SAFECO Reports 3Q Results, Strengthens Reserves by $240M

October 23, 2001

SAFECO reported third-quarter income, before charges, of $7.8 million or $0.06 per diluted share. Including $240 million in reserve strengthening and previously announced restructuring charges, SAFECO posted a net quarterly loss of $100.6 million, or $0.79 per share.

“We’ve now tackled some of the biggest issues facing the company,” said Mike McGavick, who joined SAFECO as president and CEO in late January. “With the reserve strengthening announced…we’ve completed the last step in our initial game plan to turn SAFECO around. We continue seeing improvement in the core underwriting results of several key business lines.

“This confirms our recent decision to put more of the company’s capital behind our Personal Auto line and less behind our Homeowners line; more capital behind our small-business line and less behind our large-commercial line,” McGavick continued.

During the quarter, SAFECO completed a review of Property & Casualty reserve adequacy. The review initially was announced in May.

As a result of the review — which included a study by an independent accounting firm — SAFECO increased loss reserves by $240 million pretax. “By being adequately reserved, we’re staying on top of newly developing issues affecting the entire industry,” McGavick said.

Of the additional reserves, $90 million relates to recent developments to prior-year claims for construction-defect claims, $80 million for workers’ compensation, and $70 million for other items including asbestos and environmental claims.

The reserve strengthening is funded by proceeds from the sale of SAFECO Credit Company, which was completed in August. “We’ve strengthened our balance sheet by bolstering reserves and eliminating $1.5 billion of debt,” McGavick noted.

In other major developments during the quarter, the company elected Joseph W. “Jay” Brown, an insurance industry executive with nearly 30 years experience, to SAFECO’s board of directors, and also appointed Yom Senegor as SAFECO’s chief information officer, responsible for leading the company’s strategic-planning process.

In addition, SAFECO is on track to achieve expense-reduction and employment-reduction targets outlined in July. Excluding jobs associated with the sale of its credit subsidiary, employment has declined by 600 positions so far this year. SAFECO has announced plans to reduce employment by 10 percent — or a total of 1,200 positions — by the end of 2003, with more than half of the reductions occurring this year.

SAFECO previously announced that restructuring charges associated with employment reductions would be approximately $60 million. This includes a $31.8 million charge recorded in the third quarter. An additional charge of approximately $5 million is anticipated in the fourth quarter, with remaining charges to be taken through 2003.

Overall Property & Casualty Performance
The Property & Casualty companies, SAFECO’s largest business segment, continued reporting improvements in underlying results as measured by its core combined ratio. Combined ratio is a commonly used gauge of underwriting performance measuring the percentage of premium dollars used to pay customer claims and expenses. The lower the ratio, the more effective the underwriting.

To provide clarity about the underlying performance of major lines, SAFECO is reporting combined ratio three ways:

— Total combined ratio,

— Combined ratio excluding the effects of reserve strengthening and catastrophes (which SAFECO defines as events generating multiple customer claims totaling more than $500,000), and

— Combined ratio excluding the effects of non-catastrophe weather, catastrophes and reserve strengthening.

Detailed information about combined ratios for each Property & Casualty line — as well as SAFECO’s balance sheet, consolidated operating results and supplementary financial information — is available at http://www.safeco.com/safeco/news/archive/2001_1022.asp.

Property & Casualty’s core combined ratio for the quarter improved to 101.2, compared with 102.0 in the second quarter.

Total combined ratio, however, climbed to 133.1, largely due to reserve strengthening. Excluding reserve strengthening, total combined ratio for the third quarter was 111.7, an improvement over 119.0 the previous quarter.

Overall, Property & Casualty posted a third-quarter underwriting loss of $370.8 million, which includes the $240 million reserve strengthening. This compares with total underwriting losses of $115.8 million for the same period last year.

Non-catastrophe weather losses in the quarter were $61 million, above losses typically expected in a normal third quarter.

Catastrophe losses were $56 million. Excluding losses associated with the World Trade Center attack, SAFECO’s catastrophe experience for the third quarter was about average.

More than half of SAFECO’s catastrophe losses for the quarter were associated with the Sept. 11 attacks. SAFECO’s gross exposure to this event is estimated at $70 million, of which reinsurance — primarily related to losses from the company’s Lloyds of London underwriting operation — is expected to cover $35 million. The company’s reinsurance coverage is spread among 17 different reinsurers with high credit quality.

“We maintain our original estimate that SAFECO’s net loss from this national tragedy will be $35 million,” McGavick said.

Property & Casualty’s net written premiums decreased 2.6 percent in the third quarter compared with the same period last year. This includes a 4.8 percent increase for Personal Auto, a 0.3 percent decrease for Homeowners, an 11.7 percent decrease for Business Insurance, and a 21.3 percent decrease for Commercial Insurance. These results reflect aggressive pricing and re-underwriting actions SAFECO has taken recently.

SAFECO Personal Insurance Performance
Personal Auto — SAFECO’s largest line — reported a modest underwriting profit of $2.9 million, compared with an underwriting loss of $16.5 million during the same period last year.

Core combined ratio improved to 99.1 in the third quarter, and total combined ratio progressed to 99.3. This compares favorably to a total combined ratio of 108.7 during the second quarter, and a core combined ratio of 100.2.

The line’s performance in the quarter marks the first time Auto has generated an underwriting profit since the first quarter of 1999.

“The actions we’ve been taking are having positive effects. Still, this quarter’s Auto results were a bit better than we anticipated.” McGavick said. “Until we string together several consecutive quarters of underwriting profit, I’m hesitant to say we’ve completely turned around the performance of this line. Still, this is a very positive trend.”

Homeowners recorded a third-quarter underwriting loss of $43.7 million compared with $31.2 million during the same period last year.

Total combined ratio for the line improved, but this reflects the fact that the Homeowners line was hit hard by severe storms in the second quarter. Core combined ratio for the line slipped to 92.2 in the third quarter compared with 89.9 in the previous quarter.

“We’re still early in our plans to manage Homeowners back to profitability,” McGavick noted. “We’re committed to price this product to provide a fair return.”

The review of loss reserve adequacy concluded that current reserve levels for both Auto and Homeowners are sufficient and don’t need to be increased.

SAFECO Business Insurance Performance
SAFECO has completed consolidation of its two commercial insurance lines, however, it will continue reporting results separately until 2002.

Core combined ratio for SAFECO Business Insurance — the company’s line of products for small-to-medium-sized businesses — improved to 101.2 compared with 103.5 in the second quarter. McGavick attributed the improvement to re-underwriting the book of business and obtaining adequate rates.

“We’re heartened by this continued positive trend,” he said. “We intend to grow this line with a long-term goal of being profitable on an underwriting basis.”

SAFECO Business Insurance recorded third-quarter underwriting losses of $87.9 million compared with $43.8 million during the same period last year. The increase is due to $65 million of reserve strengthening for this line and $8.1 million in losses associated with the Sept. 11 attacks. The reserve strengthening in this line is mainly associated developments related to older claims for construction defects, and some workers comp.

Performance of SAFECO Commercial Insurance — the company’s line of products for larger businesses — continues to be affected by adverse workers comp experience. In response, SAFECO cut by 90 percent the amount of new workers compensation policies it wrote during the third quarter.

Core combined ratio of Commercial Insurance slipped to 126.5 in the third quarter, compared with 124.6 in the previous quarter. Excluding the impact of reserve strengthening, total combined ratio in this line also deteriorated.

SAFECO has been aggressively increasing rates, and exiting significant portions of this line. SAFECO Commercial Insurance reported a quarterly underwriting loss of $154.6 million compared with $33.8 million during the same period last year. Factors contributing to increased underwriting losses include workers compensation results; $90 million in reserve strengthening; and $15.7 million in losses associated with the Sept. 11 attacks.

Surety
Surety turned in its best quarter in the past year, generating underwriting profits of $6.3 million. This is up from $4.6 million in the second quarter, yet largely unchanged from $6.4 million in pretax profit reported in the third quarter of 2000.

Other lines
Property & Casualty added $85 million to strengthen loss reserves of its “Other” lines. This strengthening relates primarily to asbestos and construction-defect exposures. These lines include discontinued reinsurance operations SAFECO acquired when it purchased American States. They also include SAFECO’s London operations, which reported a $10.0 million loss associated with the attack on the World Trade Center.

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