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, 1999.
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)
136,327,641 shares of no par value common stock
were outstanding at March 31, 1999.
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
March 31, 1999 and December 31, 1998
Statement of Consolidated Income and Retained Earnings 5
for the Three Months Ended March 31, 1999 and 1998
Statement of Consolidated Cash Flows 6
for the Three Months Ended March 31, 1999 and 1998
Statement of Consolidated Comprehensive Income 7
for the Three Months Ended March 31, 1999 and 1998
Item 2.Management's Discussion and Analysis 8
Part II - Other Information
Item 6.Exhibits and Reports on Form 8-K 15
*The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation
of results for the interim periods have been included. It is
suggested that these condensed consolidated 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, 1998 which has been previously 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 12, 1999 and Chief Financial Officer
H. PAUL LOWBER
-------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated May 12, 1999 and Chief Accounting Officer
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
- - - - --------------------------------------------------------------------------------
March 31 December 31
ASSETS 1999 1998
--------- -----------
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1999 - $17,371.6; 1998 -$16,679.7) $18,217.4 $17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1999 - $3,106.7; 1998 - $3,259.2) 2,729.6 2,720.9
Marketable Equity Securities, at Market Value
(Cost: 1999 - $949.0; 1998 - $952.8) 2,011.1 2,036.6
Mortgage Loans 670.2 541.5
Real Estate (At cost less accumulated depreciation) 235.9 601.2
Policy Loans 89.0 88.3
Short-Term Investments 159.2 315.9
--------- ---------
Total Investments 24,112.4 24,160.0
Cash 136.6 74.9
Accrued Investment Income 340.1 323.2
Finance Receivables
(Less unearned finance charges and allowance for doubtful accounts) 1,212.9 1,207.7
Premiums and Other Service Fees Receivable 1,020.6 978.3
Other Notes and Accounts Receivable 90.0 155.2
Reinsurance Recoverables 392.2 317.4
Deferred Policy Acquisition Costs 549.4 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 309.1 280.2
Goodwill 1,348.2 1,359.0
Other Assets 330.5 313.6
Separate Account Assets 1,225.3 1,201.1
--------- ---------
TOTAL $31,067.3 $30,891.7
========= =========
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions) (continued)
- - - - --------------------------------------------------------------------------------
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ --------- -----------
Losses and Adjustment Expense $ 4,279.4 $ 4,262.7
Life Policy Liabilities 280.1 276.8
Unearned Premiums 1,783.4 1,750.9
Funds Held Under Deposit Contracts 12,824.5 12,718.1
Debt:
Commercial Paper 712.3 732.7
Credit Company Borrowings ($1,119.1 maturing within one year) 1,143.7 1,255.2
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($11.6 maturing within one year) 101.9 227.7
Other Liabilities 1,633.2 1,153.5
Income Taxes:
Current 30.1 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities: 1999 - $654.2; 1998 - $769.9) 377.9 492.6
Separate Account Liabilities 1,225.3 1,201.1
--------- ---------
Total Liabilities 24,791.8 24,473.8
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 842.2 842.1
--------- ---------
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: (1999 - 7.4; 1998 - 7.5)
Shares Issued and Outstanding: (1999 - 136.3; 1998 - 136.3) 887.7 885.0
Retained Earnings 3,326.6 3,257.2
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 1,219.0 1,433.6
--------- ---------
Total Shareholders' Equity 5,433.3 5,575.8
--------- ---------
TOTAL $31,067.3 $30,891.7
========= =========
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- - - - --------------------------------------------------------------------------------
Three Months Ended
March 31
---------------------------
1999 1998
--------- ---------
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 1,064.4 $ 1,029.4
Life Premiums and Other Revenues 86.6 86.8
--------- ---------
Total 1,151.0 1,116.2
Real Estate -- 20.5
Credit 27.0 23.4
Asset Management 10.2 8.4
Other 32.2 14.8
Net Investment Income 389.6 374.5
Realized Investment Gain 56.3 27.9
--------- ---------
Total 1,666.3 1,585.7
--------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,043.4 987.7
Commissions 192.9 185.4
Personnel Costs 123.6 107.2
Interest 33.8 39.0
Goodwill Amortization 13.5 13.2
Other 100.9 109.7
Amortization of Deferred Policy Acquisition Costs 201.6 201.1
Deferral of Policy Acquisition Costs (206.3) (210.3)
--------- ---------
Total 1,503.4 1,433.0
--------- ---------
Income before Income Taxes 162.9 152.7
--------- ---------
Provision for Income Taxes:
Current 33.1 29.7
Deferred 0.1 0.2
--------- ---------
Total 33.2 29.9
--------- ---------
Income before Distributions on Capital Securities 129.7 122.8
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
--------- ---------
Net Income 118.5 111.6
Retained Earnings, Beginning of Period 3,257.2 3,299.1
Amortization of Underwriting Compensation on Capital Securities (0.1) (0.1)
Dividends Declared (47.7) (45.2)
Common Stock Reacquired (1.3) (4.1)
--------- ---------
Retained Earnings, End of Period $ 3,326.6 $ 3,361.3
========= =========
Net Income Per Share of Common Stock:
Diluted $ 0.87 $ 0.79
========= =========
Basic $ 0.87 $ 0.79
========= =========
Dividends Paid to Common Shareholders $ 0.35 $ 0.32
========= =========
Average Number of Shares Outstanding During the Period:
Diluted 136.6 141.8
========= =========
Basic 136.3 141.2
========= =========
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
- - - - --------------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------
1999 1998
-------- --------
OPERATING ACTIVITIES
Insurance Premiums Received $1,106.5 $1,079.0
Dividends and Interest Received 376.0 359.7
Other Operating Receipts 70.8 53.7
Insurance Claims and Policy Benefits Paid (890.8) (773.0)
Underwriting, Acquisition and Insurance Operating Costs Paid (463.6) (466.1)
Interest Paid and Distributions on Capital Securities (70.7) (67.9)
Other Operating Costs Paid (51.1) (26.3)
Income Taxes Paid (0.3) (3.6)
-------- --------
Net Cash Provided by Operating Activities 76.8 155.5
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,279.3) (1,450.3)
Fixed Maturities Held-to-Maturity -- (0.3)
Equities (44.6) (50.8)
Other Investments (128.9) (46.1)
Maturities of Fixed Maturities Available-for-Sale 285.2 218.9
Maturities of Fixed Maturities Held-to-Maturity 0.2 0.6
Sales of:
Fixed Maturities Available-for-Sale 330.9 816.6
Fixed Maturities Held-to-Maturity -- --
Equities 67.4 62.9
Other Investments 468.2 34.4
Net Decrease (Increase) in Short-Term Investments 193.6 (72.0)
Finance Receivables Originated or Acquired (115.4) (98.6)
Principal Payments Received on Finance Receivables 102.4 105.2
Other (15.7) (18.9)
-------- --------
Net Cash Used in Investing Activities (136.0) (498.4)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 792.1 310.1
Return of Funds Held Under Deposit Contracts (267.6) (264.5)
Proceeds from Notes and Mortgage Borrowings -- 20.0
Repayment of Notes and Mortgage Borrowings (132.2) (10.5)
Net (Repayment of) Proceeds from Short-Term Borrowings (119.3) 89.9
Common Stock Reacquired (1.6) (4.8)
Dividends Paid to Shareholders (47.7) (45.2)
Other (102.8) (21.2)
-------- --------
Net Cash Provided by Financing Activities 120.9 73.8
-------- --------
Net Increase (Decrease) in Cash 61.7 (269.1)
Cash at the Beginning of Period 74.9 391.4
-------- --------
Cash at the End of Period $ 136.6 $ 122.3
======== ========
(continued)
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SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions) (continued)
- - - - --------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------
1999 1998
------- -------
Net Income $ 118.5 $ 111.6
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (56.3) (27.9)
Amortization and Depreciation 35.1 39.3
Amortization of Fixed Maturity Investments (10.6) (7.3)
Deferred Income Tax Expense 0.1 0.2
Interest Expense on Deposit Contracts 149.5 147.4
Other Adjustments (3.7) 6.5
Changes in:
Losses and Adjustment Expense 16.7 14.9
Life Policy Liabilities 3.3 5.3
Unearned Premiums 32.5 11.5
Accrued Income Taxes 27.6 19.5
Accrued Interest on Accrual Bonds (11.8) (14.9)
Accrued Investment Income (16.9) (7.1)
Deferred Policy Acquisition Costs (4.7) (8.9)
Other Assets and Liabilities (202.5) (134.6)
------- -------
Total Adjustments (41.7) 43.9
------- -------
Net Cash Provided by Operating Activities $ 76.8 $ 155.5
======= =======
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- - - - --------------------------------------------------------------------------------
Three Months Ended
March 31
-----------------------
1999 1998
------- -------
Net Income $ 118.5 $ 111.6
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities (214.6) 87.6
------- -------
Comprehensive Income (Loss) $ (96.1) $ 199.2
======= =======
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - - - --------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first quarter was $119 million or $0.87 per diluted
share, compared with $0.79 per share for the first quarter of 1998. If we
exclude realized gain from investments, our income was $0.60 per diluted share,
compared with $0.66 in 1998.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
THREE MONTHS ENDED
MARCH 31
-----------------------
1999 1998
- - - - --------------------------------------------------------------------------------------
(In Millions Except Per
Share Amounts)
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Loss ................................ $ (36.3) $ (10.9)
Net Investment Income ............................ 114.3 118.1
Goodwill Amortization ............................ (10.8) (10.7)
------- -------
Total Property and Casualty .................... 67.2 96.5
Life ............................................... 44.7 36.4
Credit ............................................. 5.3 5.5
Asset Management ................................... 2.5 2.0
Corporate .......................................... (13.1) (15.6)
------- -------
Total .......................................... 106.6 124.8
Realized Investment Gain before Tax ................... 56.3 27.9
------- -------
Income before Income Taxes ............................ 162.9 152.7
------- -------
Provision for Income Taxes on:
Income before Realized Gain ........................ 13.2 20.4
Realized Investment Gain ........................... 20.0 9.5
------- -------
Total .......................................... 33.2 29.9
------- -------
Income before Distributions on
Capital Securities ................................. 129.7 122.8
Distributions on Capital Securities, Net of Tax ....... (11.2) (11.2)
------- -------
Net Income ............................................ $ 118.5 $ 111.6
======= =======
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain ........................ $ .60 $ .66
Realized Gain ...................................... .27 .13
------- -------
Net Income ............................................ $ .87 $ .79
======= =======
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Property and Casualty Insurance
Property and casualty operations for the first quarter of 1999 produced pretax
income of $67.2 million before realized gain from investments, compared with
$96.5 million a year ago. These operations had a $36.3 million underwriting loss
during the first quarter of 1999. This compares with a $13.7 million loss last
quarter, and a loss of $10.9 million for the first quarter a year ago. Adverse
weather experience affected first quarter results as catastrophe losses were $39
million, compared with $31 million last quarter and $25 million for the first
quarter a year ago. Underwriting results by major business line for the first
quarter of 1999 and the first quarter of 1998 are stated in the chart below. The
combined loss and expense ratio was 103.4 for the quarter, compared with 101.3
last quarter and 101.1 for the first quarter last year. Investment income was
$114 million, down 3% from a year ago primarily due to reduced cash flow.
Underwriting Results (In Millions)
First Qtr. First Qtr.
1999 1998
---------- ----------
Personal Lines:
Personal auto $ 6.0 $ 2.8
Homeowners (18.7) 2.4
Other personal lines 4.3 2.2
Commercial Lines:
American States Business Insurance (30.9) (16.5)
SAFECO Commercial (1.9) (9.9)
Surety 6.0 6.9
Other (1.1) 1.2
------ ------
Total $(36.3) $(10.9)
====== ======
Personal auto, our largest line, reported an underwriting profit of $6.0 million
for the first quarter, compared with a profit of $2.8 million for the same
quarter a year ago. Average loss costs increased modestly during the quarter.
The number of automobile policies in force at the end of March was 1% higher
than a year ago.
Homeowners had an underwriting loss of $18.7 million for the first quarter,
compared with a profit of $2.4 million for the first quarter of 1998.
Catastrophe losses for this line were $20 million, compared with $13 million for
the first quarter a year ago. In addition, non-weather related losses were $5
million higher than a year ago.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats, produced an underwriting profit of $4.3 million for the
quarter, compared with a profit of $2.2 million for the same quarter last year.
American States Business Insurance, which focuses on small-to-medium sized
businesses, produced an underwriting loss of $30.9 million in the first quarter
(combined ratio of 113.2), compared with a loss of $16.5 million for the same
quarter last year (combined ratio of 107.3). Adverse weather experience in the
property line and weak commercial auto results continue to affect this business.
The underwriting loss for the quarter from these two lines was $14.9 million and
$10.9 respectively, compared with $7.9 million and $5.4 million for the same
quarter a year ago.
SAFECO Commercial, which delivers insurance products and services to
medium-to-large complex commercial clients, reported an underwriting loss of
$1.9 million for the first quarter operating at a combined ratio of 101.2. This
compares favorably with a loss of $9.9 million for the same quarter last year
and a combined ratio of 106.4.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Surety produced a profit of $6.0 million, compared with a profit of $6.9 million
in the first quarter last year.
Premiums written during the quarter increased 4% over a year ago with personal
lines up less than 1%, American States Business Insurance up 10%, and SAFECO
Commercial up 8%.
During 1999, we will complete the process of cross-licensing and training agents
in both SAFECO and American States products. In addition, we will be using
SAFECO personal lines products for substantially all personal lines business,
and we will be using American States Business Insurance products for our agents'
small-to-medium sized commercial customers. To date, the transition of customers
is on schedule, and retention of business has exceeded expectations. Looking
beyond completion of these transition activities, we are well positioned for
strong future growth.
Life Insurance
Our life insurance operations produced a record pretax profit, before realized
gain from investments, of $44.7 million for the first quarter of 1999. This
compares with $36.4 million for the same period last year.
Earnings for the annuity lines were $22.2 million, compared with $16.3 million
reported for the first quarter of 1998. These results include losses from the
equity indexed annuity line of $2.6 million for the first quarter of 1999,
compared with $4.2 million a year ago. Growth in our variable annuity products
and overall expense reductions are also major contributing factors for the
higher earnings. Annuity assets now total $12.6 billion, up from $11.9 billion
at the end of first quarter 1998.
Group insurance experienced a loss of $2.9 million for the quarter, compared
with a loss of $1.4 million for the first quarter of last year, and $5.4 million
for the fourth quarter of 1998. Although we are noting some improving trends,
adverse experience in medical aggregate stop loss coverages continued to be the
main contributor to the loss during the quarter.
Benefiting from decreased mortality and expense reductions, individual life
earnings were $6.6 million, compared with $2.5 million for the same period last
year.
Credit
SAFECO Credit Company produced a first quarter pretax profit of $5.3 million for
1999, compared with $5.5 million for the first quarter of 1998. New business
loans and leases funded during the first quarter were $105.7 million versus
$97.3 million in the first quarter of 1998, reflecting a 9% increase.
Non-affiliated receivables and operating leases were $1.3 billion at March 31,
1999. The profit for the quarter was modestly impacted by the sale of SAFECO
Properties and the resulting reduction in affiliate loans. Our delinquency
experience and write-offs continue to be at satisfactorily low rates.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
SAFECO Credit's summarized financial information is as follows (in millions):
MARCH 31 DECEMBER 31
1999 1998
-------- -----------
Finance Receivables $1,212.9 $1,207.7
Other Assets 156.9 320.6
-------- --------
Total Assets $1,369.8 $1,528.3
======== ========
Credit Company Borrowings $1,143.7 $1,255.2
Other Liabilities 95.1 144.6
-------- --------
Total Liabilities $1,238.8 $1,399.8
======== ========
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
------- -------
Revenues $ 29.0 $ 26.0
Expenses 23.7 20.5
------- -------
Income before Income Taxes 5.3 5.5
Provision for Income Taxes 1.9 2.0
------- -------
Net Income $ 3.4 $ 3.5
======= =======
Asset Management
The pretax profit from asset management activities for the first quarter of 1999
was $2.5 million, up from $2.0 million in 1998, an increase of 22%. Our
operating profit (excluding gains and interest income) was $2.0 million,
compared with $1.3 million last year, a 49% increase. Increased assets under
management and a reduction of one-time costs were the main reasons for the
improved earnings. Assets under management totaled $6.9 billion at March 31,
1999, compared with $6.5 billion one year ago.
Realized Investment Gain - SAFECO Properties Sale
The realized investment gain for the first quarter of $56 million includes $30
million of gains from the sale of real estate. This primarily relates to the
sale of the majority of SAFECO Properties' assets to The Macerich Partnership,
L.P. and the Ontario Teachers' Pension Plan Board, of which the largest portion
closed in February 1999. Additional closings of real estate sales are expected
in the second quarter and also in the following months.
The sales are the reason for the decline in Investment Real Estate and Other
Debt in the Consolidated Balance Sheet and the increase in Sales of Other
Investments and the increases in Repayment of Notes and Mortgage Borrowings and
Repayment of Short-Term Borrowings in the Statement of Consolidated Cash Flows.
In the Statement of Consolidated Income and Retained Earnings, revenues for
SAFECO Properties have been included in Other Revenues from January 1, 1999
forward and related expenses have all been included in Other Expenses. For the
three months ended March 31, 1999 these revenues totaled $14.7 million and
expenses totaled $13.1 million. In the summary of income on page 8 of this
report, SAFECO Properties' pretax income amounts of $1.6 million and $1.2
million for the three months ended March 31, 1999 and 1998 respectively, are
included in the Corporate line.
Investment Portfolios
The market value of our consolidated bond portfolio was $1.2 billion in excess
of amortized cost at March 31, 1999, down from $1.7 billion at December 31, 1998
as a result of higher interest rates. The market value of our equity securities
portfolio was $1.1 billion in excess of cost at March 31, 1999.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Subsequent Event - Storms
During early May various parts of the country experienced significant adverse
weather events, particularly the states of Oklahoma and Kansas. We will quantify
our expected losses from these events as soon as more information becomes
available. The losses will be recorded in the second quarter.
Stock Repurchase Program
In May 1999 the Board of Directors approved the purchase of up to 8
million shares of SAFECO Corporation common stock through open market and
negotiated purchases, as part of its ongoing capital management plan. This
authorization follows the $200 million purchase authorization of August 1998 and
the 2 million share authorization of February 1996. Under these two
authorizations, in 1998 we acquired 5.2 million shares at a total cost of $236
million for an average price of $45.66 and in 1999 we acquired 0.8 million
shares at a total cost of $33 million for an average price of $40.36. As a
result, no amounts remain available under the August 1998 or February 1996
authorizations. For the year 1998 and the period through May 5, 1999, share
purchase activity has reduced SAFECO's shares outstanding to 135.5 million or 4%
since December 31, 1997.
Year 2000 Readiness Disclosure
SAFECO, like most other companies, is faced with the fact that some of its
computer programs have time sensitive logic that typically recognizes 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 an assessment of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses. SAFECO
has been modifying and replacing portions of its systems since 1995 so that the
system modified or replaced will be suitable for use before, during and after
the year 2000 with no significant operational problems related to its ability to
process dates correctly ("Year 2000 Ready"). In addition, SAFECO is engaged in a
regular program of testing and running the systems once Year 2000 programming
changes have been made. This testing includes trials at SAFECO's hot site, a
location provided and maintained by a third party separate from any SAFECO
facility. SAFECO believes that its program to address Year 2000 issues is
comprehensive and on schedule.
The total Year 2000 readiness cost for SAFECO is currently estimated at
approximately $17 million and as of March 31, 1999 SAFECO has incurred
approximately $16 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. Approximately 95% of
SAFECO's existing systems have been internally verified as being Year 2000 ready
as of March 31, 1999. SAFECO's last mission-critical system is scheduled to be
Year 2000 ready in August 1999. The program of testing and running the systems
after Year 2000 programming changes have been made is currently in process and
expected to continue through 1999. SAFECO also intends to bring all of its
mainframe systems down on December 31, 1999 and bring them back up on January 1,
2000. This will preserve 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. Although absolute assurance is not possible, based
on our current progress and continuing modifications, SAFECO believes that by
January 1, 2000 it will be Year 2000 ready and that Year 2000 issues will not
pose significant operational problems for its computer systems.
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SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
SAFECO is also working with its third-party partners and vendors, e.g., its
independent insurance agents, local and long distance telephone 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 ready could have a material
adverse effect on SAFECO's results of operations.
SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance
policies its property and casualty subsidiaries have sold to customers. Although
SAFECO has not written any specific Year 2000 coverage, customers may allege
coverage exists under current commercial policies, including commercial general
liability, directors and officers liability, errors and omissions liability and
product policies. The effect of such coverage issues on SAFECO's results of
operations is not reasonably estimable at this time. However, SAFECO expects
that any potential exposures will be limited because its commercial lines
business has historically not included significant numbers of the types of risks
that have the greatest Year 2000 exposure, such as financial institutions and
software and computer chip companies. In addition, SAFECO's directors and
officers liability and errors and omissions books of insurance business are not
large, together comprising approximately 1% of total property and casualty
premiums over the last three years. SAFECO continues to assess its potential
exposure to insurance claims arising from property and casualty insurance
policies written and is taking a number of actions to limit that exposure. Such
actions, in states where permitted, include the use of endorsements on
commercial property policies clarifying that there is no coverage for Year 2000
occurrences, as well as using policy language that excludes Year 2000 coverage
on certain commercial liability policies.
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14
SAFECO CORPORATION
Other -- Footnotes
SEGMENT DATA
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - ---------------------------------------------------------------------------------------------------
Property and Casualty:
Personal Lines:
Personal Auto $ 430.4 $ 6.0
Homeowners 173.7 (18.7)
Other 43.6 4.3
Commercial Lines:
ASBI 234.6 (30.9)
SAFECO Commercial 165.4 (1.9)
Surety 14.4 6.0
Other 2.3 (1.1)
-------- --------
Total 1,064.4 $ (36.3) $ 67.2 $ 84.4 $12,492.9
-------- ======== --------
Life:
Retirement Services 7.7 12.6
Settlement Annuities 0.3 9.6
Group 48.0 (2.9)
Individual 27.0 6.6
Other 3.6 18.8
-------- --------
Total 86.6 44.7 29.9 16,861.2
-------- --------
Credit 27.0 5.3 3.4 1,369.8
Asset Management 10.2 2.5 1.6 67.8
Other and Eliminations 32.2 (13.1) (0.8) 275.6
-------- -------- -------- ---------
Consolidated Totals $1,220.4 $ 106.6 $ 118.5 $31,067.3
======== ======== ======== =========
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - -------------------------------------------------------------------------------------------------------
Property and Casualty:
Personal Lines:
Personal Auto $ 422.7 $ 2.8
Homeowners 168.0 2.4
Other 39.2 2.2
Commercial Lines:
ASBI 227.5 (16.5)
SAFECO Commercial 154.3 (9.9)
Surety 14.2 6.9
Other 3.5 1.2
--------- ---------
Total 1,029.4 $ (10.9) $ 96.5 $ 100.5 $12,849.2
--------- ========= ---------
Life:
Retirement Services 5.5 9.1
Settlement Annuities 0.4 7.2
Group 49.7 (1.4)
Individual 27.7 2.5
Other 3.5 19.0
--------- ---------
Total 86.8 36.4 27.1 15,666.2
--------- ---------
Real Estate 20.5 1.2 0.9 632.5
Credit 23.4 5.5 3.5 1,237.4
Asset Management 8.4 2.0 1.3 75.4
Other and Eliminations 14.8 (16.8) (21.7) (117.9)
--------- --------- --------- ---------
Consolidated Totals $ 1,183.3 $ 124.8 $ 111.6 $30,342.8
========= ========= ========= =========
*Earnings before realized gains (losses), distributions on capital
securities and income taxes.
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15
SAFECO CORPORATION
Part II - Other Information
- - - - --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1(*) - Form of Executive Severance Agreements between
SAFECO Corporation and Rod A. Pierson, James W.
Ruddy, and W. Randall Stoddard, in each case dated
March 11, 1999, and between SAFECO Corporation and
Boh A. Dickey and Roger H. Eigsti, in both cases
dated May 5, 1999.
Exhibit 10.2(*) - Executive Severance Agreement between SAFECO
Corporation, SAFECO Life Insurance Company and
Randall H. Talbot dated March 11, 1999.
Exhibit 10.3(*) - SAFECO Long-Term Incentive Plan of 1997 as Amended
and Restated May 5,1999.
Exhibit 10.4(*) - Form of Nonqualified Stock Option Award Agreement
-- Non-Employee Director granted under the SAFECO
Long-Term Incentive Plan of 1997 as Amended and
Restated May 5, 1999.
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 March 31,
1999. The Registrant filed an 8-K dated May 6,
1999 under Item 5 (Other Items), announcing a
stock repurchase program approved by its Board of
Directors on May 5, 1999.
* A copy of this exhibit is 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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