Risk Management

Is a Bank Deal in Liberty Mutual’s Future?

Why its new holding company structure will enable Liberty to become a more active acquirer and boost earnings as well.
David KatzOctober 13, 2000

Liberty Mutual Group’s management may be playing it a little coy in not revealing any specific plans once its restructuring into a mutual holding company is finished. But the company will at least have the flexibility to make deals outside of insurance.

If nothing else, the new structure will make acquisitions of other property/casualty insurers both easier and more alluring from an accounting standpoint, says a senior Liberty official.

Certainly, according to a company fact sheet, the deal puts the company “in a position to sell stock and raise equity capital should the need arise,” while it also enables Liberty to hang onto its brand identity as a policyholder-friendly mutual. Still, the insurer doesn’t expect to issue an initial public offering or launch into a full-blown demutualization.

The revamping would also allow the insurer to move from the statutory accounting required of a mutual to the GAAP accounting used by stock companies.

The accounting change could mean big bucks in the large acquisitions the insurer likes to make. GAAP accounting would enable Liberty to amortize the cost of acquiring the goodwill of a target company over a long period rather than having to book it immediately, Paul Mattera, senior vice president and chief public affairs officer with Boston- based Liberty, told CFO.com.

For example, under statutory accounting principles, Liberty had to write off $500 million of goodwill in 1999 in connection with its May 1999, $1.5 billion purchase of the U.S. P/C operations of U.K.- based Guardian Royal Exchange, Mattera noted. Had Liberty been operating under GAAP at the time, with the greater flexibility of a mutual holding company structure, it could have recorded goodwill of only $250 million and could have amortized it over a 20-year period, according to a company spokesperson.

Big difference, huh?

Because it would let the company offer stock as well as cash to potential acquisition targets, the restructuring would also help Liberty, already an aggressive acquirer of p/c companies, be more competitive, industry analysts say. (Under its current structure as a mutual, it could not issue stock.)

The ability to issue stock would “make more resources available” to pay for acquisitions, says Michael A. Cohen, a vice president for A.M. Best Company, the Oldwick, N.J.- based rating organization.

“You can issue the stock to raise capital and use the stock to make acquisitions,” he adds.

Besides Employers of Wausau, a workers’ compensation insurer that became one of the group’s triad of major mutuals when Liberty bought it in January 1999 for roughly $600 million, Liberty has also bought such p/c carriers as Seguros Caracas (1995), Skandia Seguros (1997), Colorado Casualty (1998) and Citystate Insurance (1999).

Liberty executives say that while the restructuring should foster continued expansion, the acquisitions it’s seeking will come from familiar territory. “It will allow us to pursue [our] existing strategy of growth through acquisition in the core p/c business, which is very hard, given the current saturated nature of the industry,” according to Mattera.

“Everyone who needs insurance has insurance. So the way to grow is to steal a piece of business from someone else” via an acquisition, he explains.

But given the financial power unleashed by the restructuring, is the purchase of a bank in the company’s future?

“We don’t have those plans,” says Mattera. “We’re not convinced of the power of one-stop shopping” for financial services.

And yet, if the insurer wanted to buy a bank, the restructuring would make it much easier from a regulatory perspective, the executive grants.

Under the Gramm-Leach-Bliley Financial Services Modernization Act, only the Federal Reserve Board would regulate Liberty if the MHC did the acquiring, Mattera points out. But if it were to buy a bank within its current structure, both federal and state insurance regulators would have oversight of the company.

Announced Sept. 15, the day when Liberty filed the plan with the Massachusetts and Wisconsin insurance departments, the restructuring would form an upstream mutual holding company owned by policyholders. The MHC would in turn own a stock holding company that would own the group’s three major insurers, Liberty Mutual Insurance, Liberty Mutual Fire Insurance and Employers Insurance of Wausau.

The stock holding company would be able to offer 49 percent of the three companies’ stock to the public.

Under the plan, which the group hopes will gain full regulatory and company approval by June 2001, Liberty’s approximately 2 million policyholders would still receive dividends, with their ownership and voting rights residing in the MHC. One of the company’s key goals, according to the company fact sheet, is to continue its traditions as a mutual insurer, “working together with policyholders.” That, Liberty executives said, is a key to its brand image-and one it did not want to give up via a full-scale conversion to a stock company.

Mattera says Liberty considered merging the companies “into a single, large mutual at the top of the organization.” But that wouldn’t have the advantage of GAAP accounting. A more fundamental reason was that in assuming a single Liberty Mutual name, “we would lose the brand of Wausau,” he says.

Forming one big mutual holding company would have also stripped Liberty of its ability to provide auto, workers’ comp and other lines of coverage under the different premium rates offered by the three mutuals, according to Mattera. Most states prohibit a single insurance company from providing multiple rating plans.

Besides the benefits of mutuality and greater capital flexibility, the plan would also provide a more efficient legal structure for the three mutuals and their nearly 200 subsidiaries. Currently, although the three mutuals have a single management structure and pool their risks, legally, they’re “separate companies with separate governance and separate ownership,” according to the fact sheet.

The move would streamline governance and administration “while preserving the separate identities and brands within the group,” Liberty said. It would also cut the number of boards of directors from three to one.

Analysts greeted the move with moderate praise. Tony Latini, director of financial services for Berwind Financial, a Philadelphia- based investment banking firm, says the revamping would provide Liberty with “more flexibility” to raise funds and make acquisitions. “Liberty Mutual is a well-run company that has reached a size where [it’s] looking at capital- raising options,” he says.

For the first six months of the year, Liberty Mutual Group had revenue of $6.9 billion, pretax income of $519 million and assets of $63.5 billion.

Matthew Coyle, director of research for Standard & Poor’s Insurance Ratings Services in New York, says, “From a rating perspective, [the restructuring] has no implications at all.” But he says the plan could have merit as a long-range strategy, provided Liberty can improve its operating results, which, like those of other p-c companies, have been hit hard by the prolonged soft market in insurance.

He adds: “If you go public, it helps to go with a good track record.”