-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OEL8Au9+LoR1oV8K3aGH+lIxiRTs2AbofFKYHgz80bdiOz2NMsIxJARaiuneKROc yyLQz745GK7u8Gwy64EF4g== 0000891020-97-000431.txt : 19970329 0000891020-97-000431.hdr.sgml : 19970329 ACCESSION NUMBER: 0000891020-97-000431 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 97566264 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 10K 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 For the fiscal year ended December 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____ to _____. Commission File Number 1-6563 SAFECO CORPORATION (Exact name of registrant as specified in its charter) Washington 91-0742146 (State of Incorporation) (I.R.S. Employer I.D. No.) SAFECO Plaza, Seattle, Washington 98185 (Address of principal executive offices) 206-545-5000 (Telephone) Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value (126,322,327 shares were outstanding at January 31, 1997) 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]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 1997, was $4,800,000,000. Documents incorporated by reference: Portions of the registrant's 1996 Annual Report to Stockholders are incorporated by reference into Parts I and II. Portions of the registrant's definitive Proxy Statement for the 1997 annual shareholder meeting to be held May 7, 1997, are incorporated by reference into Part III. 2 PART I ITEM 1. BUSINESS GENERAL SAFECO Corporation (the Corporation) is a Washington corporation that owns subsidiaries in various segments of insurance and other financially related businesses. The Corporation and its subsidiaries are collectively referred to as "SAFECO." The home offices of the Corporation and its principal subsidiaries are in Seattle and Redmond, Washington. As of December 31, 1996, SAFECO had approximately 7,700 employees. The insurance subsidiaries engage in two principal lines: property and casualty, and life and health insurance. The SAFECO group of property and casualty companies ranked 25th among over 2,400 property and casualty insurers in the United States, based on 1995 statutory net premiums written. In the life and health insurance field, SAFECO Life ranked 51st among life insurance companies doing business in the United States, based on 1995 statutory premiums. All areas of the insurance business are highly competitive and no one insurance company or group of insurers dominates the market. Property and casualty and life and health insurers are subject to regulation and supervision in every jurisdiction where they do business. The nature and extent of such regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative powers to state insurance commissioners. Areas of regulation, supervision and administration include, among other things, solvency standards that insurers must meet and maintain; the licensing of insurers and their agents; the nature of limitations 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 that insurers must file about their financial condition; the amount of dividends that insurers may distribute to a parent corporation; and requirements regarding reserves for unearned premiums and losses. Regulation requires that property and casualty rates be adequate but not excessive nor unfairly discriminatory. See page 29 of the 1996 Annual Report to Stockholders, incorporated herein by reference (Exhibit 13), for more information on regulatory matters. PROPERTY AND CASUALTY INSURANCE OPERATIONS The Corporation's property and casualty subsidiaries include 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., SAFECO Select Insurance Services, Inc., and COMAV Managers, Inc. SAFECO's property and casualty subsidiaries write personal, commercial and surety lines of insurance through independent agents. Coverages include automobile, homeowners, fire and allied lines, workers' compensation, commercial multi-peril, miscellaneous casualty, surety and fidelity. These products are available in nearly all states and the District of Columbia. SAFECO sold its Canadian property and casualty operations in 1991. See page 31 of the 1996 Annual Report to Stockholders for more information. 2 3 PART I ITEM 1. BUSINESS (CONTINUED) Consolidated property and casualty gross premiums written for SAFECO's ten largest states are as follows:
1996 1995 1994 --------------------------------------------------------------------------------- (Amounts In Thousands) % of % of % of State Amount Total Amount Total Amount Total ----- ------ ----- ------ ----- ------ ----- California $ 549,379 22% $ 548,284 23% $ 553,608 24% Washington 389,238 16 388,705 17 376,557 16 Texas 183,235 7 163,710 7 152,715 7 Oregon 155,444 6 152,477 6 148,300 7 Illinois 111,353 5 106,062 5 95,689 4 Florida 91,832 4 76,095 3 61,176 3 Missouri 79,882 3 73,167 3 68,201 3 Georgia 72,647 3 70,535 3 71,619 3 Tennessee 66,064 3 58,180 2 54,932 2 Montana 57,944 2 58,831 3 51,945 2 --------------------------------------------------------------------------------- 1,757,018 71 1,696,046 72 1,634,742 71 All Others 706,483 29 670,810 28 643,303 29 --------------------------------------------------------------------------------- Total $2,463,501 100% $2,366,856 100% $2,278,045 100% =================================================================================
Voluntary personal, commercial and surety lines (which exclude assigned risk, FAIR plans, etc.) made up approximately 70%, 25% and 4%, respectively, of the 1996 gross premiums written. The gross premiums written growth of 4.1% in 1996 resulted from a 4.8% increase in personal, a 2.3% increase in commercial and a 3.1% increase in surety lines. Gross premiums written growth of 3.9% in 1995 comprised a 5.3% increase in personal, a 0.8% decrease for commercial and a 10.9% increase in surety lines. The 1996 growth in personal lines premiums resulted from increases in rates and policies in force. The number of vehicles insured increased 5.3% in 1996, compared with 1.8% in 1995 and 1.3% in 1994. The increase in 1996 came primarily from growth in targeted states east of the Rocky Mountains. The modest growth rates in 1995 and 1994 were caused primarily by rate increases. The number of homes insured increased 2.4% in 1996, 1.2% in 1995 and 2.7% in 1994. This moderate growth rate was the result of rate increases in recent years and the moratorium on writing new homeowners policies in California. SAFECO's commercial lines premiums were affected in both 1996 and 1995 by increased rate competition in workers' compensation -- particularly in California with its open rating system -- and in commercial auto. Surety premiums increased in 1996 and 1995 mainly as a result of acquiring new commercial and contract accounts. Additional financial information about SAFECO's business segments appears in Note 15 on page 68 of the 1996 Annual Report to Stockholders. 3 4 PART I ITEM 1. BUSINESS (CONTINUED) PROPERTY AND CASUALTY LOSS RESERVES The consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expense of the Corporation'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 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 and adjusted as necessary; such adjustments are included in current operations. The table on page 5 provides an analysis of changes in losses and adjustment expense reserves for 1996, 1995, and 1994 (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 $77.7 million, $59.7 million and $81.3 million in 1996, 1995 and 1994, respectively, as a result of a reduction in the estimated amounts needed to settle prior years' claims. 4 5 PART 1 ITEM 1. BUSINESS (CONTINUED) ANALYSIS OF CHANGES IN LOSSES AND ADJUSTMENT EXPENSE RESERVES (NET OF REINSURANCE):
1996 1995 1994 ------------------------------------------------------------------------------------------------- (In Thousands) Losses and Adjustment Expense Reserves at Beginning of Year $ 2,070,077 $ 2,092,946 $ 1,995,122 ------------------------------------------- Incurred Losses and Adjustment Expense for Claims Occurring in the Current Year 1,658,253 1,586,675 1,609,392 Decrease in Estimated Losses and Adjustment Expense for Claims Occurring in Prior Years (77,744) (59,699) (81,325) ------------------------------------------- Total Incurred Losses and Adjustment Expense 1,580,509 1,526,976 1,528,067 ------------------------------------------- Losses and Adjustment Expense Payments for Claims Occurring During: Current Year 939,561 856,796 809,722 Prior Years 755,367 693,049 620,521 ------------------------------------------- Total Losses and Adjustment Expense Payments 1,694,928 1,549,845 1,430,243 ------------------------------------------- Losses and Adjustment Expense Reserves at End of Year $ 1,955,658 $ 2,070,077 $ 2,092,946 =========================================== Reconciliation: Losses and Adjustment Expense Reserves, Net of Reinsurance $ 1,955,658 $ 2,070,077 $ 2,092,946 Add: Reinsurance Recoverables on Unpaid Losses at End of Year 103,412 110,746 143,858 ------------------------------------------- Losses and Adjustment Expense Reserves at End of Year, Gross of Reinsurance $ 2,059,070 $ 2,180,823 $ 2,236,804 ===========================================
The table on page 6 presents the development of the losses and adjustment expense reserves for 1986 through 1996. The top lines of the table show the estimated reserve 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 reserve as of the end of each succeeding year. The next section shows the re-estimated amount of the previously recorded reserve 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. The lower section of the table shows the cumulative redundancy (deficiency) developed with respect to the previously recorded liability as of the end of each succeeding year. For example, the 1986 reserve of $1,040.3 million developed a $53.8 million deficiency after one year which grew over ten years to a deficiency of $199.3 million. The reserve development deficiencies indicated for 1986 and 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, SAFECO's loss adjustment expenses increased rapidly, reflecting higher legal costs and increased litigation. 5 6 PART 1 ITEM 1. BUSINESS (CONTINUED) ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
Year Ended December 31 1986 1987 1988 1989 1990 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In Thousands) Reserve for Unpaid Losses and Adjustment Expenses: Gross of Reinsurance $ 1,095,163 $ 1,328,495 $ 1,523,554 $ 1,702,458 $ 1,872,144 $ 2,017,348 Reinsurance 54,881 78,975 97,003 75,279 80,683 152,029 ----------------------------------------------------------------------------------- Net of Reinsurance $ 1,040,282 $ 1,249,520 $ 1,426,551 $ 1,627,179 $ 1,791,461 $ 1,865,319 =================================================================================== Cumulative Net Amount Paid as of: One Year Later $ 382,274 $ 419,522 $ 443,056 $ 540,198 $ 603,027 $ 548,875 Two Years Later 610,331 677,053 725,684 849,568 914,456 905,725 Three Years Later 771,278 848,174 902,480 1,035,024 1,109,436 1,086,502 Four Years Later 875,910 936,447 1,010,271 1,149,505 1,221,598 1,207,170 Five Years Later 945,436 1,033,741 1,083,462 1,222,050 1,301,116 1,294,434 Six Years Later 991,806 1,082,759 1,129,885 1,276,405 1,368,889 Seven Years Later 1,029,619 1,119,813 1,169,932 1,323,026 Eight Years Later 1,057,329 1,150,953 1,203,440 Nine Years Later 1,082,006 1,177,648 Ten Years Later 1,100,542 Net Reserve Re-estimated as of: One Year Later 1,094,095 1,253,870 1,397,704 1,621,873 1,767,404 1,820,737 Two Years Later 1,118,222 1,258,193 1,368,128 1,593,554 1,705,835 1,732,844 Three Years Later 1,121,243 1,258,017 1,355,793 1,541,434 1,666,124 1,685,958 Four Years Later 1,140,282 1,264,839 1,338,568 1,544,767 1,657,170 1,650,683 Five Years Later 1,149,075 1,266,261 1,360,496 1,549,861 1,637,543 1,594,920 Six Years Later 1,168,725 1,299,601 1,386,746 1,546,875 1,608,542 Seven Years Later 1,210,457 1,332,409 1,383,317 1,525,345 Eight Years Later 1,240,940 1,328,560 1,373,694 Nine Years Later 1,239,903 1,324,452 Ten Years Later 1,239,579 Cumulative Net Redundancy (Deficiency) as of: One Year Later (53,813) (4,350) 28,847 5,306 24,057 44,582 Two Years Later (77,940) (8,673) 58,423 33,625 85,626 132,475 Three Years Later (80,961) (8,497) 70,758 85,745 125,337 179,361 Four Years Later (100,000) (15,319) 87,983 82,412 134,291 214,636 Five Years Later (108,793) (16,741) 66,055 77,318 153,918 270,399 Six Years Later (128,443) (50,081) 39,805 80,304 182,919 Seven Years Later (170,175) (82,889) 43,234 101,834 Eight Years Later (200,658) (79,040) 52,857 Nine Years Later (199,621) (74,932) Ten Years Later (199,297)
1992 1993 1994 1995 1996 ------------------------------------------------------------------- Reserve for Unpaid Losses and Adjustment Expenses: Gross of Reinsurance $ 2,052,334 $ 2,095,187 $ 2,236,804 $ 2,180,823 $ 2,059,070 Reinsurance 89,198 100,065 143,858 110,746 103,412 ------------------------------------------------------------------- Net of Reinsurance $ 1,963,136 $ 1,995,122 $ 2,092,946 $ 2,070,077 $ 1,955,658 ------------------------------------------------------------------- Cumulative Net Amount Paid as of: One Year Later $ 598,886 $ 620,521 $ 693,049 $ 755,367 Two Years Later 913,365 947,647 1,068,327 Three Years Later 1,106,033 1,147,611 Four Years Later 1,230,585 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Net Reserve Re-estimated as of: One Year Later 1,866,199 1,913,797 2,033,247 1,992,333 Two Years Later 1,782,067 1,818,306 1,902,331 Three Years Later 1,712,163 1,716,142 Four Years Later 1,642,325 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later Cumulative Net Redundancy (Deficiency) as of: One Year Later 96,937 81,325 59,699 77,744 Two Years Later 181,069 176,816 190,615 Three Years Later 250,973 278,980 Four Years Later 320,811 Five Years Later Six Years Later Seven Years Later Eight Years Later Nine Years Later Ten Years Later
6 7 PART 1 ITEM 1. BUSINESS (CONTINUED) The table below shows the approximate amounts of adverse reserve development by major category for the calendar years 1986 and 1987, viewed as of December 31, 1996. 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 both 1986 and 1987 shown below.
1986 1987 ------------------------------------------------------------------------------------ (In Millions) Environmental, Asbestos, and Other Toxic Claims Including Related Loss Adjustment Expenses $ 131 $ 106 Canadian Automobile Liability 34 27 Workers' Compensation 40 33 Loss Adjustment Expense Excluding Environmental, Asbestos and Other Toxic Claims 27 (29) Other (33) (62) ---------------- Total Adverse Development as Reported in Table on page 6 $ 199 $ 75 ================
As the trends shown in this table became apparent, SAFECO aggressively increased its reserves to address these deficiencies. For 1988 and subsequent years, SAFECO's reserve development has been favorable. This trend reflects several factors: aggressive reserving previously undertaken to correct deficiencies in years prior to 1988, favorable legislation in workers' compensation, moderation of medical costs and inflation, and claims department changes. The favorable legislation in workers' compensation, which relates primarily to the states of Oregon and California, has helped reduce fraud, allowed for faster claim settlement 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 investigations. In addition, increased focus on adjustment expenses has helped reduce these costs. In evaluating the reserve development table on page 6 and the table above, note 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, 1995 reserves that relates to losses incurred in 1986 is included in the cumulative redundancy (deficiency) amount for the years 1986 through 1994. 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 (deficiencies) based on this table. 7 8 PART 1 ITEM 1. BUSINESS (CONTINUED) The impact of reinsurance on the development information presented on page 6 is not significant. The following table summarizes reserve development, gross of reinsurance, for the last three years:
1993 1994 1995 ---------------------------------------------------------------------------- (In Thousands) Gross Reserves $2,095,187 $2,236,804 $2,180,823 ======================================== Cumulative Development Net of Reinsurance $ 278,980 $ 190,615 $ 77,744 Cumulative Development of Reinsurance Ceded 5,457 3,707 3,557 ---------------------------------------- Cumulative Development Gross of Reinsurance $ 284,437 $ 194,322 $ 81,301 ========================================
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, 1996, 1995 and 1994. Operations were credited $77.7 million, $59.7 million and $81.3 million in 1996, 1995 and 1994, respectively, as a result of reductions in the estimated amounts needed to settle prior years' claims. The property and casualty companies' reserves for losses and adjustment expense for liability coverages related to environmental, asbestos and other toxic claims totaled $102.8 million at December 31, 1996, compared with $107.5 million at December 31, 1995. These amounts do not reflect the effect of reinsurance, which is insignificant. The reserves are approximately 5% of SAFECO's total property and casualty reserves for losses and adjustment expense at both December 31, 1996 and 1995. The reserves include estimates for both reported and IBNR losses and related legal expenses. The vast majority of the environmental, asbestos and other toxic claims incurred by SAFECO's property and casualty subsidiaries come from the general liability line of business. A few of these losses occur in other coverages such as umbrella, small commercial package policies, and personal lines. Approximately 1,100 of these claims were pending at December 31, 1996, computed on an occurrence basis. For the last three years, an average of 411 claims were opened and an average of 416 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 $27,900 including legal expenses, and $16,500 excluding legal expenses. The following table summarizes the components of SAFECO's reserves for environmental, asbestos and other toxic claims at December 31, 1996:
Loss Adjustment Loss Expense Total -------------------------------------------------------- (In Thousands) Case $ 29,268 $ 11,087 $ 40,355 IBNR 27,500 34,900 62,400 ---------------------------------- Total $ 56,768 $ 45,987 $102,755 ==================================
8 9 PART 1 ITEM 1. BUSINESS (CONTINUED) This table shows the loss reserve activity analysis for liability coverages related to environmental, asbestos and other toxic claims.*
1996 1995 1994 ------------------------------------------------------------------------- (In Thousands) Reserves at Beginning of Year $ 107,510 $ 108,230 $113,410 Incurred Losses and Adjustment Expense 4,605 9,323 10,252 Losses and Adjustment Expense Payments (9,360) (10,043) (15,432) --------------------------------------- Reserves at End of Year $ 102,755 $ 107,510 $108,230 =======================================
*Amounts are before the effect of reinsurance, which is insignificant. In view of changes in environmental regulations and evolving case law which affect the development of loss reserves, the process of estimating loss reserves for environmental, asbestos and other toxic claims results in imprecise estimates. Quantitative 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. Although estimation of environmental claims is a difficult process, the reserves established for these claims at December 31, 1996 are believed to be adequate based on the known facts and current law. SAFECO has generally avoided writing coverages for larger companies with substantial exposure in these areas. State regulatory authorities require SAFECO's property and casualty insurance subsidiaries to file annual statements prepared on an accounting basis prescribed or permitted by the state (that is, on a statutory basis). The difference between the $2,059,070 reserve at December 31, 1996, for the losses and adjustment expense reported in the consolidated financial statements in accordance with generally accepted accounting principles (GAAP), and the $1,955,658 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. SAFECO's insurance 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 $103.4 million at December 31, 1996, and $110.7 million at December 31, 1995. For 1997, SAFECO's nationwide catastrophe property reinsurance program covers 90% of $400 million of single-event losses in excess of a $100 million retention. This means that in a large catastrophe, SAFECO would retain the first $100 million of losses, 10% of the next $400 million and all losses in excess of $500 million. SAFECO also has an additional earthquake reinsurance contract for 1997 for the states of Washington and Oregon that covers 90% of $100 million of single-event earthquake losses in excess of $500 million. Both of these 1997 catastrophe property reinsurance contracts include provisions for one reinstatement for a second catastrophe event in 1997 at current rates. SAFECO's aggregate coverage limit is higher for 1997 than in prior years and the additional Northwest earthquake coverage was new in 1996. 9 10 PART 1 ITEM 1. BUSINESS (CONTINUED) SAFECO's insurance subsidiaries do not enter into retrospective reinsurance contracts or participate in any unusual or nonrecurring reinsurance transactions such as reserve "swaps" or loss portfolio transfers. SAFECO does not use funding covers and does not participate in any surplus relief transactions. None of SAFECO's significant reinsurers are experiencing financial difficulties. For additional information on reinsurance, see Note 5 on page 61 of the 1996 Annual Report to Stockholders. LIFE AND HEALTH INSURANCE OPERATIONS The Corporation's 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. (collectively referred to as SAFECO Life). These companies offer individual and group insurance products, retirement services (pension) and annuity products. SAFECO Life markets these products through professional agents in all states and the District of Columbia. The most significant product lines in terms of premium/deposit volume are single premium immediate and deferred annuities, tax-sheltered annuities for the education and nonprofit entities market, corporate retirement plans and excess loss group medical insurance. SAFECO Life 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. The pension and annuity products of many life insurance companies have been affected in recent years by general economic conditions, strong returns in the equity markets, rating downgrades, increased competition and decisions by plan sponsors to diversify assets and fund management. SAFECO Life has experienced an increase in the level of withdrawal of funds from its retirement services and annuity business because of scheduled payouts on distribution-type products and the interest rate environment (see Statement of Consolidated Cash Flows on page 44 of the 1996 Annual Report to Stockholders -- Return of Funds Held Under Deposit Contracts). However, SAFECO Life's overall withdrawal experience remains relatively modest, and proceeds from the sale of its fixed income retirement services and annuity products have remained relatively stable. The table on page 11 summarizes the components of "Funds Held Under Deposit Contracts" at December 31, 1996, and describes the applicable surrender charges and surrender experience. 10 11 PART 1 ITEM 1. BUSINESS (CONTINUED) DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS - --------------------------------------------------------------------------------
Outstanding at Range of Credited or Approximate 12/31/96 Expected Maturities Assumed Interest Rates at Surrender Product (In Thousands) of Liabilities 12/31/96 Surrender Charges Experience - ---------------------------------------------------------------------------------------------------------------------------------- Universal $ 590,176 Approximately 10 - 20 5.25% to 7.15% Varies by issue age, 7% per annum Individual Years sex and duration from Life $1 to $58 per $1,000 of insurance Annuities: Structured 4,591,049 Over 25 Years 3.5% to 12.69% Cannot surrender Cannot Settlement surrender Immediate Non-Qualified 1,254,347 Approximately 4.0% to 9.0% Typically 5% in year 1 8% per annum Deferred 5 - 12 Years graded to 0% in year 6 Other 2,884 Approximately 3.57% to 8.39% None 5% per annum 7 - 10 Years Retirement Services: Guaranteed 351,263 Typically 4.85% to 8.48% Market value adjustment Less than 1% Investment 2 - 5 Years per annum Contracts Other 3,003,011 Approximately 4.41% to 7.50% Typically 9% in year 1 11% per annum Qualified 5 - 15 Years graded to 0% in year 9. Annuities SAFECO has the option to and defer payout over 20 quarters Deposits for about one quarter of these contracts. In addition, approximately $311 million of these deposits have a market value adjustment provision ---------- Total $9,792,730 ==========
11 12 PART 1 ITEM 1. BUSINESS (CONTINUED) INVESTMENTS A description of SAFECO's investment portfolio appears on pages 36 - 38 of the 1996 Annual Report to Stockholders. The rest of this section provides additional information about SAFECO's mortgage-backed securities and investment income yields. SAFECO's consolidated investments in mortgage-backed securities of $2.9 billion at market value at December 31, 1996, consist mainly of residential collateralized mortgage obligations (CMOs) and pass-throughs. The life and health portfolio contains virtually all of these securities. Approximately 96% of the mortgage-backed securities are government/agency-backed or AAA rated at December 31, 1996. SAFECO has intentionally limited its investment in riskier, more volatile CMOs (interest only, inverse floaters, and so forth.) to a small amount -- less than 1% of the total. SAFECO Consolidated Holdings of Mortgage-Backed Securities at December 31, 1996:
GAAP Market Value -------------------- Amortized Residential CMOs: Cost Amount % --------- ---------- ----- (Amounts In Millions) Planned Amortization Class (PAC) and Targeted Amortization Class (TAC) (Fixed Coupon) $ 934.4 $ 938.6 32.5% Sequential Pay (SEQ) 786.7 808.1 28.0 Accrual Coupon (Z-Tranche) 580.9 606.7 21.0 Companions/Supports 21.5 21.6 0.7 Principal Only 0.9 0.9 - Inverse Floaters 2.8 3.0 0.2 ---------- ---------- ------- Subtotal 2,327.2 2,378.9 82.4 ---------- ---------- ------- Residential Mortgage-Backed Pass-Throughs (Non-CMOs),all Fixed Coupon: Government/Agency-Backed 2.1 2.3 0.1 Private Issuer 40.8 40.9 1.4 ---------- ---------- ------- Subtotal 42.9 43.2 1.5 ---------- ---------- ------- Securitized Commercial Real Estate: Government/Agency-Backed 282.4 290.3 10.0 Pass-Throughs (Non-agency) 99.3 101.9 3.5 CMOs (Non-agency) 39.6 40.2 1.4 ---------- ---------- ------- Subtotal 421.3 432.4 14.9 ---------- ---------- ------- Asset-Backed Securities (Non-Real Estate) 33.5 33.7 1.2 ---------- ---------- ------- Total Mortgaged-Backed Securities $ 2,824.9 $ 2,888.2 100.0% ========== ========== =======
12 13 PART 1 ITEM 1. BUSINESS (CONTINUED) This table shows the quality distribution of SAFECO's mortgage-backed security portfolio (GAAP market values):
Percent at Rating December 31, 1996 ------------------------------------------------------- Government/Agency Backed 56% AAA 40 AA 2 A 1 BBB 1 BB or lower - ---- Total 100% ====
The table below summarizes pretax investment income yields for SAFECO's property and casualty and life and health insurance subsidiaries (calculations are based on GAAP amortized cost):
1996 1995 1994 ------------------------------------------------------------------------ Property and Casualty 6.8% 7.2% 7.3% Life and Health 8.1% 8.3% 8.3%
Investment income yields declined in both portfolios mainly because of the lower interest rate environment in all years shown. The property and casualty decreases also reflect the higher percentage of tax-exempt securities in this portfolio. 13 14 PART 1 ITEM 1. BUSINESS (CONTINUED) OTHER OPERATIONS SAFECO's other operations include subsidiaries involved in real estate investment and management (SAFECO Properties Inc. and its subsidiaries Winmar Company, Inc. and SAFECARE Company, Inc.), commercial lending and leasing (SAFECO Credit) and investment management. Winmar Company, Inc., acquired in 1967, invests in and manages real estate properties, primarily retail shopping centers, throughout the United States. Some of the more significant properties are located in or near Louisville, Kentucky; Cleveland and Columbus, Ohio; Albany, Jantzen Beach and Tigard, Oregon; San Antonio, Texas; Burlington, Redmond, Silverdale and Vancouver, Washington; and Milwaukee, Wisconsin. Winmar also offers real estate services, including property management, design and construction management and tenant leasing services. SAFECARE Company, Inc., organized in 1968, invests in medical real estate, primarily skilled nursing facilities. SAFECO Credit Company, Inc., organized in 1969, provides loans and equipment financing and leasing to commercial businesses, including affiliated companies. At December 31, 1996, 14% of the Credit Company's outstanding loans and leases consisted of loans to affiliated SAFECO companies.These affiliate loans are limited to 50% or less of the total loans outstanding. SAFECO Asset Management Company, acquired in 1973, is the investment advisor for SAFECO's mutual funds, variable annuity portfolios and outside pension and trust accounts. SAFECO Securities, Inc., organized in 1967, is the principal underwriter of the SAFECO Mutual Funds, comprising the SAFECO Common Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money Market Trust, and the SAFECO Managed Bond Trust. These five trusts are made up of eighteen separate investment portfolios, all of which are sold directly to the public. Thirteen of these portfolios have two additional classes of stock which are sold to the public through broker/dealers. In addition, SAFECO Securities, Inc. is the principal underwriter for the SAFECO Resource Series Trust mutual fund, with five separate investment portfolios. SAFECO Securities is also the principal underwriter for the variable insurance products issued by SAFECO Resource Variable Account B, SAFECO Separate Account SL and SAFECO Separate Account C, all of which are separate accounts of SAFECO Life Insurance Company. SAFECO Services Corporation, organized in 1972, is the transfer agent for SAFECO's 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, is a broker/dealer that distributes affiliated and nonaffiliated mutual funds and variable insurance products through its registered representatives. Talbot Financial Corporation, acquired in 1993, is a broad-based insurance brokerage with a heavy emphasis on the distribution of qualified and nonqualified annuity products and mutual funds through the banking and brokerage arenas. 14 15 PART I ITEM 2. PROPERTIES SAFECO's property and casualty insurance companies lease from General America Corporation (a wholly-owned subsidiary of SAFECO Corporation) its home office building complex located in Seattle, Washington. This complex totals 567,000 gross square feet. A 700-car parking garage is connected to the complex. SAFECO's life and health insurance companies lease from General America Corporation its home office building complex located in Redmond, Washington. This complex totals 232,000 gross square feet. Other buildings owned and occupied include a service facility in Redmond, Washington, as well as regional and branch offices in Fountain Valley, CA; Denver, CO; Atlanta, GA; St. Louis, MO; Cincinnati, OH; Portland, OR; Redmond, WA and Spokane, WA. These buildings comprise 949,000 gross square feet. All other branch and service offices use leased premises comprising 456,000 gross square feet, generally for periods of five years or less. SAFECO Properties, Inc., and its subsidiaries Winmar Company, Inc. and SAFECARE Company, Inc., invest in and manage real estate properties, primarily retail shopping centers 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. See Item 1 on page 14 of this report and Note 13 on page 66 of the 1996 Annual Report to Stockholders for additional information. 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 Corporation does not believe that such litigation will have a material adverse effect on its financial condition, future operating results or liquidity. The property and casualty insurance subsidiaries of the Corporation are parties to a number of lawsuits for liability coverages related to environmental claims. Although estimation of environmental claims loss reserves is a difficult process, the reserves established for these claims are believed to be adequate based on the known facts and current law. The loss and adjustment expense with respect to any such lawsuit, or all lawsuits related to a single incident combined, are not expected to be material to the financial condition of SAFECO. See pages 8-9 of Item 1 for more information regarding the liability of such subsidiaries for environmental claims and the process of estimating environmental loss reserves. 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 1996. 15 16 PART I EXECUTIVE OFFICERS OF THE REGISTRANT As of March 28, 1997, 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 54 Chairman since May 1993. Chief Executive Officer since January 1992. President from May 1989 to August 1996. Chief Operating Officer from 1989 to 1991. Executive Vice President and Chief Financial Officer from 1985 to 1989. Director since 1988. Boh A. Dickey 52 President and Chief Operating Officer since August 1996. Executive Vice President from January 1992 to August 1996. Chief Financial Officer from May 1989 to August 1996. Senior Vice President from 1989 to 1991. Secretary from 1985 to 1991. Vice President and Controller from 1982 to 1989. Director since 1993. Rodney A. Pierson 49 Chief Financial Officer since August 1996. Senior Vice President since February 1994. Secretary since 1991. Controller since 1990. Vice President from 1990 to 1994. Vice President of SAFECO Property and Casualty Insurance Companies from 1987 to 1990. Controller of SAFECO Property and Casualty Insurance Companies from 1984 to 1990. James W. Ruddy 47 Senior Vice President since 1992. General Counsel since 1989. Vice President from 1989 to 1992. Associate General Counsel from 1985 to 1989. Ronald L. Spaulding 53 Treasurer since January 1995. Vice President of SAFECO Life and Health Insurance Companies since 1984. Dan D. McLean 64 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. Richard E. Zunker 58 President of SAFECO Life and Health Insurance Companies since 1985. He is not an officer of the Registrant. 16 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Pages 39 and 69 of the 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Pages 70 through 73 of the 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 27 through 39 of the 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 41 through 69 of the 1996 Annual Report to Stockholders are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III The definitive proxy statement to be filed within 120 days after December 31, 1996, excluding the Annual Report of the Compensation Committee on Executive Compensation appearing on Pages 6 through 12, is incorporated herein by reference to fulfill the requirements of ITEM 10, "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT" (except for that portion of Item 10 relating to executive officers which appears in Part I of this 10-K), 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 18 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) (1) Financial Statements F-1 Consent of Independent Auditors SAFECO Corporation and Subsidiaries: The following consolidated financial statements of SAFECO Corporation and its subsidiaries, included in the 1996 Annual Report to Stockholders (pages 40 through 69), are incorporated herein by reference: Consolidated Balance Sheet December 31, 1996 and 1995 Statement of Consolidated Income Years Ended December 31, 1996, 1995 and 1994 Statement of Consolidated Cash Flows Years Ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements December 31, 1996 Report of Independent Auditors SAFECO Corporation and Subsidiaries Supplemental Consolidating Information: F-2 Balance Sheet December 31, 1996 and 1995 F-3 Statement of Income Year Ended December 31, 1996 F-4 Statement of Cash Flows Year Ended December 31, 1996 18 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (a) (2) Financial Statement Schedules F-5 Schedule I Summary of Investments Other Than Investments in Related Parties December 31, 1996 Schedule II Condensed Financial Information of the Registrant (Parent Company Only): F-6 Balance Sheet December 31, 1996 and 1995 F-7 Statement of Income Years Ended December 31, 1996, 1995 and 1994 F-8 Statement of Cash Flows Years Ended December 31, 1996, 1995 and 1994 Statement of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995 and 1994. (See page 46 of the 1996 Annual Report to Stockholders which is incorporated herein by reference.) F-9 Schedule III Supplementary Insurance Information Years Ended December 31, 1996, 1995 and 1994 F-10 Schedule IV Reinsurance Years Ended December 31, 1996, 1995 and 1994 F-11 Schedule VI Supplemental Information Concerning Property/Casualty Insurance Operations Years Ended December 31, 1996, 1995 and 1994 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 19 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (a) (3) Exhibits F-12 Exhibit Index Exhibit 3 Bylaws (as amended August 7, 1996) filed as Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. Restated Articles of Incorporation (as amended May 1, 1996) filed as Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 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. Exhibit 10 The following management contracts and compensatory plan arrangements: SAFECO Corporation Deferred Compensation Plan for Directors filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 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 Agreements with R. E. Zunker and James W. Ruddy filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 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. 20 21 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (CONTINUED) (a) (3) Exhibits F-13 Exhibit 11 Computation of Income Per Share F-14 Exhibit 12 Computation of Ratios F-15 Exhibit 21 Subsidiaries of the Registrant Exhibit 13 1996 Annual Report to Stockholders 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) Reports on Form 8-K No Forms 8-K were filed or required to be filed for any event during the quarter ended December 31, 1996. 21 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 28th day of March 1997. SAFECO CORPORATION ------------------------------ Registrant /s/ ROGER H. EIGSTI ------------------------------ Roger H. Eigsti, Chairman and Chief Executive Officer 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 - ------------------------------------------------------------------------------------- /s/ ROGER H. EIGSTI Chairman and March 28, 1997 - --------------------------------- Chief Executive Officer Roger H. Eigsti /s/ BOH A. DICKEY President, March 28, 1997 - --------------------------------- Chief Operating Officer Boh A. Dickey and Director /s/ ROD A. PIERSON Senior Vice President, March 28, 1997 - --------------------------------- Chief Financial Officer, Rod A. Pierson Secretary and Controller /s/ PHYLLIS J. CAMPBELL Director March 28, 1997 - --------------------------------- Phyllis J. Campbell /s/ ROBERT S. CLINE Director March 28, 1997 - --------------------------------- Robert S. Cline /s/ JOHN W. ELLIS Director March 28, 1997 - --------------------------------- John W. Ellis /s/ WILLIAM P. GERBERDING Director March 28, 1997 - --------------------------------- William P. Gerberding
22 23
Name Title Date - ------------------------------------------------------------------------------------- /s/ JOSHUA GREEN III Director March 28, 1997 - --------------------------------- Joshua Green III /s/ WILLIAM W. KRIPPAEHNE, JR. Director March 28, 1997 - --------------------------------- William W. Krippaehne, Jr. /s/ WILLIAM G. REED, JR. Director March 28, 1997 - --------------------------------- William G. Reed, Jr. /s/ JUDITH M. RUNSTAD Director March 28, 1997 - --------------------------------- Judith M. Runstad /s/ PAUL W. SKINNER Director March 28, 1997 - --------------------------------- Paul W. Skinner /s/ GEORGE H.WEYERHAEUSER Director March 28, 1997 - --------------------------------- George H. Weyerhaeuser
23 24 F-1 CONSENT OF ERNST & YOUNG LLP, 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 14, 1997, included in the 1996 Annual Report to Stockholders 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 Statement (Form S-8 No. 33-14381) pertaining to the SAFECO Incentive Plan of 1987 of our report dated February 14, 1997, with respect to the consolidated financial statements of SAFECO Corporation incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of SAFECO Corporation. ERNST & YOUNG LLP Seattle, Washington March 25, 1997 25 Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND SUBSIDIARIES F-2 December 31, 1996 - -------------------------------------------------------------------------------- (In Thousands)
ASSETS Property & Casualty Life & Health Real Estate Credit Company ------------------------------------------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 3,938,339 $ 7,857,499 $ - $ - Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,488,324 - - Marketable Equity Securities, at Market Value 1,196,018 23,137 - - Mortgage Loans 1,779 588,339 - - Real Estate (At cost less accumulated depreciation) - 4,384 553,846 - Policy Loans - 58,153 - - Short-Term Investments 66,152 75,379 12,351 - ------------------------------------------------------------------- Total Investments 5,202,288 11,095,215 566,197 - Cash 24,019 19,809 889 3,181 Accrued Investment Income 76,577 159,809 - 3,317 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) - - - 829,045 Loans to Affiliates - - - 153,249 Premiums and Other Service Fees Receivable 440,632 12,800 8,188 - Other Notes and Accounts Receivable 12,455 11,288 20,332 247 Reinsurance Recoverables 112,280 25,204 - - Deferred Policy Acquisition Costs 155,643 240,464 - - Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 141,987 1,353 1,622 470 Other Assets 73,258 7,432 4,111 76,100 Separate Account Assets - 491,212 - - ------------------------------------------------------------------- Total $ 6,239,139 $ 12,064,586 $601,339 $ 1,065,609 =================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense $ 2,059,070 $ 29,156 $ - $ - Unearned Premiums 938,054 8,845 - - Life Policy Liabilities - 149,624 - - Funds Held Under Deposit Contracts - 9,792,730 - - Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates - - - 808,750 Credit Company Borrowings - Affiliates - - - 93,025 7.875% Notes Due 2005 - - - - Other Notes and Mortgages - Non-Affiliates - - 165,074 - Other Notes and Mortgages - Affiliates - - 235,300 - Other Liabilities 386,576 210,037 54,622 21,691 Income Taxes: Current (4,837) (547) 11,247 (1,915) Deferred (Includes tax in unrealized appreciation of investment securities) 253,792 104,166 17,884 37,472 Separate Account Liabilities - 491,212 - - ------------------------------------------------------------------- Total Liabilities 3,632,655 10,785,223 484,127 959,023 ------------------------------------------------------------------- Common Stock 20,026 6,001 1 1,000 Additional Paid-In Capital 56,930 92,311 42,123 27,000 Retained Earnings 1,861,206 1,020,065 75,088 78,586 Unrealized Appreciation of Investment Securities, Net of Tax 671,873 160,986 - - Unrealized Loss from Foreign Currency Translation, Net of Tax (3,551) - - - ------------------------------------------------------------------- Stockholders' Equity 2,606,484 1,279,363 117,212 106,586 ------------------------------------------------------------------- Total $ 6,239,139 $ 12,064,586 $601,339 $ 1,065,609 ===================================================================
Other and Eliminations Consolidated -------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 140,405 $ 11,936,243 Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,488,324 Marketable Equity Securities, at Market Value 79,654 1,298,809 Mortgage Loans (142,130) 447,988 Real Estate (At cost less accumulated depreciation) (4,219) 554,011 Policy Loans - 58,153 Short-Term Investments (47,955) 105,927 -------------------------------- Total Investments 25,755 16,889,455 Cash 7,600 55,498 Accrued Investment Income 1,101 240,804 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) - 829,045 Loans to Affiliates (153,249) - Premiums and Other Service Fees Receivable 5,562 467,182 Other Notes and Accounts Receivable (1,935) 42,387 Reinsurance Recoverables - 137,484 Deferred Policy Acquisition Costs - 396,107 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 25,856 171,288 Other Assets 36,310 197,211 Separate Account Assets - 491,212 -------------------------------- Total $ (53,000) $ 19,917,673 ================================ LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense $ - $ 2,088,226 Unearned Premiums - 946,899 Life Policy Liabilities - 149,624 Funds Held Under Deposit Contracts - 9,792,730 Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates - 808,750 Credit Company Borrowings - Affiliates (93,025) - 7.875% Notes Due 2005 200,000 200,000 Other Notes and Mortgages - Non-Affiliates 59,670 224,744 Other Notes and Mortgages - Affiliates (235,300) - Other Liabilities 5,873 678,799 Income Taxes: Current (436) 3,512 Deferred (Includes tax in unrealized appreciation of investment securities) 4,523 417,837 Separate Account Liabilities - 491,212 -------------------------------- Total Liabilities (58,695) 15,802,333 -------------------------------- Common Stock 198,248 225,276 Additional Paid-In Capital (218,364) - Retained Earnings 7,269 3,042,214 Unrealized Appreciation of Investment Securities, Net of Tax 18,542 851,401 Unrealized Loss from Foreign Currency Translation, Net of Tax - (3,551) -------------------------------- Stockholders' Equity 5,695 4,115,340 -------------------------------- Total $ (53,000) $ 19,917,673 ================================
26 Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND SUBSIDIARIES F-2 December 31, 1995 Continued - -------------------------------------------------------------------------------- (In Thousands)
Credit ASSETS Property & Casualty Life & Health Real Estate Company ------------------------------------------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 4,081,768 $ 7,724,129 $ - $ - Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,044,517 - - Marketable Equity Securities, at Market Value 994,704 29,007 - - Mortgage Loans 1,874 553,934 - - Real Estate (At cost less accumulated depreciation) - 6,260 496,535 - Policy Loans - 55,925 - - Short-Term Investments 84,971 74,930 1,206 800 ----------------------------------------------------------------- Total Investments 5,163,317 10,488,702 497,741 800 Cash 21,052 35,533 (616) 1,067 Accrued Investment Income 79,405 150,916 - 2,892 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) - - - 741,177 Loans to Affiliates - - - 83,395 Premiums and Other Service Fees Receivable 418,854 13,060 8,050 - Other Notes and Accounts Receivable 11,729 15,044 15,571 1,010 Reinsurance Recoverables 120,628 16,656 - - Deferred Policy Acquisition Costs 145,868 210,491 - - Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 140,992 1,010 1,855 586 Other Assets 72,562 7,816 4,435 50,547 Separate Account Assets - 276,399 - - ----------------------------------------------------------------- Total $ 6,174,407 $11,215,627 $ 527,036 $ 881,474 ================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense $ 2,180,823 $ 26,407 $ - $ - Unearned Premiums 902,553 8,209 - - Life Policy Liabilities - 154,090 - - Funds Held Under Deposit Contracts - 8,756,384 - - Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates - - - 614,270 Credit Company Borrowings - Affiliates - - - 126,605 7.875% Notes Due 2005 - - - - Other Notes and Mortgages - Non-Affiliates - - 198,407 - Other Notes and Mortgages - Affiliates - - 161,046 - Other Liabilities 418,772 435,333 27,187 16,569 Income Taxes: Current 2,143 13,363 2,474 (1,534) Deferred (Includes tax in unrealized appreciation of investment securities) 239,505 196,829 25,714 28,939 Separate Account Liabilities - 276,399 - - ----------------------------------------------------------------- Total Liabilities 3,743,796 9,867,014 414,828 784,849 ----------------------------------------------------------------- Common Stock 20,026 6,001 1 1,000 Additional Paid-In Capital 56,930 92,311 42,123 27,000 Retained Earnings 1,689,261 929,238 70,084 68,625 Unrealized Appreciation of Investment Securities, Net of Tax 668,226 321,063 - - Unrealized Loss from Foreign Currency Translation, Net of Tax (3,832) - - - ----------------------------------------------------------------- Stockholders' Equity 2,430,611 1,348,613 112,208 96,625 ----------------------------------------------------------------- Total $ 6,174,407 $11,215,627 $ 527,036 $ 881,474 =================================================================
Other and Eliminations Consolidated ------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 122,247 $ 11,928,144 Fixed Maturities Held-to-Maturity, at Amortized Cost - 2,044,517 Marketable Equity Securities, at Market Value 95,697 1,119,408 Mortgage Loans (139,319) 416,489 Real Estate (At cost less accumulated depreciation) (3,837) 498,958 Policy Loans - 55,925 Short-Term Investments (93,099) 68,808 ------------------------------- Total Investments (18,311) 16,132,249 Cash 8,441 65,477 Accrued Investment Income 1,040 234,253 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) - 741,177 Loans to Affiliates (83,395) - Premiums and Other Service Fees Receivable 4,654 444,618 Other Notes and Accounts Receivable (1,215) 42,139 Reinsurance Recoverables - 137,284 Deferred Policy Acquisition Costs - 356,359 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 25,573 170,016 Other Assets 32,512 167,872 Separate Account Assets - 276,399 ------------------------------- Total $ (30,701) $ 18,767,843 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Losses and Adjustment Expense $- $ 2,207,230 Unearned Premiums - 910,762 Life Policy Liabilities - 154,090 Funds Held Under Deposit Contracts - 8,756,384 Notes and Mortgages Payable: Credit Company Borrowings - Non-Affiliates - 614,270 Credit Company Borrowings - Affiliates (126,605) - 7.875% Notes Due 2005 200,000 200,000 Other Notes and Mortgages - Non-Affiliates 54,868 253,275 Other Notes and Mortgages - Affiliates (161,046) - Other Liabilities (2,008) 895,853 Income Taxes: Current 1,554 18,000 Deferred (Includes tax in unrealized appreciation of investment securities) 7,947 498,934 Separate Account Liabilities - 276,399 ------------------------------- Total Liabilities (25,290) 14,785,197 ------------------------------- Common Stock 190,419 217,447 Additional Paid-In Capital (218,364) - Retained Earnings (1,671) 2,755,537 Unrealized Appreciation of Investment Securities, Net of Tax 24,205 1,013,494 Unrealized Loss from Foreign Currency Translation, Net of Tax - (3,832) ------------------------------- Stockholders' Equity (5,411) 3,982,646 ------------------------------- Total $ (30,701) $ 18,767,843 ===============================
27 Statement of Income - Supplemental Consolidating Information F-3 SAFECO CORPORATION AND SUBSIDIARIES Year Ended December 31, 1996 - -------------------------------------------------------------------------------- (In Thousands)
Property & Other and Casualty Life & Health Real Estate Eliminations Consolidated ------------------------------------------------------------------------- REVENUES Insurance: Property and Casualty Earned Premiums $ 2,275,364 $ - $ - $ - $ 2,275,364 Life and Health Premiums and Other Revenues - 265,924 - - 265,924 ------------------------------------------------------------------------- Total 2,275,364 265,924 - - 2,541,288 Real Estate - - 79,924 - 79,924 Finance - - - 75,699 75,699 Asset Management - - - 23,216 23,216 Other - - - 38,458 38,458 Net Investment Income 281,580 836,715 - (1,561) 1,116,734 Realized Investment Gain 64,738 10,534 (2,611) 17,389 90,050 ------------------------------------------------------------------------- Total 2,621,682 1,113,173 77,313 153,201 3,965,369 ------------------------------------------------------------------------- EXPENSES Losses, Adjustment Expense and Policy Benefits 1,580,509 782,213 - - 2,362,722 Commissions 341,990 73,680 - - 415,670 Personnel Costs 168,806 49,424 13,501 40,602 272,333 Interest - - 22,132 50,234 72,366 Dividends to Policyholders 16,221 - - - 16,221 Other 139,157 67,415 31,239 26,334 264,145 Amortization of Deferred Policy Acquisition Costs 391,210 35,652 - - 426,862 Deferral of Policy Acquisition Costs (400,985) (42,426) - - (443,411) ------------------------------------------------------------------------- Total 2,236,908 965,958 66,872 117,170 3,386,908 ------------------------------------------------------------------------- Income Before Income Taxes 384,774 147,215 10,441 36,031 578,461 ------------------------------------------------------------------------- Provision (Benefit) for Income Taxes: Current 59,159 58,276 11,856 4,187 133,478 Deferred 12,170 (6,468) (7,830) 8,160 6,032 ------------------------------------------------------------------------- Total 71,329 51,808 4,026 12,347 139,510 ------------------------------------------------------------------------- Net Income $ 313,445 $ 95,407 $ 6,415 $ 23,684 $ 438,951 =========================================================================
28 Statement of Cash Flows - Supplemental Consolidating Information F-4 SAFECO CORPORATION AND SUBSIDIARIES Year Ended December 31, 1996 - -------------------------------------------------------------------------------- (In Thousands)
Property & Other and Casualty Life & Health Real Estate Eliminations Consolidated ------------------------------------------------------------------ OPERATING ACTIVITIES Insurance Premiums Received $ 2,297,440 $ 216,802 $ - $ - $ 2,514,242 Dividends and Interest Received 277,933 755,325 2,112 68,223 1,103,593 Other Operating Receipts - 25,798 73,165 73,961 172,924 Insurance Claims and Policy Benefits Paid (1,695,463) (302,955) - - (1,998,418) Underwriting, Acquisition and Insurance Operating Costs Paid (629,712) (183,234) - 11,215 (801,731) Interest Paid - - (20,570) (48,966) (69,536) Other Operating Costs Paid - - (27,223) (61,399) (88,622) Income Taxes Paid (68,269) (72,186) (3,270) (4,394) (148,119) ------------------------------------------------------------------ Net Cash Provided by Operating Activities 181,929 439,550 24,214 38,640 684,333 ------------------------------------------------------------------ INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (475,661) (1,544,998) - (58,884) (2,079,543) Fixed Maturities Held-to-Maturity - (473,206) - - (473,206) Equities (137,739) (799) - (16,399) (154,937) Other Investments - (120,150) (99,280) 29,618 (189,812) Maturities of Fixed Maturities Available-for-Sale 239,849 466,509 - 3,296 709,654 Maturities of Fixed Maturities Held-to-Maturity - 21,694 - - 21,694 Sales of: Fixed Maturities Available-for-Sale 223,870 721,229 - 34,848 979,947 Fixed Maturities Held-to-Maturity - 13,316 - - 13,316 Equities 124,923 10,596 - 46,198 181,717 Other Investments 95 82,257 50,352 (31,730) 100,974 Net (Increase) Decrease in Short-Term Investments 18,819 (482) (11,144) (39,264) (32,071) Finance Receivables Originated or Acquired - - - (378,690) (378,690) Principal Payments Received on Finance Receivables - - - 291,981 291,981 Other (30,464) (1,968) (556) (36,263) (69,251) ------------------------------------------------------------------ Net Cash Used in Investing Activities (36,308) (826,002) (60,628) (155,289) (1,078,227) ------------------------------------------------------------------ FINANCING ACTIVITIES Funds Received Under Deposit Contracts - 1,148,590 - - 1,148,590 Return of Funds Held Under Deposit Contracts - (765,480) - - (765,480) Proceeds from Notes and Mortgage Borrowings - - 74,850 (34,650) 40,200 Repayment of Notes and Mortgage Borrowings - - (104,367) (3,100) (107,467) Net Proceeds from (Repayment of) Short-Term Borrowings (3,654) (7,802) 69,169 155,845 213,558 Common Stock Reacquired - - - (9,571) (9,571) Dividends Paid to Stockholders (139,000) (4,580) (1,348) 5,030 (139,898) Other - - (385) 4,368 3,983 ------------------------------------------------------------------ Net Cash Provided by (Used in) Financing Activities (142,654) 370,728 37,919 117,922 383,915 ------------------------------------------------------------------ Net (Decrease) Increase in Cash 2,967 (15,724) 1,505 1,273 (9,979) Cash at the Beginning of Year 21,052 35,533 (616) 9,508 65,477 ------------------------------------------------------------------ Cash at the End of the Year $ 24,019 $ 19,809 $ 889 $ 10,781 $ 55,498 ==================================================================
29 Summary of Investments Other Than Investments in Related Parties F-5 SAFECO CORPORATION AND SUBSIDIARIES Schedule I December 31, 1996 - -------------------------------------------------------------------------------- (In Thousands)
Amount at Which Shown in the Type of Investment Cost Market Value Balance Sheet - ----------------------------------------------------------------------------------------------------- Fixed Maturities Available-for-Sale Bonds: United States Government and Government Agencies and Authorities $ 1,123,418 $ 1,168,681 $ 1,168,681 States, Municipalities and Political Subdivisions 3,036,139 3,383,899 3,383,899 Mortgage-Backed Securities 2,533,036 2,588,641 2,588,641 Foreign Governments 204,765 249,238 249,238 Public Utilities 2,042,580 2,158,581 2,158,581 Convertibles and Bonds with Warrants Attached 20,300 21,721 21,721 All Other Corporate Bonds 2,119,053 2,168,663 2,168,663 Redeemable Preferred Stocks 191,238 196,819 196,819 ----------------------------------------- Total Fixed Maturities Classified as Available-for-Sale (1) 11,270,529 $11,936,243 11,936,243 ----------------------------------------- Fixed Maturities Held-to-Maturity Bonds: United States Government and Government Agencies and Authorities 244,686 $ 273,848 244,686 States, Municipalities and Political Subdivisions 103,075 106,209 103,075 Mortgage-Backed Securities 291,868 299,571 291,868 Foreign Governments 148,300 172,703 148,300 Public Utilities 545,249 589,099 545,249 All Other Corporate Bonds 1,155,146 1,228,574 1,155,146 ----------------------------------------- Total Fixed Maturities Classified as Held-to-Maturity (1) 2,488,324 $ 2,670,004 2,488,324 ----------------------------------------- Equity Securities Common Stocks: Public Utilities 57,337 $ 97,599 97,599 Banks, Trust and Insurance Companies 45,569 157,208 157,208 Industrial, Miscellaneous and All Other 445,453 914,579 914,579 Non-Redeemable Preferred Stocks 93,482 129,423 129,423 ----------------------------------------- Total Equity Securities 641,841 $ 1,298,809 1,298,809 ----------------------------------------- Other Mortgage Loans on Real Estate (1) 447,988 447,988 Real Estate (Net of depreciation) (1) 554,011 554,011 Policy Loans 58,153 58,153 Short-Term Investments 105,927 105,927 ----------------------------------------- Total Other 1,166,079 1,166,079 ----------------------------------------- Total Investments $15,566,773 $16,889,455 =========== ===========
(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, 1996. 30 Balance Sheet F-6 SAFECO CORPORATION Schedule II (Parent Company Only)
December 31 1996 1995 - -------------------------------------------------------------------------------------- (In Thousands Except Share Amounts) ASSETS 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) $4,168,957 $4,042,909 Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: 1996 - $108,341; 1995 - $78,798) 108,589 80,996 Marketable Equity Securities, at Market Value (Cost: 1996 - $41,960; 1995 - $62,856) 64,372 88,628 Notes Receivable - SAFECO Credit, due 2002 15,000 15,000 Short-Term Investments 5,305 9,005 Other Security Investments - At Cost - 763 ----------------------- Total Investments 4,362,223 4,237,301 Cash 223 115 Dividends Receivable from Affiliated Companies 37,400 34,837 Accounts Receivable from Affiliated Companies 9,530 1,058 Income Taxes - Current 1,580 - Other Assets 6,333 8,505 ----------------------- Total $4,417,289 $4,281,816 =======================
1996 1995 - ----------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts Payable from Affiliated Companies $ 1,751 $ - Accounts and Interest Payable 4,471 4,423 Income Taxes: Current - 544 Deferred 9,095 10,816 Dividends Payable to Stockholders 36,632 33,387 Medium-Term Notes Due 2002 50,000 50,000 7.875% Notes Due 2005 200,000 200,000 --------------------------- Total Liabilities 301,949 299,170 --------------------------- Preferred Stock, No Par Value: Shares Authorized: 10,000,000 Shares Issued and Outstanding: None Common Stock, No Par Value: Shares Authorized: 300,000,000 Shares Reserved for Options: 1996 - 3,344,751; 1995 - 3,699,983 Shares Issued and Outstanding: 1996 - 126,308,237; 1995 - 125,978,742 225,276 217,447 Retained Earnings 3,042,214 2,755,537 Unrealized Appreciation of Investment Securities, Net of Tax 851,401 1,013,494 Unrealized Loss from Foreign Currency Translation, Net of Tax (3,551) (3,832) --------------------------- Stockholders' Equity 4,115,340 3,982,646 --------------------------- Total $ 4,417,289 $ 4,281,816 ===========================
31 Statement of Income F-7 SAFECO CORPORATION Schedule II (Parent Company Only)
Year Ended December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------- (In Thousands) REVENUES Dividends -Non-Affiliates $ 3,412 $ 5,239 $ 6,746 Interest -Affiliates 1,456 858 58 -Others 6,061 11,370 5,035 Equity in Loss of Unconsolidated Affiliate (891) (969) (211) Realized Gain from Security Investments 17,289 6,628 2,685 ----------------------------------- Total 27,327 23,126 14,313 ----------------------------------- EXPENSES Interest 19,322 30,701 25,072 Other 629 638 638 ----------------------------------- Total 19,951 31,339 25,710 ----------------------------------- Income (Loss) Before Income Taxes 7,376 (8,213) (11,397) Provision (Benefit) for Income Taxes (Includes provision on realized gain: 1996 - $6,051; 1995 - $2,320; 1994 - $940) (1,786) 4,099 5,806 ----------------------------------- Income (Loss) Before Equity in Earnings of Subsidiaries 5,590 (4,114) (5,591) Equity in Earnings of Subsidiaries (Includes dividends accrued and received) 433,361 403,073 319,965 ----------------------------------- Consolidated Net Income $ 438,951 $ 398,959 $ 314,374 =================================== Dividends Accrued and Received From Subsidiaries (Cash): SAFECO Insurance Company of America $ 75,000 $ 69,000 $ 78,000 General Insurance Company of America 45,500 45,000 56,000 First National Insurance Company of America 4,000 4,000 6,000 SAFECO National Insurance Company 5,000 3,500 4,000 SAFECO Insurance Company of Illinois 12,000 10,000 6,000 SAFECO Life Insurance Company 4,000 4,000 4,000 SAFECO Administrative Services, Inc. 580 588 720 SAFECO Properties, Inc. 1,411 1,534 4,043 SAFECO Credit Company, Inc. 2,216 1,840 1,508 SAFECO Asset Management Company - 1,000 2,000 ----------------------------------- Total $ 149,707 $ 140,462 $ 162,271 ===================================
32 Statement of Cash Flows F-8 SAFECO CORPORATION Schedule II (Parent Company Only)
Year Ended December 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------- (In Thousands) OPERATING ACTIVITIES Dividends and Interest Received -Affiliates $ 148,600 $ 138,886 $ 128,868 -Others 11,062 16,438 11,447 Interest Paid (19,322) (33,034) (25,317) Other Operating Costs Paid (283) (1,635) (1,330) Income Taxes (Paid) Received (2,125) 5,588 4,399 ----------------------------------- Net Cash Provided By Operating Activities 137,932 126,243 118,067 ----------------------------------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (45,930) - (45,393) Equities (5,000) (3,146) (27,421) Other Investments - (211,764) - Maturities of Fixed Maturities Available-for-Sale 770 770 2,018 Sales of: Fixed Maturities Available-for-Sale 16,208 9,194 4,952 Equities 42,934 22,724 26,285 Other Investments - 196,764 - Net Decrease (Increase) in Short-Term Investments (5,830) (5,620) 41,396 Other 2,349 - (1,000) ----------------------------------- Net Cash Provided By Investing Activities 5,501 8,922 837 ----------------------------------- FINANCING ACTIVITIES Proceeds from Notes and Mortgage Borrowings - 198,664 - Repayment of Notes and Mortgage Borrowings - (201,379) - Capital Contributions to Affiliates - (1,000) (750) Common Stock Reacquired (9,571) (8,690) (5,327) Dividends Paid to Stockholders (139,898) (128,479) (118,387) Other 6,144 5,829 3,626 ----------------------------------- Net Cash Used In Financing Activities (143,325) (135,055) (120,838) ----------------------------------- Net Increase (Decrease) in Cash 108 110 (1,934) Cash at the Beginning of Year 115 5 1,939 ----------------------------------- Cash at the End of Year $ 223 $ 115 $ 5 ===================================
33 Supplementary Insurance Information F-9 SAFECO CORPORATION AND SUBSIDIARIES Schedule III December 31 - -------------------------------------------------------------------------------- (In Thousands)
Other Policy Reserve for Claims and Future Policy Benefits Deferred Benefits, Payable (Funds Policy Losses, Claims Held Under Acquisition and Loss Unearned Deposit Segment Costs Expenses Premiums Contracts - ----------------------------------------------------------------------------------------- 1996 Property and Casualty: Personal $112,533 $1,021,936 $617,533 Commercial and Surety 43,110 1,037,134 320,521 -------------------------------------- Total 155,643 2,059,070 938,054 -------------------------------------- Life and Health: Financial Services 163,802 108,584 6,420 $6,438,456 Employee Benefits 76,662 70,196 2,425 3,354,274 ------------------------------------------------------- Total 240,464 178,780 8,845 9,792,730 ------------------------------------------------------- Real Estate - - - - Credit - - - - Other and Eliminations - - - - ------------------------------------------------------- Consolidated Totals $396,107 $2,237,850 $946,899 $9,792,730 ======================================================= 1995 Property and Casualty: Personal $106,696 $1,112,559 $591,059 Commercial and Surety 39,172 1,068,264 311,494 -------------------------------------- Total 145,868 2,180,823 902,553 -------------------------------------- Life and Health: Financial Services 143,228 109,653 6,283 $5,515,427 Employee Benefits 67,263 70,844 1,926 3,240,957 ------------------------------------------------------- Total 210,491 180,497 8,209 8,756,384 ------------------------------------------------------- Real Estate - - - - Credit - - - - Other and Eliminations - - - - ------------------------------------------------------- Consolidated Totals $356,359 $2,361,320 $910,762 $8,756,384 =======================================================
Other Operating Benefits Amortization of Costs Premiums and Claims, Losses Deferred Policy (Including Service Fee Net Investment and Adjustment Acquisition Dividends to Net Premiums Year Ended December 31 Revenues Income(1) Expenses Costs Policyholders) Written - ----------------------------------------------------------------------------------------------------------------------------------- (in Thousands) 1996 Property and Casualty: Personal $1,650,690 $ 1,204,543 $ 292,886 $148,270 $1,676,258 Commercial and Surety 624,674 375,966 98,324 115,518 636,815 ---------- --------------------------------------------------------------- Total 2,275,364 $ 281,580 1,580,509 391,210 263,788 $2,313,073 ------------------------------------------------------------------------------------------------ Life and Health: - - -- Financial Services 50,705 554,844 459,239 13,756 57,425 Employee Benefits 215,219 281,871 322,974 21,896 90,668 ------------------------------------------------------------------------------- Total 265,924 836,715 782,213 35,652 148,093 ------------------------------------------------------------------------------- Real Estate - - - - 66,872 Credit - - - - 65,166 Other and Eliminations - (1,561) - - 53,405 ------------------------------------------------------------------------------- Consolidated Totals $2,541,288 $ 1,116,734 $2,362,722 $426,862 $ 597,324 =============================================================================== 1995 Property and Casualty: Personal $1,562,716 $ 1,143,191 $ 281,747 $ 140,305 $1,599,700 Commercial and Surety 599,425 383,785 94,790 111,975 607,284 ---------- --------------------------------------------------------------- Total 2,162,141 $ 291,450 1,526,976 376,537 252,280 $2,206,984 ------------------------------------------------------------------------------------------------ Life and Health: Financial Services 47,178 494,758 403,518 12,222 57,839 Employee Benefits 214,392 283,463 319,948 20,154 90,537 ------------------------------------------------------------------------------- Total 261,570 778,221 723,466 32,376 148,376 ------------------------------------------------------------------------------- Real Estate - - - - 65,899 Credit - - - - 58,499 Other and Eliminations - 5,609 - - 56,647 ------------------------------------------------------------------------------- Consolidated Totals $2,423,711 $ 1,075,280 $2,250,442 $408,913 $ 581,701 ===============================================================================
34 Supplementary Insurance Information F-9 SAFECO CORPORATION AND SUBSIDIARIES Schedule III December 31 Continued - -------------------------------------------------------------------------------- (In Thousands)
Other Policy Reserve for Claims and Future Policy Benefits Deferred Benefits, Payable (Funds Policy Losses, Claims Held Under Acquisition and Loss Unearned Deposit Segment Costs Expenses Premiums Contracts - ----------------------------------------------------------------------------------------- 1994 Property and Casualty: Personal $102,745 $1,168,981 $553,811 Commercial and Surety 38,908 1,067,823 304,370 -------------------------------------- Total 141,653 2,236,804 858,181 -------------------------------------- Life and Health: Financial Services 151,614 108,822 6,797 $4,871,635 Employee Benefits 95,576 75,550 1,986 3,116,821 ----------------------------------------------------- Total 247,190 184,372 8,783 7,988,456 ----------------------------------------------------- Real Estate - - - - Credit - - - - Other and Eliminations - - - - ----------------------------------------------------- Consolidated Totals $388,843 $2,421,176 $866,964 $7,988,456 =====================================================
Year ended December 31 - ----------------------------------------------------------------------------------------------------------------------------------- (In Thousands) Other Operating Benefits Amortization of Costs Premiums and Claims, Losses Deferred Policy (Including Service Fee Net Investment and Adjustment Acquisition Dividends to Net Premiums Revenues Income(1) Expenses Costs Policyholders) Written - ----------------------------------------------------------------------------------------------------------------------------------- 1994 Property and Casualty: Personal $1,469,857 $1,142,855 $ 272,545 $122,388 $1,507,546 Commercial and Surety 583,574 385,212 92,651 115,125 595,919 ---------- ------------------------------------------------------------- Total 2,053,431 $ 283,481 1,528,067 365,196 237,513 $2,103,465 ----------------------------------------------------------------------------------------------- Life and Health: Financial Services 46,642 435,101 354,463 9,914 53,680 Employee Benefits 230,129 271,116 319,752 19,493 94,671 ------------------------------------------------------------------------------- Total 276,771 706,217 674,215 29,407 148,351 ------------------------------------------------------------------------------- Real Estate - - - - 97,163 Credit - - - - 47,420 Other and Eliminations - 1,912 - - 45,556 ------------------------------------------------------------------------------- Consolidated Totals $2,330,202 $ 991,610 $2,202,282 $394,603 $ 576,003 ===============================================================================
(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 specificially 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 Reinsurance F-10 SAFECO CORPORATION AND SUBSIDIARIES Schedule IV Year Ended December 31 - -------------------------------------------------------------------------------- (In Thousands)
Assumed Percentage Ceded to from Other of Amount Gross Amount Other Companies Companies Net Amount Assumed to Net --------------------------------------------------------------------------------- 1996 Life Insurance In Force at Year End $28,524,843 $(1,791,116) $ 80,903 $26,814,630 0.3% ================================================================ Premiums earned: Life Insurance $ 120,774 $ (5,586) $ 175 $ 115,363 0.2% Accident/Health Insurance 158,654 (8,093) - 150,561 0.0% Property/Casualty Insurance 2,404,909 (152,637) 23,092 2,275,364 1.0% ---------------------------------------------------------------- Total $ 2,684,337 $ (166,316) $ 23,267 $ 2,541,288 0.9% ================================================================ 1995 Life Insurance In Force at Year End $28,171,372 $(1,303,597) $ 15,532 $26,883,307 0.1% ================================================================ Premiums earned: Life Insurance $ 107,511 $ (4,744) $ 152 $ 102,919 0.1% Accident/Health Insurance 169,900 (5,641) (5,608) 158,651 -3.5% Property/Casualty Insurance 2,300,853 (160,342) 21,630 2,162,141 1.0% ---------------------------------------------------------------- Total $ 2,578,264 $ (170,727) $ 16,174 $ 2,423,711 0.7% ================================================================ 1994 Life Insurance In Force at Year End $28,692,952 $(1,322,748) $ - $27,370,204 0.0% ================================================================ Premiums earned: Life Insurance $ 107,099 $ (4,844) $ 38 $ 102,293 0.0% Accident/Health Insurance 178,405 (4,216) 289 174,478 0.2% Property/Casualty Insurance 2,207,615 (175,861) 21,677 2,053,431 1.1% ---------------------------------------------------------------- Total $ 2,493,119 $ (184,921) $ 22,004 $ 2,330,202 0.9% ================================================================
36 Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations F-11 SAFECO CORPORATION Schedule VI
December 31 Year Ended December 31 - --------------------------------------------------------------------------------------------- ---------------------- (In Thousands) (In Thousands) Reserve For Discount Deferred Unpaid Losses Deducted Affiliation Policy and from with Acquisition Adjustment Loss Unearned Earned Registrant Costs Expenses Reserves Premiums Premiums - --------------------------------------------------------------------------------------------- ------------------ Property/Casualty Subsidiaries: 1996 $ 155,643 $ 2,059,070 $ - $ 938,054 $ 2,275,364 1995 $ 145,868 $ 2,180,823 $ - $ 902,553 $ 2,162,141 1994 $ 141,653 $ 2,236,804 $ - $ 858,181 $ 2,053,431
Losses and Adjustment Amortization Expenses Incurred of Deferred Paid Losses Net Related to: Policy and Investment Acquisition Adjustment Net Premiums Income Current Year Prior Years Costs Expenses Written --------------------------------------------------------------------------------------------------------- Property/Casualty Subsidiaries: 1996 $ 281,580 $ 1,658,253 $ (77,744) $ 391,210 $ 1,694,928 $ 2,313,073 1995 $ 291,450 $ 1,586,675 $ (59,699) $ 376,537 $ 1,549,845 $ 2,206,984 1994 $ 283,481 $ 1,609,392 $ (81,325) $ 365,196 $ 1,430,243 $ 2,103,465
37 SAFECO CORPORATION AND SUBSIDIARIES F-12 Exhibit Index* - -------------------------------------------------------------------------------- Exhibit 3 Bylaws (as amended August 7, 1996), filed as Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996, are incorporated herein by this reference. Restated Articles of Incorporation (as amended May 1, 1996), filed as Exhibit 3 to Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996, 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. Exhibit 10 SAFECO Corporation Deferred Compensation Plan for Directors dated November 2, 1994, filed as Exhibit 10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, is incorporated herein by this reference. 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 Agreements with R.E. Zunker and James W. Ruddy, each dated August 30, 1996, and filed as Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. 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. F-13 Exhibit 11 Computation of Income Per Share F-14 Exhibit 12 Computation of Ratios F-15 Exhibit 21 Subsidiaries of the Registrant Exhibit 13 1996 Annual Report to Stockholders (pages 27 to 73, 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 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 and Chief Financial Officer SAFECO Corporation SAFECO Plaza Seattle, Washington 98185 EX-11 2 COMPUTATION OF INCOME PER SHARE 1 Computation of Income Per Share F-13 SAFECO CORPORATION AND SUBSIDIARIES Exhibit 11
Year Ended December 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- (In Thousands Except Per Share Amounts) Primary Net Income Per Share Of Common Stock 1 Average Number of Common Shares Outstanding 126,074 125,961 125,944 ====================================== 2 Additional Common Shares Assumed Issued Under the Treasury Stock Method 609 587 470 ====================================== 3 Net Income $438,951 $398,959 $314,374 ====================================== 4 Primary Net Income Per Share of Common Stock (L.3/L.1) $ 3.48 $ 3.17 $ 2.50 ======================================
EX-12 3 COMPUTATION OF RATIOS 1 Computation of Ratio of Earnings to Fixed Charges F-14 Year Ended December 31 Exhibit 12 - -------------------------------------------------------------------------------- (In Thousands, Except Ratios)
SAFECO CORPORATION AND SUBSIDIARIES 1996 1995 1994 1993 1992 ----------------------------------------------------------------------------- Earnings Income Before Income Taxes $ 578,461 $ 513,800 $ 389,741 $ 576,937 $ 403,257 Total Fixed Charges Below 76,348 89,727 75,066 63,552 67,761 Less Interest Capitalized (101) (294) (831) (1,381) (154) Less Undistributed Loss from Unconsolidated Subsidiary 891 969 211 574 555 ----------------------------------------------------------------------------- Total Earnings $ 655,599 $ 604,202 $ 464,187 $ 639,682 $ 471,419 ============================================================================= Fixed Charges Interest $ 72,366 $ 85,409 $ 70,340 $ 58,790 $ 64,097 Interest Capitalized 101 294 831 1,381 154 Interest Portion of Rental Expense 3,326 3,194 3,050 2,768 2,855 Amortization of Deferred Debt Expense 555 830 845 613 655 ----------------------------------------------------------------------------- Total Fixed Charges $ 76,348 $ 89,727 $ 75,066 $ 63,552 $ 67,761 ============================================================================= Ratio of Earnings to Fixed Charges 8.6 6.7 6.2 10.1 7.0 =============================================================================
SAFECO CREDIT 1996 1995 1994 1993 1992 --------------------------------------------------------------- Earnings Income Before Income Taxes $19,081 $13,300 $10,761 $10,190 $ 9,036 Total Fixed Charges Below 47,544 41,854 30,721 26,056 26,800 --------------------------------------------------------------- Total Earnings $66,625 $55,154 $41,482 $36,246 $35,836 =============================================================== Fixed Charges Interest $47,448 $41,772 $30,652 $25,918 $26,646 Interest Portion of Rental Expense 96 82 69 100 102 Amortization of Deferred Debt Expense - - - 38 52 --------------------------------------------------------------- Total Fixed Charges $47,544 $41,854 $30,721 $26,056 $26,800 =============================================================== Ratio of Earnings to Fixed Charges 1.4 1.3 1.4 1.4 1.3 ===============================================================
EX-13 4 1996 ANNUAL REPORT TO STOCKHOLDERS 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFECO Corporation (the Corporation) is a Washington corporation that owns operating subsidiaries in various segments of insurance and other financially related businesses. (The Corporation and its subsidiaries are collectively referred to as "SAFECO".) The insurance subsidiaries engage in both property and casualty insurance and life and health insurance. SAFECO Properties and its subsidiaries invest in and manage real estate properties, primarily retail centers. SAFECO Credit Company provides loans and equipment financing and leasing to commercial businesses including affiliated companies. SAFECO Asset Management provides asset management services to the SAFECO family of mutual funds, SAFECO Trust Company and outside managed accounts. CAPITAL RESOURCES AND LIQUIDITY SAFECO's primary sources of cash are insurance premiums, funds received under deposit contracts, dividends, interest, rental income and asset management fees. 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, 1996, 1995 and 1994 was $684.3 million, $702.1 million and $753.0 million, respectively (see Statement of Consolidated Cash Flows on page 44). The lower amounts of operating cash flow in 1996 and 1995 were primarily due to increased claim payments caused by catastrophe losses (see pages 30 and 31 for additional discussion). The increases in property and casualty insurance premiums received in 1996 and 1995 resulted from a combination of rate increases and higher numbers of policies in force. The increases in dividends and interest received in both 1996 and 1995 were due mainly to the increasing invested asset base of the life and health insurance companies. Although property and casualty cash flow from operations was positive in all three years, the recent high level of catastrophe losses combined with the relatively low interest rate environment and a high level of bond call activity has dampened the growth of investment income. Property and casualty investment income is expected to grow slowly in 1997. The high level of proceeds from the maturity of fixed maturities in all three years was due to the high number of calls of fixed maturities and prepayments of mortgage-backed securities. These calls and prepayments were primarily due to the declining interest rate environment. Changes in interest rates have also caused fluctuations in the market value of fixed maturity investments. This has affected SAFECO's reported book value (stockholders' equity) because the difference between market value and amortized cost of fixed maturities classified as available-for-sale is included in stockholders' equity, net of tax. The real estate and credit subsidiaries have ongoing needs for outside capital. The real estate subsidiaries borrow from life insurance companies, banks, savings and loan associations and other lenders. At December 31, 1996, the real estate subsidiaries had notes and mortgages payable to non-affiliates of $165.1 million, of which $28.2 million was due within one year. It is anticipated that these obligations will be met through a combination of rollovers and replacement borrowings. 27 2 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, 1996 of $808.8 million, of which $763.9 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 1997. SAFECO Credit enters into interest rate swap agreements to reduce the impact of changes in interest rates on its variable rate debt by converting variable rate interest payments to fixed rates. The interest rate swap agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage. At December 31, 1996, interest rate swap agreements were outstanding with notional amounts of $249.0 million, replacing variable rates with fixed rates with a weighted average rate of 6.0%. Maturities of these agreements range from June 1997 to November 2003. At December 31, 1995, interest rate swap agreements were outstanding with notional amounts of $134.9 million, replacing variable rates with fixed rates with a weighted average rate of 6.0%. The notional amount of interest rate swaps outstanding is higher in 1996 compared with 1995 because SAFECO Credit has increased its use of rate swaps to correspond with the increase in variable rate debt. In 1995 SAFECO Corporation issued $200 million of 7.875% notes due in April 2005, under a Securities and Exchange Commission (SEC) shelf registration. The proceeds were used to replace SAFECO Corporation's then existing $200 million of 10.75% notes which matured in 1995. Prior to the shelf registration noted above, SAFECO Corporation and SAFECO Credit initiated a combined shelf registration in 1990. SAFECO Credit issued $149.9 million of medium-term notes under this registration, of which $46.5 million remained outstanding as of December 31, 1996. These debt securities issued by SAFECO Credit are guaranteed by SAFECO Corporation. SAFECO Corporation 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. SAFECO Life Insurance Company's ratings are A++ by A.M. Best, AA by Standard & Poor's and Aa2 by Moody's. The financial strength ratings are important in marketing insurance products. Many life insurance companies' pension and annuity products have been affected in recent years by general economic conditions, strong returns in the equity markets, rating downgrades, increased competition and decisions by plan sponsors to diversify assets and fund management. SAFECO Life has experienced an increase in the level of withdrawal of funds from its retirement services and annuity business due to scheduled payouts on distribution-type products and the interest rate environment (see Statement of Consolidated Cash Flows on page 44 - -- Return of Funds Held Under Deposit Contracts). However, SAFECO Life's overall withdrawal experience remains relatively modest, and proceeds from the sale of fixed income retirement services and annuity products have remained relatively stable. Of the total of $9.8 billion in deposit contracts at December 31, 1996, approximately 47% 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 5 to 12 years and associated surrender charges graded from 5% in year one to zero in year six. Other retirement services products, comprising approximately 31% 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 nine, and SAFECO Life retains the option to defer payouts over five years on approximately one quarter of these contracts. SAFECO Life's guaranteed investment contracts (GICs) within its retirement services area comprise approximately 4% of total deposit contracts. 28 3 SAFECO is not aware of any recently passed or current recommendations by regulatory authorities which have or would have, if passed, a material effect on its liquidity, capital resources or results of operations. The state of Washington has rules which limit the amount of dividend payments that can be made by Washington-domiciled insurance companies without prior regulatory approval. However, it is expected these rules 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 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. SAFECO's life and property and casualty companies have more than sufficient capital to meet the RBC requirements. Similarly, the NAIC's proposed 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. The NAIC has undertaken a major project to codify statutory accounting principles. While the impact of these proposals is currently being studied, the effect on statutory surplus is not expected to be material. 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 47 through 51 of this report.
YEAR ENDED DECEMBER 31 1996 1995 1994 --------- -------- -------- (In Thousands Except Per Share Amounts) INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN: PROPERTY AND CASUALTY ..................................................... $ 270,644 $256,408 $192,734 LIFE AND HEALTH ........................................................... 88,780 88,988 84,941 REAL ESTATE ............................................................... 8,411 5,929 6,568 CREDIT .................................................................... 12,178 8,872 7,365 ASSET MANAGEMENT .......................................................... 5,105 4,746 4,116 CORPORATE ................................................................. (4,901) (7,536) (7,272) --------- -------- -------- TOTAL .................................................................. 380,217 357,407 288,452 --------- -------- -------- REALIZED GAIN (LOSS), NET OF INCOME TAXES, FROM: SECURITY INVESTMENTS ...................................................... 60,730 42,083 26,035 REAL ESTATE INVESTMENTS ................................................... (1,996) (531) (113) --------- -------- -------- TOTAL .................................................................. 58,734 41,552 25,922 --------- -------- -------- NET INCOME .................................................................... $ 438,951 $398,959 $314,374 --------- -------- -------- NET INCOME PER SHARE OF COMMON STOCK: INCOME BEFORE REALIZED GAIN ............................................... $ 3.02 $ 2.84 $ 2.29 REALIZED GAIN ............................................................. .46 .33 .21 --------- -------- -------- NET INCOME ................................................................ $ 3.48 $ 3.17 $ 2.50 --------- -------- --------
29 4 PROPERTY AND CASUALTY -- OPERATIONS Through independent agents, SAFECO's property and casualty subsidiaries write personal, commercial and surety lines of insurance. Coverages include automobile, homeowners, fire and allied lines, workers' compensation, commercial multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in nearly all states and the District of Columbia. Approximately 23% of SAFECO's property and casualty premiums are written in California and approximately 45% of premiums are written in the three west coast states of California, Washington and Oregon. SAFECO's writing of new property business continues to be restricted in California to reduce its exposure to large single-event catastrophes (see discussion on page 31). SAFECO's emphasis for future personal lines growth is in various target states, mostly east of the Rocky Mountains. Voluntary personal, commercial and surety lines (which exclude assigned risk, FAIR plans, etc.) comprised approximately 70%, 25% and 4%, respectively, of the 1996 gross premiums written. The gross premiums written growth set forth in the table on page 32 of 4.1% in 1996 was comprised of a 4.8% increase for personal, a 2.3% increase for commercial and a 3.1% increase for surety lines. Gross premiums written growth of 3.9% in 1995 was comprised of a 5.3% increase for personal, a decrease of 0.8% for commercial and an increase of 10.9% for surety lines. The 1996 growth in personal lines premiums resulted from both rate increases and an increase in policies in force. The number of vehicles insured increased 5.3% in 1996, compared with 1.8% in 1995 and 1.3% in 1994. The increase in 1996 came primarily from growth in targeted states east of the Rocky Mountains. The modest growth rates in 1995 and 1994 were caused primarily by rate increases. Continued growth in the number of vehicles insured is expected in 1997, particularly in target states. The number of homes insured increased 2.4% in 1996, 1.2% in 1995 and 2.7% in 1994. This moderate growth rate was due to rate increases in recent years and to the moratorium on the writing of new homeowners policies in California (discussed on page 31). SAFECO's commercial lines premiums were affected in both 1996 and 1995 by increased rate competition in workers' compensation, particularly in California due to open rating, and increased rate competition in commercial auto. The increase in surety premiums in 1996 and 1995 was primarily due to new commercial and contract accounts acquired. Losses caused by catastrophes have had a significant impact on SAFECO's results. Catastrophe losses for all lines, net of reinsurance, totaled $104 million, $143 million and $153 million in 1996, 1995 and 1994, respectively. These losses related primarily to homeowners and other personal lines coverages (which include earthquake coverages), discussed in more detail below. The January 1994 Los Angeles earthquake was a significant factor in the 1995 and 1994 catastrophe losses. SAFECO's gross losses for all lines (before reinsurance) from the earthquake were $267 million. Net of reinsurance, the losses were $132 million. Of this net amount, $90 million was reflected in 1994 results and $42 million was reflected in 1995 results. The 1995 losses were due to subsequent increases in the estimated cost of claims from the earthquake. The total 1994 amount charged to earnings from the earthquake of $113 million included $23 million to reinstate reinsurance coverage for a second catastrophe in the event it occurred in 1994. SAFECO's strategy to reduce the impact of future catastrophe losses includes continuing to maintain a strong catastrophe reinsurance program (see discussion on page 33) and reducing exposures by obtaining higher deductibles on earthquake coverages in some states. SAFECO has restricted the writing of new property business in catastrophe-prone states and has implemented spread-of-risk strategies in states such as Colorado and Texas to help mitigate the effects of hail and wind storm losses. In addition, for the last several years SAFECO has invested in earthquake and wind modeling technologies which allow it to better monitor exposures. Voluntary personal auto, SAFECO's largest single line of business, produced pretax underwriting profits of $57.2 million, $87.4 million, and $43.4 million for 1996, 1995 and 1994, respectively. Average auto rates decreased 1% in 1996, after increases of 3% in both 1995 and 1994. This trend reflects the increased competition in this line. Average loss costs (which include the severity or cost of settling claims and the frequency of accidents) increased by 3% in 1996 over 1995, after declining slightly in 1995 compared to 1994. Due to the increasing competition in the personal auto business the underwriting profit levels of 1996 and 1995 may be difficult to achieve in 1997. The homeowners line produced pretax underwriting losses of $73.1 million, $54.2 million and $33.6 million in 1996, 1995 and 1994, respectively. Losses due to catastrophes continue to affect results for this line. Catastrophe losses for homeowners totaled $69 million, $70 million and $36 million after reinsurance in 1996, 1995 and 1994, respectively. 30 5 In addition, weather-related losses not classified as catastrophes increased by $16 million in 1996 over 1995. Some of the more significant catastrophe losses in 1996 included $16 million from a late December storm that hit the Puget Sound area, $7 million from wind and hail storms in Kentucky and Illinois in early May and $5 million from a windstorm in Phoenix in August. Significant losses in 1995 included $18 million from two late spring hail storms that hit the Dallas area, $16 million from West Coast storms in December and $11 million from storms in California in January and March. Average homeowners rates were increased 6%, 8% and 6% in 1996, 1995 and 1994, respectively. SAFECO's total homeowners premiums increased 7%, 9% and 11% in 1996, 1995 and 1994, respectively, due to rate increases, increases in the number of homes insured and continuing efforts to increase homeowners insurance to value. Rate increases and insurance-to-value efforts, combined with restricted writings, higher deductibles and spread of risk strategies in catastrophe-prone areas are all being pursued to improve future results in homeowners. A continuing increase in premiums per policy is expected in 1997 as a result of planned rate increases and the ongoing insurance-to-value effort. Excluding the impact of catastrophes, these measures are expected to improve homeowners' results in 1997. Other personal lines produced an underwriting gain of $20.2 million in 1996 and losses of $30.9 million in 1995 and $76.1 million in 1994. Coverages in these lines include earthquake, dwelling fire, inland marine and boats. The losses in 1995 and 1994 were due to the January 1994 Los Angeles earthquake. Losses from the earthquake included in these lines totaled $40 million in 1995 and $105 million, net of reinsurance, in 1994 (includes $23 million reinsurance reinstatement premium). SAFECO suspended writing new homeowners, dwelling fire and condominium policies in California in July 1994 because California requires insurers to offer earthquake coverage in connection with homeowners and other residential policies. SAFECO received approval of a new earthquake mini-policy in California in September of 1996 and began to convert existing homeowners policies to the more limited coverage provided by the mini-policy as they reach renewal date. SAFECO also modified its earthquake policies in several other states to increase the deductible. SAFECO believes federal legislation is necessary to create a permanent, long-term solution for the losses that arise from natural disasters such as earthquakes. Commercial operations produced a pretax underwriting gain of $1.6 million in 1996, compared with underwriting losses of $12.7 million and $22.5 million in 1995 and 1994, respectively. Even with continuation of the competitive commercial insurance market, SAFECO has experienced some modest renewal price increases for the past three years. The underwriting gain in 1996 was due mainly to improved results in the commercial auto line and the run-off of loss reserves related to certain discontinued commercial liability coverages. This improvement was partly offset by $16 million of commercial losses caused by the December 1996 Puget Sound storm. The lower loss in 1995 compared with 1994 was due mainly to improved results in the general liability line. Workers' compensation produced underwriting gains in all three years. However, continued rate competition resulting from certain states enacting workers' compensation reforms has reduced premiums. This rate competition is expected to continue into 1997. The effects of lower rates are expected to be partly offset by the beneficial impact of these reforms. Overall, SAFECO's voluntary commercial lines combined ratio was 98.8, 102.4 and 104.3 for 1996, 1995 and 1994, respectively. The combined ratios for all three years compare favorably with the industry and are a result of continued disciplined risk selection, relatively 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. The surety line produced pretax underwriting profits of $26.9 million, $22.3 million and $16.1 million for 1996, 1995 and 1994, respectively. Results in both the contract and commercial lines were excellent in all three years. Due to continuing intense competition in both lines, the record level of income in 1996 may be difficult to achieve in 1997. Other insurance product lines (primarily assigned risk and FAIR plans) produced an underwriting gain of $5.7 million in 1996, compared with losses of $5.5 million and $4.6 million in 1995 and 1994, respectively. The improvement in 1996 was due to reduced losses in both commercial and personal assigned risk business and to the continued depopulation of these plans in many states. SAFECO sold its Canadian property and casualty operations in 1991 with no significant gain or loss resulting from the transaction. Canadian underwriting profits were $4.5 million, $6.7 million and $8.4 million for 1996, 1995 and 1994, 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 $86 million and $113 million at December 31, 1996 and 1995, respectively. 31 6 PROPERTY AND CASUALTY OPERATING STATISTICS
1996 1995 1994 ---------- ---------- ---------- PERCENTAGE INCREASE PERCENTAGE PERCENTAGE (DECREASE) INCREASE INCREASE OVER PRIOR OVER PRIOR OVER PRIOR YEAR YEAR YEAR ---------- ---------- ---------- (in thousands) GROSS PREMIUMS WRITTEN ............................. $2,463,501 4.1% $2,366,856 3.9% $2,278,045 6.7% ---------- ---------- ---------- NET PREMIUMS WRITTEN ............................... $2,313,073 4.8 $2,206,984 4.9 $2,103,465 5.2 ---------- ---------- ---------- EARNED PREMIUMS .................................... $2,275,364 5.2 $2,162,141 5.3 $2,053,431 6.4 ---------- ---------- ---------- UNDERWRITING PROFIT (LOSS) ......................... $ 38,456 $ 6,348 $ (77,345) NET INVESTMENT INCOME .............................. 281,580 (3.4) 291,450 2.8 283,481 2.1 ---------- ---------- ---------- INCOME BEFORE REALIZED INVESTMENT GAIN AND INCOME TAXES .......................... $ 320,036 $ 297,798 $ 206,136 ---------- ---------- ----------
1996 1995 1994 ----- ----- ------ OPERATING RATIOS AS A PERCENTAGE OF EARNED PREMIUMS ------------------------------------ LOSS RATIO .................................................................... 59.09% 60.04% 64.70% ADJUSTMENT EXPENSE RATIO ...................................................... 10.37 10.58 9.72 EXPENSE RATIO ................................................................. 28.14 28.39 28.24 DIVIDENDS TO POLICYHOLDERS .................................................... .71 .70 1.11 ----- ----- ------ COMBINED RATIO ............................................................ 98.31% 99.71% 103.77% ----- ----- ------
PROPERTY AND CASUALTY -- LOSS RESERVES The liability (reserves) for losses and adjustment expense for the property and casualty companies was $2,059 million at December 31, 1996, compared to $2,181 million at December 31, 1995. The decline in this liability at December 31, 1996 compared to December 31, 1995 was due in part to losses paid in 1996 related to the 1994 Los Angeles earthquake, to the run-off of loss reserves related to the sold Canadian operations discussed previously and to the run-off of loss reserves related to certain discontinued commercial liability coverages. The liability is presented net of amounts recoverable from salvage and subrogation recoveries (see Note 1 on page 53) and gross of amounts recoverable from reinsurance (see Note 5 on page 61). The amount of reinsurance recoverables related to the above gross liabilities was $103.4 million at December 31, 1996 and $110.7 million at December 31, 1995. Reserves for losses that have been reported to SAFECO and certain legal expenses are established on the "case basis" method. Claims incurred but not reported (IBNR) and other adjustment expense are estimated using statistical procedures. Salvage and subrogation recoveries are accrued using the "case basis" method for large claims and statistical procedures for smaller claims. 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 claim 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 and adjusted as necessary; such adjustments are included in current operations. 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, 1996, 1995 and 1994. Operations were credited $77.7 million, $59.7 million and $81.3 million in 1996, 1995 and 1994, respectively, as a result of a reduction in the estimated amounts needed to settle prior years' claims. 32 7 SAFECO's property and casualty companies' reserves for losses and adjustment expense for liability coverages related to environmental, asbestos and other toxic claims totaled $102.8 million at December 31, 1996, compared with $107.5 million at December 31, 1995. 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, 1996 and 1995. 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, small commercial package policies and personal lines. The following table presents the loss reserve activity analysis for liability coverages related to environmental, asbestos and other toxic claims.*
1996 1995 1994 -------- --------- -------- (in thousands) RESERVES AT BEGINNING OF YEAR $107,510 $ 108,230 $113,410 INCURRED LOSSES AND ADJUSTMENT EXPENSE 4,605 9,323 10,252 LOSSES AND ADJUSTMENT EXPENSE PAYMENTS (9,360) (10,043) (15,432) -------- --------- -------- RESERVES AT END OF YEAR $102,755 $ 107,510 $108,230 -------- --------- --------
* Amounts are before the effect of reinsurance, which is insignificant. In view of changes in environmental regulations and evolving case law which affect the development of loss reserves, the process of estimating loss reserves for environmental, asbestos and other toxic claims results in imprecise estimates. Quantitative 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. Although estimation of environmental claims is a difficult process, the reserves established for these claims at December 31, 1996 are believed to be adequate based on the known facts and current law. SAFECO has generally avoided writing coverages for larger companies with substantial exposure in these areas. SAFECO's property and casualty companies 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 $103.4 million at December 31, 1996 and $110.7 million at December 31, 1995. SAFECO's catastrophe property reinsurance program for 1997 covers 90% of $400 million of single event losses in excess of a $100 million retention. In the event of a substantial catastrophe, SAFECO would, therefore, retain the first $100 million of losses, 10% of the next $400 million and all losses in excess of $500 million. In addition to this nationwide coverage, for the states of Washington and Oregon SAFECO has an additional earthquake reinsurance contract for 1997 that would cover 90% of $100 million of single event earthquake losses in excess of $500 million. Both of these 1997 catastrophe property reinsurance contracts include provisions for one reinstatement for a second catastrophe event in 1997 at current rates. The aggregate coverage limit is higher for 1997 than in prior years and the additional Northwest earthquake coverage was new in 1996. SAFECO's insurance subsidiaries do not enter into retrospective reinsurance contracts and do not participate in any unusual or nonrecurring reinsurance transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO does not use "funding covers" and does not participate in any surplus relief transactions. None of SAFECO's significant reinsurers are experiencing financial difficulties. Additional information on reinsurance can be found in Note 5 on page 61. 33 8 LIFE AND HEALTH The life and health companies offer individual and group insurance products, retirement services (pension) and annuity products. These products are marketed through professional agents in all states and the District of Columbia. The most significant product lines in terms of premium/deposit volume include: single premium immediate and deferred annuities, tax-sheltered annuities for the education and nonprofit entities market, corporate retirement plans and excess loss group medical insurance. Earnings before investment transactions and income taxes ("pretax income") for all lines combined were $136.7 million in 1996, compared with $135.6 million in 1995 and $131.0 million in 1994. The following table summarizes the profit contributions of the life and health companies major product lines:
1996 1995 1994 -------- --------- -------- (In Thousands) ANNUITIES $ 27,738 $ 31,249 $ 28,363 RETIREMENT SERVICES 23,901 27,277 19,298 GROUP 12,606 13,329 23,129 INDIVIDUAL 4,173 (1,272) 1,579 CORPORATE AND OTHER 68,263 64,990 58,646 -------- --------- -------- PRETAX INCOME $136,681 $ 135,573 $131,015 -------- --------- --------
The annuity operations produced pretax income of $27.7 million, $31.2 million and $28.4 million in 1996, 1995 and 1994, respectively. Approximately 80% ($4.7 billion at December 31, 1996) of annuity assets relate to single premium immediate annuities (SPIAs). These are sold to fund third party personal injury settlements and are nonsurrenderable contracts. The invested assets supporting these annuities are primarily long-maturity bonds. New SPIA deposits were $460 million in 1996, compared with $488 million in 1995 and $402 million in 1994. SPIA pretax income was $23.0 million, $24.9 million and $23.3 million in 1996, 1995 and 1994, respectively. The remaining 20% of annuity assets are deferred annuities. These are primarily fixed rate annuities marketed through financial institutions by SAFECO's subsidiary, Talbot Financial Corporation. Deferred annuity deposits were $164 million in 1996, $188 million in 1995 and $296 million in 1994. Lower interest rates and competition from equity-linked products were the main reasons for lower income from annuity operations in 1996, as well as the decline in deposit volume for both the SPIA and deferred annuity lines. SAFECO Life has recently introduced a new equity-indexed annuity to complement its fixed return products. Total annuity assets amounted to $5.9 billion at December 31, 1996 compared with $5.4 billion at December 31, 1995 and $4.7 billion at December 31, 1994. Retirement services operations produced pretax income of $23.9 million, $27.3 million and $19.3 million in 1996, 1995 and 1994, respectively. Retirement services' profits in all three years have benefited from improved investment performance and a larger asset base. The decline in 1996 income compared to 1995 was primarily due to a gradual increase in rates credited to policyholders caused by competitive market conditions. Retirement services products are primarily tax-sheltered annuities which are marketed to teachers and employees of hospitals and charitable organizations, IRAs and corporate retirement funds. SAFECO Life has protection against early policy surrenders or withdrawals of most of these products in the form of surrender charges during the initial years of each policy or the option to defer payouts over 20 quarters. Retirement services had $3.8 billion of assets on deposit at December 31, 1996 compared with $3.5 billion at December 31, 1995 and $3.3 billion at December 31, 1994. New retirement services deposit growth has slowed in recent years as lower interest rates have hampered sales of fixed return products. Although variable return products currently are a relatively small percentage of retirement services' assets, SAFECO Life is successfully focusing its efforts on these types of products. The group life and health operations contributed $12.6 million to 1996 pretax income, compared with income of $13.3 million in 1995 and $23.1 million in 1994. The strategic focus of the group operation is excess loss medical insurance, sold to self-insured employers, which accounted for $11.8 million, $14.4 million and $18.5 million of income in 1996, 1995 and 1994, respectively. Total medical profit, which includes some small-case, fully insured business, declined in 1996. Total group premiums decreased 1% during 1996, compared with decreases of 8% in 1995 and 12% in 1994. The decline in premium in the past three years was due primarily to greater competition in the excess loss market. Because of the competition since 1994, as well as the uncertainty caused by the healthcare reform debate, SAFECO Life avoided writing business at unrealistic rates and, as a result, experienced some loss of in-force medical business. With the defeat of national healthcare reform legislation, SAFECO Life has begun to increase its writings of excess loss medical insurance, as this market appears to be more attractive than in the past. 34 9 In addition to the competitive conditions noted above, in 1996 the results of the group operations were affected by adverse medical claims experience. In 1995, results were affected by adverse medical and life claims experience. In 1996 SAFECO Life began reinsuring 100% of its long-term disability business, which should benefit future earnings. This business had been producing unacceptable results. SAFECO continues to sell life and disability coverages in combination with medical coverages, but no longer actively pursues the stand-alone life and disability market. The individual life operations produced a pretax gain of $4.2 million in 1996, a loss of $1.3 million in 1995 and a gain of $1.6 million in 1994. The poor results in both 1995 and 1994 were primarily caused by increased death claims. The improvement in 1996 results was due in part to lower death claims and profits from a new bank-owned life insurance program. 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. It is a major component of SAFECO's life and health earnings, contributing pretax income of $68.3 million in 1996, $65.0 million in 1995 and $58.6 million in 1994. SAFECO's life insurance subsidiaries have not participated as a ceding company in any assumptive reinsurance transactions. See Note 5 on page 61 for additional information regarding reinsurance. REAL ESTATE SAFECO Properties, Inc., through Winmar Company, Inc., invests in and manages real estate properties, primarily retail centers, throughout the United States. SAFECARE Company, Inc., invests in medical real estate, primarily skilled nursing facilities. The real estate subsidiaries produced pretax income before investment transactions ("pretax income") of $13.1 million, $9.1 million and $10.2 million in 1996, 1995 and 1994, respectively. These pretax income amounts include gains from the sale of properties held for sale of $2.7 million, $1.9 million and $5.6 million in 1996, 1995 and 1994, respectively. The increases in pretax income (excluding these gains) in 1996 over 1995 and in 1995 over 1994 were due to improved operating results on shopping center properties and to recommencing the capitalization of carrying costs in 1995 on a mixed-use development project. Construction and pre-leasing on this development began in July 1995; the opening date is expected to be in mid-1997. In addition to the pretax income amounts above, the real estate subsidiaries realized pretax investment losses of $2.6 million, $0.8 million, and $0.2 million in 1996, 1995 and 1994, respectively. The 1996 realized investment loss was the result of a $20 million loss reserve related to SAFECO Properties' guarantee of outstanding debt financing for a not-for-profit hospital, offset by a $17.4 million gain on the sale of a shopping center. Results in all three years have been affected by the slow real estate economy and the general softness in the retail industry. Because of these conditions, SAFECO Properties' strategy is to emphasize smaller projects and enhancements to existing properties. At December 31, 1996, investment real estate held by SAFECO Properties totaled $552 million, approximately 3% of SAFECO's consolidated investments. Major retail shopping centers (including land held for development), office and industrial space and healthcare facilities comprised approximately 80% of the total. Approximately 65% of total holdings are located in the states of Washington and Oregon. Rental properties included in investment real estate are detailed in Note 13 on page 66. CREDIT SAFECO Credit Company, Inc., provides loans and equipment financing and leasing to commercial businesses, including affiliated companies. Credit operations produced pretax income of $19.1 million in 1996, compared with $13.3 million in 1995 and $10.8 million in 1994. Loan and lease receivables from non-affiliates grew 14% in 1996 and 21% in 1995. Continued growth in receivables is expected. The strong earnings in all three years are primarily attributable to the continuing increase in loan production, combined with favorable collection experience and low delinquencies. Approximately 70% of total loan and lease receivables outstanding at December 31, 1996 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. At December 31, 1996, 14% of the outstanding loans and leases of SAFECO Credit consisted of loans to affiliated SAFECO companies. 35 10 ASSET MANAGEMENT SAFECO Asset Management Company is the investment advisor for the SAFECO mutual funds, variable annuity portfolios and a growing number of outside pension and trust accounts. These investment management activities produced pretax income of $7.6 million in 1996, $6.9 million in 1995 and $6.4 million in 1994. Assets under management continue to grow and totaled $3.3 billion at December 31, 1996, an increase of 8% over 1995. In 1994 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. INVESTMENT SUMMARY SAFECO's consolidated pretax investment income increased to $1,116.7 million during 1996 from $1,075.3 million in 1995 and $991.6 million in 1994. 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 $281.6 million in 1996, $291.5 million in 1995 and $283.5 million in 1994, representing a decrease of 3% in 1996, and increases of 3% in 1995 and 2% in 1994. Although property and casualty cash flow was positive in all three years, the recent high level of catastrophe losses combined with the relatively low interest rate environment and a high level of bond call activity has dampened the growth of investment income. The decline in 1996 investment income was particularly affected by reduced cash flow in the first part of the year caused by catastrophe and weather-related claim payments. Growth in investment income in 1997 is expected to be slowed by the lower interest rate environment. The life and health companies' pretax investment income was $836.7 million in 1996, $778.2 million in 1995 and $706.2 million in 1994. The growth in all years was due primarily to the increasing amount of retirement services and annuity assets under management. Consolidated pretax realized gains from security investments totaled $92.7 million in 1996 compared with $65.1 million and $39.2 million in 1995 and 1994, respectively. The higher level of gains in 1996 and 1995 was due primarily to falling interest rates which produced calls, redemptions and mortgage pay-downs on debt securities and to the strong stock market. 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 1996, 1995 and 1994 were $5.5 million, $13.6 million and $4.8 million, respectively. These writedowns relate primarily to fixed income securities which were investment grade when purchased and later downgraded. The low amount of writedowns in all three years reflects the high quality of SAFECO's portfolios. SAFECO's property and casualty investment portfolio totaled $5.2 billion at market value at December 31, 1996. The investment philosophy for this portfolio is to emphasize investment yield without sacrificing investment quality. Fixed income securities comprised 76% of this portfolio while equity securities comprised 23% (see table on page 38). The property and casualty fixed income portfolio, which totaled $3.9 billion at market value at December 31, 1996, is currently comprised of 83% tax-exempt and 17% taxable investments. The property and casualty companies are presently investing new money primarily in long-maturity, high-quality 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 1996 was 12%, compared with 13% in both 1995 and 1994. On an after-tax basis, investment income decreased 2% in 1996 and increased 3% in 1995 and 4% in 1994. The quality of the property and casualty companies' fixed income portfolio is detailed in the following table:
PERCENT AT RATING DECEMBER 31, 1996 - ------------------------------------------------------------- AAA ................................................ 51% AA ................................................. 23 A .................................................. 18 BBB ................................................ 7 BB OR LOWER ........................................ 1 --- TOTAL ....................................... 100% ===
36 11 SAFECO's life and health investment portfolio totaled $11.3 billion at market value at December 31, 1996. Fixed income securities, all of which are taxable, comprised 93% of this investment portfolio at December 31, 1996. 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. The quality of the life and health companies' fixed income portfolio is detailed in the following table:
PERCENT AT RATING DECEMBER 31, 1996 - -------------------------------------------------------------- AAA ................................................. 41% AA .................................................. 8 A ................................................... 29 BBB ................................................. 20 BB OR LOWER ......................................... 2 --- TOTAL ........................................ 100% ===
This portfolio contains $239.2 million, at market value, of securities below investment grade quality. This was approximately 2% of the total $10.5 billion life and health fixed income portfolio at market value at December 31, 1996. On a consolidated basis, below investment grade securities with a market value of $266.3 million were held at December 31, 1996. This was less than 2% of total consolidated investments at market value of SAFECO Corporation and subsidiaries at December 31, 1996. SAFECO's consolidated investment in "exotic" securities and high-risk derivatives was less than 1% of SAFECO's total investments at both December 31, 1996 and 1995. SAFECO has intentionally avoided investing in these types of securities. In addition, SAFECO does not enter into financial instruments for trading or speculative purposes. SAFECO's consolidated investments in mortgage-backed securities -- primarily residential collateralized mortgage obligations and pass-throughs -- totaled $2.9 billion at market value at December 31, 1996. Virtually all of these securities are held in the life and health portfolio. Approximately 96% of the mortgage-backed securities are government/agency backed or AAA rated at December 31, 1996. Less than 1% of SAFECO's mortgage-backed securities are of the riskier, more volatile type (e.g., interest only, inverse floaters, etc.). SAFECO has intentionally not invested significant amounts in the riskier types of mortgage-backed securities. SAFECO Corporation, the parent company, holds an investment portfolio of securities at market value that totaled $187.8 million at December 31, 1996, compared with $178.6 million at December 31, 1995. The majority of these securities are high quality preferred stocks and U.S. Treasuries. SAFECO's consolidated investment portfolio also includes $448.0 million of mortgage loan investments at December 31, 1996, 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 55% of the total in California. Individual loans generally do not exceed $5 million. Less than 3% of the loans were non-performing at both December 31, 1996 and 1995. The allowance for mortgage loan losses was $10.9 million at December 31, 1996 and $9.6 million at December 31, 1995. For a discussion of SAFECO's investment in real estate, which is made through SAFECO Properties, Inc., see page 35 of this report. 37 12 The table below provides a summary of SAFECO's consolidated securities investment portfolio at December 31, 1996. The excess of market value over cost of the consolidated fixed income and equity security portfolios was $1.5 billion at December 31, 1996 and $1.9 billion at December 31, 1995.
AMORTIZED CARRYING MARKET DECEMBER 31, 1996 COST VALUE VALUE - ------------------------------------------------------------------------------------------------------- (IN THOUSANDS) PROPERTY AND CASUALTY: FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... $ 612,241 $ 682,450 $ 682,450 FIXED INCOME - NON-TAXABLE (AVAILABLE-FOR-SALE) ....... 2,916,204 3,255,889 3,255,889 EQUITY SECURITIES ..................................... 577,782 1,196,018 1,196,018 LIFE AND HEALTH: FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... 7,601,663 7,857,499 7,857,499 FIXED INCOME - TAXABLE (HELD-TO-MATURITY) ............. 2,488,324 2,488,324 2,670,004 EQUITY SECURITIES ..................................... 12,433 23,137 23,137 SAFECO CORPORATION: FIXED INCOME - TAXABLE (AVAILABLE-FOR-SALE) ........... 108,341 108,589 108,589 EQUITY SECURITIES ..................................... 41,960 64,372 64,372 MISCELLANEOUS ............................................. 41,746 47,098 47,098 SHORT-TERM INVESTMENTS .................................... 105,927 105,927 105,927 ----------------------------------------- TOTAL .............................................. $14,506,621 $15,829,303 $16,010,983 =========================================
38 13 NEW ACCOUNTING STANDARDS See discussion of new accounting standards on page 54. DIVIDENDS The Corporation has paid cash dividends continuously since 1933. Common stock dividends paid to stockholders were $1.11 per share in 1996, compared with $1.02 in 1995 and $0.94 in 1994. 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 4,400 common stockholders of record at December 31, 1996. 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, 1996, without charge, by making a written request to: ROD A. PIERSON SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER SAFECO CORPORATION SAFECO PLAZA SEATTLE, WASHINGTON 98185 39 14 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, 1996, its system of internal control is adequate to accomplish the objectives discussed herein. The financial statements for the years ended December 31, 1996, 1995 and 1994 have been audited 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, 1996, 1995 and 1994 (pages 41 to 69 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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 1996, 1995 and 1994 as required by the Financial Accounting Standards Board. /s/ Ernst & Young LLP Seattle, Washington February 14, 1997 40 15 STATEMENT OF CONSOLIDATED INCOME SAFECO CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995* 1994* - --------------------------------------------------------------------------------------------------------------------------- (In Thousands Except Per Share Amounts) REVENUES INSURANCE: PROPERTY AND CASUALTY EARNED PREMIUMS ................................... $2,275,364 $2,162,141 $2,053,431 LIFE AND HEALTH PREMIUMS AND OTHER REVENUES ............................. 265,924 261,570 276,771 ---------------------------------------- TOTAL ................................................................ 2,541,288 2,423,711 2,330,202 REAL ESTATE ................................................................ 79,924 74,959 107,315 FINANCE .................................................................... 75,699 65,931 53,851 ASSET MANAGEMENT ........................................................... 23,216 18,532 15,055 OTHER ...................................................................... 38,458 32,172 25,556 NET INVESTMENT INCOME (NOTE 2) ............................................. 1,116,734 1,075,280 991,610 REALIZED INVESTMENT GAIN (NOTE 2) .......................................... 90,050 64,271 39,040 ---------------------------------------- TOTAL ................................................................ 3,965,369 3,754,856 3,562,629 ---------------------------------------- EXPENSES LOSSES, ADJUSTMENT EXPENSE AND POLICY BENEFITS ............................. 2,362,722 2,250,442 2,202,282 COMMISSIONS ................................................................ 415,670 401,162 394,128 PERSONNEL COSTS ............................................................ 272,333 250,576 238,934 INTEREST ................................................................... 72,366 85,409 70,340 DIVIDENDS TO POLICYHOLDERS ................................................. 16,221 15,239 22,835 OTHER ...................................................................... 264,145 245,414 266,872 AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS .......................... 426,862 408,913 394,603 DEFERRAL OF POLICY ACQUISITION COSTS ....................................... (443,411) (416,099) (417,106) ---------------------------------------- TOTAL ................................................................ 3,386,908 3,241,056 3,172,888 ---------------------------------------- INCOME BEFORE INCOME TAXES ..................................................... 578,461 513,800 389,741 ---------------------------------------- PROVISION (BENEFIT) FOR INCOME TAXES (NOTE 14): CURRENT .................................................................... 133,478 131,464 83,609 DEFERRED ................................................................... 6,032 (16,623) (8,242) ---------------------------------------- TOTAL ................................................................ 139,510 114,841 75,367 ---------------------------------------- NET INCOME ..................................................................... $ 438,951 $ 398,959 $ 314,374 ---------------------------------------- NET INCOME PER SHARE OF COMMON STOCK (NOTE 8) .................................. $ 3.48 $ 3.17 $ 2.50 ========================================
See Notes to Financial Statements on pages 52 through 69. Prior year amounts revised to conform to 1996 classification. 41 16 CONSOLIDATED BALANCE SHEET SAFECO CORPORATION AND SUBSIDIARIES
DECEMBER 31 1996 1995 (In Thousands) - --------------------------------------------------------------------------------------------------------- ASSETS INVESTMENTS (NOTE 2): FIXED MATURITIES AVAILABLE-FOR-SALE, AT MARKET VALUE (AMORTIZED COST: 1996 - $11,270,529; 1995 - $10,853,590) .............. $11,936,243 $11,928,144 FIXED MATURITIES HELD-TO-MATURITY, AT AMORTIZED COST (MARKET VALUE: 1996 - $2,670,004; 1995 - $2,388,514) .................. 2,488,324 2,044,517 MARKETABLE EQUITY SECURITIES, AT MARKET VALUE (COST: 1996 - $641,841; 1995 - $598,130) .............................. 1,298,809 1,119,408 MORTGAGE LOANS ........................................................... 447,988 416,489 REAL ESTATE (AT COST LESS ACCUMULATED DEPRECIATION: 1996 - $81,970; 1995 - $83,831) (NOTE 3) .............................. 554,011 498,958 POLICY LOANS ............................................................. 58,153 55,925 SHORT-TERM INVESTMENTS ................................................... 105,927 68,808 -------------------------- TOTAL INVESTMENTS .................................................. 16,889,455 16,132,249 CASH ......................................................................... 55,498 65,477 ACCRUED INVESTMENT INCOME .................................................... 240,804 234,253 FINANCE RECEIVABLES (LESS UNEARNED FINANCE CHARGES AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1996 - $74,066; 1995 - $66,427) ................... 829,045 741,177 PREMIUMS AND OTHER SERVICE FEES RECEIVABLE ................................... 467,182 444,618 OTHER NOTES AND ACCOUNTS RECEIVABLE .......................................... 42,387 42,139 REINSURANCE RECOVERABLES (NOTE 5) ............................................ 137,484 137,284 DEFERRED POLICY ACQUISITION COSTS ............................................ 396,107 356,359 LAND, BUILDINGS AND EQUIPMENT FOR COMPANY USE (AT COST LESS ACCUMULATED DEPRECIATION: 1996 - $171,702; 1995 - $155,928) ..................................... 171,288 170,016 OTHER ASSETS ................................................................. 197,211 167,872 SEPARATE ACCOUNT ASSETS ...................................................... 491,212 276,399 -------------------------- TOTAL .............................................................. $19,917,673 $18,767,843 ==========================
See Notes to Financial Statements on pages 52 through 69. 42 17 CONSOLIDATED BALANCE SHEET SAFECO CORPORATION AND SUBSIDIARIES
DECEMBER 31 1996 1995 - --------------------------------------------------------------------------------------------------------- (In Thousands Except Share Amounts) LIABILITIES AND STOCKHOLDERS' EQUITY LOSSES AND ADJUSTMENT EXPENSE (NOTE 4) ....................................... $ 2,088,226 $ 2,207,230 UNEARNED PREMIUMS ............................................................ 946,899 910,762 LIFE POLICY LIABILITIES ...................................................... 149,624 154,090 FUNDS HELD UNDER DEPOSIT CONTRACTS ........................................... 9,792,730 8,756,384 NOTES AND MORTGAGES PAYABLE (NOTE 3): CREDIT COMPANY BORROWINGS ................................................ 808,750 614,270 7.875% NOTES DUE 2005 .................................................... 200,000 200,000 OTHER NOTES AND MORTGAGES ................................................ 224,744 253,275 OTHER LIABILITIES ............................................................ 678,799 895,853 INCOME TAXES (NOTE 14): CURRENT .................................................................. 3,512 18,000 DEFERRED (INCLUDES TAX ON UNREALIZED APPRECIATION OF INVESTMENT SECURITIES: 1996 - $462,939; 1995 - $558,541) ......................... 417,837 498,934 SEPARATE ACCOUNT LIABILITIES ................................................. 491,212 276,399 -------------------------- TOTAL LIABILITIES .................................................. 15,802,333 14,785,197 -------------------------- 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: 300,000,000 SHARES RESERVED FOR OPTIONS: 1996 - 3,344,751; 1995 - 3,699,983 SHARES ISSUED AND OUTSTANDING: 1996 - 126,308,237; 1995 - 125,978,742 .... 225,276 217,447 RETAINED EARNINGS (NOTE 11) .................................................. 3,042,214 2,755,537 UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX (NOTE 2) ........ 851,401 1,013,494 UNREALIZED LOSS FROM FOREIGN CURRENCY TRANSLATION, NET OF TAX ................ (3,551) (3,832) -------------------------- STOCKHOLDERS' EQUITY ............................................... 4,115,340 3,982,646 -------------------------- TOTAL .............................................................. $19,917,673 $18,767,843 ==========================
See Notes to Financial Statements on pages 52 through 69. 43 18 STATEMENT OF CONSOLIDATED CASH FLOWS SAFECO CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands) OPERATING ACTIVITIES INSURANCE PREMIUMS RECEIVED ............................................... $ 2,514,242 $ 2,394,178 $2,312,818 DIVIDENDS AND INTEREST RECEIVED ........................................... 1,103,593 1,059,653 970,267 OTHER OPERATING RECEIPTS .................................................. 172,924 165,921 175,289 INSURANCE CLAIMS AND POLICY BENEFITS PAID ................................. (1,998,418) (1,817,501) (1,674,422) UNDERWRITING, ACQUISITION AND INSURANCE OPERATING COSTS PAID .............. (801,731) (782,521) (768,236) INTEREST PAID ............................................................. (69,536) (84,943) (69,798) OTHER OPERATING COSTS PAID ................................................ (88,622) (88,070) (100,687) INCOME TAXES PAID ......................................................... (148,119) (144,581) (92,210) ----------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 684,333 702,136 753,021 ----------------------------------------- INVESTING ACTIVITIES PURCHASES OF: FIXED MATURITIES AVAILABLE-FOR-SALE .................................... (2,079,543) (2,079,336) (2,124,172) FIXED MATURITIES HELD-TO-MATURITY ...................................... (473,206) (291,965) (358,297) EQUITIES ............................................................... (154,937) (170,177) (124,588) OTHER INVESTMENTS ...................................................... (189,812) (297,118) (172,080) MATURITIES OF FIXED MATURITIES AVAILABLE-FOR-SALE ......................... 709,654 710,496 746,383 MATURITIES OF FIXED MATURITIES HELD-TO-MATURITY ........................... 21,694 17,878 54,564 SALES OF: FIXED MATURITIES AVAILABLE-FOR-SALE .................................... 979,947 549,865 786,361 FIXED MATURITIES HELD-TO-MATURITY ...................................... 13,316 - - EQUITIES ............................................................... 181,717 176,773 120,723 OTHER INVESTMENTS ...................................................... 100,974 304,870 122,903 NET (INCREASE) DECREASE IN SHORT-TERM INVESTMENTS ......................... (32,071) 23,321 13,938 FINANCE RECEIVABLES ORIGINATED OR ACQUIRED ................................ (378,690) (374,670) (301,821) PRINCIPAL PAYMENTS RECEIVED ON FINANCE RECEIVABLES ........................ 291,981 244,234 229,198 OTHER ..................................................................... (69,251) (67,071) (51,501) ----------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ............................... (1,078,227) (1,252,900) (1,058,389) ----------------------------------------- FINANCING ACTIVITIES FUNDS RECEIVED UNDER DEPOSIT CONTRACTS .................................... 1,148,590 1,304,665 1,012,164 RETURN OF FUNDS HELD UNDER DEPOSIT CONTRACTS .............................. (765,480) (720,845) (659,698) PROCEEDS FROM NOTES AND MORTGAGE BORROWINGS ............................... 40,200 199,001 39,734 REPAYMENT OF NOTES AND MORTGAGE BORROWINGS ................................ (107,467) (241,966) (119,961) NET PROCEEDS FROM SHORT-TERM BORROWINGS ................................... 213,558 143,914 150,586 COMMON STOCK REACQUIRED ................................................... (9,571) (8,690) (5,327) DIVIDENDS PAID TO STOCKHOLDERS ............................................ (139,898) (128,479) (118,387) OTHER ..................................................................... 3,983 5,137 1,928 ----------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES ........................... 383,915 552,737 301,039 ----------------------------------------- NET (DECREASE) INCREASE IN CASH ............................................... (9,979) 1,973 (4,329) CASH AT THE BEGINNING OF YEAR ................................................. 65,477 63,504 67,833 ----------------------------------------- CASH AT THE END OF YEAR ....................................................... $ 55,498 $ 65,477 $ 63,504 =========================================
See Notes to Financial Statements on pages 52 through 69. 44 19 STATEMENT OF CONSOLIDATED CASH FLOWS -- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES SAFECO CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995 1994 - --------------------------------------------------------------------------------------------------- (In Thousands) NET INCOME ................................................ $ 438,951 $398,959 $314,374 --------------------------------------- ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: REALIZED INVESTMENT GAIN ........................... (90,050) (64,271) (39,040) DEPRECIATION AND AMORTIZATION ...................... 64,060 51,706 39,473 AMORTIZATION OF FIXED MATURITY INVESTMENTS ......... (38,577) (38,150) (22,609) DEFERRED INCOME TAX EXPENSE (BENEFIT) .............. 6,032 (16,623) (8,242) INTEREST EXPENSE ON DEPOSIT CONTRACTS .............. 460,594 432,327 405,536 OTHER ADJUSTMENTS .................................. 1,493 8,000 9,514 CHANGES IN: LOSSES AND ADJUSTMENT EXPENSE ................... (119,004) (58,624) 137,482 UNEARNED PREMIUMS ............................... 36,137 43,798 47,579 LIFE POLICY LIABILITIES ......................... (4,466) (1,232) 3,834 ACCRUED INCOME TAXES ............................ (14,488) (4,627) (15,336) ACCRUED INTEREST ON ACCRUAL BONDS ............... (44,016) (36,908) (41,285) ACCRUED INVESTMENT INCOME ....................... (6,551) (4,289) (19,675) DEFERRED POLICY ACQUISITION COSTS ............... (15,973) (10,331) (21,540) OTHER ASSETS AND LIABILITIES .................... 10,191 2,401 (37,044) --------------------------------------- TOTAL ADJUSTMENTS ............................ 245,382 303,177 438,647 --------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................. $ 684,333 $702,136 $753,021 =======================================
See Notes to Financial Statements on pages 52 through 69. 45 20 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY SAFECO CORPORATION AND SUBSIDIARIES
YEAR ENDED DECEMBER 31 1996 1995 1994 (In Thousands) - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCK (NOTES 8 AND 9): BALANCE AT THE BEGINNING OF YEAR ............................................ $ 217,447 $ 211,194 $ 207,480 STOCK ISSUED FOR OPTIONS AND RIGHTS ......................................... 6,144 5,839 3,616 COMMON STOCK REACQUIRED ..................................................... (440) (486) (344) STOCK ISSUED FOR ACQUISITION OF SUBSIDIARY .................................. 575 - - OTHER ....................................................................... 1,550 900 442 ---------------------------------------- BALANCE AT THE END OF YEAR .................................................. 225,276 217,447 211,194 ---------------------------------------- RETAINED EARNINGS (NOTE 11): BALANCE AT THE BEGINNING OF YEAR ............................................ 2,755,537 2,495,800 2,307,322 NET INCOME .................................................................. 438,951 398,959 314,374 DIVIDENDS DECLARED .......................................................... (143,143) (131,018) (120,913) COMMON STOCK REACQUIRED ..................................................... (9,131) (8,204) (4,983) ---------------------------------------- BALANCE AT THE END OF YEAR .................................................. 3,042,214 2,755,537 2,495,800 ---------------------------------------- UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX (NOTE 2): BALANCE AT THE BEGINNING OF YEAR ............................................ 1,013,494 128,123 262,157 NET EFFECT OF ADOPTION OF FASB STATEMENT 115 - - 640,477 CHANGE IN UNREALIZED APPRECIATION ........................................... (162,093) 885,371 (774,511) ---------------------------------------- BALANCE AT THE END OF YEAR .................................................. 851,401 1,013,494 128,123 ---------------------------------------- UNREALIZED GAIN (LOSS) FROM FOREIGN CURRENCY TRANSLATION, NET OF TAX: BALANCE AT THE BEGINNING OF YEAR ............................................ (3,832) (5,638) (2,568) CHANGE IN UNREALIZED GAIN (LOSS) ............................................ 281 1,806 (3,070) ---------------------------------------- BALANCE AT THE END OF YEAR .................................................. (3,551) (3,832) (5,638) ---------------------------------------- STOCKHOLDERS' EQUITY ..................................................... $4,115,340 $3,982,646 $2,829,479 ========================================
See Notes to Financial Statements on pages 52 through 69. 46 21 STATEMENT OF COMBINED INCOME PROPERTY AND CASUALTY INSURANCE COMPANIES 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 & Company, Inc. SAFECO Select Insurance Services, Inc. / COMAV Managers, Inc.
YEAR ENDED DECEMBER 31 1996 1995 1994 (In Thousands) - --------------------------------------------------------------------------------------------------------------------------- NET PREMIUMS WRITTEN ............................................................ $2,313,073 $2,206,984 $2,103,465 INCREASE IN UNEARNED PREMIUMS ................................................... (37,709) (44,843) (50,034) ---------------------------------------- EARNED PREMIUMS ................................................................. 2,275,364 2,162,141 2,053,431 ---------------------------------------- LOSSES AND EXPENSES: LOSSES AND ADJUSTMENT EXPENSE ............................................... 1,580,509 1,526,976 1,528,067 COMMISSIONS ................................................................. 341,990 322,566 308,513 PERSONNEL COSTS ............................................................. 168,806 155,359 148,246 TAXES OTHER THAN PAYROLL AND INCOME TAXES ................................... 62,247 59,658 58,889 DIVIDENDS TO POLICYHOLDERS .................................................. 16,221 15,239 22,835 OTHER OPERATING EXPENSES .................................................... 76,910 80,210 72,776 AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ........................... 391,210 376,537 365,196 DEFERRAL OF POLICY ACQUISITION COSTS ........................................ (400,985) (380,752) (373,746) ---------------------------------------- TOTAL ................................................................. 2,236,908 2,155,793 2,130,776 ---------------------------------------- UNDERWRITING PROFIT (LOSS) ...................................................... 38,456 6,348 (77,345) NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN) ................................. 281,580 291,450 283,481 ---------------------------------------- INCOME BEFORE REALIZED GAIN AND INCOME TAXES .................................... 320,036 297,798 206,136 REALIZED GAIN FROM SECURITY INVESTMENTS BEFORE INCOME TAXES ......................................................... 64,738 51,657 31,003 ---------------------------------------- INCOME BEFORE INCOME TAXES ...................................................... 384,774 349,455 237,139 PROVISION FOR FEDERAL AND CANADIAN INCOME TAXES (INCLUDING TAX PROVISION ON REALIZED GAIN: 1996 - $21,937; 1995 - $17,939; 1994 - $10,298) .......................................... 71,329 59,329 23,700 ---------------------------------------- NET INCOME ...................................................................... $ 313,445 $ 290,126 $ 213,439 ========================================
See Notes to Financial Statements on pages 52 through 69. 47 22 STATEMENT OF COMBINED INCOME LIFE AND HEALTH INSURANCE COMPANIES SAFECO Life Insurance Company / SAFECO National Life Insurance Company / First SAFECO National Life Insurance Company of New York SAFECO Administrative Services, Inc.
YEAR ENDED DECEMBER 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- (In Thousands) PREMIUMS AND OTHER REVENUE ........................................... $ 265,924 $ 261,570 $276,771 NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN) ...................... 836,715 778,221 706,217 ---------------------------------------- TOTAL ...................................................... 1,102,639 1,039,791 982,988 ---------------------------------------- BENEFITS AND EXPENSES: POLICY BENEFITS .................................................. 782,213 723,466 674,215 COMMISSIONS ...................................................... 73,680 78,596 85,615 PERSONNEL COSTS .................................................. 49,424 47,536 47,698 TAXES OTHER THAN PAYROLL AND INCOME TAXES ........................ 15,874 8,268 7,891 OTHER OPERATING EXPENSES ......................................... 51,541 49,323 50,507 AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS ................ 35,652 32,376 29,407 DEFERRAL OF POLICY ACQUISITION COSTS ............................. (42,426) (35,347) (43,360) ---------------------------------------- TOTAL ...................................................... 965,958 904,218 851,973 ---------------------------------------- INCOME BEFORE REALIZED GAIN AND INCOME TAXES ......................... 136,681 135,573 131,015 REALIZED GAIN FROM SECURITY INVESTMENTS BEFORE INCOME TAXES .............................................. 10,534 5,894 5,888 ---------------------------------------- INCOME BEFORE INCOME TAXES ........................................... 147,215 141,467 136,903 PROVISION FOR INCOME TAXES (INCLUDING TAX PROVISION ON REALIZED GAIN: 1996 - $3,907; 1995 - $2,429; 1994 - $2,106) .................. 51,808 49,014 48,180 ---------------------------------------- NET INCOME ........................................................... $ 95,407 $ 92,453 $ 88,723 ========================================
See Notes to Financial Statements on pages 52 through 69. 48 23 STATEMENT OF CONSOLIDATED INCOME REAL ESTATE COMPANIES SAFECO Properties, Inc. / Winmar Company, Inc. / SAFECARE Company, Inc.
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------- (In Thousands) REVENUES OPERATING PROPERTY REVENUE ................................ $ 62,602 $64,862 $ 75,681 REAL ESTATE SALES ......................................... 13,924 5,304 26,521 INTEREST .................................................. 1,899 2,620 3,638 OTHER ..................................................... 1,499 2,173 1,475 -------------------------------------- TOTAL ............................................... 79,924 74,959 107,315 -------------------------------------- EXPENSES OPERATING PROPERTY EXPENSES ............................... 11,239 12,193 26,184 REAL ESTATE SALES COSTS ................................... 11,198 3,380 19,179 INTEREST .................................................. 29,027 29,137 27,426 DEPRECIATION .............................................. 14,259 14,854 13,520 GENERAL AND ADMINISTRATIVE ................................ 13,576 12,347 13,934 -------------------------------------- TOTAL ............................................... 79,299 71,911 100,243 INTEREST AND OTHER EXPENSES CAPITALIZED ................... (12,427) (6,012) (3,080) -------------------------------------- NET EXPENSES ........................................ 66,872 65,899 97,163 -------------------------------------- INCOME BEFORE REALIZED LOSS AND INCOME TAXES .................. 13,052 9,060 10,152 REALIZED LOSS FROM REAL ESTATE INVESTMENTS BEFORE INCOME TAXES ....................................... (2,611) (818) (174) -------------------------------------- INCOME BEFORE INCOME TAXES .................................... 10,441 8,242 9,978 PROVISION FOR INCOME TAXES (INCLUDING TAX BENEFIT ON REALIZED LOSS: 1996 - $615; 1995 - $287; 1994 - $61) .................. 4,026 2,844 3,523 -------------------------------------- NET INCOME .................................................... $ 6,415 $ 5,398 $ 6,455 ======================================
See Notes to Financial Statements on pages 52 through 69. 49 24 STATEMENT OF INCOME SAFECO CREDIT COMPANY, INC.
YEAR ENDED DECEMBER 31 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------- (In Thousands) INVESTMENT REVENUES: INTEREST AND FINANCE CHARGES: FINANCE RECEIVABLES ............................................... $ 68,116 $60,075 $49,267 AFFILIATES ........................................................ 8,548 5,868 4,330 -------------------------------------- TOTAL INVESTMENT REVENUES ...................................... 76,664 65,943 53,597 INTEREST EXPENSE ......................................................... 47,448 41,772 30,652 -------------------------------------- NET INVESTMENT INCOME ................................................ 29,216 24,171 22,945 PROVISION FOR CREDIT LOSSES .............................................. 2,400 2,600 3,650 -------------------------------------- NET INVESTMENT INCOME AFTER PROVISION FOR CREDIT LOSSES .............. 26,816 21,571 19,295 OTHER REVENUE ............................................................ 7,583 5,856 4,584 -------------------------------------- TOTAL .......................................................... 34,399 27,427 23,879 -------------------------------------- OPERATING EXPENSES: PERSONNEL COSTS ...................................................... 8,657 7,785 7,204 GENERAL AND ADMINISTRATIVE ........................................... 6,661 6,342 5,914 -------------------------------------- TOTAL .......................................................... 15,318 14,127 13,118 -------------------------------------- INCOME BEFORE INCOME TAXES ............................................... 19,081 13,300 10,761 PROVISION FOR INCOME TAXES ............................................... 6,903 4,428 3,396 -------------------------------------- NET INCOME ............................................................... $ 12,178 $ 8,872 $ 7,365 ======================================
See Notes to Financial Statements on pages 52 through 69. 50 25 STATEMENT OF COMBINED INCOME ASSET MANAGEMENT COMPANIES SAFECO Asset Management Company / SAFECO Securities, Inc. / SAFECO Services Corporation / SAFECO Trust Company
YEAR ENDED DECEMBER 31 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- (In Thousands) REVENUES MANAGEMENT AND ADVISORY FEES ................................ $ 14,394 $12,994 $11,235 TRANSFER AGENT FEES ......................................... 3,538 3,088 2,367 OTHER ....................................................... 5,284 2,450 1,453 -------------------------------------- TOTAL .................................................... 23,216 18,532 15,055 -------------------------------------- EXPENSES PERSONNEL COSTS ............................................. 7,794 6,318 4,737 MARKETING AND SHAREHOLDER COMMUNICATION ..................... 2,664 2,266 1,564 OTHER ....................................................... 5,148 3,051 2,403 -------------------------------------- TOTAL .................................................... 15,606 11,635 8,704 -------------------------------------- INCOME BEFORE INCOME TAXES ...................................... 7,610 6,897 6,351 PROVISION FOR INCOME TAXES ...................................... 2,505 2,151 2,235 -------------------------------------- NET INCOME ...................................................... $ 5,105 $ 4,746 $ 4,116 ======================================
See Notes to Financial Statements on pages 52 through 69. 51 26 NOTES TO FINANCIAL STATEMENTS (All dollar amounts in thousands, except share data, unless otherwise stated) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS SAFECO Corporation (the Corporation) is a Washington corporation that owns operating subsidiaries in various segments of insurance and other financially related businesses. (The Corporation and its subsidiaries are collectively referred to as "SAFECO".) SAFECO's businesses operate on a nationwide basis. Non-U.S. operations are insignificant. The insurance subsidiaries engage in property and casualty, surety and life and health insurance. Products are marketed primarily through independent agents. Approximately 45% of SAFECO's property and casualty premiums are written in the three west coast states of California, Washington and Oregon. SAFECO's other operations include subsidiaries involved in real estate investment and management (SAFECO Properties), commercial lending and leasing (SAFECO Credit) and investment management. BASIS OF REPORTING 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. The financial statements include SAFECO Corporation and its subsidiaries and real estate joint ventures (SAFECO). All significant intercompany transactions and accounts have been eliminated in the consolidated financial statements. Certain reclassifications have been made to prior year financial information to conform to the 1996 classification. ACCOUNTING FOR PREMIUMS Property and casualty insurance premiums are included in income as earned on a daily pro rata basis over the terms 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 life and health policies. Funds received under retirement services deposit contracts, annuity contracts and universal life policies of $1,148,590, $1,304,665 and $1,012,164 in 1996, 1995 and 1994, 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 54. 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 for 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. Write-downs are made directly on an individual security basis and reduce realized investment gains 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, 1996 and 1995 was $10,943 and $9,633, 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 is deemed impaired is written down to estimated fair value. Estimated fair 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. 52 27 Real estate taxes, interest expense and certain other carrying costs related to projects under development are capitalized as a cost of such projects until the project is substantially complete unless the total carrying value has reached estimated fair value. Costs in excess of estimated fair value are charged to operations. Projects that involve construction of income-producing property are considered to be substantially complete when available for occupancy. Projects that involve the development of real estate to be sold are considered substantially complete when planned improvement activity is concluded or the property is offered for sale. After substantial completion, carrying costs are charged to expense when incurred, and for income-producing property, depreciation is then provided. Interest capitalized relating to the development of real estate was $6,471, $3,088 and $2,482 for 1996, 1995 and 1994, respectively. SAFECO provides depreciation on buildings, furniture and automobiles at various rates based on estimated useful lives using straight-line and accelerated methods. 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. No deficiencies have been indicated in the periods presented. Life and health 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 deferred annuity, retirement services deposit contracts and universal life insurance policies are amortized over the lives of the contracts or policies in proportion to the present value of estimated future gross profits. To the extent actual experience differs from assumptions, and to the extent estimates of future gross profits require revision, the unamortized balance of deferred policy acquisition costs is adjusted accordingly; such adjustments are included in current operations. 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 on loss reserves. Salvage and subrogation recoverables are accrued using the "case basis" method for large recoverables and statistical estimates based on historical experience for smaller recoverables. Recoverable amounts deducted from the liability for losses and adjustment expense net of reinsurance were $153,613 and $134,294 at December 31, 1996 and 1995, 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 on reinsurance. LIFE POLICY LIABILITIES Liabilities for universal life insurance policies, deferred annuity contracts and retirement services deposit contracts are equal to the accumulated account value of such policies or contracts as of the valuation date. 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 5.5% to 8.75%. Liabilities for future policy benefits under traditional individual life insurance policies have been computed on the level premium method and reflect interest, mortality and persistency assumptions based on actual experience modified to provide for adverse deviation. Interest assumptions generally range from 8.5% graded to 3.25%. 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. Per share amounts have been adjusted to reflect the 2-for-1 stock split on December 1, 1995. Dilution arising from stock options is insignificant. 53 28 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) NEW ACCOUNTING STANDARDS SAFECO adopted FASB Statement 112, "Employers' Accounting for Postemployment Benefits," effective January 1, 1994. Adoption had no effect on net income. In 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 1994, which amends Statement 114. Both statements were effective for 1995 and adopted by SAFECO on January 1, 1995. Adoption did not affect net income. For additional disclosure relating to these two statements see Note 2 on page 58. In 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 which SAFECO has the positive intent and ability to hold to maturity (as narrowly defined by Statement 115) are classified as held-to-maturity and 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 are 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 56 for detail of the effect on stockholders' equity of the adoption of Statement 115. The FASB issued an Implementation Guide on Statement 115 in November 1995. In addition to providing guidance on Statement 115, the Guide allowed for a one-time-only reclassification of securities among the three categories defined in the statement. As allowed under the Guide, SAFECO reclassified certain held-to-maturity securities to the available-for-sale category on December 31, 1995. See Note 2 on page 56 for disclosures relating to this reclassification. In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121 requires impairment losses to be recorded on long-lived assets used in operations, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. It also addresses the accounting for long-lived assets that are expected to be disposed of. Statement 121 was effective for financial statements for fiscal years beginning after December 15, 1995 and SAFECO adopted it in the first quarter of 1996. Adoption did not affect net income. In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation." Statement 123 permits either expensing the fair value of stock-based compensation or disclosing in the financial statement footnotes the pro forma impact on net income as if the awards had been expensed. The statement was effective for fiscal years beginning after December 15, 1995 and SAFECO adopted it in the fourth quarter of 1996, with no effect on net income. See Note 9 on page 64. The FASB issued Statement 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," in June 1996. Statement 125 was effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996. SAFECO will adopt it in the first quarter of 1997. The FASB recently issued Statement 127 which defers for one year the effective date of certain provisions of Statement 125. Statement 125 provides guidance in determining whether a transfer of a financial asset represents a sale or a secured borrowing, as well as the accounting for any servicing assets retained. The statement also provides guidance relating to extinguishment of liabilities by debtors. Although the impact of the statement is currently being studied, it is not expected to have a material effect on SAFECO's financial position or results of operations. 54 29 NOTE 2: INVESTMENTS Investment income is comprised of:
1996 1995 1994 - ----------------------------------------------------------------------------------------- INTEREST: FIXED MATURITIES .......................... $1,025,003 $ 981,345 $ 908,194 MORTGAGE LOANS ............................ 40,954 40,874 40,664 SHORT-TERM INVESTMENTS .................... 7,602 17,371 8,354 DIVIDENDS: MARKETABLE EQUITY SECURITIES .............. 39,165 40,993 42,059 REDEEMABLE PREFERRED STOCK ................ 12,674 4,034 2,133 OTHER INVESTMENT INCOME ....................... 3,286 4,567 4,714 ---------------------------------------- TOTAL INVESTMENT INCOME ................... 1,128,684 1,089,184 1,006,118 INVESTMENT EXPENSES ........................... 11,950 13,904 14,508 ---------------------------------------- NET INVESTMENT INCOME ..................... $1,116,734 $1,075,280 $ 991,610 ========================================
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, 1996. The following analysis summarizes realized gains and losses on investments:
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------- REALIZED INVESTMENT GAINS (LOSSES): FIXED MATURITIES ............................................. $ 31,077 $ 29,293 $(8,843) MARKETABLE EQUITY SECURITIES ................................. 61,584 35,796 48,057 INVESTMENT REAL ESTATE ....................................... (2,611) (818) (174) -------------------------------------- REALIZED INVESTMENT GAIN BEFORE INCOME TAXES .............. 90,050 64,271 39,040 APPLICABLE INCOME TAXES ...................................... (31,316) (22,719) (13,118) -------------------------------------- NET REALIZED INVESTMENT GAIN .............................. $ 58,734 $ 41,552 $25,922 ======================================
The proceeds from sales of investment securities and related gains and losses for 1996 are as follows:
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE MATURITY SECURITIES - ---------------------------------------------------------------------------------------------------------- PROCEEDS FROM SALES ............................................. $ 979,947 $13,316 $181,717 ======================================= GROSS REALIZED GAINS ON SALES ................................... $ 32,973 $ - $ 66,237 GROSS REALIZED LOSSES ON SALES .................................. (27,601) (1,328) (4,653) --------------------------------------- REALIZED GAINS (LOSSES) ON SALE ................................. 5,372 (1,328) 61,584 WRITEDOWNS ...................................................... (5,465) - - OTHER, INCLUDING GAINS ON CALLS AND REDEMPTIONS ................. 32,638 (140) - --------------------------------------- TOTAL REALIZED GAIN (LOSS) .................................. $ 32,545 $(1,468) $ 61,584 =======================================
The sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuers' creditworthiness. 55 30 NOTE 2: INVESTMENTS (CONTINUED) The proceeds from sales of investment securities and related gains and losses for 1995 are as follows:
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE MATURITY SECURITIES - --------------------------------------------------------------------------------------------------- PROCEEDS FROM SALES ...................................... $ 549,865 $ - $176,773 ======================================= GROSS REALIZED GAINS ON SALES ............................ $ 26,945 $ - $ 46,546 GROSS REALIZED LOSSES ON SALES ........................... (12,331) - (10,750) --------------------------------------- REALIZED GAINS ON SALE ................................... 14,614 - 35,796 WRITEDOWNS ............................................... (13,609) - - OTHER, INCLUDING GAINS ON CALLS AND REDEMPTIONS .......... 28,288 - - --------------------------------------- TOTAL REALIZED GAIN .................................. $ 29,293 $ - $ 35,796 =======================================
The proceeds from sales of investment securities and related gains and losses for 1994 are as follows:
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE 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 =======================================
The following analysis summarizes the changes in unrealized gains and losses on investment securities (includes fixed maturities held-to-maturity and available-for-sale):
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN UNREALIZED APPRECIATION OF INVESTMENT SECURITIES: FIXED MATURITIES ............................................................. $(571,157) $1,622,513 $(1,448,717) MARKETABLE EQUITY SECURITIES ................................................. 135,690 231,231 (107,067) APPLICABLE INCOME TAXES ...................................................... 152,413 (648,810) 544,524 ---------------------------------------- NET CHANGE IN UNREALIZED APPRECIATION ..................................... $(283,054) $1,204,934 $(1,011,260) ========================================
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 of $344,872. SAFECO reclassified certain fixed maturity securities from the held-to-maturity category to the available-for-sale category on December 31, 1995, as allowed by the FASB's Implementation Guide discussed in Note 1 on page 54. The securities reclassified had a net carrying value (amortized cost) of $331,123 and a market value of $358,630 at December 31, 1995. This reclassification had no effect on net income. 56 31 The following is a summary of fixed maturities and marketable equity securities classified as available-for-sale at December 31, 1996:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN VALUE - ------------------------------------------------------------------------------------------------------------------------------ U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES ........... $ 1,123,418 $ 49,928 $ (4,665) $ 45,263 $ 1,168,681 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ... 3,036,139 350,641 (2,881) 347,760 3,383,899 DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ...... 204,765 44,479 (6) 44,473 249,238 CORPORATE SECURITIES ............................... 4,373,171 195,469 (22,856) 172,613 4,545,784 MORTGAGE-BACKED SECURITIES ......................... 2,533,036 74,169 (18,564) 55,605 2,588,641 ------------------------------------------------------------------------- TOTAL FIXED MATURITIES CLASSIFIED AS AVAILABLE-FOR-SALE .......................... 11,270,529 714,686 (48,972) 665,714 11,936,243 MARKETABLE EQUITY SECURITIES ....................... 641,841 660,296 (3,328) 656,968 1,298,809 ------------------------------------------------------------------------- TOTAL ....................................... $11,912,370 $1,374,982 $(52,300) 1,322,682 $13,235,052 ========================================== =========== DEFERRED POLICY ACQUISITION COSTS VALUATION ALLOWANCE ...................................... (19,040) APPLICABLE INCOME TAXES ............................ (452,241) ---------- UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX, INCLUDED IN STOCKHOLDERS' EQUITY ... $ 851,401 ==========
The following is a summary of fixed maturities classified as held-to-maturity at December 31, 1996:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN VALUE - ------------------------------------------------------------------------------------------------------------------------------ U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES ............. $ 244,686 $ 29,559 $ (397) $ 29,162 $ 273,848 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ..... 103,075 3,797 (663) 3,134 106,209 DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ........ 148,300 24,403 - 24,403 172,703 CORPORATE SECURITIES ................................. 1,700,395 131,053 (13,775) 117,278 1,817,673 MORTGAGE-BACKED SECURITIES ........................... 291,868 13,110 (5,407) 7,703 299,571 ----------------------------------------------------------------------- TOTAL FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY .............................. $2,488,324 $201,922 $(20,242) $181,680 $2,670,004 =======================================================================
The following is a summary of fixed maturities and marketable equity securities classified as available-for-sale at December 31, 1995:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN VALUE - ------------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES ............ $ 1,087,644 $ 98,207 $ (1,165) $ 97,042 $ 1,184,686 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS .... 2,997,988 467,564 (246) 467,318 3,465,306 DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ....... 208,920 49,505 - 49,505 258,425 CORPORATE SECURITIES ................................ 4,201,895 356,271 (10,626) 345,645 4,547,540 MORTGAGE-BACKED SECURITIES .......................... 2,357,143 120,053 (5,009) 115,044 2,472,187 ------------------------------------------------------------------------- TOTAL FIXED MATURITIES CLASSIFIED AS AVAILABLE-FOR-SALE ........................... 10,853,590 1,091,600 (17,046) 1,074,554 11,928,144 MARKETABLE EQUITY SECURITIES ........................ 598,130 525,190 (3,912) 521,278 1,119,408 ------------------------------------------------------------------------- TOTAL ........................................ $11,451,720 $1,616,790 $(20,958) 1,595,832 $13,047,552 ========================================== =========== DEFERRED POLICY ACQUISITION COSTS VALUATION ALLOWANCE ....................................... (42,815) APPLICABLE INCOME TAXES ............................. (539,523) ---------- UNREALIZED APPRECIATION OF INVESTMENT SECURITIES, NET OF TAX, INCLUDED IN STOCKHOLDERS' EQUITY .... $1,013,494 ==========
57 32 NOTE 2: INVESTMENTS (CONTINUED) The following is a summary of fixed maturities classified as held-to-maturity at December 31, 1995:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN VALUE - ------------------------------------------------------------------------------------------------------------------------------- U.S. TREASURY SECURITIES AND OBLIGATIONS OF U.S. GOVERNMENT CORPORATIONS AND AGENCIES .............. $ 210,894 $ 60,042 $ - $ 60,042 $ 270,936 OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS ...... 52,438 4,689 - 4,689 57,127 DEBT SECURITIES ISSUED BY FOREIGN GOVERNMENTS ......... 135,467 31,956 - 31,956 167,423 CORPORATE SECURITIES .................................. 1,353,837 224,245 (4,128) 220,117 1,573,954 MORTGAGE-BACKED SECURITIES ............................ 291,881 27,193 - 27,193 319,074 ----------------------------------------------------------------------- TOTAL FIXED MATURITIES CLASSIFIED AS HELD-TO-MATURITY ............................... $2,044,517 $348,125 $(4,128) $343,997 $2,388,514 =======================================================================
The amortized cost and estimated market value of fixed maturities at December 31, 1996, 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.
AVAILABLE-FOR-SALE HELD-TO-MATURITY AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST MARKET VALUE COST MARKET VALUE - --------------------------------------------------------------------------------------------------------------------------- DUE IN ONE YEAR OR LESS ......................................... $ 231,990 $ 239,015 $ 5,000 $ 5,100 DUE AFTER ONE YEAR THROUGH FIVE YEARS ........................... 1,807,022 1,875,319 - - DUE AFTER FIVE YEARS THROUGH TEN YEARS .......................... 1,634,654 1,721,751 28,570 32,934 DUE AFTER TEN YEARS ............................................. 5,063,827 5,511,517 2,162,886 2,332,399 MORTGAGE-BACKED SECURITIES ...................................... 2,533,036 2,588,641 291,868 299,571 --------------------------------------------------------- TOTAL ....................................................... $11,270,529 $11,936,243 $2,488,324 $2,670,004 =========================================================
In 1993, the FASB issued Statement 114, "Accounting by Creditors for Impairment of a Loan," which provides guidance on valuing impaired loans (FAS 114). The FASB also issued Statement 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosure" (FAS 118), in 1994, which amends Statement 114. Both statements were effective for 1995 and were adopted by SAFECO on January 1, 1995. Adoption did not affect net income. The following table summarizes SAFECO's consolidated allowance for credit losses:
1996 1995 - -------------------------------------------------------------------------------------- ALLOWANCE AT BEGINNING OF YEAR ............................... $27,516 $24,557 PROVISION FOR CREDIT LOSSES .................................. 4,450 4,200 LOANS CHARGED OFF AS UNCOLLECTIBLE ........................... (1,838) (1,891) RECOVERIES ................................................... 293 650 ---------------------- ALLOWANCE AT END OF YEAR ..................................... $30,421 $27,516 ======================
This allowance relates to SAFECO Credit's finance receivables ($829 million at December 31, 1996) and to mortgage loan investments ($448 million at December 31, 1996) nearly all of which are held by SAFECO Life Insurance Company. The 1996 and 1995 allowances include amounts determined under FAS 114 and FAS 118 (specific reserves), as well as general reserve amounts. The total investment in impaired loans, as defined under FAS 114 and FAS 118 and before any reserve for losses, is $3.3 million at December 31, 1996. A specific loan loss reserve has been established for each impaired loan, the total of which is $1.0 million at December 31, 1996 and is included in the overall allowance of $30.4 million at December 31, 1996. 58 33 NOTE 3: NOTES AND MORTGAGES PAYABLE At December 31, 1996, SAFECO Credit had short-term borrowings of $762,000 through commercial paper and $46,500 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 5.4% and 5.8% at December 31, 1996 and 1995, respectively. At December 31, 1996, SAFECO Corporation had available bank lines of credit totaling $400,000. No amounts were outstanding under these lines of credit at December 31, 1996. These lines are available for general corporate purposes, including support of SAFECO Credit's short-term borrowings. SAFECO Corporation pays a fee to have these lines of credit available and does not maintain deposits as compensating balances. SAFECO Corporation issued $200 million of 7.875% notes in 1995, under a Securities and Exchange Commission (SEC) shelf registration. The proceeds were used to replace SAFECO Corporation's then existing $200 million of 10.75% notes which matured in 1995. Prior to the shelf registration noted above, SAFECO Corporation and SAFECO Credit initiated a combined shelf registration in 1990. SAFECO Credit issued $149,850 of medium-term notes under this registration. Of this amount $46,500 remained outstanding at December 31, 1996, with a weighted average interest rate of 7.9%, and maturities from May 1997 to December 2001. SAFECO Corporation issued $50,000 of medium-term notes under this shelf registration, with a weighted average interest rate of 7.1%, all maturing in 2002 and 2003. No additional notes will be issued under this shelf registration. SAFECO Credit enters into interest rate swap agreements with outside parties to reduce the impact of changes in interest rates on its variable rate debt by converting variable rate interest payments to fixed rates. The interest rate swap agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage. At December 31, 1996, interest rate swap agreements were outstanding with notional amounts of $248,997, replacing variable rates with fixed rates with a weighted average rate of 6.0%. Maturities of these agreements range from June 1997 to November 2003. At December 31, 1995, interest rate swap agreements were outstanding with notional amounts of $134,942, replacing variable rates with fixed rates with a weighted average rate of 6.0%. There were no swap terminations in 1996, 1995 or 1994. The net interest accrued under these agreements is recorded as an adjustment to interest expense. Real estate mortgages are collateralized by the related investment real estate buildings and property. The total amount, current portions, interest rates and maturities of notes and mortgages payable at December 31 are as follows:
1996 1995 TOTAL CURRENT TOTAL CURRENT - --------------------------------------------------------------------------------------------------------------------------- SAFECO CREDIT BORROWINGS PAYABLE THROUGH 2001; WEIGHTED AVERAGE INTEREST RATES AT DECEMBER 31: 1996 - 5.6%; 1995 - 6.1% .................................... $808,750 $ 763,850 $614,270 $567,770 ------------------------------------------------------ SAFECO CORPORATION, 7.875% NOTES DUE 2005 .......................... $200,000 $ - $200,000 $ - ------------------------------------------------------ OTHER NOTES AND MORTGAGES: REAL ESTATE MORTGAGES PAYABLE IN INSTALLMENTS AND MEDIUM-TERM NOTES PAYABLE THROUGH 2014; WEIGHTED AVERAGE INTEREST RATES AT DECEMBER 31: 1996 - 7.7%; 1995 - 7.8% .................................... $169,638 $ 3,324 $216,990 $ 9,604 UNSECURED NOTES AND LOANS PAYABLE IN INSTALLMENTS THROUGH 1998; WEIGHTED AVERAGE INTEREST RATES AT DECEMBER 31: 1996 - 6.7%; 1995 - 7.3% ....................... 55,106 26,204 36,285 31,260 ------------------------------------------------------ TOTAL .................................................... $224,744 $ 29,528 $253,275 $ 40,864 ------------------------------------------------------
Aggregate annual principal installments payable under these obligations for each of the five years subsequent to 1996 are as follows: 1997 - $793,378; 1998 - - $53,164; 1999 - $4,745; 2000 - $55,331; 2001 - $14,238. 59 34 NOTE 4: PROPERTY AND CASUALTY LOSS RESERVES 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. 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. The following is a summary of the activity related to SAFECO's property and casualty companies' reserves for losses and adjustment expense (net of reinsurance amounts):
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- LOSSES AND ADJUSTMENT EXPENSE RESERVES AT BEGINNING OF YEAR ..................... $2,070,077 $2,092,946 $1,995,122 ---------------------------------------- INCURRED LOSSES AND ADJUSTMENT EXPENSE FOR CLAIMS OCCURRING IN THE CURRENT YEAR ......................................................... 1,658,253 1,586,675 1,609,392 DECREASE IN ESTIMATED LOSSES AND ADJUSTMENT EXPENSE FOR CLAIMS OCCURRING IN PRIOR YEARS .................................................... (77,744) (59,699) (81,325) ---------------------------------------- TOTAL INCURRED LOSSES AND ADJUSTMENT EXPENSE .................................... 1,580,509 1,526,976 1,528,067 ---------------------------------------- LOSSES AND ADJUSTMENT EXPENSE PAYMENTS FOR CLAIMS OCCURRING DURING: CURRENT YEAR ................................................................ 939,561 856,796 809,722 PRIOR YEARS ................................................................. 755,367 693,049 620,521 ---------------------------------------- TOTAL LOSSES AND ADJUSTMENT EXPENSE PAYMENTS .................................... 1,694,928 1,549,845 1,430,243 ---------------------------------------- LOSSES AND ADJUSTMENT EXPENSE RESERVES AT END OF YEAR ....................... $1,955,658 $2,070,077 $2,092,946 ----------------------------------------
The year-end reserve amounts above are net of related reinsurance recoverables of $103,412, $110,746 and $143,858 for 1996, 1995 and 1994, respectively. The amounts above do not include SAFECO Life Insurance Company's 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 previously undertaken to correct deficiencies in years prior to 1988, favorable legislation in workers' compensation, moderation of medical costs and inflation, and claims department changes. The favorable legislation in workers' compensation, which relates primarily to the states of Oregon and California, has helped reduce fraud, allowed for faster 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 investigations. 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, 1996, 1995 and 1994. The reserves include estimates for both reported and incurred but not reported (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. Although estimation of environmental claims is a difficult process, the reserves established for these claims at December 31, 1996 are believed to be adequate based on the known facts and current law. 60 35 NOTE 5: REINSURANCE SAFECO's insurance subsidiaries protect themselves from excessive losses by reinsuring on treaty and facultative bases. Reinsurance contracts do not relieve SAFECO of its obligations to policyholders. With respect to the amounts of reinsurance related to the liabilities for losses and 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 do not enter into retrospective reinsurance contracts and do not participate in any unusual or nonrecurring reinsurance transactions such as "swaps" of reserves, loss portfolio transfers or funding covers. The balance sheet caption reinsurance recoverables is comprised of the following amounts at December 31:
1996 1995 - -------------------------------------------------------------------------------------------------------- PROPERTY AND CASUALTY: REINSURANCE RECOVERABLES ON: UNPAID LOSSES AND ADJUSTMENT EXPENSE ................................... $103,412 $110,746 PAID LOSSES AND ADJUSTMENT EXPENSE ..................................... 8,868 9,882 LIFE AND HEALTH: REINSURANCE RECOVERABLES ON: UNPAID LOSSES AND ADJUSTMENT EXPENSE (POLICY AND CONTRACT CLAIMS) ...... 136 850 PAID CLAIMS ............................................................ 957 658 LIFE POLICY LIABILITIES ................................................ 23,784 14,844 OTHER .................................................................. 327 304 ----------------------- REINSURANCE RECOVERABLES ............................................ $137,484 $137,284 -----------------------
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 $48,424 and $50,633 at December 31, 1996 and 1995, respectively. The effects of reinsurance are netted against the insurance revenue and loss amounts in the statement of income. These amounts are as follows:
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- PROPERTY AND CASUALTY CEDED EARNED PREMIUMS ...................................... $ 152,637 $160,342 $175,861 LIFE AND HEALTH CEDED EARNED PREMIUMS ............................................ 13,679 10,385 9,060 --------------------------------------- TOTAL CEDED EARNED PREMIUMS .................................................. $ 166,316 $170,727 $184,921 --------------------------------------- PROPERTY AND CASUALTY CEDED LOSSES AND ADJUSTMENT EXPENSE ........................ $ 34,447 $ 46,184 $184,670 LIFE AND HEALTH CEDED POLICY BENEFITS ............................................ 4,039 6,344 5,588 --------------------------------------- TOTAL CEDED LOSSES, ADJUSTMENT EXPENSE AND POLICY BENEFITS ................... $ 38,486 $ 52,528 $190,258 ---------------------------------------
Property and casualty ceded earned premiums and ceded losses and adjustment expense were higher in 1994 due to reinsurance amounts related to the 1994 Los Angeles earthquake. Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above. Reinsurance premiums assumed are insignificant. 61 36 NOTE 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, 1996 are as follows:
YEAR PAYABLE MINIMUM RENTALS - -----------------------------------------------------------= 1997 ............................................ $ 8,580 1998 ............................................ 8,389 1999 ............................................ 7,558 2000 ............................................ 5,563 2001 ............................................ 4,364 2002 AND THEREAFTER ............................. 61,554 -------- TOTAL ....................................... $ 96,008 ========
The amount of rent charged to operations was $9,978, $9,582 and $9,151 for 1996, 1995 and 1994, respectively. 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 guaranties was written in the period 1984 through 1987. The remaining guaranties have maturities ranging from 1997 to 2000. At December 31, 1996 guaranties totaling $158,016 were outstanding. Substantially all individual guaranties are supported by collateral (first mortgage liens) in the underlying properties. At December 31, 1996, the reserves for losses and adjustment expense for this business was $19,079 and the related unearned premium liability was $461. At December 31, 1996, SAFECO Properties, Inc. is the guarantor of $35,100 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 $158,016 noted in the previous paragraph. During 1996, SAFECO Properties recorded an estimated loss of $20,000 to reflect the excess of the outstanding debt over the value of the collateral. For information on environmental, asbestos and other toxic claim liabilities, see Note 4. See Note 5 for discussion relating to reinsurance. NOTE 7: FINANCIAL INSTRUMENTS Estimated fair value amounts of financial instruments have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required in developing the estimates of fair value. Accordingly, these estimates are not necessarily indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions and/or estimating methodologies may have a material effect on the estimated fair value amounts. For cash, short-term investments, accounts receivable, policy loans and other liabilities, carrying value is a reasonable estimate of fair value. Fair value amounts for fixed maturities and marketable equity securities are the same as market prices for securities traded in the public marketplace or analytically determined values for securities not publicly traded. The fair values for mortgage and commercial loans have been estimated by discounting the projected cash flows using the current rate at which loans would be made to borrowers with similar credit ratings and for the same maturities. Commercial loans are a component of "Finance Receivables" in the balance sheet. Finance Receivables also include lease receivables, which are exempt from fair value disclosure requirements. The fair 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 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 7.875% notes 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 $20,000 at December 31, 1996 and $23,000 at December 31, 1995. These amounts equal the total recorded reserves for losses and adjustment expense and unearned premiums at December 31, 1996 and 1995. Other insurance-related financial instruments are exempt from fair value disclosure requirements. 62 37 Estimated fair values of financial instruments at December 31 are as follows:
1996 1995 - --------------------------------------------------------------------------------------------------------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE - --------------------------------------------------------------------------------------------------------------------------- FINANCIAL ASSETS: FIXED MATURITIES AVAILABLE-FOR-SALE ........................ $11,936,243 $11,936,243 $11,928,144 $11,928,144 FIXED MATURITIES HELD-TO-MATURITY .......................... 2,488,324 2,670,004 2,044,517 2,388,514 MARKETABLE EQUITY SECURITIES ............................... 1,298,809 1,298,809 1,119,408 1,119,408 MORTGAGE LOANS ............................................. 447,988 461,000 416,489 443,000 COMMERCIAL LOANS ........................................... 536,460 531,000 494,138 520,000 FINANCIAL LIABILITIES: FUNDS HELD UNDER DEPOSIT CONTRACTS ......................... 9,792,730 9,935,000 8,756,384 9,282,000 CREDIT COMPANY BORROWINGS .................................. 808,750 810,000 614,270 618,000 7.875% NOTES DUE 2005 ...................................... 200,000 210,000 200,000 221,000 OTHER NOTES AND MORTGAGES .................................. 224,744 228,000 253,275 265,000
DERIVATIVE FINANCIAL INSTRUMENTS SAFECO's consolidated investments in mortgage-backed securities of $2.9 billion at market value at December 31, 1996 ($2.8 billion at December 31, 1995) are primarily residential collateralized mortgage obligations and pass-throughs (CMOs). CMOs, while technically defined as derivative instruments, are exempt from derivative disclosure requirements. SAFECO's investment in CMOs comprised of the riskier, more volatile type (e.g., interest only, inverse floaters, etc.) has been intentionally limited to only a small amount -- less than 1% of total CMOs at both December 31, 1996 and 1995. 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, 1996 were approximately $30,000, or less than 1% of consolidated investments. The majority of these commitments have original terms of up to 90 days and contracted fixed interest rates with a weighted average rate of 9% at December 31, 1996. Fixed rate commitments outstanding at December 31, 1995 were approximately $45,000. Exposure to credit risk relating to these commitments (i.e., risk that the borrower will be unable to perform its obligations) is mitigated through credit review and approval controls. Because the majority of the fixed rate commitments have terms of 90 days, the estimated fair value of these commitments is not material. SAFECO does not enter into financial instruments for trading or speculative purposes. SAFECO's involvement in other investment-type derivatives is 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 to reduce the impact of changes in interest rates on its variable rate debt by converting variable rate interest payments to fixed rates. The interest rate swap agreements provide only for the exchange of interest on the notional amounts at the stated rates, with no multipliers or leverage. At December 31, 1996, interest rate swap agreements were outstanding with notional amounts of $248,997, replacing variable rates with fixed rates with a weighted average rate of 6.0%. Maturities of these agreements range from June 1997 to November 2003. At December 31, 1995, interest rate swap agreements were outstanding with notional amounts of $134,942, replacing variable rates with fixed rates with a weighted average rate of 6.0%. There were no swap terminations in 1996, 1995 and 1994. The net interest accrued under these agreements is recorded as an adjustment to interest expense. Exposure to credit risk relating to interest rate swaps is the risk that the counterparty will be unable to perform its obligations. This risk is mitigated through credit review, approval controls and by entering into agreements with only highly rated counterparties.The estimated fair value of interest rate swaps was not material at December 31, 1996 or 1995; thus, no additional disclosures are warranted. 63 38 NOTE 8: COMMON STOCK On December 1, 1995, the Corporation's common stock was split 2-for-1. Per share amounts have been adjusted to reflect the stock split. Changes in common stock outstanding for the last three years are as follows:
1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- NUMBER OF SHARES OUTSTANDING AT THE BEGINNING OF YEAR ............ 125,978,742 62,951,634 62,931,562 SHARES REACQUIRED ................................................ (254,767) (288,805) (104,320) SHARES ISSUED FOR STOCK OPTIONS AND RIGHTS ....................... 326,613 364,279 124,392 SHARES ISSUED FOR ACQUISITION OF SUBSIDIARY ...................... 257,649 - - TWO-FOR-ONE STOCK SPLIT - 62,951,634 - ----------------------------------------- NUMBER OF SHARES OUTSTANDING AT THE END OF YEAR .............. 126,308,237 125,978,742 62,951,634 =========================================
NOTE 9: STOCK INCENTIVE PLAN The SAFECO Incentive Plan of 1987 provides for the issuance of up to 4,800,000 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 the grant. The terms and conditions upon which options become exercisable may vary among grants; however, option rights expire no later than ten years from the date of grant. All share amounts and prices are adjusted for the 2-for-1 stock split in 1995. SAFECO continues to apply Accounting Principles Board Opinion 25 in accounting for its stock options, as allowed under FASB Statement 123. The effect of applying Statement 123's fair value method to SAFECO's stock option awards results in net income and earnings per share that are not materially different from amounts reported. Changes in stock options for the three years ended December 31, 1996 are as follows:
OPTIONS OUTSTANDING - ------------------------------------------------------------ WEIGHTED AVERAGE PRICE SHARES PER SHARE - ------------------------------------------------------------ BALANCE DECEMBER 31, 1993 ........... 1,828,462 $ 19.03 GRANTED ......................... 297,400 27.39 EXERCISED ....................... (238,726) 13.51 CANCELED ........................ (17,300) 26.12 ---------------------- BALANCE DECEMBER 31, 1994 ........... 1,869,836 21.00 GRANTED ......................... 312,200 29.87 EXERCISED ....................... (357,203) 15.45 CANCELED ........................ (21,200) 26.21 ---------------------- BALANCE DECEMBER 31, 1995 ........... 1,803,633 23.57 GRANTED ......................... 372,700 33.60 EXERCISED ....................... (317,890) 17.19 CANCELED ........................ - - ---------------------- BALANCE DECEMBER 31, 1996 ........... 1,858,443 $ 26.67 ====================== EXERCISABLE AT DECEMBER 31, 1996 ............... 792,129 $ 21.82 ======================
Exercise prices for options outstanding as of December 31, 1996 range from $12.25 to $38.50. 64 39 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 the stated number of years. Matured rights are issued in stock and/or paid in cash at the option of the holder. During 1996, 1995 and 1994, $1,958, $1,313 and $899, respectively, were charged to operations for the compensation element of restricted stock rights and stock appreciation rights. No performance stock rights have been awarded. Changes in restricted stock rights for the three years ended December 31, 1996 are as follows:
SHARE RIGHTS - ------------------------------------------------------------ BALANCE DECEMBER 31, 1993 ......................... 88,836 AWARDED ....................................... 40,400 MATURED ....................................... (39,898) CANCELED ...................................... (1,650) ------- BALANCE DECEMBER 31, 1994 ......................... 87,688 AWARDED ....................................... 44,800 MATURED ....................................... (35,762) CANCELED ...................................... (1,150) ------- BALANCE DECEMBER 31, 1995 ......................... 95,576 AWARDED ....................................... 44,500 MATURED ....................................... (37,342) CANCELED ...................................... - ------- BALANCE DECEMBER 31, 1996 ......................... 102,734 =======
There were 1,383,574 shares of common stock reserved for future options and rights at December 31, 1996. NOTE 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 (i.e., statutory basis). Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). Permitted statutory accounting practices encompass all accounting practices not so prescribed. Statutory net income differs from the net income reported in accordance with 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 1996 1995 1994 - ------------------------------------------------------------ PROPERTY AND CASUALTY ... $317,672 $299,330 $ 217,348 LIFE AND HEALTH ......... 97,243 103,047 48,630
STATUTORY STOCKHOLDER'S EQUITY DECEMBER 31 1996 1995 - ------------------------------------------------------------ PROPERTY AND CASUALTY .............. $2,166,187 $1,864,732 LIFE AND HEALTH .................... 587,658 504,683
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, 1996. NOTE 11: DIVIDEND RESTRICTIONS SAFECO's subsidiaries are restricted as to the amount of dividends they may pay to their parent without regulatory or lender consent. The amount of subsidiary retained earnings available for the payment of dividends to SAFECO Corporation without prior regulatory or lender approval approximated $541,082 at December 31, 1996. 65 40 NOTE 12: EMPLOYEE BENEFIT PLANS The Corporation administers profit-sharing bonus, defined contribution, and defined benefit 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 SAFECO's policy to fund the plan on a current basis to the full extent deductible under federal income tax regulations. The present value of all accrued benefits under the plan was $30,300 at December 31, 1996, determined using a discount rate of 7.6%. The fair value of plan assets was $44,000 at December 31, 1996. The cost of the plans discussed above charged to income is as follows:
1996 1995 1994 - ------------------------------------------------------------ PROFIT-SHARING BONUS ..... $21,339 $21,771 $ 18,178 DEFINED CONTRIBUTION ..... 30,534 26,889 22,591 DEFINED BENEFIT .......... 6,486 5,619 5,669 --------------------------------- TOTAL ................ $58,359 $54,279 $ 46,438 =================================
In addition, SAFECO provides certain healthcare and life insurance benefits ("other postretirement benefits") for retired employees. Substantially all employees become eligible for these benefits if they reach retirement age while working for SAFECO. The cost of these benefits is shared by SAFECO and the retiree. SAFECO accrues for these costs during the years that employees provide services, under FASB Statement 106. The transition obligation was recorded as a cumulative effect adjustment in 1993, resulting in a reduction of net income of $15,676 (net of tax). Net periodic other postretirement benefit costs were $3,178, $1,891 and $2,771 in 1996, 1995 and 1994 respectively. The following table summarizes the funded status of the plan:
DECEMBER 31 1996 1995 - ------------------------------------------------------------ TOTAL ACCUMULATED POSTRETIREMENT BENEFIT OBLIGATION (APBO) ......... $25,269 $ 27,702 LESS PLAN ASSETS AT FAIR VALUE ........ 1,097 880 -------------------- APBO IN EXCESS OF PLAN ASSETS ......... 24,172 26,822 UNRECOGNIZED GAIN ..................... 6,656 1,485 -------------------- ACCRUED POSTRETIREMENT BENEFIT COST RECORDED IN THE BALANCE SHEET ..... $30,828 $ 28,307 --------------------
Discount rate assumptions of 7.75%, 7.5% and 8.5% were used at December 31, 1996, 1995 and 1994, respectively. The accumulated postretirement benefit obligation at December 31, 1996 was determined using a healthcare cost trend rate of 11% for 1997, declining by 1% per year, starting in 1998, to 6% and remaining at that level thereafter. 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, 1996 by $3,026 and the annual net periodic other postretirement benefit cost for the year then ended by $513. NOTE 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 2034. These leases are accounted for as operating leases. Minimum future rentals from leases in effect at December 31, 1996 are as follows:
YEAR RECEIVABLE AMOUNT - ------------------------------------------------------------ 1997 ............................................. $ 41,284 1998 ............................................. 38,854 1999 ............................................. 36,113 2000 ............................................. 32,963 2001 ............................................. 30,989 2002 AND THEREAFTER .............................. 195,543 --------- TOTAL ........................................ $ 375,746 =========
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 $4,669, $4,295 and $5,460 in 1996, 1995 and 1994, respectively. The real estate companies' investment in rental property and related accumulated depreciation is as follows:
DECEMBER 31 1996 1995 - ------------------------------------------------------------ SHOPPING CENTERS ..................... $284,729 $ 303,111 OFFICE AND INDUSTRIAL SPACE .......... 47,796 46,734 HEALTHCARE FACILITIES ................ 39,981 25,850 OTHER ................................ 42,626 40,115 --------------------- 415,132 415,810 LESS ACCUMULATED DEPRECIATION ........ 82,083 83,907 --------------------- TOTAL ............................ $333,049 $ 331,903 =====================
66 41 NOTE 14: INCOME TAXES SAFECO uses the liability method of accounting for income taxes pursuant to FASB Statement 109, "Accounting for Income Taxes." 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% to income before income taxes and the consolidated provision for income taxes are as follows:
1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- COMPUTED "EXPECTED" TAX EXPENSE ......................................... $ 202,461 $179,830 $136,409 TAX-EXEMPT MUNICIPAL BOND INCOME ........................................ (66,236) (64,700) (60,039) DIVIDENDS RECEIVED DEDUCTION ............................................ (9,395) (10,238) (10,369) PRORATION ADJUSTMENT .................................................... 8,763 7,781 6,506 OTHER ................................................................... 3,917 2,168 2,860 --------------------------------------- CONSOLIDATED PROVISION FOR INCOME TAXES ............................. $ 139,510 $114,841 $ 75,367 =======================================
The tax effects of temporary differences which give rise to the deferred tax assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 are as follows:
DECEMBER 31 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS: DISCOUNTED LOSS AND ADJUSTMENT EXPENSE RESERVES ..................... $ 122,726 $131,679 $122,663 UNEARNED PREMIUM LIABILITY .......................................... 62,274 59,634 56,495 ADJUSTMENT TO LIFE POLICY LIABILITIES ............................... 34,773 30,209 20,444 CAPITALIZATION OF LIFE POLICY ACQUISITION COSTS ..................... 33,393 21,860 18,263 POSTRETIREMENT BENEFITS ............................................. 10,790 9,907 9,585 REALIZED CAPITAL LOSSES ............................................. 6,983 10,483 6,773 DEFERRED POLICY ACQUISITION COSTS VALUATION ALLOWANCE ............... 6,664 14,985 - OTHER ............................................................... 43,375 36,197 36,899 --------------------------------------- TOTAL DEFERRED TAX ASSETS ........................................ 320,978 314,954 271,122 --------------------------------------- DEFERRED TAX LIABILITIES: DEFERRED POLICY ACQUISITION COSTS ................................... 145,301 139,711 136,095 BOND DISCOUNT ACCRUAL ............................................... 27,164 22,460 19,119 ACCELERATED DEPRECIATION ............................................ 75,716 65,289 52,043 REAL ESTATE DEVELOPMENT EXPENSES CAPITALIZED ........................ 11,587 12,230 12,527 UNREALIZED APPRECIATION OF INVESTMENT SECURITIES .................... 462,939 558,541 66,818 OTHER ............................................................... 16,108 15,657 22,373 --------------------------------------- TOTAL DEFERRED TAX LIABILITIES ................................... 738,815 813,888 308,975 --------------------------------------- NET DEFERRED TAX LIABILITY ....................................... $ 417,837 $498,934 $ 37,853 =======================================
The following table reconciles the deferred tax expense (benefit) in the Statement of Consolidated Income to the net change in the deferred tax liability in the Consolidated Balance Sheet:
1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------- DEFERRED TAX EXPENSE (BENEFIT) .......................................... $ 6,032 $(16,623) $ (8,242) DEFERRED TAX CHANGES REPORTED IN STOCKHOLDERS' EQUITY: INCREASE (DECREASE) IN LIABILITY RELATED TO UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES ............. (95,602) 491,723 (72,172) INCREASE (DECREASE) IN LIABILITY RELATED TO DEFERRED POLICY ACQUISITION COSTS VALUATION ALLOWANCE ..................... 8,321 (14,985) - INCREASE (DECREASE) IN LIABILITY RELATED TO UNREALIZED GAIN (LOSS) FROM FOREIGN CURRENCY TRANSLATION .................... 152 966 (1,653) -------------------------------------- INCREASE (DECREASE) IN NET DEFERRED TAX LIABILITY ....................... $(81,097) $461,081 $(82,067) ======================================
67 42 NOTE 15: SEGMENT DATA
UNDER- INVESTMENT REALIZED WRITING IDENTIFIABLE REVENUES INCOME GAIN (LOSS) PROFIT (LOSS) NET INCOME ASSETS - ----------------------------------------------------------------------------------------------------------------------- 1996 PROPERTY AND CASUALTY: PERSONAL ...................... $1,650,690 $ 4,990 $ 352,218 COMMERCIAL AND SURETY ......... 624,674 33,466 244,057 ---------- -------- TOTAL ...................... 2,275,364 $ 281,580 $ 64,738 $ 38,456 $313,445 6,243,976 ---------- ---------- -------- ======== ----------- LIFE AND HEALTH: FINANCIAL SERVICES ............ 50,705 554,844 5,906 7,745,511 EMPLOYEE BENEFITS ............. 215,219 281,871 4,628 4,319,622 ---------- ---------- -------- ----------- TOTAL ...................... 265,924 836,715 10,534 95,407 12,065,133 ---------- ---------- -------- ----------- REAL ESTATE ....................... 79,924 (2,611) 6,415 601,339 CREDIT ............................ 84,247 12,178 1,067,524 OTHER AND ELIMINATIONS ............ 53,126 (1,561) 17,389 11,506 (60,299) ---------- ---------- -------- -------- ----------- CONSOLIDATED TOTALS ........ $2,758,585 $1,116,734 $ 90,050 $438,951 $19,917,673 ========== ========== ======== ======== =========== 1995 PROPERTY AND CASUALTY: PERSONAL ...................... $1,562,716 $ (2,526) $ 335,021 COMMERCIAL AND SURETY ......... 599,425 8,874 229,702 ---------- -------- TOTAL ...................... 2,162,141 $ 291,450 $ 51,657 $ 6,348 $290,126 6,174,407 ---------- ---------- -------- ======== ----------- LIFE AND HEALTH: FINANCIAL SERVICES ............ 47,178 494,758 14,908 7,104,443 EMPLOYEE BENEFITS ............. 214,392 283,463 (9,014) 4,111,184 ---------- ---------- -------- ----------- TOTAL ...................... 261,570 778,221 5,894 92,453 11,215,627 ---------- ---------- -------- ----------- REAL ESTATE ....................... 74,959 (818) 5,398 527,036 CREDIT ............................ 71,799 8,872 883,008 OTHER AND ELIMINATIONS ............ 44,836 5,609 7,538 2,110 (32,235) ---------- ---------- -------- -------- ----------- CONSOLIDATED TOTALS ........ $2,615,305 $1,075,280 $ 64,271 $398,959 $18,767,843 ========== ========== ======== ======== =========== 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 ---------- ---------- -------- ======== ----------- 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 ---------- ---------- -------- ----------- REAL ESTATE ....................... 107,315 (174) 6,455 545,773 CREDIT ............................ 58,181 7,365 757,166 OTHER AND ELIMINATIONS ............ 36,281 1,912 2,323 (1,608) (86,067) ---------- ---------- -------- -------- ----------- CONSOLIDATED TOTALS ........ $2,531,979 $ 991,610 $ 39,040 $314,374 $15,901,729 ========== ========== ======== ======== ===========
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. 68 43 NOTE 16: INTERIM FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ANNUAL - --------------------------------------------------------------------------------------------------------------------------- REVENUES:* 1996 .................................................. $977,602 $976,021 $992,499 $1,019,247 $3,965,369 1995 .................................................. 906,383 934,097 951,783 962,593 3,754,856 1994 .................................................. 863,506 870,074 908,963 920,086 3,562,629 INCOME BEFORE REALIZED GAIN:** 1996 .................................................. $ 89,197 $ 92,887 $105,202 $ 92,931 $ 380,217 1995 .................................................. 61,586 92,436 100,836 102,549 357,407 1994 .................................................. 43,486 88,818 69,683 86,465 288,452 REALIZED GAIN:** 1996 .................................................. $ 21,506 $ 13,096 $ 10,784 $ 13,348 $ 58,734 1995 .................................................. 3,624 10,263 14,021 13,644 41,552 1994 .................................................. 12,540 1,231 2,829 9,322 25,922 NET INCOME: 1996 .................................................. $110,703 $105,983 $115,986 $ 106,279 $ 438,951 1995 .................................................. 65,210 102,699 114,857 116,193 398,959 1994 .................................................. 56,026 90,049 72,512 95,787 314,374 (PER SHARE)*** INCOME BEFORE REALIZED GAIN:** 1996 .................................................. $ .71 $ .74 $ .83 $ .74 $ 3.02 1995 .................................................. .49 .74 .80 .81 2.84 1994 .................................................. .35 .70 .56 .68 2.29 REALIZED GAIN:** 1996 .................................................. $ .17 $ .10 $ .09 $ .10 $ .46 1995 .................................................. .03 .08 .11 .11 .33 1994 .................................................. .10 .01 .02 .08 .21 NET INCOME: 1996 .................................................. $ .88 $ .84 $ .92 $ .84 $ 3.48 1995 .................................................. .52 .82 .91 .92 3.17 1994 .................................................. .45 .71 .58 .76 2.50 DIVIDENDS PAID: 1996 .................................................. $ .26 1/2 $ .26 1/2 $ .29 $ .29 $ 1.11 1995 .................................................. .24 1/2 .24 1/2 .26 1/2 .26 1/2 1.02 1994 .................................................. .22 1/2 .22 1/2 .24 1/2 .24 1/2 .94 MARKET PRICE RANGE:**** 1996 - HIGH ......................................... $ 39 3/16 $ 35 3/8 $ 35 1/2 $ 41 5/8 $ 41 5/8 - LOW .......................................... 33 1/8 30 7/8 32 35 3/16 30 7/8 1995 - HIGH ......................................... 27 15/16 29 3/4 33 9/16 37 5/8 37 5/8 - LOW .......................................... 25 1/4 27 1/4 28 1/16 31 1/4 25 1/4
* Prior year amounts revised to conform to 1996 classification. ** Amounts are net of income tax. *** Per share amounts are adjusted for the 2-for-1 stock split in December 1995 (see Note 8). **** SAFECO Corporation common stock trades on The Nasdaq Stock Market under the symbol SAFC. 69 44 SUMMARY OF GROWTH
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands Except Per Share Amounts) SUMMARY OF CONTINUING OPERATIONS INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN: PROPERTY AND CASUALTY ...................................................... $ 270,644 $ 256,408 $ 192,734 LIFE AND HEALTH ............................................................ 88,780 88,988 84,941 REAL ESTATE ................................................................ 8,411 5,929 6,568 CREDIT ..................................................................... 12,178 8,872 7,365 ASSET MANAGEMENT ........................................................... 5,105 4,746 4,116 CORPORATE .................................................................. (4,901) (7,536) (7,272) ------------------------------------------ TOTAL ................................................................... 380,217 357,407 288,452 REALIZED GAIN, NET OF INCOME TAXES ............................................. 58,734 41,552 25,922 CUMULATIVE EFFECT OF ACCOUNTING CHANGES ........................................ - - - ------------------------------------------ NET INCOME ..................................................................... $ 438,951 $ 398,959 $ 314,374 ========================================== STATISTICS PER SHARE OF COMMON STOCK* PRIMARY NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN ................................................ $ 3.02 $ 2.84 $ 2.29 REALIZED GAIN .............................................................. .46 .33 .21 CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................................... - - - NET INCOME ................................................................. 3.48 3.17 2.50 AVERAGE NUMBER OF SHARES ................................................... 126,074 125,961 125,944 FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN ................................................ 3.00 2.82 2.28 REALIZED GAIN .............................................................. .46 .33 .21 CUMULATIVE EFFECT OF ACCOUNTING CHANGES .................................... - - - NET INCOME ................................................................. 3.46 3.15 2.49 AVERAGE NUMBER OF SHARES ................................................... 126,683 126,548 126,414 DIVIDENDS PAID ................................................................. 1.11 1.02 .94 MARKET PRICE: HIGH ....................................................................... 41 5/8 37 5/8 29 13/16 LOW ........................................................................ 30 7/8 25 1/4 23 11/16 CLOSE ...................................................................... 39 7/16 34 1/2 26 STOCKHOLDERS' EQUITY: BOOK VALUE ................................................................. 32.58 31.61 22.47 WITH SECURITIES AT MARKET VALUE, NET OF TAX ................................ 33.52 33.39 21.93 REVENUES FROM CONTINUING OPERATIONS (EXCLUDING REALIZED GAINS) INSURANCE: PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............................. $2,463,501 $2,366,856 $2,278,045 LIFE AND HEALTH ............................................................ 265,924 261,570 276,771 NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS): PROPERTY AND CASUALTY ...................................................... 281,580 291,450 283,481 LIFE AND HEALTH ............................................................ 836,715 778,221 706,217 OTHER ...................................................................... (1,561) 5,609 1,912 REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................................. 79,924 74,959 107,315 CREDIT (INCLUDING AFFILIATE LOANS) ............................................. 84,247 71,799 58,181 ASSET MANAGEMENT ............................................................... 23,216 18,532 15,055 TALBOT FINANCIAL ............................................................... 38,458 32,172 25,556 ------------------------------------------ TOTAL ................................................................... $4,072,004 $3,901,168 $3,752,533 ==========================================
*Share amounts are adjusted for stock splits. 70 45
1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------------ SUMMARY OF CONTINUING OPERATIONS INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN: PROPERTY AND CASUALTY ........................................ $ 217,187 $ 187,144 $ 145,421 $ 183,666 LIFE AND HEALTH .............................................. 76,903 75,600 79,705 77,626 REAL ESTATE .................................................. 6,136 6,040 5,850 6,139 CREDIT ....................................................... 6,439 6,140 6,396 4,476 ASSET MANAGEMENT ............................................. 4,255 4,261 3,397 3,016 CORPORATE .................................................... (3,934) (7,636) (3,852) (3,177) ----------------------------------------------------------- TOTAL ..................................................... 306,986 271,549 236,917 271,746 REALIZED GAIN, NET OF INCOME TAXES ............................... 118,915 39,745 22,661 6,663 CUMULATIVE EFFECT OF ACCOUNTING CHANGES .......................... 2,877 - - - ----------------------------------------------------------- NET INCOME ....................................................... $ 428,778 $ 311,294 $ 259,578 $ 278,409 =========================================================== STATISTICS PER SHARE OF COMMON STOCK* PRIMARY NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN .................................. $ 2.44 $ 2.17 $ 1.89 $ 2.16 REALIZED GAIN ................................................ .95 .31 .18 .05 CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... .02 - - - NET INCOME ................................................... 3.41 2.48 2.07 2.21 AVERAGE NUMBER OF SHARES ..................................... 125,758 125,584 125,478 126,238 FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN .................................. 2.43 2.15 1.87 2.14 REALIZED GAIN ................................................ .94 .31 .18 .05 CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... .02 - - - NET INCOME ................................................... 3.39 2.46 2.05 2.19 AVERAGE NUMBER OF SHARES ..................................... 126,466 126,478 126,510 126,932 DIVIDENDS PAID ................................................... .86 .78 .71 .64 MARKET PRICE: HIGH ......................................................... 33 1/4 29 9/16 24 3/8 21 1/16 LOW .......................................................... 27 21 3/16 15 5/8 12 11/16 CLOSE ........................................................ 27 1/2 28 5/8 24 3/8 16 7/16 STOCKHOLDERS' EQUITY: BOOK VALUE ................................................... 22.04 19.49 17.70 15.75 WITH SECURITIES AT MARKET VALUE, NET OF TAX .................. 28.47 23.92 21.92 16.57 REVENUES FROM CONTINUING OPERATIONS (EXCLUDING REALIZED GAINS) INSURANCE: PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............... $2,134,512 $1,937,090 $1,830,199 $1,792,836 LIFE AND HEALTH .............................................. 305,963 328,516 332,711 311,961 NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS): PROPERTY AND CASUALTY ........................................ 277,643 280,820 286,073 283,248 LIFE AND HEALTH .............................................. 668,158 623,584 557,445 476,177 OTHER ........................................................ 5,994 (1,356) 3,249 5,348 REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................... 78,252 187,172 274,387 254,718 CREDIT (INCLUDING AFFILIATE LOANS) ............................... 54,046 51,327 54,371 45,193 ASSET MANAGEMENT ................................................. 13,250 13,057 10,794 9,009 TALBOT FINANCIAL ................................................. - - - ----------------------------------------------------------- TOTAL ..................................................... $3,537,818 $3,420,210 $3,349,229 $3,178,490 ===========================================================
1989 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------------- SUMMARY OF CONTINUING OPERATIONS INCOME (LOSS), NET OF INCOME TAXES, BEFORE REALIZED GAIN: PROPERTY AND CASUALTY ........................................ $ 188,928 $ 191,443 $ 175,093 $ 99,098 LIFE AND HEALTH .............................................. 70,911 44,714 33,944 48,511 REAL ESTATE .................................................. 669 (8,142) (7,420) 2,756 CREDIT ....................................................... 4,009 3,509 2,420 3,305 ASSET MANAGEMENT ............................................. 2,545 2,021 1,493 615 CORPORATE .................................................... (3,346) 1,304 4,772 3,633 ----------------------------------------------------------- TOTAL ..................................................... 263,716 234,849 210,302 157,918 REALIZED GAIN, NET OF INCOME TAXES ............................... 36,501 33,786 42,708 66,037 CUMULATIVE EFFECT OF ACCOUNTING CHANGES .......................... - - - - ----------------------------------------------------------- NET INCOME ....................................................... $ 300,217 $ 268,635 $ 253,010 $ 223,955 =========================================================== STATISTICS PER SHARE OF COMMON STOCK* PRIMARY NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN .................................. $ 2.09 $ 1.79 $ 1.56 $ 1.17 REALIZED GAIN ................................................ .29 .26 .32 .49 CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... - - - - NET INCOME ................................................... 2.38 2.05 1.88 1.66 AVERAGE NUMBER OF SHARES ..................................... 126,384 130,900 134,930 134,804 FULLY DILUTED NET INCOME FROM CONTINUING OPERATIONS: INCOME BEFORE REALIZED GAIN .................................. 2.07 1.79 1.55 1.16 REALIZED GAIN ................................................ .29 .25 .31 .49 CUMULATIVE EFFECT OF ACCOUNTING CHANGES ...................... - - - - NET INCOME ................................................... 2.36 2.04 1.86 1.65 AVERAGE NUMBER OF SHARES ..................................... 127,444 131,512 135,968 136,112 DIVIDENDS PAID ................................................... .57 .51 .45 1/4 .41 1/4 MARKET PRICE: HIGH ......................................................... 19 5/8 14 3/4 19 15 15/16 LOW .......................................................... 11 5/8 11 1/2 12 5/16 11 3/8 CLOSE ........................................................ 17 13/16 11 13/16 13 7/8 13 1/4 STOCKHOLDERS' EQUITY: BOOK VALUE ................................................... 14.63 12.44 10.69 9.84 WITH SECURITIES AT MARKET VALUE, NET OF TAX .................. 16.57 13.54 11.44 12.61 REVENUES FROM CONTINUING OPERATIONS (EXCLUDING REALIZED GAINS) INSURANCE: PROPERTY AND CASUALTY (GROSS PREMIUMS WRITTEN) ............... $1,696,940 $1,627,861 $1,545,922 $1,479,533 LIFE AND HEALTH .............................................. 274,275 264,974 240,423 232,667 NET INVESTMENT INCOME (EXCLUDING REALIZED GAIN OR LOSS): PROPERTY AND CASUALTY ........................................ 263,415 220,496 179,837 151,959 LIFE AND HEALTH .............................................. 391,876 296,233 233,837 189,363 OTHER ........................................................ 14,670 20,245 22,573 20,833 REAL ESTATE (EXCLUDING REALIZED GAIN OR LOSS) .................... 246,216 223,190 195,900 216,082 CREDIT (INCLUDING AFFILIATE LOANS) ............................... 38,665 34,290 30,767 30,414 ASSET MANAGEMENT ................................................. 8,322 7,166 6,708 4,087 TALBOT FINANCIAL ................................................. - - - - ----------------------------------------------------------- TOTAL ..................................................... $2,934,379 $2,694,455 $2,455,967 $2,324,938 ===========================================================
71 46 SUMMARY OF GROWTH (CONTINUED)
1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In Thousands Except Ratios) PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE PERSONAL AUTO ............................................................... $ 1,086,961 $ 1,043,586 $ 1,013,445 HOMEOWNERS .................................................................. 469,154 440,247 403,673 OTHER PERSONAL .............................................................. 169,973 163,055 144,624 -------------------------------------------- TOTAL PERSONAL ....................................................... 1,726,088 1,646,888 1,561,742 COMMERCIAL .................................................................. 607,303 588,064 591,857 SURETY ...................................................................... 103,162 100,052 90,246 OTHER ....................................................................... 26,948 31,852 34,200 TOTAL CANADA ................................................................ - - - -------------------------------------------- GROSS PREMIUMS WRITTEN ...................................................... 2,463,501 2,366,856 2,278,045 CEDED REINSURANCE PREMIUMS .................................................. 150,428 159,872 174,580 -------------------------------------------- NET PREMIUMS WRITTEN ........................................................ $ 2,313,073 $ 2,206,984 $ 2,103,465 ============================================ OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE RATIOS TO EARNED PREMIUMS: LOSSES .................................................................. 59.09% 60.04% 64.70% ADJUSTMENT EXPENSE ...................................................... 10.37 10.58 9.72 UNDERWRITING EXPENSES ................................................... 28.14 28.39 28.24 DIVIDENDS TO POLICYHOLDERS .............................................. .71 .70 1.11 -------------------------------------------- COMBINED LOSSES AND EXPENSES ............................................ 98.31% 99.71% 103.77% ============================================ PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS .................................. 1.1:1 1.2:1 1.4:1 PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REALIZED GAIN PROPERTY AND CASUALTY: UNDERWRITING ............................................................ $ 38,456 $ 6,348 $ (77,345) INVESTMENT .............................................................. 281,580 291,450 283,481 PROPOSITION 103 SETTLEMENT .............................................. - - - LIFE AND HEALTH ............................................................. 136,681 135,573 131,015 REAL ESTATE ................................................................. 13,052 9,060 10,152 CREDIT ...................................................................... 19,081 13,300 10,761 ASSET MANAGEMENT ............................................................ 7,610 6,897 6,351 CORPORATE ................................................................... (8,049) (13,099) (13,714) -------------------------------------------- TOTAL ................................................................ $ 488,411 $ 449,529 $ 350,701 ============================================ STOCKHOLDERS' EQUITY BOOK VALUE .................................................................. $ 4,115,340 $ 3,982,646 $ 2,829,479 WITH SECURITIES AT MARKET VALUE, NET OF TAX ................................. 4,233,432 4,206,244 2,761,344 LONG-TERM DEBT FROM CONTINUING OPERATIONS ................................... 453,860 503,567 534,232 TOTAL ASSETS ................................................................ 19,917,673 18,767,843 15,901,729
72 47
1993 1992 1991 1990 - --------------------------------------------------------------------------------------------------------------------------------- PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE PERSONAL AUTO ................................................... $ 977,105 $ 907,016 $ 805,826 $ 717,584 HOMEOWNERS ...................................................... 362,419 310,841 271,531 239,550 OTHER PERSONAL .................................................. 126,353 109,063 92,628 82,642 ------------------------------------------------------------- TOTAL PERSONAL ........................................... 1,465,877 1,326,920 1,169,985 1,039,776 COMMERCIAL ...................................................... 544,162 491,942 450,744 464,328 SURETY .......................................................... 84,245 79,714 79,077 75,927 OTHER ........................................................... 40,228 38,478 47,507 39,128 TOTAL CANADA .................................................... - 36 82,886 173,677 ------------------------------------------------------------- GROSS PREMIUMS WRITTEN .......................................... 2,134,512 1,937,090 1,830,199 1,792,836 CEDED REINSURANCE PREMIUMS ...................................... 134,347 116,645 200,489 104,804 ------------------------------------------------------------- NET PREMIUMS WRITTEN ............................................ $ 2,000,165 $ 1,820,445 $1,629,710 $ 1,688,032 ============================================================= OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE RATIOS TO EARNED PREMIUMS: LOSSES ...................................................... 60.21% 63.93% 67.81% 65.50% ADJUSTMENT EXPENSE .......................................... 9.78 10.55 10.72 11.67 UNDERWRITING EXPENSES ....................................... 28.43 28.72 29.33 29.24 DIVIDENDS TO POLICYHOLDERS .................................. 1.07 .91 .76 .75 ------------------------------------------------------------- COMBINED LOSSES AND EXPENSES ................................ 99.49% 104.11% 108.62% 107.16% ============================================================= PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS ...................... 1.3:1 1.3:1 1.4:1 1.6:1 PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REALIZED GAIN PROPERTY AND CASUALTY: UNDERWRITING ................................................ $ 9,848 $ (72,022) $ (141,121) $ (119,173) INVESTMENT .................................................. 277,643 280,820 286,073 283,248 PROPOSITION 103 SETTLEMENT .................................. (40,000) - - - LIFE AND HEALTH ................................................. 125,306 123,604 124,109 118,486 REAL ESTATE ..................................................... 10,079 8,389 8,525 9,123 CREDIT .......................................................... 10,190 9,036 9,489 6,815 ASSET MANAGEMENT ................................................ 6,539 6,503 5,179 4,586 CORPORATE ....................................................... (10,317) (13,662) (9,625) (8,799) ------------------------------------------------------------- TOTAL .................................................... $ 389,288 $ 342,668 $ 282,629 $ 294,286 ============================================================= STOCKHOLDERS' EQUITY BOOK VALUE ...................................................... $ 2,774,391 $ 2,448,147 $2,221,134 $ 1,975,699 WITH SECURITIES AT MARKET VALUE, NET OF TAX ..................... 3,583,482 3,005,382 2,750,453 2,078,670 LONG-TERM DEBT FROM CONTINUING OPERATIONS ....................... 600,209 504,638 523,557 451,328 TOTAL ASSETS .................................................... 14,807,291 13,391,109 12,113,944 10,683,462
1989 1988 1987 1986 - --------------------------------------------------------------------------------------------------------------------------- PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE PERSONAL AUTO ................................................... $ 644,765 $ 595,969 $ 549,267 $ 519,473 HOMEOWNERS ...................................................... 222,539 219,042 214,102 207,097 OTHER PERSONAL .................................................. 74,060 71,115 68,086 64,646 -------------------------------------------------------- TOTAL PERSONAL ........................................... 941,364 886,126 831,455 791,216 COMMERCIAL ...................................................... 480,633 483,918 463,823 448,872 SURETY .......................................................... 77,195 69,817 62,472 60,594 OTHER ........................................................... 38,885 35,163 31,949 26,968 TOTAL CANADA .................................................... 158,863 152,837 156,223 151,883 -------------------------------------------------------- GROSS PREMIUMS WRITTEN .......................................... 1,696,940 1,627,861 1,545,922 1,479,533 CEDED REINSURANCE PREMIUMS ...................................... 101,428 109,921 108,177 108,751 -------------------------------------------------------- NET PREMIUMS WRITTEN ............................................ $1,595,512 $1,517,940 $1,437,745 $1,370,782 ======================================================== OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE RATIOS TO EARNED PREMIUMS: LOSSES ...................................................... 63.13% 58.05% 56.58% 61.88% ADJUSTMENT EXPENSE .......................................... 9.99 11.94 13.84 13.25 UNDERWRITING EXPENSES ....................................... 29.31 29.38 30.25 30.25 DIVIDENDS TO POLICYHOLDERS .................................. .88 .97 .72 .65 -------------------------------------------------------- COMBINED LOSSES AND EXPENSES ................................ 103.31% 100.34% 101.39% 106.03% ======================================================== PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS ...................... 1.5:1 1.8:1 2.1:1 2.2:1 PRETAX INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE REALIZED GAIN PROPERTY AND CASUALTY: UNDERWRITING ................................................ $ (52,243) $ (5,084) $ (19,698) $ (77,568) INVESTMENT .................................................. 263,415 220,496 179,837 151,959 PROPOSITION 103 SETTLEMENT .................................. - - - - LIFE AND HEALTH ................................................. 106,906 67,967 56,316 76,704 REAL ESTATE ..................................................... 884 (12,494) (10,805) 6,020 CREDIT .......................................................... 6,031 5,050 3,341 4,637 ASSET MANAGEMENT ................................................ 3,881 3,081 2,518 1,178 CORPORATE ....................................................... (8,793) (2,371) (304) (2,672) -------------------------------------------------------- TOTAL .................................................... $ 320,081 $ 276,645 $ 211,205 $ 160,258 ======================================================== STOCKHOLDERS' EQUITY BOOK VALUE ...................................................... $1,850,728 $1,570,383 $1,435,418 $1,328,215 WITH SECURITIES AT MARKET VALUE, NET OF TAX ..................... 2,096,028 1,709,729 1,535,092 1,701,853 LONG-TERM DEBT FROM CONTINUING OPERATIONS ....................... 512,859 540,996 539,825 538,081 TOTAL ASSETS .................................................... 9,415,865 7,869,181 6,738,785 5,876,072
73 EX-21 5 SUBSIDIARIES OF THE REGISTRANT 1 SAFECO Corporation Organization Chart F-15 Exhibit 21 December 31, 1996 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) 9. SAFECO Properties, Inc. (WA) A. Winmar Company, Inc. (WA) a) C-W Properties, Inc. (WA) b) Capitol Court Corporation (WI) c) Gem State Investors, Inc. (WA) 2 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 Bighorn, Inc. (WA) k) Winmar Cascade, Inc. (WA) l) Winmar Metro, Inc. (WA) m) Winmar Northwest, Inc. (WA) n) 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) o) Winmar Redmond, Inc. (WA) p) Winmar of Kitsap, Inc. (WA) q) Winmar of Texas, Inc. (TX) r) Winmar of the Desert, Inc. (CA) B. SAFECARE Company, Inc. (WA) a) RIA Development, Inc. (WA) b) S.C. Bakersfield, Inc. (WA) c) S.C. Bellevue, Inc. (WA) d) S.C. Everett, Inc. (WA) e) S.C. Lynden, Inc. (WA) f) S.C. Marysville, Inc. (WA) g) S.C. Northgate, Inc. (WA) h) S.C. Vancouver, Inc. (WA) i) Lifeguard Ventures, Inc. (50%) (CA) 10. SAFECO Credit Company, Inc. (WA) 11. SAFECO Asset Management Company (WA) 12. SAFECO Securities, Inc. (WA) 13. SAFECO Services Corporation (WA) 14. SAFECO Trust Company (WA) 3 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. Goldware & Taylor Insurance Services (CA) E. Talbot Financial Corporation (WA) a) Talbot Agency, Inc. (NM) i) Boney Moore and Talbot, Inc. (NM) ii) Glacier Insurance, Inc. (MT) iii) J. Dorr Forbes, Inc. (WA) iv) Hemet Insurance Service (CA) v) Newport Financial Corporation (IL) vi) PNMR Securities Inc. (WA) vii) Talbot Agency of California, Inc. (CA) viii) Talbot Agency of Texas, Inc. (TX) ix) Talbot Financial Services of Hawaii, Inc. (HI) x) Tandy & Wood, Inc. (ID) F. SAFECO Select Insurance Services, Inc. (CA) NOTE: Certain inactive companies are not shown. EX-27 6 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFOMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 11,936,243 2,488,324 2,670,004 1,298,809 447,988 554,011 16,889,455 55,498 137,484 396,107 19,917,673 2,088,226 946,899 149,624 9,792,730 1,233,494 0 0 225,276 3,890,064 19,917,673 2,541,288 1,116,734 90,050 217,297 2,362,722 426,862 0 578,461 139,510 438,951 0 0 0 438,951 3.48 0 2,070,077 1,658,253 (77,744) 939,561 755,367 1,955,658 (77,744)
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