Safeco reported a 15 percent rise in net income for the second quarter, as favorable reserve development helped overcome shrinking auto premium numbers.

The Seattle-based company posted net income of $199.7 million, compared with $187 million for the same period last year.

Morgan Stanley analyst William Wilt called the results mixed.

"Most of the upside came from favorable reserve development in auto and good underwriting results in smaller businesses such as surety and large commercial accounts," he wrote.

But auto premium shrank 5.6 percent and unit count fell 3.3 percent. "This is initially inconsistent with the view that Safeco can grow at a faster rate than more nationally diversified peers," he wrote.

Overall, net written premiums were $1.46 billion--a 2.8 percent decrease from the comparable 2005 period.

After-tax net realized investment losses for the quarter were $24.8 million, compared with net realized investment gains of $9.2 million in the same period of 2005.

The carrier posted an improved combined ratio of 86.7, compared with 89.1 for the same period last year.

Mr. Wilt noted the company reported run-rate expense reductions of $75 million, which he estimated would shave about 1.3 points of the expense ratio.

"Though clearly helpful, expense reductions on their own will not be enough to propel the stock meaningfully higher," he wrote.

With national auto writers continuing to raise the cost of capturing new growth, Safeco could be at a competitive disadvantage "unless it can effectively construct and execute on its unfolding tactical plans," Mr. Wilt wrote.

Special Reports /

Safeco 2nd Quarter Profit Rises, Premium Dips

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