Safeco Unveils Q3 Numbers, Notes Hurricane Impact

Seattle-based Safeco on Tuesday reported third-quarter results, reflecting strong fundamentals in a period with substantial hurricane losses and the loss on the sale of Life & Investments.

The company posted a net loss of $101.1 million – or $0.76 per diluted share for the quarter. This compares with a 2003 third-quarter net loss of $28.9 million – or $0.21 per share, when the company strengthened workers compensation reserves.

Safeco’s annualized return on equity (ROE) for the quarter was a negative 9.2 percent, compared with a negative 2.5 percent in the third quarter of 2003. Operating annualized ROE – measured using operating earnings from continuing operations and ending shareholders’ equity, excluding unrealized gains on bond investments – was 5.9 percent, compared with a negative 0.9 percent in the same period last year.

“The hurricanes brought devastation to thousands of our customers, and it brought our industry back to reality,” said Mike McGavick, Safeco chairman and CEO. “Our claims professionals have done an extraordinary job these last two months helping our agents and customers recover from not one, but four hurricanes. That’s what our business is all about.”

Continuing operations
Income from continuing operations was $5.9 million for the third quarter, up from a loss of $0.1 million in the same quarter last year. Operating earnings for the third quarter, excluding net realized investment gains and the loss on debt repurchases, were $51.8 million, compared with a $7.9 million loss in the prior-year period. Net realized after-tax investment gains for the third quarter were $32.8 million, compared with $7.8 million in the same period of 2003. The after-tax loss on the debt repurchases was $78.7 million.

The overall Property & Casualty (P/C) combined ratio was 101.6 in the
third quarter, compared with the 108.6 posted in the same period last year. Last year’s third-quarter combined ratio included pretax workers’ comp reserve strengthening of $205.0 million.

Last week, the company announced aggregate pretax catastrophe losses of $195 million for the third quarter, with $183 million representing losses from the four hurricanes that hit Florida and surrounding states in August and September.

The effect on third-quarter net loss for all catastrophes was $127 million after tax, or $0.96 per diluted share, compared with catastrophes of $13.7 million, or $0.10 per share in the third quarter of last year. Catastrophe losses increased the company’s overall combined ratio for the quarter by 13.9 points, bringing it to 101.6.

“Although it’s difficult to look beyond the hardship created by the
hurricanes, we are heartened by our strong performance across each of our major lines of business,” said McGavick. “Our underlying loss trends are good, and we’re performing better than our target margins, excluding these catastrophes. We’re proud of that fact, just as we’re proud of our people in Florida who are helping so many put their lives back together.”

Total revenues from continuing operations in the third quarter were
$1.57 billion, compared with $1.38 billion a year ago. Operating revenues, which exclude net realized investment gains, were $1.52 billion for the quarter, a 10.9 percent increase compared with third-quarter 2003.

P/C net earned premiums increased 12.0 percent for the quarter to
$1.40 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 11.6 percent compared with third-quarter 2003.

P/C pretax net investment income was $111.0 million for the quarter,
compared with $113.7 million in the same period a year ago, a decline of 2.4 percent, reflecting lower yields on the company’s fixed-income investments.

Safeco personal insurance performance
Auto, Safeco’s largest business line, reported a quarterly underwriting
profit of $51.0 million, compared with $32.2 million of underwriting profit in the third quarter of 2003.

During the quarter, $8.2 million in pretax catastrophe losses were more than offset by favorable prior-year reserve development of $10.0 million. Auto’s combined ratio in the third quarter was 92.4, compared with 94.4 in the third quarter of 2003.

Net written premiums increased 16.0 percent in the third quarter compared with a year ago. This growth was fueled by a record-breaking number of new auto policies sold in the quarter.

Policies in force (PIF) grew 9.7 percent compared with a year ago,
reflecting the effectiveness of Safeco’s new auto product and new-business platform delivery, as well as stable retention levels.

Safeco’s Property insurance line, which includes homeowners, renters and related coverages, produced an underwriting profit of $14.2 million in the third quarter, compared with a $40.5 million underwriting profit in the third quarter of 2003.

The decline in profit was due to $71.3 million in pretax catastrophe losses primarily associated with the Florida hurricanes, compared
with $12.1 million in catastrophes in the same period a year ago.

Partially offsetting the catastrophe losses this quarter was $9.0 million of favorable prior-year reserve development. Safeco has a 0.6 percent market share of premiums in the voluntary homeowners market in Florida. The Property combined ratio was 93.9 in the third quarter, compared with 82.4 in the third quarter of 2003.

Net written premiums in Property increased 0.6 percent in the third
quarter compared with a year ago. PIF declined 7.7 percent, while new
business increased 14.1 percent compared with the third quarter last year.

“We’re pleased with the underlying performance this quarter,” said
McGavick. “It is especially gratifying in Property where our tiered product and focus on profitability are proving successful.”

Safeco business insurance performance
Safeco Business Insurance (SBI) reported an underwriting loss of
$80.8 million in the third quarter, compared with a $45.5 million underwriting loss for the same period in 2003. The decline in underwriting results was due largely to $109.0 million in pretax catastrophe losses during the quarter, compared with $8.9 million in the same period a year ago. Safeco’s Commercial Multi-Peril market share of premiums in Florida is approximately 2.0 percent.

Also impacting last year’s results was $60.1 million in pretax workers’
comp reserve charges ($57.6 million in SBI Regular). Combined ratio in the third quarter was 119.4, compared with 112.2 in the third quarter of 2003.

SBI Regular reported a combined ratio of 119.5, compared with the
118.6 result in the same period last year. The third-quarter combined ratio included $79.9 million in catastrophe losses, compared with $5.2 million in the same period last year.

Net written premiums for SBI Regular – Safeco’s core line of products for small- to medium-sized businesses – increased 9.3 percent for the third quarter compared with the same period last year.

“The hurricanes hit our commercial lines hardest,” said McGavick. “Again, though, when we look beyond the catastrophe numbers, our commercial business performed better than our targets.”

Surety performance
Surety posted an underwriting profit of $10.0 million in the third
quarter, compared with the $8.5 million underwriting profit in the same
quarter of 2003.

The combined ratio for Surety was 81.3 in the third quarter, compared with 78.8 in the same quarter of 2003.

Net written premiums grew 28.5 percent compared with the same period last year, driven by higher rates and new accounts.

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 $12.6 million in the third quarter due to reserve strengthening, compared with a $149.8 million underwriting loss in the same quarter of 2003. The loss in 2003 was the result of pretax workers’ comp reserve development of $144.9 million.