Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Neal Fuller - Sr. VP of Finance and Treasurer

Paula Rosput Reynolds - Chairman, President and CEO

Ross Kari - EVP and CFO

Michael Hughes - EVP-Insurance Operations

R. Eric Martinez, Jr. - EVP - Claims, Customer Care and Procurement

Art Chong - General Counsel

Analysts

Daniel Johnson - Citadel Investment

Matthew Heimermann - JPMorgan

Michael Phillips - Stifel Nicolaus

Gary Ransom - Fox-Pitt, Kelton Cochran Caronia Waller

Charlie Gates - Credit Suisse

Safeco Corp. (SAF) Q1 FY08 Earnings Call April 25, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. My name is Tina, and I will be your conference operator today. At this time I would like to welcome everyone to the Safeco First Quarter Earnings Results Conference Call. Thank you.

Mr. Fuller, you may begin your conference.

Neal Fuller - Senior Vice President of Finance and Treasurer

Good morning, everyone, and welcome to Safeco's first quarter 2008 earnings release conference call. A copy of our PowerPoint slides, financial supplement and our news release, which we may refer to during the call, are available at www.safeco.com/ir. The call is being broadcast live on the website and will be available as an audio replay, and we will also post a transcript by early next week.

Now as announced on Wednesday, Safeco entered into a merger agreement on April 23, 2008 with Liberty Mutual Insurance Company at a price of $68.25 cash per share without interest. The transaction is subject to Safeco shareholder approval and customary regulatory and governmental approvals, including Hart-Scott-Rodino approval and regulatory approval in seven states including Washington, Missouri, Illinois, Texas, Indiana, Oregon and California. The transaction is expected to close by the end of the third quarter of 2008. Safeco will continue to pay its regular quarterly cash dividend consistent with past practice pending the closing of the transaction, and there is no plan to pay a pro rata dividend. The transaction is not subject to financing contingencies.

Because Safeco has not yet filed a preliminary proxy statement, we are not in a position to discuss and cannot take any questions regarding the proposed transaction with Liberty Mutual. So let me be clear; no questions about the transaction, the merger and acquisition environment or the regulatory approval process will be taken during the call.

With us on the call this morning are Paula Reynolds, President and CEO; Ross Kari, our Chief Financial Officer; Mike Hughes, Executive Vice President of Insurance Operations; Eric Martinez, Executive Vice President and Head of Claims and Customer Care; and Art Chong, our General Counsel. We also have other members of the senior management team in the room here for our question-and-answer session.

We'll start the call with a discussion of our results for the quarter, and then we'll open it up for your questions. We expect the call to last approximately 45 minutes. Please read the disclosures on slide 2 of the presentation regarding forward-looking statements we may make during the call and non-GAAP disclosures we may refer to during the call today. These disclosures and reconciliations between GAAP and non-GAAP measures can also be found in the 8-K filed with the SEC.

We've had another quarter of consistent strong performance and operating profit here at Safeco, and with that, I would like to turn the call over to Paula Reynolds. Paula?

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

Thank you, Neal. Good morning, everybody. Thanks for joining us. I know it's a little anti-climatic, but nevertheless I think that you will find some important information about what is going on in the business from the call today.

As you can see from the materials, Safeco enjoyed another strong quarter of profitability. Our net income for the quarter was $141.8 million or $1.57 per share. Our operating earnings for the quarter were $147.9 million or $1.64 per share. And this compares favorably with the analyst consensus estimate, which I think is down as low as about $1.43 per share. Additionally our operating ROE was a very strong 17.9%.

A couple of you have maybe perhaps observed that my insurance acumen is lacking, but I think my financial knowledge would suggest that 17.9% ROE is very close... is much closer to the 20% than sort of 10% to 15% that's been predicted as part of our inevitable demise, which obviously we've worked hard to prevent here.

So if you will turn to slide 4, excuse me... believe it or not everybody, I'm driving while I am talking, so this is the reason I'm a little herky-jerky this morning or maybe more so than usual. If you will turn to slide 4, you will see our combined ratio for the quarter was 93%, significantly ahead of our long-term target, but admittedly up from the 89.8% we posted last year in the same quarter. We did see catastrophes during the quarter of 1.6 points, compared to last year where we had basically no Cat activity whatsoever in the quarter. Our net written premiums were 2.1% down over last year due to competitive market conditions, as well as our focus on profit. This result is similar to the other national carriers that operate in the lines in which we compete.

So let me hit a couple of the highlights here. In our auto line, our combined ratio improved as a result of a lot of the focused attention we began applying last year. Eric Martinez will talk later in the call about some of the actions we've implemented, and Mike Hughes will detail the pricing and underwriting actions taken.

Another positive is that we saw lower severity increases in the quarter, I think a part of our whole game plan around Safeco True Pricing, and an increase in the decline and the frequency of accidents both very positive signs for current and future profitability.

It's interesting to note, of course, that out of all of our P&C lines, personal lines is the only place where prices are increasing in the industry, which obviously is one positive sign about where the market is going. It's also a sign of the discipline by our competitors in the marketplace relative to the other lines that, in fact, you see some pricing being taken.

Our Surety line had another outstanding quarter with a combined of 59%. Surety employees of Safeco can be very proud of this result and their wonderful track record. Despite slowdowns in the economy, our Surety is focused on public works projects where there is a significant backlog of work and need for Surety bonds.

As Neal mentioned, Tim Mikolajewski is in the room because we know you're going to want to know about how can we have this strength against the backdrop of an economy that continues to have some weakness. Our property line performed well in the quarter, despite the Cats, and we had non-Cat weather as well. Our small commercial business had solid profit, but amid admittedly deteriorating market conditions, and reflecting our discipline, premiums were down slightly over last year.

Throughout this, we've continued to deliver on what we said we would do. We've consistently exceeded your profit expectations. We've improved our competitiveness with the innovative products, improved segmentation, improved business processes and lowered expense, as well as strong capital management.

So with this, let me turn the call over to Ross Kari for financial results, then to Mike Hughes for insurance jobs, Eric Martinez for claims, and of course, as I mentioned, Tim will be on for your Surety questions.

Ross, it is yours.

Ross Kari - Executive Vice President and Chief Financial Officer

Thank you, Paula. On slide 6 you will see our productivity metrics which have shown improvement over the last several years. During the quarter the ratios were relatively unchanged with the expense for policy, of course, rising slightly. We continue to move forward on our business process improvement efforts, and that has resulted in some investments in the quarter impacting the expense for policy in force. The return on these investments will start to impact our expenses positively in the second and third quarters of this year as the process improvements and outsourcing projects come online.

Now I would like to turn to the investment portfolio. We discussed in detail the portfolio last quarter, but want to remind you that Safeco has no exposure to subprime mortgages, no CDOs or CDO-squared, no CLOs, no HELOCs, no credit default swaps and no auction rate securities. The quality and market value of our portfolio remains solid despite the turbulence in the credit and equity markets.

But market value of the portfolio was impacted by a significant sell-off and then recovery in the municipal bonds market during the quarter. This is outlined in more detail on slide 6. Largely as a result of this volatility, the net unrecognized gain in our fixed-income portfolio was down significantly in the quarter. But since quarter end, pricing of our munis has recovered to nearly where it was at year-end.

P&C pretax investment income, however, in the first quarter was $109 million, down 10% from the first quarter of 2007. The decline was driven by the reduction in the portfolio size resulting from last year's special dividend which was used to retire significant amounts of high-cost debt and repurchase shares. P&C after-tax investment income was $90 million, down 6% from first quarter 2007. This figure is affected by the smaller portfolio, but the decline is offset somewhat by a higher mix of tax exempt municipal bonds. Our average tax rate on P&C investment income was 18% in the quarter, down from 21% a year ago.

After-tax realized gains on investments were $24 million in the quarter, offset by $28 million in impairments. This, combined with other adjustments, gave us net realized losses for the quarter of $6.1 million.

During the quarter we paid down $200 million in debt that matured on February 1st. So at quarter-end our debt totaled $504 million, which will be assumed by Liberty Mutual at the closing of the proposed transaction. Our debt-to-capital at quarter-end was 13%. Book value per share was $37.09 at quarter-end compared with $37.81 at year-end.

And now I will turn it over to Mike Hughes to discuss our underwriting results.

Michael Hughes - Executive Vice President-Insurance Operations

Thank you, Ross. Good morning. We had a solid quarter with a combined ratio of 93%, including 1.6 points of catastrophe losses. Favorable prior year development was 1.4 points, largely due to our Surety operation growing our volatility reserves forward from last year to the current year.

Net written premium, as Paula mentioned, was negative 2%, reflecting market conditions and our underwriting actions in automobile. Property and Surety continued to show strong growth. Auto improved to a 99.5% combined ratio from 102.9%. We are on track for our 96 combined ratio by the fourth quarter. Loss costs trends were flat, and we made good progress on all key initiatives as outlined in slide number 8.

For the quarter, we had 16 rate increases. We expect approximately 25 to 30 rate increases in the second quarter. We should average plus 6% to plus 7% in rate increases by year-end. For Safeco True Pricing we added three states, and we will be adding six more in the second quarter. 80% of our business will now be in Safeco True Pricing by July.

As we spent some profitable producers, 500 agents were closed in 2007 and 2008, and 300 others are being re-underwritten. Growth was down by 5% in policy count with retention at 79.5% or 79.7% last year. Preferred remains healthy at 83.5% retention rate. New business was down 25% overall with preferred down 15%. Our reduction in policy force is coming from the unprofitable areas we are addressing.

You can see in our policy count that our standard and non-standard is down 24% versus our preferred only being down 1%. Renewal retention has been stable with the exception of a handful of states where rates have been greater than plus 6%. We monitor the policies that we are losing by sale, and we are losing those policies where we have had previous MVR violations or previous losses. Unprofitable business is going off the books.

As respects market conditions, we see the trend of competitors taking rates continuing. Our monitoring indicates that 80% of filings were for rate increases in the first quarter. Going forward, we will continue to protect our preferred business through Safeco True Pricing and cross-sell initiatives and continue to execute our profitability game plan.

Our property line produced a combined ratio of 95% with net written premium growth of plus 8%. Included in the 95% was 7 points of catastrophes versus zero impact in 2007. The line was also impacted by 10 points of non-Cat weather. Profitable growth continues to be fueled by our multivariate modeling and Optimum product.

Commercial had a solid quarter with a 93.5% combined ratio. SBI regular came in at 95.3%, including 1 point of catastrophe versus last year being 0. Growth slowed to a negative 1.6% net written premium, reflecting the very difficult market condition. Renewal retention was flat with new business down 14%. Total pricing in SBI regular was up 2%, clearly reflecting our disciplines. We have had several new products coming out that support improvement in growth given the market condition.

Going forward, we expect mid single digit growth for property and flat to slightly negative growth for commercial while meeting our profitability targets. In auto, we continue to expect to get to a 96 combined ratio run-rate before the end of the year.

And with that, I will pass it on to Eric Martinez.

R. Eric Martinez, Jr. - Executive Vice President - Claims, Customer Care and Procurement

Thank you, Mike. First quarter results within the claims organization are indicative of the extremely hard work this team has put forth to improve our performance, particularly in terms of the results in our auto line. We are very excited about the notable gains made in the first three months of this year.

I would first like to discuss the encouraging trends in our bodily injury severity figures, highlighting the factors contributing to our progress. Proactive management of claim files in every level of the organization including unit manager approval of all settlement offers. Product line manager review of settlements with coaching for improved performance when necessary, coupled with the daily tracking and reporting of reserves and settlements. Ongoing best practice training for all claims employees with a focus on improved and consistent file handling skills including proper reserving, coverage analysis, investigation, evaluation and negotiation with appropriate utilization of liability offsets.

This training represents a significant investment in our employees as each examiner spends three to four days in a classroom training. Since December of last year, 1,600 of our employers had finished their courses with all lines of business scheduled for completion by the end of June. It is critical to note that we're already seeing a noticeable improvement in our paid severity results, and areas of the organization have completed training.

Implementation of additional quality assurance measures with focused audits designed to identify skilled gaps in utilization of coaching for improved techniques at the unit and individual examiner level. In addition to our improving auto bodily injury results, severities in the auto field are trending below our 2008 plans with collision remaining flat since August of 2007. This is yet another indication that our strategies implemented under the guidance of a strong and stable leadership team in the fall of 2007 are producing results earlier than we originally anticipated. The combination of continuous staff training, reduced cycle times and increased spender network utilization are key drivers in our progress.

Other positive trends to note include improving our customer claims experience while driving down costs by increasing our network of preferred auto body shops to 1,356. 43% of our shirts are now utilizing this network where the repairs are guaranteed, reflecting an increase of 21 points over Q1 of 2007.

Reducing our loss inspection time by 40%. We realized this significant gain without any change to processor technology by simply encouraging our field staff to be more proactive and efficient in their scheduling. We have also made great strides in proactively addressing fraud. Technology improvements in this area have allowed for the consistent and accurate identification of potential fraud as early in the claims process as first notice of loss.

For the first quarter, we have seen a 38% improvement in our fraud results over last year's quarter. While we are pleased with the gains we have made thus far, we are eager to pursue additional work with continued investment in training and technology. In the coming months, we feel these efforts are essential not only in maintaining the progress made to date, but critical to our ongoing drive toward indispensability for our customers and our agents.

Our focus for the remainder of the year includes implementation in the second quarter of a comprehensive medical bill review program for third-party bodily injury claims, integration of Accumark, a rules-based [ph] application used to review bodyshop estimate sheets prior to the start of the repair process. Deployment of new technology, including the liability application evaluates files for the consistent application of best practices in utilization of liability offsets, along with a tool designed to improve the identification and handling of low speed vehicle impact claims. And finally, installation of a world-class logistics system designed to pivot on the variable cost of the business in order to drive speed-related efficiencies into the inspection process.

As a final note, I would be remiss if I did not talk about the exceptional response made by our customer care and catastrophe response teams during the first quarter. As we noted in our earnings release, we had an active quarter in terms of weather-related catastrophes. In spite of the very busy season, our employees have continued to deliver on our promise to our customers in outstanding fashion. In fact, we feel so strongly about the service we are providing that we started sharing customer experiences related to our customer care and claims service via Safeco's website at www.safeco.com Customer Stories.

And with that, I will turn it back to Paula for some closing remarks.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

Paula is now mercifully out of her car and not providing the risk of frequency and severity on the streets of Seattle. So I would like to wrap up.

Obviously we had an excellent quarter of profitability. And I think, secondly, we're starting to see the profits turn in auto, and pricing is one of the positives, but the severity is the severity that we're managing. So, in other words, these underlying industry trends continue to be there. We just are doing an exceptional job at this point in time against those trends. And the return on equity was extremely strong at 17.9%.

So with that, we would like to open it up to your questions, and again, please remember Neal's caution. We have actually two attorneys in the room who are prepared to muzzle us if we were speak on the transaction. We would appreciate your not back-dooring us on those questions.

Question And Answer

Operator

[Operator Instructions]. Your first question will come from the line of Dan Johnson with Citadel Investment.

Daniel Johnson - Citadel Investment

I guess I had to throw out my question list. So instead let's take a question on SBI. This is around reserve development. We've had generally a good handful of points of positive development. I don't know, 2, 3 or 4 points over the last six or seven quarters. I realized one quarter of basically nothing isn't exactly a trend. But any observations you would like to offer about why we didn't see continued positive development? What trends had we been seeing before that came to an end?

Michael Hughes - Executive Vice President-Insurance Operations

Hey Dan, Mike Hughes. How are you?

Daniel Johnson - Citadel Investment

Good thank you?

Michael Hughes - Executive Vice President-Insurance Operations

As you know, we don't plan for positive or negative development on any of our reserves. So the fact that there were no reserves up or down doesn't throw us off at all. So we simply plan on what we think the loss costs will be and how our pricing and underwriting actions will continue to lead to our profitable target. So really being no reserves to us up or down, we are perfectly fine with that result.

Daniel Johnson - Citadel Investment

Understood, but we had been positively surprised by something over the last few years, and whatever that something was wasn't in existence in the first quarter.

Michael Hughes - Executive Vice President-Insurance Operations

All I can say is, you know like the industry the accident years 2002 through 2005 were very favorable, and we had seen that in our development the last couple of years. And we had seen certainly good development in our general liability line, and we just... this quarter it was not that development. But we are again fine with that.

Daniel Johnson - Citadel Investment

Also, within SBI I know we usually talk about frequency and severity focused more around auto. Can you talk a little bit about loss cost trends within important lines of business within SBI, please?

Michael Hughes - Executive Vice President-Insurance Operations

Sure. Loss cost trends basically are matching what our expectations were. They are running mid single digit. No line specifically stands out within that range of mid single digits. Worker's compensation has been a very strong line for us the last several years, and the loss costs are slightly less than that, driven by California and the reform in California.

Daniel Johnson - Citadel Investment

Okay thank you very much for taking the question.

Operator

Our next question will come from the line of Matthew Heimermann with JPMorgan.

Matthew Heimermann - JPMorgan

...I'm going to pick on you. The homeowners growth in the quarter, that obviously is moving in the opposite direction of auto. And I was just curious if you could give us some insights into the type of customer where you are seeing growth? Is it stand-alone, or is there some package or preferred growth that is actually going on that we just cannot see because of the auto trend?

Ross Kari - Executive Vice President and Chief Financial Officer

Yes, thanks Matt. Actually it is a little of both. First, I'll mention it's a very highly preferred book of business. As I think you already know through our third generation multivariable predictive model, we use many variables including credit, and we monitor all those variables individually. And I can tell you that, as we look at the tiers through credit, over 70% of our business that's being written is in the higher tiers of credit, and only 1% is in what I would call the lower three tiers of credit.

So first, it's a very preferred book both new and renewal. Second, from the cross-sell perspective, I'll give you a little color there. Last year our book of business was 55% cross-sold home to auto. Right now today it's 55% cross-sold, and there's several dynamics. We are writing some more monoline property because in some cases our competitiveness in auto with our rate increases isn't there. But at the same token, with our multivariate modeling, we do provide extra 10-year credits and cross-sell credits, and we've been retaining more cross-sold business on our renewal book.

In addition to that, we have increased our cross-sell initiatives for both auto and home, and we're starting to see some traction in both areas, cross-selling both auto and home. So what I suspect you will see going forward is that that 55% cross-sold rate will start to increase itself. Bottom-line I would say we're pleased with the book in homeowners, and it is certainly meeting our expectations.

Matthew Heimermann - JPMorgan

Okay, that's helpful. And then the other question I had was, and I kind of did a double take when I saw this in the press release, but you suggested you saw 2% increase, and I think you were just referring to the small commercial. But that certainly contrasts with what other peers are talking about, and I just was wondering if you could give us some insights there?

Ross Kari - Executive Vice President and Chief Financial Officer

Yes, thanks, that is a great question, and several points that I would like to make there. First off, we hope we're showing everyone, certainly ourselves, that we're keeping a strong discipline in place. You heard me mention that loss costs are moving up mid single digit, and our plan is to keep our combined ratio at the target of 95 or less. So we do feel we need to get some pricing, and that 2% pricing was for our small and mid-market business SBI regular.

The second point I will make, though, as you look at our growth, you will see the marketplace is difficult, and you see although our renewal retention is solid and steady, our new business has slipped... was down 15% in the first quarter as you allude to given the competitive conditions. But again, we are going to stay disciplined.

And the third point I want to make is that even with all that said, we are still going to vigorously compete. We are just not going to compete at the wrong price, and we'll compete through our automation system, ease of doing business, and we have some new products, breadth of product that will be coming out in the second and third quarter in many of our lines to continue to compete.

Matthew Heimermann - JPMorgan

Okay. Thank you very much.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

If I can could append on that too, we really thought long and hard before we decided to take rate in SBI because of industry conditions and the competition. And after a lot of soul-searching, we concluded that we absolutely needed to have rate to maintain profitability. And you can start saying, well, maybe they don't have the scale of some of the other players. Fundamentally we are very convinced that without rate, even small commercial is going to start to be really adversely affected because of loss cost trends.

Matthew Heimermann - JPMorgan

No, that is fair. Are you seeing any other follow-through by other carriers? I know agents had suggested they expected to see moderation as the year went on in small commercial. But I don't think anybody thought about increases. Are you alone in this, or are we seeing other changes?

Ross Kari - Executive Vice President and Chief Financial Officer

I would have to say at this point, the marketplace is very competitive. And although I would still say the profit margins in small are reasonable, it has become a little more competitive. And I cannot say I have seen anybody really move the pricing up.

Matthew Heimermann - JPMorgan

Okay thanks again.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

Maybe tweaking, but that's about it.

Matthew Heimermann - JPMorgan

All right. Thank you so much. Bye.

Operator

Your next question will come from the line of Michael Phillips with Stifel Nicolaus.

Michael Phillips - Stifel Nicolaus

A question back on auto for a second. Some might say that the rate changes you are taking now, maybe I am kind of reactionary to possible obviously mispricing in the past or missing some loss trends that have happened and kind of playing catch-up now. To what extent do you think the rate changes you are taking now are making you uncompetitive in the auto side?

Ross Kari - Executive Vice President and Chief Financial Officer

Making us uncompetitive on the auto side?

Michael Phillips - Stifel Nicolaus

Yes.

Ross Kari - Executive Vice President and Chief Financial Officer

A couple of points to that. One, let's break out the renewal retention. If you look at our retention year-over-year, it's basically been flat. If you look at it from December of last year '07 to right now, we've lost about seven-tenths of a point. When we analyze where we have loss that business, it is the unprofitable sales that we feel we need to address.

We know, and I will give you some flavor on that, five states specifically we went for rates 6 points or higher, and when we go for rates over 6 points, we do see some decline. But it is coming in... then we take it further, and it is coming into sales that have created some of the unprofitability for us. And those sales are hits on motor vehicle reports and individuals that had a frequency loss that we knew we needed to change our overall segmentation, which we have with our Safeco True Pricing program.

The other thing is we are becoming much stronger as a preferred carrier rather than a non-standard and a standard carrier. And if you look at the makeup of our book, you will say that our non-standard and standard, which make up about 15% of the book, is down 23% in policy count where our preferred business has basically been holding. It's down 1%. So the sales that we want to be running off are running off, and we feel pretty good about that.

As far as being able to compete in the future, I would say this. Our Safeco True Pricing third generation of segmentation was at about 35% of our book at the end of the year. It will be in 80% of our book coming into July. That does address one of those sales that created some problems for us, which is that frequency of loss with the policyholder or MVR individual.

Safeco True Pricing is both an offensive and defensive weapon, and where we had brought it in, our new business has improved. And the fact that now we're bringing it into some of our larger states, including Washington, Oregon, Florida, Texas and New York, we will be able to compete better.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

Let me maybe just append one comment here, too. If you come up from the granular level, up 10 or 20,000 feet, here is sort of a phenomenon that you would see. We just did an analysis of people who called to cancel and where they were going and what that dynamic was. And so what you see is that among those who are canceling, something like 60% of them ultimately are canceling because they have gone outside the channel. They have gone to a direct writer.

So within the agent's office for preferred book, our business is lined up pretty well with our competitors. But there is this phenomenon that says that probably even particularly in this economy, you have more shoppers, and they are shopping inside the channel, outside the channel, and then when they are leaving, they are leaving to the direct writer who maybe isn't as segmented around that, that book that's got more motor vehicle activity in it relative to those of us who are in the agent's office competing in a highly segmented way.

Michael Phillips - Stifel Nicolaus

Okay. Thanks for all the details. I appreciate it. It sounds like then I think somebody... Mike, did you say 85% to 15% preferred versus I don't know I assume then since you also said that you are shaving off the unprofitable and keeping the profitable, that that mix has changed substantially over the past year?

Michael Hughes - Executive Vice President-Insurance Operations

Actually it's moved 3 points I believe from 82% to 85%. But if you go back the last several years, it has moved from 78% to 85%.

Michael Phillips - Stifel Nicolaus

Okay, thanks for the answer, Mike.

Operator

[Operator Instructions]. And our next question will come from the line of Gary Ransom with Fox-Pitt Kelton.

Gary Ransom - Fox-Pitt, Kelton Cochran Caronia Waller

A question on the auto trends, particularly on frequency what you were seeing in the first quarter, if the economic environment has had much of an effect. And also whether you've detected any differences in regions of the country at all?

Michael Hughes - Executive Vice President-Insurance Operations

Thanks, Gary. This is Mike. Our overall loss cost was basically flat as you heard me say. On the frequency side, it was down 2% to 3%. On the severity side, it was up 2% to 3%, getting even a little more flavor there. On the DI side, it was mid single digit. We saw negative approximately 3% frequency, but we had severity that met our expectations and was slightly improved at 7% to 8% severity. We saw significant decrease in frequency of negative 5% in property damage, while we had an expected severity of plus 3%. So given those facts, once the trends... and I will address your economic question as well.

First off, I would tell you we do believe our actions that we mentioned on rates, on Safeco True Pricing, on unprofitable producer screening and all the activities that Eric Martinez mentioned on claims, has had a positive impact on both the frequency and severity.

On the economy it well may be that we had some help on frequency in the first quarter, although that's very difficult to see. And we don't plan on it, and when we talk about a 96 combined running rate by the third or fourth quarter, we're not planning on that helping the future. But, as I look at these frequencies, there is a possibility there was some help there. I can't really say any specific area across the country; the frequency just looks like it was down everywhere.

Gary Ransom - Fox-Pitt, Kelton Cochran Caronia Waller

Okay. And if I could follow up on the shopping behavior whether I think Paula mentioned that that may have changed a little bit in this economy. Is that just activity and quoting, but obviously there is the new business volume is down? I just wanted to see if I could get a feel for the activity of the shoppers versus what you're actually being able to bind.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

I think there is no doubt that quoting is up. So closed ratios are down, absolutely and relatively.

Michael Hughes - Executive Vice President-Insurance Operations

Yes, just to give you some specifics, our close ratio... excuse me, our flow has been healthy. It is up something like 5%. Our close ratio has dropped. It's down to about 15% for our preferred book and our retail agents given the actions we're taking and the competitiveness of the marketplace. But our distributors are still working with us very closely.

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

But there are shoppers out there. People are shopping. This economy is starting to show signs on the edges, and let's face it... this barrage of advertising that's gone on for a long period of time has conditioned people to think that shopping is going to be beneficial. And interestingly, in some of our behavior work on looking at what people will change out of policy for, comparable coverage for coverage people will cancel a policy for $25 or $50 at the six-month premium. So that is really going to force everybody to have to do a lot of fine-tuning.

Gary Ransom - Fox-Pitt, Kelton Cochran Caronia Waller

All right. Thank you very much.

Operator

Our next question will come from the line of Charles Gates with Credit Suisse.

Charlie Gates - Credit Suisse

I believe it was at year-end 2003, George Joseph at Mercury General I believe opined both with regard to Safeco and Travelers that that the election to basically adopt a take-all comers strategy based on tiering would contribute to much increased underwriting losses in personal auto. Given your own experience and you know that Travelers underwriting results in personal auto have also eroded, do you think there is wisdom in that comment?

Paula Rosput Reynolds - Chairman, President and Chief Executive Officer

I am going to take it Charlie, even though I'm not the insurance expert. Because the fact is that has been one of the nub issues that we've had to confront during my tenure. And the answer is that there is wisdom in that. But the wisdom isn't necessarily... I mean is it native wisdom or is it precise wisdom?

I think our experience has been that the concept of taking all comers works if you have enough scale to have the versatility around systems. So, for example, the more non-standard, more credit challenged customer requires your billing systems to be totally versatile in terms of bad debt collections and so on. It requires your claims systems to have more, shall we say, feistiness to them than you have with a kind of more of a white glove attitude.

So a lot of the polls that we've had to plug that I think really the realization began to dawn a couple of years into our Safeco second and third generation. A lot of the holes you have to plug are much more systematic way of doing business. And so, as a result, because those things are often difficult to implement quickly, the greater wisdom is in moving the segmentation back to expect only a preferred risk.

So that's been our lesson in this, that we were built-up as a Company natively around a preferred risk, and so our preferred risk is where we excel even if we have the pricing expertise to operate in a non-standard world. So for somebody who maybe has got more adaptable business systems, they can quote more broadly, and that can be their success. But you're quite right. In our world with our history, it has been something from which we've had to recover, and I think when you look at the kind of trend in combined that Mike is citing now and the array of business, I mean George Joseph's wisdom has obviously been borne out.

Charlie Gates - Credit Suisse

The only other question, and if it's inappropriate you are going to tell me, did the save of the Company reflect an auction?

Art Chong - General Counsel

Hey Charlie that's a question about the transaction, and we cannot answer that or comment.

Charlie Gates - Credit Suisse

Thank you.

Operator

And we have no further questions at this time. I would like to turn the call back over to Mr. Fuller for any closing remarks.

Neal Fuller - Senior Vice President of Finance and Treasurer

Thank you very much for your time and for your coverage of Safeco. If you have any follow-up questions, I can be reached at 206-373-5020. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Safeco Corp. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts