As filed with the Securities and Exchange Commission on September 13, 2010

Registration No. 333-166671

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

Amendment No. 5

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

10 St. James Avenue

Boston, Massachusetts 02116

Telephone: (617) 654-3600

(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

10 St. James Avenue

Boston, Massachusetts 02116

Telephone: (617) 654-3600

(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 (617) 574-5830 (facsimile)		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

Proposed Maximum

Amount of

Title of Each Class of

Amount to be

Offering

Aggregate

Registration

Securities To be Registered

Registered(1)

Price Per Unit

Offering Price(2)

Fee(3)

Class A Common Stock, $0.01 par value per share

70,739,900

$20.00

$1,414,798,000

$93,745.10

(1) Includes 6,430,900 shares of Class A common stock to be sold upon the exercise of the underwriters’ over-allotment option, if any.

(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) under the Securities Act of 1933.

(3) The registration fee payable with respect to the registered securities has been offset as permitted by Rule 457(b) in the amount of $7,130 which was previously paid by the registrant on May 6, 2010 in connection with the registration of $100,000,000 of securities.

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 SEPTEMBER 13, 2010

PRELIMINARY PROSPECTUS

64,309,000 Shares

Class A Common Stock

$ per share

This is the initial public offering of 64,309,000 shares of Class A common stock of Liberty Mutual Agency Corporation. We are offering all of such shares and we currently expect the initial public offering price to be between $18.00 and $20.00 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 will be entitled to one vote per share while holders of our Class B common stock will generally be entitled to ten votes per share. Other primary differences between the rights of holders of Class B common stock and our Class A common stock relate to the election and removal of directors, conversion of shares of Class B common stock into shares of Class A common stock, and certain actions that require the consent of holders of Class B common stock as described in this prospectus. Holders of our Class A common stock and our Class B common stock have identical rights with regard to any dividends that may be declared by our board of directors and the liquidation, dissolution or winding up of Liberty Mutual Agency Corporation. 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 approximately 97.9% of the combined voting power of our outstanding common stock and approximately 82.1% of our total equity ownership assuming the underwriters’ option to purchase shares from an indirect subsidiary of Liberty Mutual Holding Company Inc. to cover over-allotments is not exercised (or approximately 97.6% and 80.4% respectively, if the underwriters’ over-allotment option is exercised in full).

Prior to this offering, there was no public market for our Class A common stock. We have applied to have our Class A common stock listed on the NASDAQ Global Select Market under the symbol “LMAC.”

Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 15.

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)	$	$

An indirect subsidiary of Liberty Mutual Holding Company Inc., which we refer to in this prospectus as the “selling stockholder,” has granted the underwriters a 30-day option to purchase up to an additional 6,430,900 shares of our Class A common stock to cover over-allotments. Upon any exercise of this option, the selling stockholder will satisfy its share delivery obligations by delivering outstanding shares of Class B common stock which, by their terms, will convert into an equal number of shares of Class A common stock. We will not receive any proceeds from the sale of shares, if any, by the selling stockholder. See “Underwriting.”

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

Joint Book-Running Managers


Citi	BofA Merrill Lynch

Joint Lead Managers


J.P. Morgan	Mitsubishi UFJ Securities	Wells Fargo Securities

Co-Managers

Barclays Capital Deutsche Bank Securities HSBC Morgan Stanley

BNP PARIBAS BNY Mellon Capital Markets, LLC Dowling & Partners Securities LLC Keefe, Bruyette & Woods Lloyds TSB Corporate Markets

Macquarie Capital Piper Jaffray Ramirez & Co., Inc. RBS Sandler O’Neill + Partners, L.P. The Williams Capital Group, L.P.

The date of this prospectus is , 2010

(LIBERTY MUTUAL AGENCY CORPORATION LOGOS)

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. None of Liberty Mutual Agency Corporation, any of its affiliates, the selling stockholder 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			15
Cautionary Statement Concerning Forward-Looking Statements			48
Market and Industry Data			49
Use of Proceeds			50
Dividend Policy			51
Capitalization			52
Selected Historical Consolidated Financial Data			53
Pro Forma Consolidated Financial Statements			57
Management’s Discussion and Analysis of Financial Condition and Results of Operations			64
Business			174
Regulation			201
Management			208
Principal and Selling Stockholder			257
Certain Relationships and Related Party Transactions			258
Description of Capital Stock			280
Shares Eligible For Future Sale			290
Certain U.S. Federal Tax Consequences to Non-U.S. Holders			291
Underwriting			294
Legal Matters			300
Experts			300
Where You Can Find More Information			300
Incorporation of Financial Statements by Reference			300
Index to Consolidated Financial Statements			F-1
Ex-1.1
Ex-3.1
Ex-3.2
Ex-4.1
Ex-5.1
Ex-10.1
Ex-10.8
EX-10.11(A)
EX-10.11(B)
Ex-10.12(a)
EX-10.12(B)
Ex-10.13
Ex-10.193
Ex-10.194
Ex-10.195
Ex-10.196
Ex-10.197
Ex-10.198
Ex-10.211
Ex-10.212
Ex-10.213
Ex-23.1
Ex-23.2
Ex-23.3
Ex-99.3

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; (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; (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; (f) references to our “insurance subsidiaries” refer to insurance entities directly or indirectly controlled by us; and (g) references to “selling stockholder” refer to Liberty Insurance Holdings, Inc., a Delaware corporation and a wholly-owned indirect subsidiary of Liberty Mutual Holding Company, Inc. In addition, unless otherwise specified, all references to the combined voting power of our common stock or our total equity ownership assume that the underwriters’ over-allotment option will not be exercised.

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 2009 net written premiums according to data from A.M. Best Company, Inc., which we refer to in this prospectus as “A.M. Best.” 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 12,000 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 2009 net written premiums, according to A.M. Best data. 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 and assumptions as described under “Pro Forma Consolidated Financial Statements,” we would have had $28.6 billion of total assets and $8.2 billion of stockholders’ equity as of June 30, 2010, $5.8 billion and $10.8 billion of revenues and $240 million and $866 million of net income for the six months ended June 30, 2010 and the year ended December 31, 2009, respectively. We have entered, or intend to enter, into several agreements with Liberty Mutual prior to or substantially concurrently with the consummation of this offering, including an aggregate stop loss reinsurance agreement entered into on June 30, 2010 providing for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment.

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 2009 net written premiums, according to A.M. Best data. 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 2009 net written premiums, according to A.M. Best data. 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 2009 net written premiums, according to A.M. Best data. 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 $167 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. According to the 2008 Future One Agency Universe Study by the Independent Insurance Agents and Brokers of America, Inc., which we refer to in this prospectus as “IIABA,” 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 12,000 independent agencies. These independent agencies are located in approximately 23,000 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. According to the 2008 Future One Agency Universe Study by the IIABA, 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 have been in business for over 80 years, we have a deep understanding of our agents’ and policyholders’ needs. Our local reach through our 111 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 and assumptions as described under “Pro Forma Consolidated Financial Statements,” at June 30, 2010 we would have had total assets, debt and stockholders’ equity of $28.6 billion, $1.5 billion and $8.2 billion, respectively. Furthermore, we believe our reserve position is strong and is bolstered by an aggregate stop loss reinsurance agreement, which we refer to in this prospectus as the “Run-Off Reinsurance Agreement,” between us and Liberty Mutual, which provides for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Reinsurance Agreement.” We believe our strong balance sheet and the Run-Off Reinsurance 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 more than 30 years of experience with 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 2009 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. Based on A.M. Best data, in commercial lines, we believe approximately $72 billion, or 60%, of the industry’s total 2009 net written premiums were written by approximately 490 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $49 billion, or 40%. In personal lines, we believe approximately $29 billion, or 46%, of the industry’s total 2009 net written premiums were written by approximately 370 insurers, excluding the top ten insurers, while the top ten insurers wrote the remaining approximately $34 billion, or 54%. 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.

	•	*Maintain a Strong Balance Sheet:* We focus on maintaining levels of capital adequacy, liquidity and leverage that allow us to pursue attractive growth opportunities. We are committed to disciplined underwriting, earnings growth, effective investment management and capital generation to maintain our claims-paying ratings.

	•	*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.

Claims-Paying Ratings

Our insurance subsidiaries have the following claims-paying ratings: “A−” with a stable outlook from Standard & Poor’s Rating Service (“S&P”) (“Strong”, the seventh highest of 21 ratings), “A” with a negative outlook from A.M. Best (“Excellent”, the third highest of 15 ratings), and “A2” with a negative outlook from Moody’s Investor Service Inc. (“Moody’s”) (“Good”, the sixth highest of 21 ratings). On April 23, 2008, following the announcement of the agreement to acquire Safeco, S&P and Moody’s each revised its outlook of Liberty Mutual Group and its subsidiaries to negative. On September 25, 2008, following the close of the Safeco acquisition, S&P downgraded the claims-paying ratings of the insurance companies that constitute the Liberty Mutual Insurance Group to “A−” from “A,” and returned its outlook to stable. S&P cited diminished financial flexibility, below-rating-level earnings, and an aggressive pricing and growth strategy as reasons for the downgrade. On March 9, 2009, Moody’s affirmed the claims-paying ratings of Liberty Mutual and its subsidiaries and maintained a negative outlook. Moody’s cited strain on financial flexibility and capital adequacy measures as rationale for the continuation of the negative outlook. On April 9, 2009, A.M. Best affirmed the claims-paying ratings of the Liberty Mutual Insurance Companies and revised its claims-paying ratings outlook to negative from stable. Subsequently, on June 11, 2010, A.M. Best reaffirmed its ratings and maintained a negative outlook, citing as rationale modest deterioration in operating results and a modest level of capitalization. All of our and Liberty Mutual’s rated insurance subsidiaries share the same claims-paying ratings. Financial strength ratings, which we refer to in this prospectus as “claims-paying 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 claims-paying 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 through June 30, 2010 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 dividends to Liberty Mutual in the form of debt, a portion of which will be repaid through the transfer of cash and investments prior to or immediately following the consummation of this offering. The consummation of the Transactions and this offering will result in a capital structure, comprised of equity and debt, that we believe is consistent with our insurance subsidiaries’ mix of business, risk of tolerance and desired financial flexibility. As a result of the Transactions, we will have higher levels of debt and interest expense and lower levels of stockholders’ equity and investment income in future periods.

We also have entered, or 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 Reinsurance Agreement. On June 30, 2010, we entered into the Run-Off Reinsurance Agreement with Liberty Mutual. We paid Liberty Mutual a one-time payment of $125 million in July 2010 and Liberty Mutual will indemnify us for up to $500 million of any adverse development that occurs subsequent to June 30, 2010 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 to participate in share repurchases, 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 beneficially own all of our outstanding Class B common stock, representing approximately 97.9% of the combined voting power of our outstanding common stock and approximately 82.1% of our total equity ownership. Liberty Mutual will not own any of our outstanding Class A common stock. After the completion of this offering and assuming the full exercise of the underwriters’ over-allotment option, our stockholders, other than Liberty Mutual, will hold no more than a 20% equity interest in our company. Liberty Mutual has advised us that it expects to maintain a controlling interest in our company going forward. See “Description of Capital Stock,” “Principal and Selling Stockholder” and “Risk Factors — Risks Relating to Our Relationship with Liberty Mutual.” The following

diagram shows the organizational relationship between Liberty Mutual and Liberty Mutual Agency Corporation and the economic ownership structure of the Company immediately following the offering:

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

Investing in shares of our Class A common stock involves substantial risk. The maintenance of our competitive strengths, the execution of our strategies and our future results of operations and financial condition are subject to a number of risks and uncertainties. The factors that could adversely affect our results of operations, financial condition and liquidity, as well as the successful execution of our strategies, are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. These risks include:

Risks relating to our business, such as:


	•	*Unpredictable Catastrophic Events.* Our insurance operations expose us to claims arising out of unpredictable natural and other catastrophic events, including man-made disasters such as acts of terrorism. Catastrophe losses could have a material adverse effect on our results of operations and may materially harm our financial condition, which could in turn adversely affect our claims-paying ratings and could impair our ability to raise capital.


	•	*Uncertainty in Estimating Reserves.* Our reserves for unpaid claims and claim adjustment expenses are established based on estimates leveraging actuarial methodologies and assumptions and the knowledge and judgments of our management. Establishing an appropriate level of reserves is an inherently uncertain process. 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 and our reserves at any given time could prove inadequate.

	•	*Disruptions to our Agency Relationships.* Our products are marketed solely through independent agencies, which also sell our competitors’ products. A number of factors, including aggressive pricing and compensation structures by our competitors, could negatively affect our ability to maintain a strong network of independent agencies, which in turn could have a material adverse effect on our future business volume and results of operations.

	•	*Potential Inability to Alleviate Risk Through Reinsurance Arrangements.* We attempt to limit our risk of loss through reinsurance arrangements. Our existing reinsurance arrangements may be inadequate to cover our liabilities. In addition, we remain liable to our policyholders if a reinsurer is unable or unwilling to pay amounts owed to us. Our potential inability to mitigate risk through reinsurance arrangements could have a material adverse effect on our results of operations, financial condition or liquidity.

	•	*Potential Losses in our Investment Portfolio.* Returns on our investment portfolio are an important part of our overall profitability. A major economic downturn could cause the value of state and municipal bonds, which constitute a substantial portion of our investment portfolio, to decline. In addition, during or following an economic downturn or period of financial market disruption, our investment portfolio could be subject to higher risk. A decrease in the value of our investment portfolio, a reduction in our investment income or the incurrence of realized investment losses could have a material adverse effect on our results of operations, financial condition or liquidity.

	•	*Potential for Downgrades of Claims-Paying Ratings.* Claims-paying ratings are used by policyholders and independent agents as a means of assessing the suitability of insurers as counterparties and are an important factor in establishing our competitive position. A downgrade or withdrawal of our claimspaying ratings could prevent our insurance subsidiaries from writing new business, which could have a material adverse effect on our results of operations, financial condition or liquidity.

	•	*Potential for High Severity Losses in our Surety Segment.* Claims arising out of our Surety segment expose us to potentially high severity losses, which could have a material adverse effect on our results of operations, financial condition or liquidity.

	•	*Constraints Related to Our Holding Company Structure.* As a holding company, Liberty Mutual Agency Corporation has no direct operations. Dividends and other permitted distributions from our insurance subsidiaries are expected to be Liberty Mutual Agency Corporation’s sole source of funds to meet ongoing cash requirements. These payments are limited by regulations in the jurisdictions in which our insurance subsidiaries operate. If our insurance subsidiaries are unable to pay dividends, we may have difficulty paying dividends on our common stock and meeting holding company expenses. Our insurance subsidiaries have exhausted their ability to pay any dividends to us without prior approval by regulatory authorities, at least for the twelve months following the date their most recent dividends were paid.

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


	•	*We are Dependent on Liberty Mutual for Services.* Until January 1, 2011, we will have no employees. We currently rely on Liberty Mutual for necessary services for our business and operations. Following January 1, 2011, when certain employees dedicated to our business and operations will be transferred to one of our subsidiaries, we will remain reliant on Liberty Mutual to provide us with


		critical services. If we are unable to successfully operate our business under such arrangements, it may have a material adverse impact on our results of operations, financial condition or liquidity.


	•	*We Rely on Liberty Mutual to Manage our Investment Portfolio.* We are highly dependent on Liberty Mutual in connection with the management of our investment portfolio. If we lose our investment relationship with Liberty Mutual, we may not be able to secure an investment manager who will produce returns on investments similar to those provided by Liberty Mutual in the past or any positive returns at all.

	•	*Limited Influence of Holders of Class A Common Stock.* Holders of our Class A common stock will be entitled to one vote per share while holders of our Class B common stock will generally be entitled to ten votes per share. Liberty Mutual, as holder of our Class B common stock, will also be entitled to elect 80% of the members of our board of directors and remove such directors and will also have other significant rights including the conversion of shares of Class B common stock into shares of Class A common stock and the right to consent to certain actions before they are taken by our company. As a result, holders of Class A common stock will have limited ability to influence any matters requiring stockholder approval as long as we are controlled by Liberty Mutual.


	•	*Liberty Mutual’s Control of Us and Conflicts of Interest with Liberty Mutual.* Liberty Mutual, as holder of all of our Class B common stock, will hold approximately 97.9% of the combined voting power of our outstanding common stock immediately following this offering. As a result, holders of our Class A common stock will have very limited influence over our company. In addition, certain of our directors are also directors and officers of Liberty Mutual, which may cause conflicts of interest.

Corporate Information

Liberty Mutual Agency Corporation is incorporated under the laws of Delaware. We maintain our principal executive office at 10 St. James Avenue, Boston, Massachusetts 02116. Our telephone number is (617) 654-3600.

The Offering


Class A common stock offered by us		64,309,000 shares


Common stock to be outstanding after this offering		64,309,000 shares of Class A common stock


		295,691,000 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


		295,691,000 shares of Class B common stock


Over-allotment option		The selling stockholder has granted the underwriters a 30-day option to purchase up to an additional 6,430,900 shares of our Class A common stock, at the initial public offering price less the underwriting discount, to cover over-allotments. Upon any exercise of this option, the selling stockholder will satisfy its share delivery obligations by delivering outstanding shares of Class B common stock which, by their terms, will convert into an equal number of shares of Class A common stock. In the event the underwriters exercise their over-allotment option, we will not receive any proceeds from the sale of shares by the selling stockholder. See “Principal and Selling Stockholder” and “Underwriting.”


Dividend policy		We intend to pay quarterly cash dividends on all classes of our common stock at an initial rate of $0.06 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 to us (before expenses) 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 Nasdaq Global Select Market trading symbol		We have applied to have our Class A common stock listed on the Nasdaq Global Select Market under the symbol “LMAC.”

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 approximately 97.9% of the combined voting power of our outstanding common stock and approximately 82.1% 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 the underwriters’ over-allotment option will not be exercised; and


	•	exclude: (i) 10,000,000 shares of our Class A common stock that will be reserved for issuance under the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan (see “Management — The Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan”), and (ii) an additional number of shares of our Class A common stock underlying the equity-based rollover awards to be granted in connection with this offering to certain of our officers and others who provide services to us, which number shall be determined in accordance with the discussion under “Management — Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan — Grant of Awards under the Long-Term Incentive Plan — Equity-Based Rollover Awards” and the table titled “Number of Appreciation Units to be Converted to Stock Options and Restricted Stock Units.”

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 are derived from our audited historical consolidated financial statements for the years ended December 31, 2009, 2008 and 2007 and as of December 31, 2009 and 2008, which have been audited by Ernst & Young LLP, an independent registered public accounting firm, as well as our unaudited consolidated financial statements for the six months ended June 30, 2010 and 2009 and as of June 30, 2010, which in each case have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and are included elsewhere in this prospectus. These historical results are not necessarily indicative of results in any future period. In our opinion, the unaudited financial statements provided herein have been prepared on substantially the same basis as the audited historical consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for the periods presented. Operating results for the six months ended June 30, 2010 are not necessarily indicative of those to be expected for the full fiscal year.

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 are 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.”

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 financial data have 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 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.

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 filed as exhibits to the registration statement of which this prospectus forms a part.


	Historical															Pro Forma
	Six Months															Six Months			Year Ended
	Ended June 30,						Year Ended December 31,									Ended June 30,			December 31,
	2010			2009			2009			2008			2007			2010			2009
	(Dollars in millions, except share data)

Statement of Operations Data
Net written premiums	$	5,180		$	4,975		$	10,148		$	6,704		$	4,407		$	5,180		$	10,148
Net premiums earned		5,113			5,080			9,983			6,913			4,325			5,113			9,983
Net investment income		463			439			910			719			405			417			776
Fee and other revenues		50			49			97			50			33			50			97
Net realized investment gains (losses)		227			(53	)		(53	)		(407	)		(5	)		227			(53	)

Total revenues		5,853			5,515			10,937			7,275			4,758			5,807			10,803
Claims and claim adjustment expenses		3,636			3,291			6,157			4,326			2,601			3,636			6,157
General and administrative expenses		638			494			1,005			777			551			638			1,005
Goodwill impairment ⁽¹⁾		—			—			—			973			—			—			—
Amortization of deferred policy acquisition costs		1,186			1,209			2,392			1,664			1,056			1,186			2,392
Interest expense		10			2			4			21			6			39			80

Total claims and expenses		5,470			4,996			9,558			7,761			4,214			5,499			9,634
Income (loss) before income tax expense		383			519			1,379			(486	)		544			308			1,169
Income tax expense		94			142			377			78			167			68			303

Net income (loss)	$	289		$	377		$	1,002		$	(564	)	$	377		$	240		$	866

Less: Preferred stock dividends		18			32			63			—			—			18			63

Income (loss) available to common stockholders	$	271		$	345		$	939		$	(564	)	$	377		$	222		$	803

Share Data
Net income (loss) available to common stockholders per common share:
Basic	$	0.92		$	1.17		$	3.17		$	(1.91	)	$	1.27		$	0.62		$	2.23
Diluted	$	0.92		$	1.17		$	3.17		$	(1.91	)	$	1.27		$	0.62		$	2.23
Weighted average common shares outstanding:
Basic ⁽²⁾		296			296			296			296			296			360			360
Diluted ⁽²⁾		296			296			296			296			296			360			360
Non-GAAP Financial Measure ⁽³⁾
Pre-tax operating income	$	421		$	588		$	1,455		$	934		$	599		$	346		$	1,245
Reconciliation to net income (loss):
Net income (loss)		289			377			1,002			(564	)		377			240			866
Less: Net realized investment gains (losses)		227			(53	)		(53	)		(407	)		(5	)		227			(53	)
Add: Income tax expense		94			142			377			78			167			68			303
Add: Goodwill impairment ⁽¹⁾		—			—			—			973			—			—			—
Add: Integration and other acquisition related costs		(2	)		16			23			40			50			(2	)		23
Add: Run-off reserves (Run-Off Reinsurance Agreement) ⁽⁴⁾		267			—			—			—			—			267			—

Pre-tax operating income	$	421		$	588		$	1,455		$	934		$	599		$	346		$	1,245

Combined Ratio
Claims and claim adjustment expense ratio ⁽⁵⁾		62.2	%		64.6	%		63.7	%		64.7	%		65.4	%
Underwriting expense ratio ⁽⁶⁾		31.2			31.4			31.7			33.0			35.0

Subtotal		93.4			96.0			95.4			97.7			100.4
Catastrophes ⁽⁷⁾		8.0			5.6			4.4			5.1			2.1
Net incurred losses attributable to prior years		0.9			(5.4	)		(6.2	)		(7.2	)		(7.4	)

Combined ratio ⁽⁸⁾		102.3	%		96.2	%		93.6	%		95.6	%		95.1	%

Segment Data
Net written premiums:
Commercial	$	2,257		$	2,328		$	4,585		$	3,975		$	3,039
Personal		2,495			2,231			4,689			2,122			948
Surety		363			337			707			479			312
Corporate and Other		65			79			167			128			108
Pre-tax operating income:
Commercial	$	84		$	197		$	521		$	613		$	500
Personal		139			200			429			86			71
Surety		145			93			252			156			96
Corporate and Other		53			98			253			79			(68	)
Segment combined ratios:
Commercial		105.6	%		100.6	%		97.9	%		94.1	%		92.8	%
Personal		98.8			95.5			94.8			101.1			97.1
Surety		67.2			80.8			72.3			74.7			75.7


	Historical								Pro Forma
	As of June 30,		As of December 31,						As of June 30,
	2010		2009		2008		2007		2010
	(Dollars in millions)

Balance Sheet Data
Cash and investments	$	19,732	$	22,504	$	20,062	$	11,313	$	18,921
Premium and other receivables, net		2,491		2,405		2,567		1,438		2,491
Goodwill		3,054		3,054		3,054		1,345		3,054
Other assets		4,172		4,423		5,187		2,543		4,172

Total assets		29,449		32,386		30,870		16,639		28,638
Unpaid claims and claim adjustment expenses		12,222		12,053		12,651		7,307		12,222
Unearned premiums		4,749		4,658		4,837		2,519		4,749
Debt		1,958		78		82		216		1,457
Other liabilities		2,018		3,400		2,999		1,132		2,018

Total liabilities		20,947		20,189		20,569		11,174		20,446
Stockholders’ equity		8,502		12,197		10,301		5,465		8,192


(1)		Our goodwill asset as of June 30, 2010 was $3.054 billion, which remained unchanged from December 31, 2009 and 2008, and largely consists 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)		Shares used in the historical earnings per share calculation represent the shares of Class B common stock outstanding subsequent to the September 10, 2010 share recapitalization that increased the common shares outstanding from 1,000 to 295,691,000 shares of Class B common stock. The shares used in the pro forma earnings per share calculation represent the sum of the shares of Class B common stock as well as the shares of Class A common stock expected to be outstanding subsequent to this offering. There is no difference between basic and diluted earnings per share because there were no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding.


(3)		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.

(4)		Represents unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment and a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement. On June 30, 2010 we entered into the Run-Off Reinsurance Agreement providing for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment.

(5)		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.


(6)		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.

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

(8)		Calculated by adding the claims and claim adjustment expense ratio, the underwriting expense ratio, the catastrophes ratio, and net incurred losses attributable to prior years’ combined 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, but not limited to, 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. Over the last three years we have experienced significant losses related to Hurricanes Ike and Gustav, wind and hail storms with a high concentration in the Midwest, Southeastern tornadoes, and snow and ice storms in the Northeast and Northwest regions. Catastrophe losses were $445 million, $350 million and $90 million in the years ended December 31, 2009, 2008 and 2007, respectively, and $410 million in the six months ended June 30, 2010. See “Business — Commercial — Underwriting and Pricing” and “Business — Personal — Underwriting and Pricing” for tables identifying the states that account for 55% of the direct written premium for our Commercial and Personal segments, respectively.

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, but not limited to, 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: 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 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 $12.222 billion and $12.615 billion as of June 30, 2010 and 2009, respectively, as well as $12.053 billion, $12.651 billion and $7.307 billion 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 such as our excess of loss and catastrophe coverage. For a discussion of our reinsurance program, see “Management’s Discussion and Analysis — Reinsurance Protection and Catastrophe Management.” 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, but not limited to, 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 some 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. As of June 30, 2010, we had approximately 160 customers that each had total 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 12,000 independent agencies. Independent agents may sell our competitors’ products and may stop selling our products altogether. According to the 2008 Future One Agency Universe Study by the IIABA, the total number of independent agencies in the U.S. decreased from approximately 44,000 in 1996 to approximately 37,500 in 2006 and remained at this level in 2008. Mergers and acquisitions are cited for the decrease. 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.

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, 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 in the U.S. the enactment of the Emergency Economic Stabilization Act of 2008, the American Recovery and Reinvestment Act in 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act in July of 2010. 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.

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 lower 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 includes 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, represent the majority of our total cash and invested assets. 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 unadjusted 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, but not limited to, (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 that reflect the reporting entity’s estimates of the exit price, including, but not limited to, assumptions that market participants would use in pricing the asset or liability (Level 3). An asset’s or liability’s classification within the fair value hierarchy is based on the lowest level of input that is significant to its fair value measurement. We use independent pricing services and broker quotes to price our investment securities. At June 30, 2010, approximately 3.6%, 94.6% and 1.8% of these securities represented Level 1, Level 2 and Level 3, respectively. However, the availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors, including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the financial instrument. Prices provided by independent pricing services and independent broker quotes can therefore 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. For a discussion of our investment impairments, see the “Net Realized Investment Gains (Losses)” table and the “Impairment by Issuer” table in “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Investment Portfolio — Net Realized Investment Gains (Losses).”

We review fixed maturity, public equity securities and private equity securities for impairment on a quarterly basis. Securities are reviewed for both quantitative and qualitative considerations including: (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 investment 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 when the mortgage or asset-backed 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 Reinsurance 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, but not limited to, 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, but not limited to: (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, but not limited to: (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, but not limited to, 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.

Furthermore, medical criteria legislation passed in 2004 and 2005 in several key states, which has generally reduced the number of asbestos claim filings, is now being challenged, either through new legislation or through the courts. If such challenges are wholly or partially successful, the number of asbestos claim filings could increase in the future, with an attendant increase in indemnification and defense costs for our insureds. Over the past several years, governmental agencies have not pursued remediation of environmental pollution as vigorously as in the past. If this trend should be reversed, we would expect an acceleration in pollution claim related costs.

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 have entered into a Run-Off Reinsurance Agreement with Liberty Mutual. Under the Run-Off Reinsurance Agreement, Liberty Mutual will indemnify us for up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. However, given the high level of uncertainty in estimating our run-off operations, the ultimate liabilities may exceed this $500 million cap. Further, the reinsurance provided under the Run-Off Reinsurance 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 Reinsurance Agreement by, Liberty Mutual, could have a material adverse effect on our results of operations, financial condition or liquidity. The Run-Off Reinsurance Agreement is described in more detail in “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Run-Off Reinsurance 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 — Unpaid Claims and Claim Adjustment Expenses — 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:


	•	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.

Beginning in 2004, a number of Liberty Mutual affiliated entities engaged in the insurance business received subpoenas and other requests from various state attorneys general and insurance regulators for information regarding broker compensation practices, contingent commissions and improper quotations. While none of our insurance subsidiaries received subpoenas, some of our insurance subsidiaries received requests for information regarding broker compensation practices, contingent commissions and improper quotations from various state insurance regulators. In 2006, as affiliates of Liberty Mutual, five of our current insurance subsidiaries, specifically Excelsior Insurance Company, The Midwestern Indemnity Company, The Netherlands Insurance Company, Peerless Indemnity Insurance Company and Peerless Insurance Company, 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 Liberty Mutual affiliates but neither we nor any of our insurance subsidiaries were 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. Certain lines of business that we write, including, but not limited to, 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, but not limited to, 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, but not limited to, 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, but not limited to, 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, claims paying 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, including loans, advances and transfers of property and assets, 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 and state insurance departments have adopted regulations that may alter or increase state authority to regulate insurance companies and insurance holding companies, including the adoption of the NAIC’s Annual Financial Reporting Model Regulation, also known as the Model Audit Rule, or a similar regulation, or modifications or updates thereto in each state of domicile of our insurance subsidiaries. The purpose of the Model Audit Rule is to improve state insurance departments’ surveillance of the financial condition of insurers. 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.

Traditionally, the U.S. federal government did 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, Congress has recently passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to in this prospectus as the “Dodd-Frank Act,” which provides for 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 Dodd-Frank Act, which was signed by the President on July 21, 2010, provides for, among other things, the creation of the Financial Stability Oversight Council and the Federal Insurance Office. The stated purposes of the Financial Stability Oversight Council are to identify risks to the financial stability of the U.S., promote market discipline and respond to emerging risks to the U.S. financial system. The Financial Stability Oversight Council has the authority to designate a nonbank financial company (defined by the Dodd-Frank Act as a company that predominantly engages in financial activities) to be regulated by the Board of Governors of the U.S. Federal Reserve, which we refer to in this prospectus as the “Board of Governors,” if such company’s financial distress or its nature, size, scale, concentration, interconnectedness or mix of activities would pose a threat to the financial stability of the U.S., which we refer to in this prospectus as a “Supervised Company.” Under the Dodd-Frank Act, in the event that an insurance company or an insurance holding company is designated as a Supervised Company by the Financial Stability Oversight Council, its insurance holding company system would become subject to prudential regulation (including capital requirements, leverage limits, liquidity requirements and examinations) by the Board of Governors. Therefore, if we or Liberty Mutual are designated as a Supervised Company by the Financial Stability Oversight Council, we could become subject to supervision by the Board of Governors under the Dodd-Frank Act. The activities of a Supervised Company may, in addition to prudential regulation, be further restricted in the event that the Board of Governors determines that such Supervised Company poses a grave threat to the financial stability of the U.S. Upon such a determination, the Board of Governors may limit the ability of such Supervised Company to enter into merger transactions, restrict its ability to offer financial products, require it to terminate one or more activities, or impose conditions on the manner in which it conducts activities. In addition, Supervised Companies may be subject to assessments by the Federal Depository Insurance Corporation under the Dodd-Frank Act to fund the liquidation or restructuring of troubled financial companies whose failure would pose a significant risk to the financial stability of the U.S.

Under the Dodd-Frank Act, the Federal Insurance Office will be established within the U.S. Treasury Department to monitor all aspects of the insurance industry and its authority would likely extend to all lines of insurance that our insurance subsidiaries write. The director of the Federal Insurance Office will serve in an advisory capacity to the Financial Stability Oversight Council and have the ability to recommend that an insurance company or an insurance holding company be subject to heightened prudential standards. The Dodd-Frank Act also provides for the preemption of state laws in certain instances involving the regulation of reinsurance and other limited insurance matters. At this time, we cannot assess whether any other proposed legislation or regulatory changes will be adopted, or what impact, if any, the Dodd-Frank Act or any other such legislation or changes 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, but not limited to, 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 claims paying 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, which we refer to in this prospectus as “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 claims paying 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, is subject to state-imposed restrictions. These restrictions include, but are not limited to, restrictions on the use of named storm deductibles, restrictions on the use of underwriting guidelines that use an insured’s geographic area as a factor, restrictions on exiting certain lines of business based on geographic or other considerations without notice to or approval by the state insurance department and restrictions on the ability to write private passenger automobile insurance unless an insurer also writes homeowners coverage in the state. 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 June 30, 2010 and December 31, 2009 and 2008, included in other assets were $2 million, $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 $28 million as of June 30, 2010 and $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 claims-paying ratings, which could adversely affect our ability to conduct business.

We may not maintain favorable claims-paying ratings, which could adversely affect our ability to conduct business. Third party rating agencies assess and rate the financial strength and claims-paying ability of insurers and reinsurers. These claims-paying 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 claims-paying 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 claims-paying 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’ and controlled affiliates’ current claims-paying ratings are “A−” (“Strong,” the seventh highest of 21 ratings) (stable outlook) from S&P, “A” (“Excellent,” the third highest of 15 ratings) (negative outlook) from A.M. Best and “A2” (“Good”, the sixth highest of 21 ratings) (negative outlook) from Moody’s. Periodically, the rating agencies evaluate us to confirm that we continue to meet the criteria of the claims-paying ratings previously assigned to us. A downgrade or withdrawal of our claims-paying 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 are also participants in 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 experience a deterioration in its financial condition, the uniform rating of the entire pool could suffer a downgrade.

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

On April 23, 2008, following the announcement of the agreement to acquire Safeco, S&P and Moody’s each revised its outlook of Liberty Mutual Group and its subsidiaries to negative. On September 25, 2008, following the close of the acquisition of Safeco, S&P downgraded the claims-paying ratings of the insurance companies that constitute the Liberty Mutual Insurance Group and returned its outlook to stable. On March 9, 2009, Moody’s affirmed the claims-paying ratings of Liberty Mutual and its subsidiaries and maintained a negative outlook. On April 9, 2009, A.M. Best reaffirmed the claims-paying ratings of the Liberty Mutual

Insurance Companies and revised its ratings outlook to negative from stable. Subsequently, on June 11, 2010, A.M. Best reaffirmed its claims-paying ratings and maintained a negative outlook.

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. During the six months ended June 30, 2010, our insurance subsidiaries declared and paid dividends to Liberty Mutual Agency Corporation totaling $2.471 billion. As a result of these dividends, our insurance subsidiaries’ capacity to pay us any dividends without prior approval by regulatory authorities, at least for the twelve months following the date their most recent dividends were paid, was exhausted. We have obtained regulatory approval for our top-tier insurance subsidiaries to pay additional dividends to us in the aggregate amount of $721 million. Such dividends were paid in August of 2010. 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, but not limited to, repair cost and medical inflation, could have a material adverse effect on our results.

Historically, significant 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 cost, 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, but not limited to, 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 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, but not limited to, 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, but not limited to, 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, but not limited to, 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.

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. If internet disruptions or agent frustration with our business platforms or distribution initiatives result in a loss of business, this could have a material adverse effect on our results of operations, financial condition or liquidity.

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, but not limited to:


	•	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, but not limited to, 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, such as AIR Worldwide^® Clasic/2^tm and Risk Management Solutions RiskLink^®, 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, but not limited to, 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 Nasdaq Global Select Market, which we refer to in this prospectus as “Nasdaq,” 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 necessary services, including for expertise in all areas of our business and operations. Immediately following this offering, 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, whom we refer to in this prospectus as “Agency Corporation Dedicated Employees.” Agency Corporation Dedicated Employees provide risk underwriting, claims processing, claims adjustments, policyholder services, contract management and administration, accounting, actuarial, risk management, financial, human resources, marketing and strategic support, policy administration and production, legal, regulatory compliance, reinsurance, general administration and other services necessary to our and our subsidiaries’ day-to-day business operations. Liberty Mutual provides us with additional corporate services through employees that service us and other affiliates of Liberty Mutual. 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, actuarial, risk management, financial, investment management, cash management, tax, auditing, purchasing, payroll processing, human resources and employee relations and/or benefits, marketing, strategic support, information technology, software support, business continuity, policy administration and production, real estate management, legal, regulatory compliance, complex and emerging risks claims, administration of our run-off operations, reinsurance, general administration and other services. See “Certain Relationships and Related Party Transactions.” If we are not successful at operating our business under these arrangements or if either we or Liberty Mutual are unable to retain or hire personnel necessary for our business under such arrangements, then our results of operations, financial condition or liquidity may be materially adversely affected.

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, but not limited to, 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 numerous important 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. These agreements include services agreements pursuant to which Liberty Mutual provides us with personnel and services necessary for the operation of our businesses, investment management and cash management agreements pursuant to which affiliates of Liberty Mutual manage our investment portfolio, revolving loan agreements pursuant to which Liberty Mutual provides a line of credit to our subsidiaries, a tax sharing agreement, a surety reinsurance agreement pursuant to which we reinsure surety business written by Liberty Mutual on our behalf, a registration rights agreement, real estate license agreements relating to office space occupied by us or Liberty

Mutual, the Run-Off Reinsurance Agreement, a trademark license agreement and the Intercompany Agreement. See “Certain Relationships and Related Party Transactions.”

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, which we refer to in this prospectus as “PIC,” is our subsidiary with the highest underwriting limitation, $157 million as of December 31, 2009.

Holders of our Class A common stock will have limited ability to influence matters requiring stockholder approval so long as we are controlled by Liberty Mutual and due to the relationship to Liberty Mutual of some of our directors and officers.

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 approximately 97.9% of the combined voting power of our outstanding common stock and approximately 82.1% of our total equity ownership. Holders of our Class A common stock will be entitled to one vote per share while holders of our Class B common stock will generally be entitled to ten votes per share. Liberty Mutual, as holder of our Class B common stock, will be entitled to additional rights that holders of Class A common stock will not have, such as the right to elect and remove certain directors, the ability to convert their shares of Class B common stock into shares of Class A common stock, and the right to consent to certain actions before they are taken by our company, as described in “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. 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 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, 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 our current 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 to other provisions concerning amendment of our bylaws described under “Description of Capital Stock — Anti-takeover Effects of Provisions of our Certificate of Incorporation, Bylaws and the Intercompany Agreement — Amendment”).

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.

Under the Intercompany Agreement, Liberty Mutual will generally be entitled to purchase its pro rata economic share of any additional equity securities that we may issue and will receive Class B common stock if such equity securities are in the form of common stock. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement — Equity Purchase Rights.” As a result, Liberty Mutual will have the ability to increase its voting power in our common stock in the event we issue additional shares of common stock. See “— The voting power of Class A common stock may be diluted in the future if we issue additional equity securities.”

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, but not limited to, 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, but not limited to, 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 Reinsurance 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 (which include our executives) following the transfer of employees and executives to us on January 1, 2011.

Due to the resources of Liberty Mutual, including, but not limited to, 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:


	•	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 including, but not limited to, 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 Nasdaq 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 corporate governance standards of Nasdaq. As a controlled company, certain exemptions under standards free us from the obligation to comply with certain Nasdaq 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 Nasdaq 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 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 of 1986, as amended, which we refer to in this prospectus as the “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 claims-paying ratings will be dependent upon the claims-paying 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 claims-paying ratings will be coupled with the claims-paying 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 claims-paying of Liberty Mutual, could also negatively impact our claims-paying ratings. We do not know the circumstances under which the rating agencies would no longer couple our claims-paying 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 among us, the selling stockholder and 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, but not limited to:


	•	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, repurchases of our common stock 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 360,000,000 shares of our common stock outstanding. Of these shares, Liberty Mutual will beneficially own all of our outstanding Class B common stock, representing approximately 97.9% 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. Upon any exercise of the underwriters’ over-allotment option, the selling stockholder will satisfy its share delivery obligations by delivering outstanding shares of Class B common stock which, by their terms, will convert into an equal number of shares of Class A common stock. 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.

The number of shares of Class A common stock that we are able to repurchase in the future may be limited by Liberty Mutual’s option to have us repurchase up to its pro rata share of our common stock whenever we repurchase Class A common stock.

Under the Intercompany Agreement, any time that we undertake a repurchase of shares of our Class A common stock held by stockholders other than Liberty Mutual, Liberty Mutual has the right to require us to repurchase up to its pro rata share of our common stock. Liberty Mutual must exercise its option to require us to repurchase its shares of our common stock prior to the beginning of any fiscal quarter in which we undertake a repurchase of shares of Class A common stock. The per share price that Liberty Mutual will receive for shares of our common stock that we repurchase from Liberty Mutual will be the weighted average

price per share paid by us for Class A common stock repurchased from stockholders other than Liberty Mutual during such fiscal quarter. This option may limit our ability to repurchase shares of Class A common stock held by stockholders other than Liberty Mutual to the extent we are required to use funds available for stock repurchases to satisfy any repurchase obligation to Liberty Mutual. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement.”

The voting power of Class A common stock may be diluted in the future if we issue additional equity securities.

Under the Intercompany Agreement, Liberty Mutual has a preemptive right to purchase its pro rata share of any additional equity securities that we issue to persons other than Liberty Mutual until such time as Liberty Mutual ceases to beneficially own at least 20% of the shares of our outstanding common stock. In the event that the equity securities that we issue are for common stock, are convertible into or exchangeable for shares of our common stock or are options, warrants or rights to acquire shares of our common stock, Liberty Mutual is entitled to purchase its pro rata share of such equity securities in the form of shares of our Class B common stock or securities that are convertible into or exchangeable for shares of Class B common stock or options, warrants or rights to acquire shares of Class B common stock, as the case may be. Since shares of Class B common stock are generally entitled to ten votes per share, Liberty Mutual will have the ability to increase its voting power in our common stock in the event that we issue additional equity securities. The exercise by Liberty Mutual of this preemptive right would further dilute your ability to influence matters requiring stockholder approval. As a consequence of this preemptive right, Liberty Mutual’s ability to increase its voting power is disproportionate to that of holders of our Class A common stock. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement — Equity Purchase Rights.”

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 all of our outstanding Class B common stock, representing approximately 97.9% 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 equity awards to our directors, executive officers and employees using our Class A common stock that could dilute your interest in us.

We will reserve 10,000,000 shares of our Class A common stock for issuance as equity awards to our executive officers, employees and directors and others that provide services to us. Available forms of equity award include stock options, stock appreciation rights, restricted stock, restricted stock units, performance-based awards and other equity-based awards. Class A common stock that is issued and vested under these equity awards will result in dilution of your interest in us. See “Management — Compensation Discussion and Analysis” for further details regarding the Liberty Mutual Agency Corporation 2010 Executive Long-Term Incentive Plan and the equity awards that will be made in connection with this offering.

The anti-takeover provisions of our certificate of incorporation, bylaws and the Intercompany Agreement 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;

	•	following a distribution of Class B common stock by Liberty Mutual intended to qualify as a tax-free spin-off, the restriction that a beneficial owner of 10% or more of our Class B common stock may not vote in any election of directors unless such person or group also owns at least an equivalent percentage of Class A common stock or obtains approval of our board of directors either prior to acquiring beneficial ownership of at least 5% of our Class B common stock or, where such person acquires beneficial ownership of at least 5% of our Class B common stock solely as a result of such a distribution, prior to acquiring one additional share of our Class B common stock;

	•	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 the Intercompany Agreement.”

In addition, under the Intercompany Agreement, Liberty Mutual is generally entitled to purchase its pro rata economic share of any additional equity securities that we issue and will receive Class B common stock if such equity securities are in the form of common stock. See “Certain Relationships and Related Party Transactions — Agreements with Liberty Mutual Related to this Offering — Intercompany Agreement — Equity Purchase Rights.” As a result, Liberty Mutual will have the ability to increase its voting power in our common stock in the event we issue additional shares of common stock.

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, but not limited to, 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, but not limited to, the risks discussed in this prospectus under “Risk Factors.”

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.

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, other published industry sources, which include the 2008 Future One Agency Universe Study, prepared by the IIABA, Council of Insurance Agents & Brokers 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. 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.

The rankings of our company and our competitors reflected in this prospectus are derived from net written premiums for the year ended December 31, 2009. We obtained the net written premium information for our competitors through A.M. Best’s subscription-only online data system. A.M. Best aggregates information, such as net written premiums, from the statutory filings that we and our competitors file with state insurance departments. Our list of competitors consists of those companies listed on A.M. Best’s standard “AMB Financial Groups” list and who inform A.M. Best that they utilize independent agency distribution.

For purposes of the rankings of our three operating segments against our competitors, we compared our competitors’ net written premiums by line of business for the year ended December 31, 2009 against the net written premiums for the lines of business written by each of our three operating segments: Commercial, Personal and Surety. For the commercial lines rankings in this prospectus, we used our competitors’ total net written premiums reflected in A.M. Best’s data system and subtracted the net written premiums for (1) the lines of business discussed below for the surety and personal lines rankings and (2) the following seven lines of business that we do not write: mortgage guaranty, ocean marine, medical malpractice occurrence, group accident and health, aircraft, fidelity and credit, which aligns our competitors’ business mix with our own. For the personal lines rankings in this prospectus, we used our competitors’ net written premiums for homeowners, private passenger automobile physical damage and private passenger automobile liability lines of business. For the surety rankings in this prospectus, we used the net written premiums for our competitors’ surety line of business.

We also adjusted the net written premiums reported by certain of our competitors to reflect only business written through independent insurance agencies. For two of our competitors, Progressive Corporation and Zurich Financial Services (including Farmers Insurance Group), we only included the net written premiums of their respective insurance subsidiaries that distribute through independent agencies. With one of our competitors, Hartford Financial Services Group, Inc., we excluded personal lines business that Hartford Financial Services Group, Inc. identified in its Form 10-K for the year ended December 31, 2009 as having been written through an affinity channel. Lastly, we have excluded American International Group as one of our competitors because of the sale of its independent insurance agency business, as reported in its Form 10-K for the year ended December 31, 2009.

Based on the adjusted information derived from A.M. Best’s data system, we then used our net written premiums discussed in this prospectus under “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for the year ended December 31, 2009 to rank our company (and our operating segments) against our competitors. Our total net written premiums for the year ended December 31, 2009 also included $167 million of premium reported under our Corporate and Other segment. The addition of this premium does not impact the rankings reflected in this prospectus.

USE OF PROCEEDS

Our net proceeds from this offering are estimated to be $1.170 billion, assuming an initial public offering price of $19.00 per share (the midpoint of the range set forth on the cover of this prospectus) and after deducting an assumed underwriting discount. The selling stockholder has granted the underwriters a 30-day option to purchase up to an additional 6,430,900 shares of Class A common stock. Upon any exercise of this option, the selling stockholder will satisfy its share delivery obligations by delivering outstanding shares of Class B common stock which, by their terms, will convert into an equal number of shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholder in the event the underwriters exercise their over-allotment option. All of the net proceeds to us (before expenses) of this offering will be used by us to make the following payments to Liberty Mutual:


	•	an estimated $1.040 billion to repay a portion of the $1.090 billion principal amount that remains outstanding under our note payable that we issued to Liberty Mutual in the original principal amount of $4 billion in February 2010 (the “February 2010 Note”), which note matures on February 29, 2012 and bears interest at an annual rate of 0.72%; and


	•	an estimated $130 million to repay a portion of a note payable that we will issue to Liberty Mutual prior to the closing of this offering, to complete the transfer of Ohio Casualty (the “Ohio Casualty Note”) to us. The principal amount of the Ohio Casualty Note will be equal to the net proceeds to us (before expenses) of this offering plus $310 million, and such note will mature September 1, 2020 and will bear interest at an annual rate of 5.625%.

We did not and will not receive any cash proceeds from the issuance of the February 2010 Note or the Ohio Casualty Note. Both the Ohio Casualty Note and the February 2010 Note may be prepaid by us in full or in part without penalty at any time prior to maturity.

After application of the net proceeds described above and after giving effect to cash on hand at Liberty Mutual Agency Corporation, we expect to retain approximately $268 million at Liberty Mutual Agency Corporation for working capital, payments of dividends and debt service, and other general corporate purposes.

DIVIDEND POLICY

Our board of directors currently intends to authorize the payment of a dividend of $0.06 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, but not limited to, 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 six months ended June 30, 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 us any dividends without prior approval by regulatory authorities, at least for the twelve months following the date these dividends were paid, was exhausted. We obtained regulatory approval for our top-tier insurance subsidiaries to pay additional dividends to us subsequent to June 30, 2010 in an aggregate amount of $721 million. Such dividends were paid to us in August of 2010. For the six months ended June 30, 2010 and 2009 we declared and paid dividends to Liberty Mutual of $4.047 billion and $32 million, respectively. 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 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 June 30, 2010:


	•	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 June 30, 2010.

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

You should read the following information in conjunction with 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 June 30, 2010
	Actual		Adjustments			Pro Forma
	(Dollars in millions)

Cash and short-term investments	$	1,415	$	(51	)(A)	$	1,364

Debt
February 2010 Note payable		1,901		(1,851	)(B)		50
Ohio Casualty Note payable		—		1,350	(C)		1,350
Other long-term debt		57		—			57

Total long-term debt		1,958		(501)			1,457
Stockholders’ equity
Common Stock:
Class A (par value $0.01; actual: 0 shares issued and outstanding; pro forma: 64,309,000 shares issued and outstanding)		—		1	(D)		1
Class B (par value $0.01; actual: 295,691,000 shares issued and outstanding; pro forma: 295,691,000 shares issued and outstanding)		3		—			3
Additional paid-in capital		7,783		(311	)(D)		7,472
Retained earnings		167		—			167
Accumulated other comprehensive income		549		—			549

Total stockholders’ equity		8,502		(310)			8,192

Total capitalization	$	10,460	$	(811)		$	9,649


(A)		Reflects the cash portion of the transfers made in August 2010 to Liberty Mutual to reduce the balance of the February 2010 Note.


(B)		Reflects the transfer of cash and investments in August 2010 and the transfer of a portion of the estimated net proceeds to us (before expenses) of this offering to Liberty Mutual to reduce the balance of the February 2010 Note.


(C)		Reflects the issuance of the Ohio Casualty Note in a principal amount equal to the net proceeds to us (before expenses) of this offering plus $310 million, less the transfer of a portion of the net offering proceeds to Liberty Mutual to reduce the balance of the Ohio Casualty Note.


(D)		Reflects a decrease for the dividend issued in the form of the Ohio Casualty Note (see Note (C)) and an increase for the estimated net proceeds to us (before expenses) of this offering.

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 are derived from our audited historical consolidated financial statements for the years ended December 31, 2009, 2008 and 2007 and as of December 31, 2009 and 2008, which have been audited by Ernst & Young LLP, an independent registered public accounting firm, as well as our unaudited consolidated financial statements for the six months ended June 30, 2010 and 2009 and as of June 30, 2010, which in each case have been prepared in accordance with GAAP and are included elsewhere in this prospectus. 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 are derived from our unaudited historical consolidated financial statements that are not included in this prospectus. These historical results are not necessarily indicative of results to be expected in any future period. In our opinion, the unaudited financial statements provided herein have been prepared on substantially the same basis as the audited historical consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and results of operations for the periods presented. Operating results for the six months ended June 30, 2010 are not necessarily indicative of those to be expected for the full fiscal year.

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 filed as exhibits to the registration statement of which this prospectus forms a part.


	Six Months
	Ended
	June 30,						Year Ended December 31,
	2010			2009			2009			2008			2007			2006		2005
	(Dollars in millions, except share data)

Statement of Operations Data
Net written premiums	$	5,180		$	4,975		$	10,148		$	6,704		$	4,407		$	3,748	$	3,530
Net premiums earned		5,113			5,080			9,983			6,913			4,325			3,636		3,474
Net investment income		463			439			910			719			405			308		272
Fee and other revenues		50			49			97			50			33			31		33
Net realized investment gains (losses)		227			(53	)		(53	)		(407	)		(5	)		—		45

Total revenues		5,853			5,515			10,937			7,275			4,758			3,975		3,824
Claims and claim adjustment expenses		3,636			3,291			6,157			4,326			2,601			2,342		2,205
General and administrative expenses		638			494			1,005			777			551			401		413
Goodwill impairment ⁽¹⁾		—			—			—			973			—			—		—
Amortization of deferred policy acquisition costs		1,186			1,209			2,392			1,664			1,056			866		808
Interest expense		10			2			4			21			6			1		1

Total claims and expenses		5,470			4,996			9,558			7,761			4,214			3,610		3,427
Income (loss) before income tax expense		383			519			1,379			(486	)		544			365		397
Income tax expense		94			142			377			78			167			113		150

Net income (loss)	$	289		$	377		$	1,002		$	(564	)	$	377		$	252	$	247

Less: Preferred stock dividends		18			32			63			—			—			—		—

Income (loss) available to common stockholders	$	271		$	345		$	939		$	(564	)	$	377		$	252	$	247

Share Data
Net income (loss) available to common stockholders per common share:
Basic	$	0.92		$	1.17		$	3.17		$	(1.91	)	$	1.27		$	0.85	$	0.83
Diluted	$	0.92		$	1.17		$	3.17		$	(1.91	)	$	1.27		$	0.85	$	0.83
Weighted average common shares outstanding:
Basic ⁽²⁾		296			296			296			296			296			296		296
Diluted ⁽²⁾		296			296			296			296			296			296		296
Non-GAAP Financial Measure ⁽³⁾
Pre-tax operating income	$	421		$	588		$	1,455		$	934		$	599		$	365	$	352
Reconciliation to net income (loss):
Net income (loss)		289			377			1,002			(564	)		377			252		247
Less: Net realized investment gains (losses)		227			(53	)		(53	)		(407	)		(5	)		—		45
Add: Income tax expense		94			142			377			78			167			113		150
Add: Goodwill impairment ⁽¹⁾		—			—			—			973			—			—		—
Add: Integration and other acquisition related costs		(2	)		16			23			40			50			—		—
Add: Run-off reserves (Run-Off Reinsurance Agreement) ⁽⁴⁾		267			—			—			—			—			—		—

Pre-tax operating income	$	421		$	588		$	1,455		$	934		$	599		$	365	$	352


	Six Months
	Ended
	June 30,						Year Ended December 31,
	2010			2009			2009			2008			2007			2006			2005
	(Dollars in millions, except share data)

Combined Ratio
Claims and claim adjustment expense ratio ⁽⁵⁾		62.2	%		64.6	%		63.7	%		64.7	%		65.4	%		62.2	%		58.7	%
Underwriting expense ratio ⁽⁶⁾		31.2			31.4			31.7			33.0			35.0			34.3			34.0

Subtotal		93.4			96.0			95.4			97.7			100.4			96.5			92.7
Catastrophes ⁽⁷⁾		8.0			5.6			4.4			5.1			2.1			4.0			3.1
Net incurred losses attributable to prior years		0.9			(5.4	)		(6.2	)		(7.2	)		(7.4	)		(1.8	)		1.7

Combined ratio ⁽⁸⁾		102.3	%		96.2	%		93.6	%		95.6	%		95.1	%		98.7	%		97.5	%


	As of June 30,		As of December 31,
	2010		2009		2008		2007		2006		2005

Balance Sheet Data
Cash and investments	$	19,732	$	22,504	$	20,062	$	11,313	$	6,694	$	6,140
Premium and other receivables, net		2,491		2,405		2,567		1,438		1,090		1,012
Goodwill		3,054		3,054		3,054		1,345		290		290
Other assets		4,172		4,423		5,187		2,543		1,570		1,557

Total assets		29,449		32,386		30,870		16,639		9,644		8,999
Unpaid claims and claim adjustment expenses		12,222		12,053		12,651		7,307		4,327		3,944
Unearned premiums		4,749		4,658		4,837		2,519		1,741		1,644
Debt		1,958		78		82		216		10		28
Other liabilities		2,018		3,400		2,999		1,132		1,006		837

Total liabilities		20,947		20,189		20,569		11,174		7,084		6,453
Stockholders’ equity ⁽⁹⁾		8,502		12,197		10,301		5,465		2,560		2,546


(1)		Our goodwill asset as of June 30, 2010 was $3.054 billion, which remained unchanged from December 31, 2009 and 2008 and largely consists 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)		Shares used in the historical earnings per share calculation represent shares of the Class B common stock outstanding subsequent to the September 10, 2010 share recapitalization that increased the common shares outstanding from 1,000 to 295,691,000 shares of Class B common stock. There is no difference between basic and diluted earnings per share because there were no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding.


(3)		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.

(4)		Represents unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment and a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement. On June 30, 2010 we entered into the Run-Off Reinsurance Agreement providing for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment.

(5)		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.

(6)		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.

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

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

(9)		For the purposes of presenting the Selected Historical Consolidated Financial Data, 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.

PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following pro forma consolidated statements of operations for the six months ended June 30, 2010 and the year ended December 31, 2009 and the consolidated balance sheet as of June 30, 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 on the first day of the periods presented 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 June 30, 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 included elsewhere in this prospectus. The pro forma consolidated financial statements are prepared assuming that each share of Class A common stock offered hereby is sold at a price equal to the midpoint of the offering price range as set forth on the cover page of this prospectus and that the underwriters’ over-allotment option is not exercised.

The Transactions

The following are the Transactions for which we are giving pro forma effect:


	•	*February 2010 Note.* On February 3, 2010, we declared and paid a dividend to Liberty Mutual in the form of a note payable in the aggregate principal amount of $4 billion due February 29, 2012, bearing interest at an annual rate of 0.72%. In April 2010, we repaid $2.099 billion of this note through a transfer to Liberty Mutual of investments and cash. In August 2010, we repaid an additional $811 million of this note through a transfer to Liberty Mutual of investments and cash.


	•	*Ohio Casualty Transfer.* Prior to the closing of this offering, Liberty Mutual will cause Ohio Casualty to be transferred to us through a combination of a sale of Ohio Casualty common stock in exchange for the Ohio Casualty Note, payable by us to Liberty Mutual, and the contribution of the remaining Ohio Casualty common stock not already owned by us. At the time of the transfer, we will recognize the principal amount of the Ohio Casualty Note as a liability and reflect a dividend in an equal amount as a reduction to our stockholders’ equity. The contribution of shares will have no impact on our balance sheet because the results of Ohio Casualty have been included in our historical results for all periods presented through the application of carve-out accounting. The Ohio Casualty Note will mature on September 1, 2020 and will bear interest at an annual rate of 5.625%. The actual aggregate principal amount of the Ohio Casualty Note will not be determinable until the pricing of this offering, but will equal the net proceeds to us (before expenses) of this offering plus $310 million. Regardless of the amount of the net proceeds of the offering, our pro forma stockholders’ equity and pro forma total long-term debt as of June 30, 2010 will remain constant at approximately $8.192 billion and approximately $1.457 billion, respectively, while the principal amount of the Ohio Casualty Note will fluctuate with the net proceeds to us. See Note (F) of the accompanying notes to the pro forma financial statements.


	•	*Offering Proceeds.* We expect to repay approximately $1.040 billion of the February 2010 Note and approximately $130 million of the Ohio Casualty Note with the net proceeds to us (before expenses) of this offering, which amounts assume that each share of Class A common stock offered hereby is sold at a price equal to the midpoint of the offering price range as set forth on the cover page of this prospectus. See “Use of Proceeds”.

The principal changes to our historical consolidated financial statements resulting from the pro forma adjustments related to the Transactions, including this offering, are as follows:

Consolidated Statement of Operations


	•	*Investment Income.* Investment income will decrease on a pro forma basis due to transfers of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note; and


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

Consolidated Balance Sheet


	•	*Cash and Investments.* Cash and investments will decrease by approximately $811 million on a pro forma basis due to the transfer of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note;


	•	*Debt.* Debt will decrease by approximately $501 million on a pro forma basis due to the transfer of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note, the issuance of the Ohio Casualty Note to Liberty Mutual prior to the closing of this offering, and transfers to Liberty Mutual from the net proceeds to us (before expenses) of this offering in partial satisfaction of the February 2010 Note and the Ohio Casualty Note; and


	•	*Stockholders’ Equity.* Stockholders’ equity will decrease by approximately $310 million on a pro forma basis due to the dividend to Liberty Mutual associated with the Ohio Casualty Note issuance, partially offset by an increase in stockholders’ equity from the issuance and sale of Class A common stock in 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.

Other Considerations

The following items are not reflected in the pro forma consolidated financial statements adjustments:


	•	preferred stock dividends relating to the preferred stock cancelled on April 14, 2010. These dividends decreased the income (loss) available to common stockholders and will not be recurring; and

	•	incremental ongoing costs or charges associated with being a publicly-traded company.

Our results for the first six months of 2010 were adversely impacted by a number of factors, primarily: (i) a one-time charge to general and administrative expenses of $125 million related to the Run-Off Reinsurance Agreement entered into on June 30, 2010 and described in “Summary — Transactions with Liberty Mutual” and (ii) $142 million in unfavorable incurred losses attributable to prior years related to the run-off reserves in our Corporate and Other segment (for which any adverse development that occurs subsequent to June 30, 2010 will be ceded to Liberty Mutual up to $500 million under the Run-Off Reinsurance Agreement).

Pro Forma Consolidated Statement of Operations

Six Months Ended June 30, 2010

(in millions, except per share amounts)


	Actual		Adjustments			Pro forma

Net premiums earned	$	5,113	$	—		$	5,113
Net investment income		463		(46	)^(A)		417
Fee and other revenues		50		—			50
Net realized investment gains		227		—			227

Total revenues		5,853		(46	)		5,807
Claims and claim adjustment expenses		3,636		—			3,636
General and administrative expenses		638		—			638
Amortization of deferred policy acquisition costs		1,186		—			1,186
Interest expense		10		29	^(B)		39

Total claims and expenses		5,470		29			5,499
Income before income tax expense		383		(75	)		308
Income tax expense		94		(26	)^(C)		68

Net income	$	289	$	(49	)	$	240
Less: Preferred stock dividends		18		—			18

Income available to common stockholders	$	271	$	(49	)	$	222


Income available to common stockholders per common share:
Basic	$	0.92				$	0.62
Diluted	$	0.92				$	0.62
Weighted average common shares outstanding^(D)
Basic		296					360
Diluted		296					360

See notes to pro forma consolidated financial statements.

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2009

(in millions, except per share amounts)


	Actual			Adjustments			Pro forma


Net premiums earned	$	9,983		$	—		$	9,983
Net investment income		910			(134	)^(A)		776
Fee and other revenues		97			—			97
Net realized investment losses		(53	)		—			(53	)

Total revenues		10,937			(134	)		10,803
Claims and claim adjustment expenses		6,157			—			6,157
General and administrative expenses		1,005			—			1,005
Amortization of deferred policy acquisition costs		2,392			—			2,392
Interest expense		4			76	^(B)		80

Total claims and expenses		9,558			76			9,634
Income before income tax expense		1,379			(210	)		1,169
Income tax expense		377			(74	)^(C)		303

Net income	$	1,002		$	(136	)	$	866
Less: Preferred stock dividends		63			—			63

Income available to common stockholders	$	939		$	(136	)	$	803


Income available to common stockholders per common share:
Basic	$	3.17					$	2.23
Diluted	$	3.17					$	2.23
Weighted average common shares outstanding^(D)
Basic		296						360
Diluted		296						360

See notes to pro forma consolidated financial statements.

Pro Forma Consolidated Balance Sheet

As of June 30, 2010

(in millions, except per share amounts)


	Actual		Adjustments			Pro forma


Cash and investments	$	19,732	$	(811	)^(E)	$	18,921
Premium and other receivables, net		2,491		—			2,491
Goodwill		3,054		—			3,054
Other assets		4,172		—			4,172

Total assets	$	29,449	$	(811	)	$	28,638

Unpaid claims and claim adjustment expenses	$	12,222	$	—		$	12,222
Unearned premiums		4,749		—			4,749
Long-term debt		1,958		(501	)^(F)		1,457
Other liabilities		2,018		—			2,018

Total liabilities	$	20,947	$	(501	)	$	20,446
Stockholders’ equity
Common stock:
Class A (par value $0.01; actual: 0 shares issued and outstanding; pro forma: 64,309,000 shares issued and outstanding)		—		1	^(G)		1
Class B (par value $0.01; actual: 295,691,000 shares issued and outstanding; pro forma: 295,691,000 shares issued and outstanding)		3		—			3
Additional paid-in capital		7,783		(311	)^(G)		7,472
Retained earnings		167		—			167
Accumulated other comprehensive income		549		—			549

Total stockholders’ equity		8,502		(310	)		8,192

Total liabilities and stockholders’ equity	$	29,449	$	(811	)	$	28,638

See notes to the pro forma consolidated financial statements

Notes to the Pro Forma Consolidated Financial Statements

(A) Reflects a reduction of net investment income of approximately $46 million and approximately $134 million for the six months ended June 30, 2010 and the year ended December 31, 2009, respectively, based on the reduction of cash and investments related to the $2.099 billion transferred to Liberty Mutual in April 2010 (as reflected in the June 30, 2010 historical balance sheet) and the $811 million transferred to Liberty Mutual in August 2010 (as adjusted, see Note E below), in each case in partial satisfaction of the February 2010 Note. The reduction in net investment income represents the balance of the actual cash and investments transferred to Liberty Mutual broken out by asset category multiplied by the yield for the respective period associated with that asset category.

(B) This adjustment reflects the interest expense on the following indebtedness expected to be outstanding subsequent to this offering:


	•	5.625% on the estimated $1.350 billion outstanding principal amount of the Ohio Casualty Note (see Note F below); and


	•	0.72% on the estimated $50 million outstanding principal amount of the February 2010 Note.

This adjustment assumes the notes were outstanding from the first day of each of the periods presented. The June 30, 2010 adjustment was reduced by the interest expense of $9 million incurred during the period with respect to the February 2010 Note.

(C) Reflects the income tax expense of the adjustments in our statement of operations described in Notes (A) and (B) above at an assumed Federal statutory tax rate of 35%.

(D) Shares used in the historical earnings per share calculation represent the Class B shares outstanding subsequent to the September 10, 2010 share recapitalization that increased the common shares outstanding from 1,000 shares of common stock to 295,691,000 shares of Class B common stock. The shares used in the pro forma earnings per share calculation represent the sum of the shares of Class B common stock as well as the shares of Class A common stock expected to be outstanding subsequent to the offering. There is no difference between basic and diluted earnings per share because there were no outstanding options to purchase shares of our common stock or other potentially dilutive securities outstanding.

(E) Reflects transfers made in August 2010 to Liberty Mutual of $811 million of cash and investments to reduce the balance of the February 2010 Note.

(F) The lower long-term debt balance is a result of (i) a decrease in debt of approximately $811 million due to transfers of cash and investments to Liberty Mutual in partial satisfaction of the February 2010 Note (as described in Note E above), (ii) an increase in debt of approximately $1.480 billion due to the issuance of the Ohio Casualty Note prior to the closing of this offering, and (iii) a decrease in debt from the application of the $1.170 billion estimated net proceeds to us (before expenses) of this offering (assuming the shares of Class A common stock are offered at $19.00 per share, the midpoint of the offering price range set forth on the cover page of this prospectus) against the outstanding long-term debt balances.

The principal amount of the Ohio Casualty Note will be determined subsequent to the pricing of this offering and will equal the net proceeds to us (before expenses) of this offering plus $310 million. The remaining fair value of Ohio Casualty will be contributed by Liberty Mutual to the Company as a share contribution. See “The Transactions — Ohio Casualty Transfer.” The contribution of shares will have no impact on our balance sheet because the results of Ohio Casualty have been included in our historical results for all periods presented through the application of carve-out accounting. The pro forma adjustment related to the Ohio Casualty Note was determined based on $19.00, the midpoint of the offering price range set forth on the cover of this prospectus. Regardless of the actual amount of net proceeds of the offering, our pro forma stockholders’ equity as of June 30, 2010 will be approximately $8.192 billion and our pro forma long-term debt as of such date will be approximately $1.457 billion. As illustrated below, to the extent that the actual net proceeds to us from the offering are higher or lower than such midpoint, pro forma long-term debt and pro

forma stockholders’ equity will remain constant and the principal amount of the Ohio Casualty Note will fluctuate with the proceeds as shown below:


	Estimated Net		Principal Amount of		Total
Public offering price	Proceeds		Ohio Casualty Note		Long-term Debt		Stockholders’ Equity

$18.00	$	1,108	$	1,418	$	1,457	$	8,192
$19.00	$	1,170	$	1,480	$	1,457	$	8,192
$20.00	$	1,232	$	1,542	$	1,457	$	8,192

(G) Comprised of a decrease in stockholders’ equity of approximately $310 million due to the dividend issued in the form of the Ohio Casualty Note (as described in Note F above), partially offset by the net proceeds to us (before expenses) from the issuance and sale of shares of Class A common stock in this offering, assuming that each share of Class A common stock offered hereby is sold at a price equal to the midpoint of the offering price range as set forth on the cover of this prospectus. As shown in the table to Note F, the principal amount of the Ohio Casualty Note will change based on the actual net proceeds to us of 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 included 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, but not limited to, 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


	•	*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 — Unpaid Claims and Claim Adjustment Expenses — 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. Excluding the discontinuation of the Homeowners Quota Share Treaty (see “— Consolidated Overview — Six Months Ended June 30, 2010 as Compared to Six Months Ended June 30, 2009 — Net Written Premiums”) and the impact of the Safeco acquisition, our net written premiums through the six months ended June 30, 2010 and for the year ended December 31, 2009 declined from the comparable periods in 2009 and 2008, respectively. The decline, in part, was attributable to adverse economic conditions. Commercial premiums are influenced by changing payroll levels, which are tied to employment. Personal premiums are influenced by various factors, including rates of home purchases and other homeownership trends and rates of new automobile purchases. Surety contract bond premiums are influenced by state and federal government budgets, which impact government sponsored construction and public works projects.

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 through the six months ended June 30, 2010, particularly for new business premiums. This competitive environment adversely impacted commercial lines rates, which has reduced underwriting margins, according to a fourth quarter 2009 Council of Insurance Agents & Brokers Commercial Market Survey. However, our Personal business generally continued to achieve rate increases for its products during 2009 and the first six months of 2010.

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.

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

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 stockholders’ equity and investment income resulting from dividends and transfers of cash and investments 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 “Pro Forma Consolidated Financial Statements” and “Certain Relationships and Related Party Transactions.”

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:

Six Months Ended June 30, 2010 and 2009

Net income for the six months ended June 30, 2010 was $289 million, a decrease of $88 million, or 23.3%, from the six months ended June 30, 2009. The results of the first six months of 2010 were adversely impacted by a number of factors, primarily: (i) a one-time charge to general and administrative expenses of $125 million related to the Run-Off Reinsurance Agreement entered into on June 30, 2010, (ii) $142 million in unfavorable incurred losses attributable to prior years related to run-off reserves in our Corporate and Other segment (for which Liberty Mutual will indemnify us under the Run-Off Reinsurance Agreement for up to $500 million of any adverse development that occurs subsequent to June 30, 2010) and (iii) catastrophe losses of $410 million, which represented an increase of $125 million, or 43.9%, from the six months ended June 30, 2009, due to significant hail and other storms in Montana and across several states in the Midwest region. The aggregate impact of these factors reduced our pre-tax income in the six months ended June 30, 2010 by $392 million.

Years Ended December 31, 2009, 2008 and 2007

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 June 30, 2010 was $3.054 billion, which was unchanged from December 31, 2009 and 2008 and largely consists 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. 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 six months ended June 30, 2010 as compared to the six months ended June 30, 2009, 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, unfavorable incurred losses attributable to prior years related to run-off reserves in our Corporate and Other segment, a one-time charge associated with the Run-Off Reinsurance Agreement, 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 — Six Months Ended June 30, 2010 as Compared to Six Months Ended June 30, 2009

Net Written Premiums

The table below sets forth net written premiums by segment:


	Six Months Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Commercial	$	2,257	$	2,328	$	(71	)		(3.0	)%
Personal		2,495		2,231		264			11.8
Surety		363		337		26			7.7
Corporate and Other		65		79		(14	)		(17.7	)

Total net written premiums	$	5,180	$	4,975	$	205			4.1	%

Net written premiums increased $205 million, or 4.1%, over the six months ended June 30, 2009. The increase was primarily driven by additional retained premium of $216 million in the first six months of 2010 due to the discontinuation of a quota share reinsurance treaty, effective from December 31, 2008 to December 31, 2009 that covered our homeowners policies’ property and liability coverage, which we refer to in this prospectus as the “Homeowners Quota Share Treaty”. Excluding the effects of the Homeowners Quota Share Treaty, consolidated net written premiums decreased $11 million, or 0.2%, compared to 2009 due to a decline in commercial lines and private passenger automobile premium. These items were partially offset by an increase in homeowners premium and higher contract and commercial surety bond premium.

For a description of the Homeowners Quota Share Treaty, see “— Reinsurance Protection and Catastrophe Management.” Pursuant to the terms of 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 losses ceded under the treaty.

Results of Operations

The table below sets forth consolidated results of operations:


	Six Months Ended
	June 30,						Change
	2010			2009			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	5,113		$	5,080		$	33			0.6	%
Net investment income		463			439			24			5.5
Fee and other revenues		50			49			1			2.0
Net realized investment gains (losses)		227			(53	)		280			*

Total revenues		5,853			5,515			338			6.1
Claims and expenses
Claims and claim adjustment expenses		3,636			3,291			345			10.5
General and administrative expenses		638			494			144			29.1
Amortization of deferred policy acquisition costs		1,186			1,209			(23	)		(1.9	)
Interest expense		10			2			8			*

Total claims and expenses		5,470			4,996			474			9.5
Income before income tax expense		383			519			(136	)		(26.2	)
Income tax expense		94			142			(48	)		(33.8	)

Net income	$	289		$	377		$	(88	)		(23.3	)%

Reconciliation of net income
Net income	$	289		$	377		$	(88	)		(23.3	)%
Less: Net realized investment gains (losses)		227			(53	)		280			*
Add: Income tax expense		94			142			(48	)		(33.8	)
Add: Integration and other acquisition related (benefits) costs		(2	)		16			(18	)		(112.5	)
Add: Run-off reserves (Run-off Reinsurance Agreement)		267			—			267			*

Pre-tax operating income	$	421		$	588		$	(167	)		(28.4	)%


*		Not meaningful.

Revenues

Revenues increased $338 million, or 6.1%, over the six months ended June 30, 2009, primarily driven by net realized investment gains in 2010 compared to net realized investment losses generated in 2009 as well as higher earned premium and increased net investment income.

Net Premiums Earned. Net premiums earned increased $33 million, or 0.6%, over the six months ended June 30, 2009. The increase reflected $214 million of additional retained earned premium in the first six months of 2010 due to the discontinuation of our Homeowners Quota Share Treaty, partially offset by the effects of declining net written premiums in the latter half of 2009 and the changes in 2010 net written premiums previously discussed.

Net Investment Income. Net investment income increased $24 million, or 5.5%, over the six months ended June 30, 2009. The increase was primarily due to higher fixed maturity income of $17 million from higher average asset balances and a $30 million improvement in equity earnings on limited partnerships and limited liability companies (referred to as “LLCs” in this prospectus) from the prior year. These items were partially offset by a $15 million decrease in dividend income from equity securities as well as a $9 million decrease in income from cash and cash equivalents.

Fee and Other Revenues. Fee and other revenues increased $1 million, or 2%, over the six months ended June 30, 2009. This was primarily the result of an increase in personal lines fee revenues due to the

implementation of premium payment option programs in additional states, partially offset by a reduction in commercial lines installment fee revenues and lower revenues from involuntary market service carrier operations due to lower involuntary market premium volume.

Net Realized Investment Gains (Losses). Net realized investment gains for the six months ended June 30, 2010 were $227 million as compared to net realized investment losses for the six months ended June 30, 2009 of $53 million, an increase of $280 million. The increase was primarily due to higher realized investment gains on sales of fixed maturities and equity securities of $226 million and $6 million, respectively, due to the strategic realignment of our investment portfolio, as well as a decrease in impairment losses of $48 million due to improved market conditions.

Claims and expenses

Claims and Claim Adjustment Expenses. Claims and claim adjustment expenses increased $345 million, or 10.5%, over the six months ended June 30, 2009. The increase was primarily driven by unfavorable incurred losses attributable to prior years of $47 million in the first six months of 2010 compared to $272 million of favorable incurred losses in 2009 driving an increase in losses of $319 million, higher catastrophe losses of $125 million, additional retained losses of $103 million (excluding catastrophes) in 2010 related to the discontinuation of our Homeowners Quota Share Treaty, and unfavorable current year loss experience in our commercial multiple peril liability and workers compensation lines of business. These items were partially offset by favorable current year loss cost trends in our commercial and personal property product lines as well as the private passenger automobile liability product line and a decline in losses consistent with the changes in net premiums earned previously discussed (excluding the impact of the Homeowners Quota Share Treaty).

Catastrophe losses included in claims and claim adjustment expenses totaled $410 million for the six months ended June 30, 2010 compared to $285 million for the six months ended June 30, 2009, an increase of $125 million, or 43.9%. The increase in the 2010 period was due to significant hail and other storms in Montana that primarily impacted our Personal segment, increased losses in our Commercial segment associated with severe winter storms in the New England and Mid-Atlantic regions, and hail and other severe weather events across several states in the Midwest region driving material losses in both our Commercial and Personal segments. The increase was further impacted by additional retained losses of $46 million in 2010 related to the discontinuation of our Homeowners Quota Share Treaty. These items were partially offset by prior year catastrophe losses of $42 million that emerged in 2009 largely related to Hurricane Ike and two Pacific Northwest winter storms that occurred in the fourth quarter of 2008.

Unfavorable incurred losses attributable to prior years totaled $47 million through the first six months of 2010. Our Corporate and Other segment experienced $165 million of unfavorable incurred losses attributable to prior years which were primarily related to the run-off reserves in the general liability line of business acquired as part of the 2008 Safeco acquisition. Under the Run-Off Reinsurance Agreement, Liberty Mutual will indemnify us for up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment. The unfavorable incurred losses through the first six months of 2010 were partially offset by favorable incurred losses attributable to prior years of $53 million for our Surety segment in the first six months of 2010 reflecting better than expected paid and reported loss emergence in the more recent accident years. During the first six months of 2010 our Commercial segment experienced $39 million of favorable incurred losses attributable to prior years principally driven by 2009 fourth quarter property losses emerging at lower levels than expected due to benign severity trends. Additionally, favorable emergence of $26 million for our Personal segment in the first six months of 2010 was largely due to favorable trends in the private passenger automobile liability line due to moderate severity and favorable frequency trends across multiple accident years.

General and Administrative Expenses. General and administrative expenses increased $144 million, or 29.1%, over the six months ended June 30, 2009. The increase was driven by a one-time charge of $125 million related to the Run-Off Reinsurance Agreement entered into on June 30, 2010, which provides for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment, higher costs associated

with increased quote activity, particularly in our Personal segment, and general cost increases. These items were partially offset by lower variable expenses consistent with the changes in net premiums earned previously discussed (excluding the impact of the Homeowners Quota Share Treaty), efficiencies gained from the integration of Safeco operations, and an $18 million decrease in integration and other acquisition related costs compared with the six months ended June 30, 2009.

Amortization of Deferred Policy Acquisition Costs. The amortization of deferred policy acquisition costs decreased $23 million, or 1.9%, from the six months ended June 30, 2009. The decrease was driven, in part, by lower capitalized expenses in 2009 resulting from lower written premium.

Interest Expense. Interest expense increased $8 million over the six months ended June 30, 2009. The increase reflected a higher average level of debt outstanding during 2010, which is described in more detail in the “— Liquidity and Capital Resources” section herein.

Income Tax Expense. Federal and state income tax expense decreased $48 million, or 33.8%, from the six months ended June 30, 2009. Our effective tax rate for the six months ended June 30, 2010 was 24.5% compared to 27.4% in the same period in 2009. Our effective tax rate differed from the Federal statutory rate of 35% due, in part, to investment preference items. The change in the effective rate compared to the 2009 period was due to the level of tax exempt interest relative to overall earnings.

Net income

Net income decreased $88 million, or 23.3%, from the six months ended June 30, 2009. The decrease primarily reflected the charge of $125 million associated with the Run-Off Reinsurance Agreement, adverse prior year development related to our run-off reserves and the unfavorable catastrophe results discussed above, partially offset by net realized investment gains in 2010.

Pre-tax operating income

Pre-tax operating income decreased $167 million, or 28.4%, from the six months ended June 30, 2009. The decrease was primarily driven by a decrease in the amount of favorable incurred losses attributable to prior years in 2010 compared to 2009, higher catastrophe losses, unfavorable current year loss experience in our commercial multiple peril liability and workers compensation lines of business, and higher costs associated with increased quote activity, particularly in our Personal segment. These items were partially offset by favorable current year loss cost trends in our commercial and personal property product lines as well as the private passenger automobile liability line and efficiencies gained from the integration of Safeco operations.

Combined Ratio

The following table sets forth our consolidated combined ratios:


	Six Months Ended						Change in
	June 30,						Percentage
	2010			2009			Points

Claims and claim adjustment expense ratio ⁽¹⁾		62.2	%		64.6	%		(2.4	)
Underwriting expense ratio ⁽²⁾		31.2			31.4			(0.2	)

Subtotal		93.4			96.0			(2.6	)
Catastrophes ⁽³⁾		8.0			5.6			2.4
Net incurred losses attributable to prior years		0.9			(5.4	)		6.3

Combined ratio ⁽⁴⁾		102.3	%		96.2	%		6.1


(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 Safeco acquisition, 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, the 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 decreased 2.6 points from the six months ended June 30, 2009. The decrease in the claims and claim adjustment expense ratio was driven by favorable loss cost trends in our commercial and personal property product lines as well as the private passenger automobile liability product line, partially offset by unfavorable loss experience within our commercial multiple peril liability and workers compensation lines of business. The decrease in the underwriting expense ratio was due to efficiencies gained from the integration of Safeco operations, partially offset by higher costs associated with increased quote activity, particularly in our Personal segment.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio increased 6.1 points over the six months ended June 30, 2009. The increase was driven by unfavorable incurred losses attributable to prior years primarily associated with the run-off reserves of our Corporate and Other segment (for which Liberty Mutual will indemnify us under the Run-Off Reinsurance Agreement for up to $500 million of any adverse development that occurs subsequent to June 30, 2010) versus favorable incurred losses in 2009 and higher catastrophe losses within our Commercial and Personal segments. These items were partially offset by the changes in the combined ratio discussed above.

Commercial

Net Written Premiums

The following table sets forth net written premiums by product line for our Commercial segment:


	Six Months Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Commercial multiple peril	$	879	$	913	$	(34	)		(3.7	)%
Commercial automobile		555		578		(23	)		(4.0	)
Workers compensation		440		443		(3	)		(0.7	)
General liability		242		248		(6	)		(2.4	)
Other ⁽¹⁾		141		146		(5	)		(3.4	)

Total net written premiums	$	2,257	$	2,328	$	(71	)		(3.0	)%


(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 decreased $34 million, or 3.7%, from the six months ended June 30, 2009. The decrease was primarily driven by a decline in renewal premium in 2010 due to reduced insured exposures and the impact of negative audit premiums (premium increases or decreases associated with variations in the underlying insured exposure (such as payroll or sales)), reflecting the continuing effects of adverse economic conditions. This was partially offset by modest rate and retention increases and favorable new business levels.

Commercial Automobile. Commercial automobile net written premiums decreased $23 million, or 4.0%, from the six months ended June 30, 2009. The decrease was primarily driven by lower retention and reduced

insured exposures on renewal business due to the continuing effects of adverse economic conditions. These items were partially offset by favorable new business levels.

Workers Compensation. Workers compensation net written premiums decreased $3 million, or 0.7%, from the six months ended June 30, 2009. The decrease was primarily driven by a decline in renewal premium in the 2010 period due to reduced insured exposures and the impact of negative audit premiums, both reflecting the continuing effects of adverse economic conditions. This was partially offset by a modest increase in retention and favorable new business levels.

General Liability. General liability net written premiums decreased $6 million, or 2.4%, from the six months ended June 30, 2009. The decrease was primarily driven by a decline in renewal premium due to reduced insured exposures and the impact of negative audit premiums, both reflecting the continuing effects of adverse economic conditions. This was partially offset by modest rate and retention increases and favorable new business levels.

Other. Other net written premiums decreased $5 million, or 3.4%, from the six months ended June 30, 2009. The decrease was driven by lower renewal premium, partially offset by modest premium rate increases and favorable new business levels.

Results of Operations

The following table sets forth results of operations for our Commercial segment:


	Six Months
	Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	2,272	$	2,384	$	(112	)		(4.7	)%
Net investment income		233		228		5			2.2
Fee and other revenues		17		20		(3	)		(15.0	)

Total revenues		2,522		2,632		(110	)		(4.2	)
Total claims and expenses ⁽¹⁾		2,438		2,435		3			0.1

Pre-tax operating income	$	84	$	197	$	(113	)		(57.4	)%


(1)		Integration and other acquisition related costs associated with the Safeco acquisition of $6 million in the six months ended June 30, 2009 have been excluded from total claims and expenses.

Revenues

Revenues for our Commercial segment decreased $110 million, or 4.2%, from the six months ended June 30, 2009.

Net Premiums Earned. Net premiums earned decreased $112 million, or 4.7%, from the six months ended June 30, 2009. The decrease reflected declining net written premiums in the latter half of 2009 and the changes in 2010 net written premiums previously discussed.

Net Investment Income. Net investment income increased $5 million, or 2.2%, over the six months ended June 30, 2009. The increase reflected a higher invested asset base due to the continued investment of cash flow from operations and higher benchmark investment yields.

Fee and Other Revenues. Fee and other revenues decreased $3 million, or 15.0%, from the six months ended June 30, 2009. The decrease was primarily driven by lower installment fee revenues due to the decline in net written premiums previously discussed and a mix shift towards premium payment plans that require lower fees. The remaining variance was attributable to lower fee revenues from involuntary market servicing carrier operations due to lower involuntary market premium volume.

Claims and expenses

Claims and expenses for our Commercial segment increased $3 million, or 0.1%, over the six months ended June 30, 2009. The change was driven by a decrease of $113 million in the amount of favorable incurred losses attributable to prior years compared to 2009, higher catastrophe losses of $11 million, unfavorable current year loss experience within the commercial multiple peril liability and workers compensation product lines, and general cost increases. These items were partially offset by a decline in losses and variable expenses of approximately $91 million consistent with the changes in net premiums earned previously discussed, favorable current year loss trends within the commercial multiple peril property product line and efficiencies gained from the integration of Safeco operations.

Catastrophe losses included in claims and claim adjustment expenses totaled $146 million for the six months ended June 30, 2010 compared to $135 million for the six months ended June 30, 2009, an increase of $11 million, or 8.1%. The increase in the 2010 period was driven by hail and other severe weather events across several states in the Midwest region as well as severe winter storms largely concentrated in the New England and Mid-Atlantic regions. These items were partially offset by prior year catastrophe losses of $30 million that emerged in first six months of 2009, mainly related to Hurricane Ike and two Pacific Northwest winter storms that occurred in the fourth quarter of 2008.

Favorable incurred losses attributable to prior years totaled $39 million through the first six months of 2010, $30 million of which was driven by 2009 fourth quarter property losses emerging at lower levels than expected due to benign severity trends. The remaining $9 million resulted from favorable emergence within liability lines of business.

Pre-tax operating income

Pre-tax operating income for our Commercial segment decreased $113 million, or 57.4%, from the six months ended June 30, 2009. The decrease was driven by lower favorable incurred losses attributable to prior years compared to 2009, higher catastrophe losses, and unfavorable current year loss experience within the commercial multiple peril liability and workers compensation lines. These items were partially offset by favorable current year loss cost trends within the commercial multiple peril property product line and efficiencies gained from the integration of Safeco operations.

Combined Ratio

The following table sets forth the combined ratio for our Commercial segment:


	Six Months
	Ended						Change in
	June 30,						Percentage
	2010			2009			Points

Claims and claim adjustment expense ratio		66.9	%		66.9	%		—
Underwriting expense ratio		34.0			34.4			(0.4	)

Subtotal		100.9			101.3			(0.4	)
Catastrophes		6.4			5.7			0.7
Net incurred losses attributable to prior years		(1.7	)		(6.4	)		4.7

Combined ratio		105.6	%		100.6	%		5.0

The Commercial segment combined ratio before catastrophes and net incurred losses attributable to prior years decreased 0.4 points compared to the six months ended June 30, 2009. The claims and claim adjustment expense ratio remained flat as unfavorable loss experience within our commercial multiple peril liability and workers compensation product lines was offset by favorable loss cost trends within the commercial multiple peril property line of business. The decline in the underwriting expense ratio reflected efficiencies gained from the integration of Safeco operations, partially offset by the impact of lower earned premium versus the prior year.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio increased 5.0 points over the six months ended June 30, 2009. The increase reflected higher catastrophe losses and a decrease in the amount of favorable incurred losses attributable to prior years relative to 2009, 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:


	Six Months Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Private passenger automobile	$	1,566	$	1,592	$	(26	)		(1.6	)%
Homeowners		718		445		273			61.3
Other ⁽¹⁾		211		194		17			8.8

Total net written premiums	$	2,495	$	2,231	$	264			11.8	%


(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 decreased $26 million, or 1.6%, from the six months ended June 30, 2009. Despite an increase in retention in the first six months of 2010, renewal premium was negatively impacted by declining retention over the last six months of 2009. Additional drivers of the decline were a shift towards writing higher quality risks (resulting in lower average premium per policy) and lower new business levels compared with the same period in 2009. These items were partially offset by an increase in net written premiums associated with the introduction of an annual automobile product in additional states and rate increases.

Homeowners. Homeowners net written premiums increased $273 million, or 61.3%, over the six months ended June 30, 2009. The increase primarily reflected the impact of discontinuing the Homeowners Quota Share Treaty, which resulted in $216 million of additional retained premium in 2010. Excluding the effects of the quota share treaty, homeowners net written premiums increased $57 million, or 8.6% over the six months ended June 30, 2009. The increase was driven by rate increases and favorable new business levels in 2010.

Other. Other net written premiums increased $17 million, or 8.8%, over the six months ended June 30, 2009. The increase was primarily driven by rate increases and an overall increase in policies-in-force.

Results of Operations

The following table sets forth results of operations for our Personal segment:


	Six Months Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	2,422	$	2,243	$	179			8.0	%
Net investment income		136		122		14			11.5
Fee and other revenues		33		29		4			13.8

Total revenues		2,591		2,394		197			8.2
Total claims and expenses ⁽¹⁾		2,452		2,194		258			11.8

Pre-tax operating income	$	139	$	200	$	(61	)		(30.5	)%


(1)		Integration and other acquisition related costs associated with the Safeco acquisition of $5 million in 2009 have been excluded from total claims and expenses.

Revenues

Revenues for our Personal segment increased $197 million, or 8.2%, over the six months ended June 30, 2009.

Net Premiums Earned. Net premiums earned increased $179 million, or 8.0%, over the six months ended June 30, 2009. The increase was driven by additional retained earned premium of $214 million in 2010 related to the discontinuation of our Homeowners Quota Share Treaty and the changes in 2010 net written premiums previously discussed, partially offset by declining net written premiums in the latter half of 2009.

Net Investment Income. Net investment income increased $14 million, or 11.5%, over the six months ended June 30, 2009. The increase reflected a larger invested asset base due to the continued investment of cash flow from operations and higher benchmark investment yields.

Fee and Other Revenues. Fee and other revenues increased $4 million, or 13.8%, over the six months ended June 30, 2009. The increase was primarily due to the implementation of premium payment option programs in additional states.

Claims and expenses

Claims and expenses for our Personal segment increased $258 million, or 11.8%, over the six months ended June 30, 2009. The increase was driven by additional retained losses and expenses of $168 million (excluding catastrophes) in 2010 related to the discontinuation of our Homeowners Quota Share Treaty, higher catastrophe losses of $115 million, a decrease of $85 million in the amount of favorable incurred losses attributable to prior years compared to 2009, higher costs associated with increased quote activity, and general cost increases. These items were partially offset by a decline in losses and variable expenses consistent with the changes in net premiums earned discussed above (excluding the impact of the Homeowners Quota Share Treaty), favorable current year loss trends across the property and private passenger automobile liability product lines, and efficiencies gained from the integration of Safeco operations.

Catastrophe losses included in claims and claim adjustment expenses totaled $262 million for the six months ended June 30, 2010 compared to $147 million for the six months ended June 30, 2009, an increase of $115 million, or 78.2%, over the six months ended June 30, 2009. The increase in the 2010 period was driven by significant hail and other storms in Montana and other severe weather events across several states in the Midwest region. The increase was further impacted by additional retained losses of $46 million in 2010 related to the discontinuation of our Homeowners Quota Share Treaty.

Favorable incurred losses attributable to prior years totaled $26 million through the first six months of 2010, primarily driven by favorable trends in private passenger 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 decreased $61 million, or 30.5%, from the six months ended June 30, 2009. The decrease was driven by higher catastrophe losses, a decrease in the amount of favorable incurred losses attributable to prior years and higher costs associated with increased quote activity. These items were partially offset by favorable current year loss cost trends across the property and private passenger automobile liability product lines and efficiencies gained from the integration of Safeco operations.

Combined Ratio

The following table sets forth the combined ratio for our Personal segment:


	Six Months
	Ended						Change in
	June 30,						Percentage
	2010			2009			Points

Claims and claim adjustment expense ratio		62.2	%		67.1	%		(4.9	)
Underwriting expense ratio		26.8			26.7			0.1

Subtotal		89.0			93.8			(4.8	)
Catastrophes		10.9			6.6			4.3
Net incurred losses attributable to prior years		(1.1	)		(4.9	)		3.8

Combined ratio		98.8	%		95.5	%		3.3

The Personal segment combined ratio before catastrophes and net incurred losses attributable to prior years decreased 4.8 points from the six months ended June 30, 2009. The decrease in the claims and claim adjustment expense ratio was driven by favorable loss trends across the property and private passenger automobile liability product lines. The increase in the underwriting expense ratio was due to the higher costs associated with increased quote activity, partially offset by efficiencies gained from the integration of Safeco operations.

Including the impact of catastrophes and net incurred losses attributable to prior years, the combined ratio increased 3.3 points over the six months ended June 30, 2009. The increase was driven by higher catastrophe losses and a decrease in the amount of favorable incurred losses attributable to prior years, 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:


	Six Months
	Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Contract bond	$	226	$	204	$	22			10.8	%
Commercial bond		65		56		9			16.1
Small bond ⁽¹⁾		72		77		(5	)		(6.5	)

Total net written premiums	$	363	$	337	$	26			7.7	%


(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 increased $22 million, or 10.8%, over the six months ended June 30, 2009. The increase reflected increased bidding activity, an increase in bond issuance, and an overall increase in average bond size compared with the same period in 2009.

Commercial Bond. Commercial bond net written premiums increased $9 million, or 16.1%, over the six months ended June 30, 2009, driven by increased bond issuance and an overall increase in bond size compared with the same period in 2009.

Small Bond. Small bond net written premiums decreased $5 million, or 6.5%, from the six months ended June 30, 2009, driven by a lower amount of new business writings due to strong competition.

Results of Operations

The following table sets forth the results of operations for the Surety segment:


	Six Months
	Ended
	June 30,				Change
	2010		2009		$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	357	$	375	$	(18	)		(4.8	)%
Net investment income		30		22		8			36.4

Total revenues		387		397		(10	)		(2.5	)
Total claims and expenses ⁽¹⁾		242		304		(62	)		(20.4	)

Pre-tax operating income	$	145	$	93	$	52			55.9	%


(1)		Integration and other acquisition related costs associated with the Safeco acquisition of $3 million in the six months ended June 30, 2009 have been excluded from total claims and expenses.

Revenues

Revenues for our Surety segment decreased $10 million, or 2.5%, from the six months ended June 30, 2009.

Net Premiums Earned. Net premiums earned decreased $18 million, or 4.8%, from the six months ended June 30, 2009. The decrease was driven by declining net written premiums throughout 2009 which reflected a decline in bond program utilization due to adverse economic conditions. This was partially offset by the increase in net written premiums in 2010 previously discussed.

Net Investment Income. Net investment income increased $8 million, or 36.4%, over the six months ended June 30, 2009. The increase reflected a higher invested asset base due to the continued investment of cash flow from operations and higher benchmark investment yields.

Claims and expenses

Claims and expenses for our Surety segment decreased $62 million, or 20.4%, from the six months ended June 30, 2009. The change was driven by $53 million of favorable incurred losses attributable to prior years compared with 2009, a decline in losses and variable expenses consistent with the changes in net premiums earned previously discussed, and efficiencies gained from the integration of Safeco operations.

Favorable incurred losses attributable to prior years totaled $53 million through the first six months of 2010, reflecting better than expected paid and reported claim emergence in the more recent accident years.

Pre-tax operating income

Pre-tax operating income for our Surety segment increased $52 million, or 55.9%, over the six months ended June 30, 2009. The increase was driven by an increase in the amount of favorable incurred losses attributable to prior years compared with the six months ended June 30, 2009 and efficiencies gained from the integration of Safeco operations. These items were partially offset by decreased net premiums earned and unfavorable current year loss experience related to adverse economic conditions.

Combined Ratio

The following table sets forth the combined ratio for our Surety segment:


	Six Months
	Ended						Change in
	June 30,						Percentage
	2010			2009			Points

Claims and claim adjustment expense ratio		36.2	%		35.1	%		1.1
Underwriting expense ratio		45.9			45.7			0.2

Subtotal		82.1			80.8			1.3
Net incurred losses attributable to prior years		(14.9	)		—			(14.9	)

Combined ratio		67.2	%		80.8	%		(13.6	)

The Surety segment combined ratio before catastrophes and net incurred losses attributable to prior years increased 1.3 points over the six months ended June 30, 2009. The increase in the claims and claim adjustment expense ratio reflected unfavorable current year loss experience related to adverse economic conditions. The increase in the underwriting expense ratio was primarily due to the decline in net premiums earned discussed above as underlying expenses were relatively stable compared with the same period in 2009, partially offset by efficiencies gained from the integration of Safeco operations.

Including the impact of net incurred losses attributable to prior years, the combined ratio decreased 13.6 points from the six months ended June 30, 2009. The decrease was due to favorable incurred losses attributable to prior years in the first six months of 2010, partially offset by the changes in the combined ratio discussed above.

Corporate and Other

Net Written Premiums

The following table sets forth the net written premiums for our Corporate and Other segment:


	Six Months
	Ended
	June 30,						Change
	2010			2009			$			%
	(Dollars in millions)

Assumed inter-segment reinsurance arrangements	$	107		$	119		$	(12	)		(10.1	)%
External ceded reinsurance		(42	)		(40	)		(2	)		5.0

Total net written premiums	$	65		$	79		$	(14	)		(17.7	)%

Net written premiums for our Corporate and Other segment decreased $14 million, or 17.7%, from the six months ended June 30, 2009. The change was primarily driven by a decrease in assumed premium related to our inter-segment reinsurance arrangements due to a decline in exposures and increased segment retention levels, which were largely associated with property catastrophe coverage.

Inter-Segment Reinsurance Arrangements

and scope of their segment operations. The table below reflects written premiums assumed (ceded) under the inter-segment reinsurance arrangements:


	Six Months
	Ended
	June 30,						Change
	2010			2009			$			%
	(Dollars in millions)

Commercial	$	(84	)	$	(87	)	$	3			(3.4	)%
Personal		(23	)		(32	)		9			(28.1	)
Corporate and Other		107			119			(12	)		(10.1	)

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

Results of Operations

The following table sets forth the results of operations for our Corporate and Other segment:


	Six Months
	Ended
	June 30,					Change
	2010		2009			$			%
	(Dollars in millions)

Revenues
Net premiums earned	$	62	$	78		$	(16	)		(20.5	)%
Net investment income ⁽¹⁾		64		67			(3	)		(4.5	)
Net realized investment gains (losses)		227		(53	)		280			*

Total revenues		353		92			261			*
Total claims and expenses		328		47			281			*
Interest expense		10		2			8			*

Income before income tax expense		15		43			(28	)		(65.1	)
Pre-tax operating income ⁽²⁾	$	53	$	98		$	(45	)		(45.9	)%


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

(2)		Pre-tax operating income excludes net realized investment gains (losses), unfavorable incurred losses attributable to prior years of $142 million related to run-off reserves in our Corporate and Other segment, a one-time charge of $125 million associated with the Run-Off Reinsurance Agreement in the six months ended June 30, 2010, and integration and other acquisition related (benefits) costs associated with the Safeco acquisition of $(2) million and $2 million for the six months ended June 30, 2010 and 2009, respectively.

*		Not meaningful.

Revenues

Revenues for our Corporate and Other segment increased $261 million over the six months ended June 30, 2009.

Net Premiums Earned. Net premiums earned decreased $16 million, or 20.5%, from the six months ended June 30, 2009. The decrease was primarily driven by the changes in net written premiums previously discussed.

Net Investment Income. Net investment income decreased $3 million, or 4.5%, from the six months ended June 30, 2009. The decrease reflected a decrease in the difference between actual net investment income and allocated net investment compared to 2009. Additionally, 2010 net investment income reflected higher

fixed maturity income of $17 million from higher average asset balances and a $30 million improvement in equity earnings on limited partnerships and LLCs from the prior year. These items were partially offset by a $15 million decrease in dividend income from equity securities as well as a $9 million decrease in income from cash and cash equivalents.

Net Realized Investment Gains (Losses). Net realized investment gains for the six months ended June 30, 2010 were $227 million as compared to net realized investment losses of $53 million for the six months ended June 30, 2009, an increase of $280 million. The increase was primarily due to higher realized investment gains on sales of fixed maturities and equity securities of $226 million and $6 million, respectively, due to the strategic realignment of our investment portfolio, as well as a decrease in impairment losses of $48 million due to improved market conditions.

Claims and expenses

Claims and expenses for our Corporate and Other segment increased $281 million over the six months ended June 30, 2009. The increase was primarily driven by unfavorable incurred losses attributable to prior years of $165 million in 2010 primarily related to the run-off reserves in the general liability line of business acquired as part of the 2008 Safeco acquisition versus favorable incurred losses attributable to prior years of $10 million in 2009, and a one-time charge of $125 million related to the Run-Off Reinsurance Agreement entered into on June 30, 2010 that provides for indemnification by Liberty Mutual of up to $500 million of any adverse development that occurs subsequent to June 30, 2010 related to our run-off reserves in our Corporate and Other segment.

Interest expense

Interest expense increased $8 million over the six months ended June 30, 2009. The increase reflected a higher average level of debt outstanding during 2010, which is described in more detail in the “— Liquidity and Capital Resources” section herein.

Pre-tax operating income

Pre-tax operating income for our Corporate and Other segment decreased $45 million, or 45.9%, from the six months ended June 30, 2009. The decrease was driven by unfavorable losses incurred attributable to prior years of $23 million in 2010 versus favorable incurred losses attributable to prior years of $10 million in 2009, lower premiums earned, higher interest expense, and decline in net investment income. These items were partially offset by favorable loss experience related to our inter-segment reinsurance arrangements due to large loss activity in 2009 and efficiencies gained from the integration of Safeco operations.

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:


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

Commercial	$	4,585	$	3,975	$	610		15.3	%
Personal		4,689		2,122		2,567		121.0
Surety		707		479		228		47.6
Corporate and Other		167		128		39		30.5

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:


	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 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.

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 adjusted for net realized investment gains and losses and net income attributable to limited partnerships and LLCs was 4.93% for the year ended December 31, 2009 compared to 5.01% 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 and state 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:


	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, the underwriting expense ratio, the 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:


	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		474		380		94			24.7
Other ⁽¹⁾		288		255		33			12.9

Total net written premiums	$	4,585	$	3,975	$	610			15.3	%


(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 $94 million, or 24.7%, 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 $34 million, or 9.7%, 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:


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

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:


	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:


	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)

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:


	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:


	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:


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

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.


*		Not meaningful.

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:


	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:


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

Assumed inter-segment reinsurance arrangements	$	236		$	207		$	29		14.0	%
External ceded reinsurance		(69	)		(79	)		10		(12.7	)

Total net written premiums	$	167		$	128		$	39		30.5	%

Net written premiums for our Corporate and Other segment for the years ended December 31, 2009 and 2008 were $167 million and $128 million, respectively, representing an increase of $39 million, or 30.5%. 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 $10 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:


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

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			*
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%, 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 “— 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:


	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:


	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)

Liberty Mutual Agency Corp S-1/A