Playing It Safe with Safeco
Safeco's (SAF) operating earnings of $147.9 million in 1Q08 were down 15.3% year-over-year, primarily due to lower premiums and higher catastrophe losses. However, operating earnings of $1.64 per diluted share were essentially the same as in the year-ago quarter, attributable to fewer average shares outstanding.
The company has implemented cost savings initiatives and programs to boost sales and underwriting profitability, including a market segmentation system, though strong competition in certain markets and products, especially in the auto segment, continue to pressure the company's premium and earnings growth. This trend is expected to continue during 2008.
Safeco recently entered into a definitive agreement to be acquired by Liberty Mutual Group for $68.25 per share. Our six-month price target of $68.25 per share (up from $50.00 per share previously), reflects the current takeover price, which translates to an approximately multiple of 1.80 times (up from 1.25 times) to our estimated book value (at September 30, 2008) of $37.95 per share. This implies a total return of 3.1% (1.8% capital appreciation + an annualized 2.4% dividend yield).