Safeco Sells Life, Broker Units For$1.4 Billion

The fact that Safeco will record a $200 million after-tax loss onthe sale of its life and investment businesses isn't prompting anyregrets from the company's chief executive.

“We have none at all,” Mike McGavick, Safeco's chairman andchief executive officer, said during a conference call last week,reiterating the Seattle-based insurer's plans, first disclosed inlate September, to sell off the unit to focus exclusively onproperty-casualty business.

Last week, Safeco announced two separate cash transactionsinvolving the sale of its life and investment businesses, as wellas a brokerage operation. In the bigger deal, an investor group ledby Omaha, Neb.-based Berkshire Hathaway and Bermuda-based WhiteMountains Insurance Group will together pay $1.35 billion forSafeco Life & Investments' life insurance, group insurance,annuities and mutual fund businesses.

In a separate transaction, Safeco signed a definitive agreementto sell its Talbot Financial Corp. insurance brokerage operationfor $90 million to an investor group led by senior management ofTalbot Financial, with financial support from Chicago-based HubInternational Ltd. (See related story on page 13.)

According to a press statement issued by White Mountains,Berkshire and White Mountains will each invest equally in the lifeand investments operation, putting $200 million in a newly formedacquisition company that will be capitalized with $1.0 billion.Eight additional investor partners were listed in the pressstatement.

According to Safeco Chief Financial Officer Christine Mead, thesale could potentially net Safeco an additional $25 million atclosing. More precisely, she said, “the price may increase ordecrease depending on statutory capital of the life company at June30, 2004.” Together, the businesses sold for $1.44 billion, butsince the price was lower than the value that Safeco carried on itsbooks for those businesses, the company will incur a $200 millionloss after taxes.

During the conference call, an analyst asked Mr. McGavickwhether he had second thoughts about selling the businessesconsidering the loss and whether there is anything “inherentlywrong” with the life business given that its market value was lessthan what was recorded on Safeco's balance sheet.

Mr. McGavick pointed out that the P-C operation has beendelivering a return-on-equity in the mid-teens, while the lifebusiness had been generating less than 10 percent. “That wasunlikely to change,” he said, noting that that calculation weighedheavily in the decision. “If anything, we thought we could do alittle better on P-C and as we've been reporting to you for a year,that the life segment was likely to deteriorate. So that justdidn't seem like a very attractive use of our shareholders'capital,” he said.

Responding to the issue of the lower market price, he said thatwhen prospective buyers determine a price, they factor “what thefuture earnings stream looks like” into their calculations. He alsosaid that the life business sold was not plain vanilla lifeinsurance, but included a complex mix of businesses, noting thatone-third of the life books of businesses were structuredsettlements and bank-owned life insurance blocks.

Separately, Eric Trott, a media representative for Safeco, notedanother positive aspect of the deal was that by selling the lifeinsurance businesses as a unit, Safeco saved about 1,500 jobs.

In a press statement, Mr. McGavick said that current managementwill continue to run each of the sold businesses with the samecommitment to channel distribution and customer service.

As for what's ahead for the P-C businesses at Safeco, during aninterview, Dale Lauer, president and chief operating officer ofSafeco Business Insurance, stressed the ability of Safeco to investmore in a “differentiated business model” that the insurer has itsbeen developing for almost a year.

With a focus on three main products auto, home and smallbusiness that model “basically unifies sales, services and claimscapabilities in one platform as delivered through ouragencypartners,” Mr. Lauer said. A key component of the model istechnology that allows an agent to go to one site and to quote andsell those three products in one step in a matter of minutes, hesaid. (For more details of the business model and Safeco's focus onsmall-business owners, see NU, Jan. 5, page 15.)

The sale of the life businesses “allows us to sharpen that focusreducing our costs and increasing efficiencies,” Mr. Lauersaid.

Responding to the question of how the life businesses got in theway of those goals, Mr. Lauer said it was “a matter oforganizational complexity.” By supporting multiple channels andmultiple products, “you have a more complex corporateorganization.” Reducing the complexity allows Safeco to increaseits efficiency and focus, he said.

Safeco expects both transactions, which are subject toregulatory approvals, to close before the end of third-quarter2004.

During the conference call, Ms. Mead said that proceeds from thesales would be used first to reduce the company's debt, while thebulk of the proceeds would be distributed back to shareholders inthe form of a special dividend or stock repurchase plan. Only asmall amount of the proceeds could be retained to support the P-Coperations, she said.

At White Mountains, Chief Financial Officer David Foy said thathis firm's investment in Safeco's life insurance businesses is thefirst in that sector, adding that his own background on the lifeside of the business allowed the company to spot a good deal. Mr.Foy was the CFO of Hartford Life before joining White Mountains in2003 and has a background as a life insurance actuary.

Mr. Foy said White Mountains doesn't have any particular goalsor targets to acquire life insurance operations but noted that hisexpertise in the segment does give the company the capability toexplore other deals.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, March 19, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.