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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____.
Commission File Number 1-6563
SAFECO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer I.D. No.)
SAFECO Plaza, Seattle, Washington 98185
(Address of principal executive offices)
206-545-5000
(Telephone)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(141,180,121 shares were outstanding at January 31, 1998)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X . NO .
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998, was $7,100,000,000.
Documents incorporated by reference:
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts I and II. Portions of the registrant's
definitive Proxy Statement for the 1998 annual shareholders meeting to be
held May 6, 1998, are incorporated by reference into Part III.
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PART I Item 1. Business
GENERAL
SAFECO Corporation (the Corporation) is a Washington
corporation that owns operating subsidiaries in various segments
of insurance and other financially related businesses. (The
Corporation and its subsidiaries are collectively referred to as
"SAFECO".) SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries
engage in property and casualty insurance, surety and life and
health insurance, and generated approximately 95% of SAFECO's
total 1997 revenues. The home offices of the Corporation and its
principal subsidiaries are in Seattle and Redmond, Washington.
On October 1,1997 SAFECO acquired American States Financial
Corporation ("American States"), an Indianapolis, Indiana-based
insurance holding company with 1996 revenues of $2.0 billion.
SAFECO also acquired WM Life Insurance Company on December 31,
1997. Both acquisitions were treated as purchases for accounting
purposes. See Note 2 on page 59 of the 1997 Annual Report to
Shareholders, incorporated herein by reference (Exhibit 13), for
additional information. As of December 31, 1997, SAFECO had
approximately 11,000 employees.
In February 1998 SAFECO announced its decision to sell its
real estate subsidiary, SAFECO Properties, Inc. to focus on its
core insurance and financial services businesses. SAFECO has
retained an investment banker to assist in its sales efforts. As
the operations are not material to the consolidated financial
statements they have not been reclassified as discontinued
operations.
SAFECO's insurance subsidiaries engage in two principal lines:
property and casualty (including surety), and life and health
insurance. SAFECO's property and casualty operation is one of the
largest in the United States. All areas of the insurance business
are highly competitive and no one insurance company or group of
insurers dominates the market.
The Corporation and its insurance subsidiaries are subject to
extensive regulation and supervision. This regulation is generally
designed to protect the interests of policyholders rather than
shareholders and other investors. Such regulation, generally
administered by a department of insurance in each state in which
the insurance subsidiaries do business, relates to, among other
things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and
limitations on investments; the ability to withdraw from the
state; the approval of premium rates; restrictions on the size of
risks that may be insured under a single policy; reserves and
provisions for unearned premiums, losses and other purposes;
deposits of securities for the benefit of policyholders; approval
of policy forms; and the regulation of market conduct, including
underwriting and claims practices. State insurance departments
also conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports
relating to the financial condition of insurance companies,
holding company issues and other matters. The Corporation's
insurance subsidiaries are collectively licensed to transact
insurance business in all 50 states and the District of Columbia.
See page 32 of the 1997 Annual Report to Shareholders,
incorporated herein by reference (Exhibit 13), for more
information on regulatory matters.
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PART I Item 1. Business (continued)
PROPERTY AND CASUALTY -- OPERATIONS
The Corporation's property and casualty subsidiaries include:
SAFECO Insurance Company of America, General Insurance Company of
America, First National Insurance Company of America, SAFECO
National Insurance Company, SAFECO Insurance Company of Illinois,
SAFECO Lloyds Insurance Company, SAFECO Surplus Lines Insurance
Company, American States Insurance Company, American Economy
Insurance Company, American States Preferred Insurance Company,
Insurance Company of Illinois, American States Insurance Company
of Texas, American States Lloyds Insurance Company, F. B. Beattie
& Co., Inc. and SAFECO Select Insurance Services, Inc.
SAFECO's property and casualty subsidiaries write personal,
commercial and surety lines of insurance through independent
agents. Coverages include automobile, homeowners, fire and allied
lines, workers' compensation, commercial multi-peril,
miscellaneous casualty, surety and fidelity. These products are
available in nearly all states and the District of Columbia.
As discussed above, SAFECO purchased American States on
October 1, 1997. SAFECO's strategy in purchasing American States
includes broadening its product mix available to the combined
companies' agency plant, particularly in introducing American
States' small commercial lines products into existing SAFECO
agencies. The combination increases the agency force,
geographically diversifies both the revenue and earnings base and
catastrophe risk exposure, and accelerates SAFECO's growth east of
the Rocky Mountains.
Consolidated property and casualty gross premiums written for
SAFECO's ten largest states are as follows:
1997 1996 1995
- - - ------------------------------------------------------------------------------------------------------------------------
(Amounts In Millions)
% of % of % of
State Amount Total Amount Total Amount Total
----- ------ ----- ------ ----- ------ -----
California $ 584.0 20% $ 549.4 22% $ 548.3 23%
Washington 444.0 15 389.2 16 388.7 16
Texas 225.0 8 183.2 7 163.7 7
Oregon 181.0 6 155.4 6 152.5 7
Illinois 151.6 5 111.4 5 106.1 5
Florida 118.8 4 91.8 4 76.1 3
Missouri 118.4 4 79.9 3 73.2 3
Tennessee 81.7 3 66.1 3 58.2 2
Georgia 77.0 2 72.6 3 70.5 3
Colorado 66.6 2 52.5 2 49.3 2
--------------------------------------------------------------------------------------
2,048.1 69 1,751.5 71 1,686.6 71
All Others 939.3 31 712.0 29 680.3 29
--------------------------------------------------------------------------------------
Total $ 2,987.4 100% $ 2,463.5 100% $ 2,366.9 100%
======================================================================================
The 1997 gross premiums written above include American States
from the October 1, 1997 acquisition date forward. Consequently
the by-state concentration percentages are not representative of
current geographic exposures. Based on annualized American States
premiums for 1997, the adjusted concentrations are 16% for
California, 13% for Washington, 7% for Texas, 6% for Illinois and
5% for Oregon.
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PART I Item 1. Business (continued)
Voluntary personal, commercial and surety lines (which exclude
assigned risk, FAIR plans, etc.) made up approximately 62%, 35%
and 3%, respectively, of the 1997 gross premiums written (these
percentages are based on annualized American States premiums for
1997, to better reflect actual product mix). The gross premiums
written growth of 5.6% in 1997 (excluding American States)
resulted from a 7.0% increase in personal, a 3.5% increase in
commercial and a 5.4% decrease in surety lines. Premiums written
by American States are down 2% from the fourth quarter a year ago.
Gross premiums written growth of 4.1% in 1996 resulted from a 4.8%
increase in personal, a 2.3% increase for commercial and a 3.1%
increase in surety lines.
The 1997 growth in personal lines premiums resulted primarily
from an increase in policies in force and rate increases in the
homeowners line. The number of vehicles insured increased 8.0% in
1997, compared with 5.3% in 1996 and 1.8% in 1995. The increases
in 1997 and 1996 came primarily from growth in targeted states
east of the Rocky Mountains. The number of homes insured increased
4.7% in 1997, 2.4% in 1996 and 1.2% in 1995. This relatively
modest growth rate was the result of rate increases in recent
years and the moratorium on writing new homeowners policies in
California.
SAFECO's commercial lines premiums were affected in both 1997
and 1996 by increased rate competition in workers' compensation --
particularly in California with its open rating system -- and to
increased rate competition in commercial auto. The decrease in
surety premiums in 1997 was caused by increased rate competition
in both the commercial and contract lines.
SAFECO sold its Canadian property and casualty operations in
1991. See page 35 of the 1997 Annual Report to Shareholders for
more information.
Additional financial information about SAFECO's business
segments appears in Note 17 on page 74 of the 1997 Annual Report
to Shareholders.
PROPERTY AND CASUALTY -- LOSS RESERVES
The consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment expense
("LAE") of the Corporation's property and casualty insurance
subsidiaries. The liability is presented net of amounts
recoverable from salvage and subrogation recoveries and gross of
amounts recoverable from reinsurance.
Reserves for losses that have been reported to SAFECO and
certain legal expenses are established on the "case basis" method.
Claims incurred but not reported (IBNR) and other adjustment
expense are estimated using statistical procedures. Salvage and
subrogation recoveries are accrued using the "case basis" method
for large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves which are adequate; that
is, the amounts originally recorded as reserves should at least
equal the amounts ultimately required to settle losses. These
reserves aggregate SAFECO's best estimates of the total ultimate
cost of claims that have been incurred but have not yet been paid.
The estimates are based on past claims experience and consider
current claims trends as well as social, legal and economic
conditions, including inflation. The reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular
basis to determine that the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the
amounts ultimately paid. A statistical estimate of the projected
amounts necessary to settle outstanding claims is made regularly
and compared to the recorded reserves and adjusted as necessary;
such adjustments are included in current operations.
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PART I Item 1. Business (continued)
The table below provides an analysis of changes in losses and
LAE reserves for 1997, 1996, and 1995 (net of reinsurance
amounts). Changes in the reserves are reflected in the income
statement for the year when the changes are made. Operations were
charged for an increase in estimated loss and LAE for claims
occurring in prior years of $30.5 million in 1997. The 1997 charge
includes a nonrecurring $40.0 million reserve increase related to
the American States acquisition. This reserve increase relates to
American States' previously discontinued assumed reinsurance
operations. Excluding this nonrecurring charge, the 1997 loss and
LAE development on claims occurring in prior years benefited
operations $9.5 million ($8.0 million for SAFECO and $1.5 million
for American States). Operations were credited $77.7 million and
$59.7 million in 1996 and 1995, respectively, as a result of a
reduction in the estimated amounts needed to settle prior years'
claims.
ANALYSIS OF CHANGES IN LOSS AND LAE EXPENSE RESERVES (NET OF
REINSURANCE):
1997 1996 1995
--------------------------------------------------------------------
American
SAFECO States Combined
--------------------------------------------------------------------
(In Millions)
Loss and LAE Reserves
at Beginning of Year $ 1,955.7 $- $ 1,955.7 $ 2,070.1 $ 2,092.9
--------------------------------------------------------------------
American States Loss and LAE
Reserves at Acquisition
(October 1, 1997) -- 2,204.6 2,204.6 -- --
--------------------------------------------------------------------
Incurred Loss and LAE for Claims
Occurring in the Current Year 1,678.2 291.3 1,969.5 1,658.2 1,586.7
Increase (Decrease) in
Estimated Loss and LAE
for Claims Occurring in Prior Years (8.0) 38.5 30.5 (77.7) (59.7)
--------------------------------------------------------------------
Total Incurred Loss and LAE 1,670.2 329.8 2,000.0 1,580.5 1,527.0
--------------------------------------------------------------------
Loss and LAE Payments for Claims
Occurring During:
Current Year 979.0 193.1 1,172.1 939.5 856.8
Prior Years 772.9 133.4 906.3 755.4 693.0
--------------------------------------------------------------------
Total Loss and LAE Payments 1,751.9 326.5 2,078.4 1,694.9 1,549.8
--------------------------------------------------------------------
Loss and LAE Reserves
at End of Year $ 1,874.0 $ 2,207.9 $ 4,081.9 $ 1,955.7 $ 2,070.1
====================================================================
Reconciliation:
Loss and LAE Reserves,
Net of Reinsurance $ 1,874.0 $ 2,207.9 $ 4,081.9 $ 1,955.7 $ 2,070.1
Add: Reinsurance Recoverables
on Unpaid Losses 74.2 154.4 228.6 103.4 110.7
--------------------------------------------------------------------
Loss and LAE Reserves,
Gross of Reinsurance $ 1,948.2 $ 2,362.3 $ 4,310.5 $ 2,059.1 $ 2,180.8
====================================================================
5
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PART I Item 1. Business (continued)
The table on page 7 presents the development of the loss and LAE
reserves for 1987 through 1997. The amounts reported in the table
except for the 1997 year end balance are for SAFECO only (i.e.,
does not include any amounts for American States.) The top lines
of the table show the estimated reserve for unpaid loss and LAE at
December 31 for each of the indicated years, both gross and net of
related reinsurance amounts. The upper portion of the table shows
the cumulative amount paid with respect to the previously recorded
reserve as of the end of each succeeding year. The next section
shows the re-estimated amount of the previously recorded reserve
based on experience as of each succeeding year. The estimate is
increased or decreased as more information becomes known about
individual claims and as changes in conditions and claim trends
become apparent. The lower section of the table shows the
cumulative redundancy (deficiency) developed with respect to the
previously recorded liability as of the end of each succeeding
year. For example, the 1987 reserve of $1,249.5 million developed
a $4.4 million deficiency after one year which grew over ten years
to a deficiency of $74.3 million. The reserve development
deficiency indicated for 1987 was due primarily to the emergence
of liabilities for pollution, asbestos and other hazardous toxic
claims and related legal expenses. As the emergence of these
claims developed, SAFECO aggressively increased its reserves to
address these deficiencies.
For 1988 and through 1996, SAFECO's reserve development has
been favorable. This trend reflects several factors: aggressive
reserving previously undertaken to correct deficiencies in years
prior to 1988, favorable workers' compensation legislation,
moderation of medical costs and inflation, and claims department
changes. The favorable legislation in workers' compensation, which
relates primarily to the states of Oregon and California, has
helped reduce fraud, allowed for faster claim settlement and made
it more difficult to reopen claims all of which reduced SAFECO's
ultimate loss costs. The cost of claim settlements in several
lines of business has benefited from changes in the organization
of SAFECO's claims department which has established separate
specialized units for workers' compensation, environmental
exposures and fraud investigations. In addition, increased focus
on adjustment expenses has helped reduce these costs. In
recognition of the above factors, 1996 newly reported and still
open claims were reserved at lower, more accurate levels than in
prior years. This resulted in a reduced level of favorable
development in 1997.
In evaluating the reserve development table on page 7, note
that each amount includes the effects of all changes in amounts
for prior periods. For example, the amount of the deficiency shown
for the December 31, 1996 reserves that relates to losses incurred
in 1987 is included in the cumulative redundancy (deficiency)
amount for the years 1987 through 1995. Conditions and trends that
have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies (deficiencies)
based on this table.
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ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- - - ---------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $1,328.5 $1,523.6 $1,702.5 $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1 $4,310.5
Reinsurance 79.0 97.0 75.3 80.7 152.0 89.2 100.1 143.9 110.7 103.4 228.6
---------------------------------------------------------------------------------------------------
Net of Reinsurance $1,249.5 $1,426.6 $1,627.2 $1,791.4 $1,865.3 $1,963.1 $1,995.1 $2,092.9 $2,070.1 $1,955.7 $4,081.9
===================================================================================================
Cumulative Net Amount Paid as of:
One Year Later $ 419.5 $ 443.1 $ 540.2 $ 603.0 $ 548.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9
Two Years Later 677.1 725.7 849.6 914.5 905.7 913.4 947.6 1,068.3 1,095.0
Three Years Later 848.2 902.5 1,035.0 1,109.4 1,086.5 1,106.0 1,147.6 1,252.9
Four Years Later 936.4 1,010.3 1,149.5 1,221.6 1,207.2 1,230.6 1,252.5
Five Years Later 1,033.7 1,083.5 1,222.1 1,301.1 1,294.4 1,295.7
Six Years Later 1,082.8 1,129.9 1,276.4 1,368.9 1,336.7
Seven Years Later 1,119.8 1,169.9 1,323.0 1,403.5
Eight Years Later 1,151.0 1,203.4 1,344.0
Nine Years Later 1,177.6 1,220.3
Ten Years Later 1,192.4
Net Reserve Re-estimated as of:
One Year Later 1,253.9 1,397.7 1,621.9 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2 1,992.4 1,947.7
Two Years Later 1,258.2 1,368.1 1,593.6 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3 1,889.9
Three Years Later 1,258.0 1,355.8 1,541.4 1,666.1 1,686.0 1,712.2 1,716.1 1,801.9
Four Years Later 1,264.8 1,338.6 1,544.8 1,657.2 1,650.7 1,642.3 1,643.6
Five Years Later 1,266.3 1,360.5 1,549.9 1,637.5 1,594.9 1,600.9
Six Years Later 1,299.6 1,386.7 1,546.9 1,608.5 1,569.5
Seven Years Later 1,332.4 1,383.3 1,525.4 1,595.4
Eight Years Later 1,328.6 1,373.7 1,515.4
Nine Years Later 1,324.4 1,369.2
Ten Years Later 1,323.8
Cumulative Net Redundancy (Deficiency) as of:
One Year Later (4.4) 28.9 5.3 24.0 44.6 96.9 81.3 59.7 77.7 8.0
Two Years Later (8.7) 58.5 33.6 85.6 132.5 181.0 176.8 190.6 180.2
Three Years Later (8.5) 70.8 85.8 125.3 179.3 250.9 279.0 291.0
Four Years Later (15.3) 88.0 82.4 134.2 214.6 320.8 351.5
Five Years Later (16.8) 66.1 77.3 153.9 270.4 362.2
Six Years Later (50.1) 39.9 80.3 182.9 295.8
Seven Years Later (82.9) 43.3 101.8 196.0
Eight Years Later (79.1) 52.9 111.8
Nine Years Later (74.9) 57.4
Ten Years Later (74.3)
7
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PART I Item 1. Business (continued)
The impact of reinsurance on the development information
presented on page 7 is not significant. The following table
summarizes reserve development, gross of reinsurance, for the last
three years (excluding American States):
1994 1995 1996
- - - ----------------------------------------------------------------------------------
(In Millions)
Gross Reserves $ 2,236.8 $ 2,180.8 $ 2,059.1
========================================
Cumulative Development
Net of Reinsurance $ 291.0 $ 180.2 $ 8.0
Cumulative Development
of Reinsurance Ceded 6.6 6.2 (5.1)
----------------------------------------
Cumulative Development
Gross of Reinsurance $ 297.6 $ 186.4 $ 2.9
========================================
Analysis indicates that SAFECO's reserves are adequate and
probably slightly redundant at December 31, 1997, 1996 and 1995.
Operations were charged for an increase in estimated loss and LAE
for claims occurring in prior years of $30.5 million in 1997. The
1997 charge includes a nonrecurring $40.0 million reserve increase
related to the American States acquisition. This reserve increase
relates to American States' previously discontinued assumed
reinsurance operations. Excluding this nonrecurring charge, the
1997 loss and LAE development on claims occurring in prior years
benefited operations $9.5 million ($8.0 million for SAFECO and
$1.5 million for American States). Operations were credited $77.7
million and $59.7 million in 1996 and 1995, respectively, as a
result of a reduction in the estimated amounts needed to settle
prior years' claims.
Environmental and Asbestos Claims
The property and casualty companies' reserves for losses and
LAE for liability coverages related to environmental, asbestos and
other toxic claims totaled $346.9 million at December 31, 1997
compared with $102.8 million at December 31, 1996. The increase in
1997 is due to the acquisition of American States. These amounts
do not reflect the effect of reinsurance, which is not material.
The reserves are approximately 8% and 5% respectively, of SAFECO's
total property and casualty reserves for losses and LAE at
December 31, 1997 and 1996. The reserves include estimates for
both reported and IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance
subsidiaries' environmental, asbestos and other toxic claims
result from the commercial general liability line of business and
the discontinued assumed reinsurance operations of American
States. A few of these losses occur in other coverages such as
umbrella, small commercial package policies and personal lines.
Approximately 6,412 of these claims were pending at December 31,
1997, computed on an occurrence basis. Most of these pending
environmental claims involve some type of environmental-related
coverage dispute. The average settlement cost of each
environmental, asbestos and other toxic claim for 1997 (including
American States on an annualized basis) was $11,700 including
legal expenses.
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PART I Item 1. Business (continued)
The following table summarizes the components of SAFECO's
reserves for environmental, asbestos and other toxic claims at
December 31, 1997:
Loss LAE Total
- - - ---------------------------------------------------------------------
(In Millions)
Case $ 94.1 $ 29.6 $ 123.7
-----------------------------------
IBNR 167.1 56.1 223.2
-----------------------------------
Total $ 261.2 $ 85.7 $ 346.9
===================================
This table shows the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other
toxic claims.*
1997 1996 1995
- - - -----------------------------------------------------------------------------------------------
(In Millions)
Reserves at Beginning of Year $ 102.8 $ 107.5 $ 108.2
American States Reserves at Acquisition 264.4 -- --
Incurred Losses and LAE (9.9) 4.6 9.3
Losses and LAE Payments (10.4) (9.3) (10.0)
------------------------------------
Reserves at End of Year $ 346.9 $ 102.8 $ 107.5
====================================
*Amounts are before the effect of reinsurance, which is not
material.
Although estimation of environmental claims is difficult, the
reserves established for these claims at December 31, 1997 are
believed to be adequate based on the known facts and current law.
SAFECO has generally avoided writing coverages for larger
companies with substantial exposure in these areas. In view of
changes in environmental regulations and evolving case law which
affect the development of loss reserves, the process of estimating
loss reserves for environmental, asbestos and other toxic claims
results in imprecise estimates. Quantitative techniques have to be
supplemented by subjective considerations and managerial judgment.
Because of these conditions, trends that have affected development
of these liabilities in the past may not necessarily occur in the
future.
Construction Defect Claims
Prior to its acquisition by SAFECO, American States had
experienced adverse loss development on construction defect
claims. Construction defect claims are a subset of claims that
arise from coverage provided by general property damage liability
insurance. They are defined as those claims involving allegations
of defective work which result in claims for damages related to
the diminution of value of large construction projects, such as
condominiums, office buildings, shopping centers and housing
developments. The vast majority of American States' reported
construction defect claims involve construction activity in
California, with most of such reported claims being incurred in
accident years prior to 1994.
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PART I ITEM 1. BUSINESS (CONTINUED)
From an operational perspective, in late 1992, American States
established a dedicated claim unit specifically for the management
of construction defect claims. SAFECO has not historically
separated these claims for the purpose of reserve analysis.
Beginning in 1993, American States intentionally began reducing
the volume of new contractor business written in California, and
currently is not writing any new California contractor business.
American States' reserves for construction defect claims totaled
$340.3 million at December 31, 1997. The reserves established for
these claims at December 31,1997 are believed to be adequate.
GAAP vs. Statutory
State regulatory authorities require SAFECO's property and
casualty insurance subsidiaries to file annual statements prepared
on an accounting basis prescribed or permitted by their respective
state of domicile (that is, on a statutory basis). The difference
between the $4,310.5 million reserve at December 31, 1997, for the
losses and LAE disclosed in the consolidated financial statements
in accordance with generally accepted accounting principles
(GAAP), and the $4,123.8 million reported in the annual statements
filed with state regulatory authorities related to reinsurance
recoverables and salvage and subrogation reserves. Under FASB
Statement 113, the GAAP-basis liability for losses and LAE is
reported gross of amounts recoverable from reinsurance.
Statutory-basis financial statements show the liability net of
reinsurance. Additionally, American States' statutory annual
statements do not include a provision for anticipated salvage and
subrogation recovery.
Reinsurance
SAFECO's property and casualty companies use treaty and
facultative reinsurance to help manage exposure to loss. As noted
above, the liability for unpaid losses and LAE is reported gross
of reinsurance recoverables of $228.6 million at December 31, 1997
and $103.4 million at December 31, 1996. The availability and cost
of reinsurance are subject to prevailing market conditions, both
in terms of price and available capacity. Although the reinsurer
is liable to SAFECO to the extent of the reinsurance ceded, SAFECO
remains primarily liable to the policyholder as the direct insurer
on all risks insured. To SAFECO's knowledge none of its reinsurers
is experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 1998
covers 90% of $400 million of single-event losses in excess of a
$100 million retention. In a large catastrophe, SAFECO would,
therefore, retain the first $100 million of losses, 10% of the
next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than
California SAFECO has a supplemental earthquake-only reinsurance
contract for 1998 that would cover 90% of $350 million of single-
event earthquake losses in excess of $500 million. Both of these
1998 catastrophe property reinsurance contracts include provisions
for one reinstatement for a second catastrophe event in 1998 at
current rates. The aggregate coverage limit is higher for 1998
than in prior years due to the inclusion of American States in
SAFECO's catastrophe profile.
SAFECO's insurance subsidiaries do not enter into
retrospective reinsurance contracts and do not participate in any
unusual or nonrecurring reinsurance transactions such as "swaps"
of reserves or loss portfolio transfers. SAFECO does not use
"funding covers" and does not participate in any surplus relief
transactions. For additional information on reinsurance, see Note
6 on page 66 of the 1997 Annual Report to Shareholders.
10
11
PART I ITEM 1. BUSINESS (CONTINUED)
LIFE AND HEALTH -- OPERATIONS
The Corporation's subsidiaries engaged in the life and health
insurance business are SAFECO Life Insurance Company, SAFECO
National Life Insurance Company, First SAFECO National Life
Insurance Company of New York, American States Life Insurance
Company, WM Life Insurance Company and SAFECO Administrative
Services, Inc. (collectively referred to as "SAFECO Life"). These
companies offer individual and group insurance products,
retirement services (pension) and annuity products. SAFECO Life
markets these products through professional agents in all states
and the District of Columbia. The most significant product lines
in terms of premium/deposit volume are single premium immediate
and deferred annuities, tax-sheltered annuities for the education
and nonprofit entities market, corporate retirement plans and
excess loss group medical insurance.
SAFECO acquired American States Life Insurance Company on
October 1, 1997, and WM Life Insurance Company on December 31,
1997. Both acquisitions have been treated as purchases for
accounting purposes.
SAFECO Life reinsures portions of its individual and group
life, accident and health insurance through commercial reinsurance
treaties, thus providing protection against large risks and
catastrophe situations.
Funds received under deposit contracts relate primarily to the
annuity and retirement services products of SAFECO's life and
health subsidiaries. The table on page 12 summarizes the
components of funds held under deposit contracts at December 31,
1997, and describes the applicable surrender charges and surrender
experience.
11
12
PART I ITEM 1. BUSINESS (CONTINUED)
DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
- - - ------------------------------------------------------------------------------------------------------------------------
Outstanding Expected Range of Credited
at Maturities or Assumed Interest Approximate
12/31/97 of Liabilities Rates at Surrender
Product (In Millions) (at issue date) 12/31/97 Surrender Charges Experience
- - - ------------------------------------------------------------------------------------------------------------------------
Universal $1,114.0 Approximately 5.25% to 7.15% Varies by issue age, 7% per annum
Individual 10 - 20 Years sex and duration from
Life $1 to $58 per $1,000
of insurance
Annuities:
Structured 5,151.3 Over 25 Years 3.5% to 12.69% Cannot surrender Cannot
Settlement surrender
Immediate
Deferred 2,314.1 Approximately 4.0% to 9.0% Typically 5% in year 1 14% per annum
5 - 12 Years graded to 0% in year 6
Retirement
Services:
Guaranteed 553.0 Typically 5.44% to 8.44% Market value adjustment or Less than 1%
Investment 2 - 5 Years cannot surrender in first per annum
Contracts year
Other 2,856.7 Approximately 4.55% to 7.49% Typically 9% in year 1 13% per annum
Annuities & 5 - 15 Years graded to 0% in year 9.
Deposits SAFECO has the option to
defer payout over 20
quarters for about one-
quarter of these
contracts. In addition,
approximately $241 million
of these deposits have a
market value adjustment
provision
---------
Total $11,989.1
=========
12
13
PART I ITEM 1. BUSINESS (CONTINUED)
INVESTMENTS
A description of SAFECO's investment portfolio appears on
pages 40 - 42 of the 1997 Annual Report to Shareholders. The rest of this
section provides additional information about SAFECO's mortgage-backed
securities and investment income yields.
SAFECO's consolidated investments in mortgage-backed
securities of $3.6 billion at market value at December 31, 1997,
consist mainly of residential collateralized mortgage obligations
(CMOs) and pass-throughs. The life and health portfolio contains
virtually all of these securities. Approximately 94% of the
mortgage-backed securities are government/agency-backed or AAA
rated at December 31, 1997. SAFECO has intentionally limited its
investment in riskier, more volatile CMOs (principal only, inverse
floaters, and so forth) to a small amount -- less than 1% of the
total.
SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1997:
GAAP Market Value
----------------------
Amortized
Cost Amount %
---------- ---------- ----
(Amounts In Millions)
Residential CMOs:
Planned Amortization Class
(PAC) and
Targeted Amortization Class
(TAC) (Fixed Coupon) $ 1,009.0 $ 1,030.7 28.3%
Sequential Pay (SEQ) 885.0 926.9 25.5
Accrual Coupon (Z-Tranche) 677.8 763.0 21.0
Floating Rate 43.8 43.8 1.2
Companion/Support, Principal Only,
Inverse Floaters 4.2 4.3 0.1
---------- ---------- ----
Subtotal 2,619.8 2,768.7 76.1
---------- ---------- ----
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs):
Government/Agency-Backed 133.6 134.3 3.7
Private Issue 23.1 23.6 0.6
---------- ---------- ----
Subtotal 156.7 157.9 4.3
---------- ---------- ----
Securitized Commercial
Real Estate:
Government/Agency-Backed 345.1 363.4 10.0
Pass-Throughs (Non-agency) 51.6 53.5 1.5
CMOs (Non-agency) 166.1 168.8 4.6
---------- ---------- ----
Subtotal 562.8 585.7 16.1
---------- ---------- ----
Asset-Backed Securities
(Non-Real Estate): 127.0 128.3 3.5
---------- ---------- ----
Total Mortgaged-Backed
Securities $ 3,466.3 $ 3,640.6 100.0%
========== ========== =====
13
14
PART I ITEM 1. BUSINESS (CONTINUED)
This table shows the quality distribution of SAFECO's
mortgage-backed security portfolio (GAAP market values):
Percent at
Rating December 31, 1997
--------------------------------------------------------------
Government/Agency Backed 61%
AAA 33
AA 4
A 1
BBB 1
BB or lower --
------
Total 100%
======
The table below summarizes pretax investment income yields for
SAFECO's property and casualty and life and health insurance
subsidiaries (calculations are based on GAAP amortized cost):
1997 1996 1995
--------------------------------------------------------------
Property and Casualty 6.6% 6.8% 7.2%
Life and Health 7.9% 8.1% 8.3%
Investment income yields declined in both portfolios mainly
because of the lower interest rate environment in all years shown.
The property and casualty decreases also reflect the higher
percentage of tax-exempt securities in this portfolio.
OTHER OPERATIONS
SAFECO's other operations include subsidiaries involved in
commercial lending and leasing (SAFECO Credit), investment
management and insurance agency and financial services
distribution operations.
In February 1998 SAFECO announced its decision to sell its
real estate investment and management operations, (SAFECO
Properties, Inc. and its subsidiaries Winmar Company, Inc. and
SAFECARE Company, Inc.) to focus on its core insurance and
financial services businesses. As the operations are not material
to the consolidated financial statements they have not been
reclassified as discontinued operations.
Winmar Company, Inc., acquired in 1967, invests in and manages
real estate properties, primarily retail shopping centers,
throughout the United States. Some of the more significant
properties are located in or near Louisville, KY; Cleveland, OH;
Albany and Tigard, OR; San Antonio, TX; Burlington, Redmond,
Silverdale and Vancouver, WA; and Milwaukee, WI. Winmar also
offers real estate services, including property management, design
and construction management and tenant leasing services.
14
15
PART I ITEM 1. BUSINESS (CONTINUED)
SAFECARE Company, Inc., organized in 1968, invests in medical
real estate including skilled nursing, retirement and assisted
living facilities.
SAFECO Credit Company, Inc., organized in 1969, provides loans
and equipment financing and leasing to commercial businesses,
including affiliated companies. At December 31, 1997, 13% of the
Credit Company's outstanding loans and leases consisted of loans
to affiliated SAFECO companies.
SAFECO Asset Management Company, acquired in 1973, is the
investment advisor for SAFECO's mutual funds, variable annuity
portfolios and outside pension and trust accounts.
SAFECO Securities, Inc., organized in 1967, is the principal
underwriter of the SAFECO Mutual Funds, comprising the SAFECO
Common Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt
Bond Trust, SAFECO Money Market Trust, and the SAFECO Managed Bond
Trust. These five trusts are made up of nineteen separate
investment portfolios, all of which are sold directly to the
public. Fifteen of these portfolios have two additional classes of
stock which are sold to the public through broker/dealers.
In addition, SAFECO Securities, Inc. is the principal
underwriter for the SAFECO Resource Series Trust mutual fund, with
six separate investment portfolios. SAFECO Securities is also the
principal underwriter for the variable insurance products issued
by SAFECO Resource Variable Account B, SAFECO Separate Account SL
and SAFECO Separate Account C, all of which are separate accounts
of SAFECO Life Insurance Company and for First SAFECO Separate
Account S, which is a separate account of First SAFECO National
Life Insurance Company of New York.
SAFECO Services Corporation, organized in 1972, is the
transfer agent for SAFECO's mutual funds.
SAFECO Trust Company, organized in 1994, provides asset
management and trust administrative services to high net worth
individuals and unrelated organizations.
PNMR Securities, Inc., organized in 1986, is a broker/dealer
that distributes affiliated and nonaffiliated mutual funds and
variable insurance products through its registered
representatives.
Talbot Financial Corporation, acquired in 1993, is a
broad-based insurance brokerage with a heavy emphasis on the
distribution of qualified and nonqualified annuity products and
mutual funds through the banking and brokerage arenas.
15
16
PART I ITEM 2. PROPERTIES
SAFECO's property and casualty insurance companies lease their
home office complex located in Seattle, Washington from General
America Corporation (a wholly-owned subsidiary of SAFECO
Corporation). This complex totals 567,000 gross square feet. A
700-car parking garage is connected to the complex. SAFECO's life
and health insurance companies lease their headquarters building
located in Redmond, Washington from General America Corporation.
This complex totals 232,000 gross square feet.
American States' main office complex is leased from a third
party and is located in Indianapolis, Indiana. This 408,000 gross
square foot complex is leased through 2009.
Other buildings owned and occupied include service facilities
in Redmond, Washington and Indianapolis, Indiana, as well as
regional and branch offices in Fountain Valley and Pleasant Hill,
CA; Denver, CO; Atlanta, GA; Carol Stream, IL; Fort Scott, KS; St.
Louis, MO; Cincinnati, OH; Portland, OR; Montlake Terrace,
Redmond, and Spokane, WA. These buildings comprise 1,237,000 gross
square feet. All other branch and service offices occupy leased
premises comprising 1,014,000 square feet, generally for periods
of five years or less.
SAFECO Properties, Inc., and its subsidiaries Winmar Company,
Inc. and SAFECARE Company, Inc., invest in and manage real estate
properties, primarily retail shopping centers throughout the
United States. The properties are owned by subsidiaries of Winmar
and in conjunction with other investors, and others are leased
under long-term leases. See Item 1 on page 14 of this report and
Note 15 on page 72 of the 1997 Annual Report to Shareholders for
additional information.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of their businesses, the Corporation's
insurance and other subsidiaries are subject to certain legal
actions filed or threatened in the ordinary course of their
business operations, generally as liability insurers defending
third- party claims brought against their insureds or as insurers
defending policy coverage claims brought against them. The
Corporation does not believe that such litigation will have a
material adverse effect on its financial condition, future
operating results or liquidity.
The property and casualty insurance subsidiaries of the
Corporation are parties to a number of lawsuits for liability
coverages related to environmental claims. Although estimation of
environmental claims loss reserves is difficult, the Corporation
believes that reserves established for these claims are adequate
based on the known facts and current law. The loss and loss
adjustment expense with respect to any such lawsuit, or all
lawsuits related to a single incident combined, are not expected
to be material to the financial condition of SAFECO. See page 8 of
Item 1 for more information regarding the liability of such
subsidiaries for environmental claims and the process of
estimating environmental loss reserves.
Four of the Corporation's property and casualty insurance
subsidiaries were among 23 underwriters of real property insurance
named defendants in a case brought in February 1996, in the United
States District Court for the Western District of Missouri,
alleging that their underwriting, sales and marketing practices
violated the Fair Housing Act and certain other civil rights laws.
The trial court refused to certify the plaintiff class and
dismissed the lawsuit in June 1997. The plaintiff appealed and
oral arguments on appeal were heard by the Eighth Circuit Court of
Appeals on February 9, 1998. Management believes, based on current
information, that the insurance subsidiaries' practices have
complied in all material respects with the applicable requirements
of both state and federal law and intends to vigorously defend the
appeal.
16
17
PART I ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 27, 1998, these are the names, ages and positions
of the executive officers of the Registrant as required by Item
10. No family relationships exist.
Roger H. Eigsti 55 Chairman since May 1993. Chief Executive Officer since January 1992. President from
May 1989 to August 1996. Chief Operating Officer from 1989 to 1991. Executive
Vice President and Chief Financial Officer from 1985 to 1989. Director since 1988.
Boh A. Dickey 53 President and Chief Operating Officer since August 1996. Executive Vice President
from January 1992 to August 1996. Chief Financial Officer from May 1989 to August
1996. Senior Vice President from 1989 to 1991. Secretary from 1985 to 1991. Vice
President and Controller from 1982 to 1989. Director since 1993.
Rodney A. Pierson 50 Chief Financial Officer since August 1996. Senior Vice President since February 1994.
Secretary since 1991. Controller from 1990 to 1997. Vice President from 1990 to 1994.
Vice President of SAFECO Property and Casualty Insurance Companies from 1987 to 1990.
Controller of SAFECO Property and Casualty Insurance Companies from 1984 to 1990.
James W. Ruddy 48 Senior Vice President since 1992. General Counsel since 1989. Vice President from
1989 to 1992. Associate General Counsel from 1985 to 1989.
W. Randall Stoddard 50 President of SAFECO Property and Casualty Insurance Companies since July 1997. Chief
Operating Officer of SAFECO Property and Casualty Insurance Companies from 1996 to
July 1997. Senior Vice President of Field Operations from 1994 to 1996.
Randall H. Talbot 43 President of SAFECO Life and Health Insurance Companies since February 1998. Chief
Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.
17
18
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Pages 43 and 75 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 76 through 79 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 30 through 43 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 42 and 43 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 45 through 75 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III The definitive proxy statement to be filed within 120 days after
December 31, 1997, excluding the Annual Report of the Compensation
Committee on Executive Compensation appearing on Pages 6 through
12, is incorporated herein by reference to fulfill the
requirements of ITEM 10, "DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT" (except for that portion of Item 10 relating to
executive officers which appears in Part I of this 10-K), and to
fulfill the requirements of ITEM 11, "EXECUTIVE COMPENSATION,"
ITEM 12, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT," and ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
18
19
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
F-1 Consent of Independent Auditors
SAFECO Corporation and Subsidiaries:
The following consolidated financial statements of SAFECO
Corporation and its subsidiaries, included in the 1997
Annual Report to Shareholders (pages 44 through 75), are
incorporated herein by reference:
Consolidated Balance Sheet
December 31, 1997 and 1996
Statement of Consolidated Income
Years Ended December 31, 1997, 1996 and 1995
Statement of Consolidated Cash Flows
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
December 31, 1997
Report of Independent Auditors
SAFECO Corporation and Subsidiaries Supplemental
Consolidating Information:
F-2 Balance Sheet
December 31, 1997 and 1996
F-3 Statement of Income
Year Ended December 31, 1997
F-4 Statement of Cash Flows
Year Ended December 31, 1997
19
20
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(a) (2) Financial Statement Schedules
F-5 Schedule I Summary of Investments Other Than
Investments in Related Parties
December 31, 1997
Schedule II Condensed Financial Information of the
Registrant (Parent Company Only):
F-6 Balance Sheet
December 31, 1997 and 1996
F-7 Statement of Income
Years Ended December 31, 1997, 1996
and 1995
F-8 Statement of Cash Flows
Years Ended December 31, 1997, 1996
and 1995
Statement of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996 and
1995. (See page 50 of the 1997 Annual
Report to Shareholders which is
incorporated herein by reference.)
F-9 Schedule III Supplementary Insurance Information
Years Ended December 31, 1997, 1996 and 1995
F-10 Schedule IV Reinsurance
Years Ended December 31, 1997, 1996 and 1995
F-11 Schedule VI Supplemental Information Concerning
Property/Casualty Insurance Operations
Years Ended December 31, 1997, 1996 and
1995
The following Article 7 schedules are omitted because the
information is provided elsewhere in the Annual Report
(Form 10- K) or because of the absence of conditions under
which they are required:
Schedule V
20
21
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(a) (3) Exhibits
F-12 Exhibit Index
Exhibit 2.1 Agreement and Plan of Merger dated as of June 6, 1997 by and among American States
Financial Corporation, SAFECO Corporation ("SAFECO") and ASFC Acquisition Co. filed as
Exhibit 2.1 to SAFECO's Report on Form 8-K dated June 6, 1997. SAFECO agrees to
furnish the Securities and Exchange Commission, upon request, with copies of all
omitted schedules to the foregoing Agreement and Plan of Merger.
Exhibit 3.1 Bylaws (as last amended May 7, 1997), filed as Exhibit 3.1 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
Exhibit 3.2 Restated Articles of Incorporation (as amended May 7, 1997), filed as Exhibit 3.2 to
SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
Exhibit 4.1 SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with
copies of all instruments defining rights of holders of long-term debt of SAFECO and
its consolidated subsidiaries.
Exhibit 4.2 Indenture, dated as of July 15, 1997, between SAFECO and The Chase Manhattan Bank, as
Trustee, filed as Exhibit 4.2 to SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.3 Form of Certificate of Exchange Junior Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997.
Exhibit 4.4 Certificate of Trust of SAFECO Capital Trust I dated June 18, 1997, filed as
Exhibit 4.4 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
Exhibit 4.5 Amended and Restated Declaration of Trust of SAFECO Capital Trust I dated as of
July 15, 1997, filed as Exhibit 4.5 to SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.6 Form of Exchange Capital Security Certificate for SAFECO Capital Trust I filed as
Exhibit 4.5 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated
October 17, 1997.
21
22
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
Exhibit 4.7 Form of Exchange Guarantee of SAFECO relating to the Exchange Capital Securities filed
as Exhibit 4.6 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated
October 17, 1997.
Exhibit 10.1 Five-Year Credit Agreement dated as of September 24, 1997, among SAFECO; Bank of
America National Trust and Savings Association, as Agent; Mellon Bank, N.A., as
Documentation Agent; The Chase Manhattan Bank, as Syndication Agent; and the various
co-agents, lead managers, and financial institutions identified in said Credit
Agreement as parties thereto.
The following management contracts and compensatory plan arrangements:
Exhibit 10.2 SAFECO Corporation Deferred Compensation Plan for Directors, filed as Exhibit 10 to
SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
Exhibit 10.3 Retirement Agreement between Richard E. Zunker and SAFECO Life Insurance Company dated
November 25, 1997.
Exhibit 10.4 Executive Severance Agreements between SAFECO and each of Roger H. Eigsti and Boh A.
Dickey dated May 23, 1984, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985; and the Form of Executive Severance
Agreements between SAFECO and each of Rod A. Pierson, James W. Ruddy, W. Randall
Stoddard, and Richard E. Zunker, in each case dated August 30, 1996, filed as Exhibit
10 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
Exhibit 10.5 SAFECO Long-Term Incentive Plan of 1997 filed as Exhibit 99.1 to SAFECO's Registration
Statement on Form S-8 (No. 333-26393) dated May 2, 1997.
Exhibit 10.6 Form of Stock Option Contract granted under the SAFECO Long-Term Incentive Plan of 1997.
Exhibit 10.7 Form of Restricted Stock Rights Award Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997.
Exhibit 10.8 Form of Performance Stock Rights Award Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997.
Exhibit 10.9 SAFECO Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as
amended January 31, 1990, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, and the Supplement to such Prospectus
dated November 8, 1990, filed as Exhibit 10 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990.
22
23
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1997 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included only in the electronic EDGAR filing
version of this 10-K. The Financial Data Schedule is not a separate financial
statement but a schedule that summarizes certain standard financial information
extracted directly from the financial statements in this filing.)
(b) Reports on Form 8-K
The Registrant filed three Forms 8-Ks during the quarter
ended December 31, 1997. The Registrant filed an 8-K dated October
1, 1997 under Item 2 (Acquisition and Disposition of Assets) and
Item 7 (Financial statements, Pro Forma Financial Information and
Exhibits) related to its completion of the acquisition of American
States Financial Corporation. The Registrant filed an 8-K dated
October 13, 1997 under Item 5 (Other Items), announcing its
preliminary review of earnings for the third quarter of 1997. The
Registrant filed an 8-K dated October 27, 1997 under Item 5 and
Item 7, presenting its third quarter 1997 earnings release
information.
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 27th day of March
1998.
SAFECO CORPORATION
-------------------------------------------
Registrant
/s/ ROGER H. EIGSTI
-------------------------------------------
Roger H. Eigsti, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998.
Name Title
- - - --------------------------------------------------------------------------------
/s ROGER H. EIGSTI Chairman and
- - - ---------------------------------- Chief Executive Officer
Roger H. Eigsti
/s BOH A. DICKEY President,
- - - ---------------------------------- Chief Operating Officer
Boh A. Dickey and Director
/s ROD A. PIERSON Senior Vice President,
- - - ---------------------------------- Chief Financial Officer
Rod A. Pierson and Secretary
/s H. PAUL LOWBER Vice President, Controller
- - - ---------------------------------- and Chief Accounting Officer
H. Paul Lowber
/s PHYLLIS J. CAMPBELL Director
- - - ----------------------------------
Phyllis J. Campbell
/s ROBERT S. CLINE Director
- - - ----------------------------------
Robert S. Cline
/s JOHN W. ELLIS Director
- - - ----------------------------------
John W. Ellis
24
25
Name Title
- - - --------------------------------------------------------------------------------
/s WILLIAM P. GERBERDING Director
- - - ----------------------------------
William P. Gerberding
/s JOSHUA GREEN III Director
- - - ----------------------------------
Joshua Green III
/s WILLIAM W. KRIPPAEHNE, JR. Director
- - - ----------------------------------
William W. Krippaehne, Jr.
/s WILLIAM G. REED, JR. Director
- - - ----------------------------------
William G. Reed, Jr.
/s JUDITH M. RUNSTAD Director
- - - ----------------------------------
Judith M. Runstad
/s PAUL W. SKINNER Director
- - - ----------------------------------
Paul W. Skinner
/s GEORGE H. WEYERHAEUSER Director
- - - ----------------------------------
George H. Weyerhaeuser
25
26
F-1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SAFECO Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SAFECO Corporation of our report dated February 13, 1998, included in the
1997 Annual Report to Shareholders of SAFECO Corporation.
Our audits also included the financial statement schedules of SAFECO
Corporation listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statement
(Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of
1997 of our report dated February 13, 1998, with respect to the consolidated
financial statements of SAFECO Corporation incorporated by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules, in this Annual Report (Form 10-K) for the year ended
December 31, 1997 of SAFECO Corporation.
ERNST & YOUNG LLP
Seattle, Washington
March 25, 1998
27
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND
SUBSIDIARIES F-2
December 31, 1997
- - - ----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property & Life & Credit Other and
ASSETS Casualty Health Real Estate Company Eliminations Consolidated
--------------------------------------------------------------------
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 7,135.3 $ 9,875.9 $- $- $ 132.0 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,708.6 -- -- -- 2,708.6
Marketable Equity Securities, at Market Value 1,742.1 39.3 -- -- 98.3 1,879.7
Mortgage Loans 12.0 663.7 -- -- (176.7) 499.0
Real Estate (At cost less accumulated depreciation) -- 3.6 587.0 -- (4.5) 586.1
Policy Loans -- 85.3 -- -- -- 85.3
Short-Term Investments 224.5 66.5 3.1 8.9 (168.3) 134.7
--------------------------------------------------------------------
Total Investments 9,113.9 13,442.9 590.1 8.9 (119.2) 23,036.6
Cash 96.1 246.3 -- 3.7 45.3 391.4
Accrued Investment Income 142.9 189.7 -- 3.5 0.9 337.0
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- -- 1,004.3 -- 1,004.3
Loans to Affiliates -- -- -- 162.7 (162.7) --
Premiums and Other Service Fees Receivable 925.3 12.4 9.4 -- 6.8 953.9
Other Notes and Accounts Receivable 18.0 37.0 17.1 0.3 (1.3) 71.1
Reinsurance Recoverables 268.3 42.7 -- -- -- 311.0
Deferred Policy Acquisition Costs 305.5 239.3 -- -- -- 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 207.9 1.6 2.4 0.5 25.6 238.0
Goodwill 1,261.0 35.4 0.4 -- 35.8 1,332.6
Other Assets 153.2 145.2 6.6 94.1 (57.4) 341.7
Separate Account Assets -- 905.4 -- -- -- 905.4
--------------------------------------------------------------------
Total $12,492.1 $15,297.9 $626.0 $1,278.0 $ (226.2) $29,467.8
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,310.5 $ 41.7 $ -- $ -- $ -- $ 4,352.2
Life Policy Liabilities -- 164.6 -- -- -- 164.6
Unearned Premiums 1,701.5 12.2 -- -- -- 1,713.7
Funds Held Under Deposit Contracts -- 11,989.1 -- -- -- 11,989.1
Debt:
Commercial Paper -- -- -- -- 812.8 812.8
Credit Company Borrowings - Non-Affiliates -- -- -- 892.0 -- 892.0
Credit Company Borrowings - Affiliates -- -- -- 195.0 (195.0) --
7.875% Notes Due 2005 -- -- -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- -- -- 200.0 200.0
Other Notes and Mortgages - Non-Affiliates -- -- 193.2 -- 61.9 255.1
Other Notes and Mortgages - Affiliates -- -- 289.0 -- (289.0) --
Other Liabilities 884.4 306.1 23.3 29.9 (20.4) 1,223.3
Income Taxes:
Current (13.5) 21.2 (12.1) (0.3) 14.0 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities) 192.6 172.9 28.8 43.7 8.9 446.9
Separate Account Liabilities -- 905.4 -- -- -- 905.4
--------------------------------------------------------------------
Total Liabilities 7,075.5 13,613.2 522.2 1,160.3 793.2 23,164.4
--------------------------------------------------------------------
Capital Securities -- -- -- -- 841.7 841.7
--------------------------------------------------------------------
Common Stock 25.0 11.0 -- 1.0 872.3 909.3
Additional Paid-In Capital 3,012.7 266.3 42.1 27.0 (3,348.1) --
Retained Earnings 1,463.1 1,098.1 61.7 89.7 586.5 3,299.1
Unrealized Appreciation of Investment Securities, Net of Tax 921.3 309.3 -- -- 28.2 1,258.8
Unrealized Loss from Foreign Currency Translation, Net of Tax (5.5) -- -- -- -- (5.5)
--------------------------------------------------------------------
Shareholders' Equity 5,416.6 1,684.7 103.8 117.7 (1,861.1) 5,461.7
--------------------------------------------------------------------
Total $12,492.1 $15,297.9 $626.0 $1,278.0 $ (226.2) $29,467.8
====================================================================
28
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND SUBSIDIARIES F-2
December 31, 1996 Continued
- - - ----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
ASSETS Property Life & Real Credit Other and
& Casualty Health Estate Company Eliminations Consolidated
----------------------------------------------------------------------
Investments:
Fixed Maturities Available-for-Sale, at Market Value $3,938.3 $ 7,857.5 $ -- $ -- $140.4 $11,936.2
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,488.3 -- -- -- 2,488.3
Marketable Equity Securities, at Market Value 1,196.0 23.1 -- -- 79.7 1,298.8
Mortgage Loans 1.8 588.3 -- -- (142.1) 448.0
Real Estate (At cost less accumulated depreciation) -- 4.4 553.8 -- (4.2) 554.0
Policy Loans -- 58.2 -- -- -- 58.2
Short-Term Investments 66.2 75.4 12.4 -- (48.1) 105.9
----------------------------------------------------------------------
Total Investments 5,202.3 11,095.2 566.2 -- 25.7 16,889.4
Cash 24.0 19.8 0.9 3.2 7.6 55.5
Accrued Investment Income 76.6 159.8 -- 3.3 1.1 240.8
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- -- 829.0 -- 829.0
Loans to Affiliates -- -- -- 153.2 (153.2) --
Premiums and Other Service Fees Receivable 440.6 12.8 8.2 -- 5.6 467.2
Other Notes and Accounts Receivable 12.5 11.3 20.3 0.3 (2.0) 42.4
Reinsurance Recoverables 112.3 25.2 -- -- -- 137.5
Deferred Policy Acquisition Costs 155.6 240.5 -- -- -- 396.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 141.9 1.4 1.6 0.5 25.9 171.3
Goodwill 0.8 1.5 0.4 -- 33.1 35.8
Other Assets 72.5 5.9 3.7 76.1 3.3 161.5
Separate Account Assets -- 491.2 -- -- -- 491.2
----------------------------------------------------------------------
Total $6,239.1 $12,064.6 $601.3 $1,065.6 $(52.9) $19,917.7
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $2,059.1 $ 29.2 $ -- $ -- $ -- $ 2,088.3
Life Policy Liabilities -- 149.6 -- -- -- 149.6
Unearned Premiums 938.1 8.8 -- -- -- 946.9
Funds Held Under Deposit Contracts -- 9,792.7 -- -- -- 9,792.7
Debt:
Credit Company Borrowings - Non-Affiliates -- -- -- 808.8 -- 808.8
Credit Company Borrowings - Affiliates -- -- -- 93.0 (93.0) --
7.875% Notes Due 2005 -- -- -- -- 200.0 200.0
Other Notes and Mortgages - Non-Affiliates -- -- 165.1 -- 59.6 224.7
Other Notes and Mortgages - Affiliates -- -- 235.3 -- (235.3) --
Other Liabilities 386.5 210.0 54.6 21.7 6.1 678.9
Income Taxes:
Current (4.8) (0.5) 11.2 (1.9) (0.5) 3.5
Deferred (Includes tax on unrealized appreciation
of investment securities) 253.8 104.2 17.9 37.4 4.5 417.8
Separate Account Liabilities -- 491.2 -- -- -- 491.2
----------------------------------------------------------------------
Total Liabilities 3,632.7 10,785.2 484.1 959.0 (58.6) 15,802.4
----------------------------------------------------------------------
Common Stock 20.0 6.0 -- 1.0 198.3 225.3
Additional Paid-In Capital 56.9 92.3 42.1 27.0 (218.3) --
Retained Earnings 1,861.2 1,020.1 75.1 78.6 7.2 3,042.2
Unrealized Appreciation of Investment Securities, Net of Tax 671.9 161.0 -- -- 18.5 851.4
Unrealized Loss from Foreign Currency Translation, Net of Tax (3.6) -- -- -- -- (3.6)
----------------------------------------------------------------------
Shareholders' Equity 2,606.4 1,279.4 117.2 106.6 5.7 4,115.3
----------------------------------------------------------------------
Total $6,239.1 $12,064.6 $601.3 $1,065.6 $(52.9) $19,917.7
======================================================================
29
Statement of Income - Supplemental Consolidating Information F-3
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1997
- - - ---------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property & Life & Real Other and
Casualty Health Estate Eliminations Consolidated
-------------------------------------------------------------------
REVENUES
Insurance:
Property and Casualty Earned Premiums $ 2,816.6 $ -- $ -- $ -- $ 2,816.6
Life and Health Premiums and Other Revenues -- 290.2 -- -- 290.2
-----------------------------------------------------------------
Total 2,816.6 290.2 -- -- 3,106.8
Real Estate -- -- 75.1 -- 75.1
Finance -- -- -- 86.5 86.5
Asset Management -- -- -- 27.1 27.1
Other -- -- -- 49.7 49.7
Net Investment Income 327.0 916.3 -- 1.4 1,244.7
Realized Investment Gain (Loss) 132.8 6.8 (28.3) 8.1 119.4
-----------------------------------------------------------------
Total 3,276.4 1,213.3 46.8 172.8 4,709.3
-----------------------------------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 1,960.0 856.2 -- -- 2,816.2
Commissions 429.1 95.2 -- -- 524.3
Nonrecurring 1997 Acquisition Charges 60.0 -- -- -- 60.0
Personnel Costs 210.2 56.2 13.7 49.6 329.7
Interest -- -- 23.3 78.5 101.8
Goodwill Amortization 11.0 0.5 -- 0.7 12.2
Other 191.8 67.2 28.5 32.4 319.9
Amortization of Deferred Policy Acquisition Costs 495.9 37.0 -- -- 532.9
Deferral of Policy Acquisition Costs (506.6) (53.7) -- -- (560.3)
-----------------------------------------------------------------
Total 2,851.4 1,058.6 65.5 161.2 4,136.7
-----------------------------------------------------------------
Income (Loss) Before Income Taxes 425.0 154.7 (18.7) 11.6 572.6
-----------------------------------------------------------------
Provision (Benefit) for Income Taxes:
Current 69.7 56.7 (17.4) (1.9) 107.1
Deferred 8.3 (4.0) 10.9 5.5 20.7
-----------------------------------------------------------------
Total 78.0 52.7 (6.5) 3.6 127.8
-----------------------------------------------------------------
Income (Loss) Before Distributions on Capital Securities 347.0 102.0 (12.2) 8.0 444.8
Distributions on Capital Securities, Net of Tax -- -- -- (14.8) (14.8)
-----------------------------------------------------------------
Net Income (Loss) $ 347.0 $ 102.0 $ (12.2) $ (6.8) $ 430.0
=================================================================
30
Statement of Cash Flows - Supplemental Consolidating Information F-4
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1997
- - - --------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property Other and
& Casualty Life & Health Real Estate Eliminations Consolidated
--------------------------------------------------------------------
OPERATING ACTIVITIES
Insurance Premiums Received $2,839.3 $ 224.0 $ -- $ -- $3,063.3
Dividends and Interest Received 334.6 830.4 2.1 82.5 1,249.6
Other Operating Receipts -- 32.6 74.5 88.4 195.5
Insurance Claims and Policy Benefits Paid (2,064.4) (359.0) -- -- (2,423.4)
Underwriting, Acquisition and Insurance Operating
Costs Paid (772.0) (220.5) -- (98.7) (1,091.2)
Interest Paid -- -- (23.6) (71.1) (94.7)
Other Operating Costs Paid -- -- (30.0) (62.6) (92.6)
Income Taxes Paid (79.4) (37.6) (5.9) 27.3 (95.6)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 258.1 469.9 17.1 (34.2) 710.9
--------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (638.0) (1,923.8) -- (17.0) (2,578.8)
Fixed Maturities Held-to-Maturity -- (199.6) -- -- (199.6)
Equities (246.4) (7.8) -- (7.0) (261.2)
Other Investments -- (137.5) (161.5) 57.4 (241.6)
Purchase of Subsidiaries, Net of Cash Acquired 21.4 118.2 -- (3,153.9) (3,014.3)
Maturities of Fixed Maturities Available-for-Sale 234.5 438.8 -- 20.1 693.4
Maturities of Fixed Maturities Held-to-Maturity -- 9.0 -- (0.1) 8.9
Sales of:
Fixed Maturities Available-for-Sale 822.6 883.7 -- 6.3 1,712.6
Fixed Maturities Held-to-Maturity -- -- -- -- --
Equities 487.0 13.2 -- 10.4 510.6
Other Investments 0.2 71.5 54.6 2.0 128.3
Net Decrease (Increase) in Short-Term Investments (108.1) 21.0 9.2 215.6 137.7
Finance Receivables Originated or Acquired -- -- -- (489.6) (489.6)
Principal Payments Received on Finance Receivables -- -- -- 317.3 317.3
Other (35.4) (51.0) (1.5) (58.8) (146.7)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 537.8 (764.3) (99.2) (3,097.3) (3,423.0)
--------------------------------------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,403.5 -- -- 1,403.5
Return of Funds Held Under Deposit Contracts -- (866.6) -- -- (866.6)
Proceeds from Notes and Mortgage Borrowings -- -- 52.5 158.5 211.0
Repayment of Notes and Mortgage Borrowings -- -- (6.8) (2.4) (9.2)
Net Proceeds from Short-Term Borrowings 17.2 5.0 37.0 883.7 942.9
Proceeds from Capital Securities -- -- -- 832.2 832.2
Proceeds from Common Stock Secondary Offering -- -- -- 677.2 677.2
Common Stock Reacquired -- -- -- (10.7) (10.7)
Dividends Paid to Shareholders (741.0) (21.0) (1.6) 609.5 (154.1)
Other -- -- 0.1 21.7 21.8
--------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (723.8) 520.9 81.2 3,169.7 3,048.0
--------------------------------------------------------------------
Net Increase (Decrease) in Cash 72.1 226.5 (0.9) 38.2 335.9
Cash at the Beginning of Year 24.0 19.8 0.9 10.8 55.5
--------------------------------------------------------------------
Cash at the End of the Year $ 96.1 $ 246.3 $ -- $ 49.0 $ 391.4
--------------------------------------------------------------------
31
Summary of Investments Other Than Investments in Related Parties F-5
SAFECO CORPORATION AND SUBSIDIARIES Schedule I
December 31, 1997
- - - ------------------------------------------------------------------------------------------------------------------
(In Millions)
Amount at Which
Shown in the
Type of Investment Cost Market Value Balance Sheet
- - - ------------------------------------------------------------------------------------------------------------------
Fixed Maturities Available-for-Sale
Bonds:
United States Government and Government
Agencies and Authorities $ 1,489.0 $ 1,572.7 $ 1,572.7
States, Municipalities and Political
Subdivisions 4,969.2 5,446.4 5,446.4
Mortgage-Backed Securities 3,165.4 3,304.2 3,304.2
Foreign Governments 248.8 297.1 297.1
Public Utilities 1,623.8 1,729.6 1,729.6
All Other Corporate Bonds 4,342.1 4,535.4 4,535.4
Redeemable Preferred Stocks 248.5 257.8 257.8
---------------------------------------
Total Fixed Maturities Classified as Available-for-Sale(1) 16,086.8 $17,143.2 17,143.2
---------------------------------------
Fixed Maturities Held-to-Maturity
Bonds:
United States Government and Government
Agencies and Authorities 257.9 $ 332.1 257.9
States, Municipalities and Political
Subdivisions 120.4 135.3 120.4
Mortgage-Backed Securities 300.9 336.4 300.9
Foreign Governments 148.9 189.2 148.9
Public Utilities 417.5 495.8 417.5
All Other Corporate Bonds 1,463.0 1,671.1 1,463.0
---------------------------------------
Total Fixed Maturities Classified as Held-to-Maturity(1) 2,708.6 $ 3,159.9 2,708.6
---------------------------------------
Equity Securities
Common Stocks:
Public Utilities 60.7 $ 117.4 117.4
Banks, Trust and Insurance Companies 62.1 236.1 236.1
Industrial, Miscellaneous and All Other 612.5 1,262.4 1,262.4
Non-Redeemable Preferred Stocks 233.7 263.8 263.8
---------------------------------------
Total Equity Securities 969.0 $ 1,879.7 1,879.7
---------------------------------------
Other
Mortgage Loans on Real Estate(1) 499.0 499.0
Real Estate (Net of depreciation)(1) 586.1 586.1
Policy Loans 85.3 85.3
Short-Term Investments 134.7 134.7
----------- ---------
Total Other 1,305.1 1,305.1
----------- ---------
Total Investments $21,069.5 $23,036.6
=========== =========
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate that have not produced income for the last twelve months is
less than one percent of the total of such investments at December 31,
1997.
32
Balance Sheet
SAFECO CORPORATION
(Parent Company Only) F-6
Schedule II
December 31 1997 1996
- - - -----------------------------------------------------------------------------------
(In Millions)
ASSETS
Investments:
Stock of Subsidiaries - At Cost Plus Equity in
Undistributed Earnings Since Acquisition
(Includes unrealized appreciation of investment
securities, net of tax, held by subsidiaries) $7,440.1 $4,168.9
Fixed Maturities Available-for-Sale,
at Market Value
(Amortized cost: 1997 - $92.9; 1996 - $108.3) 94.5 108.6
Marketable Equity Securities, at Market Value
(Cost: 1997 - $37.1; 1996 - $41.9) 73.9 64.4
Notes Receivable - SAFECO Credit -- 15.0
Short-Term Investments 8.7 5.3
-------------------------
Total Investments 7,617.2 4,362.2
Cash 25.5 0.2
Dividends Receivable
from Affiliated Companies 45.5 37.4
Accounts Receivable
from Affiliated Companies -- 9.5
Income Taxes - Current -- 1.6
Other Assets 20.1 6.4
-------------------------
Total $7,708.3 $4,417.3
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable to Affiliated Companies $ 0.8 $ 1.8
Accounts and Interest Payable 43.4 4.5
Income Taxes:
Current 12.9 --
Deferred 13.5 9.1
Dividends Payable to Shareholders 45.2 36.6
Debt:
Commercial Paper 812.8 --
Medium-Term Notes Due 2002 50.0 50.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 --
8.072% Junior Subordinated Debentures
(Capital Securities) 868.0 --
-------------------------
Total Liabilities 2,246.6 302.0
-------------------------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options:
1997 - 7.9; 1996 - 3.3
Shares Issued and Outstanding:
1997 - 141.2; 1996 - 126.3 909.3 225.3
Retained Earnings 3,299.1 3,042.2
Unrealized Appreciation of Investment
Securities, Net of Tax 1,258.8 851.4
Unrealized Loss from Foreign Currency
Translation, Net of Tax (5.5) (3.6)
-------------------------
Shareholders' Equity 5,461.7 4,115.3
-------------------------
Total $7,708.3 $4,417.3
=========================
33
Statement of Income F-7
SAFECO CORPORATION Schedule II
(Parent Company Only)
Year Ended December 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------
(In Millions)
REVENUES
Dividends -Non-Affiliates $ 2.8 $ 3.4 $ 5.2
Interest -Affiliates 0.9 1.5 0.9
-Others 20.0 6.1 11.4
Equity in Loss of Unconsolidated Affiliate -- (1.0) (1.0)
Realized Gain from Security Investments 7.9 17.3 6.6
------------------------------------------
Total 31.6 27.3 23.1
------------------------------------------
EXPENSES
Interest 74.3 19.3 30.7
Other 0.8 0.6 0.6
------------------------------------------
Total 75.1 19.9 31.3
------------------------------------------
Income (Loss) Before Income Taxes (43.5) 7.4 (8.2)
Provision (Benefit) for Income Taxes
(Includes provision on realized gain:
1997 - $2.8; 1996 - $6.1; 1995 - $2.3) (16.0) 1.8 (4.1)
------------------------------------------
Income (Loss) Before Equity in Earnings
of Subsidiaries (27.5) 5.6 (4.1)
Equity in Earnings of Subsidiaries
(Includes dividends accrued and received) 457.5 433.4 403.1
------------------------------------------
Consolidated Net Income $ 430.0 $ 439.0 $ 399.0
==========================================
Dividends Accrued and Received From Subsidiaries (Cash):
SAFECO Insurance Company of America $ 383.0 $ 75.0 $ 69.0
General Insurance Company of America 316.5 45.5 45.0
First National Insurance Company of America 29.5 4.0 4.0
SAFECO National Insurance Company 4.5 5.0 3.5
SAFECO Insurance Company of Illinois 12.0 12.0 10.0
SAFECO Life Insurance Company 16.0 4.0 4.0
SAFECO Administrative Services, Inc. 0.5 0.6 0.6
SAFECO Properties, Inc. 1.2 1.4 1.5
SAFECO Credit Company, Inc. 3.0 2.2 1.9
SAFECO Asset Management Company -- -- 1.0
SAFECO Capital Trust 1.0 -- --
------------------------------------------
Total $ 767.2 $ 149.7 $ 140.5
==========================================
34
Statement of Cash Flows F-8
SAFECO CORPORATION Schedule II
(Parent Company Only)
Year Ended December 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------
(In Millions)
OPERATING ACTIVITIES
Dividends and Interest Received -Affiliates $ 760.1 $ 148.6 $ 138.9
-Others 23.8 11.1 16.4
Interest Paid (34.6) (19.3) (33.0)
Other Operating Costs Paid (0.3) (0.3) (1.6)
Income Taxes Received (Paid) 31.6 (2.2) 5.5
------------------------------------------
Net Cash Provided by Operating Activities 780.6 137.9 126.2
------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale -- (45.9) --
Equities -- (5.0) (3.1)
Other Investments -- -- (211.8)
Maturities of Fixed Maturities Available-for-Sale 10.6 0.8 0.8
Acquisitions, Net of Cash Acquired (3,157.2) -- --
Sales of:
Fixed Maturities Available-for-Sale 4.3 16.2 9.2
Equities 10.3 42.9 22.7
Other Investments -- -- 196.8
Net Decrease (Increase) in Short-Term Investments 18.9 (5.8) (5.6)
Other -- 2.3 --
------------------------------------------
Net Cash Provided by (Used in) Investing Activities (3,113.1) 5.5 9.0
------------------------------------------
FINANCING ACTIVITIES
Proceeds from Notes and Mortgage Borrowings 196.1 -- 198.7
Repayment of Notes and Mortgage Borrowings -- -- (201.4)
Net Proceeds from Short-Term Borrowings 811.2 -- --
Proceeds from Junior Subordinated Debentures (Capital Securities) 832.2 -- --
Proceeds from Common Stock Secondary Offering 677.2 -- --
Common Stock Reacquired (10.7) (9.6) (8.7)
Dividends Paid to Stockholders (154.1) (139.9) (128.5)
Capital Contributions to Affiliates -- -- (1.0)
Other 5.9 6.2 5.8
------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,357.8 (143.3) (135.1)
------------------------------------------
Net Increase in Cash 25.3 0.1 0.1
Cash at the Beginning of Year 0.2 0.1 --
------------------------------------------
Cash at the End of Year $ 25.5 $ 0.2 $ 0.1
==========================================
35
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31
- - - ------------------------------------------------------------------------------------------------
(In Millions) Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts)
- - - ----------------------------- ------------------------------------------------------------------
1997
Property and Casualty:
Personal $ 165.7 $ 1,414.8 $ 913.2
Commercial and Surety 139.8 2,895.7 788.3
-------------------------------------------
Total 305.5 4,310.5 1,701.5
-------------------------------------------
Life and Health:
Financial Services 165.9 133.8 9.8 $ 8,579.4
Employee Benefits 73.4 72.5 2.4 3,409.7
-------------------------------------------------------------
Total 239.3 206.3 12.2 11,989.1
-------------------------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------------------------
Consolidated Totals $ 544.8 $ 4,516.8 $ 1,713.7 $11,989.1
=============================================================
1996
Property and Casualty:
Personal $ 112.5 $ 1,022.0 $ 617.6
Commercial and Surety 43.1 1,037.1 320.5
-------------------------------------------
Total 155.6 2,059.1 938.1
-------------------------------------------
Life and Health:
Financial Services 163.8 108.6 6.4 $ 6,438.4
Employee Benefits 76.7 70.2 2.4 3,354.3
-------------------------------------------------------------
Total 240.5 178.8 8.8 9,792.7
-------------------------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------------------------
Consolidated Totals $ 396.1 $ 2,237.9 $ 946.9 $ 9,792.7
=============================================================
Year Ended December 31
- - - -----------------------------------------------------------------------------------------------------------------------------
(In Millions)
Other Operating
Costs (Including
Benefits, Amortization of Dividends to
Premiums and Claims, Losses Deferred Policy Policyholders
Service Fee Net Investment and Adjustment Acquisition and Goodwill Net Premiums
Segment Revenues Income (1) Expenses Costs Amortization) Written
- - - --------------------------------------------------------------------------------------------------------------------------------
1997
Property and Casualty:
Personal $ 1,930.7 $ 1,361.0 $ 333.2 $ 212.8 $ 1,973.5
Commercial and Surety 885.9 599.0 162.7 182.7 854.7
-------------- --------------- -------------- ------------------------------
Total 2,816.6 $ 327.0 1,960.0 495.9 395.5 (2) $ 2,828.2
------------------------------------------------------------------------------- ============
Life and Health:
Financial Services 72.9 626.8 528.7 16.3 72.5
Employee Benefits 217.3 289.5 327.5 20.7 92.9
-------------------------------------------------------------------------------
Total 290.2 916.3 856.2 37.0 165.4
-------------------------------------------------------------------------------
Real Estate - - - - 65.5
Credit - - - - 74.7
Other and Eliminations - 1.4 - - 86.5
-------------------------------------------------------------------------------
Consolidated Totals $ 3,106.8 $ 1,244.7 $ 2,816.2 $ 532.9 $ 787.6
===============================================================================
1996
Property and Casualty:
Personal $ 1,650.7 $ 1,204.5 $ 292.9 $ 148.3 $ 1,676.3
Commercial and Surety 624.7 376.0 98.3 115.5 636.8
------------- --------------- -------------- ------------------------------
Total 2,275.4 $ 281.6 1,580.5 391.2 263.8 $ 2,313.1
------------------------------------------------------------------------------ ============
Life and Health:
Financial Services 50.7 554.8 459.2 13.7 57.4
Employee Benefits 215.2 281.9 323.0 21.9 90.7
-------------------------------------------------------------------------------
Total 265.9 836.7 782.2 35.6 148.1
-------------------------------------------------------------------------------
Real Estate - - - - 66.9
Credit - - - - 65.2
Other and Eliminations - (1.6) - - 53.4
-------------------------------------------------------------------------------
Consolidated Totals $ 2,541.3 $ 1,116.7 $ 2,362.7 $ 426.8 $ 597.4
===============================================================================
36
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31 Continued
- - - -----------------------------------------------------------------------------------
(In Millions)
Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts)
- - - ----------------------------- ----------------------------------------------------
1995
Property and Casualty:
Personal $ 106.7 $1,112.5 $ 591.1
Commercial and Surety 39.2 1,068.3 311.5
---------------------------------
Total 145.9 2,180.8 902.6
---------------------------------
Life and Health:
Financial Services 143.2 109.7 6.3 $5,515.4
Employee Benefits 67.3 70.8 1.9 3,241.0
-------------------------------------------
Total 210.5 180.5 8.2 8,756.4
-------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------
Consolidated Totals $ 356.4 $2,361.3 $ 910.8 $8,756.4
===========================================
Year Ended December 31
- - - -------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Other Operating
Costs (Including
Benefits, Amortization of Dividends to
Premiums and Claims, Losses Deferred Policy Policyholders
Service Fee Net Investment and Adjustment Acquisition and Goodwill Net Premiums
Segment Revenues Income (1) Expenses Costs Amortization) Written
- - - ----------------------------- --------------------------------------------------------------------------------------------
1995
Property and Casualty:
Personal $ 1,562.7 $ 1,143.2 $ 281.7 $ 140.3 $ 1,599.7
Commercial and Surety 599.4 383.8 94.8 112.0 607.3
----------------- -----------------------------------------------------------
Total 2,162.1 $ 291.5 1,527.0 376.5 252.3 $ 2,207.0
--------------------------------------------------------------------------- ===============
Life and Health:
Financial Services 47.2 494.7 403.5 12.2 57.8
Employee Benefits 214.4 283.5 320.0 20.2 90.5
---------------------------------------------------------------------------
Total 261.6 778.2 723.5 32.4 148.3
---------------------------------------------------------------------------
Real Estate - - - - 65.9
Credit - - - - 58.5
Other and Eliminations - 5.6 - - 56.7
---------------------------------------------------------------------------
Consolidated Totals $ 2,423.7 $ 1,075.3 $ 2,250.5 $ 408.9 $ 581.7
===========================================================================
(1) Property and casualty insurance companies' investments are available
for payment of claims and benefits for all product lines within the
segments; therefore, such investments and the related investment income
have not been identified with specific segments. In the life and health
companies, a major portion of investment income and assets is
specifically identifiable within an industry segment. The remainder of
these amounts has been allocated in proportion to the mean policy
reserves and liabilities identified with each segment.
(2) Property and casualty other operating costs for 1997 include $60.0
million of nonrecurring acquisition charges related to SAFECO's
October 1, 1997 acquisition of American States.
37
Reinsurance F-10
SAFECO CORPORATION AND SUBSIDIARIES Schedule IV
Year Ended December 31
- - - ------------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Percentage
Ceded to Assumed of Amount
Other from Other Assumed to
Gross Amount Companies Companies Net Amount Net
-------------------------------------------------------------------------------------------
1997
Life Insurance In Force at Year End $ 43,499.7 $ (3,788.5) $ 210.3 $ 39,921.5 0.5%
==================================================================================
Premiums earned:
Life Insurance $ 146.9 $ (10.1) $ 0.2 $ 137.0 0.1%
Accident/Health Insurance 160.3 (9.5) 2.4 153.2 1.6%
Property/Casualty Insurance 2,945.3 (155.8) 27.1 2,816.6 1.0%
----------------------------------------------------------------------------------
Total $ 3,252.5 $ (175.4) $ 29.7 $ 3,106.8 1.0%
==================================================================================
1996
Life Insurance In Force at Year End $ 28,524.8 $ (1,791.1) $ 80.9 $ 26,814.6 0.3%
==================================================================================
Premiums earned:
Life Insurance $ 120.8 $ (5.6) $ 0.2 $ 115.4 0.2%
Accident/Health Insurance 158.6 (8.1) -- 150.5 0.0%
Property/Casualty Insurance 2,404.9 (152.6) 23.1 2,275.4 1.0%
----------------------------------------------------------------------------------
Total $ 2,684.3 $ (166.3) $ 23.3 $ 2,541.3 0.9%
==================================================================================
1995
Life Insurance In Force at Year End $ 28,171.4 $ (1,303.6) $ 15.5 $ 26,883.3 0.1%
==================================================================================
Premiums earned:
Life Insurance $ 107.5 $ (4.7) $ 0.1 $ 102.9 0.1%
Accident/Health Insurance 169.9 (5.6) (5.6) 158.7 -3.5%
Property/Casualty Insurance 2,300.9 (160.4) 21.6 2,162.1 1.0%
----------------------------------------------------------------------------------
Total $ 2,578.3 $ (170.7) $ 16.1 $ 2,423.7 0.7%
==================================================================================
38
Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations
SAFECO CORPORATION
December 31 F-11
Schedule VI
- - - ----------------------------------------------------------------------------------------------------------------------
(In Millions)
Reserve For Discount
Deferred Unpaid Losses Deducted
Affiliation Policy and from
with Acquisition Adjustment Loss Unearned
Registrant Costs Expenses Reserves Premiums
- - - -----------------------------------------------------------------------------------------
Property/Casualty
Subsidiaries:
1997 $ 305.5 $ 4,310.5 $ -- $ 1,701.5
1996 $ 155.6 $ 2,059.1 $ -- $ 938.1
1995 $ 145.9 $ 2,180.8 $ -- $ 902.6
Year Ended December 31
- - - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Losses and Adjustment Amortization
Expenses Incurred of Deferred Paid Losses
Affiliation Net Related to: Policy and
with Earned Investment Acquisition Adjustment Net Premiums
Registrant Premiums Income Current Year Prior Years Costs Expenses Written
- - - ----------------------------------------------------------------------------------------------------------------------------------
Property/Casualty
Subsidiaries:
1997 $ 2,816.6 $ 327.0 $ 1,969.5 $ 30.5(1) $ 495.9 $ 2,078.4 $ 2,828.2
1996 $ 2,275.4 $ 281.6 $ 1,658.2 $ (77.7) $ 391.2 $ 1,694.9 $ 2,313.1
1995 $ 2,162.1 $ 291.5 $ 1,586.7 $ (59.7) $ 376.5 $ 1,549.8 $ 2,207.0
(1) The 1997 increase in losses and adjustment expenses incurred related to
prior years of $30.5 million includeds a nonrecurring $40.0 million
reserve increase related to the American States acquisition.
39
SAFECO CORPORATION AND SUBSIDIARIES
Exhibit Index F-12
- - - --------------------------------------------------------------------------------
Exhibit 2.1* Agreement and Plan of Merger dated as of June 6,
1997 by and among American States Financial
Corporation, SAFECO Corporation ("SAFECO") and
ASFC Acquisition Co. (filed as Exhibit 2.1 to
SAFECO's Report on Form 8-K dated June 6, 1997),
is incorporated herein by this reference.
SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of
all omitted schedules to the foregoing Agreement
and Plan of Merger.
Exhibit 3.1* Bylaws (as last amended May 7, 1997), filed as
Exhibit 3.1 to SAFECO's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File
No. 1-6563), are incorporated herein by this
reference.
Exhibit 3.2* Restated Articles of Incorporation (as amended
May 7, 1997), filed as Exhibit 3.2 to SAFECO's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (File No. 1-6563), are
incorporated herein by this referece.
Exhibit 4.1 SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of
all instruments defining rights of holders of
long-term debt of SAFECO and its consolidated
subsidiaries.
Exhibit 4.2* Indenture, dated as of July 15, 1997, between
SAFECO and The Chase Manhattan Bank, as Trustee,
filed as Exhibit 4.2 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(File No. 1-6563) is incorporated herein by this
reference.
Exhibit 4.3* Form of Certificate of Exchange Junior
Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 4.4* Certificate of Trust of SAFECO Capital Trust I
dated June 18, 1997, filed as Exhibit 4.4 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 1-6563),
is incorporated herein by this reference.
Exhibit 4.5* Amended and Restated Declaration of Trust of
SAFECO Capital Trust I dated as of July 15, 1997,
filed as Exhibit 4.5 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997
(File No. 1-6563) is incorporated herein by this
reference.
Exhibit 4.6* Form of Exchange Capital Security Certificate for
SAFECO Capital Trust I filed as Exhibit 4.5 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 4.7* Form of Exchange Guarantee of SAFECO relating to
the Exchange Capital Securities filed as Exhibit
4.6 to SAFECO's Registration Statement on Form
S-4 (No. 333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 10.1* Five-Year Credit Agreement dated as of September
24, 1997, among SAFECO; Bank of America National
Trust and Savings Association, as Agent; Mellon
Bank, N.A., as Documentation Agent; The Chase
Manhattan Bank, as Syndication Agent; and the
various co-agents, lead managers, and financial
institutions identified in said Credit Agreement
as parties thereto.
40
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index (continued)
- - - --------------------------------------------------------------------------------
Exhibit 10.2* SAFECO Corporation Deferred Compensation Plan for
Directors, filed as Exhibit 10 to SAFECO's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 1-6563), is
incorporated herein by this reference.
Exhibit 10.3* Retirement Agreement between Richard E. Zunker
and SAFECO Life Insurance Company dated November
25, 1997.
The following documents are incorporated herein
by this reference.
Exhibit 10.4* Executive Severance Agreements between SAFECO and
each of Roger H. Eigsti and Boh A. Dickey dated
May 23, 1984, filed as Exhibit 10 to SAFECO's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1985 (File No. 1-6563); and
the Form of Executive Severance Agreements
between SAFECO and each of Rod A. Pierson,
James W. Ruddy, W. Randall Stoddard, and Richard
E. Zunker, in each case dated August 30, 1996,
filed as Exhibit 10 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1996.
Exhibit 10.5* SAFECO Long-Term Incentive Plan of 1997 filed as
Exhibit 99.1 to SAFECO's Registration Statement
on Form S-8 (No. 333-26393) dated May 2, 1997,
is incorporated herein by this reference.
Exhibit 10.6* Form of Stock Option Contract granted under the
SAFECO Long-Term Incentive Plan of 1997.
Exhibit 10.7* Form of Restricted Stock Rights Award Agreement
granted under the SAFECO Long-Term Incentive Plan
of 1997.
Exhibit 10.8* Form of Performance Stock Rights Award Agreement
granted under the SAFECO Long-Term Incentive Plan
of 1997.
Exhibit 10.9* SAFECO Incentive Plan of 1987 contained in the
Prospectus dated November 10, 1989, as amended
January 31, 1990, filed as Exhibit 10 to SAFECO's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 1-6563), and
the Supplement to such Prospectus dated
November 8, 1990, filed as Exhibit 10 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
1-6563) are incorporated herein by this
reference.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13* 1997 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included
only in the electronic EDGAR filing version of
this 10-K. The Financial Data Schedule is not a
separate financial statement but a schedule that
summarizes certain standard financial information
extracted directly from the financial statements
in this filing.)
*Copies of these exhibits are available without charge by making a written
request to:
Rod A. Pierson
Senior Vice President and Chief Finanacial Officer
SAFECO Corporation
SAFECO Plaze
Seattle, Washington 98185