According to a press statement issued by White Mountains, Berkshire and White Mountains will each invest equally in the life and investments operation, putting $200 million in a newly formed acquisition company that will be capitalized with $1.0 billion. Eight additional investor partners were listed in the press statement.

According to Safeco Chief Financial Officer Christine Mead, the sale could potentially net Safeco an additional $25 million at closing. More precisely, she said, “the price may increase or decrease depending on statutory capital of the life company at June 30, 2004.” Together, the businesses sold for $1.44 billion, but since the price was lower than the value that Safeco carried on its books for those businesses, the company will incur a $200 million loss after taxes.

During the conference call, an analyst asked Mr. McGavick whether he had second thoughts about selling the businesses considering the loss and whether there is anything “inherently wrong” with the life business given that its market value was less than what was recorded on Safeco's balance sheet.

Mr. McGavick pointed out that the P-C operation has been delivering a return-on-equity in the mid-teens, while the life business had been generating less than 10 percent. “That was unlikely to change,” he said, noting that that calculation weighed heavily in the decision. “If anything, we thought we could do a little better on P-C and as we've been reporting to you for a year, that the life segment was likely to deteriorate. So that just didn't seem like a very attractive use of our shareholders' capital,” he said.

Responding to the issue of the lower market price, he said that when prospective buyers determine a price, they factor “what the future earnings stream looks like” into their calculations. He also said that the life business sold was not plain vanilla life insurance, but included a complex mix of businesses, noting that one-third of the life books of businesses were structured settlements and bank-owned life insurance blocks.

Separately, Eric Trott, a media representative for Safeco, noted another positive aspect of the deal was that by selling the life insurance businesses as a unit, Safeco saved about 1,500 jobs.

In a press statement, Mr. McGavick said that current management will continue to run each of the sold businesses with the same commitment to channel distribution and customer service.

As for what's ahead for the P-C businesses at Safeco, during an interview, Dale Lauer, president and chief operating officer of Safeco Business Insurance, stressed the ability of Safeco to invest more in a “differentiated business model” that the insurer has its been developing for almost a year.

With a focus on three main products auto, home and small business that model “basically unifies sales, services and claims capabilities in one platform as delivered through ouragency partners,” Mr. Lauer said. A key component of the model is technology that allows an agent to go to one site and to quote and sell those three products in one step in a matter of minutes, he said. (For more details of the business model and Safeco's focus on small-business owners, see NU, Jan. 5, page 15.)

The sale of the life businesses “allows us to sharpen that focus reducing our costs and increasing efficiencies,” Mr. Lauer said.

Responding to the question of how the life businesses got in the way of those goals, Mr. Lauer said it was “a matter of organizational complexity.” By supporting multiple channels and multiple products, “you have a more complex corporate organization.” Reducing the complexity allows Safeco to increase its efficiency and focus, he said.

Safeco expects both transactions, which are subject to regulatory approvals, to close before the end of third-quarter 2004.

During the conference call, Ms. Mead said that proceeds from the sales would be used first to reduce the company's debt, while the bulk of the proceeds would be distributed back to shareholders in the form of a special dividend or stock repurchase plan. Only a small amount of the proceeds could be retained to support the P-C operations, she said.

At White Mountains, Chief Financial Officer David Foy said that his firm's investment in Safeco's life insurance businesses is the first in that sector, adding that his own background on the life side of the business allowed the company to spot a good deal. Mr. Foy was the CFO of Hartford Life before joining White Mountains in 2003 and has a background as a life insurance actuary.

Mr. Foy said White Mountains doesn't have any particular goals or targets to acquire life insurance operations but noted that his expertise in the segment does give the company the capability to explore other deals.

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, March 19, 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.