Taking the next step: Safeco wants to concentrate on selling standardized property/casualty products.

Editor's Note:

This article is an update to "Becoming a Contender," the profile of Safeco Corp. that appeared in the October 2003 issue of Best's Review.

In its drive to be one of the top-performing companies hi the auto and small-business market, Safeco Corp. is selling its Life & Investments company and focusing on becoming a pure property/casualty enterprise. The company said the restructuring also will include the elimination of 500 jobs and $75 million in expenses from the property/casualty operations that remain.

Mike McGavick, chairman, president and chief executive officer of Seattle-based Safeco, said the moves should be considered the next step in what has been a multistage process to reposition the once-struggling carrier.

"In the last few years, we've moved from a company some speculated might not make it to being a strong competitor again," McGavick said in a conference call following the company's Sept. 29 announcement. "The difference now is that the challenge ahead is not saving the company, but building an extraordinary company. We just could not be truly excellent in both P/C and life segments."

Instead, Safeco said it wants to direct its energy into selling standardized property/casualty products through a common network of independent distributors supported by a common sales, service and technology platform.

"We clearly believe--from a focus standpoint--being a pure P/C company gets us aligned perfectly with our distribution partners, the independent distributors across the country," said Michael E. LaRocco, president and chief operating officer, Safeco Personal Insurance. "What we're going to be able to give those folks from a P/C standpoint is a single platform for small business, for home and for auto."

Dale Lauer, president and chief operating officer of Safeco Business Insurance, said that the small business, home and auto products are where the independent distributors make most of their revenue today. "It is the fastest-growing segment of both personal and commercial products in the industry, and we've already proven the success of the platform where it has been launched so far with significant growth rates and increased profitability of the business," Lauer said. Safeco launched a small business platform in early 2003 that already is seeing growth rates of 50% to 60% in that segment, Lauer said.

Safeco's new property/casualty business model has been delivering superior results across its three largest lines: automobile, homeowners and small commercial, McGavick said. The more energy invested in this model, the greater the returns, he said.

McGavick stressed that Safeco is taking these actions to be more competitive at a time when insurance companies' investment income is depressed by low interest rates, and to position the company for when the positive pricing environment in the property/casualty sector peaks.

Setting High Goals

Now listed as 13th in direct premiums written for total auto, the insurer wants to move into the ranks of the top five U.S. auto writers within seven years. And its business insurance unit, currently fifth in the nation in small business, wants to occupy the No. 1 spot in four years.

Safeco's life and investment company offers life insurance, annuities, mutual funds, employee benefits, group stop-loss medical insurance and other financial products and services through independent agents, banks and financial advisers, the company said.

While calling the life and investments subsidiary, which generated pretax operating earnings of $237 million on revenues of nearly $2 billion in 2002, "a good company," McGavick said flattening interest rates and Safeco's lack of scale made it clear that both the company and its policyholders would be best served if they were sold to a larger life and annuity writer.

"This was an extremely difficult decision given the great contributions of our L&I team and our long history together," McGavick said. "Like property/casualty, the life and investments team operates a terrific business model of its own. Life & Investments will benefit from being part of a company focused on life insurance and asset accumulation."

By the end of 2004, Safeco expects to decrease employment by at least 500 positions--excluding jobs that might be affected by the sale of the Life & Investments unit--which is to be managed through a combination of staff reductions and attrition, with most of the reductions in the Seattle area, the company said. The paring of $75 million in expenses, also by the end of next year, will include reductions in employees' medical-benefits packages in favor of leaner, more modular types of coverage; an end to offering retiree medical benefits for employees currently under age 36; and provision for a "less generous" retiree medical package for those 36 and over.

McGavick said the job cuts are needed to control rapidly expanding costs, particularly those related to medical inflation. He added that the combined effects of the cost reductions and the life and investment sale would be to allow Safeco to compete against each of its three main types of rivals, by providing more focus than national multiline carriers, more "shelf space" and better distributor arrangements than national monoline crawlers, and greater scale than regional writers.

"None of these strategies will win every day, but each has potential to win some and lose some and keep us competitive," McGavick said. In Safeco's second-quarter earnings report, the company indicated its expense levels were higher than the best performers in the property/casualty sector.

Safeco has retained Goldman Sachs to assist in the process of seeking a buyer for Life & Investments.

LaRocco said Safeco is working through the process of entertaining companies that have expressed interest in buying the Life & Investments trait.

Most of the proceeds of the sale would be returned to shareholders in the form of a special dividend, a stock repurchase plan or a combination of the two, McGavick said in a statement. A portion of the proceeds would be used to reduce Safeco's debt to a level appropriate with the company's new size, and a small amount might be retained to support ongoing business needs, he said.

Next Steps for Safeco

In addition to plans to sell its life and investment line and focus on its property/casualty business, Safeco expects to:

Cut Staff: Safeco expects to eliminate at least 500 positions--excluding jobs that may be affected by the sale of the life and investments unit.

Reduce Expenses: $75 million will be pared from its property/casualty line by identifying inefficiencies and redundancies, especially in its corporate departments.

Address Rising Benefits Costs: Safeco will stop offering retiree medical benefits for employees currently 35 years old and younger and begin providing a "less generous" retiree medical package for employees 36 and older.

Move Up: Currently in the No. 13 Spot in direct premiums written for total auto, Safeco wants to rank in the fop five within seven years and advance its business insurance unit from its No. 5 position in small business to No. 1 in four years.