Deep look reveals Liberty's intentions.

Byline: Diane Dietz The Register-Guard

For Oregon voters, Ballot Measure 38 poses a mystery.

Why is a Boston-based insurance giant so committed to enlarging its share of Oregon's minuscule workers' compensation insurance market that it's using the initiative process to try to dismantle its state-owned competitor?

Liberty Mutual, through its regional subsidiary Liberty Northwest Insurance, has spent more than $7 million to advance Measure 38, which proposes to abolish SAIF Corp., the state-owned workers' compensation insurer.

Liberty Mutual is a company with world-scale ambition that boasts 900 offices and 38,000 employees in 17 countries. On sales of $16.6 billion, the company reaped $851 million in profits last year.

Liberty's workers' compensation line alone pulls in $4.2 billion in premiums annually - with the company's Oregon business producing just 3 percent of that total.

If voters approve the ballot measure on Nov. 2, forcing the state out of the workers' compensation business and allowing Liberty to - perhaps - double its market share, Oregon would remain a tiny part of the business empire of Liberty's Boston CEO, Edmund "Ted" Kelly.

So why does Liberty care so much about deep-sixing SAIF?

Liberty's fight in Oregon doesn't seem to add up, said Don Hale, an executive at Maine Employers' Insurance Co., a long-time Liberty competitor. The potential insurance sales that Liberty might gain seem small compared with the risk of backlash by angry lawmakers and business leaders who support SAIF.

"There's something driving them. There's some reason why there's a focus on that state," Hale said. "Normally, we don't see Liberty doing what they're doing in Oregon. It's not normal."

Liberty Mutual officials say their reasons for pushing the measure are many: from questions about corruption at SAIF to irritation over a tax advantage that SAIF enjoys.

Subsidiary is born

Liberty Mutual came into the Oregon marketplace in 1983 at the request of four former SAIF executives, who quit SAIF to go into the private market.

"They had an entrepreneurial idea, and they pitched it to Liberty Mutual. Liberty Mutual thought the idea had merit, and they funded the venture," said Brian Boe, a Liberty spokesman.

Liberty had its roots in workers' compensation and was the nation's largest provider for 66 years, until it gave/ ground to rival AIG in 2002.

The Oregon executives led by ex-SAIF CEO Chuck Gill opened an office in Portland and founded Liberty Northwest Insurance, a wholly owned and controlled Liberty subsidiary.

With $55 million in start up money, the four created a lucrative business. Now, Liberty Northwest takes in $120 million in annual workers' compensation premiums alone and employs 918 people.

"They knew the accounts, they knew the system, they had this zero liability insurance company starting up," said Lynn Armstrong, a Portland insurance broker and opponent of the ballot measure.

Tony Ferronato, one of the breakaway founders, worked at the Boston parent company for a couple of years then returned to become Liberty Northwest's top executive in 2002. His annual salary and bonuses top $697,000.

Armstrong said ill-will fueled a decades-long battle between Liberty Northwest and SAIF that now has broken into public view with the ballot measure. "Personal animosity, hatred, all of those things, is part of this," he said.

But why would the parent company allow such a messy political fight to play out this election across the Oregon's television screens - especially a parent company that guards its Lady Liberty logo and hones its image through Car Talk and American Experience sponsorships?

"People who take a simplistic view of this question say Liberty Northwest is just a predator. We feel much more like the prey rather than the predator," Liberty spokesman Boe said.

In the past decade, Liberty Northwest's Oregon workers' compensation market share shrank by half, to 14 percent, although it remains the state's second-largest carrier behind SAIF. It earned $5.7 million in profit on sales of $250 million last year, and four years ago it sent $25 million in excess profits to the parent company.

SAIF and Liberty both compete in the open marketplace. SAIF has some advantage because, as a quasi-governmental organization, it pays no federal tax; but Liberty Northwest partially closed the gap in the mid-1990s when the Legislature exempted Liberty from paying some state and local taxes.

But to Liberty, it's not enough.

The company sees SAIF as a threat to its existence in Oregon so it backed the ballot measure, Boe said. "We talked to our parent company and said, `We don't want to go out without a fight.' '

Also, while spending $7 million to promote Measure 38 is big on Oregon's yardstick, it's a small expense for Liberty. Earlier this month, for instance, Liberty pledged $10 million for Boston's annual fireworks display.

Bare knuckle politics

Besides, Liberty Mutual CEO Ted Kelly has an ax to grind with state-owned workers' compensation insurance companies nationwide.

His views are revealed in memoranda from Kelly and his colleagues at the American Insurance Association trade group.

In 1999, the year after Kelly took the helm at Liberty, he began pushing the trade group to battle government-created or -run insurance companies state by state.

In at least two dozen states, government-created companies similar to SAIF offer some or all of the workers' comp coverage to businesses in their state.

Some of the states, such as Oregon, have offered the coverage since the early 1900s, when businesses were first required to pay their injured workers. Other states, such as Texas, Maine and Rhode Island, created their state workers' comp companies in recent decades after private carriers dropped out, saying the market wasn't profitable enough.

Kelly favored attacking the state funds, and he focused on Oregon, according to the memos. Oregon's SAIF gave Liberty's concerns "critical mass," wrote Bruce Wood, the insurance trade group's attorney, in an August 1999 memo.

Kelly has been public with his dislike of state workers' compensation funds. The "Insurance Journal" quoted his view that the California state workers' comp fund was like a "misbehaved animal" that should be forced back into a "supervisory cage."

Liberty executives recently vowed the company would become nimble, able to expand easily into states where profits were good or retreat where they were poor.

"The state funds have grown in size and are seen as market stabilizers," said David DePaolo, president of the Web-based WorkCompCentral information service.

"The big carriers don't like market stabilizers because that means they can't increase their prices as readily or as rapidly as they would like to. The attack on the state funds is to destabilize the markets," he said.

Kelly was too aggressive for the tastes of the American Insurance Association, the memos showed. He advocated a broad attack, but the trade group chose a milder policy of containment.

The association's attorney counseled against "risking the wrath" of the states' political leadership. "The industry needs to pick its targets carefully, following extensive political analysis," Wood wrote. "State funds are politically powerful, and the industry needs to weigh the risks of retaliation - from labor, the business community or the legislature itself."

The insurance association is neutral on Oregon's Measure 38, a spokesman said.

Appeal to voters

Over the past decade, Liberty Northwest tried to get the Oregon Legislature to pass bills restricting SAIF, with only limited success.

Frustration drove Liberty to use the state's initiative system, Liberty's Boe said.

"We had to resort to the rather extreme step of taking the question directly to the public. It wasn't that we have a love of politics or love the hurly-burly of ballot measure campaigns," he said. "It was a stark realization that if we don't do something drastic to address this issue it will never be addressed."

SAIF's supporters say this ballot box melee is about far more than Oregon's market.

"Oregon is the precedent case," said Armstrong, the Portland insurance broker.

"If they can pull this off here, they're going to try to eliminate state funds across the United States."

But DePaolo, who watches the industry from his Web-based information services firm in Camarillo, Calif., said Liberty is not so unusual.

"If you're looking for a boogeyman, Liberty Mutual isn't it," he said. "They're out looking for their own interest, which is to maximize profits. I don't think they're any different than any other big carrier."