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, 1997.
OR
[ ] 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)
126,343,401 shares of no par value common stock were outstanding at June 30,
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
Part I - Financial Information * Page
----
Item 1. Financial Statements:
Consolidated Balance Sheet, 3
June 30, 1997 and December 31, 1996
Statement of Consolidated Income and Retained Earnings 5
for the Quarters and Six Months Ended June 30, 1997 and 1996
Statement of Consolidated Cash Flows 6
for the Six Months Ended June 30, 1997 and 1996
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
*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 August 14, 1997 and Chief Financial Officer
H. PAUL LOWBER
--------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated August 14, 1997 and Chief Accounting Officer
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands)
- - --------------------------------------------------------------------------------
June 30 December 31
ASSETS 1997 1996
----------- ----------- -----------
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1997 - $11,611,078; 1996 -$11,270,529) $12,238,159 $11,936,243
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1997 - $2,864,472; 1996 - $2,670,004) 2,698,078 2,488,324
Marketable Equity Securities, at Market Value
(Cost: 1997 - $646,746; 1996 - $641,841) 1,501,093 1,298,809
Mortgage Loans 460,301 447,988
Real Estate (At cost less accumulated depreciation) 614,595 554,011
Policy Loans 59,458 58,153
Short-Term Investments 110,130 105,927
----------- -----------
Total Investments 17,681,814 16,889,455
Cash 80,497 55,498
Accrued Investment Income 247,576 240,804
Finance Receivables 913,782 829,045
Premiums and Other Service Fees Receivable 486,937 467,182
Other Notes and Accounts Receivable 53,872 42,387
Reinsurance Recoverables 129,884 137,484
Deferred Policy Acquisition Costs 411,590 396,107
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 171,676 171,288
Other Assets 211,232 197,211
Separate Account Assets 662,161 491,212
----------- -----------
TOTAL $21,051,021 $19,917,673
=========== ===========
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts) (continued)
- - -------------------------------------------------------------------------------
June 30 December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
------------------------------------ ----------- -----------
Losses and Adjustment Expense $ 1,978,170 $ 2,088,226
Unearned Premiums 981,715 946,899
Life Policy Liabilities 150,634 149,624
Funds Held Under Deposit Contracts 10,402,817 9,792,730
Notes and Mortgages Payable:
Credit Company Borrowings ($863,760 maturing within one year) 907,660 808,750
7.875% Notes Due 2005 200,000 200,000
Other Notes and Mortgages ($42,512 maturing within one year) 233,518 224,744
Other Liabilities 669,305 678,799
Federal and Canadian Income Taxes:
Current 12,311 3,512
Deferred (Includes tax on unrealized appreciation
of investment securities:
1997 - $512,932; 1996 - $456,275) 482,097 417,837
Separate Account Liabilities 662,161 491,212
----------- -----------
Total Liabilities 16,680,388 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 - 8,074,930; 1996 - 3,344,751
Shares Issued and Outstanding:
1997 - 126,343,401; 1996 - 126,308,237 227,921 225,276
Retained Earnings 3,190,430 3,042,214
Unrealized Appreciation of Investment Securities,
Net of Tax 956,622 851,401
Unrealized Loss from Foreign Currency Translation,
Net of Tax (4,340) (3,551)
----------- -----------
Total Stockholders' Equity 4,370,633 4,115,340
----------- -----------
TOTAL $21,051,021 $19,917,673
=========== ===========
5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Thousands Except Per Share Amounts)
- - -------------------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30 June 30
--------------------------- --------------------------
1997 1996 1997 1996
----------- ---------- ---------- ----------
REVENUES:
Insurance:
Property and Casualty Earned Premiums $1,176,356 $1,112,382 $ 594,862 $ 559,753
Life and Health Premiums and Other Revenues 134,984 132,280 68,417 66,596
---------- ---------- ---------- ----------
Total 1,311,340 1,244,662 663,279 626,349
Real Estate 32,673 39,595 16,360 21,282
Finance 40,974 36,575 21,406 18,478
Asset Management 11,756 11,390 6,060 4,909
Other 25,105 18,713 12,494 9,615
Net Investment Income 583,697 549,842 292,664 275,265
Realized Investment Gain 40,761 52,846 19,057 20,123
---------- ---------- ---------- ----------
Total 2,046,306 1,953,623 1,031,320 976,021
---------- ---------- ---------- ----------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,210,268 1,167,708 604,646 587,748
Commissions 226,634 201,367 117,498 104,151
Personnel Costs 148,226 133,319 75,179 66,245
Interest 37,437 35,408 18,974 17,296
Dividends to Policyholders 8,873 8,267 4,632 4,247
Other 127,801 132,519 66,522 69,334
Amortization of Deferred Policy Acquisition Costs 223,093 206,820 112,646 103,227
Deferral of Policy Acquisition Costs (236,147) (216,607) (124,262) (115,515)
---------- ---------- ---------- ----------
Total 1,746,185 1,668,801 875,835 836,733
---------- ---------- ---------- ----------
Income before Income Taxes 300,121 284,822 155,485 139,288
---------- ---------- ---------- ----------
Provision (Benefit) for Federal
and Canadian Income Taxes:
Current 63,357 70,355 36,186 34,188
Deferred 8,027 (2,219) 2,087 (883)
---------- ---------- ---------- ----------
Total 71,384 68,136 38,273 33,305
---------- ---------- ---------- ----------
Net Income 228,737 216,686 117,212 105,983
Retained Earnings, Beginning of Period 3,042,214 2,755,537 3,113,832 2,827,580
Dividends Declared (77,062) (69,955) (40,430) (36,556)
Common Stock Reacquired (3,459) (5,396) (184) (135)
---------- ---------- ---------- ----------
Retained Earnings, End of Period $3,190,430 $2,896,872 $3,190,430 $2,896,872
========== ========== ========== ==========
Net Income Per Share of Common Stock $ 1.81 $ 1.72 $ 0.93 $ 0.84
========== ========== ========== ==========
Average Number of Shares Outstanding
During the Period (In Thousands) 126,322 126,026 126,328 126,041
========== ========== ========== ==========
Cash Dividends Paid to Common Stockholders $ 0.58 $ 0.53 $ 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.
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
- - --------------------------------------------------------------------------------
Six Months Ended
June 30
----------------------------
1997 1996
---------- ----------
OPERATING ACTIVITIES
Insurance Premiums Received $1,299,170 $1,234,955
Dividends and Interest Received 577,275 545,432
Other Operating Receipts 93,859 84,567
Insurance Claims and Policy Benefits Paid (1,074,971) (1,014,121)
Underwriting, Acquisition and Insurance Operating Costs Paid (502,842) (446,428)
Interest Paid (37,595) (34,394)
Other Operating Costs Paid (51,803) (45,672)
Income Taxes Paid (56,014) (86,631)
---------- ----------
Net Cash Provided by Operating Activities 247,079 237,708
---------- ----------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,186,771) (932,925)
Fixed Maturities Held-to-Maturity (193,226) (302,343)
Equities (41,532) (75,246)
Other Investments (121,843) (81,680)
Maturities of Fixed Maturities Available-for-Sale 235,202 444,514
Maturities of Fixed Maturities Held-to-Maturity 2,622 13,518
Sales of:
Fixed Maturities Available-for-Sale 670,121 497,252
Fixed Maturities Held-to-Maturity - -
Equities 79,474 93,408
Other Investments 51,639 29,004
Net (Increase) Decrease in Short-Term Investments (10,255) 12,094
Finance Receivables Originated or Acquired (240,314) (131,597)
Principal Payments Received on Finance Receivables 149,573 92,549
Other (33,773) (30,094)
---------- ----------
Net Cash Used in Investing Activities (639,083) (371,546)
---------- ----------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 763,478 500,160
Return of Funds Held Under Deposit Contracts (405,340) (380,573)
Proceeds from Notes and Mortgage Borrowings 2,000 15,003
Repayment of Notes and Mortgage Borrowings (6,617) (61,920)
Net Proceeds from Short-Term Borrowings 125,681 110,248
Common Stock Reacquired (3,615) (5,653)
Dividends Paid to Stockholders (73,265) (66,787)
Other 14,681 3,508
---------- ----------
Net Cash Provided by Financing Activities 417,003 113,986
---------- ----------
Net Increase (Decrease) in Cash 24,999 (19,852)
Cash at the Beginning of Period 55,498 65,477
---------- ----------
Cash at the End of Period $ 80,497 $ 45,625
========== ==========
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands) (continued)
- - -------------------------------------------------------------------------------
Six Months Ended
June 30
------------------------
1997 1996
--------- --------
Net Income $ 228,737 $216,686
--------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (40,761) (52,846)
Depreciation and Amortization 34,453 30,994
Amortization of Fixed Maturity Investments (18,024) (18,913)
Deferred Income Tax Expense (Benefit) 8,027 (2,219)
Interest Expense on Deposit Contracts 224,859 224,055
Other Adjustments 1,346 720
Changes in:
Losses and Adjustment Expense (110,056) (60,903)
Unearned Premiums 34,816 32,434
Life Policy Liabilities 1,010 (5,244)
Accrued Income Taxes 8,799 (15,859)
Accrued Interest on Accrual Bonds (23,339) (19,981)
Accrued Investment Income (6,772) (660)
Deferred Policy Acquisition Costs (12,351) (9,368)
Other Assets and Liabilities (83,665) (81,188)
--------- --------
Total Adjustments 18,342 21,022
--------- --------
Net Cash Provided by Operating Activities $ 247,079 $237,708
========= ========
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SAFECO CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- - --------------------------------------------------------------------------------
SAFECO Corporation
- - ------------------
Our net income for the first six months of 1997 was $228.7 million or $1.81 per
share, compared with $1.72 per share for 1996. If we exclude realized gain from
investments, our income was $1.60 per share, compared with $1.45 in 1996.
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
1997 1996 1997 1996
- - --------------------------------------------------------------------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain $ 30,872 $ 6,482 $ 23,582 $ 4,387
Net Investment Income 139,477 140,777 69,077 69,638
--------- --------- --------- ---------
Total Property and Casualty 170,349 147,259 92,659 74,025
Life and Health Insurance 72,842 69,311 35,689 37,302
Real Estate 5,507 6,509 2,751 3,656
Credit 9,837 8,768 5,324 4,711
Asset Management 2,448 3,784 1,414 1,088
Corporate (1,623) (3,655) (1,409) (1,617)
--------- --------- --------- ---------
Total 259,360 231,976 136,428 119,165
--------- --------- --------- ---------
Realized Gain (Loss), before Tax, from:
Security Investments 40,733 52,888 19,048 20,128
Real Estate Investments 28 (42) 9 (5)
--------- --------- --------- ---------
Total 40,761 52,846 19,057 20,123
--------- --------- --------- ---------
Income before Income Taxes 300,121 284,822 155,485 139,288
--------- --------- --------- ---------
Provision for Income Taxes on:
Income before Realized Gain 58,102 49,892 31,963 26,278
Realized Gain 13,282 18,244 6,310 7,027
--------- --------- --------- ---------
Total 71,384 68,136 38,273 33,305
--------- --------- --------- ---------
Net Income $ 228,737 $ 216,686 $ 117,212 $ 105,983
========= ========= ========= =========
Net Income Per Share of Common Stock:
Income before Realized Gain $ 1.60 $ 1.45 $ .83 $ .74
Realized Gain .21 .27 .10 .10
--------- --------- --------- ---------
Net Income $ 1.81 $ 1.72 $ .93 $ .84
========= ========= ========= =========
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SAFECO CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Property and Casualty Insurance
- - -------------------------------
Property and casualty operations for the first six months of 1997 produced
pretax income of $170.3 million before realized gain from investments, compared
with $147.3 million for the first six months last year. The company had an
underwriting profit of $30.9 million for the first half of 1997, compared with
$6.5 million for the same period last year. The second quarter underwriting
profit was $23.6 million, compared with profits of $4.4 million for the second
quarter last year and $7.3 million last quarter. The combined loss and expense
ratio was 97.4 for the first six months, compared with 99.4 last year.
Investment income was $139.5 million for the first six months, down 1% from a
year ago, primarily as a result of the relatively lower interest rate
environment.
Personal auto, our largest line, reported an underwriting profit of $28.5
million for the first six months, compared with a profit of $27.9 million for
the first six months last year. The profit for the second quarter was $24.3
million. The number of vehicles insured at the end of June was 7% higher than a
year ago. Average loss costs were down 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 $15.6 million for the first six months,
compared with a loss of $40.8 million for the first half of 1996. Catastrophe
losses for this line were $22 million, compared with $30 million for the first
six months a year ago. We are working on several initiatives to continue to
improve homeowners' results including 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 $9.7 million for the
first six months, compared with a profit of $8.5 million for the first six
months last year.
Commercial lines continue to produce results that compare favorably with the
industry. For the first six months, commercial lines had an underwriting loss of
$3.3 million, operating at a combined ratio of 101.1. This compares with an
underwriting loss of $1.2 million for the first six months last year and a
combined ratio of 100.4. These strong 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 experience excellent results. The profit for this line was
$10.0 million for the first six months, compared with a profit of $11.6 million
for the first six months last year.
Premiums written for the first six months of 1997 increased 5% over a year ago
with personal lines up 6%, commercial lines up 5% and surety down 4%.
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SAFECO CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Life and Health Insurance
- - -------------------------
Our life and health insurance operations produced a pretax profit, before
realized gain from investments, of $72.8 million for the first six months of
1997. This compared with $69.3 million for the same period last year. The second
quarter profit was $35.7 million, compared to the quarterly record of $37.3
million reported in the second quarter of 1996.
The annuity and retirement services lines' combined six months earnings were
$26.4 million, compared with $26.5 million reported for the first half of 1996.
Competitive marketplace pressures have kept our profit margins for the annuity
and retirement services lines relatively flat during the two reporting periods.
Combined assets under management for both lines of business now total $10.3
billion, up from $9.7 billion at year end.
Group insurance profit was $6.8 million for the first six months, compared with
$6.0 million reported for the same period last year. Earnings from individual
life were $2.6 million for the six months, compared with $2.8 million reported
last year at this time.
Real Estate
- - -----------
SAFECO Properties' pretax income was $5.5 million for the first six months of
1997, compared with $6.5 million in 1996. This decrease in income was
principally attributable to land sales not duplicated in 1997.
Our commercial and medical real estate properties continue to perform well, and
we are looking forward to our August opening of Redmond Town Center, a 1.4
million square-foot, mixed-use development in Redmond, Washington.
Credit
- - ------
SAFECO Credit Company produced a record pretax profit of $9.8 million for the
first six months of 1997, compared with $8.8 million in the first six months of
1996. Pretax income in the second quarter was also a record high at $5.3
million, compared with $4.5 million in the first quarter. The results reflect
continuing portfolio growth, low write-off and delinquency experience, and a
decreasing operating expense ratio. Non-affiliate receivables and operating
leases surpassed $1 billion for the first time, a 19% annualized increase from
December 1996.
SAFECO Credit's summarized financial information is as follows (in thousands):
JUNE 30 DECEMBER 31
1997 1996
---------- ----------
Finance Receivables $ 913,782 $ 829,045
Other Assets 228,281 238,479
---------- ----------
Total Assets $1,142,063 $1,067,524
========== ==========
Credit Company Borrowings $ 907,660 $ 808,750
Other Liabilities 122,965 152,188
---------- ----------
Total Liabilities $1,030,625 $ 960,938
========== ==========
SIX MONTHS ENDED JUNE 30
1997 1996
---------- ----------
Revenues $ 45,523 $ 40,404
Expenses 35,686 31,636
---------- ----------
Income before Income Taxes 9,837 8,768
Provision for Income Taxes 3,463 3,130
---------- ----------
Net Income $ 6,374 $ 5,638
========== ==========
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SAFECO CORPORATION
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MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
Asset Management
- - ----------------
The pretax income from asset management activities for the first six months of
1997 was $2.4 million. This is the same as last year's results, after excluding
a $1.4 million one-time gain recognized in 1996. Our current results reflect
continued development costs in our efforts to increase the number of channels
through which we sell our products. These efforts contributed to a 41% increase
in assets under management since last year, which now total $4.3 billion at June
30, 1997. The new SAFECO U.S. Value Fund began operations during the quarter.
Investment Portfolios
- - ---------------------
The market value of our consolidated bond portfolio was $793 million in excess
of amortized cost at June 30, 1997, compared with $419 million at March 31, 1997
and $847 million at December 31, 1996. The market value of our equity securities
was $854 million in excess of cost at June 30, 1997, compared with $657 million
at December 31, 1996.
Dividend
- - --------
The second quarter of 1997 dividend paid in July to common stockholders was paid
at the rate of $0.32 per share, reflecting a 10.3% increase over the previous
payment.
Agreement to Acquire American States Financial Corporation
- - ----------------------------------------------------------
On June 6, 1997, SAFECO Corporation "SAFECO", entered into an Agreement and Plan
of Merger dated as of the same date (the "Agreement"), whereby SAFECO will
acquire American States Financial Corporation ("ASFC") through a merger of ASFC
into a wholly-owned subsidiary of SAFECO (the "Acquisition"). The Agreement was
announced on June 9, 1997. The Acquisition will be accounted for using the
purchase method of accounting. Pursuant to the Agreement and upon consummation
of the Acquisition, each outstanding share of Common Stock of ASFC ("ASFC Common
Stock") will be converted into the right to receive $47.00 in cash without
interest thereon, for an aggregate cash purchase price of $2.8 billion. In
connection with the Agreement, SAFECO has agreed to pay approximately $100
million to Lincoln National Corporation ("LNC"), the holder of approximately
83% of the outstanding ASFC Common Stock, in consideration for LNC's agreement
to release ASFC from certain debt obligations and to repay a $200 million term
loan from LNC.
SAFECO anticipates a September 30, 1997 closing. Consummation of the Acquisition
is subject to certain conditions, including among others, (i) the approval by
certain state insurance regulators of the Acquisition, (ii) approval of the
holders of ASFC Common Stock (see discussion of Voting Agreement below) and
(iii) compliance with applicable provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"). Early termination of the
HSR Act waiting period was received on July 15, 1997.
In connection with the Agreement, SAFECO and LNC have also entered into a
Voting, Support and Indemnification Agreement, dated June 6, 1997 (the "Voting
Agreement"), pursuant to which LNC agreed, among other things, (i) to vote all
ASFC Common Stock held by it or any of its subsidiaries in favor of the
Acquisition, (ii) to grant SAFECO an irrevocable proxy in all ASFC Common Stock
held by it or any of its subsidiaries for purposes of a vote of ASFC Common
Stock held to consider the Acquisition, and (iii) to allocate between LNC and
SAFECO certain tax and benefits liabilities and assets of ASFC.
SAFECO intends to finance the Acquisition and the repayment of ASFC's
obligations to LNC through a combination of long-term debt; internally available
funds; 40-year company-obligated mandatorily redeemable trust preferred
securities (the "Capital Securities") that are callable after 10 years;
commercial paper; and the issuance of common stock. As of August 14, 1997,
SAFECO has issued $841.5 million of Capital Securities (net of underwriting
compensation) and $200 million of 10-year senior notes (the "Notes") (both
financings were completed on July 15, 1997). Both the Capital Securities and the
Notes were issued as private placements under Rule 144A of the Securities Act,
with attached registration rights.
--11--
12
SAFECO CORPORATION
- - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
The additional funds to finance the Acquisition and the repayment of ASFC's
obligations to LNC are expected to come from the issuance of approximately $707
million of commercial paper, $148.5 million of Capital Securities (net of
underwriting compensation), a $600 million extraordinary dividend from SAFECO's
property and casualty subsidiaries and $627 million of SAFECO common stock (net
of underwriting compensation). SAFECO has available a credit facility from a
bank syndicate that allows it to borrow or use to back up commercial paper for
up to $1.6 billion for financing the Acquisition.
Certain portions of SAFECO's financing plan are not expected to be consummated
until later in 1997. SAFECO may determine to offer other securities or pursue
other forms of financing in lieu of certain of the offerings or borrowings
described above, or to increase or decrease the individual amounts of such
offerings and borrowings.
Coincident with the Acquisition of ASFC and the related financings, Moody's and
Standard & Poor's issued revised ratings for SAFECO's senior debt and for the
insurance subsidiaries' financial strength/claims paying ability. Also rated
were SAFECO's Capital Securities and commercial paper. A.M. Best's current
financial strength ratings of A++ for SAFECO's property and casualty and life
subsidiaries are under review pending the close of the Acquisition of ASFC.
The following table summarizes SAFECO's current ratings:
A.M. Duff & Standard &
Best Phelps Moody's Poor's
---- ------ ------- ------
SAFECO Corporation:
Senior Debt -- -- A3 A+
Capital Securities -- -- a3 A
Commercial Paper -- D-1 P-2 A-1
Financial Strength/Claims Paying Ability:
Property and Casualty Subsidiaries A++ -- A1 AA+
Life Subsidiaries A++ -- A1 AA
The revised ratings are lower due to the financing related to the ASFC
Acquisition, yet remain strong -- reflecting our overall modest use of debt and
solid balance sheet.
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13
SAFECO CORPORATION
- - ------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - --------------------------------------------------------------------------------
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.
In June of 1997, the FASB issued Statement 130, "Reporting
Comprehensive Income". Statement 130 is effective for fiscal years
beginning after December 15, 1997 and SAFECO will adopt it in the first
quarter of 1998. Adoption will have no effect on net income but will
require the reporting of "comprehensive income," which will include net
income and certain items currently reported in stockholders' equity.
The FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information" in June of 1997. Statement 131
changes the way companies report information about business segments in
annual financial statements and requires the reporting of selected
segment information in interim reports. This Statement is effective for
financial statements for periods beginning after December 15, 1997
except that providing interim information in the initial year (1998)
may be deferred until 1999. SAFECO plans on providing the required
segment information in its 1998 annual report and in its interim
reports beginning in 1999. This Statement has no effect on net income.
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SAFECO CORPORATION
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Part II - Other Information
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Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Annual Meeting of Shareholders of SAFECO Corporation was held May 7,
1997. 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 2000 with the exception of Mr. Cline, whose term
will expire in 1998. There were no broker non-votes with respect to any
of the nominees.
For Withheld
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Robert S. Cline 117,033,556 243,566
Joshua Green III 117,058,476 218,646
William G. Reed, Jr. 117,054,996 222,126
Judith M. Runstad 115,992,460 1,284,662
George H. Weyerhaeuser 117,023,215 253,907
Continuing as Directors are Roger H. Eigsti, John W. Ellis and William
W. Krippaehne, Jr., whose terms expire in 1998; and Phyllis J. Campbell,
Boh A. Dickey, William P. Gerberding and Paul W. Skinner, whose terms
expire in 1999.
The proposal to amend Article V of the Corporation's Restated Articles
of Incorporation regarding directors elected to fill vacancies on the
Board of Directors was adopted by the favorable vote of 114,160,499
shares, with 2,751,524 shares voted "against" and 365, 099 shares
abstaining. There were no broker non-votes with respect to the proposal.
The proposal to amend Article II of the Corporation's Bylaws regarding
directors elected to fill vacancies on the Board of Directors was
adopted by the favorable vote of 114,170,807 shares, with 2,737,844
shares voted "against" and 368,471 shares abstaining.
There were no broker non-votes with respect to the proposal.
The proposal to amend Article XII of the Corporation's Bylaws to provide
broader indemnification to directors and officers than available under
the current Bylaws was adopted by the favorable vote of 115,469,203
shares, with 624,845 shares voted "against" and 1,183,074 abstaining.
There were no broker non-votes with respect to the proposal.
The proposal to adopt the SAFECO Long-Term Incentive Plan of 1997 was
adopted by the favorable vote of 108,201,842 shares, with 7,755,388
shares voted "against" and 1,319,892 shares abstaining. There were no
broker non-votes with respect to the proposal.
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15
SAFECO CORPORATION
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Part II - Other Information (Continued)
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a)Exhibits:*
Exhibit 2.1 Agreement and Plan of Merger dated as of June 6,
1997 by and among American States Financial
Corporation, SAFECO Corporation ("SAFECO") and ASFC
Acquisition Co. (filed as Exhibit 2.1 to SAFECO's
Report on Form 8-K dated June 6, 1997 and incorporated
herein by reference).
Exhibit 2.2 Voting, Support, and Indemnification Agreement,
dated June 6, 1997, by and among SAFECO and Lincoln
National Corporation (filed as Exhibit 2.1 to SAFECO's
Schedule 13D dated June 6, 1997 and incorporated herein
by reference).
Exhibit 3.1 Bylaws (as last amended May 7, 1997).
Exhibit 3.2 Restated Articles of Incorporation (as amended May 7,
1997).
Exhibit 4.1 SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of all
instruments defining rights of holders of long-term
debt of SAFECO and its consolidated subsidiaries.
Exhibit 4.2 Indenture, dated as of July 15, 1997, between
SAFECO and The Chase Manhattan Bank, as Trustee.
Exhibit 4.3 Form of Junior Subordinated Deferrable Interest
Debenture (included in the Indenture included herein as
Exhibit 4.2).
Exhibit 4.4 Certificate of Trust of SAFECO Capital Trust I (the
"Trust") dated June 18, 1997.
Exhibit 4.5 Amended and Restated Declaration of Trust of the
Trust, dated as of July 15, 1997, among SAFECO, as
sponsor, the Administrators thereof, The Chase
Manhattan Bank Delaware, as Delaware Trustee, the Chase
Manhattan Bank as Property Trustee and the holders from
time to time of undivided interests in the assets of
the Trust.
Exhibit 4.6 Form of Capital Security Certificate for Trust
(included in the Amended and Restated Declaration of
Trust included herein as Exhibit 4.5).
Exhibit 4.7 Capital Securities Guarantee Agreement, dated as of
July 15, 1997, between SAFECO and The Chase Manhattan
Bank, as Guarantee Trustee.
Exhibit 10.1 The SAFECO Long-Term Incentive Plan of 1997 filed
as Exhibit 99.1 to the Registration Statement on Form
S-8 (No. 333-26393) dated May 2, 1997, is incorporated
herein by reference.
Exhibit 10.2 Registration Rights Agreement, dated July 15,
1997, among SAFECO, the Trust and Smith Barney, Inc.,
Salomon Brothers, Inc., and Bancamerica Securities,
Inc., as Initial Purchasers.
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SAFECO CORPORATION
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Part II - Other Information (Continued)
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:* (continued)
Exhibit 10.3 Registration Rights Agreement, dated July 15,
1997, between SAFECO and Smith Barney, Inc., as Initial
Purchaser.
Exhibit 27 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
The Registrant filed one report on Form 8-K during the quarter ended
June 30, 1997, under Item 5 (Other Items) and Item 7 (Financial
Statements and Exhibits), dated June 6, 1997. This Report relates to
the Registrant's planned acquisition of American States Financial
Corporation.
* Copies of Exhibits are available without charge by making a written request
to:
Rod A. Pierson,
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
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