Safeco's Alignment Strategy

By Russ Banham  |  Posted 07-01-2002

Safeco's Alignment Strategy

Two years ago, like the weather in its hometown of Seattle, the prospects for Safeco Corp. were grim. Earnings during the first quarter of 2000 had plunged 88 percent, to $9.5 million, and the insurance company finished the year with just $115 million in net income, down by more than half from the previous year and a far cry from the $430 million it had earned in 1997. Its property and casualty line, the lion's share of Safeco's business, posted an $11 million loss that year on $4.7 billion in revenues, its first loss in recent memory. Meanwhile, the company's share price, which had risen steadily throughout the 1990s to a high of $55 a share in early 1998, had fallen to below $20 by early 2000.

As a result, at the end of 2000, Safeco CEO Roger Eigsti resigned under pressure, followed by most of his top lieutenants. In January 2001, Mike McGavick, a corporate turnaround specialist, was brought in as president and CEO from CNA Financial Corp., where he had successfully resuscitated its ailing commercial insurance division. McGavick set in motion the revamping of Safeco's strategy. In an unusual twist, the process was to be driven by a new CIO, Yom Senegor, who would also serve as the company's chief strategist. "The most strategic opportunity in business today lies in technology," McGavick says, "because of what it enables our work force to do and how it helps us learn about our customers' needs and issues."

Behind Safeco

's Money Woes">

Behind Safeco's Money Woes

Safeco's troubles began in October 1997, when the insurer, with $6.9 billion in 2001 revenues, paid $2.8 billion for American States Financial Corp., a large Midwestern property/casualty insurer, in hopes of expanding beyond its roots in the Northwest. At the time, Eigsti claimed the acquisition would help Safeco expand its market base. Instead, it nearly killed the 74-year-old company.

IT View: "Technology doesn't run the business, but the business cannot run without technology. Once you integrate technology with business strategy, you learn immediately that it can drive enormous value."
Yom Senegor
Senior Vice President
Director of Strategic Planning and CIO
Safeco Corp.

To retain market share in a softening market, one in which competitive pressures drove insurance prices down year after year for a decade, Safeco did the unthinkable: It reduced rates from what were already unprofitable levels. The strategy backfired: Claims losses were higher than expected and exceeded the premium dollars coming in. Safeco's bottom line cracked like Seattle's historic Pioneer Square after last year's magnitude 6.8 earthquake. "After acquiring American States, Safeco said to its agents, 'Sell whatever you want and we'll underwrite it; just get the business and don't worry about it,'" says Mike Paisan, a principal at Williams Capital Group, a New York City-based investment bank. "That strategy came back to haunt them. The company had completely lost its underwriting discipline. A lot of poor business was put on the books in both commercial lines and personal lines, and Safeco has been paying for it ever since."

Biz View: "Auto insurance and small commercial lines are low-margin businesses that are very much dependent upon a relationship between strategy and technology."
Mike McGavick
President and CEO
Safeco Corp.

By the end of 1999, Safeco's combined ratio—a measurement of insured losses versus premium income—stood at 108.4 percent, worse than the industry's 107.9 percent, for the first time in the company's history. Meanwhile, Safeco was earmarking dollars to increase sales without the distribution channels or the technology to provide the marketing support for the effort. "Our expense ratio since the American States acquisition had climbed into the lower middle of the pack," McGavick said. "Given declining revenues, we had to step up and get our expenses in line with industry leaders."

Safeco

's Bottom Line">

Safeco's Bottom Line

Safeco sells personal auto and homeowners insurance, small and medium-size business insurance, life insurance and investment products. It's basically a commodity business: Price and service are the only ways to differentiate one company's policies from another's, says Glenn Sieber, managing partner of the insurance practice for North America at Accenture Ltd. in Hartford, Conn. To beef up the bottom line, McGavick had to reduce Safeco's risk, make the premiums competitive and improve its service. "The solution was and is technology," says Sieber.

Before he could think about the long term, though, McGavick had to stabilize the company. His first decision as CEO—reducing the stock dividend by 50 percent—was easy, given the desperate need to preserve cash. Then he cleaned up the balance sheet by writing off $1.2 billion in goodwill derived from the American States acquisition. To reduce debt further, he put a subsidiary, Safeco Credit Co., and its debt on the block, taking in $250 million while reducing Safeco's debt by half, to $1.5 billion.

A series of layoffs and consolidations followed, which executives expect will add some $100 million annually to the bottom line.

Then McGavick turned his attention to the future. Safeco needed to improve its communication with its agents over the Internet, spruce up its Web site to help potential customers locate its agents, and develop internal systems that could segment potential policyholders into different risk classes so it could start pricing its products to reap greater profits.

As he looked around Safeco, however, McGavick found little of the technology and tech experience required to make his vision reality. He realized that if technology was to be at the center of strategic opportunity, then he would need someone who knew what technology could and could not do to help guide that strategic thinking. That someone turned out to be Senegor, whom McGavick hired in September 2001 to serve as both CIO and director of strategic planning. It was a radical move, and a rare one in a generally conservative industry where CIOs have traditionally served at the whim of the heads of finance. But Senegor was up to the challenge. A former head of Accenture's insurance industry practice, Senegor had piloted a team of more than 30 partners who provided consulting and IT services to many of the nation's leading insurance companies. "I wanted someone who understood our challenges and how technology could solve them," McGavick says.

Safeco

's Alignment Strategist">

Safeco's Alignment Strategist

Senegor's goal in leaving Accenture was to practice what he had previously only preached—the alignment of IT with business strategy. "I think that at many companies, IT plays the 'other department' role, sitting there on the side doing its own thing, a cost center that does not make any money," Senegor says. "The strategy is done by others—business-unit heads who then make unrealistic demands on IT without really understanding what IT actually is or does. Because IT has no voice at the strategy table, there is no choice but to listen and try to please."

With Senegor's help, McGavick set out to target more customer segments with more products sold through more agents and channels. Safeco's products "are not properly priced," Senegor says. "That is where technology will play an extremely critical role."

Today, Safeco is concentrating its product energies on automobile and small commercial lines insurance (the insurance policies purchased by Main Street businesses), though it continues to offer homeowners insurance, as well as life insurance and investments. "Auto insurance and small commercial lines are low-margin businesses for which the cost structure—underwriting, sales, claims, customer service, etc.—is a critical competitive variant," McGavick says. "They're the kinds of businesses that are very much dependent upon a relationship between strategy and technology."

Using technology, Safeco hopes to match premiums more closely to risk by better identifying just how risky a driver is, and then pricing its policies accordingly. Auto insurance segments Safeco previously avoided, such as drivers with spotty records who buy insurance from state assigned-risk pools, are now being segmented, courted and offered policies with premiums higher than that of a driver with a spotless record. Safeco plans to use technology to obtain credit histories of policy applicants, motor vehicle records and past-claims history so that its independent agents can write more business at the right price for the risk. "You gain an edge by knowing which drivers are the better risks because you're not paying out as much on claims," says Bijan Moazami, an insurance analyst at Friedman Billings Ramsey, an Arlington, Va.-based investment bank. "If Safeco invests in technology to do this, that should definitely give them an advantage."

A second goal: improve customer service. Safeco wants to develop technology that will help it and its independent agents field customer inquiries, complete policy changes (such as adding a teenager to an auto policy), address complaints and process everything having to do with claims—from filing to review and payment—more efficiently. "Safeco has enjoyed a reputation for quality claims handling," says Williams Capital's Paisan, "and the more technology you add to that, the better and more streamlined the claims handling will become. While other insurers are investing in this technology, Safeco is ahead of the game, which should give it a competitive advantage, at least in the short term."

Safeco's Web-based customer contact strategy also seeks to cut costs. It costs the company 10 to 20 times more for each customer service call answered by a human versus going online. If it can induce customers to inquire online about a claim status or an invoice or any other matter, Safeco can reduce the number of people needed to answer the phones. And the savings can be reflected in lower premiums.

More Technology Ahead

More Technology Ahead

Safeco will continue investing in technology to improve the customer experience, from sales to filing claims, McGavick says. "Now, customers can ask questions or check on the status of their claims and get answers fast. But there are definitely more distinctions in the consumer's mind that can be created as to who we are," he says. "And that is critically important, since we are selling a product that consumers view as interchangeable."

McGavick, Senegor and other top brass are also in the thick of devising Safeco's long-term strategy, which will look out five to 10 years, to be finished in September. The committee is evaluating the marketplace, the competitive landscape and Safeco's own internal capabilities to chart a course. Senegor and McGavick won't discuss the company's likely direction, though Senegor says Safeco is thinking about moving to online sales. "People want to shop for insurance online, but they're approaching the actual buying of it slowly," he says. "I equate it to ATMs when they were introduced. Consumers had no problem lining up to pull money from the machines, but it took them a while to make deposits." Were Safeco to go this route, Senegor says, it would not shut out the company's independent agents. "Consumers always need advice on something as complex as insurance," he says, noting that customers would be directed online to an independent agent near them as part of the inquiry and sales process.

As Senegor dives into these strategy sessions with McGavick, the CFO and the business-unit heads, he does not separate the two functions of his job. After he leaves the strategy meetings, for example, Senegor confers with his IT staff to keep them abreast of corporate strategy. "This is not some business unit tossing a project to IT without IT understanding the strategic purpose," Senegor says. IT also holds quarterly reviews with each business unit and department head to evaluate priorities and the status of current projects. Moreover, IT staffers' salary bonuses are based largely on their contributions to the company's strategic goals.

Senegor is not tearing down Safeco's infrastructure entirely. "The insurance industry was an early adopter of technology, and we've got legacy systems up the wazoo," he says. "But the important thing is not the sophistication of the technology, but what it is designed to accomplish. Sometimes a 1942 Chevy is all you need."

McGavick and Senegor believe the alignment of strategy and technology will bear fruit. "Strategy and technology are wedded," Senegor says. "Technology doesn't run the business, but the business cannot run without technology; it is part and parcel of the enterprise. Once you integrate technology with business strategy, you learn immediately that it can drive enormous value."

Russ Banham is an award-winning business journalist, playwright and author of six books.

How Safeco Bridges the

Gap">

How Safeco Bridges the Gap

  • Recognizes that technology is at the center of its strategic opportunity.
  • Names one person to be CIO and director of strategic planning.
  • Reviews technology priorities with each business unit every quarter.
  • Bases IT bonuses largely on contributions toward achieving corporate strategy.