SAFECO Reports Continued Earnings With 3rdQ Net Income Increase

October 29, 2002

SAFECO reported continued earnings growth as third-quarter net income increased to $75.2 million, or $0.59 per diluted share. Income before charges and realized gains increased to $86.4 million, or $0.68 per diluted share.

This compares favorably with a net loss of $100.6 million, or a loss of $0.79 per share, in the third quarter of last year when SAFECO strengthened Property & Casualty loss reserves by $156.0 million after taxes. SAFECO’s income before charges and realized gains for the third quarter of last year was $7.8 million, or $0.06 per share.

“We had a strong quarter,” said Mike McGavick, SAFECO president and CEO, said. “We’re moving in the right direction and picking up speed, and certainly a light weather quarter helped.

“Our Property & Casualty units turned in a solid performance and are showing progress,” he added.

During the third quarter, SAFECO put its Lloyd’s of London operations into run-off, resulting in an after-tax charge of $17.1 million. This charge reflects writing off SAFECO’s investment in its U.K. subsidiary, R.F. Bailey (Underwriting Agencies) Ltd. It also includes strengthening reserves to provide for higher-than-anticipated losses as the business is run off.

“As we previously promised, we made a decision about our London operations during the third quarter,” McGavick noted. “Putting our London operations into run-off is the last major step in returning our focus to what we do best-providing personal insurance, writing insurance for small businesses, and selling life and investment products.” SAFECO is working closely with Lloyd’s of London as it runs off this business.

Property & Casualty results benefited from exceptionally mild third-quarter weather and lower-than-anticipated claims from insured catastrophes. Since SAFECO initially overestimated second-quarter losses associated with Southwest wildfires (the fires were burning out of control at the end of the second quarter, preventing adjusters from compiling precise estimates of customer losses at that time), there was a net positive effect on income of $9.9 million pretax from incurred catastrophes in the third quarter. This takes into account actual third-quarter catastrophe losses and the previously overestimated wildfire losses.

Net written premiums for SAFECO’s Property & Casualty products increased 6.1 percent in the third quarter compared with the same period in 2001. This reflected higher rates and increased sales of auto insurance and insurance for small businesses. “We’re focused on re-igniting sales, and agents and brokers are responding positively,” McGavick said.

The company reported $7.8 million of net realized investment gains after taxes, compared with $12.9 million in the third quarter of 2001.

Personal Auto, SAFECO’s largest product line, reported a quarterly pretax underwriting loss of $6.2 million. This compares with an underwriting profit of $2.9 million in third quarter 2001 when the line turned in an exceptionally strong performance due to an unusually low number of customer claims filed in Sept. 2001.

“Last year, we cautioned that our third-quarter Auto results were stronger than anticipated,” McGavick noted. “This year, our Auto results are in line with our plans. Performance is improving as expected.”

Combined ratio for Auto improved to 101.2 compared with 101.6 in the second quarter of this year.

Net written Auto premiums increased 17.6 percent in the third quarter compared with the same period last year. Policies in force were up 3.5 percent from last quarter, and up 4.7 percent compared with the third quarter of 2001. The growth reflected the early success of the company’s new Auto insurance product as well as new systems that make it easier for agents to write SAFECO policies.

SAFECO’s Homeowners insurance line reported a pretax underwriting profit of $5.5 million, an improvement over the $43.7 million underwriting loss in third quarter 2001. Combined ratio improved to 97.1 in the third quarter, compared with 119.5 in the second quarter of this year.

McGavick cautioned “not to read too much into these numbers. We are making progress, but have a ways to go.”

Net written premium in Homeowners increased 5.4 percent compared with the same quarter of 2001, and policies in force decreased 8.2 percent. These changes reflected SAFECO’s effort to obtain appropriate rates for covered risks and limit its exposures in areas prone to severe weather. Among the major contributors to Homeowners’ profit in the quarter were lower customer claims for weather losses, and positive catastrophe development associated with the Southwest wildfires that were burning when SAFECO initially estimated losses.

SAFECO continues rolling out a tiered-pricing structure for Homeowners. This new approach – which matches rates more closely to risk – currently is in place in 17 states.

“Based on early results, we’re cautiously optimistic,” McGavick said. “We’ve successfully obtained more appropriate pricing for Homeowners insurance in several markets.

“While we currently have moratoriums on writing new business in 13 states, we will lift the moratorium in Maryland later this month,” he added. “Moratoriums will be lifted in other states as we secure approval to implement changes to make this product profitable.”

SAFECO also is implementing a new wind-and-hail deductible for homes insured in wind- and hail-prone states. Already in place in Illinois, policyholders pay 1 percent of a home’s insured value before SAFECO pays for insured claims from wind and hail damage.

Meantime, SAFECO Business Insurance’s underwriting loss improved to $23.4 million pretax in the third quarter. This compares to the $243.7 million underwriting loss for the same period last year when SAFECO strengthened loss reserves for both its Business Insurance and Other lines.

Combined ratio in the third quarter was 106.6, an improvement over 111.1 in the second quarter of this year.

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