<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000.
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)
127,617,967 shares of no par value common stock were outstanding
at March 31, 2000.
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
- - - - - - - - --------------------------------------------------------------------------------
Part I - Financial Information Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet 3
March 31, 2000 and December 31, 1999
Statement of Consolidated Income and Retained Earnings 5
for the Three Months Ended March 31, 2000 and 1999
Statement of Consolidated Cash Flows 6
for the Three Months Ended March 31, 2000 and 1999
Statement of Consolidated Comprehensive Income (Loss) 7
for the Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 10
and the Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SAFECO CORPORATION
------------------------------------
Registrant
ROD A. PIERSON
------------------------------------
Rod A. Pierson
Senior Vice President
Dated May 12, 2000 and Chief Financial Officer
H. PAUL LOWBER
------------------------------------
H. Paul Lowber
Vice President, Controller
Dated May 12, 2000 and Chief Accounting Officer
-2-
<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
(In Millions)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 2000 1999
--------- -----------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $17,738.0; $17,258.9) $17,447.0 $16,830.7
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: $2,834.4; $2,772.1) 2,741.1 2,733.3
Marketable Equity Securities, at Market Value
(Cost: $1,057.5; $972.5) 1,988.0 2,004.7
Mortgage Loans 792.9 770.4
Real Estate (At cost less accumulated depreciation) 55.6 106.5
Policy Loans 91.0 91.4
Other Invested Assets 19.4 18.0
Short-Term Investments 296.6 376.0
--------- ---------
Total Investments 23,431.6 22,931.0
Cash 105.3 112.3
Accrued Investment Income 343.1 328.1
Finance Receivables
(Less unearned finance charges and allowance for doubtful accounts) 1,468.7 1,460.6
Premiums and Other Service Fees Receivable 1,092.8 1,058.3
Other Notes and Accounts Receivable 96.7 147.2
Deferred Income Tax Recoverable
(Includes tax on unrealized appreciation of investment securities: $223.8; $211.3) 90.6 105.3
Reinsurance Recoverables 430.0 384.8
Deferred Policy Acquisition Costs 599.1 598.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 379.0 344.8
Goodwill (Accumulated amortization: $157.1; $142.5) 1,340.8 1,354.9
Other Assets 289.9 343.4
Separate Account Assets 1,466.7 1,403.2
--------- ---------
TOTAL $31,134.3 $30,572.7
========= =========
</TABLE>
(continued)
-3-
<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(In Millions)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
--------- -----------
<S> <C> <C>
Losses and Adjustment Expense $ 4,522.9 $ 4,416.4
Life Policy Liabilities 306.7 281.5
Unearned Premiums 1,877.0 1,853.1
Funds Held Under Deposit Contracts 13,783.6 13,762.9
Debt:
Commercial Paper 571.1 508.8
Credit Company Borrowings ($1,001.5 maturing within one year) 1,012.8 1,323.1
Medium-Term Notes Due 2003 300.0 -
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($6.1 maturing within one year) 84.2 84.2
Other Liabilities 1,696.0 1,396.8
Current Income Taxes 0.2 6.1
Separate Account Liabilities 1,466.7 1,403.2
--------- ---------
Total Liabilities 26,021.2 25,436.1
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 842.7 842.5
--------- ---------
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: (7.2; 7.3)
Shares Issued and Outstanding: (127.6; 128.9) 833.7 841.7
Retained Earnings 3,023.8 3,062.7
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 412.9 389.7
--------- ---------
Total Shareholders' Equity 4,270.4 4,294.1
--------- ---------
TOTAL $31,134.3 $30,572.7
========= =========
</TABLE>
-4-
<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $1,131.7 $1,064.4
Life Premiums and Other Revenues 125.2 86.6
-------- --------
Total 1,256.9 1,151.0
Credit 31.7 27.0
Asset Management 10.4 10.2
Other 25.9 32.2
Net Investment Income 405.7 389.6
Realized Investment Gain 31.1 56.3
-------- --------
Total 1,761.7 1,666.3
-------- --------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,238.6 1,043.4
Commissions 201.8 192.9
Personnel Costs 121.0 123.6
Interest 38.8 33.8
Goodwill Amortization 14.8 13.5
Other 107.4 100.9
Amortization of Deferred Policy Acquisition Costs 212.4 201.6
Deferral of Policy Acquisition Costs (212.1) (206.3)
-------- --------
Total 1,722.7 1,503.4
-------- --------
Income before Income Taxes 39.0 162.9
-------- --------
Provision (Benefit) for Income Taxes:
Current (0.2) 33.1
Deferred (1.8) 0.1
-------- --------
Total (2.0) 33.2
-------- --------
Income before Distributions on Capital Securities 41.0 129.7
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
-------- --------
Net Income 29.8 118.5
Retained Earnings, Beginning of Period 3,062.7 3,257.2
Amortization of Underwriting Compensation on Capital Securities (0.1) (0.1)
Dividends Declared (47.2) (47.7)
Common Stock Reacquired (21.4) (1.3)
-------- --------
Retained Earnings, End of Period $3,023.8 $3,326.6
======== ========
Net Income Per Share of Common Stock:
Diluted $ 0.23 $ 0.87
======== ========
Basic $ 0.23 $ 0.87
======== ========
Dividends Paid to Common Shareholders $ 0.37 $ 0.35
======== ========
Average Number of Shares Outstanding During the Period:
Diluted 128.2 136.6
======== ========
Basic 128.2 136.3
======== ========
</TABLE>
-5-
<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
2000 1999
--------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $ 1,196.3 $1,106.5
Dividends and Interest Received 398.1 376.0
Other Operating Receipts 64.9 70.8
Insurance Claims and Policy Benefits Paid (987.6) (890.8)
Underwriting, Acquisition and Insurance Operating Costs Paid (455.9) (463.6)
Interest Paid and Distributions on Capital Securities (67.7) (70.7)
Other Operating Costs Paid (37.5) (51.1)
Income Taxes Refunded (Paid) 4.4 (0.3)
--------- --------
Net Cash Provided by Operating Activities 115.0 76.8
--------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,269.3) (1,279.3)
Fixed Maturities Held-to-Maturity (0.3) -
Equities (159.0) (44.6)
Other Investments (95.8) (128.9)
Maturities of Fixed Maturities Available-for-Sale 209.4 285.2
Maturities of Fixed Maturities Held-to-Maturity 1.4 0.2
Sales of:
Fixed Maturities Available-for-Sale 563.2 330.9
Equities 137.3 67.4
Other Investments 190.1 468.2
Net Decrease in Short-Term Investments 196.0 193.6
Finance Receivables Originated or Acquired (122.4) (115.4)
Principal Payments Received on Finance Receivables 111.4 102.4
Other (30.8) (15.7)
--------- --------
Net Cash Used in Investing Activities (268.8) (136.0)
--------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 480.4 792.1
Return of Funds Held Under Deposit Contracts (330.9) (267.6)
Proceeds from Notes and Mortgage Borrowings 300.0 -
Repayment of Notes and Mortgage Borrowings (13.7) (132.2)
Net Repayment of Short-Term Borrowings (219.2) (119.3)
Common Stock Reacquired (30.1) (1.6)
Dividends Paid to Shareholders (47.7) (47.7)
Other 8.0 (102.8)
--------- --------
Net Cash Provided by Financing Activities 146.8 120.9
--------- --------
Net Increase (Decrease) in Cash (7.0) 61.7
Cash at the Beginning of Period 112.3 74.9
--------- --------
Cash at the End of Period $ 105.3 $ 136.6
========= ========
</TABLE>
(continued)
-6-
<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED CASH FLOWS (Continued)
(In Millions)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
2000 1999
------- -------
<S> <C> <C>
Net Income $ 29.8 $ 118.5
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (31.1) (56.3)
Amortization and Depreciation 36.5 35.1
Amortization of Fixed Maturity Investments (9.0) (10.6)
Deferred Income Tax Expense (Benefit) (1.8) 0.1
Interest Expense on Deposit Contracts 126.5 149.5
Other Adjustments (1.8) (3.7)
Changes in:
Losses and Adjustment Expense 106.5 16.7
Life Policy Liabilities 25.2 3.3
Unearned Premiums 23.9 32.5
Accrued Income Taxes (5.9) 27.6
Accrued Interest on Accrual Bonds (11.7) (11.8)
Accrued Investment Income (15.0) (16.9)
Deferred Policy Acquisition Costs (0.3) (4.7)
Other Assets and Liabilities (156.8) (202.5)
------- -------
Total Adjustments 85.2 (41.7)
------- -------
Net Cash Provided by Operating Activities $ 115.0 $ 76.8
======= =======
</TABLE>
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- - - - - - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------
2000 1999
------- -------
<S> <C> <C>
Net Income $ 29.8 $ 118.5
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities 23.2 (214.6)
------- -------
Comprehensive Income (Loss) $ 53.0 $ (96.1)
======= =======
</TABLE>
-7-
<PAGE> 8
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - - - - - - - --------------------------------------------------------------------------------
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
SAFECO Corporation ("SAFECO" or the "Corporation") is a Washington corporation
that owns operating subsidiaries in various segments of insurance and other
financially related businesses. SAFECO's businesses operate on a nationwide
basis.
The accompanying unaudited condensed consolidated financial statements and notes
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 notes 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 and notes be read in conjunction with the
financial statements and notes included in the Corporation's Form 10-K for the
year ended December 31, 1999 which has been previously filed with the
Commission.
Certain reclassifications have been made to the prior year financial information
to conform to the current year classifications.
Note 2 - 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 after 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. Because
of continuing emerging implementation guidance from the FASB, the effect of the
new statement on the corporation's financial statements has not yet been
determined.
-8-
<PAGE> 9
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
Note 3 - Segment Data
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 2000 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - - - - - ---------------------- -------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 427.5 $ (39.8) $(11.3) $ 3,111.3
Homeowners 178.9 (14.1) (2.8) 1,308.1
Other 45.6 4.4 7.7 393.8
Commercial Lines:
ASBI 287.4 (59.0) (25.5) 3,782.1
SAFECO Commercial 174.8 (26.5) (3.7) 2,448.2
Surety 15.5 4.7 5.1 99.8
Other 2.0 (2.3) 2.4 435.5
-------- ------- ------ ---------
Total 1,131.7 $(132.6) (28.1) $ 23.9 $11,578.8
-------- ======= ------ ---------
Life:
Retirement Services 10.5 11.2 7,421.8
Settlement Annuities 0.2 7.0 6,192.3
Group 76.3 (4.0) 107.9
Individual 32.2 7.1 3,048.8
Other 6.0 17.7 957.0
-------- ------ ---------
Total 125.2 39.0 18.6 17,727.8
-------- ------ ---------
Credit 32.8 4.9 3.3 1,648.7
Asset Management 10.4 3.5 2.3 79.2
Other and Elliminations 24.8 (11.4) (18.3) 99.8
-------- ------ ------ ---------
Consolidated Totals $1,324.9 $ 7.9 $ 29.8 $31,134.3
======== ====== ====== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - - - - - ---------------------- -------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 430.4 $ 6.0 $ 28.1 $ 3,356.9
Homeowners 173.7 (18.7) (1.7) 1,411.3
Other 43.6 4.3 5.9 424.9
Commercial Lines:
ASBI 234.6 (30.9) 12.5 4,080.6
SAFECO Commercial 165.4 (1.9) 13.0 2,641.4
Surety 14.4 6.0 4.4 107.7
Other 2.3 (1.1) 5.0 470.1
-------- ------- ------ ---------
Total 1,064.4 $ (36.3) 67.2 $ 84.4 12,492.9
-------- ======= ------ ---------
Life:
Retirement Services 7.7 12.6 7,418.5
Settlement Annuities 0.3 9.6 6,157.8
Group 48.0 (2.9) 92.9
Individual 27.0 6.6 2,046.7
Other 3.6 18.8 1,145.3
-------- ------ ---------
Total 86.6 44.7 29.9 16,861.2
-------- ------ ---------
Credit 29.0 5.3 3.4 1,369.8
Asset Management 10.2 2.5 1.6 67.8
Other and Eliminations 30.2 (13.1) (0.8) 275.6
-------- ------ ------ ---------
Consolidated Totals $1,220.4 $106.6 $118.5 $31,067.3
======== ====== ====== =========
</TABLE>
* Earnings before realized gains (losses), distributions on capital securities
and income taxes.
-9-
<PAGE> 10
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS
- - - - - - - - --------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first quarter was $29.8 million or $.23 per diluted
share, compared with $.87 per share for the first quarter of 1999. If we exclude
realized gain from investments, our income was $.07 per diluted share, compared
with $.60 in 1999.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
------------------------
2000 1999
------- -------
<S> <C> <C>
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Loss $(132.6) $(36.3)
Net Investment Income 115.5 114.3
Goodwill Amortization (11.0) (10.8)
------- ------
Total Property and Casualty (28.1) 67.2
Life 39.0 44.7
Credit 4.9 5.3
Asset Management 3.5 2.5
Corporate (11.4) (13.1)
------- ------
Total 7.9 106.6
------- ------
Realized Gain before Taxes from:
Security Investments 31.1 26.3
Real Estate Investments - 30.0
------- ------
Total 31.1 56.3
------- ------
Income before Income Tax 39.0 162.9
------- ------
Provision (Benefit) for Income Taxes on:
Income before Realized Gain (12.8) 13.2
Realized Investment Gain 10.8 20.0
------- ------
Total (2.0) 33.2
------- ------
Income before Distributions on
Capital Securities 41.0 129.7
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
------- ------
Net Income $ 29.8 $118.5
======= ======
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain $ .07 $ .60
Realized Gain .16 .27
------- ------
Net Income $ .23 $ .87
======= ======
Dividends Paid to Common Shareholders $ .37 $ .35
</TABLE>
-10-
<PAGE> 11
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
As we announced on April 13, 2000, these unsatisfactory results are primarily
the result of underwriting losses in most lines of business within our property
and casualty companies. To improve results we have been aggressively increasing
prices and carefully managing expenses. In addition, we are reviewing our small
commercial business to strengthen the overall risk quality in this line. The
largest portions of the price increases we have taken have been in the
commercial insurance lines. These have been accepted in the marketplace as
commercial lines prices throughout the industry have been increasing in recent
months. However, as price increases only apply to policies as they renew, it
takes some time for these increases to significantly improve our earnings.
Our employees are diligently working on improving our results. The price
increases may slow our growth, but we believe it is a worthwhile trade-off to
improve results. All operating units, including Property and Casualty, now
report to Boh Dickey, president and chief operating officer, who will lead the
results improvement effort.
Property and Casualty Insurance
Property and casualty operations for the first quarter of 2000 produced a pretax
loss of $28 million before realized gain from investments, compared with a
profit of $67 million a year ago. These operations had a $133 million
underwriting loss during the first quarter of 2000. This compares with a $114
million loss last quarter and a loss of $36 million for the first quarter last
year. These results reflect inadequate rates, continued large losses in
commercial lines, and storms in Texas during the first quarter of 2000. In
addition to aggressively increasing prices for all lines, as described below, we
are working on numerous other initiatives to restore profitability. Catastrophe
losses were $32 million, including $19 million from tornadoes and other
hailstorms in Texas during the first quarter. By comparison, catastrophe losses
were $11 million last quarter and $39 million for the first quarter of 1999. The
combined loss and expense ratio was 111.7, compared with 110.1 last quarter and
103.4 for the first quarter a year ago. Underwriting results by major line of
business are stated in the chart below. Investment income was $116 million, up
1% from a year ago.
<TABLE>
<CAPTION>
Underwriting Results ($ Millions)
First Quarter Fourth Quarter First Quarter
2000 1999 1999
------------- -------------- -------------
<S> <C> <C> <C>
Personal Lines:
Personal auto $(39.8) $ (38.3) $ 6.0
Homeowners (14.1) 9.5 (18.7)
Other personal lines 4.4 9.8 4.3
Commercial Lines:
American States Business Insurance (ASBI) (59.0) (37.1) (30.9)
SAFECO Commercial (26.5) (59.2) (1.9)
Surety 4.7 2.0 6.0
Other (2.3) (1.0) (1.1)
------- ------- ------
Total $(132.6) $(114.3) $(36.3)
======= ======= ======
</TABLE>
The deterioration of personal auto results is a result of price competition
within the industry and increased loss costs. We are on track with our plans to
increase both auto and homeowners rates during 2000, as described in our action
plan below. The number of policies insured increased in the first quarter and is
now 1.8% higher than a year ago.
Homeowners results are still disappointing. Significant actions for improvement
include rate increases and insurance to value efforts. The number of homes
insured continued to increase during the first quarter and is now 4.9% higher
than a year ago.
American States Business Insurance (ASBI) is focused on small-to-medium sized
businesses. ASBI produced a combined ratio of 120.6, compared to 113.2 for the
same quarter last year.
-11-
<PAGE> 12
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
SAFECO Commercial delivers insurance products and services to medium-to-large
complex commercial clients. SAFECO Commercial produced a combined ratio of
115.1, compared to 101.2 for the same quarter last year.
Intense price competition, inadequate rates and an increase in the number of
large losses continue to adversely affect results in both the ASBI and SAFECO
Commercial lines. Losses in commercial auto, workers' compensation and the
general liability lines all increased compared to the same period in the prior
year.
Surety results for the first quarter are in line with expectations.
Net premiums written during the quarter increased 5.4% over a year ago, with
personal lines up 2.1%, American States Business Insurance up 20.8%, and SAFECO
Commercial down 6%.
While the profit in surety is acceptable, the rest of the results are not. The
following are some specific actions we are taking to improve the results in each
line.
o We are increasing prices, on average, nationwide in the following
lines:
Personal auto + 5%
Homeowners + 5%
ASBI + 10%
SAFECO Commercial + 13%
o We are aggressively managing our expenses to reduce our expense ratio.
For the first quarter 2000, our overall expense ratio was 29.15%,
compared with 29.82% for calendar year 1999.
o We are reviewing the risk quality of our ASBI business and expect to
non-renew those risks that are outside of prudent underwriting
guidelines.
o We have begun using an underwriting technique known as "credit
scoring" in our personal auto and homeowners lines which should
improve the overall quality of this business.
o We have begun the next cycle of our program to assure that our
homeowners book of business is properly valued and that we receive
appropriate rates for these risks. Our last cycle of using "renewal
questionnaires," completed in 1996, was successful in producing $41
million of additional premium on this business over a three year
period. As our homeowners book has more than doubled in size since
then, we are optimistic for this next cycle.
We expect improved underwriting results by the second half of this year as a
result of our actions.
Life Insurance
Our life insurance operations produced a pretax profit, before realized capital
gains, of $39.0 million for the first quarter of 2000. This compares with $44.7
million reported for the same period last year.
Earnings for the annuity lines were $18.2 million, compared with the $22.2
million for the first quarter of 1999. The decrease is primarily due to lower
interest margins, as well as the effect of changes in paydowns of collateralized
mortgage obligations. Annuity assets total $12.9 billion, compared with $12.6
billion at the end of first quarter 1999.
Group insurance experienced a loss of $4.0 million for the first quarter of
2000, compared with a loss of $2.9 million for the same period last year.
Results for medical excess loss business improved as a result of underwriting
and rating actions that have been taken to improve results for this line of
business. Group life results declined due to a higher level of claims in the
first quarter. First quarter results include one-time costs of $1 million, which
are related to the purchase of the medical excess loss and group life business
of ING Medical Risk Solutions in December. This purchase is the reason for the
increase in Life Premiums and Other Revenues in the Statement of Consolidated
Income and Retained Earnings.
-12-
<PAGE> 13
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
Individual life earnings were $7.1 million, compared with $6.6 million for the
same period last year. The increase is mainly due to increased Business Owned
Life Insurance (BOLI) deposits. BOLI deposits issued from inception total $1.5
billion as of March 31, 2000.
Credit
SAFECO Credit Company produced a pretax profit of $4.9 million for the first
three months of 2000, compared with $5.3 million for the first quarter in 1999.
While revenues increased $3.8 million over 1999, higher interest costs adversely
impacted interest spreads. New loans and leases funded during the first quarter
increased 9% to $122 million versus $112 million in 1999. Delinquency and
write-off experience continue to be at satisfactorily low levels.
SAFECO Credit's summarized financial information is as follows (in millions):
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------- -----------
<S> <C> <C>
Finance Receivables $1,468.7 $1,460.6
Other Assets 180.0 175.4
-------- --------
Total Assets $1,648.7 $1,636.0
======== ========
Credit Company Borrowings $1,012.8 $1,323.1
Other Liabilities 494.1 173.4
-------- --------
Total Liabilities $1,506.9 $1,496.5
======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues $ 32.8 $ 29.0
Expenses 27.9 23.7
-------- --------
Income before Income Taxes 4.9 5.3
Provision for Income Taxes 1.6 1.9
-------- --------
Net Income $ 3.3 $ 3.4
======== ========
</TABLE>
Asset Management
Our asset management operations produced pretax profits of $3.5 million for the
first quarter, up from $2.5 million for the first quarter a year ago. Our
operating profit (excluding gains and interest income) was $2.8 million,
compared with $2.0 million last year. The increased earnings are the result of
higher fee revenues and lower personnel costs.
Investment Portfolios
The amortized cost of our consolidated fixed maturities securities portfolio was
$198 million in excess of market value at March 31, 2000; amortized cost
exceeded market value by $389 million at December 31, 1999. The reason for the
decrease in the excess of amortized cost over market value between the two
dates was due primarily to the decline in longer term interest rates. The market
value of our equity securities portfolio was $930 million in excess of cost at
March 31, 2000.
Debt Offering
On March 16, 2000, SAFECO Corporation issued $300 million of medium-term notes
at 7.875% which mature on March 15, 2003. The proceeds of the notes were
subsequently loaned to our subsidiary SAFECO Credit to primarily repay its
commercial paper debt.
-13-
<PAGE> 14
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
Stock Repurchase Program
In February 2000, the Board of Directors authorized the repurchase of three
million shares of SAFECO Corporation common stock. The authorization was in
addition to nearly 1.3 million shares that remained under the May 1999
authorization. During the first quarter, we repurchased 1,333,000 shares in the
open market at a total cost of approximately $30 million for an average price of
$22.53. The number of shares currently authorized but not yet repurchased is 2.9
million.
Year 2000 Readiness Disclosure
SAFECO believes that its program to address Year 2000 issues is comprehensive
and as of May 12, 2000 SAFECO has not experienced any material Year 2000
complications. SAFECO, like most other companies, has been concerned that some
of its computer programs have or had 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 completed various assessments of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses, prior to
December 31, 1999. SAFECO began modifying and replacing portions of its systems
since 1995 so that the system modified or replaced would 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 engaged in a regular program of testing and running the systems
once Year 2000 programming changes were made. This testing included trials at
SAFECO's hot site, a location provided and maintained by a third party separate
from any SAFECO facility.
The total Year 2000 readiness cost for SAFECO approximated $18 million and as of
May 12, 2000 SAFECO has incurred all of this amount. These amounts have included
both modification costs, which were expensed as incurred, and certain
replacement systems costs, some of which were capitalized and amortized. All of
SAFECO's existing systems were internally verified as being Year 2000 ready as
of December 31, 1999 and the program of testing and running the systems after
Year 2000 programming changes have been made has been completed.
SAFECO has worked 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 were on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO has assessed and attempted to mitigate risks with respect to
the failure of any mission-critical, third-party partners and vendors to be Year
2000 ready. Where applicable, this effort included physically testing our common
interfaces. Failure of such parties to be Year 2000 ready could have a material
adverse effect on SAFECO's results of operations. As of May 12, 2000 SAFECO is
not aware of any of its third party partners or vendors experiencing any Year
2000 problems that would materially impact SAFECO's systems or business
processes.
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,
product policies, and assumed reinsurance. The effect of such coverage issues on
SAFECO's results of operations is not reasonably estimable at this time. SAFECO
expects, however 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. As of May
12, 2000 SAFECO is not aware of any Year 2000-related claims made under its
property and casualty insurance policies.
-14-
<PAGE> 15
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - - - - - --------------------------------------------------------------------------------
Forward-Looking Statements
Statements made in this report that relate to anticipated financial performance,
business prospects and plans, regulatory developments and similar matters may be
considered "forward-looking statements" as defined in the Private Securities
Litigation Reform Act of 1995. Statements in this report that are not historical
information are forward-looking. Such statements are subject to certain risks
and uncertainties that may cause the operations, performance, development and
results of our business to differ materially from those suggested by the
forward-looking statements. The risks and uncertainties include:
o our ability to obtain rate increases and non-renew underpriced
insurance accounts;
o realization of growth and business retention estimates;
o achievement of our premium targets and profitability;
o changes in competition and pricing environments;
o achievement of our expense reduction goals;
o the occurrence of significant natural disasters, including
earthquakes;
o weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
o driving patterns;
o fluctuations in interest rates;
o performance of financial markets;
o court decisions and trends in litigation;
o legislative and regulatory developments;
o the adequacy of loss reserves;
o the availability and pricing of reinsurance;
o the development of major Year 2000 related claims or liabilities; and
o general economic and market conditions.
In particular, because insurance rates in some jurisdictions are subject to
regulatory review and approval, our achievement of rate increases may occur in
amounts and on a time schedule different than planned, which may affect our
efforts to restore earnings in our property and casualty lines.
-15-
<PAGE> 16
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 6 - EXHIBITS AND REPORT ON FORM 8-K
- - - - - - - - --------------------------------------------------------------------------------
Item 1. Legal Proceedings
Because of the nature of their businesses, the Corporation's insurance and
other subsidiaries are subject to legal actions filed or threatened in the
ordinary course of their business operations, generally as liability insurers
defending third-party claims brought against their insureds or as insurers
defending policy coverage claims brought against them. 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 difficult, the
Corporation believes that reserves established for these claims are adequate
based on the known facts and current law. The loss and loss 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 corporation's financial
condition.
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
SAFECO filed an 8-K dated January 26, 2000 under Item 5
(Other Items), relating to its fourth quarter 1999
earnings release.
SAFECO filed an 8-K dated April 13, 2000 under Item 5,
relating to its preliminary review of earnings for the
first quarter of 2000.
SAFECO filed an 8-K dated April 24, 2000 under Item 5,
relating to its first quarter 2000 earnings release.
-16-
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 17,447
<DEBT-CARRYING-VALUE> 2,741
<DEBT-MARKET-VALUE> 2,834
<EQUITIES> 1,988
<MORTGAGE> 793
<REAL-ESTATE> 56
<TOTAL-INVEST> 23,432
<CASH> 105
<RECOVER-REINSURE> 430
<DEFERRED-ACQUISITION> 599
<TOTAL-ASSETS> 31,134
<POLICY-LOSSES> 4,523
<UNEARNED-PREMIUMS> 1,877
<POLICY-OTHER> 307
<POLICY-HOLDER-FUNDS> 13,784
<NOTES-PAYABLE> 2,368
843
0
<COMMON> 834
<OTHER-SE> 3,437
<TOTAL-LIABILITY-AND-EQUITY> 31,134
1,257
<INVESTMENT-INCOME> 406
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<UNDERWRITING-OTHER> 0
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<INCOME-TAX> (2)
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<NET-INCOME> 30
<EPS-BASIC> 0.23
<EPS-DILUTED> 0.23
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</TABLE>
