Profitable Performance by Safeco's Auto and Group Insurance Lines Drives 2nd Quarter Results
SEATTLE, July 28 -- Second-Quarter Highlights
-- Posted net income of $111.9 million, or $0.81 per diluted share.
-- Operating earnings* more than doubled despite significant customer
claims for tornado and hailstorm damage.
-- Auto insurance generated a $3.3 million underwriting profit.
-- Group stop-loss medical insurance produced pretax operating earnings of
$24.5 million.
Summary Financial Results
after tax
(In millions except 3 Months Ended 6 Months Ended
per-share data) June 30 June 30
2003 2002 2003 2002
Net Income $111.9 $105.2 $201.9 $168.8
Per Diluted Share
of Common Stock $0.81 $0.82 $1.45 $1.32
Net Realized
Investment Gains
(Losses) $14.7 $62.0 $(17.7) $82.1
Operating Earnings* $97.2 $43.2 $219.6 $86.7
Average Shares
Outstanding 139.0 128.1 138.8 128.1
* Operating Earnings is Net Income excluding Net Realized Investment Gains
(Losses). Measures used in this news release that are not based on
accounting principles generally accepted in the United States (GAAP) are
defined and reconciled to the most directly comparable GAAP measure in our
Form 8-K available through the SEC and online at
http://www.safeco.com/safeco/investor/pdfs/03q2_sup.pdf
Profitable performance of its Auto and Group stop-loss medical insurance lines drove Safeco's second-quarter results as the company reported net income of $111.9 million, or $0.81 per diluted share. This compares with net income of $105.2 million, or $0.82 per share, in the second quarter of last year.
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Operating earnings more than doubled, climbing to $97.2 million in the quarter compared with $43.2 million for the same period last year. Operating earnings is a non-GAAP measure that reflects the performance of Safeco's business lines since it excludes the effects of net realized investment gains and losses.
"We continue to be pleased with our progress," said Mike McGavick, Safeco chairman and CEO. "Considering the magnitude of claims from devastating tornadoes and hailstorms, our results show just how much progress we've made.
"Our Auto insurance line produced its first profitable quarter in almost two years," he added. "And our stop-loss medical line continues to exceed our expectations."
As previously announced, Safeco's insurance customers were hit hard by catastrophic storms in the second quarter. Claims from catastrophe losses reached $99.1 million pretax, including $60.5 million in Homeowners, $22.3 million in Auto, $14.3 million in business insurance and $2.0 million for all other lines. This compares with a total of $64.8 million in catastrophe losses for the second quarter of last year.
Safeco's return on equity for the first half of the year, based on annualized net income, was 9.2 percent. Operating return on equity, measured using annualized operating earnings and excluding unrealized gains, was 13.4 percent for the first six months of 2003.
The company realized net investment gains of $14.7 million after tax in the quarter, down from $62.0 million for the same period last year. Safeco recorded $30.3 million after tax for impaired investments during the second quarter. These impairments were more than offset by gains on securities transactions.
Overall revenues increased to $1.9 billion, up 4.0 percent compared to the second quarter of last year. Operating revenues -- excluding net realized investment gains -- grew 8.6 percent.
"We've addressed most of the fundamental issues previously facing Safeco," McGavick noted. "The one nagging challenge that remains is bringing our expenses in line with our best competitors.' As we begin developing 2004 business plans, I'm asking everyone in the company to become even more expense-conscious. We should constantly ask ourselves, 'If this were my money, would I spend it this way?'"
Net earned premiums for all Property & Casualty operations increased 7.1 percent compared with the second quarter of 2002. Net written premiums, a leading indicator of revenues in future quarters, increased 11.2 percent.
Safeco Personal Insurance Performance
Personal Auto, Safeco's largest product line, generated a pretax underwriting profit of $3.3 million, its first profitable performance since the third quarter of 2001. This compares with a loss of $7.3 million in the second quarter of 2002.
The line produced a combined ratio of 99.4, an improvement over both 100.3 in the first quarter of this year and 101.6 in the second quarter of last year. Combined ratio is a standard gauge of underwriting performance measuring the percentage of premium dollars used for customer claims and expenses. A combined ratio below 100 indicates that the line is operating profitably.
"It's good to see Auto turn a profit again," McGavick noted. "While it's too soon to say this is a trend, the signs are pointing in the right direction.
"Our goal is for Auto to consistently generate combined ratios in the mid- 90s," he added. "We would have hit that target this quarter if not for the significant amount of storm damage to vehicles. We're also seeing robust growth in the number of policies sold to the best drivers as well as improved retention."
Net written Auto premiums increased 17.0 percent compared with the second quarter of 2002. Total number of policies increased 9.6 percent compared with a year ago.
Safeco's Homeowners line reported a quarterly pretax underwriting loss of $13.4 million, compared with a loss of $36.9 million for the same period last year. Combined ratio was 107.0, better than the 119.5 generated in the second quarter last year, but not as strong as the profitable 89.7 in the first quarter of this year.
"Although the line lost money because of significant catastrophes in the quarter, the underlying fundamentals of our Homeowners line continue to improve," McGavick said.
Safeco is seeing a change in the way customers use Homeowners insurance to protect their property. Three years ago, nearly half of Safeco's Homeowners customers purchased policies with a $250 deductible, resulting in numerous small claims for maintenance-related issues. Today, 94 percent of customers have deductibles of $500 or more.
"While Homeowners is improving, we're still not getting adequate rate in every market," McGavick noted. "We have moratoriums on selling new Homeowners policies in seven states, most recently California.
"We continue rolling out our new Homeowners product, which is now available in 31 states," he added. "In this quarter's results, we saw early indications that the product more accurately matches rate to the risk we take on."
Net written premiums in Homeowners increased 0.8 percent compared to the second quarter of last year. The number of policies decreased 9.1 percent compared with the same period of 2002.
Contributing to the overall performance of Safeco Personal Insurance was a $14.8 million pretax underwriting profit in Specialty Lines, up $11.8 million compared with the second quarter last year. This is the result of increased rates, lower losses and the favorable settlement of prior-quarter claims.
Safeco Business Insurance Performance
Safeco Business Insurance reported a pretax underwriting loss of $21.5 million in the second quarter, an improvement over a $41.2 million loss in the same period last year. Combined ratio was 106.0, better than the 111.1 in the second quarter of 2002, but not as strong as the 101.5 reported in the first quarter of this year.
SBI Regular -- Safeco's core line of products for small- to medium-sized businesses -- reported a combined ratio of 104.2 in the quarter. While the performance is better than the 109.9 in the second quarter of last year, it's off from 102.0 in the first quarter of 2003 because of weather and catastrophe claims.
Expenses in Safeco's commercial insurance lines remain high as a result of several factors, including an increase in agent bonus commission costs during the second quarter and costs associated with automation.
In the first quarter, Safeco rolled out an automated system for selling Business Owners Policies -- a comprehensive package of insurance products tailored for small businesses. This contributed to a 35.7 percent increase in new accounts in the first half of this year compared with the same period last year.
Second quarter product-development efforts focused on adding commercial automobile insurance to this automated system. The new feature was launched last week and is expected to take four months to roll out nationwide. Workers' compensation insurance will be added to the automated platform in the fall, followed by commercial multi-peril insurance next year.
"We expect this system to drive profitable growth, and our costs will decline as we get further along in the rollout," McGavick noted. "That said, we're not satisfied with expenses in this line."
Net written premiums for Safeco Business Insurance increased 9.4 percent in the second quarter compared with the same period in 2002.
Net written premiums for SBI Regular increased 11.0 percent compared to the second quarter of 2002. Despite growth of 16.9 percent in the number of SBI Regular new business policies issued during the quarter, total policies in force decreased 6.9 percent compared to a year ago.
Surety Performance
Surety generated a pretax underwriting profit of $6.8 million in the quarter, up from $5.8 million in the same period last year. Combined ratio for Surety was a profitable 82.2, compared with 81.5 in the second quarter of 2002 and 88.6 in the first quarter of this year.
"Higher rates, combined with an increase in new accounts, continue to generate profitable growth in our Surety line," McGavick said.
Life & Investments Performance
Safeco Life & Investments generated pretax operating earnings of $57.9 million, up 11.3 percent from $52.0 million in the second quarter of 2002.
"Given continuing inflation in medical costs, and the fact that low interest rates are squeezing margins on our investment products, we continue to believe that this level of performance will be difficult to maintain," McGavick said.
"Although our Individual Life product line failed to turn an operating profit this quarter, overall we're pleased with another solid performance from Life & Investments," he added.
The Group product line again led performance in the second quarter, generating pretax operating earnings of $24.5 million, up from $14.1 million in the same period last year. Group's main product is stop-loss medical insurance sold to employers with self-funded benefit plans. This product insures employee benefit plans against potential large medical claims.
Group's earned premiums increased to $141.6 million from $89.0 million in the second quarter of 2002, reflecting the acquisition of a large book of business from Swiss Re in mid-2002. Group's profitable results in the quarter are attributable to an exceptionally low loss ratio of 56.3 percent, compared with 59.8 percent in the second quarter of 2002. Loss ratio measures claims costs as a percentage of total premiums -- the lower the ratio, the stronger the performance.
Income Annuities generated $8.4 million in pretax operating earnings in the quarter, up from $7.3 million in the second quarter of 2002. Income Annuities results included favorable pre-payment adjustments on mortgage- backed securities of $3.4 million compared to unfavorable adjustments of $0.3 million a year ago. The results also reflect declining investment income due to lower interest rates and bond defaults in previous quarters.
The Retirement Services line produced $4.9 million in pretax operating earnings, compared with $4.0 million during the second quarter of 2002. This is partially attributable to increased sales of fixed annuities, providing a larger base of assets to generate investment income.
Individual Life reported a quarterly pretax operating loss of $0.5 million compared with pretax operating earnings of $7.5 million for the second quarter of 2002. This change is the result of several factors -- increased life insurance claims, lower margins on life insurance products that are sensitive to interest rates, and higher expenses. "We're looking closely at these factors and taking actions to get results back on track," McGavick noted.
The Asset Management line reported pretax operating earnings of $0.1 million, down from $1.7 million in second quarter 2002. This is a result of a drop in fee income, which is based on assets under management, as well as higher expenses. Total assets under management increased to $4.0 billion from $3.7 billion at the end of the first quarter, yet still off from $4.4 billion at the end of second quarter 2002.
Additional financial information available
Safeco uses both GAAP and non-GAAP financial measures to track the performance of its insurance and investments operations. The definition of each non-GAAP measure, and a reconciliation to the most directly comparable GAAP measure, are included in Safeco's Form 8-K that will be furnished to the U.S. Securities & Exchange Commission today.
The Form 8-K will include this news release, Safeco's summary financial results, consolidated statements of income, consolidated balance sheets, and the company's second-quarter financial supplement.
All of this information is available on Safeco's Website at http://www.safeco.com/safeco/investor/pdfs/03q2_sup.pdf
Management reviews results on Webcast
Safeco's senior management team will discuss the company's second-quarter performance with analysts today at 11 a.m., Eastern Time (8 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.
About Safeco
Safeco, in business since 1923, is a Fortune 500 company based in Seattle that sells insurance and investment products through independent agents, brokers and financial advisors nationwide. Safeco products help individuals and small businesses protect what they value and secure their financial future. More information about Safeco can be found at www.safeco.com.
Forward-Looking Information Contained in this News Release
Is Subject to Risk and Uncertainty
Statements, analysis and other information contained in this news release that relate to anticipated financial performance, business prospects and plans and similar matters are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements in this news release that are not historical information are forward-looking. The operations, performance and development of our business are subject to certain risks and uncertainties that may cause actual results to differ materially from those contained in or suggested by the forward-looking statements in this news release. The risks and uncertainties include, but are not limited to:
-- the ability to obtain rate increases and decline or non-renew
underpriced insurance accounts;
-- achievement of premium targets and profitability;
-- realization of growth and business retention estimates;
-- achievement of overall expense goals;
-- success in implementing a new business entry model for personal and
commercial lines;
-- success in obtaining regulatory approval of price-tiered products and
the use of insurance scores, including credit scores as a component;
-- the ability to freely enter and exit lines of business;
-- changes in the mix of Safeco's book of business;
-- driving patterns;
-- the competitive pricing environment, initiatives by competitors and
other changes in competition;
-- weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
-- the occurrence of significant natural disasters, including earthquakes;
-- the occurrence of significant man-made disasters, such as the attack on
September 11, 2001 or war;
-- the occurrence of bankruptcies that result in losses under surety
bonds, investment losses or lower investment income;
-- the adequacy of loss and benefit reserves for the Property & Casualty
and Life & Investments businesses;
-- the ability to run off the Lloyds of London business without incurring
material unexpected charges;
-- the availability of, pricing of, and ability to collect reinsurance;
-- the ability to price for, exclude and reinsure the risk of loss from
terrorism;
-- interpretation of insurance policy provisions by courts, court
decisions regarding coverage and theories of liability, trends in
litigation and changes in claims settlement practices;
-- the outcome of any litigation against us;
-- legislative and regulatory developments affecting the actions of
insurers, including requirements regarding rates, application and
availability of coverage;
-- changes in tax laws and regulations that affect the favorable taxation
of certain life insurance products or that decrease the usefulness of
life insurance products for estate-planning purposes;
-- the effect of current insurance and credit ratings levels on business
production and the effect of negative changes to our ratings;
-- inflationary pressures on medical care costs, auto parts and repair,
construction costs and other economic sectors that increase the
severity of claims;
-- availability of bank credit facilities;
-- use of derivative securities by Safeco Financial Products, Inc.;
-- fluctuations in interest rates;
-- performance of financial markets; and
-- general economic and market conditions.
We assume no obligation to update any forward-looking statements contained in this news release.
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