Safeco Posts Strong Profits in All Major P/C Segments

Seattle-based Safeco announced strong second-quarter results, reflecting the company’s solid underwriting and the competitive strength of its automated sales platform. In addition, weather-related catastrophe losses were relatively light for the second quarter. The company posted net income of $247.5 million — or $1.77 per diluted share. This represents an increase over second-quarter 2003 net income, which was $111.9 million — or $0.81 per diluted share.

Safeco’s annualized return on equity (ROE) for the quarter was 18.7 percent, up from 10.2 percent in the second quarter of 2003. Consolidated operating annualized ROE — measured using operating earnings and shareholders’ equity, excluding unrealized gains on bond investments — was 21.9 percent, compared with 11.8 percent in the same period last year.

“These results demonstrate the effectiveness of operating our three major insurance lines — auto, homeowners and small commercial — on a single business platform,” said Mike McGavick, Safeco chairman and chief executive officer. “These are lines of business where Safeco’s cultural tradition of discipline gives us a real advantage.”

Continuing Operations

Income from Property & Casualties (P&C) operations was $248.9 million for the second quarter, up from $67.1 million in the same quarter last year. Net realized investment gains for the second quarter were $55.2 million, compared with $10.4 million in the same period of 2003.

Operating earnings for the second quarter were $193.7 million, more than a threefold increase over the $56.7 million in the prior-year period.

The overall P&C combined ratio was 85.4 in the second quarter, a significant improvement over the 101.0 posted in the same period last year. This was driven by improved underwriting results across all major P&C product lines.

Combined ratio is a standard gauge of underwriting performance measuring the percentage of premium dollars used to pay customers’ claims and expenses. The lower the ratio, the more effective the underwriting. A combined ratio below 100 indicates the line is operating profitably.

“While we benefited from favorable weather, the underlying results are better than we expected and exceeded our P&C profit targets across the board,” McGavick said. “This is especially gratifying given the second quarter is traditionally our weakest earnings quarter due to catastrophes and severe weather.”

Total revenues from continuing operations in the second quarter were $1.56 billion, up from $1.34 billion a year ago. Operating revenues, which exclude net realized investment gains, were $1.47 billion for the quarter, an 11.1 percent increase over second-quarter 2003.

P&C net earned premiums increased 12.4 percent for the quarter to $1.35 billion compared with the same period last year. For the quarter, P&C net written premiums — a leading indicator of revenues in future quarters — increased 10.4 percent over second-quarter 2003.

As previously announced, Safeco is on track to close the sale of its Life & Investments (L&I) business in the third quarter.

Safeco Personal Insurance Performance

Auto, Safeco’s largest business line, reported a quarterly underwriting profit of $61.0 million, a major improvement over the $0.9 million underwriting loss in the second quarter of 2003.

Auto’s combined ratio in the second quarter was 90.5, significantly better than the 100.2 combined ratio in the second quarter of 2003. During the quarter, Auto results benefited from $9.0 million in subrogation reserves, or a 1.4 point impact on the combined ratio.

Net written premiums for Auto continue to grow at a healthy rate, increasing 16.2 percent in the second quarter, compared with a 17.1 percent increase in the same period last year.

Second-quarter policies in force (PIF) grew 10.0 percent compared with a year ago, reflecting new-business growth and stable retention levels.

“Segmentation within our auto product continues to be a key differentiator for Safeco. With our strong underwriting capability and our efforts to uncomplicate the sales process, we continue to see the opportunities for profitable growth,” said McGavick.

Safeco’s Property insurance line, which includes homeowners, renters and related coverages, produced an underwriting profit of $79.3 million in the second quarter, compared with a $6.6 million underwriting loss in the second quarter of 2003.

The Property combined ratio was 65.1 in the second quarter, compared with 102.9 in the second quarter of 2003 when Safeco experienced higher catastrophe losses associated with severe storms that tore through the Midwest and Southeast. Claims from catastrophe losses were $15.5 million in the second quarter of 2004, compared with $62.5 million in the same quarter last year. The catastrophe impact on the Property combined ratio was 6.8 points for second-quarter 2004 and 27.1 points in 2003.

Safeco’s proactive management of the homeowners line has helped improve profitability. Slightly better-than-expected weather also was a contributor. The homeowners line benefited from favorable reserve development of $17.0 million, or a 7.5 point impact on the combined ratio, primarily reflecting better-than-expected claims frequency and contract changes put into place beginning in 2002.

“With our homeowners product once again offered across the country, we’ve seen a 6.5 percent uptick in new-business policies during the second quarter in our Property segment,” said McGavick.

Net written premiums in Property decreased 1.1 percent in the second quarter compared with a year ago. PIF declined 8.4 percent, compared with a 9.0 percent decline in the second quarter last year.

Safeco Business Insurance Performance

Safeco Business Insurance (SBI) reported an underwriting profit of $49.4 million in the second quarter, compared with a $12.1 million underwriting loss for the same period in 2003.

Combined ratio in the second quarter was 87.9, compared with 103.3 in the second quarter of 2003. Claims from catastrophe losses were $4.5 million in the second quarter of 2004, versus $13.9 million in the second quarter of last year. The catastrophe impact on the combined ratio was 1.1 points in the second quarter of 2004 and 3.8 points in the same period of 2003.

Net written premiums for SBI Regular – Safeco’s core line of products for small- to medium-sized businesses — increased 8.1 percent for the second quarter over the same period last year.

The Safeco Now single-platform interface continues to prove easy for agents to use as evidenced by the 14.3 percent increase in new-business policies for the business owner policy (BOP) line over the second quarter of last year. Commercial auto new-business policies jumped 35.8 percent over second-quarter 2003 levels, and workers compensation new-business policies grew 11.6 percent. These lines represent 47 percent of SBI Regular’s business.

“These results are a testament to sound underwriting and the power of our automated platform in serving small-business customers,” said McGavick.

SBI Regular reported a combined ratio of 89.4, a substantial improvement over the 104.2 result in the same period last year.

Surety Performance

Surety posted an underwriting profit of $11.5 million in the second quarter, compared with a $6.8 million underwriting profit in the same quarter of 2003.

Combined ratio for Surety was 75.7 in the second quarter, better than the 82.2 in the same quarter of 2003. Net written premiums grew 28.6 percent over the same period last year.

“Surety continues to demonstrate the power of disciplined underwriting, and the team has capitalized on market conditions, resulting in strong production,” said McGavick.

P&C Other

The P&C Other segment, which includes results from operations that Safeco has exited or placed in runoff, had an underwriting loss of $10.2 million in the second quarter, compared with an underwriting loss of $9.7 million in the same quarter of 2003. The losses reflect reserve strengthening.

Discontinued Life & Investments Operation

Life & Investments (L&I) produced pretax operating earnings of $33.8 million in the second quarter, compared with $60.9 million a year ago. Pretax operating earnings represent income from discontinued operations, excluding related income taxes and net realized investment gains and losses. The second-quarter results for 2004 include $6.2 million of accrued expenses associated with the sale of the business.

In reporting L&I as a discontinued operation, indirect corporate overhead expenses are no longer allocated to L&I. Previously allocated expenses of $3.0 million per quarter in 2003 have been eliminated from the L&I Other segment and included in the Corporate segment.

The Group product line reported a pretax operating loss of $2.9 million, compared with $24.5 million of pretax operating earnings posted in the second quarter of last year. The current quarter includes reserve strengthening of $15.7 million, stemming from recent higher medical claims cost trends.

Income Annuities generated a $1.3 million pretax operating loss for the quarter, down from $8.4 million in pretax operating earnings in the second quarter of 2003. This decrease was due mainly to $4.7 million of unfavorable prepayment adjustments on mortgage-backed securities compared with favorable adjustments of $3.4 million in the same quarter of last year.

Retirement Services had pretax operating earnings of $3.2 million in the second quarter, compared with $4.9 million a year earlier. The decline reflects the impact of reinvestment in securities at lower interest rates, partially offset by corresponding lower rates on fixed annuities and improved indexed annuity investment margins.

The Individual line had pretax operating earnings of $4.4 million in the second quarter of 2004, compared with a pretax operating loss of $0.5 million in the same period last year. The increase is primarily the result of improved mortality experience.

Net realized investment losses from Discontinued Operations include $59.0 million in after-tax impairments of securities in connection with the sale of L&I. Accounting rules require impairment recognition of any unrealized losses on L&I securities that are not expected to recover in value before the close of the L&I sale.

Safeco’s second-quarter press release, financial supplement and 8-K are available online at http://www.safeco.com/safeco/investor/pdfs/04Q2_sup.pdf.