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Letter to the Editor

Safeco Q3 Dominated by Hurricane Response, Strong Underlying Performance

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. (Combined ratio represents the percentage of each premium dollar spent on claims and expenses - the lower the ratio, the better the performance.)

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.

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, in business since 1923, is a Fortune 500 property and casualty insurance company based in Seattle.

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