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Behind Safeco

By Russ Banham  |  Posted 07-01-2002 Print
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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."


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