Fitch Ratings has affirmed the ‘AA-‘ insurer financial strength ratings of SAFECO Life Insurance Company and the SAFECO Property/Casualty Group.
Fitch has also affirmed its ‘A-‘ long-term and senior debt ratings on SAFECO Corporation (SAFECO) and its ‘BBB+’ rating on SAFECO Capital Trust I’s (SAFECO Capital) capital securities. In addition, Fitch has assigned ‘A-‘ ratings to SAFECO’s 4.20 percent notes due 2008 and to SAFECO’s 4.875 percent notes due 2010. The Rating Outlook for all of the ratings is Stable.
Fitch’s affirmation reflects improvements in SAFECO P/C’s underwriting results, the organization’s good competitive positions in the property/casualty market and in select life insurance markets, diverse earnings, and solid balance sheet.
Partially offsetting these positives is SAFECO P/C’s 110 percent run-rate homeowners line combined ratio, which Fitch views as high given the line’s short duration reserves and the current relatively low yielding investment environment. Additionally, Fitch believes that competitive pressures and difficult capital market conditions could adversely impact fees and spreads in several of SAFECO Life’s key business lines going forward.
Starting in 2001 and continuing through 2002, SAFECO P/C took several steps to improve its profitability, including re-underwriting portions of its book of business, implementing rate increases, and exiting specific lines and scaling back growth plans in specific geographic areas. The company’s operating profitability improved dramatically in 2002 and while comparatively low catastrophe losses and hard market conditions had a favorable impact, Fitch believes that SAFECO has made significant improvements in its underwriting profile. Going forward, Fitch anticipates that SAFECO P/C will continue to show improvements in underwriting profitability.
SAFECO’s 2002 net income before net realized capital gains and losses was $248 million and SAFECO P/C’s GAAP basis combined ratio for the year was 105.3 percent. In 2001, SAFECO reported a net loss before net realized capital gains of $1.1 billion, including $1.1 billion of after-tax charges, and SAFECO P/C’s combined ratio was 118.7 percent. For the years 1997-2000 SAFECO’s net income before net realized capital gains averaged $210 million per year.
SAFECO P/C is among the 20 largest property/casualty groups in the U.S. and the company has strong market shares in personal auto and homeowners insurance and is a key product provider to independent insurance agents. SAFECO Life is among the 50 largest life insurance groups and focuses on the group medical excess of loss market and 403(b) market. While these markets are comparatively small, SAFECO Life is well positioned in both.
Fitch believes that SAFECO P/C and SAFECO Life provide SAFECO with diverse and relatively uncorrelated earnings streams. Benefits from this diversity were evident in 2000 and 2001 when SAFECO P/C’s earnings suffered dramatically while SAFECO Life’s earnings were strong. SAFECO Life’s rating benefits from Fitch’s view that the company is a core part of the SAFECO organization.
Fitch calculates SAFECO’s year-end 2002 debt plus preferred capital securities to capital ratio on an equity-credit adjusted basis, at approximately 26 percent. SAFECO recently issued $200 million of five year and $300 million of seven year senior notes. Fitch’s expectation is that the company will use the proceeds from the issue to pay off $300 million of existing senior debt that matures in March 2003 and to call up to $200 million of medium-term notes in April 2003. Fitch estimates SAFECO’s run-rate operating earnings-based interest and preferred dividend coverage at 3-4x.
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