<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1997.
[ ] 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 I.D. No.)
SAFECO PLAZA, Seattle, Washington 98185
(Address of principal executive offices)
(206) 545-5000
(Telephone)
126,315,553 shares of no par value common stock were outstanding at March 31,
1997
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[ ].
<PAGE> 2
SAFECO CORPORATION
TABLE OF CONTENTS AND SIGNATURES
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I - Financial Information *
Item 1. Financial Statements:
Consolidated Balance Sheet, 3
March 31, 1997 and December 31, 1996
Statement of Consolidated Income and Retained Earnings 5
for the Three Months Ended March 31, 1997 and 1996
Statement of Consolidated Cash Flows 6
for the Three Months Ended March 31, 1997 and 1996
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
</TABLE>
*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, 1996 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
ROD A. PIERSON
--------------------------------------
Rod A. Pierson
Senior Vice President
Dated May 8, 1997 and Chief Financial Officer
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<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1997 1996
------------ ------------ ------------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1997 - $11,465,195; 1996 -$11,270,529) $11,825,458 $11,936,243
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1997 - $2,654,052; 1996 - $2,670,004) 2,595,729 2,488,324
Marketable Equity Securities, at Market Value
(Cost: 1997 - $638,199; 1996 - $641,841) 1,311,345 1,298,809
Mortgage Loans 445,672 447,988
Real Estate (At cost less accumulated depreciation) 581,698 554,011
Policy Loans 57,976 58,153
Short-Term Investments 83,931 105,927
----------- -----------
Total Investments 16,901,809 16,889,455
Cash 48,765 55,498
Accrued Investment Income 251,037 240,804
Finance Receivables 870,747 829,045
Premiums and Other Service Fees Receivable 468,537 467,182
Other Notes and Accounts Receivable 61,280 42,387
Reinsurance Recoverables 149,308 137,484
Deferred Policy Acquisition Costs 411,062 396,107
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 171,947 171,288
Other Assets 193,714 197,211
Separate Account Assets 541,143 491,212
----------- -----------
TOTAL $20,069,349 $19,917,673
=========== ===========
</TABLE>
(continued)
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<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts) (continued)
<TABLE>
<CAPTION>
March 31 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ------------ -------------
<S> <C> <C>
Losses and Adjustment Expense $ 2,024,353 $ 2,088,226
Unearned Premiums 947,145 946,899
Life Policy Liabilities 151,051 149,624
Funds Held Under Deposit Contracts 10,047,299 9,792,730
Notes and Mortgages Payable:
Credit Company Borrowings ($820,400 maturing within one year) 865,300 808,750
7.875% Notes Due 2005 200,000 200,000
Other Notes and Mortgages ($43,102 maturing within one year) 237,544 224,744
Other Liabilities 690,363 678,799
Federal and Canadian Income Taxes:
Current 28,241 3,512
Deferred (Includes tax on unrealized appreciation
of investment securities:
1997 - $360,009; 1996 - $456,275) 327,254 417,837
Separate Account Liabilities 541,143 491,212
------------ ------------
Total Liabilities 16,059,693 15,802,333
------------ ------------
Preferred Stock, No Par Value:
Shares Authorized: 10,000,000
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value:
Shares Authorized: 300,000,000
Shares Reserved for Options:
1997 - 3,214,124; 1996 - 3,344,751
Shares Issued and Outstanding:
1997 - 126,315,553; 1996 - 126,308,237 227,231 225,276
Retained Earnings 3,113,832 3,042,214
Unrealized Appreciation of Investment Securities,
Net of Tax 672,621 851,401
Unrealized Loss from Foreign Currency Translation,
Net of Tax (4,028) (3,551)
------------ ------------
Total Stockholders' Equity 4,009,656 4,115,340
------------ ------------
TOTAL $ 20,069,349 $ 19,917,673
============ ============
</TABLE>
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<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------------
1997 1996
-------------- --------------
<S> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 581,494 $ 552,629
Life and Health Premiums and Other Revenues 66,567 65,684
-------------- --------------
Total 648,061 618,313
Real Estate 16,313 18,313
Finance 19,568 18,097
Asset Management 5,696 6,481
Other 12,611 9,098
Net Investment Income 291,033 274,577
Realized Investment Gain 21,704 32,723
-------------- --------------
Total 1,014,986 977,602
-------------- --------------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 605,622 579,960
Commissions 109,136 97,216
Personnel Costs 73,047 67,074
Interest 18,463 18,112
Dividends to Policyholders 4,241 4,020
Other 61,279 63,185
Amortization of Deferred Policy Acquisition Costs 110,447 103,593
Deferral of Policy Acquisition Costs (111,885) (101,092)
-------------- --------------
Total 870,350 832,068
-------------- --------------
Income before Income Taxes 144,636 145,534
-------------- --------------
Provision (Benefit) for Federal
and Canadian Income Taxes:
Current 27,171 36,167
Deferred 5,940 (1,336)
-------------- --------------
Total 33,111 34,831
-------------- --------------
Net Income 111,525 110,703
Retained Earnings, Beginning of Period 3,042,214 2,755,537
Dividends Declared (36,632) (33,399)
Common Stock Reacquired (3,275) (5,261)
-------------- --------------
Retained Earnings, End of Period $ 3,113,832 $ 2,827,580
============== ==============
Net Income Per Share of Common Stock $ 0.88 $ 0.88
============== ==============
Average Number of Shares Outstanding
During the Period (In Thousands) 126,316 126,011
============== ==============
Cash Dividends Paid to Common Stockholders $ 0.29 $ 0.265
============== ==============
</TABLE>
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.
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<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31
--------------------------
1997 1996
---------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $ 632,469 $ 603,124
Dividends and Interest Received 277,634 267,865
Other Operating Receipts 46,039 44,826
Insurance Claims and Policy Benefits Paid (557,098) (530,758)
Underwriting, Acquisition and Insurance Operating Costs Paid (287,352) (253,703)
Interest Paid (11,085) (9,805)
Other Operating Costs Paid (27,507) (26,983)
Income Taxes Paid (3,121) (13,101)
--------- ---------
Net Cash Provided by Operating Activities 69,979 81,465
--------- ---------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (538,851) (407,347)
Fixed Maturities Held-to-Maturity (100,739) (152,249)
Equities (10,342) (49,761)
Other Investments (52,032) (32,083)
Maturities of Fixed Maturities Available-for-Sale 154,960 194,860
Maturities of Fixed Maturities Held-to-Maturity 429 10,483
Sales of:
Fixed Maturities Available-for-Sale 213,810 277,070
Fixed Maturities Held-to-Maturity -- --
Equities 37,382 45,508
Other Investments 20,867 13,014
Net Decrease in Short-Term Investments 23,838 20,619
Finance Receivables Originated or Acquired (115,909) (77,847)
Principal Payments Received on Finance Receivables 66,000 54,650
Other (11,867) (16,347)
--------- ---------
Net Cash Used in Investing Activities (312,454) (119,430)
--------- ---------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 402,629 184,994
Return of Funds Held Under Deposit Contracts (199,251) (191,088)
Proceeds from Notes and Mortgage Borrowings 2,000 --
Repayment of Notes and Mortgage Borrowings (1,749) (49,764)
Net Proceeds from Short-Term Borrowings 69,177 115,677
Common Stock Reacquired (3,424) (5,510)
Dividends Paid to Stockholders (36,632) (33,387)
Other 2,992 2,496
--------- ---------
Net Cash Provided by Financing Activities 235,742 23,418
--------- ---------
Net Decrease in Cash (6,733) (14,547)
Cash at the Beginning of Period 55,498 65,477
--------- ---------
Cash at the End of Period $ 48,765 $ 50,930
========= =========
</TABLE>
(continued)
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<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands) (continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Net Income $ 111,525 $ 110,703
---------- ----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (21,704) (32,723)
Depreciation and Amortization 16,903 16,344
Amortization of Fixed Maturity Investments (9,021) (9,458)
Deferred Income Tax Expense (Benefit) 5,940 (1,336)
Interest Expense on Deposit Contracts 116,872 114,081
Other Adjustments 69 (337)
Changes in:
Losses and Adjustment Expense (63,873) (46,021)
Unearned Premiums 246 (1,738)
Life Policy Liabilities 1,427 (4,285)
Accrued Income Taxes 24,729 23,136
Accrued Interest on Accrual Bonds (11,842) (9,742)
Accrued Investment Income (10,233) (3,704)
Deferred Policy Acquisition Costs (728) 2,812
Other Assets and Liabilities (90,331) (76,267)
--------- ---------
Total Adjustments (41,546) (29,238)
--------- ---------
Net Cash Provided by Operating Activities $ 69,979 $ 81,465
========= =========
</TABLE>
-7-
<PAGE> 8
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SAFECO Corporation
Our net income for the first quarter was $111.5 million or $0.88 per share,
equaling the per share amount for the first quarter a year ago. If we exclude
realized gain from investments, our income was $0.77 per share compared with
$0.71 per share in 1996.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1997 1996
IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
------------------------
<S> <C> <C>
Income (Loss) before Realized Gain and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain $ 7,290 $ 2,095
Net Investment Income 70,400 71,139
--------- ---------
Total Property and Casualty 77,690 73,234
Life and Health Insurance 37,153 32,009
Real Estate 2,756 2,853
Credit 4,513 4,057
Asset Management 1,034 2,696
Corporate (214) (2,038)
--------- ---------
Total 122,932 112,811
--------- ---------
Realized Gain (Loss), before Tax, from:
Security Investments 21,685 32,760
Real Estate Investments 19 (37)
--------- ---------
Total 21,704 32,723
--------- ---------
Income before Income Taxes 144,636 145,534
--------- ---------
Provision for Income Taxes on:
Income before Realized Gain 26,139 23,614
Realized Gain 6,972 11,217
--------- ---------
Total 33,111 34,831
--------- ---------
Net Income $ 111,525 $ 110,703
========= =========
Net Income Per Share of Common Stock:
Income before Realized Gain $ .77 $ .71
Realized Gain .11 .17
--------- ---------
Net Income $ .88 $ .88
========= =========
</TABLE>
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<PAGE> 9
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Property and Casualty Insurance
Property and casualty operations for the first quarter of 1997 produced pretax
income of $77.7 million before realized gain from investments, compared with
$73.2 million a year ago. The company had an underwriting profit of $7.3 million
for the first quarter compared with $6.6 million last quarter and $2.1 million
for the first quarter last year. The combined loss and expense ratio was 98.7
for the quarter compared with 99.6 a year ago. First quarter investment income
was $70.4 million, down 1% compared with the first quarter last year primarily
as a result of the relatively low interest rate environment.
Personal auto, our largest line, reported an underwriting profit of $4.2 million
for the first quarter, compared with a profit of $8.1 million in the first
quarter a year ago. The number of vehicles insured at the end of March was 7%
higher than a year ago. Average loss costs continue to increase at a modest
pace.
Homeowners had an underwriting loss of $11.2 million for the first quarter,
compared with a loss of $21.8 million for the first quarter of 1996. Catastrophe
losses for this line were $14 million during the quarter compared with $12
million for the first quarter last year. We are working on several initiatives
to continue to improve homeowners' results through a combination of higher
prices, increased deductibles and proper insurance to value.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats produced an underwriting profit of $3.7 million for the
quarter, the same as the first quarter last year.
Commercial lines had another good quarter, reporting an underwriting profit of
$6.1 million, compared with a profit of $5.8 million in the first quarter last
year. These strong results reflect our target marketing initiatives, a focus on
efficient operations and our ability to deliver value-added services to
customers. In addition, we continue to maintain rate adequacy in the face of
stiff price competition.
Surety continues to produce excellent results. The profit for this line was $4.5
million for the first quarter, compared with a profit of $6.6 million for the
same quarter last year.
Premiums written for the first three months increased 5% over a year ago with
personal lines up 6% and commercial lines up 4%.
-9-
<PAGE> 10
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Life and Health Insurance
Our life and health insurance operations reported a pretax profit, before
realized gain from investments, of $37.2 million for the first quarter of 1997.
This compares with $32.0 million for the same period last year and $33.1 million
for the fourth quarter of 1996.
The annuity and retirement services lines' combined first quarter earnings were
$13.9 million, up from $12.9 million for both the first quarter a year ago and
the fourth quarter of 1996. The combined assets under management for the annuity
and retirement services lines of business are approaching the $10 billion mark.
This growth is the result of sales activities in financial institutions,
structured settlements and qualified retirement planning.
Group insurance profit was $4.3 million, up from $2.8 million reported for the
same period last year. During the first quarter group life and medical claims
have declined to more normal levels.
Real Estate
SAFECO Properties' pretax income was $2.8 million for the first quarter of 1997,
compared with $2.9 million in 1996. We are pleased with these results in light
of the general softness in the retail sector.
Development activity on our 1.4 million square-foot, mixed-use project in
Redmond, Washington and two new medical real estate properties is progressing
well. We anticipate a summer 1997 opening for these projects.
Credit
SAFECO Credit Company produced a pretax profit of $4.5 million for the first
quarter of 1997 compared with $4.1 million in the same period for 1996. The
results reflect portfolio growth, continuing low write-off and delinquency
experience and a decreasing operating expense ratio. Non-affiliate receivables
and operating leases reached $958 million, an 18% annualized increase from
December 1996.
SAFECO Credit's summarized financial information is as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
---------- ----------
<S> <C> <C>
Finance Receivables $ 870,747 $ 829,045
Others Assets 204,243 238,479
---------- ----------
Total Assets $1,074,990 $1,067,524
========== ==========
Credit Company Borrowings $ 865,300 $ 808,750
Other Liabilities 100,883 152,188
---------- ----------
Total Liabilities $ 966,183 $ 960,938
========== ==========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
1997 1996
---------- ----------
<S> <C> <C>
Revenues $ 21,908 $ 19,848
Expenses 17,395 15,791
---------- ----------
Income before Income Taxes 4,513 4,057
Provision for Income Taxes 1,531 1,451
---------- ----------
Net Income $ 2,982 $ 2,606
========== ==========
</TABLE>
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<PAGE> 11
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
Asset Management
The pretax income from asset management activities for the first quarter of 1997
was $1.0 million, compared with $2.7 million for 1996. Our current results
reflect higher costs as we have increased the number of channels through which
we market and distribute our products. Assets under management increased 20%
from last year and stand at $3.7 billion at March 31, 1997.
Investment Portfolios
The market value of our consolidated bond portfolio was $419 million in excess
of amortized cost at March 31, 1997, down from $847 million at December 31, 1996
as a result of higher interest rates. The market value of our equity securities
was $673 million in excess of cost at March 31, 1997.
Stock Purchase Program
In February 1996, the Board of Directors approved the continuation of the stock
purchase program and reauthorized a total accumulation of up to two million
shares, about 2% of our issued shares. At April 25, 1997, 282,000 shares have
been purchased.
Other -- Footnotes
The following additional footnote disclosure relates to new accounting
standards.
Nature of Operations and Summary of Significant Accounting Policies -- New
Accounting Standards
In February of 1997, the Financial Accounting Standards Board (FASB)
issued Statement 128, "Earnings Per Share." Statement 128 is effective for
the fourth quarter of 1997 and SAFECO will adopt it then. The Statement
simplifies the calculation of earnings per share (EPS) and requires the
dual presentation of "basic" and "diluted" EPS on the face of the income
statement. SAFECO's currently-reported EPS (currently "primary", will
become "basic") will not be affected by Statement 128. "Diluted" EPS will
begin to be shown in addition to "basic" EPS but because SAFECO's stock
options do not have a significant dilutive effect (and are the only common
stock equivalent) the difference between "basic" and "diluted" EPS is not
expected to be material.
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<PAGE> 12
SAFECO CORPORATION
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit27 - Financial Data Schedule. (This exhibit is included only in
the electronic EDGAR filing version of this 10-Q. The Financial
Data Schedule is not a separate financial statement but a
schedule that summarizes certain standard financial information
extracted directly from the financial statements in this
filing.)
(b) Reports on Form 8-K
No Forms 8-K were filed or required to be filed for any event during
the quarter ended March 31, 1997.
-12-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND RETAINED
EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 11,825,458
<DEBT-CARRYING-VALUE> 2,595,729
<DEBT-MARKET-VALUE> 2,654,052
<EQUITIES> 1,311,345
<MORTGAGE> 445,672
<REAL-ESTATE> 581,698
<TOTAL-INVEST> 16,901,809
<CASH> 48,765
<RECOVER-REINSURE> 149,308
<DEFERRED-ACQUISITION> 411,062
<TOTAL-ASSETS> 20,069,349
<POLICY-LOSSES> 2,024,353
<UNEARNED-PREMIUMS> 947,145
<POLICY-OTHER> 151,051
<POLICY-HOLDER-FUNDS> 10,047,299
<NOTES-PAYABLE> 1,302,844
0
0
<COMMON> 227,231
<OTHER-SE> 3,782,425
<TOTAL-LIABILITY-AND-EQUITY> 20,069,349
648,061
<INVESTMENT-INCOME> 291,033
<INVESTMENT-GAINS> 21,704
<OTHER-INCOME> 54,188
<BENEFITS> 605,622
<UNDERWRITING-AMORTIZATION> 110,447
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 144,636
<INCOME-TAX> 33,111
<INCOME-CONTINUING> 111,525
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 111,525
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
