Safeco deal must face state, federal scrutiny

Before Boston's Liberty Mutual can swallow venerable Seattle-based insurer Safeco, the proposed $6.2 billion deal will have to withstand scrutiny from more than a half-dozen state and federal regulatory agencies.

The regulators — prime among them the office of Washington Insurance Commissioner Mike Kreidler — will examine the deal's potential impact on policyholders and on the insurance industry as a whole.

Full details of the transaction, announced Wednesday, have yet to be unveiled. Those details, including financial data and operational plans for the combined company, will come in filings with the U.S. Securities and Exchange Commission before a shareholder vote, as well as with Kreidler's office.

But as of now, observers say there's little chance regulators will block the deal or force major changes in it.

"Deals of this size are not going to meet much resistance, in the sense that it moves Liberty from the sixth-biggest [property and casualty insurer] to the fifth-biggest," said Jarrad Harford, a professor of corporate finance at the University of Washington's Foster School of Business. "It's not going to impact the competitive structure of the industry."

Safeco, a Seattle institution since 1923, is hardly a midget in the insurance world. Last year it took in $6.2 billion by writing auto policies, homeowner and business-owner insurance, workers' compensation coverage and a variety of other lines. The company has about 7,000 employees nationwide, including 2,100 in the Puget Sound area.

After the deal was announced, Liberty Mutual chief executive Ted Kelly said some job cuts will follow as his 41,000-employee company, which owns Liberty Northwest Insurance in Portland, absorbs Safeco. But Kelly emphasized that Liberty intends to keep Safeco as a separate brand.

The first line of regulatory review likely will be the federal government. Liberty and Safeco must file a formal notice of their proposed deal with the Federal Trade Commission and the Justice Department, which will assess the acquisition's impact on competition within the insurance industry.

Some areas might raise more concern than others, Harford said. For instance, the combined Liberty-Safeco would be the nation's second-largest issuer of surety insurance, which guarantees performance by building contractors and other businesses.

If either federal entity has concerns, it has 30 days to either object or, more likely, ask for more information. If that 30-day period expires without the FTC or Justice saying anything, that's it for the feds.

State regulators likely will take a longer and closer look. Although insurance regulators in six other states — Oregon, California, Texas, Illinois, Indiana and Missouri — also have to sign off on the deal, Kreidler's office will do most of the heavy lifting.

"Because Safeco is [headquartered] here, that's why we have the lead," said Hilary Young, a spokeswoman for the insurance commissioner's office.

State law requires that, after a public hearing, the commissioner approve the deal unless:

• It would "substantially lessen competition" in the state.

• The prospective buyer isn't competent, honest or financially sound enough to run an insurance company.

• In some other way the deal would be "hazardous or prejudicial to the insurance-buying public."

That standard, Harford said, probably would not include the effect of potential job cuts on the local economy or any broader civic impact from the loss of Safeco's corporate headquarters.

Kreidler "would have to find an insurance reason to hang it up," he said.

In a note to clients after the deal was announced, Ragen MacKenzie analyst Dustin Brumbaugh said, "We do not see any barriers from a regulatory standpoint."

The two companies hope to complete the deal by the end of September.

Insurance has largely been absent from the surge in mergers and buyouts of the past few years, Harford said. But with the Safeco-Liberty Mutual announcement, he said, "Everybody's excited that this may be the harbinger of another deal cycle."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com