UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 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)
127,770,630 shares of no par value common stock were outstanding at
September 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
Part I - Financial Information Page Page
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 3
Statements of Consolidated Income (Loss) and Retained Earnings
for the Nine Months and Three Months Ended September 30,
2001 and 2000 5
Statements of Consolidated Cash Flows
for the Nine Months Ended September 30, 2001 and 2000 6
Statements of Consolidated Comprehensive Income (Loss)
for the Nine Months and Three Months Ended September 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 17
Part II - Other Information
Item 1.Legal Proceedings 27
Item 5.Other Information 27
Item 6.Exhibits and Reports on Form 8-K 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFECO CORPORATION
------------------------
Registrant
/s/ ROD A. PIERSON
------------------------
Rod A. Pierson
Senior Vice President
Dated November 13, 2001 and Chief Financial Officer
/s/ H. PAUL LOWBER
------------------------
H. Paul Lowber
Vice President, Controller
Dated November 13, 2001 and Chief Accounting Officer
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Millions)
<table>
<s> <c> <c>
September 30 December 31
ASSETS 2001 2000
------ ------------ -----------
(Unaudited)
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $20,146.5; $20,388.1) $ 21,145.9 $ 20,830.2
Marketable Equity Securities, at Market Value
(Cost: $883.7; $875.9) 1,495.5 1,815.4
Mortgage Loans 886.3 823.0
Other Investment Assets 219.5 160.3
Short-Term Investments 1,129.2 182.3
---------- ----------
Total Investments 24,876.4 23,811.2
Cash 151.7 186.3
Accrued Investment Income 330.7 327.8
Premiums and Other Service Fees Receivable 1,043.0 1,063.0
Other Notes and Accounts Receivable 199.4 37.6
Deferred Income Tax Recoverable
(Net of tax liability related to unrealized appreciation of
invesment securities:$562.3; $483.8) 232.6 -
Reinsurance Recoverables 459.3 461.7
Deferred Policy Acquisition Costs 623.9 605.4
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 558.4 440.1
Goodwill and Intangibles
(Accumulated amortization: $54.3; $202.8) (Note 3) 98.3 1,307.4
Other Assets 188.2 260.9
Net Assets of Discontinued Credit Operations (Note 6) - 481.2
Separate Account Assets 1,070.2 1,275.1
-------- ---------
TOTAL $ 29,832.1 $ 30,257.7
======== ========
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 16
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Continued)
(In Millions)
September 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------------------------------ ------------ -----------
(Unaudited)
Losses and Adjustment Expense $ 5,015.1 $ 4,686.9
(Note 5)
Life Policy Liabilities
328.9 342.1
Unearned Premiums
1,848.4 1,836.5
Funds Held Under Deposit Contracts
14,436.8 14,085.7
Debt:
Commercial Paper
269.8 349.8
Medium-Term Notes Due 2003
318.7 300.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($5.9 maturing within
one year) 76.5 80.7
Other Liabilities
1,440.4 1,269.1
Current Income Taxes
19.7 25.8
Deferred Income Taxes
- 67.2
Separate Account Liabilities 1,070.2 1,275.1
------------ ----------
Total Liabilities
25,224.5 24,718.9
------------- ----------
Corporation-Obligated, Mandatorily Redeemable Capital
Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Corporation ("Capital
Securities") 843.3 843.0
------------- ----------
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: 6.5; 7.1
Shares Issued and Outstanding: 127.8; 127.6 840.8 834.5
Retained Earnings
1,893.7 2,966.4
Total Accumulated Other Comprehensive Income - Net of Tax
Unrealized Appreciation of Investment Securities 1,028.6 894.9
Unrealized Appreciation from Derivative Instruments and Hedging
Activities 1.2 -
------------- ----------
Total Shareholders' Equity 3,764.3 4,695.8
------------- ----------
TOTAL $ 29,832.1 $ 30,257.7
============= ==========
See Condensed Notes to Consolidated Financial Statements on pages 8
through 16
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)
Nine Months Ended Three Months Ended
September 30 September 30
------------------ ------------------
2001 2000 2001 2000
---- ---- ---- -----
(Unaudited) (Unaudited)
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 3,355.4 $ 3,410.7 $ 1,118.5 $ 1,142.4
Life Premiums and Other Revenues 391.1 378.4 130.7 122.9
--------- --------- --------- ---------
Total 3,746.5 3,789.1 1,249.2 1,265.3
Asset Management 27.2 32.7 8.8 9.9
Other 72.2 77.0 23.4 29.8
Net Investment Income 1,230.1 1,226.8 408.2 413.5
Realized Investment Gain 80.7 108.6 18.5 51.4
--------- --------- --------- ---------
Total 5,156.7 5,234.2 1,708.1 1,769.9
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits
(Note 5) 3,978.5 3,731.4 1,466.1 1,246.9
Commissions 619.7 603.2 213.1 199.4
Personnel Costs 378.8 348.6 125.9 113.1
Interest 50.0 55.2 17.7 18.4
Other 316.9 333.2 91.3 120.8
Amortization of Deferred Policy Acquisition Costs 615.5 626.3 207.8 206.5
Deferral of Policy Acquisition Costs (634.0) (643.3) (205.5) (212.8)
Goodwill and Intangibles Amortization (Note 3) 23.4 45.1 4.2 15.2
Write-Off of Goodwill (Note 3) 1,201.0 - - -
Restructuring Charge (Note 4) 31.8 - 31.8 -
--------- --------- --------- ---------
Total 6,581.6 5,099.7 1,952.4 1,707.5
--------- --------- --------- ---------
Income (Loss) from Continuing Operations before Income Taxes (1,424.9) 134.5 (244.3) 62.4
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current (28.1) 14.8 (45.6) 3.7
Deferred (376.6) (9.6) (54.0) 5.1
--------- --------- --------- ---------
Total (404.7) 5.2 (99.6) 8.8
--------- --------- --------- ---------
Income (Loss) from Continuing Operations before
Distributions on Capital Securities (1,020.2) 129.3 (144.7) 53.6
Distributions on Capital Securities, Net of Tax (33.7) (33.6) (11.3) (11.2)
--------- --------- --------- ---------
Income (Loss) from Continuing Operations (1,053.9) 95.7 (156.0) 42.4
--------- --------- --------- ---------
Income from Discontinued SAFECO Credit Operations,
Net of Tax (Note 6) 4.2 8.7 1.4 3.1
Gain from Sale of SAFECO Credit, Net of Tax (Note 6) 54.0 - 54.0 -
--------- --------- --------- ---------
Total 58.2 8.7 55.4 3.1
Income (Loss) before Cumulative Effect of Change in Accounting
Principle (995.7) 104.4 (100.6) 45.5
Cumulative Effect of Change in Accounting Principle - FAS 133,
Net of Tax (2.1) - - -
--------- --------- --------- ---------
Net Income (Loss) (997.8) 104.4 (100.6) 45.5
Retained Earnings, Beginning of Period 2,966.4 3,062.7 2,020.5 3,005.4
Amortization of Underwriting Compensation on Capital Securities (0.3) (0.3) (0.1) (0.1)
Dividends Declared (70.9) (141.7) (23.6) (47.3)
Common Stock Reacquired (3.7) (21.7) (2.5) (0.1)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 1,893.7 $ 3,003.4 $ 1,893.7 $ 3,003.4
========= ========= ========= =========
Net Income (Loss) Per Share of Common Stock:
Income (Loss) from Continuing Operations $ (8.24) $ 0.75 $(1.22) $ 0.33
Income from Discontinued Credit Operations 0.03 0.07 0.01 0.03
Gain from Sale of Credit Operations 0.42 - 0.42 -
--------- --------- --------- ---------
Income (Loss) before Cumulative Effect of Change in
Accounting Principle (7.79) 0.82 (0.79) 0.36
Cumulative Effect of Change in Accounting Principle (0.02) - - -
--------- --------- --------- ---------
Net Income (Loss): Diluted $ (7.81) $ 0.82 $ (0.79) $ 0.36
========= ========= ========== ==========
Basic $ (7.81) $ 0.82 $ (0.79) $ 0.36
========== ========= ========== ==========
Dividends Paid to Common Shareholders $ 0.74 $ 1.11 $ 0.18 $ 0.37
========== ========== ========== ==========
Average Number of Shares Outstanding During the
Period: Diluted 127.9 127.9 128.0 127.7
========== ========== ========== ==========
Basic 127.7 127.8 127.8 127.6
========== ========== ========= ==========
See Condensed Notes to Consolidated Financial Statements on pages 8 through 16
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
Nine Months Ended
September 30
----------------------
2001 2000
---- ----
(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 3,665.6 $ 3,696.2
Dividends and Interest Received 1,150.7 1,158.3
Other Operating Receipts 150.0 143.7
Insurance Claims and Policy Benefits Paid (3,097.1) (3,197.9)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,219.3) (1,171.2)
Interest Paid and Distributions on Capital Securities (128.8) (130.6)
Other Operating Costs Paid (82.3) (81.5)
Income Taxes Refunded (Paid) (47.2) 2.3
--------- -----------
Net Cash Provided by Operating Activities 391.6 419.3
--------- -----------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,511.0) (2,964.5)
Fixed Maturities Held-to-Maturity - (2.2)
Equities (206.5) (354.3)
Other Investment Assets (219.6) (305.1)
Maturities of Fixed Maturities Available-for-Sale 1,030.5 725.5
Maturities of Fixed Maturities Held-to-Maturity - 8.7
Sales of:
Fixed Maturities Available-for-Sale 1,834.5 1,858.7
Fixed Maturities Held-to-Maturity - 0.1
Equities 279.1 415.5
Other Investment Assets 121.7 361.5
Net Decrease (Increase) in Short-Term Investments (849.9) 153.5
Proceeds from Sale of SAFECO Credit Company, Inc. 97.0 -
Other
(55.4) (47.8)
` --------- -----------
Net Cash Used in Investing
Activities (479.6) (150.4)
--------- -----------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 716.3 1,094.5
Return of Funds Held Under Deposit Contracts (976.1) (1,187.1)
Proceeds from Borrowings - 300.0
Repayment of Borrowings (4.3) (3.6)
Net Proceeds (Repayment) of Short-Term Borrowings (74.4) 119.4
Common Stock Reacquired (4.7) (30.5)
Dividends Paid to Shareholders (94.5) (142.1)
Other 9.9 59.9
--------- -----------
Net Cash (Used in) Provided by Financing Activities (427.8) 210.5
--------- -----------
Cash Provided by (Used in) Discontinued Credit
Operations 481.2 (423.3)
Net Increase (Decrease) in Cash (34.6) 56.1
Cash at the Beginning of Period 186.3 103.1
--------- -----------
Cash at the End of Period $ 151.7 $ 159.2
============ ============
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 16
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
(In Millions)
Nine Months Ended
September 30
---------------------
2001 2000
---- ----
(Unaudited)
Net Income (Loss) $ (997.8) $ 104.4
----------- ---------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Income from Discontinued Credit Operations, Net of Tax (4.2) (8.7)
Cumulative Effect of Change in Accounting Principle 2.1 -
Gain from Sale of SAFECO Credit Company, Inc., Net of Tax (54.0) -
Realized Investment Gain (80.7) (108.6)
Amortization and Depreciation 65.7 79.6
Write-off of Goodwill 1,201.0 -
Amortization of Fixed Maturity Investments (47.5) (30.8)
Deferred Income Tax Benefit (376.6) (9.6)
Interest Expense on Deposit Contracts 474.0 374.3
Other Adjustments (1.6) (6.7)
Changes in:
Losses and Adjustment Expense 328.2 143.6
Life Policy Liabilities (13.2) 38.1
Unearned Premiums 11.9 83.0
Accrued Income Taxes (6.1) 1.6
Accrued Interest on Accrual Bonds (31.4) (32.1)
Accrued Investment Income 2.9 (17.5)
Deferred Policy Acquisition Costs (18.5) (19.4)
Other Assets and Liabilities (62.6) (171.9)
----------- ---------
Total Adjustments 1,389.4 314.9
------------- ----------
Net Cash Provided by Operating Activities $ 391.6 $ 419.3
=========== =========
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
Nine Months Ended Three Months Ended
September 30 September 30
------------------------ ---------------------
2001 2000 2001 2000
------- ---- ----- ----
(Unaudited) (Unaudited)
Net Income (Loss) $ (997.8) $ 104.4 $ (100.6) $ 45.5
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities 133.7 62.0 182.0 96.2
Change in Unrealized Appreciation from
Derivative Instruments and Hedging
Activities 1.2 - 10.2 -
---------- --------- --------- ---------
Comprehensive Income (Loss) $ (862.9) $ 166.4 $ 91.6 $ 141.7
=========== ========= ========= =======
See Condensed Notes to Consolidated Financial Statements on pages
8 through 16
</table>
<page>
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollar 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 was accounted for as a discontinued operation,
effective March 31, 2001. On July 24, 2001, the Company announced that it had
reached a definitive agreement to sell SAFECO Credit to General Electric Capital
Corporation ("GECC"). The sale (effective July 31, 2001) was completed on August
15, 2001. See additional disclosure regarding segment data in Note 7 and
information regarding the sale in Note 6 of this report.
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.
Net income (loss) per diluted share of common stock is based on the
weighted-average number of diluted common shares outstanding during the period.
Due to the net loss in 2001 the Company used basic weighted-average shares
outstanding to calculate earnings per share of common stock. Using diluted
weighted-average shares outstanding would have resulted in a lower net loss per
share of common stock.
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"
<page>
The FASB issued Statement 133 (SFAS 133) in June 1998. The Statement amends or
supersedes several previous FASB statements and requires recognizing 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. A derivative is
typically defined as an instrument whose value is "derived" from an underlying
instrument, index or rate, has a notional amount, and can be net settled. The
accounting for changes in the fair value of a derivative depends on the use of
the derivative and the nature of any hedge designation thereon.
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
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 nine months and quarter ended September 30, 2001, a loss of $0.8 and
$2.5, respectively, related to fair value hedge ineffectiveness was included in
realized investment gain. For the nine months and quarter ended September 30,
2001, a loss of $1.3 and $2.2, respectively, related to cash flow hedge
ineffectiveness was included in interest expense from continuing operations. For
the nine months and quarter ended September 30, 2001, a loss of $1.4 and $0.2,
respectively, related to cash flow hedges was included in Income from
Discontinued Credit Operations. At September 30, 2001, AOCI included a gain of
$1.7 ($1.2 after-tax) for the changes in fair value of cash flow 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 loss of $0.8 and $2.5 for
the nine months and quarter ended September 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. The changes in the fair value of
the hedge and the related interest 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 an increase of $1.3
and $2.2 to interest expense for the nine months and quarter ended September 30,
2001, respectively. Cash flow hedge ineffectiveness related to discontinued
operations resulted in an increase to interest expense from discontinued
operations of $1.4 and $0.2 for the nine months and quarter ended September 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
September 30, 2001, AOCI included a gain of $1.7 ($1.2 after-tax) for the
changes in fair value of cash flow hedges. The Company estimates that $6.9 of
derivative instrument and hedging activity gains included in AOCI will be
reclassified into earnings during the next twelve months.
<page>
Other Derivatives
SAFECO Credit owned a few derivatives (swaptions) that did not qualify for hedge
treatment as defined under SFAS 133. Changes in the fair value of the swaptions
were recognized in interest expense. For the seven months and month ended July
31, 2001, a loss of $0.1 and a gain of $0.3, respectively, were reported as an
increase and decrease, respectively, to interest expense for discontinued
operations. SAFECO Credit's operating results have been reported as discontinued
operations 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. As described further in Note 6 the Company
completed the sale of SAFECO Credit to GECC on August 15, 2001. These
derivatives were transferred to GECC as part of the sale of SAFECO Credit to
GECC.
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 nine months and quarter
ended September 30, 2001, the Company recognized gains of $5.3 and $0.3,
respectively on these options, futures and swaps.
SAFECO has a wholly-owned subsidiary that engages in a limited amount of
derivative trading which includes writing S&P Index options and selling credit
protection through credit default swaps. At September 30, 2001 the Company had
credit default swaps with notional amounts totaling approximately $470. 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 or in realized gain. For the nine months and
quarter ended September 30, 2001, the Company recorded gains (losses) of $4.1
and $(0.1) related to writing S&P Index options recorded through net investment
income. For the nine months and quarter ended September 30, 2001, the Company
recorded losses of $(6.6) and $(6.4) related to the credit default swaps
recorded through realized loss.
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 nine months and quarter ended September 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 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. SAFECO
does not expect the adoption of SFAS 142 to have a material impact on the
Company's financial statements.
FASB Statement 143, "Accounting for Asset Retirement Obligations"
The FASB issued Statement 143, "Accounting for Asset Retirement Obligations" in
August 2001. This standard requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. The standard is effective for fiscal years beginning after June 15,
2002. The Company will adopt SFAS 143 on January 1, 2003. SAFECO does not expect
the adoption of this statement to have a material impact on the Company's
financial statements.
FASB Statement 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"
The FASB issued Statement 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" in October 2001. The FASB's new rules on asset impairment
supersede FASB Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", and provide a single
accounting model for long-lived assets to be disposed of. The standard is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years, with early application encouraged. The
Company will adopt SFAS 144 on January 1, 2002. SAFECO does not expect the
adoption of this statement to have a material impact on the Company's financial
statements.
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
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 - Restructuring Charge
As disclosed in the June 30, 2001 Form 10-Q filing, 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 expected to be completed by the end of
2001. Since the beginning of this year SAFECO's total employment has declined by
approximately 600, excluding the reduction due to the sale of SAFECO Credit.
Positions being eliminated are in the corporate headquarters and regional
property and casualty operations. These disclosures include the jobs being
eliminated as part of the commercial operation consolidation previously
announced on May 17, 2001. When fully implemented, these actions are expected to
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 includes the pretax
charge against earnings this quarter of $31.8 (or $0.16 per diluted share after
tax) and an expected fourth quarter charge of approximately $10. The remaining
costs are expected to be incurred over the next two years as the different
events occur. These charges include estimated severance costs, stay bonuses,
employee transfer costs, recruiting and training expenses, related consulting
fees, and certain office closure costs. Charges that meet the definition of exit
costs include severance costs and lease termination costs and have been
recognized and accrued as a restructuring charge in accordance with accounting
principles generally accepted in the United States. Other charges that do not
meet the definition of exits costs have been expensed as restructuring charges
in the period incurred. These period costs include stay bonuses, employee
transfer costs, recruiting and training expenses, related consulting fees, and
certain office closure costs.
The activity related to the accrued restructuring charges for the three months
ended September 30, 2001 was as follows:
<table>
<s> <c> <c>
Lease
Termination and
Severance Other
Costs Costs Total
------------------- -------------------- -------------------
Accrual $ 13.0 $ 5.0 $ 18.0
Amounts Paid (2.4) (1.5) (3.9)
------------------- -------------------- -------------------
September 30, 2001 Liability $ 10.6 $ 3.5 $ 14.1
=================== ==================== ===================
</table>
Other charges related to the restructuring that have been expensed as incurred
totaled $13.8. These costs are primarily comprised of employee transfer costs
and employee stay bonuses. For the quarter ended September 30, 2001 the number
of employees terminated as a direct result of the restructuring effort totaled
170. These 170 employees are included in the 600 total reduction in employment
since January 1, 2001 noted above.
Note 5 - Property & Casualty Reserve Strengthening
During the third quarter 2001, the Company completed a review, initially
announced in May 2001, of property and casualty loss reserve adequacy. As a
result of this review which included a study by an independent accounting firm,
SAFECO increased reserves by $240, pretax. The Company's reserve increase is
included in third quarter 2001 underwriting results. The $240 reserve addition
relates to SAFECO's reported property and casualty segments as follows: $65 for
SAFECO Business Insurance, $90 for SAFECO Commercial Insurance, and $85 in the
Other lines of business. The Other line includes the discontinued reinsurance
operation SAFECO acquired when it purchased American States. The $240 reserve
addition relates to recent developments to prior year claims in underlying
coverages as follows: $90 for construction defect, $80 for workers compensation
and $70 for other coverages including asbestos and environmental.
The estimation of liabilities for claims related to construction defect and
asbestos and environmental is subject to greater subjectivity than for other
claims. The Company's reserve review noted the continued emergence of adverse
loss experience for construction defect and asbestos and environmental, as well
as workers compensation. As a result of the review management concluded that
ultimate losses for these three lines will be higher in the range of possible
outcomes than previously estimated.
The $90 for construction defect is due to continued adverse development on prior
year claims and the expansion of the number of claims in states outside of
California. Recent state courts' rulings have expanded the number of potential
claims beyond those contemplated by SAFECO's original estimate.
The $80 for workers compensation is due to unexpected development of prior year
claims and continued increases in medical costs. Administrative rulings have
also recently been more favorable to plaintiffs' claims for compensation,
particularly in the states of California and Florida.
The $70 for other lines, including asbestos and environmental relates to the
anticipated increase in asbestos claims relating primarily to the discontinued
reinsurance operations acquired in the American States purchase in 1997. As part
of the reserve review several trends were observed, confirmed by recent
insurance industry experience. These include an expansion of defendants to
include smaller and more peripheral firms such as installers rather than
manufacturers and producers.
The review of loss reserve adequacy concluded that current reserve levels for
personal lines (primarily Personal Auto and Homeowners) are sufficient.
To mitigate the surplus impact of the reserve strengthening, SAFECO Corporation
contributed $250 of capital to the property and casualty subsidiaries on
September 28, 2001. The source of the capital contribution was from the proceeds
of the sale of SAFECO Credit.
Note 6 - Sale of SAFECO Credit Company, Inc.
On March 14, 2001, SAFECO 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 was
accounted for as a discontinued operation, effective March 31, 2001.
On July 24, 2001, the Company announced that it had reached a definitive
agreement to sell SAFECO Credit to General Electric Capital Corporation
("GECC").
On August 15, 2001, SAFECO completed the sale (effective July 31, 2001) of
SAFECO Credit to GECC for total cash proceeds of $910, which included
the repayment of loans to SAFECO Credit and settlement of other affiliated
transactions between SAFECO Credit and the Company totaling $760. The sale
resulted in a pretax gain of $97. The after-tax gain on the sale of $54
is reported in the Statements of Consolidated Income (Loss). The sale of SAFECO
Credit was completed pursuant to the terms of an Amended and Restated Stock
Purchase Agreement, dated as of July 23, 2001 by and among GECC, the Company and
SAFECO Credit.
Note 7 - 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
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.
The life operations include five reportable segments that include Retirement
Services, Income Annuities, Group, Individual and Other.
Asset Management is the investment advisor for the SAFECO mutual funds, variable
annuity portfolios, outside pension and trust accounts.
Credit is a distinct operation which provides loans and equipment financing and
leasing to commercial business, insurance agents and affiliated companies. As
disclosed in Note 1 and 6, the sale (effective July 31, 2001) of SAFECO Credit
was completed on August 15, 2001 so this segment is accounted for as a
discontinued operation.
Other and Eliminations include corporate investment income, corporate expenses,
certain real estate operations, and eliminations, none of which are individually
significant.
<table>
<s> <c> <c>
Note 7 - Segment Data (continued)
Nine Months Ended Underwriting Pretax Income Net Income Total
September 30, 2001 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- --------------- --------------- ----------------- --------------- ----------------
Property and Casualty Insurance:
Personal
Lines:
Personal Auto $ 1,312.2 $ (62.4) $ 28.8 $ 2,914.3
Homeowners 553.7 (172.4) (132.5) 1,322.4
Other Personal 150.5 2.8 15.6 417.6
Commercial Lines:
Business Insurance 787.8 (149.9) (52.8) 3,297.0
Commercial Insurance 479.1 (244.5) (169.9) 2,388.7
Surety 67.6 13.2 17.8 186.6
Other 4.5 (98.0) (88.5) 607.7
Restructuring Charge - - (31.8) -
Write-off of Goodwill - - (1,152.1) -
--------------- --------------- ----------------- ----------------
Total 3,355.4 $ (711.2) (1,565.4) $ (1,036.8) 11,134.3
--------------- =============== ----------------- ----------------
Life Insurance:
Retirement Services 20.4 9.6 6,051.0
Income Annuities 0.3 33.0 6,875.4
Group 249.6 22.1 170.6
Individual 106.1 21.1 3,835.2
Other 14.7 55.4 1,195.2
Write-off of Goodwill - (32.3) -
--------------- ----------------- ----------------
Total 391.1 108.9 62.0 18,127.4
--------------- ----------------- ----------------
Asset Management 27.2 5.4 3.5 64.4
Discontinued Credit Operations - - 4.2 -
Gain on Sale of Credit Company - - 54.0 -
Other and Eliminations 72.2 (54.5) (84.7) 506.0
--------------- ----------------- --------------- ----------------
Consolidated Totals $ 3,845.9 $ (1,505.6) $ (997.8) $ 29,832.1
=============== ================= =============== ================
Nine Months Ended Underwriting Pretax Income Net Income Total
September 30, 2000 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- -------------- --------------- ------------------ --------------- ---------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,288.3 $ (80.2)$ 3.5 $ 3,144.7
Homeowners 544.3 (83.4) (49.0) 1,346.1
Other Personal 138.7 11.9 22.3 405.5
Commercial Lines:
Business Insurance 882.4 (129.2) (29.6) 3,867.2
Commercial Insurance 506.2 (103.8) (36.6) 2,481.1
Surety 45.9 13.5 15.1 102.5
Other 4.9 (1.6) 11.7 439.7
-------------- --------------- ------------------ ---------------
Total 3,410.7 $ (372.8) (62.6) $ 83.1 11,786.8
-------------- =============== ------------------ ---------------
Life Insurance:
Retirement Services 28.3 27.0 7,395.0
Income Annuities 1.0 19.0 6,170.0
Group 235.9 1.1 107.5
Individual 100.4 20.2 3,037.8
Other 12.8 54.2 953.6
-------------- ------------------ ---------------
Total 378.4 121.5 68.3 17,663.9
-------------- ------------------ ---------------
Asset Management 32.7 11.2 7.3 85.9
Discontinued Credit Operations - - 8.7 616.5
Other and Eliminations 77.0 (44.2) (63.0) 480.9
-------------- ------------------ --------------- ---------------
Consolidated Totals $ 3,898.8 $ 25.9 $ 104.4 $ 30,634.0
============== ================== =============== ===============
* 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.
Note 7 - Segment Data (continued)
Three Months Ended Underwriting Pretax Income Net Income Total
September 30, 2001 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- --------------- --------------- ----------------- --------------- ----------------
Property and Casualty Insurance:
Personal
Lines:
Personal Auto $ 446.5 $ 3.0 $ 31.9 $ 2,914.3
Homeowners 186.9 (43.7) (31.1) 1,322.4
Other Personal 51.0 3.0 7.2 417.6
Commercial Lines:
Business Insurance 254.2 (87.8) (56.6) 3,297.0
Commercial Insurance 151.4 (154.6) (129.8) 2,388.7
Surety 27.0 6.4 8.2 186.6
Other 1.5 (97.1) (89.4) 607.7
Restructuring Charge - - (31.8) -
Write-off of Goodwill - - - -
----------------
--------------- --------------- -----------------
Total 1,118.5 $ (370.8) (291.4) $ (153.8) 11,134.3
--------------- =============== ----------------- ----------------
Life Insurance:
Retirement Services 6.3 4.3 6,051.0
Income Annuities 0.1 10.3 6,875.4
Group 84.8 3.3 170.6
Individual 34.5 4.8 3,835.2
Other 5.0 17.9 1,195.2
Write-off of Goodwill - - -
--------------- ----------------- ----------------
Total 130.7 40.6 21.2 18,127.4
--------------- ----------------- ----------------
Asset Management 8.8 1.6 1.0 64.4
Discontinued Credit Operations - - 1.4 -
Gain on Sale of Credit Company - - 54.0 -
Other and Eliminations 23.4 (13.6) (24.4) 506.0
--------------- ----------------- --------------- ----------------
Consolidated Totals $ 1,281.4 $ (262.8) $ (100.6) $ 29,832.1
=============== ================= =============== ================
Three Months Ended Underwriting Pretax Income Net Income Total
September 30, 2000 Revenues Gain (Loss) (Loss)* (Loss) Assets
- ----------------------------------- -------------- --------------- ------------------ --------------- ---------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 432.7 $ (16.5)$ 5.0 $ 3,144.7
Homeowners 185.0 (31.2) (22.3) 1,346.1
Other Personal 47.0 1.7 4.1 405.5
Commercial Lines:
Business Insurance 296.4 (43.8) (16.2) 3,867.2
Commercial Insurance 164.1 (33.8) (15.1) 2,481.1
Surety 15.6 6.4 6.3 102.5
Other 1.6 1.4 27.0 439.7
-------------- --------------- ------------------ ---------------
Total 1,142.4 $ (115.8) (11.2) $ 41.9 11,786.8
-------------- =============== ------------------ ---------------
Life Insurance:
Retirement Services 8.5 6.8 7,395.0
Income Annuities 0.5 5.0 6,170.0
Group 77.8 0.4 107.5
Individual 33.8 6.5 3,037.8
Other 2.3 18.4 953.6
-------------- ------------------ ---------------
Total 122.9 37.1 22.0 17,663.9
-------------- ------------------ ---------------
Asset Management 9.9 2.9 1.9 85.9
Discontinued Credit Operations - - 3.1 616.5
Other and Eliminations 29.8 (17.8) (23.4) 480.9
-------------- ------------------ --------------- ---------------
Consolidated Totals $ 1,305.0 $ 11.0 $ 45.5 $ 30,634.0
============== ================== =============== ===============
* 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
(Dollar Amounts in Millions,except per share amounts, unless otherwise noted)
- -----------------------------------------------------------------------------------------------------------------------------------
SAFECO Corporation and Subsidiaries
SAFECO's net income (loss) for the nine months ended September 30, 2001 and 2000
was $(997.8) and $104.4, respectively or $(7.81) and $0.82 per share,
respectively. The following summarized financial information sets forth the
contributions of each business segment to consolidated net income.
Nine Months Ended Three Months Ended
September 30 September 30
-------------------------------- ------------------------------
2001 2000 2001 2000
- ------------------------------------------------------- -------------------------------- ------------------------------
Income (Loss) from Continuing Operations before (In Millions)
Realized Gain and Income Taxes: *
Property and Casualty Insurance:
Underwriting Loss (Note 5) $ (711.2) $ (372.8) $ (370.8) $ (115.8)
Net Investment Income 340.7 343.2 111.2 115.6
Goodwill Amortization (11.0) (33.0) - (11.0)
Restructuring Charge (Note 4) (31.8) - (31.8) -
---------------- -------------- ---------------- ---------------
Total Property and Casualty (413.3) (62.6) (291.4) (11.2)
Life 141.2 121.5 40.6 37.1
Asset Management 5.4 11.2 1.6 2.9
Corporate (37.9) (44.2) (13.6) (17.8)
Write-off of Goodwill (1,201.0) - - -
---------------- -------------- ---------------- ---------------
Total (1,505.6) 25.9 (262.8) 11.0
Realized Gain before Income Taxes 80.7 108.6 18.5 51.4
---------------- -------------- ---------------- ---------------
Income (Loss) from Continuing Operations before
Income Tax (1,424.9) 134.5 (244.3) 62.4
---------------- -------------- ---------------- ---------------
Provision (Benefit) for Income Taxes on:
Income (Loss) from Continuing Operations and
before Realized Gain (432.1) (32.8) (105.2) (9.3)
Realized Investment Gain 27.4 38.0 5.6 18.1
---------------- -------------- ---------------- ---------------
Total (404.7) 5.2 (99.6) 8.8
---------------- -------------- ---------------- ---------------
Income (Loss) from Continuing Operations before
Distributions on Capital Securities (1,020.2) 129.3 (144.7) 53.6
Distributions on Capital Securities, Net of Tax (33.7) (33.6) (11.3) (11.2)
---------------- -------------- ---------------- ---------------
Income (Loss) from Continuing Operations (1,053.9) 95.7 (156.0) 42.4
Income from Discontinued Operations (Note 6) 4.2 8.7 1.4 3.1
Gain from Sale of Discontinued Operations (Note 6) 54.0 - 54.0 -
---------------- -------------- ---------------- ----------------
Total 58.2 8.7 55.4 3.1
Income (Loss) before Cumulative Effect of Change in
Accounting Principle - FAS 133, Net of Tax (995.7) 104.4 (100.6) 45.5
Cumulative Effect of Change in Accounting Principle -
FAS 133, Net of Tax (2.1) - - -
----------------------------------------------------------------
Net Income (Loss) $ (997.8) $ 104.4 $ (100.6) $ 45.5
================================================================
Per Share of Common Stock:
Income (Loss) from Continuing Operations (8.24) 0.75 (1.22) 0.33
Income from Discontinued Operations 0.03 0.07 0.01 0.03
Gain from Sale of Discontinued Operations 0.42 - 0.42 -
---------------- -------------- ---------------- ---------------
Total 0.45 0.07 0.43 0.03
---------------- -------------- ---------------- ---------------
Income (Loss) before Cumulative Effect of Change
in Accounting Principle (7.79) 0.82 (0.79) 0.36
Cumulative Effect of Change in Accounting Principle (0.02) - - -
---------------- -------------- ---------------- ---------------
Net Income (Loss) $ (7.81) $ 0.82 $ (0.79) $ 0.36
================ ============== ================ ===============
Dividends Paid to Common Shareholders $ 0.74 $ 1.11 $ 0.18 $ 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>
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 assumed and re-underwriting the 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. Many of these action plans have been
completed; the others are being executed currently.
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 is executing its aggressive profit restoration plan for homeowners.
This includes 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 expected to be
completed by the end of 2001. Since the beginning of this year SAFECO's
total employment has declined by approximately 600, excluding the reduction
due to the sale of SAFECO Credit. Positions being eliminated are in the
corporate headquarters and regional property and casualty operations. These
disclosures include the jobs being eliminated as part of the commercial
operation consolidation previously announced on May 17, 2001. When fully
implemented, these actions are expected to 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 includes the pretax
charge in the third quarter of this year of $31.8 (or $0.16 per diluted
share after tax), an expected fourth quarter charge of approximately $10
and the balance to be spread out over the next two years as the different
events occur. See Note 4 for additional disclosures relating to
restructuring charges.
(3) In strengthening the balance sheet, four areas have been addressed and
completed. SAFECO Credit was sold on August 15, 2001 and this reduced the
Company's debt by approximately one-half. As described in Note 1 the sale
of SAFECO Credit qualified for accounting treatment as a discontinued
operation. The asset and liabilities of SAFECO Credit have been reported on
the Net Assets of Discontinued Operations line in the Consolidated Balance
Sheets at December 31, 2000. See Notes 1 and 6 for additional information
on the sale of SAFECO Credit.
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.
During the third quarter 2001, the Company completed a review, initially
announced in May 2001, of property and casualty loss reserve adequacy and
as a result increased reserves by $240, pretax. This increase strengthens
the balance sheet and helps to ensure that the Company is adequately
reserved. See additional discussion below.
(4) The people focus is designed to strengthen the tools, capabilities, and
alignment of SAFECO's employees and to implement a compensation structure
designed to motivate and reward superior performance. Programs are in
development in each area; with the new company-wide incentive plan in place
for 2002.
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. 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. In
August 2001, Joseph W. "Jay" Brown, an insurance executive with nearly 30
years experience was elected to SAFECO's board of directors. Mr. Brown,
Chairman and Chief Executive Officer of MBIA, Inc., formerly served as
President and Chief Executive Officer of Firemen's Fund Insurance Company
and Chairman and Chief Executive Officer of Talegen Holdings, Inc. Xerox's
insurance holdings company. And, in September 2001 Yom Senegor was named
Chief Information Officer bringing extensive information system experience
from Accenture (formerly Andersen Consulting).
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 nine months ended September 30, 2001 and 2000 was
$711.2 and $372.8, respectively. The underwriting loss increased $338.4 over the
prior year due primarily to reserve strengthening of $240, discussed in more
detail below. Excluding the reserve strengthening the underwriting loss for the
nine months ended September 30, 2001 was $471.2, a $98.4 increase over the nine
months ended September 30, 2000. This increase was driven by higher underwriting
losses in homeowners of $89.0 over the prior year and commercial insurance of
$50.7 (excluding the $90 in reserve strengthening), offset in part by a
reduction in the underwriting loss for business insurance of $44.2 (excluding
the $65 in reserve strengthening).
The reserve addition is the primary reason for the increase in Losses and
Adjustment Expense in the Consolidated Balance Sheets and Losses, Adjustment
Expense and Policy Benefits in the Statements of Consolidated Income (Loss).
The total combined ratio for the nine months ended September 30, 2001 and 2000
was 121.2 and 110.9, respectively. Excluding catastrophes, non-catastrophe
weather and reserve strengthening the core combined ratio for the nine months
ended September 30, 2001 and 2000 was 102.8 and 103.5, respectively. The core
combined ratio for the third quarter of 2001 was 101.2 versus 102.0 in the
second 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. It is
presented as a supplemental measure to provide clarity about the underlying
performance of major lines. The core combined ratio for the third quarter of
2001 excludes the $240 reserve strengthening.
<table>
<s> <c> <c>
Underwriting Results - Total Combined Ratios
---------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------- ----------------------------------------- --------------------------
3rd 2nd 1st 4th 3rd
Quarter Quarter Quarter Quarter Quarter
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Personal Lines
Personal Auto 99.3% 108.7% 106.5% 109.8% 103.8%
Homeowners 123.4% 151.7% 118.2% 118.0% 116.9%
Other Personal 94.1% 102.4% 97.9% 87.0% 96.3%
Total Personal Lines 105.6% 120.0% 108.7% 110.5% 106.9%
Commercial Lines
Business Insurance 134.6% 113.2% 110.1% 109.0% 114.8%
Commercial Insurance 202.2% 128.6% 126.3% 129.3% 120.5%
Total Commercial Lines 159.8% 119.1% 116.3% 116.7% 116.8%
Surety 76.5% 79.7% 87.7% 111.3% 59.0%
Total Combined Ratio 133.1% 119.0% 111.4% 112.9% 110.1%
Underwriting Results - Core Combined Ratios
---------------------------------------------------------------------------------------------------------------
2001 2000
-------------------------------------- ----------------------------------------- --------------------------
3rd 2nd 1st 4th 3rd
Quarter Quarter Quarter Quarter Quarter
-------------------------------------- ----------- ----------- ----------- ----------- -----------
Personal Lines
Personal Auto 99.1% 100.2% 106.0% 109.2% 101.7%
Homeowners 92.2% 89.9% 98.2% 93.7% 91.2%
Other Personal 87.9% 89.4% 81.0% 80.8% 88.5%
Total Personal Lines 96.4% 96.6% 101.6% 102.9% 97.8%
Commercial Lines
Business Insurance 101.2% 103.5% 103.4% 105.1% 110.4%
Commercial Insurance 126.5% 124.6% 122.5% 126.4% 117.8%
Total Commercial Lines 110.6% 111.5% 110.7% 113.2% 113.0%
Surety 76.5% 79.7% 87.7% 111.3% 59.0%
Core Combined Ratio 101.2% 102.0% 105.0% 107.1% 103.1%
</table>
Net written premiums for the property and casualty insurance companies decreased
by 2.8% for the nine months ended September 30, 2001 compared with the same
period last year. This includes an increase of 2.8% in net written premium for
Personal Auto during the nine months ended September 30, 2001, a decrease of 15%
for Business Insurance and a decrease of 11% in Commercial Insurance.
Third quarter results include $56 of catastrophe losses for all lines of
business of which $34 was from the September 11 attacks on the United States.
SAFECO's gross exposure from this event is estimated at $70. The Company's
reinsurance coverage is spread among 17 different reinsurers with high credit
quality. Net losses from the attacks include $8 for business insurance, $16 for
commercial insurance and $10 from the Lloyds of London operation which is
reported in the "other" lines.
Loss Reserve Charge - During the third quarter 2001, the Company completed a
review, initially announced in May 2001, of property and casualty loss reserve
adequacy. As a result of this review which included a study by an independent
accounting firm, SAFECO increased reserves by $240, pretax. The Company's
reserve increase is included in third quarter 2001 underwriting results. The
$240 reserve addition relates to SAFECO's reported property and casualty
segments as follows: $65 for SAFECO Business Insurance, $90 for SAFECO
Commercial Insurance, and $85 in the Other lines of business. The Other line
includes the discontinued reinsurance operation SAFECO acquired when it
purchased American States. The $240 reserve addition relates to recent
developments to prior year claims in underlying coverages as follows: $90 for
construction defect, $80 for workers compensation and $70 for other coverages
including asbestos and environmental.
The estimation of liabilities for claims related to construction defect and
asbestos and environmental is subject to greater subjectivity than for other
claims. The Company's reserve review noted the continued emergence of adverse
loss experience for construction defect and asbestos and environmental, as well
as workers compensation. As a result of the review management concluded that
ultimate losses for these three lines will be higher in the range of possible
outcomes than previously estimated.
The $90 for construction defect is due to continued adverse development on prior
year claims and the expansion of the number of claims in states outside of
California. Recent state courts' rulings have expanded the number of potential
claims beyond those contemplated by SAFECO's original estimate.
The $80 for workers compensation is due to unexpected development of prior year
claims and continued increases in medical costs. Administrative rulings have
also recently been more favorable to plaintiffs' claims for compensation,
particularly in the states of California and Florida.
The $70 for other lines, including asbestos and environmental relates to the
anticipated increase in asbestos claims relating primarily to the discontinued
reinsurance operations acquired in the American States purchase in 1997. As part
of the reserve review several trends were observed, confirmed by recent
insurance industry experience. These include an expansion of defendants to
include smaller and more peripheral firms such as installers rather than
manufacturers and producers.
The review of loss reserve adequacy concluded that current reserve levels for
personal lines (primarily Personal Auto and Homeowners) are sufficient.
To mitigate the surplus impact of the reserve strengthening, SAFECO Corporation
contributed $250 of capital to the property and casualty subsidiaries on
September 28, 2001. The source of the capital contribution was from the proceeds
of the sale of SAFECO Credit.
Personal Auto - Pretax underwriting losses for the nine months ended September
30, 2001 and 2000 were $62.4 and $80.2, respectively. Third quarter 2001 and
2000 underwriting gain (loss) were $3.0 and $(16.5), respectively. This quarter
marks the first time personal auto has generated an underwriting profit since
the first quarter of 1999. The core combined ratio improved to 99.1 in the third
quarter 2001 in comparison to 100.2 in the second quarter 2001 and 101.7 in the
third 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 2.8% to $1,338.
Homeowners - Pretax underwriting losses for the nine months ended September 30,
2001 and 2000 were $172.4 and $83.4, respectively. Third quarter 2001 and 2000
underwriting losses were $43.7 and $31.2, respectively. Catastrophes and
non-catastrophe weather losses totaled $58 for the third quarter 2001 compared
with $47 last year. The third quarter catastrophe and non-catastrophe losses
declined $56 from $114 in the second quarter 2001. SAFECO is executing its
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. Year to date price increases are approximately 9% and
additional increases are planned.
Other Personal - Other Personal Lines provide coverage for earthquake, dwelling
fire, inland marine and boats. Net premiums written increased 6.3% to $158.
Business Insurance - Pretax underwriting losses for the nine months ended
September 30, 2001 and 2000 were $149.9 and $129.2, respectively. Third quarter
2001 and 2000 underwriting losses were $87.8 and $43.8, respectively. Excluding
the $65 reserve strengthening recorded in third quarter 2001 the underwriting
losses for the nine months and quarter ended September 30, 2001 were $84.9 and
$22.8, respectively. This represents an improvement of $44 between the two
year-to-date periods. Actions taken this past year to increase prices and
eliminate unprofitable business are contributing to the improvement in the core
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 15% to $763.
Commercial Insurance - Pretax underwriting losses for the nine months ended
September 30, 2001 and 2000 were $244.5 and $103.8, respectively. Third quarter
2001 and 2000 underwriting losses were $154.6 and $33.8, respectively. Excluding
the $90 reserve strengthening recorded in third quarter 2001 the underwriting
losses for the nine months and quarter ended September 30, 2001 were $154.5 and
$64.6, respectively. Adverse workers' compensation loss experience, particularly
in California and Florida, continue to mitigate 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.
Rates are up more than 11% this year with a goal of 13%. Net premiums written
decreased 11% to $456.
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 & Investments
The life insurance companies reported pretax income, excluding realized gains
and write-off of goodwill, for the nine months ended September 30, 2001 and 2000
of $141.2 and $121.5, respectively. Third quarter 2001 and 2000 profits were
$40.6 and $37.1, respectively.
Retirement Services - Pretax income for the nine months ended September 30, 2001
and 2000 were $9.6 and $27.0, respectively. Third quarter 2001 and 2000 profits
were $4.3 and $6.8, respectively. This decline is due to a decrease in assets
under management and losses incurred from early surrenders of the equity indexed
annuity (EIA) and lower variable product fee revenue. Deposits are up over $400
compared to the prior year due to the success of a new fixed deferred annuity
product. Assets under management at September 30, 2001 and 2000 were $6 billion
and $6.4 billion, respectively, reflecting both the reduction in fixed accounts
due to surrenders and variable accounts due to market value declines. The market
value declines are the primary reason for the decrease in Separate Account
Assets and Liabilities in the Consolidated Balance Sheets. Losses in the EIA
line of $10.7 for the nine months ended September 30, 2001 included $4.7 of
additional interest-related charges related to the early surrender offer
extended to EIA policyholders which ended June 30, 2001. EIA deposit assets
under management are under $200 at September 30, 2001, down from $305 at
December 31, 2000.
Income Annuities - Pretax income for the nine months ended September 30, 2001
and 2000 were $33.0 and $19.0, respectively. Third quarter 2001 and 2000 profits
were $10.3 and $5.0, respectively. The increase in pretax income is mainly due
to increased investment income from changes in paydowns of collateralized
mortgage obligation investments. For the first nine months of 2001, the effect
was an increase to income of $4.2 compared to the same period last year, when
income decreased $4.4. Income annuity deposits of $83 for the nine
months ended September 30, 2001 are down from $337 for the same period last year
as a result of the rating downgrades for SAFECO Life in the first quarter of
2001. Assets under management at September 30, 2001 and 2000 remained unchanged
at $6.2 billion.
Group - Pretax income for the nine months ended September 30, 2001 and 2000 were
$22.1 and $1.1, respectively. Third quarter 2001 and 2000 profits were $3.3 and
$0.4, respectively. This marks the sixth 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 was 68% for the third quarter 2001 compared to 55% in the second
quarter and 68% in the third quarter 2000. Third quarter 2001 results reflect an
increase in the frequency of large claims over $200 thousand in the excess loss
specific coverage line. Premiums for the nine months ended September 30, 2001
increased $14 to $250 compared with $236 last year.
Individual - Pretax income for the nine months ended September 30, 2001 and 2000
were $21.1 and $20.2, respectively. Third quarter 2001 and 2000 profits were
$4.8 and $6.5, respectively. 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 $380 for the nine months ended
September 30, 2001 compared with September 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 nine months ended September 30, 2001 and 2000 of $5.4 and $11.2,
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 September 30, 2001 and 2000 were $4.6 billion and
$5.9 billion, respectively.
Discontinued Credit Operations
On March 14, 2001, the Company announced its intentions 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
was accounted for as a discontinued operation, effective March 31, 2001.
On July 24, 2001, the Company announced that it had reached a definitive
agreement to sell SAFECO Credit to General Electric Capital Corporation
("GECC").
On August 15, 2001, SAFECO completed the sale (effective July 31, 2001) of
SAFECO Credit to GECC for total cash proceeds of $910, which included
the repayment of loans to SAFECO Credit and settlement of other affiliated
transactions between SAFECO Credit and the Company totaling $760. The sale
resulted in a pretax gain of $97. The after-tax gain on the sale of $54
is reported in the Statements of Consolidated Income (Loss). The sale of SAFECO
Credit was completed pursuant to the terms of an Amended and Restated Stock
Purchase Agreement, dated as of July 23, 2001 by and among GECC, the Company and
SAFECO Credit.
SAFECO Credit generated after tax profits for the seven months ended July 31,
2001 and nine months ended September 30, 2000 of $4.2 and $8.7, respectively.
This represents additional after-tax earnings per share for the seven months
ended July 31, 2001 and nine months ended September 30, 2000 of $0.03 and $0.07,
respectively, not included in SAFECO's year-to-date income from continuing
operations.
SAFECO Credit's summarized financial information is as follows:
<table>
<s> <c> <c>
Balance Sheets July 31, 2001 December 31, 2000
----------------------- -------------------------
Finance Receivables $ - $ 1,617.7
Affiliate Receivables * - 171.3
Other Assets - 117.3
------------------------ -------------------------
Total Assets $ - $ 1,906.3
======================== =========================
Short-Term Borrowings $ - $ 1,154.7
Affiliate Borrowings * - 504.0
Other Liabilities - 99.1
------------------------ -------------------------
Total Liabilities $ - $ 1,757.8
======================== =========================
Seven Months Nine Months
Ended Ended
Statements of Income July 31, 2001 September 30, 2000
------------------------ -------------------------
Revenues $ 90.5 $ 104.8
Expenses 84.3 91.6
------------------------ -------------------------
Income before Income Taxes 6.2 13.2
Provision for Income Taxes 2.0 4.5
----------------------- -------------------------
Net Income $ 4.2 $ 8.7
======================== =========================
* 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 $481.2 at December
31, 2000.
</table>
Realized Gain on Investment Portfolio, Write-down of Investments and Investment
Portfolio
Pretax net realized gain from the sale of investments for the nine months ended
September 30, 2001 and 2000 was $80.7 and $108.6, respectively. Third quarter
2001 and 2000 realized gains were $18.5 and $51.4, respectively. For the nine
months ended September 30, 2001, SAFECO recognized write-downs of $64 ($36 in
the first quarter and $14 in both the second and third quarters) 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 $80.7. Write-downs for the nine months ended
September 30, 2000 were $17. In the first quarter, the Company wrote down its
equity investment in Concur Technologies, Inc. after determining 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. The
Company took a $11 writedown related to fixed income securities issued by
Helig-Meyers which has filed for Chapter 11 Bankruptcy reorganization. Another
$8 writedown related to fixed income securities issued by Westpoint Stevens, due
to a significant deterioration in credit worthiness.
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 had loaned to
SAFECO Credit some of the cash received from the sale of investments to help
repay its Commercial Paper outstanding as it matured. When the sale of SAFECO
Credit was completed in the third quarter, the short-term loans were repaid to
the Company. At September 30, 2001, much of the proceeds from the sale of SAFECO
Credit have been invested in short-term investments as reflected on the
Consolidated Balance Sheets.
Ratings
Three ratings agencies (Standard & Poor's, A.M. Best and Fitch IBCA) lowered
credit ratings for SAFECO during the first quarter 2001. 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. A.M. Best continues to maintain a negative outlook on SAFECO's
Property and Casualty Subsidiaries' Insurer Financial Strength Ratings and
SAFECO Corporation's debt rating. Lower ratings have significantly affected
SAFECO Life's ability to sell income annuities and BOLI products. SAFECO
continues to focus on maintaining its current ratings and ultimately raising
them by improving its core earnings. The following table summarizes SAFECO's
current ratings:
<table>
<s> <c> <c>
Fitch IBCA
Debt Ratings Rating Basis A.M. Best 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+
</table>
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:
<table>
<s> <c> <c>
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 Success in implementing a new business entry model for personal and commercial lines;
o Success in obtaining regulatory approval of price tiered products and the use of insurance scores;
o The ability to freely enter and exit lines of business;
o Changes in the nature of the property and casualty book of business;
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 occurrence of significant disasters, such as the attack on Sept. 11, 2001;
o The adequacy of loss reserves;
o The availability, pricing and ability to collect reinsurance;
o The ability to exclude and to reinsure the risk of loss from terrorism;
o Court decisions and trends in litigation;
o Legislative and regulatory developments;
o Rating agency actions;
o The effect of current ratings levels on business production;
o Availability of bank credit facilities;
o Fluctuations in interest rates;
o Performance of financial markets; and
o General economic and market conditions.
</table>
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
Corporation's efforts to restore earnings in the property and casualty lines.
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
ITEM 5 - OTHER INFORMATION
(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.
Item 5. Other Information
Retirement of Chief Financial Officer
On October 9, 2001 SAFECO announced that its Chief Financial Officer,
Rod Pierson, will retire on December 31, 2001. SAFECO has retained an
outside executive search firm to help in the search for his
replacement.
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (Continued)
(Amounts in Millions)
- -------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 2 Amended and Restated Stock Purchase Agreement
among General Electric Capital Corporation, SAFECO
Corporation and SAFECO Credit Company, Inc. dated as
of July 23, 2001, with respect to the disposition by
SAFECO Corporation of the stock of SAFECO Credit
Company, Inc., filed as Exhibit 2 to SAFECO's Current
Report on Form 8-K on August 15, 2001 (File No.
1-6563) is incorporated herein by this reference.
SAFECO agrees to furnish the Securities and Exchange
Commission, upon request, with copies of all omitted
schedules to the foregoing Amended and Restated Stock
Purchase Agreement.
Exhibit 10 Description of the SAFECO Corporation Interim
Leadership Performance Program
(b) Reports on Form 8-K
The registrant filed the following 8-K's during the quarter ended
September 30, 2001 and for the period up to November 13, 2001 (the
filing date of this Form 10-Q).
<table>
<s> <c> <c>
Date of Report Under Filing related to:
-------------------------- ------------------------ ----------------------------------------------------
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.
August 15, 2001 Item 5 (Other Items) Announcement relating to the completion of the
sale of SAFECO Credit to General Electric Capital
Corporation.
September 20, 2001 Item 5 (Other Items) Announcement relating to loss estimates from
September 11 attacks.
</table>