-----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, FyW7aXwKV/oXhm/qunjk8GNHx/UqBuSBeduprVn5Y0AKo9IWEtHkIryX2FmR1zCy wG3BRSj4zflAs8UY8SByqQ== 0001095811-01-001639.txt : 20010410 0001095811-01-001639.hdr.sgml : 20010410 ACCESSION NUMBER: 0001095811-01-001639 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010319 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-K SEC ACT: SEC FILE NUMBER: 001-06563 FILM NUMBER: 1571585 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-K 1 v70188e10-k.txt FORM 10-K FISCAL YEAR ENDED DECEMBER 31,2000 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, 2000 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 (127,649,087 shares were outstanding at January 31, 2001) 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 [ ]. The aggregate market value of the voting stock held by nonaffiliates of the registrant as of January 31, 2001, was $3,200,000,000. Documents incorporated by reference: Portions of the registrant's 2000 Annual Report to Shareholders are incorporated by reference into Parts I and II. The announcement regarding the Corporation's decision to sell SAFECO Credit Company, Inc., which is disclosed as a Subsequent Event on page 14 and filed on Form 8-K on March 15, 2001, should be read in conjunction with the 2000 Annual Report to Shareholders. Portions of the registrant's definitive Proxy Statement for the 2001 annual shareholders meeting to be held May 2, 2001, are incorporated by reference into Part III. 2 SAFECO CORPORATION AND SUBSIDIARIES CONTENTS
- - - - - - ---------------------------------------------------------------------------------------------- ITEM DESCRIPTION PAGE - - - - - - ---------------------------------------------------------------------------------------------- FINANCIAL INFORMATION PART I 1 Business 2 2 Properties 14 3 Legal Proceedings 14 4 Submission of Matters to a Vote of Security Holders 15 -- Executive Officers of the Registrant 16 PART II 5 Market for Registrant's Common Stock and Related Security Holder Matters 17 6 Selected Financial Data 17 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 7A Quantitative and Qualitative Disclosures About Market Risk 17 8 Financial Statements and Supplementary Data 17 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 17 PART III 10 Directors and Executive Officers of the Registrant 17 11 Executive Compensation 17 12 Security Ownership of Certain Beneficial Owners and Management 17 13 Certain Relationships and Related Transactions 17 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K PART IV 14 (a)(1) -- Financial Statements 18 14 (a)(2) -- Financial Statement Schedules 19 14 (a)(3) -- Exhibits 20 14 (b) -- Reports on Form 8-K 20 Signatures 21
1 3 PART I ITEM 1 -- BUSINESS GENERAL SAFECO Corporation (the Corporation) is a Washington corporation that owns operating subsidiaries in 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 insurance, and generated approximately 95% of SAFECO's total 2000 revenues. SAFECO's property and casualty insurance operation is one of the largest in the United States. All areas of the insurance business are highly competitive and no one insurance company or group of insurers dominates the market. The home offices of the Corporation and its principal subsidiaries are in Seattle and Redmond, Washington. As of December 31, 2000, SAFECO had approximately 13,000 employees. SAFECO's other operations include subsidiaries involved in commercial lending and leasing, investment management and insurance agency and financial services distribution operations. See page 13 of this report for additional information on the other operations. Additional financial information about SAFECO's business segments appears in Note 15 on page 74 of the 2000 Annual Report to Shareholders, incorporated herein by reference (Exhibit 13). The Corporation and its insurance subsidiaries are subject to extensive regulation and supervision, primarily designed to protect the interests of policyholders rather than shareholders and other investors. Such regulation, generally administered by a department of insurance in each state in which the insurance subsidiaries do business, relates to, among other things the: - standards of solvency that must be met and maintained; - licensing of insurers and their agents; - nature of and limitations on investments; - ability to enter into or withdraw from the state; - approval of premium rates; - restrictions on the size of risks that may be insured under a single policy; - required reserves and provisions for unearned premiums, losses and other purposes; - deposits of securities for the benefit of policyholders; - approval of policy forms; and - regulation of market conduct, including underwriting and claims practices. State insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies, holding company issues and other matters. The Corporation's insurance subsidiaries are collectively licensed to transact insurance business in all 50 states and the District of Columbia. See page 35 of the 2000 Annual Report to Shareholders for more information on regulatory issues. PROPERTY AND CASUALTY INSURANCE -- OPERATIONS Through independent agents, the Corporation's property and casualty insurance subsidiaries write personal, commercial and surety lines of insurance. Included in the lines of insurance written are automobile, homeowners, fire, commercial multi-peril, workers' compensation, miscellaneous casualty, surety and fidelity. Products are sold in all states and the District of Columbia. A listing of the Corporation's property and casualty insurance subsidiaries can be found on Exhibit 21 of this report, numbers 1 through 9 inclusive. 2 4 Consolidated gross premiums written for the Corporation's property and casualty insurance subsidiaries' ten largest states are as follows:
Year Ended December 31 2000 1999 1998 --------------------------------------------------------------------------------------------------- (Amounts In Millions) % of % of % of State Amount Total Amount Total Amount Total ------------------------- ------------------------ --------------------------- -------------------- California $ 758.4 16% $ 688.4 15% $ 669.1 15% Washington 585.3 12 594.5 13 587.6 13 Texas 327.8 7 323.4 7 314.3 7 Illinois 280.0 6 286.7 6 273.6 6 Oregon 241.7 5 239.5 5 238.6 5 Missouri 211.2 5 221.6 5 219.3 5 Florida 173.3 4 174.2 4 166.9 4 Indiana 140.9 3 160.7 3 167.2 4 Michigan 133.5 3 144.3 3 131.7 3 Tennessee 117.3 2 119.3 3 106.7 2 -------------------------------------------------------------------------- 2,969.4 63 2,952.6 64 2,875.0 64 All Others 1,739.7 37 1,692.4 36 1,566.8 36 -------------------------------------------------------------------------- Total $ 4,709.1 100% $ 4,645.0 100% $ 4,441.8 100% ==========================================================================
Personal lines, SAFECO Business Insurance (SBI) (formerly known as American States Business Insurance), SAFECO Commercial and surety lines comprised approximately 57%, 26%, 15% and 2%, respectively, of the 2000 gross premiums written of $4.7 billion. PROPERTY AND CASUALTY INSURANCE -- LOSS RESERVES The consolidated financial statements include the estimated liability (reserves) for unpaid losses and loss adjustment expense (LAE) of the Corporation's property and casualty insurance subsidiaries. The liability is presented net of amounts from expected 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 loss adjustment expenses 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. SAFECO's objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately required to settle losses. SAFECO's reserves aggregate its 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 LAE reserve development is regularly reviewed to determine that the reserving assumptions and methods are appropriate. Reserves initially set are compared to the amounts ultimately paid. A statistical estimate of the projected amounts necessary to pay outstanding claims is made regularly and compared to the recorded reserves and adjusted as necessary. Any such adjustments are included in current operations. Analysis indicates that SAFECO's recorded reserves are adequate at December 31, 2000, 1999 and 1998. The table on page 4 provides an analysis of changes in losses and LAE reserves (net of reinsurance amounts) for 2000, 1999, and 1998. Changes in the reserves are reflected in the income statement for the year when the changes are made. 3 5 Operations in 2000 were charged $148.3 million from increases in estimated loss and LAE for claims occurring in prior years. These increases were due to adverse development within commercial operations in the workers' compensation ($50.9 million), general liability ($44.4 million), commercial auto ($23.5 million) and in other ($29.5 million) lines of business as the cost of settling claims has increased. Workers' compensation development of $50.9 million was due to continued adverse development of prior reported claims as well as IBNR reserve additions to improve future adequacy. General liability development of $44.4 million was due primarily to continued adverse development of construction defect claims related to the SBI operation. Commercial auto development of $23.5 million was due to higher-than-expected loss costs in commercial operations on prior reported claims. Operations in 1999 were charged $78.8 million from increases in estimated loss and LAE from claims occurring in prior years, primarily in the construction defect, asbestos and environmental and workers' compensation lines. For both construction defect and asbestos and environmental, increased reserve estimates resulted from higher-than-expected reported claims in 1999. The increased reserve estimates for workers' compensation resulted from SAFECO's re-evaluation of loss exposures on claims related to larger commercial insureds, to an upturn in medical costs and less favorable workers' compensation legislation. Operations in 1998 benefited $100.0 million from decreases in estimated loss and LAE for claims occurring in prior years. These decreases related primarily to American States Financial Corporation (American States) operations. The claims departments of the two companies were combined in 1998. The unified claims department implemented training and reserving procedures, resulting in lower claims settlements and reduced reserves on prior years' American States' losses. The reductions were in both personal and commercial auto, workers' compensation and general liability. ANALYSIS OF CHANGES IN LOSS AND LAE RESERVES (NET OF REINSURANCE)
2000 1999 1998 ----------------------------------------------------------------------------------------------- (In Millions) Loss and LAE Reserves at Beginning of Year $ 4,069.1 $ 3,966.3 $ 4,081.9 -------------------------------------- Incurred Loss and LAE for Claims Occurring in the Current Year 3,621.7 3,353.0 3,163.2 Increase (Decrease) in Estimated Loss and LAE for Claims Occurring in Prior Years 148.3 78.8 (100.0) -------------------------------------- Total Incurred Loss and LAE 3,770.0 3,431.8 3,063.2 -------------------------------------- Loss and LAE Payments for Claims Occurring During: Current Year 2,059.3 1,926.4 1,836.2 Prior Years 1,510.7 1,402.6 1,342.6 -------------------------------------- Total Loss and LAE Payments 3,570.0 3,329.0 3,178.8 -------------------------------------- Loss and LAE Reserves at End of Year $ 4,269.1 $ 4,069.1 $ 3,966.3 ====================================== Reconciliation: Loss and LAE, Net of Reinsurance $ 4,269.1 $ 4,069.1 $ 3,966.3 Add: Reinsurance Recoverables on Unpaid Losses 343.6 309.5 253.6 -------------------------------------- Loss and LAE, Gross of Reinsurance $ 4,612.7 $ 4,378.6 $ 4,219.9 ======================================
4 6 The table on page 6 presents the development of the loss and LAE reserves for 1990 through 2000. The amounts reported in the table for the 1996 and prior year balances are for SAFECO only (i.e., do not include any amounts for American States). The top lines of the table present the recorded reserve for unpaid loss and LAE at December 31 for each of the indicated years, both gross and net of related reinsurance amounts. The upper portion of the table displays the cumulative amount paid with respect to the previously recorded reserves as of the end of each succeeding year. The next section reports the re-estimated amount of the previously recorded reserves 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 presents the cumulative redundancy (deficiency) developed with respect to the previously recorded liability as of the end of each succeeding year. For example, the 1990 reserve of $1,791.4 million developed a $24.0 million redundancy after one year which grew over ten years to a redundancy of $178.5 million. For 1990 through 1997, inclusive, SAFECO's reserve development had been favorable. This trend reflects several factors: conservative reserving previously undertaken to correct deficiencies in years prior to 1988, favorable workers' compensation legislation, 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 in the early 1990's, helped reduce fraud, allowed for faster claim settlements 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 loss adjustment expenses helped reduce these costs. As discussed on page 4, the development for 1999 was unfavorable due to commercial lines adverse development in worker's compensation, general liability and commercial auto. The development for 1998 was unfavorable resulting primarily from construction defect, asbestos and environmental and workers' compensation. In evaluating the reserve development table on page 6, 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, 1997 reserves that relates to losses incurred in 1990 is also included in the cumulative redundancy amount for the years 1990 through 1996. Conditions and trends that affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. 5 7 ANALYSIS OF LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
Year Ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- (In Millions) Reserve for Unpaid Losses and LAE: Gross of Reinsurance $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1 $4,310.5 $4,219.9 $4,378.6 $4,612.7 Reinsurance 80.7 152.0 89.2 100.1 143.9 110.7 103.4 228.6 253.6 309.5 343.6 -------------------------------------------------------------------------------------------------- Net of Reinsurance $1,791.4 $1,865.3 $1,963.1 $1,995.1 $2,092.9 $2,070.1 $1,955.7 $4,081.9 $3,966.3 $4,069.1 $4,269.1 ================================================================================================== Cumulative Net Amount Paid as of: One Year Later $ 603.0 $ 584.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9 $1,345.5 $1,389.2 $1,510.7 Two Years Later 914.5 905.7 913.4 947.6 1,068.3 1,095.0 1,101.4 2,049.3 2,165.5 Three Years Later 1,109.4 1,086.5 1,106.0 1,147.6 1,252.9 1,267.6 1,287.9 2,516.3 Four Years Later 1,221.6 1,207.2 1,230.6 1,252.5 1,341.5 1,370.0 1,404.3 Five Years Later 1,301.1 1,294.4 1,295.7 1,300.2 1,403.5 1,440.5 Six Years Later 1,368.9 1,336.7 1,326.1 1,342.9 1,449.6 Seven Years Later 1,403.5 1,356.9 1,357.8 1,377.0 Eight Years Later 1.419.0 1,381.4 1,386.6 Nine Years Later 1,439.3 1,406.2 Ten Years Later 1,462.4 Net Reserve Re-estimated as of: One Year Later 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2 1,992.4 1,947.7 3,981.9 4,045.1 4,217.4 Two Years Later 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3 1,889.9 1,861.4 3,989.0 4,070.3 Three Years Later 1,666.1 1,686.0 1,712.2 1,716.1 1,801.9 1,804.7 1,806.6 3,986.0 Four Years Later 1,657.2 1,650.7 1,642.3 1,643.6 1,733.8 1,757.1 1,799.6 Five Years Later 1,637.5 1,594.9 1,600.9 1,599.8 1,702.8 1,757.3 Six Years Later 1,608.5 1,569.5 1,554.7 1,568.3 1,691.2 Seven Years Later 1,595.4 1,548.7 1,549.8 1,578.3 Eight Years Later 1,586.7 1,551.0 1,567.2 Nine Years Later 1,592.1 1,570.1 Ten Years Later 1,612.9 Cumulative Net Redundancy (Deficiency) as of: One Year Later 24.0 44.6 96.9 81.3 59.7 77.7 8.0 100.0 (78.8) (148.3) Two Years Later 85.6 132.5 181.0 176.8 190.6 180.2 94.3 92.9 (104.0) Three Years Later 125.3 179.3 250.9 279.0 291.0 265.4 149.1 95.9 Four Years Later 134.2 214.6 320.8 351.5 359.1 313.0 156.1 Five Years Later 153.9 270.4 362.2 395.3 390.1 312.8 Six Years Later 182.9 295.8 408.4 426.8 401.7 Seven Years Later 196.0 316.6 413.3 416.8 Eight Years Later 204.7 314.3 395.9 Nine Years Later 199.3 295.2 Ten Years Later 178.5
6 8 The following table summarizes reserve development, gross of reinsurance, for the last three years as of December 31, 2000. The gross and ceded amounts for 1997 and 1998 reflect development for Michigan auto claims for personal injury protection. The reserves on these claims were increased $57.7 million, gross of reinsurance, to reflect the expected lifetime payout. This gross development was ceded to the Michigan Catastrophic Claims Association. The development on reserves net of reinsurance was unaffected.
December 31 1999 1998 1997 -------------------------------------------------------------------------- (In Millions) Gross Reserves $ 4,378.6 $ 4,219.9 $ 4,310.5 ===================================== Cumulative Development: Net of Reinsurance $ (148.3) $ (104.0) $ 95.9 Reinsurance (21.0) (90.0) (128.9) ------------------------------------- Gross of Reinsurance $ (169.3) $ (194.0) $ (33.0) =====================================
ENVIRONMENTAL AND ASBESTOS CLAIMS The property and casualty companies' reserves for losses and LAE for liability coverages related to environmental, asbestos and other toxic claims totaled $315.5 million at December 31, 2000 compared with $332.3 million at December 31, 1999. These amounts are before the effect of reinsurance, which totaled $28.8 million and $30.1 million at December 31, 2000 and 1999, respectively. These reserves are approximately 8% of total property and casualty reserves for losses and LAE at both December 31, 2000 and 1999. The reserves include estimates for both reported and IBNR losses and related legal expenses. The vast majority of SAFECO's property and casualty insurance companies' environmental, asbestos and other toxic claims result from the commercial general liability line of business and the discontinued assumed reinsurance operations of American States. A few of these losses occur in other coverages such as umbrella, small commercial package policies and personal lines. Approximately 5,600 of these claims, computed on an occurrence basis, were pending at December 31, 2000. Most of these pending environmental claims involve some type of environmental-related coverage dispute. The average settlement cost of each environmental, asbestos and other toxic claim for 2000 was $12,800 including legal expenses. The following table summarizes the components of SAFECO's reserves for environmental, asbestos and other toxic claims before the effect of reinsurance:
December 31, 2000 Loss LAE Total ----------------------------------------------------- (In Millions) Case $ 107.3 $ 7.1 $ 114.4 IBNR 134.3 66.8 201.1 ------------------------------- Total $ 241.6 $ 73.9 $ 315.5 ===============================
7 9 The table below displays the loss reserve activity analysis for liability coverages related to environmental, asbestos and other toxic claims, before the effect of reinsurance.
2000 1999 1998 ------------------------------------------------------------------------------ (In Millions) Reserves at Beginning of Year $ 332.3 $ 329.8 $ 346.9 Incurred Losses and LAE 9.6 24.8 1.6 Losses and LAE Payments (26.4) (22.3) (18.7) ---------------------------------- Reserves at End of Year $ 315.5 $ 332.3 $ 329.8 ==================================
Although estimation of environmental claims is difficult, the reserves established for these claims at December 31, 2000 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. 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 loss reserving techniques in this area need to be supplemented by subjective considerations and managerial judgment. Because of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. CONSTRUCTION DEFECT CLAIMS Construction defect claims are a subset of claims that arise from coverage provided by general property damage liability insurance. Construction defect claims are claims arising from the alleged defective work performed in the construction of large habitation structures, such as apartments, condominiums and large developments of single family dwellings or other housing. In addition to damages arising directly from the alleged defective work, construction defect claims also allege that the economic value of the structure has been diminished. The vast majority of SAFECO's construction defect claims arise from past contractor business written in California. SAFECO Commercial, which does not include SBI, has avoided writing the construction class of business in California since 1989 and has limited exposure to these types of claims. Because of this, SAFECO has not historically separated these claims for the purpose of reserve analysis. However, American States, prior to the acquisition by SAFECO, was a major writer of California contractor business until 1994 when it implemented significant restrictions in this line. The total SBI reserves for construction defect claims were $322.6 million at December 31, 2000 and $306.1 million at December 31, 1999, representing approximately 8% of total property and casualty reserves for losses and LAE at both December 31, 2000 and 1999. The following table presents the loss reserve activity analysis for American States construction defect claims after the effect of reinsurance.
2000 1999 1998 ---------------------------------------------------------------------------- (In Millions) Reserves at Beginning of Year $ 306.1 $ 328.6 $ 340.3 Incurred Losses and LAE 71.5 28.1 55.4 Losses and LAE Payments (55.0) (50.6) (67.1) -------------------------------- Reserves at End of Year $ 322.6 $ 306.1 $ 328.6 ================================
8 10 GAAP VS. STATUTORY State insurance regulatory authorities require the Corporation's property and casualty insurance subsidiaries to file annual statements prepared on an accounting basis prescribed or permitted by their respective state of domicile (that is, on a statutory basis). The difference between the $4,612.7 million reserve at December 31, 2000, for the losses and LAE disclosed in the consolidated financial statements in accordance with accounting principles generally accepted in the United States (GAAP), and the $4,269.1 million reported in the annual statements filed with state regulatory authorities relates to reinsurance recoverables. Under Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," the GAAP-basis liability for losses and LAE is reported gross of amounts recoverable from reinsurance. Statutory-basis financial statements report the liability net of reinsurance. REINSURANCE SAFECO's property and casualty insurance companies use treaty and facultative reinsurance to help manage exposure to loss. As noted on page 4, the liability for unpaid losses and LAE is reported gross of reinsurance recoverables of $343.6 million at December 31, 2000 and $309.5 million at December 31, 1999. Approximately 50% of the total reinsurance recoverable balance at December 31, 2000 was with the following four reinsurers: American Re-Insurance, Employers Reinsurance Corporation, Swiss Reinsurance America Corporation and General Reinsurance Corporation all of whom are rated A++ by A.M. Best. The reinsurance recoverable balance categorized by reinsurer rating (by A.M. Best Company on a scale ranging from A++ to F) at December 31, 2000 is presented below:
Percent at Rating December 31, 2000 -------------------------------------------------------------- A++ 50.9% A+ 4.6 A 2.3 A- 0.2 B 6.5 ---------- Total Domestic Reinsurers 64.5 ---------- Mandatory Pools 25.8 Voluntary Pools 2.3 Foreign 7.4 ---------- Total Pools and Foreign 35.5 ---------- Total 100.0% ==========
The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Due to recent tightening in the reinsurance marketplace, it is likely that the cost of reinsurance will increase in 2001. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks insured. To SAFECO's knowledge, none of its reinsurers is experiencing financial difficulties. SAFECO's business is not substantially dependent upon any single reinsurance contract. SAFECO's nationwide catastrophe property reinsurance program for 2001, covering 90% of $400 million of single-event losses in excess of $100 million retention, is unchanged from 2000. In a large catastrophe, SAFECO retains 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 all states other than California, SAFECO has a supplemental earthquake-only reinsurance contract that would cover 90% of $250 million of single-event earthquake losses in excess of $500 million. In 2000, this supplemental coverage was for $350 million of single-event earthquake losses in excess of $500 million. Catastrophe property reinsurance contracts for 2001 include provisions for one reinstatement for a second catastrophe event in 2001 at current rates. 9 11 The Corporation'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. For additional information on reinsurance, see Note 5 on page 65 of the 2000 Annual Report to Shareholders. SUBSEQUENT EVENT On February 28, 2001, a 6.8 magnitude earthquake struck the Puget Sound area. SAFECO is currently assessing the damage to determine the amount of reserve that will need to be recorded to cover the estimated claims costs for this catastrophe. Because of the time it takes to complete accurate surveys and inventories on homes and businesses damaged in earthquakes, it will be some time before a reasonable estimate of SAFECO's losses and loss adjustment expense can be made. The reserve will be recorded in the first quarter of 2001. 10 12 LIFE INSURANCE -- OPERATIONS The Corporation's life insurance subsidiaries are collectively referred to as "SAFECO Life." SAFECO Life offers individual and group insurance products, retirement services (pension) and annuity products. Products are sold 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, business-owned life insurance, equity-indexed and variable annuities, tax-sheltered annuities for the education and nonprofit markets, corporate retirement plans, excess loss group medical insurance and individual life insurance. SAFECO Life reinsures portions of its individual and group life, accident and health insurance through commercial reinsurance treaties, providing protection against large risks and catastrophe situations. A listing of the Corporation's life insurance subsidiaries can be found on Exhibit 21 of this report. SAFECO Life acquired Medical Risk Managers, Inc. on December 31, 1999. Funds held under deposit contracts relate primarily to annuity, retirement services and individual products. The table below summarizes the components of funds held under deposit contracts at December 31, 2000, and describes the applicable surrender charges and surrender experience.
DETAIL OF SAFECO LIFE'S FUNDS HELD UNDER DEPOSIT CONTRACTS - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Outstanding Expected Range of Credited at Maturities or Assumed Interest Approximate 12/31/00 of Liabilities Rates at Surrender Product (In Millions) (at issue date) 12/31/00 Surrender Charges Experience - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Universal $ 2,992.1 Approximately 5.25% to 6.00% Varies by issue age, sex and 7% per annum Individual Life 10--25 years duration from $1 to $58 per $1,000 of insurance. Annuities: Structured 6,167.8 Over 25 years 3.50% to 12.23% Cannot surrender. Cannot Settlement surrender Immediate Retirement Services: Guaranteed 594.3 Typically 2-5 5.63% to 8.44% Market value adjustment or Less than 1% Investment years cannot surrender in first year. per annum Contracts Other 3,940.0 Approximately 4.00% to 7.95% Highest surrender charges 13% per annum Annuities & 5-20 years range from 10% to 5%, graded Deposits down to 0% within 5 to 10 years. SAFECO has the option to defer payout over 5 years for approximately 13% of these contracts. Equity 391.5 Approximately Equity return Typically 8% in year 1 graded More than 50% Indexed 6 years at credited is based on to 0% after year 6. due to an offer Annuities (EIA) original S&P 500 to EIA policy- issuance, performance with holders in 2000 remaining no minimum to surrender expected guarantee. Floor their policies maturity of return based on a and receive approximately minimum fixed December 31, 4 years return on a portion 1999 account (typically 90%) of value with no the original deposit surrender amount. charge. --------- Total $14,085.7 =========
11 13 INVESTMENTS A description of SAFECO's investment portfolio appears on pages 43-45 of the 2000 Annual Report to Shareholders. The remainder of this section provides additional information about SAFECO's mortgage-backed securities and investment income yields. SAFECO's consolidated investment in mortgage-backed securities of $4.5 billion at market value at December 31, 2000, consists mainly of residential collateralized mortgage obligations (CMOs), pass-throughs and commercial loan-backed mortgage obligations (CMBS). The life insurance companies' portfolio contains virtually all of these securities. Approximately 87% of the mortgage-backed securities are government/agency-backed or AAA rated at December 31, 2000. SAFECO has intentionally limited its investment in riskier, more volatile CMOs and CMBS (e.g., principal only, inverse floaters, etc.) to less than 1% of total mortgage-backed securities at December 31, 2000. SAFECO's Consolidated Holdings of Mortgage-Backed Securities at December 31, 2000:
GAAP Market Value Amortized -------------------- December 31, 2000 Cost Amount % ------------------------------------------------------ --------- --------- ------- (Dollar Amounts In Millions) Residential CMOs: Planned (PAC) and Targeted (TAC) Amortization Class (Fixed Coupon) $ 477.4 $ 484.3 10.8% Sequential Pay (SEQ) 1,158.9 1,182.8 26.4 Accrual Coupon (Z-Tranche) 622.2 676.7 15.1 Floating Rate 76.2 78.5 1.8 Companion/Support, Principal Only, Inverse Floaters 31.7 33.0 0.7 --------- --------- ------- Subtotal 2,366.4 2,455.3 54.8 --------- --------- ------- Residential Mortgage-Backed Pass-Throughs (Non-CMOs) 331.2 341.1 7.6 --------- --------- -------- Securitized Commercial Real Estate: Government/Agency-Backed 411.1 419.8 9.4 Pass-Throughs (Non-agency) 25.6 26.2 0.6 CMOs (Non-agency) 887.8 907.4 20.3 --------- --------- -------- Subtotal 1,324.5 1,353.4 30.3 --------- --------- -------- Asset-Backed Securities (Non-Real Estate): 322.8 324.3 7.3 --------- --------- -------- Total Mortgaged-Backed Securities $ 4,344.9 $ 4,474.1 100.0% ========= ========= ========
The quality rating of SAFECO's mortgage-backed security portfolio (GAAP market values) is shown in the following table:
Percent at Rating December 31, 2000 ------------------------------------------------------------- Government/Agency Backed 46% AAA 41 AA 7 A 3 BBB 3 BB or lower - ------------- Total 100% =============
12 14 The pretax investment income yields for the Corporation's property and casualty and life insurance subsidiaries (calculations are based on GAAP amortized cost) are shown below. The main reason for the increase in the property and casualty yield in 2000 over 1999 is the shift in the property and casualty bonds from tax-exempt to taxable fixed-income bonds and proceeds from equity securities sales in third quarter which were reinvested in taxable fixed-income bonds.
Year Ended December 31 2000 1999 1998 ---------------------------------------------------------- Property and Casualty Insurance 6.4% 6.2% 6.3% Life Insurance 7.7% 7.7% 7.8%
Effective October 1, 2000, the entire held-to-maturity fixed maturities investment portfolio, with a market value of $2.8 billion, was reclassified to available-for-sale. This reclassification was made to provide more flexibility in managing the bond portfolio and resulted in an increase in other comprehensive income of $41 million in the fourth quarter. All of SAFECO's fixed-income securities are now carried at market. OTHER OPERATIONS SAFECO's other operations include subsidiaries involved in commercial lending and leasing, investment management and insurance agency and financial services distribution operations. SAFECO Credit Company, Inc., organized in 1969, provides commercial loans and equipment financing and leasing to businesses, insurance agents and affiliated companies. At December 31, 2000, 10% of the Credit Company's outstanding loans and leases consisted of loans to affiliated SAFECO companies. See subsequent event relating to SAFECO Credit Company, Inc. on page 14. SAFECO Asset Management Company, acquired in 1973, is the investment advisor for the SAFECO 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 SAFECO Managed Bond Trust. These five trusts are made up of eighteen separate investment portfolios, all of which are sold on a "no-load" basis directly to the public. Fifteen of these portfolios have two to three additional classes of stock which are sold to the public through intermediaries. In addition, SAFECO Securities, Inc. is the principal underwriter for the SAFECO Resource Series Trust, a registered investment company with six 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, SAFECO Deferred Variable Annuity Account and SAFECO Separate Account C, all of which are separate accounts of SAFECO Life Insurance Company and for First SAFECO Separate Account S, which is a separate account of First SAFECO National Life Insurance Company of New York. 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. SAFECO Investment Services, Inc., organized in 1986, is a broker/dealer and registered investment advisor that primarily 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 broker with a concentrated emphasis on the distribution of qualified and nonqualified annuity products and mutual funds through the banking and brokerage arenas. 13 15 In February 1998, SAFECO decided to sell its real estate subsidiary, SAFECO Properties, Inc., to focus on its core insurance and financial services businesses. Since SAFECO Properties' operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. See Note 1 on page 55 of the 2000 Annual Report to Shareholders for more information. Subsequent Event On March 14, 2001, the Corporation announced its decision to sell SAFECO Credit Company, Inc. An investment banker has been retained by the Corporation to advise it in connection with the sale. There is currently no formal plan of disposal and a measurement date has not yet been established. ITEM 2 -- PROPERTIES SAFECO's property and casualty insurance companies lease their home office complex located in Seattle, Washington from General America Corporation (a wholly-owned subsidiary of the Corporation). This complex totals 567,000 gross square feet. A 700-car parking garage is connected to the complex. SAFECO's life insurance companies lease their headquarters building located in Redmond, Washington from General America Corporation. This complex totals 220,000 gross square feet. SAFECO is currently developing approximately 350,000 gross square feet of additional office space for its use on land near SAFECO life insurance companies' Redmond, Washington headquarters. Other buildings owned and occupied include service facilities in Redmond, Washington and Indianapolis, Indiana, as well as regional and branch offices in Fountain Valley and Pleasant Hill, California; Denver, Colorado; Carol Stream, Illinois; St. Louis, Missouri; Cincinnati, Ohio; Portland, Oregon; Mountlake Terrace, Redmond and Spokane, Washington. These buildings comprise approximately 1,600,000 gross square feet. All other branch and service offices occupy leased premises comprising approximately 2,500,000 square feet, generally for periods of five years or less. SAFECO Properties' remaining real estate investments are primarily retail centers. See Item 1 on page 13 of this report. ITEM 3 -- LEGAL PROCEEDINGS Because of the nature of their businesses, the Corporation's insurance and other subsidiaries are subject to certain legal actions filed or threatened in the ordinary course of their business operations, generally as liability insurers defending third-party claims brought against their insureds or as insurers defending policy coverage claims brought against them. The Corporation does not believe that such litigation will have a material adverse effect on its financial condition, future operating results or liquidity. The Corporation's property and casualty insurance subsidiaries are parties to a number of lawsuits for liability coverages related to environmental claims. Although estimation of environmental claims loss reserves is difficult, the Corporation believes that reserves established for these claims are adequate based on the known facts and current law. The loss and loss 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 the Corporation. See page 7 of Item 1 for more information regarding the liability of such subsidiaries for environmental claims and the process of estimating environmental loss reserves. 14 16 Four of the Corporation's property and casualty insurance subsidiaries were among 23 underwriters of real property insurance named as defendants in a case brought in February 1996 in the United States District Court for the Western District of Missouri alleging that their underwriting, sales and marketing practices violated the Fair Housing Act and certain other civil rights laws. The trial court refused to certify the plaintiff class and dismissed the lawsuit in June 1997. The plaintiffs appealed. In February 1998, the Eighth Circuit Court of Appeals upheld the dismissal and, in January 1999, the United States Supreme Court refused to grant certiori to hear the case. Meanwhile, in January 1999, a group of plaintiffs filed separate lawsuits in Missouri State court against the SAFECO property and casualty insurance companies named in the federal court action. The state court actions against the SAFECO defendants have been removed to federal district court and assigned to the same judge who had ordered dismissal of the original federal court action. The actions have been stayed while a related action that has been dismissed against other insurers is on appeal before the Eighth Circuit Court of Appeals. Based on current information, management expects that the remaining lawsuits against the Corporation's subsidiaries will be dismissed just as the original federal court action was and intends to vigorously pursue such dismissal. The Corporation and one of its property and casualty insurance subsidiaries, General Insurance Company of America ("General"), are defendants along with six other property and casualty insurance groups in a putative class-action lawsuit filed in 1999 in Illinois State court, Hobbs v. State Farm Mutual Automobile Insurance Co., et al. The plaintiffs' complaint against the Corporation and General has been narrowed to an allegation that the defendants' support of the Certified Auto Parts Association ("CAPA"), an independent organization that certifies the quality of non-original equipment manufactured parts for vehicles, constituted a conspiracy to further the improper use of those parts. The plaintiffs seek actual as well as punitive damages. The Corporation and General will vigorously defend against these claims. One of the Corporation's life insurance subsidiaries is engaged in litigation with several factoring companies that have purchased from annuitants, at a discount, the right to receive future payments from numerous structured settlement annuity contracts. Consistent with the language of the annuity contracts, the Corporation's life insurance subsidiary has resisted with varying results the purchases and assignments of rights to these future payments. 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 2000. 15 17 EXECUTIVE OFFICERS OF THE REGISTRANT As of March 19, 2001, these are the names, ages and positions of the executive officers of the registrant as required by Item 10. No family relationships exist. Michael S. McGavick 43 Named President, Chief Executive Officer and Director effective January 30, 2001. President and Chief Operating Officer of CNA Agency Market Operations from October 1997 until January 2001, and President of CNA's Commercial Lines group from January until October 1997, and held a series of executive positions with CNA's commercial insurance operations from 1995 through October 1997. Director of the Superfund Improvement Project for the American Insurance Association from 1992 to 1995. Rodney A. Pierson 53 Chief Financial Officer since August 1996. Senior Vice President since February 1994. Secretary since 1991. Controller from 1990 to 1997. 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 51 Senior Vice President since 1992. General Counsel since 1989. Vice President from 1989 to 1992. Associate General Counsel from 1985 to 1989. Randall H. Talbot 46 President of SAFECO Life Insurance Companies since February 1998. Chief Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.
16 18 PART II ITEM 5 -- MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS Pages 47 and 73 of the 2000 Annual Report to Shareholders are incorporated herein by reference. ITEM 6 -- SELECTED FINANCIAL DATA Pages 80 through 83 of the 2000 Annual Report to Shareholders are incorporated herein by reference. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pages 33 through 47 of the 2000 Annual Report to Shareholders are incorporated herein by reference. ITEM 7A -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Pages 46 and 47 of the 2000 Annual Report to Shareholders are incorporated herein by reference. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Pages 49 through 79 of the 2000 Annual Report to Shareholders 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, 2000, excluding the Annual Report of the Compensation Committee on Executive Compensation appearing on Pages 8 through 13, is incorporated herein by reference to fulfill the requirements of Items 10 -- 13 below. ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (except for the portion of Item 10 relating to executive officers that appears on page 16 in Part I of this Form 10-K). ITEM 11 -- EXECUTIVE COMPENSATION ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17 19 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS F-1 Consent of Ernst & Young LLP, Independent Auditors SAFECO Corporation and Subsidiaries: The following consolidated financial statements of SAFECO Corporation and its subsidiaries, included in the 2000 Annual Report to Shareholders (pages 48 through 79), are incorporated herein by reference (the announcement regarding the Corporation's decision to sell SAFECO Credit Company, Inc., which is disclosed as a Subsequent Event on page 14 and filed on Form 8-K on March 15, 2001, should be read in conjunction with the 2000 Annual Report to Shareholders) Report of Ernst & Young LLP, Independent Auditors Statements of Consolidated Income Years Ended December 31, 2000, 1999 and 1998 Consolidated Balance Sheets December 31, 2000 and 1999 Statements of Consolidated Cash Flows Years Ended December 31, 2000, 1999 and 1998 Statements of Consolidated Shareholders' Equity Years Ended December 31, 2000, 1999 and 1998 Statements of Consolidated Comprehensive Income (Loss) Years Ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements December 31, 2000 SAFECO Corporation and Subsidiaries Supplemental Consolidating Information: F-2 Balance Sheets December 31, 2000 and 1999 F-3 Statement of Income Year Ended December 31, 2000 F-4 Statement of Cash Flows Year Ended December 31, 2000 18 20 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, 2000 F-6 Schedule II Balance Sheets (Condensed Financial Information of registrant (Parent Company Only)) December 31, 2000 and 1999 F-7 Schedule II Statements of Income (Condensed Financial Information of registrant (Parent Company Only)) Years Ended December 31, 2000, 1999 and 1998 F-8 Schedule II Statements of Cash Flows (Condensed Financial Information of registrant (Parent Company Only)) Years Ended December 31, 2000, 1999 and 1998 -- -- Statements of Consolidated Shareholders' Equity Years Ended December 31, 2000, 1999 and 1998. (See page 54 of the 2000 Annual Report to Shareholders which is incorporated herein by reference.) -- -- Statements of Consolidated Comprehensive Income (Loss) Years Ended December 31, 2000, 1999 and 1998. (See page 54 of the 2000 Annual Report to Shareholders which is incorporated herein by reference.) F-9 Schedule III Supplementary Insurance Information Years Ended December 31, 2000, 1999 and 1998 F-10 Schedule IV Reinsurance Years Ended December 31, 2000, 1999 and 1998 F-11 Schedule VI Supplemental Information Concerning Property-Casualty Insurance Operations Years Ended December 31, 2000, 1999 and 1998 -- Schedule V This Article 7 schedule is omitted because the information is provided elsewhere in the Annual Report (Form 10-K) or because of the absence of conditions under which it is required. 19 21 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (CONTINUED) (a) (3) EXHIBITS Exhibit Index Exhibit 11 Computation of Income Per Share Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 13 2000 Annual Report to Shareholders (the announcement regarding the corporation's decision to sell SAFECO Credit Company, Inc., which is disclosed as a Subsequent Event on page 14 and filed on Form 8-K on March 15, 2001, should be read in conjunction with the 2000 Annual Report to Shareholders) Exhibit 21 Subsidiaries of the Registrant (b) REPORTS ON FORM 8-K The registrant filed the following 8-K's during the quarter ended December 31, 2000 and for the period up to March 19, 2001 (the filing date of this Form 10-K).
FILING DATED UNDER FILING RELATED TO: --------------- -------------------- ----------------------------------------------------------- October 9, 2000 Item 5 (Other Items) Preliminary review of earnings for the 3rd quarter of 2000. December 21, 2000 Item 5 (Other Items) Announcement naming William G. Reed, Jr. as acting Chairman and acting Chief Executive Officer. January 12, 2001 Item 5 (Other Items) Preliminary review of earnings for the 4th quarter of 2000. January 30, 2001 Item 5 (Other Items) Announcement naming Michael S. McGavick as President, Chief Executive Officer and Director. February 8, 2001 Item 5 (Other Items) Announcement on reduction of dividend to common shareholders. March 1, 2001 Item 5 (Other Items) Announcement regarding earthquake coverage relating to February 28th Puget Sound area earthquake. March 15, 2001 Item 5 (Other Items) Announcement regarding decision to sell SAFECO Credit Company, Inc.
20 22 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 19th day of March 2001. SAFECO CORPORATION ----------------------- Registrant /s/ MICHAEL S. MCGAVICK ----------------------- Michael S. McGavick, President, Chief Executive Officer and Director 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 indicated on March 19, 2001.
NAME TITLE - - - - - - ---------------------------------------------------------------------- /s/ MICHAEL S. MCGAVICK President, - - - - - - --------------------------------- Chief Executive Officer Michael S. McGavick and Director /s/ ROD A. PIERSON Senior Vice President, - - - - - - --------------------------------- Chief Financial Officer Rod A. Pierson and Secretary /s/ H. PAUL LOWBER Vice President, Controller - - - - - - --------------------------------- and Chief Accounting Officer H. Paul Lowber /s/ PHYLLIS J. CAMPBELL Director - - - - - - --------------------------------- Phyllis J. Campbell /s/ ROBERT S. CLINE Director - - - - - - --------------------------------- Robert S. Cline /s/ JOHN W. ELLIS Director - - - - - - --------------------------------- John W. Ellis
21 23
NAME TITLE - - - - - - ---------------------------------------------------------------------- /s/ WILLIAM P. GERBERDING Director - - - - - - --------------------------------- William P. Gerberding /s/ JOSHUA GREEN III Director - - - - - - --------------------------------- Joshua Green III /s/ WILLIAM W. KRIPPAEHNE, JR. Director - - - - - - --------------------------------- William W. Krippaehne, Jr. /s/ WILLIAM G. REED, JR. Chairman - - - - - - --------------------------------- William G. Reed, Jr. /s/ NORMAN B. RICE Director - - - - - - --------------------------------- Norman B. Rice /s/ JUDITH M. RUNSTAD Director - - - - - - --------------------------------- Judith M. Runstad /s/ PAUL W. SKINNER Director - - - - - - --------------------------------- Paul W. Skinner
22 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 9, 2001, included in the 2000 Annual Report to Shareholders of SAFECO Corporation. Our audits also included the financial statement schedules of SAFECO Corporation listed in the Index at Item 14(a). These schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these schedules 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 the Registration Statement (Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of 1997 and the incorporation by reference in the Registration Statements (Forms S-3) pertaining to the $800,000,000 in SAFECO debt securities and the SAFECO Agency Stock Purchase Plan, of our report dated February 9, 2001, with respect to the consolidated financial statements of SAFECO Corporation incorporated 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) for the year ended December 31, 2000 of SAFECO Corporation. /s/ Ernst & Young LLP Seattle, Washington March 15, 2001 25 SAFECO CORPORATION AND SUBSIDIARIES F-2 Balance Sheets - Supplemental Consolidating Information December 31, 2000 - - - - - - -------------------------------------------------------------------------------- (In Millions)
Property & Credit Other and ASSETS Casualty Life Company Eliminations Consolidated --------------------------------------------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 6,347.4 $14,403.0 $ -- $ 79.8 $20,830.2 Marketable Equity Securities, at Market Value 1,695.0 26.2 -- 94.2 1,815.4 Mortgage Loans 58.9 848.1 -- (84.0) 823.0 Other Investment Assets 16.6 95.1 -- 48.6 160.3 Short-Term Investments 172.6 142.3 -- (132.6) 182.3 --------------------------------------------------------------------- Total Investments 8,290.5 15,514.7 -- 6.0 23,811.2 Cash 134.0 33.8 9.9 18.5 196.2 Accrued Investment Income 101.8 224.6 5.2 1.5 333.1 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) -- -- 1,617.7 -- 1,617.7 Loans to Affiliates -- -- 171.3 (171.3) -- Premiums and Other Service Fees Receivable 993.9 57.4 -- 11.7 1,063.0 Other Notes and Accounts Receivable -- 19.3 -- 18.3 37.6 Reinsurance Recoverables 362.5 99.2 -- -- 461.7 Deferred Policy Acquisition Costs 312.1 293.3 -- -- 605.4 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 258.2 1.5 0.2 180.5 440.4 Goodwill (At cost less accumulated amortization) 1,163.1 90.7 -- 53.6 1,307.4 Other Assets 180.2 74.0 102.0 6.5 362.7 Separate Account Assets -- 1,275.1 -- -- 1,275.1 --------------------------------------------------------------------- Total $11,796.3 $17,683.6 $ 1,906.3 $ 125.3 $31,511.5 ===================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Losses and Loss Adjustment Expense $ 4,612.7 $ 74.2 $ -- $ -- $ 4,686.9 Life Policy Liabilities -- 342.1 -- -- 342.1 Unearned Premiums 1,826.9 9.6 -- -- 1,836.5 Funds Held Under Deposit Contracts -- 14,085.7 -- -- 14,085.7 Debt: Commercial Paper -- -- -- 349.8 349.8 Credit Company Borrowings - Nonaffiliates -- -- 1,154.7 -- 1,154.7 Credit Company Borrowings - Affiliates -- -- 504.0 (504.0) -- 7.875% Medium-Term Notes Due 2003 -- -- -- 300.0 300.0 7.875% Notes Due 2005 -- -- -- 200.0 200.0 6.875% Notes Due 2007 -- -- -- 200.0 200.0 Other -- -- -- 80.7 80.7 Other Liabilities 834.2 323.0 39.2 112.1 1,308.5 Current Income Taxes (10.7) 35.7 3.4 0.7 29.1 Deferred Income Taxes (Includes tax on unrealized appreciation of investment securities) 132.7 18.2 56.4 (83.7) 123.6 Separate Account Liabilities -- 1,275.1 -- -- 1,275.1 --------------------------------------------------------------------- Total Liabilities 7,395.8 16,163.6 1,757.7 655.6 25,972.7 --------------------------------------------------------------------- Capital Securities -- -- -- 843.0 843.0 --------------------------------------------------------------------- Common Stock 37.9 6.0 1.0 789.6 834.5 Additional Paid-In Capital 3,000.5 264.8 27.0 (3,292.3) -- Retained Earnings 543.5 1,180.9 120.6 1,121.4 2,966.4 Total Accumulated Other Comprehensive Income 818.6 68.3 -- 8.0 894.9 --------------------------------------------------------------------- Total Shareholders' Equity 4,400.5 1,520.0 148.6 (1,373.3) 4,695.8 --------------------------------------------------------------------- Total $11,796.3 $17,683.6 $ 1,906.3 $ 125.3 $31,511.5 =====================================================================
26 SAFECO CORPORATION AND SUBSIDIARIES F-2 Balance Sheets - Supplemental Consolidating Information December 31, 1999 (Continued) - - - - - - -------------------------------------------------------------------------------- (In Millions)
Property & Credit Other and ASSETS Casualty Life Company Eliminations Consolidated --------------------------------------------------------------------- Investments: Fixed Maturities Available-for-Sale, at Market Value $ 5,950.8 $10,789.2 $ -- $ 90.7 $16,830.7 Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,733.3 -- -- 2,733.3 Marketable Equity Securities, at Market Value 1,897.5 33.6 -- 73.6 2,004.7 Mortgage Loans 57.5 830.4 -- (117.5) 770.4 Other Investment Assets 17.8 95.4 -- 102.7 215.9 Short-Term Investments 287.8 382.8 -- (294.6) 376.0 --------------------------------------------------------------------- Total Investments 8,211.4 14,864.7 -- (145.1) 22,931.0 Cash 61.9 23.2 9.2 18.0 112.3 Accrued Investment Income 104.2 218.4 4.0 1.5 328.1 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts) -- -- 1,460.6 -- 1,460.6 Loans to Affiliates -- -- 58.3 (58.3) -- Premiums and Other Service Fees Receivable 1,034.9 13.3 -- 10.1 1,058.3 Other Notes and Accounts Receivable 22.9 65.6 2.0 56.7 147.2 Deferred Income Tax Recoverable (Includes tax on unrealized appreciation of investment securities) 5.4 123.0 (51.5) 28.4 105.3 Reinsurance Recoverables 332.3 52.5 -- -- 384.8 Deferred Policy Acquisition Costs 325.4 273.4 -- -- 598.8 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 261.4 1.5 0.3 81.6 344.8 Goodwill (At cost less accumulated amortization) 1,209.0 95.7 -- 50.2 1,354.9 Other Assets 134.6 75.1 101.5 32.2 343.4 Separate Account Assets -- 1,403.2 -- -- 1,403.2 --------------------------------------------------------------------- Total $11,703.4 $17,209.6 $ 1,584.4 $ 75.3 $30,572.7 ===================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Losses and Loss Adjustment Expense $ 4,378.6 $ 37.8 $ -- $ -- $ 4,416.4 Life Policy Liabilities -- 281.5 -- -- 281.5 Unearned Premiums 1,844.3 8.8 -- -- 1,853.1 Funds Held Under Deposit Contracts -- 13,762.9 -- -- 13,762.9 Debt: Commercial Paper -- -- -- 508.8 508.8 Credit Company Borrowings - Nonaffiliates -- -- 1,323.1 -- 1,323.1 Credit Company Borrowings - Affiliates -- -- 92.8 (92.8) -- 7.875% Notes Due 2005 -- -- -- 200.0 200.0 6.875% Notes Due 2007 -- -- -- 200.0 200.0 Other -- -- -- 84.2 84.2 Other Liabilities 1,052.8 499.2 26.3 (181.5) 1,396.8 Current Income Taxes (10.1) 15.1 2.8 (1.7) 6.1 Separate Account Liabilities -- 1,403.2 -- -- 1,403.2 --------------------------------------------------------------------- Total Liabilities 7,265.6 16,008.5 1,445.0 717.0 25,436.1 --------------------------------------------------------------------- Capital Securities -- -- -- 842.5 842.5 --------------------------------------------------------------------- Common Stock 25.9 17.0 1.0 797.8 841.7 Additional Paid-In Capital 3,010.8 266.3 27.0 (3,304.1) -- Retained Earnings 815.9 1,130.9 111.4 1,004.5 3,062.7 Total Accumulated Other Comprehensive Income 585.2 (213.1) -- 17.6 389.7 --------------------------------------------------------------------- Total Shareholders' Equity 4,437.8 1,201.1 139.4 (1,484.2) 4,294.1 --------------------------------------------------------------------- Total $11,703.4 $17,209.6 $ 1,584.4 $ 75.3 $30,572.7 =====================================================================
27 SAFECO CORPORATION AND SUBSIDIARIES F-3 Statement of Income - Supplemental Consolidating Information Year Ended December 31, 2000 - - - - - - ------------------------------------------------------------------------------- (In Millions)
Property & Other and Casualty Life Eliminations Consolidated ------------------------------------------------------------ REVENUES Insurance: Property and Casualty Earned Premiums $4,563.4 $ -- $ -- $4,563.4 Life Premiums and Other Revenues -- 502.7 -- 502.7 ------------------------------------------------------------ Total 4,563.4 502.7 -- 5,066.1 Credit -- -- 143.3 143.3 Asset Management -- -- 42.9 42.9 Other -- -- 99.4 99.4 Net Investment Income 460.5 1,175.2 (8.5) 1,627.2 Realized Investment Gain (Loss) 154.4 (16.2) 1.3 139.5 ------------------------------------------------------------ Total 5,178.3 1,661.7 278.4 7,118.4 ------------------------------------------------------------ EXPENSES Losses, Adjustment Expense and Policy Benefits 3,770.0 1,232.2 (14.6) 4,987.6 Commissions 689.1 104.5 -- 793.6 Personnel Costs 342.5 85.9 68.7 497.1 Interest -- -- 173.1 173.1 Goodwill Amortization 44.0 5.9 10.6 60.5 Other 270.4 106.3 72.4 449.1 Amortization of Deferred Policy Acquisition Costs 796.6 37.6 -- 834.2 Deferral of Policy Acquisition Costs (783.3) (52.1) -- (835.4) ------------------------------------------------------------ Total 5,129.3 1,520.3 310.2 6,959.8 ------------------------------------------------------------ Income Before Income Taxes 49.0 141.4 (31.8) 158.6 ------------------------------------------------------------ Provision (Benefit) for Income Taxes: Current (52.7) 59.8 34.2 41.3 Deferred 12.2 (10.3) (44.0) (42.1) ------------------------------------------------------------ Total (40.5) 49.5 (9.8) (0.8) ------------------------------------------------------------ Income Before Distributions on Capital Securities 89.5 91.9 (22.0) 159.4 Distributions on Capital Securities, Net of Tax -- -- (44.8) (44.8) ------------------------------------------------------------ Net Income (Loss) $ 89.5 $ 91.9 $ (66.8) $ 114.6 ============================================================
28 SAFECO CORPORATION AND SUBSIDIARIES F-4 Statement of Cash Flows - Supplemental Consolidating Information Year Ended December 31, 2000 - - - - - - -------------------------------------------------------------------------------- (In Millions)
Property & Other and Casualty Life Eliminations Consolidated ------------------------------------------------------ OPERATING ACTIVITIES Insurance Premiums Received $ 4,572.9 $ 317.3 $ -- $ 4,890.2 Dividends and Interest Received 450.8 1,087.5 137.8 1,676.1 Other Operating Receipts -- 64.7 160.3 225.0 Insurance Claims and Policy Benefits Paid (3,550.0) (606.5) -- (4,156.5) Underwriting, Acquisition and Insurance Operating Costs Paid (1,388.5) (271.2) 6.9 (1,652.8) Interest Paid and Distributions on Capital Securities -- -- (202.4) (202.4) Other Operating Costs Paid -- -- (126.7) (126.7) Income Taxes Refunded (Paid) 51.8 (39.4) (6.7) 5.7 ------------------------------------------------------- Net Cash Provided by (Used in) Operating Activities 137.0 552.4 (30.8) 658.6 ------------------------------------------------------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (916.6) (2,651.8) (35.6) (3,604.0) Fixed Maturities Held-to-Maturity -- (2.2) -- (2.2) Equities (247.0) (20.8) (104.8) (372.6) Other Investments (2.7) (344.5) (14.8) (362.0) Maturities of Fixed Maturities Available-for-Sale 161.9 786.5 23.8 972.2 Maturities of Fixed Maturities Held-to-Maturity -- 8.7 -- 8.7 Sales of: Fixed Maturities Available-for-Sale 772.0 1,465.0 28.4 2,265.4 Fixed Maturities Held-to-Maturity -- 0.1 -- 0.1 Equities 566.3 28.9 66.5 661.7 Other Investments 13.2 308.9 90.1 412.2 Net Decrease (Increase) in Short-Term Investments 268.6 44.0 (31.2) 281.4 Finance Receivables Originated or Acquired -- -- (684.9) (684.9) Principal Payments Received on Finance Receivables -- -- 536.0 536.0 Other (318.6) 213.5 7.9 (97.2) ------------------------------------------------------- Net Cash Provided by (Used in) Investing Activities 297.1 (163.7) (118.6) 14.8 ------------------------------------------------------- FINANCING ACTIVITIES Funds Received Under Deposit Contracts -- 1,266.0 -- 1,266.0 Return of Funds Held Under Deposit Contracts -- (1,603.1) -- (1,603.1) Proceeds from Notes and Mortgage Borrowings -- -- 300.0 300.0 Repayment of Notes and Mortgage Borrowings -- -- (19.3) (19.3) Net Proceeds from (Repayment of) Short-Term Borrowings -- 8.5 (316.8) (308.3) Common Stock Reacquired -- -- (30.4) (30.4) Dividends Paid to Shareholders (362.0) (49.5) 222.1 (189.4) Other -- -- (5.0) (5.0) ------------------------------------------------------- Net Cash Provided by (Used in) Financing Activities (362.0) (378.1) 150.6 (589.5) ------------------------------------------------------- Net Increase in Cash 72.1 10.6 1.2 83.9 Cash at the Beginning of Year 61.9 23.2 27.2 112.3 ------------------------------------------------------- Cash at the End of the Year $ 134.0 $ 33.8 $ 28.4 $ 196.2 =======================================================
29 SAFECO CORPORATION AND SUBSIDIARIES F-5 Summary of Investments Other Than Investments in Related Parties Schedule I December 31, 2000 - - - - - - -------------------------------------------------------------------------------- (In Millions)
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 $ 1,582.5 $ 1,756.2 $ 1,756.2 States, Municipalities and Political Subdivisions 2,916.6 3,220.5 3,220.5 Mortgage-Backed Securities 4,344.9 4,474.1 4,474.1 Foreign Governments 303.6 354.6 354.6 Public Utilities 1,970.7 1,980.6 1,980.6 All Other Corporate Bonds 8,942.2 8,726.2 8,726.2 Redeemable Preferred Stocks 327.6 318.0 318.0 ------------------------------------------- Total Fixed Maturities Classified as Available-for-Sale(1) 20,388.1 $20,830.2 20,830.2 -----------------=========---------------- Equity Securities Common Stocks: Public Utilities 15.7 $ 65.6 65.6 Banks, Trust and Insurance Companies 34.2 165.5 165.5 Industrial, Miscellaneous and All Other 689.7 1,438.4 1,438.4 Non-Redeemable Preferred Stocks 136.3 145.9 145.9 ------------------------------------------- Total Equity Securities 875.9 $ 1,815.4 1,815.4 -----------------=========---------------- Other Mortgage Loans on Real Estate(1) 823.0 823.0 Policy Loans 91.4 91.4 Other Investment Assets(1) 68.9 68.9 Short-Term Investments 182.3 182.3 --------- --------- Total Other 1,165.6 1,165.6 --------- --------- Total Investments $22,429.6 $23,811.2 ========= =========
(1) The carrying value of investments in fixed maturities, mortgage loans and real estate (included in other investment assets) that have not produced income for the last twelve months is less than one percent of the total of such investments at December 31, 2000. 30 SAFECO CORPORATION F-6 Balance Sheets Schedule II (Parent Company Only)
December 31 2000 1999 - - - - - - ------------------------------------------------------------------------------------------------- (In Millions) 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) $6,226.9 $5,981.2 Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: $58.4; $77.4) 60.5 76.1 Marketable Equity Securities, at Market Value (Cost: $54.8: $22.4) 62.6 43.9 Short-Term Investments 19.1 62.8 ------------------------- Total Investments 6,369.1 6,164.0 Cash 0.1 0.1 Notes Receivable from Affiliated Companies 300.0 -- Accounts Receivable from Affiliated Companies 4.9 2.8 Income Taxes - Current 2.9 11.5 - Deferred 47.4 -- Other Assets 24.4 21.7 ------------------------- Total Assets $6,748.8 $6,200.1 ========================= LIABILITIES AND SHAREHOLDERS' EQUITY Interest Payable $ 48.7 $ 41.8 Accounts Payable 14.3 8.2 Deferred Income Taxes -- 7.0 Dividends Payable to Shareholders 47.2 47.7 Debt: Commercial Paper 349.8 508.8 Medium-Term Notes Due 2002 50.0 50.0 7.875% Medium-Term Notes Due 2003 300.0 -- 7.875% Notes Due 2005 200.0 200.0 6.875% Notes Due 2007 200.0 200.0 8.072% Junior Subordinated Debentures (Capital Securities) 843.0 842.5 ------------------------- Total Liabilities 2,053.0 1,906.0 ------------------------- 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: 7.1; 7.3 Shares Issued and Outstanding: 127.6; 128.9 834.5 841.7 Retained Earnings 2,966.4 3,062.7 Total Accumulated Other Comprehensive Income 894.9 389.7 ------------------------- Total Shareholders' Equity 4,695.8 4,294.1 ------------------------- Total Liabilities and Shareholders' Equity $6,748.8 $6,200.1 =========================
31 SAFECO CORPORATION F-7 Statements of Income Schedule II (Parent Company Only)
Year Ended December 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------- (In Millions) REVENUES Dividends -Nonaffiliates $ 1.9 $ 2.3 $ 2.5 Interest -Affiliates 20.6 0.9 0.2 -Others 4.9 7.0 6.6 Realized Gain (Loss) from Security Investments 0.8 (0.5) 5.8 --------------------------------------- Total 28.2 9.7 15.1 --------------------------------------- EXPENSES Interest 157.6 140.9 152.7 Other 8.6 1.1 1.9 --------------------------------------- Total 166.2 142.0 154.6 --------------------------------------- Loss Before Income Taxes (138.0) (132.3) (139.5) Benefit for Income Taxes (Includes provision (benefit) on realized gain (loss): $0.3; $(0.2); $2.0) (48.7) (47.0) (48.9) --------------------------------------- Loss Before Equity in Earnings of Subsidiaries (89.3) (85.3) (90.6) Equity in Earnings of Subsidiaries 203.9 337.5 442.5 --------------------------------------- Consolidated Net Income $ 114.6 $ 252.2 $ 351.9 ======================================= Dividends Accrued and Received From Subsidiaries (Cash): SAFECO Insurance Company of America $ 93.5 $ 168.0 $ 144.5 General Insurance Company of America 53.0 174.0 106.0 First National Insurance Company of America 10.0 8.0 9.0 SAFECO National Insurance Company 6.0 7.0 5.5 SAFECO Insurance Company of Illinois 14.0 12.0 12.0 American States Financial Corporation -- 346.0 233.0 American States Insurance Company 132.5 -- -- American Economy Insurance Company 43.5 -- -- American States Preferred Insurance Company 5.5 -- -- SAFECO Life Insurance Company 49.0 -- 90.0 SAFECO Administrative Services, Inc. -- -- 14.5 SAFECO Properties, Inc. 45.0 25.7 0.2 SAFECO Credit Company, Inc. 3.6 3.6 3.5 SAFECO Asset Management Company 8.9 1.8 5.6 Other 0.6 -- 2.1 --------------------------------------- Total $ 465.1 $ 746.1 $ 625.9 =======================================
32 SAFECO CORPORATION F-8 Statements of Cash Flows Schedule II (Parent Company Only)
Year Ended December 31 2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------------------------------- (In Millions) OPERATING ACTIVITIES Dividends and Interest Received -Affiliates $ 486.9 $ 761.3 $ 657.3 -Others 6.6 10.4 9.2 Interest Paid (150.1) (143.4) (150.0) Other Operating Costs Paid (2.2) (6.8) (1.2) Income Taxes Refunded 6.6 50.0 23.1 --------------------------------------- Net Cash Provided by Operating Activities 347.8 671.5 538.4 --------------------------------------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (14.9) -- (25.7) Equities (93.8) (0.1) (7.2) Maturities of Fixed Maturities Available-for-Sale 20.0 19.4 25.0 Sales of: Fixed Maturities Available-for-Sale 13.2 -- 3.2 Equities 63.3 9.7 19.3 Funds Loaned to Affiliate (300.0) -- -- Net Decrease (Increase) in Short-Term Investments 43.7 19.5 (77.3) Other -- -- (0.4) --------------------------------------- Net Cash Provided by (Used in) Investing Activities (268.5) 48.5 (63.1) --------------------------------------- FINANCING ACTIVITIES Proceeds from Medium-Term Notes 300.0 -- -- Net Repayment of Short-Term Borrowings (159.1) (229.9) (80.0) Common Stock Reacquired (30.4) (303.1) (236.8) Dividends Paid to Shareholders (189.4) (192.2) (187.5) Other (0.4) 5.0 3.8 --------------------------------------- Net Cash Used in Financing Activities (79.3) (720.2) (500.5) --------------------------------------- Net (Decrease) Increase in Cash -- (0.2) (25.2) Cash at the Beginning of Year 0.1 0.3 25.5 --------------------------------------- Cash at the End of Year $ 0.1 $ 0.1 $ 0.3 =======================================
Statement of Cash Flows Reconciliation of Net Income to Net Cash Provided by Operating Activities (Parent Company Only)
Year Ended December 31 2000 1999 1998 - - - - - - -------------------------------------------------------------------------------------------------------------- (In Millions) Net Income $ 114.6 $ 252.2 $ 351.9 --------------------------------------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Equity in Net Income of Consolidated Subsidiaries (203.9) (337.5) (442.5) Dividends Received from Consolidated Subsidiaries 465.1 746.1 625.9 Realized Investment (Gain) Loss (0.8) 0.5 (5.8) Other 1.4 1.6 1.9 Changes in: Accrued Income Taxes 8.6 2.6 (27.0) Interest Payable 6.9 (3.1) 2.1 Other Assets and Liabilities (44.1) 9.1 31.9 --------------------------------------- Total Adjustments 233.2 419.3 186.5 --------------------------------------- Net Cash Provided by Operating Activities $ 347.8 $ 671.5 $ 538.4 =======================================
33 SAFECO CORPORATION AND SUBSIDIARIES F-9 Supplementary Insurance Information Schedule III
December 31, 2000 - - - - - - ------------------------------------------------------------------------------------------------- (In Millions) Reserve for Other Policy Future Policy Claims and Deferred Benefits, Benefits Payable Policy Losses, (Funds Held Acquisition Claims and Unearned Under Deposit Segment Costs Loss Expenses Premiums Contracts) - - - - - - -------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 61.5 $ 1,134.7 $ 437.6 Homeowners 80.9 261.0 403.5 Other Personal 24.1 86.4 119.7 Commercial Lines: SBI 93.8 1,625.1 534.8 SAFECO Commercial 38.6 1,201.4 245.0 Surety 12.9 (11.8) 70.4 Other 0.3 315.9 15.9 ----------------------------------------- Total 312.1 4,612.7 1,826.9 ----------------------------------------- Life: Retirement Services 104.3 14.1 -- $ 4,925.8 Settlement Annuities -- -- -- 6,167.8 Group 17.8 173.1 2.9 -- Individual 171.2 229.1 6.7 2,992.1 Other -- -- -- -- -------------------------------------------------------- Total 293.3 416.3 9.6 14,085.7 -------------------------------------------------------- Credit -- -- -- -- Asset Management -- -- -- -- Other and Eliminations(1) -- -- -- -- -------------------------------------------------------- Consolidated Totals $ 605.4 $ 5,029.0 $ 1,836.5 $ 14,085.7 ========================================================
Year Ended December 31, 2000 ---------------------------------------------------------------------------------------- (In Millions) Other Operating Costs (Including Dividends to Policyholders, Goodwill Benefits, Amortization Amortization Claims, of Deferred and Deferral Premiums and Net Losses and Policy of Policy Net Service Fee Investment Adjustment Acquisition Acquisition Premiums Segment Revenues Income Expenses Costs Costs) Written - - - - - - ---------------------------------------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 1,723.6 $ 125.3 $ 1,446.9 $ 201.6 $ 118.4 $ 1,725.6 Homeowners 729.8 52.9 626.9 185.9 109.1 738.7 Other Personal 186.7 16.3 108.2 55.2 32.3 193.3 Commercial Lines: SBI 1,171.7 145.1 948.5 211.3 181.4 1,140.9 SAFECO Commercial 683.4 98.5 612.8 121.6 113.6 671.1 Surety 61.6 4.6 21.2 21.2 7.9 63.8 Other 6.6 17.8 5.5 (0.2) -- 6.3 ---------------------------------------------------------------------------------------- Total 4,563.4 460.5 3,770.0 796.6 562.7 $ 4,539.7 ------------------------------------------------------------------------------========== Life: Retirement Services 36.8 392.5 328.8 22.8 47.7 Settlement Annuities 1.2 495.8 440.3 -- 30.3 Group 313.6 1.9 214.7 5.3 91.2 Individual 133.8 207.0 248.4 9.5 58.2 Other 17.3 78.0 -- -- 23.1 ------------------------------------------------------------------------- Total 502.7 1,175.2 1,232.2 37.6 250.5 ------------------------------------------------------------------------- Credit -- -- -- -- 125.0 Asset Management -- -- -- -- 30.0 Other and Eliminations(1) -- (8.5) (14.6) -- 169.8 ------------------------------------------------------------------------- Consolidated Totals $ 5,066.1 $ 1,627.2 $ 4,987.6 $ 834.2 $ 1,138.0 =========================================================================
(1) Real Estate operations reported separately in 1998 are combined with Other and Eliminations in 2000. The real estate operations are currently being disposed of; its operations are not material to the consolidated financial statements. 34 SAFECO CORPORATION AND SUBSIDIARIES F-9 Supplementary Insurance Information Schedule III (Continued)
December 31, 1999 - - - - - - ------------------------------------------------------------------------------------------------- (In Millions) Reserve for Other Policy Future Policy Claims and Deferred Benefits, Benefits Payable Policy Losses, (Funds Held Acquisition Claims and Unearned Under Deposit Segment Costs Loss Expenses Premiums Contracts) - - - - - - ----------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 65.6 $ 1,125.2 $ 435.6 Homeowners 82.5 223.1 394.9 Other Personal 22.8 79.9 118.6 Commercial Lines: SBI 102.5 1,561.1 561.1 SAFECO Commercial 40.1 1,119.6 255.0 Surety 11.6 (58.8) 62.9 Other 0.3 328.5 16.2 -------------------------------------------- Total 325.4 4,378.6 1,844.3 -------------------------------------------- Life: Retirement Services 103.4 12.7 -- $ 5,782.3 Settlement Annuities -- -- -- 5,823.4 Group 13.7 80.9 2.2 -- Individual 156.3 225.7 6.6 2,157.2 Other -- -- -- -- ------------------------------------------------------------ Total 273.4 319.3 8.8 13,762.9 ------------------------------------------------------------ Credit -- -- -- -- Asset Management -- -- -- -- Other and Eliminations(1) -- -- -- -- ------------------------------------------------------------ Consolidated Totals $ 598.8 $ 4,697.9 $ 1,853.1 $ 13,762.9 ============================================================
Year Ended December 31, 1999 ---------------------------------------------------------------------------------------------- (In Millions) Other Operating Costs (Including Dividends to Policyholders, Goodwill Benefits, Amortization Amortization Claims, of Deferred and Deferral Premiums and Net Losses and Policy of Policy Net Service Fee Investment Adjustment Acquisition Acquisition Premiums Segment Revenues Income Expenses Costs Costs) Written - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 1,725.6 $ 131.0 $ 1,382.7 $ 211.0 $ 102.0 $ 1,722.5 Homeowners 708.3 51.9 544.5 190.5 92.0 722.5 Other Personal 177.7 15.8 97.8 57.2 27.7 182.2 Commercial Lines: SBI 1,017.6 141.7 830.8 190.8 179.5 1,115.7 SAFECO Commercial 686.4 97.2 553.8 124.8 115.2 676.0, Surety 59.4 3.0 17.9 17.9 8.4 59.8 Other 7.9 21.7 4.3 0.8 43.8 5.1 ------------------------------------------------------------------------------------------- Total 4,382.9 462.3 3,431.8 793.0 568.6 $ 4,483.8 --------------------------------------------------------------------------------=========== Life: Retirement Services 32.9 410.9 310.5 37.2 43.6 Settlement Annuities 1.1 486.6 423.0 -- 22.6 Group 193.9 1.9 157.1 4.4 53.6 Individual 119.8 144.7 181.6 5.5 47.3 Other 13.2 76.0 -- -- 16.0 --------------------------------------------------------------------------- Total 360.9 1,120.1 1,072.2 47.1 183.1 --------------------------------------------------------------------------- Credit -- -- -- -- 97.2 Asset Management -- -- -- -- 30.7 Other and Eliminations(1) -- 2.7 -- -- 161.1 --------------------------------------------------------------------------- Consolidated Totals $ 4,743.8 $ 1,585.1 $ 4,504.0 $ 840.1 $ 1,040.7 ===========================================================================
(1) Real Estate operations reported separately in 1998 are combined with Other and Eliminations in 1999. The real estate operations are currently being disposed of; its operations are not material to the consolidated financial statements. 35 SAFECO CORPORATION AND SUBSIDIARIES F-9 Supplementary Insurance Information Schedule III (Continued)
December 31, 1998 - - - - - - ------------------------------------------------------------------------------------------------- (In Millions) Reserve for Other Policy Future Policy Claims and Deferred Benefits, Benefits Payable Policy Losses, (Funds Held Acquisition Claims and Unearned Under Deposit Segment Costs Loss Expenses Premiums Contracts) - - - - - - ----------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 67.6 $ 1,046.9 $ 438.7 Homeowners 78.8 215.2 380.3 Other Personal 22.8 91.6 117.8 Commercial Lines: SBI 87.3 1,504.8 463.0 SAFECO Commercial 42.6 1,072.0 268.7 Surety 8.2 (59.3) 62.3 Other 0.7 348.7 11.4 -------------------------------------------- Total 308.0 4,219.9 1,742.2 -------------------------------------------- Life: Retirement Services 92.6 12.8 -- $ 5,819.0 Settlement Annuities -- -- -- 5,531.6 Group 9.8 83.3 2.3 -- Individual 110.7 223.5 6.4 1,367.5 Other -- -- -- ------------------------------------------------------------ Total 213.1 319.6 8.7 12,718.1 ------------------------------------------------------------ Real Estate -- -- -- -- Credit -- -- -- -- Asset Management -- -- -- -- Other and Eliminations -- -- -- -- ------------------------------------------------------------ Consolidated Totals $ 521.1 $ 4,539.5 $ 1,750.9 $ 12,718.1 ============================================================
Year Ended December 31, 1998 ------------------------------------------------------------------------------------------- (In Millions) Other Operating Costs (Including Dividends to Policyholders, Goodwill Benefits, Amortization Amortization Claims, of Deferred and Deferral Premiums and Net Losses and Policy of Policy Net Service Fee Investment Adjustment Acquisition Acquisition Premiums Segment Revenues Income Expenses Costs Costs) Written - - - - - - ----------------------------------------------------------------------------------------------------------------------------------- Property and Casualty: Personal Lines: Personal Auto $ 1,729.7 $ 139.5 $ 1,302.0 $ 210.8 $ 114.3 $ 1,740.5 Homeowners 686.7 54.3 532.9 182.4 98.9 701.4 Other Personal 165.2 16.0 95.6 51.7 28.0 178.0 Commercial Lines: SBI 911.6 144.2 670.1 175.6 140.7 927.6 SAFECO Commercial 640.9 98.9 438.7 110.7 119.3 648.8 Surety 58.5 3.4 16.8 14.1 8.4 58.8 Other 15.7 23.9 7.1 (0.4) 43.0 1.5 ------------------------------------------------------------------------------------------ Total 4,208.3 480.2 3,063.2 744.9 552.6 $ 4,256.6 -------------------------------------------------------------------------------=========== Life: Retirement Services 25.2 411.7 349.8 26.8 79.7 Settlement Annuities 1.5 449.4 399.1 -- 21.1 Group 203.1 2.7 161.1 3.8 55.0 Individual 110.2 98.4 135.5 8.6 62.2 Other 13.4 78.8 -- -- 19.4 -------------------------------------------------------------------------- Total 353.4 1,041.0 1,045.5 39.2 237.4(1) -------------------------------------------------------------------------- Real Estate -- -- -- -- 72.6 Credit -- -- -- -- 87.2 Asset Management -- -- -- -- 31.2 Other and Eliminations -- (2.3) -- -- 115.5 -------------------------------------------------------------------------- Consolidated Totals $ 4,561.7 $ 1,518.9 $ 4,108.7 $ 784.1 $ 1,096.5 ==========================================================================
(1) Life other operating costs for 1998 include the $46.8 million write-off of deferred acquisition costs. 36 SAFECO CORPORATION AND SUBSIDIARIES F-10 Reinsurance Schedule IV Year Ended December 31 - - - - - - -------------------------------------------------------------------------------- (In Millions)
Percentage Ceded to Assumed of Amount Gross Other from Other Assumed Amount Companies Companies Net Amount to Net ------------------------------------------------------------------------------------ 2000 Life Insurance In Force at Year End $55,077.6 $(8,815.0) $ 184.2 $46,446.8 0.4% ============================================================= Premiums earned: Life Insurance $ 231.7 $ (18.8) $ 16.6 $ 229.5 7.2% Accident/Health Insurance 269.1 (15.1) 19.2 273.2 7.0% Property/Casualty Insurance 4,717.6 (163.0) 8.8 4,563.4 0.2% ------------------------------------------------------------- Total $ 5,218.4 $ (196.9) $ 44.6 $ 5,066.1 0.9% ============================================================= 1999 Life Insurance In Force at Year End $48,021.0 $(6,168.8) $ 153.8 $42,006.0 0.4% ============================================================= Premiums earned: Life Insurance $ 215.2 $ (14.2) $ 0.7 $ 201.7 0.3% Accident/Health Insurance 171.9 (12.7) -- 159.2 0.0% Property/Casualty Insurance 4,539.4 (164.4) 7.9 4,382.9 0.2% ------------------------------------------------------------- Total $ 4,926.5 $ (191.3) $ 8.6 $ 4,743.8 0.2% ============================================================= 1998 Life Insurance In Force at Year End $45,009.4 $(5,378.4) $ 192.2 $39,823.2 0.5% ============================================================= Premiums earned: Life Insurance $ 198.8 $ (13.1) $ 0.9 $ 186.6 0.5% Accident/Health Insurance 174.8 (9.6) 1.6 166.8 1.0% Property/Casualty Insurance 4,378.5 (188.5) 18.3 4,208.3 0.4% ------------------------------------------------------------- Total $ 4,752.1 $ (211.2) $ 20.8 $ 4,561.7 0.5% =============================================================
37 SAFECO CORPORATION Supplemental Information Concerning Consolidated F-11 Property-Casualty Insurance Operations Schedule VI - - - - - - -------------------------------------------------------------------------------- (In Millions) Affiliation with Registrant: Property-Casualty Subsidiaries:
December 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------- Deferred Policy Acquisition Costs $ 312.1 $ 325.4 $ 308.0 Reserve for Losses and Adjustment Expenses 4,612.7 4,378.6 4,219.9 Discount Deducted from Loss Reserves -- -- -- Unearned Premiums 1,826.9 1,844.3 1,742.2
Year Ended December 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------- Earned Premiums $4,563.4 $4,382.9 $4,208.3 Net Investment Income 460.5 462.3 480.2 Loss and Adjustment Expenses Incurred Related to: Current Year 3,621.7 3,353.0 3,163.2 Prior Year 148.3 78.8 (100.0) Amortization of Deferred Policy Acquisition Expenses 796.6 793.0 744.9 Paid Losses and Adjustment Expenses 3,570.0 3,329.0 3,178.8 Net Premiums Written 4,539.7 4,483.8 4,256.6
38 SAFECO CORPORATION AND SUBSIDIARIES Exhibit Index - - - - - - -------------------------------------------------------------------------------- Exhibit 3.1 Bylaws (as last amended January 26, 2001). Exhibit 3.2* Restated Articles of Incorporation (as amended May 7,1997), filed as Exhibit 3.2 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), are incorporated herein by this reference. Exhibit 4.1 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 4.2* Indenture, dated as of July 15, 1997, between SAFECO and The Chase Manhattan Bank, as Trustee, filed as Exhibit 4.2 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 4.3* Form of Certificate of Exchange Junior Subordinated Debenture filed as Exhibit 4.2 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated October 17,1997, is incorporated herein by this reference. Exhibit 4.4* Certificate of Trust of SAFECO Capital Trust I dated June 18, 1997, filed as Exhibit 4.4 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 4.5* Amended and Restated Declaration of Trust of SAFECO Capital Trust I dated as of July 15, 1997, filed as Exhibit 4.5 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 4.6* Form of Exchange Capital Security Certificate for SAFECO Capital Trust I filed as Exhibit 4.5 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference. Exhibit 4.7* Form of Exchange Guarantee of SAFECO relating to the Exchange Capital Securities, filed as Exhibit 4.6 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated October 17,1997, is incorporated herein by this reference. Exhibit 4.8* Indenture, dated as of February 15, 2000, among SAFECO and The Chase Manhattan Bank, N.A., as Trustee, filed as Exhibit 4.8 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-6563), is incorporated herein by this reference. Exhibit 4.9* Form of 7.875% Notes due 2003, filed as Exhibit 4.9 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-6563), is incorporated herein by this reference. Exhibit 4.10 Form of SAFECO Agency Stock Purchase Plan Terms and Conditions as Agreed to by the Agency. Exhibit 10.1* Purchase and Sale Agreement by and between Washington Square, Inc., Kitsap Associates Limited Partnership, Winmar Cascade, Inc., Winmar Oregon, Inc., Winmar of Kitsap, Inc., SCIT, Inc., Town Center Associates, and Winmar Company, Inc., as sellers; and The Macerich Partnership, L.P., and Ontario Teachers' Pension Plan Board, as purchaser, dated December 11, 1998, filed as Exhibit 10.1 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (File No. 1-6563), is incorporated herein by this reference. SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with copies of all omitted schedules to the foregoing Purchase and Sale Agreement. Exhibit 10.2* Five-Year Credit Agreement dated as of September 24, 1997, among SAFECO; Bank of America National Trust and Savings Association, as Agent; Mellon Bank, N.A., as Documentation Agent; The Chase Manhattan Bank, as Syndication Agent; and the various co-agents, lead managers, and financial institutions identified in said Credit Agreement as a party thereto, filed as Exhibit 10.1 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.3* SAFECO Corporation Deferred Compensation Plan for Directors, As Amended and Restated on August 2, 2000, filed as Exhibit 10.1 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference. 39 SAFECO CORPORATION AND SUBSIDIARIES Exhibit Index (Continued) - - - - - - -------------------------------------------------------------------------------- Exhibit 10.4* SAFECO Deferred Compensation Plan for Executives, As Amended and Restated on August 2, 2000, filed as Exhibit 10.2 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.5* The following documents are incorporated herein by this reference: Form of Executive Severance Agreements between SAFECO and each of Rod A. Pierson and James W. Ruddy, in each case dated March 11, 1999, and between SAFECO and Boh A. Dickey dated May 5, 1999, filed as Exhibit 10.1 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended March 31,1999 (File No. 1-6563); and Executive Severance Agreement between SAFECO, SAFECO Life Insurance Company and Randall H. Talbot dated March 11, 1999, filed as Exhibit 10.2 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563). Exhibit 10.6* SAFECO Long-Term Incentive Plan of 1997 as Amended and Restated May 5, 1999, filed as Exhibit 10.3 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.7* Form of Stock Option Contract granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.6 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.8* Form of Nonqualified Stock Option Award Agreement - Non-Employee Director granted under the SAFECO Long-Term Incentive Plan of 1997 as Amended and Restated May 5, 1999, filed as Exhibit 10.4 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.9* Form of Restricted Stock Rights Award Agreement granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.7 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.10* Form of Performance Stock Rights Award Agreement granted under the SAFECO Long-Term Incentive Plan of 1997, filed as Exhibit 10.8 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.11* SAFECO Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as amended January 31, 1990, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-6563), and the Supplement to such Prospectus dated November 8, 1990, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6563), are incorporated herein by this reference. Exhibit 10.12* Separation Agreement between SAFECO Insurance Company of America and W. Randall Stoddard dated August 2, 2000, filed as Exhibit 10.3 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference. Exhibit 10.13 Separation Agreement between SAFECO Corporation and Roger H. Eigsti dated October 3, 2000. Exhibit 11 Computation of Income Per Share Exhibit 12 Computation of Ratio of Earnings to Fixed Charges Exhibit 13 2000 Annual Report to Shareholders Exhibit 21 Subsidiaries of the Registrant * 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-3.1 2 v70188ex3-1.txt EXHIBIT 3.1 1 EXHIBIT 3.1 BYLAWS OF SAFECO CORPORATION (As last amended effective January 26, 2001) ARTICLE I STOCKHOLDERS' MEETINGS 1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation for the election of Directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held at 11:00 o'clock in the morning on the first Wednesday in May or, if such day is a legal holiday, then on the following business day or on such other day as may be designated by the Chairman of the Board of Directors, the President, or the Board of Directors ("Board of Directors"). The meeting shall be held at the principal executive office of the corporation or at such other place as may be designated in the notice of the meeting. (b) For business to be properly brought before the annual meeting in accordance with these Bylaws, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must file a written notice of intention to bring such business ("Business Notice") with the Secretary of the corporation not less than 90 days before the date specified in Section 1(a) of this Article I, or if the meeting is not held within 14 days of the date specified in Section 1(a) of this Article I, then 90 days before the date of the meeting. The Business Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to bring such business before the meeting; and, as to each matter the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest of the stockholder in such business. (c) No business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1; provided, however, that nothing in this Section 1 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The presiding officer of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2 SAFECO Corporation Bylaws January 26, 2001 Page 2 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Board of Directors. Such special meetings may be for any purpose or purposes, which shall be described in the notice of such special meeting, and shall be at the date, time and place prescribed in the notice of the meeting. 3. NOTICE OF MEETING. (a) Written notice of each annual and special stockholders' meeting shall be given to all stockholders of record entitled to notice of such meeting no fewer than 10 nor more than 60 days before the meeting date, except that notice of a stockholders' meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If such written notice is placed in the United States mail, postage prepaid, and correctly addressed to the stockholder's address shown in the corporation's current record of stockholders, then the notice is effective when mailed. (b) Notice of any stockholders' meeting may be waived in writing by any stockholder at any time, either before or after the meeting. In addition, notice of the date, time, place and purpose of the meeting shall be deemed waived by any stockholder who attends a stockholders' meeting in person or by proxy, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 4. ORGANIZATION OF MEETING - QUORUM. A stockholders' meeting, duly called, can be organized for the transaction of business whenever a quorum is present. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting shall constitute a quorum. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. 5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an adjourned meeting, an adjournment or adjournments of any stockholders' meeting may be taken to the date, time and place announced by the presiding officer at the meeting, without new notice being given; but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors are elected. 6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote for each share of common stock then of record in the holder's name on the books of the corporation. Each holder of a share of capital stock other than common stock shall have the right to vote on those matters prescribed by the Board of Directors in establishing the preferences, limitations and relative rights for that class of capital stock. Every stockholder shall have the right to vote either in person or by proxy. All voting at stockholders' meetings shall be viva voce, unless any qualified voter shall demand a vote by ballot. In the case of voting by ballot, each ballot shall state the name of the stockholder voting, the number of shares owned by the 3 SAFECO Corporation Bylaws January 26, 2001 Page 3 stockholder, and, in addition, if such vote be cast by proxy it shall also state the name of the proxy. ARTICLE II BOARD OF DIRECTORS 1. NUMBER AND QUALIFICATIONS. The business and affairs of the corporation shall be managed under the direction of a Board of Directors of from 10 to 18 directors, as set from time to time by resolution of the Executive Committee, which directors need not be stockholders of the corporation. 2. ELECTION - TERM OF OFFICE. The directors shall be divided into three classes, designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each annual meeting of stockholders successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, but in no case will a decrease in the number of Directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director's term expires and until the director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. In the event of a failure to hold an election of Directors at any annual stockholders' meeting, election of Directors may be held at a special meeting of the stockholders called for that purpose; provided, that notice thereof be given all stockholders entitled to vote at such meeting at least 30 days prior to the date set for such special meeting. 3. VACANCIES. Any vacancy on the Board of Directors shall be filled by the Board of Directors or, if the directors in office constitute fewer than a quorum of the Board of Directors, then by the affirmative vote of the majority of all directors in office. 4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a committee of the Board of Directors shall nominate individuals for election as directors at the annual meeting of stockholders and at any special meeting of stockholders called for the purpose of electing directors. Nominations may also be made by any stockholder entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 4. (b) A nomination for election as director, other than nominations made by or at the direction of the Board of Directors, may be made only if a written notice of intention to nominate ("Nomination Notice") has been received by the secretary to the Board of Directors not less than 90 days before the date specified in Section 1(a) of Article I above, or if the meeting is not held within 14 days of the date specified in Section 1(a) of Article I above, then 90 days before the 4 SAFECO Corporation Bylaws January 26, 2001 Page 4 date of the meeting. The Nomination Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to make a nomination; the name, age, address and telephone number of each nominee; a description of each nominee's business experience for the past five years; a statement whether the nominee has ever been prosecuted for any crime or been a party to any proceeding in which it was alleged the nominee or any affiliate of the nominee violated any law or regulation and, if so, a complete description of such prosecution or proceeding; and any other information relating to each nominee that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended. The corporation may require any proposed nominee to furnish such additional information as may reasonably be required to determine the eligibility of such proposed nominee. In order to be considered valid the Nomination Notice must be accompanied by the written consent of each nominee to be nominated and a statement of each nominee's intention to serve as a director if elected. (c) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. The presiding officer at the stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. 5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof. 6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held quarterly, on the first Wednesday in February, May, August and November of each year, at such time and place as designated in the notice of the meeting. 7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place at any time when called by the Chairman of the Board of Directors or the President, or when called by the Secretary or an Assistant Secretary on request of three directors, or when called by any director during a national emergency of the kind that would make emergency bylaws operative for domestic insurers under the provisions of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington. 8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board of Directors and of meetings of committees of the Board of Directors shall be given by the secretary to the Board of Directors, or by the person calling the meeting, in writing or orally at least two days prior to the day upon which the meeting is to be held. Notice may be given by mail, private carrier, personal delivery, telegraph or teletype, telephone, electronic transmission or by wire or wireless equipment which transmits a facsimile of the notice. 5 SAFECO Corporation Bylaws January 26, 2001 Page 5 (b) A director may waive notice of any meeting of the Board of Directors or any committee of the Board of Directors in writing before or after the date and time of the meeting and such waiver shall be deemed the equivalent of giving notice of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee of the Board of Directors need be specified in the waiver of notice of such meeting. (c) A director's attendance at or participation in a Board of Directors or committee meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting, or promptly upon the director's arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 9. QUORUM. A majority of the total number of Directors fixed by or in the manner provided in these Bylaws or, if vacancies exist on the Board of Directors, a majority of the total number of Directors then serving on the Board of Directors shall constitute a quorum for the transaction of business at any Board of Directors' meeting; provided, however, that a quorum may not be less than one-third of the total number of Directors fixed by or in the manner provided by these Bylaws. When a quorum is present, a majority of the directors in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time-to-time without further notice. 10. CHAIRMAN OF THE BOARD OF DIRECTORS. The Directors shall appoint one member of the Board of Directors to serve as Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and Directors and shall have such other duties and responsibilities as the Board of Directors may assign from time-to-time. ARTICLE III EXECUTIVE COMMITTEE 1. MEMBERSHIP. The Executive Committee shall consist of no fewer than three members and shall include (i) the lead director of the Board of Directors, (ii) the chairs of each of the Audit, Compensation, Finance and Nominating Committees, and (iii) any other director of the corporation appointed by the Board of Directors. The lead director shall be the chair of the Executive Committee, unless the Board of Directors designates some other member of the Executive Committee as chair. 2. POWERS AND DUTIES. (a) Other than those powers specifically denied to a committee of a Board of Directors under Washington law, the Executive Committee may exercise all the powers of the Board of Directors in the management of the business of the 6 SAFECO Corporation Bylaws January 26, 2001 Page 6 corporation when the Board of Directors is not in session. All such actions of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration. (b) The Executive Committee shall determine the corporation's policy regarding charitable contributions and shall review and make recommendations to the Board of Directors as appropriate on fundamental matters, including election of Directors, succession planning, appointment of officers of the corporation and its principal subsidiaries, capital allocation among the corporation's operations, issuance and repurchase or redemption of securities, dividends to shareholders, formation of subsidiaries, and material acquisitions or dispositions of subsidiaries or assets. 3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Executive Committee may be called at any time by the chair of the Executive Committee or any two members. At all meetings of the Executive Committee, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE IV FINANCE COMMITTEE 1. MEMBERSHIP. The Finance Committee shall consist of no fewer than five members appointed by the Board of Directors, one of whom shall be designated as its chair by the Board of Directors. Each member of the Finance Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. The Finance Committee shall have general supervision of the finances and investments of the corporation. It shall designate or approve the designation of depositories for the funds of the corporation and shall have authority over all matters related to bank and custodial accounts; it shall have authority to buy and sell securities and to make loans of such character as is permitted by law; and it may direct any action necessary to collect amounts due the corporation. All actions of the Finance Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. Such actions shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration. 3. RULES OF PROCEDURE. The Finance Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Committee may be called at any time by the chair of the Finance 7 SAFECO Corporation Bylaws January 26, 2001 Page 7 Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE V AUDIT COMMITTEE 1. MEMBERSHIP. The Audit Committee shall consist of no fewer than three members who meet the qualifications described in the Audit Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Audit Committee as its chair. Each member of the Audit Committee shall continue as a member at the pleasure of the Board of Directors. 2. CHARTER. The Audit Committee shall be governed under an Audit Committee Charter which shall be adopted by the Board of Directors. 3. RULES OF PROCEDURE. The Audit Committee shall, consistent with its Charter, fix its own rules of procedure and meet where and as provided by its Charter, its rules of procedure or the Board of Directors. Special meetings of the Audit Committee may be called at any time by the chair of the Audit Committee or by any two members. At all meetings the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VI NOMINATING COMMITTEE 1. MEMBERSHIP. The Nominating Committee shall consist of no fewer than three members appointed by the Board of Directors, not more than one of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Nominating Committee as its chair. Each member of the Nominating Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Nominating Committee shall: (1) Review qualifications of candidates for Board of Directors membership from whatever source received; (2) Recommend to the Executive Committee the slate of director candidates to be proposed for election by stockholders at the annual meeting; 8 SAFECO Corporation Bylaws January 26, 2001 Page 8 (3) Recommend to the Executive Committee candidates to fill director vacancies which occur between annual meetings of stockholders; (4) Recommend to the Board of Directors criteria regarding personal qualifications for nomination as director, including experience, skills, affiliations and characteristics; (5) Recommend to the Board of Directors criteria regarding the composition of the Board of Directors, including total size and number of employee-directors; (6) Recommend to the Board of Directors criteria relating to tenure as a director, including retirement age and continuation of a director in an honorary or similar capacity; and (7) Recommend to the Board of Directors the fees to be paid to directors, including retainer, meeting and committee meeting fees, and any additional fees to be paid to a director for particular service, e.g., to the chairman of the Board of Directors or chair of any committee. The Committee shall not recommend that any such fees be paid to any director who is also an employee of the corporation or its subsidiaries. (b) All actions of the Nominating Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Nominating Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Nominating Committee may be called at any time by the chair of the Nominating Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VII COMPENSATION COMMITTEE 1. MEMBERSHIP. The Compensation Committee shall consist of no fewer than three members appointed by the Board of Directors, none of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Compensation Committee as its chair. Each member of the Compensation Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Compensation Committee shall: 9 SAFECO Corporation Bylaws January 26, 2001 Page 9 (1) Review and approve in advance salary increases for officers of the corporation and employees of its subsidiaries where the proposed salary exceeds an amount set from time-to-time by the Board of Directors; (2) Report to the Board of Directors remuneration information concerning the chief executive officer and through the chief executive officer make such information as to any employee available to any director upon request; (3) Review and recommend to the Board of Directors any additional employee benefit program of a substantial nature and material changes to existing programs; (4) Review and approve changes required by law to be made to existing employee benefit programs and non-material changes to existing programs; and (5) Administer the corporation's stock option program. (b) All actions of the Compensation Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Compensation Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Compensation Committee may be called at any time by the chair of the Compensation Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VIII OTHER COMMITTEES The Board of Directors shall have authority to establish by resolution such other committees as the Board of Directors may from time to time deem necessary or advisable. The membership, duties and authority of such committees shall be as the Board of Directors may from time to time establish. ARTICLE IX OFFICERS 1. OFFICERS ENUMERATED - APPOINTMENT. The officers of the corporation shall be a President, one or more Vice Presidents, one or more Assistant Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers, all of 10 SAFECO Corporation Bylaws January 26, 2001 Page 10 whom shall be appointed by the Board of Directors at the annual meeting thereof, to hold office for the term of one year and until their successors are appointed and qualified. 2. QUALIFICATIONS. None of the officers of the corporation need be a director. Any two or more corporate offices may be combined in one person. 3. PRESIDENT. The President shall be the chief executive officer of the corporation and shall have general charge, supervision and control over the business and affairs of the corporation and of its subsidiaries, subject to the ultimate authority of the Board of Directors. In the absence of the Chairman of the Board of Directors the President shall act in the place of the Chairman of the Board of Directors with the authority to exercise all of the Chairman's powers and perform the Chairman's duties. 4. VICE PRESIDENTS. In the absence or disability of the President, one of the Vice Presidents, in the order determined by seniority of responsibility and then order of their appointment, shall act as President until such time as the Board of Directors acts to appoint an individual to the office of President. One or more of the vice presidents may be designated by the Board of Directors as executive vice president, senior vice president or such other title as the Board of Directors deems appropriate for the position and duties. 6. SECRETARY. The Secretary shall be the custodian of the records, books of account, and seal of the corporation, and, in general, shall perform all duties usually incident to the office of Secretary, and make such reports and perform such other duties as may from time to time be requested of or assigned by the Board of Directors, the Executive Committee or the chief executive officer of the corporation. 7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as may be assigned to them by the Secretary of the corporation, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation. 8. TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer shall deposit all such funds in the name of the corporation in such depositories or invest them in such investments as may be designated or approved by the Finance Committee or the Board of Directors, and shall authorize disbursement of the funds of the corporation in payment of just demands against the corporation, or as may be ordered by the Board of Directors, the Executive Committee, or the Finance Committee on securing proper vouchers for such disbursements. The Treasurer shall render to the Board of Directors from time to time as may be required an account of all transactions as Treasurer, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Finance Committee, or the chief executive officer of the corporation. 11 SAFECO Corporation Bylaws January 26, 2001 Page 11 9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as may be assigned to them by the Treasurer, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation. 10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it shall deem necessary to exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 11. REMOVAL. Any officer of the corporation may be removed by the affirmative vote of a majority of the whole Board of Directors; such removal, however, shall be without prejudice to the contract rights of the person so removed. ARTICLE X CORPORATION PROXIES Unless otherwise ordered by the Board of Directors, any and all shares of stock owned or held by the corporation in any other corporation shall be represented and voted at any meeting of the stockholders of such other corporation by any one of the following officers of the corporation in the following order who may attend such meeting; i.e., the President, a Vice President, or the Treasurer, and such representation by any one of the officers above named shall be deemed and considered a representation in person by the corporation at such meeting. Any one of the officers above named may execute a proxy appointing any other person as attorney and proxy to represent the corporation at such stockholders' meeting and to vote all stock of such corporation owned or held by the corporation with all power and authority in the premises that any of the officers above named would possess if personally present. The Board of Directors by resolution may from time to time confer like powers upon any other person or persons. ARTICLE XI STOCK 1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be issued in such form in accordance with the corporation law of the State of Washington as may be approved by the Board of Directors, and may be signed by the chief executive officer or any Vice President, and by the Secretary or any Assistant Secretary. 2. TRANSFERS. Shares of stock may be transferred by delivery of the certificates therefor accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same by the record holder of the certificate. No transfer shall be valid except as between the parties thereto until such transfer shall have been made on the books of the corporation. Except as specifically provided in these Bylaws, no shares 12 SAFECO Corporation Bylaws January 26, 2001 Page 12 of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation. 3. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact thereof for all purposes, including the payment of dividends on such stock and the right to vote such stock. 4. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction, and upon the giving of a satisfactory bond or indemnity to the corporation. A new certificate may be issued without requiring any bond when in the judgment of the Treasurer it is proper to do so. 5. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the State of Washington. ARTICLE XII INDEMNIFICATION 1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether brought by or in the right of the corporation or otherwise) by reason of the fact that he or she is or was a director of the corporation, or, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan (an "Indemnitee"), whether the basis of a proceeding is an alleged action in an official capacity as such a director, officer, partner, trustee, employee, or agent or in any other capacity while serving as such a director, officer, partner, trustee, employee, or agent, shall be indemnified and held harmless by the corporation against all judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the Indemnitee in connection with such proceeding. Except as provided in paragraph (d) of this Section 1 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any Indemnitee only if the proceeding (or part thereof) was authorized or ratified by the Board of Directors. (b) No indemnification shall be provided to any Indemnitee for acts or omissions of the Indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the Indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled or if the corporation is otherwise prohibited by 13 SAFECO Corporation Bylaws January 26, 2001 Page 13 applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision is hereafter amended, the restrictions on indemnification set forth in this paragraph (b) shall be as set forth in such amended statutory provision. (c) The right to indemnification conferred under this Article XII shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition. An advancement of expenses shall be made upon delivery to the corporation of an undertaking, by or on behalf of an Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Article XII. (d) If a claim under this Section 1 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. An Indemnitee shall be presumed to be entitled to indemnification under this Article XII upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation), and the corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled. 2. OFFICERS. The corporation shall extend rights to indemnification and advancement of expenses in the same manner and to the same extent provided to directors under Section 1 of this Article to any person, not a director of the corporation, who is or was an officer of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan . 3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (i) with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors; (ii) pursuant to rights provided by the Washington Business Corporation Act; or (iii) as are otherwise consistent with law. 4. DEFINITIONS. For purposes of this Article XII, the terms "director," "corporation," "expenses," "party" and "proceeding" have those meanings assigned to them in Section 23B.08.500 of the Washington Business Corporation Act. 14 SAFECO Corporation Bylaws January 26, 2001 Page 14 5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another corporation of which a majority of the shares entitled to vote is held by the corporation or (b) as a partner, trustee or otherwise in a management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly-owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation. 6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act. 7. NOT EXCLUSIVE -- CONTINUING. The indemnification provided by this Article shall not be deemed exclusive of other rights to which the director, officer, employee or agent may be entitled as a matter of law or by contract, and shall continue as to a person who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 8. INSURANCE. The corporation may maintain insurance at its expense to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. ARTICLE XIII SEAL The seal of this corporation shall consist of a flat-faced, circular die which shall include: "SAFECO CORPORATION," "Corporate Seal, 1929" and the corporation's logo design. ARTICLE XIV COPIES OF RESOLUTIONS Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the stockholders, the Board of Directors, and any committees of or established by the Board of Directors, when certified by the chief executive officer, a Vice President, Secretary, or an Assistant Secretary. 15 SAFECO Corporation Bylaws January 26, 2001 Page 15 ARTICLE XV AMENDMENT OF BYLAWS 1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any meeting of the stockholders, if notice of the proposed alteration or amendment is contained in the notice of the meeting. 2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting if notice of the proposed alteration or amendment is contained in the notice of such special meeting; provided, however, that the Board of Directors shall not amend, alter or repeal any Bylaw in such a manner as to affect in any way the qualification, classification, or term of office of the directors. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the stockholders. EX-4.10 3 v70188ex4-10.txt EXHIBIT 4.10 1 EXHIBIT 4.10 SAFECO AGENCY STOCK PURCHASE PLAN TERMS AND CONDITIONS AS AGREED TO BY THE AGENCY TO ENROLL IN THE SAFECO AGENCY STOCK PURCHASE PLAN ("SASPP"), PLEASE READ THE TERMS & CONDITIONS BELOW, THEN COMPLETE AND SIGN THIS FORM AND RETURN IT TO SAFECO INSURANCE COMPANY OF AMERICA IN THE ENCLOSED ENVELOPE. The undersigned understands that unless other terms and conditions are specifically made applicable, the following terms and conditions shall govern all transactions in the Agency's SAFECO Agency Stock Purchase Plan ("SASPP") account with The Bank of New York and the voting and handling of securities in such account. 1. The Agency is responsible and liable for the payment of and the reclamation, where applicable, of all taxes, assessments, duties and other governmental charges (including any interest or penalties with respect thereto) with respect to the securities in the Agency's SASPP account. If The Bank of New York is required under applicable law to pay any tax, duty or other governmental charge or any interest or penalty with respect to the Agency's SASPP account, The Bank of New York is hereby authorized to debit the Agency's SASPP account in the amount thereof and to pay such amount to the appropriate taxing authority. 2. The Bank of New York shall not be required to accept any instructions given by or on behalf of the Agency's SASPP account unless it first receives such documents as it deems necessary or appropriate to evidence the authority of the person providing such instructions, and bearing satisfactory evidence of the payment of any applicable taxes. 3. Whenever the securities in the Agency's SASPP account (including, but not limited to, warrants, options, conversions, redemptions, tenders, options to tender or non-mandatory puts or calls) confer optional rights or provide for discretionary action or alternative courses of action by the Agency, the Agency shall be responsible for making any decisions relating thereto and for instructing The Bank of New York to act. In order for The Bank of New York to act, it must receive the Agency's instructions at its offices, addressed as The Bank of New York may from time to time request, by no later than noon (New York City time) at least two (2) business days prior to the last scheduled date to act with respect to the Agency's securities (or such earlier date or time as The Bank of New York may determine). Absent The Bank of New York's timely receipt of such instructions prior to its specified deadline, The Bank of New York shall not be liable for failure to take any action relating to or to exercise any rights conferred by such securities held in the Agency's SASPP account. 4. The Bank of New York shall notify the Agency of such rights or discretionary actions or of the date or dates by when such rights must be exercised provided that The Bank of New York has received, from the issuer or from one of the nationally recognized bond or corporate action services to which The Bank of New York subscribes, timely notice of such rights or discretionary corporate action or of the date or dates such rights must be exercised or such action must be taken. Absent actual receipt of such notice, The Bank of New York shall have no liability for failing to so notify the Agency. 5. With respect to all the Agency's securities, however registered, the voting rights are to be exercised by the Agency. The Bank of New York's only duty shall be to mail to the Agency any documents (including proxy statements, annual reports and signed Proxies) relating to the exercise of such voting rights. 6. When The Bank of New York is instructed to deliver securities or other property against payment, it may deliver such securities or other property prior to actually receiving final payment and that, as a matter of bookkeeping convenience, The Bank of New York may credit the Agency's SASPP account with anticipated proceeds of sale prior to actual receipt of final payment. The risk of non-receipt of payment shall be the Agency's and The Bank of New York shall have no liability with respect thereto. 7. All credits to the Agency's SASPP account of anticipated proceeds of sales and redemptions of securities and other property and of anticipated income from securities and other property shall be conditional upon receipt by The Bank of New York of final payment and may be reversed to the extent final payment is not received. 8. In the event that The Bank of New York in its discretion advances funds to the Agency's SASPP account to facilitate the settlement of any transaction, or elects to permit the Agency to use funds credited to the Agency's SASPP account in anticipation of final payment, or if the Agency otherwise becomes indebted to The Bank of New York (including indebtedness as a result of overdrafts in the Agency's SASPP account), the Agency shall, immediately upon demand, reimburse The Bank of New York for such amounts plus any interest thereon, and to secure such obligations to The Bank of New York in connection with the administration of the Agency's SASPP account, the Agency hereby grants a lien on and a continuing security interest in and pledge to The Bank of New York in the securities and other property in the Agency's SASPP account and any funds so credited. Such lien and security interest shall be superior to any and all other liens, security interests or claims and shall not be subject to any right of set-off or retention, counterclaim, lien or security interest of equal status. The Agency shall take any and all additional action that may be required to assure the superiority or priority of such lien and security interest in favor of The Bank of New York. 9. The Bank of New York shall not have any liability for losses incurred by the Agency or any other person as a result of the receipt or acceptance of fraudulent, forged or invalid securities (or securities which are otherwise not freely transferable or deliverable without encumbrance in any relevant market). 10. The Agency shall examine promptly each statement of the Agency's SASPP account mailed to the Agency periodically. Unless the Agency files with The Bank of New York a written exception or objection within one hundred twenty (120) days after the date of a confirmation or the closing date of the period covered by the first such statement of account that reflects an error or omission, the Agency shall be conclusively deemed to have waived any such exception or objection or claim based thereon. 11. No legal action, including one arising out of an exception or objection from a confirmation or statement of account shall be instituted against The Bank of New York after one year from the date of the first confirmation, or the first statement of the Agency's SASPP account that reflects the information, error or omission which provides the basis for such claim. 12. The Agency agrees The Bank of New York shall not be liable for any and all claims, losses, liabilities, damages or expenses (including attorneys' fees and expenses) (collectively referred to herein as "Losses") or action taken or omitted or for any loss or injury resulting from its (or its nominees) actions or its (or its nominees') performance or lack of performance of their respective duties hereunder in the absence of negligence or willful misconduct on their respective part. In no event shall The Bank of New York be liable (i) for acting in accordance with instructions from the Agency or any agent of the Agency, (ii) for special, consequential or punitive damages, (iii) for the acts or omissions of its correspondents, designees, agents, 2 subagents or sub-custodians appointed by The Bank of New York with due care, (iv) any Losses due to forces beyond the control of The Bank of New York, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, and interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services, (v) for any failure by the Agency or SAFECO Insurance Company of America to supply timely and accurate information or funds needed to enable The Bank of New York to discharge its duties, (vi) for any untrue statement or alleged untrue statement of any material fact contained in the registration statement covering the securities held in the Agency's SASPP account, or for the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which it was made, not misleading, or (vii) for any violation or alleged violation of any "blue sky" or state securities law. 13. The Agency represents and warrants that the securities or other property delivered for credit to the Agency's SASPP account (whether beneficially owned by the Agency or by others on whose behalf the Agency is acting) was at the time of such delivery free and clear of all liens, claims, security interests and encumbrances and that the Agency is fully authorized and empowered engage in the transactions contemplated by this arrangement and grant a lien on and a security interest in all the securities or other property held hereunder as set forth herein. 14. This agreement and any suit arising out of or in connection with the Agency's SASPP account shall be interpreted and construed in accordance with the internal substantive laws (and not the choice of law rules) of the State of New York. All actions and proceedings brought by the Agency relating to or arising, directly or indirectly, from this agreement or the Agency's SASPP account may only be litigated in state or federal courts located within the State of New York. The Agency hereby submits to the personal jurisdiction of such courts; the Agency hereby waives personal service of process and consents that any such service of process may be made by certified or registered mail, return receipt requested, directed to the address last specified in the Agency's SASPP account, and service so made shall be deemed completed five (5) days after it shall have been mailed; and the Agency hereby waives the right to a trial by jury in any action or proceeding relating to or arising, directly or indirectly, out of this agreement or the Agency's SASPP account. The Agency understands the significance of such waiver and agree to be bound by such waiver. 15. Commissions, fees, or other charges on any transaction in my account, or for any service for the Agency's SASPP account, will be in accordance with The Bank of New York's rates in effect at the time of the transaction or the provision of the service. Transaction fees will be deducted from the proceeds of the Agency's sales. The Bank of New York may deduct from the Agency's SASPP account any such fees, commissions or expenses owed to The Bank of New York. The Bank of New York reserves the right to sell any assets in the Agency's SASPP account to cover amounts due to The Bank of New York. 16. All securities acquired for the Agency shall be delivered to, and held and registered in the nominee name designated by The Bank of New York. The Bank of New York will mail a check to the Agency for the proceeds of any sale in the Agency's SASPP account. The Bank of New York will sell securities as agent for the Agency or buy as principal from the Agency. Upon request and subject to delivery and/or transfer charge, a certificate in the Agency's name for the full shares of the security held in the Agency's SASPP account, will be delivered to the Agency. Any remaining fractional shares will be sold and the proceeds delivered to the Agency. 17. The Bank of New York may combine any of the Agency's orders to sell securities with all other such orders received on a daily basis from other clients. Orders are generally executed on the first business day following The Bank of New York's acceptance of the Agency's order or as soon as practicable thereafter in accordance with procedures The Bank of New York may announce from time to time. In the over-the-counter market, shares may be sold by or through The Bank of New York over a period of time, and the average price of the shares shall be the price per share allocable to me. 18. Cash dividends on shares held in the Agency's SASPP account on the record date for dividends will be paid and a check issued and mailed to the Agency on payment date. The Agency's pro-rata share of stock dividends and stock splits will be credited to the Agency's SASPP account. 19. SAFECO Agency Stock Purchase Plan: The undersigned understands that the substance of this paragraph 19 and paragraphs 20 and 21 below applies to the Agency's SASPP account as an eligible participant in a stock purchase plan established by SAFECO Insurance Company of America and pursuant to a Custody Agreement for services to be provided by The Bank of New York. The Agency agrees that The Bank of New York may provide SAFECO Insurance Company of America with information concerning any transactions in the Agency's SASPP account. 20. The purchase price of the shares and the purchase date for the shares the Agency buys will be determined in accordance with the SASPP. 21. A statement of all activity in the Agency's SASPP account, including numbers of shares purchased or sold, the price per share, the transaction date, stock splits, dividends paid, and the total number of shares in the Agency's SASPP account will be sent to the Agency periodically. Other statements will be sent as required by law or regulation. Information on dividends paid on the shares held in the Agency's SASPP account will be sent to the Internal Revenue Service and to the Agency. If the Agency requests a separate confirmation for one or more purchases or sales, a fee for the furnishing of such information may be charged directly to the Agency's SASPP account. 22. The Bank of New York shall have the right to amend these Terms and Conditions by modifying or rescinding any of its existing provisions or by adding a new provision subject to prior notice to the Agency. Any such amendment shall be effective as of a date to be established by The Bank of New York. 23. Unless the Agency indicates non-acquiescence in writing, this agreement shall inure to the benefit of the successors of The Bank of New York by merger, consolidation, or otherwise, and its assigns, and The Bank of New York is authorized to transfer Agency's SASPP account to any such successors and assigns. 24. The Agency agrees that, upon the termination of its relationship with SAFECO Insurance Company of America or participation in the SAFECO Agency Stock Purchase Plan, The Bank of New York may terminate the Agency's SASPP account and at the Agency's direction either transfer the shares in the Agency's SASPP account to another brokerage account or send the shares directly to the Agency's address on file with The Bank of New York. When the Agency's SASPP account is terminated, full shares will be delivered to the Agency, subject to fees or charges. Any fractional shares will be sold and the proceeds, less any fees or charges, will be paid to the Agency. The Bank of New York's liability shall be limited pursuant to the terms of the Custody Agreement established with SAFECO Insurance Company of America and by these Terms and Conditions. Please be advised that securities held in the Agency's SASPP account by The Bank of New York, unless otherwise indicated are not backed or guaranteed by any bank nor does the Federal Deposit Insurance Corporation insure them. AGENCY: ______________________________________________________ Print Agency Name & Stat Number ____________ BY: ______________________________________________________ Date Authorized Signer Print Name of Authorized Signer
2 EX-10.13 4 v70188ex10-13.txt EXHIBIT 10.13 1 EXHIBIT 10.13 SEPARATION AGREEMENT This Separation Agreement is made and entered into by and between ROGER H. EIGSTI ("Eigsti") and SAFECO CORPORATION (the "Company"), as of the date written under the signature of Eigsti on the signature page of this Agreement. RECITALS A. Eigsti is employed as Chairman and chief executive officer of the Company, and, pursuant to terms of this Agreement, resigns as a director and officer and retires as an employee, all effective December 31, 2000. B. This Agreement sets forth the complete understanding between Eigsti and the Company regarding the commitments and obligations arising out of the termination of their employment relationship. AGREEMENT 1. Continued Employment. 1.1 Employment Period. Under the terms and subject to the conditions of this Agreement, Eigsti's employment status with the Company shall continue through and including December 31, 2000. Eigsti will retire from employment with the Company effective December 31, 2000. 1.2 Group Insurance Benefits Coverage. The Company shall continue to provide coverage under any group insurance benefits plan under which Eigsti and/or his dependents were covered on the date hereof, through and including December 31, 2000. Eigsti shall be responsible to pay any amounts chargeable as "employee premium contribution" amounts with respect to any such coverage. From and after December 31, 2000, Eigsti and/or his dependents shall be eligible for such benefits continuation or conversion coverage as may be available or required under the terms of the Company's benefits plans or policies, or as may be required under the group health plan provisions of the Consolidated Omnibus Budget Reconciliation Act of 1985, as subsequently amended (COBRA), or other applicable federal or state law. 1.3 Eligibility for Other Group Benefits. Eigsti shall continue to be eligible as an "employee" of the Company through December 31, 2000 for group benefits under the Company's employee benefit plans. Eigsti shall be eligible to participate in and shall receive contributions to the SAFECO Employees' Profit Sharing Retirement Plan, Savings Plan, and Cash Balance Plan, and for a Profit Sharing Bonus (based on an assumed annual salary of $900,000) as the same may be available to other employees of the Company 1.4 Payment for Accrued Sick Leave and Vacation Units. The Company shall by December 31, 2000 pay Eigsti for any vested sick leave units and vacation pay accrued but unused 1 of 9 2 at December 31, 2000, but only to the extent compensable under the Company's normal sick leave and vacation policies and procedures. 1.5 Reimbursement for Expenses Incurred. The Company shall reimburse Eigsti for reasonable and necessary business expenses incurred by him on or before December 31, 2000, but not submitted for reimbursement at such date, to the extent reimbursable under the Company's normal expense reimbursement policies and procedures and submitted for payment by January 15, 2001. 1.6 RSRs and Performance Stock Rights. Eigsti acknowledges and agrees that as a consequence of his retirement on December 31, 2000, any rights he may have under any grant of a restricted stock right ("RSR") or performance stock right award ("PSR Award") granted under the SAFECO Long-Term Incentive Plan of 1997 ("Plan") will expire, and he will not be entitled to any payment under any RSR or PSR Award after December 31, 2000. 1.7 Stock Options. Eigsti acknowledges and agrees that as a consequence of his retirement on December 31, 2000, and pursuant to the terms of each stock option for SAFECO Corporation common stock ("Stock Option") that has been granted to him under either the SAFECO Incentive Plan of 1987 or the Plan, other than the Stock Options granted to him in May 1998 and May 1999 whose terms have been set pursuant to Section 3.1, he will have through March 31, 2001, to exercise each Stock Option and after that date he will lose all rights under each Stock Option. 2. Payments. As compensation to Eigsti, and in consideration of his retirement as an employee and resignation as a director and officer of the Company and his release granted herein, the Company agrees to pay a total sum of $2,700,000, plus an amount equal to 17,022 multiplied by the closing price of SAFECO Corporation common stock as reported on NASDAQ on December 29, 2000 ("Calculated Payment"). This payment shall be allocated and paid as follows: 2.1 Release Payment. $1,200,000 shall be allocated as consideration for Eigsti's release of claims as set forth in section 5 of this Agreement (the "Release Payment"). Eigsti and the Company agree that $200,000 of the Release Payment represents liquidated damages for potential wage-related claims and shall be subject to withholding and deduction for payroll taxes and other deductions as are required by federal and state law. Eigsti and the Company agree that $1,000,000 of the Release Payment represents liquidated damages for other potential claims being released and does not constitute wages or a wage substitute and that the Company will not make payroll deductions or wage withholding from that amount. The Release Payment shall be made January 15, 2001 in the form of three checks, one payable to Eigsti in the amount of $200,000 less the applicable withholding and deduction for payroll taxes, one payable to Eigsti in the amount of $720,000 (72% of $ $1,000,000 of the Release Payment) and one payable to the Internal Revenue Service on behalf of Eigsti in the amount of $280,000 (28% of $1,000,000 of the Release Payment). 2 of 9 3 2.2 Non-Compete, Non-Solicitation and Non-Disparagement Payments. In consideration of the promise made by Eigsti not to compete in Section 7.1, the Company will pay Eigsti $1,000,000 on September 1, 2001. In consideration of the promises made by Eigsti not to solicit employees and not to disparage the Company in Sections 7.2 and 7.3, the Company will pay Eigsti $500,000 on September 1, 2002, and the Calculated Payment on December 29, 2000, respectively. Each of the 2001 and 2002 payments shall be made in the form of two checks, one payable to Eigsti in the amount of 72% of the specified payment and the second payable to the Internal Revenue Service on behalf of Eigsti in the amount of 28% of the specified payment. Eigsti has previously elected to defer payment of the Calculated Payment under the SAFECO Deferred Compensation Plan for Executives. 2.3 Payments in Case of Death. Should Eigsti die after his execution of this Agreement but before one or more of the payments described under Sections 2.1 or 2.2 have been made, then, so long as Eigsti has not made any claim described in Section 5 of this Agreement against the Company or any of its affiliates, employees, officers or directors, or otherwise violated the terms of this Agreement, Eigsti's right to receive the payments described in Sections 2.1 and 2.2 and his right to the ownership of the membership and automobile described in Sections 3.2 and 3.3 shall pass to his estate, i.e., to the person or persons to whom such rights pass by will or under applicable laws of descent and distribution. 3. Further Consideration. As further consideration to Eigsti for the release granted under Section 5 of this Agreement, the Company, at no cost to Eigsti, will do the following: 3.1 SAFECO Stock Option Term. Contingent upon Eigsti's execution of this Agreement and the expiration of the revocation period described in Section 13.3, SAFECO Corporation through the Compensation Committee of its Board of Directors has agreed to amend those SAFECO Corporation stock options previously granted to Eigsti in May 1998 and May 1999 to provide that the term of each shall expire on December 31, 2003, the third anniversary of Eigsti's resignation, to amend each of those options to accelerate the vesting of any unvested shares to October 3, 2000, and to amend the April 1997 stock options to accelerate the vesting of any unvested shares to August 2, 2000. Eigsti acknowledges that as a consequence of setting the term of the May 1998 and May 1999 stock options none of them will qualify for preferential income tax treatment as an incentive stock option under the Internal Revenue Code. 3.2 Transfer of Ownership. 3.2.1 Broadmoor Country Club. The Company agrees to transfer to Eigsti by December 31, 2000 the ownership of the membership in the Broadmoor Country Club that Eigsti has used. 3.2.2 Automobile. The Company agrees to transfer to Eigsti by December 31, 2000 the ownership of the Lexus automobile that Eigsti has used. 3 of 9 4 3.2.3 Liability for Taxes. Eigsti acknowledges that the transfers of ownership under Sections 3.2.1 and 3.2.2 will constitute income to him and that he is responsible for the payment of any federal income tax and any other taxes due upon transfer. 3.3 Attorney's Fees. The Company agrees to pay up to $5,000 of the attorney's fees incurred by Eigsti for a review of this Agreement. 3.4 Tax Consultation. The Company agrees to pay up to $5,000 of the tax consultation fees incurred by Eigsti for a review of matters raised by the payments contemplated by this Agreement. 3.5 Desert Island Condominium. The Company agrees that at mutually agreeable dates during 2001 and for periods of time in the aggregate not to exceed four weeks Eigsti may use without charge one of the Desert Island Condominiums owned by SAFECO Properties and have the use of one of the golf memberships at Desert Island Country Club during such time; provided, however, that all food, drink, cart rental and merchandise purchases shall be paid for by Eigsti. 4. Retirement and Resignation. 4.1 Retirement and Resignation. In consideration of the payments and other compensation described above, Eigsti notifies the Company of his retirement as an employee of the Company effective December 31, 2000 and tenders his resignation as a director and officer of the Company effective December 31, 2000. 4.2 No Authority To Act. From and after December 31, 2000, Eigsti shall have no further authority to bind the Company to any contract or agreement or to act on behalf of the Company, and the Company shall have no obligation to reimburse Eigsti for any expenses incurred by him on or after December 31, 2000, except as expressly stated in this Agreement. 4.3 Return of Materials; Transfer of Memberships. By January 31, 2001, Eigsti shall return all devices or materials owned by the Company and used by him in the course of his employment and shall transfer to the Company or cooperate with the Company in the transfer of membership in the Columbia Tower Club and sell the membership in the Central Park Tennis Club and transfer the proceeds to the Company. 5. Release and Settlement. 5.1 Release Payment. For the purposes of this Agreement "Release Payment" means the payment by the Company of the amounts referenced in Section 2.1. 5.2 Release. In consideration of the Company's delivery of the Release Payment to Eigsti under the terms of this Agreement, Eigsti hereby releases the Company and its affiliated companies, and the employees, agents, officers, directors and shareholders of any of them, from all claims, demands, actions or causes of action of any kind or nature whatsoever which Eigsti 4 of 9 5 may now have or may ever have had against any of them, whether such claims are known or unknown, and including but not limited to the Claims described in Section 5.3. However, nothing in this Separation Agreement shall create or imply any waiver by Eigsti (i) with respect to his entitlement to compensation for vested retirement benefits or deferred compensation, in accordance with the terms and conditions of the Company's employee benefit plans, or (ii) of any claims with respect to any breach by the Company of its obligations under this Agreement. 5.3 The Claims. For the purposes of this Agreement, "Claims" shall mean and include claims with respect to any of the following: (i) breach of contract; (ii) discrimination, retaliation, or constructive or wrongful discharge; (iii) lost wages, lost employee benefits, physical and personal injury, stress, mental distress, or impaired reputation; (iv) claims arising under the Age Discrimination in Employment Act ("ADEA"), Title VII of the Civil Rights Act, the Equal Pay Act, or any other federal, state or local laws or regulations prohibiting employment discrimination; (v) attorneys' fees; and (vi) any other claim arising from or relating to Eigsti's employment with the Company and/or his separation from service, including claims with respect to the Severance Agreement dated May 5, 1999 between Eigsti and the Company, which the parties agree is terminated by mutual consent as of the date of the expiration of the revocation period described in Section 13.3. 5.4 Consideration for Release. The Company represents, and Eigsti acknowledges, that the Release Payment and the further consideration described in Section 3 exceed any amount the Company may arguably be required to pay under any agreement or arrangement to which Eigsti is a party or under which he claims some benefit, or under the standard policies and procedures of the Company, and represents valuable consideration to him for the release of his ADEA and other claims described above. 6. Confidential Information. 6.1 Confidential Information. Eigsti recognizes that by virtue of his employment by the Company, Eigsti has acquired certain non-public information with respect to the Company, and its operations (the "Confidential Information"). Eigsti recognizes and acknowledges that the Confidential Information constitutes valuable, special and unique assets of the Company, access to and knowledge of which were essential to the performance of Eigsti's duties during his employment. 6.2 Non-Disclosure. Eigsti agrees to hold the Confidential Information in trust and confidence. Eigsti agrees not to (i) directly or indirectly make use of the Confidential Information, (ii) reveal any Confidential Information to any other party, or (iii) divulge or use any Confidential Information for any purpose other than for the benefit of the Company, except and to the extent Eigsti may be required to disclose by lawful order or process of a court (in which event Eigsti will provide reasonable advance notice of such disclosure to the Company and will cooperate with the Company's efforts to obtain protective treatment for such information). 5 of 9 6 6.3 Materials. Unless the Company otherwise agrees, Eigsti shall not remove from the Company's premises or possession any documents, compilations of data or other files or records of any nature, or any copy or reproduction thereof, that contain Confidential Information or that belong to the Company. 7. No Competing Employment; No Solicitation of Employees. 7.1 No Competing Employment. Eigsti agrees that until January 1, 2002, Eigsti shall not work for or consult with any company that competes with the Company or its affiliates in the insurance business without the prior written consent of the Company. 7.2 No Solicitation of Employees. Eigsti agrees that until January 1, 2003, Eigsti shall not solicit, directly or indirectly, any employee of the Company or its affiliates to leave such employment and/or to become an employee, officer or consultant of or to any other enterprise. 7.3 Non-Disparagement. Eigsti agrees not to criticize, disparage, or make negative comments about the Company, its affiliates, or any of its or their directors, officers or employees. This Section 7.3 shall not be construed to prohibit Eigsti from responding truthfully to any court or regulatory body or to responding truthfully under oath in compliance with a subpoena or other legal process. 8. No Admission. Eigsti understands and acknowledges that neither the Release Payment nor the execution and delivery of this Agreement by the Company constitutes an admission by the Company to (i) any breach of an agreement with Eigsti, (ii) any violation of a federal, state or local statute, regulation or ordinance, or (iii) any other wrongdoing. 9. Legal Action. 9.1 No Action on Released Claims. Eigsti agrees not to sue or pursue any court or administrative action against the Company, or any of its employees, agents, officers, directors or shareholders, regarding any claims released herein or otherwise arising from Eigsti's employment with the Company or his separation from service, except with respect to any breach by the Company of its obligations under this Agreement. 9.2 Liability for Defense Costs. If, notwithstanding this Agreement, Eigsti should file any lawsuit or other proceeding based on legal claims that Eigsti has released herein, Eigsti agrees that he will pay or reimburse the Company for all reasonable costs which it, or its employees, agents, officers or directors, incur in defending against Eigsti's claims. This Section shall not apply to any claimed breach by the Company of any of the terms or conditions of this Agreement. 6 of 9 7 10. Arbitration. 10.1 Notice and Selection of Arbitrator. The parties agree that any dispute arising under this Agreement, other than an action at law or in equity by the Company to seek damages for or to seek injunctive relief against Eigsti for a violation of any provision of Sections 3.2, 6 or 7, shall be submitted to arbitration in Seattle, Washington, before a disinterested arbitrator. Arbitration shall be commenced by service on the other party to the dispute by a written request for arbitration, containing a brief description of the matter at issue and the names and addresses of three arbitrators acceptable to the petitioner. The other party shall within thirty (30) days following receipt of such notice either select one of the proposed arbitrators or provide the names and addresses of three other arbitrators acceptable to the proposing party. If the parties are unable to select an arbitrator from those proposed, or, if they are unable to select a third arbitrator, an arbitrator shall be chosen impartially by the American Arbitration Association. 10.2 Rules of Proceeding. Arbitration proceedings shall be conducted under the employment rules then prevailing of the American Arbitration Association. The arbitrator shall not be bound to any formal rules of evidence or procedure, and may consider such matters as a reasonable business person would take into account in decision-making. 10.3 Decision Final and Binding. The decision of the arbitrator shall be final and binding on the parties, and may be entered and enforced in any court of competent jurisdiction. 10.4 Expenses. Each party shall share equally the expenses of the arbitrator and other arbitration expenses. Attorney fees, witness fees and other expenses incurred by a party in preparing for the arbitration are not "arbitration expenses" and shall be paid by the party incurring them. 11. Confidentiality. 11.1 Terms of Agreement. Eigsti and the Company agree that neither of them shall reveal or publicize the existence of this Agreement or its terms, including but not limited to the amount of the Release Payment, except under compulsion of law and as required under the rules and regulations of the Securities and Exchange Commission ("SEC"). Eigsti acknowledges that a copy of this Agreement will be filed as an exhibit to a filing made by the Company with the SEC and that a description of compensation paid or to be paid to him under this Agreement will be included in the Company's proxy statement. Further, the parties agree that they shall not discuss with or make to the public at large or to any individual person or persons any statements about this Agreement, or matters relating to its terms. Notwithstanding the provisions of this Section 10.1, the parties may discuss the existence and terms of this Agreement with their respective attorneys, accountants and financial advisors to the extent necessary to obtain counsel and advice therefrom. Eigsti may also discuss the existence and terms of this Agreement with his spouse after obtaining her agreement to be bound by this confidentiality provision. 7 of 9 8 11.2 Announcement Concerning Separation from Service. Eigsti and the Company shall discuss and coordinate with respect to any public announcement, or any internal or private announcement, concerning the severance of their employment relationship. 11.3 Employment References. In the event a prospective employer contacts the Company for an employment reference with respect to Eigsti, the Company shall not provide any information relating to Eigsti or his employment history or performance with the Company except for such information Eigsti authorizes the Company in writing from time to time to release in response to such inquiries. 12. Costs. Except for the Company's agreement to pay for Eigsti's attorney's fees and tax consultation as stated and limited in Sections 3.3 and 3.4, respectively, each party shall bear its own costs and expenses incurred in connection with the negotiation of this Agreement and the preparation of this Agreement. 13. Acknowledgment. 13.1 Informed Agreement. Eigsti declares that he has read and fully understands the terms of this Agreement, and its significance and consequence. Eigsti further declares that this Agreement is the product of good faith negotiations between himself and the Company, and that he voluntarily accepts the same for the purpose of resolving arrangements with respect to his separation from service. Eigsti understands and acknowledges that, except as specifically reserved herein, in exchange for the Release Payment he is waiving and giving up every possible claim arising out of his employment with the Company and/or his separation from service. 13.2 Attorney. Eigsti acknowledges that the Company has advised him to review the terms of this Agreement with an attorney and that he has done so. 13.3 Review and Revocation Periods. Eigsti acknowledges that the Company has given him at least 21 days during which to consider this Agreement prior to signing, and understands that he has seven days after signing in which he may revoke this Agreement. This Agreement shall not become effective or enforceable until such seven-day period has expired. Eigsti understands that he may revoke this Agreement by delivering a written notice to Allie Mysliwy at SAFECO Plaza, Seattle, WA 98185, no later than the close of business on the seventh day after his execution hereof. Eigsti understands and acknowledges that if he revokes this Agreement it shall not be effective or enforceable and he will not receive the payments described herein. 14. Entire Agreement. This is the entire agreement between Eigsti and the Company. Neither the Company nor any affiliate has made any promises to Eigsti other than those included within this Agreement. 8 of 9 9 15. Governing Law. The parties acknowledge that this Agreement shall be interpreted under and enforced by and consistent with the laws of the State of Washington. SAFECO CORPORATION _____________________ By_____________________ ROGER H. EIGSTI Robert S. Cline Chair, Compensation Committee Dated:________________ Dated:__________________ 9 of 9 EX-11 5 v70188ex11.txt EXHIBIT 11 1 SAFECO CORPORATION AND SUBSIDIARIES Computation of Income Per Share Exhibit 11 Year Ended December 31 2000 1999 1998 - - - - - - -------------------------------------------------------------------------------- (In Millions Except Per Share Amounts)
BASIC NET INCOME PER SHARE OF COMMON STOCK 1. Net Income $ 114.6 $ 252.2 $ 351.9 --------------------------------------------- 2. Average Number of Common Shares Outstanding 127.8 132.7 139.4 --------------------------------------------- 3. Basic Net Income Per Share of Common Stock (L.1 /L.2) $ 0.90 $ 1.90 $ 2.52 ============================================= DILUTED NET INCOME PER SHARE OF COMMON STOCK 1. Net Income $ 114.6 $ 252.2 $ 351.9 --------------------------------------------- 2. Average Number of Common Shares Outstanding 127.8 132.7 139.4 3. Additional Common Shares Assumed Issued Under Treasury Stock Method (All due to employee stock options) -- 0.1 0.5 --------------------------------------------- 4. Diluted Average Number of Common Shares Outstanding 127.8 132.8 139.9 --------------------------------------------- 5. Diluted Net Income Per Share of Common Stock (L.1 /L.4) $ 0.90 $ 1.90 $ 2.51 =============================================
EX-12 6 v70188ex12.txt EXHIBIT 12 1 SAFECO CORPORATION AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges Exhibit 12 Year Ended December 31 - - - - - - -------------------------------------------------------------------------------- (In Millions, except ratios)
SAFECO CORPORATION AND SUBSIDIARIES (Ratio of Earnings to Fixed Charges Excluding Distributions on Capital Securities) 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Earnings: Income Before Income Taxes and Distributions on Capital Securities $158.6 $332.3 $462.8 $572.6 $578.5 Total Fixed Charges Below 189.8 150.4 168.1 109.3 76.3 Less Interest Capitalized (6.1) -- (0.5) (2.0) (0.1) Less Undistributed Loss from Unconsolidated Subsidiary -- -- -- -- 0.9 ------ ------ ------ ------ ------ Total Earnings $342.3 $482.7 $630.4 $679.9 $655.6 ====== ====== ====== ====== ====== Fixed Charges: Interest $173.1 $141.0 $159.5 $101.8 $ 72.4 Interest Capitalized 6.1 -- 0.5 2.0 0.1 Interest Portion of Rental Expense 9.6 8.3 6.7 4.8 3.3 Amortization of Deferred Debt Expense 1.0 1.1 1.4 0.7 0.5 ------ ------ ------ ------ ------ Total Fixed Charges $189.8 $150.4 $168.1 $109.3 $ 76.3 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges Excluding Distributions on Capital Securities 1.8 3.2 3.8 6.2 8.6 ====== ====== ====== ====== ======
SAFECO CORPORATION AND SUBSIDIARIES (Ratio of Earnings to Fixed Charges and Distributions on Capital Securities) 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Earnings: Income Before Income Taxes $ 89.6 $263.3 $393.7 $549.8 $578.5 Total Fixed Charges Below 258.8 219.4 237.2 132.1 76.3 Less Interest Capitalized (6.1) -- (0.5) (2.0) (0.1) Less Undistributed Loss from Unconsolidated Subsidiary -- -- -- -- 0.9 ------ ------ ------ ------ ------ Total Earnings $342.3 $482.7 $630.4 $679.9 $655.6 ====== ====== ====== ====== ====== Fixed Charges: Interest $173.1 $141.0 $159.5 $101.8 $ 72.4 Distributions on Capital Securities 69.0 69.0 69.1 22.8 -- Interest Capitalized 6.1 -- 0.5 2.0 0.1 Interest Portion of Rental Expense 9.6 8.3 6.7 4.8 3.3 Amortization of Deferred Debt Expense 1.0 1.1 1.4 0.7 0.5 ------ ------ ------ ------ ------ Total Fixed Charges $258.8 $219.4 $237.2 $132.1 $ 76.3 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges and Distributions on Capital Securities 1.3 2.2 2.7 5.1 8.6 ====== ====== ====== ====== ======
SAFECO CREDIT 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Earnings: Income Before Income Taxes $ 19.3 $ 22.6 $ 22.7 $ 21.5 $ 19.1 Total Fixed Charges Below 101.0 74.7 67.1 56.4 47.5 ------ ------ ------ ------ ------ Total Earnings $120.3 $ 97.3 $ 89.8 $ 77.9 $ 66.6 ====== ====== ====== ====== ====== Fixed Charges: Interest $100.9 $ 74.6 $ 67.0 $ 56.3 $ 47.4 Interest Portion of Rental Expense 0.1 0.1 0.1 0.1 0.1 ------ ------ ------ ------ ------ Total Fixed Charges $101.0 $ 74.7 $ 67.1 $ 56.4 $ 47.5 ====== ====== ====== ====== ====== Ratio of Earnings to Fixed Charges 1.2 1.3 1.3 1.4 1.4 ====== ====== ====== ====== ======
EX-13 7 v70188ex13.txt EXHIBIT 13 1 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFECO Corporation (the Corporation), a Washington corporation, owns operating subsidiaries in segments of insurance and other financially related businesses. (The Corporation and its subsidiaries are collectively referred to as "SAFECO.") The Corporation's insurance subsidiaries engage in property and casualty insurance, surety and life insurance, and generated approximately 95% of total 2000 revenues. SAFECO Credit Company provides commercial lending to businesses, insurance agents and affiliated companies. SAFECO Asset Management Company provides asset management services to the SAFECO family of mutual funds, SAFECO Trust Company and outside managed accounts. Talbot Financial Corporation provides insurance brokerage and financial services distribution. See page 43 for a discussion of SAFECO's discontinued real estate operations. On January 30, 2001, SAFECO's Board of Directors named as chief executive officer Michael S. McGavick, former president and chief operating officer of CNA Financial Corporation's commercial insurance operation. William G. Reed, Jr. was named Chairman of the Board of Directors and continues as lead director. The Board of Directors also announced on February 7, 2001 that it had reduced the Corporation's quarterly dividend by 50%. Assuming the quarterly dividend amount is $0.185 per share, the Corporation will retain approximately $94.5 million annually that it otherwise would have paid in shareholders' dividends. Mr. McGavick is engaged in a review of SAFECO's operations with a particular emphasis on the property and casualty insurance operations that have performed poorly over the last two years. Mr. McGavick has stated that he intends to concentrate on: (1) ensuring that the recovery plans for the property and casualty insurance operations have the rigor and urgency necessary to succeed, (2) a focused review of expenses, and (3) increasing the flexibility provided by SAFECO's balance sheet. CAPITAL RESOURCES AND LIQUIDITY SOURCES AND USES OF FUNDS SAFECO's operations have liquidity requirements that vary among the principal product lines and businesses. Life insurance, retirement services and annuity product reserves are primarily longer-term liabilities that are typically predictable in nature and are supported by investments that are generally longer-term. Property and casualty liabilities are both short-term and long-term. These liabilities are less predictable in nature and generally require greater liquidity in the investment portfolio. The Corporation's liquidity needs are met by dividends from its subsidiary operations, the sale and maturity of invested assets, bank borrowings and issuances of commercial paper and other securities. The subsidiaries' primary sources of cash from operations are insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees. SAFECO uses funds to support operations, service and pay down debt, pay dividends to SAFECO shareholders, fund stock repurchases and grow the investment portfolio. Cash from insurance operations is used primarily to pay claims and claim adjustment expenses. 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. Catastrophe claims, the timing and amount of which are inherently unpredictable, may create increased liquidity requirements. Total cash provided by operating activities for the years ended December 31, 2000, 1999 and 1998 was $658.6 million, $763.0 million and $657.6 million, respectively (see Statements of Consolidated Cash Flows on page 52). Property and casualty operating cash flows were $137.0 million, $205.3 million and $293.7 million for the years ended December 31, 2000, 1999 and 1998, respectively. Although premiums received have increased in all three years, they have been outpaced by rising loss and loss adjustment expense costs, resulting in higher underwriting losses. (See more detailed discussion of property and casualty operations beginning on page 37). In addition, property and casualty after-tax cash flows from investment income have declined due to the relatively low interest rate environment, dividends paid to the Corporation (which reduce the amount of investable cash) and bond call activity (whereby higher yielding bonds are called and redeemed by issuers). Consolidated dividends and interest received have increased due to the higher invested asset base of the life insurance subsidiaries. It is anticipated that the insurance subsidiaries will pay dividends to the Corporation in 2001 in order to fund shareholder dividends and to service debt. The amount of dividends will be lower than in recent years due to weaker underwriting results, a reduction in the amount needed to fund SAFECO stockholders' dividends, and to conserve the insurance subsidiaries' capital and surplus. Funds received under deposit contracts relate primarily to annuity, retirement services and individual products of the Corporation's life insurance subsidiaries. (The Corporation's life insurance subsidiaries are collectively referred to as "SAFECO Life.") Of the total $14.1 billion in deposit contracts at December 31, 2000, approximately 44% are structured settlement immediate annuity products. These annuities have an average expected maturity of over 25 years at issuance and cannot be surrendered by policyholders. Equity-indexed annuities (EIA), comprising approximately 3% of total deposit contracts, have remaining expected maturities of approximately 4 years and associated surrender charges ranging from 8% in year one to zero after year six. During the third and fourth quarters of 2000, SAFECO Life offered to waive surrender charges in order to induce EIA policyholders to surrender their contracts. This offer was successful and resulted in surrenders of $363 million. These surrenders accounted for the majority of the increase in return of funds held under deposit contracts in 2000 compared with 1999 and 1998 (see Statements of Consolidated Cash Flows on page 52.) Since the EIA book of business has gener- 33 2 ated ongoing losses, reducing the size of the book will reduce the amount of future losses. Other annuity and retirement services products comprise approximately 28% of total deposit contracts. These products generally have expected maturities of 5 to 20 years at issuance and associated surrender charges ranging from 10% to 5% in year one reduced to zero within 5 to 10 years. SAFECO Life retains the option to defer payouts over 5 years on approximately 13% of these contracts. Universal life products comprise approximately 21% of total deposit contracts. Of the total universal life product deposit contracts, 80% are business-owned life insurance (BOLI) policies which have expected maturities of 20 to 25 years at issuance with surrender charges varying according to policy type. SAFECO Life's guaranteed investment contracts (GICs) within its retirement services area comprise the remaining 4% of total deposit contracts. The high level of proceeds from the maturity of fixed maturities in all three years was due primarily to the high number of calls of fixed maturities and prepayments of mortgage-backed securities. These calls and prepayments were primarily due to the lower interest rate environment during the past three years and issuer-driven actions. The high level of purchase and sale activity related to fixed maturities available-for-sale in 2000 and 1999 was due in part to shifting a portion of the property and casualty subsidiaries' bond holdings from tax-exempt to taxable bonds. The reason for this shift was to maximize the portfolio's after-tax return in view of the higher level of underwriting losses in 2000 and 1999 and the resulting alternative minimum tax. Much of the purchase and sale activity related to fixed maturities available-for-sale in 1998 was due to the realignment of the American States Financial Corporation's (American States) property and casualty insurance companies' investment portfolio. The high level of proceeds from equity securities in 2000 is mainly due to approximately $300 million of planned equity securities sales out of the property and casualty insurance companies' investment portfolio in the third quarter. The proceeds from these equity securities sales were reinvested in taxable fixed-income securities. These sales resulted in increased realized gains from equity securities in 2000 compared with 1999 and 1998. Additional information on realized gains can be found in Note 2 on page 58. Changes in interest rates have also caused fluctuations in the market value of fixed maturity investments. This has affected SAFECO's reported book value (shareholders' equity) and comprehensive income because the difference between market value and the amortized cost of fixed maturities classified as available-for-sale is included in shareholders' equity and comprehensive income, net of related income tax. Effective October 1, 2000, SAFECO reclassified its entire held-to-maturity fixed maturities investment portfolio to available-for-sale. This reclassification was made to provide additional investment flexibility in managing the fixed maturities portfolio. This resulted in an increase in other comprehensive income of $41 million in the fourth quarter. SAFECO Credit Company has ongoing needs for outside capital to fund its lending and leasing operating activities. Its borrowings are of short- to medium-term duration and are obtained primarily through the issuance of commercial paper, medium-term notes and the use of interest rate swaps to convert variable rate interest payments to fixed rates, as discussed further below. At December 31, 2000, SAFECO Credit had $11.3 million of medium-term notes outstanding, which were issued in 1991 and 1993 and mature in 2001. These debt securities are guaranteed by the Corporation. Including these medium-term notes and commercial paper, SAFECO Credit had unaffiliated borrowings at December 31, 2000 totaling $1,154.7 million, all of which are due within one year. It is anticipated that the majority of these commercial paper borrowings will be rolled over in 2001. Borrowing costs could increase as a result of the Corporation's lower ratings (see discussion on page 35). During 2000, SAFECO Credit replaced $300 million of its short-term commercial paper borrowings with a medium-term note payable to the Corporation due in 2003 as described further below. SAFECO Credit enters into interest rate swap agreements to reduce the impact of changes in interest 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, 2000, interest rate swap agreements were outstanding with notional amounts of $328.6 million, replacing variable rates with fixed rates with a weighted-average interest rate of 5.9%. Maturities of these agreements range from January 2001 to June 2007. At December 31, 1999, interest rate swap agreements were outstanding with notional amounts of $457.0 million, replacing variable rates with fixed rates with a weighted-average interest rate of 5.9%. In order to reduce refinancing risk, on March 16, 2000, the Corporation issued $300.0 million of medium-term notes at 7.875% which mature on March 15, 2003. In conjunction with this debt issue, the Corporation entered into interest rate swap agreements. The swaps are for notional amounts totaling $300.0 million and replace the fixed rates of the medium-term notes with variable rates at 65.03 basis points over the 90-day LIBOR rate. The swaps mature in March 2003. The proceeds of the debt issue were subsequently loaned to SAFECO Credit to reduce a portion of its short-term commercial paper. The $300.0 million of medium-term notes issued is part of a shelf offering of $800.0 million made earlier in 2000. The Corporation has available $500.0 million under the existing shelf registration. The Corporation has a bank credit facility available for $1,050.0 million. It is a five-year facility originated in 1997 that extends to 2002. The Corporation also has backup bank facilities for $315.0 million. These are 364-day commitments which expire at various dates throughout the year. These facilities are available for general corporate purposes, as well as support of the commercial paper programs of the Corporation and SAFECO Credit. In 2001, the Corporation plans to roll over its $349.8 million of commercial paper borrowings outstanding at December 31, 2000. 34 3 As part of its active capital management strategy, the Corporation periodically repurchases its common stock through open market and negotiated purchases. In February 2000, the Corporation's Board of Directors approved the repurchase of 3.0 million shares of common stock. Previous repurchase authorizations were in May 1999 for a total of 8.0 million shares and in August 1998 for a total of $200 million. For the year ended December 31, 2000, the Corporation repurchased 1.3 million shares at a total cost of $30.3 million for an average share price of $22.54. For the year ended December 31, 1999, the Corporation repurchased 7.5 million shares at a total cost of $302.1 million for an average share price of $40.14. For the year ended December 31, 1998, the Corporation repurchased 5.2 million shares at a total cost of $235.6 million for an average share price of $45.66. Repurchases combined for 2000, 1999 and 1998 totaled 9.9% of the Corporation's outstanding common shares at the beginning of 1998. The Corporation received additional dividends from its insurance subsidiaries to fund these stock repurchases. Approximately 2.9 million shares remain available for repurchase under the February 2000 authorization. RATINGS The claims-paying abilities of insurers are rated to provide both insurance consumers and industry participants with comparative information on specific insurance companies. Claims-paying ratings are important for the marketing of certain insurance products, e.g., structured settlement annuities, BOLI. Higher ratings generally indicate greater financial strength and a stronger ability to pay claims. Ratings focus on factors such as results of operations, capital resources, debt-to-equity ratio, demonstrated management expertise in the insurance business, marketing, investment operations, minimum policyholders' surplus requirements and capital sufficiency to meet projected growth, as well as access to such traditional capital as may be necessary to continue to meet standards for capital adequacy. Due primarily to continued poor underwriting results in its property and casualty operations, SAFECO's claims-paying and corporate credit ratings have been lowered in the last two years. Lower operating results combined with increased operating leverage in the property and casualty operations contributed to lower debt service coverage for the Corporation. Lower commercial paper ratings have increased the interest cost of the Corporation's and SAFECO Credit's commercial paper. SAFECO believes its financial position is sound and has action plans in place to improve its property and casualty results. It is, however, possible that further negative ratings actions may occur. If ratings are further lowered, SAFECO may incur higher borrowing costs, may have more limited means to access capital, and may be unable to market certain of its insurance products that are dependent upon ratings being at or above a particular level of risk. The following table summarizes SAFECO's current ratings:
A.M. STANDARD BEST FITCH MOODY'S & POOR'S - - - - - - ----------------------------------------------------------------------------------- SAFECO Corporation: Senior Debt bbb+ - A3 A- Capital Securities bbb - a3 BBB Commercial Paper - F-2 P-2 A-2 Financial Strength/Claims-Paying Ability: Property and Casualty Subsidiaries A AA- A1 AA- Life Subsidiaries A AA- A1 AA-
REGULATORY ISSUES 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. Those states in which SAFECO's insurance subsidiaries are domiciled or deemed to be commercially domiciled limit the amount of dividend payments that can be made by those subsidiaries without prior regulatory approval. These limitations are not anticipated to keep the insurance subsidiaries from paying dividends to the Corporation in 2001 in amounts sufficient to fund its shareholder dividends and service debt. The National Association of Insurance Commissioners (NAIC) uses risk-based capital (RBC) formulas for both life insurers and property and casualty insurers which serve as an early warning tool by the NAIC and state regulators to identify companies that are undercapitalized and 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. The NAIC recently finished revising the Accounting Practices and Procedures Manual. The revised manual will be effective January 1, 2001. The domiciliary states of the Corporation's insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that the Corporation's insurance subsidiaries use to prepare their statutory-basis financial statements. Consequently, SAFECO estimates it will increase statutory surplus of the property and casualty insurance companies by approximately $200 million and the life insurance companies by approximately $45 million. Nearly all of the increase in the amount of statutory surplus relates to the recording of a deferred tax asset that was not recorded in the statutory basis financial statements under the prior statutory accounting guidance. 35 4 YEAR 2000 READINESS DISCLOSURE As of February 9, 2001, SAFECO has not experienced any material Year 2000 complications regarding its computer systems, the technology embedded in its equipment, or its third-party partners and vendors, nor is it aware of any Year 2000-related claims made under its property and casualty insurance policies. SUMMARY OF FINANCIAL INFORMATION The following summarized financial information sets forth the contributions of each primary business segment to the consolidated net income of the Corporation. The information should be read in conjunction with the Segment Footnote (pages 74 and 75 and the related statements of income on pages 76 through 79) and supplemental information on pages 80 through 83 of this report.
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ---------------------- ---------- ---------- ---------- (In Millions Except Per Share Amounts) Income (Loss), Net of Income Taxes, Before Realized Gain: Property and Casualty $ (10.6) $ 114.8 $ 310.2 Life 102.5 116.7 46.4+ Real Estate* - - 3.4 Credit 12.8 14.5 14.4 Asset Management 8.5 8.9 5.5 Corporate (44.2) (34.4) (45.0) ---------- ---------- ---------- Total 69.0 220.5 334.9 Realized Gain, Net of Income Taxes 90.4 76.5 61.9 ---------- ---------- ---------- Income Before Distributions on Capital Securities 159.4 297.0 396.8 Distributions on Capital Securities, Net of Tax (44.8) (44.8) (44.9) ---------- ---------- ---------- Net Income $ 114.6 $ 252.2 $ 351.9 ========== ========== ========== Net Income Per Diluted Share of Common Stock: Income Before Realized Gain $ .19 $ 1.32 $ 2.07+ Realized Gain .71 .58 .44 ---------- ---------- ---------- Net Income $ .90 $ 1.90 $ 2.51 ========== ========== ==========
* 2000 and 1999 Real Estate income of $2.4 and $4.3 is included in Corporate. + 1998 Life Income includes a write-off of deferred acquisition costs of $46.8 ($30.4 after tax, $0.22 per share). 36 5 PROPERTY AND CASUALTY--OPERATIONS Through independent agents, SAFECO's property and casualty subsidiaries write personal, commercial and surety lines of insurance. Included in the lines of insurance written are automobile, homeowners, fire, commercial multi-peril, workers' compensation, miscellaneous casualty, surety and fidelity. Approximately 16% of SAFECO's property and casualty premiums are written in the state of California, and approximately 33% of premiums are written in the three West Coast states of California, Washington and Oregon. SAFECO continues to restrict writing new property business in California to manage its exposure to large, single-event catastrophes, and to restrict writing general property damage liability coverage in connection with the construction of large habitation structures to manage its exposure to construction defect claims (see discussion on page 40). Personal lines, SAFECO Business Insurance (SBI) (formerly American States Business Insurance), SAFECO Commercial and surety lines comprised approximately 57%, 26%, 15% and 2%, respectively, of the 2000 gross premiums written of $4.7 billion. PROPERTY AND CASUALTY OPERATING STATISTICS The following three tables for the property and casualty insurance companies state: (1) the results before realized gain and income taxes, (2) operating ratios, and (3) the underwriting results.
COMPONENTS OF PRETAX OPERATING INCOME -------------------------------------------- YEAR ENDED DECEMBER 31 2000 1999 1998 ---------- ---------- ---------- (In Millions) Gross Premiums Written $ 4,709.1 $ 4,645.0 $ 4,441.8 ========== ========== ========== Underwriting Loss* $ (521.9) $ (366.7) $ (109.4) Net Investment Income 460.5 462.3 480.2 Goodwill Amortization (44.0) (43.8) (43.0) ---------- ---------- ---------- Income (Loss) Before Realized Gain and Income Taxes $ (105.4) $ 51.8 $ 327.8 ========== ========== ==========
* Underwriting profit or loss is a standard industry measurement used by management to analyze core property and casualty operations. This measurement represents the net amount of earned premiums less underwriting losses and expenses; it does not include realized investment gains and losses, goodwill amortization, net investment income and taxes. This measurement does not replace net income as a measure of profitability, but is presented to supplement the other financial measurements provided.
OPERATING RATIOS* -------------------------------------------- YEAR ENDED DECEMBER 31 2000 1999 1998 ---------- ---------- ---------- Loss Ratio 70.4% 66.4% 61.3% Adjustment Expense Ratio 12.2 12.0 11.5 Expense Ratio 28.6 29.8 29.5 Dividends to Policyholders .2 .2 .3 ---------- ---------- ---------- Combined Ratio 111.4% 108.4% 102.6% ========== ========== ==========
* Operating ratios represent major components of expense expressed as a percentage of earned premiums and are commonly used measures of property and casualty insurance profitability. Ratios exclude goodwill amortization. 37 6
UNDERWRITING PROFIT (LOSS)* ----------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------- ------------------------- ------------------------- COMBINED COMBINED COMBINED YEAR ENDED DECEMBER 31 AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------- --------- --------- --------- --------- --------- (In Millions) Personal Lines: Personal Auto $ (123.0) 107.1% $ (63.3) 103.7% $ 11.5 99.3% Homeowners (116.7) 116.0 (48.2) 106.8 (56.4) 108.2 Other Personal 18.2 90.3 20.6 88.4 14.8 91.1 Commercial Lines: SAFECO Business Insurance (155.3) 113.3 (183.4) 118.0 (72.7) 108.0 SAFECO Commercial (155.7) 122.8 (107.6) 115.7 (27.9) 104.3 Surety 11.7 81.0 15.2 74.4 19.2 67.2 Other (1.1) - - - 2.1 - --------- --------- --------- --------- --------- --------- Total $ (521.9) 111.4% $ (366.7) 108.4% $ (109.4) 102.6% ========= ========= ========= ========= ========= =========
* Catastrophe losses for all lines, net of reinsurance, totaled $136 million, $103 million and $159 million in 2000, 1999 and 1998, respectively. The property and casualty insurance companies had steadily deteriorating results from the underwriting of insurance from 1998 to 2000. In each of these three years the loss ratio increased (1998 - 61.3%, 1999 - 66.4% and 2000 - 70.4%) which in turn caused the combined ratio for each year to increase (1998 - 102.6%, 1999 - 108.4% and 2000 - 111.4%). Details on the results by line of insurance as well as actions being taken to improve these underwriting results are described below. Information on the investment income generated by the property and casualty insurance operations is provided on page 43. PERSONAL AUTO Over the past three years voluntary personal auto went from producing an underwriting profit of $11.5 million in 1998 to producing underwriting losses of $63.3 million and $123.0 million in 1999 and 2000, respectively. The most significant reason for the deteriorating results was the rate decreases taken in 1999 and 1998 which were deemed necessary to retain American States business and in response to competition. Average auto rates increased nearly 6% in 2000, decreased 2% in 1999 and increased 1% in 1998. SAFECO plans to increase personal auto rates at least 7% in 2001. At the same time, over the last three years average loss costs (which include the severity or cost of settling claims and the frequency of accidents) for new reported claims increased by about 3% in 2000 and 1% in both 1999 and 1998. The increases in average loss costs have significantly lessened the improvement expected from rate increases to date. The higher average loss costs in 2000 result from medical cost inflation and the greater use of original equipment manufactured (OEM) parts. The increase in the use of OEM parts occurred following the filing of class action lawsuits challenging the industry (and SAFECO) practice of using non-OEM parts. As a result of the increase in rates in 2000, personal auto premiums written increased by less than 1% and the number of policies inforce decreased by 3%. The number of policies increased by 2% and 1% in 1999 and 1998, respectively. SAFECO expects further rate increases to depress the growth in the number of policies and to contribute to improved underwriting results. Finally, in 2000 SAFECO expanded the use of "insurance-scoring" (use of credit scores and other information) which had been used by several competitors. The use of insurance-scoring has resulted in some decrease in the number of policies that otherwise would have been written and should improve the overall quality of the book of business. HOMEOWNERS The homeowners line produced underwriting losses for the past three years of $116.7 million, $48.2 million and $56.4 million in 2000, 1999 and 1998, respectively. The acquisition of American States in 1997 increased SAFECO's exposure in this line to large, single weather events. Losses due to large, single events (nearly all weather-related) were $86 million, $52 million and $83 million for 2000, 1999 and 1998, respectively. In 2000 non-weather losses, particularly from fire and water damage, increased by $44 million over similar losses in 1999. SAFECO has taken several steps to stem these underwriting losses, but with modest success to date. These efforts include rate increases, obtaining the correct insurance-to-value, restricting writing in certain areas, imposing higher deductibles and attempting to spread risks geographically within catastrophe-prone areas. Average homeowners rates increased over 6%, 1% and 3% in 2000, 1999 and 1998, respectively. The number of homeowners policies inforce decreased by 0.1% in 2000 and increased by 4% and 2% in 1999 and 1998, respectively. These numbers suggest that SAFECO may be able to achieve even more appropriate rates given the exposures in this line. 38 7 OTHER PERSONAL LINES Other personal lines (including earthquake, dwelling fire, inland marine and boats) produced underwriting profits of $18.2 million, $20.6 million and $14.8 million in 2000, 1999 and 1998, respectively. SAFECO BUSINESS INSURANCE (SBI) SBI focuses on small- to medium-sized businesses. It produced underwriting losses of $155.3 million, $183.4 million and $72.7 million in 2000, 1999 and 1998, respectively. Premiums written increased 2% and 14% in 2000 and 1999, respectively. There are several reasons for these poor results. First, following the acquisition of American States in 1997, SAFECO sought both to underwrite and to price the business in this line to retain it. That result was achieved, but at the high cost of underwriting losses. In addition, the overall competitive marketplace (particularly in workers' compensation) and single event weather losses contributed to the poor results. SAFECO took aggressive action in 2000 to reverse the underwriting losses in this line by re-underwriting existing business, strengthening underwriting criteria and discipline, terminating relationships with agents who produced poor quality business, and obtaining rate increases, particularly in workers' compensation and commercial auto. Since mid-1999, rates on this line have increased by approximately 15% and are a significant reason for the decrease in the underwriting loss from 1999 to 2000. The actions taken have resulted in the loss of some business and should improve overall results in the future. SAFECO COMMERCIAL SAFECO Commercial focuses on medium- to large-sized businesses. It produced underwriting losses of $155.7 million, $107.6 million and $27.9 million in 2000, 1999 and 1998, respectively. The deterioration of results is due to several reasons, including the difficult underwriting environment, inadequate rates (particularly in workers' compensation), reserve increases in recognition of unfavorable trends in loss costs, and higher frequency of large losses. SAFECO has increased commercial prices by 15% in 2000 and plans additional price increases in 2001. In addition, SAFECO will continue to focus on tightening underwriting criteria in this line of business. SURETY The surety line produced pretax underwriting profits of $11.7 million, $15.2 million and $19.2 million in 2000, 1999 and 1998, respectively. Fourth quarter 2000 results were adversely affected by a $5 million net loss from the bankruptcy of one surety customer. OTHER Other insurance product lines produced an underwriting loss of $1.1 million in 2000 and broke even in 1999. These lines include assumed reinsurance and other business in run-off and assigned risk plans. PROPERTY AND CASUALTY--LOSS RESERVES The liability (reserves) for losses and loss adjustment expense (LAE) for the property and casualty companies was $4,612.7 million at December 31, 2000, compared with $4,378.6 million at December 31, 1999. The increase in the liability at December 31, 2000 compared with December 31, 1999 reflects both increased loss severities and adverse development in certain lines of business. The liability is presented net of amounts recoverable from salvage and subrogation recoveries (see Note 1 on page 57) and gross of amounts recoverable from reinsurance (see Note 5 on page 65). The amount of reinsurance recoverables related to the above gross liabilities was $343.6 million at December 31, 2000 and $309.5 million at December 31, 1999. 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. SAFECO's objective is to set reserves that are adequate; that is, the amounts originally recorded as reserves should at least equal the amounts ultimately required to settle losses. SAFECO's reserves aggregate its 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 LAE reserve development are regularly reviewed to determine that the reserving assumptions and methods are appropriate. Reserves initially set are compared to the amounts ultimately paid. A statistical estimate of the projected amounts necessary to pay outstanding claims is made regularly and compared to the recorded reserves and adjusted as necessary. Any such adjustments are included in current operations. Analysis indicates that SAFECO's recorded reserves are adequate for all three years. Operations were charged $148.3 million in 2000 from increases in estimated loss and LAE for claims occurring in prior years. These increases were due to adverse development within commercial operations in the workers' compensation ($50.9 million), general liability ($44.4 million, 39 8 primarily related to construction defect), commercial auto ($23.5 million), and in other ($29.5 million) lines of business as the costs of settling claims has increased. Operations were charged $78.8 million in 1999 due to increased exposure in certain lines of business including construction defect, asbestos and environmental and workers' compensation. Operations benefited $100.0 million in 1998 due primarily to improved claims handling changes implemented in 1998 related to the American States operations. ENVIRONMENTAL AND ASBESTOS CLAIMS The property and casualty companies' reserves for losses and LAE for liability coverages related to environmental, asbestos and other toxic claims totaled $315.5 million at December 31, 2000, compared with $332.3 million at December 31, 1999. These amounts are before the effect of reinsurance, which totaled $28.8 million and $30.1 million at December 31, 2000 and 1999, respectively. These reserves are approximately 8% of total property and casualty reserves for losses and LAE at both December 31, 2000 and 1999. The reserves include estimates for both reported and IBNR losses and related legal expenses. The vast majority of SAFECO's property and casualty insurance companies' environmental, asbestos and other toxic claims result from the commercial general liability line of business and the discontinued assumed reinsurance operations of American States. A few of these 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, before the effect of reinsurance:
YEAR ENDED DECEMBER 31 2000 1999 1998 ---------- ---------- ---------- (In Millions) Reserves at Beginning of Year $ 332.3 $ 329.8 $ 346.9 Incurred Losses and LAE 9.6 24.8 1.6 Losses and LAE Payments (26.4) (22.3) (18.7) ---------- ---------- ---------- Reserves at End of Year $ 315.5 $ 332.3 $ 329.8 =========== ========== ==========
Although estimation of environmental claims is difficult, the reserves established for these claims at December 31, 2000 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. 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 loss reserving techniques in this area need to be supplemented by subjective considerations and managerial judgment. Because of these conditions, trends that have affected development of these liabilities in the past may not necessarily occur in the future. CONSTRUCTION DEFECT CLAIMS Construction defect claims are a subset of claims that arise from coverage provided by general property damage liability insurance. Construction defect claims are claims arising from the alleged defective work performed in the construction of large habitation structures, such as apartments, condominiums and large developments of single-family dwellings or other housing. In addition to damages arising directly from the alleged defective work, construction defect claims also allege that the economic value of the structure has been diminished. The vast majority of SAFECO's construction defect claims arise from past contractor business written in the state of California. SAFECO Commercial, which does not include SBI, has avoided writing the construction class of business in California since 1989 and has limited exposure to these types of claims. Because of this business practice, SAFECO has not historically separated these claims for the purpose of reserve analysis. However, American States, prior to the acquisition by SAFECO, was a major writer of California contractor business until 1994 when it implemented significant restrictions in this line. The total SBI reserves for construction defect claims were $322.6 million at December 31, 2000 and $306.1 million at December 31, 1999, representing approximately 8% of total property and casualty reserves for losses and LAE at both December 31, 2000 and 1999. Claims payments including LAE totaled $55.0 million in 2000 and $50.6 million in 1999. REINSURANCE SAFECO's property and casualty insurance companies use treaty and facultative reinsurance to help manage exposure to loss. As noted above, the liability for unpaid losses and LAE is reported gross of reinsurance recoverables of $343.6 million at December 31, 2000 and $309.5 million at December 31, 1999. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Due to the recent tightening in the reinsurance marketplace, it is likely that the cost of reinsurance will increase in 2001. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks insured. To SAFECO's knowledge, none of its reinsurers is experiencing financial difficulties. SAFECO's nationwide catastrophe property reinsurance program for 2001, covering 90% of $400 million of single-event losses in excess of $100 million retention, is unchanged from 2000. In a large catastrophe, SAFECO retains the first $100 million of losses, 40 9 10% of the next $400 million and all losses in excess of $500 million. In addition to this nationwide coverage, for all states other than California, SAFECO has a supplemental earthquake-only reinsurance contract that covers 90% of $250 million of single-event earthquake losses in excess of $500 million. In 2000 this supplemental coverage was for $350 million of single-event earthquake losses in excess of $500 million. Catastrophe property reinsurance contracts for 2001 include provisions for one reinstatement for a second catastrophe event in 2001 at current rates. 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. Additional information on reinsurance can be found in Note 5 on page 65. LIFE The life insurance companies offer individual and group insurance products, retirement services (pension) and annuity products. The most significant product lines in terms of premium/deposit volume include single-premium immediate and deferred annuities, BOLI, equity-indexed and variable annuities, tax-sheltered annuities for the education and nonprofit markets, corporate retirement plans, excess loss group medical insurance and individual life insurance. SAFECO Life purchased the medical excess loss and group life business of ING Medical Risks Solutions (ING), as well as ING's wholly-owned underwriting subsidiary, Medical Risk Managers, on December 31, 1999 for $34 million. Earnings before investment transactions and income taxes ("pretax income") for all lines combined were $157.6 million, $178.6 million and $72.3 million in 2000, 1999 and 1998, respectively. The 1998 results include the write-off of deferred acquisition costs of $46.8 million, discussed below. The following table summarizes the pretax income amounts of the life companies' major product lines, excluding the $46.8 million write-off of deferred acquisition costs in 1998:
PRETAX INCOME ------------------------------------------- YEAR ENDED DECEMBER 31 2000 1999 1998 ---------- ---------- ---------- (In Millions) Retirement Services $ 30.0 $ 52.6 $ 12.8 Settlement Annuities 26.4 42.3 30.6 Group 4.3 (19.5) (14.1) Individual 24.6 30.1 13.9 Other 72.3 73.1 75.9 ---------- ---------- ---------- Pretax Income $ 157.6 $ 178.6 $ 119.1 ---------- ---------- ----------
RETIREMENT SERVICES SAFECO's retirement services operations produced pretax income of $30.0 million, $52.6 million and $12.8 million in 2000, 1999 and 1998, respectively. Retirement services products are primarily tax-sheltered annuities, which are marketed to teachers and employees of hospitals and charitable organizations, GICs, fixed and variable deferred annuities (both qualified and non-qualified) 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 5 years. Retirement services had $6.1 billion of assets on deposit at December 31, 2000 compared with $7.1 billion at December 31, 1999. This decline is due primarily to EIA, GIC and other fixed product withdrawals. This decrease in retirement services assets resulted in a corresponding decrease in investment income margin of $3 million in this product line for 2000. New deposits from fixed return products (including EIA) declined to approximately $205 million in 2000 from $354 million in 1999. There were no new EIA deposits in 2000 and only $4 million in 1999. New deposits from variable return products were approximately $248 million in 2000 compared with $265 million in 1999. Losses on the EIA product were $15.3 million, $2.9 million and $38.2 million in 2000, 1999 and 1998, respectively. In 2000, an offer was extended to EIA policyholders to surrender their policies and receive December 31, 1999 account value with no surrender charge. This resulted in a charge to income totaling $12 million. This offer resulted in $363 million of policy surrenders, representing over 50% of the account values on this product. Since the EIA book of business has generated ongoing losses, reducing the size of the book will reduce the amount of future losses. In 1999, a new hedging program was in place to reduce losses. Losses in 1998 were incurred before the new hedging program and related to higher-than-expected cost of S&P call options which SAFECO purchased to hedge its obligation under the EIA product. SETTLEMENT ANNUITIES The settlement annuities operations produced pretax income of $26.4 million, $42.3 million and $30.6 million in 2000, 1999 and 1998, respectively. Settlement annuities' products are single-premium immediate annuities (SPIAs) sold to fund third-party personal injury settlements and are non-surrenderable contracts. The invested assets supporting SPIAs are primarily long-maturity bonds. New SPIA deposits were $391 million, $313 million and $424 million in 2000, 1999 and 1998, respectively. Deposits in 1998 included $118 million related to the funding of benefits for former participants in American States' existing defined benefit 41 10 plan. Continued competitive pressures and SAFECO Life's lowered ratings have dampened the growth of new deposit volume in the last few years. Any further downgrades could substantially reduce the ability to attract new deposits. Total settlement annuity assets increased to $6.2 billion at December 31, 2000 compared with $5.8 billion at December 31, 1999. The decrease in operating income in 2000 is due to the effect of changes in paydowns of collateralized mortgage obligations. These changes resulted in a reduction to investment income of $4.8 million. Operating income in 2000 was also lower due to increased legal expenses to defend the qualified assignment contract terms of the structured settlement product. These legal expenses are expected to be lower in 2001. GROUP SAFECO's group insurance operations produced a gain of $4.3 million in 2000 and losses of $19.5 million and $14.1 million in 1999 and 1998, respectively. The strategic focus of the group operation is excess loss medical insurance sold to self-insured employers for their employee medical plans. Excess loss medical produced losses of $2.3 million, $26.7 million and $18.7 million in 2000, 1999 and 1998, respectively. Total group premiums increased 61% during 2000 compared with a decrease of 4% in 1999. The increase in group premiums is due primarily to the acquisition of business from ING noted above as well as continued medical rate increases. These rate increases, combined with underwriting actions, have improved the medical loss ratio to 70.3% in 2000 from 90.7% in 1999. In the past several years, competitive pressures combined with accelerating medical inflation, particularly for prescription drug costs, have produced unsatisfactory results in the excess loss medical line. Because of SAFECO's rate increases and underwriting actions, continued improvement is expected in 2001. INDIVIDUAL SAFECO Life's individual life operations produced pretax income of $24.6 million, $30.1 million and $13.9 million in 2000, 1999 and 1998, respectively. The traditional line of permanent and term product income declined by $11.6 million in 2000 compared with 1999. Higher death claims experience and increases in operating expense, mainly due to $4 million of expenses related to the American States Life policy system conversion, contributed to lower profits in this line in 2000. These declines were partially offset by increased profits in BOLI of $11.0 million in 2000 compared with $6.3 million in 1999. BOLI deposits were $710 million in 2000, compared with $705 million in 1999. Lower ratings could substantially reduce SAFECO Life's ability to attract new BOLI deposits. Individual life income was higher in 1999 compared to 1998 primarily due to decreased death claims. OTHER The other line is primarily comprised of investment income resulting from the investment of capital and prior years' earnings of the operating lines of business. These earnings are a major component of SAFECO Life's earnings, contributing pretax income of $72.3 million, $73.1 million and $75.9 million in 2000, 1999 and 1998, respectively. The 1998 pretax write-off of $46.8 million was primarily tied to two blocks of annuity business, the EIA and a declared-rate fixed annuity product, and to the universal life business. Of the total $46.8 million write-off, $41.8 million related to deferred acquisition costs on the three lines of business noted above. The EIA product, which was first sold in 1997, produced a substantial operating loss in 1998 which adversely affected the projected recoverability of its deferred acquisition costs (primarily commissions). Consequently, $28.3 million of deferred acquisition costs were written off on this product line. Steps taken to improve the results of this product have included using new hedging strategies such as the purchase of equity futures contracts. SAFECO has also suspended the writing of new EIA business. The remaining $13.5 million related to the write-off of deferred acquisition costs on a block of single-premium deferred annuities which experienced higher-than-anticipated withdrawal experience, and to the write-off of deferred acquisition costs on the universal life line of business, which experienced higher-than-expected operating costs. Of the total $46.8 million amount, the remaining $5.0 million related to the estimated cost of consolidating certain life operations to a central location and the associated employee severance and relocation costs. 42 11 REAL ESTATE SAFECO has nearly completed the sale of all of the assets of its real estate investment and management operations (SAFECO Properties, Inc.). In February 1998, SAFECO decided to sell its real estate subsidiary to focus on its core insurance and financial services businesses. The majority of SAFECO Properties' assets were sold for $570 million in a series of closings in the first half of 1999. Realized gains of $35 million were recognized in 1999. At December 31, 2000, investment real estate held by SAFECO Properties totaled $48 million, less than one percent of SAFECO's consolidated investments. Since SAFECO Properties' operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. In the Summary of Financial Information on page 36, the pretax income amounts for 2000 and 1999 are included in the Corporate line while the 1998 amount is reported on the Real Estate line. In the Statements of Consolidated Income on page 49, revenues for SAFECO Properties have been included in Other Revenues from January 1, 1999 forward and related expenses have been included in Other Expenses. For 2000 and 1999, these revenues totaled $20.5 million and $39.3 million and expenses totaled $16.7 million and $32.1 million, respectively, with income before realized gains and income taxes of $3.8 million and $7.2 million, respectively. CREDIT SAFECO Credit Company, Inc. provides loans and equipment financing and leasing to commercial businesses, insurance agents and affiliated companies. Credit operations produced pretax income of $19.3 million, $22.6 million and $22.7 million in 2000, 1999 and 1998, respectively. The earnings in all three years are primarily attributable to the continuing increase in loan and lease production, combined with favorable collection experience and low delinquencies. Loan and lease receivables from non-affiliates grew 10% in 2000 and 19% in 1999 and 1998. The competitive interest rate environment has continued to pressure interest revenues, and SAFECO Credit's cost of funds has increased partially due to SAFECO's lower credit ratings. These two factors have combined to narrow SAFECO Credit's interest rate spread, resulting in lower profits in 2000. Approximately 70% of non-affiliate loan and lease receivables outstanding at December 31, 2000 are from commercial businesses involved in construction, transportation and manufacturing. These businesses are located throughout the country with the majority 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. Approximately 1% of the receivables were non-performing at both December 31, 2000 and 1999. Loans and leases to insurance agents, agency premium financing and agent referral business are a valuable source of new business. 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 $12.9 million, $13.6 million and $8.5 million in 2000, 1999 and 1998, respectively. Assets under management totaled $5.6 billion at December 31, 2000, compared with $6.7 billion at December 31, 1999. This decline is due to asset outflows of approximately $830 million and lower valuation of assets resulting from stock market declines. CORPORATE The Corporate line includes operating results for the Corporation, Talbot Financial Corporation (Talbot), SAFECO Properties and intercompany transaction eliminations. The Corporation's primary expense is interest expense to service its debt payments in the amount of $89.0 million in 2000. Other components of the year 2000 loss include pretax expense of $5.2 million related to executive severance costs and recruiting costs for identifying and hiring a new chief executive officer. In addition, Talbot's pretax income decreased by $4.9 million in 2000 and SAFECO Properties' pretax income before realized gains decreased $3.4 million in 2000, compared with 1999. INVESTMENT SUMMARY SAFECO's consolidated pretax investment income increased to $1,627.2 million during 2000 from $1,585.1 million in 1999 and $1,518.9 million in 1998. Substantially all of this investment income is produced by the investment portfolios of SAFECO's property and casualty and life insurance subsidiaries. The property and casualty insurance companies' pretax investment income was $460.5 million, $462.3 million and $480.2 million in 2000, 1999 and 1998, respectively. On an after-tax basis investment income was $363.0 million, $387.6 million and $414.0 million for the three years ended December 31, 2000, 1999 and 1998, respectively. Although property and casualty operating cash flow was positive in all three years, the amount of dividends paid to the Corporation and the high level of claims payments, combined with the relatively low interest rate environment and bond call activity dampened the growth of investment income. After-tax investment income in 2001 is expected to be flat and will be affected by increased claims payments and the dividends paid to the Corporation to fund shareholder dividends and to service the Corporation's debt. The life companies' pretax investment income was $1,175.2 million, $1,120.1 million and $1,041.0 million in 2000, 1999 and 1998, respectively. The growth in all years was due primarily to the higher invested assets base related to the growth of funds held under deposit contracts. 43 12 Consolidated pretax realized gains from security investments totaled $139.5 million, $82.6 million and $94.2 million in 2000, 1999 and 1998, respectively. The increase in realized gains in 2000 is mainly due to realized gains on approximately $300 million of planned equity securities sales out of the property and casualty insurance companies investment portfolio in the third quarter. The proceeds from these equity securities sales were reinvested in taxable fixed-income securities. These sales resulted in increased realized gains from equity securities in 2000 as compared with 1999 and 1998. Additional information on realized gains can be found in Note 2 on page 58. 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 write-downs were $35.7 million, $0.6 million and $0.4 million in 2000, 1999 and 1998, respectively. Nearly all of these write-downs were on fixed maturities held by the life insurance companies. The increase in write-downs in 2000 was due to deteriorating credit situations of several fixed-maturity issuers, particularly in the retail and auto parts supplier industries. Additional write-downs in 2001 may be made if the slow-down in these and other sectors continues. See additional discussion of high yield bonds below. SAFECO's property and casualty investment portfolio totaled $8.3 billion at market value at December 31, 2000, compared with $8.2 billion at December 31, 1999. The investment philosophy for the property and casualty portfolio is to emphasize investment yield without sacrificing investment quality, and to provide for liquidity and diversification. Fixed-income securities comprised 79% of this portfolio while equity securities comprised 21% (see table on page 45). The property and casualty fixed-income portfolio, which totaled $6.3 billion at market value at December 31, 2000, is currently comprised of 46% tax-exempt and 54% taxable investments. The portfolio composition was 51% tax-exempt and 49% taxable at December 31, 1999. The property and casualty companies have been investing new money primarily in taxable bonds and shifting holdings from tax-exempts to taxables to maximize the portfolio's after-tax return in view of the higher level of underwriting losses in 2000 and 1999, and the resulting alternative minimum tax. The effective tax rate on investment income was 21%, 16% and 14% in 2000, 1999 and 1998, respectively, reflecting the shift to a higher level of holdings of taxable bonds. The effective tax rate is expected to increase further in 2001. The quality of the property and casualty companies' fixed-income portfolio is detailed in the following table:
PERCENT AT RATING DECEMBER 31, 2000 - - - - - - -------------------------------------------------------------------------------- AAA 50% AA 19 A 20 BBB 9 BB or lower 2 ----- Total 100% =====
SAFECO's life investment portfolio totaled $15.5 billion at market value at December 31, 2000. Fixed-income securities, all of which are taxable, comprised 93% of this investment portfolio at December 31, 2000. The investment philosophy for this portfolio is to emphasize investment yield without sacrificing investment quality, and to provide for liquidity and diversification. SAFECO also matches the projected cash inflows of this portfolio with the projected cash outflows of the liabilities of the various product lines within the life operations. Effective October 1, 2000, the entire held-to-maturity fixed maturities investment portfolio, with a market value of $2.8 billion, was reclassified to available-for-sale. This reclassification was made to provide additional investment flexibility in managing the bond portfolio and resulted in an increase in other comprehensive income of $41 million in the fourth quarter. All of SAFECO's fixed-income securities are now carried at market. The quality of the life companies' fixed-income portfolio is detailed in the following table:
PERCENT AT RATING DECEMBER 31, 2000 - - - - - - -------------------------------------------------------------------------------- AAA 33% AA 10 A 30 BBB 24 BB or lower 3 ----- Total 100% =====
This portfolio contains $436.7 million (at market value) of securities rated below investment-grade quality. These securities represent approximately 3% of the total $15.5 billion life investment portfolio at market value at December 31, 2000. On a consolidated basis, below investment-grade securities with a market value of $589.2 million were held at December 31, 2000. (The related amortized cost amount is $723.6 million or 123% of the market value.) These securities represent approximately 3% of total consolidated securities investments at market value at December 31, 2000. SAFECO's consolidated investment in "exotic" securities and high-risk derivatives was less than 1% of SAFECO's total investments at both December 31, 2000 and 1999. SAFECO generally does not enter into financial instruments for speculative purposes. 44 13 SAFECO's consolidated investment in mortgage-backed securities of $4.5 billion at market value at December 31, 2000 consists mainly of residential collateralized mortgage obligations (CMO's), pass-throughs and commercial loan-backed mortgage obligations (CMBS). The life insurance companies' portfolio contains virtually all of these securities. Approximately 87% of the mortgage-backed securities are government/agency-backed or AAA-rated at December 31, 2000. SAFECO has intentionally limited its investment in riskier, more volatile CMO's and CMBS (principal only, inverse floaters, etc.) to less than 1% of total mortgage-backed securities at December 31, 2000. The Corporation has an investment portfolio of securities that totaled $142.2 million at market value at December 31, 2000, compared with $123.5 million at December 31, 1999. The majority of these securities are preferred stocks and U.S. Treasuries. SAFECO's consolidated investment portfolio also includes $823.0 million of mortgage loan investments at December 31, 2000, representing approximately 3% of total investments. The majority of these loans are held by the life insurance 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 31% of the total in the state of California. Individual loans generally do not exceed $10 million. Less than 1% of the loans were non-performing at both December 31, 2000 and 1999. The allowance for mortgage loan losses was $10.8 million at both December 31, 2000 and 1999. The table below summarizes SAFECO's consolidated securities investment portfolio at December 31, 2000. The market value exceeded amortized cost on fixed income and equity securities by $1.4 billion at December 31, 2000 and $0.6 billion at December 31, 1999.
AMORTIZED CARRYING MARKET DECEMBER 31, 2000 COST VALUE VALUE - - - - - - -------------------------------------------------------------------------------- (In Millions) Property and Casualty: Fixed Income - Taxable $ 3,372.5 $ 3,419.4 $ 3,419.4 Fixed Income - Non-taxable 2,636.0 2,928.0 2,928.0 Equity Securities 768.8 1,694.9 1,694.9 Life: Fixed Income - Taxable 14,299.2 14,402.9 14,402.9 Equity Securities 24.6 26.2 26.2 SAFECO Corporation: Fixed Income - Taxable 58.4 60.5 60.5 Equity Securities 54.8 62.6 62.6 Other 49.7 51.1 51.1 Short-Term Investments 182.3 182.3 182.3 ----------------------------------------- Total $21,446.3 $22,827.9 $22,827.9 =========================================
45 14 MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS The first two columns of the following table under each year show the financial statement carrying values and related current estimated fair values of certain of SAFECO's financial instruments as of December 31, 2000 and 1999. The third column shows the effect on current estimated fair values assuming a 100 basis point increase in market interest rates and a 10% decline in equity prices ("sensitivity analysis").
2000 1999 -------------------------------------- -------------------------------------- ESTIMATED ESTIMATED ESTIMATED FAIR VALUE ESTIMATED FAIR VALUE FAIR VALUE AT AT ADJUSTED FAIR VALUE AT ADJUSTED CURRENT MARKET RATES AT CURRENT MARKET RATES CARRYING MARKET (SENSITIVITY CARRYING MARKET (SENSITIVITY DECEMBER 31 VALUE RATES/PRICES ANALYSIS) VALUE RATES/PRICES ANALYSIS) - - - - - - ------------------------------------------------------------------------------------------------------------------------------ (In Millions) Interest Rate Risk: Financial Assets: Fixed Maturities: Available-for-Sale $ 20,830.2 $ 20,830.2 $ 19,331.0 $ 16,830.7 $ 16,830.7 $ 15,740.0 Held-to-Maturity -- -- -- 2,733.3 2,772.1 2,528.0 Mortgage Loans 823.0 792.0 749.0 770.4 742.0 704.0 Commercial Loans 1,135.9 1,100.0 1,080.0 978.3 907.0 886.0 Financial Liabilities: Funds Held under Deposit Contracts 14,085.7 13,977.0 13,457.0 13,762.9 13,495.0 13,021.0 Commercial Paper 349.8 349.8 349.8 508.8 508.8 508.8 Credit Company Borrowings 1,154.7 1,155.0 1,155.0 1,323.1 1,323.0 1,323.0 7.875% Notes Due 2003 300.0 305.0 299.0 -- -- -- 7.875% Notes Due 2005 200.0 203.0 196.0 200.0 201.0 193.0 6.875% Notes Due 2007 200.0 193.0 184.0 200.0 191.0 180.0 Other Debt 80.7 80.0 80.0 84.2 85.0 84.0 Capital Securities 843.0 700.0 635.0 842.5 854.0 761.0 Equity Price Risk: Marketable Equity Securities 1,815.4 1,815.4 1,634.0 2,004.7 2,004.7 1,804.0
Market risk means the potential loss from adverse changes in market prices and interest rates. In addition to market risk, SAFECO is exposed to other risks, including the credit risk related to its financial instruments and the underlying insurance risk related to its core business. The sensitivity analysis above summarizes only the exposure to market risk. SAFECO manages its market risk by matching the projected cash inflows of assets with the projected cash outflows of liabilities of its investment and financial products (e.g., annuities, retirement services products). For all of its financial assets and liabilities, SAFECO seeks to maintain reasonable average durations, consistent with the maximization of income without sacrificing investment quality and providing for liquidity and diversification. SAFECO uses certain derivative financial instruments to increase its matching of cash flows. For example, interest rate swaps are used to convert debt liabilities with variable rates to fixed rates to better match the fixed-rate assets the debt supports. In addition, S&P 500 call option contracts and futures are purchased to hedge the liability of SAFECO Life's EIA product. In general, derivatives are used for hedging purposes rather than speculation. The estimated fair values at current market rates for financial instruments subject to interest rate risk in the table above are the same as those disclosed in Note 7 on page 67 to the consolidated financial statements. The estimated fair values at the adjusted market rates (assuming a 100 basis point increase in market interest rates) are calculated using discounted cash flow analysis and duration modeling, where appropriate. The estimated values do not consider the effect that changing interest rates could have on prepayment activity (e.g., CMO's and annuities). Estimated fair values for derivatives are not presented, as the amounts are not material. This sensitivity analysis provides only a limited, point-in-time view of the market risk sensitivity of certain of SAFECO's financial instruments. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in the sensitivity analysis. The sensitivity analysis is further limited as it does not consider any actions SAFECO could take 46 15 in response to actual and/or anticipated changes in interest rates and equity prices. As allowed under the guidance for these disclosures, certain financial instruments (e.g., lease receivables) are not required to be included in the sensitivity analysis. In addition, certain non-financial instruments (e.g., insurance liabilities and real estate) are excluded from the sensitivity analysis. Accordingly, any aggregation of the estimated fair value amounts or adjusted fair value amounts would not represent the underlying fair value of net equity. FORWARD-LOOKING STATEMENTS Statements made in this Management's Discussion and Analysis that relate to anticipated financial performance, business prospects and plans, regulatory developments and similar matters may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Statements in this report that are not historical information are forward-looking. Such statements are subject to certain risks and uncertainties that may cause the operations, performance, development and results of SAFECO's business to differ materially from those suggested by the forward-looking statements. The risks and uncertainties include: > SAFECO's ability to obtain rate increases and non-renew underpriced insurance accounts; > realization of growth and business retention estimates; > achievement of SAFECO's premium targets and profitability; > changes in competition and pricing environments; > achievement of SAFECO's expense reduction goals; > the occurrence of significant natural disasters, including earthquakes; > weather conditions, including the severity and frequency of storms, hurricanes, snowfalls, hail and winter conditions; > changes in the nature of the property and casualty book of business; > driving patterns; > fluctuations in interest rates; > availability of bank credit facilities; > performance of financial markets; > court decisions and trends in litigation; > rating agency actions; > legislative and regulatory developments; > the adequacy of loss reserves; > the availability and pricing of reinsurance; > the development of major Year 2000-related claims or liabilities; and > general economic and market conditions. In particular, because insurance rates in some jurisdictions are subject to regulatory review and approval, SAFECO's achievement of rate increases may occur in amounts and on a time schedule different than planned, which may affect the Corporation's efforts to restore earnings in the property and casualty lines. NEW ACCOUNTING STANDARDS See discussion of new accounting standards in Note 1 on page 57. DIVIDENDS SAFECO has paid cash dividends continuously since 1933. Common stock dividends paid to shareholders were $1.48 per share in 2000 compared with $1.44 in 1999 and $1.34 in 1998. 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 as well as dividend restrictions on its significant insurance subsidiaries as described in Note 11 on page 70. Given the deterioration of earnings over the last two years, the Board of Directors on February 7, 2001 reduced the dividend 50% by declaring a dividend of $0.185 per share payable April 23, 2001. NUMBER OF SHAREHOLDERS There were approximately 3,700 common shareholders of record at December 31, 2000. ANNUAL REPORT ON FORM 10-K SAFECO files an annual report on Form 10-K with the SEC in compliance with the regulations of the SEC. Any SAFECO shareholder may obtain Form 10-K for the year ended December 31, 2000, 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 47 16 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 consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States 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 consolidated 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 consolidated financial statements for the years ended December 31, 2000, 1999 and 1998 have been audited by Ernst & Young LLP, independent auditors. Their audits were made in accordance with auditing standards generally accepted in the United States and included a review of the system of internal accounting controls to the extent necessary to express an opinion on the consolidated 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 accounting policies and financial reporting. The management of SAFECO believes that as of December 31, 2000, its system of internal control is adequate to accomplish the objectives discussed herein. /s/ ROD A. PIERSON Rod A. Pierson Senior Vice President and Chief Financial Officer REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS Board of Directors and Shareholders of SAFECO Corporation: We have audited the accompanying consolidated balance sheets of SAFECO Corporation and its subsidiaries (the Corporation) as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. 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 consolidated financial position of SAFECO Corporation and its subsidiaries as of December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. As described in Note 1 to the financial statements, SAFECO Corporation and its subsidiaries adopted certain new accounting standards as required by the Financial Accounting Standards Board. /s/ ERNST & YOUNG LLP Seattle, Washington February 9, 2001 48 17 STATEMENTS OF CONSOLIDATED INCOME SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ----------------------------------------------------------------------------------------------- (In Millions Except Per Share Amounts) REVENUES Insurance: Property and Casualty Earned Premiums $4,563.4 $4,382.9 $4,208.3 Life Premiums and Other Revenues 502.7 360.9 353.4 ------------------------------------ Total 5,066.1 4,743.8 4,561.7 Real Estate (Note 1) - - 77.9 Credit 143.3 115.1 98.6 Asset Management 42.9 44.3 39.7 Other 99.4 111.1 60.7 Net Investment Income (Note 2) 1,627.2 1,585.1 1,518.9 Realized Investment Gain (Note 2) 139.5 117.7 94.6 ------------------------------------ Total 7,118.4 6,717.1 6,452.1 ------------------------------------ EXPENSES Losses, Adjustment Expense and Policy Benefits 4,987.6 4,504.0 4,108.7 Commissions 793.6 794.9 784.7 Personnel Costs 497.1 463.6 438.7 Interest 173.1 141.0 159.5 Goodwill Amortization 60.5 55.8 53.5 Other 449.1 452.2 448.8 Write-Off of Deferred Acquisition Costs (Note 1) - - 46.8 Amortization of Deferred Policy Acquisition Costs 834.2 840.1 784.1 Deferral of Policy Acquisition Costs (835.4) (866.8) (835.5) ------------------------------------ Total 6,959.8 6,384.8 5,989.3 ------------------------------------ Income Before Income Taxes 158.6 332.3 462.8 ------------------------------------ Provision (Benefit) for Income Taxes (Note 13): Current 41.3 71.0 104.6 Deferred (42.1) (35.7) (38.6) ------------------------------------ Total (0.8) 35.3 66.0 ------------------------------------ Income Before Distributions on Capital Securities 159.4 297.0 396.8 Distributions on Capital Securities, Net of Tax (Note 3) (44.8) (44.8) (44.9) ------------------------------------ Net Income $ 114.6 $ 252.2 $ 351.9 ==================================== Net Income Per Share of Common Stock (Note 8): Diluted $ .90 $ 1.90 $ 2.51 ==================================== Basic $ .90 $ 1.90 $ 2.52 ====================================
See Notes to Consolidated Financial Statements on pages 55 through 79. 49 18 CONSOLIDATED BALANCE SHEETS SAFECO Corporation and Subsidiaries
DECEMBER 31 2000 1999 - - - - - - ---------------------------------------------------------------------------------------- (In Millions) ASSETS Investments (Note 2): Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: $20,388.1; $17,258.9) $20,830.2 $16,830.7 Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: $ -; $2,772.1) - 2,733.3 Marketable Equity Securities, at Market Value (Cost: $875.9; $972.5) 1,815.4 2,004.7 Mortgage Loans 823.0 770.4 Other Investment Assets 160.3 215.9 Short-Term Investments 182.3 376.0 ----------------------- Total Investments 23,811.2 22,931.0 Cash 196.2 112.3 Accrued Investment Income 333.1 328.1 Finance Receivables (Less unearned finance charges and allowance for doubtful accounts: $119.4; $118.2) 1,617.7 1,460.6 Premiums and Other Service Fees Receivable 1,063.0 1,058.3 Other Notes and Accounts Receivable 37.6 147.2 Deferred Income Tax Recoverable - 105.3 Reinsurance Recoverables (Note 5) 461.7 384.8 Deferred Policy Acquisition Costs 605.4 598.8 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $241.5; $235.7) 440.4 344.8 Goodwill (At cost less accumulated amortization: $202.8; $142.5) 1,307.4 1,354.9 Other Assets 362.7 343.4 Separate Account Assets 1,275.1 1,403.2 ----------------------- Total $31,511.5 $30,572.7 =======================
See Notes to Consolidated Financial Statements on pages 55 through 79. 50 19 CONSOLIDATED BALANCE SHEETS SAFECO Corporation and Subsidiaries
DECEMBER 31 2000 1999 - - - - - - ---------------------------------------------------------------------------------------- (In Millions) LIABILITIES AND SHAREHOLDERS' EQUITY Losses and Loss Adjustment Expense (Note 4) $ 4,686.9 $ 4,416.4 Life Policy Liabilities 342.1 281.5 Unearned Premiums 1,836.5 1,853.1 Funds Held Under Deposit Contracts 14,085.7 13,762.9 Debt (Note 3): Commercial Paper 349.8 508.8 Credit Company Borrowings 1,154.7 1,323.1 7.875% Medium-Term Notes Due 2003 300.0 - 7.875% Notes Due 2005 200.0 200.0 6.875% Notes Due 2007 200.0 200.0 Other 80.7 84.2 Other Liabilities 1,308.5 1,396.8 Income Taxes (Note 13): Current 29.1 6.1 Deferred (Includes tax on unrealized appreciation of investment securities: $478.7; $207.7) 123.6 - Separate Account Liabilities 1,275.1 1,403.2 ----------------------- Total Liabilities 25,972.7 25,436.1 ----------------------- Commitments and Contingencies (Note 6) Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation ("Capital Securities") (Note 3) 843.0 842.5 ----------------------- Preferred Stock, No Par Value: Shares Authorized: 10 Shares Issued and Outstanding: None Common Stock, No Par Value (Notes 8 and 9): Shares Authorized: 300 Shares Reserved for Options: 7.1; 7.3 834.5 841.7 Shares Issued and Outstanding: 127.6; 128.9 Retained Earnings (Note 11) 2,966.4 3,062.7 Total Accumulated Other Comprehensive Income: Unrealized Appreciation of Investment Securities, Net of Tax (Note 2) 894.9 389.7 ----------------------- Total Shareholders' Equity 4,695.8 4,294.1 ----------------------- Total $31,511.5 $30,572.7 =======================
See Notes to Consolidated Financial Statements on pages 55 through 79. 51 20 STATEMENTS OF CONSOLIDATED CASH FLOWS SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------- (In Millions) OPERATING ACTIVITIES Insurance Premiums Received $ 4,890.2 $ 4,636.8 $ 4,488.2 Dividends and Interest Received 1,676.1 1,571.2 1,506.0 Other Operating Receipts 225.0 247.2 251.1 Insurance Claims and Policy Benefits Paid (4,156.5) (3,706.2) (3,596.1) Underwriting, Acquisition and Insurance Operating Costs Paid (1,652.8) (1,604.8) (1,530.1) Interest Paid and Distributions on Capital Securities (202.4) (210.6) (237.5) Other Operating Costs Paid (126.7) (128.6) (138.2) Income Taxes Refunded (Paid) 5.7 (42.0) (85.8) ------------------------------------- Net Cash Provided by Operating Activities 658.6 763.0 657.6 ------------------------------------- INVESTING ACTIVITIES Purchases of: Fixed Maturities Available-for-Sale (3,604.0) (5,422.1) (3,602.2) Fixed Maturities Held-to-Maturity (2.2) (0.9) (1.7) Equities (372.6) (231.9) (169.7) Other Investments (362.0) (460.6) (218.9) Maturities of Fixed Maturities Available-for-Sale 972.2 1,174.0 1,110.9 Maturities of Fixed Maturities Held-to-Maturity 8.7 13.3 7.3 Sales of: Fixed Maturities Available-for-Sale 2,265.4 3,715.4 2,021.6 Fixed Maturities Held-to-Maturity (Note 2) 0.1 6.3 18.2 Equities 661.7 298.1 233.1 Other Investments 412.2 830.5 159.2 Net Decrease (Increase) in Short-Term Investments 281.4 (163.7) (92.9) Finance Receivables Originated or Acquired (684.9) (916.8) (629.2) Principal Payments Received on Finance Receivables 536.0 644.6 420.3 Other (97.2) (101.0) (221.7) ------------------------------------- Net Cash Provided by (Used in) Investing Activities 14.8 (614.8) (965.7) ------------------------------------- FINANCING ACTIVITIES Funds Received Under Deposit Contracts 1,266.0 1,849.5 1,241.9 Return of Funds Held Under Deposit Contracts (1,603.1) (1,077.3) (1,116.0) Proceeds from Notes and Mortgage Borrowings 300.0 - 20.0 Repayment of Notes and Mortgage Borrowings (19.3) (138.1) (61.8) Net Proceeds from (Repayment of) Short-Term Borrowings (308.3) (184.8) 386.4 Common Stock Reacquired (30.4) (303.2) (236.8) Dividends Paid to Shareholders (189.4) (192.2) (187.5) Other (5.0) (64.7) (54.6) ------------------------------------- Net Cash Used in Financing Activities (589.5) (110.8) (8.4) ------------------------------------- Net Increase (Decrease) in Cash 83.9 37.4 (316.5) Cash at the Beginning of Year 112.3 74.9 391.4 ------------------------------------- Cash at the End of Year $ 196.2 $ 112.3 $ 74.9 =====================================
See Notes to Consolidated Financial Statements on pages 55 through 79. 52 21 STATEMENTS OF CONSOLIDATED CASH FLOWS -- RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------ (In Millions) Net Income $ 114.6 $ 252.2 $ 351.9 -------------------------------------------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (139.5) (117.7) (94.6) Amortization and Depreciation 144.1 149.9 156.9 Amortization of Fixed Maturity Investments (41.6) (46.3) (41.6) Deferred Income Tax Benefit (42.1) (35.7) (38.6) Interest Expense on Deposit Contracts 485.4 583.3 584.9 Other Adjustments (3.1) (2.9) 0.1 Changes in: Losses and Loss Adjustment Expense 270.5 153.7 (89.5) Life Policy Liabilities 60.6 4.7 1.0 Unearned Premiums (16.6) 102.2 37.2 Accrued Current Income Taxes 23.0 3.6 (6.8) Accrued Interest on Accrual Bonds (45.9) (45.4) (50.4) Accrued Investment Income (5.0) (4.9) 13.8 Deferred Policy Acquisition Costs (6.6) (28.9) 11.1 Other Assets and Liabilities (139.2) (204.8) (177.8) -------------------------------------------- Total Adjustments 544.0 510.8 305.7 -------------------------------------------- Net Cash Provided by Operating Activities $ 658.6 $ 763.0 $ 657.6 ============================================
See Notes to Consolidated Financial Statements on pages 55 through 79. 53 22 STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - --------------------------------------------------------------------------------------------------------------------- (In Millions) Common Stock (Notes 8 and 9): Balance at the Beginning of Year $ 841.7 $ 885.0 $ 909.3 Stock Issued for Options and Rights 1.5 5.2 7.8 Common Stock Reacquired (8.8) (49.1) (33.4) Other 0.1 0.6 1.3 ---------------------------------------- Balance at the End of Year 834.5 841.7 885.0 ---------------------------------------- Retained Earnings (Note 11): Balance at the Beginning of Year 3,062.7 3,257.2 3,299.1 Net Income 114.6 252.2 351.9 Amortization of Underwriting Compensation on Capital Securities (0.4) (0.4) (0.4) Dividends Declared (188.9) (192.2) (190.0) Common Stock Reacquired (21.6) (254.1) (203.4) ---------------------------------------- Balance at the End of Year 2,966.4 3,062.7 3,257.2 ---------------------------------------- Unrealized Appreciation of Investment Securities, Net of Tax (Note 2): Balance at the Beginning of Year 389.7 1,433.6 1,253.3 Change in Unrealized Appreciation 505.2 (1,043.9) 180.3 ---------------------------------------- Balance at the End of Year 894.9 389.7 1,433.6 ---------------------------------------- Shareholders' Equity $4,695.8 $4,294.1 $5,575.8 ========================================
See Notes to Consolidated Financial Statements on pages 55 through 79. STATEMENTS OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) SAFECO Corporation and Subsidiaries
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - -------------------------------------------------------------------------------------------------------- (In Millions) Net Income $ 114.6 $ 252.2 $ 351.9 ---------------------------------------- Other Comprehensive Income (Loss), Net of Tax (Note 2): Unrealized Appreciation (Depreciation) of Investment Securities Arising During the Period*+ 595.6 (985.6) 239.7 Less Reclassification Adjustment for Realized Gain Included in Net Income++ (90.4) (58.3) (59.4) ---------------------------------------- Other Comprehensive Income (Loss) 505.2 (1,043.9) 180.3 ---------------------------------------- Comprehensive Income (Loss) $ 619.8 $ (791.7) $ 532.2 ========================================
* Net of related tax of $321.1, ($531.8) and $129.2, respectively. + Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. (Note 1) ++ Net of related tax of $49.1, $30.6 and $31.3, respectively. See Notes to Consolidated Financial Statements on pages 55 through 79. 54 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (All dollar amounts are in millions, except share data, unless otherwise stated.) NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES SAFECO Corporation (the Corporation) is a Washington corporation that owns operating subsidiaries in 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 insurance. Products are marketed primarily through independent agents. Approximately 33% 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 commercial lending and leasing (SAFECO Credit), investment management and insurance agency and financial services distribution operations. In February 1998, SAFECO decided to sell its real estate subsidiary, SAFECO Properties, Inc., to focus on its core insurance and financial services businesses. The majority of SAFECO Properties' assets were sold for $570 in a series of closings during the first half of 1999. Realized gains of $35 were recognized in 1999. At December 31, 2000, investment real estate held by SAFECO Properties totaled $48, less than 1% of SAFECO's consolidated investments. Since SAFECO Properties' operations are not material to the consolidated financial statements, they have not been reclassified as discontinued operations. In the Statements of Consolidated Income, 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 2000 and 1999, these revenues totaled $20.5 and $39.3 and expenses totaled $16.7 and $32.1, with income before realized gain and income taxes of $3.8 and $7.2, respectively. BASIS OF REPORTING The financial statements have been prepared in conformity with accounting principles generally accepted in the United States and include amounts based on the best estimates and judgments of management. The financial statements include SAFECO Corporation and its subsidiaries. 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 2000 classifications. ACCOUNTING FOR PREMIUMS Property and casualty insurance premiums are included in income as earned over the terms of the respective policies. The unearned portion is determined using a daily pro rata basis and is reflected as a liability for unearned premiums, before the effect of reinsurance. See Note 5 for more information on reinsurance. Life insurance premiums for traditional individual life policies are reported as income when due from the policyholder. These policies, which include whole life and guaranteed renewable term policies, are long-duration contracts. Group life and health policy revenue is recognized when earned, over the life of the policy. The unearned premiums are reflected as liabilities on the balance sheet. Group life and health policies are short-duration contracts that include provisions allowing SAFECO to adjust the premiums for the group or cancel the group contract. Funds received under retirement services deposit contracts, annuity contracts and universal life policies were $1,266.0, $1,849.5 and $1,241.9 in 2000, 1999 and 1998, respectively. These amounts are recorded as liabilities rather than premium income when received. Revenues for universal life products consist of front-end loads and mortality and expense charges assessed against individual policyholder account balances. Front-end loads are recognized as income when earned, over the life of the policy. Mortality and expense charges are recognized as income when earned, as amounts are assessed against individual policyholder account balances ratably over the contract year. Administration fees are recognized as income as services are provided and amounts are assessed against policyholder account balances. INVESTMENTS Effective October 1, 2000, SAFECO reclassified its fixed maturities held-to-maturity investment portfolio to available-for-sale. This reclassification was made to provide additional investment flexibility and resulted in an increase in other comprehensive income of $41 in the fourth quarter. Fixed maturities are classified as available-for-sale and are carried at market value, with changes in unrealized appreciation and depreciation recorded directly to shareholders' equity (comprehensive income), net of applicable income taxes and deferred policy acquisition costs valuation allowance. The amount of unrealized appreciation and depreciation, net of tax, recognized in accumulated other comprehensive income in shareholders' equity was $894.9, $389.7 and $1,433.6 at December 31, 2000, 1999 and 1998, respectively. Of these amounts, the accumulated effect of unrealized appreciation and depreciation on deferred acquisition costs and present value of future profits was $(.3), $(.1) and $(31.9) at December 31, 2000, 1999 and 1998, respectively. Policyholder liabilities are not adjusted for unrealized appreciation and depreciation. 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 appreciation and depreciation recorded directly to shareholders' equity (comprehensive income), net of applicable income taxes. 55 24 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) When the collectibility of income for certain investments is considered doubtful, it is 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 statements 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 was $10.8 at both December 31, 2000 and 1999. Short-term investments are carried at cost, which approximates market value. SAFECO engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial collateral is required at a rate of 102% of the market value of a loaned security. The collateral is deposited by the borrower with a lending agent and retained and invested by the lending agent to generate additional income according to SAFECO's guidelines. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities fluctuates. PROPERTY, EQUIPMENT AND DEPRECIATION Property and equipment are classified as other investments or as land, buildings and equipment for company use, and are carried at cost less accumulated depreciation. SAFECO provides depreciation on buildings for company use, furniture and automobiles at various rates based on estimated useful lives using straight-line and accelerated methods. Depreciation expense was $55, $54 and $51 for December 2000, 1999 and 1998, respectively. DEFERRED POLICY ACQUISITION COSTS Property and casualty insurance acquisition costs, consisting of commissions and certain other underwriting expenses, that 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 insurance acquisition costs, consisting of commissions and certain other underwriting expenses, that vary with and are primarily related to the production of new business are deferred. Acquisition costs for deferred annuity contracts, 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. The unamortized balance of deferred policy acquisition costs is adjusted for the impact on estimated future gross profits as if net unrealized appreciation and depreciation on securities had been realized at the balance sheet date. The impact of this adjustment, net of tax, is included in accumulated other comprehensive income (loss) in shareholders' equity. A $46.8 write-off was taken in the third quarter of 1998 related to two blocks of annuity business, the equity-indexed annuity and a declared rate fixed annuity product, and to universal life business. These three lines were adversely impacted by market conditions that negatively affected the projected recoverability of deferred acquisition costs. 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. GOODWILL Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets. Goodwill is amortized on a straight-line basis over periods, not exceeding 30 years, that correspond with the benefits estimated to be derived from the acquisitions. SAFECO evaluates the carrying amount of goodwill using various analyses, including undiscounted cash flows. If impairment is indicated, goodwill is written down. The amount of impairment is typically determined using discounted cash flow analyses. Amortization periods are revised if it is estimated that the remaining period of benefit of the goodwill has changed. 56 25 LOSSES AND LOSS ADJUSTMENT EXPENSE Unpaid losses and loss adjustment expense (LAE) represent the estimated liability for claims reported plus losses incurred but not yet reported and the related estimated LAE. The liability for losses and LAE 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 LAE is adequate. These estimates are continually reviewed and adjusted as necessary; such adjustments are reflected in current operations. See Note 4 for more information on loss and LAE 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. Estimated recoverable amounts deducted from the liability for losses and LAE net of reinsurance were $231.7 and $222.3 at December 31, 2000 and 1999, respectively. The property and casualty insurance companies' liability for unpaid losses and LAE 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. For structured settlement annuities, future benefits are either fully guaranteed or are contingent on the survivorship of the annuitant. Contingent future benefits are discounted with best-estimate mortality assumptions, which include provisions for ongoing mortality improvement. Guaranteed and contingent future benefits are discounted at interest rates that grade from an average of 8.10% to ultimate rates that average 7.26%. 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. These liabilities are contingent upon the death of the insured while the policy is inforce. Estimates of future benefits are based upon assumptions of mortality and policy persistency that include provisions for adverse deviation from best estimates. Mortality assumptions are derived from both company-specific and industry statistics. Future benefits are discounted at interest rates that vary by year of issue and average 6.5%. NET INCOME PER DILUTED SHARE OF COMMON STOCK Net income per diluted share of common stock is based on the weighted-average number of diluted common shares outstanding during each year. SAFECO's only potentially dilutive instruments are stock options outstanding, and dilution from these is not significant. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board (FASB) issued Statement 131, "Disclosures about Segments of an Enterprise and Related Information," in 1997. Statement 131 changes the way information about business segments is reported in annual financial statements and requires the reporting of selected segment information in interim reports. This statement was effective for financial statements for periods beginning after December 15, 1997. SAFECO provided the disclosures beginning with its 1998 Annual Report and, as allowed under Statement 131, for its interim financial statements beginning in 1999. See Note 15 for additional information. The statement has no effect on net income. The FASB issued Statement 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS 133") in June 1998. The Statement amends or supersedes several previous FASB statements and requires the recognition of all derivatives (including certain derivative instruments imbedded in other contracts) as either assets or liabilities in the statement of financial position and measuring those instruments at fair value. The accounting for changes in such fair values depends on the use of the derivative. In June 1999, the FASB issued Statement 137, which allows entities to defer adoption of Statement 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which addresses a limited number of implementation issues arising from SFAS 133. SAFECO will adopt SFAS 133 effective January 1, 2001. SAFECO estimates that the cumulative after-tax effect of adopting SFAS 133, as amended, will decrease net income by approximately $4 and increase other comprehensive income by approximately $2. 57 26 NOTE 2: INVESTMENTS Investment income is comprised of:
2000 1999 1998 - - - - - - --------------------------------------------------------------------------------------------------- Interest: Fixed Maturities $1,476.9 $1,429.3 $1,385.2 Mortgage Loans 65.6 57.6 46.2 Short-Term Investments 25.1 17.6 16.2 Dividends: Marketable Equity Securities 44.8 52.0 48.8 Redeemable Preferred Stock 24.3 21.1 20.7 Other Investment Income 1.8 14.5 9.0 -------------------------------------- Total Investment Income 1,638.5 1,592.1 1,526.1 Investment Expenses 11.3 7.0 7.2 -------------------------------------- Net Investment Income $1,627.2 $1,585.1 $1,518.9 ======================================
The carrying value of investments in fixed maturities and mortgage loans that have not produced income for the last twelve months is less than 1% of the total of such investments at December 31, 2000. The following analysis summarizes realized gains and losses on investments:
2000 1999 1998 - - - - - - --------------------------------------------------------------------------------------------------- Realized Investment Gains (Losses): Fixed Maturities $ (51.1) $ (0.2) $ 45.8 Marketable Equity Securities 190.6 82.8 48.3 Investment Real Estate -- 35.1 0.5 -------------------------------------- Realized Investment Gain Before Income Taxes 139.5 117.7 94.6 Applicable Income Taxes (49.1) (41.2) (32.7) -------------------------------------- Realized Investment Gain $ 90.4 $ 76.5 $ 61.9 ======================================
The proceeds from sales of investment securities and related gains and losses for 2000 are as follows:*
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE MATURITY SECURITIES - - - - - - ---------------------------------------------------------------------------------------------------- Proceeds from Sales $2,265.4 $ 0.1 $ 661.7 ====================================== Gross Realized Gains on Sales $ 47.5 $ -- $ 268.5 Gross Realized Losses on Sales (82.1) -- (77.9) -------------------------------------- Realized Gains (Losses) on Sales (34.6) -- 190.6 Write-downs (35.7) -- -- Other, Including Gains on Calls and Redemptions 19.2 -- -- -------------------------------------- Total Realized Gain (Loss) $ (51.1) $ -- $ 190.6 ======================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. The 2000 sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer's creditworthiness. 58 27 The proceeds from sales of investment securities and related gains and losses for 1999 are as follows:
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE MATURITY SECURITIES - - - - - - ---------------------------------------------------------------------------------------------------- Proceeds from Sales $3,715.4 $ 6.3 $ 298.1 ====================================== Gross Realized Gains on Sales $ 90.0 $ -- $ 111.0 Gross Realized Losses on Sales (85.8) (6.3) (28.2) -------------------------------------- Realized Gains (Losses) on Sales 4.2 (6.3) 82.8 Write-downs (0.6) -- -- Other, Including Gains on Calls and Redemptions 2.5 -- -- -------------------------------------- Total Realized Gain (Loss) $ 6.1 $ (6.3) $ 82.8 ======================================
The 1999 sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer's creditworthiness. The proceeds from sales of investment securities and related gains and losses for 1998 are as follows:
FIXED FIXED MATURITIES MATURITIES MARKETABLE AVAILABLE- HELD-TO- EQUITY FOR-SALE MATURITY SECURITIES - - - - - - ---------------------------------------------------------------------------------------------------- Proceeds from Sales $2,021.6 $ 18.2 $ 233.1 ====================================== Gross Realized Gains on Sales $ 42.9 $ 3.4 $ 58.8 Gross Realized Losses on Sales (5.2) -- (10.5) -------------------------------------- Realized Gains on Sales 37.7 3.4 48.3 Write-downs (0.4) -- -- Other, Including Gains on Calls and Redemptions 5.1 -- -- -------------------------------------- Total Realized Gain $ 42.4 $ 3.4 $ 48.3 ======================================
The 1998 sales of fixed maturities held-to-maturity were made due to evidence of significant deterioration in the bond issuer's creditworthiness. The following analysis summarizes the changes in unrealized appreciation and depreciation on investment securities (includes fixed maturities held-to-maturity and available-for-sale):*
2000 1999 1998 - - - - - - --------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Unrealized Appreciation of Investment Securities: Fixed Maturities $ 831.5 $(2,103.6) $ 206.5 Marketable Equity Securities (92.7) (51.6) 173.2 Applicable Income Taxes (258.6) 754.3 (132.9) -------------------------------------- Net Change in Unrealized Appreciation $ 480.2 $(1,400.9) $ 246.8 ======================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. 59 28 NOTE 2: INVESTMENTS (CONTINUED) The following is a summary of fixed maturities and marketable equity securities at December 31, 2000:*
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN (LOSS) VALUE - - - - - - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ....... $ 1,582.5 $ 178.4 $ (4.7) $ 173.7 $ 1,756.2 Obligations of States and Political Subdivisions ........ 2,916.6 315.9 (12.0) 303.9 3,220.5 Debt Securities Issued by Foreign Governments ........... 303.6 52.2 (1.2) 51.0 354.6 Corporate Securities .................................... 11,240.5 261.7 (477.4) (215.7) 11,024.8 Mortgage-Backed Securities .............................. 4,344.9 149.6 (20.4) 129.2 4,474.1 ---------------------------------------------------------------- Total Fixed Maturities ............................. 20,388.1 957.8 (515.7) 442.1 20,830.2 Marketable Equity Securities ............................ 875.9 996.3 (56.8) 939.5 1,815.4 ---------------------------------------------------------------- Total ......................................... $21,264.0 $ 1,954.1 $ (572.5) 1,381.6 $22,645.6 ==================================== ========= Deferred Policy Acquisition Costs Valuation Allowance and Other ...................... (11.7) Applicable Income Taxes ................................. (475.0) --------- Unrealized Appreciation of Investment Securities, Net of Tax, Included in Shareholders' Equity (Total Accumulated Other Comprehensive Income) .. $ 894.9 =========
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. The following is a summary of fixed maturities and marketable equity securities classified as available-for-sale at December 31, 1999:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN (LOSS) VALUE - - - - - - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ....... $ 1,352.2 $ 33.3 $ (27.6) $ 5.7 $ 1,357.9 Obligations of States and Political Subdivisions ........ 3,160.0 153.7 (160.2) (6.5) 3,153.5 Debt Securities Issued by Foreign Governments ........... 183.3 15.3 (3.3) 12.0 195.3 Corporate Securities .................................... 8,949.1 54.6 (426.2) (371.6) 8,577.5 Mortgage-Backed Securities .............................. 3,614.3 34.0 (101.8) (67.8) 3,546.5 ---------------------------------------------------------------- Total Fixed Maturities Classified as Available-for-Sale ............................. 17,258.9 290.9 (719.1) (428.2) 16,830.7 Marketable Equity Securities ............................ 972.5 1,100.9 (68.7) 1,032.2 2,004.7 ---------------------------------------------------------------- Total ......................................... $18,231.4 $ 1,391.8 $ (787.8) 604.0 $18,835.4 ==================================== ========= Deferred Policy Acquisition Costs Valuation Allowance and Other ...................... (10.6) Applicable Income Taxes ................................. (203.7) --------- Unrealized Appreciation of Investment Securities, Net of Tax, Included in Shareholders' Equity (Total Accumulated Other Comprehensive Income) .. $ 389.7 =========
60 29 The following is a summary of fixed maturities classified as held-to-maturity at December 31, 1999:
GROSS GROSS NET ESTIMATED AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES GAIN (LOSS) VALUE - - - - - - ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ....... $ 282.5 $ 27.6 $ (0.7) $ 26.9 $ 309.4 Obligations of States and Political Subdivisions ........ 140.3 1.7 (6.0) (4.3) 136.0 Debt Securities Issued by Foreign Governments ........... 150.3 19.0 -- 19.0 169.3 Corporate Securities .................................... 1,839.7 61.9 (69.4) (7.5) 1,832.2 Mortgage-Backed Securities .............................. 320.5 10.9 (6.2) 4.7 325.2 ---------------------------------------------------------------- Total Fixed Maturities Classified as Held-to-Maturity ............................. $ 2,733.3 $ 121.1 $ (82.3) $ 38.8 $ 2,772.1 ================================================================
The amortized cost and estimated market value of fixed maturities at December 31, 2000, by contractual years-to-maturity, are presented below.* Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties.
ESTIMATED AMORTIZED MARKET COST VALUE - - - - - - ---------------------------------------------------------------------------------------------------------- Due in One Year or Less ............................................. $ 593.9 $ 594.4 Due After One Year Through Five Years ............................... 3,666.1 3,658.6 Due After Five Years Through Ten Years .............................. 2,520.5 2,551.4 Due After Ten Years ................................................. 9,262.7 9,551.7 Mortgage-Backed Securities .......................................... 4,344.9 4,474.1 --------------------------------- Total Fixed Maturities ......................................... $20,388.1 $20,830.2 =================================
* Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. The following table summarizes SAFECO's consolidated allowance for credit losses related to its mortgage loan investments and finance receivables:
2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------- Allowance at Beginning of Year ................... $34.4 $33.0 $32.5 Provision for Credit Losses ...................... 2.4 2.4 2.4 Loans Charged Off as Uncollectible ............... (1.6) (1.3) (2.3) Recoveries ....................................... 0.1 0.3 0.4 ----------------------------------- Allowance at End of Year .................... $35.3 $34.4 $33.0 ===================================
These allowances relate to SAFECO Credit's finance receivables ($1,617.7 at December 31, 2000) and to mortgage loan investments ($823.0 at December 31, 2000), the majority of which are held by SAFECO Life Insurance Company. The allowances include specific reserves, as well as general reserve amounts. The total investment in impaired loans before any reserve for losses is $0.4 at December 31, 2000. 61 30 NOTE 3: DEBT AND CAPITAL SECURITIES DEBT At December 31, 2000, the Corporation had commercial paper borrowings outstanding of $349.8. The maximum amount of commercial paper outstanding during the year was $636.9 and the average amount outstanding during the year was $544.1. The weighted-average interest rate for the year was 6.7%. The majority of this commercial paper relates to funding for SAFECO's 1997 acquisition of American States Financial Corporation. At December 31, 2000, SAFECO Credit had short-term borrowings of $1,143.4 through commercial paper and $11.3 of medium-term notes. The repayment of each of these borrowings is guaranteed by the Corporation. The maximum amount of commercial paper outstanding during the year was $1,325.2 and the average amount outstanding during the year was $1,105.3. The weighted-average interest rate for the year was 6.7%. The medium-term notes have maturities from October 2001 to December 2001 and a weighted-average interest rate of 8.3% at December 31, 2000. On March 16, 2000, SAFECO Corporation issued $300 of medium-term notes at 7.875% which mature in March 2003. The proceeds of the notes were subsequently loaned to SAFECO Credit to reduce its commercial paper debt. SAFECO Corporation has a bank credit facility available for $1,050.0. It is a five-year facility originated in 1997 that extends to 2002. The Corporation also has backup bank credit facilities for $315.0. These are 364-day commitments which expire at various dates throughout the year. These facilities are available for general corporate purposes, including support of the Corporation's and SAFECO Credit's commercial paper debt. There are no borrowings outstanding under these facilities, nor were there any borrowings outstanding as of December 31, 2000 or 1999. The Corporation pays a fee to have these facilities available and does not maintain deposits as compensating balances. These facilities have certain covenants that include requiring SAFECO to maintain a specified minimum level of shareholders' equity and a maximum debt-to-capitalization ratio. As of December 31, 2000, SAFECO was in compliance with all such covenants. The Corporation and SAFECO Credit enter into interest rate swap agreements to reduce the impact of changes in interest rates. The interest rate swap agreements provide only for the exchange of interest on the notional amount at the stated rates, with no multiplier or leverage. There were no swap terminations in 2000, 1999 or 1998. The net interest accrued under these agreements is recorded as an adjustment to interest expense. The Corporation has two interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace variable rates with fixed rates of 5.9% at December 31, 2000 and 1999. The two swaps were entered into in December 1997 and mature in December 2002 and December 2007. The Corporation also has interest rate swap agreements outstanding with notional amounts totaling $300.0 that replace fixed rates with variable rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in March 2000 and mature in March 2003. SAFECO Credit had interest rate swap agreements outstanding with notional amounts totaling $328.6 at December 31, 2000 and $457.0 at December 31, 1999 that replace variable-rate debt with fixed rates with a weighted average of 5.9% for both years. Maturities of agreements at December 31, 2000 range from January 2001 to June 2007. Real estate mortgages are collateralized by the related investment real estate buildings and property. 62 31 The total amount, current portions, interest rates and maturities of debt at December 31 are as follows:
2000 1999 ------------------------ ------------------------ TOTAL CURRENT TOTAL CURRENT - - - - - - ------------------------------------------------------------------------------------------------------------------------ SAFECO Corporation Commercial Paper Interest Rates at December 31: Range: 7.0% to 7.9%; 6.0% to 6.6% Weighted Average: 7.1%; 6.3% $ 349.8 $ 349.8 $ 508.8 $ 508.8 SAFECO Credit Borrowings Interest Rates at December 31: Range: 7.0% to 8.3%; 6.1% to 8.3% Weighted Average: 7.4%; 6.4% 1,154.7 1,154.7 1,323.1 1,311.9 SAFECO Corporation, 7.875% Medium-Term Notes Due 2003 300.0 -- -- -- SAFECO Corporation, 7.875% Notes Due 2005 200.0 -- 200.0 -- SAFECO Corporation, 6.875% Notes Due 2007 200.0 -- 200.0 -- Other Debt: SAFECO Corporation, Medium-Term Notes Due 2002 and 2003; Weighted-Average Interest Rates at December 31: 7.1%; 7.1% 50.0 -- 50.0 -- Unsecured Notes and Loans Payable; Weighted-Average Interest Rates at December 31: 6.7%; 6.8% 21.5 6.3 22.1 5.4 Real Estate Mortgages Payable; Weighted-Average Interest Rates at December 31: 8.3%; 8.3% 9.2 0.2 12.1 0.3 -------------------------------------------------------- Total Debt (Excluding Capital Securities) $2,285.2 $1,511.0 $2,316.1 $1,826.4 ========================================================
Aggregate annual principal installments payable under these obligations for each of the five years subsequent to 2000 are as follows: 2001 - $1,511.0; 2002 - $48.4; 2003 - $313.0; 2004 - $4.6; and 2005 - $200.8. CAPITAL SECURITIES On July 15, 1997, SAFECO Capital Trust I ("Capital Trust"), a consolidated wholly owned subsidiary of SAFECO Corporation, issued $850.0 of 8.072% Corporation-Obligated, Mandatorily Redeemable Capital Securities (the "Capital Securities"). In connection with Capital Trust's issuance of the Capital Securities and the related purchase by the Corporation of all of Capital Trust's common securities (the "Common Securities"), SAFECO Corporation issued to Capital Trust $876.3 principal amount of its 8.072% Junior Subordinated Deferrable Interest Debentures, due July 15, 2037 (the "Subordinated Debentures"). The sole assets of Capital Trust are and will be the Subordinated Debentures and any interest due thereon. The interest and other payment dates on the Subordinated Debentures correspond to the distribution and other payment dates on the Capital Securities and the Common Securities. Distributions on the Capital Securities and Common Securities are cumulative and payable semi-annually in arrears. The Subordinated Debentures and the related income effects are eliminated in SAFECO's financial statements. For federal income tax purposes, the Subordinated Debentures are classified as indebtedness. Accordingly, interest on the Subordinated Debentures is deductible at the federal statutory rate of 35%. The Capital Securities are mandatorily redeemable on July 15, 2037, the same date the Subordinated Debentures are due. The Capital Securities may be redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007, at a price of 104% of principal, with the call premium graded down to zero in 2017. The Corporation's obligations under the Subordinated Debentures and related agreements, taken together, constitute a full and unconditional guarantee of payments due on the Capital Securities. The Corporation has the right, at any time, to defer payments of interest on the Subordinated Debentures for up to five years. Consequently, the distributions on the Capital Securities and Common Securities would be deferred (though such distributions would continue to accrue with interest since interest would accrue on the Subordinated Debentures during any such extended interest payment period). In no case may the deferral of payments and distributions extend beyond the stated maturity dates of the respective securities. The Corporation cannot pay dividends on its common stock during such deferments. 63 32 NOTE 4: PROPERTY AND CASUALTY LOSS RESERVES Unpaid losses and loss adjustment expense (LAE) represent the estimated liability (reserves) for claims reported plus losses incurred but not reported (IBNR) and the related LAE. Although considerable variability is inherent in such estimates, management believes that the liability for unpaid losses and LAE 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 insurance companies' reserves for losses and LAE. The year-end reserve amounts above are net of related reinsurance recoverables of $343.6, $309.5 and $253.6 for 2000, 1999 and 1998, respectively.
2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------ Loss and LAE Reserves at Beginning of Year $4,069.1 $3,966.3 $4,081.9 ---------------------------------- Incurred Loss and LAE for Claims Occurring in the Current Year 3,621.7 3,353.0 3,163.2 Increase (Decrease) in Estimated Loss and LAE for Claims Occurring in Prior Years 148.3 78.8 (100.0) ---------------------------------- Total Incurred Loss and LAE 3,770.0 3,431.8 3,063.2 ---------------------------------- Loss and LAE Payments for Claims Occurring During: Current Year 2,059.3 1,926.4 1,836.2 Prior Years 1,510.7 1,402.6 1,342.6 ---------------------------------- Total Loss and LAE Payments 3,570.0 3,329.0 3,178.8 ---------------------------------- Total Loss and LAE Reserves at End of Year $4,269.1 $4,069.1 $3,966.3 ==================================
The amounts above do not include SAFECO's life subsidiaries' loss reserves for accident and health claims, as these amounts are not material in relation to consolidated loss and LAE reserves. In addition, the majority of these claims are incurred and paid in full within a one-year period. Operations in 2000 were charged $148.3 from increases in estimated loss and loss and adjustment expense for claims occurring in prior years. This increase was due to adverse development within commercial operations in the workers' compensation ($50.9), general liability ($44.4), commercial auto ($23.5) and in other ($29.5) lines of business as the costs of settling claims has increased. Workers' compensation development of $50.9 is due to continued adverse development of prior reported claims as well as IBNR reserve additions to improve future adequacy. General liability development of $44.4 is due primarily to continued adverse development of construction defect claims related to the SAFECO Business Insurance operation. Commercial auto development of $23.5 is due to higher-than-expected loss costs in commercial operations on prior reported claims. Operations in 1999 were charged $78.8 from increases in estimated loss and LAE for claims occurring in prior years, primarily in the construction defect, asbestos and environmental, and workers' compensation lines. For both construction defect and asbestos and environmental, increased reserve estimates resulted from higher-than-expected reported claims in 1999. The increased reserve estimates for workers' compensation resulted from SAFECO's re-evaluation of loss exposures on claims related to larger commercial insureds and to an upturn in medical costs and less favorable workers' compensation legislation. Operations in 1998 benefited $100.0 from a decrease in estimated loss and LAE for claims occurring in prior years. This decrease related primarily to American States' operations. The claims departments of the two companies were combined in 1998. The unified claims department implemented training and reserving procedures resulting in lower claims settlements and reduced reserves on prior years' American States losses. The reductions were in both personal and commercial auto, workers' compensation and general liability. The property and casualty insurance companies' loss and LAE reserves include reserves for environmental, asbestos and other toxic claims. These reserves are approximately 8% of total property and casualty reserves for losses and LAE at both December 31, 2000 and December 31, 1999. The reserves include estimates for both reported and IBNR losses and related adjustment expense, including legal costs. In view of changes in environmental regulations and evolving case law that affect the development of loss reserves, the process of estimating loss reserves for environmental, asbestos and other toxic claims results in imprecise estimates. Quantitative loss reserving techniques need to be supplemented by subjective considerations and managerial judgment. Because 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 difficult, the reserves established for these claims at December 31, 2000 are believed to be adequate based on the known facts and current law. 64 33 NOTE 5: REINSURANCE SAFECO's insurance subsidiaries protect themselves from excessive losses by reinsuring on treaty and facultative bases. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Although the reinsurer is liable to SAFECO to the extent of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as the direct insurer on all risks reinsured. SAFECO evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. To SAFECO's knowledge, none of its reinsurers is experiencing financial difficulties. SAFECO's business is not substantially dependent upon any single reinsurance contract. 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. Reinsurance recoverables are comprised of the following amounts at December 31:
2000 1999 - - - - - - ----------------------------------------------------------------------------------------- Property and Casualty Insurance: Reinsurance Recoverables on: Unpaid Loss and LAE Reserves $ 343.6 $ 309.5 Paid Losses and LAE 18.9 22.8 Life Insurance: Reinsurance Recoverables on: Policy and Contract Claim Reserves 3.2 0.9 Paid Claims 2.9 2.3 Life Policy Liabilities 93.1 49.3 ------------------- Total Reinsurance Recoverables $ 461.7 $ 384.8 ===================
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 sheets and totaled $60.9 and $54.5 at December 31, 2000 and 1999, respectively. The effects of reinsurance are netted against the insurance revenue and loss amounts in the Statements of Income. These amounts are as follows:
2000 1999 1998 - - - - - - --------------------------------------------------------------------------------------------------------------- Property and Casualty Insurance Ceded Earned Premiums $ 163.0 $ 164.4 $ 188.5 Life Insurance Ceded Earned Premiums 32.7 25.8 21.3 --------------------------------------- Total Ceded Earned Premiums $ 195.7 $ 190.2 $ 209.8 ======================================= Property and Casualty Insurance Ceded Losses and LAE $ 105.3 $ 147.3 $ 98.4 Life Insurance Ceded Policy Benefits 35.6 11.8 12.2 --------------------------------------- Total Ceded Losses, LAE and Policy Benefits $ 140.9 $ 159.1 $ 110.6 =======================================
Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above. Reinsurance premiums assumed are insignificant. 65 34 NOTE 6: COMMITMENTS AND CONTINGENCIES SAFECO leases office space, commercial real estate and certain equipment under leases which expire at various dates through 2012. These leases are accounted for as operating leases. Minimum rental commitments for leases in effect at December 31, 2000 are as follows:
YEAR PAYABLE MINIMUM RENTALS - - - - - - ------------------------------------------------------------------------------------ 2001 $ 44.7 2002 40.9 2003 38.3 2004 32.0 2005 29.6 2006 and Thereafter 129.5 ------ Total $315.0 ======
In addition, SAFECO has commitments under real estate construction and development contracts that total approximately $70 at December 31, 2000. Nearly all these commitments are expected to be paid in 2001. The amount of rent charged to operations was $28.7, $25.0 and $20.1 for 2000, 1999 and 1998, respectively. 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 were determined using market prices for securities traded in the public marketplace. For securities not actively traded, fair values have been estimated using values obtained from independent pricing services or quoted market prices of comparable instruments. 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 values of investment contracts (funds held under deposit contracts) with defined maturities are 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 values are estimated to be the present surrender value. The carrying values of the Corporation's and SAFECO Credit's commercial paper, as well as other debts that have variable interest rates, are reasonable estimates of fair value. For SAFECO Credit and other debts that have fixed interest rates, fair values are estimated by discounting the projected cash flows using the rate at which similar borrowings could currently be made. The fair values of the 7.875% Medium-Term notes, the 7.875% notes, the 6.875% notes and the Capital Securities are estimated based on quotes from broker/dealers who make markets in similar securities. Other insurance-related financial instruments are exempt from fair value disclosure requirements. 66 35 Estimated fair values of financial instruments at December 31 are as follows:
2000 1999 ---------------------------- --------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE - - - - - - ---------------------------------------------------------------------------------------------------------------- Financial Assets: Fixed Maturities Available-for-Sale $20,830.2 $20,830.2 $16,830.7 $16,830.7 Fixed Maturities Held-to-Maturity -- -- 2,733.3 2,772.1 Marketable Equity Securities 1,815.4 1,815.4 2,004.7 2,004.7 Mortgage Loans 823.0 792.0 770.4 742.0 Commercial Loans 1,135.9 1,100.0 978.3 907.0 Financial Liabilities: Funds Held Under Deposit Contracts 14,085.7 13,977.0 13,762.9 13,495.0 Commercial Paper 349.8 349.8 508.8 508.8 Credit Company Borrowings 1,154.7 1,155.0 1,323.1 1,323.0 7.875% Medium-Term Notes Due 2003 300.0 305.0 -- -- 7.875% Notes Due 2005 200.0 203.0 200.0 201.0 6.875% Notes Due 2007 200.0 193.0 200.0 191.0 Other Debt 80.7 80.0 84.2 85.0 Capital Securities 843.0 700.0 842.5 854.0
DERIVATIVE FINANCIAL INSTRUMENTS SAFECO's consolidated investments in mortgage-backed securities of $4,474.1 at market value at December 31, 2000 ($3,871.7 at December 31, 1999) are primarily residential collateralized mortgage obligations (CMOs), pass-throughs and commercial loan-backed mortgage obligations (CMBS). CMOs and CMBS, while technically defined as derivative instruments, are exempt from derivative disclosure requirements. SAFECO's investment in CMOs and CMBS comprised of the riskier, more volatile type (e.g., principal only, inverse floaters, etc.) has been intentionally limited to only a small amount--less than 1% of total mortgage-backed securities at both December 31, 2000 and 1999. SAFECO Credit provides loan and lease commitments at both variable and fixed rates of interest. Fixed-rate loan and lease commitments outstanding were approximately $35 and $170 at December 31, 2000 and 1999, respectively, 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, 2000. 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 or less, the estimated fair values of these commitments are not material. In 1997, SAFECO Life Insurance Company (SAFECO Life) introduced an equity-indexed annuity product that credits the policyholder based on a percentage of the gain in the S&P 500 Index. Sales of this product were suspended in the fourth quarter of 1998. A hedging program with the objective to hedge the exposure to changes in the S&P 500 market risk has been established. The program consists of buying and writing S&P 500 options, buying Treasury interest rate futures and trading S&P 500 futures and swaps. Realized gains and losses on both options and futures are recognized upon termination of the options and future contracts. SAFECO records futures and options at market value with unrealized gains and losses recorded in current income. 67 36 NOTE 7: FINANCIAL INSTRUMENTS (CONTINUED) There was no balance in assets for call options at December 31, 2000. The balance in assets for call options was $2.0 at December 31, 1999. The balance in other investments for futures contracts at December 31, 2000 and 1999 was $0.4 and $8.3, respectively. At December 31, 2000, there was no liability for written S&P 500 call options. At December 31, 1999, SAFECO had a $5.8 liability for written S&P 500 call options. In general, SAFECO does not enter into derivative financial instruments for speculative purposes. SAFECO's involvement in other investment-type derivatives is intentionally of a limited nature. Such derivatives include currency-linked bonds and equity-linked bonds. Individually, and in the aggregate, these derivatives are not material and have not been disclosed. The Corporation and SAFECO Credit enter into interest rate swap agreements to reduce the impact of changes in interest rates. The interest rate swap agreements provide only for the exchange of interest on the notional amount at the stated rates, with no multiplier or leverage. The Corporation has two interest rate swap agreements outstanding with notional amounts totaling $300.0 ($150.0 each) that replace variable rates with fixed rates of 5.9% at December 31, 2000 and 1999. The two swaps were entered into in December 1997 and mature in December 2002 and December 2007. The Corporation also has interest rate swap agreements outstanding with notional amounts totaling $300.0 that replace fixed rates with variable rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were entered into in March 2000 and mature in March 2003. SAFECO Credit had interest rate swap agreements outstanding with notional amounts totaling $328.6 at December 31, 2000 and $457.0 at December 31, 1999 that replace variable-rate debt with fixed rates with a weighted average of 5.9% for both years. Maturities of agreements at December 31, 2000 range from January 2001 to June 2007. There were no swap terminations in 2000, 1999 or 1998. 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 debt-related interest rate swaps was not material at December 31, 2000 or 1999; thus, no additional disclosures have been made. NOTE 8: COMMON STOCK Changes in common stock outstanding for the last three years are as follows:
2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------------------------------------- Number of Shares Outstanding at the Beginning of Year 128,925,000 136,262,170 141,151,093 Shares Reacquired (1,346,581) (7,549,610) (5,184,360) Shares Issued for Stock Options and Rights 70,668 212,440 295,437 ------------------------------------------------------- Number of Shares Outstanding at the End of Year 127,649,087 128,925,000 136,262,170 =======================================================
The Washington Business Corporation Act provides that reacquired shares of a Washington corporation revert to the status of authorized but unissued shares. Accordingly, the Corporation has reduced capital stock and retained earnings to reflect the repurchase of shares, and does not show treasury stock as a separate reduction. 68 37 NOTE 9: STOCK INCENTIVE PLAN The SAFECO Long-Term Incentive Plan of 1997 (the "Plan") provides for the issuance of up to 6,000,000 shares of the Corporation's 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. SAFECO continues to apply Accounting Principles Board (APB) Opinion 25 in accounting for its stock options, as allowed under FASB Statement 123. Under APB 25, because the exercise price of SAFECO's employee stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense is recognized. If compensation expense had been recorded applying Statement 123, SAFECO's net income would have been reduced by $3.8, $3.5 and $2.9 in 2000, 1999 and 1998, respectively. Basic and diluted earnings per share would also have been reduced by $0.03, $0.03 and $0.02, respectively. The weighted-average fair value (at grant date) of options granted in 2000, 1999 and 1998 was $6, $9 and $12 per share, respectively. The fair values were estimated using the Black-Scholes option pricing model, with the following assumptions for 2000: risk-free interest rate of 5.0%, dividend yield of 3.5%, volatility factor of 33% and expected life of 7 years. Changes in stock options for the three years ended December 31, 2000 are as follows:
OPTIONS OUTSTANDING ---------------------------- WEIGHTED- AVERAGE PRICE SHARES PER SHARE - - - - - - ---------------------------------------------------------------------------- Balance December 31, 1997 1,905,454 $30.07 Granted 365,400 47.85 Exercised (289,387) 26.05 Canceled (34,150) 38.96 --------------------------- Balance December 31, 1998 1,947,317 33.85 Granted 697,200 34.72 Exercised (208,954) 23.43 Canceled (37,625) 41.73 --------------------------- Balance December 31,1999 2,397,938 34.89 Granted 726,000 20.47 Exercised (61,009) 20.11 Canceled (145,250) 33.14 --------------------------- Balance December 31, 2000 2,917,679 $31.69 ===========================
The following table summarizes information about stock options outstanding December 31, 2000.
OPTIONS OUTSTANDING -------------------------------------- REMAINING WEIGHTED- CONTRACTUAL AVERAGE PRICE RANGE OF EXERCISE PRICES SHARES LIFE (YEARS) PER SHARE - - - - - - -------------------------------------------------------------------------- $ 19.38 - 27.18 983,553 7.0 $21.55 28.00 - 36.38 958,285 5.6 30.29 37.94 - 51.38 975,841 6.5 43.30 -------------------------------------- Total 2,917,679 6.4 $31.69 ======================================
OPTIONS EXERCISABLE ------------------------- WEIGHTED- AVERAGE PRICE RANGE OF EXERCISE PRICES SHARES PER SHARE - - - - - - -------------------------------------------------------------------------- $ 19.38 - 27.18 291,553 $24.07 28.00 - 36.38 666,060 30.88 37.94 - 51.38 599,345 43.42 ------------------------- Total 1,556,958 $34.43 =========================
Restricted stock rights provide for the holder to receive a stated number of share rights if the holder remains employed for the stated number of years. Performance stock rights provide for the holder to receive a stated number of share rights if the holder attains certain specified performance goals within a stated performance cycle. Performance goals may include net income, return on equity, stock price appreciation and/or other criteria. Matured restricted stock rights and earned performance stock rights are issued in stock and/or paid in cash at the option of the holder based on the fair market value of SAFECO's stock on the issue/payment date. During 2000, 1999 and 1998, ($0.6), $0.8, and $2.9, respectively, were charged to operations for the compensation element of restricted and performance stock rights. These expense amounts are determined based on variable plan accounting under APB 25. Restricted stock rights compensation expense is charged to operations over the vesting period and performance stock rights compensation expense is charged to operations when it is probable the performance goal will be achieved. 69 38 NOTE 9: STOCK INCENTIVE PLAN (CONTINUED) Changes in restricted and performance stock rights for the three years ended December 31, 2000 are as follows:
SHARE RIGHTS - - - - - - ---------------------------------------------------------------------------- Balance December 31, 1997 154,643 Awarded 89,990 Matured (43,891) Canceled (12,359) ------- Balance December 31, 1998 188,383 Awarded 114,725 Matured (39,534) Canceled (1,250) ------- Balance December 31, 1999 262,324 Awarded 130,242 Matured (41,581) Canceled (95,041) ------- Balance December 31, 2000 255,944 =======
At December 31, 2000 there were 3,935,609 shares of common stock reserved for future options and rights. NOTE 10: STATUTORY INFORMATION The Corporation's 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 accounting principles generally accepted in the United States 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 2000 1999 1998 - - - - - - --------------------------------------------------------------------- Property and Casualty Insurance $155.2 $296.6 $497.4 Life Insurance 85.6 114.0 92.5
STATUTORY SHAREHOLDER'S EQUITY DECEMBER 31 2000 1999 - - - - - - --------------------------------------------------------------------- Property and Casualty Insurance $2,286.8 $2,724.7 Life Insurance 706.0 709.4
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, 2000. The NAIC revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual will be effective January 1, 2001. The domiciliary states of the Corporation's insurance subsidiaries have adopted the provisions of the revised manual. The revised manual has changed, to some extent, prescribed statutory accounting practices and will result in changes to the accounting practices that the Corporation's insurance subsidiaries use to prepare their statutory-basis financial statements. SAFECO estimates the adoption impact of statutory codification will increase statutory surplus of the property and casualty insurance companies by approximately $200 and the life insurance companies by approximately $45. Nearly all of the impact of adopting this new requirement is related to the recording of a deferred tax asset that was not recorded in the statutory-basis financial statements under the prior statutory accounting guidance. NOTE 11: DIVIDEND RESTRICTIONS The Corporation's insurance subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay in any consecutive twelve-month period without regulatory approval. Generally, dividends may be paid out of earned surplus without approval with 30 days' prior written notice within certain limits. The limits are generally based on the greater of 10% of the prior year statutory surplus or prior year statutory net income. Dividends in excess of the prescribed limits or the subsidiary's earned surplus require formal state insurance commission approval. Based on statutory limits as of December 31, 2000, the Corporation is able to receive approximately $550.0 in dividends from its insurance and other subsidiaries in 2001 without obtaining prior regulatory approval. 70 39 NOTE 12: EMPLOYEE BENEFIT PLANS The Corporation sponsors profit-sharing bonus, defined contribution, and defined benefit plans covering substantially all employees. The defined contribution plans include 401(k) savings plans and profit-sharing retirement plans (PSRP). SAFECO's Cash Balance Plan (CBP) is a defined benefit plan covering substantially all employees and provides benefits for each year of service after 1988, based on the employee's compensation level plus a stipulated rate of return on the benefit balance. The American States defined benefit plan was merged with the Cash Balance Plan effective January 1, 1999. It is SAFECO's policy to fund the Cash Balance Plan on a current basis to the full extent deductible under federal income tax regulations. The following table summarizes the funded status of the defined benefit plans:
DECEMBER 31 2000 1999 - - - - - - ---------------------------------------------------------------------------- Change in Benefit Obligation: Benefit Obligation at Beginning of Year $143.9 $148.5 Service and Interest Costs 16.7 16.4 Amendments and Experience 2.8 (7.6) Benefits Paid (17.5) (13.4) -------------------- Benefit Obligation at End of Year 145.9 143.9 -------------------- Change in Plan Assets: Fair Value of Plan Assets at Beginning of Year 141.2 166.5 Actual Return on Plan Assets 4.2 (0.2) Company Contributions 1.5 7.3 Benefits Paid and Annuities Purchased (17.5) (32.4) -------------------- Fair Value of Plan Assets at End of Year 129.4 141.2 -------------------- Funded Status of Plan (Underfunded) (16.5) (2.7) Unrecognized Net Actuarial Gain (0.6) (11.6) -------------------- Accrued Benefit Cost $(17.1) $(14.3) ====================
Plan assumptions include a discount rate of 7.5%, an expected rate of return on plan assets of 9.0% and a rate of increase in compensation of 6.0% at December 31, 2000. Plan assets consist primarily of listed equity securities, corporate bonds and U.S. government bonds. The cost of the plans discussed above charged to income is as follows:
2000 1999 1998 - - - - - - ---------------------------------------------------------------------------- Defined Contribution-401(k) $15.5 $15.0 $12.5 Defined Contribution-(PSRP) 14.3 14.0 14.6 Defined Benefit-(CBP) 4.4 2.7 11.9 Profit-Sharing Bonus 3.3 0.6 22.7 --------------------------------- Total $37.5 $32.3 $61.7 =================================
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. The following table summarizes other postretirement benefit costs:
DECEMBER 31 2000 1999 1998 - - - - - - ---------------------------------------------------------------------------- Service Cost $ 5.4 $ 4.7 $3.1 Interest Cost 9.9 8.0 6.0 Amortization 1.5 0.8 - --------------------------------- Total $16.8 $13.5 $9.1 =================================
The following table summarizes the funded status of the plan:
DECEMBER 31 2000 1999 - - - - - - ---------------------------------------------------------------------------- Change in Benefit Obligation: Benefit Obligation at Beginning of Year $ 135.0 $ 116.3 Service and Interest Costs 15.3 12.7 Amendments and Experience (2.9) 10.3 Net Benefits Paid (3.9) (4.3) --------------------- Benefit Obligation at End of Year 143.5 135.0 Fair Value of Plan Assets at End of Year 3.2 2.4 --------------------- Funded Status of Plan (Underfunded) (140.3) (132.6) Unrecognized Net Actuarial Loss 18.5 22.1 Unrecognized Prior Service Cost 7.6 8.4 --------------------- Accrued Benefit Cost $(114.2) $(102.1) =====================
The discount rate assumption of 7.5% was used at December 31, 2000 and 1999. The accumulated postretirement benefit obligation at December 31, 2000 was determined using a healthcare cost trend rate of 9.0% for 2001, gradually decreasing to 5.0% in 2005 and remaining at that level thereafter. A 1% point increase (or decrease) in the assumed healthcare cost trend rate for each year would increase (or decrease) the accumulated other postretirement benefit obligation as of December 31, 2000 by $17.4 (or $14.4) and the annual net periodic other postretirement benefit cost for the year then ended by $2.6 (or $2.0). 71 40 NOTE 13: INCOME TAXES SAFECO uses the liability method of accounting for income taxes under which 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:
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ----------------------------------------------------------------------------------------------------- Computed "Expected" Tax Expense $ 55.5 $116.3 $ 162.0 Tax-Exempt Municipal Bond Income (58.2) (85.6) (103.0) Dividends Received Deduction (11.9) (13.3) (12.6) Proration Adjustment 9.0 12.5 14.7 Other 4.8 5.4 4.9 -------------------------------------------- Consolidated Provision (Benefit) for Income Taxes $ (0.8) $ 35.3 $ 66.0 ============================================
The tax effects of temporary differences which give rise to the deferred tax assets and deferred tax liabilities at December 31, 2000, 1999 and 1998 are as follows:
DECEMBER 31 2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- Deferred Tax Assets: Discounting of Loss and Adjustment Expense Reserves $ 254.9 $263.1 $ 265.5 Unearned Premium Liability 127.4 125.3 117.4 Adjustment to Life Policy Liabilities 54.0 67.8 55.9 Capitalization of Life Policy Acquisition Costs 84.9 70.4 54.6 Postretirement Benefits 40.0 35.7 32.8 Nondeductible Accruals 29.1 39.4 46.0 Alternative Minimum Tax Carryforward 43.1 49.0 33.0 Net Operating Loss Carryforward 73.2 4.9 - Other 81.4 68.2 48.4 ---------------------------------------------- Total Deferred Tax Assets 788.0 723.8 653.6 ---------------------------------------------- Deferred Tax Liabilities: Deferred Policy Acquisition Costs 212.1 209.6 199.6 Bond Discount Accrual 35.5 34.3 38.2 Accelerated Depreciation 87.2 84.2 76.1 Unrealized Appreciation of Investment Securities (Net of Deferred Policy Acquisition Costs Valuation Allowance: $0.2; $0.1; $17.2) 478.7 207.7 769.9 Other 98.1 82.7 62.4 ---------------------------------------------- Total Deferred Tax Liabilities 911.6 618.5 1,146.2 ---------------------------------------------- Net Deferred Tax Asset (Liability) $(123.6) $105.3 $ (492.6) ==============================================
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 Sheets:
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------ Deferred Tax Benefit $(42.1) $ (35.7) $(38.6) Net Deferred Tax Assets Acquired in Acquisitions - - (12.9) Deferred Tax Changes Reported in Shareholders' Equity: Increase (Decrease) in Liability Related to Unrealized Appreciation (Depreciation) of Investment Securities, Net of Deferred Policy Acquisition Costs Valuation Allowance 271.0 (562.2) 97.2 ---------------------------------------- Increase (Decrease) in Net Deferred Tax Asset or Liability $228.9 $(597.9) $ 45.7 ========================================
72 41 NOTE 14: INTERIM FINANCIAL INFORMATION (UNAUDITED) - - - - - - --------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ANNUAL - - - - - - -------------------------------------------------------------------------------------------------- Revenues: 2000 $ 1,761.7 $ 1,768.0 $ 1,808.6 $ 1,780.1 $ 7,118.4 1999 1,666.3 1,666.3 1,672.2 1,712.3 6,717.1 1998 1,585.7 1,600.1 1,626.7 1,639.6 6,452.1 Net Income: 2000 $ 29.8 $ 29.1 $ 45.5 $ 10.2 $ 114.6 1999 118.5 73.1 16.1 44.5 252.2 1998 111.6 69.2 74.9* 96.2 351.9 (per share) Net Income: 2000 $ .23 $ .23 $ .36 $ .08 $ .90 1999 .87 .54 .12 .34 1.90 1998 .79 .49 .54* .70 2.51 Dividends Paid: 2000 $ .37 $ .37 $ .37 $ .37 $ 1.48 1999 .35 .35 .37 .37 1.44 1998 .32 .32 .35 .35 1.34 Market Price Range:+ 2000 - High $ 26.56 $ 26.31 $ 27.63 $ 35.69 $ 35.69 - Low 18.56 19.88 20.81 22.94 18.56 1999 - High 43.38 46.44 44.38 30.50 46.44 - Low 37.38 38.69 26.91 22.00 22.00
* Third quarter 1998 net income includes the write-off of Life Company deferred acquisition costs of $46.8 ($30.4 after tax, $0.22 per share). + SAFECO Corporation common stock trades on The Nasdaq Stock Market, Inc. under the symbol SAFC. The price range represents the high and low closing sales prices. 73 42 NOTE 15: SEGMENT DATA
Pretax Underwriting Investment Income Realized Net Income Total Revenues* Gain (Loss) Income (Loss)+ Gain (Loss) (Loss) Assets - - - - - - -------------------------------------------------------------------------------------------------------------------------------- 2000 Property and Casualty Insurance: Personal Lines: Personal Auto $ 1,723.6 $ (123.0) $ 125.3 $ (10.7) $ 45.9 $ 3,146.0 Homeowners 729.8 (116.7) 52.9 (69.9) 21.5 1,382.7 Other Personal 186.7 18.2 16.3 32.1 8.2 419.8 Commercial Lines: SBI++ 1,171.7 (155.3) 145.1 (22.7) 43.6 3,814.5 SAFECO Commercial 683.4 (155.7) 98.5 (64.8) 26.6 2,492.0 Surety 61.6 11.7 4.6 14.1 4.2 138.0 Other 6.6 (1.1) 17.8 16.5 4.4 405.2 --------- --------- --------- --------- --------- --------- Total 4,563.4 $ (521.9) 460.5 (105.4) 154.4 $ 89.5 11,798.2 --------- ========= --------- --------- --------- --------- Life Insurance: Retirement Services 36.8 392.5 30.0 (25.4) 6,169.1 Settlement Annuities 1.2 495.8 26.4 17.5 6,605.7 Group 313.6 1.9 4.3 (3.5) 192.2 Individual 133.8 207.0 24.6 (3.2) 3,615.0 Other 17.3 78.0 72.3 (1.6) 1,101.6 --------- --------- --------- --------- --------- Total 502.7 1,175.2 157.6 (16.2) 91.9 17,683.6 --------- --------- --------- --------- --------- Credit 144.3 19.3 12.8 1,906.3 Asset Management 42.9 12.9 8.5 68.7 Other and Eliminations 98.4 (8.5) (65.3) 1.3 (88.1) 54.7 --------- --------- --------- --------- ---------- --------- Consolidated Totals $ 5,351.7 $ 1,627.2 $ 19.1 $ 139.5 $ 114.6 $31,511.5 ========= ========= ========= ========= ========== ========= 1999 Property and Casualty Insurance: Personal Lines: Personal Auto $ 1,725.6 $ (63.3) $ 131.0 $ 54.0 $ 27.2 $ 3,238.9 Homeowners 708.3 (48.2) 51.9 (2.6) 12.4 1,345.6 Other Personal 177.7 20.6 15.8 34.1 4.6 402.0 Commercial Lines: SBI++ 1,017.6 (183.4) 141.7 (53.0) 22.4 3,705.8 SAFECO Commercial 686.4 (107.6) 97.2 (18.3) 15.7 2,434.6 Surety 59.4 15.2 3.0 17.0 2.4 99.8 Other 7.9 - 21.7 20.6 2.6 486.7 --------- --------- --------- --------- --------- --------- Total 4,382.9 $ (366.7) 462.3 51.8 87.3 $ 172.1 11,713.4 --------- ========= --------- --------- --------- --------- Life Insurance: Retirement Services 32.9 410.9 52.6 (1.0) 7,204.8 Settlement Annuities 1.1 486.6 42.2 (5.9) 6,011.3 Group 193.9 1.9 (19.4) 0.3 104.8 Individual 119.8 144.7 30.1 (1.9) 2,959.7 Other 13.2 76.0 73.1 1.6 929.1 --------- --------- --------- --------- --------- Total 360.9 1,120.1 178.6 (6.9) 112.1 17,209.7 --------- --------- --------- --------- --------- Credit 119.8 22.6 14.5 1,635.9 Asset Management 44.3 13.6 8.9 76.7 Other and Eliminations 106.4 2.7 (52.0) 37.3 (55.4) (63.0) --------- --------- --------- --------- ---------- --------- Consolidated Totals $ 5,014.3 $ 1,585.1 $ 214.6 $ 117.7 $ 252.2 $30,572.7 ========= ========= ========= ========= ========== =========
74 43
PRETAX UNDERWRITING INVESTMENT INCOME REALIZED NET INCOME TOTAL REVENUES* GAIN (LOSS) INCOME (LOSS)+ GAIN (LOSS) (LOSS) ASSETS - - - - - - -------------------------------------------------------------------------------------------------------------------------------- 1998 Property and Casualty Insurance: Personal Lines: Personal Auto $ 1,729.7 $ 11.5 $ 139.5 $ 137.0 $ 30.5 $ 3,594.7 Homeowners 686.7 (56.4) 54.3 (8.2) 13.4 1,456.7 Other Personal 165.2 14.8 16.0 28.6 4.8 430.8 Commercial Lines: SBI++ 911.6 (72.7) 144.2 60.8 23.6 3,838.1 SAFECO Commercial 640.9 (27.9) 98.9 63.6 16.4 2,575.5 Surety 58.5 19.2 3.4 21.3 2.7 109.3 Other 15.7 2.1 23.9 24.7 3.2 564.4 --------- --------- --------- --------- --------- --------- Total 4,208.3 $ (109.4) 480.2 327.8 94.6 $ 372.4 12,569.5 --------- ========= --------- --------- --------- --------- Life Insurance: Retirement Services 25.2 411.7 12.8 4.3 7,195.1 Settlement Annuities 1.5 449.4 30.6 - 5,972.4 Group 203.1 2.7 (14.1) - 90.1 Individual 110.2 98.4 13.9 1.8 1,985.1 Other 13.4 78.8 75.9 12.2 1,110.9 --------- --------- --------- --------- --------- Total 353.4 1,041.0 119.1 18.3 58.1 16,353.6 --------- --------- --------- --------- --------- Credit 109.9 22.7 14.4 1,528.3 Asset Management 39.7 8.5 5.5 67.4 Other and Eliminations 127.3 (2.3) (109.9) (18.3) (98.5) 372.9 --------- --------- --------- --------- --------- --------- Consolidated Totals $ 4,838.6 $ 1,518.9 $ 368.2 $ 94.6 $ 351.9 $30,891.7 ========= ========= ========= ========= ========= =========
* Revenues combined with Investment Income and Realized Gains equal Total Revenue on the Statement of Consolidated Income. + Earnings before realized gains (losses), distributions on capital securities and income taxes. This is a standard industry measurement and is used by management as the key measurement of segment profit or loss. It is presented as a supplement to net income as a measure of profitability. Property and Casualty Insurance Pretax Income amounts include goodwill amortization expense of $44.0, $43.8 and $43.0, respectively. The 1998 Life Insurance amount includes the write-off of $46.8 of deferred acquisition costs. ++ Safeco Business Insurance (SBI), formerly known as American States Business Insurance (ASBI). The operating segments are based on SAFECO's internal reporting structure and how management analyzes the operating results. These segments generally represent groups of related products. The property and casualty operations include four main reportable underwriting segments. The underwriting segments are Personal Lines, Commercial Lines, Surety and Other. Personal Lines is further split into Personal Auto, Homeowners and Other Personal. Commercial Lines is further split into SAFECO Business Insurance (SBI) and SAFECO Commercial. SBI delivers insurance products and services to small-to-medium sized businesses while SAFECO Commercial delivers insurance products and services to medium-to-large complex commercial clients. The life operations include five reportable segments which include Retirement Services, Settlement Annuities, Group, Individual and Other. Credit and Asset Management are distinct operations managed separately from the insurance operations. Other and Eliminations includes corporate investment income, corporate expenses, results of the real estate operations and eliminations, none of which are individually significant. 75 44 NOTE 15: SEGMENT DATA (CONTINUED) STATEMENTS OF COMBINED INCOME Property and Casualty Insurance Companies* Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------------------------------------------- (In Millions) Net Premiums Written $ 4,539.7 $ 4,483.8 $ 4,256.6 Decrease (Increase) in Unearned Premiums 23.7 (100.9) (48.3) ---------- ---------- ---------- Earned Premiums 4,563.4 4,382.9 4,208.3 ---------- ---------- ---------- Losses and Expenses: Losses and Loss Adjustment Expense 3,770.0 3,431.8 3,063.2 Commissions 689.1 714.1 683.4 Personnel Costs 342.5 322.6 303.7 Taxes Other than Payroll and Income Taxes 116.3 123.2 115.0 Dividends to Policyholders 9.5 10.5 12.3 Other Operating Expenses 144.6 164.7 161.2 Amortization of Deferred Policy Acquisition Costs 796.6 793.0 744.9 Deferral of Policy Acquisition Costs (783.3) (810.3) (766.0) ---------- ---------- ---------- Total 5,085.3 4,749.6 4,317.7 ---------- ---------- ---------- Underwriting Loss (521.9) (366.7) (109.4) Net Investment Income (Excluding realized gain) 460.5 462.3 480.2 Goodwill Amortization (44.0) (43.8) (43.0) ---------- ---------- ---------- Income (Loss) Before Realized Gain and Income Taxes+ (105.4) 51.8 327.8 Realized Gain from Security Investments and Company-Owned Real Estate Before Income Taxes 154.4 87.3 94.6 ---------- ---------- ---------- Income Before Income Taxes 49.0 139.1 422.4 Provision (Benefit)for Income Taxes (Including tax provision on realized gain: $54.3; $30.0; $32.4) (40.5) (33.0) 50.0 ---------- ---------- ---------- Net Income $ 89.5 $ 172.1 $ 372.4 ========== ========== ==========
* 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 / SAFECO Insurance Company of Oregon / American States Insurance Company American Economy Insurance Company / American States Preferred Insurance Company / Insurance Company of Illinois American States Insurance Company of Texas / American States Lloyds Insurance Company / F.B. Beattie & Company, Inc. SAFECO Select Insurance Services, Inc. / SAFECO UK, Ltd. / R.F. Bailey, (Underwriting Agencies), Ltd. + Income (Loss) Before Realized Gain and Income Taxes is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability. 76 45 STATEMENTS OF COMBINED INCOME Life Companies* Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------- (In Millions) Premiums and Other Revenue $ 502.7 $ 360.9 $ 353.4 Net Investment Income (Excluding realized gain (loss)) 1,175.2 1,120.1 1,041.0 ---------- ---------- ---------- Total 1,677.9 1,481.0 1,394.4 ---------- ---------- ---------- Benefits and Expenses: Policy Benefits 1,232.2 1,072.2 1,045.5 Commissions 104.5 80.8 101.3 Personnel Costs 85.9 72.2 64.5 Taxes Other than Payroll and Income Taxes 23.5 25.2 14.7 Other Operating Expenses 88.7 61.4 79.6 Amortization of Deferred Policy Acquisition Costs 37.6 47.1 39.2 Deferral of Policy Acquisition Costs (52.1) (56.5) (69.5) ---------- ---------- ---------- Total 1,520.3 1,302.4 1,275.3 ---------- ---------- ---------- Income Before Realized Gain (Loss), Income Taxes and Write-Off of Deferred Acquisition Costs 157.6 178.6 119.1 Write-Off of Deferred Acquisition Costs - - (46.8) ---------- ---------- ---------- Income Before Realized Investment Gain (Loss) and Income Taxes+ 157.6 178.6 72.3 Realized Gain (Loss)from Security Investments Before Income Taxes (16.2) (6.9) 18.3 ---------- ---------- ---------- Income Before Income Taxes 141.4 171.7 90.6 Provision for Income Taxes (Including tax provision (benefit) on realized gain (loss): $(5.7); $(2.3); $6.6) 49.5 59.6 32.5 ---------- ---------- ---------- Net Income $ 91.9 $ 112.1 $ 58.1 ========== ========== ==========
* SAFECO Life Insurance Company / SAFECO National Life Insurance Company / First SAFECO National Life Insurance Company of New York American States Life Insurance Company / SAFECO Administrative Services, Inc. / SAFECO Investment Services, Inc. + Income Before Realized Gain and Income Taxes is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability. 77 46 NOTE 15: SEGMENT DATA (CONTINUED) STATEMENTS OF INCOME SAFECO Credit Company, Inc. Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - ------------------------------------------------------------------------------------------------------------------------ (In Millions) Interest and Finance Charge Revenues: Finance Receivables $ 122.7 $ 101.6 $ 87.0 Affiliates 7.2 4.7 11.3 ---------- ---------- ---------- Total Revenues 129.9 106.3 98.3 Interest Expense 100.9 74.6 67.0 ---------- ---------- ---------- Net Investment Income 29.0 31.7 31.3 Provision for Credit Losses 2.4 2.4 2.4 ---------- ---------- ---------- Net Investment Income After Provision for Credit Losses 26.6 29.3 28.9 Other Revenue 14.4 13.5 11.6 ---------- ---------- ---------- Total 41.0 42.8 40.5 ---------- ---------- ---------- Operating Expenses: Personnel Costs 11.3 10.6 9.1 General and Administrative 10.4 9.6 8.7 ---------- ---------- ---------- Total 21.7 20.2 17.8 ---------- ---------- ---------- Income Before Income Taxes 19.3 22.6 22.7 Provision for Income Taxes 6.5 8.1 8.3 ---------- ---------- ---------- Net Income $ 12.8 $ 14.5 $ 14.4 ========== ========== ==========
78 47 STATEMENTS OF COMBINED INCOME Asset Management Companies* Supplemental Segment Data
YEAR ENDED DECEMBER 31 2000 1999 1998 - - - - - - -------------------------------------------------------------------------------- (In Millions) REVENUES Management and Advisory Fees $27.7 $30.9 $27.8 Transfer Agent Fees 5.2 7.0 5.6 Other 10.0 6.4 6.3 --------------------------- Total 42.9 44.3 39.7 --------------------------- EXPENSES Personnel Costs 8.3 10.4 7.8 Marketing and Shareholder Communication 0.4 0.7 1.9 Other 21.3 19.6 21.5 --------------------------- Total 30.0 30.7 31.2 --------------------------- Income Before Income Taxes 12.9 13.6 8.5 Provision for Income Taxes 4.4 4.7 3.0 --------------------------- Net Income $ 8.5 $ 8.9 $ 5.5 ===========================
* SAFECO Asset Management Company/SAFECO Securities, Inc./SAFECO Services Corporation/SAFECO Trust Company 79 48 SUMMARY OF GROWTH (UNAUDITED)
2000 1999 1998 - - - - - - ----------------------------------------------------------------------------------------------------------- (In Millions Except Per Share Amounts) REVENUES (EXCLUDING REALIZED GAIN) Insurance: Property and Casualty (Gross premiums written) $4,709.1 $4,645.0 $4,441.8 Life 502.7 360.9 353.4 Net Investment Income: Property and Casualty 460.5 462.3 480.2 Life 1,175.2 1,120.1 1,041.0 Other 6.0 2.7 (2.3) Real Estate -- -- 77.9 Credit (Including affiliate loans) 144.3 119.8 109.9 Asset Management 42.9 44.3 39.7 Talbot Financial 78.9 71.9 57.6 Other 20.5 39.2 3.1 ---------------------------------------- Total $7,140.1 $6,866.2 $6,602.3 ======================================== INCOME SUMMARY Income (Loss), Net of Income Taxes, Before Realized Gain:* Property and Casualty $ (10.6) $ 114.8 $ 310.2 Life 102.5 116.7 46.4 Real Estate -- -- 3.4 Credit 12.8 14.5 14.4 Asset Management 8.5 8.9 5.5 Corporate (44.2) (34.4) (45.0) ---------------------------------------- Total 69.0 220.5 334.9 Realized Gain, Net of Income Taxes 90.4 76.5 61.9 ---------------------------------------- Income Before Distributions on Capital Securities 159.4 297.0 396.8 Distributions on Capital Securities, Net of Tax (44.8) (44.8) (44.9) Cumulative Effect of Accounting Changes -- -- -- ---------------------------------------- Net Income $ 114.6 $ 252.2 $ 351.9 ======================================== STATISTICS PER SHARE OF COMMON STOCK+ Net Income - Diluted: Income Before Realized Gain*++ $ .19 $ 1.32 $ 2.07 Realized Gain .71 .58 .44 Cumulative Effect of Accounting Changes -- -- -- Net Income .90 1.90 2.51 Average Number of Shares 127.8 132.8 139.9 Net Income - Basic: Income Before Realized Gain*++ .19 1.32 2.08 Realized Gain .71 .58 .44 Cumulative Effect of Accounting Changes -- -- -- Net Income .90 1.90 2.52 Average Number of Shares 127.8 132.7 139.4 Dividends Paid 1.48 1.44 1.34 Market Price: High 35.69 46.44 55.00 Low 18.56 22.00 39.88 Close 32.88 24.88 42.94 Shareholders' Equity:+++ Book Value 36.79 33.31 40.92 With Securities at Market Value, Net of Tax 36.79 33.50 43.49
* Income Before Realized Gain is a standard industry measurement used by management to analyze income from core operations and is presented to supplement net income as a measure of profitability. + Share amounts are adjusted for stock splits. ++ Net income per share amounts are after distributions on capital securities. +++ Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. 80 49
1997 1996 1995 1994 1993 1992 1991 1990 ------------------------------------------------------------------------------------------------------------------------ $2,987.4 $2,463.5 $2,366.9 $2,278.0 $2,134.5 $1,937.1 $1,830.2 $1,792.8 290.2 265.9 261.6 276.8 306.0 328.5 332.7 312.0 327.0 281.6 291.5 283.5 277.6 280.8 286.1 283.3 916.3 836.7 778.2 706.2 668.2 623.6 557.4 476.2 1.4 (1.6) 5.6 1.9 6.0 (1.4) 3.2 5.3 75.1 79.9 75.0 107.3 78.3 187.2 274.4 254.7 96.2 84.3 71.8 58.2 54.0 51.3 54.4 45.2 26.2 23.2 18.5 15.1 13.2 13.1 10.8 9.0 49.7 38.5 32.1 25.5 -- -- -- -- 0.9 -- -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------ $4,770.4 $4,072.0 $3,901.2 $3,752.5 $3,537.8 $3,420.2 $3,349.2 $3,178.5 ======================================================================================================================== $ 260.2 $ 270.6 $ 256.4 $ 192.7 $ 217.2 $ 187.1 $ 145.4 $ 183.7 97.0 88.8 89.0 85.0 76.9 75.6 79.7 77.6 6.2 8.4 5.9 6.6 6.1 6.0 5.9 6.1 14.1 12.2 8.9 7.4 6.4 6.1 6.4 4.5 4.9 5.1 4.7 4.1 4.3 4.3 3.4 3.0 (16.3) (4.9) (7.5) (7.3) (3.9) (7.6) (3.9) (3.2) ------------------------------------------------------------------------------------------------------------------------ 366.1 380.2 357.4 288.5 307.0 271.5 236.9 271.7 78.7 58.8 41.6 25.9 118.9 39.8 22.7 6.7 ------------------------------------------------------------------------------------------------------------------------ 444.8 439.0 399.0 314.4 425.9 311.3 259.6 278.4 (14.8) -- -- -- -- -- -- -- -- -- -- -- 2.9 -- -- -- ------------------------------------------------------------------------------------------------------------------------ $ 430.0 $ 439.0 $ 399.0 $ 314.4 $ 428.8 $ 311.3 $ 259.6 $ 278.4 ======================================================================================================================== $ 2.71 $ 3.01 $ 2.83 $ 2.28 $ 2.43 $ 2.15 $ 1.87 $ 2.14 .60 .46 .33 .21 .94 .31 .18 .05 -- -- -- -- .02 -- -- -- 3.31 3.47 3.16 2.49 3.39 2.46 2.05 2.19 129.8 126.5 126.4 126.4 126.5 126.5 126.5 126.9 2.72 3.02 2.84 2.29 2.44 2.17 1.89 2.16 .61 .46 .33 .21 .95 .31 .18 .05 -- -- -- -- .02 -- -- -- 3.33 3.48 3.17 2.50 3.41 2.48 2.07 2.21 129.2 126.1 126.0 125.9 125.8 125.6 125.5 126.2 1.22 1.11 1.02 .94 .86 .78 .71 .64 54.47 41.63 37.63 29.81 33.25 29.56 24.38 21.06 36.75 30.88 25.25 23.69 27.00 21.19 15.63 12.69 48.75 39.44 34.50 26.00 27.50 28.63 24.38 16.44 38.69 32.58 31.61 22.47 22.04 19.49 17.70 15.75 40.77 33.52 33.39 21.93 28.47 23.92 21.92 16.57
81 50 SUMMARY OF GROWTH (UNAUDITED)-(CONTINUED) Additional Supplemental Data
2000 1999 1998 - - - - - - ---------------------------------------------------------------------------------------------------------------------- (In Millions Except Ratios) PREMIUMS BY MAJOR CLASSES OF PROPERTY AND CASUALTY INSURANCE Personal Auto $ 1,726.4 $ 1,725.6 $ 1,745.8 Homeowners 756.6 736.5 717.4 Other 229.1 225.6 217.2 ---------- ---------- ---------- Total Personal 2,712.1 2,687.7 2,680.4 SAFECO Business Insurance 1,159.5 1,138.0 952.3 SAFECO Commercial 703.8 701.5 687.2 Surety 125.2 110.7 107.2 Other 8.5 7.1 14.7 ---------- ---------- ---------- Gross Premiums Written 4,709.1 4,645.0 4,441.8 Ceded Reinsurance Premiums 169.4 161.2 185.2 ---------- ---------- ---------- Net Premiums Written $ 4,539.7 $ 4,483.8 $ 4,256.6 ========== ========== ========== OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE* Losses 70.46% 66.34% 61.34% Adjustment Expenses 12.16 11.96 11.45 Underwriting Expenses 28.61 29.82 29.52 Dividends to Policyholders .21 .24 .29 ---------- ---------- ---------- Combined Losses and Expenses 111.44% 108.36% 102.60% ========== ========== ========== Net Premiums Written to Policyholders' Surplus 2.0:1 1.6:1 1.3:1 PRETAX INCOME (LOSS) BEFORE REALIZED GAIN Property and Casualty Insurance: Underwriting $ (521.9) $ (366.7) $ (109.4) Nonrecurring Acquisition Charges - - - Investment 460.5 462.3 480.2 Goodwill Amortization (44.0) (43.8) (43.0) Proposition 103 Settlement - - - Life Insurance 157.6 178.6 119.1 Write-Off of Deferred Acquisition Costs - - (46.8) Real Estate - - 5.3 Credit 19.3 22.6 22.7 Asset Management 12.9 13.6 8.5 Corporate (65.3) (52.0) (68.4) ---------- ---------- ---------- Total $ 19.1 $ 214.6 $ 368.2 ========== ========== ========== SHAREHOLDERS' EQUITY+ Book Value $ 4,695.8 $ 4,294.1 $ 5,575.8 With Securities at Market Value, Net of Tax 4,695.8 4,319.3 5,925.7 Long-Term Debt from Operations (Excludes Capital Securities) 792.0 495.4 625.6 Total Assets 31,511.5 30,572.7 30,891.7
* Operating ratios are GAAP basis and are based on expenses expressed as a percentage of earned premiums. Ratios exclude goodwill amortization, nonrecurring acquisition charges in 1997 and Proposition 103 settlement in 1993. + Effective October 1, 2000, the fixed maturities held-to-maturity portfolio was reclassified to available-for-sale. 82 51
1997 1996 1995 1994 1993 1992 1991 1990 - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- $ 1,295.2 $1,087.0 $1,043.6 $1,013.4 $ 977.1 $ 907.0 $ 864.1 $ 822.2 547.8 469.1 440.2 403.7 362.4 310.8 294.2 274.5 182.0 170.0 163.1 144.6 126.4 109.1 92.6 93.0 - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- 2,025.0 1,726.1 1,646.9 1,561.7 1,465.9 1,326.9 1,250.9 1,189.7 195.7 - - - - - - - 642.1 607.3 588.1 591.9 544.2 492.0 452.6 473.0 99.5 103.2 100.1 90.2 84.2 79.7 79.1 75.9 25.1 26.9 31.8 34.2 40.2 38.5 47.6 54.2 - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- 2,987.4 2,463.5 2,366.9 2,278.0 2,134.5 1,937.1 1,830.2 1,792.8 159.2 150.4 159.9 174.5 134.3 116.7 200.5 104.8 - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- $ 2,828.2 $2,313.1 $2,207.0 $2,103.5 $2,000.2 $1,820.4 $1,629.7 $1,688.0 ========== ======== ======== ======== ======== ======== ======== ======== 58.40% 59.09% 60.04% 64.70% 60.21% 63.93% 67.81% 65.50% 11.18 10.37 10.58 9.72 9.78 10.55 10.72 11.67 28.47 28.14 28.39 28.24 28.43 28.72 29.33 29.24 .66 .71 .70 1.11 1.07 .91 .76 .75 - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- 98.71% 98.31% 99.71% 103.77% 99.49% 104.11% 108.62% 107.16% ========== ======== ======== ======== ======== ======== ======== ======== 1.3:1 1.1:1 1.2:1 1.4:1 1.3:1 1.3:1 1.4:1 1.6:1 $ 36.2 $ 38.4 $ 6.3 $ (77.4) $ 9.9 $ (72.0) $ (141.1) $ (119.2) (60.0) - - - - - - - 327.0 281.6 291.5 283.5 277.6 280.8 286.1 283.3 (11.0) - - - - - - - - - - - (40.0) - - - 147.9 136.7 135.6 131.0 125.3 123.6 124.1 118.5 - - - - - - - - 9.6 13.0 9.1 10.2 10.1 8.4 8.5 9.1 21.5 19.1 13.3 10.8 10.2 9.0 9.5 6.8 7.5 7.6 6.9 6.4 6.5 6.5 5.2 4.6 (25.5) (8.0) (13.2) (13.8) (10.3) (13.6) (9.7) (8.8) - - - - - - ---------- -------- -------- -------- -------- -------- -------- -------- $ 453.2 $ 488.4 $ 449.5 $ 350.7 $ 389.3 $ 342.7 $ 282.6 $ 294.3 ========== ======== ======== ======== ======== ======== ======== ======== $ 5,461.7 $4,115.3 $3,982.6 $2,829.5 $2,774.4 $2,448.1 $2,221.1 $1,975.7 5,755.1 4,233.4 4,206.2 2,761.3 3,583.5 3,005.4 2,750.5 2,078.7 632.9 453.9 503.6 534.2 600.2 504.6 523.6 451.3 29,467.8 19,917.7 18,767.8 15,901.7 14,807.3 13,391.1 12,113.9 10,683.5
83 EX-21 8 v70188ex21.txt EXHIBIT 21 1 SAFECO CORPORATION Subsidiaries of the Registrant Exhibit 21 December 31, 2000 - - - - - - -------------------------------------------------------------------------------- SAFECO Corporation (Washington) 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) A. Insurance Company of Illinois (IL) 6. SAFECO Insurance Company of Oregon (OR) 7. American States Insurance Company (IN) 8. American Economy Insurance Company (IN) A. American States Insurance Company of Texas (TX) 9. American States Preferred Insurance Company (IN) 10. SAFECO Life Insurance Company (WA) A. SAFECO National Life Insurance Company (WA) B. First SAFECO National Life Insurance Company of New York (NY) C. American States Life Insurance Company (IN) D. Medical Risk Managers, Inc. (DE) 11. SAFECO Assigned Benefits Service Company (WA) 12. SAFECO Administrative Services, Inc. (WA) A. Employee Benefit Claims of Wisconsin, Inc. (WI) B. Wisconsin Pension and Group Services, Inc. (WI) 13. SAFECO Credit Company, Inc. (WA) 14. SAFECO Asset Management Company (WA) 15. SAFECO Securities, Inc. (WA) 16. SAFECO Services Corporation (WA) 17. SAFECO Trust Company (WA) 18. SAFECO Properties, Inc. (WA) A. SAFECARE Company, Inc. (WA) a) S.C. Bellevue, Inc. (WA) b) S.C. Marysville, Inc. (WA) B. Winmar Company, Inc. (WA) a) Capitol Court Corporation (WI) b) SCIT, Inc. (MA) c) Winmar Metro, Inc. (WA) d) Winmar Oregon, Inc. (OR) e) Winmar of the Desert, Inc. (CA) 19. General America Corporation (WA) A. F.B. Beattie & Co., Inc. (WA) a) F.B. Beattie Insurance Services, Inc. (CA) B. General America Corporation of Texas (TX) - (Attorney-in-fact) for: a) SAFECO Lloyds Insurance Company (TX) b) American States Lloyds Insurance Company (TX) C. R.F. Bailey Holdings, Ltd. (UK) a) R.F. Bailey (Underwriting Agencies), LTD. (UK) D. SAFECO Investment Services, Inc. (WA) E. SAFECO Select Insurance Services, Inc. (CA) F. Talbot Financial Corporation (WA) a) Talbot Agency, Inc. (NM) i) ASW, Insurors, Inc. (NM) ii) EBC, Inc. (NV) iii) Glenview Insurance Agency, Inc. (IL) iv) Integrated Financial & Insurance Services, Inc. (NM) v) Medcomp, Inc. (NV) vi) Newport Financial Corporation (IL) vii) Talbot Agency of Texas, Inc. (TX) viii) Talbot Financial Services of Hawaii, Inc. (HI) ix) Talbot Financial Services, Inc. (WA) x) Talbot Insurance Agency, Inc. (WA) xi) Talbot Insurance and Financial Service of NV, Inc. (NV) xii) Talbot Insurance and Financial Services, Inc. (CA) xiii) Talbot-BHJ, Inc. (WY) xiv) Talbot-Glacier Insurance, Inc. (MT) xv) Talbot-Tandy & Wood, Inc. (ID) xvi) W.C. Stapleton Insurance (CO) 20. SAFECO UK, Limited (UK) 21. SAFECO Capital Trust I (WA) Note: Certain inactive companies are not shown. -----END PRIVACY-ENHANCED MESSAGE-----