NU Online News Service, March 16, 2004, 5:26 p.m. EST – Safeco Corp., Seattle, has agreed to sell its life and investment operations to a private investment group for $1.35 billion.[@@]

The investment group, which includes White Mountains Insurance Group Ltd., Hamilton, Bermuda, and Warren Buffett’s Berkshire Hathaway Inc., Omaha, Neb., is getting Safeco’s life insurance, group insurance, annuity and mutual fund businesses.

The deal agreement includes a mechanism based on Safeco Life & Investments’ June 30 statutory book value that could increase the purchase price, Safeco says.

In a separate deal, Safeco has agreed to sell its Talbot Financial Corp. insurance brokerage operation for $90 million to an investor group led by Talbot senior managers. Hub International Ltd., Chicago, an insurance brokerage, is backing the Talbot managers, Safeco says.

Safeco hopes to complete both deals by Sept. 30. The company announced in September 2003 that it wanted to sell its life and investments operations and focus on its property-casualty business.

Although the deals will generate a significant amount of cash for Safeco, they probably will lead to an after-tax loss of about $200 million, according to Fitch Ratings, Chicago.

Safeco plans to use the deal proceeds to pay down debt and give some of the proceeds to shareholders.

Safeco is emphasizing that the buyers of Safeco Life and Talbot are committed to stability.

“Current management will continue to run each business with the same commitment to channel distribution and customer service,” Safeco Chairman Mike McGavick says in a statement about the deal.

Analysts at Moody’s Investor Service, New York, say they believe Safeco Life’s product portfolio, distribution arrangements and business strategy will remain unchanged after the transaction closes.

“Safeco Life will continue to focus primarily on the sale of bank-distributed individual deferred annuities and group health insurance, distributed through specialized brokers and third-party administrators,” Moody’s says in a comment about the Safeco Life deal.

Safeco Life will continue to be able to distribute through Safeco’s property-casualty agency channel, and it will be able to use the Safeco name for a year following the close of the transaction, Moody’s says.

David Foy, White Mountains chief financial officer, says his firm’s investment in Safeco’s life insurance businesses is the first in that sector.

The deal looked like a “good economic deal,” Foy says.

Foy is a life actuary who was chief financial officer of Hartford Life, a unit of Hartford Financial Services Group Inc., Hartford, before he joined White Mountains.

White Mountains is not out shopping for life insurers, but Foy’s background does help the company evaluate life company deals, Foy says.

Moody’s lowered Safeco Life’s long-term insurance financial strength rating to A2, from A1, back when Safeco announced it was selling the unit. The rating agency now has confirmed the A2 rating.

Safeco Life has a profitable block of structured settlement annuities, a stable block of tax-sheltered annuities and a high-quality investment portfolio, but spread compression could hurt its fixed annuity and structured settlement portfolios, its group health business could be volatile, and it has a relatively low level of statutory capitalization for its rating, Moody’s says.

Safeco Life would have to send its buyers about $10 million per year to help them pay off $300 million in bank debt, but that’s less cash than the company has been sending Safeco, Moody’s says.