Safeco Plans Cost Cuts, Sale of Life Unit; Announces ReserveCharge

NU Online News Service, Sept. 29, 4:30 p.m.EDT? Safeco Corporation today announced its plan for amajor restructuring of the corporation, including cost-cutting andstaff reduction initiatives and the intention to sell off its Life& Investments unit to focus solely on property-casualtyproducts.

In a separate announcement, Safeco also said it is strengtheningworkers compensation reserves by $205 million pretax.

Commenting on the company's restructuring announcement, Safecochief executive officer Mike McGavick said "great companies don'tstand still."

"We might have been able to cruise along at this level,producing average results quarter after quarter," he added. "But weaspire to be much better than average," Mr. McGavick said.

"Our new property-casualty business model has been deliveringsuperior results across our three largest lines--auto, homeownersand small commercial. The more energy we invest in this model, thegreater the returns," he said.

Commenting on the company's cost-cutting initiatives, Mr.McGavick noted that with its new strategic focus on p-c, there are"expense reduction opportunities, especially in our corporatedepartments." He said that Safeco had indicated in itssecond-quarter earnings report that its expense levels are higherthan best performers in the p-c insurance sector and that work isunderway across the company to identify inefficiencies andredundancies.

The goal of this cost-cutting plan is to reduce expenses by $75million by the end of next year, he added. And by that time, Safecosaid it expects to cut employment by at least 500 positions,excluding jobs that might be affected by the intended sale of itsLife & Investment unit.

Most of these job cuts are expected to occur in the Seattlearea, where the company is headquartered.

Detailing the workers' compensation reserve boost, Safeco saidthat it relates directly to settling and defending claims, and thatnearly 90 percent of these reserves are associated with claims thatoccurred in 2000 or earlier, with the vast majority in largecommercial insurance accounts that Safeco has run off itsbooks.

"We're strengthening these reserves because medical inflationisn't abating?it remains stubbornly high," added Chris Mead,Safeco's chief financial officer. "This is coupled with a legal andregulatory environment that makes market conditions unfavorable inCalifornia and several other states," she added. "Because of thisenvironment, workers compensation claims are tending to stay openfar longer than used to be the case."

Safeco also estimated that customer losses associated withHurricane Isabel are expected to reach $15 million pretax.

And in explaining its intention to put its Life &Investments (L&I) operation up for sale, Safeco said the goalis to achieve its focus on p-c insurance, which is the "best coursefor the future" for the Seattle-based insurer.

Mr. McGavick commented that most proceeds of this sale will bereturned to shareholders as a special dividend, a stock repurchaseplan or a combination of the two.

A part of the proceeds will also go towards lowering Safeco'sdebt to a level appropriate with the company's new size.Additionally, a small amount could also be retained to supportongoing business needs, he said.

"This was an extremely difficult decision given the greatcontributions of our L&I team and our long history together,"said Mr. McGavick, who explained that in 2002, L&I generatedpretax operating earnings of $237 million on revenues of nearly $2billion.

L&I total assets were $23.2 billion, and its mutual fundsassets under management were $4 billion at the end of the firsthalf of 2003.