NEW YORK (CNNMoney.com) - On the surface, auto and home insurer Safeco delivered surprisingly strong earnings in the fourth quarter despite an increasingly competitive pricing environment and the devastating hurricanes in 2005.

Safeco (down $1.64 to $54.18, Research) reported net income increased to $190.7 million, or $1.53 per share, from $179.8 million, or $1.41, a year earlier. Excluding realized investment gains, earnings climbed 9 percent to $184.3 million, or about $1.48 per share. Analysts had expected the Seattle-based company to earn $1.28 a share, according to earnings tracker Thomson First Call.

Dig a little deeper, however, and there were a number of disappointing nuggets for the market to digest -- a fact that sent Safeco shares lower. For one thing, the higher-than-expected earnings were boosted in part by a $43 million reserve release in the quarter -- a one-time gain for the company.

But fundamentally Safeco was plagued by poor premium growth in its flagship private auto business and a year-over-year decline in its topline as measured by its net written premiums in the fourth quarter.

Private auto premiums, which account for about half of the company's premium production, fell 1.4 percent while quarterly property and casualty net written premiums fell 0.8 percent to $1.38 billion.

Investors keep a close eye on net written premiums, which reflect the total premiums on all policies written by an insurer during a specified period of time, regardless of what portions have been earned.

Insurance premiums are payable in advance but the insurance company doesn't fully earn them until the policy period expires. Therefore, net written premiums can be a good indicator of future profitability.

During the company's conference call with analysts, new chief executive Paula Reynolds, who replaced Mike McGavick in January, indicated that negative trends in pricing will continue to be a challenge for the company in 2006.

In particular, company executives said the company was facing "irrational pricing" competition as competitors sharply dropped rates in its auto and homeowners business in an effort to woo consumers. But Reynolds said despite the competition, the company wasn't planning on following prices down.

"There is no temptation to break with underwriting discipline," she said.

Reynolds added that as reinsurance rates rise in the wake of last year's barrage of hurricanes and ratings companies tighten their standards, it should hit the company's competitors hard, forcing them to raise prices back to a more reasonable level in order to maintain financial strength.

Peter Streit, insurance analysts at Williams Capital Group, said the company's continued focus on underwriting discipline and its investments in technology should help keep Safeco more competitive in the insurance marketplace.

Streit, who has a buy rating on the stock, said Safeco also benefits from strong catastrophe management.

In 2005, as the insurance industry reeled from the steady barrage of deadly hurricanes, Safeco's catastrophe losses after the benefit of reinsurance fell to $267.4 million for the year from $275.4 million in 2004. Part of the company's strategy was to curb its exposure to hard-hit regions such as the Gulf Coast and Florida.

Michael Paisan, principle at Stifel Nicolaus & Co. said it's likely the company will continue to pull out or minimize its exposure to high-risk markets going forward and will manage its risk by increasing its reinsurance.

And, on its conference call, the company said it renewed its property-casualty reinsurance policies and while reinsurance pricing jumped by 20 percent to 200 percent in some cases, Safeco was able to increase its reinsurance coverage at the low end of that spike in pricing.

"I think the company is doing what it should be doing in the face of a tougher market," said Paul Newsome, senior research analyst at A.G. Edwards. "But the stock will be challenged" as Wall Street maintains caution.

One area that's keeping investors skittish is the direction the company will take under the new CEO. Reynolds took over the helm on Jan. 1 after McGavick decided to run as a Republican for the U.S. Senate seat from Washington.

The appointment garnered mixed reviews on Wall Street as analysts raised concerned that Reynolds, who had spent her entire career in the energy industry and most recently served as chief executive of AGL Resources Inc., would be too green to take over the insurance company.

Analysts that had hoped for some specific guidance on the company's direction were disappointed, although A.G. Edwards Newsome said Wall Street would likely give the new CEO another quarter to become more familiar with the company before asking the hard questions.

Newsome said her lack of experience of insurance experience was a concern, particularly as the industry faces a challenging environment.

But Stifel Nicolaus' Paisan said he expects Reynolds to follow in McGavick's footsteps when it comes to maintaining underwriting discipline and "making it a much leaner, more flexible company."

"Her background at what she was doing was very successful," he said. "There's no reason she can't translate that success into Safeco."

None of the analysts quoted in the article own shares of Safeco but A.G. Edwards has a non-investment banking relationship with the company.

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Analysts do see a positive outlook for the insurance industry in 2006. Read more here.