UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarterly Period Ended June 30, 2003
[ ] 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 [ ].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X]. NO [ ].
Common Stock, No Par Value, 138,482,061 shares were
outstanding at July 31, 2003.
Safeco Corporation and Subsidiaries
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CONTENTS
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Item Description Page
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Part I Financial Information
1 Financial Statements
Consolidated Statements of Income
for the three and six months ended June 30, 2003 and 2002 3
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and 2002 6
Consolidated Statements of Shareholders' Equity
for the six months ended June 30, 2003 and 2002 8
Consolidated Statements of Comprehensive Income (Loss)
for the three and six months ended June 30, 2003 and 2002 8
Condensed Notes to Consolidated Financial Statements 9
2 Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
4 Controls and Procedures 43
Part II Other Information
1 Legal Proceedings 44
4 Submission of Matters to a Vote of Security Holders 44
6 Exhibits and Reports on Form 8-K 45
Signatures 46
Safeco Corporation and Subsidiaries
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PART I -ITEM 1 FINANCIAL STATEMENTS
Consolidated Statements of Income
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Three Months Ended Six Months Ended
June 30 June 30
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(In Millions, Except Per Share Amounts) 2003 2002 2003 2002
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Property & Casualty Earned Premiums $ 1,201.8 $ 1,122.0 $ 2,364.9 $ 2,221.5
Life & Investments Premiums and Other Revenues 221.1 166.1 445.0 331.2
Net Investment Income 423.1 412.8 845.6 827.5
Net Realized Investment Gains (Losses) 22.3 95.4 (27.6) 126.0
Other 2.7 2.0 5.4 4.7
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Total 1,871.0 1,798.3 3,633.3 3,510.9
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EXPENSES
Losses, Loss Adjustment Expenses
and Policy Benefits 1,188.0 1,181.4 2,320.1 2,341.0
Other Underwriting and Operating Expenses 269.8 218.2 522.3 441.6
Amortization of Deferred Policy Acquisition Costs 222.7 212.4 438.9 421.9
Interest Expense 13.2 16.4 30.3 32.4
Intangibles Amortization 4.2 4.2 7.9 8.1
Restructuring Charges -- 5.5 -- 12.1
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Total 1,697.9 1,638.1 3,319.5 3,257.1
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Income Before Income Taxes and Distributions
on Capital Securities 173.1 160.2 313.8 253.8
Provision for Income Taxes 50.0 43.8 89.5 62.6
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Income Before Distributions on Capital Securities 123.1 116.4 224.3 191.2
Distributions on Capital Securities, Net of Taxes (11.2) (11.2) (22.4) (22.4)
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Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
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INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock:
Diluted $ 0.81 $ 0.82 $ 1.45 $ 1.32
Basic $ 0.81 $ 0.82 $ 1.46 $ 1.32
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Dividends Declared $ 0.185 $ 0.185 $ 0.370 $ 0.370
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Average Number of Shares Outstanding During the
Period:
Diluted 139.0 128.1 138.8 128.1
Basic 138.4 127.8 138.3 127.8
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See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Consolidated Balance Sheets
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June 30 December 31
2003 2002
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(In Millions) (Unaudited) (Audited)
ASSETS
Investments
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $23,190.5;
$22,646.1) $ 25,639.3 $ 24,278.0
Marketable Equity Securities, at Fair Value (Cost: $767.5; $777.2) 1,167.3 1,082.5
Mortgage Loans 942.8 925.9
Other Invested Assets 184.9 173.8
Short-Term Investments 434.1 311.0
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Total Investments 28,368.4 26,771.2
Cash and Cash Equivalents 199.2 188.5
Accrued Investment Income 333.8 336.3
Premiums and Service Fees Receivable 1,081.6 1,047.1
Other Notes and Accounts Receivable 239.1 162.3
Current Income Taxes Recoverable 39.1 26.2
Deferred Income Taxes Recoverable -- 124.6
Reinsurance Recoverables 568.1 578.8
Deferred Policy Acquisition Costs 622.8 626.3
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation: $319.4; $319.7) 472.4 488.7
Intangibles and Goodwill 190.1 190.0
Other Assets 284.1 259.8
Securities Lending Collateral 3,199.2 2,957.0
Separate Account Assets 995.4 899.2
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Total Assets $ 36,593.3 $ 34,656.0
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See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Consolidated Balance Sheets
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June 30 December 31
2003 2002
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(In Millions) (Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Property & Casualty Loss and Loss Adjustment Expense Reserves $ 4,916.0 $ 4,998.5
Accident and Health Reserves 155.7 170.0
Life Policy Liabilities 323.6 339.9
Unearned Premiums 2,008.4 1,847.5
Funds Held Under Deposit Contracts 16,198.7 15,655.4
Debt 1,124.6 1,123.8
Deferred Income Taxes 235.3 --
Other Liabilities 1,438.1 1,389.3
Securities Lending Payable 3,199.2 2,957.0
Separate Account Liabilities 995.4 899.2
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Total Liabilities 30,595.0 29,380.6
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Commitments and Contingencies -- --
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures of the
Corporation (Capital Securities) 844.0 843.8
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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: 11.7; 12.0
Shares Issued and Outstanding: 138.5; 138.2 1,182.9 1,178.1
Retained Earnings 2,222.6 2,072.2
Accumulated Other Comprehensive Income, Net of Taxes:
Unrealized Gains and Losses on Available-for-Sale Securities and
Derivative Financial Instruments 1,824.8 1,241.2
Unrealized Foreign Currency Translation Adjustments (10.5) (15.7)
Deferred Policy Acquisition Costs Valuation Allowance (56.7) (35.4)
Minimum Pension Liability Adjustment (8.8) (8.8)
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Total Accumulated Other Comprehensive Income 1,748.8 1,181.3
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Total Shareholders' Equity 5,154.3 4,431.6
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Total Liabilities and Shareholders' Equity $ 36,593.3 $ 34,656.0
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See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Consolidated Statements of Cash Flows
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Six Months Ended
June 30
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(In Millions) 2003 2002
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(Unaudited) (Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 2,786.3 $ 2,394.2
Dividends and Interest Received 792.8 770.4
Other Operating Receipts 121.3 88.9
Insurance Claims and Policy Benefits Paid (1,952.8) (1,858.9)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,114.9) (1,158.3)
Interest Paid and Distributions on Capital Securities (59.1) (65.8)
Income Taxes Paid (34.4) (32.9)
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Net Cash Provided by Operating Activities 539.2 137.6
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INVESTING ACTIVITIES
Purchases of
Fixed Maturities Available-for-Sale (3,326.7) (3,432.4)
Equity Securities Available-for-Sale (73.5) (160.0)
Other Invested Assets (11.4) (34.1)
Issuance of Mortgage Loans (61.2) (35.5)
Issuance of Policy Loans (12.0) (11.8)
Maturities of Fixed Maturities Available-for-Sale 1,597.5 773.7
Sales of
Fixed Maturities Available-for-Sale 1,256.4 1,603.7
Equity Securities Available-for-Sale 86.7 450.8
Other Invested Assets 1.7 45.9
Repayment of Mortgage Loans 51.2 43.6
Repayment of Policy Loans 12.3 13.4
Net (Increase) Decrease in Short-Term Investments (123.1) 385.1
Other, Net 1.6 (26.4)
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Net Cash Used in Investing Activities (600.5) (384.0)
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FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 674.9 722.7
Return of Funds Held Under Deposit Contracts (540.4) (562.6)
Proceeds from Notes 495.9 --
Repayment of Notes (510.9) (9.0)
Net Repayment of Commercial Paper -- (2.3)
Common Stock Reacquired -- (3.2)
Dividends Paid to Shareholders (51.2) (47.3)
Other, Net 3.7 4.9
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Net Cash Provided by Financing Activities 72.0 103.2
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Net Increase (Decrease) in Cash and Cash Equivalents 10.7 (143.2)
Cash and Cash Equivalents, Beginning of Period 188.5 269.3
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Cash and Cash Equivalents, End of Period $ 199.2 $ 126.1
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See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Consolidated Statements of Cash Flows --
Reconciliation of Net Income to Net Cash Provided by Operating Activities
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Six Months Ended
June 30
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(In Millions) 2003 2002
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(Unaudited) (Unaudited)
Net Income $ 201.9 $ 168.8
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ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Net Realized Investment (Gains) Losses 27.6 (126.0)
Amortization of Fixed Maturity Investments (22.3) (24.3)
Amortization and Depreciation 38.6 43.9
Deferred Income Tax Provision 52.0 8.1
Interest Expense on Deposit Contracts 452.6 434.0
Other, Net (42.1) (37.2)
Changes in
Accrued Interest on Accrual Bonds (22.5) (22.1)
Accrued Investment Income 2.5 (9.4)
Deferred Policy Acquisition Costs 3.5 (17.4)
Property & Casualty Loss and Loss Adjustment Expense Reserves (82.5) 59.6
Accident and Health Reserves (14.3) (1.0)
Life Policy Liabilities (16.3) 5.1
Unearned Premiums 160.9 53.4
Current Income Taxes Recoverable (12.9) 11.8
Other Assets and Liabilities (187.5) (409.7)
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Total Adjustments 337.3 (31.2)
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Net Cash Provided by Operating Activities $ 539.2 $ 137.6
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There were no significant non-cash financing or investing activities for the six
months ended June 30, 2003 and 2002.
See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Consolidated Statements of Shareholders' Equity
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Six Months Ended
June 30
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(In Millions) 2003 2002
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(Unaudited) (Unaudited)
COMMON STOCK
Balance at Beginning of Period $ 1,178.1 $ 841.9
Stock Issued for Options and Rights 4.8 4.8
Common Stock Reacquired -- (0.3)
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Balance at End of Period 1,182.9 846.4
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RETAINED EARNINGS
Balance at Beginning of Period 2,072.2 1,875.9
Net Income 201.9 168.8
Amortization of Underwriting Compensation on Capital Securities (0.2) (0.2)
Dividends Declared (51.3) (47.3)
Common Stock Reacquired -- (2.5)
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Balance at End of Period 2,222.6 1,994.7
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ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Period 1,181.3 916.8
Other Comprehensive Income (Loss) 567.5 (63.4)
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Balance at End of Period 1,748.8 853.4
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Shareholders' Equity $ 5,154.3 $ 3,694.5
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Consolidated Statements of Comprehensive Income
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Three Months Ended Six Months Ended
June 30 June 30
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(In Millions) 2003 2002 2003 2002
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(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
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Other Comprehensive Income (Loss),
Net of Taxes:
Change in Unrealized Gains (Losses) on
Available-for-Sale Securities 548.3 186.2 570.1 22.5
Reclassification Adjustment for Net
Realized Investment (Gains) Losses
Included in Net Income (14.7) (62.0) 17.7 (82.1)
Derivatives Qualifying as Hedges -
Net Change in Value (6.3) 11.1 (4.2) 3.9
Adjustment for Deferred Policy Acquisition
Costs (22.9) (9.2) (21.3) (4.5)
Foreign Currency Translation Adjustments (0.6) (1.4) 5.2 (3.2)
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Other Comprehensive Income (Loss) 503.8 124.7 567.5 (63.4)
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Comprehensive Income $ 615.7 $ 229.9 $ 769.4 $ 105.4
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See condensed notes to consolidated financial statements.
Safeco Corporation and Subsidiaries
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Condensed Notes to Consolidated Financial Statements (unaudited)
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(Dollar amounts in millions except per share data, unless noted otherwise)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Safeco Corporation is a Washington corporation that has been in the insurance
business since 1923. We operate subsidiaries on a nationwide basis in segments
of the insurance industry and other financial services-related businesses. Our
two principal businesses are (1) property and casualty insurance, including
surety, and (2) life and stop-loss medical insurance and asset management. These
activities generated nearly all of our revenues for the interim periods
presented in this report.
Throughout our unaudited consolidated financial statements and condensed notes
and management's discussion and analysis, Safeco Corporation and its
subsidiaries are referred to as "Safeco," "we" and "our." The property and
casualty businesses including surety, are referred to as "Property & Casualty."
The life and stop-loss medical insurance and asset management businesses are
referred to as "Life & Investments." All other activities, primarily the
financing of our business activities, are collectively referred to as
"Corporate."
Basis of Consolidation and Reporting and Use of Estimates
These 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 management, all adjustments (consisting of normal and recurring
adjustments) considered necessary for a fair presentation of results for the
interim periods have been included. Operating results for the six-month period
ended June 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003.
These unaudited consolidated financial statements and condensed notes should be
read in conjunction with the financial statements and notes included in Safeco's
2002 Annual Report on Form 10-K that was previously filed with the Securities
and Exchange Commission.
The preparation of these interim consolidated financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect
amounts reported in these consolidated financial statements. Actual results
could differ from those estimates.
The unaudited consolidated financial statements include Safeco Corporation and
its subsidiaries. All significant intercompany transactions and accounts have
been eliminated in the consolidated financial statements.
Certain reclassifications have been made to the prior year amounts to conform to
the current year presentation.
Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur if options or other dilutive
instruments outstanding under Safeco's stock-based compensation plans were
exercised.
The computation of net income per share is presented below, based upon
weighted-average basic and diluted shares outstanding:
Three Months Ended Six Months Ended
June 30 June 30
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(In Millions, Except Per Share Amounts) 2003 2002 2003 2002
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Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
Average Number of Common Shares Outstanding 138.4 127.8 138.3 127.8
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Basic Net Income Per Share $ 0.81 $ 0.82 $ 1.46 $ 1.32
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Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
Average Number of Common Shares Outstanding 138.4 127.8 138.3 127.8
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Additional Common Shares Assumed Issued Under
Treasury Stock Method 0.6 0.3 0.5 0.3
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Average Number of Common Shares Outstanding -
Diluted 139.0 128.1 138.8 128.1
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Diluted Net Income Per Share $ 0.81 $ 0.82 $ 1.45 $ 1.32
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Stock Compensation Expense
Prior to 2003, Safeco applied Accounting Principles Board (APB) Opinion 25 in
accounting for its stock options, as allowed under Financial Accounting
Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 123,
as amended. Under APB 25, no compensation expense related to options was
recognized because the exercise price of Safeco's employee stock options equaled
the fair market value of the underlying stock on the date of grant.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," amending SFAS 123, to provide
alternative methods of transition to the fair value method of accounting for
stock-based employee compensation under SFAS 123. Effective January 1, 2003,
Safeco adopted the fair value method for accounting for stock options as defined
in SFAS 123, using the prospective basis transition method provided for under
SFAS 148. Under the prospective basis transition method, Safeco will recognize
stock-based compensation expense for options granted, modified or settled after
January 1, 2003. Safeco typically grants options to employees in the second
quarter. Stock-based compensation expense for the three and six months ended
June 30, 2003 was $1.4 after tax.
The following table illustrates the pro forma effect on net income and net
income per share as if the fair value method had been applied to all outstanding
and unvested awards in each period.
Three Months Ended Six Months Ended
June 30 June 30
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(In Millions, Except Per Share Amounts) 2003 2002 2003 2002
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Net Income, as Reported $ 111.9 $ 105.2 $ 201.9 $ 168.8
Add: Stock-based Compensation Expense
Included in Reported Net Income, After-tax 1.4 -- 1.4 --
Deduct: Total Stock-based Compensation
Expense Determined Under Fair Value Based
Method for All Awards, Net of Related Tax
Effects (3.4) (3.5) (5.3) (4.4)
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Pro Forma Net Income $ 109.9 $ 101.7 $ 198.0 $ 164.4
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Net Income Per Share
Basic - as Reported $ 0.81 $ 0.82 $ 1.46 $ 1.32
Basic - Pro Forma 0.79 0.80 1.43 1.29
Diluted - as Reported $ 0.81 $ 0.82 $ 1.45 $ 1.32
Diluted - Pro Forma 0.79 0.79 1.43 1.28
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New Accounting Standards
SFAS 150, "Accounting for Financial Instruments with Characteristics of
Liabilities, Equity or Both"
SFAS 150 was issued in May 2003 and is effective for all financial instruments
created or modified after May 31, 2003, or otherwise effective July 1, 2003.
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. Effective July 1, 2003, Safeco will reclassify mandatorily redeemable
capital securities to liabilities on the Consolidated Balance Sheets. Deferred
issuance costs, currently netted against the balance of the capital securities,
will be reclassified to assets on the Consolidated Balance Sheets and amortized
into interest expense; amounts paid or accrued on the capital securities will be
recorded as interest expense on a prospective basis from the date of adoption of
the statement; these amounts are currently reported as Distributions on Capital
Securities on the Consolidated Statements of Income.
FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
FASB Interpretation 45 (FIN 45) was issued in November 2002. FIN 45 elaborates
on the disclosures required to be made by a guarantor in its financial
statements and clarifies that a guarantor is required to recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The recognition provisions are effective
prospectively for guarantees issued or modified after December 15, 2002. The
disclosure requirements are effective for periods ending after December 15,
2002. Safeco does not have any guarantees subject to the recognition provisions
of FIN 45. In accordance with the disclosure provisions, the following
guarantees were in effect at June 30, 2003:
o In April 2003, Safeco Corporation issued a letter of credit to Citibank on
behalf of Safeco UK, Ltd. (Safeco UK), a wholly-owned subsidiary. Safeco UK
conducted our London operations which were put into runoff in the third
quarter of 2002. The letter of credit guarantees payment of Safeco UK's
share of potential losses up to $19.6, arising from prior participation in
a Lloyds of London reinsurance syndicate. Prior to April 2003, this
guarantee was provided by Safeco Insurance Company of America (SICA), a
wholly-owned subsidiary.
o In June 2000, Safeco Life Insurance Company (Safeco Life), a wholly-owned
subsidiary, issued a guarantee to General America Corporation (GAC), a
wholly-owned subsidiary. Under the guarantee, Safeco Life guarantees
repayment of a loan made by GAC to Investar Holdings (Investar), an
insurance agency. The loan was made in June 2000 and requires interest only
payments until June 2017, when the principal balance becomes payable. The
principal balance of $18.5 is included with Other Notes and Accounts
Receivable on the Consolidated Balance Sheets. Investar is current on its
interest-only payments.
o In 1993, SICA issued a guarantee to the Bank of New York on behalf of
Market Square Real Estate, Inc. (Market Square), a limited liability
company in which SICA was an investor. The guarantee covers the repayment
of $10.0 of municipal bonds issued by the City of Minneapolis. The proceeds
from the 1993 bond issuance were then loaned to Market Square. In 1997,
SICA sold its interest in Market Square but remained a guarantor for the
repayment of the bonds. As a condition to the sale, Market Square granted
SICA a first mortgage on its assets, as security, for any payments SICA may
make pursuant to the guarantee. The scheduled repayment of the bonds in
2006 will be funded by the repayment of the loan made to Market Square by
the City of Minneapolis. SICA has not made any payments pursuant to the
guarantee.
o Safeco Corporation issued guarantees to the counterparties of the
International Swaps and Derivatives Association (ISDA) Master Agreements
entered into by Safeco Financial Products, Inc. (SFP), a wholly-owned
subsidiary. SFP was organized in 2000 to write S&P 500 index options to
mitigate the risk associated with Life & Investments' Equity Indexed
Annuity product. SFP also engages in limited activity 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. Safeco
Corporation guarantees the payment of any obligation owed by SFP to the
counterparties under the terms of the ISDA Master Agreements. This
obligation totaled $33.3 at June 30, 2003, representing SFP's derivative
liability position net of posted collateral.
FIN 46, "Consolidation of Variable Interest Entities"
FIN 46, "Consolidation of Variable Interest Entities," was issued in January
2003. FIN 46 requires existing unconsolidated variable interest entities (VIEs)
to be consolidated by their primary beneficiary if such entities do not
effectively disperse risks among parties involved. The interpretation explains
criteria to identify VIEs and how to assess interest in a VIE in order to
determine whether to consolidate a particular entity. FIN 46 is effective
immediately for variable interests created or obtained after January 31, 2003,
and in the interim period after June 15, 2003 for variable interests acquired
before February 1, 2003.
We have identified certain interests in VIEs as defined by FIN 46. Based on our
analysis of these interests, Safeco does not meet the FIN 46 definition of
"primary beneficiary" of any of these entities and therefore will not
consolidate the entities. Even though consolidation is not required, FIN 46
requires disclosure of the nature of any significant interests in a VIE, a
description of the VIE's activities and the maximum exposure to potential losses
due to our involvement.
In June 2000, we extended a loan to Investar, whose equity at risk was not
sufficient to finance its activities and is therefore considered a VIE under FIN
46. The loan is secured by the assets of Investar and personally guaranteed by
its equity holders. Based on our analysis of Investar's expected losses and
expected residual returns, we are not the primary beneficiary. Our potential
exposure to losses due to our interest in Investar is limited to our senior debt
holding, which was $18.5 as of June 30, 2003, excluding the value of our rights
to the assets of the agency and guarantees provided by the equity holders.
AcSEC Statement of Position (SOP), "Accounting and Reporting by Insurance
Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate
Accounts"
The provisions of the SOP are effective for fiscal years beginning after
December 15, 2003, with earlier adoption encouraged. This SOP provides guidance
in three areas: separate account presentation and valuation; the accounting
recognition given sales inducements; and the classification and valuation of
long-duration contract liabilities. We do not anticipate a material impact to
our financial statements upon adoption.
NOTE 2 - FINANCIAL INSTRUMENTS
See Note 3 of Safeco's 2002 Annual Report on Form 10-K for a discussion of
Safeco's use of derivative and 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 hedge, the changes in the fair value of the hedge and the hedged item are
recognized in net realized investment gains and losses in the Consolidated
Statements of Income. There was no fair value hedge ineffectiveness for the
three and six months ended June 30, 2003. Fair value hedge ineffectiveness for
the three and six months ended June 30, 2002 resulted in a $0.9 net realized
investment gain and a $0.3 net realized investment loss, respectively.
Cash Flow Hedges
Safeco also uses interest rate swaps to hedge the variability of future cash
flows arising from changes in interest rates associated with certain variable
rate assets and forecasted transactions. The changes in the fair value of the
hedge are recognized in the Consolidated Statements of Comprehensive Income.
Differences between the changes in the fair value of the hedge and the hedged
item represent hedge ineffectiveness and are recognized as interest expense in
the Consolidated Statements of Income. There was no cash flow hedge
ineffectiveness for the three and six months ended June 30, 2003. Cash flow
hedge ineffectiveness resulted in a decrease to interest expense for the three
and six months ended June 30, 2002 of $0.5 for both periods.
Amounts related to derivatives qualifying as cash flow hedges are recorded in
Accumulated Other Comprehensive Income (AOCI) and recognized in earnings
contemporaneously with the effect of the hedged item. SFAS 133 requires amounts
recorded in AOCI that relate to forecasted transactions that are no longer
probable of occurring within a specified time period to be recognized in
earnings immediately. In the quarter ended June 30, 2003, $15.2 was reclassified
from AOCI on the Consolidated Balance Sheets to Net Realized Investment Gains on
the Consolidated Statements of Income, related to interest rate hedges on
forecasted transactions not probable of occurring in the 12 months from July 1,
2003. No such amounts were reclassified from AOCI into earnings during the three
and six months ended June 30, 2002. We deferred $18.7 in AOCI related to
forecasted transactions that are reasonably possible of occurring over a period
starting within 12 to 36 months of July 1, 2003. Amounts deferred in AOCI will
be reclassified into earnings at the sooner of the determination that the
forecasted transaction is not probable of occurring or the forecasted
transaction occurs. No such amounts were deferred in AOCI during the three and
six months ended June 30, 2002.
At June 30, 2003, Safeco was hedging forecasted transactions with a maximum
length of 36 months.
NOTE 3 - DEBT AND CAPITAL SECURITIES
The total amount, current portions and maturities of debt and capital securities
at June 30, 2003 and December 31, 2002 are as follows:
June 30, 2003 December 31, 2002
- ------------------------------------------------------------------------------------------------------------
Total Current Long-Term Total Current Long-Term
--------------------------------------------------------------------
7.875% Medium-Term Notes Due 2003 $ -- $ -- $ -- $ 303.5 $ 303.5 $ --
7.875% Notes Due 2005 -- -- -- 200.0 200.0 --
6.875% Notes Due 2007 198.2 -- 198.2 200.0 -- 200.0
4.200% Senior Notes Due 2008 200.0 -- 200.0 -- -- --
4.875% Senior Notes Due 2010 300.0 -- 300.0 -- -- --
7.250% Senior Notes Due 2012 403.2 -- 403.2 390.6 -- 390.6
Other Notes and Loans Payable Due
Through 2008 23.2 7.3 15.9 29.7 12.3 17.4
--------------------------------------------------------------------
Total Debt (Excluding Capital 1,124.6 7.3 1,117.3 1,123.8 515.8 608.0
Securities)
8.072% Capital Securities Due 2037 844.0 -- 844.0 843.8 -- 843.8
--------------------------------------------------------------------
Total Debt and Capital Securities $ 1,968.6 $ 7.3 $ 1,961.3 $ 1,967.6 $ 515.8 $1,451.8
- ------------------------------------------------------------------------------------------------------------
On January 27, 2003, Safeco issued $200.0 of senior notes with a coupon of
4.200% that mature in 2008 and $300.0 of senior notes with a coupon of 4.875%
that mature in 2010. The notes are unsecured and rank equally with all other
unsecured senior indebtedness of Safeco. The proceeds from the notes were used
to repay $300.0 principal amount of 7.875% medium term notes due in March 2003
and to call and repay $200.0 principal amount of 7.875% notes maturing in 2005
that were callable at par on April 1, 2003.
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 the facility as of
June 30, 2003 and December 31, 2002, and Safeco was in compliance with all
covenants.
Effective July 1, 2003, Safeco will reclassify mandatorily redeemable capital
securities to liabilities on the Consolidated Balance Sheets in accordance with
SFAS 150. Deferred issuance costs currently netted against the balance of the
capital securities will be reclassified to assets and amortized into interest
expense.
NOTE 4 - 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 through the end of 2002,
Safeco's total employment decreased by approximately 1,200, excluding the
reduction due to the sale of Safeco Credit and the increase associated with the
acquisition of Swiss Re's stop-loss medical business. Positions eliminated were
in the corporate headquarters and regional Property & Casualty operations, and
these actions were completed in 2002. Total restructuring charges and period
costs associated with this restructuring were $66.1.
For the three and six months ended June 30, 2002, period costs associated with
the restructuring totaled $5.5 and $12.1, respectively. These period costs
included stay bonuses, employee transfer costs, recruiting and training
expenses, related consulting fees and certain office closure costs.
NOTE 5 - COMPREHENSIVE INCOME
Comprehensive income is defined as all changes in shareholders' equity, except
those arising from transactions with shareholders. Comprehensive income includes
net income and other comprehensive income, which for Safeco consists of changes
in net unrealized gains or losses on available-for-sale securities, net
unrealized gains or losses on derivatives, deferred policy acquisition costs
valuation allowance, foreign currency translation gains or losses, minimum
pension liability and the deferred taxes applicable to these items.
The components of other comprehensive income or loss were as follows:
SIX MONTHS ENDED JUNE 30 2003 2002
- -------------------------------------------------------------------------------------------------------------
Pretax Tax After Tax Pretax Tax After Tax
------------------------------------------------------------------
Change in Unrealized Gains (Losses) of
Available-for-Sale Securities $ 876.7 $ (306.6) $ 570.1 $ 34.3 $ (11.8) $ 22.5
Reclassification adjustment for Net
Realized
Investment (Gains) Losses Included in
Net Income 27.6 (9.9) 17.7 (126.0) 43.9 (82.1)
Derivatives Qualifying as Hedges - Net
Changes in Value (6.4) 2.2 (4.2) 6.0 (2.1) 3.9
Deferred Policy Acquisition Costs
Valuation Allowance (32.8) 11.5 (21.3) (6.9) 2.4 (4.5)
Foreign Currency Translation Adjustments 7.9 (2.7) 5.2 (4.9) 1.7 (3.2)
------------------------------------------------------------------
Other Comprehensive Income (Loss) $ 873.0 $ (305.5) $ 567.5 $ (97.5) $ 34.1 $ (63.4)
- --------------------------------------------------------------------------------------------------------------
NOTE 6 - SEGMENT INFORMATION
Safeco operates on a nationwide basis in two principal businesses: (1) property
and casualty insurance including surety (Property & Casualty), and (2) life and
stop-loss medical insurance and asset management (Life & Investments).
Property & Casualty
Safeco's Property & Casualty insurance operations are organized around our four
operating segments: Safeco Personal Insurance (SPI), Safeco Business Insurance
(SBI), Surety and Property & Casualty Other (P&C Other). These operations
contain our reportable segments, which are managed separately as described
below.
Safeco Personal Insurance
SPI writes automobile, homeowners and other insurance coverages for individuals,
and the SPI operations are organized around three reportable segments--Personal
Auto, Homeowners and Specialty, which are managed separately by these product
groupings.
The Personal Auto segment provides coverage for liability to others for both
bodily injury and property damage, for injury to an insured, and for physical
damage to an insured's own vehicle from collision and other hazards.
The Homeowners segment provides protection against losses to dwellings and
contents from a wide variety of hazards, as well as coverage for liability
arising from ownership or occupancy. Homeowners policies insure dwellings,
condominiums, and rental property contents.
The Specialty segment provides coverages for earthquake, dwelling fire, inland
marine and boat insurance for individuals.
Safeco Business Insurance
SBI writes various commercial coverages including commercial multi-peril,
workers compensation, general liability and auto. SBI's operations are organized
around three reportable segments: SBI Regular, SBI Special Accounts Facility and
SBI Runoff, which are managed separately based on the nature of the underlying
insured.
SBI Regular is Safeco's core commercial segment writing commercial lines
insurance for small- to medium-sized businesses. The principal coverages offered
by SBI Regular are commercial multi-peril, general liability, workers
compensation and auto.
SBI Special Accounts Facility writes larger commercial accounts for key Safeco
agents and our four continuing specialty commercial programs.
SBI Runoff includes results for the larger commercial business accounts and 15
specialty programs that Safeco is exiting.
Surety
Surety provides an insured with a third party guarantee of a statutory or
contractual obligation of the insured. Safeco offers surety bonds primarily for
construction, performance and for legal matters such as appeals, probate and
bankruptcies.
Property & Casualty Other
P&C Other includes discontinued assumed reinsurance business, non-voluntary
property and casualty business for personal lines, results from Safeco's Lloyds
of London operations that are in runoff and certain other discontinued product
lines.
Life & Investments
Life & Investments provides a broad range of products and services that include
individual and group insurance products, annuity products, mutual funds and
investment advisory services. These operations are managed separately as six
reportable segments: Group, Income Annuities, Retirement Services, Individual,
Asset Management and Life & Investments Other (L&I Other) based on product
groupings.
Group's principal product is stop-loss medical insurance sold to employers with
self-insured medical plans. Also included in this segment are group life,
accidental death and dismemberment and disability products.
Income Annuities' principal product is the structured settlement annuity that is
sold to fund third party personal injury settlements, providing a reliable
income stream to the injured party.
Retirement Services' products are primarily fixed and variable deferred
annuities (both qualified and non-qualified), tax-sheltered annuities (marketed
to teachers and not-for-profit organizations), guaranteed investment contracts
and corporate retirement funds.
Individual's products include term, universal and variable universal life and
bank-owned life insurance (BOLI).
Asset Management provides investment advisory and administrative services for
Safeco mutual funds, variable insurance portfolios, institutional and trust
accounts.
L&I Other is comprised mainly of investment income resulting from the investment
of capital and accumulated earnings of the operating lines of business. L&I
Other also includes the results of a wholly-owned subsidiary, Talbot Financial
Corporation (Talbot), an insurance agency.
Corporate
In addition to these operating segments, certain activities are reported in the
Corporate segment and not allocated to individual segments. The Corporate
segment includes operating results for the parent company, which primarily
includes interest expense for Safeco's debt; SFP; Safeco Properties, Inc., which
owns real estate held for sale; and intercompany eliminations.
Segment Performance Measures
Safeco's management measures segment profit or loss for Property & Casualty
based upon underwriting profit (loss), a non-GAAP measure. Underwriting profit
(loss) represents the net amount of earned premiums less underwriting losses and
expenses on a pretax basis. Management views underwriting profit (loss) as a
critical measure to assess underwriting effectiveness and to evaluate the
results of the Property & Casualty operations.
Life & Investments' results are evaluated based on pretax operating earnings, a
non-GAAP measure, which excludes net realized investment gains and losses.
Management believes the presentation of pretax operating earnings enhances the
understanding of our Life & Investments results of operations by excluding net
realized investment gains and losses, which can fluctuate significantly and
distort the comparison between periods.
Underwriting profit (loss) and pretax operating earnings are not a substitute
for net income determined in accordance with GAAP.
The following tables present selected financial information by segment and
reconcile segment revenues, underwriting profit (loss) and pretax operating
earnings to amounts reported in the Consolidated Statements of Income.
REVENUES
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------
PROPERTY & CASUALTY
Safeco Personal Insurance (SPI)
Personal Auto $ 552.9 $ 472.5 $1,081.4 $ 926.7
Homeowners 192.1 189.2 381.6 372.6
Specialty 50.5 51.2 100.3 101.2
-------------------------------------------------
Total SPI 795.5 712.9 1,563.3 1,400.5
-------------------------------------------------
Safeco Business Insurance (SBI)
Regular 272.1 251.4 538.1 496.4
Special Accounts Facility 93.2 61.6 181.1 111.6
Runoff (4.9) 57.1 (1.9) 138.6
-------------------------------------------------
Total SBI 360.4 370.1 717.3 746.6
-------------------------------------------------
Surety 38.5 31.1 70.6 60.9
P&C Other 7.4 7.9 13.7 13.5
-------------------------------------------------
Total Property & Casualty Earned Premiums 1,201.8 1,122.0 2,364.9 2,221.5
Net Investment Income 116.5 115.3 229.3 230.5
-------------------------------------------------
Total Property & Casualty Revenues
(excluding Net Realized Investment Gains (Losses)) 1,318.3 1,237.3 2,594.2 2,452.0
-------------------------------------------------
LIFE & INVESTMENTS
Group 144.5 90.9 286.8 178.3
Income Annuities 130.8 129.0 262.2 258.6
Retirement Services 96.4 94.7 192.5 187.8
Individual 95.8 93.2 191.7 186.6
Asset Management 6.7 8.0 12.9 16.2
L&I Other 50.7 44.8 106.2 94.3
-------------------------------------------------
Total Life & Investments Revenues (excluding Net Realized
Investment Gains (Losses)) 524.9 460.6 1,052.3 921.8
-------------------------------------------------
CORPORATE 5.5 5.0 14.4 11.1
Consolidated Net Realized Investment Gains (Losses) 22.3 95.4 (27.6) 126.0
-------------------------------------------------
TOTAL REVENUES $ 1,871.0 $1,798.3 $3,633.3 $3,510.9
- ----------------------------------------------------------------------------------------------------------
PRETAX UNDERWRITING PROFITS (LOSSES), PRETAX OPERATING EARNINGS
AND NET INCOME
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
PROPERTY & CASUALTY
Underwriting Profits (Losses)
Safeco Personal Insurance (SPI)
Personal Auto $ 3.3 $ (7.3) $ 1.8 $ (27.6)
Homeowners (13.4) (36.9) 6.1 (55.1)
Specialty 14.8 3.0 26.3 11.0
-------------------------------------------------------
Total SPI 4.7 (41.2) 34.2 (71.7)
-------------------------------------------------------
Safeco Business Insurance (SBI)
Regular (11.5) (25.0) (16.8) (47.6)
Special Accounts Facility (0.6) (1.8) 5.8 6.4
Runoff (9.4) (14.4) (15.7) (59.1)
-------------------------------------------------------
Total SBI (21.5) (41.2) (26.7) (100.3)
-------------------------------------------------------
Surety 6.8 5.8 10.5 8.9
P&C Other (2.3) (7.6) (9.3) (12.4)
-------------------------------------------------------
Total Underwriting Profits (Losses) (12.3) (84.2) 8.7 (175.5)
Net Investment Income 116.5 115.3 229.3 230.5
Restructuring Charges -- (5.5) -- (12.1)
-------------------------------------------------------
Total Property & Casualty Pretax Operating Earnings 104.2 25.6 238.0 42.9
-------------------------------------------------------
LIFE & INVESTMENTS
Pretax Operating Earnings
Group 24.5 14.1 53.5 24.3
Income Annuities 8.4 7.3 18.5 16.1
Retirement Services 4.9 4.0 9.9 12.0
Individual (0.5) 7.5 1.4 14.2
Asset Management 0.1 1.7 0.2 4.0
L&I Other 20.5 17.4 46.2 40.5
-------------------------------------------------------
Total Life & Investments Pretax Operating Earnings 57.9 52.0 129.7 111.1
-------------------------------------------------------
CORPORATE
Pretax Operating Earnings (11.3) (12.8) (26.3) (26.2)
-------------------------------------------------------
Consolidated Pretax Operating Earnings 150.8 64.8 341.4 127.8
Consolidated Net Realized Investment Gains (Losses)
before Income Taxes 22.3 95.4 (27.6) 126.0
-------------------------------------------------------
Consolidated Income before Income Taxes and
Distributions on Capital Securities 173.1 160.2 313.8 253.8
Provision for Income Taxes 50.0 43.8 89.5 62.6
-------------------------------------------------------
Income before Distributions on Capital Securities 123.1 116.4 224.3 191.2
Distributions on Capital Securities, Net of Taxes (11.2) (11.2) (22.4) (22.4)
-------------------------------------------------------
NET INCOME $ 111.9 $ 105.2 $ 201.9 $ 168.8
- ----------------------------------------------------------------------------------------------------------------
ASSETS
JUNE 30 2003 2002
- -------------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
Safeco Personal Insurance (SPI)
Personal Auto $ 3,746.3 $ 3,099.3
Homeowners 1,911.0 1,728.6
Specialty 693.7 643.0
----------------------------
Total SPI 6,351.0 5,470.9
----------------------------
Safeco Business Insurance (SBI)
Regular 3,328.1 3,015.1
Special Accounts Facility 689.5 359.3
Runoff 1,520.0 1,991.9
----------------------------
Total SBI 5,537.6 5,366.3
----------------------------
Surety 403.9 367.0
P&C Other 1,040.8 1,077.4
----------------------------
Total Property & Casualty 13,333.3 12,281.6
----------------------------
LIFE & INVESTMENTS
Group 366.7 187.2
Income Annuities 7,827.6 7,026.3
Retirement Services 8,077.5 7,127.4
Individual 4,662.1 4,046.7
Asset Management 64.0 70.1
L&I Other 2,157.3 1,684.3
----------------------------
Total Life & Investments 23,155.2 20,142.0
----------------------------
CORPORATE 104.8 111.2
----------------------------
TOTAL ASSETS $ 36,593.3 $ 32,534.8
- -------------------------------------------------------------------------------------------------------------
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in millions unless noted otherwise)
Management's discussion and analysis (MD&A) reviews our consolidated and segment
financial condition as of June 30, 2003 and December 31, 2002, our consolidated
results of operations for the periods ended June 30, 2003 and 2002 and, where
appropriate, factors that may affect our future financial performance. This
discussion should be read in conjunction with Safeco's MD&A and annual audited
financial statements as of December 31, 2002 contained in its 2002 annual report
on Form 10-K and the unaudited consolidated financial statements and related
condensed notes included elsewhere in this report.
Forward-looking information contained in this report is subject to risk and
uncertainty
Statements, analysis and other information contained 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, including credit scores as a component;
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 or war;
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 ability to run off the Lloyds of London business without incurring material unexpected charges;
o the availability of, pricing of, and ability to collect reinsurance;
o the ability to price for, exclude and 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,
application 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 the effect of current insurance and credit ratings levels on business production and the effect of negative changes to our
ratings;
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 use of derivative securities by Safeco Financial Products, Inc. (SFP);
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, our achievement of rate increases may occur in amounts and on a
time schedule different than planned, which may affect efforts to continue to
grow profitability in our Property & Casualty lines.
Overview
Safeco Corporation is a Washington corporation that has been in the insurance
business since 1923. We operate subsidiaries on a nationwide basis in segments
of the insurance industry and other financial services-related businesses. Our
two principal businesses are (1) property and casualty insurance, including
surety, and (2) life and stop-loss medical insurance and asset management. These
activities generated nearly all of our revenues for the interim periods
presented in this report.
Application of Critical Accounting Policies
We have identified Property & Casualty Loss and Loss Adjustment Expense (LAE)
Reserves, Property & Casualty Reinsurance, and Valuation of Investments as
accounting policies critical to understanding our results of operations and
financial condition. As such, they require management to use judgments involving
assumptions and estimates concerning future results, trends, or other
developments that could significantly influence our results should actual
experience differ from those assumptions and estimates.
The process of estimating Property & Casualty Loss and LAE Reserves involves
significant judgment and is complex and imprecise due to the number of variables
and assumptions inherent in the estimation process. Due to the assumptions and
judgments inherent in the estimation of loss and LAE reserves, actual experience
may differ from these estimates. We refine reserve estimates in an ongoing
quarterly process as experience develops. We record adjustments to reserves in
our results of operations in the periods in which we change the estimate.
Asbestos, workers compensation and construction defect reserves are subject to
the greatest degree of uncertainty and subjectivity in their estimation.
Specifically with regard to workers compensation reserves, such reserves are
subject to a greater degree of uncertainty than most reserves due to the
late-reporting nature of certain of the claims, the long-term payout of many
claims and the resulting impact of inflationary trends over time, particularly
for medical costs, and the impact of legislative actions and judicial
interpretations in establishing the prescribed benefits.
In determining management's best estimate for workers compensation reserves,
long-term medical cost inflation trends over the average claim payout period
represent our most significant assumption. We have assumed that double digit
medical cost inflation will continue in the near-term, moderating over time to
historic levels, resulting in a 5-6% medical loss severity trend over the life
of the reserves. Our best estimate of workers compensation reserves presents
some risk of unfavorable development should medical cost trends not abate.
Workers compensation reserves also have been impacted by our claim practices and
changes to our business. Since late 2001, we have placed greater emphasis on
full exposure recognition in case reserving and on settlement of long-term
claims. In addition, the nature of our workers compensation business has changed
as we have focused our efforts on small-to-medium business product lines and
de-emphasized workers compensation writings. While management has assumed that
these actions will modestly improve our ultimate loss trends, these activities
impact our claim trend data and actuarial analysis and, as a result, increase
the variability in our reserve estimates.
Because of the changes in our business and claims practices, and the current
trends in medical inflation, we are currently performing additional analyses of
our workers compensation experience to better assess our emerging trends and the
related impact on our assumptions and reserve estimates. Our analyses
incorporate additional actuarial techniques that rely on external information
to a greater extent than previous estimates and project future development with
less reliance on past reserve development and historical claims payment
patterns. Should our analyses over the upcoming quarters change our best
estimate of projected reserve development, an adjustment to reserves would be
recorded in the results of operations in the period in which we change the
estimate.
Please see additional discussion of critical accounting policies in the MD&A
section of our 2002 Annual Report on Form 10-K.
Strategic Initiatives
Safeco's strategy continues to focus on reshaping our company into a profitable,
growing enterprise. Our primary measures of progress are growth in earnings per
share (EPS) and return on equity (ROE). Specifically, our objective is, over the
long term, to achieve average annual EPS growth of 15% and top quartile ROE
performance when compared with our peer group. In addition, but secondary to
these financial goals, our objective is to achieve double digit growth in our
revenues when we can do so successfully within the context of our profit and
return goals.
The three key elements of our strategy are 1) to sell standardized products 2)
through independent distributors and 3) to offer multiple products for our
distributors to sell.
o Standardization of products - our standardized products in personal auto,
homeowners, small business and life and annuities serve the basic insurance
and investment needs of the majority of the U.S. marketplace. These
products leverage Safeco's strengths in producing and servicing homogeneous
products that require large volumes of repeatable transactions executed
efficiently and effectively. Our changes in product line mix since 2001
reflects this recognition of our core strengths.
o Independent distributors - Safeco is committed to partnering with
independent distributors to sell our products. We believe that independent
distributors serve as trusted advisors to insurance customers, and that
customers will continue to prefer this purchasing method. We believe that
independent distributors are, and will continue to be, best equipped to
appropriately match insurance and investment products to their customers'
specific needs. Our strategy focuses on providing more products for our
distributors to sell, for example, through expanded multi-tier product
offerings using multi-variant models to more accurately match price to
customer risk characteristics, enabling us to serve a broader spectrum of
risks. In addition, we have focused on making it easier for independent
distributors to use our new point of sale technology, providing operating
efficiencies in their offices. Our distributors are able to be more
profitable selling Safeco products through use of this technology, and our
commission programs are structured to incent profitable growth such that
both Safeco and our distribution partners benefit from increased sales of
profitable business.
o Multiple products - Safeco's multiple product lines enable us to meet the
key product needs of many of our distributors. We believe that our ability
to provide multiple property and casualty products and sometimes also life
and investment products facilitates an efficient relationship for our
distributors with Safeco, and provides us with a "shelf space" advantage in
our distributors' businesses.
Financial Measures Used in MD&A
In addition to financial measures presented in the consolidated financial
statements prepared in accordance with accounting principles generally accepted
in the United States (GAAP), we also use certain non-GAAP financial measures to
analyze and report our financial results. Management believes that these
non-GAAP measures, when used in conjunction with the consolidated financial
statements, can aid in understanding our financial condition and results of
operations. These non-GAAP measures are not a substitute for GAAP measures, and
where these measures are used we provide tables that reconcile the non-GAAP
measures to the GAAP measures reported in our consolidated financial statements.
Operating Revenues
Operating revenues is a non-GAAP financial measure used by management to analyze
the revenues derived directly from our Property & Casualty, Life & Investments
and Corporate operations. It excludes net realized investment gains and losses,
which can fluctuate significantly and distort a comparison between periods.
Revenue is the most directly comparable GAAP measure. We provide a
reconciliation of the GAAP measure to the non-GAAP measure in the Consolidated -
Results of Operations section following.
Operating Earnings
Operating earnings is a non-GAAP financial measure that we use to assess the
profitability of our consolidated business. In the determination of operating
earnings, we exclude net realized investment gains and losses from net income.
Net realized investment gains and losses can fluctuate significantly and distort
a comparison between periods. Net income is the most directly comparable GAAP
measure. We provide a reconciliation of the GAAP measure to the non-GAAP measure
in the Consolidated - Results of Operations section following.
Property & Casualty Underwriting Profit (Loss) and Combined Ratio
Underwriting profit (loss) represents the net amount of earned premium less
underwriting losses and expenses on a pretax basis. Management views
underwriting profit (loss) as a critical measure to assess underwriting
effectiveness and to evaluate the results of the Property & Casualty operations.
The related investment portfolio is managed separately from these underwriting
businesses and, accordingly, net investment income and net realized investment
gains and losses are discussed separately. The most directly comparable GAAP
measure is Income before Income Taxes and Distributions on Capital Securities on
our Consolidated Statements of Income. We provide a reconciliation of the GAAP
measure to the non-GAAP measure in the Segment - Results of Operations section
following. Combined ratio is a standard gauge of underwriting performance and is
calculated as losses and expenses expressed as a percentage of earned premiums.
Life & Investments Pretax Operating Earnings
Life & Investments' results are evaluated based on pretax operating earnings, a
non-GAAP measure, which excludes net realized investment gains and losses.
Management believes the presentation of pretax operating earnings enhances the
understanding of our Life & Investments results of operations by excluding net
realized investment gains and losses, which can fluctuate significantly and
distort the comparison between periods. The most directly comparable GAAP
measure is Income before Income Taxes and Distributions on Capital Securities on
our Consolidated Statements of Income. We provide a reconciliation of the GAAP
measure to the non-GAAP measure in the Segment - Results of Operations section
following.
Consolidated - Results of Operations
The following table presents summary consolidated financial information prepared
in accordance with GAAP.
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
REVENUES
Property & Casualty Earned Premiums $ 1,201.8 $ 1,122.0 $ 2,364.9 $ 2,221.5
Life & Investments Premiums and
Other Revenues 221.1 166.1 445.0 331.2
Net Investment Income 423.1 412.8 845.6 827.5
Net Realized Investment Gains (Losses) 22.3 95.4 (27.6) 126.0
Other 2.7 2.0 5.4 4.7
--------------------------------------------------------
Total 1,871.0 1,798.3 3,633.3 3,510.9
--------------------------------------------------------
EXPENSES
Losses, Loss Adjustment Expenses and
Policy Benefits 1,188.0 1,181.4 2,320.1 2,341.0
Other Underwriting, Acquisition and
Operating Expenses 496.7 434.8 969.1 871.6
Interest Expense 13.2 16.4 30.3 32.4
Restructuring Charges -- 5.5 -- 12.1
--------------------------------------------------------
Total Expenses 1,697.9 1,638.1 3,319.5 3,257.1
--------------------------------------------------------
Income before Income Taxes and Distributions
on Capital Securities 173.1 160.2 313.8 253.8
Provision for Income Taxes 50.0 43.8 89.5 62.6
--------------------------------------------------------
Income before Distributions on Capital Securities 123.1 116.4 224.3 191.2
Distributions on Capital Securities, Net of Taxes (11.2) (11.2) (22.4) (22.4)
--------------------------------------------------------
Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
- ----------------------------------------------------------------------------------------------------------
The following tables reconcile consolidated operating revenues and consolidated
operating earnings with the most directly comparable GAAP measures.
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
OPERATING REVENUES
Total Revenues $ 1,871.0 $ 1,798.3 $ 3,633.3 $ 3,510.9
Net Realized Investment (Gains) Losses
before Taxes (22.3) (95.4) 27.6 (126.0)
--------------------------------------------------------
Operating Revenues $ 1,848.7 $ 1,702.9 $ 3,660.9 $ 3,384.9
- ----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
OPERATING EARNINGS
Net Income $ 111.9 $ 105.2 $ 201.9 $ 168.8
Net Realized Investment (Gains) Losses,
Net of Taxes (14.7) (62.0) 17.7 (82.1)
--------------------------------------------------------
Operating Earnings $ 97.2 $ 43.2 $ 219.6 $ 86.7
- ----------------------------------------------------------------------------------------------------------
Consolidated revenues increased 4.0% to $1,871.0 and 3.5% to $3,633.3 during the
three and six months ended June 30, 2003, respectively, compared with revenues
of $1,798.3 and $3,510.9 for the three and six months ended June 30, 2002,
respectively. Operating revenues increased 8.6% to $1,848.7 and 8.2% to $3,660.9
during the three and six months ended June 30, 2003, respectively, compared with
operating revenues of $1,702.9 and $3,384.9 for the three and six months ended
June 30, 2002, respectively.
Our growth in the three and six months ended June 30, 2003 primarily reflected
an overall increase in Property & Casualty earned premiums, Life & Investments
premiums and other revenues and net investment income. The 7.1% and 6.5%
increase in Property & Casualty earned premiums for the three and six months
ended June 30, 2003, respectively, was driven by targeted growth in selected
markets and premium rate increases across all lines of business. Life &
Investments premiums and other revenues increased 33.1% and 34.4% for the three
and six months ended June 30, 2003, respectively, primarily due to the
acquisition of Swiss Re's stop-loss medical business in the third quarter of
2002. The increase in net investment income was primarily due to a higher
invested asset base in Life & Investments and bond calls in Property & Casualty.
Revenues also included pretax net realized investment gains of $22.3 and losses
of $27.6 for the three and six months ended June 30, 2003, respectively.
Revenues for the comparable periods in 2002 contained $95.4 and $126.0 of pretax
net realized investment gains. Pretax impairment losses included in net realized
investment gains and losses were $46.8 and $131.0 for the three and six months
ended June 30, 2003, respectively, compared with $103.9 and $114.1 for the three
and six months ended June 30, 2002, respectively.
Consolidated net income increased 6.4% to $111.9 and 19.6% to $201.9 for the
three and six months ended June 30, 2003, respectively, compared with net income
of $105.2 and $168.8 for the three and six months ended June 30, 2002,
respectively. The increases during the three and six months ended June 30, 2003
reflected improved operating earnings offset by changes in after-tax realized
investment gains and losses. Operating earnings were $97.2 and $219.6 for the
three and six months ended June 30, 2003, respectively, compared with operating
earnings of $43.2 and $86.7 for the three and six months ended June 30, 2002,
respectively. The increase in operating earnings was driven primarily by
improved underwriting results within the Property & Casualty operations and
increased operating earnings in Life & Investments' Group segment, as a result
of the acquisition of Swiss Re's stop-loss medical business in July 2002 and
favorable claim experience in this business. Property & Casualty underwriting
results benefited from earned premiums increases and lower claims frequency in
both the three months and six months ended June 30, 2003 compared with the same
periods in 2002. Offsetting those benefits were catastrophe losses in the second
quarter of 2003 totaling $99.1, primarily from a string of Midwest and Southern
tornadoes and Texas hailstorms. Catastrophe losses for the second quarter of
2002 totaled $64.8. Catastrophe losses in the first six months of 2003 were
$112.4 compared with $92.4 in the first six months of 2002.
Segment - Results of Operations
The following table summarizes the GAAP measure "Income before Income Taxes and
Distributions on Capital Securities" for Property & Casualty, Life & Investments
and Corporate. In the following sections we discuss Results of Operations for
each and reconcile the non-GAAP measures used, Property & Casualty underwriting
profit (loss) and Life & Investments pretax operating earnings, to this GAAP
measure.
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Property & Casualty $ 109.1 $ 214.6 $ 241.4 $ 274.4
Life & Investments 64.6 (23.6) 78.3 24.2
Corporate (0.6) (30.8) (5.9) (44.8)
---------------------------------------------------------
Income before Income Taxes and Distributions
on Capital Securities $ 173.1 $ 160.2 $ 313.8 $ 253.8
- -----------------------------------------------------------------------------------------------------------
Property & Casualty - Results of Operations
Safeco's Property & Casualty operations are organized around our four operating
segments, Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI),
Surety and Property & Casualty Other (P&C Other). Within SPI there are three
reportable segments, Personal Auto, Homeowners and Specialty. Within SBI the
three reportable segments are SBI Regular, SBI Special Accounts Facility and SBI
Runoff.
Property & Casualty Operating Statistics
The following three tables for Property & Casualty reflect: (1) net earned
premiums by segment; (2) underwriting profits (losses) by segment and (3)
combined ratios by segment.
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
NET EARNED PREMIUMS 2003 2002 2003 2002
---------------------------------------------------------
Personal Auto $ 552.9 $ 472.5 $ 1,081.4 $ 926.7
Homeowners 192.1 189.2 381.6 372.6
Specialty 50.5 51.2 100.3 101.2
---------------------------------------------------------
Total SPI 795.5 712.9 1,563.3 1,400.5
---------------------------------------------------------
Regular 272.1 251.4 538.1 496.4
Special Accounts Facility 93.2 61.6 181.1 111.6
Runoff (4.9) 57.1 (1.9) 138.6
---------------------------------------------------------
Total SBI 360.4 370.1 717.3 746.6
---------------------------------------------------------
Surety 38.5 31.1 70.6 60.9
P&C Other 7.4 7.9 13.7 13.5
---------------------------------------------------------
Total Property & Casualty $ 1,201.8 $ 1,122.0 $ 2,364.9 $ 2,221.5
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
UNDERWRITING PROFITS (LOSSES) 2003 2002 2003 2002
---------------------------------------------------------
Personal Auto $ 3.3 $ (7.3) $ 1.8 $ (27.6)
Homeowners (13.4) (36.9) 6.1 (55.1)
Specialty 14.8 3.0 26.3 11.0
---------------------------------------------------------
Total SPI 4.7 (41.2) 34.2 (71.7)
---------------------------------------------------------
Regular (11.5) (25.0) (16.8) (47.6)
Special Accounts Facility (0.6) (1.8) 5.8 6.4
Runoff (9.4) (14.4) (15.7) (59.1)
---------------------------------------------------------
Total SBI (21.5) (41.2) (26.7) (100.3)
---------------------------------------------------------
Surety 6.8 5.8 10.5 8.9
P&C Other (2.3) (7.6) (9.3) (12.4)
---------------------------------------------------------
Total Underwriting Profit (Loss) (12.3) (84.2) 8.7 (175.5)
Property & Casualty Net Investment Income 116.5 115.3 229.3 230.5
Property & Casualty Restructuring Charges -- (5.5) -- (12.1)
Property & Casualty Net Realized Investment Gains 4.9 189.0 3.4 231.5
---------------------------------------------------------
Property & Casualty Income before Income Taxes
and Distributions on Capital Securities $ 109.1 $ 214.6 $ 241.4 $ 274.4
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
COMBINED RATIOS+ 2003 2002 2003 2002
---------------------------------------------------------
Personal Auto 99.4% 101.6% 99.8% 103.0%
Homeowners 107.0 119.5 98.4 114.8
Specialty 70.7 94.0 73.8 89.1
---------------------------------------------------------
Total SPI 99.4 105.8 97.8 105.1
---------------------------------------------------------
Regular 104.2 109.9 103.1 109.6
Special Accounts Facility 100.7 102.9 96.8 94.2
Runoff * 125.3 * 142.6
---------------------------------------------------------
Total SBI 106.0 111.1 103.7 113.4
---------------------------------------------------------
Surety 82.2 81.5 85.1 85.4
P&C Other * * * *
---------------------------------------------------------
Total Property & Casualty 101.0% 107.5% 99.6% 107.9%
- -----------------------------------------------------------------------------------------------------------
* Not meaningful.
+ Combined ratios are GAAP basis and are calculated based on losses and expenses
expressed as a percentage of earned premiums.
Safeco Personal Insurance
Personal Auto
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ 552.9 $ 472.5 $ 1,081.4 $ 926.7
Underwriting Profit (Loss) 3.3 (7.3) 1.8 (27.6)
Combined Ratio 99.4% 101.6% 99.8% 103.0%
- -----------------------------------------------------------------------------------------------------------
Net earned premiums increased $80.4 or 17.0% in the second quarter of 2003 to
$552.9, compared with $472.5 in the same quarter of 2002. Net earned premiums
for the first six months of 2003 increased $154.7 or 16.7% to $1,081.4 compared
with $926.7 for the same period in 2002. The increase in premiums for both the
three and six month periods ended June 30, 2003, reflects rate increases as well
as growth in policies in force (PIF) each quarter since the second quarter of
2002. We implemented mid-single digit rate increases throughout 2002 and into
the second quarter of 2003, and we expect to continue to implement similar rate
increases during the remainder of the year. PIF increased 9.6% in the second
quarter of 2003 over the prior year, reflecting stable customer retention and
new business production. Three strategic initiatives launched in 2002 continue
to positively impact auto results: the introduction of our new auto insurance
product, our new business entry model using point-of-sale (POS) technology and
increased agent commissions on new business.
The new auto insurance product contains additional underwriting tiers both to
provide more refined price points based on risk and to make insurance available
to a broader range of drivers. This new auto product has been introduced in 36
states and is expected to be available in all states where we currently write
business by the end of the year. Our new auto product also expands the use of
automated underwriting techniques, using multi-variate analysis to classify auto
insurance risks into tiers.
In early 2002, we also implemented improved POS technology in our agents'
offices, making it easier for agents to write business with Safeco. This
technology allows agents to quote policies more quickly and makes it easier for
our agents to sell Safeco products.
Our new commission structure was introduced in the first quarter of 2002 and
increased commissions on new auto policies for the first six-month policy
period, and revised the bonus commission structure to align our bonus incentives
to agents with both our growth and profitability goals.
Our underwriting profit in the second quarter of 2003 was $3.3, an improvement
of $10.6 from an underwriting loss of $7.3 in the comparable quarter of 2002.
This was Personal Auto's first underwriting profit since the third quarter of
2001. For the first six months of 2003, the underwriting profit was $1.8, an
improvement of $29.4 from a $27.6 underwriting loss in the comparable period of
2002. Similarly, the combined ratio improved for both the three and six month
periods ended June 30, 2003, to 99.4% and 99.8%, respectively, compared with
101.6% and 103.0%, respectively, in the prior year periods. The improved
underwriting results for both the three and six month periods reflected higher
premium rates and an improved loss ratio. Our loss ratio was 61.9% for the
second quarter of 2003 compared with 66.5% for the same period in 2002. This
lower loss ratio was driven primarily by the higher premium rates previously
discussed, as well as lower claims frequency, partially offset by mid-single
digit increases in severity and higher catastrophe losses. Excluding catastrophe
losses, our loss ratio was 57.9% for the second quarter of 2003 compared with
65.1% for the same period in 2002. Catastrophe losses in the second quarter and
first six months of 2003 were $22.3 and $23.2, respectively, compared with $6.5
and $8.3 in the same respective periods of 2002.
Homeowners
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ 192.1 $ 189.2 $ 381.6 $ 372.6
Underwriting Profit (Loss) (13.4) (36.9) 6.1 (55.1)
Combined Ratio 107.0% 119.5% 98.4% 114.8%
- -----------------------------------------------------------------------------------------------------------
Net earned premiums increased $2.9 or 1.5% in the second quarter of 2003 to
$192.1, compared with $189.2 in the same quarter of 2002. Net earned premiums
for the first six months of 2003 increased $9.0 or 2.4% to $381.6 compared with
$372.6 for the same period of 2002. The increase reflects continued efforts to
increase rates in order to restore profitability in this product line. Our rate
increases averaged in the high teens throughout 2002 and into the second quarter
of 2003 and we expect to implement rate increases averaging in the low teens
during the remainder of the year. The impact of increased rates on earned
premiums was largely offset by continued decreases in PIF, which were down 9.1%
in the second quarter of 2003 compared with a year ago due to a decrease in new
business.
Homeowners insurance written in states where we cannot achieve profitability
continues to decrease. In July 2003, we placed a moratorium on new business in
California, the largest market for Homeowners based on 2002 net written
premiums. Currently, we have moratoriums on writing new business in seven
states. Moratoriums will be lifted in these states as we secure approval to
implement the changes necessary to move this product toward profitability. In
addition, Safeco has introduced new language into homeowners policies sold in
storm-prone Midwest states. Currently in place in 12 states, the new language
requires individuals to pay a higher deductible on repair costs for wind and
hail damage. We have also filed limits on mold damages for homeowners policies
sold in 35 of the states in which we do business. Generally, these filing limits
cap mold damages at $10 thousand, including remediation. We will continue to
file limits in other states, as allowed.
In the first quarter of 2002, we launched a new tiered pricing structure for
homeowners that more accurately prices business based on risk characteristics.
This approach, which matches rates more closely to risks, is currently in place
in 31 states, and we expect to have it in place in all but two of the remaining
states where we write homeowners business by the end of the year.
The underwriting loss for Homeowners of $13.4 improved by $23.5 in the second
quarter of 2003 compared with $36.9 in the second quarter of 2002. For the first
six months of 2003, the underwriting profit was $6.1, an improvement of $61.2,
compared with an underwriting loss of $55.1 for the same period in 2002.
Similarly, the combined ratio improved for both the three and six month periods
ended June 30, 2003, to 107.0% and 98.4%, respectively, compared with 119.5% and
114.8% in the prior year respective periods. These results reflect the actions
taken to increase rates as well as the continued trend of lower claims
frequency, partially offset by higher severity and catastrophe losses in the
first six months of 2003 compared with the prior year. Catastrophe losses in the
second quarter of 2003 increased by $19.2 to $60.5, compared with $41.3 for the
same quarter in 2002. Catastrophe losses were $68.7 for the six months ended
June 30, 2003 up $11.5 from $57.2 for the same period of 2002. The increase in
catastrophe losses in the second quarter of 2003 was due to damage incurred by a
hail storm in Texas and severe storms and tornadoes in the states of Kansas,
Missouri, Tennessee and Wyoming.
Specialty
Three Months Ended Six Months Ended
June 30 June 30
- ----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
--------------------------------------------------------
Net Earned Premiums $ 50.5 $ 51.2 $ 100.3 $ 101.2
Underwriting Profit 14.8 3.0 26.3 11.0
Combined Ratio 70.7% 94.0% 73.8% 89.1%
- ----------------------------------------------------------------------------------------------------------
Specialty lines include earthquake, dwelling fire, umbrella, inland marine and
boat insurance for individuals.
Net earned premiums decreased to $50.5 in the second quarter of 2003 from $51.2
in the same period in 2002. Net earned premiums for the first six months of 2003
decreased slightly to $100.3 compared with $101.2 in the same period in 2002.
This decrease reflected a reduction in PIF offset by increases in rates
throughout 2002 and into 2003. The PIF reduction in the first six months of 2003
reflected a decrease in new business production, particularly in the dwelling
fire product line.
Specialty's underwriting profit was $14.8 for the three months ended June 30,
2003, up $11.8 from $3.0 for the three months ended June 30, 2002. For the six
months ended June 30, 2003, underwriting profit increased by $15.3 to $26.3,
compared with a profit of $11.0 for the six months ended June 30, 2002. This was
primarily due to the rate increases described above and lower umbrella losses in
the current year. The combined ratio was 70.7% and 73.8% for the three and six
month periods of 2003, respectively, compared with 94.0% and 89.1%for the same
periods a year ago.
Safeco Business Insurance
SBI Regular
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ 272.1 $ 251.4 $ 538.1 $ 496.4
Underwriting Loss (11.5) (25.0) (16.8) (47.6)
Combined Ratio 104.2% 109.9% 103.1% 109.6%
- -----------------------------------------------------------------------------------------------------------
SBI Regular is our core commercial segment writing insurance for small- to
medium-sized businesses. Net earned premiums increased 8.2% to $272.1 and 8.4%
to $538.1 in the three and six month periods ended June 30, 2003, respectively,
compared with $251.4 and $496.4 for the respective periods of 2002. The increase
in net earned premiums reflected the impact of rate increases partially offset
by continued decreases in PIF. We implemented average insurance price increases
in the mid-teens for SBI Regular throughout 2002 and into 2003 and we expect
average price increases near the double-digits for the year. PIF decreased 6.9%
in the second quarter of 2003 compared with the prior year.
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 business model encompasses a suite of services that
includes an automated underwriting platform, a business service center and a new
business agency interface system. The new underwriting approach provides an
increased number of pricing tiers and better matching of rate to risk. The new
business entry model makes it easier for agents to quote and sell our products
to small businesses.
SBI Regular's underwriting loss improved by 54.0% to $11.5, and 64.7% to $16.8
in the three and six month periods ended June 30, 2003, respectively, compared
with the respective period losses in 2002 of $25.0 and $47.6. Similarly, the
combined ratio improved to 104.2% and 103.1% in the three and six months ended
June 30, 2003, respectively, from 109.9% and 109.6% in the comparable periods in
2002. The improvement in underwriting results in 2003 primarily reflects the
effects of rate increases and lower catastrophe losses. Catastrophe losses were
$9.2 and $13.6 in the three and six month periods ended June 30, 2003,
respectively, compared with $13.2 and $19.2 for the same periods in 2002.
Catastrophe losses in the second quarter of 2002 included $4.5 from wildfires in
Arizona.
SBI Special Accounts Facility
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ 93.2 $ 61.6 $ 181.1 $ 111.6
Underwriting Profit (Loss) (0.6) (1.8) 5.8 6.4
Combined Ratio 100.7% 102.9% 96.8% 94.2%
- -----------------------------------------------------------------------------------------------------------
SBI Special Accounts Facility (SAF) writes larger commercial accounts for our
key Safeco agents and our four continuing specialty commercial programs
(lender-placed property insurance, agents' errors and omissions insurance
written predominantly for Safeco agents, mini storage and warehouse property
coverages, and coverages for non-profit social service organizations).
Net earned premiums for the three months ended June 30, 2003 increased to $93.2
or 51.3% compared with $61.6 for the same period of 2002. Net earned premiums
increased for the first six months of 2003 by $69.5 or 62.3% to $181.1 compared
with $111.6 for the first six months of 2002. The increase in net earned
premiums in 2003 was primarily due to the consolidation of our business
insurance products in 2002; as each existing Safeco large account commercial
policy came up for renewal (reported in SBI Runoff) a decision was made by SAF
to renew or not. If it was renewed it became part of SAF, otherwise underwriting
results associated with the discontinued account remained in SBI Runoff.
Underwriting loss in the second quarter of 2003 decreased slightly by $1.2 to
$0.6, compared with a loss of $1.8 a year ago. For the first six months of 2003,
SAF achieved an underwriting profit of $5.8, a slight decrease from $6.4 in the
comparable period of 2002. Additionally, the combined ratio was 100.7% and 96.8%
for the three and six month periods ended June 30, 2003, respectively, compared
with 102.9% and 94.2% for the same periods in 2002.
SBI Runoff
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ (4.9) $ 57.1 $ (1.9) $ 138.6
Underwriting Loss (9.4) (14.4) (15.7) (59.1)
- -----------------------------------------------------------------------------------------------------------
SBI Runoff includes the large commercial business accounts and 15 specialty
programs that Safeco is exiting. We continue to run off poor-performing large
accounts and are focusing on growth in the small- to medium-sized commercial
business market as reflected in SBI Regular.
Net earned premiums in the second quarter of 2003 were $(4.9) compared with net
earned premiums of $57.1 in the 2002 second quarter. For the first six months of
2003, net earned premiums were $(1.9) compared with $138.6 in 2002. Net earned
premiums in 2003 included return premium on retrospectively rated policies. The
decreases also reflected the actions taken to exit this unprofitable business
and the renewal of policies into SAF referred to above.
Underwriting losses were $5.0 and $43.4 lower in the second quarter and first
six months of 2003, respectively, compared with a year ago reflecting the
significant decrease in premium volume. In addition, results for the first six
months of 2002 reflected reserve strengthening of $10.0 on workers compensation
for large accounts in runoff.
Surety
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Net Earned Premiums $ 38.5 $ 31.1 $ 70.6 $ 60.9
Underwriting Profit 6.8 5.8 10.5 8.9
Combined Ratio 82.2% 81.5% 85.1% 85.4%
- -----------------------------------------------------------------------------------------------------------
Surety net earned premiums increased $7.4 or 23.8% in the second quarter of 2003
to $38.5, compared with net earned premiums of $31.1 in the second quarter of
2002. For the first six months of 2003, net earned premiums increased by $9.7 or
15.9% to $70.6 from $60.9 in the first six months of 2002. The increase in net
earned premiums reflected the impact of new business production, the opening of
a new surety office in Glendale, California and rate increases.
Underwriting profit increased by $1.0 to $6.8 in the second quarter of 2003
compared with $5.8 in the same period a year ago, while the underwriting profit
in the first six months of 2003 improved by $1.6 or 18.0% to $10.5 from $8.9 in
2002. The combined ratio for the three and six month periods was 82.2% and
85.1%, respectively, compared with 81.5% and 85.4%, respectively, in 2002.
P&C Other
Three Months Ended Six Months Ended
June 30 June 30
- ---------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
-------------------------------------------------------
Net Earned Premiums $ 7.4 $ 7.9 $ 13.7 $ 13.5
Underwriting Loss (2.3) (7.6) (9.3) (12.4)
- ---------------------------------------------------------------------------------------------------------
P&C Other includes our discontinued assumed reinsurance business, our
involuntary assigned risk and other state-mandated personal lines business, our
Lloyds of London operations which are in runoff and certain discontinued product
lines.
Net earned premiums were $7.4 and $13.7 for the three and six months ended June
30, 2003, respectively, compared with $7.9 and $13.5 in the same respective
periods in 2002.
The underwriting loss in the second quarter and the first six months of 2003
decreased to $2.3 and $9.3 from $7.6 and $12.4 in 2002, respectively.
Life & Investments - Results of Operations
Life & Investments operations are managed separately as six reportable segments:
Group, Income Annuities, Retirement Services, Individual, Asset Management and
Life & Investments Other (L&I Other). The following table summarizes comparative
operating results for Life & Investments:
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Total Revenues $ 524.9 $ 460.6 $ 1,052.3 $ 921.8
---------------------------------------------------------
Policy Benefits 341.4 312.0 684.4 618.1
Other Expenses 125.6 96.6 238.2 192.6
---------------------------------------------------------
Total Benefits and Expenses 467.0 408.6 922.6 810.7
---------------------------------------------------------
Pretax Operating Earnings 57.9 52.0 129.7 111.1
Net Realized Investment Gains (Losses) 6.7 (75.6) (51.4) (86.9)
---------------------------------------------------------
Income (Loss) before Income Taxes and
Distributions on
Capital Securities $ 64.6 $ (23.6) $ 78.3 $ 24.2
- -----------------------------------------------------------------------------------------------------------
Life & Investments revenues are comprised of premiums, net investment income and
other fees. The following tables summarize revenues (excluding net realized
investment gains and losses) and pretax operating earnings by reportable
segment.
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
REVENUES 2003 2002 2003 2002
---------------------------------------------------------
Group $ 144.5 $ 90.9 $ 286.8 $ 178.3
Income Annuities 130.8 129.0 262.2 258.6
Retirement Services 96.4 94.7 192.5 187.8
Individual 95.8 93.2 191.7 186.6
Asset Management 6.7 8.0 12.9 16.2
L&I Other 50.7 44.8 106.2 94.3
---------------------------------------------------------
Total Life & Investments Revenues $ 524.9 $ 460.6 $ 1,052.3 $ 921.8
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
PRETAX OPERATING EARNINGS 2003 2002 2003 2002
---------------------------------------------------------
Group $ 24.5 $ 14.1 $ 53.5 $ 24.3
Income Annuities 8.4 7.3 18.5 16.1
Retirement Services 4.9 4.0 9.9 12.0
Individual (0.5) 7.5 1.4 14.2
Asset Management 0.1 1.7 0.2 4.0
L&I Other 20.5 17.4 46.2 40.5
---------------------------------------------------------
Pretax Operating Earnings 57.9 52.0 129.7 111.1
Net Realized Investment Gains (Losses) 6.7 (75.6) (51.4) (86.9)
---------------------------------------------------------
Income (Loss) before Income Taxes and
Distributions on Capital Securities $ 64.6 $ (23.6) $ 78.3 $ 24.2
- -----------------------------------------------------------------------------------------------------------
Group
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 144.5 $ 90.9 $ 286.8 $ 178.3
Pretax Operating Earnings 24.5 14.1 53.5 24.3
Loss Ratio 56.3% 59.8% 56.2% 59.8%
- -----------------------------------------------------------------------------------------------------------
Group's principal product offering is stop-loss medical insurance sold to
employers with self-insured medical plans. Also offered in this line are group
life, accidental death and dismemberment, and disability products.
Revenues were $144.5 and $286.8 in the three and six months ended June 30, 2003,
respectively, an increase of 59.0% and 60.9% over revenues of $90.9 and $178.3
in the same periods in 2002. The increase in 2003 revenues is primarily due to
the acquisition of Swiss Re's stop-loss medical business in July 2002, which
generated $57.4 in premiums in the second quarter and $111.3 in the first six
months of 2003.
Pretax operating earnings increased to $24.5 and $53.5 in the three and six
months ended June 30, 2003, respectively, from $14.1 and $24.3 in the comparable
periods in 2002. The increase in pretax operating earnings reflected the
addition of the Swiss Re business, and an improved loss ratio of 56.3% and 56.2%
in the three and six months ended June 30, 2003, respectively, compared with
59.8% in each period of 2002. We believe this level of profit will be difficult
to sustain over the next year due to increased competition from existing and new
entrants into the business.
We have incurred low claim costs to date in 2003. In conjunction with these
lower claim costs, we experienced favorable reserve development and reduced our
reserves by $10.5 in the first quarter of 2003 primarily related to polices
obtained in the acquisition of Swiss Re's stop-loss medical business.
Income Annuities
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 130.8 $ 129.0 $ 262.2 $ 258.6
Pretax Operating Earnings 8.4 7.3 18.5 16.1
Policyholder Liabilities 6,354.2 6,279.5 6,354.2 6,279.5
- -----------------------------------------------------------------------------------------------------------
Income Annuities' primary product is the structured settlement annuity that is
sold to fund third-party personal injury settlements, providing a reliable
income stream to the injured party. This product is extremely sensitive to
financial strength ratings, and our ratings downgrades in 2001 decreased our
ability to sell this product. Income Annuities also sells non-structured fixed
annuities, that provide an immediate payment stream. Overall sales of immediate
annuities (including structured settlements) were $35.8 and $64.2 in the three
and six months ended June 30, 2003, respectively, and $20.7 and $35.8 in the
same periods of 2002. These increases were due to continued efforts to grow the
sales of non-structured settlement annuity products. Structured settlement sales
included $8.0 and $16.8 in annuities purchased by Property & Casualty affiliates
in the three and six months ended June 30, 2003, respectively, compared with
$9.2 and $15.9 in the same periods of 2002. Income Annuities' contracts are
non-surrenderable and supported by long-term invested assets consisting
primarily of long duration bonds and mortgage-backed securities.
Revenues were $130.8 and $262.2 in the three and six months ended June 30, 2003,
respectively, compared with $129.0 and $258.6 for the same periods a year ago,
an increase of 1.4% for each period. Revenues were impacted by lower interest
rates offset by favorable prepayment adjustments on mortgage-backed securities
of $3.4 and $7.1 in the three and six months ended June 30, 2003, respectively,
compared with unfavorable prepayment adjustments of $0.3 and $1.0 in the same
periods of 2002.
Pretax operating earnings increased to $8.4 and $18.5 in the three and six
months ended June 30, 2003, respectively, compared with $7.3 and $16.1 for the
same periods a year ago. This was primarily due to the favorable prepayment
adjustment on mortgage-backed securities, partially offset by lower interest
income from bond defaults over the past year and lower interest rates on
reinvestment.
Retirement Services
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 96.4 $ 94.7 $ 192.5 $ 187.8
Pretax Operating Earnings 4.9 4.0 9.9 12.0
General Account Liabilities 6,369.2 5,661.9 6,369.2 5,661.9
Separate Account Liabilities 900.7 960.2 900.7 960.2
- -----------------------------------------------------------------------------------------------------------
The primary products in this business line are fixed deferred and variable
annuities (both qualified and non-qualified), and guaranteed investment
contracts (GIC). The profitability of these products is highly dependent on our
ability to earn an acceptable interest spread on new business. In response to
the low interest rate environment, we sell in those states that have lowered
their minimum guaranteed interest rate requirements and have curtailed sales in
states where interest spreads on our products are not acceptable. Products in
Retirement Services have protection against early withdrawals in the form of
surrender charges during the initial years of each policy or the option for
Safeco to spread payouts over five years.
Revenues increased to $96.4 and $192.5 in the three and six months ended June
30, 2003, respectively, compared with revenues of $94.7 and $187.8 in the same
periods of 2002. The increase in 2003 was due to higher investment income as a
result of growth in general account liabilities, offset by lost interest income
due to bond defaults over the past year.
Pretax operating earnings were $4.9 for the three months ended June 30, 2003,
compared with $4.0 in the same period a year ago. This increase reflected higher
investment income as a result of growth in general account liabilities, offset
by lower interest income due to bond defaults. Pretax operating earnings were
$9.9 and $12.0 for the six months ended June 30, 2003 and 2002, respectively.
This decrease reflected higher operating expenses and deferred acquisition cost
amortization in the six months ended June 30, 2003.
General account liabilities increased to $6,369.2 at June 30, 2003 from $5,661.9
at June 30, 2002. The increase was due to sales of our fixed deferred annuity
products during 2002 and the first six months of 2003, offset by scheduled GIC
withdrawals. The decrease in separate account liabilities to $900.7 from $960.2
was a result of the declines in equity markets.
Individual
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 95.8 $ 93.2 $ 191.7 $ 186.6
Pretax Operating Earnings (Loss) (0.5) 7.5 1.4 14.2
- -----------------------------------------------------------------------------------------------------------
Individual products include term, universal and variable universal life and
BOLI. BOLI is universal life insurance sold to banks and is extremely sensitive
to financial strength ratings; consequently, our ratings downgrades in 2001
significantly curtailed the volume of new BOLI deposits.
Revenues increased slightly to $95.8 and $191.7 in the three and six months
ended June 30, 2003, respectively, compared with $93.2 and $186.6 in the same
periods of 2002. Updated term and universal life insurance products launched in
2002 and a new internet sales tool (Safeco Now) contributed to the increased
sales in 2003.
The Individual segment's pretax operating loss was $0.5 for the second quarter
of 2003 compared to pretax operating earnings of $7.5 a year ago. Pretax
operating earnings of $1.4 in the six months ended June 30, 2003 were down from
2002 pretax operating earnings of $14.2 in 2002. The decreases were due
primarily to higher claims, higher operating expenses, and a lower than expected
BOLI interest spread in the three and six months ended June 30, 2003. We expect
continued earnings pressure throughout 2003 in this segment from operating
expenses and the lower than expected BOLI interest spread.
Asset Management
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 6.7 $ 8.0 $ 12.9 $ 16.2
Pretax Operating Earnings 0.1 1.7 0.2 4.0
Assets Under Management 4,033.4 4,390.9 4,033.4 4,390.9
- -----------------------------------------------------------------------------------------------------------
Asset Management serves as the investment advisor for the Safeco mutual funds
and variable insurance portfolios, and for institutional and trust accounts.
Investment advisory activities produced revenues of $6.7 and $12.9 in the three
and six months ended June 30, 2003, respectively, compared with $8.0 and $16.2
for the same periods a year ago. The decline in assets under management, due to
declining equity markets as well as a net outflow of funds, contributed to the
overall decrease in revenues and pretax operating earnings.
L&I Other
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Revenues $ 50.7 $ 44.8 $ 106.2 $ 94.3
Pretax Operating Earnings 20.5 17.4 46.2 40.5
- -----------------------------------------------------------------------------------------------------------
Our L&I Other segment is comprised mainly of investment income on capital and
accumulated earnings of the other reportable segments, as well as commissions
received by Talbot Financial Corporation (Talbot), our insurance agency, that
distributes property and casualty and life insurance products. Revenues were
$50.7 and $106.2 in the three and six months ended June 30, 2003, respectively,
a 13.2% and 12.6% increase from revenues of $44.8 and $94.3 a year ago. The
increase in revenues in 2003 was primarily due to an increase in contingent
commission bonuses and brokerage income received by Talbot and investment
income. Pretax operating earnings were $20.5 and $46.2 for the three and six
months ended June 30, 2003, respectively, and $17.4 and $40.5 for the same
periods in 2002.
Corporate - Results of Operations
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
2003 2002 2003 2002
---------------------------------------------------------
Pretax Loss before Net Realized Investment
Gains (Losses) $ (11.3) $ (12.8) $ (26.3) $ (26.2)
Net Realized Investment Gains (Losses) before
Income Taxes 10.7 (18.0) 20.4 (18.6)
---------------------------------------------------------
Loss before Income Taxes and Distributions on
Capital Securities $ (0.6) $ (30.8) $ (5.9) $ (44.8)
- -----------------------------------------------------------------------------------------------------------
The Corporate segment includes operating results for Safeco Corporation, SFP,
Safeco Properties, Inc. and intercompany transaction eliminations. Interest
expense on borrowings totaled $13.2 and $16.4 in the second quarter of 2003 and
2002, respectively, and $30.3 and $32.4 for the six months ended June 30, 2003
and 2002, respectively. These amounts do not include the expense for the
distributions on Safeco's Capital Securities which is presented separately net
of tax on the Consolidated Statements of Income. In accordance with SFAS 150,
"Accounting for Financial Instruments with Characteristics of Liabilities,
Equity, or Both", these distributions will be recorded as interest expense on a
prospective basis, beginning July 1, 2003.
SFP was organized in 2000 to write S&P 500 index options to mitigate the risk
associated with Life & Investments' Equity Indexed Annuity (EIA) product. SFP
also 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. Changes in the fair values of
these instruments and any net realized gain or loss are recognized in current
income. Net investment income includes the premium income on the credit swaps
and the earnings and fair value adjustments for the S&P 500 index options and
the convertible bonds. Net realized investment gain and loss includes the fair
value adjustments and net realized investment gains and losses from the credit
swaps. SFP's pretax loss before net realized investment gains and losses was
$1.0 for the second quarter of 2003 compared with income of $2.4 in 2002. SFP's
pretax income before net realized investment gains and losses was $1.2 and $4.8
in the first six months of 2003 and 2002, respectively.
SFP had credit swaps with notional amounts outstanding totaling $859.0 and
$975.0 at June 30, 2003 and 2002, respectively. These credit swaps involved
selling credit protection for a fee that covered 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. The credit swaps are
marked-to-market and this adjustment is recorded in net realized investment
gains and losses on the Consolidated Statements of Income. Total net realized
investment gain before taxes in the second quarter of 2003 was $10.3 compared
with a total net realized investment loss of $15.8 in the second quarter of
2002. Total net realized investment gain before taxes for the six months ended
June 30, 2003 was $19.3 compared with a total net realized investment loss of
$16.3 for the same period in 2002.
The table below summarizes the quality of the credit swap portfolio:
Percent at June 30
RATING 2003
- -----------------------------------------------------------------------------------------------------------
AAA 12%
AA 1
A 40
BBB 44
BB and lower 3
--------------------
Total 100%
- -----------------------------------------------------------------------------------------------------------
The fair value of SFP's written S&P 500 index options liability was $49.7 and
$23.4 at June 30, 2003 and 2002, respectively. SFP's investment portfolio
included investment grade convertible bonds with market values totaling $62.7
and $51.1 at June 30, 2003 and 2002, respectively.
Capital Resources and Liquidity
Sources and Uses of Funds
Safeco's operations have liquidity requirements that vary among the segments and
their 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 its subsidiary operations,
the sale and maturity of invested assets and the issuance of debt and equity.
The 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 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.
Total cash provided by operating activities was $539.2 for the first six months
of 2003 compared with $137.6 in the same period a year ago. The increase in 2003
was due to an increase in insurance premiums, partially offset by increases in
claims paid due to higher catastrophes in the second quarter of 2003.
On January 27, 2003, Safeco issued $200.0 of senior notes with a coupon of
4.200% that mature in 2008 and $300.0 of senior notes with a coupon of 4.875%
that mature in 2010. The notes are unsecured and rank equally with all our other
unsecured senior indebtedness. The proceeds from the notes were used to repay
$300.0 principal amount of 7.875% medium term notes due March 15, 2003 and to
call $200.0 principal amount of 7.875% notes maturing in 2005 at par on April 1,
2003.
On November 20, 2002, Safeco completed the sale of 10,465,000 shares of common
stock at $33.00 per share. Safeco received proceeds net of related expenses of
$328.7 from the sale of these shares. The net proceeds were used to contribute
capital of $150.0 to our Property & Casualty operations and $100.0 to our Life &
Investments operations in December 2002 to support future growth in our core
product lines and strengthen the capital base of these operations. Remaining
proceeds were used for general corporate purposes and the repayment of
outstanding indebtedness.
Safeco maintains a bank credit facility of $500.0 available through September
2005. Safeco pays a fee to have the facility available and does not maintain
deposits as compensating balances. The 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 the
facility as of June 30, 2003 or December 31, 2002 and Safeco was in compliance
with all covenants.
Management believes that the Company's cash flow from operations, investment
portfolio and credit facilities are sufficient to meet its future liquidity
needs.
The following tables summarize Safeco's contractual obligations as of June 30,
2003:
Payments due
- -----------------------------------------------------------------------------------------------------------
Less than More than
CONTRACTUAL OBLIGATIONS Total 1 Year 1-3 Years 3-5 Years 5 Years
- -----------------------------------------------------------------------------------------------------------
Long-Term Debt and Capital Securities $ 1,968.6 $ 7.3 $ 6.2 $ 407.4 $ 1,547.7
Operating Leases 345.5 53.1 93.6 80.2 118.6
------------------------------------------------------------------
Total Contractual Obligations $ 2,314.1 $ 60.4 $ 99.8 $ 487.6 $ 1,666.3
- -----------------------------------------------------------------------------------------------------------
Material terms of contractual obligations are described in the notes to our
consolidated financial statements included in our 2002 Annual Report on Form
10-K.
Ratings
The financial strength of insurers is rated to provide both insurance consumers
and industry participants with comparative information on specific insurance
companies. Financial strength ratings are important for the marketing of our
products and some lines are especially sensitive to ratings such as structured
settlement annuities, BOLI products and GICs. Higher ratings generally indicate
greater financial strength and a stronger ability to pay claims. Lower ratings
for Safeco 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. Any of these factors could have a
material adverse effect on our business, consolidated results of operations and
financial condition.
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 capital as may be necessary to continue to meet standards for capital
adequacy.
Currently, all rating agencies maintain a stable outlook on their ratings of
Safeco. On August 13, 2002, Standard & Poor's (S&P) affirmed its ratings on
Safeco Corporation and our Property & 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 on the parent's core group. On December 4, 2002, A.M. Best reaffirmed
Safeco's ratings and revised its outlook for our Corporate and Property &
Casualty ratings from negative to stable.
We believe our financial position is sound and continue to execute our action
plans to improve Property & Casualty operating results. The effect of our
operating action plans has been reflected in improved operating results and this
has improved Safeco's debt service coverage during 2002 and the first half of
2003. It is, however, possible that further negative ratings actions may occur.
Lower ratings have significantly affected Life & Investments' ability to sell
structured settlement immediate annuities and BOLI products. 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+ Baa2 BBB-
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 net investment income was $423.1 and $412.8 for the
three months ended June 30, 2003 and 2002, respectively, and was $845.6 and
$827.5 for the six months ended June 30, 2003 and 2002, respectively. The
investment portfolios of Property & Casualty and Life & Investments produced
substantially all of this net investment income.
Three Months Ended Six Months Ended
June 30 June 30
- ---------------------------------------------------------------------------------------------------------
PRETAX NET INVESTMENT INCOME 2003 2002 2003 2002
-------------------------------------------------------
Property & Casualty $ 116.5 $ 115.3 $ 229.3 $ 230.5
Life & Investments 303.9 294.5 607.4 590.6
Corporate and Other 2.7 3.0 8.9 6.4
-------------------------------------------------------
Total $ 423.1 $ 412.8 $ 845.6 $ 827.5
- ---------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------------------------------
PRETAX INVESTMENT INCOME YIELDS 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------
Property & Casualty 5.7% 6.1% 5.8% 6.1%
Life & Investments 6.7% 7.2% 6.9% 7.3%
- ---------------------------------------------------------------------------------------------------------
Property & Casualty pretax net investment income increased to $116.5 in the
second quarter of 2003 compared with $115.3 in the second quarter of 2002.
Property & Casualty pretax net investment income declined in the first six
months of 2003 to $229.3 compared with $230.5 in the first six months of 2002.
On an after-tax basis, net investment income was $87.3 and $170.0 for the three
and six months ended June 30, 2003, respectively, and $87.6 and $176.3 for the
same periods in 2002. Income for the first six months of 2003 reflected
continued declines in interest rates and the repositioning of the Property &
Casualty investment portfolio in 2002 to reduce the average duration. Results
for the second quarter of 2003 reflected a higher invested asset base and
additional income from calls of municipal bonds.
Life & Investments pretax net investment income increased to $303.9 in the
second quarter of 2003 compared with $294.5 in the second quarter of 2002, and
increased to $607.4 in the first six months of 2003 compared with $590.6 in the
same period in 2002. On an after-tax basis, net investment income was $198.3 and
$396.4 for the three and six months ended June 30, 2003, respectively, and
$192.2 and $385.6 for the comparable periods in 2002. The growth in net
investment income was due to higher invested assets related to the growth of
total funds held under deposit contracts, partially offset by lower yields on
new investments and reinvested assets.
Net Realized Investment Gains and Losses
Pretax net realized investment gains and losses for the periods indicated by
business and component were as follows:
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
PRETAX NET REALIZED INVESTMENT GAINS
(LOSSES) 2003 2002 2003 2002
---------------------------------------------------------
Property & Casualty $ 4.9 $ 189.0 $ 3.4 $ 231.5
Life & Investments 6.7 (75.6) (51.4) (86.9)
Corporate 10.7 (18.0) 20.4 (18.6)
---------------------------------------------------------
Total $ 22.3 $ 95.4 $ (27.6) $ 126.0
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
PRETAX NET REALIZED INVESTMENT GAINS (LOSSES) 2003 2002 2003 2002
---------------------------------------------------------
Gains on Securities Transactions $ 45.8 $ 212.9 $ 74.0 $ 259.7
Impairments on Fixed Maturities (38.2) (89.8) (117.6) (100.0)
Impairments on Equity Securities (8.6) (14.1) (13.4) (14.1)
Credit Swap Mark-to-Market 10.3 (15.8) 19.3 (16.3)
Other 13.0 2.2 10.1 (3.3)
---------------------------------------------------------
Total $ 22.3 $ 95.4 $ (27.6) $ 126.0
- -----------------------------------------------------------------------------------------------------------
Gains on securities transactions for the quarter ended June 30, 2003 relate
primarily to calls and fixed maturity sales initiated to manage our call risk
and improve the credit quality of the underlying portfolio.
Credit swap mark to market gains of $10.3 and $19.3 for the three and six months
ended June 30, 2003, respectively, were due to significant tightening in credit
spreads on SFP's credit swap portfolio. This compared with a widening of credit
spreads and the resulting mark-to-market loss of $15.8 and $16.3 over the same
respective periods in 2002.
Included in Other for the three and six months ended June 30, 2003 was $15.2
related to interest rate hedges on forecasted transactions not probable of
occurring. SFAS 133 requires amounts recorded in AOCI that relate to forecasted
transactions that are no longer probable of occurring within a specified time
period to be recognized in earnings immediately. No such amounts were
reclassified from AOCI into earnings during the three and six months ended June
30, 2002.
Pretax investment impairments by portfolio were as follows:
Three Months Ended Six Months Ended
June 30 June 30
- -----------------------------------------------------------------------------------------------------------
PRETAX INVESTMENT IMPAIRMENTS 2003 2002 2003 2002
---------------------------------------------------------
Property & Casualty $ 15.8 $ 18.1 $ 36.4 $ 18.9
Life & Investments 31.0 71.7 93.7 81.1
Corporate -- 14.1 0.9 14.1
---------------------------------------------------------
Total $ 46.8 $ 103.9 $ 131.0 $ 114.1
- -----------------------------------------------------------------------------------------------------------
The increase in fixed maturity impairments in the first six months of 2003
compared with a year ago, reflected impairments primarily in the airline and
franchise sectors and was due to continued credit deterioration, which began to
slow in the second quarter.
We analyze all investments with a fair value below cost as of each quarterly
reporting date to determine if an other than temporary decline in value has
occurred. The determination of whether a decline is other than temporary is made
based on the relevant facts and circumstances related to the security. These
considerations include: (1) the length of time and the extent to which the fair
value has been less than cost; (2) the financial condition and near-term
prospects of the issuer, including any specific events that influence the
operations of the issuer or that affect its future earnings potential; (3) our
intent and ability to retain the investment for a period of time sufficient to
allow for a recovery in value; (4) a review of any downgrades of the security by
a rating agency; and (5) any reduction or elimination of dividends or
non-payment of scheduled interest payments. Determining what constitutes an
other than temporary decline involves judgment. Declines in fair value below
cost not considered other than temporary in the current period could be
considered other than temporary in a future period and reduce earnings to the
extent of the impairment.
The total proceeds at fair value from fixed maturities and equities sold at a
loss were $50.0 for the second quarter ended June 30, 2003. The related total
pretax net realized investment loss on these sales was $10.1. The total proceeds
at fair value from fixed maturities and equities sold at a loss were $198.8 for
the six months ended June 30, 2003. The related total pretax net realized
investment loss on these sales was $28.8. In accordance with our investment
impairment process described above, we consider our intent and ability to retain
investments for a period of time sufficient to allow for a market value
recovery. However, our intent to hold is reassessed frequently in light of
financial market fluctuations and the financial condition and near term
prospects of the issuer. Safeco's sales activity reflects ongoing management
decisions and modifications in our intent due to actual or expected
deterioration in the issuer's credit, our decisions to lessen exposure to a
particular industry and our actions to reposition our asset allocation.
Investment Portfolio
The table below summarizes Safeco's consolidated securities investment portfolio
at June 30, 2003:
Cost or
JUNE 30, 2003 Amortized Cost Carrying Value
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
Fixed Maturities - Taxable $ 4,981.7 $ 5,377.8
Fixed Maturities - Nontaxable 1,999.3 2,203.6
Equity Securities 645.1 1,017.0
LIFE & INVESTMENTS
Fixed Maturities - Taxable 16,173.7 17,961.9
Fixed Maturities - Nontaxable 7.6 7.9
Equity Securities 113.8 123.4
CORPORATE
Fixed Maturities - Taxable 28.2 88.1
Equity Securities 8.6 26.9
------------------------------
Total Fixed Maturities and Equity Securities 23,958.0 26,806.6
Mortgage Loans 942.8 942.8
Other Invested Assets 178.8 184.9
Short-Term Investments 434.1 434.1
------------------------------
Total Consolidated Investment Portfolio $ 25,513.7 $ 28,368.4
- -----------------------------------------------------------------------------------------------------------
Safeco's consolidated portfolio of investment securities at June 30, 2003
consisted of $25,639.3 fixed maturities and $1,167.3 of equity securities at
market value. Included in the fixed maturities carrying amount were gross
unrealized losses of $126.8 and gross unrealized gains of $2,575.6. Included in
the equity securities carrying amount were gross unrealized losses of $25.8 and
gross unrealized gains of $425.6. Industries that contributed more than 10% of
the total gross unrealized loss were automobile manufacturers (11%) and
diversified financial services (15%). Safeco reviewed all securities in an
unrealized loss position and determined that these declines in fair value were
temporary as of June 30, 2003.
The following table summarizes the length of time that fixed maturities and
equity securities have been in a continual unrealized loss position as of June
30, 2003:
Types of Amount of Unrealized Loss at
Securities Length of Time in a Continual Unrealized Loss Position June 30, 2003
- -----------------------------------------------------------------------------------------------------------
Fixed Maturities Less Than Six Months $ 22.9
6 Months But Less Than 12 Months 15.7
12 Months or Greater 88.2
------------------------------
Total $ 126.8
------------------------------
Equity Securities Less Than Six Months 9.0
6 Months But Less Than 12 Months 9.0
12 Months or Greater 7.8
------------------------------
Total $ 25.8
- -----------------------------------------------------------------------------------------------------------
As of June 30, 2003, unrealized losses on fixed maturities that were in an
unrealized loss position for longer than a year amounted to $88.2. This compared
with $152.5 as of March 31, 2003. These unrealized losses represent less than 1%
of total portfolio value and are attributed to distressed credit markets
experienced throughout 2002 and in the first half of 2003. It is our intent and
ability to retain these securities for a period of time sufficient to allow for
a recovery in value. We continue to monitor fixed maturities and equities in an
unrealized loss position as part of our overall portfolio evaluation and if an
unrealized loss were determined to be other than temporary, the impairment loss
would be recognized in the Consolidated Statements of Income in the current
period when that determination is made.
Safeco's consolidated investment portfolio included $337.7 of non-publicly
traded fixed maturities and equity securities, representing 1.2% of the
portfolio at June 30, 2003.
On a consolidated basis, below investment-grade securities with a fair value of
$1.4 billion were held at June 30, 2003 compared with $1.1 billion at December
31, 2002. The related amortized cost for the below investment-grade securities
at June 30, 2003 and December 31, 2002 was $1.3 billion and $1.2 billion,
respectively.
The following table summarizes the length of time that below investment grade
fixed maturities have been in a continual loss position as of June 30, 2003:
Types of Amount of Unrealized Loss at
Securities Length of Time in a Continual Unrealized Loss Position June 30, 2003
- -----------------------------------------------------------------------------------------------------------
Fixed Maturities Less Than Six Months $ 7.0
6 Months But Less Than 12 Months 6.4
12 Months or Greater 37.3
------------------------------
Total $ 50.7
- -----------------------------------------------------------------------------------------------------------
The quality of Property & Casualty's fixed maturities portfolio (at fair value)
is detailed in the following table:
Percent at
RATING June 30, 2003
- -----------------------------------------------------------------------------------------------------------
AAA 41%
AA 12
A 25
BBB 18
BB and Lower 3
Not Rated 1
----------------------
Total 100%
- -----------------------------------------------------------------------------------------------------------
The quality of Life & Investments' fixed maturities (at fair value) portfolio is
detailed in the following table:
Percent at
RATING June 30, 2003
- -----------------------------------------------------------------------------------------------------------
AAA 33%
AA 4
A 24
BBB 32
BB and Lower 6
Not Rated 1
----------------------
Total 100%
- -----------------------------------------------------------------------------------------------------------
Our consolidated fixed maturity and equity securities portfolio is
well-diversified by issuer and by industry type. As of June 30, 2003, there were
no single-issuer holdings exceeding 1% of our consolidated investment portfolio.
Industry concentrations exceeding 3% of our consolidated investment portfolio
are as follows at June 30, 2003:
Percent at
INDUSTRY Carrying Value June 30, 2003
- ----------------------------------------------------------------------------------------------------------------
State and Political Subdivisions $ 2,899.4 10%
Electric Utilities 2,122.0 7
U.S. Government & Agencies 1,867.2 7
Banks 1,703.3 6
Diversified Financial Services 1,141.7 4
Mortgage-Backed Securities 5,461.2 19
Other 11,611.8 41
-------------------------------------------
Total Fixed Maturities and Equity Securities 26,806.6 94
Mortgage Loans 942.8 3
Other Invested Assets 184.9 1
Short-Term Investments 434.1 2
-------------------------------------------
Total Consolidated Investment Portfolio $ 28,368.4 100%
- -----------------------------------------------------------------------------------------------------------
The table below summarizes Safeco's consolidated holdings of mortgage-backed
securities at June 30, 2003:
Carrying Value
Cost or --------------------------
JUNE 30, 2003 Amortized Cost Amount Percent
- -----------------------------------------------------------------------------------------------------------
Residential
Planned and Targeted Amortization Class and Sequential Pay CMOs $ 2,296.3 $ 2,386.0 44%
Accrual Coupon (Z-Tranche) CMOs 466.4 516.1 9
Floating Rate CMOs 82.1 88.1 2
Companion/Support, Principal Only, Interest Only CMOs 14.2 14.7 --
Subordinates 23.0 23.6 --
Residential Mortgage-Backed Pass-Throughs (Non-CMOs) 405.9 423.1 8
-------------------------------------------
Total 3,287.9 3,451.6 63
-------------------------------------------
Securitized Commercial Real Estate
Government/Agency-Backed 414.4 447.7 8
CMOs and Pass-Throughs (Non-agency) 1,119.2 1,229.7 23
-------------------------------------------
Total 1,533.6 1,677.4 31
Other CMOs 324.1 332.2 6
-------------------------------------------
Total $ 5,145.6 $ 5,461.2 100%
- -----------------------------------------------------------------------------------------------------------
Safeco's consolidated investment holdings in mortgage-backed securities of $5.5
billion at fair value at June 30, 2003, consists mainly of residential
collateralized mortgage obligations (CMOs), pass-throughs and commercial
loan-backed mortgage obligations (CMBSs). Life & Investments portfolio holds
79.3% and Property & Casualty portfolio holds 20.7% of these securities.
Ninety-two percent of the mortgage-backed securities are
government/agency-backed or AAA rated at June 30, 2003. Safeco has intentionally
limited its investment in riskier, more volatile CMOs and CMBSs (e.g., principal
only, interest only, etc.) to $38.3 or 0.7% of total mortgage-backed securities
at June 30, 2003.
Item 4 - Controls and Procedures
(a) Disclosure Controls and Procedures. We have evaluated the effectiveness of
the design and operation of our "disclosure controls and procedures" as of the
end of the period covered by this report. Safeco conducted this evaluation under
the supervision and with the participation of management, including our Chief
Executive Officer, Chief Financial Officer and our disclosure committee.
(i) Definition of Disclosure Controls and Procedures. Disclosure
controls and procedures are controls and other procedures that are
designed with the objective of ensuring that information required to be
disclosed in our periodic reports filed under the Exchange Act, such as
this report, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. As defined by the
SEC, such disclosure controls and procedures are also designed with the
objective of ensuring that such information is accumulated and
communicated to our management, including our Chief Executive Officer
and Chief Financial Officer, in such a manner as to allow timely
disclosure decisions.
(ii) Limitations on the Effectiveness of Disclosure Controls and
Procedures and Internal Controls. Safeco recognizes that a system of
disclosure controls and procedures (as well as a system of internal
controls), no matter how well conceived and operated, can provide only
reasonable assurance that it will meet its objectives. Even an
effective control system has inherent limitations, including resource
constraints, the possibility of intentional circumvention or overriding
of controls, lapses in judgment and simple error or mistake.
(iii) Conclusions with Respect to Our Evaluation of Disclosure Controls
and Procedures. Our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures are
effective, meaning that the controls and procedures provide reasonable
assurance that the objectives described in paragraph (i) above are met.
(b) Changes in Internal Control Over Financial Reporting. There were no changes
in internal control over financial reporting during the second quarter that
materially affected or are reasonably likely to materially affect our internal
control over financial reporting.
Safeco Corporation and Subsidiaries
- -------------------------------------------------------------------------------
PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
Because of the nature of our businesses, Safeco's insurance and other
subsidiaries are subject to legal actions filed or threatened in the ordinary
course of our business operations, generally as liability insurers defending
third-party claims brought against our 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 our financial condition,
future operating results or liquidity.
Our property and casualty insurance subsidiaries are parties to a number of
lawsuits for liability coverages related to environmental claims. Although
estimation of reserves for environmental claims is difficult, we do not expect
the loss and LAE with respect to any such lawsuit, or all lawsuits related to a
single incident combined, to be material to our financial condition.
Our property and casualty insurance companies recently defeated allegations in a
suit filed on July 18, 2001, by a plaintiff who purported to represent a class
of present and former claim adjusters. The plaintiff claimed that claims
adjusters should have been considered non-exempt employees under the labor laws,
and sought damages representing back overtime pay for certain hours worked. The
U.S. District Court for the Northern District of Ohio disagreed and dismissed
the action on January 31, 2003. Our property and casualty insurance companies
are defending two other lawsuits alleging similar claims, one filed on August
10, 2001 in California and the other on January 14, 2003 in U.S. District Court
for the District of Connecticut. We intend to defend vigorously against these
allegations.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Safeco was held May 7, 2003. Safeco
shareholders elected five nominees to the Board of Directors. Kerry Killinger's
term expires in 2005; the terms of the other nominees elected will expire in
2006. The results of the voting were as follows:
For Withheld
-------------------------------------------------------------
Joshua Green, III 126,502,726 1,377,861
Kerry Killinger 126,315,251 1,565,336
William G. Reed, Jr. 93,542,232 34,338,355
Norman B. Rice 125,665,458 2,215,129
Judith M. Runstad 82,296,418 45,584,169
-------------------------------------------------------------
There were no broker non-votes on this matter.
At the Annual Meeting, our shareholders defeated a proposal regarding indexing
of executive stock options. The vote was 18,160,460 for, 93,795,205 against,
2,743,276 abstentions, and 13,451,646 broker non-votes.
ITEM 6 - (A)(3) - EXHIBITS
31.1 Certification of Chief Executive Officer of Safeco
Corporation, dated August 13, 2003, in accordance with
Securities Exchange Act Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Chief Financial Officer of Safeco
Corporation, dated August 13, 2003, in accordance with
Securities Exchange Act Rule 13a-14(a)/15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chief Executive Officer of Safeco
Corporation, dated August 13, 2003, in accordance with 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer of Safeco
Corporation, dated August 13, 2003, 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 8-K's during the quarter ended June
30, 2003 and for the period up to the filing date of this Form 10-Q.
Filing dated Under Filing related to:
-------------------------------------------------------------------------------------------------
April 28, 2003 Item 9 (Regulation Earnings Release for quarter ended March 31, 2003.
FD Disclosure)
May 12, 2003 Item 9 (Regulation Resignation of Controller.
FD Disclosure)
May 19, 2003 Item 5 (Other Events
and Regulation FD Estimated losses stemming from Midwest and Southern
Disclosures) Tornadoes.
June 20, 2003 Item 5 (Other Events) Resignation of member of the Board of Directors.
July 28, 2003 Item 9 (Regulation Earnings release for quarter ended June 30, 2003.
FD Disclosure)
-------------------------------------------------------------------------------------------------
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 on August 13, 2003.
Safeco Corporation
--------------------------------------------------
Registrant
/s/ CHRISTINE B. MEAD
--------------------------------------------------
Christine B. Mead
Senior Vice President, Chief Financial Officer and
Secretary