UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
07/22/02
Date of Report (Date of earliest event reported)
SAFECO CORPORATION
(Exact name of registrant as specified in Charter)
WASHINGTON 1-6563 91-0742146
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
SAFECO Plaza, Seattle, Washington 98185
(Address of principal executive officers) (Zip Code)
(206) 545-5000
(Registrant's telephone number, including area code)
Item 5. Other Events
SAFECO Executes on Core Operating Fundamentals;
Reports Earnings of $0.37 per Share
Second Quarter Highlights
- Posted income before charges of $0.37 per share, ahead of consensus
analyst estimates.
- Achieved solid performance company-wide.
- Launched new products and services to drive growth in core lines of
business.
Summary Financial Results
(In millions except per-share data)
3 Months Ended 6 Months Ended
June 30 June 30
2002 2001 2002 2001
Net Income (Loss) $105.2 $(14.4) $168.8 $(897.2)
Income (Loss) Before Charges * $46.8 $(33.4) $94.6 $(21.4)
Per Share of Common Stock
Net Income (Loss) $0.82 $(0.11) $1.32 $(7.02)
Income (Loss) Before Charges * $0.37 $(0.26) $0.74 $(0.17)
* Summary of Financial Results follows
SEATTLE, July 22 --SAFECO (Nasdaq: SAFC) today reported second-quarter income
before charges and gains of $46.8 million, or $0.37 per diluted share. This
compares with a loss of $33.4 million, or $0.26 per share, in the second quarter
of last year.
Net income, including realized gains, for the quarter was $105.2 million, or
$0.82 per share, compared with a net loss of $14.4 million, or $0.11 per share,
for the same period last year.
During the second quarter, SAFECO incurred a $3.6 million net charge as part of
a previously announced restructuring. "We are very pleased with our performance
this quarter. We keep doing what we said we'd do, and what's most exciting is
that it's showing up in the numbers," said Mike McGavick, SAFECO president and
chief executive officer.
McGavick reiterated that he "remains comfortable" with financial analysts' range
of estimates of SAFECO's performance for the full year. Currently, published
estimates of SAFECO's performance for the year range between $1.50 and $1.80 per
diluted share, with the consensus, according to Thomson Financial First Call, of
$1.67 per share.
Net written premiums for SAFECO's Property and Casualty products increased 3.3
percent in the second quarter compared with the same period in 2001. This
increase was primarily the result of higher sales of SAFECO's automobile
product. "We are seeing the positive results of our new business entry model,
improved product offering and our new commission structure," stated McGavick.
SAFECO Life & Investments had strong fixed annuity deposits of $350 million in
the second quarter and continued outstanding performance across Group
excess-loss medical product lines.
Realized gains from investments totaled $62.0 million after taxes in the
quarter, up from $18.4 million for the same period of last year. SAFECO's losses
due to WorldCom were $43.2 million after taxes. Those losses were more than
offset by gains resulting from a change in the Property and Casualty investment
strategy initiated during the second quarter to shorten duration and reduce
equity holdings.
SAFECO Personal Insurance Performance
Personal Auto, SAFECO's largest product line, reported underwriting losses of
$7.3 million -- an improvement over the $37.7 million underwriting loss recorded
in second quarter 2001.
<table>
<s> <c> <c>
- --------------------------------------------- ------------ ---------------------
Auto Combined Ratio
The lower the percentage, the better the performance.
- ------------------------------------------------------------------ -------------
Excluding
Excluding Catastrophes &
Total Catastrophes Weather
- ----------------------- --------------------- -------------------- -------------
Q299 101.3% 100.4% 100.7%
Q399 105.9% 105.5% 104.0%
Q499 108.9% 108.7% 108.3%
Q100 109.3% 108.1% 107.7%
Q200 105.6% 104.0% 102.2%
Q300 103.8% 103.1% 101.7%
Q400 109.8% 109.4% 109.2%
Q101 106.5% 106.3% 106.0%
Q201 108.7% 101.7% 100.2%
Q301 99.3% 100.4% 99.1%
Q401 104.0% 103.4% 103.0%
Q102 104.5% 104.1% 103.7%
Q202 101.6% 100.2% 99.1%
- ----------------------- --------------------- -------------------- -------------
</table>
Combined ratio for Auto improved to 101.6 in the quarter, compared with 104.5 in
the first quarter of this year, and 108.7 in the second quarter of 2001.
Combined ratio is a standard gauge of underwriting performance measuring the
percentage of premium dollars used to pay customers' claims and expenses. The
lower the ratio, the more effective the underwriting. To allow investors to
track the underlying performance of its major insurance lines and better
understand seasonal variability, SAFECO reports combined ratios three ways --
total combined ratio; combined ratio excluding catastrophes (events generating
multiple customer claims totaling more than $500,000); and combined ratio
excluding catastrophes and non-catastrophe weather.
Net written Auto premiums increased 12.6 percent in the quarter compared with
the same period last year. Policies in force are flat compared with the second
quarter of 2001, and are up 1.8 percent from last quarter.
SAFECO introduced its new Auto product during the quarter. It improves the way
the company underwrites and prices this line of insurance to better segment
business and match the right policy price to the corresponding level of risk.
The new Auto product makes SAFECO more competitive in its core market-preferred
drivers -- while also making auto insurance available to 95 percent of all
drivers that its agents see. Currently offered in 13 states, the new auto
product will be available in 40 states by year-end.
"We're still early in the rollout, yet we're pleased by the results," McGavick
said, noting that in markets where the product has been available for much of
the quarter, new business writings are up approximately 50 percent over last
quarter. "This is an encouraging response from our agency partners," McGavick
added.
Homeowners recorded underwriting losses of $36.9 million, an improvement
compared with $95.6 million in underwriting losses for the second quarter 2001.
<table>
<s> <c> <c>
- --------------------------------------------- -------------------- -------------
Homeowners Combined Ratio
The lower the percentage, the better the performance.
- ------------------------------------------------------------------ -------------
Excluding
Excluding Catastrophes &
Total Catastrophes Weather
- ----------------------- --------------------- -------------------- -------------
Q299 109.0% 99.7% 82.8%
Q399 113.0% 106.6% 91.1%
Q499 94.7% 92.6% 85.5%
Q100 107.9% 100.0% 90.5%
Q200 121.1% 104.1% 86.0%
Q300 116.9% 106.6% 91.2%
Q400 118.0% 106.2% 93.7%
Q101 118.2% 108.6% 98.2%
Q201 151.7% 112.2% 89.9%
Q301 123.4% 111.6% 92.2%
Q401 117.8% 100.5% 92.6%
Q102 110.0% 101.3% 93.7%
Q202 119.5% 97.7% 86.5%
- ----------------------- --------------------- -------------------- -------------
</table>
Combined ratio for Homeowners was 119.5 for the quarter. Traditionally during
the second quarter, volatile weather has a strong, negative effect on Homeowners
combined ratios industry-wide. However, thanks to milder weather and continued
rate action, this quarter's combined ratio marks significant improvement over
151.7 in the second quarter of 2001 when the Homeowners line was hit hard by
Midwest hailstorms. Homeowners combined ratio for first quarter 2002 was 110.0.
SAFECO's total catastrophe losses for the quarter were $65 million or 5.8 points
on the combined ratio. This includes $15 million resulting from the Arizona and
Colorado wildfires. The majority of these were Homeowners losses.
Net written premiums in Homeowners increased 7 percent compared with the same
quarter of 2001, while policies in force decreased 8.9 percent. These trends are
in line with SAFECO's plans for the Homeowners product.
SAFECO launched a new tiered pricing structure for its Homeowners product in the
second quarter. This new approach -- which matches rates more closely to risk --
currently is in use in five states, and is expected to be in place in
approximately 30 states by year-end.
In addition, SAFECO announced a temporary moratorium on issuing new Homeowners
policies in eight additional states, bringing the total to 10, where the company
has been unable to secure sufficient rates to cover the cost of providing
insurance. This is consistent with the decision announced last July to decrease
the amount of Homeowners insurance written in states where SAFECO can't be
profitable because of market or regulatory conditions.
"The industry has only made money one year in the last decade," McGavick said
referring to the Homeowners line. "We intend to remain a player in the
Homeowners market, but -- like we've said before -- we will take decisive action
in order to earn a fair return."
SAFECO Business Insurance Performance
SAFECO Business Insurance reported underwriting losses of $41.2 million, an
improvement over the $80.2 million in underwriting losses for the second quarter
of 2001.
<table>
<s> <c> <c>
- --------------------------------------------- -------------------- -------------
Business Insurance Combined Ratio
The lower the percentage, the better the performance.
- ------------------------------------------------------------------ -------------
Excluding
Excluding Catastrophes &
Total Catastrophes Weather
- ----------------------- --------------------- -------------------- -------------
Q299 116.0% 112.8% 108.9%
Q399 122.0% 120.5% 116.7%
Q499 121.2% 120.2% 118.9%
Q100 115.6% 113.6% 110.9%
Q200 113.8% 111.4% 107.2%
Q300 116.5% 115.3% 112.7%
Q400 112.3% 111.6% 108.7%
Q101 116.7% 113.7% 111.0%
Q201 119.2% 115.3% 111.5%
Q301 122.1% 115.5% 111.0%
Q401 110.9% 112.6% 110.0%
Q102 115.7% 114.1% 112.7%
Q202 111.1% 107.2% 105.2%
- ----------------------- --------------------- -------------------- -------------
Including reserve strengthening, total combined ratio was 160.7 in 3Q01
- --------------------------------------------------------------------------------
</table>
Combined ratio for the quarter was 111.1, an improvement over 115.7 in the first
quarter of the year and 119.2 in the second quarter of 2001.
Overall net written premiums in SAFECO Business Insurance declined 7.9 percent
in the second quarter compared to the same period in 2001, and policies in force
declined 10.7 percent. These reductions are associated with SAFECO's previously
announced plans to focus on small- and medium-sized accounts and minimize
exposure to larger accounts.
SAFECO Business Insurance recently introduced a suite of technology services to
give agents more tools to generate sales of new policies. "We're continuing our
investment in technology by automating back-office functions and making SAFECO
easier to do business with, freeing up agents to sell our products and make more
money," McGavick said.
"Tracking with the plan we put in place last year, we continue to see healthy
new business growth in small- to medium-sized commercial accounts," McGavick
said. "We're being much more selective in the few large-commercial accounts we
write."
Surety Performance
Surety recorded a quarterly underwriting profit of $5.7 million, up from $4.6
million during the same period last year.
Surety generated a profitable combined ratio of 81.5 in the second quarter,
compared with 89.5 in the first quarter and 79.7 during the same period last
year.
Life & Investments Performance
SAFECO Life & Investments generated pretax profit of $52.0 million, off slightly
from its performance of $57.5 million in the second quarter of 2001.
<c>
- -----------------------------------------------------------------------------------------------------------------
Life & Investments Performance 2nd 1st 4th 3rd 2nd
Pretax Profit (In millions) QTR QTR QTR QTR QTR
2002 2002 2001 2001 2001
----------------------------------------------------------------
INDIVIDUAL LIFE $7.5 $ 6.7 $1.7 $4.7 $9.6
RETIREMENT SERVICES 4.0 8.1 6.0 4.3 1.9
INCOME ANNUITIES 7.3 8.8 14.9 10.3 12.2
GROUP 14.1 10.2 4.5 3.3 12.1
ASSET MANAGEMENT 1.7 2.3 2.6 1.6 1.9
CORPORATE & OTHER 17.4 23.0 17.2 18.8 19.8
----------------------------------------------------------------
Total $ 52.0 $ 59.1 $ 46.9 $ 43.0 $57.5
================================================================
- -----------------------------------------------------------------------------------------------------------------
</table>
For the second quarter, the Group line of excess-loss insurance reported pretax
earnings of $14.1 million, compared with $12.1 million for the same period last
year. "We have shown consistent growth and performance in our Group business,"
McGavick stated.
Individual Life generated pretax income of $7.5 million, compared with $9.6
million in the same period last year. During the quarter, Individual Life
launched an online sales tool to enable agents to sell term life policies in
less than 15 minutes.
Income Annuities recorded a quarterly profit of $7.3 million, down from $12.2
million in the same quarter last year. Among the reasons for the variance are
decreased investment income from changes in pay downs of mortgage securities and
lower mortality gains.
Retirement Services generated pretax earnings of $4.0 million, compared with
$1.9 million last year. It also expanded its product offering by teaming with
ShareBuilder to provide a 401(k) plan with many of the features of a Web-based,
self-directed brokerage account.
Asset Management posted pretax profit of $1.7 million, down from $1.9 million in
the second quarter of 2001.
"Life & Investments continues to fire on all cylinders," McGavick said. "It's
profitable quarter after quarter, and it consistently delivers innovative new
products to market."
Webcast and additional information available
SAFECO's senior management team will discuss the company's second-quarter
performance with analysts today at 11 a.m. Eastern Time (8 a.m. Pacific Time).
The conference call will be broadcast live on the Internet at
http://www.safeco.com/irwebcast and archived later in the day for replay.
Detailed information about combined ratios for each Property and Casualty line
- -- as well as SAFECO's first-quarter balance sheet, income statement and
supplementary financial information -- is available at
http://www.safeco.com/safeco/news/archive/2002_0422.asp as links to this news
release.
SAFECO, in business since 1923, is a Fortune 500 company based in Seattle that
sells insurance and related financial products through more than 17,000
independent agents and financial advisors. More information about SAFECO is
available online at www.safeco.com
SAFECO CORPORATION AND SUBSIDIARIES
Summary of Financial Results
(In Millions Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
(Unaudited) (Unaudited)
Revenues
Property & Casualty
Earned Premiums $1,122.0 $1,120.4 $2,221.5 $2,236.9
Net Investment Income 115.3 113.3 230.5 229.5
Life & Investments 460.7 446.9 921.8 909.9
Corporate 4.9 6.3 11.1 10.1
Realized Gain 95.4 28.8 126.0 62.2
-------- -------- -------- --------
Total Revenues $1,798.3 $1,715.7 $3,510.9 $3,448.6
======== ======== ======== ========
Income (Loss) (All amounts net of tax)
Income (Loss) Before
Charges $46.8 $(33.4) $94.6 $(21.4)
Write-off of Goodwill -- -- -- (916.9)
Restructuring Charges (3.6) -- (7.9) --
Realized Gain from
Investments 62.0 18.4 82.1 40.4
-------- -------- ------- --------
Income (Loss) from
Continuing Operations 105.2 (15.0) 168.8 (897.9)
Income from Discontinued
Credit Operations -- 0.6 -- 2.8
-------- -------- ------- --------
Income (Loss) before
Cumulative Effect of
Change in Accounting
Principle 105.2 (14.4) 168.8 (895.1)
Cumulative Effect of
Change in Accounting
Principle - FAS 133 -- -- -- (2.1)
-------- ------- ------- --------
Net Income (Loss) $105.2 $(14.4) $168.8 $(897.2)
======== ======= ======= ========
Per Share of Common Stock:
Income (Loss) Before
Charges $0.37 $(0.26) $0.74 $(0.17)
Write-off of Goodwill -- -- -- (7.17)
Restructuring Charges (0.03) -- (0.06) --
Realized Gain from
Investments 0.48 0.15 0.64 0.32
-------- ------- ------- -------
Income (Loss) from
Continuing Operations 0.82 (0.11) 1.32 (7.02)
Income from Discontinued
Credit Operations -- -- -- 0.02
-------- ------- ------- -------
Income (Loss) before
Cumulative Effect of
Change in Accounting
Principle 0.82 (0.11) 1.32 (7.00)
Cumulative Effect of Change
in Accounting Principle
- FAS 133 -- -- -- (0.02)
-------- ------- ------- -------
Net Income (Loss) $0.82 $(0.11) $1.32 $(7.02)
======== ======= ======= =======
Dividends Paid to
Common Shareholders $0.18 $0.19 $0.37 $0.56
Common Shares Used
for Calculating Income
(Loss) Per Share 128.1 127.7 128.1 127.7
SAFECO CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In Millions)
June 30 December 31
2002 2001
(Unaudited)
ASSETS
Investments
Fixed Maturities Available-for-Sale, at Fair Value
(Cost or amortized cost: $21,746.3; $20,677.1)
$22,669.0 $21,444.1
Marketable Equity Securities,
at Fair Value (Cost: $821.1; $940.5) 1,228.3 1,596.4
Mortgage Loans 918.2 924.2
Real Estate 10.3 47.7
Policy Loans 88.9 91.0
Other Investment Assets 91.1 98.2
Short-Term Investments 287.7 672.9
---------- ---------
Total Investments 25,293.5 24,874.5
Cash 126.1 269.3
Accrued Investment Income 333.2 323.8
Premiums and Service Fees Receivable 1,051.1 973.0
Other Notes and Accounts Receivable 217.5 163.4
Deferred Income Tax Recoverable 348.2 319.0
Reinsurance Recoverables 544.4 523.2
Deferred Policy Acquisition Costs 644.2 626.8
Land, Buildings and Equipment for
Company Use 534.4 552.0
Goodwill and Intangibles 142.4 149.4
Other Assets 120.3 110.0
Securities Lending Collateral 2,120.4 1,636.2
Separate Account Assets 1,059.1 1,208.1
---------- ----------
TOTAL ASSETS $32,534.8 $31,728.7
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expenses $5,177.0 $5,118.4
Life Policy Liabilities 332.2 327.1
Unearned Premiums 1,835.6 1,782.2
Funds Held Under Deposit Contracts 15,173.4 14,624.2
Debt:
Commercial Paper 296.7 299.0
7.875% Medium-Term Notes Due 2003 310.7 323.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other 65.6 74.6
Other Liabilities 1,179.3 1,423.0
Current Income Taxes 46.7 34.9
Securities Lending Payable 2,120.4 1,636.2
Separate Account Liabilities 1,059.1 1,208.1
--------- --------
Total Liabilities 27,996.7 27,250.7
--------- --------
Capital Securities 843.6 843.4
--------- --------
Preferred Stock, No Par Value
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value
Shares Authorized: 300
Shares Reserved for Options: 7.2; 6.4
Shares Issued and Outstanding:
127.8; 127.7 846.4 841.9
Retained Earnings 1,994.7 1,875.9
Accumulated Other Comprehensive
Income, Net of Tax 853.4 916.8
---------- --------
Total Shareholders' Equity 3,694.5 3,634.6
---------- --------
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $32,534.8 $31,728.7
========== =========
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 are
"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. The operations, performance and development of
our business are subject to certain risks and uncertainties which may cause
actual results to differ materially from those contained in or suggested by the
forward-looking statements in this report. The risks and uncertainties include,
but are not limited to:
-- the ability to obtain rate increases and decline or non-renew
underpriced insurance accounts;
-- achievement of premium targets and profitability;
-- realization of growth and business retention estimates;
-- achievement of decrease in large-commercial premium volume;
-- achievement of expense savings from consolidation of commercial
operations;
-- achievement of overall expense reduction goals;
-- success in implementing a new business entry model for personal and
commercial lines;
-- success in obtaining regulatory approval of price-tiered products and
the use of insurance scores;
-- the ability to freely enter and exit lines of business;
-- changes in the mix of SAFECO's property and casualty book of business;
-- driving patterns;
-- the competitive pricing environment, initiatives by competitors and
other changes in competition;
-- weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
-- the occurrence of significant natural disasters, including earthquakes;
-- the occurrence of significant man-made disasters, such as the attack on
September 11, 2001;
-- the occurrence of bankruptcies that result in losses under surety
bonds;
-- the adequacy of loss reserves;
-- the availability of, pricing of, and ability to collect reinsurance;
-- the ability to manage exposure to the Lloyd's of London underwriting
market;
-- the ability to exclude and to reinsure the risk of loss from terrorism;
-- interpretation of insurance policy provisions by courts, court
decisions regarding coverage and theories of liability, trends in
litigation and changes in claims settlement practices;
-- the outcome of any litigation against SAFECO;
-- legislative and regulatory developments affecting the actions of
insurers, including requirements regarding rates and availability of
coverage;
-- changes in tax laws and regulations that affect the favorable taxation of
certain life insurance products or that decrease the usefulness of life
insurance products for estate planning purposes;
-- negative changes to SAFECO's ratings by rating agencies;
-- the effect of current insurance and credit ratings levels on business
production;
-- inflationary pressures on medical care costs, auto parts and repair,
construction costs and other economic sectors that increase the severity
of claims;
-- availability of bank credit facilities;
-- the profitability of the use of derivative securities by SAFECO
Financial Products;
-- fluctuations in interest rates;
-- performance of financial markets; and
-- general economic and market conditions.
Because insurance rates in some jurisdictions are subject to regulatory review
and approval, the achievement of rate increases may occur in amounts and on a
time schedule different than planned, which may affect the efforts to restore
earnings in the property and casualty lines.
SIGNATURE
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 hereunto duly authorized.
SAFECO CORPORATION
Dated: July 23, 2002
By: /s/ CHRISTINE B. MEAD
-------------------------
Christine B. Mead
Senior Vice President,
Chief Financial Officer and
Secretary