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With the close of Safeco Corp.s sale of its life operations to White Mountains Insurance Group, Ltd., analysts say that potential improvement of the units capital formation is one major benefit.

However, offsetting the benefits of new ownership, they add, are potential risks inherent in the business lines of Safeco Life Insurance Company, including its structured settlement business, group stop-loss business and asset management operations.

On Aug. 2, the sale of Seattle-based Safecos life operations was completed for $1.51 billion. The name of the life operations under new ownership will be changed to Symetra Financial on Sept. 1.

Analysts noted that private ownership could help Safeco Life improve its financial performance. Cash dividends that had been passed up to the parent could be deployed for capital formation, says Laura Bazer, an analyst with Moodys Investors Service, New York.

In the rating agencys confirmation of Safeco Lifes A2 financial strength rating, Moodys noted that “private ownership, although possibly not long term in tenure, should afford Safeco Life the time to improve its financial performance without the pressures of full public ownership.”

Among the risks associated with the life operations product lines, according to Moodys, is the risk of spread compression on its structured settlement and fixed annuity portfolios, its “sizeable exposure” to the group stop-loss business, and the credit-sensitive nature of its BOLI business.

In fact, in Safecos first-quarter 2004 report, it states that product lines including its structured settlement annuity business are “extremely sensitive” to financial strength ratings.

Kevin Maher, an analyst with Standard & Poors Corp., New York, also cites the ability to use retained earnings to build the company rather than pay out dividends to the parent. S&P revised its outlook on the life operations of the company to positive from stable.

Safeco Corp. will benefit by its new ability to focus on the property-casualty business, he adds. The operations that were sold are an “eclectic mix of businesses” for which Safeco received roughly 75% of book value, according to Maher.

The structured settlement business, he continues, is a “fairly well-managed” business that is one of the larger blocks in the marketplace. The structures are fairly predictable and are not likely to “present headaches 10 to 15 years from now,” he says. The business is the result of several acquisitions of smaller blocks of business that have resulted in a market where there are “not a lot of other competitors,” he notes.

Maher acknowledges the competitive nature of the income annuity business for structured settlements and says it could be considered a commodity.

The operations group stop-loss business is generally focused on high excess loss for individuals, he adds.

Maher says it is hard to say whether the operations will be sold later, but if such was the case, it would probably not be for at least another 3 to 5 years.

A look at Safeco Life using data provided by National Underwriter Insurance Data Services indicates that new business issued grew to $7.59 billion in 2003, up 31% from $5.8 billion in 2002.

Premium income declined to $1.7 billion in 2003, down 8.1% from 2002s $1.85 billion. That decline was driven by a decline in premium income from ordinary individual annuities and ordinary life insurance, the NU data suggests.

The data also indicates that life insurance in-force increased to $56.7 billion in 2003, 7.4% greater than 2002s $52.8 billion. The increase was helped significantly by an increase in ordinary term insurance.

The NU data also shows that net cash from operations was down 25.5% to $1.02 billion compared with $1.37 billion in 2002. However, after negative cash flow from operations in 2000, in both 2001 and 2002, net cash flow has been on the upswing, according to the NU data.


Reproduced from National Underwriter Edition, August 5, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.