Seattle-based Safeco reported solid third-quarter results, with net income of $101.1 million, or $0.80 per diluted share. This figure includes estimated after-tax net catastrophe losses of $115.8 million, or $0.91 per diluted share, mostly attributable to Hurricanes Katrina and Rita.
A year ago, Safeco reported a net loss of $101.1 million, or $0.76 per diluted share. This result stemmed from hurricane losses, the loss on the sale of Safeco’s Life and Investments business, and the loss on debt repurchases.
Operating earnings from continuing operations for the third quarter of 2005 were $97.8 million, compared with $51.8 million in the prior-year period.
After-tax net realized investment gains from continuing operations for the quarter were $5.9 million, compared with net gains of $32.8 million in third- quarter 2004.
“While the trends we’ve seen all year continued in the third quarter – both in terms of underwriting profitability and slowing growth – the real story in the quarter was our work along the Gulf Coast helping our customers and agent partners put their lives and businesses back together,” said Mike McGavick, Safeco chairman and chief executive officer. “The strength of our underlying fundamentals enabled us to withstand these devastating storms and focus on supporting people through the recovery process.”
The overall property and casualty (P/C) combined ratio for the third quarter was 97.5, compared with 101.6 in the same quarter last year.
As previously announced, Safeco’s aggregate losses from catastrophes in the quarter were estimated at $115.8 million after tax and reinsurance, or $0.91 per diluted share. This compares with third-quarter 2004 catastrophe losses of $126.6 million after tax. Pretax catastrophe losses for the third quarter of 2005, including reinstatement premiums and assessments, were estimated at $228.1 million. Pretax net-of-reinsurance catastrophe losses were estimated at $178.1 million for the quarter.
Safeco estimates hurricane losses using its knowledge of severity and reporting patterns from past storms as well as data and assumptions specific to each catastrophe. Given the difficulty in accessing some areas and other uncertainties affecting the estimation of losses, Safeco expects to refine its estimates and assumptions related to both Hurricanes Katrina and Rita as these uncertainties are resolved.
Safeco’s annualized return on equity (ROE) for the third quarter was 9.8 percent, and for the year-to-date was 16.8 percent. Annualized operating ROE – measured using operating earnings and excluding from equity unrealized gains on bonds – was 9.9 percent for the quarter.
Total revenues in the third quarter were $1.59 billion. Operating revenues from continuing operations, which exclude net realized investment gains, were $1.58 billion – up 4.3 percent from the same quarter in 2004.
P/C net earned premiums were $1.46 billion for the quarter, a 4.2 percent increase over third-quarter 2004 levels. P/C net written premiums were $1.48 billion for the quarter, up 1.2 percent compared with the same period last year.
P/C pretax net investment income for the quarter was $115.3 million, an increase of 3.9 percent compared with the prior-year period. P&C after-tax net investment income was $85.0 million, up 7.2 percent compared with the same quarter last year.
Safeco Auto reported a third-quarter pretax underwriting profit of $51.3 million, compared with $51.0 million in the same period a year ago. Contributing to the 2005 result was $24.7 million of favorable prior-year reserve development, or 3.5 points on the combined ratio. Last year’s results included $10.0 million of favorable prior-year reserve development, or 1.5 points on the combined ratio. Auto’s combined ratio was 92.8 in the quarter, compared with 92.4 a year ago.
The impact of catastrophes during the quarter was $12.9 million, or 1.7 points on the combined ratio, compared with $8.2 million, or 1.2 points on the combined ratio, last year.
Auto net written premiums rose 2.2 percent in the third quarter compared with the same quarter last year. Policies in force (PIF) grew 2.9 percent over year-ago levels, and new-business policies issued declined 27.2 percent compared with a record level of new policies sold in the same quarter in 2004. Retention of existing policyholders was down slightly from the prior-year period.
“Our Auto line continues to perform well in an increasingly competitive marketplace,” said McGavick. “Growth is slowing from the robust levels we saw last year, but we will not forego profit for growth.”
Safeco Property produced a third-quarter pretax underwriting profit of $17.2 million, compared with $14.2 million reported in the same period a year ago. Property’s combined ratio was 92.4 in the quarter, compared with 93.9 a year ago. The third-quarter 2005 combined ratio included $61.3 million in estimated pretax catastrophe losses net of reinsurance, or 24.8 points on the combined ratio, compared with $71.3 million in pretax catastrophe losses, or 30.7 points on the combined ratio, last year.
Property net written premiums decreased 1.7 percent in the quarter from the prior-year period, and PIF declined 1.6 percent from a year ago. New- business policies issued increased 36.4 percent compared with the same quarter a year ago, and there was a 2.0 percent increase in retention.
“In a quarter dominated by two major hurricanes, Safeco’s Property lines performed well, thanks to our disciplined approach to accurate pricing and catastrophe management,” said McGavick. “We are profitable in nearly all of our states and, with that in mind, we are actively seeking to grow this business.”
Safeco Business Insurance (SBI) reported a pretax underwriting loss of $19.5 million in the quarter, compared with a loss of $80.8 million for the same period in 2004. This result includes estimated pretax net-of-reinsurance catastrophe losses of $100.1 million for the quarter. Last year’s underwriting results included $109.0 million in pretax catastrophe losses.
The combined ratio for the quarter was 104.6, compared with the 119.4 combined ratio a year ago.
SBI Regular – Safeco’s core line of commercial products for small- to medium-sized businesses – reported a pretax underwriting profit of $0.9 million in the quarter, compared with a loss of $59.7 million for the same period last year.
The SBI Regular combined ratio in the third quarter was 99.7, compared with 119.5 in the same period last year. The combined ratio for SBI Regular excluding estimated catastrophes was 83.2 in the quarter, compared with 93.5 in the third quarter of 2004.
SBI Regular net written premiums increased 0.5 percent during third- quarter 2005 compared with the same period last year. PIF declined 0.2 percent compared with year-ago levels. In business lines where Safeco has automated underwriting and pricing, PIF was up 4.7 percent, while PIF in non-automated lines declined 4.8 percent. New-business policies issued for the quarter decreased 5.4 percent compared with the same quarter last year, while retention of existing customers improved 0.4 points from a year ago.
“Our ongoing work to deliver our core commercial products over our automated Safeco Now platform continues to generate solid results,” said McGavick. “The platform offers our agents and brokers ease of use and opportunities for growth, while providing greater precision in our underwriting.”
Safeco’s Special Accounts Facility (SAF), which writes selected, large commercial accounts and four specialty commercial programs, reported a pretax underwriting loss of $20.4 million in the quarter. This compares with a $21.1 million pretax underwriting loss in last year’s third quarter. SAF’s combined ratio was 119.4 in the period, compared with 119.1 last year. The underwriting losses in the third quarter of 2005 were driven by estimated hurricane losses in two programs – lender-placed property and mini-storage and warehouse properties.
The P/C Other segment, which includes results from operations Safeco has exited or placed in runoff, had a pretax underwriting loss of $18.6 million in the third quarter due to reserve strengthening, compared with a loss of $12.6 million in the same quarter of 2004. In the third quarter of 2005, Safeco sold its runoff London operations, eliminating any further liabilities associated with those operations.
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