Posted on 06 Nov 08
A reader recently wrote to ProgramBusiness’s DailyNewsFlash with questions about the acquisition of Safeco:
“What do you know about the buyout of Safeco by Liberty?
What is the educated thinking about whether this is a good thing or bad?”
The reader’s question was referred to the NewsFlash editor. She researched the topic and replied:
In September, S&P lowered Liberty’s rating once the acquisition of Safeco was completed…Liberty responded with a press release saying that S&P’s decision was both a surprise and disservice to Liberty Mutual and its policyholders.
Here’s what Liberty said on 9/25:
“Today’s announcement was in contradiction of prior announcements. When Liberty and Safeco announced the transaction in April, Standard & Poor’s placed Liberty’s ratings on CreditWatch with negative implications. In that announcement, Standard & Poor’s stated that they expected to affirm Liberty’s ratings if its capitalization was not materially below what is required for the current rating and were satisfied with Liberty’s integration efforts of Safeco.
“On July 23rd, Standard & Poor’s announced that they expected to affirm Liberty’s ratings “if capital and earnings remain strong” but could lower ratings “if pro forma capital and earnings were materially below the appropriate level for the rating.” In fact, Liberty’s reported pre-tax operating income of nearly $900 million in the first six months of 2008 was approximately 3 percent higher than the same period in 2007. In addition, Liberty’s pro forma capital adequacy using Standard & Poor’s published criteria indicates Liberty’s capital is adequate to maintain our ‘A’ rating.
“ The turbulence and uncertainty in today’s financial and credit markets has focused a negative spotlight on Standard & Poor’s process. As a result, one would have hoped that now more than ever Standard & Poor’s would have recognized its fiduciary obligation to act in a consistent, coherent and accurate manner. Unfortunately, they have not.”.
“For example, the use of “return on revenue” as a meaningful measure of relative profitability, versus return on capital, ignores the relative risks associated with the different sources of revenue in different companies, and the capital required to support the revenues”.
“Another example is the reference to aggressive pricing, which ignores the “Strong” rating from Standard and Poor’s based upon its own detailed review of Liberty’s underwriting risk management controls, issued only seven months ago. In fact, Liberty has produced a superior five-year average return on capital. Liberty has adequate capital for the “A” rating and an Enterprise Risk Management process that is rated “Strong” (top 15 percent) based upon Standard and Poor’s own detailed “Level 2 Review.” Further, Standard and Poor’s reference to a statutory combined ratio of 105 percent does not reflect international operations and, as a result, is not representative of worldwide underwriting results.
“Finally, Standard and Poor’s states that reduced ability to access the capital markets is behind the downgrade, a criterion that in this environment would lead to downgrading the entire industry.”
Since Sept. 25 so much has happened in the marketplace…not sure how this has affected Liberty’s overall performance. but consolidation is inevitable. According to Liberty Mutual, with the addition of Safeco, it becomes the fifth largest property and casualty insurer in the U.S., with more than $32 billion in direct written premium based on 2007 results for both companies. Safeco joins Liberty Mutual's Agency Markets business unit, which now ranks third in personal lines and fifth in commercial lines in the independent agent distribution channel. The combined surety operation becomes the second largest in the country.
I assume this is a good thing since financial strength and dominance in the marketplace is needed in this tenuous climate.
I hope this answers your question, please let me know if we can help with anything else.