SAFECO RESOURCE VARIABLE ACCOUNT B
497, 1997-05-12
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<PAGE>   1
 
MAY 1, 1997                                        SAFECO LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
 
                    GROUP FLEXIBLE PURCHASE PAYMENT DEFERRED
                           VARIABLE ANNUITY CONTRACTS
                                   ISSUED BY
                       SAFECO RESOURCE VARIABLE ACCOUNT B
                                      AND
                         SAFECO LIFE INSURANCE COMPANY
 
Home Office: Retirement Services Department   Annuity Service Office: Retirement
Services Dept.
15411 N.E. 51st Street, Redmond, Washington 98052     P.O. Box 3882, Seattle, WA
98124-3882
                                 1-800-426-7649
 
The Group Flexible Purchase Payment Deferred Variable Annuity Contracts (the
Contracts) described in this Prospectus provide for accumulation of Contract
Values and payment of monthly annuity payments on a variable basis. The
Contracts are designed for use in conjunction with retirement plans which
receive favorable tax treatment under Sections 401(k), 403(b) or 457 of the
Internal Revenue Code of 1986, as amended (Code) (see "Definitions").
 
Purchase Payments for the Contracts will be allocated to a segregated investment
account of SAFECO Life Insurance Company (SAFECO) which has been designated
SAFECO Resource Variable Account B (the Separate Account). The Separate Account
invests in shares of SAFECO Resource Series Trust (see SAFECO Resource Series
Trust). SAFECO Resource Series Trust currently consists of the SAFECO Resource
Equity, Bond and Money Market Portfolios.
 
This Prospectus concisely sets forth the information a prospective investor
should know before investing. Additional information about the Contracts is
contained in the Statement of Additional Information which is available at no
charge. Some of the discussions contained in this Prospectus will refer to the
more detailed description contained in the Statement of Additional Information
which is incorporated by reference in this Prospectus. For the Statement of
Additional Information, call l-800-426-7649 or write to the Annuity Service
Office address above.
 
THE CONTRACTS PROVIDE THAT A CONTINGENT DEFERRED SALES CHARGE WILL BE ASSESSED
AGAINST A WITHDRAWAL IF A PARTICIPANT WITHDRAWS ALL OR A PORTION OF THE
PARTICIPANT'S ACCUMULATION ACCOUNT VALUE WITHIN THE FIRST EIGHT CERTIFICATE
YEARS. WHILE THE CONTINGENT DEFERRED SALES CHARGE ASSESSES A PERCENTAGE OF THE
CURRENT VALUE OF A PARTICIPANT'S ACCUMULATION ACCOUNT ACCORDING TO THE STATED
SCHEDULE, THE TOTAL CONTINGENT DEFERRED SALES CHARGE COLLECTED BY SAFECO WILL
NOT EXCEED 8.5% OF THE PURCHASE PAYMENTS MADE BY A PARTICIPANT. SEE "CHARGES AND
DEDUCTIONS" FOR MORE INFORMATION.
 
A 10% PENALTY TAX MAY BE IMPOSED BY THE INTERNAL REVENUE SERVICE FOR PREMATURE
DISTRIBUTIONS. SEE "WITHDRAWAL" FOR MORE INFORMATION.
 
- --------------------------------------------------------------------------------
 
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
 
                                       -1-
<PAGE>   2
 
THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
 
This Prospectus and the Statement of Additional Information are dated May 1,
1997.
 
INQUIRIES: Any inquiries should be made by telephone to the Annuity Service
Office, 1-800-426-7649 or to the representative from whom this Prospectus was
obtained.
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                        Page
<S>                                                                                     <C>
DEFINITIONS...........................................................................    4
 
AN INTRODUCTION TO THE CONTRACTS......................................................    6
 
EXPENSE TABLE.........................................................................    7
 
SCHEDULE OF ACCUMULATION UNIT VALUES AND ACCUMULATION UNITS OUTSTANDING...............    9
 
FINANCIAL STATEMENTS..................................................................   10
 
PERFORMANCE INFORMATION...............................................................   10
     All Sub-Accounts (Other than SAFECO Resource Money Market Sub-Account)...........   10
     SAFECO Resource Money Market Sub-Account.........................................   10
     Rankings.........................................................................   11
 
SAFECO................................................................................   11
 
THE SEPARATE ACCOUNT..................................................................   11
     SAFECO Resource Equity Sub-Account...............................................   11
     SAFECO Resource Bond Sub-Account.................................................   12
     SAFECO Resource Money Market Sub-Account.........................................   12
 
SAFECO RESOURCE SERIES TRUST..........................................................   12
VOTING RIGHTS.........................................................................   12
 
SUBSTITUTION OF SECURITIES............................................................   13
 
PURCHASING A CONTRACT.................................................................   13
     Application......................................................................   13
     Minimum Purchase Payments........................................................   13
     Transfers........................................................................   13
     Employee Terminated..............................................................   13
     Allocation of Net Purchase Payments..............................................   14
     Principal Underwriter............................................................   14
 
CHARGES AND DEDUCTIONS................................................................   14
     Deduction for Premium and Other Taxes............................................   14
     Deduction for Mortality and Expense Risk Premium.................................   14
     Deduction for Contingent Deferred Sales Charge...................................   15
     Examples.........................................................................   16
</TABLE>
 
                                       -2-
<PAGE>   3
 
<TABLE>
<CAPTION>
                                                                                        Page
<S>                                                                                     <C>
     Reduction or Elimination of the Contingent Deferred Sales Charge.................   16
     Other Expenses...................................................................   17
     Deduction for Administration Charge..............................................   17
     Deduction for Transfer Charge....................................................   17
 
RIGHTS UNDER THE CONTRACT.............................................................   17
 
CONTRACT VALUE........................................................................   18
 
ANNUITY PROVISIONS....................................................................   18
     Selection of Settlement Options..................................................   18
     Commencement of Annuity Payments.................................................   18
     Settlement Options...............................................................   18
     Frequency and Amount of Annuity Payments.........................................   19
     Failure to Select Settlement Option..............................................   19
 
DISTRIBUTION REQUIREMENTS.............................................................   20
     Death Benefit Guarantee..........................................................   20
 
TAXES.................................................................................   21
     General..........................................................................   21
     Qualified Plans..................................................................   21
     Multiple Contracts...............................................................   22
     Income Tax Withholding...........................................................   22
 
WITHDRAWALS...........................................................................   23
     Tax Treatment of Withdrawals.....................................................   23
     Tax Sheltered Annuity Withdrawal Limitations.....................................   23
     Withdrawal Amount................................................................   24
 
LEGAL PROCEEDINGS.....................................................................   24
 
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION..........................   24
</TABLE>
 
                                       -3-
<PAGE>   4
 
                                  DEFINITIONS
 
ACCUMULATION UNIT - An accounting unit of measure used to calculate Contract
     Values prior to the Annuity Date.
 
ADMINISTRATION CHARGE - The amount paid to compensate SAFECO for its expense in
     administering the Contract.
 
ANNUITY DATE - The date on which annuity payments are to commence for the
     Participant as specified in the Participant's Certificate.
 
ANNUITY PURCHASE AGREEMENT - An agreement between a Participant and Employer
     under the terms of which Employer is authorized and agrees to make certain
     Purchase Payments on a Participant's behalf to be applied toward the
     purchase of an annuity contract for such Participant. Such agreement shall
     provide for the purchase of annuity contracts which qualify for tax
     deferral under Sections 401(k), 403(b) or 457 of the Internal Revenue Code.
 
ANNUITY UNIT - An accounting unit of measure used to calculate annuity payments
     after the Annuity Date.
 
APPLICATION FOR PARTICIPATION - The document by which an Employee applies to
     participate under the Contract.
 
BENEFICIARY - The person(s) entitled to receive benefits under the Contract upon
     the death of a Participant.
 
CERTIFICATE - The Allocated Group Variable Annuity Certificate issued to each
     Participant which includes all provisions of the Contract and which
     evidences a Participant's interest in the Contract.
 
CERTIFICATE ANNIVERSARY - The same day and month of the Effective Date of each
     Certificate in subsequent years.
 
CERTIFICATE EFFECTIVE DATE - The earlier of the date the initial Purchase
     Payment is invested for a specific Participant, or the Participant's
     Certificate Year under SAFECO s Qualified Pension Annuity Series III, III
     Plus or IV. The earlier date may only be used with the first purchase of a
     Certificate. For all subsequent purchases of a Certificate by the
     Participant, the Certificate Effective Date shall be the same as the
     Certificate Issue Date for that Certificate.
 
CERTIFICATE ISSUE DATE - The date on which the initial Purchase Payment is
     invested for a specific Participant and the Certificate is issued to the
     Participant pursuant to the Contract.
 
CERTIFICATE YEAR - The twelve-month period which commences on the Effective Date
     of each Certificate and, thereafter, from each Certificate Anniversary.
 
CONTRACT ISSUE DATE - The date the Contract is issued and stated as such on the
     Contract Data page.
 
CONTRACT VALUE - The sum of the values of all Accumulation Units attributable to
     the Contract.
 
EMPLOYEE - Any person presently or in the future employed by Employer.
 
NET INVESTMENT FACTOR - A factor used in the calculation of the Accumulation
     Unit Value and the Annuity Unit Value.
 
NET PURCHASE PAYMENTS - Purchase Payments less premium taxes and applicable
     Administration Charges.
 
PARTICIPANT - Any Employee of Employer who has executed an Application for
     Participation which has been accepted by SAFECO.
 
PARTICIPANT'S ACCUMULATION ACCOUNT - The account established on behalf of each
     Participant which reflects the Participant's interest in the Contract.
 
PORTFOLIO - A segment of the SAFECO Resource Series Trust which constitutes a
     separate and distinct class of shares.
 
                                       -4-
<PAGE>   5
 
PURCHASE PAYMENTS - Payments made to purchase Accumulation Units for a
     Participant's Accumulation Account.
 
QUALIFIED PLAN - For purposes herein, a retirement plan which receives favorable
     tax treatment under Sections 401(k), 403(b) or 457 of the Internal Revenue
     Code.
 
SAFECO - SAFECO Life Insurance Company.
 
SAFECO RESOURCE SERIES TRUST - The funding vehicle for the Separate Account.
 
SEPARATE ACCOUNT - The separate investment account of SAFECO designated as
     SAFECO Resource Variable Account B.
 
VALUATION DATE - Each day that the New York Stock Exchange is open for business,
     which is Monday through Friday, except for New Year's Day, President's Day,
     Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
     and Christmas Day.
 
VALUATION PERIOD - The period commencing at the close of business on each
     Valuation Date and ending at the close of business for the next succeeding
     Valuation Date.
 
WITHDRAWAL - Any deduction of Accumulation Units from a Participant's
     Accumulation Account.
 
                                       -5-
<PAGE>   6
 
                        AN INTRODUCTION TO THE CONTRACTS
 
The Contracts described in this Prospectus provide for accumulation of Contract
Values and payment of monthly annuity payments on a variable basis. The
Contracts are designed for use with retirement plans which receive favorable tax
treatment under Sections 401(k), 403(b) or 457 of the Code.
 
Purchase Payments for the Contracts are allocated to a segregated investment
account of SAFECO Life Insurance Company (the Separate Account). The assets of
the Separate Account are the property of SAFECO and obligations arising under
the Contracts are SAFECO's general corporate obligations.
 
The Separate Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one Portfolio of the SAFECO Resource Series Trust (the
Trust). There are currently three Portfolios available to the Separate Account
under the Trust: the SAFECO Resource Equity, Bond and Money Market Portfolios.
The availability of a Portfolio as an investment to a Participant is dependent
on the terms of the Qualified Plan in which he or she participates. Each
Portfolio of the Trust has a different investment objective. For more
information on the Trust and its respective Portfolios, please see "SAFECO
Resource Series Trust" and the Prospectus for the Trust which accompanies and
should be read with this Prospectus.
 
To acquire a Contract, an Employer enters into an Annuity Purchase Agreement.
Under the Agreement, the Employer agrees to make certain Purchase Payments on a
Participant's behalf. The minimum Purchase Payment is $30 per Participant per
any Sub-Account. An Employee can become a Participant under the Contract by
completing an Application for Participation. SAFECO will issue a Certificate to
each Participant eligible under the Contract and for each Participant's
Accumulation Account established under the Contract. The Accumulation Account
reflects each Participant's interest in the Contract Value. For more
information, see "Purchasing a Contract."
 
The Contract Value is the sum of the value of all Accumulation Units
attributable to the Contract. The value of an Accumulation Unit will vary from
Valuation Period to Valuation Period which begins at 1:00 P.M. West Coast time
(4:00 P.M. New York time) on each day the New York Stock Exchange is open for
trading. See "Contract Value" for more information.
 
Various charges and deductions are made from Purchase Payments, Participant's
Accumulation Accounts and the Separate Account. These include premium or other
taxes, a Mortality and Expense Risk Premium, an Administration Charge and
Transfer Charges. Upon full or partial withdrawal of a Participant's
Accumulation Account, a Contingent Deferred Sales Charge for those Purchase
Payments received in the first 8 Certificate Years, which exceed 10% of the
value of the Accumulation Units in a Participant's Account, may also be assessed
as a percentage of withdrawal. See "Charges and Deductions" for more
information. In addition, there are deductions from and expenses paid out of the
assets of the Trust. See the accompanying Trust Prospectus.
 
Annuity Payments begin on a specified Annuity Date according to a selected
Settlement Option. Minimum distributions are required once a Participant attains
a certain age. For a discussion of Annuity Dates, Settlement Options and
Distributions, see "Annuity Provisions" and "Distribution Requirements."
 
Withdrawals are subject to the Qualified Plan under which the Contract is issued
and the Code. The Code imposes a 10% penalty tax on the taxable portion of any
distribution from Qualified Plans, including both 401(a) and 403(b) plans, with
certain exceptions. See "Withdrawal" for more comprehensive information.
 
Effective January 1, 1989, the Tax Reform Act of 1986 limits the withdrawal of
amounts attributable to contributions made pursuant to a salary reduction
agreement (as defined in Section 403(b)(11) of the Code) to circumstances where
the Participant attains age 59 1/2, separates from service, dies, becomes
disabled (within the meaning of Section 72(m)(7) of the Code), or in the case of
hardship. However, withdrawals for hardship are restricted to the portion of the
Participant's Accumulation Account Value which represents contributions made by
the Participant and does not include any income attributable to those
contributions. See "Tax Sheltered Annuity Withdrawal Limitations" in this
Prospectus for more information.
 
Generally, Participants are not taxed on increases in the value of the
Participant's Accumulation Account until distribution occurs. However, taxation
of Participants will vary with the type of and terms and conditions
 
                                       -6-
<PAGE>   7
 
of each Qualified Plan under which the Contracts are offered. For a discussion
of the tax treatment of annuities, see "Taxes."
 
                                 EXPENSE TABLE
 
                       SAFECO RESOURCE VARIABLE ACCOUNT B
 
PARTICIPANT'S TRANSACTION EXPENSES:
 
Contingent Deferred Sales Charge (as a percentage of withdrawal)*: This charge
applies to Withdrawals in any Certificate Year which exceed 10% of the value of
the Accumulation Units in a Participant's Account:
 
<TABLE>
<S>                                <C>
Certificate Year 1                 9% of withdrawal
Certificate Year 2                 9% of withdrawal
Certificate Year 3                 8% of withdrawal
Certificate Year 4                 7% of withdrawal
Certificate Year 5                 6% of withdrawal
Certificate Year 6                 5% of withdrawal
Certificate Year 7                 4% of withdrawal
Certificate Year 8                 2% of withdrawal
Certificate Year 9 and after       0%
</TABLE>
 
*While the Contingent Deferred Sales Charge assesses a percentage of the current
value of a Participant's Accumulation Account according to the stated schedule,
total Contingent Deferred Sales Charges collected by SAFECO will not exceed 8.5%
of the Purchase Payments made by a Participant.
 
<TABLE>
<S>                                                                        <C>
TRANSFER (EXCHANGE) CHARGE:                                                $10 per transfer
</TABLE>
 
     (first four transfers per calendar year and pre-established monthly
     automatic transfers from one Sub-Account to another are free)
 
<TABLE>
<S>                                                                        <C>
ANNUAL ADMINISTRATION CHARGE                                               $30 per Participant*
SEPARATE ACCOUNT ANNUAL EXPENSES:
(as a percentage of average account value)
     Mortality and Expense Risk Premium                                    1.25%
                                                                           -----
     Total Separate Account Annual Expenses                                1.25%
                                                                           -----
SAFECO RESOURCE SERIES TRUST ANNUAL EXPENSES:
(as a percentage of average net assets)
Management Fees
     SAFECO Resource Equity Portfolio                                      .70%
     SAFECO Resource Bond Portfolio                                        .73%
     SAFECO Resource Money Market Portfolio                                .62%
Other Expenses
     SAFECO Resource Equity Portfolio                                      .02%
     SAFECO Resource Bond Portfolio**                                      .00%
     SAFECO Resource Money Market Portfolio**                              .00%
Total Trust Annual Expenses (After Reimbursement)
     SAFECO Resource Equity Portfolio                                      .72%
     SAFECO Resource Bond Portfolio                                        .73%
     SAFECO Resource Money Market Portfolio                                .62%
</TABLE>
 
  * For purposes of the Examples, the annual Administration Charge is calculated
    as a ratio of total Administration Charges collected during the year to the
    total average net assets of all Sub-Accounts. The annual Administration
    Charge percentage will change each year because of changes in total
    Administra-
 
                                       -7-
<PAGE>   8
 
    tion Charges collected during the year and the total average net assets of
    all Sub-Accounts. This will result in variations in the Expense Table each
    year.
 
 ** SAFECO pays all Other Expenses of each Portfolio until a Portfolio's assets
    reach $20 million. Once a Portfolio's assets exceed $20 million, the Other
    Expenses of the Portfolio will be paid by such Portfolio.
 
    During the year ended December 31, 1996, SAFECO paid for or reimbursed all
    of the Other Expenses of the Bond and Money Market Portfolios. Expenses
    before such reimbursement as a percentage of net assets were as follows:
 
<TABLE>
<S>                                                                     <C>
     SAFECO Resource Bond Portfolio                                       .87%
     SAFECO Resource Money Market Portfolio                               .90%
</TABLE>
 
<TABLE>
<CAPTION>
     EXAMPLES FOR SAFECO RESOURCE EQUITY SUB-ACCOUNT       Year 1    Year 3    Year 5    Year 10
- ---------------------------------------------------------  ------    ------    ------    -------
<S>                                                        <C>       <C>       <C>       <C>
Assuming a 5% return on assets, you would pay the
following
expenses on a $1,000 investment:
  Assuming withdrawal at end of period...................   105       146       179        251
  Assuming annuitization at end of period................    22        68       117        251
  Assuming no withdrawal.................................    22        68       117        251
</TABLE>
 
<TABLE>
<CAPTION>
  EXAMPLES FOR SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT    Year 1    Year 3    Year 5    Year 10
- ---------------------------------------------------------  ------    ------    ------    -------
<S>                                                        <C>       <C>       <C>       <C>
Assuming a 5% return on assets, you would pay the
following
expenses on a $1,000 investment:
  Assuming withdrawal at end of period ..................   104       144       174        241
  Assuming annuitization at end of period................    21        65       112        241
  Assuming no withdrawal.................................    21        65       112        241
</TABLE>
 
<TABLE>
<CAPTION>
      EXAMPLES FOR SAFECO RESOURCE BOND SUB-ACCOUNT        Year 1    Year 3    Year 5    Year 10
- ---------------------------------------------------------  ------    ------    ------    -------
<S>                                                        <C>       <C>       <C>       <C>
Assuming a 5% return on assets, you would pay the
following
expenses on a $1,000 investment:
  Assuming withdrawal at end of period...................   105       147       179        252
  Assuming annuitization at end of period................    22        68       117        252
  Assuming no withdrawal.................................    22        68       117        252
</TABLE>
 
The information in the "Examples" is provided to assist the Participant in
understanding the various costs and expenses charged to a Participant's
Accumulation Account either directly or indirectly and reflects expenses of
SAFECO Resource Variable Account B and SAFECO Resource Series Trust. The
Examples do not reflect premium taxes which may be applicable. Contingent
Deferred Sales Charges may be waived in certain circumstances. For additional
information, see "Charges and Deductions" in this Prospectus for SAFECO Resource
Variable Account B and "Management of the Trust" in the Prospectus for SAFECO
Resource Series Trust.
 
THE INFORMATION ABOVE IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
 
                                       -8-
<PAGE>   9
 
    SCHEDULE OF ACCUMULATION UNIT VALUES AND ACCUMULATION UNITS OUTSTANDING
                       SAFECO RESOURCE VARIABLE ACCOUNT B
 
The following selected financial data are derived from the financial statements
of SAFECO Resource Variable Account B, which have been audited by Ernst & Young
LLP, independent auditors. The data should be read in conjunction with the
financial statements, related notes, and other financial information
incorporated by reference herein.
 
<TABLE>
<CAPTION>
                          1996        1995        1994        1993       1992      1991      1990      1989      1988      1987
                        ---------   ---------   ---------   ---------   -------   -------   -------   -------   -------   -------
<S>                     <C>         <C>         <C>         <C>         <C>       <C>       <C>       <C>       <C>       <C>
SAFECO RESOURCE EQUITY SUB-ACCOUNT
July 21 value
(initial public
offering)                                                                                                                 $12.101
December 31 value       $  39.829   $  32.321   $  25.424   $  23.630   $18.704   $17.520   $13.987   $14.937   $11.901   $ 9.588
December 31 units       3,328,130   2,773,699   2,125,903   1,402,021   920,315   611,236   362,309   266,682   223,680   205,352
SAFECO RESOURCE BOND SUB-ACCOUNT
July 21 value
(initial public
offering)                                                                                                                 $10.126
December 31 value       $  17.991   $  18.117   $  15.559   $  16.253   $14.882   $14.107   $12.532   $11.909   $10.835   $10.250
December 31 units         503,739     481,273     479,731     446,935   310,293   255,098   219,928   211,685   200,405   200,017
SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT
July 21 value
(initial public
offering)                                                                                                                 $10.083
December 31 value       $  14.944   $  14.417   $  13.837   $  13.516   $13.335   $13.074   $12.527   $11.754   $10.923   $10.318
December 31 units         341,159     308,155     341,722     273,511   307,262   231,643   224,216   210,094   209,593   203,233
</TABLE>
 
                                       -9-
<PAGE>   10
 
                              FINANCIAL STATEMENTS
 
The financial statements for the Separate Account and SAFECO Life Insurance
Company are contained in the Statement of Additional Information which is
available at no charge by calling 1-800-426-7649 or writing to the Annuity
Service Office address on the cover.
 
                            PERFORMANCE INFORMATION
 
In advertisements, the "yield," "effective yield," "total return" and "average
annual total return" of the Sub-Accounts may be quoted.
 
ALL SUB-ACCOUNTS (OTHER THAN SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT)
 
"Yield" is the annualization on a 360-day basis of net income per unit over a
30-day period divided by the accumulation unit value on the last day of the
period. Yield figures are calculated by determining the income generated by an
investment in the Sub-Account over a 30-day period. The income is then
annualized by assuming that the income generated during the 30-day period
continues to be generated each month for a 12-month period and is shown as a
percentage of the investment. Yield figures will reflect deduction of the
Administration Charge which is assessed on every Participant's Accumulation
Account on an annual basis, but will not include any applicable Contingent
Deferred Sales Charge.
 
"Total return" is the total percentage change in the unit value of an investment
over a stated period of time. "Average annual total return" is the annual
percentage change in the unit value of an investment over a stated period of
time. Both total return and average annual total return assume the reinvestment
of dividend and capital gains distributions.
 
Standardized total return figures which appear in advertisements or sales
literature will be calculated for required time periods based on a set initial
investment amount and include the annual Administration Charge and the
Contingent Deferred Sales Charge. From time to time, non-standardized total
return figures may accompany the standardized figures. Non-standardized total
return figures may be calculated in a variety of ways including but not
necessarily limited to different time periods, different initial investment
amounts, additions of periodic payments, use of time weighted average annual
returns which take into consideration the length of time each investment has
been on deposit, and without the Administration Charge and/or with or without
the Contingent Deferred Sales Charge. Non-standardized figures may cause the
performance of the Sub-Accounts to appear higher than performance calculated
using standard parameters.
 
SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT
 
"Yield" is the annualization on a 365-day basis of the SAFECO Resource Money
Market Sub-Account's net income over a 7-day period. Yield figures are
calculated by determining the income generated by an investment in the
Sub-Account over a 7-day period. The income is then annualized by assuming that
the income generated during the 7-day period continues to be generated each week
for a 52-week period and is shown as a percentage of the investment.
 
"Effective yield" is the annualization, on a 365-day basis, of the Sub-Account's
net income over a 7-day period with dividends reinvested. The effective yield
will be slightly higher than the yield because of the compounding effect of this
assumed reinvestment.
 
As explained above, yield figures will reflect deduction of the annual
Administration Charge which is assessed to all Participants' Accumulation
Accounts, but will not include any applicable Contingent Deferred Sales Charge.
 
For the SAFECO Resource Money Market Portfolio, total return and average annual
total return are non-standardized performance figures which may accompany the
standardized yield and effective yield. "Total return" is the total percentage
change in the unit value of an investment over a stated period of time and
"average annual total return" is the annual percentage change in the unit value
of an investment over a stated
 
                                      -10-
<PAGE>   11
 
period of time. Non-standardized total return and average annual total return
figures for the SAFECO Resource Money Market Portfolio may be calculated in a
variety of ways, as described above.
 
RANKINGS
 
In addition to these performance figures, the Sub-Accounts may advertise
rankings as provided by the Lipper Variable Insurance Products Performance
Analysis Service published by Lipper Analytical Services, Inc. which monitors
separate account performance for variable annuity products such as the
Contracts, the VARDS Report which is a monthly variable annuity industry
analysis compiled by Variable Annuity Research & Data Service of Roswell,
Georgia and published by Financial Planning Resources, Inc. or the Variable
Annuity Performance Report published by Morningstar, Inc. which is also a
monthly analysis of variable annuity performance. Rankings provided by these
sources may or may not include all applicable charges.
 
Performance figures and quoted rankings are indicative only of past performance
and are not intended to represent future investment results.
 
For additional information concerning the calculation of "yield," "effective
yield," "total return" and "average annual total return," see the "Additional
Performance Information" section of the Statement of Additional Information.
 
                                     SAFECO
 
SAFECO Life Insurance Company (SAFECO) is a stock life insurance company which
was organized under the laws of the state of Washington on January 23, 1957.
SAFECO writes individual and group life, accident and health insurance and
annuities. SAFECO is licensed to do business in the District of Columbia and all
states except New York. SAFECO is a wholly-owned subsidiary of SAFECO
Corporation which is a holding company whose subsidiaries are engaged primarily
in insurance and financial service businesses. The home office of SAFECO is
located at 15411 N.E. 51st Street, Redmond, Washington 98052.
 
                              THE SEPARATE ACCOUNT
 
The Board of Directors of SAFECO adopted a resolution to establish a segregated
asset account pursuant to Washington insurance law on February 6, 1986. This
segregated asset account has been designated SAFECO Resource Variable Account B
(Separate Account). SAFECO has caused the Separate Account to be registered with
the Securities and Exchange Commission as a unit investment trust pursuant to
the provisions of the Investment Company Act of 1940. The Separate Account meets
the definition of a "separate account" under the federal securities laws.
 
The assets of the Separate Account are the property of SAFECO. However, the
assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business SAFECO may conduct. Income, gains
and losses, whether or not realized, are in accordance with the Contracts
credited to or charged against the Separate Account without regard to other
income, gains or losses of SAFECO. SAFECO's obligations arising under the
Contracts are general corporate obligations.
 
The Separate Account is divided into Sub-Accounts, with the assets of each
Sub-Account invested in one or more Portfolio(s) of SAFECO Resource Series
Trust. Currently there are three Portfolios available under the Trust: the
SAFECO Resource Equity Portfolio, SAFECO Resource Bond Portfolio and SAFECO
Resource Money Market Portfolio. The availability of a Portfolio as an
investment to a Participant is dependent on the terms of the Qualified Plan in
which he or she participates.
 
SAFECO RESOURCE EQUITY SUB-ACCOUNT
 
The investment objective of the SAFECO Resource Equity Sub-Account is to seek
long-term growth of capital and reasonable current income.
 
                                      -11-
<PAGE>   12
 
The SAFECO Resource Equity Sub-Account invests in the Trust's Equity Portfolio.
To pursue its investment objective, the SAFECO Resource Equity Portfolio
ordinarily invests principally in common stocks or securities convertible into
common stocks. Fixed-Income securities may be purchased in accordance with
business and financial conditions.
 
SAFECO RESOURCE BOND SUB-ACCOUNT
 
The investment objective of the SAFECO Resource Bond Sub-Account is to seek as
high a level of current income as is consistent with the relative stability of
capital.
 
The SAFECO Resource Bond Sub-Account invests in the Trust's Bond Portfolio. To
pursue its investment objective, the SAFECO Resource Bond Portfolio invests
primarily in medium-term debt securities. Although the SAFECO Resource Bond
Portfolio does not intend to purchase below investment grade bonds during the
coming year, it may hold up to 20% of total assets in bonds which are downgraded
after purchase to below investment grade quality by Standard & Poor's
Corporation or Moody's Investors Service, Inc. Below investment grade bonds are
commonly referred to as high-yield or "junk" bonds and have special risks
associated with them. See the Trust's Prospectus and Statement of Additional
Information for more information.
 
SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT
 
The investment objective of the SAFECO Resource Money Market Sub-Account is to
seek as high a level of current income as is consistent with the preservation of
capital and liquidity through investments in high-quality money market
investments maturing in thirteen months or less.
 
The SAFECO Resource Money Market Sub-Account invests in the Trust's Money Market
Portfolio which seeks to maintain a net asset value per share of $1.00. SHARES
OF THE SAFECO RESOURCE MONEY MARKET PORTFOLIO ARE NEITHER INSURED, NOR
GUARANTEED, BY THE U.S. GOVERNMENT. THERE IS NO ASSURANCE THAT THE SAFECO
RESOURCE MONEY MARKET PORTFOLIO WILL MAINTAIN A STABLE NET ASSET VALUE OF $1.00
PER SHARE.
 
                          SAFECO RESOURCE SERIES TRUST
 
SAFECO Resource Series Trust (Trust) has been established to act as a funding
vehicle for the Contracts offered. The investment adviser to the Trust is SAFECO
Asset Management Company (SAM), SAFECO Plaza, Seattle, Washington. The Trust is
an open-end, diversified, management investment company. While a brief summary
of the investment objectives of each Trust Portfolio is set forth above, more
comprehensive information is found in the current Prospectus for the Trust.
 
THE TRUST PROSPECTUS IS ATTACHED AND ACCOMPANIES THIS PROSPECTUS. BOTH DOCUMENTS
SHOULD BE READ TOGETHER AND CAREFULLY BEFORE INVESTING. AN ADDITIONAL PROSPECTUS
AND THE STATEMENT OF ADDITIONAL INFORMATION FOR THE TRUST CAN BE OBTAINED BY
CALLING THE NUMBER ON THE COVER PAGE OF THIS PROSPECTUS OR WRITING TO THE
ADDRESS OF THE ANNUITY SERVICE OFFICE LISTED THERE. ADDITIONAL PORTFOLIOS MAY BE
ESTABLISHED BY THE TRUST FROM TIME TO TIME AND MAY BE MADE AVAILABLE TO
PARTICIPANTS.
 
                                 VOTING RIGHTS
 
In accordance with its view of present applicable law, SAFECO will vote the
shares of the Trust held in the Separate Account at special meetings of the
shareholders in accordance with instructions received from persons having the
voting interest in the Separate Account. SAFECO will vote shares it owns for
which it has not received instructions, as well as shares attributable to it, in
the same proportion as it votes shares for which it has received instructions.
The Trust does not hold regular meetings of shareholders.
 
The number of shares which a person has a right to vote will be determined as of
a date to be chosen by SAFECO not more than sixty (60) days prior to the meeting
of the Trust. Voting instructions will be solicited by written communication at
least fourteen (14) days prior to such meeting with respect to the Trust.
 
                                      -12-
<PAGE>   13
 
                           SUBSTITUTION OF SECURITIES
 
If the shares of the Trust (or any Portfolio within the Trust) should no longer
be available for investment by the Separate Account or, if in the judgment of
SAFECO, further investment in such shares should become inappropriate in view of
the purpose of the Contracts, SAFECO may substitute shares of another mutual
fund (or Portfolio within the Trust) for shares already purchased or to be
purchased in the future by Purchase Payments under the Contracts. No
substitution of securities may take place without prior approval of the
Securities and Exchange Commission and under such requirements as it may impose.
 
                             PURCHASING A CONTRACT
 
APPLICATION
 
In order to acquire a Contract, an Employer enters into an Annuity Purchase
Agreement. Pursuant to that agreement, the Employer is authorized and agrees to
make certain Purchase Payments on a Participant's behalf to be applied toward
the purchase of an annuity for such Participant. In order to become a
Participant under the Contract, an employee must complete an Application for
Participation. Each eligible Participant will receive a Certificate, along with
a copy of the Contract, which will evidence a Participant's interest in the
Contract.
 
MINIMUM PURCHASE PAYMENTS
 
The minimum Purchase Payment is $30 per Participant per any Sub-Account.
 
TRANSFERS
 
A Participant may transfer Accumulation Units between Sub-Accounts or into
SAFECO's Qualified Pension Annuity Series III. See "Deduction for Transfer
Charge" in this Prospectus.
 
Accumulation Units which are being transferred will be redeemed at the price
next computed after the Participant's transfer request is received. The purchase
of Accumulation Units in the Sub-Account the Participant is transferring into or
the deposit into SAFECO's Qualified Pension Annuity Series III will normally be
executed the same day. However, the Sub-Accounts reserve the right to delay the
payment of proceeds and, therefore, the purchase in a transfer for up to seven
days if making immediate payment could adversely affect the Sub-Account
redeemed.
 
The first four transfers per calendar year and pre-established monthly automatic
transfers from one Sub-Account to another are free. A $10 fee per transfer is
charged after these limits are reached.
 
1. Transfer Limitations:
 
   The transfer privilege is not intended to provide a means for frequent
   trading in response to short-term fluctuations in the market (i.e., market
   timing). Excessive transfer transactions can be disadvantageous to other
   Participants and to Resource Variable Account B.
 
2. Transfers By Written Request:
 
   Accumulation Units may be transferred by writing SAFECO at the address on the
   Prospectus cover and specifying the transfer desired and your Certificate
   Number. The request must be signed by the Participant or a third party to
   whom the Participant has given appropriate authority. SAFECO must be given a
   copy of the document granting such authority.
 
EMPLOYEE TERMINATED
 
If an Employee's employment with Employer is terminated, the Employee may
continue to participate under the Contract to the extent of Purchase Payments
previously made on behalf of such Employee by Employer prior to termination of
employment. No further contributions will be accepted under the Contract on
behalf of any Participant who has ceased to be an Employee.
 
                                      -13-
<PAGE>   14
 
ALLOCATION OF NET PURCHASE PAYMENTS
 
A Net Purchase Payment is equal to the Purchase Payment less any applicable
premium taxes and applicable Administration Charges. Net Purchase Payments are
allocated to the Separate Account and are converted into Accumulation Units. The
Net Purchase Payments are divided by the value of an Accumulation Unit for the
Sub-Account Valuation Period during which such allocation occurs to determine
the number of Accumulation Units attributable to the Net Purchase Payment. For
initial Net Purchase Payments on behalf of any Participant, if the Application
for Participation is in good order, SAFECO will apply the Net Purchase Payment
to the Separate Account and credit the Participant's Accumulation Account with
Accumulation Units within two business days of receipt. If the Application is
not in good order, SAFECO will attempt to achieve good order or will return the
Application and the Purchase Payment within five business days. For subsequent
Purchase Payments in good order, SAFECO will apply the Net Purchase Payment to
the Separate Account and credit the Participant's Accumulation Account with
Accumulation Units during the next Valuation Period after the Purchase Payment
was received.
 
PRINCIPAL UNDERWRITER
 
Currently SAFECO Securities, Inc.(SSI) acts as the principal underwriter of the
contracts. SSI has its business address at SAFECO Plaza, Seattle, Washington
98185. Prior to April 29, 1994, PNMR Securities, Inc. (PNMR), SAFECO Plaza,
Seattle Washington 98185, acted as the principal underwriter of the Contracts.
SSI and PNMR are wholly-owned subsidiaries of SAFECO Corporation and therefore
are affiliates of SAFECO.
 
                             CHARGES AND DEDUCTIONS
 
Various charges and deductions are made from Purchase Payments, Participants'
Accumulation Accounts and the Separate Account. These charges and deductions
are:
 
DEDUCTION FOR PREMIUM AND OTHER TAXES
 
Any premium taxes or other taxes levied by any governmental entity which SAFECO,
in its sole discretion, determines have resulted from the establishment or
maintenance of the Separate Account, or from the investment experience of the
Separate Account, or from the receipt by SAFECO of Purchase Payments or from the
issuance of the Contract or from the commencement of annuity payments will be
charged against Purchase Payments, a Participant's Accumulation Account or
withdrawal value. Premium taxes currently imposed by certain states on the type
of Contracts offered hereby range from 0% to 2.5%. Some states assess their
premium taxes at the time Purchase Payments are made; others assess their
premium taxes at the time annuity payments commence. Premium taxes are subject
to change or amendment by state legislatures, administrative interpretations or
judicial acts. Such premium taxes will depend on, among other things, the
location of the Employer, the classification of the Contract by the states, the
status of SAFECO within such state and the insurance tax laws of such state.
 
DEDUCTION FOR MORTALITY AND EXPENSE RISK PREMIUM
 
SAFECO deducts on each Valuation Date a Mortality and Expense Risk Premium which
is equal on an annual basis to 1.25% of the daily net asset value of the
Separate Account. The mortality risks assumed by SAFECO arise from its
contractual obligation to make annuity payments after the Annuity Date for the
life of the Participant, to waive Contingent Deferred Sales Charges in the event
of the death of a Participant and to guarantee return of net Purchase Payments
upon the Participant's death. The expense risk assumed by SAFECO is that the
costs of administering the Contracts and the Separate Account will exceed the
amount received from the Administration Charge.
 
If the Mortality and Expense Risk Premium is insufficient to cover the actual
costs, the loss will be borne by SAFECO. Conversely, if the amount deducted
proves more than sufficient, the excess will be profit to SAFECO. SAFECO expects
a profit from this charge.
 
                                      -14-
<PAGE>   15
 
The Mortality and Expense Risk Premium is guaranteed by SAFECO and cannot be
increased.
 
DEDUCTION FOR CONTINGENT DEFERRED SALES CHARGE
 
In certain situations that a Participant withdraws all or a portion of the
Participant's Accumulation Account, a Contingent Deferred Sales Charge is
deducted from the Withdrawal. This charge reimburses SAFECO for expenses
incurred in connection with the promotion, sale and distribution of the
Contracts. The Contingent Deferred Sales Charge is applied only to those
Purchase Payments received in the first eight (8) Certificate Years. The
Contract or Certificate describes the situations where the Contingent Deferred
Sales Charge does not apply. Some of these situations are:
 
<TABLE>
<C>      <S>
   (i)   under a Settlement Option;
 
  (ii)   on distributions made pursuant to the death of a Participant;
 
 (iii)   on a transfer of the market value of some or all of a Participant's Accumulation
         Account into SAFECO's Qualified Pension Annuity Series III;
 
  (iv)   on a transfer of the market value of Accumulation Units between Sub-Accounts;
 
   (v)   effective April 1, 1989, with respect to the sum of withdrawals taken in any
         Certificate Year which do not exceed 10% of the value of the Accumulation Units in a
         Participant's Accumulation Account from which the withdrawal is taken; or
 
  (vi)   effective April 29, 1994 and subject to cancellation by written notice by SAFECO, for
         transfers by a 401(k) Participant into SAFECO's Qualified Pension Annuity Series V or
         VI, or Spinnaker due to death, disability, retirement, termination of employment, or
         plan termination under the following conditions:
 
         a. the amount withdrawn is $2,000 or more, or the entire Participant's Accumulation
         Account, when it is being transferred to Qualified Pension Annuity Series V;
 
         b. the amount withdrawn is $5,000 or more when it is being transferred to Qualified
         Pension Annuity Series VI; or
 
         c. the amount withdrawn is $2,000 or more when it is being transferred to Spinnaker.
</TABLE>
 
The amount of the Contingent Deferred Sales Charge will be based on the
following:
 
<TABLE>
<CAPTION>
                     Contingent Deferred Sales Charge
Certificate Year      as a Percentage of Withdrawal
- ----------------     --------------------------------
<C>                  <S>
        1                     9% of withdrawal
        2                     9% of withdrawal
        3                     8% of withdrawal
        4                     7% of withdrawal
        5                     6% of withdrawal
        6                     5% of withdrawal
        7                     4% of withdrawal
        8                     2% of withdrawal
        9 and
         after                0%
</TABLE>
 
The Contingent Deferred Sales Charge assesses a percentage of the current value
of a Participant's Accumulation Account according to the stated schedule.
However, total Contingent Deferred Sales Charges collected by SAFECO will not
exceed 8.5% of the Purchase Payments made by a Participant.
 
                                      -15-
<PAGE>   16
 
The commissions paid to registered representatives on the sale of Contracts are
not more than 7% of the Purchase Payments. In addition, commissions, overrides
and bonuses may be paid to SSI's registered representatives and/or other
distributors of the Contracts. A bonus dependent upon persistency of funds on
deposit in Resource B Contracts is one type of bonus that may be paid. Noncash
compensation may include accrual of conference travel credits and prizes. To the
extent that the Contingent Deferred Sales Charge is insufficient to cover the
actual cost of distribution, SAFECO may use any of its corporate assets,
including potential profit which may arise from the Mortality and Expense Risk
Premium, to make up any difference.
 
EXAMPLES
 
The following examples may be helpful in understanding how the Contingent
Deferred Sales Charge works:
 
Example 1:
 
The Participant contributes $10,000 in the first Certificate Year and nothing
additional in the next five years for a total of $10,000 in deposits. In the
sixth Certificate Year, the Participant withdraws the entire Accumulation
Account which now has a value of $16,000. The penalty-free amount is 10% of
$16,000, or $1,600. The Contingent Deferred Sales Charge would be calculated as
follows: the appropriate percentage is 5%. The Contingent Deferred Sales charge
is 5% multiplied by $14,400 ($16,000-$1,600), which is $720.
 
Example 2:
 
The Participant contributes $1,000 per year for ten years for a total of $10,000
in deposits. In the twelfth Certificate Year, the Participant elects to withdraw
a gross amount of $5,000 from the Participant's Accumulation Account which has a
current value of $15,000. Since at least eight Certificate Years have passed,
there is no Contingent Deferred Sales Charge applicable.
 
REDUCTION OR ELIMINATION OF THE CONTINGENT DEFERRED SALES CHARGE
 
The amount of the Contingent Deferred Sales Charge on the Contracts may be
reduced or eliminated when sales of the Contracts are made to a group in a
manner that results in savings of sales expenses. The entitlement to reduction
of the Contingent Deferred Sales Charge will be determined by SAFECO after
examination of all the relevant factors such as:
 
1. The size and type of group to which sales are to be made. Generally, the
   sales expenses for a larger group are less than for a smaller group because
   of the ability to implement large numbers of Contracts with fewer sales
   contacts.
 
2. The total amount of Purchase Payments to be received. Per Contract sales
   expenses are likely to be less on larger Purchase Payments than on smaller
   ones.
 
3. Any prior or existing relationship with SAFECO. Per Contract sales expenses
   are likely to be less when there is a prior existing relationship because of
   the likelihood of implementing the Contract with fewer sales contacts.
 
4. There may be other circumstances, of which SAFECO is not presently aware,
   which could result in reduced sales expenses.
 
If, after consideration of the foregoing factors, SAFECO determines that there
will be a reduction in sales expenses, SAFECO may provide for a reduction or
elimination of the Contingent Deferred Sales Charge.
 
The Contingent Deferred Sales Charge may be eliminated when the Contracts are
issued to an officer, director or employee of SAFECO or any of its affiliates.
In no event will reductions or elimination of the Contingent Deferred Sales
Charge be permitted where reductions or elimination will be unfairly
discriminatory to any person.
 
                                      -16-
<PAGE>   17
 
OTHER EXPENSES
 
There are other deductions from and expenses paid out of the assets of SAFECO
Resource Series Trust which are described in the accompanying Trust Prospectus.
 
DEDUCTION FOR ADMINISTRATION CHARGE
 
SAFECO deducts an annual fee of $30 per Participant per calendar year, or any
portion thereof, from the Participant's Accumulation Account for administrative
expenses associated with the administration of the Participant's Accumulation
Account and of the Separate Account. The $30 fee will be deducted on the date
the initial Purchase Payment is invested and on each Certificate Anniversary.
The Administration Charge is also assessed in the event of a total withdrawal.
In the event the Certificate Anniversary and the deduction from initial Purchase
Payments or complete withdrawal fall within one calendar year, SAFECO shall
deduct no more than $30 for that particular year. Prior to the Annuity Date for
the Participant, the Administration Charge is not guaranteed and may be changed
for future years. However, the Administration Charge may never exceed $35 per
Participant per calendar year. SAFECO does not make a profit from the
Administration Charge.
 
The fee is deducted first from the SAFECO Resource Money Market Sub-Account. In
the event there are no Accumulation Units in the SAFECO Resource Money Market
Sub-Account or not enough in value to meet the Administration Charge, the
balance of deductions necessary is then taken from the SAFECO Resource Bond
Sub-Account and finally from the SAFECO Resource Equity Sub-Account.
 
DEDUCTION FOR TRANSFER CHARGE
 
A Participant may elect one of the following methods of transfer:
 
1. The first four transfers per Participant per Calendar Year of any of a
   Participant's Accumulation Account into SAFECO's Qualified Pension Annuity
   Series III or between Sub-Accounts will have no transfer charge assessed
   against them. Any additional transfers will be subject to a $10 transfer
   charge, which will be deducted from the value of Accumulation Units
   transferred. Each transfer is subject to a $1,000 minimum or the entire
   Sub-Account if less. A $500 minimum must be maintained in a Sub-Account to
   keep it open for all Certificates issued after April 28, 1989. A $250 minimum
   may be maintained in a Sub-Account for all Certificates issued prior to and
   including April 28, 1989; or
 
2. Pre-established monthly automatic transfers of a single dollar amount of at
   least $250 into SAFECO's Qualified Pension Annuity Series III or between
   Sub-Accounts will have no transfer charge assessed against them. Any
   additional transfers will be subject to a $10 transfer charge which will be
   deducted from the value of Accumulation Units being transferred. The monthly
   transfers will continue to be made until the Participant requests
   discontinuance or there are no funds left in the Sub-Account to transfer. If
   monthly transfers are discontinued prior to six months after establishing the
   transfers, all transfers will be considered to have been made under paragraph
   1 above.
 
                           RIGHTS UNDER THE CONTRACT
 
Prior to the Annuity Date, the Employer has the voting rights under the
Contract. After the Annuity Date, the Participant has the voting rights with
respect to the Participant's Accumulation Account, and the Participant's
Beneficiary will have such rights upon the Participant's death. The Participant
has the right to select settlement options and designate beneficiaries, subject
to any limitations contained in the Qualified Plan pursuant to which the
Contract was acquired. The Beneficiary has any rights passed on as a result of
the death of the Participant.
 
SAFECO will issue a Certificate to each Participant eligible according to the
Contract and for each Participant's Accumulation Account established under the
Contract. A Certificate shall not be issued and an Accumulation Account shall
not be established on behalf of a Participant who is over 75 years of age on the
Certificate Issue Date under Contracts issued after April 28, 1989. Each
Certificate will state in substance the
 
                                      -17-
<PAGE>   18
 
provisions of the Contract and the benefits to which such Participant is
entitled. No Participant shall have any rights under the Contract until, and
only to the extent that, Purchase Payments on the Participant's behalf are
received by SAFECO.
 
To the extent permitted by law, the benefits or payments under the Contract
shall not be assignable or otherwise transferable, nor subject to commutation,
encumbrance or alienation and shall not be subject to any claim of any creditor
or to any legal process by any creditor.
 
All withdrawals are subject to the Plan under which the Contract is issued and
the Internal Revenue Code of 1986, as amended. However, withdrawals from a
Participant's Accumulation Account taken solely for purposes of an exchange or a
transfer to another contract are not limited by these restrictions.
 
The Contract may not be modified by SAFECO without the consent of the Employer,
except as may be required by applicable law.
 
                                 CONTRACT VALUE
 
The Contract Value is the sum of the value of all Accumulation Units
attributable to the Contract. A Participant's Accumulation Account reflects the
Participant's share of the Contract Value.
 
The value of an Accumulation Unit will vary from Valuation Period to Valuation
Period. The value of an Accumulation Unit is determined at the end of the
Valuation Period and reflects the investment earnings or loss and the deductions
for the Valuation Period.
 
                               ANNUITY PROVISIONS
 
SELECTION OF SETTLEMENT OPTIONS
 
At the time a Participant completes the Application for Participation, a
Settlement Option must be selected. A Participant may, upon at least thirty (30)
days' prior written notice to SAFECO, at any time prior to the Annuity Date,
elect a different Settlement Option or any other annuity form satisfactory to
SAFECO and the Participant.
 
COMMENCEMENT OF ANNUITY PAYMENTS
 
Annuity payments to a Participant will begin on the Participant's Annuity Date.
An Annuity Date is selected at the time the Participant completes the
Application for Participation. The selection of an Annuity Date is limited by
the terms of the Qualified Plan pursuant to which the Contract was acquired. A
Participant may, upon at least thirty (30) days' prior written notice to SAFECO,
change the Annuity Date to a date which must be the first day of a calendar
month. The Annuity Date may not be deferred, however, beyond any date specified
under the Qualified Plan or as limited under the Internal Revenue Code of 1986,
as amended.
 
SETTLEMENT OPTIONS
 
The net proceeds payable upon settlement of a Participant's interest in the
Contract, may be paid under one of the following options.
 
Option 1 - Variable Life Annuity.  A variable annuity payable monthly during the
lifetime of the Participant.
 
Option 2 - Variable Life Annuity with 120 or 240 Monthly Payments Guaranteed.  A
variable annuity payable monthly during the lifetime of the Participant with the
guarantee that, if at the death of the Participant, the guaranteed number of
payments has not been received by the Participant, payments will be made to the
Beneficiary for the remainder of the guarantee period. If the Beneficiary does
not desire payments to continue for the remainder of the guarantee period, the
Beneficiary may elect to have the present value of the guaranteed annuity
payments remaining, as of the date notice of death is received by SAFECO,
commuted at the assumed investment rate of 4% and paid in a single sum.
 
                                      -18-
<PAGE>   19
 
Option 3 - Joint and Survivor Annuity.  An annuity payable monthly first to the
Participant while the Participant is living. After the death of the Participant,
payments will be continued to the Participant's spouse for as long as he or she
lives. The annuity payable for the life of the spouse shall not be less than
one-half of, or greater than, the amount of the annuity payable during the joint
lives of the Participant and spouse.
 
Option 4 - Systematic Withdrawal Income Plan(TM).  Each month a specified number
of whole or partial Accumulation Units is liquidated for payment to the
Participant. The number to be liquidated during a given year shall be a
sufficient number so as to be expected to deplete the account over the life
expectancy of the Participant or the joint lives of the Participant and such
person's Beneficiary, with at least 50% of the payments expected to be paid
during the Participant's life expectancy. This calculation may be made annually
based on the attained age of the Participant or joint lives of the Participant
and such person's Beneficiary. Systematic Withdrawal Income Plan is a trademark
of SAFECO Life Insurance Company.
 
The Participant and a designated Beneficiary who is the spouse of a deceased
Participant must elect whether or not to recalculate life expectancy. The
election must be made by written notice and is irrevocable. Participants in a
Cash or Deferred Savings Plan give such notice to the Plan administrator as
required by the terms of the Plan. The Contractholder must notify SAFECO as to
the results of such election. Participants in a Tax Sheltered Annuity or a
Deferred Compensation Plan must give written notice of their election regarding
recalculation to SAFECO prior to March lst following the year in which the
Participant attains age 70 1/2. For these Participants, notice must also specify
whether minimum distributions made under Settlement Option 4 shall be based on
the value of Participant's entire Accumulation Account balance, or whether the
value of benefits accrued prior to 1987 should be excluded from the calculation.
If SAFECO has not received such written notice prior to March lst following the
year in which the Participant attains age 70 1/2, SAFECO will recalculate life
expectancy and distributions will be based on the value of the Participant's
entire Accumulation Account balance as of the end of the preceding calendar
year.
 
Option 5 - Installment Payments.  A Participant who has been issued a
Certificate prior to April 29, 1989, may elect an immediate or deferred
installment payment program under which withdrawals are taken from the
Participant's Accumulation Account in a predetermined amount on a predetermined
frequency. Installment payments are not available as a Settlement Option to a
Participant who is issued a Certificate after April 28, 1989. Under the
Installment Payment Settlement Option the value of the Participant's
Accumulation Account must be exhausted over 3 or more years for a Participant's
Accumulation Account of at least 5 years duration where the Participant has
attained at least age 59 1/2. Withdrawals under this program are not subject to
Contingent Deferred Sales Charges. If the Beneficiary does not desire payments
to continue for the remainder of the guarantee period, the Beneficiary may elect
to have the present value of the guaranteed annuity payments remaining, as of
the date the notice of death is received by SAFECO, commuted at the assumed
investment rate of 4% and paid in a single payment.
 
Option 6 - Other.  Any other fixed or variable form of annuity satisfactory to
both SAFECO and the Participant.
 
FREQUENCY AND AMOUNT OF ANNUITY PAYMENTS
 
Except as described below, annuity payments will be paid monthly. If the net
amount available to apply under any Settlement Option is less than $5,000,
SAFECO shall have the right to pay such amount in one lump sum in lieu of the
payment otherwise provided. In addition, for Certificates issued after April 28,
1989, if annuity payments would be or become less than $250, SAFECO shall have
the right to change the frequency of payments to such intervals as will result
in payments of at least $250. For Certificates issued prior to April 28, 1989,
if annuity payments would be or become less than $100, SAFECO shall have the
right to change the frequency of payments to such intervals as will result in
payments of at least $100.
 
FAILURE TO SELECT SETTLEMENT OPTION
 
For all Participants in a Tax Sheltered Annuity Plan established under Section
403(b) of the Internal Revenue Code, or an Eligible State Deferred Compensation
Plan established under Section 457 of the Internal Revenue Code, minimum
distributions shall commence no later than April 1st following the year in
 
                                      -19-
<PAGE>   20
 
which the Participant attains age 70 1/2, unless the Participant sends written
notice to SAFECO requesting that distributions not commence or notifying SAFECO
that the Participant meets one of the criteria for a later required beginning
date. See "Distribution Requirements" in this Prospectus. If SAFECO has not
received written notice prior to March 1st following the year in which the
Participant attains age 70 1/2 and if designated beneficiary information has
been provided to SAFECO, SAFECO will make the required distributions based on
joint life expectancy with recalculation of life expectancy under Option 4, the
Systematic Withdrawal Income Plan and in accordance with the minimum
distribution rules in Section 401(a)(9) of the Internal Revenue Code. See
"Settlement Options" in this Prospectus. If designated beneficiary information
has not been provided to SAFECO, SAFECO will make the required distributions
based on single life expectancy with recalculation of life expectancy under
Option 4, and in accordance with the minimum distribution rules in Section
401(a)(9) of the Internal Revenue Code. The calculation of the required
distributions shall be based on the entire Participant's account balance as of
the end of the calendar year preceding the distribution year.
 
For all Participants in a Cash or Deferred Compensation Plan under Section
401(k) of the Internal Revenue Code, distributions will be made in accordance
with the provisions of the Plan at the Contractholder's written direction.
SAFECO shall not be obligated to issue an annuity or to make a cash distribution
until it receives written direction containing the terms and conditions, manner
and amounts of such annuity or cash distribution.
 
                           DISTRIBUTION REQUIREMENTS
 
All Settlement Options under the Contract shall distribute the Participant's
Accumulation Account pursuant to the Plan and the minimum distribution rules in
Section 40l(a)(9) of the Code.
 
Minimum distributions must begin by the Participant's required beginning date
defined as April lst following the year the Participant reaches age 70 1/2. For
a Participant who is not a more than 5% owner, the required beginning date is
April lst of the calendar year following the later of age 70 1/2 or retirement.
 
Participants in a Cash or Deferred Savings Plan should consult the Plan
Administrator regarding the application of the minimum distribution rules to
their Plan benefits. SAFECO will commence required minimum distributions on
April lst following the year a Participant in a Tax-Sheltered Annuity or
Deferred Compensation Plan reaches age 70 1/2. Participants in Tax Sheltered
Annuities and Deferred Compensation Plans who do not want SAFECO to commence
required minimum distributions, or Participants who are still employed and wish
to defer commencement of distributions until retirement, must send SAFECO
written notice of such election prior to March lst following the year the
Participant reaches age 70 1/2. Participants in governmental or church Plans who
are still employed and elect to defer commencement of distributions must also
give SAFECO notice of retirement.
 
If the Participant dies before required distributions commence, the Accumulation
Account must be distributed by December 31st of the year which contains the
fifth anniversary of the Participant's death, or over a designated Beneficiary's
life expectancy. Where the Accumulation Account is distributed over the
designated Beneficiary's life expectancy, a nonspouse must begin distributions
by December 31st of the year following the year of the Participant's death. A
surviving spouse may wait to begin payments until the year the Participant would
have reached age 70 1/2 if that date is later than the year following the date
of death.
 
If the Participant dies on or after the date required distributions have
commenced, payment to the designated Beneficiary must continue at least as
rapidly as the method in effect prior to the Participant's death.
 
DEATH BENEFIT GUARANTEE
 
If the Participant dies before distributions commence, or on or after the date
distributions have already commenced to the Participant pursuant to Option 4, or
Option 5, the amount of the payment made after the Participant's death will be
the greater of Net Purchase Payments less any prior withdrawals or the value of
the
 
                                      -20-
<PAGE>   21
 
Participant's Accumulation Account determined as of the next Valuation Period
following the date both proof of death and an election for a single sum payment
or Settlement Option is received by SAFECO. If a single sum settlement is
elected, payment will be made within seven business days of receipt of such
election and proof of death. Election must be made by the Beneficiary during the
sixty (60) day period commencing with date of receipt by SAFECO of notification
of death. If no election is made within such sixty (60) day period, then a
single sum settlement will be paid to the Beneficiary. The death benefit
guarantee does not apply if the Participant dies after distributions have
commenced pursuant to Options 1, 2, 3, or 6.
 
                                     TAXES
 
The following description is based upon SAFECO's understanding of current
federal income tax law applicable to annuities in general. SAFECO cannot predict
the probability that any changes in such laws will be made. Purchasers are
cautioned to seek competent tax advice regarding the possibility of such
changes. SAFECO does not guarantee the tax status of the Contracts and
Certificates. Purchasers bear the complete risk that the Contracts may not be
treated as "annuity contracts" under federal income tax laws. It should be
further understood that the following discussion is not exhaustive and that
special rules not described in this Prospectus may be applicable in certain
situations. Moreover, no attempt has been made to consider any applicable state
or other tax laws.
 
GENERAL
 
Section 72 of the Code governs taxation of annuities in general. A Participant
is not taxed on increases in the value of an Accumulation Account until
distribution occurs, either in the form of a lump sum payment, a withdrawal or
as annuity payments under the Settlement Option elected. For a lump sum payment
received as a total surrender (total redemption), the recipient is taxed on the
portion of the payment that exceeds the cost basis of the Contract. Since the
Contract is designed exclusively for use with Qualified Plans, there may be no
cost basis and all such distributions will be treated as income to the
recipient. The taxable portion of the lump sum payment is taxed at ordinary
income tax rates.
 
Any premium taxes or other taxes levied by any government entity which SAFECO,
in its sole discretion, determines have resulted from the establishment or
maintenance of the Separate Account, or from the investment experience of the
Separate Account, or from the receipt by SAFECO of Purchase Payments, or from
the issuance of the Contract or from the commencement of annuity payments under
the Contract will be charged against Purchase Payments, the Participant's
Accumulation Account or withdrawal values.
 
For annuity payments, a portion of each payment in excess of an exclusion amount
is includible in taxable income. The exclusion amount for payments based on a
fixed annuity option is determined by multiplying the payment by the ratio that
the cost basis of the Contract (adjusted for any period or refund feature) bears
to the expected return under the Contract. The exclusion amount for payments
based on a variable annuity option is determined by dividing the cost basis of
the Contract (adjusted for any period certain or refund guarantee) by the number
of years over which the annuity is expected to be paid. Payments received after
the investment in the Contract has been recovered (i.e. when the total of the
excludable amount equal the investment in the Contract) are fully taxable. The
taxable portion is taxed at ordinary income tax rates. For certain types of
Qualified Plans there may be no cost basis in the contract within the meaning of
Section 72 of the Code. Participants under the Contracts should seek competent
financial advice about the tax consequences of distributions under the Qualified
Plan under which the Contracts are purchased.
 
QUALIFIED PLANS
 
The Contracts offered by this Prospectus are designed to be suitable for use
under various types of Qualified Plans. Taxation of Participants in each
Qualified Plan varies with the type of plan and terms and conditions of each
specific plan. Participants, Annuitants and Beneficiaries are cautioned that
benefits under a Qualified Plan may be subject to the terms and conditions of
the plan regardless of the terms and conditions of the Contracts issued pursuant
to the plan. Following are general descriptions of the types of Qualified Plans
with which the Contracts may be used. Such descriptions are not exhaustive and
are for general informational
 
                                      -21-
<PAGE>   22
 
purposes only. The tax rules regarding Qualified Plans are very complex and will
have differing applications depending on individual facts and circumstances.
Each Participant should obtain competent tax advice prior to purchasing a
Contract issued under a Qualified Plan.
 
Contracts issued pursuant to Qualified Plans include special provisions
restricting Contract provisions that may otherwise be available and described in
this Prospectus. Generally, Contracts issued pursuant to Qualified Plans are not
transferable except upon surrender or annuitization. Various penalty and excise
taxes may apply to contributions or distributions made in violation of
applicable limitations. Furthermore, certain withdrawal penalties and
restrictions may apply to surrenders from Qualified Contracts.
 
1. Cash or Deferred Savings Plans
 
   Under Section 40l(k) of the Code, a Cash or Deferred Savings Plan is a plan
   offered by an Employer which allows Employees to elect to reduce their
   compensation with the reduced amounts set aside for the Employees in a
   tax-deferred retirement program. The Code places limitations on these plans
   including on such items as amount of allowable contributions, form, manner
   and timing of distributions, transferability of benefits, vesting and
   nonforfeitability of interests, nondiscrimination in eligibility and
   participation and the tax treatment of distributions, withdrawals and
   surrenders.
 
2. Tax-Sheltered Annuities
 
   Section 403(b) of the Code permits the purchase of "tax-sheltered annuities"
   by public schools and certain charitable, educational and scientific
   organizations described in Section 501(c)(3) of the Code. These qualifying
   Employers may make contributions to the Contracts for the benefit of their
   Employees. Such contributions are not includible in the gross income of the
   Employee until the Employee receives distributions from the Contract. The
   amount of contributions to the tax-sheltered annuity is limited to certain
   maximums imposed by the Code. Furthermore, the Code sets forth additional
   restrictions governing such items as transferability, distributions,
   nondiscrimination and withdrawals. When the Contract is issued pursuant to a
   plan qualified under Section 403(b) of the Code, the Participant's entire
   interest in the Contract is nonforfeitable.
 
3. Deferred Compensation Plans
 
   Under Section 457 of the Code, governmental and certain other tax exempt
   Employers may establish deferred compensation plans for the benefit of their
   Employees which may invest in annuity contracts. The Code, as in the case of
   Qualified Plans, establishes limitations and restrictions on eligibility,
   contributions and distributions. Under these plans, contributions made for
   the benefit of the Employees will not be includible in the Employees' gross
   income until distributed from the plan.
 
MULTIPLE CONTRACTS
 
The Code provides that multiple non-qualified annuity contracts which are issued
within a calendar year to the same contract owner by one company or its
affiliates are treated as one annuity contract for purposes of determining tax
consequences of any distribution. Such treatment may result in adverse tax
consequences, including the more rapid taxation of the distributed amounts from
such combination of contracts. These aggregation rules do not apply to contracts
issued through Cash or Deferred Savings Plans under Section 401(k) or
Tax-Sheltered Annuity Plans under Section 403(b). However, they do apply to
contracts issued through Deferred Compensation Plans under Section 457.
Participants in a Deferred Compensation Plan under Section 457 of the Code
should consult a tax advisor prior to purchasing more than one non-qualified
annuity contract in any calendar year.
 
INCOME TAX WITHHOLDING
 
All distributions or any portion(s) thereof which are includible in the gross
income of the taxpayer are subject to Federal income tax withholding. Generally,
amounts are withheld from periodic payments at the same rate
 
                                      -22-
<PAGE>   23
 
as wages and at the rate of 10% from non-periodic payments. However, the
taxpayer, in most cases, may elect not to have taxes withheld or to have
withholding done at a different rate.
 
Effective January 1, 1993, certain distributions from retirement plans qualified
under Section 401 or Section 403(b) of the Code, which are not directly rolled
over to another eligible retirement plan or Individual Retirement Account or
Individual Retirement Annuity, are subject to a mandatory 20% withholding for
Federal income tax. The 20% withholding requirement does not apply to: (a)
distributions for the life or life expectancy of the Participant or joint and
last survivor expectancy of the Participant and a designated Beneficiary; (b)
distributions for a specified period of 10 years or more; or (c) distributions
which are required minimum distributions. Participants should consult their own
tax counsel or other tax advisor regarding withholding.
 
                                  WITHDRAWALS
 
TAX TREATMENT OF WITHDRAWALS
 
The Code imposes a 10% penalty tax on the taxable portion of any distribution
from Qualified Plans, including both 40l(k) and 403(b) plans. To the extent
amounts are not includible in gross income because they have been rolled over to
an IRA or to another Qualified Plan, no tax penalty will be imposed. The tax
penalty will not apply to the following distributions: (a) if distribution is
made on or after the date on which the Participant reaches age 59 1/2; (b)
distributions following the death or disability of the Participant (for this
purpose disability is as defined in Section 72(m)(7) of the Code); (c)
distributions after separation from service that are part of substantially equal
periodic payments, not less frequently than annually, made for the life (or life
expectancy) of the Participant or the joint lives (or joint life expectancies)
of such Participant and a designated Beneficiary; (d) distributions to a
Participant who has separated from service after attaining age 55; (e)
distributions made to the Participant to the extent such distributions do not
exceed the amount allowable as a deduction under Code Section 213 to the
Participant for amounts paid during the taxable year for medical care; and (f)
distributions made to an alternate payee pursuant to a qualified domestic
relations order.
 
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year following the year in which the employee attains age
70 1/2. Required distributions must be over a period not exceeding the life
expectancy of the individual or the joint lives or life expectancies of the
individual and his or her designated beneficiary. If the required minimum
distributions are not made, a 50% penalty tax is imposed as to the amount not
distributed. In addition, distributions in excess of $150,000 per year in the
case of periodic distributions and in excess of $750,000 in the case of lump sum
distributions may be subject to an additional 15% excise tax unless an exemption
applies.
 
TAX SHELTERED ANNUITY WITHDRAWAL LIMITATIONS
 
Effective January l, 1989, the Code limits the withdrawal of amounts
attributable to contributions made pursuant to a salary reduction agreement (as
defined in Section 403(b)(11) of the Code) to circumstances where the
Participant attains age 59 1/2, separates from service, dies, becomes disabled
(within the meaning of Section 72(m)(7) of the Code), or in the case of
hardship. However, withdrawals for hardship are restricted to the portion of the
Participant's Accumulation Account value which represents contributions made by
the Participant and does not include any income attributable to those
contributions.
 
These limitations on withdrawals apply only to salary reduction contributions
made after December 31, 1988, income attributable to such contributions, and to
income attributable to amounts held as of December 31, 1988. However, these
limitations will apply to all amounts (regardless of when or how the
contributions were originally made) which are transferred or rolled over from a
custodial account (as defined in Section 403(b)(7)) into the Participant's
Accumulation Account.
 
                                      -23-
<PAGE>   24
 
The limitations on withdrawals do not affect rollovers or transfers between
certain Qualified Plans. Participants should consult their own tax counsel or
other tax advisor regarding any distributions. The discussion contained in this
Prospectus regarding taxes should be considered in light of the above.
 
WITHDRAWAL AMOUNT
 
Subject to the withdrawal restrictions noted above, SAFECO will pay the amount
of any withdrawal within seven (7) business days of receipt of such request in
good order.
 
Upon a withdrawal by a Participant, the number of Accumulation Units in a
particular Sub-Account will be reduced by a number equal to the amount of any
(a) Withdrawal, including the Contingent Deferred Sales Charge, and (b) taxes,
including premium taxes and, if applicable, income taxes, for which no other
provision was made, and (c) Transfer Charges. Administration Charges will also
be applied to the Accumulation Account. See "Deduction for Administration
Charge" in this Prospectus. A Participant's Accumulation Account will not be
reduced by the number of units equal to the amount of any early withdrawal
penalty tax referred to above. The early withdrawal penalty tax must be paid
directly by the Participant.
 
Because of the potential tax consequences of a withdrawal, and because the
Qualified Plan may impose additional conditions, Participants should consult the
plan administrator and competent tax advisors before making a withdrawal.
 
                               LEGAL PROCEEDINGS
 
There are no legal proceedings to which the Separate Account, SAFECO Securities,
Inc. or PNMR Securities, Inc. is a party. SAFECO is engaged in various kinds of
routine litigation work which, in the opinion of SAFECO, is not of material
importance in relation to the total capital and surplus of SAFECO.
 
                            TABLE OF CONTENTS OF THE
                      STATEMENT OF ADDITIONAL INFORMATION
 
<TABLE>
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ANNUITY PROVISIONS....................................................................    3
     General..........................................................................    3
     Annuity Unit.....................................................................    3
     Net Investment Factor............................................................    3
     Assumed Investment Factor........................................................    3
     Amount of Annuity Payments.......................................................    3
     Additional Provisions............................................................    4
ADDITIONAL PERFORMANCE INFORMATION....................................................    4
     Performance Comparisons..........................................................    4
     Performance Information..........................................................    4
       Yields.........................................................................    4
       Total Returns..................................................................    5
EXPERTS...............................................................................    5
FINANCIAL STATEMENTS..................................................................    5
</TABLE>
 
                                      -24-
<PAGE>   25
 
                      STATEMENT OF ADDITIONAL INFORMATION
 
                         SAFECO LIFE INSURANCE COMPANY
                              GENERAL INFORMATION
                                     SAFECO
 
SAFECO Life Insurance Company (SAFECO) is a wholly-owned subsidiary of SAFECO
Corporation which is a holding company whose subsidiaries are engaged primarily
in insurance and financial services businesses.
 
During the establishment of the Separate Account, SAFECO contributed capital to
the Separate Account which was immediately invested in the SAFECO Resource
Series Trust (Trust). At December 31, 1996, SAFECO's contribution represented
39.7% and 58.7% of the value of the SAFECO Resource Bond and SAFECO Resource
Money Market Sub-Accounts, respectively. SAFECO may remove all or a portion of
these amounts at anytime. However, SAFECO will attempt to minimize any potential
material adverse effect such withdrawals may have on contractholder values.
 
               SAFEKEEPING OF THE ASSETS OF THE SEPARATE ACCOUNT
 
SAFECO holds the assets of the Separate Account. The assets are kept segregated
and held separate and apart from the general account assets of SAFECO. SAFECO
maintains records of all Separate Account purchases and redemptions of the
shares of each Portfolio of SAFECO Resource Series Trust.
 
                              INDEPENDENT AUDITORS
 
Ernst & Young LLP, 999 Third Avenue, Suite 3500, Seattle, Washington 98104, is
the independent auditor of the financial statements of SAFECO and the Separate
Account.
 
                                  DISTRIBUTOR
 
Currently, SAFECO Securities, Inc. (SSI), acts as the principal underwriter for
the Contracts. The offering is on a continuous basis. Prior to April 29, 1994,
PNMR Securities, Inc. (PNMR) acted as the principal underwriter for the
Contracts. SSI and PNMR are both wholly-owned subsidiaries and affiliates of
SAFECO. For the years ended 1994, 1995 and 1996, PNMR, through SSI, received
$1,640,855, $2,318,815 and $2,695,859 in commissions for the distribution of the
Contracts of which no payments were retained.
 
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus for the Group Flexible Purchase Payment
Deferred Variable Annuity Contracts.
 
The Prospectus concisely sets forth information that a prospective investor
should know before investing. For a copy of the Prospectus, call 1-800-426-7649
or write to SAFECO Life Insurance Company, Annuity Service Office: Retirement
Services Department, P.O. Box 3882, Seattle, Washington 98124-3882.
 
This Statement of Additional Information and the Prospectus are both dated May
1, 1997.
 
                                       -1-
<PAGE>   26
 
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                                                                    PAGE
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ANNUITY PROVISIONS................................................................    3
  General.........................................................................    3
  Annuity Unit....................................................................    3
  Net Investment Factor...........................................................    3
  Assumed Investment Factor.......................................................    3
  Amount of Annuity Payments......................................................    3
  Additional Provisions...........................................................    4
ADDITIONAL PERFORMANCE INFORMATION................................................    4
  Performance Comparisons.........................................................    4
  Performance Information.........................................................    4
     Yields.......................................................................    4
     Total Returns................................................................    5
EXPERTS...........................................................................    5
FINANCIAL STATEMENTS..............................................................    5
</TABLE>
 
                                       -2-
<PAGE>   27
 
                               ANNUITY PROVISIONS
 
GENERAL
 
The Settlement Options and related provisions are described in the Prospectus.
 
ANNUITY UNIT
 
     The value of the Annuity Unit is determined by multiplying the value of the
Annuity Unit for the immediately preceding Valuation Period by the Net
Investment Factor for the Valuation Period for which the value is being
calculated, and dividing the result by the Assumed Investment Factor for such
Valuation Period, where these two factors are defined as follows:
 
NET INVESTMENT FACTOR
 
     The Net Investment Factor for any Sub-Account for any Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result where:
 
(a) is the net result of:
 
     (1) the net asset value per share of the Trust determined as of the current
         Valuation Period; plus
 
     (2) the per share amount of any dividend or capital-gain distribution made
         by the Trust if the "ex-dividend" date occurs during the current
         Valuation Period; plus or minus
 
     (3) a per share credit or charge, respectively, which is determined by
         SAFECO, for changes in tax reserves resulting from investment
         operations of the Sub-Account.
 
(b) is the net result of:
 
     (1) the net asset value per share of the Trust determined as of the
         immediately preceding Valuation Period; plus or minus
 
     (2) the per share credit or charge, respectively, for any changes in tax
         reserves for the immediately preceding Valuation Period.
 
(c) is the percentage factor equal to the Mortality and Expense Risk Premium.
    Such factor is equal on an annual basis to 1.25% of the daily net asset
    value of the Sub-Account.
 
The Net Investment Factor may be greater or less than one; therefore, the
Annuity Unit value may increase or decrease.
 
ASSUMED INVESTMENT FACTOR
 
     The Assumed Investment Factor for a one day Valuation Period is 1.00010746.
This factor neutralizes the assumed investment return of 4% in the Annuity
Tables found in the Contract's Appendix A.
 
AMOUNT OF ANNUITY PAYMENTS
 
     A Variable Annuity is an annuity with payments which are not predetermined
as to dollar amount and will vary in accordance with the net investment results
of the Separate Account. The dollar amount of the first monthly Variable Annuity
payment will be determined by applying the Participant's Accumulation Account,
as of the 15th day of the preceding month, to the Annuity Tables contained in
the Contract's Appendix A. The number of Annuity Units to be credited to the
Annuitant will be determined by dividing such first monthly payment by the
Annuity Unit Value calculated as of the 15th day of the preceding month. This
number of Annuity Units remains fixed during the annuity payment period. The
dollar amount of each Variable Annuity payment after the first shall be
determined by multiplying (a) the number of Annuity Units credited to the
Annuitant by (b) the Annuity Unit value as of the 15th day of the preceding
month.
 
                                       -3-
<PAGE>   28
 
     The Annuity Table is based on the 1983 Group Annuity Mortality Table,
Projected, with an age setback of 1 year if the annuity payment begins in the
years 2000-2009, 2 years if the annuity payment begins in the years 2010-2019
and an additional 1 year setback for each additional ten years following. The
interest rate assumed in the Table is 4% per annum.
 
ADDITIONAL PROVISIONS
 
     SAFECO may require proof of age of the Participant before making any life
annuity payment provided for by the Contract. If the age of the Participant has
been misstated, the amount payable will be the amount that the Accumulation
Units would have provided at the correct age. Once monthly life income payments
have begun, any underpayments will be made up in one sum with the next annuity
payment. Overpayments will be deducted from the future annuity payments until
the total is repaid.
 
     Prior to any settlement of a death claim, due proof of Participant's death
must be submitted to SAFECO.
 
     Where any benefits under the Contract are contingent upon the recipient
being alive on a given date, SAFECO may require proof satisfactory to it that
such condition has been met.
 
                       ADDITIONAL PERFORMANCE INFORMATION
 
STANDARDIZED COMPUTATION OF PERFORMANCE
 
     PERFORMANCE COMPARISONS.  Performance Information for a Sub-Account may be
compared, in reports and advertising, to: (i) Standard & Poor's Stock Index, Dow
Jones Industrial Averages, Donahue Money Market Institutional Averages, or other
unmanaged indices generally regarded as representative of the securities
markets; (ii) other Variable Annuity separate accounts or other investment
products traced by Lipper Analytical Services, Inc., the Variable Annuity
Research and Data Service, or Morningstar, Inc., which are widely used
independent research firms that rank mutual funds and other investment companies
by overall performance, investment objectives and assets; and (iii) the Consumer
Price Index (a measure of inflation) to assess the real rate of return from an
investment in a Contract. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for annuity charges,
investment management costs, brokerage costs and other transaction costs that
are normally paid when directly investing in securities.
 
     Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Reports and
advertising also may contain other information, including the ranking of any
Sub-Account derived from rankings of Variable Annuity separate accounts or other
investment products traced by Lipper Analytical Services, Inc. or by rating
services, companies, publications, or other persons which rank separate accounts
or other investment products on overall performance or other criteria.
 
PERFORMANCE INFORMATION
 
     YIELDS.  Some Sub-Accounts may advertise yields. Yields quoted in
advertising reflect the change in value of a hypothetical investment in the
Sub-Account over a stated period of time, not taking in to account capital gains
or losses or the imposition of any Contingent Deferred Sales Charge. Yields are
annualized and stated as a percentage.
 
     Current yield and effective yield are calculated for the SAFECO Resource
Money Market Sub-Account. Current Yield is based on the change in the value of a
hypothetical investment (exclusive of capital changes) over a particular seven
(7) day period, less a hypothetical charge reflecting deductions from values
during the period (the base period), and stated as a percentage of the
investment at the start of the base period (the base period return). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield figure carried to at least the nearest hundredth of one percent. Effective
yield assumes that all dividends received during an annual period have been
reinvested. This compounding effect causes effective yield to be higher than
current yield. Calculation of effective yield begins with the same base period
return used in the
 
                                       -4-
<PAGE>   29
 
calculation of current yield, which is then annualized to reflect weekly
compounding pursuant to the following formula:
 
            Effective Yield = [(Base Period Return + 1)(365/7)] - 1
 
     Yield for the SAFECO Resource Bond Sub-Account is based on all investment
income (including dividends and interest) per accumulation unit earned during a
particular thirty (30) day period, less expenses accrued during the period (net
investment income). Yield is computed by dividing net investment income by the
value of an accumulation unit on the last day of the period, according to the
following formula:
 
                       Yield = 2[((a - b)/cd + 1)(6) - 1]
 
     where a = net investment income earned during the period by the
corresponding Available Fund portfolio, b = expenses accrued for the period (net
of any reimbursements), c = the average daily number of accumulation units
outstanding during the period, and d = the value (maximum offering price) per
accumulation unit on the last day of the period.
 
     TOTAL RETURNS.  Total return reflects all aspects of a Sub-Account's
return, including the automatic reinvestment by the Sub-Account of all
distributions and the deduction of all applicable charges to the Sub-Account on
an annual basis, including mortality and expense risk charges, the Annual
Administration Maintenance Charge, and any other charges against Contract Value.
Quotations also will assume a termination (surrender) at the end of the
particular period and reflect the deduction of the Contingent Deferred Sales
Charge, if applicable. Additional quotations may be given that do not assume a
termination (surrender) and do not take into account deduction of the Contingent
Deferred Sales Charge, since the Contracts are intended as long-term products.
 
     From time to time, non-standardized total return figures may accompany the
standardized figures. Non-standardized total return figures may be calculated in
a variety of ways including but not necessarily limited to different time
periods, different initial investment amounts, additions of periodic payments,
use of time weighted average annual returns which take into consideration the
length of time each investment has been on deposit, and without the
Administration Charge and/or with or without the Contingent Deferred Sales
Charge. Non-standardized figures may cause the performance of the Sub-Accounts
to appear higher than performance calculated using standard parameters.
 
     Average annual total returns are calculated by determining the growth or
decline in value of a hypothetical investment in the Sub-Account over certain
periods, including 1, 5, and 10 years (up to the life of the Sub-Account), and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant over the period. Investors should realize that the Sub-Account's
experience is not constant over time, but changes from year to year, and that
the average annual returns represent averaged figures as opposed to the
year-to-year performance of a Sub-Account. Average annual returns are calculated
pursuant to the following formula: P(1 + T)(n) = ERV, where P is a hypothetical
initial payment of $1,000, T is the average annual total return, n is the number
of years, and ERV is the withdrawal value at the end of the period.
 
     Cumulative total returns are unaveraged and reflect the simple change in
value of a hypothetical investment in the Sub-Account over a stated period of
time.
 
                                    EXPERTS
 
     The financial statements of SAFECO Resource Variable Account B and SAFECO
Life Insurance Company and Subsidiaries appearing in the Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, to the
extent indicated in their reports thereon also appearing in the Statement of
Additional Information. Such financial statements have been included herein in
reliance on their reports given on the authority of such firm as experts in
accounting and auditing.
 
                              FINANCIAL STATEMENTS
 
     The consolidated financial statements of SAFECO Life Insurance Company and
Subsidiaries included herein should be considered only as bearing upon the
ability of SAFECO to meet its obligations under the Contracts.
 
                                       -5-
<PAGE>   30
 
                              FINANCIAL STATEMENTS
 
                       SAFECO RESOURCE VARIABLE ACCOUNT B
 
                               TABLE OF CONTENTS
 
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<S>                                                                                     <C>
Report of Ernst & Young LLP, Independent Auditors.....................................    7
Statement of Assets and Liabilities as of December 31, 1996...........................    8
Statement of Operations for the year ended December 31, 1996..........................    9
Statements of Changes in Net Assets for the years ended December 31, 1996 and 1995....   10
Notes to Financial Statements (including accumulation unit data)......................   11
</TABLE>
 
                                       -6-
<PAGE>   31
 
                          REPORT OF ERNST & YOUNG LLP,
                              INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS OF SAFECO LIFE INSURANCE COMPANY AND
PARTICIPANTS OF SAFECO RESOURCE VARIABLE ACCOUNT B
 
     We have audited the accompanying statements of assets and liabilities of
certain Sub-Accounts of SAFECO Resource Variable Account B (comprising,
respectively, the SAFECO Resource Equity, SAFECO Resource Bond, and SAFECO
Resource Money Market Sub-Accounts) as of December 31, 1996, and the related
statements of operations, the statements of changes in net assets, and the
accumulation unit data for each of the periods indicated therein. These
financial statements and accumulation unit data are the responsibility of the
SAFECO Resource Variable Account B's management. Our responsibility is to
express an opinion on these financial statements and accumulation unit data
based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and accumulation
unit data are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and accumulation unit data. Our procedures included confirmation of
securities owned as of December 31, 1996, by correspondence with SAFECO Resource
Series Trust. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
     In our opinion, the financial statements and accumulation unit data
referred to above present fairly, in all material respects, the financial
position of each of the respective Sub-Accounts of SAFECO Resource Variable
Account B as listed above at December 31, 1996, the results of their operations,
the changes in their net assets, and the accumulation unit data for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
 
                                                        /s/ ERNST & YOUNG LLP   
Seattle, Washington
January 31, 1997
 
                                       -7-
<PAGE>   32
 
December 31, 1996
- --------------------------------------------------------------------------------
 
STATEMENT OF ASSETS AND LIABILITIES
 
<TABLE>
<CAPTION>
                                                                                           SUB-ACCOUNTS
                                                                            ------------------------------------------
                                                                             SAFECO           SAFECO           SAFECO
                      AS OF DECEMBER 31, 1996                                EQUITY            BOND             MMKT
- ------------------------------------------------------------------------------------------------------------------
                                                                            -- (In Thousands, Except Per-Unit and Per
                                                                                        Share Amounts) --
<S>                                                                         <C>              <C>              <C>
ASSETS:
  Investments in underlying Portfolios:
  Investments, at cost                                                      $118,571         $ 9,443          $ 5,104
                                                                            =======          =======          =======
  Shares owned                                                                6,101              844            5,104
  Net asset value per share                                                 $ 21.75          $ 10.75          $  1.00
                                                                            -------          -------          -------
  Investments, at value                                                     132,704            9,073            5,104
  Cash                                                                           26                2                1
                                                                            -------          -------          -------
    Total assets                                                            132,730            9,075            5,105
 
LIABILITIES:
  Mortality and expense risk charge payable                                     146               10                6
  Fees payable                                                                   26                2                1
                                                                            -------          -------          -------
    Total liabilities                                                           172               12                7
                                                                            -------          -------          -------
NET ASSETS                                                                  $132,558         $ 9,063          $ 5,098
                                                                            =======          =======          =======
ACCUMULATION UNITS OUTSTANDING                                                3,328              504              341
                                                                            =======          =======          =======
ACCUMULATION UNIT VALUE*
  (Net assets divided by accumulation
    units outstanding)                                                      $39.829          $17.991          $14.944
                                                                            =======          =======          =======
</TABLE>
 
* Redemption price per unit is the unit value less any applicable contingent
deferred sales charge.
 
                       See Notes to Financial Statements
 
                                       -8-
<PAGE>   33
 
                                              SAFECO RESOURCE VARIABLE ACCOUNT B
- --------------------------------------------------------------------------------
 
                                                         STATEMENT OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                                           SUB-ACCOUNTS
                                                                           ----------------------------------------
                                                                                  YEAR ENDED DECEMBER 31, 1996
                                                                            SAFECO           SAFECO           SAFECO
                                                                            EQUITY            BOND             MMKT
                                                                           ----------------------------------------
                                                                                     -- ($ in Thousands) --
<S>                                                                        <C>              <C>              <C>
INVESTMENT INCOME:
  Income dividends and capital gain
    distributions                                                          $12,467          $   495          $   241
EXPENSES:
  Mortality and expense risk charge                                          1,394              111               63
                                                                           -------          -------          -------
NET INVESTMENT INCOME                                                       11,073              384              178
NET REALIZED AND UNREALIZED GAIN (LOSS)
  ON INVESTMENTS:
  Net realized gain (loss) on investments                                    4,626              (20)               -
  Net change in unrealized appreciation                                      7,840             (425)               -
                                                                           -------          -------          -------
NET GAIN (LOSS) ON INVESTMENTS                                              12,466             (445)               -
                                                                           -------          -------          -------
NET CHANGE IN NET ASSETS RESULTING
  FROM OPERATIONS                                                          $23,539          $   (61)         $   178
                                                                           =======          =======          =======
</TABLE>
 
                       See Notes to Financial Statements
 
                                       -9-
<PAGE>   34
 
December 31, 1996
- --------------------------------------------------------------------------------
 
STATEMENT OF CHANGES IN NET ASSETS
 
<TABLE>
<CAPTION>
                                                                          SUB-ACCOUNTS
                                      ----------------------------------------------------------------------------
                                                                 FOR THE YEAR ENDED DECEMBER 31
                                               SAFECO                        SAFECO                        SAFECO
                                               EQUITY                         BOND                          MMKT
                                      ----------------------        ----------------------        ----------------------
                                        1996           1995           1996           1995           1996           1995
                                      ----------------------        ----------------------        ----------------------
 
                                                                      -- (In Thousands) --
<S>                                   <C>            <C>            <C>            <C>            <C>            <C>
OPERATIONS:
  Net investment income               $  11,073      $   9,089      $     384      $     422      $     178      $     187
  Net realized gain (loss) on
    investments                           4,626          2,869            (20)           (29)             -              -
  Net change in unrealized
    appreciation                          7,840          5,057           (425)           773              -              -
                                      ---------      ---------      ---------      ---------      ---------      ---------
  Net change in net assets
    resulting from operations            23,539         17,015            (61)         1,166            178            187
NET ACCUMULATION UNIT TRANSACTIONS       19,372         18,584            405             89            478           (473)
                                      ---------      ---------      ---------      ---------      ---------      ---------
TOTAL CHANGE IN NET ASSETS               42,911         35,599            344          1,255            656           (286)
NET ASSETS AT BEGINNING OF PERIOD        89,647         54,048          8,719          7,464          4,442          4,728
                                      ---------      ---------      ---------      ---------      ---------      ---------
NET ASSETS AT END OF PERIOD           $ 132,558      $  89,647      $   9,063      $   8,719      $   5,098      $   4,442
                                      =========      =========      =========      =========      =========      =========
 
OTHER INFORMATION
Increase (Decrease) in Units and
  Amounts
UNITS:
  Sales                                     925            905             87             87            717            587
  Redemptions                              (371)          (257)           (65)           (86)          (684)          (621)
                                      ---------      ---------      ---------      ---------      ---------      ---------
    Net change                              554            648             22              1             33            (34)
                                      =========      =========      =========      =========      =========      =========
AMOUNTS:
  Sales                               $  32,687      $  25,905      $   1,555      $   1,469      $  10,520      $   8,274
  Redemptions                           (13,315)        (7,321)        (1,150)        (1,380)       (10,042)        (8,747)
                                      ---------      ---------      ---------      ---------      ---------      ---------
    Net change                        $  19,372      $  18,584      $     405      $      89      $     478      $    (473)
                                      =========      =========      =========      =========      =========      =========
DECEMBER 31, 1996:
  Paid in capital                     $  79,810                     $   6,681                     $   3,856
  Par value per unit                       None                          None                          None
  Accumulation units authorized       Unlimited                     Unlimited                     Unlimited
  Accumulation units owned by
    SAFECO                                  200                           200                           200
</TABLE>
 
                       See Notes to Financial Statements
 
                                      -10-
<PAGE>   35
 
                                              SAFECO RESOURCE VARIABLE ACCOUNT B
- --------------------------------------------------------------------------------
 
                                                   NOTES TO FINANCIAL STATEMENTS
 
1.  ORGANIZATION
 
    SAFECO Resource Variable Account B (Variable Account B) is registered under
    the Investment Company Act of 1940, as amended, as a segregated unit
    investment trust of SAFECO Life Insurance Company (SAFECO), a wholly-owned
    subsidiary of SAFECO Corporation. Variable Account B is comprised of 12
    portfolios. The information contained in this financial statement relates to
    the sub-accounts invested in shares of the three portfolios designated
    below.
 
<TABLE>
<CAPTION>
                       SUB-ACCOUNT                                UNDERLYING PORTFOLIO
    --------------------------------------------------------------------------------------------
    <S>                                                 <C>
                                                        SAFECO Resource Series Trust --
    SAFECO Resource Equity (SAFECO Equity)              Equity Portfolio
    SAFECO Resource Bond (SAFECO Bond)                  Bond Portfolio
    SAFECO Resource Money Market (SAFECO MMKT)          Money Market Portfolio
</TABLE>
 
2.  SIGNIFICANT ACCOUNTING POLICIES
 
    SECURITY VALUATION -- Investments in portfolio shares are carried in the
    statement of assets and liabilities at net asset value as reported by the
    respective Portfolio. Realized gains or losses on securities transactions
    are determined using the First-In First-Out (FIFO) cost method. Security
    transactions are recorded on the trade date.
 
    DISTRIBUTIONS -- The net investment income and realized capital gains of
    Variable Account B are not distributed, but are retained and reinvested for
    the benefit of accumulation unit owners.
 
    FEDERAL INCOME TAX -- Operations of Variable Account B are included in the
    federal income tax return of SAFECO, which is taxed as a "life insurance
    company" under the Internal Revenue Code. Under current federal income tax
    law, no income taxes are payable with respect to operations of Variable
    Account B.
 
3.  EXPENSES
 
    A mortality and expense risk charge is deducted by SAFECO from Variable
    Account B on a daily basis which is equal, on an annual basis, to 1.25% of
    the average daily net asset value of Variable Account B. The mortality risks
    assumed by SAFECO arise from its contractual obligation to make annuity
    payments after the annuity date for the life of the participant and to waive
    withdrawal charges in the event of the death of a participant. The expense
    risk assumed by SAFECO is that the costs of administering the contracts and
    Variable Account B will exceed the amount received from the administration
    charge.
 
    The following expenses may be deducted from a contractholder's account by
    SAFECO and not directly from Variable Account B. As a fee for expenses
    associated with the administration of the contract owner's account, an
    annual charge of $30 may be deducted by SAFECO from the accumulated value of
    each contract on the date the initial purchase payment is invested and on
    each certificate anniversary. In the event that a participant withdraws all
    or a portion of the participant's accumulation account, a contingent
    deferred sales charge is imposed on withdrawals of purchase payments in the
    first eight certificate years. Any premium tax levied by a state or
    government entity with respect to the Variable Account B contract will be
    charged against the contract. Fees and charges may vary by product.
 
                                      -11-
<PAGE>   36
 
December 31, 1996                             SAFECO RESOURCE VARIABLE ACCOUNT B
- --------------------------------------------------------------------------------
 
NOTES TO FINANCIAL STATEMENTS
(Continued)
 
4.  INVESTMENT TRANSACTIONS
 
<TABLE>
<CAPTION>
                                                                                              SUB-ACCOUNTS
                                                                                   ----------------------------------
                                                                                    SAFECO       SAFECO       SAFECO
                                                                                    EQUITY        BOND         MMKT
     -------------------------------------------------------------------------------------------------------------
                                                                                         -- ($ in Thousands) --
     <S>                                                                           <C>          <C>          <C>
     PURCHASES for the year ended December 31, 1996                                $46,553      $ 2,256      $12,206
                                                                                   =======      =======      =======
     SALES for the year ended December 31, 1996                                    $16,050      $ 1,465      $11,549
                                                                                   =======      =======      =======
</TABLE>
 
5.  ACCUMULATION UNIT DATA
 
<TABLE>
<CAPTION>
                                                                                              SUB-ACCOUNTS
                                                                                   ----------------------------------
                                                                                    SAFECO       SAFECO       SAFECO
                                                                                    EQUITY        BOND         MMKT
     -------------------------------------------------------------------------------------------------------------
     <S>                                                                           <C>          <C>          <C>
     December 31, 1992                                                             $18.704      $14.882      $13.335
     December 31, 1993                                                              23.630       16.253       13.516
     December 31, 1994                                                              25.424       15.559       13.837
     December 31, 1995                                                              32.321       18.117       14.417
     December 31, 1996                                                              39.829       17.991       14.944
</TABLE>
 
                                      -12-
<PAGE>   37
                    Audited Consolidated Financial Statements






                          SAFECO Life Insurance Company
                                and Subsidiaries

              For the Years Ended December 31, 1996, 1995 and 1994
<PAGE>   38
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS




                                TABLE OF CONTENTS



                                                                        PAGE

Report of Independent Auditors..........................................   1

Consolidated Financial Statements

       Consolidated Balance Sheet.......................................   2

       Statement of Consolidated Income.................................   4

       Statement of Changes in Stockholder's Equity.....................   5

       Statement of Consolidated Cash Flows.............................   6

       Notes to Consolidated Financial Statements.......................   8
<PAGE>   39
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS


Board of Directors
SAFECO Life Insurance Company

We have audited the accompanying consolidated balance sheet of SAFECO Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995, and the
related statements of consolidated income, changes in stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SAFECO Life
Insurance Company and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

As described in Note 1 to the Consolidated Financial Statements, SAFECO Life
Insurance Company and subsidiaries adopted certain new accounting standards in
1995 and 1994 as required by the Financial Accounting Standards Board.



                                                  /s/ ERNST & YOUNG LLP

Seattle, Washington
February 14, 1997

                                       1
<PAGE>   40
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts)

<TABLE>
<CAPTION>
                                                                                    December 31
                                                                                    -----------
                                                                               1996            1995
                                                                               ----            ----
<S>                                                                         <C>             <C>
ASSETS

Investments (Note 2):
     Fixed Maturities Available-for-Sale, at Market Value
      (Amortized Cost: 1996-$7,597,733; 1995-$7,195,332) ..........      $  7,853,553       $ 7,720,108
     Fixed Maturities Held-to-Maturity, at Amortized Cost
      (Market Value: 1996-$2,670,004; 1995-$2,388,514) ............         2,488,324         2,044,517
     Marketable Equity Securities, at Market Value
      (Cost: 1996-$9,629; 1995-$14,904) ...........................            18,902            25,776
     First Mortgage Loans on Real Estate:
      Nonaffiliates (At cost, less allowance for losses:
       1996-$10,943; 1995-$9,633) .................................           447,596           416,110
      Affiliates ..................................................           140,743           137,823
     Real Estate (At cost, less accumulated depreciation:
      1996-$180; 1995-$398) .......................................             4,134             4,972
     Policy Loans .................................................            58,153            55,925
     Short-Term Investments (At cost which approximates market) ...            69,878            68,614
     Investment in Limited Partnerships ...........................               250             1,289
                                                                          -----------       -----------
          Total Investments .......................................        11,081,533        10,475,134
Cash ..............................................................            19,136            34,886
Accrued Investment Income .........................................           159,790           150,897
Accounts and Notes Receivable (At cost, less allowance for doubtful
     accounts: 1996-$85; 1995-$72) ................................            23,582            27,971
Reinsurance Recoverables (Note 5) .................................            25,204            16,656
Deferred Policy Acquisition Costs (Net of valuation allowance:
     1996-$19,040; 1995-$42,815) ..................................           240,464           210,491
Other Assets ......................................................             5,497             5,739
Current Income Taxes Recoverable (Note 9) .........................               792                --
Assets Held in Separate Accounts ..................................           491,212           276,399
                                                                          -----------       -----------
          Total Assets ............................................       $12,047,210       $11,198,173
                                                                          ===========       ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       2
<PAGE>   41
<TABLE>
<CAPTION>
                                                                  December 31
                                                                  -----------
                                                              1996             1995
                                                           ----------       ----------
<S>                                                        <C>              <C>
LIABILITIES AND STOCKHOLDER'S EQUITY

Liabilities:
Policy and Contract Liabilities (Note 5):
Future Policy Benefits .............................      $   149,624       $  154,090
Policy and Contract Claims .........................           29,155           26,407
Premiums Paid in Advance ...........................            8,846            8,209
Funds Held Under Deposit Contracts .................        9,792,730        8,756,384
Other Policyholders' Funds .........................          134,422          323,302
                                                          -----------       ----------
 Total Policy and Contract Liabilities .............       10,114,777        9,268,392
Other Liabilities ..................................           76,089          112,008
Federal Income Taxes (Note 9):
Current ............................................               --           13,047
Deferred (Includes tax on unrealized appreciation of
investment securities: 1996-$86,120;
1995-$172,493) .....................................          103,648          196,492
Liabilities Related to Separate Accounts ...........          491,212          276,399
                                                          -----------       ----------
Total Liabilities ..................................       10,785,726        9,866,338
                                                          -----------       ----------

Stockholder's Equity:
Common Stock, $250 Par Value;
20,000 Shares Authorized, Issued and Outstanding ...            5,000            5,000
Additional Paid-In Capital .........................           85,000           85,000
Retained Earnings (Note 7) .........................        1,011,439          921,383
Unrealized Appreciation of Investment Securities,
Net of Tax (Note 2) ................................          160,045          320,452
                                                          -----------       ----------
Total Stockholder's Equity .........................        1,261,484        1,331,835
                                                          -----------       ----------


Total Liabilities and Stockholder's Equity .........      $12,047,210      $11,198,173
                                                          ===========      ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       3
<PAGE>   42
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
                                                                   Year Ended December 31
                                                                   ----------------------
                                                              1996            1995            1994
                                                          -----------     -----------     -----------
<S>                                                       <C>             <C>             <C>
(In Thousands)
Revenues:
     Premiums ........................................    $   240,100     $   237,025     $   252,929
     Investment Income:
     Interest on Fixed Maturities ....................        767,309         716,510         648,296
     Interest on Mortgage Loans ......................         52,127          51,912          51,135
     Interest on Short-Term Investments ..............          2,935           4,017           3,351
     Dividends from Marketable Equity Securities .....            843           1,387           1,446
     Dividends from Redeemable Preferred Stock .......         12,654           3,065             618
     Other Investment Income .........................          3,879           4,155           4,375
                                                          -----------     -----------     -----------
          Total ......................................        839,747         781,046         709,221
      Less Investment Expenses .......................          3,709           3,546           3,551
                                                          -----------     -----------     -----------
     Net Investment Income ...........................        836,038         777,500         705,670
                                                          -----------     -----------     -----------
     Other Revenue ...................................         12,933          11,608           9,795
     Realized Investment Gain ........................         10,439           5,676           5,639
                                                          -----------     -----------     -----------
          Total ......................................      1,099,510       1,031,809         974,033
                                                          -----------     -----------     -----------

Benefits and Expenses:
     Policy Benefits .................................        782,213         723,466         674,215
     Commissions .....................................         74,724          79,163          84,760
     Personnel Costs .................................         43,609          42,314          42,439
     Taxes Other Than Payroll and Income Taxes .......         15,512           7,913           7,652
     Other Operating Expenses ........................         45,224          42,978          44,519
     Amortization of Deferred Policy
       Acquisition Costs .............................         35,652          32,376          29,407
     Deferral of Policy Acquisition Costs ............        (42,426)        (35,347)        (43,360)
                                                          -----------     -----------     -----------
          Total ......................................        954,508         892,863         839,632
                                                          -----------     -----------     -----------

Income before Federal Income Taxes ...................        145,002         138,946         134,401
                                                          -----------     -----------     -----------

Provision (Benefit) for Federal Income Taxes (Note 9):
     Current .........................................         57,417          61,830          57,365
     Deferred ........................................         (6,471)        (13,800)        (10,154)
                                                          -----------     -----------     -----------
          Total ......................................         50,946          48,030          47,211
                                                          -----------     -----------     -----------

Net Income ...........................................    $    94,056     $    90,916     $    87,190
                                                          ===========     ===========     ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       4
<PAGE>   43
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                                                                 Year Ended December 31
                                                                                                 ----------------------
                                                                                         1996          1995              1994
                                                                                         ----          ----              ----
                                                                                                    (In Thousands)
<S>                                                                                 <C>             <C>             <C>
Common Stock ...................................................................    $     5,000     $     5,000     $     5,000
                                                                                    -----------     -----------     -----------

Additional Paid-In Capital .....................................................         85,000          85,000          85,000
                                                                                    -----------     -----------     -----------

Retained Earnings:
     Balance at the Beginning of Year ..........................................        921,383         834,467         751,277
     Net Income ................................................................         94,056          90,916          87,190
     Dividends to Parent .......................................................         (4,000)         (4,000)         (4,000)
                                                                                    -----------     -----------     -----------
     Balance at the End of Year ................................................      1,011,439         921,383         834,467
                                                                                    -----------     -----------     -----------

Unrealized Appreciation (Depreciation) of Investment
 Securities, Net of Tax (Note 1 and 2):
  Balance at the Beginning of Year .............................................        320,452        (126,229)          6,828
  Net Effect of Adoption of FASB Statement 115 .................................             --              --         279,957
  Change in Unrealized Appreciation or Depreciation ............................       (175,861)        474,511        (413,014)
  Change in Deferred Policy Acquisition Costs
   Valuation Allowance .........................................................         15,454         (27,830)             --
                                                                                    -----------     -----------     -----------
Balance at the End of Year .....................................................        160,045         320,452        (126,229)
                                                                                    -----------     -----------     -----------

  Stockholder's Equity .........................................................    $ 1,261,484     $ 1,331,835     $   798,238
                                                                                    ===========     ===========     ===========
</TABLE>


                 See Notes to Consolidated Financial Statements

                                       5
<PAGE>   44
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
                                                                                            Year Ended December 31
                                                                                            ----------------------
                                                                                   1996             1995            1994
                                                                                -----------     -----------     -----------
                                                                                               (In Thousands)
<S>                                                                             <C>             <C>             <C>
OPERATING ACTIVITIES:
     Insurance Premiums Received ............................................   $   216,801     $   216,269     $   233,129
     Dividends and Interest Received ........................................       754,878         703,053         641,234
     Other Operating Receipts ...............................................        12,948          10,607          11,419
     Insurance Claims and Policy Benefits Paid ..............................      (302,955)       (272,206)       (242,523)
     Underwriting, Acquisition and Insurance
       Operating Costs Paid .................................................      (172,251)       (169,904)       (177,188)
     Income Taxes Paid ......................................................       (71,255)        (61,247)        (60,566)
                                                                                -----------     -----------     -----------
          Net Cash Provided by Operating Activities .........................       438,166         426,572         405,505
                                                                                -----------     -----------     -----------

INVESTING ACTIVITIES:
     Purchases of:
       Fixed Maturities Available-for-Sale ..................................    (1,544,998)     (1,424,510)     (1,110,154)
       Fixed Maturities Held-to-Maturity ....................................      (473,206)       (291,965)       (358,297)
       Marketable Equity Securities .........................................          (272)           (260)           (407)
       Other Investments ....................................................           (15)            (14)        (24,381)
       Policy and Nonaffiliated Mortgage Loans ..............................       (85,485)        (55,302)        (68,710)
       Affiliated Mortgage Loans ............................................       (34,650)        (12,643)        (54,000)
     Maturities of Fixed Maturities Available-for-Sale ......................       466,509         375,291         476,410
     Maturities of Fixed Maturities Held-to-Maturity ........................        21,694          17,878          54,564
     Sales of:
       Fixed Maturities Available-for-Sale ..................................       721,229         327,160         250,227
       Fixed Maturities Held-to-Maturity ....................................        13,316              --              --
       Marketable Equity Securities .........................................        10,394           2,172              65
       Other Investments ....................................................         1,100             180          23,992
       Real Estate ..........................................................         1,086             876           1,885
       Policy and Nonaffiliated Mortgage Loans ..............................        48,341          50,734          42,038
       Affiliated Mortgage Loans ............................................        31,730           8,977           6,714
     Net (Increase) Decrease in Short-Term Investments ......................        (1,250)         (5,811)         11,793
     Other ..................................................................          (747)           (122)            947
                                                                                -----------     -----------     -----------
          Net Cash Used in Investing Activities .............................      (825,224)     (1,007,359)       (747,314)
                                                                                -----------     -----------     -----------

FINANCING ACTIVITIES:
     Funds Received Under Deposit Contracts .................................     1,148,590       1,304,665       1,012,164
     Return of Funds Held Under Deposit Contracts ...........................      (765,480)       (720,845)       (659,697)
     Dividends to Parent ....................................................        (4,000)         (4,000)         (4,000)
     Net Proceeds from (Repayment of) Short-Term Borrowings .................        (7,802)          9,143             842
                                                                                -----------     -----------     -----------
          Net Cash Provided by Financing Activities .........................       371,308         588,963         349,309
                                                                                -----------     -----------     -----------

     Net Increase (Decrease) in Cash ........................................       (15,750)          8,176           7,500
     Cash at Beginning of Year ..............................................        34,886          26,710          19,210
                                                                                -----------     -----------     -----------

     Cash at End of Year ....................................................   $    19,136     $    34,886     $    26,710
                                                                                ===========     ===========     ===========
</TABLE>

For purposes of reporting cash flows, cash consists of balances on hand and on
deposit in banks and financial institutions.

                 See Notes to Consolidated Financial Statements

                                       6
<PAGE>   45
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS -
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES  

<TABLE>
<CAPTION>
                                                                                      Year Ended December 31
                                                                              -------------------------------------
                                                                                 1996          1995          1994
                                                                              ---------     ---------     ---------
                                                                                         (In Thousands)
<S>                                                                           <C>          <C>            <C>

Net Income ...............................................................    $  94,056     $  90,916     $  87,190
                                                                              ---------     ---------     ---------

Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain .................................................      (10,439)       (5,676)       (5,639)
Amortization of Fixed Maturity Investments ...............................      (26,811)      (26,050)      (12,247)
Deferred Federal Income Tax Benefit ......................................       (6,471)      (13,800)      (10,154)
Interest Expense on Deposit Contracts ....................................      460,594       432,327       405,536
Other ....................................................................          574         3,140          (440)

Changes in:
Future Policy Benefits ...................................................       (4,466)       (1,232)        3,834
Policy and Contract Claims ...............................................        2,748        (2,643)       (4,136)
Premiums Paid in Advance .................................................          637          (574)       (1,174)
Deferred Policy Acquisition Costs ........................................       (6,198)       (6,116)      (12,990)
Accrued Investment Income ................................................       (8,893)       (8,990)      (13,695)
Accrued Interest on Accrual Bonds ........................................      (44,015)      (36,908)      (41,285)
Other Receivables ........................................................       (8,639)       (2,353)        5,064
Current Federal Income Taxes .............................................      (13,839)          583        (3,201)
Other Assets and Liabilities .............................................        4,668           449         1,820
Other Policyholders' Funds ...............................................        4,660         3,499         7,022
                                                                              ---------     ---------     ---------

Total Adjustments ........................................................      344,110       335,656       318,315
                                                                              ---------     ---------     ---------

Net Cash Provided by Operating Activities ................................    $ 438,166     $ 426,572     $ 405,505
                                                                              =========     =========     =========
</TABLE>

                 See Notes to Consolidated Financial Statements

                                       7
<PAGE>   46
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     NATURE OF OPERATIONS. SAFECO Life Insurance Company (the Company) is a
     stock life insurance company organized under the laws of the state of
     Washington. The Company offers individual and group insurance products,
     pension plans and annuity products, marketed through professional agents in
     all states and the District of Columbia. The Company owns two subsidiaries,
     SAFECO National Life Insurance Company and First SAFECO National Life
     Insurance Company of New York. The Company is a wholly-owned subsidiary of
     SAFECO Corporation which is a Washington corporation whose subsidiaries
     engage primarily in insurance and financial service businesses.

     BASIS OF REPORTING. The consolidated financial statements have been
     prepared in accordance with generally accepted accounting principles
     appropriate in the circumstances and include amounts based on the best
     estimates and judgments of management. The financial statements include
     SAFECO Life Insurance Company and its subsidiaries.

     All significant intercompany transactions have been eliminated in the
     consolidated financial statements. Certain reclassifications have been made
     to prior year financial information to conform to the 1996 classifications.

     ACCOUNTING FOR PREMIUMS. Life and health insurance premiums are reported as
     income when collected for traditional individual life policies and when
     earned for group life and health policies. Funds received under pension
     deposit contracts, annuity contracts and universal life policies are
     recorded as liabilities rather than premium income when received. Revenues
     for universal life products consist of front-end loads, mortality charges
     and expense charges assessed against individual policyholder account
     balances. These loads and charges are recognized as income when earned.

     INVESTMENTS. The Company adopted Financial Accounting Standards Board
     (FASB) Statement 115, "Accounting for Certain Investments in Debt and
     Equity Securities," on January 1, 1994, applying the provisions of the
     Statement to investments held as of, or acquired after that date. See
     discussion of new accounting standards on page 10.

     Fixed maturity investments (i.e., bonds and redeemable preferred stocks)
     which the Company has the positive intent and ability to hold to maturity
     are classified as held-to-maturity and carried at amortized cost in the
     balance sheet. Fixed maturities classified as available-for-sale are
     carried at market value, with changes in unrealized gains and losses
     recorded directly to stockholder's equity, net of applicable income taxes
     and deferred policy acquisition costs valuation allowance. The Company has
     no fixed maturities classified as trading.

     All marketable equity securities are classified as available-for-sale and
     carried at market value, with changes in unrealized gains and losses
     recorded directly to stockholder's equity, net of applicable income taxes.

     When the collectibility of income on certain investments is considered
     doubtful, they are placed on non-accrual status and thereafter interest
     income is recognized only when payment is received. Investments that have
     declined in market value below cost and for which the decline is judged to
     be other than temporary are written down to fair value. Writedowns are made
     directly on an individual security basis and reduce realized investment
     gains in the Statement of Consolidated Income.

     The cost of security investments sold is determined by the "identified
     cost" method.

     Mortgage loans are carried at outstanding principal balances, less an
     allowance for loan losses.



                                       8
<PAGE>   47
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1 (continued)

     REAL ESTATE AND DEPRECIATION. Income-producing real estate is classified as
     an investment. The Company provides straight-line depreciation on its
     buildings based upon their estimated useful lives.

     Investment real estate that has declined in market value below cost and for
     which the decline is judged to be other than temporary is written down to
     estimated realizable value. Writedowns reduce realized investment gains in
     the Statement of Consolidated Income.

     DEFERRED POLICY ACQUISITION COSTS. Life and health acquisition costs,
     consisting of commissions and certain other underwriting expenses, which
     vary with and are primarily related to the production of new business, are
     deferred.

     Acquisition costs for pension deposit contracts, deferred annuity contracts
     and universal life policies are amortized over the lives of the contracts
     or policies in proportion to the present value of estimated future gross
     profits. To the extent actual experience differs from assumptions, and to
     the extent estimates of future gross profits require revision, the
     unamortized balance of deferred policy acquisition costs is adjusted
     accordingly; such adjustments would be included in current operations.
     There were no significant revisions made in 1996, 1995 or 1994.

     Acquisition costs for traditional individual life insurance policies are
     amortized over the premium payment period of the related policies using
     assumptions consistent with those used in computing policy benefit
     liabilities. Acquisition costs for group life and health policies are
     amortized over the lives of the policies in proportion to premium received.

     FUTURE POLICY BENEFITS. Liabilities for universal life insurance policies,
     deferred annuity and pension deposit contracts are equal to the accumulated
     account value of such policies or contracts as of the valuation date.
     Liabilities for structured settlement annuities are based on interest rate
     assumptions using market rates at issue, graded downward over 40 years to a
     range of 5.5% to 8.75%.

     Liabilities for future policy benefits under traditional individual life
     insurance policies have been computed on the level premium method using
     interest, mortality and persistency assumptions based on actual experience
     modified to provide for adverse deviation. Interest assumptions range from
     8.5% graded to 3.25%.

     POLICY AND CONTRACT CLAIMS. The liability for policy and contract claims is
     established on the basis of reported losses ("case basis" method).
     Provision is also made for claims incurred but not reported, based on
     historical experience. The estimates for claims incurred but not reported
     are continually reviewed and any necessary adjustments are reflected in
     current operations.

     SEPARATE ACCOUNTS. The Company administers segregated asset accounts for
     variable annuity and variable universal life clients. The assets of these
     Separate Accounts, which consist of common stocks, are the property of the
     Company. The liabilities of these Separate Accounts represent reserves
     established to meet withdrawal and future benefit payment provisions of
     contracts with these clients. The assets of the Separate Accounts, equal to
     the reserves and other contract liabilities of the Separate Accounts, are
     not chargeable with liabilities arising out of any other business the
     Company may conduct. Investment risks associated with market value changes
     are borne by the clients. Deposits, withdrawals, net investment income and
     realized and unrealized capital gains and losses on the assets of the
     Separate Account are not reflected in the Statement of Consolidated Income.
     Management fees and other charges assessed against the contracts are
     included in other revenue.



                                       9
<PAGE>   48
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 (continued)

     FEDERAL INCOME TAXES. The Company and its subsidiaries are included in a
     consolidated federal income tax return filed by SAFECO Corporation. Tax
     payments (credits) are made to or received from SAFECO Corporation on a
     separate tax return filing basis. The Company provides for federal income
     taxes based on financial reporting income and deferred federal income taxes
     on temporary differences between financial reporting and taxable income.

     NEW ACCOUNTING STANDARDS. The Company adopted FASB Statement 112,
     "Employers' Accounting for Postemployment Benefits," effective January 1,
     1994. Adoption had no effect on net income.

     In 1993, the FASB adopted Statement 114, "Accounting by Creditors for
     Impairment of a Loan," which provides guidance on valuing impaired loans.
     The FASB also issued Statement 118, "Accounting by Creditors for Impairment
     of a Loan - Income Recognition and Disclosures," in 1994, which amends
     Statement 114. Both statements were effective for 1995 and adopted by the
     Company on January 1, 1995. Adoption did not affect net income. For
     additional disclosure relating to these two statements, see Note 2.

     In 1993, the FASB issued Statement 115, "Accounting for Certain Investments
     in Debt and Equity Securities," which expands the use of fair value
     accounting for debt and equity securities. As of January 1, 1994, the
     Company adopted the provisions of this Statement for investments held as
     of, or acquired after that date. Statement 115 requires that debt and
     equity securities be classified as trading, available- for-sale, or
     held-to-maturity.

     Fixed maturity securities that the Company has the positive intent and
     ability to hold to maturity (as narrowly defined by Statement 115) are
     classified as held-to-maturity and are reported at amortized cost. Fixed
     maturity securities classified as available-for-sale are carried at market
     value, with changes in unrealized gains and losses recorded directly to
     stockholder's equity, net of applicable income taxes and any deferred
     policy acquisition costs valuation allowance. All marketable equity
     securities are classified as available-for-sale and continue to be carried
     at market value, with changes in unrealized gains and losses recorded
     directly to stockholder's equity, net of applicable income taxes. Under
     Statement 115, trading securities are carried at market value with
     immediate recognition in income of changes in market value. Since the
     Company does not have any securities held for trading, the adoption of this
     Statement had no effect on net income.

     The net effect on stockholder's equity of the adoption of Statement 115 was
     an increase of $279,957,000 as of January 1, 1994. The net increase was
     comprised of the following amounts: aggregate market value in excess of
     amortized cost of fixed maturities classified as available-for-sale of
     $458,471,000, less deferred policy acquisition costs valuation allowance of
     $27,768,000 and deferred income taxes at 35% of $150,746,000.

     The FASB issued an Implementation Guide on Statement 115 in November 1995.
     In addition to providing guidance on Statement 115, the Guide allowed for a
     one-time-only reclassification of securities among the three categories
     defined in Statement 115. The Company reclassified certain fixed maturity
     securities from the held-to-maturity category to the available-for-sale
     category on December 31, 1995, as allowed by the Guide. The securities
     reclassified had a net carrying value (amortized cost) of $331,123,000 and
     a market value of $358,630,000 at December 31, 1995. This reclassification
     had no effect on net income.



                                       10
<PAGE>   49
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



2.   INVESTMENT SUMMARY

      A summary of fixed maturities and marketable equity securities classified
      as available-for-sale at December 31, 1996 follows:

<TABLE>
<CAPTION>
                                                                              Gross         Gross         Net           Estimated
                                                              Amortized    Unrealized     Unrealized    Unrealized        Market
                                                                Cost          Gains         Losses         Gain           Value
                                                                ----          -----         ------         ----           -----
                                                                             
                                                                                       (In Thousands)
<S>                                                        <C>           <C>            <C>            <C>           <C> 
United States government and                               
  government agencies and authorities ...........          $  746,401    $   38,689     $   (1,915)    $   36,774    $  783,175
States, municipalities and political subdivisions             131,538        11,192        (1,009)         10,183       141,721
Foreign governments .............................              74,427         4,575            (7)          4,568        78,995
Public utilities ................................           1,428,912        72,384        (7,220)         65,164     1,494,076
All other corporate bonds .......................           2,707,297       100,673       (15,464)         85,209     2,792,506
Mortgage-backed securities ......................           2,509,158        72,485       (18,563)         53,922     2,563,080
                                                           ----------    ----------     ----------     ----------    ----------
Total fixed maturities classified as                       
  available-for-sale ............................           7,597,733       299,998       (44,178)        255,820     7,853,553
Marketable equity securities ....................               9,629         9,518          (245)          9,273        18,902
                                                           ----------    ----------     ----------     ----------    ----------
Total investment securities classified as                  
  available-for-sale ............................          $7,607,362    $  309,516     $  (44,423)       265,093    $7,872,455
                                                           ==========     ==========     ==========                  ==========
                                                           
Deferred policy acquisition costs valuation allowance ............................................        (19,040)
Applicable federal income tax ....................................................................
                                                                                                          (86,008)
                                                                                                       ----------
Unrealized appreciation of investment securities, 
  net of tax, included in stockholder's equity ...................................................     $  160,045
                                                                                                       ==========
</TABLE>

      A summary of fixed maturities classified as held-to-maturity at December
      31, 1996 follows:

<TABLE>
<CAPTION>
                                                                       Gross         Gross          Net        Estimated
                                                      Amortized      Unrealized    Unrealized    Unrealized      Market
                                                        Cost           Gains         Losses        Gain          Value
                                                        ----           -----         ------        ----          -----
                                                                                  (In Thousands)
<S>                                                  <C>           <C>           <C>              <C>         <C>            

United States government and
  government agencies and authorities ...........    $  244,686    $   29,559    $     (396)    $   29,163    $  273,849
States, municipalities and political subdivisions       103,075         3,797          (664)         3,133       106,208
Foreign governments .............................       148,300        24,403            --         24,403       172,703
Public utilities ................................       545,249        48,130        (4,279)        43,851       589,100
All other corporate bonds .......................     1,155,146        82,922        (9,495)        73,427     1,228,573
Mortgage-backed securities ......................       291,868        13,110        (5,407)         7,703       299,571
                                                     ----------    ----------    ----------     ----------    ----------
Total fixed maturities classified as
  held-to-maturity ..............................    $2,488,324    $  201,921    $  (20,241)    $  181,680    $2,670,004
                                                     ==========    ==========    ==========     ==========    ==========
</TABLE>










                                       11
<PAGE>   50
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 (continued)

      A summary of fixed maturities and marketable equity securities classified
as available-for-sale at December 31, 1995 follows:

<TABLE>
<CAPTION>
                                                                       Gross        Gross           Net        Estimated
                                                       Amortized    Unrealized    Unrealized     Unrealized     Market
                                                         Cost          Gains       Losses          Gain          Value
                                                         ----          -----       ------          ----          -----
<S>                                                  <C>           <C>           <C>            <C>            <C>
                                                                                (In Thousands)
United States government and
  government agencies and authorities ...........    $  737,429    $   73,770    $   (1,007)    $   72,763    $  810,192
States, municipalities and political subdivisions       141,085        20,879            --         20,879       161,964
Foreign governments .............................        67,873         7,248            --          7,248        75,121
Public utilities ................................     1,452,490       137,913        (1,395)       136,518     1,589,008
All other corporate bonds .......................     2,475,343       183,117        (7,690)       175,427     2,650,770
Mortgage-backed securities ......................     2,321,112       116,938        (4,997)       111,941     2,433,053
                                                     ----------    ----------    ----------     ----------    ----------
Total fixed maturities classified as
  available-for-sale ............................     7,195,332       539,865       (15,089)       524,776     7,720,108
Marketable equity securities ....................        14,904        11,172          (300)        10,872        25,776
                                                     ----------    ----------    ----------     ----------    ----------
Total investment securities classified as
  available-for-sale ............................    $7,210,236    $  551,037    $  (15,389)       535,648    $7,745,884
                                                     ==========    ==========     ==========                  ==========


Deferred policy acquisition costs valuation allowance ......................................       (42,815)
Applicable federal income tax ..............................................................      (172,381)
                                                                                                ----------
Unrealized appreciation of investment securities,
  net of tax, included in stockholder's equity .............................................    $  320,452
                                                                                                ==========
</TABLE>

      A summary of fixed maturities classified as held-to-maturity at December
31, 1995 follows:

<TABLE>
<CAPTION>
                                                                       Gross         Gross          Net          Estimated
                                                        Amortized    Unrealized    Unrealized    Unrealized       Market
                                                          Cost          Gains        Losses         Gain          Value
                                                          ----          -----        ------         ----          -----
                                                                                  (In Thousands)
<S>                                                  <C>          <C>            <C>             <C>          <C>
United States government and
  government agencies and authorities ...........    $  210,894    $   60,042    $       --     $   60,042    $  270,936
States, municipalities and political subdivisions        52,438         4,689            --          4,689        57,127
Foreign governments .............................       135,467        31,956            --         31,956       167,423
Public utilities ................................       456,938        83,571            --         83,571       540,509
All other corporate bonds .......................       896,899       140,673        (4,128)       136,545     1,033,444
Mortgage-backed securities ......................       291,881        27,194            --         27,194       319,075
                                                     ----------    ----------    ----------     ----------    ----------
Total fixed maturities classified as
  held-to-maturity ..............................    $2,044,517    $  348,125    $   (4,128)    $  343,997    $2,388,514
                                                     ==========    ==========    ==========     ==========    ==========
</TABLE>




                                       12
<PAGE>   51
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2 (continued)



      The amortized cost and estimated market value of fixed maturities at
      December 31, 1996, by contractual maturity, are presented below. Expected
      maturities may differ from contractual maturities because certain
      borrowers have the right to call or prepay obligations with or without
      call or prepayment penalties.

<TABLE>
<CAPTION>
                                               Available-for-Sale         Held-to-Maturity
                                               ------------------         ----------------
                                                         Estimated                   Estimated
                                           Amortized       Market      Amortized      Market
                                              Cost         Value         Cost          Value
                                              ----         -----         ----          -----
<S>                                       <C>          <C>            <C>           <C>    
                                                              (In Thousands)

Due in one year or less ..............    $  193,009    $  199,669    $    5,000    $    5,100
Due after one year through five years      1,582,958     1,639,786            --            --
Due after five years through ten years     1,233,599     1,264,009        28,570        32,934
Due after ten years ..................     2,079,009     2,187,009     2,162,886     2,332,399
Mortgage-backed securities ...........     2,509,158     2,563,080       291,868       299,571
                                          ----------    ----------    ----------    ----------

                          Total ......    $7,597,733    $7,853,553    $2,488,324    $2,670,004
                                          ==========    ==========    ==========    ==========
</TABLE>


      At December 31, 1996 and 1995, the Company held below investment grade
      fixed maturities of $242 million and $239 million at amortized cost,
      respectively. The respective market values of these investments were
      approximately $239 million and $240 million. These holdings amounted to
      2.3% and 2.4% of the Company's investments in fixed maturities at market
      value at December 31, 1996 and 1995, respectively.

      The carrying value of investments in fixed maturities and mortgage loans
      that did not produce income during the year ended December 31, 1996 is
      less than one percent of the total of such investments.

      Certain fixed maturity securities with an amortized cost of $4,648,000 and
      $4,578,000 at December 31, 1996 and 1995, respectively, were on deposit
      with various regulatory authorities to meet requirements of insurance and
      financial codes.

      At both December 31, 1996 and 1995, mortgage loans constituted
      approximately 4.9% of total assets and are secured by first mortgage liens
      on income-producing commercial real estate, primarily in the retail,
      industrial and office building sectors. The majority of the properties are
      located in the western United States, with 42% of the total in California.
      Individual loans generally do not exceed $5 million. At December 31, 1996,
      less than 1% of the loans were non-performing.


                                       13
<PAGE>   52
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 2 (continued)

      The proceeds from sales of investment securities and related gains and
losses for 1996 are as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31, 1996
                                                                            ----------------------------

                                                             Fixed Maturities         Fixed Maturities      Marketable
                                                             Available-for-Sale       Held-to-Maturity    Equity Securities
                                                             ------------------       ----------------    -----------------
                                                                                      (In Thousands)
<S>                                                          <C>                      <C>                 <C>
Proceeds from sales .......................................    $ 721,229              $  13,316              10,394
                                                               =========              =========           =========
                                                                                                       
Gross realized gains on sales .............................    $  19,779              $      --               4,847
Gross realized losses on sales ............................      (18,837)                (1,328)                 --
                                                               ---------              ---------           ---------
                                                                                                       
    Realized gains (losses) on sales ......................          942                 (1,328)              4,847
                                                                                                       
Other (Including net gain or loss on calls and redemptions)       13,687                   (141)                 --
Writedowns (Including writedowns on                                                                    
    securities subsequently sold) .........................       (5,465)                    --                  --
                                                               ---------              ---------           ---------
                                                                                                       
Total realized gain  (loss) ...............................    $   9,164              $  (1,469)              4,847
                                                               =========              =========           =========
</TABLE>

     Two fixed maturities classified as held-to-maturity were sold during 1996
     due to evidence of a significant deterioration in credit quality. The
     amortized cost of these securities was $14,644,000, and the losses realized
     on these sales were $1,328,000.

     The proceeds from sales of investment securities and related gains and
     losses for 1995 are as follows:


<TABLE>
<CAPTION>
                                                                               Year Ended December 31, 1995
                                                                               ----------------------------
                                                  
                                                              Fixed Maturities     Fixed Maturities       Marketable
                                                            Available-for-Sale     Held-to-Maturity    Equity Securities
                                                            ------------------     ----------------    -----------------
                                                                                   (In Thousands)
<S>                                                         <C>                    <C>                 <C>
Proceeds from sales ...............................                $ 327,160           $      --          $   2,172
                                                                   =========           =========          =========
                                                                                                        
Gross realized gains on sales .....................                $  16,366           $      --          $   1,253
Gross realized losses on sales ....................                   (4,336)                 --               (282)
                                                                   ---------           ---------          ---------
                                                                                                        
    Realized gains on sales .......................                   12,030                  --                971
                                                                                                        
Other (Including net gain on calls and redemptions)                    7,833                  --                 --
Writedowns (Including writedowns on                                                                     
    securities subsequently sold) .................                  (13,628)                 --                 --
                                                                   ---------           ---------          ---------

                                                                                                        
Total realized gain ...............................                $   6,235          $      --           $     971
                                                                   =========          =========           =========
</TABLE>

                                       14
<PAGE>   53
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 2 (continued)

      The proceeds from sales of investment securities and related gains and
losses for 1994 are as follows:

<TABLE>
<CAPTION>
                                                                            Year Ended December 31, 1994
                                                                            ----------------------------
                                                                            
                                                        Fixed Maturities       Fixed Maturities         Marketable
                                                        Available-for-Sale     Held-to-Maturity      Equity Securities
                                                        ------------------     ----------------      -----------------
                                                                              (In Thousands)
<S>                                                     <C>                    <C>                   <C>
Proceeds from sales ...............................             $ 250,227           $     --          $      65
                                                                =========           ========          =========
                                                                                                    
Gross realized gains on sales .....................             $  12,994           $     --          $     115
Gross realized losses on sales ....................                (1,533)                --               (224)
                                                                ---------           --------          ---------
                                                                                                    
     Realized gains (losses) on sales .............                11,461                 --               (109)
                                                                                                    
Other (Including net gain on calls and redemptions)                 2,475                 --                 --
Writedowns (Including writedowns on                                                                 
    securities subsequently sold) .................                (4,804)                --                 --
                                                                ---------           --------          ---------
                                                                                                    
Total realized gain (loss) ........................             $   9,132           $     --          $    (109)
                                                                =========           ========          =========
</TABLE>

      The following summarizes the realized gains and losses, the changes in
      unrealized gains and losses, and applicable income taxes on all
      investments:

<TABLE>
<CAPTION>
                                                                                           Year Ended December 31
                                                                                           ----------------------
                                                                                     1996         1995          1994
                                                                                     ----         ----          ----
                                                                                               (In Thousands)
<S>                                                                                  <C>         <C>          <C>
Realized gains (losses):
     Fixed maturities ........................................................       7,695        6,235        9,132
     Marketable equity securities ............................................       4,847          971         (109)
     First mortgage loans on real estate .....................................      (2,050)      (1,600)      (3,000)
     Real estate .............................................................        (114)          70         (184)
     Short-term investments ..................................................          --           --         (200)
     Investment in limited partnerships ......................................          61           --           --
                                                                                  --------      -------      -------

          Realized gain before federal income taxes ..........................      10,439        5,676        5,639
                                                                                  ========      =======      =======
</TABLE>


<TABLE>
<CAPTION>
                                                                                            Year Ended December 31
                                                                                            ----------------------
                                                                                               
                                                                                      1996         1995         1994
                                                                                      ----         ----         ----
                                                                                               (In Thousands)
<S>                                                                             <C>          <C>          <C>
Increase (decrease) in unrealized appreciation of:
     Fixed maturities classified as available-for-sale .......................  $ (268,956)  $  726,046    $  (201,270)
     Marketable equity securities ............................................      (1,599)       3,971         (3,432)
     Deferred policy acquisition costs valuation allowance ...................      23,775      (42,815)            --
     Applicable federal income tax ...........................................      86,373     (240,521)        71,645
                                                                                ----------   ----------    -----------


     Net change in unrealized appreciation or depreciation ...................  $ (160,407)   $ 446,681      $(133,057)
                                                                                ----------   ----------    -----------
</TABLE>

                                                                                



                                       15
<PAGE>   54
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 2 (continued)

The following table summarizes the Company's allowance for credit losses on 
non-affiliated mortgage loans.

<TABLE>
<CAPTION>
                                                        Year Ended December 31
                                                        ----------------------

                                                          1996          1995
                                                          ----          ----
                                                            (In Thousands)
<S>                                                  <C>            <C>
Allowance at beginning of year .................      $     9,633   $      9,511
Provision for credit losses ....................            2,050          1,600
Recoveries .....................................               --             15
Loans charged off as uncollectible .............             (740)        (1,493)
                                                       ----------   ------------
Allowance at end of year .......................      $    10,943   $      9,633
                                                      ===========   ============
</TABLE>

 
      The allowance includes amounts determined under FAS 114 and FAS 118
      (specific reserves), as well as general reserve amounts. The total
      investment in impaired loans, as defined under FAS 114 and 118 and before
      any reserve for losses, is $3.2 and $5.7 million at December 31, 1996 and
      1995, respectively. A specific loan loss reserve has been established for
      each impaired loan, the total of which is $835,000 and $2.1 million and is
      included in the overall allowance of $10.9 and $9.6 million at December
      31, 1996 and 1995, respectively.


3.   COMMITMENTS AND CONTINGENCIES

     The Company is obligated under a real estate lease with an affiliate,
     General America Corporation, which expires in 2010. The minimum annual
     rental commitments under this obligation are $2,336,000. At December 31,
     1996, unfunded mortgage loan commitments approximated $9,375,000. The
     Company had no other material commitments or contingencies at December 31,
     1996.


4.   FINANCIAL INSTRUMENTS

     ESTIMATED FAIR VALUES. Fair value amounts have been determined using
     available market information and appropriate valuation methodologies.
     However, considerable judgment is required in developing the estimates of
     fair value. Accordingly, these estimates are not necessarily indicative of
     the amount that could be realized in a current market exchange. The use of
     different market assumptions and/or estimating methodologies may have a
     material effect on the estimated fair value amounts.

     Carrying value is a reasonable estimate of fair value for cash, policy
     loans, short-term investments, accounts receivable and other liabilities.


                                       16
<PAGE>   55
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 4 (continued)

     Fair value amounts for investments in fixed maturities and marketable
     equity securities are the same as market value. Market value generally
     represents quoted market prices for securities traded in the public market
     place or analytically determined values for securities not publicly traded.

     The fair values of mortgage loans have been estimated by discounting the
     projected cash flows using the current rate at which loans would be made to
     borrowers with similar credit ratings and for the same maturities.

     The fair value of investment contracts with defined maturities is estimated
     by discounting projected cash flows using rates that would be offered for
     similar contracts with the same remaining maturities. For investment
     contracts with no defined maturity, fair value is estimated to be the
     present surrender value. These investment contracts are included in Funds
     Held Under Deposit Contracts.

     Estimated fair values of financial instruments at December 31 are as
     follows:

<TABLE>
<CAPTION>
                                                    1996                       1995
                                                    ----                       ----

                                         Carrying        Estimated    Carrying    Estimated
                                          Amount        Fair Value     Amount     Fair Value
                                          ------        ----------     ------     ----------

                                                           (In Thousands)
<S>                                    <C>           <C>           <C>           <C>                
Financial assets:
  Fixed maturities available-for-sale    $7,853,553    $7,853,553    $7,720,108    $7,720,108
  Fixed maturities held-to-maturity .     2,488,324     2,670,004     2,044,517     2,388,514
  Marketable equity securities ......        18,902        18,902        25,776        25,776
  Mortgage loans ....................       588,339       596,000       553,933       584,000

Financial liabilities:
  Funds held under deposit contracts      9,792,730     9,935,000     8,756,384     9,282,000
</TABLE>


     Other insurance-related financial instruments are exempt from fair value 
     disclosure requirements.

     DERIVATIVE FINANCIAL INSTRUMENTS. The Company's investments in
     mortgage-backed securities of $2.9 billion and $2.8 billion at market at
     December 31, 1996 and 1995, respectively, are primarily residential
     collateralized mortgage obligations and pass-throughs ("CMOs"). CMOs, while
     technically defined as derivative instruments, are exempt from derivative
     disclosure requirements. The Company's investment in CMOs comprised of the
     riskier, more volatile type (e.g., interest only, inverse floaters, etc.)
     has been intentionally limited to only a small amount (i.e., less than 1%
     of total CMOs at both December 31, 1996 and 1995).

     The Company does not enter into financial instruments for trading or
     speculative purposes. The Company's involvement in other investment-type
     derivatives is also, intentionally, of a very limited nature. Such
     derivatives include currency-linked bonds and fixed-rate loan commitments.
     Individually, and in the aggregate, these derivatives are not material and
     thus no additional disclosures are warranted.



                                       17

<PAGE>   56
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.   POLICY AND CONTRACT LIABILITIES

     REINSURANCE. The Company protects itself from excessive losses by ceding
     reinsurance to other companies, using automatic and facultative treaties.
     Reinsurance contracts do not relieve the Company of its obligations to
     policyholders. A continuing liability exists in the event a reinsurance
     company is unable to meet its obligations to the Company. The financial
     condition of its reinsurers is evaluated by the Company to minimize its
     exposure to losses from reinsurer insolvencies.

     The balance sheet caption "Reinsurance Recoverables" is comprised of the
     following amounts:
<TABLE>
<CAPTION>
                                                            December 31
                                                     ---------------------------
                                                         1996           1995
                                                     ------------   ------------
                                                           (In Thousands)

<S>                                                  <C>            <C>        
      Unpaid losses and adjustment expense ........  $       136    $       850
      Paid claims .................................          957            658
      Life policy liabilities .....................       23,784         14,844
      Other reinsurance recoverables ..............          327            304
                                                     -----------    -----------

           Total reinsurance recoverables .........  $    25,204    $    16,656
                                                     ===========    ===========
</TABLE>



     The effects of reinsurance on the premium and policy benefit amounts in the
     Statement of Consolidated Income are as follows:

<TABLE>
<CAPTION>
                                         Year Ended December 31
                                ------------------------------------------
                                    1996           1995           1994
                                -------------  -------------  ------------
                                             (In Thousands)
<S>                               <C>           <C>             <C>     
      Reinsurance Ceded:

           Premiums ..........    $(13,679)     $(10,385)       $(9,060)
                                  ========      ========        =======

           Policy benefits ...    $ (4,039)     $ (6,344)       $(5,588)
                                  ========      ========        =======


      Reinsurance Assumed:

           Premiums ..........    $    175      $ (5,456)       $   327
                                  ========      ========        =======

           Policy benefits ...    $  2,500      $ (2,503)       $ 3,421
                                  ========      ========        =======
</TABLE>



     In 1995, the Company sold a reinsurance assumed block of group disabled
     lives, involving disability income coverage, back to the ceding reinsurance
     pool. The ceding pool acquired the Company's $5.7 million disabled life
     claim reserve for a return-of-premium payment of $5.7 million. The
     reinsurance assumed premiums and policy benefits shown above reflect this
     transaction.

     POLICY AND CONTRACT CLAIMS. Accident and health claim reserves, the
     majority of which are incurred and paid in full within a one-year period,
     amount to less than 1% of total policy and contract liabilities. Therefore,
     no additional disclosures are warranted.


                                       18
<PAGE>   57
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   STATUTORY BASIS INFORMATION

     The Company and its subsidiaries are required to file annual statements
     with state regulatory authorities prepared on an accounting basis as
     prescribed or permitted by such authorities (statutory basis). Prescribed
     statutory accounting practices include state laws, regulations, and general
     administrative rules, as well as a variety of publications of the National
     Association of Insurance Commissioners (NAIC). Permitted statutory
     accounting practices encompass all accounting practices not so prescribed.

     Statutory net income differs from income reported in accordance with
     generally accepted accounting principles primarily because policy
     acquisition costs are expensed when incurred, reserves are based on
     different assumptions and income tax expense reflects only taxes paid or
     currently payable.

     Statutory net income and stockholder's equity, by company, are as follows:

<TABLE>
<CAPTION>
                                                                         Year Ended December 31
                                                                ----------------------------------------
                                                                    1996          1995          1994
                                                                ------------  -------------  -----------
                                                                               (In Thousands)
<S>                                                                <C>          <C>           <C> 
Statutory Net Income:
     SAFECO Life Insurance Company ..........................      $95,676      $101,456      $47,280
     SAFECO National Life Insurance Company .................        1,249         1,187        1,242
     First SAFECO National Life Insurance Company  
       of New York ..........................................          318           404          108
                                                                   -------      --------      -------

          Total .............................................      $97,243      $103,047      $48,630
                                                                   =======      ========      =======
</TABLE>

<TABLE>
<CAPTION>
                                                                         Year Ended December 31
                                                                ----------------------------------------
                                                                    1996          1995          1994
                                                                ------------  -------------  -----------
                                                                               (In Thousands)
<S>                                                                <C>           <C>           <C> 
Statutory Stockholder's Equity:
     SAFECO Life Insurance Company ..........................      $562,100      $479,152      $391,328
     SAFECO National Life Insurance Company .................        15,263        15,522        15,849
     First SAFECO National Life Insurance Company 
       of New York ..........................................       10,295        10,009         9,644
                                                                   --------      --------      --------

          Total .............................................      $587,658      $504,683      $416,821
                                                                   ========      ========      ========
</TABLE>


     The Company has received written approval from the Washington State
     Insurance Department to treat certain loans (all made at market rates) to
     related SAFECO Corporation subsidiaries as admitted assets. The allowance
     of such loans has not materially enhanced surplus at December 31, 1996.


7.   DIVIDEND RESTRICTIONS

     Insurance companies are restricted by certain states as to the amount of
     dividends they may pay within a given calendar year to their parent without
     regulatory consent. That restriction is the greater of statutory net gain
     from operations for the previous year or 10% of policyholder surplus at the
     close of the previous year, subject to a maximum limit equal to statutory
     earned surplus. The amount of retained earnings available for the payment
     of dividends to SAFECO Corporation without prior regulatory approval was
     $99,198,000 at December 31, 1996.

                                       19
<PAGE>   58
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.   EMPLOYEE BENEFIT PLANS

     SAFECO Corporation and subsidiary companies (the Companies) administer
     defined contribution, defined benefit and profit sharing bonus plans
     covering substantially all employees. The defined contribution plans
     include profit sharing retirement plans and a savings plan. Benefits are
     earned under the defined benefit plan for each year of service after 1988,
     based on the employee's compensation level plus a stipulated rate of return
     on the benefit balance. It is SAFECO Corporation's policy to fund the
     defined benefit plan on a current basis to the full extent deductible under
     federal income tax regulations. The cost of these plans to the Company was
     $7,901,000, $7,599,000 and $6,329,000 for the years ended December 31,
     1996, 1995 and 1994, respectively.

     The Companies also provide certain healthcare and life insurance benefits
     ("other postretirement benefits") for retired employees. Substantially all
     employees may become eligible for these benefits if they reach retirement
     age while working for the Companies. The cost of these benefits is shared
     with the retiree. The Company accrues for these costs during the years that
     employees provide services, under FASB Statement 106. Net periodic other
     postretirement benefit costs for the Company were $474,000, $282,000 and
     $432,000 in 1996, 1995 and 1994, respectively.

     The following table summarizes the Company's funded status of the plan:
<TABLE>
<CAPTION>
                                                                           December 31
                                                                     ------------------------
                                                                        1996         1995
                                                                     -----------  -----------
                                                                           (In Thousands)
<S>                                                                    <C>         <C>   
Total accumulated postretirement benefit obligation (APBO) ..........      $3,765      $4,310

Less:  plan assets at fair value ....................................         133         133
                                                                           ------      ------

APBO in excess of plan assets .......................................       3,632       4,177

Unrecognized gain ...................................................       1,283         361
                                                                           ------      ------

Accrued postretirement benefit cost recorded on the balance sheet ...      $4,915      $4,538
                                                                           ======      ======
</TABLE>


     Discount rate assumptions of 7.75%, 7.5% and 8.5% were used at December 31,
     1996, 1995 and 1994, respectively. The accumulated postretirement benefit
     obligation at December 31, 1996 was determined using a healthcare cost
     trend rate of 11% for 1997, declining by 1% per year, starting in 1998, to
     6% and remaining at that level thereafter. A one percentage point increase
     in the assumed healthcare cost trend rate for each year would increase the
     accumulated other postretirement benefit obligation as of December 31, 1996
     by $451,000 and the annual net periodic other postretirement benefit cost
     for the year then ended by $76,000.

                                       20
<PAGE>   59
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9.   INCOME TAXES

     The Company uses the liability method of accounting for income taxes
     pursuant to FASB Statement 109, "Accounting for Income Taxes." Under the
     liability method, deferred tax assets and liabilities are determined based
     on the differences between their financial reporting and their tax bases
     and are measured using the enacted tax rates.

     Differences between income tax computed by applying the U.S. federal income
     tax rate of 35% to income before income taxes and the provision for federal
     income taxes are as follows:
<TABLE>
<CAPTION>
                                                                Year Ended December 31
                                                       ------------------------------------------
                                                          1996           1995           1994
                                                       ------------  -------------  -------------
                                                                  (In Thousands)
<S>                                                     <C>             <C>             <C>
Computed "expected" tax expense ..................      $ 50,751        $ 48,631        $ 47,040

Dividends received deduction .....................           (24)            (44)            (64)

Tax exempt interest ..............................            (6)             (7)             (8)

Other ............................................           225            (550)            243
                                                        --------        --------        --------

     Income tax expense ..........................      $ 50,946        $ 48,030        $ 47,211
                                                        ========        ========        ========

Percent of income tax expense to income before tax          35.1%           34.6%           35.1%
                                                        ========        ========        ========
</TABLE>



     The tax effect of temporary differences which give rise to the deferred tax
     assets and deferred tax liabilities are as follows:

<TABLE>
<CAPTION>
                                                                                          December 31
                                                                                  ---------------------------
                                                                                      1996          1995
                                                                                  ------------  -------------
                                                                                        (In Thousands)
<S>                                                                                <C>           <C>
Deferred tax assets:
     Discounted loss and adjustment expense reserves ........................      $  1,359      $  1,990
     Uncollected premium adjustment .........................................         2,270         2,011

     Adjustment to life policy liabilities ..................................        34,773        30,209

     Capitalization of policy acquisition costs .............................        33,393        21,860

     Postretirement benefits ................................................         1,720         1,588

     Realized capital losses ................................................         5,887         9,348

     Guarantee fund assessments .............................................         3,518         3,680

     Other ..................................................................         1,630         1,414
                                                                                   --------      --------

            Total deferred tax assets .......................................        84,550        72,100
                                                                                   --------      --------

Deferred tax liabilities:
     Deferred policy acquisition costs ......................................        90,826        88,657
     Bond discount accrual ..................................................         9,525         5,905
     Unrealized appreciation of investment securities (Net of deferred policy
        acquisition costs valuation allowance: 1996-$6,664; 1995-$14,985) ...        86,120       172,493
     Other ..................................................................         1,727         1,537
                                                                                   --------      --------

            Total deferred tax liabilities ..................................       188,198       268,592
                                                                                   --------      --------

            Net deferred tax liability ......................................      $103,648      $196,492
                                                                                   ========      ========
</TABLE>


                                       21
<PAGE>   60
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 9 (continued)

     The following table reconciles the deferred tax benefit in the Statement of
     Income to the change in the deferred tax liability in the balance sheet at
     December 31:

<TABLE>
<CAPTION>
                                                                   1996          1995         1994
                                                                -----------   -----------  ------------
                                                                             (In Thousands)

<S>                                                              <C>          <C>           <C> 
Deferred tax benefit.........................................    $ (6,471)    $ (13,800)    $(10,154)

Deferred tax changes reported in stockholder's equity:
  Increase (decrease) in liability related to unrealized
     appreciation or depreciation of investment securities...     (94,694)      255,506      (71,645)

  Increase (decrease) in liability related to deferred
     policy acquisition costs valuation allowance............       8,321       (14,985)        --
                                                                 --------     ---------     --------

Increase (decrease) in net deferred tax liability............    $(92,844)    $ 226,721     $(81,799)
                                                                 ========     =========     ========
</TABLE>


                                       22
<PAGE>   61
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.      SEGMENT DATA

         A major portion of investment income, realized gains or losses and
assets is specifically identifiable with an industry segment. The remainder of
these amounts has been allocated in proportion to the investment income
identified with each segment.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31, 1996
                                                            --------------------------------------------
                                                              Financial        Employee
                                                               Services        Benefits        Total
                                                            --------------  --------------  ------------
                                                                            (In Thousands)
<S>                                                            <C>            <C>            <C>
Revenue:
      Premiums and Other (Including $35,477 of financial
            services revenue received from affiliates) ...    $ 48,964       $204,069       $  253,033
      Identifiable Investment Income .....................      506,628        256,939          763,567
      Investment Income Allocated ........................       48,157         24,314           72,471
      Identifiable Realized Gain from Investments ........        2,636          2,884            5,520
      Realized Gain from Investments Allocated ...........        3,271          1,648            4,919
                                                               --------       --------       ----------

            Total Revenue ................................     $609,656       $489,854       $1,099,510
                                                               ========       ========       ==========

      Income Before Income Taxes .........................     $ 81,849       $ 63,153       $  145,002
                                                               ========       ========       ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                     December 31, 1996
                                                       --------------------------------------------
                                                         Financial        Employee
                                                          Services        Benefits        Total
                                                       --------------  --------------  ------------
                                                                       (In Thousands)
<S>                                                     <C>              <C>              <C>
Identifiable Assets:

      Deferred Policy Acquisition Costs .............   $  163,802       $   76,662       $   240,464

      Policy Loans ..................................       30,774           27,379            58,153

      Invested Assets ...............................    6,660,938        3,298,105         9,959,043

      Other .........................................      163,855          533,823           697,678

Invested Assets Allocated ...........................      707,269          357,068         1,064,337

Other Assets Allocated ..............................       18,288            9,247            27,535

                                                        ----------       ----------       -----------

            Total Assets ............................   $7,744,926       $4,302,284       $12,047,210
                                                        ==========       ==========       ===========


Amortization of Deferred Policy Acquisition Costs ...   $   13,756       $   21,896       $    35,652
                                                        ==========       ==========       ===========
</TABLE>


                                       23
<PAGE>   62
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Note 10 (continued)

<TABLE>
<CAPTION>
                                                                          Year Ended December 31, 1995
                                                                 -----------------------------------------------
                                                                   Financial        Employee
                                                                   Services         Benefits           Total
                                                                 -------------    -------------      -----------
                                                                                  (In Thousands)
<S>                                                               <C>              <C>              <C>
Revenue:
      Premiums and Other (Including $29,029 of financial
           services revenue received from affiliates) ......     $  45,284        $ 203,349        $   248,633
      Identifiable Investment Income .......................        450,655          256,570            707,225

      Investment Income Allocated ..........................         44,043           26,232             70,275

      Identifiable Realized Gain (Loss) from Investments ...         16,020           (8,586)             7,434

      Realized Loss from Investments Allocated .............         (1,112)            (646)            (1,758)
                                                                  ---------        ---------        -----------

           Total Revenue ...................................      $ 554,890        $ 476,919        $ 1,031,809
                                                                  =========        =========        ===========

Income Before Income Taxes .................................      $  84,956        $  53,990        $   138,946
                                                                  =========        =========        ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                               December 31, 1995
                                                                  --------------------------------------------
                                                                   Financial        Employee
                                                                   Services         Benefits          Total
                                                                  ----------       ----------      -----------
                                                                                  (In Thousands)
<S>                                                               <C>              <C>              <C>
Identifiable Assets:
      Deferred Policy Acquisition Costs ....................      $  143,228       $   67,263       $   210,491
      Policy Loans .........................................          29,109           26,816            55,925
      Invested Assets ......................................       6,086,143        3,261,042         9,347,185
      Other ................................................         155,358          327,863           483,221
Invested Assets Allocated ..................................         671,864          400,160         1,072,024
Other Assets Allocated .....................................          18,179           11,148            29,327
                                                                  ----------       ----------       -----------

           Total Assets ....................................      $7,103,881       $4,094,292       $11,198,173
                                                                  ==========       ==========       ===========


Amortization of Deferred Policy Acquisition Costs ..........      $   12,222       $   20,154       $    32,376
                                                                  ==========       ==========       ===========
</TABLE>


                                       24
<PAGE>   63
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 10 (continued)


<TABLE>
<CAPTION>
                                                            Year Ended December 31, 1994
                                                    -----------------------------------------------
                                                       Financial        Employee
                                                       Services         Benefits           Total
                                                    -------------    -------------      -----------
                                                                        (In Thousands)
<S>                                                  <C>              <C>              <C>
Revenue:

      Premiums and Other (Including $27,955 of
           financial services revenue
           received from affiliates) ..............  $  42,805        $ 219,919        $ 262,724

      Identifiable Investment Income ..............    395,127          245,909          641,036

      Investment Income Allocated .................     39,909           24,725           64,634

      Identifiable Realized Gain from .............      6,744            1,267            8,011
      Investments

      Realized Loss from Investments Allocated ....     (1,463)            (909)          (2,372)
                                                     ---------        ---------        ---------

           Total Revenue ..........................  $ 483,122        $ 490,911        $ 974,033
                                                     =========        =========        =========

Income Before Income Taxes ........................  $  70,200        $  64,201        $ 134,401
                                                     =========        =========        =========
</TABLE>

<TABLE>
<CAPTION>
                                                               December 31, 1994
                                               -----------------------------------------------
                                                  Financial        Employee
                                                  Services         Benefits           Total
                                               -------------    -------------      -----------
                                                                  (In Thousands)
<S>                                           <C>                <C>                <C>
Identifiable Assets:

      Deferred Policy Acquisition Costs ....  $   151,614        $    95,576        $   247,190

      Policy Loans .........................       28,467             24,862             53,329

      Invested Assets ......................    4,859,921          2,874,141          7,734,062

      Other ................................      153,120            248,641            401,761

Invested Assets Allocated ..................      542,890            336,343            879,233

Other Assets Allocated .....................         (880)              (569)            (1,449)
                                              -----------        -----------        -----------

           Total Assets ....................  $ 5,735,132        $ 3,578,994        $ 9,314,126
                                              ===========        ===========        ===========

Amortization of Deferred Policy
Acquisition Costs ..........................  $     9,914        $    19,493        $    29,407
                                              ===========        ===========        ===========
</TABLE>


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