-----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, Tmn3yt1rCgqhGLRHZGAx+8yn/S865iAabbN+jG1w7zkVvOHiw6JdMmnyq4zrGkDh XYdLZQ1qKXwGsJBQDlwr/Q== 0000891020-99-001396.txt : 19990901 0000891020-99-001396.hdr.sgml : 19990901 ACCESSION NUMBER: 0000891020-99-001396 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06563 FILM NUMBER: 99687586 BUSINESS ADDRESS: STREET 1: 4333 BROOKLYN AVE NE STREET 2: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: 4333 BROOKLYN AVE NE CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-Q 1 FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1999. 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) 131,528,092 shares of no par value common stock were outstanding at June 30, 1999. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. 2 SAFECO CORPORATION - - -------------------------------------------------------------------------------- TABLE OF CONTENTS AND SIGNATURES
Part I - Financial Information * Page ---- Item 1. Financial Statements: Consolidated Balance Sheet, June 30, 1999 and December 31, 1998 3 Statement of Consolidated Income and Retained Earnings for the Quarters and Six Months Ended June 30, 1999 and 1998 5 Statement of Consolidated Cash Flows for Six Months Ended June 30, 1999 and 1998 6 Statement of Consolidated Comprehensive Income for the Quarters and Six Months Ended June 30, 1999 and 1998 7 Item 2. Management's Discussion and Analysis 8 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders 17 Item 6. Exhibits and Reports on Form 8-K 17
* The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of results for the interim periods have been included. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Corporation's Form 10-K for the year ended December 31, 1998 which has been previously filed with the Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFECO CORPORATION -------------------------------------- Registrant ROD A. PIERSON -------------------------------------- Rod A. Pierson Senior Vice President Dated August 13, 1999 and Chief Financial Officer H. PAUL LOWBER -------------------------------------- H. Paul Lowber Vice President, Controller and Dated August 13, 1999 and Chief Accounting Officer -2- 3 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) - - --------------------------------------------------------------------------------
June 30 December 31 ASSETS 1999 1998 --------- ----------- Investments: Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: 1999 - $17,166.8; 1998 -$16,679.7) $17,439.5 $17,855.6 Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1999 - $2,939.8; 1998 - $3,259.2) 2,725.0 2,720.9 Marketable Equity Securities, at Market Value (Cost: 1999 - $959.6; 1998 - $952.8) 2,146.9 2,036.6 Mortgage Loans 700.9 541.5 Real Estate (At cost less accumulated depreciation) 229.2 601.2 Policy Loans 88.1 88.3 Short-Term Investments 170.7 315.9 --------- --------- Total Investments 23,500.3 24,160.0 Cash 149.0 74.9 Accrued Investment Income 322.8 323.2 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) 1,344.8 1,207.7 Premiums and Other Service Fees Receivable 1,048.4 978.3 Other Notes and Accounts Receivable 134.9 155.2 Reinsurance Recoverables 388.1 317.4 Deferred Policy Acquisition Costs 572.9 521.1 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 309.6 280.2 Goodwill 1,334.0 1,359.0 Other Assets 408.1 313.6 Separate Account Assets 1,320.2 1,201.1 --------- --------- TOTAL $30,833.1 $30,891.7 ========= =========
(continued) -3- 4 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Millions) (continued) - - --------------------------------------------------------------------------------
June 30 December 31 1999 1998 --------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY Losses and Adjustment Expense $ 4,287.2 $ 4,262.7 Life Policy Liabilities 279.7 276.8 Unearned Premiums 1,851.3 1,750.9 Funds Held Under Deposit Contracts 13,197.0 12,718.1 Debt: Commercial Paper 656.2 732.7 Credit Company Borrowings ($1,224.9 maturing within one year) 1,249.4 1,255.2 7.875% Notes Due 2005 200.0 200.0 6.875% Notes Due 2007 200.0 200.0 Other ($7.2 maturing within one year) 79.8 227.7 Other Liabilities 1,498.4 1,153.5 Income Taxes: Current 9.7 2.5 Deferred (Includes tax on unrealized appreciation of investment securities: 1999 - $505.8; 1998 - $769.9) 193.4 492.6 Separate Account Liabilities 1,320.2 1,201.1 --------- --------- Total Liabilities 25,022.3 24,473.8 --------- --------- Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation ("Capital Securities") 842.3 842.1 --------- --------- Preferred Stock, No Par Value: Shares Authorized: 10 Shares Issued and Outstanding: None -- -- Common Stock, No Par Value: Shares Authorized: 300 Shares Reserved for Options: (1999 - 7.3; 1998 - 7.5) Shares Issued and Outstanding: (1999 - 131.5; 1998 - 136.3) 857.7 885.0 Retained Earnings 3,167.3 3,257.2 Total Accumulated Other Comprehensive Income - Unrealized Appreciation of Investment Securities, Net of Tax 943.5 1,433.6 --------- --------- Total Shareholders' Equity 4,968.5 5,575.8 --------- --------- TOTAL $30,833.1 $30,891.7 ========= =========
-4- 5 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (In Millions Except Per Share Amounts) - - --------------------------------------------------------------------------------
Six Months Ended Three Months Ended June 30 June 30 ------------------------ ------------------------ 1999 1998 1999 1998 --------- --------- --------- --------- REVENUES: Insurance: Property and Casualty Earned Premiums $ 2,147.7 $ 2,075.9 $ 1,083.3 $ 1,046.5 Life Premiums and Other Revenues 177.0 176.5 90.4 89.7 --------- --------- --------- --------- Total 2,324.7 2,252.4 1,173.7 1,136.2 Real Estate -- 39.1 -- 18.6 Credit 54.1 47.4 27.1 24.0 Asset Management 21.3 17.6 11.1 9.2 Other 61.0 30.2 28.8 15.4 Net Investment Income 785.2 754.2 395.6 379.7 Realized Investment Gain 86.3 44.9 30.0 17.0 --------- --------- --------- --------- Total 3,332.6 3,185.8 1,666.3 1,600.1 --------- --------- --------- --------- EXPENSES: Losses, Adjustment Expense and Policy Benefits 2,137.4 2,054.5 1,094.0 1,066.8 Commissions 395.8 385.7 202.9 200.3 Personnel Costs 232.1 220.5 108.5 113.3 Interest 67.1 77.7 33.3 38.7 Goodwill Amortization 27.3 26.5 13.8 13.3 Other 223.0 213.6 122.1 103.9 Amortization of Deferred Policy Acquisition Costs 420.8 387.1 219.2 186.0 Deferral of Policy Acquisition Costs (428.3) (418.2) (222.0) (207.9) --------- --------- --------- --------- Total 3,075.2 2,947.4 1,571.8 1,514.4 --------- --------- --------- --------- Income before Income Taxes 257.4 238.4 94.5 85.7 --------- --------- --------- --------- Provision (Benefit) for Income Taxes: Current 78.9 76.7 45.8 47.0 Deferred (35.5) (41.5) (35.6) (41.7) --------- --------- --------- --------- Total 43.4 35.2 10.2 5.3 --------- --------- --------- --------- Income before Distributions on Capital Securities 214.0 203.2 84.3 80.4 Distributions on Capital Securities, Net of Tax (22.4) (22.4) (11.2) (11.2) --------- --------- --------- --------- Net Income 191.6 180.8 73.1 69.2 Retained Earnings, Beginning of Period 3,257.2 3,299.1 3,326.6 3,361.3 Amortization of Underwriting Compensation on Capital Securities (0.2) (0.2) (0.1) (0.1) Dividends Declared (96.4) (94.6) (48.7) (49.4) Common Stock Reacquired (184.9) (4.6) (183.6) (0.5) --------- --------- --------- --------- Retained Earnings, End of Period $ 3,167.3 $ 3,380.5 $ 3,167.3 $ 3,380.5 ========= ========= ========= ========= Net Income Per Share of Common Stock: Diluted $ 1.41 $ 1.28 $ 0.54 $ 0.49 ========= ========= ========= ========= Basic $ 1.42 $ 1.28 $ 0.55 $ 0.49 ========= ========= ========= ========= Dividends Paid to Common Shareholders $ 0.70 $ 0.64 $ 0.35 $ 0.32 ========= ========= ========= ========= Average Number of Shares Outstanding During the Period: Diluted 135.6 141.8 134.5 141.8 ========= ========= ========= ========= Basic 135.2 141.2 134.1 141.2 ========= ========= ========= =========
-5- 6 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Millions) - - --------------------------------------------------------------------------------
Six Months Ended June 30 ------------------------ 1999 1998** -------- -------- OPERATING ACTIVITIES Insurance Premiums Received $2,297.1 $2,218.0 Dividends and Interest Received 806.9 727.3 Other Operating Receipts 131.7 121.1 Insurance Claims and Policy Benefits Paid (1,825.4) (1,744.9) Underwriting, Acquisition and Insurance Operating Costs Paid (700.4) (727.0) Interest Paid and Distributions on Capital Securities (116.4) (109.0) Other Operating Costs Paid (76.8) (61.4) Income Taxes Paid (58.6) (60.0) -------- -------- Net Cash Provided by Operating Activities 458.1 364.1 -------- -------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (2,642.5) (2,702.1) Fixed Maturities Held-to-Maturity -- (0.9) Equities (97.7) (86.7) Other Investments (251.7) (100.3) Maturities of Fixed Maturities Available-for-Sale 624.9 548.9 Maturities of Fixed Maturities Held-to-Maturity 1.4 3.2 Sales of: Fixed Maturities Available-for-Sale 1,633.6 1,673.9 Fixed Maturities Held-to-Maturity* 6.3 18.2 Equities 123.1 134.5 Other Investments 592.2 86.7 Net Increase in Short-Term Investments (18.3) (63.1) Finance Receivables Originated or Acquired (340.1) (252.3) Principal Payments Received on Finance Receivables 208.2 196.7 Other (159.5) (138.7) -------- -------- Net Cash Used in Investing Activities (320.1) (682.0) -------- -------- FINANCING ACTIVITIES Funds Received Under Deposit Contracts 1,069.2 628.0 Return of Funds Held Under Deposit Contracts (533.7) (572.2) Proceeds from Notes and Mortgage Borrowings -- 20.0 Repayment of Notes and Mortgage Borrowings (152.1) (13.9) Net (Repayment of) Proceeds from Short-Term Borrowings (17.1) 45.1 Common Stock Reacquired (216.8) (5.3) Dividends Paid to Shareholders (95.4) (90.4) Other (118.0) (28.4) -------- -------- Net Cash Used in Financing Activities (63.9) (17.1) -------- -------- Net Increase (Decrease) in Cash 74.1 (335.0) Cash at the Beginning of Period 74.9 391.4 -------- -------- Cash at the End of Period $ 149.0 $ 56.4 ======== ========
* The sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer's creditworthiness. **Certain amounts have been reclassified to conform to the current year presentation. (continued) -6- 7 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Millions) (continued) - - --------------------------------------------------------------------------------
Six Months Ended June 30 ---------------------- 1999 1998** ------- ------- Net Income $ 191.6 $ 180.8 ------- ------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (86.3) (44.9) Amortization and Depreciation 74.4 78.0 Amortization of Fixed Maturity Investments (24.8) (19.3) Deferred Income Tax Expense (35.5) (41.5) Interest Expense on Deposit Contracts 294.7 253.2 Other Adjustments (18.7) 12.2 Changes in: Losses and Adjustment Expense 24.5 (10.3) Life Policy Liabilities 2.9 16.8 Unearned Premiums 100.4 68.7 Accrued Income Taxes 7.2 3.3 Accrued Interest on Accrual Bonds (23.2) (26.1) Accrued Investment Income 0.4 (16.7) Deferred Policy Acquisition Costs (7.3) (30.3) Other Assets and Liabilities (42.2) (59.8) ------- ------- Total Adjustments 266.5 183.3 ------- ------- Net Cash Provided by Operating Activities $ 458.1 $ 364.1 ======= =======
SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) (In Millions) - - --------------------------------------------------------------------------------
Six Months Ended Three Months Ended June 30 June 30 ------------------ ------------------- 1999 1998 1999 1998 ------ ------ ------ ------- Net Income $191.6 $180.8 $ 73.1 $ 69.2 Other Comprehensive Income (Loss), Net of Taxes: Change in Unrealized Appreciation of Investment Securities (490.1) 121.5 (275.5) 33.9 ------ ------ ------ ------ Comprehensive Income (Loss) $(298.5) $302.3 $(202.4) $103.1 ====== ====== ====== ======
**Certain amounts have been reclassified to conform to the current year presentation. -7- 8 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - - -------------------------------------------------------------------------------- SAFECO Corporation Our net income for the first six months of 1999 was $191.6 million or $1.41 per diluted share, compared with $1.28 per share for the same period in 1998. If we exclude realized gain from investments, our income was $1.00 per diluted share, compared with $1.07 per share in 1998. The following summarized financial information sets forth the contributions of each business segment to our consolidated income.
Six Months Ended Three Months Ended June 30 June 30 1999 1998 1999 1998 - - ------------------------------------------------------------------------------------------------- (In Millions Except Per Share Amounts) Income (Loss) before Realized Gain and Income Taxes: Property and Casualty Insurance: Underwriting Loss ............................ $(113.3) $ (75.3) $ (77.0) $ (64.4) Net Investment Income ........................ 230.0 240.5 115.7 122.4 Goodwill Amortization ........................ (21.8) (21.4) (11.0) (10.7) ------- ------- ------- ------- Total Property and Casualty ................ 94.9 143.8 27.7 47.3 Life ........................................... 83.3 65.4 38.6 29.0 Credit ......................................... 11.0 11.2 5.7 5.7 Asset Management ............................... 5.8 3.1 3.3 1.1 Corporate ...................................... (23.9) (30.0) (10.8) (14.4) ------- ------- ------- ------- Total ...................................... 171.1 193.5 64.5 68.7 Realized Investment Gain before Tax .............. 86.3 44.9 30.0 17.0 ------- ------- ------- ------- Income before Income Taxes ....................... 257.4 238.4 94.5 85.7 Provision (Benefit) for Income Taxes on: Income before Realized Gain .................... 13.3 19.7 0.1 (0.7) Realized Investment Gain ....................... 30.1 15.5 10.1 6.0 ------- ------- ------- ------- Total ...................................... 43.4 35.2 10.2 5.3 ------- ------- ------- ------- Income before Distributions on Capital Securities ............................. 214.0 203.2 84.3 80.4 Distributions on Capital Securities, Net of Tax .. (22.4) (22.4) (11.2) (11.2) ------- ------- ------- ------- Net Income ....................................... $ 191.6 $ 180.8 $ 73.1 $ 69.2 ======= ======= ======= ======= Net Income Per Diluted Share of Common Stock: Income before Realized Gain .................... $ 1.00 $ 1.07 $ .40 $ .41 Realized Gain .................................. .41 .21 .14 .08 ------- ------- ------- ------- Net Income ....................................... $ 1.41 $ 1.28 $ .54 $ .49 ======= ======= ======= ======= Dividends Paid to Common Shareholders ............ $ .70 $ .64 $ .35 $ .32
-8- 9 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Property and Casualty Insurance Property and casualty operations for the first six months of 1999 produced pretax income of $94.9 million before realized gain from investments, compared with $143.8 million a year ago. These operations had an underwriting loss of $113.3 million for the first half of 1999, compared with an underwriting loss of $75.3 million for the same period last year. The second quarter underwriting loss was $77.0 million, compared with an underwriting loss of $36.3 million in the first quarter of 1999 and a loss of $64.4 million for the second quarter last year. Catastrophe losses were $72 million for the first six months of 1999 and $34 million for the second quarter, compared with $105 million for the first six months last year. Underwriting results by major business line for the first six months and the second quarter of 1999 and 1998 are stated in the chart below. The combined loss and expense ratio was 105.3 for the first six months and 107.1 for the second quarter only. This compares with 103.6 for the first six months last year and 106.1 for the second quarter a year ago. Investment income was $230 million, down 4% from a year ago primarily due to providing funding for our stock repurchase program. Underwriting Results (In Millions)
Six Months Second Quarter -------------------- -------------------- 1999 1998 1999 1998 Personal Lines: Personal auto $ 0.5 $ 15.0 $ (5.5) $ 12.2 Homeowners (34.6) (38.7) (15.9) (41.1) Other personal lines 7.8 6.3 3.5 4.1 Commercial Lines: American States Business Insurance (85.3) (51.1) (54.4) (34.6) SAFECO Commercial (13.6) (19.5) (11.7) (9.6) Surety 12.4 11.0 6.4 4.1 Other (0.5) 1.7 0.6 0.5 ------- ------- ------- ------- Total $(113.3) $ (75.3) $ (77.0) $ (64.4) ======= ======= ======= =======
Personal auto, our largest line, reported an underwriting profit of $0.5 million for the first six months, compared with a profit of $15.0 million for the first six months last year. Our auto rates have decreased by about 2% in the aggregate as price competition has intensified throughout the industry. Average loss costs increased modestly during the first six months of 1999. The number of automobile policies inforce at the end of June was one percent higher than a year ago. Homeowners had an underwriting loss of $34.6 million for the first six months, compared with a loss of $38.7 million for the first six months of 1998. Catastrophe losses for this line were $37 million for the first six months of 1999, compared with $54 million for the first six months last year. Non-weather related losses for the first half of 1999 were $17 million higher than a year ago. Other personal lines, which provide coverage for earthquake, dwelling fire, inland marine and boats, produced an underwriting profit of $7.8 million for the first six months, compared with a profit of $6.3 million for the same period last year. American States Business Insurance (ASBI), which is focused on small-to-medium sized businesses, produced an underwriting loss of $85.3 million in the first six months (combined ratio of 117.8), compared with a loss of $51.1 million for the same period last year (combined ratio of 111.2). The current year results reflect an unusual number of large losses during the second quarter. In addition, weak commercial auto results and adverse weather experience continue to affect results for this business. We are working on several initiatives to improve results in this line. -9- 10 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- SAFECO Commercial reported an underwriting loss of $13.6 million for the first six months (combined ratio of 104.1), compared with a loss of $19.5 million for the first six months last year (combined ratio of 106.2). Intense price competition, particularly for workers' compensation, continues to impact these results. Surety produced a profit of $12.4 million for the first six months of 1999, compared with a profit of $11.0 million for the first six months last year. Premiums written during the first six months increased 4% over a year ago, with personal lines down less than one percent, American States Business Insurance up 14%, and SAFECO Commercial up 5%. During 1999, we will complete the process of cross-licensing and training agents in both SAFECO and American States products. As this transition progressed we have not taken any significant price increases in order to facilitate a smooth transition. Now that we are nearing completion of this process, we are pursuing modest price increases in many of the major product lines of all enterprises in order to improve our underwriting results. Life Insurance Our life insurance operations produced a pretax profit, before realized gain from investments, of $83.3 million for the first six months of 1999. This compares with $65.4 million reported for the first six months of 1998. The second quarter profit of $38.6 million compares with $29.0 million reported for the second quarter of 1998. Earnings for the annuity lines were $44.6 million, compared with the $25.3 million reported for the first half of 1998. The second quarter gain of $22.4 million is significantly up from the $9.0 million reported in the same quarter last year. Growth in our structured settlement and variable annuity products are major contributing factors in the higher earnings. These results include losses from the equity-indexed annuity line of $4.8 million for the first half of 1999, a significant improvement compared with $13.9 million a year ago. Annuity assets now total $12.8 billion, up from $12.1 billion at the end of the first half of 1998. Group insurance experienced a loss of $11.6 million for the first half of 1999, compared with a loss of $2.1 million for the same period last year. The second quarter loss of $8.7 million compares with a loss of $700,000 reported for the second quarter of last year. After starting to see improvements in claims for excess loss medical coverages during the first quarter of 1999, loss experience deteriorated in the second quarter, particularly for the cost of pharmaceuticals. To correct this downturn, additional underwriting and pricing actions were taken in mid-June. Individual life earnings were $12.9 million, compared with $4.7 million for the same period last year. This increase is due to improved claims experience and lower expenses in the traditional life line of business. -10- 11 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Credit SAFECO Credit Company produced a pretax profit of $11.0 million for the first six months of 1999, compared with $11.2 million in 1998. New loans and leases funded during the six months were a record $348 million versus $258 million in the comparable period for 1998, reflecting a 35% increase. The $108 million funded in June was a historical high. Non-affiliate receivables and operating leases were $1.5 billion, representing a 20% annualized increase from December 31, 1998. Loans and leases to insurance agents, agency premium financing and agent referral business continue to be a valuable source of new business. Our delinquency experience and write-offs continue to be at satisfactorily low rates. SAFECO Credit's summarized financial information is as follows (in millions):
JUNE 30 DECEMBER 31 1999 1998 -------- -------- Finance Receivables $1,344.8 $1,207.7 Other Assets 237.4 320.6 -------- -------- Total Assets $1,582.2 $1,528.3 ======== ======== Credit Company Borrowings $1,249.4 $1,255.2 Other Liabilities 199.0 144.6 -------- -------- Total Liabilities $1,448.4 $1,399.8 ======== ========
SIX MONTHS ENDED JUNE 30 1999 1998 -------- -------- Revenues $ 57.3 $ 52.8 Expenses 46.3 41.6 -------- -------- Income before Income Taxes 11.0 11.2 Provision for Income Taxes 3.9 4.1 -------- -------- Net Income $ 7.1 $ 7.1 ======== ========
Asset Management The pretax profit from asset management activities for the first six months of 1999 was a record $5.8 million, up from $3.1 million in 1998, an increase of 87%. Our operating profit (excluding gains and interest income) was also a record $5.0 million, compared to $2.1 million last year, a 139% increase. Higher fee revenue and reductions of one-time costs were the main reasons for the improved earnings. Assets under management totaled $7.1 billion at June 30, 1999, up slightly from $7.0 billion one year ago. -11- 12 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Sale of SAFECO Properties The realized investment gain for the first six months of 1999 of $86 million includes $30 million of gains from the sale of real estate. This primarily relates to the sale of the majority of SAFECO Properties' assets to The Macerich Partnership, L.P. and the Ontario Teachers' Pension Plan Board, of which the largest portion closed in February 1999. The sales are the reason for the decline in Investment Real Estate and Other Debt in the Consolidated Balance Sheet and the increase in Sales of Other Investments and the increases in Repayment of Notes and Mortgage Borrowings in the Statement of Consolidated Cash Flows. In the Statement of Consolidated Income and Retained Earnings, revenues for SAFECO Properties have been included in Other Revenues from January 1, 1999 forward and related expenses have all been included in Other Expenses. For the six months and three months ended June 30, 1999 these revenues totaled $25.3 million and $10.6 million, respectively, and expenses totaled $21.1 million and $8.0 million, respectively. In the summary of income on page 8 of this report, SAFECO Properties' pretax income amounts are included in the Corporate line. For the six months ended June 30, 1999 and 1998 these pretax income amounts totaled $4.2 million and $2.4 million, respectively, and for the three months ended June 30, 1999 and 1998 totaled $2.6 million and $1.2 million, respectively. Investment Portfolios The market value of our consolidated bond portfolio was $488 million in excess of amortized cost at June 30, 1999, down from $1.7 billion at December 31, 1998 as a result of higher interest rates. The market value of our equity securities portfolio was $1.2 billion in excess of cost at June 30, 1999. Dividend The second quarter of 1999 dividend paid in July to common shareholders was paid at the rate of $0.37 per share, reflecting a 5.7% increase over the previous payment. Stock Repurchase Program In May 1999, the Board of Directors approved the purchase of 8,000,000 shares of SAFECO Corporation common stock. During the second quarter, the company purchased 4,821,000 shares in the open market for $213.6 million, for an average price of $44.31 per share. Approximately 785,000 of these shares were purchased under a previous authorization. Therefore, the number of shares authorized but not yet purchased under the remaining authorization is 3,964,000 shares. Year 2000 Readiness Disclosure SAFECO, like most other companies, is faced with the fact that some of its computer programs have time sensitive logic that typically recognizes a date using "00" as the year 1900 rather than the year 2000. SAFECO is highly dependent on automated systems and systems applications that use computer programs to conduct ongoing operations. Such systems are used to process claims, bill and collect premiums from customers, manage investments and many other activities. If these systems were unable to process data accurately because of Year 2000-related failures, these activities would be interrupted and could have a material adverse effect on SAFECO's results of operations. SAFECO has completed an assessment of Year 2000 issues in connection with its computer systems and the technology embedded in the equipment it uses. SAFECO has been modifying and replacing portions of its systems since 1995 so that the system modified or replaced will be suitable for use before, during and after the year 2000 with no significant operational problems related to its ability to process dates correctly ("Year 2000 Ready"). In addition, SAFECO is engaged in a regular program of testing and running the systems once Year 2000 programming changes have been made. This testing includes trials at SAFECO's hot site, a location provided and maintained by a third party separate from any SAFECO facility. SAFECO believes that its program to address Year 2000 issues is comprehensive and on schedule. -12- 13 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- The total Year 2000 readiness cost for SAFECO is currently estimated at approximately $18 million and as of June 30, 1999 SAFECO has incurred approximately $17 million of that amount. These estimated amounts include both modification costs, which are expensed as incurred, and certain replacement systems costs, some of which are capitalized and amortized. Approximately 98% of SAFECO's existing systems have been internally verified as being Year 2000 ready as of June 30, 1999. SAFECO's last mission-critical system is scheduled to be Year 2000 ready in August 1999. The program of testing and running the systems after Year 2000 programming changes have been made is currently in process and expected to continue through 1999. SAFECO also intends to bring all of its mainframe systems down on December 31, 1999 and bring them back up on January 1, 2000. This will preserve information contained in those systems at December 31, 1999 and permit SAFECO to retrieve and use that information should an unanticipated Year 2000 problem occur. In addition, as a contingency against unanticipated problems on and after January 1, 2000, SAFECO's Information Systems department will be prepared to address on an expedited basis any problems that should arise. Although absolute assurance is not possible, based on our current progress and continuing modifications, SAFECO believes that by January 1, 2000 it will be Year 2000 ready and that Year 2000 issues will not pose significant operational problems for its computer systems. SAFECO is also working with its third-party partners and vendors, e.g., its independent insurance agents, local and long distance telephone companies, banks and securities trading firms, to assure that they are on schedule to detect and fix any Year 2000 problems which might affect SAFECO's systems or business processes. SAFECO will assess and attempt to mitigate risks with respect to the failure of any mission critical third-party partners and vendors to be Year 2000 ready. Failure of such parties to be Year 2000 ready could have a material adverse effect on SAFECO's results of operations. SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance policies its property and casualty subsidiaries have sold to customers. Although SAFECO has not written any specific Year 2000 coverage, customers may allege coverage exists under current commercial policies, including commercial general liability, directors and officers liability, errors and omissions liability and product policies. The effect of such coverage issues on SAFECO's results of operations is not reasonably estimable at this time. However, SAFECO expects that any potential exposures will be limited because its commercial lines business has historically not included significant numbers of the types of risks that have the greatest Year 2000 exposure, such as financial institutions and software and computer chip companies. In addition, SAFECO's directors and officers liability and errors and omissions books of insurance business are not large, together comprising approximately 1% of total property and casualty premiums over the last three years. SAFECO continues to assess its potential exposure to insurance claims arising from property and casualty insurance policies written and is taking a number of actions to limit that exposure. Such actions, in states where permitted, include the use of endorsements on commercial property policies clarifying that there is no coverage for Year 2000 occurrences, as well as using policy language that excludes Year 2000 coverage on certain commercial liability policies. -13- 14 SAFECO CORPORATION - - -------------------------------------------------------------------------------- Other -- Footnotes SEGMENT DATA
Six Months Ended Underwriting Pretax Income Net Income Total June 30, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets - - ------------------------------------------------------------- -------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 862.5 $ 0.5 Homeowners 349.5 (34.6) Other 88.0 7.8 Commercial Lines: ASBI 478.5 (85.3) SAFECO Commercial 335.6 (13.6) Surety 29.7 12.4 Other 3.9 (0.5) ---------- -------- Total 2,147.7 $ (113.3) $ 94.9 $ 145.1 $ 12,154.9 ---------- ======== -------- Life: Retirement Services 16.6 25.0 Settlement Annuities 0.7 19.6 Group 96.5 (11.6) Individual 56.4 12.9 Other 6.8 37.4 ---------- -------- Total 177.0 83.3 53.2 16,819.1 ---------- -------- Credit 54.1 11.0 7.1 1,582.2 Asset Management 21.3 5.8 3.8 69.6 Other and Eliminations 61.0 (23.9) (17.6) 207.3 ---------- -------- ----------- ----------- Consolidated Totals $ 2,461.1 $ 171.1 $ 191.6 $ 30,833.1 ========== ======== =========== ===========
Six Months Ended Underwriting Pretax Income Net Income Total June 30, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets - - ---------------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 854.6 $ 15.0 Homeowners 337.7 (38.7) Other 80.4 6.3 Commercial Lines: ASBI 454.3 (51.1) SAFECO Commercial 313.9 (19.5) Surety 28.1 11.0 Other 6.9 1.7 --------- --------- Total 2,075.9 $ (75.3) $ 143.8 $ 166.5 $12,651.9 --------- ========= --------- Life: Retirement Services 12.9 11.1 Settlement Annuities 0.7 14.2 Group 101.5 (2.1) Individual 54.7 4.7 Other 6.7 37.5 --------- --------- Total 176.5 65.4 45.9 15,956.1 --------- --------- Real Estate 39.1 2.4 0.5 668.9 Credit 47.4 11.2 7.1 1,319.4 Asset Management 17.6 3.1 2.0 77.4 Other and Eliminations 30.2 (32.4) (41.2) (381.3) --------- --------- --------- --------- Consolidated Totals $ 2,386.7 $ 193.5 $ 180.8 $30,292.4 ========= ========= ========= =========
* Earnings before realized gains (losses), distributions on capital securities and income taxes. -14- 15 SAFECO CORPORATION Other -- Footnotes (Continued) - - -------------------------------------------------------------------------------- SEGMENT DATA
Three Months Ended Underwriting Pretax Income Net Income Total June 30, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets - - ------------------------------------------------------------------------------------------------------ Property and Casualty: Personal Lines: Personal Auto $ 432.1 $ (5.5) Homeowners 175.8 (15.9) Other 44.4 3.5 Commercial Lines: ASBI 243.9 (54.4) SAFECO Commercial 170.2 (11.7) Surety 15.3 6.4 Other 1.6 0.6 --------- --------- Total 1,083.3 $ (77.0) $ 27.7 $ 60.7 $12,154.9 --------- ========= --------- Life: Retirement Services 8.9 12.4 Settlement Annuities 0.4 10.0 Group 48.5 (8.7) Individual 29.4 6.3 Other 3.2 18.6 --------- --------- Total 90.4 38.6 23.3 16,819.1 --------- --------- Credit 27.1 5.7 3.7 1,582.2 Asset Management 11.1 3.3 2.2 69.6 Other and Eliminations 28.8 (10.8) (16.8) 207.3 --------- --------- --------- --------- Consolidated Totals $ 1,240.7 $ 64.5 $ 73.1 $30,833.1 ========= ========= ========= =========
Three Months Ended Underwriting Pretax Income Net Income Total June 30, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets - - ------------------------------------------------------------------------------------------------------ Property and Casualty: Personal Lines: Personal Auto $ 431.9 $ 12.2 Homeowners 169.7 (41.1) Other 41.2 4.1 Commercial Lines: ASBI 226.8 (34.6) SAFECO Commercial 159.6 (9.6) Surety 13.9 4.1 Other 3.4 0.5 --------- --------- Total 1,046.5 $ (64.4) $ 47.3 $ 66.0 $12,651.9 --------- ========= --------- Life: Retirement Services 7.4 2.0 Settlement Annuities 0.3 7.0 Group 51.8 (0.7) Individual 27.0 2.2 Other 3.2 18.5 --------- --------- Total 89.7 29.0 18.8 15,956.1 --------- --------- Real Estate 18.6 1.2 (0.4) 668.9 Credit 24.0 5.7 3.6 1,319.4 Asset Management 9.2 1.1 0.7 77.4 Other and Eliminations 15.4 (15.6) (19.5) (381.3) --------- --------- --------- --------- Consolidated Totals $ 1,203.4 $ 68.7 $ 69.2 $30,292.4 ========= ========= ========= =========
* Earnings before realized gains (losses), distributions on capital securities and income taxes. -15- 16 SAFECO CORPORATION Other -- Footnotes (Continued) - - -------------------------------------------------------------------------------- The following additional footnote disclosure relates to new accounting standards. Nature of Operations and Summary of Significant Accounting Policies -- New Accounting Standards The Financial Accounting Standards Board (FASB) issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. The Statement amends or supersedes several previous FASB statements and requires recognizing all derivatives as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. The FASB also issued Statement 137 in June 1999 which allows entities to defer adoption of Statement 133 to fiscal years beginning June 15, 2000. Statement 133 may still be adopted early, as of the beginning of any fiscal quarter that begins after June 1998. SAFECO will adopt the new statement no later than the first quarter of 2001. The impact of the Statement is currently being studied, and the effect of the new statement on the financial statements has not yet been determined. -16- 17 SAFECO CORPORATION Part II - Other Information - - -------------------------------------------------------------------------------- Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of SAFECO Corporation was held May 5, 1999. SAFECO shareholders elected five nominees to the Board of Directors by the votes shown below. The terms of all of the nominees elected will expire in 2002 with the exception of Mr. Rice, whose term will expire in 2000. There were no broker non-votes with respect to any of the nominees.
For Withheld --- -------- Phyllis J. Campbell 123,061,108 629,768 Boh A. Dickey 123,086,388 604,488 William P. Gerberding 122,939,568 751,308 Norman B. Rice 122,111,519 1,579,357 Paul W. Skinner 123,101,963 588,913
Continuing as Directors are Joshua Green III, William G. Reed, Jr. and Judith M. Runstad, whose terms expire in 2000; and Robert S. Cline, Roger H. Eigsti, John W. Ellis and William W. Krippaehne, Jr., whose terms expire in 2001. The proposal to approve the SAFECO Long-Term Incentive Plan of 1997 as amended and restated was adopted by the favorable vote of 111,850,721 shares, with 11,223,210 shares voted "against" and 616,945 shares abstaining. There were no broker non-votes with respect to the proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 - Financial Data Schedule. (This exhibit is included only in the electronic EDGAR filing version of this 10-Q. The Financial Data Schedule is not a separate financial statement but a schedule that summarizes certain standard financial information extracted directly from the financial statements in this filing.) (b)Reports on Form 8-K The Registrant filed an 8-K dated May 5, 1999 under Item 5 (Other Items), announcing a stock repurchase program approved by its Board of Directors on May 5, 1999. The Registrant filed an 8-K dated July 13, 1999 under Item 5, announcing its preliminary review of earnings for the second quarter of 1999. -17- EX-27 2 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 17,439 2,725 2,940 2,147 701 229 23,500 149 388 573 30,833 4,287 1,851 280 13,197 2,385 842 0 858 4,111 30,833 2,325 785 86 136 2,137 421 0 257 43 214 0 0 0 192 1.42 1.41 0 0 0 0 0 0 0
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