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 September 30, 2004
[ ] 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 [ ].
126,830,466 shares of common stock of Safeco Corporation, no par value, were
outstanding at November 1, 2004.
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 (Loss)
for the three and nine months
ended September 30, 2004 and 2003 3
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 4
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2004 and 2003 5
Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 2004 and 2003 7
Consolidated Statements of Comprehensive Income (Loss)
for the three and nine months ended
September 30, 2004 and 2003 8
Condensed Notes to Consolidated Financial Statements 9
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 24
4 Controls and Procedures 47
Part II Other Information
1 Legal Proceedings 48
2 Changes in Securities, Use of Proceeds and Issuer Purchase
of Equity Securities 48
6 Exhibits and Reports on Form 8-K 49
Signatures 50
Safeco Corporation and Subsidiaries
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Consolidated Statements of Income (Loss)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
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2004 2003 2004 2003
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(In Millions, Except Per Share Amounts) (Unaudited) (Unaudited)
REVENUES
Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3
Net Investment Income 115.5 114.7 349.6 354.1
Net Realized Investment Gains 50.5 12.8 178.2 36.7
Other 0.2 2.6 0.6 7.9
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Total 1,566.9 1,380.5 4,621.0 4,014.0
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EXPENSES
Losses and Loss Adjustment Expenses 1,029.9 1,003.5 2,632.2 2,639.3
Other Underwriting and Operating Expenses 162.8 148.8 475.7 471.3
Amortization of Deferred Policy Acquisition Costs 232.5 211.5 681.9 626.1
Loss on Debt Repurchases 121.0 -- 121.0 --
Interest Expense 25.3 30.4 87.3 96.1
Restructuring Charges -- -- 1.4 --
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Total 1,571.5 1,394.2 3,999.5 3,832.8
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Income (Loss) from Continuing Operations before
Income Taxes (4.6) (13.7) 621.5 181.2
Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7
----------------------------------------------------------
Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5
Results from Discontinued Operations
(Net of Taxes of $(52.3) and $(39.1) in 2004
and $(35.6) and $(6.5) in 2003) (107.0) (28.8) (57.8) 26.5
----------------------------------------------------------
Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0
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INCOME (LOSS) PER SHARE OF COMMON STOCK - DILUTED
Income (Loss) from Continuing Operations $ 0.04 $ -- $ 3.20 $ 1.06
Results from Discontinued Operations (0.80) (0.21) (0.42) 0.19
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Net Income (Loss) $ (0.76) $ (0.21) $ 2.78 $ 1.25
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INCOME (LOSS) PER SHARE OF COMMON STOCK - BASIC
Income (Loss) from Continuing Operations $ 0.04 $ -- $ 3.23 $ 1.06
Results from Discontinued Operations (0.81) (0.21) (0.43) 0.19
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Net Income (Loss) $ (0.77) $ (0.21) $ 2.80 $ 1.25
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Dividends Declared $ 0.220 $ 0.185 $ 0.590 $ 0.555
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Average Number of Shares Outstanding During the
Period:
Diluted 132.5 138.5 137.5 138.9
Basic 131.5 138.5 136.5 138.4
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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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SEPTEMBER 30 DECEMBER 31
2004 2003
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(In Millions) (Unaudited)
ASSETS
Investments
Available-for-Sale Securities:
Fixed Maturities, at Fair Value
(Cost or amortized cost: $8,824.7; $7,717.2) $ 9,188.2 $ 8,159.2
Marketable Equity Securities, at Fair Value
(Cost: $580.7; $684.8) 972.5 1,166.2
Other Invested Assets 8.4 18.8
----------------------------------
Total Investments 10,169.1 9,344.2
Cash and Cash Equivalents 327.6 319.0
Accrued Investment Income 116.4 120.9
Premiums and Service Fees Receivable 1,156.6 1,043.9
Other Notes and Accounts Receivable 64.1 104.8
Current Income Taxes Recoverable 84.3 20.5
Deferred Income Taxes Recoverable 337.1 274.3
Reinsurance Recoverables 371.0 372.0
Deferred Policy Acquisition Costs 391.6 356.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation: $324.3; $311.8) 391.8 433.7
Other Assets 233.5 256.5
Securities Lending Collateral 1,022.6 951.9
Assets of Discontinued Operations -- 22,548.9
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Total Assets $ 14,665.7 $ 36,147.4
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LIABILITIES AND SHAREHOLDERS' EQUITY
Loss and Loss Adjustment Expense Reserves $ 5,259.9 $ 5,044.6
Unearned Premiums 2,249.9 2,053.6
Debt 1,332.9 1,951.3
Other Liabilities 1,076.2 1,180.0
Securities Lending Payable 1,022.6 951.9
Liabilities of Discontinued Operations -- 19,942.7
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Total Liabilities 10,941.5 31,124.1
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Commitments and Contingencies -- --
Common Stock, No Par Value; Shares Authorized: 300.0
Shares Reserved for Options: 9.3; 11.6
Shares Issued and Outstanding: 126.8; 138.6 630.6 1,197.3
Retained Earnings 2,611.9 2,308.7
Total Accumulated Other Comprehensive Income 481.7 1,517.3
----------------------------------
Total Shareholders' Equity 3,724.2 5,023.3
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Total Liabilities and Shareholders' Equity $ 14,665.7 $ 36,147.4
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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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NINE MONTHS ENDED SEPTEMBER 30 2004 2003
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(In Millions) (Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received $ 4,176.1 $ 3,781.7
Dividends and Interest Received 405.9 350.5
Insurance Claims Paid (2,414.7) (2,514.2)
Underwriting, Acquisition, Insurance and Other Operating Costs Paid (1,195.9) (1,210.4)
Interest Paid (123.5) (125.9)
Income Taxes Paid (103.2) (19.8)
------------------------------
Net Cash Provided by Operating Activities 744.7 261.9
------------------------------
INVESTING ACTIVITIES
Purchases of
Fixed Maturities Available-for-Sale (2,281.0) (1,453.9)
Equity Securities Available-for-Sale (390.3) (146.5)
Maturities and Calls of Fixed Maturities Available-for-Sale 710.7 780.1
Sales of:
Fixed Maturities Available-for-Sale 479.4 157.8
Equity Securities Available-for-Sale 643.1 705.8
Proceeds from Sales of Subsidiaries 1,510.0 --
Other, Net 5.7 13.2
------------------------------
Net Cash Provided by Investing Activities 677.6 56.5
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FINANCING ACTIVITIES
Repurchase of Notes (735.2) --
Proceeds from Notes Issued -- 495.9
Repayment of Notes -- (510.1)
Dividends Paid to Shareholders (77.1) (76.8)
Common Stock Reacquired (661.0) --
Stock Options Exercised 59.6 5.9
Other, Net -- 0.4
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Net Cash Used in Financing Activities (1,413.7) (84.7)
------------------------------
Net Increase in Cash and Cash Equivalents 8.6 233.7
Cash and Cash Equivalents at Beginning of Period 319.0 369.1
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Cash and Cash Equivalents at End of Period $ 327.6 $ 602.8
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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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NINE MONTHS ENDED SEPTEMBER 30 2004 2003
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(In Millions) (Unaudited)
Net Income $ 382.6 $ 173.0
--------------------------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATiNG
ACTIVITIES
Income from Discontinued Operations, Net of Taxes (73.2) (26.5)
Loss on Sale of Discontinued Operations, Net of Taxes 131.0 --
Net Realized Investment Gains (178.2) (36.7)
Amortization of Fixed Maturities 33.9 5.4
Amortization and Depreciation 44.2 42.0
Deferred Income Tax Provision 53.0 36.9
Other 14.3 5.9
Changes in
Accrued Investment Income 4.5 (1.2)
Deferred Policy Acquisition Costs (34.8) (25.0)
Loss and Loss Adjustment Expense Reserves 215.3 98.1
Unearned Premiums 196.3 227.2
Current Income Taxes Recoverable 69.9 (19.8)
Other Assets and Liabilities (114.1) (217.4)
--------------------------------
Total Adjustments 362.1 88.9
--------------------------------
Net Cash Provided by Operating Activities $ 744.7 $ 261.9
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There were no significant non-cash financing or investing activities for the nine months ended September 30, 2004 and 2003.
See Condensed Notes to Consolidated Financial Statements.
Safeco Corporation and Subsidiaries
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Consolidated Statements of Shareholders' Equity
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NINE MONTHS ENDED SEPTEMBER 30 2004 2003
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(In Millions) (Unaudited)
Common Stock
Balance at Beginning of Period $ 1,197.3 $ 1,178.1
Stock Issued for Options and Rights (2.3 and 0.3 shares) 82.9 7.7
Stock Compensation Expense 11.4 --
Common Stock Reacquired (14.1 shares) (661.0) --
------------------------------
Balance at End of Period 630.6 1,185.8
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Retained Earnings
Balance at Beginning of Period 2,308.7 2,072.2
Net Income 382.6 173.0
Dividends Declared (79.4) (76.9)
Other -- (0.2)
------------------------------
Balance at End of Period 2,611.9 2,168.1
------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF TAXES:
Unrealized Gains And Losses On Available-For-Sale Securities
Balance at Beginning of Period 1,576.8 1,227.5
Change during Period (1,078.2) 419.7
------------------------------
Balance at End of Period 498.6 1,647.2
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Unrealized Gains And Losses On Derivative Instruments
Balance at Beginning of Period 12.2 13.7
Change during Period (12.2) (8.6)
------------------------------
Balance at End of Period -- 5.1
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Unrealized Foreign Currency Translation Adjustment
Balance at Beginning of Period (8.8) (15.7)
Change during Period (2.4) 1.1
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Balance at End of Period (11.2) (14.6)
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Deferred Policy Acquisition Costs Valuation Allowance
Balance at Beginning of Period (57.2) (35.4)
Change during Period 57.2 (14.0)
------------------------------
Balance at End of Period -- (49.4)
------------------------------
Minimum Pension Liability Adjustment
Balance at Beginning of Period (5.7) (8.8)
Change during Period -- --
------------------------------
Balance at End of Period (5.7) (8.8)
------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF TAXES 481.7 1,579.5
------------------------------
SHAREHOLDERS' EQUITY $ 3,724.2 $ 4,933.4
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Consolidated Statements of Comprehensive Income (Loss)
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THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
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2004 2003 2004 2003
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(In Millions) (Unaudited) (Unaudited)
Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0
------------------------------------------------------
Other Comprehensive Income (Loss),
Net of Taxes:
Change in Unrealized Gains (Losses) on (980.3)
Available-for-Sale Securities (466.4) (230.6) 339.5
Reclassification Adjustment for Net Realized
Investment (Gains) Losses Included in Net
Income (Loss) (180.9) 62.5 (97.9) 80.2
Derivatives Qualifying as Cash Flow Hedges - (12.2)
Net Change in Fair Value (0.4) (4.4) (8.6)
Foreign Currency Translation Adjustments 1.6 (4.1) (2.4) 1.1
Adjustment for Deferred Policy Acquisition Costs
Valuation Allowance 24.8 7.3 57.2 (14.0)
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Other Comprehensive Income (Loss) (621.3) (169.3) (1,035.6) 398.2
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Comprehensive Income (Loss) $ (722.4) $ (198.2) $ (653.0) $ 571.2
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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 State corporation operating across the United
States, with insignificant non-U.S. activities. Our subsidiaries sell property
and casualty insurance including surety. We generated virtually all of our
revenues for the periods presented in this report from these activities.
Throughout our unaudited Consolidated Financial Statements, 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" and "P&C." All other continuing activities, primarily the financing of
our business activities, are collectively referred to as "Corporate." The
discontinued life insurance, group stop-loss medical insurance and asset
management businesses are referred to as "Discontinued Operations," "Life &
Investments" and "L&I."
On March 15, 2004, we entered into definitive agreements to sell substantially
all our L&I operations. On April 8, 2004, we entered into an agreement for the
sale of the remaining part of our L&I operations and accordingly we have
presented L&I as a Discontinued Operation in these Consolidated Financial
Statements in accordance with Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." Prior-year amounts have been
restated to reflect the presentation of Discontinued Operations.
On August 2, 2004, we completed the sale of our L&I operations to an investment
group led by White Mountains Insurance Group, Ltd. and Berkshire Hathaway, Inc.
We completed the sale of Talbot Financial Corporation on July 1, 2004 and the
sale of Safeco Trust Company on April 19, 2004. See Note 9 - Discontinued
Operations.
Basis of Consolidation and Reporting and Use of Estimates
We prepared the unaudited Consolidated Financial Statements 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. Results for the nine-month period ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
These unaudited Consolidated Financial Statements and Condensed Notes should be
read in conjunction with the Consolidated Financial Statements and Notes
included in our 2003 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 us to make estimates and assumptions that may affect amounts
reported in these Consolidated Financial Statements and accompanying notes.
Actual results could differ from those estimates.
The unaudited Consolidated Financial Statements include Safeco Corporation and
its subsidiaries. All significant intercompany transactions and balances have
been eliminated in the Consolidated Financial Statements.
We have made certain reclassifications to the prior-year amounts to conform to
the current-year presentation.
Earnings per Share
We calculate basic earnings per share by dividing net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share reflect the potential dilution that could occur if options or
other dilutive instruments granted under our stock-based compensation plans were
exercised.
We present the computation of net income (loss) per share below, based upon
weighted-average common and dilutive shares outstanding:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
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2004 2003 2004 2003
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Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0
Average Number of Common Shares Outstanding 131.5 138.5 136.5 138.4
------------------------------------------------------
Basic Net Income (Loss) Per Share $ (0.77) $ (0.21) $ 2.80 $ 1.25
- ---------------------------------------------------------------------------------------------------------
Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0
Average Number of Common Shares Outstanding 131.5 138.5 136.5 138.4
Additional Common Shares Assumed Issued Under
Treasury Stock Method 1.0 -- 1.0 0.5
------------------------------------------------------
Average Number of Common Shares Outstanding -
Diluted 132.5 138.5 137.5 138.9
------------------------------------------------------
Diluted Net Income (Loss) Per Share $ (0.76) $ (0.21) $ 2.78 $ 1.25
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Due to the loss from continuing operations in the third quarter of 2003, we used
basic weighted-average shares outstanding to calculate diluted net loss per
share of common stock. Using diluted weighted-average shares outstanding would
have resulted in a lower net loss per share of common stock.
On August 2, 2004, we repurchased 13,247,863 shares, or approximately 9.5% of
our outstanding common stock under an Accelerated Stock Buyback (ASB) program.
The shares were purchased from a dealer at a price of $46.80 per share, for a
total cost of $623.0. Through the ASB program we returned excess capital from
the L&I sale to shareholders and immediately reduced the number of our common
shares outstanding. The dealer obtained the shares that we purchased by
borrowing them in the open market, and then repurchases shares in the market
over the next six to nine months to repay the borrowed shares. $200.0 of the ASB
is subject to a collar, a contract that sets a minimum and maximum price for us
for the shares repurchased under the collar. At the end of the program, we may
receive, or be required to pay, a price adjustment based on the volume weighted
average price of our common stock during the period of the ASB repurchases. This
adjustment will be recorded in shareholders' equity.
On October 25, 2004, we paid a quarterly dividend of $0.22 per share. This
represents an 18.9% increase per share over our previous quarterly dividend of
$0.185 per share.
Stock-Based Compensation Expense
The Safeco Long-Term Incentive Plan of 1997 (the Plan), as amended, provides for
the issuance of up to 12,000,000 shares of our common stock. Incentive stock
options, non-qualified stock options, restricted stock rights (RSR), performance
stock rights (PSR) and stock appreciation rights are authorized under the Plan.
We grant stock-based compensation awards at the fair market value of the stock
on the date of the grant.
Prior to 2003, we applied Accounting Principles Board (APB) Opinion 25 in
accounting for our stock options, as allowed under SFAS 123, "Accounting for
Stock-Based Compensation," as amended. Under APB 25, we recognized no
compensation expense related to options because the exercise price of our
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. We adopted the fair value
method for accounting for stock-based compensation effective January 1, 2003,
using the prospective basis transition method. Under this method, we have
recognized stock-based compensation expense for options granted, modified or
settled after January 1, 2003. Stock-based compensation expense was $5.6 ($4.8
after tax) for the three months ended September 30, 2004 and $15.9 ($12.8 after
tax) for the nine months ended September 30, 2004. Stock-based compensation
expense was $4.4 ($2.7 after tax) for the three months ended September 30, 2003
and $7.5 ($4.4 after tax) for the nine months ended September 30, 2003.
Effective in the second quarter of 2004, we replaced our annual stock option
program with a restricted stock program.
The following table illustrates the pro forma effect on net income (loss) and
net income (loss) per share as if the fair value method had been applied to all
outstanding and unvested awards in each period:
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------
Net Income (Loss), as reported $ (101.1) $ (28.9) $ 382.6 $ 173.0
Add: Stock-based Compensation Expense Included in
Reported Net Income (Loss), After Tax 4.8 2.7 12.8 4.4
Deduct: Pro Forma Stock-based Compensation Expense* (5.9) (4.6) (16.0) (10.2)
-------------------------------------------------------
Pro Forma Net Income (Loss) $ (102.2) $ (30.8) $ 379.4 $ 167.2
-------------------------------------------------------
Net Income (Loss) Per Share
Basic - as Reported $ (0.77) $ (0.21) $ 2.80 $ 1.25
Diluted - as Reported $ (0.76) $ (0.21) $ 2.78 $ 1.25
Basic - Pro Forma $ (0.78) $ (0.22) $ 2.78 $ 1.21
Diluted - Pro Forma $ (0.77) $ (0.22) $ 2.76 $ 1.20
- ----------------------------------------------------------------------------------------------------------
* Determined under fair value based method for all awards, net of related tax effects.
Cash Balance Plan
The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan
that provides benefits for each year of service after 1988, based on each
eligible participant's compensation plus a stipulated rate of return on their
benefit balance. We make contributions to the CBP based on funding requirements
set by the Employee Retirement Income Security Act (ERISA). We contributed $12.9
pretax to the CBP in February 2004.
Other Postretirement Benefits
We also provide certain healthcare and life insurance benefits, Other
Postretirement Benefits (OPRB), for certain retired employees, their
beneficiaries and eligible dependents. We contributed $1.3 pretax in the third
quarter and $3.6 pretax in the first nine months of 2004.
We amended our OPRB program in the third quarter of 2003. The amendments created
negative prior service cost, which will be amortized over the average remaining
service period of all active participants. The related amortization resulted in
a credit to OPRB expense of $1.7 pretax for the three months ended September 30,
2004 and $7.2 pretax for the nine months ended September 30, 2004.
The following tables summarize CBP and OPRB costs charged (credited) to Income
(Loss) from Continuing Operations for the three and nine months ended September
30, 2004 and 2003:
CBP OPRB
------------------------------ ------------------------------
THREE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003
- ------------------------------------------ --------------- -------------- -------------- ---------------
Service Cost $ 2.7 $ 2.0 $ 0.2 $ 1.4
Interest Cost 2.0 1.9 0.9 2.2
Expected Return on Plan Assets (2.1) (1.7) -- --
Curtailment Gain -- -- -- (8.3)
Amortization of Prior Service Cost and
Unrecognized Net Actuarial (Gain) Loss 0.1 0.4 (1.7) 0.4
--------------- -------------- -------------- ---------------
Total $ 2.7 $ 2.6 $ (0.6) $ (4.3)
- ------------------------------------------ --------------- -------------- -------------- ---------------
CBP OPRB
------------------------------ ------------------------------
NINE MONTHS ENDED SEPTEMBER 30 2004 2003 2004 2003
- ------------------------------------------ --------------- -------------- -------------- ---------------
Service Cost $ 8.3 $ 6.2 $ 0.5 $ 4.4
Interest Cost 6.0 5.5 3.2 7.4
Expected Return on Plan Assets (6.5) (4.9) -- --
Curtailment Gain -- -- -- (8.3)
Amortization of Prior Service Cost and
Unrecognized Net Actuarial (Gain) Loss 0.2 1.0 (7.2) 1.4
--------------- -------------- -------------- ---------------
Total $ 8.0 $ 7.8 $ (3.5) $ 4.9
- ------------------------------------------ --------------- -------------- -------------- ---------------
Variable Interest Entities
On August 2, 2004, we sold our $19.7 loan with Investar Holdings (Investar) for
$13.5. With the sale of this loan, we no longer have an interest in Investar.
The guarantee issued by Safeco Life Insurance Company to General America
Corporation, our wholly-owned subsidiary, was extinguished as a result of this
transaction. The $3.8 after tax loss on the loan sale is included in the loss on
the sale of L&I in Discontinued Operations.
New Accounting Standards
FASB Exposure Draft, "Share-Based Payment"
On March 31, 2004, the FASB issued its Exposure Draft, "Share-Based Payment",
which is a proposed amendment to SFAS 123. The proposed statement would require
all share-based compensation awards granted, modified or settled after December
15, 1994 to be accounted for using the fair value method of accounting on a
prospective basis. As discussed in "Stock-Based Compensation Expense", we
adopted the fair value method of accounting for share-based awards effective
January 1, 2003. Based on the current amount of remaining unvested share-based
awards issued since December 15, 1994 not previously recognized at fair value,
we do not believe that adoption of the statement in its current form would have
a material impact on our financial condition or results of operations. On
October 13, 2004, the FASB indicated that SFAS 123R, "Share-Based Payment", will
be effective for interim or annual periods beginning after January 15, 2005 and
it will issue a final statement late in 2004.
FASB Staff Position (FSP) 106-2 "Accounting & Disclosure Requirements related to
the Medicare Prescription Drug, Improvement and Modernization Act of 2003" (the
Act)
In May 2004, FSP 106-2 was issued. FSP 106-2 provides guidance on accounting for
the Act, which introduced a Medicare prescription-drug benefit and a federal
subsidy to sponsors of retiree health-care plans that provide a benefit at least
"actuarially equivalent" to the Medicare benefit. We determined that the
potential impact of the subsidy would not be considered a significant event as
defined in SFAS 106, "Employer's Accounting for Postretirement Benefits, Other
than Pensions." Accordingly, recognition of the subsidy will not occur until the
next measurement date of plan assets and liabilities (December 31, 2004).
Emerging Issues Task Force (EITF) 03-1, "The Meaning of Other-than-Temporary
Impairment and its Application to Certain Investments"
In September 2004, the FASB issued FSP 03-1-1 delaying the effective date for
applying paragraphs 10-20 of EITF 03-1. Paragraphs 10-20 provide guidance for
evaluating whether impairments of debt and equity holdings are
"other-than-temporary" and require immediate recognition in earnings. The
effective date for applying the accounting guidance of EITF 03-1 is currently
under review by the FASB. The disclosure requirements of EITF 03-1 remain
unchanged and were effective for fiscal periods ending after December 15, 2003.
NOTE 2 - INVESTMENTS
FIXED MATURITIES AND MARKETABLE EQUITY SECURITIES
The following tables summarize our fixed maturities and marketable equity
securities at September 30, 2004 and December 31, 2003:
COST OR GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR
SEPTEMBER 30, 2004 COST GAINS LOSSES GAINS VALUE
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Fixed Maturities:
U.S. Government and
Agencies $ 1,104.9 $ 48.7 $ (1.9) $ 46.8 $ 1,151.7
State and Political
Subdivisions 2,353.6 147.9 (2.6) 145.3 2,498.9
Foreign Governments 103.2 4.9 (1.5) 3.4 106.6
Corporate Securities:
Banks 805.8 31.1 (1.4) 29.7 835.5
Electric Utilities 390.3 12.3 (1.0) 11.3 401.6
Diversified Financial
Services 414.2 9.7 (0.4) 9.3 423.5
Other 2,403.6 94.4 (4.2) 90.2 2,493.8
--------------- -------------- -------------- --------------- --------------
Total Corporate Securities 4,013.9 147.5 (7.0) 140.5 4,154.4
Mortgage-Backed Securities 1,249.1 32.2 (4.7) 27.5 1,276.6
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Total Fixed Maturities 8,824.7 381.2 (17.7) 363.5 9,188.2
Marketable Equity Securities 580.7 396.4 (4.6) 391.8 972.5
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Total $ 9,405.4 $ 777.6 $ (22.3) $ 755.3 $ 10,160.7
- ------------------------------- --------------- -------------- -------------- --------------- --------------
COST OR GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 2003 COST GAINS LOSSES GAINS VALUE
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Fixed Maturities:
U.S. Government and
Agencies $ 964.6 $ 53.3 $ (0.5) $ 52.8 $ 1,017.4
State and Political
Subdivisions 2,219.6 164.9 (3.4) 161.5 2,381.1
Foreign Governments 41.8 3.7 -- 3.7 45.5
Corporate Securities:
Banks 565.0 39.5 (0.2) 39.3 604.3
Electric Utilities 276.5 14.7 (0.8) 13.9 290.4
Diversified Financial
Services 400.1 12.8 (1.1) 11.7 411.8
Other 2,161.7 126.5 (7.7) 118.8 2,280.5
--------------- -------------- -------------- --------------- --------------
Total Corporate Securities 3,403.3 193.5 (9.8) 183.7 3,587.0
Mortgage-Backed Securities 1,087.9 43.6 (3.3) 40.3 1,128.2
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Total Fixed Maturities 7,717.2 459.0 (17.0) 442.0 8,159.2
Marketable Equity Securities 684.8 484.1 (2.7) 481.4 1,166.2
- ------------------------------- --------------- -------------- -------------- --------------- --------------
Total $ 8,402.0 $ 943.1 $ (19.7) $ 923.4 $ 9,325.4
- ------------------------------- --------------- -------------- -------------- --------------- --------------
The following table shows our investment gross unrealized losses and fair values
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at September 30, 2004:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------- --------------------------- -------------------------
DESCRIPTION FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
OF SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
- --------------------------- ---------- -------------- ------------ -------------- ----------- -------------
Fixed Maturities:
U.S. Government and
Agencies $ 277.0 $ (1.0) $ 39.1 $ (0.9) $ 316.1 $ (1.9)
State and Political
Subdivisions 179.6 (1.9) 17.3 (0.7) 196.9 (2.6)
Foreign Governments 65.6 (1.5) -- -- 65.6 (1.5)
Corporate Securities 792.6 (5.6) 42.4 (1.4) 835.0 (7.0)
Mortgaged-Backed
Securities 364.6 (3.6) 36.7 (1.1) 401.3 (4.7)
---------- -------------- -- ------------ -------------- -- ----------- -------------
Total Fixed Maturities 1,679.4 (13.6) 135.5 (4.1) 1,814.9 (17.7)
Marketable Equity
Securities 91.6 (4.6) -- -- 91.6 (4.6)
---------- -------------- -- ------------ -------------- -- ----------- -------------
Total $1,771.0 $ (18.2) $135.5 $ (4.1) $ 1,906.5 $ (22.3)
- --------------------------- ---------- -------------- -- ------------ -------------- -- ----------- -------------
The unrealized losses of these investments represented approximately 0.2% of the
cost of our investment portfolio at September 30, 2004.
We reviewed all our investments with unrealized losses at September 30, 2004 in
accordance with our impairment policy. Our evaluation concluded that these
declines in fair value were temporary after considering:
o That the majority of such losses for securities in an unrealized loss
position for less than 12 months were interest rate related
o For securities in an unrealized loss position for 12 months or more, the
financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings
potential
o Our intent and ability to keep the security long enough to recover its
value
FIXED MATURITIES BY MATURITY DATE
The following table summarizes the cost or amortized cost and fair value of our
fixed maturities at September 30, 2004, by contractual years-to-maturity. Actual
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without prepayment penalties:
COST OR
MATURITY AMORTIZED COST FAIR VALUE
- ----------------------------------------------------------------------- --------------------------------------------
One Year or Less $ 770.8 $ 779.3
Over One Year through Five Years 3,452.9 3,558.6
Over Five Years through Ten Years 1,395.2 1,456.5
Over Ten Years 1,956.7 2,117.2
Mortgage-Backed Securities 1,249.1 1,276.6
----------------------------------------
Total Fixed Maturities $ 8,824.7 $ 9,188.2
- --------------------------------------------------------------------------------------------------------------------
The carrying value of securities on deposit with state regulatory authorities
was $431.9 at September 30, 2004 and $399.9 at December 31, 2003.
NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are instruments whose values are derived from underlying
instruments, indices or rates, have notional amounts and can be net settled.
This may include derivatives that are "embedded" in other derivative instruments
or in certain existing assets or liabilities. We use derivative financial
instruments, including interest rate swaps, as a means of hedging exposure to
interest rate risk.
Interest rate risk is the risk of economic losses due to changes in the level of
interest rates. We manage interest rate risk through active portfolio management
and selective use of interest rate swaps as hedges to change the characteristics
of certain assets and liabilities. With interest rate swap agreements, we
exchange with a counterparty, at specified intervals, interest rate payments of
differing character (for example, fixed-rate payments exchanged for
variable-rate payments), based on an underlying principal balance (notional
amount). No cash is exchanged at the outset of the contract and no principal
payments are made by either party. The net interest accrued and the net interest
payments made at each interest payment due date are recorded to interest income
or expense, depending on the hedged item.
FAIR VALUE HEDGES
We use interest rate swaps to hedge the change in fair value of certain
fixed-rate debt. At September 30, 2004 we had $430.0 of notional amounts
outstanding relating to such hedges. These derivatives have been designated as
fair value hedges and, because they have been determined to be highly effective,
changes in their fair value and the related portions of the debt that they hedge
are recognized on a net basis in Net Realized Investment Gains in the
Consolidated Statements of Income (Loss).
Differences between the changes in fair value of these derivatives and the
hedged items represent hedge ineffectiveness. In the three and nine months ended
September 30, 2004 and 2003, no amounts were recognized in earnings due to hedge
ineffectiveness.
In conjunction with the September 1, 2004 repayment of the 7.25% senior notes
(see Note 5), we unwound a portion of the interest rate swap totaling $145.0
notional amount. We reported a pretax gain of $2.0 on the unwinding of this fair
value hedge in Net Realized Investment Gains in the Consolidated Statements of
Income (Loss).
OTHER DERIVATIVES
Safeco Financial Products (SFP), our wholly owned subsidiary, engaged in limited
derivatives activity by selling single-name credit default swaps, writing and
hedging S&P 500 index options and investing in and hedging convertible bonds.
All these derivative positions were terminated prior to December 31, 2003 and
SFP was dissolved in October 2004. These SFP activities were not designated for
hedge accounting treatment under SFAS 133. Changes in the fair values of these
instruments were recognized in Net Realized Investment Gains in the Consolidated
Statements of Income (Loss). The fee income on the credit default swaps and the
earnings and fair value adjustments for the S&P 500 index options and the
convertible bonds were included in Net Investment Income in the Consolidated
Statements of Income (Loss). Pretax income (loss) before net realized investment
gains for SFP was $(0.9) for the three months ended September 30, 2003 and there
was no income or loss for this period in 2004. Pretax income (loss) before net
realized investment gains for SFP was $(0.4), and $0.3 for the nine months ended
September 30, 2004 and 2003. Net realized investment gains before tax for SFP
were $2.8 and $22.1 for the three and nine months ended September 30, 2003 and
there were no gains or losses in the same periods of 2004.
NOTE 4 - INCOME TAXES
We use the liability method of accounting for income taxes in accordance with
SFAS 109, "Accounting for Income Taxes," under which deferred income tax assets
and liabilities are determined based on the differences between their financial
reporting and their tax bases and are measured using the enacted tax rates.
Differences between income taxes computed by applying the U.S. federal income
tax rate of 35% to Income (Loss) from Continuing Operations before Income Taxes
and the consolidated provision (benefit) for income taxes were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------------------
Income (Loss) from Continuing
Operations before Income Taxes $ (4.6) $ (13.7) $ 621.5 $ 181.2
- -----------------------------------------------------------------------------------------------------------
Computed "Expected" Tax Expense (1.6) (4.8) 217.5 63.4
Tax-Exempt Municipal Bond Income (8.9) (9.3) (27.1) (27.9)
Dividends Received Deduction (1.8) (2.2) (6.3) (6.9)
Other 1.8 2.7 (3.0) 6.1
-------------------------------------------------------------------
Provision (Benefit) for Income Taxes $ (10.5) $ (13.6) $ 181.1 $ 34.7
-------------------------------------------------------------------
Current Provision (Benefit) for Income
Taxes 23.9 0.3 128.1 (2.1)
Deferred Provision (Benefit) for Income
Taxes (34.4) (13.9) 53.0 36.8
-------------------------------------------------------------------
Provision (Benefit) for Income Taxes $ (10.5) $ (13.6) $ 181.1 $ 34.7
- -----------------------------------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred income
tax assets and deferred income tax liabilities at September 30, 2004 and
December 31, 2003 were as follows:
SEPTEMBER 30 DECEMBER 31
2004 2003
- ----------------------------------------------------------------------------------------------------------
Deferred Income Tax Assets
Goodwill $ 170.4 $ 185.9
Discounting of Loss and Loss Adjustment Expense Reserves
for Tax Purposes 212.6 211.4
Unearned Premium Liability 171.9 159.0
Investment Impairments 12.4 26.2
Postretirement Benefits 40.9 42.1
Alternative Minimum Tax Carryforwards 79.9 62.4
Net Operating Loss Carryforwards -- 23.5
Other 96.2 63.8
---------------------------------
Total Deferred Income Tax Assets 784.3 774.3
---------------------------------
Deferred Income Tax Liabilities
Unrealized Appreciation of Investment Securities, Derivative Financial
Instruments, Deferred Policy Acquisition Cost Valuation Allowance,
Minimum Pension Liability and Foreign Currency Adjustment 253.8 314.2
Deferred Policy Acquisition Costs 137.1 124.9
Other 56.3 60.9
---------------------------------
Total Deferred Income Tax Liabilities 447.2 500.0
---------------------------------
Net Deferred Income Tax Asset $ 337.1 $ 274.3
- -----------------------------------------------------------------------------------------------------------
The sale of L&I generated capital losses for tax purposes that are carried back
to offset capital gains in 2002 and 2003. The offset of those prior year capital
gains by the capital losses had the effect of releasing net operating losses
from those years to be carried forward to the current quarter. The utilization
of the net operating losses in the third quarter generated additional
alternative minimum tax.
NOTE 5 - LONG-TERM DEBT
The following table shows the total principal amount of our long-term debt,
interest rates and maturities of debt. No debt is due within one year at
September 30, 2004 and December 31, 2003.
SEPTEMBER 30 DECEMBER 31
2004 2003
- -----------------------------------------------------------------------------------------------------------
6.875% Notes Due 2007 $ 200.0 $ 200.0
4.200% Notes Due 2008 200.0 200.0
4.875% Notes Due 2010 300.0 300.0
7.250% Notes Due 2012 230.0 375.0
8.072% Debentures Due 2037 402.9 876.3
------------------------------------
Total Debt $ 1,332.9 $ 1,951.3
- -----------------------------------------------------------------------------------------------------------
On August 13, 2004 we repurchased $473.4 in principal amount of 8.072% capital
securities for $562.7, and on September 1, 2004 we repurchased $145.0 in
principal amount of 7.25% senior notes for $170.9. Including transaction costs,
we reported a pretax loss on debt repurchases of $121.0 in the Consolidated
Statements of Income (Loss).
As of September 30, 2004, we maintained a bank credit facility with $300.0
available through September 2005.
NOTE 6 - RESTRUCTURING CHARGES
In September 2003, we announced that we would eliminate approximately 500 jobs
and all such jobs had been eliminated by March 31, 2004. The positions impacted
were primarily in our corporate departments. We expect this initiative to reduce
our 2004 operating expenses by approximately $75.0.
For the nine months ended September 30, 2004, period costs associated with the
restructuring totaled $1.4. These period costs represented termination benefits.
There were no restructuring costs in the three months ended September 30, 2004.
Estimated and actual costs associated with the restructuring were as follows:
THREE MONTHS NINE MONTHS
TOTAL ENDED ENDED
EXPECTED SEPTEMBER 30 SEPTEMBER 30
COSTS 2003 2004 2004
- --------------------------------------------------------------------------------------------------------------
One-Time Termination Benefits $ 9.6 $ 8.2 $ -- $ 1.4
Lease Termination Costs and Other Costs 1.0 1.0 -- --
------------------------------------------------------------------
Total $ 10.6 $ 9.2 $ -- $ 1.4
- --------------------------------------------------------------------------------------------------------------
Estimated costs associated with the restructuring to reduce our expenses were
allocated to our reportable segments in our Continuing Operations as follows:
THREE MONTHS NINE MONTHS
TOTAL ENDED ENDED
EXPECTED SEPTEMBER 30 SEPTEMBER 30
COSTS 2003 2004 2004
- -------------------------------------------------------------------------------------------------------------
Safeco Personal Insurance (SPI)
Auto $ 4.5 $ 3.8 $ -- $ 0.7
Property 1.8 1.6 -- 0.2
Specialty 0.1 0.1 -- --
-------------------------------------------------------------------
Total SPI 6.4 5.5 -- 0.9
-------------------------------------------------------------------
Safeco Business Insurance (SBI)
SBI Regular 2.2 1.9 -- 0.3
SBI Special Accounts Facility 0.7 0.6 -- 0.1
-------------------------------------------------------------------
Total SBI 2.9 2.5 -- 0.4
-------------------------------------------------------------------
Surety 0.4 0.3 -- 0.1
P&C Other -- -- -- --
-------------------------------------------------------------------
Total P&C 9.7 8.3 -- 1.4
Corporate 0.9 0.9 -- --
-------------------------------------------------------------------
Total $ 10.6 $ 9.2 $ -- $ 1.4
- -----------------------------------------------------------------------------------------------------------
The activity related to previously accrued restructuring charges as of September
30, 2004 was as follows:
BALANCE AT BALANCE AT
DECEMBER 31 COSTS AMOUNTS SEPTEMBER 30
2003 ACCRUED PAID 2004
- ------------------------------------------ ----------------- ------------ ----------------- ----------------
Severance Costs $ 0.2 $ -- $ 0.2 $ --
Lease Terminations and Other Costs 0.7 -- 0.7 --
----------------- ------------ ----------------- ----------------
Total $ 0.9 $ -- $ 0.9 $ --
- ------------------------------------------ ----------------- ------------ ----------------- ----------------
NOTE 7 - 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 us consists of changes in
unrealized gains or losses on investments carried at fair market value,
derivatives, deferred policy acquisition costs valuation allowance, changes in
foreign currency translation gains or losses and minimum pension liability.
The components of other comprehensive income or loss were as follows:
NINE MONTHS ENDED SEPTEMBER 30 2004 2003
- ----------------------------------------------------------------------------------------------------------
AFTER AFTER
PRETAX TAXES TAX PRETAX TAXES TAX
--------------------------------------------------------------------
Change in Unrealized Gains and Losses $ (1,508.2) $ 527.9 $ (980.3) $ 522.6 $ (183.1) $ 339.5
of Available-for-Sale Securities
Reclassification adjustment for Net
Realized Investment (Gains) Losses
included in Net Income (150.6) 52.7 (97.9) 123.1 (42.9) 80.2
Derivatives Qualifying as Cash Flow
Hedges - Net Changes in Fair Value (18.7) 6.5 (12.2) (13.3) 4.7 (8.6)
Deferred Policy Acquisition Costs
Valuation Allowance 88.0 (30.8) 57.2 (21.5) 7.5 (14.0)
Foreign Currency Translation
Adjustments (3.7) 1.3 (2.4) 1.7 (0.6) 1.1
--------------------------------------------------------------------
Other Comprehensive Income (Loss) $ (1,593.2) $ 557.6 $(1,035.6) $ 612.6 $ (214.4) $ 398.2
- ----------------------------------------------------------------------------------------------------------
NOTE 8 - SEGMENT INFORMATION
CONTINUING OPERATIONS
On January 1, 2004, we made minor revisions to our P&C segments that better
reflect how these segments are managed. Our non-voluntary auto and property
results, previously in P&C Other, are now included in SPI Auto and SPI Property.
Certain products, previously reported in SPI Specialty, primarily earthquake,
inland marine and dwelling fire, are now included in SPI Property. Our
commercial specialty programs and large commercial accounts in runoff,
previously in SBI Runoff, are now included in P&C Other. Prior-period amounts
have been reclassified to reflect the revised presentation of P&C segments.
P&C
Our P&C Insurance operations are organized around our four business segments:
Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI), Surety and P&C
Other. These operations contain our reportable segments, which are managed
separately as described below.
SAFECO PERSONAL INSURANCE
SPI offers auto, homeowners and other specialty insurance products for
individuals, and the SPI operations are organized around three reportable
segments - Auto, Property and Specialty - which are managed separately by these
product groupings.
The Auto segment provides coverage for liability of our customers to others for
both bodily injury and property damage, for injuries sustained by our customers
and for physical damage to our customers' vehicles from collision and other
hazards.
The Property segment provides homeowners, earthquake, dwelling fire and inland
marine coverage for individuals. Our Property coverages protect homes,
condominiums and rental property contents against losses from a wide variety of
hazards. We also protect individuals from liability for accidents that occur on
their property.
The Specialty segment provides umbrella, recreational vehicle, motorcycle and
boat insurance coverage for individuals.
SAFECO BUSINESS INSURANCE
SBI offers business owner policies, multi-peril packages, property, general
liability, commercial auto and workers compensation. SBI's operations are
organized around two segments: SBI Regular and SBI Special Accounts Facility,
which are managed separately based on the nature of the underlying insured.
SBI Regular is our core commercial segment writing a variety of commercial
insurance products for small- to medium-sized businesses (customers who pay
annual written premiums of $200,000 or less). Our principal business insurance
products include business owner policies, commercial auto, commercial
multi-peril, workers compensation, property and general liability.
SBI Special Accounts Facility writes larger commercial accounts for our key
agents who sell our core P&C products as well as our four specialty commercial
programs, which are lender-placed property insurance, agents' errors and
omissions insurance, mini-storage and warehouse properties and non-profit social
services organizations.
SURETY
We offer surety bonds primarily for construction, performance and legal matters
that include appeals, probate and bankruptcies.
P&C OTHER
P&C Other includes large commercial business accounts, commercial specialty
programs and London operations that are in runoff and certain product lines that
we have exited.
OUR RESULTS
Our management measures segment profit or loss for our business based upon
underwriting results. Underwriting results (profit or loss) represents the net
amount of earned premium less underwriting losses and expenses on a pretax
basis. Management views underwriting profit or loss as a critical measure to
assess underwriting effectiveness and to evaluate the results of our operations.
Underwriting results are not a substitute for net income determined in
accordance with GAAP.
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 includes
interest expense for our debt; loss on debt repurchases; SFP, which was engaged
in limited derivative activity until its operations were wound down in December
2003; intercompany eliminations and other corporate activities.
In reporting L&I as a Discontinued Operation, indirect corporate overhead
expenses are no longer allocated to L&I. Previously allocated expenses of $2.3
for the third quarter and $12.8 for the first nine months of 2004 and $3.0 for
the third quarter and $9.0 for the first nine months of 2003 have been
eliminated for the L&I Other segment and included in our Corporate segment.
DISCONTINUED OPERATIONS
L&I
The Discontinued Operations include results of our L&I businesses. See Note 9
for more information.
In reporting L&I as a Discontinued Operation, indirect corporate overhead
expenses are no longer allocated to L&I. Previously allocated expenses of $3.0
per quarter in 2003 have been eliminated from the L&I operations and included in
the Corporate segment. Prior-period amounts have been restated to reflect the
presentation of L&I as a Discontinued Operation.
The following tables present selected financial information by segment for our
Continuing Operations and reconcile segment revenues and underwriting results to
amounts reported in the Consolidated Statements of Income (Loss).
REVENUES
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------------
PROPERTY & CASUALTY
Safeco Personal Insurance (SPI)
Auto $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3
Property 232.1 229.9 687.8 688.0
Specialty 23.4 21.4 66.7 61.5
-----------------------------------------------------------------
Total SPI 925.9 825.4 2,688.5 2,391.8
-----------------------------------------------------------------
Safeco Business Insurance (SBI)
SBI Regular 307.0 275.4 908.9 813.5
SBI Special Accounts Facility 110.5 100.6 335.2 281.7
-----------------------------------------------------------------
Total SBI 417.5 376.0 1,244.1 1,095.2
-----------------------------------------------------------------
Surety 53.7 40.0 146.7 110.6
P&C Other 3.6 9.0 13.3 17.7
-----------------------------------------------------------------
Total Earned Premiums 1,400.7 1,250.4 4,092.6 3,615.3
Net Investment Income 111.0 113.7 338.5 343.0
-----------------------------------------------------------------
Total Revenues (excluding Net Realized 1,511.7 1,364.1 4,431.1 3,958.3
Investment Gains)
CORPORATE 4.7 3.6 11.7 19.0
Net Realized Investment Gains 50.5 12.8 178.2 36.7
-----------------------------------------------------------------
TOTAL REVENUES $ 1,566.9 $ 1,380.5 $ 4,621.0 $ 4,014.0
- -----------------------------------------------------------------------------------------------------------
PRETAX UNDERWRITING PROFITS (LOSSES) AND NET INCOME (LOSS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------------
PROPERTY & CASUALTY
Underwriting Profits (Losses)
Safeco Personal Insurance (SPI)
Auto $ 51.0 $ 32.2 $ 135.1 $ 24.7
Property 14.2 40.5 154.9 61.9
Specialty (4.3) 6.7 8.8 22.2
-----------------------------------------------------------------
Total SPI 60.9 79.4 298.8 108.8
-----------------------------------------------------------------
Safeco Business Insurance (SBI)
SBI Regular (59.7) (51.3) (4.0) (68.1)
SBI Special Accounts Facility (21.1) 5.8 14.9 11.6
-----------------------------------------------------------------
Total SBI (80.8) (45.5) 10.9 (56.5)
-----------------------------------------------------------------
Surety 10.0 8.5 30.8 19.0
P&C Other (12.6) (149.8) (29.9) (170.0)
-----------------------------------------------------------------
Total Pretax Underwriting Profit (Loss) (22.5) (107.4) 310.6 (98.7)
Net Investment Income 111.0 113.7 338.5 343.0
Restructuring Charges -- -- (1.4) --
-----------------------------------------------------------------
Total Property & Casualty 88.5 6.3 647.7 244.3
CORPORATE (22.6) (32.8) (83.4) (99.8)
Loss on Debt Repurchases (121.0) -- (121.0) --
Net Realized Investment Gains before Taxes 50.5 12.8 178.2 36.7
-----------------------------------------------------------------
Income (Loss) from Continuing Operations (4.6) (13.7) 621.5 181.2
before Income Taxes
Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7
-----------------------------------------------------------------
Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5
Results from Discontinued Operations,
Net of Tax (107.0) (28.8) (57.8) 26.5
-----------------------------------------------------------------
NET INCOME (LOSS) $ (101.1) $ (28.9) $ 382.6 $ 173.0
- -----------------------------------------------------------------------------------------------------------
ASSETS SEPTEMBER 30 DECEMBER 31
2004 2003
- -----------------------------------------------------------------------------------------------------------
PROPERTY & CASUALTY
Safeco Personal Insurance (SPI)
Auto $ 4,153.8 $ 3,683.0
Property 2,222.1 2,199.8
Specialty 217.8 189.0
--------------------------------
Total SPI 6,593.7 6,071.8
--------------------------------
Safeco Business Insurance (SBI)
SBI Regular 3,529.6 3,235.6
SBI Special Accounts Facility 859.0 722.1
--------------------------------
Total SBI 4,388.6 3,957.7
--------------------------------
Surety 498.1 385.6
P&C Other 2,199.0 2,490.3
--------------------------------
TOTAL PROPERTY & CASUALTY 13,679.4 12,905.4
--------------------------------
CORPORATE 986.3 693.1
DISCONTINUED OPERATIONS -- 22,548.9
--------------------------------
TOTAL ASSETS $ 14,665.7 $ 36,147.4
- -----------------------------------------------------------------------------------------------------------
NOTE 9 - DISCONTINUED OPERATIONS
On March 15, 2004, we entered into a definitive agreement to sell our life
insurance, group stop-loss medical insurance and asset management operations to
a group of investors led by White Mountains Insurance Group, Ltd., and Berkshire
Hathaway Inc. On August 2, 2004, this transaction was completed.
In a separate transaction, on March 15, 2004, we entered into a definitive
agreement to sell Talbot Financial Corporation (Talbot), our insurance brokerage
operation for $90.0 to an investor group led by senior management of Talbot,
with financial support from Hub International Limited. On July 1, 2004, this
transaction was completed.
On April 8, 2004, we entered into a definitive agreement to sell Safeco Trust
Company to Mellon Trust of Washington, and on April 19, 2004, this transaction
was completed with a gain of $3.8 after tax.
Proceeds from these sales totaled $1,510.0 including $64.3 in dividends, and the
after-tax loss on these transactions was $134.8 in the third quarter and $131.0
for the nine months ended September 30, 2004.
The enterprises included in these transactions represent all of the business and
earnings generated by the L&I segments. We have presented L&I as a Discontinued
Operation, as we have met all of the "held-for-sale" criteria under SFAS 144.
Results of Discontinued Operations (net of taxes) included:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
----------------------------------------------------------
Total Revenues $ 159.4 $ 400.0 $ 1,140.5 $ 1,400.9
- -----------------------------------------------------------------------------------------------------------
Income (Loss) from Discontinued Operations $ 35.8 $ (64.4) $ 92.2 $ 20.0
before Income Taxes
Income Taxes 8.0 (35.6) 19.0 (6.5)
----------------------------------------------------------
Income (Loss) from Discontinued Operations, Net
of Taxes 27.8 (28.8) 73.2 26.5
Loss on Disposition, Net of Taxes (134.8) -- (131.0) --
- -----------------------------------------------------------------------------------------------------------
Results of Discontinued Operations, Net of Taxes $ (107.0) $ (28.8) $ (57.8) $ 26.5
- -----------------------------------------------------------------------------------------------------------
Contributing to the loss from the sale of L&I and included in Discontinued
Operations in our Consolidated Statements of Income (Loss) is a curtailment gain
of $4.7 net of taxes related to the former L&I employees who will no longer
accrue benefits under the OPRB plan.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions unless noted otherwise)
This discussion should be read with the consolidated financial statements and
related footnotes included elsewhere in this report.
Forward-Looking Information
Forward-looking information contained in this report is subject to risk and
uncertainty.
Information contained in this report that relates 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. Our business is subject to certain risks and
uncertainties that may cause actual results to differ materially from those
suggested by the forward-looking statements in this report. The risks and
uncertainties include, but are not limited to:
o Risks related to the pricing and underwriting of our products, and the
subsequent establishment of reserves, such as:
- Successful implementation of a new-business entry model for personal
and commercial lines
- Our ability to appropriately price and reserve for changes in the mix
of our book of business
- Our ability to establish pricing for any changes in driving patterns
- Inflationary pressures on medical care costs, auto parts and repair,
construction costs and other economic sectors that increase the
severity of claims
- The availability and pricing of our reinsurance, including coverage
for loss from terrorism and our ability to collect from our reinsurers
- Our ability to price for or exclude the risk of loss from terrorism on
our policies
o Risks related to our Property & Casualty (P&C) insurance strategy such as:
- Our ability to achieve premium targets and profitability, including
realization of growth and business retention estimates
- Our ability to achieve overall expense goals
- Our ability to run off our London business and other businesses that
we have exited without incurring material unexpected charges
o Regulatory, judicial and legislative risks such as:
- Our ability to freely enter and exit lines of business
- Our ability to successfully obtain regulatory approval of rates and
underwriting guidelines, including price-tiered products and the use
of insurance scores that include credit information as a component
- Interpretation of insurance policy provisions by courts or tax
authorities, court decisions regarding coverage and theories of
liability, trends in litigation and changes in claims settlement
practices
- The outcome of any litigation against us
- Legislative and regulatory developments affecting the actions of
insurers, including requirements regarding rates, taxes, agent and
broker commissions and availability of coverage
o The competitive pricing environment, initiatives by competitors and other
changes in the competition
o Unusual loss activity, such as:
- Weather conditions, including the severity and frequency of storms,
hurricanes, hail, snowfall and winter conditions
- The occurrence of significant natural disasters, including earthquakes
- The occurrence of significant man-made disasters, such as terrorist
attacks or war
- The occurrence of bankruptcies that result in losses on insurance
products or investments
o Financial and economic conditions such as:
- Performance of financial markets
- Availability of bank credit facilities
- Fluctuations in interest rates
- General economic conditions
o Operational risks such as:
- Damage to our infrastructure in a disruption of our operations
- Internal or external fraud perpetrated against us
Summary
We are an insurance company with headquarters in Seattle, Washington. We sell
insurance to drivers, homeowners, and small- and medium-sized businesses; and
surety bonds through a national network of independent agents and brokers. Our
business helps people protect what they value and deal with the unexpected. We
earn revenue from insurance policy premiums and income on our invested assets.
On August 2, 2004, we completed the sale of our Life & Investments (L&I)
operation to an investment group led by White Mountains Insurance Group, Ltd.,
and Berkshire Hathaway Inc. We completed the sales of Talbot Financial
Corporation on July 1, 2004 and Safeco Trust Company on April 19, 2004. See
"Liquidity and Capital Resources" for discussion on the use of proceeds.
OUR STRATEGY AND LEADERSHIP STRUCTURE
On September 27, 2004, we announced a new leadership structure for our company
that aligns with our strategy and how we do business: standardized insurance
products delivered over a unified platform through a common independent
distribution network. The cornerstone of the structure will be the newly created
"Office of the President," which will include the following three organizations
with shared accountability and responsibility for our results:
o Product: Our auto, home, small business and surety products serve the
insurance needs of a broad range of customers. The Product
organization will bring together these product lines, underwriting and
claims.
o Platform: This organization will include the people, technology and
processes that support our company - including Safeco Now, our
internet-based sales platform where our distributors can quote and
issue most of our insurance products in minutes. The Platform
organization will include finance, information technology, service,
human resources and operations.
o Distribution: This organization will be responsible for acquiring new
customers, building and protecting our brand and supporting our
independent distributors. The Distribution organization will include
sales, distribution, marketing, research, brand and reputation
management.
This new structure became effective November 3, 2004.
Reviewing Our Results of Operations
HOW WE REPORT OUR RESULTS
On January 1, 2004, we made minor revisions to our P&C segments. Our
non-voluntary auto and property results, previously in P&C Other, are now
included in SPI Auto and SPI Property. Certain products, previously reported in
SPI Specialty, primarily earthquake, inland marine and dwelling fire, are now
included in SPI Property. Our commercial specialty programs and large commercial
accounts in runoff, previously SBI Runoff, are now included in P&C Other.
Prior-period amounts have been reclassified to reflect the revised presentation
of our P&C segments.
We manage our P&C businesses in four business and seven reportable segments:
o Safeco Personal Insurance (SPI)
-- Auto
-- Property
-- Specialty
o Safeco Business Insurance (SBI)
-- SBI Regular
-- SBI Special Accounts Facility
o Surety
o P&C Other
As previously discussed, our L&I businesses are reported as Discontinued
Operations.
In addition to these segments, certain activities such as interest expense and
intercompany eliminations are reported in Corporate and not allocated to
individual segments.
HOW WE MEASURE PROFITABILITY
P&C -- We use three measures of our operating results to assess the
profitability of our P&C businesses. These measures are net earned premiums,
underwriting profit or loss and combined ratio.
We include property and casualty insurance premiums in revenue as earned over
the terms of the respective policies. We report the unearned portion of the
policy premium as a liability on the Consolidated Balance Sheets before the
effect of reinsurance.
Underwriting profit or loss is our net earned premiums less our losses from
claims, loss adjustment expenses (LAE) and underwriting expenses. Combined ratio
is our losses, LAE and underwriting expenses divided by our net earned premiums.
We report combined ratio as a percentage. For example, a combined ratio of 95%
means that our losses, LAE and underwriting expenses equal 95% of our net earned
premiums, or a 5% underwriting profit. A lower combined ratio reflects better
results than a higher combined ratio.
We don't include our investment portfolio results when measuring the
profitability of our businesses. That's because we manage the investment
portfolio separately from our underwriting activities.
INVESTMENT RESULTS
Investment activities are an important part of our business. We invest insurance
premiums received in a diversified portfolio until needed to pay claims. Income
from our investments is a significant part of our total revenues and net income.
Our investment philosophy is to:
o Emphasize investment yield, balanced with investment quality and risk
o Provide for liquidity when needed
o Diversify our portfolio
We measure our investment results in two parts - the net investment income that
we earn on our invested assets and the net realized investment gains and losses
we recognize when we sell or impair investments.
Application of Critical Accounting Estimates
We have identified Loss and LAE Reserves, Reinsurance and Valuation of
Investments as accounting estimates 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.
Please see additional discussion of critical accounting estimates in the MD&A
section of our 2003 Annual Report on Form 10-K.
Consolidated Results of Operations
The following table presents summary consolidated financial information for the
periods indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
-------------------------------------------------------
REVENUES
Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3
Net Investment Income 115.5 114.7 349.6 354.1
Net Realized Investment Gains 50.5 12.8 178.2 36.7
Other Revenues 0.2 2.6 0.6 7.9
-------------------------------------------------------
Total Revenues 1,566.9 1,380.5 4,621.0 4,014.0
-------------------------------------------------------
EXPENSES
Losses and Loss Adjustment Expenses 1,029.9 1,003.5 2,632.2 2,639.3
Other Underwriting and Operating Expenses 162.8 148.8 475.7 471.3
Amortization of Deferred Acquisition Costs 232.5 211.5 681.9 626.1
Loss on Debt Repurchases 121.0 -- 121.0 --
Interest Expense 25.3 30.4 87.3 96.1
Restructuring Charges -- -- 1.4 --
-------------------------------------------------------
Total Expenses 1,571.5 1,394.2 3,999.5 3,832.8
-------------------------------------------------------
Income (Loss) from Continuing Operations before
Income Taxes (4.6) (13.7) 621.5 181.2
Provision (Benefit) for Income Taxes (10.5) (13.6) 181.1 34.7
-------------------------------------------------------
Income (Loss) from Continuing Operations 5.9 (0.1) 440.4 146.5
Results from Discontinued Operations
(Net of Taxes of $(52.3) and $(39.1) in 2004 and
$(35.6) and $(6.5) in 2003) (107.0) (28.8) (57.8) 26.5
-------------------------------------------------------
Net Income (Loss) $ (101.1) $ (28.9) $ 382.6 $ 173.0
- ----------------------------------------------------------------------------------------------------------
Net Income (Loss) - Net loss for the three months ended September 30, 2004 was
$101.1, compared with a net loss of $28.9 for the same period last year. Net
Income for the nine months ended September 30, 2004 was $382.6 compared with
$173.0 for the same period last year. Excluding results from Discontinued
Operations, Income from Continuing Operations was $5.9 in the third quarter of
2004 compared with a Loss from Continuing Operations of $0.1 for the same period
last year, and Income from Continuing Operations for the nine months ended
September 30, 2004 was $440.4 and $146.5 in 2003. Income from Continuing
Operations was impacted by:
o Growth: Our earned premiums increased by 12.0% in the third quarter of 2004
and 13.2% in the first nine months of 2004 compared with the same periods
in 2003.
o Catastrophe losses: After-tax catastrophe losses were $126.6 in the third
quarter of 2004, compared with $13.7 in 2003. After-tax catastrophe losses
were $153.0 for the first nine months of 2004, compared with $86.8 in 2003.
o Underwriting Profit: Excluding the catastrophes, our underwriting profit
margins exceeded our targets, reflecting favorable loss trends and pricing
above loss costs.
o Reserve actions: We experienced favorable reserve development in SPI of
$14.3 after tax during the third quarter of 2004 and $31.2 after tax for
the first nine months of 2004. We reported unfavorable development in
workers compensation reserves of $133.3 after tax for the three and nine
months ended September 30, 2003.
o Loss on Debt Repurchases: We used $735.2 of the proceeds from the sale of
L&I to repurchase $618.4 in principal amount of debt and capital
securities. Including transaction costs, this resulted in a loss on debt
repurchases of $78.7 after tax in the third quarter of 2004.
o Net Realized Investment Gains included $14.7 of pretax gains on sales of
equity securities in the third quarter and $76.3 of pretax gains from the
sales of equity securities in the second quarter of 2004. These gains will
largely offset the loss on the sale of L&I for tax purposes.
Revenues - The increase in revenues for the third quarter and the nine months
ended September 30, 2004 reflected growth in earned premiums and net realized
investment gains. Earned premium growth resulted from:
o New business growth driven by our automated sales and service platform,
Safeco Now, from our three major segments (Auto, Property and SBI Regular)
o Growth in policies-in-force (PIF), reflecting the number of policies that
we renew and the new policies that we write, for Auto of 9.7% and SBI
Regular of 0.3% compared with a year ago
o Stable retention in Auto and Property, and improved retention at policy
renewal in our SBI Regular segment from 77.9% in 2003 to 79.8% in 2004
o Premium rate increases across our major lines of business
The increase in Net Realized Investment Gains during the third quarter of 2004
was due to sales of equity securities. We sold equity securities in the third
quarter of 2004 realizing investment gains of $14.7. The increase in net
realized investment gains during the nine months ended September 30, 2004, was
primarily due to the sale of equity securities in the third quarter and a $76.3
gain from the sales of equity securities in the second quarter of 2004. Strong
performance in our equity holdings during 2004 increased the weight of our
equity securities within the portfolio and we sold equity securities to reduce
our holdings to our target of 10% of total investments. Impairments of $9.1 in
2004 compared with $47.3 in 2003 also contributed to the change in net realized
investment gains for the nine months ended September 30, 2004. These gains will
largely offset the loss on sale of L&I for tax purposes.
Losses and Loss Adjustment Expenses - The increase in losses and LAE in the
three months and nine months ended September 30, 2004 reflects our growth and
higher catastrophe losses. Catastrophe losses, primarily from the four
hurricanes that hit Florida and surrounding states in August and September of
2004, were $194.8 pretax in the three months ended September 30, 2004, compared
with $21.0 in the same period of 2003. Pretax catastrophe losses for the nine
months ended September 30, 2004, were $235.4, compared with $133.5 in 2003.
Losses and LAE in the third quarter of 2004 included $22.0 in favorable
prior-year reserve development in SPI and for the nine months of 2004 included
$48.0 in favorable prior-year reserve development in SPI. Losses and LAE in the
three and nine months ended September 30, 2003 also included $205.0 pretax in
workers compensation reserve strengthening.
Other Underwriting and Operating Corporate Expenses - The increase in
underwriting and operating expenses primarily resulted from costs associated
with business growth offset partially by our corporate expense reduction efforts
initiated in September 2003.
Amortization of Deferred Acquisition Costs - The increases in amortization of
deferred acquisition costs reflect growth in our business during 2004.
Loss on Debt Repurchases - In the third quarter of 2004, we repurchased $618.4
in principal amount of our debt. Including transaction costs, we reported a
pretax loss on debt repurchases of $121.0 in the Consolidated Statements of
Income (Loss).
Interest Expense - The decrease in interest expense of $5.1 for the three months
and $8.8 for the nine months ended September 30, 2004 compared with the same
periods in 2003 was due to a lower average balance of debt outstanding than
during the same periods in 2003 primarily due to the repurchases of debt
described above.
Restructuring Charges - The charges in the nine months ended September 30, 2004
represent termination benefits related to the corporate expense reduction effort
announced in September 2003. All announced positions were eliminated by March
31, 2004, and this effort was completed by September 30, 2004.
Results from Discontinued Operations - Results from Discontinued Operations
include the loss on the sale of our L&I operations of $134.8 for the three
months ended September 30, 2004 and $131.0 for the nine months ended September
30, 2004, partially offset by income from Discontinued Operations. Results for
the nine months ended September 30, 2004 included $46.7 in after-tax impairment
charges related to all L&I securities with unrealized losses and our expectation
that these securities would not recover in value before the completion of the
sale, compared with $77.7 in after-tax impairment charges in the third quarter
and first nine months of 2003.
Continuing Operations
Reconciling Segment Results
The following table assists in reconciling our GAAP results, specifically the
"Income (Loss) from Continuing Operations before Income Taxes" line from our
Consolidated Statements of Income (Loss) to our segment performance measures.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- --------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
------------------------------------------------------------
P&C $ 130.3 $ 13.5 $ 810.1 $ 254.9
Corporate (134.9) (27.2) (188.6) (73.7)
------------------------------------------------------------
Income (Loss) from Continuing Operations
before Income Taxes $ (4.6) $ (13.7) $ 621.5 $ 181.2
- --------------------------------------------------------------------------------------------------------
The P&C GAAP results are further detailed into segment underwriting results.
Underwriting results provide a helpful picture of how our company is doing.
However, using them to measure profitability - while fairly common in our
industry - does not follow GAAP.
Our P&C Operating Results
The primary measures of our operating results include our underwriting profit or
loss, net earned premiums, and combined ratios. The next three tables report
those key items - by our reportable segments - for the three and nine months
ended September 30, 2004 and 2003. More information about the results - also by
segment - follows the tables.
First, net earned premiums are the primary driver of our revenues:
THREE MONTHS ENDED NINE MONTHS ENDED
NET EARNED PREMIUMS SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
SPI
Auto $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3
Property 232.1 229.9 687.8 688.0
Specialty 23.4 21.4 66.7 61.5
--------------------------------------------------------
Total SPI 925.9 825.4 2,688.5 2,391.8
--------------------------------------------------------
SBI
SBI Regular 307.0 275.4 908.9 813.5
SBI Special Accounts Facility 110.5 100.6 335.2 281.7
--------------------------------------------------------
Total SBI 417.5 376.0 1,244.1 1,095.2
--------------------------------------------------------
Surety 53.7 40.0 146.7 110.6
P&C Other 3.6 9.0 13.3 17.7
--------------------------------------------------------
Total P&C Earned Premiums $ 1,400.7 $ 1,250.4 $ 4,092.6 $ 3,615.3
- ----------------------------------------------------------------------------------------------------
Next, underwriting profit (loss) is our measure of each P&C segment's
performance:
THREE MONTHS ENDED NINE MONTHS ENDED
UNDERWRITING PROFITS (LOSSES) SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
SPI
Auto $ 51.0 $ 32.2 $ 135.1 $ 24.7
Property 14.2 40.5 154.9 61.9
Specialty (4.3) 6.7 8.8 22.2
--------------------------------------------------------
Total SPI 60.9 79.4 298.8 108.8
--------------------------------------------------------
SBI
SBI Regular (59.7) (51.3) (4.0) (68.1)
SBI Special Accounts Facility (21.1) 5.8 14.9 11.6
--------------------------------------------------------
Total SBI (80.8) (45.5) 10.9 (56.5)
--------------------------------------------------------
Surety 10.0 8.5 30.8 19.0
P&C Other (12.6) (149.8) (29.9) (170.0)
--------------------------------------------------------
Total Underwriting Profit (Loss) (22.5) (107.4) 310.6 (98.7)
Net Investment Income 111.0 113.7 338.5 343.0
Restructuring Charges -- -- (1.4) --
Net Realized Investment Gains 41.8 7.2 162.4 10.6
--------------------------------------------------------
P&C Income from Continuing Operations
before Income Taxes $ 130.3 $ 13.5 $ 810.1 $ 254.9
- ----------------------------------------------------------------------------------------------------
Finally, combined ratios show the relationship between net earned premiums and
underwriting profit (loss). Using ratios helps us see our operating trends
without the effect of changes in net earned premiums:
THREE MONTHS ENDED NINE MONTHS ENDED
COMBINED RATIOS+ SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
SPI
Auto 92.4% 94.4% 93.0% 98.5%
Property 93.9 82.4 77.5 91.0
Specialty 118.3 68.6 86.7 63.9
--------------------------------------------------------
Total SPI 93.4 90.4 88.9 95.5
--------------------------------------------------------
SBI
SBI Regular 119.5 118.6 100.4 108.4
SBI Special Accounts Facility 119.1 94.3 95.5 95.9
--------------------------------------------------------
Total SBI 119.4 112.2 99.1 105.2
--------------------------------------------------------
Surety 81.3 78.8 79.0 82.8
P&C Other * * * *
--------------------------------------------------------
Total P&C Operations 101.6% 108.6% 92.4% 102.7%
- ----------------------------------------------------------------------------------------------------
+ Combined ratios are GAAP basis. Expressed as a percentage, they are equal
to losses and expenses divided by net earned premiums.
* Not meaningful because this is in runoff with minimal premium.
Auto
The Auto segment provides voluntary and non-voluntary coverage for liability of
our customers to others for both bodily injury and property damage, for injuries
sustained by our customers and for physical damage to our customers' vehicles
from collision and other hazards.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- ----------------------------------------------------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
Net Earned Premiums $ 670.4 $ 574.1 $ 1,934.0 $ 1,642.3
Underwriting Profit 51.0 32.2 135.1 24.7
Combined Ratio 92.4% 94.4% 93.0% 98.5%
- ----------------------------------------------------------------------------------------------------
NET EARNED PREMIUMS
Net earned premiums increased by $96.3 or 16.8% for the three months ended
September 30, 2004 and $291.7 or 17.8% for the nine months ended September 30,
2004 compared with the same periods in 2003. The increases in net earned
premiums were driven by:
o Growth of PIF: PIF grew by 9.7% at September 30, 2004 compared with a year
ago. Retention was stable in 2004 at 80.1% compared with 2003 while new
business growth more than offset the policies that did not renew. New
business policies written grew 2.9% in the third quarter and 15.3% for the
nine months ended September 30, 2004 compared with 2003. This growth
reflects the effectiveness of our point-of-sale (POS) technology in making
it easier for our distributors to sell our products.
o Increases in filed rates: We file rate changes on a state-by-state basis.
On average, we implemented mid-single digit annual rate increases in 2003
and low-single digit annual rate increases in 2004.
UNDERWRITING RESULTS AND COMBINED RATIO
The improved underwriting results reflected increased earned premiums as
discussed above and improved loss ratios. Our 15-tier segmented model continues
to provide more accurate matching of prices for a wide range of risks. Our loss
and LAE ratio improved to 69.1% in the third quarter of 2004 compared with 72.2%
in the third quarter of 2003, and 70.1% in the first nine months of 2004
compared with 75.3% in the same period of 2003. Our expense ratio was 23.3% in
the third quarter of 2004 compared with 22.2% in the third quarter of 2003, and
22.9% in the first nine months of 2004, compared with 23.2% in the same period
of 2003.
These underwriting results and combined ratios were primarily driven by:
o Improved profit margins: Rate increases exceeded loss cost increases in the
third quarter and the first nine months of 2004. Annual increases in loss
costs have averaged approximately 1%-2% over the past two years, while
earned rate increases have ranged in the mid-single digits over that same
period.
o Favorable reserve development: Results in the third quarter 2004 included
favorable reserve development of $10.0 related to prior accident years,
primarily related to continuing improvements in preferred and non-standard
loss development, contributing 1.5 points to the improved combined ratio.
Results in the first nine months of 2004 included favorable reserve
development of $19.0 occurring in prior periods, contributing 1.0 point to
the improved combined ratio.
o Claims handling: We've invested in training for our claims representatives
which has led to more efficient and effective claims handling. We also have
improved our claims processes, which has contributed to lower loss
adjustment expense ratios in the first nine months of 2004.
o Catastrophe losses: Higher catastrophe losses in the third quarter of 2004
partially offset the improved loss and LAE ratios. Pretax catastrophe
losses were $8.2 in the third quarter of 2004 (a 1.2 point impact on the
combined ratio), and there were no catastrophe losses in the same period of
2003. However, catastrophe losses of $17.7 (a 0.9 point impact on the
combined ratio) were lower in the first nine months of 2004, compared with
$23.1 (a 1.4 point impact on the combined ratio) in the same period of
2003.
o Expense ratio: The increase in our expense ratio for the quarter was a
result of increased bonus commissions and accrued employee performance
bonuses due to our improved underwriting results offset by expense
reduction efforts. The decline in the nine months 2004 compared with 2003
is the result of the impact of our wide-ranging expense improvement
efforts.
WHERE WE'RE HEADED
Our commitment to ease of doing business by lowering our agents' costs and
providing an easy to use sales platform continues through the launch of Safeco
Now. Our auto product is now available on Safeco Now in all of the states where
we write business. In May 2004, we started launching our policy change tool for
handling certain simple but frequent policy endorsements. Additional web-based
policy-change transactions will be delivered in phases throughout the remainder
of 2004 and into 2005.
In Auto, we are experiencing a more competitive marketplace as our competitors
increase advertising and sales incentives. There have been some modest and
selective rate decreases by competitors. We remain committed to disciplined
pricing using our segmented product, and our rate increases continue to exceed
our loss cost trends.
We believe that the combination of our ongoing product development through
segmentation, improvement in our ease of doing business through Safeco Now and
targeted expansion into eastern states will allow us to continue to build
profitable growth in the face of increasing competition.
Property
Our Property segment provides homeowners, earthquake, dwelling fire and inland
marine coverage for individuals. Our Property coverages protect homes,
condominiums and rental property contents against losses from a wide variety of
hazards. We also protect individuals from liability for accidents that occur on
their property.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 232.1 $ 229.9 $ 687.8 $ 688.0
Underwriting Profit 14.2 40.5 154.9 61.9
Combined Ratio 93.9% 82.4% 77.5% 91.0%
- -----------------------------------------------------------------------------------------------------------
NET EARNED PREMIUMS
Net earned premiums were up slightly in the three months ended September 30,
2004, compared with the same period in 2003. Net earned premiums were flat in
the nine months ended September 30, 2004, compared with the same period in
2003.This primarily reflects new business and rate increases:
o New business: Our new business increased during the third quarter of 2004
over a year ago by 14.1% and during the first nine months of 2004 over a
year ago by 9.6%, as our nine-tier new homeowners product is available in
43 of the 44 states where we write business. In addition, we lifted new
business moratoriums throughout 2003 and into 2004, and as a result have no
statewide new business moratoriums remaining. The number of policies that
did not renew in 2004 exceeded the number of new policies that we wrote,
leading to a net reduction in PIF of 7.7% at September 30, 2004 compared
with a year ago.
o Rate increases: We file rate changes on a state-by-state basis. Overall we
implemented average rate increases in the low to mid teens in 2003, while
rates were relatively flat in the first nine months of 2004. These rate
changes are earned in our revenues over the twelve-month policy term.
Additionally, premiums reflect automatic increases in the amount of
insurance coverage to adjust for inflation.
UNDERWRITING RESULTS AND COMBINED RATIO
The decline in underwriting results in the third quarter of 2004 compared with a
year ago was primarily due to the four hurricanes in Florida and surrounding
states, partially offset by lower non-catastrophe weather-related losses. The
underwriting results for the first nine months of 2004 compared with a year ago
reflect our improved loss ratios as our nine-tier segmented model continues to
provide more accurate matching of prices for a wide range of risks. Our loss and
LAE ratio was 67.5% in the third quarter of 2004 compared with 53.9% in the
third quarter of 2003, and 50.4% in the first nine months of 2004 compared with
62.1% in the same period of 2003. Our expense ratio was 26.4% in the third
quarter of 2004 compared with 28.5% in the third quarter of 2003, and 27.1% in
the first nine months of 2004 compared with 28.9% in the same period of 2003.
The underwriting results and combined ratios were driven by:
o Lower losses: Property loss costs excluding catastrophes continue to
decline, driven primarily by double digit declines in claims frequency. The
rate of decrease in loss costs has been declining since the third quarter
of 2003, but is still in the high single-digits.
o Catastrophe losses: Our pretax catastrophe losses were $71.3 (a 30.7 point
impact on combined ratio) for the three months ended September 30, 2004 and
$94.2 (a 13.7 point impact on combined ratio) for the nine months ended
September 30, 2004 compared with $12.1 (a 5.3 point impact on combined
ratio) and $83.9 (a 12.2 point impact on combined ratio) for the same
periods in 2003. Catastrophes in 2004 were primarily from the four
hurricanes in Florida and the surrounding states. Property's pretax
catastrophe losses from these hurricanes were $66.3. Our National
Catastrophe Team remains in Florida, helping customers rebuild from the
hurricanes. Our estimated losses from these events, particularly the most
recent Hurricane Jeanne, are still evolving and these estimates may be
revised in future quarters as labor and material costs are better known and
losses are paid. Catastrophe losses in 2003 were due to a hailstorm in
Texas and severe storms and tornadoes in Kansas, Missouri, Tennessee and
Wyoming.
o Claims handling: We've invested in training for our claims representatives
which has led to more efficient and effective claims handling.
o Our segmented homeowners product: Our nine-tier segmented underwriting
model is performing as expected and better matches prices to risk. It is
now in place in all states where we write business except California.
o Favorable reserve development: Results in third quarter 2004 included
favorable reserve development of $9.0 which positively impacted the
combined ratio by 3.9 points. Results in the first nine months of 2004
included favorable reserve development of $26.0 contributing 3.8 points to
the improved combined ratio. The favorable development was driven mainly by
the changes in contract terms, and decreased frequency of claims beyond
that previously expected.
WHERE WE'RE HEADED
In April 2004, we started launching our homeowners product on Safeco Now, our
web-based sales and service platform, which is now available in all of the 44
states where we write business. As expected, this has contributed to the
increase in new business compared with the prior year. We will continue to
evaluate our segmented product to ensure our growth is profitable. In the fourth
quarter of 2004, we will start rolling out our segmented dwelling fire product
on Safeco Now.
Specialty
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 23.4 $ 21.4 $ 66.7 $ 61.5
Underwriting Profit (Loss) (4.3) 6.7 8.8 22.2
Combined Ratio 118.3% 68.6% 86.7% 63.9%
- -----------------------------------------------------------------------------------------------------------
Our Specialty operation provides individuals with umbrella, recreational
vehicle, motorcycle and boat insurance. These products serve to round out our
personal lines insurance product offerings.
NET EARNED PREMIUMS
Net earned premiums increased $2.0 or 9.3% for the third quarter 2004, compared
with the same period in 2003 and $5.2 or 8.5% for the first nine months of 2004,
compared with the same period in 2003. This increase was driven primarily by a
20.4% increase in the sales of new umbrella policies and a 6.8% increase in the
sale of new boat-owner policies.
UNDERWRITING RESULTS AND COMBINED RATIO
The lower underwriting results in 2004, compared with the same periods in 2003,
reflect higher catastrophe losses in 2004 from boat owners and unusually low
umbrella losses in the second quarter of 2003. Our loss and LAE ratio was 93.3%
in the third quarter of 2004, compared with 43.4% in the third quarter of 2003,
and 61.6% in the first nine months of 2004, compared with 38.0% in the same
period of 2003. Pretax catastrophe losses were $6.3 (a 26.9 point impact on the
combined ratio). The catastrophes were primarily due to the four hurricanes in
Florida and surrounding states in the third quarter and first nine months of
2004, and there were no catastrophe losses in 2003.
SBI Regular
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 307.0 $ 275.4 $ 908.9 $ 813.5
Underwriting Loss (59.7) (51.3) (4.0) (68.1)
Combined Ratio 119.5% 118.6% 100.4% 108.4%
- -----------------------------------------------------------------------------------------------------------
Our SBI Regular segment provides insurance for small-to-medium-sized businesses
(customers who pay annual written premiums of $200,000 or less). This is our
core commercial lines business. Our main products include:
o Business owner policies (BOP)
o Commercial auto
o Commercial property
o Commercial multi-peril (CMP)
o General liability
o Workers compensation
NET EARNED PREMIUMS
Net earned premiums increased $31.6 or 11.5% in the third quarter and $95.4 or
11.7% in the first nine months of 2004 compared with the same periods of 2003.
This reflects rate increases averaging 10.0% in 2003 and mid-single digits in
2004, along with growth in new business sales reflecting our focus on ease of
doing business for our distributors. These efforts included:
o Continued focus on our redesigned business model: In the first nine months
of 2004, new sales continued at a strong pace, as new business for BOP,
commercial auto and workers compensation, utilizing Safeco Now, was up
20.6%. However, the rate of growth began to slow in the third quarter as
new business for products available on Safeco Now (BOP, commercial auto and
workers compensation) was up 4.8% compared with a year ago, reflecting the
third quarter 2003 rollout of BOP on Safeco Now. New business for all
products was down 7.6% compared with a year ago, reflecting increased
competition. We remain committed to pricing our products approximately
relative to our loss cost trends to achieve our profit margin targets.
o Emphasis on retaining customers: Renewal retention of SBI Regular customers
improved to 79.8% in the third quarter 2004 from 77.9% in third quarter
2003. This strong improvement is attributed to our automated underwriting
platform, which has allowed us to improve our accuracy in pricing risks and
has led to higher retention within our most favorable pricing tiers.
o Growth in our Business Service Center: We provide agents with an option to
have us service the policies of their customers for a fee. This allows the
agents to focus on growing their business and shifts the policy servicing
activities to us. We experience higher retention of these policyholders,
benefiting both us and the agent. Since its inception in 2002, we have seen
growth in the business entering our Business Service Center, and in third
quarter 2004 we achieved a significant increase in premium volume, compared
with the same period in 2003. Currently this business represents a small
percentage of premiums; however, we have aggressive growth goals in this
area.
o Introduction of our field specialization model: We have created separate
underwriting units for our core small-business and mid-market business. We
believe that this new approach, the "field specialization model," increases
efficiency and underwriting accuracy.
UNDERWRITING RESULTS AND COMBINED RATIO
The underwriting results for the three and nine months ended September 30, 2004
were impacted by higher earned premium discussed above and higher catastrophe
losses. In September 2003, we strengthened workers compensation loss reserves by
$57.6. Our loss and LAE ratio was 86.6% in the third quarter of 2004 compared
with 81.8% in the third quarter of 2003, and 67.0% in the first nine months of
2004 compared with 70.9% in the same period of 2003. Our expense ratio was 32.9%
in the third quarter of 2004 compared with 36.8% in the third quarter of 2003,
and 33.4% in the first nine months of 2004 compared with 37.5% in the same
period of 2003. The decline in the expense ratio in 2004 is the result of the
impact of our wide-ranging expense improvement efforts.
These underwriting results and combined ratio were primarily driven by:
o Catastrophe losses: Our pretax catastrophe losses were $79.9 (a 26.0 point
impact on combined ratio) in the three months ended September 30, 2004,
compared with $5.2 (a 1.9 point impact on combined ratio) in the same
period of 2003, and $85.8 (a 9.4 point impact on combined ratio) in the
nine months ended September 30, 2004, compared with $18.8 (a 2.3 point
impact on combined ratio) in the same period of 2003. The higher
catastrophe losses were mainly due to hurricanes in Florida and surrounding
states. Our CMP market share of voluntary premiums in Florida is 2.0%.
o Prior year reserve development: Results for the three and nine months ended
September 30, 2003 included $57.6 pretax workers compensation reserve
strengthening for prior years.
WHERE WE'RE HEADED
In SBI Regular, we are experiencing increased competition in our middle market
business (customers who pay annual written premiums from $25,000 to $200,000).
Historically, this business is more price-competitive as industry profit margins
expand. Some carriers are lowering rates to be more price-competitive,
particularly in the commercial property line where rates appear to be adequate.
However, inflation in building materials costs is increasing and will impact
loss costs. We remain committed to disciplined pricing of our business based on
loss cost trends and meeting our profit margin targets. We will further compete
in this segment through our field specialization model. In addition, we have
implemented our automated underwriting platform for our in force business in CMP
which will provide more accurate pricing and segmentation. In the fourth quarter
of 2004, we will begin to launch our automated underwriting platform for new CMP
customers as well.
In July 2004, after reviewing the recent reforms and closely monitoring the
market, we lifted a new business moratorium for California workers compensation
market and will write policies for existing small account customers in just 50
classes of business for which we already write BOP, automobile or CMP policies.
In addition, we will be expanding our BOP product by adding additional classes
of business in the fourth quarter of 2004 throughout the U.S.
SBI Special Accounts Facility
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 110.5 $ 100.6 $ 335.2 $ 281.7
Underwriting Profit (Loss) (21.1) 5.8 14.9 11.6
Combined Ratio 119.1% 94.3% 95.5% 95.9%
- -----------------------------------------------------------------------------------------------------------
Our SBI Special Accounts Facility (SAF) segment includes insurance for large
commercial accounts (customers who pay annual written premiums of more than
$200,000) and four commercial programs.
While our main focus is the small- to medium-sized market, we continue to serve
some large commercial accounts on behalf of key agents and brokers who sell our
core property and casualty products. Sixty percent of our new small-commercial
business comes from distributors who also sell to large commercial accounts.
SAF also provides insurance for the following commercial programs:
o Lender-placed property
o Agents' errors and omissions (predominantly for Safeco agents)
o Property and liability insurance for mini-storage and warehouse properties
o Non-profit social services organizations professional and general
liability insurance
NET EARNED PREMIUMS
Net earned premiums increased $9.9 or 9.8% in the third quarter and $53.5 or
19.0% in the first nine months of 2004. This was driven by continued price
increases primarily in our program business.
Underwriting Results and Combined Ratio
Our underwriting results reflect our premium growth; however, higher catastrophe
claims in 2004 more than offset the underwriting profit from that growth in the
third quarter. Our loss and LAE ratio was 80.1% in the third quarter of 2004
compared with 60.3% in the third quarter of 2003, and 58.1% in the first nine
months of 2004, compared with 57.5% in the same period of 2003.
These underwriting results and combined ratio were primarily driven by:
o Price increases: The premium growth in the third quarter of $9.9 and $53.5
in the first nine months of 2004 was due to price increases.
o Catastrophe losses: The underwriting loss for the three months ended
September 30, 2004 included $29.1 in pretax catastrophe losses (26.3 point
impact on the combined ratio), compared with $3.6 (3.6 point impact on the
combined ratio) in 2003. The underwriting profit for the nine months ended
September 30, 2004 includes $31.4 in catastrophe losses (9.4 point impact
on the combined ratio), compared with $7.2 (2.6 point impact on the
combined ratio).
o Prior year reserve development: Results of the three and nine months ended
September 30, 2003 included $2.5 in prior years workers compensation
reserve strengthening.
Surety
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 53.7 $ 40.0 $ 146.7 $ 110.6
Underwriting Profit 10.0 8.5 30.8 19.0
Combined Ratio 81.3% 78.8% 79.0% 82.8%
- -----------------------------------------------------------------------------------------------------------
Our Surety segment provides surety bonds for construction and commercial
businesses.
NET EARNED PREMIUMS
Our net earned premiums increased $13.7 or 34.3% for the three months ended
September 30, 2004 and $36.1 or 32.6% for the nine months ended September 30,
2004 compared with the same periods in 2003. This was due to rate increases in
2003 and new business as a result of capitalizing on market conditions and as a
result of the 2003 opening of new offices in Glendale, California and Syracuse,
New York.
UNDERWRITING RESULTS AND COMBINED RATIO
Our underwriting profit improved by $1.5 in the third quarter and $11.8 in the
first nine months of 2004 compared with the same periods of 2003. These results
reflect our continued disciplined underwriting.
Surety implemented Safeco Now in April 2004 for the automated underwriting of
small transactional bonds. While this is currently less than 5% of our surety
premiums, it allows our distributors to quote and issue transactional bonds
quickly and easily from our common distribution platform. Surety implemented
direct billing for these bonds in October 2004.
P&C Other
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Earned Premiums $ 3.6 $ 9.0 $ 13.3 $ 17.7
Underwriting Loss (12.6) (149.8) (29.9) (170.0)
- -----------------------------------------------------------------------------------------------------------
Our P&C Other segment includes our:
o Runoff of assumed reinsurance business acquired as part of the American
States acquisition
o London operations that have been in runoff since the third quarter of 2002
o Large commercial business accounts in runoff and specialty programs that
we exited
P&C Other's underwriting losses were due to prior year reserve strengthening.
The underwriting loss in 2003 includes $144.9 workers compensation reserve
strengthening for prior years.
Our Corporate Results
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Corporate Segment Loss $ (22.6) $ (32.8) $ (83.4) $ (99.8)
Loss on Debt Repurchases (121.0) -- (121.0) --
Net Realized Investment Gains before Income
Taxes 8.7 5.6 15.8 26.1
---------------------------------------------------------------
Corporate Loss from Continuing Operations
before Income Taxes $ (134.9) $ (27.2) $ (188.6) $ (73.7)
- -----------------------------------------------------------------------------------------------------------
In our Corporate segment, we include:
o Interest expense we pay on our debt
o Loss on debt repurchases
o Our intercompany eliminations
o Miscellaneous corporate activities
On August 13, 2004, we repurchased $473.4 in principal amount of 8.072% capital
securities for $562.7, and on September 1, 2004, we repurchased $145.0 in
principal amount of 7.25% senior notes for $170.9. Including transaction costs,
we reported pretax loss on debt repurchases of $121.0 in the Consolidated
Statements of Income (Loss).
Our interest expense on borrowings totaled $25.3 and $87.3 in the three and nine
months ended September 30, 2004 and $30.4 and $96.1 in the same periods last
year. The decrease in interest expense for the three and nine months ended
September 30, 2004 compared with the same periods in 2003 was due to a lower
average balance of debt outstanding than during the same periods in 2003. The
lower average balance of debt outstanding was due to the debt repurchases
described above.
In reporting L&I as a Discontinued Operation, indirect corporate overhead
expenses are no longer allocated to L&I. Previously allocated expenses of $2.3
for the third quarter and $12.8 for the first nine months of 2004 and $3.0 for
the third quarter and $9.0 for the first nine months of 2003 have been
eliminated for the L&I Other segment and included in our Corporate segment.
Capital Resources and Liquidity
OUR LIQUIDITY NEEDS
Continuing Operations - P&C liabilities are somewhat unpredictable and generally
short in duration. The payments we make to policyholders depend upon losses they
suffer from accidents or other events. While we can estimate how much cash we'll
need and when we'll need it, we cannot predict all future events, particularly
catastrophes. So we use investments with greater liquidity to support our P&C
businesses' need for funds.
SOURCES OF OUR FUNDS
We generate cash flow primarily from insurance premiums, dividends, interest and
sales or maturity of investments.
We have not engaged in the sale of investments or other assets by
securitization.
The cash flow from our operating activities was:
o $744.7 of cash flow generated in the first nine months of 2004
o $261.9 of cash flow generated in the first nine months of 2003
The increase in 2004 was due to increased premiums of $4,176.1 in 2004 compared
with $3,781.7 in 2003 and decreased insurance claims paid of $2,414.7 in 2004
and $2,514.2 in 2003 reflecting our improved underwriting results. The estimated
losses of $194.8 from the hurricanes in Florida and the surrounding states are
expected to be paid over the next six to twelve months. Dividends and interest
received on our investment portfolio of $405.9 in 2004 compared with $350.5 in
2003 also contributed to the increase in cash flow.
We believe that cash flows from our operations, investment portfolio, and credit
facilities are sufficient to meet our future liquidity needs.
HOW WE USE OUR FUNDS
We use funds to support operations, make interest and principal payments on
debt, pay dividends to our shareholders, repurchase stock, and grow our
investment portfolio.
We use cash from insurance operations primarily to pay claims and claim
adjustment expenses.
We require insurance premiums to be paid in advance. As a result, cash flows
into our business before or at the time premium revenues are recognized. Cash
flows out of our business in subsequent months or years as claims are paid.
Quarterly Dividends -- On October 25, 2004, we paid a quarterly dividend of
$0.22 per share. This represents an 18.9% increase per share over the previous
quarterly dividend of $0.185 per share.
Sale of L&I and Use of Proceeds -- On August 2, 2004, we completed the sale of
our L&I operations resulting in $1,510.0 of aggregate sales proceeds. Of these
proceeds, $735.2 was used to repurchase $618.4 of debt, $623.0 was used to
execute an accelerated stock buyback (ASB) program of 13,247,863 shares of
common stock and the balance was retained to provide flexibility for the future
and pay transaction-related expenses.
Repurchases of Debt -- On August 13, 2004, we repurchased $473.4 in principal
amount of 8.072% debentures for $562.7, and on September 1, 2004, we repurchased
$145.0 in principal amount of 7.25% senior notes for $170.9. Including
transaction costs, we reported a pretax loss on debt repurchases of $121.0 in
the Consolidated Statements of Income (Loss).
ASB -- On August 2, 2004, we repurchased 13,247,863 shares, or approximately
9.5% of our outstanding common stock under an ASB program. The shares were
purchased from a dealer at a price of $46.80 per share, for a total cost of
$623.0. Through the ASB program, we returned excess capital from the L&I sale to
shareholders and immediately reduced the number of our common shares
outstanding. The dealer obtained the shares that we purchased by borrowing them
in the open market, and then repurchases shares in the market over the next six
to nine months to repay the borrowed shares. $200.0 of the ASB is subject to a
collar, a contract that sets a minimum and maximum price for us for the shares
repurchased under the collar. At the end of the program, we may receive, or be
required to pay, a price adjustment based on volume weighted average price of
our common stock during the period of the ASB repurchases. This adjustment will
be recorded in shareholders' equity.
Our Bank Credit Facility -- On August 2, 2004, in conjunction with the sale of
L&I, we amended the bank credit facility to lower the available amount to
$300.0. We also negotiated a lower minimum amount of shareholders' equity we
need to maintain to comply with the debt covenants of this facility. The terms
of the bank credit facility - which runs through September 2005 - require us to:
o Pay a fee to have these funds available
o Maintain a specified minimum level of shareholders' equity
o Keep our debt-to-capitalization ratio below a specified maximum
The bank credit facility does not require us to maintain any deposits as
compensating balances.
At September 30, 2004 and December 31, 2003 we had no borrowings under the bank
credit facility and we were in compliance with all the terms of this credit
facility.
FINANCIAL STRENGTH RATINGS
Financial strength (or claims paying) ratings provide a benchmark for comparing
insurers. Higher ratings generally indicate greater financial strength and a
greater ability to pay claims.
Here are our current ratings:
A.M. STANDARD
BEST & POOR'S MOODY'S FITCH
- -------------------------------------------- ----------------- --------------- -------------- --------------
Safeco Corporation Senior Debt bbb+ BBB+ Baa1 A-
P&C Insurance Subsidiaries A A+ A1 AA-
- -------------------------------------------- ----------------- --------------- -------------- --------------
Each agency has a stable outlook on the ratings.
We believe our financial position is sound. As we have continued to execute our
plans to improve our operating results, our financial position has strengthened.
Our debt service coverage has improved over the last two years, and we expect
that to continue.
IMPACT OF FINANCIAL STRENGTH RATINGS
Lower financial strength ratings could materially and adversely affect our
company and its performance and could:
o Increase the number of customers who terminate their policies
o Decrease new sales
o Increase our borrowing costs
o Limit our access to capital
o Restrict our ability to compete
Our Investment Results
Investment returns are an important part of our overall profitability.
Fluctuations in the fixed income or equity markets could affect the timing and
the amount of our net investment income. Defaults by third parties in the
payment or performance of their obligations - primarily on our investments in
corporate bonds - could reduce our investment income or result in realized
investment losses.
NET INVESTMENT INCOME
This table summarizes our pretax net investment income by portfolio:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Property & Casualty $ 111.0 $ 113.7 $ 338.5 $ 343.0
Corporate and Other 4.5 1.0 11.1 11.1
---------------------------------------------------------------
Total $ 115.5 $ 114.7 $ 349.6 $ 354.1
- -----------------------------------------------------------------------------------------------------------
Our pretax investment income yield was 5.0% for the three months ended September
30, 2004, compared with 5.9% for the same period in 2003. Our pretax investment
income yield was 5.2% for the nine months ended September 30, 2004, compared
with 5.9% for the same period in 2003. The declines in our pretax investment
income yields in our portfolio reflected the low interest rate environment on
reinvested assets partially offset by a reduction in our equity securities and
reinvestments in taxable bonds.
Our after-tax investment income yield was 3.6% for the three months ended
September 30, 2004 compared with 4.3% for the same period in 2003. Our after-tax
investment income yield was 3.8% for the nine months ended September 30, 2004,
compared with 4.4% for the same period in 2003. The declines in our after-tax
investment income yields in our portfolio reflect the low interest rate
environment and a greater percentage of higher quality taxable bonds.
NET REALIZED INVESTMENT GAINS AND LOSSES
Pretax net realized investment gains and losses for the three and nine months
ended September 30, 2004 and 2003 by portfolio were:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Property & Casualty $ 41.8 $ 7.2 $ 162.4 $ 10.6
Corporate 8.7 5.6 15.8 26.1
---------------------------------------------------------------
Total $ 50.5 $ 12.8 $ 178.2 $ 36.7
- -----------------------------------------------------------------------------------------------------------
Pretax net realized investment gains and losses for the three and nine months
ended September 30, 2004 and 2003 by component were:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Net Gains on Securities Transactions $ 53.8 $ 16.8 $ 187.3 $ 56.1
Impairments on Fixed Maturities (3.3) (5.8) (8.8) (31.1)
Impairments on Equity Securities (0.2) (4.2) (0.3) (16.2)
Credit Default Swap Mark-to-Market -- 2.8 -- 22.1
Other 0.2 3.2 -- 5.8
---------------------------------------------------------------
Total $ 50.5 $ 12.8 $ 178.2 $ 36.7
- -----------------------------------------------------------------------------------------------------------
Investment Sales Activity - Net realized investment gains for the third quarter
of 2004 include gains of $14.7 on equity securities generated to offset losses
on the sale of L&I for tax purposes. Net realized investment gains for the nine
months include the equity gains in the third quarter and also include $76.3 from
sales of equity securities in the second quarter. Strong performance in our
equity holdings during the current year increased the weight of the equity
securities within our portfolio and we sold equity securities during the second
quarter of 2004 to reduce our holdings in equity securities to our target of 10%
of the total investment portfolio. Net gains on securities transactions during
the third quarter and nine months of 2003 resulted primarily from calls and
fixed maturity sales initiated to manage our call risk and improve the credit
quality of the underlying portfolio. These calls - issuers redeeming bonds in
which we have invested before the final maturity date - are an expected part of
our investment activity, particularly when interest rates are low.
Impairments - We closely monitor every investment that has declined in fair
value to below our cost. If we determine that the decline is other than
temporary, we write down the security to its fair value and record the charge as
an impairment in the Consolidated Statements of Income (Loss) in the period of
the other than temporary decline.
We continually monitor our investment portfolio and markets for opportunities
to:
o Improve credit quality
o Reduce our exposure to companies and industries with credit problems
o Manage call risk
In our impairment determination process, we consider our intent and ability to
hold investments long enough for them to recover in value. However, our intent
to hold the investment can change due to:
o Financial market fluctuations
o Changes in the financial condition and near-term prospects of the issuer
o Strategic decisions to sell businesses
Pretax investment impairments for the three and nine months ended September 30,
2004 and 2003 by portfolio were:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
- -----------------------------------------------------------------------------------------------------------
2004 2003 2004 2003
---------------------------------------------------------------
Property & Casualty $ 3.5 $ 10.0 $ 9.1 $ 46.4
Corporate -- -- -- 0.9
---------------------------------------------------------------
Total $ 3.5 $ 10.0 $ 9.1 $ 47.3
- -----------------------------------------------------------------------------------------------------------
The impairments in the first nine months of 2003 primarily resulted from credit
deterioration particularly in the airline and franchise sectors.
For the three and nine months ended September 30, 2004, the fair value of fixed
maturities and equity securities that we sold at a loss was $48.5 and $221.2
compared with $42.6 and $151.0 in the same period last year. Our total net
realized investment loss on these sales for the quarter ended September 30, 2004
was $2.3 and for the quarter ended September 30, 2003 was $10.9. Our total net
realized investment loss on these sales for the nine months ended September 30,
2004 was $16.7 and $27.8 for the same period in 2003.
Investment Portfolio
These tables summarize our investment portfolio at September 30, 2004 and
December 2003:
SEPTEMBER 30, 2004 COST OR CARRYING
AMORTIZED COST VALUE
- -----------------------------------------------------------------------------------------------------------
P&C
Fixed Maturities - Taxable $ 6,465.3 $ 6,687.2
Fixed Maturities - Non-taxable 2,011.4 2,152.4
Equity Securities 550.8 933.6
Corporate
Fixed Maturities - Taxable 348.0 348.6
Equity Securities 29.9 38.9
------------------------------------
Total Fixed Maturities and Equity Securities 9,405.4 10,160.7
Other Invested Assets 8.4 8.4
------------------------------------
Total Investment Portfolio $ 9,413.8 $ 10,169.1
- -----------------------------------------------------------------------------------------------------------
COST OR CARRYING
DECEMBER 31, 2003 AMORTIZED COST VALUE
- -----------------------------------------------------------------------------------------------------------
P&C
Fixed Maturities - Taxable $ 5,534.3 $ 5,828.2
Fixed Maturities - Non-taxable 2,007.5 2,156.5
Equity Securities 650.5 1,115.5
Corporate
Fixed Maturities - Taxable 175.4 174.5
Equity Securities 34.3 50.7
------------------------------------
Total Fixed Maturities and Equity Securities 8,402.0 9,325.4
Other Invested Assets 18.8 18.8
------------------------------------
Total Investment Portfolio $ 8,420.8 $ 9,344.2
- -----------------------------------------------------------------------------------------------------------
As of September 30, 2004, our fixed maturities carried at $9,188.2 included:
o Gross unrealized gains of $381.2
o Gross unrealized losses of $17.7
As of September 30, 2004, our equity securities carried at $972.5 included:
o Gross unrealized gains of $396.4
o Gross unrealized losses of $4.6
The following table summarizes the length of time that fixed maturities and
equity securities have been in a continual unrealized loss position as of
September 30, 2004:
LENGTH OF TIME IN A AMOUNT OF
CONTINUAL UNREALIZED UNREALIZED LOSS AT
TYPES OF SECURITIES LOSS POSITION SEPTEMBER 30, 2004
- ---------------------------------------------------------------------------------------------------------
Fixed Maturities Less than 12 months $ 13.6
12 Months or Greater 4.1
----------------------------
Total 17.7
----------------------------
Equity Securities Less than 12 months 4.6
12 Months or Greater --
----------------------------
Total $ 4.6
- ---------------------------------------------------------------------------------------------------------
The unrealized losses of these investments represented approximately 0.2% of the
cost of our investment portfolio at September 30, 2004.
We reviewed all our investments with unrealized losses at September 30, 2004 in
accordance with our impairment policy. Our evaluation concluded that these
declines in fair value were temporary after considering:
o That the majority of such losses for securities in an unrealized loss
position for less than 12 months were interest rate related
o For securities in an unrealized loss position for 12 months or more, the
financial condition and near-term prospects of the issuer of the security,
including any specific events that may affect its operations or earnings
potential
o Our intent and ability to keep the security long enough to recover its
value
DIVERSIFICATION
Our investment portfolio is well-diversified by issuer and industry type with no
single holding exceeding 1% of our consolidated investment portfolio.
The following tables show investment types and industries that exceed 3% of our
portfolio at September 30, 2004 and December 31, 2003:
CARRYING PERCENT
SEPTEMBER 30, 2004 VALUE OF TOTAL
- -----------------------------------------------------------------------------------------------------------
State and Political Subdivisions $ 2,498.9 25%
Mortgage-Backed Securities 1,276.6 13
U.S. Government and Agencies 1,164.4 11
Banks 992.7 10
Electric Utilities 440.2 4
Diversified Financial Services 454.0 4
Other 3,333.9 33
----------------------------------
Total Fixed Maturities and Equity Securities 10,160.7 100
Other Invested Assets 8.4 --
----------------------------------
Total Investment Portfolio $ 10,169.1 100%
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 CARRYING PERCENT
VALUE OF TOTAL
- -----------------------------------------------------------------------------------------------------------
State and Political Subdivisions $ 2,381.1 26%
Mortgage-Backed Securities 1,128.1 12
U.S. Government and Agencies 1,034.6 11
Banks 778.1 8
Electric Utilities 473.9 5
Diversified Financial Services 263.3 3
Other 3,266.3 35
----------------------------------
Total Fixed Maturities and Equity Securities 9,325.4 100
Other Invested Assets 18.8 --
----------------------------------
Total Investment Portfolio $ 9,344.2 100%
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INVESTMENT PORTFOLIO QUALITY
The quality ratings of our fixed maturities portfolio at September 30, 2004 and
December 31, 2003 were:
PERCENT AT PERCENT AT
RATING SEPTEMBER 30, 2004 DECEMBER 31, 2003
- -----------------------------------------------------------------------------------------------------------
AAA 43% 42%
AA 11 11
A 29 23
BBB 14 19
BB and lower 2 3
Not Rated 1 2
-------------------------------------------
Total 100% 100%
- -----------------------------------------------------------------------------------------------------------
BELOW INVESTMENT GRADE AND OTHER SECURITIES
A security is considered below investment grade if it has a rating below BBB.
Our investment portfolio includes below investment grade fixed maturities with a
fair value of:
o $169.3 at September 30, 2004
o $252.7 at December 31, 2003
At September 30, 2004, these securities represented 1.7% of our investments at
fair value. The related amortized cost of the below investment grade securities
at September 30, 2004 was $155.0 compared with $233.7 at December 31, 2003.
Our below investment grade securities had a net unrealized investment gain of
$14.3 at September 30, 2004. That gain was comprised of:
o Gross unrealized investment gains of $14.8
o Gross unrealized investment losses of $0.5
At September 30, 2004 our investment portfolio also included:
o $103.8 of non-publicly traded fixed maturities and equity securities -
representing 1.0% of our total portfolio, compared with $82.9 at year end
2003
o $89.7 of not-rated securities - representing 0.9% of our total portfolio,
compared with $88.3 at year end 2003
MORTGAGE-BACKED SECURITIES
This table summarizes our holdings of mortgage-backed securities at September
30, 2004:
CARRYING VALUE
COST OR ------------------------
SEPTEMBER 30, 2004 AMORTIZED COST AMOUNT PERCENT
- ------------------------------------------------------------- ------------------ -- ------------ -----------
Residential
Planned and Targeted Amortization Class and Sequential Pay
CMOs $ 579.6 $ 582.6 46%
Accrual Coupon (Z-Tranche) CMOs 13.7 14.5 1
Floating Rate CMOs 104.9 105.3 8
Residential Mortgage-Backed Pass-Throughs (Non-CMOs) 7.5 8.0 1
------------------ -- ------------ -----------
Total Residential 705.7 710.4 56
Securitized Commercial Real Estate
Government/Agency-Backed 46.9 49.1 4
CMOs and Pass-Throughs (Non-agency) 377.3 395.7 31
------------------ -- ------------ -----------
Total Securitized Commercial Real Estate 424.2 444.8 35
Other CMOs 119.2 121.4 9
------------------ -- ------------ -----------
Total $ 1,249.1 $ 1,276.6 100%
- ------------------------------------------------------------- ------------------ -- ------------ -----------
Here are the quality ratings of our mortgage-backed securities portfolio:
RATING SEPTEMBER 30, 2004
- --------------------------------------------------------- ----------------------------------
Government/Agency Backed 44%
AAA 46
AA 5
A 3
BBB 1
BB or lower 1
----------------------------------
Total 100%
- --------------------------------------------------------- ----------------------------------
Quality of Our Mortgage-Backed Securities - At September 30, 2004, 90% of our
mortgage-backed securities were either government/agency-backed or AAA rated.
We've limited our investment in riskier, more volatile CMOs and commercial
mortgage-backed securities to $14.5. That amount represents 1.1% of our total
mortgage-backed securities.
OUR CONTRACTUAL OBLIGATONS
Our contractual obligations at September 30, 2004 were:
Payment by
---------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 Year Years Years 5 Years
- -------------------------------------- ------------ -------------- -------------- ------------- ------------
Long-Term Debt Including Interest $ 2,612.7 $ 83.9 $ 367.9 $ 327.7 $ 1,833.2
Operating Leases 285.2 44.6 85.1 74.5 81.0
Purchase Obligations 349.4 99.1 162.5 45.0 42.8
Pension Obligations 326.5 18.8 29.5 29.7 248.5
Loss and LAE Reserves (1) 5,259.9 1,887.2 1,540.5 634.6 1,197.6
------------ -------------- -------------- ------------- ------------
Total Contractual Obligations $ 8,833.7 $ 2,133.6 $ 2,185.5 $ 1,111.5 $ 3,403.1
- -------------------------------------- ------------ -------------- -------------- ------------- ------------
(1) Loss and LAE reserves represent our best estimate of losses from
claims and related settlement costs. Because of the nature of
insurance policies, there is typically no minimum contractual
commitment associated with covered claims. Both the amounts and timing
of such payments are estimates, and the inherent variability of
resolving claims and changes in market conditions make the timing of
cash outflows uncertain. The ultimate amount and timing of Loss and
LAE payments could differ from our estimates.
ITEM 4 - CONTROLS AND PROCEDURES
We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures under the supervision and with the
participation of management, including our Chief Executive Officer, Chief
Financial Officer and our disclosure committee.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were
effective as of September 30, 2004 to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission rules and forms.
There have been no changes in our internal controls over financial reporting
during the third quarter that materially affected, or are reasonably likely to
materially affect, our controls over financial reporting.
Safeco Corporation and Subsidiaries
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PART II - OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1 - LEGAL PROCEEDINGS
Because of the nature of our businesses, we are subject to legal actions filed
or threatened in the ordinary course of our operations. Generally, our
involvement in legal action involves defending third-party claims brought
against our insureds (in our role as liability insurer) or principals on surety
bonds and defending policy coverage claims brought against us.
We do not believe that such litigation will materially and adversely affect 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. Estimation of
reserves for environmental claims is difficult. However, we do not expect these
lawsuits to materially affect our financial condition.
Our P&C companies were sued in the U.S. District Court of Connecticut on January
14, 2003, by a plaintiff seeking back overtime pay for claims adjusters who they
claim should have been considered non-exempt employees under the labor laws. The
plaintiff made two attempts to obtain class status for this suit; both attempts
were unsuccessful. The plaintiff appealed both decisions. One has been upheld on
appeal, and the other is pending before the same appellate panel. We continue to
deny any suggestion of wrongdoing, and are actively defending against these
allegations.
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY
SECURITIES
Issuer Purchase of Equity Securities
- ------------------------------------------------------------------------------------------------------------
Total Number of Shares Maximum Number of
Purchased As Part Of Shares That May Yet Be
Total Number Of Average Price Publicly Announced Plans Purchased Under The
Period Shares Purchased Paid Per Share Or Programs (1) Plans or Programs
- ------------------ ----------------- ------------------ -------------------------- -------------------------
July 1-31 - - - 21,487,088
August 1-31 13,247,863 $46.80 13,247,863 8,239,225
September 1-30 - - - 8,239,225
----------------- ------------------ --------------------------
Total 13,247,863 $46.80 13,247,863
- ------------------ ----------------- ------------------ --------------------------
(1) On March 15, 2004, we announced our intent to repurchase a limited
amount of our common stock under an existing stock repurchase program.
Under this program, we had previously authorized the repurchase of up
to 11 million shares of common stock, and as of the date of the
announcement, approximately 2.4 million shares of that amount remained
available for repurchase.
On July 19, 2004, our Board of Directors approved a plan to repurchase
up to 20,000,000 shares of common stock (in addition to the 1,487,088
shares that remained available for repurchase pursuant to the prior
Board authorization). On August 2, 2004, we publicly announced the
repurchase of 13,247,863 shares pursuant to this plan under an
Accelerated Stock Buyback program.
As of September 30, 2004, 8,239,225 shares remained available for
repurchase under the repurchase plans described above, neither of
which is subject to an expiration date.
Safeco Corporation and Subsidiaries
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a)(3) - EXHIBITS
10.1 Safeco Leadership Performance Plan as amended.
31.1 Certification of Chief Executive Officer of Safeco Corporation,
dated November 5, 2004, 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 November 5, 2004, 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 November 5, 2004, 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 November 5, 2004, 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 reports on Form 8-K during the
quarter ended September 30, 2004 and for the period up to the filing
date of this Form 10-Q.
FILING DATED UNDER FILING RELATED TO:
------------------------------------------------------------------------------------------------------
July 20, 2004 Item 12 (Results of Earnings Release for Quarter ended June 30, 2004.
Operations and
Financial Condition)
August 2, 2004 Item 5 (Other Events) Safeco completes sale of Life & Investments
operation and use of proceeds.
Safeco increases dividends to shareholders.
Safeco initiates tender offers for 8.072% Capital
Securities due 2037 and 7.25% Senior Notes due
2012.
August 10, 2004 Item 10 Amendments to Code of Ethics.
August 13, 2004 Item 5 (Other Events) Safeco Completes Tender Offer for 8.072% Capital
Securities Due 2037.
August 17, 2004 Items 2 & 7 (Disposition Sale of Life and Investments.
of Assets and Financial
Statements)
August 25, 2004 Items 8.01 & 9.01 Safeco announces estimate of losses from Hurricane
Charley.
August 31, 2004 Items 8.01 & 9.01 Safeco completes Tender Offer for 7.25% Senior
Notes Due 2012.
September 21, 2004 Items 8.01 & 9.01 Safeco estimates Losses from Hurricane Frances.
September 28, 2004 Items 8.01 & 9.01 Safeco Announces New Leadership Structure to Drive
Future Profit and Growth.
October 13, 2004 Items 8.01 & 9.01 Safeco estimates Third Quarter Catastrophe Losses.
October 19, 2004 Items 2.02 & 9.01 Earnings Release for Quarter ended September 30,
2004.
------------------------------------------------------------------------------------------------------
Safeco Corporation and Subsidiaries
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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 November 5, 2004.
Safeco Corporation
------------------------------------
Registrant
/s/ MAURICE S. HEBERT
------------------------------------
Maurice S. Hebert
Senior Vice President, Controller