Liberty Mutual to Acquire Safeco Insurance in $6.2B Deal

April 23, 2008

Liberty Mutual Group has agreed to acquire all outstanding shares of common stock of Safeco Corp. for $68.25 per share in cash in a deal that will make Liberty Mutual the fifth largest U.S. property/casualty insurer and second largest surety writer.

The proposed transaction, which is valued at approximately $6.2 billion, has been approved by the boards of directors of both companies. It is subject to approval by Safeco's shareholders as well as the customary regulatory approvals and conditions. The transaction is expected to close by the end of the third quarter of 2008. The transaction is not subject to financing contingencies.

Currently, Liberty Mutual Group is the sixth largest property and casualty insurer in the United States based on the company's 2007 direct written premium of $20.2 billion, while Safeco had 2007 direct written premium of $5.9 billion.

Following the transaction, Safeco will become part of Liberty Mutual Group's Agency Markets business unit. Liberty Mutual Agency Markets had revenues of $5.6 billion in 2007. Combined, the organization will have about 15,000 independent agencies.

"The addition of Safeco significantly expands and strengthens the Liberty Mutual Group," said Edmund F. Kelly, Liberty Mutual Group chairman, president and chief executive officer. "Safeco's operations and product mix complement our existing Agency Markets operations."

Kelly said both organizations also have surety businesses which when combined will form the second largest surety business in the United States.

Safeco president and chief executive officer Paula Reynolds said, "This is the opportunity to take West Coast inventiveness and launch it with a global brand at a substantial premium to Safeco shareholders."

Gary Gregg, president of Liberty Mutual Agency Markets, said that with revenue approaching $12 billion, Agency Markets will rank third in personal and fifth in commercial property and casualty products distributed through independent agents in the United States.

In light of the proposed transaction, Safeco has postponed its previously scheduled annual meeting of shareholders to have been held on May 7, 2008. Safeco will provide information on the timing of the annual and special shareholder meeting to approve the transaction announced today when available.

Even before adding Safeco, Liberty Mutual Agency Markets is the largest regional independent agency force with $7.3 billion in premium.

Safeco sells personal auto and homeowners' insurance, and also small-case commercial insurance and surety products. Safeco reported strong full-year operating results, with net income of $707 million and a combined loss and expense ratio of 91.4 percent. At year-end 2007, Safeco's consolidated financial leverage totaled 17.6 percent.

"The acquisition of Safeco by Liberty will provide Liberty with greater personal insurance depth, greater competitive presence in the Western U.S., and greater national scale," said Standard & Poor's credit analyst Michael Gross.

Standard & Poor's Ratings Services placed its ratings of Safeco Corp. and Liberty Mutual Insurance Group and their affiliates on CreditWatch negative.

"Standard & Poor's currently expects to equalize its long-term ratings on Safeco with those on Liberty upon close of the transaction," said Gross.

"Safeco's acquisition will significantly increase the size of Liberty's U.S. property/casualty business and improve diversification," added Standard & Poor's analyst John Iten.

Iten said that the acquisition of Safeco for about 1.8x of its book value will result in a "significant decline in Liberty's capital adequacy because Liberty's statutory capital will be reduced by the substantial amount of goodwill created and higher capital charges due to the consolidation of Safeco's assets and liabilities onto Liberty's balance sheet."

He said that Standard & Poor's expects to either affirm or lower the ratings on LMGI and Liberty once it has completed its analysis of Liberty's operating company capitalization as of year-end 2007 and met with members of management to discuss in more detail their plans for integrating Safeco into Agency Markets.

The Safeco deal is the second big acquisition in the past year for Liberty Mutual. The insurer finalized its acquisition of Ohio Casualty Corp. last August. The company then announced a realignment of its regional agency company organization to make room for Ohio Casualty and its $1.4 billion in premium.

That transaction was valued at $2.7 billion. Liberty Mutual said it funded the purchase with cash on hand and short-term debt. The value per share was $44.00.

The Ohio Casualty move strengthened Liberty Mutual's agency presence in Midwestern and Atlantic states, complementing its position in other regions. The overall current line-up of Liberty Mutual Agency Markets companies is:

America First Insurance: Arkansas, Kansas, Louisiana, Missouri, Oklahoma and Texas

Indiana Insurance: Illinois, Indiana, Iowa, Michigan, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin

Montgomery Insurance: Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina and Tennessee

Ohio Casualty: Delaware, Kentucky, Maryland, Ohio, Pennsylvania, Virginia, Washington, D.C., and West Virginia

Peerless Insurance: Connecticut, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont

Three additional agency companies -- Colorado Casualty (Arizona, Colorado, Nevada, New Mexico, Utah and Wyoming), Golden Eagle (California) and Liberty Northwest (Alaska, Idaho, Montana, Oregon and Washington) operate in their current territories.

Liberty Mutual Agency Markets also includes Wausau Insurance, a national commercial property and casualty insurer; and Summit Holding Southeast, Inc., workers compensation insurer in the Southeast.

Sources:
Liberty Mutual Group
www.libertymutualgroup.com

Safeco Corp.
www.safeco.com