1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
F O R M 10 - Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number 1-6563
SAFECO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer
Identification No.)
SAFECO Plaza, Seattle, Washington 98185
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code (206) 545-5000
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
62,978,743 shares of no par value common
stock were outstanding at March 31, 1995
2
SAFECO CORPORATION
TABLE OF CONTENTS AND SIGNATURES
Part I - Financial Information* Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet,
March 31, 1995 and December 31, 1994 3
Statement of Consolidated Income and Retained Earnings for
the Three Months Ended March 31, 1995 and 1994 5
Statement of Consolidated Cash Flows for
the Three Months Ended March 31, 1995 and 1994 6
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 13
* The accompanying unaudited condensed financial statements
have been prepared in accordance with the instructions to
Form 10-Q. In the opinion of management, they include all
adjustments (none of which were other than normal and
recurring adjustments) which are necessary for a fair
presentation of results for the interim periods. It is
suggested that these condensed financial statements be read
in conjunction with the financial statements and the notes
thereto included in the Company's Form 10-K for the year
ended ended December 31, 1994 which has previously been
filed with the Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
SAFECO CORPORATION
-----------------------------
(Registrant)
BOH A. DICKEY
-----------------------------
Boh A. Dickey
Executive Vice President and
Dated May 11, 1995 Chief Financial Officer
ROD A. PIERSON
-----------------------------
Rod A. Pierson
Senior Vice President, Secretary,
Controller and Chief Accounting
Dated May 11, 1995 Officer
-2-
3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
March 31 December 31
ASSETS 1995 1994
----------- -----------
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1995 - $9,822,993; 1994 - $9,608,210) $10,139,061 $ 9,509,071
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1995 - $2,098,909; 1994 - $1,948,309) 2,102,507 2,053,132
Marketable Equity Securities, at Market Value
(Cost: 1995 - $573,116; 1994 - $565,007) 929,968 855,054
Mortgage Loans 419,390 418,983
Real Estate (At cost less accumulated depreciation) 505,662 475,865
Policy Loans 53,393 53,329
Short-Term Investments 286,557 101,574
----------- -----------
Total Investments 14,436,538 13,467,008
Cash 46,815 63,504
Accrued Investment Income 226,008 229,964
Finance Receivables 639,150 619,059
Premiums and Other Service Fees Receivable 420,065 418,733
Other Notes and Accounts Receivable 43,648 69,572
Reinsurance Recoverables 171,109 172,510
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 164,937 160,973
Deferred Policy Acquisition Costs 392,745 388,843
Other Assets 329,630 311,563
----------- -----------
TOTAL $16,870,645 $15,901,729
=========== ===========
(continued)
-3-
4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts) (continued)
March 31 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1995 1994
----------- -----------
Losses and Adjustment Expense $ 2,294,838 $ 2,265,854
Unearned Premiums 868,154 866,964
Life Policy Liabilities 156,744 155,322
Funds Held Under Deposit Contracts 8,219,373 7,988,456
Notes and Mortgages Payable:
Credit Company Borrowings ($484,300 maturing within one year) 555,650 510,600
10.75% Notes Due September 1995 200,000 200,000
Other Notes and Mortgages ($8,756 maturing within one year) 274,675 272,309
7.875% Notes Due 2005 200,000 -
Other Liabilities 684,625 754,258
Federal and Canadian Income Taxes:
Current 40,402 22,627
Deferred (Includes tax on unrealized appreciation
of investment securities:
1995 - $235,522; 1994 - $66,818) 198,609 35,860
----------- -----------
Total Liabilities 13,693,070 13,072,250
----------- -----------
Preferred Stock, No Par Value:
Shares Authorized: 10,000,000
Shares Issued and Outstanding: None - -
Common Stock, No Par Value:
Shares Authorized: 150,000,000
Shares Reserved for Options:
1995 - 1,965,350; 1994 - 2,042,691
Shares Issued and Outstanding:
1995 - 62,978,743; 1994 - 62,951,634 213,443 211,194
Retained Earnings 2,528,144 2,495,800
Unrealized Appreciation of Investment
Securities, Net of Tax 441,432 128,123
Unrealized Loss from Foreign Currency
Translation, Net of Tax (5,444) (5,638)
----------- -----------
Total Stockholders' Equity 3,177,575 2,829,479
----------- -----------
TOTAL $16,870,645 $15,901,729
=========== ===========
-4-
5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except Per Share Amounts)
Three Months Ended
March 31
-------------------------
1995 1994
----------- -----------
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 526,430 $ 477,408
Life and Health Premiums and Other Revenues 67,401 71,604
----------- -----------
Total 593,831 549,012
Real Estate 19,901 31,798
Finance 14,892 12,038
Asset Management 4,274 3,495
Net Investment Income 259,351 242,322
Realized Investment Gain 5,278 19,160
----------- -----------
Total 897,527 857,825
----------- -----------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 589,499 561,910
Commissions 99,618 91,904
Personnel Costs 53,038 51,759
Interest 19,915 16,226
Dividends to Policyholders 4,661 5,601
Other 57,937 69,119
Amortization of Deferred Policy Acquisition Costs 100,509 95,457
Deferral of Policy Acquisition Costs (103,776) (97,719)
----------- -----------
Total 821,401 794,257
----------- -----------
Income before Income Taxes 76,126 63,568
----------- -----------
Provision (Benefit) for Federal
and Canadian Income Taxes:
Current 17,059 12,574
Deferred (6,143) (5,032)
----------- -----------
Total 10,916 7,542
----------- -----------
Net Income 65,210 56,026
Retained Earnings, Beginning of Period 2,495,800 2,307,322
Dividends Declared (30,860) (28,336)
Common Stock Reacquired (2,006) (892)
----------- -----------
Retained Earnings, End of Period $ 2,528,144 $ 2,334,120
=========== ===========
Net Income Per Share of Common Stock $ 1.04 $ 0.89
=========== ===========
Average Number of Shares Outstanding
During the Period (In Thousands) 62,966 62,948
=========== ===========
Cash Dividends Paid to Common
Stockholders $ 0.49 $ 0.45
=========== ===========
Income per share of common stock is based on the average number of common
shares outstanding. Stock options do not have a significant dilutive effect
on income per share.
-5-
6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
Three Months Ended
March 31
---------------------------
1995 1994
--------- ---------
OPERATING ACTIVITIES:
Insurance Premiums Received $ 575,147 $ 559,197
Dividends and Interest Received 260,815 238,481
Other Operating Receipts 43,719 44,541
Insurance Claims and Policy Benefits Paid (444,573) (450,121)
Underwriting, Acquisition and Insurance Operating
Costs Paid (243,241) (248,616)
Interest Paid (24,085) (17,878)
Other Operating Costs Paid (27,703) (26,284)
Income Taxes Recovered (Paid) 1,146 (14,987)
--------- ---------
Net Cash Provided by Operating Activities 141,225 84,333
--------- ---------
INVESTING ACTIVITIES:
Purchases of:
Fixed Maturities Available-for-Sale (465,192) (578,870)
Fixed Maturities Held-to-Maturity (45,375) (135,972)
Equities (53,217) (36,860)
Other Investments (220,645) (58,899)
Maturities of Fixed Maturities Available-for-Sale 150,559 260,821
Maturities of Fixed Maturities Held-to-Maturity 2,724 33,583
Sales of:
Fixed Maturities Available-for-Sale 91,969 255,072
Fixed Maturities Held-to-Maturity - -
Equities 43,406 22,661
Other Investments 28,133 28,108
Net Decrease in Short-Term Investments 13,124 23,236
Finance Receivables Originated or Acquired (84,101) (61,997)
Principal Payments Received on Finance Receivables 53,266 42,673
Other (13,634) (9,841)
--------- ---------
Net Cash Used in Investing Activities (498,983) (216,285)
--------- ---------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts 303,994 220,602
Return of Funds Held Under Deposit Contracts (179,445) (156,942)
Proceeds from Notes and Mortgage Borrowings 198,930 24,207
Repayment of Notes and Mortgage Borrowings (645) (49,648)
Net Proceeds from Short-Term Borrowings 48,944 94,703
Common Stock Reaquired (2,139) (946)
Dividends Paid to Stockholders (30,848) (28,322)
Other 2,278 1,616
--------- ---------
Net Cash Provided by Financing Activities 341,069 105,270
--------- ---------
Net Decrease in Cash (16,689) (26,682)
Cash at Beginning of Period 63,504 67,833
--------- ---------
Cash at End of Period $ 46,815 $ 41,151
========= =========
(continued)
-6-
7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands) (continued)
Three Months Ended
March 31
--------------------------
1995 1994
-------- ---------
Net Income $ 65,210 $ 56,026
-------- ---------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (5,278) (19,160)
Depreciation and Amortization 11,332 9,399
Amortization of Fixed Maturity Investments (7,661) (4,655)
Deferred Income Tax Benefit (6,143) (5,032)
Interest Expense on Deposit Contracts 108,333 97,049
Other Adjustments 2,882 3,483
Changes in:
Losses and Adjustment Expense Liabilities 28,984 124,267
Unearned Premiums 1,190 7,479
Life Policy Liabilities 1,422 2,152
Accrued Income Taxes 17,775 (1,839)
Accrued Interest on Accrual Bonds (8,980) (10,173)
Accrued Investment Income 3,956 (2,837)
Deferred Policy Acquisition Costs (3,902) (2,262)
Other Assets and Liabilities (67,895) (169,564)
-------- ---------
Total Adjustments 76,015 28,307
-------- ---------
Net Cash Provided by Operating Activities $141,225 $ 84,333
======== =========
-7-
8
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - - - -------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first quarter was $65.2 million or $1.04 per share,
compared with $0.89 per share in 1994. If we exclude realized gain from
investments, our net income was $0.98 per share, compared with $0.69 per share
in 1994. As discussed below, both quarters were impacted by the January, 1994
Los Angeles earthquake.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
THREE MONTHS ENDED
MARCH 31
1995 1994
---------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)
Income (Loss) before Realized Gain and Income Taxes:
Property and Casualty Insurance:
Underwriting Loss $(37,376) $(59,525)
Net Investment Income 72,451 70,170
-------- --------
Total Property and Casualty 35,075 10,645
Life and Health Insurance 31,814 30,023
Real Estate 2,464 2,793
Credit 2,385 2,484
Asset Management 1,653 1,743
Corporate (2,543) (3,280)
-------- --------
Total 70,848 44,408
-------- --------
Realized Gain (Loss), before Tax, from:
Security Investments 5,146 19,205
Real Estate Investments 132 (45)
-------- --------
Total 5,278 19,160
-------- --------
Income before Income Taxes 76,126 63,568
-------- --------
Provision for Income Taxes on:
Income before Realized Gain 9,262 922
Realized Gain 1,654 6,620
-------- --------
Total 10,916 7,542
-------- --------
Net Income $ 65,210 $ 56,026
======== ========
Net Income Per Share of Common Stock $ 1.04 $ .89
======== ========
-8-
9
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - -------------------------------------------------------------------------------
Property and Casualty Insurance
Property and casualty operations for the first quarter of 1995 produced pretax
income of $35.1 million before realized gain from investments, compared with
$10.6 million a year ago. The loss from underwriting was $37.4 million for the
first quarter, compared with $59.5 million in the first quarter of 1994. The
current quarter results were adversely impacted by a $25.0 million increase in
the estimated cost of claims from the January, 1994 Los Angeles earthquake.
This increase brings our estimate of total gross losses from the event up to
$250 million. Loss costs for the quarter also include $11.1 million from the
wind and rain storms that caused extensive damage in California throughout the
quarter and $7.3 million to cover the estimated cost of two hailstorms in Texas
during March. The total losses from catastrophe-related events in the first
quarter of 1995 were $45.6 million. In 1994, the charge to first quarter
earnings from catastrophes was $93 million, including $83.1 million, after
reinsurance, for the Los Angeles earthquake. The combined loss and expense
ratio was 107.1 for the first quarter of 1995, compared with 112.5 a year ago.
First quarter investment income increased 3% from a year ago to $72.5 million.
Personal auto, our largest line, produced an underwriting profit of $2.3
million for the first quarter of 1995. This compares with a loss of $4.3
million last quarter and a profit of $17.1 million in the first quarter a year
ago. Loss costs are up approximately 9% due to increases in both the frequency
and severity of auto claims.
Homeowners produced an underwriting loss of $17.9 million for the quarter,
compared with a loss of $7.4 million a year ago. Catastrophes, including the
California and Texas storms discussed above, added $15.4 million to first
quarter loss costs for this line. This compares with $11.2 million of
catastrophe losses a year ago. We continue to pursue additional premium for
this coverage through a combination of higher prices and proper insurance to
value.
Commercial lines produced an underwriting loss of $3.2 million in the first
quarter, operating at a combined ratio of 102.3. In the first quarter last
year the loss was $3.0 million and the combined ratio was 102.4. The combined
ratios for both years compare very favorably with the industry. These results
reflect our target marketing initiatives, a focus on efficient operations and
our ability to deliver value-added service to customers. In addition, we
continue to maintain rate adequacy in the face of stiff price competition.
Surety continues to produce excellent results. The profit for this line was
$4.8 million for the first quarter, compared with a profit of $3.6 million for
the same quarter last year. Premiums written increased 23% over a year ago,
primarily due to increases in both the number and size of contract bonds
written.
Including surety, total premiums written for the first three months increased
5% over a year ago with personal lines up 5% and commercial lines up 3%.
-9-
10
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - -------------------------------------------------------------------------------
Life and Health Insurance
The life and health insurance operations produced a pretax profit, before
realized gain from investments, of $31.8 million for the first quarter of 1995.
This compares with $30.0 million for the same period last year. The comparable
profit for the fourth quarter of 1994 was $35.4 million.
The annuity and pension lines combined first quarter earnings were $12.8
million, an increase over the $9.7 million reported for the first quarter of
1994 and equivalent to the $12.6 million for the last quarter of 1994.
Increased investment income, due to higher interest rates, and expense control
measures continue to benefit these lines. Group insurance earnings declined to
$3.5 million for the first quarter, compared with $4.8 million for the same
period last year. This reduction in group earnings is the result of
competitive market conditions and an increase in life and disability claim
activity.
Real Estate
SAFECO Properties' pretax income was $2.5 million for the first quarter of
1995, compared with $2.8 million in 1994. These results continue to be
favorable, despite the negative impact resulting from higher interest rates
when compared with 1994 and additional depreciation charges on several new
projects. In the Statement of Consolidated Income and Retained Earnings, the
decrease in Real Estate Revenues and Other Expenses is due primarily to a lower
level of sales of properties held for sale in the first quarter of 1995,
compared with the same period in 1994.
Credit
SAFECO Credit Company produced a pretax profit of $2.4 million in the first
quarter of 1995, compared with $2.5 million in the same period of 1994. New
commercial loan and lease fundings in 1995 were 29% greater than in the first
quarter of 1994. Non-affiliate receivables and operating leases reached $683
million at March 31, 1995, an annualized 13% increase from December, 1994.
Delinquency experience continued at very low levels with accounts past due 30
days or more totaling less than 1% at March 31, 1995.
SAFECO Credit's summarized financial information is as follows (in thousands):
MARCH 31 DECEMBER 31
1995 1994
-------- -----------
Finance Receivables $639,150 $619,059
Other Assets 124,709 138,107
-------- --------
Total Assets $763,859 $757,166
======== ========
Credit Company Borrowings $555,650 $510,600
Other Liabilities 117,464 156,973
-------- --------
Total Liabilities $673,114 $667,573
======== ========
THREE MONTHS ENDED MARCH 31
---------------------------
1995 1994
-------- --------
Revenues $ 16,418 $ 13,071
Expenses 14,033 10,587
-------- --------
Income before Income Taxes 2,385 2,484
Provision for Federal Income Taxes 773 813
-------- --------
Net Income $ 1,612 $ 1,671
======== ========
-10-
11
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - -------------------------------------------------------------------------------
Asset Management
The pretax income from our investment management operations for the first
quarter was $1.7 million, the same amount as last year. Assets under
management have grown to $2.6 billion, an increase of 15% over March 31, 1994.
Investment Portfolios
The market value of our consolidated bond portfolio was $312 million in excess
of amortized cost at March 31, 1995. This compares with market value being
$204 million below amortized cost at December 31, 1994. This improvement in
market value reflects the strength in the bond market during the first quarter
as a result of lower interest rates.
The market value of our equity securities was $357 million in excess of cost at
March 31, 1995.
Stock Purchase Program
In May, 1990, the Board of Directors approved the continuation of the stock
purchase program and authorized a total accumulation of up to two million
shares, about 3% of our issued shares. At April 21, 1995, 1,143,000 shares
have been purchased.
Debt Issue
On March 29, 1995, we issued $200 million of 7-7/8% notes, due April 1, 2005.
The proceeds of this issue are invested in short-term treasury securities and
will be used to redeem our existing 10-3/4% notes due September 15, 1995.
Subsequent Event - Texas Storms
On April 29 and 30, and on May 5 and 6, 1995, severe wind and hail storms hit
the north Texas and Dallas/Ft. Worth regions. Our current estimate of insured
losses from the April 29 and 30 storms is approximately $10 million. Estimates
of losses are not yet available for the May 5 and 6 storms. Losses from both
events will be recorded in the second quarter of 1995.
-11-
12
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - -------------------------------------------------------------------------------
Other -- Footnotes
The following additional footnote disclosures relate to new accounting
standards.
Summary of Significant Accounting Policies - New Accounting Standards
In March of 1995, the Financial Accounting Standards Board (FASB)
issued Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." Statement 121
requires that under specified circumstances certain assets be reviewed
for impairment. If an impairment is indicated the asset shall be
written down to fair value. Statement 121 is effective for financial
statements for fiscal years beginning after December 15, 1995 and
SAFECO will adopt it in the first quarter of 1996. Although the impact
of the Statement is currently being studied, it is not expected to
have a material effect on SAFECO's financial position or results of
operations.
Investments
In May of 1993, the FASB issued Statement 114, "Accounting by
Creditors for Impairment of a Loan," which provides guidance on
valuing impaired loans (FAS 114). The FASB also issued Statement 118,
"Accounting by Creditors for Impairment of a Loan -- Income
Recognition and Disclosures" (FAS 118), in October of 1994, which
amends Statement 114. Both statements are effective for 1995 and were
adopted by SAFECO on January 1, 1995. Adoption did not affect net
income.
The following table summarizes SAFECO's consolidated allowance for
credit losses for the first quarter of 1995 (in thousands):
Allowance as of December 31, 1994 $24,557
Provision for Credit Losses 1,150
Recoveries 100
Loans Charged Off as Uncollectible (382)
-------
Allowance as of March 31, 1995 $25,425
=======
This allowance relates to SAFECO Credit's Finance Receivables ($639
million at March 31, 1995) and to Mortgage Loan investments ($419
million at March 31, 1995) nearly all of which are held by SAFECO's
life and health company. The allowance includes amounts determined
under FAS 114 and FAS 118 (specific reserves), as well as general
reserve amounts. The total investment in impaired loans, as defined
under FAS 114 and 118 and before any reserve for losses, is $9.8
million at March 31, 1995. A specific loan loss reserve has been
established for each impaired loan, the total of which is $2.8 million
at March 31, 1995 and is included in the overall allowance of $25.4
million at March 31, 1995.
-12-
13
SAFECO CORPORATION
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 4.1 Indenture, dated as of March 1, 1995, among SAFECO
Corporation, SAFECO Credit Company, Inc. and The Chase
Manhattan Bank, N.A., as Trustee (filed as Exhibit 4.1
to the Registrant's Report on Form 8-K dated March 29,
1995 and incorporated herein by reference).
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K
The Registrant filed one report on Form 8-K during the quarter ended
March 31, 1995, under Item 7(c) (Financial Statements and Exhibits),
dated March 29, 1995. This Report on Form 8-K contained the form
of note and other documents relating to the Registrant's $200 million
of 7-7/8% Notes due April 1, 2005, which were issued on March 29,
1995.
-13-