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Safeco reported first-quarter net income of $90.0 million, or $0.65 per diluted share in a release today. The numbers mark a significant improvement over the same period in 2002, when Safeco generated net income of $63.6 million, or $0.50 per share.
Excluding the effects of net realized investment gains and losses, Safeco produced operating earnings of $122.4 million-considerably stronger than the first quarter of 2002 when the company generated $43.5 million in operating earnings.
“We had a good quarter. The underlying results for each business unit were better than expected,” said Mike McGavick, Safeco chairman and CEO.
“Added to this, mild weather and the unexpectedly strong performance of our stop-loss medical line turned it into a great quarter,” he said.
Safeco recorded after-tax impairments of $54.7 million in the first quarter, primarily related to Life & Investments’ holdings in the airline and franchise sectors. This resulted in an after-tax net realized investment loss of $32.4 million, compared with a $20.1 million gain in the first quarter of 2002.
Return on equity, based on annualized net income, was 8.9 percent in the first quarter. Operating return on equity, measured using annualized operating earnings and excluding FAS115 unrealized gains, was 15.2 percent.
Total revenues in the quarter increased to $1.762 billion, up 2.9 percent from $1.713 billion for the same period in 2002. Operating revenues-excluding net realized investment gains (losses)-grew 7.7 percent.
“Our core lines are showing continued, steady progress,” McGavick noted. “We’re successfully growing our business and our profits at the same time.”
Safeco’s Property & Casualty units generated $21.0 million in underwriting profits in the first quarter, a significant improvement over the $91.3 million underwriting loss for the same period in 2002.
“It’s gratifying to turn in our first underwriting profit in more than four years,” McGavick said. “We’re definitely making solid progress toward our goal of consistently generating an underwriting profit.
“Looking forward, however, second quarter is when we typically experience our largest storm losses. We’re less than a month into the quarter, and we’ve already been hit by a Texas hailstorm with losses of about $30 million,” he added. “While we expect to show continued improvement in our core results, we know today we’re not going to benefit from another lucky break in the weather.”
Net earned premiums for all Property & Casualty operations increased 5.8 percent compared with the first quarter a year ago; and net written premiums increased 10.9 percent.
Property & Casualty investment income declined to $82.7 million after tax, compared with $88.7 million for the first quarter a year ago. The lower results reflect a continued decline in interest rates and the repositioning of the Property & Casualty investment portfolio in 2002 to reduce the average duration of holdings.
Safeco Personal Insurance Performance
Personal Auto, Safeco’s largest product line, generated a modest pretax underwriting loss of $1.5 million, better than the $20.3 million underwriting loss in the first quarter of 2002.
Auto produced a combined ratio in the quarter of 100.3-an improvement over both 104.5 in the first quarter of 2002 and 102.0 in the fourth quarter.
Net written Auto premiums increased 18.3 percent in the first quarter compared with the same period of 2002. Policies in force increased 9.6 percent compared with the first quarter of 2002, and the number of total Auto customers continued above 1.5 million for the second consecutive quarter.
“We’re very pleased with the performance of this line,” McGavick added. “Adding to the good news, we just received approval to sell our new Auto product in California and Washington-our two largest markets. This should help drive profitable growth throughout the year.”
Safeco’s Homeowners line produced a pretax underwriting profit of $19.5 million in the first quarter, marking the third consecutive profitable quarter for this product. By comparison, Homeowners generated an $18.2 million underwriting loss for the first quarter of 2002.
“The Homeowners team is doing an excellent job managing this line for profitability,” McGavick said. “Still, if we had typical weather in the first quarter, the line would have been unprofitable in the quarter.”
Homeowners reported $21.1 million in weather and catastrophe losses, down from $29.8 million in the first quarter of 2002. Combined ratio improved to 89.7, better than both the 110.0 in the first quarter of 2002 and 93.5 in the fourth quarter.
Net written premium in Homeowners increased 3.3 percent compared with the first quarter of last year. Policies in force decreased 8.3 percent compared with the same period of 2002. Both trends are consistent with Safeco’s plans to return this line to appropriate levels of profitability.
Safeco Business Insurance Performance
Safeco Business Insurance reported a quarterly pretax underwriting loss of $5.2 million, markedly better than the $59.1 million underwriting loss for the same period in 2002.
Combined ratio improved to 101.5, compared to 115.7 for the first quarter of 2002 and 104.9 for the fourth quarter. Total weather and catastrophe losses in the quarter were $10.1 million, compared with $11.3 million in losses in the same period last year.
SBI Regular-Safeco’s core line of products for small- to medium-sized businesses-reported a combined ratio of 102.0 in the quarter, better than the 109.2 in the first quarter of 2002 but off from 97.0 in the fourth quarter when the line benefited from favorable catastrophe reserve development.
Losses from the commercial business Safeco is running off its books declined to $6.3 million during the first quarter.
“Clearly, the rate and underwriting actions we’ve taken are showing up in these results,” McGavick said, “and the runoff book has an increasingly small impact.”
Net written premium for Safeco Business Insurance grew 4.0 percent in the first quarter compared with the same period in 2002. Net written premiums for SBI Regular increased 7.0 percent year over year.
New business for SBI Regular increased 13.7 percent in the quarter, while policies in force decreased 7.4 percent. “Business insurance sales were slow at the start of the quarter,” McGavick said, “yet we saw healthy growth in March as more and more agents began using our online automated underwriting model.”
Surety Performance
Surety generated a pretax underwriting profit of $3.7 million, up from $3.1 million in the first quarter of 2002.
Combined ratio for Surety was 88.6 in the quarter, compared with 89.5 in the first quarter of 2002 and 81.4 in the fourth quarter.