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Auto Claims Dent Safeco's Showing

May 1, 2007

By Amy Martinez, Seattle Times

May 2--Shares of Safeco tumbled Tuesday after the Seattle-based company released first-quarter financial results showing weakness in its auto-insurance business.

First-quarter profit declined 12 percent to $182.5 million, or $1.71 a share, from $208.2 million, or $1.69 a share, a year ago.

The results disappointed Wall Street, and the stock fell nearly 3 percent in regular trading to $64.93, then to $64.50 after hours.

"We did have challenges in the auto-loss costs early in the quarter," President and CEO Paula Rosput Reynolds told analysts in a conference call. "We've spent a lot of time on it, as have others in the industry who have seen similar trends."

Underwriting profit for the auto-insurance business fell $36.3 million over the year to $17.2 million, and auto policies shrank 3.5 percent to 1.74 million.

Safeco's overall profitability was helped by a drop in pretax catastrophe losses, which were $2.8 million in the January-through-March period, down from $36 million a year ago.

But with catastrophe losses "negligible," Bijan Moazami, an analyst with Friedman Billings Ramsey, said he expected a stronger bottom line. He rates Safeco shares "underperform."

"The underlying results show a disturbing trend," Moazami wrote in a note to clients.

"Every business line, except surety, reported a deteriorating combined ratio and a decreasing underwriting profit year over year. The auto segment, Safeco's largest business, appears to be leading the decline in profitability."

The combined ratio of Safeco's property and casualty business, a key measure of its underwriting profitability, was 89.8, less favorable than the 86.9 of a year earlier.

The combined ratio is the percent of each premium dollar that goes to claims and expenses. A ratio of 100 or less indicates a profit.

Safeco said the combined ratio for its auto-insurance business was 97.4 in the first quarter, worse than the 92.2 posted a year ago. Executive Vice President Michael Hughes said the company hopes to achieve its target of 96 by year's end.

Hughes said bad weather in some parts of the U.S. contributed to an auto-claim uptick.

"We had a poor month of January," he said during Tuesday's conference call. "The weather had considerable impacts on certain states."

Because the company bought back more than 20 million shares during 2006, it reported higher earnings per share than in last year's first quarter.

Safeco, which employs about 7,600, including nearly 2,600 in the Puget Sound area, cut expenses by $75 million in 2006. It has said it plans to eliminate an additional $50 million to $75 million this year.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

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Copyright (c) 2007, Seattle Times

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