1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 F O R M 10 - Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 1994 [ ] 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 Identification No.) SAFECO Plaza, Seattle, Washington 98185 ---------------------------------------- (Address of principal executive offices) Registrant's Telephone Number, Including Area Code (206) 545-5000 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 62,965,914 shares of no par value common stock were outstanding at March 31, 1994. 2 SAFECO CORPORATION - - --------------------------------------------------------------- TABLE OF CONTENTS & SIGNATURES Part I - Financial Information* Page --------- Item 1: Consolidated Balance Sheet, March 31, 1994 and December 31, 1993 3 Statement of Consolidated Income and Retained Earnings for the Three Months Ended March 31, 1994 and 1993 5 Statement of Consolidated Cash Flows for the Three Months Ended March 31, 1994 and 1993 6 Item 2: Management's Discussion and Analysis 8 Part II - Other Information Item 6(b): Exhibits and Reports on Form 8-K 13 * The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q. In the opinion of management, they include all adjustments (none of which were other than normal and recurring adjustments) which are necessary for a fair presentation of results for the interim periods. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 1993 which has previously been filed with the Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFECO CORPORATION ------------------ (Registrant) BOH A. DICKEY --------------- Boh A. Dickey Executive Vice President and Dated May 6, 1994 Chief Financial Officer ROD A. PIERSON --------------- Rod A. Pierson Senior Vice President, Secretary, Controller Dated May 6, 1994 and Chief Accounting Officer -2- 3 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands Except Share Amounts) - - -------------------------------------------------------------------- March 31 December 31 1994 1993 ASSETS ------------ ------------ Investments: Fixed Maturities Available-for-Sale, at Market Value (Amortized Cost: $8,959,987) (a) $9,455,196 $ - Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1994-$2,013,817; 1993-$11,965,731) 1,937,682 10,720,976 Marketable Equity Securities, at Market Value (Cost: 1994-$539,751; 1993-$513,138) 884,826 910,252 Mortgage Loans 404,128 402,138 Real Estate (At cost less accumulated depreciation) 473,268 447,797 Policy Loans 50,416 50,488 Short-Term Investments 109,019 109,047 ------------ ------------ Total Investments 13,314,535 12,640,698 Cash 41,151 67,833 Accrued Investment Income 213,126 210,289 Finance Receivables 556,582 547,759 Premiums and Other Service Fees Receivable 400,139 400,873 Other Notes and Accounts Receivable 93,620 75,977 Reinsurance Recoverables 246,582 126,240 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 152,424 149,618 Deferred Policy Acquisition Costs 362,268 367,303 Other Assets 248,946 220,701 ------------ ------------ TOTAL $15,629,373 $14,807,291 ============ ============ (continued) -3- 4 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands Except Share Amounts) (continued) - - -------------------------------------------------------------------- March 31 December 31 1994 1993 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense $2,252,639 $2,128,372 Unearned Premiums 826,864 819,385 Life Policy Liabilities 153,640 151,488 Funds Held Under Deposit Contracts 7,388,738 7,229,439 Notes and Mortgages Payable: Credit Company Borrowings ($384,250 maturing within one year) 478,400 427,930 10.75% Notes Due September 1995 200,000 200,000 Other Notes and Mortgages ($47,417 maturing within one year) 295,708 290,505 Other Liabilities 648,614 629,891 Federal and Canadian Income Taxes: Current 36,124 37,963 Deferred (Includes tax on unrealized appreciation of investment securities: 1994-$291,546; 1993-$138,990) (a) 264,428 117,927 ------------ ------------ Total Liabilities 12,545,155 12,032,900 ------------ ------------ Preferred Stock, No Par Value: Shares Authorized: 10,000,000 Shares Issued and Outstanding: None - - Common Stock, No Par Value: Shares Authorized: 150,000,000 Shares Reserved for Options: 1994-2,117,064; 1993-2,182,828 Shares Issued and Outstanding: 1994-62,965,914; 1993-62,931,562 209,091 207,480 Retained Earnings 2,334,120 2,307,322 Unrealized Appreciation of Investment Securities, Net of Tax (a) 545,476 262,157 Unrealized Loss from Foreign Currency Translation, Net of Tax (4,469) (2,568) ------------ ------------ Total Stockholders' Equity 3,084,218 2,774,391 ------------ ------------ TOTAL $15,629,373 $14,807,291 ============ ============ <FN> (a) See Management's Discussion and Analysis - "Other - Footnote" section. -4- 5 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (In Thousands) - - ----------------------------------------------------------------------------- Three Months Ended March 31 ----------------------- 1994 1993 ----------- ----------- REVENUES: Insurance: Property and Casualty Earned Premiums $477,408 $459,350 Life and Health Premiums and Other Revenues 71,604 79,645 ----------- ----------- Total 549,012 538,995 Real Estate 31,798 23,285 Finance 12,038 12,109 Asset Management 3,495 3,095 Net Investment Income 242,322 233,857 Realized Investment Gain 19,160 25,955 ----------- ----------- Total 857,825 837,296 ----------- ----------- EXPENSES: Losses, Adjustment Expense and Policyholders' Benefits 561,910 534,741 Commissions 91,904 86,998 Personnel Costs 51,759 51,860 Interest 16,226 14,672 Dividends to Policyholders 5,601 4,025 Other 69,119 59,310 Amortization of Deferred Policy Acquisition Costs 95,457 88,388 Deferral of Policy Acquisition Costs (97,719) (93,344) ----------- ----------- Total 794,257 746,650 ----------- ----------- Income before Income Taxes 63,568 90,646 ----------- ----------- Provision (Benefit) for Federal and Canadian Income Taxes: Current 12,574 23,235 Deferred (5,032) (5,093) ----------- ----------- Total 7,542 18,142 ----------- ----------- Income before Cumulative Effect of Accounting Changes 56,026 72,504 Cumulative Effect of Accounting Changes: Postretirements Benefits - (15,676) Income Taxes - 18,553 ----------- ----------- Net Income 56,026 75,381 Retained Earnings, Beginning of Period 2,307,322 1,993,350 Dividends Declared (28,336) (25,769) Common Stock Reacquired (892) (2,082) ----------- ----------- Retained Earnings, End of Period $2,334,120 $2,040,880 =========== =========== Net Income Per Share of Common Stock: Income before Cumulative Effect of Accounting Changes $0.89 $1.15 Cumulative Effect of Accounting Changes: Postretirements Benefits - (0.25) Income Taxes - 0.30 ----------- ----------- Net Income $0.89 $1.20 =========== =========== Average Number of Shares Outstanding During the Period (In Thousands) 62,948 62,833 =========== =========== Cash Dividends Paid to Common Stockholders $0.45 $0.41 =========== =========== <FN> Income per share of common stock is based on the average number of common shares outstanding. Stock options do not have a significant dilutive effect on income per share. -5- 6 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Thousands) - - ------------------------------------------------------------------------ Three Months Ended March 31 ----------------------- 1994 1993 * ----------- ----------- OPERATING ACTIVITIES: Insurance Premiums Received $559,197 $517,277 Dividends and Interest Received 238,481 225,806 Other Operating Receipts 44,541 30,480 Insurance Claims and Policyholders' Benefits Paid (450,121) (397,939) Underwriting, Acquisition and Insurance Operating Costs Paid (248,616) (209,240) Interest Paid (17,878) (16,105) Other Operating Costs Paid (26,284) (17,895) Income Taxes Paid (14,987) (9,866) ----------- ----------- Net Cash Provided by Operating Activities 84,333 122,518 ----------- ----------- INVESTING ACTIVITIES: Purchase of: Fixed Maturities Available-for-Sale (578,870) - Fixed Maturities Held-to-Maturity (135,972) (748,556) Equities (36,860) (25,759) Other Investments (58,899) (24,211) Maturities of Fixed Maturities Available-for-Sale 260,821 - Maturities of Fixed Maturities Held-to-Maturity 33,583 220,170 Sale of: Fixed Maturities Available-for-Sale 255,072 - Fixed Maturities Held-to-Maturity - 272,222 Equities 22,661 33,199 Other Investments 28,108 56,733 Net Decrease (Increase) in Short-Term Investments 23,236 (34,373) Finance Receivables Originated or Acquired (61,997) (54,853) Principal Payments Received on Finance Receivables 42,673 39,846 Other (9,841) (8,110) ----------- ----------- Net Cash Used in Investing Activities (216,285) (273,692) ----------- ----------- FINANCING ACTIVITIES: Funds Received Under Deposit Contracts 220,602 280,166 Return of Funds Held Under Deposit Contracts (156,942) (122,901) Proceeds from Notes and Mortgage Borrowings 24,207 20,450 Repayment of Notes and Mortgage Borrowings (49,648) (23,921) Net Proceeds from Short-Term Borrowings 94,703 8,357 Common Stock Reaquired (946) (2,194) Dividends Paid to Stockholders (28,322) (25,755) Other 1,616 975 ----------- ----------- Net Cash Provided by Financing Activities 105,270 135,177 ----------- ----------- Net Decrease in Cash (26,682) (15,997) Cash at Beginning of Period 67,833 73,122 ----------- ----------- Cash at End of Period $41,151 $57,125 =========== =========== (continued) -6- 7 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (continued) (In Thousands) - - ------------------------------------------------------------------------ Three Months Ended March 31 ----------------------- 1994 1993 * ----------- ----------- Net Income $56,026 $75,381 ----------- ----------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (19,160) (25,955) Depreciation and Amortization 9,399 7,570 Amortization of Fixed Maturity Investments (4,655) (6,474) Deferred Income Tax Benefit (5,032) (5,093) Interest Expense on Deposit Contracts 97,049 100,668 Cumulative Effect of Accounting Changes - (2,877) Other Adjustments 3,483 1,309 Changes in: Losses and Adjustment Expense Liabilities 124,267 20,459 Life Policy Liabilities 2,152 867 Unearned Premiums 7,479 2,926 Deferred Policy Acquisition Costs (2,262) (4,956) Accrued Investment Income (2,837) 3,244 Accrued Interest on Accrual Bonds (10,173) (18,196) Accrued Income Taxes (1,839) 13,826 Other Assets and Liabilities (169,564) (40,181) ----------- ----------- Total Adjustments 28,307 47,137 ----------- ----------- Net Cash Provided by Operating Activities $84,333 $122,518 =========== =========== <FN> * Certain reclassifications have been made to the 1993 amounts to conform to current year classifications. -7- 8 SAFECO CORPORATION - - ------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - - ----------------------------------------------------------------- SAFECO Corporation - - ------------------ Our net income for the first quarter was $56.0 million or $0.89 per share, compared with $1.20 per share in 1993. If we exclude realized gain from investments, our net income was $0.69 per share, compared with $0.88 in 1993. The total impact on the first quarter's results of the Los Angeles earthquake discussed below was $0.88 per share. The following summarized financial information sets forth the contributions of each business segment to our consolidated income. Three Months Ended March 31 ------------------ 1994 1993 ------ ------ (In Thousands Except Per Share Amounts) Income (Loss) before Realized Gain and Income Taxes: Property and Casualty Insurance: Underwriting Loss $(59,525) $(37,728) Net Investment Income 70,170 69,374 -------- -------- Total Property and Casualty 10,645 31,646 Life and Health Insurance 30,023 30,443 Real Estate 2,793 2,395 Credit 2,484 2,132 Asset Management 1,743 1,487 Corporate (3,280) (3,412) -------- -------- Total 44,408 64,691 -------- -------- Realized Gain (Loss), before Tax, from: Security Investments 19,205 25,955 Real Estate Investments (45) - -------- -------- Total 19,160 25,955 -------- -------- Income before Income Taxes 63,568 90,646 -------- -------- Provision for Income Taxes on: Income before Realized Gain 922 9,387 Realized Gain 6,620 8,755 -------- -------- Total 7,542 18,142 -------- -------- Income before Cumulative Effect of Accounting Changes 56,026 72,504 Cumulative Effect of Accounting Changes: Postretirement Benefits - (15,676) Income Taxes - 18,553 -------- -------- Net Income $56,026 $75,381 ======== ======== Net Income Per Share of Common Stock: Income before Cumulative Effect of Accounting Changes $.89 $1.15 Cumulative Effect of Accounting Changes: Postretirement Benefits - (.25) Income Taxes - .30 -------- -------- Net Income $.89 $1.20 ======== ======== -8- 9 SAFECO CORPORATION - - ------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - ----------------------------------------------------------------- Property and Casualty Insurance - - ------------------------------- Property and casualty operations for the first quarter of 1994 produced pretax income of $10.6 million before realized gain from investments.This compares with $31.6 million a year ago. The first quarter produced an underwriting loss of $59.5 million, including the loss from the earthquake that struck the Northridge area of Los Angeles on January 17. This underwriting loss follows three consecutive quarters of underwriting profits. The first quarter a year ago had an underwriting loss of $37.7 million, including the $27 million of claims from a windstorm in the Puget Sound area. Losses from the Northridge earthquake are expected to be $62.5 million after reinsurance. This consists of total claims from the earthquake, presently estimated to be $175 million, less $112.5 million recoverable under our catastrophe insurance program. This program reimburses us for 90% of single event losses between $50 and $200 million. In addition to the $62.5 million net earthquake losses, first quarter underwriting results reflect a $20.6 million premium that we are paying our reinsurers to reinstate coverage for a second catastrophe event in 1994 should it occur. In the Balance Sheet, the asset Reinsurance Recoverables is higher at March 31, 1994 due to the amounts recoverable by SAFECO from its reinsurers related to the Northridge earthquake. The combined loss and expense ratio was 112.5 for the quarter, compared with 108.2 a year ago. Investment income was $70.2 million, up slightly from last year's first quarter. Personal auto, our largest line, continues to perform well. This line produced an underwriting profit of $17.1 million for the first quarter,compared with $5.7 million in the first quarter last year. Loss costs continue to increase at less than a 5% annual rate. Other personal lines, which provide coverage for earthquake, dwelling fire, inland marine, boats and recreational vehicles, produced an underwriting loss of $69.2 million for the first quarter as a result of the California earthquake. By comparison, these lines produced a profit of $20.6 million for all of 1993. The earthquake line is vulnerable to infrequent but severe losses. We support proposed legislation to create a national disaster protection program that would create a federal reinsurance program to help mitigate insurance company risk relating to a severe earthquake and other catastrophes. Homeowners produced an underwriting loss of $7.4 million for the quarter, compared with a loss of $37.0 million in the first quarter of 1993. Results include $11.2 million after reinsurance from catastrophes, including $2.9 million from the Los Angeles earthquake.By comparison, first quarter loss costs a year ago included $31.4 million from catastrophe claims. Although this line continues to be adversely affected by catastrophes, it is benefiting from the 1993 rate increases and the continuing efforts to improve homeowners insurance to value. Commercial lines produced an underwriting loss of $3.0 million in the first quarter. This compares with a loss of $12.3 million in the first quarter last year. Results have benefited from our focus on specific states and efforts to reduce expense and to maintain rate adequacy in the face of stiff price competition. -9- 10 SAFECO CORPORATION - - ------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - ----------------------------------------------------------------- Surety continues to produce excellent results. The profit for this line was $3.6 million for the first quarter, compared with a profit of $4.4 million for the same quarter last year. Total premiums written for the first three months increased 10% over a year ago with personal lines up 8%, and commercial lines up 18%. The growth in commercial lines is mainly due to successful efforts to write significant accounts from larger commercial agents in targeted markets. Life and Health Insurance - - ------------------------- Life and health insurance operations produced a pretax profit, before realized gain from investments, of $30.0 million for the first quarter of 1994, compared with $30.4 million for the same period last year. The annuity and pension lines combined first quarter earnings were $9.7 million, an increase over the $8.8 million reported for the first quarter of 1993. Group insurance earnings were $4.8 million for the first quarter, compared with $6.3 million for the first quarter of 1993. Group medical premiums have declined due to uncertainties caused by pending health care reform. Our primary strategy is to strengthen our group life and disability products and to explore opportunities to provide group medical coverages under any reformed health care system. Real Estate - - ----------- SAFECO Properties' pretax income was $2.8 million, compared with $2.4 million for the first quarter of 1993. The 1994 results include a pretax gain from property held for sale of $1.6 million. Credit - - ------ SAFECO Credit Company reported pretax profit of $2.5 million for the first three months of 1994, compared with $2.1 million in 1993. Net income was $1.7 million for the first three months of 1994, compared with $1.1 million in 1993. Rate competition and increasing borrowing costs continue to pressure our margins, but record first quarter loan production provided an offset.Non-affiliate receivables reached $570 million at March 31, 1994, a 7% annualized increase from December, 1993. Delinquency experience continues to be excellent with accounts past due 30 days or more averaging less than 2% over the past twelve months. Asset Management - - ---------------- The pretax income from our investment management operations for the quarter was $1.7 million, compared with $1.5 million for the same period in 1993. Assets under management at March 31, 1994 totaled approximately $2.3 billion. -10- 11 SAFECO CORPORATION - - ------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - ----------------------------------------------------------------- Realized Gain and Carrying Value of Security Investments - - -------------------------------------------------------- Realized pretax gain from security investments was $19.2 million during the first quarter, compared with $26.0 million a year ago. The market value of our consolidated bond portfolio was $571 million in excess of amortized cost at March 31, 1994, down from $1.2 billion at December 31, 1993. These declines reflect the weakness in the bond market during the first quarter as a result of higher interest rates. However, these higher rates will benefit our investment income in the future. During the first quarter, we adopted Financial Accounting Statement Number 115, "Accounting for Certain Investments in Debt and Equity Securities". As a result, over 80% of our fixed maturity security investments are now classified as "Available for Sale", as defined,and carried in the financial statements at market value, net of related deferred taxes. These investments were previously carried at amortized cost. This accounting change does not affect income but is the primary reason for the increase in our book value to $48.98 per share at March 31, 1994, up from $44.09 at December 31, 1993. Stock Purchase Program - - ---------------------- In May 1990, the Board of Directors approved the continuation of the stock purchase program and authorized a total accumulation of up to two million shares, about 3% of our issued shares. At April 22, 1994, 1,036,289 shares have been purchased. Other - Footnotes - - ----------------- The following additional footnote disclosures are being made due to the adoption of two new accounting standards in the first quarter of 1994. Employee Benefit Plans - - ---------------------- SAFECO adopted Financial Accounting Standards Board Statement 112, "Employers' Accounting for Postemployment Benefits", effective January 1, 1994. Adoption had no effect on net income. Investments - - ----------- In May 1993, the Financial Accounting Standards Board issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities", which expands the use of fair value accounting for debt and equity securities. As of January 1, 1994, SAFECO adopted the provisions of this statement for investments held as of, or acquired after that date. Statement 115 requires that debt and equity securities be classified as trading, available-for-sale or held-to-maturity. Debt securities that SAFECO has the positive intent and ability to hold to maturity (as narrowly defined by Statement 115) are classified as held-to-maturity and are reported at amortized cost. Debt securities classified as available-for- sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. All marketable equity securities continue to be carried at market value, with changes in unrealized gains -11- 12 SAFECO CORPORATION - - ------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - ----------------------------------------------------------------- and losses recorded directly to stockholders' equity, net of applicable income taxes. Under Statement 115, trading securities are to be carried at market value with immediate recognition in income of changes in market value. Since SAFECO does not have any securities held for trading, the adoption of Statement 115 had no effect on net income. As required by Statement 115, no restatement of prior period amounts has been made. The following reconciliation of Stockholders' Equity from December 31, 1993 to March 31, 1994 shows the effect of adoption of Statement 115 as of January 1, 1994 and the change in net unrealized holding gains (losses) in the first quarter of 1994. (In Thousands) -------------- Stockholders' Equity, December 31, 1993 $2,774,391 Net effect of adoption of Statement 115 (1) 640,477 ---------- Stockholders' Equity, January 1, 1994 3,414,868 Net income 56,026 Dividends declared (28,336) Net decrease in unrealized appreciation of investment securities, net of tax and deferred policy acquisition costs valuation allowance (2) (357,159) Other items affecting Stockholders' Equity (1,181) --------- Stockholders' Equity, March 31, 1994 $3,084,218 ========== SAFECO had no sales during the first quarter of 1994 of debt securities classified as held-to-maturity. The first quarter decline in the unrealized appreciation of investment securities was due to weakness in both the bond and stock markets as a result of higher interest rates. See note (2) below for the components of the decrease. (1) The net effect of adopting Statement 115 is comprised as follows: Aggregate market value in excess of amortized cost of debt securities classified as available-for-sale, at January 1, 1994 $1,013,117 Deferred policy acquisition costs valuation allowance (27,768) Deferred income taxes, at 35% (344,872) ---------- Net effect of adoption of Statement 115 $ 640,477 ========== (2) The decrease in net unrealized appreciation of investment securities is comprised as follows: Decrease in unrealized appreciation of debt securities, available- for-sale $ (517,908) Decrease in unrealized appreciation of marketable equity securities (52,039) Decrease in deferred policy acquisition costs valuation allowance 20,471 Decrease in deferred income taxes 192,317 ---------- Net decrease in unrealized appreciation of investment securities, net of tax and deferred policy acquisition costs valuation allowance $(357,159) ========= -12- 13 SAFECO CORPORATION - - -------------------- Part II - Other Information - - ----------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K --------------------------------- (b) The Registrant filed two reports on Form 8-K during the quarter ended March 31, 1994 under Item 5 (Other Events), dated February 4, 1994, and March 2, 1994, both pertaining to the January 17, 1994 earthquake in southern California. -13-