1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1996.
[ ] 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
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(Exact name of registrant as specified in its charter)
WASHINGTON 91-0742146
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(State of Incorporation) (I.R.S. Employer I.D. No.)
SAFECO PLAZA, SEATTLE, WASHINGTON 98185
----------------------------------------
(Address of principal executive offices)
(206) 545-5000
--------------
(Registrant's telephone number, including area code)
126,050,278 shares of no par value common stock were outstanding at June 30,
1996
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 [ ].
2
SAFECO CORPORATION
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TABLE OF CONTENTS AND SIGNATURES
Part I - Financial Information * Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet, 3
June 30, 1996 and December 31, 1995
Statement of Consolidated Income and Retained Earnings 5
for the Quarters and Six Months Ended June 30, 1996 and 1995
Statement of Consolidated Cash Flows 6
for the Six Months Ended June 30, 1996 and 1995
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
*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 December 31,
1995 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
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Boh A. Dickey
Executive Vice President
Dated August 6, 1996 and Chief Financial Officer
ROD A. PIERSON
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Rod A. Pierson
Senior Vice President, Secretary, Controller
Dated August 6, 1996 and Chief Accounting Officer
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
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June 30 December 31
ASSETS 1996 1995
------------- -------------
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1996 - $10,817,193; 1995 -$10,853,590) $ 11,258,490 $ 11,928,144
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1996 - $2,418,469; 1995 - $2,388,514) 2,326,838 2,044,517
Marketable Equity Securities, at Market Value
(Cost: 1996 - $613,776; 1995 - $598,130) 1,184,790 1,119,408
Mortgage Loans 431,250 416,489
Real Estate (At cost less accumulated depreciation) 522,902 498,958
Policy Loans 57,021 55,925
Short-Term Investments 56,722 68,808
------------- -------------
Total Investments 15,838,013 16,132,249
Cash 45,625 65,477
Accrued Investment Income 234,913 234,253
Finance Receivables 774,901 741,177
Premiums and Other Service Fees Receivable 474,566 444,618
Other Notes and Accounts Receivable 74,128 42,139
Reinsurance Recoverables 152,689 137,284
Deferred Policy Acquisition Costs 398,759 356,359
Land, Buildings and Equipment for Company Use 172,220 170,016
(At cost less accumulated depreciation)
Other Assets 180,833 167,872
Separate Account Assets 380,551 276,399
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TOTAL $ 18,727,198 $ 18,767,843
============= =============
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts(continued)
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June 30 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995*
------------ ------------
Losses and Adjustment Expense $ 2,146,327 $ 2,207,230
Unearned Premiums 943,196 910,762
Life Policy Liabilities 148,846 154,090
Funds Held Under Deposit Contracts 9,285,896 8,756,384
Notes and Mortgages Payable:
Credit Company Borrowings ($669,300 maturing within one year) 714,200 614,270
7.875% Notes Due 2005 200,000 200,000
Other Notes and Mortgages ($25,149 maturing within one year) 234,077 253,275
Other Liabilities 596,998 895,853
Federal and Canadian Income Taxes:
Current 2,141 18,000
Deferred (Includes tax on unrealized appreciation
of investment securities:
1996 - $350,885; 1995 - 543,556) 303,906 498,934
Separate Account Liabilities 380,551 276,399
------------ ------------
Total Liabilities 14,956,138 14,785,197
------------ ------------
Prefered Stock, No Par Value:
Shares Authorized: 10,000,000 - -
Shares Issued and Outstanding: None
Common Stock, No Par Value:
Shares Authorized: 300,000,000
Shares Reserved for Options:
1996 - 3,450,805; 1995 - 3,699,983
Shares Issued and Outstanding:
1996 - 126,050,278; 1995 - 125,978,742 222,321 217,447
Retained Earnings 2,896,872 2,755,537
Unrealized Appreciation of Investment Securities,
Net of Tax 655,677 1,013,494
Unrealized Loss from Foreign Currency Translation,
Net of Tax (3,810) (3,832)
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Total Stockholders' Equity 3,771,060 3,982,646
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TOTAL $ 18,727,198 $ 18,767,843
============= =============
*Certain amounts have been reclassified to conform to the 1996 presentation.
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except Per Share Amounts)
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Six Months Ended Three Months Ended
June 30 June 30
---------------- -----------------
1996 1995* 1996 1995*
---- ----- ---- -----
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 1,112,382 $ 1,061,101 $ 559,753 $ 534,671
Life and Health Premiums and Other Revenues 132,280 134,681 66,596 67,280
----------- ----------- ---------- -----------
Total 1,244,662 1,195,782 626,349 601,951
Real Estate 39,595 38,829 21,282 18,928
Finance 36,575 30,977 18,478 16,085
Asset Management 11,390 8,732 4,909 4,458
Other 18,713 17,163 9,615 8,307
Net Investment Income 549,842 528,271 275,265 268,920
Realized Investment Gain 52,846 20,726 20,123 15,448
----------- ----------- ---------- -----------
Total 1,953,623 1,840,480 976,021 934,097
----------- ----------- ---------- -----------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,167,708 1,142,820 587,748 553,321
Commissions 201,367 201,082 104,151 101,464
Personnel Costs 133,319 121,087 66,245 63,317
Interest 35,408 44,717 17,296 24,462
Dividends to Policyholders 8,267 8,565 4,247 3,904
Other 132,519 122,962 69,334 61,241
Amortization of Deferred Policy Acquisition Costs 206,820 202,436 103,227 101,927
Deferral of Policy Acquisition Costs (216,607) (212,008) (115,515) (108,232)
----------- ----------- ---------- -----------
Total 1,668,801 1,631,661 836,733 801,404
----------- ----------- ---------- -----------
Income before Income Taxes 284,822 208,819 139,288 132,693
----------- ----------- ---------- ----------
Provision (Benefit) for Federal
and Canadian Income Taxes
Current 70,355 46,894 34,188 29,835
Deferred (2,219) (5,984) (883) 159
----------- ----------- ---------- ----------
Total 68,136 40,910 33,305 29,994
----------- ----------- ---------- ----------
Net Income 216,686 167,909 105,983 102,699
Retained Earnings, Beginning of Period 2,755,537 2,495,800 2,827,580 2,528,144
Dividends Declared (69,955) (64,247) (36,556) (33,387)
Common Stock Reacquired (5,396) (4,290) (135) (2,284)
----------- ----------- ---------- ----------
Retained Earnings, End of Period $ 2,896,872 $ 2,595,172 $2,896,872 $ 2,595,172
=========== =========== =========== ===========
Net Income Per Share of Common Stock $ 1.72 $ 1.34 $ 0.84 $ 0.82
=========== =========== =========== ===========
Average Number of Shares Outstanding
During the Period (In Thousands) 126,026 125,948 126,041 125,966
=========== =========== =========== ===========
Cash Dividends Paid to Common Stockholders $ 0.53 $ 0.49 $ 0.265 $ 0.245
=========== =========== =========== ===========
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.
*Certain amounts have been reclassified to conform to the 1996 presentation.
1995 share amounts are adjusted to reflect the December 1995 2-for-1 stock
split.
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
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Six Months Ended
June 30
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1996 1995
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OPERATING ACTIVITIES:
Insurance Premiums Received $ 1,234,955 $ 1,191,683
Dividends and Interest Received 545,432 530,030
Other Operating Receipts 84,567 92,007
Insurance Claims and Policy Benefits Paid (1,014,121) (890,523)
Underwriting, Acquisition and Insurance Operating Costs Paid (446,428) (444,517)
Interest Paid (34,394) (41,564)
Other Operating Costs Paid (45,672) (48,754)
Income Taxes Paid (86,631) (34,903)
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Net Cash Provided by Operating Activities 237,708 353,459
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INVESTING ACTIVITIES:
Purchases of:
Fixed Maturities Available-for-Sale (932,925) (910,581)
Fixed Maturities Held-to-Maturity (302,343) (90,651)
Equities (75,246) (109,216)
Other Investments (81,680) (245,289)
Maturities of Fixed Maturities Available-for-Sale 444,514 288,565
Maturities of Fixed Maturities Held-to-Maturity 13,518 6,250
Sales of:
Fixed Maturities Available-for-Sale 497,252 237,734
Fixed Maturities Held-To-Maturity - -
Equities 93,408 85,223
Other Investments 29,004 46,436
Net Decrease in Short-Term Investments 12,094 31,512
Finance Receivables Originated or Acquired (131,597) (179,287)
Principal Payments Received on Finance Receivables 92,549 108,422
Other (30,094) (30,289)
------------ ------------
Net Cash Used in Investing Activities (371,546) (761,171)
------------ ------------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts 500,160 543,639
Return of Funds Held Under Deposit Contracts (380,573) (357,599)
Proceeds from Notes and Mortgage Borrowings 15,003 199,001
Repayment of Notes and Mortgage Borrowings (61,920) (17,131)
Net proceeds from Short-Term Borrowings 110,248 96,445
Common Stock Reacquired (5,653) (4,564)
Dividends Paid to Stockholders (66,787) (61,708)
Other 3,508 4,184
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Net Cash Provided by Financing Activities 113,986 402,267
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Net Decrease in Cash (19,852) (5,445)
Cash at the Beginning of Period 65,477 63,504
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Cash at the End of Period $ 45,625 $ 58,059
============ ============
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands) (continued)
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Six Months Ended
June 30
--------------------
1996 1995
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Net Income $ 216,686 $ 167,909
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Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (52,846) (20,726)
Depreciation and Amortization 30,994 21,601
Amortization of Fixed Maturity Investments (18,913) (16,031)
Deferred Income Tax Benefit (2,219) (5,984)
Interest Expense on Deposit Contracts 224,055 217,864
Other Adjustments 720 6,133
Changes in:
Losses and Adjustment Expense (60,903) (17,353)
Unearned Premiums 32,434 34,258
Life Policy Liabilities (5,244) 1,964
Accrued Income Taxes (15,859) 11,206
Accrued Interest on Accrual Bonds (19,981) (14,320)
Accrued Investment Income (660) 953
Deferred Policy Acquisition Costs (9,368) (11,285)
Other Assets and Liabilities (81,188) (22,730)
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Total Adjustments 21,022 185,550
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Net Cash Provided by Operating Activities $ 237,708 $ 353,459
========== =========
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
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SAFECO Corporation
Our net income for the first six months of 1996 was $217 million or $1.72 per
share, compared with $1.34 per share for 1995. If we exclude realized gain
from investments, our income was $1.45 per share, compared with $1.23 per
share in 1995.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
1996 1995 1996 1995
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
- - -------------------------------------------------------------------------------------------------------------------
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain (Loss) $ 6,482 $ (30,438) $ 4,387 $ 6,938
Net Investment Income 140,777 145,534 69,638 73,083
----------- ----------- ----------- ----------
Total Property and Casualty 147,259 115,096 74,025 80,021
Life and Health Insurance 69,311 66,738 37,302 34,924
Real Estate 6,509 3,755 3,656 1,291
Credit 8,768 5,464 4,711 3,079
Asset Management 3,784 3,207 1,088 1,554
Corporate (3,655) (6,167) (1,617) (3,624)
----------- ----------- ----------- ----------
Total 231,976 188,093 119,165 117,245
----------- ----------- ----------- ----------
Realized Gain (Loss), before Tax, from:
Security Investments 52,888 20,249 20,128 15,103
Real Estate Investments (42) 477 (5) 345
----------- ----------- ----------- ----------
Total 52,846 20,726 20,123 15,448
----------- ----------- ----------- ----------
Income before Income Taxes 284,822 208,819 139,288 132,693
----------- ----------- ----------- ----------
Provision for Income Taxes on:
Income before Realized Gain 49,892 34,071 26,278 24,809
Realized Gain 18,244 6,839 7,027 5,185
----------- ----------- ------------ ----------
Total 68,136 40,910 33,305 29,994
----------- ----------- ----------- ----------
Net Income $ 216,686 $ 167,909 $ 105,983 $ 102,699
=========== =========== =========== ==========
Net Income Per Share of Common Stock $ 1.72 $ 1.34 $ .84 $ .82
=========== =========== =========== ==========
Note: Amounts per share are adjusted to reflect the December 1995 2-for-1
stock split.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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Property and Casualty Insurance
Property and casualty operations for the first six months of 1996 produced
pretax income of $147.3 million before realized gain from investments, compared
with $115.1 million for the first six months last year. The company had an
underwriting profit of $6.5 million for the first six months, compared with a
loss of $30.4 million for the first six months a year ago. In the second
quarter the underwriting profit was $4.4 million, compared with a profit of
$6.9 million for the same quarter last year. Catastrophe losses were $40
million for the first six months, compared with $90 million for the first six
months of 1995. The 1995 catastrophe losses include $28 million from two
Dallas hailstorms and a $25 million increase in the estimated cost of the
January 1994 Northridge earthquake. In the Statement of Consolidated Cash
Flows, Net Cash Provided by Operating Activities is lower in the first six
months of 1996 compared with the first six months of 1995 primarily due to
higher claims payments in 1996. These higher claims payments reflect
catastrophe losses incurred in 1994 and 1995 and paid in the first six months
of 1996, and higher payments of 1996 losses on short-tail lines. The combined
loss and expense ratio was 99.4 for the first six months, compared with 102.9
last year. Investment income was $140.8 million, down 3% from a year ago as a
result of reduced cash flow, mainly in the first quarter, and calls of higher
coupon bonds. The proceeds of these calls were reinvested at significantly
lower rates.
Personal auto, our largest line, produced an underwriting profit of $27.9
million for the first six months, compared with a $30.4 million profit for the
first six months last year. The profit for the second quarter was $19.8
million. Average loss costs decreased slightly during the first six months due
to a decline in both the frequency and severity of auto bodily injury claims.
Homeowners had an underwriting loss of $40.8 million for the first six months,
compared with a loss of $39.6 million for the first half of 1995.
Weather-related losses, including catastrophe losses, were $66 million for this
line, compared with $63 million during the first six months last year.
Non-weather related claims, particularly fire and water damage claims, have
also increased this year. We continue to pursue additional premiums for this
coverage through a combination of higher prices and proper insurance to value.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats, produced an underwriting profit of $8.5 million for
the first six months. This compares with a $19.1 million loss for the first
six months last year which included the increase in the estimated cost of the
Northridge earthquake.
Commercial lines continue to produce results that compare favorably with the
industry. For the first six months, commercial lines had an underwriting loss
of $1.2 million, operating at a combined ratio of 100.4. A year ago, the loss
was $11.2 million and the combined ratio was 104.1.
The surety line results were excellent for both contract and commercial bond
business. The profit for this line was $11.6 million for the first six months,
compared with a profit of $10.9 million for the first six months last year.
Premiums written for the first six months increased 4% over a year ago with
personal lines up 5% and commercial lines up 2%.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
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Life and Health Insurance
Our life and health companies produced a pretax profit, before realized gain
from investments, of $69.3 million for the first six months of 1996, compared
with $66.7 million for the same period last year. The second quarter profit
was $37.3 million, compared with $34.9 million for the second quarter of 1995.
The annuity and retirement services lines' combined six months earnings were
$26.5 million, compared with $28.7 million reported for the first half of 1995.
Due to competitive market pressures, we have increased the interest rates
credited to our plan holders resulting in reduced profit margins. Group
insurance profit was $6.0 million for the first six months, up from the $5.3
million reported for the same period last year. Individual life insurance
earnings, for the six months, were $2.8 million, compared with $1.2 million for
the first six months of 1995. Recently introduced products combined with new
marketing strategies are having a positive effect on our individual life
operation.
Real Estate
SAFECO Properties' pretax income was $6.5 million for the first six months of
1996, compared with $3.8 million in 1995. We are very pleased with these
record operating results, particularly in view of the difficult retail business
environment.
Construction on Redmond Town Center, our 1.4 million square-foot, mixed-use
development project in Redmond, Washington is on schedule for a spring 1997
opening. In June we signed a long-term lease to provide up to approximately
600,000 square feet of office space for the new corporate campus of AT&T
Wireless. In addition, leasing for the 400,000 square-foot, high fashion
retail component of the center is progressing well.
Credit
SAFECO Credit Company produced a record pretax profit of $8.8 million for the
first six months of 1996, compared with $5.5 million in the first six months of
1995. Income in the second quarter was $4.7 million, compared with $3.1
million in the second quarter of 1995. Continuing higher loan and lease
outstandings, favorable write-off experience and relatively stable short-term
interest rates were contributing elements to these results. Non-affiliate
receivables and operating leases reached $843 million at June 30, 1996, a 10%
annualized increase from December 1995.
SAFECO Credit's summarized financial information is as follows (in thousands):
JUNE 30 DECEMBER 31
1996 1995
---------- ------------
Finance Receivables $774,901 $741,177
Others Assets 188,770 141,873
-------- --------
Total Assets $963,671 $883,050
======== ========
Credit Company Borrowings $714,200 $614,270
Other Liabilities 148,316 172,155
-------- --------
Total Liabilities $862,516 $786,425
======== ========
SIX MONTHS ENDED JUNE 30
1996 1995
--------- --------
Revenues $ 40,404 $ 34,112
Expenses 31,636 28,648
--------- ---------
Income before Income Taxes 8,768 5,464
Provision for Income Taxes 3,130 1,795
--------- ---------
Net Income $ 5,638 $ 3,669
========= =========
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - -------------------------------------------------------------------------------
Asset Management
Asset management activities produced a pretax profit of $3.8 million for the
first six months of 1996, compared with $3.2 million last year. Assets under
management are approximately $3.0 billion, a 12% increase over June 30, 1995.
Investment Portfolios
The market value of our consolidated bond portfolio was $533 million in excess
of amortized cost at June 30, 1996, down from $721 million at March 31, 1996
and $1.4 billion at December 31, 1995. The market value of our equity
securities was $571 million in excess of cost at June 30, 1996.
Dividend
The second quarter 1996 dividend to common stockholders was paid at the rate of
$0.29 per share, reflecting a 9.4% increase over the previous payment.
Other-- Footnotes
The following additional footnote disclosure relates to new accounting
standards.
Nature of Operations and 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 impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying value. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of.
Statement 121 is effective for financial statements for fiscal years
beginning after December 15, 1995 and SAFECO adopted it in the first
quarter of 1996. Adoption did not affect net income.
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SAFECO CORPORATION
Part II - Other Information
- - --------------------------------------------------------------------------------
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of SAFECO Corporation was held May
1, 1996. SAFECO shareholders elected five nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 1999 with the exception of Mr. Krippaehne,
whose term will expire in 1998. There were no broker non-votes with
respect to any of the nominees.
Votes Votes
For Withheld
Phyllis J. Campbell 115,785,807 1,571,191
Boh A. Dickey 116,572,380 784,618
William P. Gerberding 116,557,954 799,044
William W. Krippaehne, Jr. 116,018,766 1,338,232
Paul W. Skinner 116,731,430 625,568
In addition, the shareholders voted to amend Article III of the
Corporation's Restated Articles of Incorporation to increase the
number of authorized shares of Common Stock from 150,000,000 to
300,000,000. The vote was 109,235,708 "for" adoption of the
proposal, 7,484,612 "against" and 636,678 "abstain". There were no
broker non-votes with respect to the proposal.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3 - Restated Articles of Incorporation (as amended
May 1, 1996).
Exhibit 27 - Financial Data Schedule. (This exhibit is
included only in the electronic EDGAR filing
version on this 10-Q. The Financial Data Schedule
is not a separate financial statement but a
schedule that summarizes certain standard
financial information extracted directly from the
financial statements in this filing.)
(b) Reports on Form 8-K
No Forms 8-K were filed or required to be filed for any event
during the quarter ended June 30, 1996.
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