UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following pro forma combined condensed financial statements reflect
the proposed acquisition by SAFECO Corporation (the "Corporation") of
American States Financial Corporation ("American States") through the merger
of American States with and into a subsidiary of the Corporation (the
"Merger") and the consummation of the financings proposed by the Corporation
in connection with funding a portion of the purchase price of such
acquisition. The Merger will be accounted for by the Corporation using the
purchase method of accounting. In connection therewith, the purchase price
will be allocated to the assets and liabilities of American States as of the
effective time of the Merger (the "Effective Time"), and the results of
operations of American States will be included in the Corporation's
consolidated results of operations thereafter.
The Corporation's preliminary allocation of the purchase price was based
upon the estimated fair value of the assets acquired and liabilities assumed
and, in some instances, the effects of conforming American States' accounting
practices to those of the Corporation. The actual allocation will be based on
further studies and valuations as of the Effective Time and will be primarily
affected by the impact of market interest rates as of the Effective Time upon
the valuation of assets and liabilities of American States and any revision at
the Effective Time of estimated costs to eliminate duplicative facilities and
equipment and to record the estimated liability for severance and other employee
termination costs. The actual adjustments (other than those related to the
accruals of certain costs at the Effective Time described above) are not, at the
present time, expected to be significantly different; however, there can be no
assurance that significant differences will not arise.
The pro forma combined condensed financial statements do not include all
adjustments to conform the accounting policies of American States to those
followed by the Corporation. The nature and extent of such adjustments, if any,
will be based upon further study and analysis. Although any such adjustments are
not currently expected to be significant to the pro forma financial results,
there can be no assurance that significant adjustments will not be determined to
be necessary as additional information becomes available.
The pro forma combined condensed financial statements are unaudited and
combine the operations of the Corporation and American States for the three
months ended March 31, 1997 and for the year ended December 31, 1996 on a
consolidated basis. The pro forma balance sheet assumes that the Merger will
be accounted for as a "purchase" of American States by the Corporation under
generally accepted accounting principles. The pro forma balance sheet assumes
that the Merger occurred at March 31, 1997. The pro forma statements of
income assume that the Merger occurred on January 1, 1996. The consummation
of the Merger is subject to certain conditions, and there can be no assurance
that the Merger will be consummated. The pro forma combined condensed
financial statements have not been compiled, reviewed or audited by
independent accountants. See Item 5 of the Corporation's Current Report on
Form 8-K to which these Unaudited Pro Forma Combined Condensed Financial
Statements are an exhibit.
The Corporation's assumptions as to the terms of the financings proposed
to be entered into in connection with the Merger are subject to change due to
fluctuations in market conditions, prevailing interest rates and other
factors. Certain portions of the Corporation's financing plan are not
expected to be consummated until later in 1997. The Corporation may determine
to offer other securities or pursue other forms of financing in lieu of
certain of the offerings or borrowings described in the accompanying notes,
or to increase or decrease the individual amounts of such offerings and
borrowings. While any such changes to the Corporation's plan of financing are
not expected to be significant to the pro forma financial results, there can
be no assurance that significant changes will not be made in the future.
The unaudited pro forma combined condensed financial statements have been
included for information purposes only and were prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. As further
discussed in the accompanying notes, the pro forma combined condensed
financial statements do not purport to be indicative of the financial
position or operating results that would have been achieved had the Merger
been consummated as of the dates indicated and should not be construed as
representative of the combined company's future financial position or
operating results.
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997
(UNAUDITED)
(IN MILLIONS)
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
ASSETS
Investments
Fixed Maturities Available-for-Sale, at
Market Value............................... $11,825.5 $ 3,689.2 $ (600.0) (a) $14,914.7
Fixed Maturities Held-to-Maturity, at
Amortized Cost............................. 2,595.7 2,595.7
Marketable Equity Securities, at Market
Value...................................... 1,311.3 427.8 1,739.1
Mortgage Loans............................... 445.7 22.6 468.3
Real Estate.................................. 581.7 581.7
Short-Term Investments....................... 83.9 75.5 159.4
Other Invested Assets........................ 58.0 39.0 97.0
----------- ----------- ----------- -----------
Total Investments.......................... 16,901.8 4,254.1 (600.0) 20,555.9
Cash........................................... 48.8 15.8 (41.0) (b) 23.6
Accrued Investment Income...................... 251.0 58.6 309.6
Finance Receivables............................ 870.7 870.7
Premiums and Other Service Fees Receivable..... 468.5 447.9 916.4
Reinsurance Recoverables....................... 149.3 178.3 327.6
Deferred Policy Acquisition Costs.............. 411.1 210.0 (55.0) (c) 566.1
Deferred Federal Income Taxes Recoverable...... 154.9 89.2 (d) 0.0
(244.1) (e)
Land, Buildings and Equipment for Company
Use.......................................... 172.0 31.9 203.9
Cost in Excess of Net Assets of Acquired
Subsidiaries................................. 36.6 96.9 (96.9) (f) 1,699.3
1,662.7 (g)
Other Assets................................... 218.4 65.9 284.3
Separate Account Assets........................ 541.1 541.1
----------- ----------- ----------- -----------
Total Assets............................... $20,069.3 $ 5,514.3 $ 714.9 $26,298.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 1997 (CONTINUED)
(UNAUDITED)
(IN MILLIONS)
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses, Adjustment Expense and Future Policy
Benefits..................................... $ 2,175.5 $ 2,862.2 (h) $ 5,037.7
Unearned Premiums.............................. 947.1 728.2 1,675.3
Funds Held Under Deposit Contracts............. 10,047.3 10,047.3
Short-Term Debt................................ 863.5(1) 66.7 $ (66.7) (a) 863.5(1)
Long-Term Debt................................. 439.3(2) 232.9 (232.9) (a) 1,296.3(2)
857.0 (a)
Other Liabilities.............................. 690.4 280.5 30.0 (i) 1,035.5
41.6 (j)
9.6 (k)
(16.6) (l)
(m)
Current Federal Income Taxes Payable........... 28.2 15.8 44.0
Deferred Federal Income Taxes Payable.......... 327.3 (244.1) (e) 83.2
Separate Account Liabilities................... 541.1 541.1
----------- ----------- ----------- -----------
Total Liabilities.......................... 16,059.7 4,186.3 377.9 20,623.9
----------- ----------- ----------- -----------
Corporation-Obligated, Mandatorily Redeemable
Preferred Securities of Subsidiary Trust
Holding Solely Junior Subordinated Debentures 1,000.0 (a) 990.0
of the Corporation........................... (10.0) (a)
----------- ----------- ----------- -----------
Common Stock................................... 227.2 304.5 (304.5) (n) 902.2
700.0 (a)
(25.0) (a)
Retained Earnings.............................. 3,113.8 909.4 (909.4) (n) 3,113.8
Unrealized Appreciation of Investment
Securities, Net of Tax....................... 672.6 114.1 (114.1) (n) 672.6
Unrealized Loss from Foreign Currency
Translation, Net of Tax...................... (4.0) (4.0)
----------- ----------- ----------- -----------
Total Stockholders' Equity................. 4,009.6 1,328.0 (653.0) 4,684.6
----------- ----------- ----------- -----------
Total Liabilities and Stockholders'
Equity................................... $20,069.3 $ 5,514.3 $ 714.9 $26,298.5
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
- --------------------------
(1) Includes $820.4 million of SAFECO Credit Company, Inc. short-term
borrowings.
(2) Includes $44.9 million of SAFECO Credit Company, Inc. long-term borrowings.
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ----------- ----------- --------- -----------
REVENUES
Insurance:
Property and Casualty Earned Premiums........ $ 2,275.4 $ 1,617.2 $ 3,892.6
Life and Health Premiums and Other
Revenues................................... 265.9 56.9 322.8
----------- ----------- ----------- -----------
Total...................................... 2,541.3 1,674.1 4,215.4
Real Estate.................................... 79.9 79.9
Finance........................................ 75.7 75.7
Asset Management............................... 23.2 23.2
Other.......................................... 38.5 38.5
Net Investment Income.......................... 1,116.7 274.3 $ (36.0) (o) 1,355.0
Realized Investment Gain....................... 90.1 35.6 125.7
----------- ----------- ----------- -----------
Total Revenues............................. 3,965.4 1,984.0 (36.0) 5,913.4
----------- ----------- ----------- -----------
EXPENSES
Losses, Adjustment Expense and Policy
Benefits..................................... 2,362.7 1,248.9 3,611.6
Commissions.................................... 415.7 283.0 698.7
Interest....................................... 72.4 12.4 33.9 (o) 118.7
Other.......................................... 552.6 243.8 66.5 (p) 860.4
(2.5) (i)
Amortization of Deferred Policy Acquisition
Costs........................................ 426.9 338.0 764.9
Deferral of Policy Acquisition Costs........... (443.4) (337.8) (781.2)
----------- ----------- ----------- -----------
Total Expenses............................. 3,386.9 1,788.3 97.9 5,273.1
----------- ----------- ----------- -----------
Income before Income Taxes....................... 578.5 195.7 (133.9) 640.3
Provision (Benefit) for Federal Income Taxes..... 139.5 26.0 (29.8) (q) 135.7
----------- ----------- ----------- -----------
Income before Dividends on Capital Securities.... 439.0 169.7 (104.1) 504.6
Dividends on Capital Securities, Net of Tax...... -- -- 54.3 (o) 54.3
----------- ----------- ----------- -----------
Net Income Available to Common Shareholders...... $ 439.0 $ 169.7 $ (158.4) $ 450.3
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Earnings Per Share of Common Stock............... $ 3.48 $ 3.03 NA (r) $ 3.18
Weighted Average Shares Outstanding.............. 126.1 56.0 NA (r) 141.7
PRO FORMA COMBINED CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL
--------------------------
AMERICAN PRO FORMA
STATES ADJUSTMENTS
SAFECO FINANCIAL INCREASE NOTE PRO FORMA
CORPORATION CORPORATION (DECREASE) REFERENCE COMBINED
----------- ------------- ------------- --------- -----------
REVENUES
Insurance:
Property and Casualty Earned Premiums........ $ 581.5 $ 408.7 $ 990.2
Life and Health Premiums and Other
Revenues................................... 66.6 14.6 81.2
----------- ------ ------ -----------
Total...................................... 648.1 423.3 1,071.4
Real Estate.................................... 16.3 16.3
Finance........................................ 19.6 19.6
Asset Management............................... 5.7 5.7
Other.......................................... 12.6 2.4 15.0
Net Investment Income.......................... 291.0 66.5 $ (9.0) (o) 348.5
Realized Investment Gain....................... 21.7 9.7 31.4
----------- ------ ------ -----------
Total Revenues............................. 1,015.0 501.9 (9.0) 1,507.9
----------- ------ ------ -----------
EXPENSES
Losses, Adjustment Expense and Policy
Benefits..................................... 605.6 297.5 903.1
Commissions.................................... 109.1 72.9 182.0
Interest....................................... 18.5 5.2 8.5 (o) 32.2
Other.......................................... 138.6 63.7 16.7 (p) 218.4
(0.6) (i)
Amortization of Deferred Policy Acquisition
Costs........................................ 110.4 82.8 193.2
Deferral of Policy Acquisition Costs........... (111.8) (87.5) (199.3)
----------- ------ ------ -----------
Total Expenses............................. 870.4 434.6 24.6 1,329.6
----------- ------ ------ -----------
Income before Income Taxes....................... 144.6 67.3 (33.6) 178.3
Provision (Benefit) for Federal Income Taxes..... 33.1 13.3 (7.4) (q) 39.0
----------- ------ ------ -----------
Income before Dividends on Capital Securities.... 111.5 54.0 (26.2) 139.3
Dividends on Capital Securities, Net of Tax...... -- -- 13.6 (o) 13.6
----------- ------ ------ -----------
Net Income Available to Common Shareholders...... $ 111.5 $ 54.0 $ (39.8) $ 125.7
----------- ------ ------ -----------
----------- ------ ------ -----------
Earnings Per Share of Common Stock............... $ 0.88 $ 0.90 NA (r) $ 0.89
Weighted Average Shares Outstanding.............. 126.3 60.1 NA (r) 141.9
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The pro forma combined condensed financial statements assume all shares of
common stock of American States are converted, pursuant to the Merger, into cash
in the amount of $47.00 per share of American States common stock.
The following describes the pro forma adjustments reflected in the
accompanying unaudited pro forma combined condensed financial statements:
PRO FORMA ADJUSTMENTS:
(in millions, except share amounts)
(a) The following adjustments reflect the funding of the acquisition of American
States:
SOURCES:
Bank debt............................................................................................ $ 657.0
Proceeds from issuance of notes due 2007............................................................. 200.0
Proceeds from issuance of Corporation-obligated, mandatorily redeemable preferred securities of
subsidiary trust holding solely junior subordinated debentures of the Corporation, and other
capital securities.................................................................................. 1,000.0
Less underwriting compensation.................................................................... (10.0)
Proceeds from issuance of the Corporation's common stock............................................. 700.0
Less underwriting compensation.................................................................... (25.0)
Special dividend from the Corporation's property and casualty subsidiaries........................... 600.0
---------
Total............................................................................................ $ 3,122.0
---------
---------
USES:
Purchase price of outstanding shares of common stock of American States
(60,050,515 shares x $47).......................................................................... $ 2,822.4
Retire American States debt.......................................................................... 299.6
---------
Total............................................................................................ $ 3,122.0
---------
---------
(b) To record the direct out-of-pocket costs of the acquisition.
(c) To adjust deferred acquisition costs to reflect the Corporation's deferral
policies.
(d) Deferred tax adjustment arising from allocation of purchase price to the
fair value of American States' assets and liabilities.
(e) To net American States' deferred tax asset against the Corporation's
deferred tax liability.
(f) To eliminate American States' goodwill.
(g) To record the excess of the cost to acquire American States over the fair
value of net assets acquired (goodwill).
(h) Adjustments of unpaid loss and adjustment expense resulting from the
Corporation's evaluation of American States' reserves will be recorded in
operations in the period determined. The Corporation expects to record $40.0
of additional reserves in the fourth quarter of 1997, which will result in
an after-tax charge of $26.0.
(i) To record lease-related fair value adjustments and related amortization.
(j) To record the estimated liability for severance and other costs for certain
executive officers and employees of American States.
(k) To increase other liabilities for pension obligations.
(l) To reduce other liabilities for postretirement obligations.
(m) The Corporation expects to accrue in the fourth quarter of 1997 an
estimated liability of $23.0 ($15.0 after-tax) for first-year incentive
commissions on American States' personal lines premiums.
(n) To eliminate American States' equity:
Common stock...................................................................................... $ (304.5)
Retained earnings................................................................................. (909.4)
Unrealized gain................................................................................... (114.1)
(o) The following adjustments reflect the financing effects of the acquisition:
INVESTMENT INCOME:
Loss of investment income due to special dividend from the Corporation's property and casualty
subsidiaries ($600.0 at 6.0%, rate based on current market yields for tax-exempt securities)...... $ (36.0)
INTEREST EXPENSE:
Retire existing American States debt ($100.0 at 7 1/8%, $200.0 at 6.7%).............................. $ (20.5)
Bank debt interest expense ($657.0 at 6.0%).......................................................... 39.4
Notes due 2007 interest expense ($200.0 at 7.5%)..................................................... 15.0
---------
Total interest expense effect.................................................................... $ 33.9
---------
---------
DIVIDENDS ON CAPITAL SECURITIES:
Corporation-obligated, mandatorily redeemable preferred securities of subsidiary trust holding
solely junior subordinated debentures of the Corporation ($1,000 x 8.36%)........................ $ 83.6
(interest rates on bank debt, notes due 2007 and dividends on capital securities based on
expected yields for these securities when issued)
(p) To record the amortization of goodwill over 25 years.
(q) To record income tax expense (benefit) of the pro forma adjustments.
(r) Pro forma earnings per share has been determined by adding the additional
shares of common stock to be issued by the Corporation to finance the
acquisition. At an assumed offering price of $45 per share, outstanding
shares increase by 15,555,556 ($700.0/$45 per share).