Safeco Posting Loss, Says Core Earnings Strong

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By Michael Ha

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NU Online News Service, Oct. 27, 4:14 p.m.EST?Safeco Corp., reported a third quarter net loss of$28.9 million that it blamed on a previously announced boost inworkers' compensation reserves and charges related to the plannedsale of its life and investments business.

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The Seattle-based insurer had recorded $75.2 million in profitduring the corresponding period last year. Overall revenues for thequarter were $1.8 billion, down slightly from one year ago.

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Management said that an unusual accounting requirement relatedto the upcoming sale had skewed the results it was reporting.

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Commenting on his company's financial numbers, Mike McGavick,Safeco's chief executive officer, stressed that despite the netloss, the insurer's core units posted strong earnings.

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Mr. McGavick commented, though, that raging wildfires which haveconsumed hundreds of thousands of acres in Southern California thisweek will have some impact on Safeco's homeowners line forfourth-quarter results.

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Speaking at a conference call this morning, Mr. McGavick said,"It's an interesting time at Safeco. We are reporting what we thinkare pretty impressive core operating results. But we also have acouple of unusual items in the quarter that give it somecomplexity."

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Safeco is now also in the midst of dealing with individuals whoare affected by job cuts announced last month, Mr. McGavick noted."It's a very challenging period for the company. But we take heartthat fundamentals of the company are showing such rapid andtremendous improvements. The future bodes well for Safeco as aprofitable, fast-growing property-casualty company."

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Discussing the earnings numbers, he noted that while the companyhad a net loss of $28.9 million for the third quarter, "part ofthat were realized losses on investments, which totaled $62.5million." The company recorded total after-tax investmentimpairments of $87 million, with $80.5 million for its Life &Investments unit.

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Mr. McGavick said impairments for Life & Investments arerelated to accounting requirement that the company take as a resultof its decision to sell the L&I business.

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While Safeco plans to hold onto these investments, theseimpairments aren't expected to recover in value before the unit issold. And accounting rules require that impairments of unrealizedlosses be recognized if the business unit is up for sale.

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"We view that as a truly unusual accounting-related item. Theway we look at it, the $80.5 million in impairments for Life &Investments is an accounting peculiarity," Mr. McGavick argued.

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Mr. McGavick also pointed out that the insurer's operatingearnings, excluding realized losses, were $33.6 million for thethird quarter, which is lower than $67.4 million posted for theyear-ago period, but "when you consider that our operating earningsinclude the workers' comp reserve charge, these are very strongresults. We are pretty pleased with the performance for thequarter."

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Further commenting on the workers' comp reserve increase, headded, "we previously announced a reserve strengthening of $133million after-tax, $205 million pretax."

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"We would encourage you to do the math in whatever way you thinkis appropriate, but we are very comfortable where this has takenour reserve position to," Mr. McGavick said. He also commented thatthe insurer did not take into account "any of the positive actionsthat are now happening in California and elsewhere" when itstrengthened its workers' comp reserve.

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"So we are feeling very comfortable with our reserve position,"he said. "This reserve strengthening has certainly, for anyimaginable future, put the reserve issue behind us."

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Including the reserve charge, the overall p-c combined ratio forthe quarter was 108.6. But without the reserve charge, the combinedratio for the company was 92.2. "This is a terrific result," Mr.McGavick added.

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Safeco also saw its net written premium increase by 11.2percent, led by a 15.2 percent rise in auto and a 13.1 percent jumpin business insurance.

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Personal auto, the insurer's largest product line, generated anunderwriting profit of $35.4 million for the third quarter. But thecompany's business insurance unit posted a pretax underwriting lossof $195.3 million, hurt by workers' comp reserve hike.

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Additionally, net written premiums in homeowners line dropped by2.2 percent compared to last year, as policies in force declined9.3 percent. It still delivered strong results, though, with aquarterly underwriting profit of $32.1 million pretax. "But that ismainly due to light catastrophes in the third quarter," Mr.McGavick commented. "As fires burn in California, it is obviousthat there will be some catastrophe impact in the fourth quarterthat was unanticipated."

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Safeco has a number of subsidiaries offering a wide range ofinsurance products. Its Safeco Insurance Co. of America and FirstNational Insurance Co. of America provide personal and commercialinsurance, including auto, homeowners, fire, multi-peril andworkers' compensation.

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