When Boston’s Liberty Mutual Group plunked down $6.2 billion to acquire Seattle’s Safeco Corp., the move elicited more mild surprise than shock.

Mark Gorman, principal of Saint Paul, Minn.-based Mark B. Gorman & Associates LLC says the news confirms a widespread expectation that large-scale merger and acquisition (M&A) activity would eventually occur in the insurance space as it had in other financial services sectors. Indeed, Liberty had indicated it was willing to spend a nice chunk of change to grow the company after spending $2.7 billion to acquire Ohio Casualty Insurance Co. last year. With the deal, Safeco will become part of Liberty Mutual Group’s Agency Markets business unit, which had revenues of $5.6 billion in 2007.

“Having these two players [combine] is fascinating, but having M&A activity of this type is not a surprise,” Gorman says. “It’s been predicted for some time.”

Gorman says one of the most interesting aspects of the deal is that it pairs Safeco, which has a reputation for product innovation and for being forward-thinking in its use of technology, with Liberty’s regional markets group.

“This type of merger allows for leveraging of a distribution channel, and also size and scope,” Gorman says. “I can see immediate benefits for both organizations in terms of pairing technology and product innovation with a distribution focus and capability."

In a statement, Safeco president and CEO Paula Reynolds said the deal represents an opportunity to take “West Coast inventiveness” and launch it with a global brand at a substantial premium to Safeco shareholders.

According to Gorman, the high premium Liberty was willing to pay to acquire Safeco reflects a belief on the part of Liberty of the accretive nature of this type of merger for core operations and organic revenue growth. However, the size of the merger will engender significant pressures from integration standpoint, especially for next three to six months.

“The addition of Safeco significantly expands and strengthens the Liberty Mutual Group,” says Edmund Kelly, Liberty Mutual Group chairman, president and CEO. “Safeco’s operations and product mix complement our existing Agency Markets operations. Additionally, both organizations have superb Surety businesses, which, when combined, will form the second-largest Surety business in the United States.”

Fortunately for Liberty Mutual, Gorman says, the company has a good track record with acquisitions. “One would hope that they have lessons learned and best practices established after previous integrations,” he says.  

Following the transaction, Liberty Mutual Group will become the fifth-largest U.S. property/casualty insurer based on the companies’ combined 2007 direct written premium of $26.2 billion, and the combined organization will have about 15,000 independent agencies. The proposed transaction, which is expected to close by the end of the third quarter of this year, has been approved by the boards of directors of both companies, but is subject to approval by Safeco’s shareholders as well as regulatory approvals and conditions.

Sources: Liberty Mutual Group, INN archives

Image: Courtesy of Wikipedia.org — The Car of Juggernaut, as depicted in the 1851 Illustrated London Reading Book

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