$6.2b shot of growth for Hub insurer

Liberty Mutual deal for Safeco continues local spree

Liberty Mutual Group said yesterday it will buy the Seattle insurance company Safeco Corp. for $6.2 billion, in the largest acquisition by a Massachusetts company in nearly two years.

The deal is Liberty's second in a year and a signal the Boston insurer, flush with cash, hopes to be a survivor amid mergers that have swallowed up many local companies and that are expected to heat up in the insurance industry.

"Our belief has been that consolidation is inevitable, and if we're going to be a relevant company, we would have to be large," said Edmund F. Kelly, Liberty Mutual's chairman and chief executive.

Massachusetts firms have been on a shopping spree, bucking the commonly held notion that local companies are only targets of acquisitions. Since early 2006, Massachusetts companies have been buyers in 23 major deals valued at $84.6 billion, according to Capital IQ, a unit of the research firm Standard & Poor's. Twenty-five major Massachusetts companies have been acquired in deals valued at $59.4 billion in the same period.

Life sciences and technology firms - from Boston Scientific Corp. to EMC Corp. - are driving the recent acquisitions by Massachusetts companies. But the memory of earlier high-profile takeovers - such as those of FleetBoston Financial Corp. and Gillette Co. - are etched in the local psyche, making it feel as if the state is being raided.

Economist Mark Zandi explains why: "The Massachusetts economy has held its own over this period," he said. But when big companies are acquired, "Often, there are layoffs, and they're quite visible." By contrast, when local companies do the buying, he said, "It doesn't necessarily mean they're going to add to payrolls in Massachusetts."

Liberty Mutual is adding jobs, but its purchase of Safeco could mean cutbacks in certain places as the companies are merged. Liberty Mutual employs 3,600 people in Massachusetts and 41,000 worldwide.

Liberty Mutual said the Safeco deal, on top of its $2.9 billion purchase last year of Ohio Casualty Insurance Co., will make the Boston company the fifth-largest player in the property and casualty business, up from sixth today. It also will be second in the surety business, which insures contractors.

Safeco had $5.9 billion in premiums from customers in 2007; Liberty Mutual had $20.2 billion.

Analysts said the addition of the Safeco brand - the name is on the Seattle Mariners' baseball stadium - will raise Liberty Mutual's profile west of the Mississippi and strengthen its position among the top players in the property and casualty insurance business. Both companies sell auto and home insurance to individuals and liability coverage to companies; Safeco, which will remain as a brand name, has focused on consumer and small business insurance. Together, they will have 15,000 agencies selling their products.

"Liberty Mutual has been aggressive," said Lanny Thorndike, managing partner at Century Capital Management, a Boston investment firm that follows the insurance industry. Among firms selling insurance to consumers through agents, he said, "They've suddenly gone from being a secondary player to being a force."

And they're paying plenty to do it.

Liberty Mutual agreed to pay $68.25 a share in cash for Safeco, or 51 percent more than the stock's closing price Tuesday of $45.23. In fact, it's been a year since Safeco's shares traded at the level Liberty Mutual is paying. Safeco lost money in its auto insurance business in the fourth quarter and struggled with higher auto claim costs throughout the year.

Cliff Gallant, an analyst at Keefe, Bruyette & Woods in New York, said Liberty is paying a generous price, perhaps to stave off any rival bidders, but that Safeco is more valuable than its recent stock price reflects. "Safeco is one of the best brands in the insurance business," Gallant said. "They're one of the real prizes out there."

Safeco shares jumped 45.8 percent to $65.94 yesterday on the acquisition news.

Liberty Mutual faces less scrutiny in its deals than a publicly traded company because it is privately held, and owned by its policyholders. Kelly, its chief executive, said he thinks the price the company is paying for Safeco is fair. "It's a premium off a very depressed market," he said.

Kelly said he's surprised his publicly traded competitors haven't been doing more deals in this environment.

Indeed, many people in the insurance business are expecting mergers and acquisitions to pick up. The industry is considered mature, and it's facing pricing pressures in auto and other lines of insurance.

Said Gallant, the analyst, "It's great for the consumer, but tough for the companies. But their balance sheets are actually in pretty good shape and profits are OK. From the acquirer's point of view, it's a good time."

Liberty Mutual had nearly $26 billion in revenue in 2007 and posted net income of $1.5 billion. The Safeco transaction is expected to close by the end of the third quarter.

Beth Healy can be reached at bhealy@globe.com.