Safeco Plans Cost Cuts, Sale of Life Unit; Announces Reserve Charge

Safeco Plans Cost Cuts, Sale of Life Unit; Announces Reserve Charge

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

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

Commenting on the company's restructuring announcement, Safeco chief executive officer Mike McGavick said "great companies don't stand still."

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

"Our new property-casualty business model has been delivering superior results across our three largest lines--auto, homeowners and small commercial. The more energy we invest in this model, the greater 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 corporate departments." He said that Safeco had indicated in its second-quarter earnings report that its expense levels are higher than best performers in the p-c insurance sector and that work is underway across the company to identify inefficiencies and redundancies.

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

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

Detailing the workers' compensation reserve boost, Safeco said that it relates directly to settling and defending claims, and that nearly 90 percent of these reserves are associated with claims that occurred in 2000 or earlier, with the vast majority in large commercial insurance accounts that Safeco has run off its books.

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

Safeco also estimated that customer losses associated with Hurricane 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 goal is to achieve its focus on p-c insurance, which is the "best course for the future" for the Seattle-based insurer.

Mr. McGavick commented that most proceeds of this sale will be returned to shareholders as a special dividend, a stock repurchase plan or a combination of the two.

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

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

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