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, 1998.
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)
141,225,536 shares of no par value common stock were outstanding at June 30,
1998.
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, 1998 and December 31, 1997
Statement of Consolidated Income and Retained Earnings 5
for the Quarters and Six Months Ended June 30, 1998 and 1997
Statement of Consolidated Cash Flows 6
for the Six Months Ended June 30, 1998 and 1997
Statement of Consolidated Comprehensive Income 7
for the Quarters and Six Months Ended June 30, 1998 and 1997
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 5. Other Information - Bylaw Amendments 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 Corporation's Form 10-K for the year ended
December 31, 1997 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
/s/ ROD A. PIERSON
-------------------------------------
Rod A. Pierson
Senior Vice President
Dated August 14, 1998 and Chief Financial Officer
/s/ H. PAUL LOWBER
-------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated August 14, 1998 and Chief Accounting Officer
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
June 30 December 31
ASSETS 1998 1997
--------- ---------
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1998 - $16,615.9; 1997 -$16,086.8) $17,732.9 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1998 - $3,239.7; 1997 - $3,159.9) 2,707.5 2,708.6
Marketable Equity Securities, at Market Value
(Cost: 1998 - $954.5; 1997 - $969.0) 2,000.4 1,879.7
Mortgage Loans 509.7 499.0
Real Estate (At cost less accumulated depreciation) 611.6 586.1
Policy Loans 86.2 85.3
Short-Term Investments 217.1 134.7
--------- ---------
Total Investments 23,865.4 23,036.6
Cash 56.4 391.4
Accrued Investment Income 320.3 337.0
Finance Receivables 1,042.0 1,004.3
Premiums and Other Service Fees Receivable 995.1 953.9
Other Notes and Accounts Receivable 53.2 71.1
Reinsurance Recoverables 288.8 311.0
Deferred Policy Acquisition Costs 568.4 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 255.0 238.0
Goodwill 1,345.4 1,332.6
Other Assets 353.8 341.7
Separate Account Assets 1,148.6 905.4
--------- ---------
TOTAL $30,292.4 $29,467.8
========= =========
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions) (continued)
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------- ---------
Losses and Adjustment Expense $ 4,341.9 $ 4,352.2
Life Policy Liabilities 279.1 262.3
Unearned Premiums 1,782.4 1,713.7
Funds Held Under Deposit Contracts 12,184.0 11,891.4
Debt:
Commercial Paper 755.8 812.8
Credit Company Borrowings ($963.5 maturing within one year) 988.0 892.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($72.3 maturing within one year) 261.6 255.1
Other Liabilities 1,153.0 1,223.3
Federal Income Taxes:
Current 12.6 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities: 1998 - $741.7; 1997 - $675.6) 474.3 446.9
Separate Account Liabilities 1,148.6 905.4
--------- ---------
Total Liabilities 23,781.3 23,164.4
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 841.9 841.7
--------- ---------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options: (1998 - 7.7; 1997 - 7.9)
Shares Issued and Outstanding: (1998 - 141.2; 1997 - 141.2) 913.9 909.3
Retained Earnings 3,380.5 3,299.1
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 1,374.8 1,253.3
--------- ---------
Total Shareholders' Equity 5,669.2 5,461.7
--------- ---------
TOTAL $30,292.4 $29,467.8
========= =========
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
Six Months Ended Three Months Ended
June 30 June 30
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 2,075.9 $ 1,176.4 $ 1,046.5 $ 594.9
Life Premiums and Other Revenues 176.5 135.0 89.7 68.4
--------- --------- --------- ---------
Total 2,252.4 1,311.4 1,136.2 663.3
Real Estate 39.1 32.7 18.6 16.4
Finance 47.4 40.9 24.0 21.3
Asset Management 18.8 11.7 9.9 6.0
Other 29.0 25.1 14.7 12.5
Net Investment Income 754.2 583.7 379.7 292.7
Realized Investment Gain 44.9 40.8 17.0 19.1
--------- --------- --------- ---------
Total 3,185.8 2,046.3 1,600.1 1,031.3
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 2,054.5 1,210.3 1,066.8 604.7
Commissions 385.7 226.6 200.3 117.5
Personnel Costs 220.5 148.2 113.3 75.1
Interest 77.7 37.4 38.7 18.9
Goodwill Amortization 26.5 2.9 13.3 1.4
Other 213.6 133.7 103.9 69.8
Amortization of Deferred Policy Acquisition Costs 387.1 223.1 186.0 112.6
Deferral of Policy Acquisition Costs (418.2) (236.1) (207.9) (124.2)
--------- --------- --------- ---------
Total 2,947.4 1,746.1 1,514.4 875.8
--------- --------- --------- ---------
Income before Income Taxes 238.4 300.2 85.7 155.5
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current 76.7 63.4 47.0 36.2
Deferred (41.5) 8.0 (41.7) 2.1
--------- --------- --------- ---------
Total 35.2 71.4 5.3 38.3
--------- --------- --------- ---------
Income before Distributions on Capital Securities 203.2 228.8 80.4 117.2
Distributions on Capital Securities, Net of Tax (22.4) -- (11.2) --
--------- --------- --------- ---------
Net Income 180.8 228.8 69.2 117.2
Retained Earnings, Beginning of Period 3,299.1 3,042.2 3,361.3 3,113.8
Amortization of Underwriting Compensation on Capital Securities (0.2) -- (0.1) --
Dividends Declared (94.6) (77.1) (49.4) (40.4)
Common Stock Reacquired (4.6) (3.5) (0.5) (0.2)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 3,380.5 $ 3,190.4 $ 3,380.5 $ 3,190.4
========= ========= ========= =========
Net Income Per Share of Common Stock:
Basic $ 1.28 $ 1.81 $ 0.49 $ 0.93
========= ========= ========= =========
Diluted $ 1.28 $ 1.80 $ 0.49 $ 0.92
========= ========= ========= =========
Dividends Paid to Common Shareholders $ 0.64 $ 0.58 $ 0.32 $ 0.29
========= ========= ========= =========
Average Number of Shares Outstanding During the Period:
Basic 141.2 126.3 141.2 126.3
========= ========= ========= =========
Diluted 141.8 126.9 141.8 126.9
========= ========= ========= =========
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
Six Months Ended
June 30
----------------------
1998 1997
-------- --------
OPERATING ACTIVITIES
Insurance Premiums Received $2,218.0 $1,299.1
Dividends and Interest Received 727.3 577.3
Other Operating Receipts 121.1 93.9
Insurance Claims and Policy Benefits Paid (1,661.0) (1,075.0)
Underwriting, Acquisition and Insurance Operating Costs Paid (842.4) (502.8)
Interest Paid and Distributions on Capital Securities (109.0) (37.6)
Other Operating Costs Paid (61.4) (51.8)
Income Taxes Paid (60.0) (56.0)
-------- --------
Net Cash Provided by Operating Activities 332.6 247.1
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,702.1) (1,186.8)
Fixed Maturities Held-to-Maturity (0.9) (193.2)
Equities (86.7) (41.5)
Other Investments (100.3) (121.8)
Maturities of Fixed Maturities Available-for-Sale 548.9 235.2
Maturities of Fixed Maturities Held-to-Maturity 3.2 2.6
Sales of:
Fixed Maturities Available-for-Sale 1,673.9 670.1
Fixed Maturities Held-to-Maturity* 18.2 --
Equities 134.5 79.5
Other Investments 86.7 51.6
Net Increase in Short-Term Investments (63.1) (10.3)
Finance Receivables Originated or Acquired (252.3) (240.3)
Principal Payments Received on Finance Receivables 196.7 149.6
Other (107.2) (33.8)
-------- --------
Net Cash Used in Investing Activities (650.5) (639.1)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 628.0 763.5
Return of Funds Held Under Deposit Contracts (572.2) (405.3)
Proceeds from Notes and Mortgage Borrowings 20.0 2.0
Repayment of Notes and Mortgage Borrowings (13.9) (6.6)
Net Proceeds from Short-Term Borrowings 45.1 125.7
Common Stock Reacquired (5.3) (3.6)
Dividends Paid to Shareholders (90.4) (73.3)
Other (28.4) 14.6
-------- --------
Net Cash Provided by (Used in) Financing Activities (17.1) 417.0
-------- --------
Net Increase (Decrease) in Cash (335.0) 25.0
Cash at the Beginning of Period 391.4 55.5
-------- --------
Cash at the End of Period $ 56.4 $ 80.5
======== ========
* The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions) (continued)
Six Months Ended
June 30
--------------------
1998 1997
------- -------
Net Income $ 180.8 $ 228.8
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (44.9) (40.8)
Amortization and Depreciation 78.0 34.5
Amortization of Fixed Maturity Investments (19.3) (18.0)
Deferred Income Tax Expense (Benefit) (41.5) 8.0
Interest Expense on Deposit Contracts 253.2 224.9
Other Adjustments 12.2 1.4
Changes in:
Losses and Adjustment Expense (10.3) (110.0)
Life Policy Liabilities 16.8 34.8
Unearned Premiums 68.7 1.0
Accrued Income Taxes 3.3 8.8
Accrued Interest on Accrual Bonds (26.1) (23.3)
Accrued Investment Income (16.7) (6.8)
Deferred Policy Acquisition Costs (30.3) (12.4)
Other Assets and Liabilities (91.3) (83.8)
------- -------
Total Adjustments 151.8 18.3
------- -------
Net Cash Provided by Operating Activities $ 332.6 $ 247.1
======= =======
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(In Millions)
Six Months Ended Three Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
Net Income $ 180.8 $ 228.8 $ 69.2 $ 117.2
Other Comprehensive Income, Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities 121.5 104.4 33.9 283.6
------- ------- ------- -------
Comprehensive Income $ 302.3 $ 333.2 $ 103.1 $ 400.8
======= ======= ======= =======
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SAFECO Corporation
Our net income for the first six months of 1998 was $180.8 million or $1.28 per
share, compared with $1.81 per share for the same period in 1997. If we exclude
realized gain from investments, our income was $1.07 per share, compared with
$1.60 in 1997. The 1998 amounts reflect claims from the unusual weather patterns
experienced during the second quarter and include the results of American States
Financial Corporation, which was acquired on October 1, 1997.
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
1998 1997 1998 1997
------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain (Loss) $ (75.3) $ 30.9 $ (64.4) $ 23.6
Net Investment Income 240.5 139.5 122.4 69.1
Goodwill Amortization (21.4) -- (10.7) --
------- ------- ------- -------
Total Property and Casualty 143.8 170.4 47.3 92.7
Life 65.4 72.8 29.0 35.6
Real Estate 2.4 5.5 1.2 2.7
Credit 11.2 9.8 5.7 5.3
Asset Management 3.1 2.4 1.1 1.4
Corporate (32.4) (1.5) (15.6) (1.3)
------- ------- ------- -------
Total 193.5 259.4 68.7 136.4
Realized Investment Gain before Tax 44.9 40.8 17.0 19.1
------- ------- ------- -------
Income before Income Taxes 238.4 300.2 85.7 155.5
------- ------- ------- -------
Provision (Benefit) for Income Taxes on:
Income before Realized Gain 19.7 58.1 (0.7) 31.9
Realized Investment Gain 15.5 13.3 6.0 6.4
------- ------- ------- -------
Total 35.2 71.4 5.3 38.3
------- ------- ------- -------
Income before Distributions on
Capital Securities 203.2 228.8 80.4 117.2
Distributions on Capital Securities,
Net of Tax (22.4) -- (11.2) --
------- ------- ------- -------
Net Income $ 180.8 $ 228.8 $ 69.2 $ 117.2
======= ======= ======= =======
Net Income Per Share of Common Stock:
Income before Realized Gain $ 1.07 $ 1.60 $ .41 $ .83
Realized Gain .21 .21 .08 .10
------- ------- ------- -------
Net Income $ 1.28 $ 1.81 $ .49 $ .93
======= ======= ======= =======
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SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Property and Casualty Insurance
Property and casualty operations for the first six months of 1998 produced
pretax income of $143.8 million before realized gain from investments, compared
with $170.4 million a year ago. The company had an underwriting loss of $75.3
million for the first half of 1998, compared with an underwriting profit of
$30.9 million for the same period last year. The second quarter underwriting
loss was $64.4 million as a result of $80 million in claims from catastrophe
losses caused by numerous storms throughout the country. This compares with an
underwriting loss of $10.9 million in the first quarter of 1998 and a profit of
$23.6 million for the second quarter a year ago. Catastrophe losses were 7.5
percent of premiums in the second quarter, compared with 2.5 percent last
quarter and 2 percent for the second quarter last year. The underwriting results
for the first six months and second quarter of 1998 and 1997 are detailed below.
The combined loss and expense ratio was 103.6 for the first six months and 106.1
for the second quarter only. This compares with 97.4 for the first six months
last year and 96.0 for the second quarter a year ago. Investment income was
$240.5 million for the first six months of 1998.
Underwriting Results (In Millions)
Six Months Second Quarter
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
SAFECO
Personal auto $ 21.5 $ 28.5 $ 15.7 $ 24.3
Homeowners (13.4) (15.6) (15.6) (4.3)
Other personal lines 5.2 9.7 4.1 6.0
Commercial (21.9) (3.3) (10.5) (9.4)
Surety 11.0 10.0 4.1 5.5
Other 2.8 1.6 2.9 1.5
American States
Business insurance (51.5) -- (36.3) --
Personal lines (29.0) -- (28.8) --
------- ------- ------- -------
Total $ (75.3) $ 30.9 $ (64.4) $ 23.6
======= ======= ======= =======
SAFECO
Personal auto, our largest line, reported an underwriting profit of $21.5
million for the first six months, compared with a profit of $28.5 million for
the first six months last year. The number of vehicles insured at the end of
June was 7% higher than a year ago. Average loss costs decreased during the
second quarter primarily due to a continuing decline in the frequency of bodily
injury claims.
Homeowners had an underwriting loss of $13.4 million for the first six months,
compared with a loss of $15.6 million for the first six months of 1997.
Catastrophe losses for this line were $27 million for the first six months of
1998, compared with $22 million for the first six months last year. Adverse
catastrophe claims experience was offset by the favorable impact of higher
prices, increased deductibles and initiatives to improve insurance to value.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine, and boats, produced an underwriting profit of $5.2 million for
the first six months, compared with a profit of $9.7 million for the same period
last year.
SAFECO Commercial reported an underwriting loss of $21.9 million for the first
six months (combined ratio of 107.0), compared with a loss of $3.3 million for
the first six months last year (combined ratio of 101.1). Increased price
competition, particularly for workers' compensation, has affected results
adversely.
Surety produced a profit of $11.0 million for the first six months of 1998,
compared with a profit of $10.0 million for the first six months last year.
Premiums written during the first six months, excluding American States,
increased 8% over a year ago with personal lines up 7.5% and commercial lines up
10%.
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SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
American States
American States' catastrophe losses were $63 million for the first six months of
1998 with $37 million for personal lines and $26 million for business insurance.
For the second quarter, claims from catastrophe losses totaled $46 million. The
unusual weather patterns during the quarter resulted in personal lines producing
an underwriting loss of $28.8 million for the second quarter. This compares with
an underwriting loss of $0.2 million for the first quarter.
American States Business Insurance produced an underwriting loss of $36.3
million in the second quarter (combined ratio of 115.9), compared with an
underwriting loss of $15.2 million last quarter (combined ratio of 106.7).
Weather-related losses were higher than normal. Premiums written by American
States during the first six months of 1998 were down 1.5%, compared with the
same period last year, with business insurance down 2% and personal lines down
1%.
Combined Companies
During 1998 a significant amount of resources has been and will be committed to
cross-licensing and training our agents in both SAFECO and American States
product lines on a state-by-state process. We are on schedule with this process
as well as other significant areas related to the combination of the two
operations. We have received positive feedback from our agents about their
expanded opportunities to sell products once this cross-licensing and training
has been completed.
Life Insurance
Our life insurance operations produced a pretax profit, before realized gain
from investments, of $65.4 million for the first six months of 1998. This
compares with $72.8 million reported for the first six months of 1997. The
second quarter profit of $29.0 million is down from the $35.6 million reported
for the second quarter of 1997.
Group insurance experienced a loss of $2.1 million for the first half of 1998,
compared with a profit of $6.8 million for the same period last year. The second
quarter loss of $0.7 million compares with a profit of $2.5 million reported for
the second quarter of last year. Adverse experience in medical aggregate stop
loss coverages continues to be the main contributor to the loss.
Earnings for the annuity lines were $25.3 million, compared with $26.4 million
reported for the first half of 1997. The second quarter gain of $9.0 million is
down from the $12.6 million reported in the same quarter last year. The decline
in earnings is due to the continuing high cost of options purchased to fund our
obligations related to our equity indexed annuity product line. Annuity assets
now total $12.1 billion. Individual life earnings were $4.7 million for the
first six months, compared with $2.6 million for the same period last year. The
increase is due to the acquisition of American States Life Insurance Company.
Real Estate
SAFECO Properties' pretax income was $2.4 million for the first six months of
1998, compared with $5.5 million in 1997. This decrease is primarily the result
of start-up costs and additional depreciation charges on our new Redmond Town
Center project and the expensing of carrying costs related to a regional
shopping center currently being converted to an alternative retail format. As
noted in last quarter's report, SAFECO Corporation announced in February 1998
that SAFECO Properties, Inc. would be sold and that Salomon Smith Barney has
been retained to assist in the selling process. It is anticipated that the sale
will conclude before the end of 1998.
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SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Credit
SAFECO Credit Company produced a record pretax profit of $11.2 million for the
first six months of 1998, compared with $9.8 million in the first six months of
1997. Pretax income in the second quarter was $5.7 million, compared with $5.5
million in the first quarter. The results reflect continued portfolio growth,
low write-off and delinquency experience, and a decreasing operating expense
ratio. Non-affiliate receivables and operating leases total $1.2 billion,
representing a 7% annualized increase during 1998.
SAFECO Credit's summarized financial information is as follows (in millions):
JUNE 30 DECEMBER 31
1998 1997
-------- --------
Finance Receivables $1,042.0 $1,004.3
Other Assets 277.4 273.9
-------- --------
Total Assets $1,319.4 $1,278.2
======== ========
Credit Company Borrowings $ 988.0 $ 892.0
Other Liabilities 208.4 268.5
-------- --------
Total Liabilities $1,196.4 $1,160.5
======== ========
SIX MONTHS ENDED JUNE 30
1998 1997
------- -------
Revenues $ 52.8 $ 45.5
Expenses 41.6 35.7
------- -------
Income before Income Taxes 11.2 9.8
Provision for Income Taxes 4.1 3.4
------- -------
Net Income $ 7.1 $ 6.4
======= =======
Asset Management
The pretax profit from asset management activities for the first six months of
1998 was $3.1 million, compared with $2.4 million for the same period last year.
Our operating profit (excluding gains and interest income) was $2.1 million
versus $1.7 million last year. Assets under management were $7.0 billion at June
30, 1998, compared with $4.3 billion last year, an increase of 63%.
Investment Portfolios
The market value of our consolidated bond portfolio was $1.6 billion in excess
of amortized cost at June 30, 1998, up from $1.5 billion at December 31, 1997.
The market value of our equity securities portfolio was $1.0 billion in excess
of cost at June 30, 1998.
Dividend
The second quarter of 1998 dividend paid in July to common shareholders was paid
at the rate of $0.35 per share, reflecting a 9.4% increase over the previous
payment.
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12
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Stock Repurchase Program
On August 5, 1998 SAFECO's board of directors approved the purchase from
time-to-time of up to $200 million worth of its common stock through open market
and negotiated purchases. SAFECO believes that its common stock represents a
good value. When added to the ongoing authorization to purchase up to 2 million
shares of common stock, of which approximately 500,000 shares had been purchased
at July 31, 1998, the combined authorization will permit an accumulation of up
to an additional 4.2% of SAFECO's outstanding shares. Commencing on the second
day following the authorization (August 7, 1998) through August 12, 1998,
Safeco has purchased approximately 1.4 million shares, at a total cost of $62.4
million.
Year 2000
SAFECO, like most other companies, is faced with the fact that our older
computer programs have time sensitive software that typically recognized a date
using "00" as the year 1900 rather than the year 2000. SAFECO is highly
dependent on automated systems and systems applications that use computer
programs to conduct ongoing operations. Such systems are used to process
claims, bill and collect premiums from customers, manage investments and many
other activities. If these systems were unable to process data accurately
because of Year 2000-related failures, these activities would be interrupted
and could have a material adverse effect on SAFECO's results of operations.
SAFECO has completed the assessment of Year 2000 issues in connection with our
computer systems and technology embedded in the equipment we use. We have been
modifying and replacing portions of our software since 1995 so that our systems
will function properly with respect to dates in the year 2000 and thereafter.
In addition, SAFECO is engaged in a regular problem of testing and running the
systems once Year 2000 changes have been made. This testing includes review by
our Internal Audit department as well as separate testing at SAFECO's hot site,
a location provided and maintained by a third party separate from any SAFECO
facility. SAFECO believes that our program to address Year 2000 issues is
comprehensive and on schedule.
The total Year 2000 compliance cost for SAFECO is estimated at
approximately $15 million and as of June 30, 1998 SAFECO has incurred
approximately $9 million of that amount. These estimated amounts include both
modification costs, which are expensed as incurred, and certain replacement
systems costs, some of which are capitalized and amortized. Over 85% of
existing SAFECO systems have been tested and verified as being Year 2000
compliant at June 30, 1998. SAFECO's objective is to have the rest of our
systems, including the most sophisticated applications, Year 2000 compliant by
the end of 1998, with testing to conclude in 1999. We also intend to bring all
of our critical systems down on December 31, 1999 and bring them back up on
January 1, 2000. This will preserve all information contained in those systems
at December 31, 1999 and permit SAFECO to retrieve and use that information
should an unanticipated Year 2000 problem occur. In addition, as a contingency
against unanticipated problems on and after January 1, 2000, SAFECO's
Information Systems department will be prepared to address on an expedited
basis any problems that should arise. Based on our current progress and
continuing modifications, SAFECO believes that by January 1, 2000 it will be
Year 2000 compliant and that Year 2000 issues will not pose significant
operational problems for our computer systems.
SAFECO is working with our third-party partners and vendors, e.g., our
independent insurance agents, local and long distance phone companies, banks
and securities trading firms, to assure that they are on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO will assess and attempt to mitigate risks with respect to the
failure of any mission critical third-party partners and vendors to be Year
2000 ready. Failure of such parties to be Year 2000 compliant could have a
material adverse effect on SAFECO's results of operations.
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13
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 June of 1997, the Financial Accounting Standards Board (FASB) issued
Statement 130, "Reporting Comprehensive Income." Statement 130 is effective for
fiscal years beginning after December 15, 1997 and SAFECO adopted it in the
first quarter of 1998. The Statement has no effect on net income but requires
the reporting of "comprehensive income," which includes net income and certain
items currently reported in shareholders' equity. See the "Statement of
Consolidated Comprehensive Income" on page 7 of this report.
The FASB issued Statement 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" in February 1998. Statement 132 revises
employers' disclosures about pension and other postretirement benefit plans.
This statement is effective for financial statements for periods beginning after
December 15, 1997, and SAFECO will provide the disclosures in its 1998 annual
report. This statement has no effect on net income.
The FASB issued Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It may also be adopted
early, as of the beginning of any fiscal quarter that begins after issuance of
the statement. SAFECO will adopt the new statement no later than the first
quarter of 2000. The statement amends several previous FASB statements and
requires recognizing all derivatives as either assets or liabilities in the
statement of financial position and measuring those instruments at fair value.
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.
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14
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
6, 1998. SAFECO shareholders elected four nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 2001. There were no broker non-votes with
respect to any of the nominees.
For Withheld
----------- --------
Robert S. Cline 127,383,079 772,403
Roger H. Eigsti 127,392,378 763,104
John W. Ellis 127,337,786 817,696
William W. Krippaehne, Jr. 127,380,556 774,926
Continuing as directors are Phyllis J. Campbell, Boh A. Dickey, William
P. Gerberding and Paul W. Skinner, whose terms expire in 1999; and
Joshua Green III, William G. Reed, Jr., Judith M. Runstad and George H.
Weyerhaeuser, whose terms expire in 2000. Mr. Weyerhaeuser will retire
as a director in 1999.
Item 5. Other Information - Bylaw Amendments
The Board of Directors of SAFECO Corporation adopted certain amendments
to the Corporation's Bylaws on August 5, 1998. The amended Bylaws
provide that shareholders may nominate persons for election to the
Board of Directors only if a written notice of intention to nominate
has been delivered to the secretary to the SAFECO Corporation Board of
Directors at SAFECO Plaza, Seattle, Washington 98185 not less than 90
days before the scheduled date of the meeting. The notice of nomination
must contain the name, address, telephone number, and number of shares
of SAFECO Corporation common stock owned by the nominating shareholder
and the information relating to each nominee required with respect to
nominees for director under the federal proxy solicitation rules. The
notice of nomination must be accompanied by each nominee's written
consent to being a nominee and statement of intention to serve as a
director if elected.
The Corporation's Bylaws further provide that for a shareholder to
bring other business before an annual meeting of shareholders, the
shareholder desiring to bring such business must file a written notice
of intention to that effect with the Secretary of the Corporation at
SAFECO Plaza, Seattle, Washington 98185 not less than 90 days before
the scheduled date of the meeting. The notice must contain the name,
address, telephone number and number of shares of SAFECO Corporation
common stock owned by the shareholder intending to bring such business
before the meeting and a brief description of the business desired to
be brought, the reasons for conducting it at the meeting, and any
material interest of the shareholder in such business.
The 1999 annual meeting of the Corporation's shareholders will be held
on May 5, 1999. Therefore, the deadline for submitting notices of
intention to nominate persons for director and notices of intention to
bring business before the 1999 annual shareholders' meeting is February
4, 1999.
Under the federal proxy solicitation rules, proposals submitted by a
shareholder for inclusion in the Corporation's proxy materials for the
1999 annual meeting must be received by the Corporation by November 20,
1998.
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15
SAFECO CORPORATION
(Continued)
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3* - Bylaws (as amended August 5, 1998.)
Exhibit 10* - SAFECO Deferred Compensation Plan for Executives
dated May 6, 1998.
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
No Forms 8-K were filed or required to be filed for any event
during the quarter ended June 30, 1998. The Registrant filed an
8-K dated July 10, 1998, under Item 5 (Other Items) ,announcing
its preliminary review of earnings for the second quarter of 1998.
The Registrant filed an 8-K dated August 5, 1998, under Item 5,
announcing a stock repurchase program approved by its Board of
Directors on August 5, 1998.
*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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