Fitch has affirmed all ratings of SAFECO Corporation and its insurance subsidiaries. At the same time, the rating outlook has moved from Stable to Negative. The primary factor for the change in rating outlook is the continued weak operating results in the property/casualty operation.
All commercial lines have reported poor combined ratios for several periods, and earnings from personal lines have diminished since early 1999. While material rate increases have been implemented during 2000 that should improve operating performance in 2001, Fitch believes that the reported performance in 2000 is below prior expectations. Fitch believes that to maintain its current rating the company should demonstrate operating performance at least commensurate with the industry.
SAFECO’s results have deteriorated quicker than peer companies in recent periods. Further, Fitch believes the company’s emphasis on retention of business and maintaining market share following its $3.1 billion acquisition of American States Insurance Group in 1997 increases management’s challenge to return to targeted underwriting performance in the near term. With management’s stated objective to improve underwriting results, premium revenues are expected to demonstrate slowed growth relative to recent periods.
Fitch plans to review SAFECO’s performance following year-end 2000 results. At that time, Fitch could take a rating action based on operating trends demonstrated in the final half of 2000. SAFECO’s ratings are supported by the organization’s strong brand name, valued relationships with the independent agency channel, conservative reserve position and high quality investment portfolio.
The ratings also favorably reflect recent management actions taken to reduce catastrophe risks. The insurer financial strength rating of the life operation is linked to the property/casualty company ratings.
Fitch believes the life operation’s balance sheet and competitive position relative to peer companies is good, although modestly weaker when compared to the property/casualty operation. Further, Fitch believes that current management views the operation of the life insurance business as a critical component of the corporate-wide strategy to serve the independent agency distribution network. As such, the life operations, along with the property/casualty operations, are considered a core operation of SAFECO. The life operation maintains strong niches in both structured settlements and the retirement services market, a stable asset/liability risk profile and sound management oversight, a strong statutory surplus position and a conservative investment portfolio.
Competitive pressures in the group excess loss market and interest rate risk inherent in both the company’s product line and investment portfolio are also considered in the rating. SAFECO’s financing of the American States acquisition increased financial leverage in the organization from a historically conservative position to a higher level.
The current level of financial leverage at SAFECO is considered slightly higher than many peer companies. The commercial paper ratings of SAFECO and SAFECO Credit Company reflect the organization’s overall good business profile, conservative management, solid surplus position, diverse operations, above-average competitive positioning and strong balance sheet. All outstanding debt of SAFECO Credit is guaranteed by SAFECO.
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