<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 SEPTEMBER 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)
<TABLE>
<S> <C>
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer I.D. No.)
</TABLE>
SAFECO PLAZA, Seattle, Washington 98185
(Address of principal executive offices)
(206) 545-5000
(Telephone)
127,634,407 shares of no par value common stock were outstanding at September
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>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheet
September 30, 2000 and December 31, 1999 3
Statement of Consolidated Income and Retained Earnings
for the Nine Months and Quarters Ended September 30, 2000 and 1999 5
Statement of Consolidated Cash Flows
for the Nine Months Ended September 30, 2000 and 1999 6
Statement of Consolidated Comprehensive Income (Loss)
for the Nine Months and Quarters Ended September 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 5. Other Information 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
/s/ ROD A. PIERSON
---------------------------------------
Rod A. Pierson
Senior Vice President
Dated November 3, 2000 and Chief Financial Officer
/s/ H. PAUL LOWBER
---------------------------------------
H. Paul Lowber
Vice President, Controller
Dated November 3, 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>
September 30 December 31
ASSETS 2000 1999
------ ------------ -----------
(Unaudited)
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $17,766.7; $17,258.9) $17,579.4 $16,830.7
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: $2,816.5; $2,772.1) 2,753.0 2,733.3
Marketable Equity Securities, at Market Value
(Cost: $941.8; $972.5) 1,828.7 2,004.7
Mortgage Loans 819.5 770.4
Real Estate (At cost less accumulated depreciation) 57.1 106.5
Other Investment Assets 106.6 109.4
Short-Term Investments 250.3 376.0
--------- ---------
Total Investments 23,394.6 22,931.0
Cash 165.3 112.3
Accrued Investment Income 346.2 328.1
Finance Receivables
(Less unearned finance charges and allowance for doubtful accounts) 1,579.5 1,460.6
Premiums and Other Service Fees Receivable 1,125.1 1,058.3
Other Notes and Accounts Receivable 79.2 147.2
Deferred Income Tax Recoverable
(Includes tax on unrealized appreciation of investment securities: $244.9; $211.3) 85.4 105.3
Reinsurance Recoverables 393.7 384.8
Deferred Policy Acquisition Costs 618.2 598.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 440.3 344.8
Goodwill (Accumulated amortization: $187.4; $142.5) 1,336.4 1,354.9
Other Assets 340.4 343.4
Separate Account Assets 1,361.0 1,403.2
--------- ---------
TOTAL $31,265.3 $30,572.7
========= =========
</TABLE>
(continued)
See Notes to Financial Statements on pages 8 through 10.
-3-
<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET (Continued)
(In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------------ -----------
(Unaudited)
<S> <C> <C>
Losses and Adjustment Expense $ 4,560.0 $ 4,416.4
Life Policy Liabilities 319.6 281.5
Unearned Premiums 1,936.1 1,853.1
Funds Held Under Deposit Contracts 14,177.6 13,762.9
Debt:
Commercial Paper 586.2 508.8
Credit Company Borrowings ($1,007.1 maturing within one year) 1,018.4 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 ($5.8 maturing within one year) 81.7 84.2
Other Liabilities 1,384.6 1,396.8
Current Income Taxes 8.1 6.1
Separate Account Liabilities 1,361.0 1,403.2
--------- ---------
Total Liabilities 26,133.3 25,436.1
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 842.9 842.5
--------- ---------
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) 834.0 841.7
Retained Earnings 3,003.4 3,062.7
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 451.7 389.7
--------- ---------
Total Shareholders' Equity 4,289.1 4,294.1
--------- ---------
TOTAL $31,265.3 $30,572.7
========= =========
</TABLE>
See Notes to Financial Statements on pages 8 through 10.
-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>
Nine Months Ended Three Months Ended
September 30 September 30
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 3,410.7 $ 3,255.7 $ 1,142.4 $ 1,108.0
Life Premiums and Other Revenues 378.4 268.4 122.9 91.4
--------- --------- --------- ---------
Total 3,789.1 3,524.1 1,265.3 1,199.4
Credit 104.1 84.3 38.7 30.2
Asset Management 32.7 32.7 9.9 11.4
Other 77.0 84.9 29.8 23.9
Net Investment Income 1,226.8 1,182.5 413.5 397.3
Realized Investment Gain 108.6 96.3 51.4 10.0
--------- --------- --------- ---------
Total 5,338.3 5,004.8 1,808.6 1,672.2
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 3,731.4 3,331.5 1,246.9 1,194.1
Commissions 603.2 594.8 199.4 199.0
Personnel Costs 357.2 348.9 115.8 116.8
Interest 127.5 102.9 47.0 35.8
Goodwill Amortization 45.1 41.0 15.2 13.7
Other 343.2 339.0 123.9 116.0
Amortization of Deferred Policy Acquisition Costs 626.3 624.0 206.5 203.2
Deferral of Policy Acquisition Costs (643.3) (651.2) (212.8) (222.9)
--------- --------- --------- ---------
Total 5,190.6 4,730.9 1,741.9 1,655.7
--------- --------- --------- ---------
Income before Income Taxes 147.7 273.9 66.7 16.5
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current 16.5 65.7 2.4 (13.2)
Deferred (6.8) (33.1) 7.6 2.4
--------- --------- --------- ---------
Total 9.7 32.6 10.0 (10.8)
--------- --------- --------- ---------
Income before Distributions on Capital Securities 138.0 241.3 56.7 27.3
Distributions on Capital Securities, Net of Tax (33.6) (33.6) (11.2) (11.2)
--------- --------- --------- ---------
Net Income 104.4 207.7 45.5 16.1
Retained Earnings, Beginning of Period 3,062.7 3,257.2 3,005.4 3,167.3
Amortization of Underwriting Compensation on Capital Securities (0.3) (0.3) (0.1) (0.1)
Dividends Declared (141.7) (144.5) (47.3) (48.1)
Common Stock Reacquired (21.7) (231.2) (0.1) (46.3)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 3,003.4 $ 3,088.9 $ 3,003.4 $ 3,088.9
========= ========= ========= =========
Net Income Per Share of Common Stock:
Diluted $ 0.82 $ 1.55 $ 0.36 $ 0.12
========= ========= ========= =========
Basic $ 0.82 $ 1.55 $ 0.36 $ 0.12
========= ========= ========= =========
Dividends Paid to Common Shareholders $ 1.11 $ 1.07 $ 0.37 $ 0.37
========= ========= ========= =========
Average Number of Shares Outstanding During the Period:
Diluted 127.9 134.0 127.7 131.0
========= ========= ========= =========
Basic 127.8 133.7 127.6 130.8
========= ========= ========= =========
</TABLE>
See Notes to Financial Statements on pages 8 through 10.
-5-
<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
2000 1999
-------- --------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $3,696.2 $3,467.7
Dividends and Interest Received 1,218.7 1,187.1
Other Operating Receipts 169.3 187.2
Insurance Claims and Policy Benefits Paid (3,197.9) (2,769.5)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,171.2) (1,198.3)
Interest Paid and Distributions on Capital Securities (173.8) (181.2)
Other Operating Costs Paid (96.0) (105.7)
Income Taxes Refunded (Paid) 0.3 (61.1)
-------- --------
Net Cash Provided by Operating Activities 445.6 526.2
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,964.5) (3,911.3)
Fixed Maturities Held-to-Maturity (2.2) (1.2)
Equities (354.3) (168.2)
Other Investments (305.1) (380.4)
Maturities of Fixed Maturities Available-for-Sale 725.5 894.0
Maturities of Fixed Maturities Held-to-Maturity 8.7 2.6
Sales of:
Fixed Maturities Available-for-Sale 1,858.7 2,607.9
Fixed Maturities Held-to-Maturity* 0.1 6.3
Equities 415.5 230.5
Other Investments 361.5 780.2
Net Decrease (Increase) in Short-Term Investments 153.5 (20.3)
Finance Receivables Originated or Acquired (515.7) (546.4)
Principal Payments Received on Finance Receivables 388.7 322.6
Other (68.1) (77.5)
-------- --------
Net Cash Used in Investing Activities (297.7) (261.2)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,094.5 1,311.2
Return of Funds Held Under Deposit Contracts (1,187.1) (798.4)
Proceeds from Notes and Mortgage Borrowings 300.0 --
Repayment of Notes and Mortgage Borrowings (16.9) (136.0)
Net Repayment of Short-Term Borrowings (171.9) (171.2)
Common Stock Reacquired (30.5) (273.1)
Dividends Paid to Shareholders (142.1) (144.1)
Other 59.1 (41.4)
-------- --------
Net Cash Used in Financing Activities (94.9) (253.0)
-------- --------
Net Increase in Cash 53.0 12.0
Cash at the Beginning of Period 112.3 74.9
-------- --------
Cash at the End of Period $ 165.3 $ 86.9
======== ========
</TABLE>
*The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
(continued)
See Notes to Financial Statements on pages 8 through 10.
-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>
Nine Months Ended
September 30
-------------------
2000 1999
------ ------
(Unaudited)
<S> <C> <C>
Net Income $104.4 $207.7
------ ------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (108.6) (96.3)
Amortization and Depreciation 94.9 113.1
Amortization of Fixed Maturity Investments (30.8) (36.4)
Deferred Income Tax Benefit (6.8) (33.1)
Interest Expense on Deposit Contracts 374.3 417.1
Other Adjustments (4.9) (1.7)
Changes in:
Losses and Adjustment Expense 143.6 110.8
Life Policy Liabilities 38.1 5.5
Unearned Premiums 83.0 160.8
Accrued Income Taxes 2.0 (17.1)
Accrued Interest on Accrual Bonds (32.1) (30.6)
Accrued Investment Income (18.1) (14.6)
Deferred Policy Acquisition Costs (19.4) (27.2)
Other Assets and Liabilities (174.0) (231.8)
------ ------
Total Adjustments 341.2 318.5
------ ------
Net Cash Provided by Operating Activities $445.6 $526.2
====== ======
</TABLE>
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30 September 30
------------------ ------------------
2000 1999 2000 1999
------ ------ ------ ------
(Unaudited)
<S> <C> <C> <C> <C>
Net Income $104.4 $ 207.7 $ 45.5 $ 16.1
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation (Depreciation)
of Investment Securities 62.0 (813.1) 96.2 (323.0)
------ ------- ------ -------
Comprehensive Income (Loss) $166.4 $(605.4) $141.7 $(306.9)
====== ======= ====== =======
</TABLE>
See Notes to Financial Statements on pages 8 through 10.
-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 consolidated financial statements and condensed 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 Securities
and Exchange 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," ("SFAS 133") in
June 1998. The Statement amends or supersedes several previous FASB statements
and requires the recognition of all derivatives (including certain derivative
instruments imbedded in other contracts) as either assets or liabilities in the
statement of financial position and measuring those instruments at fair value.
The accounting for changes in such fair values depends on the use of the
derivative. 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.
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 SFAS 133.
SAFECO plans to adopt SFAS 133 on January 1, 2001. SAFECO estimates that, the
cumulative after-tax effect of adopting SFAS 133, as amended, will increase net
income and other comprehensive income by no more than $20 million. However, the
transition effect as of January 1, 2001, is subject to change due to the
following unknown variables as of that date: (1) the amount of actual
derivatives and their related hedge positions, (2) market values of derivatives
and hedge positions, and (3) further interpretation of SFAS 133 by the FASB.
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 (Unaudited)(Continued)
--------------------------------------------------------------------------------
Note 3 - Segment Data (continued)
(in Millions)
<TABLE>
<CAPTION>
NINE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
SEPTEMBER 30, 2000 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
------------------ --------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 1,288.3 $ (80.2) $ 3.5 $ 3,144.7
Homeowners 544.3 (83.4) (49.0) 1,346.1
Other 138.7 11.9 22.3 405.5
Commercial Lines:
ASBI 882.4 (129.2) (29.6) 3,867.2
SCI 506.2 (103.8) (36.6) 2,481.1
Surety 45.9 13.5 15.1 102.5
Other 4.9 (1.6) 11.7 439.7
--------- --------- --------- ---------
Total 3,410.7 $ (372.8) (62.6) $ 83.1 11,786.8
--------- ========= --------- ---------
Life:
Retirement Services 28.3 27.0 7,395.0
Settlement Annuities 1.0 19.0 6,170.0
Group 235.9 1.1 107.5
Individual 100.4 20.2 3,037.8
Other 12.8 54.2 953.6
--------- --------- ---------
Total 378.4 121.5 68.3 17,663.9
--------- --------- ---------
Credit 104.8 13.2 8.7 1,825.9
Asset Management 32.7 11.2 7.3 85.9
Other and Eliminations 76.3 (44.2) (63.0) (97.2)
--------- --------- --------- ---------
Consolidated Totals $ 4,002.9 $ 39.1 $ 104.4 $31,265.3
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
SEPTEMBER 30, 1999 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
------------------ --------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 1,295.5 $ (25.1) $ 63.1 $ 3,148.4
Homeowners 527.5 (57.7) (23.3) 1,347.7
Other 132.5 10.9 21.1 406.0
Commercial Lines:
ASBI 741.1 (146.3) (50.3) 3,871.8
SCI 509.1 (48.4) 18.1 2,484.0
Surety 44.3 13.2 14.5 102.6
Other 5.7 1.0 16.4 440.2
--------- --------- --------- ---------
Total 3,255.7 $ (252.4) 59.6 $ 146.9 11,800.7
--------- ========= --------- ---------
Life:
Retirement Services 24.9 36.3 7,390.8
Settlement Annuities 0.9 31.1 6,134.8
Group 145.0 (15.8) 92.6
Individual 87.6 22.3 2,039.1
Other 10.0 54.9 1,141.0
--------- --------- ---------
Total 268.4 128.8 81.5 16,798.3
--------- --------- ---------
Credit 88.3 17.6 11.5 1,559.7
Asset Management 32.7 9.5 6.1 70.2
Other and Eliminations 80.9 (37.9) (38.3) 55.3
--------- --------- --------- ---------
Consolidated Totals $ 3,726.0 $ 177.6 $ 207.7 $30,284.2
========= ========= ========= =========
</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 (Unaudited) (Continued)
--------------------------------------------------------------------------------
Note 3 - Segment Data (continued)
(In Millions)
<TABLE>
<CAPTION>
THREE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
SEPTEMBER 30, 2000 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
------------------ --------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 432.7 $ (16.5) $ 11.7 $ 3,144.7
Homeowners 185.0 (31.2) (19.2) 1,346.1
Other 47.0 1.7 5.4 405.5
Commercial Lines:
ASBI 296.4 (43.8) (10.5) 3,867.2
SCI 164.1 (33.8) (11.4) 2,481.1
Surety 15.6 6.4 7.1 102.5
Other 1.6 1.4 5.7 439.7
--------- --------- --------- ---------
Total 1,142.4 $ (115.8) $ (11.2) $ 41.9 11,786.8
--------- --------- --------- ---------
Life:
Retirement Services 8.5 6.8 7,395.0
Settlement Annuities 0.5 5.0 6,170.0
Group 77.8 0.4 107.5
Individual 33.8 6.5 3,037.8
Other 2.3 18.4 953.6
--------- --------- ---------
Total 122.9 37.1 22.0 17,663.9
--------- --------- ---------
Credit 36.9 4.3 3.0 1,825.9
Asset Management 9.9 2.9 1.9 85.9
Other and Eliminations 31.6 (17.8) (23.3) (97.2)
--------- --------- --------- ---------
Consolidated Totals $ 1,343.7 $ 15.3 $ 45.5 $31,265.3
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
SEPTEMBER 30, 1999 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
------------------ --------- ------------ ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 433.0 $ (25.6) $ 3.2 $ 3,148.4
Homeowners 178.0 (23.1) (11.5) 1,347.7
Other 44.5 3.1 6.6 406.0
Commercial Lines:
ASBI 262.6 (61.0) (28.9) 3,871.8
SCI 173.5 (34.8) (12.3) 2,484.0
Surety 14.6 0.8 1.4 102.6
Other 1.8 1.5 6.2 440.2
--------- --------- --------- ---------
Total 1,108.0 $ (139.1) (35.3) $ 1.8 11,800.7
--------- --------- --------- ---------
Life:
Retirement Services 8.3 11.3 7,390.8
Settlement Annuities 0.2 11.5 6,134.8
Group 48.5 (4.2) 92.6
Individual 31.2 9.4 2,039.1
Other 3.2 17.5 1,141.0
--------- --------- ---------
Total 91.4 45.5 28.3 16,798.3
--------- --------- ---------
Credit 31.0 6.6 4.4 1,559.7
Asset Management 11.4 3.7 2.3 70.2
Other and Eliminations 23.1 (14.0) (20.7) 55.3
--------- --------- --------- ---------
Consolidated Totals $ 1,264.9 $ 6.5 $ 16.1 $30,284.2
========= ========= ========= =========
</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 nine months of 2000 was $104.4 million or $.82 per
diluted share, compared with $1.55 per share for the same period in 1999. If we
exclude realized gain from investments, our income was $.27 per diluted share,
compared with $1.08 in 1999.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
(In Millions Except Per Share Amounts) 2000 1999 2000 1999
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income (Loss) before Realized Gain
and Income Taxes: *
Property and Casualty Insurance:
Underwriting Loss $(372.8) $(252.4) $(115.8) $(139.1)
Net Investment Income 343.2 344.9 115.6 114.9
Goodwill Amortization (33.0) (32.9) (11.0) (11.1)
-------- -------- -------- --------
Total Property and Casualty (62.6) 59.6 (11.2) (35.3)
Life 121.5 128.8 37.1 45.5
Credit 13.2 17.6 4.3 6.6
Asset Management 11.2 9.5 2.9 3.7
Corporate (44.2) (37.9) (17.8) (14.0)
-------- -------- -------- --------
Total 39.1 177.6 15.3 6.5
-------- -------- -------- --------
Realized Gain before Taxes from:
Security Investments 108.6 66.3 51.4 10.0
Real Estate Investments -- 30.0 -- --
-------- -------- -------- --------
Total 108.6 96.3 51.4 10.0
-------- -------- -------- --------
Income before Income Tax 147.7 273.9 66.7 16.5
-------- -------- -------- --------
Provision (Benefit) for Income Taxes on:
Income before Realized Gain (28.3) (1.2) (8.1) (14.5)
Realized Investment Gain 38.0 33.8 18.1 3.7
-------- -------- -------- --------
Total 9.7 32.6 10.0 (10.8)
-------- -------- -------- --------
Income before Distributions on
Capital Securities 138.0 241.3 56.7 27.3
Distributions on Capital Securities, Net of Tax (33.6) (33.6) (11.2) (11.2)
-------- -------- -------- --------
Net Income $ 104.4 $ 207.7 $ 45.5 $ 16.1
======== ======== ======== ========
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain $ .27 $ 1.08 $ .10 $ .07
Realized Gain .55 .47 .26 .05
-------- -------- -------- --------
Net Income $ .82 $ 1.55 $ .36 $ .12
======== ======== ======== ========
Dividends Paid to Common Shareholders $ 1.11 $ 1.07 $ .37 $ .37
</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)
--------------------------------------------------------------------------------
Our combined loss and expense ratio for the third quarter was 110.1, an
improvement from 110.9 in the second quarter and 112.6 in the third quarter a
year ago. Personal auto and ASBI results for this quarter were in line with our
expectations. However, as we announced on October 9, 2000, adverse trends in
workers' compensation and commercial auto, and adverse development of claims
from catastrophe losses in homeowners in the second quarter slowed our overall
improvement.
Our aggressive property and casualty price increases continue to be ahead of
schedule. As a result of our price increases, expense reductions, and
non-renewal of unprofitable business, we expect improvement in our underwriting
results over the next several quarters.
Property and Casualty Insurance
Property and casualty insurance operations for the first nine months of 2000
produced a pretax loss of $63 million before realized gain from investments,
compared with a profit of $60 million a year ago. The combined ratio was 110.9
for the first nine months of 2000, compared with 107.8 for the first nine months
last year. These operations had an underwriting loss of $116 million during the
third quarter of 2000. This compares with a $124 million underwriting loss last
quarter and an underwriting loss of $139 million for the third quarter last
year. Underwriting results by major line of business are stated below.
Investment income was $343 million, down less than one percent from a year ago.
<TABLE>
<CAPTION>
Underwriting Results (In THREE MONTHS ENDED
Millions) NINE MONTHS ENDED ---------------------------------
SEPTEMBER 30 SEPTEMBER 30 JUNE 30
------------------- ------------------- -------
2000 1999 2000 1999 2000
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Personal Lines:
Personal auto $ (80.2) $(25.1) $(16.5) $(25.6) $(23.9)
Homeowners (83.4) (57.7) (31.2) (23.1) (38.1)
Other personal lines 11.9 10.9 1.7 3.1 5.8
Commercial Lines:
ASBI (129.2) (146.3) (43.8) (61.0) (26.4)
SAFECO Commercial (103.8) (48.4) (33.8) (34.8) (43.5)
Surety 13.5 13.2 6.4 0.8 2.4
Other (1.6) 1.0 1.4 1.5 (0.7)
------- ------- ------- ------- -------
Total $(372.8) $(252.4) $(115.8) $(139.1) $(124.4)
======= ======= ======= ======= =======
Combined Ratio 110.9 107.8 110.1 112.6 110.9
</TABLE>
The combined ratio for personal auto improved to 103.8 for the third quarter,
down from 105.6 last quarter and 109.3 in the first quarter. We are increasing
our auto rates nearly 6% this year. The effect of rate increases, agency
cancellations, and tighter underwriting are contributing to the improvement in
our auto results. These actions are impacting the number of automobile policies
in force which ended the third quarter one percent lower than a year ago.
Homeowner weather-related losses in the third quarter were $48 million, up from
$39 million for the same quarter last year. Third quarter losses include an $11
million increase in the cost of settling catastrophe claims that occurred in the
second quarter. While weather-related losses for the quarter and first nine
months are up from a year ago, fire and other non-weather losses have also
increased causing weaker nine-month results. We are increasing our rates over 6%
this year. The number of homes insured ended the quarter 2.5% higher than a year
ago. 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.
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.
The combined ratio for ASBI, which is focused on small-to-medium sized
businesses, was 114.8 for the third quarter, compared with 123.2 for the same
quarter last year. For the first nine months of this year, the combined ratio
improved to 114.6, down from 119.7 a year ago. Prices on this business are up
14% from mid-1999. Additional price increases are planned for the remainder of
this year and 2001.
-12-
<PAGE> 13
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
--------------------------------------------------------------------------------
SAFECO Commercial produced a combined ratio of 120.5 for the first nine months,
compared with 109.5 for the first nine months of 1999. The current year results
reflect continuing adverse trends in workers' compensation and commercial auto.
Our prices on renewal business written in the first nine months were
approximately 15% higher than a year ago.
Surety produced a profit of $13.5 million in the first nine months, compared
with a profit of $13.2 million for the first nine months last year.
We expect improvement in the profitability of our property and casualty
operations resulting from higher prices in every major line, underwriting
actions that have been taken, and from the lower overall expense ratio that has
resulted from our expense management efforts.
Life Insurance
Our life insurance operations produced a pretax profit before realized capital
gains of $121.5 million for the first nine months of 2000. This compares with
$128.8 million reported for the first nine months of 1999. The third quarter
profit of $37.1 million compares with $45.5 million reported for the third
quarter of 1999.
Earnings for the annuity lines (i.e., retirement services and settlement
annuities) were $46 million, compared with $67.4 million for the first nine
months of 1999. The decrease in earnings is due to lower investment income,
increased benefits due to equity index annuity policyholders taking advantage of
an early surrender offer we made in the third quarter, the effect of changes in
paydowns of collateralized mortgage obligations, and increased legal expenses to
defend the qualified assignment contract terms of our structured settlement
product. The early surrender offer on the equity indexed annuity resulted in
$221 million of gross surrenders in the quarter. This is the main reason for the
increase in the Return of Funds Held Under Deposit Contracts line of the
Condensed Statement of Consolidated Cash Flows. Annuity assets total $12.6
billion, compared with $12.7 billion one year ago.
Group insurance experienced a gain of $1.1 million for the first nine months of
2000, compared with a loss of $15.8 million for the same period last year. The
third quarter profit of $430,000 compared with a loss of $4.3 million for the
third 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.
Individual life earnings were $20.2 million for the first nine months of 2000,
compared with $22.3 million for the same period last year. The decrease is
mainly due to poorer claims experience in term products and increased expenses
related to a system conversion expected to be complete in 2000, which are
partially offset by increased earnings in Business Owned Life Insurance (BOLI).
BOLI deposits totaled $665 million for the first nine months of 2000. BOLI
deposits issued from inception total $2.1 billion as of September 30, 2000.
Credit
SAFECO Credit Company produced a pretax profit of $13.2 million for the first
nine months of 2000, compared with $17.6 million in 1999. Pretax profit for the
third quarter was $4.3 million, compared with $4.0 million in the second
quarter. While revenues increased $16.5 million over the comparable period in
1999, higher interest costs continued to adversely impact interest spreads. New
loans and leases funded during the first nine months were $513 million, compared
with $537 million in 1999. Non-affiliated 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>
SEPTEMBER 30 DECEMBER 31
2000 1999
------------ -----------
<S> <C> <C>
Finance Receivables $1,579.5 $1,460.6
Other Assets 246.4 175.4
-------- --------
Total Assets $1,825.9 $1,636.0
======== ========
Credit Company Borrowings $1,018.4 $1,323.1
Other Liabilities 662.0 173.4
-------- --------
Total Liabilities $1,680.4 $1,496.5
======== ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30
------------------
2000 1999
------ ------
<S> <C> <C>
Revenues $104.8 $ 88.3
Expenses 91.6 70.7
------ ------
Income before Income Taxes 13.2 17.6
Provision for Income Taxes 4.5 6.1
------ ------
Net Income $ 8.7 $ 11.5
====== ======
</TABLE>
Asset Management
Asset management operations recorded $11.2 million in pretax earnings during the
nine months ended September 30, 2000, compared with $9.5 million for the same
period in 1999. Included in the earnings is a $2 million realized gain from the
sale of investment securities. Assets under management totaled $5.9 billion at
September 30, down from $6.5 billion one year ago.
Realized Gain from Investments
Our pretax realized gain from the sale of investments in the third quarter was
$51 million or $.26 per share, compared with $.05 per share in the third quarter
a year ago. The gains were primarily the result of selling approximately $200
million of equity securities and reinvesting the funds in fixed income
securities. This was done to reduce our overall exposure to the volatility of
the equity market and was accomplished in a fairly strong equity market in the
third quarter.
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 November 3, 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 November
3, 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)
--------------------------------------------------------------------------------
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 of 2000, 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 per share. The number of shares currently authorized but not yet
repurchased is 2.9 million. The Company did not repurchase any shares during the
second or third quarters.
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 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 5. Other Information - Bylaw Amendments
The Board of Directors of SAFECO Corporation adopted certain amendments
to the Corporation's Bylaws on August 2, 2000. The amended Bylaws provide
that the Corporation's Executive Committee will be comprised of not fewer
than three members, including the individual then serving as the "lead
director," who will chair the Committee.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits:
Exhibit 3*- Bylaws (as amended August 2, 2000)
Exhibit 10.1*- Deferred Compensation Plan for Directors as
amended and restated August 2, 2000.
Exhibit 10.2*- Deferred Compensation Plan for Executives as
amended and restated August 2, 2000.
Exhibit 10.3*- Separation Agreement between SAFECO
Insurance Company of America and W. Randall
Stoddard dated August 2, 2000.
Exhibit 27- Financial Data Schedule. (This exhibit is
included only in the electronic EDGAR filing
version of this Form 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 August 3, 2000 under Item 5 (Other
Items), relating to changes in senior management.
SAFECO filed an 8-K dated October 9, 2000 under Item 5, announcing
its preliminary review of earnings for the third quarter of 2000.
*Copies of the Exhibit is available without charge by making a written request
to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
-16-
