Safeco Shares at Fair Value

Safeco Corporation (SAF) is among the twenty largest property/casualty insurers in the United States, writing net premiums of $5.6 billion in 2007.

The company’s operating earnings were $1.60 per share, five cents below our expectations. They were down 3.0% year-over-year, driven by decline in premiums and substantially higher catastrophe losses. Liberty Mutual acquisition of Safeco is expected to close by the end of 3Q08. Therefore, given the takeout price of $68.25 per share, we see limited upside to owning the shares of Safeco at this time. Hence we reiterate our Hold recommendation.

Following a review of SAF’s 2Q08 results, we are maintaining our FY08 earnings expectation at $6.00 per share, but moderating our FY09E earnings expectation to $5.90 per share from $6.10 per share previously. At the current levels, the shares of SAF trade at 1.79 times its 2Q08 book value of $37.64 per share, significantly ahead of its peer median.

Our six-month price target of $68.25 per share reflects the current takeover price, which translates to an approximate multiple of 1.77 times to our estimated book value (at September 30, 2008) of $38.54 per share. This implies a total return of 1.8% (1.2% capital appreciation + an annualized 2.4% dividend yield).

Read the full analyst report on SAF