Liberty's Purchase Of Safeco Hailed By Agents, But Rating Agencies Wary

Robert A. Rusbuldt, president and chief executive officer of the Independent Insurance Agents and Brokers of America, called the announcement good news for independent agents.

"Liberty Mutual and its regional agency companies are 100 percent committed to the [independent agency] system," he said. "We are pleased that they are so committed…and now will be one of the largest independent agency companies in the country."

Dan Holst, the executive vice president of the Independent Insurance Agents and Brokers of Washington State, said that Seattle-based Safeco and Liberty North West, Liberty Mutual's independent agent distribution subsidiary in his region, are highly respected by agents in the state.

"They are good companies that agents know and trust," he said.

The Boston-based carrier said that upon completion of the deal, with revenue approaching $12 billion, Liberty Mutual Agency Markets–its independent agent arm–would be ranked third in personal lines and fifth in commercial property-casualty products distributed through some 15,000 independent agencies.

In 2007, the unit generated $5.6 billion in net written premium with approximately 7,000 employees.

Mr. Rusbuldt noted that transitions can be stressful, but Liberty Mutual has a long history of integrating companies–most recently completing its deal to acquire Ohio Casualty Corp., which distributes through independent agents. "We believe that over the long haul this will be good for independent agents," he said.

The consolidation of the two will probably make small agencies nervous, noted Mr. Holst, because it gives them one fewer market, but he had not received any negative feedback yet on the announcement. "It's too early to know how it will all play out," he said.

However, Standard & Poor's and Fitch Ratings were less enthusiastic about the deal, which is expected to close in the third quarter of this year. Both rating agencies placed Liberty Mutual on credit watch with negative implications, questioning the acquisition's financing.

Moody's affirmed Liberty Mutual's financial strength rating of "A2," but dropped Safeco's rating, placing it on review for possible downgrade.

The deal calls for a combination of cash and debt. The rating agencies said they are concerned with Liberty Mutual's capital adequacy. Fitch noted that Liberty could face some difficulty raising capital for its debt due to a challenging credit market.

S&P appeared to indicate that it would affirm Liberty's rating after a review of its capitalization, but Fitch seemed pessimistic, saying it might drop Liberty one or two notches based on its models.

Gary Gregg, president of Liberty Mutual Agency Markets, declined to comment on the rating action.

He told National Underwriter that the insurer has had an interest in Safeco for some years but was not engaged in negotiations over that period. He declined to provide any additional details.

From a strategic standpoint, the deal creates a terrific geographical mix, he said, with Liberty's primary business on the East Coast and Safeco's primarily on the West. "We get a great geographic spread and strengthen across-the-board together," he said.

He underscored the benefit mix, saying Liberty Mutual Agency Markets is 71 percent commercial and 18 percent personal lines, while Safeco is 66 personal and 28 percent commercial. Couple that with both companies' strong surety business, making Liberty the third-largest carrier in that line.

Both carriers will bring additional strengths to the table, with a common focus on innovation and agency relationships adding up to a very strong company for independent agents to represent, he said.

Agents will also benefit from technology enhancements, bringing a combined information technology investment of $400 million to the table, he added.

"It's a great fit because of a whole suite of different things, whether it is claims systems, agent systems or underwriting systems. No one operation has clearly better software, so this is a great way to bring it together and get better," he said.

"The addition of Safeco significantly expands and strengthens the Liberty Mutual Group," said Edmund F. Kelly, Liberty Mutual Group's chairman, president and chief executive officer.

Paula Reynolds, Safeco's president and CEO, called the deal an "opportunity to take West Coast inventiveness and launch it with a global brand at a substantial premium to Safeco shareholders."

In light of the proposed transaction, Safeco postponed its annual shareholders meeting, scheduled for May 7. It will hold a special meeting sometime later in the year.

Liberty Mutual Group offers workers' compensation, personal auto, homeowners, commercial multiperil, commercial auto, general liability, surety, global specialty, group disability, assumed reinsurance and fire coverage. It employs over 41,000 people in more than 900 offices around the world.

Safeco provides insurance for individuals and for small- and midsize businesses, including personal auto and homeowners, as well as and surety bonds.