Safeco Sells Life & Investments to Focus on P/C Insurance

Aiming to be one of the top-performing companies in its sector, Safeco unveiled a new corporate structure with a clear focus on delivering Property & Casualty insurance products. As a result, Safeco intends to sell its Life & Investments business unit.

Safeco is targeting expense reductions of $75 million by the end of 2004 and putting its energy into selling standardized Property & Casualty products through a common network of independent distributors supported by a common sales, service and technology platform.

“Great companies don’t stand still,” said Mike McGavick, Safeco chairman and CEO. “We did the hard work in successfully turning our company around and making Safeco competitive again. That was only the first step.

“We might have been able to cruise along at this level, producing average results quarter after quarter,” he added. “But we aspire to be much better than average. We aim to be an extraordinary company — among the leaders in our industry in terms of profit, return to shareholders, premium growth, and agent and customer satisfaction.”

Property & Casualty Focus

“Our new Property & Casualty business model has been delivering superior results across our three largest lines – auto, homeowners and small commercial,” McGavick said. “The more energy we invest in this model, the greater the returns.”

McGavick stressed that Safeco is taking these actions now to be more competitive at a time when insurance companies’ investment income is depressed due to historically low interest rates, and to position the company for when the positive pricing environment in the Property & Casualty sector peaks.

“We’re making dramatic changes in our company to remove everything that stands in our way of unleashing an aggressive competitor in the property-casualty insurance marketplace,” he said.

“Safeco’s best course for the future is to have a strong Property & Casualty focus, delivering nearly all of our products over the same sales and service platform, and through a common network of independent distributors,” McGavick added. “We believe this gives Safeco a unique and sustainable market advantage, lowers our distributors’ costs, and provides customers with competitively priced products and exceptional service.”

Sale of Life & Investments

To achieve this clear focus on Property & Casualty (P&C) insurance, Safeco placed its Life & Investments (L&I) operation for sale. Safeco has retained Goldman Sachs to assist in the process of seeking a buyer.

“Most of the proceeds of the sale will be returned to shareholders in the form of a special dividend, a stock repurchase plan, or a combination of the two,” McGavick said. A portion of the proceeds will be used to reduce Safeco’s debt to a level appropriate with the company’s new size, and a small amount may be retained to support ongoing business needs.

L&I offers life insurance, annuities, mutual funds, employee benefits, group stop-loss medical insurance, and other financial products and services through independent agents, banks and financial advisors.

In 2002, L&I generated pretax operating earnings of $237.0 million on revenues of nearly $2.0 billion. L&I total assets were $23.2 billion, and its Mutual Funds assets under management were $4.0 billion at the end of the second quarter of 2003.

“This was an extremely difficult decision given the great contributions of our L&I team and our long history together,” McGavick said. “Like P&C, the Life & Investments team operates a terrific business model of its own. L&I will benefit from being part of a company focused on life insurance and asset accumulation.”

Expense Reductions

In Safeco’s second-quarter earnings release, the company indicated its expense levels are higher than the best performers in the property-casualty insurance sector. Work is underway across the company to identify inefficiencies and redundancies, with a target of reducing expenses by $75 million by the end of 2004.

“With our new strategic focus and the planned sale of L&I, there are expense reduction opportunities, especially in our corporate departments,” said McGavick. “We intend to be a company that continuously strives for ways to reduce cost, be more effective and produce better results for all stakeholders. A leaner corporate staff allows us to be more competitive.”

By the end of next year, Safeco expects to decrease employment by at least 500 positions (excluding jobs that may be affected by the sale of L&I). This will be managed through a combination of staff reductions and attrition. Most of the reductions will occur in the Seattle area.

Safeco anticipates a fourth-quarter restructuring charge associated with these expense-reduction efforts.

“Organizations that focus on customers – Claim, Sales and Service – are largely unaffected by these job reductions,” McGavick stressed. “Our customer base is growing, and we will grow these organizations, as appropriate, to continue providing outstanding customer service.

“Tackling our expense problem now, during a favorable pricing cycle, positions us for profitable growth when the insurance market becomes more competitive,” he added. “Every day we put off this work, more efficient competitors can gain an advantage with lower-priced products. That’s why our current expense gap must be addressed now.”

Benefit Changes

The company also is reconfiguring employee and retiree benefit plans to contain spiraling health care costs and bring the plans more in line with those of competitors and most major American corporations.

At the same time, Safeco is enhancing employee incentive compensation, vacation benefits and the company’s 401(k) retirement savings plan.

“Despite the difficult nature of some of the changes we’re announcing today, Safeco remains committed to investing in people,” McGavick said. “These benefit changes provide our coworkers with more flexibility and increased earnings potential.”