Since joining SAFECO as Chief Executive Officer in late January 2001, Michael S. McGavick and the senior leadership team have engaged in a review of SAFECO’s operations with a particular emphasis on the Property & Casualty operations. This review resulted in actions that focused on:
A comprehensive review of the entire operation confirmed that the core strengths and most profitable opportunities for SAFECO were in personal auto, small-to-medium commercial insurance and life and investments. The recovery plans for Property & Casualty involved actions on several fronts:
In August 2001, SAFECO Credit was sold, generating $250 in net proceeds, resulting in a pretax gain of $97, and reducing SAFECO’s debt by approximately one-half or $1.5 billion. SAFECO Credit is reported as a discontinued operation as described in the Discontinued Operations - SAFECO Credit section of this MD&A.
Property & Casualty had steadily deteriorating results from the underwriting of insurance from 1999 to 2001. In each of these three years the loss ratio increased (1999 - 66.4%, 2000 - 70.4% and 2001 - 74.5%) which in turn caused the combined ratio for each year to increase (1999 - 108.4%, 2000 - 111.4% and 2001 - 118.7%). Excluding the $240.0 loss reserve strengthening described further in the Loss Reserve Strengthening section below, the loss ratio in 2001 was 70.7% and the combined ratio was 113.4%. Details on the results by line of insurance as well as actions being taken to improve these underwriting results are described below. Operating results started showing signs of a positive turnaround in the fourth quarter of 2001 which produced a combined ratio of 111.3% compared with 113.4% for all of 2001 (excluding the loss reserve strengthening).
In the case of workers’ compensation, the $80.0 is due to unexpected development of prior year claims and continued increases in medical costs. This includes the impact of administrative rulings that have recently been more favorable to plaintiffs’ claims for compensation, particularly in the states of California and Florida.
business model with three new capabilities will be introduced to support business growth in 2002. These new capabilities include an automated underwriting platform, a commercial service center and a new business agency interface system. In combination, these capabilities will support policy growth by delivering more accurate pricing, reduced transaction time, ease of doing business with SAFECO and expanded services for business customers. Top line premium growth is not expected until 2003.
Life & Investments’ income annuities operations produced pretax income of $47.8, $26.4 and $42.2 in 2001, 2000 and 1999, respectively. Income annuities’ main product is the single-premium immediate annuity (SPIA) which is sold to fund third-party personal injury settlements. This product is extremely sensitive to financial strength ratings. These contracts are non-surrenderable and are intended to provide a reliable income stream to the injured party. The increase in pretax income in 2001 is due primarily to the release of reserves upon death due to favorable experience and an increase in investment income due to faster paydowns on collateralized mortgage obligation (CMO) investments. Pretax income in 2000 decreased from 1999 due to increased legal expenses to defend the qualified assignment contract terms of SPIA policies and also a decrease in investment income due to slower paydowns on CMO’s.
At December 31, 2001, SFP had single credit default swaps with notional amounts outstanding totaling $490.0. These single credit default swaps involve selling credit protection for a fee that covers certain credit events on assets owned by the buyer (financial institutions and investment banks) such that if a credit event occurs SFP would make a payment to the buyer.
SAFECO Credit provided loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. In March 2001 SAFECO announced its intention to sell SAFECO Credit. A plan of disposal was formalized establishing the measurement date as March 31, 2001; consequently, SAFECO Credit was accounted for as a discontinued operation, effective March 31, 2001.
Effective January 1, 2001, the Corporation’s insurance subsidiaries adopted the NAIC’s revised Accounting Practices and Procedures Manual and the domiciliary states of the Corporation’s insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and resulted in changes to the accounting practices that the Corporation’s insurance subsidiaries use to prepare their statutory-basis financial statements. Upon adoption, SAFECO’s property and casualty insurance companies’ statutory surplus increased by $207.4 and the life insurance companies by $45.3. Nearly all of the increase in the amounts of statutory surplus relates to the recording of a deferred tax asset that was not recorded in the statutory basis financial statements under the prior statutory accounting guidance.
The table below summarizes SAFECO’s consolidated holdings of mortgage-backed securities at December 31, 2001: