S&P Puts Liberty and Safeco on CreditWatch Negative

April 23, 2008

Standard & Poor’s Ratings Services has placed its ratings on both Liberty Mutual Group Inc. (LMGI) and Seattle-based Safeco Corp on CreditWatch with negative implications, following the announcement that Liberty has signed a definitive agreement to purchase Safeco for around $6.2 billion (See related article).

S&P’s counterparty credit and senior unsecured debt ratings and other ratings on LMGI are currently ‘BBB.’ It rates the Liberty Mutual Insurance Group (Liberty) as ‘A.’

Its counterparty credit and senior debt ratings on Safeco Corp. (NTSE:SAF) are ‘BBB+’, while it rates Safeco Insurance Co. Intercompany Pool members (collectively, Safeco) as ‘A+’

“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,” noted S&P credit analyst Michael Gross. He also indicated that S&P “currently expects to equalize its long-term ratings on Safeco with those on Liberty upon close of the transaction.”

S&P credit analyst John Iten noted: “Safeco’s acquisition will significantly increase the size of Liberty’s U.S. property/casualty business and improve diversification.”

S&P explained: “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.”

S&P also indicted that it “expects to either affirm or lower the ratings on LMGI and Liberty once we have completed our analysis of Liberty’s operating company capitalization as of year-end 2007 and pro forma for the acquisition of Safeco.

“In addition, we expect to meet with members of management to discuss in more detail their plans for integrating Safeco into Agency Markets, the new management structure, and the anticipated impact on Liberty’s financial results.

“If pro forma capital adequacy remains strong and we are satisfied that the integration process will proceed smoothly, we are likely to affirm the ratings. If our analysis indicates that pro forma capital adequacy will be materially below the appropriate level for the rating, we could lower the ratings. If this occurs, the ratings on LMGI and Liberty would likely not be lowered by more than one notch.”

Source: Standard & Poor’s – www.standardandpoors.com

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