-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HksQoklm7vebYqtfAVrpMT410Ziov6AtHr1Hk+bU/iT0aRVRwc2921KqktQWs2nb D5C3kPUFcRFtI3eRM2OSLQ== 0000867579-04-000311.txt : 20041105 0000867579-04-000311.hdr.sgml : 20041105 20041105172722 ACCESSION NUMBER: 0000867579-04-000311 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20040930 FILED AS OF DATE: 20041105 DATE AS OF CHANGE: 20041105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 041123730 BUSINESS ADDRESS: STREET 1: 4333 BROOKLYN AVE NE STREET 2: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: 4333 BROOKLYN AVE NE CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-Q 1 en0786_10queue.txt 10-Q 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 Quarterly Period Ended September 30, 2004 [ ] 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 State of Incorporation: Washington I.R.S. Employer I.D. No.: 91-0742146 Address of Principal Executive Offices: Safeco Plaza, Seattle, Washington 98185 Telephone: 206-545-5000 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 [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X]. NO [ ]. 126,830,466 shares of common stock of Safeco Corporation, no par value, were outstanding at November 1, 2004. Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- CONTENTS - ------------------------------------------------------------------------------- Item Description Page - ------------------------------------------------------------------------------- Part I Financial Information 1 Financial Statements Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2004 and 2003 3 Consolidated Balance Sheets September 30, 2004 and December 31, 2003 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 5 Consolidated Statements of Shareholders' Equity for the nine months ended September 30, 2004 and 2003 7 Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2004 and 2003 8 Condensed Notes to Consolidated Financial Statements 9 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 24 4 Controls and Procedures 47 Part II Other Information 1 Legal Proceedings 48 2 Changes in Securities, Use of Proceeds and Issuer Purchase of Equity Securities 48 6 Exhibits and Reports on Form 8-K 49 Signatures 50 Safeco Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Income (Loss) - ----------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ------------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ---------------------------------------------------------- (In Millions, Except Per Share Amounts) (Unaudited) (Unaudited) REVENUES Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3 Net Investment Income 115.5 114.7 349.6 354.1 Net Realized Investment Gains 50.5 12.8 178.2 36.7 Other 0.2 2.6 0.6 7.9 ---------------------------------------------------------- Total 1,566.9 1,380.5 4,621.0 4,014.0 ---------------------------------------------------------- EXPENSES Losses and Loss Adjustment Expenses 1,029.9 1,003.5 2,632.2 2,639.3 Other Underwriting and Operating Expenses 162.8 148.8 475.7 471.3 Amortization of Deferred Policy Acquisition Costs 232.5 211.5 681.9 626.1 Loss on Debt Repurchases 121.0 -- 121.0 -- Interest Expense 25.3 30.4 87.3 96.1 Restructuring Charges -- -- 1.4 -- ---------------------------------------------------------- Total 1,571.5 1,394.2 3,999.5 3,832.8 ---------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes (4.6) (13.7) 621.5 181.2 Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7 ---------------------------------------------------------- Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5 Results from Discontinued Operations (Net of Taxes of $(52.3) and $(39.1) in 2004 and $(35.6) and $(6.5) in 2003) (107.0) (28.8) (57.8) 26.5 ---------------------------------------------------------- Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0 - ------------------------------------------------------------------------------------------------------------- INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED Income (Loss) from Continuing Operations $ 0.04 $ -- $ 3.20 $ 1.06 Results from Discontinued Operations (0.80) (0.21) (0.42) 0.19 ---------------------------------------------------------- Net Income (Loss) $ (0.76) $ (0.21) $ 2.78 $ 1.25 ---------------------------------------------------------- INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC Income (Loss) from Continuing Operations $ 0.04 $ -- $ 3.23 $ 1.06 Results from Discontinued Operations (0.81) (0.21) (0.43) 0.19 ---------------------------------------------------------- Net Income (Loss) $ (0.77) $ (0.21) $ 2.80 $ 1.25 ---------------------------------------------------------- Dividends Declared $ 0.220 $ 0.185 $ 0.590 $ 0.555 - ------------------------------------------------------------------------------------------------------------- Average Number of Shares Outstanding During the Period: Diluted 132.5 138.5 137.5 138.9 Basic 131.5 138.5 136.5 138.4 - ------------------------------------------------------------------------------------------------------------- See Condensed Notes to Consolidated Financial Statements. Safeco Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets - ----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30 DECEMBER 31 2004 2003 - ------------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) ASSETS Investments Available-for-Sale Securities: Fixed Maturities, at Fair Value (Cost or amortized cost: $8,824.7; $7,717.2) $ 9,188.2 $ 8,159.2 Marketable Equity Securities, at Fair Value (Cost: $580.7; $684.8) 972.5 1,166.2 Other Invested Assets 8.4 18.8 ---------------------------------- Total Investments 10,169.1 9,344.2 Cash and Cash Equivalents 327.6 319.0 Accrued Investment Income 116.4 120.9 Premiums and Service Fees Receivable 1,156.6 1,043.9 Other Notes and Accounts Receivable 64.1 104.8 Current Income Taxes Recoverable 84.3 20.5 Deferred Income Taxes Recoverable 337.1 274.3 Reinsurance Recoverables 371.0 372.0 Deferred Policy Acquisition Costs 391.6 356.8 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $324.3; $311.8) 391.8 433.7 Other Assets 233.5 256.5 Securities Lending Collateral 1,022.6 951.9 Assets of Discontinued Operations -- 22,548.9 ---------------------------------- Total Assets $ 14,665.7 $ 36,147.4 - ------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Loss and Loss Adjustment Expense Reserves $ 5,259.9 $ 5,044.6 Unearned Premiums 2,249.9 2,053.6 Debt 1,332.9 1,951.3 Other Liabilities 1,076.2 1,180.0 Securities Lending Payable 1,022.6 951.9 Liabilities of Discontinued Operations -- 19,942.7 ---------------------------------- Total Liabilities 10,941.5 31,124.1 ---------------------------------- Commitments and Contingencies -- -- Common Stock, No Par Value; Shares Authorized: 300.0 Shares Reserved for Options: 9.3; 11.6 Shares Issued and Outstanding: 126.8; 138.6 630.6 1,197.3 Retained Earnings 2,611.9 2,308.7 Total Accumulated Other Comprehensive Income 481.7 1,517.3 ---------------------------------- Total Shareholders' Equity 3,724.2 5,023.3 ---------------------------------- Total Liabilities and Shareholders' Equity $ 14,665.7 $ 36,147.4 - ------------------------------------------------------------------------------------------------------------- See Condensed Notes to Consolidated Financial Statements. Safeco Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 2004 2003 - --------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) OPERATING ACTIVITIES Insurance Premiums Received $ 4,176.1 $ 3,781.7 Dividends and Interest Received 405.9 350.5 Insurance Claims Paid (2,414.7) (2,514.2) Underwriting, Acquisition, Insurance and Other Operating Costs Paid (1,195.9) (1,210.4) Interest Paid (123.5) (125.9) Income Taxes Paid (103.2) (19.8) ------------------------------ Net Cash Provided by Operating Activities 744.7 261.9 ------------------------------ INVESTING ACTIVITIES Purchases of Fixed Maturities Available-for-Sale (2,281.0) (1,453.9) Equity Securities Available-for-Sale (390.3) (146.5) Maturities and Calls of Fixed Maturities Available-for-Sale 710.7 780.1 Sales of: Fixed Maturities Available-for-Sale 479.4 157.8 Equity Securities Available-for-Sale 643.1 705.8 Proceeds from Sales of Subsidiaries 1,510.0 -- Other, Net 5.7 13.2 ------------------------------ Net Cash Provided by Investing Activities 677.6 56.5 ------------------------------ FINANCING ACTIVITIES Repurchase of Notes (735.2) -- Proceeds from Notes Issued -- 495.9 Repayment of Notes -- (510.1) Dividends Paid to Shareholders (77.1) (76.8) Common Stock Reacquired (661.0) -- Stock Options Exercised 59.6 5.9 Other, Net -- 0.4 ------------------------------ Net Cash Used in Financing Activities (1,413.7) (84.7) ------------------------------ Net Increase in Cash and Cash Equivalents 8.6 233.7 Cash and Cash Equivalents at Beginning of Period 319.0 369.1 ------------------------------ Cash and Cash Equivalents at End of Period $ 327.6 $ 602.8 - --------------------------------------------------------------------------------------------------------- See Condensed Notes to Consolidated Financial Statements. Safeco Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows - Reconciliation of Net Income to Net Cash Provided by Operating Activities - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 2004 2003 - ----------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) Net Income $ 382.6 $ 173.0 -------------------------------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATiNG ACTIVITIES Income from Discontinued Operations, Net of Taxes (73.2) (26.5) Loss on Sale of Discontinued Operations, Net of Taxes 131.0 -- Net Realized Investment Gains (178.2) (36.7) Amortization of Fixed Maturities 33.9 5.4 Amortization and Depreciation 44.2 42.0 Deferred Income Tax Provision 53.0 36.9 Other 14.3 5.9 Changes in Accrued Investment Income 4.5 (1.2) Deferred Policy Acquisition Costs (34.8) (25.0) Loss and Loss Adjustment Expense Reserves 215.3 98.1 Unearned Premiums 196.3 227.2 Current Income Taxes Recoverable 69.9 (19.8) Other Assets and Liabilities (114.1) (217.4) -------------------------------- Total Adjustments 362.1 88.9 -------------------------------- Net Cash Provided by Operating Activities $ 744.7 $ 261.9 - ----------------------------------------------------------------------------------------------------------- There were no significant non-cash financing or investing activities for the nine months ended September 30, 2004 and 2003. See Condensed Notes to Consolidated Financial Statements. Safeco Corporation and Subsidiaries - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Shareholders' Equity - ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30 2004 2003 - ----------------------------------------------------------------------------------------------------------- (In Millions) (Unaudited) Common Stock Balance at Beginning of Period $ 1,197.3 $ 1,178.1 Stock Issued for Options and Rights (2.3 and 0.3 shares) 82.9 7.7 Stock Compensation Expense 11.4 -- Common Stock Reacquired (14.1 shares) (661.0) -- ------------------------------ Balance at End of Period 630.6 1,185.8 ------------------------------ Retained Earnings Balance at Beginning of Period 2,308.7 2,072.2 Net Income 382.6 173.0 Dividends Declared (79.4) (76.9) Other -- (0.2) ------------------------------ Balance at End of Period 2,611.9 2,168.1 ------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES: Unrealized Gains And Losses On Available-For-Sale Securities Balance at Beginning of Period 1,576.8 1,227.5 Change during Period (1,078.2) 419.7 ------------------------------ Balance at End of Period 498.6 1,647.2 ------------------------------ Unrealized Gains And Losses On Derivative Instruments Balance at Beginning of Period 12.2 13.7 Change during Period (12.2) (8.6) ------------------------------ Balance at End of Period -- 5.1 ------------------------------ Unrealized Foreign Currency Translation Adjustment Balance at Beginning of Period (8.8) (15.7) Change during Period (2.4) 1.1 ------------------------------ Balance at End of Period (11.2) (14.6) ------------------------------ Deferred Policy Acquisition Costs Valuation Allowance Balance at Beginning of Period (57.2) (35.4) Change during Period 57.2 (14.0) ------------------------------ Balance at End of Period -- (49.4) ------------------------------ Minimum Pension Liability Adjustment Balance at Beginning of Period (5.7) (8.8) Change during Period -- -- ------------------------------ Balance at End of Period (5.7) (8.8) ------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES 481.7 1,579.5 ------------------------------ SHAREHOLDERS' EQUITY $ 3,724.2 $ 4,933.4 - ----------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Comprehensive Income (Loss) - ----------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------ (In Millions) (Unaudited) (Unaudited) Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0 ------------------------------------------------------ Other Comprehensive Income (Loss), Net of Taxes: Change in Unrealized Gains (Losses) on (980.3) Available-for-Sale Securities (466.4) (230.6) 339.5 Reclassification Adjustment for Net Realized Investment (Gains) Losses Included in Net Income (Loss) (180.9) 62.5 (97.9) 80.2 Derivatives Qualifying as Cash Flow Hedges - (12.2) Net Change in Fair Value (0.4) (4.4) (8.6) Foreign Currency Translation Adjustments 1.6 (4.1) (2.4) 1.1 Adjustment for Deferred Policy Acquisition Costs Valuation Allowance 24.8 7.3 57.2 (14.0) ------------------------------------------------------ Other Comprehensive Income (Loss) (621.3) (169.3) (1,035.6) 398.2 ------------------------------------------------------ Comprehensive Income (Loss) $ (722.4) $ (198.2) $ (653.0) $ 571.2 - ----------------------------------------------------------------------------------------------------------- See Condensed Notes to Consolidated Financial Statements.
Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- Condensed Notes to Consolidated Financial Statements (unaudited) - ------------------------------------------------------------------------------- (Dollar amounts in millions except per share data, unless noted otherwise) NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Safeco Corporation is a Washington State corporation operating across the United States, with insignificant non-U.S. activities. Our subsidiaries sell property and casualty insurance including surety. We generated virtually all of our revenues for the periods presented in this report from these activities. Throughout our unaudited Consolidated Financial Statements, Safeco Corporation and its subsidiaries are referred to as "Safeco," "we" and "our." The property and casualty businesses including surety are referred to as "Property & Casualty" and "P&C." All other continuing activities, primarily the financing of our business activities, are collectively referred to as "Corporate." The discontinued life insurance, group stop-loss medical insurance and asset management businesses are referred to as "Discontinued Operations," "Life & Investments" and "L&I." On March 15, 2004, we entered into definitive agreements to sell substantially all our L&I operations. On April 8, 2004, we entered into an agreement for the sale of the remaining part of our L&I operations and accordingly we have presented L&I as a Discontinued Operation in these Consolidated Financial Statements in accordance with Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Prior-year amounts have been restated to reflect the presentation of Discontinued Operations. On August 2, 2004, we completed the sale of our L&I operations to an investment group led by White Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc. We completed the sale of Talbot Financial Corporation on July 1, 2004 and the sale of Safeco Trust Company on April 19, 2004. See Note 9 - Discontinued Operations. Basis of Consolidation and Reporting and Use of Estimates We prepared the unaudited Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q. Certain financial information, which is required in the annual financial statements prepared in conformity with GAAP, may not be required for interim financial reporting purposes and has been condensed or omitted. 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. Results for the nine-month period ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. These unaudited Consolidated Financial Statements and Condensed Notes should be read in conjunction with the Consolidated Financial Statements and Notes included in our 2003 Annual Report on Form 10-K that was previously filed with the Securities and Exchange Commission. The preparation of these interim Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that may affect amounts reported in these Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates. The unaudited Consolidated Financial Statements include Safeco Corporation and its subsidiaries. All significant intercompany transactions and balances have been eliminated in the Consolidated Financial Statements. We have made certain reclassifications to the prior-year amounts to conform to the current-year presentation. Earnings per Share We calculate basic earnings per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if options or other dilutive instruments granted under our stock-based compensation plans were exercised. We present the computation of net income (loss) per share below, based upon weighted-average common and dilutive shares outstanding: THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 - --------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------ Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0 Average Number of Common Shares Outstanding 131.5 138.5 136.5 138.4 ------------------------------------------------------ Basic Net Income (Loss) Per Share $ (0.77) $ (0.21) $ 2.80 $ 1.25 - --------------------------------------------------------------------------------------------------------- Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0 Average Number of Common Shares Outstanding 131.5 138.5 136.5 138.4 Additional Common Shares Assumed Issued Under Treasury Stock Method 1.0 -- 1.0 0.5 ------------------------------------------------------ Average Number of Common Shares Outstanding - Diluted 132.5 138.5 137.5 138.9 ------------------------------------------------------ Diluted Net Income (Loss) Per Share $ (0.76) $ (0.21) $ 2.78 $ 1.25 - ---------------------------------------------------------------------------------------------------------
Due to the loss from continuing operations in the third quarter of 2003, we used basic weighted-average shares outstanding to calculate diluted net loss per share of common stock. Using diluted weighted-average shares outstanding would have resulted in a lower net loss per share of common stock. On August 2, 2004, we repurchased 13,247,863 shares, or approximately 9.5% of our outstanding common stock under an Accelerated Stock Buyback (ASB) program. The shares were purchased from a dealer at a price of $46.80 per share, for a total cost of $623.0. Through the ASB program we returned excess capital from the L&I sale to shareholders and immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we purchased by borrowing them in the open market, and then repurchases shares in the market over the next six to nine months to repay the borrowed shares. $200.0 of the ASB is subject to a collar, a contract that sets a minimum and maximum price for us for the shares repurchased under the collar. At the end of the program, we may receive, or be required to pay, a price adjustment based on the volume weighted average price of our common stock during the period of the ASB repurchases. This adjustment will be recorded in shareholders' equity. On October 25, 2004, we paid a quarterly dividend of $0.22 per share. This represents an 18.9% increase per share over our previous quarterly dividend of $0.185 per share. Stock-Based Compensation Expense The Safeco Long-Term Incentive Plan of 1997 (the Plan), as amended, provides for the issuance of up to 12,000,000 shares of our common stock. Incentive stock options, non-qualified stock options, restricted stock rights (RSR), performance stock rights (PSR) and stock appreciation rights are authorized under the Plan. We grant stock-based compensation awards at the fair market value of the stock on the date of the grant. Prior to 2003, we applied Accounting Principles Board (APB) Opinion 25 in accounting for our stock options, as allowed under SFAS 123, "Accounting for Stock-Based Compensation," as amended. Under APB 25, we recognized no compensation expense related to options because the exercise price of our employee stock options equaled the fair market value of the underlying stock on the date of grant. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure," amending SFAS 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS 123. We adopted the fair value method for accounting for stock-based compensation effective January 1, 2003, using the prospective basis transition method. Under this method, we have recognized stock-based compensation expense for options granted, modified or settled after January 1, 2003. Stock-based compensation expense was $5.6 ($4.8 after tax) for the three months ended September 30, 2004 and $15.9 ($12.8 after tax) for the nine months ended September 30, 2004. Stock-based compensation expense was $4.4 ($2.7 after tax) for the three months ended September 30, 2003 and $7.5 ($4.4 after tax) for the nine months ended September 30, 2003. Effective in the second quarter of 2004, we replaced our annual stock option program with a restricted stock program. The following table illustrates the pro forma effect on net income (loss) and net income (loss) per share as if the fair value method had been applied to all outstanding and unvested awards in each period: THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30 ENDED SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------- Net Income (Loss), as reported $ (101.1) $ (28.9) $ 382.6 $ 173.0 Add: Stock-based Compensation Expense Included in Reported Net Income (Loss), After Tax 4.8 2.7 12.8 4.4 Deduct: Pro Forma Stock-based Compensation Expense* (5.9) (4.6) (16.0) (10.2) ------------------------------------------------------- Pro Forma Net Income (Loss) $ (102.2) $ (30.8) $ 379.4 $ 167.2 ------------------------------------------------------- Net Income (Loss) Per Share Basic - as Reported $ (0.77) $ (0.21) $ 2.80 $ 1.25 Diluted - as Reported $ (0.76) $ (0.21) $ 2.78 $ 1.25 Basic - Pro Forma $ (0.78) $ (0.22) $ 2.78 $ 1.21 Diluted - Pro Forma $ (0.77) $ (0.22) $ 2.76 $ 1.20 - ---------------------------------------------------------------------------------------------------------- * Determined under fair value based method for all awards, net of related tax effects.
Cash Balance Plan The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan that provides benefits for each year of service after 1988, based on each eligible participant's compensation plus a stipulated rate of return on their benefit balance. We make contributions to the CBP based on funding requirements set by the Employee Retirement Income Security Act (ERISA). We contributed $12.9 pretax to the CBP in February 2004. Other Postretirement Benefits We also provide certain healthcare and life insurance benefits, Other Postretirement Benefits (OPRB), for certain retired employees, their beneficiaries and eligible dependents. We contributed $1.3 pretax in the third quarter and $3.6 pretax in the first nine months of 2004. We amended our OPRB program in the third quarter of 2003. The amendments created negative prior service cost, which will be amortized over the average remaining service period of all active participants. The related amortization resulted in a credit to OPRB expense of $1.7 pretax for the three months ended September 30, 2004 and $7.2 pretax for the nine months ended September 30, 2004. The following tables summarize CBP and OPRB costs charged (credited) to Income (Loss) from Continuing Operations for the three and nine months ended September 30, 2004 and 2003: CBP OPRB ------------------------------ ------------------------------ THREE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003 - ------------------------------------------ --------------- -------------- -------------- --------------- Service Cost $ 2.7 $ 2.0 $ 0.2 $ 1.4 Interest Cost 2.0 1.9 0.9 2.2 Expected Return on Plan Assets (2.1) (1.7) -- -- Curtailment Gain -- -- -- (8.3) Amortization of Prior Service Cost and Unrecognized Net Actuarial (Gain) Loss 0.1 0.4 (1.7) 0.4 --------------- -------------- -------------- --------------- Total $ 2.7 $ 2.6 $ (0.6) $ (4.3) - ------------------------------------------ --------------- -------------- -------------- --------------- CBP OPRB ------------------------------ ------------------------------ NINE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003 - ------------------------------------------ --------------- -------------- -------------- --------------- Service Cost $ 8.3 $ 6.2 $ 0.5 $ 4.4 Interest Cost 6.0 5.5 3.2 7.4 Expected Return on Plan Assets (6.5) (4.9) -- -- Curtailment Gain -- -- -- (8.3) Amortization of Prior Service Cost and Unrecognized Net Actuarial (Gain) Loss 0.2 1.0 (7.2) 1.4 --------------- -------------- -------------- --------------- Total $ 8.0 $ 7.8 $ (3.5) $ 4.9 - ------------------------------------------ --------------- -------------- -------------- ---------------
Variable Interest Entities On August 2, 2004, we sold our $19.7 loan with Investar Holdings (Investar) for $13.5. With the sale of this loan, we no longer have an interest in Investar. The guarantee issued by Safeco Life Insurance Company to General America Corporation, our wholly-owned subsidiary, was extinguished as a result of this transaction. The $3.8 after tax loss on the loan sale is included in the loss on the sale of L&I in Discontinued Operations. New Accounting Standards FASB Exposure Draft, "Share-Based Payment" On March 31, 2004, the FASB issued its Exposure Draft, "Share-Based Payment", which is a proposed amendment to SFAS 123. The proposed statement would require all share-based compensation awards granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting on a prospective basis. As discussed in "Stock-Based Compensation Expense", we adopted the fair value method of accounting for share-based awards effective January 1, 2003. Based on the current amount of remaining unvested share-based awards issued since December 15, 1994 not previously recognized at fair value, we do not believe that adoption of the statement in its current form would have a material impact on our financial condition or results of operations. On October 13, 2004, the FASB indicated that SFAS 123R, "Share-Based Payment", will be effective for interim or annual periods beginning after January 15, 2005 and it will issue a final statement late in 2004. FASB Staff Position (FSP) 106-2 "Accounting & Disclosure Requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the Act) In May 2004, FSP 106-2 was issued. FSP 106-2 provides guidance on accounting for the Act, which introduced a Medicare prescription-drug benefit and a federal subsidy to sponsors of retiree health-care plans that provide a benefit at least "actuarially equivalent" to the Medicare benefit. We determined that the potential impact of the subsidy would not be considered a significant event as defined in SFAS 106, "Employer's Accounting for Postretirement Benefits, Other than Pensions." Accordingly, recognition of the subsidy will not occur until the next measurement date of plan assets and liabilities (December 31, 2004). Emerging Issues Task Force (EITF) 03-1, "The Meaning of Other-than-Temporary Impairment and its Application to Certain Investments" In September 2004, the FASB issued FSP 03-1-1 delaying the effective date for applying paragraphs 10-20 of EITF 03-1. Paragraphs 10-20 provide guidance for evaluating whether impairments of debt and equity holdings are "other-than-temporary" and require immediate recognition in earnings. The effective date for applying the accounting guidance of EITF 03-1 is currently under review by the FASB. The disclosure requirements of EITF 03-1 remain unchanged and were effective for fiscal periods ending after December 15, 2003. NOTE 2 - INVESTMENTS FIXED MATURITIES AND MARKETABLE EQUITY SECURITIES The following tables summarize our fixed maturities and marketable equity securities at September 30, 2004 and December 31, 2003: COST OR GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR SEPTEMBER 30, 2004 COST GAINS LOSSES GAINS VALUE - ------------------------------- --------------- -------------- -------------- --------------- -------------- Fixed Maturities: U.S. Government and Agencies $ 1,104.9 $ 48.7 $ (1.9) $ 46.8 $ 1,151.7 State and Political Subdivisions 2,353.6 147.9 (2.6) 145.3 2,498.9 Foreign Governments 103.2 4.9 (1.5) 3.4 106.6 Corporate Securities: Banks 805.8 31.1 (1.4) 29.7 835.5 Electric Utilities 390.3 12.3 (1.0) 11.3 401.6 Diversified Financial Services 414.2 9.7 (0.4) 9.3 423.5 Other 2,403.6 94.4 (4.2) 90.2 2,493.8 --------------- -------------- -------------- --------------- -------------- Total Corporate Securities 4,013.9 147.5 (7.0) 140.5 4,154.4 Mortgage-Backed Securities 1,249.1 32.2 (4.7) 27.5 1,276.6 - ------------------------------- --------------- -------------- -------------- --------------- -------------- Total Fixed Maturities 8,824.7 381.2 (17.7) 363.5 9,188.2 Marketable Equity Securities 580.7 396.4 (4.6) 391.8 972.5 - ------------------------------- --------------- -------------- -------------- --------------- -------------- Total $ 9,405.4 $ 777.6 $ (22.3) $ 755.3 $ 10,160.7 - ------------------------------- --------------- -------------- -------------- --------------- -------------- COST OR GROSS GROSS NET AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 2003 COST GAINS LOSSES GAINS VALUE - ------------------------------- --------------- -------------- -------------- --------------- -------------- Fixed Maturities: U.S. Government and Agencies $ 964.6 $ 53.3 $ (0.5) $ 52.8 $ 1,017.4 State and Political Subdivisions 2,219.6 164.9 (3.4) 161.5 2,381.1 Foreign Governments 41.8 3.7 -- 3.7 45.5 Corporate Securities: Banks 565.0 39.5 (0.2) 39.3 604.3 Electric Utilities 276.5 14.7 (0.8) 13.9 290.4 Diversified Financial Services 400.1 12.8 (1.1) 11.7 411.8 Other 2,161.7 126.5 (7.7) 118.8 2,280.5 --------------- -------------- -------------- --------------- -------------- Total Corporate Securities 3,403.3 193.5 (9.8) 183.7 3,587.0 Mortgage-Backed Securities 1,087.9 43.6 (3.3) 40.3 1,128.2 - ------------------------------- --------------- -------------- -------------- --------------- -------------- Total Fixed Maturities 7,717.2 459.0 (17.0) 442.0 8,159.2 Marketable Equity Securities 684.8 484.1 (2.7) 481.4 1,166.2 - ------------------------------- --------------- -------------- -------------- --------------- -------------- Total $ 8,402.0 $ 943.1 $ (19.7) $ 923.4 $ 9,325.4 - ------------------------------- --------------- -------------- -------------- --------------- --------------
The following table shows our investment gross unrealized losses and fair values aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2004: LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL ------------------------- --------------------------- ------------------------- DESCRIPTION FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES - --------------------------- ---------- -------------- ------------ -------------- ----------- ------------- Fixed Maturities: U.S. Government and Agencies $ 277.0 $ (1.0) $ 39.1 $ (0.9) $ 316.1 $ (1.9) State and Political Subdivisions 179.6 (1.9) 17.3 (0.7) 196.9 (2.6) Foreign Governments 65.6 (1.5) -- -- 65.6 (1.5) Corporate Securities 792.6 (5.6) 42.4 (1.4) 835.0 (7.0) Mortgaged-Backed Securities 364.6 (3.6) 36.7 (1.1) 401.3 (4.7) ---------- -------------- -- ------------ -------------- -- ----------- ------------- Total Fixed Maturities 1,679.4 (13.6) 135.5 (4.1) 1,814.9 (17.7) Marketable Equity Securities 91.6 (4.6) -- -- 91.6 (4.6) ---------- -------------- -- ------------ -------------- -- ----------- ------------- Total $1,771.0 $ (18.2) $135.5 $ (4.1) $ 1,906.5 $ (22.3) - --------------------------- ---------- -------------- -- ------------ -------------- -- ----------- -------------
The unrealized losses of these investments represented approximately 0.2% of the cost of our investment portfolio at September 30, 2004. We reviewed all our investments with unrealized losses at September 30, 2004 in accordance with our impairment policy. Our evaluation concluded that these declines in fair value were temporary after considering: o That the majority of such losses for securities in an unrealized loss position for less than 12 months were interest rate related o For securities in an unrealized loss position for 12 months or more, the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential o Our intent and ability to keep the security long enough to recover its value FIXED MATURITIES BY MATURITY DATE The following table summarizes the cost or amortized cost and fair value of our fixed maturities at September 30, 2004, by contractual years-to-maturity. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties: COST OR MATURITY AMORTIZED COST FAIR VALUE - ----------------------------------------------------------------------- -------------------------------------------- One Year or Less $ 770.8 $ 779.3 Over One Year through Five Years 3,452.9 3,558.6 Over Five Years through Ten Years 1,395.2 1,456.5 Over Ten Years 1,956.7 2,117.2 Mortgage-Backed Securities 1,249.1 1,276.6 ---------------------------------------- Total Fixed Maturities $ 8,824.7 $ 9,188.2 - --------------------------------------------------------------------------------------------------------------------
The carrying value of securities on deposit with state regulatory authorities was $431.9 at September 30, 2004 and $399.9 at December 31, 2003. NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are instruments whose values are derived from underlying instruments, indices or rates, have notional amounts and can be net settled. This may include derivatives that are "embedded" in other derivative instruments or in certain existing assets or liabilities. We use derivative financial instruments, including interest rate swaps, as a means of hedging exposure to interest rate risk. Interest rate risk is the risk of economic losses due to changes in the level of interest rates. We manage interest rate risk through active portfolio management and selective use of interest rate swaps as hedges to change the characteristics of certain assets and liabilities. With interest rate swap agreements, we exchange with a counterparty, at specified intervals, interest rate payments of differing character (for example, fixed-rate payments exchanged for variable-rate payments), based on an underlying principal balance (notional amount). No cash is exchanged at the outset of the contract and no principal payments are made by either party. The net interest accrued and the net interest payments made at each interest payment due date are recorded to interest income or expense, depending on the hedged item. FAIR VALUE HEDGES We use interest rate swaps to hedge the change in fair value of certain fixed-rate debt. At September 30, 2004 we had $430.0 of notional amounts outstanding relating to such hedges. These derivatives have been designated as fair value hedges and, because they have been determined to be highly effective, changes in their fair value and the related portions of the debt that they hedge are recognized on a net basis in Net Realized Investment Gains in the Consolidated Statements of Income (Loss). Differences between the changes in fair value of these derivatives and the hedged items represent hedge ineffectiveness. In the three and nine months ended September 30, 2004 and 2003, no amounts were recognized in earnings due to hedge ineffectiveness. In conjunction with the September 1, 2004 repayment of the 7.25% senior notes (see Note 5), we unwound a portion of the interest rate swap totaling $145.0 notional amount. We reported a pretax gain of $2.0 on the unwinding of this fair value hedge in Net Realized Investment Gains in the Consolidated Statements of Income (Loss). OTHER DERIVATIVES Safeco Financial Products (SFP), our wholly owned subsidiary, engaged in limited derivatives activity by selling single-name credit default swaps, writing and hedging S&P 500 index options and investing in and hedging convertible bonds. All these derivative positions were terminated prior to December 31, 2003 and SFP was dissolved in October 2004. These SFP activities were not designated for hedge accounting treatment under SFAS 133. Changes in the fair values of these instruments were recognized in Net Realized Investment Gains in the Consolidated Statements of Income (Loss). The fee income on the credit default swaps and the earnings and fair value adjustments for the S&P 500 index options and the convertible bonds were included in Net Investment Income in the Consolidated Statements of Income (Loss). Pretax income (loss) before net realized investment gains for SFP was $(0.9) for the three months ended September 30, 2003 and there was no income or loss for this period in 2004. Pretax income (loss) before net realized investment gains for SFP was $(0.4), and $0.3 for the nine months ended September 30, 2004 and 2003. Net realized investment gains before tax for SFP were $2.8 and $22.1 for the three and nine months ended September 30, 2003 and there were no gains or losses in the same periods of 2004. NOTE 4 - INCOME TAXES We use the liability method of accounting for income taxes in accordance with SFAS 109, "Accounting for Income Taxes," under which deferred income 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 taxes computed by applying the U.S. federal income tax rate of 35% to Income (Loss) from Continuing Operations before Income Taxes and the consolidated provision (benefit) for income taxes were as follows: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes $ (4.6) $ (13.7) $ 621.5 $ 181.2 - ----------------------------------------------------------------------------------------------------------- Computed "Expected" Tax Expense (1.6) (4.8) 217.5 63.4 Tax-Exempt Municipal Bond Income (8.9) (9.3) (27.1) (27.9) Dividends Received Deduction (1.8) (2.2) (6.3) (6.9) Other 1.8 2.7 (3.0) 6.1 ------------------------------------------------------------------- Provision (Benefit) for Income Taxes $ (10.5) $ (13.6) $ 181.1 $ 34.7 ------------------------------------------------------------------- Current Provision (Benefit) for Income Taxes 23.9 0.3 128.1 (2.1) Deferred Provision (Benefit) for Income Taxes (34.4) (13.9) 53.0 36.8 ------------------------------------------------------------------- Provision (Benefit) for Income Taxes $ (10.5) $ (13.6) $ 181.1 $ 34.7 - -----------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred income tax assets and deferred income tax liabilities at September 30, 2004 and December 31, 2003 were as follows: SEPTEMBER 30 DECEMBER 31 2004 2003 - ---------------------------------------------------------------------------------------------------------- Deferred Income Tax Assets Goodwill $ 170.4 $ 185.9 Discounting of Loss and Loss Adjustment Expense Reserves for Tax Purposes 212.6 211.4 Unearned Premium Liability 171.9 159.0 Investment Impairments 12.4 26.2 Postretirement Benefits 40.9 42.1 Alternative Minimum Tax Carryforwards 79.9 62.4 Net Operating Loss Carryforwards -- 23.5 Other 96.2 63.8 --------------------------------- Total Deferred Income Tax Assets 784.3 774.3 --------------------------------- Deferred Income Tax Liabilities Unrealized Appreciation of Investment Securities, Derivative Financial Instruments, Deferred Policy Acquisition Cost Valuation Allowance, Minimum Pension Liability and Foreign Currency Adjustment 253.8 314.2 Deferred Policy Acquisition Costs 137.1 124.9 Other 56.3 60.9 --------------------------------- Total Deferred Income Tax Liabilities 447.2 500.0 --------------------------------- Net Deferred Income Tax Asset $ 337.1 $ 274.3 - -----------------------------------------------------------------------------------------------------------
The sale of L&I generated capital losses for tax purposes that are carried back to offset capital gains in 2002 and 2003. The offset of those prior year capital gains by the capital losses had the effect of releasing net operating losses from those years to be carried forward to the current quarter. The utilization of the net operating losses in the third quarter generated additional alternative minimum tax. NOTE 5 - LONG-TERM DEBT The following table shows the total principal amount of our long-term debt, interest rates and maturities of debt. No debt is due within one year at September 30, 2004 and December 31, 2003. SEPTEMBER 30 DECEMBER 31 2004 2003 - ----------------------------------------------------------------------------------------------------------- 6.875% Notes Due 2007 $ 200.0 $ 200.0 4.200% Notes Due 2008 200.0 200.0 4.875% Notes Due 2010 300.0 300.0 7.250% Notes Due 2012 230.0 375.0 8.072% Debentures Due 2037 402.9 876.3 ------------------------------------ Total Debt $ 1,332.9 $ 1,951.3 - -----------------------------------------------------------------------------------------------------------
On August 13, 2004 we repurchased $473.4 in principal amount of 8.072% capital securities for $562.7, and on September 1, 2004 we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 in the Consolidated Statements of Income (Loss). As of September 30, 2004, we maintained a bank credit facility with $300.0 available through September 2005. NOTE 6 - RESTRUCTURING CHARGES In September 2003, we announced that we would eliminate approximately 500 jobs and all such jobs had been eliminated by March 31, 2004. The positions impacted were primarily in our corporate departments. We expect this initiative to reduce our 2004 operating expenses by approximately $75.0. For the nine months ended September 30, 2004, period costs associated with the restructuring totaled $1.4. These period costs represented termination benefits. There were no restructuring costs in the three months ended September 30, 2004. Estimated and actual costs associated with the restructuring were as follows: THREE MONTHS NINE MONTHS TOTAL ENDED ENDED EXPECTED SEPTEMBER 30 SEPTEMBER 30 COSTS 2003 2004 2004 - -------------------------------------------------------------------------------------------------------------- One-Time Termination Benefits $ 9.6 $ 8.2 $ -- $ 1.4 Lease Termination Costs and Other Costs 1.0 1.0 -- -- ------------------------------------------------------------------ Total $ 10.6 $ 9.2 $ -- $ 1.4 - --------------------------------------------------------------------------------------------------------------
Estimated costs associated with the restructuring to reduce our expenses were allocated to our reportable segments in our Continuing Operations as follows: THREE MONTHS NINE MONTHS TOTAL ENDED ENDED EXPECTED SEPTEMBER 30 SEPTEMBER 30 COSTS 2003 2004 2004 - ------------------------------------------------------------------------------------------------------------- Safeco Personal Insurance (SPI) Auto $ 4.5 $ 3.8 $ -- $ 0.7 Property 1.8 1.6 -- 0.2 Specialty 0.1 0.1 -- -- ------------------------------------------------------------------- Total SPI 6.4 5.5 -- 0.9 ------------------------------------------------------------------- Safeco Business Insurance (SBI) SBI Regular 2.2 1.9 -- 0.3 SBI Special Accounts Facility 0.7 0.6 -- 0.1 ------------------------------------------------------------------- Total SBI 2.9 2.5 -- 0.4 ------------------------------------------------------------------- Surety 0.4 0.3 -- 0.1 P&C Other -- -- -- -- ------------------------------------------------------------------- Total P&C 9.7 8.3 -- 1.4 Corporate 0.9 0.9 -- -- ------------------------------------------------------------------- Total $ 10.6 $ 9.2 $ -- $ 1.4 - -----------------------------------------------------------------------------------------------------------
The activity related to previously accrued restructuring charges as of September 30, 2004 was as follows: BALANCE AT BALANCE AT DECEMBER 31 COSTS AMOUNTS SEPTEMBER 30 2003 ACCRUED PAID 2004 - ------------------------------------------ ----------------- ------------ ----------------- ---------------- Severance Costs $ 0.2 $ -- $ 0.2 $ -- Lease Terminations and Other Costs 0.7 -- 0.7 -- ----------------- ------------ ----------------- ---------------- Total $ 0.9 $ -- $ 0.9 $ -- - ------------------------------------------ ----------------- ------------ ----------------- ----------------
NOTE 7 - Comprehensive income Comprehensive income is defined as all changes in shareholders' equity, except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income, which for us consists of changes in unrealized gains or losses on investments carried at fair market value, derivatives, deferred policy acquisition costs valuation allowance, changes in foreign currency translation gains or losses and minimum pension liability. The components of other comprehensive income or loss were as follows: NINE MONTHS ENDED SEPTEMBER 30 2004 2003 - ---------------------------------------------------------------------------------------------------------- AFTER AFTER PRETAX TAXES TAX PRETAX TAXES TAX -------------------------------------------------------------------- Change in Unrealized Gains and Losses $ (1,508.2) $ 527.9 $ (980.3) $ 522.6 $ (183.1) $ 339.5 of Available-for-Sale Securities Reclassification adjustment for Net Realized Investment (Gains) Losses included in Net Income (150.6) 52.7 (97.9) 123.1 (42.9) 80.2 Derivatives Qualifying as Cash Flow Hedges - Net Changes in Fair Value (18.7) 6.5 (12.2) (13.3) 4.7 (8.6) Deferred Policy Acquisition Costs Valuation Allowance 88.0 (30.8) 57.2 (21.5) 7.5 (14.0) Foreign Currency Translation Adjustments (3.7) 1.3 (2.4) 1.7 (0.6) 1.1 -------------------------------------------------------------------- Other Comprehensive Income (Loss) $ (1,593.2) $ 557.6 $(1,035.6) $ 612.6 $ (214.4) $ 398.2 - ----------------------------------------------------------------------------------------------------------
NOTE 8 - SEGMENT INFORMATION CONTINUING OPERATIONS On January 1, 2004, we made minor revisions to our P&C segments that better reflect how these segments are managed. Our non-voluntary auto and property results, previously in P&C Other, are now included in SPI Auto and SPI Property. Certain products, previously reported in SPI Specialty, primarily earthquake, inland marine and dwelling fire, are now included in SPI Property. Our commercial specialty programs and large commercial accounts in runoff, previously in SBI Runoff, are now included in P&C Other. Prior-period amounts have been reclassified to reflect the revised presentation of P&C segments. P&C Our P&C Insurance operations are organized around our four business segments: Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI), Surety and P&C Other. These operations contain our reportable segments, which are managed separately as described below. SAFECO PERSONAL INSURANCE SPI offers auto, homeowners and other specialty insurance products for individuals, and the SPI operations are organized around three reportable segments - Auto, Property and Specialty - which are managed separately by these product groupings. The Auto segment provides coverage for liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for physical damage to our customers' vehicles from collision and other hazards. The Property segment provides homeowners, earthquake, dwelling fire and inland marine coverage for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We also protect individuals from liability for accidents that occur on their property. The Specialty segment provides umbrella, recreational vehicle, motorcycle and boat insurance coverage for individuals. SAFECO BUSINESS INSURANCE SBI offers business owner policies, multi-peril packages, property, general liability, commercial auto and workers compensation. SBI's operations are organized around two segments: SBI Regular and SBI Special Accounts Facility, which are managed separately based on the nature of the underlying insured. SBI Regular is our core commercial segment writing a variety of commercial insurance products for small- to medium-sized businesses (customers who pay annual written premiums of $200,000 or less). Our principal business insurance products include business owner policies, commercial auto, commercial multi-peril, workers compensation, property and general liability. SBI Special Accounts Facility writes larger commercial accounts for our key agents who sell our core P&C products as well as our four specialty commercial programs, which are lender-placed property insurance, agents' errors and omissions insurance, mini-storage and warehouse properties and non-profit social services organizations. SURETY We offer surety bonds primarily for construction, performance and legal matters that include appeals, probate and bankruptcies. P&C OTHER P&C Other includes large commercial business accounts, commercial specialty programs and London operations that are in runoff and certain product lines that we have exited. OUR RESULTS Our management measures segment profit or loss for our business based upon underwriting results. Underwriting results (profit or loss) represents the net amount of earned premium less underwriting losses and expenses on a pretax basis. Management views underwriting profit or loss as a critical measure to assess underwriting effectiveness and to evaluate the results of our operations. Underwriting results are not a substitute for net income determined in accordance with GAAP. CORPORATE In addition to these operating segments, certain activities are reported in the Corporate segment and not allocated to individual segments. The Corporate segment includes operating results for the parent company, which includes interest expense for our debt; loss on debt repurchases; SFP, which was engaged in limited derivative activity until its operations were wound down in December 2003; intercompany eliminations and other corporate activities. In reporting L&I as a Discontinued Operation, indirect corporate overhead expenses are no longer allocated to L&I. Previously allocated expenses of $2.3 for the third quarter and $12.8 for the first nine months of 2004 and $3.0 for the third quarter and $9.0 for the first nine months of 2003 have been eliminated for the L&I Other segment and included in our Corporate segment. DISCONTINUED OPERATIONS L&I The Discontinued Operations include results of our L&I businesses. See Note 9 for more information. In reporting L&I as a Discontinued Operation, indirect corporate overhead expenses are no longer allocated to L&I. Previously allocated expenses of $3.0 per quarter in 2003 have been eliminated from the L&I operations and included in the Corporate segment. Prior-period amounts have been restated to reflect the presentation of L&I as a Discontinued Operation. The following tables present selected financial information by segment for our Continuing Operations and reconcile segment revenues and underwriting results to amounts reported in the Consolidated Statements of Income (Loss). REVENUES THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ----------------------------------------------------------------- PROPERTY & CASUALTY Safeco Personal Insurance (SPI) Auto $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3 Property 232.1 229.9 687.8 688.0 Specialty 23.4 21.4 66.7 61.5 ----------------------------------------------------------------- Total SPI 925.9 825.4 2,688.5 2,391.8 ----------------------------------------------------------------- Safeco Business Insurance (SBI) SBI Regular 307.0 275.4 908.9 813.5 SBI Special Accounts Facility 110.5 100.6 335.2 281.7 ----------------------------------------------------------------- Total SBI 417.5 376.0 1,244.1 1,095.2 ----------------------------------------------------------------- Surety 53.7 40.0 146.7 110.6 P&C Other 3.6 9.0 13.3 17.7 ----------------------------------------------------------------- Total Earned Premiums 1,400.7 1,250.4 4,092.6 3,615.3 Net Investment Income 111.0 113.7 338.5 343.0 ----------------------------------------------------------------- Total Revenues (excluding Net Realized 1,511.7 1,364.1 4,431.1 3,958.3 Investment Gains) CORPORATE 4.7 3.6 11.7 19.0 Net Realized Investment Gains 50.5 12.8 178.2 36.7 ----------------------------------------------------------------- TOTAL REVENUES $ 1,566.9 $ 1,380.5 $ 4,621.0 $ 4,014.0 - ----------------------------------------------------------------------------------------------------------- PRETAX UNDERWRITING PROFITS (LOSSES) AND NET INCOME (LOSS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ----------------------------------------------------------------- PROPERTY & CASUALTY Underwriting Profits (Losses) Safeco Personal Insurance (SPI) Auto $ 51.0 $ 32.2 $ 135.1 $ 24.7 Property 14.2 40.5 154.9 61.9 Specialty (4.3) 6.7 8.8 22.2 ----------------------------------------------------------------- Total SPI 60.9 79.4 298.8 108.8 ----------------------------------------------------------------- Safeco Business Insurance (SBI) SBI Regular (59.7) (51.3) (4.0) (68.1) SBI Special Accounts Facility (21.1) 5.8 14.9 11.6 ----------------------------------------------------------------- Total SBI (80.8) (45.5) 10.9 (56.5) ----------------------------------------------------------------- Surety 10.0 8.5 30.8 19.0 P&C Other (12.6) (149.8) (29.9) (170.0) ----------------------------------------------------------------- Total Pretax Underwriting Profit (Loss) (22.5) (107.4) 310.6 (98.7) Net Investment Income 111.0 113.7 338.5 343.0 Restructuring Charges -- -- (1.4) -- ----------------------------------------------------------------- Total Property & Casualty 88.5 6.3 647.7 244.3 CORPORATE (22.6) (32.8) (83.4) (99.8) Loss on Debt Repurchases (121.0) -- (121.0) -- Net Realized Investment Gains before Taxes 50.5 12.8 178.2 36.7 ----------------------------------------------------------------- Income (Loss) from Continuing Operations (4.6) (13.7) 621.5 181.2 before Income Taxes Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7 ----------------------------------------------------------------- Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5 Results from Discontinued Operations, Net of Tax (107.0) (28.8) (57.8) 26.5 ----------------------------------------------------------------- NET INCOME (LOSS) $ (101.1) $ (28.9) $ 382.6 $ 173.0 - ----------------------------------------------------------------------------------------------------------- ASSETS SEPTEMBER 30 DECEMBER 31 2004 2003 - ----------------------------------------------------------------------------------------------------------- PROPERTY & CASUALTY Safeco Personal Insurance (SPI) Auto $ 4,153.8 $ 3,683.0 Property 2,222.1 2,199.8 Specialty 217.8 189.0 -------------------------------- Total SPI 6,593.7 6,071.8 -------------------------------- Safeco Business Insurance (SBI) SBI Regular 3,529.6 3,235.6 SBI Special Accounts Facility 859.0 722.1 -------------------------------- Total SBI 4,388.6 3,957.7 -------------------------------- Surety 498.1 385.6 P&C Other 2,199.0 2,490.3 -------------------------------- TOTAL PROPERTY & CASUALTY 13,679.4 12,905.4 -------------------------------- CORPORATE 986.3 693.1 DISCONTINUED OPERATIONS -- 22,548.9 -------------------------------- TOTAL ASSETS $ 14,665.7 $ 36,147.4 - -----------------------------------------------------------------------------------------------------------
NOTE 9 - DISCONTINUED OPERATIONS On March 15, 2004, we entered into a definitive agreement to sell our life insurance, group stop-loss medical insurance and asset management operations to a group of investors led by White Mountains Insurance Group, Ltd., and Berkshire Hathaway Inc. On August 2, 2004, this transaction was completed. In a separate transaction, on March 15, 2004, we entered into a definitive agreement to sell Talbot Financial Corporation (Talbot), our insurance brokerage operation for $90.0 to an investor group led by senior management of Talbot, with financial support from Hub International Limited. On July 1, 2004, this transaction was completed. On April 8, 2004, we entered into a definitive agreement to sell Safeco Trust Company to Mellon Trust of Washington, and on April 19, 2004, this transaction was completed with a gain of $3.8 after tax. Proceeds from these sales totaled $1,510.0 including $64.3 in dividends, and the after-tax loss on these transactions was $134.8 in the third quarter and $131.0 for the nine months ended September 30, 2004. The enterprises included in these transactions represent all of the business and earnings generated by the L&I segments. We have presented L&I as a Discontinued Operation, as we have met all of the "held-for-sale" criteria under SFAS 144. Results of Discontinued Operations (net of taxes) included: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ---------------------------------------------------------- Total Revenues $ 159.4 $ 400.0 $ 1,140.5 $ 1,400.9 - ----------------------------------------------------------------------------------------------------------- Income (Loss) from Discontinued Operations $ 35.8 $ (64.4) $ 92.2 $ 20.0 before Income Taxes Income Taxes 8.0 (35.6) 19.0 (6.5) ---------------------------------------------------------- Income (Loss) from Discontinued Operations, Net of Taxes 27.8 (28.8) 73.2 26.5 Loss on Disposition, Net of Taxes (134.8) -- (131.0) -- - ----------------------------------------------------------------------------------------------------------- Results of Discontinued Operations, Net of Taxes $ (107.0) $ (28.8) $ (57.8) $ 26.5 - -----------------------------------------------------------------------------------------------------------
Contributing to the loss from the sale of L&I and included in Discontinued Operations in our Consolidated Statements of Income (Loss) is a curtailment gain of $4.7 net of taxes related to the former L&I employees who will no longer accrue benefits under the OPRB plan. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions unless noted otherwise) This discussion should be read with the consolidated financial statements and related footnotes included elsewhere in this report. Forward-Looking Information Forward-looking information contained in this report is subject to risk and uncertainty. Information contained in this report that relates to anticipated financial performance, business prospects and plans, regulatory developments and similar matters are "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. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. The risks and uncertainties include, but are not limited to: o Risks related to the pricing and underwriting of our products, and the subsequent establishment of reserves, such as: - Successful implementation of a new-business entry model for personal and commercial lines - Our ability to appropriately price and reserve for changes in the mix of our book of business - Our ability to establish pricing for any changes in driving patterns - Inflationary pressures on medical care costs, auto parts and repair, construction costs and other economic sectors that increase the severity of claims - The availability and pricing of our reinsurance, including coverage for loss from terrorism and our ability to collect from our reinsurers - Our ability to price for or exclude the risk of loss from terrorism on our policies o Risks related to our Property & Casualty (P&C) insurance strategy such as: - Our ability to achieve premium targets and profitability, including realization of growth and business retention estimates - Our ability to achieve overall expense goals - Our ability to run off our London business and other businesses that we have exited without incurring material unexpected charges o Regulatory, judicial and legislative risks such as: - Our ability to freely enter and exit lines of business - Our ability to successfully obtain regulatory approval of rates and underwriting guidelines, including price-tiered products and the use of insurance scores that include credit information as a component - Interpretation of insurance policy provisions by courts or tax authorities, court decisions regarding coverage and theories of liability, trends in litigation and changes in claims settlement practices - The outcome of any litigation against us - Legislative and regulatory developments affecting the actions of insurers, including requirements regarding rates, taxes, agent and broker commissions and availability of coverage o The competitive pricing environment, initiatives by competitors and other changes in the competition o Unusual loss activity, such as: - Weather conditions, including the severity and frequency of storms, hurricanes, hail, snowfall and winter conditions - The occurrence of significant natural disasters, including earthquakes - The occurrence of significant man-made disasters, such as terrorist attacks or war - The occurrence of bankruptcies that result in losses on insurance products or investments o Financial and economic conditions such as: - Performance of financial markets - Availability of bank credit facilities - Fluctuations in interest rates - General economic conditions o Operational risks such as: - Damage to our infrastructure in a disruption of our operations - Internal or external fraud perpetrated against us Summary We are an insurance company with headquarters in Seattle, Washington. We sell insurance to drivers, homeowners, and small- and medium-sized businesses; and surety bonds through a national network of independent agents and brokers. Our business helps people protect what they value and deal with the unexpected. We earn revenue from insurance policy premiums and income on our invested assets. On August 2, 2004, we completed the sale of our Life & Investments (L&I) operation to an investment group led by White Mountains Insurance Group, Ltd., and Berkshire Hathaway Inc. We completed the sales of Talbot Financial Corporation on July 1, 2004 and Safeco Trust Company on April 19, 2004. See "Liquidity and Capital Resources" for discussion on the use of proceeds. OUR STRATEGY AND LEADERSHIP STRUCTURE On September 27, 2004, we announced a new leadership structure for our company that aligns with our strategy and how we do business: standardized insurance products delivered over a unified platform through a common independent distribution network. The cornerstone of the structure will be the newly created "Office of the President," which will include the following three organizations with shared accountability and responsibility for our results: o Product: Our auto, home, small business and surety products serve the insurance needs of a broad range of customers. The Product organization will bring together these product lines, underwriting and claims. o Platform: This organization will include the people, technology and processes that support our company - including Safeco Now, our internet-based sales platform where our distributors can quote and issue most of our insurance products in minutes. The Platform organization will include finance, information technology, service, human resources and operations. o Distribution: This organization will be responsible for acquiring new customers, building and protecting our brand and supporting our independent distributors. The Distribution organization will include sales, distribution, marketing, research, brand and reputation management. This new structure became effective November 3, 2004. Reviewing Our Results of Operations HOW WE REPORT OUR RESULTS On January 1, 2004, we made minor revisions to our P&C segments. Our non-voluntary auto and property results, previously in P&C Other, are now included in SPI Auto and SPI Property. Certain products, previously reported in SPI Specialty, primarily earthquake, inland marine and dwelling fire, are now included in SPI Property. Our commercial specialty programs and large commercial accounts in runoff, previously SBI Runoff, are now included in P&C Other. Prior-period amounts have been reclassified to reflect the revised presentation of our P&C segments. We manage our P&C businesses in four business and seven reportable segments: o Safeco Personal Insurance (SPI) -- Auto -- Property -- Specialty o Safeco Business Insurance (SBI) -- SBI Regular -- SBI Special Accounts Facility o Surety o P&C Other As previously discussed, our L&I businesses are reported as Discontinued Operations. In addition to these segments, certain activities such as interest expense and intercompany eliminations are reported in Corporate and not allocated to individual segments. HOW WE MEASURE PROFITABILITY P&C -- We use three measures of our operating results to assess the profitability of our P&C businesses. These measures are net earned premiums, underwriting profit or loss and combined ratio. We include property and casualty insurance premiums in revenue as earned over the terms of the respective policies. We report the unearned portion of the policy premium as a liability on the Consolidated Balance Sheets before the effect of reinsurance. Underwriting profit or loss is our net earned premiums less our losses from claims, loss adjustment expenses (LAE) and underwriting expenses. Combined ratio is our losses, LAE and underwriting expenses divided by our net earned premiums. We report combined ratio as a percentage. For example, a combined ratio of 95% means that our losses, LAE and underwriting expenses equal 95% of our net earned premiums, or a 5% underwriting profit. A lower combined ratio reflects better results than a higher combined ratio. We don't include our investment portfolio results when measuring the profitability of our businesses. That's because we manage the investment portfolio separately from our underwriting activities. INVESTMENT RESULTS Investment activities are an important part of our business. We invest insurance premiums received in a diversified portfolio until needed to pay claims. Income from our investments is a significant part of our total revenues and net income. Our investment philosophy is to: o Emphasize investment yield, balanced with investment quality and risk o Provide for liquidity when needed o Diversify our portfolio We measure our investment results in two parts - the net investment income that we earn on our invested assets and the net realized investment gains and losses we recognize when we sell or impair investments. Application of Critical Accounting Estimates We have identified Loss and LAE Reserves, Reinsurance and Valuation of Investments as accounting estimates critical to understanding our results of operations and financial condition. As such, they require management to use judgments involving assumptions and estimates concerning future results, trends, or other developments that could significantly influence our results should actual experience differ from those assumptions and estimates. Please see additional discussion of critical accounting estimates in the MD&A section of our 2003 Annual Report on Form 10-K. Consolidated Results of Operations The following table presents summary consolidated financial information for the periods indicated. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------- REVENUES Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3 Net Investment Income 115.5 114.7 349.6 354.1 Net Realized Investment Gains 50.5 12.8 178.2 36.7 Other Revenues 0.2 2.6 0.6 7.9 ------------------------------------------------------- Total Revenues 1,566.9 1,380.5 4,621.0 4,014.0 ------------------------------------------------------- EXPENSES Losses and Loss Adjustment Expenses 1,029.9 1,003.5 2,632.2 2,639.3 Other Underwriting and Operating Expenses 162.8 148.8 475.7 471.3 Amortization of Deferred Acquisition Costs 232.5 211.5 681.9 626.1 Loss on Debt Repurchases 121.0 -- 121.0 -- Interest Expense 25.3 30.4 87.3 96.1 Restructuring Charges -- -- 1.4 -- ------------------------------------------------------- Total Expenses 1,571.5 1,394.2 3,999.5 3,832.8 ------------------------------------------------------- Income (Loss) from Continuing Operations before Income Taxes (4.6) (13.7) 621.5 181.2 Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7 ------------------------------------------------------- Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5 Results from Discontinued Operations (Net of Taxes of $(52.3) and $(39.1) in 2004 and $(35.6) and $(6.5) in 2003) (107.0) (28.8) (57.8) 26.5 ------------------------------------------------------- Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0 - ----------------------------------------------------------------------------------------------------------
Net Income (Loss) - Net loss for the three months ended September 30, 2004 was $101.1, compared with a net loss of $28.9 for the same period last year. Net Income for the nine months ended September 30, 2004 was $382.6 compared with $173.0 for the same period last year. Excluding results from Discontinued Operations, Income from Continuing Operations was $5.9 in the third quarter of 2004 compared with a Loss from Continuing Operations of $0.1 for the same period last year, and Income from Continuing Operations for the nine months ended September 30, 2004 was $440.4 and $146.5 in 2003. Income from Continuing Operations was impacted by: o Growth: Our earned premiums increased by 12.0% in the third quarter of 2004 and 13.2% in the first nine months of 2004 compared with the same periods in 2003. o Catastrophe losses: After-tax catastrophe losses were $126.6 in the third quarter of 2004, compared with $13.7 in 2003. After-tax catastrophe losses were $153.0 for the first nine months of 2004, compared with $86.8 in 2003. o Underwriting Profit: Excluding the catastrophes, our underwriting profit margins exceeded our targets, reflecting favorable loss trends and pricing above loss costs. o Reserve actions: We experienced favorable reserve development in SPI of $14.3 after tax during the third quarter of 2004 and $31.2 after tax for the first nine months of 2004. We reported unfavorable development in workers compensation reserves of $133.3 after tax for the three and nine months ended September 30, 2003. o Loss on Debt Repurchases: We used $735.2 of the proceeds from the sale of L&I to repurchase $618.4 in principal amount of debt and capital securities. Including transaction costs, this resulted in a loss on debt repurchases of $78.7 after tax in the third quarter of 2004. o Net Realized Investment Gains included $14.7 of pretax gains on sales of equity securities in the third quarter and $76.3 of pretax gains from the sales of equity securities in the second quarter of 2004. These gains will largely offset the loss on the sale of L&I for tax purposes. Revenues - The increase in revenues for the third quarter and the nine months ended September 30, 2004 reflected growth in earned premiums and net realized investment gains. Earned premium growth resulted from: o New business growth driven by our automated sales and service platform, Safeco Now, from our three major segments (Auto, Property and SBI Regular) o Growth in policies-in-force (PIF), reflecting the number of policies that we renew and the new policies that we write, for Auto of 9.7% and SBI Regular of 0.3% compared with a year ago o Stable retention in Auto and Property, and improved retention at policy renewal in our SBI Regular segment from 77.9% in 2003 to 79.8% in 2004 o Premium rate increases across our major lines of business The increase in Net Realized Investment Gains during the third quarter of 2004 was due to sales of equity securities. We sold equity securities in the third quarter of 2004 realizing investment gains of $14.7. The increase in net realized investment gains during the nine months ended September 30, 2004, was primarily due to the sale of equity securities in the third quarter and a $76.3 gain from the sales of equity securities in the second quarter of 2004. Strong performance in our equity holdings during 2004 increased the weight of our equity securities within the portfolio and we sold equity securities to reduce our holdings to our target of 10% of total investments. Impairments of $9.1 in 2004 compared with $47.3 in 2003 also contributed to the change in net realized investment gains for the nine months ended September 30, 2004. These gains will largely offset the loss on sale of L&I for tax purposes. Losses and Loss Adjustment Expenses - The increase in losses and LAE in the three months and nine months ended September 30, 2004 reflects our growth and higher catastrophe losses. Catastrophe losses, primarily from the four hurricanes that hit Florida and surrounding states in August and September of 2004, were $194.8 pretax in the three months ended September 30, 2004, compared with $21.0 in the same period of 2003. Pretax catastrophe losses for the nine months ended September 30, 2004, were $235.4, compared with $133.5 in 2003. Losses and LAE in the third quarter of 2004 included $22.0 in favorable prior-year reserve development in SPI and for the nine months of 2004 included $48.0 in favorable prior-year reserve development in SPI. Losses and LAE in the three and nine months ended September 30, 2003 also included $205.0 pretax in workers compensation reserve strengthening. Other Underwriting and Operating Corporate Expenses - The increase in underwriting and operating expenses primarily resulted from costs associated with business growth offset partially by our corporate expense reduction efforts initiated in September 2003. Amortization of Deferred Acquisition Costs - The increases in amortization of deferred acquisition costs reflect growth in our business during 2004. Loss on Debt Repurchases - In the third quarter of 2004, we repurchased $618.4 in principal amount of our debt. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 in the Consolidated Statements of Income (Loss). Interest Expense - The decrease in interest expense of $5.1 for the three months and $8.8 for the nine months ended September 30, 2004 compared with the same periods in 2003 was due to a lower average balance of debt outstanding than during the same periods in 2003 primarily due to the repurchases of debt described above. Restructuring Charges - The charges in the nine months ended September 30, 2004 represent termination benefits related to the corporate expense reduction effort announced in September 2003. All announced positions were eliminated by March 31, 2004, and this effort was completed by September 30, 2004. Results from Discontinued Operations - Results from Discontinued Operations include the loss on the sale of our L&I operations of $134.8 for the three months ended September 30, 2004 and $131.0 for the nine months ended September 30, 2004, partially offset by income from Discontinued Operations. Results for the nine months ended September 30, 2004 included $46.7 in after-tax impairment charges related to all L&I securities with unrealized losses and our expectation that these securities would not recover in value before the completion of the sale, compared with $77.7 in after-tax impairment charges in the third quarter and first nine months of 2003. Continuing Operations Reconciling Segment Results The following table assists in reconciling our GAAP results, specifically the "Income (Loss) from Continuing Operations before Income Taxes" line from our Consolidated Statements of Income (Loss) to our segment performance measures. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - -------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 ------------------------------------------------------------ P&C $ 130.3 $ 13.5 $ 810.1 $ 254.9 Corporate (134.9) (27.2) (188.6) (73.7) ------------------------------------------------------------ Income (Loss) from Continuing Operations before Income Taxes $ (4.6) $ (13.7) $ 621.5 $ 181.2 - --------------------------------------------------------------------------------------------------------
The P&C GAAP results are further detailed into segment underwriting results. Underwriting results provide a helpful picture of how our company is doing. However, using them to measure profitability - while fairly common in our industry - does not follow GAAP. Our P&C Operating Results The primary measures of our operating results include our underwriting profit or loss, net earned premiums, and combined ratios. The next three tables report those key items - by our reportable segments - for the three and nine months ended September 30, 2004 and 2003. More information about the results - also by segment - follows the tables. First, net earned premiums are the primary driver of our revenues: THREE MONTHS ENDED NINE MONTHS ENDED NET EARNED PREMIUMS SEPTEMBER 30 SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 -------------------------------------------------------- SPI Auto $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3 Property 232.1 229.9 687.8 688.0 Specialty 23.4 21.4 66.7 61.5 -------------------------------------------------------- Total SPI 925.9 825.4 2,688.5 2,391.8 -------------------------------------------------------- SBI SBI Regular 307.0 275.4 908.9 813.5 SBI Special Accounts Facility 110.5 100.6 335.2 281.7 -------------------------------------------------------- Total SBI 417.5 376.0 1,244.1 1,095.2 -------------------------------------------------------- Surety 53.7 40.0 146.7 110.6 P&C Other 3.6 9.0 13.3 17.7 -------------------------------------------------------- Total P&C Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3 - ----------------------------------------------------------------------------------------------------
Next, underwriting profit (loss) is our measure of each P&C segment's performance: THREE MONTHS ENDED NINE MONTHS ENDED UNDERWRITING PROFITS (LOSSES) SEPTEMBER 30 SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 -------------------------------------------------------- SPI Auto $ 51.0 $ 32.2 $ 135.1 $ 24.7 Property 14.2 40.5 154.9 61.9 Specialty (4.3) 6.7 8.8 22.2 -------------------------------------------------------- Total SPI 60.9 79.4 298.8 108.8 -------------------------------------------------------- SBI SBI Regular (59.7) (51.3) (4.0) (68.1) SBI Special Accounts Facility (21.1) 5.8 14.9 11.6 -------------------------------------------------------- Total SBI (80.8) (45.5) 10.9 (56.5) -------------------------------------------------------- Surety 10.0 8.5 30.8 19.0 P&C Other (12.6) (149.8) (29.9) (170.0) -------------------------------------------------------- Total Underwriting Profit (Loss) (22.5) (107.4) 310.6 (98.7) Net Investment Income 111.0 113.7 338.5 343.0 Restructuring Charges -- -- (1.4) -- Net Realized Investment Gains 41.8 7.2 162.4 10.6 -------------------------------------------------------- P&C Income from Continuing Operations before Income Taxes $ 130.3 $ 13.5 $ 810.1 $ 254.9 - ----------------------------------------------------------------------------------------------------
Finally, combined ratios show the relationship between net earned premiums and underwriting profit (loss). Using ratios helps us see our operating trends without the effect of changes in net earned premiums: THREE MONTHS ENDED NINE MONTHS ENDED COMBINED RATIOS+ SEPTEMBER 30 SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 -------------------------------------------------------- SPI Auto 92.4% 94.4% 93.0% 98.5% Property 93.9 82.4 77.5 91.0 Specialty 118.3 68.6 86.7 63.9 -------------------------------------------------------- Total SPI 93.4 90.4 88.9 95.5 -------------------------------------------------------- SBI SBI Regular 119.5 118.6 100.4 108.4 SBI Special Accounts Facility 119.1 94.3 95.5 95.9 -------------------------------------------------------- Total SBI 119.4 112.2 99.1 105.2 -------------------------------------------------------- Surety 81.3 78.8 79.0 82.8 P&C Other * * * * -------------------------------------------------------- Total P&C Operations 101.6% 108.6% 92.4% 102.7% - ----------------------------------------------------------------------------------------------------
+ Combined ratios are GAAP basis. Expressed as a percentage, they are equal to losses and expenses divided by net earned premiums. * Not meaningful because this is in runoff with minimal premium. Auto The Auto segment provides voluntary and non-voluntary coverage for liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for physical damage to our customers' vehicles from collision and other hazards. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ---------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 -------------------------------------------------------- Net Earned Premiums $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3 Underwriting Profit 51.0 32.2 135.1 24.7 Combined Ratio 92.4% 94.4% 93.0% 98.5% - ----------------------------------------------------------------------------------------------------
NET EARNED PREMIUMS Net earned premiums increased by $96.3 or 16.8% for the three months ended September 30, 2004 and $291.7 or 17.8% for the nine months ended September 30, 2004 compared with the same periods in 2003. The increases in net earned premiums were driven by: o Growth of PIF: PIF grew by 9.7% at September 30, 2004 compared with a year ago. Retention was stable in 2004 at 80.1% compared with 2003 while new business growth more than offset the policies that did not renew. New business policies written grew 2.9% in the third quarter and 15.3% for the nine months ended September 30, 2004 compared with 2003. This growth reflects the effectiveness of our point-of-sale (POS) technology in making it easier for our distributors to sell our products. o Increases in filed rates: We file rate changes on a state-by-state basis. On average, we implemented mid-single digit annual rate increases in 2003 and low-single digit annual rate increases in 2004. UNDERWRITING RESULTS AND COMBINED RATIO The improved underwriting results reflected increased earned premiums as discussed above and improved loss ratios. Our 15-tier segmented model continues to provide more accurate matching of prices for a wide range of risks. Our loss and LAE ratio improved to 69.1% in the third quarter of 2004 compared with 72.2% in the third quarter of 2003, and 70.1% in the first nine months of 2004 compared with 75.3% in the same period of 2003. Our expense ratio was 23.3% in the third quarter of 2004 compared with 22.2% in the third quarter of 2003, and 22.9% in the first nine months of 2004, compared with 23.2% in the same period of 2003. These underwriting results and combined ratios were primarily driven by: o Improved profit margins: Rate increases exceeded loss cost increases in the third quarter and the first nine months of 2004. Annual increases in loss costs have averaged approximately 1%-2% over the past two years, while earned rate increases have ranged in the mid-single digits over that same period. o Favorable reserve development: Results in the third quarter 2004 included favorable reserve development of $10.0 related to prior accident years, primarily related to continuing improvements in preferred and non-standard loss development, contributing 1.5 points to the improved combined ratio. Results in the first nine months of 2004 included favorable reserve development of $19.0 occurring in prior periods, contributing 1.0 point to the improved combined ratio. o Claims handling: We've invested in training for our claims representatives which has led to more efficient and effective claims handling. We also have improved our claims processes, which has contributed to lower loss adjustment expense ratios in the first nine months of 2004. o Catastrophe losses: Higher catastrophe losses in the third quarter of 2004 partially offset the improved loss and LAE ratios. Pretax catastrophe losses were $8.2 in the third quarter of 2004 (a 1.2 point impact on the combined ratio), and there were no catastrophe losses in the same period of 2003. However, catastrophe losses of $17.7 (a 0.9 point impact on the combined ratio) were lower in the first nine months of 2004, compared with $23.1 (a 1.4 point impact on the combined ratio) in the same period of 2003. o Expense ratio: The increase in our expense ratio for the quarter was a result of increased bonus commissions and accrued employee performance bonuses due to our improved underwriting results offset by expense reduction efforts. The decline in the nine months 2004 compared with 2003 is the result of the impact of our wide-ranging expense improvement efforts. WHERE WE'RE HEADED Our commitment to ease of doing business by lowering our agents' costs and providing an easy to use sales platform continues through the launch of Safeco Now. Our auto product is now available on Safeco Now in all of the states where we write business. In May 2004, we started launching our policy change tool for handling certain simple but frequent policy endorsements. Additional web-based policy-change transactions will be delivered in phases throughout the remainder of 2004 and into 2005. In Auto, we are experiencing a more competitive marketplace as our competitors increase advertising and sales incentives. There have been some modest and selective rate decreases by competitors. We remain committed to disciplined pricing using our segmented product, and our rate increases continue to exceed our loss cost trends. We believe that the combination of our ongoing product development through segmentation, improvement in our ease of doing business through Safeco Now and targeted expansion into eastern states will allow us to continue to build profitable growth in the face of increasing competition. Property Our Property segment provides homeowners, earthquake, dwelling fire and inland marine coverage for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We also protect individuals from liability for accidents that occur on their property. THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 232.1 $ 229.9 $ 687.8 $ 688.0 Underwriting Profit 14.2 40.5 154.9 61.9 Combined Ratio 93.9% 82.4% 77.5% 91.0% - -----------------------------------------------------------------------------------------------------------
NET EARNED PREMIUMS Net earned premiums were up slightly in the three months ended September 30, 2004, compared with the same period in 2003. Net earned premiums were flat in the nine months ended September 30, 2004, compared with the same period in 2003.This primarily reflects new business and rate increases: o New business: Our new business increased during the third quarter of 2004 over a year ago by 14.1% and during the first nine months of 2004 over a year ago by 9.6%, as our nine-tier new homeowners product is available in 43 of the 44 states where we write business. In addition, we lifted new business moratoriums throughout 2003 and into 2004, and as a result have no statewide new business moratoriums remaining. The number of policies that did not renew in 2004 exceeded the number of new policies that we wrote, leading to a net reduction in PIF of 7.7% at September 30, 2004 compared with a year ago. o Rate increases: We file rate changes on a state-by-state basis. Overall we implemented average rate increases in the low to mid teens in 2003, while rates were relatively flat in the first nine months of 2004. These rate changes are earned in our revenues over the twelve-month policy term. Additionally, premiums reflect automatic increases in the amount of insurance coverage to adjust for inflation. UNDERWRITING RESULTS AND COMBINED RATIO The decline in underwriting results in the third quarter of 2004 compared with a year ago was primarily due to the four hurricanes in Florida and surrounding states, partially offset by lower non-catastrophe weather-related losses. The underwriting results for the first nine months of 2004 compared with a year ago reflect our improved loss ratios as our nine-tier segmented model continues to provide more accurate matching of prices for a wide range of risks. Our loss and LAE ratio was 67.5% in the third quarter of 2004 compared with 53.9% in the third quarter of 2003, and 50.4% in the first nine months of 2004 compared with 62.1% in the same period of 2003. Our expense ratio was 26.4% in the third quarter of 2004 compared with 28.5% in the third quarter of 2003, and 27.1% in the first nine months of 2004 compared with 28.9% in the same period of 2003. The underwriting results and combined ratios were driven by: o Lower losses: Property loss costs excluding catastrophes continue to decline, driven primarily by double digit declines in claims frequency. The rate of decrease in loss costs has been declining since the third quarter of 2003, but is still in the high single-digits. o Catastrophe losses: Our pretax catastrophe losses were $71.3 (a 30.7 point impact on combined ratio) for the three months ended September 30, 2004 and $94.2 (a 13.7 point impact on combined ratio) for the nine months ended September 30, 2004 compared with $12.1 (a 5.3 point impact on combined ratio) and $83.9 (a 12.2 point impact on combined ratio) for the same periods in 2003. Catastrophes in 2004 were primarily from the four hurricanes in Florida and the surrounding states. Property's pretax catastrophe losses from these hurricanes were $66.3. Our National Catastrophe Team remains in Florida, helping customers rebuild from the hurricanes. Our estimated losses from these events, particularly the most recent Hurricane Jeanne, are still evolving and these estimates may be revised in future quarters as labor and material costs are better known and losses are paid. Catastrophe losses in 2003 were due to a hailstorm in Texas and severe storms and tornadoes in Kansas, Missouri, Tennessee and Wyoming. o Claims handling: We've invested in training for our claims representatives which has led to more efficient and effective claims handling. o Our segmented homeowners product: Our nine-tier segmented underwriting model is performing as expected and better matches prices to risk. It is now in place in all states where we write business except California. o Favorable reserve development: Results in third quarter 2004 included favorable reserve development of $9.0 which positively impacted the combined ratio by 3.9 points. Results in the first nine months of 2004 included favorable reserve development of $26.0 contributing 3.8 points to the improved combined ratio. The favorable development was driven mainly by the changes in contract terms, and decreased frequency of claims beyond that previously expected. WHERE WE'RE HEADED In April 2004, we started launching our homeowners product on Safeco Now, our web-based sales and service platform, which is now available in all of the 44 states where we write business. As expected, this has contributed to the increase in new business compared with the prior year. We will continue to evaluate our segmented product to ensure our growth is profitable. In the fourth quarter of 2004, we will start rolling out our segmented dwelling fire product on Safeco Now. Specialty THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 23.4 $ 21.4 $ 66.7 $ 61.5 Underwriting Profit (Loss) (4.3) 6.7 8.8 22.2 Combined Ratio 118.3% 68.6% 86.7% 63.9% - -----------------------------------------------------------------------------------------------------------
Our Specialty operation provides individuals with umbrella, recreational vehicle, motorcycle and boat insurance. These products serve to round out our personal lines insurance product offerings. NET EARNED PREMIUMS Net earned premiums increased $2.0 or 9.3% for the third quarter 2004, compared with the same period in 2003 and $5.2 or 8.5% for the first nine months of 2004, compared with the same period in 2003. This increase was driven primarily by a 20.4% increase in the sales of new umbrella policies and a 6.8% increase in the sale of new boat-owner policies. UNDERWRITING RESULTS AND COMBINED RATIO The lower underwriting results in 2004, compared with the same periods in 2003, reflect higher catastrophe losses in 2004 from boat owners and unusually low umbrella losses in the second quarter of 2003. Our loss and LAE ratio was 93.3% in the third quarter of 2004, compared with 43.4% in the third quarter of 2003, and 61.6% in the first nine months of 2004, compared with 38.0% in the same period of 2003. Pretax catastrophe losses were $6.3 (a 26.9 point impact on the combined ratio). The catastrophes were primarily due to the four hurricanes in Florida and surrounding states in the third quarter and first nine months of 2004, and there were no catastrophe losses in 2003. SBI Regular THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 307.0 $ 275.4 $ 908.9 $ 813.5 Underwriting Loss (59.7) (51.3) (4.0) (68.1) Combined Ratio 119.5% 118.6% 100.4% 108.4% - -----------------------------------------------------------------------------------------------------------
Our SBI Regular segment provides insurance for small-to-medium-sized businesses (customers who pay annual written premiums of $200,000 or less). This is our core commercial lines business. Our main products include: o Business owner policies (BOP) o Commercial auto o Commercial property o Commercial multi-peril (CMP) o General liability o Workers compensation NET EARNED PREMIUMS Net earned premiums increased $31.6 or 11.5% in the third quarter and $95.4 or 11.7% in the first nine months of 2004 compared with the same periods of 2003. This reflects rate increases averaging 10.0% in 2003 and mid-single digits in 2004, along with growth in new business sales reflecting our focus on ease of doing business for our distributors. These efforts included: o Continued focus on our redesigned business model: In the first nine months of 2004, new sales continued at a strong pace, as new business for BOP, commercial auto and workers compensation, utilizing Safeco Now, was up 20.6%. However, the rate of growth began to slow in the third quarter as new business for products available on Safeco Now (BOP, commercial auto and workers compensation) was up 4.8% compared with a year ago, reflecting the third quarter 2003 rollout of BOP on Safeco Now. New business for all products was down 7.6% compared with a year ago, reflecting increased competition. We remain committed to pricing our products approximately relative to our loss cost trends to achieve our profit margin targets. o Emphasis on retaining customers: Renewal retention of SBI Regular customers improved to 79.8% in the third quarter 2004 from 77.9% in third quarter 2003. This strong improvement is attributed to our automated underwriting platform, which has allowed us to improve our accuracy in pricing risks and has led to higher retention within our most favorable pricing tiers. o Growth in our Business Service Center: We provide agents with an option to have us service the policies of their customers for a fee. This allows the agents to focus on growing their business and shifts the policy servicing activities to us. We experience higher retention of these policyholders, benefiting both us and the agent. Since its inception in 2002, we have seen growth in the business entering our Business Service Center, and in third quarter 2004 we achieved a significant increase in premium volume, compared with the same period in 2003. Currently this business represents a small percentage of premiums; however, we have aggressive growth goals in this area. o Introduction of our field specialization model: We have created separate underwriting units for our core small-business and mid-market business. We believe that this new approach, the "field specialization model," increases efficiency and underwriting accuracy. UNDERWRITING RESULTS AND COMBINED RATIO The underwriting results for the three and nine months ended September 30, 2004 were impacted by higher earned premium discussed above and higher catastrophe losses. In September 2003, we strengthened workers compensation loss reserves by $57.6. Our loss and LAE ratio was 86.6% in the third quarter of 2004 compared with 81.8% in the third quarter of 2003, and 67.0% in the first nine months of 2004 compared with 70.9% in the same period of 2003. Our expense ratio was 32.9% in the third quarter of 2004 compared with 36.8% in the third quarter of 2003, and 33.4% in the first nine months of 2004 compared with 37.5% in the same period of 2003. The decline in the expense ratio in 2004 is the result of the impact of our wide-ranging expense improvement efforts. These underwriting results and combined ratio were primarily driven by: o Catastrophe losses: Our pretax catastrophe losses were $79.9 (a 26.0 point impact on combined ratio) in the three months ended September 30, 2004, compared with $5.2 (a 1.9 point impact on combined ratio) in the same period of 2003, and $85.8 (a 9.4 point impact on combined ratio) in the nine months ended September 30, 2004, compared with $18.8 (a 2.3 point impact on combined ratio) in the same period of 2003. The higher catastrophe losses were mainly due to hurricanes in Florida and surrounding states. Our CMP market share of voluntary premiums in Florida is 2.0%. o Prior year reserve development: Results for the three and nine months ended September 30, 2003 included $57.6 pretax workers compensation reserve strengthening for prior years. WHERE WE'RE HEADED In SBI Regular, we are experiencing increased competition in our middle market business (customers who pay annual written premiums from $25,000 to $200,000). Historically, this business is more price-competitive as industry profit margins expand. Some carriers are lowering rates to be more price-competitive, particularly in the commercial property line where rates appear to be adequate. However, inflation in building materials costs is increasing and will impact loss costs. We remain committed to disciplined pricing of our business based on loss cost trends and meeting our profit margin targets. We will further compete in this segment through our field specialization model. In addition, we have implemented our automated underwriting platform for our in force business in CMP which will provide more accurate pricing and segmentation. In the fourth quarter of 2004, we will begin to launch our automated underwriting platform for new CMP customers as well. In July 2004, after reviewing the recent reforms and closely monitoring the market, we lifted a new business moratorium for California workers compensation market and will write policies for existing small account customers in just 50 classes of business for which we already write BOP, automobile or CMP policies. In addition, we will be expanding our BOP product by adding additional classes of business in the fourth quarter of 2004 throughout the U.S. SBI Special Accounts Facility THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 110.5 $ 100.6 $ 335.2 $ 281.7 Underwriting Profit (Loss) (21.1) 5.8 14.9 11.6 Combined Ratio 119.1% 94.3% 95.5% 95.9% - -----------------------------------------------------------------------------------------------------------
Our SBI Special Accounts Facility (SAF) segment includes insurance for large commercial accounts (customers who pay annual written premiums of more than $200,000) and four commercial programs. While our main focus is the small- to medium-sized market, we continue to serve some large commercial accounts on behalf of key agents and brokers who sell our core property and casualty products. Sixty percent of our new small-commercial business comes from distributors who also sell to large commercial accounts. SAF also provides insurance for the following commercial programs: o Lender-placed property o Agents' errors and omissions (predominantly for Safeco agents) o Property and liability insurance for mini-storage and warehouse properties o Non-profit social services organizations professional and general liability insurance NET EARNED PREMIUMS Net earned premiums increased $9.9 or 9.8% in the third quarter and $53.5 or 19.0% in the first nine months of 2004. This was driven by continued price increases primarily in our program business. Underwriting Results and Combined Ratio Our underwriting results reflect our premium growth; however, higher catastrophe claims in 2004 more than offset the underwriting profit from that growth in the third quarter. Our loss and LAE ratio was 80.1% in the third quarter of 2004 compared with 60.3% in the third quarter of 2003, and 58.1% in the first nine months of 2004, compared with 57.5% in the same period of 2003. These underwriting results and combined ratio were primarily driven by: o Price increases: The premium growth in the third quarter of $9.9 and $53.5 in the first nine months of 2004 was due to price increases. o Catastrophe losses: The underwriting loss for the three months ended September 30, 2004 included $29.1 in pretax catastrophe losses (26.3 point impact on the combined ratio), compared with $3.6 (3.6 point impact on the combined ratio) in 2003. The underwriting profit for the nine months ended September 30, 2004 includes $31.4 in catastrophe losses (9.4 point impact on the combined ratio), compared with $7.2 (2.6 point impact on the combined ratio). o Prior year reserve development: Results of the three and nine months ended September 30, 2003 included $2.5 in prior years workers compensation reserve strengthening. Surety THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 53.7 $ 40.0 $ 146.7 $ 110.6 Underwriting Profit 10.0 8.5 30.8 19.0 Combined Ratio 81.3% 78.8% 79.0% 82.8% - -----------------------------------------------------------------------------------------------------------
Our Surety segment provides surety bonds for construction and commercial businesses. NET EARNED PREMIUMS Our net earned premiums increased $13.7 or 34.3% for the three months ended September 30, 2004 and $36.1 or 32.6% for the nine months ended September 30, 2004 compared with the same periods in 2003. This was due to rate increases in 2003 and new business as a result of capitalizing on market conditions and as a result of the 2003 opening of new offices in Glendale, California and Syracuse, New York. UNDERWRITING RESULTS AND COMBINED RATIO Our underwriting profit improved by $1.5 in the third quarter and $11.8 in the first nine months of 2004 compared with the same periods of 2003. These results reflect our continued disciplined underwriting. Surety implemented Safeco Now in April 2004 for the automated underwriting of small transactional bonds. While this is currently less than 5% of our surety premiums, it allows our distributors to quote and issue transactional bonds quickly and easily from our common distribution platform. Surety implemented direct billing for these bonds in October 2004. P&C Other THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Earned Premiums $ 3.6 $ 9.0 $ 13.3 $ 17.7 Underwriting Loss (12.6) (149.8) (29.9) (170.0) - -----------------------------------------------------------------------------------------------------------
Our P&C Other segment includes our: o Runoff of assumed reinsurance business acquired as part of the American States acquisition o London operations that have been in runoff since the third quarter of 2002 o Large commercial business accounts in runoff and specialty programs that we exited P&C Other's underwriting losses were due to prior year reserve strengthening. The underwriting loss in 2003 includes $144.9 workers compensation reserve strengthening for prior years. Our Corporate Results THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Corporate Segment Loss $ (22.6) $ (32.8) $ (83.4) $ (99.8) Loss on Debt Repurchases (121.0) -- (121.0) -- Net Realized Investment Gains before Income Taxes 8.7 5.6 15.8 26.1 --------------------------------------------------------------- Corporate Loss from Continuing Operations before Income Taxes $ (134.9) $ (27.2) $ (188.6) $ (73.7) - -----------------------------------------------------------------------------------------------------------
In our Corporate segment, we include: o Interest expense we pay on our debt o Loss on debt repurchases o Our intercompany eliminations o Miscellaneous corporate activities On August 13, 2004, we repurchased $473.4 in principal amount of 8.072% capital securities for $562.7, and on September 1, 2004, we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported pretax loss on debt repurchases of $121.0 in the Consolidated Statements of Income (Loss). Our interest expense on borrowings totaled $25.3 and $87.3 in the three and nine months ended September 30, 2004 and $30.4 and $96.1 in the same periods last year. The decrease in interest expense for the three and nine months ended September 30, 2004 compared with the same periods in 2003 was due to a lower average balance of debt outstanding than during the same periods in 2003. The lower average balance of debt outstanding was due to the debt repurchases described above. In reporting L&I as a Discontinued Operation, indirect corporate overhead expenses are no longer allocated to L&I. Previously allocated expenses of $2.3 for the third quarter and $12.8 for the first nine months of 2004 and $3.0 for the third quarter and $9.0 for the first nine months of 2003 have been eliminated for the L&I Other segment and included in our Corporate segment. Capital Resources and Liquidity OUR LIQUIDITY NEEDS Continuing Operations - P&C liabilities are somewhat unpredictable and generally short in duration. The payments we make to policyholders depend upon losses they suffer from accidents or other events. While we can estimate how much cash we'll need and when we'll need it, we cannot predict all future events, particularly catastrophes. So we use investments with greater liquidity to support our P&C businesses' need for funds. SOURCES OF OUR FUNDS We generate cash flow primarily from insurance premiums, dividends, interest and sales or maturity of investments. We have not engaged in the sale of investments or other assets by securitization. The cash flow from our operating activities was: o $744.7 of cash flow generated in the first nine months of 2004 o $261.9 of cash flow generated in the first nine months of 2003 The increase in 2004 was due to increased premiums of $4,176.1 in 2004 compared with $3,781.7 in 2003 and decreased insurance claims paid of $2,414.7 in 2004 and $2,514.2 in 2003 reflecting our improved underwriting results. The estimated losses of $194.8 from the hurricanes in Florida and the surrounding states are expected to be paid over the next six to twelve months. Dividends and interest received on our investment portfolio of $405.9 in 2004 compared with $350.5 in 2003 also contributed to the increase in cash flow. We believe that cash flows from our operations, investment portfolio, and credit facilities are sufficient to meet our future liquidity needs. HOW WE USE OUR FUNDS We use funds to support operations, make interest and principal payments on debt, pay dividends to our shareholders, repurchase stock, and grow our investment portfolio. We use cash from insurance operations primarily to pay claims and claim adjustment expenses. We require insurance premiums to be paid in advance. As a result, cash flows into our business before or at the time premium revenues are recognized. Cash flows out of our business in subsequent months or years as claims are paid. Quarterly Dividends -- On October 25, 2004, we paid a quarterly dividend of $0.22 per share. This represents an 18.9% increase per share over the previous quarterly dividend of $0.185 per share. Sale of L&I and Use of Proceeds -- On August 2, 2004, we completed the sale of our L&I operations resulting in $1,510.0 of aggregate sales proceeds. Of these proceeds, $735.2 was used to repurchase $618.4 of debt, $623.0 was used to execute an accelerated stock buyback (ASB) program of 13,247,863 shares of common stock and the balance was retained to provide flexibility for the future and pay transaction-related expenses. Repurchases of Debt -- On August 13, 2004, we repurchased $473.4 in principal amount of 8.072% debentures for $562.7, and on September 1, 2004, we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 in the Consolidated Statements of Income (Loss). ASB -- On August 2, 2004, we repurchased 13,247,863 shares, or approximately 9.5% of our outstanding common stock under an ASB program. The shares were purchased from a dealer at a price of $46.80 per share, for a total cost of $623.0. Through the ASB program, we returned excess capital from the L&I sale to shareholders and immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we purchased by borrowing them in the open market, and then repurchases shares in the market over the next six to nine months to repay the borrowed shares. $200.0 of the ASB is subject to a collar, a contract that sets a minimum and maximum price for us for the shares repurchased under the collar. At the end of the program, we may receive, or be required to pay, a price adjustment based on volume weighted average price of our common stock during the period of the ASB repurchases. This adjustment will be recorded in shareholders' equity. Our Bank Credit Facility -- On August 2, 2004, in conjunction with the sale of L&I, we amended the bank credit facility to lower the available amount to $300.0. We also negotiated a lower minimum amount of shareholders' equity we need to maintain to comply with the debt covenants of this facility. The terms of the bank credit facility - which runs through September 2005 - require us to: o Pay a fee to have these funds available o Maintain a specified minimum level of shareholders' equity o Keep our debt-to-capitalization ratio below a specified maximum The bank credit facility does not require us to maintain any deposits as compensating balances. At September 30, 2004 and December 31, 2003 we had no borrowings under the bank credit facility and we were in compliance with all the terms of this credit facility. FINANCIAL STRENGTH RATINGS Financial strength (or claims paying) ratings provide a benchmark for comparing insurers. Higher ratings generally indicate greater financial strength and a greater ability to pay claims. Here are our current ratings: A.M. STANDARD BEST & POOR'S MOODY'S FITCH - -------------------------------------------- ----------------- --------------- -------------- -------------- Safeco Corporation Senior Debt bbb+ BBB+ Baa1 A- P&C Insurance Subsidiaries A A+ A1 AA- - -------------------------------------------- ----------------- --------------- -------------- --------------
Each agency has a stable outlook on the ratings. We believe our financial position is sound. As we have continued to execute our plans to improve our operating results, our financial position has strengthened. Our debt service coverage has improved over the last two years, and we expect that to continue. IMPACT OF FINANCIAL STRENGTH RATINGS Lower financial strength ratings could materially and adversely affect our company and its performance and could: o Increase the number of customers who terminate their policies o Decrease new sales o Increase our borrowing costs o Limit our access to capital o Restrict our ability to compete Our Investment Results Investment returns are an important part of our overall profitability. Fluctuations in the fixed income or equity markets could affect the timing and the amount of our net investment income. Defaults by third parties in the payment or performance of their obligations - primarily on our investments in corporate bonds - could reduce our investment income or result in realized investment losses. NET INVESTMENT INCOME This table summarizes our pretax net investment income by portfolio: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Property & Casualty $ 111.0 $ 113.7 $ 338.5 $ 343.0 Corporate and Other 4.5 1.0 11.1 11.1 --------------------------------------------------------------- Total $ 115.5 $ 114.7 $ 349.6 $ 354.1 - -----------------------------------------------------------------------------------------------------------
Our pretax investment income yield was 5.0% for the three months ended September 30, 2004, compared with 5.9% for the same period in 2003. Our pretax investment income yield was 5.2% for the nine months ended September 30, 2004, compared with 5.9% for the same period in 2003. The declines in our pretax investment income yields in our portfolio reflected the low interest rate environment on reinvested assets partially offset by a reduction in our equity securities and reinvestments in taxable bonds. Our after-tax investment income yield was 3.6% for the three months ended September 30, 2004 compared with 4.3% for the same period in 2003. Our after-tax investment income yield was 3.8% for the nine months ended September 30, 2004, compared with 4.4% for the same period in 2003. The declines in our after-tax investment income yields in our portfolio reflect the low interest rate environment and a greater percentage of higher quality taxable bonds. NET REALIZED INVESTMENT GAINS AND LOSSES Pretax net realized investment gains and losses for the three and nine months ended September 30, 2004 and 2003 by portfolio were: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Property & Casualty $ 41.8 $ 7.2 $ 162.4 $ 10.6 Corporate 8.7 5.6 15.8 26.1 --------------------------------------------------------------- Total $ 50.5 $ 12.8 $ 178.2 $ 36.7 - -----------------------------------------------------------------------------------------------------------
Pretax net realized investment gains and losses for the three and nine months ended September 30, 2004 and 2003 by component were: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Net Gains on Securities Transactions $ 53.8 $ 16.8 $ 187.3 $ 56.1 Impairments on Fixed Maturities (3.3) (5.8) (8.8) (31.1) Impairments on Equity Securities (0.2) (4.2) (0.3) (16.2) Credit Default Swap Mark-to-Market -- 2.8 -- 22.1 Other 0.2 3.2 -- 5.8 --------------------------------------------------------------- Total $ 50.5 $ 12.8 $ 178.2 $ 36.7 - -----------------------------------------------------------------------------------------------------------
Investment Sales Activity - Net realized investment gains for the third quarter of 2004 include gains of $14.7 on equity securities generated to offset losses on the sale of L&I for tax purposes. Net realized investment gains for the nine months include the equity gains in the third quarter and also include $76.3 from sales of equity securities in the second quarter. Strong performance in our equity holdings during the current year increased the weight of the equity securities within our portfolio and we sold equity securities during the second quarter of 2004 to reduce our holdings in equity securities to our target of 10% of the total investment portfolio. Net gains on securities transactions during the third quarter and nine months of 2003 resulted primarily from calls and fixed maturity sales initiated to manage our call risk and improve the credit quality of the underlying portfolio. These calls - issuers redeeming bonds in which we have invested before the final maturity date - are an expected part of our investment activity, particularly when interest rates are low. Impairments - We closely monitor every investment that has declined in fair value to below our cost. If we determine that the decline is other than temporary, we write down the security to its fair value and record the charge as an impairment in the Consolidated Statements of Income (Loss) in the period of the other than temporary decline. We continually monitor our investment portfolio and markets for opportunities to: o Improve credit quality o Reduce our exposure to companies and industries with credit problems o Manage call risk In our impairment determination process, we consider our intent and ability to hold investments long enough for them to recover in value. However, our intent to hold the investment can change due to: o Financial market fluctuations o Changes in the financial condition and near-term prospects of the issuer o Strategic decisions to sell businesses Pretax investment impairments for the three and nine months ended September 30, 2004 and 2003 by portfolio were: THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 - ----------------------------------------------------------------------------------------------------------- 2004 2003 2004 2003 --------------------------------------------------------------- Property & Casualty $ 3.5 $ 10.0 $ 9.1 $ 46.4 Corporate -- -- -- 0.9 --------------------------------------------------------------- Total $ 3.5 $ 10.0 $ 9.1 $ 47.3 - -----------------------------------------------------------------------------------------------------------
The impairments in the first nine months of 2003 primarily resulted from credit deterioration particularly in the airline and franchise sectors. For the three and nine months ended September 30, 2004, the fair value of fixed maturities and equity securities that we sold at a loss was $48.5 and $221.2 compared with $42.6 and $151.0 in the same period last year. Our total net realized investment loss on these sales for the quarter ended September 30, 2004 was $2.3 and for the quarter ended September 30, 2003 was $10.9. Our total net realized investment loss on these sales for the nine months ended September 30, 2004 was $16.7 and $27.8 for the same period in 2003. Investment Portfolio These tables summarize our investment portfolio at September 30, 2004 and December 2003: SEPTEMBER 30, 2004 COST OR CARRYING AMORTIZED COST VALUE - ----------------------------------------------------------------------------------------------------------- P&C Fixed Maturities - Taxable $ 6,465.3 $ 6,687.2 Fixed Maturities - Non-taxable 2,011.4 2,152.4 Equity Securities 550.8 933.6 Corporate Fixed Maturities - Taxable 348.0 348.6 Equity Securities 29.9 38.9 ------------------------------------ Total Fixed Maturities and Equity Securities 9,405.4 10,160.7 Other Invested Assets 8.4 8.4 ------------------------------------ Total Investment Portfolio $ 9,413.8 $ 10,169.1 - ----------------------------------------------------------------------------------------------------------- COST OR CARRYING DECEMBER 31, 2003 AMORTIZED COST VALUE - ----------------------------------------------------------------------------------------------------------- P&C Fixed Maturities - Taxable $ 5,534.3 $ 5,828.2 Fixed Maturities - Non-taxable 2,007.5 2,156.5 Equity Securities 650.5 1,115.5 Corporate Fixed Maturities - Taxable 175.4 174.5 Equity Securities 34.3 50.7 ------------------------------------ Total Fixed Maturities and Equity Securities 8,402.0 9,325.4 Other Invested Assets 18.8 18.8 ------------------------------------ Total Investment Portfolio $ 8,420.8 $ 9,344.2 - -----------------------------------------------------------------------------------------------------------
As of September 30, 2004, our fixed maturities carried at $9,188.2 included: o Gross unrealized gains of $381.2 o Gross unrealized losses of $17.7 As of September 30, 2004, our equity securities carried at $972.5 included: o Gross unrealized gains of $396.4 o Gross unrealized losses of $4.6 The following table summarizes the length of time that fixed maturities and equity securities have been in a continual unrealized loss position as of September 30, 2004: LENGTH OF TIME IN A AMOUNT OF CONTINUAL UNREALIZED UNREALIZED LOSS AT TYPES OF SECURITIES LOSS POSITION SEPTEMBER 30, 2004 - --------------------------------------------------------------------------------------------------------- Fixed Maturities Less than 12 months $ 13.6 12 Months or Greater 4.1 ---------------------------- Total 17.7 ---------------------------- Equity Securities Less than 12 months 4.6 12 Months or Greater -- ---------------------------- Total $ 4.6 - ---------------------------------------------------------------------------------------------------------
The unrealized losses of these investments represented approximately 0.2% of the cost of our investment portfolio at September 30, 2004. We reviewed all our investments with unrealized losses at September 30, 2004 in accordance with our impairment policy. Our evaluation concluded that these declines in fair value were temporary after considering: o That the majority of such losses for securities in an unrealized loss position for less than 12 months were interest rate related o For securities in an unrealized loss position for 12 months or more, the financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential o Our intent and ability to keep the security long enough to recover its value DIVERSIFICATION Our investment portfolio is well-diversified by issuer and industry type with no single holding exceeding 1% of our consolidated investment portfolio. The following tables show investment types and industries that exceed 3% of our portfolio at September 30, 2004 and December 31, 2003: CARRYING PERCENT SEPTEMBER 30, 2004 VALUE OF TOTAL - ----------------------------------------------------------------------------------------------------------- State and Political Subdivisions $ 2,498.9 25% Mortgage-Backed Securities 1,276.6 13 U.S. Government and Agencies 1,164.4 11 Banks 992.7 10 Electric Utilities 440.2 4 Diversified Financial Services 454.0 4 Other 3,333.9 33 ---------------------------------- Total Fixed Maturities and Equity Securities 10,160.7 100 Other Invested Assets 8.4 -- ---------------------------------- Total Investment Portfolio $ 10,169.1 100% - ----------------------------------------------------------------------------------------------------------- DECEMBER 31, 2003 CARRYING PERCENT VALUE OF TOTAL - ----------------------------------------------------------------------------------------------------------- State and Political Subdivisions $ 2,381.1 26% Mortgage-Backed Securities 1,128.1 12 U.S. Government and Agencies 1,034.6 11 Banks 778.1 8 Electric Utilities 473.9 5 Diversified Financial Services 263.3 3 Other 3,266.3 35 ---------------------------------- Total Fixed Maturities and Equity Securities 9,325.4 100 Other Invested Assets 18.8 -- ---------------------------------- Total Investment Portfolio $ 9,344.2 100% - -----------------------------------------------------------------------------------------------------------
INVESTMENT PORTFOLIO QUALITY The quality ratings of our fixed maturities portfolio at September 30, 2004 and December 31, 2003 were: PERCENT AT PERCENT AT RATING SEPTEMBER 30, 2004 DECEMBER 31, 2003 - ----------------------------------------------------------------------------------------------------------- AAA 43% 42% AA 11 11 A 29 23 BBB 14 19 BB and lower 2 3 Not Rated 1 2 ------------------------------------------- Total 100% 100% - -----------------------------------------------------------------------------------------------------------
BELOW INVESTMENT GRADE AND OTHER SECURITIES A security is considered below investment grade if it has a rating below BBB. Our investment portfolio includes below investment grade fixed maturities with a fair value of: o $169.3 at September 30, 2004 o $252.7 at December 31, 2003 At September 30, 2004, these securities represented 1.7% of our investments at fair value. The related amortized cost of the below investment grade securities at September 30, 2004 was $155.0 compared with $233.7 at December 31, 2003. Our below investment grade securities had a net unrealized investment gain of $14.3 at September 30, 2004. That gain was comprised of: o Gross unrealized investment gains of $14.8 o Gross unrealized investment losses of $0.5 At September 30, 2004 our investment portfolio also included: o $103.8 of non-publicly traded fixed maturities and equity securities - representing 1.0% of our total portfolio, compared with $82.9 at year end 2003 o $89.7 of not-rated securities - representing 0.9% of our total portfolio, compared with $88.3 at year end 2003 MORTGAGE-BACKED SECURITIES This table summarizes our holdings of mortgage-backed securities at September 30, 2004: CARRYING VALUE COST OR ------------------------ SEPTEMBER 30, 2004 AMORTIZED COST AMOUNT PERCENT - ------------------------------------------------------------- ------------------ -- ------------ ----------- Residential Planned and Targeted Amortization Class and Sequential Pay CMOs $ 579.6 $ 582.6 46% Accrual Coupon (Z-Tranche) CMOs 13.7 14.5 1 Floating Rate CMOs 104.9 105.3 8 Residential Mortgage-Backed Pass-Throughs (Non-CMOs) 7.5 8.0 1 ------------------ -- ------------ ----------- Total Residential 705.7 710.4 56 Securitized Commercial Real Estate Government/Agency-Backed 46.9 49.1 4 CMOs and Pass-Throughs (Non-agency) 377.3 395.7 31 ------------------ -- ------------ ----------- Total Securitized Commercial Real Estate 424.2 444.8 35 Other CMOs 119.2 121.4 9 ------------------ -- ------------ ----------- Total $ 1,249.1 $ 1,276.6 100% - ------------------------------------------------------------- ------------------ -- ------------ -----------
Here are the quality ratings of our mortgage-backed securities portfolio: RATING SEPTEMBER 30, 2004 - --------------------------------------------------------- ---------------------------------- Government/Agency Backed 44% AAA 46 AA 5 A 3 BBB 1 BB or lower 1 ---------------------------------- Total 100% - --------------------------------------------------------- ----------------------------------
Quality of Our Mortgage-Backed Securities - At September 30, 2004, 90% of our mortgage-backed securities were either government/agency-backed or AAA rated. We've limited our investment in riskier, more volatile CMOs and commercial mortgage-backed securities to $14.5. That amount represents 1.1% of our total mortgage-backed securities. OUR CONTRACTUAL OBLIGATONS Our contractual obligations at September 30, 2004 were: Payment by --------------------------------------------------------------------- Less than 1-3 3-5 More than Total 1 Year Years Years 5 Years - -------------------------------------- ------------ -------------- -------------- ------------- ------------ Long-Term Debt Including Interest $ 2,612.7 $ 83.9 $ 367.9 $ 327.7 $ 1,833.2 Operating Leases 285.2 44.6 85.1 74.5 81.0 Purchase Obligations 349.4 99.1 162.5 45.0 42.8 Pension Obligations 326.5 18.8 29.5 29.7 248.5 Loss and LAE Reserves (1) 5,259.9 1,887.2 1,540.5 634.6 1,197.6 ------------ -------------- -------------- ------------- ------------ Total Contractual Obligations $ 8,833.7 $ 2,133.6 $ 2,185.5 $ 1,111.5 $ 3,403.1 - -------------------------------------- ------------ -------------- -------------- ------------- ------------ (1) Loss and LAE reserves represent our best estimate of losses from claims and related settlement costs. Because of the nature of insurance policies, there is typically no minimum contractual commitment associated with covered claims. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims and changes in market conditions make the timing of cash outflows uncertain. The ultimate amount and timing of Loss and LAE payments could differ from our estimates.
ITEM 4 - CONTROLS AND PROCEDURES We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer and our disclosure committee. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2004 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. There have been no changes in our internal controls over financial reporting during the third quarter that materially affected, or are reasonably likely to materially affect, our controls over financial reporting. Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- PART II - OTHER INFORMATION - ------------------------------------------------------------------------------- ITEM 1 - LEGAL PROCEEDINGS Because of the nature of our businesses, we are subject to legal actions filed or threatened in the ordinary course of our operations. Generally, our involvement in legal action involves defending third-party claims brought against our insureds (in our role as liability insurer) or principals on surety bonds and defending policy coverage claims brought against us. We do not believe that such litigation will materially and adversely affect our financial condition, future operating results or liquidity. Our property and casualty insurance subsidiaries are parties to a number of lawsuits for liability coverages related to environmental claims. Estimation of reserves for environmental claims is difficult. However, we do not expect these lawsuits to materially affect our financial condition. Our P&C companies were sued in the U.S. District Court of Connecticut on January 14, 2003, by a plaintiff seeking back overtime pay for claims adjusters who they claim should have been considered non-exempt employees under the labor laws. The plaintiff made two attempts to obtain class status for this suit; both attempts were unsuccessful. The plaintiff appealed both decisions. One has been upheld on appeal, and the other is pending before the same appellate panel. We continue to deny any suggestion of wrongdoing, and are actively defending against these allegations. ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES Issuer Purchase of Equity Securities - ------------------------------------------------------------------------------------------------------------ Total Number of Shares Maximum Number of Purchased As Part Of Shares That May Yet Be Total Number Of Average Price Publicly Announced Plans Purchased Under The Period Shares Purchased Paid Per Share Or Programs (1) Plans or Programs - ------------------ ----------------- ------------------ -------------------------- ------------------------- July 1-31 - - - 21,487,088 August 1-31 13,247,863 $46.80 13,247,863 8,239,225 September 1-30 - - - 8,239,225 ----------------- ------------------ -------------------------- Total 13,247,863 $46.80 13,247,863 - ------------------ ----------------- ------------------ -------------------------- (1) On March 15, 2004, we announced our intent to repurchase a limited amount of our common stock under an existing stock repurchase program. Under this program, we had previously authorized the repurchase of up to 11 million shares of common stock, and as of the date of the announcement, approximately 2.4 million shares of that amount remained available for repurchase. On July 19, 2004, our Board of Directors approved a plan to repurchase up to 20,000,000 shares of common stock (in addition to the 1,487,088 shares that remained available for repurchase pursuant to the prior Board authorization). On August 2, 2004, we publicly announced the repurchase of 13,247,863 shares pursuant to this plan under an Accelerated Stock Buyback program. As of September 30, 2004, 8,239,225 shares remained available for repurchase under the repurchase plans described above, neither of which is subject to an expiration date.
Safeco Corporation and Subsidiaries ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a)(3) - EXHIBITS 10.1 Safeco Leadership Performance Plan as amended. 31.1 Certification of Chief Executive Officer of Safeco Corporation, dated November 5, 2004, in accordance with Securities Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of Safeco Corporation, dated November 5, 2004, in accordance with Securities Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer of Safeco Corporation, dated November 5, 2004, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of Safeco Corporation, dated November 5, 2004, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) - REPORTS ON FORM 8-K The registrant filed the following reports on Form 8-K during the quarter ended September 30, 2004 and for the period up to the filing date of this Form 10-Q. FILING DATED UNDER FILING RELATED TO: ------------------------------------------------------------------------------------------------------ July 20, 2004 Item 12 (Results of Earnings Release for Quarter ended June 30, 2004. Operations and Financial Condition) August 2, 2004 Item 5 (Other Events) Safeco completes sale of Life & Investments operation and use of proceeds. Safeco increases dividends to shareholders. Safeco initiates tender offers for 8.072% Capital Securities due 2037 and 7.25% Senior Notes due 2012. August 10, 2004 Item 10 Amendments to Code of Ethics. August 13, 2004 Item 5 (Other Events) Safeco Completes Tender Offer for 8.072% Capital Securities Due 2037. August 17, 2004 Items 2 & 7 (Disposition Sale of Life and Investments. of Assets and Financial Statements) August 25, 2004 Items 8.01 & 9.01 Safeco announces estimate of losses from Hurricane Charley. August 31, 2004 Items 8.01 & 9.01 Safeco completes Tender Offer for 7.25% Senior Notes Due 2012. September 21, 2004 Items 8.01 & 9.01 Safeco estimates Losses from Hurricane Frances. September 28, 2004 Items 8.01 & 9.01 Safeco Announces New Leadership Structure to Drive Future Profit and Growth. October 13, 2004 Items 8.01 & 9.01 Safeco estimates Third Quarter Catastrophe Losses. October 19, 2004 Items 2.02 & 9.01 Earnings Release for Quarter ended September 30, 2004. ------------------------------------------------------------------------------------------------------
Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- 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 on November 5, 2004. Safeco Corporation ------------------------------------ Registrant /s/ MAURICE S. HEBERT ------------------------------------ Maurice S. Hebert Senior Vice President, Controller EX-10.1 2 en0786.txt EX-10.1 SAFECO LEADERSHIP PERFORMANCE PLAN Effective January 1, 2002 (As last amended November 2, 2004) TABLE OF CONTENTS SECTION 1: PURPOSE.......................................................................................3 SECTION 2: DEFINITIONS...................................................................................4 2.1 Business Unit..........................................................................4 2.2 Change in Control......................................................................4 2.3 Committee..............................................................................4 2.4 Company................................................................................4 2.5 Corporate..............................................................................4 2.6 Corporation............................................................................4 2.7 Disability.............................................................................4 2.8 Effective Date.........................................................................4 2.9 Eligible Employee......................................................................4 2.10 Employee...............................................................................5 2.11 Incentive Award........................................................................5 2.12 Minimum Financial Requirement..........................................................5 2.13 Participant............................................................................5 2.14 Performance Period.....................................................................5 2.15 Plan...................................................................................5 2.16 Retirement.............................................................................5 2.17 Salary.................................................................................5 2.18 Senior Leadership......................................................................6 2.19 Target Award...........................................................................6 SECTION 3: PARTICIPATION.................................................................................6 3.1 Eligible Employees.....................................................................7 3.2 Participation Date.....................................................................7 3.3 Rehired Eligible Employees.............................................................7 SECTION 4: INCENTIVE POOL................................................................................8 4.1 Funding Performance Measures...........................................................8 4.2 Incentive Pool Calculation.............................................................8 SECTION 5: INCENTIVE AWARDS.............................................................................10 5.1 Calculation of Incentive Award........................................................10 5.2 Condition Precedent to Payment of Incentive Award.....................................11 5.3 Payment of Incentive Award............................................................11 5.4 Termination of Employment.............................................................11 5.5 Partial Year Participation............................................................12 SECTION 6: ADMINISTRATION...............................................................................13 6.1 Activities, Duties and Responsibilities of the Committee..............................13 6.2 Notices...............................................................................13 SECTION 7: AMENDMENT AND TERMINATION....................................................................14 7.1 Amendment and Termination of the Plan.................................................14 SECTION 8: MISCELLANEOUS................................................................................15 8.1 Tax Withholding.......................................................................15 8.2 Continuation of Employment............................................................15 8.3 Products and Underwriting.............................................................15 8.4 No Trust or Fund......................................................................15 8.5 Governing Law; Severability...........................................................15 8.6 Spendthrift Clause....................................................................16 8.7 Entire Plan...........................................................................16 8.8 Effective Date and Term...............................................................16
SECTION 1: PURPOSE The purpose of the Safeco Leadership Performance Plan (the "Plan") is to provide certain managers and other salaried employees of the Company with the opportunity to earn an incentive bonus based on achievement of specified performance goals during a Performance Period, thereby motivating participating employees to achieve company financial and operational objectives. SECTION 2: DEFINITIONS 2.1 Business Unit "Business Unit" means the following operating organizations of Safeco Corporation's subsidiaries: Life & Investments, Property & Casualty, Safeco Business Insurance, Safeco Personal Insurance, and Surety. 2.2 Change in Control "Change in Control" has the meaning set forth in the Safeco Long-Term Incentive Plan of 1997, or any successor plan thereto. 2.3 Committee "Committee" means the Compensation Committee of the Safeco Corporation Board of Directors. 2.4 Company "Company" means collectively Safeco Corporation and its subsidiaries. 2.5 Corporate "Corporate" means the overall administrative organization for the Corporation, which organization supports and is distinct from the Business Units. 2.6 Corporation "Corporation" means the Safeco Corporation. 2.7 Disability "Disability" has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto. 2.8 Effective Date "Effective Date" has the meaning set forth in Section 8.8. 2.9 Eligible Employee "Eligible Employee" means an Employee who has satisfied the eligibility criteria of Section 3.1. 2.10 Employee "Employee" means any person who is employed on a salaried basis other than someone who is (a) a non-union hourly Employee, (b) included in a unit of persons covered by a collective bargaining agreement, or (c) is a leased employee within the meaning of Internal Revenue Code section 414(n)(2). 2.11 Incentive Award "Incentive Award" means the annual amount awarded to an Eligible Employee under the Plan pursuant to Section 5.1. 2.12 Minimum Financial Requirement "Minimum Financial Requirement" means an overall financial result established for the Corporation by the Committee below which no Incentive Awards are made under the Plan, unless at the discretion of the Committee. 2.13 Participant "Participant" means an Eligible Employee who qualifies for participation as provided in Section 3.2 and 3.3. 2.14 Performance Period "Performance Period" means the calendar year period during which performance goals are established and an Eligible Employee's performance is measured in order to determine whether the Eligible Employee is eligible for an Incentive Award. 2.15 Plan "Plan" means this Safeco Leadership Performance Plan. 2.16 Retirement "Retirement" has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto. 2.17 Salary "Salary" means for each Performance Period the total of all amounts the Employer paid to an Employee for personal services, including: (a) Base salary; (b) Amounts paid to an Employee while on an Authorized Leave of Absence or short term disability; and (c) Any pre-tax Employee contributions made by the Employer on behalf of the Employee for the Plan Year to the Safeco Flexible Benefits Program, the Safeco 401(k)/Profit Sharing Retirement Plan, or the Safeco Deferred Compensation Plan for Executives; but excluding: (d) Amounts paid for overtime; (e) All Employer contributions to deferred compensation or other fringe benefit plans; (f) Cash incentives and bonuses paid, accrued or earned under any incentive compensation plan; (g) Long-term disability benefits; (h) Severance pay; and (i) Any other payments or benefits. 2.18 Senior Leadership Team "Senior Leadership Team" means the Senior Leadership Team appointed from time to time by the Corporation's Chief Executive Officer. 2.19 Target Award "Target Award" means the value, stated as a percentage of Salary or as a dollar amount, which represents the expected payment for a position when Corporate, Business Unit and personal goals are achieved. In the event of an Employee's position change during a Performance Period (e.g. promotion, reclassification, or transfer), the Target Award for that Performance Period may be adjusted. If the Employee's position change results in a move from one Target Award to another, or from another company-sponsored incentive plan to the Plan, the Employee's Target Award will be blended ("Blended Target Award"). The Blended Target Award is based on the number of calendar days spent at each Target Award level. The Blended Target Award is applied to the Employee's total Salary for the Performance Period. Where an incentive plan does not have a defined target award, the target award will be 0% for the purpose of the Blended Target Award calculation. SECTION 3: PARTICIPATION 3.1 Eligible Employees An Employee of the Company shall be eligible to participate in the Plan if he or she: (a) is a key management employee, or a non-management employee holding a key leadership position with the Company as determined at the discretion of the Corporation's Chief Executive Officer or a Business Unit President; (b) occupies a position that is assigned to a leadership job band within the Corporation's compensation structure; and (c) is not eligible to participate concurrently in the Safeco Success Sharing Plan or any other Company-sponsored variable pay or incentive bonus plan. Provided however, that the Committee may extend participation in the Plan to any Employee in its sole discretion. 3.2 Participation Date An Eligible Employee shall commence participation on the later of: (a) the Effective Date; (b) the date when transferred or promoted from an ineligible position into a Plan-eligible position; (c) if hired by the Company after September 30 in a Performance Period, January 1 of the next following Performance Period. 3.3 Rehired Eligible Employees An individual who terminates employment and is rehired during the same Performance Period and who satisfies the eligibility criteria of Section 3.1 shall be eligible to participate in the Plan for such Performance Period only if he or she has been employed for at least 90 consecutive days during such Performance Period. SECTION 4: INCENTIVE POOL 4.1 Funding Performance Measures (a) The Committee shall establish Corporate and Business Unit funding performance measures ("Funding Performance Measures") and a Corporation Minimum Financial Requirement for each Performance Period on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Funding Performance Measures may include performance criteria for the Corporation, a subsidiary, a Business Unit, an operating group, or a division of the Company or a subsidiary. (b) During any Performance Period, the Committee may adjust the Funding Performance Measures for such Performance Period as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine. (c) The Funding Performance Measures shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Funding Performance Measures may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years. (d) The Committee will establish Funding Performance Measures and the Minimum Financial Requirement not later than 90 days after the beginning of the Performance Period. 4.2 Incentive Pool Calculation For each Performance Period, the Committee shall establish a target incentive pool based on the sum of Target Awards and Blended Target Awards for all Corporate Participants. The Committee shall further establish Business Unit target incentive pools based on the sum of Target Awards and Blended Target Awards for all Business Unit Participants. The target incentive pools, Target Awards and Blended Target Awards shall then be adjusted as follows: (a) for Corporate, the target incentive pool, Target Awards and Blended Target Awards shall be adjusted based on Corporate performance results relative to Corporate Funding Performance Measures established under Section 4.1; and (b) for Business Units, the target incentive pool, Target Awards and Blended Target Awards shall be adjusted based on a combination of Corporate and relevant Business Unit results relative to Funding Performance Measures established under Section 4.1. (c) Target Awards and Blended Target Awards adjusted pursuant to Section 4.2 (a) and (b) shall be defined as "Modified Target Awards." (d) in no event may any incentive pool be adjusted in excess of 200% of the target incentive pool. After such adjustments, the incentive pools shall be allocated among Corporate and the Business Units in order to calculate Incentive Awards to Participants. SECTION 5: INCENTIVE AWARDS 5.1 Calculation of Incentive Award (a) The Participant's Incentive Award for a Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment, (2) the Participant's paid Salary during the Performance Period, (3) the Participant's Target Award, and (4) individual performance measures. In the event that a Participant moves from one target award to another or from another company-sponsored incentive plan to the Plan, providing that the Employee meets the definition of Participant in the Plan, the Employee's Target Award will be blended as indicated in Section 2.19. The Participant's Incentive Award for the Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment as of the last day as a Participant, or the last day of employment for eligible terminated employees, (2) the Participant's total paid Salary during the Performance Period, (3) the Participant's Blended Target Award, and (4) individual performance. As soon as practical after the end of a Performance Period, the Participant's management shall assess individual performance by measuring results attributable to performance goals established for the Performance Period. Such performance goals may represent any combination and weighting of Business Unit, operating group, division, unit or individual objectives. Assessment of results shall occur through application of Company-approved performance evaluation tools. (b) In the event that the performance of Corporate or a Business Unit does not meet the threshold level of performance to result in the funding of an incentive pool under Section 4.2, an Incentive Award may nonetheless be paid to a Participant in the discretion of the Committee or the Corporation's Chief Executive Officer; provided, however, that the Incentive Award shall not exceed 25% of the Participant's Target Award. No Incentive Awards may be granted under the Plan unless the Corporation's Minimum Financial Requirement has been satisfied. (c) In no event may the Participant's Incentive Award exceed 200% of his or her Modified Target Award, as indicated in Section 4.2, without the approval of the Committee. 5.2 Condition Precedent to Payment of Incentive Award To receive an Incentive Award under Section 5.1, except as stated in Sections 5.4 and 5.5, a written performance evaluation must have first been completed for the Participant and the Employee must have been a Participant as of the last day of the Performance Period and remain continuously employed with the Company through the date of the payment of the Incentive Award. 5.3 Payment of Incentive Award Subject to the conditions set forth below, Incentive Awards shall be paid to Participants in a lump sum as soon as administratively feasible after the close of the Performance Period. Such payment shall consist of 100% cash; provided, however: (a) The Committee may direct that selected Participants receive all or a portion of their respective Incentive Awards as a grant under the Safeco Long-Term Incentive Plan of 1997 or any successor plan thereto. The actual amount of such a grant will be determined pursuant to any reasonable methodology chosen by the Committee. The Committee, in accordance with the Safeco Long-Term Incentive Plan of 1997, shall have full and final authority to establish the terms, conditions and definitions that govern such grants. (b) The Committee may permit deferral of some or all of a Participant's Incentive Award to the Safeco Deferred Compensation Plan for Executives in accordance with such plan's terms. 5.4 Termination of Employment If an Employee's employment with the Company terminates prior to the date of the payment of the Incentive Award, he or she shall not be entitled to an Incentive Award; provided, however: (a) in the event the Participant's employment with the Company terminates during the Performance Period, or following the end of the Performance Period but before the payment of the Incentive Award is made, on account of Retirement, death or Disability, the Participant (or his or her estate) will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) in which the Participant was actively employed with the Company. Individual performance measures are not a factor. (b) In the event the Participant's employment with the Company is involuntarily terminated by the Company due to a reduction in force, office closure or other organizational change, and the Participant is entitled to severance under the Safeco Employees' Severance Plan and meets the criteria for participation under that plan, the Participant will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) in which the Participant was actively employed with the Company. Individual performance measures are not a factor. (c) In the event the employment of a Participant who has executed a Change in Control Severance Agreement is terminated without cause (as determined in the sole discretion of the Committee) during the Performance Period by the Company (or an acquirer corporation or affiliate thereof) following a Change in Control, the Participant shall be eligible to receive an Incentive Award for the entire Performance Period, calculated and paid in accordance with Section 6.1(c) of the Change in Control Agreement. 5.5 Partial Year Participation If an Employee who has been a Participant in the Plan for any portion of the Performance Period terminates from the Plan and remains continuously employed with the Company through the date of the payment of the Incentive Award, such Employee shall be entitled to a pro-rated Incentive Award for such Performance Period, calculated pursuant to Sections 2.19 and 5.1, with the exception of Employees who move from the Plan to the Success Sharing Plan (SSP). These Employees' incentive award, if any, will be calculated pursuant to Safeco's Success Sharing Plan. SECTION 6: ADMINISTRATION 6.1 Activities, Duties and Responsibilities of the Committee This Plan shall be administered by the Committee. The Committee shall have exclusive authority, in its discretion, to determine all matters relating to Incentive Awards under the Plan. The Committee shall also have exclusive authority to interpret the Plan and may from time to time adopt and change rules and regulations of general application for the Plan's administration. The Committee's interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Committee pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Committee may delegate administrative duties to the Company's officers or managers. 6.2 Notices All notices and communications to the Committee in connection with this Plan shall be in writing, shall be delivered by first class mail, by courier or by hand, shall be addressed to the Committee at the following address: Safeco Leadership Performance Plan, Attn: Corporate Compensation and Benefits, Safeco Corporation, Safeco Plaza, 4333 Brooklyn N.E., Seattle, WA 98185, and shall be deemed to have been given and delivered only upon actual receipt by the Committee. All notices and communications to an Eligible Employee shall be in writing and shall be delivered via paper or electronic media as determined by the Company. SECTION 7: AMENDMENT AND TERMINATION 7.1 Amendment and Termination of the Plan The Committee shall each have the right to amend or terminate the Plan at any time and to discontinue (either temporarily or permanently) the distribution of Incentive Awards; provided, however, that no amendment or termination of the Plan shall adversely affect an Eligible Employee's right to payment of an Incentive Award that was earned and awarded prior to the date of the amendment or termination. SECTION 8: MISCELLANEOUS 8.1 Tax Withholding The Company shall withhold from Incentive Awards all amounts necessary to satisfy applicable federal, state and local withholding tax requirements. 8.2 Continuation of Employment The existence of the Plan does not create any employment contract, any guarantee of continued employment, or any right or assurance as to any minimum length of employment. An Eligible Employee's employment may be terminated at any time, with or without reason and with or without prior notice, at the option of the Company or the Eligible Employee. 8.3 Products and Underwriting The Company reserves the right to withdraw existing products from distribution, reassign distribution of specific products, make new products available, adjust production credit, revise its business plans and strategies and modify its underwriting, reserves, claims, employment and other practices and policies without the Eligible Employee's consent and without adjusting the performance measures. 8.4 No Trust or Fund The Plan is intended to constitute an "unfunded" plan. Nothing contained herein shall require the Company to segregate any monies or other property, or to create any trusts, and no Eligible Employee shall have any rights that are greater than those of a general unsecured creditor of the Company. 8.5 Governing Law; Severability The Plan shall be governed by the laws of the State of Washington, without regard to its choice of law or conflict of law provisions. The federal and state courts in King County, Washington, shall have exclusive jurisdiction and venue to resolve issues that may arise out of or relate to the Plan. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision. 8.6 Spendthrift Clause Except as may be otherwise provided by law, no benefit, payment or distribution under the Plan, or right to receive such a benefit, payment or distribution, shall be subject either to the claim of any creditor of an Eligible Employee or to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of such person. No Eligible Employee shall have any right to alienate, commute, anticipate or assign (either in law or equity) all or any portion of any benefit, payment or distribution under the Plan. 8.7 Entire Plan The Plan contains the entire understanding and undertaking of the Company with respect to the provision of an incentive plan for Eligible Employees and, as to that subject, supersedes any and all prior and contemporaneous undertakings, agreements, understandings, practices, policies, inducements or conditions, whether express or implied, oral or written, except as herein contained. 8.8 Effective Date and Term The effective date of the Plan is January 1, 2002. The Plan shall continue from year to year until terminated in accordance with Section 7. EX-31.1 3 en0786ex311.txt EX-31.1 Exhibit 31.1 Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- Certification of Chief Executive Officer - ------------------------------------------------------------------------------- I, Michael S. McGavick, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Safeco Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ MICHAEL S. MCGAVICK ----------------------- Michael S. McGavick Chairman, President and Chief Executive Officer EX-31.2 4 en0786_312.txt EX-31.2 Exhibit 31.2 Safeco Corporation and Subsidiaries - ------------------------------------------------------------------------------- Certification of Chief Financial Officer - -------------------------------------------------------------------------------- I, Christine B. Mead, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of Safeco Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 5, 2004 /s/ CHRISTINE B. MEAD ----------------------- Christine B. Mead Chief Financial Officer and Executive Vice President EX-32.1 5 en0786_321.txt EX-32.1 Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Safeco Corporation (the "Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Michael S. McGavick, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 5, 2004 /s/ MICHAEL S. MCGAVICK ---------------------------------- Michael S. McGavick Chairman, President and Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 6 en0786_322.txt EX-32.2 Exhibit 32.2 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of Safeco Corporation (the "Company") on Form 10-Q for the quarter ended September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Christine B. Mead, Chief Financial Officer and Executive Vice President, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 5, 2004 /s/ CHRISTINE B. MEAD --------------------- Christine B. Mead Chief Financial Officer and Executive Vice President A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----