<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, 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)
127,629,632 shares of no par value common stock were outstanding
at June 30, 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
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet
June 30, 2000 and December 31, 1999 3
Statement of Consolidated Income and Retained Earnings
for the Six Months and Quarters Ended June 30, 2000 and 1999 5
Statement of Consolidated Cash Flows
for the Six Months Ended June 30, 2000 and 1999 6
Statement of Consolidated Comprehensive Income (Loss)
for the Six Months and Quarters Ended June 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II - Other Information
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information - Bylaw Amendments 16
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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 10, 2000 and Chief Financial Officer
H. PAUL LOWBER
-----------------------------------
H. Paul Lowber
Vice President, Controller
Dated August 10, 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>
June 30 December 31
ASSETS 2000 1999
------ --------- -----------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $17,759.2; $17,258.9) $17,394.6 $16,830.7
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: $2,781.0; $2,772.1) 2,743.9 2,733.3
Marketable Equity Securities, at Market Value
(Cost: $1,081.4; $972.5) 1,997.5 2,004.7
Mortgage Loans 815.8 770.4
Real Estate (At cost less accumulated depreciation) 57.0 106.5
Policy Loans 90.4 91.4
Other Invested Assets 16.8 18.0
Short-Term Investments 315.5 376.0
--------- ---------
Total Investments 23,431.5 22,931.0
Cash 94.4 112.3
Accrued Investment Income 327.6 328.1
Finance Receivables
(Less unearned finance charges and allowance for
doubtful accounts) 1,543.9 1,460.6
Premiums and Other Service Fees Receivable 1,109.0 1,058.3
Other Notes and Accounts Receivable 51.9 147.2
Deferred Income Tax Recoverable
(Includes tax on unrealized appreciation of investment
securities: $193.0; $211.3) 135.3 105.3
Reinsurance Recoverables 406.6 384.8
Deferred Policy Acquisition Costs 610.4 598.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 415.1 344.8
Goodwill (Accumulated amortization: $172.3; $142.5) 1,331.0 1,354.9
Other Assets 326.9 343.4
Separate Account Assets 1,398.5 1,403.2
--------- ---------
TOTAL $31,182.1 $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>
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ --------- -----------
<S> <C> <C>
Losses and Adjustment Expense $ 4,545.0 $ 4,416.4
Life Policy Liabilities 318.0 281.5
Unearned Premiums 1,933.5 1,853.1
Funds Held Under Deposit Contracts 14,098.6 13,762.9
Debt:
Commercial Paper 556.9 508.8
Credit Company Borrowings ($1,013.4 maturing within
one year) 1,024.6 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 ($5.9 maturing within one year) 82.6 84.2
Other Liabilities 1,479.7 1,396.8
Current Income Taxes 7.1 6.1
Separate Account Liabilities 1,398.5 1,403.2
--------- ---------
Total Liabilities 26,144.5 25,436.1
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures of the Corporation
("Capital Securities") 842.8 842.5
--------- ---------
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) 833.9 841.7
Retained Earnings 3,005.4 3,062.7
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities,
Net of Tax 355.5 389.7
--------- ---------
Total Shareholders' Equity 4,194.8 4,294.1
--------- ---------
TOTAL $31,182.1 $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>
Six Months Ended Three Months Ended
June 30 June 30
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 2,268.3 $ 2,147.7 $ 1,136.6 $ 1,083.3
Life Premiums and Other Revenues 255.5 177.0 130.3 90.4
--------- --------- --------- ---------
Total 2,523.8 2,324.7 1,266.9 1,173.7
Credit 65.4 54.1 33.7 27.1
Asset Management 22.8 21.3 12.4 11.1
Other 47.2 61.0 21.3 28.8
Net Investment Income 813.3 785.2 407.6 395.6
Realized Investment Gain 57.2 86.3 26.1 30.0
--------- --------- --------- ---------
Total 3,529.7 3,332.6 1,768.0 1,666.3
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 2,484.5 2,137.4 1,245.9 1,094.0
Commissions 403.8 395.8 202.0 202.9
Personnel Costs 241.4 232.1 120.4 108.5
Interest 80.5 67.1 41.7 33.3
Goodwill Amortization 29.9 27.3 15.1 13.8
Other 219.3 223.0 111.9 122.1
Amortization of Deferred Policy Acquisition Costs 419.8 420.8 207.4 219.2
Deferral of Policy Acquisition Costs (430.5) (428.3) (218.4) (222.0)
--------- --------- --------- ---------
Total 3,448.7 3,075.2 1,726.0 1,571.8
--------- --------- --------- ---------
Income before Income Taxes 81.0 257.4 42.0 94.5
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current 14.1 78.9 14.3 45.8
Deferred (14.4) (35.5) (12.6) (35.6)
--------- --------- --------- ---------
Total (0.3) 43.4 1.7 10.2
--------- --------- --------- ---------
Income before Distributions on Capital Securities 81.3 214.0 40.3 84.3
Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2)
--------- --------- --------- ---------
Net Income 58.9 191.6 29.1 73.1
Retained Earnings, Beginning of Period 3,062.7 3,257.2 3,023.8 3,326.6
Amortization of Underwriting Compensation on
Capital Securities (0.2) (0.2) (0.1) (0.1)
Dividends Declared (94.4) (96.4) (47.2) (48.7)
Common Stock Reacquired (21.6) (184.9) (0.2) (183.6)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 3,005.4 $ 3,167.3 $ 3,005.4 $ 3,167.3
========= ========= ========= =========
Net Income Per Share of Common Stock:
Diluted $ 0.46 $ 1.41 $ 0.23 $ 0.54
========= ========= ========= =========
Basic $ 0.46 $ 1.42 $ 0.23 $ 0.55
========= ========= ========= =========
Dividends Paid to Common Shareholders $ 0.74 $ 0.70 $ 0.37 $ 0.35
========= ========= ========= =========
Average Number of Shares Outstanding During the Period:
Diluted 128.0 135.6 127.7 134.5
========= ========= ========= =========
Basic 127.9 135.2 127.6 134.1
========= ========= ========= =========
</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>
Six Months Ended
June 30
-----------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $2,471.1 $2,297.1
Dividends and Interest Received 817.1 806.9
Other Operating Receipts 125.1 131.7
Insurance Claims and Policy Benefits Paid (2,124.6) (1,825.4)
Underwriting, Acquisition and Insurance Operating Costs Paid (865.5) (700.4)
Interest Paid and Distributions on Capital Securities (101.8) (116.4)
Other Operating Costs Paid (78.0) (76.8)
Income Taxes Paid (0.9) (58.6)
-------- --------
Net Cash Provided by Operating Activities 242.5 458.1
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,097.4) (2,642.5)
Fixed Maturities Held-to-Maturity (1.5) --
Equities (236.9) (97.7)
Other Investments (182.9) (251.7)
Maturities of Fixed Maturities Available-for-Sale 481.4 624.9
Maturities of Fixed Maturities Held-to-Maturity 8.5 1.4
Sales of:
Fixed Maturities Available-for-Sale 1,142.6 1,633.6
Fixed Maturities Held-to-Maturity* 0.1 6.3
Equities 219.2 123.1
Other Investments 252.0 592.2
Net Decrease (Increase) in Short-Term Investments 242.7 (18.3)
Finance Receivables Originated or Acquired (333.8) (340.1)
Principal Payments Received on Finance Receivables 248.0 208.2
Other (55.5) (159.5)
-------- --------
Net Cash Used in Investing Activities (313.5) (320.1)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 824.4 1,069.2
Return of Funds Held Under Deposit Contracts (672.5) (533.7)
Proceeds from Notes and Mortgage Borrowings 300.0 --
Repayment of Notes and Mortgage Borrowings (16.0) (152.1)
Net Repayment of Short-Term Borrowings (224.9) (17.1)
Common Stock Reacquired (30.3) (216.8)
Dividends Paid to Shareholders (94.9) (95.4)
Other (32.7) (118.0)
-------- --------
Net Cash Provided by (Used in) Financing Activities 53.1 (63.9)
-------- --------
Net Increase (Decrease) in Cash (17.9) 74.1
Cash at the Beginning of Period 112.3 74.9
-------- --------
Cash at the End of Period $ 94.4 $ 149.0
======== ========
</TABLE>
*The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
(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>
Six Months Ended
June 30
---------------------
2000 1999
------- -------
<S> <C> <C>
Net Income $ 58.9 $ 191.6
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (57.2) (86.3)
Amortization and Depreciation 69.7 74.4
Amortization of Fixed Maturity Investments (19.9) (24.8)
Deferred Income Tax Benefit (14.4) (35.5)
Interest Expense on Deposit Contracts 267.2 294.7
Other Adjustments (1.7) (18.7)
Changes in:
Losses and Adjustment Expense 128.6 24.5
Life Policy Liabilities 36.5 2.9
Unearned Premiums 80.4 100.4
Accrued Income Taxes 1.0 7.2
Accrued Interest on Accrual Bonds (21.8) (23.2)
Accrued Investment Income 0.5 0.4
Deferred Policy Acquisition Costs (11.6) (7.3)
Other Assets and Liabilities (273.7) (42.2)
------- -------
Total Adjustments 183.6 266.5
------- -------
Net Cash Provided by Operating Activities $ 242.5 $ 458.1
======= =======
</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
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 58.9 $ 191.6 $ 29.1 $ 73.1
Other Comprehensive Loss, Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities (34.2) (490.1) (57.4) (275.5)
------- ------- ------- -------
Comprehensive Income (Loss) $ 24.7 $(298.5) $ (28.3) $(202.4)
======= ======= ======= =======
</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/A 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. In June 1999,
the FASB issued Statement 137 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. In June 2000, the FASB issued Statement 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", which addresses
a limited number of implementation issues arising from FAS 133. 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.
Note 3 - Segment Data
The operating segments are presented based on SAFECO's internal reporting
structure and how management analyzes the operating results. These segments
generally represent groups of related products.
The property and casualty operations include four main reportable underwriting
segments. The underwriting segments are Personal Lines, Commercial Lines, Surety
and Other. Personal Lines is further split into Personal Auto, Homeowners and
Other. Commercial Lines is further split into American States Business Insurance
(ASBI) and SAFECO Commercial (SCI). ASBI delivers insurance products and
services to small-to-medium sized businesses while SAFECO Commercial delivers
insurance products and services to medium-to-large complex commercial clients.
The life operations include five reportable segments which include Retirement
Services, Settlement Annuities, Group, Individual and Other.
Credit and Asset Management are distinct operations managed separately from the
insurance operations. Other and Eliminations include corporate investment
income, corporate expenses, results of the real estate operations and
eliminations, none of which are individually significant.
-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 (continued)
(in Millions)
<TABLE>
<CAPTION>
SIX MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
JUNE 30, 2000 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
---------------- -------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 855.6 $ (63.7) $ (8.2) $ 3,088.3
Homeowners 359.3 (52.2) (29.8) 1,321.4
Other 91.7 10.2 16.9 398.3
Commercial Lines:
ASBI 586.0 (85.4) (19.1) 3,797.0
SAFECO Commercial 342.1 (70.0) (25.2) 2,435.9
Surety 30.3 7.1 8.0 100.7
Other 3.3 (3.0) 6.0 430.6
-------- ------- ------ ---------
Total 2,268.3 $(257.0) (51.4) $ 41.2 11,572.2
-------- ======= ------ ---------
Life:
Retirement Services 19.8 20.2 7,425.6
Settlement Annuities 0.5 14.0 6,195.5
Group 158.1 0.7 107.9
Individual 66.6 13.7 3,050.3
Other 10.5 35.8 957.6
-------- ------ ---------
Total 255.5 84.4 46.3 17,736.9
-------- ------ ---------
Credit 67.9 8.9 5.7 1,747.9
Asset Management 22.8 8.3 5.4 80.0
Other and Eliminations 44.7 (26.4) (39.7) 45.1
-------- ------ ------ ---------
Consolidated Totals $2,659.2 $ 23.8 $ 58.9 $31,182.1
======== ====== ====== =========
</TABLE>
<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 $ 59.9 $ 3,258.3
Homeowners 349.5 (34.6) (11.8) 1,382.2
Other 88.0 7.8 14.5 418.9
Commercial Lines:
ASBI 478.5 (85.3) (21.4) 3,957.9
SAFECO Commercial 335.6 (13.6) 30.4 2,571.8
Surety 29.7 12.4 13.1 107.9
Other 3.9 (0.5) 10.2 457.9
-------- ------- ------ ---------
Total 2,147.7 $(113.3) 94.9 $145.1 12,154.9
-------- ======= ------ ---------
Life:
Retirement Services 16.6 25.0 7,399.9
Settlement Annuities 0.7 19.6 6,142.4
Group 96.5 (11.6) 92.7
Individual 56.4 12.9 2,041.6
Other 6.8 37.4 1,142.5
-------- ------ ---------
Total 177.0 83.3 53.2 16,819.1
-------- ------ ---------
Credit 57.3 11.0 7.1 1,582.2
Asset Management 21.3 5.8 3.8 69.6
Other and Eliminations 57.8 (23.9) (17.6) 207.3
-------- ------ ------ ---------
Consolidated Totals $2,461.1 $171.1 $191.6 $30,833.1
======== ====== ====== =========
</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 1 - FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
--------------------------------------------------------------------------------
Note 3 - Segment Data (continued)
(In Millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
JUNE 30, 2000 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
------------------ -------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 428.1 $ (23.9) $ 3.1 $ 3,088.3
Homeowners 180.4 (38.1) (27.0) 1,321.4
Other 46.1 5.8 9.2 398.3
Commercial Lines:
ASBI 298.6 (26.4) 6.4 3,797.0
SAFECO Commercial 167.3 (43.5) (21.5) 2,435.9
Surety 14.8 2.4 2.9 100.7
Other 1.3 (0.7) 3.6 430.6
-------- ------- ------ ---------
Total 1,136.6 $(124.4) (23.3) $ 17.3 11,572.2
-------- ======= ------ ---------
Life:
Retirement Services 9.3 9.0 7,425.6
Settlement Annuities 0.3 7.0 6,195.5
Group 81.8 4.7 107.9
Individual 34.4 6.6 3,050.3
Other 4.5 18.1 957.6
-------- ------ ---------
Total 130.3 45.4 27.7 17,736.9
-------- ------ ---------
Credit 35.1 4.0 2.4 1,747.9
Asset Management 12.4 4.8 3.1 80.0
Other and Eliminations 19.9 (15.0) (21.4) 45.1
-------- ------ ------ ---------
Consolidated Totals $1,334.3 $ 15.9 $ 29.1 $31,182.1
======== ====== ====== =========
</TABLE>
<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) $ 31.8 $ 3,258.3
Homeowners 175.8 (15.9) (10.1) 1,382.2
Other 44.4 3.5 8.6 418.9
Commercial Lines:
ASBI 243.9 (54.4) (33.9) 3,957.9
SAFECO Commercial 170.2 (11.7) 17.4 2,571.8
Surety 15.3 6.4 8.7 107.9
Other 1.6 0.6 5.2 457.9
-------- ------ ------ ---------
Total 1,083.3 $(77.0) 27.7 $ 60.7 12,154.9
-------- ====== ------ ---------
Life:
Retirement Services 8.9 12.4 7,399.9
Settlement Annuities 0.4 10.0 6,142.4
Group 48.5 (8.7) 92.7
Individual 29.4 6.3 2,041.6
Other 3.2 18.6 1,142.5
-------- ------ ---------
Total 90.4 38.6 23.3 16,819.1
-------- ------ ---------
Credit 28.3 5.7 3.7 1,582.2
Asset Management 11.1 3.3 2.2 69.6
Other and Eliminations 27.6 (10.8) (16.8) 207.3
-------- ------ ------ ---------
Consolidated Totals $1,240.7 $ 64.5 $ 73.1 $30,833.1
======== ====== ====== =========
</TABLE>
* Earnings before realized gains (losses), distributions on capital securities
and income taxes.
-10-
<PAGE> 11
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS
--------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first six months of 2000 was $58.9 million or $.46 per
diluted share, compared with $1.41 per share for the same period in 1999. If we
exclude realized gain from investments, our income was $.17 per diluted share,
compared with $1.00 per share in 1999.
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
--------------------- ---------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------
(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 $(257.0) $(113.3) $(124.4) $ (77.0)
Net Investment Income 227.6 230.0 112.1 115.7
Goodwill Amortization (22.0) (21.8) (11.0) (11.0)
------- ------- ------- -------
Total Property and Casualty (51.4) 94.9 (23.3) 27.7
Life 84.4 83.3 45.4 38.6
Credit 8.9 11.0 4.0 5.7
Asset Management 8.3 5.8 4.8 3.3
Corporate (26.4) (23.9) (15.0) (10.8)
------- ------- ------- -------
Total 23.8 171.1 15.9 64.5
------- ------- ------- -------
Realized Gain before Taxes from:
Security Investments 57.2 56.3 26.1 30.0
Real Estate Investments -- 30.0 -- --
------- ------- ------- -------
Total 57.2 86.3 26.1 30.0
------- ------- ------- -------
Income before Income Tax 81.0 257.4 42.0 94.5
------- ------- ------- -------
Provision (Benefit) for Income Taxes on:
Income before Realized Gain (20.2) 13.3 (7.4) 0.1
Realized Investment Gain 19.9 30.1 9.1 10.1
------- ------- ------- -------
Total (0.3) 43.4 1.7 10.2
------- ------- ------- -------
Income before Distributions on
Capital Securities 81.3 214.0 40.3 84.3
Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2)
------- ------- ------- -------
Net Income $ 58.9 $ 191.6 $ 29.1 $ 73.1
======= ======= ======= =======
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain $ .17 $ 1.00 $ .10 $ .40
Realized Gain .29 .41 .13 .14
------- ------- ------- -------
Net Income $ .46 $ 1.41 $ .23 $ .54
======= ======= ======= =======
Dividends Paid to Common Shareholders $ .74 $ .70 $ .37 $ .35
</TABLE>
* Note: Income before Realized Gain and Income Taxes is a standard industry
measurement used by management to analyze income from core operations and is
presented to supplement net income as a measure of profitability.
-11-
<PAGE> 12
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
--------------------------------------------------------------------------------
We are disappointed that we did not make more progress this quarter. The major
reasons were severe weather, mainly affecting the homeowners line and several
large losses in our large commercial (SCI) operation. We are pleased, however,
with the improved results for the quarter in the American States Business
Insurance (ASBI) line. The ASBI combined loss and expense ratio decreased to
108.8 from 120.6 in the first quarter. We also saw significant improvement in
our Life Company group insurance operation which produced a profit of $4.7
million in the second quarter, compared with a loss of $4.0 million in the first
quarter.
Our property and casualty price increases continue to be on or ahead of
schedule. We also continued to improve our expense ratio, which decreased over
one point to 28.6% for the six months ended June 30, 2000, compared with 29.8%
for calendar year 1999.
We anticipate improved underwriting results in the third and fourth quarters of
this year from price increases, expense reductions and elimination of
unprofitable business.
Property and Casualty Insurance
Property and casualty operations for the six months of 2000 produced a pretax
loss of $51 million before realized gain from investments, compared with a
profit of $95 million a year ago. These operations had an underwriting loss of
$124 million during the second quarter of 2000. This compares with a $133
million loss last quarter and a loss of $77 million for the second quarter last
year. These results reflect inadequate rates, large losses in SCI and seasonal
weather-related losses. Weather-related losses increased $22 million over the
1999 second quarter to $111 million. The combined ratio was 111.3 for the first
six months of 2000, compared with 105.3 for the first six months last year.
Underwriting results by major line of business are stated in the chart below.
Investment income was $228 million, down one percent from a year ago.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
Underwriting Results (In Millions) JUNE 30 JUNE 30
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Personal Lines:
Personal auto $ (63.7) $ 0.5 $ (23.9) $ (5.5)
Homeowners (52.2) (34.6) (38.1) (15.9)
Other personal lines 10.2 7.8 5.8 3.5
Commercial Lines:
American States Business Insurance (85.4) (85.3) (26.4) (54.4)
SAFECO Commercial (70.0) (13.6) (43.5) (11.7)
Surety 7.1 12.4 2.4 6.4
Other (3.0) (0.5) (0.7) 0.6
------- ------- ------- -------
Total $(257.0) $(113.3) $(124.4) $ (77.0)
======= ======= ======= =======
</TABLE>
The combined ratio for personal auto improved to 105.6 for the quarter, down
from 109.3 in the first quarter. Rate reductions taken in 1999 in response to
intensified industry wide price competition are the primary cause of this year's
weaker results compared with 1999. The number of automobile policies in force at
the end of the second quarter was one percent higher than a year ago. We are
increasing our auto rates approximately 5% this year. The effect of these rate
increases, agency cancellations and tighter underwriting have resulted in a
slight decrease in the number of automobile policies in force during the second
quarter.
Homeowner weather-related losses in the second quarter were $63 million, up from
$31 million in the first quarter. While weather-related claims in the first six
months were approximately the same as a year ago, fire and other non-weather
losses increased this year causing the weaker six month results. The number of
homes insured is 4.6% higher than a year ago. We are increasing our rates over
6% this year. In addition, to improve results, we have begun the next cycle of
our "insurance to value" program to assure that our homeowners book of business
is properly valued and that we receive appropriate rates for these risks.
-12-
<PAGE> 13
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
--------------------------------------------------------------------------------
In both our personal auto and homeowners lines, we are expanding our use of an
underwriting technique known as "credit scoring" which should improve the
overall quality of this business.
Results for American States Business Insurance, which is focused on
small-to-medium sized businesses, improved in the second quarter. For the
quarter, this line produced an underwriting loss of $26.4 million, an
improvement of $32.6 million from the first quarter. The combined ratio
decreased to 108.8 from 120.6 in the first quarter. We have reviewed our book of
business, tightened underwriting standards and increased our prices in this line
by over 10% from a year ago. Additional price increases are planned for the
remainder of this year and 2001.
SAFECO Commercial produced a combined ratio of 120.5 for the first six months,
compared with 104.1 for the first six months of 1999. Results this year have
been impacted by a number of large losses including fires, workers compensation
and general liability losses. Our prices on business written in the first six
months were approximately 11% higher than a year ago with additional increases
planned for the second half of the year.
Surety produced a profit of $7.1 million in the first six months, compared with
a profit of $12.4 million for the first six months last year.
We are confident that we will see improvements in our property and casualty
operations during the second half of 2000. Our price increases, being taken in
every major line, are being accepted in the marketplace. Our overall expense
ratio continues to improve as we manage expenses aggressively. In addition, our
emphasis on underwriting and agency management will have a positive impact on
our earnings.
Life Insurance
Our life insurance operations produced a pretax profit, before realized capital
gains, of $84.4 million for the first six months of 2000. This compares with
$83.3 million for the first six months of 1999. The second quarter profit of
$45.4 million compares with $38.6 million reported for the second quarter of
1999.
Earnings for the annuity lines were $34.1 million, compared with $44.6 million
for the first half of 1999. The decrease is primarily due to lower interest
margins, as well as the effect of changes in pay downs of collateralized
mortgage obligations. Annuity assets total $12.9 billion compared to $12.8
billion at the end of the first half of 1999.
Group insurance earned a profit of $700,000 for the first half of 2000, compared
with a loss of $11.6 million for the same period last year. The second quarter
profit of $4.7 million compares with a loss of $8.7 million for the second
quarter of last year. The improved results are due to the underwriting and
rating actions that were taken to correct the adverse experience in medical stop
loss coverages. Group premium volume for the first six months was $157 million,
an increase of 63% from last year. This is mainly due to the December 1999
acquisition of the medical excess loss and group life business of ING Medical
Risk Solutions.
Individual life earnings were $13.7 million for the first half of 2000, compared
with $12.9 million for the same period last year. The increase is mainly due to
increased Business Owned Life Insurance (BOLI) deposits of $415 million for the
first half of 2000. BOLI deposits issued from inception total $1.8 billion as of
June 30, 2000.
Credit
SAFECO Credit Company produced a pretax profit of $8.9 million for the first six
months of 2000, compared with $11.0 million in 1999. Pretax profit for the
second quarter was $4.0 million compared with $4.9 million in the first quarter.
While revenues increased $10.6 million over the comparable period in 1999,
higher interest costs adversely impacted interest spreads. New loans and leases
funded during the first six months were $331 million, compared with $348 million
in 1999. Non-affiliate receivables and operating leases were $1.7 billion,
compared with $1.6 billion at December 31, 1999. Delinquency and write-off
experience continue to be at satisfactorily low levels.
-13-
<PAGE> 14
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
--------------------------------------------------------------------------------
SAFECO Credit's summarized financial information is as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
-------- -----------
<S> <C> <C>
Finance Receivables $1,543.9 $1,460.6
Other Assets 204.0 175.4
-------- --------
Total Assets $1,747.9 $1,636.0
======== ========
Credit Company Borrowings $1,024.6 $1,323.1
Other Liabilities 580.0 173.4
-------- --------
Total Liabilities $1,604.6 $1,496.5
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
2000 1999
----- -----
<S> <C> <C>
Revenues $67.9 $57.3
Expenses 59.0 46.3
----- -----
Income before Income Taxes 8.9 11.0
Provision for Income Taxes 3.2 3.9
----- -----
Net Income $ 5.7 $ 7.1
===== =====
</TABLE>
Asset Management
Our asset management operations earned $8.3 million in pretax profits during the
first half of 2000, compared with $5.8 million for the same six-month period in
1999. Assets under management totaled $6.1 billion at June 30, 2000.
Investment Portfolios
The amortized cost of our consolidated fixed maturities securities portfolio was
$327 million in excess of market value at June 30, 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 $916 million in excess of cost at June 30, 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.
Year 2000 Readiness Disclosure
As of August 10, 2000 SAFECO has not experienced any material Year 2000
complications regarding its computer systems, technology embedded in the
equipment it uses, or its third-party partners and vendors. Also as of August
10, 2000, SAFECO is not aware of any Year 2000-related claims made under its
property and casualty insurance policies.
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. The Company did not repurchase any shares during the second quarter.
-14-
<PAGE> 15
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
--------------------------------------------------------------------------------
Lead Director
On May 3, 2000, William G. Reed, Jr. was appointed Lead Director by our Board of
Directors. He is working with senior management and the other directors to
achieve the Company's short and long-term earnings objectives. Mr. Reed, whose
family is a long-term shareholder of SAFECO, is our longest-tenured director,
serving on the board since 1974. His father previously was a director of SAFECO
for 41 years.
Subsequent Event
On August 3, 2000, the Company announced changes in senior management. Roger
Eigsti, Chairman and Chief Executive Officer, announced his intention to retire
effective December 31, 2000, and Randall Stoddard, Property & Casualty
President, submitted his resignation effective immediately. SAFECO's press
release covering this event was filed under Form 8-K dated August 3, 2000, as
noted on page 17 of this report.
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:
- our ability to obtain rate increases and non-renew underpriced insurance
accounts;
- realization of growth and business retention estimates;
- achievement of our premium targets and profitability;
- changes in competition and pricing environments;
- achievement of our expense reduction goals;
- the occurrence of significant natural disasters, including earthquakes;
- weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
- driving patterns;
- fluctuations in interest rates;
- performance of financial markets;
- court decisions and trends in litigation;
- legislative and regulatory developments;
- the adequacy of loss reserves;
- the availability and pricing of reinsurance;
- the development of major Year 2000 related claims or liabilities; and
- 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 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of SAFECO Corporation was held May 3,
2000. SAFECO shareholders elected four nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 2003. There were no broker non-votes with respect
to any of the nominees.
<TABLE>
<CAPTION>
FOR WITHHELD
----------- ----------
<S> <C> <C>
Joshua Green III 106,388,272 7,181,718
William G. Reed, Jr. 106,385,920 7,184,070
Norman B. Rice 105,449,774 8,120,216
Judith M. Runstad 102,470,666 11,099,324
</TABLE>
Continuing as Directors are Robert S. Cline, Roger H. Eigsti, John W.
Ellis and William W. Krippaehne, Jr., whose terms expire in 2001, and
Phyllis J. Campbell, Boh A. Dickey, William P. Gerberding and Paul W.
Skinner, whose terms expire in 2002. Mr. Eigsti announced on August 3,
2000 that his intention is to retire December 31, 2000.
Item 5. Other Information - Bylaw Amendments
The Board of Directors of SAFECO Corporation adopted certain amendments
to the Corporation's Bylaws on May 3, 2000. The amended Bylaws provide
that the Board of Directors will adopt an Audit Committee Charter under
which the corporation's Audit Committee will be governed. The Audit
Committee Charter sets forth the Committee's responsibilities,
establishes qualifications for Committee membership, and provides for
regular meetings of the Committee.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - Bylaws (as amended May 3, 2000)
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.)
-16-
<PAGE> 17
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (Continued)
--------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K (Continued)
(b) Reports on Form 8-K
SAFECO filed an 8-K dated April 13, 2000 under Item 5
(Other Items), 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.
SAFECO filed an 8-K dated August 3, 2000 under Item 5,
relating to changes in senior management.
-17-
