Liberty Mutual to buy Safeco for $6.2 billion

By Jessica Hall and Paritosh Bansal

PHILADELPHIA/NEW YORK (Reuters) - Diversified insurer Liberty Mutual Group said on Wednesday it would buy Safeco Corp SAF.N for $6.2 billion in a deal that would make Liberty Mutual the fifth-largest U.S. property and casualty insurer.

Each share of Safeco will be exchanged for $68.25 cash, nearly a 51 percent premium to Safeco's closing stock price of $45.23 on Tuesday. Safeco shares jumped 45.7 percent, or $20.69, to $65.92 in afternoon trading on the New York Stock Exchange.

Liberty Mutual sells a range of insurance products, including automobile, homeowners, general liability, surety, workers compensation, assumed reinsurance and fire.

Safeco, which provides insurance for individuals and for small- and mid-sized businesses, would become part of Liberty Mutual's agency markets business unit. Combined, the organization would have about 15,000 independent agencies.

"Safeco's operations and product mix complement our existing agency markets operations," said Liberty Mutual Chairman Edmund Kelly.

"They are very strong West of the Mississippi and we are very strong east of the Mississippi and have an international presence, as well," Kelly said.

Liberty Mutual is the sixth-largest property and casualty insurer in the United States, based on its 2007 direct written premium of $20.2 billion. Safeco had 2007 direct written premium of $5.9 billion.

The deal follows Liberty Mutual's acquisition of Ohio Casualty last year. Liberty Mutual said it would continue to look at other acquisition opportunities.

Liberty Mutual and Safeco started weighing a deal about six months ago, after Liberty Mutual initiated discussions, Kelly said.

"We have a publicly espoused position of being acquisitive. We want to be a consolidator," Kelly said. "We will make sure this integration goes smoothly and well, but over time, we will be looking at other acquisitions."

HIGH PREMIUM

Safeco had been seen as a potential acquisition target for several years, but "deteriorating underwriting in its core auto insurance book caused some investors to question just how much an acquirer would pay," said Sandler O'Neill analyst Paul Newsome.

"We are surprised at how much Liberty Mutual was willing to pay," Newsome said.

Before the stock jumped on Wednesday, Safeco's shares traded at about 7.5 times earnings, below the sector's median multiple of 10.2 times earnings.

Kelly said Liberty Mutual was paying roughly 10-times earnings for Safeco, which was within the sector's typical range of takeover premiums of roughly 9- to 11-times earnings.