SAFECO CORPORATION AND SUBSIDIARIES
NINE MONTHS ENDED SEPTEMBER 30, 1997
To Our Shareholders:
Our net income for the first nine months of 1997 was $350.5 million or $2.77
per share, compared with $2.64 per share for 1996. If we exclude realized
gain from investments, our income was $2.23 per share, compared with $2.28
per share in 1996.
PROPERTY AND CASUALTY INSURANCE
Property and casualty operations for the first nine months of 1997 produced
pretax income of $229.5 million before realized gain from investments,
compared with $243.1 million for the first nine months last year. The company
had an underwriting profit of $19.2 million for the first nine months,
compared with $31.9 million for the same period last year. The third quarter
produced an underwriting loss of $11.7 million. This compares with profits of
$25.4 million for the third quarter last year and $23.6 million last quarter.
The combined loss and expense ratio was 98.9 for the first nine months and
101.9 for the third quarter only. This compares with 98.1 for the first nine
months last year and 95.6 for the third quarter a year ago. Investment income
was $210.3 million, down less than 1% from a year ago.
Personal auto, our largest line, reported an underwriting profit of $35.3
million for the first nine months, compared with a profit of $46.1 million
for the first nine months last year. The profit for the third quarter was
$6.8 million. The number of vehicles insured at the end of September was 8%
higher than a year ago. Average loss costs were down slightly during the
first nine months due to a decline in both the frequency and severity of auto
bodily injury claims.
Homeowners had an underwriting loss of $21.0 million for the first nine
months, compared with a loss of $57.3 million for the first nine months of
1996. Catastrophe losses for this line were $31 million, compared with $45
million for the first nine months a year ago. We are working on several
initiatives to continue to improve homeowners' results through a combination
of higher prices, increased deductibles and proper insurance to value.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats, produced an underwriting profit of $10.9 million for
the first nine months, compared with a profit of $13.7 million for the first
nine months last year.
Commercial lines produced an underwriting loss of $22.1 million during the
third quarter operating at a combined ratio of 114.3. For the first nine
months, the underwriting loss was $25.4 million, and the combined ratio was
105.6. By comparison, commercial lines reported an underwriting profit of
$10.3 million for the first nine months last year and a combined ratio of
97.6. The current year results reflect several unusually large losses during
the third quarter. Also, the results for the prior year and first six months
of 1997 were favorably impacted by claims settled for less than had been
reserved.
Surety continues to experience excellent results. The profit for this line
was $16.5 million for the first nine months, compared with a profit of $18.3
million for the first nine months last year.
Premiums written for the first nine months increased 5% over a year ago with
personal lines up 6% and commercial lines up 4%.
LIFE AND HEALTH INSURANCE
Our life and health insurance operations produced a pretax profit, before
realized gain from investments, of $108.4 million for the first nine
months of 1997. This compares with $103.6 million for the same period last
year. The third quarter profit was $35.5 million, compared to $34.3 million
reported in the third quarter of 1996.
Combined nine months earnings for the annuity and retirement services lines
were $40.4 million, compared with $38.7 million reported for the first nine
months of 1996. Low market interest rates and competitive pressures continue
to affect our profit margins for the annuity and retirement services lines.
Combined assets under management for both lines of business now total $10.6
billion, up from the $9.7 billion at year end.
On September 3, 1997 we announced a strategic alliance to distribute SAFECO
Life annuities through Washington Mutual's multi-state banking network. As a
part of the alliance, we will acquire Washington Mutual's insurance
subsidiary, WM Life Insurance Company. The $140 million acquisition is
expected to be completed by year-end.
REAL ESTATE
SAFECO Properties' pretax income was $7.2 million for the first nine months
of 1997, compared with $9.7 million in 1996. This decrease is primarily
attributable to 1996 land sales not duplicated in 1997 and to the expensing
of the carrying costs on a regional shopping center being renovated.
Our commercial and medical real estate properties continue to produce solid
operating results. In addition, Redmond Town Center, our 1.4 million
square-foot, mixed-use development in Redmond, Washington, celebrated its
grand opening on September 18.
CREDIT
SAFECO Credit Company produced a record pretax profit of $15.6 million for
the first nine months of 1997, compared with $14.0 million in the first nine
months of 1996. Pretax income in the third quarter was also a quarterly high
at $5.8 million, compared with $5.3 million in the second 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 total $1.0 billion, representing a 16%
annualized increase during 1997.
ASSET MANAGEMENT
The pretax income from asset management activities for the first nine months
of 1997 was $4.3 million. This is higher than the $3.8 million earned during
the same period last year, 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 52%
increase in assets under management since last year, which total a record
$4.8 billion at September 30, 1997.
INVESTMENT PORTFOLIOS
During the quarter, we recognized a significant amount of gains on sale of
investments. This was a result of the liquidation of approximately $600
million of our securities portfolio, which was used in the acquisition of
American States Financial Corporation.
The market value of our consolidated bond portfolio was $1.1 billion in
excess of amortized cost at September 30, 1997, compared with $847 million at
December 31, 1996. The market value of our equity securities portfolio was
$885 million in excess of cost at September 30, 1997.
ACQUISITION OF AMERICAN STATES FINANCIAL CORPORATION
On October 1, 1997, we acquired American States Financial Corporation for
$2.8 billion in cash plus the repayment of $300 million of American States'
debt to its parent, Lincoln National Corporation. We have essentially
completed our financing related to this acquisition as described below (in
millions):
Internal Funds $ 600
Common Stock 596
Capital Securities 842
Senior Notes 200
Commercial Paper 886
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$3,124
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The fourth quarter of 1997 will be the first quarter that SAFECO and American
States will operate as a combined entity.
/s/ Roger H. Eigsti
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October 24, 1997 Roger H. Eigsti
Seattle, Washington Chairman and Chief Executive Officer
SAFECO CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN MILLIONS)
SEPTEMBER 30 DECEMBER 31
1997 1996
ASSETS
Investments:
Fixed Maturities, at Market Value
(Cost: 1997--$11,323.4; 1996--$11,270.5)............... $12,154.1 $11,936.3
Fixed Maturities, at Amortized Cost
(Market Value: 1997--$3,005.2; 1996--$2,670.0)......... 2,705.0 2,488.3
Marketable Equity Securities, at Market Value
(Cost: 1997--$518.2; 1996--$641.8)..................... 1,403.5 1,298.8
Real Estate.............................................. 608.9 554.0
Other Invested Assets.................................... 3,842.9 612.1
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Total Investments...................................... $20,714.4 16,889.5
Finance Receivables........................................ 929.4 829.0
Deferred Policy Acquisition Costs.......................... 407.3 396.1
Other Assets............................................... 2,193.7 1,803.1
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Total.................................................. $24,244.8 $19,917.7
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LIABILITIES AND SHAREHOLDERS' EQUITY
Losses, Adjustment Expense and Future Policy Benefits...... $ 2,148.5 $ 2,237.9
Unearned Premiums.......................................... 1,010.8 946.9
Funds Held Under Deposit Contracts......................... 10,617.9 9,792.7
Debt....................................................... 3,022.9 1,233.5
Other Liabilities.......................................... 2,010.3 1,591.4
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Total Liabilities...................................... 18,810.4 15,802.4
Capital Securities......................................... 841.6 -
Common Shareholders' Equity (Common shares issued and
outstanding: 1997--126.3; 1996--126.3)................... 4,592.8 4,115.3
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Total.................................................. $24,244.8 $19,917.7
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Book Value per Common Share............................... $ 36.35 $ 32.58
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
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REVENUES
Property and Casualty.................... $1,957.2 $1,860.9 $ 676.4 $ 641.3
Life and Health.......................... 204.0 199.0 69.0 66.7
Investment (Excluding Realized Gain)..... 887.5 830.6 303.8 280.7
Real Estate.............................. 51.3 57.1 18.6 17.5
Credit................................... 70.5 62.0 25.0 21.6
Asset Management......................... 18.7 16.5 6.9 5.2
Talbot Financial......................... 38.2 28.5 13.2 9.8
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Total.............................. $3,227.4 $3,054.6 $1,112.9 $1,042.8
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SAFECO CORPORATION AND SUBSIDIARIES
SUMMARY OF CONSOLIDATED INCOME (UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1996 1997 1996
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain (Loss).......... $ 19.2 $ 31.9 $(11.7) $ 25.4
Net Investment Income............. 210.3 211.2 70.9 70.4
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Total Property and Casualty.. 229.5 243.1 59.2 95.8
Life and Health Insurance.............. 108.4 103.6 35.5 34.3
Real Estate............................ 7.2 9.7 1.7 3.2
Credit................................. 15.6 14.0 5.8 5.3
Asset Management....................... 4.3 5.2 1.9 1.4
Corporate.............................. (2.9) (6.1) (1.4) (2.5)
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Total........................ 362.1 369.5 102.7 137.5
Realized Investment Gain before Tax......... 105.6 69.5 64.8 16.7
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Income before Income Taxes.................. 467.7 439.0 167.5 154.2
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Provision for Income Taxes on:
Income before Realized Gain............ 77.6 82.1 19.5 32.3
Realized Investment Gain............... 36.1 24.2 22.8 5.9
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Total........................ 113.7 106.3 42.3 38.2
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Income before Distributions on
Capital Securities..................... 354.0 332.7 125.2 116.0
Distributions on Capital Securities,
Net of Tax............................. 3.5 - 3.5 -
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Net Income.................................. $350.5 $332.7 $121.7 $116.0
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Net Income Per Share of Common Stock:
Income before Realized Gain............ $ 2.23 $ 2.28 $ .63 $ .83
Realized Gain.......................... .54 .36 .33 .09
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Net Income.................................. $ 2.77 $ 2.64 $ .96 $ .92
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Dividends Paid to Common Shareholders....... $ .90 $ .82 $ .32 $ .29