Liberty Mutual CEO: TRIA is needed.

Liberty Mutual Insurance Cos., well known for its focus on loss prevention on the job through its research institute for safety, is the first

insurance company to receive the National Safety Council's Green Cross for Safety Medal. Edmund F. Kelly, Liberty Mutual's chairman, president and chief executive officer, recently accepted the award on behalf of the company at a reception in New York. Shortly before that event, Kelly spoke to Best's Review about workplace safety efforts and other issues ranging from renewal of the Terrorism Risk Insurance Act to the company's approach to integrating acquisitions into the larger organization.

You've said that America's workplaces have become steadily safer over the years. What more can U.S. businesses do to improve their safety rating?

You start with the assumption that, in some sense, all workplace injuries should be avoidable. That's an ideal, but it's an ideal we all work for. It has to come from the top management to set standards to do better next year than this year, and do better the following year after that, and they have to regard work safety as an investment rather than an expense. Too frequently, when a financial player buys a company, you see that they regard workplace safety as an expense and they treat the workplace safety people as vendors rather than partners in protecting employees. I think buying into safety as an investment and the right thing to do is fundamental.

You are a strong proponent of the Terrorism Risk Insurance Act. What will be the implications for the industry and Liberty Mutual in particular if TRIA is not extended?

There is not enough capital in the private .sector to absorb a significant terrorist event. It's very easy to construct scenarios that would be well beyond what we could absorb. By the very nature of modern industrial society and modern financial society, we have large aggregations or concentrations of risk, that is, we the industry and we, individual insurers, within the industry. So, it is highly likely that in some areas of the country, particularly with respect to workers' comp where there are no exclusions, but also in some states where they do not permit exclusions in property for fire following, then indeed you will see a shortage of capacity in the marketplace very quickly. I would posit that each major insurer is looking at their concentrations in the event that TRIA isn't passed, and unquestionably some will have to consider whether they can continue to insure concentrations of risk.

In recent years, Liberty Mutual has achieved much growth through acquisitions. What strategy do you follow to integrate these new companies into the organization?

I will say that we are at a stage now where I regard acquisitions and integration as a core competency. We have a very strong strategic business unit structure. By that I mean we have four major SBUs: commercial market, that's domestic commercial markets; personal lines, which is the traditional direct selling and affinity business; the agency business; and international.

No. 1, the acquisitions we do are within the SBUs, so first of all, if the personal lines business we acquired from Prudential didn't work out, it wouldn't seep over and affect the other SBUs. So we try to encapsulate the execution risk.

No. 2, we set very, very tough deadlines for extracting efficiencies and doing all that has to be done.

And No. 3 ... we always tell the people that acquisition without organic growth is a bankrupt strategy. We always emphasize our No. 1 objective for any SBU is organic growth. So we don't let them get their heads turned by acquisition.

Have you always been able to encapsulate the risk?

We have, but I will say that to some extent we had to learn. When we first took over Wausau, we didn't set tough enough standards early on for integration efficiency. We learned our lesson then. And when we did start doing it, we set extraordinarily tough standards. So we encapsulated it. We learned, to be honest, four or five years ago.

Is 2005 going to play out as a very active year in mergers and acquisitions?

Obviously, at the end of the cycle, those of us who have taken advantage of the cycle, have strong balance sheets, and a lot of cash and growth is going to be hard to come by. Any industry in which you see this is ripe for consolidation. So I expect there will be consolidation.

The one unknown is what the impact of all the various investigations will have and if they are enough of a distraction--I can't put it any other way--that they would tend to dampen what would be significant M&A activity.

What are your biggest challenges in personal lines in this soft market?

We're not seeing it that soft. We're obviously not seeing the sort of price increases we've had in the past, but it's still very profitable. In a sense, over the last many years, personal lines has moved from what I'd call an underwriting game--although it's still an underwriting game because we're all after very sophisticated price tiers and analyses--but I would view it as a merchandising game where you're trying to figure out what groups you want the merchandise to go to. You use your underwriting criteria to identify the groups. It's a different sort of challenge--market presence, market position, quality of service. The big are getting bigger and to stay in the race you've got to be able to figure out how to market, sell and service at a level that consumers demand.