Safeco suffered two jolts last week–posting a nearly 25 percent drop in quarterly earnings as Chief Executive Officer Mike McGavick said he would be leaving the carrier, reportedly to explore a possible run for the U.S. Senate.

Insurance industry sources in Washington said Mr. McGavick will have an exploratory committee consider whether he should seek the Republican nomination to run against U.S. Sen. Maria Cantwell, a Democrat. The Seattle Times reported that he is the GOP consensus candidate.

Seattle-based Safeco produced net income in the second quarter of $187.3 million, compared to $247 million in the same period last year. It attributed the poorer showing to declining investment income and a rising but still impressive combined ratio.

Much of the decline can be attributed to after-tax net realized investment gains from continuing operations that came in at $9.2 million, compared to $55.4 million in the second quarter of last year. Second-quarter catastrophe losses fell more than 50 percent to $13.1 million pretax, compared to $29 million in the second quarter of 2004.

Written premiums grew 3.6 percent. “While that’s a healthy rate given what we see going on in the marketplace, we note that it’s in line with our expectation that premium growth would slow at this time–as we had forecast earlier in the year,” Mr. McGavick said.

In a conference call with analysts, Mr. McGavick was positive about the results, including the second-quarter combined ratio of 89.1, which rose from 85.4 in 2004.

Noting that the combined ratio was evidence of the continuation of a “truly strong bottom-line performance,” he said the figure fell in line with recent quarters, even though it wasn’t as good as the “truly extraordinary” 85.4 figure last year.

Concerning his political activity, Mr. McGavick, who also serves as president and chairman of Safeco, said: “A number of folks began encouraging me to consider the possibility that there was public service on my horizon. I’ve decided to step down…in order to consider that possibility fully.”

While he said the best way to do that is to “make a clean break” so that his consideration of this possibility will not in any way impact the company, Mr. McGavick will actually stay on as chairman until year-end. He leaves as CEO at the end of the month.

Mr. McGavick also said the board has requested that he be available to continue to lead the company if a new CEO is not in place by Aug. 31–and that he has agreed to spend the remainder of the year traveling around to meet with agents and perform other “transitional leadership services.”

Safeco Lead Director Bob Cline said that many potential successors have “already been identified,” and that both internal and external candidates are being considered.

Recalling different types of rumors “about whether or not Safeco was going to survive” that had swirled around the company four-and-a-half years ago when he took the helm, Mr. McGavick said the decision to step down was difficult after having been part of the management team credited with turning the company around.

He said he had “fulfilled the mission that I had been hired to take on–to get Safeco back to being one of the top performers.”

Mr. McGavick is no stranger to the world of politics. Before taking his previous position in insurance–as head of Agency Market operations for Chicago-based CNA–in 1995, he was director of the Superfund Improvement Project for the American Insurance Association, serving as lead negotiator in working to transform the nation’s Superfund cleanup laws.

Mr. McGavick’s background includes a stint in 1988 as chief of staff for former GOP Sen. Slade Gordon, who Ms. Cantwell defeated by a razor-thin margin in 2000.

As chief of staff, “the job was all-around communications and, in essence, what we now tend to call ‘brand,’” he said in a 2001 interview with National Underwriter, drawing a parallel to the world of personal lines insurance, where “it’s very important how you handle your brand.”

Infobox, with McGavick mug:

At A Glance

Who Is Mike McGavick?

Mike McGavick, leaving Safeco to perhaps run for the U.S. Senate out of Washington State, has had a varied background in insurance and politics–sometimes at the same time. Among the highlights:

o Since 2001: Chairman, president and CEO of Safeco Corp.

o 1995-2001: Held a number of executive positions at CNA, including president and chief operating officer of the company’s largest operating unit.

o 1992-95: Began his insurance career as director of the AIA’s Superfund Improvement Project.

o 1989-91: Served as chief of staff for U.S. Senator Slade Gorton, after running Sen. Gorton’s successful campaign in 1988.