SAFECO CORP - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended March 31, 2003

[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Transition Period from to .

Commission File Number: 1-6563

Safeco Corporation

State of Incorporation: Washington
I.R.S. Employer I.D. No.: 91-0742146

Address of Principal Executive Offices: Safeco Plaza, Seattle, Washington 98185
Telephone: 206-545-5000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES [X]. NO [ ].

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [X]. NO [ ].

Common Stock, No Par Value 138,384,390 shares were outstanding at April 30, 2003.

TABLE OF CONTENTS


		Consolidated Statements of Income
		Consolidated Balance Sheets
		Consolidated Statements of Cash Flows
		Consolidated Statements of Shareholders’ Equity
		Consolidated Statements of Comprehensive Income (Loss)
		Condensed Notes to Consolidated Financial Statements
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 4 – CONTROLS AND PROCEDURES
PART II – OTHER INFORMATION
	ITEM 1 – LEGAL PROCEEDINGS
	ITEM 6 – EXHIBITS AND REPORTS ON FORM 8-K
Signatures
Certification of Chief Executive Officer
Exhibit 10.1
Exhibit 99.1
Exhibit 99.2

Safeco Corporation and Subsidiaries

CONTENTS


Item	Description	Page

Part I	Financial Information
1	Financial Statements
	Consolidated Statements of Income for the three months ended March 31, 2003 and 2002	3
	Consolidated Balance Sheets March 31, 2003 and December 31, 2002	4
	Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002	6
	Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2003 and 2002	8
	Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2003 and 2002	8
	Condensed Notes to Consolidated Financial Statements	9
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
4	Controls and Procedures	43
Part II	Other Information
1	Legal Proceedings	44
6	Exhibits and Reports on Form 8-K	44
Signatures		46
Certifications		47

Safeco Corporation and Subsidiaries

Consolidated Statements of Income


THREE MONTHS ENDED MARCH 31		2003			2002

(In Millions, Except Per Share Amounts)		(Unaudited)
REVENUES
Property & Casualty Earned Premiums		$	1,163.1		$	1,099.5
Life & Investments Premiums and Other Revenues			223.9			165.1
Net Investment Income			422.5			414.7
Net Realized Investment Gains (Losses)			(49.9	)		30.6
Other			2.7			2.7

Total			1,762.3			1,712.6

EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits			1,132.1			1,159.6
Other Underwriting and Operating Expenses			252.5			223.4
Amortization of Deferred Policy Acquisition Costs			216.2			209.5
Interest Expense			17.1			16.0
Intangibles and Goodwill Amortization			3.7			3.9
Restructuring Charges			—			6.6

Total			1,621.6			1,619.0

Income Before Income Taxes and Distributions on Capital Securities			140.7			93.6
Provision for Income Taxes			39.5			18.8

Income Before Distributions on Capital Securities			101.2			74.8
Distributions on Capital Securities, Net of Taxes			(11.2	)		(11.2	)

Net Income		$	90.0		$	63.6

INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock – Diluted & Basic		$	0.65		$	0.50

Dividends Declared		$	.185		$	.185

Average Number of Shares Outstanding During the Period: Diluted			138.7			128.1
	Basic		138.3			127.8

See condensed notes to consolidated financial statements.

Safeco Corporation and Subsidiaries

Consolidated Balance Sheets


			March 31		December 31
			2003		2002

(In Millions)				(Unaudited)
ASSETS
Investments
	Available-for-Sale Securities:
		Fixed Maturities, at Fair Value (Cost or amortized cost: $22,743.6; $22,646.1)	$	24,514.7	$	24,278.0
		Marketable Equity Securities, at Fair Value (Cost: $784.5; $777.2)		1,043.8		1,082.5
	Mortgage Loans			930.8		925.9
	Other Invested Assets			159.6		173.8
	Short-Term Investments			603.1		311.0

Total Investments				27,252.0		26,771.2
Cash and Cash Equivalents				215.3		188.5
Accrued Investment Income				348.1		336.3
Premiums and Service Fees Receivable				1,066.8		1,047.1
Other Notes and Accounts Receivable				223.4		162.3
Current Income Taxes Recoverable				3.9		26.2
Deferred Income Taxes				79.4		124.6
Reinsurance Recoverables				553.8		578.8
Deferred Policy Acquisition Costs				639.1		626.3
Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $296.4; $319.7)				477.9		488.7
Intangibles and Goodwill				186.6		190.0
Other Assets				270.6		259.8
Securities Lending Collateral				3,278.4		2,957.0
Separate Account Assets				850.8		899.2

Total Assets			$	35,446.1	$	34,656.0

See condensed notes to consolidated financial statements.

Safeco Corporation and Subsidiaries

Consolidated Balance Sheets


	March 31		December 31
	2003		2002

(In Millions)		(Unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Property & Casualty Loss and Loss Adjustment Expense Reserves	$	4,914.2	$	4,998.5
Accident and Health Reserves		157.2		170.0
Life Policy Liabilities		343.8		339.9
Unearned Premiums		1,893.2		1,847.5
Funds Held Under Deposit Contracts		15,889.4		15,655.4
Debt		1,311.8		1,123.8
Other Liabilities		1,401.4		1,389.3
Securities Lending Payable		3,278.4		2,957.0
Separate Account Liabilities		850.8		899.2

Total Liabilities		30,040.2		29,380.6

Commitments and Contingencies		—		—
Corporation-Obligated, Mandatorily Redeemable Capital Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures of the Corporation (Capital Securities)		843.9		843.8

Preferred Stock, No Par value
Shares Authorized: 10
Shares Issued and Outstanding: None		—		—
Common Stock, No Par Value
Shares Authorized: 300
Shares Reserved for Options: 11.9; 12.0
Shares Issued and Outstanding: 138.3; 138.2		1,180.5		1,178.1
Retained Earnings		2,136.5		2,072.2
Accumulated Other Comprehensive Income, Net of Taxes		1,245.0		1,181.3

Total Shareholders’ Equity		4,562.0		4,431.6

Total Liabilities and Shareholders’ Equity	$	35,446.1	$	34,656.0

See condensed notes to consolidated financial statements.

Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows


THREE MONTHS ENDED MARCH 31		2003			2002

(In Millions)		(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received		$	1,339.0		$	1,153.9
Dividends and Interest Received			371.2			391.6
Other Operating Receipts			52.5			54.2
Insurance Claims and Policy Benefits Paid			(983.9	)		(945.7	)
Underwriting, Acquisition and Insurance Operating Costs Paid			(548.3	)		(484.6	)
Interest Paid and Distributions on Capital Securities			(48.2	)		(53.4	)
Income Taxes Received (Paid)			0.4			(10.4	)

Net Cash Provided by Operating Activities			182.7			105.6

INVESTING ACTIVITIES
Purchases of
	Fixed Maturities Available-for-Sale		(1,712.3	)		(1,202.5	)
	Equity Securities Available-for-Sale		(34.4	)		(49.9	)
	Other Invested Assets		(22.2	)		(25.6	)
Issuance of Mortgage Loans			(27.4	)		(16.5	)
Issuance of Policy Loans			(6.2	)		(5.7	)
Maturities of Fixed Maturities Available-for-Sale			815.2			377.1
Sales of
	Fixed Maturities Available-for-Sale		818.4			263.4
	Equity Securities Available-for-Sale		30.7			65.1
	Other Invested Assets		31.4			4.5
Repayment of Mortgage Loans			22.4			19.4
Repayment of Policy Loans			6.8			7.0
Net (Increase) Decrease in Short-Term Investments			(292.1	)		479.5
Other, Net			4.4			(7.0	)

Net Cash Used in Investing Activities			(365.3	)		(91.2	)

FINANCING ACTIVITIES
Funds Received Under Deposit Contracts			339.3			336.1
Return of Funds Held Under Deposit Contracts			(293.2	)		(300.7	)
Proceeds from Notes			495.9			—
Repayment of Notes			(309.2	)		(8.5	)
Net Repayment of Commercial Paper			—			(4.2	)
Common Stock Reacquired			—			(1.4	)
Dividends Paid to Shareholders			(25.6	)		(23.6	)
Other, Net			2.2			3.3

Net Cash Provided by Financing Activities			209.4			1.0

Net Increase in Cash and Cash Equivalents			26.8			15.4
Cash and Cash Equivalents Beginning of Period			188.5			269.3

Cash and Cash Equivalents End of Period		$	215.3		$	284.7

See condensed notes to consolidated financial statements.

Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows –
Reconciliation of Net Income to Net Cash Provided by Operating Activities


THREE MONTHS ENDED MARCH 31		2003			2002

(In Millions)		(Unaudited)
Net Income		$	90.0		$	63.6

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
	Net Realized Investment (Gains) Losses		49.9			(30.6	)
	Amortization of Fixed Maturity Investments		(14.0	)		(13.4	)
	Amortization and Depreciation		19.0			21.1
	Deferred Income Tax Provision		11.1			12.2
	Interest Expense on Deposit Contracts		210.9			209.0
	Other, Net		(19.0	)		(19.9	)
Changes in
	Accrued Interest on Accrual Bonds		(11.3	)		(11.5	)
	Accrued Investment Income		(11.8	)		(23.2	)
	Deferred Policy Acquisition Costs		(12.8	)		(11.4	)
	Property & Casualty Loss and Loss Adjustment Expense Reserves		(84.3	)		23.3
	Accident and Health Reserves		(12.8	)		(5.3	)
	Life Policy Liabilities		3.9			(1.7	)
	Unearned Premiums		45.7			(9.4	)
	Current Income Taxes Recoverable		22.3			(6.9	)
	Other Assets and Liabilities		(104.1	)		(90.3	)

Total Adjustments			92.7			42.0

Net Cash Provided by Operating Activities		$	182.7		$	105.6

There were no significant non-cash financing or investing activities for the three months ended March 31, 2003 and 2002.

See condensed notes to consolidated financial statements.

Safeco Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity


THREE MONTHS ENDED MARCH 31	2003			2002

(In Millions)	(Unaudited)
COMMON STOCK
Balance at Beginning of Period	$	1,178.1		$	841.9
Stock Issued for Options and Rights		2.4			3.7
Common Stock Reacquired		—			(0.4	)

Balance at End of Period		1,180.5			845.2

RETAINED EARNINGS
Balance at Beginning of Period		2,072.2			1,875.9
Net Income		90.0			63.6
Amortization of Underwriting Compensation on Capital Securities		(0.1	)		(0.1	)
Dividends Declared		(25.6	)		(23.6	)
Common Stock Reacquired		—			(1.1	)

Balance at End of Period		2,136.5			1,914.7

ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Period		1,181.3			916.8
Other Comprehensive Income (Loss)		63.7			(188.1	)

Balance at End of Period		1,245.0			728.7

Shareholders’ Equity	$	4,562.0		$	3,488.6

Consolidated Statements of Comprehensive Income (Loss)


THREE MONTHS ENDED MARCH 31		2003		2002

(In Millions)		(Unaudited)
Net Income		$	90.0	$	63.6

Other Comprehensive Income (Loss), Net of Taxes
	Change in Unrealized Appreciation (Depreciation) of Investment Securities		21.8		(163.9	)
	Less Reclassification Adjustment for Net Realized Investment (Gains) Losses Included in Net Income		32.4		(19.9	)
	Derivatives Qualifying as Hedges - Net Change in Value		2.1

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