Seattle-based Safeco has reported second-quarter net income of $199.7 million, reflecting consistent, profitable underwriting performance across all major lines of business. According to the company, it initiated expense savings activity to target a $75 million run-rate reduction by end of 2006. The company also repurchased 3.7 million shares, or three percent of outstanding shares of common stock.
The company produced net income for second-quarter 2006 of $199.7 million, or $1.68 per diluted share. This compares with net income of $187.3 million, or $1.46 per diluted share, for the same quarter last year.
Operating earnings, which exclude gains of $21.3 million on the sale of real estate and net realized investment losses of $24.8 million, were $203.2 million for the quarter, compared with $178.1 million in the prior-year period — an increase of 14 percent.
After-tax net realized investment losses for the quarter were $24.8 million, compared with net realized investment gains of $9.2 million in the same period of 2005.
Paula Rosput Reynolds, Safeco president and chief executive officer, said, “We have taken the foundational steps to govern process improvement and our technology investments, and we have launched our innovation program. These efforts, combined with continued underwriting discipline and aggressive capital management, are intended to provide investors in Safeco with top-tier ROE on an ongoing basis.”
Safeco’s overall property and casualty (P&C) combined ratio was 86.7 for the quarter versus 89.1 in the same quarter last year. (Combined ratio is the percentage of each premium dollar spent on claims and expenses — the lower the ratio, the better the performance.)
Pretax catastrophe losses for the second quarter were $60.7 million, compared with $13.1 million a year ago. This difference reflects minimal catastrophe activity in the second quarter of last year.
Safeco’s annualized return on equity (ROE) for the second quarter was 20.1 percent. Annualized operating ROE — measured using operating earnings and excluding from equity unrealized gains or losses on bonds — was 20.6 percent for the quarter.
Total revenues in the second quarter were $1.54 billion, compared with $1.59 billion in 2005. Operating revenues, which exclude net realized investment gains or losses and real estate sale gains, were $1.54 billion for the quarter, compared with $1.58 billion during the same period in 2005.
P&C net written premiums were $1.46 billion for the second quarter, a 2.8 percent decrease from the year-ago period. P&C net written premiums include written premiums from Safeco’s lender-placed property business which it sold in April 2006. The net written premiums related to this business were $28.9 million for the second quarter, compared with $35.8 million a year ago, impacting the second-quarter net written premium decrease by 0.4 percent. P&C net earned premiums were $1.41 billion for the quarter, a 2.9 percent decrease compared with the prior year.
P&C pretax net investment income for the quarter was $117.8 million, an increase of 4.0 percent compared with the same period last year. P&C after-tax net investment income was $90.0 million, an increase of 8.3 percent compared with year-ago levels.
During the quarter, Safeco initiated expense-savings activities as part of its previously stated goal of becoming a low-cost insurance provider. The company expects to achieve savings of $75 million in its expense run rate by the end of 2006. Greater expense reduction will occur in 2007, also targeted to improve Safeco’s competitive position in the marketplace.
“Even as we drive costs out of our operations, we’re taking steps to enhance the partnership we have with our independent agents — who are among the very best in the industry,” Reynolds said. “Looking longer term, we’re also stepping up the pace of innovation companywide to bring our agents and policyholders new insurance products and services that will deliver consistent returns in future years.”
Safeco Auto reported a quarterly pretax underwriting profit of $62.0 million, compared with $39.6 million in the same period last year. Auto’s combined ratio was 90.9 in the quarter, compared with 94.4 a year ago. Second-quarter 2006 results include $25.6 million of favorable prior-year reserve development due to lower-than-expected bodily injury severity. Pretax catastrophe losses for the quarter were $12.7 million, compared with $4.5 million last year.
Auto net written premiums declined 5.6 percent in the quarter compared with the second-quarter 2005. Policies in force (PIF) decreased 3.3 percent in the second quarter from year-ago levels, though Preferred Auto PIF was down only 0.5 percent. Reflecting competitive market conditions, new-business policies decreased 31.3 percent compared with the same quarter in 2005, and retention was slightly lower.
Safeco Property, which includes homeowners, landlord protection and related coverages, produced a quarterly pretax underwriting profit of $32.3 million, compared with $72.5 million in the same period a year ago. Property’s combined ratio was 85.8 in the quarter, compared with 68.2 in the same quarter of 2005. The second-quarter 2006 results included $38.3 million in pretax catastrophe losses, compared with $5.6 million a year ago.
Property net written premiums increased 1.1 percent in the quarter compared with a year ago while PIF was down 0.5 percent from prior-year levels. Excluding Florida, where Safeco is concluding its exit of the personal property market, PIF was up 0.6 percent.
New-business policies increased 3.1 percent compared with the same period last year, and retention was steady.
Safeco Business Insurance (SBI) reported a pretax underwriting profit of $84.8 million in the second quarter, compared with $54.2 million for the same period in 2005. The second-quarter combined ratio was 79.1, compared with 87.3 a year ago.
SBI Regular — Safeco’s core commercial line serving small- to mid-sized businesses — reported a pretax underwriting profit of $58.9 million in the quarter, compared with $47.4 million for the same period last year. The SBI Regular combined ratio was 81.0 in the second quarter, compared with 85.2 in the same period last year. Second-quarter 2006 results include $20.2 million in favorable prior-year reserve development due to lower-than-expected general liability frequencies. Second-quarter results also include $10.0 million in pretax catastrophe losses compared with minimal catastrophe activity in the prior-year period.
SBI Regular net written premiums during the second quarter were down slightly compared with the same period last year. SBI Regular PIF also was down 0.8 percent compared with year-ago levels. New-business policies issued for the quarter decreased 2.4 percent compared with the same quarter last year, and the retention rate of existing customers decreased.
SBI Regular net written premiums were up 5.7 percent in the business product lines delivered over the Safeco Now(R) automated underwriting platform.
The Special Accounts Facility (SAF), which writes selected large-commercial accounts and three specialty commercial programs, reported a pretax underwriting profit of $25.9 million in the quarter. This compares with a $6.8 million pretax underwriting profit in last year’s second quarter. SAF’s combined ratio was 73.0 in the period, compared with 93.8 last year. Second-quarter 2006 results include $17.8 million in favorable prior-year reserve development due to lower-than-expected general liability frequencies.
Surety reported a pretax underwriting profit of $22.0 million in the quarter, compared with $7.9 million for the same period in 2005. Surety’s combined ratio was 68.8 for the second quarter, compared with 87.6 a year ago. Second-quarter net written premiums grew 11.9 percent compared with the same period last year. This growth reflects the vigor in construction markets and the overall higher cost of construction projects undertaken by Surety’s customers.
The P&C Other segment, which includes results from operations that Safeco has exited or placed in runoff, had a pretax underwriting loss of $19.1 million in the second quarter, compared with an underwriting loss of $21.9 million in the same quarter of 2005. The losses largely reflect prior-year reserve development for general liability claims.
On May 31, 2006, Safeco completed the sale of its Redmond office campus and recognized a pretax gain of $32.8 million ($21.3 million after tax). As previously announced, Safeco will be relocating its corporate headquarters to leased space in downtown Seattle. As a result, the company intends to sell its current home office building complex in the second half of 2006.
During second-quarter 2006, Safeco repurchased 3.7 million shares, or three percent, of its outstanding common stock at an average price of $55.59 per share, for a total cost of $205.5 million.
“We are managing and deploying our capital and resources for the benefit of shareholders and at the same time investing in the business,” said Reynolds. In 2006, Safeco has repurchased 8.9 million shares, or 7 percent, of its outstanding shares at a total cost of $475.7 million, and in May increased its dividend 20 percent.
Safeco’s senior management team will discuss the company’s second-quarter performance with analysts today at 10 a.m., Eastern Time (7 a.m., Pacific Time). The conference call will be broadcast live on the Internet at http://www.safeco.com/irwebcast and archived later in the day for replay.
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