<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1996
or
[ ] 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)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(126,322,327 shares were outstanding at January 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 .
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of January 31, 1997, was $4,800,000,000.
Documents incorporated by reference:
Portions of the registrant's 1996 Annual Report to Stockholders are
incorporated by reference into Parts I and II. Portions of the
registrant's definitive Proxy Statement for the 1997 annual shareholder
meeting to be held May 7, 1997, are incorporated by reference into Part
III.
<PAGE> 2
PART I ITEM 1. BUSINESS
GENERAL
SAFECO Corporation (the Corporation) is a Washington
corporation that owns subsidiaries in various segments of
insurance and other financially related businesses. The
Corporation and its subsidiaries are collectively referred to
as "SAFECO." The home offices of the Corporation and its
principal subsidiaries are in Seattle and Redmond, Washington.
As of December 31, 1996, SAFECO had approximately 7,700
employees.
The insurance subsidiaries engage in two principal lines:
property and casualty, and life and health insurance. The
SAFECO group of property and casualty companies ranked 25th
among over 2,400 property and casualty insurers in the United
States, based on 1995 statutory net premiums written. In the
life and health insurance field, SAFECO Life ranked 51st among
life insurance companies doing business in the United States,
based on 1995 statutory premiums. All areas of the insurance
business are highly competitive and no one insurance company
or group of insurers dominates the market.
Property and casualty and life and health insurers are subject
to regulation and supervision in every jurisdiction where they
do business. The nature and extent of such regulation varies,
but generally has its source in statutes that delegate
regulatory, supervisory and administrative powers to state
insurance commissioners. Areas of regulation, supervision and
administration include, among other things, solvency standards
that insurers must meet and maintain; the licensing of
insurers and their agents; the nature of limitations on
investments; deposits of securities for the benefit of
policyholders; approval of policy forms and premium rates;
periodic examination of the affairs of insurance companies;
annual and other reports that insurers must file about their
financial condition; the amount of dividends that insurers may
distribute to a parent corporation; and requirements regarding
reserves for unearned premiums and losses. Regulation requires
that property and casualty rates be adequate but not excessive
nor unfairly discriminatory. See page 29 of the 1996 Annual
Report to Stockholders, incorporated herein by reference
(Exhibit 13), for more information on regulatory matters.
PROPERTY AND CASUALTY INSURANCE OPERATIONS
The Corporation's property and casualty subsidiaries include
SAFECO Insurance Company of America, General Insurance Company
of America, First National Insurance Company of America,
SAFECO National Insurance Company, SAFECO Insurance Company of
Illinois, SAFECO Lloyds Insurance Company, SAFECO Surplus
Lines Insurance Company, F. B. Beattie & Co., Inc., SAFECO
Select Insurance Services, Inc., and COMAV Managers, Inc.
SAFECO's property and casualty subsidiaries write personal,
commercial and surety lines of insurance through independent
agents. Coverages include automobile, homeowners, fire and
allied lines, workers' compensation, commercial multi-peril,
miscellaneous casualty, surety and fidelity. These products
are available in nearly all states and the District of
Columbia.
SAFECO sold its Canadian property and casualty operations in
1991. See page 31 of the 1996 Annual Report to Stockholders
for more information.
2
<PAGE> 3
PART I ITEM 1. BUSINESS (CONTINUED)
Consolidated property and casualty gross premiums written for
SAFECO's ten largest states are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------
(Amounts In Thousands)
% of % of % of
State Amount Total Amount Total Amount Total
----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
California $ 549,379 22% $ 548,284 23% $ 553,608 24%
Washington 389,238 16 388,705 17 376,557 16
Texas 183,235 7 163,710 7 152,715 7
Oregon 155,444 6 152,477 6 148,300 7
Illinois 111,353 5 106,062 5 95,689 4
Florida 91,832 4 76,095 3 61,176 3
Missouri 79,882 3 73,167 3 68,201 3
Georgia 72,647 3 70,535 3 71,619 3
Tennessee 66,064 3 58,180 2 54,932 2
Montana 57,944 2 58,831 3 51,945 2
---------------------------------------------------------------------------------
1,757,018 71 1,696,046 72 1,634,742 71
All Others 706,483 29 670,810 28 643,303 29
---------------------------------------------------------------------------------
Total $2,463,501 100% $2,366,856 100% $2,278,045 100%
=================================================================================
</TABLE>
Voluntary personal, commercial and surety lines (which exclude
assigned risk, FAIR plans, etc.) made up approximately 70%,
25% and 4%, respectively, of the 1996 gross premiums written.
The gross premiums written growth of 4.1% in 1996 resulted
from a 4.8% increase in personal, a 2.3% increase in
commercial and a 3.1% increase in surety lines. Gross premiums
written growth of 3.9% in 1995 comprised a 5.3% increase in
personal, a 0.8% decrease for commercial and a 10.9% increase
in surety lines.
The 1996 growth in personal lines premiums resulted from
increases in rates and policies in force. The number of
vehicles insured increased 5.3% in 1996, compared with 1.8% in
1995 and 1.3% in 1994. The increase in 1996 came primarily
from growth in targeted states east of the Rocky Mountains.
The modest growth rates in 1995 and 1994 were caused primarily
by rate increases. The number of homes insured increased 2.4%
in 1996, 1.2% in 1995 and 2.7% in 1994. This moderate growth
rate was the result of rate increases in recent years and the
moratorium on writing new homeowners policies in California.
SAFECO's commercial lines premiums were affected in both 1996
and 1995 by increased rate competition in workers'
compensation -- particularly in California with its open
rating system -- and in commercial auto.
Surety premiums increased in 1996 and 1995 mainly as a result
of acquiring new commercial and contract accounts.
Additional financial information about SAFECO's business
segments appears in Note 15 on page 68 of the 1996 Annual
Report to Stockholders.
3
<PAGE> 4
PART I ITEM 1. BUSINESS (CONTINUED)
PROPERTY AND CASUALTY LOSS RESERVES
The consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment
expense of the Corporation's property and casualty insurance
subsidiaries. The liability is presented net of amounts
recoverable from salvage and subrogation recoveries and gross
of amounts recoverable from reinsurance.
Reserves for losses that have been reported to SAFECO and
certain legal expenses are established on the "case basis"
method. Claims incurred but not reported (IBNR) and other
adjustment expense are estimated using statistical procedures.
Salvage and subrogation recoveries are accrued using the "case
basis" method for large claims and statistical procedures for
smaller claims.
These reserves aggregate SAFECO's best estimates of the total
ultimate cost of claims that have been incurred but have not
yet been paid. The estimates are based on past claims
experience and consider current claims trends as well as
social, legal and economic conditions, including inflation.
The reserves are not discounted.
Loss and adjustment expense reserve development is reviewed on
a regular basis to determine that the reserving assumptions
and methods are appropriate. Reserves initially determined are
compared to the amounts ultimately paid. A statistical
estimate of the projected amounts necessary to settle
outstanding claims is made regularly and compared to the
recorded reserves and adjusted as necessary; such adjustments
are included in current operations.
The table on page 5 provides an analysis of changes in losses
and adjustment expense reserves for 1996, 1995, and 1994 (net
of reinsurance amounts). Changes in the reserves are reflected
in the income statement for the year when the changes are
made. Operations were credited $77.7 million, $59.7 million
and $81.3 million in 1996, 1995 and 1994, respectively, as a
result of a reduction in the estimated amounts needed to
settle prior years' claims.
4
<PAGE> 5
PART 1 ITEM 1. BUSINESS (CONTINUED)
ANALYSIS OF CHANGES IN LOSSES AND ADJUSTMENT EXPENSE RESERVES
(NET OF REINSURANCE):
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Losses and Adjustment Expense
Reserves at Beginning of Year $ 2,070,077 $ 2,092,946 $ 1,995,122
-------------------------------------------
Incurred Losses and Adjustment Expense for Claims
Occurring in the Current Year 1,658,253 1,586,675 1,609,392
Decrease in Estimated Losses and Adjustment
Expense for Claims Occurring in Prior Years (77,744) (59,699) (81,325)
-------------------------------------------
Total Incurred Losses and Adjustment Expense 1,580,509 1,526,976 1,528,067
-------------------------------------------
Losses and Adjustment Expense Payments for Claims
Occurring During:
Current Year
939,561 856,796 809,722
Prior Years 755,367 693,049 620,521
-------------------------------------------
Total Losses and Adjustment Expense Payments 1,694,928 1,549,845 1,430,243
-------------------------------------------
Losses and Adjustment Expense
Reserves at End of Year $ 1,955,658 $ 2,070,077 $ 2,092,946
===========================================
Reconciliation:
Losses and Adjustment Expense Reserves,
Net of Reinsurance $ 1,955,658 $ 2,070,077 $ 2,092,946
Add: Reinsurance Recoverables on Unpaid
Losses at End of Year 103,412 110,746 143,858
-------------------------------------------
Losses and Adjustment Expense
Reserves at End of Year, Gross of Reinsurance $ 2,059,070 $ 2,180,823 $ 2,236,804
===========================================
</TABLE>
The table on page 6 presents the development of the losses and
adjustment expense reserves for 1986 through 1996. The top
lines of the table show the estimated reserve for unpaid
losses and adjustment expense at December 31 for each of the
indicated years, both gross and net of related reinsurance
amounts. The upper portion of the table shows the cumulative
amount paid with respect to the previously recorded reserve as
of the end of each succeeding year. The next section shows the
re-estimated amount of the previously recorded reserve based
on experience as of each succeeding year. The estimate is
increased or decreased as more information becomes known about
individual claims and as changes in conditions and claim
trends become apparent. The lower section of the table shows
the cumulative redundancy (deficiency) developed with respect
to the previously recorded liability as of the end of each
succeeding year. For example, the 1986 reserve of $1,040.3
million developed a $53.8 million deficiency after one year
which grew over ten years to a deficiency of $199.3 million.
The reserve development deficiencies indicated for 1986 and
1987 were due to the emergence of liabilities for pollution,
asbestos and other hazardous toxic claims and related legal
expenses and adverse development from the automobile liability
and workers' compensation lines due to significant medical
inflation and trends in the civil justice system. In this same
period, SAFECO's loss adjustment expenses increased rapidly,
reflecting higher legal costs and increased litigation.
5
<PAGE> 6
PART 1 ITEM 1. BUSINESS (CONTINUED)
ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
<TABLE>
<CAPTION>
Year Ended December 31 1986 1987 1988 1989 1990 1991
- ------------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $ 1,095,163 $ 1,328,495 $ 1,523,554 $ 1,702,458 $ 1,872,144 $ 2,017,348
Reinsurance 54,881 78,975 97,003 75,279 80,683 152,029
-----------------------------------------------------------------------------------
Net of Reinsurance $ 1,040,282 $ 1,249,520 $ 1,426,551 $ 1,627,179 $ 1,791,461 $ 1,865,319
===================================================================================
Cumulative Net Amount Paid as of:
One Year Later $ 382,274 $ 419,522 $ 443,056 $ 540,198 $ 603,027 $ 548,875
Two Years Later 610,331 677,053 725,684 849,568 914,456 905,725
Three Years Later 771,278 848,174 902,480 1,035,024 1,109,436 1,086,502
Four Years Later 875,910 936,447 1,010,271 1,149,505 1,221,598 1,207,170
Five Years Later 945,436 1,033,741 1,083,462 1,222,050 1,301,116 1,294,434
Six Years Later 991,806 1,082,759 1,129,885 1,276,405 1,368,889
Seven Years Later 1,029,619 1,119,813 1,169,932 1,323,026
Eight Years Later 1,057,329 1,150,953 1,203,440
Nine Years Later 1,082,006 1,177,648
Ten Years Later 1,100,542
Net Reserve Re-estimated as of:
One Year Later 1,094,095 1,253,870 1,397,704 1,621,873 1,767,404 1,820,737
Two Years Later 1,118,222 1,258,193 1,368,128 1,593,554 1,705,835 1,732,844
Three Years Later 1,121,243 1,258,017 1,355,793 1,541,434 1,666,124 1,685,958
Four Years Later 1,140,282 1,264,839 1,338,568 1,544,767 1,657,170 1,650,683
Five Years Later 1,149,075 1,266,261 1,360,496 1,549,861 1,637,543 1,594,920
Six Years Later 1,168,725 1,299,601 1,386,746 1,546,875 1,608,542
Seven Years Later 1,210,457 1,332,409 1,383,317 1,525,345
Eight Years Later 1,240,940 1,328,560 1,373,694
Nine Years Later 1,239,903 1,324,452
Ten Years Later 1,239,579
Cumulative Net Redundancy (Deficiency) as of:
One Year Later (53,813) (4,350) 28,847 5,306 24,057 44,582
Two Years Later (77,940) (8,673) 58,423 33,625 85,626 132,475
Three Years Later (80,961) (8,497) 70,758 85,745 125,337 179,361
Four Years Later (100,000) (15,319) 87,983 82,412 134,291 214,636
Five Years Later (108,793) (16,741) 66,055 77,318 153,918 270,399
Six Years Later (128,443) (50,081) 39,805 80,304 182,919
Seven Years Later (170,175) (82,889) 43,234 101,834
Eight Years Later (200,658) (79,040) 52,857
Nine Years Later (199,621) (74,932)
Ten Years Later (199,297)
</TABLE>
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $ 2,052,334 $ 2,095,187 $ 2,236,804 $ 2,180,823 $ 2,059,070
Reinsurance 89,198 100,065 143,858 110,746 103,412
-------------------------------------------------------------------
Net of Reinsurance $ 1,963,136 $ 1,995,122 $ 2,092,946 $ 2,070,077 $ 1,955,658
-------------------------------------------------------------------
Cumulative Net Amount Paid as of:
One Year Later $ 598,886 $ 620,521 $ 693,049 $ 755,367
Two Years Later 913,365 947,647 1,068,327
Three Years Later 1,106,033 1,147,611
Four Years Later 1,230,585
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Reserve Re-estimated as of:
One Year Later 1,866,199 1,913,797 2,033,247 1,992,333
Two Years Later 1,782,067 1,818,306 1,902,331
Three Years Later 1,712,163 1,716,142
Four Years Later 1,642,325
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Cumulative Net Redundancy (Deficiency) as of:
One Year Later 96,937 81,325 59,699 77,744
Two Years Later 181,069 176,816 190,615
Three Years Later 250,973 278,980
Four Years Later 320,811
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
</TABLE>
6
<PAGE> 7
PART 1 ITEM 1. BUSINESS (CONTINUED)
The table below shows the approximate amounts of adverse
reserve development by major category for the calendar years
1986 and 1987, viewed as of December 31, 1996. Note that each
year below stands on its own and the years should not be added
together. For example, the amount of adverse development
recorded in 1987 or subsequent for losses incurred in 1982 is
included in the adverse development amounts for both 1986 and
1987 shown below.
<TABLE>
<CAPTION>
1986 1987
------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
Environmental, Asbestos, and Other
Toxic Claims Including Related
Loss Adjustment Expenses $ 131 $ 106
Canadian Automobile Liability 34 27
Workers' Compensation 40 33
Loss Adjustment Expense
Excluding Environmental,
Asbestos and Other Toxic Claims 27 (29)
Other (33) (62)
----------------
Total Adverse Development as
Reported in Table on page 6 $ 199 $ 75
================
</TABLE>
As the trends shown in this table became apparent, SAFECO
aggressively increased its reserves to address these
deficiencies.
For 1988 and subsequent years, SAFECO's reserve development
has been favorable. This trend reflects several factors:
aggressive reserving previously undertaken to correct
deficiencies in years prior to 1988, favorable legislation in
workers' compensation, moderation of medical costs and
inflation, and claims department changes. The favorable
legislation in workers' compensation, which relates primarily
to the states of Oregon and California, has helped reduce
fraud, allowed for faster claim settlement and made it more
difficult to reopen claims -- all of which reduced SAFECO's
ultimate loss costs. The cost of claim settlements in several
lines of business has benefited from changes in the
organization of SAFECO's claims department which has
established separate specialized units for workers'
compensation, environmental exposures and fraud
investigations. In addition, increased focus on adjustment
expenses has helped reduce these costs.
In evaluating the reserve development table on page 6 and the
table above, note that each amount includes the effects of all
changes in amounts for prior periods. For example, the amount
of the redundancy shown for the December 31, 1995 reserves
that relates to losses incurred in 1986 is included in the
cumulative redundancy (deficiency) amount for the years 1986
through 1994. Conditions and trends that have affected
development of the liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies (deficiencies) based on this
table.
7
<PAGE> 8
PART 1 ITEM 1. BUSINESS (CONTINUED)
The impact of reinsurance on the development information
presented on page 6 is not significant. The following table
summarizes reserve development, gross of reinsurance, for the
last three years:
<TABLE>
<CAPTION>
1993 1994 1995
----------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Gross Reserves $2,095,187 $2,236,804 $2,180,823
========================================
Cumulative Development
Net of Reinsurance $ 278,980 $ 190,615 $ 77,744
Cumulative Development
of Reinsurance Ceded 5,457 3,707 3,557
----------------------------------------
Cumulative Development
Gross of Reinsurance $ 284,437 $ 194,322 $ 81,301
========================================
</TABLE>
SAFECO's objective is to set reserves which are adequate; that
is, the amounts originally recorded as reserves should at
least equal the amounts ultimately required to settle losses.
Analysis indicates that SAFECO's reserves are adequate and
probably slightly redundant at December 31, 1996, 1995 and
1994. Operations were credited $77.7 million, $59.7 million
and $81.3 million in 1996, 1995 and 1994, respectively, as a
result of reductions in the estimated amounts needed to settle
prior years' claims.
The property and casualty companies' reserves for losses and
adjustment expense for liability coverages related to
environmental, asbestos and other toxic claims totaled $102.8
million at December 31, 1996, compared with $107.5 million at
December 31, 1995. These amounts do not reflect the effect of
reinsurance, which is insignificant. The reserves are
approximately 5% of SAFECO's total property and casualty
reserves for losses and adjustment expense at both December
31, 1996 and 1995. The reserves include estimates for both
reported and IBNR losses and related legal expenses.
The vast majority of the environmental, asbestos and other
toxic claims incurred by SAFECO's property and casualty
subsidiaries come from the general liability line of business.
A few of these losses occur in other coverages such as
umbrella, small commercial package policies, and personal
lines. Approximately 1,100 of these claims were pending at
December 31, 1996, computed on an occurrence basis. For the
last three years, an average of 411 claims were opened and an
average of 416 claims were closed each year. Most of SAFECO's
pending environmental claims involve some type of
environmental-related coverage dispute. The average settlement
cost of each environmental, asbestos and other toxic claim for
the last three years was $27,900 including legal expenses, and
$16,500 excluding legal expenses.
The following table summarizes the components of SAFECO's
reserves for environmental, asbestos and other toxic claims at
December 31, 1996:
<TABLE>
<CAPTION>
Loss
Adjustment
Loss Expense Total
--------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Case $ 29,268 $ 11,087 $ 40,355
IBNR 27,500 34,900 62,400
----------------------------------
Total $ 56,768 $ 45,987 $102,755
==================================
</TABLE>
8
<PAGE> 9
PART 1 ITEM 1. BUSINESS (CONTINUED)
This table shows the loss reserve activity analysis for
liability coverages related to environmental, asbestos and
other toxic claims.*
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Reserves at Beginning of Year $ 107,510 $ 108,230 $113,410
Incurred Losses and
Adjustment Expense 4,605 9,323 10,252
Losses and Adjustment
Expense Payments (9,360) (10,043) (15,432)
---------------------------------------
Reserves at End of Year $ 102,755 $ 107,510 $108,230
=======================================
</TABLE>
*Amounts are before the effect of reinsurance, which is
insignificant.
In view of changes in environmental regulations and evolving
case law which affect the development of loss reserves, the
process of estimating loss reserves for environmental,
asbestos and other toxic claims results in imprecise
estimates. Quantitative techniques have to be supplemented by
subjective considerations and managerial judgment. In view of
these conditions, trends that have affected development of
these liabilities in the past may not necessarily occur in the
future. Although estimation of environmental claims is a
difficult process, the reserves established for these claims
at December 31, 1996 are believed to be adequate based on the
known facts and current law. SAFECO has generally avoided
writing coverages for larger companies with substantial
exposure in these areas.
State regulatory authorities require SAFECO's property and
casualty insurance subsidiaries to file annual statements
prepared on an accounting basis prescribed or permitted by the
state (that is, on a statutory basis). The difference between
the $2,059,070 reserve at December 31, 1996, for the losses
and adjustment expense reported in the consolidated financial
statements in accordance with generally accepted accounting
principles (GAAP), and the $1,955,658 reported in the annual
statement filed with state regulatory authorities relates to
reinsurance recoverables. Under FASB Statement 113, the
GAAP-basis liability for losses and adjustment expense is
reported gross of amounts recoverable from reinsurance.
Statutory-basis financial statements show the liability net of
reinsurance.
SAFECO's insurance subsidiaries protect themselves from
excessive losses by reinsuring on treaty and facultative
bases. As noted above, the liability for unpaid losses and
adjustment expense is reported gross of reinsurance
recoverables of $103.4 million at December 31, 1996, and
$110.7 million at December 31, 1995. For 1997, SAFECO's
nationwide catastrophe property reinsurance program covers 90%
of $400 million of single-event losses in excess of a $100
million retention. This means that in a large catastrophe,
SAFECO would retain the first $100 million of losses, 10% of
the next $400 million and all losses in excess of $500
million. SAFECO also has an additional earthquake reinsurance
contract for 1997 for the states of Washington and Oregon that
covers 90% of $100 million of single-event earthquake losses
in excess of $500 million. Both of these 1997 catastrophe
property reinsurance contracts include provisions for one
reinstatement for a second catastrophe event in 1997 at
current rates. SAFECO's aggregate coverage limit is higher for
1997 than in prior years and the additional Northwest
earthquake coverage was new in 1996.
9
<PAGE> 10
PART 1 ITEM 1. BUSINESS (CONTINUED)
SAFECO's insurance subsidiaries do not enter into
retrospective reinsurance contracts or participate in any
unusual or nonrecurring reinsurance transactions such as
reserve "swaps" or loss portfolio transfers. SAFECO does not
use funding covers and does not participate in any surplus
relief transactions. None of SAFECO's significant reinsurers
are experiencing financial difficulties. For additional
information on reinsurance, see Note 5 on page 61 of the 1996
Annual Report to Stockholders.
LIFE AND HEALTH INSURANCE OPERATIONS
The Corporation's subsidiaries engaged in the life and health
insurance business are SAFECO Life Insurance Company, SAFECO
National Life Insurance Company, First SAFECO National Life
Insurance Company of New York and SAFECO Administrative
Services, Inc. (collectively referred to as SAFECO Life).
These companies offer individual and group insurance products,
retirement services (pension) and annuity products. SAFECO
Life markets these products through professional agents in all
states and the District of Columbia. The most significant
product lines in terms of premium/deposit volume are single
premium immediate and deferred annuities, tax-sheltered
annuities for the education and nonprofit entities market,
corporate retirement plans and excess loss group medical
insurance.
SAFECO Life reinsures portions of its individual and group
life, accident and health insurance through commercial
reinsurance treaties, thus providing protection against large
risks and catastrophe situations.
The pension and annuity products of many life insurance
companies have been affected in recent years by general
economic conditions, strong returns in the equity markets,
rating downgrades, increased competition and decisions by plan
sponsors to diversify assets and fund management. SAFECO Life
has experienced an increase in the level of withdrawal of
funds from its retirement services and annuity business
because of scheduled payouts on distribution-type products and
the interest rate environment (see Statement of Consolidated
Cash Flows on page 44 of the 1996 Annual Report to
Stockholders -- Return of Funds Held Under Deposit Contracts).
However, SAFECO Life's overall withdrawal experience remains
relatively modest, and proceeds from the sale of its fixed
income retirement services and annuity products have remained
relatively stable. The table on page 11 summarizes the
components of "Funds Held Under Deposit Contracts" at December
31, 1996, and describes the applicable surrender charges and
surrender experience.
10
<PAGE> 11
PART 1 ITEM 1. BUSINESS (CONTINUED)
DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Outstanding at Range of Credited or Approximate
12/31/96 Expected Maturities Assumed Interest Rates at Surrender
Product (In Thousands) of Liabilities 12/31/96 Surrender Charges Experience
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Universal $ 590,176 Approximately 10 - 20 5.25% to 7.15% Varies by issue age, 7% per annum
Individual Years sex and duration from
Life $1 to $58 per $1,000
of insurance
Annuities:
Structured 4,591,049 Over 25 Years 3.5% to 12.69% Cannot surrender Cannot
Settlement surrender
Immediate
Non-Qualified 1,254,347 Approximately 4.0% to 9.0% Typically 5% in year 1 8% per annum
Deferred 5 - 12 Years graded to 0% in year 6
Other 2,884 Approximately 3.57% to 8.39% None 5% per annum
7 - 10 Years
Retirement
Services:
Guaranteed 351,263 Typically 4.85% to 8.48% Market value adjustment Less than 1%
Investment 2 - 5 Years per annum
Contracts
Other 3,003,011 Approximately 4.41% to 7.50% Typically 9% in year 1 11% per annum
Qualified 5 - 15 Years graded to 0% in year 9.
Annuities SAFECO has the option to
and defer payout over 20 quarters
Deposits for about one quarter of
these contracts.
In addition, approximately
$311 million of these
deposits have a market
value adjustment provision
----------
Total $9,792,730
==========
</TABLE>
11
<PAGE> 12
PART 1 ITEM 1. BUSINESS (CONTINUED)
INVESTMENTS
A description of SAFECO's investment portfolio appears on
pages 36 - 38 of the 1996 Annual Report to Stockholders. The
rest of this section provides additional information about
SAFECO's mortgage-backed securities and investment income
yields.
SAFECO's consolidated investments in mortgage-backed
securities of $2.9 billion at market value at December 31,
1996, consist mainly of residential collateralized mortgage
obligations (CMOs) and pass-throughs. The life and health
portfolio contains virtually all of these securities.
Approximately 96% of the mortgage-backed securities are
government/agency-backed or AAA rated at December 31, 1996.
SAFECO has intentionally limited its investment in riskier,
more volatile CMOs (interest only, inverse floaters, and so
forth.) to a small amount -- less than 1% of the total.
SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1996:
<TABLE>
<CAPTION>
GAAP Market Value
--------------------
Amortized
Residential CMOs: Cost Amount %
--------- ---------- -----
(Amounts In Millions)
<S> <C> <C> <C>
Planned Amortization Class
(PAC) and
Targeted Amortization Class
(TAC) (Fixed Coupon) $ 934.4 $ 938.6 32.5%
Sequential Pay (SEQ) 786.7 808.1 28.0
Accrual Coupon (Z-Tranche) 580.9 606.7 21.0
Companions/Supports 21.5 21.6 0.7
Principal Only 0.9 0.9 -
Inverse Floaters 2.8 3.0 0.2
---------- ---------- -------
Subtotal 2,327.2 2,378.9 82.4
---------- ---------- -------
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs),all Fixed Coupon:
Government/Agency-Backed 2.1 2.3 0.1
Private Issuer 40.8 40.9 1.4
---------- ---------- -------
Subtotal 42.9 43.2 1.5
---------- ---------- -------
Securitized Commercial
Real Estate:
Government/Agency-Backed 282.4 290.3 10.0
Pass-Throughs (Non-agency) 99.3 101.9 3.5
CMOs (Non-agency) 39.6 40.2 1.4
---------- ---------- -------
Subtotal 421.3 432.4 14.9
---------- ---------- -------
Asset-Backed Securities
(Non-Real Estate) 33.5 33.7 1.2
---------- ---------- -------
Total Mortgaged-Backed
Securities $ 2,824.9 $ 2,888.2 100.0%
========== ========== =======
</TABLE>
12
<PAGE> 13
PART 1 ITEM 1. BUSINESS (CONTINUED)
This table shows the quality distribution of SAFECO's
mortgage-backed security portfolio (GAAP market values):
<TABLE>
<CAPTION>
Percent at
Rating December 31, 1996
-------------------------------------------------------
<S> <C>
Government/Agency Backed 56%
AAA 40
AA 2
A 1
BBB 1
BB or lower -
----
Total 100%
====
</TABLE>
The table below summarizes pretax investment income yields for
SAFECO's property and casualty and life and health insurance
subsidiaries (calculations are based on GAAP amortized cost):
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty 6.8% 7.2% 7.3%
Life and Health 8.1% 8.3% 8.3%
</TABLE>
Investment income yields declined in both portfolios mainly
because of the lower interest rate environment in all years
shown. The property and casualty decreases also reflect the
higher percentage of tax-exempt securities in this portfolio.
13
<PAGE> 14
PART 1 ITEM 1. BUSINESS (CONTINUED)
OTHER OPERATIONS
SAFECO's other operations include subsidiaries involved in
real estate investment and management (SAFECO Properties Inc.
and its subsidiaries Winmar Company, Inc. and SAFECARE
Company, Inc.), commercial lending and leasing (SAFECO Credit)
and investment management.
Winmar Company, Inc., acquired in 1967, invests in and manages
real estate properties, primarily retail shopping centers,
throughout the United States. Some of the more significant
properties are located in or near Louisville, Kentucky;
Cleveland and Columbus, Ohio; Albany, Jantzen Beach and
Tigard, Oregon; San Antonio, Texas; Burlington, Redmond,
Silverdale and Vancouver, Washington; and Milwaukee,
Wisconsin. Winmar also offers real estate services, including
property management, design and construction management and
tenant leasing services.
SAFECARE Company, Inc., organized in 1968, invests in medical
real estate, primarily skilled nursing facilities.
SAFECO Credit Company, Inc., organized in 1969, provides loans
and equipment financing and leasing to commercial businesses,
including affiliated companies. At December 31, 1996, 14% of
the Credit Company's outstanding loans and leases consisted of
loans to affiliated SAFECO companies.These affiliate loans are
limited to 50% or less of the total loans outstanding.
SAFECO Asset Management Company, acquired in 1973, is the
investment advisor for SAFECO's mutual funds, variable annuity
portfolios and outside pension and trust accounts.
SAFECO Securities, Inc., organized in 1967, is the principal
underwriter of the SAFECO Mutual Funds, comprising the SAFECO
Common Stock Trust, SAFECO Taxable Bond Trust, SAFECO
Tax-Exempt Bond Trust, SAFECO Money Market Trust, and the
SAFECO Managed Bond Trust. These five trusts are made up of
eighteen separate investment portfolios, all of which are sold
directly to the public. Thirteen of these portfolios have two
additional classes of stock which are sold to the public
through broker/dealers.
In addition, SAFECO Securities, Inc. is the principal
underwriter for the SAFECO Resource Series Trust mutual fund,
with five separate investment portfolios. SAFECO Securities is
also the principal underwriter for the variable insurance
products issued by SAFECO Resource Variable Account B, SAFECO
Separate Account SL and SAFECO Separate Account C, all of
which are separate accounts of SAFECO Life Insurance Company.
SAFECO Services Corporation, organized in 1972, is the
transfer agent for SAFECO's mutual funds.
SAFECO Trust Company, organized in 1994, provides asset
management and trust administrative services to high net worth
individuals and unrelated organizations.
PNMR Securities, Inc., organized in 1986, is a broker/dealer
that distributes affiliated and nonaffiliated mutual funds and
variable insurance products through its registered
representatives.
Talbot Financial Corporation, acquired in 1993, is a
broad-based insurance brokerage with a heavy emphasis on the
distribution of qualified and nonqualified annuity products
and mutual funds through the banking and brokerage arenas.
14
<PAGE> 15
PART I ITEM 2. PROPERTIES
SAFECO's property and casualty insurance companies lease from
General America Corporation (a wholly-owned subsidiary of
SAFECO Corporation) its home office building complex located
in Seattle, Washington. This complex totals 567,000 gross
square feet. A 700-car parking garage is connected to the
complex.
SAFECO's life and health insurance companies lease from
General America Corporation its home office building complex
located in Redmond, Washington. This complex totals 232,000
gross square feet.
Other buildings owned and occupied include a service facility
in Redmond, Washington, as well as regional and branch offices
in Fountain Valley, CA; Denver, CO; Atlanta, GA; St. Louis,
MO; Cincinnati, OH; Portland, OR; Redmond, WA and Spokane, WA.
These buildings comprise 949,000 gross square feet.
All other branch and service offices use leased premises
comprising 456,000 gross square feet, generally for periods of
five years or less.
SAFECO Properties, Inc., and its subsidiaries Winmar Company,
Inc. and SAFECARE Company, Inc., invest in and manage real
estate properties, primarily retail shopping centers
throughout the United States. The projects are owned by
subsidiaries of Winmar and in conjunction with other
investors, and others are leased under long-term leases. See
Item 1 on page 14 of this report and Note 13 on page 66 of the
1996 Annual Report to Stockholders for additional information.
ITEM 3. LEGAL PROCEEDINGS
The insurance and other subsidiaries of the Corporation,
because of the nature of their business, are subject to
certain legal actions filed or threatened, all in the ordinary
course of business. The Corporation does not believe that such
litigation will have a material adverse effect on its
financial condition, future operating results or liquidity.
The property and casualty insurance subsidiaries of the
Corporation are parties to a number of lawsuits for liability
coverages related to environmental claims. Although estimation
of environmental claims loss reserves is a difficult process,
the reserves established for these claims are believed to be
adequate based on the known facts and current law. The loss
and adjustment expense with respect to any such lawsuit, or
all lawsuits related to a single incident combined, are not
expected to be material to the financial condition of SAFECO.
See pages 8-9 of Item 1 for more information regarding the
liability of such subsidiaries for environmental claims and
the process of estimating environmental loss reserves.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
fourth quarter of 1996.
15
<PAGE> 16
PART I EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 28, 1997, these are the names, ages and positions
of the executive officers of the Registrant as required by
Item 10. No family relationships exist.
Roger H. Eigsti 54 Chairman since May 1993. Chief
Executive Officer since January
1992. President from May 1989 to
August 1996. Chief Operating
Officer from 1989 to 1991.
Executive Vice President and
Chief Financial Officer from
1985 to 1989. Director since
1988.
Boh A. Dickey 52 President and Chief Operating
Officer since August 1996.
Executive Vice President
from January 1992 to
August 1996. Chief
Financial Officer from May
1989 to August 1996.
Senior Vice President from
1989 to 1991. Secretary
from 1985 to 1991. Vice
President and Controller
from 1982 to 1989.
Director since 1993.
Rodney A. Pierson 49 Chief Financial Officer since
August 1996. Senior Vice
President since February
1994. Secretary since
1991. Controller since
1990. Vice President from
1990 to 1994. Vice
President of SAFECO
Property and Casualty
Insurance Companies from
1987 to 1990. Controller
of SAFECO Property and
Casualty Insurance
Companies from 1984 to
1990.
James W. Ruddy 47 Senior Vice President since
1992. General Counsel
since 1989. Vice President
from 1989 to 1992.
Associate General Counsel
from 1985 to 1989.
Ronald L. Spaulding 53 Treasurer since January
1995. Vice President
of SAFECO Life and
Health Insurance Companies
since 1984.
Dan D. McLean 64 President of SAFECO Property and
Casualty Insurance
Companies since January
1993. Senior Vice
President of SAFECO
Property and Casualty
Insurance Companies from
1984 to December 1992 and
Chief Operating Officer of
such companies from
February 1992 to December
1992. He is not an officer
of the Registrant.
Richard E. Zunker 58 President of SAFECO Life and
Health Insurance Companies
since 1985. He is not an
officer of the Registrant.
16
<PAGE> 17
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
SECURITY HOLDER MATTERS
Pages 39 and 69 of the 1996 Annual Report to Stockholders are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 70 through 73 of the 1996 Annual Report to Stockholders
are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 27 through 39 of the 1996 Annual Report to Stockholders
are incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 41 through 69 of the 1996 Annual Report to Stockholders
are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III The definitive proxy statement to be filed within 120 days
after December 31, 1996, excluding the Annual Report of the
Compensation Committee on Executive Compensation appearing on
Pages 6 through 12, is incorporated herein by reference to
fulfill the requirements of ITEM 10, "DIRECTORS AND EXECUTIVE
OFFICERS OF THE REGISTRANT" (except for that portion of Item
10 relating to executive officers which appears in Part I of
this 10-K), and to fulfill the requirements of ITEM 11,
"EXECUTIVE COMPENSATION," ITEM 12, "SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," and ITEM 13,
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
17
<PAGE> 18
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K
(a) (1) Financial Statements
F-1 Consent of Independent Auditors
SAFECO Corporation and Subsidiaries:
The following consolidated financial statements of
SAFECO Corporation and its subsidiaries, included
in the 1996 Annual Report to Stockholders (pages 40
through 69), are incorporated herein by reference:
Consolidated Balance Sheet
December 31, 1996 and 1995
Statement of Consolidated Income
Years Ended December 31, 1996, 1995 and 1994
Statement of Consolidated Cash Flows
Years Ended December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
December 31, 1996
Report of Independent Auditors
SAFECO Corporation and Subsidiaries Supplemental
Consolidating Information:
F-2 Balance Sheet
December 31, 1996 and 1995
F-3 Statement of Income
Year Ended December 31, 1996
F-4 Statement of Cash Flows
Year Ended December 31, 1996
18
<PAGE> 19
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(a) (2) Financial Statement Schedules
F-5 Schedule I Summary of Investments Other Than
Investments in Related Parties
December 31, 1996
Schedule II Condensed Financial Information of
the Registrant (Parent Company
Only):
F-6 Balance Sheet
December 31, 1996 and 1995
F-7 Statement of Income
Years Ended December 31, 1996, 1995
and 1994
F-8 Statement of Cash Flows
Years Ended December 31, 1996, 1995
and 1994
Statement of Changes in Stockholders'
Equity
Years Ended December 31, 1996,
1995 and 1994. (See page 46 of
the 1996 Annual
Report to Stockholders which is
incorporated herein by
reference.)
F-9 Schedule III Supplementary Insurance Information
Years Ended December 31, 1996, 1995
and 1994
F-10 Schedule IV Reinsurance
Years Ended December 31, 1996,
1995 and 1994
F-11 Schedule VI Supplemental Information
Concerning Property/Casualty
Insurance Operations
Years Ended December 31, 1996,
1995 and 1994
The following Article 7 schedules are omitted
because the information is provided elsewhere in
the Annual Report (Form 10-K) or because of the
absence of conditions under which they are
required:
Schedule V
19
<PAGE> 20
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(a) (3) Exhibits
F-12 Exhibit Index
Exhibit 3 Bylaws (as amended August 7, 1996)
filed as Exhibit 3 to Registrant's
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
Restated Articles of Incorporation
(as amended May 1, 1996) filed as
Exhibit 3 to Registrant's Quarterly
Report on Form 10-Q for the quarter
ended June 30, 1996.
Exhibit 4 SAFECO agrees to furnish the
Securities and Exchange Commission,
upon request, with copies of all
instruments defining rights of
holders of long-term debt of SAFECO
and its consolidated subsidiaries.
Exhibit 10 The following management contracts
and compensatory plan arrangements:
SAFECO Corporation Deferred
Compensation Plan for Directors filed
as Exhibit 10 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended December 31, 1994.
Executive Severance Agreements with
Roger Eigsti and Boh A. Dickey, each
filed as Exhibit 10 to the
Registrant's Annual Report on Form
10-K for the fiscal year ended
December 31, 1985; and Executive
Severance Agreements with R. E.
Zunker and James W. Ruddy filed as
Exhibit 10 to the Registrant's
Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996.
SAFECO Incentive Plan of 1987 filed
as Exhibit 10 to Registrant's Annual
Report on Form 10-K for the fiscal
year ended December 31, 1989, and
Supplement thereto filed as Exhibit
10 to Registrant's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1990.
20
<PAGE> 21
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(a) (3) Exhibits
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1996 Annual Report to Stockholders
Exhibit 27 Financial Data Schedule (This exhibit
is included only in the electronic
EDGAR filing version of this 10-K.
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 December 31, 1996.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 28th day of March
1997.
SAFECO CORPORATION
------------------------------
Registrant
/s/ ROGER H. EIGSTI
------------------------------
Roger H. Eigsti, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------------------------------------------------------
<S> <C> <C>
/s/ ROGER H. EIGSTI Chairman and March 28, 1997
- --------------------------------- Chief Executive Officer
Roger H. Eigsti
/s/ BOH A. DICKEY President, March 28, 1997
- --------------------------------- Chief Operating Officer
Boh A. Dickey and Director
/s/ ROD A. PIERSON Senior Vice President, March 28, 1997
- --------------------------------- Chief Financial Officer,
Rod A. Pierson Secretary and Controller
/s/ PHYLLIS J. CAMPBELL Director March 28, 1997
- ---------------------------------
Phyllis J. Campbell
/s/ ROBERT S. CLINE Director March 28, 1997
- ---------------------------------
Robert S. Cline
/s/ JOHN W. ELLIS Director March 28, 1997
- ---------------------------------
John W. Ellis
/s/ WILLIAM P. GERBERDING Director March 28, 1997
- ---------------------------------
William P. Gerberding
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------------------------------------------------------
<S> <C> <C>
/s/ JOSHUA GREEN III Director March 28, 1997
- ---------------------------------
Joshua Green III
/s/ WILLIAM W. KRIPPAEHNE, JR. Director March 28, 1997
- ---------------------------------
William W. Krippaehne, Jr.
/s/ WILLIAM G. REED, JR. Director March 28, 1997
- ---------------------------------
William G. Reed, Jr.
/s/ JUDITH M. RUNSTAD Director March 28, 1997
- ---------------------------------
Judith M. Runstad
/s/ PAUL W. SKINNER Director March 28, 1997
- ---------------------------------
Paul W. Skinner
/s/ GEORGE H.WEYERHAEUSER Director March 28, 1997
- ---------------------------------
George H. Weyerhaeuser
</TABLE>
23
<PAGE> 24
F-1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SAFECO Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SAFECO Corporation of our report dated February 14, 1997, included in the
1996 Annual Report to Stockholders of SAFECO Corporation.
Our audits also included the financial statement schedules of SAFECO Corporation
listed in Item 14(a). These schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statement
(Form S-8 No. 33-14381) pertaining to the SAFECO Incentive Plan of 1987 of our
report dated February 14, 1997, with respect to the consolidated financial
statements of SAFECO Corporation incorporated herein by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules included in this Annual Report (Form 10-K) of SAFECO
Corporation.
ERNST & YOUNG LLP
Seattle, Washington
March 25, 1997
<PAGE> 25
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND
SUBSIDIARIES F-2
December 31, 1996
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
ASSETS Property & Casualty Life & Health Real Estate Credit Company
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 3,938,339 $ 7,857,499 $ - $ -
Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,488,324 - -
Marketable Equity Securities, at Market Value 1,196,018 23,137 - -
Mortgage Loans 1,779 588,339 - -
Real Estate (At cost less accumulated depreciation) - 4,384 553,846 -
Policy Loans - 58,153 - -
Short-Term Investments 66,152 75,379 12,351 -
-------------------------------------------------------------------
Total Investments 5,202,288 11,095,215 566,197 -
Cash 24,019 19,809 889 3,181
Accrued Investment Income 76,577 159,809 - 3,317
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) - - - 829,045
Loans to Affiliates - - - 153,249
Premiums and Other Service Fees Receivable 440,632 12,800 8,188 -
Other Notes and Accounts Receivable 12,455 11,288 20,332 247
Reinsurance Recoverables 112,280 25,204 - -
Deferred Policy Acquisition Costs 155,643 240,464 - -
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 141,987 1,353 1,622 470
Other Assets 73,258 7,432 4,111 76,100
Separate Account Assets - 491,212 - -
-------------------------------------------------------------------
Total $ 6,239,139 $ 12,064,586 $601,339 $ 1,065,609
===================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Adjustment Expense $ 2,059,070 $ 29,156 $ - $ -
Unearned Premiums 938,054 8,845 - -
Life Policy Liabilities - 149,624 - -
Funds Held Under Deposit Contracts - 9,792,730 - -
Notes and Mortgages Payable:
Credit Company Borrowings - Non-Affiliates - - - 808,750
Credit Company Borrowings - Affiliates - - - 93,025
7.875% Notes Due 2005 - - - -
Other Notes and Mortgages - Non-Affiliates - - 165,074 -
Other Notes and Mortgages - Affiliates - - 235,300 -
Other Liabilities 386,576 210,037 54,622 21,691
Income Taxes:
Current (4,837) (547) 11,247 (1,915)
Deferred (Includes tax in unrealized appreciation
of investment securities) 253,792 104,166 17,884 37,472
Separate Account Liabilities - 491,212 - -
-------------------------------------------------------------------
Total Liabilities 3,632,655 10,785,223 484,127 959,023
-------------------------------------------------------------------
Common Stock 20,026 6,001 1 1,000
Additional Paid-In Capital 56,930 92,311 42,123 27,000
Retained Earnings 1,861,206 1,020,065 75,088 78,586
Unrealized Appreciation of Investment Securities, Net of Tax 671,873 160,986 - -
Unrealized Loss from Foreign Currency Translation, Net of Tax (3,551) - - -
-------------------------------------------------------------------
Stockholders' Equity 2,606,484 1,279,363 117,212 106,586
-------------------------------------------------------------------
Total $ 6,239,139 $ 12,064,586 $601,339 $ 1,065,609
===================================================================
</TABLE>
<TABLE>
<CAPTION>
Other and
Eliminations Consolidated
--------------------------------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 140,405 $ 11,936,243
Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,488,324
Marketable Equity Securities, at Market Value 79,654 1,298,809
Mortgage Loans (142,130) 447,988
Real Estate (At cost less accumulated depreciation) (4,219) 554,011
Policy Loans - 58,153
Short-Term Investments (47,955) 105,927
--------------------------------
Total Investments 25,755 16,889,455
Cash 7,600 55,498
Accrued Investment Income 1,101 240,804
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) - 829,045
Loans to Affiliates (153,249) -
Premiums and Other Service Fees Receivable 5,562 467,182
Other Notes and Accounts Receivable (1,935) 42,387
Reinsurance Recoverables - 137,484
Deferred Policy Acquisition Costs - 396,107
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 25,856 171,288
Other Assets 36,310 197,211
Separate Account Assets - 491,212
--------------------------------
Total $ (53,000) $ 19,917,673
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Adjustment Expense $ - $ 2,088,226
Unearned Premiums - 946,899
Life Policy Liabilities - 149,624
Funds Held Under Deposit Contracts - 9,792,730
Notes and Mortgages Payable:
Credit Company Borrowings - Non-Affiliates - 808,750
Credit Company Borrowings - Affiliates (93,025) -
7.875% Notes Due 2005 200,000 200,000
Other Notes and Mortgages - Non-Affiliates 59,670 224,744
Other Notes and Mortgages - Affiliates (235,300) -
Other Liabilities 5,873 678,799
Income Taxes:
Current (436) 3,512
Deferred (Includes tax in unrealized appreciation
of investment securities) 4,523 417,837
Separate Account Liabilities - 491,212
--------------------------------
Total Liabilities (58,695) 15,802,333
--------------------------------
Common Stock 198,248 225,276
Additional Paid-In Capital (218,364) -
Retained Earnings 7,269 3,042,214
Unrealized Appreciation of Investment Securities, Net of Tax 18,542 851,401
Unrealized Loss from Foreign Currency Translation, Net of Tax - (3,551)
--------------------------------
Stockholders' Equity 5,695 4,115,340
--------------------------------
Total $ (53,000) $ 19,917,673
================================
</TABLE>
<PAGE> 26
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND
SUBSIDIARIES F-2
December 31, 1995 Continued
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Credit
ASSETS Property & Casualty Life & Health Real Estate Company
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 4,081,768 $ 7,724,129 $ - $ -
Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,044,517 - -
Marketable Equity Securities, at Market Value 994,704 29,007 - -
Mortgage Loans 1,874 553,934 - -
Real Estate (At cost less accumulated depreciation) - 6,260 496,535 -
Policy Loans - 55,925 - -
Short-Term Investments 84,971 74,930 1,206 800
-----------------------------------------------------------------
Total Investments 5,163,317 10,488,702 497,741 800
Cash 21,052 35,533 (616) 1,067
Accrued Investment Income 79,405 150,916 - 2,892
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) - - - 741,177
Loans to Affiliates - - - 83,395
Premiums and Other Service Fees Receivable 418,854 13,060 8,050 -
Other Notes and Accounts Receivable 11,729 15,044 15,571 1,010
Reinsurance Recoverables 120,628 16,656 - -
Deferred Policy Acquisition Costs 145,868 210,491 - -
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 140,992 1,010 1,855 586
Other Assets 72,562 7,816 4,435 50,547
Separate Account Assets - 276,399 - -
-----------------------------------------------------------------
Total $ 6,174,407 $11,215,627 $ 527,036 $ 881,474
=================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Adjustment Expense $ 2,180,823 $ 26,407 $ - $ -
Unearned Premiums 902,553 8,209 - -
Life Policy Liabilities - 154,090 - -
Funds Held Under Deposit Contracts - 8,756,384 - -
Notes and Mortgages Payable:
Credit Company Borrowings - Non-Affiliates - - - 614,270
Credit Company Borrowings - Affiliates - - - 126,605
7.875% Notes Due 2005 - - - -
Other Notes and Mortgages - Non-Affiliates - - 198,407 -
Other Notes and Mortgages - Affiliates - - 161,046 -
Other Liabilities 418,772 435,333 27,187 16,569
Income Taxes:
Current 2,143 13,363 2,474 (1,534)
Deferred (Includes tax in unrealized appreciation of
investment securities) 239,505 196,829 25,714 28,939
Separate Account Liabilities - 276,399 - -
-----------------------------------------------------------------
Total Liabilities 3,743,796 9,867,014 414,828 784,849
-----------------------------------------------------------------
Common Stock 20,026 6,001 1 1,000
Additional Paid-In Capital 56,930 92,311 42,123 27,000
Retained Earnings 1,689,261 929,238 70,084 68,625
Unrealized Appreciation of Investment Securities, Net of Tax 668,226 321,063 - -
Unrealized Loss from Foreign Currency Translation, Net of Tax (3,832) - - -
-----------------------------------------------------------------
Stockholders' Equity 2,430,611 1,348,613 112,208 96,625
-----------------------------------------------------------------
Total $ 6,174,407 $11,215,627 $ 527,036 $ 881,474
=================================================================
</TABLE>
<TABLE>
<CAPTION>
Other and
Eliminations Consolidated
-------------------------------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 122,247 $ 11,928,144
Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,044,517
Marketable Equity Securities, at Market Value 95,697 1,119,408
Mortgage Loans (139,319) 416,489
Real Estate (At cost less accumulated depreciation) (3,837) 498,958
Policy Loans - 55,925
Short-Term Investments (93,099) 68,808
-------------------------------
Total Investments (18,311) 16,132,249
Cash 8,441 65,477
Accrued Investment Income 1,040 234,253
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) - 741,177
Loans to Affiliates (83,395) -
Premiums and Other Service Fees Receivable 4,654 444,618
Other Notes and Accounts Receivable (1,215) 42,139
Reinsurance Recoverables - 137,284
Deferred Policy Acquisition Costs - 356,359
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 25,573 170,016
Other Assets 32,512 167,872
Separate Account Assets - 276,399
-------------------------------
Total $ (30,701) $ 18,767,843
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and Adjustment Expense $- $ 2,207,230
Unearned Premiums - 910,762
Life Policy Liabilities - 154,090
Funds Held Under Deposit Contracts - 8,756,384
Notes and Mortgages Payable:
Credit Company Borrowings - Non-Affiliates - 614,270
Credit Company Borrowings - Affiliates (126,605) -
7.875% Notes Due 2005 200,000 200,000
Other Notes and Mortgages - Non-Affiliates 54,868 253,275
Other Notes and Mortgages - Affiliates (161,046) -
Other Liabilities (2,008) 895,853
Income Taxes:
Current 1,554 18,000
Deferred (Includes tax in unrealized appreciation of
investment securities) 7,947 498,934
Separate Account Liabilities - 276,399
-------------------------------
Total Liabilities (25,290) 14,785,197
-------------------------------
Common Stock 190,419 217,447
Additional Paid-In Capital (218,364) -
Retained Earnings (1,671) 2,755,537
Unrealized Appreciation of Investment Securities, Net of Tax 24,205 1,013,494
Unrealized Loss from Foreign Currency Translation, Net of Tax - (3,832)
-------------------------------
Stockholders' Equity (5,411) 3,982,646
-------------------------------
Total $ (30,701) $ 18,767,843
===============================
</TABLE>
<PAGE> 27
Statement of Income - Supplemental Consolidating Information F-3
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Property & Other and
Casualty Life & Health Real Estate Eliminations Consolidated
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $ 2,275,364 $ - $ - $ - $ 2,275,364
Life and Health Premiums and Other Revenues - 265,924 - - 265,924
-------------------------------------------------------------------------
Total 2,275,364 265,924 - - 2,541,288
Real Estate - - 79,924 - 79,924
Finance - - - 75,699 75,699
Asset Management - - - 23,216 23,216
Other - - - 38,458 38,458
Net Investment Income 281,580 836,715 - (1,561) 1,116,734
Realized Investment Gain 64,738 10,534 (2,611) 17,389 90,050
-------------------------------------------------------------------------
Total 2,621,682 1,113,173 77,313 153,201 3,965,369
-------------------------------------------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 1,580,509 782,213 - - 2,362,722
Commissions 341,990 73,680 - - 415,670
Personnel Costs 168,806 49,424 13,501 40,602 272,333
Interest - - 22,132 50,234 72,366
Dividends to Policyholders 16,221 - - - 16,221
Other 139,157 67,415 31,239 26,334 264,145
Amortization of Deferred Policy Acquisition Costs 391,210 35,652 - - 426,862
Deferral of Policy Acquisition Costs (400,985) (42,426) - - (443,411)
-------------------------------------------------------------------------
Total 2,236,908 965,958 66,872 117,170 3,386,908
-------------------------------------------------------------------------
Income Before Income Taxes 384,774 147,215 10,441 36,031 578,461
-------------------------------------------------------------------------
Provision (Benefit) for Income Taxes:
Current 59,159 58,276 11,856 4,187 133,478
Deferred 12,170 (6,468) (7,830) 8,160 6,032
-------------------------------------------------------------------------
Total 71,329 51,808 4,026 12,347 139,510
-------------------------------------------------------------------------
Net Income $ 313,445 $ 95,407 $ 6,415 $ 23,684 $ 438,951
=========================================================================
</TABLE>
<PAGE> 28
Statement of Cash Flows - Supplemental Consolidating Information F-4
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1996
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Property & Other and
Casualty Life & Health Real Estate Eliminations Consolidated
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $ 2,297,440 $ 216,802 $ - $ - $ 2,514,242
Dividends and Interest Received 277,933 755,325 2,112 68,223 1,103,593
Other Operating Receipts - 25,798 73,165 73,961 172,924
Insurance Claims and Policy Benefits Paid (1,695,463) (302,955) - - (1,998,418)
Underwriting, Acquisition and Insurance Operating
Costs Paid (629,712) (183,234) - 11,215 (801,731)
Interest Paid - - (20,570) (48,966) (69,536)
Other Operating Costs Paid - - (27,223) (61,399) (88,622)
Income Taxes Paid (68,269) (72,186) (3,270) (4,394) (148,119)
------------------------------------------------------------------
Net Cash Provided by Operating Activities 181,929 439,550 24,214 38,640 684,333
------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (475,661) (1,544,998) - (58,884) (2,079,543)
Fixed Maturities Held-to-Maturity - (473,206) - - (473,206)
Equities (137,739) (799) - (16,399) (154,937)
Other Investments - (120,150) (99,280) 29,618 (189,812)
Maturities of Fixed Maturities Available-for-Sale 239,849 466,509 - 3,296 709,654
Maturities of Fixed Maturities Held-to-Maturity - 21,694 - - 21,694
Sales of:
Fixed Maturities Available-for-Sale 223,870 721,229 - 34,848 979,947
Fixed Maturities Held-to-Maturity - 13,316 - - 13,316
Equities 124,923 10,596 - 46,198 181,717
Other Investments 95 82,257 50,352 (31,730) 100,974
Net (Increase) Decrease in Short-Term Investments 18,819 (482) (11,144) (39,264) (32,071)
Finance Receivables Originated or Acquired - - - (378,690) (378,690)
Principal Payments Received on Finance Receivables - - - 291,981 291,981
Other (30,464) (1,968) (556) (36,263) (69,251)
------------------------------------------------------------------
Net Cash Used in Investing Activities (36,308) (826,002) (60,628) (155,289) (1,078,227)
------------------------------------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts - 1,148,590 - - 1,148,590
Return of Funds Held Under Deposit Contracts - (765,480) - - (765,480)
Proceeds from Notes and Mortgage Borrowings - - 74,850 (34,650) 40,200
Repayment of Notes and Mortgage Borrowings - - (104,367) (3,100) (107,467)
Net Proceeds from (Repayment of) Short-Term Borrowings (3,654) (7,802) 69,169 155,845 213,558
Common Stock Reacquired - - - (9,571) (9,571)
Dividends Paid to Stockholders (139,000) (4,580) (1,348) 5,030 (139,898)
Other - - (385) 4,368 3,983
------------------------------------------------------------------
Net Cash Provided by (Used in) Financing
Activities (142,654) 370,728 37,919 117,922 383,915
------------------------------------------------------------------
Net (Decrease) Increase in Cash 2,967 (15,724) 1,505 1,273 (9,979)
Cash at the Beginning of Year 21,052 35,533 (616) 9,508 65,477
------------------------------------------------------------------
Cash at the End of the Year $ 24,019 $ 19,809 $ 889 $ 10,781 $ 55,498
==================================================================
</TABLE>
<PAGE> 29
Summary of Investments Other Than Investments in Related Parties F-5
SAFECO CORPORATION AND SUBSIDIARIES Schedule I
December 31, 1996
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Amount at Which
Shown in the
Type of Investment Cost Market Value Balance Sheet
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities Available-for-Sale
Bonds:
United States Government and Government
Agencies and Authorities $ 1,123,418 $ 1,168,681 $ 1,168,681
States, Municipalities and Political
Subdivisions 3,036,139 3,383,899 3,383,899
Mortgage-Backed Securities 2,533,036 2,588,641 2,588,641
Foreign Governments 204,765 249,238 249,238
Public Utilities 2,042,580 2,158,581 2,158,581
Convertibles and Bonds
with Warrants Attached 20,300 21,721 21,721
All Other Corporate Bonds 2,119,053 2,168,663 2,168,663
Redeemable Preferred Stocks 191,238 196,819 196,819
-----------------------------------------
Total Fixed Maturities Classified
as Available-for-Sale (1) 11,270,529 $11,936,243 11,936,243
-----------------------------------------
Fixed Maturities Held-to-Maturity
Bonds:
United States Government and Government
Agencies and Authorities 244,686 $ 273,848 244,686
States, Municipalities and Political
Subdivisions 103,075 106,209 103,075
Mortgage-Backed Securities 291,868 299,571 291,868
Foreign Governments 148,300 172,703 148,300
Public Utilities 545,249 589,099 545,249
All Other Corporate Bonds 1,155,146 1,228,574 1,155,146
-----------------------------------------
Total Fixed Maturities Classified
as Held-to-Maturity (1) 2,488,324 $ 2,670,004 2,488,324
-----------------------------------------
Equity Securities
Common Stocks:
Public Utilities 57,337 $ 97,599 97,599
Banks, Trust and Insurance Companies 45,569 157,208 157,208
Industrial, Miscellaneous and All Other 445,453 914,579 914,579
Non-Redeemable Preferred Stocks 93,482 129,423 129,423
-----------------------------------------
Total Equity Securities 641,841 $ 1,298,809 1,298,809
-----------------------------------------
Other
Mortgage Loans on Real Estate (1) 447,988 447,988
Real Estate (Net of depreciation) (1) 554,011 554,011
Policy Loans 58,153 58,153
Short-Term Investments 105,927 105,927
-----------------------------------------
Total Other 1,166,079 1,166,079
-----------------------------------------
Total Investments $15,566,773 $16,889,455
=========== ===========
</TABLE>
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate that have not produced income for the last twelve months is
less than one percent of the total of such investments at December 31,
1996.
<PAGE> 30
Balance Sheet F-6
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
December 31 1996 1995
- --------------------------------------------------------------------------------------
(In Thousands Except Share Amounts)
<S> <C> <C>
ASSETS
Investments:
Stock of Subsidiaries - At Cost Plus Equity in
Undistributed Earnings Since Acquisition
(Includes unrealized appreciation of
investment securities, net of
tax, held by subsidiaries) $4,168,957 $4,042,909
Fixed Maturities Available-for-Sale,
at Market Value
(Amortized cost: 1996 - $108,341; 1995 - $78,798) 108,589 80,996
Marketable Equity Securities, at Market Value
(Cost: 1996 - $41,960; 1995 - $62,856) 64,372 88,628
Notes Receivable - SAFECO Credit, due 2002 15,000 15,000
Short-Term Investments 5,305 9,005
Other Security Investments - At Cost - 763
-----------------------
Total Investments 4,362,223 4,237,301
Cash 223 115
Dividends Receivable
from Affiliated Companies 37,400 34,837
Accounts Receivable
from Affiliated Companies 9,530 1,058
Income Taxes - Current 1,580 -
Other Assets 6,333 8,505
-----------------------
Total $4,417,289 $4,281,816
=======================
</TABLE>
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable from Affiliated Companies $ 1,751 $ -
Accounts and Interest Payable 4,471 4,423
Income Taxes:
Current - 544
Deferred 9,095 10,816
Dividends Payable to Stockholders 36,632 33,387
Medium-Term Notes Due 2002 50,000 50,000
7.875% Notes Due 2005 200,000 200,000
---------------------------
Total Liabilities 301,949 299,170
---------------------------
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:
1996 - 3,344,751; 1995 - 3,699,983
Shares Issued and Outstanding:
1996 - 126,308,237; 1995 - 125,978,742 225,276 217,447
Retained Earnings 3,042,214 2,755,537
Unrealized Appreciation of Investment
Securities, Net of Tax 851,401 1,013,494
Unrealized Loss from Foreign Currency
Translation, Net of Tax (3,551) (3,832)
---------------------------
Stockholders' Equity 4,115,340 3,982,646
---------------------------
Total $ 4,417,289 $ 4,281,816
===========================
</TABLE>
<PAGE> 31
Statement of Income F-7
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
REVENUES
Dividends -Non-Affiliates $ 3,412 $ 5,239 $ 6,746
Interest -Affiliates 1,456 858 58
-Others 6,061 11,370 5,035
Equity in Loss of Unconsolidated Affiliate (891) (969) (211)
Realized Gain from Security Investments 17,289 6,628 2,685
-----------------------------------
Total 27,327 23,126 14,313
-----------------------------------
EXPENSES
Interest 19,322 30,701 25,072
Other 629 638 638
-----------------------------------
Total 19,951 31,339 25,710
-----------------------------------
Income (Loss) Before Income Taxes 7,376 (8,213) (11,397)
Provision (Benefit) for Income Taxes
(Includes provision on realized gain:
1996 - $6,051; 1995 - $2,320; 1994 - $940) (1,786) 4,099 5,806
-----------------------------------
Income (Loss) Before Equity in Earnings
of Subsidiaries 5,590 (4,114) (5,591)
Equity in Earnings of Subsidiaries
(Includes dividends accrued and received) 433,361 403,073 319,965
-----------------------------------
Consolidated Net Income $ 438,951 $ 398,959 $ 314,374
===================================
Dividends Accrued and Received From Subsidiaries (Cash):
SAFECO Insurance Company of America $ 75,000 $ 69,000 $ 78,000
General Insurance Company of America 45,500 45,000 56,000
First National Insurance Company of America 4,000 4,000 6,000
SAFECO National Insurance Company 5,000 3,500 4,000
SAFECO Insurance Company of Illinois 12,000 10,000 6,000
SAFECO Life Insurance Company 4,000 4,000 4,000
SAFECO Administrative Services, Inc. 580 588 720
SAFECO Properties, Inc. 1,411 1,534 4,043
SAFECO Credit Company, Inc. 2,216 1,840 1,508
SAFECO Asset Management Company - 1,000 2,000
-----------------------------------
Total $ 149,707 $ 140,462 $ 162,271
===================================
</TABLE>
<PAGE> 32
Statement of Cash Flows F-8
SAFECO CORPORATION Schedule II
(Parent Company Only)
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Dividends and Interest Received -Affiliates $ 148,600 $ 138,886 $ 128,868
-Others 11,062 16,438 11,447
Interest Paid (19,322) (33,034) (25,317)
Other Operating Costs Paid (283) (1,635) (1,330)
Income Taxes (Paid) Received (2,125) 5,588 4,399
-----------------------------------
Net Cash Provided By Operating Activities 137,932 126,243 118,067
-----------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (45,930) - (45,393)
Equities (5,000) (3,146) (27,421)
Other Investments - (211,764) -
Maturities of Fixed Maturities Available-for-Sale 770 770 2,018
Sales of:
Fixed Maturities Available-for-Sale 16,208 9,194 4,952
Equities 42,934 22,724 26,285
Other Investments - 196,764 -
Net Decrease (Increase) in Short-Term Investments (5,830) (5,620) 41,396
Other 2,349 - (1,000)
-----------------------------------
Net Cash Provided By Investing Activities 5,501 8,922 837
-----------------------------------
FINANCING ACTIVITIES
Proceeds from Notes and Mortgage Borrowings - 198,664 -
Repayment of Notes and Mortgage Borrowings - (201,379) -
Capital Contributions to Affiliates - (1,000) (750)
Common Stock Reacquired (9,571) (8,690) (5,327)
Dividends Paid to Stockholders (139,898) (128,479) (118,387)
Other 6,144 5,829 3,626
-----------------------------------
Net Cash Used In Financing Activities (143,325) (135,055) (120,838)
-----------------------------------
Net Increase (Decrease) in Cash 108 110 (1,934)
Cash at the Beginning of Year 115 5 1,939
-----------------------------------
Cash at the End of Year $ 223 $ 115 $ 5
===================================
</TABLE>
<PAGE> 33
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
Property and Casualty:
Personal $112,533 $1,021,936 $617,533
Commercial and Surety 43,110 1,037,134 320,521
--------------------------------------
Total 155,643 2,059,070 938,054
--------------------------------------
Life and Health:
Financial Services 163,802 108,584 6,420 $6,438,456
Employee Benefits 76,662 70,196 2,425 3,354,274
-------------------------------------------------------
Total 240,464 178,780 8,845 9,792,730
-------------------------------------------------------
Real Estate - - - -
Credit - - - -
Other and Eliminations - - - -
-------------------------------------------------------
Consolidated Totals $396,107 $2,237,850 $946,899 $9,792,730
=======================================================
1995
Property and Casualty:
Personal $106,696 $1,112,559 $591,059
Commercial and Surety 39,172 1,068,264 311,494
--------------------------------------
Total 145,868 2,180,823 902,553
--------------------------------------
Life and Health:
Financial Services 143,228 109,653 6,283 $5,515,427
Employee Benefits 67,263 70,844 1,926 3,240,957
-------------------------------------------------------
Total 210,491 180,497 8,209 8,756,384
-------------------------------------------------------
Real Estate - - - -
Credit - - - -
Other and Eliminations - - - -
-------------------------------------------------------
Consolidated Totals $356,359 $2,361,320 $910,762 $8,756,384
=======================================================
</TABLE>
<TABLE>
<CAPTION>
Other
Operating
Benefits Amortization of Costs
Premiums and Claims, Losses Deferred Policy (Including
Service Fee Net Investment and Adjustment Acquisition Dividends to Net Premiums
Year Ended December 31 Revenues Income(1) Expenses Costs Policyholders) Written
- -----------------------------------------------------------------------------------------------------------------------------------
(in Thousands)
<S> <C> <C> <C> <C> <C>
1996
Property and Casualty:
Personal $1,650,690 $ 1,204,543 $ 292,886 $148,270 $1,676,258
Commercial and Surety 624,674 375,966 98,324 115,518 636,815
---------- ---------------------------------------------------------------
Total 2,275,364 $ 281,580 1,580,509 391,210 263,788 $2,313,073
------------------------------------------------------------------------------------------------
Life and Health: - - --
Financial Services 50,705 554,844 459,239 13,756 57,425
Employee Benefits 215,219 281,871 322,974 21,896 90,668
-------------------------------------------------------------------------------
Total 265,924 836,715 782,213 35,652 148,093
-------------------------------------------------------------------------------
Real Estate - - - - 66,872
Credit - - - - 65,166
Other and Eliminations - (1,561) - - 53,405
-------------------------------------------------------------------------------
Consolidated Totals $2,541,288 $ 1,116,734 $2,362,722 $426,862 $ 597,324
===============================================================================
1995
Property and Casualty:
Personal $1,562,716 $ 1,143,191 $ 281,747 $ 140,305 $1,599,700
Commercial and Surety 599,425 383,785 94,790 111,975 607,284
---------- ---------------------------------------------------------------
Total 2,162,141 $ 291,450 1,526,976 376,537 252,280 $2,206,984
------------------------------------------------------------------------------------------------
Life and Health:
Financial Services 47,178 494,758 403,518 12,222 57,839
Employee Benefits 214,392 283,463 319,948 20,154 90,537
-------------------------------------------------------------------------------
Total 261,570 778,221 723,466 32,376 148,376
-------------------------------------------------------------------------------
Real Estate - - - - 65,899
Credit - - - - 58,499
Other and Eliminations - 5,609 - - 56,647
-------------------------------------------------------------------------------
Consolidated Totals $2,423,711 $ 1,075,280 $2,250,442 $408,913 $ 581,701
===============================================================================
</TABLE>
<PAGE> 34
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31 Continued
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
Property and Casualty:
Personal $102,745 $1,168,981 $553,811
Commercial and Surety 38,908 1,067,823 304,370
--------------------------------------
Total 141,653 2,236,804 858,181
--------------------------------------
Life and Health:
Financial Services 151,614 108,822 6,797 $4,871,635
Employee Benefits 95,576 75,550 1,986 3,116,821
-----------------------------------------------------
Total 247,190 184,372 8,783 7,988,456
-----------------------------------------------------
Real Estate - - - -
Credit - - - -
Other and Eliminations - - - -
-----------------------------------------------------
Consolidated Totals $388,843 $2,421,176 $866,964 $7,988,456
=====================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31
- -----------------------------------------------------------------------------------------------------------------------------------
(In Thousands)
Other
Operating
Benefits Amortization of Costs
Premiums and Claims, Losses Deferred Policy (Including
Service Fee Net Investment and Adjustment Acquisition Dividends to Net Premiums
Revenues Income(1) Expenses Costs Policyholders) Written
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994
Property and Casualty:
Personal $1,469,857 $1,142,855 $ 272,545 $122,388 $1,507,546
Commercial and Surety 583,574 385,212 92,651 115,125 595,919
---------- -------------------------------------------------------------
Total 2,053,431 $ 283,481 1,528,067 365,196 237,513 $2,103,465
-----------------------------------------------------------------------------------------------
Life and Health:
Financial Services 46,642 435,101 354,463 9,914 53,680
Employee Benefits 230,129 271,116 319,752 19,493 94,671
-------------------------------------------------------------------------------
Total 276,771 706,217 674,215 29,407 148,351
-------------------------------------------------------------------------------
Real Estate - - - - 97,163
Credit - - - - 47,420
Other and Eliminations - 1,912 - - 45,556
-------------------------------------------------------------------------------
Consolidated Totals $2,330,202 $ 991,610 $2,202,282 $394,603 $ 576,003
===============================================================================
</TABLE>
(1) Property and casualty insurance companies' investments are available
for payment of claims and benefits for all product lines within the
segments; therefore, such investments and the related investment income
have not been identified with specific segments. In the life and health
companies, a major portion of investment income and assets is
specificially identifiable within an industry segment. The remainder of
these amounts has been allocated in proportion to the mean policy
reserves and liabilities identified with each segment.
<PAGE> 35
Reinsurance F-10
SAFECO CORPORATION AND SUBSIDIARIES Schedule IV
Year Ended December 31
- --------------------------------------------------------------------------------
(In Thousands)
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from Other of Amount
Gross Amount Other Companies Companies Net Amount Assumed to Net
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Life Insurance In Force at Year End $28,524,843 $(1,791,116) $ 80,903 $26,814,630 0.3%
================================================================
Premiums earned:
Life Insurance $ 120,774 $ (5,586) $ 175 $ 115,363 0.2%
Accident/Health Insurance 158,654 (8,093) - 150,561 0.0%
Property/Casualty Insurance 2,404,909 (152,637) 23,092 2,275,364 1.0%
----------------------------------------------------------------
Total $ 2,684,337 $ (166,316) $ 23,267 $ 2,541,288 0.9%
================================================================
1995
Life Insurance In Force at Year End $28,171,372 $(1,303,597) $ 15,532 $26,883,307 0.1%
================================================================
Premiums earned:
Life Insurance $ 107,511 $ (4,744) $ 152 $ 102,919 0.1%
Accident/Health Insurance 169,900 (5,641) (5,608) 158,651 -3.5%
Property/Casualty Insurance 2,300,853 (160,342) 21,630 2,162,141 1.0%
----------------------------------------------------------------
Total $ 2,578,264 $ (170,727) $ 16,174 $ 2,423,711 0.7%
================================================================
1994
Life Insurance In Force at Year End $28,692,952 $(1,322,748) $ - $27,370,204 0.0%
================================================================
Premiums earned:
Life Insurance $ 107,099 $ (4,844) $ 38 $ 102,293 0.0%
Accident/Health Insurance 178,405 (4,216) 289 174,478 0.2%
Property/Casualty Insurance 2,207,615 (175,861) 21,677 2,053,431 1.1%
----------------------------------------------------------------
Total $ 2,493,119 $ (184,921) $ 22,004 $ 2,330,202 0.9%
================================================================
</TABLE>
<PAGE> 36
Supplemental Information Concerning Consolidated Property/Casualty Insurance
Operations F-11
SAFECO CORPORATION Schedule VI
<TABLE>
<CAPTION>
December 31 Year Ended December 31
- --------------------------------------------------------------------------------------------- ----------------------
(In Thousands) (In Thousands)
Reserve For Discount
Deferred Unpaid Losses Deducted
Affiliation Policy and from
with Acquisition Adjustment Loss Unearned Earned
Registrant Costs Expenses Reserves Premiums Premiums
- --------------------------------------------------------------------------------------------- ------------------
<S> <C> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1996 $ 155,643 $ 2,059,070 $ - $ 938,054 $ 2,275,364
1995 $ 145,868 $ 2,180,823 $ - $ 902,553 $ 2,162,141
1994 $ 141,653 $ 2,236,804 $ - $ 858,181 $ 2,053,431
</TABLE>
<TABLE>
<CAPTION>
Losses and Adjustment Amortization
Expenses Incurred of Deferred Paid Losses
Net Related to: Policy and
Investment Acquisition Adjustment Net Premiums
Income Current Year Prior Years Costs Expenses Written
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1996 $ 281,580 $ 1,658,253 $ (77,744) $ 391,210 $ 1,694,928 $ 2,313,073
1995 $ 291,450 $ 1,586,675 $ (59,699) $ 376,537 $ 1,549,845 $ 2,206,984
1994 $ 283,481 $ 1,609,392 $ (81,325) $ 365,196 $ 1,430,243 $ 2,103,465
</TABLE>
<PAGE> 37
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index*
- --------------------------------------------------------------------------------
Exhibit 3 Bylaws (as amended August 7, 1996), filed as Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1996, are incorporated herein by this
reference.
Restated Articles of Incorporation (as amended May 1,
1996), filed as Exhibit 3 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996, are
incorporated herein by this reference.
Exhibit 4 SAFECO agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all instruments
defining rights of holders of long-term debt of SAFECO and
its consolidated subsidiaries.
Exhibit 10 SAFECO Corporation Deferred Compensation Plan for Directors
dated November 2, 1994, filed as Exhibit 10 to Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1994, is incorporated herein by this
reference.
The following documents are incorporated herein by this
reference: the Executive Severance Agreements with Roger
Eigsti and Boh A. Dickey, each dated May 23, 1984, and
filed as Exhibit 10 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1985; and
the Executive Severance Agreements with R.E. Zunker and
James W. Ruddy, each dated August 30, 1996, and filed as
Exhibit 10 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1996.
Prospectus dated November 10, 1989 for the SAFECO Incentive
Plan of 1987 (as amended January 31, 1990) filed as Exhibit
10 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1989 and the Supplement to
such Prospectus dated November 7, 1990, filed as Exhibit 10
to Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1990.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1996 Annual Report to Stockholders (pages 27 to 73,
inclusive)
Exhibit 27 Financial Data Schedule (This Exhibit is included only in
the electronic Edgar filing version of this 10-K. The
Financial Data Schedule is not a separate financial
statement but a schedule that summarizes certain financial
information extracted directly from the financial
statements in this filing.)
* Copies of Exhibits are available without charge by making a written request
to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
<PAGE> 1
Computation of Income Per Share F-13
SAFECO CORPORATION AND SUBSIDIARIES Exhibit 11
<TABLE>
<CAPTION>
Year Ended December 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
Primary Net Income Per Share
Of Common Stock
<S> <C> <C> <C>
1 Average Number of Common
Shares Outstanding 126,074 125,961 125,944
======================================
2 Additional Common Shares
Assumed Issued Under the
Treasury Stock Method 609 587 470
======================================
3 Net Income $438,951 $398,959 $314,374
======================================
4 Primary Net Income Per Share
of Common Stock (L.3/L.1) $ 3.48 $ 3.17 $ 2.50
======================================
</TABLE>
<PAGE> 1
Computation of Ratio of Earnings to Fixed Charges F-14
Year Ended December 31 Exhibit 12
- --------------------------------------------------------------------------------
(In Thousands, Except Ratios)
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES
1996 1995 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings
Income Before Income Taxes $ 578,461 $ 513,800 $ 389,741 $ 576,937 $ 403,257
Total Fixed Charges Below 76,348 89,727 75,066 63,552 67,761
Less Interest Capitalized (101) (294) (831) (1,381) (154)
Less Undistributed Loss
from Unconsolidated Subsidiary 891 969 211 574 555
-----------------------------------------------------------------------------
Total Earnings $ 655,599 $ 604,202 $ 464,187 $ 639,682 $ 471,419
=============================================================================
Fixed Charges
Interest $ 72,366 $ 85,409 $ 70,340 $ 58,790 $ 64,097
Interest Capitalized 101 294 831 1,381 154
Interest Portion of Rental Expense 3,326 3,194 3,050 2,768 2,855
Amortization of Deferred Debt Expense 555 830 845 613 655
-----------------------------------------------------------------------------
Total Fixed Charges $ 76,348 $ 89,727 $ 75,066 $ 63,552 $ 67,761
=============================================================================
Ratio of Earnings to Fixed Charges 8.6 6.7 6.2 10.1 7.0
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
SAFECO CREDIT
1996 1995 1994 1993 1992
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings
Income Before Income Taxes $19,081 $13,300 $10,761 $10,190 $ 9,036
Total Fixed Charges Below 47,544 41,854 30,721 26,056 26,800
---------------------------------------------------------------
Total Earnings $66,625 $55,154 $41,482 $36,246 $35,836
===============================================================
Fixed Charges
Interest $47,448 $41,772 $30,652 $25,918 $26,646
Interest Portion of Rental Expense 96 82 69 100 102
Amortization of Deferred Debt Expense - - - 38 52
---------------------------------------------------------------
Total Fixed Charges $47,544 $41,854 $30,721 $26,056 $26,800
===============================================================
Ratio of Earnings to Fixed Charges 1.4 1.3 1.4 1.4 1.3
===============================================================
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) The insurance subsidiaries engage in both property and
casualty insurance and life and health insurance. SAFECO Properties and its
subsidiaries invest in and manage real estate properties, primarily retail
centers. SAFECO Credit Company provides loans and equipment financing and
leasing to commercial businesses including affiliated companies. SAFECO Asset
Management provides asset management services to the SAFECO family of mutual
funds, SAFECO Trust Company and outside managed accounts.
CAPITAL RESOURCES AND LIQUIDITY
SAFECO's primary sources of cash are insurance premiums, funds received
under deposit contracts, dividends, interest, rental income and asset management
fees. Most insurance premiums are received before or at the time premium
revenues are recognized, while related claims are incurred and paid in
subsequent months or years. Any resulting cash flow is used primarily to pay
shareholder dividends and to expand the investment portfolio.
Total cash provided by operating activities for the years ended December 31,
1996, 1995 and 1994 was $684.3 million, $702.1 million and $753.0 million,
respectively (see Statement of Consolidated Cash Flows on page 44). The lower
amounts of operating cash flow in 1996 and 1995 were primarily due to increased
claim payments caused by catastrophe losses (see pages 30 and 31 for additional
discussion). The increases in property and casualty insurance premiums received
in 1996 and 1995 resulted from a combination of rate increases and higher
numbers of policies in force. The increases in dividends and interest received
in both 1996 and 1995 were due mainly to the increasing invested asset base of
the life and health insurance companies. Although property and casualty cash
flow from operations was positive in all three years, the recent high level of
catastrophe losses combined with the relatively low interest rate environment
and a high level of bond call activity has dampened the growth of investment
income. Property and casualty investment income is expected to grow slowly in
1997.
The high level of proceeds from the maturity of fixed maturities in all
three years was due to the high number of calls of fixed maturities and
prepayments of mortgage-backed securities. These calls and prepayments were
primarily due to the declining interest rate environment. Changes in interest
rates have also caused fluctuations in the market value of fixed maturity
investments. This has affected SAFECO's reported book value (stockholders'
equity) because the difference between market value and amortized cost of fixed
maturities classified as available-for-sale is included in stockholders' equity,
net of tax.
The real estate and credit subsidiaries have ongoing needs for outside
capital. The real estate subsidiaries borrow from life insurance companies,
banks, savings and loan associations and other lenders. At December 31, 1996,
the real estate subsidiaries had notes and mortgages payable to non-affiliates
of $165.1 million, of which $28.2 million was due within one year. It is
anticipated that these obligations will be met through a combination of
rollovers and replacement borrowings.
27
<PAGE> 2
SAFECO Credit Company's borrowings are short- to medium-term and are
obtained primarily from the issuance of commercial paper and medium-term notes.
SAFECO Credit had unaffiliated borrowings at December 31, 1996 of $808.8
million, of which $763.9 million was due within one year. Almost all of this
current portion is comprised of short-term commercial paper borrowings. It is
anticipated that the majority of these commercial paper borrowings will be
rolled over in 1997. SAFECO Credit enters into interest rate swap agreements to
reduce the impact of changes in interest rates on its variable rate debt by
converting variable rate interest payments to fixed rates. The interest rate
swap agreements provide only for the exchange of interest on the notional
amounts at the stated rates, with no multipliers or leverage. At December 31,
1996, interest rate swap agreements were outstanding with notional amounts of
$249.0 million, replacing variable rates with fixed rates with a weighted
average rate of 6.0%. Maturities of these agreements range from June 1997 to
November 2003. At December 31, 1995, interest rate swap agreements were
outstanding with notional amounts of $134.9 million, replacing variable rates
with fixed rates with a weighted average rate of 6.0%. The notional amount of
interest rate swaps outstanding is higher in 1996 compared with 1995 because
SAFECO Credit has increased its use of rate swaps to correspond with the
increase in variable rate debt.
In 1995 SAFECO Corporation issued $200 million of 7.875% notes due in April
2005, under a Securities and Exchange Commission (SEC) shelf registration. The
proceeds were used to replace SAFECO Corporation's then existing $200 million of
10.75% notes which matured in 1995.
Prior to the shelf registration noted above, SAFECO Corporation and SAFECO
Credit initiated a combined shelf registration in 1990. SAFECO Credit issued
$149.9 million of medium-term notes under this registration, of which $46.5
million remained outstanding as of December 31, 1996. These debt securities
issued by SAFECO Credit are guaranteed by SAFECO Corporation. SAFECO Corporation
issued $50.0 million of medium-term notes under this registration, all maturing
in 2002 and 2003. No additional notes will be issued under this shelf
registration.
SAFECO Corporation's debt is rated AA by Standard & Poor's and Aa3 by
Moody's Investor Services. SAFECO's property and casualty companies' financial
strength ratings are A++ by A.M. Best, AAA by Standard & Poor's and Aa1 by
Moody's. SAFECO Life Insurance Company's ratings are A++ by A.M. Best, AA by
Standard & Poor's and Aa2 by Moody's. The financial strength ratings are
important in marketing insurance products.
Many life insurance companies' pension and annuity products have been
affected in recent years by general economic conditions, strong returns in the
equity markets, rating downgrades, increased competition and decisions by plan
sponsors to diversify assets and fund management. SAFECO Life has experienced an
increase in the level of withdrawal of funds from its retirement services and
annuity business due to scheduled payouts on distribution-type products and the
interest rate environment (see Statement of Consolidated Cash Flows on page 44
- -- Return of Funds Held Under Deposit Contracts). However, SAFECO Life's overall
withdrawal experience remains relatively modest, and proceeds from the sale of
fixed income retirement services and annuity products have remained relatively
stable. Of the total of $9.8 billion in deposit contracts at December 31, 1996,
approximately 47% are structured settlement immediate annuity products. These
annuities have average expected maturities of over 25 years and cannot be
surrendered by policyholders. Other annuity products, comprising approximately
13% of total deposit contracts, generally have expected maturities of 5 to 12
years and associated surrender charges graded from 5% in year one to zero in
year six. Other retirement services products, comprising approximately 31% of
total deposit contracts, have expected maturities of 5 to 15 years. Surrender
charges on these products are typically 9% in year one graded to zero in year
nine, and SAFECO Life retains the option to defer payouts over five years on
approximately one quarter of these contracts. SAFECO Life's guaranteed
investment contracts (GICs) within its retirement services area comprise
approximately 4% of total deposit contracts.
28
<PAGE> 3
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities which have or would have, if passed, a material effect on
its liquidity, capital resources or results of operations.
The state of Washington has rules which limit the amount of dividend
payments that can be made by Washington-domiciled insurance companies without
prior regulatory approval. However, it is expected these rules will not restrict
SAFECO's insurance subsidiaries from paying dividends to SAFECO Corporation
(parent company) in amounts similar to those presently being paid and those paid
in the past.
The National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital (RBC) formulas for both life insurers and property and
casualty insurers. For life insurers, the RBC guidelines became effective
December 31, 1993; the RBC guidelines for property and casualty companies became
effective December 31, 1994. The formulas are used as an early warning tool by
the NAIC and state regulators to identify companies that are under-capitalized
and which merit further regulatory attention or the initiation of regulatory
action. SAFECO's life and property and casualty companies have more than
sufficient capital to meet the RBC requirements.
Similarly, the NAIC's proposed Model Investment Law, if adopted by certain
states in which SAFECO operates, should not significantly impact SAFECO, as its
assets are, and historically have been, conservatively invested.
The NAIC has undertaken a major project to codify statutory accounting
principles. While the impact of these proposals is currently being studied, the
effect on statutory surplus is not expected to be material.
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information sets forth the contributions
of each business segment to the consolidated net income of SAFECO Corporation.
The information should be read in conjunction with the related statements of
income on pages 47 through 51 of this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
--------- -------- --------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C>
INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN:
PROPERTY AND CASUALTY ..................................................... $ 270,644 $256,408 $192,734
LIFE AND HEALTH ........................................................... 88,780 88,988 84,941
REAL ESTATE ............................................................... 8,411 5,929 6,568
CREDIT .................................................................... 12,178 8,872 7,365
ASSET MANAGEMENT .......................................................... 5,105 4,746 4,116
CORPORATE ................................................................. (4,901) (7,536) (7,272)
--------- -------- --------
TOTAL .................................................................. 380,217 357,407 288,452
--------- -------- --------
REALIZED GAIN (LOSS), NET OF INCOME TAXES, FROM:
SECURITY INVESTMENTS ...................................................... 60,730 42,083 26,035
REAL ESTATE INVESTMENTS ................................................... (1,996) (531) (113)
--------- -------- --------
TOTAL .................................................................. 58,734 41,552 25,922
--------- -------- --------
NET INCOME .................................................................... $ 438,951 $398,959 $314,374
--------- -------- --------
NET INCOME PER SHARE OF COMMON STOCK:
INCOME BEFORE REALIZED GAIN ............................................... $ 3.02 $ 2.84 $ 2.29
REALIZED GAIN ............................................................. .46 .33 .21
--------- -------- --------
NET INCOME ................................................................ $ 3.48 $ 3.17 $ 2.50
--------- -------- --------
</TABLE>
29
<PAGE> 4
PROPERTY AND CASUALTY -- OPERATIONS
Through independent agents, SAFECO's property and casualty subsidiaries
write personal, commercial and surety lines of insurance. Coverages include
automobile, homeowners, fire and allied lines, workers' compensation, commercial
multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in
nearly all states and the District of Columbia. Approximately 23% of SAFECO's
property and casualty premiums are written in California and approximately 45%
of premiums are written in the three west coast states of California, Washington
and Oregon. SAFECO's writing of new property business continues to be restricted
in California to reduce its exposure to large single-event catastrophes (see
discussion on page 31). SAFECO's emphasis for future personal lines growth is in
various target states, mostly east of the Rocky Mountains.
Voluntary personal, commercial and surety lines (which exclude assigned
risk, FAIR plans, etc.) comprised approximately 70%, 25% and 4%, respectively,
of the 1996 gross premiums written. The gross premiums written growth set forth
in the table on page 32 of 4.1% in 1996 was comprised of a 4.8% increase for
personal, a 2.3% increase for commercial and a 3.1% increase for surety lines.
Gross premiums written growth of 3.9% in 1995 was comprised of a 5.3% increase
for personal, a decrease of 0.8% for commercial and an increase of 10.9% for
surety lines.
The 1996 growth in personal lines premiums resulted from both rate increases
and an increase in policies in force. The number of vehicles insured increased
5.3% in 1996, compared with 1.8% in 1995 and 1.3% in 1994. The increase in 1996
came primarily from growth in targeted states east of the Rocky Mountains. The
modest growth rates in 1995 and 1994 were caused primarily by rate increases.
Continued growth in the number of vehicles insured is expected in 1997,
particularly in target states. The number of homes insured increased 2.4% in
1996, 1.2% in 1995 and 2.7% in 1994. This moderate growth rate was due to rate
increases in recent years and to the moratorium on the writing of new homeowners
policies in California (discussed on page 31).
SAFECO's commercial lines premiums were affected in both 1996 and 1995 by
increased rate competition in workers' compensation, particularly in California
due to open rating, and increased rate competition in commercial auto. The
increase in surety premiums in 1996 and 1995 was primarily due to new commercial
and contract accounts acquired.
Losses caused by catastrophes have had a significant impact on SAFECO's
results. Catastrophe losses for all lines, net of reinsurance, totaled $104
million, $143 million and $153 million in 1996, 1995 and 1994, respectively.
These losses related primarily to homeowners and other personal lines coverages
(which include earthquake coverages), discussed in more detail below. The
January 1994 Los Angeles earthquake was a significant factor in the 1995 and
1994 catastrophe losses. SAFECO's gross losses for all lines (before
reinsurance) from the earthquake were $267 million. Net of reinsurance, the
losses were $132 million. Of this net amount, $90 million was reflected in 1994
results and $42 million was reflected in 1995 results. The 1995 losses were due
to subsequent increases in the estimated cost of claims from the earthquake. The
total 1994 amount charged to earnings from the earthquake of $113 million
included $23 million to reinstate reinsurance coverage for a second catastrophe
in the event it occurred in 1994.
SAFECO's strategy to reduce the impact of future catastrophe losses
includes continuing to maintain a strong catastrophe reinsurance program (see
discussion on page 33) and reducing exposures by obtaining higher deductibles on
earthquake coverages in some states. SAFECO has restricted the writing of new
property business in catastrophe-prone states and has implemented spread-of-risk
strategies in states such as Colorado and Texas to help mitigate the effects of
hail and wind storm losses. In addition, for the last several years SAFECO has
invested in earthquake and wind modeling technologies which allow it to better
monitor exposures.
Voluntary personal auto, SAFECO's largest single line of business, produced
pretax underwriting profits of $57.2 million, $87.4 million, and $43.4 million
for 1996, 1995 and 1994, respectively. Average auto rates decreased 1% in 1996,
after increases of 3% in both 1995 and 1994. This trend reflects the increased
competition in this line. Average loss costs (which include the severity or cost
of settling claims and the frequency of accidents) increased by 3% in 1996 over
1995, after declining slightly in 1995 compared to 1994. Due to the increasing
competition in the personal auto business the underwriting profit levels of 1996
and 1995 may be difficult to achieve in 1997.
The homeowners line produced pretax underwriting losses of $73.1 million,
$54.2 million and $33.6 million in 1996, 1995 and 1994, respectively. Losses due
to catastrophes continue to affect results for this line. Catastrophe losses for
homeowners totaled $69 million, $70 million and $36 million after reinsurance in
1996, 1995 and 1994, respectively.
30
<PAGE> 5
In addition, weather-related losses not classified as catastrophes increased by
$16 million in 1996 over 1995. Some of the more significant catastrophe losses
in 1996 included $16 million from a late December storm that hit the Puget Sound
area, $7 million from wind and hail storms in Kentucky and Illinois in early May
and $5 million from a windstorm in Phoenix in August. Significant losses in 1995
included $18 million from two late spring hail storms that hit the Dallas area,
$16 million from West Coast storms in December and $11 million from storms in
California in January and March. Average homeowners rates were increased 6%, 8%
and 6% in 1996, 1995 and 1994, respectively. SAFECO's total homeowners premiums
increased 7%, 9% and 11% in 1996, 1995 and 1994, respectively, due to rate
increases, increases in the number of homes insured and continuing efforts to
increase homeowners insurance to value. Rate increases and insurance-to-value
efforts, combined with restricted writings, higher deductibles and spread of
risk strategies in catastrophe-prone areas are all being pursued to improve
future results in homeowners. A continuing increase in premiums per policy is
expected in 1997 as a result of planned rate increases and the ongoing
insurance-to-value effort. Excluding the impact of catastrophes, these measures
are expected to improve homeowners' results in 1997.
Other personal lines produced an underwriting gain of $20.2 million in 1996
and losses of $30.9 million in 1995 and $76.1 million in 1994. Coverages in
these lines include earthquake, dwelling fire, inland marine and boats. The
losses in 1995 and 1994 were due to the January 1994 Los Angeles earthquake.
Losses from the earthquake included in these lines totaled $40 million in 1995
and $105 million, net of reinsurance, in 1994 (includes $23 million reinsurance
reinstatement premium). SAFECO suspended writing new homeowners, dwelling fire
and condominium policies in California in July 1994 because California requires
insurers to offer earthquake coverage in connection with homeowners and other
residential policies. SAFECO received approval of a new earthquake mini-policy
in California in September of 1996 and began to convert existing homeowners
policies to the more limited coverage provided by the mini-policy as they reach
renewal date. SAFECO also modified its earthquake policies in several other
states to increase the deductible. SAFECO believes federal legislation is
necessary to create a permanent, long-term solution for the losses that arise
from natural disasters such as earthquakes.
Commercial operations produced a pretax underwriting gain of $1.6 million in
1996, compared with underwriting losses of $12.7 million and $22.5 million in
1995 and 1994, respectively. Even with continuation of the competitive
commercial insurance market, SAFECO has experienced some modest renewal price
increases for the past three years. The underwriting gain in 1996 was due mainly
to improved results in the commercial auto line and the run-off of loss reserves
related to certain discontinued commercial liability coverages. This improvement
was partly offset by $16 million of commercial losses caused by the December
1996 Puget Sound storm. The lower loss in 1995 compared with 1994 was due mainly
to improved results in the general liability line. Workers' compensation
produced underwriting gains in all three years. However, continued rate
competition resulting from certain states enacting workers' compensation reforms
has reduced premiums. This rate competition is expected to continue into 1997.
The effects of lower rates are expected to be partly offset by the beneficial
impact of these reforms. Overall, SAFECO's voluntary commercial lines combined
ratio was 98.8, 102.4 and 104.3 for 1996, 1995 and 1994, respectively. The
combined ratios for all three years compare favorably with the industry and are
a result of continued disciplined risk selection, relatively limited impact of
weather-related losses on SAFECO's commercial property risks and concentration
of commercial writings in states with the most favorable legal and regulatory
climates.
The surety line produced pretax underwriting profits of $26.9 million, $22.3
million and $16.1 million for 1996, 1995 and 1994, respectively. Results in both
the contract and commercial lines were excellent in all three years. Due to
continuing intense competition in both lines, the record level of income in 1996
may be difficult to achieve in 1997.
Other insurance product lines (primarily assigned risk and FAIR plans)
produced an underwriting gain of $5.7 million in 1996, compared with losses of
$5.5 million and $4.6 million in 1995 and 1994, respectively. The improvement in
1996 was due to reduced losses in both commercial and personal assigned risk
business and to the continued depopulation of these plans in many states.
SAFECO sold its Canadian property and casualty operations in 1991 with no
significant gain or loss resulting from the transaction. Canadian underwriting
profits were $4.5 million, $6.7 million and $8.4 million for 1996, 1995 and
1994, respectively, and resulted from reductions in the estimated cost of
settling prior years' claims. Under the sales agreement SAFECO retained the
liabilities for losses incurred prior to April 1, 1991. Canadian assets were $86
million and $113 million at December 31, 1996 and 1995, respectively.
31
<PAGE> 6
PROPERTY AND CASUALTY OPERATING STATISTICS
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
PERCENTAGE
INCREASE PERCENTAGE PERCENTAGE
(DECREASE) INCREASE INCREASE
OVER PRIOR OVER PRIOR OVER PRIOR
YEAR YEAR YEAR
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
GROSS PREMIUMS WRITTEN ............................. $2,463,501 4.1% $2,366,856 3.9% $2,278,045 6.7%
---------- ---------- ----------
NET PREMIUMS WRITTEN ............................... $2,313,073 4.8 $2,206,984 4.9 $2,103,465 5.2
---------- ---------- ----------
EARNED PREMIUMS .................................... $2,275,364 5.2 $2,162,141 5.3 $2,053,431 6.4
---------- ---------- ----------
UNDERWRITING PROFIT (LOSS) ......................... $ 38,456 $ 6,348 $ (77,345)
NET INVESTMENT INCOME .............................. 281,580 (3.4) 291,450 2.8 283,481 2.1
---------- ---------- ----------
INCOME BEFORE REALIZED INVESTMENT
GAIN AND INCOME TAXES .......................... $ 320,036 $ 297,798 $ 206,136
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- ------
OPERATING RATIOS AS A
PERCENTAGE OF EARNED PREMIUMS
------------------------------------
<S> <C> <C> <C>
LOSS RATIO .................................................................... 59.09% 60.04% 64.70%
ADJUSTMENT EXPENSE RATIO ...................................................... 10.37 10.58 9.72
EXPENSE RATIO ................................................................. 28.14 28.39 28.24
DIVIDENDS TO POLICYHOLDERS .................................................... .71 .70 1.11
----- ----- ------
COMBINED RATIO ............................................................ 98.31% 99.71% 103.77%
----- ----- ------
</TABLE>
PROPERTY AND CASUALTY -- LOSS RESERVES
The liability (reserves) for losses and adjustment expense for the property
and casualty companies was $2,059 million at December 31, 1996, compared to
$2,181 million at December 31, 1995. The decline in this liability at December
31, 1996 compared to December 31, 1995 was due in part to losses paid in 1996
related to the 1994 Los Angeles earthquake, to the run-off of loss reserves
related to the sold Canadian operations discussed previously and to the run-off
of loss reserves related to certain discontinued commercial liability coverages.
The liability is presented net of amounts recoverable from salvage and
subrogation recoveries (see Note 1 on page 53) and gross of amounts recoverable
from reinsurance (see Note 5 on page 61). The amount of reinsurance recoverables
related to the above gross liabilities was $103.4 million at December 31, 1996
and $110.7 million at December 31, 1995.
Reserves for losses that have been reported to SAFECO and certain legal
expenses are established on the "case basis" method. Claims incurred but not
reported (IBNR) and other adjustment expense are estimated using statistical
procedures. Salvage and subrogation recoveries are accrued using the "case
basis" method for large claims and statistical procedures for smaller claims.
These reserves aggregate SAFECO's best estimates of the total ultimate cost
of claims that have been incurred but have not yet been paid. The estimates are
based on past claims experience and consider current claim trends as well as
social, legal and economic conditions, including inflation. The reserves are not
discounted.
Loss and adjustment expense reserve development is reviewed on a regular
basis to determine that the reserving assumptions and methods are appropriate.
Reserves initially determined are compared to the amounts ultimately paid. A
statistical estimate of the projected amounts necessary to settle outstanding
claims is made regularly and compared to the recorded reserves and adjusted as
necessary; such adjustments are included in current operations.
SAFECO's objective is to set reserves which are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. Analysis indicates that SAFECO's reserves
are adequate and probably slightly redundant at December 31, 1996, 1995 and
1994. Operations were credited $77.7 million, $59.7 million and $81.3 million in
1996, 1995 and 1994, respectively, as a result of a reduction in the estimated
amounts needed to settle prior years' claims.
32
<PAGE> 7
SAFECO's property and casualty companies' reserves for losses and adjustment
expense for liability coverages related to environmental, asbestos and other
toxic claims totaled $102.8 million at December 31, 1996, compared with $107.5
million at December 31, 1995. These amounts are before the effect of
reinsurance, which is insignificant. These reserves are approximately 5% of
total property and casualty reserves for losses and adjustment expense at both
December 31, 1996 and 1995. The reserves include estimates for both reported and
IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance subsidiaries'
environmental, asbestos and other toxic claims result from the general liability
line of business. A few of these types of losses occur in other coverages such
as umbrella, small commercial package policies and personal lines.
The following table presents the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic claims.*
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
(in thousands)
<S> <C> <C> <C>
RESERVES AT BEGINNING
OF YEAR $107,510 $ 108,230 $113,410
INCURRED LOSSES AND
ADJUSTMENT EXPENSE 4,605 9,323 10,252
LOSSES AND ADJUSTMENT
EXPENSE PAYMENTS (9,360) (10,043) (15,432)
-------- --------- --------
RESERVES AT END OF YEAR $102,755 $ 107,510 $108,230
-------- --------- --------
</TABLE>
* Amounts are before the effect of reinsurance, which is insignificant.
In view of changes in environmental regulations and evolving case law which
affect the development of loss reserves, the process of estimating loss reserves
for environmental, asbestos and other toxic claims results in imprecise
estimates. Quantitative techniques have to be supplemented by subjective
considerations and managerial judgment. In view of these conditions, trends
that have affected development of these liabilities in the past may not
necessarily occur in the future. Although estimation of environmental claims is
a difficult process, the reserves established for these claims at December 31,
1996 are believed to be adequate based on the known facts and current law.
SAFECO has generally avoided writing coverages for larger companies with
substantial exposure in these areas.
SAFECO's property and casualty companies protect themselves from excessive
losses by reinsuring on treaty and facultative bases. As noted above, the
liability for unpaid losses and adjustment expense is reported gross of
reinsurance recoverables of $103.4 million at December 31, 1996 and $110.7
million at December 31, 1995. SAFECO's catastrophe property reinsurance program
for 1997 covers 90% of $400 million of single event losses in excess of a $100
million retention. In the event of a substantial catastrophe, SAFECO would,
therefore, retain the first $100 million of losses, 10% of the next $400 million
and all losses in excess of $500 million. In addition to this nationwide
coverage, for the states of Washington and Oregon SAFECO has an additional
earthquake reinsurance contract for 1997 that would cover 90% of $100 million of
single event earthquake losses in excess of $500 million. Both of these 1997
catastrophe property reinsurance contracts include provisions for one
reinstatement for a second catastrophe event in 1997 at current rates. The
aggregate coverage limit is higher for 1997 than in prior years and the
additional Northwest earthquake coverage was new in 1996.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use "funding covers" and does not participate in any surplus relief
transactions. None of SAFECO's significant reinsurers are experiencing financial
difficulties. Additional information on reinsurance can be found in Note 5 on
page 61.
33
<PAGE> 8
LIFE AND HEALTH
The life and health companies offer individual and group insurance products,
retirement services (pension) and annuity products. These products are marketed
through professional agents in all states and the District of Columbia. The most
significant product lines in terms of premium/deposit volume include: single
premium immediate and deferred annuities, tax-sheltered annuities for the
education and nonprofit entities market, corporate retirement plans and excess
loss group medical insurance.
Earnings before investment transactions and income taxes ("pretax income")
for all lines combined were $136.7 million in 1996, compared with $135.6 million
in 1995 and $131.0 million in 1994.
The following table summarizes the profit contributions of the life and
health companies major product lines:
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
(In Thousands)
<S> <C> <C> <C>
ANNUITIES $ 27,738 $ 31,249 $ 28,363
RETIREMENT SERVICES 23,901 27,277 19,298
GROUP 12,606 13,329 23,129
INDIVIDUAL 4,173 (1,272) 1,579
CORPORATE AND OTHER 68,263 64,990 58,646
-------- --------- --------
PRETAX INCOME $136,681 $ 135,573 $131,015
-------- --------- --------
</TABLE>
The annuity operations produced pretax income of $27.7 million, $31.2
million and $28.4 million in 1996, 1995 and 1994, respectively. Approximately
80% ($4.7 billion at December 31, 1996) of annuity assets relate to single
premium immediate annuities (SPIAs). These are sold to fund third party personal
injury settlements and are nonsurrenderable contracts. The invested assets
supporting these annuities are primarily long-maturity bonds. New SPIA deposits
were $460 million in 1996, compared with $488 million in 1995 and $402 million
in 1994. SPIA pretax income was $23.0 million, $24.9 million and $23.3 million
in 1996, 1995 and 1994, respectively. The remaining 20% of annuity assets are
deferred annuities. These are primarily fixed rate annuities marketed through
financial institutions by SAFECO's subsidiary, Talbot Financial Corporation.
Deferred annuity deposits were $164 million in 1996, $188 million in 1995 and
$296 million in 1994. Lower interest rates and competition from equity-linked
products were the main reasons for lower income from annuity operations in 1996,
as well as the decline in deposit volume for both the SPIA and deferred annuity
lines. SAFECO Life has recently introduced a new equity-indexed annuity to
complement its fixed return products. Total annuity assets amounted to $5.9
billion at December 31, 1996 compared with $5.4 billion at December 31, 1995 and
$4.7 billion at December 31, 1994.
Retirement services operations produced pretax income of $23.9 million,
$27.3 million and $19.3 million in 1996, 1995 and 1994, respectively. Retirement
services' profits in all three years have benefited from improved investment
performance and a larger asset base. The decline in 1996 income compared to 1995
was primarily due to a gradual increase in rates credited to policyholders
caused by competitive market conditions. Retirement services products are
primarily tax-sheltered annuities which are marketed to teachers and employees
of hospitals and charitable organizations, IRAs and corporate retirement funds.
SAFECO Life has protection against early policy surrenders or withdrawals of
most of these products in the form of surrender charges during the initial years
of each policy or the option to defer payouts over 20 quarters. Retirement
services had $3.8 billion of assets on deposit at December 31, 1996 compared
with $3.5 billion at December 31, 1995 and $3.3 billion at December 31, 1994.
New retirement services deposit growth has slowed in recent years as lower
interest rates have hampered sales of fixed return products. Although variable
return products currently are a relatively small percentage of retirement
services' assets, SAFECO Life is successfully focusing its efforts on these
types of products.
The group life and health operations contributed $12.6 million to 1996
pretax income, compared with income of $13.3 million in 1995 and $23.1 million
in 1994. The strategic focus of the group operation is excess loss medical
insurance, sold to self-insured employers, which accounted for $11.8 million,
$14.4 million and $18.5 million of income in 1996, 1995 and 1994, respectively.
Total medical profit, which includes some small-case, fully insured business,
declined in 1996. Total group premiums decreased 1% during 1996, compared with
decreases of 8% in 1995 and 12% in 1994. The decline in premium in the past
three years was due primarily to greater competition in the excess loss market.
Because of the competition since 1994, as well as the uncertainty caused by the
healthcare reform debate, SAFECO Life avoided writing business at unrealistic
rates and, as a result, experienced some loss of in-force medical business. With
the defeat of national healthcare reform legislation, SAFECO Life has begun to
increase its writings of excess loss medical insurance, as this market appears
to be more attractive than in the past.
34
<PAGE> 9
In addition to the competitive conditions noted above, in 1996 the results
of the group operations were affected by adverse medical claims experience. In
1995, results were affected by adverse medical and life claims experience. In
1996 SAFECO Life began reinsuring 100% of its long-term disability business,
which should benefit future earnings. This business had been producing
unacceptable results. SAFECO continues to sell life and disability coverages in
combination with medical coverages, but no longer actively pursues the
stand-alone life and disability market.
The individual life operations produced a pretax gain of $4.2 million in
1996, a loss of $1.3 million in 1995 and a gain of $1.6 million in 1994. The
poor results in both 1995 and 1994 were primarily caused by increased death
claims. The improvement in 1996 results was due in part to lower death claims
and profits from a new bank-owned life insurance program.
The corporate and other line is primarily comprised of investment income
resulting from the investment of capital and prior years earnings of the
operating lines of business. It is a major component of SAFECO's life and health
earnings, contributing pretax income of $68.3 million in 1996, $65.0 million in
1995 and $58.6 million in 1994.
SAFECO's life insurance subsidiaries have not participated as a ceding
company in any assumptive reinsurance transactions. See Note 5 on page 61 for
additional information regarding reinsurance.
REAL ESTATE
SAFECO Properties, Inc., through Winmar Company, Inc., invests in and
manages real estate properties, primarily retail centers, throughout the United
States. SAFECARE Company, Inc., invests in medical real estate, primarily
skilled nursing facilities.
The real estate subsidiaries produced pretax income before investment
transactions ("pretax income") of $13.1 million, $9.1 million and $10.2 million
in 1996, 1995 and 1994, respectively. These pretax income amounts include gains
from the sale of properties held for sale of $2.7 million, $1.9 million and $5.6
million in 1996, 1995 and 1994, respectively. The increases in pretax income
(excluding these gains) in 1996 over 1995 and in 1995 over 1994 were due to
improved operating results on shopping center properties and to recommencing the
capitalization of carrying costs in 1995 on a mixed-use development project.
Construction and pre-leasing on this development began in July 1995; the opening
date is expected to be in mid-1997.
In addition to the pretax income amounts above, the real estate subsidiaries
realized pretax investment losses of $2.6 million, $0.8 million, and $0.2
million in 1996, 1995 and 1994, respectively. The 1996 realized investment loss
was the result of a $20 million loss reserve related to SAFECO Properties'
guarantee of outstanding debt financing for a not-for-profit hospital, offset by
a $17.4 million gain on the sale of a shopping center.
Results in all three years have been affected by the slow real estate
economy and the general softness in the retail industry. Because of these
conditions, SAFECO Properties' strategy is to emphasize smaller projects and
enhancements to existing properties.
At December 31, 1996, investment real estate held by SAFECO Properties
totaled $552 million, approximately 3% of SAFECO's consolidated investments.
Major retail shopping centers (including land held for development), office and
industrial space and healthcare facilities comprised approximately 80% of the
total. Approximately 65% of total holdings are located in the states of
Washington and Oregon. Rental properties included in investment real estate are
detailed in Note 13 on page 66.
CREDIT
SAFECO Credit Company, Inc., provides loans and equipment financing and
leasing to commercial businesses, including affiliated companies. Credit
operations produced pretax income of $19.1 million in 1996, compared with $13.3
million in 1995 and $10.8 million in 1994. Loan and lease receivables from
non-affiliates grew 14% in 1996 and 21% in 1995. Continued growth in receivables
is expected. The strong earnings in all three years are primarily attributable
to the continuing increase in loan production, combined with favorable
collection experience and low delinquencies.
Approximately 70% of total loan and lease receivables outstanding at
December 31, 1996 are from commercial businesses involved in heavy construction,
transportation and manufacturing. Most of these businesses are located in the
West Coast and Rocky Mountain regions of the United States. Loans and leases are
fully secured by liens on the collateral financed. At December 31, 1996, 14% of
the outstanding loans and leases of SAFECO Credit consisted of loans to
affiliated SAFECO companies.
35
<PAGE> 10
ASSET MANAGEMENT
SAFECO Asset Management Company is the investment advisor for the SAFECO
mutual funds, variable annuity portfolios and a growing number of outside
pension and trust accounts. These investment management activities produced
pretax income of $7.6 million in 1996, $6.9 million in 1995 and $6.4 million in
1994. Assets under management continue to grow and totaled $3.3 billion at
December 31, 1996, an increase of 8% over 1995. In 1994 SAFECO Trust Company was
chartered to serve the investment needs of high net worth individuals. Continued
growth in assets under management from existing funds, new funds and from new
pension accounts is expected.
INVESTMENT SUMMARY
SAFECO's consolidated pretax investment income increased to $1,116.7 million
during 1996 from $1,075.3 million in 1995 and $991.6 million in 1994.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life and health insurance
subsidiaries.
The property and casualty companies' pretax investment income was $281.6
million in 1996, $291.5 million in 1995 and $283.5 million in 1994, representing
a decrease of 3% in 1996, and increases of 3% in 1995 and 2% in 1994. Although
property and casualty cash flow was positive in all three years, the recent high
level of catastrophe losses combined with the relatively low interest rate
environment and a high level of bond call activity has dampened the growth of
investment income. The decline in 1996 investment income was particularly
affected by reduced cash flow in the first part of the year caused by
catastrophe and weather-related claim payments. Growth in investment income in
1997 is expected to be slowed by the lower interest rate environment.
The life and health companies' pretax investment income was $836.7 million
in 1996, $778.2 million in 1995 and $706.2 million in 1994. The growth in all
years was due primarily to the increasing amount of retirement services and
annuity assets under management.
Consolidated pretax realized gains from security investments totaled $92.7
million in 1996 compared with $65.1 million and $39.2 million in 1995 and 1994,
respectively. The higher level of gains in 1996 and 1995 was due primarily to
falling interest rates which produced calls, redemptions and mortgage pay-downs
on debt securities and to the strong stock market. Consolidated realized gains
from security investments are recorded net of losses on the sale or write-down
of investments. Each investment that has declined in market value below cost is
monitored closely. If the decline is judged to be other than temporary the
security is written down to fair value. The amounts of such writedowns in 1996,
1995 and 1994 were $5.5 million, $13.6 million and $4.8 million, respectively.
These writedowns relate primarily to fixed income securities which were
investment grade when purchased and later downgraded. The low amount of
writedowns in all three years reflects the high quality of SAFECO's portfolios.
SAFECO's property and casualty investment portfolio totaled $5.2 billion at
market value at December 31, 1996. The investment philosophy for this portfolio
is to emphasize investment yield without sacrificing investment quality. Fixed
income securities comprised 76% of this portfolio while equity securities
comprised 23% (see table on page 38).
The property and casualty fixed income portfolio, which totaled $3.9 billion
at market value at December 31, 1996, is currently comprised of 83% tax-exempt
and 17% taxable investments. The property and casualty companies are presently
investing new money primarily in long-maturity, high-quality tax-exempt bonds
and plan to continue to do so in the foreseeable future. However, SAFECO may
shift its investment of new money between taxables and tax-exempts periodically
in the future to maximize the portfolio's after-tax return in view of the
alternative minimum tax. Major portfolio adjustments are not currently
anticipated. The effective tax rate on investment income for 1996 was 12%,
compared with 13% in both 1995 and 1994. On an after-tax basis, investment
income decreased 2% in 1996 and increased 3% in 1995 and 4% in 1994.
The quality of the property and casualty companies' fixed income portfolio
is detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1996
- -------------------------------------------------------------
<S> <C>
AAA ................................................ 51%
AA ................................................. 23
A .................................................. 18
BBB ................................................ 7
BB OR LOWER ........................................ 1
---
TOTAL ....................................... 100%
===
</TABLE>
36
<PAGE> 11
SAFECO's life and health investment portfolio totaled $11.3 billion at
market value at December 31, 1996. Fixed income securities, all of which are
taxable, comprised 93% of this investment portfolio at December 31, 1996. SAFECO
matches the projected cash inflows of this portfolio with the projected cash
outflows of the liabilities of the various product lines within the life and
health operations. The quality of the life and health companies' fixed income
portfolio is detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1996
- --------------------------------------------------------------
<S> <C>
AAA ................................................. 41%
AA .................................................. 8
A ................................................... 29
BBB ................................................. 20
BB OR LOWER ......................................... 2
---
TOTAL ........................................ 100%
===
</TABLE>
This portfolio contains $239.2 million, at market value, of securities below
investment grade quality. This was approximately 2% of the total $10.5 billion
life and health fixed income portfolio at market value at December 31, 1996. On
a consolidated basis, below investment grade securities with a market value of
$266.3 million were held at December 31, 1996. This was less than 2% of total
consolidated investments at market value of SAFECO Corporation and subsidiaries
at December 31, 1996.
SAFECO's consolidated investment in "exotic" securities and high-risk
derivatives was less than 1% of SAFECO's total investments at both December 31,
1996 and 1995. SAFECO has intentionally avoided investing in these types of
securities. In addition, SAFECO does not enter into financial instruments for
trading or speculative purposes.
SAFECO's consolidated investments in mortgage-backed securities -- primarily
residential collateralized mortgage obligations and pass-throughs -- totaled
$2.9 billion at market value at December 31, 1996. Virtually all of these
securities are held in the life and health portfolio. Approximately 96% of the
mortgage-backed securities are government/agency backed or AAA rated at December
31, 1996. Less than 1% of SAFECO's mortgage-backed securities are of the
riskier, more volatile type (e.g., interest only, inverse floaters, etc.).
SAFECO has intentionally not invested significant amounts in the riskier types
of mortgage-backed securities.
SAFECO Corporation, the parent company, holds an investment portfolio of
securities at market value that totaled $187.8 million at December 31, 1996,
compared with $178.6 million at December 31, 1995. The majority of these
securities are high quality preferred stocks and U.S. Treasuries.
SAFECO's consolidated investment portfolio also includes $448.0 million of
mortgage loan investments at December 31, 1996, approximately 3% of total
investments. These loans are held by the life and health companies and are
secured by first mortgage liens on completed, income-producing commercial real
estate, primarily in the retail, industrial and office building sectors. The
majority of the properties are located in the western United States, with
approximately 55% of the total in California. Individual loans generally do not
exceed $5 million. Less than 3% of the loans were non-performing at both
December 31, 1996 and 1995. The allowance for mortgage loan losses was $10.9
million at December 31, 1996 and $9.6 million at December 31, 1995.
For a discussion of SAFECO's investment in real estate, which is made
through SAFECO Properties, Inc., see page 35 of this report.
37
<PAGE> 12
The table below provides a summary of SAFECO's consolidated securities
investment portfolio at December 31, 1996. The excess of market value over cost
of the consolidated fixed income and equity security portfolios was $1.5 billion
at December 31, 1996 and $1.9 billion at December 31, 1995.
<TABLE>
<CAPTION>
AMORTIZED CARRYING MARKET
DECEMBER 31, 1996 COST VALUE VALUE
- -------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
PROPERTY AND CASUALTY:
FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... $ 612,241 $ 682,450 $ 682,450
FIXED INCOME - NON-TAXABLE (AVAILABLE-FOR-SALE) ....... 2,916,204 3,255,889 3,255,889
EQUITY SECURITIES ..................................... 577,782 1,196,018 1,196,018
LIFE AND HEALTH:
FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... 7,601,663 7,857,499 7,857,499
FIXED INCOME - TAXABLE (HELD-TO-MATURITY) ............. 2,488,324 2,488,324 2,670,004
EQUITY SECURITIES ..................................... 12,433 23,137 23,137
SAFECO CORPORATION:
FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... 108,341 108,589 108,589
EQUITY SECURITIES ..................................... 41,960 64,372 64,372
MISCELLANEOUS ............................................. 41,746 47,098 47,098
SHORT-TERM INVESTMENTS .................................... 105,927 105,927 105,927
-----------------------------------------
TOTAL .............................................. $14,506,621 $15,829,303 $16,010,983
=========================================
</TABLE>
38
<PAGE> 13
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards on page 54.
DIVIDENDS
The Corporation has paid cash dividends continuously since 1933. Common
stock dividends paid to stockholders were $1.11 per share in 1996, compared with
$1.02 in 1995 and $0.94 in 1994. These dividends are funded with dividends to
the Corporation from its subsidiaries. The Corporation expects to continue
paying dividends in the foreseeable future. However, payment of future dividends
is subject to the Board of Directors' approval and is dependent upon earnings
and the financial condition of the Corporation.
NUMBER OF STOCKHOLDERS
There were approximately 4,400 common stockholders of record at December 31,
1996.
ANNUAL REPORT ON FORM 10-K
The Corporation files an Annual Report on Form 10-K with the Securities and
Exchange Commission in compliance with the regulations of the Securities and
Exchange Commission. Form 10-K contains additional information about the
Corporation and its subsidiary companies. Any SAFECO Corporation stockholder may
obtain Form 10-K for the year ended December 31, 1996, without charge, by making
a written request to:
ROD A. PIERSON
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
SAFECO CORPORATION
SAFECO PLAZA
SEATTLE, WASHINGTON 98185
39
<PAGE> 14
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements,
related notes and all other information presented in this annual report. The
financial statements have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances and include amounts based
on the best estimates and judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity
of data in these financial statements, SAFECO maintains a comprehensive system
of internal accounting controls. These controls are supported by the careful
selection and training of qualified personnel, by the appropriate division of
duties and responsibilities, and by written policies and procedures. In
addition, an integral part of the comprehensive system of internal control is
an effective internal audit department. SAFECO's internal audit department
systematically evaluates the adequacy and effectiveness of internal accounting
controls and measures adherence to established policies and procedures. The
management of SAFECO believes that as of December 31, 1996, its system of
internal control is adequate to accomplish the objectives discussed herein.
The financial statements for the years ended December 31, 1996, 1995 and
1994 have been audited by Ernst & Young LLP, independent auditors. Their audits
were made in accordance with generally accepted auditing standards and included
a review of the system of internal accounting controls to the extent necessary
to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and
Stockholders of
SAFECO Corporation
We have audited the financial statements of SAFECO Corporation and its
subsidiaries for the years ended December 31, 1996, 1995 and 1994 (pages 41 to
69 inclusive). These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of SAFECO Corporation and its
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, SAFECO Corporation and
its subsidiaries adopted certain new accounting standards in 1996, 1995 and 1994
as required by the Financial Accounting Standards Board.
/s/ Ernst & Young LLP
Seattle, Washington
February 14, 1997
40
<PAGE> 15
STATEMENT OF CONSOLIDATED INCOME
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995* 1994*
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
INSURANCE:
PROPERTY AND CASUALTY EARNED PREMIUMS ................................... $2,275,364 $2,162,141 $2,053,431
LIFE AND HEALTH PREMIUMS AND OTHER REVENUES ............................. 265,924 261,570 276,771
----------------------------------------
TOTAL ................................................................ 2,541,288 2,423,711 2,330,202
REAL ESTATE ................................................................ 79,924 74,959 107,315
FINANCE .................................................................... 75,699 65,931 53,851
ASSET MANAGEMENT ........................................................... 23,216 18,532 15,055
OTHER ...................................................................... 38,458 32,172 25,556
NET INVESTMENT INCOME (NOTE 2) ............................................. 1,116,734 1,075,280 991,610
REALIZED INVESTMENT GAIN (NOTE 2) .......................................... 90,050 64,271 39,040
----------------------------------------
TOTAL ................................................................ 3,965,369 3,754,856 3,562,629
----------------------------------------
EXPENSES
LOSSES, ADJUSTMENT EXPENSE AND POLICY BENEFITS ............................. 2,362,722 2,250,442 2,202,282
COMMISSIONS ................................................................ 415,670 401,162 394,128
PERSONNEL COSTS ............................................................ 272,333 250,576 238,934
INTEREST ................................................................... 72,366 85,409 70,340
DIVIDENDS TO POLICYHOLDERS ................................................. 16,221 15,239 22,835
OTHER ...................................................................... 264,145 245,414 266,872
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS .......................... 426,862 408,913 394,603
DEFERRAL OF POLICY ACQUISITION COSTS ....................................... (443,411) (416,099) (417,106)
----------------------------------------
TOTAL ................................................................ 3,386,908 3,241,056 3,172,888
----------------------------------------
INCOME BEFORE INCOME TAXES ..................................................... 578,461 513,800 389,741
----------------------------------------
PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 14):
CURRENT .................................................................... 133,478 131,464 83,609
DEFERRED ................................................................... 6,032 (16,623) (8,242)
----------------------------------------
TOTAL ................................................................ 139,510 114,841 75,367
----------------------------------------
NET INCOME ..................................................................... $ 438,951 $ 398,959 $ 314,374
----------------------------------------
NET INCOME PER SHARE OF COMMON STOCK (NOTE 8) .................................. $ 3.48 $ 3.17 $ 2.50
========================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
Prior year amounts revised to conform to 1996 classification.
41
<PAGE> 16
CONSOLIDATED BALANCE SHEET
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
(In Thousands)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
INVESTMENTS (NOTE 2):
FIXED MATURITIES AVAILABLE-FOR-SALE, AT MARKET VALUE
(AMORTIZED COST: 1996 - $11,270,529; 1995 - $10,853,590) .............. $11,936,243 $11,928,144
FIXED MATURITIES HELD-TO-MATURITY, AT AMORTIZED COST
(MARKET VALUE: 1996 - $2,670,004; 1995 - $2,388,514) .................. 2,488,324 2,044,517
MARKETABLE EQUITY SECURITIES, AT MARKET VALUE
(COST: 1996 - $641,841; 1995 - $598,130) .............................. 1,298,809 1,119,408
MORTGAGE LOANS ........................................................... 447,988 416,489
REAL ESTATE (AT COST LESS ACCUMULATED DEPRECIATION:
1996 - $81,970; 1995 - $83,831) (NOTE 3) .............................. 554,011 498,958
POLICY LOANS ............................................................. 58,153 55,925
SHORT-TERM INVESTMENTS ................................................... 105,927 68,808
--------------------------
TOTAL INVESTMENTS .................................................. 16,889,455 16,132,249
CASH ......................................................................... 55,498 65,477
ACCRUED INVESTMENT INCOME .................................................... 240,804 234,253
FINANCE RECEIVABLES (LESS UNEARNED FINANCE CHARGES AND ALLOWANCE
FOR DOUBTFUL ACCOUNTS: 1996 - $74,066; 1995 - $66,427) ................... 829,045 741,177
PREMIUMS AND OTHER SERVICE FEES RECEIVABLE ................................... 467,182 444,618
OTHER NOTES AND ACCOUNTS RECEIVABLE .......................................... 42,387 42,139
REINSURANCE RECOVERABLES (NOTE 5) ............................................ 137,484 137,284
DEFERRED POLICY ACQUISITION COSTS ............................................ 396,107 356,359
LAND, BUILDINGS AND EQUIPMENT FOR COMPANY USE (AT COST LESS ACCUMULATED
DEPRECIATION:
1996 - $171,702; 1995 - $155,928) ..................................... 171,288 170,016
OTHER ASSETS ................................................................. 197,211 167,872
SEPARATE ACCOUNT ASSETS ...................................................... 491,212 276,399
--------------------------
TOTAL .............................................................. $19,917,673 $18,767,843
==========================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
42
<PAGE> 17
CONSOLIDATED BALANCE SHEET
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ---------------------------------------------------------------------------------------------------------
(In Thousands Except Share Amounts)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LOSSES AND ADJUSTMENT EXPENSE (NOTE 4) ....................................... $ 2,088,226 $ 2,207,230
UNEARNED PREMIUMS ............................................................ 946,899 910,762
LIFE POLICY LIABILITIES ...................................................... 149,624 154,090
FUNDS HELD UNDER DEPOSIT CONTRACTS ........................................... 9,792,730 8,756,384
NOTES AND MORTGAGES PAYABLE (NOTE 3):
CREDIT COMPANY BORROWINGS ................................................ 808,750 614,270
7.875% NOTES DUE 2005 .................................................... 200,000 200,000
OTHER NOTES AND MORTGAGES ................................................ 224,744 253,275
OTHER LIABILITIES ............................................................ 678,799 895,853
INCOME TAXES (NOTE 14):
CURRENT .................................................................. 3,512 18,000
DEFERRED (INCLUDES TAX ON UNREALIZED APPRECIATION OF INVESTMENT
SECURITIES: 1996 - $462,939; 1995 - $558,541) ......................... 417,837 498,934
SEPARATE ACCOUNT LIABILITIES ................................................. 491,212 276,399
--------------------------
TOTAL LIABILITIES .................................................. 15,802,333 14,785,197
--------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
PREFERRED STOCK, NO PAR VALUE:
SHARES AUTHORIZED: 10,000,000
SHARES ISSUED AND OUTSTANDING: NONE
COMMON STOCK, NO PAR VALUE (NOTES 8 AND 9):
SHARES AUTHORIZED: 300,000,000
SHARES RESERVED FOR OPTIONS: 1996 - 3,344,751; 1995 - 3,699,983
SHARES ISSUED AND OUTSTANDING: 1996 - 126,308,237; 1995 - 125,978,742 .... 225,276 217,447
RETAINED EARNINGS (NOTE 11) .................................................. 3,042,214 2,755,537
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX (NOTE 2) ........ 851,401 1,013,494
UNREALIZED LOSS FROM FOREIGN CURRENCY TRANSLATION, NET OF TAX ................ (3,551) (3,832)
--------------------------
STOCKHOLDERS' EQUITY ............................................... 4,115,340 3,982,646
--------------------------
TOTAL .............................................................. $19,917,673 $18,767,843
==========================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
43
<PAGE> 18
STATEMENT OF CONSOLIDATED CASH FLOWS
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
INSURANCE PREMIUMS RECEIVED ............................................... $ 2,514,242 $ 2,394,178 $2,312,818
DIVIDENDS AND INTEREST RECEIVED ........................................... 1,103,593 1,059,653 970,267
OTHER OPERATING RECEIPTS .................................................. 172,924 165,921 175,289
INSURANCE CLAIMS AND POLICY BENEFITS PAID ................................. (1,998,418) (1,817,501) (1,674,422)
UNDERWRITING, ACQUISITION AND INSURANCE OPERATING COSTS PAID .............. (801,731) (782,521) (768,236)
INTEREST PAID ............................................................. (69,536) (84,943) (69,798)
OTHER OPERATING COSTS PAID ................................................ (88,622) (88,070) (100,687)
INCOME TAXES PAID ......................................................... (148,119) (144,581) (92,210)
-----------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 684,333 702,136 753,021
-----------------------------------------
INVESTING ACTIVITIES
PURCHASES OF:
FIXED MATURITIES AVAILABLE-FOR-SALE .................................... (2,079,543) (2,079,336) (2,124,172)
FIXED MATURITIES HELD-TO-MATURITY ...................................... (473,206) (291,965) (358,297)
EQUITIES ............................................................... (154,937) (170,177) (124,588)
OTHER INVESTMENTS ...................................................... (189,812) (297,118) (172,080)
MATURITIES OF FIXED MATURITIES AVAILABLE-FOR-SALE ......................... 709,654 710,496 746,383
MATURITIES OF FIXED MATURITIES HELD-TO-MATURITY ........................... 21,694 17,878 54,564
SALES OF:
FIXED MATURITIES AVAILABLE-FOR-SALE .................................... 979,947 549,865 786,361
FIXED MATURITIES HELD-TO-MATURITY ...................................... 13,316 - -
EQUITIES ............................................................... 181,717 176,773 120,723
OTHER INVESTMENTS ...................................................... 100,974 304,870 122,903
NET (INCREASE) DECREASE IN SHORT-TERM INVESTMENTS ......................... (32,071) 23,321 13,938
FINANCE RECEIVABLES ORIGINATED OR ACQUIRED ................................ (378,690) (374,670) (301,821)
PRINCIPAL PAYMENTS RECEIVED ON FINANCE RECEIVABLES ........................ 291,981 244,234 229,198
OTHER ..................................................................... (69,251) (67,071) (51,501)
-----------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ............................... (1,078,227) (1,252,900) (1,058,389)
-----------------------------------------
FINANCING ACTIVITIES
FUNDS RECEIVED UNDER DEPOSIT CONTRACTS .................................... 1,148,590 1,304,665 1,012,164
RETURN OF FUNDS HELD UNDER DEPOSIT CONTRACTS .............................. (765,480) (720,845) (659,698)
PROCEEDS FROM NOTES AND MORTGAGE BORROWINGS ............................... 40,200 199,001 39,734
REPAYMENT OF NOTES AND MORTGAGE BORROWINGS ................................ (107,467) (241,966) (119,961)
NET PROCEEDS FROM SHORT-TERM BORROWINGS ................................... 213,558 143,914 150,586
COMMON STOCK REACQUIRED ................................................... (9,571) (8,690) (5,327)
DIVIDENDS PAID TO STOCKHOLDERS ............................................ (139,898) (128,479) (118,387)
OTHER ..................................................................... 3,983 5,137 1,928
-----------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 383,915 552,737 301,039
-----------------------------------------
NET (DECREASE) INCREASE IN CASH ............................................... (9,979) 1,973 (4,329)
CASH AT THE BEGINNING OF YEAR ................................................. 65,477 63,504 67,833
-----------------------------------------
CASH AT THE END OF YEAR ....................................................... $ 55,498 $ 65,477 $ 63,504
=========================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
44
<PAGE> 19
STATEMENT OF CONSOLIDATED CASH FLOWS -- RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ---------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
NET INCOME ................................................ $ 438,951 $398,959 $314,374
---------------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
REALIZED INVESTMENT GAIN ........................... (90,050) (64,271) (39,040)
DEPRECIATION AND AMORTIZATION ...................... 64,060 51,706 39,473
AMORTIZATION OF FIXED MATURITY INVESTMENTS ......... (38,577) (38,150) (22,609)
DEFERRED INCOME TAX EXPENSE (BENEFIT) .............. 6,032 (16,623) (8,242)
INTEREST EXPENSE ON DEPOSIT CONTRACTS .............. 460,594 432,327 405,536
OTHER ADJUSTMENTS .................................. 1,493 8,000 9,514
CHANGES IN:
LOSSES AND ADJUSTMENT EXPENSE ................... (119,004) (58,624) 137,482
UNEARNED PREMIUMS ............................... 36,137 43,798 47,579
LIFE POLICY LIABILITIES ......................... (4,466) (1,232) 3,834
ACCRUED INCOME TAXES ............................ (14,488) (4,627) (15,336)
ACCRUED INTEREST ON ACCRUAL BONDS ............... (44,016) (36,908) (41,285)
ACCRUED INVESTMENT INCOME ....................... (6,551) (4,289) (19,675)
DEFERRED POLICY ACQUISITION COSTS ............... (15,973) (10,331) (21,540)
OTHER ASSETS AND LIABILITIES .................... 10,191 2,401 (37,044)
---------------------------------------
TOTAL ADJUSTMENTS ............................ 245,382 303,177 438,647
---------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. $ 684,333 $702,136 $753,021
=======================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
45
<PAGE> 20
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK (NOTES 8 AND 9):
BALANCE AT THE BEGINNING OF YEAR ............................................ $ 217,447 $ 211,194 $ 207,480
STOCK ISSUED FOR OPTIONS AND RIGHTS ......................................... 6,144 5,839 3,616
COMMON STOCK REACQUIRED ..................................................... (440) (486) (344)
STOCK ISSUED FOR ACQUISITION OF SUBSIDIARY .................................. 575 - -
OTHER ....................................................................... 1,550 900 442
----------------------------------------
BALANCE AT THE END OF YEAR .................................................. 225,276 217,447 211,194
----------------------------------------
RETAINED EARNINGS (NOTE 11):
BALANCE AT THE BEGINNING OF YEAR ............................................ 2,755,537 2,495,800 2,307,322
NET INCOME .................................................................. 438,951 398,959 314,374
DIVIDENDS DECLARED .......................................................... (143,143) (131,018) (120,913)
COMMON STOCK REACQUIRED ..................................................... (9,131) (8,204) (4,983)
----------------------------------------
BALANCE AT THE END OF YEAR .................................................. 3,042,214 2,755,537 2,495,800
----------------------------------------
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX (NOTE 2):
BALANCE AT THE BEGINNING OF YEAR ............................................ 1,013,494 128,123 262,157
NET EFFECT OF ADOPTION OF FASB STATEMENT 115 - - 640,477
CHANGE IN UNREALIZED APPRECIATION ........................................... (162,093) 885,371 (774,511)
----------------------------------------
BALANCE AT THE END OF YEAR .................................................. 851,401 1,013,494 128,123
----------------------------------------
UNREALIZED GAIN (LOSS) FROM FOREIGN CURRENCY TRANSLATION, NET OF TAX:
BALANCE AT THE BEGINNING OF YEAR ............................................ (3,832) (5,638) (2,568)
CHANGE IN UNREALIZED GAIN (LOSS) ............................................ 281 1,806 (3,070)
----------------------------------------
BALANCE AT THE END OF YEAR .................................................. (3,551) (3,832) (5,638)
----------------------------------------
STOCKHOLDERS' EQUITY ..................................................... $4,115,340 $3,982,646 $2,829,479
========================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
46
<PAGE> 21
STATEMENT OF COMBINED INCOME
PROPERTY AND CASUALTY INSURANCE COMPANIES
SAFECO Insurance Company of America / General Insurance Company of America /
First National Insurance Company of America / SAFECO National Insurance Company
SAFECO Insurance Company of Illinois / SAFECO Lloyds Insurance Company / SAFECO
Surplus Lines Insurance Company / F.B. Beattie & Company, Inc.
SAFECO Select Insurance Services, Inc. / COMAV Managers, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET PREMIUMS WRITTEN ............................................................ $2,313,073 $2,206,984 $2,103,465
INCREASE IN UNEARNED PREMIUMS ................................................... (37,709) (44,843) (50,034)
----------------------------------------
EARNED PREMIUMS ................................................................. 2,275,364 2,162,141 2,053,431
----------------------------------------
LOSSES AND EXPENSES:
LOSSES AND ADJUSTMENT EXPENSE ............................................... 1,580,509 1,526,976 1,528,067
COMMISSIONS ................................................................. 341,990 322,566 308,513
PERSONNEL COSTS ............................................................. 168,806 155,359 148,246
TAXES OTHER THAN PAYROLL AND INCOME TAXES ................................... 62,247 59,658 58,889
DIVIDENDS TO POLICYHOLDERS .................................................. 16,221 15,239 22,835
OTHER OPERATING EXPENSES .................................................... 76,910 80,210 72,776
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ........................... 391,210 376,537 365,196
DEFERRAL OF POLICY ACQUISITION COSTS ........................................ (400,985) (380,752) (373,746)
----------------------------------------
TOTAL ................................................................. 2,236,908 2,155,793 2,130,776
----------------------------------------
UNDERWRITING PROFIT (LOSS) ...................................................... 38,456 6,348 (77,345)
NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN) ................................. 281,580 291,450 283,481
----------------------------------------
INCOME BEFORE REALIZED GAIN AND INCOME TAXES .................................... 320,036 297,798 206,136
REALIZED GAIN FROM SECURITY INVESTMENTS
BEFORE INCOME TAXES ......................................................... 64,738 51,657 31,003
----------------------------------------
INCOME BEFORE INCOME TAXES ...................................................... 384,774 349,455 237,139
PROVISION FOR FEDERAL AND CANADIAN INCOME TAXES
(INCLUDING TAX PROVISION ON REALIZED GAIN: 1996 - $21,937;
1995 - $17,939; 1994 - $10,298) .......................................... 71,329 59,329 23,700
----------------------------------------
NET INCOME ...................................................................... $ 313,445 $ 290,126 $ 213,439
========================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
47
<PAGE> 22
STATEMENT OF COMBINED INCOME
LIFE AND HEALTH INSURANCE COMPANIES
SAFECO Life Insurance Company / SAFECO National Life Insurance Company / First
SAFECO National Life Insurance Company of New York
SAFECO Administrative Services, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUE ........................................... $ 265,924 $ 261,570 $276,771
NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN) ...................... 836,715 778,221 706,217
----------------------------------------
TOTAL ...................................................... 1,102,639 1,039,791 982,988
----------------------------------------
BENEFITS AND EXPENSES:
POLICY BENEFITS .................................................. 782,213 723,466 674,215
COMMISSIONS ...................................................... 73,680 78,596 85,615
PERSONNEL COSTS .................................................. 49,424 47,536 47,698
TAXES OTHER THAN PAYROLL AND INCOME TAXES ........................ 15,874 8,268 7,891
OTHER OPERATING EXPENSES ......................................... 51,541 49,323 50,507
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ................ 35,652 32,376 29,407
DEFERRAL OF POLICY ACQUISITION COSTS ............................. (42,426) (35,347) (43,360)
----------------------------------------
TOTAL ...................................................... 965,958 904,218 851,973
----------------------------------------
INCOME BEFORE REALIZED GAIN AND INCOME TAXES ......................... 136,681 135,573 131,015
REALIZED GAIN FROM SECURITY INVESTMENTS
BEFORE INCOME TAXES .............................................. 10,534 5,894 5,888
----------------------------------------
INCOME BEFORE INCOME TAXES ........................................... 147,215 141,467 136,903
PROVISION FOR INCOME TAXES
(INCLUDING TAX PROVISION ON REALIZED GAIN:
1996 - $3,907; 1995 - $2,429; 1994 - $2,106) .................. 51,808 49,014 48,180
----------------------------------------
NET INCOME ........................................................... $ 95,407 $ 92,453 $ 88,723
========================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
48
<PAGE> 23
STATEMENT OF CONSOLIDATED INCOME
REAL ESTATE COMPANIES
SAFECO Properties, Inc. / Winmar Company, Inc. / SAFECARE Company, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
REVENUES
OPERATING PROPERTY REVENUE ................................ $ 62,602 $64,862 $ 75,681
REAL ESTATE SALES ......................................... 13,924 5,304 26,521
INTEREST .................................................. 1,899 2,620 3,638
OTHER ..................................................... 1,499 2,173 1,475
--------------------------------------
TOTAL ............................................... 79,924 74,959 107,315
--------------------------------------
EXPENSES
OPERATING PROPERTY EXPENSES ............................... 11,239 12,193 26,184
REAL ESTATE SALES COSTS ................................... 11,198 3,380 19,179
INTEREST .................................................. 29,027 29,137 27,426
DEPRECIATION .............................................. 14,259 14,854 13,520
GENERAL AND ADMINISTRATIVE ................................ 13,576 12,347 13,934
--------------------------------------
TOTAL ............................................... 79,299 71,911 100,243
INTEREST AND OTHER EXPENSES CAPITALIZED ................... (12,427) (6,012) (3,080)
--------------------------------------
NET EXPENSES ........................................ 66,872 65,899 97,163
--------------------------------------
INCOME BEFORE REALIZED LOSS AND INCOME TAXES .................. 13,052 9,060 10,152
REALIZED LOSS FROM REAL ESTATE INVESTMENTS
BEFORE INCOME TAXES ....................................... (2,611) (818) (174)
--------------------------------------
INCOME BEFORE INCOME TAXES .................................... 10,441 8,242 9,978
PROVISION FOR INCOME TAXES
(INCLUDING TAX BENEFIT ON REALIZED LOSS:
1996 - $615; 1995 - $287; 1994 - $61) .................. 4,026 2,844 3,523
--------------------------------------
NET INCOME .................................................... $ 6,415 $ 5,398 $ 6,455
======================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
49
<PAGE> 24
STATEMENT OF INCOME
SAFECO CREDIT COMPANY, INC.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
INVESTMENT REVENUES:
INTEREST AND FINANCE CHARGES:
FINANCE RECEIVABLES ............................................... $ 68,116 $60,075 $49,267
AFFILIATES ........................................................ 8,548 5,868 4,330
--------------------------------------
TOTAL INVESTMENT REVENUES ...................................... 76,664 65,943 53,597
INTEREST EXPENSE ......................................................... 47,448 41,772 30,652
--------------------------------------
NET INVESTMENT INCOME ................................................ 29,216 24,171 22,945
PROVISION FOR CREDIT LOSSES .............................................. 2,400 2,600 3,650
--------------------------------------
NET INVESTMENT INCOME AFTER PROVISION FOR CREDIT LOSSES .............. 26,816 21,571 19,295
OTHER REVENUE ............................................................ 7,583 5,856 4,584
--------------------------------------
TOTAL .......................................................... 34,399 27,427 23,879
--------------------------------------
OPERATING EXPENSES:
PERSONNEL COSTS ...................................................... 8,657 7,785 7,204
GENERAL AND ADMINISTRATIVE ........................................... 6,661 6,342 5,914
--------------------------------------
TOTAL .......................................................... 15,318 14,127 13,118
--------------------------------------
INCOME BEFORE INCOME TAXES ............................................... 19,081 13,300 10,761
PROVISION FOR INCOME TAXES ............................................... 6,903 4,428 3,396
--------------------------------------
NET INCOME ............................................................... $ 12,178 $ 8,872 $ 7,365
======================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
50
<PAGE> 25
STATEMENT OF COMBINED INCOME
ASSET MANAGEMENT COMPANIES
SAFECO Asset Management Company / SAFECO Securities, Inc. / SAFECO Services
Corporation / SAFECO Trust Company
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
REVENUES
MANAGEMENT AND ADVISORY FEES ................................ $ 14,394 $12,994 $11,235
TRANSFER AGENT FEES ......................................... 3,538 3,088 2,367
OTHER ....................................................... 5,284 2,450 1,453
--------------------------------------
TOTAL .................................................... 23,216 18,532 15,055
--------------------------------------
EXPENSES
PERSONNEL COSTS ............................................. 7,794 6,318 4,737
MARKETING AND SHAREHOLDER COMMUNICATION ..................... 2,664 2,266 1,564
OTHER ....................................................... 5,148 3,051 2,403
--------------------------------------
TOTAL .................................................... 15,606 11,635 8,704
--------------------------------------
INCOME BEFORE INCOME TAXES ...................................... 7,610 6,897 6,351
PROVISION FOR INCOME TAXES ...................................... 2,505 2,151 2,235
--------------------------------------
NET INCOME ...................................................... $ 5,105 $ 4,746 $ 4,116
======================================
</TABLE>
See Notes to Financial Statements on pages 52 through 69.
51
<PAGE> 26
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts in thousands, except share data, unless otherwise stated)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries engage in
property and casualty, surety and life and health insurance. Products are
marketed primarily through independent agents. Approximately 45% of SAFECO's
property and casualty premiums are written in the three west coast states of
California, Washington and Oregon. SAFECO's other operations include
subsidiaries involved in real estate investment and management (SAFECO
Properties), commercial lending and leasing (SAFECO Credit) and investment
management.
BASIS OF REPORTING
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and include
amounts based on the best estimates and judgments of management. The financial
statements include SAFECO Corporation and its subsidiaries and real estate joint
ventures (SAFECO).
All significant intercompany transactions and accounts have been eliminated
in the consolidated financial statements. Certain reclassifications have been
made to prior year financial information to conform to the 1996 classification.
ACCOUNTING FOR PREMIUMS
Property and casualty insurance premiums are included in income as earned on
a daily pro rata basis over the terms of the respective policies. The unearned
portion is included in the balance sheet as a liability for unearned premiums,
before the effect of reinsurance. See Note 5 for more information on
reinsurance.
Life and health insurance premiums are reported as income when collected for
traditional individual life policies and when earned for group life and health
policies. Funds received under retirement services deposit contracts, annuity
contracts and universal life policies of $1,148,590, $1,304,665 and $1,012,164
in 1996, 1995 and 1994, respectively, are recorded as liabilities rather than
premium income when received. Revenues for universal life products consist of
front-end loads, mortality charges and expense charges assessed against
individual policyholder account balances. These loads and charges are recognized
as income when earned.
INVESTMENTS
SAFECO adopted Financial Accounting Standards Board (FASB) Statement 115,
"Accounting for Certain Investments in Debt and Equity Securities," on January
1, 1994, applying the provisions of the statement to investments held as of, or
acquired after that date. See discussion of new accounting standards on page 54.
Fixed maturity investments (bonds and redeemable preferred stock) which
SAFECO has the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost in the balance sheet. Fixed
maturities 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. SAFECO has no fixed maturities classified as trading.
All marketable equity securities are classified as available-for-sale and
are carried at market value, with changes in unrealized gains and losses
recorded directly to stockholders' equity, net of applicable income taxes.
When the collectibility of income for certain investments is considered
doubtful, they are placed on nonaccrual status and thereafter interest income is
recognized only when payment is received. Investments that have declined in
market value below cost and for which the decline is judged to be other than
temporary are written down to fair value. Write-downs are made directly on an
individual security basis and reduce realized investment gains in the statement
of income.
The cost of security investments sold is determined by the "identified cost"
method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for mortgage loan losses. The allowance for mortgage loan losses at
December 31, 1996 and 1995 was $10,943 and $9,633, respectively.
Short-term investments are carried at cost, which approximates market value.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are classified as investment real estate or as land,
buildings and equipment for company use, and are carried at cost less
accumulated depreciation.
Investment real estate that is deemed impaired is written down to estimated
fair value. Estimated fair values of real estate are obtained using independent
appraisals, outside consultants, internal analysis and judgment as appropriate
under the circumstances. Values are reviewed quarterly. The writedowns are
included in realized investment losses in the statement of income.
52
<PAGE> 27
Real estate taxes, interest expense and certain other carrying costs related
to projects under development are capitalized as a cost of such projects until
the project is substantially complete unless the total carrying value has
reached estimated fair value. Costs in excess of estimated fair value are
charged to operations. Projects that involve construction of income-producing
property are considered to be substantially complete when available for
occupancy. Projects that involve the development of real estate to be sold are
considered substantially complete when planned improvement activity is concluded
or the property is offered for sale. After substantial completion, carrying
costs are charged to expense when incurred, and for income-producing property,
depreciation is then provided.
Interest capitalized relating to the development of real estate was $6,471,
$3,088 and $2,482 for 1996, 1995 and 1994, respectively.
SAFECO provides depreciation on buildings, furniture and automobiles at
various rates based on estimated useful lives using straight-line and
accelerated methods.
DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance acquisition costs, consisting of commissions
and certain other underwriting expenses, which vary with and are primarily
related to the production of business, are deferred and amortized over the
effective period of the related insurance policies. Investment income is
considered in determining whether a premium deficiency exists. No deficiencies
have been indicated in the periods presented.
Life and health insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, which vary with and are primarily related
to the production of new business are deferred. Acquisition costs for deferred
annuity, retirement services deposit contracts and universal life insurance
policies are amortized over the lives of the contracts or policies in proportion
to the present value of estimated future gross profits. To the extent actual
experience differs from assumptions, and to the extent estimates of future gross
profits require revision, the unamortized balance of deferred policy acquisition
costs is adjusted accordingly; such adjustments are included in current
operations. Acquisition costs for traditional individual life insurance policies
are amortized over the premium payment period of the related policies using
assumptions consistent with those used in computing policy benefit liabilities.
LOSSES AND ADJUSTMENT EXPENSE
Unpaid losses and adjustment expense represent the estimated liability for
claims reported plus losses incurred but not yet reported and the related
estimated adjustment expense. The liability for losses and related adjustment
expense is determined using "case basis" evaluations and statistical analyses
and represents an estimate of the ultimate net cost of all losses incurred but
not paid through December 31 of each year. Although considerable variability is
inherent in such estimates, management believes that the liability for unpaid
losses and related adjustment expense is adequate. These estimates are
continually reviewed and adjusted as necessary; such adjustments are included in
current operations. See Note 4 for more information on loss reserves.
Salvage and subrogation recoverables are accrued using the "case basis"
method for large recoverables and statistical estimates based on historical
experience for smaller recoverables. Recoverable amounts deducted from the
liability for losses and adjustment expense net of reinsurance were $153,613 and
$134,294 at December 31, 1996 and 1995, respectively.
The property and casualty companies' liability for unpaid losses and
adjustment expense is presented gross of amounts recoverable from reinsurers.
See Note 5 for more information on reinsurance.
LIFE POLICY LIABILITIES
Liabilities for universal life insurance policies, deferred annuity
contracts and retirement services deposit contracts are equal to the accumulated
account value of such policies or contracts as of the valuation date.
Liabilities for structured settlement annuities are based on interest rate
assumptions using market rates at issue, graded downward over 40 years to a
range of 5.5% to 8.75%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method and reflect
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions generally range
from 8.5% graded to 3.25%.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is based on the weighted average number
of common shares outstanding during each year. Per share amounts have been
adjusted to reflect the 2-for-1 stock split on December 1, 1995. Dilution
arising from stock options is insignificant.
53
<PAGE> 28
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
SAFECO adopted FASB Statement 112, "Employers' Accounting for Postemployment
Benefits," effective January 1, 1994. Adoption had no effect on net income.
In 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan," which provides guidance on valuing impaired loans. The
FASB also issued Statement 118, "Accounting by Creditors for Impairment of a
Loan -- Income Recognition and Disclosures," in 1994, which amends Statement
114. Both statements were effective for 1995 and adopted by SAFECO on January 1,
1995. Adoption did not affect net income. For additional disclosure relating to
these two statements see Note 2 on page 58.
In 1993, the FASB 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. Fixed maturity securities which
SAFECO has the positive intent and ability to hold to maturity (as narrowly
defined by Statement 115) are classified as held-to-maturity and reported at
amortized cost. Fixed maturity 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
are classified as available-for-sale and are 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 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 this statement had no
effect on net income. As required by Statement 115, no restatement of prior
period amounts has been made. See Note 2 on page 56 for detail of the effect on
stockholders' equity of the adoption of Statement 115.
The FASB issued an Implementation Guide on Statement 115 in November 1995.
In addition to providing guidance on Statement 115, the Guide allowed for a
one-time-only reclassification of securities among the three categories defined
in the statement. As allowed under the Guide, SAFECO reclassified certain
held-to-maturity securities to the available-for-sale category on December 31,
1995. See Note 2 on page 56 for disclosures relating to this reclassification.
In March 1995, the FASB issued Statement 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121
requires impairment losses to be recorded on long-lived assets used in
operations, when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying value. It also addresses the accounting for long-lived assets that are
expected to be disposed of. Statement 121 was effective for financial statements
for fiscal years beginning after December 15, 1995 and SAFECO adopted it in the
first quarter of 1996. Adoption did not affect net income.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation." Statement 123 permits either expensing the fair value of
stock-based compensation or disclosing in the financial statement footnotes the
pro forma impact on net income as if the awards had been expensed. The statement
was effective for fiscal years beginning after December 15, 1995 and SAFECO
adopted it in the fourth quarter of 1996, with no effect on net income. See Note
9 on page 64.
The FASB issued Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," in June 1996. Statement 125
was effective for transfers and servicing of financial assets and extinguishment
of liabilities occurring after December 31, 1996. SAFECO will adopt it in the
first quarter of 1997. The FASB recently issued Statement 127 which defers for
one year the effective date of certain provisions of Statement 125. Statement
125 provides guidance in determining whether a transfer of a financial asset
represents a sale or a secured borrowing, as well as the accounting for any
servicing assets retained. The statement also provides guidance relating to
extinguishment of liabilities by debtors. Although the impact of the statement
is currently being studied, it is not expected to have a material effect on
SAFECO's financial position or results of operations.
54
<PAGE> 29
NOTE 2: INVESTMENTS
Investment income is comprised of:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST:
FIXED MATURITIES .......................... $1,025,003 $ 981,345 $ 908,194
MORTGAGE LOANS ............................ 40,954 40,874 40,664
SHORT-TERM INVESTMENTS .................... 7,602 17,371 8,354
DIVIDENDS:
MARKETABLE EQUITY SECURITIES .............. 39,165 40,993 42,059
REDEEMABLE PREFERRED STOCK ................ 12,674 4,034 2,133
OTHER INVESTMENT INCOME ....................... 3,286 4,567 4,714
----------------------------------------
TOTAL INVESTMENT INCOME ................... 1,128,684 1,089,184 1,006,118
INVESTMENT EXPENSES ........................... 11,950 13,904 14,508
----------------------------------------
NET INVESTMENT INCOME ..................... $1,116,734 $1,075,280 $ 991,610
========================================
</TABLE>
The carrying value of investments in fixed maturities and mortgage loans
that have not produced income for the last twelve months is less than one
percent of the total of such investments at December 31, 1996.
The following analysis summarizes realized gains and losses on investments:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REALIZED INVESTMENT GAINS (LOSSES):
FIXED MATURITIES ............................................. $ 31,077 $ 29,293 $(8,843)
MARKETABLE EQUITY SECURITIES ................................. 61,584 35,796 48,057
INVESTMENT REAL ESTATE ....................................... (2,611) (818) (174)
--------------------------------------
REALIZED INVESTMENT GAIN BEFORE INCOME TAXES .............. 90,050 64,271 39,040
APPLICABLE INCOME TAXES ...................................... (31,316) (22,719) (13,118)
--------------------------------------
NET REALIZED INVESTMENT GAIN .............................. $ 58,734 $ 41,552 $25,922
======================================
</TABLE>
The proceeds from sales of investment securities and related gains and
losses for 1996 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROCEEDS FROM SALES ............................................. $ 979,947 $13,316 $181,717
=======================================
GROSS REALIZED GAINS ON SALES ................................... $ 32,973 $ - $ 66,237
GROSS REALIZED LOSSES ON SALES .................................. (27,601) (1,328) (4,653)
---------------------------------------
REALIZED GAINS (LOSSES) ON SALE ................................. 5,372 (1,328) 61,584
WRITEDOWNS ...................................................... (5,465) - -
OTHER, INCLUDING GAINS ON CALLS AND REDEMPTIONS ................. 32,638 (140) -
---------------------------------------
TOTAL REALIZED GAIN (LOSS) .................................. $ 32,545 $(1,468) $ 61,584
=======================================
</TABLE>
The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuers' creditworthiness.
55
<PAGE> 30
NOTE 2: INVESTMENTS (CONTINUED)
The proceeds from sales of investment securities and related gains and
losses for 1995 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROCEEDS FROM SALES ...................................... $ 549,865 $ - $176,773
=======================================
GROSS REALIZED GAINS ON SALES ............................ $ 26,945 $ - $ 46,546
GROSS REALIZED LOSSES ON SALES ........................... (12,331) - (10,750)
---------------------------------------
REALIZED GAINS ON SALE ................................... 14,614 - 35,796
WRITEDOWNS ............................................... (13,609) - -
OTHER, INCLUDING GAINS ON CALLS AND REDEMPTIONS .......... 28,288 - -
---------------------------------------
TOTAL REALIZED GAIN .................................. $ 29,293 $ - $ 35,796
=======================================
</TABLE>
The proceeds from sales of investment securities and related gains and
losses for 1994 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROCEEDS FROM SALES ...................................... $ 786,361 $ - $120,723
=======================================
GROSS REALIZED GAINS ON SALES ............................ $ 19,235 $ - $ 52,680
GROSS REALIZED LOSSES ON SALES ........................... (50,043) - (4,623)
---------------------------------------
REALIZED GAINS (LOSSES) ON SALE .......................... (30,808) - 48,057
WRITEDOWNS ............................................... (4,804) - -
OTHER, INCLUDING GAINS ON CALLS AND REDEMPTIONS .......... 26,769 - -
---------------------------------------
TOTAL REALIZED GAIN (LOSS) ........................... $ (8,843) $ - $ 48,057
=======================================
</TABLE>
The following analysis summarizes the changes in unrealized gains and losses
on investment securities (includes fixed maturities held-to-maturity and
available-for-sale):
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE) IN UNREALIZED APPRECIATION OF INVESTMENT SECURITIES:
FIXED MATURITIES ............................................................. $(571,157) $1,622,513 $(1,448,717)
MARKETABLE EQUITY SECURITIES ................................................. 135,690 231,231 (107,067)
APPLICABLE INCOME TAXES ...................................................... 152,413 (648,810) 544,524
----------------------------------------
NET CHANGE IN UNREALIZED APPRECIATION ..................................... $(283,054) $1,204,934 $(1,011,260)
========================================
</TABLE>
As discussed in Note 1, SAFECO adopted the provisions of FASB Statement 115
as of January 1, 1994. The net effect on stockholders' equity of the adoption of
Statement 115 was an increase of $640,477 as of January 1, 1994. The net
increase of $640,477 was comprised of the following amounts: aggregate market
value in excess of amortized cost of fixed maturities classified as
available-for-sale of $1,013,117, less deferred policy acquisition costs
valuation allowance of $27,768 and deferred income taxes of $344,872.
SAFECO reclassified certain fixed maturity securities from the
held-to-maturity category to the available-for-sale category on December 31,
1995, as allowed by the FASB's Implementation Guide discussed in Note 1 on page
54. The securities reclassified had a net carrying value (amortized cost) of
$331,123 and a market value of $358,630 at December 31, 1995. This
reclassification had no effect on net income.
56
<PAGE> 31
The following is a summary of fixed maturities and marketable equity
securities classified as available-for-sale at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT CORPORATIONS AND AGENCIES ........... $ 1,123,418 $ 49,928 $ (4,665) $ 45,263 $ 1,168,681
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ... 3,036,139 350,641 (2,881) 347,760 3,383,899
DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ...... 204,765 44,479 (6) 44,473 249,238
CORPORATE SECURITIES ............................... 4,373,171 195,469 (22,856) 172,613 4,545,784
MORTGAGE-BACKED SECURITIES ......................... 2,533,036 74,169 (18,564) 55,605 2,588,641
-------------------------------------------------------------------------
TOTAL FIXED MATURITIES CLASSIFIED AS
AVAILABLE-FOR-SALE .......................... 11,270,529 714,686 (48,972) 665,714 11,936,243
MARKETABLE EQUITY SECURITIES ....................... 641,841 660,296 (3,328) 656,968 1,298,809
-------------------------------------------------------------------------
TOTAL ....................................... $11,912,370 $1,374,982 $(52,300) 1,322,682 $13,235,052
========================================== ===========
DEFERRED POLICY ACQUISITION COSTS VALUATION
ALLOWANCE ...................................... (19,040)
APPLICABLE INCOME TAXES ............................ (452,241)
----------
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES,
NET OF TAX, INCLUDED IN STOCKHOLDERS' EQUITY ... $ 851,401
==========
</TABLE>
The following is a summary of fixed maturities classified as
held-to-maturity at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT CORPORATIONS AND AGENCIES ............. $ 244,686 $ 29,559 $ (397) $ 29,162 $ 273,848
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ..... 103,075 3,797 (663) 3,134 106,209
DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ........ 148,300 24,403 - 24,403 172,703
CORPORATE SECURITIES ................................. 1,700,395 131,053 (13,775) 117,278 1,817,673
MORTGAGE-BACKED SECURITIES ........................... 291,868 13,110 (5,407) 7,703 299,571
-----------------------------------------------------------------------
TOTAL FIXED MATURITIES CLASSIFIED AS
HELD-TO-MATURITY .............................. $2,488,324 $201,922 $(20,242) $181,680 $2,670,004
=======================================================================
</TABLE>
The following is a summary of fixed maturities and marketable equity
securities classified as available-for-sale at December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT CORPORATIONS AND AGENCIES ............ $ 1,087,644 $ 98,207 $ (1,165) $ 97,042 $ 1,184,686
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS .... 2,997,988 467,564 (246) 467,318 3,465,306
DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ....... 208,920 49,505 - 49,505 258,425
CORPORATE SECURITIES ................................ 4,201,895 356,271 (10,626) 345,645 4,547,540
MORTGAGE-BACKED SECURITIES .......................... 2,357,143 120,053 (5,009) 115,044 2,472,187
-------------------------------------------------------------------------
TOTAL FIXED MATURITIES CLASSIFIED AS
AVAILABLE-FOR-SALE ........................... 10,853,590 1,091,600 (17,046) 1,074,554 11,928,144
MARKETABLE EQUITY SECURITIES ........................ 598,130 525,190 (3,912) 521,278 1,119,408
-------------------------------------------------------------------------
TOTAL ........................................ $11,451,720 $1,616,790 $(20,958) 1,595,832 $13,047,552
========================================== ===========
DEFERRED POLICY ACQUISITION COSTS VALUATION
ALLOWANCE ....................................... (42,815)
APPLICABLE INCOME TAXES ............................. (539,523)
----------
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES,
NET OF TAX, INCLUDED IN STOCKHOLDERS' EQUITY .... $1,013,494
==========
</TABLE>
57
<PAGE> 32
NOTE 2: INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities classified as
held-to-maturity at December 31, 1995:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S.
GOVERNMENT CORPORATIONS AND AGENCIES .............. $ 210,894 $ 60,042 $ - $ 60,042 $ 270,936
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ...... 52,438 4,689 - 4,689 57,127
DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ......... 135,467 31,956 - 31,956 167,423
CORPORATE SECURITIES .................................. 1,353,837 224,245 (4,128) 220,117 1,573,954
MORTGAGE-BACKED SECURITIES ............................ 291,881 27,193 - 27,193 319,074
-----------------------------------------------------------------------
TOTAL FIXED MATURITIES CLASSIFIED AS
HELD-TO-MATURITY ............................... $2,044,517 $348,125 $(4,128) $343,997 $2,388,514
=======================================================================
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1996, by contractual maturity, are presented below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DUE IN ONE YEAR OR LESS ......................................... $ 231,990 $ 239,015 $ 5,000 $ 5,100
DUE AFTER ONE YEAR THROUGH FIVE YEARS ........................... 1,807,022 1,875,319 - -
DUE AFTER FIVE YEARS THROUGH TEN YEARS .......................... 1,634,654 1,721,751 28,570 32,934
DUE AFTER TEN YEARS ............................................. 5,063,827 5,511,517 2,162,886 2,332,399
MORTGAGE-BACKED SECURITIES ...................................... 2,533,036 2,588,641 291,868 299,571
---------------------------------------------------------
TOTAL ....................................................... $11,270,529 $11,936,243 $2,488,324 $2,670,004
=========================================================
</TABLE>
In 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan," which provides guidance on valuing impaired loans (FAS
114). The FASB also issued Statement 118, "Accounting by Creditors for
Impairment of a Loan -- Income Recognition and Disclosure" (FAS 118), in 1994,
which amends Statement 114. Both statements were effective for 1995 and were
adopted by SAFECO on January 1, 1995. Adoption did not affect net income.
The following table summarizes SAFECO's consolidated allowance for credit
losses:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
ALLOWANCE AT BEGINNING OF YEAR ............................... $27,516 $24,557
PROVISION FOR CREDIT LOSSES .................................. 4,450 4,200
LOANS CHARGED OFF AS UNCOLLECTIBLE ........................... (1,838) (1,891)
RECOVERIES ................................................... 293 650
----------------------
ALLOWANCE AT END OF YEAR ..................................... $30,421 $27,516
======================
</TABLE>
This allowance relates to SAFECO Credit's finance receivables ($829 million
at December 31, 1996) and to mortgage loan investments ($448 million at December
31, 1996) nearly all of which are held by SAFECO Life Insurance Company. The
1996 and 1995 allowances include amounts determined under FAS 114 and FAS 118
(specific reserves), as well as general reserve amounts. The total investment in
impaired loans, as defined under FAS 114 and FAS 118 and before any reserve for
losses, is $3.3 million at December 31, 1996. A specific loan loss reserve has
been established for each impaired loan, the total of which is $1.0 million at
December 31, 1996 and is included in the overall allowance of $30.4 million at
December 31, 1996.
58
<PAGE> 33
NOTE 3: NOTES AND MORTGAGES PAYABLE
At December 31, 1996, SAFECO Credit had short-term borrowings of $762,000
through commercial paper and $46,500 of medium-term notes. The repayment of each
of these borrowings is guaranteed by SAFECO Corporation. The weighted average
interest rates on the short-term borrowings were 5.4% and 5.8% at December 31,
1996 and 1995, respectively.
At December 31, 1996, SAFECO Corporation had available bank lines of credit
totaling $400,000. No amounts were outstanding under these lines of credit at
December 31, 1996. These lines are available for general corporate purposes,
including support of SAFECO Credit's short-term borrowings. SAFECO Corporation
pays a fee to have these lines of credit available and does not maintain
deposits as compensating balances.
SAFECO Corporation issued $200 million of 7.875% notes in 1995, under a
Securities and Exchange Commission (SEC) shelf registration. The proceeds were
used to replace SAFECO Corporation's then existing $200 million of 10.75% notes
which matured in 1995.
Prior to the shelf registration noted above, SAFECO Corporation and SAFECO
Credit initiated a combined shelf registration in 1990. SAFECO Credit issued
$149,850 of medium-term notes under this registration. Of this amount $46,500
remained outstanding at December 31, 1996, with a weighted average interest rate
of 7.9%, and maturities from May 1997 to December 2001. SAFECO Corporation
issued $50,000 of medium-term notes under this shelf registration, with a
weighted average interest rate of 7.1%, all maturing in 2002 and 2003. No
additional notes will be issued under this shelf registration.
SAFECO Credit enters into interest rate swap agreements with outside parties
to reduce the impact of changes in interest rates on its variable rate debt by
converting variable rate interest payments to fixed rates. The interest rate
swap agreements provide only for the exchange of interest on the notional
amounts at the stated rates, with no multipliers or leverage. At December 31,
1996, interest rate swap agreements were outstanding with notional amounts of
$248,997, replacing variable rates with fixed rates with a weighted average rate
of 6.0%. Maturities of these agreements range from June 1997 to November 2003.
At December 31, 1995, interest rate swap agreements were outstanding with
notional amounts of $134,942, replacing variable rates with fixed rates with a
weighted average rate of 6.0%. There were no swap terminations in 1996, 1995 or
1994. The net interest accrued under these agreements is recorded as an
adjustment to interest expense.
Real estate mortgages are collateralized by the related investment real
estate buildings and property.
The total amount, current portions, interest rates and maturities of notes
and mortgages payable at December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
TOTAL CURRENT TOTAL CURRENT
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAFECO CREDIT BORROWINGS PAYABLE THROUGH 2001;
WEIGHTED AVERAGE INTEREST RATES AT DECEMBER 31:
1996 - 5.6%; 1995 - 6.1% .................................... $808,750 $ 763,850 $614,270 $567,770
------------------------------------------------------
SAFECO CORPORATION, 7.875% NOTES DUE 2005 .......................... $200,000 $ - $200,000 $ -
------------------------------------------------------
OTHER NOTES AND MORTGAGES:
REAL ESTATE MORTGAGES PAYABLE IN INSTALLMENTS AND
MEDIUM-TERM NOTES PAYABLE THROUGH 2014;
WEIGHTED AVERAGE INTEREST RATES AT DECEMBER 31:
1996 - 7.7%; 1995 - 7.8% .................................... $169,638 $ 3,324 $216,990 $ 9,604
UNSECURED NOTES AND LOANS PAYABLE IN INSTALLMENTS
THROUGH 1998; WEIGHTED AVERAGE INTEREST RATES AT
DECEMBER 31: 1996 - 6.7%; 1995 - 7.3% ....................... 55,106 26,204 36,285 31,260
------------------------------------------------------
TOTAL .................................................... $224,744 $ 29,528 $253,275 $ 40,864
------------------------------------------------------
</TABLE>
Aggregate annual principal installments payable under these obligations for
each of the five years subsequent to 1996 are as follows: 1997 - $793,378; 1998
- - $53,164; 1999 - $4,745; 2000 - $55,331; 2001 - $14,238.
59
<PAGE> 34
NOTE 4: PROPERTY AND CASUALTY LOSS RESERVES
Unpaid losses and adjustment expense represent the estimated liability for
claims reported plus losses incurred but not yet reported and the related
estimated adjustment expense. Although considerable variability is inherent in
such estimates, management believes that the liability for unpaid losses and
related adjustment expense is adequate. These estimates are continually reviewed
and adjusted as necessary; such adjustments are included in current operations.
The following is a summary of the activity related to SAFECO's property and
casualty companies' reserves for losses and adjustment expense (net of
reinsurance amounts):
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LOSSES AND ADJUSTMENT EXPENSE RESERVES AT BEGINNING OF YEAR ..................... $2,070,077 $2,092,946 $1,995,122
----------------------------------------
INCURRED LOSSES AND ADJUSTMENT EXPENSE FOR CLAIMS OCCURRING
IN THE CURRENT YEAR ......................................................... 1,658,253 1,586,675 1,609,392
DECREASE IN ESTIMATED LOSSES AND ADJUSTMENT EXPENSE FOR CLAIMS
OCCURRING IN PRIOR YEARS .................................................... (77,744) (59,699) (81,325)
----------------------------------------
TOTAL INCURRED LOSSES AND ADJUSTMENT EXPENSE .................................... 1,580,509 1,526,976 1,528,067
----------------------------------------
LOSSES AND ADJUSTMENT EXPENSE PAYMENTS FOR CLAIMS OCCURRING DURING:
CURRENT YEAR ................................................................ 939,561 856,796 809,722
PRIOR YEARS ................................................................. 755,367 693,049 620,521
----------------------------------------
TOTAL LOSSES AND ADJUSTMENT EXPENSE PAYMENTS .................................... 1,694,928 1,549,845 1,430,243
----------------------------------------
LOSSES AND ADJUSTMENT EXPENSE RESERVES AT END OF YEAR ....................... $1,955,658 $2,070,077 $2,092,946
----------------------------------------
</TABLE>
The year-end reserve amounts above are net of related reinsurance
recoverables of $103,412, $110,746 and $143,858 for 1996, 1995 and 1994,
respectively.
The amounts above do not include SAFECO Life Insurance Company's loss
reserves for accident and health claims as these amounts are not material in
relation to consolidated losses and adjustment expense reserves and because the
majority of these claims are incurred and paid in full within a one-year period.
The decrease in the property and casualty companies' estimated losses and
adjustment expense for claims occurring in prior years reflects several factors:
aggressive reserving previously undertaken to correct deficiencies in years
prior to 1988, favorable legislation in workers' compensation, moderation of
medical costs and inflation, and claims department changes. The favorable
legislation in workers' compensation, which relates primarily to the states of
Oregon and California, has helped reduce fraud, allowed for faster settlement of
claims and made it more difficult to reopen claims -- all of which reduced
SAFECO's ultimate loss costs. The cost of claim settlements in several lines of
business has benefited from changes in the organization of SAFECO's claims
department which has established separate specialized units for workers'
compensation, environmental exposures and fraud investigations. In addition,
increased focus on adjustment expenses has helped reduce these costs.
The property and casualty companies' liability for unpaid losses and
adjustment expense includes reserves for environmental, asbestos and other toxic
claims. These reserves are approximately 5% of total property and casualty
reserves for losses and adjustment expense at December 31, 1996, 1995 and 1994.
The reserves include estimates for both reported and incurred but not reported
(IBNR) losses and related legal expenses. Reserving for these claims is subject
to significant uncertainties. Such uncertainties include difficulties in
predicting the outcome of judicial decisions as case law evolves regarding
liability exposure, insurance coverage and interpretation of policy language and
changes in environmental regulations. In view of these conditions, trends that
have affected development of these liabilities in the past may not necessarily
occur in the future. Although estimation of environmental claims is a difficult
process, the reserves established for these claims at December 31, 1996 are
believed to be adequate based on the known facts and current law.
60
<PAGE> 35
NOTE 5: REINSURANCE
SAFECO's insurance subsidiaries protect themselves from excessive losses by
reinsuring on treaty and facultative bases. Reinsurance contracts do not relieve
SAFECO of its obligations to policyholders. With respect to the amounts of
reinsurance related to the liabilities for losses and adjustment expense, life
policy liabilities and unearned premiums, a continuing liability exists in the
event reinsurance companies are unable to meet their obligations. SAFECO
evaluates the financial condition of its reinsurers to minimize its exposure to
losses from reinsurer insolvencies.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves, loss portfolio transfers or funding
covers.
The balance sheet caption reinsurance recoverables is comprised of the
following amounts at December 31:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
PROPERTY AND CASUALTY:
REINSURANCE RECOVERABLES ON:
UNPAID LOSSES AND ADJUSTMENT EXPENSE ................................... $103,412 $110,746
PAID LOSSES AND ADJUSTMENT EXPENSE ..................................... 8,868 9,882
LIFE AND HEALTH:
REINSURANCE RECOVERABLES ON:
UNPAID LOSSES AND ADJUSTMENT EXPENSE (POLICY AND CONTRACT CLAIMS) ...... 136 850
PAID CLAIMS ............................................................ 957 658
LIFE POLICY LIABILITIES ................................................ 23,784 14,844
OTHER .................................................................. 327 304
-----------------------
REINSURANCE RECOVERABLES ............................................ $137,484 $137,284
-----------------------
</TABLE>
The unearned premium liability is presented before the effect of
reinsurance. The reinsurance amounts related to the unearned premium liability
are included with other assets in the balance sheet and totaled $48,424 and
$50,633 at December 31, 1996 and 1995, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the statement of income. These amounts are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY AND CASUALTY CEDED EARNED PREMIUMS ...................................... $ 152,637 $160,342 $175,861
LIFE AND HEALTH CEDED EARNED PREMIUMS ............................................ 13,679 10,385 9,060
---------------------------------------
TOTAL CEDED EARNED PREMIUMS .................................................. $ 166,316 $170,727 $184,921
---------------------------------------
PROPERTY AND CASUALTY CEDED LOSSES AND ADJUSTMENT EXPENSE ........................ $ 34,447 $ 46,184 $184,670
LIFE AND HEALTH CEDED POLICY BENEFITS ............................................ 4,039 6,344 5,588
---------------------------------------
TOTAL CEDED LOSSES, ADJUSTMENT EXPENSE AND POLICY BENEFITS ................... $ 38,486 $ 52,528 $190,258
---------------------------------------
</TABLE>
Property and casualty ceded earned premiums and ceded losses and adjustment
expense were higher in 1994 due to reinsurance amounts related to the 1994 Los
Angeles earthquake.
Reinsurance premiums ceded on a written basis are approximately equal to the
ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
61
<PAGE> 36
NOTE 6: COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment
under leases which expire at various dates through 2058. These leases are
accounted for as operating leases. Minimum rental commitments for leases in
effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR PAYABLE MINIMUM RENTALS
- -----------------------------------------------------------=
<S> <C>
1997 ............................................ $ 8,580
1998 ............................................ 8,389
1999 ............................................ 7,558
2000 ............................................ 5,563
2001 ............................................ 4,364
2002 AND THEREAFTER ............................. 61,554
--------
TOTAL ....................................... $ 96,008
========
</TABLE>
The amount of rent charged to operations was $9,978, $9,582 and $9,151 for
1996, 1995 and 1994, respectively.
The property and casualty companies have written financial guaranty
insurance covering municipal revenue bond issues, real estate partnership
borrowings and residual values of certain commercial buildings. The majority of
these guaranties was written in the period 1984 through 1987. The remaining
guaranties have maturities ranging from 1997 to 2000. At December 31, 1996
guaranties totaling $158,016 were outstanding. Substantially all individual
guaranties are supported by collateral (first mortgage liens) in the underlying
properties. At December 31, 1996, the reserves for losses and adjustment expense
for this business was $19,079 and the related unearned premium liability was
$461.
At December 31, 1996, SAFECO Properties, Inc. is the guarantor of $35,100 of
outstanding debt financing for a not-for-profit hospital. SAFECO's property and
casualty companies have, in turn, guaranteed the full amount of this potential
obligation of SAFECO Properties and this amount is included in the guaranty
total of $158,016 noted in the previous paragraph. During 1996, SAFECO
Properties recorded an estimated loss of $20,000 to reflect the excess of the
outstanding debt over the value of the collateral.
For information on environmental, asbestos and other toxic claim
liabilities, see Note 4.
See Note 5 for discussion relating to reinsurance.
NOTE 7: FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in developing the estimates of fair
value. Accordingly, these estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The use of
different market assumptions and/or estimating methodologies may have a material
effect on the estimated fair value amounts.
For cash, short-term investments, accounts receivable, policy loans and
other liabilities, carrying value is a reasonable estimate of fair value.
Fair value amounts for fixed maturities and marketable equity securities are
the same as market prices for securities traded in the public marketplace or
analytically determined values for securities not publicly traded.
The fair values for mortgage and commercial loans have been estimated by
discounting the projected cash flows using the current rate at which loans would
be made to borrowers with similar credit ratings and for the same maturities.
Commercial loans are a component of "Finance Receivables" in the balance
sheet. Finance Receivables also include lease receivables, which are exempt from
fair value disclosure requirements.
The fair value of investment contracts (Funds Held Under Deposit Contracts)
with defined maturities is estimated by discounting projected cash flows using
rates that would be offered for similar contracts with the same remaining
maturities. For investment contracts with no defined maturities, fair value is
estimated to be the present surrender value.
The carrying values of SAFECO Credit and other notes and mortgages
borrowings that have variable interest rates are reasonable estimates of fair
value. For these borrowings that have fixed interest rates, fair value is
estimated by discounting the projected cash flows using the rate at which
similar borrowings could currently be made. The fair value of the 7.875% notes
is estimated based on quotes from broker/dealers who make markets in similar
securities.
The estimated fair value of the property and casualty companies' financial
guaranty business (see Note 6) was approximately $20,000 at December 31, 1996
and $23,000 at December 31, 1995. These amounts equal the total recorded
reserves for losses and adjustment expense and unearned premiums at December 31,
1996 and 1995. Other insurance-related financial instruments are exempt from
fair value disclosure requirements.
62
<PAGE> 37
Estimated fair values of financial instruments at December 31 are as
follows:
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
FIXED MATURITIES AVAILABLE-FOR-SALE ........................ $11,936,243 $11,936,243 $11,928,144 $11,928,144
FIXED MATURITIES HELD-TO-MATURITY .......................... 2,488,324 2,670,004 2,044,517 2,388,514
MARKETABLE EQUITY SECURITIES ............................... 1,298,809 1,298,809 1,119,408 1,119,408
MORTGAGE LOANS ............................................. 447,988 461,000 416,489 443,000
COMMERCIAL LOANS ........................................... 536,460 531,000 494,138 520,000
FINANCIAL LIABILITIES:
FUNDS HELD UNDER DEPOSIT CONTRACTS ......................... 9,792,730 9,935,000 8,756,384 9,282,000
CREDIT COMPANY BORROWINGS .................................. 808,750 810,000 614,270 618,000
7.875% NOTES DUE 2005 ...................................... 200,000 210,000 200,000 221,000
OTHER NOTES AND MORTGAGES .................................. 224,744 228,000 253,275 265,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO's consolidated investments in mortgage-backed securities of $2.9
billion at market value at December 31, 1996 ($2.8 billion at December 31, 1995)
are primarily residential collateralized mortgage obligations and pass-throughs
(CMOs). CMOs, while technically defined as derivative instruments, are exempt
from derivative disclosure requirements. SAFECO's investment in CMOs comprised
of the riskier, more volatile type (e.g., interest only, inverse floaters, etc.)
has been intentionally limited to only a small amount -- less than 1% of total
CMOs at both December 31, 1996 and 1995.
SAFECO Credit provides loan and lease commitments, at both variable and
fixed rates of interest. Fixed rate loan and lease commitments outstanding at
December 31, 1996 were approximately $30,000, or less than 1% of consolidated
investments. The majority of these commitments have original terms of up to 90
days and contracted fixed interest rates with a weighted average rate of 9% at
December 31, 1996. Fixed rate commitments outstanding at December 31, 1995 were
approximately $45,000. Exposure to credit risk relating to these commitments
(i.e., risk that the borrower will be unable to perform its obligations) is
mitigated through credit review and approval controls. Because the majority of
the fixed rate commitments have terms of 90 days, the estimated fair value of
these commitments is not material.
SAFECO does not enter into financial instruments for trading or speculative
purposes. SAFECO's involvement in other investment-type derivatives is
intentionally of a very limited nature. Such derivatives include currency-linked
bonds and equity-linked bonds. Individually, and in the aggregate, these
derivatives are not material and thus no additional disclosures are warranted.
Interest rate swap agreements are entered into by SAFECO Credit to reduce
the impact of changes in interest rates on its variable rate debt by converting
variable rate interest payments to fixed rates. The interest rate swap
agreements provide only for the exchange of interest on the notional amounts at
the stated rates, with no multipliers or leverage. At December 31, 1996,
interest rate swap agreements were outstanding with notional amounts of
$248,997, replacing variable rates with fixed rates with a weighted average rate
of 6.0%. Maturities of these agreements range from June 1997 to November 2003.
At December 31, 1995, interest rate swap agreements were outstanding with
notional amounts of $134,942, replacing variable rates with fixed rates with a
weighted average rate of 6.0%. There were no swap terminations in 1996, 1995 and
1994. The net interest accrued under these agreements is recorded as an
adjustment to interest expense. Exposure to credit risk relating to interest
rate swaps is the risk that the counterparty will be unable to perform its
obligations. This risk is mitigated through credit review, approval controls and
by entering into agreements with only highly rated counterparties.The estimated
fair value of interest rate swaps was not material at December 31, 1996 or 1995;
thus, no additional disclosures are warranted.
63
<PAGE> 38
NOTE 8: COMMON STOCK
On December 1, 1995, the Corporation's common stock was split 2-for-1. Per
share amounts have been adjusted to reflect the stock split.
Changes in common stock outstanding for the last three years are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NUMBER OF SHARES OUTSTANDING AT THE BEGINNING OF YEAR ............ 125,978,742 62,951,634 62,931,562
SHARES REACQUIRED ................................................ (254,767) (288,805) (104,320)
SHARES ISSUED FOR STOCK OPTIONS AND RIGHTS ....................... 326,613 364,279 124,392
SHARES ISSUED FOR ACQUISITION OF SUBSIDIARY ...................... 257,649 - -
TWO-FOR-ONE STOCK SPLIT - 62,951,634 -
-----------------------------------------
NUMBER OF SHARES OUTSTANDING AT THE END OF YEAR .............. 126,308,237 125,978,742 62,951,634
=========================================
</TABLE>
NOTE 9: STOCK INCENTIVE PLAN
The SAFECO Incentive Plan of 1987 provides for the issuance of up to
4,800,000 shares of SAFECO Corporation common stock. Stock options, restricted
stock rights, performance stock rights and stock appreciation rights are
authorized under the Plan.
Stock options are granted at exercise prices not less than the fair market
value of the stock on the date of the grant. The terms and conditions upon which
options become exercisable may vary among grants; however, option rights expire
no later than ten years from the date of grant.
All share amounts and prices are adjusted for the 2-for-1 stock split in
1995.
SAFECO continues to apply Accounting Principles Board Opinion 25 in
accounting for its stock options, as allowed under FASB Statement 123. The
effect of applying Statement 123's fair value method to SAFECO's stock option
awards results in net income and earnings per share that are not materially
different from amounts reported.
Changes in stock options for the three years ended December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ------------------------------------------------------------
WEIGHTED
AVERAGE PRICE
SHARES PER SHARE
- ------------------------------------------------------------
<S> <C> <C>
BALANCE DECEMBER 31, 1993 ........... 1,828,462 $ 19.03
GRANTED ......................... 297,400 27.39
EXERCISED ....................... (238,726) 13.51
CANCELED ........................ (17,300) 26.12
----------------------
BALANCE DECEMBER 31, 1994 ........... 1,869,836 21.00
GRANTED ......................... 312,200 29.87
EXERCISED ....................... (357,203) 15.45
CANCELED ........................ (21,200) 26.21
----------------------
BALANCE DECEMBER 31, 1995 ........... 1,803,633 23.57
GRANTED ......................... 372,700 33.60
EXERCISED ....................... (317,890) 17.19
CANCELED ........................ - -
----------------------
BALANCE DECEMBER 31, 1996 ........... 1,858,443 $ 26.67
======================
EXERCISABLE AT
DECEMBER 31, 1996 ............... 792,129 $ 21.82
======================
</TABLE>
Exercise prices for options outstanding as of December 31, 1996 range from
$12.25 to $38.50.
64
<PAGE> 39
Restricted stock rights provide for the holder to receive a stated number of
share rights if the holder remains in the employ of the Corporation for the
stated number of years. Matured rights are issued in stock and/or paid in cash
at the option of the holder. During 1996, 1995 and 1994, $1,958, $1,313 and
$899, respectively, were charged to operations for the compensation element of
restricted stock rights and stock appreciation rights. No performance stock
rights have been awarded.
Changes in restricted stock rights for the three years ended December 31,
1996 are as follows:
<TABLE>
<CAPTION>
SHARE RIGHTS
- ------------------------------------------------------------
<S> <C>
BALANCE DECEMBER 31, 1993 ......................... 88,836
AWARDED ....................................... 40,400
MATURED ....................................... (39,898)
CANCELED ...................................... (1,650)
-------
BALANCE DECEMBER 31, 1994 ......................... 87,688
AWARDED ....................................... 44,800
MATURED ....................................... (35,762)
CANCELED ...................................... (1,150)
-------
BALANCE DECEMBER 31, 1995 ......................... 95,576
AWARDED ....................................... 44,500
MATURED ....................................... (37,342)
CANCELED ...................................... -
-------
BALANCE DECEMBER 31, 1996 ......................... 102,734
=======
</TABLE>
There were 1,383,574 shares of common stock reserved for future options and
rights at December 31, 1996.
NOTE 10: STATUTORY INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (i.e., statutory basis). Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance with
generally accepted accounting principles primarily because policy acquisition
costs are expensed when incurred, life insurance reserves are based on different
assumptions and income tax expense reflects only taxes paid or currently
payable.
Statutory net income and equity are as follows:
<TABLE>
<CAPTION>
STATUTORY NET INCOME 1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
PROPERTY AND CASUALTY ... $317,672 $299,330 $ 217,348
LIFE AND HEALTH ......... 97,243 103,047 48,630
</TABLE>
<TABLE>
<CAPTION>
STATUTORY STOCKHOLDER'S EQUITY
DECEMBER 31 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
PROPERTY AND CASUALTY .............. $2,166,187 $1,864,732
LIFE AND HEALTH .................... 587,658 504,683
</TABLE>
SAFECO's insurance subsidiaries have received written approval from the
Washington State Insurance Department to treat certain loans to related SAFECO
subsidiaries (all made at market rates) as admitted assets. The allowance of
such loans has not materially enhanced surplus at December 31, 1996.
NOTE 11: DIVIDEND RESTRICTIONS
SAFECO's subsidiaries are restricted as to the amount of dividends they may
pay to their parent without regulatory or lender consent. The amount of
subsidiary retained earnings available for the payment of dividends to SAFECO
Corporation without prior regulatory or lender approval approximated $541,082 at
December 31, 1996.
65
<PAGE> 40
NOTE 12: EMPLOYEE BENEFIT PLANS
The Corporation administers profit-sharing bonus, defined contribution, and
defined benefit plans covering substantially all employees. The defined
contribution plans include profit sharing retirement plans and a savings plan.
Benefits are earned under the defined benefit plan for each year of service
after 1988, based on the employee's compensation level plus a stipulated rate of
return on the benefit balance. It is SAFECO's policy to fund the plan on a
current basis to the full extent deductible under federal income tax
regulations. The present value of all accrued benefits under the plan was
$30,300 at December 31, 1996, determined using a discount rate of 7.6%. The fair
value of plan assets was $44,000 at December 31, 1996.
The cost of the plans discussed above charged to income is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------
<S> <C> <C> <C>
PROFIT-SHARING BONUS ..... $21,339 $21,771 $ 18,178
DEFINED CONTRIBUTION ..... 30,534 26,889 22,591
DEFINED BENEFIT .......... 6,486 5,619 5,669
---------------------------------
TOTAL ................ $58,359 $54,279 $ 46,438
=================================
</TABLE>
In addition, SAFECO provides certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees become eligible for these benefits if they reach retirement age while
working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree. SAFECO accrues for these costs during the years that employees provide
services, under FASB Statement 106. The transition obligation was recorded as a
cumulative effect adjustment in 1993, resulting in a reduction of net income of
$15,676 (net of tax).
Net periodic other postretirement benefit costs were $3,178, $1,891 and
$2,771 in 1996, 1995 and 1994 respectively.
The following table summarizes the funded status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
TOTAL ACCUMULATED POSTRETIREMENT
BENEFIT OBLIGATION (APBO) ......... $25,269 $ 27,702
LESS PLAN ASSETS AT FAIR VALUE ........ 1,097 880
--------------------
APBO IN EXCESS OF PLAN ASSETS ......... 24,172 26,822
UNRECOGNIZED GAIN ..................... 6,656 1,485
--------------------
ACCRUED POSTRETIREMENT BENEFIT COST
RECORDED IN THE BALANCE SHEET ..... $30,828 $ 28,307
--------------------
</TABLE>
Discount rate assumptions of 7.75%, 7.5% and 8.5% were used at December 31,
1996, 1995 and 1994, respectively. The accumulated postretirement benefit
obligation at December 31, 1996 was determined using a healthcare cost trend
rate of 11% for 1997, declining by 1% per year, starting in 1998, to 6% and
remaining at that level thereafter. A one-percentage-point increase in the
assumed healthcare cost trend rate for each year would increase the accumulated
other postretirement benefit obligation as of December 31, 1996 by $3,026 and
the annual net periodic other postretirement benefit cost for the year then
ended by $513.
NOTE 13: REAL ESTATE COMPANIES' LEASED PROPERTIES
The real estate companies receive rental income, principally from shopping
centers, under leases which expire at various dates through 2034. These leases
are accounted for as operating leases. Minimum future rentals from leases in
effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR RECEIVABLE AMOUNT
- ------------------------------------------------------------
<S> <C>
1997 ............................................. $ 41,284
1998 ............................................. 38,854
1999 ............................................. 36,113
2000 ............................................. 32,963
2001 ............................................. 30,989
2002 AND THEREAFTER .............................. 195,543
---------
TOTAL ........................................ $ 375,746
=========
</TABLE>
These amounts do not include contingent rentals that are based on a
percentage of sales in excess of stipulated minimums or increases in the
Consumer Price Index. Contingent rentals included in revenue were $4,669, $4,295
and $5,460 in 1996, 1995 and 1994, respectively.
The real estate companies' investment in rental property and related
accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995
- ------------------------------------------------------------
<S> <C> <C>
SHOPPING CENTERS ..................... $284,729 $ 303,111
OFFICE AND INDUSTRIAL SPACE .......... 47,796 46,734
HEALTHCARE FACILITIES ................ 39,981 25,850
OTHER ................................ 42,626 40,115
---------------------
415,132 415,810
LESS ACCUMULATED DEPRECIATION ........ 82,083 83,907
---------------------
TOTAL ............................ $333,049 $ 331,903
=====================
</TABLE>
66
<PAGE> 41
NOTE 14: INCOME TAXES
SAFECO uses the liability method of accounting for income taxes pursuant to
FASB Statement 109, "Accounting for Income Taxes." Under the liability method,
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal income
tax rate of 35% to income before income taxes and the consolidated provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPUTED "EXPECTED" TAX EXPENSE ......................................... $ 202,461 $179,830 $136,409
TAX-EXEMPT MUNICIPAL BOND INCOME ........................................ (66,236) (64,700) (60,039)
DIVIDENDS RECEIVED DEDUCTION ............................................ (9,395) (10,238) (10,369)
PRORATION ADJUSTMENT .................................................... 8,763 7,781 6,506
OTHER ................................................................... 3,917 2,168 2,860
---------------------------------------
CONSOLIDATED PROVISION FOR INCOME TAXES ............................. $ 139,510 $114,841 $ 75,367
=======================================
</TABLE>
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
DISCOUNTED LOSS AND ADJUSTMENT EXPENSE RESERVES ..................... $ 122,726 $131,679 $122,663
UNEARNED PREMIUM LIABILITY .......................................... 62,274 59,634 56,495
ADJUSTMENT TO LIFE POLICY LIABILITIES ............................... 34,773 30,209 20,444
CAPITALIZATION OF LIFE POLICY ACQUISITION COSTS ..................... 33,393 21,860 18,263
POSTRETIREMENT BENEFITS ............................................. 10,790 9,907 9,585
REALIZED CAPITAL LOSSES ............................................. 6,983 10,483 6,773
DEFERRED POLICY ACQUISITION COSTS VALUATION ALLOWANCE ............... 6,664 14,985 -
OTHER ............................................................... 43,375 36,197 36,899
---------------------------------------
TOTAL DEFERRED TAX ASSETS ........................................ 320,978 314,954 271,122
---------------------------------------
DEFERRED TAX LIABILITIES:
DEFERRED POLICY ACQUISITION COSTS ................................... 145,301 139,711 136,095
BOND DISCOUNT ACCRUAL ............................................... 27,164 22,460 19,119
ACCELERATED DEPRECIATION ............................................ 75,716 65,289 52,043
REAL ESTATE DEVELOPMENT EXPENSES CAPITALIZED ........................ 11,587 12,230 12,527
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES .................... 462,939 558,541 66,818
OTHER ............................................................... 16,108 15,657 22,373
---------------------------------------
TOTAL DEFERRED TAX LIABILITIES ................................... 738,815 813,888 308,975
---------------------------------------
NET DEFERRED TAX LIABILITY ....................................... $ 417,837 $498,934 $ 37,853
=======================================
</TABLE>
The following table reconciles the deferred tax expense (benefit) in the
Statement of Consolidated Income to the net change in the deferred tax liability
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
DEFERRED TAX EXPENSE (BENEFIT) .......................................... $ 6,032 $(16,623) $ (8,242)
DEFERRED TAX CHANGES REPORTED IN STOCKHOLDERS' EQUITY:
INCREASE (DECREASE) IN LIABILITY RELATED TO UNREALIZED
APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ............. (95,602) 491,723 (72,172)
INCREASE (DECREASE) IN LIABILITY RELATED TO DEFERRED
POLICY ACQUISITION COSTS VALUATION ALLOWANCE ..................... 8,321 (14,985) -
INCREASE (DECREASE) IN LIABILITY RELATED TO UNREALIZED
GAIN (LOSS) FROM FOREIGN CURRENCY TRANSLATION .................... 152 966 (1,653)
--------------------------------------
INCREASE (DECREASE) IN NET DEFERRED TAX LIABILITY ....................... $(81,097) $461,081 $(82,067)
======================================
</TABLE>
67
<PAGE> 42
NOTE 15: SEGMENT DATA
<TABLE>
<CAPTION>
UNDER-
INVESTMENT REALIZED WRITING IDENTIFIABLE
REVENUES INCOME GAIN (LOSS) PROFIT (LOSS) NET INCOME ASSETS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996
PROPERTY AND CASUALTY:
PERSONAL ...................... $1,650,690 $ 4,990 $ 352,218
COMMERCIAL AND SURETY ......... 624,674 33,466 244,057
---------- --------
TOTAL ...................... 2,275,364 $ 281,580 $ 64,738 $ 38,456 $313,445 6,243,976
---------- ---------- -------- ======== -----------
LIFE AND HEALTH:
FINANCIAL SERVICES ............ 50,705 554,844 5,906 7,745,511
EMPLOYEE BENEFITS ............. 215,219 281,871 4,628 4,319,622
---------- ---------- -------- -----------
TOTAL ...................... 265,924 836,715 10,534 95,407 12,065,133
---------- ---------- -------- -----------
REAL ESTATE ....................... 79,924 (2,611) 6,415 601,339
CREDIT ............................ 84,247 12,178 1,067,524
OTHER AND ELIMINATIONS ............ 53,126 (1,561) 17,389 11,506 (60,299)
---------- ---------- -------- -------- -----------
CONSOLIDATED TOTALS ........ $2,758,585 $1,116,734 $ 90,050 $438,951 $19,917,673
========== ========== ======== ======== ===========
1995
PROPERTY AND CASUALTY:
PERSONAL ...................... $1,562,716 $ (2,526) $ 335,021
COMMERCIAL AND SURETY ......... 599,425 8,874 229,702
---------- --------
TOTAL ...................... 2,162,141 $ 291,450 $ 51,657 $ 6,348 $290,126 6,174,407
---------- ---------- -------- ======== -----------
LIFE AND HEALTH:
FINANCIAL SERVICES ............ 47,178 494,758 14,908 7,104,443
EMPLOYEE BENEFITS ............. 214,392 283,463 (9,014) 4,111,184
---------- ---------- -------- -----------
TOTAL ...................... 261,570 778,221 5,894 92,453 11,215,627
---------- ---------- -------- -----------
REAL ESTATE ....................... 74,959 (818) 5,398 527,036
CREDIT ............................ 71,799 8,872 883,008
OTHER AND ELIMINATIONS ............ 44,836 5,609 7,538 2,110 (32,235)
---------- ---------- -------- -------- -----------
CONSOLIDATED TOTALS ........ $2,615,305 $1,075,280 $ 64,271 $398,959 $18,767,843
========== ========== ======== ======== ===========
1994
PROPERTY AND CASUALTY:
PERSONAL ...................... $1,469,857 $(67,932) $ 316,922
COMMERCIAL AND SURETY ......... 583,574 (9,413) 218,457
---------- --------
TOTAL ...................... 2,053,431 $ 283,481 $ 31,003 $(77,345) $213,439 5,355,735
---------- ---------- -------- ======== -----------
LIFE AND HEALTH:
FINANCIAL SERVICES ............ 46,642 435,101 5,281 5,735,705
EMPLOYEE BENEFITS ............. 230,129 271,116 607 3,593,417
---------- ---------- -------- -----------
TOTAL ...................... 276,771 706,217 5,888 88,723 9,329,122
---------- ---------- -------- -----------
REAL ESTATE ....................... 107,315 (174) 6,455 545,773
CREDIT ............................ 58,181 7,365 757,166
OTHER AND ELIMINATIONS ............ 36,281 1,912 2,323 (1,608) (86,067)
---------- ---------- -------- -------- -----------
CONSOLIDATED TOTALS ........ $2,531,979 $ 991,610 $ 39,040 $314,374 $15,901,729
========== ========== ======== ======== ===========
</TABLE>
Property and casualty companies' investments are available for payments of
claims and benefits for all product lines within the segments; therefore, such
investments and the related investment income and realized gains have not been
identified with specific segments. In the life and health companies, a major
portion of investment income, realized gains and assets is specifically
identifiable within an industry segment. The remainder of these amounts has been
allocated in proportion to the mean policy reserves and liabilities identified
with each segment.
68
<PAGE> 43
NOTE 16: INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:*
1996 .................................................. $977,602 $976,021 $992,499 $1,019,247 $3,965,369
1995 .................................................. 906,383 934,097 951,783 962,593 3,754,856
1994 .................................................. 863,506 870,074 908,963 920,086 3,562,629
INCOME BEFORE REALIZED GAIN:**
1996 .................................................. $ 89,197 $ 92,887 $105,202 $ 92,931 $ 380,217
1995 .................................................. 61,586 92,436 100,836 102,549 357,407
1994 .................................................. 43,486 88,818 69,683 86,465 288,452
REALIZED GAIN:**
1996 .................................................. $ 21,506 $ 13,096 $ 10,784 $ 13,348 $ 58,734
1995 .................................................. 3,624 10,263 14,021 13,644 41,552
1994 .................................................. 12,540 1,231 2,829 9,322 25,922
NET INCOME:
1996 .................................................. $110,703 $105,983 $115,986 $ 106,279 $ 438,951
1995 .................................................. 65,210 102,699 114,857 116,193 398,959
1994 .................................................. 56,026 90,049 72,512 95,787 314,374
(PER SHARE)***
INCOME BEFORE REALIZED GAIN:**
1996 .................................................. $ .71 $ .74 $ .83 $ .74 $ 3.02
1995 .................................................. .49 .74 .80 .81 2.84
1994 .................................................. .35 .70 .56 .68 2.29
REALIZED GAIN:**
1996 .................................................. $ .17 $ .10 $ .09 $ .10 $ .46
1995 .................................................. .03 .08 .11 .11 .33
1994 .................................................. .10 .01 .02 .08 .21
NET INCOME:
1996 .................................................. $ .88 $ .84 $ .92 $ .84 $ 3.48
1995 .................................................. .52 .82 .91 .92 3.17
1994 .................................................. .45 .71 .58 .76 2.50
DIVIDENDS PAID:
1996 .................................................. $ .26 1/2 $ .26 1/2 $ .29 $ .29 $ 1.11
1995 .................................................. .24 1/2 .24 1/2 .26 1/2 .26 1/2 1.02
1994 .................................................. .22 1/2 .22 1/2 .24 1/2 .24 1/2 .94
MARKET PRICE RANGE:****
1996 - HIGH ......................................... $ 39 3/16 $ 35 3/8 $ 35 1/2 $ 41 5/8 $ 41 5/8
- LOW .......................................... 33 1/8 30 7/8 32 35 3/16 30 7/8
1995 - HIGH ......................................... 27 15/16 29 3/4 33 9/16 37 5/8 37 5/8
- LOW .......................................... 25 1/4 27 1/4 28 1/16 31 1/4 25 1/4
</TABLE>
* Prior year amounts revised to conform to 1996 classification.
** Amounts are net of income tax.
*** Per share amounts are adjusted for the 2-for-1 stock split in December 1995
(see Note 8).
**** SAFECO Corporation common stock trades on The Nasdaq Stock Market under the
symbol SAFC.
69
<PAGE> 44
SUMMARY OF GROWTH
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Per Share Amounts)
<S> <C> <C> <C>
SUMMARY OF CONTINUING OPERATIONS
INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN:
PROPERTY AND CASUALTY ...................................................... $ 270,644 $ 256,408 $ 192,734
LIFE AND HEALTH ............................................................ 88,780 88,988 84,941
REAL ESTATE ................................................................ 8,411 5,929 6,568
CREDIT ..................................................................... 12,178 8,872 7,365
ASSET MANAGEMENT ........................................................... 5,105 4,746 4,116
CORPORATE .................................................................. (4,901) (7,536) (7,272)
------------------------------------------
TOTAL ................................................................... 380,217 357,407 288,452
REALIZED GAIN, NET OF INCOME TAXES ............................................. 58,734 41,552 25,922
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ........................................ - - -
------------------------------------------
NET INCOME ..................................................................... $ 438,951 $ 398,959 $ 314,374
==========================================
STATISTICS PER SHARE OF COMMON STOCK*
PRIMARY NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN ................................................ $ 3.02 $ 2.84 $ 2.29
REALIZED GAIN .............................................................. .46 .33 .21
CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................................... - - -
NET INCOME ................................................................. 3.48 3.17 2.50
AVERAGE NUMBER OF SHARES ................................................... 126,074 125,961 125,944
FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN ................................................ 3.00 2.82 2.28
REALIZED GAIN .............................................................. .46 .33 .21
CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................................... - - -
NET INCOME ................................................................. 3.46 3.15 2.49
AVERAGE NUMBER OF SHARES ................................................... 126,683 126,548 126,414
DIVIDENDS PAID ................................................................. 1.11 1.02 .94
MARKET PRICE:
HIGH ....................................................................... 41 5/8 37 5/8 29 13/16
LOW ........................................................................ 30 7/8 25 1/4 23 11/16
CLOSE ...................................................................... 39 7/16 34 1/2 26
STOCKHOLDERS' EQUITY:
BOOK VALUE ................................................................. 32.58 31.61 22.47
WITH SECURITIES AT MARKET VALUE, NET OF TAX ................................ 33.52 33.39 21.93
REVENUES FROM CONTINUING OPERATIONS
(EXCLUDING REALIZED GAINS)
INSURANCE:
PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............................. $2,463,501 $2,366,856 $2,278,045
LIFE AND HEALTH ............................................................ 265,924 261,570 276,771
NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS):
PROPERTY AND CASUALTY ...................................................... 281,580 291,450 283,481
LIFE AND HEALTH ............................................................ 836,715 778,221 706,217
OTHER ...................................................................... (1,561) 5,609 1,912
REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................................. 79,924 74,959 107,315
CREDIT (INCLUDING AFFILIATE LOANS) ............................................. 84,247 71,799 58,181
ASSET MANAGEMENT ............................................................... 23,216 18,532 15,055
TALBOT FINANCIAL ............................................................... 38,458 32,172 25,556
------------------------------------------
TOTAL ................................................................... $4,072,004 $3,901,168 $3,752,533
==========================================
</TABLE>
*Share amounts are adjusted for stock splits.
70
<PAGE> 45
<TABLE>
<CAPTION>
1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUMMARY OF CONTINUING OPERATIONS
INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN:
PROPERTY AND CASUALTY ........................................ $ 217,187 $ 187,144 $ 145,421 $ 183,666
LIFE AND HEALTH .............................................. 76,903 75,600 79,705 77,626
REAL ESTATE .................................................. 6,136 6,040 5,850 6,139
CREDIT ....................................................... 6,439 6,140 6,396 4,476
ASSET MANAGEMENT ............................................. 4,255 4,261 3,397 3,016
CORPORATE .................................................... (3,934) (7,636) (3,852) (3,177)
-----------------------------------------------------------
TOTAL ..................................................... 306,986 271,549 236,917 271,746
REALIZED GAIN, NET OF INCOME TAXES ............................... 118,915 39,745 22,661 6,663
CUMULATIVE EFFECT OF ACCOUNTING CHANGES .......................... 2,877 - - -
-----------------------------------------------------------
NET INCOME ....................................................... $ 428,778 $ 311,294 $ 259,578 $ 278,409
===========================================================
STATISTICS PER SHARE OF COMMON STOCK*
PRIMARY NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN .................................. $ 2.44 $ 2.17 $ 1.89 $ 2.16
REALIZED GAIN ................................................ .95 .31 .18 .05
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... .02 - - -
NET INCOME ................................................... 3.41 2.48 2.07 2.21
AVERAGE NUMBER OF SHARES ..................................... 125,758 125,584 125,478 126,238
FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN .................................. 2.43 2.15 1.87 2.14
REALIZED GAIN ................................................ .94 .31 .18 .05
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... .02 - - -
NET INCOME ................................................... 3.39 2.46 2.05 2.19
AVERAGE NUMBER OF SHARES ..................................... 126,466 126,478 126,510 126,932
DIVIDENDS PAID ................................................... .86 .78 .71 .64
MARKET PRICE:
HIGH ......................................................... 33 1/4 29 9/16 24 3/8 21 1/16
LOW .......................................................... 27 21 3/16 15 5/8 12 11/16
CLOSE ........................................................ 27 1/2 28 5/8 24 3/8 16 7/16
STOCKHOLDERS' EQUITY:
BOOK VALUE ................................................... 22.04 19.49 17.70 15.75
WITH SECURITIES AT MARKET VALUE, NET OF TAX .................. 28.47 23.92 21.92 16.57
REVENUES FROM CONTINUING OPERATIONS
(EXCLUDING REALIZED GAINS)
INSURANCE:
PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............... $2,134,512 $1,937,090 $1,830,199 $1,792,836
LIFE AND HEALTH .............................................. 305,963 328,516 332,711 311,961
NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS):
PROPERTY AND CASUALTY ........................................ 277,643 280,820 286,073 283,248
LIFE AND HEALTH .............................................. 668,158 623,584 557,445 476,177
OTHER ........................................................ 5,994 (1,356) 3,249 5,348
REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................... 78,252 187,172 274,387 254,718
CREDIT (INCLUDING AFFILIATE LOANS) ............................... 54,046 51,327 54,371 45,193
ASSET MANAGEMENT ................................................. 13,250 13,057 10,794 9,009
TALBOT FINANCIAL ................................................. - - -
-----------------------------------------------------------
TOTAL ..................................................... $3,537,818 $3,420,210 $3,349,229 $3,178,490
===========================================================
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUMMARY OF CONTINUING OPERATIONS
INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN:
PROPERTY AND CASUALTY ........................................ $ 188,928 $ 191,443 $ 175,093 $ 99,098
LIFE AND HEALTH .............................................. 70,911 44,714 33,944 48,511
REAL ESTATE .................................................. 669 (8,142) (7,420) 2,756
CREDIT ....................................................... 4,009 3,509 2,420 3,305
ASSET MANAGEMENT ............................................. 2,545 2,021 1,493 615
CORPORATE .................................................... (3,346) 1,304 4,772 3,633
-----------------------------------------------------------
TOTAL ..................................................... 263,716 234,849 210,302 157,918
REALIZED GAIN, NET OF INCOME TAXES ............................... 36,501 33,786 42,708 66,037
CUMULATIVE EFFECT OF ACCOUNTING CHANGES .......................... - - - -
-----------------------------------------------------------
NET INCOME ....................................................... $ 300,217 $ 268,635 $ 253,010 $ 223,955
===========================================================
STATISTICS PER SHARE OF COMMON STOCK*
PRIMARY NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN .................................. $ 2.09 $ 1.79 $ 1.56 $ 1.17
REALIZED GAIN ................................................ .29 .26 .32 .49
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... - - - -
NET INCOME ................................................... 2.38 2.05 1.88 1.66
AVERAGE NUMBER OF SHARES ..................................... 126,384 130,900 134,930 134,804
FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS:
INCOME BEFORE REALIZED GAIN .................................. 2.07 1.79 1.55 1.16
REALIZED GAIN ................................................ .29 .25 .31 .49
CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... - - - -
NET INCOME ................................................... 2.36 2.04 1.86 1.65
AVERAGE NUMBER OF SHARES ..................................... 127,444 131,512 135,968 136,112
DIVIDENDS PAID ................................................... .57 .51 .45 1/4 .41 1/4
MARKET PRICE:
HIGH ......................................................... 19 5/8 14 3/4 19 15 15/16
LOW .......................................................... 11 5/8 11 1/2 12 5/16 11 3/8
CLOSE ........................................................ 17 13/16 11 13/16 13 7/8 13 1/4
STOCKHOLDERS' EQUITY:
BOOK VALUE ................................................... 14.63 12.44 10.69 9.84
WITH SECURITIES AT MARKET VALUE, NET OF TAX .................. 16.57 13.54 11.44 12.61
REVENUES FROM CONTINUING OPERATIONS
(EXCLUDING REALIZED GAINS)
INSURANCE:
PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............... $1,696,940 $1,627,861 $1,545,922 $1,479,533
LIFE AND HEALTH .............................................. 274,275 264,974 240,423 232,667
NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS):
PROPERTY AND CASUALTY ........................................ 263,415 220,496 179,837 151,959
LIFE AND HEALTH .............................................. 391,876 296,233 233,837 189,363
OTHER ........................................................ 14,670 20,245 22,573 20,833
REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................... 246,216 223,190 195,900 216,082
CREDIT (INCLUDING AFFILIATE LOANS) ............................... 38,665 34,290 30,767 30,414
ASSET MANAGEMENT ................................................. 8,322 7,166 6,708 4,087
TALBOT FINANCIAL ................................................. - - - -
-----------------------------------------------------------
TOTAL ..................................................... $2,934,379 $2,694,455 $2,455,967 $2,324,938
===========================================================
</TABLE>
71
<PAGE> 46
SUMMARY OF GROWTH (CONTINUED)
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In Thousands Except Ratios)
<S> <C> <C> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
PERSONAL AUTO ............................................................... $ 1,086,961 $ 1,043,586 $ 1,013,445
HOMEOWNERS .................................................................. 469,154 440,247 403,673
OTHER PERSONAL .............................................................. 169,973 163,055 144,624
--------------------------------------------
TOTAL PERSONAL ....................................................... 1,726,088 1,646,888 1,561,742
COMMERCIAL .................................................................. 607,303 588,064 591,857
SURETY ...................................................................... 103,162 100,052 90,246
OTHER ....................................................................... 26,948 31,852 34,200
TOTAL CANADA ................................................................ - - -
--------------------------------------------
GROSS PREMIUMS WRITTEN ...................................................... 2,463,501 2,366,856 2,278,045
CEDED REINSURANCE PREMIUMS .................................................. 150,428 159,872 174,580
--------------------------------------------
NET PREMIUMS WRITTEN ........................................................ $ 2,313,073 $ 2,206,984 $ 2,103,465
============================================
OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE
RATIOS TO EARNED PREMIUMS:
LOSSES .................................................................. 59.09% 60.04% 64.70%
ADJUSTMENT EXPENSE ...................................................... 10.37 10.58 9.72
UNDERWRITING EXPENSES ................................................... 28.14 28.39 28.24
DIVIDENDS TO POLICYHOLDERS .............................................. .71 .70 1.11
--------------------------------------------
COMBINED LOSSES AND EXPENSES ............................................ 98.31% 99.71% 103.77%
============================================
PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS .................................. 1.1:1 1.2:1 1.4:1
PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE REALIZED GAIN
PROPERTY AND CASUALTY:
UNDERWRITING ............................................................ $ 38,456 $ 6,348 $ (77,345)
INVESTMENT .............................................................. 281,580 291,450 283,481
PROPOSITION 103 SETTLEMENT .............................................. - - -
LIFE AND HEALTH ............................................................. 136,681 135,573 131,015
REAL ESTATE ................................................................. 13,052 9,060 10,152
CREDIT ...................................................................... 19,081 13,300 10,761
ASSET MANAGEMENT ............................................................ 7,610 6,897 6,351
CORPORATE ................................................................... (8,049) (13,099) (13,714)
--------------------------------------------
TOTAL ................................................................ $ 488,411 $ 449,529 $ 350,701
============================================
STOCKHOLDERS' EQUITY
BOOK VALUE .................................................................. $ 4,115,340 $ 3,982,646 $ 2,829,479
WITH SECURITIES AT MARKET VALUE, NET OF TAX ................................. 4,233,432 4,206,244 2,761,344
LONG-TERM DEBT FROM CONTINUING OPERATIONS ................................... 453,860 503,567 534,232
TOTAL ASSETS ................................................................ 19,917,673 18,767,843 15,901,729
</TABLE>
72
<PAGE> 47
<TABLE>
<CAPTION>
1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
PERSONAL AUTO ................................................... $ 977,105 $ 907,016 $ 805,826 $ 717,584
HOMEOWNERS ...................................................... 362,419 310,841 271,531 239,550
OTHER PERSONAL .................................................. 126,353 109,063 92,628 82,642
-------------------------------------------------------------
TOTAL PERSONAL ........................................... 1,465,877 1,326,920 1,169,985 1,039,776
COMMERCIAL ...................................................... 544,162 491,942 450,744 464,328
SURETY .......................................................... 84,245 79,714 79,077 75,927
OTHER ........................................................... 40,228 38,478 47,507 39,128
TOTAL CANADA .................................................... - 36 82,886 173,677
-------------------------------------------------------------
GROSS PREMIUMS WRITTEN .......................................... 2,134,512 1,937,090 1,830,199 1,792,836
CEDED REINSURANCE PREMIUMS ...................................... 134,347 116,645 200,489 104,804
-------------------------------------------------------------
NET PREMIUMS WRITTEN ............................................ $ 2,000,165 $ 1,820,445 $1,629,710 $ 1,688,032
=============================================================
OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE
RATIOS TO EARNED PREMIUMS:
LOSSES ...................................................... 60.21% 63.93% 67.81% 65.50%
ADJUSTMENT EXPENSE .......................................... 9.78 10.55 10.72 11.67
UNDERWRITING EXPENSES ....................................... 28.43 28.72 29.33 29.24
DIVIDENDS TO POLICYHOLDERS .................................. 1.07 .91 .76 .75
-------------------------------------------------------------
COMBINED LOSSES AND EXPENSES ................................ 99.49% 104.11% 108.62% 107.16%
=============================================================
PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS ...................... 1.3:1 1.3:1 1.4:1 1.6:1
PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE REALIZED GAIN
PROPERTY AND CASUALTY:
UNDERWRITING ................................................ $ 9,848 $ (72,022) $ (141,121) $ (119,173)
INVESTMENT .................................................. 277,643 280,820 286,073 283,248
PROPOSITION 103 SETTLEMENT .................................. (40,000) - - -
LIFE AND HEALTH ................................................. 125,306 123,604 124,109 118,486
REAL ESTATE ..................................................... 10,079 8,389 8,525 9,123
CREDIT .......................................................... 10,190 9,036 9,489 6,815
ASSET MANAGEMENT ................................................ 6,539 6,503 5,179 4,586
CORPORATE ....................................................... (10,317) (13,662) (9,625) (8,799)
-------------------------------------------------------------
TOTAL .................................................... $ 389,288 $ 342,668 $ 282,629 $ 294,286
=============================================================
STOCKHOLDERS' EQUITY
BOOK VALUE ...................................................... $ 2,774,391 $ 2,448,147 $2,221,134 $ 1,975,699
WITH SECURITIES AT MARKET VALUE, NET OF TAX ..................... 3,583,482 3,005,382 2,750,453 2,078,670
LONG-TERM DEBT FROM CONTINUING OPERATIONS ....................... 600,209 504,638 523,557 451,328
TOTAL ASSETS .................................................... 14,807,291 13,391,109 12,113,944 10,683,462
</TABLE>
<TABLE>
<CAPTION>
1989 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
PERSONAL AUTO ................................................... $ 644,765 $ 595,969 $ 549,267 $ 519,473
HOMEOWNERS ...................................................... 222,539 219,042 214,102 207,097
OTHER PERSONAL .................................................. 74,060 71,115 68,086 64,646
--------------------------------------------------------
TOTAL PERSONAL ........................................... 941,364 886,126 831,455 791,216
COMMERCIAL ...................................................... 480,633 483,918 463,823 448,872
SURETY .......................................................... 77,195 69,817 62,472 60,594
OTHER ........................................................... 38,885 35,163 31,949 26,968
TOTAL CANADA .................................................... 158,863 152,837 156,223 151,883
--------------------------------------------------------
GROSS PREMIUMS WRITTEN .......................................... 1,696,940 1,627,861 1,545,922 1,479,533
CEDED REINSURANCE PREMIUMS ...................................... 101,428 109,921 108,177 108,751
--------------------------------------------------------
NET PREMIUMS WRITTEN ............................................ $1,595,512 $1,517,940 $1,437,745 $1,370,782
========================================================
OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE
RATIOS TO EARNED PREMIUMS:
LOSSES ...................................................... 63.13% 58.05% 56.58% 61.88%
ADJUSTMENT EXPENSE .......................................... 9.99 11.94 13.84 13.25
UNDERWRITING EXPENSES ....................................... 29.31 29.38 30.25 30.25
DIVIDENDS TO POLICYHOLDERS .................................. .88 .97 .72 .65
--------------------------------------------------------
COMBINED LOSSES AND EXPENSES ................................ 103.31% 100.34% 101.39% 106.03%
========================================================
PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS ...................... 1.5:1 1.8:1 2.1:1 2.2:1
PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE REALIZED GAIN
PROPERTY AND CASUALTY:
UNDERWRITING ................................................ $ (52,243) $ (5,084) $ (19,698) $ (77,568)
INVESTMENT .................................................. 263,415 220,496 179,837 151,959
PROPOSITION 103 SETTLEMENT .................................. - - - -
LIFE AND HEALTH ................................................. 106,906 67,967 56,316 76,704
REAL ESTATE ..................................................... 884 (12,494) (10,805) 6,020
CREDIT .......................................................... 6,031 5,050 3,341 4,637
ASSET MANAGEMENT ................................................ 3,881 3,081 2,518 1,178
CORPORATE ....................................................... (8,793) (2,371) (304) (2,672)
--------------------------------------------------------
TOTAL .................................................... $ 320,081 $ 276,645 $ 211,205 $ 160,258
========================================================
STOCKHOLDERS' EQUITY
BOOK VALUE ...................................................... $1,850,728 $1,570,383 $1,435,418 $1,328,215
WITH SECURITIES AT MARKET VALUE, NET OF TAX ..................... 2,096,028 1,709,729 1,535,092 1,701,853
LONG-TERM DEBT FROM CONTINUING OPERATIONS ....................... 512,859 540,996 539,825 538,081
TOTAL ASSETS .................................................... 9,415,865 7,869,181 6,738,785 5,876,072
</TABLE>
73
<PAGE> 1
SAFECO Corporation Organization Chart F-15
Exhibit 21
December 31, 1996
SAFECO CORPORATION (Washington)
(ownership percentages are 100%, except where indicated)
1. SAFECO Insurance Company of America (WA)
A. SAFECO Management Corporation (NY)
B. SAFECO Surplus Lines Insurance Company (WA)
2. General Insurance Company of America (WA)
3. First National Insurance Company of America (WA)
4. SAFECO National Insurance Company (MO)
5. SAFECO Insurance Company of Illinois (IL)
6. SAFECO Life Insurance Company (WA)
A. SAFECO National Life Insurance Company (WA)
B. First SAFECO National Life Insurance Company
of New York (NY)
7. SAFECO Assigned Benefits Service Company (WA)
8. SAFECO Administrative Services, Inc. (WA)
A. Employee Benefit Claims of Wisconsin, Inc. (WI)
B. Wisconsin Pension and Group Services, Inc. (WI)
9. SAFECO Properties, Inc. (WA)
A. Winmar Company, Inc. (WA)
a) C-W Properties, Inc. (WA)
b) Capitol Court Corporation (WI)
c) Gem State Investors, Inc. (WA)
<PAGE> 2
d) Kitsap Mall, Inc. (WA)
e) SAFECO Properties of Boise, Inc.
(ID)
f) SCIT, Inc. (MA)
g) Valley Fair Shopping Centers,
Inc. (DE)
h) WDI Golf Club, Inc. (CA)
i) WNY Development, Inc. (WA)
j) Winmar Bighorn, Inc. (WA)
k) Winmar Cascade, Inc. (WA)
l) Winmar Metro, Inc. (WA)
m) Winmar Northwest, Inc. (WA)
n) Winmar Oregon, Inc. (OR)
i) North Coast
Management, Inc. (OR)
ii) Pacific Surfside Corp. (OR)
iii) Washington Square, Inc. (WA)
iv) Winmar of Jantzen Beach, Inc. (OR)
v) Winmar Pacific, Inc. (WA)
vi) W-P Development, Inc. (OR)
o) Winmar Redmond, Inc. (WA)
p) Winmar of Kitsap, Inc. (WA)
q) Winmar of Texas, Inc. (TX)
r) Winmar of the Desert, Inc. (CA)
B. SAFECARE Company, Inc. (WA)
a) RIA Development, Inc. (WA)
b) S.C. Bakersfield, Inc. (WA)
c) S.C. Bellevue, Inc. (WA)
d) S.C. Everett, Inc. (WA)
e) S.C. Lynden, Inc. (WA)
f) S.C. Marysville, Inc. (WA)
g) S.C. Northgate, Inc. (WA)
h) S.C. Vancouver, Inc. (WA)
i) Lifeguard Ventures, Inc. (50%) (CA)
10. SAFECO Credit Company, Inc. (WA)
11. SAFECO Asset Management Company (WA)
12. SAFECO Securities, Inc. (WA)
13. SAFECO Services Corporation (WA)
14. SAFECO Trust Company (WA)
<PAGE> 3
15. General America Corporation (WA)
A. COMAV Managers, Inc (IL)
B. F.B. Beattie & Co., Inc. (WA)
a) F.B. Beattie Insurance Services, Inc. (CA)
C. General America Corporation of Texas (TX) -
(Attorney-in-fact) for:
a) SAFECO Lloyds Insurance Company (TX)
D. Goldware & Taylor Insurance Services (CA)
E. Talbot Financial Corporation (WA)
a) Talbot Agency, Inc. (NM)
i) Boney Moore and Talbot, Inc. (NM)
ii) Glacier Insurance, Inc. (MT)
iii) J. Dorr Forbes, Inc. (WA)
iv) Hemet Insurance Service (CA)
v) Newport Financial Corporation (IL)
vi) PNMR Securities Inc. (WA)
vii) Talbot Agency of California, Inc. (CA)
viii) Talbot Agency of Texas, Inc. (TX)
ix) Talbot Financial Services of Hawaii,
Inc. (HI)
x) Tandy & Wood, Inc. (ID)
F. SAFECO Select Insurance Services, Inc. (CA)
NOTE: Certain inactive companies are not shown.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION 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> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 11,936,243
<DEBT-CARRYING-VALUE> 2,488,324
<DEBT-MARKET-VALUE> 2,670,004
<EQUITIES> 1,298,809
<MORTGAGE> 447,988
<REAL-ESTATE> 554,011
<TOTAL-INVEST> 16,889,455
<CASH> 55,498
<RECOVER-REINSURE> 137,484
<DEFERRED-ACQUISITION> 396,107
<TOTAL-ASSETS> 19,917,673
<POLICY-LOSSES> 2,088,226
<UNEARNED-PREMIUMS> 946,899
<POLICY-OTHER> 149,624
<POLICY-HOLDER-FUNDS> 9,792,730
<NOTES-PAYABLE> 1,233,494
0
0
<COMMON> 225,276
<OTHER-SE> 3,890,064
<TOTAL-LIABILITY-AND-EQUITY> 19,917,673
2,541,288
<INVESTMENT-INCOME> 1,116,734
<INVESTMENT-GAINS> 90,050
<OTHER-INCOME> 217,297
<BENEFITS> 2,362,722
<UNDERWRITING-AMORTIZATION> 426,862
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 578,461
<INCOME-TAX> 139,510
<INCOME-CONTINUING> 438,951
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 438,951
<EPS-PRIMARY> 3.48
<EPS-DILUTED> 0
<RESERVE-OPEN> 2,070,077
<PROVISION-CURRENT> 1,658,253
<PROVISION-PRIOR> (77,744)
<PAYMENTS-CURRENT> 939,561
<PAYMENTS-PRIOR> 755,367
<RESERVE-CLOSE> 1,955,658
<CUMULATIVE-DEFICIENCY> (77,744)
</TABLE>
