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Letter to the Editor

Safeco Reports Steady Earnings Growth in Q1

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 chief executive officer. "Added to this, mild weather and the unexpectedly strong performance of our stop-loss medical line turned it into a great quarter."

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.

"The performance of our investment portfolio doesn't appear out of the ordinary in comparison with other significant holders of bonds, which most life insurance operations are," McGavick said.

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."

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. Combined ratio is a standard gauge of underwriting performance measuring the percentage of premium dollars used for customer claims and expenses. The lower the ratio, the more effective the underwriting.

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 said. "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."

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