Safeco Warns of Major Profit Shortfall

Investors who own shares of casualty insurance firm Safeco Inc. may be wishing they had bought some insurance themselves--against company missteps.

The Seattle-based firm warned Monday that third-quarter earnings will be as much as 80% below analysts’ expectations because of higher claims.

Safeco has reported seven consecutive quarters of lower earnings.

Yet just two weeks ago, Boh Dickey, Safeco’s president, said the company expected to report higher profit in the second half of the year as insurance rate increases finally pushed through to its bottom line.

“Any outside observer is going to wonder what’s going on,” said J. Paul Newsome, an analyst at Lehman Bros. He said he lowered his estimates for Safeco’s earnings for the next five quarters.

If there was good news for Safeco on Monday, it was that some investors jumped into the stock after it initially plunged on the warning.

The shares (ticker: SAFC) fell as low as $21.94 on Nasdaq early Monday after closing at $25.75 on Friday. But by the end of the day the stock had pared its losses, closing at $24.50, down $1.25.

Neither did Safeco’s warning do much damage to the rest of the property and casualty insurance sector. Most of its rivals’ stocks have risen sharply this year on expectations that higher premiums will continue to drive earnings growth well into 2001.

Safeco seems to be struggling while many of its rivals are faring much better.

Safeco’s board ousted CEO Roger Eigsti in August amid dissatisfaction with the company’s earnings record. Safeco, like other insurers, has suffered from intense price competition in the property-casualty insurance market in recent years.

The stock has plummeted from a peak of $55 a share in 1998. Many other property and casualty insurers also have seen their stocks slide; the difference is that many have enjoyed a sharp rebound this year as premiums, and profits, have begun to improve.

Not Safeco. “Although we are on track with our expected results for personal auto and small commercial [insurance], our expected combined ratios for large commercial and homeowners will be higher than we anticipated at the beginning of the quarter,” Dickey said.

A high combined ratio indicates an insurance company is having trouble making money off its basic insurance underwriting business.

Safeco said it was also experiencing higher claims in its workers’ compensation and commercial auto businesses.

Safeco now expects operating earnings of 5 to 10 cents a share for the quarter, well below the 25 cents forecast by analysts surveyed by First Call/Thomson Financial.

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Taking Stock of Insurers

An earnings-shortfall warning Monday from property/casualty insurance firm Safeco had only a modest effect on its stock and on shares of its rivals. Most of the companies have seen their stocks surge this year on expectations that higher insurance premiums will pump up earnings. A sampling of major property/casualty names, including the stocks’ price-to-earnings ratios (P/E) based on analysts’ average estimates of 2001 earnings per share:

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2001 Ticker Mon. close YTD pctg. est. Stock symbol and change change P/E* Hartford Finl. HIG $71.25,-$0.75 +50% 15 Allstate ALL 33.38,-0.75 +39 11 St. Paul SPC 45.81,-1.00 +36 14 Loews LTR 80.81,-0.19 +33 6 Chubb CB 72.94,-1.81 +30 15 Amer. Intl. Group AIG 93.31,-0.31 +29 33 Progressive PGR 81.38,-2.63 +11 29 Cincinnati Finl. CINF 34.02,-0.92 +9 18 Safeco SAFC 24.50,-1.25 -2 13 MGIC MTG 59.50, +0.69 -1 11 S&P; 500 index 1,402.03,-6.96 -5 22

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Sources: Bloomberg News, Times research, Zacks Investment Research (earnings estimates)