<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission File Number 1-6563
SAFECO CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Washington 91-0742146
---------- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
SAFECO Plaza, Seattle, Washington 98185
----------------------------------------
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code (206) 545-5000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
62,995,413 shares of no par value common
stock were outstanding at September 30, 1994.
<PAGE> 2
SAFECO CORPORATION
- - - ---------------------------------------------------------------
TABLE OF CONTENTS & SIGNATURES
Part I - Financial Information* Page
---------
Item 1. Financial Statements:
Consolidated Balance Sheet,
September 30, 1994 and December 31, 1993 3
Statement of Consolidated Income and Retained
Earnings for the Quarters and Nine Months
Ended September 30, 1994 and 1993 5
Statement of Consolidated Cash Flows for the Nine
Months Ended September 30, 1994 and 1993 6
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibit 27 Financial Data Schedule
(b) Form 8-K was not required to be filed for any
event during the quarter ended September 30, 1994.
* The accompanying unaudited condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q.
In the opinion of management, they include all adjustments (none
of which were other than normal and recurring adjustments) which
are necessary for a fair presentation of results for the interim
periods. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-K for the year ended
December 31, 1993 which has previously been filed with the
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
SAFECO CORPORATION
------------------
(Registrant)
BOH A. DICKEY
---------------
Boh A. Dickey
Executive Vice President and
Dated November 7, 1994 Chief Financial Officer
ROD A. PIERSON
---------------
Rod A. Pierson
Senior Vice President, Secretary, Controller
Dated November 7, 1994 and Chief Accounting Officer
-2-
<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
- - - --------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
1994 1993
ASSETS ------------ ------------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale,
at Market Value (Amortized Cost:
$9,420,534) (a) $9,492,905 $ -
Fixed Maturities Held-to-Maturity,
at Amortized Cost (Market value:
1994-$1,863,501;
1993-$11,965,731) 1,962,046 10,720,976
Marketable Equity Securities,
at Market Value (Cost:
1994-$556,781;
1993-$513,138) 914,610 910,252
Mortgage Loans 413,476 402,138
Real Estate (At cost less
accumulated depreciation) 473,357 447,797
Policy Loans 51,843 50,488
Short-Term Investments 91,529 109,047
------------ ------------
Total Investments 13,399,766 12,640,698
Cash 47,347 67,833
Accrued Investment Income 219,979 210,289
Finance Receivables 594,286 547,759
Premiums and Other Service Fees
Receivable 420,786 400,873
Other Notes and Accounts Receivable 81,825 75,977
Reinsurance Recoverables 206,847 126,240
Land, Buildings and Equipment for
Company Use (At cost less
accumulated depreciation) 155,277 149,618
Deferred Policy Acquisition Costs 385,663 367,303
Other Assets 293,459 220,701
------------ ------------
TOTAL $15,805,235 $14,807,291
============ ============
(continued)
-3-
<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts) (continued)
- - - --------------------------------------------------------------------
September 30 December 31
1994 1993
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Adjustment Expense $2,268,454 $2,128,372
Unearned Premiums 889,443 819,385
Life Policy Liabilities 155,793 151,488
Funds Held Under Deposit Contracts 7,759,103 7,229,439
Notes and Mortgages Payable:
Credit Company Borrowings ($393,430
maturing within one year) 472,280 427,930
10.75% Notes Due September 1995 200,000 200,000
Other Notes and Mortgages ($18,098
maturing within one year) 279,272 290,505
Other Liabilities 722,683 629,891
Federal and Canadian Income Taxes:
Current 18,656 37,963
Deferred (Includes tax on unrealized
appreciation of investment
securities: 1994-$150,570;
1993-$138,990) (a) 114,463 117,927
------------ ------------
Total Liabilities 12,880,147 12,032,900
------------ ------------
Preferred Stock, No Par Value:
Shares Authorized: 10,000,000
Shares Issued and Outstanding: None - -
Common Stock, No Par Value:
Shares Authorized: 150,000,000
Shares Reserved for Options:
1994-2,061,941; 1993-2,182,828
Shares Issued and Outstanding:
1994-62,995,413; 1993-62,931,562 210,657 207,480
Retained Earnings 2,433,655 2,307,322
Unrealized Appreciation of Investment
Securities, Net of Tax (a) 283,664 262,157
Unrealized Loss from Foreign Currency
Translation, Net of Tax (2,888) (2,568)
------------ ------------
Total Stockholders' Equity 2,925,088 2,774,391
------------ ------------
TOTAL $15,805,235 $14,807,291
============ ============
<FN>
(a) See Management's Discussion and Analysis -
"Other - Footnote" section.
</TABLE>
-4-
<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except Per Share Amounts)
- - - -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
----------------------- -----------------------
1994 1993 1994 1993
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $1,517,223 $1,424,145 $529,234 $493,925
Life & Health Premiums & Other Revenues 209,984 231,870 68,451 74,544
----------- ----------- ----------- -----------
Total 1,727,207 1,656,015 597,685 568,469
Real Estate 84,220 58,181 30,931 17,154
Finance 38,737 37,541 13,948 12,552
Asset Management 13,130 9,461 5,687 3,262
Net Investment Income 735,927 711,228 249,303 239,306
Realized Investment Gain 24,983 136,874 4,242 56,272
----------- ----------- ----------- -----------
Total 2,624,204 2,609,300 901,796 897,015
----------- ----------- ----------- -----------
EXPENSES:
Losses, Adjustment Expense and
Policy Benefits 1,646,327 1,519,343 570,804 504,818
Commissions 295,657 274,297 105,420 95,869
Proposition 103 Settlement - 40,000 - 40,000
Personnel Costs 165,840 169,628 55,453 57,606
Interest 50,801 44,198 17,670 14,883
Dividends to Policyholders 17,339 14,416 6,469 5,026
Other 200,243 167,590 69,361 54,025
Amortization of Deferred Policy
Acquisition Costs 293,615 273,549 101,096 94,957
Deferral of Policy Acquisition Costs (313,022) (294,099) (110,256) (102,719)
----------- ----------- ----------- -----------
Total 2,356,800 2,208,922 816,017 764,465
----------- ----------- ----------- -----------
Income before Income Taxes 267,404 400,378 85,779 132,550
----------- ----------- ----------- -----------
Provision (Benefit) for Federal
and Canadian Income Taxes:
Current 63,689 127,207 17,112 44,178
Deferred (14,872) (22,474) (3,845) (5,418)
----------- ----------- ----------- -----------
Total 48,817 104,733 13,267 38,760
----------- ----------- ----------- -----------
Income before Cumulative Effect
of Accounting Changes 218,587 295,645 72,512 93,790
Cumulative Effect of Accounting Changes:
Postretirement Benefits - (15,676) - -
Income Taxes - 18,553 - -
----------- ----------- ----------- -----------
Net Income 218,587 298,522 72,512 93,790
Retained Earnings, Beginning of Period 2,307,322 1,993,350 2,392,445 2,141,580
Dividends Declared (90,065) (82,378) (30,868) (28,314)
Common Stock Reacquired (2,189) (3,803) (434) (1,365)
----------- ----------- ----------- -----------
Retained Earnings, End of Period $2,433,655 $2,205,691 $2,433,655 $2,205,691
=========== =========== =========== ===========
Net Income Per Share of Common Stock:
Income before Cumulative Effect
of Accounting Changes $3.47 $4.70 $1.15 $1.49
Cumulative Effect of Accounting Changes:
Postretirement Benefits - (0.25) - -
Income Taxes - 0.30 - -
----------- ----------- ----------- -----------
Net Income $3.47 $4.75 $1.15 $1.49
=========== =========== =========== ===========
Average Number of Shares Outstanding
During the Period (In Thousands) 62,971 62,863 62,988 62,894
=========== =========== =========== ===========
Cash Dividends Paid to Common
Stockholders $1.39 $1.27 $0.49 $0.45
=========== =========== =========== ===========
<FN>
Income per share of common stock is based on the average number of common
shares outstanding. Stock options do not have a significant dilutive
effect on income per share.
-5-
</TABLE>
<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
- - - ------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
1994 1993 *
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Insurance Premiums Received $1,730,935 $1,643,591
Dividends and Interest Received 721,356 687,675
Other Operating Receipts 133,648 92,156
Insurance Claims and Policy
Benefits Paid (1,269,183) (1,193,156)
Underwriting, Acquisition and
Insurance Operating Costs Paid (596,378) (548,111)
Interest Paid (54,181) (45,139)
Other Operating Costs Paid (75,101) (48,949)
Income Taxes Paid (76,470) (125,714)
----------- -----------
Net Cash Provided by
Operating Activities 514,626 462,353
----------- -----------
INVESTING ACTIVITIES:
Purchase of:
Fixed Maturities Available-for-Sale (1,584,272) -
Fixed Maturities Held-to-Maturity (262,546) (2,218,051)
Equities (98,908) (93,258)
Other Investments (130,009) (97,748)
Maturities of Fixed Maturities
Available-for-Sale 626,188 -
Maturities of Fixed Maturities Held-to-Maturity 52,991 760,394
Sale of:
Fixed Maturities Available-for-Sale 562,861 -
Fixed Maturities Held-to-Maturity - 730,415
Equities 73,365 125,865
Other Investments 96,622 67,616
Net Decrease in Short-Term Investments 23,362 58,195
Finance Receivables Originated
or Acquired (220,595) (197,607)
Principal Payments Received
on Finance Receivables 161,616 147,721
Other (34,652) (18,532)
----------- -----------
Net Cash Used in
Investing Activities (733,977) (734,990)
----------- -----------
FINANCING ACTIVITIES:
Funds Received Under
Deposit Contracts 731,442 799,218
Return of Funds Held Under
Deposit Contracts (482,157) (402,150)
Proceeds from Notes and
Mortgage Borrowings 38,174 23,950
Repayment of Notes and
Mortgage Borrowings (119,395) (47,656)
Net Proceeds from (Repayment
of) Short-Term Borrowings 119,163 (10,019)
Common Stock Reaquired (2,325) (4,008)
Dividends Paid to Stockholders (87,520) (79,819)
Other 1,483 3,087
----------- -----------
Net Cash Provided by
Financing Activities 198,865 282,603
----------- -----------
Net Decrease in Cash (20,486) 9,966
Cash at Beginning of Period 67,833 73,122
----------- -----------
Cash at End of Period $47,347 $83,088
=========== ===========
(continued)
-6-
<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS (continued)
(In Thousands)
- - - ------------------------------------------------------------------------
Nine Months Ended
September 30
-----------------------
1994 1993 *
----------- -----------
Net Income $218,587 $298,522
----------- -----------
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Realized Investment Gain (24,983) (136,874)
Depreciation and Amortization 28,993 23,082
Amortization of Fixed Maturity Investments (16,270) (17,430)
Deferred Income Tax Benefit (14,872) (22,474)
Interest Expense on Deposit Contracts 293,490 303,141
Cumulative Effect of Accounting Changes - (2,877)
Other Adjustments 8,789 4,341
Changes in:
Losses and Adjustment Expense Liabilities 140,082 18,994
Unearned Premiums 70,058 82,170
Life Policy Liabilities 4,305 (120)
Accrued Income Taxes (19,307) 3,475
Accrued Interest on Accrual Bonds (32,275) (44,251)
Accrued Investment Income (9,690) (4,399)
Deferred Policy Acquisition Costs (18,360) (20,550)
Other Assets and Liabilities (113,921) (22,397)
----------- -----------
Total Adjustments 296,039 163,831
----------- -----------
Net Cash Provided by Operating Activities $514,626 $462,353
=========== ===========
<FN>
* Certain reclassifications have been made to the 1993
amounts to conform to current year classifications.
</TABLE>
-7-
<PAGE> 8
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - - -------------------------------------------------------------------
SAFECO Corporation
- - - ------------------
Our net income for the first nine months of 1994 was $218.6 million or
$3.47 per share compared with $4.75 for 1993. If we exclude realized
gain from investments, which is explained in the next paragraph, our per
share income was $3.21 per share, compared with $3.34 per share in 1993.
These results for the first nine months of 1994 have been impacted $1.24
per share as a result of the January, 1994 Los Angeles earthquake as
discussed below. Third quarter and nine month 1993 results include a
$0.41 per share charge related to our California Proposition 103
settlement.
During the first nine months of 1994, realized gain from investments was
$0.26 per share, compared with $1.36 per share in 1993. The pretax gain
from security investments of $25.0 million compares with $128.8 million
a year ago. Declining interest rates during 1993 produced calls and
redemptions in our bond portfolios resulting in substantial capital
gains. As interest rates have risen in 1994, calls and redemptions have
decreased significantly.
The following summarized financial information sets forth the
contributions of each business segment to our consolidated income.
Nine Months Ended Three Months Ended
September 30 September 30
--------------------- --------------------
1994 1993 1994 1993
- - - ----------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
Income (Loss) before
Realized Gain
and Income Taxes:
Property and Casualty
Insurance:
Underwriting
Gain (Loss) $ (73,657) $ (9,339) $(29,075) $ 12,293
Net Investment
Income 211,070 208,030 70,891 69,058
Proposition 103
Settlement - (40,000) - (40,000)
--------- --------- --------- --------
Total Property
and Casualty 137,413 158,619 41,816 41,351
Life and Health
Insurance 95,619 93,078 35,841 30,369
Real Estate 7,724 7,170 2,531 2,340
Credit 7,440 7,835 2,961 2,944
Asset Management 4,694 4,377 1,586 1,498
Corporate (10,469) (7,647) (3,198) (2,224)
--------- ---------- ---------- ---------
Total 242,421 263,504 81,537 76,278
--------- ---------- ---------- ---------
Realized Gain (Loss),
before Tax, from:
Security Investments 25,034 128,810 4,242 54,790
Real Estate Investments (51) 8,064 - 1,482
--------- ---------- --------- ---------
Total 24,983 136,874 4,242 56,272
--------- ---------- --------- ---------
Income before Income
Taxes 267,404 400,378 85,779 132,550
--------- ---------- --------- ---------
Provision for Income
Taxes on:
Income before Realized
Gain 40,434 53,439 11,854 14,685
Realized Gain 8,383 51,294 1,413 24,075
--------- --------- --------- ---------
Total 48,817 104,733 13,267 38,760
--------- --------- --------- ---------
Income before Cumulative
Effect of Accounting
Changes 218,587 295,645 72,512 93,790
Cumulative Effect of
Accounting Changes:
Postretirement Benefits - (15,676) - -
Income Taxes - 18,553 - -
--------- --------- --------- ---------
Net Income $ 218,587 $ 298,522 $ 72,512 $ 93,790
========= ========= ========= =========
Net Income Per Share
of Common Stock:
Income before Cumulative
Effect of Accounting
Changes $3.47 $4.70 $1.15 $1.49
Cumulative Effect of
Accounting Changes:
Postretirement Benefits - (.25) - -
Income Taxes - .30 - -
---------- ---------- ---------- ---------
Net Income $ 3.47 $ 4.75 $ 1.15 $ 1.49
========== ========== ========== =========
- 8 -
<PAGE> 9
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - ----------------------------------------------------------------------
Property and Casualty Insurance
- - - -------------------------------
Property and casualty operations for the first nine months of 1994
produced pretax income of $137.4 million before realized gain from
investments, compared with $198.7 million (excluding the $40 million
Proposition 103 settlement) for the first nine months a year ago. The
third quarter of 1994 produced an underwriting loss of $29.1 million.
During the quarter the estimated cost of claims from the January 17 Los
Angeles earthquake was increased from $175 to $225 million, before
reimbursement from reinsurers. SAFECO's reinsurance covers 90% of losses
between $50 and $200 million. Additional earthquake costs recorded
during the third quarter were $30.2 million, resulting from the increase
in the earthquake estimate of $27.5 million of net losses and an
additional $2.7 million that we are paying our reinsurers to fully
reinstate our coverage for a second catastrophe event in 1994, should it
occur. For the first nine months, the loss from underwriting was $73.7
million, compared with a loss of $9.3 million a year ago. The current
year results include $90.0 million in net losses from the earthquake and
$23.3 million of reinsurance reinstatement premiums. The combined loss
and expense ratio was 104.9 for the first nine months, compared with
100.7 last year. Investment income was $211.1 million, up slightly from
a year ago.
Personal auto, our largest line, continues to perform well. This line
produced an underwriting profit of $47.2 million for the first nine
months, compared with $25.3 million for the first nine months last year.
Current year loss costs are up approximately 6% over a year ago.
Other personal lines, which provide coverage for earthquake, dwelling
fire, inland marine, boats and recreational vehicles, were adversely
affected by the Los Angeles earthquake described earlier. These lines
produced an underwriting loss of $25.4 million for the third quarter and
a loss of $85.6 million for the first nine months. By comparison, these
lines produced a profit of $20.6 million for all of 1993. In the Consolidated
Balance Sheet, the asset Reinsurance Recoverables is higher at September 30,
1994 due to the amounts recoverable by SAFECO from its reinsurers related to
the Northridge earthquake.
Homeowners produced an underwriting loss of $27.5 million for the first
nine months, compared with a loss of $49.9 million for the first nine
months of 1993. The improvement in 1994 results is partially due to
lower catastrophe losses which were $30.4 million after reinsurance, for
the first nine months, compared with $42.4 million a year ago. In
addition, results for this line are benefiting from rate increases and
continuing efforts to improve homeowners insurance to value.
Commercial lines produced an underwriting loss of $17.6 million for the
first nine months, operating at a combined ratio of 104.4. A year ago,
the loss was $12.8 million and the combined ratio was 103.6. The
combined ratios for both years compare favorably with the industry and
are a result of our focus on specific states and efforts to reduce
expense and maintain rate adequacy in the face of stiff price
competition.
- 9 -
<PAGE> 10
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - ----------------------------------------------------------------------
Surety continues to experience excellent results for both contract and
commercial bond business. The profit for this line was $11.2 million for
the first nine months, compared with a profit of $15.4 million for the
first nine months last year.
Total premiums written for the first nine months increased 8% over a
year ago with personal lines up 8% and commercial lines up 9%.
Life and Health Insurance
- - - -------------------------
Life and health insurance operations produced a pretax profit, before
realized gain from investments, of $95.6 million for the first nine
months of 1994. This compares with $93.1 million for the same period in
1993. Income for the third quarter was $35.8 million, up from the $29.8
million for the second quarter and $30.4 million for the third quarter
of last year.
The annuity and pension lines combined nine months earnings were $35.1
million, up from the $26.6 million reported for the first nine months of
1993. The favorable effects of reduced expenses and increased investment
income attributable to rising interest rates are the major factors
contributing to the excellent earnings in annuity and pension lines.
Group insurance earnings were $15.8 million for the first nine months,
compared with $21.0 million for the first nine months of 1993. Lower
group earnings and premium revenue were primarily caused by competitive
pressures and market uncertainty surrounding health care reform.
Real Estate
- - - -----------
SAFECO Properties' pretax income was $7.7 million for the first nine
months of 1994, compared with $7.2 million for 1993. In the Statement
of Consolidated Income, the increase in Real Estate Revenues and Other
Expenses is due primarily to a higher level of sales of properties held
for sale in the first and third quarters of 1994.
- 10 -
<PAGE> 11
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - ----------------------------------------------------------------------
Credit
- - - ------
SAFECO Credit Company reported pretax profit of $7.4 million for the
first nine months of 1994 compared with $7.8 million in 1993. New
loan/lease production continued at record levels which partially offset
the effect of continuing rate competition and increased borrowings
costs. Non-affiliate receivables and operating leases reached $631
million at September 30, 1994, a 13% annualized increase from December,
1993. Delinquency experience continued at record low levels with
accounts past due 30 days or more less than 1% at September 30th.
SAFECO Credit's summarized financial information is as follows (in
thousands):
September 30 December 31
1994 1993
---------- -----------
Finance Receivables $ 594,286 $ 547,759
Other Assets 107,753 114,283
---------- ----------
Total Assets $ 702,039 $ 662,042
========== ==========
Credit Company Borrowings $ 472,280 $ 427,930
Other Liabilities 141,986 150,380
---------- ----------
Total Liabilities $ 614,266 $ 578,310
========== ==========
Nine Months Ended September
---------------------------
1994 1993
-------- ------
Revenues $ 41,825 $ 40,194
Expenses 34,385 32,359
--------- ---------
Income before Income Taxes 7,440 7,835
Provision for Federal Income Taxes 2,272 2,911
--------- ---------
Income before Cumulative Effect of
Accounting Changes 5,168 4,924
Cumulative Effect of Accounting
Changes - 403
--------- ---------
Net Income $ 5,168 $ 4,521
========= =========
Asset Management
- - - ----------------
The pretax income from our investment management activities for the
first nine months of 1994 was $4.7 million, compared with $4.4 million
for the same period last year. Assets under management are approximately
$2.5 billion, up from $2.3 billion a year ago. As part of our strategy
to increase assets, we launched two new lines of business during the
quarter: SAFECO Advisor Series, a mutual fund family that will be
distributed through banks and broker-dealers, and SAFECO Trust Company,
which will provide trust services to high net worth individuals.
Investment Portfolios
- - - ---------------------
The market value of our consolidated bond portfolio was $26 million
below amortized cost at September 30, 1994. This compares with market
value being in excess of amortized cost by $168 million at June 30, 1994
and $1.2 billion at December 31, 1993. These declines reflect the
weakness in the bond market during 1994 as a result of higher interest
rates. However, these higher interest rates will benefit our investment
income in the future.
The market value of our equity securities was $358 million in excess of
cost at September 30, 1994.
- 11 -
<PAGE> 12
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - ----------------------------------------------------------------------
Other - Footnotes
- - - -----------------
The following additional footnote disclosures are being made due to the
adoption of two new accounting standards in the first quarter of 1994.
Employee Benefit Plans
----------------------
SAFECO adopted Financial Accounting Standards Board Statement 112,
"Employers' Accounting for Postemployment Benefits", effective
January 1, 1994. Adoption had no effect on net income.
Investments
-----------
In May 1993, the Financial Accounting Standards Board issued
Statement 115, "Accounting for Certain Investments in Debt and
Equity Securities", which expands the use of fair value accounting
for debt and equity securities. As of January 1, 1994, SAFECO
adopted the provisions of this statement for investments held as
of, or acquired after that date. Statement 115 requires that debt
and equity securities be classified as trading, available-for-sale
or held-to-maturity. Debt securities that SAFECO has the positive
intent and ability to hold to maturity (as narrowly defined by
Statement 115) are classified as held-to-maturity and are reported
at amortized cost. Debt securities classified as available-for-sale
are carried at market value, with changes in unrealized gains and
losses recorded directly to stockholders equity, net of applicable
income taxes and deferred policy acquisition costs valuation
allowance. All marketable equity securities continue to be carried
at market value, with changes in unrealized gains and losses
recorded directly to stockholders' equity, net of applicable income
taxes. Under Statement 115, trading securities are to be carried at
market value with immediate recognition in income of changes in
market value. Since SAFECO does not have any securities held for
trading, the adoption of Statement 115 had no effect on net income.
As required by Statement 115, no restatement of prior period
amounts has been made.
- 12 -
<PAGE> 13
SAFECO CORPORATION
- - - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - ----------------------------------------------------------------------
The following reconciliation of Stockholders' Equity from December
31, 1993 to September 30, 1994 shows the effect of adoption of Statement
115 as of January 1, 1994 and the change in net unrealized holding gains
(losses) for the first nine months of 1994.
(In Thousands)
Stockholders' Equity, December 31, 1993 $2,774,391
Net effect of adoption of Statement 115 (1) 640,477
----------
Stockholders' Equity, January 1, 1994 3,414,868
Net income 218,587
Dividends declared (90,065)
Net decreased in unrealized appreciation of
investment securities, net of tax and
deferred policy acquisition costs valuation
allowance (2) (618,971)
Other items affecting Stockholders' Equity 669
----------
Stockholders' Equity, September 30, 1994 $2,925,088
==========
SAFECO had no sales during the first nine months of debt securities
classified as held-to-maturity. The decline in the unrealized
appreciation of investment securities was due to weakness in both
the bond and stock markets as a result of higher interest rates.
See note (2) below for the components of the decrease.
(1) The net effect of adopting Statement 115
is comprised as follows:
Aggregate market value in excess of
amortized cost of debt securities
classified as available-for-sale,
at January 1, 1994 $1,013,117
Deferred policy acquisition costs
valuation allowance (27,768)
Deferred income taxes, at 35% (344,872)
-----------
Net effect of adoption of
Statement 115 $ 640,477
==========
(2) The decrease in net unrealized
appreciation of investment
securities is comprised
as follows:
Decrease in unrealized appreciation
of debt securities, available-
for-sale $ (940,746)
Decrease in unrealized appreciation
of marketable equity securities (39,285)
Decrease in deferred policy acquisition
costs valuation allowance 27,768
Decrease in deferred income taxes 333,292
----------
Net decrease in unrealized appreciation
of investment securities, net of tax
and deferred policy acquisition costs
valuation allowance $ (618,971)
==========
- 13 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED STATEMENT OF
CONSOLIDATED INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STAEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<DEBT-HELD-FOR-SALE> 9,492,905
<DEBT-CARRYING-VALUE> 1,962,046
<DEBT-MARKET-VALUE> 1,863,501
<EQUITIES> 914,610
<MORTGAGE> 413,476
<REAL-ESTATE> 473,357
<TOTAL-INVEST> 13,399,766
<CASH> 47,347
<RECOVER-REINSURE> 20,587
<DEFERRED-ACQUISITION> 385,663
<TOTAL-ASSETS> 15,805,235
<POLICY-LOSSES> 2,268,454
<UNEARNED-PREMIUMS> 889,443
<POLICY-OTHER> 155,793
<POLICY-HOLDER-FUNDS> 7,759,103
<NOTES-PAYABLE> 951,552
<COMMON> 210,657
0
0
<OTHER-SE> 2,714,431
<TOTAL-LIABILITY-AND-EQUITY> 15,805,235
1,727,207
<INVESTMENT-INCOME> 735,927
<INVESTMENT-GAINS> 24,983
<OTHER-INCOME> 136,087
<BENEFITS> 1,646,327
<UNDERWRITING-AMORTIZATION> 293,615
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 267,404
<INCOME-TAX> 48,817
<INCOME-CONTINUING> 218,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 218,587
<EPS-PRIMARY> 3.47
<EPS-DILUTED> 3.47
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
Reinsurance Recoverable in the financial data schedule above is the amount
recoverable on paid losses. Reinsurance Recoverables in the Consolidated
Balance Sheet($206,847) includes amounts recoverable on paid and unpaid losses.
</TABLE>
