Liberty Mutual Group Inc. said Wednesday it has agreed to buy Safeco Corp. for $6.2 billion in cash in a deal to create the nation’s fifth-largest property and casualty insurer.
The boards of Boston-based Liberty Mutual and Seattle-based Safeco approved the deal, which represents a 51 percent premium over Safeco’s closing price on Tuesday.
Liberty Mutual, which is owned by its policyholders, said there are no financing conditions on its offer and plans to use its available cash for the purchase.
But with Wall Street nervous amid a credit crunch, Standard & Poor’s placed Liberty Mutual’s credit ratings on watch for a possible cut.
The transaction, which is subject to approval by Safeco shareholders as well as regulators, is expected to close by the end of the third quarter.
Liberty Mutual has offered $68.25 per share for Safeco, whose stock soared $20.72, or almost 46 percent, to $65.95 in afternoon trading.
Liberty Mutual currently ranks as the nation’s No. 6 property and casualty insurer, based on its $20.2 billion in insurance policies sold last year including automobile and homeowner’s coverage, compared with Safeco’s $5.9 billion.
In addition to providing personal coverage, Liberty Mutual offers commercial insurance to large businesses, some of them overseas. Safeco’s focus is on coverage for individuals and small-to medium-sized businesses, primarily in the West, in contrast to Liberty Mutual’s stronger presence in the East.
“The addition of Safeco significantly expands and strengthens the Liberty Mutual Group,” said Edmund F. Kelly, Liberty Mutual’s chairman, president and chief executive officer.
Once the transaction is completed, Safeco would become part of Liberty Mutual’s Agency Markets business unit, which posted $5.6 billion in revenue last year.
“This is the opportunity to take West Coast inventiveness and launch it with a global brand at a substantial premium to Safeco shareholders,” said Safeco President and Chief Executive Officer Paula Reynolds.
Liberty Mutual said it intended to fund the transaction with available cash, but would also issue up to $1.5 billion in debt.
“Absent this issuance, Liberty has adequate liquidity to fund the entire transaction with existing cash and using bridge financing to permit an orderly liquidation of investments,” a company statement said.
But S&P put its investment-grade ratings for Liberty Mutual’s credit on watch “with negative implications,” signaling that the ratings will either remain the same or be cut after the ratings agency conducts a review.
While noting that the Safeco acquisition could improve Liberty Mutual’s U.S. business and diversify the company, S&P analyst John Iten said in a research note that the deal “will result in a significant decline in Liberty’s capital adequacy.”
Liberty Mutual spokesman John Cusolito and Safeco spokesman David Monfried said it was too early to comment on whether the deal would lead to job cuts in Liberty Mutual’s 41,000-person work force, and Safeco’s roughly 7,000 employees.
Such transactions typically lead to cuts to reduce duplication in back-office operations and other areas.
Monfried said Safeco would retain its 85-year-old brand name and continue selling policies through its national network of agents and brokers.
Banc of America Securities analyst Alain Karaoglan said in a research note that the acquisition “confirms our thesis that many areas of the property and casualty sector remain undervalued and attractive, as fundamentals and balance sheets across many companies remain solid.”
Liberty Mutual, a 96-year-old firm, posted a profit of $1.5 billion last year on $25.9 billion in revenue. Safeco’s profit last year was $707.8 million, on revenue of $6.2 billion.