Acquired in 2008 by the Liberty Mutual Insurance Company, Safeco Corporation was an insurance holding company that provided property and casualty insurance to individuals and small- to mid-size businesses in the U.S.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Safeco Corporation is a financial company. Financial companies, by their nature, typically have high debt to equity leverage, which is not a meaningful analytical metric. We suggest you use the equity to assets ratio instead.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
On October 1, 1997, SAFECO acquired all of the outstanding shares of common stock of American States Financial Corporation for $2,824 [million] in cash. SAFECO also repaid $300 of outstanding debt obligations of American States. The acquisition has been treated as a purchase for accounting purposes; therefore, American States' operations are included in SAFECO's consolidated financial statements since October 1, 1997. The excess of the purchase price over the fair value of net assets acquired of $1,300 was recorded as goodwill and is being amortized over 30 years. The fair value of assets acquired excluding cash was $7,035.1 and the fair value of liabilities assumed was $4,204.7. American States is an Indianapolis, Indiana-based insurer that writes commercial and personal insurance, as well as life insurance, throughout the United States. Its revenues were $1,984 for 1996.
On October 15, 1997, in a secondary offering we issued 13.0 million shares of SAFECO common stock, receiving net proceeds of $595.5 million. The proceeds have been used to pay off commercial paper that matured in late October 1997. The underwriters of this stock offering exercised their overallotment option on November 6, 1997, resulting in the issuance of an additional 1.8 million shares, with net proceeds to SAFECO of $82.5 million. The proceeds will be used to pay off a like amount of commercial paper.
Effective March 31, 2001, the Company elected to change its method for assessing the recoverability of goodwill from one based on undiscounted cash flows to one based on a market-value method. The Company believes that this change in accounting principle to the market-value method is a preferable way to assess the current value of goodwill. As a result of the change to a market-value methodology, the Company wrote off all its goodwill as of March 31, 2001. The pretax amount of the write-off was $1,201.0; the related deferred tax benefit amount was $284.1. On an after-tax basis, the write-off totaled $916.9 or $7.17 per share.
On March 15, 2004, we entered into a definitive agreement to sell our life insurance, group stop-loss medical insurance and asset management operations to a group of investors led by White Mountains Insurance Group, Ltd., and Berkshire Hathaway Inc. On August 2, 2004, this transaction was completed. Proceeds totaled $1,510.0 including $64.3 in dividends, and the after-tax loss on these transactions was $134.8 in the third quarter ended September 30, 2004.
On April 23, 2008, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Liberty Mutual Insurance Company, a Massachusetts stock insurance company ("Liberty Mutual"), and Big Apple Merger Corporation, a Washington corporation and a wholly owned subsidiary of Liberty Mutual ("Merger Sub"). Subject to the terms and conditions of the Merger Agreement, Merger Sub will merge with and into us and we will continue as the surviving corporation and a wholly owned subsidiary of Liberty Mutual (the "Merger"). At the effective time of the Merger, each outstanding share of our common stock, other than shares owned by us or Liberty Mutual and any dissenting shares in the Merger, will be automatically converted into the right to receive $68.25 in cash, without interest, subject to any applicable withholding tax.