ceded to us through an assumed reinsurance agreement with Liberty Mutual, which will be amended and restated in connection with this offering. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Restated Surety Reinsurance Agreement.”

Our Surety segment’s ability to attract large contract business depends on our underwriting limitations. The federal Miller Act requires a contractor awarded a federal construction contract to supply a surety bond issued by a company holding a U.S. Treasury Department Certificate of Authority. Upon review of each company’s financial information, the Treasury Department determines the underwriting limitation for each company. The underwriting limitation represents 10% of the company’s paid-in capital and surplus less certain deductions. Pursuant to Treasury Department regulations, a company may not issue a single bond that exceeds its underwriting limitation absent co-insurance or reinsurance for the amount in excess of its underwriting limitation. A surety carrier that writes business through a company with a high underwriting limitation has a competitive advantage in the surety marketplace. A company with a high underwriting limitation can write large surety bonds on its own financial strength without the need for reinsurance or co-insurance. Agents and surety bond customers view a high underwriting limitation as a sign of financial strength and stability when assessing a potential surety relationship. As of December 31, 2009, Liberty Mutual had an underwriting limitation of over $663 million. Peerless Insurance Company is our subsidiary with the highest underwriting limitation, $157 million as of December 31, 2009.

Control of us by Liberty Mutual and the relationship to Liberty Mutual of some of our directors and officers may limit your ability to influence matters requiring stockholder approval.

Following the completion of this offering, Liberty Mutual will beneficially own 100% of our Class B common stock and none of our Class A common stock, representing % of the combined voting power of our outstanding common stock and % of our total equity ownership. The holders of our Class A common stock and our Class B common stock have identical rights, preferences and privileges except with respect to voting, the election and removal of directors, conversion of Class B common stock into Class A common stock and certain actions that require the consent of holders of Class B common stock described under “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement” and “Description of Capital Stock — Approval Rights of Holders of Class B Common Stock.” Holders of our Class B common stock will generally be entitled to ten votes per share of Class B common stock, and the holders of our Class A common stock will be entitled to one vote per share of Class A common stock. Until such a time as Liberty Mutual, or its successor, beneficially owns shares of our common stock representing less than a majority of the votes entitled to be cast by the holders of outstanding voting stock, Liberty Mutual will have the ability to take stockholder action without the vote of any other stockholder and without having to call a stockholder meeting and elect at least 80% of our directors, and investors in this offering will not be able to affect the outcome of any stockholder vote during this period. As a result, Liberty Mutual may, through our board of directors, influence all matters affecting us, including:


	•	any determination with respect to our business plans and policies;

	•	any determination with respect to mergers, acquisitions and other business combinations;

	•	our acquisition or disposition of assets;

	•	our financing activities;

	•	certain changes to our certificate of incorporation;

	•	changes to agreements providing for our transition to becoming a public company; and

	•	determinations with respect to enforcement of rights we may have against third parties.

Under the provisions of our certificate of incorporation and the Intercompany Agreement, the prior affirmative vote or written consent of the holders of a majority of the outstanding shares of the Class B common stock will be required in connection with various corporate actions by us until such time as Liberty Mutual ceases to beneficially own at least 20% of the shares of our outstanding common stock. The corporate actions requiring such prior consent include, subject to certain exceptions:


	•	the adoption or implementation of any stockholder rights plan;

	•	any consolidation or merger of us with any person, or entry into any other transaction or series of transactions that would otherwise result in a change of control;

	•	any acquisition by us or any sale, lease, exchange or other disposition, other than transactions between us and our subsidiaries, or any series of related acquisitions or dispositions, involving consideration in excess of $25 million;

	•	the issuance by us or one of our subsidiaries of any stock or stock equivalents;

	•	the incurrence, issuance, assumption, guarantee or otherwise becoming liable for any debt, other than up to $200 million of debt in connection with a revolving credit facility;

	•	our dissolution, liquidation or winding up;

	•	the election, designation, appointment or removal of any of our executive officers;

	•	the declaration of dividends on any class or series of our capital stock other than preferred stock;

	•	any change in our authorized capital stock or our creation of any class or series of capital stock;


	•	any change in the number of directors on our board of directors, or filling any newly created seats or vacancies on our board of directors; or

	•	the amendment of various provisions of our certificate of incorporation and bylaws.

In addition, for as long as Liberty Mutual beneficially owns at least 20% of our outstanding common stock, we will be required to receive Liberty Mutual’s prior consent for any action in regards to our enterprise risk profile that is inconsistent with the joint management of our enterprise risk with Liberty Mutual on a consolidated basis as directed by Liberty Mutual.

If Liberty Mutual does not provide any requisite consent allowing us to take such actions when requested, we will not be able to take such actions and, as a result, our results of operations, financial condition or liquidity may be harmed.

Liberty Mutual’s voting control and its additional rights described above may discourage transactions involving a change of control of us, including transactions in which you as a holder of our Class A common stock might otherwise receive a premium for your shares over the then-current market price. While Liberty Mutual currently has no intent to do so, Liberty Mutual is not prohibited from selling a controlling interest in us to a third party and may do so without your approval and without providing a purchase of your shares of Class A common stock. Accordingly, your shares of Class A common stock may be worth less than they would be if Liberty Mutual did not maintain voting control over us or have the additional rights described above.

Our ability to undertake new risks may be restricted as a result of Liberty Mutual’s approval rights over changes in our enterprise risk management profile.

We assess our risk taking with the goal to be within our risk appetite in order to maintain value for all of the areas of our company. This approach to company-wide risk management is commonly referred to as enterprise risk management, which we refer to in this prospectus as “ERM.” Our philosophy and framework goes beyond the quantification, aggregation and identification of risks (and the correlations) inherent in the business and operations of the enterprise. This philosophy also provides our management with a framework for evaluating the assumption of risk in the context of expected profit potential and capital and rating implications based on the most up-to-date market intelligence and within the confines of prescribed underwriting and risk tolerance guidelines. Our ERM incorporates operational risk, tail events, reputational and other risks.

Our certificate of incorporation and the Intercompany Agreement will provide that for as long as Liberty Mutual beneficially owns at least 20% of our outstanding common stock, we are required to jointly manage our enterprise risk with Liberty Mutual (including, but not limited to, exposure to underwriting risks related to natural and other catastrophes, credit risk in our investment portfolios, insurance operations and otherwise and other risks that are of a nature subject to the oversight of Liberty Mutual’s enterprise risk management committee) on a consolidated basis with and as determined by Liberty Mutual. Our certificate of incorporation further provides that, to the fullest extent permitted by law, we renounce any interest or expectancy in, and waive any claim with respect to, any business opportunity that may otherwise be available to us were enterprise risk management not so managed. As a result, our ability to undertake new risks outside the risk appetite of Liberty Mutual, including writing new lines of business and writing risks in certain geographic areas, may be restricted. See “— Risks Relating to Our Relationship with Liberty Mutual — Control of us by Liberty Mutual and the relationship to Liberty Mutual of some of our directors and officers may limit your ability to influence matters requiring stockholder approval,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Enterprise Risk Management,” “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering” and “Description of Capital Stock-Approval Rights of Holders of Class B Common Stock.”

Control of us by Liberty Mutual and the relationship to Liberty Mutual of some of our directors and officers may result in conflicts of interest.

Because Liberty Mutual’s interests may differ from ours, actions that Liberty Mutual, as our controlling stockholder, may take with respect to us may not be favorable to us. As a result, conflicts of interest may arise between us and Liberty Mutual in a number of areas relating to our past and ongoing relationships. It is expected that certain of our directors will also be directors or executive officers of Liberty Mutual or its other affiliates. These relationships could create, or appear to create, potential conflicts of interest when these individuals are faced with decisions that could have different implications for us and Liberty Mutual. These potential conflicts could arise, for example, over matters such as the desirability of an acquisition opportunity, employee retention or recruiting, or our dividend policy. To address corporate opportunities that are presented to our directors or officers that are also directors or officers of Liberty Mutual or its other affiliates and other potential conflicts of interest, we will adopt a corporate opportunity policy which will be incorporated into our certificate of incorporation. See “Description of Capital Stock — Certificate of Incorporation Provisions Relating to Corporate Opportunities and Interested Directors.” We cannot assure you that the provisions in our certificate of incorporation will adequately address potential conflicts of interest or that potential conflicts of interest will be resolved in our favor or that we will be able to take advantage of corporate opportunities presented to individuals who are officers or directors of both us and Liberty Mutual or its other affiliates. As a result, we may be precluded from pursuing certain growth initiatives.

Our certificate of incorporation will provide that Liberty Mutual and its directors will have limited liability to us for engaging in certain competitive activities.

Our certificate of incorporation will provide that, subject to any contractual provision to the contrary, Liberty Mutual will not have an obligation to refrain from:


	•	engaging in the same or similar business activities or lines of business as we do;

	•	doing business with any of our clients or customers; or

	•	employing or otherwise engaging any of our officers or employees.

Under our certificate of incorporation, neither Liberty Mutual nor any officer or director of Liberty Mutual, except as provided in our certificate of incorporation, will be liable to us or to our stockholders for breach of any fiduciary duty by reason of any of these activities. See “Description of Capital Stock — Certificate of Incorporation Provisions Relating to Corporate Opportunities and Interested Directors.”

We are prohibited from taking certain actions that could affect Liberty Mutual.

Our certificate of incorporation will provide that, without the consent of Liberty Mutual, we may not engage in any activity which would require Liberty Mutual to obtain any approval, consent or authorization of or under any law or with any regulatory agency or cause any of our directors who is also a director or officer of Liberty Mutual or its affiliates to be ineligible to serve, or prohibited from serving, as a director of Liberty Mutual or its other affiliates. As a result, if Liberty Mutual does not provide any requisite consent allowing us to take such actions when requested, we will not be able to take such actions and, as a result, our results of operations, financial condition or liquidity may be harmed. See “Description of Capital Stock — Provisions Relating to Regulatory Status.”

Our inability to resolve favorably any disputes that arise between us and Liberty Mutual with respect to our past and ongoing relationships may result in a significant reduction of our revenue.

Disputes may arise between Liberty Mutual and us in a number of areas relating to our ongoing relationships, including:


	•	labor, tax, employee benefit, indemnification and other matters arising from our separation from Liberty Mutual;

	•	services to be provided to us by Liberty Mutual;


	•	employee retention and recruiting;

	•	business combinations involving us;

	•	sales or dispositions by Liberty Mutual of all or any portion of its beneficial ownership interest in us;

	•	the nature, quality and pricing of services Liberty Mutual has agreed to provide us;

	•	investment opportunities that may be attractive to both Liberty Mutual and us;

	•	issues arising under the tax sharing agreement;

	•	the Run-Off Indemnification Agreement; and

	•	business opportunities that may be attractive to both Liberty Mutual and us.

We have agreed to a dispute resolution mechanism with Liberty Mutual in several of our agreements, whereby we will attempt in good faith to negotiate a resolution of disputes arising between Liberty Mutual and our company without resorting to arbitration. If these efforts are not successful, the dispute will be submitted to binding arbitration. See “Certain Relationships and Related Party Transactions.” However, disputes may still arise and may not be resolved favorably for us.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable than if we were dealing with an unaffiliated party.

The agreements we will enter into with Liberty Mutual may be amended upon agreement between the parties. While we are controlled by Liberty Mutual, we may not have the leverage to negotiate amendments to these agreements on terms as favorable to us as those we would negotiate with an unaffiliated third party.

Liberty Mutual may engage in the same type of business as us and thereby hamper our ability to successfully operate and expand our business.

Liberty Mutual is not exiting the property casualty insurance business as part of the initial public offering of our company. Because Liberty Mutual may currently or in the future engage in the same activities in which we engage, there is a risk that we may be in direct competition with Liberty Mutual. While Liberty Mutual has indicated to us that their current expectation is to manage their activities such that opportunities to acquire U.S. commercial lines property and casualty businesses focused on small and mid-size businesses, personal lines businesses and surety businesses distributed through independent agents will be pursued through our company, Liberty Mutual is not legally obligated to do so and could in the future manage their activities in a different way. Moreover, Liberty Mutual is not legally obligated to refrain from soliciting or hiring any of the Agency Corporation Dedicated Employees (including any of our executives) following the transfer of employees and executives to us on January 1, 2011.

Due to the resources of Liberty Mutual, including financial resources, name recognition and knowledge of our strengths, weaknesses and business practices, Liberty Mutual could have a significant competitive advantage over us should they decide to engage in the type of business we conduct, which may have a material adverse effect on our operations and financial condition. Liberty Mutual could additionally assert control over us in a way that could impede our growth or our ability to enter new markets or otherwise adversely affect our business.

Our historical and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.

The historical and pro forma financial information included in this prospectus does not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company

during the periods presented or those we will achieve in the future. This is primarily a result of the following factors:


	•	Our historical and pro forma financial results reflect allocations of corporate expenses from Liberty Mutual. Those allocations may be different from the comparable expenses we would have incurred had we operated as a stand-alone company;

	•	Significant changes in our cost structure, financing and business operations have occurred as a result of the Transactions. As a result, the costs reflected in our historical consolidated and pro forma financial statements may not represent our costs in future periods with respect to economies of scale; stand-alone costs for services previously provided by Liberty Mutual; the need for additional personnel to perform services previously provided by Liberty Mutual; and the legal, accounting, compliance and other costs associated with being a public company with listed equity; see “— We have no experience operating as a stand-alone company and immediately following this offering we will not have our own employees or executives until January 1, 2011 and will be solely dependent on the management, personnel and facilities of Liberty Mutual, and will thereafter remain significantly dependent on Liberty Mutual”; and

	•	Under some of our agreements with third parties, our separation from Liberty Mutual allows the other party to the agreement to terminate the agreement pursuant to a change of control provision, which may be triggered when Liberty Mutual’s ownership of our company decreases to less than 50%. If the other party to any of these agreements does not wish to continue the agreement, we may be required to terminate or modify our existing agreement or seek alternative arrangements, which could result in reduced sales, increased costs or other disruptions to our business.

We will be a “controlled company” within the meaning of the New York Stock Exchange rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

After the completion of this offering, Liberty Mutual will beneficially own more than 50% of the combined voting power of our outstanding common stock and we will be a “controlled company” under the NYSE corporate governance standards. As a controlled company, certain exemptions under the NYSE standards free us from the obligation to comply with certain NYSE corporate governance requirements, including the following requirements:


	•	that a majority of our board of directors consist of independent directors;

	•	that we have a nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

	•	that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

	•	for an annual performance evaluation of the nominating and governance committee and compensation committee.

As a result of our use of the “controlled company” exemptions, you will not have the same protection afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

Third parties may seek to hold us responsible for liabilities of Liberty Mutual.

Third parties may seek to hold us responsible for Liberty Mutual liabilities. Under our Intercompany Agreement with Liberty Mutual, Liberty Mutual will indemnify us for claims and losses relating to liabilities related to the business of Liberty Mutual and its affiliates and not related to our business. However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Liberty Mutual.

We are party to a tax sharing agreement with Liberty Mutual and will be party to the Intercompany Agreement, which further addresses tax issues. Under these agreements our tax liabilities generally are determined as if we were not part of any consolidated, combined or unitary tax group of Liberty Mutual. We nonetheless could be held liable for the tax liabilities of other members of these groups for any taxable period during which we filed consolidated, combined or unitary tax returns with such members.

We have historically been included in Liberty Mutual’s consolidated group for U.S. federal income tax purposes, as well as in certain consolidated, combined or unitary groups that include Liberty Mutual and/or certain of its subsidiaries for state and local income tax purposes. We are party to a tax sharing agreement with Liberty Mutual. After this offering, we will also be party to the Intercompany Agreement, which applies the principles of the tax sharing agreement for purposes of other combined and unitary returns. Pursuant to these agreements, we and Liberty Mutual generally make or will make payments to each other such that, with respect to tax returns for any taxable period in which we or any of our subsidiaries were or are included in Liberty Mutual’s consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Liberty Mutual and/or its subsidiaries, the amount of taxes to be paid by us is determined, subject to certain adjustments, as if we and each of our subsidiaries included in such consolidated, combined or unitary group had filed tax returns separate from Liberty Mutual. If we generate a loss that is used by Liberty Mutual, Liberty Mutual will compensate us for that loss when it could have been carried back by us to produce a refund or carried forward by us to reduce our taxable income.

We have been included in the Liberty Mutual consolidated group for U.S. federal income tax purposes for periods in which Liberty Mutual owned at least 80% of each of the total voting power and value of our outstanding stock and expect to be included in such consolidated group following this offering. Each member of a consolidated group during any part of a consolidated return year is severally liable for tax on the consolidated return of such year and for any subsequently determined deficiency thereon. Similarly, in some jurisdictions, each member of a consolidated, combined or unitary group for state, local or foreign income tax purposes is severally liable for the state, local or foreign income tax liability of each other member of the consolidated, combined or unitary group. Accordingly, for any period in which we are included in the Liberty Mutual consolidated group for U.S. federal income tax purposes or any other consolidated, combined or unitary group of Liberty Mutual and/or its subsidiaries, we could be liable in the event that any income tax liability was incurred, but not discharged, by any other member of any such group. Under the tax sharing agreement and the Intercompany Agreement, Liberty Mutual indemnifies us for any income tax liability of Liberty Mutual for which we are held liable. In addition, by virtue of its controlling ownership and the existing tax sharing agreement, Liberty Mutual controls substantially all of our tax decisions and has sole authority to respond to and conduct all tax proceedings, including tax audits relating to Liberty Mutual’s consolidated or combined income tax returns in which we are included.

We could be held liable for underfunded pension liabilities of Liberty Mutual.

We could also be held liable for underfunded liabilities under the Liberty Mutual pension plan. Liberty Mutual sponsors a tax-qualified defined benefit pension plan governed by the Employee Retirement Income Security Act of 1974, as amended, which we refer to in this prospectus as “ERISA.” This pension plan covers over 35,000 active and 38,000 terminated vested and retired employees of Liberty Mutual Group, and approximately 11,000 of these active participants will be employed by us, after 2010. Under ERISA, each member of a controlled group of corporations can be jointly and severally liable under certain circumstances for these pension liabilities as well as a termination premium of $1,250 per participant for up to a three-year period following an involuntary termination by the PBGC or a distress termination by Liberty Mutual of this pension plan. Under the Intercompany Agreement, Liberty Mutual will indemnify us for any of these pension liabilities for which we might be held liable. See “Certain Relationships and Related Party Agreements — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement.” However, if those liabilities are significant and we are ultimately held liable for them, we cannot assure that we will be able to recover the full amount of our losses from Liberty Mutual. As of the date of this prospectus, Liberty Mutual’s pension plan is in compliance with ERISA’s minimum funding standards and we are not aware of any current facts that would be reasonably likely to trigger any liability under ERISA to us with respect to underfunded amounts under Liberty Mutual’s pension plan. As of January 1, 2010, the fair market value of assets was $3.614 billion and the estimated funding target liability of this pension plan was

$3.656 billion. Note that the funding target is not intended to represent the liabilities of the Liberty Mutual pension plan in the event of a plan termination. As of the date of this prospectus, $200 million has been contributed this year to the Liberty Mutual pension plan with respect to the 2009 tax year as permitted under the Internal Revenue Code and this amount has been included in the fair market value shown above. We will separately establish a new defined benefit pension plan for future service provided by our employees effective as of January 1, 2011.

Our financial strength ratings will be dependent upon the financial strength ratings of Liberty Mutual and could be adversely affected in the event that Liberty Mutual’s financial condition deteriorates.

Given Liberty Mutual’s significant ownership and control, we anticipate and believe that our financial strength ratings will be coupled with the financial strength ratings of Liberty Mutual. As a result, any deterioration in the financial condition of Liberty Mutual, or any other event which the rating agencies deem to negatively impact the financial strength of Liberty Mutual, could also negatively impact our financial strength ratings. We do not know the circumstances under which the rating agencies would no longer couple our financial strength ratings with Liberty Mutual’s.

We may not use the Liberty Mutual name under certain circumstances.

We market our insurance products using a co-branding strategy under which each of our operating segment brands is identified as a member of the Liberty Mutual Group. We have the right to use certain marks containing the words “Liberty Mutual” and the Statue of Liberty design under a Trademark License Agreement with Liberty Mutual. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Trademark License Agreement.” Liberty Mutual may terminate the Trademark License Agreement in the event it no longer beneficially owns more than 50% of the combined voting power of our common stock. Our inability to use the Liberty Mutual trademarks could adversely affect our go-to-market strategy because the strength of the Liberty Mutual trademarks cannot easily be replicated.

Risks Relating to This Offering and Ownership of Our Class A Common Stock

An active trading market for our Class A common stock may not develop, and you may not be able to sell your Class A common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for our Class A common stock. An active trading market for shares of our Class A common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of Class A common stock at an attractive price, or at all. The price for our Class A common stock in this offering will be determined by negotiations with Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representatives of the underwriters, and it may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your Class A common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our ability to raise capital by selling our Class A common stock, and it may impair our ability to motivate our management and employees through equity incentive awards and our ability to raise capital or acquire other companies by using our Class A common stock as consideration.

Because there has not been any public market for our Class A common stock, the market price and trading volume of our Class A common stock may be volatile.

You should consider an investment in our Class A common stock to be risky and you should invest in our Class A common stock only if you can withstand a significant loss and wide fluctuations in the market value of your investment. The price of our Class A common stock after the closing of this offering may fluctuate widely, depending upon many factors, including:


	•	the perceived prospects for the insurance industry in general or for our company or Liberty Mutual;

	•	differences between our actual financial and operating results and those expected by investors;

	•	changes in the share price of public companies with which we compete;


	•	news about our industry and our competitors;

	•	changes in our relationship with Liberty Mutual;

	•	news about our new products or services, enhancements, significant contracts, acquisitions or strategic investments;

	•	changes in our capital structure, such as future issuances of securities or our incurrence of debt;

	•	changes in general economic or market conditions;

	•	broad market fluctuations;

	•	regulatory actions or changes in applicable laws, rules or regulations;

	•	unfavorable or lack of published research by securities or industry analysts; and

	•	departures of key personnel.

Our Class A common stock may trade at prices significantly below the initial public offering price. In addition, when the market price of a company’s common equity drops significantly, stockholders often institute securities class action lawsuits against the company. A lawsuit against us could cause us to incur substantial costs and could divert the time and attention of our management and other resources.

The price of our Class A common stock may decline due to the large number of outstanding shares eligible for future sale to the public.

Sales in the future of substantial amounts of our common stock that are currently beneficially owned by Liberty Mutual, or the possibility of these sales, may adversely affect the price of our common stock and may make it more difficult for us to raise capital through the issuance of equity securities. See “Certain Relationships and Related Party Transactions.”

After the completion of this offering, there will be shares of our common stock outstanding. Of these shares, Liberty Mutual will beneficially own all of our outstanding Class B common stock, representing % of the combined voting power of our outstanding common stock. Liberty Mutual may convert any shares of Class B common stock that they own into shares of Class A common stock at any time. Also, in connection with this offering, we have granted Liberty Mutual certain registration rights to sell their remaining common stock under the Securities Act of 1933, as amended (the “Securities Act”). Registration of these shares under the Securities Act would result in these shares, other than shares purchased by us or our affiliates, becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to their Offering — Registration Rights Agreement.” Shares of Class B common stock automatically convert into shares of Class A common stock upon a sale or transfer by Liberty Mutual. Liberty Mutual may elect to convert shares of Class B common stock that it beneficially owns into shares of Class A common stock and use such shares of Class A common stock as consideration to pay for future acquisitions by Liberty Mutual. The holding of such a large number of common stock by a single entity, and future sales of those shares (subject to the 180-day lockup that Liberty Mutual has agreed to in connection with this offering), could create an overhang effect that may depress the trading price of our Class A common stock.

You may be prevented from recognizing a change of control premium on the sale of Class A common stock.

Liberty Mutual currently beneficially owns all of our outstanding common stock. After completion of this offering, Liberty Mutual will beneficially own 100% of our outstanding Class B common stock, representing % of the combined voting power of our outstanding common stock. For as long as Liberty Mutual owns a majority of our voting securities, a takeover of our company will require Liberty Mutual’s approval. Because the Class B common stock has greater aggregate voting power than the Class A common stock, the accumulation of a significant block of Class B common stock after completion of this offering could result in a change of control without the affirmative vote of holders of Class A common stock.

In addition, provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger or other change of control that a stockholder may consider favorable.

We plan to issue a number of options to purchase Class A common stock to our directors, executive officers and employees that could dilute your interest in us.

Upon the closing of this offering, we will have shares of Class A common stock available for issuance to our directors, executive officers and employees in connection with grants of options to purchase Class A common stock under our employee benefits arrangements. Issuances of Class A common stock to our directors, executive officers and employees pursuant to the exercise of stock options under our employee benefits arrangements will dilute your interest in us.

The anti-takeover provisions of our certificate of incorporation and bylaws could delay or prevent an acquisition of us, which could decrease the trading price of our common stock.

Our certificate of incorporation and bylaws will contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our board of directors rather than to attempt a hostile takeover. These provisions will include:


	•	a board of directors that is divided into three classes with staggered terms;

	•	after Liberty Mutual ceases to beneficially own a majority of the voting power of our common stock, elimination of the right of our stockholders to act by written consent;

	•	rules regarding how our stockholders may present proposals or nominate directors for election at stockholder meetings;

	•	the prohibition of cumulative voting in the election of directors or any other matters;

	•	the right of our board of directors to issue preferred stock without stockholder approval; and

	•	limitations on the right of stockholders to remove directors.

We believe that these provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our board of directors and by providing our board of directors with more time to assess any acquisition proposal. These provisions are not intended to make us immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our board of directors determines is not in our best interests and that of our stockholders. See “Description of Capital Stock — Anti-Takeover Effects of Provisions of Our Certificate of Incorporation, Bylaws and Other Intercompany Agreements.”

Applicable insurance laws may make it difficult to effect a change of control of our company.

Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Generally, state statutes provide that “control” over a domestic insurer is presumed to exist where any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting stock of the domestic insurer, unless the applicable state insurance commissioner, upon application, determines otherwise. Prior to granting approval of an application to acquire control of a domestic insurer, a state insurance commissioner will typically consider such factors as the financial strength of the applicant, the integrity of the applicant’s board of directors and executive officers, the applicant’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Even persons who do not acquire beneficial ownership of more than 10% of the outstanding shares of our common stock may be deemed to have acquired such control, if the applicable state insurance commissioner, determines that such persons, directly or indirectly, exercise a controlling influence over our management or policies.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The information contained in this prospectus may contain “forward-looking statements.” All statements, other than statements of historical facts, included or referenced in this prospectus that address activities, events or developments which we expect or anticipate will or may occur in the future are forward-looking statements. The words “will,” “may,” “should,” “believe,” “intend,” “expect,” “anticipate,” “project,” “estimate,” “predict” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements include, among others, statements with respect to our:


	•	business strategy;

	•	reinsurance coverage;

	•	catastrophic losses;

	•	investment performance;

	•	financial and operating targets or plans;

	•	investment, economic and underwriting market conditions;

	•	incurred unpaid claims and claim adjustment expenses and the adequacy of our claims and claim adjustment expense reserves and related reinsurance;

	•	projections of revenues (including premium rates (either for new or renewal business) and premium volume), income (or loss), earnings (or loss) per share, combined ratio, dividends, market share or other financial forecasts;

	•	expansion and growth of our business and operations; and

	•	liquidity and future capital expenditures.

These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions and expected future developments, as well as other factors believed to be appropriate in the circumstances. However, whether actual results and developments will conform with its expectations and predictions is subject to a number of risks and uncertainties that could cause actual results to differ materially from expectations, including the risks discussed beginning on page 12 of this prospectus.

Consequently, all of the forward-looking statements made in this prospectus are qualified by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. We assume no obligation to update publicly any such forward-looking statements, whether as a result of new information, future events or otherwise.

USE OF PROCEEDS

Our net proceeds from this offering are estimated to be $ million, or $ million if the underwriters’ over-allotment option is exercised in full, assuming an initial public offering price of $ per share (the midpoint of the range set forth on the cover of this prospectus). We intend to use the net proceeds of this offering to repay a portion of two notes payable that we owe or will owe to Liberty Mutual. For a description of the interest rate and maturity of each of these notes and the amount of net proceeds to be used to repay each note, see Note (B) of notes to the “Pro Forma Consolidated Financial Statements.” See also “Certain Relationships and Related Party Transactions — The Transactions.”

DIVIDEND POLICY

Our board of directors currently intends to authorize the payment of a dividend of $ per Class A common share and Class B common share per quarter to our stockholders of record, beginning in the first quarter of 2011. Any determination to pay dividends will be at the discretion of our board of directors and will be dependent upon our subsidiaries’ payment of dividends and/or other statutorily permissible payments to us, our results of operations and cash flows, our financial position and capital requirements, general business conditions, any legal, tax, regulatory and contractual restrictions on the payment of dividends, including consent rights of Liberty Mutual as holder of our Class B common stock, and any other factors our board of directors deems relevant.

We are a holding company and have no direct operations. While our non-insurance subsidiaries are not subject to restrictions limiting their ability to declare and pay dividends other than those imposed by corporate law, our insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. Our ability to pay dividends depends primarily on the ability of our insurance subsidiaries to pay dividends to us.

During the years ended December 31, 2009, 2008 and 2007, we declared and paid dividends to Liberty Mutual of $84 million, $979 million and $0, respectively.

For the first three months of 2010, our insurance subsidiaries declared and paid ordinary and extraordinary dividends to Liberty Mutual Agency Corporation totaling approximately $2.471 billion. As a result of these dividends, our insurance subsidiaries’ capacity to pay ordinary dividends for the remainder of 2010 was exhausted and the statutory surplus of our insurance subsidiaries as of March 31, 2010 was $5.091 billion. In connection with a dividend we intend to declare to Liberty Mutual prior to the completion of this offering, we intend to seek regulatory approval for our top-tier insurance subsidiaries to make distributions in an aggregate amount of up to $ million.

For more information regarding restrictions on the payment of dividends by us and our insurance subsidiaries, see “Regulation,” “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement — Restrictive Covenants” and “Description of Capital Stock — Approval Rights of Holders of Class B Common Stock.”

CAPITALIZATION

The table below sets forth, as of December 31, 2009:


	•	our actual cash and short-term investments and capitalization; and

	•	our pro forma cash and short-term investments and capitalization after giving effect to this offering and the Transactions for which we have made pro forma adjustments as if they had occurred on December 31, 2009.

For more information about the Transactions, see “Pro Forma Consolidated Financial Statements.”

You should read the following information in conjunction with our historical consolidated financial statements and related notes and the information provided under the captions “Selected Historical Consolidated Financial Data,” “Pro Forma Consolidated Financial Statements,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes which are included elsewhere in this prospectus, as well as the historical financial statements of Safeco and Ohio Casualty that are filed as exhibits to the registration statement of which this prospectus forms a part and are incorporated by reference herein.


	As of December 31, 2009
	Actual		Pro Forma
	(Dollars in millions)

Cash and short-term investments	$	1,657	$
Debt (including current portion)
Notes payable	$		$
Other debt

Total long term debt		59
Stockholders’ equity
Common stock (par value $0.01; issued and outstanding shares of Class A common and shares of Class B common (after giving effect to the recapitalization))		—
Additional paid-in-capital		9,491
Retained earnings		2,218
Accumulated other comprehensive income (loss)		488

Total stockholders’ equity		12,197
Total capitalization	$	12,275	$

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The following tables set forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data presented below for the years ended December 31, 2009, 2008 and 2007 and as of December 31, 2009 and 2008 is derived from our historical financial statements included elsewhere in this prospectus, which have been prepared in accordance with GAAP, and have been audited by Ernst & Young LLP, an independent registered public accounting firm. The selected historical consolidated financial data presented below for the years ended December 31, 2006 and 2005 and as of December 31, 2007, 2006 and 2005 is derived from our unaudited historical consolidated financial statements not included in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period.

Our results of operations for the years ended December 31, 2009, 2008 and 2007 are not directly comparable. We acquired Safeco on September 22, 2008 and Ohio Casualty on August 24, 2007. Each of these acquisitions significantly increased the size of our existing business and expanded the scope of our operations. The financial results of each of these acquired businesses is only included in our consolidated results from and after the respective dates of acquisition. Non-recurring items related to these acquisitions and the Transactions also affect the comparability of our financial results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Factors Affecting Comparability of Financial Information.”

You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and related notes included elsewhere in this prospectus, as well as the historical financial statements of Safeco and Ohio Casualty that are incorporated by reference in this prospectus.


	Year Ended December 31,
	2009			2008			2007			2006			2005
	(Dollars in millions, except share data)

Statement of Operations Data
Net written premiums	$	10,148		$	6,704		$	4,407		$	3,748		$	3,530

Net premiums earned		9,983			6,913			4,325			3,636			3,474
Net investment income		910			719			405			308			272
Fee and other revenues		97			50			33			31			33
Net realized investment (losses) gains		(53	)		(407	)		(5	)		—			45

Total revenues		10,937			7,275			4,758			3,975			3,824

Claims and claim adjustment expenses		6,157			4,326			2,601			2,342			2,205
General and administrative expenses		1,005			777			551			401			413
Goodwill impairment(1)		—			973			—			—			—
Amortization of deferred policy acquisition costs		2,392			1,664			1,056			866			808
Interest expense		4			21			6			1			1

Total claims and expenses		9,558			7,761			4,214			3,610			3,427

Income (loss) before income tax expense		1,379			(486	)		544			365			397
Income tax expense		377			78			167			113			150

Net income (loss)	$	1,002		$	(564	)	$	377		$	252		$	247

Share Data
Net income (loss) per common share:
Basic	$			$			$			$			$
Diluted	$			$			$			$			$
Weighted average common shares outstanding:
Basic
Diluted
Non-GAAP Financial Measure(2)
Pre-tax operating income	$	1,455		$	934		$	599		$	365		$	352
Reconciliation to net income (loss):
Net income (loss)		1,002			(564	)		377			252			247
Less: Net realized investment (losses) gains		(53	)		(407	)		(5	)		—			45
Add: Income tax expense		377			78			167			113			150
Add: Goodwill impairment		—			973			—			—			—
Add: Integration and other acquisition related costs		23			40			50			—			—

Pre-tax operating income	$	1,455		$	934		$	599		$	365		$	352

Combined Ratio
Claims and claim adjustment expense ratio(3)		63.7	%		64.7	%		65.4	%		62.2	%		58.7	%
Underwriting expense ratio(4)		31.7			33.0			35.0			34.3			34.0

Subtotal		95.4			97.7			100.4			96.5			92.7
Catastrophes(5)		4.4			5.1			2.1			4.0			3.1
Net incurred losses attributable to prior years		(6.2	)		(7.2	)		(7.4	)		(1.8	)		1.7

Combined ratio(6)		93.6	%		95.6	%		95.1	%		98.7	%		97.5	%


	As of December 31,
	2009		2008		2007		2006		2005
	(Dollars in millions)

Balance Sheet Data
Cash and investments	$	22,504	$	20,062	$	11,313	$	6,694	$	6,140
Premium and other receivables, net		2,405		2,567		1,438		1,090		1,012
Goodwill		3,054		3,054		1,345		290		290
Other assets		4,423		5,250		2,543		1,570		1,557

Total assets		32,386		30,933		16,639		9,644		8,999

Unpaid claims and claim adjustment expenses		12,053		12,651		7,307		4,327		3,944
Unearned premiums		4,658		4,837		2,519		1,741		1,644
Long-term debt		59		82		216		10		28
Other liabilities		3,419		3,062		1,132		1,006		837

Total liabilities		20,189		20,632		11,174		7,084		6,453

Stockholders’ equity(7)	$	12,197	$	10,301	$	5,465	$	2,560	$	2,546


(1)		Our goodwill asset at December 31, 2009 and 2008 was $3,054 million, largely consisting of purchase price in excess of net assets relating to the Ohio Casualty and Safeco acquisitions. These acquisitions resulted in significant cost synergies and other benefits throughout Liberty Mutual Group. Liberty Mutual Group performed an impairment analysis in the third quarter of 2009 using an income-based approach. Based on that analysis, the fair market value of Liberty Mutual Group’s Agency Markets business unit exceeded its carrying value and thus no impairment was necessary. However, because the legal entities that gave rise to this goodwill are part of our company, when we prepared our carve-out financial statements we were required under GAAP to record the full amount of the historical goodwill on our balance sheet and to test that goodwill for our financial statements at each of our reporting units (i.e., segments), only taking into account the synergies and benefits realized by each of our segments, without regard to synergies and benefits realized elsewhere in the Liberty Mutual Group. We conducted an impairment analysis on each of our segments on this required basis in the fourth quarter of 2008, and determined that the carrying value of the goodwill for our Personal segment exceeded its fair value, and recognized an impairment charge in our Personal segment of $973 million in 2008. However the carrying value of goodwill recorded in the consolidated financial statements of Liberty Mutual Group was unaffected.

(2)		We consider pre-tax operating income to be a useful supplement to net income (loss), its most comparable GAAP measure, in evaluating our financial performance. We believe that the presentation of pre-tax operating income is valuable because it assists an investor in determining the degree to which our insurance-related revenues, composed primarily of net premiums earned, net investment income and fee and other revenues, have generated operating earnings after meeting our insurance-related obligations, composed primarily of claims and claim adjustment expenses and other operating costs.

(3)		Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses.

(4)		Calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses.

(5)		Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses.

(6)		Calculated by adding the claims and claim adjustment expense ratio, underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years’ ratio.

(7)		The cumulative effect of the change in the method of accounting that resulted in an increase in the opening balance of retained earnings as of January 1, 2007 in the consolidated statement of changes in stockholders’ equity has been recognized in 2005 for the purpose of presenting Selected Historical Consolidated Financial Data.

Pro Forma Consolidated Financial Statements

The following pro forma consolidated statements of operations for the three months ended March 31, 2010 and the year ended December 31, 2009 and the consolidated balance sheet as of March 31, 2010 have been derived by application of pro forma adjustments to our historical consolidated financial statements. The pro forma consolidated statements of operations give pro forma effect to this offering and the Transactions as if they had been completed as of January 1, 2009 and the pro forma consolidated balance sheet gives pro forma effect to this offering and the Transactions as if they had been completed as of March 31, 2010. The Transactions are described in more detail under “Summary — Transactions with Liberty Mutual” and “Certain Relationships and Related Party Transactions — The Transactions.” The pro forma consolidated financial data should also be read in conjunction with the information contained in “Selected Historical Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.

The principal changes to our historical consolidated financial statements resulting from the pro forma adjustments are as follows:


	•	*Debt.* Debt will increase by approximately $ on a pro forma basis due to the issuance of a purchase note payable to Liberty Mutual in connection with Liberty Mutual’s transfer of Ohio Casualty to us prior to consummation of this offering, net of repayments from the net proceeds of this offering of a portion of such note together with a portion of another note payable that we owe to Liberty Mutual;

	•	*Stockholders’ Equity.* Stockholders’ equity will decrease on a pro forma basis due to dividends of cash, invested assets and debt to Liberty Mutual, partially offset by an increase in stockholders’ equity from the issuance and sale of Class A common stock in this offering;

	•	*Investment Income.* Investment income will decrease on a pro forma basis due to payments and dividends of cash and invested assets to Liberty Mutual; and

	•	*Interest Expense.* Interest expense will increase on a pro forma basis due to higher average levels of outstanding debt following this offering.

The assumptions underlying the pro forma adjustments are described in the accompanying notes which should be read in conjunction with these pro forma consolidated financial statements.

The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable under the circumstances. The pro forma consolidated financial statements are included for informational purposes only and do not purport to represent what our results of operations or financial condition would have been had the offering and the Transactions actually occurred on the dates indicated, nor do they purport to project the results of our operations or financial condition for any future period or as of any future date.

Pro Forma Consolidated Statement of Operations

Three Months Ended March 31, 2010

Actual

Adjustments

Pro forma

(dollars in millions)

Net premiums earned

Net investment income

(A)

Fee and other revenues

Net realized investment (losses) gains

Total revenues

Claims and claim adjustment expenses

General and administrative expenses

Amortization of deferred policy acquisition costs

Interest expense

(B)

Total claims and expenses

Income (loss) before income tax expense

Income tax expense

(C)

Net income (loss)

See notes to pro forma consolidated financial statements

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2009


	Actual			Adjustments		Pro forma
	(dollars in millions)

Net premiums earned	$	9,983		$		$
Net investment income		910			(A)
Fee and other revenues		97
Net realized investment (losses) gains		(53	)

Total revenues		10,937
Claims and claim adjustment expenses		6,157
General and administrative expenses		1,005
Amortization of deferred policy acquisition costs		2,392
Interest expense		4			(B)

Total claims and expenses		9,558

Income (loss) before income tax expense		1,379
Income tax expense		377			(C)

Net income (loss)	$	1,002		$		$

See notes to pro forma consolidated financial statements

Pro Forma Consolidated Balance Sheet

As of March 31, 2010

Actual

Adjustments

Pro forma

(dollars in millions)

Cash and investments

(D)

Premium and other receivables, net

Goodwill

Other assets

Total assets

Unpaid claims and claim adjustment expenses

Unearned premiums

Long-term debt

(E)

Other liabilities

Total liabilities

Stockholders’ equity

(F)

Total liabilities and stockholders’ equity

See notes to the pro forma consolidated financial statements

Notes to the Pro Forma Consolidated Financial Statements

(A) Reflects the estimated loss of investment income earned during the respective periods associated with the following payments and dividends to Liberty Mutual which would have reduced the weighted average amount of cash and invested assets held during the respective periods:


	•	$ of cash and invested assets paid in March 2010 to settle a payable balance resulting from the termination of the reinsurance agreements between a subsidiary of ours and insurance company subsidiaries of Liberty Mutual;

	•	$ of cash and invested assets to be paid concurrently with or prior to the consummation of this offering as partial satisfaction of two notes payable issued by us to Liberty Mutual, excluding cash proceeds from this offering used for such purpose; and

	•	$ of cash and invested assets to be paid prior to the consummation of this offering as special dividends and $125 million of cash and invested assets paid on 2010 as consideration for entering into the Run-Off Indemnification Agreement.

(B) Reflects incremental interest expense during the respective periods associated with the following transactions in 2010:


	•	issuance on February 3, 2010 of a $4.0 billion note payable due February 29, 2012 to Liberty Mutual, bearing interest at an annual rate of 0.72%. We refer to this note payable as the “February 2010 Note.” Prior to completion of this offering we expect to repay approximately $ of principal amount of the February 2010 Note as part of the special dividends referenced in Note A above and expect to repay an additional $ from the net proceeds of this offering. The adjustment assumes the portion of the February 2010 Note that was not repaid prior to or concurrently with the consummation of the offering was outstanding during each of the periods presented, bearing interest at an annual rate of %.

	•	issuance of a $ purchase note payable due to Liberty Mutual in connection with Liberty Mutual’s transfer of Ohio Casualty to us prior to the consummation of this offering, bearing interest at an annual rate of %. We refer to this note payable as the “Ohio Casualty Note.” The issuance of the Ohio Casualty Note will be reflected as a dividend in our financial statements. Prior to completion of this offering we expect to repay approximately $ of principal amount of the Ohio Casualty Note as part of the special dividends referenced in Note A above and expect to repay an additional $ from the net proceeds of this offering, which amount assumes each share of Class A common stock is sold at a price equal to the midpoint of the estimated offering price range set forth on the cover page of this prospectus. The adjustment assumes the portion of the Ohio Casualty Note that was not repaid prior to or concurrently with the consummation of the offering was outstanding during each of the periods presented. For each $1.00 dollar change in the actual sale price per share of Class A common stock from the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the principal amount of the Ohio Casualty Note following completion of the offering would change by approximately $ and, consequently, our pro forma interest expense would change by approximately $ and $ for the three months ended March 31, 2010 and the year ended December 31, 2009, respectively.

(C) Reflects adjustments to income tax expense due to adjustments in our results of operations described in Notes (A) and (B) above at an assumed effective tax rate of 35%.

(D) Reflects dividends to Liberty Mutual of cash and invested assets in connection with the Transactions of (i) $ made between April 1, 2010 and the date of this prospectus and (ii) $ expected to be made after the date of this prospectus and prior to consummation of this offering, excluding net proceeds from this offering.

(E) Comprised of (i) an increase in debt of $ due to the issuance of the Ohio Casualty Note prior to the consummation of this offering, partially offset by (ii) a decrease in debt of $ due to the partial repayment of the February 2010 Note and the Ohio Casualty Note from the estimated net proceeds of this offering.

(F) Comprised of a decrease in stockholders’ equity of $ due to dividends of cash and invested assets to Liberty Mutual that will be accounted for as dividends between April 1, 2010 and consummation of this offering, partially offset by the issuance and sale of shares of Class A common stock in this offering.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the historical consolidated financial statements appearing elsewhere in this prospectus or which have been filed as an exhibit to the registration statement of which this prospectus forms a part and are incorporated by reference in this prospectus. For an understanding of pro forma financial information taking into account the Transactions, please see the section entitled “Pro Forma Consolidated Financial Statements.” This discussion contains forward-looking statements that constitute our plans, estimates and beliefs. These forward-looking statements involve numerous risks and uncertainties, including those discussed below and elsewhere in this prospectus in the sections entitled “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements.” Actual results may differ materially from those contained in any forward-looking statements.

Overview

Business

We are the second largest writer of property and casualty insurance distributed through independent agencies in the United States, and the tenth largest writer of all property and casualty insurance in the United States, in each case based on 2008 net written premiums. We offer a balanced mix of commercial and personal property and casualty insurance coverage to small and mid-size businesses and individuals throughout the United States. We also provide contract and commercial surety bonds on a national basis. We conduct our business through three operating segments and a corporate segment. The following is a description of our three operating segments:


	•	*Commercial:* Our Commercial segment uses our eight regional brands to offer insurance coverage for commercial multiple peril, commercial automobile, workers compensation, general liability and other commercial risks to small and mid-size businesses (generally fewer than 150 employees and annual insurance premiums under $150,000) and a national brand for excess casualty products.

	•	*Personal:* Our Personal segment uses the Safeco Insurance brand to offer insurance coverage on a national basis for private passenger automobile, homeowners and other personal property and liability risks to individuals.

	•	*Surety:* Our Surety segment offers contract and commercial surety bonds utilizing the Liberty Mutual Surety brand for large national accounts and the Liberty SuretyFirst brand for regional and individual accounts.

In addition to our three operating segments, we have a fourth segment, Corporate and Other, which reflects the results of external reinsurance, inter-segment reinsurance arrangements, run-off operations (see “— Critical Accounting Estimates — Claims and Claim Adjustment Expense Reserves — Corporate and Other — Run-Off Operations”), net realized investment gains (losses), unallocated investment income, and interest and other expenses. For a description of inter-segment reinsurance arrangements, see “— Overview — Inter-Segment Revenue and Expenses.”

Business Trends and Conditions

General Economic Conditions. During 2009 our net written premiums were impacted adversely across all operating segments by adverse economic conditions. Commercial premiums were impacted by decreasing payroll levels, which are tied to employment. Personal premiums were influenced by various factors including declines in home purchases and other unfavorable homeownership trends and fewer new automobile purchases. Surety contract bond premiums were influenced by state and federal government budget deficits which generally result in fewer government sponsored construction and public works projects. Economic conditions improved moderately during the second half of 2009 with the U.S. gross domestic product experiencing growth during the second half of the year.

Competitive Environment. The property and casualty insurance industry remains a largely fragmented industry with a few large carriers and many smaller insurers. Property and casualty insurance market conditions in our Commercial business continued to be competitive in 2009 particularly for new business premiums. This competitive environment adversely impacted commercial lines rates and retention, which has reduced underwriting margins. However, our Personal business generally continued to achieve rate increases for its products during 2009.

Loss Cost Trends. Factors that affect loss cost trends in commercial and private passenger automobile underwriting include inflation in the cost of automobile repairs, medical care and litigation of liability claims, improved automobile safety features, legislative changes and general economic conditions. Factors that affect loss costs trends in property underwriting include inflation in the cost of building materials and labor costs and demand caused by weather-related and other catastrophes. Factors that affect loss cost trends in workers compensation underwriting include inflation in the cost of medical care, litigation of liability claims and general economic conditions. Medical treatments are also at risk from changes in state-mandated fee schedules. Personal lines frequency continues to be favorable, while the increase in severity is moderate, but within our overall expectations. Commercial lines severity has remained flat, in line with recent years, while frequency has come in lower than our expectations.

Potential Regulatory Changes. Historically, property and casualty carriers have not been subject to extensive federal regulation, but rather have been regulated at the individual state level. The potential for more extensive federal oversight, however, is increasing as a result of efforts to implement a National Insurance Office as well as discussions of the impact on the insurance industry of systemic risk. We believe we are well positioned to succeed under either state or federal regulation due to our history and experience with state-based regional operations and given our scale and national capabilities.

Cyclicality of the Property and Casualty Insurance Industry. The property and casualty insurance business is cyclical in nature and has historically been characterized by periods of intense price competition, which could have an adverse effect on our results of operations and financial condition. Periods of intense price competition historically have alternated with periods when shortages of underwriting capacity have permitted more attractive premium levels. Any significant decrease in the premium rates we can charge for property and casualty insurance would adversely affect our results.

Factors Affecting Comparability of Financial Information

The financial information included in this discussion for any particular fiscal period may not be directly comparable to the information presented for other fiscal periods and may not be representative of results in future fiscal periods. Key items that affect the comparability of our financial information are as follows:

Transactions. We have effected several significant transactions since December 31, 2009 and intend to effect several additional significant transactions prior to consummation of this offering. As a result of the Transactions, in future periods we expect to have higher levels of debt and interest expense and lower levels of investment income resulting from special payments and distributions to Liberty Mutual prior to and concurrently with this offering. For additional information about the Transactions and the impact they would have had on our historical financial results and financial position, see “Certain Relationships and Related Party Transactions” and “Pro Forma Consolidated Financial Statements.”

Run-Off Indemnification Agreement. We intend to enter into an indemnification agreement with Liberty Mutual prior to completion of this offering under which we will pay Liberty Mutual a one-time payment of $125 million and Liberty Mutual will indemnify us for up to $500 million of adverse development in our run-off reserves in our Corporate and Other Segment. See “— Critical Accounting Estimates — Claims and Claim Adjustment Expenses — Unpaid Claims and Claim Adjustment Expenses — Corporate and Other” and “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Indemnification Agreement.” The payment to Liberty Mutual will result in a non-recurring charge in 2010.

Acquisitions. We acquired Safeco on September 22, 2008 and Ohio Casualty on August 24, 2007. Safeco was a publicly-traded insurance holding company that sold personal, commercial and surety products primarily through independent agents in the United States, with approximately $5.6 billion of net written premiums in 2007. Ohio Casualty was a publicly-traded insurance holding company that sold personal, commercial and specialty insurance products primarily through independent agents in the United States, with approximately $1.4 billion of net written premiums in 2006. Because the financial results of each of these acquired businesses are only included in our consolidated results from and after the date of acquisition, the results of operations for each of the fiscal periods presented below are not comparable. Historical financial information of Ohio Casualty and Safeco for periods prior to the date of acquisition have been filed as an exhibit to the registration statement of which this prospectus forms a part and are incorporated by reference in this prospectus. See “Incorporation of Financial Statements by Reference.”

Goodwill. Our goodwill asset at December 31, 2009 and 2008 was $3,054 million, largely consisting of purchase price in excess of net assets relating to the Ohio Casualty and Safeco acquisitions. These acquisitions resulted in significant cost synergies and other benefits throughout Liberty Mutual Group. Liberty Mutual Group performed an impairment analysis in the third quarter of 2009 using an income-based approach. Based on that analysis, the fair market value of Liberty Mutual Group’s Agency Markets business unit exceeded its carrying value and thus no impairment was necessary. However, because the legal entities that gave rise to this goodwill are part of our company, when we prepared our carve-out financial statements we were required under GAAP to record the full amount of the historical goodwill on our balance sheet and to test that goodwill for our financial statements at each of our reporting units (i.e., segments), only taking into account the synergies and benefits realized by each of our segments, without regard to synergies and benefits realized elsewhere in the Liberty Mutual Group. We conducted an impairment analysis on each of our segments on this required basis in the fourth quarter of 2008, and determined that the carrying value of the goodwill for our Personal segment exceeded its fair value, and recognized an impairment charge in our Personal segment of $973 million in 2008. However, the carrying value of goodwill recorded in the consolidated financial statements of Liberty Mutual Group was unaffected.

Revenues and Expenses

The major components of our revenues are net premiums earned, net investment income, fee and other revenues and net realized investment gains (losses).

Net Premiums Earned. Premiums earned on insurance policies are generally reported as earned income on a pro-rata basis over the terms of the respective policies as coverage is provided. For insurance policies with variable premiums, premium estimates are reviewed and updated periodically, with resulting adjustments reflected in current operating results.

Net Investment Income. Net investment income includes interest, dividends and other earnings derived from our cash and invested assets minus the expenses associated with these investments.

Fee and Other Revenues. Fee and other revenues are primarily comprised of premium installment fees and other miscellaneous revenues from involuntary assigned risk pools that are earned on a pro-rata basis over the term of the related policies.

Net Realized Investment Gains (Losses). Net realized investment gains (losses) include gains and losses on sales of investments recognized in income using the specific identification method. Included in net realized investment gains (losses) are other-than-temporary impairment losses on our invested assets. Net realized investment gains (losses) exclude losses on investments accounted for using the equity method.

The major components of operating expenses are claims and claim adjustment expenses, general and administrative expenses, amortization of deferred policy acquisition costs, and interest expense.

Claims and Claim Adjustment Expenses. Claims and claim adjustment expenses represent the total loss sustained by us, whether paid or unpaid. Unpaid claims and claim adjustment expense reserves represent management’s best estimate of the ultimate cost of unpaid claims and claim adjustment expenses for claims

that have been reported but not yet paid and the cost of claims not yet reported. Also included are the estimated expenses of settling claims, including legal and other fees.

General and Administrative Expenses. We include the following expenses, net of any portion associated with claims, within general and administrative expenses: expenses associated with the various services agreements with Liberty Mutual and its affiliates, intangible amortization, bad debt expenses, as well as other expenses associated with our insurance operations.

Amortization of Deferred Policy Acquisition Costs. Costs that vary with and are primarily related to the acquisition of new insurance policies are deferred and amortized over the respective policy terms to the extent recoverable. Deferred policy acquisition costs include commissions, underwriting expenses and premium taxes and are amortized in proportion to the recognition of earned premiums.

Interest Expense. Interest expense represents interest associated with our outstanding debt.

Inter-Segment Revenue and Expenses

Allocation of Investment Income. We allocate a notional investment account and the related net investment income to our business segments. The notional investment account is equal to the beginning of year insurance liabilities for the segments plus capital allocated to the segments. Cash flow from operations during the year adds to the balance. We develop a benchmark investment yield that reflects the average planned total return on our investment portfolio and apply the benchmark investment yields to each business segment’s notional investment account as of the beginning of each year plus current year operating cash flows to produce total investment income by business segment. The difference between our actual net investment income and the allocated business segment investment income is reported in our Corporate and Other business segment along with all realized investment gains and losses.

Inter-Segment Reinsurance Arrangements. We reinsure risks with external reinsurers on a company-wide basis through our Corporate and Other segment, which permits us to leverage our scale and diversification to maximize the efficiency of our external reinsurance purchases, and obtain more favorable terms than could any individual segment. We use inter-segment reinsurance arrangements as a tool to provide our Commercial and Personal segments the flexibility to retain the risks and benefits they believe are appropriate given the size and scope of their segment operations. The terms of our inter-segment reinsurance arrangements are finalized during our annual planning process in advance of their effective date and are reflected in the operating results of our segments on a basis that is consistent with external reinsurance. We believe that the pricing of our inter-segment reinsurance arrangements reflected in our results is consistent with market pricing. The use of inter-segment reinsurance arrangements has no effect on our consolidated results of operations or on our statutory financial statements.

Use of Non-GAAP Financial Measure

Certain tables and related disclosures in this prospectus refer to pre-tax operating income as a non-GAAP financial measure. We believe this measure provides useful information to investors in evaluating our financial performance or condition. In addition, our management and board of directors use this measure to gauge the performance of our operations and for business planning purposes. In the following paragraphs, we provide a definition of this non-GAAP measure and explain our use of the measure and why we believe investors will find it useful.

Pre-Tax Operating Income. Pre-tax operating income is a non-GAAP measure of our performance. We define pre-tax operating income as income (loss) before income tax expense excluding net realized investment gains (losses) and items that our management believes are not directly connected to the management of the insurance and underwriting aspects of our business. We consider pre-tax operating income to be an appropriate indicator of underwriting and operating results and a significant metric we utilize internally to evaluate performance. For a reconciliation of pre-tax operating income to net income (loss), see our consolidated results of operations for the year ended December 31, 2009 as compared to the year ended December 31, 2008 and for the year ended December 31, 2008 as compared to December 31, 2007.

Net income (loss) is the most directly comparable GAAP measure to pre-tax operating income. Net income (loss) for any period presents the results of our insurance operations, as well as our net realized investment gains (losses), integration and other acquisition related costs, and the adjustment to our goodwill asset that occurred in 2008.

We believe investors will find it useful to review the results of our insurance operations as reflected in our pre-tax operating income because it will assist an investor in determining whether our insurance-related revenues, comprised primarily of net premiums earned, net investment income and fee and other revenues, have generated operating earnings after meeting our insurance-related obligations, comprised primarily of claims and claim adjustment expenses, other operating expenses and interest expense.

Pre-tax operating income is not a substitute for net income determined in accordance with GAAP. The adjustments made to derive pre-tax operating income are important to understand our overall results from operations. Net realized investment gains (losses) and integration and other acquisition related costs occur in the periods presented. We believe the adjustments are appropriate because net realized investment gains (losses) are significantly impacted by both discretionary and economic factors which may not be indicative of future performance and the timing and amount of integration and other acquisition related costs are not connected to our management of the insurance and underwriting aspects of our business.

Consolidated Overview — Year Ended December 31, 2009 as Compared to Year Ended December 31, 2008

Net Written Premiums

The table below sets forth net written premiums by segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$		%
	(Dollars in millions)

Commercial	$	4,590	$	3,975	$	615		15.5	%
Personal		4,689		2,122		2,567		121.0
Surety		707		479		228		47.6
Corporate and Other		162		128		34		26.6

Total net written premiums	$	10,148	$	6,704	$	3,444		51.4	%

Net written premiums for the year ended December 31, 2009 were $10.148 billion, an increase of $3.444 billion, or 51.4%, over the year ended December 31, 2008. The increase reflected $3.640 billion of net written premiums acquired through Safeco and modest premium rate increases. Excluding the effects of the Safeco acquisition in 2008, consolidated net written premiums in 2009 decreased $196 million, or 3.6%, from 2008. The decline was primarily driven by lower retention of policyholders compared to 2008 due to a more competitive environment and reduced exposures due to economic conditions.

Results of Operations

The table below sets forth consolidated results of operations for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,						Change
	2009			2008			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	9,983		$	6,913		$	3,070			44.4	%
Net investment income		910			719			191			26.6
Fee and other revenues		97			50			47			94.0
Net realized investment losses		(53	)		(407	)		354			(87.0	)

Total revenues		10,937			7,275			3,662			50.3
Claims and expenses
Claims and claim adjustment expenses		6,157			4,326			1,831			42.3
General and administrative expenses		1,005			777			228			29.3
Goodwill impairment		—			973			(973	)		(100.0	)
Amortization of deferred policy acquisition costs		2,392			1,664			728			43.8
Interest expense		4			21			(17	)		(81.0	)

Total claims and expenses		9,558			7,761			1,797			23.2
Income (loss) before income tax expense		1,379			(486	)		1,865			*
Income tax expense		377			78			299			*

Net income (loss)	$	1,002		$	(564	)	$	1,566			*


Reconciliation of Net Income (Loss)
Net income (loss)	$	1,002		$	(564	)	$	1,566			*
Less: Net realized investment losses		(53	)		(407	)		354			(87.0	)
Add: Income tax expense		377			78			299			*
Add: Goodwill impairment		—			973			(973	)		(100.0	)
Add: Integration and other acquisition related costs		23			40			(17	)		(42.5	)

Pre-tax operating income	$	1,455		$	934		$	521			55.8	%


*		Not meaningful.

Revenues

Revenues for the year ended December 31, 2009 were $10.937 billion, an increase of $3.662 billion, or 50.3%, over the year ended December 31, 2008 driven by increased net premiums earned, increased net investment income, increased fee and other revenues, and lower net realized investment losses.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 were $9.983 billion, an increase of $3.070 billion, or 44.4%, over the year ended December 31, 2008. The increase in 2009 reflected $3.739 billion of premium related to the Safeco acquisition, which was partially offset by a decrease in audit premium (premium increases or decreases associated with variations in the underlying insured exposure (such as payroll or sales)) in commercial lines and the decrease in our net written premiums excluding the effects of the Safeco acquisition previously discussed. See “— Commercial – Results of Operations – Revenues — Net Premiums Earned.”

Net premiums earned in 2009 were further reduced by a $450 million increase of ceded premium related to our Homeowners Quota Share Treaty, which was effective December 31, 2008 to December 31, 2009. For a description of this treaty, see “— Reinsurance Protection and Catastrophe Management.” Pursuant to the terms of the treaty, which we refer to as the “Homeowners Quota Share Treaty,” we ceded to unaffiliated reinsurers 31.7% of the net premiums earned on our homeowners line, subject to certain exclusions contained in the treaty. In turn, the reinsurers accepted 31.7% of our net liability for losses occurring during the effective period of the treaty, subject to certain loss occurrence and aggregate limits contained in the treaty. Any recoveries under the treaty are allocated between Liberty Mutual, which also ceded a quota share of its homeowners business, and us in the same ratio that each party’s losses bear to the total ceded losses under the treaty.

Net Investment Income. Net investment income for the year ended December 31, 2009 was $910 million, an increase of $191 million, or 26.6%, over the year ended December 31, 2008. The increase in net investment income in 2009 reflected higher fixed maturities income of $281 million due to the increase in fixed maturity securities relating to the Safeco acquisition, the sale of equity securities during 2008 that were reinvested in fixed maturities, and the continued investment of cash flows from operations. Partially offsetting these items were a decrease in limited partnership income of $28 million reflecting reduced market valuations, a decrease in dividend income of $17 million due to the reduction in our equity portfolio in light of our decision to reduce exposure to the equity markets, and higher investment expenses of $34 million due to the Safeco acquisition, additional management fees, and variable compensation costs. Our average investment yield was 4.67% for the year ended December 31, 2009 compared to 4.87% for the year ended December 31, 2008. See “— Investment Portfolio — Investment Returns.”

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2009 were $97 million, an increase of $47 million, or 94.0%, over the year ended December 31, 2008 driven primarily by the additional fee revenues generated by the acquired Safeco personal lines business, partially offset by a decline in fee revenues from the Commercial segment’s servicing of policyholders in state mandated pools due to lower premium volume.

Net Realized Investment Losses. Net realized investment losses for the year ended December 31, 2009 were $53 million, a decrease of $354 million, or 87.0%, from the year ended December 31, 2008. The decrease was primarily the result of a $243 million increase in investment gains on sales of our fixed maturities and equity securities and a $107 million decline in impairment losses compared to 2008. In the fourth quarter of 2008, we reduced our exposure to the equity markets (with a large portion of the sales in 2008 relating to the acquired Safeco equity securities), which contributed to the overall decline in the average preferred and common stock investment balances compared to 2008. See “— Investment Portfolio” for details regarding other-than-temporary impairments.

Claims and expenses

Claims and Claim Adjustment Expenses. Claims and claim adjustment expenses for the year ended December 31, 2009 were $6.157 billion, an increase of $1.831 billion, or 42.3%, over the year ended December 31, 2008. The increase in 2009 primarily reflected the impact of the Safeco acquisition net of efficiencies achieved through integration, a $95 million increase in the amount of catastrophe losses, partially offset by an increase of $121 million in the amount of favorable prior year loss development, which we refer to in this prospectus as “incurred losses attributable to prior years”’ in 2009 compared to 2008. In addition, 2009 benefited from favorable frequency and severity trends across many of our property product lines (excluding catastrophes) and favorable loss trends within personal automobile liability as compared to the prior year.

Catastrophe losses in 2009 totaled $445 million compared to $350 million in 2008. The increase of $95 million reflected an increase in covered exposures as a result of the Safeco acquisition. Catastrophe losses in 2009 were concentrated in our Commercial and Personal segments driven, in large part, by several wind and hail storms in the Midwest and winter storms in the Northwest and Northeast regions of the United States. Additionally, catastrophe losses included $50 million of prior year catastrophe losses that emerged in 2009

primarily driven by Hurricane Ike in September 2008 and two Pacific Northwest winter storms that occurred in the fourth quarter of 2008.

Each of our segments experienced favorable incurred losses attributable to prior years in 2009 totaling $618 million, with 85% of the favorable emergence concentrated in our Commercial and Personal segments. Our Commercial segment experienced $314 million in favorable incurred losses attributable to prior years which were driven by actual losses emerging at levels lower than expected and lower than expected severity trends within the commercial multiple peril and commercial automobile product lines. Our Commercial segment also reflected significant favorable incurred losses attributable to prior years in the general liability product line, driven by several factors, including moderate severity and favorable frequency trends. Favorable emergence of $211 million for our Personal segment in 2009 was primarily due to favorable trends in private passenger automobile bodily injury claims, with improved estimates driven, in large part, by moderate severity and favorable frequency trends across multiple accident years.

General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2009 were $1.005 billion, an increase of $228 million, or 29.3%, over the year ended December 31, 2008. The increase was primarily driven by growth in business volume related to the Safeco acquisition net of efficiencies achieved through integration, additional intangible asset amortization of $28 million and additional management fees, partially offset by a $17 million decrease in integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions.

Goodwill Impairment. In the fourth quarter of 2008, we recognized an impairment charge of $973 million in our Personal segment as previously discussed. See — “Overview — Factors Affecting Comparability of Financial Information — Goodwill.”

Amortization of Deferred Policy Acquisition Costs. The amortization of deferred policy acquisition costs for the year ended December 31, 2009 was $2.392 billion, an increase of $728 million, or 43.8%, over the year ended December 31, 2008. The growth in amortization of deferred policy acquisition costs in 2009 was primarily due to growth in business volume related to the Safeco acquisition, consistent with the increase in net premiums earned.

Interest Expense. Interest expense for the year ended December 31, 2009 was $4 million, a decrease of $17 million, or 81.0%, from the year ended December 31, 2008. The decrease primarily reflected a higher average level of debt outstanding during 2008 related to the Ohio Casualty and Safeco acquisitions, which is described in more detail in the “— Liquidity and Capital Resources” section herein.

Income Tax Expense. Federal, state, and foreign income tax expense for the year ended December 31, 2009 was $377 million, an increase of $299 million over the year ended December 31, 2008. Our effective tax rate for 2009 was 27.3% compared to (16.0%) for 2008. Our effective tax rate for each of the years differed from the Federal statutory rate of 35% due in part to investment items such as tax exempt investment income on municipal bonds, and dividend received deductions for dividends from domestic stocks. The 2008 effective tax rate was further impacted by revisions to estimates and the goodwill impairment described above, which was not deductible for tax purposes.

Net income (loss)

Net income for the year ended December 31, 2009 was $1.002 billion as compared with a net loss of $564 million from the year ended December 31, 2008, an increase of $1.566 billion. Net loss in 2008 was adversely impacted by the impairment to our goodwill asset of $973 million and $407 million of realized investment losses. The increase in 2009 was impacted by favorable underwriting results discussed in more detail above.

Pre-tax operating income

Pre-tax operating income for the year ended December 31, 2009 was $1.455 billion, an increase of $521 million, or 55.8%, over the year ended December 31, 2008. The increase in pre-tax operating income was attributable to operating earnings and cost efficiencies associated with the Safeco acquisition, underwriting

results driven by favorable frequency and severity trends across most property lines (both catastrophe and non-catastrophe) as well as the private passenger automobile liability product line.

Combined Ratio

The following table sets forth our consolidated combined ratios for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended						Change in
	December 31,						Percentage
	2009			2008			Points

Claims and claim adjustment expense ratio(1)		63.7	%		64.7	%		(1.0	)
Underwriting expense ratio(2)		31.7			33.0			(1.3	)

Subtotal		95.4			97.7			(2.3	)
Catastrophes(3)		4.4			5.1			(0.7	)
Net incurred losses attributable to prior years		(6.2	)		(7.2	)		1.0

Combined ratio(4)		93.6	%		95.6	%		(2.0	)


(1)		Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses.

(2)		The underwriting expense ratio is calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses.

(3)		Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses.

(4)		Calculated by adding the claims and claim adjustment expense ratio, underwriting expense ratio, catastrophes ratio, and net incurred losses attributable to prior years ratio.

Our combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2009 was 95.4%, a decrease of 2.3 points from the year ended December 31, 2008. The decrease in the claims and claim adjustment expense ratio was primarily driven by favorable loss cost trends across both the personal property and liability product lines, as well as favorable commercial property results. The decrease in the underwriting expense ratio reflected the impact of writing more personal lines business, which typically has a lower expense ratio and increased efficiencies resulting from the Safeco acquisition, partially offset by additional management fees.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2009 was 93.6%, a decrease of 2.0 points from the year ended December 31, 2008. The decrease reflected the changes in the combined ratio previously discussed and lower catastrophe losses due to favorable frequency and severity, partially offset by a decrease in the amount of favorable incurred loss attributable to prior years in 2009 as compared to 2008.

Commercial

Net Written Premiums

The following table sets forth net written premiums by product line for our Commercial segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$			%
	(Dollars in millions)

Commercial multiple peril	$	1,825	$	1,531	$	294			19.2	%
Commercial automobile		1,118		923		195			21.1
Workers compensation		880		886		(6	)		(0.7	)
General liability		479		380		99			26.1
Other(1)		288		255		33			12.9

Total net written premiums	$	4,590	$	3,975	$	615			15.5	%


(1)		Other net written premiums consist primarily of inland marine, farmowners multiple peril, allied lines, and fire.

Commercial Multiple Peril. Commercial multiple peril net written premiums for the year ended December 31, 2009 increased $294 million, or 19.2%, over the year ended December 31, 2008. The increase primarily reflected $372 million of premium related to the Safeco acquisition (i.e., the amount by which Safeco’s contribution to our net written premiums in 2009 exceeded its contribution in 2008). Excluding the effects of the acquisition, commercial multiple peril net written premiums decreased $78 million, or 5.6%, reflecting lower retention due to competitive market conditions and adverse economic conditions. This was partially offset by modest premium rate increases and favorable new business levels in 2009.

Commercial Automobile. Commercial automobile net written premiums for the year ended December 31, 2009 increased $195 million, or 21.1%, over the year ended December 31, 2008. The increase primarily reflected $200 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, commercial automobile net written premiums decreased $5 million, or 0.6%, due to lower retention due to competitive market conditions, partially offset by favorable new business levels.

Workers Compensation. Workers compensation net written premiums for the year ended December 31, 2009 decreased $6 million, or 0.7%, from the year ended December 31, 2008, with the Safeco acquisition adding $54 million of premium to our results in 2009. Excluding the effects of the acquisition, workers compensation net written premiums declined $60 million, or 7.0%, due to lower retention rates, decline in new business levels due to the competitive environment, our discontinuance of writing workers compensation business on a direct basis in our Commercial segment’s Liberty Northwest geographic region, and reduced exposures due to adverse economic conditions.

General Liability. General liability net written premiums for the year ended December 31, 2009 increased $99 million, or 26.1%, over the year ended December 31, 2008. The increase primarily reflected an increase of $128 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, general liability net written premiums decreased by $29 million, or 8.3%, reflecting a reduction in retention due to competitive market conditions, partially offset by modest premium rate increases.

Other. Other net written premiums for the year ended December 31, 2009 increased $33 million, or 12.9%, over the year ended December 31, 2008. The increase primarily reflected an increase of $50 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, other net written premiums decreased $17 million, or 7.9%, reflecting a reduction in new business levels and retention due to competitive market conditions.

Results of Operations

The following table sets forth the results of operations for our Commercial segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	4,606	$	4,024	$	582			14.5	%
Net investment income		458		402		56			13.9
Fee and other revenues		34		30		4			13.3

Total revenues		5,098		4,456		642			14.4
Total claims and expenses(1)		4,577		3,843		734			19.1

Pre-tax operating income	$	521	$	613	$	(92	)		(15.0	)%


(1)		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $11 million in 2009 and $19 million in 2008 have been excluded from total claims and expenses.

Revenues

Revenues for our Commercial segment for the year ended December 31, 2009 were $5.098 billion, an increase of $642 million, or 14.4%, over the year ended December 31, 2008.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 were $4.606 billion, an increase of $582 million, or 14.5%, over the year ended December 31, 2008. The increase in 2009 reflected $881 million of premiums related to the Safeco acquisition, partially offset by negative audit premiums and lower net premiums earned associated with the changes in net written premiums previously discussed. Some of our policies provide for premium adjustments based on our audit of our policyholders’ books and records after the policy coverage period. When premium determined after the audit is complete is less than our estimate, it results in a negative audit premium.

Net Investment Income. Net investment income for the year ended December 31, 2009 was $458 million, an increase of $56 million, or 13.9%, over the year ended December 31, 2008. The increase in 2009 reflected additional invested assets assumed as a result of the Safeco acquisition and continued investment of cash flow from operations, partially offset by lower benchmark investment yields.

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2009 were $34 million, an increase of $4 million, or 13.3%, over the year ended December 31, 2008. The increase in 2009 was primarily driven by the additional installment fee revenues generated through the addition of the Safeco business, partially offset by a decline in revenues from involuntary market servicing carrier operations due to lower involuntary market premium volume.

Claims and expenses

Claims and expenses for our Commercial segment during the year ended December 31, 2009 were $4.577 billion, an increase of $734 million, or 19.1%, over the year ended December 31, 2008. The increase primarily reflected the impact of the Safeco acquisition net of efficiencies achieved through integration, a $136 million decrease in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008, higher catastrophe losses of $38 million and additional management fees. These items were partially offset by favorable property frequency across our commercial multiple peril and commercial automobile product lines and lower costs of $34 million associated with third-party claims adjusters driven by higher usage in 2008, primarily related to Hurricanes Ike and Gustav.

Catastrophe losses included in claims and claim adjustment expenses in 2009 totaled $208 million compared to $170 million in 2008. The increase of $38 million reflected several wind and hail storms in the Midwest and winter storms in the Northwest and Northeast regions of the United States. Additionally, 2009 catastrophe losses included $36 million of prior year catastrophe losses that emerged in 2009, primarily driven by Hurricane Ike and two Pacific Northwest winter storms that occurred in the fourth quarter of 2008.

Favorable incurred losses attributable to prior years of $314 million in 2009 were primarily driven by actual losses emerging at levels lower than expected and moderate severity trends within the commercial multiple peril and commercial automobile product lines. Additionally, favorable incurred losses attributable to prior years in the general liability product line were driven by several factors, including moderate severity and favorable frequency trends.

Pre-tax operating income

Pre-tax operating income for our Commercial segment for the year ended December 31, 2009 was $521 million, a decrease of $92 million, or 15.0%, from the year ended December 31, 2008 primarily driven by a $136 million decrease in the amount of favorable incurred losses attributable to prior years in 2009 as compared to 2008, higher catastrophe losses of $38 million and additional management fees. These items were partially offset by favorable frequency across most property lines and operating earnings and efficiencies gained from the Safeco acquisition.

Combined Ratio

The following table sets forth the combined ratio for our Commercial segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended						Change in
	December 31,						Percentage
	2009			2008			Points

Claims and claim adjustment expense ratio		65.4	%		66.3	%		(0.9	)
Underwriting expense ratio		34.8			34.8			—

Subtotal		100.2			101.1			(0.9	)
Catastrophes		4.5			4.2			0.3
Net incurred losses attributable to prior years		(6.8	)		(11.2	)		4.4

Combined ratio		97.9	%		94.1	%		3.8

The Commercial segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2009 was 100.2%, a decrease of 0.9 points from the year ended December 31, 2008. The decrease in the claims and claim adjustment expense ratio was primarily due to favorable frequency across most property lines (as compared to the prior year) and lower costs associated with third-party claims adjusters. The underwriting expense ratio remained unchanged from the year ended December 31, 2008. The lower costs associated with acquired Safeco business and efficiencies gained from the Safeco acquisition were offset by additional management fees. Additionally, both the claims and claim adjustment expense ratio and the underwriting expense ratio benefited modestly from premium rate increases.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2009 was 97.9%, an increase of 3.8 points over the year ended December 31, 2008. The increase in the year primarily reflected a decrease in the amount of favorable incurred losses attributable to prior years in 2009 as compared to 2008, partially offset by the changes in the combined ratio previously discussed.

Personal

Net Written Premiums

The following table sets forth net written premiums by product line for our Personal segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$		%
	(Dollars in millions)

Private passenger automobile	$	3,134	$	1,500	$	1,634		108.9	%
Homeowners		1,164		472		692		146.6
Other(1)		391		150		241		160.7

Total net written premiums	$	4,689	$	2,122	$	2,567		121.0	%


(1)		Other net written premiums consist primarily of fire, allied lines, general liability and inland marine.

Private Passenger Automobile. Private passenger automobile net written premiums for the year ended December 31, 2009 increased $1.634 billion, or 108.9%, over the year ended December 31, 2008. The increase primarily reflected an increase of $1.591 billion of premium related to the Safeco acquisition. Excluding the effects of the acquisition, private passenger automobile net written premiums increased $43 million, or 5.0%, primarily due to rate increases in 2009. This was partially offset by a decline in new business levels and lower retention due to competitive market conditions.

Homeowners. Homeowners net written premiums for the year ended December 31, 2009 increased $692 million, or 146.6%, over the year ended December 31, 2008. The increase primarily reflected an increase of $650 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, homeowners net written premiums increased $42 million in 2009, or 10.7%, primarily due to rate increases.

Other. Other net written premiums for the year ended December 31, 2009 increased $241 million, or 160.7%, over the year ended December 31, 2008. The increase primarily reflected an increase of $250 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, other net written premiums decreased by $9 million, or 10.2%, due to lower policy renewal rates in 2009.

Results of Operations

The following table sets forth results of operations for our Personal segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$		%
	(Dollars in millions)

Revenues
Net premiums earned	$	4,458	$	2,277	$	2,181		95.8	%
Net investment income		246		131		115		87.8
Fee and other revenues		62		20		42		*

Total revenues		4,766		2,428		2,338		96.3
Total claims and expenses(1)		4,337		2,342		1,995		85.2

Pre-tax operating income	$	429	$	86	$	343		*


(1)		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $9 million in 2009 and $29 million in 2008 have been excluded from total claims and expenses. The


		goodwill impairment of $973 million realized in our Personal segment in 2008 has been excluded from total claims and expenses.

*		Not meaningful.

Revenues

Revenues for our Personal segment for the year ended December 31, 2009 were $4.766 billion, an increase of $2.338 billion, or 96.3%, over the year ended December 31, 2008.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 were $4.458 billion, an increase of $2.181 billion, or 95.8%, over the year ended December 31, 2008. The increase in 2009 reflected $2.469 billion related to the Safeco acquisition and the net premiums earned associated with the changes in net written premiums previously discussed. The net premiums earned in 2009 were also impacted by the cession of $450 million of premiums associated with the Homeowners Quota Share Treaty.

Net Investment Income. Net investment income for the year ended December 31, 2009 was $246 million, an increase of $115 million, or 87.8%, over the year ended December 31, 2008. The increase in 2009 reflected earnings from a larger average invested asset base as a result of the Safeco acquisition and continued investment of cash flow from operations, partially offset by lower benchmark investment yields.

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2009 were $62 million, an increase of $42 million over the year ended December 31, 2008. The increase in 2009 primarily reflected additional installment fees generated by the acquired Safeco business.

Claims and expenses

Claims and expenses for our Personal segment during the year ended December 31, 2009 were $4.337 billion, an increase of $1.995 billion, or 85.2%, over the year ended December 31, 2008. The increase in 2009 primarily reflected the impact of the Safeco acquisition net of efficiencies achieved through integration, higher catastrophe losses of $113 million, additional intangible asset amortization of $23 million and additional management fees, partially offset by an increase of $168 million in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008. Claims and expenses in 2009 benefited further from improved current year loss trends across most property lines and the private passenger automobile liability line, lower costs of $60 million associated with third-party claims adjusters driven by higher usage in 2008 primarily related to Hurricanes Ike and Gustav and ceded losses and expenses of $416 million in connection with the Homeowners Quota Share Treaty.

Catastrophe losses included in claims and claim adjustment expenses in 2009 totaled $236 million compared to $123 million in 2008. The increase of $113 million reflected an increase in covered exposures as a result of the Safeco acquisition. Catastrophe losses in 2009 were driven by several wind and hail storms in the Midwest and winter storms in the Northwest and Northeast regions of the United States. Additionally, 2009 catastrophe losses included $14 million of prior year catastrophe losses that emerged in 2009, primarily driven by Hurricane Ike in September 2008 and two Pacific Northwest winter storms that occurred in the fourth quarter of 2008.

Favorable incurred losses attributable to prior years of $211 million in 2009 were primarily driven by favorable trends in personal automobile bodily injury claims. The improved estimates were driven, in large part, by moderate severity and favorable frequency trends across multiple accident years.

Pre-tax operating income

Pre-tax operating income for our Personal segment for the year ended December 31, 2009 was $429 million, an increase of $343 million over the year ended December 31, 2008. The increase in 2009 reflected operating earnings and efficiencies gained from the Safeco acquisition, improved current year loss trends within the private passenger automobile and homeowners product lines as compared to the prior year, an increase of $168 million in the amount of favorable incurred losses attributable to prior years in 2009

compared to 2008 in the private passenger automobile liability line of business, and lower costs of $60 million associated with third-party claim adjusters due to higher usage in 2008 related to Hurricanes Ike and Gustav.

Combined Ratio

The following table sets forth the combined ratio for our Personal segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended						Change in
	December 31,						Percentage
	2009			2008			Points

Claims and claim adjustment expense ratio		67.1	%		68.9	%		(1.8	)
Underwriting expense ratio		27.1			28.7			(1.6	)

Subtotal		94.2			97.6			(3.4	)
Catastrophes		5.3			5.4			(0.1	)
Net incurred losses attributable to prior years		(4.7	)		(1.9	)		(2.8	)

Combined ratio		94.8	%		101.1	%		(6.3	)

The Personal segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2009 was 94.2%, a decrease of 3.4 points from the year ended December 31, 2008. The decrease in the claims and claim adjustment expense ratio reflected favorable loss trends across most property lines and the private passenger automobile liability line compared to the prior year, as well as lower costs associated with third-party claims adjusters. The decrease in the underwriting expense ratio was primarily due to lower costs and scale benefits associated with the acquired Safeco business, which made up a higher portion of the overall book in 2009 relative to 2008, partially offset by additional management fees. Additionally, both the claims and claim adjustment expense ratio and underwriting expense ratio were favorably impacted by rate increases.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2009 was 94.8%, a decrease of 6.3 points from the year ended December 31, 2008. The decrease primarily reflected the changes in the combined ratio previously discussed and favorable incurred losses attributable to prior years in the private passenger automobile liability line due to better than expected loss trends.

Surety

Net Written Premiums

The following table sets forth net written premiums by product line for our Surety segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$		%
	(Dollars in millions)

Contract bond	$	434	$	298	$	136		45.6	%
Commercial bond		118		66		52		78.8
Small bond(1)		155		115		40		34.8

Total net written premiums	$	707	$	479	$	228		47.6	%


(1)		Small bond net written premiums consist of contract and commercial bonds covering small and mid-size businesses and individuals distributed through our network of independent property and casualty insurance agencies.

Contract Bond. Contract bond net written premiums for the year ended December 31, 2009 increased $136 million, or 45.6%, over the year ended December 31, 2008. The increase primarily reflected an increase

of $168 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, contract bond net written premiums decreased by $32 million, or 14.1%, reflecting a decline in exposures due to adverse economic conditions.

Commercial Bond. Commercial bond net written premiums for the year ended December 31, 2009 increased $52 million, or 78.8%, over the year ended December 31, 2008. The increase primarily reflected an increase of $50 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, commercial bond net written premiums increased $2 million, or 4.9%.

Small Bond. Small bond net written premiums for the year ended December 31, 2009 increased $40 million, or 34.8%, over the year ended December 31, 2008. The increase primarily reflected an increase of $40 million of premium related to the Safeco acquisition. Excluding the effects of the acquisition, small bond net written premiums remained flat.

Results of Operations

The following table sets forth the results of operations for the Surety segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,				Change
	2009		2008		$		%
	(Dollars in millions)

Revenues
Net premiums earned	$	753	$	478	$	275		57.5	%
Net investment income		47		37		10		27.0
Fee and other revenues		1		—		1		*

Total revenues		801		515		286		55.5
Total claims and expenses(1)		549		359		190		52.9

Pre-tax operating income	$	252	$	156	$	96		61.5	%


(1)		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $4 million in 2009 and $3 million in 2008 have been excluded from total claims and expenses.

Revenues

Revenues for our Surety segment for the year ended December 31, 2009 were $801 million, an increase of $286 million, or 55.5%, over the year ended December 31, 2008.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 were $753 million, an increase of $275 million, or 57.5%, over the year ended December 31, 2008. The increase in 2009 largely reflected $301 million of premium related to the Safeco acquisition as well as the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2009 was $47 million, an increase of $10 million, or 27.0%, over the year ended December 31, 2008. The increase in 2009 reflected additional invested assets assumed as a result of the Safeco acquisition and continued investment of operating cash flow from operations, partially offset by lower benchmark investment yields.

Claims and expenses

Claims and expenses for our Surety segment during the year ended December 31, 2009 were $549 million, an increase of $190 million, or 52.9%, over the year ended December 31, 2008. The increase primarily reflected the impact of the Safeco acquisition net of efficiencies gained through integration and increased third-party claims adjuster costs of $9 million related to outside consulting. These items were partially offset

by an increase of $32 million in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008.

Pre-tax operating income

Pre-tax operating income for our Surety segment for the year ended December 31, 2009 was $252 million, an increase of $96 million, or 61.5%, over the year ended December 31, 2008. The increase was primarily driven by operating earnings and efficiencies gained from the Safeco acquisition and an increase of $32 million in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008. These items were partially offset by increased third-party claims adjuster costs of $9 million related to outside consulting.

Combined Ratio

The following table sets forth the combined ratio for our Surety segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended						Change in
	December 31,						Percentage
	2009			2008			Points

Claims and claim adjustment expense ratio		33.7	%		32.3	%		1.4
Underwriting expense ratio		45.2			46.2			(1.0	)

Subtotal		78.9			78.5			0.4
Catastrophes		—			—			—
Net incurred losses attributable to prior years		(6.6	)		(3.8	)		(2.8	)

Combined ratio		72.3	%		74.7	%		(2.4	)

The Surety segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2009 was 78.9%, an increase of 0.4 points over the year ended December 31, 2008. The claims and claim adjustment expense ratio increased 1.4 points reflecting adverse economic conditions, while the underwriting expense ratio declined 1.0 points from 2008, primarily due to efficiencies gained from the Safeco acquisition.

Including the impact of net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2009 was 72.3%, a decrease of 2.4 points from the year ended December 31, 2008. The decrease was primarily due to favorable incurred losses attributable to prior years, partially offset by the changes in the combined ratio previously discussed.

Corporate and Other

Net Written Premiums

The following table sets forth the net written premiums for our Corporate and Other segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,						Change
	2009			2008			$		%
	(Dollars in millions)

Assumed inter-segment reinsurance arrangements	$	236		$	207		$	29		14.0	%
External ceded reinsurance		(74	)		(79	)		5		(6.3	)

Total net written premiums	$	162		$	128		$	34		26.6	%

Net written premiums for our Corporate and Other segment for the years ended December 31, 2009 and 2008 were $162 million and $128 million, respectively, representing an increase of $34 million, or 26.6%. The increase reflected additional premium relating to our inter-segment reinsurance arrangements of $29 million

driven in large part by increased exposures associated with the Safeco acquisition, partially offset by increased segment retention levels. The remaining increase was attributable to a reduction of external reinsurance premium ceded of $5 million due to higher retentions, largely associated with property catastrophe coverage provided by Liberty Mutual.

Inter-Segment Reinsurance Arrangements

We use inter-segment reinsurance arrangements as a tool to provide our Commercial and Personal operating segments the flexibility to retain the risks and benefits they believe are appropriate given the size and scope of their segment operations. The table below reflects written premiums assumed (ceded) under the inter-segment reinsurance arrangements:


	Year Ended
	December 31,						Change
	2009			2008			$			%
	(Dollars in millions)

Commercial	$	(173	)	$	(163	)	$	(10	)		6.1	%
Personal		(63	)		(44	)		(19	)		43.2
Corporate and Other		236			207			29			14.0

Total net written premiums	$	—		$	—		$	—			—	%

Results of Operations

The following table sets forth the results of operations for our Corporate and Other segment for the year ended December 31, 2009 as compared to the year ended December 31, 2008:


	Year Ended
	December 31,						Change
	2009			2008			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	166		$	134		$	32			23.9	%
Net investment income(1)		159			149			10			6.7
Net realized investment losses		(53	)		(407	)		354			(87.0	)

Total revenues		272			(124	)		396			*
Total claims and expenses		67			172			(105	)		(61.0	)
Interest expense		4			21			(17	)		(81.0	)

Income (loss) before income tax expense		201			(317	)		518			(163.4	)
Pre-tax operating income(2)	$	253		$	79		$	174			*


(1)		The difference between our actual net investment income and the allocated business segment investment income is reported in Corporate and Other.

(2)		For Corporate and Other, pre-tax operating income excludes net realized investment losses and integration and other acquisition related benefits associated with the Ohio Casualty and Safeco acquisitions of $1 million in 2009 and $11 million in 2008.

*		Not meaningful.

Revenues

Revenues for our Corporate and Other segment for the year ended December 31, 2009 were $272 million, an increase of $396 million over the year ended December 31, 2008.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2009 were $166 million, an increase of $32 million, or 23.9% over the year ended December 31, 2008. The increase in 2009 was primarily driven by the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2009 was $159 million, an increase of $10 million, or 6.7%, over the year ended December 31, 2008. The increase in 2009 was primarily related to a higher invested asset base associated with an increased block of run-off reserves acquired through the Safeco acquisition, partially offset by a reduction in the difference between actual net investment income and allocated net investment income in 2009 compared to 2008.

Claims and expenses

Claims and expenses for our Corporate and Other segment during the year ended December 31, 2009 were $67 million, a decrease of $105 million, or 61.0%, from the year ended December 31, 2008. The decrease in 2009 primarily reflected favorable loss experience associated with our inter-segment reinsurance arrangements, largely due to significant catastrophe activity that occurred in 2008 (including Hurricanes Ike and Gustav). An additional driver of the decrease was an increase of $57 million in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008 in both our run-off operations and external reinsurance programs. For a description of our run-off operations, see “— Critical Accounting Estimates — Claims and Claims Adjustment Expense Reserves — Unpaid Claims and Claim Adjustment Expenses — Corporate and Other — Run-Off Operations.” These items were partially offset by a decrease in the amount of loss recoveries relating to our property catastrophe reinsurance coverage provided by Liberty Mutual, due to the relative absence of severe catastrophe losses in 2009.

Interest expense

Interest expense for the year ended December 31, 2009 was $4 million, a decrease of $17 million, or 81.0%, over the year ended December 31, 2008. The decrease primarily reflected a higher average level of debt outstanding during 2008 related to the Ohio Casualty and Safeco acquisitions, which is described in more detail in “— Liquidity and Capital Resources.”

Pre-tax operating income

Pre-tax operating income for our Corporate and Other segment for the year ended December 31, 2009 was $253 million, an increase of $174 million over the year ended December 31, 2008. The increase was primarily due to favorable loss experience associated with our inter-segment reinsurance arrangements, largely due to significant catastrophe activity that occurred in 2008 (including Hurricanes Ike and Gustav), an increase in the amount of favorable incurred losses attributable to prior years in 2009 compared to 2008 in both our run-off operations and external reinsurance programs, an increase in net premiums earned consistent with the changes in net written premiums previously discussed, and lower interest expense. These items were partially offset by a decrease in the amount of loss recoveries relating to our property catastrophe reinsurance coverage provided by Liberty Mutual, due to the relative absence of severe catastrophe losses in 2009.

Consolidated Overview — Year Ended December 31, 2008 as Compared to Year Ended December 31, 2007

Net Written Premiums

The table below sets forth net written premiums by segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Commercial	$	3,975	$	3,039	$	936		30.8	%
Personal		2,122		948		1,174		123.8
Surety		479		312		167		53.5
Corporate and Other		128		108		20		18.5

Total net written premiums	$	6,704	$	4,407	$	2,297		52.1	%

Net written premiums for the year ended December 31, 2008 were $6.704 billion, an increase of $2.297 billion, or 52.1%, over the year ended December 31, 2007. The increase reflected the Ohio Casualty and Safeco acquisitions, $925 million and $1.254 billion, respectively. Excluding the effects of these acquisitions consolidated net written premiums in 2008 increased $118 million, or 3.0%, over 2007. The increase over 2007 was primarily attributable to increased levels of new business, predominantly in our Personal segment, partially offset by $224 million of premiums ceded related to the Homeowners Quota Share Treaty and modest decreases in retention for both personal and commercial product lines.

Results of Operations

The table below sets forth consolidated results of operations for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,						Change
	2008			2007			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	6,913		$	4,325		$	2,588			59.8	%
Net investment income		719			405			314			77.5
Fee and other revenues		50			33			17			51.5
Net realized investment losses		(407	)		(5	)		(402	)		*

Total revenues	$	7,275			4,758			2,517			52.9
Claims and expenses
Claims and claim adjustment expenses		4,326			2,601			1,725			66.3
General and administrative expenses		777			551			226			41.0
Goodwill impairment		973			—			973			*
Amortization of deferred policy acquisition costs		1,664			1,056			608			57.6
Interest expense		21			6			15			*

Total claims and expenses	$	7,761			4,214			3,547			84.2
Income (loss) before income tax expense		(486	)		544			(1,030	)		(189.3	)
Income tax expense		78			167			(89	)		(53.3	)

Net income (loss)	$	(564	)	$	377		$	(941	)		*


Reconciliation of Net Income (Loss)
Net income	$	(564	)	$	377		$	(941	)		*
Less: Net realized investment losses		(407	)		(5	)		(402	)		*
Add: Income tax expense		78			167			(89	)		(53.3	)
Add: Goodwill impairment		973			—			973			*
Add: Integration and other acquisition related costs		40			50			(10	)		(20.0	)

Pre-tax operating income	$	934		$	599		$	335			55.9	%


*		Not meaningful

Revenues

Revenues for the year ended December 31, 2008 were $7.275 billion, an increase of $2.517 billion, or 52.9%, over the year ended December 31, 2007, driven by increased net premiums earned and net investment income, partially offset by higher net realized investment losses.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 were $6.913 billion, an increase of $2.588 billion, or 59.8%, over the year ended December 31, 2007. The increase in 2008 reflected $888 million of premium related to the Ohio Casualty acquisition, $1.206 billion of premium related to the Safeco acquisition and the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2008 was $719 million, an increase of $314 million, or 77.5%, over the year ended December 31, 2007. The increase in net investment income in 2008 reflected an increase in fixed maturities income of $295 million due to the increase in fixed

maturity securities relating to the Ohio Casualty and Safeco acquisitions and the continued investment of cash flow from operations. Additionally, the increase in dividend income of $15 million on our equity securities was mainly attributable to the additional equity securities acquired with Safeco. These increases were partially offset by a decrease in limited partnership income due to reduced valuations. Our average investment yield was 4.87% for the year ended December 31, 2008 compared to 4.81% for the year ended December 31, 2007. See “— Investment Portfolio.”

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2008 were $50 million, an increase of $17 million, or 51.5%, over the year ended December 31, 2007 driven primarily by the additional premium installment fees generated by the acquired Safeco business.

Net Realized Investment Losses. Net realized investment losses for the year ended December 31, 2008 were $407 million, an increase of $402 million over the year ended December 31, 2007. The increase was primarily the result of a $206 million increase in impairment losses and a $161 million increase in investment losses on sales of our equity securities compared to 2007. The equity security sales and impairment losses contributed to the overall decline in the average preferred and common stock investment balances compared to 2007.

Claims and expenses

Claims and Claim Adjustment Expenses. Claims and claim adjustment expenses for the year ended December 31, 2008 were $4.326 billion, an increase of $1.725 billion, or 66.3%, over the year ended December 31, 2007. The increase in 2008 primarily reflected the impact of the Ohio Casualty and Safeco acquisitions net of efficiencies achieved through integration, and higher catastrophe losses of $260 million. The increase in 2008 also reflected unfavorable frequency trends across the commercial multiple peril, automobile physical damage (commercial and private passenger), and homeowners product lines, partially offset by an increase of $179 million in the amount of favorable incurred losses attributable to prior years in 2008 compared to 2007 primarily in commercial liability lines.

Catastrophe losses included in claims and claim adjustment expenses in 2008 totaled $350 million compared to $90 million in 2007, an increase of $260 million. Catastrophe losses in 2008 were spread across our segments: $170 million in our Commercial segment, $123 million in our Personal segment and $57 million in our Corporate and Other segment. The Commercial and Personal segment catastrophes related primarily to tornado losses (primarily in Tennessee), wind and hail storms that impacted several regions throughout the United States (with high concentration in the Midwest) and the September 2008 Hurricanes Ike and Gustav. The $57 million of catastrophe losses in our Corporate and Other segment was driven by internal property catastrophe reinsurance losses, in part, associated with Hurricanes Ike and Gustav.

Favorable incurred losses attributable to prior years in 2008 totaled $497 million. Our Commercial segment accounted for $450 million, primarily driven by actual losses emerging at levels lower than expected and moderate severity trends within the commercial multiple peril and commercial automobile product lines. Additionally, the Commercial segment experienced better than expected loss development in the general liability product line primarily driven by moderate severity and favorable frequency trends.

General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2008 were $777 million, an increase of $226 million, or 41.0%, over the year ended December 31, 2007. The increase primarily reflected the impact of the Ohio Casualty and Safeco acquisitions, including increased restructuring and integration costs of $25 million and additional intangible asset amortization of $16 million, partially offset by the extinguishment of pension and postretirement liabilities relating to the transfer of these plans to Liberty Mutual Group of $35 million.

Goodwill Impairment. In the fourth quarter of 2008, we recognized an impairment charge of $973 million in our Personal segment as previously discussed. See “— Overview — Factors Affecting Comparability of Financial Information — Goodwill.”

Amortization of Deferred Policy Acquisition Costs. The amortization of deferred policy acquisition costs for the year ended December 31, 2008 were $1.664 billion, an increase of $608 million, or 57.6% over

the year ended December 31, 2007. The growth in amortization costs in 2008 was primarily due to growth in business volume related to the Ohio Casualty and Safeco acquisitions, consistent with the increase in net premiums earned.

Interest Expense. Interest expense for the year ended December 31, 2008 was $21 million, an increase of $15 million over the year ended December 31, 2007. The increase primarily reflected the impact of the Safeco acquisition.

Income Tax Expense. Federal, state, and foreign income tax expense for the year ended December 31, 2008 was $78 million, a decrease of $89 million from the year ended December 31, 2007. Our effective tax rate for the year ended December 31, 2008 was (16.0%) compared to 30.7% for December 31, 2007.

Net income (loss)

Net loss for the year ended December 31, 2008 was $564 million versus net income of $377 million for the year ended December 31, 2007. Net loss in 2008 was adversely impacted by the $973 million impairment to our goodwill asset and $407 million of net realized investment losses, partially offset by favorable operating results discussed in more detail above.

Pre-tax operating income

Pre-tax operating income for the year ended December 31, 2008 was $934 million, an increase of $335 million, or 55.9%, over the year ended December 31, 2007. The increase was primarily attributable to additional earnings and investment income generated by the Ohio Casualty and Safeco acquisitions and an increase of $179 million in the amount of favorable incurred losses attributable to prior years in 2008 compared to 2007. These items were partially offset by higher catastrophe losses of $260 million and an increase in non-catastrophe property losses, primarily driven by unfavorable frequency in the commercial multiple peril, automobile physical damage (commercial and private passenger) and homeowners product lines.

Combined ratio

The following table sets forth the consolidated combined ratio for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended						Change in
	December 31,						Percentage
	2008			2007			Points

Claims and claim adjustment expense ratio(1)		64.7	%		65.4	%		(0.7	)
Underwriting expense ratio(2)		33.0			35.0			(2.0	)

Subtotal		97.7			100.4			(2.7	)
Catastrophes(3)		5.1			2.1			3.0
Net incurred losses attributable to prior years		(7.2	)		(7.4	)		0.2

Combined ratio(4)		95.6	%		95.1	%		0.5	%


(1)		Calculated by dividing claims and claim adjustment expenses by net premiums earned (net of premiums earned attributable to prior years). Catastrophes and net incurred losses attributable to prior years are excluded from claims and claim adjustment expenses.

(2)		The underwriting expense ratio is calculated by dividing the sum of general and administrative expenses and amortization of deferred policy acquisition costs less fee revenues by net premiums earned (net of premiums earned attributable to prior years). Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions, intangible amortization, and bad debt expenses have been excluded from the combined ratio. These costs are reflected within general and administrative expenses.

(3)		Calculated by dividing catastrophes by net premiums earned. Catastrophes include all current and prior year catastrophe losses.


(4)		Calculated by adding the claims and claim adjustment expense ratio, underwriting expense ratio, catastrophes ratio, and net incurred losses attributable to prior years ratio.

Our combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2008 was 97.7%, a decrease of 2.7 points versus the year ended December 31, 2007. The decrease in the claims and claim adjustment expense ratio reflected favorable Surety losses due to both lower reported and paid claims activity, partially offset by unfavorable frequency in the commercial multiple peril, automobile physical damage (commercial and private passenger), and homeowners product lines as compared to the prior year. The decrease in the underwriting expense ratio reflected the impact of writing more personal lines business, which typically has a lower expense ratio, and increased efficiencies resulting from the Ohio Casualty and Safeco acquisitions.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2008 was 95.6%, an increase of 0.5 points over the year ended December 31, 2007. The increase in 2008 primarily reflected higher catastrophe losses, partially offset by the changes in the combined ratio previously discussed.

Commercial

Net Written Premiums

The following table sets forth net written premiums by product line for our Commercial segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Commercial multiple peril	$	1,531	$	1,193	$	338		28.3	%
Commercial automobile		923		662		261		39.4
Workers compensation		886		748		138		18.4
General liability		380		228		152		66.7
Other(1)		255		208		47		22.6

Total net written premiums	$	3,975	$	3,039	$	936		30.8	%


(1)		Other net written premiums consist primarily of inland marine, farmowners multiple peril, allied lines and fire.

Commercial Multiple Peril. Commercial multiple peril net written premiums for the year ended December 31, 2008, increased $338 million, or 28.3%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $221 million and $150 million, respectively (i.e., with respect to Ohio Casualty, the amount by which its contribution to our net written premiums in 2008 exceeded its contribution in 2007; and with respect to Safeco, its contribution to our net written premiums in 2008). Excluding the effects of the acquisitions, commercial multiple peril net written premiums decreased $33 million, or 3.0%, reflecting lower retention and modest declines in rate due to competitive market conditions, partially offset by increased new business levels in 2008.

Commercial Automobile. Commercial automobile net written premiums for the year ended December 31, 2008 increased $261 million, or 39.4%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $166 million and $115 million, respectively. Excluding the effects of the acquisitions, commercial automobile net written premiums decreased $20 million, or 3.4%, reflecting lower retention and rate decreases due to competitive market conditions, partially offset by increased new business levels in 2008.

Workers Compensation. Workers compensation net written premiums for the year ended December 31, 2008, increased $138 million, or 18.4%, over the year ended December 31, 2007. The increase primarily

reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $79 million and $29 million, respectively. Excluding the effects of the acquisitions, workers compensation net written premiums increased $30 million, or 4.2%, due to increased new business levels, partially offset by modest declines in retention and rate.

General Liability. General liability net written premiums for the year ended December 31, 2008, increased $152 million, or 66.7%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $117 million and $30 million, respectively. Excluding the effects of the acquisitions, general liability net written premiums increased $5 million, or 2.8%. The increase was driven by increased new business, partially offset by decreases in premium rates and lower levels of retention.

Other. Other net written premiums for the year ended December 31, 2008, increased $47 million, or 22.6%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $19 million and $40 million, respectively. Excluding the effects of the acquisitions, other net written premiums decreased $12 million, or 6.0%. The decrease was driven by a reduction in rate and retention levels due to a competitive market environment.

Results of operations

The following table sets forth results of operations for the Commercial segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Revenues
Net premiums earned	$	4,024	$	3,025	$	999		33.0	%
Net investment income		402		287		115		40.1
Fee and other revenues		30		23		7		30.4

Total revenues		4,456		3,335		1,121		33.6
Total claims and expenses(1)		3,843		2,835		1,008		35.6

Pre-tax operating income	$	613	$	500	$	113		22.6	%


(1)		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $19 million in 2008 and $26 million in 2007 have been excluded from total claims and expenses.

Revenues

Revenues for our Commercial segment for the year ended December 31, 2008 were $4.456 billion, an increase of $1.121 billion, or 33.6%, over the year ended December 31, 2007.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 were $4.024 billion, an increase of $999 million, or 33.0%, over the year ended December 31, 2007. The increase in 2008 reflected an increase of $578 million of premium related to the Ohio Casualty acquisition, $424 million of premium related to the Safeco acquisition, and the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2008 was $402 million, an increase of $115 million, or 40.1%, over the year ended December 31, 2007. The increase in 2008 reflected earnings from the additional invested assets assumed from the Ohio Casualty and Safeco acquisitions and continued investment of cash flow from operations.

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2008 were $30 million, an increase of $7 million, or 30.4%, over the year ended December 31, 2007 largely due to the additional fee revenues generated by the acquisitions of Ohio Casualty and Safeco.

Claims and expenses

Claims and expenses for our Commercial segment for the year ended December 31, 2008 were $3.843 billion, an increase of $1.008 billion, or 35.6%, over the year ended December 31, 2007. The increase primarily reflected the impact of the Ohio Casualty and Safeco acquisitions (including additional intangible asset amortization of $11 million) net of efficiencies achieved through integration, higher catastrophe losses of $115 million, higher costs of $47 million associated with third-party claims adjusters driven by higher usage in 2008 related to Hurricanes Ike and Gustav, and unfavorable property frequency across our commercial multiple peril and commercial automobile product lines. These items were partially offset by an increase of $119 million in the amount of favorable incurred losses attributable to prior years in 2008 compared to 2007 and favorable commercial liability loss experience.

Catastrophe losses included in claims and claim adjustment expenses in 2008 totaled $170 million compared to $55 million in 2007, an increase of $115 million. Catastrophe losses in 2008 were primarily driven by tornado losses (primarily in Tennessee), wind and hail storms that impacted several regions throughout the United States (with high concentration in the Midwest) and the September 2008 Hurricanes Ike and Gustav.

Favorable incurred losses attributable to prior years of $450 million in 2008 were primarily driven by actual losses emerging at levels lower than expected and moderate severity trends within the commercial multiple peril product line. Additionally, favorable incurred losses attributable to prior years in the general liability product line were primarily driven by moderate severity and favorable frequency trends.

Pre-tax operating income

Pre-tax operating income for our Commercial segment for the year ended December 31, 2008 was $613 million, an increase of $113 million, or 22.6%, over the year ended December 31, 2007, primarily resulting from the additional earnings and investment income generated by the Ohio Casualty and Safeco acquisitions and an increase of $119 million in the amount of favorable incurred losses attributable to prior years in 2008 compared to 2007. These items were partially offset by higher catastrophe losses of $115 million, increased costs of $47 million associated with third-party claims adjusters mainly related to Hurricanes Ike and Gustav, unfavorable frequency across most property lines, mainly within the commercial multiple peril and commercial automobile product lines.

Combined Ratio

The following table sets forth the combined ratio for our Commercial segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended						Change in
	December 31,						Percentage
	2008			2007			Points

Claims and claim adjustment expense ratio		66.3	%		66.4	%		(0.1	)
Underwriting expense ratio		34.8			35.5			(0.7	)

Subtotal		101.1			101.9			(0.8	)
Catastrophes		4.2			1.8			2.4
Net incurred losses attributable to prior years		(11.2	)		(10.9	)		(0.3	)

Combined ratio		94.1	%		92.8	%		1.3

The Commercial segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2008 was 101.1%, a decrease of 0.8 points from the year ended December 31, 2007. The slight decrease in the claims and claim adjustment expense ratio was attributable to favorable commercial liability loss experience, offset by adverse non-catastrophe weather experience driving unfavorable frequency across most property lines and an increase in costs associated with third-party claims

adjusters. The underwriting expense ratio decreased year over year due to efficiencies gained from the Ohio Casualty acquisition and lower agency profit share expenses consistent with catastrophe activity.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2008 was 94.1%, an increase of 1.3 points over the year ended December 31, 2007. The increase primarily reflected higher catastrophe losses including tornado losses (primarily in Tennessee), wind and hail storms that impacted several regions throughout the United States (with high concentration in the Midwest) and the September 2008 Hurricanes Ike and Gustav, partially offset by decreases in the combined ratio previously discussed.

Personal

Net Written Premiums

The following table sets forth net written premiums by product line for our Personal segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Private passenger automobile	$	1,500	$	572	$	928		162.2	%
Homeowners		472		321		151		47.0
Other(1)		150		55		95		172.7

Total net written premiums	$	2,122	$	948	$	1,174		123.8	%


(1)		Other net written premiums consist primarily of fire, allied lines, general liability, and inland marine

Private Passenger Automobile. Private passenger automobile net written premiums for the year ended December 31, 2008 increased $928 million, or 162.2%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $163 million and $640 million, respectively. Excluding the effects of the acquisitions, private passenger automobile net written premiums increased $125 million, or 25.4%, reflecting increased new business driven primarily by territory expansion.

Homeowners. Homeowners net written premiums for the year ended December 31, 2008 increased $151 million, or 47.0%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions of $92 million and $80 million, respectively. Excluding the effects of the acquisitions, homeowners net written premiums decreased by $21 million, or 7.7%, primarily due to increased ceded premium related to the Homeowners Quota Share Treaty ($224 million). Further adjusting for the impact of the Homeowners Quota Share Treaty, net written premiums increased 23.1% primarily due to increased new business due to territory expansion.

Other. Other net written premiums for the year ended December 31, 2008 increased $95 million, or 172.7%, over the year ended December 31, 2007. The increase primarily reflected the impact of the Ohio Casualty and Safeco acquisitions, $26 million and $62 million, respectively. Excluding the effects of the acquisitions, other net written premiums increased by $7 million, or 17.1%, reflecting increased new business.

Results of Operations

The following table sets forth results of operations for our Personal segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Revenues
Net premiums earned	$	2,277	$	894	$	1,383		154.7	%
Net investment income		131		47		84		178.7
Fee and other revenues		20		7		13		185.7

Total revenues		2,428		948		1,480		156.1
Total claims and expenses(1)		2,342		877		1,465		167.0

Pre-tax operating income	$	86	$	71	$	15		21.1	%


(1)		Integration and other acquisition related costs associated with the Ohio Casualty and Safeco acquisitions of $29 million in 2008 and $3 million in 2007 have been excluded from total claims and expenses. The goodwill impairment of $973 million in our Personal segment in 2008 has been excluded from total claims and expenses.

Revenues

Revenues for our Personal segment for the year ended December 31, 2008 were $2.428 billion, an increase of $1.480 billion, or 156.1%, over the year ended December 31, 2007.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 were $2.277 billion, an increase of $1.383 billion, or 154.7%, over the year ended December 31, 2007. The increase in 2008 reflected $273 million and $665 million of additional premium from the Ohio Casualty and Safeco acquisitions, respectively, and the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2008 was $131 million, an increase of $84 million, or 178.7%, over the year ended December 31, 2007. The increase in 2008 reflected earnings from the additional invested assets assumed as a result of the Ohio Casualty and Safeco acquisitions and continued investment of cash flow from operations.

Fee and Other Revenues. Fee and other revenues for the year ended December 31, 2008 were $20 million, an increase of $13 million over the year ended December 31, 2007. The increase in 2008 primarily reflected the additional premium installment fees generated by the addition of the Safeco business.

Claims and expenses

Claims and expenses for our Personal segment during the year ended December 31, 2008 were $2.342 billion, an increase of $1.465 billion, or 167.0% over the year ended December 31, 2007. The increase in 2008 primarily reflected the impact of the Ohio Casualty and Safeco acquisitions net of efficiencies gained through integration, higher catastrophe losses of $95 million, increased costs of $94 million primarily due to higher utilization of third-party claims adjusters related to Hurricanes Ike and Gustav, and adverse non-catastrophe weather experience driving unfavorable frequency in the private passenger automobile physical damage and homeowner product lines.

Catastrophe losses included in claims and claim adjustment expenses in 2008 totaled $123 million compared to $28 million in 2007, an increase of $95 million. Catastrophe losses in 2008 were driven by tornado losses (primarily in Tennessee), several wind and hail storms throughout the United States and the September 2008 Hurricanes Ike and Gustav.

Favorable incurred losses attributable to prior years of $43 million in 2008 were primarily driven by the private passenger automobile liability line due to better than expected loss trends.

Pre-tax operating income

Pre-tax operating income for our Personal segment for the year ended December 31, 2008 was $86 million, an increase of $15 million, or 21.1%, over the year ended December 31, 2007, primarily resulting from additional operating earnings and efficiencies generated by the acquisitions of Ohio Casualty and Safeco, partially offset by higher catastrophe losses of $95 million, increased costs of $94 million associated with third-party claims adjusters mainly related to Hurricanes Ike and Gustav, and adverse non-catastrophe weather experience in the private passenger automobile and homeowner product lines.

Combined Ratio

The following table sets forth the combined ratio for our Personal segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended						Change in
	December 31,						Percentage
	2008			2007			Points

Claims and claim adjustment expense ratio		68.9	%		66.0	%		2.9
Underwriting expense ratio		28.7			33.1			(4.4	)

Subtotal		97.6			99.1			(1.5	)
Catastrophes		5.4			3.1			2.3
Net incurred losses attributable to prior years		(1.9	)		(5.1	)		3.2

Combined ratio		101.1	%		97.1	%		4.0

The Personal segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2008 was 97.6%, a decrease of 1.5 points from the year ended December 31, 2007. The increase in the claims and claim adjustment expense ratio reflected unfavorable frequency in the private passenger automobile and homeowner product lines due to adverse non-catastrophe weather experience and increased costs associated with third-party claims adjusters. The decrease in the underwriting expense ratio was primarily due to lower costs associated with the acquired Safeco business, scale benefits immediately recognized from the Safeco acquisition, and lower agency profit share expenses consistent with catastrophe activity and overall underwriting results.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2008 was 101.1%, an increase of 4.0 points over the year ended December 31, 2007. The increase primarily reflected higher catastrophe losses related to Hurricanes Ike & Gustav, tornadoes, and Midwest storm activity, and a decrease in the amount of favorable incurred losses attributable to prior years in 2008 as compared to 2007, partially offset by the changes in the combined ratio previously discussed.

Surety

Net Written Premiums

The following table sets forth net written premiums by product line for our Surety segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$		%
	(Dollars in millions)

Contract bond	$	298	$	213	$	85		39.9	%
Commercial bond		66		43		23		53.5
Small bond(1)		115		56		59		105.4

Total net written premiums	$	479	$	312	$	167		53.5	%


(1)		Small bond net written premiums consist of contract and commercial bonds covering small- and mid-size businesses and individuals distributed through our network of independent property and casualty insurance agencies.

Contract Bond. Contract bond net written premiums for the year ended December 31, 2008 increased $85 million, or 39.9%, over the year ended December 31, 2007. The increase primarily reflected an increase of $71 million in premiums related to the Safeco acquisition. Excluding the effects of the acquisition, contract bond net written premiums increased $14 million, or 6.6%, reflecting an increase in contract writings.

Commercial Bond. Commercial bond net written premiums for the year ended December 31, 2008 increased $23 million, or 53.5%, over the year ended December 31, 2007. The increase primarily reflected an increase of $25 million in premiums related to the Safeco acquisition. Excluding the effects of the acquisition, commercial bond net written premiums decreased $2 million, or 4.7%.

Small Bond. Small bond net written premiums for the year ended December 31, 2008 increased $59 million, or 105.4%, over the year ended December 31, 2007. The increase primarily reflected an increase in premiums related to the Ohio Casualty and Safeco acquisitions, $42 million and $10 million, respectively. Excluding the effects of the acquisitions, Small bond net written premiums increased $7 million, or 19.4%, due to growth in writings.

Results of Operations

The following table sets forth the results of operations for our Surety segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,				Change
	2008		2007		$			%
	(Dollars in millions)

Net premiums earned	$	478	$	289	$	189			65.4	%
Net investment income		37		25		12			48.0
Fee and other revenues		—		3		(3	)		(100.0	)

Total revenues		515		317		198			62.5
Total claims and expenses(1)		359		221		138			62.4

Pre-tax operating income	$	156	$	96	$	60			62.5	%


(1)		Integration and other acquisition related costs, associated with the Ohio Casualty and Safeco acquisitions, of $3 million in 2008 and $1 million in 2007 have been excluded from total claims and expenses.

Revenues

Revenues for our Surety segment for the year ended December 31, 2008 were $515 million, an increase of $198 million, or 62.5%, over the year ended December 31, 2007.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 were $478 million, an increase of $189 million, or 65.4%, over the year ended December 31, 2007. The increase in 2008 reflected $38 million of premium related to the Ohio Casualty acquisition, $117 million of premium related to the Safeco acquisition and the net premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2008 was $37 million, an increase of $12 million, or 48.0%, over the year ended December 31, 2007. The increase in 2008 reflected earnings from the additional invested assets assumed as a result of the Ohio Casualty and Safeco acquisitions and continued investment of cash flow from operations.

Claims and expenses

Claims and expenses for our Surety segment during the year ended December 31, 2008 were $359 million, an increase of $138 million, or 62.4%, over the year ended December 31, 2007. The increase in 2008 primarily reflected the impact of the Ohio Casualty and Safeco acquisitions and a decrease of $4 million in the amount of favorable incurred losses attributable to prior years as compared to 2007, partially offset by lower reported and paid claims activity as compared to the prior year.

Pre-tax operating income

Pre-tax operating income for our Surety segment for the year ended December 31, 2008 was $156 million, an increase of $60 million, or 62.5%, over the year ended December 31, 2007, driven by additional earnings from the Ohio Casualty and Safeco acquisitions and lower reported and paid claims activity. These items were partially offset by a decrease of $4 million in the amount of favorable incurred losses attributable to prior years as compared to 2007.

Combined Ratio

The following table sets forth the combined ratio for our Surety segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended						Change in
	December 31,						Percentage
	2008			2007			Points

Claims and claim expense ratio		32.3	%		36.7	%		(4.4	)
Underwriting expense ratio		46.2			46.6			(0.4	)

Subtotal		78.5			83.3			(4.8	)
Catastrophes		—			—			—
Net incurred losses attributable to prior years		(3.8	)		(7.6	)		3.8

Combined ratio		74.7	%		75.7	%		(1.0	)

The Surety segment combined ratio before catastrophes and net incurred losses attributable to prior years for the year ended December 31, 2008 was 78.5%, a decrease of 4.8 points from the year ended December 31, 2007. The decrease in the claims and claim adjustment expense ratio reflected both lower reported and paid claims activity as compared to the prior year.

Including the impact of net incurred losses attributable to prior years, the combined ratio for the year ended December 31, 2008 was 74.7%, a decrease of 1.0 points from the year ended December 31, 2007. The decrease of 1.0 points was primarily attributable to the changes in the combined ratio previously discussed,

partially offset by a decrease in the amount of favorable incurred losses attributable to prior years in 2008 compared to 2007.

Corporate and Other

Net Written Premiums

The following table sets forth the net written premiums for our Corporate and Other segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,						Change
	2008			2007			$			%
	(Dollars in millions)

Assumed inter-segment reinsurance arrangements	$	207		$	141		$	66			46.8	%
External ceded reinsurance		(79	)		(33	)		(46	)		139.4

Total net written premiums	$	128		$	108		$	20			18.5	%

Net written premiums for our Corporate and Other segment for the years ended December 31, 2008 and 2007 were $128 million and $108 million, respectively, representing an increase of $20 million, or 18.5%. The increase reflected additional premium relating to our inter-segment reinsurance arrangements of $66 million driven in large part by increased exposures associated with the Ohio Casualty acquisition, offset by additional external reinsurance premium ceded of $46 million due to increased exposures requiring reinsurance protection due to the Ohio Casualty acquisition.

Inter-Segment Reinsurance Arrangements


	Year Ended
	December 31,						Change
	2008			2007			$			%
	(Dollars in millions)

Commercial	$	(163	)	$	(109	)	$	(54	)		49.5	%
Personal		(44	)		(32	)		(12	)		37.5
Corporate and Other		207			141			66			46.8

Total net written premiums	$	—		$	—		$	—			—	%

Results of Operations

The following table sets forth the results of operations for our Corporate and Other segment for the year ended December 31, 2008 as compared to the year ended December 31, 2007:


	Year Ended
	December 31,						Change
	2008			2007			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	134		$	117		$	17			14.5	%
Net investment income(1)		149			46			103			*
Net realized investment losses		(407	)		(5	)		(402	)		*
Fee and other revenues		—			—			—			—

Total revenues		(124	)		158			(282	)		(178.5	)
Total claims and expenses		172			245			(73	)		(29.8	)
Interest expense		21			6			15			*

Loss before income tax expense		(317	)		(93	)		(224	)		*
Pre-tax operating income (loss)(2)	$	79		$	(68	)	$	147			*


(1)		The difference between our actual net investment income and the allocated business segment investment income is reported in Corporate and Other.

(2)		For Corporate and Other, pre-tax operating income excludes net realized investment losses and integration and other acquisition related (benefits) costs associated with the Ohio Casualty and Safeco acquisitions of $(11) million in 2008 and $20 million in 2007.

*		Not meaningful.

Revenues

Revenues for our Corporate and Other segment for the year ended December 31, 2008 were $(124) million, a decrease of $282 million, or 178.5%, from the year ended December 31, 2007.

Net Premiums Earned. Net premiums earned for the year ended December 31, 2008 were $134 million, an increase of $17 million, or 14.5%, over the year ended December 31, 2007. The increase in 2008 was primarily driven by the net written premiums earned associated with the changes in net written premiums previously discussed.

Net Investment Income. Net investment income for the year ended December 31, 2008 was $149 million, an increase of $103 million over the year ended December 31, 2007. The increase in 2008 was primarily driven by an increase in the difference between actual net investment income and allocated net investment income in 2008 compared to the year ended December 31, 2007. Additionally, the increase in 2008 was related to higher invested asset base associated with the increased block of run-off reserves acquired through the Safeco acquisition.

Claims and expenses

Claims and expenses for our Corporate and Other segment during the year ended December 31, 2008 were $172 million, a decrease of $73 million, or 29.8% from the year ended December 31, 2007. The decrease

primarily reflected an increase in the amount of loss recoveries relating to our property catastrophe reinsurance coverage from Liberty Mutual consistent with the significant catastrophe activity in 2008 (largely Hurricanes Ike and Gustav), unfavorable losses attributable to prior years in 2007 within both our run-off (mainly A&E claims) and reinsurance operations, and lower litigation expenses. These items were partially offset by unfavorable loss experience associated with our inter-segment reinsurance arrangements, largely due to the aforementioned 2008 catastrophe activity.

Interest expense

Interest expense for our Corporate and Other segment for the year ended December 31, 2008 was $21 million, an increase of $15 million over the year ended December 31, 2007. The increase primarily reflects the impact of the Safeco acquisition.

Pre-tax operating income

Pre-tax operating income for Corporate and Other segment for the year ended December 31, 2008 was $79 million, an increase of $147 million over the year ended December 31, 2007. The increase was primarily driven by higher net investment income of $103 million and an increase in the amount of loss recoveries relating to our property catastrophe reinsurance coverage with Liberty Mutual consistent with the significant catastrophe activity in 2008 (largely Hurricanes Ike and Gustav). Third-party catastrophe reinsurance recoveries are recorded in our Corporate and Other segment. The related direct losses are recorded in our operating segments and our Corporate and Other segment records the associated assumed losses to the extent covered by inter-segment reinsurance arrangements. Further impacting the increase in pre-tax operating income in 2008 were unfavorable losses attributable to prior years in 2007 within both our run-off operations (mainly A&E claims) and reinsurance operations, an increase in net premiums earned consistent with the changes in net written premiums previously discussed, and lower litigation expenses. These items were partially offset by unfavorable loss experience associated with our inter-segment reinsurance arrangements, largely due to the aforementioned 2008 catastrophe activity, and higher interest expense.

Investment Portfolio

Insurance company investments must comply with applicable laws and regulations which prescribe the kind, quality and concentration of investments. In general, these laws and regulations permit investments, within specified limits and subject to some qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, mortgage loans, real estate and some other investments.

Investment Strategy

Our investment strategy seeks long-term returns through disciplined security selection, portfolio diversity and an integrated approach to risk management. We select and monitor investments to balance the goals of safety, stability, liquidity, growth and after-tax total return with the need to comply with regulatory investment requirements. Asset liability management is accomplished by setting an asset target duration range that is influenced by the following factors: (i) the estimated reserve payout pattern, (ii) the inclusion of our tactical capital market views into the investment decision making process and (iii) our overall risk tolerance. We aim to achieve a relatively safe and stable income stream by maintaining a broad-based portfolio of investment grade bonds. These holdings are supplemented by investments in additional asset types with the objective of further enhancing the portfolio’s diversification and expected returns. These additional asset types include commercial mortgages and other real estate financing investments, non-investment grade bonds, and common and preferred stock. We manage our investment risks through consideration of duration of liabilities, diversification, credit limits, careful analytic review of each investment decision, and comprehensive risk assessments of the overall portfolio.

Our investment policy and strategy are reviewed and approved by the board of directors of each of our insurance subsidiaries, which meet on a regular basis to review and consider investment activities, tactics and new investment classes. Pursuant to the terms of investment management agreements, and with the oversight of the board of directors of each of our insurance subsidiaries and our Chief Financial Officer, Liberty Mutual manages our insurance subsidiaries’ investment portfolios with an experienced team of investment personnel. See “Certain Relationships and Related Party Transactions — Investment Management Agreements.”

Investment Returns

A summary of our investment results for the years ended December 31, 2009, 2008 and 2007 is as follows:


	Year Ended December 31,
	2009		2008		2007
	(Dollars in millions)

Net investment income	$	910	$	719	$	405
Net realized investment losses		(53)		(407)		(5)

Total investment results	$	857	$	312	$	400

Average invested assets(1)	$	19,501	$	14,769	$	8,416
Average investment yield(2)		4.67%		4.87%		4.81%
Average investment yield on fixed maturities(2)		5.06%		4.77%		4.59%
Average investment yield on equity securities(2)		6.52%		6.68%		5.84%
Average investment yield on mortgage loans(2)		5.74%		6.39%		5.49%


(1)		Excludes net unrealized investment gains and losses and cash and cash equivalents.

(2)		Excludes net realized investment gains and losses and net unrealized investment gains and losses

Net Investment Income

The following table summarizes our net investment income for the years ended December 31, 2009, 2008 and 2007:


	Year Ended December 31,
Net Investment Income	2009			2008			2007
	(Dollars in millions)

Fixed maturities	$	932		$	651		$	356
Equity securities		28			45			30
Limited partnerships and LLCs		(43	)		(15	)		3
Mortgage loans		14			7			1
Cash and cash equivalent interest		12			27			18
Other investment income		5			8			3

Gross investment income		948			723			411
Investment expenses		(38	)		(4	)		(6	)

Net investment income	$	910		$	719		$	405

Net investment income for the year ended December 31, 2009 was $910 million, an increase of $191 million over the year ended December 31, 2008. The increase in net investment income in 2009 reflected a higher average invested asset base due to $8.6 billion of investments acquired with the Safeco acquisition as well as the continued reinvestment of cash flows from operations. The increase was partially offset by a decrease in limited partnership income of $28 million, reflecting reduced market valuations, a decrease in dividend income due to the reduction in the equity portfolio and higher investment expenses due to the Safeco acquisition, additional management fees, and variable compensation costs. The higher asset base as well as a 0.2% increase in the average investment yield contributed $281 million in investment income from fixed maturities in the year ended December 31, 2009 compared with the prior year. The $15 million reduction in investment income from cash and cash equivalent investments was primarily the result of lower yields compared with the prior year. Investment income on mortgage loans increased by $7 million in 2009 from the prior year driven by an increase in the asset base and is consistent with our diversification strategy. For the

year ended December 31, 2009, the average investment yield excluding net realized investment gains and losses was 4.67% compared with 4.92% for the year ended December 31, 2008.

Net investment income for the year ended December 31, 2008 was $719 million, an increase of $314 million over the year ended December 31, 2007. The increase in net investment income in 2008 reflected an increase in the average invested asset base from the Safeco and Ohio Casualty acquisitions and the continued reinvestment of cash flow from operations. The $295 million increase in fixed maturities income was primarily the result of a $172 million increase in taxable bonds and a $124 million increase in tax-exempt bonds over the same period in 2007. The $18 million decrease in limited partnership income from the same period in 2007 was driven by reduced market valuations during the last quarter of 2008 and a lack of exit opportunities as a result of the economic environment during that time.

Current Investment Portfolio

Our investment portfolio mix at December 31, 2009 consisted in large part of high quality, fixed maturity securities and short-term investments with a smaller allocation to common and preferred equity securities and other investments, such as mortgage loans, private equity and private real estate investments. Many of these other investments are held in limited partnerships and limited liability companies (“LLCs”). We believe that prudent levels of investments in common equity securities and other investments within our investment portfolio are likely to enhance long term after-tax total returns without significantly increasing the risk profile of the portfolio. We regularly review our entire portfolio in the context of macroeconomic and capital market conditions.

Invested Assets (including cash and cash equivalents)

The following table summarizes our invested assets by asset category as of December 31, 2009 and December 31, 2008:


	As of December 31,
	2009					2008
	Carrying		% of			Carrying		% of
Type of Investment	Value		Total			Value		Total
	(Dollars in millions)

Fixed maturities, available for sale, at fair value	$	20,125		89.4	%	$	16,820		83.9	%
Equity securities, available for sale, at fair value		301		1.3			501		2.5
Short-term investments		109		0.5			382		1.9
Mortgage loans		271		1.2			201		1.0
Other investments		150		0.7			190		0.9
Cash and cash equivalents		1,548		6.9			1,968		9.8

Total invested assets	$	22,504		100.0	%	$	20,062		100.0	%

Total invested assets as of December 31, 2009 were $22.504 billion, an increase of $2.442 billion, or 12.2%, over December 31, 2008. The increase reflects investment of cash flows from operations and an increase in unrealized gains primarily due to a decrease in credit spreads. Partially offsetting the increase was a decline in the equity investment holdings as we reduced our exposure to common equities.

Fixed maturities available for sale as of December 31, 2009 were $20.125 billion, an increase of $3.305 billion, or 19.6%, over December 31, 2008. The increase reflects market value increases and additional purchases of fixed income securities.

Equity securities available for sale as of December 31, 2009 were $301 million ($85 million common stock and $216 million preferred stock versus $215 million common stock and $286 million preferred stock as of December 31, 2008), a decrease of $200 million or 39.9% from December 31, 2008. The decrease in total equity securities available for sale primarily reflects the sale of common equities partially offset by market appreciation.

Short term investments as of December 31, 2009 were $109 million, a decrease of $273 million, or 71.5%, from December 31, 2008. This decrease reflected a decline in short term assets held as collateral in connection with our securities lending program and redeployment into the fixed maturities portfolio.

Mortgage loans as of December 31, 2009 were $271 million, an increase of $70 million or 34.8% over December 31, 2008. The increase reflected $77 million of new capital loaned, and $7 million in principal repayments. The entire mortgage loan portfolio was U.S. based. As of December 31, 2009, the average total loan size was $1.5 million and the average loan participation size was $0.1 million. At December 31, 2009, approximately 91% of the loans were full or partial recourse to borrowers.

Other investments include limited partnerships and LLCs. As of December 31, 2009, other investments were $150 million, a decrease of $40 million or 21.1% over December 31, 2008. These investments consist of traditional private equity partnerships of $37 million, other partnerships of $39 million, and real estate partnerships of $74 million. Our investments in limited partnerships and LLCs are long-term in nature and highly illiquid.

Cash and cash equivalents as of December 31, 2009 were $1.548 billion, a decrease of $420 million, or 21.3%, from December 31, 2008. This decrease reflects the purchase of long-term securities partially offset by cash generated from operations and the previously mentioned equity security sales. In general, we expect cash and cash equivalent assets to range between 2% to 5% of total invested assets.

As of December 31, 2009, our available-for-sale investment securities reflected $761 million as Level 1 (quoted prices in active markets), primarily U.S. Treasuries. The majority of our invested assets are reported as Level 2 (quoted prices from other observable inputs). As of December 31, 2009, we reported $19.46 billion of our available-for-sale investment securities as Level 2, consisting primarily of various fixed maturity securities. Finally, we reported $309 million as Level 3 (unobservable inputs), primarily comprised of corporate bonds for which a market price is not readily available.

As of December 31, 2009, we had unfunded commitments in traditional private equity partnerships, real estate partnerships, and other, of $41 million, $241 million and $12 million respectively. As of December 31, 2009, we had commitments to purchase various residential mortgage-backed securities at a cost and fair market value of $119 million.

The following tables summarize our available-for-sale portfolio by security type as of December 31, 2009 and December 31, 2008:


	As of December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in millions)

U.S. government and agency securities	$	706	$	21	$	(2	)	$	725
Mortgage and asset-backed securities:
Residential		4,730		142		(46	)		4,826
Commercial		558		11		(17	)		552
Other mortgage and ABS securities		920		37		(19	)		938
U.S. state and municipal		8,319		471		(48	)		8,742
Corporate and other		4,137		229		(41	)		4,325
Foreign government securities		18		—		(1	)		17

Total fixed maturities		19,388		911		(174	)		20,125

Common stock		53		32		(−	)		85
Preferred stock		205		26		(15	)		216

Total equity securities		258		58		(15	)		301


Total securities available for sale	$	19,646	$	969	$	(189	)	$	20,426


	As of December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in millions)

U.S. government and agency securities	$	604	$	47	$	(2	)	$	649
Mortgage and asset-backed securities:
Residential		3,162		84		(91	)		3,155
Commercial		551		1		(67	)		485
Other mortgage and ABS securities		792		12		(38	)		766
U.S. state and municipal		8,568		97		(409	)		8,256
Corporate and other		3,746		41		(298	)		3,489
Foreign government securities		18		2		—			20

Total fixed maturities		17,441		284		(905	)		16,820

Common stock		282		—		(67	)		215
Preferred stock		329		21		(64	)		286

Total equity securities		611		21		(131	)		501

Total securities available for sale	$	18,052	$	305	$	(1,036	)	$	17,321

The following table summarizes our allocation of fixed maturities by credit quality as of December 31, 2009 and December 31, 2008:


	As of December 31,
	2009					2008
	Fair		% of			Fair		% of
Fixed Maturities by Credit Quality(1)	Value		Total			Value		Total
	(Dollars in millions)

AAA	$	9,863		49.0	%	$	8,071		48.0	%
AA+, AA, AA−		4,193		20.8			4,223		25.1
A+, A, A−		3,191		15.9			2,599		15.4
BBB+, BBB, BBB−		1,943		9.7			1,506		8.9

Total investment grade		19,190		95.4	%		16,399		97.4	%
BB+, BB, BB−		472		2.3			213		1.3
B+, B, B−		382		1.9			196		1.2
CCC or lower		81		0.4			12		0.1

Total below investment grade		935		4.6	%		421		2.6	%
Total fixed maturities	$	20,125		100.0	%	$	16,820		100.0	%


(1)		For purposes of this disclosure, credit quality is primarily based upon S&P’s ratings.

As of December 31, 2009, no single issuer, excluding U.S. Treasuries, agency securities and mortgage-backed securities, accounted for more than 1% of invested assets.

Our allocation to investment grade securities decreased slightly to 95.4% at December 31, 2009 from 97.4% December 31, 2008. We had 4.6% of our fixed maturity securities invested in non-investment grade securities at December 31, 2009, an increase of 2.0% compared to December 31, 2008 primarily due to the significant tightening of non-investment grade credit spreads and downgrades on investment grade securities. As of December 31, 2009, the overall average credit quality rating stood at AA. Our holdings of below investment grade securities primarily consist of an actively managed diversified portfolio of fixed rate high yield securities and floating rate loans.

The following tables summarize our mortgage and asset-backed fixed maturity portfolio by credit quality as of December 31, 2009 and 2008:


	As of December 31, 2009
Mortgage and Asset-Backed Fixed																B or						% of
Maturities by Credit Quality	AAA			AA			A			BBB			BB			Lower			Total			Total
	(Dollars in millions)

SBA(1) loans	$	727		$	—		$	—		$	—		$	—		$	—		$	727			11.5	%
GNMA(2) residential mortgage		2,384			—			—			—			—			—			2,384			37.8
FNMA(3) residential mortgage		935			—			—			—			—			—			935			14.8
FHLMC(4) residential mortgage		1,208			—			—			—			—			—			1,208			19.1
Prime residential mortgage		133			—			6			15			6			37			197			3.1
Alt-A residential mortgage		38			—			1			1			—			24			64			1.0
Sub-prime residential mortgage		7			5			11			3			—			12			38			0.6
Commercial mortgage backed securities		439			33			39			41			—			—			552			8.8
Non-mortgage asset backed securities		121			22			28			19			18			3			211			3.3

Total	$	5,992		$	60		$	85		$	79		$	24		$	76		$	6,316			100.0	%

% of Total		94.9	%		0.9	%		1.3	%		1.3	%		0.4	%		1.2	%		100.0	%


(1)		SBA is the Small Business Administration.

(2)		GNMA is the Government National Mortgage Association.

(3)		FNMA is the Federal National Mortgage Association.

(4)		FMLMC is the Federal Home Loan Mortgage Corporation.


	As of December 31, 2008
Mortgage and Asset-Backed Fixed																B or						% of
Maturities by Credit Quality	AAA			AA			A			BBB			BB			Lower			Total			Total
	(Dollars in millions)

SBA loans	$	496		$	—		$	—		$	—		$	—		$	—		$	496			11.3	%
GNMA residential mortgage		143			—			—			—			—			—			143			3.2
FNMA residential mortgage		1,162			—			—			—			—			—			1,162			26.4
FHLMC residential mortgage		1,444			—			—			—			—			—			1,444			32.8
Prime residential mortgage		265			9			3			5			—			—			282			6.4
Alt-A residential mortgage		55			—			—			6			—			—			61			1.4
Sub-prime residential mortgage		47			8			5			1			—			2			63			1.4
Commercial mortgage backed securities		452			27			4			2			—			—			485			11.0
Non-mortgage asset backed securities		165			28			46			27			3			1			270			6.1

Total	$	4,229		$	72		$	58		$	41		$	3		$	3		$	4,406			100.0	%

% of Total		96.0	%		1.6	%		1.3	%		0.9	%		0.1	%		0.1	%		100.0	%

As of December 31, 2009, more than 83% of our securitized portfolio was explicitly backed by the U.S. government (GNMA and SBA) or by government-sponsored entities (FHLMC and FNMA). During 2009, we moved some of our liquidity into longer-term mortgage backed securities. GNMAs increased by $2.241 billion, reflecting acquisitions in 2009 as part of our overall strategy to improve liquidity and credit quality. Over 94% of our mortgage and asset-backed holdings were rated AAA at December 31, 2009. At December 31, 2009, our commercial mortgage backed securities portfolio was well diversified and of high quality with over 85% rated AA or above, approximately 16% of the underlying collateral having been defeased with U.S. Treasuries, and less than 18% of the holdings backed by 2006 to 2008 vintage transactions.

The following table summarizes our allocation of fixed maturities by maturity date as of December 31, 2009 and December 31, 2008:


	As of December 31,
	2009					2008
	Fair		% of			Fair		% of
Fixed Maturities by Maturity Date	Value		Total			Value		Total
	(Dollars in millions)

1 year or less	$	565		2.8	%	$	352		2.1	%
Over 1 year through 5 years		3,494		17.4			2,975		17.7
Over 5 years through 10 years		3,241		16.1			2,706		16.1
Over 10 years		6,509		32.3			6,381		37.9
Mortgage and asset-backed securities		6,316		31.4			4,406		26.2

Total fixed maturities	$	20,125		100.0	%	$	16,820		100.0	%

During 2009, after taking into consideration changes in investment opportunities and our view of the current and prospective business and economic environment, we made only minor adjustments to the average life of our investment portfolio.

Included in our fixed maturity portfolio at December 31, 2009 was $4.325 billion of corporate and other fixed maturities. These credit exposures are diversified across a number of industries. The following table shows the industry credit sectors for those exposures. At December 31, 2009, the corporate and other portfolio was approximately 20% of our fixed maturity portfolio.


	As of December 31, 2009
	Carrying		Average Credit
Credit Sector	Value		Rating(1)
	(Dollars in millions)

Corporate and other fixed maturities:
Financial:
Banks	$	398	A
Diversified Financial Services		310	A−
Other		252	A−

Total Financial		960	A−
Communications:
Telecommunications		445	BBB+
Media		221	BBB
Advertising		10	B+

Total Communications		676	BBB+
Consumer non-cyclical:
Beverages		222	A−
Other		404	BBB

Total Consumer non-cyclical		626	BBB+
Industrials		508	BBB
Utilities		408	BBB+
Other		1,147	BBB

Total Corporate and other fixed maturities	$	4,325	BBB+


(1)		For purposes of this disclosure, credit quality is primarily based upon S&P ratings.

Net Realized Investment Gains (Losses)

The following tables summarize our net realized investment gains (losses) for the years ended December 31, 2009, 2008 and 2007:


							Change in
	Sales and						Derivatives
Net Realized Investment Gains (Losses)	Dispositions			Impairments			Value		Total
				(Dollars in millions)

Year Ended December 31, 2009:
Fixed maturities	$	25		$	(44	)	$	—	$	(19	)
Common and preferred stock		27			(53	)		—		(26	)
Other		(3	)		(5	)		—		(8	)

Total	$	49		$	(102	)	$	—	$	(53	)

Year Ended December 31, 2008:
Fixed maturities	$	(40	)	$	(61	)	$	—	$	(101	)
Common and preferred stock		(165	)		(148	)		—		(313	)
Other		1			—			6		7

Total	$	(204	)	$	(209	)	$	6	$	(407	)

Year Ended December 31, 2007:
Fixed maturities	$	2		$	(3	)	$	—	$	(1	)
Common and preferred stock		(4	)		—			—		(4	)

Total	$	(2	)	$	(3	)	$	—	$	(5	)


Components of Net Realized	Year Ended December 31,
Investment Gains (Losses)	2009			2008			2007
	(Dollars in millions)

Fixed maturities:
Gross realized gains	$	42		$	20		$	16
Gross realized (losses)		(61	)		(121	)		(17	)
Equities:
Gross realized gains		30			7			7
Gross realized (losses)		(56	)		(320	)		(11	)
Other:
Gross realized gains		—			7			—
Gross realized (losses)		(8	)		—			—

Total net realized investment (losses) gains	$	(53	)	$	(407	)	$	(5	)

Net realized investment losses for the year ended December 31, 2009 were $53 million, compared to $407 million and $5 million in the same periods in 2008 and 2007, respectively. The decrease in 2009 and increase in 2008 reflect impairment losses recorded in 2008 on fixed maturity and equity investments related to securities deemed to be other-than-temporarily impaired due to market conditions.

Effective January 1, 2009, we adopted FASB Staff Position FAS 115-2 and 124-2 Recognition and Presentation of Other-Than-Temporary Impairments as codified in FASB Codification Update to FASB Accounting Codification (“ASC”) 320, Investments — Debt and Equity Securities. See Note 1 — “Nature of Operations and Summary of Significant Accounting Policies” to our historical consolidated financial statements appearing elsewhere in this prospectus for details. In the first quarter of 2009, we recorded a cumulative effect adjustment, net of income taxes, in the amount of $3 million. The adjustment was an increase to retained earnings and a corresponding decrease to accumulated other comprehensive income (loss).

The following tables summarize our significant impairments by issuer for the years ended December 31, 2009, 2008 and 2007:


	Year Ended December 31, 2009
	Fixed			Preferred			Common						Total by
Impairments by Issuer	Maturities			Stock			Stock			Other			Issuer
	(Dollars in millions)

LMIA High Yield Fund	$	—		$	—		$	(28	)	$	—		$	(28	)
Bank of America		(5	)		(9	)		—			—			(14	)
Commonwealth of Puerto Rico		(9	)		—			—			—			(9	)
Citigroup Inc.		—			(9	)		—			—			(9	)
AIG		(4	)		(4	)		—			—			(8	)
Total other		(26	)		(3	)		—			(5	)		(34	)

Total by security type	$	(44	)	$	(25	)	$	(28	)	$	(5	)	$	(102	)


	Year Ended December 31, 2008
	Fixed			Preferred			Common			Total by
Impairments by Issuer	Maturities			Stock			Stock			Issuer
	(Dollars in millions)

Freddie Mac	$	—		$	(44	)	$	—		$	(44	)
Fannie Mae		—			(32	)		(8	)		(40	)
Lehman Brothers		(13	)		—			—			(13	)
General Electric		—			—			(10	)		(10	)
Wells Fargo Company		—			(9	)		—			(9	)
Other		(48	)		(9	)		(36	)		(93	)

Total by security type	$	(61	)	$	(94	)	$	(54	)	$	(209	)


	Year Ended December 31, 2007
	Fixed			Preferred		Common		Total by
Impairments by Issuer	Maturities			Stock		Stock		Issuer
	(Dollars in millions)

Fannie Mae	$	(1	)	$	—	$	—	$	(1	)
Other		(2	)		—		—		(2	)

Total by security type	$	(3	)	$	—	$	—	$	(3	)

If we believe a decline in the value of a particular investment is temporary, the decline is recorded as an unrealized loss in stockholders’ equity. If we believe the decline is “other-than-temporary,” and we believe that we will not be able to collect all cash flows due on our fixed income securities, then the carrying value of the investment is written down to the expected cash flow amount and a realized loss is recorded as a credit impairment. A non-credit impairment loss is recognized in other comprehensive income, net of applicable taxes as the difference between expected cash flow and fair value. As a result of our quarterly other-than-temporary impairment review, investment impairment losses for the year ended December 31, 2009 were $100 million, compared to $209 million and $3 million for the years ended December 31, 2008 and 2007, respectively.

For the year ended December 31, 2009, we recorded impairment losses on our available-for-sale fixed maturities of $44 million compared to $61 million and $3 million in the same periods in 2008 and 2007, respectively. Included within the $44 million of impairment losses for the year ended December 31, 2009 were $5 million of charges recognized as non-credit impairments. We concluded that the remaining gross unrealized losses of our available-for-sale fixed maturities as of December 31, 2009 and 2008 were temporary.

For equity securities, if we believe the decline is “other-than-temporary,” the carrying value of the investment is written down to fair value and a realized loss is recorded. The gross unrealized losses recorded

on equity securities at December 31, 2009 and December 31, 2008 resulted primarily from decreases in quoted market values from the dates that certain investment securities were acquired as opposed to fundamental changes in the issuer’s financial performance and near-term financial prospects. For the year ended December 31, 2009, we recorded impairment losses on our available-for-sale equity securities of $53 million compared to $148 million and $0 in the same periods in 2008 and 2007, respectively. We concluded that the remaining gross unrealized losses of our available-for-sale equity securities as of December 31, 2009 and 2008 were temporary.

The following table shows a schedule of our unrealized losses and fair value by security type by duration of potential impairment as of December 31, 2009:


	Less Than 12 Months					Greater Than 12 Months
				Fair Value of					Fair Value of
Unrealized Losses and Fair Value by	Unrealized			Investments with		Unrealized			Investments with
Security Type	Losses			Unrealized Losses		Losses			Unrealized Losses
	(Dollars in millions)

U.S. Government and agency securities	$	(2	)	$	140	$	—		$	—
Mortgage and asset-backed securities:
Residential		(6	)		569		(40	)		149
Commercial		—			38		(17	)		163
Other mortgage and ABS securities		(5	)		126		(14	)		39
U.S. state and municipal		(11	)		426		(37	)		248
Corporate and other		(7	)		321

Proposed Maximum

Amount of

Title of Each Class of

Aggregate

Registration

Securities To be Registered

Offering Price(1)

Class A Common Stock, $.01 par value per share

$100,000,000

Liberty Mutual Agency Corp S-1