SAFECO Corp.'s $1.6B Comm Paper Prog Rtd 'A-1' by S&P NY

Business Wire, Sept 24, 1997

NEW YORK--(BUSINESS WIRE)--Sept. 24, 1997-- Standard & Poor's CreditWire 9/24/97 -- Standard & Poor's today assigned its `A-1' rating to SAFECO Corp.'s $1.6 billion commercial paper program. The long-term counterparty credit rating on the company is single-`A'-plus and the short-term counterparty credit rating is `A-1'. The outlook on the long-term rating is stable.

The company is expected to partially finance the acquisition of American States Intercompany Pool with funds from this commercial paper program.

MAJOR RATING FACTORS:

-- Strong capitalization at insurance operations. Consolidated capitalization at operating companies was significantly weakened by the extent of double leverage at the insurance operations created as a result of the American States transaction. Under Standard & Poor's capital adequacy model, pro forma capitalization of the combined insurance operations dropped to a good 144% from a superior 190%. Consolidated capitalization and double leverage are expected to improve as SAFECO pays down debt and issues equity; however, the improvement is not expected to materially better operating capitalization to a triple-`A' level in the near term.

-- Above-average financial flexibility at the operating insurance companies and at the holding company. As part of the financing of the deal, SAFECO Insurance Co. Intercompany Pool will be upstreaming $600 million in dividends, which will impact the insurance group's previously strong capital position. At the holding company, financial leverage is expected to increase and place added strain on the operating companies to service the debt and interest payments. On a pro forma basis, debt to capital is expected to rise to 27% from 24%, while fixed charge coverage will drop to 3.5 times (x) from 7.7x.

-- Heightened catastrophe exposure. As a larger and more geographically diversified company, SAFECO will be exposed to both frequency and severity risk. While SAFECO is expected to purchase additional reinsurance protection, the combination of a weaker capital position and a somewhat larger exposure increases the insurance group's catastrophe risk.

-- Improved business position. As a result of the American States acquisition, SAFECO's net written premiums will increase nearly 70% to $4 billion and provide the geographic and business diversity that SAFECO has been seeking. Additionally, the transaction safely places SAFECO as one of the preeminent agency writers in the property/casualty industry. However, a deal of this size and nature is expected to pose some challenges.

-- Operating performance of the consolidated group will decline, but still remain better than the industry's record. As SAFECO is able to integrate American States' personal lines business with its own, the consolidated operation's results should improve, but volatility may remain, given the new company's increased national presence. SAFECO has consistently produced a statutory combined ratio near 100%, while American States' operating results have been volatile and averaged 106%. Much of American States' weaker performance was a result of its personal lines operations and related catastrophe losses.

OUTLOOK: STABLE

Financial leverage and double leverage at the holding company should decline as the company pays down existing debt and issues additional equity, Standard & Poor's said. -- CreditWire -0- For more information on criteria or subscriptions: http://www.ratings.standardpoor.com

CONTACT: Kristin H Brooks, New York, 212/208-1252

Darin Feldman, New York, 212/208-8746