Not surprisingly in the asset management business these days, companies that once thought they could do it all are now returning to their core businesses and product lines.

The latest one to admit defeat was Seattle-based Safeco Corp., which is selling its Life & Investments (L&I) division in order to recommit solely to property and casualty, homeowners and automotive insurance lines. The L&I division encompasses Safeco's mutual funds, annuities, life insurance, employee benefits and medical insurance products sold through agents, banks and financial advisers.

A Strategic Decision'

"It became apparent to us that we could not be truly excellent in both the P&C and the life and investments business. It was clear to us that we were going to have to make a strategic decision," said Mike McGavick, chairman and CEO of Safeco, in a conference call last Tuesday. "As the interest rates flattened out and made the competitive pressures in that marketplace even tougher, lacking scale over time was going to be a crucial disadvantage. The best chance for the Life & Investments business [is] to be owned by someone focused on that business with superior scale."

Safeco has hired Goldman Sachs to find a buyer for the division. A spokesman for the company did not have any more information on potential buyers at this time.

During the conference call, Safeco also said it was reducing expenses by $75 million and laying off 500 employees by the end of 2004 to focus more closely on its P&C products. It is also redesigning its internal employee pay and benefits packages.

According to Safeco, last year the division generated pretax operating earnings of $237 million, which was based on revenues of about $2 billion. Total assets for the group were $23.2 billion at the end of the second quarter. (Mutual fund assets totaled $4 billion for that same period.) Book value under the generally accepted accounting principles (GAAP) was $2.8 billion ($1.7 billion excluding unrealized net gains) as of June 30.

"It's a symptomatic problem of insurance companies," said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I. "Generally, those that have small money management arms have a difficult time making it work."

According to Bobroff, Safeco's challenge was one of size, scale and the inability to attract and retain personnel that would give the company an edge. Speaking of companies in Safeco's position, Bobroff said, "Most don't have large enough portfolios for them to attract first-class talent, or the cost is too expensive to retain them."

On the Heels of Restructuring

Industry observers were surprised not at the announcement, but at the timing, because the company had gone through restructuring earlier this year to improve its mutual fund business.

"One now wonders whether that was an effort to polish things up and get it ready for sale," said Langdon Healy, an analyst with Morningstar.

Bobroff, also surprised, said that Safeco kept changing the objectives of its mutual fund business by going from load to no-load funds and back to a combination of the two fund types. It also hired Kevin Rowell to head up its mutual funds division last September.

Nonetheless, "Safeco's agents are primarily P&C agents," he said. "When they look at the business to the future, the fund industry's growth is anemic except for a handful of firms."

Healy also worries that the sale will negatively affect Safeco fund shareholders. "That's partly just because acquisitions in general are problematic," he said.

"Mutual funds stand in a difficult position in that they have an obligation to the shareholders to their funds and [also when they are] managed by an asset management company [that] has an obligation to try to serve the shareholders in the stock of the company," Healy said. "Anybody that's interested in Safeco as a buyer is presumably interested in buying it because they believe they can make a profit by owning it. Being profitable means ever-larger assets under management, and that goal may not be in line with the interests of the fund shareholders."

McGavick said that after debt, proceeds from the sale will be returned to shareholders via special dividend or through a stock repurchase plan.

Copyright 2003 Thomson Media Inc. All Rights Reserved.

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