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EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SAFECO Corporation (the Corporation), a Washington corporation, owns operating
subsidiaries in segments of insurance and other financially related businesses.
(The Corporation and its subsidiaries are collectively referred to as "SAFECO.")
The Corporation's insurance subsidiaries engage in property and casualty
insurance, surety and life insurance, and generated approximately 95% of total
2000 revenues.
SAFECO Credit Company provides commercial lending to businesses, insurance
agents and affiliated companies. SAFECO Asset Management Company provides asset
management services to the SAFECO family of mutual funds, SAFECO Trust Company
and outside managed accounts. Talbot Financial Corporation provides insurance
brokerage and financial services distribution. See page 43 for a discussion of
SAFECO's discontinued real estate operations.
On January 30, 2001, SAFECO's Board of Directors named as chief executive
officer Michael S. McGavick, former president and chief operating officer of CNA
Financial Corporation's commercial insurance operation. William G. Reed, Jr. was
named Chairman of the Board of Directors and continues as lead director. The
Board of Directors also announced on February 7, 2001 that it had reduced the
Corporation's quarterly dividend by 50%. Assuming the quarterly dividend amount
is $0.185 per share, the Corporation will retain approximately $94.5 million
annually that it otherwise would have paid in shareholders' dividends. Mr.
McGavick is engaged in a review of SAFECO's operations with a particular
emphasis on the property and casualty insurance operations that have performed
poorly over the last two years. Mr. McGavick has stated that he intends to
concentrate on: (1) ensuring that the recovery plans for the property and
casualty insurance operations have the rigor and urgency necessary to succeed,
(2) a focused review of expenses, and (3) increasing the flexibility provided by
SAFECO's balance sheet.
CAPITAL RESOURCES AND LIQUIDITY
SOURCES AND USES OF FUNDS
SAFECO's operations have liquidity requirements that vary among the
principal product lines and businesses. Life insurance, retirement services and
annuity product reserves are primarily longer-term liabilities that are
typically predictable in nature and are supported by investments that are
generally longer-term. Property and casualty liabilities are both short-term and
long-term. These liabilities are less predictable in nature and generally
require greater liquidity in the investment portfolio.
The Corporation's liquidity needs are met by dividends from its subsidiary
operations, the sale and maturity of invested assets, bank borrowings and
issuances of commercial paper and other securities. The subsidiaries' primary
sources of cash from operations are insurance premiums, funds received under
deposit contracts, dividends, interest and asset management fees.
SAFECO uses funds to support operations, service and pay down debt, pay
dividends to SAFECO shareholders, fund stock repurchases and grow the investment
portfolio. Cash from insurance operations is used primarily to pay claims and
claim adjustment expenses. Most insurance premiums are received before or at the
time premium revenues are recognized, while related claims are incurred and paid
in subsequent months or years. Catastrophe claims, the timing and amount of
which are inherently unpredictable, may create increased liquidity requirements.
Total cash provided by operating activities for the years ended December
31, 2000, 1999 and 1998 was $658.6 million, $763.0 million and $657.6 million,
respectively (see Statements of Consolidated Cash Flows on page 52). Property
and casualty operating cash flows were $137.0 million, $205.3 million and $293.7
million for the years ended December 31, 2000, 1999 and 1998, respectively.
Although premiums received have increased in all three years, they have been
outpaced by rising loss and loss adjustment expense costs, resulting in higher
underwriting losses. (See more detailed discussion of property and casualty
operations beginning on page 37). In addition, property and casualty after-tax
cash flows from investment income have declined due to the relatively low
interest rate environment, dividends paid to the Corporation (which reduce the
amount of investable cash) and bond call activity (whereby higher yielding bonds
are called and redeemed by issuers). Consolidated dividends and interest
received have increased due to the higher invested asset base of the life
insurance subsidiaries. It is anticipated that the insurance subsidiaries will
pay dividends to the Corporation in 2001 in order to fund shareholder dividends
and to service debt. The amount of dividends will be lower than in recent years
due to weaker underwriting results, a reduction in the amount needed to fund
SAFECO stockholders' dividends, and to conserve the insurance subsidiaries'
capital and surplus.
Funds received under deposit contracts relate primarily to annuity,
retirement services and individual products of the Corporation's life insurance
subsidiaries. (The Corporation's life insurance subsidiaries are collectively
referred to as "SAFECO Life.") Of the total $14.1 billion in deposit contracts
at December 31, 2000, approximately 44% are structured settlement immediate
annuity products. These annuities have an average expected maturity of over 25
years at issuance and cannot be surrendered by policyholders. Equity-indexed
annuities (EIA), comprising approximately 3% of total deposit contracts, have
remaining expected maturities of approximately 4 years and associated surrender
charges ranging from 8% in year one to zero after year six. During the third and
fourth quarters of 2000, SAFECO Life offered to waive surrender charges in order
to induce EIA policyholders to surrender their contracts. This offer was
successful and resulted in surrenders of $363 million. These surrenders
accounted for the majority of the increase in return of funds held under deposit
contracts in 2000 compared with 1999 and 1998 (see Statements of Consolidated
Cash Flows on page 52.) Since the EIA book of business has gener-
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ated ongoing losses, reducing the size of the book will reduce the amount of
future losses. Other annuity and retirement services products comprise
approximately 28% of total deposit contracts. These products generally have
expected maturities of 5 to 20 years at issuance and associated surrender
charges ranging from 10% to 5% in year one reduced to zero within 5 to 10 years.
SAFECO Life retains the option to defer payouts over 5 years on approximately
13% of these contracts. Universal life products comprise approximately 21% of
total deposit contracts. Of the total universal life product deposit contracts,
80% are business-owned life insurance (BOLI) policies which have expected
maturities of 20 to 25 years at issuance with surrender charges varying
according to policy type. SAFECO Life's guaranteed investment contracts (GICs)
within its retirement services area comprise the remaining 4% of total deposit
contracts.
The high level of proceeds from the maturity of fixed maturities in all
three years was due primarily to the high number of calls of fixed maturities
and prepayments of mortgage-backed securities. These calls and prepayments were
primarily due to the lower interest rate environment during the past three years
and issuer-driven actions. The high level of purchase and sale activity related
to fixed maturities available-for-sale in 2000 and 1999 was due in part to
shifting a portion of the property and casualty subsidiaries' bond holdings from
tax-exempt to taxable bonds. The reason for this shift was to maximize the
portfolio's after-tax return in view of the higher level of underwriting losses
in 2000 and 1999 and the resulting alternative minimum tax. Much of the purchase
and sale activity related to fixed maturities available-for-sale in 1998 was due
to the realignment of the American States Financial Corporation's (American
States) property and casualty insurance companies' investment portfolio. The
high level of proceeds from equity securities in 2000 is mainly due to
approximately $300 million of planned equity securities sales out of the
property and casualty insurance companies' investment portfolio in the third
quarter. The proceeds from these equity securities sales were reinvested in
taxable fixed-income securities. These sales resulted in increased realized
gains from equity securities in 2000 compared with 1999 and 1998. Additional
information on realized gains can be found in Note 2 on page 58.
Changes in interest rates have also caused fluctuations in the market value
of fixed maturity investments. This has affected SAFECO's reported book value
(shareholders' equity) and comprehensive income because the difference between
market value and the amortized cost of fixed maturities classified as
available-for-sale is included in shareholders' equity and comprehensive income,
net of related income tax. Effective October 1, 2000, SAFECO reclassified its
entire held-to-maturity fixed maturities investment portfolio to
available-for-sale. This reclassification was made to provide additional
investment flexibility in managing the fixed maturities portfolio. This resulted
in an increase in other comprehensive income of $41 million in the fourth
quarter.
SAFECO Credit Company has ongoing needs for outside capital to fund its
lending and leasing operating activities. Its borrowings are of short- to
medium-term duration and are obtained primarily through the issuance of
commercial paper, medium-term notes and the use of interest rate swaps to
convert variable rate interest payments to fixed rates, as discussed further
below. At December 31, 2000, SAFECO Credit had $11.3 million of medium-term
notes outstanding, which were issued in 1991 and 1993 and mature in 2001. These
debt securities are guaranteed by the Corporation. Including these medium-term
notes and commercial paper, SAFECO Credit had unaffiliated borrowings at
December 31, 2000 totaling $1,154.7 million, all of which are due within one
year. It is anticipated that the majority of these commercial paper borrowings
will be rolled over in 2001. Borrowing costs could increase as a result of the
Corporation's lower ratings (see discussion on page 35). During 2000, SAFECO
Credit replaced $300 million of its short-term commercial paper borrowings with
a medium-term note payable to the Corporation due in 2003 as described further
below.
SAFECO Credit enters into interest rate swap agreements to reduce the
impact of changes in interest rates. The interest rate swap agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. At December 31, 2000, interest rate swap
agreements were outstanding with notional amounts of $328.6 million, replacing
variable rates with fixed rates with a weighted-average interest rate of 5.9%.
Maturities of these agreements range from January 2001 to June 2007. At December
31, 1999, interest rate swap agreements were outstanding with notional amounts
of $457.0 million, replacing variable rates with fixed rates with a
weighted-average interest rate of 5.9%.
In order to reduce refinancing risk, on March 16, 2000, the Corporation
issued $300.0 million of medium-term notes at 7.875% which mature on March 15,
2003. In conjunction with this debt issue, the Corporation entered into interest
rate swap agreements. The swaps are for notional amounts totaling $300.0 million
and replace the fixed rates of the medium-term notes with variable rates at
65.03 basis points over the 90-day LIBOR rate. The swaps mature in March 2003.
The proceeds of the debt issue were subsequently loaned to SAFECO Credit to
reduce a portion of its short-term commercial paper. The $300.0 million of
medium-term notes issued is part of a shelf offering of $800.0 million made
earlier in 2000. The Corporation has available $500.0 million under the existing
shelf registration.
The Corporation has a bank credit facility available for $1,050.0 million.
It is a five-year facility originated in 1997 that extends to 2002. The
Corporation also has backup bank facilities for $315.0 million. These are
364-day commitments which expire at various dates throughout the year. These
facilities are available for general corporate purposes, as well as support of
the commercial paper programs of the Corporation and SAFECO Credit. In 2001, the
Corporation plans to roll over its $349.8 million of commercial paper borrowings
outstanding at December 31, 2000.
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As part of its active capital management strategy, the Corporation
periodically repurchases its common stock through open market and negotiated
purchases. In February 2000, the Corporation's Board of Directors approved the
repurchase of 3.0 million shares of common stock. Previous repurchase
authorizations were in May 1999 for a total of 8.0 million shares and in August
1998 for a total of $200 million. For the year ended December 31, 2000, the
Corporation repurchased 1.3 million shares at a total cost of $30.3 million for
an average share price of $22.54. For the year ended December 31, 1999, the
Corporation repurchased 7.5 million shares at a total cost of $302.1 million for
an average share price of $40.14. For the year ended December 31, 1998, the
Corporation repurchased 5.2 million shares at a total cost of $235.6 million for
an average share price of $45.66. Repurchases combined for 2000, 1999 and 1998
totaled 9.9% of the Corporation's outstanding common shares at the beginning of
1998. The Corporation received additional dividends from its insurance
subsidiaries to fund these stock repurchases. Approximately 2.9 million shares
remain available for repurchase under the February 2000 authorization.
RATINGS
The claims-paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products, e.g., structured settlement annuities, BOLI. Higher
ratings generally indicate greater financial strength and a stronger ability to
pay claims. Ratings focus on factors such as results of operations, capital
resources, debt-to-equity ratio, demonstrated management expertise in the
insurance business, marketing, investment operations, minimum policyholders'
surplus requirements and capital sufficiency to meet projected growth, as well
as access to such traditional capital as may be necessary to continue to meet
standards for capital adequacy. Due primarily to continued poor underwriting
results in its property and casualty operations, SAFECO's claims-paying and
corporate credit ratings have been lowered in the last two years. Lower
operating results combined with increased operating leverage in the property and
casualty operations contributed to lower debt service coverage for the
Corporation. Lower commercial paper ratings have increased the interest cost of
the Corporation's and SAFECO Credit's commercial paper. SAFECO believes its
financial position is sound and has action plans in place to improve its
property and casualty results. It is, however, possible that further negative
ratings actions may occur. If ratings are further lowered, SAFECO may incur
higher borrowing costs, may have more limited means to access capital, and may
be unable to market certain of its insurance products that are dependent upon
ratings being at or above a particular level of risk.
The following table summarizes SAFECO's current ratings:
A.M. STANDARD
BEST FITCH MOODY'S & POOR'S
- - - - - - -----------------------------------------------------------------------------------
SAFECO Corporation:
Senior Debt bbb+ - A3 A-
Capital Securities bbb - a3 BBB
Commercial Paper - F-2 P-2 A-2
Financial Strength/Claims-Paying Ability:
Property and Casualty
Subsidiaries A AA- A1 AA-
Life Subsidiaries A AA- A1 AA-
REGULATORY ISSUES
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities which have or would have, if passed, a material effect on
its liquidity, capital resources or results of operations.
Those states in which SAFECO's insurance subsidiaries are domiciled or
deemed to be commercially domiciled limit the amount of dividend payments that
can be made by those subsidiaries without prior regulatory approval. These
limitations are not anticipated to keep the insurance subsidiaries from paying
dividends to the Corporation in 2001 in amounts sufficient to fund its
shareholder dividends and service debt.
The National Association of Insurance Commissioners (NAIC) uses risk-based
capital (RBC) formulas for both life insurers and property and casualty insurers
which serve as an early warning tool by the NAIC and state regulators to
identify companies that are undercapitalized and merit further regulatory
attention or the initiation of regulatory action. SAFECO's life and property and
casualty companies have more than sufficient capital to meet the RBC
requirements.
The NAIC recently finished revising the Accounting Practices and Procedures
Manual. The revised manual will be effective January 1, 2001. The domiciliary
states of the Corporation's insurance subsidiaries have adopted the provisions
of the revised manual. The revised manual has changed, to some extent,
prescribed statutory accounting practices and will result in changes to the
accounting practices that the Corporation's insurance subsidiaries use to
prepare their statutory-basis financial statements. Consequently, SAFECO
estimates it will increase statutory surplus of the property and casualty
insurance companies by approximately $200 million and the life insurance
companies by approximately $45 million. Nearly all of the increase in the amount
of statutory surplus relates to the recording of a deferred tax asset that was
not recorded in the statutory basis financial statements under the prior
statutory accounting guidance.
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YEAR 2000 READINESS DISCLOSURE
As of February 9, 2001, SAFECO has not experienced any material Year 2000
complications regarding its computer systems, the technology embedded in its
equipment, or its third-party partners and vendors, nor is it aware of any Year
2000-related claims made under its property and casualty insurance policies.
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information sets forth the contributions of
each primary business segment to the consolidated net income of the Corporation.
The information should be read in conjunction with the Segment Footnote (pages
74 and 75 and the related statements of income on pages 76 through 79) and
supplemental information on pages 80 through 83 of this report.
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ---------------------- ---------- ---------- ----------
(In Millions Except Per Share Amounts)
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty $ (10.6) $ 114.8 $ 310.2
Life 102.5 116.7 46.4+
Real Estate* - - 3.4
Credit 12.8 14.5 14.4
Asset Management 8.5 8.9 5.5
Corporate (44.2) (34.4) (45.0)
---------- ---------- ----------
Total 69.0 220.5 334.9
Realized Gain, Net of Income Taxes 90.4 76.5 61.9
---------- ---------- ----------
Income Before Distributions on Capital Securities 159.4 297.0 396.8
Distributions on Capital Securities, Net of Tax (44.8) (44.8) (44.9)
---------- ---------- ----------
Net Income $ 114.6 $ 252.2 $ 351.9
========== ========== ==========
Net Income Per Diluted Share of Common Stock:
Income Before Realized Gain $ .19 $ 1.32 $ 2.07+
Realized Gain .71 .58 .44
---------- ---------- ----------
Net Income $ .90 $ 1.90 $ 2.51
========== ========== ==========
* 2000 and 1999 Real Estate income of $2.4 and $4.3 is included in Corporate.
+ 1998 Life Income includes a write-off of deferred acquisition costs of
$46.8 ($30.4 after tax, $0.22 per share).
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PROPERTY AND CASUALTY--OPERATIONS
Through independent agents, SAFECO's property and casualty subsidiaries write
personal, commercial and surety lines of insurance. Included in the lines of
insurance written are automobile, homeowners, fire, commercial multi-peril,
workers' compensation, miscellaneous casualty, surety and fidelity.
Approximately 16% of SAFECO's property and casualty premiums are written in
the state of California, and approximately 33% of premiums are written in the
three West Coast states of California, Washington and Oregon. SAFECO continues
to restrict writing new property business in California to manage its exposure
to large, single-event catastrophes, and to restrict writing general property
damage liability coverage in connection with the construction of large
habitation structures to manage its exposure to construction defect claims (see
discussion on page 40).
Personal lines, SAFECO Business Insurance (SBI) (formerly American States
Business Insurance), SAFECO Commercial and surety lines comprised approximately
57%, 26%, 15% and 2%, respectively, of the 2000 gross premiums written of $4.7
billion.
PROPERTY AND CASUALTY OPERATING STATISTICS
The following three tables for the property and casualty insurance companies
state: (1) the results before realized gain and income taxes, (2) operating
ratios, and (3) the underwriting results.
COMPONENTS OF PRETAX OPERATING INCOME
--------------------------------------------
YEAR ENDED DECEMBER 31 2000 1999 1998
---------- ---------- ----------
(In Millions)
Gross Premiums Written $ 4,709.1 $ 4,645.0 $ 4,441.8
========== ========== ==========
Underwriting Loss* $ (521.9) $ (366.7) $ (109.4)
Net Investment Income 460.5 462.3 480.2
Goodwill Amortization (44.0) (43.8) (43.0)
---------- ---------- ----------
Income (Loss) Before Realized Gain and Income Taxes $ (105.4) $ 51.8 $ 327.8
========== ========== ==========
* Underwriting profit or loss is a standard industry measurement used by
management to analyze core property and casualty operations. This
measurement represents the net amount of earned premiums less underwriting
losses and expenses; it does not include realized investment gains and
losses, goodwill amortization, net investment income and taxes. This
measurement does not replace net income as a measure of profitability, but
is presented to supplement the other financial measurements provided.
OPERATING RATIOS*
--------------------------------------------
YEAR ENDED DECEMBER 31 2000 1999 1998
---------- ---------- ----------
Loss Ratio 70.4% 66.4% 61.3%
Adjustment Expense Ratio 12.2 12.0 11.5
Expense Ratio 28.6 29.8 29.5
Dividends to Policyholders .2 .2 .3
---------- ---------- ----------
Combined Ratio 111.4% 108.4% 102.6%
========== ========== ==========
* Operating ratios represent major components of expense expressed as a
percentage of earned premiums and are commonly used measures of property
and casualty insurance profitability. Ratios exclude goodwill amortization.
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UNDERWRITING PROFIT (LOSS)*
-----------------------------------------------------------------------------------------
2000 1999 1998
------------------------- ------------------------- -------------------------
COMBINED COMBINED COMBINED
YEAR ENDED DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
(In Millions)
Personal Lines:
Personal Auto $ (123.0) 107.1% $ (63.3) 103.7% $ 11.5 99.3%
Homeowners (116.7) 116.0 (48.2) 106.8 (56.4) 108.2
Other Personal 18.2 90.3 20.6 88.4 14.8 91.1
Commercial Lines:
SAFECO Business Insurance (155.3) 113.3 (183.4) 118.0 (72.7) 108.0
SAFECO Commercial (155.7) 122.8 (107.6) 115.7 (27.9) 104.3
Surety 11.7 81.0 15.2 74.4 19.2 67.2
Other (1.1) - - - 2.1 -
--------- --------- --------- --------- --------- ---------
Total $ (521.9) 111.4% $ (366.7) 108.4% $ (109.4) 102.6%
========= ========= ========= ========= ========= =========
* Catastrophe losses for all lines, net of reinsurance, totaled $136 million,
$103 million and $159 million in 2000, 1999 and 1998, respectively.
The property and casualty insurance companies had steadily deteriorating
results from the underwriting of insurance from 1998 to 2000. In each of these
three years the loss ratio increased (1998 - 61.3%, 1999 - 66.4% and 2000 -
70.4%) which in turn caused the combined ratio for each year to increase (1998 -
102.6%, 1999 - 108.4% and 2000 - 111.4%). Details on the results by line of
insurance as well as actions being taken to improve these underwriting results
are described below. Information on the investment income generated by the
property and casualty insurance operations is provided on page 43.
PERSONAL AUTO
Over the past three years voluntary personal auto went from producing an
underwriting profit of $11.5 million in 1998 to producing underwriting losses of
$63.3 million and $123.0 million in 1999 and 2000, respectively. The most
significant reason for the deteriorating results was the rate decreases taken in
1999 and 1998 which were deemed necessary to retain American States business and
in response to competition. Average auto rates increased nearly 6% in 2000,
decreased 2% in 1999 and increased 1% in 1998. SAFECO plans to increase personal
auto rates at least 7% in 2001. At the same time, over the last three years
average loss costs (which include the severity or cost of settling claims and
the frequency of accidents) for new reported claims increased by about 3% in
2000 and 1% in both 1999 and 1998. The increases in average loss costs have
significantly lessened the improvement expected from rate increases to date. The
higher average loss costs in 2000 result from medical cost inflation and the
greater use of original equipment manufactured (OEM) parts. The increase in the
use of OEM parts occurred following the filing of class action lawsuits
challenging the industry (and SAFECO) practice of using non-OEM parts. As a
result of the increase in rates in 2000, personal auto premiums written
increased by less than 1% and the number of policies inforce decreased by 3%.
The number of policies increased by 2% and 1% in 1999 and 1998, respectively.
SAFECO expects further rate increases to depress the growth in the number of
policies and to contribute to improved underwriting results. Finally, in 2000
SAFECO expanded the use of "insurance-scoring" (use of credit scores and other
information) which had been used by several competitors. The use of
insurance-scoring has resulted in some decrease in the number of policies that
otherwise would have been written and should improve the overall quality of the
book of business.
HOMEOWNERS
The homeowners line produced underwriting losses for the past three years of
$116.7 million, $48.2 million and $56.4 million in 2000, 1999 and 1998,
respectively. The acquisition of American States in 1997 increased SAFECO's
exposure in this line to large, single weather events. Losses due to large,
single events (nearly all weather-related) were $86 million, $52 million and $83
million for 2000, 1999 and 1998, respectively. In 2000 non-weather losses,
particularly from fire and water damage, increased by $44 million over similar
losses in 1999. SAFECO has taken several steps to stem these underwriting
losses, but with modest success to date. These efforts include rate increases,
obtaining the correct insurance-to-value, restricting writing in certain areas,
imposing higher deductibles and attempting to spread risks geographically within
catastrophe-prone areas. Average homeowners rates increased over 6%, 1% and 3%
in 2000, 1999 and 1998, respectively. The number of homeowners policies inforce
decreased by 0.1% in 2000 and increased by 4% and 2% in 1999 and 1998,
respectively. These numbers suggest that SAFECO may be able to achieve even more
appropriate rates given the exposures in this line.
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OTHER PERSONAL LINES
Other personal lines (including earthquake, dwelling fire, inland marine and
boats) produced underwriting profits of $18.2 million, $20.6 million and $14.8
million in 2000, 1999 and 1998, respectively.
SAFECO BUSINESS INSURANCE (SBI)
SBI focuses on small- to medium-sized businesses. It produced underwriting
losses of $155.3 million, $183.4 million and $72.7 million in 2000, 1999 and
1998, respectively. Premiums written increased 2% and 14% in 2000 and 1999,
respectively. There are several reasons for these poor results. First, following
the acquisition of American States in 1997, SAFECO sought both to underwrite and
to price the business in this line to retain it. That result was achieved, but
at the high cost of underwriting losses. In addition, the overall competitive
marketplace (particularly in workers' compensation) and single event weather
losses contributed to the poor results. SAFECO took aggressive action in 2000 to
reverse the underwriting losses in this line by re-underwriting existing
business, strengthening underwriting criteria and discipline, terminating
relationships with agents who produced poor quality business, and obtaining rate
increases, particularly in workers' compensation and commercial auto. Since
mid-1999, rates on this line have increased by approximately 15% and are a
significant reason for the decrease in the underwriting loss from 1999 to 2000.
The actions taken have resulted in the loss of some business and should improve
overall results in the future.
SAFECO COMMERCIAL
SAFECO Commercial focuses on medium- to large-sized businesses. It produced
underwriting losses of $155.7 million, $107.6 million and $27.9 million in 2000,
1999 and 1998, respectively. The deterioration of results is due to several
reasons, including the difficult underwriting environment, inadequate rates
(particularly in workers' compensation), reserve increases in recognition of
unfavorable trends in loss costs, and higher frequency of large losses. SAFECO
has increased commercial prices by 15% in 2000 and plans additional price
increases in 2001. In addition, SAFECO will continue to focus on tightening
underwriting criteria in this line of business.
SURETY
The surety line produced pretax underwriting profits of $11.7 million, $15.2
million and $19.2 million in 2000, 1999 and 1998, respectively. Fourth quarter
2000 results were adversely affected by a $5 million net loss from the
bankruptcy of one surety customer.
OTHER
Other insurance product lines produced an underwriting loss of $1.1 million in
2000 and broke even in 1999. These lines include assumed reinsurance and other
business in run-off and assigned risk plans.
PROPERTY AND CASUALTY--LOSS RESERVES
The liability (reserves) for losses and loss adjustment expense (LAE) for the
property and casualty companies was $4,612.7 million at December 31, 2000,
compared with $4,378.6 million at December 31, 1999. The increase in the
liability at December 31, 2000 compared with December 31, 1999 reflects both
increased loss severities and adverse development in certain lines of business.
The liability is presented net of amounts recoverable from salvage and
subrogation recoveries (see Note 1 on page 57) and gross of amounts recoverable
from reinsurance (see Note 5 on page 65). The amount of reinsurance recoverables
related to the above gross liabilities was $343.6 million at December 31, 2000
and $309.5 million at December 31, 1999.
Reserves for losses that have been reported to SAFECO and certain legal
expenses are established on the "case basis" method. Claims incurred but not
reported (IBNR) and other adjustment expense are estimated using statistical
procedures. Salvage and subrogation recoveries are accrued using the "case
basis" method for large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves that are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. SAFECO's reserves aggregate its best
estimates of the total ultimate cost of claims that have been incurred but have
not yet been paid. The estimates are based on past claims experience and
consider current claim trends as well as social, legal and economic conditions,
including inflation. The reserves are not discounted.
Loss and LAE reserve development are regularly reviewed to determine that
the reserving assumptions and methods are appropriate. Reserves initially set
are compared to the amounts ultimately paid. A statistical estimate of the
projected amounts necessary to pay outstanding claims is made regularly and
compared to the recorded reserves and adjusted as necessary. Any such
adjustments are included in current operations.
Analysis indicates that SAFECO's recorded reserves are adequate for all
three years. Operations were charged $148.3 million in 2000 from increases in
estimated loss and LAE for claims occurring in prior years. These increases were
due to adverse development within commercial operations in the workers'
compensation ($50.9 million), general liability ($44.4 million,
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primarily related to construction defect), commercial auto ($23.5 million), and
in other ($29.5 million) lines of business as the costs of settling claims has
increased. Operations were charged $78.8 million in 1999 due to increased
exposure in certain lines of business including construction defect, asbestos
and environmental and workers' compensation. Operations benefited $100.0 million
in 1998 due primarily to improved claims handling changes implemented in 1998
related to the American States operations.
ENVIRONMENTAL AND ASBESTOS CLAIMS
The property and casualty companies' reserves for losses and LAE for liability
coverages related to environmental, asbestos and other toxic claims totaled
$315.5 million at December 31, 2000, compared with $332.3 million at December
31, 1999. These amounts are before the effect of reinsurance, which totaled
$28.8 million and $30.1 million at December 31, 2000 and 1999, respectively.
These reserves are approximately 8% of total property and casualty reserves for
losses and LAE at both December 31, 2000 and 1999. The reserves include
estimates for both reported and IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance companies'
environmental, asbestos and other toxic claims result from the commercial
general liability line of business and the discontinued assumed reinsurance
operations of American States. A few of these losses occur in other coverages
such as umbrella, small commercial package policies and personal lines.
The following table presents the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic claims,
before the effect of reinsurance:
YEAR ENDED DECEMBER 31 2000 1999 1998
---------- ---------- ----------
(In Millions)
Reserves at Beginning of Year $ 332.3 $ 329.8 $ 346.9
Incurred Losses and LAE 9.6 24.8 1.6
Losses and LAE Payments (26.4) (22.3) (18.7)
---------- ---------- ----------
Reserves at End of Year $ 315.5 $ 332.3 $ 329.8
=========== ========== ==========
Although estimation of environmental claims is difficult, the reserves
established for these claims at December 31, 2000 are believed to be adequate
based on the known facts and current law. SAFECO has generally avoided writing
coverages for larger companies with substantial exposure in these areas. In view
of changes in environmental regulations and evolving case law, which affect the
development of loss reserves, the process of estimating loss reserves for
environmental, asbestos and other toxic claims results in imprecise estimates.
Quantitative loss reserving techniques in this area need to be supplemented by
subjective considerations and managerial judgment. Because of these conditions,
trends that have affected development of these liabilities in the past may not
necessarily occur in the future.
CONSTRUCTION DEFECT CLAIMS
Construction defect claims are a subset of claims that arise from coverage
provided by general property damage liability insurance. Construction defect
claims are claims arising from the alleged defective work performed in the
construction of large habitation structures, such as apartments, condominiums
and large developments of single-family dwellings or other housing. In addition
to damages arising directly from the alleged defective work, construction defect
claims also allege that the economic value of the structure has been diminished.
The vast majority of SAFECO's construction defect claims arise from past
contractor business written in the state of California. SAFECO Commercial, which
does not include SBI, has avoided writing the construction class of business in
California since 1989 and has limited exposure to these types of claims. Because
of this business practice, SAFECO has not historically separated these claims
for the purpose of reserve analysis. However, American States, prior to the
acquisition by SAFECO, was a major writer of California contractor business
until 1994 when it implemented significant restrictions in this line. The total
SBI reserves for construction defect claims were $322.6 million at December 31,
2000 and $306.1 million at December 31, 1999, representing approximately 8% of
total property and casualty reserves for losses and LAE at both December 31,
2000 and 1999. Claims payments including LAE totaled $55.0 million in 2000 and
$50.6 million in 1999.
REINSURANCE
SAFECO's property and casualty insurance companies use treaty and facultative
reinsurance to help manage exposure to loss. As noted above, the liability for
unpaid losses and LAE is reported gross of reinsurance recoverables of $343.6
million at December 31, 2000 and $309.5 million at December 31, 1999. The
availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity. Due to the recent
tightening in the reinsurance marketplace, it is likely that the cost of
reinsurance will increase in 2001. Although the reinsurer is liable to SAFECO to
the extent of the reinsurance ceded, SAFECO remains primarily liable to the
policyholder as the direct insurer on all risks insured. To SAFECO's knowledge,
none of its reinsurers is experiencing financial difficulties.
SAFECO's nationwide catastrophe property reinsurance program for 2001,
covering 90% of $400 million of single-event losses in excess of $100 million
retention, is unchanged from 2000. In a large catastrophe, SAFECO retains the
first $100 million of losses,
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10% of the next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than California,
SAFECO has a supplemental earthquake-only reinsurance contract that covers 90%
of $250 million of single-event earthquake losses in excess of $500 million. In
2000 this supplemental coverage was for $350 million of single-event earthquake
losses in excess of $500 million. Catastrophe property reinsurance contracts for
2001 include provisions for one reinstatement for a second catastrophe event in
2001 at current rates.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use funding covers and does not participate in any surplus relief
transactions. Additional information on reinsurance can be found in Note 5 on
page 65.
LIFE
The life insurance companies offer individual and group insurance products,
retirement services (pension) and annuity products. The most significant product
lines in terms of premium/deposit volume include single-premium immediate and
deferred annuities, BOLI, equity-indexed and variable annuities, tax-sheltered
annuities for the education and nonprofit markets, corporate retirement plans,
excess loss group medical insurance and individual life insurance.
SAFECO Life purchased the medical excess loss and group life business of
ING Medical Risks Solutions (ING), as well as ING's wholly-owned underwriting
subsidiary, Medical Risk Managers, on December 31, 1999 for $34 million.
Earnings before investment transactions and income taxes ("pretax income")
for all lines combined were $157.6 million, $178.6 million and $72.3 million in
2000, 1999 and 1998, respectively. The 1998 results include the write-off of
deferred acquisition costs of $46.8 million, discussed below. The following
table summarizes the pretax income amounts of the life companies' major product
lines, excluding the $46.8 million write-off of deferred acquisition costs in
1998:
PRETAX INCOME
-------------------------------------------
YEAR ENDED DECEMBER 31 2000 1999 1998
---------- ---------- ----------
(In Millions)
Retirement Services $ 30.0 $ 52.6 $ 12.8
Settlement Annuities 26.4 42.3 30.6
Group 4.3 (19.5) (14.1)
Individual 24.6 30.1 13.9
Other 72.3 73.1 75.9
---------- ---------- ----------
Pretax Income $ 157.6 $ 178.6 $ 119.1
---------- ---------- ----------
RETIREMENT SERVICES
SAFECO's retirement services operations produced pretax income of $30.0 million,
$52.6 million and $12.8 million in 2000, 1999 and 1998, respectively. Retirement
services products are primarily tax-sheltered annuities, which are marketed to
teachers and employees of hospitals and charitable organizations, GICs, fixed
and variable deferred annuities (both qualified and non-qualified) and corporate
retirement funds. SAFECO Life has protection against early policy surrenders or
withdrawals of most of these products in the form of surrender charges during
the initial years of each policy or the option to defer payouts over 5 years.
Retirement services had $6.1 billion of assets on deposit at December 31, 2000
compared with $7.1 billion at December 31, 1999. This decline is due primarily
to EIA, GIC and other fixed product withdrawals. This decrease in retirement
services assets resulted in a corresponding decrease in investment income margin
of $3 million in this product line for 2000. New deposits from fixed return
products (including EIA) declined to approximately $205 million in 2000 from
$354 million in 1999. There were no new EIA deposits in 2000 and only $4 million
in 1999. New deposits from variable return products were approximately $248
million in 2000 compared with $265 million in 1999.
Losses on the EIA product were $15.3 million, $2.9 million and $38.2
million in 2000, 1999 and 1998, respectively. In 2000, an offer was extended to
EIA policyholders to surrender their policies and receive December 31, 1999
account value with no surrender charge. This resulted in a charge to income
totaling $12 million. This offer resulted in $363 million of policy surrenders,
representing over 50% of the account values on this product. Since the EIA book
of business has generated ongoing losses, reducing the size of the book will
reduce the amount of future losses. In 1999, a new hedging program was in place
to reduce losses. Losses in 1998 were incurred before the new hedging program
and related to higher-than-expected cost of S&P call options which SAFECO
purchased to hedge its obligation under the EIA product.
SETTLEMENT ANNUITIES
The settlement annuities operations produced pretax income of $26.4 million,
$42.3 million and $30.6 million in 2000, 1999 and 1998, respectively. Settlement
annuities' products are single-premium immediate annuities (SPIAs) sold to fund
third-party personal injury settlements and are non-surrenderable contracts. The
invested assets supporting SPIAs are primarily long-maturity bonds. New SPIA
deposits were $391 million, $313 million and $424 million in 2000, 1999 and
1998, respectively. Deposits in 1998 included $118 million related to the
funding of benefits for former participants in American States' existing defined
benefit
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plan. Continued competitive pressures and SAFECO Life's lowered ratings have
dampened the growth of new deposit volume in the last few years. Any further
downgrades could substantially reduce the ability to attract new deposits. Total
settlement annuity assets increased to $6.2 billion at December 31, 2000
compared with $5.8 billion at December 31, 1999. The decrease in operating
income in 2000 is due to the effect of changes in paydowns of collateralized
mortgage obligations. These changes resulted in a reduction to investment income
of $4.8 million. Operating income in 2000 was also lower due to increased legal
expenses to defend the qualified assignment contract terms of the structured
settlement product. These legal expenses are expected to be lower in 2001.
GROUP
SAFECO's group insurance operations produced a gain of $4.3 million in 2000 and
losses of $19.5 million and $14.1 million in 1999 and 1998, respectively. The
strategic focus of the group operation is excess loss medical insurance sold to
self-insured employers for their employee medical plans. Excess loss medical
produced losses of $2.3 million, $26.7 million and $18.7 million in 2000, 1999
and 1998, respectively. Total group premiums increased 61% during 2000 compared
with a decrease of 4% in 1999. The increase in group premiums is due primarily
to the acquisition of business from ING noted above as well as continued medical
rate increases. These rate increases, combined with underwriting actions, have
improved the medical loss ratio to 70.3% in 2000 from 90.7% in 1999. In the past
several years, competitive pressures combined with accelerating medical
inflation, particularly for prescription drug costs, have produced
unsatisfactory results in the excess loss medical line. Because of SAFECO's rate
increases and underwriting actions, continued improvement is expected in 2001.
INDIVIDUAL
SAFECO Life's individual life operations produced pretax income of $24.6
million, $30.1 million and $13.9 million in 2000, 1999 and 1998, respectively.
The traditional line of permanent and term product income declined by $11.6
million in 2000 compared with 1999. Higher death claims experience and increases
in operating expense, mainly due to $4 million of expenses related to the
American States Life policy system conversion, contributed to lower profits in
this line in 2000. These declines were partially offset by increased profits in
BOLI of $11.0 million in 2000 compared with $6.3 million in 1999. BOLI deposits
were $710 million in 2000, compared with $705 million in 1999. Lower ratings
could substantially reduce SAFECO Life's ability to attract new BOLI deposits.
Individual life income was higher in 1999 compared to 1998 primarily due to
decreased death claims.
OTHER
The other line is primarily comprised of investment income resulting from the
investment of capital and prior years' earnings of the operating lines of
business. These earnings are a major component of SAFECO Life's earnings,
contributing pretax income of $72.3 million, $73.1 million and $75.9 million in
2000, 1999 and 1998, respectively.
The 1998 pretax write-off of $46.8 million was primarily tied to two blocks
of annuity business, the EIA and a declared-rate fixed annuity product, and to
the universal life business. Of the total $46.8 million write-off, $41.8 million
related to deferred acquisition costs on the three lines of business noted
above. The EIA product, which was first sold in 1997, produced a substantial
operating loss in 1998 which adversely affected the projected recoverability of
its deferred acquisition costs (primarily commissions). Consequently, $28.3
million of deferred acquisition costs were written off on this product line.
Steps taken to improve the results of this product have included using new
hedging strategies such as the purchase of equity futures contracts. SAFECO has
also suspended the writing of new EIA business. The remaining $13.5 million
related to the write-off of deferred acquisition costs on a block of
single-premium deferred annuities which experienced higher-than-anticipated
withdrawal experience, and to the write-off of deferred acquisition costs on the
universal life line of business, which experienced higher-than-expected
operating costs. Of the total $46.8 million amount, the remaining $5.0 million
related to the estimated cost of consolidating certain life operations to a
central location and the associated employee severance and relocation costs.
42
11
REAL ESTATE
SAFECO has nearly completed the sale of all of the assets of its real estate
investment and management operations (SAFECO Properties, Inc.). In February
1998, SAFECO decided to sell its real estate subsidiary to focus on its core
insurance and financial services businesses. The majority of SAFECO Properties'
assets were sold for $570 million in a series of closings in the first half of
1999. Realized gains of $35 million were recognized in 1999. At December 31,
2000, investment real estate held by SAFECO Properties totaled $48 million, less
than one percent of SAFECO's consolidated investments. Since SAFECO Properties'
operations are not material to the consolidated financial statements, they have
not been reclassified as discontinued operations. In the Summary of Financial
Information on page 36, the pretax income amounts for 2000 and 1999 are included
in the Corporate line while the 1998 amount is reported on the Real Estate line.
In the Statements of Consolidated Income on page 49, revenues for SAFECO
Properties have been included in Other Revenues from January 1, 1999 forward and
related expenses have been included in Other Expenses. For 2000 and 1999, these
revenues totaled $20.5 million and $39.3 million and expenses totaled $16.7
million and $32.1 million, respectively, with income before realized gains and
income taxes of $3.8 million and $7.2 million, respectively.
CREDIT
SAFECO Credit Company, Inc. provides loans and equipment financing and leasing
to commercial businesses, insurance agents and affiliated companies. Credit
operations produced pretax income of $19.3 million, $22.6 million and $22.7
million in 2000, 1999 and 1998, respectively. The earnings in all three years
are primarily attributable to the continuing increase in loan and lease
production, combined with favorable collection experience and low delinquencies.
Loan and lease receivables from non-affiliates grew 10% in 2000 and 19% in 1999
and 1998. The competitive interest rate environment has continued to pressure
interest revenues, and SAFECO Credit's cost of funds has increased partially due
to SAFECO's lower credit ratings. These two factors have combined to narrow
SAFECO Credit's interest rate spread, resulting in lower profits in 2000.
Approximately 70% of non-affiliate loan and lease receivables outstanding
at December 31, 2000 are from commercial businesses involved in construction,
transportation and manufacturing. These businesses are located throughout the
country with the majority located in the West Coast and Rocky Mountain regions
of the United States. Loans and leases are fully secured by liens on the
collateral financed. Approximately 1% of the receivables were non-performing at
both December 31, 2000 and 1999. Loans and leases to insurance agents, agency
premium financing and agent referral business are a valuable source of new
business.
ASSET MANAGEMENT
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual
funds, variable annuity portfolios and a growing number of outside pension and
trust accounts. These investment management activities produced pretax income of
$12.9 million, $13.6 million and $8.5 million in 2000, 1999 and 1998,
respectively. Assets under management totaled $5.6 billion at December 31, 2000,
compared with $6.7 billion at December 31, 1999. This decline is due to asset
outflows of approximately $830 million and lower valuation of assets resulting
from stock market declines.
CORPORATE
The Corporate line includes operating results for the Corporation, Talbot
Financial Corporation (Talbot), SAFECO Properties and intercompany transaction
eliminations. The Corporation's primary expense is interest expense to service
its debt payments in the amount of $89.0 million in 2000. Other components of
the year 2000 loss include pretax expense of $5.2 million related to executive
severance costs and recruiting costs for identifying and hiring a new chief
executive officer. In addition, Talbot's pretax income decreased by $4.9 million
in 2000 and SAFECO Properties' pretax income before realized gains decreased
$3.4 million in 2000, compared with 1999.
INVESTMENT SUMMARY
SAFECO's consolidated pretax investment income increased to $1,627.2 million
during 2000 from $1,585.1 million in 1999 and $1,518.9 million in 1998.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life insurance subsidiaries.
The property and casualty insurance companies' pretax investment income
was $460.5 million, $462.3 million and $480.2 million in 2000, 1999 and 1998,
respectively. On an after-tax basis investment income was $363.0 million, $387.6
million and $414.0 million for the three years ended December 31, 2000, 1999 and
1998, respectively. Although property and casualty operating cash flow was
positive in all three years, the amount of dividends paid to the Corporation and
the high level of claims payments, combined with the relatively low interest
rate environment and bond call activity dampened the growth of investment
income. After-tax investment income in 2001 is expected to be flat and will be
affected by increased claims payments and the dividends paid to the Corporation
to fund shareholder dividends and to service the Corporation's debt.
The life companies' pretax investment income was $1,175.2 million,
$1,120.1 million and $1,041.0 million in 2000, 1999 and 1998, respectively. The
growth in all years was due primarily to the higher invested assets base related
to the growth of funds held under deposit contracts.
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12
Consolidated pretax realized gains from security investments totaled
$139.5 million, $82.6 million and $94.2 million in 2000, 1999 and 1998,
respectively. The increase in realized gains in 2000 is mainly due to realized
gains on approximately $300 million of planned equity securities sales out of
the property and casualty insurance companies investment portfolio in the third
quarter. The proceeds from these equity securities sales were reinvested in
taxable fixed-income securities. These sales resulted in increased realized
gains from equity securities in 2000 as compared with 1999 and 1998. Additional
information on realized gains can be found in Note 2 on page 58.
Consolidated realized gains from security investments are recorded net of
losses on the sale or write-down of investments. Each investment that has
declined in market value below cost is monitored closely. If the decline is
judged to be other than temporary, the security is written down to fair value.
The amounts of such write-downs were $35.7 million, $0.6 million and $0.4
million in 2000, 1999 and 1998, respectively. Nearly all of these write-downs
were on fixed maturities held by the life insurance companies. The increase in
write-downs in 2000 was due to deteriorating credit situations of several
fixed-maturity issuers, particularly in the retail and auto parts supplier
industries. Additional write-downs in 2001 may be made if the slow-down in these
and other sectors continues. See additional discussion of high yield bonds
below.
SAFECO's property and casualty investment portfolio totaled $8.3 billion
at market value at December 31, 2000, compared with $8.2 billion at December 31,
1999. The investment philosophy for the property and casualty portfolio is to
emphasize investment yield without sacrificing investment quality, and to
provide for liquidity and diversification. Fixed-income securities comprised 79%
of this portfolio while equity securities comprised 21% (see table on page 45).
The property and casualty fixed-income portfolio, which totaled $6.3
billion at market value at December 31, 2000, is currently comprised of 46%
tax-exempt and 54% taxable investments. The portfolio composition was 51%
tax-exempt and 49% taxable at December 31, 1999. The property and casualty
companies have been investing new money primarily in taxable bonds and shifting
holdings from tax-exempts to taxables to maximize the portfolio's after-tax
return in view of the higher level of underwriting losses in 2000 and 1999, and
the resulting alternative minimum tax. The effective tax rate on investment
income was 21%, 16% and 14% in 2000, 1999 and 1998, respectively, reflecting the
shift to a higher level of holdings of taxable bonds. The effective tax rate is
expected to increase further in 2001.
The quality of the property and casualty companies' fixed-income portfolio
is detailed in the following table:
PERCENT AT
RATING DECEMBER 31, 2000
- - - - - - --------------------------------------------------------------------------------
AAA 50%
AA 19
A 20
BBB 9
BB or lower 2
-----
Total 100%
=====
SAFECO's life investment portfolio totaled $15.5 billion at market value
at December 31, 2000. Fixed-income securities, all of which are taxable,
comprised 93% of this investment portfolio at December 31, 2000. The investment
philosophy for this portfolio is to emphasize investment yield without
sacrificing investment quality, and to provide for liquidity and
diversification. SAFECO also matches the projected cash inflows of this
portfolio with the projected cash outflows of the liabilities of the various
product lines within the life operations. Effective October 1, 2000, the entire
held-to-maturity fixed maturities investment portfolio, with a market value of
$2.8 billion, was reclassified to available-for-sale. This reclassification was
made to provide additional investment flexibility in managing the bond portfolio
and resulted in an increase in other comprehensive income of $41 million in the
fourth quarter. All of SAFECO's fixed-income securities are now carried at
market.
The quality of the life companies' fixed-income portfolio is detailed in
the following table:
PERCENT AT
RATING DECEMBER 31, 2000
- - - - - - --------------------------------------------------------------------------------
AAA 33%
AA 10
A 30
BBB 24
BB or lower 3
-----
Total 100%
=====
This portfolio contains $436.7 million (at market value) of securities
rated below investment-grade quality. These securities represent approximately
3% of the total $15.5 billion life investment portfolio at market value at
December 31, 2000. On a consolidated basis, below investment-grade securities
with a market value of $589.2 million were held at December 31, 2000. (The
related amortized cost amount is $723.6 million or 123% of the market value.)
These securities represent approximately 3% of total consolidated securities
investments at market value at December 31, 2000.
SAFECO's consolidated investment in "exotic" securities and high-risk
derivatives was less than 1% of SAFECO's total investments at both December 31,
2000 and 1999. SAFECO generally does not enter into financial instruments for
speculative purposes.
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SAFECO's consolidated investment in mortgage-backed securities of $4.5
billion at market value at December 31, 2000 consists mainly of residential
collateralized mortgage obligations (CMO's), pass-throughs and commercial
loan-backed mortgage obligations (CMBS). The life insurance companies' portfolio
contains virtually all of these securities. Approximately 87% of the
mortgage-backed securities are government/agency-backed or AAA-rated at December
31, 2000. SAFECO has intentionally limited its investment in riskier, more
volatile CMO's and CMBS (principal only, inverse floaters, etc.) to less than 1%
of total mortgage-backed securities at December 31, 2000.
The Corporation has an investment portfolio of securities that totaled
$142.2 million at market value at December 31, 2000, compared with $123.5
million at December 31, 1999. The majority of these securities are preferred
stocks and U.S. Treasuries.
SAFECO's consolidated investment portfolio also includes $823.0 million of
mortgage loan investments at December 31, 2000, representing approximately 3% of
total investments. The majority of these loans are held by the life insurance
companies and are secured by first mortgage liens on completed, income-producing
commercial real estate, primarily in the retail, industrial and office building
sectors. The majority of the properties are located in the western United
States, with approximately 31% of the total in the state of California.
Individual loans generally do not exceed $10 million. Less than 1% of the loans
were non-performing at both December 31, 2000 and 1999. The allowance for
mortgage loan losses was $10.8 million at both December 31, 2000 and 1999.
The table below summarizes SAFECO's consolidated securities investment portfolio
at December 31, 2000. The market value exceeded amortized cost on fixed income
and equity securities by $1.4 billion at December 31, 2000 and $0.6 billion at
December 31, 1999.
AMORTIZED CARRYING MARKET
DECEMBER 31, 2000 COST VALUE VALUE
- - - - - - --------------------------------------------------------------------------------
(In Millions)
Property and Casualty:
Fixed Income - Taxable $ 3,372.5 $ 3,419.4 $ 3,419.4
Fixed Income - Non-taxable 2,636.0 2,928.0 2,928.0
Equity Securities 768.8 1,694.9 1,694.9
Life:
Fixed Income - Taxable 14,299.2 14,402.9 14,402.9
Equity Securities 24.6 26.2 26.2
SAFECO Corporation:
Fixed Income - Taxable 58.4 60.5 60.5
Equity Securities 54.8 62.6 62.6
Other 49.7 51.1 51.1
Short-Term Investments 182.3 182.3 182.3
-----------------------------------------
Total $21,446.3 $22,827.9 $22,827.9
=========================================
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MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The first two columns of the following table under each year show the financial
statement carrying values and related current estimated fair values of certain
of SAFECO's financial instruments as of December 31, 2000 and 1999. The third
column shows the effect on current estimated fair values assuming a 100 basis
point increase in market interest rates and a 10% decline in equity prices
("sensitivity analysis").
2000 1999
-------------------------------------- --------------------------------------
ESTIMATED ESTIMATED
ESTIMATED FAIR VALUE ESTIMATED FAIR VALUE
FAIR VALUE AT AT ADJUSTED FAIR VALUE AT ADJUSTED
CURRENT MARKET RATES AT CURRENT MARKET RATES
CARRYING MARKET (SENSITIVITY CARRYING MARKET (SENSITIVITY
DECEMBER 31 VALUE RATES/PRICES ANALYSIS) VALUE RATES/PRICES ANALYSIS)
- - - - - - ------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Interest Rate Risk:
Financial Assets:
Fixed Maturities:
Available-for-Sale $ 20,830.2 $ 20,830.2 $ 19,331.0 $ 16,830.7 $ 16,830.7 $ 15,740.0
Held-to-Maturity -- -- -- 2,733.3 2,772.1 2,528.0
Mortgage Loans 823.0 792.0 749.0 770.4 742.0 704.0
Commercial Loans 1,135.9 1,100.0 1,080.0 978.3 907.0 886.0
Financial Liabilities:
Funds Held under
Deposit Contracts 14,085.7 13,977.0 13,457.0 13,762.9 13,495.0 13,021.0
Commercial Paper 349.8 349.8 349.8 508.8 508.8 508.8
Credit Company Borrowings 1,154.7 1,155.0 1,155.0 1,323.1 1,323.0 1,323.0
7.875% Notes Due 2003 300.0 305.0 299.0 -- -- --
7.875% Notes Due 2005 200.0 203.0 196.0 200.0 201.0 193.0
6.875% Notes Due 2007 200.0 193.0 184.0 200.0 191.0 180.0
Other Debt 80.7 80.0 80.0 84.2 85.0 84.0
Capital Securities 843.0 700.0 635.0 842.5 854.0 761.0
Equity Price Risk:
Marketable Equity Securities 1,815.4 1,815.4 1,634.0 2,004.7 2,004.7 1,804.0
Market risk means the potential loss from adverse changes in market prices
and interest rates. In addition to market risk, SAFECO is exposed to other
risks, including the credit risk related to its financial instruments and the
underlying insurance risk related to its core business. The sensitivity analysis
above summarizes only the exposure to market risk.
SAFECO manages its market risk by matching the projected cash inflows of
assets with the projected cash outflows of liabilities of its investment and
financial products (e.g., annuities, retirement services products). For all of
its financial assets and liabilities, SAFECO seeks to maintain reasonable
average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.
SAFECO uses certain derivative financial instruments to increase its matching of
cash flows. For example, interest rate swaps are used to convert debt
liabilities with variable rates to fixed rates to better match the fixed-rate
assets the debt supports. In addition, S&P 500 call option contracts and futures
are purchased to hedge the liability of SAFECO Life's EIA product. In general,
derivatives are used for hedging purposes rather than speculation.
The estimated fair values at current market rates for financial
instruments subject to interest rate risk in the table above are the same as
those disclosed in Note 7 on page 67 to the consolidated financial statements.
The estimated fair values at the adjusted market rates (assuming a 100 basis
point increase in market interest rates) are calculated using discounted cash
flow analysis and duration modeling, where appropriate. The estimated values do
not consider the effect that changing interest rates could have on prepayment
activity (e.g., CMO's and annuities). Estimated fair values for derivatives are
not presented, as the amounts are not material.
This sensitivity analysis provides only a limited, point-in-time view of
the market risk sensitivity of certain of SAFECO's financial instruments. The
actual impact of market interest rate and price changes on the financial
instruments may differ significantly from those shown in the sensitivity
analysis. The sensitivity analysis is further limited as it does not consider
any actions SAFECO could take
46
15
in response to actual and/or anticipated changes in interest rates and equity
prices. As allowed under the guidance for these disclosures, certain financial
instruments (e.g., lease receivables) are not required to be included in the
sensitivity analysis. In addition, certain non-financial instruments (e.g.,
insurance liabilities and real estate) are excluded from the sensitivity
analysis. Accordingly, any aggregation of the estimated fair value amounts or
adjusted fair value amounts would not represent the underlying fair value of net
equity.
FORWARD-LOOKING STATEMENTS
Statements made in this Management's Discussion and Analysis that relate to
anticipated financial performance, business prospects and plans, regulatory
developments and similar matters may be considered "forward-looking statements"
as defined in the Private Securities Litigation Reform Act of 1995. Statements
in this report that are not historical information are forward-looking. Such
statements are subject to certain risks and uncertainties that may cause the
operations, performance, development and results of SAFECO's business to differ
materially from those suggested by the forward-looking statements. The risks and
uncertainties include:
> SAFECO's ability to obtain rate increases and non-renew underpriced insurance
accounts;
> realization of growth and business retention estimates;
> achievement of SAFECO's premium targets and profitability;
> changes in competition and pricing environments;
> achievement of SAFECO's expense reduction goals;
> the occurrence of significant natural disasters, including earthquakes;
> weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
> changes in the nature of the property and casualty book of business;
> driving patterns;
> fluctuations in interest rates;
> availability of bank credit facilities;
> performance of financial markets;
> court decisions and trends in litigation;
> rating agency actions;
> legislative and regulatory developments;
> the adequacy of loss reserves;
> the availability and pricing of reinsurance;
> the development of major Year 2000-related claims or liabilities; and
> general economic and market conditions.
In particular, because insurance rates in some jurisdictions are subject
to regulatory review and approval, SAFECO's achievement of rate increases may
occur in amounts and on a time schedule different than planned, which may affect
the Corporation's efforts to restore earnings in the property and casualty
lines.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 1 on page 57.
DIVIDENDS
SAFECO has paid cash dividends continuously since 1933. Common stock dividends
paid to shareholders were $1.48 per share in 2000 compared with $1.44 in 1999
and $1.34 in 1998. These dividends are funded with dividends to the Corporation
from its subsidiaries. The Corporation expects to continue paying dividends in
the foreseeable future. However, payment of future dividends is subject to the
Board of Directors' approval and is dependent upon earnings and the financial
condition of the Corporation as well as dividend restrictions on its significant
insurance subsidiaries as described in Note 11 on page 70. Given the
deterioration of earnings over the last two years, the Board of Directors on
February 7, 2001 reduced the dividend 50% by declaring a dividend of $0.185 per
share payable April 23, 2001.
NUMBER OF SHAREHOLDERS
There were approximately 3,700 common shareholders of record at December 31,
2000.
ANNUAL REPORT ON FORM 10-K
SAFECO files an annual report on Form 10-K with the SEC in compliance with the
regulations of the SEC. Any SAFECO shareholder may obtain Form 10-K for the year
ended December 31, 2000, 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
47
16
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements,
related notes and all other information presented in this annual report. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States appropriate in the
circumstances and include amounts based on the best estimates and judgments of
management.
In order to safeguard assets and to maintain the integrity and
objectivity of data in these consolidated financial statements, SAFECO maintains
a comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel, by the
appropriate division of duties and responsibilities and by written policies and
procedures. In addition, an integral part of the comprehensive system of
internal control is an effective internal audit department. SAFECO's Internal
Audit Department systematically evaluates the adequacy and effectiveness of
internal accounting controls and measures adherence to established policies and
procedures.
The consolidated financial statements for the years ended December 31,
2000, 1999 and 1998 have been audited by Ernst & Young LLP, independent
auditors. Their audits were made in accordance with auditing standards generally
accepted in the United States and included a review of the system of internal
accounting controls to the extent necessary to express an opinion on the
consolidated financial statements.
The Audit Committee of the Board of Directors, comprised solely of
outside directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the Audit Committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of accounting policies
and financial reporting.
The management of SAFECO believes that as of December 31, 2000, its
system of internal control is adequate to accomplish the objectives discussed
herein.
/s/ ROD A. PIERSON
Rod A. Pierson
Senior Vice President and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders of SAFECO Corporation:
We have audited the accompanying consolidated balance sheets of SAFECO
Corporation and its subsidiaries (the Corporation) as of December 31, 2000 and
1999, and the related consolidated statements of income, comprehensive income,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of SAFECO
Corporation and its subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
As described in Note 1 to the financial statements, SAFECO Corporation
and its subsidiaries adopted certain new accounting standards as required by the
Financial Accounting Standards Board.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 9, 2001
48
17
STATEMENTS OF CONSOLIDATED INCOME
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - -----------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
REVENUES
Insurance:
Property and Casualty Earned Premiums $4,563.4 $4,382.9 $4,208.3
Life Premiums and Other Revenues 502.7 360.9 353.4
------------------------------------
Total 5,066.1 4,743.8 4,561.7
Real Estate (Note 1) - - 77.9
Credit 143.3 115.1 98.6
Asset Management 42.9 44.3 39.7
Other 99.4 111.1 60.7
Net Investment Income (Note 2) 1,627.2 1,585.1 1,518.9
Realized Investment Gain (Note 2) 139.5 117.7 94.6
------------------------------------
Total 7,118.4 6,717.1 6,452.1
------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 4,987.6 4,504.0 4,108.7
Commissions 793.6 794.9 784.7
Personnel Costs 497.1 463.6 438.7
Interest 173.1 141.0 159.5
Goodwill Amortization 60.5 55.8 53.5
Other 449.1 452.2 448.8
Write-Off of Deferred Acquisition Costs (Note 1) - - 46.8
Amortization of Deferred Policy Acquisition Costs 834.2 840.1 784.1
Deferral of Policy Acquisition Costs (835.4) (866.8) (835.5)
------------------------------------
Total 6,959.8 6,384.8 5,989.3
------------------------------------
Income Before Income Taxes 158.6 332.3 462.8
------------------------------------
Provision (Benefit) for Income Taxes (Note 13):
Current 41.3 71.0 104.6
Deferred (42.1) (35.7) (38.6)
------------------------------------
Total (0.8) 35.3 66.0
------------------------------------
Income Before Distributions on Capital Securities 159.4 297.0 396.8
Distributions on Capital Securities, Net of Tax (Note 3) (44.8) (44.8) (44.9)
------------------------------------
Net Income $ 114.6 $ 252.2 $ 351.9
====================================
Net Income Per Share of Common Stock (Note 8):
Diluted $ .90 $ 1.90 $ 2.51
====================================
Basic $ .90 $ 1.90 $ 2.52
====================================
See Notes to Consolidated Financial Statements on pages 55 through 79.
49
18
CONSOLIDATED BALANCE SHEETS
SAFECO Corporation and Subsidiaries
DECEMBER 31 2000 1999
- - - - - - ----------------------------------------------------------------------------------------
(In Millions)
ASSETS
Investments (Note 2):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $20,388.1; $17,258.9) $20,830.2 $16,830.7
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: $ -; $2,772.1) - 2,733.3
Marketable Equity Securities, at Market Value
(Cost: $875.9; $972.5) 1,815.4 2,004.7
Mortgage Loans 823.0 770.4
Other Investment Assets 160.3 215.9
Short-Term Investments 182.3 376.0
-----------------------
Total Investments 23,811.2 22,931.0
Cash 196.2 112.3
Accrued Investment Income 333.1 328.1
Finance Receivables
(Less unearned finance charges
and allowance for doubtful
accounts: $119.4; $118.2) 1,617.7 1,460.6
Premiums and Other Service Fees Receivable 1,063.0 1,058.3
Other Notes and Accounts Receivable 37.6 147.2
Deferred Income Tax Recoverable - 105.3
Reinsurance Recoverables (Note 5) 461.7 384.8
Deferred Policy Acquisition Costs 605.4 598.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated
depreciation: $241.5; $235.7) 440.4 344.8
Goodwill
(At cost less accumulated
amortization: $202.8; $142.5) 1,307.4 1,354.9
Other Assets 362.7 343.4
Separate Account Assets 1,275.1 1,403.2
-----------------------
Total $31,511.5 $30,572.7
=======================
See Notes to Consolidated Financial Statements on pages 55 through 79.
50
19
CONSOLIDATED BALANCE SHEETS
SAFECO Corporation and Subsidiaries
DECEMBER 31 2000 1999
- - - - - - ----------------------------------------------------------------------------------------
(In Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expense (Note 4) $ 4,686.9 $ 4,416.4
Life Policy Liabilities 342.1 281.5
Unearned Premiums 1,836.5 1,853.1
Funds Held Under Deposit Contracts 14,085.7 13,762.9
Debt (Note 3):
Commercial Paper 349.8 508.8
Credit Company Borrowings 1,154.7 1,323.1
7.875% Medium-Term Notes Due 2003 300.0 -
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other 80.7 84.2
Other Liabilities 1,308.5 1,396.8
Income Taxes (Note 13):
Current 29.1 6.1
Deferred (Includes tax on unrealized appreciation of
investment securities: $478.7; $207.7) 123.6 -
Separate Account Liabilities 1,275.1 1,403.2
-----------------------
Total Liabilities 25,972.7 25,436.1
-----------------------
Commitments and Contingencies (Note 6)
Corporation-Obligated, Mandatorily Redeemable
Capital Securities of Subsidiary Trust Holding
Solely Junior Subordinated Debentures of the
Corporation ("Capital Securities") (Note 3) 843.0 842.5
-----------------------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None
Common Stock, No Par Value (Notes 8 and 9):
Shares Authorized: 300
Shares Reserved for Options: 7.1; 7.3 834.5 841.7
Shares Issued and Outstanding: 127.6; 128.9
Retained Earnings (Note 11) 2,966.4 3,062.7
Total Accumulated Other Comprehensive Income:
Unrealized Appreciation of Investment Securities,
Net of Tax (Note 2) 894.9 389.7
-----------------------
Total Shareholders' Equity 4,695.8 4,294.1
-----------------------
Total $31,511.5 $30,572.7
=======================
See Notes to Consolidated Financial Statements on pages 55 through 79.
51
20
STATEMENTS OF CONSOLIDATED CASH FLOWS
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - -------------------------------------------------------------------------------------------------------------------
(In Millions)
OPERATING ACTIVITIES
Insurance Premiums Received $ 4,890.2 $ 4,636.8 $ 4,488.2
Dividends and Interest Received 1,676.1 1,571.2 1,506.0
Other Operating Receipts 225.0 247.2 251.1
Insurance Claims and Policy Benefits Paid (4,156.5) (3,706.2) (3,596.1)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,652.8) (1,604.8) (1,530.1)
Interest Paid and Distributions on Capital Securities (202.4) (210.6) (237.5)
Other Operating Costs Paid (126.7) (128.6) (138.2)
Income Taxes Refunded (Paid) 5.7 (42.0) (85.8)
-------------------------------------
Net Cash Provided by Operating Activities 658.6 763.0 657.6
-------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (3,604.0) (5,422.1) (3,602.2)
Fixed Maturities Held-to-Maturity (2.2) (0.9) (1.7)
Equities (372.6) (231.9) (169.7)
Other Investments (362.0) (460.6) (218.9)
Maturities of Fixed Maturities Available-for-Sale 972.2 1,174.0 1,110.9
Maturities of Fixed Maturities Held-to-Maturity 8.7 13.3 7.3
Sales of:
Fixed Maturities Available-for-Sale 2,265.4 3,715.4 2,021.6
Fixed Maturities Held-to-Maturity (Note 2) 0.1 6.3 18.2
Equities 661.7 298.1 233.1
Other Investments 412.2 830.5 159.2
Net Decrease (Increase) in Short-Term Investments 281.4 (163.7) (92.9)
Finance Receivables Originated or Acquired (684.9) (916.8) (629.2)
Principal Payments Received on Finance Receivables 536.0 644.6 420.3
Other (97.2) (101.0) (221.7)
-------------------------------------
Net Cash Provided by (Used in) Investing Activities 14.8 (614.8) (965.7)
-------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,266.0 1,849.5 1,241.9
Return of Funds Held Under Deposit Contracts (1,603.1) (1,077.3) (1,116.0)
Proceeds from Notes and Mortgage Borrowings 300.0 - 20.0
Repayment of Notes and Mortgage Borrowings (19.3) (138.1) (61.8)
Net Proceeds from (Repayment of) Short-Term Borrowings (308.3) (184.8) 386.4
Common Stock Reacquired (30.4) (303.2) (236.8)
Dividends Paid to Shareholders (189.4) (192.2) (187.5)
Other (5.0) (64.7) (54.6)
-------------------------------------
Net Cash Used in Financing Activities (589.5) (110.8) (8.4)
-------------------------------------
Net Increase (Decrease) in Cash 83.9 37.4 (316.5)
Cash at the Beginning of Year 112.3 74.9 391.4
-------------------------------------
Cash at the End of Year $ 196.2 $ 112.3 $ 74.9
=====================================
See Notes to Consolidated Financial Statements on pages 55 through 79.
52
21
STATEMENTS OF CONSOLIDATED CASH FLOWS --
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ------------------------------------------------------------------------------------------------------------
(In Millions)
Net Income $ 114.6 $ 252.2 $ 351.9
--------------------------------------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain (139.5) (117.7) (94.6)
Amortization and Depreciation 144.1 149.9 156.9
Amortization of Fixed Maturity Investments (41.6) (46.3) (41.6)
Deferred Income Tax Benefit (42.1) (35.7) (38.6)
Interest Expense on Deposit Contracts 485.4 583.3 584.9
Other Adjustments (3.1) (2.9) 0.1
Changes in:
Losses and Loss Adjustment Expense 270.5 153.7 (89.5)
Life Policy Liabilities 60.6 4.7 1.0
Unearned Premiums (16.6) 102.2 37.2
Accrued Current Income Taxes 23.0 3.6 (6.8)
Accrued Interest on Accrual Bonds (45.9) (45.4) (50.4)
Accrued Investment Income (5.0) (4.9) 13.8
Deferred Policy Acquisition Costs (6.6) (28.9) 11.1
Other Assets and Liabilities (139.2) (204.8) (177.8)
--------------------------------------------
Total Adjustments 544.0 510.8 305.7
--------------------------------------------
Net Cash Provided by Operating Activities $ 658.6 $ 763.0 $ 657.6
============================================
See Notes to Consolidated Financial Statements on pages 55 through 79.
53
22
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ---------------------------------------------------------------------------------------------------------------------
(In Millions)
Common Stock (Notes 8 and 9):
Balance at the Beginning of Year $ 841.7 $ 885.0 $ 909.3
Stock Issued for Options and Rights 1.5 5.2 7.8
Common Stock Reacquired (8.8) (49.1) (33.4)
Other 0.1 0.6 1.3
----------------------------------------
Balance at the End of Year 834.5 841.7 885.0
----------------------------------------
Retained Earnings (Note 11):
Balance at the Beginning of Year 3,062.7 3,257.2 3,299.1
Net Income 114.6 252.2 351.9
Amortization of Underwriting Compensation on Capital Securities (0.4) (0.4) (0.4)
Dividends Declared (188.9) (192.2) (190.0)
Common Stock Reacquired (21.6) (254.1) (203.4)
----------------------------------------
Balance at the End of Year 2,966.4 3,062.7 3,257.2
----------------------------------------
Unrealized Appreciation of Investment Securities, Net of Tax (Note 2):
Balance at the Beginning of Year 389.7 1,433.6 1,253.3
Change in Unrealized Appreciation 505.2 (1,043.9) 180.3
----------------------------------------
Balance at the End of Year 894.9 389.7 1,433.6
----------------------------------------
Shareholders' Equity $4,695.8 $4,294.1 $5,575.8
========================================
See Notes to Consolidated Financial Statements on pages 55 through 79.
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - --------------------------------------------------------------------------------------------------------
(In Millions)
Net Income $ 114.6 $ 252.2 $ 351.9
----------------------------------------
Other Comprehensive Income (Loss), Net of Tax (Note 2):
Unrealized Appreciation (Depreciation) of Investment
Securities Arising During the Period*+ 595.6 (985.6) 239.7
Less Reclassification Adjustment for Realized Gain
Included in Net Income++ (90.4) (58.3) (59.4)
----------------------------------------
Other Comprehensive Income (Loss) 505.2 (1,043.9) 180.3
----------------------------------------
Comprehensive Income (Loss) $ 619.8 $ (791.7) $ 532.2
========================================
* Net of related tax of $321.1, ($531.8) and $129.2, respectively.
+ Effective October 1, 2000, the fixed maturities held-to-maturity
portfolio was reclassified to available-for-sale. (Note 1)
++ Net of related tax of $49.1, $30.6 and $31.3, respectively.
See Notes to Consolidated Financial Statements on pages 55 through 79.
54
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts are in millions, except share data, unless otherwise
stated.)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in segments of insurance and other financially related
businesses. (The Corporation and its subsidiaries are collectively referred to
as "SAFECO.") SAFECO's businesses operate on a nationwide basis. Non-U.S.
operations are insignificant. The insurance subsidiaries engage in property and
casualty, surety and life insurance. Products are marketed primarily through
independent agents. Approximately 33% of SAFECO's property and casualty premiums
are written in the three West Coast states of California, Washington and Oregon.
SAFECO'S other operations include subsidiaries involved in commercial
lending and leasing (SAFECO Credit), investment management and insurance agency
and financial services distribution operations.
In February 1998, SAFECO decided to sell its real estate subsidiary,
SAFECO Properties, Inc., to focus on its core insurance and financial services
businesses. The majority of SAFECO Properties' assets were sold for $570 in a
series of closings during the first half of 1999. Realized gains of $35 were
recognized in 1999. At December 31, 2000, investment real estate held by SAFECO
Properties totaled $48, less than 1% of SAFECO's consolidated investments. Since
SAFECO Properties' operations are not material to the consolidated financial
statements, they have not been reclassified as discontinued operations. In the
Statements of Consolidated Income, 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 2000 and 1999, these revenues
totaled $20.5 and $39.3 and expenses totaled $16.7 and $32.1, with income before
realized gain and income taxes of $3.8 and $7.2, respectively.
BASIS OF REPORTING
The financial statements have been prepared in conformity with accounting
principles generally accepted in the United States and include amounts based on
the best estimates and judgments of management. The financial statements include
SAFECO Corporation and its subsidiaries.
All significant intercompany transactions and accounts have been
eliminated in the consolidated financial statements. Certain reclassifications
have been made to prior year financial information to conform to the 2000
classifications.
ACCOUNTING FOR PREMIUMS
Property and casualty insurance premiums are included in income as earned over
the terms of the respective policies. The unearned portion is determined using a
daily pro rata basis and is reflected as a liability for unearned premiums,
before the effect of reinsurance. See Note 5 for more information on
reinsurance.
Life insurance premiums for traditional individual life policies are
reported as income when due from the policyholder. These policies, which include
whole life and guaranteed renewable term policies, are long-duration contracts.
Group life and health policy revenue is recognized when earned, over the life of
the policy. The unearned premiums are reflected as liabilities on the balance
sheet. Group life and health policies are short-duration contracts that include
provisions allowing SAFECO to adjust the premiums for the group or cancel the
group contract. Funds received under retirement services deposit contracts,
annuity contracts and universal life policies were $1,266.0, $1,849.5 and
$1,241.9 in 2000, 1999 and 1998, respectively. These amounts are recorded as
liabilities rather than premium income when received. Revenues for universal
life products consist of front-end loads and mortality and expense charges
assessed against individual policyholder account balances. Front-end loads are
recognized as income when earned, over the life of the policy. Mortality and
expense charges are recognized as income when earned, as amounts are assessed
against individual policyholder account balances ratably over the contract year.
Administration fees are recognized as income as services are provided and
amounts are assessed against policyholder account balances.
INVESTMENTS
Effective October 1, 2000, SAFECO reclassified its fixed maturities
held-to-maturity investment portfolio to available-for-sale. This
reclassification was made to provide additional investment flexibility and
resulted in an increase in other comprehensive income of $41 in the fourth
quarter. Fixed maturities are classified as available-for-sale and are carried
at market value, with changes in unrealized appreciation and depreciation
recorded directly to shareholders' equity (comprehensive income), net of
applicable income taxes and deferred policy acquisition costs valuation
allowance. The amount of unrealized appreciation and depreciation, net of tax,
recognized in accumulated other comprehensive income in shareholders' equity was
$894.9, $389.7 and $1,433.6 at December 31, 2000, 1999 and 1998, respectively.
Of these amounts, the accumulated effect of unrealized appreciation and
depreciation on deferred acquisition costs and present value of future profits
was $(.3), $(.1) and $(31.9) at December 31, 2000, 1999 and 1998, respectively.
Policyholder liabilities are not adjusted for unrealized appreciation and
depreciation. SAFECO has no fixed maturities classified as trading.
All marketable equity securities are classified as available-for-sale
and are carried at market value, with changes in unrealized appreciation and
depreciation recorded directly to shareholders' equity (comprehensive income),
net of applicable income taxes.
55
24
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
When the collectibility of income for certain investments is considered
doubtful, it is placed on nonaccrual status and thereafter interest income is
recognized only when payment is received. Investments that have declined in
market value below cost and for which the decline is judged to be other than
temporary are written down to fair value. Write-downs are made directly on an
individual security basis and reduce realized investment gains in the statements
of income.
The cost of security investments sold is determined by the "identified
cost" method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for mortgage loan losses. The allowance for mortgage loan losses was
$10.8 at both December 31, 2000 and 1999.
Short-term investments are carried at cost, which approximates market
value.
SAFECO engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral is required at a rate of 102% of the market value of a loaned
security. The collateral is deposited by the borrower with a lending agent and
retained and invested by the lending agent to generate additional income
according to SAFECO's guidelines. The market value of the loaned securities is
monitored on a daily basis, with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are classified as other investments or as land, buildings
and equipment for company use, and are carried at cost less accumulated
depreciation.
SAFECO provides depreciation on buildings for company use, furniture and
automobiles at various rates based on estimated useful lives using straight-line
and accelerated methods. Depreciation expense was $55, $54 and $51 for December
2000, 1999 and 1998, respectively.
DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, that vary with and are primarily related to
the production of business are deferred and amortized over the effective period
of the related insurance policies. Investment income is considered in
determining whether a premium deficiency exists. No deficiencies have been
indicated in the periods presented.
Life insurance acquisition costs, consisting of commissions and certain
other underwriting expenses, that vary with and are primarily related to the
production of new business are deferred. Acquisition costs for deferred annuity
contracts, retirement services deposit contracts and universal life insurance
policies are amortized over the lives of the contracts or policies in proportion
to the present value of estimated future gross profits. To the extent actual
experience differs from assumptions, and to the extent estimates of future gross
profits require revision, the unamortized balance of deferred policy acquisition
costs is adjusted accordingly; such adjustments are included in current
operations. The unamortized balance of deferred policy acquisition costs is
adjusted for the impact on estimated future gross profits as if net unrealized
appreciation and depreciation on securities had been realized at the balance
sheet date. The impact of this adjustment, net of tax, is included in
accumulated other comprehensive income (loss) in shareholders' equity. A $46.8
write-off was taken in the third quarter of 1998 related to two blocks of
annuity business, the equity-indexed annuity and a declared rate fixed annuity
product, and to universal life business. These three lines were adversely
impacted by market conditions that negatively affected the projected
recoverability of deferred acquisition costs. Acquisition costs for traditional
individual life insurance policies are amortized over the premium payment period
of the related policies using assumptions consistent with those used in
computing policy benefit liabilities.
GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the fair
value of their net assets. Goodwill is amortized on a straight-line basis over
periods, not exceeding 30 years, that correspond with the benefits estimated to
be derived from the acquisitions. SAFECO evaluates the carrying amount of
goodwill using various analyses, including undiscounted cash flows. If
impairment is indicated, goodwill is written down. The amount of impairment is
typically determined using discounted cash flow analyses. Amortization periods
are revised if it is estimated that the remaining period of benefit of the
goodwill has changed.
56
25
LOSSES AND LOSS ADJUSTMENT EXPENSE
Unpaid losses and loss adjustment expense (LAE) represent the estimated
liability for claims reported plus losses incurred but not yet reported and the
related estimated LAE. The liability for losses and LAE is determined using
"case basis" evaluations and statistical analyses, and represents an estimate of
the ultimate net cost of all losses incurred but not paid through December 31 of
each year. Although considerable variability is inherent in such estimates,
management believes that the liability for unpaid losses and LAE is adequate.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. See Note 4 for more information
on loss and LAE reserves.
Salvage and subrogation recoverables are accrued using the "case basis"
method for large recoverables and statistical estimates based on historical
experience for smaller recoverables. Estimated recoverable amounts deducted from
the liability for losses and LAE net of reinsurance were $231.7 and $222.3 at
December 31, 2000 and 1999, respectively.
The property and casualty insurance companies' liability for unpaid
losses and LAE is presented gross of amounts recoverable from reinsurers. See
Note 5 for more information on reinsurance.
LIFE POLICY LIABILITIES
Liabilities for universal life insurance policies, deferred annuity contracts
and retirement services deposit contracts are equal to the accumulated account
value of such policies or contracts as of the valuation date. For structured
settlement annuities, future benefits are either fully guaranteed or are
contingent on the survivorship of the annuitant. Contingent future benefits are
discounted with best-estimate mortality assumptions, which include provisions
for ongoing mortality improvement. Guaranteed and contingent future benefits are
discounted at interest rates that grade from an average of 8.10% to ultimate
rates that average 7.26%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method and reflect
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. These liabilities are contingent upon
the death of the insured while the policy is inforce. Estimates of future
benefits are based upon assumptions of mortality and policy persistency that
include provisions for adverse deviation from best estimates. Mortality
assumptions are derived from both company-specific and industry statistics.
Future benefits are discounted at interest rates that vary by year of issue and
average 6.5%.
NET INCOME PER DILUTED SHARE OF COMMON STOCK
Net income per diluted share of common stock is based on the weighted-average
number of diluted common shares outstanding during each year. SAFECO's only
potentially dilutive instruments are stock options outstanding, and dilution
from these is not significant.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued Statement 131,
"Disclosures about Segments of an Enterprise and Related Information," in 1997.
Statement 131 changes the way information about business segments is reported in
annual financial statements and requires the reporting of selected segment
information in interim reports. This statement was effective for financial
statements for periods beginning after December 15, 1997. SAFECO provided the
disclosures beginning with its 1998 Annual Report and, as allowed under
Statement 131, for its interim financial statements beginning in 1999. See Note
15 for additional information. The statement has no effect on net income.
The FASB issued Statement 133, "Accounting for Derivative Instruments
and Hedging Activities," ("SFAS 133") in June 1998. The Statement amends or
supersedes several previous FASB statements and requires the recognition of all
derivatives (including certain derivative instruments imbedded in other
contracts) as either assets or liabilities in the statement of financial
position and measuring those instruments at fair value. The accounting for
changes in such fair values depends on the use of the derivative. In June 1999,
the FASB issued Statement 137, which allows entities to defer adoption of
Statement 133 to fiscal years beginning after June 15, 2000. In June 2000, the
FASB issued Statement 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities," which addresses a limited number of implementation
issues arising from SFAS 133.
SAFECO will adopt SFAS 133 effective January 1, 2001. SAFECO estimates
that the cumulative after-tax effect of adopting SFAS 133, as amended, will
decrease net income by approximately $4 and increase other comprehensive income
by approximately $2.
57
26
NOTE 2: INVESTMENTS
Investment income is comprised of:
2000 1999 1998
- - - - - - ---------------------------------------------------------------------------------------------------
Interest:
Fixed Maturities $1,476.9 $1,429.3 $1,385.2
Mortgage Loans 65.6 57.6 46.2
Short-Term Investments 25.1 17.6 16.2
Dividends:
Marketable Equity Securities 44.8 52.0 48.8
Redeemable Preferred Stock 24.3 21.1 20.7
Other Investment Income 1.8 14.5 9.0
--------------------------------------
Total Investment Income 1,638.5 1,592.1 1,526.1
Investment Expenses 11.3 7.0 7.2
--------------------------------------
Net Investment Income $1,627.2 $1,585.1 $1,518.9
======================================
The carrying value of investments in fixed maturities and mortgage loans
that have not produced income for the last twelve months is less than 1% of the
total of such investments at December 31, 2000.
The following analysis summarizes realized gains and losses on investments:
2000 1999 1998
- - - - - - ---------------------------------------------------------------------------------------------------
Realized Investment Gains (Losses):
Fixed Maturities $ (51.1) $ (0.2) $ 45.8
Marketable Equity Securities 190.6 82.8 48.3
Investment Real Estate -- 35.1 0.5
--------------------------------------
Realized Investment Gain Before Income Taxes 139.5 117.7 94.6
Applicable Income Taxes (49.1) (41.2) (32.7)
--------------------------------------
Realized Investment Gain $ 90.4 $ 76.5 $ 61.9
======================================
The proceeds from sales of investment securities and related gains and losses
for 2000 are as follows:*
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - - - - ----------------------------------------------------------------------------------------------------
Proceeds from Sales $2,265.4 $ 0.1 $ 661.7
======================================
Gross Realized Gains on Sales $ 47.5 $ -- $ 268.5
Gross Realized Losses on Sales (82.1) -- (77.9)
--------------------------------------
Realized Gains (Losses) on Sales (34.6) -- 190.6
Write-downs (35.7) -- --
Other, Including Gains on Calls and Redemptions 19.2 -- --
--------------------------------------
Total Realized Gain (Loss) $ (51.1) $ -- $ 190.6
======================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was
reclassified to available-for-sale.
The 2000 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
58
27
The proceeds from sales of investment securities and related gains and losses
for 1999 are as follows:
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - - - - ----------------------------------------------------------------------------------------------------
Proceeds from Sales $3,715.4 $ 6.3 $ 298.1
======================================
Gross Realized Gains on Sales $ 90.0 $ -- $ 111.0
Gross Realized Losses on Sales (85.8) (6.3) (28.2)
--------------------------------------
Realized Gains (Losses) on Sales 4.2 (6.3) 82.8
Write-downs (0.6) -- --
Other, Including Gains on Calls and Redemptions 2.5 -- --
--------------------------------------
Total Realized Gain (Loss) $ 6.1 $ (6.3) $ 82.8
======================================
The 1999 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
The proceeds from sales of investment securities and related gains and losses
for 1998 are as follows:
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - - - - ----------------------------------------------------------------------------------------------------
Proceeds from Sales $2,021.6 $ 18.2 $ 233.1
======================================
Gross Realized Gains on Sales $ 42.9 $ 3.4 $ 58.8
Gross Realized Losses on Sales (5.2) -- (10.5)
--------------------------------------
Realized Gains on Sales 37.7 3.4 48.3
Write-downs (0.4) -- --
Other, Including Gains on Calls and Redemptions 5.1 -- --
--------------------------------------
Total Realized Gain $ 42.4 $ 3.4 $ 48.3
======================================
The 1998 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
The following analysis summarizes the changes in unrealized appreciation and
depreciation on investment securities (includes fixed maturities
held-to-maturity and available-for-sale):*
2000 1999 1998
- - - - - - ---------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Unrealized Appreciation of Investment Securities:
Fixed Maturities $ 831.5 $(2,103.6) $ 206.5
Marketable Equity Securities (92.7) (51.6) 173.2
Applicable Income Taxes (258.6) 754.3 (132.9)
--------------------------------------
Net Change in Unrealized Appreciation $ 480.2 $(1,400.9) $ 246.8
======================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was
reclassified to available-for-sale.
59
28
NOTE 2: INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities and marketable equity securities
at December 31, 2000:*
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and Obligations
of U.S. Government Corporations and Agencies ....... $ 1,582.5 $ 178.4 $ (4.7) $ 173.7 $ 1,756.2
Obligations of States and Political Subdivisions ........ 2,916.6 315.9 (12.0) 303.9 3,220.5
Debt Securities Issued by Foreign Governments ........... 303.6 52.2 (1.2) 51.0 354.6
Corporate Securities .................................... 11,240.5 261.7 (477.4) (215.7) 11,024.8
Mortgage-Backed Securities .............................. 4,344.9 149.6 (20.4) 129.2 4,474.1
----------------------------------------------------------------
Total Fixed Maturities ............................. 20,388.1 957.8 (515.7) 442.1 20,830.2
Marketable Equity Securities ............................ 875.9 996.3 (56.8) 939.5 1,815.4
----------------------------------------------------------------
Total ......................................... $21,264.0 $ 1,954.1 $ (572.5) 1,381.6 $22,645.6
==================================== =========
Deferred Policy Acquisition Costs
Valuation Allowance and Other ...................... (11.7)
Applicable Income Taxes ................................. (475.0)
---------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity
(Total Accumulated Other Comprehensive Income) .. $ 894.9
=========
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was
reclassified to available-for-sale.
The following is a summary of fixed maturities and marketable equity securities
classified as available-for-sale at December 31, 1999:
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and Obligations
of U.S. Government Corporations and Agencies ....... $ 1,352.2 $ 33.3 $ (27.6) $ 5.7 $ 1,357.9
Obligations of States and Political Subdivisions ........ 3,160.0 153.7 (160.2) (6.5) 3,153.5
Debt Securities Issued by Foreign Governments ........... 183.3 15.3 (3.3) 12.0 195.3
Corporate Securities .................................... 8,949.1 54.6 (426.2) (371.6) 8,577.5
Mortgage-Backed Securities .............................. 3,614.3 34.0 (101.8) (67.8) 3,546.5
----------------------------------------------------------------
Total Fixed Maturities Classified as
Available-for-Sale ............................. 17,258.9 290.9 (719.1) (428.2) 16,830.7
Marketable Equity Securities ............................ 972.5 1,100.9 (68.7) 1,032.2 2,004.7
----------------------------------------------------------------
Total ......................................... $18,231.4 $ 1,391.8 $ (787.8) 604.0 $18,835.4
==================================== =========
Deferred Policy Acquisition Costs
Valuation Allowance and Other ...................... (10.6)
Applicable Income Taxes ................................. (203.7)
---------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity
(Total Accumulated Other Comprehensive Income) .. $ 389.7
=========
60
29
The following is a summary of fixed maturities classified as held-to-maturity at
December 31, 1999:
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Securities and Obligations
of U.S. Government Corporations and Agencies ....... $ 282.5 $ 27.6 $ (0.7) $ 26.9 $ 309.4
Obligations of States and Political Subdivisions ........ 140.3 1.7 (6.0) (4.3) 136.0
Debt Securities Issued by Foreign Governments ........... 150.3 19.0 -- 19.0 169.3
Corporate Securities .................................... 1,839.7 61.9 (69.4) (7.5) 1,832.2
Mortgage-Backed Securities .............................. 320.5 10.9 (6.2) 4.7 325.2
----------------------------------------------------------------
Total Fixed Maturities Classified as
Held-to-Maturity ............................. $ 2,733.3 $ 121.1 $ (82.3) $ 38.8 $ 2,772.1
================================================================
The amortized cost and estimated market value of fixed maturities at
December 31, 2000, by contractual years-to-maturity, are presented below.*
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
ESTIMATED
AMORTIZED MARKET
COST VALUE
- - - - - - ----------------------------------------------------------------------------------------------------------
Due in One Year or Less ............................................. $ 593.9 $ 594.4
Due After One Year Through Five Years ............................... 3,666.1 3,658.6
Due After Five Years Through Ten Years .............................. 2,520.5 2,551.4
Due After Ten Years ................................................. 9,262.7 9,551.7
Mortgage-Backed Securities .......................................... 4,344.9 4,474.1
---------------------------------
Total Fixed Maturities ......................................... $20,388.1 $20,830.2
=================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was
reclassified to available-for-sale.
The following table summarizes SAFECO's consolidated allowance for credit losses
related to its mortgage loan investments and finance receivables:
2000 1999 1998
- - - - - - ----------------------------------------------------------------------------------------
Allowance at Beginning of Year ................... $34.4 $33.0 $32.5
Provision for Credit Losses ...................... 2.4 2.4 2.4
Loans Charged Off as Uncollectible ............... (1.6) (1.3) (2.3)
Recoveries ....................................... 0.1 0.3 0.4
-----------------------------------
Allowance at End of Year .................... $35.3 $34.4 $33.0
===================================
These allowances relate to SAFECO Credit's finance receivables ($1,617.7
at December 31, 2000) and to mortgage loan investments ($823.0 at December 31,
2000), the majority of which are held by SAFECO Life Insurance Company. The
allowances include specific reserves, as well as general reserve amounts. The
total investment in impaired loans before any reserve for losses is $0.4 at
December 31, 2000.
61
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NOTE 3: DEBT AND CAPITAL SECURITIES
DEBT
At December 31, 2000, the Corporation had commercial paper borrowings
outstanding of $349.8. The maximum amount of commercial paper outstanding during
the year was $636.9 and the average amount outstanding during the year was
$544.1. The weighted-average interest rate for the year was 6.7%. The majority
of this commercial paper relates to funding for SAFECO's 1997 acquisition of
American States Financial Corporation.
At December 31, 2000, SAFECO Credit had short-term borrowings of
$1,143.4 through commercial paper and $11.3 of medium-term notes. The repayment
of each of these borrowings is guaranteed by the Corporation. The maximum amount
of commercial paper outstanding during the year was $1,325.2 and the average
amount outstanding during the year was $1,105.3. The weighted-average interest
rate for the year was 6.7%. The medium-term notes have maturities from October
2001 to December 2001 and a weighted-average interest rate of 8.3% at December
31, 2000.
On March 16, 2000, SAFECO Corporation issued $300 of medium-term notes
at 7.875% which mature in March 2003. The proceeds of the notes were
subsequently loaned to SAFECO Credit to reduce its commercial paper debt.
SAFECO Corporation has a bank credit facility available for $1,050.0. It
is a five-year facility originated in 1997 that extends to 2002. The Corporation
also has backup bank credit facilities for $315.0. These are 364-day commitments
which expire at various dates throughout the year. These facilities are
available for general corporate purposes, including support of the Corporation's
and SAFECO Credit's commercial paper debt. There are no borrowings outstanding
under these facilities, nor were there any borrowings outstanding as of December
31, 2000 or 1999. The Corporation pays a fee to have these facilities available
and does not maintain deposits as compensating balances. These facilities have
certain covenants that include requiring SAFECO to maintain a specified minimum
level of shareholders' equity and a maximum debt-to-capitalization ratio. As of
December 31, 2000, SAFECO was in compliance with all such covenants.
The Corporation and SAFECO Credit enter into interest rate swap
agreements to reduce the impact of changes in interest rates. The interest rate
swap agreements provide only for the exchange of interest on the notional amount
at the stated rates, with no multiplier or leverage.
There were no swap terminations in 2000, 1999 or 1998. The net interest
accrued under these agreements is recorded as an adjustment to interest expense.
The Corporation has two interest rate swap agreements outstanding with
notional amounts totaling $300.0 ($150.0 each) that replace variable rates with
fixed rates of 5.9% at December 31, 2000 and 1999. The two swaps were entered
into in December 1997 and mature in December 2002 and December 2007.
The Corporation also has interest rate swap agreements outstanding with
notional amounts totaling $300.0 that replace fixed rates with variable rates at
65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in
March 2000 and mature in March 2003.
SAFECO Credit had interest rate swap agreements outstanding with
notional amounts totaling $328.6 at December 31, 2000 and $457.0 at December 31,
1999 that replace variable-rate debt with fixed rates with a weighted average of
5.9% for both years. Maturities of agreements at December 31, 2000 range from
January 2001 to June 2007.
Real estate mortgages are collateralized by the related investment real
estate buildings and property.
62
31
The total amount, current portions, interest rates and maturities of debt at
December 31 are as follows:
2000 1999
------------------------ ------------------------
TOTAL CURRENT TOTAL CURRENT
- - - - - - ------------------------------------------------------------------------------------------------------------------------
SAFECO Corporation Commercial Paper
Interest Rates at December 31:
Range: 7.0% to 7.9%; 6.0% to 6.6%
Weighted Average: 7.1%; 6.3% $ 349.8 $ 349.8 $ 508.8 $ 508.8
SAFECO Credit Borrowings
Interest Rates at December 31:
Range: 7.0% to 8.3%; 6.1% to 8.3%
Weighted Average: 7.4%; 6.4% 1,154.7 1,154.7 1,323.1 1,311.9
SAFECO Corporation, 7.875% Medium-Term Notes Due 2003 300.0 -- -- --
SAFECO Corporation, 7.875% Notes Due 2005 200.0 -- 200.0 --
SAFECO Corporation, 6.875% Notes Due 2007 200.0 -- 200.0 --
Other Debt:
SAFECO Corporation, Medium-Term Notes
Due 2002 and 2003; Weighted-Average
Interest Rates at December 31: 7.1%; 7.1% 50.0 -- 50.0 --
Unsecured Notes and Loans Payable; Weighted-Average
Interest Rates at December 31: 6.7%; 6.8% 21.5 6.3 22.1 5.4
Real Estate Mortgages Payable; Weighted-Average
Interest Rates at December 31: 8.3%; 8.3% 9.2 0.2 12.1 0.3
--------------------------------------------------------
Total Debt (Excluding Capital Securities) $2,285.2 $1,511.0 $2,316.1 $1,826.4
========================================================
Aggregate annual principal installments payable under these obligations
for each of the five years subsequent to 2000 are as follows: 2001 - $1,511.0;
2002 - $48.4; 2003 - $313.0; 2004 - $4.6; and 2005 - $200.8.
CAPITAL SECURITIES
On July 15, 1997, SAFECO Capital Trust I ("Capital Trust"), a consolidated
wholly owned subsidiary of SAFECO Corporation, issued $850.0 of 8.072%
Corporation-Obligated, Mandatorily Redeemable Capital Securities (the "Capital
Securities"). In connection with Capital Trust's issuance of the Capital
Securities and the related purchase by the Corporation of all of Capital Trust's
common securities (the "Common Securities"), SAFECO Corporation issued to
Capital Trust $876.3 principal amount of its 8.072% Junior Subordinated
Deferrable Interest Debentures, due July 15, 2037 (the "Subordinated
Debentures"). The sole assets of Capital Trust are and will be the Subordinated
Debentures and any interest due thereon. The interest and other payment dates on
the Subordinated Debentures correspond to the distribution and other payment
dates on the Capital Securities and the Common Securities. Distributions on the
Capital Securities and Common Securities are cumulative and payable
semi-annually in arrears. The Subordinated Debentures and the related income
effects are eliminated in SAFECO's financial statements.
For federal income tax purposes, the Subordinated Debentures are
classified as indebtedness. Accordingly, interest on the Subordinated Debentures
is deductible at the federal statutory rate of 35%.
The Capital Securities are mandatorily redeemable on July 15, 2037, the
same date the Subordinated Debentures are due. The Capital Securities may be
redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007,
at a price of 104% of principal, with the call premium graded down to zero in
2017. The Corporation's obligations under the Subordinated Debentures and
related agreements, taken together, constitute a full and unconditional
guarantee of payments due on the Capital Securities.
The Corporation has the right, at any time, to defer payments of
interest on the Subordinated Debentures for up to five years. Consequently, the
distributions on the Capital Securities and Common Securities would be deferred
(though such distributions would continue to accrue with interest since interest
would accrue on the Subordinated Debentures during any such extended interest
payment period). In no case may the deferral of payments and distributions
extend beyond the stated maturity dates of the respective securities. The
Corporation cannot pay dividends on its common stock during such deferments.
63
32
NOTE 4: PROPERTY AND CASUALTY LOSS RESERVES
Unpaid losses and loss adjustment expense (LAE) represent the estimated
liability (reserves) for claims reported plus losses incurred but not reported
(IBNR) and the related LAE. Although considerable variability is inherent in
such estimates, management believes that the liability for unpaid losses and LAE
is adequate. These estimates are continually reviewed and adjusted as necessary;
such adjustments are included in current operations.
The following is a summary of the activity related to SAFECO's property
and casualty insurance companies' reserves for losses and LAE. The year-end
reserve amounts above are net of related reinsurance recoverables of $343.6,
$309.5 and $253.6 for 2000, 1999 and 1998, respectively.
2000 1999 1998
- - - - - - ------------------------------------------------------------------------------------------------------------------------
Loss and LAE Reserves at Beginning of Year $4,069.1 $3,966.3 $4,081.9
----------------------------------
Incurred Loss and LAE for Claims Occurring in the Current Year 3,621.7 3,353.0 3,163.2
Increase (Decrease) in Estimated Loss and LAE for Claims Occurring in Prior Years 148.3 78.8 (100.0)
----------------------------------
Total Incurred Loss and LAE 3,770.0 3,431.8 3,063.2
----------------------------------
Loss and LAE Payments for Claims Occurring During:
Current Year 2,059.3 1,926.4 1,836.2
Prior Years 1,510.7 1,402.6 1,342.6
----------------------------------
Total Loss and LAE Payments 3,570.0 3,329.0 3,178.8
----------------------------------
Total Loss and LAE Reserves at End of Year $4,269.1 $4,069.1 $3,966.3
==================================
The amounts above do not include SAFECO's life subsidiaries' loss
reserves for accident and health claims, as these amounts are not material in
relation to consolidated loss and LAE reserves. In addition, the majority of
these claims are incurred and paid in full within a one-year period.
Operations in 2000 were charged $148.3 from increases in estimated loss
and loss and adjustment expense for claims occurring in prior years. This
increase was due to adverse development within commercial operations in the
workers' compensation ($50.9), general liability ($44.4), commercial auto
($23.5) and in other ($29.5) lines of business as the costs of settling claims
has increased. Workers' compensation development of $50.9 is due to continued
adverse development of prior reported claims as well as IBNR reserve additions
to improve future adequacy. General liability development of $44.4 is due
primarily to continued adverse development of construction defect claims related
to the SAFECO Business Insurance operation. Commercial auto development of $23.5
is due to higher-than-expected loss costs in commercial operations on prior
reported claims.
Operations in 1999 were charged $78.8 from increases in estimated loss
and LAE for claims occurring in prior years, primarily in the construction
defect, asbestos and environmental, and workers' compensation lines. For both
construction defect and asbestos and environmental, increased reserve estimates
resulted from higher-than-expected reported claims in 1999. The increased
reserve estimates for workers' compensation resulted from SAFECO's re-evaluation
of loss exposures on claims related to larger commercial insureds and to an
upturn in medical costs and less favorable workers' compensation legislation.
Operations in 1998 benefited $100.0 from a decrease in estimated loss
and LAE for claims occurring in prior years. This decrease related primarily to
American States' operations. The claims departments of the two companies were
combined in 1998. The unified claims department implemented training and
reserving procedures resulting in lower claims settlements and reduced reserves
on prior years' American States losses. The reductions were in both personal and
commercial auto, workers' compensation and general liability.
The property and casualty insurance companies' loss and LAE reserves
include reserves for environmental, asbestos and other toxic claims. These
reserves are approximately 8% of total property and casualty reserves for losses
and LAE at both December 31, 2000 and December 31, 1999. The reserves include
estimates for both reported and IBNR losses and related adjustment expense,
including legal costs. In view of changes in environmental regulations and
evolving case law that affect the development of loss reserves, the process of
estimating loss reserves for environmental, asbestos and other toxic claims
results in imprecise estimates. Quantitative loss reserving techniques need to
be supplemented by subjective considerations and managerial judgment. Because of
these conditions, trends that have affected development of these liabilities in
the past may not necessarily occur in the future. Although estimation of
environmental claims is difficult, the reserves established for these claims at
December 31, 2000 are believed to be adequate based on the known facts and
current law.
64
33
NOTE 5: REINSURANCE
SAFECO's insurance subsidiaries protect themselves from excessive losses by
reinsuring on treaty and facultative bases. The availability and cost of
reinsurance are subject to prevailing market conditions, both in terms of price
and available capacity. Although the reinsurer is liable to SAFECO to the extent
of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as
the direct insurer on all risks reinsured. SAFECO evaluates the financial
condition of its reinsurers to minimize its exposure to losses from reinsurer
insolvencies. To SAFECO's knowledge, none of its reinsurers is experiencing
financial difficulties. SAFECO's business is not substantially dependent upon
any single reinsurance contract.
SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and do not participate in any unusual or nonrecurring
reinsurance transactions such as "swaps" of reserves or loss portfolio
transfers. SAFECO does not use funding covers and does not participate in any
surplus relief transactions.
Reinsurance recoverables are comprised of the following amounts at December 31:
2000 1999
- - - - - - -----------------------------------------------------------------------------------------
Property and Casualty Insurance:
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves $ 343.6 $ 309.5
Paid Losses and LAE 18.9 22.8
Life Insurance:
Reinsurance Recoverables on:
Policy and Contract Claim Reserves 3.2 0.9
Paid Claims 2.9 2.3
Life Policy Liabilities 93.1 49.3
-------------------
Total Reinsurance Recoverables $ 461.7 $ 384.8
===================
The unearned premium liability is presented before the effect of
reinsurance. The reinsurance amounts related to the unearned premium liability
are included with other assets in the balance sheets and totaled $60.9 and $54.5
at December 31, 2000 and 1999, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the Statements of Income. These amounts are as follows:
2000 1999 1998
- - - - - - ---------------------------------------------------------------------------------------------------------------
Property and Casualty Insurance Ceded Earned Premiums $ 163.0 $ 164.4 $ 188.5
Life Insurance Ceded Earned Premiums 32.7 25.8 21.3
---------------------------------------
Total Ceded Earned Premiums $ 195.7 $ 190.2 $ 209.8
=======================================
Property and Casualty Insurance Ceded Losses and LAE $ 105.3 $ 147.3 $ 98.4
Life Insurance Ceded Policy Benefits 35.6 11.8 12.2
---------------------------------------
Total Ceded Losses, LAE and Policy Benefits $ 140.9 $ 159.1 $ 110.6
=======================================
Reinsurance premiums ceded on a written basis are approximately equal to
the ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
65
34
NOTE 6: COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment under
leases which expire at various dates through 2012. These leases are accounted
for as operating leases. Minimum rental commitments for leases in effect at
December 31, 2000 are as follows:
YEAR PAYABLE MINIMUM RENTALS
- - - - - - ------------------------------------------------------------------------------------
2001 $ 44.7
2002 40.9
2003 38.3
2004 32.0
2005 29.6
2006 and Thereafter 129.5
------
Total $315.0
======
In addition, SAFECO has commitments under real estate construction and
development contracts that total approximately $70 at December 31, 2000. Nearly
all these commitments are expected to be paid in 2001.
The amount of rent charged to operations was $28.7, $25.0 and $20.1 for
2000, 1999 and 1998, respectively.
For information on environmental, asbestos and other toxic claim
liabilities, see Note 4.
See Note 5 for discussion relating to reinsurance.
NOTE 7: FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in developing the estimates of fair value.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions and/or estimating methodologies may have a material effect on the
estimated fair value amounts.
For cash, short-term investments, accounts receivable, policy loans and
other liabilities, carrying value is a reasonable estimate of fair value.
Fair value amounts for fixed maturities and marketable equity securities
were determined using market prices for securities traded in the public
marketplace. For securities not actively traded, fair values have been estimated
using values obtained from independent pricing services or quoted market prices
of comparable instruments.
The fair values for mortgage and commercial loans have been estimated by
discounting the projected cash flows using the current rate at which loans would
be made to borrowers with similar credit ratings and for the same maturities.
Commercial loans are a component of finance receivables in the balance sheet.
Finance receivables also include lease receivables, which are exempt from fair
value disclosure requirements.
The fair values of investment contracts (funds held under deposit
contracts) with defined maturities are estimated by discounting projected cash
flows using rates that would be offered for similar contracts with the same
remaining maturities. For investment contracts with no defined maturities, fair
values are estimated to be the present surrender value.
The carrying values of the Corporation's and SAFECO Credit's commercial
paper, as well as other debts that have variable interest rates, are reasonable
estimates of fair value. For SAFECO Credit and other debts that have fixed
interest rates, fair values are estimated by discounting the projected cash
flows using the rate at which similar borrowings could currently be made. The
fair values of the 7.875% Medium-Term notes, the 7.875% notes, the 6.875% notes
and the Capital Securities are estimated based on quotes from broker/dealers who
make markets in similar securities.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
66
35
Estimated fair values of financial instruments at December 31 are as follows:
2000 1999
---------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- - - - - - ----------------------------------------------------------------------------------------------------------------
Financial Assets:
Fixed Maturities Available-for-Sale $20,830.2 $20,830.2 $16,830.7 $16,830.7
Fixed Maturities Held-to-Maturity -- -- 2,733.3 2,772.1
Marketable Equity Securities 1,815.4 1,815.4 2,004.7 2,004.7
Mortgage Loans 823.0 792.0 770.4 742.0
Commercial Loans 1,135.9 1,100.0 978.3 907.0
Financial Liabilities:
Funds Held Under Deposit Contracts 14,085.7 13,977.0 13,762.9 13,495.0
Commercial Paper 349.8 349.8 508.8 508.8
Credit Company Borrowings 1,154.7 1,155.0 1,323.1 1,323.0
7.875% Medium-Term Notes Due 2003 300.0 305.0 -- --
7.875% Notes Due 2005 200.0 203.0 200.0 201.0
6.875% Notes Due 2007 200.0 193.0 200.0 191.0
Other Debt 80.7 80.0 84.2 85.0
Capital Securities 843.0 700.0 842.5 854.0
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO's consolidated investments in mortgage-backed securities of $4,474.1 at
market value at December 31, 2000 ($3,871.7 at December 31, 1999) are primarily
residential collateralized mortgage obligations (CMOs), pass-throughs and
commercial loan-backed mortgage obligations (CMBS). CMOs and CMBS, while
technically defined as derivative instruments, are exempt from derivative
disclosure requirements. SAFECO's investment in CMOs and CMBS comprised of the
riskier, more volatile type (e.g., principal only, inverse floaters, etc.) has
been intentionally limited to only a small amount--less than 1% of total
mortgage-backed securities at both December 31, 2000 and 1999.
SAFECO Credit provides loan and lease commitments at both variable and
fixed rates of interest. Fixed-rate loan and lease commitments outstanding were
approximately $35 and $170 at December 31, 2000 and 1999, respectively, or less
than 1% of consolidated investments. The majority of these commitments have
original terms of up to 90 days and contracted fixed interest rates with a
weighted-average rate of 9% at December 31, 2000. Exposure to credit risk
relating to these commitments (i.e., risk that the borrower will be unable to
perform its obligations) is mitigated through credit review and approval
controls. Because the majority of the fixed-rate commitments have terms of 90
days or less, the estimated fair values of these commitments are not material.
In 1997, SAFECO Life Insurance Company (SAFECO Life) introduced an
equity-indexed annuity product that credits the policyholder based on a
percentage of the gain in the S&P 500 Index. Sales of this product were
suspended in the fourth quarter of 1998. A hedging program with the objective to
hedge the exposure to changes in the S&P 500 market risk has been established.
The program consists of buying and writing S&P 500 options, buying Treasury
interest rate futures and trading S&P 500 futures and swaps.
Realized gains and losses on both options and futures are recognized
upon termination of the options and future contracts. SAFECO records futures and
options at market value with unrealized gains and losses recorded in current
income.
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36
NOTE 7: FINANCIAL INSTRUMENTS (CONTINUED)
There was no balance in assets for call options at December 31, 2000.
The balance in assets for call options was $2.0 at December 31, 1999. The
balance in other investments for futures contracts at December 31, 2000 and 1999
was $0.4 and $8.3, respectively. At December 31, 2000, there was no liability
for written S&P 500 call options. At December 31, 1999, SAFECO had a $5.8
liability for written S&P 500 call options.
In general, SAFECO does not enter into derivative financial instruments
for speculative purposes. SAFECO's involvement in other investment-type
derivatives is intentionally of a limited nature. Such derivatives include
currency-linked bonds and equity-linked bonds. Individually, and in the
aggregate, these derivatives are not material and have not been disclosed.
The Corporation and SAFECO Credit enter into interest rate swap
agreements to reduce the impact of changes in interest rates. The interest rate
swap agreements provide only for the exchange of interest on the notional amount
at the stated rates, with no multiplier or leverage.
The Corporation has two interest rate swap agreements outstanding with
notional amounts totaling $300.0 ($150.0 each) that replace variable rates with
fixed rates of 5.9% at December 31, 2000 and 1999. The two swaps were entered
into in December 1997 and mature in December 2002 and December 2007.
The Corporation also has interest rate swap agreements outstanding with
notional amounts totaling $300.0 that replace fixed rates with variable rates at
65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in
March 2000 and mature in March 2003.
SAFECO Credit had interest rate swap agreements outstanding with
notional amounts totaling $328.6 at December 31, 2000 and $457.0 at December 31,
1999 that replace variable-rate debt with fixed rates with a weighted average of
5.9% for both years. Maturities of agreements at December 31, 2000 range from
January 2001 to June 2007.
There were no swap terminations in 2000, 1999 or 1998. The net interest
accrued under these agreements is recorded as an adjustment to interest expense.
Exposure to credit risk relating to interest rate swaps is the risk that the
counterparty will be unable to perform its obligations. This risk is mitigated
through credit review, approval controls and by entering into agreements with
only highly rated counterparties. The estimated fair value of debt-related
interest rate swaps was not material at December 31, 2000 or 1999; thus, no
additional disclosures have been made.
NOTE 8: COMMON STOCK
Changes in common stock outstanding for the last three years are as follows:
2000 1999 1998
- - - - - - ----------------------------------------------------------------------------------------------------------------------
Number of Shares Outstanding at the Beginning of Year 128,925,000 136,262,170 141,151,093
Shares Reacquired (1,346,581) (7,549,610) (5,184,360)
Shares Issued for Stock Options and Rights 70,668 212,440 295,437
-------------------------------------------------------
Number of Shares Outstanding at the End of Year 127,649,087 128,925,000 136,262,170
=======================================================
The Washington Business Corporation Act provides that reacquired shares
of a Washington corporation revert to the status of authorized but unissued
shares. Accordingly, the Corporation has reduced capital stock and retained
earnings to reflect the repurchase of shares, and does not show treasury stock
as a separate reduction.
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37
NOTE 9: STOCK INCENTIVE PLAN
The SAFECO Long-Term Incentive Plan of 1997 (the "Plan") provides for the
issuance of up to 6,000,000 shares of the Corporation's common stock. Stock
options, restricted stock rights, performance stock rights and stock
appreciation rights are authorized under the Plan.
Stock options are granted at exercise prices not less than the fair
market value of the stock on the date of the grant. The terms and conditions
upon which options become exercisable may vary among grants; however, option
rights expire no later than ten years from the date of grant.
SAFECO continues to apply Accounting Principles Board (APB) Opinion 25
in accounting for its stock options, as allowed under FASB Statement 123. Under
APB 25, because the exercise price of SAFECO's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
If compensation expense had been recorded applying Statement 123,
SAFECO's net income would have been reduced by $3.8, $3.5 and $2.9 in 2000, 1999
and 1998, respectively. Basic and diluted earnings per share would also have
been reduced by $0.03, $0.03 and $0.02, respectively. The weighted-average fair
value (at grant date) of options granted in 2000, 1999 and 1998 was $6, $9 and
$12 per share, respectively. The fair values were estimated using the
Black-Scholes option pricing model, with the following assumptions for 2000:
risk-free interest rate of 5.0%, dividend yield of 3.5%, volatility factor of
33% and expected life of 7 years.
Changes in stock options for the three years ended December 31, 2000 are
as follows:
OPTIONS OUTSTANDING
----------------------------
WEIGHTED-
AVERAGE PRICE
SHARES PER SHARE
- - - - - - ----------------------------------------------------------------------------
Balance December 31, 1997 1,905,454 $30.07
Granted 365,400 47.85
Exercised (289,387) 26.05
Canceled (34,150) 38.96
---------------------------
Balance December 31, 1998 1,947,317 33.85
Granted 697,200 34.72
Exercised (208,954) 23.43
Canceled (37,625) 41.73
---------------------------
Balance December 31,1999 2,397,938 34.89
Granted 726,000 20.47
Exercised (61,009) 20.11
Canceled (145,250) 33.14
---------------------------
Balance December 31, 2000 2,917,679 $31.69
===========================
The following table summarizes information about stock options
outstanding December 31, 2000.
OPTIONS OUTSTANDING
--------------------------------------
REMAINING WEIGHTED-
CONTRACTUAL AVERAGE PRICE
RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PER SHARE
- - - - - - --------------------------------------------------------------------------
$ 19.38 - 27.18 983,553 7.0 $21.55
28.00 - 36.38 958,285 5.6 30.29
37.94 - 51.38 975,841 6.5 43.30
--------------------------------------
Total 2,917,679 6.4 $31.69
======================================
OPTIONS EXERCISABLE
-------------------------
WEIGHTED-
AVERAGE PRICE
RANGE OF EXERCISE PRICES SHARES PER SHARE
- - - - - - --------------------------------------------------------------------------
$ 19.38 - 27.18 291,553 $24.07
28.00 - 36.38 666,060 30.88
37.94 - 51.38 599,345 43.42
-------------------------
Total 1,556,958 $34.43
=========================
Restricted stock rights provide for the holder to receive a stated
number of share rights if the holder remains employed for the stated number of
years. Performance stock rights provide for the holder to receive a stated
number of share rights if the holder attains certain specified performance goals
within a stated performance cycle. Performance goals may include net income,
return on equity, stock price appreciation and/or other criteria.
Matured restricted stock rights and earned performance stock rights are
issued in stock and/or paid in cash at the option of the holder based on the
fair market value of SAFECO's stock on the issue/payment date. During 2000, 1999
and 1998, ($0.6), $0.8, and $2.9, respectively, were charged to operations for
the compensation element of restricted and performance stock rights. These
expense amounts are determined based on variable plan accounting under APB 25.
Restricted stock rights compensation expense is charged to operations over the
vesting period and performance stock rights compensation expense is charged to
operations when it is probable the performance goal will be achieved.
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38
NOTE 9: STOCK INCENTIVE PLAN (CONTINUED)
Changes in restricted and performance stock rights for the three years ended
December 31, 2000 are as follows:
SHARE RIGHTS
- - - - - - ----------------------------------------------------------------------------
Balance December 31, 1997 154,643
Awarded 89,990
Matured (43,891)
Canceled (12,359)
-------
Balance December 31, 1998 188,383
Awarded 114,725
Matured (39,534)
Canceled (1,250)
-------
Balance December 31, 1999 262,324
Awarded 130,242
Matured (41,581)
Canceled (95,041)
-------
Balance December 31, 2000 255,944
=======
At December 31, 2000 there were 3,935,609 shares of common stock
reserved for future options and rights.
NOTE 10: STATUTORY INFORMATION
The Corporation's insurance subsidiaries are required to file annual statements
with state regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (i.e., statutory basis). Prescribed statutory
accounting practices include state laws, regulations and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (NAIC). Permitted statutory accounting practices
encompass all accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance
with accounting principles generally accepted in the United States primarily
because policy acquisition costs are expensed when incurred, life insurance
reserves are based on different assumptions and income tax expense reflects only
taxes paid or currently payable.
Statutory net income and equity are as follows:
STATUTORY NET INCOME 2000 1999 1998
- - - - - - ---------------------------------------------------------------------
Property and Casualty
Insurance $155.2 $296.6 $497.4
Life Insurance 85.6 114.0 92.5
STATUTORY SHAREHOLDER'S EQUITY
DECEMBER 31 2000 1999
- - - - - - ---------------------------------------------------------------------
Property and Casualty
Insurance $2,286.8 $2,724.7
Life Insurance 706.0 709.4
SAFECO's insurance subsidiaries have received written approval from the
Washington State Insurance Department to treat certain loans to related SAFECO
subsidiaries (all made at market rates) as admitted assets. The allowance of
such loans has not materially enhanced surplus at December 31, 2000.
The NAIC revised the Accounting Practices and Procedures Manual in a
process referred to as Codification. The revised manual will be effective
January 1, 2001. The domiciliary states of the Corporation's insurance
subsidiaries have adopted the provisions of the revised manual. The revised
manual has changed, to some extent, prescribed statutory accounting practices
and will result in changes to the accounting practices that the Corporation's
insurance subsidiaries use to prepare their statutory-basis financial
statements. SAFECO estimates the adoption impact of statutory codification will
increase statutory surplus of the property and casualty insurance companies by
approximately $200 and the life insurance companies by approximately $45. Nearly
all of the impact of adopting this new requirement is related to the recording
of a deferred tax asset that was not recorded in the statutory-basis financial
statements under the prior statutory accounting guidance.
NOTE 11: DIVIDEND RESTRICTIONS
The Corporation's insurance subsidiaries are restricted by state regulations as
to the aggregate amount of dividends they may pay in any consecutive
twelve-month period without regulatory approval. Generally, dividends may be
paid out of earned surplus without approval with 30 days' prior written notice
within certain limits. The limits are generally based on the greater of 10% of
the prior year statutory surplus or prior year statutory net income. Dividends
in excess of the prescribed limits or the subsidiary's earned surplus require
formal state insurance commission approval. Based on statutory limits as of
December 31, 2000, the Corporation is able to receive approximately $550.0 in
dividends from its insurance and other subsidiaries in 2001 without obtaining
prior regulatory approval.
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NOTE 12: EMPLOYEE BENEFIT PLANS
The Corporation sponsors profit-sharing bonus, defined contribution, and defined
benefit plans covering substantially all employees. The defined contribution
plans include 401(k) savings plans and profit-sharing retirement plans (PSRP).
SAFECO's Cash Balance Plan (CBP) is a defined benefit plan covering
substantially all employees and provides benefits for each year of service after
1988, based on the employee's compensation level plus a stipulated rate of
return on the benefit balance. The American States defined benefit plan was
merged with the Cash Balance Plan effective January 1, 1999. It is SAFECO's
policy to fund the Cash Balance Plan on a current basis to the full extent
deductible under federal income tax regulations.
The following table summarizes the funded status of the defined benefit
plans:
DECEMBER 31 2000 1999
- - - - - - ----------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit Obligation
at Beginning of Year $143.9 $148.5
Service and Interest Costs 16.7 16.4
Amendments and Experience 2.8 (7.6)
Benefits Paid (17.5) (13.4)
--------------------
Benefit Obligation at End of Year 145.9 143.9
--------------------
Change in Plan Assets:
Fair Value of Plan Assets
at Beginning of Year 141.2 166.5
Actual Return on Plan Assets 4.2 (0.2)
Company Contributions 1.5 7.3
Benefits Paid and Annuities
Purchased (17.5) (32.4)
--------------------
Fair Value of Plan Assets
at End of Year 129.4 141.2
--------------------
Funded Status of Plan (Underfunded) (16.5) (2.7)
Unrecognized Net Actuarial Gain (0.6) (11.6)
--------------------
Accrued Benefit Cost $(17.1) $(14.3)
====================
Plan assumptions include a discount rate of 7.5%, an expected rate of
return on plan assets of 9.0% and a rate of increase in compensation of 6.0% at
December 31, 2000. Plan assets consist primarily of listed equity securities,
corporate bonds and U.S. government bonds.
The cost of the plans discussed above charged to income is as follows:
2000 1999 1998
- - - - - - ----------------------------------------------------------------------------
Defined Contribution-401(k) $15.5 $15.0 $12.5
Defined Contribution-(PSRP) 14.3 14.0 14.6
Defined Benefit-(CBP) 4.4 2.7 11.9
Profit-Sharing Bonus 3.3 0.6 22.7
---------------------------------
Total $37.5 $32.3 $61.7
=================================
In addition, SAFECO provides certain healthcare and life insurance
benefits ("other postretirement benefits") for retired employees. Substantially
all employees become eligible for these benefits if they reach retirement age
while working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree.
The following table summarizes other postretirement benefit costs:
DECEMBER 31 2000 1999 1998
- - - - - - ----------------------------------------------------------------------------
Service Cost $ 5.4 $ 4.7 $3.1
Interest Cost 9.9 8.0 6.0
Amortization 1.5 0.8 -
---------------------------------
Total $16.8 $13.5 $9.1
=================================
The following table summarizes the funded status of the plan:
DECEMBER 31 2000 1999
- - - - - - ----------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit Obligation at
Beginning of Year $ 135.0 $ 116.3
Service and Interest Costs 15.3 12.7
Amendments and Experience (2.9) 10.3
Net Benefits Paid (3.9) (4.3)
---------------------
Benefit Obligation at End of Year 143.5 135.0
Fair Value of Plan Assets at
End of Year 3.2 2.4
---------------------
Funded Status of Plan (Underfunded) (140.3) (132.6)
Unrecognized Net Actuarial Loss 18.5 22.1
Unrecognized Prior Service Cost 7.6 8.4
---------------------
Accrued Benefit Cost $(114.2) $(102.1)
=====================
The discount rate assumption of 7.5% was used at December 31, 2000 and
1999.
The accumulated postretirement benefit obligation at December 31, 2000
was determined using a healthcare cost trend rate of 9.0% for 2001, gradually
decreasing to 5.0% in 2005 and remaining at that level thereafter. A 1% point
increase (or decrease) in the assumed healthcare cost trend rate for each year
would increase (or decrease) the accumulated other postretirement benefit
obligation as of December 31, 2000 by $17.4 (or $14.4) and the annual net
periodic other postretirement benefit cost for the year then ended by $2.6 (or
$2.0).
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NOTE 13: INCOME TAXES
SAFECO uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal
income tax rate of 35% to income before income taxes and the consolidated
provision for income taxes are as follows:
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - -----------------------------------------------------------------------------------------------------
Computed "Expected" Tax Expense $ 55.5 $116.3 $ 162.0
Tax-Exempt Municipal Bond Income (58.2) (85.6) (103.0)
Dividends Received Deduction (11.9) (13.3) (12.6)
Proration Adjustment 9.0 12.5 14.7
Other 4.8 5.4 4.9
--------------------------------------------
Consolidated Provision (Benefit) for Income Taxes $ (0.8) $ 35.3 $ 66.0
============================================
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 2000, 1999 and 1998 are as
follows:
DECEMBER 31 2000 1999 1998
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
Discounting of Loss and Adjustment Expense Reserves $ 254.9 $263.1 $ 265.5
Unearned Premium Liability 127.4 125.3 117.4
Adjustment to Life Policy Liabilities 54.0 67.8 55.9
Capitalization of Life Policy Acquisition Costs 84.9 70.4 54.6
Postretirement Benefits 40.0 35.7 32.8
Nondeductible Accruals 29.1 39.4 46.0
Alternative Minimum Tax Carryforward 43.1 49.0 33.0
Net Operating Loss Carryforward 73.2 4.9 -
Other 81.4 68.2 48.4
----------------------------------------------
Total Deferred Tax Assets 788.0 723.8 653.6
----------------------------------------------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 212.1 209.6 199.6
Bond Discount Accrual 35.5 34.3 38.2
Accelerated Depreciation 87.2 84.2 76.1
Unrealized Appreciation of Investment Securities (Net of Deferred
Policy Acquisition Costs Valuation Allowance: $0.2; $0.1; $17.2) 478.7 207.7 769.9
Other 98.1 82.7 62.4
----------------------------------------------
Total Deferred Tax Liabilities 911.6 618.5 1,146.2
----------------------------------------------
Net Deferred Tax Asset (Liability) $(123.6) $105.3 $ (492.6)
==============================================
The following table reconciles the deferred tax expense (benefit) in the
Statement of Consolidated Income to the net change in the deferred tax liability
in the Consolidated Balance Sheets:
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ------------------------------------------------------------------------------------------------------------------------
Deferred Tax Benefit $(42.1) $ (35.7) $(38.6)
Net Deferred Tax Assets Acquired in Acquisitions - - (12.9)
Deferred Tax Changes Reported in Shareholders' Equity:
Increase (Decrease) in Liability Related to Unrealized
Appreciation (Depreciation) of Investment Securities,
Net of Deferred Policy Acquisition Costs Valuation Allowance 271.0 (562.2) 97.2
----------------------------------------
Increase (Decrease) in Net Deferred Tax Asset or Liability $228.9 $(597.9) $ 45.7
========================================
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NOTE 14: INTERIM FINANCIAL INFORMATION (UNAUDITED)
- - - - - - --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
- - - - - - --------------------------------------------------------------------------------------------------
Revenues:
2000 $ 1,761.7 $ 1,768.0 $ 1,808.6 $ 1,780.1 $ 7,118.4
1999 1,666.3 1,666.3 1,672.2 1,712.3 6,717.1
1998 1,585.7 1,600.1 1,626.7 1,639.6 6,452.1
Net Income:
2000 $ 29.8 $ 29.1 $ 45.5 $ 10.2 $ 114.6
1999 118.5 73.1 16.1 44.5 252.2
1998 111.6 69.2 74.9* 96.2 351.9
(per share)
Net Income:
2000 $ .23 $ .23 $ .36 $ .08 $ .90
1999 .87 .54 .12 .34 1.90
1998 .79 .49 .54* .70 2.51
Dividends Paid:
2000 $ .37 $ .37 $ .37 $ .37 $ 1.48
1999 .35 .35 .37 .37 1.44
1998 .32 .32 .35 .35 1.34
Market Price Range:+
2000 - High $ 26.56 $ 26.31 $ 27.63 $ 35.69 $ 35.69
- Low 18.56 19.88 20.81 22.94 18.56
1999 - High 43.38 46.44 44.38 30.50 46.44
- Low 37.38 38.69 26.91 22.00 22.00
* Third quarter 1998 net income includes the write-off of Life Company
deferred acquisition costs of $46.8 ($30.4 after tax, $0.22 per share).
+ SAFECO Corporation common stock trades on The Nasdaq Stock Market, Inc.
under the symbol SAFC. The price range represents the high and low closing
sales prices.
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NOTE 15: SEGMENT DATA
Pretax
Underwriting Investment Income Realized Net Income Total
Revenues* Gain (Loss) Income (Loss)+ Gain (Loss) (Loss) Assets
- - - - - - --------------------------------------------------------------------------------------------------------------------------------
2000
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,723.6 $ (123.0) $ 125.3 $ (10.7) $ 45.9 $ 3,146.0
Homeowners 729.8 (116.7) 52.9 (69.9) 21.5 1,382.7
Other Personal 186.7 18.2 16.3 32.1 8.2 419.8
Commercial Lines:
SBI++ 1,171.7 (155.3) 145.1 (22.7) 43.6 3,814.5
SAFECO Commercial 683.4 (155.7) 98.5 (64.8) 26.6 2,492.0
Surety 61.6 11.7 4.6 14.1 4.2 138.0
Other 6.6 (1.1) 17.8 16.5 4.4 405.2
--------- --------- --------- --------- --------- ---------
Total 4,563.4 $ (521.9) 460.5 (105.4) 154.4 $ 89.5 11,798.2
--------- ========= --------- --------- --------- ---------
Life Insurance:
Retirement Services 36.8 392.5 30.0 (25.4) 6,169.1
Settlement Annuities 1.2 495.8 26.4 17.5 6,605.7
Group 313.6 1.9 4.3 (3.5) 192.2
Individual 133.8 207.0 24.6 (3.2) 3,615.0
Other 17.3 78.0 72.3 (1.6) 1,101.6
--------- --------- --------- --------- ---------
Total 502.7 1,175.2 157.6 (16.2) 91.9 17,683.6
--------- --------- --------- --------- ---------
Credit 144.3 19.3 12.8 1,906.3
Asset Management 42.9 12.9 8.5 68.7
Other and Eliminations 98.4 (8.5) (65.3) 1.3 (88.1) 54.7
--------- --------- --------- --------- ---------- ---------
Consolidated Totals $ 5,351.7 $ 1,627.2 $ 19.1 $ 139.5 $ 114.6 $31,511.5
========= ========= ========= ========= ========== =========
1999
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,725.6 $ (63.3) $ 131.0 $ 54.0 $ 27.2 $ 3,238.9
Homeowners 708.3 (48.2) 51.9 (2.6) 12.4 1,345.6
Other Personal 177.7 20.6 15.8 34.1 4.6 402.0
Commercial Lines:
SBI++ 1,017.6 (183.4) 141.7 (53.0) 22.4 3,705.8
SAFECO Commercial 686.4 (107.6) 97.2 (18.3) 15.7 2,434.6
Surety 59.4 15.2 3.0 17.0 2.4 99.8
Other 7.9 - 21.7 20.6 2.6 486.7
--------- --------- --------- --------- --------- ---------
Total 4,382.9 $ (366.7) 462.3 51.8 87.3 $ 172.1 11,713.4
--------- ========= --------- --------- --------- ---------
Life Insurance:
Retirement Services 32.9 410.9 52.6 (1.0) 7,204.8
Settlement Annuities 1.1 486.6 42.2 (5.9) 6,011.3
Group 193.9 1.9 (19.4) 0.3 104.8
Individual 119.8 144.7 30.1 (1.9) 2,959.7
Other 13.2 76.0 73.1 1.6 929.1
--------- --------- --------- --------- ---------
Total 360.9 1,120.1 178.6 (6.9) 112.1 17,209.7
--------- --------- --------- --------- ---------
Credit 119.8 22.6 14.5 1,635.9
Asset Management 44.3 13.6 8.9 76.7
Other and Eliminations 106.4 2.7 (52.0) 37.3 (55.4) (63.0)
--------- --------- --------- --------- ---------- ---------
Consolidated Totals $ 5,014.3 $ 1,585.1 $ 214.6 $ 117.7 $ 252.2 $30,572.7
========= ========= ========= ========= ========== =========
74
43
PRETAX
UNDERWRITING INVESTMENT INCOME REALIZED NET INCOME TOTAL
REVENUES* GAIN (LOSS) INCOME (LOSS)+ GAIN (LOSS) (LOSS) ASSETS
- - - - - - --------------------------------------------------------------------------------------------------------------------------------
1998
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,729.7 $ 11.5 $ 139.5 $ 137.0 $ 30.5 $ 3,594.7
Homeowners 686.7 (56.4) 54.3 (8.2) 13.4 1,456.7
Other Personal 165.2 14.8 16.0 28.6 4.8 430.8
Commercial Lines:
SBI++ 911.6 (72.7) 144.2 60.8 23.6 3,838.1
SAFECO Commercial 640.9 (27.9) 98.9 63.6 16.4 2,575.5
Surety 58.5 19.2 3.4 21.3 2.7 109.3
Other 15.7 2.1 23.9 24.7 3.2 564.4
--------- --------- --------- --------- --------- ---------
Total 4,208.3 $ (109.4) 480.2 327.8 94.6 $ 372.4 12,569.5
--------- ========= --------- --------- --------- ---------
Life Insurance:
Retirement Services 25.2 411.7 12.8 4.3 7,195.1
Settlement Annuities 1.5 449.4 30.6 - 5,972.4
Group 203.1 2.7 (14.1) - 90.1
Individual 110.2 98.4 13.9 1.8 1,985.1
Other 13.4 78.8 75.9 12.2 1,110.9
--------- --------- --------- --------- ---------
Total 353.4 1,041.0 119.1 18.3 58.1 16,353.6
--------- --------- --------- --------- ---------
Credit 109.9 22.7 14.4 1,528.3
Asset Management 39.7 8.5 5.5 67.4
Other and Eliminations 127.3 (2.3) (109.9) (18.3) (98.5) 372.9
--------- --------- --------- --------- --------- ---------
Consolidated Totals $ 4,838.6 $ 1,518.9 $ 368.2 $ 94.6 $ 351.9 $30,891.7
========= ========= ========= ========= ========= =========
* Revenues combined with Investment Income and Realized Gains equal Total
Revenue on the Statement of Consolidated Income.
+ Earnings before realized gains (losses), distributions on capital
securities and income taxes. This is a standard industry measurement and is
used by management as the key measurement of segment profit or loss. It is
presented as a supplement to net income as a measure of profitability.
Property and Casualty Insurance Pretax Income amounts include goodwill
amortization expense of $44.0, $43.8 and $43.0, respectively. The 1998 Life
Insurance amount includes the write-off of $46.8 of deferred acquisition
costs.
++ Safeco Business Insurance (SBI), formerly known as American States Business
Insurance (ASBI).
The operating segments are based on SAFECO's internal reporting structure
and how management analyzes the operating results. These segments generally
represent groups of related products.
The property and casualty operations include four main reportable
underwriting segments. The underwriting segments are Personal Lines, Commercial
Lines, Surety and Other. Personal Lines is further split into Personal Auto,
Homeowners and Other Personal. Commercial Lines is further split into SAFECO
Business Insurance (SBI) and SAFECO Commercial. SBI delivers insurance products
and services to small-to-medium sized businesses while SAFECO Commercial
delivers insurance products and services to medium-to-large complex commercial
clients.
The life operations include five reportable segments which include
Retirement Services, Settlement Annuities, Group, Individual and Other.
Credit and Asset Management are distinct operations managed separately from
the insurance operations. Other and Eliminations includes corporate investment
income, corporate expenses, results of the real estate operations and
eliminations, none of which are individually significant.
75
44
NOTE 15: SEGMENT DATA (CONTINUED)
STATEMENTS OF COMBINED INCOME
Property and Casualty Insurance Companies*
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ----------------------------------------------------------------------------------------------------------------------------
(In Millions)
Net Premiums Written $ 4,539.7 $ 4,483.8 $ 4,256.6
Decrease (Increase) in Unearned Premiums 23.7 (100.9) (48.3)
---------- ---------- ----------
Earned Premiums 4,563.4 4,382.9 4,208.3
---------- ---------- ----------
Losses and Expenses:
Losses and Loss Adjustment Expense 3,770.0 3,431.8 3,063.2
Commissions 689.1 714.1 683.4
Personnel Costs 342.5 322.6 303.7
Taxes Other than Payroll and Income Taxes 116.3 123.2 115.0
Dividends to Policyholders 9.5 10.5 12.3
Other Operating Expenses 144.6 164.7 161.2
Amortization of Deferred Policy Acquisition Costs 796.6 793.0 744.9
Deferral of Policy Acquisition Costs (783.3) (810.3) (766.0)
---------- ---------- ----------
Total 5,085.3 4,749.6 4,317.7
---------- ---------- ----------
Underwriting Loss (521.9) (366.7) (109.4)
Net Investment Income (Excluding realized gain) 460.5 462.3 480.2
Goodwill Amortization (44.0) (43.8) (43.0)
---------- ---------- ----------
Income (Loss) Before Realized Gain and Income Taxes+ (105.4) 51.8 327.8
Realized Gain from Security Investments
and Company-Owned Real Estate Before Income Taxes 154.4 87.3 94.6
---------- ---------- ----------
Income Before Income Taxes 49.0 139.1 422.4
Provision (Benefit)for Income Taxes
(Including tax provision on realized gain: $54.3; $30.0; $32.4) (40.5) (33.0) 50.0
---------- ---------- ----------
Net Income $ 89.5 $ 172.1 $ 372.4
========== ========== ==========
* SAFECO Insurance Company of America / General Insurance Company of America
/ First National Insurance Company of America
SAFECO National Insurance Company / SAFECO Insurance Company of Illinois /
SAFECO Lloyds Insurance Company
SAFECO Surplus Lines Insurance Company / SAFECO Insurance Company of Oregon
/ American States Insurance Company
American Economy Insurance Company / American States Preferred Insurance
Company / Insurance Company of Illinois
American States Insurance Company of Texas / American States Lloyds
Insurance Company / F.B. Beattie & Company, Inc.
SAFECO Select Insurance Services, Inc. / SAFECO UK, Ltd. / R.F. Bailey,
(Underwriting Agencies), Ltd.
+ Income (Loss) Before Realized Gain and Income Taxes is a standard industry
measurement used by management to analyze income from core operations and
is presented to supplement net income as a measure of profitability.
76
45
STATEMENTS OF COMBINED INCOME
Life Companies*
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - -------------------------------------------------------------------------------------------------------------------------
(In Millions)
Premiums and Other Revenue $ 502.7 $ 360.9 $ 353.4
Net Investment Income (Excluding realized gain (loss)) 1,175.2 1,120.1 1,041.0
---------- ---------- ----------
Total 1,677.9 1,481.0 1,394.4
---------- ---------- ----------
Benefits and Expenses:
Policy Benefits 1,232.2 1,072.2 1,045.5
Commissions 104.5 80.8 101.3
Personnel Costs 85.9 72.2 64.5
Taxes Other than Payroll and Income Taxes 23.5 25.2 14.7
Other Operating Expenses 88.7 61.4 79.6
Amortization of Deferred Policy Acquisition Costs 37.6 47.1 39.2
Deferral of Policy Acquisition Costs (52.1) (56.5) (69.5)
---------- ---------- ----------
Total 1,520.3 1,302.4 1,275.3
---------- ---------- ----------
Income Before Realized Gain (Loss), Income Taxes
and Write-Off of Deferred Acquisition Costs 157.6 178.6 119.1
Write-Off of Deferred Acquisition Costs - - (46.8)
---------- ---------- ----------
Income Before Realized Investment Gain (Loss) and Income Taxes+ 157.6 178.6 72.3
Realized Gain (Loss)from Security Investments Before Income Taxes (16.2) (6.9) 18.3
---------- ---------- ----------
Income Before Income Taxes 141.4 171.7 90.6
Provision for Income Taxes (Including tax provision (benefit) on
realized gain (loss): $(5.7); $(2.3); $6.6) 49.5 59.6 32.5
---------- ---------- ----------
Net Income $ 91.9 $ 112.1 $ 58.1
========== ========== ==========
* SAFECO Life Insurance Company / SAFECO National Life Insurance Company /
First SAFECO National Life Insurance Company of New York American States
Life Insurance Company / SAFECO Administrative Services, Inc. / SAFECO
Investment Services, Inc.
+ Income Before Realized Gain and Income Taxes is a standard industry
measurement used by management to analyze income from core operations and
is presented to supplement net income as a measure of profitability.
77
46
NOTE 15: SEGMENT DATA (CONTINUED)
STATEMENTS OF INCOME
SAFECO Credit Company, Inc.
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - ------------------------------------------------------------------------------------------------------------------------
(In Millions)
Interest and Finance Charge Revenues:
Finance Receivables $ 122.7 $ 101.6 $ 87.0
Affiliates 7.2 4.7 11.3
---------- ---------- ----------
Total Revenues 129.9 106.3 98.3
Interest Expense 100.9 74.6 67.0
---------- ---------- ----------
Net Investment Income 29.0 31.7 31.3
Provision for Credit Losses 2.4 2.4 2.4
---------- ---------- ----------
Net Investment Income After Provision for Credit Losses 26.6 29.3 28.9
Other Revenue 14.4 13.5 11.6
---------- ---------- ----------
Total 41.0 42.8 40.5
---------- ---------- ----------
Operating Expenses:
Personnel Costs 11.3 10.6 9.1
General and Administrative 10.4 9.6 8.7
---------- ---------- ----------
Total 21.7 20.2 17.8
---------- ---------- ----------
Income Before Income Taxes 19.3 22.6 22.7
Provision for Income Taxes 6.5 8.1 8.3
---------- ---------- ----------
Net Income $ 12.8 $ 14.5 $ 14.4
========== ========== ==========
78
47
STATEMENTS OF COMBINED INCOME
Asset Management Companies*
Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998
- - - - - - --------------------------------------------------------------------------------
(In Millions)
REVENUES
Management and Advisory Fees $27.7 $30.9 $27.8
Transfer Agent Fees 5.2 7.0 5.6
Other 10.0 6.4 6.3
---------------------------
Total 42.9 44.3 39.7
---------------------------
EXPENSES
Personnel Costs 8.3 10.4 7.8
Marketing and Shareholder Communication 0.4 0.7 1.9
Other 21.3 19.6 21.5
---------------------------
Total 30.0 30.7 31.2
---------------------------
Income Before Income Taxes 12.9 13.6 8.5
Provision for Income Taxes 4.4 4.7 3.0
---------------------------
Net Income $ 8.5 $ 8.9 $ 5.5
===========================
* SAFECO Asset Management Company/SAFECO Securities, Inc./SAFECO Services
Corporation/SAFECO Trust Company
79
48
SUMMARY OF GROWTH (UNAUDITED)
2000 1999 1998
- - - - - - -----------------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
REVENUES (EXCLUDING REALIZED GAIN)
Insurance:
Property and Casualty (Gross premiums written) $4,709.1 $4,645.0 $4,441.8
Life 502.7 360.9 353.4
Net Investment Income:
Property and Casualty 460.5 462.3 480.2
Life 1,175.2 1,120.1 1,041.0
Other 6.0 2.7 (2.3)
Real Estate -- -- 77.9
Credit (Including affiliate loans) 144.3 119.8 109.9
Asset Management 42.9 44.3 39.7
Talbot Financial 78.9 71.9 57.6
Other 20.5 39.2 3.1
----------------------------------------
Total $7,140.1 $6,866.2 $6,602.3
========================================
INCOME SUMMARY
Income (Loss), Net of Income Taxes, Before Realized Gain:*
Property and Casualty $ (10.6) $ 114.8 $ 310.2
Life 102.5 116.7 46.4
Real Estate -- -- 3.4
Credit 12.8 14.5 14.4
Asset Management 8.5 8.9 5.5
Corporate (44.2) (34.4) (45.0)
----------------------------------------
Total 69.0 220.5 334.9
Realized Gain, Net of Income Taxes 90.4 76.5 61.9
----------------------------------------
Income Before Distributions on Capital Securities 159.4 297.0 396.8
Distributions on Capital Securities, Net of Tax (44.8) (44.8) (44.9)
Cumulative Effect of Accounting Changes -- -- --
----------------------------------------
Net Income $ 114.6 $ 252.2 $ 351.9
========================================
STATISTICS PER SHARE OF COMMON STOCK+
Net Income - Diluted:
Income Before Realized Gain*++ $ .19 $ 1.32 $ 2.07
Realized Gain .71 .58 .44
Cumulative Effect of Accounting Changes -- -- --
Net Income .90 1.90 2.51
Average Number of Shares 127.8 132.8 139.9
Net Income - Basic:
Income Before Realized Gain*++ .19 1.32 2.08
Realized Gain .71 .58 .44
Cumulative Effect of Accounting Changes -- -- --
Net Income .90 1.90 2.52
Average Number of Shares 127.8 132.7 139.4
Dividends Paid 1.48 1.44 1.34
Market Price:
High 35.69 46.44 55.00
Low 18.56 22.00 39.88
Close 32.88 24.88 42.94
Shareholders' Equity:+++
Book Value 36.79 33.31 40.92
With Securities at Market Value, Net of Tax 36.79 33.50 43.49
* Income Before Realized Gain is a standard industry measurement used by
management to analyze income from core operations and is presented to
supplement net income as a measure of profitability.
+ Share amounts are adjusted for stock splits.
++ Net income per share amounts are after distributions on capital
securities.
+++ Effective October 1, 2000, the fixed maturities held-to-maturity
portfolio was reclassified to available-for-sale.
80
49
1997 1996 1995 1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------------------------------------
$2,987.4 $2,463.5 $2,366.9 $2,278.0 $2,134.5 $1,937.1 $1,830.2 $1,792.8
290.2 265.9 261.6 276.8 306.0 328.5 332.7 312.0
327.0 281.6 291.5 283.5 277.6 280.8 286.1 283.3
916.3 836.7 778.2 706.2 668.2 623.6 557.4 476.2
1.4 (1.6) 5.6 1.9 6.0 (1.4) 3.2 5.3
75.1 79.9 75.0 107.3 78.3 187.2 274.4 254.7
96.2 84.3 71.8 58.2 54.0 51.3 54.4 45.2
26.2 23.2 18.5 15.1 13.2 13.1 10.8 9.0
49.7 38.5 32.1 25.5 -- -- -- --
0.9 -- -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------
$4,770.4 $4,072.0 $3,901.2 $3,752.5 $3,537.8 $3,420.2 $3,349.2 $3,178.5
========================================================================================================================
$ 260.2 $ 270.6 $ 256.4 $ 192.7 $ 217.2 $ 187.1 $ 145.4 $ 183.7
97.0 88.8 89.0 85.0 76.9 75.6 79.7 77.6
6.2 8.4 5.9 6.6 6.1 6.0 5.9 6.1
14.1 12.2 8.9 7.4 6.4 6.1 6.4 4.5
4.9 5.1 4.7 4.1 4.3 4.3 3.4 3.0
(16.3) (4.9) (7.5) (7.3) (3.9) (7.6) (3.9) (3.2)
------------------------------------------------------------------------------------------------------------------------
366.1 380.2 357.4 288.5 307.0 271.5 236.9 271.7
78.7 58.8 41.6 25.9 118.9 39.8 22.7 6.7
------------------------------------------------------------------------------------------------------------------------
444.8 439.0 399.0 314.4 425.9 311.3 259.6 278.4
(14.8) -- -- -- -- -- -- --
-- -- -- -- 2.9 -- -- --
------------------------------------------------------------------------------------------------------------------------
$ 430.0 $ 439.0 $ 399.0 $ 314.4 $ 428.8 $ 311.3 $ 259.6 $ 278.4
========================================================================================================================
$ 2.71 $ 3.01 $ 2.83 $ 2.28 $ 2.43 $ 2.15 $ 1.87 $ 2.14
.60 .46 .33 .21 .94 .31 .18 .05
-- -- -- -- .02 -- -- --
3.31 3.47 3.16 2.49 3.39 2.46 2.05 2.19
129.8 126.5 126.4 126.4 126.5 126.5 126.5 126.9
2.72 3.02 2.84 2.29 2.44 2.17 1.89 2.16
.61 .46 .33 .21 .95 .31 .18 .05
-- -- -- -- .02 -- -- --
3.33 3.48 3.17 2.50 3.41 2.48 2.07 2.21
129.2 126.1 126.0 125.9 125.8 125.6 125.5 126.2
1.22 1.11 1.02 .94 .86 .78 .71 .64
54.47 41.63 37.63 29.81 33.25 29.56 24.38 21.06
36.75 30.88 25.25 23.69 27.00 21.19 15.63 12.69
48.75 39.44 34.50 26.00 27.50 28.63 24.38 16.44
38.69 32.58 31.61 22.47 22.04 19.49 17.70 15.75
40.77 33.52 33.39 21.93 28.47 23.92 21.92 16.57
81
50
SUMMARY OF GROWTH (UNAUDITED)-(CONTINUED)
Additional Supplemental Data
2000 1999 1998
- - - - - - ----------------------------------------------------------------------------------------------------------------------
(In Millions Except Ratios)
PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE
Personal Auto $ 1,726.4 $ 1,725.6 $ 1,745.8
Homeowners 756.6 736.5 717.4
Other 229.1 225.6 217.2
---------- ---------- ----------
Total Personal 2,712.1 2,687.7 2,680.4
SAFECO Business Insurance 1,159.5 1,138.0 952.3
SAFECO Commercial 703.8 701.5 687.2
Surety 125.2 110.7 107.2
Other 8.5 7.1 14.7
---------- ---------- ----------
Gross Premiums Written 4,709.1 4,645.0 4,441.8
Ceded Reinsurance Premiums 169.4 161.2 185.2
---------- ---------- ----------
Net Premiums Written $ 4,539.7 $ 4,483.8 $ 4,256.6
========== ========== ==========
OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE*
Losses 70.46% 66.34% 61.34%
Adjustment Expenses 12.16 11.96 11.45
Underwriting Expenses 28.61 29.82 29.52
Dividends to Policyholders .21 .24 .29
---------- ---------- ----------
Combined Losses and Expenses 111.44% 108.36% 102.60%
========== ========== ==========
Net Premiums Written to Policyholders' Surplus 2.0:1 1.6:1 1.3:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty Insurance:
Underwriting $ (521.9) $ (366.7) $ (109.4)
Nonrecurring Acquisition Charges - - -
Investment 460.5 462.3 480.2
Goodwill Amortization (44.0) (43.8) (43.0)
Proposition 103 Settlement - - -
Life Insurance 157.6 178.6 119.1
Write-Off of Deferred Acquisition Costs - - (46.8)
Real Estate - - 5.3
Credit 19.3 22.6 22.7
Asset Management 12.9 13.6 8.5
Corporate (65.3) (52.0) (68.4)
---------- ---------- ----------
Total $ 19.1 $ 214.6 $ 368.2
========== ========== ==========
SHAREHOLDERS' EQUITY+
Book Value $ 4,695.8 $ 4,294.1 $ 5,575.8
With Securities at Market Value, Net of Tax 4,695.8 4,319.3 5,925.7
Long-Term Debt from Operations (Excludes Capital Securities) 792.0 495.4 625.6
Total Assets 31,511.5 30,572.7 30,891.7
* Operating ratios are GAAP basis and are based on expenses expressed as a
percentage of earned premiums. Ratios exclude goodwill amortization,
nonrecurring acquisition charges in 1997 and Proposition 103 settlement in
1993.
+ Effective October 1, 2000, the fixed maturities held-to-maturity portfolio
was reclassified to available-for-sale.
82
51
1997 1996 1995 1994 1993 1992 1991 1990
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
$ 1,295.2 $1,087.0 $1,043.6 $1,013.4 $ 977.1 $ 907.0 $ 864.1 $ 822.2
547.8 469.1 440.2 403.7 362.4 310.8 294.2 274.5
182.0 170.0 163.1 144.6 126.4 109.1 92.6 93.0
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
2,025.0 1,726.1 1,646.9 1,561.7 1,465.9 1,326.9 1,250.9 1,189.7
195.7 - - - - - - -
642.1 607.3 588.1 591.9 544.2 492.0 452.6 473.0
99.5 103.2 100.1 90.2 84.2 79.7 79.1 75.9
25.1 26.9 31.8 34.2 40.2 38.5 47.6 54.2
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
2,987.4 2,463.5 2,366.9 2,278.0 2,134.5 1,937.1 1,830.2 1,792.8
159.2 150.4 159.9 174.5 134.3 116.7 200.5 104.8
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
$ 2,828.2 $2,313.1 $2,207.0 $2,103.5 $2,000.2 $1,820.4 $1,629.7 $1,688.0
========== ======== ======== ======== ======== ======== ======== ========
58.40% 59.09% 60.04% 64.70% 60.21% 63.93% 67.81% 65.50%
11.18 10.37 10.58 9.72 9.78 10.55 10.72 11.67
28.47 28.14 28.39 28.24 28.43 28.72 29.33 29.24
.66 .71 .70 1.11 1.07 .91 .76 .75
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
98.71% 98.31% 99.71% 103.77% 99.49% 104.11% 108.62% 107.16%
========== ======== ======== ======== ======== ======== ======== ========
1.3:1 1.1:1 1.2:1 1.4:1 1.3:1 1.3:1 1.4:1 1.6:1
$ 36.2 $ 38.4 $ 6.3 $ (77.4) $ 9.9 $ (72.0) $ (141.1) $ (119.2)
(60.0) - - - - - - -
327.0 281.6 291.5 283.5 277.6 280.8 286.1 283.3
(11.0) - - - - - - -
- - - - (40.0) - - -
147.9 136.7 135.6 131.0 125.3 123.6 124.1 118.5
- - - - - - - -
9.6 13.0 9.1 10.2 10.1 8.4 8.5 9.1
21.5 19.1 13.3 10.8 10.2 9.0 9.5 6.8
7.5 7.6 6.9 6.4 6.5 6.5 5.2 4.6
(25.5) (8.0) (13.2) (13.8) (10.3) (13.6) (9.7) (8.8)
- - - - - - ---------- -------- -------- -------- -------- -------- -------- --------
$ 453.2 $ 488.4 $ 449.5 $ 350.7 $ 389.3 $ 342.7 $ 282.6 $ 294.3
========== ======== ======== ======== ======== ======== ======== ========
$ 5,461.7 $4,115.3 $3,982.6 $2,829.5 $2,774.4 $2,448.1 $2,221.1 $1,975.7
5,755.1 4,233.4 4,206.2 2,761.3 3,583.5 3,005.4 2,750.5 2,078.7
632.9 453.9 503.6 534.2 600.2 504.6 523.6 451.3
29,467.8 19,917.7 18,767.8 15,901.7 14,807.3 13,391.1 12,113.9 10,683.5
83