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, 2001
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)
127,770,463 shares of no par value common stock were outstanding at June 30,
2001.
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>
SAFECO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS AND SIGNATURES
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<s> <c> <c>
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Part I - Financial Information Page
------------
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000 3
Statements of Consolidated Income (Loss) and Retained Earnings
for the Six Months and Three Months Ended June 30, 2001 and 2000 5
Statements of Consolidated Cash Flows
for the Six Months Ended June 30, 2001 and 2000 6
Statements of Consolidated Comprehensive Income (Loss)
for the Six Months and Three Months Ended June 30, 2001 and 2000 7
Condensed Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14
Part II - Other Information
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 24
</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 August 10, 2001 and Chief Financial Officer
/s/ H. PAUL LOWBER
----------------------------------------
H. Paul Lowber
Vice President, Controller
Dated August 10, 2001 and Chief Accounting Officer
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Millions)
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<s> <c> <c>
- -----------------------------------------------------------------------------------------------------------------------------------
June 30 December 31
ASSETS 2001 2000
------------ ------------------ ---------------
(Unaudited)
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $19,465.6; $20,388.1) $ 20,003.6 $ 20,830.2
Marketable Equity Securities, at Market Value
(Cost: $820.8; $875.9) 1,601.4 1,815.4
Mortgage Loans 850.8 823.0
Other Investment Assets 194.2 160.3
Short-Term Investments 403.0 182.3
------------------ --------------
Total Investments 23,053.0 23,811.2
Cash 179.4 186.3
Accrued Investment Income 309.5 327.8
Premiums and Other Service Fees Receivable 1,068.4 1,063.0
Other Notes and Accounts Receivable 118.9 37.6
Current Income Tax Recoverable 3.3 -
Deferred Income Tax Recoverable
(Includes tax on unrealized appreciation of investment securities: $453.3; $483.8) 287.2 -
Reinsurance Recoverables 446.7 461.7
Deferred Policy Acquisition Costs 616.4 605.4
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 546.9 440.1
Goodwill and Intangibles (Accumulated amortization: $50.6; $202.8) (Note 3) 94.0 1,307.4
Other Assets 195.8 260.9
Net Assets of Discontinued Credit Operations (Note 1) 844.5 481.2
Separate Account Assets 1,261.5 1,275.1
------------------ --------------
TOTAL $ 29,025.5 $ 30,257.7
================== ==============
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 13
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Continued)
(In Millions)
- ------------------------------------------------------------------------------------------------------------------------------------
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
-------------------------------------------------- ----------------- -----------------
(Unaudited)
Losses and Adjustment Expense $ 4,714.4 $ 4,686.9
Life Policy Liabilities 322.4 342.1
Unearned Premiums 1,856.7 1,836.5
Funds Held Under Deposit Contracts 14,099.2 14,085.7
Debt:
Commercial Paper 284.4 349.8
Medium-Term Notes Due 2003 318.5 300.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($6.1 maturing within one year) 77.9 80.7
Other Liabilities 1,150.5 1,269.1
Current Income Taxes - 25.8
Deferred Income Taxes - 67.2
Separate Account Liabilities 1,261.5 1,275.1
----------------- -----------------
Total Liabilities 24,485.5 24,718.9
----------------- -----------------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 843.2 843.0
----------------- -----------------
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: 6.6; 7.1
Shares Issued and Outstanding: 127.8; 127.6 838.7 834.5
Retained Earnings 2,020.5 2,966.4
Total Accumulated Other Comprehensive Income - Net of Tax
Unrealized Appreciation of Investment Securities 846.6 894.9
Unrealized Depreciation from Derivative Instruments and Hedging Activities (9.0) -
----------------- -----------------
Total Shareholders' Equity 3,696.8 4,695.8
----------------- -----------------
TOTAL $ 29,025.5 $ 30,257.7
================= =================
See Condensed Notes to Consolidated Financial Statements on pages 8 through 13
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED INCOME (LOSS) AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30 June 30
------------------------------------ --------------------------------------
2001 2000 2001 2000
----------------- ------------------ ----------------- -----------------
(Unaudited) (Unaudited)
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 2,236.9 $ 2,268.3 $ 1,120.4 $ 1,136.6
Life Premiums and Other Revenues 260.4 255.5 125.8 130.3
----------------- ------------------ ----------------- -----------------
Total 2,497.3 2,523.8 1,246.2 1,266.9
Asset Management 18.4 22.8 9.3 12.4
Other 48.8 47.2 24.3 21.3
Net Investment Income 821.9 813.3 407.1 407.6
Realized Investment Gain 62.2 57.2 28.8 26.1
----------------- ------------------ ----------------- -----------------
Total 3,448.6 3,464.3 1,715.7 1,734.3
----------------- ------------------ ----------------- -----------------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 2,512.4 2,484.5 1,289.3 1,245.9
Commissions 406.6 403.8 208.7 202.0
Personnel Costs 252.9 235.5 125.6 117.3
Interest 32.3 36.8 15.3 19.0
Goodwill and Intangibles Amortization (Note 3) 19.2 29.9 4.0 15.1
Write-Off of Goodwill (Note 3) 1,201.0 - - -
Other 225.6 212.4 112.3 108.0
Amortization of Deferred Policy Acquisition Costs 407.7 419.8 201.5 207.4
Deferral of Policy Acquisition Costs (428.5) (430.5) (215.1) (218.4)
-------------- ------------------ ----------------- -----------------
Total 4,629.2 3,392.2 1,741.6 1,696.3
--------------- ------------------ ----------------- -----------------
Income (Loss) from Continuing Operations before
Income Taxes (1,180.6) 72.1 (25.9) 38.0
----------------- ------------------ ----------------- -----------------
Provision (Benefit) for Income Taxes:
Current 17.5 11.2 11.3 12.2
Deferred (322.6) (14.7) (33.4) (12.1)
----------------- ------------------ ----------------- -----------------
Total (305.1) (3.5) (22.1) 0.1
----------------- ------------------ ----------------- -----------------
Income (Loss) from Continuing Operations before
Distributions on Capital Securities (875.5) 75.6 (3.8) 37.9
Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2)
----------------- ------------------ ----------------- -----------------
Income (Loss) from Continuing Operations (897.9) 53.2 (15.0) 26.7
Income from Discontinued Credit Operations, Net of Tax 2.8 5.7 0.6 2.4
----------------- ------------------ ----------------- -----------------
Income (Loss) before Cumulative Effect of Change in
Accounting Principle (895.1) 58.9 (14.4) 29.1
Cumulative Effect of Change in Accounting
Principle - FAS 133, Net of Tax (2.1) - - -
----------------- ------------------ ----------------- -----------------
Net Income (Loss) (897.2) 58.9 (14.4) 29.1
Retained Earnings, Beginning of Period 2,966.4 3,062.7 2,059.5 3,023.8
Amortization of Underwriting Compensation on
Capital Securities (0.2) (0.2) (0.1) (0.1)
Dividends Declared (47.3) (94.4) (23.7) (47.2)
Common Stock Reacquired (1.2) (21.6) (0.8) (0.2)
----------------- ------------------ ----------------- -----------------
Retained Earnings, End of Period $ 2,020.5 $ 3,005.4 $ 2,020.5 $ 3,005.4
================= ================== ================= =================
Net Income (Loss) Per Share of Common Stock:
Income (Loss) from Continuing Operatons $ (7.02) $ 0.42 $ (0.11) $ 0.22
Income from Discontinued Credit Operations 0.02 0.04 - 0.01
----------------- ------------------ ----------------- -----------------
Income (Loss) before Cumulative Effect of
Change in Accounting Principle (7.00) 0.46 (0.11) 0.23
Cumulative Effect of Change in Accounting
Principle (0.02) - - -
----------------- ------------------ ----------------- -----------------
Net Income (Loss): Diluted $ (7.02) $ 0.46 $ (0.11) $ 0.23
================== ================== ================= ==================
Basic $ (7.02) $ 0.46 $ (0.11) $ 0.23
================= ================== ================= =================
Dividends Paid to Common Shareholders $ 0.56 $ 0.74 $ 0.19 $ 0.37
================= ================== ================= =================
Average Number of Shares Outstanding
During the Period: Diluted 127.9 128.0 128.0 127.7
================= ================== ================= =================
Basic 127.7 127.9 127.8 127.6
================= ================== ================= =================
See Condensed Notes to Consolidated Financial Statements on pages 8 through 13
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
-------------------------------------
2001 2000
---------------- ----------------
(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 2,456.8 $ 2,471.1
Dividends and Interest Received 794.1 767.0
Other Operating Receipts 102.4 107.7
Insurance Claims and Policy Benefits Paid (2,227.9) (2,124.6)
Underwriting, Acquisition and Insurance Operating Costs Paid (845.9) (865.5)
Interest Paid and Distributions on Capital Securities (72.0) (69.1)
Other Operating Costs Paid (62.0) (67.4)
Income Taxes Paid (35.5) (1.2)
---------------- ----------------
Net Cash Provided by Operating Activities 110.0 218.0
---------------- ----------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,273.4) (2,097.4)
Fixed Maturities Held-to-Maturity - (1.5)
Equities (117.0) (236.9)
Other Investment Assets (137.2) (182.9)
Maturities of Fixed Maturities Available-for-Sale 634.3 481.4
Maturities of Fixed Maturities Held-to-Maturity - 8.5
Sales of:
Fixed Maturities Available-for-Sale 1,689.7 1,142.6
Fixed Maturities Held-to-Maturity - 0.1
Equities 219.9 219.2
Other Investment Assets 86.1 252.0
Net Decrease (Increase) in Short-Term Investments (220.7) 242.7
Other (45.8) (49.3)
---------------- ----------------
Net Cash Provided by (Used in) Investing Activities 835.9 (221.5)
---------------- ----------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 267.3 824.4
Return of Funds Held Under Deposit Contracts (690.6) (672.5)
Proceeds from Borrowings - 300.0
Repayment of Borrowings (2.8) (2.7)
Net Proceeds (Repayment) of Short-Term Borrowings (65.2) 63.1
Common Stock Reacquired (1.7) (30.3)
Dividends Paid to Shareholders (70.9) (94.9)
Other (25.6) (32.5)
---------------- ----------------
Net Cash (Used in) Provided by Financing Activities (589.5) 354.6
---------------- ----------------
Cash Used in Discontinued Credit Operations (363.3) (362.9)
Net Decrease in Cash (6.9) (11.8)
Cash at the Beginning of Period 186.3 103.1
---------------- ----------------
Cash at the End of Period $ 179.4 $ 91.3
================ ================
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 13
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
(In Millions)
- ----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30
-------------------------------------
2001 2000
---------------- ----------------
(Unaudited)
Net Income (Loss) $ (897.2) $ 58.9
---------------- ----------------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Income from Discontinued Credit Operations, Net of Tax (2.8) (5.7)
Cumulative Effect of Change in Accounting Principle 2.1 -
Realized Investment Gain (62.2) (57.2)
Amortization and Depreciation 46.6 59.4
Write-off of Goodwill 1,201.0 -
Amortization of Fixed Maturity Investments (32.5) (19.9)
Deferred Income Tax Benefit (322.6) (14.7)
Interest Expense on Deposit Contracts 297.7 267.2
Other Adjustments (4.6) (2.9)
Changes in:
Losses and Adjustment Expense 27.5 128.6
Life Policy Liabilities (19.7) 36.5
Unearned Premiums 20.2 80.4
Accrued Income Taxes (29.1) (1.9)
Accrued Interest on Accrual Bonds (21.2) (21.8)
Accrued Investment Income 18.3 1.0
Deferred Policy Acquisition Costs (11.0) (11.6)
Other Assets and Liabilities (100.5) (278.3)
---------------- ----------------
Total Adjustments 1,007.2 159.1
---------------- ----------------
Net Cash Provided by Operating Activities $ 110.0 $ 218.0
================ ================
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30 June 30
------------------------------------- -------------------------------------
2001 2000 2001 2000
---------------- ---------------- ---------------- ----------------
(Unaudited) (Unaudited)
Net Income (Loss) $ (897.2) $ 58.9 $ (14.4) $ 29.1
Other Comprehensive Income, Net of Taxes:
Change in Unrealized Appreciation of
Investment Securities (48.3) (34.2) (141.9) (57.4)
Change in Unrealized Depreciation from Derivative
Instruments and Hedging Activities (9.0) - (1.7) -
---------------- ---------------- ---------------- ----------------
Comprehensive Income (Loss) $ (954.5) $ 24.7 $ (158.0) $ (28.3)
================ ================ ================ ================
See Condensed Notes to Consolidated Financial Statements on pages 8 through 13
</table>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
SAFECO Corporation ("SAFECO" or the "Company") 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 accounting principles generally accepted
in the United States 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 accounting principles generally accepted in the United States 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 consolidated financial statements and condensed notes be
read in conjunction with the financial statements and notes incorporated by
reference in the Company's Form 10-K for the year ended December 31, 2000 which
has been previously filed with the Securities and Exchange Commission.
On March 14, 2001, SAFECO announced its intentions to sell its credit
subsidiary, SAFECO Credit Company, Inc. ("SAFECO Credit"). On March 31, 2001, a
plan of disposal was formalized establishing the measurement date as March 31,
2001; consequently, SAFECO Credit has been accounted for as a discontinued
operation, effective March 31, 2001. See additional disclosure regarding segment
data in Note 4 of this report. On July 24, 2001, the Company announced that it
had reached a definitive agreement to sell SAFECO Credit to General Electric
Capital Commercial Equipment Financing. It is anticipated that the transaction
will close in the third quarter 2001.
In the first quarter of 2001, effective March 31, 2001, SAFECO elected to change
its accounting policy for assessing goodwill from one based on undiscounted cash
flows to one based on a market-value method. The Company believes that the
market-value method is a preferable way to assess the current value of goodwill.
As a result, SAFECO recorded a write-off of $1,201.0 ($916.9 after-tax or $7.17
per share) in the first quarter. See additional disclosure in Note 3 of this
report.
Certain reclassifications have been made to the prior year financial information
to conform to the current year classifications.
Note 2 - New Accounting Standards
Financial Accounting Standards Board ("FASB") Statement 133, "Accounting for
Derivative Instruments and Hedging Activities"
The FASB issued Statement 133 (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 embedded 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 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.
Effective January 1, 2001, the Company adopted SFAS 133, as amended. All
derivatives, whether designated anew in hedging relationships on January 1, 2001
or not, are required to be recorded on the balance sheet at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability (fair value hedge), (b) a hedge of the exposure to variable cash flows
of a forecasted transaction (cash flow hedge), or (c) a hedge of the foreign
currency exposure of a net investment in foreign operation.
As a result of adopting SFAS 133 on January 1, 2001 and in accordance with the
transition provisions, the Company recorded a loss of $3.2 ($2.1 after-tax or
$0.02 per share), which represents the cumulative effect of the adoption in the
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
Statements of Consolidated Income. In addition, the Company also recorded a loss
of $3.0 ($1.9 after-tax) to accumulated other comprehensive income (AOCI)
related to the adoption impact of SFAS 133.
For the six months and quarter ended June 30, 2001, a gain of $1.7 and loss of
$0.6, respectively, related to fair value hedge ineffectiveness was included in
realized investment gain. For the six months and quarter ended June 30, 2001, a
gain of $0.9 and $2.8, respectively, related to cash flow hedge ineffectiveness
was included in interest expense from continuing operations. For the six months
and quarter ended June 30, 2001, a loss of $1.2 and $0.5, respectively, related
to cash flow hedge ineffectiveness was included in Income from Discontinued
Credit Operations. At June 30, 2001, AOCI included a loss of $13.9 ($9.0
after-tax) for the changes in fair value of cash flow and fair value hedges.
The Company's derivatives and hedges are described further below:
Fair Value Hedges
The Company uses interest rate swaps to offset the change in value of certain
fixed rate assets and liabilities. In calculating the effective portion of the
fair value hedges, the changes in the fair value of the hedge and the hedged
item are recognized in realized gains in the Statements of Consolidated Income.
Differences between the changes in the fair value of the hedge and the hedged
item represent hedge ineffectiveness and are recognized in realized gain or
loss. Fair value hedge ineffectiveness resulted in a gain of $1.7 and loss of
$0.6 for the six months and quarter ended June 30, 2001, respectively. At
January 1, 2001, the cumulative effect of the adoption of SFAS 133 related to
fair value hedges was a loss of $2.6 ($1.7 after-tax). This cumulative loss at
adoption was reported as the cumulative effect of change in accounting principle
reported in the Statements of Consolidated Income.
Cash Flow Hedges
The Company also uses interest rate swaps to hedge the variability of future
cash flows associated with variable rate debt. In calculating the effective
portion of cash flow hedges, the changes in the fair value of the hedge and the
related debt are recognized in AOCI. Differences between the changes in the fair
value of the hedge and the hedged items represent hedge ineffectiveness and are
recognized in interest expense. Cash flow hedge ineffectiveness related to
continuing operations resulted in a decrease to interest expense of $0.9 and
$2.8 for the six months and quarter ended June 30, 2001, respectively. Cash flow
hedge ineffectiveness related to discontinued operations resulted in an increase
to interest expense from discontinued operations of $1.2 and $0.5 for the six
months and quarter ended June 30, 2001, respectively. At January 1, 2001, the
cumulative effect of the adoption of SFAS 133 was a loss of $3.0 ($1.9
after-tax) and was recorded to AOCI. At June 30, 2001, the sum of the cumulative
effect at adoption and current quarter impact loss totaling $13.9 ($9.0
after-tax) was recorded in AOCI related to changes in fair value of the cash
flow hedges. The Company estimates that $4.5 of derivative instrument and
hedging activity gains included in AOCI will be reclassified into earnings
during the next twelve months.
Other Derivatives
SAFECO Credit owns a few derivatives (swaptions) that do not qualify for hedge
treatment as defined under SFAS 133. These swaptions are interest rate swaps
written by financial institutions that can be extended at expiration for another
term at the financial institution's option. Changes in the fair value of the
swaptions are recognized in interest expense. For the six months and quarter
ended June 30, 2001, a loss of $0.4 and $0.3, respectively, was reported as an
increase to interest expense for discontinued operations. SAFECO Credit's
operating results have been reported as a discontinued operation on the
Statements of Consolidated Income (Loss). At January 1, 2001, the cumulative
effect of the adoption of SFAS 133 related to the swaptions was a loss of $0.6
($0.4 after-tax). This cumulative loss at adoption was reported as the
cumulative effect of change in accounting principle reported in the Statements
of Consolidated Income.
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
In 1997, the Company introduced an equity-indexed annuity (EIA) product that
credits the policyholder based on a percentage of the gain in the S&P 500 Index.
The Company has a hedging program with the objective to hedge the exposure to
changes in the S&P 500. The program consists of buying and writing S&P 500
options, buying Treasury interest rate futures and trading S&P 500 futures and
swaps. Sales of the EIA product were suspended in the fourth quarter of 1998. As
permitted under a grandfathering clause in SFAS 133, the Company elected not to
apply the fair value adjustment requirement of this statement to the embedded
derivatives contained in the liability related to EIA products sold prior to
January 1, 1999. The change in fair value of the options, futures and swaps used
to hedge the EIA liability is recognized as an adjustment to realized investment
gain in the Statements of Consolidated Income. For the six months and quarter
ended June 30, 2001, the Company recognized gains of $5.0 and $3.4, respectively
on these options, futures and swaps.
SAFECO has a wholly-owned subsidiary that engages in a limited amount of
derivative trading. Trading activities include the writing of S&P Index options
and selling credit protection through credit default swaps. At June 30, 2001 the
Company had credit default swaps with notional amounts totaling approximately
$250. These activities are not designated as hedging activities under SFAS 133
and changes in the fair values of these investments and the realized gain or
loss are recognized in net investment income. For the six months and quarter
ended June 30, 2001, the Company recorded changes in the fair value and realized
gains totaling $4.0 and $2.5, respectively, on these activities.
The Company formally documents all relationships between the hedging instruments
and hedged items, as well as its risk-management objectives and strategies for
undertaking various hedge transactions. The Company links all hedges that are
designated as fair value hedges to specific assets or liabilities on the balance
sheet. The Company links all hedges that are designated as cash flow hedges to
forecasted transactions. The Company also assesses, both at the inception of the
hedge and on an on-going basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge, the Company discontinues hedge accounting prospectively.
No fair value hedges or cash flow hedges were derecognized or discontinued
during the six months and quarter ended June 30, 2001.
FASB Statement 141, "Business Combinations"
The FASB issued Statement 141 ("SFAS 141"), "Business Combinations" in July
2001. This statement changes the approach companies use to account for a
business combination. It eliminates the pooling-of-interests method of
accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. The requirements of SFAS
141 are effective for any business combination accounted for by the purchase
method that is completed after June 30, 2001. The Company adopted this statement
effective July 1, 2001 with no impact on the Company's financial statements.
FASB Statement 142, "Goodwill and Other Intangible Assets"
The FASB issued Statement 142 ("SFAS 142"), "Goodwill and Other Intangible
Assets" in July 2001. Under SFAS 142, goodwill and indefinite-lived intangible
assets are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives (but with no maximum life). The amortization provisions of
SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July 1, 2001,
companies are required to adopt SFAS 142 in fiscal years beginning after
December 15, 2001. The Company will adopt SFAS 142 on January 1, 2002.
Note 3 - Change in Accounting for Goodwill
In the first quarter of 2001, effective March 31, 2001, the Company elected to
change its method for assessing the recoverability of goodwill from one based on
undiscounted cash flows to one based on a market-value method. The Company
believes that this change in accounting principle to the market-value method is
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
a preferable way to assess the current value of goodwill. As a result of the
change to a market-value methodology, the Company wrote off all of its goodwill
as of March 31, 2001. The pretax amount of the write-off was $1,201.0; the
related deferred tax benefit amount was $284.1. On an after-tax basis, the
write-off totaled $916.9 or $7.17 per share.
The market value method used to assess the recoverability of goodwill compares
the Company's market capitalization (stock price multiplied by shares
outstanding) to the reported book value (total shareholders' equity) of the
Company. Given the extent of the shortfall of market capitalization compared to
the reported book value as of March 31, 2001 and that a similar shortfall had
existed for almost two years, the Company concluded that under the new method
the entire goodwill asset was impaired and a write-off of the full amount was
necessary. The vast majority of this goodwill (98%) resulted from the 1997
acquisition of American States Financial Corporation whose operations have been
fully integrated into those of the Company.
The details of the write-off by business segment are presented below.
<table>
<s> <c> <c>
Gross Write-off, Net
Segment Write-off Tax Benefit of Tax
-------------------------------------- ------------------- ----------------- ------------------
Property & Casualty Insurance $ 1,152.1 $ 273.9 $ 878.2
Life Insurance 32.3 6.7 25.6
Other 16.6 3.5 13.1
--- --------------- -- -------------- --- --------------
Total $ 1,201.0 $ 284.1 $ 916.9
=================== ================= ==================
</table>
Note 4 - 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 Business Insurance and Commercial
Insurance. Business Insurance delivers insurance products and services to
small-to-medium sized businesses, while Commercial Insurance delivers insurance
products and services to medium-to-large complex commercial clients.
The life operations include five reportable segments that include Retirement
Services, Income Annuities, Group, Individual and Other.
Asset Management and Credit are distinct operations managed separately from the
insurance operations. As disclosed in Note 1 on page 8, SAFECO Credit is now
accounted for as a discontinued operation.
Other and Eliminations include corporate investment income, corporate expenses,
results of the real estate operations and eliminations, none of which are
individually significant.
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
Note 4 - Segment Data (continued)
<table>
<s> <c> <c>
Six Months Ended Underwriting Pretax Income Net Income Total
June 30, 2001 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- --------------- --------------- ----------------- --------------- ----------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 865.7 $ (65.4) $ (3.1) $ 2,829.7
Homeowners 366.8 (128.7) (101.4) 1,284.0
Other Personal 99.5 (0.2) 8.4 400.0
Commercial Lines:
Business Insurance 533.6 (62.1) 3.8 3,197.9
Commercial Insurance 327.7 (89.9) (40.1) 2,274.7
Surety 40.6 6.8 9.6 163.1
Other 3.0 (0.9) 0.9 532.4
Write-off of Goodwill - - (1,152.1) -
----------------
--------------- --------------- -----------------
Total 2,236.9 $ (340.4) (1,274.0) $ (883.0) 10,681.8
--------------- =============== ----------------- ----------------
Life Insurance:
Retirement Services 14.1 5.3 6,018.4
Income Annuities 0.2 22.7 6,694.2
Group 164.8 18.8 163.3
Individual 71.6 16.3 3,704.6
Other 9.7 37.5 1,034.2
Write-off of Goodwill - (32.3) -
--------------- ----------------- ----------------
Total 260.4 68.3 40.8 17,614.7
--------------- ----------------- ----------------
Asset Management 18.4 3.8 2.5 70.2
Discontinued Credit Operations - - 2.8 844.5
Other and Eliminations 48.8 (40.9) (60.3) (186.0)
--------------- ----------------- --------------- ----------------
Consolidated Totals $ 2,564.5 $ (1,242.8) $ (897.2) $ 29,025.5
=============== ================= =============== ================
Six Months Ended Underwriting Pretax Income Net Income Total
June 30, 2000 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- -------------- --------------- ------------------ --------------- ---------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 855.6 $ (63.7)$ (1.5) $ 3,088.3
Homeowners 359.3 (52.2) (26.7) 1,321.4
Other Personal 91.7 10.2 18.2 398.3
Commercial Lines:
Business Insurance 586.0 (85.4) (13.4) 3,797.0
Commercial Insurance 342.1 (70.0) (21.5) 2,435.9
Surety 30.3 7.1 8.8 100.7
Other 3.3 (3.0) (15.3) 430.6
-------------- --------------- ------------------ ---------------
Total 2,268.3 $ (257.0) (51.4) $ 41.2 11,572.2
-------------- =============== ------------------ ---------------
Life Insurance:
Retirement Services 19.8 20.2 7,425.6
Income 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
-------------- ------------------ ---------------
Asset Management 22.8 8.3 5.4 80.0
Discontinued Credit Operations - - 5.7 542.6
Other and Eliminations 47.2 (26.4) (39.7) 45.1
-------------- ------------------ --------------- ---------------
Consolidated Totals $ 2,593.8 $ 14.9 $ 58.9 $ 29,976.8
============== ================== =============== ===============
* Income before realized gains (losses), distributions on capital securities,
income taxes, discontinued Credit operations and cumulative effect of change
in accounting principle. Amounts include the March 31, 2001 write-off of
goodwill for Property and Casualty Insurance of $1,152.1, Life Insurance of
$32.3 and Other of $16.6 totaling $1,201.0. The Other goodwill write-off of
$16.6 is included in Other and Eliminations.
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- --------------------------------------------------------------------------------
Note 4 - Segment Data (continued)
Three Months Ended Underwriting Pretax Income Net Income Total
June 30, 2001 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- --------------- --------------- ----------------- --------------- ----------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 438.2 $ (37.8) $ (6.9) $ 2,829.7
Homeowners 184.6 (95.6) (81.7) 1,284.0
Other Personal 50.4 (1.2) 3.1 400.0
Commercial Lines:
Business Insurance 261.7 (34.7) (2.4) 3,197.9
Commercial Insurance 161.0 (46.1) (19.7) 2,274.7
Surety 22.7 4.6 6.2 163.1
Other 1.8 (1.9) 2.0 532.4
Write-off of Goodwill - - - -
----------------
--------------- --------------- -----------------
Total 1,120.4 $ (212.7) (99.4) $ (32.6) 10,681.8
--------------- =============== ----------------- ----------------
Life Insurance:
Retirement Services 6.4 1.9 6,018.4
Income Annuities 0.1 12.3 6,694.2
Group 80.9 12.1 163.3
Individual 33.6 9.5 3,704.6
Other 4.8 18.6 1,034.2
Write-off of Goodwill - - -
--------------- ----------------- ----------------
Total 125.8 54.4 30.4 17,614.7
--------------- ----------------- ----------------
Asset Management 9.3 1.9 1.3 70.2
Discontinued Credit Operations - - 0.7 844.5
Other and Eliminations 24.3 (11.6) (14.2) (186.0)
--------------- ----------------- --------------- ----------------
Consolidated Totals $ 1,279.8 $ (54.7) $ (14.4) $ 29,025.5
=============== ================= =============== ================
Three Months Ended Underwriting Pretax Income Net Income Total
June 30, 2000 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- -------------- --------------- ------------------ --------------- ---------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 428.1 $ (23.9)$ 6.6 $ 3,088.3
Homeowners 180.4 (38.1) (25.4) 1,321.4
Other Personal 46.1 5.8 9.9 398.3
Commercial Lines:
Business Insurance 298.6 (26.4) 9.0 3,797.0
Commercial Insurance 167.3 (43.5) (19.8) 2,435.9
Surety 14.8 2.4 3.4 100.7
Other 1.3 (0.7) (7.0) 430.6
-------------- --------------- ------------------ ---------------
Total 1,136.6 $ (124.4) (23.3) $ 17.3 11,572.2
-------------- =============== ------------------ ---------------
Life Insurance:
Retirement Services 9.3 9.0 7,425.6
Income 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
-------------- ------------------ ---------------
Asset Management 12.4 4.8 3.1 80.0
Discontinued Credit Operations - - 2.4 542.6
Other and Eliminations 21.3 (15.0) (21.4) 45.1
-------------- ------------------ --------------- ---------------
Consolidated Totals $ 1,300.6 $ 11.9 $ 29.1 $ 29,976.8
============== ================== =============== ===============
* Income before realized gains (losses), distributions on capital securities,
income taxes, discontinued Credit operations and cumulative effect of change
in accounting principle.
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Millions, except per share amounts, unless otherwise noted)
SAFECO Corporation and Subsidiaries
SAFECO's net income (loss) for the six months ended June 30, 2001 and 2000 was
$(897.2) and $58.9, respectively or $(7.02) and $0.46 per share, respectively.
Excluding realized gain from investments, write-off of goodwill and discontinued
operations, the income (loss) per share for the six months ended June 30, 2001
and 2000 was $(0.17) and $0.13, respectively. The following summarized financial
information sets forth the contributions of each business segment to
consolidated income.
Six Months Ended Three Months Ended
June 30 June 30
-------------------------------- ------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------- ------------------------------
Income (Loss) from Continuing Operations before (In Millions Except Per Share Amounts)
Realized Gain and Income Taxes: *
Property and Casualty Insurance:
Underwriting Loss $ (340.4) $ (257.0) $ (212.7) $ (124.4)
Net Investment Income 229.5 227.6 113.3 112.1
Goodwill Amortization (11.0) (22.0) - (11.0)
------------- ------------ ------------- ------------
Total Property and Casualty (121.9) (51.4) (99.4) (23.3)
Life 100.6 84.4 54.4 45.4
Asset Management 3.8 8.3 1.9 4.8
Corporate (24.3) (26.4) (11.6) (15.0)
Write-off of Goodwill (1,201.0) - - -
------------- ------------ ------------- ------------
Total (1,242.8) 14.9 (54.7) 11.9
Realized Gain before Income Taxes 62.2 57.2 28.8 26.1
------------- ------------ ------------- ------------
Income (Loss) from Continuing Operations before Income (1,180.6) 72.1 (25.9) 38.0
Tax
------------- ------------ ------------- ------------
Provision (Benefit) for Income Taxes on:
Income (Loss) from Continuing Operations and
before Realized Gain (326.9) (23.4) (32.5) (9.0)
Realized Investment Gain 21.8 19.9 10.4 9.1
------------- ------------ ------------- ------------
Total (305.1) (3.5) (22.1) 0.1
------------- ------------ ------------- ------------
Income (Loss) from Continuing Operations before
Distributions on Capital Securities (875.5) 75.6 (3.8) 37.9
Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2)
------------- ------------ ------------- ------------
Income (Loss) from Continuing Operations (897.9) 53.2 (15.0) 26.7
Income from Discontinued Operations 2.8 5.7 0.6 2.4
------------- ------------ ------------- ------------
Income (Loss) before Cumulative Effect of Change in
Accounting Principle - FAS 133, Net of Tax (895.1) 58.9 (14.4) 29.1
Cumulative Effect of Change in Accounting Principle -
FAS 133, Net of Tax (2.1) - - -
------------- ------------ ------------- ------------
Net Income (Loss) $ (897.2) $ 58.9 $ (14.4) $ 29.1
============= =========== ============= ============
Per Share of Common Stock:
Income (Loss) before Realized Gain and Write-off of $ (0.17) $ 0.13 $ (0.26) $ 0.09
Goodwill
Write-off of Goodwill (7.17) - - -
Realized Gain 0.32 0.29 0.15 0.13
------------- ------------ ------------- ------------
Income (Loss) from Continuing Operations (7.02) 0.42 (0.11) 0.22
Income from Discontinued Operations 0.02 0.04 - 0.01
------------- ------------ ------------- ------------
Income (Loss) before Cumulative Effect of Change in
Accounting Principle (7.00) 0.46 (0.11) 0.23
Cumulative Effect of Change in Accounting Principle (0.02) - - -
------------- ------------ ------------- ------------
Net Income (Loss) $ (7.02) $ 0.46 $ (0.11) $ 0.23
============= =========== ============= ============
Dividends Paid to Common Shareholders $ 0.56 $ 0.74 $ 0.19 $ 0.37
* Note: Income (Loss) from Continuing Operations 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.
</table>
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
Since late January 2001, the new Chief Executive Officer and the senior
management team engaged in a review of the Company's operations with a
particular emphasis on the property and casualty insurance operations. This
review resulted in urgent actions being taken. Specific action plans resulting
from this review have been introduced that focus on: (1) assuring that the
recovery plans for the property and casualty insurance operations have the rigor
and urgency necessary to succeed, especially with respect to getting appropriate
rates for the risks we assume and re-underwriting our book of business; (2)
rigorously analyzing and reducing expenses; (3) strengthening the balance sheet;
and (4) investment in the Company's employees and the third-parties who
distribute the Company's products.
Urgent Actions
(1) The recovery plans for the property and casualty operations involve actions
on several fronts. Rate increases in the auto, homeowners, small and large
commercial lines are being taken. Re-underwriting continues in the personal
insurance, business insurance and commercial insurance lines, involving
aggressively non-renewing lower quality risks. Re-underwriting in the
business insurance area resulted in the reduction of $120 of unprofitable
business.
On May 17, 2001, the Company announced its decision to consolidate its
commercial lines operations by reducing the number of regional offices. The
new operations will be known as SAFECO Business Insurance (SBI) and will
focus on small-to-medium business product lines. SBI will include a special
facility to underwrite large commercial accounts produced by agents and
brokers who support SAFECO's core personal and small-to-medium business
product lines. The Company also decided to exit roughly half of its $270
Select Markets business because these specialty insurance products do not
fit with the Company's core business focus. Once the contracts for the
discontinued lines expire they will not be renewed. The runoff period may
take up to two to three years.
SAFECO recently announced an aggressive profit restoration plan for
homeowners. Elements of the plan include pricing the product to generate a
fair return, restricting policy terms, insurance to value efforts and a
willingness to exit markets that do not respond to pricing actions.
(2) A rigorous company wide effort to reduce expenses is ongoing. On July 18,
2001, the Company announced that it would be eliminating approximately
1,200 jobs by the end of 2003 with half of the reductions to be completed
by the end of 2001. Positions will be eliminated in the corporate
headquarters and regional operations. This announcement includes the jobs
to be eliminated as part of the commercial operation consolidation
previously announced on May 17, 2001. When fully implemented, these actions
will reduce the Company's annual operating expenses by approximately $100.
Restructuring charges and period costs associated with these changes are
expected to total approximately $60 through 2003. This will include a
pretax charge against earnings in the third quarter of this year of
approximately $40 (or $0.20 per diluted share after tax), a fourth quarter
charge of approximately $5 and the balance to be spread out over the next
two years as the different changes occur. These charges include estimated
severance costs, stay bonuses, employee transfer costs, recruiting and
training expenses and office closure costs. Charges that meet the
requirements of exits costs, in accordance with generally accepted
accounting principles, will be recognized and accrued as a restructuring
charge when the costs can be reasonably estimated. Other charges that do
not meet the definition of exit costs will be expensed as a restructuring
charge in the period incurred.
(3) In strengthening the balance sheet, the decision to sell SAFECO Credit was
driven by a desire to reduce the Company's debt. When the sale is closed,
approximately one-half of the Company's debt will be eliminated. On July
24, 2001, SAFECO announced that it had reached a definitive agreement to
sell SAFECO Credit to General Electric Capital Commercial Equipment
Financing. It is anticipated that the transaction will close in the third
quarter 2001.
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
Effective March 31, 2001, the Company elected to change its method for
assessing the recoverability of goodwill. As a result, all goodwill was
written-off. This brings the book value of the Company more in line with
market value as investors had discounted the value of the goodwill for some
time.
On February 8, 2001, the Company announced a 50% reduction in its quarterly
dividend from $0.37 per share to $0.185 per share starting with the April
2001 dividend payment to shareholders. This reduction is expected to
provide the Company cash savings of approximately $95 per year.
An independent review of the Company's property and casualty loss reserve
balances is underway with a particular emphasis on asbestos, construction
defect and workers' compensation exposures. The analysis is intended to
help management better understand emerging industry trends and how they may
be affecting the Company. The analysis is expected to be completed during
the third quarter of 2001 at which time the Company will evaluate the
impact of the analysis on its business and evaluate the need for any
additional reserves.
(4) The people focus is designed to strengthen the tools, capabilities, and
alignment of our employees and to implement a compensation structure
designed to motivate and reward superior performance. Programs are in
development in each area.
In addition, hiring strong leaders is crucial. To this end, in July 2001
Michael LaRocco was appointed President and Chief Operating Officer of
SAFECO Personal Insurance. Mr. LaRocco most recently headed the $1.2
billion northeastern operations for GEICO. And, in May 2001 Bruce
Allenbaugh was named Senior Vice President of Corporate Marketing bringing
wide experiences from Avenue A, NextLink and Pepsi-Cola to the Company. The
Company is also reviewing its relationships with its agents who sell
property and casualty insurance products to assure that the agents who
represent the company are providing it with a sufficient volume and mix of
profitable business to help return the property and casualty operations to
underwriting profitability.
Property and Casualty Insurance
The underwriting loss for the six months ended June 30, 2001 and 2000 was $340.4
and $257.0, respectively. The underwriting loss increased $83.4 over the prior
year due primarily to increases in underwriting losses on homeowners of $76.5
and commercial insurance of $19.9, offset in part by a reduction in the
underwriting loss for business insurance of $23.3.
Catastrophic storms in St. Louis in early April generated customer claims of
approximately $60, one of the largest weather-related losses in the Company's
history. The St. Louis storm along with Tropical Storm Allison and severe
weather throughout the Midwest was the major cause of the increased pretax
operating loss for the quarter. Catastrophes added $123 to second quarter loss
costs, including $73 for homeowners, $30 for personal auto, $13 for business
insurance and $7 for all other lines of business. Non-catastrophe weather losses
for the quarter totaled $67, including $41 for homeowners, $13 for business
insurance, $7 for personal auto and $6 for all other lines of business.
Catastrophes and non-catastrophe weather losses for the second quarter 2001 and
2000 were $190 and $111, respectively.
The total combined ratio for the six months ended June 30, 2001 and 2000 was
115.2 and 111.3, respectively. Excluding catastrophes and non-catastrophe
weather the core combined ratio for the six months ended June 30, 2001 and 2000
was 103.5 and 103.6, respectively. The core combined ratio for the second
quarter of 2001 was 102.0 versus 105.0 in the first quarter. A table showing the
total and core combined ratios for each of the last 5 quarters is presented
below.
The total combined ratio is a commonly used gauge of underwriting performance
measuring the percentage of premium dollars used to pay customer claims and
expenses. The lower the ratio, the more effective the underwriting. The core
combined ratio for personal and commercial lines excludes catastrophes - which
SAFECO defines as events generating multiple customer claims totaling in excess
of $0.5 - and the effects of non-catastrophe weather-related claims.
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
<table>
<s> <c> <c>
Underwriting Results - Total Combined Ratios
---------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------- ------------------------------------------
2nd 1st 4th 3rd 2nd
Quarter Quarter Quarter Quarter Quarter
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Personal Lines
Personal Auto 108.7% 106.5% 109.8% 103.8% 105.6%
Homeowners 151.7% 118.2% 118.0% 116.9% 121.1%
Other Personal 102.4% 97.9% 87.0% 96.3% 87.4%
Total Personal Lines 120.0% 108.7% 110.5% 106.9% 108.5%
Commercial Lines
Business Insurance 113.2% 110.1% 109.0% 114.8% 108.8%
Commercial Insurance 128.6% 126.3% 129.3% 120.5% 126.0%
Total Commercial Lines 119.1% 116.3% 116.7% 116.8% 115.0%
Surety 79.7% 87.7% 111.3% 59.0% 83.8%
Total Combined Ratio 119.0% 111.4% 112.9% 110.1% 110.9%
Underwriting Results - Core Combined Ratios
---------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------- ------------------------------------------
2nd 1st 4th 3rd 2nd
Quarter Quarter Quarter Quarter Quarter
----------- ----------- ----------- ----------- -----------
Personal Lines
Personal Auto 100.2% 106.0% 109.2% 101.7% 102.2%
Homeowners 89.9% 98.2% 93.7% 91.2% 86.0%
Other Personal 89.4% 81.0% 80.8% 88.5% 81.4%
Total Personal Lines 96.6% 101.6% 102.9% 97.8% 96.2%
Commercial Lines
Business Insurance 103.5% 103.4% 105.1% 110.4% 100.5%
Commercial Insurance 124.6% 122.5% 126.4% 117.8% 122.5%
Total Commercial Lines 111.5% 110.7% 113.2% 113.0% 108.4%
Surety 79.7% 87.7% 111.3% 59.0% 83.8%
Core Combined Ratio 102.0% 105.0% 107.1% 103.1% 101.1%
An independent review of the Company's property and casualty loss reserve
balances is underway with a particular emphasis on asbestos, construction defect
and workers' compensation exposures. The analysis is intended to help management
better understand emerging industry trends and how they may be affecting the
Company. The analysis is expected to be completed during the third quarter of
2001 at which time the Company will evaluate the impact of the analysis on its
business and evaluate the need for any additional reserves.
Net written premiums for the property and casualty insurance companies decreased
by 3.0% for the six months ended June 30, 2001 compared with the same period
last year. This includes an increase of 2 percent in net written premium for
Personal Lines during the six months ended June 30, 2001, a decrease of 17
percent for Business Insurance and a decrease of 6 percent in Commercial
Insurance.
Personal Auto - Pretax underwriting losses for the six months ended June 30,
2001 and 2000 were $65.4 and $63.7, respectively. Second quarter 2001 and 2000
underwriting losses were $37.8 and $23.9, respectively. Catastrophes and
non-catastrophe weather losses for the quarter were $37 for the quarter ended
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
June 30, 2001 compared with $15 for the second quarter of 2000. The core
combined ratio improved and declined to 100.2% in the second quarter 2001 from
106.0% in the first quarter 2001 and 102.2% in the second quarter of 2000.
SAFECO continues to re-underwrite its personal auto business and increase rates.
The effect of rate increases, agency cancellations, and tighter underwriting are
impacting the number of automobile policies in-force, which ended the second
quarter 4% lower than a year ago. However, net auto premiums written increased
2% to $882.
Homeowners - Pretax underwriting losses for the six months ended June 30, 2001
and 2000 were $128.7 and $52.2, respectively. Second quarter 2001 and 2000
underwriting losses were $95.6 and $38.1, respectively. Catastrophes and
non-catastrophe weather losses totaled $114 for the second quarter 2001 compared
with $63 last year. SAFECO recently announced an aggressive profit restoration
plan for homeowners. Elements of the plan include pricing the product to
generate a fair return, restricting policy terms, insurance to value efforts and
a willingness to exit markets that do not respond to pricing actions.
Other Personal - Other Personal Lines provide coverage for earthquake, dwelling
fire, inland marine and boats. Second quarter loss costs include $2 for the
April St. Louis storm and other catastrophe events. Net premiums written
increased 10% to $105.
Business Insurance - Pretax underwriting losses for the six months ended June
30, 2001 and 2000 were $62.1 and $85.4, respectively. This represents an
improvement of more than 27% between the two years. Second quarter 2001 and 2000
underwriting loss were $34.7 and $26.4, respectively. Actions taken this past
year to increase prices and eliminate unprofitable business are contributing to
the improvement in the combined ratio for the current year. The re-underwriting
of this book of business, which resulted in the elimination of approximately
$120 of annual premium, was completed during the second quarter. These actions
have resulted in a loss of business with net premiums written down 17% to $526.
On May 17, 2001, the Company announced its decision to consolidate its
commercial operations. The new operations will be known as SAFECO Business
Insurance (SBI) and will focus on small-to-medium business product lines. SBI
will include a special facility to underwrite large commercial accounts produced
by agents and brokers who supports SAFECO's core personal and small-to-medium
business product lines. The new SBI organization will have six underwriting
field offices throughout the country. The Company also decided to exit roughly
half of its $270 Select Markets business because these specialty insurance
products do not fit with the Company's core business focus. Once the contracts
for the discontinued lines expire they will not be renewed. The runoff period
may take up to two to three years.
Commercial Insurance - Pretax underwriting losses for the six months ended June
30, 2001 and 2000 were $89.9 and $70.0, respectively. Second quarter 2001 and
2000 underwriting loss were $46.1 and $43.5, respectively. Adverse workers'
compensation loss experience, particularly in California and Florida, is
mitigating actions taken to improve results. SAFECO continues to increase
prices, and intends to increase the non-renewal of policies in markets that have
been consistently unprofitable. Net premiums written decreased 6% to $324.
As discussed in the Business Insurance section above, the large commercial
insurance operations will be consolidated into the new SBI operations. The
property and casualty operating results for Business Insurance and Commercial
Insurance will continue to be shown separate for the remainder of 2001 and will
be combined starting in 2002.
Life Insurance
The life insurance companies reported pretax income, excluding realized gains
and write-off of goodwill, for the six months ended June 30, 2001 and 2000 of
$100.6 and $84.4, respectively. Second quarter 2001 and 2000 profits were $54.4
and $45.4, respectively.
Retirement Services - Pretax income for the six months ended June 30, 2001 and
2000 were $5.3 and $20.2, respectively. Second quarter 2001 and 2000 profits
were $1.9 and $9.0, respectively. This decline is due to a decrease in assets
under management and losses incurred from early surrenders of the equity indexed
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
annuity (EIA). Assets under management at June 30, 2001 and 2000 were $6 billion
and $7 billion, respectively. Losses in the EIA line of $8.9 for the six months
ended June 30, 2001 included $4.7 of additional interest-related charges related
to the early surrender offer extended to EIA policyholders in 2001. EIA deposit
assets under management are $200 at June 30, 2001, down from $253 at March 31,
2001 and $305 at December 31, 2000.
Income Annuities - Pretax income for the six months ended June 30, 2001 and 2000
were $22.7 and $14.0, respectively. Second quarter 2001 and 2000 profits were
$12.3 and $7.0, respectively. The increase in pretax income is mainly due to
increased investment income from changes in paydowns of collateralized mortgage
obligation investments. Assets under management at June 30, 2001 and 2000
remained unchanged at $6 billion.
Group - Pretax income for the six months ended June 30, 2001 and 2000 were $18.8
and $0.7, respectively. Second quarter 2001 and 2000 profits were $12.1 and
$4.7, respectively. This marks the fifth consecutive profitable quarter for the
group line and continues to reflect underwriting and ratings actions taken to
correct the adverse experience in medical stop loss coverage. Group's overall
loss ratio improved to 55% for the second quarter 2001 compared to 66% in the
first quarter and 67% in the second quarter 2000. Premiums for the six months
ended June 30, 2001 increased $7 to $164 compared with $157 last year.
Individual - Pretax income for the six months ended June 30, 2001 and 2000 were
$16.3 and $13.7, respectively. Second quarter 2001 and 2000 profits were $9.5
and $6.6, respectively. The increases are primarily the result of improved
claims experience. Sales of Business Owned Life Insurance (BOLI) have been
negatively impacted by the first quarter 2001 ratings downgrade. See below for
additional information on the rating agency downgrades. Due to the ratings
downgrades the Company has not received any new BOLI deposits in 2001.
As reflected in the Statements of Consolidated Cash Flows, the funds received
under deposit contracts have declined about $560 for the six months ended June
2001 compared with June 30, 2000. The decline is due primarily to the negative
impact of the first quarter 2001 ratings downgrade, impacting BOLI, income
annuities and retirement services products, whose customer base is sensitive to
ratings changes.
Asset Management
The asset management operations recorded pretax earnings for the six months
ended June 30, 2001 and 2000 of $3.8 and $8.3, respectively. The decline in
income is due in part to a lower amount of management and advisory fees
resulting from lower assets under management. Assets under management at June
30, 2001 and 2000 were $5.4 billion and $6.1 billion, respectively.
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
Discontinued Credit Operations
On March 14, 2001, the Company announced its intention to sell its credit
subsidiary, SAFECO Credit. On March 31, 2001, a plan of disposal was formalized
establishing the measurement date as March 31, 2001; consequently, SAFECO Credit
has been accounted for as a discontinued operation, effective March 31, 2001.
SAFECO Credit generated pretax profits for the six months ended June 30, 2001
and 2000 of $4.5 and $8.9, respectively. This represents additional after-tax
earnings per share for the six months ended June 30, 2001 and 2000 of $0.02 and
$0.04, respectively, not included in SAFECO's year-to-date continuing operating
profits.
On July 24, 2001, the Company announced it had agreed to sell SAFECO Credit to
General Electric Capital Commercial Equipment Financing. The sale is expected to
be completed in the third quarter 2001. Specific terms of the sale have not yet
been disclosed. The Company expects to recognize a gain on the sale of SAFECO
Credit.
SAFECO Credit's summarized financial information is as follows:
June 30 December 31
2001 2000
---------------- -----------------
Finance Receivables $ 1,648.8 $ 1,617.7
Affiliate Receivables * 199.7 171.3
Other Assets 118.0 117.3
------------------ ------------------
Total Assets $ 1,966.5 $ 1,906.3
================== ==================
Short-Term Borrowings $ 829.2 $ 1,154.7
Affiliate Borrowings * 896.4 504.0
Other Liabilities 93.1 99.1
------------------ ------------------
Total Liabilities $ 1,818.7 $ 1,757.8
================== ==================
Six Months Ended
June 30
---------------------------------------
2001 2000
---------------- ------------------
Revenues $ 78.0 $ 67.9
Expenses 73.5 59.0
---------------- ------------------
Income before Income Taxes 4.5 8.9
Provision for Income Taxes 1.7 3.2
---------------- ------------------
Net Income $ 2.8 $ 5.7
================== ==================
* The summarized balance sheets presented show SAFECO Credit on a stand
alone basis and do not reflect the elimination of Affiliate Receivables
and Affiliate Borrowings. When these affiliate balances are eliminated
the Net Assets of Discontinued Credit Operations are $844.5 at June 30,
2001 and $481.2 at December 31, 2000.
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
Realized Gain on Investment Portfolio, Write-down of Investments and Investment
Portfolio
Pretax net realized gain from the sale of investments for the six months ended
June 30, 2001 and 2000 was $62.2 and $57.2, respectively. Second quarter 2001
and 2000 realized gains were $28.8 and $26.1, respectively. For the six months
ended June 30, 2001, SAFECO recognized write-downs of $50 ($36 in the first
quarter and $14 in the second quarter) on the investment portfolio due to
deteriorating credit worthiness and market value declines of certain debt and
equity issues. These write-downs are included in the realized gain amount of
$62.2. Write-downs for the same period last year were $10. In the first quarter,
the Company wrote down its equity investment in Concur Technologies, Inc.
because management determined that the decline in the market value was other
than temporary. The investment has been written down to fair value with the
charge of $24 going to realized loss. Another $9 of the write-down relates to
fixed income securities issued by Helig-Meyers which has filed for Chapter 11
Bankruptcy reorganization.
As reflected in the Statements of Consolidated Cash Flows, the Company has
liquidated some fixed maturities and marketable equity securities to increase
liquidity. As a result of rating agency downgrades, discussed further below,
borrowing rates have increased for the Company. SAFECO Corporation has loaned to
SAFECO Credit some of the cash received from the sale of investments to help
repay its Commercial Paper outstanding as it matures. At June 30, 2001, cash
available to meet liquidity needs has increased approximately $200 from December
31, 2000. These funds have been invested in short-term investments.
Rating Agency Downgrades
Three ratings agencies (Standard & Poor's, A.M. Best and Fitch IBCA) lowered
credit ratings for SAFECO during the first quarter. On May 8, 2001, Moody's
lowered SAFECO's senior debt ratings and confirmed the A1 insurance financial
strength ratings of its principal property and casualty and life insurance
subsidiaries. Lower ratings will significantly affect SAFECO Life's ability to
sell income annuities and BOLI products. SAFECO is addressing the situation by
taking steps to strengthen its balance sheet and improve its core earnings. The
following table summarizes SAFECO's ratings as of August 10, 2001:
Fitch
Debt Ratings Rating Basis A.M. Best IBCA Moody's S&P
----------------------------------------------------------------------------------------------------------
SAFECO Corporation Senior Debt bbb+ -- Baa1 BBB+
SAFECO Corporation Capital Securities bbb -- baa1 BBB-
SAFECO Corporation Commercial Paper -- F2 P-2 A-2
Insurer Financial Strength
----------------------------------------------------------------------------------------------------------
Property and Casualty Subsidiaries A AA- A1 A+
Life Insurance Subsidiaries A AA- A1 A+
SAFECO CORPORATION AND SUBSIDIARIES
PART I -- FINANCIAL INFORMATION
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- -------------------------------------------------------------------------------
Forward-looking information is subject to risk and uncertainty
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 SAFECO's business to differ materially from those suggested by the
forward-looking statements. The risks and uncertainties include:
o SAFECO's ability to sell SAFECO Credit Company, Inc.;
o SAFECO's ability to obtain rate increases and non-renew underpriced
insurance accounts;
o Achievement of SAFECO's premium targets and profitability;
o Decrease in large-commercial premium volume;
o Achievement of expense savings from consolidation of commercial
operations;
o Achievement of SAFECO's expense reduction goals;
o Realization of growth and business retention estimates;
o Changes in the nature of the property and casualty book of business;
o Amount and duration of losses from discontinued commercial lines;
o Development and implementation of an automated underwriting process,
including the use of insurance scoring, in personal and
commercial operations;
o Driving patterns;
o Changes in competition and pricing environments;
o Weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
o The occurrence of significant natural disasters, including earthquakes;
o The development of major Year 2000 related claims or liabilities;
o The adequacy of loss reserves;
o The availability and pricing of reinsurance;
o Court decisions and trends in litigation;
o Legislative and regulatory developments;
o Rating agency actions;
o Availability of bank credit facilities;
o Fluctuations in interest rates;
o Performance of financial markets; and
o General economic and market conditions.
In particular, because insurance rates in some jurisdictions are subject to
regulatory review and approval, SAFECO's achievement of rate increases may occur
in amounts and on a time schedule different than planned, which may affect the
Company's efforts to restore earnings in the property and casualty lines.
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(Amounts in Millions)
- -------------------------------------------------------------------------------
Item 1. Legal Proceedings
Because of the nature of their businesses, the Company'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 Company 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 Company are
parties to a number of lawsuits for liability coverages related to
environmental claims. Although estimation of environmental claims loss
reserves is difficult, the Company 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 Company's financial condition.
General Insurance Company of America ("General") is a defendant in
Hobbs v. State Farm Mutual Automobile Insurance Co., et al., a putative
class-action lawsuit filed in 1999 in Illinois state court against
seven property and casualty insurance groups. The plaintiffs allege
that the defendants' support of the Certified Auto Parts Association,
an independent organization that certifies the quality of non-original
equipment manufactured parts for vehicles, constituted a conspiracy to
further the improper use of those parts. The plaintiffs seek damages
and injunctive relief. General is vigorously defending against these
claims.
In July 2000, SAFECO Insurance Company of America filed suit in U.S.
District Court for the Middle District of North Carolina to collect
amounts due from a workers' compensation policyholder, Magna
Corporation ("Magna"). Under a contract with SAFECO Insurance Company
of America, Magna, on behalf of its Professional Employee Organizations
and their client companies, assumed obligations for significant
deductibles and expense reimbursements. On March 19, 2001, Magna filed
a petition under Chapter 7 of the United States Bankruptcy Code. The
total amount due SAFECO Insurance Company of America from Magna may
reach $43.
The SAFECO Property & Casualty Insurance Companies were sued on July
18, 2001, in U.S. District Court for the Northern District of Ohio by a
former SAFECO claims adjuster, Duane J. Jastremski. The plaintiff
purports to represent a nationwide class of present and former SAFECO
claims adjusters. He asserts that claims adjusters should have been
considered non-exempt employees under the federal Fair Labor Standards
Act and seeks damages representing back overtime pay for certain hours
worked by SAFECO claims adjusters. SAFECO intends to vigorously defend
against this allegation.
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of SAFECO Corporation was held May
2, 2001. SAFECO shareholders elected three nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 2004. There were no broker non-votes with
respect to any of the nominees.
For Withheld
------------------ ------------------
Robert S. Cline 103,269,413 5,143,614
William W. Krippaehne, Jr. 103,261,962 5,151,065
Michael S. McGavick 103,404,919 5,008,108
Continuing as Directors are Phyllis J. Campbell, William P.
Gerberding, and Paul W. Skinner, whose terms expire in 2002, and
Joshua Green III, William G. Reed, Jr., Norman B. Rice and Judith M.
Runstad, whose terms expire in 2003.
The proposal to approve the SAFECO Long-Term Incentive Plan of 1997 as
Amended and Restated was adopted by the favorable vote of 96,324,382
shares, with 11,223,567 shares votes "against" and 865,078 shares
abstaining. There were no broker non-votes with respect to the
proposal.
Item 5. Other Information
On August 9, 2001 SAFECO's Board of Directors announced the election
of Joseph W. Brown as a director. Brown, chairman and chief executive
of MBIA Inc., and of its main operating unit MBIA Insurance Corp., will
join the SAFECO board in November. MBIA Insurance Corp. is a financial
guarantor and specialized financial services company. Brown has worked
in the insurance industry for nearly 30 years, including serving as
president and CEO of Fireman's Fund Insurance Company and chairman and
CEO of Talegen Holdings, Inc., Xerox's insurance holdings company.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
The registrant filed the following 8-K's during the quarter ended
June 30, 2001 and for the period up to August 10, 2001 (the filing
date of this Form 10-Q).
Filing dated Under Filing related to:
-------------------- ------------------------ ----------------------------------------------------------
April 4, 2001 Item 5 (Other Items) Announcement regarding expected earthquake losses to
SAFECO of approximately $15 million.
April 24, 2001 Item 5 (Other Items) Announcement relating to the first quarter 2001 earnings
release.
May 18, 2001 Item 5 (Other Items) Announcement relating to the consolidation of SAFECO's
commercial operations.
July 11, 2001 Item 5 (Other Items) Preliminary review of earnings for the second quarter
2001.
July 18, 2001 Item 5 (Other Items) Announcement relating to expense reduction plan.