Analyst: Safeco’s Earnings Per Share Likely to Be Lower

Goldman Sachs announced it is lowering its 2007 earnings per share estimate for Safeco by $0.55 to $6.20, primarily to reflect the third quarter EPS shortfall, as well as higher fourth quarter catastrophe
losses expected to arise out of the California wildfires.

The analyst said its new fourth quarter EPS estimate is now $1.50 versus the $1.80 it had estimated earlier. The company also noted it was using a lower 4Q share count given the company’s aggressive share repurchase program year to date and what it expects will continue into the 4Q.

For 2008-2011, Goldman Sachs said it was raising its EPS estimates by $0.25, $0.30, $0.20, and $0.20 to $6.75, $6.75, $6.60, and $6.55, respectively. The increases primarily reflect a more aggressive share repurchase program than it had previously assumed.

Given the company’s lack of top-line growth, the analyst believes that Safeco can use a significant portion of its after-tax operating earnings to repurchase shares. “Like its peers, it appears that Safeco will find it increasingly difficult to generate meaningful returns in a more competitive pricing environment. Of note, the company described the auto market as competitive yet rationale, and we expect the company to selectively implement moderate rate increases this year and next,” Goldman Sachs stated. “In addition, Safeco plans to maintain its
underwriting discipline in small commercial lines, which are slightly more competitive, while middle-market and large corporate segments have witnessed steeper declines. Thus we are forecasting flat premium growth over the next few years given the offsetting effects of increased rates and lower volume.”

Goldman Sachs said it expected management to become increasingly
more aggressive with share repurchase activity to return excess capital and bolster what it believes would otherwise be sub-par returns, given that the shares appear to be more fairly valued at
current levels.

Source: Goldman Sachs