1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 1-6563
SAFECO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer I.D. No.)
SAFECO PLAZA, Seattle, Washington 98185
(Address of principal executive offices)
(206) 545-5000
(Telephone)
127,746,347 shares of no par value common stock were outstanding at March
31, 2001.
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES [X] NO [ ].
2
SAFECO CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS AND SIGNATURES
- - --------------------------------------------------------------------------------
Part I - Financial Information
Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 2001 and December 31, 2000 3
Statements of Consolidated Income (Loss) and Retained Earnings
for the Three Months Ended March 31, 2001 and 2000 5
Statements of Consolidated Cash Flows
for the Three Months Ended March 31, 2001 and 2000 6
Statements of Consolidated Comprehensive Income (Loss)
for the Three Months Ended March 31, 2001 and 2000 7
Condensed Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
Part II - Other Information
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SAFECO CORPORATION
---------------------------------
Registrant
/s/ ROD A. PIERSON
---------------------------------
Rod A. Pierson
Senior Vice President
Dated May 14, 2001 and Chief Financial Officer
/s/ H. PAUL LOWBER
---------------------------------
H. Paul Lowber
Vice President, Controller
Dated May 14, 2001 and Chief Accounting Officer
-2-
3
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Millions)
- - --------------------------------------------------------------------------------
March 31 December 31
ASSETS 2001 2000
------ ----------- ----------
(Unaudited)
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $19,416.2; $20,388.1) $ 20,164.4 $ 20,830.2
Marketable Equity Securities, at Market Value
(Cost: $800.4; $875.9) 1,590.0 1,815.4
Mortgage Loans 818.2 823.0
Other Investment Assets 196.7 160.3
Short-Term Investments 504.5 182.3
----------- ----------
Total Investments 23,273.8 23,811.2
Cash 247.2 186.3
Accrued Investment Income 328.4 327.8
Premiums and Other Service Fees Receivable 1,014.4 1,063.0
Other Notes and Accounts Receivable 130.5 37.6
Deferred Income Tax Recoverable 171.8 --
Reinsurance Recoverables 462.8 461.7
Deferred Policy Acquisition Costs 607.1 605.4
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 533.5 440.1
Goodwill and Intangibles (Accumulated amortization: $51.6; $202.8) (Note 3) 91.2 1,307.4
Other Assets 212.2 260.9
Net Assets of Discontinued Credit Operations (Note 1) 755.2 481.2
Separate Account Assets 1,147.3 1,275.1
----------- -----------
TOTAL $ 28,975.4 $ 30,257.7
=========== ===========
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 12.
-3-
4
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Continued)
(In Millions)
- - --------------------------------------------------------------------------------
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
------------------------------------ - ----------- -----------
(Unaudited)
Losses and Adjustment Expense $ 4,665.2 $ 4,686.9
Life Policy Liabilities 323.0 342.1
Unearned Premiums 1,834.7 1,836.5
Funds Held Under Deposit Contracts 14,076.0 14,085.7
Debt:
Commercial Paper 269.2 349.8
Medium-Term Notes Due 2003 313.4 300.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($6.3 maturing within one year) 79.1 80.7
Other Liabilities 1,133.2 1,269.1
Current Income Taxes 13.2 25.8
Deferred Income Taxes
(Includes tax on unrealized appreciation of investment securities:
$534.4; $483.8) -- 67.2
Separate Account Liabilities 1,147.3 1,275.1
----------- -----------
Total Liabilities 24,254.3 24,718.9
----------- -----------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 843.1 843.0
----------- -----------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options: (6.8, 7.1)
Shares Issued and Outstanding: (127.7; 127.6) 837.3 834.5
Retained Earnings 2,059.5 2,966.4
Total Accumulated Other Comprehensive Income - Net of Tax
Unrealized Appreciation of Investment Securities 988.5 894.9
Unrealized Depreciation from Derivative Instruments and Hedging Activities (7.3) --
----------- -----------
Total Shareholders' Equity 3,878.0 4,695.8
----------- -----------
TOTAL $ 28,975.4 $ 30,257.7
=========== ===========
See Condensed Notes to Consolidated Financial Statements on pages 8 through 12.
-4-
5
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED INCOME (LOSS) AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- - --------------------------------------------------------------------------------
Three Months Ended
March 31
----------------------------
2001 2000
------------ ------------
(Unaudited)
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 1,116.5 $ 1,131.7
Life Premiums and Other Revenues 134.6 125.2
------------ ------------
Total 1,251.1 1,256.9
Asset Management 9.1 10.4
Other 24.5 25.9
Net Investment Income 414.8 405.7
Realized Investment Gain 33.4 31.1
------------ ------------
Total 1,732.9 1,730.0
------------ ------------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,223.1 1,238.6
Commissions 197.9 201.8
Personnel Costs 127.3 118.2
Interest 17.0 17.8
Goodwill Amortization (Note 3) 15.2 14.8
Write-Off of Goodwill (Note 3) 1,201.0 --
Other 113.3 104.4
Amortization of Deferred Policy Acquisition Costs 206.2 212.4
Deferral of Policy Acquisition Costs (213.4) (212.1)
------------ ------------
Total 2,887.6 1,695.9
------------ ------------
Income (Loss) from Continuing Operations before Income Taxes (1,154.7) 34.1
------------ ------------
Provision (Benefit) for Income Taxes:
Current 6.2 (1.0)
Deferred (289.2) (2.6)
------------ ------------
Total (283.0) (3.6)
------------ ------------
Income (Loss) from Continuing Operations before Distributions on
Capital Securities (871.7) 37.7
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
------------ ------------
Income (Loss) from Continuing Operations (882.9) 26.5
Income from Discontinued Credit Operations, Net of Tax 2.2 3.3
------------ ------------
Income (Loss) before Cumulative Effect of Change in Accounting Principle (880.7) 29.8
Cumulative Effect of Change in Accounting Principle - FAS 133, Net of Tax (2.1) --
------------ ------------
Net Income (Loss) (882.8) 29.8
Retained Earnings, Beginning of Period 2,966.4 3,062.7
Amortization of Underwriting Compensation on Capital Securities (0.1) (0.1)
Dividends Declared (23.6) (47.2)
Common Stock Reacquired (0.4) (21.4)
------------ ------------
Retained Earnings, End of Period $ 2,059.5 $ 3,023.8
============ ============
Net Income (Loss) Per Share of Common Stock:
Income (Loss) from Continuing Operations $ (6.91) $ 0.20
Income from Discontinued Credit Operations 0.02 0.03
------------ ------------
Income (Loss) before Cumulative Effect of Change in Accounting Principle (6.89) 0.23
Cumulative Effect of Change in Accounting Principle (0.02) --
------------ ------------
Net Income (Loss): Diluted $ (6.91) $ 0.23
============ ============
Basic $ (6.91) $ 0.23
============ ============
Dividends Paid to Common Shareholders $ 0.37 $ 0.37
============ ============
Average Number of Shares Outstanding During the Period: Diluted 127.7 128.2
============ ============
Basic 127.6 128.2
============ ============
See Condensed Notes to Consolidated Financial Statements on pages 8 through 12.
-5-
6
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Millions)
- - --------------------------------------------------------------------------------
Three Months Ended
March 31
-------------------------
2001 2000
---------- ----------
(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 1,234.5 $ 1,196.3
Dividends and Interest Received 399.3 373.3
Other Operating Receipts 59.1 56.8
Insurance Claims and Policy Benefits Paid (1,115.3) (987.6)
Underwriting, Acquisition and Insurance Operating Costs Paid (406.7) (456.0)
Interest Paid and Distributions on Capital Securities (57.5) (49.8)
Other Operating Costs Paid (47.8) (33.3)
Income Taxes (Paid) Refunded (9.3) 3.4
---------- ----------
Net Cash Provided by Operating Activities 56.3 103.1
---------- ----------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (537.9) (1,269.3)
Fixed Maturities Held-to-Maturity - (0.3)
Equities (69.8) (159.0)
Other Investment Assets (76.2) (95.8)
Maturities of Fixed Maturities Available-for-Sale 212.5 209.4
Maturities of Fixed Maturities Held-to-Maturity - 1.4
Sales of:
Fixed Maturities Available-for-Sale 1,214.2 563.2
Equities 158.8 137.3
Other Investment Assets 116.6 190.1
Net Decrease (Increase) in Short-Term Investments (322.2) 196.0
Other (28.3) (29.1)
---------- ----------
Net Cash Provided by (Used in) Investing Activities 667.7 (256.1)
---------- ----------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 89.9 480.4
Return of Funds Held Under Deposit Contracts (372.6) (330.9)
Proceeds from Borrowings - 300.0
Repayment of Borrowings (1.7) (0.4)
Net Proceeds (Repayment) of Short-Term Borrowings (75.1) 84.2
Common Stock Reacquired (0.5) (30.1)
Dividends Paid to Shareholders (47.2) (47.7)
Other 18.1 10.1
---------- ----------
Net Cash (Used in) Provided by Financing Activities (389.1) 465.6
---------- ----------
Cash Used in Discontinued Credit Operations (274.0) (312.6)
Net Increase in Cash 60.9 0.0
Cash at the Beginning of Period 186.3 103.1
---------- ----------
Cash at the End of Period $ 247.2 $ 103.1
========== ==========
(continued)
See Condensed Notes to Consolidated Financial Statements on pages 8 through 12.
-6-
7
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
STATEMENTS OF CONSOLIDATED CASH FLOWS (Continued)
(In Millions)
- - --------------------------------------------------------------------------------
Three Months Ended
March 31
------------------------
2001 2000
---------- --------
(Unaudited)
Net Income (Loss) $ (882.8) $ 29.8
---------- --------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Income from Discontinued Credit Operations , Net of Tax (2.2) (3.3)
Cumulative Effect of Change in Accounting Principle 2.1 -
Realized Investment Gain (33.4) (31.1)
Amortization and Depreciation 21.9 31.5
Write-off of Goodwill 1,201.0 --
Amortization of Fixed Maturity Investments (16.9) (9.0)
Deferred Income Tax Benefit (289.2) (2.6)
Interest Expense on Deposit Contracts 141.2 126.5
Other Adjustments (0.3) (2.4)
Changes in:
Losses and Adjustment Expense (21.7) 106.5
Life Policy Liabilities (19.1) 25.2
Unearned Premiums (1.8) 23.9
Accrued Income Taxes (12.6) (7.8)
Accrued Interest on Accrual Bonds (10.9) (11.7)
Accrued Investment Income (0.6) (14.9)
Deferred Policy Acquisition Costs (1.7) (0.3)
Other Assets and Liabilities (16.7) (157.2)
---------- --------
Total Adjustments 939.1 73.3
---------- --------
Net Cash Provided by Operating Activities $ 56.3 $ 103.1
========== ========
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- - --------------------------------------------------------------------------------
Three Months Ended
March 31
--------------------
2001 2000
-------- -------
(Unaudited)
Net Income (Loss) $ (882.8) $ 29.8
Other Comprehensive Income, Net of Taxes:
Change in Unrealized Appreciation of Investment Securities 93.6 23.2
Change in Unrealized Depreciation from Derivative Instruments
and Hedging Activities (7.3) --
-------- -------
Comprehensive Income (Loss) $ (796.5) $ 53.0
======== =======
See Condensed Notes to Consolidated Financial Statements on pages 8 through 12.
-7-
8
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
Note 1 - Nature of Operations and Summary of Significant Accounting Policies
SAFECO Corporation ("SAFECO" or the "Company") is a Washington corporation that
owns operating subsidiaries in various segments of insurance and other
financially related businesses. SAFECO's businesses operate on a nationwide
basis.
The accompanying unaudited consolidated financial statements and condensed notes
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the information and notes
required by accounting principles generally accepted in the United States for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal and recurring adjustments) considered necessary for a fair
presentation of results for the interim periods have been included. It is
suggested that these consolidated financial statements and condensed notes be
read in conjunction with the financial statements and notes incorporated by
reference in the Corporation's Form 10-K for the year ended December 31, 2000
which has been previously filed with the Securities and Exchange Commission.
On March 14, 2001, the Corporation announced its intentions to sell its credit
subsidiary. On March 31, 2001, a plan of disposal was formalized establishing
the measurement date as March 31, 2001; consequently, SAFECO Credit Company,
Inc. is now accounted for as a discontinued operation. See additional disclosure
regarding segment data (Note 4) on page 11 of this report.
Effective March 31, 2001, SAFECO elected to change its accounting policy for
assessing goodwill from one based on undiscounted cash flows to one based on a
market-value method. The Company believes that the market-value method is a
preferable way to assess the current value of goodwill. As a result, SAFECO
recorded a write-off of $1,201.0 ($916.9 after-tax or $7.17 per share). See
additional disclosure in Note 3 on page 10 of this report.
Certain reclassifications have been made to the prior year financial information
to conform to the current year classifications.
Note 2 - New Accounting Standards
The Financial Accounting Standards Board ("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 embedded 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 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.
Effective January 1, 2001, the Company adopted SFAS 133, as amended. All
derivatives, whether designated anew in hedging relationships on January 1, 2001
or not, are required to be recorded on the balance sheet at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability (fair value hedge), (b) a hedge of the exposure to variable cash flows
of a forecasted transaction (cash flow hedge), or (c) a hedge of the foreign
currency exposure of a net investment in foreign operation.
As a result of adopting SFAS 133 on January 1, 2001 and in accordance with the
transition provisions, the Company recorded a loss of $3.2 ($2.1 after-tax or
$0.02 per share), which represents the cumulative effect of the adoption in the
Statements of Consolidated Income. In addition, the Company also recorded a loss
of $3.0 ($1.9 after-tax) to accumulated other comprehensive income (AOCI)
related to the adoption impact of SFAS 133.
-8-
9
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - -------------------------------------------------------------------------------
For the three months ended March 31, 2001, Realized Investment Gain included a
gain of $2.3 related to fair value hedge ineffectiveness. Interest expense
included a loss of $1.7 that was comprised of $1.6 related to cash flow hedge
ineffectiveness and $0.1 for the change in fair value of swaptions not
designated as hedging instruments. AOCI included a loss of $8.5 ($5.4 after-tax)
for the changes in fair value of cash flow hedges.
The Company's derivatives and hedges are described further below:
Fair Value Hedges
The Company uses interest rate swaps to offset the change in value of certain
fixed rate assets and liabilities. In calculating the effective portion of the
fair value hedges, the changes in the fair value of the hedge and the hedged
item are recognized in realized gains in the Statements of Consolidated Income.
Differences between the changes in the fair value of the hedge and the hedged
item represents hedge ineffectiveness and are recognized in realized gain or
loss. Fair value hedge ineffectiveness resulted in a gain of approximately $2.3
for the three months ended March 31, 2001. At January 1, 2001, the cumulative
effect of the adoption of SFAS 133 related to fair value hedges was a loss of
$2.6 ($1.7 after-tax). This cumulative loss at adoption was reported as the
cumulative effect of change in accounting principle reported in the Statements
of Consolidated Income.
Cash Flow Hedges
The Company also uses interest rate swaps to hedge the variability of future
cash flows associated with variable rate debt. In calculating the effective
portion of cash flow hedges, the changes in the fair value of the hedge and the
related debt are recognized in AOCI. Differences between the changes in the fair
value of the hedge and the hedged items represents hedge ineffectiveness and are
recognized in interest expense. Cash flow hedge ineffectiveness resulted in a
additional interest expense of $2.0 for the three months ended March 31, 2001.
At March 31, 2001, the Company recorded a loss of $8.5 ($5.4 after-tax) related
to the current quarter changes in fair value of the cash flow hedge in AOCI. At
January 1, 2001, the cumulative effect of the adoption of SFAS 133 was a loss of
$3.0 ($1.9 after-tax) and was recorded to AOCI. At March 31, 2001, the sum of
the cumulative effect at adoption and current quarter impact loss totaling $11.5
($7.3 after-tax) was recorded in AOCI related to changes in fair value of the
cash flow hedges. The Company estimates that $1.9 of derivative instrument and
hedging activity gains included in AOCI will be reclassified into earnings
during the next twelve months.
Other Derivatives
The Company owns a few derivatives (swaptions) that do not qualify for hedge
treatment as defined under SFAS 133. These swaptions are interest rate swaps
written by financial institutions that can be extended at expiration for another
term at the financial institution's option. Changes in the fair value of the
swaptions are recognized in interest expense. As of March 31, 2001, a loss of
$0.1 was reported as an increase to interest expense. At January 1, 2001, the
cumulative effect of the adoption of SFAS 133 related to the swaptions was a
loss of $0.6 ($0.4 after-tax). This cumulative loss at adoption was reported as
the cumulative effect of change in accounting principle reported in the
Statements of Consolidated Income.
In 1997, the Company introduced an equity-indexed annuity (EIA) product that
credits the policyholder based on a percentage of the gain in the S&P 500 Index.
The Company has a hedging program with the objective to hedge the exposure to
changes in the S&P 500. The program consists of buying and writing S&P 500
options, buying Treasury interest rate futures and trading S&P 500 futures and
swaps. Sales of the EIA product were suspended in the fourth quarter of 1998. As
permitted under a grandfathering clause in SFAS 133, the Company elected not to
apply the fair value adjustment requirement of this statement to the embedded
derivatives contained in the liability related to EIA products sold prior to
January 1, 1999. The change in fair value of the options, futures and swaps used
to hedge the EIA liability is recognized as an adjustment to Realized Investment
Gain in the Statements of Consolidated Income. As of March 31, 2001, the Company
recorded gains of $1.6 on these options, futures and swaps.
-9-
10
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
------------------------------------------------------------------------------
SAFECO has a wholly-owned subsidiary that engages in a limited amount of
derivative trading. Trading activities include the writing of S&P Index options
and selling credit protection through credit default swaps. These activities are
not designated as hedging activities under SFAS 133 and changes in the fair
values of these investments and the realized gain or loss are recognized in Net
Investment Income. As of March 31, 2001, the Company recorded changes in the
fair value and realized gains totaling $1.5 on these activities.
The Company formally documents all relationships between the hedging instruments
and hedged items, as well as its risk-management objectives and strategies for
undertaking various hedge transactions. The Company links all hedges that are
designated as fair value hedges to specific assets or liabilities on the balance
sheet. The Company links all hedges that are designated as cash flow hedges to
forecasted transactions. The Company also assesses, both at the inception of the
hedge and on an on-going basis, whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge, the Company discontinues hedge accounting prospectively.
No fair value hedges or cash flow hedges were derecognized or discontinued
during the three months ended March 31, 2001.
Note 3 - Change in Accounting for Goodwill
Effective March 31, 2001, the Company elected to change its method for assessing
the recoverability of goodwill from one based on undiscounted cash flows to one
based on a market-value method. The Company believes that this change in
accounting principle to the market-value method is a preferable way to assess
the current value of goodwill. As a result of the change to a market-value
methodology, the Company wrote off all its goodwill as of March 31, 2001. The
pretax amount of the write-off was $1,201.0; the related deferred tax benefit
amount was $284.1. On an after-tax basis, the write-off totaled $916.9 or $7.17
per share.
The market value method used to assess the recoverability of goodwill compares
the Company's market capitalization (stock price multiplied by shares
outstanding) to the reported book value (total shareholders' equity) of the
Company. Given the extent of the shortfall of market capitalization compared to
the reported book value as of March 31, 2001 and that a similar shortfall had
existed for almost two years, the Company concluded that under the new method
the entire goodwill asset was impaired and a write-off of the full amount was
necessary. The vast majority of this goodwill (98%) resulted from the 1997
acquisition of American States Financial Corporation whose operations have been
fully integrated into those of the Company.
The details of the write-off by business segment are presented below.
GROSS WRITE-OFF,
SEGMENT WRITE-OFF TAX BENEFIT NET OF TAX
----------------------------- ---------- ----------- ----------
Property & Casualty Insurance $ 1,152.1 $ 273.9 $ 878.2
Life Insurance 32.3 6.7 25.6
Other 16.6 3.5 13.1
---------- -------- --------
Total $ 1,201.0 $ 284.1 $ 916.9
========== ======== ========
-10-
11
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - -------------------------------------------------------------------------------
Note 4 - Segment Data
The operating segments are presented 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. Commercial Lines is further split into Business Insurance and Commercial
Insurance. Business Insurance delivers insurance products and services to
small-to-medium sized businesses, while Commercial Insurance delivers insurance
products and services to medium-to-large complex commercial clients.
The life operations include five reportable segments that include Retirement
Services, Income Annuities, Group, Individual and Other.
Asset Management and Credit are distinct operations managed separately from the
insurance operations. As disclosed in Note 1 on page 8, SAFECO Credit is now
accounted for as a discontinued operation.
Other and Eliminations include corporate investment income, corporate expenses,
results of the real estate operations and eliminations, none of which are
individually significant.
-11-
12
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - -------------------------------------------------------------------------------
Note 4 - Segment Data (continued)
THREE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
MARCH 31, 2001 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
- - ------------------------------ ------------ ------------ -------------- ------------ -------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 427.5 $ (27.6) $ 3.8 $ 2,863.6
Homeowners 182.2 (33.1) (19.7) 1,257.5
Other Personal 49.1 1.0 5.3 382.6
Commercial Lines:
Business Insurance 271.9 (27.4) 6.2 3,481.6
Commercial Insurance 166.7 (43.8) (20.4) 2,267.9
Surety 17.9 2.2 3.4 134.3
Other 1.2 1.0 (1.1) 365.9
Write-off of Goodwill -- -- (1,152.1) --
---------- ------- ---------- -----------
Total 1,116.5 $(127.7) (1,174.6) $ (850.4) 10,753.4
---------- ======= ---------- -----------
Life Insurance:
Retirement Services 7.7 3.4 5,918.6
Income Annuities 0.1 10.4 6,742.9
Group 83.9 6.7 158.7
Individual 38.0 6.8 3,684.1
Other 4.9 18.9 1,097.8
Write-off of Goodwill -- (32.3) --
---------- ---------- -----------
Total 134.6 13.9 10.4 17,602.1
---------- ---------- -----------
Asset Management 9.1 1.9 1.2 65.7
Discontinued Credit Operations -- -- 1.7 755.2
Other and Eliminations 24.5 (29.3) (45.7) (201.0)
---------- ---------- ----------- -----------
Consolidated Totals $ 1,284.7 $ (1,188.1) $ (882.8) $ 28,975.4
========== ========== =========== ===========
THREE MONTHS ENDED UNDERWRITING PRETAX INCOME NET INCOME TOTAL
MARCH 31, 2000 REVENUES GAIN (LOSS) (LOSS)* (LOSS) ASSETS
- - ------------------------------ ------------ ------------ -------------- ------------ -------------
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 427.5 $ (39.8) $ (8.1) $ 3,111.3
Homeowners 178.9 (14.1) (1.3) 1,308.1
Other Personal 45.6 4.4 8.3 393.8
Commercial Lines:
Business Insurance 287.4 (59.0) (22.4) 3,782.1
Commercial Insurance 174.8 (26.5) (1.7) 2,448.2
Surety 15.5 4.7 5.4 99.8
Other 2.0 (2.3) (8.3) 435.5
--------- ---------- ---------- -----------
Total 1,131.7 $ (132.6) (28.1) $ 23.9 11,578.8
--------- ========== ---------- -----------
Life Insurance:
Retirement Services 10.5 11.2 7,421.8
Income Annuities 0.2 7.0 6,192.3
Group 76.3 (4.0) 107.9
Individual 32.2 7.1 3,048.8
Other 6.0 17.7 957.0
---------- ---------- -----------
Total 125.2 39.0 18.6 17,727.8
---------- ---------- -----------
Asset Management 10.4 3.5 2.3 79.2
Discontinued Credit Operations -- -- 3.3 488.8
Other and Eliminations 25.9 (11.4) (18.3) 222.6
---------- ---------- ----------- -----------
Consolidated Totals $ 1,293.2 $ 3.0 $ 29.8 $ 30,097.2
========== ========== =========== ===========
*Income before realized gains (losses), distributions on capital securities,
income taxes, discontinued Credit operations and cumulative effect of change in
accounting principle. Amounts include the March 31, 2001 write-off of goodwill
for Property and Casualty Insurance of $1,152.1, Life Insurance of $32.3 and
Other of $16.6 totaling $1,201.0. The Other goodwill write-off of $16.6 is
included in Other and Eliminations.
-12-
13
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2- MANAGEMENT'S DISCUSSION AND ANALYSIS
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - -------------------------------------------------------------------------------
SAFECO Corporation and Subsidiaries
SAFECO's net loss for the first three months of 2001 was $(882.8) or $(6.91) per
share, compared with net income of $0.23 per share for the same period in 2000.
Excluding realized gain from investments, write-off of goodwill and discontinued
operations, income was $0.09 per share, compared with $0.04 in 2000. The
following summarized financial information sets forth the contributions of each
business segment to consolidated income.
THREE MONTHS ENDED
MARCH 31
----------------------------
2001 2000
--------------------------------------------------------------------------------------------------
Income (Loss) from Continuing Operations before Realized Gain and
Income Taxes: *
Property and Casualty Insurance:
Underwriting Loss $ (127.7) $ (132.6)
Net Investment Income 116.2 115.5
Goodwill Amortization (11.0) (11.0)
------------ ----------
Total Property and Casualty Insurance (22.5) (28.1)
Life Insurance 46.2 39.0
Asset Management 1.9 3.5
Corporate (12.7) (11.4)
Write-off of Goodwill (See Notes 3 & 4
of the Condensed Consolidated Notes
to Financial Statements) (1,201.0) --
------------ ----------
Total (1,188.1) 3.0
Realized Gain before Income Taxes 33.4 31.1
------------ ----------
Income (Loss) from Continuing Operations before Income Taxes (1,154.7) 34.1
------------ ----------
Provision (Benefit) for Income Taxes on:
Income (Loss) from Continuing Operations
and before Realized Gain (294.4) (14.4)
Realized Investment Gain 11.4 10.8
------------ ----------
Total (283.0) (3.6)
------------ ----------
Income (Loss) from Continuing Operations
before Distributions on Capital Securities (871.7) 37.7
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
------------ ----------
Income (Loss) from Continuing Operations (882.9) 26.5
Income from Discontinued Credit Operations, Net of Tax 2.2 3.3
------------ ----------
Income (Loss) before Cumulative Effect of
Change in Accounting Principle (880.7) 29.8
Cumulative Effect of Change in Accounting Principle -
FAS 133, Net of Tax (2.1) --
------------ ----------
Net Income (Loss) $ (882.8) $ 29.8
============ ==========
Per Share of Common Stock:
Income before Realized Gain and $ 0.09 $ 0.04
Write-off of Goodwill
Write-off of Goodwill (7.17) --
Realized Gain 0.17 0.16
------------ ----------
Income (Loss) from Continuing Operations (6.91) 0.20
Income from Discontinued Credit Operations 0.02 0.03
------------ ----------
Income (Loss) before Cumulative Effect
of Change in Accounting Principle (6.89) 0.23
Cumulative Effect of Change in Accounting Principle (0.02) --
------------ ----------
Net Income (Loss) $ (6.91) $ 0.23
============ ==========
Dividends Paid to Common Shareholders $ 0.37 $ 0.37
* Note: Income (Loss) from Continuing Operations 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.
-13-
14
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
The company's new chief executive officer is engaged in a review of the
company's operations with a particular emphasis on the property and casualty
insurance operations. This review is concentrated on: (1) assuring that the
recovery plans for the property and casualty insurance operations have the rigor
and urgency necessary to succeed; (2) a rigorous analysis and reduction of
expenses; (3) strengthening the balance sheet; and (4) the people who are the
company's employees and who are the third-parties who distribute the companies
products. In addition, a senior management team is engaged in developing a
long-range strategy for the company.
The first element of focus is to ensure that the recovery plans for the property
and casualty operations are urgent enough. Re-underwriting has tightened in the
personal insurance area. The Company is now aggressively non-renewing lower
quality risks. Re-underwriting in the business insurance area is expected to
result in the reduction of $100 of unprofitable business. In addition, two
underperforming lines of business are under strategic review. In the large
commercial area the issues are what level of large commercial appetite is
appropriate and whether the small business and large commercial business should
be combined. Decisions regarding commercial operations are expected in several
weeks. For the homeowners line, a team is reviewing a series of proposals and
action is expected in a couple of months. In addition, rate increases in all
major lines are being implemented.
The second area of review is expenses. An across the Company review has been
initiated. Specific actions to reduce expenses will be announced after core
strategic decisions have been made.
The third area of focus is to strengthen the balance sheet. The decision to sell
SAFECO Credit was driven by a desire to reduce the Company's debt. When the sale
is closed approximately one half of the Company's debt will be eliminated. It is
currently anticipated that a sale agreement will be reached in the second
quarter and the transaction closed by the end of the third quarter. The
write-off of goodwill brings the book value of the Company more in line with
market value as investors have discounted the value of the goodwill for some
time. Management is still pursuing other ways to strengthen the balance sheet.
In connection with the fourth area, people, the focus is on strengthening the
tools, capabilities, and alignment of our employees and implementing a
compensation structure designed to motivate and reward superior performance. In
addition, the company is reviewing its relationships with its agents who sell
property and casualty insurance products to assure that the agents who represent
the company are providing it with a sufficient volume and mix of profitable
business to help return the property and casualty operations to underwriting
profitability.
Property and Casualty Insurance
The Company's financial results are on target for the first quarter and in line
with plans to improve performance and create shareholder value. Performance in
the core insurance lines, when adjusted for catastrophic events such as
earthquakes, is starting to see improvement. SAFECO expects financial results to
decline in the second quarter due to seasonal storms in the Midwest.
Catastrophic storms in St. Louis in early April are expected to generate
customer claims of approximately $60, one of the largest weather related losses
in the Company's history. Continued improvement in operating results is expected
in subsequent quarters.
The property and casualty insurance companies posted improvements in the first
quarter as underwriting losses declined to $127.7 compared with $132.6 for the
same period last year.
This positive change is the result of better performance by SAFECO Business
Insurance, which reduced underwriting losses for small-business insurance to
$27.4 this year compared to $59.0 last year - an improvement of more than 50
percent. Also showing improvement was SAFECO's personal auto insurance line,
which reduced quarterly underwriting losses to $27.6 this year compared with
$39.8 last year. Offsetting the improvements in small-business and personal auto
insurance were higher underwriting losses for homeowners and Commercial
Insurance, the Company's line of products for larger businesses. Quarterly
underwriting losses in homeowners increased to $33.1 this year from $14.1 last
year; Commercial Insurance underwriting losses increased to $43.8 this year from
$26.5 last year.
-14-
15
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
Net written premiums for the property and casualty insurance companies decreased
by 2.5% this year compared with the same period last year. This includes an
increase of 1 percent in net written premium for Personal Lines during the
quarter and a decrease of 16 percent for Business Insurance. Net written
premiums in Commercial Insurance remained unchanged.
The combined ratio is a commonly used gauge of underwriting performance. It
measures the percentage of premium dollars spent paying policyholder claims and
company expenses. The lower the ratio, the more effective the underwriting.
Combined ratio figures reported by SAFECO include the effects of catastrophic
losses such as the recent Seattle-area earthquake.
UNDERWRITING RESULTS - COMBINED RATIOS
------------------------------------------------------------------------------------------
2001 2000
---------- -----------------------------------------------
1ST 4TH 3RD 2ND 1ST
QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- -------- ---------
PERSONAL LINES
Personal Auto 106.5% 109.8% 103.8% 105.6% 109.3%
Homeowners 118.2% 118.0% 116.9% 121.1% 107.9%
Other Personal 97.9% 87.0% 96.3% 87.4% 90.4%
Total Personal Lines 108.7% 110.5% 106.9% 108.5% 107.9%
COMMERCIAL LINES
Business Insurance 110.1% 109.0% 114.8% 108.8% 120.6%
Commercial Insurance 126.3% 129.3% 120.5% 126.0% 115.1%
Surety 87.7% 111.3% 59.0% 83.8% 69.7%
TOTAL COMBINED RATIO 111.4% 112.9% 110.1% 110.9% 111.7%
Personal Auto - The Personal Auto line reduced its quarterly underwriting losses
to $27.6 this year compared with $39.8 last year. Following a change of Personal
Insurance leadership in March, efforts were accelerated to re-underwrite most of
the personal lines book. Later this year, new automated underwriting
technologies will be introduced to reduce costs, improve risk selection and help
attract new business by offering more price tiers. Continuing rate increases of
approximately 8% are planned for this year after increasing rates 6% last year.
The effect of rate increases, agency cancellations and tighter underwriting is
impacting the number of automobile policies in force which ended the first
quarter 3.5% lower than a year ago. Net auto premiums written increased 1.4% to
$448.
Homeowners - Quarterly underwriting losses in Homeowners increased to $33.1 this
year from $14.1 last year. Homeowners weather-related losses were $36 for the
first quarter, up $5 from a year ago. Non-weather related losses were up $14,
adding 7 points to the first quarter combined ratio. Continuing rate increases
of approximately 9.5% are planned for this year after increasing rates 6% last
year. Net homeowners premiums written declined 1% to $164.
Other Personal - Other Personal Lines provide coverage for earthquake, dwelling
fire, inland marine and boats. SAFECO estimates that claims from February's
6.8-magnitude earthquake in the Seattle area will approximate $15, with
approximately $6 for personal lines, $6 in Business Insurance claims, and $3 in
Commercial Insurance claims. Net premiums written increased 12.8% to $48.
Business Insurance - The Business Insurance line underwriting losses decreased
to $27.4 this year compared to $59.0 last year. Actions taken this past year to
increase prices and eliminate unprofitable business are contributing to the
first quarter improvement from a year ago. These actions have resulted in a loss
of business with net premiums written down 16% to $266.
Commercial Insurance - Underwriting losses increased to $43.8 this year from
$26.5 last year. Adverse workers' compensation loss experience, particularly in
California and Florida, is mitigating actions taken to improve results.
-15-
16
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
SAFECO continues to increase prices, and intends to increase the non-renewal of
policies in markets that have been consistently unprofitable. Net premiums
written increased 0.2% to $168.
Life Insurance
The life insurance companies reported pretax income, excluding realized gains
and write-off of goodwill, of $46.2 this year compared with $39.0 last year.
Retirement Services and Income Annuities - Earnings for the annuity lines
declined to $13.8 this year compared with $18.2 last year. This is the result of
lower investment income for fixed annuities due to withdrawals, and lower fee
income for variable annuities due to declines in the equity market. Assets under
management were $12 billion at March 31, 2001 compared with $13 billion at March
31, 2000. Another early surrender offer was extended to the Equity Indexed
Annuity policyholder resulting in $53 of surrenders during the quarter. As
reflected in the Statements of Consolidated Cash Flows, the return of funds held
under deposit contracts increased over the prior year due to the increase in
withdraws and surrenders. The funds received under deposit contract have
declined over the prior year due to the negative impact of the first quarter
ratings downgrades.
Group - The group line recorded pretax income of $6.7 compared with a loss of $4
a year earlier. This marks the fourth consecutive profitable quarter for the
group line and continues to reflect underwriting and ratings actions taken to
correct the adverse experience in medical stop loss coverage. Group's overall
loss ratio improved to 65% this year compared to 75% last year. Premiums
increased $8 to $84 this year compared with $76 last year.
Individual - Earnings for the individual life product line decreased slightly to
$6.8 this year compared with $7.1 last year. The decrease is the result of
increased claims. The increased claims experience in universal life is offset by
improved profits in Business Owned Life Insurance (BOLI). Sales in the BOLI line
are negatively impacted by the first quarter ratings downgrade. See below for
additional information on the rating agency downgrades.
Asset Management
Asset management operations recorded $1.9 in pretax earnings during the three
months ended March 31, 2001, compared with $3.5 for the same period in 2000.
Assets under management totaled $5.0 billion at March 31, 2001 down from $6.4
billion one year ago.
Discontinued Credit Operations
On March 14, 2001, the Corporation announced its intention to sell its credit
subsidiary. On March 31, 2001, a plan of disposal was formalized establishing
the measurement date as March 31, 2001; consequently, SAFECO Credit Company,
Inc. ("SAFECO Credit") is now accounted for as a discontinued operation. SAFECO
Credit generated pretax profits of $4.0 this year compared with $4.9 last year.
This represents additional after-tax earnings of $0.02 per share not included in
SAFECO's first-quarter operating profits. During the same period last year,
SAFECO Credit produced $0.03 per share.
-16-
17
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
SAFECO Credit's summarized financial information is as follows:
MARCH 31 DECEMBER 31
2001 2000
---------- ----------
Finance Receivables $ 1,642.9 $ 1,617.7
Affiliate Receivables* 182.7 171.3
Other Assets 115.7 117.3
---------- ----------
Total Assets $ 1,941.3 $ 1,906.3
========== ==========
Short-Term Borrowings $ 903.6 $ 1,154.7
Affiliate Borrowings* 791.9 504.0
Other Liabilities 99.8 99.1
---------- ----------
Total Liabilities $ 1,795.3 $ 1,757.8
========== ==========
THREE MONTHS ENDED
MARCH 31
-------------------------
2001 2000
---------- ----------
Revenues $ 39.4 $ 32.8
Expenses 35.4 27.9
---------- ----------
Income before Income Taxes 4.0 4.9
Provision for Income Taxes 1.8 1.6
---------- ----------
Net Income $ 2.2 $ 3.3
========== ==========
* The summarized balance sheets presented show SAFECO Credit on a stand alone
basis and does not reflect the elimination of Affiliate Receivables and
Affiliate Borrowings. When these affiliate balances are eliminated the Net
Assets of Discontinued Credit Operations are $755.2 at March 31, 2001 and
$481.2 at December 31, 2000.
Realized Gain on Investment Portfolio, Write-down of Investments and Investment
Portfolio
Pretax net realized gain from the sale of investments was $33.4 this year
compared with $31.2 last year. SAFECO took write-downs totaling $36 on the
investment portfolio this quarter due to deteriorating credit worthiness and
market value declines of certain debt and equity issues. These write-downs are
included in the realized gain amount of $33.4. Write-downs for the same period
last year were $9. The Company wrote down its investment in Concur Technologies,
Inc. because management determined that the decline in the market value was
other than temporary. The investment has been written down to fair value with
the charge of $24 going to realized loss. Another $7 of the write-down relates
to fixed income securities issued by Helig-Meyers which has filed for Chapter 11
Bankruptcy reorganization.
As reflected in the Statements of Consolidated Cash Flows, the Company has
liquidated some fixed maturities and marketable equity securities to increase
liquidity. As a result of rating agency downgrades, discussed further below,
borrowing rates have increased for the Company. SAFECO Corporation has loaned to
SAFECO Credit some of the cash received from the sale of investments to help
repay its Commercial Paper outstanding as it matures. At March 31, 2001, cash
available to meet liquidity needs has increased approximately $300 from December
31, 2000. These funds have been invested in short-term investments.
-17-
18
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
Rating Agency Downgrades
Three ratings agencies (Standard & Poor's, A.M. Best and Fitch IBCA) lowered
credit ratings for SAFECO during the first quarter. On May 8, 2001, Moody's
lowered SAFECO's senior debt ratings and confirmed the A1 insurance financial
strength ratings of its principal property and casualty and life insurance
subsidiaries. Lower ratings will significantly affect SAFECO Life's ability to
sell structured settlement annuities and business-owned life insurance products.
SAFECO is addressing the situation by taking steps to strengthen its balance
sheet and improve its core earnings. The following table summarizes SAFECO's
ratings as of May 11, 2001:
FITCH
DEBT RATINGS RATING BASIS A.M. BEST IBCA MOODY'S S&P
---------------------------------------------------------------------------------------
SAFECO Corporation Senior Debt bbb+ -- Baa1 BBB+
SAFECO Corporation Capital Securities bbb -- baa1 BBB-
SAFECO Corporation Commercial Paper -- F2 P-2 A-2
INSURER FINANCIAL STRENGTH
---------------------------------------------------------------------------------------
Property and Casualty Subsidiaries A AA- A1 A+
Life Insurance Subsidiaries A AA- A1 A+
-18-
19
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
(Amounts in Millions, except per share amounts, unless otherwise noted)
- - --------------------------------------------------------------------------------
Forward-looking information is subject to risk and uncertainty
Statements made in this report 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 sell SAFECO Credit Company; Inc.,
- SAFECO's ability to obtain rate increases and non-renew underpriced
insurance accounts;
- Achievement of SAFECO's premium targets and profitability;
- Achievement of SAFECO's expense reduction goals;
- Realization of growth and business retention estimates;
- Changes in the nature of the property and casualty book of business;
- Driving patterns;
- Changes in competition and pricing environments;
- Weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
- The occurrence of significant natural disasters, including earthquakes;
- The development of major Year 2000 related claims or liabilities;
- The adequacy of loss reserves;
- The availability and pricing of reinsurance;
- Court decisions and trends in litigation;
- Legislative and regulatory developments;
- Rating agency actions;
- Availability of bank credit facilities;
- Fluctuations in interest rates;
- Performance of financial markets; 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.
-19-
20
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
(AMOUNTS IN MILLIONS)
- - -------------------------------------------------------------------------------
Item 1. Legal Proceedings
Because of the nature of their businesses, the Corporation's insurance
and other subsidiaries are subject to legal actions filed or threatened
in the ordinary course of their business operations, generally as
liability insurers defending third-party claims brought against their
insureds or as insurers defending policy coverage claims brought
against them. The Corporation does not believe that such litigation
will have a material adverse effect on its financial condition, future
operating results or liquidity.
The property and casualty insurance subsidiaries of the Corporation are
parties to a number of lawsuits for liability coverages related to
environmental claims. Although estimation of environmental claims loss
reserves is difficult, the Corporation believes that reserves
established for these claims are adequate based on the known facts and
current law. The loss and loss adjustment expense with respect to any
such lawsuit, or all lawsuits related to a single incident combined,
are not expected to be material to the Corporation's financial
condition.
SAFECO Corporation has been dismissed from Hobbs v. State Farm Mutual
Automobile Insurance Co., et al., a putative class-action lawsuit filed
in 1999 in Illinois state court against SAFECO, one of its property and
casualty insurance subsidiaries, General Insurance Company of America
("General"), and six other property and casualty insurance groups.
General remains a defendant in the plaintiffs' complaint that the
defendants' support of the Certified Auto Parts Association, an
independent organization that certifies the quality of non-OEM parts for
vehicles, constituted a conspiracy to further the improper use of those
parts. General will vigorously defend against these claims.
SAFECO Insurance Company of America filed suit in 2000 in North Carolina
federal court to collect amounts due from a workers' compensation
policyholder, Magna Corporation ("Magna"). Under a contract with SAFECO
Insurance Company of America, Magna, on behalf of its Professional
Employee Organizations and their client companies, assumed obligations
for significant deductibles and expense reimbursements. On March 19,
2001, Magna filed a petition under Chapter 7 of the United States
Bankruptcy Code. The total amount due SAFECO Insurance Company of
America from Magna may reach $43.
-20-
21
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 4.1* SAFECO Agency Stock Purchase Plan filed as
Exhibit 4.1 to SAFECO's Registration Statement on
Form S-3 (No. 333-33444) dated August 30, 2000 is
incorporated herein by this reference.
Exhibit 10.1* Form of Retirement Agreement dated as of
January 29, 2001 by and between Boh A. Dickey and
SAFECO.
Exhibit 10.2* Form of Employment Agreement dated as of
January 26, 2001 between SAFECO and Michael S.
McGavick.
Exhibit 10.3* Incentive Compensation Plan for President/Chief
Executive Officer 2001.
Exhibit 10.4* Form of Nonqualified Stock Option Contract between
SAFECO and Michael S. McGavick dated January 26,
2001.
Exhibit 10.5* Form of Restricted Stock Rights Award
Agreement issued under the SAFECO Long-Term
Incentive Plan of 1997 between SAFECO and Michael
S. McGavick dated January 26, 2001.
Exhibit 10.6* Form of Change in Control Severance Agreement
dated January 26, 2001 by and between SAFECO and
Michael S. McGavick dated March 27, 2001.
Exhibit 10.7* Form of Performance Stock Rights Award Agreement
issued under the SAFECO Long-Term Incentive Plan of
1997 between SAFECO and Michael S. McGavick dated
March 27, 2001.
Exhibit 18* Letter from Ernst & Young LLP dated May 11,
2001 regarding change in accounting principles.
*Copies of the Exhibits are available without charge by making a
written request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
-21-
22
SAFECO CORPORATION AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (Continued)
AMOUNTS IN MILLIONS
- - --------------------------------------------------------------------------------
(b) Reports on Form 8-K
The registrant filed the following 8-K's during the quarter ended
March 31, 2001 and for the period up to May 14, 2001 (the filing
date of this Form 10-Q).
FILING DATED UNDER FILING RELATED TO:
------------------- --------------------- ---------------------------------------------
January 12, 2001 Item 5 (Other Items) Preliminary review of earnings for the 4th
quarter of 2000.
January 30, 2001 Item 5 (Other Items) Announcement naming Michael S. McGavick as
President, Chief Executive Officer and
Director.
February 8, 2001 Item 5 (Other Items) Announcement on reduction of dividend to
common shareholders.
March 1, 2001 Item 5 (Other Items) Announcement regarding earthquake coverage
relating to February 28th Puget Sound area
earthquake.
March 15, 2001 Item 5 (Other Items) Announcement regarding decision to sell
SAFECO Credit Company, Inc.
April 4, 2001 Item 5 (Other Items) Announcement regarding expected earthquake
losses to SAFECO of approximately $15.
April 24, 2001 Item 5 (Other Items) Announcement relating to the first quarter
2001 earnings release.
-22-