UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10-Q
- -------------------------------------------------------------------------------
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended September 30, 2002
[ ] 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
State of Incorporation: Washington
I.R.S. Employer I.D. No.: 91-0742146
Address of Principal Executive Offices: SAFECO Plaza, Seattle, Washington 98185
Telephone: 206-545-5000
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 [ ].
Common Stock, No Par Value: 127,743,059 shares were outstanding at October 31,
2002
SAFECO Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------------
CONTENTS
- ----------------------------------------------------------------------------------------------------------
Item Description Page
- ----------------------------------------------------------------------------------------------------------
Part I Financial Information
1 Financial Statements
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 2
Consolidated Statements of Income (Loss)
for the three and nine months ended September 30, 2002 and 2001 4
Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended September 30, 2002 and 2001 5
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2002 and 2001 6
Condensed Notes to Consolidated Financial Statements 8
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 18
4 Controls and Procedures 35
Part II Other Information
1 Legal Proceedings 37
5 Other Information 37
6 Exhibits and Reports on Form 8-K 38
Signatures 39
Certifications 40
' Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
PART I Item 1 - FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------
September 30 December 31
2002 2001
- -----------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
ASSETS
Investments
Fixed Maturities, at Fair Value
(Cost or amortized cost: $22,045.4; $20,677.1) $23,657.8 $21,444.1
Marketable Equity Securities, at Fair Value
(Cost: $828.0; $940.5) 1,037.7 1,596.4
Mortgage Loans 921.1 924.2
Other Investment Assets 212.5 236.9
Short-Term Investments 511.0 672.9
---------------------------
Total Investments 26,340.1 24,874.5
Cash 181.3 269.3
Accrued Investment Income 350.2 323.8
Premiums and Service Fees Receivable 1,086.0 973.0
Other Notes and Accounts Receivable 309.0 163.4
Current Income Tax Recoverable 5.5 --
Deferred Income Tax Recoverable 170.6 319.0
Reinsurance Recoverables 604.5 523.2
Deferred Policy Acquisition Costs 640.6 626.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 525.7 552.0
Intangibles and Goodwill (Note 8)
(Accumulated amortization: $97.7; $85.9) 193.5 149.4
Other Assets 124.6 110.0
Securities Lending Collateral (Note 1) 2,358.1 1,636.2
Separate Account Assets 853.2 1,208.1
---------------------------
Total Assets $33,742.9 $31,728.7
- -----------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Consolidated Balance Sheets
- -----------------------------------------------------------------------------------------------------------
September 30 December 31
2002 2001
- -----------------------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Loss Adjustment Expenses $ 5,227.2 $ 5,118.4
Life Policy Liabilities 342.6 327.1
Unearned Premiums 1,884.5 1,782.2
Funds Held Under Deposit Contracts 15,453.0 14,624.2
Debt (Note 3) 1,127.8 1,096.6
Other Liabilities 1,594.6 1,423.0
Current Income Taxes -- 34.9
Securities Lending Payable (Note 1) 2,358.1 1,636.2
Separate Account Liabilities 853.2 1,208.1
---------------------------
Total Liabilities 28,841.0 27,250.7
---------------------------
Commitments and Contingencies -- --
Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary
Trust Holding Solely Junior Subordinated Debentures of the Corporation (Capital
Securities) 843.7 843.4
---------------------------
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: 12.1; 6.4
Shares Issued and Outstanding: 127.8; 127.7 847.6 841.9
Retained Earnings 2,042.7 1,875.9
Accumulated Other Comprehensive Income, Net of Taxes 1,167.9 916.8
---------------------------
Total Shareholders' Equity 4,058.2 3,634.6
---------------------------
Total Liabilities and Shareholders' Equity $33,742.9 $31,728.7
- -----------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Consolidated Statements of Income (Loss)
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts) (Unaudited) (Unaudited)
REVENUES
Insurance
Property & Casualty Earned Premiums $ 1,135.2 $1,118.5 $ 3,356.7 $3,355.4
Life & Investments Premiums and Other Revenues 223.3 158.8 554.5 479.6
-------------------------------------------------
Total 1,358.5 1,277.3 3,911.2 3,835.0
Other 3.2 3.4 7.9 8.8
Net Investment Income 420.4 408.9 1,247.9 1,232.2
Net Realized Investment Gains 12.5 18.5 138.5 80.7
-------------------------------------------------
Total 1,794.6 1,708.1 5,305.5 5,156.7
-------------------------------------------------
EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits 1,171.8 1,466.1 3,512.8 3,978.5
Commissions 233.7 213.1 654.0 619.7
Personnel Costs 123.7 125.9 363.4 378.8
Interest 17.9 17.7 50.3 50.0
Intangibles and Goodwill Amortization (Note 8) 4.2 4.2 12.3 23.4
Other 128.5 91.3 352.5 316.9
Amortization of Deferred Policy Acquisition Costs 220.1 207.8 642.0 615.5
Deferral of Policy Acquisition Costs (230.4) (205.5) (672.8) (634.0)
Restructuring Charges (Note 7) 3.0 31.8 15.1 31.8
Goodwill Write-off (Note 8) -- -- -- 1,201.0
-------------------------------------------------
Total 1,672.5 1,952.4 4,929.6 6,581.6
-------------------------------------------------
Income (Loss) from Continuing Operations before Income Taxes
And Change in Accounting Principle 122.1 (244.3) 375.9 (1,424.9)
-------------------------------------------------
Provision (Benefit) for Income Taxes
Current 27.7 (45.6) 82.2 (28.1)
Deferred 7.9 (54.0) 16.0 (376.6)
-------------------------------------------------
Total 35.6 (99.6) 98.2 (404.7)
-------------------------------------------------
Income (Loss) from Continuing Operations before Distributions on
Before Distributions on Capital Securities
Capital Securities and Change in Accounting Principle 86.5 (144.7) 277.7 (1,020.2)
Distributions on Capital Securities, Net of Taxes (11.3) (11.3) (33.7) (33.7)
-------------------------------------------------
Income (Loss) from Continuing Operations
Before Change in Accounting Principle 75.2 (156.0) 244.0 (1,053.9)
-------------------------------------------------
Income from Discontinued Credit Operations, Net of Taxes (Note 6) -- 1.4 -- 4.2
Gain from Sale of SAFECO Credit Operations, Net of Taxes -- 54.0 -- 54.0
-------------------------------------------------
Total -- 55.4 -- 58.2
-------------------------------------------------
Income (Loss) before Cumulative Effect of Change in Accounting 75.2 (100.6) 244.0 (995.7)
Principle
Cumulative Effect of Change in Accounting Principle - SFAS 133, Net -- -- -- (2.1)
of Taxes
-------------------------------------------------
Net Income (Loss) (Note 8) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
- ----------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) PER SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations
Before Change in Accounting Principle $ 0.59 $ (1.22) $ 1.91 $ (8.24)
Income from Discontinued Credit Operations, Net of Taxes (Note 6) -- 0.01 -- 0.03
Gain from Sale of SAFECO Credit Operations, Net of Taxes -- 0.42 -- 0.42
-------------------------------------------------
Income (Loss) before Cumulative Effect of Change in Accounting 0.59 (0.79) 1.91 (7.79)
Principle
Cumulative Effect of Change in Accounting Principle- SFAS 133, Net -- -- -- (0.02)
of Taxes
-------------------------------------------------
Net Income (Loss) Per Share of Common Stock - Diluted & Basic (Note $ 0.59 $ (0.79) $ 1.91 $ (7.81)
8)
- ----------------------------------------------------------------------------------------------------------------------
Dividends Paid to Common Shareholders $ 0.185 $ 0.185 $ 0.555 $ 0.740
- ----------------------------------------------------------------------------------------------------------------------
Average Number of Shares Outstanding During the Period:(Note 1)Diluted 128.1 128.0 128.1 127.9
Basic 127.8 127.8 127.8 127.7
- ----------------------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
2002 2001
- ----------------------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
COMMON STOCK
Balance at Beginning of Period $ 841.9 $ 834.5
Stock Issued for Options and Rights 6.7 6.9
Common Stock Reacquired (1.5) (1.0)
Other 0.5 0.4
------------------------
Balance at End of Period 847.6 840.8
------------------------
RETAINED EARNINGS
Balance at Beginning of Period 1,875.9 2,966.4
Net Income (Loss) 244.0 (997.8)
Amortization of Underwriting Compensation on Capital (0.3) (0.3)
Securities
Dividends Declared (70.9) (70.9)
Common Stock Reacquired (6.0) (3.7)
------------------------
Balance at End of Period 2,042.7 1,893.7
------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Period 916.8 894.9
Other Comprehensive Income 251.1 134.9
------------------------
Balance at End of Period 1,167.9 1,029.8
------------------------
Shareholders' Equity $ 4,058.2 $ 3,764.3
- ----------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------
Consolidated Statements of Comprehensive Income (Loss)
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
(In Millions) (Unaudited) (Unaudited)
Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
-----------------------------------------------------
Other Comprehensive Income, Net of Taxes
Increase in Unrealized Appreciation
of Investment Securities 327.8 203.1 349.5 202.5
Less Reclassification Adjustment for Net Realized
Investment Gains Included in Net Income (Loss) (7.8) (12.8) (89.9) (53.3)
Deferred Policy Acquisition Costs Valuation (11.0) (6.8) (15.4) (8.6)
Allowance
Foreign Currency and Other Adjustments 5.5 8.7 6.9 (5.7)
-----------------------------------------------------
Other Comprehensive Income 314.5 192.2 251.1 134.9
-----------------------------------------------------
Comprehensive Income (Loss) $ 389.7 $ 91.6 $ 495.1 $ (862.9)
- ------------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
2002 2001
- ------------------------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 3,679.6 $ 3,665.6
Dividends and Interest Received 1,152.3 1,150.7
Other Operating Receipts 148.8 150.0
Insurance Claims and Policy Benefits Paid (2,857.5) (3,097.1)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,203.6) (1,219.3)
Interest Paid and Distributions on Capital Securities (120.3) (128.8)
Other Operating Costs Paid (93.1) (82.3)
Income Taxes Paid (117.3) (47.2)
-------------------------
Net Cash Provided by Operating Activities 588.9 391.6
-------------------------
INVESTING ACTIVITIES
Purchases of
Fixed Maturities (4,798.3) (2,511.0)
Equities (246.9) (206.5)
Other Investment Assets (187.8) (219.6)
Maturities of Fixed Maturities 1,236.9 1,030.5
Sales of
Fixed Maturities 2,289.4 1,834.5
Equities 537.5 279.1
Other Investment Assets 113.7 121.7
Net Decrease (Increase) in Short-Term Investments 161.9 (849.9)
Proceeds from Sale of SAFECO Credit Operations -- 250.0
Other 30.5 (55.4)
-------------------------
Net Cash Used in Investing Activities (863.1) (326.6)
-------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,010.1 716.3
Return of Funds Held under Deposit Contracts (778.8) (976.1)
Proceeds from Notes and Mortgage Borrowings 371.8 --
Repayment of Notes and Mortgage Borrowings (46.2) (4.3)
Repayment of Short-Term Borrowings (299.0) (74.4)
Common Stock Reacquired (7.5) (4.7)
Dividends Paid to Shareholders (70.9) (94.5)
Other 6.7 9.9
-------------------------
Net Cash Provided by (Used in) Financing Activities 186.2 (427.8)
-------------------------
Cash Provided by Discontinued Credit Operations -- 328.2
-------------------------
Net Decrease in Cash (88.0) (34.6)
Cash at Beginning of Period 269.3 186.3
-------------------------
Cash at End of Period $ 181.3 $ 151.7
- ------------------------------------------------------------------------------------------------------------
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- -----------------------------------------------------------------------------------------------------------
Consolidated Statements of Cash Flows -
Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities
- -----------------------------------------------------------------------------------------------------------
Nine Months Ended
September 30
2002 2001
- -----------------------------------------------------------------------------------------------------------
(In Millions) (Unaudited)
Net Income (Loss) $ 244.0 $ (997.8)
------------------------
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net Realized Investment Gains (138.5) (80.7)
Amortization and Depreciation 64.7 65.7
Amortization of Fixed Maturity Investments (39.5) (47.5)
Deferred Income Tax Provision (Benefit) 16.0 (376.6)
Interest Expense on Deposit Contracts 566.6 474.0
Other Adjustments 6.0 (1.6)
Goodwill Write-Off -- 1,201.0
Income from Discontinued Credit Operations, Net of Taxes -- (4.2)
Gain from Sale of SAFECO Credit Operations, Net of Taxes -- (54.0)
Cumulative Effect of Change in Accounting Principle, Net of Taxes -- 2.1
Changes in
Losses and Loss Adjustment Expenses 7.0 328.2
Life Policy Liabilities 12.8 (13.2)
Unearned Premiums 101.4 11.9
Accrued Income Taxes (53.9) (6.1)
Accrued Interest on Accrual Bonds (33.5) (31.4)
Accrued Investment Income (26.4) 2.9
Deferred Policy Acquisition Costs (37.4) (18.5)
Other Assets and Liabilities (100.4) (62.6)
------------------------
Total Adjustments 344.9 1,389.4
------------------------
Net Cash Provided by Operating Activities $ 588.9 $ 391.6
- -----------------------------------------------------------------------------------------------------------
There were no significant non-cash financing or investing activities for the
nine months ended September 30, 2002 and 2001.
See condensed notes to consolidated financial statements.
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Condensed Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Dollar amounts in millions except per share data, unless noted otherwise)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Consolidation and Reporting
SAFECO Corporation (SAFECO) is a Washington State corporation that owns
operating subsidiaries engaged in property and casualty insurance and surety
operations, life insurance and asset management. These operations generate
virtually all of SAFECO's revenues. SAFECO's businesses operate on a nationwide
basis. Non-U.S. operations are not significant to overall operations.
SAFECO and its subsidiaries are collectively referred to as "SAFECO." The
property and casualty insurance and surety operations are collectively referred
to as "Property & Casualty." The life insurance and asset management operations
are collectively referred to as "Life & Investments." Other operations not
included in either Property & Casualty or Life & Investments are collectively
referred to as "Corporate."
The accompanying unaudited consolidated financial statements and condensed notes
have been prepared in conformity with accounting principles generally accepted
in the United States (GAAP) for interim financial information and with the
instructions to Form 10-Q. Certain financial information, which is required in
the annual financial statements prepared in conformity with GAAP, may not be
required for interim financial reporting purposes and has been condensed or
omitted. In the opinion of SAFECO's management, all adjustments (consisting of
normal and recurring adjustments) considered necessary for a fair presentation
of results for the interim periods have been included. The results of operations
for the period ended September 30, 2002 are not necessarily indicative of the
results expected for the full year.
These consolidated financial statements and condensed notes should be read in
conjunction with the financial statements and notes in SAFECO's 2001 Annual
Report on Form 10-K/A, which has been previously filed with the Securities and
Exchange Commission.
The preparation of financial statements in conformity with GAAP requires
SAFECO's management to make estimates and assumptions that affect amounts
reported in these consolidated financial statements. Actual results could differ
from those estimates. The consolidated financial statements include SAFECO
Corporation and its subsidiaries. SAFECO has no material unconsolidated
subsidiaries and no interests in off-balance sheet special purpose entities. All
significant intercompany transactions and accounts have been eliminated in the
consolidated financial statements.
Certain reclassifications have been made to the prior year information to
conform to the current year presentation.
Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
reflect the potential dilution that could occur if options granted under
SAFECO's stock-based compensation plans were exercised resulting in the issuance
of common shares that would then share in SAFECO's earnings.
Due to the net loss for the three and nine months ended September 30,
2001, SAFECO used basic weighted-average shares outstanding to calculate
earnings (loss) per share of common stock. Using diluted weighted-average shares
outstanding would have resulted in a lower net loss per share of common stock.
Securities Lending
SAFECO engages in securities lending whereby certain securities from its
investment portfolio are loaned to other institutions for short periods of time.
Initial collateral is required from the borrower 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.
The fair value of the collateral deposited by the borrowers at September 30,
2002 and December 31, 2001 was $2,358.1 and $1,636.2, respectively. The
securities lending collateral and the corresponding securities lending payable
are reported on the Consolidated Balance Sheets as assets and liabilities,
respectively.
New Accounting Standards
FASB Statement 142, "Goodwill and Other Intangible Assets"
The Financial Accounting Standards Board (FASB) issued Statement 142 (SFAS 142),
"Goodwill and Other Intangible Assets" in July 2001. Under SFAS 142, goodwill
and indefinite-lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives (but with no maximum life). The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in
fiscal years beginning after December 15, 2001. SAFECO adopted SFAS 142
effective January 1, 2002 with no material impact on its consolidated financial
statements. See Note 8 for additional information.
NOTE 2 - FINANCIAL INSTRUMENTS
Fair Value Hedges
SAFECO uses interest rate swaps to offset the change in value of certain fixed
rate assets and liabilities. In calculating the effective portion of the fair
value hedges, the changes in the fair value of the hedge and the hedged item are
recognized in net realized investment gains in the Consolidated Statements of
Income (Loss). Differences between the changes in the fair value of the hedge
and the hedged item represent hedge ineffectiveness and are recognized in net
realized investment gains/losses. For the three and nine months ended September
30, 2002, a gain of $0.9 and a gain of $0.6, respectively, was recognized in net
realized investment gains due to hedge ineffectiveness. Fair value hedge
ineffectiveness for the three and nine months ended September 30, 2001 resulted
in a loss of $2.5 and gain of $0.8, respectively.
Cash Flow Hedges
SAFECO also uses interest rate swaps to hedge the variability of future cash
flows associated with certain variable rate assets and debt. The changes in the
fair value of the hedged item and the related interest rate swap are recognized
in accumulated other comprehensive income (AOCI). Differences between the
changes in the fair value of the hedge and the hedged items represent hedge
ineffectiveness and are recognized in interest expense. For the three months
ended September 30, 2002, there was no ineffectiveness. For the nine months
ended September 30, 2002 cash flow hedge ineffectiveness resulted in a decrease
of $0.5 to interest expense. Cash flow hedge ineffectiveness related to
continuing operations for the three and nine months ended September 30, 2001
resulted in an increase in interest expense of $2.2 and $1.3, respectively.
During the third quarter of 2002, $18.7 was reclassified from AOCI to realized
loss relating to a cash flow hedge that was terminated in connection with the
retirement of the underlying commercial paper borrowings. There were no other
cash flow hedges or fair value hedges discontinued during the three and nine
months ended September 30, 2002 or 2001.
Other Derivatives
In 1997, Life & Investments introduced an equity indexed annuity (EIA) product
that credits the policyholder based on a percentage of the gain in the S&P 500
Index. SAFECO has a hedging program with the objective to hedge the exposure to
changes in the S&P 500 Index. The program consists of buying and writing S&P 500
index options, buying Treasury interest rate futures and trading S&P 500 futures
and swaps. Sales of the EIA product were suspended in the fourth quarter of
1998. As permitted under a grandfathering clause in FASB Statement 133 (SFAS
133) Accounting for Derivative Instruments and Hedging Activities, SAFECO
elected not to apply the fair value adjustment requirement of this statement to
the embedded derivatives contained in the liability related to EIA products sold
prior to January 1, 1999. The change in fair value of the options, futures and
swaps used to hedge the EIA liability is recognized as an adjustment to net
realized investment gains in the Consolidated Statements of Income (Loss).
SAFECO's wholly-owned subsidiary, SAFECO Financial Products, Inc. (SFP) was
incorporated in 2000 to write S&P 500 index options to mitigate the risk
associated with the EIA. Since 2001, SFP has engaged in limited trading for its
own account by selling single name credit default swaps, writing and hedging S&P
500 index options and investing in and hedging convertible bonds. SFP's
activities are not designated as hedging activities for purposes of SFAS 133.
Consequently, mark-to-market adjustments of these instruments and any default
losses realized are recorded in realized gains or losses in the Consolidated
Statements of Income (Loss).
NOTE 3 - DEBT
The total amount, current portions and maturities of debt and capital securities
at September 30, 2002 and December 31, 2001 are as follows:
September 30, 2002 December 31, 2001
- -----------------------------------------------------------------------------------------------------------
Total Current Long-Term Total Current Long-Term
---------------------------------------------------------------------
Commercial Paper $ -- $ -- $ -- $ 299.0$ 299.0 $ --
7.875% Medium-Term Notes Due 2003 307.5 307.5 -- 323.0 -- 323.0
7.875% Notes Due 2005 200.0 -- 200.0 200.0 -- 200.0
6.875% Notes Due 2007 200.0 -- 200.0 200.0 -- 200.0
7.25% Notes Due 2012 389.1 -- 389.1 -- -- --
Medium-Term Notes, Due 2002 and 2003 7.7 7.7 -- 50.0 42.9 7.1
Other Notes and Loans Payable 23.5 4.4 19.1 24.6 5.9 18.7
---------------------------------------------------------------------
Total Debt (Excluding Capital 1,127.8 319.6 808.2 1,096.6 347.8 748.8
Securities)
8.072% Capital Securities Due 2037 843.7 -- 843.7 843.4 -- 843.4
---------------------------------------------------------------------
Total Debt and Capital Securities $ 1,971.5$ 319.6 $ 1,651.9 $ 1,940.0$ 347.8 $ 1,592.2
- -----------------------------------------------------------------------------------------------------------
On August 23, 2002, SAFECO issued $375.0 of senior notes with a coupon of 7.25%
that mature in 2012. The proceeds of the notes were used for the repayment of
$299.0 of commercial paper borrowings, $18.7 for the termination of related
interest rate swaps and $28.4 for repayment of medium-term notes. The balance is
expected to be used to repay upcoming debt maturities and for general corporate
purposes. SAFECO simultaneously entered into a $375.0 notional interest rate
swap to effectively convert the fixed rate senior note obligation into a
Libor-based floating rate obligation. The fair value of the interest rate swap
is marked-to-market on the balance sheet with the offsetting corresponding asset
or liability included in the face value of the debt.
SAFECO also has $300.0 of 7.875% medium term note agreements that mature in
March 2003. These notes are hedged with $300.0 notional interest rate swaps to
effectively convert the fixed rate obligation into a Libor-based floating rate
obligation. The fair value of the interest rate swaps are marked to market on
the balance sheet with the offsetting corresponding asset or liability included
in the face value of the debt.
SAFECO renewed its bank credit facility in September 2002 with $500.0 available
through September 2005. This replaced the $800.0 facility that expired in
September 2002. SAFECO pays a fee to have the facility available and does not
maintain deposits as compensating balances. Similar to its previous facility,
the new facility carries certain covenants that require SAFECO to maintain a
specified minimum level of shareholders' equity and a maximum
debt-to-capitalization ratio. There were no borrowings under either facility as
of September 30, 2002 and December 31, 2001 and SAFECO was in compliance with
all covenants.
NOTE 4 - ACQUISITIONS
In July 2002, SAFECO completed its acquisition of the medical excess loss and
group life business of Swiss Re Life & Health America Holding Company (Swiss
Re). The primary purpose of the acquisition is to build a greater presence in
the medical excess loss market and leverage SAFECO's expertise in this line of
business. The transaction was in the form of an indemnity coinsurance agreement,
with total assets acquired of $137.0 including the acquisition of Fort Wayne
Risk Management Services, and resulted in the recognition of $25.8 of other
intangible assets and $26.2 of goodwill. Nearly all of the other intangible
assets are comprised of the value of the reinsurance contracts (and the related
customer relationships) and are being amortized over a useful life of 20 years.
The assets and liabilities acquired from Swiss Re are included in the
Consolidated Balance Sheets as of September 30, 2002 and beginning in July 2002,
the results of these operations were included in the Consolidated Statements of
Income (Loss). The acquired business generated written premiums of $60.1 and
pretax operating income of $12.6 in the third quarter of 2002. For segment
reporting purposes, these operations are included with the results of Life &
Investments in the Group segment.
NOTE 5 - RUNOFF OF LONDON OPERATIONS
In the third quarter of 2002, SAFECO made the decision to put its London
operations into run off, resulting in an after-tax charge of $17.1 in the
quarter. This charge reflects the write-off of SAFECO's investment in its U.K.
subsidiary, R.F. Bailey (Underwriting Agencies) Ltd. It also includes
strengthening reserves to provide for higher-than-anticipated losses as the
business is run off.
NOTE 6 - DISCONTINUED OPERATIONS
SAFECO Credit Company, Inc. (SAFECO Credit) provided loans and equipment
financing and leasing to commercial businesses, insurance agents and affiliated
companies. In March 2001, SAFECO decided to sell SAFECO Credit. A plan of
disposal was formalized establishing the measurement date as March 31, 2001; as
a result, SAFECO Credit was accounted for as a discontinued operation effective
March 31, 2001. On July 24, 2001 SAFECO reached a definitive agreement to sell
SAFECO Credit to General Electric Capital Corporation (GECC). The sale was
completed on August 15, 2001 (effective as of July 31, 2001) for total cash
proceeds of $918.9. This included the repayment of loans to SAFECO Credit and
settlement of other affiliated transactions between SAFECO Credit and SAFECO
totaling $668.9. The sale resulted in net proceeds of $250.0 and a pretax gain
of $97.0. The after-tax gain on the sale of $54.0 is reported in the
Consolidated Statements of Income (Loss).
NOTE 7 - RESTRUCTURING CHARGES
In July 2001, SAFECO announced that it would eliminate approximately 1,200 jobs
by the end of 2003. Since the beginning of 2001, SAFECO's total employment has
decreased by approximately 1,200, excluding the reduction due to the sale of
SAFECO Credit, concluding the planned job eliminations. Positions eliminated
have been in the corporate headquarters and regional property and casualty
operations.
Restructuring charges and period costs associated with these changes are
expected to total approximately $65 through the end of 2002. Restructuring
charges incurred for the nine months ended September 30, 2002 totaled $15.1.
Restructuring charges from July 2001 through September 30, 2002 totaled $59.4
(exit costs totaled $18.0 and were accrued in the third quarter of 2001; period
costs totaled $41.4). The accrued exit costs of $18.0 included severance costs
and lease termination costs that were recognized and accrued as a restructuring
charge (exit costs) in the third quarter of 2001. Other charges not meeting the
definition of exit costs have been expensed as restructuring charges in the
period incurred. These period costs include stay bonuses, employee transfer
costs, recruiting and training expenses, related consulting fees and certain
office closure costs. The remaining charges are expected to be incurred over the
balance of 2002.
The activity related to the accrued restructuring charges at September 30, 2002
was as follows:
Restructuring Charge Liability
- ---------------------------------------------------------------------------------------------------------
Accrual in the Third Quarter of 2001 $ 18.0
Amounts Paid During the Three Months Ended:
September 30, 2001 (3.9)
December 31, 2001 (5.6)
March 31, 2002 (7.8)
June 30, 2002 (0.7)
September 30, 2002 --
----------------
Balance at September 30, 2002 $ --
- ---------------------------------------------------------------------------------------------------------
NOTE 8 - INTANGIBLES AND GOODWILL
SAFECO adopted SFAS 142 on January 1, 2002. Under SFAS 142, goodwill and
indefinite-lived intangible assets are no longer amortized but are reviewed
annually (or more frequently if impairment indicators arise) for impairment.
Separable intangible assets that are not deemed to have an indefinite life will
continue to be amortized over their useful lives (but with no maximum life). As
a result of adopting SFAS 142, $28.0 of other intangibles was reclassified as
goodwill. The adoption had minimal impact on net income.
The following table presents the intangibles and goodwill at September 30, 2002
and December 31, 2001. The purchase of Swiss Re's group medical excess loss
business (see Note 4) increased intangible and goodwill assets by $25.8 and
$26.2, respectively, from the prior quarter.
September 30 December 31
INTANGIBLES AND GOODWILL 2002 2001
- ------------------------------------------------------------------------------------------------------------
Other Amortizable Intangibles $ 135.7 $ 146.5
Goodwill 57.8 2.9
------------------------------
Total Intangibles and Goodwill $ 193.5 $ 149.4
- ------------------------------------------------------------------------------------------------------------
In accordance with the disclosure requirements of SFAS 142, the following table
reverses the effect of the intangibles and goodwill amortization on the reported
net income (loss) for the three months and nine months ended September 30, 2002
and 2001 to show comparability between the periods presented.
Three Months Ended Nine Months Ended
September 30 September 30
------------------------- -------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Reported Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
Add back: Intangibles and Goodwill Amortization -- -- -- 9.5
---------------------------------------------------
Adjusted Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (988.3)
---------------------------------------------------
INCOME (LOSS) PER SHARE - DILUTED AND BASIC
Reported Net Income (Loss) $ 0.59 $ (0.79) $ 1.91 $ (7.81)
Add back: Intangibles and Goodwill Amortization -- -- -- 0.07
---------------------------------------------------
Adjusted Net Income (Loss) $ 0.59 $ (0.79) $ 1.91 $ (7.74)
- ------------------------------------------------------------------------------------------------------------
Effective March 31, 2001, SAFECO elected to change its accounting policy for
assessing goodwill from one based on undiscounted cash flows to one based on a
market-value method. The market-value method was determined to be a preferable
way to assess the current value of goodwill. As a result, we recorded a goodwill
write-off of $1,201.0 ($916.9 after-tax) in the first quarter of 2001.
The market value method used to assess the recoverability of goodwill compared
SAFECO's market capitalization (stock price multiplied by shares outstanding) to
its reported book value (total shareholders' equity). Given the extent of the
shortfall of market capitalization compared to the reported book value as of
March 31, 2001 and the fact that a similar shortfall had existed for almost two
years, SAFECO concluded that under the new method the entire goodwill asset was
impaired and a write-off of the full amount was necessary. The majority of this
goodwill (97%) resulted from the 1997 acquisition of American States Financial
Corporation whose operations have been fully integrated into those of SAFECO.
NOTE 9 - SEGMENT INFORMATION
The operating segments presented are based on SAFECO's internal reporting
structure and how our management analyzes the operating results. These segments
generally represent groups of related products or markets.
Property & Casualty's operations include four reportable underwriting segments.
The underwriting segments are SAFECO Personal Insurance (SPI), SAFECO Business
Insurance (SBI), Surety and Property & Casualty Other. SPI is further split into
Personal Auto, Homeowners and Specialty. SBI is further split into SBI Regular,
Special Accounts Facility and Run-off. SBI Regular is SAFECO's core commercial
segment, focused on underwriting commercial insurance for small-to-medium sized
businesses. Special Accounts Facility underwrites specialty commercial programs
and larger commercial accounts. Run-off includes results for the larger
commercial business accounts and the specialty programs that SAFECO is currently
exiting. Property & Casualty Other includes assumed reinsurance business,
non-voluntary property and casualty business for personal lines, results from
SAFECO's Lloyds of London operation and discontinued product lines.
Life & Investments' operations include six reportable segments: Retirement
Services, Income Annuities, Group, Individual, Asset Management and Life &
Investments Other.
The discontinued SAFECO Credit operation provided loans and equipment financing
and leasing to commercial business, insurance agents and affiliated companies.
As disclosed in Note 6, the sale of SAFECO Credit was completed on August 15,
2001. This segment is accounted for as a discontinued operation.
The Corporate segment includes operating results for the parent company, SAFECO
Financial Products, Inc., SAFECO Properties and intercompany transactions.
Pretax
Premium Underwriting Net Pretax Net Realized Net
THREE MONTHS ENDED and Other Income Investment Income Investment Income Total
SEPTEMBER 30, 2002 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
SPI
Personal Auto $ 497.4 $ (6.2) $ 32.8 $ 26.6 $ 23.2 $3,528.4
Homeowners 192.7 5.5 14.1 19.6 10.5 1,618.7
Specialty 51.1 9.6 5.0 14.6 4.3 541.0
SBI
SBI Regular 255.4 (11.9) 29.1 17.2 17.9 3,323.4
Special Accounts
Facility 75.2 3.9 1.5 5.4 2.8 216.9
Run-off 24.2 (15.4) 23.5 8.1 8.2 2,804.7
Surety 32.7 2.7 3.0 5.7 3.9 308.9
Other 6.5 (33.6) 5.5 (28.1) 0.4 240.2
Restructuring Charges -- -- -- (3.0) -- --
----------------------------------------------------------- -----------
Total 1,135.2 $ (45.4) 114.5 66.1 71.2 $ 97.4 12,582.2
----------------------------------------------------------- -----------
LIFE & INVESTMENTS
Retirement Services 5.6 90.7 1.4 (30.2) 7,228.6
Income Annuities -- 134.0 11.5 10.7 7,471.4
Group 147.9 1.4 22.4 0.3 340.7
Individual 35.6 60.6 3.5 4.2 4,283.2
Asset Management 6.7 0.3 0.9 (0.2) 63.7
Other 27.5 20.1 19.9 2.2 1,795.5
-------------
---------- --------------------------------------
Total 223.3 307.1 59.6 (13.0) 30.0 21,183.1
---------- -------------------------------------- -------------
Corporate 3.2 (1.2) (16.1) (45.7) (52.2) (22.4)
---------- ---------------------------------------------------------------
Consolidated Totals $ 1,361.7 $ 420.4 $ 109.6 $ 12.5 $ 75.2 $33,742.9
- -----------------------------------------------------------------------------------------------------------
* Pretax Income (Loss) before net realized investment 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.
Pretax
Premium Underwriting Net Pretax Net Realized Net
THREE MONTHS ENDED and Other Income Investment Income Investment Income Total
SEPTEMBER 30, 2001 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
SPI
Personal Auto $ 446.5 $ 3.0 $ 28.9 $ 31.9 $ 10.9 $3,183.3
Homeowners 186.9 (43.7) 12.6 (31.1) 5.1 1,399.1
Specialty 51.0 3.0 4.2 7.2 2.0 424.8
SBI
SBI Regular 254.2 (87.8) 31.2 (56.6) 8.8 3,387.3
Special Accounts
Facility 30.5 (2.0) 1.5 (0.5) 1.1 185.9
Run-off 120.9 (153.8) 23.3 (130.5) 4.1 2,808.1
Surety 27.0 6.4 1.8 8.2 1.7 139.6
Other 1.5 (95.9) 7.7 (88.2) 0.4 409.9
Goodwill Amortization -- -- -- -- -- --
Goodwill Write-off -- -- -- -- -- --
Restructuring Charges -- -- -- (31.8) -- --
----------------------------------------------------------- -------------
Total 1,118.5 $ (370.8) 111.2 (291.4) 34.1 $ (153.8) 11,938.0
----------------------------------------------------------- -------------
LIFE & INVESTMENTS
Retirement Services 6.2 86.1 4.3 (4.5) 6,203.4
Income Annuities 0.1 130.8 10.3 2.3 7,029.6
Group 84.8 0.9 3.3 (0.5) 171.4
Individual 34.5 57.4 4.8 0.2 3,937.4
Asset Management 8.3 0.5 1.6 -- 68.1
Other 24.9 19.4 18.7 (6.4) 1,653.0
Goodwill Write-off -- -- -- -- --
-------------
---------- --------------------------------------
Total 158.8 295.1 43.0 (8.9) 22.5 19,062.9
---------- -------------------------------------- -------------
Discontinued Credit
Operations -- -- -- -- 1.4 --
Gain on Sale of Credit
Operations -- -- -- -- 54.0 --
Corporate 3.4 2.6 (14.4) (6.7) (24.7) 462.2
---------- ---------------------------------------------------------------
Consolidated Totals $ 1,280.7 $ 408.9 $ (262.8) $ 18.5 $ (100.6) $31,463.1
- -----------------------------------------------------------------------------------------------------------
* Pretax Income (Loss) before net realized investment gains (losses),
distributions on capital securities, income taxes, discontinued Credit
operations and cumulative effect of change in accounting principle. 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.
Pretax
Premium Underwriting Net Pretax Net Realized Net
NINE MONTHS ENDED and Other Income Investment Income Investment Income Total
SEPTEMBER 30, 2002 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
SPI
Personal Auto $ 1,424.1 $ (33.8) $ 100.3 $ 66.5 $ 100.9 $3,528.4
Homeowners 565.3 (49.6) 43.8 (5.8) 45.1 1,618.7
Specialty 152.3 20.6 15.0 35.6 18.2 541.0
SBI
SBI Regular 751.8 (59.5) 89.3 29.8 76.5 3,323.4
Special Accounts
Facility 186.8 10.3 6.8 17.1 16.0 216.9
Run-off 162.8 (74.5) 62.9 (11.6) 24.5 2,804.7
Surety 93.6 11.6 8.9 20.5 17.1 308.9
Other 20.0 (46.0) 18.0 (28.0) 4.4 240.2
Restructuring Charges -- -- -- (15.1) -- --
----------------------------------------------------------- -------------
Total 3,356.7 $ (220.9) 345.0 109.0 302.7 $ 300.6 12,582.2
----------------------------------------------------------- -------------
LIFE & INVESTMENTS
Retirement Services 18.5 265.6 13.4 (76.7) 7,228.6
Income Annuities 0.1 392.5 27.6 (17.0) 7,471.4
Group 324.0 3.6 46.7 0.1 340.7
Individual 106.6 176.2 17.7 (2.4) 4,283.2
Asset Management 22.3 0.9 4.9 (0.9) 63.7
Other 83.0 58.9 60.4 (3.0) 1,795.5
-------------
---------- --------------------------------------
Total 554.5 897.7 170.7 (99.9) 46.6 21,183.1
---------- -------------------------------------- -------------
Corporate 7.9 5.2 (42.3) (64.3) (103.2) (22.4)
---------- ---------------------------------------------------------------
Consolidated Totals $ 3,919.1 $1,247.9 $ 237.4 $ 138.5 $ 244.0 $33,742.9
- -----------------------------------------------------------------------------------------------------------
* Pretax Income (Loss) before net realized investment 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.
Pretax
Premium Underwriting Net Pretax Net Realized Net
NINE MONTHS ENDED and Other Income Investment Income Investment Income Total
SEPTEMBER 30, 2001 Revenues (Loss) Income (Loss)* Gain(Loss) (Loss) Assets
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
SPI
Personal Auto $ 1,312.2 $ (62.4) $ 91.2 $ 28.8 $ 32.9 $3,183.3
Homeowners 553.7 (172.4) 39.9 (132.5) 15.4 1,399.1
Specialty 150.5 2.8 12.8 15.6 6.2 424.8
SBI
SBI Regular 787.8 (149.9) 97.1 (52.8) 28.0 3,387.3
Special Accounts
Facility 92.8 2.0 4.6 6.6 3.3 185.9
Run-off 386.3 (248.3) 70.0 (178.3) 13.3 2,808.1
Surety 67.6 13.2 4.6 17.8 4.4 139.6
Other 4.5 (96.2) 20.5 (75.7) 1.4 409.9
Goodwill Amortization -- -- -- (11.0) -- --
Goodwill Write-off -- -- -- (1,152.1) -- --
Restructuring Charges -- -- -- (31.8) -- --
----------------------------------------------------------- -------------
Total 3,355.4 $ (711.2) 340.7 (1,565.4) 104.9 $(1,036.8) 11,938.0
----------------------------------------------------------- -------------
LIFE & INVESTMENTS
Retirement Services 20.4 255.8 9.6 (19.1) 6,203.4
Income Annuities 0.3 394.6 33.0 13.1 7,029.6
Group 249.6 2.7 22.1 (1.2) 171.4
Individual 106.1 169.5 21.1 (1.5) 3,937.4
Asset Management 25.5 1.7 5.4 -- 68.1
Other 77.7 59.9 59.4 4.8 1,653.0
Goodwill Write-off -- -- (48.9) -- --
---------- -------------------------------------- -------------
Total 479.6 884.2 101.7 (3.9) 54.6 19,062.9
---------- -------------------------------------- -------------
Discontinued Credit
Operations -- -- -- -- 4.2 --
Gain on Sale of Credit
Operations -- -- -- -- 54.0 --
Corporate 8.8 7.3 (41.9) (20.3) (73.8) 462.2
---------- ---------------------------------------------------------------
Consolidated Totals $ 3,843.8 $1,232.2 $(1,505.6) $ 80.7 $ (997.8) $31,463.1
- -----------------------------------------------------------------------------------------------------------
* Pretax Income (Loss) before net realized investment gains (losses),
distributions on capital securities, income taxes, discontinued Credit
operations and cumulative effect of change in accounting principle. 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.
Amounts include the March 31, 2001 goodwill write-off for Property & Casualty
of $1,152.1 and Life & Investments of $48.9 totaling $1,201.0.
- --------------------------------------------------------------------------------
PART I Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
(Dollar amounts in millions unless noted otherwise)
SAFECO Corporation (SAFECO) is a Washington State corporation that owns
operating subsidiaries engaged in property and casualty insurance and surety
operations, life insurance and asset management. These operations generate
virtually all of SAFECO's revenues.
SAFECO and its subsidiaries are collectively referred to as "SAFECO." Our
property and casualty insurance and surety operations are collectively referred
to as "Property & Casualty." Our life insurance and asset management operations
are collectively referred to as "Life & Investments." Other operations not
included in either Property & Casualty or Life & Investments are collectively
referred to as "Corporate."
Strategic Summary
SAFECO remains on track with the focused efforts started in 2001 to return to
profitability. In 2001 management undertook a comprehensive review of SAFECO's
operations and determined that our core strengths were in personal auto,
small-to-medium commercial insurance, life insurance and asset management. In
the Property & Casualty operations, specific actions were taken in 2001 to raise
rates, eliminate unprofitable accounts and exit non-core lines of business.
The significant actions we have taken to improve the fundamentals of our
homeowners business have begun to show in improved underwriting results. We are
continuing our efforts to secure sufficient rates for risks accepted and reduce
our exposures to catastrophe and weather losses. We are more optimistic now than
in the recent past that the homeowners line may achieve acceptable underwriting
returns in the future.
Additional efforts in 2002, particularly for SAFECO's Property & Casualty
operations, include improving sales growth through independent agents and
improving service and claims handling processes.
SAFECO's financial results through the first three quarters of 2002 are showing
meaningful improvement. The main drivers have been our focused efforts on
raising rates, eliminating unprofitable accounts and re-underwriting business in
property and casualty insurance lines. Our homeowners and small business lines
have also benefited significantly from lower than anticipated weather and
catastrophe losses in 2002. In addition, continued strong results in Life &
Investments operations in the first nine months of 2002 contributed to improved
2002 results.
Summary of Financial Information
The following summarized financial information should be read in conjunction
with the Segment Footnote (Note 9) in the Condensed Notes to Consolidated
Financial Statements in this report. Detailed discussions of Property &
Casualty, Life & Investments and Corporate operations follow in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
INCOME (LOSS)
Property & Casualty* $ 66.1 $ (291.4) $ 109.0 $(1,565.4)
Life & Investments* 59.6 43.0 170.7 101.7
Corporate (16.1) (14.4) (42.3) (41.9)
-------------------------------------------------
Income (Loss) from Continuing Operations
before Net Realized Investment Gains and Income Taxes 109.6 (262.8) 237.4 (1,505.6)
Income Tax Provision (Benefit) 30.9 (105.2) 49.6 (432.1)
-------------------------------------------------
Income (Loss) from Continuing Operations
before Distributions on Capital Securities and
Net Realized Investment Gains 78.7 (157.6) 187.8 (1,073.5)
Net Realized Investment Gains, Net of Taxes 7.8 12.9 89.9 53.3
Distributions on Capital Securities, Net of Taxes (11.3) (11.3) (33.7) (33.7)
-------------------------------------------------
Income (Loss) from Continuing Operations 75.2 (156.0) 244.0 (1,053.9)
-------------------------------------------------
Income from Discontinued Credit Operations, Net of Taxes -- 1.4 -- 4.2
Gain from Sale of SAFECO Credit, Net of Taxes -- 54.0 -- 54.0
-------------------------------------------------
Total -- 55.4 -- 58.2
-------------------------------------------------
Income (Loss) before Cumulative Effect of
Change in Accounting Principle 75.2 (100.6) 244.0 (995.7)
-- --
Cumulative Effect of Change in Accounting Principle, Net
of Taxes -- (2.1)
-------------------------------------------------
Net Income (Loss) $ 75.2 $ (100.6) $ 244.0 $ (997.8)
-------------------------------------------------
Per Share of Common Stock
Income (Loss) Before Net Realized Investment Gains* $ 0.53 $ (1.32)$ 1.21 $ (1.49)
Goodwill Write-off -- -- -- (7.17)
Net Realized Investment Gains 0.06 0.10 0.70 0.42
-----------------------------------------------
Income (Loss) from Continuing Operations* 0.59 (1.22) 1.91 (8.24)
-----------------------------------------------
Income from Discontinued Credit Operations, Net of Taxes -- 0.01 -- 0.03
Gain from Sale of SAFECO Credit, Net of Taxes -- 0.42 -- 0.42
-----------------------------------------------
Total -- 0.43 -- 0.45
-----------------------------------------------
Income (Loss) before Cumulative Effect of Change
in Accounting Principle 0.59 (0.79) 1.91 (7.79)
Cumulative Effect of Change in Accounting Principle -- -- -- (0.02)
-----------------------------------------------
Net Income (Loss) $ 0.59 $ (0.79)$ 1.91 $ (7.81)
- ---------------------------------------------------------------------------------------------------------
* Pretax amounts for the nine months ended September 30, 2001 include the pretax
goodwill write-off in March 2001 discussed in Note 8. Property & Casualty pretax
amounts for the three and nine months ended September 31, 2001 include the loss
reserve strengthening of $240.0.
The following is a summary of highlights for the first nine months of 2002:
Property & Casualty
o Improved the combined ratio to 106.6 for the nine months ended September
30, 2002, from 121.2 in the comparable period in 2001 (114.0 in 2001
excluding Property & Casualty loss reserve strengthening of $240.0 in the
third quarter of 2001). Third quarter 2002 combined ratio of 104.0 improved
from 107.5 in the second quarter of 2002.
o Improved homeowners results by $49.2 and reduced SAFECO Business Insurance
underwriting losses by $65.2 in the third quarter of 2002 compared to the
third quarter of 2001, excluding the 2001 loss reserve strengthening. Both
lines were positively impacted by milder than anticipated weather and
minimal catastrophe losses in 2002, as well as our continued rate increases
and underwriting actions.
o Personal auto policies in force increased reflecting early success of our
new auto product.
o Charge of $26.3 ($17.1 after-tax) in the third quarter of 2002, reflecting
the write-off of our London operations. It also includes strengthening
reserves to provide for higher-than-anticipated losses as the business is
run off.
o Recognized year-to-date restructuring charges of $15.1 ($9.8 after-tax)
compared to $31.8 ($20.7 after-tax) for the nine months ended September 30,
2001.
Life & Investments
o Generated pretax income of $59.6 for the quarter ended September 30, 2002,
compared to $43.0 in the third quarter of 2001.
o Closed the acquisition of Swiss Re's group medical excess loss and group
life insurance businesses in July 2002, which contributed $12.6 pretax
income to Life & Investment results in the third quarter of 2002.
o Year-to-date deposits of fixed annuity products totaled $807 compared to
$575 for the nine months ended September 30, 2001.
Property & Casualty - Operations
Property & Casualty writes personal, commercial and surety lines of insurance
through independent agents. The lines of insurance written include personal and
commercial auto, homeowners, fire, commercial multi-peril, workers'
compensation, general liability, property, surety and fidelity.
Operating Statistics
Income (Loss) before Net Realized
Investment Gains and Income Taxes
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Earned Premiums $ 1,135.2 $ 1,118.5 $ 3,356.7 $ 3,355.4
--------------------------------------------------
Underwriting Loss* $ (45.4) $ (370.8) $ (220.9) $ (711.2)
Net Investment Income 114.5 111.2 345.0 340.7
Goodwill Amortization -- -- -- (11.0)
Goodwill Write-off -- -- -- (1,152.1)
Restructuring Charges (3.0) (31.8) (15.1) (31.8)
--------------------------------------------------
Income (Loss) Before Net Realized Investment Gains
and Income Taxes $ 66.1 $ (291.4) $ 109.0 $(1,565.4)
- -----------------------------------------------------------------------------------------------------------
* Underwriting income or loss is a standard industry measurement used by
management to analyze core Property & Casualty operations. This measurement
represents the net amount of earned premiums less underwriting losses and
expenses; it does not include net realized investment gains and losses,
goodwill amortization, goodwill write-off, restructuring charges, net
investment income or taxes. This measurement does not replace net income as a
measure of profitability, but is presented to supplement the other financial
measurements provided.
Total earned premiums for Property & Casualty lines for the third quarter of
2002 increased by 1.5% compared to the same period of 2001. Earned premiums for
the nine months ended September 30, 2002 were flat compared to the same period
of 2001 due to efforts begun in 2001 to re-underwrite business, eliminate
unprofitable accounts and exit non-core lines of business. On a net written
basis, premiums increased 6.1% for the third quarter of 2002 compared to 2001
and increased 2% for the nine months ending September 30, 2002 compared to the
same period of 2001. Increases over the prior year were driven by rate increases
across the Property & Casualty businesses and growth in policies in force in the
personal auto line.
Property & Casualty pretax net investment income increased slightly in the first
nine months of 2002 compared to the same period of 2001. The repositioning of
the Property & Casualty investment portfolio begun in the second quarter of 2002
has shifted the allocation to taxable bonds from nontaxable bonds, resulting in
higher pretax investment income. Property & Casualty after-tax net investment
income for the nine months ended September 30, 2002 was $260.3, down 2.7% from
the same period in 2001. See additional discussion in the Investment Summary
section of this Management's Discussion and Analysis.
In the first quarter of 2001, SAFECO wrote off all the goodwill related to its
1997 American States Financial Corporation acquisition resulting in a pretax
charge of $1,152.1 ($878.2 after-tax).
The 2002 restructuring charges related to the consolidation of the commercial
property and casualty operations started in the third quarter of 2001. See Note
7 - Restructuring Charges for additional information. In the second quarter of
2002 the previously identified elimination of 1,200 positions was completed.
During the third quarter of 2001, SAFECO completed a review of Property &
Casualty's loss reserve adequacy. As a result of this review, which included an
independent actuarial study, management concluded that ultimate losses for
certain lines would be higher in the range of possible outcomes than previously
estimated. The total reserve addition was $240.0 pretax and was included in
SAFECO's reported Property & Casualty segments as follows: SBI Regular of $65.0,
SBI Runoff of $90.0 and Other of $85.0. The $240.0 reserve addition related to
developments in prior year claims is as follows: $80.0 for workers'
compensation, $90.0 for construction defect and $70.0 for other claims including
asbestos and environmental.
For workers' compensation, the $80.0 was due to unexpected development of prior
year claims, continued increases in medical costs and unfavorable administrative
rulings that were more favorable to plaintiffs' compensation claims. For
construction defect and asbestos and environmental, the reserve additions were
due to continued emergence of adverse loss experience due to newly emerging
trends including the expansion of defendants in connection with asbestos and
environmental claims and the expansion of construction defect claims beyond
California.
GAAP Operating Ratios*
-------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
2002 2001+ 2002 2001+
- -----------------------------------------------------------------------------------------------------------
Loss Ratio 59.1% 84.2% 63.3% 76.5%
Loss Adjustment Expense Ratio 13.0 18.8 12.4 14.6
Expense Ratio 31.9 30.1 30.9 30.1
-------------------------------------------------
Combined Ratio 104.0% 133.1% 106.6% 121.2%
- -----------------------------------------------------------------------------------------------------------
* Operating ratios represent major components of expense expressed as a
percentage of earned premiums and are standard industry measurements used by
management to analyze Property & Casualty's profitability. Ratios exclude
intangibles and goodwill amortization, goodwill write-off and restructuring
charges.
+ Includes loss reserve strengthening of $240.0 in 2001. For the three months
ended September 30, 2001 excluding this adjustment, the Combined Ratio was
111.7,; the Loss Ratio was 69.0% and Loss Adjustment Expense Ratio was 12.6%.
For the nine months ended September 30, 2001, the adjusted Combined Ratio was
114.0%, the Loss Ratio was 71.5% and Loss Adjustment Expense Ratio was 12.4%.
The loss ratio for Property & Casualty operations improved by 25.1% points to
59.1% for the third quarter of 2002 from 84.2% a year ago. (Excluding the impact
of the third quarter 2001 loss reserve strengthening of $240.0, the 2001 loss
ratio was 69.0%.) This improvement reflects lower catastrophe and
weather-related losses in 2002 as well as aggressive actions to increase rates,
re-underwrite business and terminate contracts with agents writing unprofitable
business for us. These actions also reduced premium levels, resulting in a
higher expense ratio. As revenue growth begins to return, the expense ratio is
expected to improve. The higher expense ratio also reflects, in part, higher
commission ratios as our mix of business changes and low commission workers'
compensation business represents a smaller portion of our business. It also
reflects costs associated with putting our London operations into run off.
Underwriting Income (Loss)*
---------------------------------------------------
2002 2001+
---------------------------------------------------
Combined Combined
THREE MONTHS ENDED SEPTEMBER 30 Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
PERSONAL INSURANCE
Personal Auto $ (6.2) 101.2% $ 3.0 99.3%
Homeowners 5.5 97.1 (43.7) 123.4
Specialty 9.6 81.2 3.0 94.1
SAFECO BUSINESS INSURANCE
SBI Regular (11.9) 104.7 (87.8) 134.6
Special Accounts Facility 3.9 94.8 (2.0) 106.6
Run-off (15.4) 163.6 (153.8) 232.0
Surety 2.7 91.8 6.4 76.5
Other (33.6) -- (95.9) --
---------------------------------------------------
Total Property & Casualty Operations $ (45.4) 104.0% $ (370.8) 133.1%
- ----------------------------------------------------------------------------------------------------------
* Catastrophe losses for all lines, net of reinsurance, totaled $(9.9) and
$56.3 in the third quarter of 2002 and 2001, respectively. The reduction in
losses on catastrophes in the third quarter 2002 was due to lower third
quarter catastrophe losses and the reduction of reserves associated with
Southwest wild fires burning at the end of the second quarter of 2002.
Catastrophes are defined as events resulting in losses greater than $0.5
involving multiple claims and policyholders.
+ Includes loss reserve strengthening of $240.0 in 2001. For the three months
ended September 30, 2001 excluding this adjustment, the Combined Ratio was
111.7%, the Loss Ratio was 69.0% and Loss Adjustment Expense Ratio was 12.6%.
Underwriting Income (Loss)*
---------------------------------------------------
2002 2001+
---------------------------------------------------
Combined Combined
NINE MONTHS ENDED SEPTEMBER 30 Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------
PERSONAL INSURANCE
Personal Auto $ (33.8) 102.4% $ (62.4) 104.8%
Homeowners (49.6) 108.8 (172.4) 131.1
Specialty 20.6 86.4 2.8 98.1
SAFECO BUSINESS INSURANCE
SBI Regular (59.5) 107.9 (149.9) 119.0
Special Accounts Facility 10.3 94.5 2.0 97.9
Run-off (74.5) 145.8 (248.3) 166.5
Surety 11.6 87.6 13.2 80.5
Other (46.0) -- (96.2) --
---------------------------------------------------
Total Property & Casualty Operations $ (220.9) 106.6% $ (711.2) 121.2%
- ----------------------------------------------------------------------------------------------------------
* Catastrophe losses for all lines, net of reinsurance, totaled $82.5 and
$216.9 in the nine months ended September 30, 2002 and 2001, respectively.
Catastrophes are defined as events resulting in losses greater than $0.5,
involving multiple claims and policyholders.
+ Includes loss reserve strengthening of $240.0 in 2001. For the nine months
ended September 30, 2001, the adjusted Combined Ratio was 114.0%, the Loss
Ratio was 71.5% and Loss Adjustment Expense Ratio was 12.4%.
Personal Insurance - Auto
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ 536.4 $ 456.2 $ 1,502.7 $ 1,338.1
Underwriting Income (Loss) (6.2) 3.0 (33.8) (62.4)
Combined Ratio 101.2% 99.3% 102.4% 104.8%
The underwriting loss for the third quarter of 2002 of $6.2 compared to the
gain in the comparable quarter in 2001 reflects the unusually low number of
customer claims filed in September 2001. The 2002 year-to-date improvement in
underwriting loss of $28.6 reflects the actions taken in 2001 to increase rates,
cancel contracts with agencies producing unprofitable business for us and
tighten underwriting standards. Personal auto policies in force (PIF) at
September 30, 2002 increased by 4.7% compared to a year ago. This growth
reflects the introduction of our new auto insurance product with additional
pricing tiers to both provide more refined price points and to make insurance
available to a broader range of drivers, as well as the implementation of
point-of-sale technology in early 2002 which makes it easier for our agents to
write business with SAFECO. The new auto product has been introduced in 17
states and is expected to be available in 23 states in total by year-end 2002.
Net written premium increased by 17.6% in the third quarter of 2002 compared to
the same period a year ago, primarily reflecting price increases as well as the
PIF growth noted above.
In 2002, SPI - Personal Auto expanded its use of "insurance-scoring"
underwriting techniques, which use multiple variants to classify auto insurance
risks. These techniques are used by several competitors. Management believes the
use of insurance scoring, along with stricter underwriting standards, has
resulted in better matching of rates with risk. The use of these techniques has
been the subject of both legislative and regulatory review, resulting in some
instances in the limitations on these techniques. In addition to using these new
underwriting techniques, SPI - Personal Auto completed the launch of its new
automated underwriting system with point of sale technology. This system allows
SAFECO's agents to more efficiently quote and sell policies.
The automation initiative, new product introduction, rate increases, stricter
underwriting standards and increased agent commissions on new auto business are
all expected to contribute to improved profitability and policy growth in this
line of business.
Personal Insurance - Homeowners
Three Months Ended Nine Months Ended
September 30 September 30
---------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net Written Premium $ 212.1 $ 201.2 $ 592.4 $ 564.7
Underwriting Income (Loss) 5.5 (43.7) (49.6) (172.4)
Combined Ratio 97.1% 123.4% 108.8% 131.1%
The underwriting income (loss) for SPI - Homeowners improved by $49.2 and $122.8
in the three and nine months ended September 30, 2002, respectively, compared to
the 2001 comparable periods. Similarly the combined ratio improved to 97.1% and
108.8% for the three and nine months ended September 30, 2002, respectively,
compared to 123.4% and 131.1% in the comparable periods in 2001. These
improvements were due to lower catastrophe and weather-related losses due to
milder than anticipated weather conditions during the first nine months of 2002
compared to the same period of 2001, and continued rate increases. SPI
- -Homeowners catastrophe losses were $(6.6) in the third quarter of 2002 compared
to $22.0 a year ago. For the nine months ended September 30, 2002 and 2001
homeowner catastrophe losses were $50.6 and $112.3, respectively. Midwest
catastrophic hailstorms and Tropical Storm Allison impacted the homeowners line
in the third quarter of 2001. The reduction in losses on catastrophes in the
third quarter of 2002 was due to lower weather and catastrophe losses as well as
a reduction of reserves associated with second-quarter Southwest wildfires.
These fires were burning out of control at the end of the second quarter of
2002, preventing adjusters from compiling precise estimates of customer losses
at that time. Catastrophes are defined by SAFECO as events resulting in losses
greater than $0.5, involving multiple claims and policyholders.
In addition, our aggressive actions to increase rates and tighten underwriting
standards contributed to lower losses in this line of business. We also reduced
agent commissions for new monoline homeowners business during the first quarter
of 2002.
Homeowners PIF at September 30, 2002 decreased 8.2% from a year ago due to these
actions. Net written premiums increased 5.4% in the third quarter of 2002
compared to a year ago due to price increases. Homeowner average renewal
premiums have increased 14.5% in the third quarter 2002 when compared to the
same period in 2001. We launched a new tiered pricing structure for homeowners
in the first quarter of 2002 that more accurately prices business based on risk
characteristics. This approach, which matches rates more closely to risks, is
currently in place in 17 states, and we expect to have it in place in
approximately 23 states in total by year-end 2002.
SAFECO has continued raising prices, tightening terms and conditions and
reducing monoline homeowners commissions to improve SPI - Homeowners
underwriting results. In addition, in states where we have been unable to secure
sufficient rates to cover the cost of providing insurance, we have instituted a
moratorium on new homeowners business. Currently, there are moratoriums on
writing new business in 12 states. Moratoriums will be lifted in other states as
we secure approval to implement changes to move this product toward
profitability.
As announced in July 2001, we will continue to decrease the amount of homeowners
insurance written in states where we cannot achieve profitability. In addition,
SAFECO is introducing new language into homeowners policies sold in storm-prone
Midwest states. Already in place in Illinois, this change requires individuals
to pay a deductible of 1 percent of their home's value before insurance covers
repair costs for wind and hail damage.
Personal Insurance - Specialty
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ 54.4 $ 53.4 $ 158.4 $ 158.0
Underwriting Income 9.6 3.0 20.6 2.8
Combined Ratio 81.2% 94.1% 86.4% 98.1%
SPI - Specialty lines include earthquake, dwelling fire, inland marine and boat
insurance for individuals. Underwriting results for this business line improved
by $6.6 and $17.8 for the three and nine months ended September 30, 2002,
respectively, compared to the same periods in 2001. The improvement for the
third quarter of 2002 over the same 2001 period was primarily due to a reduction
in personal umbrella loss costs. For the nine months ended September 30, 2002
compared to the same period in 2001, the improvement was due to lower
catastrophe and weather loss costs as well as a reduction in personal umbrella
loss costs.
SAFECO Business Insurance
Consistent with our decision to focus on commercial lines insurance for
small-to-medium businesses, we began to consolidate our small-to-medium
(formerly Business Insurance) and large commercial lines (formerly Commercial
Insurance) operations in May 2001. For reporting purposes, these consolidated
commercial lines are now reported as SAFECO Business Insurance (SBI). Within
SBI, operations are managed and reported as SBI Regular, Special Accounts
Facility and Run-off.
SBI - Regular
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ 253.5 $ 236.9 $ 797.1 $ 763.1
Underwriting Loss (11.9) (87.8) (59.5) (149.9)
Combined Ratio 104.7% 134.6% 107.9% 119.0%
SBI - Regular is the core commercial segment writing commercial lines insurance
for small-to-medium sized businesses.
Underwriting losses were $75.9 and $90.4 lower in the three and nine months
ended September 30, 2002, respectively, compared to the 2001 comparable periods.
Excluding the impact of loss reserve strengthening on this line in the third
quarter of 2001, the improvement in underwriting losses for the three and nine
months ended September 30, 2002 was $11.0 and $25.5, respectively, compared to
the 2001 comparable periods. The combined ratio improved to 104.7% and 107.9%
for the three and nine months ended September 30, 2002, respectively, compared
to 134.6% and 119.0% for the 2001 comparable periods. Excluding the impact of
loss reserve strengthening, the combined ratios for the 2001 comparable periods
were 109.0% and 110.7%. The improvements were due to the aggressive actions
taken in 2001 to re-underwrite existing business, apply stricter underwriting
standards and increase rates, as well as lower claim costs from catastrophe and
weather losses.
Net written premiums increased 7.0% and 4.4% for the three and nine months ended
September 30, 2002, respectively, compared to the 2001 periods, reflecting rate
increases partially offset by declines in PIF. SBI - Regular's average renewal
premiums have increased 13.0% in the third quarter 2002 when compared to the
same period in 2001.
SBI-Regular is introducing a redesigned business model to support sales growth,
deliver pricing more accurately matched to risk characteristics and improve
customer service. The suite of technology services being introduced includes an
automated underwriting platform, a business service center and a new business
agency interface system. The underwriting platform and service center were
launched during the first and second quarters of 2002 and the new business
agency interface module is expected to launch in the fourth quarter of 2002.
SBI - Special Accounts Facility
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ 88.2 $ 33.3 $ 249.7 $ 99.4
Underwriting Income (Loss) 3.9 (2.0) 10.3 2.0
Combined Ratio 94.8% 106.6% 94.5% 97.9%
SBI - Special Accounts Facility writes continuing business for four specialty
commercial programs and larger commercial accounts written for key SAFECO
agents.
Underwriting income was $5.9 higher in the three months ended September 30,
2002, compared to the same period in 2001 and $8.3 higher for the comparable
nine month period ended September 30. The combined ratio was 94.8% and 94.5% for
the three and nine months ended September 30, 2002, respectively, compared to
106.6% and 97.9% in the comparable periods in 2001. SBI took aggressive actions
in 2001 to re-underwrite existing business, apply stricter underwriting
standards and increase rates. These actions drove the underwriting improvements
as well as profits from our acquisition in September 2001 of a lender-placed
property business. Net written premium for the SBI - Special Accounts Facility
increased 164.9% and 151.2% for the three and nine months ended September 30,
2002 over comparable 2001 periods due to this new lender-placed business,
combined with increased rates.
SBI - Run-off
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ (2.2) $ 98.8 $ 28.8 $ 339.8
Underwriting Loss (15.4) (153.8) (74.5) (248.3)
Combined Ratio 163.6% 232.0% 145.8% 166.5%
SBI - Run-off includes large commercial business accounts and 15 specialty
programs that SAFECO is exiting. We continue to run off poor-performing large
accounts and have established programs to focus on growth in the core
small-to-medium commercial business market.
Underwriting losses were $138.4 and $173.8 lower in the three and nine
months ended September 30, 2002, respectively, compared to the 2001 comparable
periods. Excluding the impact of loss reserve strengthening in the third quarter
of 2001, improvement in underwriting losses was $48.4 and $83.8 in the three and
nine months ended September 30, 2002, respectively, compared to the 2001
comparable periods. These improvements reflect the actions taken to reduce this
unprofitable business. SBI - Runoff net written premium for the quarter ended
September 30, 2002 included a reduction of $3.0 for estimated unbilled premiums
for workers' compensation reflecting lower estimated audit premiums due to the
significant decrease in workers' compensation business in this segment.
The underwriting loss for the nine months ended September 30, 2002 included a
$10.0 addition to reserves in the first quarter of 2002 for prior year
development in workers' compensation for large business accounts in SBI -
Run-off. The workers' compensation line continues to be unprofitable and SBI -
Run-off has substantially reduced its writing of this business and has not
renewed workers' compensation coverage in unprofitable markets. The lower
underwriting loss in the three and nine months ended September 30, 2002 reflects
the reduction of business volume as insurance policies are not renewed.
Surety
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Net Written Premium $ 38.4 $ 33.2 $ 101.2 $ 101.4
Underwriting Income 2.7 6.4 11.6 13.2
Combined Ratio 91.8% 76.5% 87.6% 80.5%
The combined ratio was 91.8% and 87.7% for the three and nine months ended
September 30, 2002, respectively, compared to 76.5% and 80.5% in the comparable
periods in 2001. Lower underwriting income for the three and nine months ended
September 30, 2002 reflected higher loss experience in the quarter.
Other
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Underwriting Loss $ (33.6) $ (95.9) $ (46.0) $ (96.2)
Property & Casualty Other includes assumed reinsurance business, non-voluntary
property and casualty business for personal lines, results from SAFECO's Lloyds
of London operation and discontinued product lines.
In the third quarter of 2002, SAFECO made the decision to put its London
operations into run off, resulting in an after-tax charge of $17.1 in the
quarter. This charge reflects the write-off of SAFECO's investment in its U.K.
subsidiary, R.F. Bailey (Underwriting Agencies) Ltd. It also includes
strengthening reserves to provide for higher-than-anticipated losses as the
business is run off.
Reserve strengthening of $85.0 was included in the underwriting loss reported
for the three and nine months ended September 30, 2001.
Life & Investments - Operations
Life & Investments offers individual and group insurance products, retirement
services, annuity products, mutual funds and investment advisory services. The
most significant product lines in terms of premium and deposit volume include
single premium immediate and deferred annuities, group medical excess loss
insurance, business owned life insurance, variable annuities, tax-sheltered
annuities, corporate retirement plans, and individual life insurance.
Income before net realized investment losses and income taxes (pretax income)
for all lines combined was $59.6 and $170.7 in the three and nine months ended
September 30, 2002, respectively, compared to $43.0 and $101.7 ($150.6 before
goodwill write-off) in the 2001 comparable periods. The primary reason for the
higher pretax income amounts in 2002 compared to 2001 (excluding goodwill
write-down) is the additional income from the acquisition of the Swiss Re group
medical excess loss and group life insurance business in July 2002, as well as
continued favorable group medical excess loss ratios. The premiums from the
acquired Swiss Re business are the main reason for the increase in Life &
Investments Premiums and Other Revenues, in the Consolidated Statements of
Income (Loss) for the three and nine months ended September 30, 2002 compared to
the same periods in 2001.
SAFECO's ratings downgrades in early 2001 continued to affect Life &
Investments' ability to sell certain of its products. The impact of the ratings
downgrades and other information about the lines of business are discussed
further below.
The following table summarizes the pretax income for Life & Investments major
product lines:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------
PRETAX INCOME 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Retirement Services $ 1.4 $ 4.3 $ 13.4 $ 9.6
Income Annuities 11.5 10.3 27.6 33.0
Group 22.4 3.3 46.7 22.1
Individual 3.5 4.8 17.7 21.1
Asset Management 0.9 1.6 4.9 5.4
Other 19.9 18.7 60.4 59.4
Goodwill Write-off -- -- -- (48.9)
------------------------------------------------
Income Before Net Realized Investment Losses and Income $ 59.6 $ 43.0 $ 170.7 $ 101.7
Taxes
- -----------------------------------------------------------------------------------------------------------
Retirement Services
Pretax income decreased by $2.9 and increased by $3.8 for the three and nine
months ended September 30, 2002, respectively, compared to the 2001
corresponding periods. The decrease in the third quarter of 2002 was due
primarily to bond defaults that lowered investment income and the declining
equity markets that resulted in additional amortization of deferred acquisition
costs, higher guaranteed minimum death benefit reserves on variable annuity
products and lower fee revenue. These factors also impacted retirement services
results for the nine months ended September 30, 2002. Results for the comparable
period in 2001 were impacted by losses on our discontinued equity index annuity
product of $10.7, compared with losses of $3.2 for the nine months ended
September 30, 2002.
Retirement services deposits increased by $282 for the first nine months of 2002
to $1,019 from $737 in 2001 largely due to sales of the SAFECO Select fixed
deferred annuity product, which totaled $712 through September 30, 2002 compared
to $482 in the first nine months of 2001. Sales of this new product slowed in
the third quarter of 2002 to $147 due to the low interest rate environment. The
declining equity markets is the primary reason for the decrease in Separate
Account Assets and Liabilities in the Consolidated Balance Sheets.
Assets under management increased to $6.6 billion at September 30, 2002 compared
to $6.0 billion a year ago.
Income Annuities
Pretax income increased by $1.2 and decreased by $5.4 in the three and nine
months ended September 30, 2002, respectively, compared to the 2001
corresponding periods. The income fluctuations were due primarily to repayments
and changes in anticipated repayments of collateralized mortgage obligation
investments driven by lower interest rates. The impact of actual or anticipated
repayment rates may lower future investment income should interest rates rise.
Total income annuity assets of $6.3 billion at September 30, 2002 were up
slightly compared to a year ago. The primary product in this business line is
the single-premium immediate annuity that is sold to fund third-party personal
injury settlements. This product is extremely sensitive to financial strength
ratings and SAFECO's ratings downgrades during the first quarter of 2001
significantly curtailed the volume of new income annuity deposits. Deposits for
income annuities were $70.0 for the nine months ended September 30, 2002
compared to $58.0 for the same period in 2001.
Group
The primary product offering in this business line is excess loss insurance sold
to employers with self-insured employee medical plans.
In July 2002, we completed our acquisition of the medical excess loss and group
life business of Swiss Re Life & Health America Holding Company (Swiss Re). The
primary purpose of the acquisition is to build greater presence in the medical
excess loss market and leverage SAFECO's expertise in this line. The acquired
business generated written premiums of $60.1 and pretax operating income of
$12.6 in the third quarter of 2002. See Note 4 for additional information.
Pretax income increased by $19.1 and $24.6 in the three and nine months ended
September 30, 2002, respectively, compared to the 2001 comparable periods. These
improvements included the additional income of $12.6 in the third quarter of
2002 from the acquired Swiss Re business and reflected continued low loss
ratios. The medical loss ratio in the third quarter of 2002 was 58%, compared to
68% in the third quarter of 2001. The current low loss ratios may be difficult
to achieve in future quarters.
Individual
Individual products include term, universal and variable universal life and
business owned life insurance (BOLI). BOLI is universal life insurance sold to
banks and is extremely sensitive to financial strength ratings. SAFECO's ratings
downgrades during the first quarter of 2001 significantly curtailed the volume
of new BOLI deposits.
Pretax income decreased by $1.3 and $3.4 in the three and nine months ended
September 30, 2002, respectively, compared to the 2001 corresponding periods.
These decreases were due primarily to increased claims experience in BOLI and
other universal life products, and lower investment income due to bond defaults
in 2002.
Asset Management
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual
funds, variable annuity portfolios and a number of outside pension and trust
accounts. Pretax income decreased by $0.7 and $0.5 in the three and nine months
ended September 30, 2002, respectively, compared to the 2001 corresponding
periods. The decreases in income were due to lower investment advisory fees on
reduced assets under management. Assets under management totaled $3.7 billion at
September 30, 2002 compared to $4.6 billion at September 30, 2001 and reflected
lower asset values.
Other
The Life & Investments Other line is comprised mainly of investment income from
the investment of capital and prior years' earnings of the operating lines of
business, as well as pretax earnings from Talbot Financial Corporation (Talbot),
a wholly-owned subsidiary. Talbot is an insurance agency that distributes both
property and casualty and life insurance products. Talbot's revenues and pretax
income increased in the third quarter of 2002 due to higher commission revenues.
Pretax income for the Other line increased $1.2 and $1.0 for the three and nine
months ended September 30, 2002, compared to the 2001 corresponding periods.
Corporate
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Loss before Net Realized Investment Gains (Losses)
and Income Taxes $ (16.1) $ (14.4) $ (42.3) $ (41.9)
The Corporate segment includes operating results for the parent company, SAFECO
Financial Products, Inc. (SFP), SAFECO Properties and intercompany elimination
transactions. The parent company's primary expense is interest expense on
borrowings, totaling $17.9 and $17.7 for the third quarter of 2002 and 2001,
respectively, and totaling $50.3 and $50.0 for the nine months ended September
30, 2002 and 2001, respectively. These amounts do not include the expense for
the distributions on SAFECO's Capital Securities which is presented net of tax
on the Consolidated Statements of Income (Loss).
SFP, a wholly-owned subsidiary, engages in limited activity for its own account
by selling single name credit default swaps (credit swaps), writing and hedging
S&P 500 index options and investing in and hedging convertible bonds. The third
quarter 2002 pretax operating loss of $5.4 and the third quarter 2001 pretax
operating gain of $2.0 reflect the significant change in the levels of market
volatility between the two periods.
At September 30, 2002, SFP had credit swaps with notional amounts outstanding
totaling $835.0. These credit swaps involved selling credit protection for a fee
that covers certain credit events on assets owned by the buyer (financial
institutions and investment banks) such that if a credit event occurs SFP would
make a payment to the buyer. Approximately 96% of the credit swap's underlying
issuers were rated investment grade by Standard and Poor's (BBB- or higher),
with 60% of the portfolio rated A- or higher. The credit swaps are
marked-to-market and this adjustment is recorded in net realized investment
gains and losses on the income statement. The third quarter 2002 SFP losses of
$27.3 included a $8.6 realized loss arising from the WorldCom bankruptcy.
The fair value of SFP's written S&P 500 index options liability was $21.4 and
$29.9 at September 30, 2002 and 2001, respectively. SFP's investment portfolio
included investment grade convertible bonds with market values totaling $50.1 at
September 30, 2002. There were no convertible bonds at September 30, 2001.
Capital Resources and Liquidity
Sources and Uses of Funds
SAFECO's operations have liquidity requirements that vary among the segments and
principal product lines. Life insurance, retirement services and annuity product
reserves are primarily longer-duration liabilities that are typically
predictable in nature and are supported by investments that are generally
longer-duration. Property & 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.
SAFECO's liquidity needs are met by dividends from our subsidiary operations,
the sale and maturity of invested assets and external borrowings. Our
subsidiaries' primary sources of cash from operations are insurance premiums,
funds received under deposit contracts, dividends, interest and asset management
fees. SAFECO has not engaged in the sale by securitization of any investments or
other assets.
SAFECO's liquidity needs are being met and the successful achievement of our
goals will enhance our liquidity position; conversely, an inability to sustain
adequate profitability may adversely affect our capital resources and liquidity
position.
SAFECO uses funds to support operations, service and pay down debt, pay
dividends to SAFECO shareholders 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.
In order to better match invested asset duration to the duration of related
liabilities, during 2002 we have repositioned our Property & Casualty investment
portfolio to reduce the bond investment portfolio duration from approximately 7
to approximately 5. As of September 30, 2002, the bond investment portfolio's
duration was 4.9 compared to 5.7 at June 30, 2002 and 7 at March 31, 2002. The
Property & Casualty asset allocation mix also has been adjusted to reduce
volatility, by lowering the exposure to equity securities. Equity securities
comprised approximately 10% of this investment portfolio at September 30, 2002
compared to approximately 18% at December 31, 2001. As a result of executing
this strategy, this portfolio's allocation to taxable bonds has increased
relative to its tax-exempt holdings. As a result, pretax investment income for
the Property & Casualty investment portfolio has increased compared to 2001
while after-tax investment income has declined for the three months ended
September 30, 2002 compared to the three months ended September 30, 2001.
Total cash provided by operating activities for the nine months ended September
30, 2002 and 2001 was $588.9 and $391.6, respectively (see Consolidated
Statements of Cash Flows for additional information). The main reason for the
improved operating cash flow is lower Property & Casualty claims payments, due
primarily to lower catastrophe and weather losses as well as the effect of our
re-underwriting and pricing efforts begun in 2001. After tax investment income
has declined during 2002 and is expected to be lower for the remainder of 2002
due to lower interest rates and changes in SAFECO's investment strategy as
discussed above. There will be no changes in our dividend policy for the
remainder of 2002.
The higher level of proceeds from the sale of fixed maturities and equities and
the higher level of purchases of fixed maturities for the nine months ending
September 30, 2002 compared to the corresponding period in 2001 were due to the
portfolio repositioning discussed above.
On August 23, 2002, SAFECO issued $375.0 of senior notes with a coupon of 7.25%
that mature in 2012. These notes were issued under a universal shelf
registration that was filed with the Securities and Exchange Commission in the
second quarter of 2002, that allows SAFECO to issue up to $900 in securities.
The proceeds of the notes were used for the repayment of $299.0 of commercial
paper borrowings, $18.7 for the termination of related interest rate swaps and
$28.4 for repayment of medium-term notes. The balance is expected to be used to
repay upcoming debt maturities and for general corporate purposes. SAFECO
simultaneously entered into a $375.0 notional interest rate swap to effectively
convert the fixed rate senior note obligation into a Libor-based floating rate
obligation. The fair value of the interest rate swap is marked-to-market on the
balance sheet with the offsetting corresponding asset or liability included in
the face value of the debt.
SAFECO renewed its bank credit facility in September 2002 with $500.0 available
through September 2005. This replaced the $800.0 facility that expired in
September 2002. SAFECO pays a fee to have the facility available and does not
maintain deposits as compensating balances. Similar to its previous facility,
the new facility carries certain covenants that require SAFECO to maintain a
specified minimum level of shareholders' equity and a maximum
debt-to-capitalization ratio. There were no borrowings under either facility as
of September 30, 2002 and December 31, 2001 and SAFECO was in compliance with
all covenants.
The $900 universal shelf registration described above has $525 available for
issuance, after our third quarter 2002 issuance of $375 of senior notes.
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 and financial strength ratings have become an
increasingly important factor in establishing the competitive position of
insurance companies. Claims-paying ratings are important for the marketing of
certain insurance products, for example, structured settlement annuities and
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-capital 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.
Lower ratings could, among other things, significantly affect our ability to
sell certain life insurance and investment products, materially increase the
number of policy surrenders and withdrawals by policyholders of cash value from
their policies, adversely affect relationships with broker-dealers, banks,
agents and other distributors of our products and services, adversely affect new
sales, significantly affect borrowing costs or limit our access to capital, and
adversely affect our ability to compete. As a consequence, any of these factors
could have a material adverse affect on our business, results of operations and
financial condition.
Due primarily to Property & Casualty's poor underwriting results in 2000 and
2001, our claims paying and corporate credit ratings were lowered, most recently
in the first half of 2001. All rating agencies except for A.M. Best maintain a
stable outlook on their ratings of SAFECO. As of September 30, 2002, A.M. Best
maintained a negative outlook on Property & Casualty's financial strength rating
and SAFECO's debt ratings while maintaining a stable outlook on the Life &
Investments companies. On August 13, 2002, Standard & Poor's (S&P) affirmed its
ratings on SAFECO and our property and casualty subsidiaries. At the same time,
S&P lowered its ratings on our life insurance subsidiaries because of a change
in S&P group methodology criteria, which modified the rating provided to
subsidiaries. The new criteria generally limits the rating given to a subsidiary
that S&P deems "strategically important" to the parent to within one notch of
the rating of the parent's core group.
Lower operating results in 2000 and 2001 combined with increased operating
leverage in Property & Casualty contributed to lower debt service coverage for
SAFECO. In addition, the interest rates on short-term borrowings increased due
to the ratings downgrades. We believe our financial position is sound and
continue to execute our action plans to improve Property & Casualty results. The
effect of our action plans is being reflected in improved operating results and
SAFECO's debt service coverage has improved during the first nine months of
2002. It is, however, possible that further negative ratings actions may occur.
Lower ratings have significantly affected Life & Investments ability to sell
income annuities and BOLI. If ratings are further lowered, SAFECO may incur
higher borrowing costs, may have more limited means to access capital, and may
have additional difficulties marketing certain of its insurance products that
are dependent upon ratings being at or above a particular level.
The following table summarizes SAFECO's current ratings:
Standard
A.M. Best Fitch Moody's & Poor's
- -----------------------------------------------------------------------------------------------------------
SAFECO Corporation
Senior Debt bbb+ A- Baa1 BBB+
Capital Securities bbb BBB+ baa1 BBB-
Commercial Paper AMB-2 F-2 P-2 A-2
Financial Strength/Claims-Paying Ability
Property & Casualty Subsidiaries A AA- A1 A+
Life Subsidiaries A AA- A1 A
- -----------------------------------------------------------------------------------------------------------
Investment Summary
Net Investment Income
SAFECO's consolidated pretax investment income was $420.4 and $408.9 for the
third quarter of 2002 and 2001, respectively, and was $1,247.9 and $1,232.2 for
the nine months ended September 30, 2002 and 2001, respectively. The investment
portfolios of Property & Casualty and Life & Investments produced substantially
all of this investment income. The net investment income detail is presented
below:
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
PRETAX INVESTMENT INCOME 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Property & Casualty $ 114.5 $ 111.2 $ 345.0 $ 340.7
Life & Investments 307.1 295.1 897.7 884.2
Corporate (1.2) 2.6 5.2 7.3
----------------------- ------------------------
Total $ 420.4 $ 408.9 $ 1,247.9 $ 1,232.2
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
-------------------------------------------------
PRETAX INVESTMENT RETURNS 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------
Property & Casualty 5.9% 6.2% 5.9% 6.3%
Life & Investments 7.5% 7.6% 7.4% 7.6%
Life & Investments pretax investment income has increased slightly for the three
months and nine months ended September 30, 2002 compared to 2001 corresponding
periods due primarily to the higher invested assets base in the current period.
The increased income due to the growth in the investment portfolio was partially
offset by losses from bond defaults.
Although Property & Casualty's pretax investment income has increased slightly
in 2002 compared to 2001, after-tax investment income declined for the nine
months ended September 30, 2002 compared to the 2001 corresponding period due to
the portfolio repositioning discussed below and to lower interest rates.
After-tax investment income for the remainder of 2002 is expected to be lower
due to lower interest rates and this repositioning of the investment portfolio.
In order to better match invested asset duration to the duration of related
liabilities, during 2002 we have repositioned our Property & Casualty investment
portfolio to reduce the bond investment portfolio duration from approximately 7
to approximately 5. As of September 30, 2002, the bond investment portfolio's
duration was 4.9 compared to 5.7 at June 30, 2002 and 7 at March 31, 2002. The
Property & Casualty asset allocation mix also has been adjusted to reduce
volatility, by lowering the exposure to equity securities. Equity securities
comprised approximately 10% of this investment portfolio at September 30, 2002
compared to approximately 18% at December 31, 2001. As a result of executing
this strategy, this portfolio's allocation to taxable bonds has increased
relative to its tax-exempt holdings. As a result, pretax investment income for
the Property & Casualty investment portfolio has increased compared to 2001
while after-tax investment income has declined for the three months ended
September 30, 2002 compared to the three months ended September 30, 2001.
Net Realized Investment Gains (Losses)
Consolidated pretax net realized investment gains totaled $12.5 and $18.5 for
the three months ended September 30, 2002 and 2001, respectively, and $138.5 and
$80.7 for the first nine months ended September 30, 2002 and 2001, respectively.
The significant net gains realized for the nine months in 2002 compared to the
corresponding period of 2001 were due primarily to gains of $203.0 from the
repositioning of the Property & Casualty investment portfolio.
Pretax net realized gains/losses by major segment were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------------------------
PRETAX NET REALIZED GAINS (LOSSES) 2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------
Property & Casualty $ 71.2 $ 34.1 $ 302.7 $ 104.9
Life & Investments (13.0) (8.9) (99.9) (3.9)
Corporate (45.7) (6.7) (64.3) (20.3)
----------------------------------------------------
Total $ 12.5 $ 18.5 $ 138.5 $ 80.7
- -----------------------------------------------------------------------------------------------------------
Included in the consolidated totals above are net losses from the write-down of
certain investments. Each investment that has declined in fair value below cost
is monitored and if the decline is judged to be other than temporary, the
security is written down to fair value. Pretax consolidated investment
write-downs were $38.0 and $14.4 for the three months ended September 30, 2002
and 2001, respectively, and $152.1 and $64.5 for the nine months ended September
30, 2002 and 2001, respectively. The write-downs in 2002 were due to credit
deterioration and corporate failures of fixed-maturity issuers, primarily in the
telecommunications and energy sectors.
The consolidated totals also include derivative activity related to SFP's credit
default swaps activity as well as the reclassification from accumulated other
comprehensive income to realized loss of $18.7 related to the termination of an
interest rate swap in the third quarter of 2002 discussed in Note 2 - Financial
Instruments. The losses on credit default swaps totaled $43.6 for the nine
months ended September 30, 2002 and $27.3 for the third quarter of 2002.
Consequently, mark-to-market adjustments of these instruments and any default
losses realized are recorded in realized gains or losses in the Consolidated
Statements of Income (Loss).
- --------------------------------------------------------------------------------
PART I Item 4 - CONTROLS AND PROCEDURES
- --------------------------------------------------------------------------------
Item 4 - Controls and Procedures
Within 90 days before the filing of this Form 10-Q, under the supervision and
with the participation of SAFECO management, including our Chief Executive
Officer and Chief Financial Officer, we carried out an evaluation of the
effectiveness of the design and operation of SAFECO's disclosure controls and
procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that SAFECO's disclosure controls and procedures are effective in
timely alerting them to material information relating to SAFECO, required to be
included in SAFECO's periodic SEC filings.
There have been no significant changes in SAFECO's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
Forward-looking information is subject to risk and uncertainty
Statements made in this report that relate to anticipated financial performance,
business prospects and plans, regulatory developments and similar matters are
"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. The operations, performance and development of
our business are subject to certain risks and uncertainties that may cause
actual results to differ materially from those contained in or suggested by the
forward-looking statements in this report. The risks and uncertainties include,
but are not limited to:
o the ability to obtain rate increases and decline or non-renew underpriced
insurance accounts;
o achievement of premium targets and profitability;
o realization of growth and business retention estimates;
o achievement of overall expense goals;
o success in implementing a new business entry model for personal and
commercial lines;
o success in obtaining regulatory approval of price-tiered products and the
use of insurance scores;
o the ability to freely enter and exit lines of business;
o changes in the mix of SAFECO's book of business;
o driving patterns;
o the competitive pricing environment, initiatives by competitors and other
changes in competition;
o weather conditions, including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions;
o the occurrence of significant natural disasters, including earthquakes;
o the occurrence of significant man-made disasters, such as the attack on
September 11, 2001;
o the occurrence of bankruptcies that result in losses under surety bonds,
investment losses or lower investment income;
o the adequacy of loss and benefit reserves for the Property & Casualty and
Life & Investments businesses;
o the availability of, pricing of, and ability to collect reinsurance;
o the ability to run off the Lloyd's of London business without incurring
material unexpected charges;
o the ability to exclude and to reinsure the risk of loss from terrorism;
o interpretation of insurance policy provisions by courts, court decisions
regarding coverage and theories of liability, trends in litigation and
changes in claims settlement practices;
o the outcome of any litigation against us;
o legislative and regulatory developments affecting the actions of insurers,
including requirements regarding rates and availability of coverage;
o changes in tax laws and regulations that affect the favorable taxation of
certain life insurance products or that decrease the usefulness of life
insurance products for estate planning purposes;
o negative changes to our ratings by rating agencies;
o the effect of current insurance and credit ratings levels on business
production;
o inflationary pressures on medical care costs, auto parts and repair,
construction costs and other economic sectors that increase the severity of
claims;
o availability of bank credit facilities;
o the profitability of the use of derivative securities by SAFECO Financial
Products;
o fluctuations in interest rates;
o performance of financial markets; and
o general economic and market conditions.
Because insurance rates in some jurisdictions are subject to regulatory review
and approval, the achievement of rate increases may occur in amounts and on a
time schedule different than planned, which may affect the efforts to restore
earnings in the property and casualty lines.
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION - Item 1 - LEGAL PROCEEDINGS & Item 5 - OTHER
INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
Because of the nature of their businesses, SAFECO's insurance and other
subsidiaries are subject to 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. SAFECO does not believe that such
litigation will have a material adverse effect on its financial condition,
future operating results or liquidity.
The property and casualty insurance subsidiaries of SAFECO are parties to a
number of lawsuits for liability coverages related to environmental claims.
Although estimation of reserves for environmental claims is difficult, the loss
and loss adjustment expenses with respect to any such lawsuit, or all lawsuits
related to a single incident combined, are not expected to be material to
Safeco's financial condition. For more information regarding the liability of
such subsidiaries for environmental claims and the difficult process of
estimating environmental reserves see the Property & Casualty - Loss Reserve
section under Part I, Item 1 in SAFECO's 2001 Annual Report on Form 10-K/A.
The SAFECO property and casualty insurance companies were sued on July 18, 2001
in U.S. District Court for the Northern District of Ohio and on August 10, 2001
in California state court by plaintiffs who purport to represent classes of
present and former claims adjusters. The plaintiffs claim that claims adjusters
should have been considered non-exempt employees under the labor laws, and seek
damages representing back overtime pay for certain hours worked. SAFECO intends
to vigorously defend against these allegations.
On August 6, 2002, General Insurance Company of America was voluntarily
dismissed by the plaintiffs as a defendant in Hobbs v. State Farm Mutual
Automobile Insurance Co., et al., a putative class-action lawsuit filed in 1999
in Illinois state court against seven property and casualty insurance groups.
Item 5 - Other Information
Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, as amended
by Section 202 of the Sarbanes-Oxley Act of 2002, SAFECO is responsible for
disclosing the non-audit services approved by SAFECO's audit committee to be
performed by our external auditors, Ernst & Young LLP, during the third quarter.
During the quarterly period covered by this report, the Audit Committee approved
the engagement of Ernst & Young, LLP to review the reserves and related
accounting for SAFECO's investment in its U.K. subsidiary, R.F. Bailey
(Underwriting Agencies) Ltd., and related operations.
PART II OTHER INFORMATION - Item 6 - EXHIBITS AND REPORTS ON FORM 8-K
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Separation Agreement between SAFECO Corporation and H. Paul
Lowber dated July 31, 2002.
10.2 Credit Agreement dated as of September 18, 2002 among SAFECO
Corporation, as the Borrower, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer, JPMorgan
Chase Bank and US Bank, as Co-Syndication Agents, Keybank
National Association, as Documentation Agent, and the other
lenders party thereto.
99.1 Certification of Chief Executive Officer of SAFECO Corporation,
dated November 6, 2002, in accordance with 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of Chief Financial Officer of SAFECO Corporation,
dated November 6, 2002, in accordance with 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The registrant filed the following Form 8-K's during the quarter ended
September 30, 2002 and for the period up to the filing date of this
Form 10-Q.
Filing dated Under Filing related to:
-----------------------------------------------------------------------
July 5, 2002 Item 5 (Other Items) Announcement of SAFECO's
finance group appointments.
July 23, 2002 Item 5 (Other Items) Earnings press release for
quarter ended June 30, 2002.
August 1, 2002 Item 5 (Other Items) Announcement of closing of
Swiss Re group medical
excess loss acquisition.
August 14, 2002 Item 9 (FD Statements under Oath by CEO
Disclosures) & CFO; Certifications by CEO
& CFO.
August 21, 2002 Item 5(Other Items) Information and agreements
Item 7 (Financial for Form S-3 originally
Statements) filed on May 7, 2002.
September 24, 2002 Item 5 (Other Items) Announcement of SAFECO
renewal of credit facility
agreements.
October 28, 2002 Item 5 (Other Items) Earnings press release for
quarter ended September 30,
2002.
-----------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SAFECO CORPORATION
-------------------------------------------------
Registrant
Dated: November 6, 2002 /s/ CHRISTINE B. MEAD
-------------------------------------------------
Christine B. Mead
Senior Vice President, Chief Financial Officer
and Secretary
Dated: November 6, 2002 /s/ RICHARD M. LEVY
-------------------------------------------------
Richard M. Levy
Vice President, Controller
and Chief Accounting Officer
SAFECO Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Certification of Chief Executive Officer
- --------------------------------------------------------------------------------
I, Michael S. McGavick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SAFECO
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 6, 2002 /s/ MICHAEL S. MCGAVICK
-----------------------
Michael S. McGavick
President and
Chief Executive Officer
SAFECO Corporation and Subsidiaries
Certification of Chief Financial Officer
I, Chrstine B. Mead, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SAFECO
Corporation;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 6, 2002 /s/ CHRISTINE B. MEAD
---------------------
Christine B. Mead
Senior Vice President,
Chief Financial Officer
and Secretary