UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
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AMENDMENT NO. 2
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
2 Properties 12
3 Legal Proceedings 12
4 Submission of Matters to a Vote of Security Holders 13
-- Executive Officers of the Registrant 13
Part II 5 Market for Registrant's Common Stock and Related
Security Holder Matters 14
6 Selected Financial Data 15
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
7A Quantitative and Qualitative Disclosures About Market Risk 42
8 Financial Statements and Supplementary Data 43
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 43
Part III 10 Directors and Executive Officers of the Registrant 44
11 Executive Compensation 44
12 Security Ownership of Certain Beneficial Owners and Management 44
13 Certain Relationships and Related Transactions 44
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Part IV 14 (a)(1) - Financial Statements 45
14 (a)(2) - Financial Statement Schedules 45
14 (a)(3) - Exhibits 45
14 (b) - Reports on Form 8-K 45
Management's Report 47
Index to Financial Statements, Schedules and Exhibits FS-1
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On August 13, 2002, SAFECO Corporation hereby amends its Annual Report on Form
10-K for the year ended December 31, 2001 to include additional information or
clarifying statements in:
Item 1 Business - Life & Investments
Item 6 Selected Financial Data
Item 7 MD&A - Investment summary
Part IV 14 (a)(1) Financial Statements - Consolidated Statements of Cash Flows
Part IV 14 (a)(1) Financial Statements - Notes to Consolidated Financial Statements:
Note 1 Summary of Significant Accounting Policies
Note 3 Financial Instruments
Note 4 Property & Casualty Loss Reserves
Part IV 14 (a)(1) Financial Statements - Supplemental Consolidating Information (unaudited)
Statements of Cash Flows (unaudited)
Part IV 14 (a)(3) Exhibits - Exhibit 12 Computation of Ratio of Earnings (Loss) to Fixed Charges
- Exhibit 23.1 Consent of Ernst & Young LLP, Independent Auditors
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 (the 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.
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:
- standards of solvency that must be met and maintained;
- licensing of insurers and their agents;
- nature of and limitations on investments;
- ability to enter into or withdraw from the state;
- approval of premium rates;
- restrictions on the size of risks that may be insured under a single policy;
- required reserves and provisions for unearned premiums, losses and other
purposes;
- deposits of securities for the benefit of policyholders;
- approval of policy forms; and
- 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).
1
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%
========================================================================================
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.
2
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.
3
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
==============================================================================================================
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
4
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.
5
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
6
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
-------------------------------
CUMULATIVE DEVELOPMENT
Net of Reinsurance $ (345.1) $ (378.7) $ (243.6)
Reinsurance (25.6) (53.0) (115.4)
-------------------------------
Gross of Reinsurance $ (370.7) $ (431.7) $ (359.0)
========================================================================
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)
-------------------------------
Reserves at End of Year $ 340.7 $ 315.5 $ 332.3
=========================================================================
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.
7
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
- -----------------------------------------------------------------------
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
=======================================================================
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.
8
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
- --------------------------------------------------------------------------
A++ 43.7%
A+ 8.7
A 4.3
A- 0.5
B 0.2
Lloyds of London 3.7
Non-Rated 6.6
-----
Total Domestic Reinsurers 67.7
-----
State Reinsurance Pools 23.7
Other Reinsurance Pools 2.1
Foreign Reinsurers 6.5
-----
Total Reinsurance Pools and Foreign Reinsurers 32.3
-----
Total 100.0%
==========================================================================
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.
9
LIFE & INVESTMENTS
Life & Investments offers individual and group insurance products, retirement
services, annuity products, mutual funds and investment advisory services. 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 Credited
Expected Maturities or Assumed Approximate
Outstanding of Liabilities Interest Rates as of Surrender
PRODUCT Balance (at issue date) 12/31/01 Surrender Charges Experience
- -----------------------------------------------------------------------------------------------------------------------------------
Income Annuities $ 6,245.3 Over 25 years 3.50% to 12.20% Cannot surrender Cannot surrender
Other 4,574.3 Approximately 4.00% to 7.95% Highest surrender 14.5% per annum
Annuities & 5-20 years charges range from
Deposits 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 age, 8% per annum
Individual Life 10-25 years sex and duration from
$1 to $58 per $1,000
of insurance.
Guaranteed 391.7 Typically 5.63% to 8.40% Market value adjustment Less than 1%
Investment 2-5 years or cannot surrender per annum
Contracts in first year.
Equity 208.7 Approximately 6 Equity return credited Typically 8% in year 1 More than 45% due
Indexed years at original is based on S&P 500 graded to 0% after to an offer to EIA
Annuities (EIA) issuance, remaining performance with no year 6. policyholders in
expected maturity of minimum guarantee. 2001 to surrender their
approximately 3 years. Floor return based on a policies and receive
After 6 years, interest minimum fixed return on December 31, 2000
terms can be reset. a portion (typically account value with no
Policyholders can choose 90%)of the original surrender charge.
not to surrender their deposit amount.
contracts.
- -----------------------------------------------------------------------------------------------------------------------------------
Total $14,624.2
===================================================================================================================================
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.
10
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.
11
ITEM 2 - PROPERTIES
General America Corporation (a wholly-owned subsidiary of SAFECO Corporation)
leases office space to both Property & Casualty and Life & Investments. Property
& Casualty's and Corporate's home office facility (567,000 gross square feet) is
located in Seattle, Washington. A 700-car parking garage is connected to this
facility. Life & Investments' headquarters facility (220,000 gross square feet)
is located in Redmond, Washington.
Other buildings owned and occupied include the newly developed office space
(343,000 gross square feet) in Redmond, Washington that was completed in late
2001. Additional company-owned facilities are regional and branch offices
located in Fountain Valley and Pleasant Hill, California; Denver, Colorado;
Carol Stream, Illinois; St. Louis, Missouri; Cincinnati, Ohio; Portland, Oregon;
Mountlake Terrace and Spokane, Washington. These buildings, including the newly
developed Redmond, Washington facility, total approximately 1,960,000 gross
square feet. All other branch and service offices occupy leased premises
totaling approximately 2,756,000 gross square feet, generally subject to lease
periods of five years or less. Total leased and owned office space totals
approximately 5,503,000 gross square feet.
ITEM 3 - LEGAL PROCEEDINGS
(Dollar amounts in millions)
Because of the nature of their businesses, SAFECO'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. SAFECO 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 Corporation are parties
to a number of lawsuits for liability coverages related to environmental claims.
Although estimation of reserves for environmental claims is difficult, the loss
and loss adjustment expenses with respect to any such lawsuit, or all lawsuits
related to a single incident combined, are not expected to be material to the
Corporation's financial condition. For more information regarding the liability
of such subsidiaries for environmental claims and the difficult process of
estimating environmental reserves see the Property & Casualty - Loss Reserve
section under Part I, Item 1.
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 ("CAPA"), 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. Because of the uncertainty of recovering amounts due, SAFECO Insurance
Company of America has written-off all receivable amounts totaling $27 due from
Magna.
The SAFECO property and casualty insurance companies have been sued in U.S.
District Court for the Northern District of Ohio and in California state court
by plaintiffs who purport to represent classes of present and former claims
adjusters. They claim that claims adjusters should have been considered
non-exempt employees under the labor laws, and seek damages representing back
overtime pay for certain hours worked. SAFECO intends to vigorously defend
against these allegations.
12
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 2001.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 6, 2002, these are the names, ages and positions of the executive
officers of the registrant as required by Item 10. No family relationships
exist.
Name Age Position
- ----------------------------------------------------------------------------------------
Bruce M. Allenbaugh 45 Senior Vice President of Corporate Marketing since May 7,
2001. Vice President of Marketing for Avenue A from
November 1999 to January 2001. Vice President of
Marketing for Nextlink (now XO Communications) from 1994
to 1999. Held a series of management positions with
Pepsi-Cola from 1985 to 1994.
Michael E. LaRocco 45 President of SAFECO Personal Insurance since July 16,
2001. Regional Vice President, Northeast Region for GEICO
Corporation from 1998 to July 2001. Vice President of
Underwriting and Product Management for GEICO from 1996
through 1998, Vice President of GEICO Casualty from 1994
to 1996, and held a series of management positions with
GEICO from 1993 through 1998.
Dale E. Lauer 55 President of SAFECO Business Insurance
since July 16, 2001. Senior Vice President of
SAFECO Business Insurance from 1997 to July 2001.
Vice President of commercial lines underwriting for
the SAFECO property and casualty insurance
companies from 1992 to 1997.
Michael S. McGavick 44 President, Chief Executive Officer and Director since
January 30, 2001. President and Chief Operating Officer
of CNA Agency Market Operations from October 1997 until
January 2001, and President of CNA's Commercial Lines
group from January until October 1997, and held a series
of executive positions with CNA's commercial insurance
operations from 1995 through October 1997. Director of
the Superfund Improvement Project for the American
Insurance Association from 1992 to 1995.
Christine B. Mead 46 Named Senior Vice President, Chief Financial Officer and
Secretary effective January 24, 2002. Senior Vice
President and Chief Financial Officer for Travelers
Insurance Group from 2000 to January 2002; Senior Vice
President and Chief Financial Officer for Travelers
Property Casualty Corp - Personal Lines from 1996 to
2000; held a series of management positions with
Travelers Corporation from 1989 to 1996.
Allie R. Mysliwy 47 Senior Vice President of Human
Resources since July 2001. Vice President of Human
Resources from July 1999 to July 2001; Vice
President of Human Resources for SAFECO Life
Insurance Company from 1994 to 1999.
James W. Ruddy 52 Senior Vice President since 1992. General Counsel since
1989. Vice President from 1989 to 1992. Associate General
Counsel from 1985 to 1989.
Yomtov Senegor 43 Senior Vice President and Chief
Information Officer since October 1, 2001. Central
Region Insurance Managing Partner with Accenture
(formerly Andersen Consulting) from November 1997
to October 2001, and Partner from 1992 to 1997.
Randall H. Talbot 47 President of SAFECO Life Insurance companies since
February 1998. Chief Executive Officer and President of
Talbot Financial Corporation from 1988 to 1998.
13
SAFECO Corporation and Subsidiaries
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET INFORMATION
SAFECO Corporation's common stock trades on the NASDAQ Stock Market under the
symbol SAFC. High and low market prices of the Corporation's common shares were
as follows:
First Second Third Fourth
MARKET PRICE RANGES Quarter Quarter Quarter Quarter Annual
- ------------------------------------------------------------------------------
2001 - HIGH $32.06 $30.11 $31.72 $32.79 $32.79
- LOW 21.75 25.41 26.02 29.11 21.75
2000 - High 26.56 26.31 27.63 35.69 35.69
- Low 18.56 19.88 20.81 22.94 18.56
- ------------------------------------------------------------------------------
There were approximately 3,300 common shareholders of record at December 31,
2001.
DIVIDENDS
SAFECO has paid cash dividends continuously since 1933. Common stock dividends
paid to shareholders were $0.93 per share in 2001 compared with $1.48 in 2000
and $1.44 in 1999. These dividends are funded with dividends to the Corporation
from its subsidiaries. The Corporation expects to continue paying dividends in
the foreseeable future. However, payment of future dividends is subject to the
Board of Directors' approval and is dependent upon earnings and the financial
condition of the Corporation as well as dividend restrictions on its significant
insurance subsidiaries as described in Note 13 of the Notes to Consolidated
Financial Statements. Given the deterioration of earnings in recent years, in
February 2001 the Board of Directors reduced the quarterly dividend 50% from
$0.37 to $0.185 per share.
First Second Third Fourth
DIVIDENDS PAID Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------
2001 $ .370 $ .185 $ .185 $ .185 $ .925
2000 .370 .370 .370 .370 1.480
1999 .350 .350 .370 .370 1.440
- -------------------------------------------------------------------------------
14
ITEM 6 - SELECTED FINANCIAL DATA
The following selected consolidated financial data of SAFECO was derived from
the consolidated financial statements of the Corporation. The following
financial data should be read in conjunction with the Consolidated Financial
Statements and accompanying notes.
SUMMARY OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
(In Millions except per share values)
REVENUES
Insurance
Property & Casualty Earned Premiums $ 4,472.8 $4,563.4 $4,382.9 $4,208.3 $2,816.6
Life & Investments Premiums & Other Revenues 637.0 618.2 473.9 447.0 363.1
Net Investment Income
Property & Casualty 457.7 460.5 462.3 480.2 327.0
Life & Investments 1,180.3 1,181.5 1,123.2 1,044.7 919.3
Corporate 11.3 (8.5) 2.8 (2.3) 1.4
Real Estate -- -- -- 77.9 75.1
Corporate 10.4 20.5 39.2 3.1 0.9
Realized Investment Gain 93.0 139.5 117.7 94.6 119.4
-------------------------------------------------------------
Total $ 6,862.5 $6,975.1 $6,602.0 $6,353.5 $4,622.8
=============================================================
INCOME SUMMARY (NET OF TAX)
Income (Loss), Before Realized Gain*
Property & Casualty $(1,115.3) $ (10.6) $ 114.8 $ 310.2 $ 260.2
Life & Investments 88.6 107.7 126.9 53.5 102.4
Real Estate -- -- -- 3.4 6.2
Corporate (35.3) (40.8) (35.7) (46.6) (16.8)
-------------------------------------------------------------
Total (1,062.0) 56.3 206.0 320.5 352.0
Realized Gain 61.5 90.4 76.5 61.9 78.7
-------------------------------------------------------------
Income (Loss) Before Distributions
on Capital Securities (1,000.5) 146.7 282.5 382.4 430.7
Distributions on Capital Securities (44.8) (44.8) (44.8) (44.9) (14.8)
Discontinued Credit Operations 58.2 12.7 14.5 14.4 14.1
Cumulative Effect of Accounting Change (2.1) -- -- -- --
-------------------------------------------------------------
Net Income (Loss) $ (989.2) $ 114.6 $ 252.2 $ 351.9 $ 430.0
=============================================================
PER SHARE OF COMMON STOCK
Net Income (Loss) - Diluted
Income (Loss) Before Realized Gain*+ $ (8.66) $ .09 $ 1.21 $ 1.97 $ 2.60
Realized Gain .48 .71 .58 .44 .60
Discontinued Credit Operations .45 .10 .11 .10 .11
Cumulative Effect of Accounting Change (0.02) -- -- -- --
-------------------------------------------------------------
Net Income (Loss) $ (7.75) $ .90 $ 1.90 $ 2.51 $ 3.31
=============================================================
Average Number of Shares (in millions) 127.7 127.8 132.8 139.9 129.8
Net Income (Loss) - Basic
Income (Loss) Before Realized Gain*+ $ (8.66) $ .09 $ 1.21 $ 1.98 $ 2.61
Realized Gain .48 .71 .58 .44 .61
Discontinued Credit Operations .45 .10 .11 .10 .11
Cumulative Effect of Accounting Change (0.02) -- -- -- --
-------------------------------------------------------------
Net Income (Loss) $ (7.75) $ .90 $ 1.90 $ 2.52 $ 3.33
=============================================================
Average Number of Shares (in millions) 127.7 127.8 132.7 139.4 129.2
Dividends Paid $ 0.93 $ 1.48 $ 1.44 $ 1.34 $ 1.22
* Income (Loss) Before Realized Gain 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.
+ Net income (loss) per share amounts are after distributions on capital
securities.
15
SUMMARY OF OPERATIONS (UNAUDITED) (continued)
Additional Supplemental Data
YEAR ENDED DECEMBER 31 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------
(In Millions except per share values)
PROPERTY & CASUALTY WRITTEN PREMIUMS
Personal Auto $ 1,797.0 $ 1,726.4 $ 1,725.6 $ 1,745.8 $ 1,295.2
Homeowners 762.7 756.6 736.5 717.4 547.8
Specialty 229.5 229.1 225.6 217.2 182.0
-----------------------------------------------------------
Total Personal 2,789.2 2,712.1 2,687.7 2,680.4 2,025.0
Business Insurance 1,000.8 1,159.5 1,138.0 952.3 195.7
Commercial Insurance 617.2 703.8 701.5 687.2 642.1
Surety 154.7 125.2 110.7 107.2 99.5
Other 8.3 8.5 7.1 14.7 25.1
-----------------------------------------------------------
Gross Written Premiums 4,570.2 4,709.1 4,645.0 4,441.8 2,987.4
Ceded Reinsurance Premiums 131.0 169.4 161.2 185.2 159.2
-----------------------------------------------------------
Net Written Premiums $ 4,439.2 $ 4,539.7 $ 4,483.8 $ 4,256.6 $ 2,828.2
===========================================================
PROPERTY & CASUALTY OPERATING RATIOS*
Losses 74.5% 70.4% 66.4% 61.3% 58.4%
Adjustment Expenses 14.1 12.2 12.0 11.5 11.2
Underwriting Expenses 30.1 28.8 30.0 29.8 29.1
----------------------------------------------------------
Combined Ratio 118.7% 111.4% 108.4% 102.6% 98.7%
==========================================================
Net Written Premiums to
Policyholders' Surplus 2.0:1 2.0:1 1.6:1 1.3:1 1.3:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property & Casualty
Underwriting $ (837.5) $ (521.9) $ (366.7) $ (109.4) $ 36.2
Nonrecurring Acquisition Charges -- -- -- -- (60.0)
Net Investment Income 457.7 460.5 462.3 480.2 327.0
Goodwill Amortization (11.0) (44.0) (43.8) (43.0) (11.0)
Write-off of Goodwill (1,165.2) -- -- -- --
Restructuring Charges (44.3) -- -- -- --
Life & Investments 197.5 168.5 195.1 131.1 156.9
Write-off of Goodwill (48.9) -- -- -- --
Write-off of Deferred
Acquisition Costs -- -- -- (46.8) --
Real Estate -- -- -- 5.3 9.6
Corporate (54.6) (63.2) (55.0) (71.9) (27.0)
----------------------------------------------------------
Total $(1,506.3) $ (0.1) $ 191.9 $ 345.5 $ 431.7
==========================================================
TOTAL ASSETS $30,092.5 $30,257.7 $29,223.6 $29,553.0 $28,502.2
DEBT
Current 347.8 356.3 514.5 770.9 897.3
Long-Term 748.8 774.2 478.5 589.5 570.6
----------------------------------------------------------
Total 1,096.6 1,130.5 993.0 1,360.4 1,467.9
CAPITAL SECURITIES 843.4 843.0 842.5 842.1 841.7
SHAREHOLDERS' EQUITY 3,634.6 4,695.8 4,294.1 5,575.8 5,461.7
BOOK VALUE PER SHARE 28.45 36.79 33.31 40.92 38.69
* Operating ratios are GAAP basis and are based on expenses expressed as a
percentage of earned premiums. Ratios exclude goodwill write-off, goodwill
amortization, restructuring charges and nonrecurring acquisition charges.
16
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions unless noted otherwise)
SAFECO Corporation (the Corporation) is a Washington state corporation that owns
operating subsidiaries engaged in property and casualty insurance, surety, life
insurance and asset management. These operations generated virtually all of the
2001 revenues.
The Corporation and its subsidiaries are collectively referred to as "SAFECO."
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."
Since joining SAFECO as Chief Executive Officer in late January 2001, Michael S.
McGavick and the senior leadership team have engaged in a review of SAFECO's
operations with a particular emphasis on the Property & Casualty operations.
This review resulted in actions that focused on:
(1) Ensuring that the recovery plans for Property & Casualty operations had the
rigor and urgency necessary to succeed;
(2) Analyzing and reducing expenses;
(3) Strengthening the balance sheet; and
(4) Investing in SAFECO's employees.
Many of the plans to address the urgent actions have been completed and others
are in process. These actions are explained in more detail in the remainder of
this Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A).
ACTIONS
(1) A comprehensive review of the entire operation confirmed that the core
strengths and most profitable opportunities for SAFECO were in personal
auto, small-to-medium commercial insurance and life and investments. The
recovery plans for Property & Casualty involved actions on several fronts:
- Rates were raised across all lines of business, with specific focus on
the underperforming lines of homeowners and large commercial.
- Nearly 1,000 underperforming agents no longer represent SAFECO.
- Additional underwriting actions were taken on unprofitable individual
accounts.
- SAFECO exited lines of business not core to its strategy. For example,
15 of 19 Select Markets programs were cancelled.
For further discussion of these and other actions see the Property &
Casualty - Operations section of this MD&A.
(2) A rigorous company-wide effort to reduce expenses was commenced and
continues. In July 2001, SAFECO announced that it would eliminate
approximately 1,200 jobs by the end of 2003 with half of the reductions
expected to be completed in 2001. SAFECO's total employment declined by
approximately 900 in 2001, excluding the reduction due to the sale of SAFECO
Credit. Positions being eliminated are in the corporate headquarters and
regional Property & Casualty operations. When fully implemented, these
actions are expected to reduce SAFECO's annual operating expenses by
approximately $100.
Restructuring charges and period costs associated with these changes are
expected to total approximately $65 through 2002. This includes pretax
charges incurred in 2001 of $44 and $21 to be incurred throughout 2002 as
the restructuring actions occur. Additional information can be found in Note
12 in the Notes to Consolidated Financial Statements.
17
(3) In strengthening SAFECO's balance sheet, four separate actions were taken.
- In February 2001, SAFECO 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 provides the
Corporation cash savings of approximately $95 per year and brought the
dividend more in line with financial performance.
- Effective March 31, 2001, SAFECO wrote off $1.2 billion of goodwill
associated with the 1997 American States Insurance acquisition (Property
& Casualty $1,152.1, Life & Investments $48.9). See Note 1 in the Notes
to Consolidated Financial Statements for additional information.
- In August 2001, SAFECO Credit was sold, generating $250 in net proceeds,
resulting in a pretax gain of $97, and reducing SAFECO's debt by
approximately one-half or $1.5 billion. SAFECO Credit is reported as a
discontinued operation as described in the Discontinued Operations -
SAFECO Credit section of this MD&A.
- During the third quarter 2001, SAFECO completed a review, initially
announced in May 2001, of Property & Casualty loss reserve adequacy and
as a result increased reserves by $240, pretax. For additional
information see the Property & Casualty - Operations, Loss Reserve
Strengthening section of this MD&A.
(4) Investing in SAFECO's employees has been accomplished as follows:
- Increased emphasis on employee training to strengthen the tools and
capabilities of the workforce.
- A performance-based compensation system based on the achievement of
specific goals linked directly to SAFECO's business plan was developed
and is being implemented in early 2002. The new compensation system
applies to all SAFECO employees, including the senior leadership team,
and is designed to motivate and reward superior performance. In addition
employee communication was increased to help all employees better
understand SAFECO's business plans and their role in helping achieve
them.
- SAFECO added several strong leaders and completed the formation of a new
senior leadership team:
>> In May 2001 Bruce Allenbaugh was named Senior Vice President of
Corporate Marketing bringing wide experiences from Avenue A,
NextLink and Pepsi-Cola to SAFECO;
>> 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 September 2001 Yomtov Senegor was named Chief Information Officer
bringing extensive information systems experience from Accenture
(formerly Andersen Consulting);
>> In January 2002 Christine Mead was named Senior Vice President and
Chief Financial Officer. Ms. Mead most recently was the Chief
Financial Officer for Travelers Insurance Group's property and
casualty business bringing extensive experience in financial
management and strategy from that company as well as prior public
accounting experience with Deloitte & Touche and
PricewaterhouseCoopers; and
>> The Board of Directors was also strengthened with the August 2001
election of Joseph W. "Jay" Brown, an insurance executive with
nearly 30 years experience. 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.
- Introduced a corporate-wide program on diversity to prepare SAFECO to
compete in a more diverse America and to increase workforce
effectiveness.
18
SAFECO's leaders have identified four focus areas for the coming year. They are:
(1) Improving sales growth through independent agents;
(2) Improving levels of service and claims handling;
(3) Driving execution through enhanced metrics and management practices; and
(4) Continuing investment in SAFECO's employees.
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information should be read in conjunction
with the Segment Footnote (Note 15) in the Notes to Consolidated Financial
Statements. Detailed discussion of Property & Casualty and Life & Investments
operations follows in this MD&A.
YEAR ENDED DECEMBER 31 2001 2000 1999
- ----------------------------------------------------------------------------------------
INCOME (LOSS)
Property & Casualty $(1,600.3) $(105.4) $ 51.8
Life & Investments 148.6 168.5 195.1
Corporate (54.6) (63.2) (55.0)
--------------------------------
Income (Loss) Before Realized Gain and Income Taxes* (1,506.3) (0.1) 191.9
Income Tax Benefit (444.3) (56.4) (14.1)
--------------------------------
Income (Loss) Before Realized Gain (1,062.0) 56.3 206.0
Realized Investment Gain, Net of Taxes 61.5 90.4 76.5
Distribution on Capital Securities, Net of Taxes (44.8) (44.8) (44.8)
--------------------------------
Income (Loss) from Continuing Operations (1,045.3) 101.9 237.7
Discontinued Credit Operations, Including Gain on
Disposition, Net of Taxes 58.2 12.7 14.5
Cumulative Effect of Change in Accounting Principle,
Net of Taxes (2.1) -- --
--------------------------------
Net Income (Loss) $ (989.2) $ 114.6 $252.2
================================
PER DILUTED SHARE OF COMMON STOCK
Income (Loss) Before Realized Gain* $ (8.66) $ .09 $ 1.21
Realized Investment Gain .48 .71 .58
--------------------------------
Income (Loss) from Continuing Operations (8.18) .80 1.79
Discontinued Credit Operations, Including Gain on
Disposition .45 .10 .11
Cumulative Effect of Change in Accounting Principle (.02) -- --
--------------------------------
Net Income (Loss) $ (7.75) $ .90 $ 1.90
========================================================================================
* Income (loss) before realized gain and income taxes in 2001 includes goodwill
write-down of $1,214.1 ($925.5 after tax, $7.24 per share), Property &
Casualty loss reserve strengthening of $240.0 ($156.0 after tax, $1.22 per
share) and restructuring charges of $44.3 ($28.8 after tax, $.22 per share).
The following is a summary of the major items that affected SAFECO's financial
results in 2001:
Property & Casualty
- - Recognized goodwill write-down of $1,165.2 before tax ($886.9 after tax).
- - Net catastrophe losses for 2001 were $268.0 before tax ($174.2 after tax)
which was more than $100 higher than the highest year in SAFECO's past
(1998). These 2001 losses include $60.0 before tax ($39.0 after tax) for
storm damages in the St. Louis area in April and $51.0 before tax ($33.2
after tax) of net losses from the World Trade Center attacks.
- - Completed a reserve review and increased loss reserves $240.0 before tax
($156.0 after tax).
- - Consolidated commercial lines and recognized restructuring charges of $44.3
before tax ($28.8 after tax).
19
Life & Investments
- - Generated record pretax earnings (before goodwill write-down) of $197.5 for
the year ($127.1 after tax).
- - Recognized goodwill write-down of $48.9 before tax ($38.7 after tax).
SAFECO Corporation
- - Sale of SAFECO Credit resulting in a gain of $97.0 before tax ($54.0 after
tax).
- - Recognized investment write-downs of $126.8 before tax ($82.4 after tax) due
to credit deterioration and corporate failures of certain investment
holdings.
- - Quarterly dividend to shareholders was reduced from $0.37 cents to $0.185
cents per share resulting in annual cash savings of $94.5.
PROPERTY & CASUALTY - OPERATIONS
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.
Approximately 17% of Property & Casualty premiums are written in the state of
California, and approximately 35% of premiums are written in the three West
Coast states of California, Washington and Oregon. SAFECO purchased American
States Financial Corporation (American States) in October 1997. This purchase
broadened the product mix available to the combined companies and geographically
diversified SAFECO's revenue and risk exposure. The purchase also increased
Property & Casualty's risk exposure to the types of commercial business written
by American States as well as to weather-related losses in the midwest.
Personal Insurance, Business Insurance, Commercial Insurance and Surety
comprised approximately 61%, 22%, 14% and 3%, respectively, of the 2001 gross
written premiums of $4.6 billion. Gross written premiums decreased $138.9 (2.9%)
in 2001 due to re-underwriting efforts which included non-renewing underpriced
risks and reducing underperforming and unprofitable lines. In addition,
relationships with approximately 1,000 underperforming agents were terminated in
2001. These actions resulted in an overall net decrease in premiums, more than
offsetting the impact of premium rate increases.
Property & Casualty Operating Statistics
The following three tables for Property & Casualty reflect: (1) income (loss)
before realized gains and income taxes, (2) operating ratios, and (3)
underwriting profit (loss).
Income (Loss) Before Realized
Gains and Income Taxes
---------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------------------
Net Earned Premiums $ 4,472.8 $4,563.4 $4,382.9
---------------------------------
Underwriting Loss *+ $ (837.5) $ (521.9) $ (366.7)
Net Investment Income 457.7 460.5 462.3
Goodwill Amortization (11.0) (44.0) (43.8)
Goodwill Write-down (1,165.2) -- --
Restructuring Charges (44.3) -- --
---------------------------------
Income (Loss) Before Realized Gains and Income Taxes $(1,600.3) $ (105.4) $ 51.8
- ------------------------------------------------------------------------------------------
* Underwriting profit or loss is a standard industry measurement used by
management to analyze core Property & Casualty operations. This measurement
represents the net amount of earned premiums less underwriting losses and
expenses; it does not include realized investment gains and losses, goodwill
amortization, goodwill write-down, restructuring charges, net investment
income and taxes. This measurement does not replace net income as a measure of
profitability, but is presented to supplement the other financial measurements
provided.
+ Includes Loss Reserve Strengthening of $240.0 in 2001 (see discussion in the
next section for more information). Excluding this adjustment the underwriting
loss was $(597.5).
20
GAAP Operating Ratios*
-------------------------------
YEAR ENDED DECEMBER 31 2001+ 2000 1999
- ----------------------------------------------------------------------------------------
Loss Ratio 74.5% 70.4% 66.4%
Loss Adjustment Expense Ratio 14.1 12.2 12.0
Expense Ratio 30.1 28.8 30.0
-------------------------------
Combined Ratio 118.7% 111.4% 108.4%
========================================================================================
* Operating ratios represent major components of expense expressed as a
percentage of earned premiums and are commonly used measures of Property &
Casualty's profitability. Ratios exclude goodwill amortization, goodwill
write-down and restructuring charges.
+ Includes Loss Reserve Strengthening of $240.0 in 2001. Excluding this
adjustment the Combined Ratio was 113.4%; the Loss Ratio was 70.7% and the
Loss Adjustment Expense Ratio was 12.6%.
Underwriting Profit (Loss)*
---------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------
Combined Combined Combined
YEAR ENDED DECEMBER 31 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------
PERSONAL LINES
Personal Auto $ (80.5) 104.6% $ (123.0) 107.1% $ (63.3) 103.7%
Homeowners (205.6) 127.8 (116.7) 116.0 (48.2) 106.8
Specialty 3.9 98.0 18.2 90.3 20.6 88.4
COMMERCIAL LINES
Business Insurance (163.2) 115.8 (155.3) 113.3 (183.4) 118.0
Commercial Insurance (276.2) 144.0 (155.7) 122.8 (107.6) 115.7
Surety 2.4 97.5 11.7 81.0 15.2 74.4
Other (118.3) -- (1.1) -- -- --
---------------------------------------------------------------
Total $ (837.5) 118.7% $ (521.9) 111.4% $ (366.7) 108.4%
========================================================================================
* Catastrophe losses for all lines, net of reinsurance, totaled $268.0, $136.0
and $103.0 in 2001, 2000 and 1999, respectively. Catastrophes are defined as
events resulting in losses greater than $0.5, involving multiple claims and
policyholders.
Property & Casualty had steadily deteriorating results from the underwriting of
insurance from 1999 to 2001. In each of these three years the loss ratio
increased (1999 - 66.4%, 2000 - 70.4% and 2001 - 74.5%) which in turn caused the
combined ratio for each year to increase (1999 - 108.4%, 2000 - 111.4% and 2001
- - 118.7%). Excluding the $240.0 loss reserve strengthening described further in
the Loss Reserve Strengthening section below, the loss ratio in 2001 was 70.7%
and the combined ratio was 113.4%. Details on the results by line of insurance
as well as actions being taken to improve these underwriting results are
described below. Operating results started showing signs of a positive
turnaround in the fourth quarter of 2001 which produced a combined ratio of
111.3% compared with 113.4% for all of 2001 (excluding the loss reserve
strengthening).
Information on the investment income generated by Property & Casualty is
provided in the Investment Summary section of this MD&A.
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:
21
$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 of this MD&A.
Additional information about loss reserves can be found in the Property &
Casualty - Loss Reserves section of this MD&A.
Personal Insurance - Auto
Rate increases, agency cancellations and tighter underwriting have helped to
reduce the combined ratio from 107.1 in 2000 to 104.6 in 2001. The losses from
underwriting of $80.5 in 2001, $123.0 in 2000 and $63.3 in 1999 were primarily
the result of rate decreases in 1999 and 1998 which were taken to retain
American States business and to respond to competition. Average auto rates
increased 9% and 6% in 2001 and 2000, respectively, and decreased 2% in 1999.
SAFECO plans to increase personal auto rates on average 7% (including inflation
adjustments) in 2002. Actions taken in 2001 to re-underwrite all personal lines
business and these rate increases are contributing to the improvements in
personal auto results. These actions have resulted in the decline in the number
of personal auto policies in force by 4% offset by an increase in written
premiums by 4% in 2001. SAFECO expects further rate increases to depress the
growth in the number of policies and to contribute to improved underwriting
results.
In 2000 Property & Casualty expanded the use of "insurance-scoring" (utilizing
multiple variants to classify risk) which is in use by several competitors. As
expected the use of insurance-scoring along with tighter underwriting standards
has resulted in a better match of rate and risk. In August 2001 SAFECO began to
launch a new automated underwriting initiative with point of sale technology
that allows its agent partners to more efficiently quote and sell policies. This
technology also includes the updated version of the automated multi-variant
underwriting model. This automated approach is expected eventually to handle the
majority of new business. The automation initiative, rate increases and tighter
underwriting actions are expected to help improve the overall quality of this
line of business going forward. The use of insurance-scoring is the subject of
both legislative and regulatory review in several states where Property &
Casualty has a concentration of business, including Washington state. Property &
Casualty will comply with any limitation imposed by regulation or legislation on
the use of insurance-scoring, including modification of its underwriting model
as may be necessary.
22
The decrease in policies in force in 2001 was most significant for preferred
driver auto insurance policies. This decrease was offset in part by a
substantial increase in non-standard auto insurance policies. Growth in the
preferred auto line is key to long-term profitability in auto and retention of
in force business remains a critical issue for this line. The focus going
forward is to seek a return to growth in policies in force aided by a new
product with additional pricing tiers coupled with the automated underwriting
initiative. SAFECO recently announced changes in agent compensation which
provide greater incentives to agents for writing new auto business. In addition
the personal auto, homeowners and specialty lines are now managed on an
individual product line basis by state instead of the former regional management
basis. This change will provide a closer focus on profitability on an individual
product line basis.
Personal Insurance - Homeowners
The homeowners line operated at a combined ratio of 127.8, 116.0 and 106.8 and
the underwriting losses by year were $205.6, $116.7 and $48.2 in 2001, 2000 and
1999, respectively. The acquisition of American States in 1997 increased
SAFECO's exposure to large, single weather-related events due to geographic
concentration of homeowners risk particularly in the midwest. Losses due to
large, single events (nearly all weather-related) were $145.0, $86.0 and $52.0
for 2001, 2000 and 1999, respectively. In 2001 the increase includes $60.0 for a
single catastrophic storm in St. Louis. Non-weather losses, particularly from
fire and water damage, increased by $26.5 in 2001 over similar losses in 2000.
Non-weather losses in 2000 increased $44.4 over similar losses in 1999.
Property & Casualty is executing an aggressive profit restoration plan for
homeowners. Elements of the plan include pricing the product to generate an
appropriate return based on risk characteristics, adding new pricing tiers,
restricting policy terms, insurance to value efforts (involves updating
policyholders coverage levels) and a willingness to exit geographic markets that
do not respond to pricing actions. This action plan is expected to take up to
two years to restore acceptable underwriting results. Average homeowners rates
(including inflation adjustments) increased approximately 12%, 6% and 1% in
2001, 2000 and 1999, respectively. These actions have resulted in a reduction in
new business production of 41% in 2001, and total homeowners policies in force
decreased 8% in 2001 and were flat in 2000, compared with an increase of 4% in
1999. Under the new agent compensation plan, commissions for new monoline
homeowners business have been reduced. In addition, a moratorium on writing
homeowners business in Texas was established in September 2001 in response to
concern about the rising number of mold claims.
Personal Insurance - Specialty
Specialty lines (including earthquake, dwelling fire, inland marine and boats)
produced underwriting profits of $3.9, $18.2 and $20.6 in 2001, 2000 and 1999,
respectively. The Seattle earthquake that occurred in February impacted results
in 2001.
Business Insurance
Business Insurance focuses on small-to-medium-sized businesses. It produced
underwriting losses of $163.2, $155.3 and $183.4 and operated at combined ratios
of 115.8, 113.3 and 118.0 in 2001, 2000 and 1999, respectively. Written premiums
decreased 14% in 2001 and increased 2% in 2000. The 2001 underwriting loss
includes a $65.0 reserve charge described earlier relating to unfavorable prior
year development on construction defect and workers' compensation claims. In
addition, following the acquisition of American States in 1997, Property &
Casualty sought both to underwrite and to price this business to ensure
retention of in force business, resulting in higher underwriting losses. In
recent years, the overall competitive marketplace (particularly in workers'
compensation) led to further price reductions. Property & Casualty took
aggressive action in 2001 and 2000 to reverse the underwriting losses in this
line by re-underwriting existing business, strengthening underwriting criteria
and discipline, terminating relationships with agents who produced poor quality
business, and obtaining rate increases, particularly in workers' compensation
and commercial auto. Workers' compensation remains an unprofitable line as
medical loss costs are expected to continue to rise. As a result new business
production has been substantially curtailed. Workers' compensation net written
premiums were down 32% in 2001 from 2000 despite rate increases of approximately
14%.
Re-underwriting this book of business and agency cancellations resulted in the
reduction of $90.0 of unprofitable business in 2001. In 2002 the focus is to
improve profitability by achieving rate adequacy with a goal of increasing rates
on average 20% on the small-to-medium-sized businesses, and 30% on the
medium-to-larger-sized businesses. In 2002 the focus on the agents will be to
secure profitable growth. A redesigned
23
business model with three new capabilities will be introduced to support
business growth in 2002. These new capabilities include an automated
underwriting platform, a commercial service center and a new business agency
interface system. In combination, these capabilities will support policy growth
by delivering more accurate pricing, reduced transaction time, ease of doing
business with SAFECO and expanded services for business customers. Top line
premium growth is not expected until 2003.
Delivery and implementation of the redesigned business model will require a
substantial effort in 2002. This represents a significant departure from the
traditional individual risk underwriting approach. The success of this
implementation will be critical to improved underwriting results in business
insurance over the next few years.
In May 2001 Property & Casualty announced its decision to consolidate its
commercial lines operations and reduce the number of regional offices. The
consolidated operations are now known as SAFECO Business Insurance (SBI) and
focus on small-to-medium business product lines. SBI includes a special facility
to underwrite large commercial accounts produced by agents and brokers who
support Property & Casualty's core personal and small-to-medium business product
lines. For reporting purposes these two segments have been shown separately
through 2001 but will be combined into one segment beginning with the first
quarter 2002.
Commercial Insurance
As discussed above Property & Casualty has now completed the process of
consolidating its commercial lines operations and will focus on small-to-medium
business product lines going forward. Starting in May 2001, Property & Casualty
discontinued its pursuit of large single account business as it was
significantly unprofitable. Accounts above one hundred thousand dollars in
premiums are now underwritten by a special facility within SBI.
Commercial Insurance focused on medium- to large-sized businesses. It produced
underwriting losses of $276.2, $155.7 and $107.6 and operated at combined ratios
of 144.0, 122.8 and 115.7 in 2001, 2000 and 1999, respectively. Included in the
underwriting loss is the $90.0 reserve charge described earlier relating to
construction defect, workers' compensation and asbestos and environmental
claims. The continued weakness in the underwriting results is due to several
reasons, including the competitive underwriting environment, inadequate rates,
adverse loss experience (particularly with workers' compensation in California,
Texas and Florida), reserve increases in recognition of unfavorable trends in
loss costs and higher frequency of large losses. Property & Casualty has
increased commercial prices by 21% and 17% in 2001 and 2000, respectively.
Commercial insurance gross written premiums declined 12.3% to $617.2 in 2001
from $703.8 in 2000.
During 2001, SAFECO decided to exit approximately half of its $270.0 Select
Markets business because these specialty commercial insurance products did not
fit with SAFECO's core business focus. Once the contracts for the discontinued
lines expire, they will not be renewed. The runoff period may take up to three
years. In September 2001, SAFECO acquired a book of lender-placed property
business from ACE, with annual premiums of approximately $80.0, more than
doubling SAFECO's lender-placed property book of business.
Surety
The surety line produced pretax underwriting profits of $2.4, $11.7 and $15.2 in
2001, 2000 and 1999, respectively. Fourth quarter 2001 results were adversely
affected by an $18.0 loss, after reinsurance, from the bankruptcy of Enron, a
large energy company. Surety issued advance pay and payment guaranty bonds for
Enron totaling $193.5. The estimated gross loss related to these bonds is $59.5.
Excluding the loss related to Enron, Surety profits in 2001 were $20.4. Due to
the complex nature of the Enron bankruptcy, additional losses may occur as
further information develops. Additional losses, if any, cannot be estimated at
this time and any such losses would impact current operating results.
As a result of extraordinary loss experience in the industry in all major lines
of surety in 2001, prices of surety bonds have increased and industry capacity
has been reduced. Continued availability of adequate reinsurance is integral to
SAFECO's ability to profitably grow the surety line in the future.
Other
Other insurance product lines produced underwriting losses of $118.3 and $1.1 in
2001 and 2000, respectively, and broke even in 1999. These lines include assumed
reinsurance and other business in run-off. Included in
24
the underwriting loss is the $85.0 reserve charge described earlier relating to
construction defect and asbestos and environmental issues and $30.0 of reserves
from the September 11, 2001 attacks on the World Trade Center, net of
reinsurance. The $30.0 loss was incurred by SAFECO's London subsidiary, R.F.
Bailey Underwriting Agencies, Ltd. (R.F. Bailey) (see below for discussion of
total losses from terrorism). SAFECO completed a review of R.F. Bailey in 2001
and its options in the Lloyd's of London underwriting market. As a result of the
review in the fourth quarter of 2001, SAFECO wrote off $13.1 of goodwill
associated with the 1999 acquisition of R.F. Bailey.
Impact of Terrorism
As a result of the September 11, 2001 terrorist attacks, SAFECO estimated its
losses net of reinsurance at $52.0, of which $21.0 is attributable to SBI
accounts, $30.0 to reinsurance written through R.F. Bailey and $1.0 to Life &
Investments. Effective January 1, 2002, SAFECO's reinsurers stopped providing
terrorism coverage in SAFECO's commercial property and casualty reinsurance
treaties. The impact is immediate with respect to new business and affects
renewal business as the policies come up for renewal throughout the year.
Consequently, except with respect to certain property risks with policy limits
in excess of $10.0 for which there may be limited reinsurance for terrorism,
SAFECO does not have reinsurance coverage for terrorism losses on its commercial
property and casualty policies. Terrorism was similarly excluded from the
workers' compensation reinsurance treaties but is not excluded on the surety
treaties. The existing reinsurance treaty for homeowners does not have a
terrorism exclusion although SAFECO has received notice that its personal lines
treaties may be modified. SAFECO's catastrophe treaty also excludes terrorism
except for personal lines losses other than from biological, chemical or nuclear
contamination.
For its direct writings in 2002, SAFECO has adopted the commercial property and
casualty terrorism exclusion developed and filed for approval by the Insurance
Services Office (ISO). This exclusion is absolute with respect to losses from
terrorism arising from biological, chemical or nuclear hazards. With respect to
non-biological, non-chemical and non-nuclear losses from terrorism, the
exclusions only apply if the total losses from a terrorist event exceed $25.0.
In addition, for casualty policies, the exclusion will apply if the terrorist
event involves the deaths or serious injury to 50 or more persons. The property
exclusion does not apply to losses arising from fire following a terrorist event
in the 29 states that follow the standard fire policy form.
The ISO terrorism exclusion for commercial property and casualty policies has
been approved or conditionally approved in over 45 states. The conditional
approval specifies either or both that the insurer demonstrate that reinsurance
for terrorism is not available to it or that the exclusion may not be used if a
federal law is in effect that addresses the treatment of losses arising from
acts of terrorism. Two states, New York and California, have refused to approve
the ISO exclusion. Although SAFECO writes a significant amount of commercial
business in California, this state represents less than 20% of SAFECO's
commercial book of business and the book is primarily comprised of workers'
compensation risks. To date, ISO terrorism exclusions have not been approved for
use on personal lines policies.
As a consequence of the action of SAFECO's reinsurers described above and the
current unavailability of the ISO exclusion for SAFECO's commercial property and
casualty policies in some states, SAFECO will continue to be exposed to
commercial losses that arise from terrorism and to be without reinsurance for
such losses. It will also have no reinsurance for terrorism related losses in
its workers' compensation line.
With regard to commercial lines policies, SAFECO's focus is on the
small-to-medium account business. Few of its customers are viewed as potential
terrorism targets. In states where exclusions for terrorism are approved, they
are being added to policies for certain classes of business, in geographic areas
where the potential for attack may be greater and where SAFECO insures a high
concentration of values. For workers' compensation the number of employees
covered is monitored and coverage is declined in cases where the exposure is
severe. SAFECO's exposure to personal lines losses currently is relatively
modest due to small individual exposure and wide spread of risk. Therefore,
SAFECO believes its terrorism exposure is relatively modest across all product
lines.
25
PROPERTY & CASUALTY - LOSS RESERVES
Reserves for loss and loss adjustment expenses (LAE) for Property & Casualty
were $5,053.7 at December 31, 2001 compared with $4,612.7 at December 31, 2000.
The increase in reserves at December 31, 2001 compared with December 31, 2000
reflected both increased loss severities and adverse prior year development in
certain lines of business. The December 31, 2001 reserves included $240.0 of
loss and LAE reserve strengthening (see Loss Reserve Strengthening section under
the Property & Casualty - Operations section of this MD&A). The liability is
presented net of amounts recoverable from salvage and subrogation (see Summary
of Significant Accounting Policies in Note 1 of the Notes to Consolidated
Financial Statements) and gross of amounts recoverable from reinsurance (see
Note 5 in the Notes to Consolidated Financial Statements). The total amount of
reinsurance recoverables was $415.9 at December 31, 2001 and $343.6 at December
31, 2000.
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 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. Operations were charged $148.3 in 2000 from increases in
estimated 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 ($29.5) lines of business as the costs of
settling claims increased. Property & Casualty operations were charged $78.8 in
1999 due to increased losses including construction defect, asbestos and
environmental, and workers' compensation.
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 claims for 2001 was fifteen thousand dollars including
legal expenses.
26
The following table presents the loss and LAE reserve activity for liability
coverages related to environmental, asbestos and other toxic claims, before
reinsurance:
DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------
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)
-------------------------------
Reserves at End of Year $ 340.7 $ 315.5 $ 332.3
==============================================================================
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. 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 and 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 SBI, 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
- ------------------------------------------------------------------------------
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
==============================================================================
The significant uncertainties involved in the reserving for these claims include
future court resolution, judicial interpretations, regulatory actions, and
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.
27
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 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.
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
- ---------------------------------------------------------------------------
A++ 43.7%
A+ 8.7
A 4.3
A- 0.5
B 0.2
Lloyds of London 3.7
Non-Rated 6.6
------------
Total Domestic Reinsurers 67.7
------------
State Reinsurance Pools 23.7
Other Reinsurance Pools 2.1
Foreign Reinsurers 6.5
------------
Total Reinsurance Pools and Foreign Reinsurers 32.3
------------
Total 100.0%
===========================================================================
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.
28
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. Additional information on reinsurance can be found in Note 5 of
the Notes to Consolidated Financial Statements.
LIFE & INVESTMENTS
Life & Investments offers individual and group insurance products, retirement
services, annuity products, mutual funds and investment advisory services. 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.
Earnings before investment losses and income taxes (pretax income) for all lines
combined were $148.6 ($197.5 before goodwill write-down), $168.5 and $195.1 in
2001, 2000 and 1999, respectively. The main reason for the increase in income in
2001 (before goodwill write-down) versus 2000 was due to improved results in
Income Annuities and Group.
SAFECO's ratings downgrades in early 2001 have impacted Life & Investments'
ability to sell some of its products. The impact of the ratings downgrades and
other information about the lines of business are explained further below.
The following table summarizes the pretax income (loss) for Life & Investments
major product lines:
Pretax Income (Loss)
-------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- -----------------------------------------------------------------------------
Retirement Services $ 15.6 $ 30.0 $ 52.6
Income Annuities 47.8 26.4 42.2
Group 26.6 4.3 (19.4)
Individual 22.8 24.6 30.1
Asset Management * 8.0 13.0 13.6
Other * 76.7 70.2 76.0
Goodwill Write-down (48.9) -- --
-------------------------------
Pretax Income $ 148.6 $ 168.5 $ 195.1
=============================================================================
* Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments operating
results. Prior period information has been reclassified to reflect this
change.
Retirement Services
SAFECO's retirement services operations produced pretax income of $15.6, $30.0
and $52.6 in 2001, 2000 and 1999, respectively. Retirement services products are
primarily tax-sheltered annuities (marketed primarily to teachers and
not-for-profit organizations), fixed and variable deferred annuities (both
qualified and non-qualified), guaranteed investment contracts (GIC) and
corporate retirement funds. This line has protection against early withdrawals
of most of these products in the form of surrender charges during the initial
years of each policy or the option to defer payouts over five years. Pretax
income declined by $14.4 in 2001 due to the decline in assets under management
during the first two quarters of 2001, a reduction in variable product fee
revenue due to unfavorable market conditions and an increase in operating costs.
Pretax income declined $22.6 in 2000 compared to 1999 mainly due to losses from
the Equity Index Annuity (EIA) product and a decline in assets under management.
Losses on the EIA product were $14.4, $15.3 and $2.9 in 2001, 2000 and 1999,
respectively. In 2001 and 2000, offers were extended to EIA policyholders to
surrender their policies and receive their account values with no surrender
charge. This resulted in a charge to income totaling $5.8 and $12.0 in 2001 and
2000, respectively. At December 31, 2001, $161.0 remained on deposit for the EIA
product compared to $305.0 and $596.0 at December 31, 2000 and 1999,
respectively. Life & Investments stopped marketing this product in 1999.
29
Assets under management increased to $6.2 billion at December 31, 2001 from $6.1
billion at December 31, 2000 and decreased from $7.1 billion at December 31,
1999. Assets under management declined during the first two quarters of 2001 to
$5.8 billion at June 30, 2001 due to unfavorable market conditions and increased
during the last two quarters of 2001 to $6.2 billion at December 31, 2001. The
decline in assets during 2000 was the result of withdrawals of GIC and other
fixed accounts which also reduced fee income.
New deposits from fixed return products were $788.0, $205.0 and $354.0 in 2001,
2000 and 1999, respectively. In 2001, $693.0 of the new deposits were from the
new SAFECO Select deferred annuity product sold during the second half of 2001.
New deposits from variable return products were $299.0, $248.0 and $265.0 in
2001, 2000 and 1999, respectively.
Income Annuities
Life & Investments' income annuities operations produced pretax income of $47.8,
$26.4 and $42.2 in 2001, 2000 and 1999, respectively. Income annuities' main
product is the single-premium immediate annuity (SPIA) which is sold to fund
third-party personal injury settlements. This product is extremely sensitive to
financial strength ratings. These contracts are non-surrenderable and are
intended to provide a reliable income stream to the injured party. The increase
in pretax income in 2001 is due primarily to the release of reserves upon death
due to favorable experience and an increase in investment income due to faster
paydowns on collateralized mortgage obligation (CMO) investments. Pretax income
in 2000 decreased from 1999 due to increased legal expenses to defend the
qualified assignment contract terms of SPIA policies and also a decrease in
investment income due to slower paydowns on CMO's.
Total income annuity assets increased to $6.3 billion at December 31, 2001
compared with $6.2 billion at December 31, 2000 and $5.8 billion at December 31,
1999. New SPIA deposits were $99.0, $391.0 and $313.0 in 2001, 2000 and 1999,
respectively. Deposits are down significantly in 2001 as a result of the ratings
downgrade that is discussed further in the Ratings section of this MD&A.
Group
SAFECO's group insurance operations produced pretax income of $26.6 and $4.3 in
2001 and 2000, respectively, and a pretax loss of $19.4 in 1999. Group's main
product offering is excess loss insurance sold to employers with self-insured
employee medical plans. Also offered are group life, accidental death &
dismemberment and disability products. The increase in pretax income of $22.3
and $23.7 in 2001 and 2000, respectively, is due to a decrease in the medical
loss ratio to 64% for 2001 from 68% in 2000 and 81% in 1999. Rate increases and
underwriting actions have contributed to the decreases in the loss ratio.
Total group premiums increased 6% in 2001 and 61% during 2000 compared with a
decrease of 4% in 1999. The increase in group premiums for 2000 is due primarily
to the acquisition of excess loss business from ING Medical Risk Solutions at
the end of 1999 as well as continued medical rate increases.
Individual
SAFECO's individual life operations produced pretax income of $22.8, $24.6 and
$30.1 in 2001, 2000 and 1999, respectively. Individual products include term,
universal and variable universal life and business owned life insurance (BOLI).
BOLI is universal life insurance sold to banks and is extremely sensitive to
financial strength ratings. Pretax income declined $1.8 in 2001 due to increased
claims experience which was partially offset by increased earnings on BOLI,
permanent and term life products. New BOLI deposits were $120.0, $710.0 and
$705.0 in 2001, 2000 and 1999, respectively. The decline in the BOLI deposits in
2001 is due to the ratings downgrade that is discussed further in the Ratings
section of this MD&A.
Asset Management
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual
funds, variable annuity portfolios and a number of outside pension and trust
accounts. These investment management activities produced pretax income of $8.0,
$13.0 and $13.6 in 2001, 2000 and 1999, respectively. Assets under management
totaled $5.1 billion, $5.6 billion and $6.7 billion at December 31, 2001, 2000
and 1999, respectively. The decline in assets under management is due primarily
to asset outflows of approximately $450.0 and $830.0 in 2001 and 2000 due to
unfavorable market conditions and investment performance.
30
Other
The other line is a major component of Life & Investments' earnings,
contributing pretax income of $76.7, $70.2 and $76.0 in 2001, 2000 and 1999,
respectively. It is comprised mainly of investment income resulting from the
investment of capital and prior years' earnings of the operating lines of
business and earnings from Talbot Financial Corporation (Talbot), a wholly-owned
subsidiary. Talbot is an insurance agency that distributes both property and
casualty and life insurance products. Talbot's pretax income (loss) was $4.6,
$(2.1) and $2.8 in 2001, 2000 and 1999, respectively. Excluding Talbot the other
line contributed $72.2, $72.4 and $73.2 in 2001, 2000 and 1999, respectively.
CORPORATE
The Corporate segment includes operating results for the Corporation, SAFECO
Financial Products, SAFECO Properties, and intercompany transaction
eliminations. The Corporation's primary expense is interest expense on
borrowings totaling $79.0, $89.0 and $72.0 in 2001, 2000 and 1999, respectively.
These amounts do not include the expense for the distributions on SAFECO's
Capital Securities which is presented net of tax on the Consolidated Statements
of Income (Loss).
The Corporation has made loans to certain officers and other members of
management related to stock option exercises and home purchases related to
relocations upon initial hiring. At December 31, 2001 these related-party loans
totaled less than $10.0. Corresponding interest income on the related party
loans is included in the Corporate segment.
The Corporation's wholly-owned subsidiary, SAFECO Financial Products (SFP) was
organized in 2000, to write S&P 500 index options to mitigate the risk
associated with the EIA (see Life & Investments section for further discussion
on EIA). Due to the success of this activity, SFP also engaged in limited
activity for its own account in 2001 by writing S&P 500 index options, selling
single credit default swaps and investing in convertible bonds. These activities
are not designed as hedging activities. Consequently, both changes in the fair
values of these instruments and any realized gain or loss are recognized in
current income. Net investment income includes the premium income on the single
credit default swaps and the earnings and fair value adjustments for the S&P 500
index options and the convertible bonds. Realized gain or loss includes the fair
value adjustments and realized gains or losses from the single credit default
swaps. Pretax income before realized loss was $6.7 and $2.3 for 2001 and 2000,
respectively. Realized loss was $18.2 in 2001 including a $7.8 loss from an
Enron single credit default swap. There were no realized gains or losses in
2000.
At December 31, 2001, SFP had single credit default swaps with notional amounts
outstanding totaling $490.0. These single credit default swaps involve selling
credit protection for a fee that covers certain credit events on assets owned by
the buyer (financial institutions and investment banks) such that if a credit
event occurs SFP would make a payment to the buyer.
The table below summarizes the quality of the single credit default swap
portfolio:
Percent at
RATING December 31, 2001
- --------------------------------------------------------------------------
AAA 6%
AA 10
A 51
BBB 33
BB or lower --
------------
Total 100%
==========================================================================
The fair value of the liability due to writing S&P index options was $45.4 at
December 31, 2001. In addition SFP had investment grade convertible bonds with
market values totaling $38.4 at December 31, 2001.
In 1998, SAFECO decided to divest itself of its real estate operations (SAFECO
Properties) and most of the assets were sold in 1999. A few properties remain
and most are expected to be sold in 2002. Income from the real estate subsidiary
will continue to decline as the remaining assets are sold. At December 31, 2001,
investment real estate held by SAFECO Properties totaled $42.9, less than one
percent of SAFECO's
31
consolidated investments. Because the assets and operations are not material to
the consolidated financial statements, they have not been reclassified as
discontinued operations. In the Consolidated Statements of Income (Loss),
revenues for SAFECO Properties are included in Other Revenues and related
expenses are included in Other Expenses. For 2001, 2000 and 1999, these revenues
totaled $10.4, $20.5 and $39.3 and expenses totaled $9.9, $16.7 and $32.1,
respectively. SAFECO Properties' income before realized gains and income taxes
is included in the Corporate segment and totaled $0.5, $3.8 and $7.2, for 2001,
2000 and 1999, respectively.
DISCONTINUED CREDIT OPERATIONS
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.
On July 24, 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 for total cash proceeds of $918.9, which included the
repayment of loans to SAFECO Credit and settlement of other affiliated
transactions between SAFECO Credit and the Corporation totaling $668.9. The sale
resulted in net proceeds of $250.0 and a pretax gain of $97.0. The after-tax
gain on the sale of $54.0 is reported in the Consolidated Statements of 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 Corporation and SAFECO Credit.
SAFECO Credit generated after tax profits for the seven months ended July 31,
2001 of $4.2 and years ended December 31, 2000 and 1999 of $12.7 and $14.5,
respectively.
CAPITAL RESOURCES AND LIQUIDITY
Sources and Uses of Funds
SAFECO's operations have liquidity requirements that vary among the segments and
their principal product lines. Life insurance, retirement services and annuity
product reserves are primarily longer-term liabilities that are typically
predictable in nature and are supported by investments that are generally
longer-term. Property & Casualty liabilities are both short-term and long-term.
These liabilities are less predictable in nature and generally require greater
liquidity in the investment portfolio.
The Corporation's liquidity needs are met by dividends from its subsidiary
operations, the sale and maturity of invested assets, bank borrowings and
issuances of commercial paper and debt. The subsidiaries' primary sources of
cash from operations are insurance premiums, funds received under deposit
contracts, dividends, interest and asset management fees. SAFECO has not engaged
in the sale by securitization of any investments or other assets.
Given the number of changes underway, SAFECO's ability to achieve the goals of
improving the profitability of Property & Casualty and maintaining the
profitability of its entire operations involves uncertainty. SAFECO's liquidity
needs are currently being met and the successful achievement of its goals will
enhance its liquidity position; conversely, further deterioration of
profitability may adversely affect its capital resources and liquidity position.
SAFECO uses funds to support operations, service and pay down debt, pay
dividends to SAFECO shareholders and grow the investment portfolio. Cash from
insurance operations is used primarily to pay claims and claim adjustment
expenses. Most insurance premiums are received before or at the time premium
revenues are recognized, while related claims are incurred and paid in
subsequent months or years. Catastrophe claims, the timing and amount of which
are inherently unpredictable, may create increased liquidity requirements.
Total cash provided by operating activities for 2001, 2000 and 1999 was $528.8,
$619.2 and $718.1, respectively (see Consolidated Statements of Cash Flows for
additional information). Property & Casualty's operating cash flows were $37.0,
$137.0 and $205.3 for 2001, 2000 and 1999, respectively. This decline is due
mainly to the poor underwriting results and resultant claims expenses paid as
well as a decline in premium
32
volume. Although Property & Casualty began raising premium rates in 2001 there
has been an offsetting impact due to reductions in the number of policies in
force. In addition, Property & Casualty's after-tax cash flows from investment
income have declined due to the relatively low interest rate environment,
dividends paid to the Corporation (which reduce the amount of investable cash)
and bond call activity (whereby higher yielding bonds are called and redeemed by
issuers). Consolidated dividends and interest received have increased due to the
higher invested asset base of Life & Investments. It is anticipated that the
insurance subsidiaries will continue to pay dividends to the Corporation in 2002
in order to fund shareholder dividends and to service debt. The weak
underwriting results in prior years have resulted in a reduction in the amount
of available subsidiary dividends. This has impacted the Corporation's liquidity
and financial flexibility. Given the deterioration of earnings in recent years,
in February 2001 the Board of Directors reduced the quarterly dividend by 50%
from $0.37 to $0.185 per share.
Short-term investments and cash at December 31, 2001 were significantly higher
than at December 31, 2000 due primarily to proceeds received from the sale of
SAFECO Credit in August 2001. The cash received was invested in primarily
short-term commercial paper and will be re-invested long term as the commercial
paper matures during the first half of 2002.
Funds received under deposit contracts relate primarily to annuity, retirement
services and individual products of Life & Investments. Of the total $14.6
billion in deposit contracts at December 31, 2001, approximately 43% are
structured settlement immediate annuity products. These annuities have an
average expected maturity of over 25 years at issuance and cannot be surrendered
by policyholders. Equity indexed annuities (EIA), comprising approximately 1% of
total deposit contracts, have remaining expected maturities of approximately 4
years and associated surrender charges ranging from 8% in year one to zero after
year six. During 2000 and 2001, Life & Investments offered to waive surrender
charges on several different occasions in order to induce EIA policyholders to
surrender their contracts. These offers were successful and resulted in a
reduction of the EIA policy account balance of $144.0 and $291.0 in 2001 and
2000, respectively. Since the EIA book of business had been generating ongoing
losses, reducing the size of the book will reduce the amount of future losses.
These surrenders accounted for the majority of the increase in the return of
funds held under deposit contracts in 2000 compared with 1999 (see Consolidated
Statements of Cash Flows for more information). Other annuity and retirement
services products comprise approximately 31% of total deposit contracts. These
products generally have expected maturities of 5 to 20 years at issuance and
associated surrender charges ranging from 10% to 5% in year one reduced to zero
within 5 to 10 years. Life & Investments retains the option to defer payouts
over 5 years on approximately 20% of these contracts. Universal life products
comprise approximately 22% of total deposit contracts. Of the total universal
life product deposit contracts, 80% are business owned life insurance (BOLI)
policies which have expected maturities of 20 to 25 years at issuance with
surrender charges varying according to policy type. As a result of the downgrade
in SAFECO's ratings, Life & Investments new BOLI deposits declined to $120.0 in
2001 compared to $710.0 and $705.0 in 2000 and 1999, respectively. The
guaranteed investment contracts within the retirement services area comprise the
remaining 3% of total deposit contracts.
The high level of proceeds from the maturity of fixed maturities in all three
years was due primarily to the high number of calls of fixed maturities and
prepayments of mortgage-backed securities. These calls and prepayments were
primarily due to the lower interest rate environment during the past three years
and issuer-driven actions. The high level of purchase and sale activity related
to fixed maturities available-for-sale in 2000 and 1999 was due in part to
shifting a portion of Property & Casualty's bond holdings from tax-exempt to
taxable bonds. The reason for this shift was to maximize the portfolio's
after-tax return in view of the higher level of underwriting losses in 2000 and
1999 and the resulting alternative minimum tax. The high level of proceeds from
equity securities in 2000 is mainly due to approximately $300.0 of planned
equity securities sales out of Property & Casualty's investment portfolio in the
third quarter. The proceeds from these equity securities sales were reinvested
in taxable fixed-income securities. These sales resulted in increased realized
gains from equity securities in 2000 compared with 1999. Additional information
on realized gains can be found in Note 2 of the Notes to Consolidated Financial
Statements.
In order to reduce refinancing risk, on March 16, 2000, the Corporation issued
$300.0 of medium-term notes at 7.875% which mature on March 15, 2003. In
conjunction with this debt issue, the Corporation entered into interest rate
swap agreements. The swaps are for notional amounts totaling $300.0 and replace
the fixed rates of the medium-term notes with variable rates at 65.03 basis
points over the 90-day LIBOR rate. The swaps mature in March 2003. The $300.0 of
medium-term notes issued is part of a shelf offering of $800.0 made earlier in
2000. The Corporation has available $500.0 under the existing shelf
registration.
33
The Corporation has a five-year bank credit facility available for $800.0 that
was originated in 1997 and extends to September 2002. This facility is available
for general corporate purposes and as a back up to the Corporation's commercial
paper program. The Corporation plans to renew the bank credit facility when it
expires in September 2002. Based on the current financial position and
expectations, SAFECO believes it will be able to renew this facility. In 2002,
the Corporation plans to roll over its $299.0 of commercial paper borrowings
outstanding at December 31, 2001.
As part of its capital management strategy, the Corporation periodically
repurchases its common stock through open market and negotiated purchases, when
given appropriate market conditions and liquidity availability. In February 2000
the Corporation's Board of Directors approved the repurchase of 3.0 shares of
common stock. Previous repurchase authorizations were in May 1999 for a total of
8.0 shares and in August 1998 for a total of $200.0. For the year ended December
31, 2001, the Corporation did not repurchase a material number or dollar amount
of shares. For the year ended December 31, 2000, the Corporation repurchased 1.3
shares at a total cost of $30.3 for an average share price of $22.54. For the
year ended December 31, 1999, the Corporation repurchased 7.5 shares at a total
cost of $302.1 for an average share price of $40.14. Repurchases combined for
2001, 2000 and 1999 totaled approximately 7% of the Corporation's outstanding
common shares at the beginning of 1999. The Corporation received additional
dividends from its insurance subsidiaries to fund these stock repurchases.
Approximately 2.7 shares remain available for repurchase under the February 2000
authorization. SAFECO does not anticipate that it will repurchase any material
amount of its common stock in 2002.
Ratings
The claims-paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products, e.g., structured settlement annuities, business
owned life insurance. Higher ratings generally indicate greater financial
strength and a stronger ability to pay claims. Ratings focus on factors such as
results of operations, capital resources, debt-to-capital ratio, demonstrated
management expertise in the insurance business, marketing, investment
operations, minimum policyholders' surplus requirements and capital sufficiency
to meet projected growth, as well as access to such traditional capital as may
be necessary to continue to meet standards for capital adequacy.
Due primarily to Property & Casualty`s continued poor underwriting results,
SAFECO's claims-paying and corporate credit ratings have been lowered in recent
years, most recently in the first half of 2001. As of December 31, 2001, A.M.
Best maintains a negative outlook on Property & Casualty's financial strength
rating and the Corporation's debt rating. All other rating agency ratings are
stable. Lower operating results combined with increased operating leverage in
Property & Casualty contributed to lower debt service coverage for the
Corporation. Although overall interest expense for the Corporation has decreased
due to the general market decline in short term borrowing rates in 2001,
SAFECO's relative interest rates on short term borrowing are higher due to the
ratings downgrades. SAFECO believes its financial position is sound and has
action plans in place to improve Property & Casualty results. It is, however,
possible that further negative ratings actions may occur. Lower ratings have
significantly affected Life & Investments ability to sell income annuities and
business owned life insurance products. If ratings are further lowered, SAFECO
may incur higher borrowing costs, may have more limited means to access capital,
and may have additional difficulties marketing certain of its insurance products
that are dependent upon ratings being at or above a particular level of risk.
The following table summarizes SAFECO's current ratings:
Standard
A.M. Best Fitch Moody's & Poor's
- ------------------------------------------------------------------------------------
SAFECO Corporation
Senior Debt bbb+ A- Baa1 BBB+
Capital Securities bbb BBB+ baa1 BBB-
Commercial Paper -- F-2 P-2 A-2
Financial Strength/Claims-Paying Ability
Property & Casualty Subsidiaries A AA- A1 A+
Life Subsidiaries A AA- A1 A+
- ------------------------------------------------------------------------------------
34
Regulatory Issues
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities which have or would have, if passed, a material effect on
its liquidity, capital resources or results of operations.
Limitations or prohibitions on the use of insurance scoring, which is partially
based on personal credit information, could adversely affect Property &
Casualty's business plans, depending on the specifics of any such limitation or
prohibition.
Those states in which SAFECO's insurance subsidiaries are domiciled or deemed to
be commercially domiciled limit the amount of dividend payments that can be made
by those subsidiaries without prior regulatory approval. These limitations are
not anticipated to keep the insurance subsidiaries from paying dividends to the
Corporation in 2002 in amounts sufficient to fund its shareholder dividends and
service debt. Based on the statutory limits as of December 31, 2001, the
Corporation is able to receive approximately $470.0 in dividends from its
subsidiaries in 2002 without obtaining prior regulatory approval.
The National Association of Insurance Commissioners (NAIC) uses risk-based
capital (RBC) formulas for both life insurers and property and casualty
insurers. These serve as an early warning tool by the NAIC and state regulators
to identify companies that are undercapitalized and merit further regulatory
attention or the initiation of regulatory action. SAFECO's life and property and
casualty companies have more than sufficient capital to meet the RBC
requirements.
Effective January 1, 2001, the Corporation's insurance subsidiaries adopted the
NAIC's revised Accounting Practices and Procedures Manual and the domiciliary
states of the Corporation's insurance subsidiaries have adopted the provisions
of the revised manual. The revised manual has changed, to some extent,
prescribed statutory accounting practices and resulted in changes to the
accounting practices that the Corporation's insurance subsidiaries use to
prepare their statutory-basis financial statements. Upon adoption, SAFECO's
property and casualty insurance companies' statutory surplus increased by $207.4
and the life insurance companies by $45.3. Nearly all of the increase in the
amounts of statutory surplus relates to the recording of a deferred tax asset
that was not recorded in the statutory basis financial statements under the
prior statutory accounting guidance.
INCOME TAXES
As of December 31, 2001, SAFECO had approximately $1,163.1 of gross deferred tax
assets ($319.0 net deferred tax asset), including net operating loss
carryforwards that expire in 2020, for which no valuation allowance has been
recorded. The realization of these assets is based upon estimates of future
taxable income. In preparing estimates of future taxable income, SAFECO has used
the assumptions and projections utilized in its internal financial projections.
These projections of future profitable results are subject to uncertainties
primarily related to the variability of Property & Casualty underwriting
results. Should results not be as profitable as SAFECO has forecasted, a
valuation allowance may be required to be established. Any such allowance would
impact current operating results.
INVESTMENT SUMMARY
Net Investment Income
SAFECO's consolidated pretax investment income increased to $1,649.3 during 2001
from $1,633.5 and $1,588.3 in 2000 and 1999, respectively. Substantially all of
this investment income is produced by the investment portfolios of Property &
Casualty and Life & Investments. The net investment income (loss) detail is
presented below:
Net Pretax Investment Income (Loss)
-----------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- --------------------------------------------------------------------------------
Property & Casualty $ 457.7 $ 460.5 $ 462.3
Life & Investments 1,180.3 1,181.5 1,123.2
Corporate 11.3 (8.5) 2.8
-----------------------------------
Total $1,649.3 $1,633.5 $1,588.3
================================================================================
35
Pretax Investment Income Yields
-------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ------------------------------------------------------------------------------
Property & Casualty 6.3% 6.4% 6.2%
Life & Investments 7.5% 7.7% 7.7%
- ------------------------------------------------------------------------------
The Property & Casualty pretax investment income was $457.7, $460.5 and $462.3
in 2001, 2000 and 1999, respectively. On an after-tax basis investment income
was $358.2, $363.0 and $387.6 for 2001, 2000 and 1999, respectively. Although
Property & Casualty operating cash flow was positive in all three years, the
amount of dividends paid to the Corporation over the three year period and the
high level of claims payments, combined with the relatively low interest rate
environment and bond call activity dampened the growth of investment income.
After-tax investment income in 2002 is expected to be slightly lower due to
lower market interest rates and slowed premium revenue cash flows. Dividends
paid to the Corporation totaled $13.6, $362.0 and $717.5 for 2001, 2000 and
1999, respectively. Dividends to the Corporation have declined due to
underwriting losses over the past several years and regulatory restrictions on
dividend payments. Additional information about dividend restrictions can be
found in Note 13 of the Notes to Consolidated Financial Statements.
Life & Investments pretax investment income was $1,180.3, $1,181.5 and $1,123.2
in 2001, 2000 and 1999, respectively. The growth in investment income from 1999
to 2000 was due primarily to the higher invested assets base related to the
growth of funds held under deposit contracts. Although the investment portfolio
has grown in 2001, investment income is flat due to lower investment yields and
the overall decline in the equity security markets.
Realized Investment Gains
Consolidated pretax realized gains from security investments totaled $93.0,
$139.5, and $82.6 in 2001, 2000 and 1999, respectively. The increase in realized
gains in 2000 is mainly due to realized gains on approximately $300.0 of planned
equity securities sales out of Property & Casualty's investment portfolio during
the third quarter 2000. The proceeds from these equity securities sales were
reinvested in taxable fixed-income securities. Additional information on
realized gains can be found in Note 2 of the Notes to Consolidated Financial
Statements.
Consolidated realized gains from security investments are recorded net of losses
on the sale or write-down of investments. Each investment that has declined in
fair value below cost is monitored closely and if the decline is judged to be
other than temporary, the security is written down to fair value. In determining
whether a decline in the fair value of a security below cost is other than
temporary, SAFECO considers the relevant facts and circumstances related to the
security. These include: (1) the length of time and the extent to which the fair
value has been less than cost; (2) the financial condition and near-term
prospects of the issuer, including any specific events that influence the
operations of the issuer or that affect its future earnings potential; and (3)
SAFECO's intent and ability to retain the investment for a period of time
sufficient to allow for a recovery in value. Determining what constitutes an
other than temporary decline involves significant judgment. Declines in fair
value below cost not considered other than temporary in the current period could
be considered other than temporary in a future period and reduce earnings to the
extent of the write-down. As of December 31, 2001 unrealized losses on
securities that were in an unrealized loss position for longer than a year
amounted to $11 for equity securities and $226 for fixed maturity securities.
SAFECO continues to monitor these securities as part of its overall portfolio
evaluation and if an unrealized loss is determined to be other than temporary,
the loss would be recognized in the current period.
The amounts of investment write-downs were $126.8, $35.7 and $0.6 in 2001, 2000
and 1999, respectively. In 2001, the write-downs amounted to $36.2, $66.5 and
$24.1 for Property & Casualty, Life & Investments and Corporate, respectively.
Nearly all of these write-downs for Property & Casualty and Life & Investments
in 2001 and 2000 were on fixed maturities. The write-down of $24.1 for Corporate
related to an equity security whose decline in fair value was other than
temporary. The increases in write-downs in 2001 and 2000 were due to credit
deterioration and corporate failures of several fixed-maturity issuers,
particularly in the retail, auto parts supply, and telecommunications sectors.
Included in the 2001 write-downs of $126.8 is $12.1 for investments in Enron,
which filed for bankruptcy in the fourth quarter of 2001. The total amount of
gross unrealized loss on fixed maturity and equity securities at December 31,
2001 was $409.9 and is detailed by investment category in Note 2 on page FS-14.
Additional write-downs are possible in 2002 due to the continued weak economy,
however, the timing and amount of any write-downs is not currently estimable.
The total sales proceeds at fair value from fixed maturities and equities sold
at a loss in 2001 was $501.0. The related total realized loss on these sales was
$56.1. In accordance with the investment impairment process described above,
SAFECO considers its intent and ability to retain investments for a period of
time sufficient to
36
allow for a market value recovery. However, intent to hold is frequently
reassessed due to the financial market fluctuations and the financial condition
and near term prospects of the issuer. SAFECO's sales activity in 2001
represented a change in SAFECO's intent due to actual or expected deterioration
in the issuer's credit and SAFECO's decisions to lessen exposure to a particular
issuer or industry.
The following table discloses the maturity ranges of the holdings of fixed
maturity securities as of December 31, 2001 that were in an unrealized loss
position.
<Table>
<Caption>
Cost or
Amortized Fair
DECEMBER 31, 2001 Cost Value
- ----------------- --------- -----
One Year or Less $ 31.9 $ 29.9
Over One Year Through Five Years 882.3 826.6
Over Five Years Through Ten Years 743.3 698.5
Over Ten Years 3,225.2 3,001.7
Mortgage-Backed Securities 797.6 771.8
-------- --------
Total Fixed Maturities $5,680.3 $5,328.5
======== ========
</Table>
Investment Portfolio
The table below summarizes SAFECO's consolidated securities investment portfolio
at December 31, 2001. The fair value recorded amount exceeded the cost or
amortized cost on fixed maturities and equity securities by $1.4 billion at
December 31, 2001.
Cost or
Amortized Fair
DECEMBER 31, 2001 Cost Value
- ------------------------------------------------------------------------------
PROPERTY & CASUALTY
Fixed Maturities - Taxable $ 3,673.5 $ 3,792.9
Fixed Maturities - Non-taxable 2,500.8 2,727.2
Equity Securities 850.2 1,482.6
Short-Term Investments 354.0 354.0
LIFE & INVESTMENTS
Fixed Maturities - Taxable 14,460.8 14,877.8
Equity Securities 62.9 67.8
Short-Term Investments 262.4 262.4
CORPORATE
Fixed Maturities - Taxable 42.0 46.2
Equity Securities 27.4 46.0
Short-Term Investments 56.5 56.5
---------------------
Total $22,290.5 $23,713.4
==============================================================================
Property & Casualty's investment portfolio totaled $8.5 billion at estimated
fair value at December 31, 2001, compared with $8.3 billion at December 31,
2000. The investment philosophy for Property & Casualty's portfolio is to
emphasize investment yield without sacrificing investment quality, and to
provide for liquidity and diversification. Fixed maturities securities comprised
77% of this portfolio while equity securities comprised 18%.
Property & Casualty's fixed maturities portfolio, which totaled $6.5 billion at
estimated fair value at December 31, 2001, is currently comprised of 42%
tax-exempt and 58% taxable investments compared with 46% tax-exempt and 54%
taxable at December 31, 2000. Property & Casualty has been investing new money
primarily in taxable bonds and shifting holdings from tax-exempts to taxables to
maximize the portfolio's after-tax return in view of the higher level of
underwriting losses in 2001 and 2000, and the resulting alternative minimum tax.
The effective tax rate on investment income was 22%, 21% and 16% in 2001, 2000
and 1999, respectively, reflecting the shift to a higher level of taxable bond
holdings.
The quality of Property & Casualty's fixed maturities portfolio is detailed in
the following table:
Percent at
RATING December 31, 2001
- ----------------------------------------------------------------------------
AAA 50%
AA 17
A 19
BBB 11
BB or lower 3
------------
Total 100%
============================================================================
Life & Investments' portfolio totaled $16.3 billion at fair value at December
31, 2001 compared with $15.6 billion at December 31, 2000. Fixed maturities
securities, all of which are taxable, comprised 91% of this investment portfolio
at December 31, 2001. The investment philosophy for this portfolio is to
emphasize investment yield
37
without sacrificing investment quality, and to provide for liquidity and
diversification. Life & Investments also matches the projected cash inflows of
this portfolio with the projected cash outflows of the liabilities of the
various product lines within the Life & Investments operations. Effective
October 1, 2000, the entire held-to-maturity fixed maturities investment
portfolio, with a fair value of $2.8 billion, was reclassified to
available-for-sale. This reclassification was made to provide additional
investment flexibility in managing the bond portfolio and resulted in an
increase in other comprehensive income of $41.0 in the fourth quarter of 2000.
All of SAFECO's fixed maturities securities are now carried at fair value.
The quality of Life & Investments' fixed maturities portfolio is detailed in the
following table:
Percent at
RATING December 31, 2001
- ---------------------------------------------------------------------------
AAA 33%
AA 10
A 26
BBB 27
BB or lower 4
------------
Total 100%
===========================================================================
This portfolio contains $643.1 at fair value of securities rated below
investment-grade quality. These securities represent approximately 4% of the
total $16.3 billion Life & Investments portfolio at fair value at December 31,
2001. On a consolidated basis, below investment-grade securities with a fair
value of $790.8 were held at December 31, 2001. The related amortized cost
amount is $858.9 or 109% of the fair value. The gross unrealized loss was $87.7,
gross unrealized gain $19.6, and net unrealized loss $68.1. These securities
represented approximately 4% of total consolidated securities investments at
fair value at December 31, 2001. As discussed above, investment write-downs
impacting income have and may continue to occur on these below investment grade
securities.
SAFECO's investment portfolio includes approximately $420.0 of fixed maturities
at December 31, 2001 that are not publicly traded and/or non-rated. This
represents approximately 2% of total fixed maturity investments. The gross
dollar amount of unrealized loss (fair value less amortized cost) on these
securities totaled approximately $6.0 at December 31, 2001. The gross dollar
amount of unrealized gain was approximately $35.0. Fair values for these
securities have been estimated using quoted market prices of comparable
instruments based on industry sector, credit quality and maturity and/or
internally prepared valuations using third party modeling tools, which also
typically use comparable-instrument pricing techniques based on industry sector,
credit quality and maturity. For non-rated fixed maturity securities, ratings
are internally prepared based on externally-rated securities with comparable
credit quality and in similar industry sectors.
SAFECO's investment portfolio included less than $20 of equity securities that
were not publicly traded at December 31, 2001.
SAFECO's consolidated investment in mortgage-backed securities of $4.8 billion
at fair value at December 31, 2001, consists mainly of residential
collateralized mortgage obligations (CMOs), pass-throughs and commercial
loan-backed mortgage obligations (CMBS). Life & Investments portfolio holds 82%
while Property & Casualty holds 18% of these securities. Approximately 87% of
the mortgage-backed securities are government/agency-backed or AAA rated at
December 31, 2001. SAFECO has intentionally limited its investment in riskier,
more volatile CMOs and CMBS (e.g., principal only, inverse floaters, etc.) to
less than 1% of total mortgage-backed securities at December 31, 2001.
38
The table below summarizes SAFECO's consolidated holdings of mortgage-backed
securities at December 31, 2001:
Carrying Value
Amortized -------------------
DECEMBER 31, 2001 Cost Amount Percent
- -----------------------------------------------------------------------------------------
RESIDENTIAL
Planned and Targeted Amortization Class,
and Sequential Pay CMOs $1,790.9 $1,843.5 38.8%
Accrual Coupon (Z-Tranche) CMOs 626.1 687.5 14.4
Floating Rate CMOs 79.1 82.5 1.7
Companion/Support, Principal Only, Inverse Floater CMOs 22.5 23.7 0.5
Residential Mortgage-Backed Pass-Throughs (Non-CMOs) 309.8 321.3 6.7
--------------------------------
Subtotal 2,828.4 2,958.5 62.1
--------------------------------
SECURITIZED COMMERCIAL REAL ESTATE
Government/Agency-Backed 414.8 428.7 9.0
CMOs and Pass-Throughs (Non-agency) 1,049.6 1,079.9 22.7
--------------------------------
Subtotal 1,464.4 1,508.6 31.7
--------------------------------
Other CMO's - Asset Backed Securities (Non-Real Estate) 289.5 293.0 6.2
--------------------------------
Total Mortgaged-Backed Securities $4,582.3 $4,760.1 100.0%
=========================================================================================
The quality rating of SAFECO's mortgage-backed security portfolio is shown in
the following table:
Percent at
RATING December 31, 2001
- --------------------------------------------------------------------------------
Government/Agency Backed 49%
AAA 38
AA 7
A 3
BBB 3
BB or Lower --
----------
Total 100%
================================================================================
SAFECO's consolidated investment portfolio also included $924.2 of mortgage loan
investments at December 31, 2001, representing approximately 4% of total
investments. The collateral value of the mortgage portfolio was approximately
$1.6 billion at December 31, 2001 making the loan-to-value on the mortgage
portfolio less than 60%. Historically the mortgage portfolio has performed well
and the loan charge-off rate has been very low on this portfolio over the past
three years (see additional information about the allowance for mortgage loans
in Note 2 of the Notes to Consolidated Financial Statements). The majority of
these loans are held by Life & Investments and are secured by first mortgage
liens on completed, income-producing commercial real estate, primarily in the
retail, industrial and office building sectors. The majority of the properties
are located in the western United States, with approximately 69% of the total in
the states of Washington (32%), Oregon (11%) and California (26%). Individual
loans generally do not exceed $10. Less than 1% of the loans were non-performing
at both December 31, 2001 and 2000. The allowance for mortgage loan losses was
$10.5 and $10.8 at December 31, 2001 and 2000, respectively.
39
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 1 of the Notes to
Consolidated Financial Statements.
DIVIDENDS
SAFECO has paid cash dividends continuously since 1933. Common stock dividends
paid to shareholders were $0.93 per share in 2001 compared with $1.48 in 2000
and $1.44 in 1999. These dividends are funded with dividends to the Corporation
from its subsidiaries. The Corporation expects to continue paying dividends in
the foreseeable future. However, payment of future dividends is subject to the
Board of Directors' approval and is dependent upon earnings and the financial
condition of the Corporation as well as dividend restrictions on its significant
insurance subsidiaries as described in Note 13 of the Notes to Consolidated
Financial Statements. Given the deterioration of earnings in recent years, in
February 2001 the Board of Directors reduced the quarterly dividend 50% from
$0.37 to $0.185 per share.
40
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
SAFECO's 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:
- - The ability to obtain rate increases and non-renew underpriced insurance
accounts;
- - Achievement of premium targets and profitability;
- - Realization of growth and business retention estimates;
- - 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 nature of the 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 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, pricing 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 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 rates 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;
- - 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. We assume no obligation to update
any forward-looking statements contained in this report.
41
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The first two columns of the following table under each year show the financial
statement carrying values and related current fair values of certain of SAFECO's
financial instruments as of December 31, 2001 and 2000. The third column shows
the effect on current fair values assuming a 100 basis point increase in market
interest rates and a 10% decline in equity prices (sensitivity analysis).
2001 2000
---------------------------------------- ---------------------------------------
Fair Value Fair Value
Fair Value At Adjusted Fair Value At Adjusted
At Current Market Rates At Current Market Rates
Carrying Market (Sensitivity Carrying Market (Sensitivity
DECEMBER 31 Value Rates/Prices Analysis) Value Rates/Prices Analysis)
- -------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Interest Rate Risk
- -------------------------------------------------------------------------------------------------------------------------------
FINANCIAL ASSETS
Fixed Maturities
Available-for-Sale $21,444.1 $21,444.1 $20,127.0 $20,830.2 $20,830.2 $19,331.0
Mortgage Loans 924.2 928.0 876.0 823.0 792.0 749.0
Derivative Financial Instruments
Interest Rate Swaps 49.8 49.8 43.0 -- 2.3 2.0
Options/Futures 11.9 11.9 12.0 0.4 0.4 0.5
FINANCIAL LIABILITIES
Funds Held under Deposit
Contracts 14,624.2 14,314.0 13,711.0 14,085.7 13,977.0 13,457.0
Commercial Paper 299.0 299.0 299.0 349.8 349.8 349.8
7.875% Notes Due 2003 323.0 323.0 320.0 300.0 305.0 299.0
7.875% Notes Due 2005 200.0 207.0 204.0 200.0 203.0 196.0
6.875% Notes Due 2007 200.0 196.0 188.0 200.0 193.0 184.0
Other Debt 74.6 76.0 76.0 80.7 80.0 80.0
Derivative Financial Instruments
Single Credit Default Swaps 10.4 10.4 10.0 -- -- --
Interest Rate Swaps 18.0 18.0 8.0 -- 3.9 4.0
Options/Futures 47.1 47.1 47.0 -- -- --
Capital Securities 843.4 721.0 652.0 843.0 700.0 635.0
Equity Price Risk
- -------------------------------------------------------------------------------------------------------------------------------
Marketable Equity Securities 1,596.4 1,596.4 1,437.0 1,815.4 1,815.4 1,634.0
- -------------------------------------------------------------------------------------------------------------------------------
Market risk means the potential loss from adverse changes in market prices and
interest rates. In addition to market risk, SAFECO is exposed to other risks,
including the credit risk related to its financial instruments and the
underlying insurance risk related to its core business. The sensitivity analysis
above summarizes only the exposure to market risk.
SAFECO manages its market risk by matching the projected cash inflows of assets
with the projected cash outflows of liabilities of its investment and financial
products (e.g., annuities, retirement services products). For all of its
financial assets and liabilities, SAFECO seeks to maintain reasonable average
durations, consistent with the maximization of income without sacrificing
investment quality and providing for liquidity and diversification. SAFECO uses
certain derivative financial instruments to increase its matching of cash flows.
For example, interest rate swaps are used to convert debt liabilities with
variable rates to fixed rates to better match the fixed-rate assets the debt
supports. In addition, S&P 500 call option contracts and futures are purchased
to hedge the liability of SAFECO Life's equity indexed annuity products.
42
The fair values at current market rates for financial instruments subject to
interest rate risk in the preceding table are the same as those disclosed in
Note 3 of the Notes to Consolidated Financial Statements. The estimated fair
values at the adjusted market rates (assuming a 100 basis point increase in
market interest rates) are calculated using discounted cash flow analysis and
duration modeling, where appropriate. The estimated values do not consider the
effect that changing interest rates could have on prepayment activity (e.g.,
CMO's and annuities).
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of certain of SAFECO's financial instruments. The actual
impact of market interest rate and price changes on the financial instruments
may differ significantly from those shown in the sensitivity analysis. The
sensitivity analysis is further limited as it does not consider any actions
SAFECO could take in response to actual and/or anticipated changes in interest
rates and equity prices. As allowed under the guidance for these disclosures,
certain financial instruments (e.g., lease receivables) are not required to be
included in the sensitivity analysis. In addition, certain non-financial
instruments (e.g., insurance liabilities and real estate) are excluded from the
sensitivity analysis. Accordingly, any aggregation of the estimated fair value
amounts or adjusted fair value amounts would not represent the underlying fair
value of net equity.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the Index to Financial
Statements, Schedules and Exhibits on page FS-1 are filed as part of this
report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
43
SAFECO Corporation and Subsidiaries
PART III
The definitive proxy statement to be filed within 120 days after December 31,
2001, excluding the section Annual Report of the Compensation Committee on
Executive Compensation, is incorporated herein by reference to fulfill the
requirements of Items 10 - 13 below.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(except for the portion of Item 10 relating to executive officers that appears
in Part I - Executive Officers of the Registrant on Form 10-K).
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
44
SAFECO Corporation and Subsidiaries
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
(a)(2) FINANCIAL STATEMENT SCHEDULES
(a)(3) EXHIBITS
The financial statements, financial statement schedules and exhibits
listed in the Index to Financial Statements, Schedules and Exhibits on
page FS-1 are filed as a part of this report.
(b) REPORTS ON FORM 8-K
The registrant filed the following 8-K's during the quarter ended December 31,
2001 and for the period up to the filing date of this Form 10-K.
Filing dated Under Filing related to:
- ------------------------------------------------------------------------------------------
December 11, 2001 Item 5 (Other Items) Announcement relating to expected
losses from the Enron bankruptcy and continued
difficulties in Homeowners line.
January 24, 2002 Item 5 (Other Items) Announcement relating to the appointment of
Christine B. Mead as Chief Financial Officer of
SAFECO Corporation.
March 5, 2002 Item 5 (Other Items) Announcement relating to SAFECO's acquisition of
Swiss Re's medical excess-loss and group life
insurance business.
- ------------------------------------------------------------------------------------------
45
THIS PAGE INTENTIONALLY LEFT BLANK.
46
SAFECO Corporation and Subsidiaries
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements, related
notes and all other information presented in this annual report. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States appropriate in the
circumstances and include amounts based on the best estimates and judgments of
management.
In order to safeguard assets and to maintain the integrity and objectivity of
data in these consolidated financial statements, SAFECO maintains a
comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel, by the
appropriate division of duties and responsibilities and by written policies and
procedures. In addition, an integral part of the comprehensive system of
internal control is an effective internal audit department. SAFECO's Internal
Audit Department systematically evaluates the adequacy and effectiveness of
internal accounting controls and measures adherence to established policies and
procedures.
The consolidated financial statements for the years ended December 31, 2001,
2000 and 1999 have been audited by Ernst & Young LLP, independent auditors.
Their audits were performed in accordance with auditing standards generally
accepted in the United States and included a review of the system of internal
accounting controls to the extent necessary to express an opinion on the
consolidated financial statements.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the Audit Committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of accounting policies
and financial reporting.
The management of SAFECO believes that as of December 31, 2001, its system of
internal control is adequate to accomplish the objectives discussed herein.
/s/ MIKE MCGAVICK
- ---------------------------------
Mike McGavick
President and Chief Executive Officer
47
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
- --------------------------------------------------------------------------------
Description Page
- ----------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Report of Independent Auditors FS-2
Consolidated Statements of Income (Loss) FS-3
Consolidated Balance Sheets FS-4
Consolidated Statements of Cash Flows FS-6
Consolidated Statements of Cash Flows - FS-7
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities
Consolidated Statements of Shareholders' Equity FS-8
Consolidated Statements of Comprehensive Income (Loss) FS-8
Notes to Consolidated Financial Statements FS-9
Supplemental Consolidating Information (unaudited)
Statements of Income (Loss) (unaudited) FS-39
Balance Sheets (unaudited) FS-40
Statements of Cash Flows (unaudited) FS-42
Statements of Cash Flows -
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities
(unaudited) FS-43
FINANCIAL STATEMENT SCHEDULES
I Summary of Investments Other Than Investments in Related Parties S-1
II Condensed Financial Information of Registrant
Statements of Income (Loss) S-2
Balance Sheets S-3
Statements of Cash Flows S-4
Statements of Cash Flows -
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities S-5
III Supplemental Insurance Information S-6
IV Reinsurance S-12
VI Supplemental Information Concerning Property & Casualty Insurance Operations S-13
EXHIBITS
Index to Exhibits E-1
12 Computation of Ratio of Earnings (Loss) to Fixed Charges E-2
SIGNATURES
- ----------------------------------------------------------------------------------------------------------
Schedules other than those listed above are omitted because they are not
applicable or the information is otherwise contained in the Consolidated
Financial Statements.
FS-1
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP Independent Auditors
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS AND SHAREHOLDERS OF SAFECO CORPORATION:
We have audited the accompanying consolidated balance sheets of SAFECO
Corporation and its subsidiaries (the Corporation) as of December 31, 2001 and
2000, and the related consolidated statements of income (loss), comprehensive
income (loss), shareholders' equity, and cash flows for each of the three years
in the period ended December 31, 2001. Our audits also included the financial
statement schedules listed in the Index at Item 14(a). These financial
statements and schedules are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SAFECO Corporation
and its subsidiaries at December 31, 2001 and 2000, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As described in Note 1 to the consolidated financial statements, SAFECO
Corporation and its subsidiaries changed its method of accounting for goodwill
and also changed its method of accounting for derivative financial instruments.
/s/ ERNEST & YOUNG LLP
Seattle, Washington
February 8, 2002
FS-2
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
--------- -------- --------
(In Millions Except Per Share Amounts)
REVENUES
Insurance
Property & Casualty Earned Premiums $ 4,472.8 $4,563.4 $4,382.9
Life & Investments Premiums and Other Revenues 637.0 618.2 473.9
--------- -------- --------
Total 5,109.8 5,181.6 4,856.8
Other 10.4 20.5 39.2
Net Investment Income (Note 2) 1,649.3 1,633.5 1,588.3
Realized Investment Gain (Note 2) 93.0 139.5 117.7
--------- -------- --------
Total 6,862.5 6,975.1 6,602.0
--------- -------- --------
EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits (Note 4) 5,199.1 4,987.6 4,504.0
Commissions 818.2 794.9 796.4
Personnel Costs 496.4 484.8 448.0
Interest 65.7 73.2 70.6
Goodwill and Intangibles Amortization 26.7 60.5 55.8
Other 446.7 435.9 444.3
Amortization of Deferred Policy Acquisition Costs 824.5 834.2 840.1
Deferral of Policy Acquisition Costs (859.9) (835.4) (866.8)
Write-off of Goodwill (Note 1) 1,214.1 -- --
Restructuring Charges (Note 12) 44.3 -- --
--------- -------- --------
Total 8,275.8 6,835.7 6,292.4
--------- -------- --------
Income (Loss) from Continuing Operations Before Income Taxes (1,413.3) 139.4 309.6
--------- -------- --------
Provision (Benefit) for Income Taxes (Note 6)
Current (7.6) 39.6 67.1
Deferred (405.2) (46.9) (40.0)
--------- -------- --------
Total (412.8) (7.3) 27.1
--------- -------- --------
Income (Loss) from Continuing Operations before Distributions
on Capital Securities (1,000.5) 146.7 282.5
Distributions on Capital Securities, Net of Tax (Note 7) (44.8) (44.8) (44.8)
--------- -------- --------
Income (Loss) from Continuing Operations (1,045.3) 101.9 237.7
--------- -------- --------
Income from Discontinued Credit Operations, Net of Tax (Note 11) 4.2 12.7 14.5
Gain from Sale of Credit Operations, Net of Tax (Note 11) 54.0 -- --
--------- -------- --------
Total Income from Discontinued Operations 58.2 12.7 14.5
--------- -------- --------
Income (Loss) before Cumulative Effect of Change
in Accounting Principle (987.1) 114.6 252.2
Cumulative Effect of Change in Accounting Principle,
Net of Tax (Notes 1 and 3) (2.1) -- --
--------- -------- --------
Net Income (Loss) $ (989.2) $ 114.6 $ 252.2
========= ======== ========
INCOME (LOSS) PER SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations $ (8.18) $ 0.80 $ 1.79
Income from Discontinued Operations 0.45 0.10 0.11
Cumulative Effect of Change in Accounting Principle (0.02) -- --
--------- -------- --------
Net Income (Loss) Per Share of Common Stock - Diluted & Basic $ (7.75) $ 0.90 $ 1.90
========== ========= =========
See notes to consolidated financial statements.
FS-3
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000
---------- ---------
(In Millions)
ASSETS
Investments (Note 2)
Fixed Maturities Available-for-Sale, at Fair Value
(Cost or amortized cost: $20,677.1; $20,388.1) $ 21,444.1 $20,830.2
Marketable Equity Securities, at Fair Value
(Cost: $940.5; $875.9) 1,596.4 1,815.4
Mortgage Loans 924.2 823.0
Other Investment Assets 236.9 160.3
Short-Term Investments 672.9 182.3
---------- ---------
Total Investments 24,874.5 23,811.2
Cash 269.3 186.3
Accrued Investment Income 323.8 327.8
Premiums and Service Fees Receivable 973.0 1,063.0
Other Notes and Accounts Receivable 163.4 37.6
Deferred Income Tax Recoverable (Note 6) 319.0 --
Reinsurance Recoverables (Note 5) 523.2 461.7
Deferred Policy Acquisition Costs 626.8 605.4
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation: $285.0; $241.5) 552.0 440.1
Goodwill and Intangibles (Note 1)
(Accumulated amortization: $57.6; $202.8) 95.0 1,307.4
Other Assets 164.4 260.9
Net Assets of Discontinued Credit Operations (Note 11) -- 481.2
Separate Account Assets 1,208.1 1,275.1
---------- ---------
Total Assets $ 30,092.5 $30,257.7
========== =========
See notes to consolidated financial statements.
FS-4
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000
- ----------- ---------- ---------
(In Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expenses (Note 4) $ 5,118.4 $ 4,686.9
Life Policy Liabilities 327.1 342.1
Unearned Premiums 1,782.2 1,836.5
Funds Held Under Deposit Contracts 14,624.2 14,085.7
Debt (Note 7)
Commercial Paper 299.0 349.8
7.875% Medium-Term Notes Due 2003 323.0 300.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other 74.6 80.7
Other Liabilities 1,423.0 1,269.1
Income Taxes (Note 6)
Current 34.9 25.8
Deferred -- 67.2
Separate Account Liabilities 1,208.1 1,275.1
---------- ---------
Total Liabilities 25,614.5 24,718.9
---------- ---------
Commitments and Contingencies (Note 10) -- --
Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Corporation
(Capital Securities) (Note 7) 843.4 843.0
---------- ---------
Preferred Stock, No Par value
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value (Note 9)
Shares Authorized: 300
Shares Reserved for Option: 6.4; 7.1
Shares Issued and Outstanding: 127.7; 127.6 841.9 834.5
Retained Earnings (Note 13) 1,875.9 2,966.4
Accumulated Other Comprehensive Income, Net of Tax 916.8 894.9
---------- ---------
Total Shareholders' Equity 3,634.6 4,695.8
---------- ---------
Total Liabilities and Shareholders' Equity $30,092.5 $30,257.7
========= =========
See notes to consolidated financial statements.
FS-5
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
---------- --------- ---------
(In Millions)
OPERATING ACTIVITIES
Insurance Premiums Received $ 4,873.8 $ 4,890.2 $ 4,636.8
Dividends and Interest Received 1,547.1 1,584.5 1,479.5
Other Operating Receipts 190.2 190.7 212.9
Insurance Claims and Policy Benefits Paid (4,074.5) (4,156.5) (3,706.2)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,751.1) (1,652.8) (1,604.8)
Interest Paid and Distributions on Capital Securities (127.1) (139.1) (147.1)
Other Operating Costs Paid (88.3) (104.6) (113.5)
Income Taxes Refunded (Paid) (41.3) 6.9 (39.6)
---------- --------- ---------
Net Cash Provided by Operating Activities 528.8 619.3 718.0
---------- --------- ---------
INVESTING ACTIVITIES
Purchases of
Fixed Maturities Available-for-Sale (3,988.5) (3,604.0) (5,422.1)
Fixed Maturities Held-to-Maturity -- (2.2) (0.9)
Equities (364.6) (372.6) (231.9)
Other Investment Assets (301.2) (362.0) (460.6)
Maturities of Fixed Maturities Available-for-Sale 1,443.7 972.2 1,174.0
Maturities of Fixed Maturities Held-to-Maturity -- 8.7 13.3
Sales of
Fixed Maturities Available-for-Sale 2,418.0 2,265.4 3,715.4
Fixed Maturities Held-to-Maturity (Note 2) -- 0.1 6.3
Equities 437.6 661.7 298.1
Other Investment Assets 257.6 412.2 830.5
Net Decrease (Increase) in Short-Term Investments (436.1) 281.4 (163.7)
Proceeds from Sale of Credit Operations 250.0 -- --
Other (75.5) (79.7) (85.3)
---------- --------- ---------
Net Cash Provided by (Used in) Investing Activities (359.0) 181.2 (326.9)
---------- --------- ---------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,051.1 1,266.0 1,849.5
Return of Funds Held under Deposit Contracts (1,301.1) (1,603.1) (1,077.3)
Proceeds from Notes and Mortgage Borrowings -- 300.0 --
Repayment of Notes and Mortgage Borrowings (6.2) (6.0) (138.1)
Repayment of Short-Term Borrowings (46.6) (153.2) (252.8)
Common Stock Reacquired (8.1) (30.4) (303.2)
Dividends Paid to Shareholders (118.1) (189.4) (192.2)
Other 14.0 (5.0) (64.7)
---------- --------- ---------
Net Cash Used in Financing Activities (415.0) (421.1) (178.8)
---------- --------- ---------
Cash Provided by (Used In) Discontinued Credit Operations 328.2 (296.2) (179.5)
---------- --------- ---------
Net increase in Cash 83.0 83.2 32.8
Cash at Beginning of Year 186.3 103.1 70.3
---------- --------- ---------
Cash at End of Year $ 269.3 $ 186.3 $ 103.1
========== ========= =========
See notes to consolidated financial statements.
FS-6
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS -
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
---------- --------- ---------
(In Millions)
Net Income (Loss) $ (989.2) $ 114.6 $ 252.2
---------- --------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Income from Discontinued Credit Operations, Net of Tax (4.2) (12.7) (14.5)
Cumulative Effect of Change in Accounting Principle, Net of Tax 2.1 -- --
Gain from Sale of Credit Operations, Net of Tax (54.0) -- --
Realized Investment Gain (93.0) (139.5) (117.7)
Amortization and Depreciation 87.1 123.6 128.2
Amortization of Fixed Maturity Investments (62.0) (41.6) (46.3)
Deferred Income Tax Benefit (405.2) (46.9) (40.0)
Interest Expense on Deposit Contracts 732.0 485.4 583.3
Write-off of Goodwill 1,214.1 -- --
Other Adjustments (79.9) (5.5) (5.3)
Changes in
Losses and Loss Adjustment Expenses 431.5 270.5 153.7
Life Policy Liabilities (15.0) 60.6 4.7
Unearned Premiums (54.3) (16.6) 102.2
Accrued Income Taxes 9.1 22.5 0.6
Accrued Interest on Accrual Bonds (42.8) (45.9) (45.4)
Accrued Investment Income 4.0 (3.7) (5.7)
Deferred Policy Acquisition Costs (21.4) (6.6) (28.9)
Other Assets and Liabilities (130.1) (138.9) (203.1)
---------- --------- ---------
Total Adjustments 1,518.0 504.7 465.8
---------- --------- ---------
Net Cash Provided by Operating Activities $ 528.8 $ 619.3 $ 718.0
========== ========= =========
There were no significant non-cash financing or investing activities for the
years ended December 31, 2001, 2000 and 1999.
See notes to consolidated financial statements.
FS-7
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000 1999
- ----------- ---------- --------- ---------
(In Millions Except Share Amounts)
COMMON STOCK (NOTE 9)
Balance at Beginning of Year $ 834.5 $ 841.7 $ 885.0
Stock Issued for Options and Rights 8.6 1.5 5.2
Common Stock Reacquired (1.7) (8.8) (49.1)
Other 0.5 0.1 0.6
---------- --------- ---------
Balance at End of Year 841.9 834.5 841.7
---------- --------- ---------
RETAINED EARNINGS (NOTE 13)
Balance at Beginning of Year 2,966.4 3,062.7 3,257.2
Net Income (Loss) (989.2) 114.6 252.2
Amortization of Underwriting Compensation on Capital Securities (0.4) (0.4) (0.4)
Dividends Declared (94.5) (188.9) (192.2)
Common Stock Reacquired (6.4) (21.6) (254.1)
---------- --------- ---------
Balance at End of Year 1,875.9 2,966.4 3,062.7
---------- --------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAX (NOTE 2)
Balance at Beginning of Year 894.9 389.7 1,433.6
Other Comprehensive Income (Loss) 21.9 505.2 (1,043.9)
---------- --------- ---------
Balance at End of Year 916.8 894.9 389.7
---------- --------- ---------
Shareholders' Equity $ 3,634.6 $ 4,695.8 $ 4,294.1
========== ========= =========
DECEMBER 31 2001 2000 1999
- ----------- ----------- ----------- -----------
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Year 127,649,087 128,925,000 136,262,170
Shares Issued for Stock Options and Rights 352,250 70,668 212,440
Shares Reacquired (268,086) (1,346,581) (7,549,610)
----------- ----------- -----------
Number of Shares Outstanding at End of Year 127,733,251 127,649,087 128,925,000
=========== =========== ===========
See notes to consolidated financial statements.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
(In Millions)
Net Income (Loss) $ (989.2) $ 114.6 $ 252.2
---------- --------- ---------
Other Comprehensive Income (Loss), Net of Tax
Change in Unrealized Appreciation (Depreciation) of
Investment Securities* 88.3 595.9 (1,018.0)
Less Reclassification Adjustment for Realized Gain
Included in Net Income (61.5) (90.4) (58.3)
Deferred Policy Acquisition Costs Valuation Allowance (6.0) 0.1 31.8
Foreign Currency and Other Adjustments 1.1 (0.4) 0.6
---------- --------- ---------
Other Comprehensive Income (Loss) 21.9 505.2 (1,043.9)
---------- --------- ---------
Comprehensive Income (Loss) $ (967.3) $ 619.8 $ (791.7)
========== ========= =========
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio
was reclassified to available-for-sale (Note 1).
See notes to consolidated financial statements.
FS-8
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Dollar amounts in millions except per share data, unless noted otherwise)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
SAFECO Corporation (SAFECO or the Corporation) is a Washington corporation that
owns operating subsidiaries engaged in property and casualty insurance, surety,
life insurance and asset management. These operations generated virtually all of
the 2001 revenues. SAFECO's businesses operate on a nationwide basis. Non-U.S.
operations are insignificant. Products are marketed primarily through
independent agents. Approximately 35% of SAFECO's property and casualty premiums
are written in the three West Coast states of California, Washington and Oregon.
BASIS OF CONSOLIDATION AND REPORTING
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and include
amounts based on the best estimates and judgments of management. The
consolidated financial statements include SAFECO Corporation and its
subsidiaries. SAFECO has no material unconsolidated subsidiaries and no
interests in off-balance sheet special purpose entities. All significant
intercompany transactions and accounts have been eliminated in the consolidated
financial statements. Prior year information has been reclassified to conform to
the current year presentation.
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and claims and expenses during the reporting period. Actual results
could differ from those estimates.
ACCOUNTING FOR PROPERTY & CASUALTY OPERATIONS
Premiums Earned
Property and casualty insurance premiums are included in income as earned over
the terms of the respective policies. The unearned portion is determined using a
daily pro rata basis and is reflected as a liability for unearned premiums,
before the effect of reinsurance. See Note 5 for more information on
reinsurance.
Losses and Loss Adjustment Expenses
Unpaid losses and loss adjustment expenses (LAE) represent the estimated
liability for claims reported plus losses incurred but not yet reported and the
related estimated LAE. The liability for losses and LAE is determined using
"case basis" evaluations and statistical analyses, and represents an estimate of
the ultimate net cost of all losses incurred but not paid through December 31 of
each year. These estimates are continually reviewed and adjusted as necessary;
such adjustments are reflected in current operations. See Note 4 for more
information on loss and LAE reserves.
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 reflects adjustments to reserves in the results
of operations in the periods in which the estimates are
FS-9
changed. In establishing reserves, SAFECO takes into account estimated
recoveries for reinsurance, salvage and subrogation.
Salvage and subrogation recoverables are accrued using the "case basis" method
for large recoverables and statistical estimates based on historical experience
for smaller recoverables. Estimated recoverable amounts deducted from the
liability for losses and LAE net of reinsurance were $254.4 and $231.7 at
December 31, 2001 and 2000, respectively.
The property and casualty insurance companies' reserves for unpaid losses and
LAE are presented gross of amounts recoverable from reinsurers. See Note 5 for
more information on reinsurance.
Policy Acquisition Expenses
Property and casualty insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, that vary with and are primarily related to
the production of business, are deferred and amortized over the effective period
of the related insurance policies. Investment income is considered in
determining whether a premium deficiency exists. If investment income was not
considered, a premium deficiency would exist. This assessment of recoverability
is performed in aggregate at the following levels: total personal lines, total
commercial lines and surety. Any premium deficiencies would result in additional
deferred acquisition cost amortization in the period determined; no deficiencies
have been indicated in the periods presented.
ACCOUNTING FOR LIFE & INVESTMENTS OPERATIONS
Premiums Earned
Life insurance premiums for traditional individual life policies are reported as
income when due from the policyholder. These policies, which include whole life
and guaranteed renewable term policies, are long-duration contracts. Group life
and health policy revenue is recognized when earned, over the life of the
policy. The unearned premiums are reflected as liabilities on the balance sheet.
Group life and health policies are short-duration contracts that include
provisions allowing SAFECO to adjust the premiums for the group or cancel the
group contract.
Funds received under retirement services deposit contracts, annuity contracts
and universal life policies were $1,051.1, $1,266.0 and $1,849.5 in 2001, 2000
and 1999, respectively. These amounts are recorded as liabilities rather than
premium income when received. Revenues for universal life products consist of
front-end loads and mortality and expense charges assessed against individual
policyholder account balances. Front-end loads are recognized as income when
earned, over the life of the policy. Mortality and expense charges are
recognized as income when earned, as amounts are assessed against individual
policyholder account balances ratably over the contract year. Administration
fees are recognized as income as services are provided and amounts are assessed
against policyholder account balances.
Life Policy Liabilities
Liabilities for universal life insurance policies, deferred annuity contracts
and retirement services deposit contracts are equal to the accumulated account
value of such policies or contracts as of the valuation date. For structured
settlement annuities, future benefits are either fully guaranteed or are
contingent on the survivorship of the annuitant. Contingent future benefits are
discounted with best-estimate mortality assumptions, which include provisions
for ongoing mortality improvement. Guaranteed and contingent future benefits are
discounted at interest rates that grade from an average of 8.07% to ultimate
rates that average 7.23%.
Liabilities for future policy benefits under traditional individual life and
group life insurance policies have been computed on the level premium method and
reflect interest, mortality and persistency assumptions based on actual
experience modified to provide for adverse deviation. These liabilities are
contingent upon the death of the insured while the policy is in force. Estimates
of future benefits are based upon assumptions of mortality and policy
persistency that include provisions for adverse deviation from best estimates.
Mortality assumptions are derived from both company-specific and industry
statistics. Future benefits are discounted at interest rates that vary by year
of issue and average 6.5%.
Liabilities for claims under group medical coverages are established on the
basis of reported losses ("case basis" method). Provision is also made for
claims incurred but not reported, based on historical experience.
FS-10
Estimates for claims incurred but not reported are continually reviewed and any
necessary adjustments are reflected in current operations.
Policy Acquisition Expenses
Life and medical insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, that vary with and are primarily related to
the production of new business, are deferred.
Acquisition costs for deferred annuity contracts, retirement services deposit
contracts and universal life insurance policies are amortized over the lives of
the contracts or policies in proportion to the present value of estimated future
gross profits. To the extent actual experience differs from assumptions and to
the extent estimates of future gross profits require revision, the unamortized
balance of deferred policy acquisition costs is adjusted accordingly; such
adjustments are included in current operations. No material adjustments were
made in 2001 or 2000. In 1999 a $13.0 write-off of deferred policy acquisition
cost related to the discontinued equity indexed annuity product was made. The
unamortized balance of deferred policy acquisition costs is adjusted for the
impact on estimated future gross profits as if net unrealized appreciation and
depreciation on securities had been realized at the balance sheet date. The
impact of this adjustment, net of tax, is included in accumulated other
comprehensive income (loss) in shareholders' equity. Acquisition costs for
traditional individual life insurance policies are amortized over the premium
payment period of the related policies using assumptions consistent with those
used in computing policy benefit liabilities. Acquisition costs for group life
and medical policies are amortized over the lives of the policies.
ACCOUNTING FOR INVESTMENTS
Effective October 1, 2000, SAFECO reclassified its entire fixed maturities
held-to-maturity investment portfolio to available-for-sale. The amortized cost
of the fixed maturities reclassified totaled $2,753.0 and the market value
totaled $2,816.5. The unrealized gain amount net of deferred taxes was $41.3 and
was recorded as an increase in other comprehensive income in the fourth quarter
of 2000. The reclassification was made in anticipation of the pending adoption
of SFAS 133, "Accounting for Derivative Instruments and Hedging Activity"
(adopted on January 1, 2001) as well as providing additional investment
flexibility for these fixed maturities, including being able to make timely
sales based on indications of credit quality declines and improving call
protection.
All marketable equity securities are classified as available-for-sale and are
carried at fair value, with changes in unrealized appreciation and depreciation
recorded directly to shareholders' equity (other comprehensive income), net of
deferred income taxes.
Derivative financial instruments are carried at fair value. Changes in the fair
value of cash flow hedges are recorded in other comprehensive income, net of
deferred income taxes. Changes in the value of fair value hedges are recorded in
current period earnings.
When the collectibility of income for certain investments is considered
doubtful, they are placed on non-accrual status and thereafter interest income
is recognized only when payment is received. Each investment that has declined
in fair value below cost is monitored closely and if the decline is judged to be
other than temporary, the security is written down to fair value. In determining
whether a decline in the fair value of a security below cost is other than
temporary, SAFECO considers the relevant facts and circumstances related to the
security. These include: (1) the length of time and the extent to which the fair
value has been less than cost; (2) the financial condition and near-term
prospects of the issuer, including any specific events that influence the
operations of the issuer or that affect its future earnings potential; and (3)
SAFECO's intent and ability to retain the investment for a period of time
sufficient to allow for a recovery in value. Determining what constitutes an
other than temporary decline involves significant judgment. Declines in fair
value below cost not considered other than temporary in the current period could
be considered other than temporary in a future period and reduce earnings to the
extent of the write-down.
The cost of security investments sold is determined by the "identified cost"
method.
Mortgage loans are carried at outstanding principal balances, less an allowance
for mortgage loan losses. The allowance for mortgage loan losses was $10.5 and
$10.8 at December 31, 2001 and 2000, respectively. A mortgage loan is considered
impaired when it is probable that SAFECO will be unable to collect principal and
interest amounts due. For mortgage loans that are determined to be impaired, a
reserve is established for the difference between the amortized cost and fair
value of the underlying collateral. Impaired loans were not significant at
December 31, 2001 and 2000.
FS-11
Short-term investments are carried at cost, which approximates market value.
SAFECO engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral is required at a rate of 102% of the market value of a loaned
security. The collateral is deposited by the borrower with a lending agent and
retained and invested by the lending agent to generate additional income
according to SAFECO's guidelines. The market value of the loaned securities is
monitored on a daily basis, with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are classified as other investments or as land,
buildings and equipment for company use and are carried at cost less accumulated
depreciation.
SAFECO provides depreciation on buildings for company use, furniture and
automobiles at various rates based on estimated useful lives using straight-line
and accelerated methods. Depreciation expense was $69.0, $55.0 and $54.0 for
2001, 2000 and 1999, respectively.
GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the fair
value of their net assets. Prior to March 31, 2001 goodwill was amortized on a
straight-line basis over periods, not exceeding 30 years, that corresponded with
the benefits estimated to be derived from the acquisitions.
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 market-value method was
determined to be 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) in the first
quarter.
The market value method used to assess the recoverability of goodwill compared
SAFECO's market capitalization (stock price multiplied by shares outstanding) to
the reported book value (total shareholders' equity) of the Corporation. 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, SAFECO 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 (97%) resulted from the 1997 acquisition of American
States Financial Corporation (American States) whose operations have been fully
integrated into those of the Corporation.
In the fourth quarter of 2001, after completion of a study, SAFECO determined
that its goodwill in R.F. Bailey (Underwriting Agencies) Ltd. was impaired
resulting in an additional write-down of $13.1 ($8.5 after tax).
See the New Accounting Standards section of this note for FASB Statement 141
"Business Combinations" and FASB Statement 142 "Goodwill and Other Intangible
Assets" for recent authoritative literature addressing goodwill.
COMMON STOCK
The Washington Business Corporation Act provides that reacquired shares of a
Washington State corporation revert to the status of authorized but unissued
shares. Accordingly, the Corporation has reduced capital stock and retained
earnings to reflect the repurchase of shares and does not show treasury stock as
a separate reduction.
EARNINGS PER SHARE
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
reflect the potential dilution that could occur if options granted under various
stock-based compensation plans were exercised resulting in the issuance of
common shares that would then share in the Corporation's earnings.
FS-12
Due to the net loss in 2001 the Corporation 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.
NEW ACCOUNTING STANDARDS
Financial Accounting Standards Board (FASB) pronouncements which have recently
affected SAFECO or will in the near future are as follows:
FASB Statement 133, "Accounting for Derivative Instruments and Hedging
Activities"
The FASB issued Statement 133 (SFAS 133), "Accounting for Derivative Instruments
and Hedging Activities" 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, SAFECO 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. Additional information on the
impact of adoption of SFAS 133 is in Note 3.
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. SAFECO adopted this
statement effective July 1, 2001 with no impact on its 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 Corporation will adopt SFAS 142 effective January 1,
2002. SAFECO does not expect the adoption of SFAS 142 to have a material impact
on its financial statements.
FASB Statement 143, "Accounting for Asset Retirement Obligations"
The FASB issued Statement 143 (SFAS 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 Corporation will adopt SFAS 143 effective January 1, 2003. SAFECO
does not expect the adoption of this statement to have a material impact on its
financial statements.
FASB Statement 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets"
FS-13
The FASB issued Statement 144 (SFAS 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 Corporation
will adopt SFAS 144 effective January 1, 2002. SAFECO does not expect the
adoption of this statement to have a material impact on its financial
statements.
NOTE 2 - INVESTMENTS
Fixed Maturities and Marketable Equity Securities
The following is a summary of fixed maturities and marketable equity securities.
Cost or Gross Gross Net
Amortized Unrealized Unrealized Unrealized Fair
DECEMBER 31, 2001 Cost Gains Losses Gain Value
- ----------------- ---------- ---------- ---------- ---------- ---------
Fixed Maturities
U.S. Government & Agencies $ 1,408.1 $ 146.3 $ (2.1) $ 144.2 $ 1,552.3
State and Political Subdivisions 2,887.1 278.5 (23.4) 255.1 3,142.2
Foreign Governments 290.8 59.7 (0.1) 59.6 350.4
Corporate Securities 11,508.8 430.7 (300.4) 130.3 11,639.1
Mortgage-Backed Securities 4,582.3 203.6 (25.8) 177.8 4,760.1
---------- --------- --------- --------- ---------
Total Fixed Maturities 20,677.1 1,118.8 (351.8) 767.0 21,444.1
Marketable Equity Securities 940.5 714.0 (58.1) 655.9 1,596.4
---------- --------- --------- --------- ---------
Total $ 21,617.6 $ 1,832.8 $ (409.9) $ 1,422.9 $23,040.5
========== ========= ========= ========= =========
Cost or Gross Gross Net
Amortized Unrealized Unrealized Unrealized Fair
DECEMBER 31, 2000 Cost Gains Losses Gain(Loss) Value
- ----------------- ---------- ---------- ---------- ---------- ---------
Fixed Maturities
U.S. Government & Agencies $ 1,582.5 $ 178.4 $ (4.7) $ 173.7 $ 1,756.2
State and Political Subdivisions 2,916.6 315.9 (12.0) 303.9 3,220.5
Foreign Governments 303.6 52.2 (1.2) 51.0 354.6
Corporate Securities 11,240.5 261.7 (477.4) (215.7) 11,024.8
Mortgage-Backed Securities 4,344.9 149.6 (20.4) 129.2 4,474.1
---------- --------- --------- --------- ---------
Total Fixed Maturities 20,388.1 957.8 (515.7) 442.1 20,830.2
Marketable Equity Securities 875.9 996.3 (56.8) 939.5 1,815.4
---------- --------- --------- --------- ---------
Total $ 21,264.0 $ 1,954.1 $ (572.5) $ 1,381.6 $22,645.6
========== ========= ========= ========= =========
Fixed Maturities by Maturity Date
The cost or amortized cost and fair value of fixed maturities at December 31,
2001, by contractual years-to-maturity, are presented below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without prepayment penalties.
Cost or
Amortized Fair
DECEMBER 31, 2001 Cost Value
- ----------------- ---------- ---------
One Year or Less $ 598.4 $ 608.3
Over One Year Through Five Years 4,067.4 4,191.0
Over Five Years Through Ten Years 2,438.0 2,515.3
Over Ten Years 8,991.0 9,369.4
Mortgage-Backed Securities 4,582.3 4,760.1
---------- ---------
Total Fixed Maturities $ 20,677.1 $21,444.1
========== =========
FS-14
The following summarizes the components of Accumulated Other Comprehensive
Income included in the Consolidated Balance Sheets:
DECEMBER 31 2001 2000* 1999
- ----------- ---------- --------- ---------
Fixed Maturities & Marketable Equity Securities+ $ 1,422.9 $ 1,381.6 $ 604.0
Foreign Currency and Other Adjustments+ (9.4) (11.2) (10.4)
Deferred Policy Acquisition Costs Valuation Allowance++ (9.3) -- (0.2)
Deferred Income Taxes (487.4) (475.5) (203.7)
---------- --------- ---------
Accumulated Other Comprehensive Income $ 916.8 $ 894.9 $ 389.7
========== ========= =========
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio
was reclassified to available-for-sale.
+ Related income tax expense: $494.0, $479.4 and $207.4.
+ Related income tax benefit: $3.3, $3.9 and $3.6.
++ Related income tax benefit: $3.3, $0.0 and $0.1.
The following analysis summarizes the changes in unrealized appreciation
(depreciation) on investment securities (includes fixed maturities
held-to-maturity and available-for-sale):
DECEMBER 31 2001 2000* 1999
- ----------- ---------- --------- ---------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Fixed Maturities and Marketable Equity Securities $ 41.3 $ 777.6 $(1,655.7)
Foreign Currency and Other Adjustments 1.8 (0.8) 1.0
Deferred Policy Acquisition Costs Valuation Allowance (9.3) 0.2 48.9
Deferred Income Taxes (11.9) (271.8) 561.9
---------- --------- ---------
Change in Unrealized Appreciation (Depreciation) $ 21.9 $ 505.2 $(1,043.9)
========== ========= =========
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio
was reclassified to available-for-sale.
Net Investment Income
The following is a summary of net investment income.
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
Interest
Fixed Maturities $ 1,450.6 $ 1,478.5 $ 1,429.5
Mortgage Loans 68.3 65.6 57.6
Short-Term Investments 43.4 27.1 19.5
Dividends
Marketable Equity Securities 38.2 47.6 53.1
Redeemable Preferred Stock 24.1 24.3 21.1
Other Investment Income 36.6 1.7 14.5
---------- --------- ---------
Total Investment Income 1,661.2 1,644.8 1,595.3
Investment Expenses (11.9) (11.3) (7.0)
---------- --------- ---------
Net Investment Income $ 1,649.3 $ 1,633.5 $ 1,588.3
========== ========= =========
The carrying value of investments in fixed maturities and mortgage loans that
have not produced income for the last twelve months is less than 1% of the total
of such investments at December 31, 2001.
FS-15
Realized Investment Gains (Losses)
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ------- ------ ------
REALIZED INVESTMENT GAINS (LOSSES)*
Fixed Maturities $ (35.5) $(51.1) $ (0.2)
Marketable Equity Securities 142.6 190.6 82.8
Financial Instruments (14.1) -- --
Investment Real Estate -- -- 35.1
------- ------ ------
Realized Investment Gain Before Income Taxes 93.0 139.5 117.7
Applicable Income Taxes (31.5) (49.1) (41.2)
------- ------ ------
Realized Investment Gain $ 61.5 $ 90.4 $ 76.5
======= ====== ======
* Amounts include investment write-downs of $126.8, $35.7 and $0.6, pretax, for
the years ended December 31, 2001, 2000 and 1999, respectively.
The proceeds from sales of investment securities and related gains (losses) for
2001 are as follows:
Fixed
Maturities Marketable
Available- Equity Financial
YEAR ENDED DECEMBER 31, 2001 For-Sale Securities Instruments
- ---------------------------- ---------- ---------- -----------
Proceeds from Sales $ 2,418.0 $ 437.6 $ --
========== ========= =========
Gross Realized Gains $ 86.5 $ 194.7 $ --
Gross Realized Losses (31.9) (24.2) (7.8)
---------- --------- ---------
Realized Gains (Losses) 54.6 170.5 (7.8)
Write-downs (98.4) (28.4) --
Other, Including Gains (Losses) on Calls and Redemptions 8.3 0.5 (6.3)
---------- --------- ---------
Total Realized Gain (Loss) $ (35.5) $ 142.6 $ (14.1)
========== ========= =========
The proceeds from sales of investment securities and related gains (losses) for
2000 are as follows:
Fixed Fixed
Maturities Maturities Marketable
Available- Held-To- Equity
YEAR ENDED DECEMBER 31, 2000 For-Sale Maturity Securities
- ---------------------------- ---------- --------- ----------
Proceeds from Sales $ 2,265.4 $ 0.1 $ 661.7
========== ========= =========
Gross Realized Gains $ 47.5 $ -- $ 268.5
Gross Realized Losses (82.1) -- (77.9)
---------- --------- ---------
Realized Gains (Losses) (34.6) -- 190.6
Write-downs (35.7) -- --
Other, Including Gains on Calls and Redemptions 19.2 -- --
---------- --------- ---------
Total Realized Gain (Loss) $ (51.1) $ -- $ 190.6
========== ========= =========
FS-16
The proceeds from sales of investment securities and related gains (losses) for
1999 are as follows:
Fixed Fixed
Maturities Maturities Marketable
Available- Held-To- Equity
YEAR ENDED DECEMBER 31, 1999 For-Sale Maturity Securities
- ---------------------------- ---------- ---------- ----------
Proceeds from Sales $ 3,715.4 $ 6.3 $ 298.1
========== ========= =========
Gross Realized Gains $ 90.0 $ -- $ 111.0
Gross Realized Losses (85.8) (6.3) (28.2)
---------- --------- ---------
Realized Gains (Losses) 4.2 (6.3) 82.8
Write-downs (0.6) -- --
Other, Including Gains on Calls and Redemptions 2.5 -- --
---------- --------- ---------
Total Realized Gain (Loss) $ 6.1 $ (6.3) $ 82.8
========== ========= =========
The 2000 and 1999 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
The following table summarizes SAFECO's allowance for mortgage loan losses:
DECEMBER 31 2001 2000 1999
- ----------- ------- ------ ------
Allowance at Beginning of Year $ 10.8 $ 10.8 $ 11.2
Loans Charged-off as Uncollectible (0.3) -- (0.4)
------- ------ ------
Allowance at End of Year $ 10.5 $ 10.8 $ 10.8
======= ====== ======
These allowances relate to mortgage loan investments ($924.2 and $823.0 at
December 31, 2001 and 2000, respectively), the majority of which are held by
SAFECO Life Insurance Company. The total investment in impaired loans was less
than $1.0 at December 31, 2001 and 2000.
NOTE 3 - FINANCIAL INSTRUMENTS
Fair value amounts of financial instruments have been determined using available
market information and appropriate valuation methodologies including discounted
cash flows, as appropriate for the various financial instruments. Considerable
judgment is required in developing certain of the estimates of fair value. They
are not necessarily indicative of the amounts that could be realized in a
current market exchange.
SAFECO's investment portfolio includes approximately $420.0 of fixed maturities
at December 31, 2001 that are not publicly traded and/or non-rated. This
represents approximately 2% of total fixed maturity investments. The gross
dollar amount of unrealized loss (fair value less amortized cost) on these
securities totaled approximately $6.0 at December 31, 2001. The gross dollar
amount of unrealized gain was approximately $35.0. Fair values for these
securities have been estimated using quoted market prices of comparable
instruments based on industry sector, credit quality and maturity and/or
internally prepared valuations using third party modeling tools, which also
typically use comparable-instrument pricing techniques based on industry sector,
credit quality and maturity. For non-rated fixed maturity securities, ratings
are internally prepared based on externally-rated securities with comparable
credit quality and in similar industry sectors.
SAFECO's investment portfolio included less than $20 of equity securities that
were not publicly traded at December 31, 2001.
The fair values for mortgage loans have been estimated by discounting the
projected cash flows using the current rate at which loans would be made to
borrowers with similar credit ratings and for the same maturities.
For cash, short-term investments, accounts receivable, policy loans and other
liabilities, carrying value is a reasonable estimate of fair value.
The fair values of investment contracts (funds held under deposit contracts)
with defined maturities are estimated by discounting projected cash flows using
rates that would be offered for similar contracts with the
FS-17
same remaining maturities. For investment contracts with no defined maturities,
fair values are estimated to be the present surrender value.
The carrying values of the Corporation's commercial paper, as well as other
debts that have variable interest rates, are reasonable estimates of fair value.
The fair values of the 7.875% Medium-Term notes, the 7.875% notes, the 6.875%
notes and the Capital Securities are estimated based on quotes from
broker/dealers who make markets in similar securities.
The fair values of the derivative financial instruments generally represent the
estimated amounts that SAFECO would expect to receive or pay upon termination of
the contracts at the reporting date. Quoted fair values are available for most
derivatives. For derivative financial instruments not actively traded, fair
values are estimated using values obtained from independent pricing services,
internal modeling or quoted market prices of comparable instruments.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
Fair values of financial instruments are as follows:
DECEMBER 31 2001 2000
- ----------- ---------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
---------- ---------- --------- ----------
FINANCIAL ASSETS
Fixed Maturities $ 21,444.1 $21,444.1 $20,830.2 $20,830.2
Marketable Equity Securities 1,596.4 1,596.4 1,815.4 1,815.4
Mortgage Loans 924.2 928.0 823.0 792.0
Separate Account Assets 1,208.1 1,208.1 1,275.1 1,275.1
Derivative Financial Instruments
Interest Rate Swaps 49.8 49.8 -- 2.3
Options/Futures 11.9 11.9 0.4 0.4
FINANCIAL LIABILITIES
Funds Held Under Deposit Contracts 14,624.2 14,314.0 14,085.7 13,977.0
Commercial Paper 299.0 299.0 349.8 349.8
7.875% Medium Term Notes Due 2003 323.0 323.0 300.0 305.0
7.875% Notes Due 2005 200.0 207.0 200.0 203.0
6.875% Notes Due 2007 200.0 196.0 200.0 193.0
Other Debt 74.6 76.0 80.7 80.0
Separate Account Liabilities 1,208.1 1,208.1 1,275.1 1,275.1
Derivative Financial Instruments
Single Credit Default Swaps 10.4 10.4 -- --
Interest Rate Swaps 18.0 18.0 -- 3.9
Options/Futures 47.1 47.1 -- --
Capital Securities 843.4 721.0 843.0 700.0
---------- --------- --------- ---------
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO uses derivative financial instruments, including interest rate swaps,
options, forward contracts and financial futures, as a means of hedging exposure
to equity price changes and/or interest rate risk on anticipated transactions or
existing assets and liabilities. The Corporation's insurance subsidiaries do not
hold or issue derivative instruments for trading purposes.
These derivative financial instruments have off-balance sheet risk. Derivative
financial instruments with off-balance sheet risk involve, to varying degrees,
elements of credit and market risk in excess of the amount recognized on the
consolidated balance sheet. The contract or notional amounts of these
instruments reflect the extent of involvement SAFECO has in a particular class
of derivative financial instrument. However, the maximum loss of cash flow
associated with these instruments can be less than these amounts. For interest
rate swaps, forward contracts and financial futures, credit risk is limited to
the amount that it would cost SAFECO to replace the contract. SAFECO is the
writer of option contracts and as such has no credit risk since the counterparty
has no performance obligation after it has paid a premium.
FS-18
SAFECO monitors the creditworthiness of counterparties to these derivative
financial instruments by using criteria of acceptable risk that are consistent
with on-balance sheet derivative financial instruments. The controls include
credit approvals, limits and other monitoring procedures.
SAFECO's consolidated investments in mortgage-backed securities of $4,760.1 at
market value at December 31, 2001 ($4,474.1 at December 31, 2000) are primarily
residential collateralized mortgage obligations (CMOs), pass-throughs and
commercial loan-backed mortgage obligations (CMBS). CMOs and CMBS, while
technically defined as derivative instruments, are exempt from derivative
disclosure requirements. SAFECO's investment in CMOs and CMBS comprised of the
riskier, more volatile type (e.g., principal only, inverse floaters, etc.) has
been intentionally limited to only a small amount - less than 1% of total
mortgage-backed securities at both December 31, 2001 and 2000.
The Corporation entered into interest rate swap agreements to reduce the impact
of changes in interest rates. The interest rate swap agreements provide only for
the exchange of interest on the notional amount at the stated rates, with no
multiplier or leverage.
The Corporation has two interest rate swap agreements outstanding with notional
amounts totaling $300.0 ($150.0 each) that replace variable rates with fixed
rates of 5.9% at December 31, 2001 and 2000. The two swaps were entered into in
December 1997 and mature in December 2002 and December 2007. The estimated fair
value of the liability for these interest rate swaps at December 31, 2001 and
2000 was $13.6 and $3.9, respectively. These interest rate swaps are classified
as cash flow hedges in accordance with SFAS 133. See discussion below regarding
the impact of SFAS 133 on these interest rate swaps.
The Corporation also has interest rate swap agreements outstanding with notional
amounts totaling $300.0 ($150.0 each) that replace fixed rates with variable
rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were entered
into in March 2000 and mature in March 2003. The estimated fair value of the
assets for these interest rate swaps at December 31, 2001 and 2000 was $23.0 and
$8.9, respectively. These interest rate swaps are classified as fair value
hedges in accordance with SFAS 133. See discussion below regarding the impact of
SFAS 133 on these interest rate swaps.
There were no material swap terminations in 2001, 2000 or 1999. The net interest
accrued under these agreements is recorded as an adjustment to interest expense.
Exposure to credit risk relating to interest rate swaps is the risk that the
counterparty will be unable to perform its obligations. This risk is mitigated
through credit review, approval controls and by entering into agreements with
only highly rated counterparties.
As a result of adopting SFAS 133 on January 1, 2001 and in accordance with the
transition provisions, SAFECO 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
Consolidated Statements of Income (Loss). In addition, the Corporation 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.
SAFECO 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. SAFECO links all hedges that are
designated as fair value hedges to specific assets or liabilities on the balance
sheet. SAFECO links all hedges that are designated as cash flow hedges to
forecasted transactions. SAFECO 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, SAFECO discontinues hedge accounting prospectively. No
fair value hedges or cash flow hedges were not recognized or discontinued during
the year ended December 31, 2001.
SAFECO's derivatives and hedges are described further below:
Fair Value Hedges
SAFECO 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 Consolidated Statements of Income (Loss).
Differences between the changes in the fair value of the hedge and the hedged
item represent hedge ineffectiveness and are recognized in realized gain or
loss. Fair value hedge ineffectiveness resulted in a gain of $4.0 for the year
FS-19
ended December 31, 2001. 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 Consolidated Statements
of Income (Loss).
Cash Flow Hedges
SAFECO also uses interest rate swaps to hedge the variability of future cash
flows associated with variable rate assets and 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 a
decrease of $0.3 to interest expense for 2001. 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 December 31, 2001, AOCI included a loss
of $1.5 ($1.0 after-tax) for the changes in fair value of cash flow hedges. The
Corporation estimates that $13.3 of derivative instrument and hedging activity
gains included in AOCI will be reclassified into earnings during the next twelve
months.
For the seven months ended July 31, 2001, a loss of $1.4, related to cash flow
hedge ineffectiveness was included in Income from Discontinued Credit
Operations.
Other Derivatives
SAFECO Credit owned a number of 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 ended July
31, 2001 a loss of $0.1 was reported as an increase to interest expense for
discontinued operations. SAFECO Credit's operating results have been reported as
discontinued operations on the Consolidated Statements of 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 Consolidated Statements of Income (Loss). As described further
in Note 11 the Corporation 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, SAFECO introduced an equity indexed annuity (EIA) product that credits
the policyholder based on a percentage of the gain in the S&P 500 Index. SAFECO
has a hedging program with the objective to hedge the exposure to changes in the
S&P 500 Index. 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, SAFECO 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 Consolidated Statements of Income (Loss). For 2001, SAFECO
recognized losses of $0.3 on these options, futures and swaps.
The Corporation's wholly-owned subsidiary, SAFECO Financial Products (SFP) was
incorporated in 2000, to write S&P 500 index options to mitigate the risk
associated with the equity indexed annuity. Due to the success of this activity,
SFP engaged in limited trading for its own account in 2001 by focusing on
selling credit protection through single credit default swaps and investing in
convertible bonds. SFP's activities are not designed as hedging activities.
Consequently, both changes in the fair values of these instruments and any
realized gain or loss are recognized in current income. Income before realized
loss was $6.7 and $2.3 for 2001 and 2000, respectively. Realized loss was $18.2
for 2001 including the $7.8 loss from the Enron single credit default swap.
There were no realized gains or losses in 2000.
FS-20
NOTE 4 - PROPERTY & CASUALTY LOSS RESERVES
Unpaid losses and loss adjustment expenses (LAE) represent the estimated
reserves for claims reported plus losses incurred but not reported (IBNR) and
the related LAE. Although considerable variability is inherent in such
estimates, SAFECO believes that the liability for unpaid losses and LAE is
adequate as of December 31, 2001. 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 reflects 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.
SAFECO has established loss and loss adjustment expense reserves for asbestos
and environmental claims and for construction defect claims. Reserves are
recognized for reported claims and for incurred but not reported claims, and
include the estimated cost of related legal expenses. SAFECO has separate
claims-handling units with claims personnel dedicated to handle asbestos and
environmental claims and construction defect claims. These units also assist in
establishing loss reserves for these claims. The process of estimating reserves
for these claims involves greater subjectivity than for other claims and past
claim experience may not be representative of future claim experience, due to
the risk inherent in major litigation, diverging legal interpretations,
regulatory actions, and other factors. The reserves represent SAFECO's best
current estimate of ultimate losses and loss adjustment expenses based upon
known facts and the current state of the law and coverage litigation. However,
these claims and related litigation, particularly if current trends continue to
accelerate, could result in future liabilities significantly different from
those currently estimated. The impact on reserves of changes in these factors
would be reflected in future operating results.
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.
FS-21
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.
The following is a summary of the activity related to SAFECO's property and
casualty insurance companies' reserves for losses and LAE. The year-end reserve
amounts below are net of related reinsurance recoverables of $415.9, $343.6 and
$309.5 for 2001, 2000 and 1999, respectively.
DECEMBER 31 2001 2000 1999
- ----------- ---------- --------- ---------
Loss and LAE Reserves at Beginning of Year $ 4,269.1 $ 4,069.1 $ 3,966.3
---------- --------- ---------
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
---------- --------- ---------
Total Incurred Loss and LAE 3,964.2 3,770.0 3,431.8
---------- --------- ---------
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
---------- --------- ---------
Total Loss and LAE Payments 3,595.5 3,570.0 3,329.0
---------- --------- ---------
Total Loss and LAE Reserves at End of Year $ 4,637.8 $ 4,269.1 $ 4,069.1
========== ========= =========
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), 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.
NOTE 5 - REINSURANCE
SAFECO's insurance subsidiaries use treaty and facultative reinsurance to help
manage exposures to loss. The availability and cost of reinsurance are subject
to prevailing market conditions, both in terms of price and available capacity.
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 reinsured. SAFECO evaluates the financial condition of its
reinsurers to minimize its exposure to losses from reinsurer insolvencies. The
magnitude of recent losses in the reinsurance industry 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
FS-22
experiencing financial difficulties. SAFECO's business is not substantially
dependent upon any single reinsurance account.
Because the amount of 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. As a result, SAFECO must estimate the
amount of reinsurance recoverables it anticipates receiving based on the terms
of the reinsurance contract and historical reinsurance recovery information.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use funding covers and does not participate in any surplus relief
transactions.
Reinsurance recoverables are comprised of the following amounts at December 31:
DECEMBER 31 2001 2000
- ----------- ------- -------
PROPERTY & CASUALTY INSURANCE
Reinsurance Recoverables on
Unpaid Loss and LAE Reserves $ 415.9 $ 343.6
Paid Losses and LAE 17.2 18.9
LIFE INSURANCE
Reinsurance Recoverables on
Policy and Contract Claim Reserves 2.5 3.2
Paid Claims 2.5 2.9
Life Policy Liabilities 85.1 93.1
------- -------
Total Reinsurance Recoverables $ 523.2 $ 461.7
======= =======
The unearned premium liability is presented before the effect of reinsurance.
The reinsurance amounts related to the unearned premium liability are included
with other assets in the balance sheets and totaled $40.4 and $60.9 at December
31, 2001 and 2000, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the Consolidated Statements of Income (Loss). These amounts are as
follows:
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ------- ------- -------
Property & Casualty Insurance Ceded Earned Premiums $ 151.5 $ 163.0 $ 164.4
Life Insurance Ceded Earned Premiums 34.6 32.7 25.8
------- ------- -------
Total Ceded Earned Premiums $ 186.1 $ 195.7 $ 190.2
======= ======= =======
Property & Casualty Insurance Ceded Losses and LAE $ 130.5 $ 105.3 $ 147.3
Life Insurance Ceded Policy Benefits 13.2 35.6 11.8
------- ------- -------
Total Ceded Losses, LAE and Policy Benefits $ 143.7 $ 140.9 $ 159.1
======= ======= =======
Reinsurance premiums ceded on a written basis are approximately equal to the
ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
FS-23
NOTE 6 - INCOME TAXES
SAFECO uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal income tax
rate of 35% to income (loss) before income taxes and the consolidated provision
(benefit) for income taxes are as follows:
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- -------- ------- -------
Computed "Expected" Tax Expense (Benefit) $ (494.7) $ 48.8 $ 108.4
Write-Off of Goodwill 137.7 -- --
Tax-Exempt Municipal Bond Income (54.1) (58.2) (85.6)
Dividends Received Deduction (10.1) (11.9) (13.3)
Proration Adjustment 8.2 9.0 12.5
Other 0.2 5.0 5.1
-------- ------- -------
Consolidated Provision (Benefit) for Income Taxes $ (412.8) $ (7.3) $ 27.1
======== ======= =======
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 2001 and 2000 are as
follows:
DECEMBER 31 2001 2000
- ----------- -------- ------
DEFERRED TAX ASSETS
Goodwill $ 237.8 $ --
Discounting of Loss and Loss Adjustment Expense Reserves 228.1 254.9
Unearned Premium Liability 131.3 127.3
Adjustment to Life Policy Liabilities 71.9 54.0
Capitalization of Life Policy Acquisition Costs 84.3 84.9
Impaired Security Write-downs 58.5 18.2
Postretirement Benefits 44.3 40.0
Nondeductible Accruals 25.3 29.1
Alternative Minimum Tax Carryforward -- 35.4
Net Operating Loss Carryforward 218.5 73.2
Other 63.1 52.0
-------- ------
Total Deferred Tax Assets 1,163.1 769.0
-------- ------
DEFERRED TAX LIABILITIES
Deferred Policy Acquisition Costs 222.6 212.1
Bond Discount Accrual 46.5 35.5
Accelerated Depreciation 16.6 17.0
Unrealized Appreciation of Investment Securities, Derivative
Financial Instruments, Deferred Policy Acquisition Cost
Valuation Allowance and Foreign Currency Adjustment 497.7 478.7
Other 60.7 92.9
-------- ------
Total Deferred Tax Liabilities 844.1 836.2
-------- ------
Net Deferred Tax Asset (Liability) $ 319.0 $(67.2)
======== ======
The following table reconciles the deferred tax expense (benefit) in the
Consolidated Statements of Income (Loss) to the net change in the deferred tax
liability in the Consolidated Balance Sheets:
DECEMBER 31 2001 2000 1999
- ----------- ------- ------ -------
Deferred Tax Benefit $(405.2) $(46.9) $ (40.0)
Deferred Tax Changes Reported in Shareholders' Equity
Increase (Decrease) in Liability Related to Unrealized Appreciation
(Depreciation) of Investment Securities, Derivative
Financial Instruments, Deferred Policy Acquisition Cost Valuation
Allowance and Foreign Currency Adjustment 19.0 270.9 (562.2)
------- ------ -------
Increase (Decrease) in Net Deferred Tax Asset or Liability $(386.2) $224.0 $(602.2)
======= ====== =======
FS-24
NOTE 7 - DEBT AND CAPITAL SECURITIES
The total amount, current portions, interest rates and maturities of debt and
capital securities at December 31 are as follows:
DECEMBER 31 2001 2000
- ----------- -------------------- ---------------------
Total Current Total Current
-------- ------- -------- -------
Commercial Paper, Interest Rates at December 31:
Range: 2.5% to 3.3%; 7.0% to 7.9%
Weighted Average: 3.0%; 7.1% $ 299.0 $299.0 $ 349.8 $349.8
7.875% Medium-Term Notes Due 2003 323.0 -- 300.0 --
7.875% Notes Due 2005 200.0 -- 200.0 --
6.875% Notes Due 2007 200.0 -- 200.0 --
Medium-Term Notes, Due 2002 and 2003; Weighted-Average
Interest Rates at December 31: 7.1%; 7.1% 50.0 42.9 50.0 --
Notes and Loans Payable; Weighted-Average
Interest Rates at December 31: 7.7%; 7.4% 24.6 5.9 30.7 6.5
-------- ------ -------- ------
Total Debt (Excluding Capital Securities) 1,096.6 347.8 1,130.5 356.3
8.072% Capital Securities Due 2037 843.4 -- 843.0 --
-------- ------ -------- ------
Total Debt and Capital Securities $1,940.0 $347.8 $1,973.5 $356.3
======== ====== ======== ======
Aggregate annual principal installments payable under these obligations for each
of the five years subsequent to 2001 are as follows: 2002 - $347.8; 2003 -
$311.9; 2004 - $5.4; 2005 - $200.8; and 2006 - $0.8.
DEBT
At December 31, 2001, the Corporation had commercial paper borrowings
outstanding of $299.0. The maximum amount of commercial paper outstanding during
2001 was $449.0 and the average amount outstanding during the year was $289.3.
The weighted-average interest rate for the year was 5.2%.
The Corporation entered into interest rate swap agreements to reduce the impact
of changes in interest rates. The interest rate swap agreements provide only for
the exchange of interest on the notional amount at the stated rates, with no
multiplier or leverage. The Corporation has two interest rate swap agreements
outstanding with notional amounts totaling $300.0 ($150.0 each) that replace
variable rates with fixed rates of 5.9% at December 31, 2001 and 2000. The two
swaps were entered into in December 1997 and mature in December 2002 and
December 2007.
In March 2000, SAFECO issued $300 of medium-term notes at 7.875% which mature in
March 2003. The Corporation also has interest rate swap agreements outstanding
with notional amounts totaling $300.0 ($150.0 each) that replace fixed rates
with variable rates at 65.03 basis points over the 90-day LIBOR rate. These
swaps were entered into in March 2000 and mature in March 2003.
There were no material swap terminations in 2001, 2000, or 1999. The net
interest accrued under these agreements is recorded as an adjustment to interest
expense. Exposure to credit risk relating to interest rate swaps is the risk
that the counterparty will be unable to perform its obligations. This risk is
mitigated through credit review, approval controls and by entering into
agreements with only highly rated counterparties.
The Notes and Loans Payable include real estate mortgages which are
collateralized by the related investment real estate buildings and property.
SAFECO has a bank credit facility available for $800.0. The five-year facility
originated in 1997 and extends to September 2002. There were no borrowings
outstanding under this facility as of December 31, 2001 or 2000. The Corporation
pays a fee to have the facility available and does not maintain deposits as
compensating balances. This facility carries certain covenants that requires
SAFECO to maintain a specified minimum level of shareholders' equity and a
maximum debt-to-capitalization ratio. As of December 31, 2001 and 2000, SAFECO
was in compliance with all such covenants.
FS-25
CAPITAL SECURITIES
On July 15, 1997, SAFECO Capital Trust I (Capital Trust), a consolidated
wholly-owned subsidiary of SAFECO Corporation, issued $850.0 of 8.072%
Corporation-Obligated, Mandatorily Redeemable Capital Securities (the Capital
Securities). In connection with Capital Trust's issuance of the Capital
Securities and the related purchase by the Corporation of all of Capital Trust's
common securities (the Common Securities), SAFECO Corporation issued to Capital
Trust the principal amount of $876.3 of its 8.072% Junior Subordinated
Deferrable Interest Debentures, due July 15, 2037 (the Subordinated Debentures).
The sole assets of Capital Trust are and will be the Subordinated Debentures and
any interest due thereon. The interest and other payment dates on the
Subordinated Debentures correspond to the distribution and other payment dates
on the Capital Securities and the Common Securities. Distributions on the
Capital Securities and the Common Securities are cumulative and payable
semi-annually in arrears. The Subordinated Debentures and the related income
effects are eliminated in SAFECO's financial statements.
For federal income tax purposes, the Subordinated Debentures are classified as
indebtedness. Accordingly, interest on the Subordinated Debentures is deductible
at the federal statutory rate of 35%.
The Capital Securities are mandatorily redeemable on July 15, 2037, the same
date the Subordinated Debentures are due. The Capital Securities may be
redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007,
at a price of 104% of principal, with the call premium graded down to zero in
2017. The Corporation's obligations under the Subordinated Debentures and
related agreements, taken together, constitute a full and unconditional
guarantee of payments due on the Capital Securities.
The Corporation has the right, at any time, to defer payments of interest on the
Subordinated Debentures for up to five years. Consequently, the distributions on
the Capital Securities and the Common Securities would be deferred (though such
distributions would continue to accrue with interest since interest would accrue
on the Subordinated Debentures during any such extended interest payment
period). In no case may the deferral of payments and distributions extend beyond
the stated maturity dates of the respective securities. The Corporation cannot
pay dividends on its common stock during such deferments.
NOTE 8 - EMPLOYEE BENEFIT PLANS
The Corporation sponsors defined contribution and defined benefit plans covering
substantially all employees. A bonus plan based on overall company profit,
payable to employees based on compensation, is being replaced effective January
1, 2002. The replacement plan continues to be based on company profit but is
payable to employees based on business unit profitability and individual
performance. The defined contribution plans include 401(k) plans and
profit-sharing retirement plans. SAFECO's 401(k) plan has a matching component
under which SAFECO contributes 66.6% of the employee's contribution, up to 6% of
compensation, for eligible employees. Employer matching contributions, as well
as profit-sharing contributions, are made in cash. SAFECO's Cash Balance Plan
(CBP) is a defined benefit plan that provides benefits for each year of service
after 1988, based on the employee's compensation level plus a stipulated rate of
return on the benefit balance. It is SAFECO's policy to fund the CBP on a
current basis to the full extent deductible under federal income tax
regulations.
In addition, SAFECO provides certain healthcare and life insurance benefits
(Other Post-Retirement Benefits or OPRB) for retired employees. Substantially
all employees become eligible for these benefits if they reach retirement age
while working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree.
FS-26
The following table summarizes the plan's benefit obligations and assets and
SAFECO's net accrued benefit liabilities:
Other Post-Retirement
Pension Benefits (CBP) Benefits
-------------------------------------------------
DECEMBER 31 2001 2000 2001 2000
---------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year $ 145.9 $ 143.9 $ 143.5 $ 135.0
Service and Interest Costs 16.9 16.7 15.6 15.3
Liability (Gain) Loss 0.7 2.8 (21.0) (2.9)
Net Benefits Paid (16.7) (17.5) (4.6) (3.9)
---------- --------- --------- ---------
Benefit Obligation at End of Year 146.8 145.9 133.5 143.5
---------- --------- --------- ---------
CHANGE IN PLAN ASSETS
Fair value of Plan Assets at Beginning of Year 129.4 141.2 3.2 2.4
Actual Return on Plan Assets 2.1 4.2 0.1 0.1
Company Contributions 10.2 1.5 4.2 4.6
Benefits Paid (16.7) (17.5) (4.6) (3.9)
---------- --------- --------- ---------
Fair Value of Plan Assets at End of Year 125.0 129.4 2.9 3.2
---------- --------- --------- ---------
Funded Status of Plan (21.8) (16.5) (130.6) (140.3)
Unrecognized Net Actuarial (Gain) Loss 9.6 (0.6) (2.9) 18.5
Unrecognized Prior Service Cost -- -- 6.7 7.6
---------- --------- --------- ---------
Accrued Benefit Liabilities $ (12.2) $ (17.1) $ (126.8) $ (114.2)
========== ========= ========= =========
Actuarial assumptions for the above disclosures are set forth in the following
table:
DECEMBER 31 2001 2000 1999
---- ---- ----
PENSION BENEFITS
Discount Rate 7.25% 7.50% 7.50%
Expected Return on Plan Assets 9.00 9.00 9.00
Rate of Compensation Increases 5.00 6.00 6.00
OTHER POSTRETIREMENT BENEFITS
Discount Rate 7.25% 7.50% 7.50%
==== ==== ====
The cost of the plans discussed above (excluding OPRB's) charged to income is as
follows:
YEAR ENDED DECEMBER 31 2001 2000 1999
------- ------ ------
Defined Contribution - 401(k) $ 16.0 $ 15.5 $ 15.0
Defined Contribution - (Profit Sharing) 14.5 14.3 14.0
Defined Benefit - (CBP) 5.4 4.4 2.7
Profit-Sharing and Other Incentive Bonuses 4.5 3.3 0.6
------- ------ ------
Total $ 40.4 $ 37.5 $ 32.3
======= ====== ======
The following table summarizes other postretirement benefit costs:
YEAR ENDED DECEMBER 31 2001 2000 1999
------- ------ ------
Service Cost $ 5.1 $ 5.4 $ 4.7
Interest Cost 10.5 9.9 8.0
Amortization 1.1 1.5 0.8
------- ------ ------
Total $ 16.7 $ 16.8 $ 13.5
======= ====== ======
FS-27
The accumulated postretirement benefit obligation at December 31, 2001 was
determined using a healthcare cost trend rate of 9% for 2002, gradually
decreasing to 5% in 2006 and remaining at that level thereafter. A 1% point
increase (or decrease) in the assumed healthcare cost trend rate for each year
would increase (or decrease) the accumulated other postretirement benefit
obligation as of December 31, 2001 by $14.2 (or $11.9) and the annual net
periodic other postretirement benefit cost for the year then ended by $2.4 (or
$1.9).
NOTE 9 - STOCK INCENTIVE PLANS
The SAFECO Long-Term Incentive Plan of 1997 (the Plan) provides for the issuance
of up to 6,000,000 shares of the Corporation's common stock. Stock options,
restricted stock rights (RSR), performance stock rights (PSR) and stock
appreciation rights are authorized under the Plan. Stock options are granted at
exercise prices not less than the fair market value of the stock on the date of
the grant. The terms and conditions upon which options become exercisable may
vary among grants; however, option rights expire no later than ten years from
the date of grant.
The SAFECO Agency Stock Purchase Plan of 2000 (Agency Plan) provides for the
issuance of up to 1,000,000 shares of the Corporation's common stock to agents
that meet certain eligibility requirements. Agents meeting the eligibility
requirements can purchase the Corporation's common stock at a discount off the
close price on the purchase day. Common stock issued under the Agency Plan is
held in a custodial account and restricted from sale, transfer or assignment
during the two year restriction period. As of December 31, 2001, 41,826 shares
had been purchased and were held in the custodial account.
At December 31, 2001 there were 3,446,152 shares of common stock reserved for
future options and rights.
SAFECO continues to apply Accounting Principles Board (APB) Opinion 25 in
accounting for its stock options, as allowed under FASB Statement 123. Under APB
25, because the exercise price of SAFECO's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized. If compensation expense had been recorded using the fair
value method described in Statement 123, SAFECO would have recognized additional
expense in its Consolidated Statements of Income (Loss) by $4.4, $3.8 and $3.5
in 2001, 2000 and 1999, respectively. Basic and diluted income (loss) per share
would also have been reduced by $0.03 for each of these years. The
weighted-average fair value (at grant date) of options granted in 2001, 2000 and
1999 was $7, $6 and $9 per share, respectively. The fair values were estimated
using the Black-Scholes option pricing model, with the following assumptions for
2001: risk-free interest rate of 4.5%, dividend yield of 2.5%, volatility factor
of 35% and expected life of 4 years.
Changes in stock options for the three years ended December 31, 2001 are as
follows:
Options Outstanding
--------------------------
Weighted
Average Price
Shares Per Share
--------- -------------
Balance December 31, 1998 1,947,317 $ 33.85
Granted 697,200 34.72
Exercised (208,954) 23.43
Canceled (37,625) 41.73
--------- -------
Balance December 31, 1999 2,397,938 34.89
Granted 726,000 20.47
Exercised (61,009) 20.11
Canceled (145,250) 33.14
--------- -------
Balance December 31, 2000 2,917,679 31.69
Granted 894,750 26.45
Exercised (317,293) 23.74
Canceled (710,902) 32.33
--------- -------
Balance December 31, 2001 2,784,234 $ 30.75
========= =======
FS-28
Information about stock options outstanding and exercisable at December 31, 2001
are as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------------
Remaining Weighted- Weighted
Contractual Average Price Average Price
RANGE OF EXERCISE PRICES Shares Life (Years) Per Share Shares Per Share
--------- ------------ ------------- --------- -------------
$ 20.00 - 25.56 911,160 8.1 $ 21.88 230,610 $ 20.99
26.75 - 31.75 899,368 7.1 27.97 274,118 28.72
$ 32.13 - 51.38 973,706 5.2 41.62 834,781 41.59
--------- --- ------- --------- -------
Total 2,784,234 6.8 $ 30.75 1,339,509 $ 35.41
========= === ======= ========= =======
RSR's provide for the holder to receive a stated number of share rights if the
holder remains employed for the stated number of years. PSR's provide for the
holder to receive a stated number of share rights if the holder attains certain
specified performance goals within a stated performance cycle. Performance goals
may include net income, return on equity, stock price appreciation and/or other
criteria.
Matured RSR's and earned PSR's are issued in stock and/or paid in cash at the
option of the holder based on the fair market value of SAFECO's stock on the
issue/payment date. During 2001, 2000 and 1999, $1.4, ($0.6) and $0.8,
respectively, were charged to operations for the compensation element of
restricted and performance stock rights. These expense amounts are determined
based on variable plan accounting under APB 25. RSR's compensation expense is
charged to operations over the vesting period and PSR's compensation expense is
charged to operations when it is probable the performance goal will be achieved.
Changes in RSR's and PSR's for the three years ended December 31, 2001 are as
follows:
Share Rights
------------
Balance December 31, 1998 188,383
Awarded 114,725
Matured (39,534)
Canceled (1,250)
--------
Balance December 31, 1999 262,324
Awarded 130,242
Matured (41,581)
Canceled (95,041)
--------
Balance December 31, 2000 255,944
Awarded 110,591
Matured (29,929)
Canceled (167,494)
--------
Balance December 31, 2001 169,112
========
NOTE 10 - COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment under
leases which expire at various dates through 2018. These leases are accounted
for as operating leases. Minimum rental commitments for leases in effect at
December 31, 2001 are as follows:
YEAR PAYABLE Minimum Rentals
---------------
2002 $ 49.2
2003 50.6
2004 45.9
2005 41.4
2006 38.6
2007 and Thereafter 169.7
-------
Total $ 395.4
=======
FS-29
In addition, SAFECO has commitments under real estate construction and
development contracts that total approximately $44.4 at December 31, 2001.
Approximately $38.0 of this amount is expected to be paid in 2002.
The amount of rent charged to operations was $45.0, $43.0 and $36.0 for 2001,
2000 and 1999, respectively.
For information on environmental, asbestos and other toxic claim liabilities,
see Note 4. For information on reinsurance, see Note 5.
NOTE 11 - DISCONTINUED OPERATIONS
SAFECO Credit Company, Inc.
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.
On July 24, 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 for total cash proceeds of $918.9, which included the
repayment of loans to SAFECO Credit and settlement of other affiliated
transactions between SAFECO Credit and the Corporation totaling $668.9. The sale
resulted in net proceeds of $250.0 and a pretax gain of $97.0. The after-tax
gain on the sale of $54.0 is reported in the Consolidated Statements of 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 Corporation and SAFECO Credit.
SAFECO Properties, Inc.
In 1998, SAFECO decided to divest itself of its real estate operations (SAFECO
Properties) and most of the assets were sold in 1999. A few properties remain
and most are expected to be sold in 2002. Income from the real estate subsidiary
will continue to decline as the remaining assets are sold. At December 31, 2001,
investment real estate held by SAFECO Properties totaled $42.9, less than one
percent of SAFECO's consolidated investments. Because the assets and operations
are not material to the consolidated financial statements, they have not been
reclassified as discontinued operations. In the Consolidated Statements of
Income (Loss), revenues for SAFECO Properties are included in Other Revenues and
related expenses are included in Other Expenses. For 2001, 2000 and 1999, these
revenues totaled $10.4, $20.5 and $39.3 and expenses totaled $9.9, $16.7 and
$32.1, respectively. SAFECO Properties' income before realized gains and income
taxes is included in the Corporate segment and totaled $0.5, $3.8 and $7.2, for
2001, 2000 and 1999, respectively.
NOTE 12 - RESTRUCTURING CHARGES
In July 2001, SAFECO 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 2001 SAFECO's total employment has
declined by approximately 900, excluding the reduction due to the sale of SAFECO
Credit. Positions being eliminated are in the corporate headquarters and
regional property and casualty operations.
Restructuring charges and period costs associated with these changes are
expected to total approximately $65 through 2002. This includes the pretax
charge against earnings this year of $44.3 ($28.8 after tax). The remaining
costs are expected to be incurred in 2002. 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. These 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 exit 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.
FS-30
The activity related to the accrued restructuring charges at December 31, 2001
was as follows:
Lease
Termination
Severance and Other
DECEMBER 31, 2001 Costs Costs Total
--------- ----------- ------
Accrual $ 13.0 $ 5.0 $ 18.0
Amounts Paid (8.0) (1.5) (9.5)
------- ------ ------
Liability at End of Year $ 5.0 $ 3.5 $ 8.5
======= ====== ======
Other related restructuring charges that have been expensed as incurred totaled
$26.3. These costs are primarily comprised of employee transfer costs and
employee stay bonuses.
NOTE 13 - DIVIDEND RESTRICTIONS
The Corporation's insurance subsidiaries are restricted by state regulations as
to the aggregate amount of dividends they may pay in any consecutive
twelve-month period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with 30 days' prior written notice
within certain limits. The limits are generally based on the greater of 10% of
the prior year statutory surplus or prior year statutory net income. Dividends
in excess of the prescribed limits or the subsidiary's earned surplus require
formal state insurance commission approval. Based on statutory limits as of
December 31, 2001, the Corporation is able to receive approximately $470.0 in
dividends from its subsidiaries in 2002 without obtaining prior regulatory
approval.
NOTE 14 - STATUTORY FINANCIAL INFORMATION
State insurance regulatory authorities require the 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). Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as a variety of publications of the NAIC. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance with
accounting principles generally accepted in the United States primarily because
policy acquisition costs are expensed when incurred, life insurance reserves are
based on different assumptions and income tax expense reflects only taxes paid
or currently payable.
FS-31
Statutory net income (loss) and equity are as follows:
STATUTORY NET INCOME (LOSS)
YEAR ENDED DECEMBER 31 2001 2000 1999
------- ------ ------
Property & Casualty $(218.2) $155.2 $296.6
Life 132.0 85.6 114.0
======= ====== ======
STATUTORY SHAREHOLDER'S EQUITY
DECEMBER 31 2001 2000
-------- --------
Property & Casualty $2,266.9 $2,286.8
Life 782.9 706.0
======== ========
The NAIC revised the Accounting Practices and Procedures Manual in a process
referred to as Codification effective January 1, 2001. The domiciliary states of
the Corporation's insurance subsidiaries have adopted the provisions of the
revised manual. The revised manual has changed, to some extent, prescribed
statutory accounting practices and resulted in changes to the accounting
practices that the Corporation's insurance subsidiaries use to prepare their
statutory-basis financial statements. Upon adoption, SAFECO's property and
casualty insurance companies statutory surplus increased by $207.4 and the life
insurance companies by $45.3. Nearly all of the increase in the amount of
statutory surplus relates to the recording of deferred tax assets that were not
recorded in the statutory basis financial statements under the prior statutory
accounting guidance.
NOTE 15 - SEGMENT INFORMATION
The operating segments presented are based on SAFECO's internal reporting
structure and how management analyzes the operating results. These segments
generally represent groups of related products.
Property & Casualty's 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
Specialty. 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 operating results for Business Insurance and Commercial Insurance
will be combined beginning in 2002.
Life & Investments operations include six reportable segments: Retirement
Services, Income Annuities, Group, Individual, Asset Management and Other.
Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments operating
results. Prior year information has been reclassified to conform to the current
year presentation.
The Credit operation provided loans and equipment financing and leasing to
commercial business, insurance agents and affiliated companies. As disclosed in
Note 11, 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.
The Corporate segment includes operating results for the Parent Company, SAFECO
Financial Products, SAFECO Properties and intercompany transaction eliminations.
FS-32
NOTE 15 - SEGMENT INFORMATION (continued)
Underwriting Net Pretax Realized Net
Gain Investment Income Gain Income Total
2001 Revenues* (Loss) Income* (Loss)+ (Loss)* (Loss) Assets
- ---- --------- ------------ ---------- --------- -------- --------- ---------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $1,767.4 $ (80.5) $ 127.3 $ 46.8 $ 43.0 $3,149.3
Homeowners 740.6 (205.6) 56.5 (149.1) 20.0 1,444.8
Specialty 201.6 3.9 19.3 23.2 8.1 482.9
Commercial Lines
Business Insurance 1,033.0 (163.2) 126.5 (36.7) 35.1 3,334.5
Commercial
Insurance 627.7 (276.2) 93.1 (183.1) 22.5 2,328.8
Surety 95.6 2.4 9.9 12.3 6.0 275.7
Other 6.9 (118.3) 25.1 (104.2) 4.1 214.3
Write-off of Goodwill -- -- -- (1,165.2) -- --
Restructuring Charges -- -- -- (44.3) -- --
-------- -------- -------- --------- -------- ---------
Total 4,472.8 $ (837.5) 457.7 (1,600.3) 138.8 $(1,024.3) 11,230.3
-------- -------- -------- --------- -------- ---------
LIFE & INVESTMENTS+
Retirement Services 27.9 339.2 15.6 (29.2) 6,252.4
Income Annuities 0.4 529.6 47.8 10.6 6,832.6
Group 332.5 3.7 26.6 (1.6) 172.5
Individual 141.1 226.7 22.8 (7.4) 3,875.5
Asset Management 33.6 2.3 8.0 -- 69.3
Other 101.5 78.8 76.7 5.1 1,239.1
Write-off of Goodwill -- -- (48.9) -- --
-------- -------- --------- -------- ---------
Total 637.0 1,180.3 148.6 (22.5) 72.5 18,441.4
-------- -------- --------- -------- ---------
Discontinued Credit
Operations -- -- -- -- 4.2 --
Gain on Sale of Credit
Operations -- -- -- -- 54.0 --
Cumulative Effect of
Change in Accounting
Principle -- -- -- -- (2.1) --
Corporate 10.4 11.3 (54.6) (23.3) (93.5) 420.8
-------- -------- --------- -------- -------- ---------
Consolidated Totals $5,120.2 $1,649.3 $(1,506.3) $ 93.0 $ (989.2) $30,092.5
======== ======== ======== ========= ======== ======== =========
* Revenues combined with Net Investment Income and Realized Gain equal Total
Revenue on the Consolidated Statements of Income (Loss).
+ Earnings before realized gains (losses), distributions on capital securities
and income taxes. This is a standard industry measurement and is used by
management as the key measurement of segment profit or loss. It is presented
as a supplement to net income as a measure of profitability. Property and
Casualty's pretax income amounts include goodwill amortization expense of
$11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.
+ Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results.
FS-33
NOTE 15 - SEGMENT INFORMATION (continued)
Underwriting Net Pretax Realized Net
Gain Investment Income Gain Income Total
2000 Revenues* (Loss) Income* (Loss)+ (Loss)* (Loss) Assets
- ---- --------- ------------ ---------- ------- -------- ------ --------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $1,723.6 $ (123.0) $ 125.3 $ 2.3 $ 45.9 $3,146.0
Homeowners 729.8 (116.7) 52.9 (63.8) 21.5 1,382.7
Specialty 186.7 18.2 16.3 34.5 8.2 419.8
Commercial Lines
Business Insurance 1,171.7 (155.3) 145.1 (10.2) 43.6 3,814.5
Commercial
Insurance 683.4 (155.7) 98.5 (57.2) 26.6 2,492.0
Surety 61.6 11.7 3.6 15.3 4.2 138.0
Other 6.6 (1.1) 18.8 (26.3) 4.4 405.2
-------- -------- -------- ------- ------ --------
Total 4,563.4 $ (521.9) 460.5 (105.4) 154.4 $ 89.5 11,798.2
-------- -------- -------- ------- ------ --------
LIFE & INVESTMENTS+
Retirement Services 36.8 392.5 30.0 (25.4) 6,169.1
Income Annuities 1.2 495.8 26.4 17.5 6,605.7
Group 313.6 2.0 4.3 (3.5) 192.2
Individual 133.8 206.9 24.6 (3.2) 3,615.0
Asset Management 37.0 5.9 13.0 -- 68.7
Other 95.8 78.4 70.2 (1.6) 1,192.0
-------- -------- ------- ------ --------
Total 618.2 1,181.5 168.5 (16.2) 97.2 17,842.7
-------- -------- ------- ------ --------
Discontinued Credit
Operations -- -- -- -- 12.7 481.2
Corporate 20.5 (8.5) (63.2) 1.3 (84.8) 135.6
-------- -------- ------- ------ ------ --------
Consolidated Totals $5,202.1 $1,633.5 $ (0.1) $139.5 $114.6 $30,257.7
======== ======== ======== ======= ====== ====== =========
* Revenues combined with Net Investment Income and Realized Gain equal Total
Revenue on the Consolidated Statements of Income (Loss).
+ Earnings before realized gains (losses), distributions on capital securities
and income taxes. This is a standard industry measurement and is used by
management as the key measurement of segment profit or loss. It is presented
as a supplement to net income as a measure of profitability. Property and
Casualty's pretax income amounts include goodwill amortization expense of
$11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.
+ Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results. Prior year information has been reclassified to conform to
the current year presentation.
FS-34
NOTE 15 - SEGMENT INFORMATION (continued)
Underwriting Net Pretax Realized Net
Gain Investment Income Gain Income Total
1999 Revenues* (Loss) Income* (Loss)+ (Loss)* (Loss) Assets
- ---- --------- ------------ ---------- -------- -------- -------- ----------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $1,725.6 $ (63.3) $ 131.0 $ 67.7 $ 27.2 $ 3,238.9
Homeowners 708.3 (48.2) 51.9 3.7 12.4 1,345.6
Specialty 177.7 20.6 15.8 36.4 4.6 402.0
Commercial Lines
Business Insurance 1,017.6 (183.4) 141.7 (41.7) 22.4 3,705.8
Commercial
Insurance 686.4 (107.6) 97.2 (10.4) 15.7 2,434.6
Surety 59.4 15.2 3.0 18.2 2.4 99.8
Other 7.9 -- 21.7 (22.1) 2.6 486.7
-------- -------- -------- -------- -------- ----------
Total 4,382.9 $ (366.7) 462.3 51.8 87.3 $ 172.1 11,713.4
-------- -------- -------- -------- -------- ----------
LIFE & INVESTMENTS+
Retirement Services 32.9 410.9 52.6 (1.0) 7,204.8
Income Annuities 1.1 486.6 42.2 (6.0) 6,011.3
Group 193.9 1.8 (19.4) 0.3 104.8
Individual 119.8 144.7 30.1 (1.9) 2,959.7
Asset Management 41.7 2.6 13.6 -- 73.7
Other 84.5 76.6 76.0 1.7 1,018.7
-------- -------- -------- -------- ----------
Total 473.9 1,123.2 195.1 (6.9) 122.3 17,373.0
-------- -------- -------- -------- ----------
Discontinued Credit
Operations -- -- -- -- 14.5 173.8
Corporate 39.2 2.8 (55.0) 37.3 (56.7) (36.6)
-------- -------- -------- -------- -------- ----------
Consolidated Totals $4,896.0 $1,588.3 $ 191.9 $ 117.7 $ 252.2 $29,223.6
======== ======== ======== ======== ======== ======== ==========
* Revenues combined with Net Investment Income and Realized Gain equal Total
Revenue on the Consolidated Statements of Income (Loss).
+ Earnings before realized gains (losses), distributions on capital securities
and income taxes. This is a standard industry measurement and is used by
management as the key measurement of segment profit or loss. It is presented
as a supplement to net income as a measure of profitability. Property and
Casualty's pretax income amounts include goodwill amortization expense of
$11.0, $44.0 and $43.8 for 2001, 2000 and 1999, respectively.
+ Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results. Prior year information has been reclassified to conform to
the current year presentation.
FS-35
NOTE 15 - SEGMENT INFORMATION (continued)
COMBINED STATEMENTS OF INCOME (LOSS)
Property & Casualty Operations*
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2001 2000 1999
---------- --------- ---------
Earned Premiums $ 4,472.8 $ 4,563.4 $ 4,382.9
---------- --------- ---------
Losses and Expenses
Losses and Loss Adjustment Expenses 3,964.2 3,770.0 3,431.8
Commissions 709.8 689.1 714.1
Personnel Costs 345.9 342.5 322.6
Taxes Other than Payroll and Income Taxes 113.3 116.3 123.2
Dividends to Policyholders 5.5 9.5 10.5
Other Operating Expenses 182.3 144.6 164.7
Amortization of Deferred Policy Acquisition Costs 792.2 796.6 793.0
Deferral of Policy Acquisition Costs (802.9) (783.3) (810.3)
---------- --------- ---------
Total 5,310.3 5,085.3 4,749.6
---------- --------- ---------
Underwriting Loss (837.5) (521.9) (366.7)
Net Investment Income 457.7 460.5 462.3
Goodwill Amortization (11.0) (44.0) (43.8)
Write-off of Goodwill+ (1,165.2) -- --
Restructuring Charges (44.3) -- --
---------- --------- ---------
Income (Loss) Before Realized Gain and Income Taxes+ (1,600.3) (105.4) 51.8
Realized Gain from Security Investments Before Income Taxes 138.8 154.4 87.3
---------- --------- ---------
Income (Loss) Before Income Taxes (1,461.5) 49.0 139.1
Benefit for Income Taxes
(Including tax provision on realized gain: $47.8; $54.3; $30.0) (437.2) (40.5) (33.0)
---------- --------- ---------
Net Income (Loss) $ (1,024.3) $ 89.5 $ 172.1
========== ========= =========
* SAFECO Insurance Company of America/General Insurance Company of America/
First National Insurance Company of America/SAFECO National Insurance
Company/SAFECO Insurance Company of Illinois/SAFECO Insurance Company of
Oregon/SAFECO Management Corporation/SAFECO Surplus Lines Insurance
Company/SAFECO Insurance Company of Pennsylvania/Insurance Company of
Illinois/SAFECO Lloyds Insurance Company/American States Insurance
Company/American Economy Insurance Company/American States Preferred
Insurance Company/American States Insurance Company of Texas/American
States Lloyds Insurance Company/F.B. Beattie & Company, Inc./SAFECO
Financial Institution Solutions, Inc./R.F. Bailey Holdings, Ltd./SAFECO
UK, Ltd.
+ In 2001, SAFECO changed its method of assessing recoverability of goodwill
from an undiscounted cash flow approach to the market value approach which
resulted in the write-off of goodwill in the amount of $1,152.1 pretax. An
additional pretax write-off of $13.1 occurred during the fourth quarter.
+ Income (Loss) 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.
FS-36
NOTE 15 - SEGMENT INFORMATION (continued)
COMBINED STATEMENTS OF INCOME
Life & Investments Operations*++
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2001 2000 1999
-------- -------- --------
Premiums and Other Revenue $ 637.0 $ 618.2 $ 473.9
Net Investment Income 1,180.3 1,181.5 1,123.2
-------- -------- --------
Total 1,817.3 1,799.7 1,597.1
-------- -------- --------
Benefits and Expenses
Policy Benefits 1,234.9 1,232.2 1,072.2
Commissions 108.4 105.8 82.2
Personnel Costs 150.5 142.3 125.4
Taxes Other than Payroll and Income Taxes 13.6 24.4 26.3
Other Operating Expenses 137.1 141.0 105.3
Amortization of Deferred Policy Acquisition Costs 32.3 37.6 47.1
Deferral of Policy Acquisition Costs (57.0) (52.1) (56.5)
Write-off of Goodwill+ 48.9 -- --
-------- -------- --------
Total 1,668.7 1,631.2 1,402.0
-------- -------- --------
Income Before Realized Investment Loss and Income Taxes+ 148.6 168.5 195.1
Realized Loss from Security Investments Before Income Taxes (22.5) (16.2) (6.9)
-------- -------- --------
Income Before Income Taxes 126.1 152.3 188.2
Provision for Income Taxes
(Including tax benefit on realized loss: $8.1; $5.7; $2.3) 51.9 55.1 65.9
-------- -------- --------
Income before Cumulative Effect of Change in Accounting Principle 74.2 97.2 122.3
Cumulative Effect of Change in Accounting Principle (1.7) -- --
-------- -------- --------
Net Income $ 72.5 $ 97.2 $ 122.3
======== ======== ========
* SAFECO Life Insurance Company/First SAFECO National Life Insurance Company
of New York/SAFECO National Life Insurance Company/American States Life
Insurance Company/Medical Risk Managers, Inc./SAFECO Administrative
Services, Inc./Employee Benefit Claims of Wisconsin, Inc./Wisconsin
Pension and Group Services, Inc./SAFECO Assigned Benefits Service Company/
SAFECO Asset Management Company/SAFECO Securities, Inc./SAFECO Services
Corporation/SAFECO Trust Company/SAFECO Investment Services, Inc./
Talbot Financial Corporation.
+ In 2001, SAFECO changed its method of assessing recoverability of goodwill
from an undiscounted cash flow approach to the market value approach which
resulted in the write-off of goodwill in the amount of $48.9 pretax.
+ Income Before Realized Loss 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.
++ Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results. Prior year information has been reclassified to conform to
the current year presentation.
FS-37
NOTE 16 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
First Second Third Fourth
Quarter Quarter Quarter Quarter Annual
--------- --------- --------- --------- ---------
REVENUES
2001 $ 1,732.9 $ 1,715.7 $ 1,708.1 $ 1,705.8 $ 6,862.5
2000 1,730.0 1,734.3 1,769.9 1,740.9 6,975.1
1999 1,639.3 1,639.2 1,642.0 1,681.5 6,602.0
NET INCOME (LOSS)
2001* $ (882.8) $ (14.4) $ (100.6) $ 8.6 $ (989.2)
2000 29.8 29.1 45.5 10.2 114.6
1999 118.5 73.1 16.1 44.5 252.2
NET INCOME (LOSS) PER SHARE
2001* $ (6.91) $ (.11) $ (.79) $ .06 $ (7.75)
2000 .23 .23 .36 .08 .90
1999 .87 .54 .12 .34 1.90
========= ========= ========= ========= =========
* Included in the 2001 income (loss) amounts are the following:
First quarter - goodwill write-off of $1,201.0 ($917.0 after tax, $7.17 per
share)
Third quarter - Property & Casualty's loss reserve strengthening of $240.0
($156.0 after tax, $1.22 per share) and restructuring charges of $31.8
($20.7 after tax, $0.16 per share)
Fourth quarter - goodwill write-off of $13.1 ($8.5 after tax, $0.07 per
share) and restructuring charges of $12.5 ($8.1 after tax, $0.06 per
share)
FS-38
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF INCOME (LOSS) - SUPPLEMENTAL CONSOLIDATING INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Property & Life &
YEAR ENDED DECEMBER 31, 2001 Casualty Investments Corporate Consolidated
---------- ----------- --------- ------------
(In Millions)
REVENUES
Insurance
Property & Casualty Earned Premiums $ 4,472.8 $ -- $ -- $ 4,472.8
Life & Investments Premiums & Other Revenues -- 637.0 -- 637.0
---------- --------- --------- ---------
Total 4,472.8 637.0 -- 5,109.8
Other -- -- 10.4 10.4
Net Investment Income 457.7 1,180.3 11.3 1,649.3
Realized Investment Gain (Loss) 138.8 (22.5) (23.3) 93.0
---------- --------- --------- ---------
Total 5,069.3 1,794.8 (1.6) 6,862.5
---------- --------- --------- ---------
EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits 3,964.2 1,234.9 -- 5,199.1
Commissions 709.8 108.4 -- 818.2
Personnel Costs 345.9 150.5 -- 496.4
Interest -- 2.1 63.6 65.7
Goodwill and Intangibles Amortization 11.0 15.7 -- 26.7
Other 301.1 132.9 12.7 446.7
Amortization of Deferred Policy Acquisition Costs 792.2 32.3 -- 824.5
Deferral of Policy Acquisition Costs (802.9) (57.0) -- (859.9)
Write-off of Goodwill 1,165.2 48.9 -- 1,214.1
Restructuring Charges 44.3 -- -- 44.3
---------- --------- --------- ---------
Total 6,530.8 1,668.7 76.3 8,275.8
---------- --------- --------- ---------
Income (Loss) from Continuing Operations Before
Income Taxes (1,461.5) 126.1 (77.9) (1,413.3)
---------- --------- --------- ---------
Provision (Benefit) for Income Taxes
Current (69.5) 82.9 (21.0) (7.6)
Deferred (367.7) (31.0) (6.5) (405.2)
---------- --------- --------- ---------
Total (437.2) 51.9 (27.5) (412.8)
---------- --------- --------- ---------
Income (Loss) from Continuing Operations before
Distributions on Capital Securities (1,024.3) 74.2 (50.4) (1,000.5)
Distributions on Capital Securities, Net of Tax -- -- (44.8) (44.8)
---------- --------- --------- ---------
Income (Loss) from Continuing Operations (1,024.3) 74.2 (95.2) (1,045.3)
---------- --------- --------- ---------
Income from Discontinued Credit Operations, Net of Tax -- -- 4.2 4.2
Gain from Sale of Credit Operations, Net of Tax -- -- 54.0 54.0
---------- --------- --------- ---------
Total Income from Discontinued Operations -- -- 58.2 58.2
---------- --------- --------- ---------
Income (Loss) before Cumulative Effect of Change
in Accounting Principle (1,024.3) 74.2 (37.0) (987.1)
Cumulative Effect of Change in Accounting
Principle, Net of Tax -- (1.7) (0.4) (2.1)
---------- --------- --------- ---------
Net Income (Loss) $ (1,024.3) $ 72.5 $ (37.4) $ (989.2)
========== ========= ========= =========
FS-39
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
BALANCE SHEETS - SUPPLEMENTAL CONSOLIDATING INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Property & Life &
DECEMBER 31, 2001 Casualty Investments Corporate Consolidated
(In Millions) ---------- ----------- --------- ------------
ASSETS
Investments
Fixed Maturities Available-for-Sale, at Fair Value $ 6,520.1 $14,877.8 $ 46.2 $21,444.1
Marketable Equity Securities, at Fair Value 1,482.6 67.8 46.0 1,596.4
Mortgage Loans 61.6 946.7 (84.1) 924.2
Other Investment Assets 38.8 132.0 66.1 236.9
Short-Term Investments 354.0 262.4 56.5 672.9
---------- --------- --------- ---------
Total Investments 8,457.1 16,286.7 130.7 24,874.5
Cash 173.2 88.7 7.4 269.3
Accrued Investment Income 100.8 220.5 2.5 323.8
Premiums and Service Fees Receivable 945.2 27.8 -- 973.0
Other Notes and Accounts Receivable 4.3 52.4 106.7 163.4
Deferred Income Tax Recoverable 336.5 -- (17.5) 319.0
Reinsurance Recoverables 433.1 90.1 -- 523.2
Deferred Policy Acquisition Costs 322.7 304.1 -- 626.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 327.6 5.1 219.3 552.0
Goodwill and Intangibles (At cost less accumulated
amortization) 6.0 89.0 -- 95.0
Other Assets 123.8 68.9 (28.3) 164.4
Separate Account Assets -- 1,208.1 -- 1,208.1
---------- --------- --------- ---------
Total Assets $ 11,230.3 $18,441.4 $ 420.8 $30,092.5
========== ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expenses $ 5,053.7 $ 64.7 $ -- $ 5,118.4
Life Policy Liabilities -- 327.1 -- 327.1
Unearned Premiums 1,772.9 9.3 -- 1,782.2
Funds Held Under Deposit Contracts -- 14,624.2 -- 14,624.2
Debt
Commercial Paper -- -- 299.0 299.0
7.875% Medium-Term Notes Due 2003 -- -- 323.0 323.0
7.875% Notes Due 2005 -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- 200.0 200.0
Other -- 15.6 59.0 74.6
Other Liabilities 955.2 305.0 162.8 1,423.0
Income Taxes
Current Income Taxes 6.4 4.2 24.3 34.9
Deferred Income Taxes -- 96.6 (96.6) --
Separate Account Liabilities -- 1,208.1 -- 1,208.1
---------- --------- --------- ---------
Total Liabilities 7,788.2 16,654.8 1,171.5 25,614.5
---------- --------- --------- ---------
Capital Securities -- -- 843.4 843.4
---------- --------- --------- ---------
Common Stock 37.9 7.5 796.5 841.9
Additional Paid-in Capital 3,269.1 319.2 (3,588.3) --
Retained Earnings (495.2) 1,176.0 1,195.1 1,875.9
Accumulated Other Comprehensive Income, Net of Tax 630.3 283.9 2.6 916.8
---------- --------- --------- ---------
Total Shareholders' Equity 3,442.1 1,786.6 (1,594.1) 3,634.6
---------- --------- --------- ---------
Total Liabilities and Shareholders' Equity $ 11,230.3 $18,441.4 $ 420.8 $30,092.5
========== ========= ========= =========
FS-40
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
BALANCE SHEETS - SUPPLEMENTAL CONSOLIDATING INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Property & Life &
DECEMBER 31, 2000 Casualty Investments Corporate Consolidated
- ----------------- ---------- ----------- --------- ------------
(In Millions)
ASSETS
Investments
Fixed Maturities Available-for-Sale, at Fair Value $ 6,347.4 $14,420.0 $ 62.8 $20,830.2
Marketable Equity Securities, at Fair Value 1,695.0 57.9 62.5 1,815.4
Mortgage Loans 58.9 848.1 (84.0) 823.0
Other Investment Assets 16.6 95.2 48.5 160.3
Short-Term Investments 172.6 154.6 (144.9) 182.3
--------- --------- --------- ---------
Total Investments 8,290.5 15,575.8 (55.1) 23,811.2
Cash 134.0 51.8 0.5 186.3
Accrued Investment Income 101.8 224.8 1.2 327.8
Premiums and Service Fees Receivable 993.9 68.4 0.7 1,063.0
Other Notes and Accounts Receivable -- 25.1 12.5 37.6
Reinsurance Recoverables 362.5 99.2 -- 461.7
Deferred Policy Acquisition Costs 312.1 293.3 -- 605.4
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 258.2 6.0 175.9 440.1
Goodwill and Intangibles (At cost less accumulated
amortization) 1,163.1 144.3 -- 1,307.4
Other Assets 182.1 78.9 (0.1) 260.9
Net Assets of Discontinued Credit Operations -- -- 481.2 481.2
Separate Account Assets -- 1,275.1 -- 1,275.1
--------- --------- --------- ---------
Total Assets $11,798.2 $17,842.7 $ 616.8 $30,257.7
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expenses $ 4,612.7 $ 74.2 $ -- $ 4,686.9
Life Policy Liabilities -- 342.1 -- 342.1
Unearned Premiums 1,826.9 9.6 -- 1,836.5
Funds Held Under Deposit Contracts -- 14,085.7 -- 14,085.7
Debt
Commercial Paper -- -- 349.8 349.8
7.875% Medium-Term Notes Due 2003 -- -- 300.0 300.0
7.875% Notes Due 2005 -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- 200.0 200.0
Other -- 21.5 59.2 80.7
Other Liabilities 836.1 368.1 64.9 1,269.1
Income Taxes
Current Income Taxes (10.7) 36.5 -- 25.8
Deferred Income Taxes 132.7 13.6 (79.1) 67.2
Separate Account Liabilities -- 1,275.1 -- 1,275.1
--------- --------- --------- ---------
Total Liabilities 7,397.7 16,226.4 1,094.8 24,718.9
--------- --------- --------- ---------
Capital Securities -- -- 843.0 843.0
--------- --------- --------- ---------
Common Stock 37.9 7.5 789.1 834.5
Additional Paid-in Capital 3,000.5 319.2 (3,319.7) --
Retained Earnings 543.5 1,219.0 1,203.9 2,966.4
Accumulated Other Comprehensive Income, Net of Tax 818.6 70.6 5.7 894.9
--------- --------- --------- ---------
Total Shareholders' Equity 4,400.5 1,616.3 (1,321.0) 4,695.8
--------- --------- --------- ---------
Total Liabilities and Shareholders' Equity $11,798.2 $17,842.7 $ 616.8 $30,257.7
========= ========= ========= =========
FS-41
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS - SUPPLEMENTAL CONSOLIDATING INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
Property & Life &
YEAR ENDED DECEMBER 31, 2001 Casualty Investments Corporate Consolidated
- ---------------------------- ---------- ----------- --------- ------------
(In Millions)
OPERATING ACTIVITIES
Insurance Premiums Received $ 4,489.9 $ 383.9 $ -- $ 4,873.8
Dividends and Interest Received 462.6 1,067.0 17.5 1,547.1
Other Operating Receipts -- 178.7 11.5 190.2
Insurance Claims and Policy Benefits Paid (3,574.9) (499.6) -- (4,074.5)
Underwriting, Acquisition and Insurance Operating Costs
Paid (1,426.5) (305.4) (19.2) (1,751.1)
Interest Paid and Distributions on Capital Securities -- (2.0) (125.1) (127.1)
Other Operating Costs Paid -- (97.0) 8.7 (88.3)
Income Taxes Refunded (Paid) 85.9 (110.4) (16.8) (41.3)
---------- --------- --------- ---------
Net Cash Provided by (Used in) Operating Activities 37.0 615.2 (123.4) 528.8
---------- --------- --------- ---------
INVESTING ACTIVITIES
Purchases of
Fixed Maturities (1,107.0) (2,867.3) (14.2) (3,988.5)
Equities (329.7) (21.4) (13.5) (364.6)
Other Investment Assets (24.8) (266.2) (10.2) (301.2)
Maturities of Fixed Maturities 232.1 1,211.6 -- 1,443.7
Sales of
Fixed Maturities 683.1 1,676.5 58.4 2,418.0
Equities 398.9 11.1 27.6 437.6
Other Investment Assets 90.0 154.4 13.2 257.6
Net Increase in Short-Term Investments (90.5) (73.4) (272.2) (436.1)
Proceeds from Sale of Credit Operations -- -- 250.0 250.0
Other (71.6) (0.6) (3.3) (75.5)
---------- --------- --------- ---------
Net Cash Used in Investing Activities (219.5) (175.3) 35.8 (359.0)
---------- --------- --------- ---------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,051.1 -- 1,051.1
Return of Funds Held under Deposit Contracts -- (1,301.1) -- (1,301.1)
Repayment of Notes and Mortgage Borrowings -- (6.0) (0.2) (6.2)
Net Proceeds from (Repayment of) Short-Term Borrowings -- 4.2 (50.8) (46.6)
Common Stock Reacquired -- -- (8.1) (8.1)
Dividends Paid to Shareholders (14.4) (114.8) 11.1 (118.1)
Capital Contribution 254.1 -- (254.1) --
Other (18.0) (36.4) 68.4 14.0
---------- --------- --------- ---------
Net Cash Provided by (Used in) Financing Activities 221.7 (403.0) (233.7) (415.0)
---------- --------- --------- ---------
Cash Provided by Discontinued Credit Operations -- -- 328.2 328.2
---------- --------- --------- ---------
Net increase in Cash 39.2 36.9 6.9 83.0
Cash at Beginning of Year 134.0 51.8 0.5 186.3
---------- --------- --------- ---------
Cash at End of Year $ 173.2 $ 88.7 $ 7.4 $ 269.3
========== ========= ========= =========
FS-42
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS - SUPPLEMENTAL CONSOLIDATING INFORMATION -
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
(UNAUDITED)
- --------------------------------------------------------------------------------
Property & Life &
YEAR ENDED DECEMBER 31, 2001 Casualty Investments Corporate Consolidated
- ---------------------------- ---------- ----------- --------- ------------
(In Millions)
Net Income (Loss) $ (1,024.3) $ 72.5 $ (37.4) $ (989.2)
---------- --------- --------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Income from Discontinued Credit Operations, Net of Tax -- -- (4.2) (4.2)
Cumulative Effect of Change in Accounting Principle,
Net of Tax -- 1.7 0.4 2.1
Gain from Sale of Credit Operations, Net of Tax -- -- (54.0) (54.0)
Realized Investment Gain (Loss) (138.8) 22.5 23.3 (93.0)
Amortization and Depreciation 58.4 24.1 4.6 87.1
Amortization of Fixed Maturity Investments (11.8) (50.2) -- (62.0)
Deferred Income Tax Benefit (367.7) (31.0) (6.5) (405.2)
Interest Expense on Deposit Contracts -- 732.0 -- 732.0
Write-off of Goodwill 1,165.2 48.9 -- 1,214.1
Other Adjustments -- (77.0) (2.9) (79.9)
Changes in
Losses and Loss Adjustment Expenses 441.0 (9.5) -- 431.5
Life Policy Liabilities -- (15.0) -- (15.0)
Unearned Premiums (54.0) (0.3) -- (54.3)
Accrued Income Taxes 17.1 (32.3) 24.3 9.1
Accrued Interest on Accrual Bonds -- (42.8) -- (42.8)
Accrued Investment Income 1.0 4.3 (1.3) 4.0
Deferred Policy Acquisition Costs (10.6) (10.8) -- (21.4)
Other Assets and Liabilities (38.5) (21.9) (69.7) (130.1)
---------- --------- --------- ---------
Total Adjustments 1,061.3 542.7 (86.0) 1,518.0
---------- --------- --------- ---------
Net Cash Provided by Operating Activities $ 37.0 $ 615.2 $ (123.4) $ 528.8
========== ========= ========= =========
There were no significant non-cash financing or investing activities for the
years ended December 31, 2001, 2000 and 1999.
FS-43
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
FINANCIAL SCHEDULES
- --------------------------------------------------------------------------------
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES Schedule I
- --------------------------------------------------------------------------------
TYPE OF INVESTMENTS
Cost or Balance
Amortized Fair Sheet
DECEMBER 31, 2001 Cost Value Amount
- ----------------- ---------- --------- ---------
(In Millions)
FIXED MATURITIES
Bonds
U.S. Government & Agencies $ 1,408.1 $ 1,552.3 $ 1,552.3
States and Political Subdivisions 2,887.1 3,142.2 3,142.2
Foreign Governments 290.8 350.4 350.4
Public Utilities 2,083.7 2,088.3 2,088.3
Convertible Bonds 124.1 135.3 135.3
Mortgage-Backed Securities 4,582.3 4,760.1 4,760.1
All Other Corporate Bonds 9,018.4 9,131.3 9,131.3
Redeemable Preferred Stocks 282.6 284.2 284.2
---------- --------- ---------
Total Fixed Maturities(1) 20,677.1 $21,444.1 21,444.1
---------- ========= ---------
EQUITY SECURITIES
Common Stocks
Public Utilities 31.0 $ 71.0 71.0
Banks, Trust and Insurance Companies 46.0 141.4 141.4
Industrial, Miscellaneous and All Other 723.4 1,246.8 1,246.8
Non-Redeemable Preferred Stocks 140.1 137.2 137.2
---------- --------- ---------
Total Equity Securities 940.5 $ 1,596.4 1,596.4
---------- ========= ---------
OTHER
Mortgage Loans on Real Estate(1) 924.2 924.2
Policy Loans 91.0 91.0
Other Investment Assets(1) 104.2 145.9
Short-Term Investments 672.9 672.9
---------- ---------
Total Other 1,792.3 1,834.0
---------- ---------
Total Investments $ 23,409.9 $24,874.5
========== =========
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate (included in other investment assets) that have not produced
income for the last twelve months is less than one percent of the total of
such investments at December 31, 2001.
S-1
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF INCOME (LOSS) Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (Parent Company)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
(In Millions)
REVENUES
Dividends - Nonaffiliates $ 1.5 $ 1.9 $ 2.3
Interest - Affiliates 16.8 20.6 0.9
- Others 1.1 4.9 7.0
Realized Investment Gain (Loss) (13.0) 0.8 (0.5)
---------- --------- ---------
Total 6.4 28.2 9.7
---------- --------- ---------
EXPENSES
Interest (Includes Distributions on Capital Securities) 147.8 157.6 140.9
Other 5.4 8.6 1.1
---------- --------- ---------
Total 153.2 166.2 142.0
---------- --------- ---------
Loss before Income Taxes (146.8) (138.0) (132.3)
Benefit for Income Taxes (Includes provision (benefit)
on realized gain (loss): $(4.6); $0.3; $(0.2)) (52.0) (48.7) (47.0)
---------- --------- ---------
Loss from Continuing Operations (94.8) (89.3) (85.3)
Income from Discontinued Credit Operations, Net of Tax 4.2 -- --
Gain from Sale of Credit Operations, Net of Tax 54.0 -- --
---------- --------- ---------
Loss before Equity in Net Loss of Subsidiaries (36.6) (89.3) (85.3)
Equity in Net Income (Loss) of Subsidiaries (952.6) 203.9 337.5
---------- --------- ---------
Consolidated Net Income (Loss) $ (989.2) $ 114.6 $ 252.2
========== ========= =========
S-2
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONDENSED BALANCE SHEETS Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (Parent Company)
- --------------------------------------------------------------------------------
DECEMBER 31 2001 2000
- ----------- ---------- ---------
(In Millions)
ASSETS
Investments
Stock of Subsidiaries - At Cost Plus Equity in Undistributed Earnings $ 5,330.4 $ 6,226.9
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $4.2; $58.4) 5.5 60.5
Marketable Equity Securities, at Market Value (Cost: $27.8; $54.8) 45.8 62.6
Other Invested Assets 23.0 --
Short-Term Investments 5.5 19.1
---------- ---------
Total Investments 5,410.2 6,369.1
Cash -- 0.1
Notes Receivable from Affiliated Companies -- 300.0
Receivables from Affiliated Companies 222.6 4.9
Income Tax Recoverable - Current -- 2.9
- Deferred 52.5 47.4
Other Assets 13.0 24.4
---------- ---------
Total Assets $ 5,698.3 $ 6,748.8
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Payable $ 48.7 $ 48.7
Payables to Affiliated Companies 3.4 4.1
Other Liabilities 49.8 10.2
Current Income Taxes Payable 22.8 --
Dividends Payable to Shareholders 23.6 47.2
Debt
Commercial Paper 299.0 349.8
Medium-Term Notes Due 2002 50.0 50.0
7.875% Medium-Term Notes Due 2003 323.0 300.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
8.072% Junior Subordinated Debentures (Capital Securities) 843.4 843.0
---------- ---------
Total Liabilities 2,063.7 2,053.0
---------- ---------
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: 6.4; 7.1
Shares Issued and Outstanding: 127.7; 127.6 841.9 834.5
Retained Earnings 1,875.9 2,966.4
Accumulated Other Comprehensive Income, Net of Tax 916.8 894.9
---------- ---------
Total Shareholders' Equity 3,634.6 4,695.8
---------- ---------
Total Liabilities and Shareholders' Equity $ 5,698.3 $ 6,748.8
========== =========
S-3
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (Parent Company)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
(In Millions)
OPERATING ACTIVITIES
Dividends and Interest Received - Affiliates $ 220.3 $ 486.9 $ 761.3
- Others 10.1 6.6 10.4
Interest Paid and Distributions on Capital Securities (147.5) (150.1) (143.4)
Other Operating Costs Paid 6.0 (2.2) (6.8)
Income Taxes Refunded (Paid) (13.4) 6.6 50.0
---------- --------- ---------
Net Cash Provided by Operating Activities 75.5 347.8 671.5
---------- --------- ---------
INVESTING ACTIVITIES
Purchases of
Fixed Maturities (4.1) (14.9) --
Equities (13.6) (93.8) (0.1)
Maturities of Fixed Maturities -- 20.0 19.4
Sales of
Fixed Maturities 58.3 13.2 --
Equities 27.5 63.3 9.7
Funds Loaned to Affiliate -- (300.0) --
Net Decrease in Short-Term Investments 13.6 43.7 19.5
Proceeds from Sale of Credit Operations 250.0 -- --
Funds Repaid by Affiliate 96.1 -- --
Capital Contribution to Subsidiaries (324.1) -- --
Other (9.7) -- --
---------- --------- ---------
Net Cash Provided by (Used in) Investing Activities 94.0 (268.5) 48.5
---------- --------- ---------
FINANCING ACTIVITIES
Proceeds from Medium-Term Notes -- 300.0 --
Net Repayment of Short Term Borrowings (50.8) (159.1) (229.9)
Common Stock Reacquired (8.1) (30.4) (303.1)
Dividends Paid to Shareholders (118.1) (189.4) (192.2)
Other 7.4 (0.4) 5.0
---------- --------- ---------
Net Cash Used in Financing Activities (169.6) (79.3) (720.2)
---------- --------- ---------
Net Decrease in Cash (0.1) -- (0.2)
Cash at Beginning of Year 0.1 0.1 0.3
---------- --------- ---------
Cash at End of Year $ -- $ 0.1 $ 0.1
========== ========= =========
S-4
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS - Schedule II
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT (Parent Company)
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
(In Millions)
Net Income (Loss) $ (989.2) $ 114.6 $ 252.2
---------- --------- ---------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Equity in Net Income (Loss) of Consolidated Subsidiaries 952.6 (203.9) (337.5)
Dividends Received from Consolidated Subsidiaries 207.6 465.1 746.1
Gain from Sale of Credit Operations, Net of Tax (54.0) -- --
Realized Investment (Gain) Loss 13.0 (0.8) 0.5
Deferred Income Tax Benefit (10.2) (50.7) --
Other (0.3) 1.4 1.6
Changes in
Accrued Income Taxes 25.7 8.6 2.6
Interest Payable -- 6.9 (3.1)
Other Assets and Liabilities (69.7) 6.6 9.1
---------- --------- ---------
Total Adjustments 1,064.7 233.2 419.3
---------- --------- ---------
Net Cash Provided by Operating Activities $ 75.5 $ 347.8 $ 671.5
========== ========= =========
There were no significant non-cash financing or investing activities for the
years ended December 31, 2001, 2000 and 1999.
S-5
SAFECO Corporation and Subsidiaries
SUPPLEMENTAL INSURANCE INFORMATION
DECEMBER 31, 2001
- ---------------------------------------------------------------------------------------
(In Millions)
Reserve for
Future Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
SEGMENT Costs Expenses Premiums Payable
----------- ------------- --------- ------------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $ 64.4 $ 1,172.5 $ 465.4
Homeowners 79.8 298.5 406.0
Specialty 24.6 98.3 119.8
Commercial Lines
Business Insurance 87.0 1,439.1 484.5
Commercial Insurance 32.8 1,357.1 194.2
Surety 33.7 57.1 87.6
Other 0.4 631.1 15.4
Write-off of Goodwill -- -- --
Restructuring Charges -- -- --
--------- --------- --------- ---------
Total 322.7 5,053.7 1,772.9
--------- --------- --------- ---------
LIFE & INVESTMENTS*
Retirement Services 120.2 14.7 -- $ 5,174.7
Income Annuities -- -- -- 6,245.3
Group 16.5 142.0 2.3 --
Individual 167.4 235.1 7.0 3,204.2
Asset Management -- -- -- --
Other -- -- -- --
Write-off of Goodwill -- -- -- --
--------- --------- --------- ---------
Total 304.1 391.8 9.3 14,624.2
--------- --------- --------- ---------
Other and Eliminations -- -- -- --
--------- --------- --------- ---------
Consolidated Totals $ 626.8 $ 5,445.5 $ 1,782.2 $14,624.2
========= ========= ========= =========
* Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results.
S-6
- --------------------------------------------------------------------------------
Schedule III
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2001
- --------------------------------------------------------------------------------
Premiums Benefits, Amortization
and Claims, of Deferred
Service Net Losses and Policy Other
Fee Investment Adjustment Acquisition Operating Net Written
Revenues Income Expenses Costs Costs Premiums
--------- ---------- ---------- ------------ --------- -----------
$ 1,767.4 $ 127.3 $ 1,429.2 $ 295.0 $ 123.7 $ 1,795.2
740.6 56.5 724.1 114.0 108.1 743.0
201.6 19.3 130.1 36.1 31.5 204.2
1,033.0 126.5 845.0 185.8 165.4 983.3
627.7 93.1 684.1 115.4 104.4 575.7
95.6 9.9 30.3 42.6 20.3 131.5
6.9 25.1 121.4 3.3 11.5 6.3
-- -- -- -- 1,165.2 --
-- -- -- -- 44.3 --
--------- --------- --------- --------- --------- ---------
4,472.8 457.7 3,964.2 792.2 1,774.4 $ 4,439.2
--------- --------- --------- --------- --------- ---------
27.9 339.2 284.5 17.0 50.0
0.4 529.6 463.9 -- 18.3
332.5 3.7 212.2 5.7 91.7
141.1 226.7 274.3 9.6 61.1
33.6 2.3 -- -- 27.9
101.5 78.8 -- -- 103.6
-- -- -- -- 48.9
--------- --------- --------- --------- ---------
637.0 1,180.3 1,234.9 32.3 401.5
--------- --------- --------- --------- ---------
-- 11.3 -- -- 76.3
--------- --------- --------- --------- ---------
$ 5,109.8 $ 1,649.3 $ 5,199.1 $ 824.5 $ 2,252.2
========= ========= ========= ========= =========
S-7
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL INSURANCE INFORMATION (continued)
- --------------------------------------------------------------------------------
DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(In Millions)
Reserve for
Future Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
SEGMENT Costs Expenses Premiums Payable
- ------- ----------- ------------- --------- ------------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $ 61.5 $ 1,134.7 $ 437.6
Homeowners 80.9 261.0 403.5
Specialty 24.1 86.4 119.7
Commercial Lines
Business Insurance 93.8 1,625.1 534.8
Commercial Insurance 38.6 1,201.4 245.0
Surety 12.9 (11.8) 70.4
Other 0.3 315.9 15.9
--------- --------- --------- ---------
Total 312.1 4,612.7 1,826.9
--------- --------- --------- ---------
LIFE & INVESTMENTS*
Retirement Services 104.3 14.1 -- $ 4,925.8
Income -- -- -- 6,167.8
Group 17.8 173.1 2.9 --
Individual 171.2 229.1 6.7 2,992.1
Asset Management -- -- -- --
Other -- -- -- --
--------- --------- --------- ---------
Total 293.3 416.3 9.6 14,085.7
--------- --------- --------- ---------
Other and Eliminations -- -- -- --
--------- --------- --------- ---------
Consolidated Totals $ 605.4 $ 5,029.0 $ 1,836.5 $14,085.7
========= ========= ========= =========
* Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results. Prior year information has been reclassified to conform to
the current year presentation.
S-8
- --------------------------------------------------------------------------------
Schedule III
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
Premiums Benefits, Amortization
and Claims, of Deferred
Service Net Losses and Policy Other
Fee Investment Adjustment Acquisition Operating Net Written
Revenues Income Expenses Costs Costs Premiums
--------- ---------- ---------- ------------ --------- -----------
$ 1,723.6 $ 125.3 $ 1,446.9 $ 294.4 $ 105.3 $ 1,725.6
729.8 52.9 626.9 116.6 103.0 738.7
186.7 16.3 108.2 30.3 30.0 193.3
1,171.7 145.1 948.5 209.5 169.0 1,140.9
683.4 98.5 612.8 120.3 106.0 671.1
61.6 3.6 21.2 22.0 6.7 63.8
6.6 18.8 5.5 3.5 42.7 6.3
--------- --------- --------- --------- --------- ---------
4,563.4 460.5 3,770.0 796.6 562.7 $ 4,539.7
--------- --------- --------- --------- --------- =========
36.8 392.5 328.8 22.8 47.7
1.2 495.8 440.3 -- 30.3
313.6 2.0 214.7 5.3 91.3
133.8 206.9 248.4 9.5 58.2
37.0 5.9 -- -- 29.9
95.8 78.4 -- -- 104.0
--------- --------- --------- --------- ---------
618.2 1,181.5 1,232.2 37.6 361.4
--------- --------- --------- --------- ---------
-- (8.5) (14.6) -- 89.8
--------- --------- --------- --------- ---------
$5,181.6 $ 1,633.5 $ 4,987.6 $ 834.2 $ 1,013.9
========= ========= ========= ========= =========
S-9
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL INSURANCE INFORMATION (continued)
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(In Millions)
Reserve for
Future Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims Claims and
Acquisition and Loss Unearned Benefits
SEGMENT Costs Expenses Premiums Payable
- ------- ----------- ------------- --------- ------------
PROPERTY & CASUALTY
Personal Lines
Personal Auto $ 65.6 $ 1,125.2 $ 435.6
Homeowners 82.5 223.1 394.9
Specialty 22.8 79.9 118.6
Commercial Lines
Business Insurance 102.5 1,561.1 561.1
Commercial Insurance 40.1 1,119.6 255.0
Surety 11.6 (58.8) 62.9
Other 0.3 328.5 16.2
--------- --------- --------- ---------
Total 325.4 4,378.6 1,844.3
--------- --------- --------- ---------
LIFE & INVESTMENTS*
Retirement Services 103.4 12.7 -- $ 5,782.3
Income Annuities -- -- -- 5,823.4
Group 13.7 80.9 2.2 --
Individual 156.3 225.7 6.6 2,157.2
Asset Management -- -- -- --
Other -- -- -- --
--------- --------- --------- ---------
Total 273.4 319.3 8.8 13,762.9
--------- --------- --------- ---------
Other and Eliminations -- -- -- --
--------- --------- --------- ---------
Consolidated Totals $ 598.8 $ 4,697.9 $ 1,853.1 $13,762.9
========= ========= ========= =========
* Effective December 31, 2001, SAFECO's asset management companies and Talbot
Financial Corporation are reported as part of the Life & Investments
operating results. Prior year information has been reclassified to conform to
the current year presentation.
S-10
- --------------------------------------------------------------------------------
Schedule III
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
Premiums Benefits, Amortization
and Claims, of Deferred
Service Net Losses and Policy Other
Fee Investment Adjustment Acquisition Operating Net Written
Revenues Income Expenses Costs Costs Premiums
--------- ---------- ---------- ------------ --------- -----------
$ 1,725.6 $ 131.0 $ 1,382.7 $ 304.3 $ 101.9 $ 1,722.5
708.3 51.9 544.5 120.0 92.0 722.5
177.7 15.8 97.8 31.6 27.7 182.2
1,017.6 141.7 830.8 190.7 179.5 1,115.7
686.4 97.2 553.8 125.0 115.2 676.0
59.4 3.0 17.9 17.9 8.4 59.8
7.9 21.7 4.3 3.5 43.9 5.1
--------- --------- --------- --------- --------- ---------
4,382.9 462.3 3,431.8 793.0 568.6 $ 4,483.8
--------- --------- --------- --------- --------- ---------
32.9 410.9 310.5 37.2 43.5
1.1 486.6 423.0 -- 22.5
193.9 1.8 157.1 4.4 53.6
119.8 144.7 181.6 5.5 47.3
41.7 2.6 -- -- 30.7
84.5 76.6 -- -- 85.1
--------- --------- --------- --------- ---------
473.9 1,123.2 1,072.2 47.1 282.7
--------- --------- --------- --------- ---------
-- 2.8 -- -- 97.0
--------- --------- --------- --------- ---------
$ 4,856.8 $ 1,588.3 $ 4,504.0 $ 840.1 $ 948.3
========= ========= ========= ========= =========
S-11
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
REINSURANCE Schedule IV
- --------------------------------------------------------------------------------
Ceded to Assumed
Gross Other from Other Net Assumed
YEAR ENDED DECEMBER 31 Amount Companies Companies Amount to Net
- ---------------------- ---------- --------- ---------- --------- -------
(In Millions)
2001
Life Insurance in Force at Year End $ 57,330.1 $(9,846.3) $ 181.3 $47,665.1 0.4%
---------- --------- --------- --------- ---
Premiums Earned
Life & Investments $ 368.0 $ (21.8) $ 4.8 $ 351.0 1.4%
Accident & Health Insurance 299.6 (13.6) -- 286.0 0.0%
Property & Casualty Insurance 4,597.3 (151.4) 26.9 4,472.8 0.6%
---------- --------- --------- --------- ---
Total $ 5,264.9 $ (186.8) $ 31.7 $ 5,109.8 0.6%
========== ========= ========= ========= ===
2000
Life Insurance in Force at Year End $ 55,077.6 $(8,815.0) $ 184.2 $46,446.8 0.4%
---------- --------- --------- --------- ---
Premiums Earned
Life & Investments $ 347.2 $ (18.8) $ 16.6 $ 345.0 4.8%
Accident & Health Insurance 269.1 (15.1) 19.2 273.2 7.0%
Property & Casualty Insurance 4,717.6 (163.0) 8.8 4,563.4 0.2%
---------- --------- --------- --------- ---
Total $ 5,333.9 $ (196.9) $ 44.6 $ 5,181.6 0.9%
========== ========= ========= ========= ===
1999
Life Insurance in Force at Year End $ 48,021.0 $(6,168.8) $ 153.8 $42,006.0 0.4%
---------- --------- --------- --------- ---
Premiums Earned
Life & Investments $ 328.2 $ (14.2) $ 0.7 $ 314.7 0.2%
Accident & Health Insurance 171.9 (12.7) -- 159.2 0.0%
Property & Casualty Insurance 4,539.4 (164.4) 7.9 4,382.9 0.2%
---------- --------- --------- --------- ---
Total $ 5,039.5 $ (191.3) $ 8.6 $ 4,856.8 0.2%
========== ========= ========= ========= ===
S-12
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION CONCERNING
CONSOLIDATED PROPERTY & CASUALTY INSURANCE OPERATIONS Schedule VI
- --------------------------------------------------------------------------------
AFFILIATION WITH REGISTRANT: PROPERTY & CASUALTY SUBSIDIARIES
DECEMBER 31 2001 2000 1999
- ----------- ---------- --------- ---------
(In Millions)
Deferred Policy Acquisition Costs $ 322.7 $ 312.1 $ 325.4
Reserve for Losses and Loss Adjustment Expenses 5,053.7 4,612.7 4,378.6
Discount Deducted from Loss Reserves -- -- --
Unearned Premiums 1,772.9 1,826.9 1,844.3
YEAR ENDED DECEMBER 31 2001 2000 1999
- ---------------------- ---------- --------- ---------
Earned Premiums $ 4,472.8 $ 4,563.4 $ 4,382.9
Net Investment Income 457.7 460.5 462.3
Loss and Loss Adjustment Expenses Incurred Related to
Current Year 3,619.1 3,621.7 3,353.0
Prior Year 345.1 148.3 78.8
Amortization of Deferred Policy Acquisition Expenses 792.2 796.6 793.0
Paid Losses and Loss Adjustment Expenses 3,595.5 3,570.0 3,329.0
Net Written Premiums 4,439.2 4,539.7 4,483.8
---------- --------- ---------
S-13
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
EXHIBITS
- --------------------------------------------------------------------------------
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
INDEX TO EXHIBITS
- --------------------------------------------------------------------------------
12 Computation of Ratio of Earnings (Loss) to Fixed charges
23.1 Consent of Ernst & Young LLP, Independent Auditors
E-1
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SIGNATURES
- --------------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Amendment No. 2 to be signed on its behalf
by the undersigned thereunto duly authorized on August 13, 2002.
SAFECO CORPORATION
----------------------------------------------
Registrant
/s/ CHRISTINE B. MEAD
----------------------------------------------
Christine B. Mead
Senior Vice President, Chief Financial Officer
and Secretary
/s/ RICHARD M. LEVY
----------------------------------------------
Richard M. Levy
Vice President, Controller