UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Year Ended December 31, 2001
Commission File Number 1-6563
SAFECO CORPORATION
State of Incorporation: Washington
I.R.S. Employer I.D. No.: 91-0742146
Address of Principal Executive Offices: SAFECO Plaza, Seattle, Washington 98185
Telephone: 206-545-5000
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, No Par Value: 127,760,084 shares were outstanding at
January 31, 2002
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 [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 2002, was $3,900,000,000.
Documents incorporated by reference:
Portions of the registrant's definitive Proxy Statement for the 2002 annual
shareholders meeting are incorporated by reference into Part III.
SAFECO Corporation and Subsidiaries
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Contents
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Item Description Page
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Financial Information
Part I 1 Business 1
On May 6, 2002, SAFECO Corporation hereby amends its Annual Report on Form 10-K
for the year ended December 31, 2001 to include information on competition in
"Financial Information, Part I, Item 1, Business."
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SAFECO Corporation and Subsidiaries
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Part I
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(Dollar amounts in millions except for ratios and per share data unless noted
otherwise)
ITEM 1 - BUSINESS
General
SAFECO Corporation is a Washington state corporation, operating on a nationwide
basis. Non-U.S. operations are insignificant. The various operating subsidiaries
are engaged in property and casualty insurance, surety, life insurance and asset
management. These operations generated virtually all of the 2001 revenues.
SAFECO Corporation and its predecessor companies have been in business since
1923. The Corporation and its subsidiaries are collectively referred to as
"SAFECO" or the "Corporation." The property and casualty insurance operations
are collectively referred to as "Property & Casualty." The life insurance and
asset management operations are collectively referred to as "Life &
Investments." Other operations not included in either Property & Casualty or
Life & Investments are collectively referred to as "Corporate."
The home offices of the Corporation and its principal subsidiaries are located
in Seattle and Redmond, Washington. As of December 31, 2001, SAFECO had
approximately 12,000 employees.
For additional information on SAFECO's other businesses, see Other Operations of
this section and Note 15 of the Notes to Consolidated Financial Statements.
The Corporation and its insurance subsidiaries are subject to extensive
regulation and supervision, primarily designed to protect the interests of
policyholders rather than shareholders and other investors. Such regulation,
generally administered by a department of insurance in each state in which the
insurance subsidiaries do business, relates to, among other things the:
o standards of solvency that must be met and maintained;
o licensing of insurers and their agents;
o nature of and limitations on investments;
o ability to enter into or withdraw from the state;
o approval of premium rates;
o restrictions on the size of risks that may be insured under a single
policy;
o required reserves and provisions for unearned premiums, losses and
other purposes;
o deposits of securities for the benefit of policyholders;
o approval of policy forms; and
o regulation of market conduct, including underwriting and claims
practices.
State insurance departments also conduct periodic examinations of the affairs of
insurance companies and require the filing of annual and other reports relating
to the financial condition of insurance companies, holding company issues and
other matters. The Corporation's insurance subsidiaries are collectively
licensed to transact insurance business in all 50 states and the District of
Columbia. See additional information in Part II, Item 7, - Regulatory Issues in
the Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A).
Competition
Both the property and casualty insurance business and the life insurance and
investments business are highly competitive. Competition in SAFECO's business
segments is based on price, service, commission structure, product features,
financial strength, claims paying ability, ratings and name recognition. SAFECO
competes with a large number of domestic and foreign insurers, and in the life
and investments business, with non-insurance financial services companies, such
as banks, broker-dealers and asset managers. These companies sell through
various distribution channels, including independent agents, captive agents and
directly to the consumer. SAFECO competes not only for business and individual
customers, employer and other group customers but also for agents and other
distributors of investment and insurance products. Some of SAFECO's competitors
offer a broader array of products, have more competitive pricing or, with
respect to insurers, have higher claims paying ability ratings. Some may also
have greater financial resources with which to compete. Also, other financial
institutions are now able to offer services similar to SAFECO's own as a result
of the Gramm-Leach-Bliley Act, which was adopted in November of 1999.
Property & Casualty
Through independent agents, Property & Casualty writes personal, commercial and
surety lines of insurance. Included in the lines of insurance written are
automobile, homeowners, fire, commercial multi-peril, workers' compensation,
miscellaneous casualty, surety and fidelity. Products are sold in all states and
the District of Columbia. A listing of the Corporation's property and casualty
insurance subsidiaries is included in Note 15 Segment Information (Property &
Casualty Operations) of the Notes to Consolidated Financial Statements.
Consolidated gross written premiums for Property & Casualty's ten largest states
are as follows:
YEAR ENDED DECEMBER 31 2001 2000 1999
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% of % of % of
State Amount Total Amount Total Amount Total
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California $ 785.8 17% $ 758.4 16% $ 688.4 15%
Washington 582.2 13 585.3 12 594.5 13
Texas 325.2 7 327.8 7 323.4 7
Illinois 243.6 5 280.0 6 286.7 6
Oregon 239.8 5 241.7 5 239.5 5
Missouri 196.1 4 211.2 5 221.6 5
Florida 166.3 4 173.3 4 174.2 4
Colorado 120.4 3 110.1 2 99.4 2
Michigan 119.3 3 133.5 3 144.3 3
Connecticut 118.2 3 113.8 2 115.7 2
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Total ten largest states 2,896.9 64 2,935.1 62 2,887.7 62
All others 1,673.3 36 1,774.0 38 1,757.3 38
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Total $ 4,570.2 100% $ 4,709.1 100% $ 4,645.0 100%
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Personal Insurance, Business Insurance, Commercial Insurance and Surety lines
comprised approximately 61%, 22%, 14% and 3%, respectively, of the 2001 gross
written premiums of $4,570.2.
Property & Casualty - Loss Reserves
The consolidated financial statements include the estimated reserves for unpaid
losses and loss adjustment expenses (LAE) of Property & Casualty. The reserves
are presented net of amounts from expected salvage and subrogation recoveries
and gross of amounts recoverable from reinsurance.
Reserves for losses that have been reported to Property & Casualty and certain
legal expenses are established on the "case basis" method. Claims incurred but
not reported (IBNR) and other LAE are estimated using actuarial procedures.
Salvage and subrogation recoveries are accrued using the "case basis" method for
large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves that are adequate; that is, the amounts
originally recorded as reserves should equal the amounts ultimately required to
settle losses. SAFECO's reserves reflect its aggregate best estimate of the
total ultimate cost of claims that have been incurred but have not yet been
paid. SAFECO believes its reserves are adequate as of December 31, 2001. The
estimates are based on past claims experience and consider current claim trends
as well as social, legal and economic conditions, including inflation. The
reserves are not discounted.
The process of estimating claim reserves is complex and imprecise due to a
number of variables. These variables are affected by both internal and external
events such as changes in claims handling procedures, trends in loss costs,
inflation, judicial trends and legislative changes. Many of these items are
difficult to quantify, particularly on a prospective basis. Additionally, there
may be significant lags between the occurrence of the insured event and the time
it is actually reported to the insurer. SAFECO continually refines reserve
estimates in a regular ongoing process as experience develops and further claims
are reported and settled. SAFECO records adjustments to reserves in the results
of operations in the periods in which the estimates are changed. In establishing
reserves, SAFECO takes into account estimated recoveries for reinsurance,
salvage and subrogation.
Property & Casualty Loss Reserve Strengthening
During the third quarter 2001, SAFECO completed a review of Property &
Casualty's loss reserve adequacy. As a result of this review, which included an
independent actuarial study, Property & Casualty increased reserves by $240.0,
pretax. The $240.0 reserve addition related to Property & Casualty segments as
follows: $65.0 for Business Insurance, $90.0 for Commercial Insurance, and $85.0
in the Other lines of business. The Other lines include the discontinued
reinsurance operation SAFECO acquired when it purchased American States in 1997.
The $240.0 reserve addition relates to recent developments in prior year claims
as follows: $80.0 for workers' compensation, $90.0 for construction defect and
$70.0 for other coverages including asbestos and environmental.
In the case of workers' compensation, the $80.0 is due to unexpected development
of prior year claims and continued increases in medical costs. This includes the
impact of administrative rulings that have recently been more favorable to
plaintiffs' claims for compensation, particularly in the states of California
and Florida.
The estimation of liabilities related to construction defect and asbestos and
environmental claims is subject to greater subjectivity than for other claims.
SAFECO's reserve review noted the continued emergence of adverse loss experience
for construction defect and asbestos and environmental claims due to newly
emerging trends in the disposition of such cases. As a result of the review,
management concluded that ultimate losses for these lines will be higher in the
range of possible outcomes than previously estimated.
The $90.0 increase in construction defect reserves is due to continued adverse
development on prior year claims and the expansion of the number of claims in
states outside California. Recent state courts' rulings have expanded the number
of potential claims beyond those contemplated by SAFECO's original estimate.
The $70.0 increase in reserves for Other lines, including asbestos and
environmental claims, relates to the anticipated increase in asbestos claims
relating primarily to the discontinued reinsurance operations acquired in the
American States purchase. Consistent with recent insurance industry experience,
trends observed include an expansion of defendants to include smaller and more
peripheral firms such as installers in addition to asbestos manufacturers and
producers.
The review of loss reserve adequacy concluded that personal lines reserves were
adequate.
To mitigate the capital impact of the reserve strengthening, the Corporation
contributed $250.0 of capital to Property & Casualty on September 28, 2001. The
source of the capital contribution was the proceeds from the sale of SAFECO
Credit. See additional information in the Discontinued Operations - SAFECO
Credit section in the MD&A.
The following table provides an analysis of changes in loss and LAE reserves
(net of reinsurance amounts) for 2001, 2000 and 1999. Changes in reserves are
reflected in the income statement for the year when the changes are made.
DECEMBER 31 2001 2000 1999
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Loss and LAE Reserves at Beginning of Year $ 4,269.1 $ 4,069.1 $ 3,966.3
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Incurred Loss and LAE for Claims Occurring in the Current Year 3,619.1 3,621.7 3,353.0
Increase in Estimated Loss and LAE for Claims Occurring in Prior Years 345.1 148.3 78.8
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Total Incurred Loss and LAE 3,964.2 3,770.0 3,431.8
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Loss and LAE Payments for Claims Occurring During
Current Year 1,976.8 2,059.3 1,926.4
Prior Years 1,618.7 1,510.7 1,402.6
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Total Loss and LAE Payments 3,595.5 3,570.0 3,329.0
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Loss and LAE Reserves at End of Year, Net of Reinsurance $ 4,637.8 $ 4,269.1 $ 4,069.1
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RECONCILIATION
Loss and LAE Reserves at End of Year, Net of Reinsurance $ 4,637.8 $ 4,269.1 $ 4,069.1
Add: Reinsurance Recoverables on Unpaid Losses 415.9 343.6 309.5
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Loss and LAE Reserves at End of Year, Gross of Reinsurance $ 5,053.7 $ 4,612.7 $ 4,378.6
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The amounts above do not include SAFECO's life subsidiaries' loss reserves for
accident and health claims, as these amounts are not material in relation to
consolidated loss and LAE reserves. In addition, the majority of these claims
are incurred and paid in full within a one-year period.
Property & Casualty operations in 2001 were charged $345.1 from increases in
estimated loss and LAE for claims occurring in prior years. These increases
included $142.6 in workers' compensation, $132.8 in general liability, as well
as $21.6 in homeowners, $23.1 in commercial auto and $25.0 in all other lines.
This adverse development includes the $240.0 of loss reserve strengthening
discussed earlier.
Property & Casualty operations in 2000 were charged $148.3 from increases in
estimated loss and loss and LAE for claims occurring in prior years. These
increases were due to adverse development within commercial operations in
workers' compensation ($50.9), general liability ($44.4) primarily related to
construction defect, commercial auto ($23.5) and in other lines of business
($29.5) as the costs of settling claims increased. Workers' compensation
development was due to continued adverse development of prior reported claims as
well as IBNR reserve additions. General liability development was due primarily
to continued adverse development of construction defect claims related to the
SAFECO Business Insurance operation. Commercial auto development was due to
higher than expected loss costs in commercial operations on prior reported
claims.
Property & Casualty operations in 1999 were charged $78.8 from increases in
estimated loss and LAE for claims occurring in prior years, primarily in
construction defect, asbestos and environmental and workers' compensation. For
both construction defect and asbestos and environmental, increased reserve
estimates resulted from higher than expected reported claims in 1999. The
increased reserve estimates for workers' compensation resulted from SAFECO's
re-evaluation of loss exposures on claims related to larger commercial insureds
and to an upturn in medical costs and less favorable workers' compensation
legislation.
The following table (Analysis of Losses and Loss Adjustment Expenses Reserve
Development) presents the development of the loss and LAE reserves for 1991
through 2001. The amounts reported in the table for the 1996 and prior year
balances are for SAFECO only (i.e., do not include any amounts for American
States). The top lines of the table present the recorded reserve for unpaid loss
and LAE at December 31 for each of the indicated years, both gross and net of
related reinsurance amounts. The upper portion of the table displays the
cumulative amount paid with respect to the previously recorded reserves as of
the end of each succeeding year. The next section reports the re-estimated
amount of the previously recorded reserves based on experience as of each
succeeding year. The estimate is increased or decreased as more information
becomes known about individual claims and as changes in conditions and claim
trends become apparent. The lower section of the table presents the cumulative
redundancy (deficiency) developed with respect to the previously recorded
liability as of the end of each succeeding year. For example, the 1991 reserve
of $1,865.3 developed a $44.6 redundancy after one year which grew over ten
years to a redundancy of $265.2.
For 1991 through 1996, inclusive, SAFECO's reserve development had been
favorable. This trend reflected several factors: conservative reserving
previously undertaken to correct deficiencies in years prior to 1988, favorable
workers' compensation legislation, moderation of medical costs and inflation and
claims department changes. The favorable legislation in workers' compensation,
which relates primarily to the states of Oregon and California in the early
1990's, helped reduce fraud, allowed for faster claim settlements and made it
more difficult to reopen claims - all of which reduced SAFECO's ultimate loss
costs. During this period, the cost of claim settlements in several lines of
business had benefited from changes in the organization of SAFECO's claims
department which established separate specialized units for workers'
compensation, environmental exposures and fraud investigations. In addition,
increased focus on loss adjustment expenses helped reduce these costs.
Starting in 1997 unfavorable trends began to emerge with respect to the combined
reserves of SAFECO and American States. Adverse loss experience in construction
defect, asbestos and environmental, as well as workers' compensation
significantly contributed to the unfavorable trends. As discussed above, these
unfavorable trends prompted SAFECO to perform a reserve review which was
completed in the third quarter of 2001. As a result of this review Property &
Casualty increased reserves by $240.0 which is reflected in the $345.1 adverse
development for 2000.
As discussed previously, the development for 1999 was unfavorable due to
commercial lines adverse development in workers' compensation, general liability
and commercial auto.
In evaluating the following reserve development table (Analysis of Losses and
Loss Adjustment Expenses Reserve Development), note that each amount includes
the effects of all changes in amounts for prior periods. For example, the amount
of the redundancy shown for the December 31, 1996 reserves that relates to
losses incurred in 1991 is also included in the cumulative redundancy amount for
the years 1991 through 1995. Conditions and trends that affected development of
the liability in the past may not necessarily occur in the future. Accordingly,
it may not be appropriate to extrapolate future redundancies or deficiencies
based on this table.
Analysis of Losses and Loss Adjustment Expenses Reserve Development
December 31 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
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RESERVE FOR UNPAID LOSSES AND LAE
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Gross of Reinsurance $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1 $4,310.5 $4,219.9 $4,378.6 $4,612.7 $5,053.7
Reinsurance 152.0 89.2 100.1 143.9 110.7 103.4 228.6 253.6 309.5 343.6 415.9
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Net of Reinsurance $1,865.3 $1,963.1 $1,995.1 $2,092.9 $2,070.1 $1,955.7 $4,081.9 $3,966.3 $4,069.1 $4,269.1 $4,637.8
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CUMULATIVE NET AMOUNT PAID AS OF
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One Year Later $ 584.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9 $1,345.5 $1,389.2 $1,510.7 $1,618.7
Two Years Later 905.7 913.4 947.6 1,068.3 1,095.0 1,101.4 2,049.3 2,165.5 2,336.2
Three Years Later 1,086.5 1,106.0 1,147.6 1,252.9 1,267.6 1,287.9 2,516.3 2,638.0
Four Years Later 1,207.2 1,230.6 1,252.5 1,341.5 1,370.0 1,404.3 2,821.0
Five Years Later 1,294.4 1,295.7 1,300.2 1,403.5 1,440.5 1,485.3
Six Years Later 1,336.7 1,326.1 1,342.9 1,449.6 1,493.1
Seven Years Later 1,356.9 1,357.8 1,377.0 1,488.9
Eight Years Later 1,381.4 1,386.6 1,406.1
Nine Years Later 1,406.2 1,412.4
Ten Years Later 1,429.5
NET RESERVE RE-ESTIMATED AS OF
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One Year Later $1,820.7 $1,866.2 $1,913.8 $2,033.2 $1,992.4 $1,947.7 $3,981.9 $4,045.1 $4,217.4$4,614.2
Two Years Later 1,732.8 1,782.1 1,818.3 1,902.3 1,889.9 1,861.4 3,989.0 4,070.3 4,447.8
Three Years Later 1,686.0 1,712.2 1,716.1 1,801.9 1,804.7 1,806.6 3,986.0 4,209.9
Four Years Later 1,650.7 1,642.3 1,643.6 1,733.8 1,757.1 1,799.6 4,097.1
Five Years Later 1,594.9 1,600.9 1,599.8 1,702.8 1,757.3 1,849.6
Six Years Later 1,569.5 1,554.7 1,568.3 1,691.2 1,803.3
Seven Years Later 1,548.7 1,549.8 1,578.3 1,733.2
Eight Years Later 1,551.0 1,567.2 1,616.3
Nine Years Later 1,570.1 1,601.2
Ten Years Later 1,600.1
CUMULATIVE NET REDUNDANCY(DEFICIENCY)AS OF
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One Year Later $ 44.6 $ 96.9 $ 81.3 $ 59.7 $ 77.7 $ 8.0 $ 100.0 $ (78.8)$ (148.3)$ (345.1)
Two Years Later 132.5 181.0 176.8 190.6 180.2 94.3 92.9 (104.0) (378.7)
Three Years Later 179.3 250.9 279.0 291.0 265.4 149.1 95.9 (243.6)
Four Years Later 214.6 320.8 351.5 359.1 313.0 156.1 (15.2)
Five Years Later 270.4 362.2 395.3 390.1 312.8 106.1
Six Years Later 295.8 408.4 426.8 401.7 266.8
Seven Years Later 316.6 413.3 416.8 359.7
Eight Years Later 314.3 395.9 378.8
Nine Years Later 295.2 361.9
Ten Years Later 265.2
The following table summarizes reserve development, gross of reinsurance, for
the last three years as of December 31, 2001.
DECEMBER 31 2000 1999 1998
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Gross Reserves $ 4,612.7 $ 4,378.6 $ 4,219.9
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CUMULATIVE DEVELOPMENT
Net of Reinsurance $ (345.1) $ (378.7) $ (243.6)
Reinsurance (25.6) (53.0) (115.4)
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Gross of Reinsurance $ (370.7) $ (431.7) $ (359.0)
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Environmental and Asbestos Claims
Property & Casualty reserves for loss and LAE for liability coverages related to
environmental, asbestos and other toxic claims totaled $340.7 at December 31,
2001, compared with $315.5 at December 31, 2000. These amounts are before the
effect of reinsurance, which totaled $19.7 and $28.8 at December 31, 2001 and
2000, respectively. These reserves are approximately 7% of total property and
casualty reserves for loss and LAE at both December 31, 2001 and 2000. The
reserves included estimates for both reported and IBNR claims and related legal
expenses.
The vast majority of Property & Casualty's environmental, asbestos and other
toxic claims resulted from the commercial general liability line of business and
the discontinued assumed reinsurance operations of American States.
Approximately 4,800 of these claims, computed on an occurrence basis, were
pending at December 31, 2001. The average settlement cost of each environmental,
asbestos and other toxic claim for 2001 was fifteen thousand dollars including
legal expenses.
The following table presents the loss reserve activity for liability coverages
related to environmental, asbestos and other toxic claims, before reinsurance:
DECEMBER 31 2001 2000 1999
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Reserves at Beginning of Year $ 315.5 $ 332.3 $ 329.8
Incurred Losses and LAE 51.7 9.6 24.8
Losses and LAE Payments (26.5) (26.4) (22.3)
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Reserves at End of Year $ 340.7 $ 315.5 $ 332.3
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IBNR reserves comprise 69% of total environmental and asbestos reserves at
December 31, 2001. The incurred losses and LAE amount of $51.7 in the table
above includes $50.0 of loss reserve strengthening in September 2001. Continued
emergence of these claims has resulted in higher ultimate expected losses than
previously estimated. While Property & Casualty has generally avoided writing
coverages for larger companies with substantial exposure in these areas, recent
industry experience with asbestos claims has shown an expansion of defendants to
include smaller and more peripheral firms. The exposure of the assumed
reinsurance operations also follows the general industry trend. This has
resulted in higher estimates of ultimate losses. Developing industry trends will
continue to be monitored and used in conjunction with other quantitative loss
reserving techniques to evaluate reserves on an ongoing basis.
The significant uncertainties involved in the reserving for these claims include
future court resolution, judicial interpretations, regulatory actions, industry
experience as well as company experience. Changes in these factors could result
in future claims significantly different from those currently predicted. The
impact upon reserves of changes in these factors would be reflected in future
operating results.
Construction Defect Claims
The total Property & Casualty reserves for construction defect claims were
$382.9 at December 31, 2001 and $322.6 at December 31, 2000, representing
approximately 8% of total Property & Casualty reserves for loss and LAE at both
December 31, 2001 and 2000.
Construction defect claims are a subset of claims that arise from coverage
provided by general property damage liability insurance. Construction defect
claims arise from the alleged defective work performed in the construction of
large habitation structures, such as apartments, condominiums and large
developments of single-family dwellings or other housing. In addition to damages
arising directly from the alleged defective work, construction defect claims
often also allege that the economic value of the structure has been diminished.
The vast majority of Property & Casualty's construction defect claims arise from
past contractor business written in the state of California. Commercial
Insurance, which does not include Business Insurance, has avoided writing the
construction class of business in California since 1989 and has limited exposure
to these types of claims. However, American States, prior to its acquisition by
SAFECO, was a major writer of California contractor business until 1994 when it
implemented significant restrictions in this line. Continued loss development in
California as well as emerging claims in other states resulted in additions to
reserves of $90.0 as part of the loss reserve strengthening in September 2001.
The following table presents the loss and LAE reserve activity for liability
coverages related to construction defect claims, before reinsurance:
DECEMBER 31 2001 2000 1999
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Reserves at Beginning of Year $ 322.6 $ 306.1 $ 328.6
Incurred Losses and LAE 119.2 71.5 28.1
Losses and LAE Payments (58.9) (55.0) (50.6)
-------------------------------------
Reserves at End of Year $ 382.9 $ 322.6 $ 306.1
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The significant uncertainties involved in the reserving for these claims include
future court resolution, judicial interpretations, regulatory actions, industry
experience as well as company experience. Changes in these factors could result
in future claims significantly different from those currently predicted. The
impact upon reserves of changes in these factors would be reflected in future
operating results.
Reinsurance
Property & Casualty uses treaty and facultative reinsurance to help manage
exposures to loss. Property & Casualty's reinsurance coverages relate to surety
business and personal and commercial property coverages. As noted above, the
liability for unpaid losses and LAE is reported gross of reinsurance
recoverables of $415.9 at December 31, 2001 and $343.6 at December 31, 2000.
This increase is due primarily to reinsurance recoverables related to the surety
Enron loss (see Surety section of the MD&A for additional information) and
losses resulting from the World Trade Center attacks. Because the amount of the
reinsurance recoverables can vary depending on the size of an individual loss
or, in some cases, the aggregate amount of all losses in a particular line of
business, the exact amount of the reinsurance recoverables is not known until
all losses are settled. Therefore, Property & Casualty must estimate the amount
of reinsurance recoverables it anticipates receiving. To estimate this amount,
Property & Casualty uses the terms of the reinsurance contracts and historical
reinsurance recovery information and applies that information to the gross loss
reserve estimate.
The availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity. Due to the recent
tightening in the reinsurance marketplace, it is likely that the cost of
reinsurance will increase in 2002. Although the reinsurer is liable to SAFECO to
the extent of the reinsurance ceded, SAFECO remains primarily liable to the
policyholder as the direct insurer on all risks insured. In addition, the
magnitude of losses in the reinsurance industry resulting from the September 11,
2001 terrorist attacks is expected to impact the financial strength of
reinsurers which may result in collectibility or recoverability issues. However,
to SAFECO's knowledge, none of its reinsurers is currently experiencing
financial difficulties. SAFECO's business is not substantially dependent upon
any single reinsurance account.
See discussion on Impact of Terrorism and its impact on reinsurance in the MD&A.
Approximately 42% of the total reinsurance recoverables balance at December 31,
2001 was with the following four reinsurers: American Re-Insurance, Employers
Reinsurance Corporation, Swiss Reinsurance America Corporation and General
Reinsurance Corporation all of whom are rated A++ by A.M. Best. The reinsurance
recoverables balance categorized by reinsurer rating (by A.M. Best Company on a
scale ranging from A++ to F) at December 31, 2001 is presented below:
Percent at
RATING December 31, 2001
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A++ 43.7%
A+ 8.7
A 4.3
A- 0.5
B 0.2
Lloyds of London 3.7
Non-Rated 6.6
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Total Domestic Reinsurers 67.7
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State Reinsurance Pools 23.7
Other Reinsurance Pools 2.1
Foreign Reinsurers 6.5
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Total Reinsurance Pools and Foreign Reinsurers 32.3
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Total 100.0%
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Property & Casualty's nationwide catastrophe property reinsurance program for
2002, covering 90% of $400.0 of single-event losses in excess of $100.0
retention, is unchanged from 2001. In a large catastrophe, Property & Casualty
retains the first $100.0 of losses, 10% of the next $400.0 and all losses in
excess of $500.0. In 2001, in addition to this nationwide coverage, for all
states other than California, SAFECO had a supplemental earthquake-only
reinsurance contract that covered 90% of $250.0 of single-event earthquake
losses in excess of $500.0. Given Property & Casualty's successful efforts to
reduce West Coast earthquake exposure, it was no longer considered necessary to
continue this excess contract in 2002. Catastrophe property reinsurance
contracts for 2002 include provisions for one reinstatement for a second
catastrophe event in 2002 at current rates.
Property & Casualty does not enter into retrospective reinsurance contracts and
does not participate in any unusual or nonrecurring reinsurance transactions
such as "swaps" of reserves or loss portfolio transfers. Property & Casualty
does not use funding covers and does not participate in any surplus relief
transactions. See Note 5 of the Notes to Consolidated Financial Statements for
additional information on reinsurance.
Statutory Accounting
State insurance regulatory authorities require the property and casualty
insurance subsidiaries to file annual statements prepared on an accounting basis
prescribed by the National Association of Insurance Commissioners' (NAIC)
revised Accounting Practices and Procedures Manual or permitted by their
respective state of domicile (that is, on a statutory basis). The difference
between the $5,053.7 reserve at December 31, 2001, for the losses and LAE
disclosed in the consolidated financial statements in accordance with accounting
principles generally accepted in the United States (GAAP), and the $4,637.8
reported in the annual statements filed with state regulatory authorities
relates to reinsurance recoverables. Under Statement of Financial Accounting
Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts," the GAAP-basis liability for losses and LAE is
reported gross of amounts recoverable from reinsurance. Statutory-basis
financial statements report the liability net of reinsurance.
Life & Investments
Life & Investments offers individual and group insurance products, retirement
services, annuity products, mutual funds and investment advisory services. Life
& Investments distributes its products through independent agents and other
financial intermediaries. The most significant product lines in terms of
premium and deposit volume include single premium immediate and deferred
annuities, business owned life insurance, variable annuities, tax-sheltered
annuities, corporate retirement plans, excess loss group medical insurance and
individual life insurance. SAFECO Life reinsures portions of its individual and
group life, accident and health insurance through commercial reinsurance
treaties, providing protection against large risks and catastrophe situations. A
listing of the Corporation's life insurance & investment subsidiaries is
included in Note 15 Segment Information (Life & Investments Operations) of the
Notes to Consolidated Financial Statements.
Funds held under deposit contracts relate primarily to annuity, retirement
services and individual products. The table below summarizes the components of
funds held under deposit contracts at December 31, 2001, and describes the
applicable surrender charges and surrender experience.
Detail of Funds Held Under Deposit Contracts at December 31, 2001
Range of
Expected Credited
Maturities or Assumed Approximate
Outstanding of Liabilities Interest Rates Surrender
PRODUCT Balance (at issue date) as of 12/31/01 Surrender Charges Experience
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Income $ 6,245.3 Over 25 years 3.50% to 12.20% Cannot surrender Cannot surrender
Annuities
Other 4,574.3 Approximately 4.00% to 7.95% Highest surrender 14.5% per annum
Annuities & 5-20 years charges range
Deposits from 10% to 5%,
graded down to 0%
within 5 to 10
years. SAFECO has
the option to
defer payout over
5 years for 20%
of these contracts.
Universal 3,204.2 Approximately 5.00% to 6.00% Varies by issue 8% per annum
Individual Life 10-25 years age, sex and
duration from $1
to $58 per $1,000
of insurance.
Guaranteed 391.7 Typically 5.63% to 8.40% Market value Less than 1%
Investment 2-5 years adjustment or per annum
Contracts cannot surrender
in first year.
Equity 208.7 Approximately 6 Equity return Typically 8% in More than 45%
Indexed years at original credited is year 1 graded to due to an offer
Annuities (EIA) issuance, based on S&P 500 0% after to EIA
remaining performance with year 6. policy-holders
expected maturity no minimum in 2001 to
of approximately guarantee. Floor surrender their
3 years. return based on policies and
a minimum fixed receive
return on a December 31,
portion 2000 account
(typically 90%) value with no
of the original surrender charge.
deposit amount.
- -----------------------------------------------------------------------------------------------------------
Total $ 14,624.2
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Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of Life & Investments' operating
results. These subsidiaries include the following:
SAFECO Asset Management Company, acquired in 1973, serves as the investment
advisor for the SAFECO mutual funds, variable annuity portfolios and outside
pension and trust accounts.
SAFECO Securities, Inc., organized in 1967, is the principal underwriter of the
SAFECO Mutual Funds, comprising the SAFECO Common Stock Trust, SAFECO Taxable
Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money Market Trust and SAFECO
Managed Bond Trust. These five trusts are made up of nineteen separate
investment portfolios, all of which are sold on a "no-load" basis directly to
the public. Seventeen of these portfolios have two to three additional classes
of stock which are sold to the public through intermediaries. In addition,
SAFECO Securities, Inc. is the principal underwriter for the SAFECO Resource
Series Trust, a registered investment company with six separate investment
portfolios. SAFECO Securities is also the principal underwriter for the variable
insurance products issued by SAFECO Resource Variable Account B, SAFECO Separate
Account SL, SAFECO Deferred Variable Annuity Account and SAFECO Separate Account
C, all of which are separate accounts of SAFECO Life Insurance Company and for
First SAFECO Separate Account S, which is a separate account of First SAFECO
National Life Insurance Company of New York.
SAFECO Services Corporation, organized in 1972, is the transfer agent for the
SAFECO mutual funds.
SAFECO Trust Company, organized in 1994, provides asset management and trust
administrative services to high net worth individuals and unrelated
organizations.
SAFECO Investment Services, Inc., organized in 1986, is a broker/dealer and
registered investment advisor that distributes affiliated and nonaffiliated
mutual funds, variable insurance products and securities through its registered
representatives.
Talbot Financial Corporation, acquired in 1993, is a broad-based insurance
broker with a concentrated emphasis on the distribution of qualified and
nonqualified annuity products and mutual funds through the banking and brokerage
arenas.
Other Operations
SAFECO Financial Products (SFP), organized in 2000, engages in limited activity
by writing S&P 500 index options, selling single credit default swaps and
investing in convertible bonds. For additional information see the Corporate
section of the MD&A.
Discontinued Operations
SAFECO Credit Company, Inc. (SAFECO Credit) - SAFECO Credit provided loans and
equipment financing and leasing to commercial businesses, insurance agents and
affiliated companies. In March 2001, SAFECO announced its intention to sell
SAFECO Credit. 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. In July 2001, the Corporation
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. See Note
11 of the Notes to Consolidated Financial Statements.
SAFECO Properties, Inc. - In February 1998, SAFECO decided to sell its real
estate subsidiary, SAFECO Properties, Inc., to focus on its core insurance and
financial services businesses. See Note 11 of the Notes to Consolidated
Financial Statements.
A listing of the Corporation's subsidiaries is shown on Exhibit 21 of this
report.
Subsequent Event
On March 4, 2002, SAFECO reached a definitive agreement to acquire Swiss Re's
medical excess-loss and group life insurance business. SAFECO is acquiring $240
in annual excess-loss medical insurance premium and $10 in group-life insurance
premium. Pending regulatory approval, the acquisition is expected to close in
June 2002.
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Signatures
- -------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 1 to be signed on its behalf by
the undersigned thereunto duly authorized on May 6, 2002.
SAFECO CORPORATION
--------------------------------------------------
Registrant
/s/ CHRISTINE B. MEAD
--------------------------------------------------
Christine B. Mead
Senior Vice President, Chief Financial Officer
and Secretary
/s/ H. PAUL LOWBER
--------------------------------------------------
H. Paul Lowber
Vice President, Controller
and Chief Accounting Officer