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May 6, 1998
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Attn: Filing Desk, Room 1004
Document Control
Re: SAFECO Life Insurance Company ("SAFECO")
SAFECO Resource Variable Account B ("Registrant")
(File Nos. 33-06546 and 811-4716)
Commissioners:
Attached for filing, pursuant to Rule 497(c) of the Securities Act of 1933, is a
copy of the above referenced Registrant's form of Prospectus and Statement of
Additional Information.
Please acknowledge receipt in the usual manner.
Sincerely,
/s/ William E. Crawford
William E. Crawford
Counsel
Attachment: Form of Prospectus and Statement of Additional Information
<PAGE>
MAY 1, 1998 SAFECO LIFE INSURANCE COMPANY
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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 six Portfolios, three
which are offered hereunder: 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.
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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.
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THIS PROSPECTUS SHOULD BE RETAINED FOR FUTURE REFERENCE.
This Prospectus and the Statement of Additional Information are dated May 1,
1998.
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
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PAGE
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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.................................... 12
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................................................... 14
Allocation of Net Purchase Payments................................... 14
Principal Underwriter................................................. 14
</TABLE>
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<TABLE>
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CHARGES AND DEDUCTIONS.................................................... 14
Deduction for Premium and Other Taxes................................. 14
Deduction for Mortality and Expense Risk Premium...................... 15
Deduction for Contingent Deferred Sales Charge........................ 15
Examples.............................................................. 16
Reduction or Elimination of the Contingent Deferred Sales Charge...... 17
Other Expenses........................................................ 17
Deduction for Administration Charge................................... 17
Deduction for Transfer Charge......................................... 18
RIGHTS UNDER THE CONTRACT................................................. 18
CONTRACT VALUE............................................................ 18
ANNUITY PROVISIONS........................................................ 19
Selection of Settlement Options....................................... 19
Commencement of Annuity Payments...................................... 19
Settlement Options.................................................... 19
Frequency and Amount of Annuity Payments.............................. 20
Failure to Select Settlement Option................................... 20
DISTRIBUTION REQUIREMENTS................................................. 21
Death Benefit Guarantee............................................... 21
TAXES..................................................................... 21
General............................................................... 22
Qualified Plans....................................................... 22
Multiple Contracts.................................................... 23
Income Tax Withholding................................................ 23
WITHDRAWALS............................................................... 24
Tax Treatment of Withdrawals.......................................... 24
Tax Sheltered Annuity Withdrawal Limitations.......................... 24
Withdrawal Amount..................................................... 24
LEGAL PROCEEDINGS......................................................... 25
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION.............. 25
</TABLE>
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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.
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PORTFOLIO - A segment of the SAFECO Resource Series Trust which constitutes a
separate and distinct class of shares.
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.
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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 Prospectuses.
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
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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 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.
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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>
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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 .73%
SAFECO Resource Bond Portfolio .74%
SAFECO Resource Money Market Portfolio .64%
Other Expenses
SAFECO Resource Equity Portfolio .02%
SAFECO Resource Bond Portfolio** .00%
SAFECO Resource Money Market Portfolio** .00%
</TABLE>
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Total Trust Annual Expenses (After Reimbursement)
SAFECO Resource Equity Portfolio .75%
SAFECO Resource Bond Portfolio .74%
SAFECO Resource Money Market Portfolio .64%
</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
Administration 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, 1997, 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:
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SAFECO Resource Bond Portfolio .90%
SAFECO Resource Money Market Portfolio .81%
</TABLE>
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EXAMPLES FOR SAFECO RESOURCE EQUITY SUB-ACCOUNT Year 1 Year 3 Year 5 Year 10
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Assuming a 5% return on assets, you would pay the
following expenses on a $1,000 investment:
Assuming withdrawal at end of period.................... 105 145 177 248
Assuming annuitization at end of period................. 22 67 115 248
Assuming no withdrawal.................................. 22 67 115 248
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EXAMPLES FOR SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT Year 1 Year 3 Year 5 Year 10
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Assuming a 5% return on assets, you would pay the
following expenses on a $1,000 investment:
Assuming withdrawal at end of period.................... 104 142 172 236
Assuming annuitization at end of period................. 21 64 110 236
Assuming no withdrawal.................................. 21 64 110 236
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EXAMPLES FOR SAFECO RESOURCE BOND SUB-ACCOUNT Year 1 Year 3 Year 5 Year 10
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Assuming a 5% return on assets, you would pay the
following expenses on a $1,000 investment:
Assuming withdrawal at end of period.................... 105 145 177 247
Assuming annuitization at end of period................. 22 67 115 247
Assuming no withdrawal.................................. 22 67 115 247
</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".
THE INFORMATION ABOVE IS NOT INTENDED TO BE REPRESENTATIVE OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
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Like other insurance, mutual fund, financial and business organizations and
individuals around the world, SAFECO Life and the Separate Account could be
adversely affected if the computer systems used by SAFECO Life, its principal
underwriter, underlying mutual fund managers and investment advisors or other
companies that provide services to the Separate Account do not properly process
and calculate date related information from and after January 1, 2000. This is
commonly called the "Year 2000 problem." SAFECO Life is taking steps it believes
are reasonably designed to address the Year 2000 problem with respect to the
computer systems that each of them uses and to obtain satisfactory assurances
that comparable steps are being taken by each of SAFECO Life's other, major
service providers. It is not anticipated that the Separate Account will incur
any charges or that there will be any difficulties in accurate and timely
reporting resulting from the change in year from 1999 to 2000.
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>
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1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SAFECO RESOURCE EQUITY SUB-ACCOUNT
(July 21, 1987
value,
initial public
offering $12.101)
December 31 value $ 49.122 $ 39.829 $ 32.321 $ 25.424 $ 23.630 $ 18.704 $ 17.520 $ 13.987 $ 14.937 $ 11.901
December 31 units 3,475,377 3,328,130 2,773,699 2,125,903 1,402,021 920,315 611,236 362,309 266,682 223,680
SAFECO RESOURCE BOND SUB-ACCOUNT
(July 21, 1987
value,
initial public
offering $10.126)
December 31 value $ 19.265 $ 17.991 $ 18.117 $ 15.559 $ 16.253 $ 14.882 $ 14.107 $ 12.532 $ 11.909 $ 10.835
December 31 units 501,020 503,739 481,273 479,731 446,935 310,293 255,098 219,928 211,685 200,405
SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT
(July 21, 1987
value,
initial public
offering $10.083)
December 31 value $ 15.509 $ 14.944 $ 14.417 $ 13.837 $ 13.516 $ 13.335 $ 13.074 $ 12.527 $ 11.754 $ 10.923
December 31 units 174,158 341,159 308,155 341,722 273,511 307,262 231,643 224,216 210,094 209,593
</TABLE>
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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
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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 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.
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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.
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 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
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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.
The Trust is intended to be the funding vehicle for variable annuity contracts
and variable life insurance policies to be offered by the separate accounts of
certain life insurance companies which may or may not be affiliated. The Trust
currently does not foresee any disadvantages to the Participants arising from
the fact that the interests of the holders of the variable annuity contracts and
the variable life insurance policies may differ. Nevertheless, the Trust's
Trustees intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to determine what action,
if any, should be taken in response thereto.
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.
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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.
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
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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 3.5%.
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.
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:
(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;
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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.
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
- ----------------- -------------------------------
<S> <C>
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.
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. Non-cash
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.
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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.
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
Prospectuses.
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.
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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 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.
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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.
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
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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 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.
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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 401(a)(9) of the Code.
Minimum distributions must begin by the Participant's required beginning date
defined as April lst following the later of the year the Participant reaches age
70 1/2 or the year the Participant retires (for a Participant who is not a 5%
owner).
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.
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 (not to exceed 15 years if a non-spouse
Beneficiary of a Deferred Compensation Plan Participant), a non-spouse 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 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
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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 equals 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 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.
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1. Cash or Deferred Savings Plans
Under Section 401(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 the
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 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
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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 401(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; (f)
distributions made to an alternate payee pursuant to a qualified domestic
relations order; (g) distributions made to pay health insurance premiums for an
unemployed Participant; (h) distributions made to the Participant to pay
qualified higher education expenses; and (i) Distributions made to the
Participant for a first home purchase.
Generally, distributions from a qualified plan must commence no later than April
1 of the calendar year following the later of the year in which the employee
attains age 70 1/2 or retires. For more information, see "Distribution
Requirements." If the required minimum distributions are not made, a 50% penalty
tax is imposed as to the amount not distributed.
TAX SHELTERED ANNUITY WITHDRAWAL LIMITATIONS
Effective January 1, 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.
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
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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
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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................................................................... 6
FINANCIAL STATEMENTS...................................................... 6
</TABLE>
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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 March 31, 1998, SAFECO's contribution represented 20%
of the value of the SAFECO Resource Bond Sub-Account. 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, are
the independent auditors 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 1995, 1996 and 1997, PNMR, through SSI, received
$2,318,815, $2,695,859 and $2,614,103 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, 1998.
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TABLE OF CONTENTS
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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................................................................... 6
FINANCIAL STATEMENTS...................................................... 6
</TABLE>
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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
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of Annuity Units credited to the Annuitant by (b) the Annuity Unit value as of
the 15th day of the preceding month.
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 tracked 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
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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 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.
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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 upon 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.
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FINANCIAL STATEMENTS
SAFECO RESOURCE VARIABLE ACCOUNT B
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Report of Ernst & Young LLP, Independent Auditors......................... 9
Statement of Assets and Liabilities as of December 31, 1997............... 10
Statement of Operations and Changes in Net Assets for the year or period
ended December 31, 1997 and 1996........................................ 12
Notes to Financial Statements (including accumulation unit data).......... 16
</TABLE>
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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 statement of assets and liabilities of SAFECO
Resource Variable Account B (comprising, respectively, the SAFECO Resource
Equity, SAFECO Resource Growth, SAFECO Resource Northwest, SAFECO Resource Bond,
SAFECO Resource Money Market, SAFECO Resource Small Company Stock, Scudder
International, Scudder Balanced, Lexington Natural Resources, Lexington Emerging
Markets, Federated Utility, Federated High Income Bond, Federated International
Equity, American Century Balanced, and American Century International
Sub-Accounts) as of December 31, 1997, and the related statements of operations
and changes in net assets, and the historical accumulation unit values for each
of the periods indicated therein. These financial statements and historical
accumulation unit values are the responsibility of the SAFECO Resource Variable
Account B's management. Our responsibility is to express an opinion on these
financial statements and historical accumulation unit values 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 historical
accumulation unit values are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of portfolio
shares owned as of December 31, 1997, by correspondence with the underlying
portfolio of each Sub-Account. 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 historical accumulation unit values
referred to above present fairly, in all material respects, the financial
position of each of the Sub-Accounts constituting SAFECO Resource Variable
Account B at December 31, 1997, the results of their operations, the changes in
their net assets, and the historical accumulation unit values for each of the
periods indicated therein, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Seattle, Washington
January 30, 1998
-9-
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
SAFECO Resource Variable Account B
As of December 31, 1997
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
(In Thousands, Except SAFECO
Per-Share SAFECO SAFECO SAFECO SAFECO SAFECO SMALL
and Per-Unit Amounts) EQUITY GROWTH NW BOND MMKT COMPANY
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
ASSETS:
Investments in
underlying
Portfolios:
Investments, at cost $ 145,281 $ 73,425 $ 4,003 $ 9,661 $ 2,704 $ 181
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
SHARES OWNED 6,787 3,571 304 875 2,704 14
NET ASSET VALUE PER
SHARE $ 25.18 $ 23.35 $ 15.20 $ 11.04 $ 1.00 $ 12.33
---------- --------- --------- --------- --------- ---------
Investments, at value 170,907 83,376 4,626 9,663 2,704 176
Cash 39 2 -- 4 1 --
---------- --------- --------- --------- --------- ---------
Total assets 170,946 83,378 4,626 9,667 2,705 176
LIABILITIES:
Mortality and expense
risk charge payable 189 92 5 11 3 --
Other 40 2 -- 4 1 --
---------- --------- --------- --------- --------- ---------
Total liabilities 229 94 5 15 4 --
---------- --------- --------- --------- --------- ---------
NET ASSETS $ 170,717 $ 83,284 $ 4,621 $ 9,652 $ 2,701 $ 176
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
ACCUMULATION UNITS
OUTSTANDING 3,475 2,153 298 501 174 14
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
ACCUMULATION UNIT VALUE*
(Net assets divided by
accumulation units
oustanding) $ 49.122 $ 38.686 $ 15.493 $ 19.265 $ 15.509 $ 12.759
---------- --------- --------- --------- --------- ---------
---------- --------- --------- --------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
* The redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
See Notes to Financial Statements
-10-
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------------------------
LEX LEX FED
SCUDDER SCUDDER NATURAL EMERGING FED HIGH FED AMC AMC
INT'L BALANCED RESOURCES MARKETS UTILITY INCOME INT'L BALANCED INT'L
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in
underlying
Portfolios:
Investments, at cost $15,505 $10,298 $ 646 $ 292 $ 639 $ 732 $ 295 $ 347 $ 453
-------- -------- --------- --------- -------- ------- ------- --------- ------
-------- -------- --------- --------- -------- ------- ------- --------- ------
SHARES OWNED 1,184 891 45 27 53 70 25 42 66
NET ASSET VALUE PER
SHARE $ 14.11 $ 13.30 $ 14.91 $ 8.91 $ 14.29 $ 10.95 $ 12.27 $ 8.24 $ 6.84
-------- -------- --------- --------- -------- ------- ------- --------- ------
Investments, at value 16,704 11,856 678 238 757 761 311 349 450
Cash -- 1 -- -- -- -- -- -- --
-------- -------- --------- --------- -------- ------- ------- --------- ------
Total assets 16,704 11,857 678 238 757 761 311 349 450
LIABILITIES:
Mortality and expense
risk charge payable 19 13 1 -- 1 1 1 1 --
Other -- -- -- -- -- -- -- -- --
-------- -------- --------- --------- -------- ------- ------- --------- ------
Total liabilities 19 13 1 -- 1 1 1 1 --
-------- -------- --------- --------- -------- ------- ------- --------- ------
NET ASSETS $16,685 $11,844 $ 677 $ 238 $ 756 $ 760 $ 310 $ 348 $ 450
-------- -------- --------- --------- -------- ------- ------- --------- ------
-------- -------- --------- --------- -------- ------- ------- --------- ------
ACCUMULATION UNITS
OUTSTANDING 1,184 693 45 27 50 62 26 43 66
-------- -------- --------- --------- -------- ------- ------- --------- ------
-------- -------- --------- --------- -------- ------- ------- --------- ------
ACCUMULATION UNIT VALUE*
(Net assets divided by
accumulation units
oustanding) $14.094 $17.080 $ 14.996 $ 8.703 $ 15.144 $12.290 $12.017 $ 8.185 $6.793
-------- -------- --------- --------- -------- ------- ------- --------- ------
-------- -------- --------- --------- -------- ------- ------- --------- ------
</TABLE>
- --------------------------------------------------------------------------------
* The redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
See Notes to Financial Statements
-11-
<PAGE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
SAFECO Resource Variable Account B
Year or Period Ended December 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------
SAFECO SAFECO SAFECO
EQUITY GROWTH NW
--------------------- --------------------- ---------------------
(In Thousands) 1997 1996 1997 1996 1997 1996
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 12,420 $ 12,467 $ 13,463 $ 3,680 $ 198 $ 18
Mortality and expense
risk charge (1,934) (1,394) (784) (395) (43) (30)
Net realized gain
(loss) on investments 9,610 4,626 5,338 1,462 227 66
Net change in
unrealized
appreciation 11,494 7,840 5,019 3,825 442 175
--------- --------- --------- --------- --------- ---------
NET CHANGE IN NET ASSETS
RESULTING FROM
OPERATIONS 31,590 23,539 23,036 8,572 824 229
UNIT TRANSACTIONS:
Purchases 37,076 32,687 28,799 22,046 1,905 969
Redemptions (30,507) (13,315) (13,657) (4,576) (757) (435)
--------- --------- --------- --------- --------- ---------
NET UNIT TRANSACTIONS 6,569 19,372 15,142 17,470 1,148 534
--------- --------- --------- --------- --------- ---------
TOTAL CHANGE IN NET
ASSETS 38,159 42,911 38,178 26,042 1,972 763
NET ASSETS AT BEGINNING
OF YEAR 132,558 89,647 45,106 19,064 2,649 1,886
--------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF YEAR $ 170,717 $ 132,558 $ 83,284 $ 45,106 $ 4,621 $ 2,649
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
* For the period from May 1, 1997 (inception date) to December 31, 1997.
See Notes to Financial Statements
-12-
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------------------
SAFECO
SAFECO SAFECO SMALL SCUDDER
BOND MMKT COMPANY INT'L
--------------------- --------------------- --------- ---------------------
1997 1996 1997 1996 1997* 1997 1996
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 509 $ 495 $ 172 $ 241 $ 6 $ 349 $ 219
Mortality and expense
risk charge (113) (111) (43) (63) -- (204) (142)
Net realized gain
(loss) on investments (143) (20) -- -- 1 1,473 173
Net change in
unrealized
appreciation 371 (425) -- -- (5) (467) 1,164
--------- --------- --------- --------- --------- --------- ---------
NET CHANGE IN NET ASSETS
RESULTING FROM
OPERATIONS 624 (61) 129 178 2 1,151 1,414
UNIT TRANSACTIONS:
Purchases 1,459 1,555 14,068 10,520 220 7,878 5,680
Redemptions (1,494) (1,150) (16,594) (10,042) (46) (6,231) (1,518)
--------- --------- --------- --------- --------- --------- ---------
NET UNIT TRANSACTIONS (35) 405 (2,526) 478 174 1,647 4,162
--------- --------- --------- --------- --------- --------- ---------
TOTAL CHANGE IN NET
ASSETS 589 344 (2,397) 656 176 2,798 5,576
NET ASSETS AT BEGINNING
OF YEAR 9,063 8,719 5,098 4,442 -- 13,887 8,311
--------- --------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF YEAR $ 9,652 $ 9,063 $ 2,701 $ 5,098 $ 176 $ 16,685 $ 13,887
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
* For the period from May 1, 1997 (inception date) to December 31, 1997.
See Notes to Financial Statements
-13-
<PAGE>
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
SAFECO RESOURCE VARIABLE ACCOUNT B
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------
LEX LEX
SCUDDER NATURAL EMERGING
BALANCED RESOURCES MARKETS
--------------------- --------------------- ---------------------
(In Thousands) 1997 1996 1997 1996# 1997 1996#
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 672 $ 249 $ 21 $ 1 $ -- $ --
Mortality and expense
risk charge (121) (70) (8) (3) (4) (1)
Net realized gain
(loss) on investments 350 218 42 9 3 --
Net change in
unrealized
appreciation 1,044 148 (6) 38 (49) (5)
--------- --------- --------- --------- --------- ---------
NET CHANGE IN NET ASSETS
RESULTING FROM
OPERATIONS 1,945 545 49 45 (50) (6)
UNIT TRANSACTIONS:
Purchases 4,296 4,418 450 344 299 207
Redemptions (1,677) (966) (206) (5) (211) (1)
--------- --------- --------- --------- --------- ---------
NET UNIT TRANSACTIONS 2,619 3,452 244 339 88 206
--------- --------- --------- --------- --------- ---------
TOTAL CHANGE IN NET
ASSETS 4,564 3,997 293 384 38 200
NET ASSETS AT BEGINNING
OF YEAR 7,280 3,283 384 -- 200 --
--------- --------- --------- --------- --------- ---------
NET ASSETS AT END OF YEAR $ 11,844 $ 7,280 $ 677 $ 384 $ 238 $ 200
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
* For the period from May 1, 1997 (inception date) to December 31, 1997.
# For the period from February 15, 1996 (inception date) to December 31,
1996.
See Notes to Financial Statements
-14-
<PAGE>
<TABLE>
<CAPTION>
SUB-ACCOUNTS
-------------------------------------------------------------------------------------
FED
FED HIGH FED AMC AMC
UTILITY INCOME INT'L BALANCED INT'L
------------------- ------------------- ------------------- -------- --------
1997 1996# 1997 1996# 1997 1996# 1997* 1997*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 16 $ 6 $ 15 $ 5 $ -- $ -- $ -- $ --
Mortality and expense
risk charge (6) (2) (4) -- (3) -- (1) (1)
Net realized gain
(loss) on investments 15 -- 5 -- 1 -- 1 --
Net change in
unrealized
appreciation 97 20 24 4 14 1 1 (3)
-------- -------- -------- -------- -------- --- -------- --------
NET CHANGE IN NET ASSETS
RESULTING FROM
OPERATIONS 122 24 40 9 12 1 1 (4)
UNIT TRANSACTIONS:
Purchases 431 265 682 109 273 43 363 492
Redemptions (77) (9) (77) (3) (18) (1) (16) (38)
-------- -------- -------- -------- -------- --- -------- --------
NET UNIT TRANSACTIONS 354 256 605 106 255 42 347 454
-------- -------- -------- -------- -------- --- -------- --------
TOTAL CHANGE IN NET
ASSETS 476 280 645 115 267 43 348 450
NET ASSETS AT BEGINNING
OF YEAR 280 -- 115 -- 43 -- -- --
-------- -------- -------- -------- -------- --- -------- --------
NET ASSETS AT END OF YEAR $ 756 $ 280 $ 760 $ 115 $ 310 $ 43 $ 348 $ 450
-------- -------- -------- -------- -------- --- -------- --------
-------- -------- -------- -------- -------- --- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
* For the period from May 1, 1997 (inception date) to December 31, 1997.
# For the period from February 15, 1996 (inception date) to December 31,
1996.
See Notes to Financial Statements
-15-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SAFECO Resource Variable Account B (the Separate Account) 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. Purchasers of various SAFECO variable annuity products
direct their investment to one or more of the sub-accounts of the Separate
Account. Each sub-account invests in shares of a designated portfolio as
indicated below. Not all sub-accounts are available in all SAFECO variable
annuity products.
<TABLE>
<CAPTION>
SUB-ACCOUNTS UNDERLYING PORTFOLIOS
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SAFECO Resource Series Trust
SAFECO Resource Equity (SAFECO Equity) Equity Portfolio
SAFECO Resource Growth (SAFECO Growth) Growth Portfolio
SAFECO Resource Northwest (SAFECO NW) Northwest Portfolio
SAFECO Resource Bond (SAFECO Bond) Bond Portfolio
SAFECO Resource Money Market (SAFECO MMKT) Money Market Portfolio
SAFECO Resource Small Company Stock (SAFECO Small Company) Small Company Stock Portfolio
Scudder Variable Life Investment Fund
Scudder International (SCUDDER Int'l) International Portfolio
Scudder Balanced Balanced Portfolio
Lexington Natural Resources Trust
Lexington Natural Resources (LEX Natural Resources) Natural Resources Portfolio
Lexington Emerging Markets Fund, Inc.
Lexington Emerging Markets (LEX Emerging Markets) Emerging Markets Portfolio
Federated Insurance Series
Federated Utility (FED Utility) Utility Fund II
Federated High Income Bond (FED High Income) High Income Bond Fund II
Federated International Equity (FED Int'l) International Equity Fund II
American Century Variable Portfolios, Inc.
American Century Balanced (AMC Balanced) VP Balanced Portfolio
American Century International (AMC Int'l) VP International Portfolio
</TABLE>
-16-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Separate Account in the preparation of its financial statements.
These policies are in conformity with generally accepted accounting principles,
which permit management to make certain estimates and assumptions at the date of
the financial statements.
SECURITY VALUATION. Investments in portfolio shares are carried in the
statement of assets and liabilities at net asset value as reported by the
underlying 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 the
Separate Account are not distributed, but are retained and reinvested for the
benefit of accumulation unit owners.
FEDERAL INCOME TAX. Operations of the Separate Account 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 the Separate Account.
3. EXPENSES
SAFECO assumes mortality and expense risks related to the operations of the
Separate Account. SAFECO deducts a daily charge from the assets of the Separate
Account to cover these risks. This charge is, on an annual basis, equal to a
rate of 1.25% of the daily net assets of the Separate Account.
There may be fees deducted by SAFECO from a contractholder's account and not
directly from the Separate Account. These fees may vary by product.
4. INVESTMENT TRANSACTIONS
Purchase and sales activity in underlying portfolio shares for the year ended
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
(In Thousands)
SUB-ACCOUNT PURCHASES SALES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SAFECO Equity $ 50,277 $ 33,178
SAFECO Growth 42,786 14,921
SAFECO NW 2,195 890
SAFECO Bond 2,097 1,735
SAFECO MMKT 15,049 17,449
SAFECO Small Company 226* 46*
SCUDDER Int'l 8,480 6,685
SCUDDER Balanced 5,122 1,948
LEX Natural Resources 480 222
LEX Emerging Markets 300 216
FED Utility 594 229
FED High Income 698 81
FED Int'l 350 98
AMC Balanced 368* 22*
AMC Int'l 508* 54*
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* For the period from May 1, 1997 (inception date) to December 31, 1997.
-17-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
5. HISTORICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------------------------
SUB-ACCOUNT 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SAFECO Equity $ 49.122 $ 39.829 $ 32.321 $ 25.424 $ 23.630
SAFECO Growth 38.686 27.082 20.756 14.897 13.480
SAFECO NW 15.493 11.968 10.777 10.156 9.923
SAFECO Bond 19.265 17.991 18.117 15.559 16.253
SAFECO MMKT 15.509 14.944 14.417 13.837 13.516
SAFECO Small Company* 12.759 -- -- -- --
SCUDDER Int'l 14.094 13.083 11.540 10.519 10.743
SCUDDER Balanced 17.080 13.919 12.596 10.066 10.346
LEX Natural Resources** 14.996 14.169 -- -- --
LEX Emerging Markets** 8.703 9.968 -- -- --
FED Utility** 15.144 12.106 -- -- --
FED High Income** 12.290 10.933 -- -- --
FED Int'l** 12.017 11.052 -- -- --
AMC Balanced* 8.185 -- -- -- --
AMC Int'l* 6.793 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
* Unit value on the inception date (May 1, 1997) was $10.000, $7.160, and
$6.200, for the SAFECO Small Company, AMC Balanced and AMC Int'l
Sub-accounts, respectively.
** Unit value on the inception date (February 15, 1996) was $11.920, $10.540,
$11.410, $10.050, and $10.480, for the LEX Natural Resources, LEX Emerging
Markets, FED Utility, FED High Income, and FED Int'l Sub-accounts,
respectively.
-18-
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
SAFECO LIFE INSURANCE COMPANY
AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A-19
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors................................................................ A-21
Consolidated Financial Statements
Consolidated Balance Sheet................................................................ A-22
Statement of Consolidated Income.......................................................... A-23
Statement of Changes in Shareholder's Equity.............................................. A-24
Statement of Consolidated Cash Flows...................................................... A-25
Notes to Consolidated Financial Statements................................................ A-27
</TABLE>
A-20
<PAGE>
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, 1997 and 1996, and the
related statements of consolidated income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997.
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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, 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 as required by the Financial Accounting Standards Board.
/s/ Ernst & Young LLP
Seattle, Washington
February 13, 1998
A-21
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized Cost: 1997-$8,901,583; 1996-$7,597,733)...................... $ 9,401,886 $ 7,853,553
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market Value: 1997-$3,159,888; 1996-$2,670,004)........................ 2,708,558 2,488,324
Marketable Equity Securities, at Market Value
(Cost: 1997-$10,651; 1996-$9,629)....................................... 15,552 18,902
First Mortgage Loans on Real Estate:
Nonaffiliates (At cost, less allowance for losses:
1997-$11,609; 1996-$10,943)........................................... 475,975 447,596
Affiliates.............................................................. 175,183 140,743
Real Estate............................................................... 3,399 4,134
Policy Loans.............................................................. 60,249 58,153
Short-Term Investments (At cost which approximates market)................ 56,374 69,878
Investment in Limited Partnerships........................................ 250 250
----------- -----------
Total Investments....................................................... 12,897,426 11,081,533
Cash........................................................................ 244,512 19,136
Accrued Investment Income................................................... 181,757 159,790
Accounts and Notes Receivable (At cost, less allowance
for doubtful accounts: 1997-$78; 1996-$85)................................ 48,204 23,582
Reinsurance Recoverables (Note 6)........................................... 28,515 25,204
Deferred Policy Acquisition Costs (Net of valuation
allowance: 1997-$35,349; 1996-$19,040).................................... 239,843 240,464
Present Value of Future Profits............................................. 13,239 --
Other Assets................................................................ 63,544 5,497
Current Income Taxes Recoverable (Note 10).................................. -- 792
Assets Held in Separate Accounts............................................ 905,417 491,212
----------- -----------
Total Assets........................................................ $14,622,457 $12,047,210
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy and Contract Liabilities (Note 6):
Future Policy Benefits.................................................. $ 151,675 $ 149,624
Policy and Contract Claims.............................................. 37,688 29,155
Premiums Paid in Advance................................................ 9,145 8,846
Funds Held Under Deposit Contracts...................................... 11,539,473 9,792,730
Other Policyholders' Funds.............................................. 166,759 134,422
----------- -----------
Total Policy and Contract Liabilities................................. 11,904,740 10,114,777
Other Liabilities......................................................... 125,247 76,089
Federal Income Taxes (Note 10):
Current................................................................. 19,192 --
Deferred (Includes tax on unrealized appreciation of investment
securities: 1997-$164,449; 1996-$86,120)............................... 179,296 103,648
Liabilities Related to Separate Accounts.................................. 905,417 491,212
----------- -----------
Total Liabilities..................................................... 13,133,892 10,785,726
----------- -----------
Shareholder'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 8)................................................ 1,093,048 1,011,439
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3)..... 305,517 160,045
----------- -----------
Total Shareholder's Equity............................................ 1,488,565 1,261,484
----------- -----------
Total Liabilities and Shareholder's Equity.......................... $14,622,457 $12,047,210
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
A-22
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums...................................................... $ 240,595 $ 240,100 $ 237,025
Investment Income:
Interest on Fixed Maturities................................ 830,837 767,309 716,510
Interest on Mortgage Loans.................................. 56,232 52,127 51,912
Interest on Short-Term Investments.......................... 3,419 2,935 4,017
Dividends from Marketable Equity Securities................. 1,044 843 1,387
Dividends from Redeemable Preferred Stock................... 16,026 12,654 3,065
Other Investment Income..................................... 3,843 3,879 4,155
---------- ---------- ----------
Total................................................... 911,401 839,747 781,046
Less Investment Expenses.................................... 3,485 3,709 3,546
---------- ---------- ----------
Net Investment Income......................................... 907,916 836,038 777,500
---------- ---------- ----------
Other Revenue................................................. 21,751 12,933 11,608
Realized Investment Gain (Note 3)............................. 6,807 10,439 5,676
---------- ---------- ----------
Total................................................... 1,177,069 1,099,510 1,031,809
---------- ---------- ----------
Benefits and Expenses:
Policy Benefits............................................... 844,926 782,213 723,466
Commissions................................................... 93,681 74,724 79,163
Personnel Costs............................................... 48,503 43,609 42,314
Taxes Other Than Payroll and Income Taxes..................... 11,817 15,512 7,913
Other Operating Expenses...................................... 46,639 45,224 42,978
Amortization of Deferred Policy Acquisition Costs............. 36,946 35,652 32,376
Deferral of Policy Acquisition Costs.......................... (53,068) (42,426) (35,347)
---------- ---------- ----------
Total................................................... 1,029,444 954,508 892,863
---------- ---------- ----------
Income before Federal Income Taxes.............................. 147,625 145,002 138,946
---------- ---------- ----------
Provision (Benefit) for Federal Income Taxes (Note 10):
Current....................................................... 54,705 57,417 61,830
Deferred...................................................... (4,689) (6,471) (13,800)
---------- ---------- ----------
Total................................................... 50,016 50,946 48,030
---------- ---------- ----------
Net Income...................................................... $ 97,609 $ 94,056 $ 90,916
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
A-23
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<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.......................... 1,011,439 921,383 834,467
Net Income................................................ 97,609 94,056 90,916
Dividends to Parent....................................... (16,000) (4,000) (4,000)
---------- ---------- ----------
Balance at the End of Year................................ 1,093,048 1,011,439 921,383
---------- ---------- ----------
Unrealized Appreciation of Investment Securities, Net of Tax
(Note 3):
Balance at the Beginning of Year.......................... 160,045 320,452 (126,229)
Change in Unrealized Appreciation......................... 156,073 (175,861) 474,511
Change in Deferred Policy Acquisition Costs Valuation
Allowance............................................... (10,601) 15,454 (27,830)
---------- ---------- ----------
Balance at the End of Year................................ 305,517 160,045 320,452
---------- ---------- ----------
Shareholder's Equity.................................... $1,488,565 $1,261,484 $1,331,835
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
A-24
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Insurance Premiums Received................................. $ 216,089 $ 216,801 $ 216,269
Dividends and Interest Received............................. 819,433 754,878 703,053
Other Operating Receipts.................................... 19,299 12,948 10,607
Insurance Claims and Policy Benefits Paid................... (353,227) (302,955) (272,206)
Underwriting, Acquisition and Insurance Operating Costs
Paid...................................................... (202,077) (172,251) (169,904)
Income Taxes Paid........................................... (36,140) (71,255) (61,247)
----------- ----------- -----------
Net Cash Provided by Operating Activities............... 463,377 438,166 426,572
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of:
Fixed Maturities Available-for-Sale....................... (1,891,778) (1,544,998) (1,424,510)
Fixed Maturities Held-to-Maturity......................... (199,589) (473,206) (291,965)
Purchase of Subsidiary, Net of Cash Acquired.............. 116,122 -- --
Marketable Equity Securities.............................. (5,773) (272) (260)
Other Investments......................................... (15) (15) (14)
Policy and Nonaffiliated Mortgage Loans................... (96,019) (85,485) (55,302)
Affiliated Mortgage Loans................................. (40,000) (34,650) (12,643)
Maturities of Fixed Maturities Available-for-Sale........... 435,788 466,509 375,291
Maturities of Fixed Maturities Held-to-Maturity............. 8,907 21,694 17,878
Sales of:
Fixed Maturities Available-for-Sale....................... 869,091 721,229 327,160
Fixed Maturities Held-to-Maturity......................... -- 13,316 --
Marketable Equity Securities.............................. 11,185 10,394 2,172
Other Investments......................................... 2,000 1,100 180
Real Estate............................................... 639 1,086 876
Policy and Nonaffiliated Mortgage Loans................... 61,159 48,341 50,734
Affiliated Mortgage Loans................................. 5,560 31,730 8,977
Net (Increase) Decrease in Short-Term Investments........... 11,519 (1,250) (5,811)
Other....................................................... (50,141) (747) (122)
----------- ----------- -----------
Net Cash Used in Investing Activities................... (761,345) (825,224) (1,007,359)
----------- ----------- -----------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts...................... 1,392,517 1,148,590 1,304,665
Return of Funds Held Under Deposit Contracts................ (861,221) (765,480) (720,845)
Dividends to Parent......................................... (13,000) (4,000) (4,000)
Net Proceeds from (Repayment of) Short-Term Borrowings...... 5,048 (7,802) 9,143
----------- ----------- -----------
Net Cash Provided by Financing Activities............... 523,344 371,308 588,963
----------- ----------- -----------
Net Increase (Decrease) in Cash............................... 225,376 (15,750) 8,176
Cash at Beginning of Year..................................... 19,136 34,886 26,710
----------- ----------- -----------
Cash at End of Year........................................... $ 244,512 $ 19,136 $ 34,886
----------- ----------- -----------
----------- ----------- -----------
</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
A-25
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS --
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Income........................................................... $ 97,609 $ 94,056 $ 90,916
--------- --------- ---------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain......................................... (6,807) (10,439) (5,676)
Amortization of Fixed Maturity Investments....................... (24,929) (26,811) (26,050)
Deferred Federal Income Tax Benefit.............................. (4,689) (6,471) (13,800)
Interest Expense on Deposit Contracts............................ 473,851 460,594 432,327
Other............................................................ (7,877) 574 3,140
Changes in:
Future Policy Benefits......................................... 1,855 (4,466) (1,232)
Policy and Contract Claims..................................... 2,830 2,748 (2,643)
Premiums Paid in Advance....................................... 299 637 (574)
Deferred Policy Acquisition Costs.............................. (15,688) (6,198) (6,116)
Accrued Investment Income...................................... (11,451) (8,893) (8,990)
Accrued Interest on Accrual Bonds.............................. (48,354) (44,015) (36,908)
Other Receivables.............................................. (5,467) (8,639) (2,353)
Current Federal Income Taxes................................... 18,565 (13,839) 583
Other Assets and Liabilities................................... (2,350) 4,668 449
Other Policyholders' Funds..................................... (4,020) 4,660 3,499
--------- --------- ---------
Total Adjustments............................................ 365,768 344,110 335,656
--------- --------- ---------
Net Cash Provided by Operating Activities............................ $ 463,377 $ 438,166 $ 426,572
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
A-26
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
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 directly owns three subsidiaries, SAFECO
National Life Insurance Company, First SAFECO National Life Insurance Company
of New York, and WM Life Insurance Company, and indirectly owns Empire Life
Insurance Company. The Company acquired WM Life Insurance Company and Empire
Life Insurance Company in 1997 (see Note 2). 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 1997 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. 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 shareholder'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 shareholder'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.
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.
A-27
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
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 1997, 1996 or 1995.
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.
PRESENT VALUE OF FUTURE PROFITS. The present value of future profits
represents the actuarially determined present value of anticipated profits to
be realized from annuity and life insurance business purchased. The present
value was determined using a discount rate of 12.5%. For annuity contracts,
amortization of the present value of future profits is in relation to the
present value of the expected gross profits on the contracts, discounted
using the interest rate credited to the underlying policies. The present
value of future profits is reviewed periodically to determine that the
unamortized portion does not exceed expected recoverable amounts. No
impairment adjustments were recorded in 1997.
OTHER ASSETS. Call options on the S&P 500 index are purchased by the Company
to hedge the growth in interest credited on equity indexed annuities sold.
Premiums paid to purchase these call options are capitalized and included in
other assets. Call option premiums are amortized as an expense over the term
of the option on a straight-line basis. Gains and losses on these instruments
are recorded in income when realized. The balance in other assets for call
option premiums at December 31, 1997 is $21,232.
The Financial Accounting Standards Board (FASB) has issued an exposure draft
addressing accounting and disclosure requirements for derivative financial
instruments. The Company's accounting treatment for options may change in the
future based on the issuance of definitive guidance from the FASB.
On December 31, 1997, the Company acquired Washington Mutual, Inc.' s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company, and Washington Mutual, Inc. agreed to distribute the Company's
annuity products through the Washington Mutual, Inc. multi-state banking
network. The portion of this transaction relating to the distribution
agreement is valued at $35 million and will be amortized on a straight-line
basis over 15 years. The unamortized balance of $35 million is included in
other assets.
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.
A-28
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
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.
FEDERAL INCOME TAXES. The Company and its subsidiaries, except for WM Life
Insurance Company and Empire Life Insurance Company, 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. 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
3.
In June of 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for fiscal years beginning after December
15, 1997 and the Company will adopt it in the first quarter of 1998. Adoption
will have no effect on net income but will require the reporting of
"comprehensive income," which will include net income and certain items
currently reported in shareholder's equity.
The FASB issued Statement 131, "Disclosures about Segments of an Enterprise
and Related Information," in June of 1997. Statement 131 changes the way
information about business segments is reported in annual financial
statements and requires the reporting of selected segment information in
interim reports. This statement is effective for financial statements for
periods beginning after December 15, 1997, and the Company plans on providing
the required segment information in its 1998 consolidated financial
statements. This statement has no effect on net income.
2. ACQUISITION
On December 31, 1997, the Company acquired Washington Mutual, Inc.'s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company for $105.8 million. The fair value of assets acquired, excluding
cash, was $766,921, and the fair value of liabilities assumed was $882,226.
The acquisition is being treated as a purchase for accounting purposes, and
allocation of purchase price resulted in no goodwill. The transaction was
financed through internal sources.
The unaudited pro forma condensed results of operations presented below
assume the acquisition of WM Life Insurance Company and Empire Life Insurance
Company occurred at the beginning of 1996, and give effects to actual
operating results prior to the acquisition. These pro forma results are not
necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of 1996 nor are they
necessarily indicative of future consolidated results.
A-29
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 (continued)
PRO FORMA INFORMATION -- UNAUDITED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues................................ $ 1,244,530 $ 1,162,614
Net income.............................. 103,474 97,654
</TABLE>
3. INVESTMENT SUMMARY
A summary of fixed maturities and marketable equity securities classified as
available-for-sale at December 31, 1997 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities.............. $ 604,305 $ 61,328 $ (47) $ 61,281 $ 665,586
States, municipalities and political
subdivisions.......................... 134,160 13,439 (720) 12,719 146,879
Foreign governments..................... 102,053 6,674 (7) 6,667 108,720
Public utilities........................ 1,467,168 100,208 (1,175) 99,033 1,566,201
All other corporate bonds............... 3,803,982 186,502 (1,174) 185,328 3,989,310
Mortgage-backed securities.............. 2,789,915 139,056 (3,781) 135,275 2,925,190
----------- ----------- ------------ ------------ -----------
Total fixed maturities classified as
available-for-sale.................... 8,901,583 507,207 (6,904) 500,303 9,401,886
Marketable equity securities............ 10,651 4,906 (5) 4,901 15,552
----------- ----------- ------------ ------------ -----------
Total investment securities classified
as available-for-sale................. $ 8,912,234 $ 512,113 $ (6,909) 505,204 $ 9,417,438
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Deferred policy acquisition costs
valuation allowance........................................................... (35,349)
Applicable federal income tax................................................... (164,338)
------------
Unrealized appreciation of investment
securities, net of tax, included in
shareholder's equity.......................................................... $ 305,517
------------
------------
</TABLE>
A summary of fixed maturities classified as held-to-maturity at December 31,
1997 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities.............. $ 257,881 $ 74,238 $ -- $ 74,238 $ 332,119
States, municipalities and political
subdivisions.......................... 120,345 14,917 -- 14,917 135,262
Foreign governments..................... 148,903 40,306 -- 40,306 189,209
Public utilities........................ 417,519 78,330 -- 78,330 495,849
All other corporate bonds............... 1,462,968 208,201 (142) 208,059 1,671,027
Mortgage-backed securities.............. 300,942 35,574 (94) 35,480 336,422
----------- ----------- ------ ------------ -----------
Total fixed maturities classified as
held-to-maturity...................... $ 2,708,558 $ 451,566 $ (236) $ 451,330 $ 3,159,888
----------- ----------- ------ ------------ -----------
----------- ----------- ------ ------------ -----------
</TABLE>
A-30
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
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
----------- ----------- ------------ ------------ -----------
<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
shareholder'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
----------- ----------- ----------- ----------- -----------
<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>
A-31
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
The amortized cost and estimated market value of fixed maturities at December
31, 1997, 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>
Due in one year or less............................... $ 243,954 $ 245,140 $ -- $ --
Due after one year through five years................. 1,886,758 1,959,986 3 4
Due after five years through ten years................ 1,268,615 1,320,613 49,128 56,715
Due after ten years................................... 2,712,341 2,950,957 2,358,485 2,766,747
Mortgage-backed securities............................ 2,789,915 2,925,190 300,942 336,422
----------- ----------- ----------- -----------
Total............................................. $ 8,901,583 $ 9,401,886 $ 2,708,558 $ 3,159,888
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At December 31, 1997 and 1996, the Company held below investment grade fixed
maturities of $316 million and $242 million at amortized cost, respectively.
The respective market values of these investments were approximately $329
million and $239 million. These holdings amounted to 2.6% and 2.3% of the
Company's investments in fixed maturities at market value at December 31,
1997 and 1996, respectively.
Certain fixed maturity securities with an amortized cost of $7,543 and $4,648
at December 31, 1997 and 1996, respectively, were on deposit with various
regulatory authorities to meet requirements of insurance and financial codes.
At December 31, 1997 and 1996, mortgage loans constituted approximately 4.5%
and 4.9% of total assets, respectively, 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 39% of the total in California.
Individual loans generally do not exceed $5 million.
The carrying value of investments in fixed maturities and mortgage loans that
did not produce income during the year ended December 31, 1997 is less than
one percent of the total of such investments.
The proceeds from sales of investment securities and related gains and losses
for 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
FIXED MATURITIES FIXED MATURITIES MARKETABLE
AVAILABLE-FOR-SALE HELD-TO-MATURITY EQUITY SECURITIES
----------------- ---------------- -----------------
<S> <C> <C> <C>
Proceeds from sales................................. $ 869,091 $ -- $ 11,185
----------------- -------- --------
----------------- -------- --------
Gross realized gains on sales....................... $ 5,805 $ -- $ 6,832
Gross realized losses on sales...................... (9,410) -- (397)
----------------- -------- --------
Realized gains (losses) on sales................ (3,605) -- 6,435
Other (Including net gain on calls and
redemptions)...................................... 5,074 -- --
Writedowns (Including writedowns on securities
subsequently sold)................................ (197) -- --
----------------- -------- --------
Total realized gain................................. $ 1,272 $ -- $ 6,435
----------------- -------- --------
----------------- -------- --------
</TABLE>
A-32
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (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
----------------- ---------------- -----------------
<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, and the losses realized on these sales
were $1,328.
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
----------------- ---------------- -----------------
<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>
A-33
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
The following summarizes the realized gain before federal income taxes and
the net change in unrealized appreciation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities..................................................... $ 1,272 $ 7,695 $ 6,235
Marketable equity securities......................................... 6,435 4,847 971
First mortgage loans on real estate.................................. (900) (2,050) (1,600)
Real estate.......................................................... -- (114) 70
Investment in limited partnerships................................... -- 61 --
---------- ---------- ----------
Realized gain before federal income taxes.......................... $ 6,807 $ 10,439 $ 5,676
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (decrease) in unrealized appreciation of:
Fixed maturities classified as available-for-sale.................... $ 244,483 $ (268,956) $ 726,046
Marketable equity securities......................................... (4,372) (1,599) 3,971
Deferred policy acquisition costs valuation allowance................ (16,309) 23,775 (42,815)
Applicable federal income tax........................................ (78,330) 86,373 (240,521)
---------- ---------- ----------
Net change in unrealized appreciation................................ $ 145,472 $ (160,407) $ 446,681
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes the Company's allowance for credit losses on
non-affiliated mortgage loans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Allowance at beginning of year......................................................... $ 10,943 $ 9,633
Provision for credit losses............................................................ 900 2,050
Loans charged off as uncollectible..................................................... (234) (740)
--------- ---------
Allowance at end of year............................................................... $ 11,609 $ 10,943
--------- ---------
--------- ---------
</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 $3.3 and $3.2 million at December 31, 1997 and 1996, respectively.
A specific loan loss reserve has been established for each impaired loan, the
total of which is $550 and $835 and is included in the overall allowance of
$11.6 and $10.9 million at December 31, 1997 and 1996, respectively.
4. 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 were $2,401 at December 31, 1997. At
December 31, 1997, unfunded mortgage loan commitments approximated $5,785.
The Company had no other material commitments or contingencies at December
31, 1997.
A-34
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. 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.
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>
1997 1996
---------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available-for-sale.............. $ 9,401,886 $ 9,401,886 $ 7,853,553 $ 7,853,553
Fixed maturities held-to-maturity................ 2,708,558 3,159,888 2,488,324 2,670,004
Marketable equity securities..................... 15,552 15,552 18,902 18,902
Mortgage loans................................... 651,158 677,000 588,339 596,000
Financial liabilities:
Funds held under deposit contracts............... 11,539,473 12,021,000 9,792,730 9,935,000
</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 $3.3 billion and $2.9 billion, at market
values, at December 31, 1997 and 1996, 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 1.5% and 1% of total CMOs at December 31, 1997 and 1996,
respectively).
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 call options, interest rate swaps on bond investments,
currency-linked bonds and fixed-rate loan commitments. Individually, and in
the aggregate, the notional amounts and fair values of these derivatives are
not material and thus no additional disclosures are warranted.
A-35
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Unpaid losses and adjustment expense................................................... $ 906 $ 136
Paid claims............................................................................ 770 957
Life policy liabilities................................................................ 26,756 23,784
Other reinsurance recoverables......................................................... 83 327
--------- ---------
Total reinsurance recoverables................................................. $ 28,515 $ 25,204
--------- ---------
--------- ---------
</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
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reinsurance Ceded:
Premiums................................................................ $ (13,305) $ (13,679) $ (10,385)
--------- --------- ---------
--------- --------- ---------
Policy benefits......................................................... $ (7,853) $ (4,039) $ (6,344)
--------- --------- ---------
--------- --------- ---------
Reinsurance Assumed:
Premiums................................................................ $ 180 $ 175 $ (5,456)
--------- --------- ---------
--------- --------- ---------
Policy benefits......................................................... $ 2,902 $ 2,500 $ (2,503)
--------- --------- ---------
--------- --------- ---------
</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.
7. 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.
A-36
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 (continued)
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. The net
income reported in the Statement of Consolidated Income does not include the
net income of either WM Life Insurance Company or Empire Life Insurance
Company, as their acquisition was effective December 31, 1997.
Statutory net income and shareholder's equity, by company, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Net Income:
SAFECO Life Insurance Company.......................................... $ 95,012 $ 95,676 $ 101,456
SAFECO National Life Insurance Company................................. 1,322 1,249 1,187
First SAFECO National Life Insurance Company
of New York.......................................................... 314 318 404
---------- ---------- ----------
Total............................................................ $ 96,648 $ 97,243 $ 103,047
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Stockholder's Equity:
SAFECO Life Insurance Company and Subsidiaries......................... $ 672,230 $ 587,658 $ 504,683
---------- ---------- ----------
---------- ---------- ----------
</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, 1997.
8. 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. Under insurance regulations of the state of Washington,
the 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 $94,672 at December 31,
1997.
9. 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 $7,531, $7,901 and
$7,599 for the years ended December 31, 1997, 1996 and 1995, respectively.
A-37
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 (continued)
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, pursuant to FASB Statement 106. Net periodic
other postretirement benefit costs for the Company were $392, $474 and $282
in 1997, 1996 and 1995, respectively.
The following table summarizes the Company's allocated share of the funded
status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Total accumulated postretirement benefit obligation (APBO)..................... $ 4,709 $ 3,765
Less: plan assets at fair value................................................ 172 133
--------- ---------
APBO in excess of plan assets.................................................. 4,537 3,632
Unrecognized gain.............................................................. 631 1,283
--------- ---------
Accrued postretirement benefit cost recorded on the balance sheet.............. $ 5,168 $ 4,915
--------- ---------
--------- ---------
</TABLE>
Discount rate assumptions of 7.375%, 7.75% and 7.5% were used at December
31, 1997, 1996 and 1995, respectively. The accumulated postretirement
benefit obligation at December 31, 1997 was determined using a healthcare
cost trend rate of 10% for 1998, declining by 1% per year, starting in 1999,
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, 1997 by $626 and the annual net periodic other postretirement
benefit cost for the year then ended by $68.
10. 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
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense...................................... $ 51,669 $ 50,751 $ 48,631
Dividends received deduction......................................... (49) (24) (44)
Tax exempt interest.................................................. (4) (6) (7)
Other................................................................ (1,600) 225 (550)
--------- --------- ---------
Income tax expense........................................... $ 50,016 $ 50,946 $ 48,030
--------- --------- ---------
--------- --------- ---------
Percent of income tax expense to income before tax................... 33.9% 35.1% 34.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-38
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 (continued)
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
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Discounted loss and adjustment expense reserves........................... $ 77 $ 1,359
Uncollected premium adjustment............................................ 2,607 2,270
Adjustment to life policy liabilities..................................... 51,176 34,773
Capitalization of policy acquisition costs................................ 40,354 33,393
Postretirement benefits................................................... 1,809 1,720
Realized capital losses................................................... 3,534 5,887
Guarantee fund assessments................................................ 4,163 3,518
Other..................................................................... 2,031 1,630
--------- ---------
Total deferred tax assets........................................... 105,751 84,550
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs......................................... 96,317 90,826
Present value of future profits........................................... 3,084 --
Bond discount accrual..................................................... 19,631 9,525
Unrealized appreciation of investment securities (Net of deferred policy
acquisition costs valuation allowance: 1997-$12,372; 1996-$6,664)....... 164,449 86,120
Other..................................................................... 1,566 1,727
--------- ---------
Total deferred tax liabilities...................................... 285,047 188,198
--------- ---------
Net deferred tax liability.......................................... $ 179,296 $ 103,648
--------- ---------
--------- ---------
</TABLE>
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 for
the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax benefit............................................... $ (4,689) $ (6,471) $ (13,800)
Net deferred tax liability acquired in acquisitions................ 2,008 -- --
Deferred tax changes reported in shareholder's equity:
Increase (decrease) in liability related to unrealized
appreciation or depreciation of investment securities.......... 84,037 (94,694) 255,506
Increase (decrease) in liability related to deferred policy
acquisition costs valuation allowance.......................... (5,708) 8,321 (14,985)
--------- --------- ---------
Increase (decrease) in net deferred tax liability.................. $ 75,648 $ (92,844) $ 226,721
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-39
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. 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, 1997
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Revenue:
Premiums and Other (Including $29,169 of financial services
revenue received from affiliates)............................. $ 56,649 $ 205,697 $ 262,346
Identifiable Investment Income.................................. 564,917 263,240 828,157
Investment Income Allocated..................................... 54,188 25,571 79,759
Identifiable Realized Gain (Loss) from Investments.............. (789) 1,400 611
Realized Gain from Investments Allocated........................ 4,213 1,983 6,196
----------- ----------- -------------
Total Revenue............................................. $ 679,178 $ 497,891 $ 1,177,069
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 16,249 $ 20,697 $ 36,946
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 80,110 $ 67,515 $ 147,625
----------- ----------- -------------
----------- ----------- -------------
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Costs............................... $ 166,447 $ 73,396 $ 239,843
Policy Loans.................................................... 32,091 28,158 60,249
Invested Assets................................................. 8,378,819 3,412,049 11,790,868
Other........................................................... 627,490 834,628 1,462,118
Invested Assets Allocated......................................... 710,485 335,825 1,046,310
Other Assets Allocated............................................ 15,543 7,526 23,069
----------- ----------- -------------
Total Assets.............................................. $ 9,930,875 $ 4,691,582 $ 14,622,457
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<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
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 13,756 $ 21,896 $ 35,652
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 81,849 $ 63,153 $ 145,002
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
A-40
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 (continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
Identifiable Assets:
<S> <C> <C> <C>
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
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<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
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 12,222 $ 20,154 $ 32,376
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 84,956 $ 53,990 $ 138,946
----------- ----------- -------------
----------- ----------- -------------
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<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
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
A-41
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. IMPACT OF YEAR 2000 (UNAUDITED)
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This is commonly called the "Year 2000
problem." The Company has completed its assessment and has been modifying and
replacing portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Year 2000
compliance cost for the Company is estimated at approximately $1,050, and as
of December 31, 1997, the Company has incurred and expensed approximately
$570. Based on the current progress and continuing modifications, the Company
believes that it will be Year 2000 compliant and that the Year 2000 problem
will not pose significant operational problems for its computer systems.
A-42
