Safeco Produces Strong Underwriting Results in Auto, Homeowners and Surety

Safeco – which recently announced a clear focus on Property & Casualty insurance – reported strong third-quarter underwriting results in most insurance lines.

“We generated healthy underwriting profits in Auto, Homeowners and Surety,” said Mike McGavick, Safeco chairman and CEO. “Our fundamentals are strong. The underwriting results across our Property & Casualty businesses point to the soundness of our new course.”

As previously announced, the company strengthened workers compensation reserves in the quarter by $133.3 million after tax ($205.0 million pretax). “Absent this action, our Business Insurance line also would have been profitable,” McGavick said.

For the quarter, Safeco reported a net loss of $28.9 million ($0.21 per share). This compares to net income of $75.2 million ($0.59 per diluted share) in the third quarter of 2002 when the company put its Lloyd’s of London operation into run-off and took a $17.1 million after-tax charge ($0.13 per share).

Factors contributing to Safeco’s overall results in the third quarter of 2003 were:

*The workers’ compensation reserve strengthening.
*Impairments of investments securities held by Life & Investments (L&I), which aren’t expected to recover in value before L&I is sold. Although Safeco intends to continue holding these investments, accounting rules require impairment recognition of unrealized losses because the business unit is for sale. During the quarter, Safeco recorded total after-tax investment impairments of $87.0 million, with $80.5 million associated with L&I.
*A $13.2 million benefit due to a favorable federal income tax settlement regarding prior tax years for L&I.

Operating earnings for the third quarter were $33.6 million after tax, compared with $67.4 million for the same period last year. “When you consider that our operating earnings include the reserve charge, these are very strong results,” McGavick said.

In the fourth quarter, Safeco anticipates an after-tax restructuring charge of approximately $10 million associated with previously announced actions to reduce expenses by $75 million in 2004. This charge is related to eliminating 500 jobs not affected by the sale of L&I.

“We had a number of unusual items in the quarter,” McGavick said. “When you look at our Property & Casualty operating fundamentals, you see outstanding underwriting performance combined with healthy sales growth.

“Our underwriting models and common sales platform are producing positive results faster than we initially expected,” he added. “We’re on the right path for sustained, profitable growth.”

Safeco’s return on equity for the first nine months of the year, based on annualized net income, is 5.0 percent. Operating return on equity, measured using annualized operating earnings and excluding unrealized gains, is 10.0 percent for the first nine months of 2003.

Overall revenues in the third quarter were $1.8 billion, down slightly from a year ago. Operating revenues – excluding net realized investment gains – grew 5.2 percent.

Net earned premiums for all Property & Casualty operations increased 10.1 percent compared with the third quarter of 2002. Net written premiums, a leading indicator of revenues in future quarters, increased 11.2 percent.

Insured catastrophe losses for the quarter totaled $21.0 million. This compares with $9.9 million favorable catastrophe reserve development reported in the third quarter of 2002.

In conjunction with its strategy to focus on Property & Casualty products, the company is winding down its Safeco Financial Products operation, which primarily sells credit default swaps.

Safeco Personal Insurance Performance

Personal Auto, Safeco’s largest product line, generated an underwriting profit of $35.4 million in the third quarter, a significant improvement over a $6.2 million underwriting loss during the same period last year.

The Auto line produced a combined ratio of 93.9 percent, better than both 99.4 in the second quarter of this year and 101.2 in the third quarter of 2002. (Combined ratio is a standard gauge of underwriting performance measuring the percentage of premium dollars used for customer claims and expenses. A combined ratio below 100 indicates the line is operating profitably.)

Net written Auto premiums increased 15.2 percent compared with the third quarter of 2002. New business was up in the quarter, and the total number of policies increased 8.9 percent compared to a year ago.

“The trends are pointing in the right direction,” McGavick noted. “Auto is generating the type of profit we anticipated. We’re seeing strong growth with higher Auto policy sales in September than any previous month in company history.”

Safeco’s Homeowners line reported a quarterly underwriting profit of $32.1 million pretax, up from $5.5 million for the same period last year.

Combined ratio was a profitable 83.3, a marked improvement over both 107.0 in the second quarter of this year and 97.1 in the third quarter of 2002.

“Homeowners turned in an extraordinary quarter,” McGavick said. “While weather played a part, most of these results are because of our hard work to return this line to profitability.”

Net written premiums in Homeowners decreased 2.2 percent compared to the third quarter of last year as policies in force declined 9.3 percent. In September, however, Safeco reported a small increase in sales of new Homeowners policies.

“Our new Homeowners product is in place in almost every state where we write business,” McGavick said. “By month’s end, we will have lifted moratoriums on new accounts in all but three states-Florida, New York and Texas.

“Going forward, Homeowners could be a growing line for Safeco,” he added, “but we’ll remain mindful that in this line-which is prone to catastrophe losses and severe weather-profit comes first.”

Safeco Business Insurance Performance

Safeco Business Insurance reported a pretax underwriting loss of $195.3 million in the third quarter, the result of strengthening prior-year workers compensation reserves by $205.0 million pretax. This compares with an underwriting loss of $23.4 million during the same quarter of last year.

Total combined ratio for Safeco Business Insurance was 151.6 in the quarter. Excluding the reserve strengthening, the combined ratio was a profitable 97.4. This compares with a combined ratio of 106.0 in the second quarter of this year and 106.6 during the third quarter of 2002.

SBI Regular-Safeco’s core line of products for small- to medium-sized businesses-reported a combined ratio of 118.6 in the quarter. Excluding the effects of the reserve charge, SBI Regular’s combined ratio was a profitable 97.7. This compares with a combined ratio of 104.2 in the second quarter of this year and 104.7 during the third quarter of 2002.

“Our new sales and underwriting platform is generating the types of results we expected,” McGavick said. “We automated commercial Auto insurance during the quarter, and sales of new policies are up over 26 percent. We automated our Business-Owners Policy earlier in the year, and sales increased 65 percent in the third quarter.

“More important than the sales growth is the fact that we’re producing underwriting results that allow us to compete profitably in the small-business insurance marketplace,” he added.

Net written premiums for Safeco Business Insurance increased 13.1 percent in the third quarter compared with the same period in 2002.

Net written premiums for SBI Regular increased 11.0 percent compared to the third quarter of 2002. Total policies in force decreased 5.1 percent compared to a year ago, but were off only 0.2 percent compared to June 30 of this year.

Surety Performance

Surety generated a pretax underwriting profit of $8.5 million in the quarter, up substantially from $2.7 million in the same period last year. Combined ratio for Surety was a profitable 78.8, compared with 91.8 in the third quarter of 2002 and 82.2 in the second quarter of this year.

“Surety turned in great results this quarter,” McGavick said. “While we expect continued profit from Surety, we would be hard pressed to regularly repeat these results.”

Life & Investments Performance

Safeco Life & Investments generated pretax operating earnings of $41.1 million in the third quarter, off from $59.6 million for the same period last year.

“The Life & Investments unit continues to be a strong performer, and these results are very consistent with our expectations,” McGavick said. “As we shift our focus to Property & Casualty lines, we’re seeking a buyer that will help Life & Investments build on its track record of solid growth and consistent profits.”

The Group product line reported pretax operating earnings of $12.5 million, down from $22.4 million in the third quarter of last year. Group’s main product is stop-loss medical insurance to protect employers with self- funded benefit plans against large medical claims.

“As we’ve been saying for several quarters, Group’s results had been exceptional, and we didn’t anticipate the line would continue performing at that level,” McGavick noted. “This quarter, the results are more in line with our expectations.”

Income Annuities reported a pretax operating loss of $0.9 million, compared with pretax operating earnings of $11.5 million for the same period last year. The change is the result of $5.8 million in unfavorable pre-payment adjustments on mortgage-backed securities due to changes in interest rates. For comparison, in the third quarter of 2002, Income Annuities recorded a positive $6.3 million adjustment on mortgage-backed securities.

Retirement Services generated quarterly pretax operating earnings of $3.3 million, an improvement over $1.4 million for the third quarter of 2002.

Individual Life reported quarterly pretax operating earnings of $3.9 million in the quarter, up from $3.5 million for the same period last year.

The Asset Management business reported pretax operating earnings of $1.1 million, a slight improvement over $0.9 million in the third quarter of 2002. Total assets under management were $4.0 billion, essentially unchanged since the end of the second quarter of this year.