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
10/28/02
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
Turnaround continues as SAFECO reports third-quarter profits
SEATTLE--(Oct. 28, 2002)--
Third-Quarter Highlights
o Posted net income of $0.59 per share, and income before charges of $0.68
per share.
o Completed acquisition of Swiss Re's group excess-loss medical insurance
business, contributing $0.06 per share to income.
o Placed its Lloyd's of London business into run-off, taking a third-quarter
charge of $0.13 per share.
o Property & Casualty performance benefited from light weather during the
quarter.
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Summary Financial Results after tax 3 Months Ended 9 Months Ended
(In millions except per-share data) September 30 September 30
2002 2001 2002 2001
---------------------------------------------- -------------- ---------------- --------------- -----------------
Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
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Income (Loss) Before Charges * $ 86.4 $ 7.8 $ 181.0 $ (13.6)
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---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Per Share of Common Stock
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Net Income (Loss) $ $0.59 $ (0.79) $ 1.91 $ (7.81)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Income (Loss) Before Charges * $ $0.68 $ 0.06 $ 1.42 $ (0.11)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
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* "Income (Loss) Before Charges" is a non-GAAP disclosure that excludes
realized investment gains and losses, charges associated with running off
SAFECO's London operations, previously announced restructuring charges,
goodwill write-offs, reserve strengthening in the third quarter of 2001,
gains from discontinued Credit Company operations, and the cumulative
effect of adopting FAS 133 on derivatives. A reconciliation of Income
(Loss) Before Charges to Net Income (Loss) is included at the end of this
news release.
----------------------------------------------------------------------------------------------------------------
SAFECO (NASDAQ:SAFC) today reported continued earnings growth as
third-quarter net income increased to $75.2 million, or $0.59 per diluted share.
Income before charges and realized gains increased to $86.4 million, or $0.68
per diluted share.
This compares favorably with a net loss of $100.6 million, or a loss of
$0.79 per share, in the third quarter of last year when SAFECO strengthened
Property & Casualty loss reserves by $156.0 million after taxes. SAFECO's income
before charges and realized gains for the third quarter of last year was $7.8
million, or $0.06 per share.
"We had a strong quarter," said Mike McGavick, SAFECO president and
chief executive officer. "We're moving in the right direction and picking up
speed, and certainly a light weather quarter helped.
"Our Property & Casualty units turned in a solid performance and are
showing progress," he added, "and Life & Investments continues to generate
strong earnings."
Life & Investments produced a record-setting quarter, partly the result
of earnings from the recently acquired Swiss Re group excess-loss medical and
group life insurance business. The acquisition, which made SAFECO the nation's
largest writer of excess-loss insurance for employers with self-funded medical
plans, contributed $8.2 million to net income after taxes.
During the third quarter, SAFECO put its Lloyd's of London operations
into run-off, resulting in an after-tax charge of $17.1 million. This charge
reflects writing off SAFECO's investment in its U.K. subsidiary, R.F. Bailey
(Underwriting Agencies) Ltd. It also includes strengthening reserves to provide
for higher-than-anticipated losses as the business is run off.
"As we previously promised, we made a decision about our London
operations during the third quarter," McGavick noted. "Putting our London
operations into run-off is the last major step in returning our focus to what we
do best--providing personal insurance, writing insurance for small businesses,
and selling life and investment products." SAFECO is working closely with
Lloyd's of London as it runs off this business.
Property & Casualty results benefited from exceptionally mild
third-quarter weather and lower-than-anticipated claims from insured
catastrophes. Since SAFECO initially overestimated second-quarter losses
associated with Southwest wildfires (the fires were burning out of control at
the end of the second quarter, preventing adjusters from compiling precise
estimates of customer losses at that time), there was a net positive effect on
income of $9.9 million pretax from incurred catastrophes in the third quarter.
This takes into account actual third-quarter catastrophe losses and the
previously overestimated wildfire losses.
Net written premiums for SAFECO's Property & Casualty products
increased 6.1 percent in the third quarter compared with the same period in
2001. This reflected higher rates and increased sales of auto insurance and
insurance for small businesses. "We're focused on re-igniting sales, and agents
and brokers are responding positively," McGavick said.
The company reported $7.8 million of net realized investment gains
after taxes, compared with $12.9 million in the third quarter of 2001.
SAFECO successfully completed a $375 million, 10-year bond offering
during the third quarter. Proceeds from the notes were used to retire $300
million in commercial paper and $28 million in other debt that matured in the
third quarter. The balance will be used for upcoming debt maturities and general
corporate purposes.
SAFECO Personal Insurance Performance
Personal Auto, SAFECO's largest product line, reported a quarterly
pretax underwriting loss of $6.2 million. This compares with an underwriting
profit of $2.9 million in third quarter 2001 when the line turned in an
exceptionally strong performance due to an unusually low number of customer
claims filed in September 2001.
"Last year, we cautioned that our third-quarter Auto results were
stronger than anticipated," McGavick noted. "This year, our Auto results are in
line with our plans. Performance is improving as expected."
Combined ratio for Auto improved to 101.2 compared with 101.6 in the
second quarter of this year.
- --------------------------------------------- -------------------- -------------
Auto Combined Ratio
The lower the percentage, the better the performance.
Excluding
Excluding Catastrophes
Total Catastrophes & Weather
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%
Q302* 101.2% 101.3% 100.5%
- --------------------------------------------------------------------------------
* "Excluding Catastrophes" results higher than "Total" due to favorable loss
reserve development in the third quarter.
- --------------------------------------------------------------------------------
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,
SAFECO reports combined ratios three ways -- total combined ratio; combined
ratio excluding catastrophes (which SAFECO defines as single events that
generate multiple claims and total losses in excess of $500,000); and combined
ratio excluding catastrophes and non-catastrophe weather.
Net written Auto premiums increased 17.6 percent in the third quarter
compared with the same period last year. Policies in force were up 3.5 percent
from last quarter, and up 4.7 percent compared with the third quarter of 2001.
The growth reflected the early success of the company's new Auto insurance
product as well as new systems that make it easier for agents to write SAFECO
policies.
Introduced earlier this year, SAFECO's new Auto product currently is
available in 17 states. In markets where the product has rolled out, new
business writings have increased more than 50 percent over the same period last
year. "We remain encouraged by the early acceptance of our new Auto product,"
McGavick said. "We've seen healthy sales growth and strong support from agents."
The new product improves the way SAFECO underwrites and prices Auto
insurance to better segment business and match price to the corresponding level
of risk. With this product, SAFECO now can provide coverage for the vast
majority of drivers who purchase insurance through independent agents.
- --------------------------------------------- -------------------- -------------
Homeowners Combined Ratio
The lower the percentage, the better the performance.
Excluding
Excluding Catastrophes
Total Catastrophes & Weather
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%
Q302* 97.1% 100.5% 89.1%
- --------------------------------------------------------------------------------
* "Excluding Catastrophes" results higher than "Total" due to favorable loss
reserve development in the third quarter.
- --------------------------------------------------------------------------------
SAFECO's Homeowners insurance line reported a pretax underwriting
profit of $5.5 million, an improvement over the $43.7 million underwriting loss
in third quarter 2001. Combined ratio improved to 97.1 in the third quarter,
compared with 119.5 in the second quarter of this year.
McGavick cautioned "not to read too much into these numbers. We are
making progress, but have a ways to go."
Net written premium in Homeowners increased 5.4 percent compared with
the same quarter of 2001, and policies in force decreased 8.2 percent. These
changes reflected SAFECO's effort to obtain appropriate rates for covered risks
and limit its exposures in areas prone to severe weather.
Among the major contributors to Homeowners' profit in the quarter were
lower customer claims for weather losses, and positive catastrophe development
associated with the Southwest wildfires that were burning when SAFECO initially
estimated losses.
SAFECO continues rolling out a tiered-pricing structure for Homeowners.
This new approach--which matches rates more closely to risk--currently is in
place in 17 states.
"Based on early results, we're cautiously optimistic," McGavick said.
"We've successfully obtained more appropriate pricing for Homeowners insurance
in several markets.
"While we currently have moratoriums on writing new business in 13
states, we will lift the moratorium in Maryland later this month," he added.
"Moratoriums will be lifted in other states as we secure approval to implement
changes to make this product profitable."
SAFECO also is implementing a new wind-and-hail deductible for homes
insured in wind- and hail-prone states. Already in place in Illinois,
policyholders pay 1 percent of a home's insured value before SAFECO pays for
insured claims from wind and hail damage.
SAFECO Business Insurance Performance
SAFECO Business Insurance's underwriting loss improved to $23.4 million
pretax in the third quarter. This compares to the $243.7 million underwriting
loss for the same period last year when SAFECO strengthened loss reserves for
both its Business Insurance and Other lines.
Combined ratio in the third quarter was 106.6, an improvement over
111.1 in the second quarter of this year.
- --------------------------------------------- -------------------- -------------
Business Insurance Combined Ratio
The lower the percentage, the better the performance.
- ------------------------------------------------------------------ -------------
Excluding
Excluding Catastrophes
Total Catastrophes & Weather
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%
Q302* 106.6% 107.8% 105.3%
- ----------------------- --------------------- -------------------- -------------
- -Including reserve strengthening, total combined ratio was 160.7 in 3Q01
*"Excluding Catastrophes" results higher than "Total" due to favorable
catastrophe development in the third quarter.
- --------------------------------------------------------------------------------
"During the quarter, we incurred additional expenses for bonus
commissions, rewarding agents for writing more profitable business," McGavick
said. "We're also seeing higher commission ratios as our mix of business changes
and workers' compensation represents a smaller portion of our business.
"Loss ratios in our commercial lines continue to improve," he added,
"and we're seeing a nice increase in new small business policies."
While the number of new policies for small businesses increased 26
percent compared with the third quarter of 2001, there was a 28 percent decrease
in workers' compensation policies. Consequently, total policy count decreased
11.9 percent compared with the third quarter of 2001.
Overall, net written premiums in SAFECO Business Insurance declined 8.0
percent in the third quarter compared to the same period in 2001, while premiums
for SAFECO's core small business lines increased 7.0 percent.
Surety Performance
Surety recorded a quarterly underwriting profit of $2.7 million pretax,
down from $6.3 million for the same period last year. The decrease reflects the
fact that Surety turned in one of its best quarters in history in the third
quarter of 2001, as well as higher losses in the third quarter of this year.
Combined ratio was a profitable 91.8 in the third quarter compared with
81.5 in the second quarter.
Life & Investments Performance
SAFECO Life & Investments generated record pretax quarterly profits of
$59.6 million, compared with $43.0 million for the third quarter of 2001. This
marks the third time in the past two years that the business unit has produced
record quarterly earnings.
- ----------------------------------------------------------------------------------------------------------------
Life & Investments Performance 3rd 2nd 1st 4th 3rd
Pretax Profit (In millions) QTR QTR QTR QTR QTR
2002 2002 2002 2001 2001
Individual life $ 3.5 $ 7.5 $ 6.7 $ 1.7 $ 4.7
retirement Services 1.4 4.0 8.1 6.0 4.3
Income Annuities 11.5 7.3 8.8 14.9 10.3
Group 22.4 14.1 10.2 4.5 3.3
Asset Management 1.0 1.7 2.3 2.6 1.6
Corporate & other 19.8 17.4 23.0 17.2 18.8
---------------------------------------------------------------
Total $ 59.6 $ 52.0 $ 59.1 $ 46.9 $ 43.0
===============================================================
- ----------------------------------------------------------------------------------------------------------------
Leading the increase was the Group line, which posted pretax income of
$22.4 million compared with $3.4 million for the third quarter of 2001. Group's
result included $12.6 million generated from business SAFECO acquired from Swiss
Re during the quarter, and $9.8 million from business SAFECO had on the books
prior to the acquisition.
"The early results from this acquisition are very exciting, but we're
fully cognizant that the story of an acquisition is told over the long term,"
McGavick said. "This acquisition allows us to grow in a market where we have
considerable expertise."
Also posting strong results was the Income Annuities line, which
generated pretax income of $11.5 million, up from $10.3 million during the same
period last year. This included $6.3 million in increased investment income due
to higher-than-anticipated repayment rates on mortgage-backed securities driven
by unusually low interest rates. The impact of actual or anticipated repayment
rates may lower future investment income should interest rates rise.
Individual Life generated a quarterly profit of $3.5 million, down from
$4.7 million in third quarter 2001, largely because of higher mortality claims.
Performance of the Retirement Services line declined to $1.4 million,
compared with $4.3 million during the same period last year. Asset Management
posted pretax profit of $0.9 million, compared with $1.6 million in the third
quarter of 2001. Both lines were affected by weakness in the equity markets.
Additional financial information available
Copies of SAFECO's summary financial results, income statement and
balance sheet are available, as links to this news release, at
http://www.safeco.com/news/archive/2002_1028.asp. This information also will be
included in SAFECO's current report on Form 8-K that will be filed today.
SAFECO's third-quarter financial supplement is available online at
http://www.safeco.com/irsupplements.
Management reviews results on Webcast
SAFECO's senior management team will discuss the company's
third-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.
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
###
Reconciliation of Net Income (Loss) to Income (Loss) Before Charges
---------------------------------------------- ------------------------------- ---------------------------------
Summary Financial Results after tax 3 Months Ended 9 Months Ended
(In millions except per-share data) September 30 September 30
2002 2001 2002 2001
Unaudited Unaudited
---------------------------------------------- ------------------------------- ---------------------------------
Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Net Realized Investment Gains 7.8 12.9 89.9 53.3
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Income (Loss) Before Net Realized Investment 67.4 (113.5) 154.1 (1,051.1)
Gains
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Charges
Run-off of London Operations (17.1) - (17.1) -
Restructuring (1.9) (20.7) (9.8) (20.7)
Goodwill Write-off - - - (916.9)
2001 Reserve Strengthening - (156.0) - (156.0)
Discontinued Credit Operations - 55.4 - 58.2
Adoption of New Accounting Standard - - - (2.1)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Income (Loss) Before Charges $ 86.4 $ 7.8 $ 181.0 $ (13.6)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Per Share of Common Stock
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Net Income (Loss) $ 0.59 $ (0.79) $ 1.91 $ (7.81)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Net Realized Investment Gains 0.06 0.10 0.70 0.42
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Income (Loss) Before Net Realized Investment 0.53 (0.89) 1.21 (8.23)
Gains
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Charges
Run-off of London Operations (0.13) - (0.13) -
Restructuring (0.02) (0.16) (0.08) (0.16)
Goodwill Write-off - - - (7.17)
2001 Reserve Strengthening - (1.22) - (1.22)
Discontinued Credit Operations - 0.43 - 0.45
Adoption of New Accounting Standard - - - (0.02)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
Income (Loss) Before Charges $ 0.68 $ 0.06 $ 1.42 $ (0.11)
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
---------------------------------------------- --- ---------- ---- ----------- --- ----------- -- --------------
- --------------------------------------------------------------------------------
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 that 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:
o the ability to obtain rate increases and decline or non-renew underpriced
insurance accounts;
o achievement of premium targets and profitability;
o realization of growth and business retention estimates;
o achievement of decrease in large-commercial premium volume;
o achievement of expense savings from consolidation of commercial operations;
o achievement of overall expense reduction goals;
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 mix of SAFECO's book of business;
o driving patterns;
o the competitive pricing environment, initiatives by competitors and other
changes in competition;
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 man-made disasters, such as the attack on
September 11, 2001;
o the occurrence of bankruptcies that result in losses under surety bonds;
o the adequacy of reserves for the Property & Casualty and Life & Investments
businesses;
o the ability to run off the Lloyd's of London business without incurring
material unexpected losses;
o the availability of, pricing of, and ability to collect reinsurance;
o the ability to exclude and to reinsure the risk of loss from terrorism;
o interpretation of insurance policy provisions by courts, court decisions
regarding coverage and theories of liability, trends in litigation and
changes in claims settlement practices;
o the outcome of any litigation against us;
o legislative and regulatory developments affecting the actions of insurers,
including requirements regarding rates and availability of coverage;
o 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;
o negative changes to our ratings by rating agencies;
o the effect of current insurance and credit ratings levels on business
production;
o inflationary pressures on medical care costs, auto parts and repair,
construction costs and other economic sectors that increase the severity of
claims;
o availability of bank credit facilities;
o the profitability of the use of derivative securities by
SAFECO Financial Products;
o fluctuations in interest rates;
o performance of financial markets; and
o 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 continue
to improve earnings in the property and casualty lines.
- --------------------------------------------------------------------------------
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
Dated: October 28, 2002 /s/ RICHARD M. LEVY
---------------------------------------
Richard M. Levy
Vice President, Controller
and Chief Accounting Officer