Jim Swegle Vice President, Safeco Personal Insurance Annual AIFA Conference March 3, 2008

Transcription

1 Jim Swegle Vice President, Safeco Personal Insurance 2008 Annual AIFA Conference March 3, 2008

2 Safe-Harbor Statement UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Forward-looking information contained in this presentation is subject to risk and uncertainty. Information contained in this presentation that relates to Safeco s anticipated financial performance, business prospects and plans, and similar matters are forward-looking statements as defined in the Private Securities Litigation Reform Act of Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this presentation, including changes in general economic and business conditions, changes in the insurance industry, and changes in our business strategies. Investors should bear this in mind as they consider forward-looking statements. Additional information on factors that may impact these forwardlooking statements can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Risk Factors sections in our 2007 Annual Report on Form 10-K. The information contained in this presentation is as of the date indicated. We assume no obligation to update any forward-looking statements contained in this presentation as a result of new information or future events or developments. We also may discuss various non-gaap financial measures, including Operating Revenue, Operating Earnings and Operating Earnings per Share, Operating Return on Equity, Net Written Premiums and Underwriting Profits and Combined Ratios. Please refer to our 10-K filing of February 29, 2008, or our website for the most directly comparable GAAP measures together with our reconciliation of the two. 2

3 Presentation Outline Safeco overview Investments and capital Catastrophe management Personal lines Property Specialty Auto Expense management 3

4 Safeco at a Glance 7% 7% 17% 9% 31% Other Surety 23% 26% Personal Lines Property 46% 27% Small Commercial 7% Personal Lines Auto 2007 Net Written Premium: $5,640M 2007 Underwriting Profit: $480M 4

5 Safeco Has Outperformed the Industry with Few Exceptions Industry Combined Ratio Safeco's Combined Ratio 125% 120% 115% 110% 105% 100% 95% 90% 85% 80% Source: Dowling & Partners for Industry data; GAAP-basis data for Safeco 5

6 Investment Portfolio: No Surprises No subprime exposure No CDOs or CDOs-squared; No CLOs No HELOC exposure No credit default swaps No auction rate notes $5B Municipal bonds: Overall credit quality is AA+, with an AA - overall underlying rating Insurance-enhanced municipal bonds represent $2.7 billion (56% of the muni bond portfolio) Underlying credit quality of Safeco's insured muni bond portfolio is A+ $1B RMBS (& Mfd Housing) portfolio: By year of origination 11% 17% 15% 1% 3% 52% Pre % % % % % % 0% U.S. Government Foreign Governments MBS Other States & Political Subdivisions Corporate Bonds Marketable Equity Securities 6

7 Track Record for Active Capital Management Common Dividend Rate Increases 2004: up 19% 2005: up 14% 2006: up 20% 2007: up 33% (current yield approximately 3.3%) Common Share Repurchases 2004: 14.1 million shares for $ 679 million 2005: 4.5 million shares for $ 240 million 2006: 20.7 million shares for $1,165 million 2007: 17.0 million shares for $1,000 million Total= 56.3 million shares for $3,084 million (41% of shares o/s at 12/31/03) Additional $500 million share repurchase program announced December 2007 Debt: Paid down $546M of higher cost debt in

8 Safeco Personal Insurance 3% 27% 10% Specialty 72% Property 70% 18% Auto 2007 Net Written Premium: $3,674M 2007 Underwriting Profit: $176M 8

9 Safeco s Superior Catastrophe Risk Management INDUSTRY LOSS SAFECO LOSS SAFECO LOSS SHARE SAFECO MARKET SHARE 2003 California wildfires $ 2.0B $ 16M 0.80% 3.03% 2004 Hurricanes $20.4B $232M 1.14% 1.26% Hurricane Katrina $41.1B $114M 0.28% 0.99% Hurricane Rita $ 5.1B $ 42M 0.83% 1.45% Hurricane Wilma $10.3B $ 45M 0.44% 1.26% 2007 California wildfires $ 2.3B $ 27M 1.19% 2.75% Industry loss data from ISO s Property Claim Services unit (except, California Department of Insurance estimate for 2007 California wildfires) Safeco market share estimates based on A.M. Best data and weighted for business mix of industry s losses as reported by the Insurance Information Institute (market share for Wilma assumes average business mix of industry s losses from the 2004 hurricanes) Safeco losses are pretax, before reinsurance 9

10 We Follow Strict Catastrophe Risk Underwriting Guidelines Product management approach Cat load by product, by state, including allocated reinsurance, annual expected loss and any assessment load No subsidization of one product with another, or one state with another Pricing and underwriting philosophy geared toward long-term market stability Examples of our strict underwriting guidelines Hurricane: ineligible risks within five miles of coast for personal lines; mandatory hurricane deductibles in coastal counties; began exit from Florida personal property market in 2005 Earthquake - New Madrid: mandatory EQ deductibles since 2003 (minimum 15% for MO and IL); reduced commissions; further restrictions on older masonry structures; no new EQ coverage in AR Earthquake - West Coast: separate EQ mini-policies sold in CA (since 1997), WA and OR; mandatory 15%, 20%, 25% deductibles (minimum 20% in WA); 100 zip codes identified as highseverity zones Wildfire: extensive brush mapping since 1970; no dwellings with shake roofs in fire areas; no new business in hazard zones Wind & Hail: mandatory deductible in hail-prone states since

11 Example: October 2007 California Wildfires 11

12 Example: October 2007 California Wildfires Witch Fire 12

13 Strong Credit in Safeco Homeowners Credit and mortgage counts used in Safeco s rating models since 1999 Heavily tilted towards the Preferred market: 70% of our book has an Insurance Bureau Score [IBS] greater than 700 (= top 1/3 of IBS range) 99% of our book is at or above the IBS average Only 1% of our book has an IBS below 300 (= bottom 1/3 of IBS range) And, for higher risk segments, we get more rate 13

14 Tiered Pricing Models Yield Consistent Results Across Risk Segments Safeco Loss Ratios: Homeowners Market LOW RISK Pre-Tiering Post-Tiering HIGH RISK 14

15 Safeco True Pricing for Home (3 rd Generation Underwriting Model) v3.0: ~8% average price difference between tiers v2.6 H15 ~.75 v2.8 H15 ~.75 H17 ~.80 v3.0 = STP H01 =.52 H20 ~.85 H30 ~ 1.00 H21 ~.85 H27 ~ Tiers Homeowners H35 ~ 1.20 H38 ~ 1.25 H31 ~ 1.00 H34 ~ 1.10 H45 ~ 1.30 H39 ~ Tiers H60 ~ 1.60 H45 ~ 1.30 H70 ~ 1.95 H57 ~ 1.50 H80 ~ 2.74 H67 ~ 1.75 H90 = 4.50 H71 ~ 1.95 H80 ~ 2.74

16 Personal Specialty Lines Includes: Motorcycle RVs Watercraft Umbrella Full product offering, combined with ease-of-use for agents, is driving strong growth We offer a market for 95% of all riders and motorcycles We target the 12 million registered boats that are 26 or smaller (95% of all watercraft), not on the Texas Gulf Coast Our umbrella provides protection up to $5 million 16

17 Expanding Customer Choices to a Good, Better, Best Approach Greater focus on consumer choice products across personal lines Safeco Optimum Package TM for Auto endorsement offering eight bundled coverages to reward safe driving and provide extra protection for emergencies, repairs and personal property: Up to $500 in deductible savings for safe driving with us Free replacement electronic keys Up to $1K in emergency expenses Up to $1K for stolen property, and four other features Big 6 for Home: Safeco Optimum Package TM offering all-risks contents coverage and higher internal policy limits Identity theft recovery 50% extended dwelling coverage 17

18 Open Seas R&D Unit: Focused on Innovation Developing innovative products and services Focus is customer-centric, rather than product-driven Teensurance TM, unique consumer solution for parents and their teen drivers, was launched in 2007 Other products for Homeowners and Commercial are in the works Open Seas current innovation project portfolio (8 projects) Consumer Observation Prototypes Market Test Implementation Auto Homeowners 1 1 Commercial

19 Cross-Selling Success At the end of 2007, 38% of our Auto customers had their Homeowners policy with us, 55% of our Homeowners customers had their Auto policy with us, and nearly 9% of our eligible* Auto customers had an Umbrella policy with us 60% 9.0% 50% 8.8% Auto / Home 40% 30% 20% 8.6% 8.4% 8.2% Umbrella 10% 8.0% 0% Auto Home Umbrella 7.8% * Only preferred and standard auto policyholders are eligible for a Safeco umbrella policy 19

20 >>> Auto Underperformed in 2007 (Year-over year change, except combined ratio and retention rate) 4Q07 4Q06 FY07 FY06 Combined ratio 102.9% 92.7% 98.8% 91.0% Net written premium -4.1% -4.8% -3.6% -5.0% Policy retention rate 80.2% 79.5% Ending policies in force -3.4% -4.1% New business policy count -14.7% -5.7% -1.8% -23.6% Accident year run rate of 99% was 3+ points higher than long-term target of 96% 20

21 Industry s Challenge: Auto Bodily Injury Severity Trends 13,000 United States - Bodily Injury 12,000 11,000 10,000 Severity 9,000 8,000 7,000 6,000 12/ / / / / / / / / / / / / / / / /2007 Industry Calendar Paid Severity 12qFit Safeco Acc Yr Inc Capped/Excl. W thr. Severity - 3 Mo Lag 36mFit Safeco Accident Year Incurred Severity - 3 Mo Lag 36 m fit Safeco Newly Reported Capped/Excl. W thr. Severity 36mFit Safeco Newly Reported Severity 36 m fit Industry Calendar Paid Severity Safeco Acc Yr Inc Capped/Excl. W thr. Severity - 3 Mo Lag Safeco Accident Year Incurred Severity - 3 Mo Lag Safeco Newly Reported Capped/Excl. W thr. Severity Safeco Newly Reported Severity 21

22 Insurance Research Council: Update on Claimed Medical Expenses Medical expenses reported by auto injury claimants rising faster than inflation 9% annualized growth from in average claimed economic losses (medical care, lost wages, other out-of-pocket expenditures) for bodily injury (BI) 8% annualized growth from in average claimed economic losses for personal injury protection (PIP) 3% annualized growth in overall CPI inflation; 4% CPI inflation rate for medical care over the same period Causes of more rapid growth in auto severity More frequent use of more expensive treatment alternatives Increased unit cost for claimed treatment Evidence suggests that medical providers may be reacting to cost pressures in other areas by increasing their charges to auto injury insurers NOTE: IRC s study was based on 42,000 auto injury claims closed by 22 insurers (representing 58% of the private passenger auto, or PPA, insurance market in the U.S. in 2006) with payment under the five principal PPA coverages 22

23 Actions Taken to Restore Auto to Profitability Target Rate increases filed 4.2% for full year 2007 (8% annualized run-rate of 4Q07 actions) Another 6% increase planned for 2008 (front-end loaded) 30 of our 44 states are File and Use states Rollout of Safeco True Pricing for Auto (next generation of Safeco s automated underwriting model) 23 states implemented in 2007 Remaining 20 states planned for 2008 (all Safeco s Auto states, except California) Refined producer review process 300 agent appointments cancelled Another 350 identified for reunderwriting Executing on claims strategy to reduce loss costs through improved training and logistics management 23

24 Fixing Auto: Filed Rates Up 4% in 2007 Month Total Revisions Countrywide Premium Average Rate Change CW Avg Rate Change YTD Change Jan % 0.8% 0.2% 0.2% KS, MO, MT, MD, NM, WA Feb 2 1.0% -3.2% 0.0% 0.1% ND, WV Mar 4 7.1% 1.9% 0.1% 0.3% 0.3% IL, IN, MD, MI Apr 4 6.0% -0.4% 0.0% 0.3% AZ, KY, PA, UT May % 5.8% 0.8% 1.0% NC, OK, TX Jun 1 6.0% 4.8% 0.3% 1.3% 1.1% FL Jul % 2.8% 0.4% 1.7% CO, KS, MD, MO, MT, OH, WI Aug 3 3.8% 3.4% 0.1% 1.8% LA, OH, VA Sep 7 8.3% 3.6% 0.3% 2.1% 0.8% AR, ID, MD, MS, OK, TN, WI Oct % 1.9% 0.5% 2.6% CA, FL, SD, TX, UT, WY Nov 5 6.7% 6.6% 0.4% 3.0% FL, IA, NE, NV, OR Dec % 6.6% 1.0% 4.1% 2.0% AZ, NM, OK, VA, VT, WA 2007 Total % 4.1% 4.1% 24

25 Safeco True Pricing for Auto Improving underwriting accuracy and retention: Third generation of our multivariate predictive underwriting tool Tiered prices by coverage (bodily injury, physical damage, collision, etc.) Increases dramatically the number of pricing tiers (from 13 to 150 tiers) Re-underwrites all policies at renewal (rate change caps reduce dislocation) Fixes a broken cell in our model (for drivers with MVR points so that they re now placed in the appropriate pricing tier) Applies appropriate discounts to policyholders for tenure and multiple accounts 25

26 How We Think about Auto It s a fiercely competitive business Multi-variate modeling is minimum table stakes Visibility into data and early trend identification Automation of data feeds for verification Ability to protect tenured book through in-force re-pricing Continued vigilance and upgrading of claims practices Ability to package Auto and Home together We will continue to improve our performance Pricing sophistication Loss cost management Driving expense ratio down Enhancing distribution capabilities 26

27 Personal Lines Auto: Percent of Written Premium by Channel 60 Direct Independent Agents Captive Agents Independent Agents holding their own -- Captive channel feeding growth in Direct Source: Safeco Market Research and A.M. Best 27

28 Safeco Has Begun the Journey of Channel Diversification Total New Business 2% 5% Direct Platform Agencies 8% 5% 14% 97% 93% Traditional Agencies 92% 82%

29 Safeco s Focus in Auto is on Preferred Risks Percent of Auto POLICIES IN FORCE (at Year End): Preferred Standard Nonstandard 29

30 Safeco Auto Policyholders: Distribution by Credit Rating Safeco Auto Policies-in-Force (PIF) at 12/31/07 by Insurance Bureau Score (IBS) Group 25% 20% PIF Percentage 15% 10% 5% 0% below PIF % 3% 3% 4% 5% 7% 9% 10% 11% 11% 22% 15% **No Score group includes mix of no scores, no hits and policies where credit is not pulled (CA, young adults, spin-offs, etc). CA policies where no score was ordered accounts for 5% of CW PIF. 751 or higher No Score** 30

31 Auto Process Improvements: Comparative Rater Example 45% 40% 35% 30% 25% 20% We re reducing the rate of errors that occur when our agents use a comparative rating tool to quote Safeco Auto 15% 10% 5% 0% 100% 90% 80% 70% 60% 50% Sources for new Safeco Auto policies in 2007 Traditional Q&I Retail Comparative Raters Virtual Producer Wholesale Platform 22% 28% Use of Comp. Raters is growing 40% 30% 20% 10% 0% Feb '07 Mar '07 Apr '07 May '07 Jun '07 Jul '07 Aug '07 Sep '07 Oct '07 Nov '07 Dec '07 31

32 Expense Management and Improving Productivity (Ratios are based on incurred expenses) 60% LAE Ratio Expense Ratio LAE + Expense Ratio 50% 40% 30% 20% 10% 0% >>> Targeted run-rate expense savings for 2008: $25 - $50M >>> Annualized operating expense savings achieved in 2007: $50M >>> Annualized operating expense savings achieved in 2006: $75M 32

33 Safeco s Overall Strategy Consistent underwriting with automated models for all core lines (auto, property, small commercial, some surety) Commitment to continued upgrades to our pricing models Ongoing investment in state-of-the-art technology to promote ease of use in multiple channels Sophisticated management of high-quality investment portfolio Aggressive balance sheet and capital management Relentless focus on improving operating costs Research & Development unit (Open Seas) devoted to developing customer-centric, innovative products 33

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