-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, ZEzSGD7DOqwbQgvC0vmINnOPoUb9tmZYhYbnTnMjfvNB8opnfwfX8Ztlsjk10hYW PSZB9CVEC/ezr0ExtF8EjA== 0000891020-95-000057.txt : 19950616 0000891020-95-000057.hdr.sgml : 19950616 ACCESSION NUMBER: 0000891020-95-000057 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950316 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 95521289 BUSINESS ADDRESS: STREET 1: SAFECO PLZ CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-K405 1 FORM 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1994. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) 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 ------------ (Registrant's telephone number, including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, No Par Value (62,961,710 shares were outstanding at January 31, 1995) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]. Aggregate market value of voting stock held by non-affiliates of registrant as January 31, 1995: $3,321,000,000 Documents Incorporated by Reference
Parts of This Form Document: Into Which Incorporated: Portions of the Parts I and II 1994 Annual Report to Stockholders Portions of the Part III Definitive Proxy Statement to be Filed Within 120 days after December 31, 1994.
2 PART I ITEM 1. BUSINESS SAFECO Corporation (the Corporation, or SAFECO) is a Washington Corporation which directly or indirectly owns the stock of operating subsidiaries engaged in various segments of the insurance business and other operating subsidiaries engaged in other financially-related lines of business. The Corporation also manages the SAFECO family of mutual funds. The home offices of the Corporation and its principal subsidiaries are in Seattle, Washington and Redmond, Washington. The Corporation and its subsidiaries had 7,550 employees at December 31, 1994. The insurance subsidiaries are engaged in two principal lines: property and casualty insurance, and life and health insurance. Both are subject to regulation and supervision in every jurisdiction in which they do business. The nature and extent of such regulation varies, but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation, supervision and administration relate, among other things, to the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of limitation on investments; deposits of securities for the benefit of policyholders; approval of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; the amount of dividends which may be distributed to a parent corporation; requirements regarding reserves for unearned premiums and losses and other matters. Regulation requires that property and casualty rates be adequate but not excessive nor unfairly discriminatory. See page 26 in the Annual Report to Stockholders, hereby incorporated by reference (Exhibit 13), for more information on certain regulatory matters. In 1988, California voters narrowly passed Proposition 103, an initiative which significantly affects the property and casualty insurance business in that state. See Note 6 on page 55 in the 1994 Annual Report to Stockholders for more details. All areas of the insurance business are highly competitive due to the marketing structure and the large number of stock and mutual insurance companies and other entities competing. These factors prevent any one insurance company or group of insurers from dominating the market. Property and Casualty Operations Subsidiaries engaged in the property and casualty insurance business, which insure commercial, personal and surety lines, are SAFECO Insurance Company of America, General Insurance Company of America, First National Insurance Company of America, SAFECO National Insurance Company, SAFECO Insurance Company of Illinois, SAFECO Lloyds Insurance Company, SAFECO Surplus Lines Insurance Company, F. B. Beattie & Co., Inc., COMAV Managers, Inc., and Whitehall Insurance Brokers, Inc. Coverages include automobile, homeowners, fire and allied lines, commercial multi-peril, miscellaneous casualty, fidelity and workers' compensation. Their products are primarily sold through independent insurance agents in nearly all states and the District of Columbia. SAFECO sold its Canadian property and casualty operations in 1991. See page 29 in the 1994 Annual Report to Stockholders for more information. - 1 - 3 PART I ITEM 1. BUSINESS (Continued) The following table shows consolidated property and casualty gross premiums written for SAFECO's ten largest states (amounts in thousands):
1994 1993 1992 % of % of % of State Amount Total Amount Total Amount Total ----- ---------- ----- ----------- ----- ---------- ----- California $ 553,608 24% $ 531,779 25% $ 479,003 25% Washington 376,557 16% 351,231 16% 314,566 16% Texas 152,715 7% 134,183 6% 107,208 6% Oregon 148,300 7% 144,534 7% 133,586 7% Illinois 95,689 4% 81,892 4% 74,382 4% Georgia 71,619 3% 65,852 3% 59,925 3% Missouri 68,201 3% 64,763 3% 59,883 3% Florida 61,176 3% 45,679 2% 39,171 2% Tennessee 54,932 2% 54,207 3% 52,796 3% Montana 51,945 2% 46,404 2% 41,766 2% ---------- ---- ---------- ---- ---------- ---- 1,634,742 71% 1,520,524 71% 1,362,286 71% All Others 643,303 29% 613,988 29% 574,804 29% ---------- ---- ---------- ---- ---------- ---- TOTAL $2,278,045 100% $2,134,512 100% $1,937,090 100% ========== ==== ========== ==== ========== ====
Voluntary personal, commercial and surety lines (which excludes assigned risk, FAIR plans, etc.) comprise approximately 69%, 26% and 4%, respectively, of the 1994 gross premiums written. The gross premiums written growth of 6.7% in 1994 is comprised of a 6.6% increase for personal, and increases of 7.1% for commercial and 7.1% for surety lines. Gross premiums written growth of 10.2% in 1993 was comprised of a 10.4% increase for personal, and increases of 10.3% for commercial and 5.7% for surety lines. The growth in personal lines premiums is the result of both rate increases and an increase in policies in force. The number of vehicles insured increased 1.3% in 1994, compared with increases of 2.2% in 1993 and 6.2% in 1992. This trend in the number of vehicles insured has been caused primarily by rate increases placed in effect in recent years. The number of homes insured increased 2.7% in 1994, 8.0% in 1993 and 10.8% in 1992. This trend in the growth rate is also due in part to rate increases placed in effect in recent years. SAFECO's commercial lines premiums increased in 1994 and 1993 as a result of both growth in policies in force and some rate increases. Continued growth in commercial premiums written is expected in 1995. The increase in surety premiums in 1994 is primarily due to new commercial and contract accounts acquired. Additional financial information about SAFECO's business segments is set forth in Note 15 on page 62 of the 1994 Annual Report to Stockholders. - 2 - 4 PART I ITEM 1. BUSINESS (Continued) The consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expense of SAFECO's property and casualty insurance subsidiaries. The liability is presented net of amounts recoverable from salvage and subrogation recoveries and gross of amounts recoverable from reinsurance. Reserves for losses that have been reported to SAFECO and certain legal expenses are established on a "case basis" method. Claims incurred but not reported (IBNR) and other adjustment expense are estimated using statistical procedures. Salvage and subrogation recoveries are accrued using the "case basis" method for large claims and statistical procedures for smaller claims. These reserves aggregate SAFECO's best estimates of the total ultimate cost of claims that have been incurred but have not yet been paid. The estimates are based on past claims experience and consider current claims trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted. Loss and adjustment expense reserve development is reviewed on a regular basis to determine that the reserving assumptions and methods are appropriate. Reserves initially determined are compared to the amounts ultimately paid. A statistical estimate of the projected amounts necessary to settle outstanding claims is made regularly and compared to the recorded reserves. The table on page 4 provides an analysis of changes in losses and adjustment expense reserves for 1994, 1993 and 1992 (net of reinsurance amounts). Changes in the reserves are reflected in the income statement for the year when the changes are made. Operations were credited $81.3 million, $96.9 million and $44.6 million in 1994, 1993, and 1992, respectively, as a result of a reduction in the estimated amounts needed to settle prior years' claims. - 3 - 5 PART I ITEM 1. BUSINESS (Continued) Analysis of Changes in Losses and Adjustment Expense Reserves - (Net of reinsurance amounts):
1994 1993 1992 (In Thousands) Losses and adjustment expense reserves at beginning of year . . . . . . . . . . . $1,995,122 $1,963,136 $1,865,319 ---------- ---------- ---------- Incurred losses and adjustment expense for claims occurring in the current year . . . . . . . . . . . . . . . . 1,609,392 1,447,565 1,351,234 Decrease in estimated losses and adjustment expense for claims occurring in prior years . . . . . . . . . . . . . . (81,325) (96,937) (44,582) ---------- ---------- ---------- Total incurred losses and adjustment expense . . . . . . . . . . . . . . . . . 1,528,067 1,350,628 1,306,652 ---------- ---------- ---------- Losses and adjustment expense payments for claims occurring during: Current year . . . . . . . . . . . . . . . 809,722 719,756 659,960 Prior years . . . . . . . . . . . . . . . . . . . . 620,521 598,886 548,875 ---------- ---------- ---------- Total losses and adjustment expense payments . . . . . . . . . . . . . . . . . . 1,430,243 1,318,642 1,208,835 ---------- ---------- ---------- Losses and adjustment expense reserves at end of year . . . . . . . . . . . . . . $2,092,946 $1,995,122 $1,963,136 ========== ========== ==========
Reconciliation of Liability for Losses and Adjustment Expense Reserves (per property and casualty balance sheet):
(In Thousands) Losses and adjustment expense reserves at end of year . . . . . . . . . . . . . . $2,092,946 $1,995,122 $1,963,136 Reinsurance recoverables on unpaid losses at end of year . . . . . . . . . . . . 143,858 100,065 89,198 ---------- ---------- ---------- Losses and adjustment expense reserves, gross of reinsurance recoverables, at end of year . . . . . . . . . . . . $2,236,804 $2,095,187 $2,052,334 ========== ========== ==========
The table on page 5 presents the development of the losses and ` adjustment expense reserves for 1984 through 1994. The top lines of the table show the estimated liability for unpaid losses and adjustment expense at December 31 for each of the indicated years, both gross and net of related reinsurance amounts. The upper portion of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The next section shows the re-estimated amount of the previously recorded liability based on experience as of each succeeding year. The estimate is increased or decreased as more information becomes known about individual claims and as changes in conditions and claim trends become apparent. - 4 - 6 PART 1 ITEM 1.BUSINESS (Continued)
Analysis of Losses and Adjustment Expenses Reserve Development Year Ended December 31 1984 1985 1986 1987 1988 1989 ----- ----- ----- ----- ----- ----- (Thousands of Dollars) Liability for unpaid losses and adjustment expenses: Gross of reisurance $ 647,656 $ 841,300 $1,095,163 $1,328,495 $1,523,554 $1,702,458 Reinsurance 18,266 39,910 54,881 78,975 97,003 75,279 --------- --------- ---------- ---------- ---------- ---------- Net of reinsurance $ 629,390 $ 801,390 $1,040,282 $1,249,520 $1,426,551 $1,627,179 ========= ========= ========== ========== ========== ========== Net paid (cumulative) as of: One Year Later $ 274,748 $ 320,606 $ 382,274 $ 419,522 $ 443,056 $ 540,198 Two Years Later 427,283 526,276 610,331 677,053 725,684 849,568 Three Years Later 544,725 664,680 771,278 848,174 902,480 1,035,024 Four Years Later 624,475 758,202 875,910 936,447 1,010,271 1,149,505 Five Years Later 677,612 820,514 945,436 1,033,741 1,083,462 1,222,050 Six Years Later 717,637 837,182 991,806 1,082,759 1,129,885 Seven Years Later 746,826 895,193 1,029,619 1,119,813 Eight Years Later 765,662 922,963 1,057,329 Nine Years Later 787,597 945,133 Ten Years Later 807,037 Net liability re-estimated as of: One Year Later 681,465 888,650 1,094,095 1,253,870 1,397,704 1,621,873 Two Years Later 747,037 946,871 1,118,222 1,258,193 1,368,128 1,593,554 Three Years Later 784,297 961,356 1,121,243 1,258,017 1,355,793 1,541,434 Four Years Later 800,150 969,202 1,140,282 1,264,839 1,338,568 1,544,767 Five Years Later 810,458 989,095 1,149,075 1,266,261 1,360,496 1,549,861 Six Years Later 825,823 1,005,888 1,168,725 1,299,601 1,386,746 Seven Years Later 847,874 1,031,969 1,210,457 1,332,409 Eight Years Later 875,820 1,075,759 1,240,940 Nine Years Later 919,446 1,101,353 Ten Years Later 939,901 Net redundancy (deficiency) cumulative as of: One Year Later (52,075) (87,260) (53,813) (4,350) 28,847 5,306 Two Years Later (117,647) (145,481) (77,940) (8,673) 58,423 33,625 Three Years Later (154,907) (159,966) (80,961) (8,497) 70,758 85,745 Four Years Later (170,760) (167,812) (100,000) (15,319) 87,983 82,412 Five Years Later (181,068) (187,705) (108,793) (16,741) 66,055 77,318 Six Years Later (196,433) (204,498) (128,443) (50,081) 39,805 Seven Years Later (218,484) (230,579) (170,175) (82,889) Eight Years Later (246,430) (274,369) (200,658) Nine Years Later (290,056) (299,963) Ten Years Later (310,511)
Analysis of Losses and Adjustment Expenses Reserve Development Year Ended December 31 1990 1991 1992 1993 1994 ----- ----- ----- ----- ----- Liability for unpaid losses and adjustment expenses: Gross of reisurance $1,872,144 $2,017,348 $2,052,334 $2,095,187 $2,236,804 Reinsurance 80,683 152,029 89,198 100,065 143,858 ---------- ---------- ---------- ---------- ---------- Net of reinsurance $1,791,461 $1,865,319 $1,963,136 $1,995,122 $2,092,946 ========== ========== ========== ========== ========== Net paid (cumulative) as of: One Year Later $ 603,027 $ 548,875 $ 598,886 $ 620,521 Two Years Later 914,456 905,725 913,365 Three Years Later 1,109,436 1,086,502 Four Years Later 1,221,598 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Net liability re-estimated as of: One Year Later 1,767,404 1,820,737 1,866,199 1,913,797 Two Years Later 1,705,835 1,732,844 1,782,067 Three Years Later 1,666,124 1,685,958 Four Years Later 1,657,170 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Net redundancy (deficiency) cumulative as of: One Year Later 24,057 44,582 96,937 81,325 Two Years Later 85,626 132,475 181,069 Three Years Later 125,337 179,361 Four Years Later 134,291 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later
- 5 - 7 PART I ITEM 1. BUSINESS (Continued) The lower section of the table on Page 5 shows the cumulative redundancy (deficiency) developed with respect to the previously recorded liability as of the end of each succeeding year. For example, the 1984 reserve of $629.4 million developed a $52.1 million deficiency after one year which grew over ten years to a deficiency of $310.5 million. The reserve development deficiencies indicated for the years 1984 through 1987 were due to the emergence of liabilities for pollution, asbestos and other hazardous toxic claims and related legal expenses and adverse development from the automobile liability and workers' compensation lines due to significant medical inflation and trends in the civil justice system. In this same period, loss adjustment expenses were increasing rapidly, reflecting higher legal costs and increased litigation. The table below presents the approximate amounts of adverse reserve development by major category for the calendar years 1984-1987 viewed as of December 31, 1994. Note that each year below stands on its own and the years should not be added together. For example, the amount of adverse development recorded in 1987 or subsequent for losses incurred in 1982, is included in the adverse development amounts for each year shown below.
1984 1985 1986 1987 (In Millions) Environmental, asbestos, and other toxic claims including related loss adjustment expenses $154 $140 $117 $ 92 Canadian Automobile Liability 22 27 34 27 Workers Compensation 29 41 42 35 Loss Adjustment Expense excluding environmental, asbestos, and other toxic claims 63 67 39 (16) Other 43 25 (31) (55) ---- ---- ---- ---- Total adverse development as reported in table on page 5 $311 $300 $201 $ 83 ==== ==== ==== ====
As the trends noted above became apparent, SAFECO aggressively increased reserves to address these deficiencies. For 1988 and subsequent years, SAFECO's reserve development has been favorable. This trend reflects the aggressive reserving undertaken in prior years to correct deficiencies which is no longer necessary, favorable legislation in the workers' compensation area, moderation of medical costs and inflation and claims department changes. The favorable legislation in the workers' compensation area, which relates primarily in the states of Oregon and California, has helped reduce fraud, allowed for final settlement of claims and made it more difficult to reopen claims -- all of which reduced SAFECO's ultimate loss costs. The cost of claim settlements in several lines of business has benefited from changes in the organization of SAFECO's claims department which has established separate specialized units for workers' compensation, environmental exposures and fraud investigation. In addition, increased focus on adjustment expenses has helped reduce these costs. - 6 - 8 PART I ITEM 1. BUSINESS (Continued) The impact of reinsurance on the development information presented on Page 5 is not significant. Reserve development gross of reinsurance for the previous three years is as follows (in thousands):
1991 1992 1993 Gross reserves $2,017,348 $2,052,334 $2,095,187 ========== ========== ========== Cumulative development net of reinsurance $ 179,361 $ 181,069 $ 81,325 Cumulative development of reinsurance ceded (1,472) 5,648 8,604 ---------- ---------- ---------- Cumulative development gross of reinsurance $ 177,889 $ 186,717 $ 89,929 ========== ========== ==========
SAFECO'S objective is to set reserves which are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately required to settle losses. Analysis indicates that SAFECO's reserves are adequate and probably slightly redundant at December 31, 1994, 1993 and 1992. Operations were credited $81.3 million, $96.9 million and $44.6 million in 1994, 1993 and 1992, respectively, as a result of a reduction in the estimated amounts needed to settle prior years' claims. In evaluating the information contained in the reserve development table on page 5, and the table on page 6, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of the redundancy shown for the December 31, 1993 reserves that relate to losses incurred in 1984 will be included in the cumulative redundancy or deficiency amount for the years 1984 through 1992. This table does not present accident or policy year development data, which some readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. SAFECO's property and casualty companies' reserves for losses and adjustment expense for liability coverages related to environmental, asbestos and other toxic claims totaled $108.2 million at December 31, 1994, compared with $113.4 million at December 31, 1993. These amounts are before the effect of reinsurance, which is insignificant. These reserves are approximately 5% of total property and casualty reserves for losses and adjustment expense at both December 31, 1994 and 1993. The reserves include estimates for both reported and IBNR losses and related legal expenses. The vast majority of SAFECO's property and casualty insurance subsidiaries' environmental, asbestos and other toxic claims result from the general liability line of business. A few of these types of losses occur in other coverages such as umbrella and small commercial package policies. Approximately 1,100 of these claims were pending at December 31, 1994 computed on an occurrence basis. For the last three years, an average of 606 claims were opened and an average of 576 claims were closed each year. Most of SAFECO's pending environmental claims involve some type of environmental-related coverage dispute. The average settlement cost of each environmental, asbestos and other toxic claim for the last three years was $18,300 including legal expenses and $10,300 excluding legal expenses. - 7 - 9 PART I ITEM 1. BUSINESS (Continued) The components of these reserves at December 31, 1994 are as follows (in thousands):
Loss Adjustment Loss Expense Total -------- -------- --------- Case . . . . . . . . . . . . . . . . . $ 40,020 $ 11,710 $ 51,730 IBNR . . . . . . . . . . . . . . . . . 27,000 29,500 56,500 -------- -------- --------- Total . . . . . . . . . . . . . . . . . $ 67,020 $ 41,210 $ 108,230 ======== ======== =========
The following table presents the loss reserve activity analysis for liability coverages related to environmental, asbestos and other toxic claims. (in thousands)*
1994 1993 1992 Reserves at beginning of year . . . . . $113,410 $110,543 $110,218 Incurred losses and adjustment expense . . . . . . . . . . 10,252 9,364 10,070 Losses and adjustment expense payments . . . . . . . . . . . (15,432) (6,497) (9,745) -------- ------- -------- Reserves at end of year . . . . . . . . $108,230 $113,410 $110,543 ======== ======== ========
* Amounts are before the effect of reinsurance, which is insignificant. In view of the changes in environmental regulations and legal decisions which affect the development of loss reserves, the process to estimate loss reserves for environmental, asbestos and other toxic claims results in imprecise estimates. Quantitative techniques have to be supplemented by subjective considerations and managerial judgment. In view of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. The reserves carried for these claims at December 31, 1994 are estimates based on the known facts and current law and are believed to be adequate. SAFECO has generally avoided writing coverages for larger companies with substantial exposure in these areas. The property and casualty insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). The difference between the liability at December 31, 1994 for losses and adjustment expense reported in the consolidated financial statements in accordance with generally accepted accounting principles (GAAP) of $2,236,804,000 and $2,092,946,000 reported in the annual statement filed with state regulatory authorities relates to reinsurance recoverables. Under FASB Statement 113 the GAAP-basis liability for losses and adjustment expense is reported gross of amounts recoverable from reinsurance. Statutory-basis financial statements show the liability net of reinsurance. - 8 - 10 PART I ITEM 1. BUSINESS (Continued) SAFECO's property and casualty subsidiaries protect themselves from excessive losses by reinsuring on treaty and facultative bases. Reinsurance recoverables relating to unpaid losses and adjustment expense were $143.9 million at December 31, 1994 and $100.1 million at December 31, 1993. This increase is due to amounts recoverable by SAFECO from its reinsurers related to the Los Angeles earthquake. Reinsurance costs for catastrophe coverages have increased in the last few years and are expected to remain higher in the foreseeable future, given the large amount of catastrophe losses in recent years. SAFECO's catastrophe property reinsurance program for 1995 covers 90% of $282 million of single event losses in excess of a $75 million retention. In the event of a substantial catastrophe, SAFECO would, therefore, retain the first $75 million of losses, 10% of the next $282 million and all losses in excess of $357 million. The 1995 catastrophe property reinsurance contract includes a provision for one reinstatement for a second catastrophe event in 1995 at current rates. Both the retention level and the aggregate coverage limit for 1995 are higher than in prior years. SAFECO's insurance subsidiaries do not enter into retrospective reinsurance contracts and have not participated in any unusual or nonrecurring reinsurance transactions such as "swaps" of reserves or portfolio loss transfers. SAFECO does not use "funding covers" and has not participated in any surplus relief transactions. None of SAFECO's significant reinsurers are experiencing financial difficulties. Additional information on reinsurance can be found in Note 5 on page 54 in the Annual Report to Stockholders. In 1993, approximately 2,400 active insurance companies competed for $242 billion in property and casualty insurance premiums in the United States. The SAFECO group of property and casualty companies ranked 26th among significant groups of such companies, based on net premiums written. - 9 - 11 PART I ITEM 1. BUSINESS (Continued) Life and Health Operations Subsidiaries engaged in the life and health insurance business are SAFECO Life Insurance Company, SAFECO National Life Insurance Company, First SAFECO National Life Insurance Company of New York and SAFECO Administrative Services, Inc. These companies offer individual and group insurance products, pension plans and annuity products. SAFECO Life's major market in the group operations is excess loss medical insurance, sold to self-insured employers. Products are marketed through professional agents in all states and the District of Columbia. SAFECO Life Insurance Company reinsures portions of its individual and group life, accident and health insurance through commercial reinsurance treaties, thus providing protection against large risks and catastrophe situations. In the life and health insurance field, SAFECO Life Insurance Company competes against some of the largest corporations in the United States. On the basis of 1993 statutory premiums, SAFECO Life Insurance Company ranked 47th among life insurance companies doing business in the United States. Many life insurance companies' pension and annuity products have been impacted by general economic conditions, volatile investment returns, rating downgrades, increased competition and decisions by plan sponsors to diversify assets and fund management. SAFECO Life Insurance Company has experienced an increase in the level of withdrawal of funds from its pension and annuity business (see Statement of Consolidated Cash Flows on page 40 of the 1994 Annual Report to Stockholders -- Return of Funds Held Under Deposit Contracts), due to scheduled payouts on distribution-type products and the interest rate environment. However, SAFECO Life Insurance Company's overall withdrawal experience remains relatively modest, and recent interest rate increases have increased SAFECO Life Insurance Company's sales of fixed income pension and annuity products. The table on page 11 sets forth a summary of the components of "Funds Held Under Deposit Contracts" at December 31, 1994 and describes the applicable surrender charges and surrender experience. - 10 - 12 DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
Range of Outstanding at Credited or Assumed December 31, Interest Rates at Approximate 1994 Expected Maturities December 31, Surrender Product (in Thousands) of Liabilities 1994 Surrender Charges Experience ------- -------------- ------------------------- ------------------- ----------------- ------------ Universal Individual Life $ 204,231 Approximately 15-20 Years 5.50% to 6.25% Varies by issue 7% per annum age, sex, and duration from $1 to $58 per $1,000 of insurance Annuities: Structured Settlement 3,617,489 25 Years & Over 4.0% to 12.4% Cannot surrender Cannot surrender Immediate Non-Qualified Deferred 1,043,852 Approximately 5-12 Years 3.8% to 9.0% Typically 5% in 8.5% per annum Year 1 graded to 0% in Year 6 Other 6,057 Approximately 7-10 Years 7.25% to 8.25% None 5% per annum Pension: Guaranteed Investment 185,841 Typically 4 Years 4.43% to 9.74% Cannot surrender Less than 1% Contacts except in extremely per annum unusual circum- stances Other Qualified Annuities 2,930,986 Approximately 5-15 Years 5.00% to 7.35% Typically 9% in 7% per annum and Deposits ---------- year 1 graded to 0% in year 9. SAFECO has the option to defer payout over 20 quarters for one-half of these contracts. In addition, approxi- mately $540 million of these deposits have a market value adjustment provision. TOTAL $7,988,456 ==========
- 11 - 13 PART I ITEM 1. BUSINESS (Continued) Investments A description of SAFECO's investment portfolio begins on Page 33 of the 1994 Annual Report to Stockholders. SAFECO's consolidated investments in mortgage-backed securities (primarily residential collateralized mortgage obligations, or CMOs, and pass-throughs) totaled $2.2 billion at market value at December 31, 1994. Approximately 97% of these securities are held in the life and health insurance portfolio, with the balance held in the property and casualty insurance portfolio. Approximately 94% of the mortgage- backed securities are government/agency backed or AAA rated at December 31, 1994. Less than 1% of SAFECO's mortgage-backed securities are of the riskier, highly volatile type (e.g., interest only, inverse floaters, etc.). SAFECO has intentionally not invested significant amounts in the riskier types of mortgage-backed securities. The following two tables detail SAFECO's consolidated holdings of mortgage-backed securities. SAFECO Consolidated Holdings of Mortgage-Backed Securities at December 31, 1994 (dollar amounts in millions):
GAAP Market Value Amortized -------------------- Cost Amount % --------- ------- ------- Residential CMOs: Planned Amortization Class (PAC) and Targeted Amortization Class (TAC) (Fixed Coupon) $ 716.3 $ 656.0 29.6% Sequential Pay (SEQ) 867.8 861.0 38.9 Accrual Coupon (Z-Tranche) 384.8 359.0 16.2 Companions/Supports 7.0 6.4 .3 Principal Only -- -- -- Inverse Floaters 5.2 5.1 .2 Interest Only -- 0.5 -- -------- -------- ------ Subtotal 1,981.1 1,888.0 85.2 -------- -------- ------ Residential Mortgage-Backed Pass-Throughs (Non-CMOs): Government/Agency Backed - all Fixed Coupon 162.1 159.4 7.2 Private Issuer-Fixed Coupon 49.7 50.2 2.3 Private Issuer-Floating 6.8 6.9 .3 -------- -------- ------ Subtotal 218.6 216.5 9.8 -------- -------- ------ Securitized Commercial Real Estate (Non-agency): Pass-Throughs 65.9 62.7 2.8 CMOs 49.0 48.1 2.2 -------- -------- ------ Subtotal 114.9 110.8 5.0 -------- -------- ------ Asset-Backed Securities (Non-Real Estate) -- -- -- -------- -------- ------ Total Mortgaged-Backed Securities $2,314.6 $2,215.3 100.0% ======== ======== ======
- 12 - 14 PART I ITEM 1. BUSINESS (Continued) The quality distribution of SAFECO's mortgage-backed security portfolio as of December 31, 1994 as a percentage of GAAP market value is as follows:
Quality Percent ------- ------- Government/Agency Backed 61% AAA 33 AA 4 A 1 BBB 1 BB or lower - ---- 100% ====
The following table presents pretax investment income yields for SAFECO's property and casualty and life and health insurance subsidiaries (calculations based on GAAP amortized cost):
1994 1993 1992 ------ ------ ------ (In Thousands) Property and Casualty 7.3% 7.6% 8.2% Life and Health 8.3% 8.8% 9.3%
The declines in the investment income yields for both portfolios are primarily due to the lower interest rate environment in 1992, 1993 and for the first part of 1994. Rising rates in 1994 have resulted in higher yields on new money invested. The property and casualty decreases also reflect the higher percentage of tax-exempt securities in this portfolio. Other Operations The other subsidiaries of the Corporation, which are engaged in lines of business other than insurance, have been acquired or organized since 1966 in the course of a program of diversification. These include SAFECO Properties, Inc. and its subsidiaries (including Winmar Company, Inc. and SAFECARE Company, Inc.), SAFECO Credit Company, Inc., SAFECO Asset Management Company, SAFECO Securities, Inc., SAFECO Services Corporation, SAFECO Trust Company, PNMR Securities, Inc. and Talbot Financial Corporation. Winmar Company, Inc., acquired in 1967, invests in and manages real estate properties, primarily regional shopping centers. These properties are located in or near Burlington, Seattle, Vancouver and Silverdale, Washington; Cleveland and Columbus, Ohio; Louisville, Kentucky; West Valley City, Utah; Rancho Mirage, California; Boise, Idaho; Medford, Albany, Tigard and Jantzen Beach, Oregon; Milwaukee, Wisconsin; and San Antonio, Texas. Winmar also offers real estate services, including property management, design and construction management and tenant leasing services. See Item 2 - Properties, for additional information. SAFECARE Company, Inc., organized in 1968, owns and leases healthcare facilities (including skilled nursing and psychiatric facilities) and medical office buildings to third parties. See Item 2 - Properties, for additional information. SAFECO Properties, Inc. sold its hospital operating and management company (SAFECARE Health Services, Inc.) in May of 1992. See page 32 of the 1994 Annual Report to Stockholders for more information. - 13 - 15 PART I ITEM 1. BUSINESS (Continued) SAFECO Credit Company, Inc., organized in 1969, provides loans and equipment financing and leasing to commercial businesses. Approximately 10 to 15% of the business of SAFECO Credit Company, Inc. consists of loans to other members of the SAFECO group. These loans are limited to 50% or less of the total loans outstanding. SAFECO Asset Management Company, acquired by the Corporation in 1973, serves as the investment advisor to the SAFECO Mutual Funds and various institutional accounts of unrelated organizations. SAFECO Securities, Inc., organized in 1967, is the principal underwriter of the SAFECO Mutual Funds including: the SAFECO Common Stock Trust, SAFECO Bond Trust, SAFECO Tax-Exempt Bond Trust and the SAFECO Money Market Trust, totaling fourteen separate investment portfolios, which are marketed directly to the public; the SAFECO Institutional Series Trust which is marketed to institutions and has one investment portfolio; the SAFECO Advisor Series Trust which is sold to the public through broker/dealers and which has eight investment portfolios each of which has three classes of stock. In addition, SAFECO Securities, Inc. is the principal underwriter for the SAFECO Resource Series Trust mutual fund which has five separate investment portfolios and for the variable insurance products issued by SAFECO Resource Variable Account B, SAFECO Separate Account SL and SAFECO Variable Account C, all of which are separate accounts of SAFECO Life Insurance Company. SAFECO Services Corporation, organized in 1972, is the transfer agent for the SAFECO Mutual Funds. SAFECO Trust Company, organized in 1994, provides asset management and trust administrative services to high net worth individuals and unrelated organizations. PNMR Securities, Inc., organized in 1986, acts as a broker-dealer, making shares of unaffiliated and affiliated mutual funds and proprietary and non-proprietary variable insurance products available to the public through its registered representatives. Talbot Financial Corporation, acquired by the Corporation in 1993, is a broad-based insurance brokerage with a heavy emphasis on the distribution of qualified and non-qualified annuity products and mutual funds through the banking and brokerage arenas. - 14 - 16 PART I ITEM 2. PROPERTIES Following is a brief description of the materially important properties owned and leased by SAFECO and its subsidiaries. SAFECO's property and casualty group leases from General America Corporation (wholly-owned subsidiary of SAFECO Corporation), its home office building complex located in Seattle, Washington. This complex totals 574,000 gross square feet. A 700-car parking garage is connected to the complex. SAFECO's life and health insurance companies lease their home office building complex, located in Redmond, Washington, from General America Corporation. This complex totals 232,000 gross square feet. Other buildings owned and occupied by the Companies include a service facility in Redmond, Washington, as well as regional and branch offices in Atlanta, GA; Fountain Valley, CA; Cincinnati, OH; Denver, CO; Portland, OR; St. Louis, MO; and Redmond and Spokane, WA, comprising 949,000 gross square feet. All owned buildings are of modern construction, including air conditioning. All other branch and service offices utilize leased premises comprising 422,000 gross square feet, generally for periods of five years or less. Winmar Company, Inc. is engaged in the investment in and management of a wide variety of real estate projects, primarily regional shopping centers, located throughout the United States. The projects are owned by subsidiaries of Winmar and in conjunction with other investors, and others are leased under long-term leases. The following is a summary of the property leased to others. All construction is of steel or steel and concrete.
Rentable Area Description (Sq. Ft.) Acreage ----------- --------- ------- Cleveland Heights, Ohio: Shopping Center 966,000 67 ---------- --- Tigard, Oregon: Shopping Center 826,000 73 Land and free-standing retail stores 10,000 11 ---------- --- Total 836,000 84 ---------- --- Milwaukee, Wisconsin: Shopping Center 663,000 60 ---------- --- Louisville, Kentucky: Shopping Center 657,000 70 ---------- --- West Valley City, Utah: Shopping Center 605,000 59 Free-standing retail stores 36,000 3 ---------- --- Total 641,000 62 ---------- --- Burlington, Washington: Shopping Center 407,000 67 ---------- --- Silverdale, Washington: Shopping Center 451,000 56 Office building and cinema 60,000 4 ---------- --- Total 511,000 60 ---------- --- Other 785,000 277 ---------- --- TOTAL RENTABLE AREA 5,466,000 747 ========== ===
Winmar also owns or leases pursuant to long-term ground leases 1,497 acres of undeveloped land, primarily in Washington, Oregon, Texas and California. - 15 - 17 PART I ITEM 2. PROPERTIES (Continued) SAFECARE Company, Inc. owns and leases healthcare facilities, which contain approximately 400 beds, to qualified operators. SAFECARE also owns and leases to third parties medical office buildings totaling 46,000 square feet. ITEM 3. LEGAL PROCEEDINGS The insurance and other subsidiaries of the Corporation, because of the nature of their business, are subject to certain legal actions filed or threatened, all in the ordinary course of business. The property and casualty insurance subsidiaries of the Corporation are parties to a number of lawsuits for liability coverages related to environmental claims, for which adequate reserves have been established. The loss and adjustment expense with respect to any such lawsuit, or all lawsuits related to a single incident combined, is not expected to exceed $15 million. See Pages 7 and 8 of Item 1 for more information regarding the liability of such subsidiaries for environmental claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1994. EXECUTIVE OFFICERS OF THE REGISTRANT As of March 16, 1995 these are the names, ages and positions of the executive officers of the Registrant as required by Item 10. No family relationships exist. Roger H. Eigsti 52 Chairman since May, 1993. President and Chief Executive Officer since January, 1992. President and Chief Operating Officer from May, 1989 to December, 1991. Executive Vice President and Chief Financial Officer from 1985 to May, 1989. Director since 1988. Boh A. Dickey 50 Director since August, 1993. Executive Vice President since January, 1992. Chief Financial Officer since May, 1989. Senior Vice President from May, 1989 to December, 1991. Secretary from 1985 to November, 1991. Vice President and Controller from 1982 to May, 1989. Dan D. McLean 62 President of SAFECO Property and Casualty Insurance Companies since January, 1993. Senior Vice President of SAFECO Property and Casualty Insurance Companies from 1984 to December, 1992 and Chief Operating Officer of such companies from February, 1992 to December, 1992. He is not an officer of the Registrant. Rodney A. Pierson 47 Senior Vice President since February, 1994. Secretary since November, 1991. Controller since May, 1990. Vice President from May, 1990 to January, 1994. Vice President of SAFECO Property and Casualty Insurance Companies from 1987 to May, 1990. Controller of SAFECO Property and Casualty Insurance Companies from 1984 to May, 1990.
- 16 - 18 PART I EXECUTIVE OFFICERS OF THE REGISTRANT (Continued) James W. Ruddy 45 Senior Vice President since November, 1992. General Counsel since May, 1989. Vice President from May, 1989 to November, 1992. Associate General Counsel from 1985 to May, 1989. Richard E. Zunker 56 President of SAFECO Life and Health Insurance Companies since 1985. He is not an officer of the Registrant. Ronald L. Spaulding 51 Vice President and Treasurer since January, 1995. Vice President of SAFECO Life and Health Insurance Companies since 1984.
PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Pages 35 and 63 of the 1994 Annual Report to Stockholders are hereby incorporated by reference. ITEM 6. SELECTED FINANCIAL DATA Pages 64 through 67 of the 1994 Annual Report to Stockholders are hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 25 through 35 of the 1994 Annual Report to Stockholders are hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 37 through 63 of the 1994 Annual Report to Stockholders are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III The definitive proxy statement to be filed within 120 days after December 31, 1994, excluding the Annual Report of the Compensation Committee on Executive Compensation appearing on Pages 9 through 16, is hereby incorporated by reference to fulfill the requirements of Item 10, "Directors and Officers" (except for that portion of Item 10 relating to executive officers which appears in Part I above), and to fulfill the requirements of Item 11, "Executive Compensation," Item 12, "Security Ownership of Certain Beneficial Owners and Management," and Item 13, "Certain Relationships and Related Transactions." - 17 - 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (a) FINANCIAL STATEMENTS AND EXHIBITS F-1 Consent of Independent Auditors SAFECO Corporation and Subsidiaries: Financial Statements (pages 36 through 63 of the 1994 Annual Report to Stockholders, containing the following statements, are hereby incorporated by reference): Consolidated Balance Sheet, December 31, 1994 and 1993. Statement of Consolidated Income for the Three Years Ended December 31, 1994. Statement of Consolidated Cash Flows for the Three Years Ended December 31, 1994. Notes to Financial Statements for the Three Years Ended December 31, 1994. Report of Independent Auditors. SAFECO Corporation and Subsidiaries Supplemental Consolidating Information: F-2 Balance Sheet, December 31, 1994 and 1993. F-3 Statement of Income for the Year Ended December 31, 1994. F-4 Statement of Cash Flows for the Year Ended December 31, 1994. Schedules: F-5 Schedule I - Summary of Investments - Other Than Investments in Related Parties, December 31, 1994. Schedule II - Condensed Financial Information of the Registrant (Parent Company Only). F-6 Balance Sheet, December 31, 1994 and 1993. F-7 Statement of Income for the Three Years Ended December 31, 1994. F-8 Statement of Cash Flows for the Three Years Ended December 31, 1994. Statement of Changes in Stockholders' Equity for the Three Years Ended December 31, 1994. (See page 42 of the 1994 Annual Report to Stockholders which is hereby incorporated by reference.) F-9 Schedule III - Supplementary Insurance Information for the Years Ended December 31, 1994, 1993 and 1992. F-10 Schedule IV - Reinsurance for the Years Ended December 31, 1994, 1993 and 1992. - 18 - 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (Continued) F-11 Schedule VI - Supplemental Information Concerning Property/Casualty Insurance Operations for the Years Ended December 31, 1994, 1993 and 1992. The following Article 7 schedules are omitted because the information is provided elsewhere in the Annual Report (Form 10-K) or because of the absence of conditions under which they are required: Schedule V Exhibits: F-12 Exhibit Index Exhibit 3 - Bylaws (as amended August 4, 1993) filed as Exhibit 3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. - Restated Articles of Incorporation (as amended May 4, 1988) filed as Exhibit 3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988. Exhibit 4 - SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of SAFECO and its consolidated subsidiaries.
- 19 - 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K: (Continued) Exhibit 10 The following management contracts and compensatory plan arrangements: F-13 - SAFECO Corporation Deferred Compensation Plan for Directors. - Executive Severance Agreements with Roger Eigsti and Boh A. Dickey, each filed as Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; and Executive Severance Agreement with R. E. Zunker filed as Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. - SAFECO Incentive Plan of 1987 filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and Supplement thereto filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990. - SAFECO Stock Option Plan filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984 and Appendix thereto filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986. F-14 Exhibit 11 - Computation of Income Per Share F-15 Exhibit 12 - Computation of Ratios F-16 Exhibit 21 - Subsidiaries of the Registrant F-17 Exhibit 28 - (P) Information from Reports Furnished to State Insurance Regulatory Authorities (paper-filed only, under Form SE) Exhibit 13 - 1994 Annual Report to Stockholders (pages 25 to 67, inclusive) Exhibit 27 - Financial Data Schedule (This exhibit is included only in the electronic EDGAR filing version of this 10-K. 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) EXHIBITS AND REPORTS ON FORM 8-K No Form 8-Ks were filed, nor required to be filed for any event during the quarter ended December 31, 1994. - 20 - 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 this 16th day of March, 1995. SAFECO CORPORATION By ROGER H. EIGSTI --------------------------------- Roger H. Eigsti, Chairman, Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title Date ROGER H. EIGSTI - - ---------------------------------- Chairman, March 16, 1995 Roger H. Eigsti Chief Executive Officer and President BOH A. DICKEY - - ---------------------------------- Executive Vice President, March 16, 1995 Boh A. Dickey Chief Financial Officer and Director ROD A. PIERSON - - ---------------------------------- Senior Vice President, March 16, 1995 Rod A. Pierson Secretary, Controller and Chief Accounting Officer PHYLLIS J. CAMPBELL - - ---------------------------------- Director March 16, 1995 Phyllis J. Campbell ROBERT S. CLINE - - ---------------------------------- Director March 16, 1995 Robert S. Cline JOHN W. ELLIS - - ---------------------------------- Director March 16, 1995 John W. Ellis WILLIAM P. GERBERDING - - ---------------------------------- Director March 16, 1995 William P. Gerberding DONALD G. GRAHAM, JR. - - ---------------------------------- Director March 16, 1995 Donald G. Graham, Jr.
- 21 - 23
Name Title Date JOSHUA GREEN III - - ---------------------------------- Director March 16, 1995 Joshua Green III - - ---------------------------------- Director Harold W. Haynes CALVERT KNUDSEN - - ---------------------------------- Director March 16, 1995 Calvert Knudsen WILLIAM G. REED, JR. - - ---------------------------------- Director March 16, 1995 William G. Reed, Jr. JUDITH M. RUNSTAD - - ---------------------------------- Director March 16, 1995 Judith M. Runstad HENRY T. SEGERSTROM - - ---------------------------------- Director March 16, 1995 Henry T. Segerstrom PAUL W. SKINNER - - ---------------------------------- Director March 16, 1995 Paul W. Skinner GEORGE H. WEYERHAEUSER - - ---------------------------------- Director March 16, 1995 George H. Weyerhaeuser WILLIAM R. WILEY - - ---------------------------------- Director March 16, 1995 William R. Wiley
- 22 - 24 F-1 CONSENT OF INDEPENDENT AUDITORS SAFECO Corporation: We consent to the incorporation by reference in this Annual Report (Form 10-K) of SAFECO Corporation of our report dated February 10, 1995, included in the 1994 Annual Report to Shareholders of SAFECO Corporation. Our audits also included the financial statement schedules of SAFECO Corporation listed in Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the incorporation by reference in Registration Statements (Form S-8 Nos. 2-58654 and 33-14381 and Form S-3 No. 33-52863) of SAFECO Corporation of our report dated February 10, 1995, with respect to the consolidated financial statements and schedules of SAFECO Corporation included and/or incorporated by reference in the Annual Report (Form 10-K) for the year ended December 31, 1994. ERNST & YOUNG LLP Seattle, Washington March 15, 1995 25 F-2 SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING INFORMATION BALANCE SHEET, DECEMBER 31, 1994 (In Thousands)
- - ----------------------------------------------------------------------------------------------------------------- Property & Life & Real Casualty Health Estate ----------- ---------- --------- ASSETS Investments: Fixed Maturities Available-for-Sale, at Market Value . . . $ 3,473,186 $5,919,478 $ - Fixed Maturities Held-to-Maturity, at Amortized Cost . . . - 2,053,132 - Marketable Equity Securities, at Market Value . . . . . . . 735,053 24,887 - Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . 1,956 552,597 - Real Estate (At cost less accumulated depreciation) . . . . - 6,367 473,429 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . - 53,329 - Short-Term Investments . . . . . . . . . . . . . . . . . . 137,008 67,822 749 ----------- ---------- --------- Total Investments . . . . . . . . . . . . . . . . . . . 4,347,203 8,677,612 474,178 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,296 27,222 366 Accrued Investment Income . . . . . . . . . . . . . . . . . . . 83,932 141,926 - Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) . . . . . . . . . . . - - - Loans to Affiliates . . . . . . . . . . . . . . . . . . . . . . - - - Premiums and Other Service Fees Receivable . . . . . . . . . . 393,726 12,213 9,114 Other Notes and Accounts Receivable . . . . . . . . . . . . . . 11,089 9,248 54,848 Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . 156,993 15,517 - Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) . . . . . . . . . . 132,399 690 1,426 Deferred Policy Acquisition Costs . . . . . . . . . . . . . . . 141,653 247,190 - Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 74,444 167,298 5,841 ----------- ---------- --------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,355,735 $9,298,916 $ 545,773 =========== ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense . . . . . . . . . . . . . . . . . $ 2,236,804 $ 29,050 $ - Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . 858,181 8,783 - Life Policy Liabilities . . . . . . . . . . . . . . . . . . . . - 155,322 - Funds Held Under Deposit Contracts . . . . . . . . . . . . . . - 7,988,456 - Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates . . . . . . . . - - - Credit Company Borrowings - Affiliates . . . . . . . . . . - - - 10.75% Notes Due 1995 . . . . . . . . . . . . . . . . . . . - - - Other Notes and Mortgages - Non-Affiliates . . . . . . . . - - 217,210 Other Notes and Mortgages - Affiliates . . . . . . . . . . - - 161,044 Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 381,663 321,172 28,399 Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . 8,509 12,852 2,692 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 19,635 (30,206) 28,084 ----------- ---------- --------- Total Liabilities . . . . . . . . . . . . . . . . . . . 3,504,792 8,485,429 437,429 ----------- ---------- --------- Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 20,026 6,001 1 Additional Paid-In Capital . . . . . . . . . . . . . . . . . . 57,057 92,311 42,123 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 1,530,635 841,373 66,220 Unrealized Appreciation (Depreciation) of Investment Securities, Net of Tax . . . . . . . . . . . . . . . . . . 248,863 (126,198) - Unrealized Loss from Foreign Currency Translation, Net of Tax . (5,638) - - ----------- ---------- --------- Stockholders' Equity . . . . . . . . . . . . . . . . . 1,850,943 813,487 108,344 ----------- ---------- --------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,355,735 $9,298,916 $ 545,773 =========== ========== =========
- - -------------------------------------------------------------------------------------------------------------------- Other Credit and Company Eliminations Consolidated ---------- ------------ ------------- ASSETS Investments: Fixed Maturities Available-for-Sale, at Market Value . . . $ - $ 116,407 $ 9,509,071 Fixed Maturities Held-to-Maturity, at Amortized Cost . . . - - 2,053,132 Marketable Equity Securities, at Market Value . . . . . . . - 95,114 855,054 Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . - (135,570) 418,983 Real Estate (At cost less accumulated depreciation) . . . . - (3,931) 475,865 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . - - 53,329 Short-Term Investments . . . . . . . . . . . . . . . . . . 1,050 (105,055) 101,574 ---------- ----------- ------------ Total Investments . . . . . . . . . . . . . . . . . . . 1,050 (33,035) 13,467,008 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,061 10,559 63,504 Accrued Investment Income . . . . . . . . . . . . . . . . . . . 2,155 1,951 229,964 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) . . . . . . . . . . . 619,059 - 619,059 Loans to Affiliates . . . . . . . . . . . . . . . . . . . . . . 89,073 (89,073) - Premiums and Other Service Fees Receivable . . . . . . . . . . - 3,680 418,733 Other Notes and Accounts Receivable . . . . . . . . . . . . . . 33 (5,646) 69,572 Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . - - 172,510 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) . . . . . . . . . . 499 25,959 160,973 Deferred Policy Acquisition Costs . . . . . . . . . . . . . . . - - 388,843 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 32,248 31,732 311,563 ---------- ----------- ------------ TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 755,178 $ (53,873) $ 15,901,729 ========== =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense . . . . . . . . . . . . . . . . . $ - $ - $ 2,265,854 Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . - - 866,964 Life Policy Liabilities . . . . . . . . . . . . . . . . . . . . - - 155,322 Funds Held Under Deposit Contracts . . . . . . . . . . . . . . - - 7,988,456 Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates . . . . . . . . 510,600 - 510,600 Credit Company Borrowings - Affiliates . . . . . . . . . . 113,205 (113,205) - 10.75% Notes Due 1995 . . . . . . . . . . . . . . . . . . . - 200,000 200,000 Other Notes and Mortgages - Non-Affiliates . . . . . . . . - 55,099 272,309 Other Notes and Mortgages - Affiliates . . . . . . . . . . - (161,044) - Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 24,020 (996) 754,258 Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . (2,073) 647 22,627 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 19,833 (1,486) 35,860 ---------- ----------- ----------- Total Liabilities . . . . . . . . . . . . . . . . . . . 665,585 (20,985) 13,072,250 ---------- ----------- ----------- Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 184,166 211,194 Additional Paid-In Capital . . . . . . . . . . . . . . . . . . 27,000 (218,491) - Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 61,593 (4,021) 2,495,800 Unrealized Appreciation (Depreciation) of Investment Securities, Net of Tax . . . . . . . . . . . . . . . . . . - 5,458 128,123 Unrealized Loss from Foreign Currency Translation, Net of Tax . - - (5,638) ---------- ----------- ------------ Stockholders' Equity . . . . . . . . . . . . . . . . . 89,593 (32,888) 2,829,479 ---------- ------------ ------------ TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 755,178 $ (53,873) $ 15,901,729 ========== =========== ============
26 F-2 SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING INFORMATION (CONTINUED) BALANCE SHEET, DECEMBER 31, 1993 (In Thousands)
- - ----------------------------------------------------------------------------------------------------------------- Property & Life & Real Casualty Health Estate ----------- ---------- --------- Investments: Fixed Maturities, at Amortized Cost . . . . . . . . . . . . $3,226,514 $7,426,593 $ - Marketable Equity Securities, at Market Value . . . . . . . 775,603 26,713 - Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . 3,151 487,090 - Real Estate (At cost less accumulated depreciation) . . . . - 7,492 444,431 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . - 50,488 - Short-Term Investments . . . . . . . . . . . . . . . . . . 90,605 77,866 228 ---------- ---------- --------- Total Investments . . . . . . . . . . . . . . . . . . . 4,095,873 8,076,242 444,659 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,834 19,858 494 Accrued Investment Income . . . . . . . . . . . . . . . . . . . 79,101 128,232 - Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) . . . . . . . . . . . - - - Loans to Affiliates . . . . . . . . . . . . . . . . . . . . . . - - - Premiums and Other Service Fees Receivable . . . . . . . . . . 375,392 13,257 8,904 Other Notes and Accounts Receivable . . . . . . . . . . . . . . 7,945 14,736 55,351 Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . 111,074 15,166 - Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) . . . . . . . . . . 120,495 692 1,558 Deferred Policy Acquisition Costs . . . . . . . . . . . . . . . 133,103 234,200 - Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 62,789 105,478 6,445 ---------- ---------- --------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $5,014,606 $8,607,861 $ 517,411 ========== ========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense . . . . . . . . . . . . . . . . . $2,095,187 $ 33,185 $ - Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . 809,427 9,958 - Life Policy Liabilities . . . . . . . . . . . . . . . . . . . . - 151,488 - Funds Held Under Deposit Contracts . . . . . . . . . . . . . . - 7,229,439 - Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates . . . . . . . . - - - Credit Company Borrowings - Affiliates . . . . . . . . . . - - - 10.75% Notes Due 1995 . . . . . . . . . . . . . . . . . . . - - - Other Notes and Mortgages - Non-Affiliates . . . . . . . . - - 225,077 Other Notes and Mortgages - Affiliates . . . . . . . . . . - - 131,816 Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 301,099 253,042 26,169 Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . 19,477 15,961 2,496 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 15,630 51,575 25,921 ---------- ---------- --------- Total Liabilities . . . . . . . . . . . . . . . . . . . 3,240,820 7,744,648 411,479 ---------- ---------- --------- Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 12,526 6,006 1 Additional Paid-In Capital . . . . . . . . . . . . . . . . . . 63,557 92,806 42,123 Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 1,468,196 757,573 63,808 Unrealized Appreciation (Depreciation) of Marketable Equity Securities, Net of Tax . . . . . . . . . . . . . . . . . . 232,075 6,828 - Unrealized Loss from Foreign Currency Translation, Net of Tax . (2,568) - - ---------- ---------- --------- Stockholders' Equity . . . . . . . . . . . . . . . . . 1,773,786 863,213 105,932 ---------- ---------- --------- TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $5,014,606 $8,607,861 $ 517,411 ========== ========== =========
- - -------------------------------------------------------------------------------------------------------------------- Other Credit and Company Eliminations Consolidated ---------- ------------ ------------- Investments: Fixed Maturities, at Amortized Cost . . . . . . . . . . . . $ - $ 67,869 $ 10,720,976 Marketable Equity Securities, at Market Value . . . . . . . 147 107,789 910,252 Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . - (88,103) 402,138 Real Estate (At cost less accumulated depreciation) . . . . - (4,126) 447,797 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . - - 50,488 Short-Term Investments . . . . . . . . . . . . . . . . . . 3,895 (63,547) 109,047 -------- ----------- ------------ Total Investments . . . . . . . . . . . . . . . . . . . 4,042 19,882 12,640,698 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,790 13,857 67,833 Accrued Investment Income . . . . . . . . . . . . . . . . . . . 1,681 1,275 210,289 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) . . . . . . . . . . . 547,759 - 547,759 Loans to Affiliates . . . . . . . . . . . . . . . . . . . . . . 84,694 (84,694) - Premiums and Other Service Fees Receivable . . . . . . . . . . - 3,320 400,873 Other Notes and Accounts Receivable . . . . . . . . . . . . . . 367 (2,422) 75,977 Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . - - 126,240 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) . . . . . . . . . . 527 26,346 149,618 Deferred Policy Acquisition Costs . . . . . . . . . . . . . . . - - 367,303 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . 16,199 29,790 220,701 ---------- ----------- ------------ TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 660,059 $ 7,354 $ 14,807,291 ========== ========== =========-- LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense . . . . . . . . . . . . . . . . . $ - $ - $ 2,128,372 Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . - - 819,385 Life Policy Liabilities . . . . . . . . . . . . . . . . . . . . - - 151,488 Funds Held Under Deposit Contracts . . . . . . . . . . . . . . - - 7,229,439 Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates . . . . . . . . 427,930 - 427,930 Credit Company Borrowings - Affiliates . . . . . . . . . . 113,015 (113,015) - 10.75% Notes Due 1995 . . . . . . . . . . . . . . . . . . . - 200,000 200,000 Other Notes and Mortgages - Non-Affiliates . . . . . . . . - 65,428 290,505 Other Notes and Mortgages - Affiliates . . . . . . . . . . - (131,816) - Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . 21,448 28,133 629,891 Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . (1,983) 2,012 37,963 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . 15,917 8,884 117,927 ---------- ----------- ------------ Total Liabilities . . . . . . . . . . . . . . . . . . . 576,327 59,626 12,032,900 ---------- ----------- ------------ Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . 1,000 187,947 207,480 Additional Paid-In Capital . . . . . . . . . . . . . . . . . . 27,000 (225,486) - Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . 55,736 (37,991) 2,307,322 Unrealized Appreciation (Depreciation) of Marketable Equity Securities, Net of Tax . . . . . . . . . . . . . . . . . . (4) 23,258 262,157 Unrealized Loss from Foreign Currency Translation, Net of Tax . - - (2,568) ---------- ----------- ------------ Stockholders' Equity . . . . . . . . . . . . . . . . . 83,732 (52,272) 2,774,391 ---------- ----------- ------------ TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . $ 660,059 $ 7,354 $ 14,807,291 ========== =========== ============
27 F-3 SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING INFORMATION STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1994 (In Thousands)
- - ---------------------------------------------------------------------------------------------------------------------------- Property & Life & Real Casualty Health Estate ----------- ---------- --------- REVENUES: Insurance: Property and Casualty Earned Premiums . . . . . . . . . . . . . . . . . $2,053,431 $ - $ - Life and Health Premiums and Other Revenues . . . . . . . . . . . . . . - 276,771 - ---------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,053,431 276,771 - Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 107,315 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 283,481 706,217 - Realized Investment Gain . . . . . . . . . . . . . . . . . . . . . . . . . 31,003 5,888 (174) ---------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,367,915 988,876 107,141 ---------- --------- -------- EXPENSES: Losses, Adjustment Expense and Policy Benefits . . . . . . . . . . . . . . 1,528,067 674,215 - Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308,513 85,615 - Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,246 47,698 16,641 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 25,080 Dividends to Policyholders . . . . . . . . . . . . . . . . . . . . . . . . 22,835 - - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,665 58,398 55,442 Amortization of Deferred Policy Acquisition Costs . . . . . . . . . . . . . 365,196 29,407 - Deferral of Policy Acquisition Costs . . . . . . . . . . . . . . . . . . . (373,746) (43,360) - ---------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,130,776 851,973 97,163 ---------- --------- -------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 237,139 136,903 9,978 ---------- --------- -------- Provision (Benefit) for Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,082 58,332 1,360 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,382) (10,152) 2,163 ---------- --------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,700 48,180 3,523 ---------- --------- -------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213,439 $ 88,723 $ 6,455 ========== ========= ========
- - --------------------------------------------------------------------------------------------------------------- Other and Eliminations Consolidated ------------ ------------ REVENUES: Insurance: Property and Casualty Earned Premiums . . . . . . . . . . . . . . . . . $ - $2,053,431 Life and Health Premiums and Other Revenues . . . . . . . . . . . . . . - 276,771 -------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2,330,202 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 107,315 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,851 53,851 Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055 15,055 Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,912 991,610 Realized Investment Gain . . . . . . . . . . . . . . . . . . . . . . . . . 2,323 39,040 -------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,141 3,537,073 -------- ---------- EXPENSES: Losses, Adjustment Expense and Policy Benefits . . . . . . . . . . . . . . - 2,202,282 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 394,128 Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,941 224,526 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,266 69,346 Dividends to Policyholders . . . . . . . . . . . . . . . . . . . . . . . . - 22,835 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,213 256,718 Amortization of Deferred Policy Acquisition Costs . . . . . . . . . . . . . - 394,603 Deferral of Policy Acquisition Costs . . . . . . . . . . . . . . . . . . . - (417,106) -------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,420 3,147,332 -------- ---------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 5,721 389,741 -------- ---------- Provision (Benefit) for Federal and Canadian Income Taxes: Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,165) 83,609 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,129 (8,242) -------- ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) 75,367 -------- ---------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,757 $ 314,374 ======== ==========
28 F-4 SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTAL CONSOLIDATING INFORMATION STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1994 (In Thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------- Real Property & Life & Estate Casualty Health Companies ----------- ---------- --------- OPERATING ACTIVITIES: Insurance Premiums Received . . . . . . . . . . . . . . . . . . . . . . . . $ 2,079,689 $ 233,129 $ - Dividends and Interest Received . . . . . . . . . . . . . . . . . . . . . . 276,171 641,759 3,454 Other Operating Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . - 25,499 99,059 Insurance Claims and Policy Benefits Paid . . . . . . . . . . . . . . . . . (1,431,899) (242,523) - Underwriting, Acquisition and Insurance Operating Costs Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (586,239) (187,356) - Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (24,816) Other Operating Costs Paid . . . . . . . . . . . . . . . . . . . . . . . . . - - (52,475) Income Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31,717) (61,440) (1,137) ---------- ---------- --------- Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . 306,005 409,068 24,085 ---------- ---------- --------- INVESTING ACTIVITIES: Purchase of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . (939,765) (1,110,154) - Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . - (358,297) - Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,991) (1,177) - Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,869) (147,100) (56,866) Maturities of Fixed Maturities Available-for-Sale . . . . . . . . . . . . . 265,255 476,410 - Maturities of Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . - 54,564 - Sale of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . 525,875 250,227 - Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . - - - Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,327 651 - Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,662 74,679 39,125 Net Decrease (Increase) in Short-Term Investments . . . . . . . . . . . . . (42,002) 9,360 (522) Finance Receivables Originated or Acquired . . . . . . . . . . . . . . . . . - - - Principal Payments Received on Finance Receivables . . . . . . . . . . . . . - - - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (33,328) 545 (511) ---------- ---------- --------- Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . (229,836) (750,292) (18,774) ---------- ---------- --------- FINANCING ACTIVITIES: Funds Received Under Deposit Contracts . . . . . . . . . . . . . . . . . . . - 1,012,164 - Return of Funds Held Under Deposit Contracts . . . . . . . . . . . . . . . . - (659,698) - Proceeds from Notes and Mortgage Borrowings . . . . . . . . . . . . . . . . - - 69,734 Repayment of Notes and Mortgage Borrowings . . . . . . . . . . . . . . . . . - - (69,358) Net Proceeds from (Repayment of) Short-Term Borrowings . . . . . . . . . . . 28,293 842 (594) Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . - - - Dividends Paid to Stockholders . . . . . . . . . . . . . . . . . . . . . . . (119,000) (4,720) (3,640) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (1,581) ---------- ---------- -------- Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . (90,707) 348,588 (5,439) ---------- ---------- -------- Net (Decrease) Increase in Cash . . . . . . . . . . . . . . . . . . . . . . . . . (14,538) 7,364 (128) Cash at the Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 28,834 19,858 494 ---------- ---------- -------- Cash at the End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,296 $ 27,222 $ 366 ========== ========== ========
- - ----------------------------------------------------------------------------------------------------------------------- Other and Eliminations Consolidated ------------ ------------ OPERATING ACTIVITIES: Insurance Premiums Received . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,312,818 Dividends and Interest Received . . . . . . . . . . . . . . . . . . . . . . 48,883 970,267 Other Operating Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . 50,731 175,289 Insurance Claims and Policy Benefits Paid . . . . . . . . . . . . . . . . . - (1,674,422) Underwriting, Acquisition and Insurance Operating Costs Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,359 (768,236) Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (44,982) (69,798) Other Operating Costs Paid . . . . . . . . . . . . . . . . . . . . . . . . . (48,212) (100,687) Income Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,084 (92,210) ----------- ------------ Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . 13,863 753,021 ----------- ------------ INVESTING ACTIVITIES: Purchase of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . (74,253) (2,124,172) Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . - (358,297) Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,420) (124,588) Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,755 (172,080) Maturities of Fixed Maturities Available-for-Sale . . . . . . . . . . . . . 4,718 746,383 Maturities of Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . - 54,564 Sale of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . 10,259 786,361 Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . - - Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,745 120,723 Other Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,563) 122,903 Net Decrease (Increase) in Short-Term Investments . . . . . . . . . . . . . 47,102 13,938 Finance Receivables Originated or Acquired . . . . . . . . . . . . . . . . . (301,821) (301,821) Principal Payments Received on Finance Receivables . . . . . . . . . . . . . 229,198 229,198 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,207) (51,501) ------------ ------------ Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . (59,487) (1,058,389) ------------ ------------ FINANCING ACTIVITIES: Funds Received Under Deposit Contracts . . . . . . . . . . . . . . . . . . . - 1,012,164 Return of Funds Held Under Deposit Contracts . . . . . . . . . . . . . . . . - (659,698) Proceeds from Notes and Mortgage Borrowings . . . . . . . . . . . . . . . . (30,000) 39,734 Repayment of Notes and Mortgage Borrowings . . . . . . . . . . . . . . . . . (50,603) (119,961) Net Proceeds from (Repayment of) Short-Term Borrowings . . . . . . . . . . . 122,045 150,586 Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . (5,327) (5,327) Dividends Paid to Stockholders . . . . . . . . . . . . . . . . . . . . . . . 8,973 (118,387) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,509 1,928 ----------- ------------ Net Cash Provided by (Used in) Financing Activities . . . . . . . . . . 48,597 301,039 ----------- ------------ Net (Decrease) Increase in Cash . . . . . . . . . . . . . . . . . . . . . . . . . 2,973 (4,329) Cash at the Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 18,647 67,833 ----------- ------------ Cash at the End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,620 $ 63,504 =========== ============
29 F-5 Schedule I SAFECO CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1994 (In Thousands)
Column A Column B Column C Column D - - -------- ---------- ---------- --------- Amount at Which Shown in the Market Balance Type of Investment Cost Value Sheet - - ------------------ ---------- ----------- --------- Fixed Maturities Available-for-Sale: Bonds: United States Government and Government Agencies and Authorities . . . . . . . . . . . . . . . $ 1,050,325 $ 1,013,397 $ 1,013,397 States, Municipalities and Political Subdivisions . . . . . . . . . . . . . . . . . . . . . 2,740,754 2,828,455 2,828,455 Foreign Governments . . . . . . . . . . . . . . . . . . . 227,398 246,565 246,565 Public Utilities . . . . . . . . . . . . . . . . . . . . . 1,503,815 1,464,172 1,464,172 Convertibles and Bonds with Warrants Attached . . . . . . . . . . . . . . . . 21,490 22,408 22,408 All Other Corporate Bonds . . . . . . . . . . . . . . . . 4,033,980 3,902,143 3,902,143 Redeemable Preferred Stock . . . . . . . . . . . . . . . . . . 30,448 31,931 31,931 ----------- ----------- ----------- Total Fixed Maturities classified as Available-for-Sale (1) . . . . . . . . . . . 9,608,210 $ 9,509,071 9,509,071 ----------- =========== ----------- Fixed Maturities Held-to-Maturity: Bonds: United States Government and Government Agencies and Authorities . . . . . . . . . . . . . . . 246,233 $ 230,338 246,233 States, Municipalities and Political Subdivisions . . . . 36,517 38,250 36,517 Foreign Governments . . . . . . . . . . . . . . . . . . . 139,951 140,168 139,951 Public Utilities . . . . . . . . . . . . . . . . . . . . . 434,962 430,781 434,962 All Other Corporate Bonds . . . . . . . . . . . . . . . . 1,195,469 1,108,772 1,195,469 ----------- ----------- ----------- Total Fixed Maturities classified as Held-to-Maturity (1) . . . . . . . . . . . . 2,053,132 $ 1,948,309 2,053,132 ----------- =========== ----------- Equity Securities: Common Stocks: Public Utilities . . . . . . . . . . . . . . . . . . . . . 59,831 $ 81,305 81,305 Banks, Trust and Insurance Companies . . . . . . . . . . . 34,205 73,539 73,539 Industrial, Miscellaneous and All Other . . . . . . . . . 282,186 480,765 480,765 Non-Redeemable Preferred Stocks . . . . . . . . . . . . . . . 188,785 219,445 219,445 ----------- ----------- ----------- Total Equity Securities . . . . . . . . . . . . 565,007 $ 855,054 855,054 ----------- =========== ----------- Other: Mortgage Loans on Real Estate (1) . . . . . . . . . . . . . . 418,983 418,983 Real Estate (Net of depreciation) (1) . . . . . . . . . . . . 475,865 475,865 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . 53,329 53,329 Short-Term Investments . . . . . . . . . . . . . . . . . . . . 101,574 101,574 ----------- ----------- Total Other . . . . . . . . . . . . . . . . . . 1,049,751 1,049,751 ----------- ----------- Total Investments . . . . . . . . . . . . . $13,276,100 $13,467,008 =========== ===========
(1) The carrying value of investments in fixed maturities, mortgage loans and real estate that have not produced income for the last twelve months is less than one percent of the total of such investments at December 31, 1994. 30 F-6 Schedule II SAFECO CORPORATION (Parent Company Only) Balance Sheet (In Thousands Except Share Amounts) _____________________
ASSETS December 31 1994 1993 ---------- --------- Investments: Stock of Subsidiaries - At Cost Plus Equity in Undistributed Earnings Since Acquisition (Includes unrealized appreciation of investment securities, net of tax, held by subsidiaries) . . . . . . . . . . . $2,907,866 $2,867,013 Marketable Equity Securities, at Market Value (Cost: 1994 - $76,058; 1993 - $72,521) . . . . . 88,739 102,845 Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: $89,793) . . . . 80,821 -- Fixed Maturities Held-to-Maturity, at Amortized Cost (Market Value: $54,122) . . . . . . . . . . -- 51,803 Short-Term Investments . . . . . . . . . . . . . . 3,385 38,945 Other Security Investments - At Cost . . . . . . . 1,732 943 ---------- ---------- Total Investments . . . . . . . . . . . . . 3,082,543 3,061,549 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1,939 Dividends Receivable from Affiliated Companies . . . . . 32,403 1,000 Accounts Receivable from Affiliated Companies . . . . . -- 5,870 Federal Income Taxes - Current . . . . . . . . . . . . . 204 -- Other Assets . . . . . . . . . . . . . . . . . . . . . . 4,098 2,435 ---------- ---------- TOTAL ASSETS . . . . . . . . . . . . . . . . . . $3,119,253 $3,072,793 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY December 31 1994 1993 ---------- --------- Liabilities: Accounts and Interest Payable - Other . . . . . . . $ 6,430 $ 6,507 Federal Income Tax: Current . . . . . . . . . . . . . . . . . . . -- 1,317 Deferred . . . . . . . . . . . . . . . . . . . 2,496 12,256 Dividends Payable to Stockholders . . . . . . . . . 30,848 28,322 10.75% Notes Due September 1995 . . . . . . . . . . 200,000 200,000 Medium-Term Notes . . . . . . . . . . . . . . . . . 50,000 50,000 ---------- ---------- Total Liabilities . . . . . . . . . . . . . 289,774 298,402 ---------- ---------- Stockholders' Equity: Preferred Stock, No Par Value: Shares Authorized: 10,000,000 Shares Issued and Outstanding: None Common Stock, No Par Value: Shares Authorized: 150,000,000 Shares Reserved for Options: 1994 - 2,042,691; 1993 - 2,128,828 Shares Issued and Outstanding: 1994 - 62,951,634; 1993 - 62,931,562 . . . 211,194 207,480 Retained Earnings . . . . . . . . . . . . . . . . . 2,495,800 2,307,322 Unrealized Appreciation of Investment Securities, Net of Tax . . . . . . . . . . . . 128,123 262,157 Unrealized Loss from Foreign Currency Translation, Net of Tax . . . . . . . . . . . (5,638) (2,568) ---------- ---------- Total Stockholders' Equity . . . . . . . . 2,829,479 2,774,391 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . $3,119,253 $3,072,793 ========== ==========
31 F-7 Schedule II SAFECO CORPORATION (Parent Company Only) STATEMENT OF INCOME (In Thousands)
Year Ended December 31 1994 1993 1992 ------- ------- -------- REVENUES: Dividends Received from Non-Affiliates . . . . . . . . . . . . . . . . $ 6,746 $ 10,480 $ 6,182 Interest Earned - Affiliate . . . . . . . . . . . . . . . . . . . . . 58 859 678 - Others . . . . . . . . . . . . . . . . . . . . . . . 5,035 4,016 1,619 Equity in Loss of Unconsolidated Affiliate . . . . . . . . . . . . . . (211) (574) (555) Realized Gain from Security Investments . . . . . . . . . . . . . . . 2,685 11,958 2,539 -------- -------- -------- Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . 14,313 26,739 10,463 -------- -------- -------- EXPENSES: Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,072 24,792 22,756 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . 638 476 864 -------- -------- -------- Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 25,710 25,268 23,620 -------- -------- -------- Income (Loss) Before Income Taxes . . . . . . . . . . . . . . . . . . . . . (11,397) 1,471 (13,157) Federal Income Tax Benefit (Includes provision on realized gain: 1994 - $940; 1993 - $4,518; 1992 - $863) . . . . . . . . . . . . . . . 5,806 1,864 5,855 -------- -------- -------- Income (Loss) Before Cumulative Effect of Accounting Change . . . . . . . (5,591) 3,335 (7,302) Cumulative Effect of Accounting Change for Income Taxes . . . . . . . . . . -- (687) -- -------- -------- -------- Income (Loss) Before Equity in Earnings of Subsidiaries . . . . . . . . . . (5,591) 2,648 (7,302) Equity in Earnings of Subsidiaries (Includes dividends accrued and received) . . . . . . . . . . . . . . 319,965 426,130 318,596 -------- -------- -------- Consolidated Net Income . . . . . . . . . . . . . . . . . . . . . $314,374 $428,778 $311,294 ======== ======== ======== DIVIDENDS ACCRUED AND RECEIVED FROM SUBSIDIARIES (Cash): SAFECO Insurance Company of America . . . . . . . . . . . . . . . . . $ 78,000 $ 69,000 $ 60,500 General Insurance Company of America . . . . . . . . . . . . . . . . . 56,000 48,500 43,000 First National Insurance Company of America . . . . . . . . . . . . . 6,000 8,500 5,500 SAFECO National Insurance Company . . . . . . . . . . . . . . . . . . 4,000 3,000 8,000 SAFECO Insurance Company of Illinois . . . . . . . . . . . . . . . . . 6,000 5,000 6,000 SAFECO Life Insurance Company . . . . . . . . . . . . . . . . . . . . 4,000 4,000 4,000 SAFECO Administrative Services, Inc. . . . . . . . . . . . . . . . . . 720 560 800 SAFECO Properties, Inc. . . . . . . . . . . . . . . . . . . . . . . . 4,043 1,336 1,320 SAFECO Credit Company, Inc. . . . . . . . . . . . . . . . . . . . . . 1,508 1,532 1,596 SAFECO Asset Management Company . . . . . . . . . . . . . . . . . . . 2,000 2,000 -- -------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $162,271 $143,428 $130,716 ======== ======== ========
32 F-8 Schedule II SAFECO CORPORATION (Parent Company Only) STATEMENT OF CASH FLOWS (In Thousands)
Year Ended December 31 1994 1993 1992 -------- ------- -------- OPERATING ACTIVITIES: Dividends and Interest Received - Affiliates . . . . . . . . . . . . . . . . $ 128,868 $ 144,288 $ 130,930 - Other . . . . . . . . . . . . . . . . . . 11,447 10,739 7,018 Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,317) (25,064) (22,653) Other Operating Costs Paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,330) (404) (458) Income Taxes Received . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,399 7,432 600 --------- --------- --------- Net Cash Provided By Operating Activities . . . . . . . . . . . . . . . 118,067 136,991 115,437 --------- --------- --------- INVESTING ACTIVITIES: Purchase of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . (45,393) -- -- Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . -- (12,883) (42,106) Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,421) (32,902) -- Maturities of Fixed Maturities Available-for-Sale . . . . . . . . . . . . . 2,018 -- -- Maturities of Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . -- 705 917 Sales of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . . . . . . . . 4,952 -- -- Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . . . . . . . . -- 15,665 532 Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,285 27,692 3,586 Net (Increase) Decrease in Short-Term Investments . . . . . . . . . . . . . 41,396 (13,245) (20,265) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,000) -- (1,878) --------- --------- --------- Net Cash (Used In) Provided By Investing Activities . . . . . . . . . . 837 (14,968) (59,214) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from Medium-Term Note Borrowings . . . . . . . . . . . . . . . . . -- 7,150 42,850 Capital Contributions to Affiliates . . . . . . . . . . . . . . . . . . . . (750) (19,175) -- Return of Capital Distribution . . . . . . . . . . . . . . . . . . . . . . . -- -- 1,000 Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . . . . . . . (5,327) (4,329) (11,897) Dividends Paid to Stockholders . . . . . . . . . . . . . . . . . . . . . . . (118,387) (108,133) (97,953) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,626 4,153 7,969 --------- --------- --------- Net Cash Used In Financing Activities . . . . . . . . . . . . . . . . . (120,838) (120,334) (58,031) --------- --------- --------- Net Increase (Decrease) in Cash . . . . . . . . . . . . . . . . . . . . . . . (1,934) 1,689 (1,808) Cash at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . 1,939 250 2,058 --------- --------- --------- Cash at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5 $ 1,939 $ 250 ========= ========= =========
33 F-9 SCHEDULE III SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (In Thousands)
Column A Column B Column C Column D Column E Column F - - -------- -------- -------- -------- -------- -------- Reserve Other for Policy Future Claims and Policy Benefits Benefits, Payable Premiums Deferred Losses, (Funds and Policy Claims Held Under Service Acquisition and Loss Unearned Deposit Fee Segment Costs Expenses Premiums Contracts) Revenues - - ------- ----------- --------- -------- ---------- -------- 1994 Property and Casualty: Personal . . . . . . . . $ 102,745 $1,168,981 $ 553,811 $1,469,857 Commercial and Surety . 38,908 1,067,823 304,370 583,574 --------- ---------- --------- ---------- Total . . . . . . . . 141,653 2,236,804 858,181 2,053,431 --------- ---------- --------- ---------- Life and Health: Financial Services . . . 151,614 108,822 6,797 $4,871,635 46,642 Employee Benefits . . . 95,576 75,550 1,986 3,116,821 230,129 --------- ---------- --------- ---------- ---------- Total . . . . . . . . 247,190 184,372 8,783 7,988,456 276,771 --------- ---------- --------- ---------- ---------- Real Estate . . . . . . . . . . -- -- -- -- -- Other and Eliminations . . . . -- -- -- -- -- --------- ---------- --------- ---------- ---------- Consolidated Totals . $ 388,843 $2,421,176 $ 866,964 $7,988,456 $2,330,202 ========= ========== ========= ========== ========== 1993 Property and Casualty: Personal . . . . . . . . $ 97,104 $1,088,269 $ 515,820 $1,400,705 Commercial and Surety . 35,999 1,006,918 293,607 529,009 --------- ---------- --------- ---------- Total . . . . . . . . 133,103 2,095,187 809,427 1,929,714 --------- ---------- --------- ---------- Life and Health: Financial Services . . . 137,479 109,272 7,246 $4,184,024 44,156 Employee Benefits . . . 96,721 75,401 2,712 3,045,415 261,807 --------- ---------- --------- ---------- ---------- Total . . . . . . . . 234,200 184,673 9,958 7,229,439 305,963 --------- ---------- --------- ---------- ---------- Real Estate . . . . . . . . . . -- -- -- -- -- Other and Eliminations . . . . -- -- -- -- -- --------- ---------- --------- ---------- ---------- Consolidated Totals . $ 367,303 $2,279,860 $ 819,385 $7,229,439 $2,235,677 ========= ========== ========= ========== ==========
Column A Column G Column H Column I Column J Column K - - -------- -------- -------- -------- -------- -------- Other Amortiza- Operating Benefits, tion of Costs Claims, Deferred (Including Net Losses and Policy Dividends Net Investment Adjustment Acquisition to Policy- Premiums Segment Income (1) Expense Costs holders) Written - - ------- ---------- ---------- ----------- ---------- --------- 1994 Property and Casualty: Personal . . . . . . . . $1,142,855 $ 272,545 $ 122,388 $1,507,546 Commercial and Surety . 385,212 92,651 115,125 595,919 ---------- --------- --------- ---------- Total . . . . . . . . $ 283,481 1,528,067 365,196 237,513 $2,103,465 --------- ---------- --------- --------- ========== Life and Health: Financial Services . . . 435,101 354,463 9,914 53,680 Employee Benefits . . . 271,116 319,752 19,493 94,671 --------- ---------- --------- --------- Total . . . . . . . . 706,217 674,215 29,407 148,351 --------- ---------- --------- --------- Real Estate . . . . . . . . . . -- -- -- 97,163 Other and Eliminations . . . . 1,912 -- -- 67,420 --------- ---------- --------- --------- Consolidated Totals . $ 991,610 $2,202,282 $ 394,603 $ 550,447 ========= ========== ========= ========= 1993 Property and Casualty: Personal . . . . . . . . $1,018,241 $ 260,094 $146,388 $1,446,534 Commercial and Surety . 332,387 81,903 120,853 553,631 ---------- --------- --------- ---------- Total . . . . . . . . $ 277,643 1,350,628 341,997 267,241 $2,000,165 --------- ---------- --------- --------- ========== Life and Health: Financial Services . . . 390,550 319,202 7,395 53,057 Employee Benefits . . . 277,608 356,276 18,955 93,930 --------- ---------- --------- --------- Total . . . . . . . . 668,158 675,478 26,350 146,987 --------- ---------- --------- --------- Real Estate . . . . . . . . . . -- -- -- 68,173 Other and Eliminations . . . . 5,994 -- -- 62,893 --------- ---------- --------- --------- Consolidated Totals . $ 951,795 $2,026,106 $ 368,347 $ 545,294 ========= ========== ========= =========
34 F-9 Schedule III SAFECO CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (In Thousands)
Column A Column B Column C Column D Column E Column F - - -------- -------- -------- -------- -------- -------- Reserve Other for Policy Future Claims and Policy Benefits Benefits, Payable Premiums Deferred Losses, (Funds and Policy Claims Held Under Service Acquisition and Loss Unearned Deposit Fee Segment Costs Expenses Premiums Contracts) Revenues - - ------- ----------- --------- -------- ---------- -------- 1992 Property and Casualty: Personal . . . . . . . . $ 91,072 $1,065,890 $ 468,785 $1,258,893 Commercial and Surety . 33,407 986,444 263,381 495,567 --------- ---------- --------- ---------- Total . . . . . . . . 124,479 2,052,334 732,166 1,754,460 --------- ---------- --------- ---------- Life and Health: Financial Services . . . 124,459 110,312 7,017 $3,480,758 40,511 Employee Benefits . . . 97,166 78,617 3,416 2,901,897 288,005 --------- ---------- --------- ---------- ---------- Total . . . . . . . . 221,625 188,929 10,433 6,382,655 328,516 --------- ---------- --------- ---------- ---------- Real Estate . . . . . . . . . . -- -- -- -- -- Other and Eliminations . . . . -- -- -- -- -- --------- ---------- --------- ---------- ---------- Consolidated Totals . $ 346,104 $2,241,263 $ 742,599 $6,382,655 $2,082,976 ========= ========== ========= ========== ==========
Column A Column G Column H Column I Column J Column K - - -------- -------- -------- -------- -------- -------- Other Amortiza- Operating Benefits, tion of Costs Claims, Deferred (Including Net Losses and Policy Dividends Net Investment Adjustment Acquisition to Policy- Premiums Segment Income (1) Expense Costs holders) Written - - ------- ---------- ---------- ----------- ---------- -------- 1992 Property and Casualty: Personal . . . . . . . . $ 960,590 $ 239,284 $ 96,731 $1,314,448 Commercial and Surety . 346,062 81,055 102,760 505,997 ---------- --------- --------- ---------- Total . . . . . . . . $ 280,820 1,306,652 320,339 199,491 $1,820,445 --------- ---------- --------- --------- ========== Life and Health: Financial Services . . . 344,970 283,787 4,940 42,848 Employee Benefits . . . 278,614 390,352 13,921 92,648 --------- ---------- --------- --------- Total . . . . . . . . 623,584 674,139 18,861 135,496 --------- ---------- --------- --------- Real Estate . . . . . . . . . . -- -- -- 178,783 Other and Eliminations . . . . (1,356) -- -- 57,720 --------- ---------- --------- --------- Consolidated Totals . $ 903,048 $1,980,791 $ 339,200 $ 571,490 ========= ========== ========= =========
(1) Property and casualty insurance companies' investments are available for payment of claims and benefits for all product lines within the segments; therefore, such investments and the related investment income have not been identified with specific segments. In the life and health companies, a major portion of investment income and assets is specifically identifiable within an industry segment. The remainder of these amounts has been allocated in proportion to the mean policy reserves and liabilities identified with each segment. 35 F-10 Schedule IV SAFECO CORPORATION AND SUBSIDIARIES REINSURANCE FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (In Thousands)
Column A Column B Column C Column D Column E Column F - - -------- -------- -------- -------- -------- -------- Percentage Ceded Assumed of Amount Gross to Other from Other Net Assumed Amount Companies Companies Amount to Net -------- --------- --------- -------- --------- Year Ended December 31, 1994 - - ----------------- Life Insurance In-Force at December 31, 1994 . . . . . . . . $28,692,952 $(1,322,748) $ -- $27,370,204 0.0% =========== =========== ======= =========== ====== Earned Premiums: Life Insurance . . . . . . . . . . . $ 107,099 $ (4,844) $ 38 $ 102,293 0.0 Accident and Health Insurance . . . 178,405 (4,216) 289 174,478 0.2 Property and Casualty Insurance . . 2,207,615 (175,861) 21,677 2,053,431 1.1 ----------- ----------- ------- ----------- Total Premiums . . . . . . . $ 2,493,119 $ (184,921) $22,004 $ 2,330,202 0.9% =========== =========== ======= =========== ====== Year Ended December 31, 1993 - - ----------------- Life Insurance In-Force at December 31, 1993 . . . . . . . . . $28,009,316 $(1,302,251) $ -- $26,707,065 0.0% =========== =========== ======= =========== ====== Earned Premiums: Life Insurance . . . . . . . . . . . $ 104,755 $ (4,465) $ -- $ 100,290 0.0 Accident and Health Insurance . . . 210,240 (5,111) 544 205,673 0.3 Property and Casualty Insurance . . 2,034,268 (127,537) 22,983 1,929,714 1.2 ----------- ----------- ------- ---------- Total Premiums . . . . . . . $ 2,349,263 $ (137,113) $23,527 $ 2,235,677 1.1% =========== =========== ======= =========== ====== Year Ended December 31, 1992 - - ----------------- Life Insurance In-Force at December 31, 1992 . . . . . . . . $27,416,558 $(1,301,956) $ -- $26,114,602 0.0% =========== =========== ======= =========== ====== Earned Premiums: Life Insurance . . . . . . . . . . . $ 106,049 $ (3,796) $ 10 $ 102,263 0.0 Accident and Health Insurance . . . 229,723 (5,396) 1,926 226,253 0.9 Property and Casualty Insurance . . 1,854,442 (124,352) 24,370 1,754,460 1.4 ----------- ----------- ------- ----------- Total Premiums . . . . . . . $ 2,190,214 $ (133,544) $26,306 $ 2,082,976 1.3% =========== =========== ======= =========== ======
36 F-11 Schedule VI SAFECO CORPORATION SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (In Thousands)
- - ---------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K - - -------- -------- ---------- ---------- ---------- ---------- ---------- -------- ----------- -------- -------- Losses and Loss Reserve Adjustment for Expenses Amorti- Unpaid Incurred zation of Affilia- Deferred Losses Discount Related to Deferred Paid tion Policy and Loss if any, ----------------- Policy Losses With Acqui- Adjust- Deducted Net (a) (b) Acquisi- and Loss Net Regis- sition ment In Unearned Earned Investment Current Prior tion Adjustment Premiums trant Costs Expense Column C Premiums Premiums Income Year Years Costs Expense Written - - -------- -------- ---------- ---------- --------- --------- ---------- --------- ------- ---------- ---------- -------- Consolidated Property and Casualty Subsidiaries: 1994 $141,653 $2,236,804 $ -- $858,181 $2,053,431 $283,481 $1,609,392 $(81,325) $365,196 $1,430,243 $2,103,465 1993 $133,103 $2,095,187 $ -- $809,427 $1,929,714 $277,643 $1,447,565 $(96,937) $341,997 $1,318,642 $2,000,165 1992 $124,479 $2,052,334 $ -- $732,166 $1,754,460 $280,820 $1,351,234 $(44,582) $320,339 $1,208,835 $1,820,445
37 F-12 SAFECO CORPORATION AND SUBSIDIARIES EXHIBIT INDEX* Exhibit 3 - Bylaws (as amended August 4, 1993) filed as Exhibit 3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993, are incorporated herein by this reference. - Restated Articles of Incorporation (as amended May 4, 1988) filed as Exhibit 3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988, are incorporated herein by this reference. Exhibit 4 - SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with copies of all instruments defining rights of holders of long-term debt of SAFECO and its consolidated subsidiaries. F-13 Exhibit 10 - SAFECO Corporation Deferred Compensation Plan for Directors dated November 2, 1994. - The following documents are incorporated herein by this reference: the Executive Severance Agreements with Roger Eigsti and Boh A. Dickey, each dated May 23, 1984, and filed as Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1985; and the Executive Severance Agreement with R.E. Zunker dated May 1, 1985 and filed as Exhibit 10 to the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. - Prospectus dated November 10, 1989 for the SAFECO Incentive Plan of 1987 (as amended January 31, 1990), filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 and the Supplement to such Prospectus dated November 7, 1990 filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, the Prospectus dated February 1, 1985 for the SAFECO Stock Option Plan filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1984 and the Appendix dated January 26, 1987 to such Prospectus filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1986, are incorporated herein by this reference.
38 SAFECO CORPORATION AND SUBSIDIARIES (Continued) EXHIBIT INDEX* F-14 Exhibit 11 - Computation of Income Per Share F-15 Exhibit 12 - Computation of Ratios F-16 Exhibit 21 - Subsidiaries of the Registrant F-17 Exhibit 28 - (P) Information from Reports Furnished to State Insurance Regulatory Agencies (paper-filed only, under Form SE) Exhibit 13 - 1994 Annual Report to Stockholders (pages 25 to 67, inclusive) Exhibit 27 - Financial Data Schedule (This exhibit is included only in the electronic EDGAR filing version of this 10-K. 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.)
* Copies of Exhibits are available without charge by making a written request to: Rod A. Pierson Senior Vice President, Secretary and Controller SAFECO Corporation SAFECO Plaza Seattle, WA 98185 EX-10 2 EXHIBIT 10 1 F-13 Exhibit 10 SAFECO CORPORATION DEFERRED COMPENSATION PLAN FOR DIRECTORS 1. PURPOSE The purpose of this Deferred Compensation Plan (the "Plan") is to provide for deferral of payment of all or a portion of any annual retainer fees, meeting fees, or both, payable to directors of SAFECO Corporation (the "Company"). 2. ELIGIBILITY Any director of the Company entitled to compensation as a director is eligible to elect to participate in the Plan. 3. ELECTION TO PARTICIPATE a. A director may elect to defer all or a specified percentage of annual retainer fees, meeting fees, or both, that may thereafter become payable, by executing and delivering to the Company a notice which states the amount or the percentage of the fees to be deferred. An election or change in election must be made by December 31 to be effective for fees to be paid in the following year, except that with respect to any new director joining the Board during a calendar year, the election to defer for the remainder of the year must be made within 30 days of such director's appointment or election to the Board. b. An election to participate will remain in effect until participation in the Plan terminates, or until the election is changed by a notice to the Company increasing or decreasing the amount or percentage of fees to be deferred. If a director or former director having an account under the Plan (a "Participant") terminates participation in the Plan, all amounts accrued in the Participant's account prior to termination will continue to be held subject to the Plan. 4. DEFERRAL ACCOUNTS a. All fees deferred under the Plan shall be credited to the Participant in a deferral account. Fees shall be credited at the time the fees otherwise are payable. b. Interest will be computed on each Participant's account during each calendar year at the federal long-term rate in effect at January 1 of such year for purposes of Section 1274 of the Internal Revenue Code of 1986, as amended. 1 2 5. DISTRIBUTIONS a. A Participant shall elect, by written notice to the Administrative Committee, the timing of distributions from the Plan, such election to be irrevocable once made. The election shall be made no later than December 31 of the year prior to the calendar year in which the Participant reaches age 72. Distributions must commence no later than the year the Participant retires from the Board or otherwise terminates service as a director. b. An election shall specify one of the following payment options: (1) Payment of the entire account balance in a single lump sum payment. (2) Payment of the account balance in annual installments over a stated period not to exceed 10 years and the initial year of payment. In the case of payments to be made over two or more years, the amount payable to the Participant each year shall be computed so that the aggregate amount in a Participant's account under the Plan shall be distributed in approximately equal installments in each year for which deferred compensation payments are to be made. c. Distributions shall be made in accordance with the election unless the Administrative Committee determines in its discretion that distributions should be made at some different time or in some different manner. d. If the Participant fails to furnish the Administrative Committee with a written election regarding the timing of distributions from the Plan, the Participant's entire account balance shall be paid out in a single lump sum payment within 30 days following the Participant's retirement or other termination of service as a director of the Company. e. A Participant may request that amounts credited to the Participant's deferral account be distributed during the Participant's term of office as a director of the Company or that an election regarding distribution of the account be changed. Any such request must set forth the reason therefor and is subject to approval by the Committee in its sole and absolute discretion. The Committee may establish guidelines for its own use in considering any such request or any other request or election under the Plan, but such guidelines shall not in any way limit the Committee's discretion in acting upon a request or 2 3 election, or in determining the timing and manner of any distribution to be made under the Plan. 6. BENEFICIARIES A Participant may designate one or more beneficiaries to receive distributions from the Plan, upon the death of the Participant. If no beneficiary has been designated, all such amounts shall be paid to the personal representative of the Participant. The death of a Participant shall not affect the timing or manner of distributions from the Participant's account, except as may be otherwise determined by the Administrative Committee upon request of the personal representative or beneficiary of the Participant. 7. TERMINATION OR AMENDMENT OF THE PLAN The Plan may be terminated, modified, or amended from time to time by resolution of the Board of Directors. If the Plan is terminated, all amounts accrued prior to termination will continue to remain subject to the provisions of the Plan as if the Plan had not been terminated. 8. PARTICIPANTS' RIGHTS a. Amounts deferred and accrued under the Plan remain the property of the Company, and no Participant or other person shall acquire any property interest in the account or any other assets of the Company on account of participation in the Plan, a Participant's rights being limited to receiving from the Company the payments provided for in the Plan. The Plan is unfunded, and to the extent that any Participant acquires a right to receive payments from the Plan, such right shall be no greater than the right of an unsecured creditor of the Company. b. The right of a Participant or of the Participant's legal representative or beneficiary to receive payments from the Plan shall not be subject to anticipation, sale, assignment, pledge, encumbrance or charge, nor shall such right be liable for or subject to the debts, contracts, liabilities or torts of the Participant, or the Participant's legal representative or beneficiaries. 9. POWERS OF ADMINISTRATIVE COMMITTEE The Board shall from time to time appoint a committee, which shall be designated the Administrative Committee, to administer the Plan. The Administrative Committee shall have full power and authority to construe and interpret the Plan. Members of the Administrative Committee who are otherwise 3 4 eligible to participate in the Plan may do so while serving as members of such Committee, provided that no member shall be entitled to vote or take any other action as part of the Committee with respect to such member's benefits under the Plan. Decisions of the Administrative Committee shall be final and binding upon the Participants, their legal representatives and beneficiaries. Approval by the Administrative Committee of any election or request made by a Participant or the legal representative or beneficiary of a Participant shall be subject to the sole discretion of the Committee. 4 EX-11 3 EXHIBIT 11 1 F-14 Exhibit 11 SAFECO CORPORATION AND SUBSIDIARIES COMPUTATION OF INCOME PER SHARE (In Thousands, Except Per Share Amounts)
Year Ended December 31 1994 1993 1992 -------- -------- -------- PRIMARY INCOME PER SHARE OF COMMON STOCK: 1. Average number of common shares outstanding 62,972 62,879 62,792 ======== ======== ======== 2. Additional common shares assumed issued under the treasury stock method 235 354 447 ======== ======== ======== 3. Net Income $314,374 $428,778 $311,294 ======== ======== ======== 4. Primary Net Income per share of common stock (L.3 / L.1) $ 4.99 $ 6.82 $ 4.96 ======== ======== ========
EX-12 4 EXHIBIT 12 1 F-15 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES SAFECO CORPORATION AND CONSOLIDATED SUBSIDIARIES (In Thousands, Except Ratios)
Year Ended December 31 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Fixed Charges: Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 69,346 $ 58,790 $ 64,097 $ 70,797 $ 68,512 Interest Capitalized . . . . . . . . . . . . . . . . . . 831 1,381 154 30 2,040 Interest Portion of Rental Expense . . . . . . . . . . . 3,050 2,768 2,855 2,595 2,280 Amortization of Deferred Debt Expense . . . . . . . . . . 845 613 655 572 436 -------- -------- -------- -------- -------- Total Fixed Charges . . . . . . . . . . . . . . . . . $ 74,072 $ 63,552 $ 67,761 $ 73,994 $ 73,268 ======== ======== ======== ======== ======== Earnings: Income From Continuing Operations Before Income Taxes . . $389,741 $576,937 $403,257 $317,314 $303,982 Total Fixed Charges Above . . . . . . . . . . . . . . . . 74,072 63,552 67,761 73,994 73,268 Less Interest Capitalized . . . . . . . . . . . . . . . . (831) (1,381) (154) (30) (2,040) Less Undistributed Loss from Unconsolidated Subsidiary . . . . . . . . . . . . . . 211 574 555 218 35 -------- -------- -------- -------- -------- Total Earnings . . . . . . . . . . . . . . . . . . . $463,193 $639,682 $471,419 $391,496 $375,245 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges . . . . . . . . . . . . 6.3 10.1 7.0 5.3 5.1 ======== ======== ======== ======== ========
SAFECO CREDIT
Year Ended December 31 1994 1993 1992 1991 1990 ------ ------ ------ ------ ------ Fixed Charges: Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 30,652 $ 25,918 $ 26,646 $ 30,516 $ 27,057 Interest Portion of Rental Expense . . . . . . . . . . . 69 100 102 160 76 Amortization of Deferred Debt Expense . . . . . . . . . . -- 38 52 24 8 -------- -------- -------- -------- -------- Total Fixed Charges . . . . . . . . . . . . . . . . . $ 30,721 $ 26,056 $ 26,800 $ 30,700 $ 27,141 ======== ======== ======== ======== ======== Earnings: Income Before Income Taxes . . . . . . . . . . . . . . . $ 10,761 $ 10,190 $ 9,036 $ 9,489 $ 6,815 Total Fixed Charges Above . . . . . . . . . . . . . . . . 30,721 26,056 26,800 30,700 27,141 -------- -------- -------- -------- -------- Total Earnings . . . . . . . . . . . . . . . . . . . $ 41,482 $ 36,246 $ 35,836 $ 40,189 $ 33,956 ======== ======== ======== ======== ======== Ratio of Earnings to Fixed Charges . . . . . . . . . . . . 1.4 1.4 1.3 1.3 1.3 ======== ======== ======== ======== ========
EX-13 5 EXHIBIT 13 1 1994 ANNUAL REPORT MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFECO Corporation (the Corporation, or SAFECO) is a Washington corporation which owns operating subsidiaries in various segments of insurance and other financially related businesses. The insurance subsidiaries are engaged in both property and casualty insurance and life and health insurance. SAFECO Properties and its subsidiaries invest in, develop and manage real estate properties, primarily regional shopping centers. SAFECO Credit Company provides loans and equipment financing and leasing to commercial businesses including affiliated companies. SAFECO also provides asset management to the SAFECO family of mutual funds, SAFECO Trust Company and other outside managed accounts. CAPITAL RESOURCES AND LIQUIDITY Insurance premiums, dividends, interest, rental income and asset management fees are SAFECO's primary sources of cash. Most insurance premiums are received before or at the time premium revenues are recognized, while related claims are incurred and paid in subsequent months or years. Any resulting cash flow is used primarily to pay shareholder dividends and to expand the investment portfolio. Total cash provided by operating activities for the years ended December 31, 1994, 1993 and 1992 was $753.0 million, $633.6 million and $664.6 million, respectively (see Statement of Consolidated Cash Flows on page 40). The lower amount of operating cash flow in 1993 compared to 1994 and 1992 was primarily due to payments relating to the Proposition 103 settlement (see Note 6 on page 55) and to higher income taxes paid in 1993. Property and casualty insurance premiums received are higher in 1994 and 1993, resulting from a combination of rate increases and a higher number of policies in force. Other operating receipts and other operating costs paid decreased in 1993, due to the sale of the hospital operations in May of 1992. These cash flows increased in 1994 compared with 1993 due mainly to a higher level of sales of properties held for sale. Dividends and interest received increased in both 1994 and 1993 due mainly to the increasing invested asset base of the life and health insurance companies. Higher interest rates in 1994 also increased interest received for that year. The 1994 new classification of items in the investing activities section of the Statement of Consolidated Cash Flows was due to the adoption of Financial Accounting Standards Board (FASB) Statement 115 (see Note 1 on page 49). Adoption had no effect on SAFECO's cash flow or net income. The high level of proceeds from the maturity of fixed maturities in all three years was due to the large amount of calls of fixed maturities and prepayments of mortgage-backed securities resulting from lower interest rates in 1992, 1993 and the first part of 1994. Calls and prepayments slowed in 1994 as interest rates rose throughout the year and this trend of lower calls and prepayments is expected to continue into 1995. The rise in interest rates has also reduced the market value of fixed maturity securities in 1994 and this has affected SAFECO's reported book value (stockholders' equity) because the difference between market value and amortized cost on fixed maturities classified as available-for-sale is included in stockholders' equity, net of tax. SAFECO's investment income has been positively impacted by the rise in interest rates and this trend is expected to continue into 1995. The real estate and credit subsidiaries have ongoing needs for outside capital. The real estate subsidiaries borrow from life insurance companies, banks and savings and loan associations and other lenders. At December 31, 1994, the real estate subsidiaries had notes and mortgages payable to non-affiliates of $217.2 million, of which $6.1 million was due within one year. It is anticipated that these obligations will be met through a combination of rollovers and replacement borrowings. The real estate subsidiaries refinanced approximately $53 million of debt in 1993, taking advantage of lower interest rates on longer-term borrowings. SAFECO Credit Company's borrowings are short to medium-term and are obtained primarily from the issuance of commercial paper and medium-term notes. SAFECO Credit had unaffiliated borrowings at December 31, 1994 of $510.6 million, of which $432.3 million was due within one year. Almost all of this current portion is comprised of short-term commercial paper borrowings. It is anticipated that the majority of these commercial paper borrowings will be rolled over in 1995. SAFECO Credit has entered into interest rate swap agreements to reduce the impact of changes in interest rates on its floating rate debt. At December 31, 1994, interest rate swap agreements were outstanding with notional amounts of $70.9 million, replacing the floating rates of 6.06% to 6.73% with fixed rates ranging from 4.51% to 9.00%. Maturities of the agreements range from July 1995 to February 2001. In July 1994 the Securities and Exchange Commission (SEC) declared effective a shelf registration providing for the issuance of up to $200 million of debt securities by SAFECO Corporation. No securities have yet been issued under this registration. These securities may be offered and sold from time to time, with various maturities and other terms to be determined at the time of issuance. Any proceeds will be 25 2 SAFECO CORPORATION used for general corporate purposes which will likely include replacing much of SAFECO Corporation's $200 million of 10.75% notes which come due in September of 1995. Although it is currently anticipated that the 10.75% notes will be funded primarily by debt issued under the 1994 shelf registration, proceeds from the sales of securities owned by SAFECO Corporation or dividends from SAFECO's subsidiaries may provide a portion of the funds needed to retire this debt. A shelf registration providing for the issuance of up to $200 million of debt securities by SAFECO Corporation and/or SAFECO Credit was declared effective by the SEC in 1990. SAFECO Credit issued $149.9 million of medium-term notes under this registration, of which $94.2 million is still outstanding as of December 31, 1994. These debt securities issued by SAFECO Credit are guaranteed by SAFECO Corporation. In addition to providing funds to expand SAFECO Credit's loan and lease portfolio, the issuance of the medium- term notes has reduced SAFECO Credit's reliance on short-term financing. As of December 31, 1994, SAFECO Corporation had issued $50.0 million of medium-term notes under this registration, all maturing in 2002 and 2003. No additional notes will be issued under this shelf registration. SAFECO Corporation's debt is rated AA by Standard & Poor's and Aa3 by Moody's Investor Services. SAFECO's property and casualty companies' financial strength ratings are A++ by A.M. Best, AAA by Standard & Poor's and Aa1 by Moody's, and SAFECO Life Insurance Company is rated A+ by A.M. Best, AA by Standard & Poor's and Aa2 by Moody's. The financial strength ratings are important to SAFECO and the industry in marketing insurance products. Many life insurance companies' pension and annuity products have been impacted by general economic conditions, volatile investment returns, rating downgrades, increased competition and decisions by plan sponsors to diversify assets and fund management. SAFECO has experienced an increase in the level of withdrawal of funds from its pension and annuity business (see Statement of Consolidated Cash Flows on page 40 -- Return of Funds Held Under Deposit Contracts), due to scheduled payouts on distribution-type products and the interest rate environment. However, SAFECO's overall withdrawal experience remains relatively modest, and recent interest rate increases have increased SAFECO's sales of fixed income pension and annuity products. Of the total of $8.0 billion in deposit contracts at December 31, 1994, approximately 45% are structured settlement immediate annuity products. These annuities have average expected maturities of over 25 years and cannot be surrendered by policyholders. Other annuity products, comprising approximately 13% of total deposit contracts, generally have expected maturities of between 5 to 12 years and associated surrender charges graded from 5% in year one to zero in year six. SAFECO's guaranteed investment contracts (GICs) within its pension area comprise approximately 2% of total deposit contracts. These contracts have average maturities of four years and cannot be surrendered except in extremely unusual circumstances. Other pension products comprising approximately 37% of total deposit contracts, have expected maturities of 5 to 15 years. Surrender charges on these products are typically 9% in year one graded to zero in year 9, and SAFECO retains the option to defer payouts over five years on approximately one-half of these contracts. SAFECO is not aware of any recently passed or current recommendations by regulatory authorities which have or would have, if passed, a material effect on the Corporation's liquidity, capital resources or results of operations. The state of Washington adopted new rules in 1993 governing the amount of dividend payments that can be made by Washington domiciled insurance companies without prior regulatory approval. These new rules are more restrictive than the previous rules. However, it is expected they will not restrict SAFECO's insurance subsidiaries from paying dividends to SAFECO Corporation (parent company) in amounts similar to those presently being paid and those paid in the past. The National Association of Insurance Commissioners (NAIC) has adopted new risk-based capital (RBC) formulas for both life insurers and property and casualty insurers. For life insurers, the RBC guidelines became effective December 31, 1993; the RBC guidelines for property and casualty companies became effective December 31, 1994. The formulas are used as an early warning tool by the NAIC and state regulators to identify companies that are under capitalized and which merit further regulatory attention or the initiation of regulatory action. The RBC formula for life insurers establishes capital requirements relating to amounts of insurance risk, business risk, asset credit risk and interest rate risk. The RBC formula for property and casualty insurers establishes capital requirements relating to amounts of underwriting risk, asset risk, credit risk and off-balance sheet risk. SAFECO's life and property and casualty companies have more than sufficient capital to meet the RBC requirements. Similarly, the NAIC's proposed new Model Investment Law, if adopted by certain states in which SAFECO operates, should not significantly impact SAFECO as its assets are, and historically have been, conservatively invested. 26 3 1994 ANNUAL REPORT SUMMARY OF FINANCIAL INFORMATION The following summarized financial information sets forth the contributions of each business segment to the consolidated net income of SAFECO Corporation. The information should be read in conjunction with the related statements of income on pages 43 through 47 of this report.
Year Ended December 31 (In Thousands Except Per Share Amounts) 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------ Income (Loss), Net of Income Taxes, Before Realized Gain: Property and Casualty . . . . . . . . . . . . . . . . . . . . . $192,734 $217,187* $187,144 Life and Health . . . . . . . . . . . . . . . . . . . . . . . . 84,941 76,903 75,600 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 6,568 6,136 6,040 Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,365 6,439 6,140 Asset Management . . . . . . . . . . . . . . . . . . . . . . . 4,116 4,255 4,261 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,272) (3,934) (7,636) ---------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,452 306,986 271,549 ---------------------------------- Realized Gain (Loss), Net of Income Taxes, from: Security Investments . . . . . . . . . . . . . . . . . . . . . 26,035 113,506 40,431 Real Estate Investments . . . . . . . . . . . . . . . . . . . . (113) 5,409 (686) ---------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,922 118,915 39,745 ---------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 314,374 425,901 311,294 Cumulative Effect of Accounting Changes . . . . . . . . . . . . . . -- 2,877 -- ---------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314,374 $428,778 $311,924 ================================== Net Income Per Share of Common Stock: Income Before Realized Gain . . . . . . . . . . . . . . . . . . $ 4.58 $ 4.88 $ 4.33 Realized Gain . . . . . . . . . . . . . . . . . . . . . . . . . .41 1.89 .63 Cumulative Effect of Accounting Changes . . . . . . . . . . . . -- .05 -- ---------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.99 $ 6.82 $ 4.96 ==================================
* Includes a charge of $40 million ($26 million after tax, or $0.41 per share) for the Proposition 103 settlement. PROPERTY AND CASUALTY -- OPERATIONS Through independent agents, SAFECO's property and casualty subsidiaries write personal, commercial and surety lines of insurance including automobile, homeowners, fire and allied lines, commercial multi-peril, miscellaneous casualty, surety, fidelity and workers' compensation. Products are sold in nearly all states and the District of Columbia. SAFECO sold its Canadian property and casualty operations in June of 1991 (see discussion on page 29). Approximately 25% of SAFECO's property and casualty premiums are written in California and approximately 47% of premiums are written in the three west coast states of California, Washington and Oregon. Voluntary personal, commercial and surety lines (which excludes assigned risk, FAIR plans, etc.) comprise approximately 69%, 26% and 4%, respectively, of the 1994 gross premiums written. The gross premiums written growth set forth in the table on page 29 of 6.7% in 1994 is comprised of a 6.6% increase for personal, and increases of 7.1% for commercial and 7.1% for surety lines. Gross premiums written growth of 10.2% in 1993 was comprised of a 10.4% increase for personal, and increases of 10.3% for commercial and 5.7% for surety lines. The growth in personal lines premiums is the result of both rate increases and an increase in policies in force. The number of vehicles insured increased 1.3% in 1994, compared with increases of 2.2% in 1993 and 6.2% in 1992. This trend in the growth rate has been caused primarily by rate increases placed in effect in recent years. The number of homes insured increased 2.7% in 1994, 8.0% in 1993 and 10.8% in 1992. This trend in the growth rate is also due in part to rate increases placed in effect in recent years. 27 4 SAFECO CORPORATION SAFECO's commercial lines premiums increased in 1994 and 1993 as a result of both growth in policies in force and some rate increases. Continued growth in commercial premiums written is expected in 1995. The increase in surety premiums in 1994 is primarily due to new commercial and contract accounts acquired. Property and casualty results for 1994 include $90.0 million in net losses from the January 17, 1994 Los Angeles earthquake. Losses were $225 million before reinsurance. In addition, $23.3 million was incurred to reinstate reinsurance coverage for a second catastrophe in the event it occurred in 1994 and $9.0 million was incurred to pay for reinsurance coverage for a third catastrophe in the event it occurred in 1994. Most of these amounts relate to earthquake coverage, included in other personal lines discussed below. Voluntary personal auto, SAFECO's largest single line of business, produced pretax underwriting profits of $43.4 million, $37.3 million and $5.6 million in 1994, 1993 and 1992, respectively. The improvement in 1994 and 1993 was due primarily to rate increases that were taken in 1990, 1991 and 1992. Average auto rates were increased 3% in 1994 and 6% in 1993 while loss costs were up 7% in 1994 and 4% in 1993. During the second half of 1994, the severity or cost of settling claims increased and the frequency of accidents also increased. The level of auto rate increases in 1995 will be substantially dependent upon loss cost trends. The homeowners line produced pretax underwriting losses of $33.6 million, $51.7 million and $62.1 million in 1994, 1993 and 1992, respectively. Although weather-related and catastrophic events in SAFECO's homeowners line moderated in 1994, the losses in all three years reflect an historically high level of these events in the three years. Catastrophe losses for homeowners, before reinsurance, totaled $44.6 million, $51.8 million and $90.7 million in 1994, 1993 and 1992, respectively. After reinsurance, these amounts totaled $35.8 million, $51.5 million and $94.7 million for the respective three years. The 1994 homeowners claims include $4.8 million after reinsurance from the Los Angeles earthquake (see other personal lines discussion below), $6.6 million from an April hailstorm in Dallas and over $4.0 million from winter storms and freezing on the East Coast in January. The 1993 homeowners claims include $26.6 million from the Puget Sound area windstorm in January and $7.4 million from the California wildfires in November. The 1992 homeowners claims include $31.7 million from hailstorms in Kansas and Texas and $22.5 million resulting from an increase in the estimated cost of settling claims from the October 1991 fire in Oakland, California. Homeowners rates were increased 6%, 7% and 5% in 1994, 1993 and 1992, respectively. SAFECO's total homeowners premiums increased 11% , 17% and 8% in 1994, 1993 and 1992, respectively, due to rate increases, increases in the number of homes insured and efforts to increase homeowners insurance to value. The insurance-to-value effort was begun in 1993 to review the adequacy of coverage or policy limits for nearly all homes over a three year period. An increase in premiums per policy is expected in 1995 as a result of planned rate increases and additional premiums from the insurance-to-value effort. Other personal lines produced an underwriting loss of $76.1 million in 1994, compared with underwriting profits of $20.6 million and $18.1 million in 1993 and 1992, respectively. Coverages in these lines include earthquake, dwelling fire, inland marine, boats and recreational vehicles. Earthquake losses caused by the Los Angeles earthquake were $81.6 million net of reinsurance. In addition, as noted above, $23.3 million was incurred to reinstate reinsurance coverage for a second catastrophe in the event it occurred in 1994 -- nearly all of this related to other personal lines. California currently requires insurers to offer earthquake coverage in connection with homeowners and other residential policies. After careful review, effective July 1, 1994 SAFECO suspended writing new homeowners, dwelling fire and condominium policies in California. Existing homeowners policies are being renewed and earthquake coverage is being offered every two years as required by California insurance regulations, to policyholders who previously declined the coverage. Federal legislation is necessary to create a permanent, long-term solution for the losses that arise from natural disasters such as earthquakes. SAFECO supports the National Disaster Protection Partnership Act, currently before Congress, as the best means to encourage mitigation efforts to reduce such losses and to provide a mechanism to pay such losses. Commercial operations produced pretax underwriting losses of $22.5 million, $5.5 million and $22.5 million for 1994, 1993 and 1992, respectively. Even with a continuation of the competitive commercial insurance market, SAFECO has experienced modest renewal price increases for the past three years. Small commercial package policies and workers' compensation lines were much improved in 1994 over 1993; however, results worsened in 1994 for general liability and commercial auto coverages. Overall, SAFECO's voluntary commercial lines combined ratio was 104.3, 101.2 and 105.2 for 1994, 1993 and 1992, respectively. The combined ratios for all three years compare favorably with the industry and are a result of continued disciplined risk selection, limited impact of weather-related losses on SAFECO's commercial property risks and concentration of commercial writings in states with the most favorable legal and regulatory climates. 28 5 1994 ANNUAL REPORT The surety line produced pretax underwriting profits of $16.1 million, $18.2 million and $3.2 million for 1994, 1993 and 1992, respectively. The 1992 results were impacted by several contract bond losses. In 1994 SAFECO continued to acquire new accounts in both the contract and commercial lines. Other insurance product lines (primarily assigned risk and FAIR plans) produced underwriting losses of $4.6 million, $9.0 million and $14.3 million in 1994, 1993 and 1992, respectively. These losses declined in 1994 because of reduced losses in commercial assigned risk business. The lower losses in 1993 were due to a reduction in personal auto non-voluntary losses, due in turn to reduced losses from the California Assigned Risk Plan and Canadian non-voluntary pool. SAFECO sold its Canadian property and casualty operations in 1991 with no significant gain or loss resulting from the transaction. Underwriting results had been unsatisfactory, primarily as a result of stringent and unrealistic auto rate regulation and high loss costs in Ontario. These poor results and the expectation that they would continue were primary reasons for the sale. Canadian underwriting profits were $8.4 million, $5.3 million and $7.6 million for 1994, 1993 and 1992, respectively, and resulted from reductions in the estimated cost of settling prior years' claims. Under the sales agreement SAFECO retained the liabilities for losses incurred prior to April 1, 1991. Canadian assets were $215 million and $220 million at December 31, 1994 and 1993, respectively. PROPERTY AND CASUALTY OPERATING STATISTICS
1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------- Percentage Percentage Percentage Increase Increase Increase (Decrease) (Decrease) Over Prior Over Prior Over Prior Year Year Year ------------------------------------------------------------------- (In Thousands) Gross Premiums Written . . . . . . . . $2,278,045 6.7% $2,134,512 10.2% $1,937,090 5.8% ========== ========== ========== Net Premiums Written . . . . . . . . . $2,103,465 5.2 $2,000,165 9.9 $1,820,445 11.7 ========== ========== ========== Earned Premiums . . . . . . . . . . . . $2,053,431 6.4 $1,929,714 10.0 $1,754,460 7.2 ========== ========== ========== Underwriting Profit (Loss) . . . . . . $ (77,345) $ 9,848 $ (72,022) Net Investment Income . . . . . . . . . 283,481 2.1 277,643 (1.1) 280,820 (1.8) Proposition 103 Settlement . . . . . . -- (40,000) -- ---------- ---------- ---------- Income before Realized Investment Gain and Income Taxes . . . . . . $ 206,136 $ 247,491 $ 208,798 ========== ========== ==========
1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------- Operating Ratios as a % of Earned Premiums (GAAP Basis) ------------------------------ Loss Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.70% 60.21% 63.93% Adjustment Expense Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 9.72 9.78 10.55 Expense Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.24 28.43 28.72 Dividends to Policyholders . . . . . . . . . . . . . . . . . . . . . . . . 1.11 1.07 .91 ------------------------------ Combined Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103.77% 99.49% 104.11% ==============================
29 6 SAFECO CORPORATION PROPERTY AND CASUALTY -- PROPOSITION 103 For discussion relating to California's Proposition 103, see Note 6 on page 55. PROPERTY AND CASUALTY -- LOSS RESERVES The liability (reserves) for losses and adjustment expense for the property and casualty companies was $2,237 million at December 31, 1994, compared with $2,095 million at December 31, 1993. The liability is presented net of amounts recoverable from salvage and subrogation recoveries (see Note 1 on page 49) and gross of amounts recoverable from reinsurance (see Note 5 on page 54). The amount of reinsurance recoverables related to the above gross liabilities was $143.9 million at December 31, 1994 and $100.1 million at December 31, 1993. Reserves for losses that have been reported to the Corporation and certain legal expenses are established on the "case basis" method. Claims incurred but not reported (IBNR) and other adjustment expense are estimated using statistical procedures. Salvage and subrogation recoveries are accrued using the "case basis" method for large claims and statistical procedures for smaller claims. These reserves aggregate SAFECO's best estimates of the total ultimate cost of claims that have been incurred but have not yet been paid. The estimates are based on past claims experience and consider current claims trends as well as social, legal and economic conditions, including inflation. The reserves are not discounted. Loss and adjustment expense reserve development is reviewed on a regular basis to determine that the reserving assumptions and methods are appropriate. Reserves initially determined are compared to the amounts ultimately paid. A statistical estimate of the projected amounts necessary to settle outstanding claims is made regularly and compared to the recorded reserves. SAFECO's objective is to set reserves which are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately required to settle losses. Analysis indicates that SAFECO's reserves are adequate and probably slightly redundant at December 31, 1994, 1993 and 1992. Operations were credited $81.3 million, $96.9 million and $44.6 million in 1994, 1993 and 1992, respectively, as a result of a reduction in the estimated amounts needed to settle prior years' claims. SAFECO's property and casualty companies' reserves for losses and adjustment expense for liability coverages related to environmental, asbestos and other toxic claims totaled $108.2 million at December 31, 1994, compared with $113.4 million at December 31, 1993. These amounts are before the effect of reinsurance, which is insignificant. These reserves are approximately 5% of total property and casualty reserves for losses and adjustment expense at both December 31, 1994 and 1993. The reserves include estimates for both reported and IBNR losses and related legal expenses. The vast majority of SAFECO's property and casualty insurance subsidiaries' environmental, asbestos and other toxic claims result from the general liability line of business. A few of these types of losses occur in other coverages such as umbrella and small commercial package policies. The following table presents the loss reserve activity analysis for liability coverages related to environmental, asbestos and other toxic claims.*
1994 1993 1992 - - ----------------------------------------------------------------------------------------------------- (In Thousands) Reserves at beginning of year . . . . . . . . . . . . . . . . $113,410 $110,543 $110,218 Incurred losses and adjustment expense . . . . . . . . . . . 10,252 9,364 10,070 Losses and adjustment expense payments . . . . . . . . . . . (15,432) (6,497) (9,745) ---------------------------------- Reserves at end of year . . . . . . . . . . . . . . . . . . . $108,230 $113,410 $110,543 ==================================
* Amounts are before the effect of reinsurance, which is insignificant. In view of the changes in environmental regulations and legal decisions which affect the development of loss reserves, the process to estimate loss reserves for environmental, asbestos and other toxic claims results in imprecise estimates. Quantitative techniques have to be supplemented by subjective considerations and managerial judgment. In view of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. The reserves carried for these claims at December 31, 1994 are estimates based on the known facts and current law and are believed to be adequate. SAFECO has generally avoided writing coverages for larger companies with substantial exposure in these areas. The property and casualty subsidiaries protect themselves from excessive losses by reinsuring on treaty and facultative bases. As noted above, the liability for unpaid losses and adjustment expense is reported gross of reinsurance recoverables of $143.9 million at December 31, 1994 and $100.1 million at December 31, 1993. This increase is due to amounts recoverable by SAFECO from its reinsurers related to the Los Angeles earthquake. Reinsurance costs for catastrophe coverages have increased in the last few years and are expected to remain higher in the foreseeable future, given the large amount of catastrophe losses in recent years. SAFECO's catastrophe property reinsurance program for 1995 covers 90% of $282 million of single event losses in excess of a $75 million retention. In the event of a substantial catastrophe, SAFECO would, therefore, retain the first $75 million of losses, 10% of the next $282 million and all losses in excess of $357 million. The 1995 catastrophe property reinsurance program includes an allowance for one reinstatement for a second catastrophe event in 1995 at current rates. Both the retention level and the aggregate coverage limit for 1995 are higher than in prior years. 30 7 1994 ANNUAL REPORT SAFECO's insurance subsidiaries do not enter into retrospective reinsurance contracts and have not participated in any unusual or nonrecurring reinsurance transactions such as "swaps" of reserves or portfolio loss transfers. SAFECO does not use "funding covers" and has not participated in any surplus relief transactions. None of SAFECO's significant reinsurers are experiencing financial difficulties. Additional information on reinsurance can be found in Note 5 on page 54. LIFE AND HEALTH The life and health companies offer individual and group insurance products, pension plans and annuity products, marketed through professional agents in all states and the District of Columbia. Earnings before investment transactions and income taxes ("pretax income") in 1994 were $131.0 million, compared with $125.3 million in 1993 and $123.6 million in 1992. The following table summarizes the profit contributions of the life and health companies' major product lines:
1994 1993 1992 - - -------------------------------------------------------------------------------------------------- (In Thousands) Group . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,129 $ 27,661 $ 26,844 Pension . . . . . . . . . . . . . . . . . . . . . . . . 19,298 16,098 15,770 Annuities . . . . . . . . . . . . . . . . . . . . . . . 28,363 21,233 20,114 Individual . . . . . . . . . . . . . . . . . . . . . . 1,579 2,431 4,125 Corporate and Other . . . . . . . . . . . . . . . . . . 58,646 57,883 56,751 -------------------------------------- Pretax income . . . . . . . . . . . . . . . . . . $131,015 $125,306 $123,604 ======================================
The group life and health operations contributed $23.1 million to the 1994 pretax income, compared with income of $27.7 million and $26.8 million in 1993 and 1992, respectively. The major market of the group operation is excess loss medical insurance, sold to self-insured employers, which accounted for $18.5 million, $15.8 million and $16.3 million of income in 1994, 1993 and 1992, respectively. Total medical profit which also includes some small-case, fully insured business, remained flat for the three year period. Total group premiums decreased 12% during 1994, compared with decreases of 10% in 1993 and 3% in 1992. The premium declines in all three years are due to SAFECO's withdrawal from the small-case, fully insured market in many states and to greater competition in the large-case, excess loss market. SAFECO has avoided writing business at unsatisfactory rates and as a result, experienced the loss of some group in-force medical business. The premium decline in 1994 was also partially due to the uncertainty caused by the health care reform debate. The decrease in 1994 group income was due to adverse life claims experience and poor long-term disability experience on groups of 500 or more lives. The group profits in all three years were lower than 1991 and 1990 due primarily to increased industry competition, the uncertainty over healthcare reform, and a reduction in group premium volume. The tight competition is expected to continue into 1995. National healthcare reform legislation was not enacted during 1994 and the emphasis may now shift to state reform initiatives; however, the impact of state reform should not be as adverse to SAFECO's group business as had been proposed under the Clinton administration's plan. Regardless of the impact of healthcare reform, SAFECO intends to remain active in the group insurance arena, offering primarily group life and disability coverage. While the outcome of healthcare reform is uncertain, SAFECO will continue to actively market large-case, self-funded medical programs. Pension operations produced pretax income of $19.3 million, $16.1 million and $15.8 million in 1994, 1993 and 1992, respectively. Pension profits increased in all three years as a result of fewer bond defaults, a larger asset base and consistent management of interest rate margins stemming from adjustments in credited interest rates. Improved results in 1994 were due to both higher spreads and higher sales of fixed rate products, both in turn caused by rising interest rates in 1994. The pension operations had $3.3 billion of assets on deposit at December 31, 1994, compared with $3.1 billion at December 31, 1993. Pension deposit growth increased in 1994 after slowing in 1993 and 1992. Rising interest rates in 1994 increased deposits for fixed rate products. SAFECO's sales of variable annuity products continue to increase and two new variable annuity products are being introduced in 1995. The annuity operations produced pretax income of $28.4 million, $21.2 million and $20.1 million in 1994, 1993 and 1992, respectively. Increased assets under management, investment income and the release of reserves as a result of higher than anticipated mortality experience benefited 1994 results. Earnings in 1993 and 1992 benefited from higher investment income resulting from fewer bond defaults and accelerated payments from mortgage-backed securities. New deposits from single-premium immediate annuity (SPIA) products were $402 million in 1994, compared with $447 million in 1993 and $348 million in 1992. SPIA pretax income was $23.3 million, $17.5 million and $15.7 million in 1994, 1993 and 1992, respectively. Increased interest spreads on new issues benefited this book of business in 1994 and 1993. Deferred annuity deposits were $296 million in 1994 compared with $218 million in 1993 and $221 million in 1992. Total annuity assets amounted to $4.7 billion at December 31, 1994, compared with $4.1 billion at December 31, 1993. 31 8 SAFECO CORPORATION The individual life operations produced pretax income of $1.6 million, $2.4 million and $4.1 million in 1994, 1993 and 1992, respectively. The relatively low level of earnings in all three years was due to lower investment income, increased claims costs and a change in the mix of new business written. The majority of new writings are comprised of interest sensitive products such as universal life and variable universal life products. Term insurance has accounted for virtually all new issues of traditional life products in recent years and now comprises more than 93% of the total traditional face amount in force. The corporate and other line is primarily comprised of investment income resulting from the investment of capital and prior years' earnings of the operating lines of business, and is a major component of SAFECO's life and health earnings, contributing pretax income of $58.6 million in 1994, $57.9 million in 1993 and $56.8 million in 1992. Investment income in 1995 should benefit from the higher interest rate environment. SAFECO's life insurance subsidiaries have not participated as a ceding company in any assumptive reinsurance transactions. See Note 5 on page 54 for additional information regarding reinsurance. REAL ESTATE SAFECO Properties, Inc. through Winmar Company, Inc., invests in and manages real estate properties, primarily regional shopping centers, throughout the United States. SAFECARE Company, Inc. invests in medical real estate, primarily nursing homes and convalescent centers. The real estate subsidiaries produced pretax income before investment transactions of $10.2 million, $10.1 million and $8.4 million in 1994, 1993 and 1992, respectively. In addition, the sale of several mature medical properties resulted in a pretax gain from real estate investments of $8.1 million in 1993. Results in 1994, when compared with 1993, included gains of $5.6 million on the sale of properties held for sale, offset in part by lower earnings from SAFECO's purchase of a shopping center and the sale of the medical properties in 1993. The increase in 1993 compared with 1992 was due primarily to the effect of lower interest rates on borrowing costs combined with improved operating results for certain of SAFECO's larger retail shopping centers. However, results in all three years have been impacted by the slow real estate economy and the overall depressed retail industry. These conditions have led to the delay of certain potential developments which has resulted in the expensing of certain carrying costs, totaling $6.5 million, $3.6 million and $3.7 million in 1994, 1993 and 1992, respectively. Because of the continuing difficult real estate industry SAFECO's strategy is to emphasize smaller projects and enhancements to existing properties. SAFECO Properties sold its hospital operating and management company (SAFECARE Health Services, Inc.) in May of 1992. The $128 million cash sales price resulted in a gain of approximately $6.4 million, which was substantially offset by the write-down to estimated realizable value of certain other real estate holdings. These hospital operations produced pretax income of $2.0 million in 1992. SAFECO concluded it should no longer be in the hospital management business, in order to focus on its core business of commercial real estate. As the hospital operations are not material to the Corporation's consolidated financial statements, they have not been reclassified as discontinued operations. At December 31, 1994, investment real estate held by SAFECO Properties totaled $471 million, approximately 3% of consolidated investments. Major retail shopping centers (including land held for development) and healthcare facilities comprised approximately 74% of the total. Approximately 65% of these holdings are located in the states of Washington and Oregon. Rental properties included in investment real estate are detailed in Note 13 on page 60. CREDIT SAFECO Credit Company, Inc. provides loans and equipment financing and leasing to commercial businesses, including affiliated companies. Credit operations produced pretax income of $10.8 million in 1994, compared with $10.2 million in 1993 and $9.0 million in 1992. Loan and lease receivables from non- affiliates grew 15% in 1994 and 11% in 1993. The strong earnings in all three years are attributable primarily to the continuing increase in receivables, combined with favorable collection experience and low delinquencies. Earnings in 1993 and 1992 also benefited from lower interest rates; however, results in 1994 were affected by increased borrowing costs and rate competition. Approximately 70% of total loan and lease receivables outstanding at December 31, 1994 are from commercial businesses involved in heavy construction, transportation and manufacturing. Most of these businesses are located in the West Coast and Rocky Mountain regions of the United States. Loans and leases are fully secured by liens on the collateral financed. A significant portion of SAFECO Credit's business consists of loans to affiliated companies, limited to 50% or less of total loans and leases outstanding. ASSET MANAGEMENT SAFECO Asset Management Company is the investment advisor for the SAFECO mutual funds, variable annuity portfolios and a growing number of outside pension accounts. These investment management activities produced pretax income of $6.4 million in 1994, $6.5 million in 1993 and $6.5 million in 1992. Assets under management continue to grow and totaled $2.5 billion at December 31, 1994, an increase of 4% over 1993. To expand the penetration of its mutual funds, in 1994 SAFECO added a series of load funds which are distributed through banks and broker-dealers. In addition, SAFECO Trust Company was chartered to serve the investment needs of high net worth individuals. Continued growth in assets under management, from existing funds, new funds and from new pension accounts, is expected. 32 9 1994 ANNUAL REPORT INVESTMENT SUMMARY SAFECO Corporation's consolidated pretax investment income increased to $991.6 million during 1994 from $951.8 million in 1993 and $903.0 million in 1992. Substantially all of this investment income is produced by the investment portfolios of SAFECO's property and casualty and life and health insurance subsidiaries. The property and casualty companies' pretax investment income was $283.5 million in 1994, $277.6 million in 1993 and $280.8 million in 1992, representing an increase of 2% in 1994 and decreases of 1% and 2% in 1993 and 1992, respectively. The increase in 1994 is primarily due to higher interest rates and improved cash flow. The slowdown in investment income in 1993 and 1992 was primarily the result of lower investment yields and reduced cash flow caused by large catastrophe losses and withdrawal from Canada. The property and casualty fixed income portfolio, which totaled $3.5 billion at market value at December 31, 1994, is currently comprised of 77% tax-exempt and 23% taxable investments. The property and casualty companies are presently investing new money primarily in tax-exempt bonds and plan to continue to do so in the foreseeable future. However, SAFECO may shift its investment of new money between taxables and tax-exempts periodically in the future to maximize the portfolio's after-tax return in view of the alternative minimum tax. Major portfolio adjustments are not currently anticipated. The effective tax rate on investment income for 1994 was 13%, down from 15% and 16% for 1993 and 1992, respectively, which reflects the higher percentage of tax-exempt securities in the portfolio. On an after-tax basis, investment income increased 4% in 1994, decreased 0.3% in 1993 and increased 0.2% in 1992. SAFECO's investment philosophy for the property and casualty portfolio is to emphasize investment yield, but without sacrificing investment quality. Equity investments make up 17% of the market value of the total property and casualty portfolio. The equity percentage of the portfolio may be increased gradually in 1995 if investment opportunities become available. The quality of the property and casualty companies' fixed income portfolio is detailed in the following table:
Percent at Rating December 31, 1994 ------------------------------------------------------------------ AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . 48% AA . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 BB or lower . . . . . . . . . . . . . . . . . . . . . . . 1 --- Total . . . . . . . . . . . . . . . . . . . . . . . . 100%
A second major portfolio is held by the life and health insurance companies. SAFECO matches the projected cash inflows of this portfolio with the projected cash outflows of the liabilities of the various product lines within the life and health operations. Fixed income securities comprise 92% of the life and health companies' total investments at December 31, 1994. The quality of the life and health companies' fixed income portfolio is detailed in the following table:
Percent at Rating December 31, 1994 ------------------------------------------------------------------ AAA . . . . . . . . . . . . . . . . . . . . . . . . . . . 39% AA . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 A . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 BB or lower . . . . . . . . . . . . . . . . . . . . . . . 2 --- Total . . . . . . . . . . . . . . . . . . . . . . . . 100%
This portfolio contains $155.9 million, at market value, of securities below investment grade quality. This was approximately 2% of the total $7.9 billion life and health fixed income portfolio at December 31, 1994. SAFECO's holdings of below investment grade securities are about the same as in 1993, reflecting the priority placed on maintaining the quality of the life and health portfolio. SAFECO Corporation's non-life subsidiaries hold the remaining investments in below investment grade securities. On a consolidated basis, below investment grade securities with a market value of $180.6 million were held at December 31, 1994. This was approximately 1% of the total investments of SAFECO Corporation and consolidated subsidiaries at December 31, 1994. SAFECO's consolidated investment in "exotic" securities and high-risk derivatives is less than 1% of the total investments of SAFECO Corporation and subsidiaries at December 31, 1994. SAFECO has intentionally avoided investing in these types of securities. SAFECO's consolidated investments in mortgage-backed securities -- primarily residential collateralized mortgage obligations (CMOs) and pass-throughs -- totaled $2.2 billion at market value at December 31, 1994. Approximately 97% of these securities are held in the life and health portfolio, with the balance held in the property and casualty portfolio. Approximately 94% of the mortgage-backed securities are government/agency backed or AAA rated at December 31, 1994. Less than 1% of SAFECO's mortgage-backed securities are of the riskier, highly volatile type (e.g., interest only, inverse floaters, etc.). SAFECO has intentionally not invested significant amounts in the riskier types of mortgage-backed securities. 33 10 SAFECO CORPORATION Consolidated pretax realized gains from security investments totaled $39.2 million for 1994, compared with $179.5 million and $60.6 million in 1993 and 1992, respectively. The higher levels of gains in 1993 and 1992 were due primarily to falling interest rates which produced calls, redemptions and pay-downs on debt securities. Rising interest rates in 1994 lowered the gains from these sources. Consolidated realized gains from security investments are recorded net of losses on the sale or write-down of investments. Each investment that has declined in market value below cost is monitored closely. If the decline is judged to be other than temporary the security is written down to fair value. The amounts of such writedowns in 1994, 1993 and 1992 were $4.8 million, $15.2 million and $20.6 million, respectively. Fixed income securities purchased as below investment grade included in these amounts were none in 1994 and $3.0 million and $6.2 million in 1993 and 1992, respectively. The remainder of the writedowns relate primarily to fixed income securities which were investment grade when purchased and later downgraded. The lower level of writedowns reflects the high quality of the portfolios. SAFECO Corporation, the parent company, holds an investment portfolio of securities that totaled $172.9 million at market value at December 31, 1994, compared with $195.9 million at December 31, 1993. The majority of these securities are high quality preferred stocks and U.S. Treasuries. For a discussion of the Corporation's investment in real estate, which is made through SAFECO Properties, Inc., see page 32 of this report. SAFECO Corporation's consolidated investment portfolio also included $419.0 million of mortgage loan investments at December 31, 1994, approximately 3% of total investments. These loans are held by the life and health companies and are secured by first mortgage liens on completed, income-producing commercial real estate, primarily in the retail, industrial and office building sectors. The majority of the properties are located in the western United States, with approximately 57% of the total in California. Individual loans generally do not exceed $5 million. Approximately 3% of the loans were non-performing at both December 31, 1994 and 1993. The allowance for mortgage loan losses was $9.5 million at December 31, 1994 and $7.0 million at December 31, 1993. The table below provides a summary of SAFECO's consolidated securities investment portfolio at December 31, 1994. The excess of market value over cost of the consolidated fixed income and equity security portfolio was $86 million at December 31, 1994 and $1.6 billion at December 31, 1993. The large decline in the excess of market over cost was due to the rise in interest rates in 1994, which reduced the market value of SAFECO's fixed income securities. As noted above, the securities held in the life and health portfolio are designed to match the projected cash outflows of the various product line liabilities. The increase in interest rates in 1994 resulted in corresponding decreases in the fair value of these liabilities, to a great extent offsetting the decline in market value of these securities. The following is a summary of the consolidated securities investment portfolio at December 31, 1994:
Amortized Carrying Market Cost Value Value - - -------------------------------------------------------------------------------------------------------- (In Thousands) Property and Casualty: Fixed Income -- taxable (available-for-sale) . . . . $ 769,627 $ 798,118 $ 798,118 Fixed Income -- non-taxable (available-for-sale) . . 2,590,927 2,675,068 2,675,068 Equity Securities . . . . . . . . . . . . . . . . . 470,341 735,053 735,053 Life and Health: Fixed Income -- taxable (available-for-sale) . . . . 6,120,861 5,919,478 5,919,478 Fixed Income -- taxable (held-to-maturity) . . . . . 2,053,132 2,053,132 1,948,309 Equity Securities . . . . . . . . . . . . . . . . . 17,826 24,887 24,887 SAFECO Corporation: Fixed Income -- taxable (available-for-sale) . . . . 89,793 80,821 80,821 Equity Securities . . . . . . . . . . . . . . . . . 76,058 88,739 88,739 Miscellaneous . . . . . . . . . . . . . . . . . . . . . . 37,784 41,961 41,961 Short-Term Investments . . . . . . . . . . . . . . . . . 101,574 101,574 101,574 ------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . $12,327,923 $12,518,831 $12,414,008 ==========================================
34 11 1994 ANNUAL REPORT NEW ACCOUNTING STANDARDS SAFECO adopted Financial Accounting Standards Board (FASB) Statements 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and 109, "Accounting for Income Taxes," in the first quarter of 1993. See the Consolidated Statement of Income on page 37 for the effect on income of adoption of statements 106 and 109. For additional disclosure relating to statements 106 and 109, see Note 12 and Note 14, respectively. SAFECO adopted FASB Statement 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. Adoption had no effect on net income. SAFECO adopted FASB Statement 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in the first quarter of 1993. Adoption had no effect on net income. See Note 5 for disclosures relating to reinsurance. In May of 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on valuing impaired loans. The FASB also issued Statement 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," in October of 1994, which amends Statement 114. Both statements are effective for 1995. Based on current analysis, the impact on SAFECO's net income and financial condition of adopting these statements is not expected to be significant. In May of 1993, the FASB issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities," which expands the use of fair value accounting for debt and equity securities. As of January 1, 1994, SAFECO adopted the provisions of this statement for investments held as of, or acquired after that date. Statement 115 requires that debt and equity securities be classified as trading, available-for-sale or held-to-maturity. Fixed maturity securities that SAFECO has the positive intent and ability to hold to maturity (as narrowly defined by Statement 115) are classified as held-to-maturity and are reported at amortized cost. Fixed maturity securities classified as available-for-sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. All marketable equity securities are classified as available-for-sale and continue to be carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes. Under Statement 115, trading securities are carried at market value with immediate recognition in income of changes in market value. Since SAFECO does not have any securities held for trading, the adoption of this statement had no effect on net income. As required by Statement 115, no restatement of prior period amounts has been made. See Note 2 on page 50 for detail of the effect on stockholders' equity of the adoption of Statement 115. The FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," in October of 1994. Statement 119 requires the presentation of certain disclosures about derivative financial instruments and is effective for 1994. SAFECO has made the additional required disclosures for 1994 in Note 7. DIVIDENDS The Corporation has paid cash dividends continuously since 1933. Common stock dividends paid to stockholders were $1.88 per share in 1994, compared with $1.72 in 1993 and $1.56 in 1992. These dividends are funded with dividends to the Corporation from its subsidiaries. The Corporation expects to continue paying dividends in the foreseeable future. However, payment of future dividends is subject to the Board of Directors' approval and is dependent upon earnings and the financial condition of the Corporation. NUMBER OF STOCKHOLDERS There were approximately 4,700 common stockholders of record at December 31, 1994. ANNUAL REPORT ON FORM 10-K The Corporation files an Annual Report on Form 10-K with the Securities and Exchange Commission in compliance with the regulations of the Securities and Exchange Commission. Form 10-K contains additional information about the Corporation and its subsidiary companies. Any SAFECO Corporation stockholder may obtain Form 10-K for the year ended December 31, 1994 without charge, by making a written request to: Rod A. Pierson Senior Vice President, Secretary and Controller SAFECO Corporation SAFECO Plaza Seattle, Washington 98185 35 12 SAFECO CORPORATION MANAGEMENT'S REPORT The management of SAFECO is responsible for the financial statements, related notes and all other information presented in this annual report. The financial statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts based on the best estimates and judgments of management. In order to safeguard assets and to maintain the integrity and objectivity of data in these financial statements, SAFECO maintains a comprehensive system of internal accounting controls. These controls are supported by the careful selection and training of qualified personnel, by the appropriate division of duties and responsibilities, and by written policies and procedures. In addition, an integral part of the comprehensive system of internal control is an effective internal audit department. SAFECO's internal audit department systematically evaluates the adequacy and effectiveness of internal accounting controls and measures adherence to established policies and procedures. The management of SAFECO believes that as of December 31, 1994, its system of internal control is adequate to accomplish the objectives discussed herein. The financial statements for the years ended December 31, 1994, 1993 and 1992 have been examined by Ernst & Young LLP, independent auditors. Their audits were made in accordance with generally accepted auditing standards and included a review of the system of internal accounting controls to the extent necessary to express an opinion on the financial statements. The audit committee of the Board of Directors, comprised solely of outside directors, meets regularly with the independent auditors, management and internal auditors to review the scope and results of the audit work performed. The independent auditors have unrestricted access to the audit committee, without the presence of management, to discuss the results of their audit, the adequacy of internal accounting controls and the quality of financial reporting. REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Board of Directors and Stockholders of SAFECO Corporation: We have audited the financial statements of SAFECO Corporation and its subsidiaries for the years ended December 31, 1994, 1993 and 1992 (pages 37 to 63 inclusive). These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SAFECO Corporation and its subsidiaries as of December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As described in Note 1 to the financial statements, SAFECO Corporation and its subsidiaries adopted certain new accounting standards in 1994 and 1993 as required by the Financial Accounting Standards Board. /s/ Ernst & Young LLP Seattle, Washington February 10, 1995 36 13 SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME Year Ended December 31 (In Thousands Except Per Share Amounts) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Revenues: Insurance: Property and Casualty Earned Premiums . . . . . . . . . . . $2,053,431 $1,929,714 $1,754,460 Life and Health Premiums and Other Revenues . . . . . . . . 276,771 305,963 328,516 -------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,330,202 2,235,677 2,082,976 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . 107,315 78,252 187,172 Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,851 50,061 47,896 Asset Management . . . . . . . . . . . . . . . . . . . . . . . . 15,055 13,250 13,057 Net Investment Income (Note 2) . . . . . . . . . . . . . . . . . 991,610 951,795 903,048 Realized Investment Gain (Note 2) . . . . . . . . . . . . . . . 39,040 187,649 60,589 -------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 3,537,073 3,516,684 3,294,738 -------------------------------------------- Expenses: Losses, Adjustment Expense and Policy Benefits . . . . . . . . . 2,202,282 2,026,106 1,980,791 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 394,128 362,446 343,154 Proposition 103 Settlement (Note 6) . . . . . . . . . . . . . . -- 40,000 -- Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . 224,526 226,393 233,971 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,346 58,790 64,097 Dividends to Policyholders . . . . . . . . . . . . . . . . . . . 22,835 20,653 15,978 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 256,718 226,558 289,164 Amortization of Deferred Policy Acquisition Costs . . . . . . . 394,603 368,347 339,200 Deferral of Policy Acquisition Costs . . . . . . . . . . . . . . (417,106) (389,546) (374,874) -------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 3,147,332 2,939,747 2,891,481 -------------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 389,741 576,937 403,257 -------------------------------------------- Provision (Benefit) for Federal and Canadian Income Taxes (Note 14): Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,609 172,939 125,815 Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,242) (21,903) (33,852) -------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . 75,367 151,036 91,963 -------------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 314,374 425,901 311,294 Cumulative Effect of Accounting Changes (Notes 12 and 14): Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (15,676) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- 18,553 -- -------------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,374 $ 428,778 $ 311,294 ============================================ Net Income Per Share of Common Stock: Income Before Cumulative Effect of Accounting Changes . . . . . $ 4.99 $ 6.77 $ 4.96 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . -- (.25) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . -- .30 -- -------------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.99 $ 6.82 $ 4.96 ============================================
See Notes to Financial Statements on pages 48 through 63. 37 14 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
December 31 (In Thousands) 1994 1993 - - ------------------------------------------------------------------------------------------------------ ASSETS Investments (Note 2): Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: $9,608,210) . . . . . . . . . . . . . . . . $ 9,509,071 $ -- Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1994 -- $1,948,309; 1993 -- $11,965,731) . . . 2,053,132 10,720,976 Marketable Equity Securities, at Market Value (Cost: 1994 -- $565,007; 1993 -- $513,138). . . . . . . . . . 855,054 910,252 Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . 418,983 402,138 Real Estate (At cost less accumulated depreciation: 1994 -- $105,841; 1993 -- $94,610) (Note 3) . . . . . . . . . 475,865 447,797 Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 53,329 50,488 Short-Term Investments . . . . . . . . . . . . . . . . . . . . . 101,574 109,047 ----------------------------- Total Investments . . . . . . . . . . . . . . . . . . . 13,467,008 12,640,698 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,504 67,833 Accrued Investment Income . . . . . . . . . . . . . . . . . . . . . 229,964 210,289 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts: 1994 -- $56,276; 1993 -- $51,147) . . . . 619,059 547,759 Premiums and Other Service Fees Receivable . . . . . . . . . . . . 418,733 400,873 Other Notes and Accounts Receivable . . . . . . . . . . . . . . . . 69,572 75,977 Reinsurance Recoverables (Note 5) . . . . . . . . . . . . . . . . . 172,510 126,240 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: 1994 -- $141,185; 1993 -- $127,522) . . . . . . . . . . . . . 160,973 149,618 Deferred Policy Acquisition Costs . . . . . . . . . . . . . . . . . 388,843 367,303 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 311,563 220,701 ----------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $15,901,729 $14,807,291 =============================
See Notes to Financial Statements on pages 48 through 63. 38 15 SAFECO CORPORATION AND SUBSIDIARIES
December 31 (In Thousands Except Share Amounts) 1994 1993 - - ------------------------------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense (Note 4) . . . . . . . . . . . . . . $ 2,265,854 $ 2,128,372 Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . . . . 866,964 819,385 Life Policy Liabilities . . . . . . . . . . . . . . . . . . . . . . 155,322 151,488 Funds Held Under Deposit Contracts . . . . . . . . . . . . . . . . 7,988,456 7,229,439 Notes and Mortgages Payable (Note 3): Credit Company Borrowings . . . . . . . . . . . . . . . . . . . 510,600 427,930 10.75% Notes Due September 1995 . . . . . . . . . . . . . . . . 200,000 200,000 Other Notes and Mortgages . . . . . . . . . . . . . . . . . . . 272,309 290,505 Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 754,258 629,891 Federal and Canadian Income Taxes (Note 14): Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,627 37,963 Deferred (Includes tax on unrealized appreciation of investment securities: 1994 -- $66,818; 1993 -- $138,990) . . . . . . . . 35,860 117,927 ----------------------------- Total Liabilities . . . . . . . . . . . . . . . . . . . 13,072,250 12,032,900 ----------------------------- Commitments and Contingencies (Note 6) Preferred Stock, No Par Value: Shares Authorized: 10,000,000 Shares Issued and Outstanding: None Common Stock, No Par Value (Notes 8 and 9): Shares Authorized: 150,000,000 Shares Reserved for Options: 1994 -- 2,042,691; 1993 -- 2,182,828 Shares Issued and Outstanding: 1994 -- 62,951,634; 1993 -- 62,931,562 211,194 207,480 Retained Earnings (Note 11) . . . . . . . . . . . . . . . . . . . . 2,495,800 2,307,322 Unrealized Appreciation of Investment Securities, Net of Tax . . . 128,123 262,157 Unrealized Loss from Foreign Currency Translation, Net of Tax . . . (5,638) (2,568) ----------------------------- Stockholders' Equity . . . . . . . . . . . . . . . . . . 2,829,479 2,774,391 ----------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . $15,901,729 $14,807,291 =============================
See Notes to Financial Statements on pages 48 through 63. 39 16 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Insurance Premiums Received . . . . . . . . . . . . . . . . . . $ 2,312,818 $ 2,205,521 $ 2,073,514 Dividends and Interest Received . . . . . . . . . . . . . . . . 970,267 919,890 860,410 Other Operating Receipts . . . . . . . . . . . . . . . . . . . . 175,289 127,828 212,689 Insurance Claims and Policy Benefits Paid . . . . . . . . . . . (1,674,422) (1,570,643) (1,495,936) Underwriting, Acquisition and Insurance Operating Costs Paid . . (768,236) (710,460) (653,424) Proposition 103 Settlement . . . . . . . . . . . . . . . . . . . -- (39,815) -- Interest Paid . . . . . . . . . . . . . . . . . . . . . . . . . (69,798) (59,268) (63,796) Other Operating Costs Paid . . . . . . . . . . . . . . . . . . . (100,687) (70,296) (155,578) Income Taxes Paid . . . . . . . . . . . . . . . . . . . . . . . (92,210) (169,144) (113,302) --------------------------------------------- Net Cash Provided by Operating Activities . . . . . . . 753,021 633,613 664,577 --------------------------------------------- INVESTING ACTIVITIES: Purchases of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . (2,124,172) -- -- Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . (358,297) (2,843,953) (2,804,215) Equities . . . . . . . . . . . . . . . . . . . . . . . . . . (124,588) (118,856) (88,278) Other Investments . . . . . . . . . . . . . . . . . . . . . (172,080) (138,151) (98,544) Maturities of Fixed Maturities Available-for-Sale . . . . . . . 746,383 -- -- Maturities of Fixed Maturities Held-to-Maturity . . . . . . . . 54,564 1,010,532 754,619 Sales of: Fixed Maturities Available-for-Sale . . . . . . . . . . . . 786,361 -- -- Fixed Maturities Held-to-Maturity . . . . . . . . . . . . . -- 845,395 1,093,592 Equities. . . . . . . . . . . . . . . . . . . . . . . . . . . 120,723 185,968 83,111 Other Investments . . . . . . . . . . . . . . . . . . . . . 122,903 93,193 63,220 Net Decrease (Increase) in Short-Term Investments . . . . . . . 13,938 57,878 (41,234) Finance Receivables Originated or Acquired . . . . . . . . . . . (301,821) (286,758) (258,794) Principal Payments Received on Finance Receivables . . . . . . . 229,198 228,772 186,229 Proceeds from Sale of Hospital Operations . . . . . . . . . . . -- -- 125,115 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51,501) (47,297) (25,789) --------------------------------------------- Net Cash Used in Investing Activities . . . . . . . . . (1,058,389) (1,013,277) (1,010,968) FINANCING ACTIVITIES: --------------------------------------------- Funds Received Under Deposit Contracts . . . . . . . . . . . . . 1,012,164 1,001,880 954,813 Return of Funds Held Under Deposit Contracts . . . . . . . . . . (659,698) (555,430) (506,090) Proceeds from Notes and Mortgage Borrowings . . . . . . . . . . 39,734 131,950 42,850 Repayment of Notes and Mortgage Borrowings . . . . . . . . . . . (119,961) (115,883) (82,680) Net Proceeds from Short-Term Borrowings . . . . . . . . . . . . 150,586 20,880 52,897 Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . (5,327) (4,329) (11,897) Dividends Paid to Stockholders . . . . . . . . . . . . . . . . . (118,387) (108,133) (97,953) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,928 3,440 7,286 --------------------------------------------- Net Cash Provided by Financing Activities . . . . . . . 301,039 374,375 359,226 --------------------------------------------- Net (Decrease) Increase in Cash . . . . . . . . . . . . . . . . . . (4,329) (5,289) 12,835 Cash at the Beginning of Year . . . . . . . . . . . . . . . . . . . 67,833 73,122 60,287 --------------------------------------------- Cash at the End of Year . . . . . . . . . . . . . . . . . . . . . . $ 63,504 $ 67,833 $ 73,122 =============================================
For purposes of reporting cash flows, cash consists of balances on hand and on deposit in banks and financial institutions. See Notes to Financial Statements on pages 48 through 63. 40 17 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS -- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $314,374 $428,778 $311,294 ------------------------------------------ Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain . . . . . . . . . . . . . . . . . . (39,040) (187,649) (60,589) Depreciation and Amortization . . . . . . . . . . . . . . . 39,473 32,113 31,928 Amortization of Fixed Maturity Investments . . . . . . . . . (22,609) (20,910) (17,376) Deferred Income Tax Benefit . . . . . . . . . . . . . . . . (8,242) (21,903) (33,852) Interest Expense on Deposit Contracts . . . . . . . . . . . 405,536 400,122 375,305 Cumulative Effect of Accounting Changes . . . . . . . . . . -- (2,877) -- Other Adjustments . . . . . . . . . . . . . . . . . . . . . 9,514 4,998 7,730 Changes in: Losses and Adjustment Expense Liabilities . . . . . . . 137,482 37,274 30,060 Unearned Premiums . . . . . . . . . . . . . . . . . . . 47,579 76,786 56,767 Life Policy Liabilities . . . . . . . . . . . . . . . . 3,834 1,323 3,521 Accrued Income Taxes . . . . . . . . . . . . . . . . . . (15,336) 7,850 11,842 Accrued Interest on Accrual Bonds . . . . . . . . . . . (41,285) (56,712) (68,509) Accrued Investment Income . . . . . . . . . . . . . . . (19,675) (9,254) (13,491) Deferred Policy Acquisition Costs . . . . . . . . . . . (21,540) (21,199) (35,674) Other Assets and Liabilities . . . . . . . . . . . . . . (37,044) (35,127) 65,621 ------------------------------------------ Total Adjustments. . . . . . . . . . . . . . . . 438,647 204,835 353,283 ------------------------------------------ Net Cash Provided by Operating Activities . . . . . . . . . . . . . $753,021 $633,613 $664,577 ==========================================
See Notes to Financial Statements on pages 48 through 63. 41 18 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------------- Common Stock (Notes 8 and 9): Balance at the Beginning of Year . . . . . . . . . . . . . . . . $ 207,480 $ 200,557 $ 191,300 Stock Issued for Options and Rights . . . . . . . . . . . . . . 3,616 4,152 7,968 Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . (344) (223) (713) Stock Issued for Acquisition of Subsidiary . . . . . . . . . . . -- 2,149 -- Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 442 845 2,002 -------------------------------------------- Balance at the End of Year . . . . . . . . . . . . . . . . . . . 211,194 207,480 200,557 -------------------------------------------- Retained Earnings (Note 11): Balance at the Beginning of Year . . . . . . . . . . . . . . . . 2,307,322 1,993,350 1,793,726 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 314,374 428,778 311,294 Dividends Declared . . . . . . . . . . . . . . . . . . . . . . . (120,913) (110,700) (100,486) Common Stock Reacquired . . . . . . . . . . . . . . . . . . . . (4,983) (4,106) (11,184) -------------------------------------------- Balance at the End of Year . . . . . . . . . . . . . . . . . . . 2,495,800 2,307,322 1,993,350 -------------------------------------------- Unrealized Appreciation of Investment Securities, Net of Tax (Note 2): Balance at the Beginning of Year . . . . . . . . . . . . . . . . 262,157 256,189 231,224 Net Effect of Adoption of FASB Statement 115 . . . . . . . . . . 640,477 -- -- Change in Unrealized Appreciation . . . . . . . . . . . . . . . (774,511) 5,968 24,965 -------------------------------------------- Balance at the End of Year . . . . . . . . . . . . . . . . . . . 128,123 262,157 256,189 -------------------------------------------- Unrealized Gain (Loss) from Foreign Currency Translation, Net of Tax: Balance at the Beginning of Year . . . . . . . . . . . . . . . . (2,568) (1,949) 4,884 Change in Unrealized Gain (Loss) from Foreign Currency Translation . . . . . . . . . . . . . . . . . . . . (3,070) (619) (6,833) -------------------------------------------- Balance at the End of Year . . . . . . . . . . . . . . . . . . . (5,638) (2,568) (1,949) -------------------------------------------- Stockholders' Equity . . . . . . . . . . . . . . . . . . $2,829,479 $2,774,391 $2,448,147 ============================================
See Notes to Financial Statements on pages 48 through 63. 42 19 PROPERTY AND CASUALTY INSURANCE COMPANIES SAFECO Insurance Company of America o General Insurance Company of America First National Insurance Company of America o SAFECO National Insurance Company o SAFECO Insurance Company of Illinois SAFECO Lloyds Insurance Company o SAFECO Surplus Lines Insurance Company o F.B. Beattie and Co., Inc. STATEMENT OF COMBINED INCOME
Year Ended December (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Net Premiums Written . . . . . . . . . . . . . . . . . . . . . . . $2,103,465 $2,000,165 $1,820,445 Increase in Unearned Premiums . . . . . . . . . . . . . . . . . . . (50,034) (70,451) (65,985) -------------------------------------------- Earned Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . 2,053,431 1,929,714 1,754,460 -------------------------------------------- Losses and Expenses: Losses and Adjustment Expense . . . . . . . . . . . . . . . . . 1,528,067 1,350,628 1,306,652 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 308,513 280,357 261,802 Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . 148,246 150,960 136,773 Taxes Other than Payroll and Income Taxes . . . . . . . . . . . 58,889 53,094 48,749 Dividends to Policyholders . . . . . . . . . . . . . . . . . . . 22,835 20,653 15,978 Other Operating Expenses . . . . . . . . . . . . . . . . . . . . 72,776 72,798 65,806 Amortization of Deferred Policy Acquisition Costs . . . . . . . 365,196 341,997 320,339 Deferral of Policy Acquisition Costs . . . . . . . . . . . . . . (373,746) (350,621) (329,617) -------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 2,130,776 1,919,866 1,826,482 -------------------------------------------- Underwriting Profit (Loss) . . . . . . . . . . . . . . . . . . . . (77,345) 9,848 (72,022) Net Investment Income (Excluding realized gain) . . . . . . . . . . 283,481 277,643 280,820 Proposition 103 Settlement . . . . . . . . . . . . . . . . . . . . -- (40,000) -- -------------------------------------------- Income Before Realized Gain and Income Taxes . . . . . . . . . . . 206,136 247,491 208,798 Realized Gain from Security Investments Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . 31,003 114,561 54,622 -------------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 237,139 362,052 263,420 Provision for Federal and Canadian Income Taxes (Including tax provision on realized gain: 1994 -- $10,298; 1993 -- $43,398; 1992 -- $18,107) . . . . . . . . . . . . . 23,700 73,702 39,761 -------------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 213,439 288,350 223,659 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (12,258) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- 7,337 -- -------------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213,439 $ 283,429 $ 223,659 ============================================
See Notes to Financial Statements on pages 48 through 63. 43 20 LIFE AND HEALTH INSURANCE COMPANIES SAFECO Life Insurance Company o SAFECO National Life Insurance Company First SAFECO National Life Insurance Company of New York o SAFECO Administrative Services, Inc. STATEMENT OF COMBINED INCOME
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Premiums and Other Revenue . . . . . . . . . . . . . . . . . . . . $276,771 $305,963 $328,516 Net Investment Income (Excluding realized gain) . . . . . . . . . . 706,217 668,158 623,584 ------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . 982,988 974,121 952,100 ------------------------------------------ Benefits and Expenses: Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . 674,215 675,478 674,139 Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . 85,615 82,089 80,207 Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . 47,698 48,431 47,279 Taxes Other than Payroll and Income Taxes . . . . . . . . . . . 7,891 9,003 9,556 Other Operating Expenses . . . . . . . . . . . . . . . . . . . . 50,507 46,389 43,711 Amortization of Deferred Policy Acquisition Costs . . . . . . . 29,407 26,350 18,861 Deferral of Policy Acquisition Costs . . . . . . . . . . . . . . (43,360) (38,925) (45,257) ------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . 851,973 848,815 828,496 ------------------------------------------ Income Before Realized Gain and Income Taxes . . . . . . . . . . . 131,015 125,306 123,604 Realized Gain from Security Investments Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . 5,888 53,544 3,377 ------------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 136,903 178,850 126,981 Provision for Federal Income Taxes (Including tax provision on realized gain: 1994 -- $2,106; 1993 -- $18,344; 1992 -- $1,175) . . . . . 48,180 66,747 49,179 ------------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 88,723 112,103 77,802 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (2,493) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- 9,092 -- ----------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,723 $118,702 $ 77,802 =========================================
See Notes to Financial Statements on pages 48 through 63. 44 21 REAL ESTATE COMPANIES SAFECO Properties, Inc. o Winmar Company, Inc. o SAFECARE Company, Inc. STATEMENT OF CONSOLIDATED INCOME
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Revenues: Operating Property Revenue . . . . . . . . . . . . . . . . . . . $ 75,681 $64,315 $ 60,864 Healthcare Facility Revenue . . . . . . . . . . . . . . . . . . -- -- 101,542 Real Estate Sales . . . . . . . . . . . . . . . . . . . . . . . 26,521 5,979 12,350 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,638 4,609 6,490 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,475 3,349 5,926 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 107,315 78,252 187,172 ----------------------------------------- Expenses: Operating Property Expenses . . . . . . . . . . . . . . . . . . 26,184 22,369 23,310 Healthcare Facility Operating Expenses . . . . . . . . . . . . . -- -- 91,849 Real Estate Sales Costs . . . . . . . . . . . . . . . . . . . . 19,179 5,750 10,937 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,426 21,553 26,628 Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 13,520 10,486 14,213 General and Administrative . . . . . . . . . . . . . . . . . . . 12,154 11,504 13,783 Minority Interest . . . . . . . . . . . . . . . . . . . . . . . 1,780 371 468 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 100,243 72,033 181,188 Interest and Other Expenses Capitalized . . . . . . . . . . . . (3,080) (3,860) (2,405) ----------------------------------------- Net Expenses . . . . . . . . . . . . . . . . . . . . . . 97,163 68,173 178,783 ----------------------------------------- Income Before Realized Gain (Loss) and Income Taxes . . . . . . . . 10,152 10,079 8,389 Realized Gain (Loss) from Real Estate Investments Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . (174) 8,126 (6) ----------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 9,978 18,205 8,383 Provision for Federal Income Taxes (Including tax provision (benefit) on realized gain (loss): 1994 -- $(61); 1993 -- $2,717; 1992 -- $680) . . . . . . . . 3,523 6,660 3,029 ----------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 6,455 11,545 5,354 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (360) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- 3,389 -- ----------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,455 $14,574 $ 5,354 =========================================
See Notes to Financial Statements on pages 48 through 63. 45 22 SAFECO CREDIT COMPANY, INC. STATEMENT OF INCOME
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Investment Revenues: Interest and Finance Charges: Finance Receivables . . . . . . . . . . . . . . . . . . . . $48,986 $45,151 $43,156 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 4,330 3,985 3,431 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 53,316 49,136 46,587 Interest on Other Investments . . . . . . . . . . . . . . . . . 281 140 1,480 ----------------------------------------- Total Investment Revenues . . . . . . . . . . . . . . . 53,597 49,276 48,067 Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . 30,652 25,918 26,646 ----------------------------------------- Net Investment Income . . . . . . . . . . . . . . . . . . . . . 22,945 23,358 21,421 Provision for Credit Losses . . . . . . . . . . . . . . . . . . . . 3,650 4,450 3,420 ----------------------------------------- Net Investment Income After Provision for Credit Losses . . . . 19,295 18,908 18,001 Other Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,584 4,770 3,260 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 23,879 23,678 21,261 ----------------------------------------- Operating Expenses: Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . 7,204 7,274 7,483 General and Administrative . . . . . . . . . . . . . . . . . . 5,914 6,214 4,742 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . 13,118 13,488 12,225 ----------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 10,761 10,190 9,036 Provision for Federal Income Taxes . . . . . . . . . . . . . . . . 3,396 3,751 2,896 ----------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 7,365 6,439 6,140 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (360) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- (42) -- ----------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,365 $ 6,037 $ 6,140 =========================================
See Notes to Financial Statements on pages 48 through 63. 46 23 ASSET MANAGEMENT COMPANIES SAFECO Asset Management Company o SAFECO Securities, Inc. SAFECO Services Corporation o SAFECO Trust Company STATEMENT OF COMBINED INCOME
Year Ended December 31 (In Thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------- Revenues: Management and Advisory Fees . . . . . . . . . . . . . . . . . . $11,235 $10,074 $ 8,867 Transfer Agent Fees . . . . . . . . . . . . . . . . . . . . . . 2,367 1,877 1,866 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,453 1,299 2,324 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055 13,250 13,057 ----------------------------------------- Expenses: Personnel Costs . . . . . . . . . . . . . . . . . . . . . . . . 4,737 4,199 3,326 Marketing and Shareholder Communication . . . . . . . . . . . . 1,564 890 649 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,403 1,622 2,579 ----------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,704 6,711 6,554 ----------------------------------------- Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . 6,351 6,539 6,503 Provision for Federal Income Taxes . . . . . . . . . . . . . . . . 2,235 2,284 2,242 ----------------------------------------- Income Before Cumulative Effect of Accounting Changes . . . . . . . 4,116 4,255 4,261 Cumulative Effect of Accounting Changes: Postretirement Benefits (Net of tax) . . . . . . . . . . . . . . -- (204) -- Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2 -- ----------------------------------------- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,116 $ 4,053 $ 4,261 =========================================
See Notes to Financial Statements on pages 48 through 63. 47 24 SAFECO CORPORATION NOTES TO FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Reporting The financial statements have been prepared in accordance with generally accepted accounting principles and include SAFECO Corporation and its subsidiaries and real estate joint ventures (the Corporation, or SAFECO). All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements. Certain reclassifications have been made to the prior year financial information to conform to the 1994 classification. SAFECO Properties, Inc. sold its hospital operations subsidiary, SAFECARE Health Services, Inc. in May of 1992. See page 32 for further information. As these operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. Accounting for Premiums Property and casualty insurance premiums are included in income as earned on a daily pro rata basis over the term of the respective policies. The unearned portion is included in the balance sheet as a liability for unearned premiums, before the effect of reinsurance. See Note 5 for more information on reinsurance. Life and health insurance premiums are reported as income when collected for traditional individual life policies and when earned for group and individual health policies. Funds received under pension deposit contracts, annuities and universal life policies of $1,012,164, $1,001,880 and $954,813 in 1994, 1993 and 1992, respectively, are recorded as liabilities rather than premium income when received. Revenues for universal life products consist of front-end loads, mortality charges and expense charges assessed against individual policyholder account balances. These loads and charges are recognized as income when earned. Investments SAFECO adopted Financial Accounting Standards Board (FASB) Statement 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994, applying the provisions of the statement to investments held as of, or acquired after that date. See discussion of new accounting standards on page 49. Fixed maturity investments (bonds and redeemable preferred stock) which SAFECO has the positive intent and ability to hold to maturity are classified as held-to-maturity and carried at amortized cost in the balance sheet. Fixed maturities classified as available-for-sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. SAFECO has no fixed maturities classified as trading. All marketable equity securities are classified as available-for-sale and are carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes. When the collectibility of income on certain investments is considered doubtful, they are placed on nonaccrual status and thereafter interest income is recognized only when payment is received. Investments that have declined in market value below cost and for which the decline is judged to be other than temporary are written down to fair value. Writedowns are made directly on an individual security basis and are included in realized invest-ment losses in the statement of income. The cost of security investments sold is determined by the "identified cost" method. Mortgage loans are carried at outstanding principal balances, less an allowance for mortgage loan losses. The allowance for mortgage loan losses at December 31, 1994 and 1993 was $9,511 and $7,000, respectively. Short-term investments are carried at cost, which approximates market value. Property, Equipment and Depreciation Property and equipment are classified as investment real estate or as land, buildings and equipment for company use, and are carried at cost less accumulated depreciation. Investment real estate that has declined in market value below cost and for which the decline is judged to be other than temporary is written down to estimated net realizable value. Estimated values of real estate are obtained using independent appraisals, outside consultants, internal analysis and judgment as appropriate under the circumstances. Values are reviewed quarterly. The writedowns are included in realized investment losses in the statement of income. Real estate taxes, interest expense and certain other carrying costs related to projects under development are capitalized as a cost of such projects during the development phase and until the project is substantially completed or until the total carrying value equals estimated net realizable value. After substantial completion, the carrying costs are charged to expense when incurred and depreciation is provided. Projects that involve construction of income-producing property are considered to be substantially complete at the earlier of attainment of a predetermined occupancy level or one year of operations. Projects that involve the development of land are considered substantially complete when planned improvement activity is concluded or the property is offered for sale. Interest capitalized relating to the development of real estate was $2,482, $3,554 and $2,129 for 1994, 1993 and 1992, respectively. SAFECO provides depreciation on buildings, furniture and automobiles at various rates based on estimated useful lives using straight-line and accelerated methods. 48 25 Deferred Policy Acquisition Costs Property and casualty insurance acquisition costs, consisting of commissions and certain other underwriting expenses, which vary with and are primarily related to the production of business, are deferred and amortized over the effective period of the related insurance policies. Investment income is considered in determining whether a premium deficiency exists. Life insurance acquisition costs, consisting of commissions and certain other underwriting expenses, which vary with and are primarily related to the production of new business, are deferred. Acquisition costs for annuity contracts and universal life insurance policies are amortized over the lives of the contracts or policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions, and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly. Policy acquisition costs for traditional individual life insurance policies are amortized over the premium payment period of the related policies using assumptions consistent with those used in computing policy benefit liabilities. Losses and Adjustment Expense Unpaid losses and adjustment expense represent the estimated liability for claims reported plus losses incurred but not yet reported and the related estimated adjustment expense. The liability for losses and related adjustment expense is determined using "case basis" evaluations and statistical analyses and represents an estimate of the ultimate net cost of all losses incurred but not paid through December 31 of each year. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid losses and related adjustment expense is adequate. These estimates are continually reviewed and adjusted as necessary; such adjustments are included in current operations. See Note 4 for more information. Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables. Recoverable amounts deducted from the liability for losses and adjustment expense were $131,093 and $134,042 at December 31, 1994 and 1993 respectively. The property and casualty companies' liability for unpaid losses and adjustment expense is presented gross of amounts recoverable from reinsurers. See Note 5 for more information. Life Policy Liabilities Liabilities for universal life insurance policies, deferred annuity contracts and pension deposit contracts are equal to the accumulated account value of such policies or contracts as of the valuation date. Liabilities for structured settlement annuities are based on interest rate assumptions using market rates at issue, graded downward over 40 years to a range of 5 1/2% to 8 3/4%. Liabilities for future benefits under traditional individual life insurance policies have been computed on the net level premium method and reflect interest, mortality and persistency assumptions based on Company experience modified to provide for adverse deviation. Interest assumptions generally range from 8 1/2% graded to 3 1/4%. Net Income Per Share of Common Stock Net income per share of common stock is based on the weighted average number of common shares outstanding during each year. Dilution arising from stock options is insignificant. New Accounting Standards SAFECO adopted Financial Accounting Standards Board (FASB) Statements 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and 109, "Accounting for Income Taxes," in the first quarter of 1993. See the Consolidated Statement of Income on page 37 for the effect on income of adoption of statements 106 and 109. For additional disclosure relating to statements 106 and 109, see Note 12 and Note 14, respectively. SAFECO adopted FASB Statement 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. Adoption had no effect on net income. SAFECO adopted FASB Statement 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," in the first quarter of 1993. Adoption had no effect on net income. See Note 5 for disclosures relating to reinsurance. In May of 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on valuing impaired loans. The FASB also issued Statement 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures," in October of 1994, which amends Statement 114. Both statements are effective for 1995. Based on current analysis, the impact on SAFECO's net income and financial condition of adopting these statements is not expected to be significant. In May of 1993, the FASB issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities," which expands the use of fair value accounting for debt and equity securities. As of January 1, 1994, SAFECO adopted the provisions of this statement for investments held as of, or acquired after that date. Statement 115 requires that debt and equity securities be classified as trading, available-for-sale or held-to-maturity. Fixed maturity securities that SAFECO has the positive intent and ability to hold to maturity (as narrowly defined by Statement 115) are classified as held-to-maturity and are reported at amortized cost. Fixed maturity securities classified as available-for-sale are carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes and deferred policy acquisition costs valuation allowance. All marketable equity securities are classified as available-for-sale and continue to be carried at market value, with changes in unrealized gains and losses recorded directly to stockholders' equity, net of applicable income taxes. 49 26 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Under Statement 115, trading securities are carried at market value with immediate recognition in income of changes in market value. Since SAFECO does not have any securities held for trading, the adoption of this statement had no effect on net income. As required by Statement 115, no restatement of prior period amounts has been made. See Note 2 below for detail of the effect on stockholders' equity of the adoption of Statement 115. The FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments," in October of 1994. Statement 119 requires the presentation of certain disclosures about derivative financial instruments and is effective for 1994. SAFECO has made the additional required disclosures for 1994 in Note 7. 2. INVESTMENTS Investment income is comprised of:
1994 1993 1992 - - -------------------------------------------------------------------------------- Interest: Fixed maturities . . . . . . . . . . $ 908,194 $867,022 $818,429 Mortgage loans . . . . . . . . . . . , 40,664 40,027 39,817 Short-term investments . . . . . . . 8,354 8,266 8,365 Dividends: Marketable equity securities . . . . 42,059 45,146 42,092 Redeemable preferred stock . . . . . 2,133 1,540 1,584 Other investment income . . . . . . . . 4,714 4,830 5,156 ---------------------------------------- Total investment income. . . . . . . 1,006,118 966,831 915,443 Investment expenses . . . . . . . . . . 14,508 15,036 12,395 ---------------------------------------- Net investment income. . . . . . . . $ 991,610 $951,795 $903,048 ========================================
The carrying value of investments in fixed maturities and mortgage loans that have not produced income for the last twelve months is less than one percent of the total of such investments at December 31, 1994. The following analysis summarizes realized gains and losses on investments:
1994 1993 1992 - - -------------------------------------------------------------------------------- Realized investment gains (losses): Fixed maturities. . . . . . . . . . $ (8,843) $121,907 $ 39,532 Marketable equity securities . . . . 48,057 57,616 21,063 Investment real estate . . . . . . . (174) 8,126 (6) ---------------------------------------- Realized investment gain before taxes. . . . . . . . . . . . . 39,040 187,649 60,589 Applicable income taxes. . . . . . . (13,118) (68,734) (20,844) ---------------------------------------- Net realized investment gain. . . $ 25,922 $118,915 $ 39,745 ========================================
The following analysis summarizes the changes in unrealized gains and losses on investment securities:
1994 1993 1992 - - -------------------------------------------------------------------------------- Increase (decrease) in unrealized appreciation of investment securities: Fixed maturities . . . . . . . . . . $(1,448,717) $ 400,459 $ 42,298 Marketable equity securities . . . . (107,067) 8,949 37,826 Applicable income taxes. . . . . . . 544,524 (155,617) (27,242) --------------------------------------- Net change in unrealized appreciation. . . . . . . . . . $(1,011,260) $ 253,791 $ 52,882 =======================================
As discussed in Note 1, SAFECO adopted the provisions of FASB Statement 115 as of January 1, 1994. The net effect on stockholders' equity of the adoption of Statement 115 was an increase of $640,477 as of January 1, 1994. The net increase of $640,477 was comprised of the following amounts: aggregate market value in excess of amortized cost of fixed maturities classified as available-for-sale of $1,013,117, less deferred policy acquisition costs valuation allowance of $27,768 and deferred income taxes at 35% of $344,872. 50 27 The following is a summary of fixed maturities and marketable equity securities classified as available-for-sale at December 31, 1994:
Gross Gross Net Estimated Amortized Unrealized Unrealized Unrealized Market Cost Gains Losses Gain (Loss) Value - - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies . . . . . . . . . $ 1,009,473 $ 5,002 $ (43,104) $ (38,102) $ 971,371 Obligations of states and political subdivisions. . . . . 2,740,754 192,205 (104,504) 87,701 2,828,455 Debt securities issued by foreign governments . . . . . . 227,398 22,713 (3,546) 19,167 246,565 Corporate securities. . . . . . . . . . . . . . . . . . . 3,806,929 60,441 (175,136) (114,695) 3,692,234 Mortgage-backed securities. . . . . . . . . . . . . . . . 1,793,208 33,287 (87,980) (54,693) 1,738,515 Other debt securities . . . . . . . . . . . . . . . . . . 30,448 1,608 (125) 1,483 31,931 ------------------------------------------------------------------------- Total fixed maturities classified as available-for-sale 9,608,210 315,256 (414,395) (99,139) 9,509,071 Marketable equity securities. . . . . . . . . . . . . . . 565,007 314,211 (24,164) 290,047 855,054 ------------------------------------------------------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . $10,173,217 $629,467 $ (438,559) 190,908 $10,364,125 ======================================== =========== Applicable income taxes . . . . . . . . . . . . . . . . . (62,785) --------- Unrealized appreciation of investment securities, net of tax, included in stockholders' equity . . . . . $ 128,123 =========
The following is a summary of fixed maturities classified as held-to- maturity at December 31, 1994:
Gross Gross Net Estimated Amortized Unrealized Unrealized Unrealized Market Cost Gains Losses Gain (Loss) Value - - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies . . . . . . . . $ 124,266 $ 649 $ (10,953) $ (10,304) $ 113,962 Obligations of states and political subdivisions. . . . 36,517 2,260 (527) 1,733 38,250 Debt securities issued by foreign governments . . . . . 139,951 2,651 (2,434) 217 140,168 Corporate securities. . . . . . . . . . . . . . . . . . 1,230,969 24,490 (76,261) (51,771) 1,179,198 Mortgage-backed securities. . . . . . . . . . . . . . . 521,429 8,374 (53,072) (44,698) 476,731 ------------------------------------------------------------------------ Total fixed maturities classified as held-to-maturity. . . . . . . . . . . . . . . . $2,053,132 $ 38,424 $(143,247) $(104,823) $ 1,948,309 ========================================================================
The following is a summary of all fixed maturities as of December 31, 1993:
Gross Gross Net Estimated Amortized Unrealized Unrealized Unrealized Market Cost Gains Losses Gain (Loss) Value - - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies. . . . . . . . . $ 1,028,324 $ 88,900 $ (395) $ 88,505 $ 1,116,829 Obligations of states and political subdivisions . . . . 2,539,412 453,726 (1,410) 452,316 2,991,728 Debt securities issued by foreign governments. . . . . . 389,838 84,316 (157) 84,159 473,997 Corporate securities. . . . . . . . . . . . . . . . . .. 4,488,884 471,956 (18,086) 453,870 4,942,754 Mortgage-backed securities. . . . . . . . . . . . . . .. 2,262,286 177,872 (13,997) 163,875 2,426,161 Other debt securities. . . . . . . . . . . . . . . . . . 12,232 2,072 (42) 2,030 14,262 ------------------------------------------------------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . $10,720,976 $1,278,842 $(34,087) $1,244,755 $11,965,731 =========================================================================
Included in the 1993 amounts above are certain fixed maturities classified as available-for-sale and carried in the balance sheet at the lower of aggregate amortized cost or market value. At December 31, 1993, these investments had a carrying value of $172,269 and a market value of $227,442. At December 31, 1993, the aggregate market value of marketable equity securities was in excess of cost by $397,114, comprised of gross unrealized gains of $399,515 and gross unrealized losses of $2,401. 51 28 2. INVESTMENTS (Continued) The amortized cost and estimated market value of fixed maturities at December 31, 1994, by contractual maturity, are presented below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
Estimated Fixed Maturities, Available-for-Sale Amortized Cost Market Value - - ------------------------------------------------------------------------------------------------------------------------------ Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 181,213 $ 181,998 Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,314,911 1,289,322 Due after five years through ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,927,706 1,879,994 Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,391,172 4,419,242 Mortgage-backed securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,793,208 1,738,515 -------------------------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,608,210 $9,509,071 ==========================
Estimated Fixed Maturities, Held-to-Maturity Amortized Cost Market Value - - ------------------------------------------------------------------------------------------------------------------------------ Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 $ 113 Due after one year through five years . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 4,600 Due after five years through ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . 3 4 Due after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,526,587 1,466,861 Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 521,429 476,731 -------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . $2,053,132 $1,948,309 ==========================
The proceeds from sales of investment securities and related gains and losses for 1994 are as follows:
Marketable Fixed Maturities, Fixed Maturities, Equity Available-for-Sale Held-to-Maturity Securities - - --------------------------------------------------------------------------------------------------------------------------------- Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . $786,361 $ -- $120,723 -------------------------------------------------- Gross realized gains on sales . . . . . . . . . . . . . . . . . . . $ 19,235 $ -- $ 52,680 Gross realized losses on sales . . . . . . . . . . . . . . . . . . (50,043) -- (4,623) -------------------------------------------------- Realized gains (losses) on sale . . . . . . . . . . . . . . . . . . (30,808) -- 48,057 Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,804) -- -- Other, including gains on calls and redemptions . . . . . . . . . . 26,769 -- -- -------------------------------------------------- Total realized gain (loss) . . . . . . . . . . . . . . . . . . . $ (8,843) $ -- $ 48,057 ==================================================
As indicated above no sales of fixed maturities classified as held-to-maturity occurred in 1994, the year of adoption of FASB 115. The proceeds from sales of investments in fixed maturities and related gains and losses for 1993 and 1992 are as follows:
1993 1992 - - ---------------------------------------------------------------------------------------------------------------------------- Proceeds from sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $845,395 $1,093,592 ------------------------- Gross realized gains on sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 92,809 $ 59,932 Gross realized losses on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,120) (26,361) ------------------------- Realized gains on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,689 33,571 Writedowns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,171) (20,571) Other, including gains on calls and redemptions. . . . . . . . . . . . . . . . . . . . . . . . 67,389 26,532 ------------------------- Total realized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $121,907 $ 39,532 =========================
52 29 3. NOTES AND MORTGAGES PAYABLE At December 31, 1994, SAFECO Credit had short-term borrowings of $413,000 through commercial paper and master note agreements and $94,150 of medium-term notes. The repayment of each of these borrowings is guaranteed by SAFECO Corporation. The weighted average interest rates on the short-term borrowings were 5.8% and 3.3% at December 31, 1994 and 1993, respectively. At December 31, 1994, SAFECO Credit had available bank lines of credit totaling $350,000. No amounts were outstanding under these lines of credit at December 31, 1994. These lines support 90-day borrowings and day-to-day (quickline) borrowings. SAFECO Credit pays a fee to have these lines of credit available and does not maintain deposits as compensating balances. In July 1994, the Securities and Exchange Commission (SEC) declared effective a shelf registration of $200,000 of debt securities by SAFECO Corporation. No securities have yet been issued under this registration. These securities may be offered and sold from time to time, with various maturities and other terms to be determined at the time of issuance. Any proceeds will be used for general corporate purposes which will likely include replacing much of SAFECO Corporation's $200,000 of 10.75% notes which come due September of 1995. In December 1990, the SEC declared effective a shelf registration of $200,000 of debt securities by SAFECO Corporation and/or SAFECO Credit. SAFECO Credit issued $149,850 of medium-term notes under this shelf registration. The $94,150 outstanding notes under this shelf registration have rates ranging from 6.90% to 9.15% and maturities from April 1995 to December 2001. SAFECO Corporation issued $50,000 of medium-term notes under this shelf registration, with rates ranging from 6.96% to 7.33%, all maturing in 2002 and 2003. No additional notes will be issued under this shelf registration. SAFECO Credit and SAFECO's real estate companies enter into interest rate swap agreements with outside parties to reduce the impact of changes in interest rates on their floating rate debt. At December 31, 1994, interest rate swap agreements were outstanding with notional amounts of $70,855, which replace the floating rates of 6.06% to 6.73% with fixed rates ranging from 4.51% to 9.00%. Maturities of the agreements range from July 1995 to February 2001. All of these swaps relate to SAFECO Credit. The real estate companies' agreements matured in 1993. There were no swap terminations in 1994, 1993, or 1992. The net interest accrued of $1,283 under these agreements in 1994 was recorded as an increase in interest expense. Substantially all investment real estate is pledged as collateral for real estate mortgages and contracts payable. The total amount, current portions, interest rates and maturities of notes and mortgages payable at December 31 are as follows:
1994 1993 ----------------------------------------------------------- Total Current Total Current - - ----------------------------------------------------------------------------------------------------------------------------------- SAFECO Credit borrowings payable through 2001; 1994 interest rates from 4.51% to 9.15% . . . . . . . . . . . . . . $510,600 $432,250 $427,930 $333,780 =========================================================== Other Notes and Mortgages: Real estate mortgages and contracts payable in installments and medium-term notes payable through 2014; 1994 interest rates from 6.0% to 11.25% . . . . . . . . . $232,136 $ 3,828 $238,093 $ 34,982 Unsecured notes and loans payable in installments through 1997; 1994 interest rates from 6.06% to 8.5%. . . . . . 40,173 3,227 52,412 29,096 ----------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . $272,309 $ 7,055 $290,505 $ 64,078 ===========================================================
Aggregate annual principal installments payable under these obligations for each of the five years subsequent to 1994 are as follows: 1995 -- $439,305; 1996 - - -- $74,374; 1997 -- $32,040; 1998 -- $24,505; 1999 -- $4,265. 53 30 4. PROPERTY AND CASUALTY LOSS RESERVES The following is a summary of the activity related to SAFECO's property and casualty companies' reserve for losses and adjustment expense (net of reinsurance amounts):
1994 1993 1992 - - ----------------------------------------------------------------------------------------------------------------------------- Losses and adjustment expense reserves at beginning of year . . . . . . . . . $1,995,122 $1,963,136 $1,865,319 ---------------------------------------------- Incurred losses and adjustment expense for claims occurring in the current year. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,609,392 1,447,565 1,351,234 Decrease in estimated losses and adjustment expense for claims occurring in prior years . . . . . . . . . . . . . . . . . . . . . . . . . (81,325) (96,937) (44,582) ---------------------------------------------- Total incurred losses and adjustment expense. . . . . . . . . . . . . . . . . 1,528,067 1,350,628 1,306,652 ---------------------------------------------- Losses and adjustment expense payments for claims occurring during: Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809,722 719,756 659,960 Prior years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620,521 598,886 548,875 ---------------------------------------------- Total losses and adjustment expense payments. . . . . . . . . . . . . . . . . 1,430,243 1,318,642 1,208,835 ---------------------------------------------- Losses and adjustment expense reserves at end of year. . . . . . . . . $2,092,946 $1,995,122 $1,963,136 ==============================================
The year-end reserve amounts above are net of related reinsurance recoverables of $143,858, $100,065 and $89,198 for 1994, 1993 and 1992, respectively. The amounts above do not include SAFECO's life and health insurance companies' loss reserves for accident and health claims as these amounts are not material in relation to consolidated losses and adjustment expense reserves and because the majority of these claims are incurred and paid in full within a one-year period. The decrease in the property and casualty companies' estimated losses and adjustment expense for claims occurring in prior years reflects several factors: aggressive reserving undertaken in prior years to correct deficiencies which is no longer necessary, favorable legislation in the workers' compensation area, moderation of medical costs and inflation and claims department changes. The favorable legislation in the workers' compensation area, which relates primarily to the states of Oregon and California, has helped reduce fraud, allowed for final settlement of claims and made it more difficult to reopen claims -- all of which reduced SAFECO's ultimate loss costs. The cost of claim settlements in several lines of business has benefited from changes in the organization of SAFECO's claims department which has established separate specialized units for workers' compensation, environmental exposures and fraud investigation. In addition, increased focus on adjustment expenses has helped reduce these costs. The property and casualty companies' liability for unpaid losses and adjustment expense includes reserves for environmental, asbestos and other toxic claims. These reserves are approximately 5% of total property and casualty reserves for losses and adjustment expense at December 31, 1994, 1993 and 1992. The reserves include estimates for both reported and IBNR losses and related legal expenses. Reserving for these claims is subject to significant uncertainties. Such uncertainties include difficulties in predicting the outcome of judicial decisions as case law evolves regarding liability exposure, insurance coverage and interpretation of policy language and changes in environmental regulations. In view of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. 5. REINSURANCE SAFECO's insurance subsidiaries protect themselves from excessive losses by reinsuring on treaty and facultative bases. Reinsurance contracts do not relieve SAFECO from its obligations to policyholders. With respect to the amounts of reinsurance related to the liabilities for losses, adjustment expense, life policy liabilities and unearned premiums, a continuing liability exists, in the event reinsurance companies are unable to meet their obligations. SAFECO evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. SAFECO's insurance subsidiaries have not entered into retrospective reinsurance contracts and have not participated in any unusual or nonrecurring reinsurance transactions such as "swaps" of reserves, portfolio loss transfers or funding covers. The balance sheet caption "Reinsurance Recoverables" is comprised of the following amounts at December 31:
1994 1993 - - --------------------------------------------------------------------- Property and Casualty: Reinsurance recoverables on: Unpaid losses and adjustment expense . . . . . . . . . $143,858 $100,065 Paid losses and adjustment expense. . . . . . . . . . . . . . . 13,135 11,009 Life and Health: Reinsurance recoverables on: Unpaid losses and adjustment expense (policy and contract claims) . . . . . . . . 646 132 Paid claims. . . . . . . . . . . . . . 506 1,037 Life policy liabilities. . . . . . . . 14,033 13,821 Other. . . . . . . . . . . . . . . . . 332 176 ------------------------ Reinsurance recoverables . . . . . . $172,510 $126,240 ========================
54 31 The Unearned Premium liability is presented before the effect of reinsurance. The reinsurance amounts related to the unearned premium liability are included with Other Assets in the balance sheet and totaled $51,103 and $52,384 at December 31, 1994 and 1993, respectively. The effects of reinsurance are netted against the insurance revenue and loss amounts in the statement of income. These amounts are as follows:
1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------------------- Property and Casualty ceded earned premiums . . . . . . . . . . . . . . . . . . . $175,861 $127,537 $124,352 Life and Health ceded earned premiums . . . . . . . . . . . . . . . . . . . . . . 9,060 9,576 9,192 ---------------------------------------- Total ceded premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $184,921 $137,113 $133,544 ======================================== Property and Casualty ceded losses and adjustment expense . . . . . . . . . . . . $184,670 $ 54,996 $ 53,087 Life and Health ceded policy benefits . . . . . . . . . . . . . . . . . . . . . . 5,588 7,441 6,463 ---------------------------------------- Total ceded losses, adjustment expense and policy benefits . . . . . . . . . . $190,258 $ 62,437 $ 59,550 ========================================
Property and casualty reinsurance recoverables, ceded premiums and ceded losses and adjustment expense are higher in 1994 due to the reinsurance amounts related to the Los Angeles earthquake on January 17, 1994. Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above. Reinsurance premiums assumed are insignificant. 6. COMMITMENTS AND CONTINGENCIES SAFECO leases office space, commercial real estate and certain equipment under leases which expire at various dates through 2058. These leases are accounted for as operating leases. Minimum rental commitments for leases in effect at December 31, 1994 are as follows:
Year Payable Minimum Rentals - - ------------------------------------------------------------------------------ 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,630 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,742 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,665 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,274 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,503 2000 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . 61,011 ------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $86,825 =======
The amount of rent charged to operations was $9,151, $8,305 and $8,564 for 1994, 1993 and 1992, respectively. See Note 5 for discussion relating to reinsurance. The property and casualty companies have written financial guaranty insurance covering municipal revenue bond issues, real estate partnership borrowings and residual values of certain commercial buildings. The majority of these guarantees were written in the period 1984 through 1987. The remaining guarantees have maturities ranging from 1995 to 1998. At December 31, 1994, guarantees totaling $205,180 were outstanding. Substantially all individual guarantees are supported by collateral (first mortgage liens) in the underlying properties. At December 31, 1994, the reserve for losses and loss adjustment expense for this business was $27,585 and the related unearned premium reserve was $1,003. At December 31, 1994, SAFECO Properties, Inc. is the guarantor of $36,600 of outstanding debt financing for a not-for-profit hospital. SAFECO's property and casualty companies have, in turn, guaranteed the full amount of this potential obligation of SAFECO Properties and this amount is included in the guaranty total of $205,180 noted in the paragraph above. The credit risk exposure is limited to any excess of the outstanding debt over the value of the collateral. Proposition 103 In November 1988, California voters passed Proposition 103, an initiative that, among other things, required property and casualty insurance rates to be rolled back to levels 20% below their 1987 levels for a one-year rollback period. In June 1989, SAFECO made rate filings that demonstrated its rates should not be required to be reduced during the rollback period and should be approved for future use. The California Insurance Department, however, alleged SAFECO had a rollback obligation of $88.7 million plus interest. SAFECO consistently contested the Department's approach concerning the rollback matter in rate hearings and related litigation from 1989 through August 1993. In order to end four years of legal proceedings and avoid future years of such proceedings, SAFECO agreed in August 1993, to pay $40 million to policyholders who purchased or renewed policies covered by Proposition 103 during the rollback period. This $40 million settlement, $0.41 per share on an after-tax basis, was reflected in the financial results during the third quarter of 1993. 55 32 6. COMMITMENTS AND CONTINGENCIES (Continued) Environmental, Asbestos and Other Toxic Claims The property and casualty companies' liability for unpaid losses and adjustment expense includes reserves for environmental, asbestos and other toxic claims. Reserving for these claims is subject to significant uncertainties. Such uncertainties include difficulties in predicting the outcome of judicial decisions as case law evolves regarding liability exposure, insurance coverage and interpretation of policy language and changes in environmental regulations. In view of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. The reserves carried for these claims at December 31, 1994 are estimates based on the known facts and current law and are believed to be adequate. 7. FINANCIAL INSTRUMENTS Estimated fair value amounts of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimating methodologies may have a material effect on the estimated fair value amounts. For cash, short-term investments, accounts receivable, policy loans and other liabilities, carrying value is a reasonable estimate of fair value. Fair value amounts for fixed maturities and marketable equity securities are the same as market value. Market value generally represents quoted market prices for securities traded in the public marketplace or analytically determined values for securities not publicly traded. The fair values of mortgage and commercial loans have been estimated by discounting the projected cash flows using the current rate at which loans would be made to borrowers with similar credit ratings and for the same maturities. Commercial loans are a component of "Finance Receivables" in the balance sheet. Finance Receivables also include lease receivables, which are exempt from fair value disclosure requirements. The fair value of investment contracts (Funds Held Under Deposit Contracts) with defined maturities is estimated by discounting projected cash flows using rates that would be offered for similar contracts with the same remaining maturities. For investment contracts with no defined maturities, fair value is estimated to be the present surrender value. The carrying values of the SAFECO Credit and Other Notes and Mortgages borrowings that have variable interest rates are reasonable estimates of fair value. For these borrowings that have fixed interest rates, fair value is estimated by discounting the projected cash flows using the rate at which similar borrowings could currently be made. The fair value of the 10.75% Notes Due September 1995 is estimated based on quotes from broker-dealers who make markets in similar securities. The estimated fair value of the property and casualty companies' financial guaranty business (see Note 6) was approximately $29,000 at December 31, 1994 and $24,000 at December 31, 1993. These amounts equal the total recorded reserves for losses and loss adjustment expense and unearned premiums at December 31, 1994 and 1993. Other insurance related financial instruments are exempt from fair value disclosure requirements. Estimated fair values of financial instruments at December 31 are as follows:
1994 1993 -------------------------------------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value - - --------------------------------------------------------------------------------------------------------------------------------- Financial assets: Fixed maturities available-for-sale . . . . . . . . . . . . . . . . $9,509,071 $9,509,071 $ - $ - Fixed maturities held-to-maturity . . . . . . . . . . . . . . . . . 2,053,132 1,948,309 10,720,976 11,965,731 Marketable equity securities. . . . . . . . . . . . . . . . . . . . 855,054 855,054 910,252 910,252 Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . 418,983 416,000 402,138 437,000 Commercial loans. . . . . . . . . . . . . . . . . . . . . . . . . . 411,851 403,000 368,735 370,000 Financial liabilities: Funds held under deposit contracts. . . . . . . . . . . . . . . . . 7,988,456 7,678,000 7,229,439 7,531,000 Credit Company borrowings . . . . . . . . . . . . . . . . . . . . . 510,600 510,000 427,930 438,000 10.75% notes due September 1995 . . . . . . . . . . . . . . . . . . 200,000 204,000 200,000 220,000 Other notes and mortgages . . . . . . . . . . . . . . . . . . . . . 272,309 259,000 290,505 297,000
56 33 Derivative Financial Investments The following disclosures about derivative financial instruments are made in accordance with the requirements of FASB Statement 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments." SAFECO's consolidated investments in mortgage-backed securities of $2.2 billion are primarily residential collateralized mortgage obligations and pass-throughs ("CMOs"). CMOs, while technically defined as derivative instruments, are exempt from FAS 119 disclosure requirements. SAFECO's investment in CMOs comprised of the riskier, highly-volatile type (e.g. interest only, inverse floaters, etc.) has been intentionally limited to only a small amount -- less than 1% of total CMO's at December 31, 1994. SAFECO Credit provides loan and lease commitments, at both variable and fixed rates of interest. Fixed rate loan and lease commitments outstanding at December 31, 1994 were approximately $64,000, or less than 1% of consolidated investments. The majority of these commitments have original terms of 90 days, and contracted fixed interest rates range from 8.2% to 12.0% at December 31, 1994. Exposure to credit risk relating to these commitments (risk that the borrower will be unable to perform its obligations) is mitigated through credit review and approval controls. Because the majority of the fixed rate commitments have terms of 90 days, the estimated fair value of these commitments is not material. SAFECO's involvement in other investment-type derivatives is also, intentionally, of a very limited nature. Such derivatives include currency-linked bonds and equity-linked bonds. Individually, and in the aggregate, these derivatives are not material and thus no additional disclosures are warranted. Interest rate swap agreements are entered into by SAFECO Credit and the real estate companies to reduce the impact of changes in interest rates on their floating rate debt. At December 31, 1994, interest rate swap agreements were outstanding with notional amounts of $70,855, which replace the floating rates of 6.06% to 6.73% with fixed rates ranging from 4.51% to 9.00%. Maturities of the agreements range from July 1995 to February 2001. All of these swaps relate to SAFECO Credit. The real estate companies' agreements matured in 1993. There were no swap terminations during 1994, 1993 or 1992. The net interest accrued of $1,283 in 1994 under these agreements was recorded as an increase in interest expense. The fair value of interest rate swaps is the difference between the present value of SAFECO's future interest obligations at the stated (fixed) rate and the counterparties' obligations at the floating rates. The estimated present value of SAFECO's obligations under the swaps was lower than the counterparties' by approximately $1,000 at December 31, 1994. At December 31, 1993 the estimated present value of SAFECO's obligations under the swaps exceeded the counterparties' by $3,000. Exposure to credit risk relating to interest rate swaps (risk that the counterparty will be unable to perform its obligations) is mitigated through credit review and approval controls. 8. COMMON STOCK Changes in common stock outstanding for the last three years are as follows:
1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------------- Number of shares outstanding at the beginning of year. . . . . . . . 62,931,562 62,815,265 62,748,014 Shares reacquired. . . . . . . . . . . . . . . . . . . . . . . . . . (104,320) (69,872) (233,777) Shares issued for stock options and rights. . . . . . . . . . . . . . 124,392 152,393 301,028 Shares issued for acquisition of subsidiary . . . . . . . . . . . . . -- 33,776 -- ----------------------------------------- Number of shares outstanding at the end of year. . . . . . . . . . 62,951,634 62,931,562 62,815,265 =========================================
57 34 9. STOCK INCENTIVE PLAN The SAFECO Incentive Plan of 1987 provides for the issuance of up to 2,400,000 shares of SAFECO Corporation common stock. Stock options, restricted stock rights, performance stock rights and stock appreciation rights are authorized under the Plan. Stock options are granted at exercise prices not less than the fair market value of the stock on the date of grant. The terms and conditions upon which options become exercisable may vary among grants; however, option rights expire no later than ten years from the date of grant. Changes in stock options for the three years ended December 31, 1994 are as follows:
Options Outstanding - - -------------------------------------------------------------------------------- Shares Price Per Share --------------------------- Balance December 31, 1991 1,104,776 $ 8.06 - $39.38 Granted . . . . . . . . . . . . . . . . . . . . 141,400 46.63 - 56.38 Exercised . . . . . . . . . . . . . . . . . . . (293,790) 8.06 - 38.50 Canceled. . . . . . . . . . . . . . . . . . . . (23,550) 26.00 - 38.75 --------------------------- Balance December 31, 1992 928,836 14.34 - 56.38 Granted . . . . . . . . . . . . . . . . . . . . 137,600 56.50 - 63.50 Exercised . . . . . . . . . . . . . . . . . . . (147,705) 14.34 - 39.38 Canceled. . . . . . . . . . . . . . . . . . . . (4,500) 28.63 - 39.25 --------------------------- Balance December 31, 1993 914,231 14.50 - 63.50 Granted . . . . . . . . . . . . . . . . . . . . 148,700 49.50 - 58.50 Exercised . . . . . . . . . . . . . . . . . . . (119,363) 14.50 - 47.88 Canceled. . . . . . . . . . . . . . . . . . . . (8,650) 35.50 - 62.13 --------------------------- Balance December 31, 1994 934,918 $18.81 - $63.50 --------------------------- Exercisable at December 31, 1994 . . . . . . . . . . . . . . . 458,194 $18.81 - $63.50 ---------------------------
Restricted stock rights provide for the holder to receive a stated number of share rights if the holder remains in the employ of the Corporation for a stated number of years. Matured rights are issued in stock and/or paid in cash at the option of the holder. During 1994, 1993 and 1992, $827, $1,436 and $1,383, respectively, were charged to operations for the compensation element of restricted stock rights. Changes in restricted stock rights for the three years ended December 31, 1994 are as follows:
Share Rights - - -------------------------------------------------------------------------------- Balance December 31, 1991. . . . . . . . . . . . . . . . . . . . 62,887 Awarded. . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,450 Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . (24,550) Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,245) ------- Balance December 31, 1992. . . . . . . . . . . . . . . . . . . . 54,542 Awarded. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,100 Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,511) Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (713) ------- Balance December 31, 1993. . . . . . . . . . . . . . . . . . . . 44,418 Awarded. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,200 Matured. . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,949) Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . (825) ------- Balance December 31, 1994. . . . . . . . . . . . . . . . . . . . 43,844 -------
Stock appreciation rights have been granted in tandem with certain options. Stock appreciation rights provide stock option holders the right to receive payment in cash and/or stock equal to the appreciation in value of the optioned stock from the date of grant, in lieu of exercise of stock options held. Shares exercised during 1994, 1993 and 1992 include 2,000, 500 and 2,400, respectively, which were surrendered under the Plan to exercise stock appreciation rights. During 1994, 1993 and 1992, $72, $21, and $114, respectively, were charged to operations for the compensation element of stock appreciation rights. There were 1,063,929 shares of common stock reserved for future options and rights at December 31, 1994. No performance stock rights have been awarded. 10. STATUTORY INFORMATION The insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on an accounting basis prescribed or permitted by such authorities (statutory basis). Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices that are not prescribed. Statutory net income differs from net income reported in accordance with generally accepted accounting principles primarily because policy acquisition costs are expensed when incurred, life insurance reserves are based on different assumptions and income tax expense reflects only taxes paid or currently payable. Statutory net income and equity are as follows:
Statutory Net Income 1994 1993 1992 - - -------------------------------------------------------------------------------- Property and Casualty. . . . . . . . . . . $ 217,348 $283,605 $206,729 Life and Health. . . . . . . . . . . . . . 48,630 19,141 30,629
December 31 Statutory Stockholder's Equity 1994 1993 - - -------------------------------------------------------------------------------- Property and Casualty . . . . . . . . . . . . . . . . . $1,506,112 $1,557,360 Life and Health . . . . . . . . . . . . . . . . . . . . 416,821 382,878
SAFECO's insurance subsidiaries have received written approval from the Washington State Insurance Department to treat certain loans to related SAFECO subsidiaries (all made at market rates) as admitted assets. The allowance of such loans has not materially enhanced surplus at December 31, 1994. 58 35 11. DIVIDEND RESTRICTIONS The insurance subsidiaries are restricted by certain states as to the amount of dividends they may pay to their parent without regulatory consent. In addition, dividend payments by certain other SAFECO subsidiaries are limited by agreements with lenders which have provided financing for those subsidiaries. The amount of subsidiary retained earnings available for the payment of dividends to SAFECO Corporation without prior regulatory or lender approval approximated $291,696 at December 31, 1994. 12. EMPLOYEE BENEFIT PLANS The Corporation administers defined contribution, defined benefit and profit sharing bonus plans covering substantially all employees. The defined contribution plans include profit sharing retirement plans and a savings plan. Benefits are earned under the defined benefit plan for each year of service after 1988, based on the employee's compensation level plus a stipulated rate of return on the benefit balance. It is the Corporation's policy to fund the plan on a current basis to the full extent deductible under federal income tax regulations. Included in the amounts below are $5,431, $4,987 and $5,181 of contributions to the defined benefit plan for 1994, 1993 and 1992, respectively. These contributions approximate the accrual expense for each year. The cost of the plans discussed above charged to income is as follows:
1994 1993 1992 - - ------------------------------------------------------------------------------------- Property and Casualty . . . . . . . . . . . . $36,505 $42,623 $35,102 Life and Health . . . . . . . . . . . . . . . 6,890 8,592 7,150 Real Estate . . . . . . . . . . . . . . . . . 1,564 1,807 2,154 All Others. . . . . . . . . . . . . . . . . . 1,479 2,166 1,541 ------------------------------------- Total. . . . . . . . . . . . . . . . . . . $46,438 $55,188 $45,947 =====================================
In addition, SAFECO provides certain healthcare and life insurance benefits ("other postretirement benefits") for retired employees. Substantially all employees may become eligible for these benefits if they reach retirement age while working for the Corporation. The cost of these benefits is shared by SAFECO and the retiree. Effective January 1, 1993, SAFECO adopted FASB Statement 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." Under Statement 106, the Corporation now accrues for other postretirement benefits during the years that employees provide services. Prior to adoption of Statement 106, other postretirement benefits were accounted for on the pay-as-you-go (cash) basis. The transition obligation (i.e., the accumulated postretirement benefit obligation) of $23,751 was recorded as a cumulative effect adjustment in the first quarter of 1993 which net of tax resulted in a reduction of net income of $15,676. Components of the net periodic other postretirement benefit cost are as follows:
1994 1993 - - ------------------------------------------------------------------------------ Service cost -- benefits earned during the period . . . . . . . . . . . . . . . $ 980 $ 880 Interest cost on accumulated postretirement benefit obligation . . . . . . . 1,816 1,861 Actual return on plan assets . . . . . . . . . . . (18) 24 Net amortization and deferral. . . . . . . . . . . (43) 24 Net periodic postretirement ------------------------ benefit cost . . . . . . . . . . . . . . . . $2,771 $2,741 ========================
The following table summarizes the funded status of the plan:
December 31 1994 1993 - - ------------------------------------------------------------------------------ Accumulated postretirement benefit obligation (APBO): Retirees . . . . . . . . . . . . . . . . . . . . $ 8,539 $10,115 Fully eligible active plan participants . . . . . . . . . . . . . . . . . 3,179 4,646 Other active plan participants . . . . . . . . . 7,982 9,972 ------------------------ Total APBO . . . . . . . . . . . . . . . . . . 19,700 24,733 Less plan assets at fair value . . . . . . . . . . . 584 420 ------------------------ Funded status. . . . . . . . . . . . . . . . . . . . 19,116 24,313 Unrecognized gain. . . . . . . . . . . . . . . . . . 8,270 1,056 ------------------------ Accrued postretirement benefit cost recorded in the balance sheet . . . . . . . . . . $27,386 $25,369 ========================
Other postretirement benefit cost is determined using actuarial assumptions at the beginning of the year. The funded status is determined using assumptions at the end of the year. The discount rate used was 8 1/2%, 7 1/2% and 8% at December 31, 1994, 1993 and January 1, 1993, respectively. The accumulated postretirement benefit obligation at December 31, 1994 was determined using a healthcare cost trend rate of 12% for 1995, declining by 1% per year to 6% and remaining at that level thereafter. The ultimate trend rate of 6% represents a 1% reduction from the 7% rate used for the prior year's valuation. A one percentage point increase in the assumed healthcare cost trend rate for each year would increase the accumulated other postretirement benefit obligation as of December 31, 1994 by $2,187 and the annual net periodic other postretirement benefit cost for the year then ended by $454. 59 36 13. REAL ESTATE COMPANIES' LEASED PROPERTIES The real estate companies receive rental income, principally from shopping centers, under leases which expire at various dates through 2047. These leases are accounted for as operating leases. Minimum future rentals from leases in effect at December 31,1994 are as follows:
Year Receivable Amount - - --------------------------------------------------------------------------- 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,785 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,017 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,371 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,528 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,864 2000 and thereafter. . . . . . . . . . . . . . . . . . . . . . 162,374 -------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $332,939 ========
These amounts do not include contingent rentals that are based on a percentage of sales in excess of stipulated minimums or increases in the Consumer Price Index. Contingent rentals included in revenue were $5,665, $4,976 and $5,693 in 1994, 1993 and 1992, respectively. The real estate companies' investment in rental property and related accumulated depreciation is as follows:
December 31 1994 1993 - - ---------------------------------------------------------------------- Shopping centers . . . . . . . . . . . . $343,747 $287,734 Healthcare facilities . . . . . . . . . . 19,467 15,169 Other . . . . . . . . . . . . . . . . . . 50,726 44,056 ------------------------- 413,940 346,959 Less accumulated depreciation . . . . . . 97,949 87,083 ------------------------- Total . . . . . . . . . . . . . . . . $315,991 $259,876 =========================
14. INCOME TAXES As of January 1, 1993, SAFECO adopted the liability method of accounting for income taxes pursuant to FASB Statement 109, "Accounting for Income Taxes." This accounting change was implemented through a cumulative effect adjustment which reduced the net deferred tax liability (and increased net income in the first quarter of 1993) by $18,553. Prior year financial statements and related disclosures which follow the guidelines provided in APB 11 were not restated. Under the liability method, deferred tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the enacted tax rates. Differences between income tax computed by applying the U.S. Federal income tax rate of 35% in 1994 and 1993 and 34% in 1992 to income before income taxes and the consolidated provision for Federal and Canadian income taxes are as follows:
1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------------------- Computed "expected" tax expense . . . . . . . . . . . . . . . . . . $136,409 $201,928 $137,107 Tax-exempt municipal bond income . . . . . . . . . . . . . . . . . (60,039) (55,139) (47,906) Dividends received deduction. . . . . . . . . . . . . . . . . . . . (10,369) (11,031) (9,908) Proration adjustment. . . . . . . . . . . . . . . . . . . . . . . . 6,506 5,137 3,593 Federal tax rate change . . . . . . . . . . . . . . . . . . . . . . -- 4,151 -- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,860 5,990 9,077 ------------------------------------------------- Consolidated provision for Federal and Canadian income taxes . . $ 75,367 $151,036 $ 91,963 =================================================
60 37 The tax effects of temporary differences which give rise to the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993 are as follows:
December 31 1994 1993 - - ----------------------------------------------------------------------------------------------------------------------------------- Deferred tax assets: Discounted loss and adjustment expense reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,663 $121,406 Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,495 52,993 Adjustment to life policy liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,444 7,838 Capitalization of policy acquisition costs -- 1990 Tax Act . . . . . . . . . . . . . . . . . . . . . . . . 18,263 14,105 Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,585 8,879 Realized capital gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,773 7,406 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,899 30,500 ------------------- Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,122 243,127 ------------------- Deferred tax liabilities: Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,095 128,556 Bond discount accrual. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,119 16,673 Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,043 42,314 Real estate development expenses capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,527 13,173 Unrealized appreciation of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,818 138,990 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,380 21,348 ------------------- Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306,982 361,054 ------------------- Net deferred tax liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,860 $117,927 ===================
The deferred tax benefit of $8,242 for 1994 represents the decrease in the net deferred tax liability of $82,067 excluding a decrease of $72,172 related to unrealized appreciation of investment securities and a decrease of $1,653 related to the unrealized loss from foreign currency translation which are reported in stockholders'equity. The deferred tax benefit of $21,903 for 1993 represents the decrease in the net deferred tax liability of $19,253 excluding an increase of $2,980 related to unrealized appreciation of marketable equity securities and a decrease of $330 related to the unrealized gain from foreign currency translation which are reported in stockholders' equity. Under APB 11 deferred tax expense (benefit) resulted from timing differences in the recognition of revenue and expense for tax and financial statement purposes. For 1992 the sources of these differences and the tax effect of each were as follows:
1992 - - ------------------------------------------------------------------------------ Discounted loss and adjustment expense reserves. . . . . . . . . . $ (9,045) Bond discount accrual . . . . . . . . . . . . . . . . . . . . . . 4,536 Deferred policy acquisition costs. . . . . . . . . . . . . . . . . 12,130 Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . (10,590) Salvage and subrogation reserves . . . . . . . . . . . . . . . . . 1,318 Adjustment to life policy liabilities . . . . . . . . . . . . . . (27,393) Capitalization of policy acquisition costs -- 1990 Tax Act . . . . (4,162) Accelerated depreciation . . . . . . . . . . . . . . . . . . . . . 1,813 Real estate development expenses capitalized . . . . . . . . . . . (2,515) Realized capital gains . . . . . . . . . . . . . . . . . . . . . . (6,468) Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,524 -------- Deferred tax benefit. . . . . . . . . . . . . . . . . . . . . . $(33,852) ========
61 38 SAFECO CORPORATION 15. SEGMENT DATA
UNDER- WRITING CAPITAL INVESTMENT REALIZED PROFIT NET IDENTIFIABLE EXPEN- REVENUES INCOME GAIN (LOSS) (LOSS) INCOME* ASSETS DITURES - - ----------------------------------------------------------------------------------------------------------------------------- (In Thousands) 1994 Property and Casualty: Personal. . . . . . . . . . . . . $1,469,857 $(67,932) $ 316,922 Commercial and Surety. . . . . . 583,574 (9,413) 218,457 ---------- -------- Total . . . . . . . . . . . . . 2,053,431 $283,481 $ 31,003 $(77,345) $213,439 5,355,735 $32,774 --------------------------------------------- ----------- Life and Health: Financial Services. . . . . . . . 46,642 435,101 5,281 5,735,705 Employee Benefits . . . . . . . . 230,129 271,116 607 3,593,417 ---------------------------------- ----------- Total . . . . . . . . . . . . . . . 276,771 706,217 5,888 88,723 9,329,122 330 ---------------------------------- ----------- Real Estate . . . . . . . . . . . . 107,315 (174) 6,455 545,773 47,572 Other and Eliminations . . . . . . 68,906 1,912 2,323 5,757 671,099 748 ---------------------------------- ----------------------------------- Consolidated Totals. . . . . . . . $2,506,423 $991,610 $ 39,040 $314,374 $15,901,729 $81,424 ================================== =================================== 1993 Property and Casualty: Personal. . . . . . . . . . . . . $1,400,705 $ 6,252 $ 294,597 Commercial and Surety . . . . . . 529,009 3,596 213,898 ---------- -------- Total . . . . . . . . . . . . 1,929,714 $277,643 $114,561 $ 9,848 $283,429** 5,014,606 $26,320 --------------------------------------------- ----------- Life and Health: Financial Services. . . . . . . . 44,156 390,550 61,486 5,052,710 Employee Benefits . . . . . . . . 261,807 277,608 (7,942) 3,555,151 ---------------------------------- ----------- Total . . . . . . . . . . . . 305,963 668,158 53,544 118,702 8,607,861 486 ---------------------------------- ----------- Real Estate . . . . . . . . . . . . 78,252 8,126 14,574 517,411 47,363 Other and Eliminations . . . . . . 63,311 5,994 11,418 12,073 667,413 69 ---------------------------------- ----------------------------------- Consolidated Totals . . . . . $2,377,240 $951,795 $187,649 $428,778 $14,807,291 $74,238 ================================== =================================== 1992 Property and Casualty: Personal. . . . . . . . . . . . . $1,258,893 $(37,712) $ 265,987 Commercial and Surety . . . . . . 495,567 (34,310) 172,509 ---------- -------- Total . . . . . . . . . . . . 1,754,460 $280,820 $ 54,622 $(72,022) $223,659 4,745,518 $22,273 --------------------------------------------- ----------- Life and Health: Financial Services . . . . . . . 40,511 344,970 11,281 4,257,512 Employee Benefits . . . . . . . . 288,005 278,614 (7,904) 3,356,978 ---------------------------------- ----------- Total . . . . . . . . . . . . 328,516 623,584 3,377 77,802 7,614,490 214 ---------------------------------- ----------- Real Estate . . . . . . . . . . . . 187,172 (6) 5,354 463,872 23,771 Other and Eliminations . . . . . . 60,953 (1,356) 2,596 4,479 567,229 553 ---------------------------------- ----------------------------------- Consolidated Totals . . . . . $2,331,101 $903,048 $ 60,589 $311,294 $13,391,109 $46,811 ================================== ===================================
Property and casualty companies' investments are available for payments of claims and benefits for all product lines within the segments; therefore, such investments and the related investment income and realized gains have not been identified with specific segments. In the life and health companies, a major portion of investment income, realized gains and assets is specifically identifiable within an industry segment. The remainder of these amounts has been allocated in proportion to the mean policy reserves and liabilities identified with each segment. *1993 Net Income amounts include cumulative effect of accounting changes (FASB Statements 106 and 109). **1993 Property and Casualty Net Income includes a charge of $40,000 ($26,000 after tax) for the Proposition 103 settlement. 62 39 1994 ANNUAL REPORT 16. INTERIM FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter Annual - - ------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Revenues: 1994 . . . . . . . . . . . . . . . . . . . . . . . . $857,825 $864,583 $901,796 $912,869 $3,537,073 1993 . . . . . . . . . . . . . . . . . . . . . . . . 837,296 874,989 897,015 907,384 3,516,684 1992 . . . . . . . . . . . . . . . . . . . . . . . . 833,917 827,551 808,119 825,151 3,294,738 Income Before Realized Gain: * 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ 43,486 $ 88,818 $ 69,683 $ 86,465 $ 288,452 1993 . . . . . . . . . . . . . . . . . . . . . . . . 55,304 93,168 61,593 96,921 306,986 1992 . . . . . . . . . . . . . . . . . . . . . . . . 78,689 30,386 71,239 91,235 271,549 Realized Gain: * 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ 12,540 $ 1,231 $ 2,829 $ 9,322 $ 25,922 1993 . . . . . . . . . . . . . . . . . . . . . . . . 17,200 36,183 32,197 33,335 118,915 1992 . . . . . . . . . . . . . . . . . . . . . . . . 6,340 11,760 8,910 12,735 39,745 Net Income: ** 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ 56,026 $ 90,049 $ 72,512 $ 95,787 $ 314,374 1993 . . . . . . . . . . . . . . . . . . . . . . . . 75,381 129,351 93,790 130,256 428,778 1992 . . . . . . . . . . . . . . . . . . . . . . . . 85,029 42,146 80,149 103,970 311,294 (Per Share) Income Before Realized Gain: * 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ .69 $ 1.41 $ 1.11 $ 1.37 $ 4.58 1993 . . . . . . . . . . . . . . . . . . . . . . . . .88 1.48 .98 1.54 4.88 1992 . . . . . . . . . . . . . . . . . . . . . . . . 1.25 .48 1.14 1.46 4.33 Realized Gain: * 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ .20 $ .02 $ .04 $ .15 $ .41 1993 . . . . . . . . . . . . . . . . . . . . . . . . .27 .58 .51 .53 1.89 1992 . . . . . . . . . . . . . . . . . . . . . . . . .10 .19 .14 .20 .63 Net Income: ** 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ .89 $ 1.43 $ 1.15 $ 1.52 $ 4.99 1993 . . . . . . . . . . . . . . . . . . . . . . . . 1.20 2.06 1.49 2.07 6.82 1992 . . . . . . . . . . . . . . . . . . . . . . . . 1.35 .67 1.28 1.66 4.96 Dividends Paid: 1994 . . . . . . . . . . . . . . . . . . . . . . . . $ .45 $ .45 $ .49 $ .49 $ 1.88 1993 . . . . . . . . . . . . . . . . . . . . . . . . .41 .41 .45 .45 1.72 1992 . . . . . . . . . . . . . . . . . . . . . . . . .37 .37 .41 .41 1.56 Market Price Range: *** 1994 -- High . . . . . . . . . . . . . . . . . . . . $ 59 1/4 $ 59 5/8 $ 58 7/8 $ 52 $ 59 5/8 -- Low . . . . . . . . . . . . . . . . . . . . 52 3/4 50 49 5/8 47 3/8 47 3/8 1993 -- High . . . . . . . . . . . . . . . . . . . . 66 1/2 66 1/8 65 1/4 65 3/8 66 1/2 -- Low . . . . . . . . . . . . . . . . . . . . 56 7/8 54 7/8 58 1/4 54 54
* Amounts are net of income tax. ** 1993 amounts include cumulative effect of adoption of FASB Statements 106 and 109. Both of these new accounting standards were adopted in the first quarter of 1993. The combined effect on net income was an increase of $2,877 or $0.05 per share. *** SAFECO Corporation common stock is traded on the NASDAQ. 63 40 SAFECO CORPORATION
SUMMARY OF GROWTH (In Thousands Except Per Share Amounts) 1994 1993 1992 - - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF CONTINUING OPERATIONS Income (Loss), Net of Income Taxes, Before Realized Gain: Property and Casualty . . . . . . . . . . . . . . . . . . . . . . . . $ 192,734 $ 217,187 $ 187,144 Life and Health . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,941 76,903 75,600 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,568 6,136 6,040 Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,365 6,439 6,140 Asset Management. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,116 4,255 4,261 Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,272) (3,934) (7,636) ------------------------------------------ Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,452 306,986 271,549 Realized Gain, Net of Income Taxes . . . . . . . . . . . . . . . . . . . 25,922 118,915 39,745 Cumulative Effect of Accounting Changes. . . . . . . . . . . . . . . . . -- 2,877 -- ------------------------------------------ Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 314,374 $ 428,778 $ 311,294 =========================================================================================================================== STATISTICS PER SHARE OF COMMON STOCK* Primary Net Income from Continuing Operations: Income Before Realized Gain. . . . . . . . . . . . . . . . . . . . . . $ 4.58 $ 4.88 $ 4.33 Realized Gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 1.89 .63 Cumulative Effect of Accounting Changes. . . . . . . . . . . . . . . . -- .05 -- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.99 6.82 4.96 Average Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 62,972 62,879 62,792 Fully Diluted Net Income from Continuing Operations: Income Before Realized Gain. . . . . . . . . . . . . . . . . . . . . . 4.56 4.85 4.29 Realized Gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41 1.88 .63 Cumulative Effect of Accounting Changes. . . . . . . . . . . . . . . . -- .05 -- Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.97 6.78 4.92 Average Number of Shares . . . . . . . . . . . . . . . . . . . . . . . 63,207 63,233 63,239 Dividends Paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.88 1.72 1.56 Market Price: High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 5/8 66 1/2 59 1/8 Low. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3/8 54 42 3/8 Close. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 55 57 1/4 Stockholders' Equity: Book Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.95 44.09 38.97 With Securities at Market Value, Net of Tax. . . . . . . . . . . . . . 43.86 56.94 47.84 REVENUES FROM CONTINUING OPERATIONS (EXCLUDING REALIZED GAINS) Insurance: Property and Casualty (Gross premiums written) . . . . . . . . . . . . $2,278,045 $2,134,512 $1,937,090 Life and Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . 276,771 305,963 328,516 Net Investment Income (Excluding realized gain or loss): Property and Casualty. . . . . . . . . . . . . . . . . . . . . . . . . 283,481 277,643 280,820 Life and Health. . . . . . . . . . . . . . . . . . . . . . . . . . . . 706,217 668,158 623,584 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,912 5,994 (1,356) Real Estate (Excluding realized gain or loss) . . . . . . . . . . . . . . 107,315 78,252 187,172 Credit (Including affiliate loans). . . . . . . . . . . . . . . . . . . . 58,181 54,046 51,327 Asset Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,055 13,250 13,057 ------------------------------------------ Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,726,977 $3,537,818 $3,420,210 ==========================================
*Per share amounts are adjusted for stock dividends and stock splits. 64 41 1994 ANNUAL REPORT
1991 1990 1989 1988 1987 1986 1985 1984 ------------------------------------------------------------------------------------------------------------------------ $ 145,421 $ 183,666 $ 188,928 $ 191,443 $ 175,093 $ 99,098 $ 52,342 $ 47,742 79,705 77,626 70,911 44,714 33,944 48,511 48,141 52,460 5,850 6,139 669 (8,142) (7,420) 2,756 1,554 3,483 6,396 4,476 4,009 3,509 2,420 3,305 3,956 3,664 3,397 3,016 2,545 2,021 1,493 615 125 (306) (3,852) (3,177) (3,346) 1,304 4,772 3,633 10,581 13,966 ------------------------------------------------------------------------------------------------------------------------ 236,917 271,746 263,716 234,849 210,302 157,918 116,699 121,009 22,661 6,663 36,501 33,786 42,708 66,037 46,220 6,844 -- -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------ $ 259,578 $ 278,409 $ 300,217 $ 268,635 $ 253,010 $ 223,955 $ 162,919 $ 127,853 ======================================================================================================================== $ 3.78 $ 4.31 $ 4.17 $ 3.59 $ 3.12 $ 2.34 $ 1.62 $ 1.63 .36 .10 .58 .51 .63 .98 .65 .09 -- -- -- -- -- -- -- -- 4.14 4.41 4.75 4.10 3.75 3.32 2.27 1.72 62,739 63,119 63,192 65,450 67,465 67,402 71,928 74,462 3.75 4.29 4.14 3.58 3.09 2.32 1.61 1.62 .35 .10 .57 .51 .63 .97 .64 .09 -- -- -- -- -- -- -- -- 4.10 4.39 4.71 4.09 3.72 3.29 2.25 1.71 63,255 63,466 63,722 65,756 67,984 68,056 72,604 74,944 1.42 1.28 1.14 1.02 .901/2 .821/2 .771/2 .70 48 3/4 42 1/8 39 1/4 29 1/2 38 31 7/8 23 1/4 17 1/2 31 1/4 25 3/8 23 1/4 23 24 5/8 22 3/4 15 1/2 13 3/8 48 3/4 32 7/8 35 5/8 23 5/8 27 3/4 26 1/2 23 1/4 16 1/2 35.40 31.50 29.27 24.87 21.39 19.68 16.44 14.40 43.83 33.14 33.15 27.08 22.87 25.22 19.50 14.66 $1,830,199 $1,792,836 $1,696,940 $1,627,861 $1,545,922 $1,479,533 $1,246,206 $1,031,156 332,711 311,961 274,275 264,974 240,423 232,667 243,374 228,443 286,073 283,248 263,415 220,496 179,837 151,959 127,668 112,397 557,445 476,177 391,876 296,233 233,837 189,363 144,586 103,108 3,249 5,348 14,670 20,245 22,573 20,833 18,373 15,977 274,387 254,718 246,216 223,190 195,900 216,082 208,527 176,188 54,371 45,193 38,665 34,290 30,767 30,414 30,039 31,352 10,794 9,009 8,322 7,166 6,708 4,087 2,489 1,745 ------------------------------------------------------------------------------------------------------------------------ $3,349,229 $3,178,490 $2,934,379 $2,694,455 $2,455,967 $2,324,938 $2,021,262 $1,700,366 ========================================================================================================================
65 42
SUMMARY OF GROWTH (Continued) (In Thousands Except Ratios) 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------- PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE Personal Auto. . . . . . . . . . . . . . . . . . . . . . . $ 1,013,445 $ 977,105 $ 907,016 Homeowners . . . . . . . . . . . . . . . . . . . . . . . . 403,673 362,419 310,841 Other Personal. . . . . . . . . . . . . . . . . . . . . . . 144,624 126,353 109,063 - - ------------------------------------------------------------------------------------------------------- Total Personal. . . . . . . . . . . . . . . . . . . 1,561,742 1,465,877 1,326,920 Commercial . . . . . . . . . . . . . . . . . . . . . . . . 591,857 544,162 491,942 Surety . . . . . . . . . . . . . . . . . . . . . . . . . . 90,246 84,245 79,714 Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 34,200 40,228 38,478 Total Canada. . . . . . . . . . . . . . . . . . . . . . . . -- -- 36 - - ------------------------------------------------------------------------------------------------------- Gross Premiums Written. . . . . . . . . . . . . . . . . . . 2,278,045 2,134,512 1,937,090 Ceded Reinsurance Premiums . . . . . . . . . . . . . . . . 174,580 134,347 116,645 - - ------------------------------------------------------------------------------------------------------- Net Premiums Written . . . . . . . . . . . . . . . . . . . $ 2,103,465 $ 2,000,165 $ 1,820,445 ======================================================================================================= OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE RATIOS TO EARNED PREMIUMS (GAAP BASIS): Losses. . . . . . . . . . . . . . . . . . . . . . . . . 64.70% 60.21% 63.93% Adjustment Expense. . . . . . . . . . . . . . . . . . . 9.72 9.78 10.55 Underwriting Expenses. . . . . . . . . . . . . . . . . . 28.24 28.43 28.72 Dividends to Policyholders . . . . . . . . . . . . . . . 1.11 1.07 .91 - - ------------------------------------------------------------------------------------------------------- Combined Losses and Expenses . . . . . . . . . . . . . . 103.77% 99.49% 104.11% - - ------------------------------------------------------------------------------------------------------- Premiums Written to Policyholders' Surplus. . . . . . . . . 1.4:1 1.3:1 1.3:1 PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REALIZED GAIN Property and Casualty: Underwriting. . . . . . . . . . . . . . . . . . . . . . $ (77,345) $ 9,848 $ (72,022) Investment. . . . . . . . . . . . . . . . . . . . . . . 283,481 277,643 280,820 Proposition 103 Settlement. . . . . . . . . . . . . . . -- (40,000) -- Life and Health . . . . . . . . . . . . . . . . . . . . . . 131,015 125,306 123,604 Real Estate . . . . . . . . . . . . . . . . . . . . . . . . 10,152 10,079 8,389 Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 10,761 10,190 9,036 Asset Management . . . . . . . . . . . . . . . . . . . . . 6,351 6,539 6,503 Corporate. . . . . . . . . . . . . . . . . . . . . . . . . (13,714) (10,317) (13,662) - - ------------------------------------------------------------------------------------------------------- Total . . . . . . . . . . . . . . . . . . . . . . . $ 350,701 $ 389,288 $ 342,668 ======================================================================================================= STOCKHOLDERS' EQUITY Book Value . . . . . . . . . . . . . . . . . . . . . . . . $ 2,829,479 $ 2,774,391 $ 2,448,147 With Securities at Market, Net of Tax. . . . . . . . . . . 2,761,344 3,583,482 3,005,382 LONG-TERM DEBT FROM CONTINUING OPERATIONS. . . . . . . . . 534,232 600,209 504,638 TOTAL ASSETS. . . . . . . . . . . . . . . . . . . . . . . . 15,901,729 14,807,291 13,391,109
66 43 1994 ANNUAL REPORT
1991 1990 1989 1988 - - ------------------------------------------------------- $ 805,826 $ 717,584 $ 644,765 $ 595,969 271,531 239,550 222,539 219,042 92,628 82,642 74,060 71,115 - - ------------------------------------------------------- 1,169,985 1,039,776 941,364 886,126 450,744 464,328 480,633 483,918 79,077 75,927 77,195 69,817 47,507 39,128 38,885 35,163 82,886 173,677 158,863 152,837 - - ------------------------------------------------------- 1,830,199 1,792,836 1,696,940 1,627,861 200,489 104,804 101,428 109,921 - - ------------------------------------------------------- $ 1,629,710 $ 1,688,032 $1,595,512 $1,517,940 - - ------------------------------------------------------- 67.81% 65.50% 63.13% 58.05% 10.72 11.67 9.99 11.94 29.33 29.24 29.31 29.38 .76 .75 .88 .97 - - ------------------------------------------------------- 108.62% 107.16% 103.31% 100.34% - - ------------------------------------------------------- 1.4:1 1.6:1 1.5:1 1.8:1 $ (141,121) $ (119,173) $ (52,243) $ (5,084) 286,073 283,248 263,415 220,496 -- -- -- -- 124,109 118,486 106,906 67,967 8,525 9,123 884 (12,494) 9,489 6,815 6,031 5,050 5,179 4,586 3,881 3,081 (9,625) (8,799) (8,793) (2,371) - - ------------------------------------------------------- $ 282,629 $ 294,286 $ 320,081 $ 276,645 - - ------------------------------------------------------- $ 2,221,134 $ 1,975,699 $1,850,728 $1,570,383 2,750,453 2,078,670 2,096,028 1,709,729 523,557 451,328 512,859 540,996 12,113,944 10,683,462 9,415,865 7,869,181 1987 1986 1985 1984 - - ------------------------------------------------------- $ 549,267 $ 519,473 $ 452,476 $ 399,322 214,102 207,097 199,739 193,800 68,086 64,646 59,996 47,995 - - ------------------------------------------------------- 831,455 791,216 712,211 641,117 463,823 448,872 328,942 202,761 62,472 60,594 49,435 40,590 31,949 26,968 20,131 16,570 156,223 151,883 135,487 130,118 - - ------------------------------------------------------- 1,545,922 1,479,533 1,246,206 1,031,156 108,177 108,751 72,628 50,096 - - ------------------------------------------------------- $ 1,437,745 $ 1,370,782 $ 1,173,578 $ 981,060 - - ------------------------------------------------------- 56.58% 61.88% 66.43% 65.98% 13.84 13.25 12.12 10.54 30.25 30.25 31.44 33.28 .72 .65 .56 .42 - - ------------------------------------------------------- 101.39% 106.03% 110.55% 110.22% - - ------------------------------------------------------- 2.1:1 2.2:1 2.4:1 2.4:1 $ (19,698) $ (77,568) $ (115,975) $ (96,363) 179,837 151,959 127,668 112,397 -- -- -- -- 56,316 76,704 76,109 58,560 (10,805) 6,020 2,110 7,707 3,341 4,637 4,501 4,077 2,518 1,178 244 (566) (304) (2,672) 9,053 15,009 - - ------------------------------------------------------- $ 211,205 $ 160,258 $ 103,710 $ 100,821 - - ------------------------------------------------------- $ 1,435,418 $ 1,328,215 $ 1,105,684 $1,068,607 1,535,092 1,701,853 1,311,762 1,088,084 539,825 538,081 489,402 347,351 6,738,785 5,876,072 4,766,332 3,861,804
67 EX-21 6 EXHIBIT 21 1 F-16 Exhibit 21 SAFECO Corporation Organization Chart December 31, 1994 SAFECO CORPORATION (Washington) (ownership percentages are 100%, except where indicated) 1. SAFECO Insurance Company of America (WA) A. SAFECO Management Corporation (NY) B. SAFECO Surplus Lines Insurance Company (WA) 2. General Insurance Company of America (WA) 3. First National Insurance Company of America (WA) 4. SAFECO National Insurance Company (MO) 5. SAFECO Insurance Company of Illinois (IL) 6. SAFECO Life Insurance Company (WA) A. SAFECO National Life Insurance Company (WA) B. First SAFECO National Life Insurance Company of New York (NY) 7. SAFECO Assigned Benefits Service Company (WA) 8. SAFECO Administrative Services, Inc. (WA) A. Employee Benefit Claims of Wisconsin, Inc. (WI) B. Wisconsin Pension and Group Services, Inc. (WI) 2 9. SAFECO Properties, Inc. (WA) A. Winmar Company, Inc. (WA) a) Barton Street Corporation (WA) b) Capitol Court Corporation (WI) c) Gem State Investors, Inc. (WA) d) Kitsap Mall, Inc. (WA) e) SAFECO Properties of Boise, Inc. (ID) f) SCIT, Inc. (MA) g) Valley Fair Shopping Centers, Inc. (DE) h) WDI Golf Club, Inc. (CA) i) WNY Development, Inc. (WA) j) Winmar Cascade, Inc. (WA) k) Winmar Metro, Inc. (WA) l) Winmar Northwest, Inc. (WA) m) Winmar Oregon, Inc. (OR) i) North Coast Management, Inc. (OR) ii) Pacific Surfside Corp. (OR) iii) Washington Square, Inc. (WA) iv) Winmar of Jantzen Beach, Inc. (OR) v) Winmar Pacific, Inc. (WA) vi) W-P Development, Inc. (OR) n) Winmar Redmond, Inc. (WA) o) Winmar of Kitsap, Inc. (WA) p) Winmar of Texas, Inc. (TX) q) Winmar of Wisconsin, Inc. (WI) r) Winmar of the Desert, Inc. (CA) s) C-W Properties, Inc. (50%) (WA) B. SAFECARE Company, Inc. (WA) a) S.C. Bellevue, Inc. (WA) b) S.C. Everett, Inc. (WA) c) S.C. Marysville, Inc. (WA) d) S.C. Simi Valley, Inc. (WA) i) Simi Valley Hospital, Inc. (WA) e) S.C. Vancouver, Inc. (WA) f) Lifeguard Ventures, Inc. (50%) (CA) C. RIA Development, Inc. (WA) 10. SAFECO Credit Company, Inc. (WA) 3 11. SAFECO Asset Management Company (WA) 12. SAFECO Securities, Inc. (WA) 13. SAFECO Services Corporation (WA) 14. SAFECO Trust Company (WA) 15. General America Corporation (WA) A. COMAV Managers, Inc. (IL) B. F.B. Beattie & Co., Inc. (WA) a) F.B. Beattie Insurance Services, Inc., (CA) C. General America Corporation of Texas (TX) -- (Attorney-in-fact) for: a) SAFECO Lloyds Insurance Company (TX) D. S&T Financial Corporation (WA) a) PNMR Securities, Inc. (WA) b) Talbot Financial Corporation (WA) i) Talbot Agency, Inc. (NM) E. Whitehall Insurance Brokers, Inc. (CA) 16. AGENA Inc. (20%) (WA) NOTE: Certain inactive companies are not shown. EX-27 7 EXHIBIT 27
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED BALANCE SHEET AND THE UNAUDITED STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 9,509,071 2,053,132 1,948,309 855,054 418,983 475,865 13,467,008 63,504 172,510 388,843 15,901,729 2,265,854 866,964 155,322 7,988,456 982,909 211,194 0 0 2,618,285 15,901,729 2,330,202 991,610 39,040 176,221 2,202,282 394,603 0 389,741 75,367 314,374 0 0 0 314,374 4.99 0 1,995,122 1,609,392 (81,325) 809,722 620,521 2,092,946 (81,325)
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