<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1999.
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)
131,528,092 shares of no par value common stock were outstanding
at June 30, 1999.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
<PAGE> 2
SAFECO CORPORATION
- - --------------------------------------------------------------------------------
TABLE OF CONTENTS AND SIGNATURES
<TABLE>
<CAPTION>
Part I - Financial Information * Page
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet,
June 30, 1999 and December 31, 1998 3
Statement of Consolidated Income and Retained Earnings
for the Quarters and Six Months Ended June 30, 1999 and 1998 5
Statement of Consolidated Cash Flows
for Six Months Ended June 30, 1999 and 1998 6
Statement of Consolidated Comprehensive Income
for the Quarters and Six Months Ended June 30, 1999 and 1998 7
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
* The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation of results
for the interim periods have been included. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Corporation's Form 10-K for the
year ended December 31, 1998 which has been previously filed with the
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFECO CORPORATION
--------------------------------------
Registrant
ROD A. PIERSON
--------------------------------------
Rod A. Pierson
Senior Vice President
Dated August 13, 1999 and Chief Financial Officer
H. PAUL LOWBER
--------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated August 13, 1999 and Chief Accounting Officer
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<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1999 1998
--------- -----------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1999 - $17,166.8; 1998 -$16,679.7) $17,439.5 $17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1999 - $2,939.8; 1998 - $3,259.2) 2,725.0 2,720.9
Marketable Equity Securities, at Market Value
(Cost: 1999 - $959.6; 1998 - $952.8) 2,146.9 2,036.6
Mortgage Loans 700.9 541.5
Real Estate (At cost less accumulated depreciation) 229.2 601.2
Policy Loans 88.1 88.3
Short-Term Investments 170.7 315.9
--------- ---------
Total Investments 23,500.3 24,160.0
Cash 149.0 74.9
Accrued Investment Income 322.8 323.2
Finance Receivables
(Less unearned finance charges and allowance for doubtful accounts) 1,344.8 1,207.7
Premiums and Other Service Fees Receivable 1,048.4 978.3
Other Notes and Accounts Receivable 134.9 155.2
Reinsurance Recoverables 388.1 317.4
Deferred Policy Acquisition Costs 572.9 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 309.6 280.2
Goodwill 1,334.0 1,359.0
Other Assets 408.1 313.6
Separate Account Assets 1,320.2 1,201.1
--------- ---------
TOTAL $30,833.1 $30,891.7
========= =========
</TABLE>
(continued)
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<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions) (continued)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
--------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,287.2 $ 4,262.7
Life Policy Liabilities 279.7 276.8
Unearned Premiums 1,851.3 1,750.9
Funds Held Under Deposit Contracts 13,197.0 12,718.1
Debt:
Commercial Paper 656.2 732.7
Credit Company Borrowings ($1,224.9 maturing within one year) 1,249.4 1,255.2
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($7.2 maturing within one year) 79.8 227.7
Other Liabilities 1,498.4 1,153.5
Income Taxes:
Current 9.7 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities: 1999 - $505.8; 1998 - $769.9) 193.4 492.6
Separate Account Liabilities 1,320.2 1,201.1
--------- ---------
Total Liabilities 25,022.3 24,473.8
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 842.3 842.1
--------- ---------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options: (1999 - 7.3; 1998 - 7.5)
Shares Issued and Outstanding: (1999 - 131.5; 1998 - 136.3) 857.7 885.0
Retained Earnings 3,167.3 3,257.2
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 943.5 1,433.6
--------- ---------
Total Shareholders' Equity 4,968.5 5,575.8
--------- ---------
TOTAL $30,833.1 $30,891.7
========= =========
</TABLE>
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<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------ ------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 2,147.7 $ 2,075.9 $ 1,083.3 $ 1,046.5
Life Premiums and Other Revenues 177.0 176.5 90.4 89.7
--------- --------- --------- ---------
Total 2,324.7 2,252.4 1,173.7 1,136.2
Real Estate -- 39.1 -- 18.6
Credit 54.1 47.4 27.1 24.0
Asset Management 21.3 17.6 11.1 9.2
Other 61.0 30.2 28.8 15.4
Net Investment Income 785.2 754.2 395.6 379.7
Realized Investment Gain 86.3 44.9 30.0 17.0
--------- --------- --------- ---------
Total 3,332.6 3,185.8 1,666.3 1,600.1
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 2,137.4 2,054.5 1,094.0 1,066.8
Commissions 395.8 385.7 202.9 200.3
Personnel Costs 232.1 220.5 108.5 113.3
Interest 67.1 77.7 33.3 38.7
Goodwill Amortization 27.3 26.5 13.8 13.3
Other 223.0 213.6 122.1 103.9
Amortization of Deferred Policy Acquisition Costs 420.8 387.1 219.2 186.0
Deferral of Policy Acquisition Costs (428.3) (418.2) (222.0) (207.9)
--------- --------- --------- ---------
Total 3,075.2 2,947.4 1,571.8 1,514.4
--------- --------- --------- ---------
Income before Income Taxes 257.4 238.4 94.5 85.7
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current 78.9 76.7 45.8 47.0
Deferred (35.5) (41.5) (35.6) (41.7)
--------- --------- --------- ---------
Total 43.4 35.2 10.2 5.3
--------- --------- --------- ---------
Income before Distributions on Capital Securities 214.0 203.2 84.3 80.4
Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2)
--------- --------- --------- ---------
Net Income 191.6 180.8 73.1 69.2
Retained Earnings, Beginning of Period 3,257.2 3,299.1 3,326.6 3,361.3
Amortization of Underwriting Compensation on Capital Securities (0.2) (0.2) (0.1) (0.1)
Dividends Declared (96.4) (94.6) (48.7) (49.4)
Common Stock Reacquired (184.9) (4.6) (183.6) (0.5)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 3,167.3 $ 3,380.5 $ 3,167.3 $ 3,380.5
========= ========= ========= =========
Net Income Per Share of Common Stock:
Diluted $ 1.41 $ 1.28 $ 0.54 $ 0.49
========= ========= ========= =========
Basic $ 1.42 $ 1.28 $ 0.55 $ 0.49
========= ========= ========= =========
Dividends Paid to Common Shareholders $ 0.70 $ 0.64 $ 0.35 $ 0.32
========= ========= ========= =========
Average Number of Shares Outstanding During the Period:
Diluted 135.6 141.8 134.5 141.8
========= ========= ========= =========
Basic 135.2 141.2 134.1 141.2
========= ========= ========= =========
</TABLE>
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<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30
------------------------
1999 1998**
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $2,297.1 $2,218.0
Dividends and Interest Received 806.9 727.3
Other Operating Receipts 131.7 121.1
Insurance Claims and Policy Benefits Paid (1,825.4) (1,744.9)
Underwriting, Acquisition and Insurance Operating Costs Paid (700.4) (727.0)
Interest Paid and Distributions on Capital Securities (116.4) (109.0)
Other Operating Costs Paid (76.8) (61.4)
Income Taxes Paid (58.6) (60.0)
-------- --------
Net Cash Provided by Operating Activities 458.1 364.1
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,642.5) (2,702.1)
Fixed Maturities Held-to-Maturity -- (0.9)
Equities (97.7) (86.7)
Other Investments (251.7) (100.3)
Maturities of Fixed Maturities Available-for-Sale 624.9 548.9
Maturities of Fixed Maturities Held-to-Maturity 1.4 3.2
Sales of:
Fixed Maturities Available-for-Sale 1,633.6 1,673.9
Fixed Maturities Held-to-Maturity* 6.3 18.2
Equities 123.1 134.5
Other Investments 592.2 86.7
Net Increase in Short-Term Investments (18.3) (63.1)
Finance Receivables Originated or Acquired (340.1) (252.3)
Principal Payments Received on Finance Receivables 208.2 196.7
Other (159.5) (138.7)
-------- --------
Net Cash Used in Investing Activities (320.1) (682.0)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,069.2 628.0
Return of Funds Held Under Deposit Contracts (533.7) (572.2)
Proceeds from Notes and Mortgage Borrowings -- 20.0
Repayment of Notes and Mortgage Borrowings (152.1) (13.9)
Net (Repayment of) Proceeds from Short-Term Borrowings (17.1) 45.1
Common Stock Reacquired (216.8) (5.3)
Dividends Paid to Shareholders (95.4) (90.4)
Other (118.0) (28.4)
-------- --------
Net Cash Used in Financing Activities (63.9) (17.1)
-------- --------
Net Increase (Decrease) in Cash 74.1 (335.0)
Cash at the Beginning of Period 74.9 391.4
-------- --------
Cash at the End of Period $ 149.0 $ 56.4
======== ========
</TABLE>
* The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
**Certain amounts have been reclassified to conform to the current year
presentation.
(continued)
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<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions) (continued)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
1999 1998**
------- -------
<S> <C> <C>
Net Income $ 191.6 $ 180.8
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (86.3) (44.9)
Amortization and Depreciation 74.4 78.0
Amortization of Fixed Maturity Investments (24.8) (19.3)
Deferred Income Tax Expense (35.5) (41.5)
Interest Expense on Deposit Contracts 294.7 253.2
Other Adjustments (18.7) 12.2
Changes in:
Losses and Adjustment Expense 24.5 (10.3)
Life Policy Liabilities 2.9 16.8
Unearned Premiums 100.4 68.7
Accrued Income Taxes 7.2 3.3
Accrued Interest on Accrual Bonds (23.2) (26.1)
Accrued Investment Income 0.4 (16.7)
Deferred Policy Acquisition Costs (7.3) (30.3)
Other Assets and Liabilities (42.2) (59.8)
------- -------
Total Adjustments 266.5 183.3
------- -------
Net Cash Provided by Operating Activities $ 458.1 $ 364.1
======= =======
</TABLE>
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------ -------------------
1999 1998 1999 1998
------ ------ ------ -------
<S> <C> <C> <C> <C>
Net Income $191.6 $180.8 $ 73.1 $ 69.2
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities (490.1) 121.5 (275.5) 33.9
------ ------ ------ ------
Comprehensive Income (Loss) $(298.5) $302.3 $(202.4) $103.1
====== ====== ====== ======
</TABLE>
**Certain amounts have been reclassified to conform to the current year
presentation.
-7-
<PAGE> 8
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first six months of 1999 was $191.6 million or $1.41 per
diluted share, compared with $1.28 per share for the same period in 1998. If we
exclude realized gain from investments, our income was $1.00 per diluted share,
compared with $1.07 per share in 1998.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
1999 1998 1999 1998
- - -------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C> <C>
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Loss ............................ $(113.3) $ (75.3) $ (77.0) $ (64.4)
Net Investment Income ........................ 230.0 240.5 115.7 122.4
Goodwill Amortization ........................ (21.8) (21.4) (11.0) (10.7)
------- ------- ------- -------
Total Property and Casualty ................ 94.9 143.8 27.7 47.3
Life ........................................... 83.3 65.4 38.6 29.0
Credit ......................................... 11.0 11.2 5.7 5.7
Asset Management ............................... 5.8 3.1 3.3 1.1
Corporate ...................................... (23.9) (30.0) (10.8) (14.4)
------- ------- ------- -------
Total ...................................... 171.1 193.5 64.5 68.7
Realized Investment Gain before Tax .............. 86.3 44.9 30.0 17.0
------- ------- ------- -------
Income before Income Taxes ....................... 257.4 238.4 94.5 85.7
Provision (Benefit) for Income Taxes on:
Income before Realized Gain .................... 13.3 19.7 0.1 (0.7)
Realized Investment Gain ....................... 30.1 15.5 10.1 6.0
------- ------- ------- -------
Total ...................................... 43.4 35.2 10.2 5.3
------- ------- ------- -------
Income before Distributions on
Capital Securities ............................. 214.0 203.2 84.3 80.4
Distributions on Capital Securities, Net of Tax .. (22.4) (22.4) (11.2) (11.2)
------- ------- ------- -------
Net Income ....................................... $ 191.6 $ 180.8 $ 73.1 $ 69.2
======= ======= ======= =======
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain .................... $ 1.00 $ 1.07 $ .40 $ .41
Realized Gain .................................. .41 .21 .14 .08
------- ------- ------- -------
Net Income ....................................... $ 1.41 $ 1.28 $ .54 $ .49
======= ======= ======= =======
Dividends Paid to Common Shareholders ............ $ .70 $ .64 $ .35 $ .32
</TABLE>
-8-
<PAGE> 9
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Property and Casualty Insurance
Property and casualty operations for the first six months of 1999 produced
pretax income of $94.9 million before realized gain from investments, compared
with $143.8 million a year ago. These operations had an underwriting loss of
$113.3 million for the first half of 1999, compared with an underwriting loss of
$75.3 million for the same period last year. The second quarter underwriting
loss was $77.0 million, compared with an underwriting loss of $36.3 million in
the first quarter of 1999 and a loss of $64.4 million for the second quarter
last year. Catastrophe losses were $72 million for the first six months of 1999
and $34 million for the second quarter, compared with $105 million for the first
six months last year. Underwriting results by major business line for the first
six months and the second quarter of 1999 and 1998 are stated in the chart
below. The combined loss and expense ratio was 105.3 for the first six months
and 107.1 for the second quarter only. This compares with 103.6 for the first
six months last year and 106.1 for the second quarter a year ago. Investment
income was $230 million, down 4% from a year ago primarily due to providing
funding for our stock repurchase program.
Underwriting Results (In Millions)
<TABLE>
<CAPTION>
Six Months Second Quarter
-------------------- --------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Personal Lines:
Personal auto $ 0.5 $ 15.0 $ (5.5) $ 12.2
Homeowners (34.6) (38.7) (15.9) (41.1)
Other personal lines 7.8 6.3 3.5 4.1
Commercial Lines:
American States Business Insurance (85.3) (51.1) (54.4) (34.6)
SAFECO Commercial (13.6) (19.5) (11.7) (9.6)
Surety 12.4 11.0 6.4 4.1
Other (0.5) 1.7 0.6 0.5
------- ------- ------- -------
Total $(113.3) $ (75.3) $ (77.0) $ (64.4)
======= ======= ======= =======
</TABLE>
Personal auto, our largest line, reported an underwriting profit of $0.5 million
for the first six months, compared with a profit of $15.0 million for the first
six months last year. Our auto rates have decreased by about 2% in the aggregate
as price competition has intensified throughout the industry. Average loss costs
increased modestly during the first six months of 1999. The number of automobile
policies inforce at the end of June was one percent higher than a year ago.
Homeowners had an underwriting loss of $34.6 million for the first six months,
compared with a loss of $38.7 million for the first six months of 1998.
Catastrophe losses for this line were $37 million for the first six months of
1999, compared with $54 million for the first six months last year. Non-weather
related losses for the first half of 1999 were $17 million higher than a year
ago.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats, produced an underwriting profit of $7.8 million for the
first six months, compared with a profit of $6.3 million for the same period
last year.
American States Business Insurance (ASBI), which is focused on small-to-medium
sized businesses, produced an underwriting loss of $85.3 million in the first
six months (combined ratio of 117.8), compared with a loss of $51.1 million for
the same period last year (combined ratio of 111.2). The current year results
reflect an unusual number of large losses during the second quarter. In
addition, weak commercial auto results and adverse weather experience continue
to affect results for this business. We are working on several initiatives to
improve results in this line.
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<PAGE> 10
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
SAFECO Commercial reported an underwriting loss of $13.6 million for the first
six months (combined ratio of 104.1), compared with a loss of $19.5 million for
the first six months last year (combined ratio of 106.2). Intense price
competition, particularly for workers' compensation, continues to impact these
results.
Surety produced a profit of $12.4 million for the first six months of 1999,
compared with a profit of $11.0 million for the first six months last year.
Premiums written during the first six months increased 4% over a year ago, with
personal lines down less than one percent, American States Business Insurance up
14%, and SAFECO Commercial up 5%.
During 1999, we will complete the process of cross-licensing and training agents
in both SAFECO and American States products. As this transition progressed we
have not taken any significant price increases in order to facilitate a smooth
transition. Now that we are nearing completion of this process, we are pursuing
modest price increases in many of the major product lines of all enterprises in
order to improve our underwriting results.
Life Insurance
Our life insurance operations produced a pretax profit, before realized gain
from investments, of $83.3 million for the first six months of 1999. This
compares with $65.4 million reported for the first six months of 1998. The
second quarter profit of $38.6 million compares with $29.0 million reported for
the second quarter of 1998.
Earnings for the annuity lines were $44.6 million, compared with the $25.3
million reported for the first half of 1998. The second quarter gain of $22.4
million is significantly up from the $9.0 million reported in the same quarter
last year. Growth in our structured settlement and variable annuity products are
major contributing factors in the higher earnings. These results include losses
from the equity-indexed annuity line of $4.8 million for the first half of 1999,
a significant improvement compared with $13.9 million a year ago. Annuity assets
now total $12.8 billion, up from $12.1 billion at the end of the first half of
1998.
Group insurance experienced a loss of $11.6 million for the first half of 1999,
compared with a loss of $2.1 million for the same period last year. The second
quarter loss of $8.7 million compares with a loss of $700,000 reported for the
second quarter of last year. After starting to see improvements in claims for
excess loss medical coverages during the first quarter of 1999, loss experience
deteriorated in the second quarter, particularly for the cost of
pharmaceuticals. To correct this downturn, additional underwriting and pricing
actions were taken in mid-June.
Individual life earnings were $12.9 million, compared with $4.7 million for the
same period last year. This increase is due to improved claims experience and
lower expenses in the traditional life line of business.
-10-
<PAGE> 11
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Credit
SAFECO Credit Company produced a pretax profit of $11.0 million for the first
six months of 1999, compared with $11.2 million in 1998. New loans and leases
funded during the six months were a record $348 million versus $258 million in
the comparable period for 1998, reflecting a 35% increase. The $108 million
funded in June was a historical high. Non-affiliate receivables and operating
leases were $1.5 billion, representing a 20% annualized increase from December
31, 1998. Loans and leases to insurance agents, agency premium financing and
agent referral business continue to be a valuable source of new business. Our
delinquency experience and write-offs continue to be at satisfactorily low
rates.
SAFECO Credit's summarized financial information is as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-------- --------
<S> <C> <C>
Finance Receivables $1,344.8 $1,207.7
Other Assets 237.4 320.6
-------- --------
Total Assets $1,582.2 $1,528.3
======== ========
Credit Company Borrowings $1,249.4 $1,255.2
Other Liabilities 199.0 144.6
-------- --------
Total Liabilities $1,448.4 $1,399.8
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
-------- --------
<S> <C> <C>
Revenues $ 57.3 $ 52.8
Expenses 46.3 41.6
-------- --------
Income before Income Taxes 11.0 11.2
Provision for Income Taxes 3.9 4.1
-------- --------
Net Income $ 7.1 $ 7.1
======== ========
</TABLE>
Asset Management
The pretax profit from asset management activities for the first six months of
1999 was a record $5.8 million, up from $3.1 million in 1998, an increase of
87%. Our operating profit (excluding gains and interest income) was also a
record $5.0 million, compared to $2.1 million last year, a 139% increase. Higher
fee revenue and reductions of one-time costs were the main reasons for the
improved earnings. Assets under management totaled $7.1 billion at June 30,
1999, up slightly from $7.0 billion one year ago.
-11-
<PAGE> 12
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Sale of SAFECO Properties
The realized investment gain for the first six months of 1999 of $86 million
includes $30 million of gains from the sale of real estate. This primarily
relates to the sale of the majority of SAFECO Properties' assets to The Macerich
Partnership, L.P. and the Ontario Teachers' Pension Plan Board, of which the
largest portion closed in February 1999.
The sales are the reason for the decline in Investment Real Estate and Other
Debt in the Consolidated Balance Sheet and the increase in Sales of Other
Investments and the increases in Repayment of Notes and Mortgage Borrowings in
the Statement of Consolidated Cash Flows. In the Statement of Consolidated
Income and Retained Earnings, revenues for SAFECO Properties have been included
in Other Revenues from January 1, 1999 forward and related expenses have all
been included in Other Expenses. For the six months and three months ended June
30, 1999 these revenues totaled $25.3 million and $10.6 million, respectively,
and expenses totaled $21.1 million and $8.0 million, respectively. In the
summary of income on page 8 of this report, SAFECO Properties' pretax income
amounts are included in the Corporate line. For the six months ended June 30,
1999 and 1998 these pretax income amounts totaled $4.2 million and $2.4 million,
respectively, and for the three months ended June 30, 1999 and 1998 totaled $2.6
million and $1.2 million, respectively.
Investment Portfolios
The market value of our consolidated bond portfolio was $488 million in excess
of amortized cost at June 30, 1999, down from $1.7 billion at December 31, 1998
as a result of higher interest rates. The market value of our equity securities
portfolio was $1.2 billion in excess of cost at June 30, 1999.
Dividend
The second quarter of 1999 dividend paid in July to common shareholders was paid
at the rate of $0.37 per share, reflecting a 5.7% increase over the previous
payment.
Stock Repurchase Program
In May 1999, the Board of Directors approved the purchase of 8,000,000 shares of
SAFECO Corporation common stock. During the second quarter, the company
purchased 4,821,000 shares in the open market for $213.6 million, for an average
price of $44.31 per share. Approximately 785,000 of these shares were purchased
under a previous authorization. Therefore, the number of shares authorized but
not yet purchased under the remaining authorization is 3,964,000 shares.
Year 2000 Readiness Disclosure
SAFECO, like most other companies, is faced with the fact that some of its
computer programs have time sensitive logic that typically recognizes a date
using "00" as the year 1900 rather than the year 2000. SAFECO is highly
dependent on automated systems and systems applications that use computer
programs to conduct ongoing operations. Such systems are used to process claims,
bill and collect premiums from customers, manage investments and many other
activities. If these systems were unable to process data accurately because of
Year 2000-related failures, these activities would be interrupted and could have
a material adverse effect on SAFECO's results of operations.
SAFECO has completed an assessment of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses. SAFECO
has been modifying and replacing portions of its systems since 1995 so that the
system modified or replaced will be suitable for use before, during and after
the year 2000 with no significant operational problems related to its ability to
process dates correctly ("Year 2000 Ready"). In addition, SAFECO is engaged in a
regular program of testing and running the systems once Year 2000 programming
changes have been made. This testing includes trials at SAFECO's hot site, a
location provided and maintained by a third party separate from any SAFECO
facility. SAFECO believes that its program to address Year 2000 issues is
comprehensive and on schedule.
-12-
<PAGE> 13
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
The total Year 2000 readiness cost for SAFECO is currently estimated at
approximately $18 million and as of June 30, 1999 SAFECO has incurred
approximately $17 million of that amount. These estimated amounts include both
modification costs, which are expensed as incurred, and certain replacement
systems costs, some of which are capitalized and amortized. Approximately 98% of
SAFECO's existing systems have been internally verified as being Year 2000 ready
as of June 30, 1999. SAFECO's last mission-critical system is scheduled to be
Year 2000 ready in August 1999. The program of testing and running the systems
after Year 2000 programming changes have been made is currently in process and
expected to continue through 1999. SAFECO also intends to bring all of its
mainframe systems down on December 31, 1999 and bring them back up on January 1,
2000. This will preserve information contained in those systems at December 31,
1999 and permit SAFECO to retrieve and use that information should an
unanticipated Year 2000 problem occur. In addition, as a contingency against
unanticipated problems on and after January 1, 2000, SAFECO's Information
Systems department will be prepared to address on an expedited basis any
problems that should arise. Although absolute assurance is not possible, based
on our current progress and continuing modifications, SAFECO believes that by
January 1, 2000 it will be Year 2000 ready and that Year 2000 issues will not
pose significant operational problems for its computer systems.
SAFECO is also working with its third-party partners and vendors, e.g., its
independent insurance agents, local and long distance telephone companies, banks
and securities trading firms, to assure that they are on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO will assess and attempt to mitigate risks with respect to the
failure of any mission critical third-party partners and vendors to be Year 2000
ready. Failure of such parties to be Year 2000 ready could have a material
adverse effect on SAFECO's results of operations.
SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance
policies its property and casualty subsidiaries have sold to customers. Although
SAFECO has not written any specific Year 2000 coverage, customers may allege
coverage exists under current commercial policies, including commercial general
liability, directors and officers liability, errors and omissions liability and
product policies. The effect of such coverage issues on SAFECO's results of
operations is not reasonably estimable at this time. However, SAFECO expects
that any potential exposures will be limited because its commercial lines
business has historically not included significant numbers of the types of risks
that have the greatest Year 2000 exposure, such as financial institutions and
software and computer chip companies. In addition, SAFECO's directors and
officers liability and errors and omissions books of insurance business are not
large, together comprising approximately 1% of total property and casualty
premiums over the last three years. SAFECO continues to assess its potential
exposure to insurance claims arising from property and casualty insurance
policies written and is taking a number of actions to limit that exposure. Such
actions, in states where permitted, include the use of endorsements on
commercial property policies clarifying that there is no coverage for Year 2000
occurrences, as well as using policy language that excludes Year 2000 coverage
on certain commercial liability policies.
-13-
<PAGE> 14
SAFECO CORPORATION
- - --------------------------------------------------------------------------------
Other -- Footnotes
SEGMENT DATA
<TABLE>
<CAPTION>
Six Months Ended Underwriting Pretax Income Net Income Total
June 30, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - ------------------------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 862.5 $ 0.5
Homeowners 349.5 (34.6)
Other 88.0 7.8
Commercial Lines:
ASBI 478.5 (85.3)
SAFECO Commercial 335.6 (13.6)
Surety 29.7 12.4
Other 3.9 (0.5)
---------- --------
Total 2,147.7 $ (113.3) $ 94.9 $ 145.1 $ 12,154.9
---------- ======== --------
Life:
Retirement Services 16.6 25.0
Settlement Annuities 0.7 19.6
Group 96.5 (11.6)
Individual 56.4 12.9
Other 6.8 37.4
---------- --------
Total 177.0 83.3 53.2 16,819.1
---------- --------
Credit 54.1 11.0 7.1 1,582.2
Asset Management 21.3 5.8 3.8 69.6
Other and Eliminations 61.0 (23.9) (17.6) 207.3
---------- -------- ----------- -----------
Consolidated Totals $ 2,461.1 $ 171.1 $ 191.6 $ 30,833.1
========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Underwriting Pretax Income Net Income Total
June 30, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 854.6 $ 15.0
Homeowners 337.7 (38.7)
Other 80.4 6.3
Commercial Lines:
ASBI 454.3 (51.1)
SAFECO Commercial 313.9 (19.5)
Surety 28.1 11.0
Other 6.9 1.7
--------- ---------
Total 2,075.9 $ (75.3) $ 143.8 $ 166.5 $12,651.9
--------- ========= ---------
Life:
Retirement Services 12.9 11.1
Settlement Annuities 0.7 14.2
Group 101.5 (2.1)
Individual 54.7 4.7
Other 6.7 37.5
--------- ---------
Total 176.5 65.4 45.9 15,956.1
--------- ---------
Real Estate 39.1 2.4 0.5 668.9
Credit 47.4 11.2 7.1 1,319.4
Asset Management 17.6 3.1 2.0 77.4
Other and Eliminations 30.2 (32.4) (41.2) (381.3)
--------- --------- --------- ---------
Consolidated Totals $ 2,386.7 $ 193.5 $ 180.8 $30,292.4
========= ========= ========= =========
</TABLE>
* Earnings before realized gains (losses), distributions on capital securities
and income taxes.
-14-
<PAGE> 15
SAFECO CORPORATION
Other -- Footnotes (Continued)
- - --------------------------------------------------------------------------------
SEGMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
June 30, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 432.1 $ (5.5)
Homeowners 175.8 (15.9)
Other 44.4 3.5
Commercial Lines:
ASBI 243.9 (54.4)
SAFECO Commercial 170.2 (11.7)
Surety 15.3 6.4
Other 1.6 0.6
--------- ---------
Total 1,083.3 $ (77.0) $ 27.7 $ 60.7 $12,154.9
--------- ========= ---------
Life:
Retirement Services 8.9 12.4
Settlement Annuities 0.4 10.0
Group 48.5 (8.7)
Individual 29.4 6.3
Other 3.2 18.6
--------- ---------
Total 90.4 38.6 23.3 16,819.1
--------- ---------
Credit 27.1 5.7 3.7 1,582.2
Asset Management 11.1 3.3 2.2 69.6
Other and Eliminations 28.8 (10.8) (16.8) 207.3
--------- --------- --------- ---------
Consolidated Totals $ 1,240.7 $ 64.5 $ 73.1 $30,833.1
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
June 30, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 431.9 $ 12.2
Homeowners 169.7 (41.1)
Other 41.2 4.1
Commercial Lines:
ASBI 226.8 (34.6)
SAFECO Commercial 159.6 (9.6)
Surety 13.9 4.1
Other 3.4 0.5
--------- ---------
Total 1,046.5 $ (64.4) $ 47.3 $ 66.0 $12,651.9
--------- ========= ---------
Life:
Retirement Services 7.4 2.0
Settlement Annuities 0.3 7.0
Group 51.8 (0.7)
Individual 27.0 2.2
Other 3.2 18.5
--------- ---------
Total 89.7 29.0 18.8 15,956.1
--------- ---------
Real Estate 18.6 1.2 (0.4) 668.9
Credit 24.0 5.7 3.6 1,319.4
Asset Management 9.2 1.1 0.7 77.4
Other and Eliminations 15.4 (15.6) (19.5) (381.3)
--------- --------- --------- ---------
Consolidated Totals $ 1,203.4 $ 68.7 $ 69.2 $30,292.4
========= ========= ========= =========
</TABLE>
* Earnings before realized gains (losses), distributions on capital securities
and income taxes.
-15-
<PAGE> 16
SAFECO CORPORATION
Other -- Footnotes (Continued)
- - --------------------------------------------------------------------------------
The following additional footnote disclosure relates to new accounting
standards.
Nature of Operations and Summary of Significant Accounting Policies -- New
Accounting Standards
The Financial Accounting Standards Board (FASB) issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities," in June 1998.
The Statement amends or supersedes several previous FASB statements and requires
recognizing all derivatives as either assets or liabilities in the statement of
financial position and measuring those instruments at fair value. The FASB also
issued Statement 137 in June 1999 which allows entities to defer adoption of
Statement 133 to fiscal years beginning June 15, 2000. Statement 133 may still
be adopted early, as of the beginning of any fiscal quarter that begins after
June 1998. SAFECO will adopt the new statement no later than the first quarter
of 2001. The impact of the Statement is currently being studied, and the effect
of the new statement on the financial statements has not yet been determined.
-16-
<PAGE> 17
SAFECO CORPORATION
Part II - Other Information
- - --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of SAFECO Corporation was held May 5,
1999. SAFECO shareholders elected five nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 2002 with the exception of Mr. Rice, whose term
will expire in 2000. There were no broker non-votes with respect to any
of the nominees.
<TABLE>
<CAPTION>
For Withheld
--- --------
<S> <C> <C>
Phyllis J. Campbell 123,061,108 629,768
Boh A. Dickey 123,086,388 604,488
William P. Gerberding 122,939,568 751,308
Norman B. Rice 122,111,519 1,579,357
Paul W. Skinner 123,101,963 588,913
</TABLE>
Continuing as Directors are Joshua Green III, William G. Reed, Jr. and
Judith M. Runstad, whose terms expire in 2000; and Robert S. Cline,
Roger H. Eigsti, John W. Ellis and William W. Krippaehne, Jr., whose
terms expire in 2001.
The proposal to approve the SAFECO Long-Term Incentive Plan of 1997 as
amended and restated was adopted by the favorable vote of 111,850,721
shares, with 11,223,210 shares voted "against" and 616,945 shares
abstaining. There were no broker non-votes with respect to the proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 - Financial Data Schedule. (This exhibit is included only in
the electronic EDGAR filing version of this 10-Q. The
Financial Data Schedule is not a separate financial
statement but a schedule that summarizes certain standard
financial information extracted directly from the financial
statements in this filing.)
(b)Reports on Form 8-K
The Registrant filed an 8-K dated May 5, 1999 under Item 5
(Other Items), announcing a stock repurchase program
approved by its Board of Directors on May 5, 1999.
The Registrant filed an 8-K dated July 13, 1999 under Item
5, announcing its preliminary review of earnings for the
second quarter of 1999.
-17-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 17,439
<DEBT-CARRYING-VALUE> 2,725
<DEBT-MARKET-VALUE> 2,940
<EQUITIES> 2,147
<MORTGAGE> 701
<REAL-ESTATE> 229
<TOTAL-INVEST> 23,500
<CASH> 149
<RECOVER-REINSURE> 388
<DEFERRED-ACQUISITION> 573
<TOTAL-ASSETS> 30,833
<POLICY-LOSSES> 4,287
<UNEARNED-PREMIUMS> 1,851
<POLICY-OTHER> 280
<POLICY-HOLDER-FUNDS> 13,197
<NOTES-PAYABLE> 2,385
842
0
<COMMON> 858
<OTHER-SE> 4,111
<TOTAL-LIABILITY-AND-EQUITY> 30,833
2,325
<INVESTMENT-INCOME> 785
<INVESTMENT-GAINS> 86
<OTHER-INCOME> 136
<BENEFITS> 2,137
<UNDERWRITING-AMORTIZATION> 421
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 257
<INCOME-TAX> 43
<INCOME-CONTINUING> 214
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192
<EPS-BASIC> 1.42
<EPS-DILUTED> 1.41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
