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 MARCH 31, 1997. [ ] 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 I.D. No.) SAFECO PLAZA, Seattle, Washington 98185 (Address of principal executive offices) (206) 545-5000 (Telephone) 126,315,553 shares of no par value common stock were outstanding at March 31, 1997 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 TABLE OF CONTENTS AND SIGNATURES Page ----- Part I - Financial Information * Item 1. Financial Statements: Consolidated Balance Sheet, 3 March 31, 1997 and December 31, 1996 Statement of Consolidated Income and Retained Earnings 5 for the Three Months Ended March 31, 1997 and 1996 Statement of Consolidated Cash Flows 6 for the Three Months Ended March 31, 1997 and 1996 Item 2. Management's Discussion and Analysis 8 Part II - Other Information 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, 1996 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 ROD A. PIERSON -------------------------------------- Rod A. Pierson Senior Vice President Dated May 8, 1997 and Chief Financial Officer -2- 3 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands) March 31 December 31 ASSETS 1997 1996 ------------ ------------ ------------ Investments: Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: 1997 - $11,465,195; 1996 -$11,270,529) $11,825,458 $11,936,243 Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1997 - $2,654,052; 1996 - $2,670,004) 2,595,729 2,488,324 Marketable Equity Securities, at Market Value (Cost: 1997 - $638,199; 1996 - $641,841) 1,311,345 1,298,809 Mortgage Loans 445,672 447,988 Real Estate (At cost less accumulated depreciation) 581,698 554,011 Policy Loans 57,976 58,153 Short-Term Investments 83,931 105,927 ----------- ----------- Total Investments 16,901,809 16,889,455 Cash 48,765 55,498 Accrued Investment Income 251,037 240,804 Finance Receivables 870,747 829,045 Premiums and Other Service Fees Receivable 468,537 467,182 Other Notes and Accounts Receivable 61,280 42,387 Reinsurance Recoverables 149,308 137,484 Deferred Policy Acquisition Costs 411,062 396,107 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 171,947 171,288 Other Assets 193,714 197,211 Separate Account Assets 541,143 491,212 ----------- ----------- TOTAL $20,069,349 $19,917,673 =========== =========== (continued) -3- 4 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands Except Share Amounts) (continued) March 31 December 31 LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996 ------------------------------------ ------------ ------------- Losses and Adjustment Expense $ 2,024,353 $ 2,088,226 Unearned Premiums 947,145 946,899 Life Policy Liabilities 151,051 149,624 Funds Held Under Deposit Contracts 10,047,299 9,792,730 Notes and Mortgages Payable: Credit Company Borrowings ($820,400 maturing within one year) 865,300 808,750 7.875% Notes Due 2005 200,000 200,000 Other Notes and Mortgages ($43,102 maturing within one year) 237,544 224,744 Other Liabilities 690,363 678,799 Federal and Canadian Income Taxes: Current 28,241 3,512 Deferred (Includes tax on unrealized appreciation of investment securities: 1997 - $360,009; 1996 - $456,275) 327,254 417,837 Separate Account Liabilities 541,143 491,212 ------------ ------------ Total Liabilities 16,059,693 15,802,333 ------------ ------------ Preferred 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: 1997 - 3,214,124; 1996 - 3,344,751 Shares Issued and Outstanding: 1997 - 126,315,553; 1996 - 126,308,237 227,231 225,276 Retained Earnings 3,113,832 3,042,214 Unrealized Appreciation of Investment Securities, Net of Tax 672,621 851,401 Unrealized Loss from Foreign Currency Translation, Net of Tax (4,028) (3,551) ------------ ------------ Total Stockholders' Equity 4,009,656 4,115,340 ------------ ------------ TOTAL $ 20,069,349 $ 19,917,673 ============ ============ -4- 5 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (In Thousands Except Per Share Amounts) Three Months Ended March 31 --------------------------------- 1997 1996 -------------- -------------- REVENUES: Insurance: Property and Casualty Earned Premiums $ 581,494 $ 552,629 Life and Health Premiums and Other Revenues 66,567 65,684 -------------- -------------- Total 648,061 618,313 Real Estate 16,313 18,313 Finance 19,568 18,097 Asset Management 5,696 6,481 Other 12,611 9,098 Net Investment Income 291,033 274,577 Realized Investment Gain 21,704 32,723 -------------- -------------- Total 1,014,986 977,602 -------------- -------------- EXPENSES: Losses, Adjustment Expense and Policy Benefits 605,622 579,960 Commissions 109,136 97,216 Personnel Costs 73,047 67,074 Interest 18,463 18,112 Dividends to Policyholders 4,241 4,020 Other 61,279 63,185 Amortization of Deferred Policy Acquisition Costs 110,447 103,593 Deferral of Policy Acquisition Costs (111,885) (101,092) -------------- -------------- Total 870,350 832,068 -------------- -------------- Income before Income Taxes 144,636 145,534 -------------- -------------- Provision (Benefit) for Federal and Canadian Income Taxes: Current 27,171 36,167 Deferred 5,940 (1,336) -------------- -------------- Total 33,111 34,831 -------------- -------------- Net Income 111,525 110,703 Retained Earnings, Beginning of Period 3,042,214 2,755,537 Dividends Declared (36,632) (33,399) Common Stock Reacquired (3,275) (5,261) -------------- -------------- Retained Earnings, End of Period $ 3,113,832 $ 2,827,580 ============== ============== Net Income Per Share of Common Stock $ 0.88 $ 0.88 ============== ============== Average Number of Shares Outstanding During the Period (In Thousands) 126,316 126,011 ============== ============== Cash Dividends Paid to Common Stockholders $ 0.29 $ 0.265 ============== ============== 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 -------------------------- 1997 1996 ---------- ----------- OPERATING ACTIVITIES Insurance Premiums Received $ 632,469 $ 603,124 Dividends and Interest Received 277,634 267,865 Other Operating Receipts 46,039 44,826 Insurance Claims and Policy Benefits Paid (557,098) (530,758) Underwriting, Acquisition and Insurance Operating Costs Paid (287,352) (253,703) Interest Paid (11,085) (9,805) Other Operating Costs Paid (27,507) (26,983) Income Taxes Paid (3,121) (13,101) --------- --------- Net Cash Provided by Operating Activities 69,979 81,465 --------- --------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (538,851) (407,347) Fixed Maturities Held-to-Maturity (100,739) (152,249) Equities (10,342) (49,761) Other Investments (52,032) (32,083) Maturities of Fixed Maturities Available-for-Sale 154,960 194,860 Maturities of Fixed Maturities Held-to-Maturity 429 10,483 Sales of: Fixed Maturities Available-for-Sale 213,810 277,070 Fixed Maturities Held-to-Maturity -- -- Equities 37,382 45,508 Other Investments 20,867 13,014 Net Decrease in Short-Term Investments 23,838 20,619 Finance Receivables Originated or Acquired (115,909) (77,847) Principal Payments Received on Finance Receivables 66,000 54,650 Other (11,867) (16,347) --------- --------- Net Cash Used in Investing Activities (312,454) (119,430) --------- --------- FINANCING ACTIVITIES Funds Received Under Deposit Contracts 402,629 184,994 Return of Funds Held Under Deposit Contracts (199,251) (191,088) Proceeds from Notes and Mortgage Borrowings 2,000 -- Repayment of Notes and Mortgage Borrowings (1,749) (49,764) Net Proceeds from Short-Term Borrowings 69,177 115,677 Common Stock Reacquired (3,424) (5,510) Dividends Paid to Stockholders (36,632) (33,387) Other 2,992 2,496 --------- --------- Net Cash Provided by Financing Activities 235,742 23,418 --------- --------- Net Decrease in Cash (6,733) (14,547) Cash at the Beginning of Period 55,498 65,477 --------- --------- Cash at the End of Period $ 48,765 $ 50,930 ========= ========= (continued) -6- 7 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Thousands) (continued) Three Months Ended March 31 ------------------------- 1997 1996 ---------- ----------- Net Income $ 111,525 $ 110,703 ---------- ---------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (21,704) (32,723) Depreciation and Amortization 16,903 16,344 Amortization of Fixed Maturity Investments (9,021) (9,458) Deferred Income Tax Expense (Benefit) 5,940 (1,336) Interest Expense on Deposit Contracts 116,872 114,081 Other Adjustments 69 (337) Changes in: Losses and Adjustment Expense (63,873) (46,021) Unearned Premiums 246 (1,738) Life Policy Liabilities 1,427 (4,285) Accrued Income Taxes 24,729 23,136 Accrued Interest on Accrual Bonds (11,842) (9,742) Accrued Investment Income (10,233) (3,704) Deferred Policy Acquisition Costs (728) 2,812 Other Assets and Liabilities (90,331) (76,267) --------- --------- Total Adjustments (41,546) (29,238) --------- --------- Net Cash Provided by Operating Activities $ 69,979 $ 81,465 ========= ========= -7- 8 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS SAFECO Corporation Our net income for the first quarter was $111.5 million or $0.88 per share, equaling the per share amount for the first quarter a year ago. If we exclude realized gain from investments, our income was $0.77 per share compared with $0.71 per share in 1996. The following summarized financial information sets forth the contributions of each business segment to our consolidated income. THREE MONTHS ENDED MARCH 31 1997 1996 IN THOUSANDS EXCEPT PER SHARE AMOUNTS) ------------------------ Income (Loss) before Realized Gain and Income Taxes: Property and Casualty Insurance: Underwriting Gain $ 7,290 $ 2,095 Net Investment Income 70,400 71,139 --------- --------- Total Property and Casualty 77,690 73,234 Life and Health Insurance 37,153 32,009 Real Estate 2,756 2,853 Credit 4,513 4,057 Asset Management 1,034 2,696 Corporate (214) (2,038) --------- --------- Total 122,932 112,811 --------- --------- Realized Gain (Loss), before Tax, from: Security Investments 21,685 32,760 Real Estate Investments 19 (37) --------- --------- Total 21,704 32,723 --------- --------- Income before Income Taxes 144,636 145,534 --------- --------- Provision for Income Taxes on: Income before Realized Gain 26,139 23,614 Realized Gain 6,972 11,217 --------- --------- Total 33,111 34,831 --------- --------- Net Income $ 111,525 $ 110,703 ========= ========= Net Income Per Share of Common Stock: Income before Realized Gain $ .77 $ .71 Realized Gain .11 .17 --------- --------- Net Income $ .88 $ .88 ========= ========= -8- 9 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Property and Casualty Insurance Property and casualty operations for the first quarter of 1997 produced pretax income of $77.7 million before realized gain from investments, compared with $73.2 million a year ago. The company had an underwriting profit of $7.3 million for the first quarter compared with $6.6 million last quarter and $2.1 million for the first quarter last year. The combined loss and expense ratio was 98.7 for the quarter compared with 99.6 a year ago. First quarter investment income was $70.4 million, down 1% compared with the first quarter last year primarily as a result of the relatively low interest rate environment. Personal auto, our largest line, reported an underwriting profit of $4.2 million for the first quarter, compared with a profit of $8.1 million in the first quarter a year ago. The number of vehicles insured at the end of March was 7% higher than a year ago. Average loss costs continue to increase at a modest pace. Homeowners had an underwriting loss of $11.2 million for the first quarter, compared with a loss of $21.8 million for the first quarter of 1996. Catastrophe losses for this line were $14 million during the quarter compared with $12 million for the first quarter last year. We are working on several initiatives to continue to improve homeowners' results through a combination of higher prices, increased deductibles and proper insurance to value. Other personal lines, which provide coverage for earthquake, dwelling fire, inland marine and boats produced an underwriting profit of $3.7 million for the quarter, the same as the first quarter last year. Commercial lines had another good quarter, reporting an underwriting profit of $6.1 million, compared with a profit of $5.8 million in the first quarter last year. These strong results reflect our target marketing initiatives, a focus on efficient operations and our ability to deliver value-added services 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 $4.5 million for the first quarter, compared with a profit of $6.6 million for the same quarter last year. Premiums written for the first three months increased 5% over a year ago with personal lines up 6% and commercial lines up 4%. -9- 10 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Life and Health Insurance Our life and health insurance operations reported a pretax profit, before realized gain from investments, of $37.2 million for the first quarter of 1997. This compares with $32.0 million for the same period last year and $33.1 million for the fourth quarter of 1996. The annuity and retirement services lines' combined first quarter earnings were $13.9 million, up from $12.9 million for both the first quarter a year ago and the fourth quarter of 1996. The combined assets under management for the annuity and retirement services lines of business are approaching the $10 billion mark. This growth is the result of sales activities in financial institutions, structured settlements and qualified retirement planning. Group insurance profit was $4.3 million, up from $2.8 million reported for the same period last year. During the first quarter group life and medical claims have declined to more normal levels. Real Estate SAFECO Properties' pretax income was $2.8 million for the first quarter of 1997, compared with $2.9 million in 1996. We are pleased with these results in light of the general softness in the retail sector. Development activity on our 1.4 million square-foot, mixed-use project in Redmond, Washington and two new medical real estate properties is progressing well. We anticipate a summer 1997 opening for these projects. Credit SAFECO Credit Company produced a pretax profit of $4.5 million for the first quarter of 1997 compared with $4.1 million in the same period for 1996. The results reflect portfolio growth, continuing low write-off and delinquency experience and a decreasing operating expense ratio. Non-affiliate receivables and operating leases reached $958 million, an 18% annualized increase from December 1996. SAFECO Credit's summarized financial information is as follows (in thousands): MARCH 31 DECEMBER 31 1997 1996 ---------- ---------- Finance Receivables $ 870,747 $ 829,045 Others Assets 204,243 238,479 ---------- ---------- Total Assets $1,074,990 $1,067,524 ========== ========== Credit Company Borrowings $ 865,300 $ 808,750 Other Liabilities 100,883 152,188 ---------- ---------- Total Liabilities $ 966,183 $ 960,938 ========== ========== THREE MONTHS ENDED MARCH 31 1997 1996 ---------- ---------- Revenues $ 21,908 $ 19,848 Expenses 17,395 15,791 ---------- ---------- Income before Income Taxes 4,513 4,057 Provision for Income Taxes 1,531 1,451 ---------- ---------- Net Income $ 2,982 $ 2,606 ========== ========== -10- 11 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) Asset Management The pretax income from asset management activities for the first quarter of 1997 was $1.0 million, compared with $2.7 million for 1996. Our current results reflect higher costs as we have increased the number of channels through which we market and distribute our products. Assets under management increased 20% from last year and stand at $3.7 billion at March 31, 1997. Investment Portfolios The market value of our consolidated bond portfolio was $419 million in excess of amortized cost at March 31, 1997, down from $847 million at December 31, 1996 as a result of higher interest rates. The market value of our equity securities was $673 million in excess of cost at March 31, 1997. Stock Purchase Program In February 1996, the Board of Directors approved the continuation of the stock purchase program and reauthorized a total accumulation of up to two million shares, about 2% of our issued shares. At April 25, 1997, 282,000 shares have been purchased. 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 February of 1997, the Financial Accounting Standards Board (FASB) issued Statement 128, "Earnings Per Share." Statement 128 is effective for the fourth quarter of 1997 and SAFECO will adopt it then. The Statement simplifies the calculation of earnings per share (EPS) and requires the dual presentation of "basic" and "diluted" EPS on the face of the income statement. SAFECO's currently-reported EPS (currently "primary", will become "basic") will not be affected by Statement 128. "Diluted" EPS will begin to be shown in addition to "basic" EPS but because SAFECO's stock options do not have a significant dilutive effect (and are the only common stock equivalent) the difference between "basic" and "diluted" EPS is not expected to be material. -11- 12 SAFECO CORPORATION Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit27 - Financial Data Schedule. (This exhibit is included only in the electronic EDGAR filing version of 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 March 31, 1997. -12-