-----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, BFQCYA6PXr6No3PMQrYVgOtn9RQd3qmz0qHjB7O52nnYYxHmVPVN3jNSjQZdhyLV yHl5A1q1Lf3GUmRFoCTfAQ== 0000891020-98-001619.txt : 19981116 0000891020-98-001619.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891020-98-001619 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: SEC FILE NUMBER: 001-06563 FILM NUMBER: 98747738 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 FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1998. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____. Commission File Number 1-6563 SAFECO CORPORATION (Exact name of registrant as specified in its charter) Washington 91-0742146 (State of Incorporation) (I.R.S. Employer I.D. No.) SAFECO PLAZA, Seattle, Washington 98185 (Address of principal executive offices) (206) 545-5000 (Telephone) 136,256,423 shares of no par value common stock were outstanding at September 30, 1998. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X] NO [ ]. 2 SAFECO CORPORATION - -------------------------------------------------------------------------------- TABLE OF CONTENTS AND SIGNATURES Part I - Financial Information * Page ---- Item 1. Financial Statements: Consolidated Balance Sheet, 3 September 30, 1998 and December 31, 1997 Statement of Consolidated Income and Retained Earnings 5 for the Quarters and Nine Months Ended September 30, 1998 and 1997 Statement of Consolidated Cash Flows 6 for the Nine Months Ended September 30, 1998 and 1997 Statement of Consolidated Comprehensive Income 7 for the Quarters and Nine Months Ended September 30, 1998 and 1997 Item 2. Management's Discussion and Analysis 8 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 14
*The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q. In the opinion of management, they include all adjustments (none of which were other than normal and recurring adjustments) which are necessary for a fair presentation of results for the interim periods. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Corporation's Form 10-K for the year ended December 31, 1997 which has previously been filed with the Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFECO CORPORATION ------------------------------------- Registrant ROD A. PIERSON ------------------------------------- Rod A. Pierson Senior Vice President Dated November 13, 1998 and Chief Financial Officer H. PAUL LOWBER ------------------------------------- H. Paul Lowber Vice President, Controller and Dated November 13, 1998 and Chief Accounting Officer -2- 3 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) - --------------------------------------------------------------------------------
September 30 December 31 ASSETS 1998 1997 ------ ------------- ------------- Investments: Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: 1998 - $16,689.3; 1997 -$16,086.8) $ 18,137.5 $ 17,143.2 Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1998 - $3,322.4; 1997 - $3,159.9) 2,714.6 2,708.6 Marketable Equity Securities, at Market Value (Cost: 1998 - $954.4; 1997 - $969.0) 1,817.4 1,879.7 Mortgage Loans 519.6 499.0 Real Estate (At cost less accumulated depreciation) 610.9 586.1 Policy Loans 87.9 85.3 Short-Term Investments 201.0 134.7 ------------- ------------- Total Investments 24,088.9 23,036.6 Cash 55.0 391.4 Accrued Investment Income 385.8 337.0 Finance Receivables 1,121.4 1,004.3 Premiums and Other Service Fees Receivable 1,015.7 953.9 Other Notes and Accounts Receivable 151.0 71.1 Reinsurance Recoverables 301.2 311.0 Deferred Policy Acquisition Costs 521.0 544.8 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 265.7 238.0 Goodwill 1,335.9 1,332.6 Other Assets 321.1 341.7 Separate Account Assets 998.2 905.4 ------------- ------------- TOTAL $ 30,560.9 $ 29,467.8 ============= =============
(continued) -3- 4 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (continued) - --------------------------------------------------------------------------------
September 30 December 31 LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997 ------------------------------------ ------------- ------------- Losses and Adjustment Expense $ 4,311.9 $ 4,352.2 Life Policy Liabilities 285.1 262.3 Unearned Premiums 1,811.0 1,713.7 Funds Held Under Deposit Contracts 12,406.6 11,891.4 Debt: Commercial Paper 963.7 812.8 Credit Company Borrowings ($1,040.9 maturing within one year) 1,065.4 892.0 7.875% Notes Due 2005 200.0 200.0 6.875% Notes Due 2007 200.0 200.0 Other ($50.6 maturing within one year) 240.7 255.1 Other Liabilities 1,154.0 1,223.3 Income Taxes: Current 6.6 9.3 Deferred (Includes tax on unrealized appreciation of investment securities: 1998 - $786.0; 1997 - $675.6) 524.1 446.9 Separate Account Liabilities 998.2 905.4 ------------- ------------- Total Liabilities 24,167.3 23,164.4 Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation ("Capital Securities") 842.0 841.7 ------------- ------------- Preferred Stock, No Par Value: Shares Authorized: 10 Shares Issued and Outstanding: None -- -- Common Stock, No Par Value: Shares Authorized: 300 Shares Reserved for Options: (1998 - 7.6; 1997 - 7.9) Shares Issued and Outstanding: (1998 - 136.3; 1997 - 141.2) 882.5 909.3 Retained Earnings 3,212.0 3,299.1 Total Accumulated Other Comprehensive Income - Unrealized Appreciation of Investment Securities, Net of Tax 1,457.1 1,253.3 ------------- ------------- Total Shareholders' Equity 5,551.6 5,461.7 ------------- ------------- TOTAL $ 30,560.9 $ 29,467.8 ============= =============
-4- 5 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (In Millions Except Per Share Amounts) - --------------------------------------------------------------------------------
Nine Months Ended Three Months Ended September 30 September 30 ------------------------- ------------------------- 1998 1997 1998 1997 --------- --------- --------- --------- REVENUES: Insurance: Property and Casualty Earned Premiums $ 3,140.1 $ 1,789.6 $ 1,064.2 $ 613.2 Life Premiums and Other Revenues 266.1 204.0 89.6 69.0 --------- --------- --------- --------- Total 3,406.2 1,993.6 1,153.8 682.2 Real Estate 58.9 51.3 19.8 18.6 Finance 72.7 63.3 25.3 22.4 Asset Management 30.8 18.7 12.0 7.0 Other 43.6 38.2 14.6 13.1 Net Investment Income 1,137.9 887.5 383.7 303.8 Realized Investment Gain 62.4 105.6 17.5 64.8 --------- --------- --------- --------- Total 4,812.5 3,158.2 1,626.7 1,111.9 --------- --------- --------- --------- EXPENSES: Losses, Adjustment Expense and Policy Benefits 3,072.4 1,866.6 1,017.9 656.3 Commissions 593.5 348.4 207.8 121.8 Personnel Costs 323.7 225.8 103.2 77.6 Interest 119.0 61.5 41.3 24.1 Goodwill Amortization 40.0 4.7 13.5 1.8 Other 330.4 206.2 116.8 72.5 Write-off of Deferred Acquisition Costs 46.8 -- 46.8 -- Amortization of Deferred Policy Acquisition Costs 586.9 339.3 199.8 116.2 Deferral of Policy Acquisition Costs (635.0) (362.0) (216.8) (125.9) --------- --------- --------- --------- Total 4,477.7 2,690.5 1,530.3 944.4 --------- --------- --------- --------- Income before Income Taxes 334.8 467.7 96.4 167.5 --------- --------- --------- --------- Provision (Benefit) for Income Taxes: Current 81.5 115.7 4.8 52.3 Deferred (36.0) (2.0) 5.5 (10.0) --------- --------- --------- --------- Total 45.5 113.7 10.3 42.3 --------- --------- --------- --------- Income before Distributions on Capital Securities 289.3 354.0 86.1 125.2 Distributions on Capital Securities, Net of Tax (33.6) (3.5) (11.2) (3.5) --------- --------- --------- --------- Net Income 255.7 350.5 74.9 121.7 Retained Earnings, Beginning of Period 3,299.1 3,042.2 3,380.5 3,190.4 Amortization of Underwriting Compensation on Capital Securities (0.3) (0.1) (0.1) (0.1) Dividends Declared (142.3) (117.5) (47.7) (40.4) Common Stock Reacquired (200.2) (9.2) (195.6) (5.7) --------- --------- --------- --------- Retained Earnings, End of Period $ 3,212.0 $ 3,265.9 $ 3,212.0 $ 3,265.9 ========= ========= ========= ========= Net Income Per Share of Common Stock: Basic $ 1.82 $ 2.77 $ 0.54 $ 0.96 ========= ========= ========= ========= Diluted $ 1.81 $ 2.76 $ 0.54 $ 0.96 ========= ========= ========= ========= Dividends Paid to Common Shareholders $ 0.99 $ 0.90 $ 0.35 $ 0.32 ========= ========= ========= ========= Average Number of Shares Outstanding During the Period: Basic 140.4 126.3 138.9 126.3 ========= ========= ========= ========= Diluted 141.0 126.9 139.4 127.0 ========= ========= ========= =========
-5- 6 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Millions) - --------------------------------------------------------------------------------
Nine Months Ended September 30 ------------------------------- 1998 1997 ------------ ------------ OPERATING ACTIVITIES Insurance Premiums Received $ 3,351.6 $ 1,978.5 Dividends and Interest Received 1,104.4 887.2 Other Operating Receipts 187.2 147.0 Insurance Claims and Policy Benefits Paid (2,670.0) (1,596.1) Underwriting, Acquisition and Insurance Operating Costs Paid (1,179.8) (702.5) Interest Paid and Distributions on Capital Securities (181.6) (50.1) Other Operating Costs Paid (99.1) (75.7) Income Taxes Paid (65.1) (95.1) ------------ ------------ Net Cash Provided by Operating Activities 447.6 493.2 ------------ ------------ INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (3,197.5) (1,693.6) Fixed Maturities Held-to-Maturity (1.7) (198.0) Equities (119.3) (53.5) Other Investments (157.5) (177.7) Maturities of Fixed Maturities Available-for-Sale 808.0 451.7 Maturities of Fixed Maturities Held-to-Maturity 5.0 3.2 Sales of: Fixed Maturities Available-for-Sale 1,859.5 1,265.4 Fixed Maturities Held-to-Maturity* 18.2 -- Equities 168.0 278.4 Other Investments 125.2 69.5 Net Increase in Short-Term Investments (47.0) (3,211.2) Finance Receivables Originated or Acquired (417.5) (341.1) Principal Payments Received on Finance Receivables 281.0 230.5 Other (148.6) (65.7) ------------ ------------ Net Cash Used in Investing Activities (824.2) (3,442.1) ------------ ------------ FINANCING ACTIVITIES Funds Received Under Deposit Contracts 868.3 1,071.9 Return of Funds Held Under Deposit Contracts (819.3) (639.1) Proceeds from Notes and Mortgage Borrowings 20.0 207.2 Repayment of Notes and Mortgage Borrowings (43.8) (7.9) Net Proceeds from Short-Term Borrowings 363.2 1,628.9 Proceeds from Capital Securities -- 832.2 Common Stock Reacquired (233.1) (9.6) Dividends Paid to Shareholders (139.8) (113.7) Other 24.7 15.8 ------------ ------------ Net Cash Provided by Financing Activities 40.2 2,985.7 ------------ ------------ Net Increase (Decrease) in Cash (336.4) 36.8 Cash at the Beginning of Period 391.4 55.5 ------------ ------------ Cash at the End of Period $ 55.0 $ 92.3 ============ ============
* The sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer's creditworthiness. (continued) -6- 7 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Millions) (continued) - --------------------------------------------------------------------------------
Nine Months Ended September 30 ------------------------------ 1998 1997 ------------ ------------ Net Income $ 255.7 $ 350.5 ------------ ------------ Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (62.4) (105.6) Amortization and Depreciation 115.3 55.8 Amortization of Fixed Maturity Investments (32.0) (27.4) Deferred Income Tax Benefit (36.0) (2.0) Interest Expense on Deposit Contracts 359.5 335.7 Other Adjustments 16.1 2.2 Changes in: Losses and Adjustment Expense (40.3) (90.3) Life Policy Liabilities 22.8 0.9 Unearned Premiums 97.3 63.9 Accrued Income Taxes (2.7) 19.8 Accrued Interest on Accrual Bonds (37.8) (35.3) Accrued Investment Income (48.8) (8.4) Deferred Policy Acquisition Costs (5.0) (22.7) Other Assets and Liabilities (154.1) (43.9) ------------ ------------ Total Adjustments 191.9 142.7 ------------ ------------ Net Cash Provided by Operating Activities $ 447.6 $ 493.2 ============ ============
SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (In Millions) - --------------------------------------------------------------------------------
Nine Months Ended Three Months Ended September 30 September 30 ----------------------------- ----------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net Income $ 255.7 $ 350.5 $ 74.9 $ 121.7 Other Comprehensive Income, Net of Taxes: Change in Unrealized Appreciation of Investment Securities 203.8 247.8 82.3 143.4 ------------ ------------ ------------ ------------ Comprehensive Income $ 459.5 $ 598.3 $ 157.2 $ 265.1 ============ ============ ============ ============
-7- 8 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- SAFECO Corporation Our net income for the first nine months of 1998 was $255.7 million or $1.81 per diluted share, compared with $2.76 per share for the same period in 1997. If we exclude realized gain from investments and the one-time write-off of deferred acquisition costs relating to our life insurance operations discussed below, our income was $1.74 per diluted share, compared with $2.22 per share in 1997. The 1998 amounts include the results of American States Financial Corporation, which was acquired on October 1, 1997. Income was $0.68 per diluted share for the third quarter of 1998, excluding realized gain and the one-time write-off, compared with $0.63 for the third quarter of 1997. The following summarized financial information sets forth the contributions of each business segment to our consolidated income.
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (IN MILLIONS EXCEPT PER SHARE AMOUNTS) Income (Loss) before Realized Gain and Income Taxes: Property and Casualty Insurance: Underwriting Gain (Loss) $ (95.7) $ 19.2 $ (20.4) $ (11.7) Net Investment Income 362.0 210.3 121.5 70.9 Goodwill Amortization (32.1) -- (10.7) -- ---------- ---------- ---------- ---------- Total Property and Casualty 234.2 229.5 90.4 59.2 Life 106.5 108.4 41.1 35.5 Write-off of Deferred Acquisition Costs (46.8) -- (46.8) -- Real Estate 4.5 7.2 2.1 1.7 Credit 16.7 15.6 5.5 5.8 Asset Management 6.5 4.3 3.4 1.9 Corporate (49.2) (2.9) (16.8) (1.4) ---------- ---------- ---------- ---------- Total 272.4 362.1 78.9 102.7 Realized Investment Gain before Tax 62.4 105.6 17.5 64.8 ---------- ---------- ---------- ---------- Income before Income Taxes 334.8 467.7 96.4 167.5 ---------- ---------- ---------- ---------- Provision for Income Taxes on: Income before Realized Gain 23.7 77.6 4.0 19.5 Realized Investment Gain 21.8 36.1 6.3 22.8 ---------- ---------- ---------- ---------- Total 45.5 113.7 10.3 42.3 ---------- ---------- ---------- ---------- Income before Distributions on Capital Securities 289.3 354.0 86.1 125.2 Distributions on Capital Securities, Net of Tax (33.6) (3.5) (11.2) (3.5) ---------- ---------- ---------- ---------- Net Income $ 255.7 $ 350.5 $ 74.9 $ 121.7 ========== ========== ========== ========== Net Income Per Diluted Share of Common Stock: Income before Realized Gain $ 1.52 $ 2.22 $ .46 $ .63 Realized Gain .29 .54 .08 .33 ---------- ---------- ---------- ---------- Net Income $ 1.81 $ 2.76 $ .54 $ .96 ========== ========== ========== ==========
-8- 9 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - -------------------------------------------------------------------------------- Property and Casualty Insurance Property and casualty operations for the first nine months of 1998 produced pretax income of $234.2 million before realized gain from investments, compared with $229.5 million a year ago. These operations had an underwriting loss of $95.7 million for the first nine months of 1998, compared with an underwriting profit of $19.2 million for the same period last year. The third quarter underwriting loss was $20.4 million, down from our 1998 second quarter underwriting loss of $64.4 million. The underwriting loss was $11.7 million (SAFECO only) for the third quarter a year ago. Catastrophe losses added $128 million to loss costs for the first nine months of 1998. As a percent of premiums, catastrophe losses were 4.1 percent, compared with 3.6 percent for the first nine months a year ago. Underwriting results for the first nine months and the third quarter of 1998 and 1997 are detailed below. The combined loss and expense ratio was 103.1 for the first nine months of 1998 and 101.9 for the third quarter only. This compares with 98.9 for the first nine months last year and 101.9 for the third quarter a year ago. Investment income was $362 million for the first nine months of 1998.
Underwriting Results (In Millions) Nine Months Third Quarter ---------------------------- ---------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- Personal Lines: (Including American States in 1998) Personal auto $ 20.8 $ 35.3 $ 5.8 $ 6.8 Homeowners (52.0) (21.0) (13.3) (5.4) Other personal lines 8.9 10.9 2.7 1.2 Commercial Lines: American States Business Insurance (66.1) -- (15.1) -- SAFECO Commercial (24.0) (25.4) (4.4) (22.1) Surety 16.0 16.5 5.0 6.4 Other 0.7 2.9 (1.1) 1.4 ---------- ---------- ---------- ---------- Total $ (95.7) $ 19.2 $ (20.4) $ (11.7) ========== ========== ========== ==========
Personal auto, our largest line, reported an underwriting profit of $20.8 million for the first nine months, compared with a profit of $35.3 million for the first nine months last year. The number of automobile policies inforce at September 30, 1998 was 3.2 percent higher than the combined total for SAFECO and American States a year ago. Average loss costs remained flat during the third quarter. Homeowners had an underwriting loss of $52.0 million for the first nine months, compared with a loss of $21.0 million for the first nine months of 1997. Catastrophe losses for this line were $65 million, compared with $31 million (SAFECO only) for the first nine months last year. Adverse catastrophe claims experience was partially offset by the favorable impact of higher prices, increased deductibles and initiatives to improve insurance to value. Other personal lines, which provide coverage for earthquake, dwelling fire, inland marine, and boats, produced an underwriting profit of $8.9 million for the first nine months, compared with a profit of $10.9 million for the same period last year. American States Business Insurance produced an underwriting loss of $66.1 million for the first nine months of 1998 primarily due to the adverse weather experience this year. For the third quarter, the underwriting loss was $15.1 million (combined ratio of 106.6). SAFECO Commercial reported an underwriting loss of $24.0 million for the first nine months (combined ratio of 105.0), compared with a loss of $25.4 million for the same period last year (combined ratio of 105.6). Increased price competition, particularly for workers' compensation, has had an adverse impact on results. -9- 10 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - -------------------------------------------------------------------------------- Surety produced a profit of $16.0 million for the first nine months of 1998, compared with a profit of $16.5 million for the first nine months a year ago. Premiums written during the first nine months increased 4 percent over the same period a year ago with personal lines up 5 percent, SAFECO Commercial up 9 percent, and American States Business Insurance down 1 percent. During 1998 a significant amount of resources has been and will be committed to cross-licensing and training our agents in both SAFECO and American States product lines on a state-by-state process. We are on schedule with this process as well as other significant areas related to the combination of the two operations. We have received positive feedback from our agents about their expanded opportunities to sell products once this cross-licensing and training has been completed. Life Insurance Our life insurance operations produced a pretax profit of $106.5 million for the first nine months of 1998, before realized gain from investments and a $46.8 million write-off of deferred acquisition costs. This compares with $108.4 million reported for the first nine months of 1997. The third quarter profit, excluding the write-off, was $41.1 million, compared with $35.5 million a year ago. The $46.8 million charge is primarily tied to two blocks of annuity business, our equity-indexed product and a fixed annuity product, and to our universal life business, all of which have been adversely affected by market conditions. Approximately $28 million of the write-off relates to our equity-indexed annuity product. The cost of the options we purchased to fund our obligation under these contracts increased significantly during the third quarter adversely affecting the projected recoverability of deferred acquisition costs. Earnings for our annuity lines were $50.9 million for the first nine months, compared with $40.4 million in 1997. Annuity assets now total $12.0 billion. Group insurance experienced a loss of $8.8 million for the first nine months of 1998, compared with a profit of $10.6 million for the same period last year. The third quarter loss of $6.6 million compares with a profit of $3.7 million reported for the third quarter of last year. Adverse experience in medical aggregate stop loss coverages continues to be the main contributor to the loss. We are withdrawing from the Multiple Employer Trust (MET) marketplace and we are focusing on growing our excess loss medical product line and related work site sold products. We have also taken corrective rate action in our excess loss medical lines, which should have a positive effect on future earnings. We have reviewed the capital needs of our life insurance operations and will pay a dividend of $78 million to SAFECO Corporation in the fourth quarter. The series of changes this quarter are a result of a seven-month effort at our life company to position ourselves properly for growth in both revenue and return on equity. Real Estate SAFECO Properties' pretax income was $4.5 million for the first nine months of 1998, compared with $7.2 million in 1997. As previously reported, we are in the process of selling SAFECO Properties and anticipate that an agreement for the sale of the majority of its assets will be signed in the near future. -10- 11 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - -------------------------------------------------------------------------------- CREDIT SAFECO Credit Company produced a record pretax profit of $16.7 million for the first nine months of 1998, compared with $15.6 million in the first nine months of 1997. The results continue to reflect portfolio growth, low write-off and delinquency experience, and a decreasing operating expense ratio. Non-affiliate receivables and operating leases total $1.2 billion, representing a 14% annualized increase during 1998. SAFECO Credit's summarized financial information is as follows (in millions):
SEPTEMBER 30 DECEMBER 31 1998 1997 ------------- ------------- Finance Receivables $ 1,121.4 $ 1,004.3 Other Assets 286.7 273.9 ------------- ------------- Total Assets $ 1,408.1 $ 1,278.2 ============= ============= Credit Company Borrowings $ 1,065.4 $ 892.0 Other Liabilities 217.0 268.5 ------------- ------------- Total Liabilities $ 1,282.4 $ 1,160.5 ============= =============
NINE MONTHS ENDED SEPTEMBER 30 1998 1997 ------------- ------------- Revenues $ 80.8 $ 70.5 Expenses 64.1 54.9 ------------- ------------- Income before Income Taxes 16.7 15.6 Provision for Income Taxes 6.0 5.0 ------------- ------------- Net Income $ 10.7 $ 10.6 ============= =============
Asset Management Pretax profit from asset management was a record $6.5 million for the first nine months of 1998, compared with $4.3 million for the same period in 1997, an increase of 50%. Increased earnings are a result of growth in assets under management which totaled $6.2 billion at September 30, 1998 compared with $4.8 billion at September 30, 1997. Investment Portfolios The market value of our consolidated bond portfolio was $2.1 billion in excess of amortized cost at September 30, 1998, up from $1.5 billion at December 31, 1997, as a result of lower interest rates. The market value of our equity securities portfolio was $863 million in excess of cost at September 30, 1998. -11- 12 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - -------------------------------------------------------------------------------- Stock Repurchase Program In August 1998 the Board of Directors approved the purchase of $200 million of SAFECO Corporation stock. This authorization was in addition to a February, 1996 authorization to acquire two million shares of which approximately 1,500,000 shares remained available as of June 30, 1998. During the third quarter, the Company purchased 4,984,000 shares in the open market for $227.2 million for an average price of $45.59 per share. As of October 23, 1998 the number of shares authorized but not yet purchased was 894,000 shares. Year 2000 SAFECO, like most other companies, is faced with the fact that our older computer programs have time sensitive software that typically recognizes a date using "00" as the year 1900 rather than the Year 2000. SAFECO is highly dependent on automated systems and systems applications that use computer programs to conduct ongoing operations. Such systems are used to process claims, bill and collect premiums from customers, manage investments and many other activities. If these systems were unable to process data accurately because of Year 2000-related failures, these activities would be interrupted and could have a material adverse effect on SAFECO's results of operations. SAFECO has completed an assessment of Year 2000 issues in connection with our computer systems and the technology embedded in the equipment we use. We have been modifying and replacing portions of our software since 1995 so that our systems will function properly with respect to dates in the year 2000 and thereafter. In addition, SAFECO is engaged in a regular program of testing and running the systems once Year 2000 programming changes have been made. This testing includes trials at SAFECO's hot site, a location provided and maintained by a third party separate from any SAFECO facility. SAFECO believes that our program to address Year 2000 issues is comprehensive and on schedule. The total Year 2000 compliance cost for SAFECO is currently estimated at approximately $17 million and as of September 30, 1998 SAFECO has incurred approximately $10 million of that amount. These estimated amounts include both modification costs, which are expensed as incurred, and certain replacement systems costs, some of which are capitalized and amortized. Approximately 80% of SAFECO's existing systems have been internally verified as being Year 2000 ready at September 30, 1998. SAFECO's objective is to have substantially all of our systems Year 2000 ready by January 1999, with the last mission-critical system expected to be Year 2000 ready in August 1999. The program of testing and running the systems after Year 2000 programming changes have been made is currently in process and expected to continue into 1999. We also intend to bring all of our mainframe systems down on December 31, 1999 and bring them back up on January 1, 2000. This will preserve information contained in those systems at December 31, 1999 and permit SAFECO to retrieve and use that information should an unanticipated Year 2000 problem occur. In addition, as a contingency against unanticipated problems on and after January 1, 2000, SAFECO's Information Systems department will be prepared to address on an expedited basis any problems that should arise. Based on our current progress and continuing modifications, SAFECO believes that by January 1, 2000 we will be Year 2000 ready and that Year 2000 issues will not pose significant operational problems for our computer systems. SAFECO is working with our third-party partners and vendors, e.g., our independent insurance agents, local and long distance telephone companies, banks and securities trading firms, to assure that they are on schedule to detect and fix any Year 2000 problems which might affect SAFECO's systems or business processes. SAFECO will assess and attempt to mitigate risks with respect to the failure of any mission critical third-party partners and vendors to be Year 2000 ready. Failure of such parties to be Year 2000 ready could have a material adverse effect on SAFECO's results of operations. SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance policies its property and casualty subsidiaries have sold to customers. Although SAFECO has not written any specific Year 2000 coverage, customers may allege coverage exist under current commercial policies, including commercial general liability, directors and officers liability, errors and omissions liability and product policies. The effect of such coverage issues on SAFECO's results of operations is not reasonably estimable at this time. However, SAFECO expects that any potential exposures will be limited because its commercial lines business has historically not included significant numbers of the types of risks that have the greatest Year 2000 exposure, such as financial institutions and software and chip companies. In addition, SAFECO's directors and officers liability and errors and omissions books of insurance business are not large, together comprising approximately 1% of total property and casualty premiums over the last three years. SAFECO continues to assess its potential exposure to insurance claims arising from property and casualty insurance policies written and is taking a number of actions to limit that exposure. Such actions include the use of endorsements on commercial property policies clarifying that there is no coverage for Year 2000 occurrences, as well as using policy language that excludes Year 2000 coverage on certain commercial liability policies. -12- 13 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - -------------------------------------------------------------------------------- Other -- Footnotes The following additional footnote disclosure relates to new accounting standards. Nature of Operations and Summary of Significant Accounting Policies -- New Accounting Standards In June of 1997, the Financial Accounting Standards Board (FASB) issued Statement 130, "Reporting Comprehensive Income." Statement 130 is effective for fiscal years beginning after December 15, 1997 and SAFECO adopted it in the first quarter of 1998. The Statement has no effect on net income but requires the reporting of "comprehensive income," which includes net income and certain items currently reported in shareholders' equity. See the "Statement of Consolidated Comprehensive Income" on page 7 of this report. The FASB issued Statement 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" in February 1998. Statement 132 revises employers' disclosures about pension and other postretirement benefit plans. This statement is effective for financial statements for periods beginning after December 15, 1997, and SAFECO will provide the disclosures in its 1998 annual report. This statement has no effect on net income. The FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities" in June 1998. The statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. It may also be adopted early, as of the beginning of any fiscal quarter that begins after issuance of the statement. SAFECO will adopt the new statement no later than the first quarter of 2000. The statement amends several previous FASB statements and requires recognizing all derivatives as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. Although the impact of the statement is currently being studied, it is not expected to have a material effect on SAFECO's financial position or results of operations. -13- 14 SAFECO CORPORATION Part II - Other Information - -------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 - Financial Data Schedule. (This exhibit is included only in the electronic EDGAR filing version of this 10-Q. The Financial Data Schedule is not a separate financial statement but a schedule that summarizes certain standard financial information extracted directly from the financial statements in this filing.) (b) Reports on Form 8-K The Registrant filed two Forms 8-Ks during the quarter ended September 30, 1998. The Registrant filed an 8-K dated July 10, 1998, under Item 5 (Other Items), announcing its preliminary review of earnings for the second quarter of 1998. The Registrant filed an 8-K dated August 5, 1998, under Item 5, announcing a stock repurchase program approved by its Board of Directors on August 5, 1998. The Registrant filed an 8-K dated October 14, 1998, under Item 5, announcing that its life operation would record a pretax charge to earnings of $46.8 million in the third quarter of 1998. -14- EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 18,138 2,715 3,322 1,817 520 611 24,089 55 301 521 30,561 4,312 1,811 285 12,407 2,670 842 0 883 4,669 30,561 3,406 1,138 62 206 3,072 587 0 335 46 289 0 0 0 256 1.82 1.81 0 0 0 0 0 0 0
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