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SPINNAKER PLUS File Nos. 33-69600/811-4716
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
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Post-Effective Amendment No. 7 [ X ]
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 27 [ X ]
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(Check appropriate box or boxes.)
SAFECO RESOURCE VARIABLE ACCOUNT B
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(Exact Name of Registrant)
SAFECO Life Insurance Company
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(Name of Depositor)
15411 N.E. 51st Street, Redmond, Washington 98052
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(Address of Depositor's Principal Executive Offices) (Zip Code)
Depositor's Telephone Number, including Area Code (425) 867-8000
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Name and Address of Agent for Service
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WILLIAM E. CRAWFORD
15411 N.E. 51st Street
Redmond, Washington 98052
(425) 867-8257
Approximate date of Proposed Public Offering . . . . . . . . . . As Soon as
Practicable after Effective Date
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
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X on April 30, 1999 pursuant to paragraph (b) of Rule 485
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60 days after filing pursuant to paragraph (a)(1) of Rule 485
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on (date) pursuant to paragraph (a)(1) of Rule 485
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If appropriate, check the following:
this post-effective amendment designates a new effective date for a
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previously filed post-effective amendment.
Registrant has declared that it has registered an indefinite number or amount of
securities under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. Registrant filed a Rule 24f-2 Notice for the
fiscal year ending December 31, 1998 on or about March 26, 1999.
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SAFECO RESOURCE VARIABLE ACCOUNT B
REGISTRATION STATEMENT ON FORM N-4
CROSS REFERENCE SHEET
Item No. Location
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PART A
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Item 1. Cover Page . . . . . . . . . . . . . . . Cover Page
Item 2. Definitions. . . . . . . . . . . . . . . Index of Special Terms
Item 3. Synopsis or Highlights . . . . . . . . . Fee Table; Summary
Item 4. Condensed Financial Information. . . . . Appendix -- Accumulation
Unit Value History
Item 5. General Description of Registrant,
Depositor, and Portfolio Companies . . . Other Information
Item 6. Deductions and Expenses. . . . . . . . . Expenses; Fee Table
Item 7. General Description of Variable
Annuity Contracts. . . . . . . . . . . . The Annuity Contract
Item 8. Annuity Period . . . . . . . . . . . . . Annuity Payments (Income
Phase)
Item 9. Distribution Requirements. . . . . . . . Annuity Payments (Income
Phase) and Death Benefit
Item 10. Purchases and Contract Value . . . . . . Purchase
Item 11. Redemptions. . . . . . . . . . . . . . . Access to Your Money
Item 12. Taxes. . . . . . . . . . . . . . . . . . Taxes
Item 13. Legal Proceedings. . . . . . . . . . . . Other Information
Item 14. Table of Contents of the Statement
of Additional Information. . . . . . . . Other Information
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Item No. Location
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PART B
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Item 15. Cover Page . . . . . . . . . . . . . . . Cover Page
Item 16. Table of Contents. . . . . . . . . . . . Cover Page
Item 17. General Information and History. . . . . The Separate Account;
Experts
Item 18. Services . . . . . . . . . . . . . . . . Not Applicable
Item 19. Purchase of Securities Being Offered . . Not Applicable
Item 20. Underwriters . . . . . . . . . . . . . . Distribution
Item 21. Calculation of Performance Data. . . . . Performance Information
Item 22. Annuity Payments . . . . . . . . . . . . Annuity Provisions
Item 23. Financial Statements . . . . . . . . . . Financial Statements
PART C
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Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
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PART A
PROSPECTUS
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SPINNAKER-TM- PLUS
Variable Annuity
ISSUED BY
SAFECO RESOURCE
VARIABLE ACCOUNT B
AND
SAFECO LIFE
INSURANCE COMPANY
This prospectus describes the Spinnaker Plus Variable Annuity Contract and
contains important information. Please read it before investing and keep it on
file for future reference.
To learn more about the Spinnaker Plus Variable Annuity Contract, you can obtain
a copy of the Statement of Additional Information (SAI) dated April 30, 1999.
The SAI has been filed with the Securities and Exchange Commission (SEC) and is
legally part of the prospectus. The SEC maintains a website at
http://www.sec.gov. You may request a free copy of the SAI, or a paper copy of
this prospectus if you have received it in an electronic format, by calling us
at 1-877-472-3326 or writing us at: PO Box 34690, Seattle, WA 98124-1690.
SAFECO RESOURCE SERIES TRUST
MANAGED BY SAFECO ASSET MANAGEMENT COMPANY
- RST Equity Portfolio
- RST Growth Portfolio
- RST Northwest Portfolio
- RST Bond Portfolio
- RST Money Market Portfolio
- RST Small Company Stock Portfolio
FEDERATED INSURANCE SERIES
MANAGED BY FEDERATED ADVISERS
- Federated High Income Bond Fund II
- Federated International Equity Fund II
- Federated Utility Fund II
LEXINGTON EMERGING MARKETS FUND, INC.
MANAGED BY LEXINGTON MANAGEMENT CORPORATION
- Lexington Emerging Markets Fund, Inc.
LEXINGTON NATURAL RESOURCES TRUST
MANAGED BY LEXINGTON MANAGEMENT CORPORATION
- Lexington Natural Resources Trust
SCUDDER VARIABLE LIFE INVESTMENT FUND
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
- Scudder Balanced Portfolio
- Scudder International Portfolio
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
MANAGED BY AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
- VP Balanced
- VP International
VARIABLE INSURANCE PRODUCTS FUND II ("VIP II")
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
- VIP II Contrafund Portfolio
VARIABLE INSURANCE PRODUCTS FUND III ("VIP III")
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
- VIP III Growth Opportunities Portfolio
INVESCO VARIABLE INVESTMENT FUNDS, INC.
MANAGED BY INVESCO FUNDS GROUP, INC.
- INVESCO VIF-Realty Portfolio
INVESTMENT IN A VARIABLE ANNUITY CONTRACT IS SUBJECT TO RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL. THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD,
OR ANY OTHER AGENCY.
NEITHER THE SEC OR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Dated: April 30, 1999
SPINNAKER PLUS PROSPECTUS
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<TABLE>
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TABLE OF CONTENTS PAGE
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SUMMARY........................................ 1
FEE TABLE...................................... 3
EXAMPLES....................................... 4
1. THE ANNUITY CONTRACT................ 5
Owner............................... 5
Annuitant........................... 5
Beneficiary......................... 5
Assignment.......................... 5
2. ANNUITY PAYMENTS (INCOME PHASE)..... 5
Changing Portfolios After the 6
Annuity Date......................
3. PURCHASE............................ 6
Purchase Payments................... 6
Allocation of Purchase Payments..... 7
Accumulation Units.................. 7
Right to Examine.................... 7
4. INVESTMENT OPTIONS.................. 7
Variable Investment Options......... 7
Fixed Account....................... 8
Transfers........................... 8
Scheduled Transfers................. 8
Dollar Cost Averaging............. 8
Appreciation or Interest Sweep.... 8
Portfolio Rebalancing............. 9
Substitution........................ 9
5. EXPENSES............................ 9
Insurance Charge.................... 9
Contingent Deferred Sales Charge.... 9
Withdrawal Charge................... 9
Transfer Charge..................... 9
Premium Taxes....................... 9
Income or Other Taxes............... 9
Portfolio Expenses.................. 10
6. TAXES............................... 10
Annuity Contracts in General........ 10
Qualified Contracts................. 10
Non-qualified Contracts............. 10
Diversification..................... 10
Tax Withholding..................... 10
7. ACCESS TO YOUR MONEY................ 10
Free Withdrawal Amount.............. 11
Healthcare Confinement.............. 11
Repetitive Withdrawals.............. 11
Withdrawal Restrictions on TSA or 11
403(b)............................
Withdrawal Restrictions on Texas 11
Optional Retirement Program
("Texas ORP").....................
Minimum Value....................... 11
8. PERFORMANCE......................... 11
9. DEATH BENEFIT....................... 12
Death of Owner before Annuity 12
Date..............................
Death of Annuitant after Annuity 13
Date..............................
Beneficiary Designation............. 13
10. OTHER INFORMATION................... 13
SAFECO Life......................... 13
Separate Account.................... 13
General Account..................... 13
Distribution (Principal 13
Underwriter)......................
Legal Proceedings................... 14
Right to Suspend Annuity Payments, 14
Transfers or Withdrawals..........
Voting Rights....................... 14
Reduction of Charges or Additional 14
Amounts Credited..................
Year 2000........................... 14
Internet Information................ 14
Financial Statements................ 14
TABLE OF CONTENTS OF STATEMENT OF
ADDITIONAL INFORMATION......................... 14
APPENDIX
Accumulation Unit Value History................ A-1
INDEX OF SPECIAL TERMS
We have used simple, clear language as much as possible in
this prospectus. However, by the very nature of the
contract certain technical words or terms are unavoidable.
We have identified the following as some of these words or
terms. They are identified in the text in italic and the
page that is indicated here is where we believe you will
find the best explanation for the word or term.
PAGE
Accumulation Phase............................. 5
Accumulation Unit.............................. 7
Annuitant...................................... 5
Annuity Date................................... 5
Annuity Payments............................... 5
Annuity Unit................................... 7
Beneficiary.................................... 5
Fixed Account.................................. 8
Income Phase................................... 5
Joint Owner.................................... 5
Non-qualified.................................. 10
Owner.......................................... 5
Portfolios..................................... 8
Purchase Payment............................... 6
Qualified...................................... 10
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SPINNAKER PLUS PROSPECTUS
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Tax Deferral................................... 5
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SPINNAKER PLUS PROSPECTUS
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SUMMARY
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TOPICS IN THIS SUMMARY CORRESPOND TO SECTIONS IN THE PROSPECTUS WHICH DISCUSS
THEM IN MORE DETAIL.
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THE ANNUITY CONTRACT
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The annuity contract is an agreement between you, the OWNER, and SAFECO Life
Insurance Company ("SAFECO Life", "we", and "us"). It is designed to help you
invest on a tax-deferred basis and meet long-term financial goals, such as
retirement funding. The contract provides for a guaranteed income or a death
benefit. You should not buy the contract if you are looking for a short-term
investment or if you cannot accept the risk of getting back less money than you
put in.
You may divide your money among any or all of our 18 variable investment
PORTFOLIOS and 1 FIXED ACCOUNT. The value of the PORTFOLIOS can fluctuate up or
down, based on the performance of the underlying investments. Your investment in
the PORTFOLIOS is not guaranteed and you may lose money. The FIXED ACCOUNT
offers an interest rate guaranteed by SAFECO Life. Your choices for the various
investment options are found in Section 4.
Like most annuities, this contract has an ACCUMULATION PHASE and an INCOME
PHASE. During the ACCUMULATION PHASE, you invest money in your contract.
Earnings accumulate on a tax-deferred basis and are treated as income when you
make a withdrawal. Your earnings are based on the investment performance of the
PORTFOLIOS you selected and/or the interest rate earned on the FIXED ACCOUNT.
During the INCOME PHASE, you will receive payments from your annuity.
The amount of money you are able to accumulate in your contract during the
ACCUMULATION PHASE will determine the amount of your payments during the INCOME
PHASE.
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ANNUITY PAYMENTS (INCOME PHASE)
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You can select from one of four payment options. This selection cannot be
changed after your payments begin. During the INCOME PHASE, you have the same
investment options you had during the ACCUMULATION PHASE. You can choose to have
payments come from the FIXED ACCOUNT, the PORTFOLIOS or both. If you choose to
have any part of your payments come from the PORTFOLIOS, the dollar amount of
your payments may go up or down.
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PURCHASE
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You can buy this contract with $50,000 or more. You can make additional PURCHASE
PAYMENTS of $250 or more only within six months of your initial PURCHASE
PAYMENT. These additional PURCHASE PAYMENTS are not permitted in New Jersey.
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INVESTMENT OPTIONS
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Not all PORTFOLIOS listed below may be available for all contracts. Each
PORTFOLIO is fully described in its accompanying prospectus.
MANAGED BY SAFECO ASSET MANAGEMENT COMPANY
- RST Equity Portfolio
- RST Growth Portfolio
- RST Northwest Portfolio
- RST Bond Portfolio
- RST Money Market Portfolio
- RST Small Company Stock Portfolio
MANAGED BY FEDERATED ADVISERS
- Federated High Income Bond Fund II
- Federated International Equity Fund II
- Federated Utility Fund II
MANAGED BY LEXINGTON MANAGEMENT CORPORATION
- Lexington Emerging Markets Fund, Inc.
- Lexington Natural Resources Trust
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
- Scudder Balanced Portfolio
- Scudder International Portfolio
MANAGED BY AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
- VP Balanced
- VP International
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
- VIP II Contrafund Portfolio
- VIP III Growth Opportunities Portfolio
MANAGED BY INVESCO FUNDS GROUP, INC.
- INVESCO VIF-Realty Portfolio
Depending upon market conditions, you can make or lose money in any of these
PORTFOLIOS. You may also allocate money to the FIXED ACCOUNT which credits
guaranteed interest.
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EXPENSES
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The contract has insurance features and investment features, and there are costs
related to each.
We deduct an insurance charge ("mortality and expense risk charge") which equals
1.25% annually of the average daily value of your contract allocated to the
PORTFOLIOS. This is not charged on money allocated to the FIXED ACCOUNT.
If you take more than 10% of your contract value out in a contract year, you may
be assessed a contingent
SPINNAKER PLUS PROSPECTUS
1
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deferred sales charge. The amount of this charge depends upon the age of your
contract and is based upon the amount withdrawn. It starts at 8% in the first
contract year and decreases one percent each contract year until in the ninth
and later contract years when there is no charge.
If more than one withdrawal is made during a contract year, a separate
withdrawal charge equal to the lesser of $25 or 2% of the amount withdrawn may
apply.
You can transfer between investment options up to 12 times per contract year
free of charge. A transfer charge equal to the lesser of $10 or 2% of the amount
being transferred may apply to each additional transfer.
In a limited number of states there is a premium tax of up to 3.5%, depending
upon the state. In this case, a premium tax charge for the payment of these
taxes may be deducted.
There are also annual PORTFOLIO expenses which vary depending upon the
PORTFOLIOS you select. In 1998, these expenses ranged from 0.56% to 2.08%.
The Fee Table and Examples following this Summary show the various expenses you
will incur directly and indirectly by investing in the contract. There are
situations where all or some of the OWNER transaction expenses do not apply. See
Section 5 -- Expenses for a complete discussion.
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TAXES
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Generally, earnings and amounts equal to PURCHASE PAYMENTS made with pre-tax
dollars are not taxed until you take them out. During the ACCUMULATION PHASE,
taxable amounts generally come out first and are taxed as ordinary income.
Exceptions may apply to contracts issued in connection with certain retirement
plans. If you are younger than 59 1/2 when you take money out, you may be
charged a 10% penalty on the taxable amount. During the INCOME PHASE, ANNUITY
PAYMENTS are considered partly a return of your original investment and partly
earnings, and are taxed in the year received.
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ACCESS TO YOUR MONEY
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You may take money out at any time during the ACCUMULATION PHASE unless you are
restricted by requirements of a retirement plan. Each contract year, you can
take up to 10% of the contract value without paying a contingent deferred sales
charge. Amounts in excess of 10% may be subject to a contingent deferred sales
charge. This charge varies based on the age of your contract, not on the age of
particular PURCHASE PAYMENTS. You may have to pay income taxes and tax penalties
on any money you take out.
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PERFORMANCE
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The value of your contract will vary up or down depending upon the investment
performance of the PORTFOLIOS you choose. Past performance is not a guarantee of
future results.
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DEATH BENEFIT
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If you die before moving to the INCOME PHASE, your BENEFICIARY will receive a
death benefit.
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OTHER INFORMATION
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RIGHT TO EXAMINE. If you cancel the contract within 10 days after receiving it
(or whatever period is required in your state), we will send your money back
without assessing a contingent deferred sales charge. You will receive whatever
your contract is worth on the day we receive your request. This may be more or
less than your original PURCHASE PAYMENT. If required by law, we will return
your original PURCHASE PAYMENT.
TRANSACTIONS. You can initiate transfers or withdrawals as needed or schedule
them in advance under the following strategies:
- Dollar Cost Averaging: You may elect to automatically transfer a set amount
from any PORTFOLIO or the FIXED ACCOUNT to any of the other PORTFOLIOS
monthly or quarterly. This feature attempts to achieve a lower average cost
per unit over time.
- Appreciation or Interest Sweep: As long as your contract value exceeds
$10,000, you may elect to have interest from the FIXED ACCOUNT or earnings
from the RST Money Market Portfolio automatically swept monthly, quarterly,
or annually into any PORTFOLIO of your choice.
- Portfolio Rebalancing: As long as your contract value exceeds $10,000, you
may elect to have each PORTFOLIO rebalanced quarterly, semi-annually or
annually to maintain your specified allocation percentages.
- Repetitive Withdrawals: You may elect to receive monthly, quarterly or
annual checks during the ACCUMULATION PHASE. Any money you receive may
result in contract charges, income taxes and tax penalties.
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INQUIRIES
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If you need more information, please contact us at:
SAFECO LIFE INSURANCE COMPANY
15411 N.E. 51ST STREET
REDMOND, WA 98052
1-877-472-3326
http://www.SAFECO.com
SPINNAKER PLUS PROSPECTUS
2
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SAFECO RESOURCE VARIABLE ACCOUNT B FEE TABLE
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OWNER TRANSACTION EXPENSES (See Note 2)
Contingent Deferred Sales Charge (as a percentage of the amount withdrawn)
No charge for first 10% of contract value withdrawn in a contract year.
Thereafter, the charge is:
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year 1 ........... 8% year 4 ........... 5% year 7 ........... 2%
year 2 ........... 7% year 5 ........... 4% year 8 ........... 1%
year 3 ........... 6% year 6 ........... 3% year 9+ .......... 0%
</TABLE>
Withdrawal Charge
No charge for first withdrawal in a contract year; thereafter, the charge is
$25 per withdrawal or, if less, 2% of the amount of the withdrawal.
Transfer Charge
No charge for first 12 transfers in a contract year; thereafter, the charge
is $10 per transfer or, if less, 2% of the amount transferred.
ANNUAL ADMINISTRATION MAINTENANCE CHARGE
None.
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SEPARATE ACCOUNT ANNUAL EXPENSES Mortality and Expense Risk Charge............ 1.25%
(as a percentage of average account value) Asset Related Administration Charge.......... None
Total Separate Account Annual Expenses....... 1.25%
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<CAPTION>
Total Annual
PORTFOLIO EXPENSES Management Other Portfolio
(as a percentage of average net assets) Fees Expenses Expenses
(after reimbursement and waiver for certain
Portfolios)
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MANAGED BY SAFECO ASSET MANAGEMENT COMPANY (a)
RST Equity Portfolio............................................................. .74% .04% .78%
RST Growth Portfolio............................................................. .74% .06% .80%
RST Northwest Portfolio.......................................................... .74% .22% .96%
RST Bond Portfolio............................................................... .74% .09% .83%
RST Money Market Portfolio....................................................... .65% .16% .81%
RST Small Company Stock Portfolio................................................ .85% .10% .95%
MANAGED BY FEDERATED ADVISERS (a)
Federated High Income Bond Fund II............................................... .60% .18% .78%
Federated International Equity Fund II........................................... .53% .72% 1.25%
Federated Utility Fund II........................................................ .68% .25% .93%
MANAGED BY LEXINGTON MANAGEMENT CORPORATION (a)
Lexington Emerging Markets Fund, Inc............................................. .85% 1.23% 2.08%
Lexington Natural Resources Trust................................................ 1.00% .29% 1.29%
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC. (a)
Scudder Balanced Portfolio....................................................... .475% .082% .56%
Scudder International Portfolio.................................................. .867% .176% 1.04%
MANAGED BY AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. (a)
VP Balanced (c).................................................................. 0.90% 0.00% 0.90%
VP International (c)............................................................. 1.50% 0.00% 1.50%
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY (b)
VIP II Contrafund Portfolio...................................................... .59% .11% .70%
VIP III Growth Opportunities Portfolio........................................... .59% .12% .71%
MANAGED BY INVESCO FUNDS GROUP, INC. (a)
INVESCO VIF-Realty Portfolio..................................................... .90% 1.00% 1.90%
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</TABLE>
(a) In some cases the fund advisers agree to waive or reimburse all or a portion
of the PORTFOLIO expenses. For those PORTFOLIOS where such an agreement
exists, the expenses absent waiver or reimbursement would have been .99% for
the RST Northwest Portfolio; .98% for the RST Bond Portfolio; .89% for the
RST Money Market Portfolio; 1.18% for the RST Small Company Stock Portfolio;
1.72% for the Federated International Equity Fund II; 1.00% for the
Federated Utility Fund II and 8.78% for the INVESCO VIF-Realty Portfolio. In
addition, we have Fund Participation Agreements with each of the non-SAFECO
fund managers that describe the administrative practices and
responsibilities of the parties.
(b) A portion of the brokerage commissions certain funds pay was used to reduce
funds expenses. In addition, certain funds have entered into arrangements
with their custodian whereby credits realized, as a result of uninvested
cash balances were used to reduce custodian expenses. Including these
reductions, the total operating expenses presented in the table would have
been .66% for the VIP II Contrafund Portfolio and .70% for the VIP III
Growth Opportunities Portfolio.
(c) These PORTFOLIOS charge their management fee based on assets in the
PORTFOLIO. The highest fees are shown in this Fee Table. See the PORTFOLIO
prospectuses for more detailed information.
The above PORTFOLIO expenses were provided by the PORTFOLIOS. We have not
independently verified the accuracy of the information.
SPINNAKER PLUS PROSPECTUS
3
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EXAMPLES
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You would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets:
(a) upon surrender at the end of each time period;
(b) if the contract is not surrendered or is annuitized.
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGED BY SAFECO ASSET MANAGEMENT COMPANY
RST Equity Portfolio (a) $ 95 (a) $ 123 (a) $ 151 (a) $ 236
(b) $ 21 (b) $ 64 (b) $ 109 (b) $ 236
RST Growth Portfolio (a) $ 95 (a) $ 123 (a) $ 152 (a) $ 238
(b) $ 21 (b) $ 64 (b) $ 110 (b) $ 238
RST Northwest Portfolio (a) $ 96 (a) $ 128 (a) $ 160 (a) $ 254
(b) $ 22 (b) $ 69 (b) $ 118 (b) $ 254
RST Bond Portfolio (a) $ 95 (a) $ 124 (a) $ 153 (a) $ 241
(b) $ 21 (b) $ 65 (b) $ 112 (b) $ 241
RST Money Market Portfolio (a) $ 95 (a) $ 123 (a) $ 152 (a) $ 239
(b) $ 21 (b) $ 65 (b) $ 111 (b) $ 239
RST Small Company Stock Portfolio (a) $ 96 (a) $ 127 (a) $ 159 (a) $ 253
(b) $ 22 (b) $ 69 (b) $ 118 (b) $ 253
MANAGED BY FEDERATED ADVISERS
Federated High Income Bond Fund II (a) $ 95 (a) $ 123 (a) $ 151 (a) $ 236
(b) $ 21 (b) $ 64 (b) $ 109 (b) $ 236
Federated International Equity Fund II (a) $ 99 (a) $ 136 (a) $ 174 (a) $ 284
(b) $ 25 (b) $ 78 (b) $ 133 (b) $ 284
Federated Utility Fund II (a) $ 96 (a) $ 127 (a) $ 158 (a) $ 251
(b) $ 22 (b) $ 68 (b) $ 117 (b) $ 251
MANAGED BY LEXINGTON MANAGEMENT CORPORATION
Lexington Emerging Markets Fund, Inc. (a) $ 107 (a) $ 159 (a) $ 213 (a) $ 362
(b) $ 34 (b) $ 102 (b) $ 174 (b) $ 362
Lexington Natural Resources Trust (a) $ 99 (a) $ 137 (a) $ 176 (a) $ 288
(b) $ 26 (b) $ 79 (b) $ 135 (b) $ 288
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
Scudder Balanced Portfolio (a) $ 93 (a) $ 116 (a) $ 140 (a) $ 212
(b) $ 18 (b) $ 57 (b) $ 98 (b) $ 212
Scudder International Portfolio (a) $ 97 (a) $ 130 (a) $ 164 (a) $ 263
(b) $ 23 (b) $ 72 (b) $ 123 (b) $ 263
MANAGED BY AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
VP Balanced (a) $ 96 (a) $ 126 (a) $ 157 (a) $ 248
(b) $ 22 (b) $ 67 (b) $ 115 (b) $ 248
VP International (a) $ 101 (a) $ 143 (a) $ 186 (a) $ 308
(b) $ 28 (b) $ 85 (b) $ 145 (b) $ 308
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
VIP II Contrafund Portfolio (a) $ 94 (a) $ 120 (a) $ 147 (a) $ 227
(b) $ 20 (b) $ 61 (b) $ 105 (b) $ 227
VIP III Growth Opportunities Portfolio (a) $ 94 (a) $ 121 (a) $ 148 (a) $ 229
(b) $ 20 (b) $ 62 (b) $ 106 (b) $ 229
MANAGED BY INVESCO FUNDS GROUP, INC.
INVESCO VIF-Realty Portfolio (a) $ 105 (a) $ 154 (a) $ 204 (a) $ 346
(b) $ 32 (b) $ 97 (b) $ 165 (b) $ 346
</TABLE>
EXPLANATION OF FEE TABLE AND EXAMPLES
1. The purpose of the Fee Table is to show the various expenses you will incur
directly and indirectly by investing in the contract. The Fee Table reflects
expenses of the Separate Account as well as the PORTFOLIOS.
2. There are situations where all or some of the OWNER transaction expenses do
not apply. See Section 5 -- Expenses for a complete discussion.
3. The examples do not reflect premium taxes that may apply depending on the
state where you live.
4. The examples should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
THE APPENDIX CONTAINS ACCUMULATION UNIT VALUE HISTORY.
SPINNAKER PLUS PROSPECTUS
4
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- ---------------------------------------------------
1. THE ANNUITY CONTRACT
- ----------------------------------------------
This prospectus describes a variable annuity contract offered by SAFECO Life.
The annuity contract is an agreement between SAFECO Life and you, the OWNER,
where we promise to pay you (or someone else you choose) an income in the form
of ANNUITY PAYMENTS, beginning on a date you select, or a death benefit to your
BENEFICIARY(IES). Before you begin receiving ANNUITY PAYMENTS, your annuity is
in the ACCUMULATION PHASE. Once you begin receiving ANNUITY PAYMENTS, your
contract switches to the INCOME PHASE.
The contract benefits from TAX DEFERRAL. You can change your investment
allocation or transfer between investment options without paying tax on contract
earnings until you take money out.
The contract is called a variable annuity because you can choose among 18
variable investment PORTFOLIOS in which you can make or lose money depending
upon market conditions. The investment performance of the PORTFOLIO(S) you
select affects the value of your contract and the amount of any variable ANNUITY
PAYMENTS.
The contract also has a FIXED ACCOUNT. Your money earns interest at a rate we
set. The annual effective interest rate credited to a PURCHASE PAYMENT will
never be less than 3% and is guaranteed for at least 12 months. The total
interest credited to you in the FIXED ACCOUNT affects the value of your
contract. The amount of fixed ANNUITY PAYMENTS you receive remains level for the
entire INCOME PHASE.
OWNER
The OWNER is as shown on the contract application, unless changed. You, as the
OWNER, may exercise all ownership rights under the contract. Once ANNUITY
PAYMENTS begin, the ANNUITANT is the OWNER.
The contract can be owned by JOINT OWNERS. Each JOINT OWNER has equal ownership
rights and must exercise those rights jointly.
ANNUITANT
The ANNUITANT is the person on whose life ANNUITY PAYMENTS are based and who
receives ANNUITY PAYMENTS. You are the ANNUITANT unless you designate someone
else before ANNUITY PAYMENTS begin.
BENEFICIARY
The BENEFICIARY receives any benefit payable after you die, or if applicable,
after the ANNUITANT dies.
ASSIGNMENT
You can assign the contract. This may result in current taxation and, if you are
under age 59 1/2, a 10% tax penalty. Assignments are effective when we receive
and acknowledge them. We are not liable for payments made prior to receipt of an
effective assignment. We are not responsible for the validity of any
assignments, tax consequences or actions we may take based on an assignment
later determined to be invalid.
If your contract is an Individual Retirement Annuity ("IRA") or otherwise
tax-qualified, your ability to assign the contract may be limited.
- ---------------------------------------------------
2. ANNUITY PAYMENTS (INCOME PHASE)
- ----------------------------------------------
You can switch to the INCOME PHASE at any time unless you are restricted by the
requirements of a retirement plan. During the INCOME PHASE, the ANNUITANT will
receive ANNUITY PAYMENTS beginning on the ANNUITY DATE. You may select or change
an annuity option at any time prior to the ANNUITY DATE.
If you want to retain ownership rights in the contract after the ANNUITY DATE,
including the right to receive ANNUITY PAYMENTS, you must designate yourself as
the ANNUITANT. After the ANNUITY DATE, you cannot change or add an ANNUITANT or
change your annuity option. If you are not the ANNUITANT and ANNUITY PAYMENTS
begin, there may be gift tax and income tax consequences.
ANNUITY PAYMENTS are required to begin on the earlier of:
- the first available payment date after you elect to begin ANNUITY PAYMENTS;
- the latest ANNUITY DATE specified in your contract; or
- a different ANNUITY DATE if required by law.
You can choose whether ANNUITY PAYMENTS will be made on a fixed basis, variable
basis, or both. You can choose separate ANNUITY DATES for variable ANNUITY
PAYMENTS and fixed ANNUITY PAYMENTS. If the amount applied to an annuity option
is less than $5,000, we may pay you in a lump sum where permitted by state law.
You can choose one of the options listed below or any other option you want and
that we agree to provide. Life annuity options (the first three options) convert
ACCUMULATION UNITS to ANNUITY UNITS on the ANNUITY DATE and once started, cannot
be stopped. See the SAI for additional information.
LIFE ANNUITY. The ANNUITANT receives monthly ANNUITY PAYMENTS for life.
ANNUITY PAYMENTS stop when the ANNUITANT dies.
LIFE ANNUITY WITH GUARANTEED PERIOD. The ANNUITANT receives monthly ANNUITY
PAYMENTS for life with the promise that payments will be made for a
guaranteed period, usually 10 or 20 years, as selected by you. If the
ANNUITANT dies before all guaranteed payments have been made, the rest will
be made to the BENEFICIARY. ANNUITY PAYMENTS stop the later of the date the
ANNUITANT dies or the date the last guaranteed payment is made.
SPINNAKER PLUS PROSPECTUS
5
<PAGE>
JOINT AND SURVIVOR LIFE ANNUITY. The ANNUITANT receives monthly ANNUITY
PAYMENTS for life. After the ANNUITANT dies, the second ANNUITANT, if living,
receives a specified percentage of each ANNUITY PAYMENT for life. At the time
you elect ANNUITY PAYMENTS, you choose the second ANNUITANT and the
percentage of payment the second ANNUITANT is to receive. ANNUITY PAYMENTS
stop on the later of the date the ANNUITANT dies or the date the second
ANNUITANT dies.
SYSTEMATIC WITHDRAWAL INCOME PLAN-TM-. The ANNUITANT receives substantially
equal ANNUITY PAYMENTS based on:
- the ANNUITANT'S life expectancy; or
- the joint life expectancy of the ANNUITANT and a BENEFICIARY, with at
least 50% of the contract value expected to be distributed during the
ANNUITANT'S life.
ANNUITY PAYMENTS can be monthly, quarterly, or annually as selected by you.
Each ANNUITY PAYMENT reduces the number of ACCUMULATION UNITS and/or value of
the FIXED ACCOUNT in the contract. ANNUITY PAYMENTS continue until the
ANNUITANT'S entire value in the PORTFOLIOS and/or FIXED ACCOUNT has been paid
out. The ANNUITANT can stop these ANNUITY PAYMENTS and receive a lump sum
equal to the annuity value less any contingent deferred sales charge. There
may be tax consequences and penalties for stopping these ANNUITY PAYMENTS.
This option does not promise to make payments for the ANNUITANT'S life. If
the ANNUITANT dies before all ANNUITY PAYMENTS have been made, there will be
a death benefit payable to the BENEFICIARY. See Section 9 -- Death Benefit
for more information.
If you do not choose an annuity option by the ANNUITY DATE, we will make ANNUITY
PAYMENTS under the Systematic Withdrawal Income Plan unless your contract states
otherwise.
We reserve the right to change the payment frequency if payment amounts would be
less than $250. You may elect to have payments delivered by mail or
electronically transferred to a bank account.
We require proof of age before beginning ANNUITY PAYMENTS that are based on life
or life expectancy. If the age of any ANNUITANT has been misstated, ANNUITY
PAYMENTS will be based on the corrected information. Underpayments will be made
up in a lump sum with the next scheduled payment. Overpayments will be deducted
from future payments until the total is repaid. We may require evidence
satisfactory to us that an ANNUITANT is living before we make any payment.
ANNUITY PAYMENTS based on investment in the FIXED ACCOUNT will stay the same.
Any portion of ANNUITY PAYMENTS based on investment in the PORTFOLIOS will vary
in amount depending on investment performance. If you don't tell us otherwise,
ANNUITY PAYMENTS will be based on the investment allocations in place on the
ANNUITY DATE. After the ANNUITY DATE, the ANNUITANT may not switch between fixed
and variable ANNUITY PAYMENTS.
If you choose to have any portion of ANNUITY PAYMENTS based on investment in the
PORTFOLIOS, the dollar amount of each payment will depend on:
- the value of your contract in the PORTFOLIOS as of the first close of the
New York Stock Exchange ("NYSE") on or after the 15th day of the month
preceding the ANNUITY DATE;
- an assumed investment return; and
- the investment performance of the PORTFOLIOS you selected.
If actual performance of the PORTFOLIOS exceeds the assumed investment return,
the value of ANNUITY UNITS increases and subsequent ANNUITY PAYMENTS will be
larger. Similarly, if the actual performance is less than the assumed investment
return, the value of your ANNUITY UNITS decreases and subsequent ANNUITY
PAYMENTS will be smaller. Under the Systematic Withdrawal Income Plan, ANNUITY
PAYMENTS remain substantially equal. However, investment performance may
increase or decrease the number of ACCUMULATION UNITS that will be liquidated to
make substantially equal payments and may shorten or lengthen the period over
which ANNUITY PAYMENTS are received.
CHANGING PORTFOLIOS AFTER
THE ANNUITY DATE
After ANNUITY PAYMENTS start, the ANNUITANT may request to change PORTFOLIO
elections once a month. Transfers are not allowed to or from the FIXED ACCOUNT.
Certain election requests may be modified to ensure that the value remaining in
a PORTFOLIO after the change is sufficient to satisfy any distribution
requirements calculated for that tax year. Changes will affect the number of
ANNUITY UNITS used to calculate ANNUITY PAYMENTS. See the SAI for more
information.
- ---------------------------------------------------
3. PURCHASE
- ----------------------------------------------
PURCHASE PAYMENTS
A PURCHASE PAYMENT is the money you give us to buy the contract, plus any
additional money you invest in the contract after you own it. You can purchase a
contract with a minimum initial investment of $50,000. Additional PURCHASE
PAYMENTS of $250 or more may only be made within six months of your initial
PURCHASE PAYMENT. These additional PURCHASE PAYMENTS are not permitted in New
Jersey.
Any PURCHASE PAYMENT in excess of $1 million requires our prior approval.
SPINNAKER PLUS PROSPECTUS
6
<PAGE>
Your initial PURCHASE PAYMENT is normally credited to you within two days of our
receipt. If your initial PURCHASE PAYMENT is not accompanied by all the
information we need to issue your contract, we will contact you to get it. If we
cannot get all the required information within five days, we will either return
your PURCHASE PAYMENT or get your permission to keep it until we have received
the necessary information. Your contract date is the date your initial PURCHASE
PAYMENT and all required information are received at SAFECO Life.
We reserve the right to refuse any application or PURCHASE PAYMENT.
ALLOCATION OF PURCHASE PAYMENTS
You tell us how to apply your initial PURCHASE PAYMENT by specifying your
desired allocation on the contract application. Unless you tell us otherwise,
subsequent PURCHASE PAYMENTS will be allocated in the same proportion as your
most recent PURCHASE PAYMENT (unless that was a PURCHASE PAYMENT you directed us
to allocate on a one-time-only basis). You may change the way subsequent
PURCHASE PAYMENTS are allocated by providing us with written instructions or by
telephoning us, if we have your written authorization to accept telephone
instructions. See "Transfers" as discussed in Section 4.
Once a PURCHASE PAYMENT is received, the portion to be allocated to the FIXED
ACCOUNT is credited the day it is received. The portion to be allocated to the
PORTFOLIOS is effective and valued as of the next close of the NYSE. This is
usually 4:00 p.m. eastern time. If for any reason the NYSE has closed for the
day prior to our receipt of your PURCHASE PAYMENT it will be valued as of the
close of the NYSE on its next regular business day.
ACCUMULATION UNITS
The value of the variable portion of your contract will go up or down depending
upon the investment performance of the PORTFOLIO(S) you choose. In order to keep
track of this we use a unit of measure called an ACCUMULATION UNIT, which works
like a share of a mutual fund. During the INCOME PHASE, we call them ANNUITY
UNITS.
We calculate the value of an ACCUMULATION UNIT, for each PORTFOLIO, after the
NYSE closes each day by:
1. determining the total value of the particular PORTFOLIO;
2. subtracting from that amount insurance and other charges; and
3. dividing this amount by the number of outstanding ACCUMULATION UNITS of
the particular PORTFOLIO.
The value of an ACCUMULATION UNIT may go up or down from day to day.
When you make PURCHASE PAYMENTS or transfers into a PORTFOLIO, we credit your
contract with ACCUMULATION UNITS. Conversely, when you request a withdrawal or a
transfer of money from a PORTFOLIO, ACCUMULATION UNITS are liquidated. In either
case, the increase or decrease in the number of your ACCUMULATION UNITS is
determined by taking the amount of the PURCHASE PAYMENT, transfer or withdrawal
and dividing it by the value of an ACCUMULATION UNIT on the date the transaction
occurs.
EXAMPLE: On Monday we receive a $1,000 PURCHASE PAYMENT from you before the
NYSE closes. You have told us you want this to go to the RST Growth
Portfolio. When the NYSE closes on that Monday, we determine that the value
of an ACCUMULATION UNIT for the RST Growth Portfolio is $34.12. We then
divide $1,000 by $34.12 and credit your contract on Monday night with 29.31
ACCUMULATION UNITS for the RST Growth Portfolio.
RIGHT TO EXAMINE
You may cancel the contract without charge by returning it to us or your
registered representative within the period stated on the front of your
contract. This period will be at least 10 days (longer in some states). You will
receive your contract value, a return of PURCHASE PAYMENTS or the greater of the
two depending on state requirements or if your contract is an IRA. Contract
value may be more or less than PURCHASE PAYMENTS. When we are required to
guarantee a return of PURCHASE PAYMENTS, we reserve the right to initially apply
amounts designated for the PORTFOLIOS to the RST Money Market Portfolio until
the contract is 15 days old. These amounts will then be allocated in the manner
you selected unless you have canceled the contract.
- ---------------------------------------------------
4. INVESTMENT OPTIONS
- ----------------------------------------------
VARIABLE INVESTMENT OPTIONS
MANAGED BY SAFECO ASSET MANAGEMENT COMPANY
- RST Equity Portfolio
- RST Growth Portfolio
- RST Northwest Portfolio
- RST Bond Portfolio
- RST Money Market Portfolio
- RST Small Company Stock Portfolio
MANAGED BY FEDERATED ADVISERS
- Federated High Income Bond Fund II
- Federated International Equity Fund II
- Federated Utility Fund II
MANAGED BY LEXINGTON MANAGEMENT CORPORATION
- Lexington Emerging Markets Fund, Inc.
- Lexington Natural Resources Trust
MANAGED BY SCUDDER KEMPER INVESTMENTS, INC.
- Scudder Balanced Portfolio
- Scudder International Portfolio
SPINNAKER PLUS PROSPECTUS
7
<PAGE>
MANAGED BY AMERICAN CENTURY INVESTMENT MANAGEMENT, INC.
- VP Balanced
- VP International
MANAGED BY FIDELITY MANAGEMENT & RESEARCH COMPANY
- VIP II Contrafund Portfolio
- VIP III Growth Opportunities Portfolio
MANAGED BY INVESCO FUNDS GROUP, INC.
- INVESCO VIF -- Realty Portfolio
Not all PORTFOLIOS listed above may be available for all contracts. Additional
PORTFOLIOS may be available in the future. The PORTFOLIOS are not offered
directly to the public but are available to life insurance companies as
investment options for variable annuity and variable life insurance contracts.
The performance for these PORTFOLIOS may differ substantially from publicly
traded mutual funds with similar names and objectives.
EACH PORTFOLIO HAS ITS OWN INVESTMENT OBJECTIVE. YOU SHOULD READ THE
PROSPECTUSES FOR THESE PORTFOLIOS CAREFULLY BEFORE INVESTING. COPIES OF THESE
PROSPECTUSES ACCOMPANY THIS PROSPECTUS AND MAY INCLUDE INFORMATION ON OTHER
PORTFOLIOS NOT AVAILABLE UNDER THIS CONTRACT.
FIXED ACCOUNT
The contract also offers a FIXED ACCOUNT with interest rates that are guaranteed
by SAFECO Life.
Each PURCHASE PAYMENT will be credited with the interest rate established for
the date that we receive the PURCHASE PAYMENT. This rate will apply to the
PURCHASE PAYMENT for at least 12 months from the date we receive it.
Thereafter we can adjust the interest rate. Adjusted rates will apply to
PURCHASE PAYMENTS and their credited interest for at least 12 months, when the
rate can be adjusted again.
Different interest rates may apply to each of your PURCHASE PAYMENTS depending
on the interest rate established for the date we receive the PURCHASE PAYMENT
and any subsequent rate adjustments. Annual effective interest rates will never
be less than 3%.
TRANSFERS
During the ACCUMULATION PHASE you can transfer money among the PORTFOLIOS and
the FIXED ACCOUNT 12 times per contract year free of charge. We measure a
contract year from the anniversary of your contract date. Each additional
transfer in a contract year may have a charge of $10 or 2% of the amount
transferred whichever is less.
The minimum amount you can transfer out of any investment option at one time is
$500. In addition to this $500 minimum, transfers out of the FIXED ACCOUNT are
limited to a maximum of 10% of the FIXED ACCOUNT value per contract year. You
must transfer the entire amount out of the investment option if, after a
transfer, the remaining balance would be less than $500. The minimum you can
transfer into any investment option is $50.
We will accept transfers by written request or by telephone. Each transfer must
identify:
- your contract;
- the amount of the transfer; and
- which investment options are affected.
Transfers by telephone will be accepted if we have properly signed authorization
on record. You may authorize someone else to make transfers by telephone on your
behalf. We will use reasonable procedures to confirm that instructions given to
us by telephone are genuine. If we do not use such procedures, we may be liable
for any losses due to unauthorized or fraudulent instructions. We tape record
all telephone instructions.
We reserve the right to modify, suspend or terminate transfer privileges at any
time.
SCHEDULED TRANSFERS
You can choose among several investment strategies which are available for any
investment option that has not had a previous transfer or withdrawal taken
during that contract year. For each investment option, scheduled transfers can
be initiated once during each contract year. Once started, these scheduled
transfers will stop if an unscheduled transfer or withdrawal is made from the
"source" investment option. Scheduled transfers will otherwise continue until
you instruct us to stop or all money has been transferred out of the "source"
investment option. These scheduled transfers will not count against your 12 free
transfers as long as you continue them for at least six months.
DOLLAR COST AVERAGING. This strategy is designed to achieve a lower average
cost per unit over time. It does not assure a profit nor protect against a
loss. Investing should continue at a consistent level in both market ups and
downs. You can systematically transfer set amounts of at least $50 each month
or quarter from any PORTFOLIO or the FIXED ACCOUNT to any of the other
PORTFOLIOS.
Quarterly Dollar Cost Averaging transfers from the FIXED ACCOUNT are limited
to 4% (1.33% monthly) of your value in the FIXED ACCOUNT as of the date of
the initial transfer. By choosing to have the transfer limit recalculated
annually, the limit is raised to 4.5% per quarter (1.5% monthly). There are
no percentage limits on transfers out of the PORTFOLIOS.
APPRECIATION OR INTEREST SWEEP. If your contract value is at least $10,000,
you can instruct us to automatically transfer earnings up to 10% from the RST
Money Market Portfolio or earned interest up to 10% from the FIXED ACCOUNT to
the other PORTFOLIOS monthly, quarterly or annually.
SPINNAKER PLUS PROSPECTUS
8
<PAGE>
PORTFOLIO REBALANCING. After your money has been invested, the performance
of the PORTFOLIOS may cause the percentage in each PORTFOLIO to change from
your original allocations. If your contract value is at least $10,000, you
can instruct us to adjust your investment in the PORTFOLIOS to maintain a
predetermined mix quarterly, semiannually or annually. Portfolio Rebalancing
can be used with Dollar Cost Averaging and Appreciation or Interest Sweep;
however, it is not available for the FIXED ACCOUNT.
SUBSTITUTION
If any shares of the PORTFOLIOS are no longer available, or if in our view no
longer meet the purpose of the contract, it may be necessary to substitute
shares of another PORTFOLIO. We will seek prior approval of the SEC and give you
notice before doing this.
- ---------------------------------------------------
5. EXPENSES
- ----------------------------------------------
There are charges and other expenses associated with the contract that reduce
the return on your investment in the contract. These charges and expenses are:
INSURANCE CHARGE
Each day, we make a deduction for the mortality and expense risk charge. We do
this as part of our calculation of the value of ACCUMULATION and ANNUITY UNITS.
This charge is equal, on an annual basis, to 1.25% of the average daily net
asset value of each PORTFOLIO. This charge is for all the insurance benefits
(e.g., guaranteed annuity rates and death benefits) and for the risk (expense
risk) that the current charges will not be sufficient in the future to cover the
cost of administering the contract. If the charges under the contract are not
sufficient, then we will bear the loss. If the charges are more than sufficient,
we will retain the excess. The rate of the mortality and expense risk charge
will not be increased.
CONTINGENT DEFERRED SALES CHARGE
A contingent deferred sales charge may be assessed on withdrawals in excess of
your free withdrawal amount that is described under Section 7 -- Access to Your
Money. This charge is for expenses incurred in connection with the promotion,
sale and distribution of the contracts. If the contingent deferred sales charge
is insufficient, excess amounts resulting from the mortality and expense risk
charge may be used to recover these expenses.
This contract bases contingent deferred sales charge on the age of your
contract, not on the length of time each PURCHASE PAYMENT is in your contract.
The contingent deferred sales charge ("CDSC" in the table below) is stated as a
percentage of the amount you withdraw. It starts at 8% in the first contract
year and declines one percent each contract year as follows:
- ---------------------------------------------------
Contract Year 1 2 3 4 5 6 7 8 9+
- ---------------------------------------------------
CDSC 8% 7% 6% 5% 4% 3% 2% 1% 0%
- ---------------------------------------------------
When the withdrawal is for only part of the value of your contract, the
contingent deferred sales charge is deducted from the remaining value in your
contract.
We will not assess the contingent deferred sales charge for:
- ANNUITY PAYMENTS;
- Repetitive Withdrawals taken over life expectancy;
- eligible healthcare confinement withdrawals; and
- death benefits.
We may reduce or eliminate the amount of the contingent deferred sales charge
when the contract is sold under circumstances which reduce our sales expense.
See Section 10 -- Other Information.
WITHDRAWAL CHARGE
We may deduct a separate withdrawal charge equal to $25 or 2% of the amount
withdrawn whichever is less, for each withdrawal after the first withdrawal in
any contract year. This charge is deducted from the remaining value in your
contract.
We will not deduct this charge for ANNUITY PAYMENTS or Repetitive Withdrawals.
TRANSFER CHARGE
You can make 12 free transfers every contract year. If you make more than 12
transfers in a contract year, we may deduct a transfer charge equal to $10 or 2%
of the amount that is transferred whichever is less.
If the transfer is part of Dollar Cost Averaging, Appreciation or Interest
Sweep, or Portfolio Rebalancing it will not be counted as part of your 12 free
transfers.
PREMIUM TAXES
States and other governmental entities (e.g., municipalities) may charge premium
taxes. These taxes generally range from 0% to 3.5%, depending on the state, and
are subject to change. Some states charge for these taxes at the time a PURCHASE
PAYMENT is made. In this case, PURCHASE PAYMENTS as discussed in this prospectus
may reflect a deduction for the premium tax. Other states charge for these taxes
when ANNUITY PAYMENTS begin. We may make a deduction from your contract for the
payment of these taxes.
INCOME OR OTHER TAXES
Currently we do not pay income or other taxes on earnings attributable to your
contract. However, if we ever incur such taxes, we reserve the right to deduct
them from your contract.
SPINNAKER PLUS PROSPECTUS
9
<PAGE>
PORTFOLIO EXPENSES
There are deductions from and expenses paid out of the assets of the various
PORTFOLIOS. These expenses are summarized in the Fee Table of this prospectus.
For more detailed information, you should refer to the PORTFOLIO prospectuses
that accompany this prospectus.
- ---------------------------------------------------
6. TAXES
- ----------------------------------------------
This section and additional information in the SAI discuss how federal income
tax applies to annuities in general. This information is not complete and is not
intended as tax advice. Tax laws and their interpretations are complex and
subject to change. No attempt is made to discuss state or other tax laws. SAFECO
Life does not guarantee the tax treatment of any contract or any transaction
involving a contract. You should consult a competent tax adviser about your
individual circumstances.
ANNUITY CONTRACTS IN GENERAL
Under the Internal Revenue Code of 1986, as amended ("Code"), you generally do
not pay tax on contract earnings until received. Different tax rules apply to
PURCHASE PAYMENTS and distributions depending on how you take money out and
whether your contract is QUALIFIED or NON-QUALIFIED.
Earnings for corporate owned contracts and other contracts not owned for the
benefit of natural persons are generally taxed as ordinary income in the current
year. Exceptions may apply.
QUALIFIED CONTRACTS
Contracts purchased as an Individual Retirement Annuity ("IRA"), Roth IRA, Tax
Sheltered Annuity ("TSA"), Deferred Compensation Plan ("457") or specially
sponsored retirement plan, are referred to as QUALIFIED contracts. To the extent
PURCHASE PAYMENTS have a zero cost basis (were made with pre-tax dollars),
distributions will be taxed as ordinary income.
QUALIFIED contracts are subject to special rules and limits on PURCHASE PAYMENTS
and distributions that vary according to the type of retirement plan. Ineligible
or excess contributions to certain retirement plans can result in substantial
penalties and possible loss of the contract's or retirement plan's QUALIFIED
status. Tax penalties of 10% or more, may apply to certain distributions; for
example if you are under age 59 1/2 and not disabled as defined by the Code.
There may be substantial penalties if you fail to take required minimum
distributions, usually beginning by age 70 1/2.
In some cases, you must satisfy retirement plan or Code requirements before you
take money out. For example, the Code restricts certain withdrawals from TSAs.
NON-QUALIFIED CONTRACTS
Contracts purchased with after-tax money and not part of an IRA, Roth IRA, TSA,
457 or specially sponsored retirement plan, are referred to as NON-QUALIFIED
contracts and receive different tax treatment than QUALIFIED contracts. Your
cost basis equals the total amount of the after-tax PURCHASE PAYMENTS remaining
in the contract.
The Code generally treats distributions as coming first from earnings and then
from PURCHASE PAYMENTS. Contracts issued by the same insurer to the same OWNER
in the same year are treated as one contract for tax purposes. Distributions
from NON-QUALIFIED contracts are taxed as ordinary income to the extent they are
attributable to earnings. Since you have already been taxed on the cost basis,
distributions attributable to PURCHASE PAYMENTS are generally not taxed.
There may be a 10% tax penalty on earnings withdrawn before you reach age
59 1/2. Certain exceptions apply, such as death or disability as defined by the
Code.
DIVERSIFICATION
Variable annuity contracts receive TAX DEFERRAL as long as investment in the
PORTFOLIOS meet diversification standards set by Treasury Regulations. This
favorable tax treatment allows you to select and make transfers among PORTFOLIOS
without paying income tax until you take money out.
We believe the PORTFOLIOS offered under this contract are being managed to
comply with existing standards. To date, neither Treasury Regulations nor the
Code give specific guidance as to the circumstances under which your contract
might lose its tax favored status as an annuity because of the number and type
of PORTFOLIOS you can select from, and the extent to which you can make
transfers. If issued, such guidance could be applied either prospectively or
retroactively. Due to the uncertainty in this area, we reserve the right to
modify the contract in an attempt to maintain favorable tax treatment.
TAX WITHHOLDING
Generally, federal income tax is withheld from the taxable portion of
withdrawals at a rate of 10%. Withholding on periodic payments as defined by the
Code is at the same rate as wages. Typically, you may elect not to have income
taxes withheld or to have withholding done at a different rate. Certain
distributions from 403(b) plans, which are not directly rolled over to another
eligible retirement plan or IRA, are subject to a mandatory 20% withholding.
- ---------------------------------------------------
7. ACCESS TO YOUR MONEY
- ----------------------------------------------
Under your contract, money may be accessed:
- by withdrawing all or some of your money during the ACCUMULATION PHASE;
- by receiving payments during the INCOME PHASE (see Section 2 -- Annuity
Payments); or
- when a death benefit is paid to your BENEFICIARY (see Section 9 -- Death
Benefit).
SPINNAKER PLUS PROSPECTUS
10
<PAGE>
During the ACCUMULATION PHASE, you can take money out by writing to us.
Withdrawals must be at least $250. Unless you tell us differently, partial
withdrawals will be made pro rata from each investment option. Once we receive
your request, withdrawals from the PORTFOLIOS will be effective as of the next
close of the NYSE.
A withdrawal may have a contingent deferred sales charge and a withdrawal
charge. There are situations where all or some of these charges don't apply. See
Section 5 -- Expenses for a discussion of the charges.
FREE WITHDRAWAL AMOUNT
Your contract has a free withdrawal amount. There is no contingent deferred
sales charge on the first 10% of your contract value withdrawn in a contract
year. There is no withdrawal charge on the first withdrawal you make in a
contract year.
HEALTHCARE CONFINEMENT
If approved in your state, there is no contingent deferred sales charge on
withdrawals you make while you are confined in an eligible healthcare facility
(or within 60 days after confinement ends) if:
- the confinement began after your contract date; and
- we receive confirmation that your confinement has continued for 60 or more
consecutive days.
REPETITIVE WITHDRAWALS
You may request Repetitive Withdrawals at a predetermined frequency and amount.
Repetitive Withdrawals may be used to avoid tax penalties for premature
withdrawals or to satisfy distribution requirements of certain retirement plans.
To do this they must be a part of substantially equal withdrawals made at least
annually and based on:
- your life expectancy; or
- the joint life expectancy of you and a BENEFICIARY, with at least 50% of
your contract value expected to be withdrawn during your life.
You may begin Repetitive Withdrawals based on life expectancy by providing us
with the correct information we need to calculate the monthly, quarterly, or
annual withdrawal amount. If you take additional withdrawals or otherwise modify
or stop these Repetitive Withdrawals, charges may apply and there may be tax
consequences and penalties.
If you make Repetitive Withdrawals that are not based on life expectancy, the
same restrictions, income taxes, and tax penalties that apply to random
withdrawals also apply to Repetitive Withdrawals.
WITHDRAWAL RESTRICTIONS ON TSA OR 403(b)
Withdrawals attributable to salary reduction contributions to TSAs for years
after 1988 and any earnings accrued after 1988, cannot be taken out unless:
- you attain age 59 1/2;
- you leave your job;
- you die or become disabled as defined by the Code;
- you experience a qualifying hardship (applies to contributions only); or
- you divorce and a distribution to your former spouse is permitted under a
Qualified Domestic Relations Order.
Tax penalties may apply to withdrawals. Restrictions on withdrawals from TSAs do
not affect rollovers or transfers between certain retirement plans.
WITHDRAWAL RESTRICTIONS ON
TEXAS OPTIONAL RETIREMENT PROGRAM
("TEXAS ORP")
Withdrawals from contracts issued in connection with Texas ORP cannot be taken
unless you:
- terminate employment in all eligible Texas institutions of higher education;
- retire;
- attain age 70 1/2; or
- die.
You must obtain a certificate of termination from your employer before you
request a withdrawal from the Texas ORP.
MINIMUM VALUE
If, after a withdrawal, the value in any PORTFOLIO or the FIXED ACCOUNT is less
than $500, the remaining amount will also be withdrawn. If, after a withdrawal,
the remaining contract value is less than $500 ($1,000 in Maine and South
Carolina), the entire contract value will be withdrawn and your contract will
terminate.
Withdrawals, including any charges, reduce the number of ACCUMULATION UNITS in
the PORTFOLIOS and/or the value of the FIXED ACCOUNT as well as the death
benefit. Income taxes, tax penalties and certain restrictions may also apply.
See Section 6 -- Taxes.
- ---------------------------------------------------
8. PERFORMANCE
- ----------------------------------------------
From time to time, we may advertise "yield", "effective yield", "total return"
and "average annual total return" for some or all of the PORTFOLIOS. Some of the
PORTFOLIOS have been in existence prior to being offered in the contract. We
calculate performance data of any period prior to the PORTFOLIO being offered in
the contract as if
SPINNAKER PLUS PROSPECTUS
11
<PAGE>
the PORTFOLIO had been offered during those periods, using current charges and
expenses.
Performance data and rankings are based on historical results and do not promise
or project future performance.
Standardized performance makes it easier for you to compare performance of
variable contracts issued by different companies. It uses set time periods and
PURCHASE PAYMENT amounts and reflects the contingent deferred sales charge.
Non-standardized performance helps you compare performance of PORTFOLIOS within
a contract. From time to time, non-standardized performance may accompany
standardized figures. Non-standardized performance uses different time periods
and PURCHASE PAYMENT amounts and may not reflect all of the charges included in
standardized figures. For this reason, non-standardized PORTFOLIO performance
may appear higher. Non-standardized figures may also include performance of a
PORTFOLIO prior to the PORTFOLIO'S availability in any variable annuity contract
we offer.
Each PORTFOLIO may, from time to time, advertise performance relative to certain
performance rankings and indices compiled on an industry-wide basis, for
example:
- "Lipper Variable Insurance Products Performance Analysis Service" monitors
performance for variable annuity PORTFOLIOS and is published by Lipper
Analytical Services, Inc.
- "VARDS Report" is a monthly, variable annuity industry analysis published by
Financial Planning Resources, Inc.
- "Variable Annuity Performance Report" is a monthly analysis of variable
annuity performance published by Morningstar, Inc.
Rankings provided by these and other sources may not include all applicable
charges. More information on the method used to calculate performance for the
PORTFOLIOS and information about independent services that monitor and rank the
performance of variable annuities is in the SAI.
- ---------------------------------------------------
9. DEATH BENEFIT
- ----------------------------------------------
DEATH OF OWNER BEFORE ANNUITY DATE
If you die before ANNUITY PAYMENTS start or while you are receiving ANNUITY
PAYMENTS under the Systematic Withdrawal Income Plan, we will pay a death
benefit under your contract as follows to the:
- surviving OWNER or JOINT OWNER; or if none, then
- surviving primary BENEFICIARIES; or if none, then
- surviving contingent BENEFICIARIES; or if none, then
- estate of the last OWNER to die.
The death benefit is the higher of:
1) your current contract value; or
2) if you are a sole OWNER or the oldest JOINT OWNER, the Minimum
Guaranteed Death Benefit.
When determining the higher of (1) or (2) above, the calculations are based on
the earlier of:
- the date we receive proof of death and the BENEFICIARY'S election of how to
receive payment; or
- six months from the date of death.
The initial Minimum Guaranteed Death Benefit is equal to your first PURCHASE
PAYMENT. It is reset on each 8-year contract anniversary until the oldest OWNER
attains age 72. The reset benefit is equal to the immediately preceding Minimum
Guaranteed Death Benefit or is "stepped up" to your contract value on that date,
if higher.
The Minimum Guaranteed Death Benefit is immediately increased by additional
PURCHASE PAYMENTS and adjusted for:
- withdrawals;
- amounts paid to you as ANNUITANT under the Systematic Withdrawal Income
Plan;
- any amounts paid or payable to a surviving ANNUITANT under the Systematic
Withdrawal Income Plan; and
- any portion of the contract value converted to ANNUITY UNITS as a result of
switching to the INCOME PHASE.
The death benefit is also reduced dollar for dollar for any withdrawals made
after the OWNER'S death.
The death benefit is immediately payable upon the death of the first OWNER to
die or, if the OWNER is not an individual (e.g. a corporation or trust), on the
death of the first ANNUITANT prior to the ANNUITY DATE. To pay the death
benefit, we need proof of death such as a certified copy of a death certificate,
plus written direction from your BENEFICIARY regarding how he or she wants to
receive the money.
If a death for which the death benefit is payable occurred more than six months
before we received proof of death or the BENEFICIARY selected how to receive
payment, the value of the benefit will be determined as of six months after the
date of death. From this point on the benefit value will be subject to
investment performance and applicable contract charges until the date payment is
made. This value may go up or down. Thus, BENEFICIARIES should notify us of a
death as promptly as possible to limit their risk of a decline in benefit value.
SPINNAKER PLUS PROSPECTUS
12
<PAGE>
A BENEFICIARY under a NON-QUALIFIED contract may elect to receive the death
benefit as:
1) a lump sum made no later than five years from the date of death; or
2) ANNUITY PAYMENTS made over the BENEFICIARY'S life or life expectancy. To
receive ANNUITY PAYMENTS, the BENEFICIARY must make this election within
60 days from our receipt of proof of death. ANNUITY PAYMENTS must begin
within one year from the date of death. Once ANNUITY PAYMENTS begin they
cannot be changed.
A BENEFICIARY under a QUALIFIED contract may have different death benefit
elections depending upon the retirement plan.
In some cases, a spouse who is entitled to receive a death benefit may have the
option to continue the contract instead. If this spouse is also the oldest JOINT
OWNER, the Minimum Guaranteed Death Benefit will apply on the death of this
spouse. Otherwise, the benefit on the death of your spouse will be the contract
value.
DEATH OF ANNUITANT AFTER ANNUITY DATE
After the ANNUITY DATE the ANNUITANT is the OWNER. Once ANNUITY PAYMENTS start,
there is no longer a death benefit under the contract unless the last ANNUITANT
dies while receiving payments under the Systematic Withdrawal Income Plan. Other
annuity options may direct remaining guaranteed payments to the BENEFICIARY. All
ANNUITY PAYMENTS will be distributed to the BENEFICIARY at least as rapidly as
they would have been made to the ANNUITANT. See Section 2 -- Annuity Payments
for more information.
BENEFICIARY DESIGNATION
You may designate BENEFICIARIES on your contract application or by sending us a
signed and dated request. You may change the BENEFICIARY at any time. An
irrevocable BENEFICIARY must consent in writing to any change. A new BENEFICIARY
designation revokes any prior designation and is not effective until we record
the change. We are not responsible for the validity of any BENEFICIARY
designation nor for any actions we may take prior to receiving and recording a
BENEFICIARY change.
- ---------------------------------------------------
10. OTHER INFORMATION
- ----------------------------------------------
SAFECO LIFE
SAFECO Life was incorporated as a stock life insurance company under Washington
law on January 23, 1957. We provide individual and group life, accident and
health insurance, and annuity products and are licensed to do business in the
District of Columbia and all states except New York. We are a wholly owned
subsidiary of SAFECO Corporation which is a holding company whose subsidiaries
are primarily engaged in insurance and financial service businesses.
SEPARATE ACCOUNT
We originally adopted a Board Resolution to establish SAFECO Resource Variable
Account B ("Separate Account") under Washington law on February 6, 1986. The
Separate Account holds the assets that underlie contract values invested in the
PORTFOLIOS. The Separate Account is registered with the SEC as a unit investment
trust under the Investment Company Act of 1940, as amended.
Under Washington law, the assets in the Separate Account are the property of
SAFECO Life. However, assets in the Separate Account that are attributable to
contracts are not chargeable with liabilities arising out of any other business
we may conduct. Income, gains and losses (realized and unrealized), resulting
from assets in the Separate Account are credited to or charged against the
Separate Account without regard to other income, gains or losses of SAFECO Life.
Promises we make in the contract are general corporate obligations of SAFECO
Life and are not dependent on assets in the Separate Account.
GENERAL ACCOUNT
If you put your money into the FIXED ACCOUNT, it goes into SAFECO Life's general
account. The general account is made up of all of SAFECO Life's assets other
than those attributable to separate accounts. All of the assets of the general
account are chargeable with the claims of any of our contract OWNERS as well as
our creditors. The general account invests its assets in accordance with state
insurance law.
We are not required to register the FIXED ACCOUNT or any interests therein, with
the SEC. For this reason, SEC staff has not reviewed disclosure relating to the
FIXED ACCOUNT. However, such disclosure may be subject to general provisions in
federal securities laws that relate to accuracy and completeness of statements
made in the prospectus.
DISTRIBUTION (PRINCIPAL UNDERWRITER)
The contracts are underwritten by SAFECO Securities, Inc. ("SSI"). They are sold
by individuals who, in addition to being licensed to sell variable annuity
contracts for SAFECO Life, are also registered representatives of broker-dealers
who have a current sales agreement with SSI. SSI is an affiliate of SAFECO Life
and is located at 10865 Willows Road NE, Redmond, Washington 98052. It is
registered as a broker-dealer with the SEC under the Securities Act of 1934 and
is a member of the National Association of Securities Dealers, Inc. No amounts
are retained by SSI for acting as principal underwriter for SAFECO Life
contracts.
The commissions paid to registered representatives on the sale of contracts are
not more than 4.8% of PURCHASE PAYMENTS. In addition, commissions, allowances
and bonuses may be paid to registered representatives and/or
SPINNAKER PLUS PROSPECTUS
13
<PAGE>
other distributors of the contracts. A bonus dependent upon persistency is one
type of bonus that may be paid.
LEGAL PROCEEDINGS
There are no legal proceedings to which the Separate Account or SSI is a party.
SAFECO Life is engaged in various kinds of litigation which, in the opinion of
SAFECO Life, are not of material importance in relation to the total capital and
surplus of SAFECO Life.
RIGHT TO SUSPEND ANNUITY PAYMENTS, TRANSFERS OR WITHDRAWALS
We may be required to suspend or postpone payment of ANNUITY PAYMENTS,
transfers, or withdrawals from the PORTFOLIOS for any period of time when:
- the NYSE is closed (other than customary weekend or holiday closings);
- trading on the NYSE is restricted;
- an emergency exists such that disposal of or determination of the value of
the PORTFOLIO shares is not reasonably practicable; or
- the SEC, by order, so permits for your protection.
Additionally, we reserve the right to defer payment of transfers or withdrawals
from the FIXED ACCOUNT for the period permitted by law, but not for more than
six months.
VOTING RIGHTS
SAFECO Life is the legal owner of the PORTFOLIOS' shares. However, when a
PORTFOLIO solicits proxies in connection with a shareholder vote, we are
required to ask you for instructions as to how to vote those shares. All shares
are voted in the same proportion as the instructions we received. Should we
determine that we are no longer required to comply with the above, we will vote
the shares in our own right.
REDUCTION OF CHARGES OR ADDITIONAL AMOUNTS CREDITED
Under some circumstances we may expect to experience lower costs or higher
revenues associated with issuing and administering certain contracts. For
example, sales expenses are expected to be less when contracts are sold to a
large group of individuals. Under such circumstances we may pass a portion of
these anticipated savings on to you by reducing OWNER transaction charges
(including the contingent deferred sales charge) or crediting additional FIXED
ACCOUNT interest.
We may also take such action in connection with contracts sold to our officers,
directors, and employees and their family members, employees of our affiliates
and their family members, and registered representatives and employees of
broker-dealers that have a current selling agreement with us. In each
circumstance such actions will be reasonably related to the savings or revenues
anticipated and will be applied in a non-discriminatory manner. These actions
may be withdrawn or modified by us at any time.
YEAR 2000
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 advisers, 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. However, with
approximately 90% of its systems year 2000 ready, SAFECO Life is currently
developing business continuity plans for year 2000 contingencies.
INTERNET INFORMATION
You can find more information about the Spinnaker Plus Variable Annuity Contract
as well as other products and financial services offered by SAFECO companies on
the Internet at http://www.SAFECO.com. This website is frequently updated with
new information and can help you locate a representative near you.
The SEC also maintains a website at http://www.sec.gov, which contains a copy of
the Separate Account's most recent registration statement and general consumer
information.
FINANCIAL STATEMENTS
The financial statements of SAFECO Life and SAFECO Resource Variable Account B
have been included in the Statement of Additional Information.
TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Separate Account
Experts
Distribution
Performance Information
Federal Tax Status
Annuity Provisions
Financial Statements
</TABLE>
SPINNAKER PLUS PROSPECTUS
14
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APPENDIX
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ACCUMULATION UNIT VALUE HISTORY
The following schedule includes ACCUMULATION UNIT values for the periods
indicated. This data has been extracted from the Separate Account's Financial
Statements. This information should be read in conjunction with the Separate
Account's Financial Statements and related notes which are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RST EQUITY SUB-ACCOUNT
(July 21, 1987 value, initial public
offering $12.101)
December 31 value $60.601 $49.122 $39.829 $32.321 $25.424 $23.630 $18.704 $17.520 $13.987 $14.937
December 31 units 3,559,405 3,475,377 3,328,130 2,773,699 2,125,903 1,402,021 920,315 611,236 362,309 266,682
RST GROWTH SUB-ACCOUNT
(January 7 value, initial public offering) $10.000
December 31 value $38.894 $38.686 $27.082 $20.756 $14.897 $13.480
December 31 units 2,512,560 2,152,824 1,665,534 918,525 421,837 56,074
RST NORTHWEST SUB-ACCOUNT
(January 7 value, initial public offering) $10.000
December 31 value $15.741 $15.493 $11.968 $10.777 $10.156 $9.923
December 31 units 356,071 298,250 221,295 174,958 108,875 37,710
RST BOND SUB-ACCOUNT
(July 21, 1987 value, initial public
offering $10.126)
December 31 value $20.712 $19.265 $17.991 $18.117 $15.559 $16.253 $14.882 $14.107 $12.532 $11.909
December 31 units 618,282 501,020 503,739 481,273 479,731 446,935 310,293 255,098 219,928 211,685
RST MONEY MARKET SUB-ACCOUNT
(July 21, 1987 value, initial public
offering $10.083)
December 31 value $16.074 $15.509 $14.944 $14.417 $13.837 $13.516 $13.335 $13.074 $12.527 $11.754
December 31 units 315,741 174,158 341,159 308,155 341,722 273,511 307,262 231,643 224,216 210,094
RST SMALL COMPANY STOCK SUB-ACCOUNT
(May 1 value, initial public
offering) $10.000
December 31 value $10.080 $12.759
December 31 units 52,464 13,800
SCUDDER INTERNATIONAL SUB-ACCOUNT
(August 3 value, initial public offering) $9.335
December 31 value $16.492 $14.094 $13.083 $11.540 $10.519 $10.743
December 31 units 1,164,046 1,183,847 1,061,505 720,181 466,212 68,405
SCUDDER BALANCED SUB-ACCOUNT
(August 3 value, initial public offering) $9.886
December 31 value $20.784 $17.080 $13.919 $12.596 $10.066 $10.346
December 31 units 978,872 693,428 523,019 260,651 122,456 10,168
LEXINGTON NATURAL RESOURCES TRUST SUB-ACCOUNT
(February 15 value, initial public
offering) $11.920
December 31 value $11.897 $14.996 $14.169
December 31 units 45,892 45,155 27,116
LEXINGTON EMERGING MARKETS FUND, INC. SUB-ACCOUNT
(February 15 value, initial public
offering) $10.540
December 31 value $6.163 $8.703 $9.968
December 31 units 18,218 27,307 20,092
FEDERATED UTILITY FUND II SUB-ACCOUNT
(February 15 value, initial public
offering) $11.410
December 31 value $17.045 $15.144 $12.106
December 31 units 72,072 49,930 23,141
</TABLE>
SPINNAKER PLUS PROSPECTUS
A-1
<PAGE>
ACCUMULATION UNIT VALUE HISTORY (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
---------- ---------- ---------- ---------- ---------- ---------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FEDERATED HIGH INCOME BOND FUND II SUB-ACCOUNT
(February 15 value, initial public
offering) $10.050
December 31 value $12.465 $12.290 $10.933
December 31 units 115,039 61,817 10,503
FEDERATED INTERNATIONAL EQUITY FUND II SUB-ACCOUNT
(February 15 value, initial public
offering) $10.480
December 31 value $14.905 $12.017 $11.052
December 31 units 38,872 25,822 3,911
VP BALANCED SUB-ACCOUNT
(May 1 value, initial public
offering) $7.160
December 31 value $9.360 $8.185
December 31 units 160,296 42,551
VP INTERNATIONAL SUB-ACCOUNT
(May 1 value, initial public
offering) $6.200
December 31 value $7.968 $6.793
December 31 units 167,553 66,237
VIP II CONTRAFUND SUB-ACCOUNT
May 1 value
(initial public
offering) $10.000
December 31 value $11.340
December 31 units 22,734
VIP III GROWTH OPPORTUNITIES SUB-ACCOUNT
May 1 value
(initial public
offering) $10.000
December 31 value $11.229
December 31 units 53,918
INVESCO VIF-REALTY SUB-ACCOUNT
May 1 value
(initial public
offering) $10.000
December 31 value $8.601
December 31 units 9,666
</TABLE>
SPINNAKER PLUS PROSPECTUS
A-2
<PAGE>
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE>
SPINNAKER-TM- PLUS VARIABLE ANNUITY
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL SINGLE PURCHASE PAYMENT DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
SAFECO RESOURCE VARIABLE ACCOUNT B
AND
SAFECO LIFE INSURANCE COMPANY
- ------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the prospectus for the Individual Single Purchase Payment
Deferred Variable Annuity Contract.
The prospectus concisely sets forth information that a prospective investor
should know before investing. For a copy of the prospectus, call
1-877-472-3326 or write to SAFECO Life Insurance Company, Annuity Service
Office, Retirement Services Department, P.O. Box 34690, Seattle, Washington
98124-1690.
This Statement of Additional Information and the prospectus are both dated
April 30, 1999.
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SEPARATE ACCOUNT........................................................................................... 2
Mortality and Expense Guarantee.......................................................................... 2
EXPERTS.................................................................................................... 3
DISTRIBUTION............................................................................................... 3
Reduction or Elimination of Contingent Deferred Sales Charge............................................. 3
PERFORMANCE INFORMATION.................................................................................... 3
Total Return............................................................................................. 3
Yield.................................................................................................... 4
Performance Comparison................................................................................... 5
Tax Comparison........................................................................................... 5
FEDERAL TAX STATUS......................................................................................... 6
Note..................................................................................................... 6
General.................................................................................................. 6
Diversification.......................................................................................... 6
Multiple Contracts....................................................................................... 7
Contracts Owned by Other than Natural Persons............................................................ 7
Income Tax Withholding................................................................................... 8
Tax Treatment of Withdrawals -- Non-Qualified Contracts.................................................. 8
Retirement Plans......................................................................................... 8
Tax Treatment of Withdrawals -- Qualified Contracts...................................................... 10
Tax Sheltered Annuities -- Withdrawal Limitations........................................................ 11
ANNUITY PROVISIONS......................................................................................... 11
Annuity Unit Value....................................................................................... 11
Variable Annuity Payments................................................................................ 11
FINANCIAL STATEMENTS....................................................................................... 12
</TABLE>
<PAGE>
SEPARATE ACCOUNT
SAFECO Life Insurance Company ("the Company," "we," and "us"), is a wholly owned
subsidiary of SAFECO Corporation which is a holding company whose subsidiaries
are engaged primarily in insurance and financial services businesses.
We established SAFECO Resource Variable Account B ("the Separate Account") on
February 6, 1986, to hold assets that underlie contract values invested in the
portfolios. During the establishment of the Separate Account, we contributed
capital to the Separate Account which was immediately invested in the SAFECO
Resource Series Trust. At March 31, 1999, the Company's contribution represented
13.8% of the value of the RST Bond Portfolio. We may remove all or a portion of
these amounts at anytime. However, we will attempt to minimize any potential
material adverse effect such withdrawals may have on contract values.
The Separate Account meets the definition of "separate account" under Washington
State law and under the federal securities laws. It is registered with the
Securities and Exchange Commission ("SEC") as a unit investment trust under the
Investment Company Act of 1940, as amended. This registration does not involve
supervision of the management of the Separate Account or the Company by the SEC.
The assets of the Separate Account are the property of the Company. The Separate
Account invests in the underlying portfolios that are offered under the
contract. Each portfolio is a part of a series of portfolios designed for use in
variable annuity and variable life insurance products, not all of which may be
available under the contracts described herein. We maintain records of all
Separate Account purchases and redemptions of the shares of the portfolios. We
do not guarantee the investment performance of the Separate Account, its assets,
or the portfolios. Contract values allocated to the Separate Account and the
amount of variable annuity payments will vary with the value of the shares of
the underlying portfolios, and are also reduced by expenses and transaction
charges assessed under the contracts.
Accumulation units and variable annuity payments will reflect the investment
performance of the Separate Account with respect to amounts allocated to it.
Since the Separate Account is always fully invested in the shares of the
portfolios, its investment performance reflects the investment performance of
those entities. The investments of the Separate Account will be valued at their
fair market value in accordance with the procedures approved by the Board of
Directors of SAFECO Life Insurance Company and the Separate Account committee.
The values of such shares held by the Separate Account fluctuate and are subject
to the risks of changing economic conditions. The contract owner bears the
entire investment risk. There can be no assurance that the aggregate value in
the contract and amount of variable annuity payments will equal or exceed the
purchase payments made under a contract for the reasons described above, or
because of the premature death of the annuitant after the annuity date.
MORTALITY AND EXPENSE GUARANTEE
We guarantee that the dollar amount of each variable annuity payment made after
the first payment will not be adversely affected by variations in actual
mortality experience or actual expenses incurred in excess of the expense
deductions provided for in the contract (although the Company does not guarantee
the amounts of the variable annuity payments).
To the extent that the contingent deferred sales charge is insufficient to cover
all the distribution costs and related expenses, some portion of the proceeds
from the mortality and expense risk charge may be utilized to meet such excess
distribution expenses. We have represented in documents filed with the SEC that
the mortality and expense risk charge is consistent with the mortality and
expense risks we assume and is within the range of industry practice, based on
our review of our requirements and industry practice. Moreover, we have
represented that use of any proceeds from such charge to defray distribution
expenses has a reasonable likelihood of benefiting the Separate Account and
owners.
2
<PAGE>
EXPERTS
The financial statements of SAFECO Resource Variable Account B and SAFECO Life
Insurance Company and Subsidiaries, appearing in this Statement of Additional
Information, have been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports thereon appearing elsewhere herein, and are included
in reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
DISTRIBUTION
SAFECO Securities, Inc. (SSI), an affiliate of the Company, acts as the
principal underwriter for the contracts. The contracts issued by the Separate
Account are offered on a continuous basis.
REDUCTION OR ELIMINATION OF 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 individuals or to
a group of individuals in a manner that results in savings of sales expenses.
Any reduction of the contingent deferred sales charge will be determined by us
after examination of all the relevant factors such as:
1. The size and type of group to which sales are to be made will be considered.
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 will be considered. Per
contract sales expenses are likely to be less on larger purchase payments
than on smaller ones.
3. Any prior or existing relationship with us. Per contract sales expenses are
likely to be less when there is a prior or existing relationship because of
the likelihood of implementing the contracts with fewer sales contacts.
4. There may be other circumstances, of which we are not presently aware, which
could result in reduced sales expenses.
If, after consideration of the foregoing factors, we determine that there will
be a reduction in sales expenses, the Company 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 the Company 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.
PERFORMANCE INFORMATION
TOTAL RETURN
"Total return" is the total percentage change in the unit value of an investment
over a stated period of time. It reflects all aspects of a portfolio's return,
including the automatic reinvestment by the portfolio of all distributions and
the deduction of all applicable charges to the portfolio on an annual basis,
including the mortality and expense risk 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.
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 will reflect the contingent deferred
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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 invested, and with or
without the contingent deferred sales charge. Non-standardized figures may cause
the performance of the portfolios to appear higher than performance calculated
using standard parameters.
"Average annual total return" is the annual percentage change in the unit value
of an investment over a stated period of time. It is calculated by determining
the growth or decline in value of a hypothetical investment in the portfolio
over certain periods, including 1, 5, and 10 years (up to the portfolio's
availability through the Separate 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 portfolio'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 portfolio.
Average annual returns are calculated pursuant to the following formula:
P(1 + T) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000;
T = the average annual total return;
n = the number of years; and
ERV = the withdrawal value at the end of the time period used.
"Cumulative total returns" are not averaged and reflect the simple change in
value of a hypothetical investment in the portfolio over a stated period of
time.
Total return, average total return, and cumulative total return assume
reinvestment of dividend and capital gains distributions.
From time to time, additional quotations of total return based on the historical
performance of the portfolios may also be presented.
YIELD
Some portfolios may advertise yields. Yields quoted in advertising reflect the
change in value of a hypothetical investment in the portfolio over a stated
period of time, not taking into account capital gains or losses. Yield figures
will not reflect any applicable contingent deferred sales charge. Yields are
annualized and stated as a percentage.
Current yield and effective yield are calculated for the RST Money Market
Portfolio. Current yield is based on the change in the value of a hypothetical
investment (exclusive of capital changes) over a particular seven (7) day
period, less a hypothetical charge reflecting deductions from values during the
period (the base period), and stated as a percentage of the investment at the
start of the base period (the base period return). The base period return is
then annualized by assuming that the income generated during the seven day
period continues to be generated each week for a 52 week period. It is
multiplied 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) to the power of (365/7)] - 1
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For the RST Money Market Portfolio, total return and average annual total return
are non-standardized performance figures which may accompany the standardized
yield and effective yield.
Yield for portfolios other than RST Money Market Portfolio 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) to the power of 6 - 1]
where:
a=net investment income earned during the period by the corresponding 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.
The income is then annualized on a 360 day basis 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. Again, yield
figures will not reflect any applicable contingent deferred sales charge.
PERFORMANCE COMPARISON
The Company may also show historical accumulation unit values in certain
advertisements containing illustrations. These illustrations will be based on
actual accumulation unit values. Performance information for a portfolio 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 tracked 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
portfolio 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.
TAX COMPARISON
Reports and advertising also may show the effect of tax deferred compounding on
investment returns, or returns in general, illustrated by graphs, charts, or
otherwise, which may include a comparison, at various points in time, of the
return from an investment in a contract (giving effect to all fees and charges),
or returns in general, on a tax-deferred basis (assuming one or more tax rates)
with the return on a taxable basis, and which will disclose the tax
characteristics of the investments shown, including the impact of withdrawals
and surrenders.
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FEDERAL TAX STATUS
NOTE
The following description is based upon the Company's understanding of current
federal income tax law applicable to annuities in general. Tax laws are complex
and subject to change. We cannot predict the probability that any changes in the
interpretation of or the laws themselves, will occur. Purchasers are cautioned
to seek competent tax advice regarding the possibility of such changes. We do
not guarantee the tax status of the contracts. 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 SAI or the
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 Internal Revenue Code of 1986, as amended, ("the Code")
governs taxation of annuities in general. An owner is generally not taxed on
increases in the value of a contract until distribution occurs, either in the
form of a lump sum payment, a withdrawal, or as annuity payments under the
option elected. For a lump sum payment received as a total surrender (total
redemption), the recipient is generally taxed on the portion of the payment that
exceeds the cost basis in the contract. For non-qualified contracts, this cost
basis is generally the purchase payments, while for qualified contracts there
may be no cost basis. The taxable portion of the lump sum payment is taxed at
ordinary income tax rates.
For annuity payments, a portion of each payment in excess of an exclusion amount
is includable in taxable income. The exclusion amount for payments based on a
fixed annuity is determined by multiplying the payment by the ratio that the
cost basis of the contract (adjusted for any period certain or refund feature)
bears to the expected return under the contract. The exclusion amount for
payments based on a variable annuity 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 amounts equals the investment in the contract) are generally fully
taxable. The taxable portion is taxed at ordinary income tax rates. For certain
types of retirement plans there may be no cost basis in the contract within the
meaning of Section 72 of the Code resulting in the annuity payments being fully
includable in taxable income. Owners, annuitants and beneficiaries under the
contracts should seek competent financial advice about the tax consequences of
any distributions.
The Company is taxed as a life insurance company under the Code. For federal
income tax purposes, the Separate Account is not a separate entity from the
Company and its operations form a part of the Company.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable annuity contracts. The Code provides that a
variable annuity contract will not be treated as an annuity contract for any
period (and any subsequent period) for which the investments are not, in
accordance with regulations prescribed by the United States Treasury Department
("Treasury Department"), adequately diversified. Disqualification of the
contract as an annuity contract would result in imposition of federal income tax
to the owner with respect to earnings allocable to the contract prior to the
receipt of payments under the contract. The Code contains a safe harbor
provision which provides that annuity contracts such as the contracts meet the
diversification requirements if, as of the end of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five percent (55%) of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies.
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On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
1.817-5), which established diversification requirements for the portfolios
underlying variable contracts such as those described in the prospectus. The
Regulations amplify the diversification requirements for variable contracts set
forth in the Code and provide an alternative to the safe harbor provision
described above. Under the Regulations, an investment portfolio will be deemed
adequately diversified if: (1) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (2) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (3) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (4) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments.
The Code provides that, for purposes of determining whether or not the
diversification standards imposed on the underlying assets of variable contracts
by Section 817(h) of the Code have been met, "each United States government
agency or instrumentality shall be treated as a separate issuer."
The Company intends that all portfolios underlying the contracts will be managed
in such a manner as to comply with these diversification requirements.
The Treasury Department has indicated that the diversification Regulations do
not provide guidance regarding the circumstances in which owner control of the
investments of the Separate Account will cause the contract owner to be treated
as the owner of the assets of the Separate Account, thereby resulting in the
loss of favorable tax treatment for the contract. At this time it cannot be
determined whether additional guidance will be provided and what standards may
be contained in such guidance.
The amount of owner control which may be exercised under the contract is
different in some respects from the situations addressed in published rulings
issued by the Internal Revenue Service in which it was held that the contract
owner was not the owner of the assets of the separate account. It is unknown
whether these differences, such as your ability to transfer among portfolios or
the number and type of portfolios available, would cause you to be considered
the owner of the assets of the separate account resulting in the imposition of
federal income tax with respect to earnings allocable to the contract prior to
receipt of payments under the contract.
In the event any forthcoming guidance or ruling is considered to set forth a new
position, such guidance or ruling will generally be applied only prospectively.
However, if such ruling or guidance was not considered to set forth a new
position, it may be applied retroactively resulting in the contract owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, the Company reserves the right to modify
the contract in an attempt to maintain favorable tax treatment.
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 more rapid taxation of the distributed amounts from such
multiple contracts. These aggregation rules may also apply in connection with
certain 457 plans. You should consult a tax adviser prior to purchasing more
than one annuity in any calendar year.
CONTRACTS OWNED BY OTHER THAN NATURAL PERSONS
Under Section 72(u) of the Code, the earnings on purchase payments for the
contracts will be taxed currently to the owner if the owner is not a natural
person, e.g. a corporation or certain other entities, unless the contract is
held by certain trusts or other entities as an agent for a natural person or to
hold retirement plan assets. Purchasers who are not natural persons should
consult their own tax counsel or other tax adviser before purchasing a contract.
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INCOME TAX WITHHOLDING
All distributions or any portion(s) thereof which are includable in the gross
income of the owner 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 owner, in most cases, may
elect not to have taxes withheld or to have withholding done at a different
rate. Special withholding rules apply to United States citizens residing outside
the United States and to non-resident aliens.
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 generally does not apply to:
a) a series of substantially equal payments made at least annually for the life
or life expectancy of the participant or joint and last survivor expectancy of
the participant and a designated beneficiary; or b) distributions for a
specified period of 10 years or more; or c) distributions which are required
minimum distributions; or d) the portion of distributions not includable in
gross income (i.e. returns of after-tax contributions). You should consult your
own tax counsel or other tax adviser regarding income tax withholding.
TAX TREATMENT OF WITHDRAWALS -- NON-QUALIFIED CONTRACTS
Section 72 of the Code governs treatment of distributions from annuity
contracts. It provides that if the contract value exceeds the aggregate purchase
payments made, any amount withdrawn will be treated as coming first from the
earnings and then, only after the income portion is exhausted, as coming from
the principal. Withdrawn earnings are includable in gross income. It further
provides that a ten percent (10%) penalty will apply to the income portion of
any premature distribution. However, the penalty is not imposed on amounts
received: (a) after the taxpayer reaches age 59 1/2; (b) after the death of the
owner; (c) if the taxpayer is totally disabled (for this purpose disability is
as defined in Section 72(m)(7) of the Code); (d) in a series of substantially
equal periodic payments made not less frequently than annually for the life (or
life expectancy) of the taxpayer or for the joint lives (or joint life
expectancies) of the taxpayer and his or her beneficiary; (e) under an immediate
annuity; or (f) which are allocable to purchase payments made prior to August
14, 1982.
The above information does not apply to qualified contracts. However, separate
tax withdrawal penalties and restrictions may apply to such qualified contracts.
(See "Tax Treatment of Withdrawals -- Qualified Contracts" below.)
RETIREMENT PLANS
The contracts offered herein are designed to be suitable for use under various
types of retirement plans. Taxation of participants in each retirement plan
varies with the type of plan and terms and conditions of each specific plan.
Owners, annuitants and beneficiaries are cautioned that benefits under a
retirement 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. Some retirement plans are subject to distribution and other requirements
that are not incorporated into the Company's administrative procedures. Contract
owners, participants and beneficiaries are responsible for determining that
contributions, distributions and other transactions with respect to the contract
comply with applicable law. Following are general descriptions of some types of
retirement plans with which the contracts are most often used. Such descriptions
are not exhaustive and are for general informational purposes only. The tax
rules regarding retirement plans are very complex and will have differing
applications depending on individual facts and circumstances. Each purchaser
should obtain competent tax advice prior to purchasing a contract issued in
connection with a retirement plan.
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Contracts issued in connection with retirement plans include special provisions
that may restrict or modify contract provisions and administrative services
described in the prospectus. Generally, contracts issued pursuant to retirement
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 these contracts. (See "Tax
Treatment of Withdrawals -- Qualified Contracts", below.)
On July 6, 1983, the Supreme Court decided in Arizona Governing Committee v.
NorrisARIZONA GOVERNING COMMITTEE V. NORRIS that optional annuity benefits
provided under an employer's deferred compensation plan could not, under Title
VII of the Civil Rights Act of 1964, vary between men and women. The contracts
sold by the Company in connection with retirement plans will utilize annuity
tables which do not differentiate on the basis of sex. Such annuity tables will
also be available for use in connection with certain non-qualified deferred
compensation plans.
a. Tax Sheltered Annuities
Section 403(b) of the Code permits the purchase of "Tax Sheltered Annuities"
("TSA") 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 includable in the gross income of the
employees until the employees receive distributions from the contracts. 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. (See "Tax Treatment of Withdrawals --
Qualified Contracts" below.) Any employee should obtain competent tax advice
as to the tax treatment and suitability of such an investment.
b. Individual Retirement Annuities
Section 408 of the Code permits eligible individuals to contribute to an
individual retirement program known as a traditional "Individual Retirement
Annuity" ("IRA"). Under applicable limitations, certain amounts may be
contributed to an IRA which will be deductible from the individual's gross
income. These IRAs are subject to limitations on eligibility, contributions,
transferability and distributions. (See "Tax Treatment of Withdrawals --
Qualified Contracts" below.) Traditional IRAs include the SEP IRA and SIMPLE
IRA. An employer can establish a SEP IRA or SIMPLE IRA for its employees.
Under an employer's SEP IRA or SIMPLE IRA, contributions for each eligible
employee can be made under a contract issued as an IRA. Under certain
conditions, distributions from other IRAs and other retirement plans may be
rolled over or transferred on a tax-deferred basis into an IRA. Sales of
contracts for use with IRAs are subject to special requirements imposed by
the Code, including the requirement that certain informational disclosure be
given to persons desiring to establish an IRA. Purchasers of contracts to be
qualified as Individual Retirement Annuities should obtain competent tax
advice as to the tax treatment and suitability of such an investment.
c. Roth Individual Retirement Annuities
Section 408A of the Code permits eligible individuals to make nondeductible
contributions to an individual retirement program known as a Roth Individual
Retirement Annuity. Section 408A includes limits on how much you may
contribute to a Roth Individual Retirement Annuity and when distributions
may commence. Qualified distributions from Roth Individual Retirement
Annuities are excluded from taxable gross income. "Qualified distributions"
are distributions which (a) are made more than five years after the taxable
year of the first contribution to the Roth Individual Retirement Annuity,
and (b) meet any of the following conditions; (1) the annuity owner has
reached age 59 1/2; (2) the distribution is paid to a beneficiary after the
owner's death; (3) the annuity owner is disabled; or (4) the distribution
will be used for a first time home purchase. (Qualified distributions for
first time home purchases may not exceed $10,000.) Non-qualified
distributions are includable in taxable
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gross income only to the extent that they exceed the contributions made to
the Roth Individual Retirement Annuity. The taxable portion of a
non-qualified distribution may be subject to the 10% penalty tax.
Subject to certain limitations, you may convert a regular Individual
Retirement Account or Annuity to a Roth Individual Retirement Annuity. You
will be required to include the taxable portion of the conversion in your
taxable gross income, but you will not be required to pay the 10% penalty
tax.
d. Deferred Compensation Plans
Section 457 of the Code permits governmental and certain other tax exempt
employers to establish deferred compensation plans for the benefit of their
employees. The Code establishes limitations and restrictions on eligibility,
contributions and distributions. Under these plans, contributions made for
the benefit of the employees will not be includable in the employees' gross
income until distributed from the plan. Special rules apply to deferred
compensation plans. Owners should consult their own tax counsel or other tax
adviser regarding any distributions.
TAX TREATMENT OF WITHDRAWALS -- QUALIFIED CONTRACTS
Section 72(t) of the Code imposes a 10% penalty tax on the taxable portion of
any distribution from certain retirement plans, including contracts issued and
qualified under Code Sections 403(b) (Tax Sheltered Annuities) and 408
(Individual Retirement Annuities). To the extent amounts are not includable in
gross income because they have been rolled over to an IRA or to another eligible
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 owner or annuitant (as applicable) reaches age 59 1/2; (b)
distributions following the death or disability of the owner or annuitant (as
applicable) (for this purpose disability is as defined in Section 72(m)(7) of
the Code); (c) after separation from service, distributions that are part of
substantially equal periodic payments made not less frequently than annually for
the life (or life expectancy) of the owner or annuitant (as applicable) or the
joint lives (or joint life expectancies) of such owner or annuitant (as
applicable) and his or her designated beneficiary; (d) distributions to an owner
or annuitant (as applicable) who has separated from service after he has
attained age 55; (e) distributions made to the owner or annuitant (as
applicable) to the extent such distributions do not exceed the amount allowable
as a deduction under Code Section 213 to the owner or annuitant (as applicable)
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 owner or
annuitant; (h) distributions made to an owner or annuitant to pay qualified
higher education expenses; and (i) distributions made to an owner or annuitant
for first home purchases. The exceptions stated in (d), (e) and (f) above do not
apply in the case of an Individual Retirement Annuity. The exception stated in
(c) above applies to an Individual Retirement Annuity without the requirement
that there be a separation from service.
Generally, distributions from a retirement plan must commence no later than
April 1st of the calendar year, following the year in which the employee attains
age 70 1/2. Distributions from a TSA or Deferred Compensation Plan may, however,
be deferred until actual retirement, if later. Required distributions must be
over a period not exceeding the life expectancy of the individual or the joint
lives or life expectancies of the individual and his or her designated
beneficiary. If the required minimum distributions are not made, a 50% penalty
tax is imposed as to the amount not distributed.
Roth IRAs are not subject to the required minimum distribution rule.
Distributions from a Roth IRA may be deferred until the death of the owner or
annuitant.
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TAX SHELTERED ANNUITIES -- WITHDRAWAL LIMITATIONS
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 only when the owner: (1) attains age 59 1/2; (2)
separates from service; (3) dies or becomes disabled (within the meaning of
Section 72(m)(7) of the Code); (4) in the case of hardship, or (5) is divorced
and the distribution is permitted under a Qualified Domestic Relations Order.
Withdrawals for hardship are restricted to the portion of the owner's contract
value which represents contributions made by the owner and does not include any
investment results. The limitations on withdrawals became effective on January
1, 1989 and apply only to salary reduction contributions made after December 31,
1988, to income attributable to such contributions and to income attributable to
amounts held as of December 31, 1988. The limitations on withdrawals do not
affect rollovers or transfers between certain retirement plans. Owners should
consult their own tax counsel or other tax adviser regarding any distributions.
ANNUITY PROVISIONS
ANNUITY UNIT VALUE
The value of an annuity unit for each portfolio on any date varies to reflect
the investment experience of the portfolio, the assumed investment rate of 4% on
which the annuity tables are based, and the deduction for charges assessed and
imposed by the Company, including a mortality and expense risk charge and, if
applicable, a charge for premium taxes.
For any valuation period the value of an annuity unit is determined by
multiplying the value of an annuity unit for each portfolio, as of 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 an Assumed Investment Factor to adjust for the assumed investment
return of 4% used in calculating the annuity rate tables.
The Net Investment Factor is a number that represents the change in the net
asset value of a portfolio on successive days when the NYSE is open. The Net
Investment Factor for any portfolio for any valuation period is determined by
taking the net asset value per share of the portfolio, (adjusted for earnings,
realized or unrealized capital gains or losses, and deductions for tax, if any),
as of the current valuation period, and dividing it by the adjusted net asset
value per share of the portfolio for the preceding period, and then subtracting
the percentage factor for the mortality and expense risk charge. The Net
Investment Factor may be greater than or equal to one, therefore the annuity
unit value may increase or decrease.
The Assumed Investment Factor for a one day valuation period is 1.00010746. This
factor neutralizes the assumed investment return of 4% in the Variable Annuity
Purchase Rate Table in the contract.
VARIABLE ANNUITY PAYMENTS
The amount of the first annuity payment under a contract will be determined on
the basis of the annuity option selected, the annuity purchase rate, the date of
birth of the annuitant, and the annuity date. The amount of the first payment is
the sum of the payments from each investment option determined by applying the
contract value, after deduction for premium taxes, if applicable, as of the 15th
day of the preceding month, to the variable annuity tables contained in the
contract (which are guaranteed for the duration of the contract). For variable
annuitizations which take place beginning in the year 2000-2009, an age setback
of one year will be used; for those beginning in the year 2010-2019, an age
setback of two years will be used; and so on with an additional one year age
setback for each additional ten years.
The number of annuity units in each portfolio to be credited to the annuitant is
determined by dividing the amount of the first annuity payment from that
portfolio by the value of an annuity unit as of the 15th day of the month
preceding the annuity date. The number of annuity units used to calculate the
variable
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annuity payment each month remains constant unless the annuitant changes
portfolio elections. The value of annuity units in each portfolio will fluctuate
with the investment experience of the portfolios.
The dollar amount of the variable portion of each annuity payment after the
first is the sum of the payments from each portfolio, which are determined by
multiplying the number of annuity units per portfolio by the value of an annuity
unit (for that investment option) as of the 15th day of the preceding month.
To illustrate the manner in which variable annuity payments are determined
consider this example. Item (4) in the example shows the applicable monthly
payment rate for an annuitant with an adjusted age 63, who has elected a life
variable annuity payment plan with a guarantee period of 10 years with the
assumed investment rate of 4%. (Option 2, as described in the prospectus).
<TABLE>
<S> <C> <C>
(1) Assumed number of accumulation units in a portfolio on maturity
date............................................................... 25,000
(2) Assumed value of an accumulation unit in a portfolio at maturity... $ 12.5000
(3) Cash value of contract at maturity, (1) x (2)...................... $ 312,500
(4) Consideration required to purchase $1 of monthly annuity from
annuity rate table................................................. $ 183.53
(5) Amount of first payment from a portfolio, (3) divided by (4)....... $1,702.72
(6) Assumed value of annuity unit in a portfolio at maturity........... $ 13.0000
(7) Number of annuity units credited in a portfolio, (5) divided by
(6)................................................................ 130.9785
</TABLE>
The $312,500 value at maturity provides a first payment from the portfolio of
$1,702.72, and payments thereafter of the varying dollar value of 130.9785
annuity units. The amount of subsequent payments from the portfolio is
determined by multiplying 130.9785 units by the value of an annuity unit in the
portfolio on the applicable valuation date. For example, if that unit value is
$13.25, the monthly payment from the portfolio will be 130.9785 multiplied by
$13.25, or $1,735.47.
However, the value of the annuity unit depends on the investment experience of
the portfolio. Thus in the example above, if the Net Investment Factor for the
following month was less than the assumed investment rate of 4%, the annuity
unit would decline in value. If the annuity unit value declined to $12.75 the
succeeding monthly payment would then be 130.9785 x $12.75, or $1,669.98.
For the sake of simplicity the foregoing example assumes that all of the annuity
units are in one portfolio. If there are annuity units in two or more
portfolios, the annuity payment from each portfolio is calculated separately, in
the manner illustrated, and the total monthly payment is the sum of the payments
from the portfolios.
FINANCIAL STATEMENTS
The consolidated financial statements of the Company and subsidiaries included
herein should be considered only as bearing upon the ability of the Company to
meet its obligations under the contracts.
12
<PAGE>
FINANCIAL STATEMENTS
SAFECO RESOURCE VARIABLE ACCOUNT B
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Assets and Liabilities as of December 31, 1998................................................ 1
Statements of Operations and Changes in Net Assets for the Year or Period Ended December 31, 1998 and
1997...................................................................................................... 5
Notes to Financial Statements.............................................................................. 11
Report of Ernst & Young LLP, Independent Auditors.......................................................... 14
</TABLE>
13
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNTS
--------------------------------------------------------------------
SAFECO
(In Thousands, Except Per-Share and SAFECO SAFECO SAFECO SAFECO MONEY
Per-Unit Amounts) EQUITY GROWTH NORTHWEST BOND MARKET
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in underlying Portfolios:
Investments, at cost $ 151,267 $ 89,215 $ 4,965 $ 12,009 $ 5,061
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SHARES OWNED 6,866 4,114 359 1,067 5,061
NET ASSET VALUE PER SHARE $ 29.97 $ 21.30 $ 15.64 $ 11.41 $ 1.00
------------ ------------ ------------ ------------ ------------
Investments, at value 205,780 87,630 5,611 12,171 5,061
Dividend Receivable 10,148 10,191 - 654 19
------------ ------------ ------------ ------------ ------------
Total assets 215,928 97,821 5,611 12,825 5,080
LIABILITIES:
Mortality and expense risk charge payable 224 98 6 13 5
------------ ------------ ------------ ------------ ------------
NET ASSETS: $ 215,704 $ 97,723 $ 5,605 $ 12,812 $ 5,075
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
ACCUMULATION UNITS OUTSTANDING 3,559 2,513 356 618 316
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
ACCUMULATION UNIT VALUE *
(Net assets divided by accumulation units
outstanding) $ 60.601 $ 38.894 $ 15.741 $ 20.712 $ 16.074
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
* Redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------
SAFECO LEXINGTON LEXINGTON
(In Thousands, Except Per-Share and SMALL SCUDDER SCUDDER NATURAL EMERGING
Per-Unit Amounts) COMPANY INTERNATIONAL BALANCED RESOURCES MARKETS
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in underlying Portfolios:
Investments, at cost $ 691 $ 17,554 $ 16,652 $ 691 $ 190
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
SHARES OWNED 54 1,320 1,339 50 20
NET ASSET VALUE PER SHARE $ 9.87 $ 14.56 $ 15.21 $ 11.03 $ 5.65
------------ ------------- ------------ ------------ ------------
Investments, at value 530 19,218 20,365 547 112
Dividend Receivable - - - - -
------------ ------------- ------------ ------------ ------------
Total assets 530 19,218 20,365 547 112
LIABILITIES:
Mortality and expense risk charge payable 1 20 20 1 -
------------ ------------- ------------ ------------ ------------
NET ASSETS: $ 529 $ 19,198 $ 20,345 $ 546 $ 112
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
ACCUMULATION UNITS OUTSTANDING 52 1,164 979 46 18
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
ACCUMULATION UNIT VALUE *
(Net assets divided by accumulation units
outstanding) $ 10.080 $ 16.492 $ 20.784 $ 11.897 $ 6.163
------------ ------------- ------------ ------------ ------------
------------ ------------- ------------ ------------ ------------
</TABLE>
* Redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------
FEDERATED AMERICAN AMERICAN
(In Thousands, Except Per-Share and FEDERATED HIGH FEDERATED CENTURY CENTURY
Per-Unit Amounts) UTILITY INCOME INTERNATIONAL BALANCED INTERNATIONAL
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
ASSETS:
Investments in underlying Portfolios:
Investments, at cost $ 1,045 $ 1,424 $ 512 $ 1,445 $ 1,295
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
SHARES OWNED 81 131 38 180 175
NET ASSET VALUE PER SHARE $ 15.27 $ 10.92 $ 15.39 $ 8.34 $ 7.62
------------ ------------ ------------- ------------ ------------
Investments, at value 1,229 1,436 580 1,501 1,336
Dividend Receivable - - - - -
------------ ------------ ------------- ------------ ------------
Total assets 1,229 1,436 580 1,501 1,336
LIABILITIES:
Mortality and expense risk charge payable 1 2 1 1 1
------------ ------------ ------------- ------------ ------------
NET ASSETS: $ 1,228 $ 1,434 $ 579 $ 1,500 $ 1,335
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
ACCUMULATION UNITS OUTSTANDING 72 115 39 160 168
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
ACCUMULATION UNIT VALUE *
(Net assets divided by accumulation units
outstanding) $ 17.045 $ 12.465 $ 14.905 $ 9.360 $ 7.968
------------ ------------ ------------- ------------ ------------
------------ ------------ ------------- ------------ ------------
</TABLE>
* Redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
SUB-ACCOUNTS
------------------------------------------
FIDELITY
(In Thousands, Except Per-Share and FIDELITY GROWTH INVESCO
Per-Unit Amounts) CONTRAFUND OPPORTUNITIES REALTY
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
ASSETS:
Investments in underlying Portfolios:
Investments, at cost $ 220 $ 541 $ 92
------------- ------------ -------------
------------- ------------ -------------
SHARES OWNED 11 26 10
NET ASSET VALUE PER SHARE $ 24.44 $ 22.88 $ 8.22
------------- ------------ -------------
Investments, at value 258 606 83
Dividend Receivable - - -
------------- ------------ -------------
Total assets 258 606 83
LIABILITIES:
Mortality and expense risk charge payable - 1 -
------------- ------------ -------------
NET ASSETS: $ 258 $ 605 $ 83
------------- ------------ -------------
------------- ------------ -------------
ACCUMULATION UNITS OUTSTANDING 23 54 10
------------- ------------ -------------
------------- ------------ -------------
ACCUMULATION UNIT VALUE *
(Net assets divided by accumulation units
outstanding) $ 11.340 $ 11.229 $ 8.601
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
* Redemption price per unit is the accumulation unit value less any
applicable contingent deferred sales charge.
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
SAFECO SAFECO SAFECO
EQUITY GROWTH NORTHWEST
- --------------------------------------------------------------------------------------------------------------------------
---------------------- ---------------------- ----------------------
(In Thousands) 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 10,148 $ 12,420 $ 10,191 $ 13,463 $ - $ 198
Mortality and expense risk charge (2,413) (1,934) (1,226) (784) (67) (43)
Net realized gain (loss) on investments 3,440 9,610 775 5,338 72 227
Net change in unrealized appreciation
(depreciation) 28,887 11,494 (11,535) 5,019 22 442
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 40,062 31,590 (1,795) 23,036 27 824
UNIT TRANSACTIONS:
Purchases 42,556 37,076 41,575 28,799 1,866 1,905
Redemptions (37,631) (30,507) (25,341) (13,657) (909) (757)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 4,925 6,569 16,234 15,142 957 1,148
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS 44,987 38,159 14,439 38,178 984 1,972
NET ASSETS AT BEGINNING OF YEAR 170,717 132,558 83,284 45,106 4,621 2,649
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 215,704 $ 170,717 $ 97,723 $ 83,284 $ 5,605 $ 4,621
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
SAFECO SAFECO SAFECO
BOND MONEY MARKET SMALL COMPANY
- --------------------------------------------------------------------------------------------------------------------------
---------------------- ---------------------- ----------------------
(In Thousands) 1998 1997 1998 1997 1998 1997 *
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 654 $ 509 $ 195 $ 172 $ - $ 6
Mortality and expense risk charge (136) (113) (51) (43) (6) -
Net realized gain (loss) on investments 88 (143) - - (56) 1
Net change in unrealized appreciation
(depreciation) 161 371 - - (156) (5)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 767 624 144 129 (218) 2
UNIT TRANSACTIONS:
Purchases 5,235 1,459 18,405 14,068 772 220
Redemptions (2,842) (1,494) (16,175) (16,594) (201) (46)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 2,393 (35) 2,230 (2,526) 571 174
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS 3,160 589 2,374 (2,397) 353 176
NET ASSETS AT BEGINNING OF YEAR 9,652 9,063 2,701 5,098 176 -
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 12,812 $ 9,652 $ 5,075 $ 2,701 $ 529 $ 176
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
* For the period from May 1, 1997 (inception date) to December 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
SCUDDER SCUDDER LEXINGTON NATURAL
INTERNATIONAL BALANCED RESOURCES
- --------------------------------------------------------------------------------------------------------------------------
---------------------- ---------------------- ----------------------
(In Thousands) 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 2,297 $ 349 $ 1,024 $ 672 $ 45 $ 21
Mortality and expense risk charge (231) (204) (195) (121) (8) (8)
Net realized gain (loss) on investments 281 1,473 135 350 (4) 42
Net change in unrealized appreciation
(depreciation) 465 (467) 2,154 1,044 (177) (6)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 2,812 1,151 3,118 1,945 (144) 49
UNIT TRANSACTIONS:
Purchases 4,944 7,878 8,153 4,296 169 450
Redemptions (5,243) (6,231) (2,770) (1,677) (156) (206)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS (299) 1,647 5,383 2,619 13 244
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS 2,513 2,798 8,501 4,564 (131) 293
NET ASSETS AT BEGINNING OF YEAR 16,685 13,887 11,844 7,280 677 384
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 19,198 $ 16,685 $ 20,345 $ 11,844 $ 546 $ 677
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
LEXINGTON
EMERGING FEDERATED FEDERATED
MARKETS UTILITY HIGH INCOME
- --------------------------------------------------------------------------------------------------------------------------
---------------------- ---------------------- ----------------------
(In Thousands) 1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ 13 $ - $ 54 $ 16 $ 28 $ 15
Mortality and expense risk charge (2) (4) (12) (6) (15) (4)
Net realized gain (loss) on investments (45) 3 14 15 - 5
Net change in unrealized appreciation
(depreciation) (24) (49) 66 97 (17) 24
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS (58) (50) 122 122 (4) 40
UNIT TRANSACTIONS:
Purchases 44 299 548 431 1,081 682
Redemptions (112) (211) (198) (77) (403) (77)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS (68) 88 350 354 678 605
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS (126) 38 472 476 674 645
NET ASSETS AT BEGINNING OF YEAR 238 200 756 280 760 115
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 112 $ 238 $ 1,228 $ 756 $ 1,434 $ 760
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------------------------------------------
FEDERATED AMERICAN CENTURY AMERICAN CENTURY
INTERNATIONAL BALANCED INTERNATIONAL
- --------------------------------------------------------------------------------------------------------------------------
---------------------- ---------------------- ----------------------
(In Thousands) 1998 1997 1998 1997 * 1998 1997 *
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS:
Dividend income $ - $ - $ 66 $ - $ 40 $ -
Mortality and expense risk charge (6) (3) (11) (1) (12) (1)
Net realized gain (loss) on investments 29 1 (1) 1 9 -
Net change in unrealized appreciation
(depreciation) 53 14 55 1 44 (3)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 76 12 109 1 81 (4)
UNIT TRANSACTIONS:
Purchases 271 273 1,169 363 1,096 492
Redemptions (78) (18) (126) (16) (292) (38)
---------- ---------- ---------- ---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 193 255 1,043 347 804 454
---------- ---------- ---------- ---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS 269 267 1,152 348 885 450
NET ASSETS AT BEGINNING OF YEAR 310 43 348 - 450 -
---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 579 $ 310 $ 1,500 $ 348 $ 1,335 $ 450
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
* For the period from May 1, 1997 (inception date) to December 31, 1997.
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEAR OR PERIOD ENDED DECEMBER 31
<TABLE>
<CAPTION>
SUB-ACCOUNTS
----------------------------------
FIDELITY
FIDELITY GROWTH INVESCO
CONTRAFUND OPPORTUNITIES REALTY
- --------------------------------------------------------------------------------------
---------- ---------- ----------
(In Thousands) 1998 # 1998 # 1998 #
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------
OPERATIONS:
Dividend income $ - $ - $ 2
Mortality and expense risk charge (1) (2) (1)
Net realized gain (loss) on investments 12 (2) -
Net change in unrealized appreciation
(depreciation) 38 65 (9)
---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM OPERATIONS 49 61 (8)
UNIT TRANSACTIONS:
Purchases 489 586 93
Redemptions (280) (42) (2)
---------- ---------- ----------
NET CHANGE IN NET ASSETS RESULTING FROM UNIT
TRANSACTIONS 209 544 91
---------- ---------- ----------
TOTAL CHANGE IN NET ASSETS 258 605 83
NET ASSETS AT BEGINNING OF YEAR - - -
---------- ---------- ----------
NET ASSETS AT END OF YEAR $ 258 $ 605 $ 83
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
# For the period from May 1, 1998 (inception date) to December 31, 1998.
SEE NOTES TO FINANCIAL STATEMENTS
10
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
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. The performance of the underlying
portfolios may differ substantially from publicly traded mutual funds with
similar names and objectives.
<TABLE>
<CAPTION>
Sub-Accounts Underlying Portfolios
<S> <C>
- ------------------------------------------------------------------------------------------------------
SAFECO Resource Series Trust
SAFECO Resource Equity (SAFECO Equity) RST Equity Portfolio
SAFECO Resource Growth (SAFECO Growth) RST Growth Portfolio
SAFECO Resource Northwest (SAFECO Northwest) RST Northwest Portfolio
SAFECO Resource Bond (SAFECO Bond) RST Bond Portfolio
SAFECO Resource Money Market (SAFECO Money Market) RST Money Market Portfolio
SAFECO Resource Small Company Stock (SAFECO Small
Company) RST Small Company Stock Portfolio
Scudder Variable Life Investment Fund
Scudder International Scudder International Portfolio
Scudder Balanced Scudder Balanced Portfolio
Lexington Natural Resources Trust
Lexington Natural Resources Lexington Natural Resources Trust
Lexington Emerging Markets Fund, Inc.
Lexington Emerging Markets Lexington Emerging Markets Fund, Inc.
Federated Insurance Series
Federated Utility Federated Utility Fund II
Federated High Income Bond (Federated High Income) Federated High Income Bond Fund II
Federated International Equity (Federated
International) Federated International Equity Fund II
American Century Variable Portfolios, Inc.
American Century Balanced VP Balanced
American Century International VP International
Variable Insurance Products Fund II (VIP II)
Fidelity Contrafund VIP II Contrafund Portfolio
Variable Insurance Products Fund III (VIP III)
Fidelity Growth Opportunities VIP III Growth Opportunities Portfolio
INVESCO Variable Investment Funds, Inc.
INVESCO Realty INVESCO VIF-Realty Portfolio
</TABLE>
11
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
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. The policies are in conformity with generally accepted
accounting principles.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
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.
SECURITY TRANSACTIONS -- Security transactions are recorded on the trade
date. Effective January 1, 1998, realized gains and losses on security
transactions are determined using the average cost method. Prior to 1998,
the First-In First-Out cost method was used. This change in accounting
method has no net impact on the results of operations or on net assets.
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 average 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.
12
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
4. INVESTMENT TRANSACTIONS
Purchase and sales activity in underlying portfolio shares for the year
ended December 31, 1998 was as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
SUB-ACCOUNT PURCHASES SALES
<S> <C> <C>
- ---------------------------------------------------------------
SAFECO Equity $19,467 $ 16,921
SAFECO Growth 27,991 12,976
SAFECO Northwest 1,691 800
SAFECO Bond 4,356 2,096
SAFECO Money Market 14,078 11,722
SAFECO Small Company 791 225
Scudder International 5,766 3,997
Scudder Balanced 7,630 1,411
Lexington Natural Resources 305 256
Lexington Emerging Markets 58 115
Federated Utility 572 180
Federated High Income 1,019 327
Federated International 380 192
American Century Balanced 1,205 106
American Century International 1,125 292
Fidelity Contrafund 488* 280*
Fidelity Growth Opportunities 586* 43*
INVESCO Realty Fund 94* 2*
</TABLE>
* For the period from May 1, 1998 (inception date) to December 31, 1998.
5. HISTORICAL ACCUMULATION UNIT VALUES
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------
SAFECO Equity $60.601 $49.122 $39.829 $32.321 $25.424
SAFECO Growth 38.894 38.686 27.082 20.756 14.897
SAFECO Northwest 15.741 15.493 11.968 10.777 10.156
SAFECO Bond 20.712 19.265 17.991 18.117 15.559
SAFECO Money Market 16.074 15.509 14.944 14.417 13.837
SAFECO Small Company
* 10.080 12.759 - - -
Scudder International 16.492 14.094 13.083 11.540 10.519
Scudder Balanced 20.784 17.080 13.919 12.596 10.066
Lexington Natural
Resources ** 11.897 14.996 14.169 - -
Lexington Emerging
Markets ** 6.163 8.703 9.968 - -
Federated Utility ** 17.045 15.144 12.106 - -
Federated High Income
** 12.465 12.290 10.933 - -
Federated
International ** 14.905 12.017 11.052 - -
American Century
Balanced * 9.360 8.185 - - -
American Century
International * 7.968 6.793 - - -
Fidelity Contrafund # 11.340 - - - -
Fidelity Growth
Opportunities # 11.229 - - - -
INVESCO Realty Fund # 8.601 - - - -
</TABLE>
* Unit values on the inception date (May 1, 1997) were $10.000, $7.160,
and $6.200, for the SAFECO RST Small Company, AMC Balanced and AMC
International Sub-accounts, respectively.
** Unit values on the inception date (February 15, 1996) were $11.920,
$10.540, $11.410, $10.050, and $10.480, for the Lexington Natural
Resources, Lexington Emerging Markets, Federated Utility, Federated High
Income and Federated International Sub-accounts, respectively.
# Unit value on the inception date (May 1, 1998) was $10.000 for the
Fidelity Contrafund, Fidelity Growth Opportunities and INVESCO Realty
Sub-accounts.
13
<PAGE>
SAFECO Resource Variable Account B
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of SAFECO Life Insurance Company and Participants of
SAFECO Resource Variable Account B
We have audited the accompanying statements of assets and liabilities of 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, American Century International, Fidelity
Contrafund, Fidelity Growth Opportunities and INVESCO Realty Sub-Accounts) as of
December 31, 1998, 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 the 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 and historical accumulation unit values. Our procedures
included confirmation of portfolio shares owned as of December 31, 1998, 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, 1998, 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.
Seattle, Washington /s/ ERNST & YOUNG LLP
February 26, 1999
14
<PAGE>
Audited Consolidated Financial Statements
SAFECO Life Insurance Company
and Subsidiaries
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
WITH REPORT OF INDEPENDENT AUDITORS
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Financial Statements
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . . 2
Statement of Consolidated Income. . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Changes in Shareholder's Equity . . . . . . 5
Statement of Consolidated Comprehensive Income. . . . . . . . . . . . 5
Statement of Consolidated Cash Flows. . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 8
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
SAFECO Life Insurance Company
We have audited the accompanying consolidated balance sheets of SAFECO Life
Insurance Company and subsidiaries as of December 31, 1998 and 1997, and the
related statements of consolidated income, changes in shareholder's equity,
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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
1998 as required by the Financial Accounting Standards Board.
Seattle, Washington /s/Ernst & Young LLP
February 12, 1999
1
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized Cost: 1998-$9,718,627; 1997-$8,901,583) . . . . . $10,281,711 $ 9,401,886
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market Value: 1998-$3,259,194; 1997-$3,159,888) . . . . . . 2,720,883 2,708,558
Marketable Equity Securities, at Market Value
(Cost: 1998-$14,665; 1997-$10,651) . . . . . . . . . . . . . 18,737 15,552
First Mortgage Loans on Real Estate:
Nonaffiliates (At cost, less allowance for losses:
1998-$11,173; 1997-$11,609). . . . . . . . . . . . . . . . 503,734 475,975
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . 160,693 175,183
Real Estate. . . . . . . . . . . . . . . . . . . . . . . . . . 2,942 3,399
Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . 62,359 60,249
Short-Term Investments (At cost which approximates market) . . 54,164 56,374
Other Invested Assets. . . . . . . . . . . . . . . . . . . . . 5,211 250
----------- -----------
Total Investments. . . . . . . . . . . . . . . . . . . . . 13,810,434 12,897,426
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,321 244,512
Accrued Investment Income. . . . . . . . . . . . . . . . . . . . 190,887 181,757
Accounts and Notes Receivable (At cost, less allowance
for doubtful accounts: 1998-$107; 1997-$78). . . . . . . . . . 110,850 48,204
Reinsurance Recoverables (Note 6). . . . . . . . . . . . . . . . 32,354 28,515
Deferred Policy Acquisition Costs (Net of valuation allowance:
1998-$45,108; 1997-$35,349). . . . . . . . . . . . . . . . . . 213,022 239,843
Present Value of Future Profits. . . . . . . . . . . . . . . . . 12,362 13,239
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . 61,510 63,544
Current Income Taxes Recoverable (Note 10) . . . . . . . . . . . 17,169 --
Assets Held in Separate Accounts . . . . . . . . . . . . . . . . 1,201,135 905,417
----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . $15,658,044 $14,622,457
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Policy and Contract Liabilities (Note 6):
Future Policy Benefits . . . . . . . . . . . . . . . . . . . $ 158,949 $ 151,675
Policy and Contract Claims . . . . . . . . . . . . . . . . . 38,391 37,688
Premiums Paid in Advance . . . . . . . . . . . . . . . . . . 8,161 9,145
Funds Held Under Deposit Contracts . . . . . . . . . . . . . 12,364,937 11,539,473
Other Policyholders' Funds . . . . . . . . . . . . . . . . . 61,029 166,759
----------- -----------
Total Policy and Contract Liabilities. . . . . . . . . . . 12,631,467 11,904,740
Other Liabilities. . . . . . . . . . . . . . . . . . . . . . . 149,684 125,247
Federal Income Taxes (Note 10):
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 19,192
Deferred (Includes tax on unrealized appreciation of
investment securities: 1998-$182,717; 1997-$164,449) . . . 199,744 179,296
Liabilities Related to Separate Accounts . . . . . . . . . . . 1,201,135 905,417
----------- -----------
Total Liabilities. . . . . . . . . . . . . . . . . . . . . 14,182,030 13,133,892
----------- -----------
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) . . . . . . . . . . . . . . . . . . 1,046,572 1,093,048
Accumulated Other Comprehensive Income . . . . . . . . . . . . 339,442 305,517
----------- -----------
Total Shareholder's Equity . . . . . . . . . . . . . . . . 1,476,014 1,488,565
----------- -----------
Total Liabilities and Shareholder's Equity . . . . . . . $15,658,044 $14,622,457
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 254,410 $ 240,595 $ 240,100
Investment Income:
Interest on Fixed Maturities . . . . . . . . . . . . . . . . 925,827 830,837 767,309
Interest on Mortgage Loans . . . . . . . . . . . . . . . . . 56,313 56,232 52,127
Interest on Short-Term Investments . . . . . . . . . . . . . 4,898 3,419 2,935
Dividends from Marketable Equity Securities. . . . . . . . . 693 1,044 843
Dividends from Redeemable Preferred Stock. . . . . . . . . . 17,088 16,026 12,654
Other Investment Income. . . . . . . . . . . . . . . . . . . 4,446 3,843 3,879
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,009,265 911,401 839,747
Less Investment Expenses . . . . . . . . . . . . . . . . . . 3,804 3,485 3,709
------------ ------------ ------------
Net Investment Income. . . . . . . . . . . . . . . . . . . . . 1,005,461 907,916 836,038
------------ ------------ ------------
Other Revenue. . . . . . . . . . . . . . . . . . . . . . . . . 28,069 21,751 12,933
Realized Investment Gain (Note 3). . . . . . . . . . . . . . . 13,612 6,807 10,439
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,301,552 1,177,069 1,099,510
------------ ------------ ------------
Benefits and Expenses:
Policy Benefits. . . . . . . . . . . . . . . . . . . . . . . . 994,081 844,926 782,213
Commissions. . . . . . . . . . . . . . . . . . . . . . . . . . 95,250 93,681 74,724
Personnel Costs. . . . . . . . . . . . . . . . . . . . . . . . 53,814 48,503 43,609
Taxes Other Than Payroll and Income Taxes. . . . . . . . . . . 12,980 11,817 15,512
Other Operating Expenses . . . . . . . . . . . . . . . . . . . 54,815 46,639 45,224
Amortization of Deferred Policy Acquisition Costs. . . . . . . 39,076 36,946 35,652
Deferral of Policy Acquisition Costs . . . . . . . . . . . . . (65,944) (53,068) (42,426)
Amortization of Present Value of Future Profits. . . . . . . . 3,790 -- --
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187,862 1,029,444 954,508
------------ ------------ ------------
Income before Write-off of
Deferred Policy Acquisition Costs. . . . . . . . . . . . . . . 113,690 147,625 145,002
Write-off of Deferred Policy Acquisition Costs . . . . . . . . . (46,800) -- --
------------ ------------ ------------
Income before Federal Income Taxes . . . . . . . . . . . . . . . 66,890 147,625 145,002
------------ ------------ ------------
Provision (Benefit) for Federal Income Taxes (Note 10):
Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,725 54,705 57,417
Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,359) (4,689) (6,471)
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . 23,366 50,016 50,946
------------ ------------ ------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,524 $ 97,609 $ 94,056
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<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 . . . . . . . . . . . . . . . 1,093,048 1,011,439 921,383
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . 43,524 97,609 94,056
Dividends to Parent. . . . . . . . . . . . . . . . . . . . . . (90,000) (16,000) (4,000)
------------ ------------ ------------
Balance at the End of Year . . . . . . . . . . . . . . . . . . 1,046,572 1,093,048 1,011,439
------------ ------------ ------------
Accumulated Other Comprehensive Income:
Unrealized Appreciation of Investment
Securities, Net of Tax (Note 3):
Balance at the Beginning of Year . . . . . . . . . . . . . 305,517 160,045 320,452
Change in Unrealized Appreciation, Net of Deferred
Policy Acquisition Costs Valuation Allowance . . . . . . 33,925 145,472 (160,407)
------------ ------------ ------------
Balance at the End of Year . . . . . . . . . . . . . . . . 339,442 305,517 160,045
------------ ------------ ------------
Shareholder's Equity . . . . . . . . . . . . . . . . . . $ 1,476,014 $ 1,488,565 $ 1,261,484
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,524 $ 97,609 $ 94,056
Other Comprehensive Income, Net of Tax (Note 3):
Unrealized Appreciation (Depreciation) of Investment
Securities Arising During the Year (Net of tax:
1998-$21,842; 1997-$81,029; 1996-($81,469)). . . . . . . . . 40,563 150,482 (151,300)
Less: Reclassification Adjustment for Realized Gains
Included in Net Income (Net of tax: 1998-$3,574;
1997-$2,697; 1996-$4,904). . . . . . . . . . . . . . . . . (6,638) (5,010) (9,107)
------------ ------------ ------------
Other Comprehensive Income (Loss). . . . . . . . . . . . . . .. 33,925 145,472 (160,407)
------------ ------------ ------------
Comprehensive Income (Loss). . . . . . . . . . . . . . . . . . . $ 77,449 $ 243,081 $ (66,351)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Insurance Premiums Received. . . . . . . . . . . . . . . . . .. $ 224,293 $ 216,089 $ 216,801
Dividends and Interest Received. . . . . . . . . . . . . . . .. 919,236 819,433 754,878
Other Operating Receipts . . . . . . . . . . . . . . . . . . .. 27,498 19,299 12,948
Insurance Claims and Policy Benefits Paid. . . . . . . . . . .. (402,118) (353,227) (302,955)
Underwriting, Acquisition and Insurance
Operating Costs Paid . . . . . . . . . . . . . . . . . . . .. (221,294) (202,077) (172,251)
Income Taxes Paid. . . . . . . . . . . . . . . . . . . . . . .. (61,086) (36,140) (71,255)
------------ ------------ ------------
Net Cash Provided by Operating Activities. . . . . . . . .. 486,529 463,377 438,166
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of:
Fixed Maturities Available-for-Sale. . . . . . . . . . . . .. (2,117,938) (1,891,778) (1,544,998)
Fixed Maturities Held-to-Maturity. . . . . . . . . . . . . .. (1,691) (199,589) (473,206)
Purchase of Subsidiary, Net of Cash Acquired . . . . . . . .. -- 116,122 --
Other Investments. . . . . . . . . . . . . . . . . . . . . .. (7,345) (5,788) (287)
Policy and Nonaffiliated Mortgage Loans. . . . . . . . . . .. (103,602) (96,019) (85,485)
Affiliated Mortgage Loans. . . . . . . . . . . . . . . . . .. -- (40,000) (34,650)
Options. . . . . . . . . . . . . . . . . . . . . . . . . . .. (168,554) (13,977) --
Maturities of Fixed Maturities Available-for-Sale. . . . . . .. 732,377 435,788 466,509
Maturities of Fixed Maturities Held-to-Maturity. . . . . . . .. 7,280 8,907 21,694
Sales of:
Fixed Maturities Available-for-Sale. . . . . . . . . . . . .. 643,539 869,091 721,229
Fixed Maturities Held-to-Maturity. . . . . . . . . . . . . .. 18,235 -- 13,316
Other Investments. . . . . . . . . . . . . . . . . . . . . .. 7,522 13,824 12,580
Policy and Nonaffiliated Mortgage Loans. . . . . . . . . . .. 65,797 61,159 48,341
Affiliated Mortgage Loans. . . . . . . . . . . . . . . . . .. 14,491 5,560 31,730
Options. . . . . . . . . . . . . . . . . . . . . . . . . . .. 141,302 -- --
Net (Increase) Decrease in Short-Term Investments. . . . . . .. 2,013 11,519 (1,250)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. (1,163) (36,164) (747)
------------ ------------ ------------
Net Cash Used in Investing Activities. . . . . . . . . . . .. (767,737) (761,345) (825,224)
------------ ------------ ------------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts . . . . . . . . . . . .. 1,198,147 1,392,517 1,148,590
Return of Funds Held Under Deposit Contracts . . . . . . . . .. (1,091,965) (861,221) (765,480)
Dividends to Parent. . . . . . . . . . . . . . . . . . . . . .. (94,000) (13,000) (4,000)
Net Proceeds from (Repayment of) Short-Term Borrowings . . . .. 32,835 5,048 (7,802)
------------ ------------ ------------
Net Cash Provided by Financing Activities. . . . . . . . . .. 45,017 523,344 371,308
------------ ------------ ------------
Net Increase (Decrease) in Cash. . . . . . . . . . . . . . . . .. (236,191) 225,376 (15,750)
Cash at Beginning of Year. . . . . . . . . . . . . . . . . . . .. 244,512 19,136 34,886
------------ ------------ ------------
Cash at End of Year. . . . . . . . . . . . . . . . . . . . . . .. $ 8,321 $ 244,512 $ 19,136
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
For pruposes of reporting cash flows, cash consists of balances on hand and on
deposit in banks and financial institutions.
See Notes to Consolidated Financial Statements
6
<PAGE>
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
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,524 $ 97,609 $ 94,056
------------ ------------ ------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain . . . . . . . . . . . . . . . . . . (13,612) (6,807) (10,439)
Amortization of Fixed Maturity Investments . . . . . . . . . (26,774) (24,929) (26,811)
Deferred Federal Income Tax Benefit. . . . . . . . . . . . . (1,359) (4,689) (6,471)
Interest Expense on Deposit Contracts. . . . . . . . . . . . 633,437 501,230 484,962
Mortality and Expense Changes and Administrative Fees. . . . (29,753) (27,379) (24,368)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,535 (7,877) 574
Changes in:
Future Policy Benefits . . . . . . . . . . . . . . . . . . 7,274 1,855 (4,466)
Policy and Contract Claims . . . . . . . . . . . . . . . . 703 2,830 2,748
Premiums Paid in Advance . . . . . . . . . . . . . . . . . (984) 299 637
Deferred Policy Acquisition Costs. . . . . . . . . . . . . 17,062 (15,688) (6,198)
Accrued Investment Income. . . . . . . . . . . . . . . . . (9,130) (11,451) (8,893)
Accrued Interest on Accrual Bonds. . . . . . . . . . . . . (50,440) (48,354) (44,015)
Other Receivables. . . . . . . . . . . . . . . . . . . . . (9,979) (5,467) (8,639)
Current Federal Income Taxes . . . . . . . . . . . . . . . (36,361) 18,565 (13,839)
Other Assets and Liabilities . . . . . . . . . . . . . . . (42,225) (2,350) 4,668
Other Policyholders' Funds . . . . . . . . . . . . . . . . (389) (4,020) 4,660
------------ ------------ ------------
Total Adjustments. . . . . . . . . . . . . . . . . . . . 443,005 365,768 344,110
------------ ------------ ------------
Net Cash Provided by Operating Activities. . . . . . . . . . . . $ 486,529 $ 463,377 $ 438,166
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements
7
<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 Empire Life Insurance Company. The
Company acquired WM Life Insurance Company and Empire Life Insurance
Company on December 31, 1997 (see Note 2). WM Life Insurance Company was
merged into the Company on July 1, 1998. 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 1998
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 (comprehensive
income), 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 (comprehensive income), net of
applicable income taxes.
When the collectibility of income on certain investments is considered
doubtful, they are placed on non-accrual status and thereafter interest
income is recognized only when payment is received. Investments that have
declined in market value below cost and for which the decline is judged to
be other than temporary are written down to fair value. Writedowns are
made directly on an individual security basis and reduce realized
investment gains in the Statement of Consolidated Income.
The cost of security investments sold is determined by the "identified
cost" method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for loan losses.
8
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 1 (continued)
REAL ESTATE AND DEPRECIATION. Income-producing real estate is classified
as an investment. The Company provides straight-line depreciation on its
buildings based upon their estimated useful lives.
Investment real estate that has declined in market value below cost and for
which the decline is judged to be other than temporary is written down to
estimated realizable value. Writedowns reduce realized investment gains in
the Statement of Consolidated Income.
DEFERRED POLICY ACQUISITION COSTS. Life and health acquisition costs,
consisting of commissions and certain other underwriting expenses, which
vary with and are primarily related to the production of new business, are
deferred.
Acquisition costs for pension deposit contracts, deferred annuity contracts
and universal life policies are amortized over the lives of the contracts
or policies in proportion to the present value of estimated future gross
profits. To the extent actual experience differs from assumptions, and to
the extent estimates of future gross profits require revision, the
unamortized balance of deferred policy acquisition costs is adjusted
accordingly; such adjustments would be included in current operations. In
1998, a $46.8 million write-off of deferred acquisition costs was charged
to current operations. This charge is primarily tied to two blocks of
annuity business, the equity-indexed product and a declared rate fixed
annuity product, and to the universal life business, all of which have been
adversely affected by market conditions. Approximately $28 million of the
write-off relates to the equity-indexed annuity product. The cost of the
options purchased to fund the obligation under these contracts increased
significantly, adversely affecting the projected recoverability of deferred
acquisition costs. There were no significant revisions made in 1997 or
1996.
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 1998 or 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. See Note 5 for additional information.
The Financial Accounting Standards Board (FASB) issued Statement 133,
"Accounting for Derivative Instruments and Hedging Activities" in June 1998
addressing accounting and disclosure requirements for derivative financial
instruments. The Company's accounting treatment for options will change
when guidance in this Statement is adopted. See page 11 for additional
information.
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
9
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 1 (continued)
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 was valued at $35,000 and will be amortized
on a straight-line basis over 15 years. The unamortized balance of $32,667
is included in other assets. See Note 2 for additional information.
FUTURE POLICY BENEFITS. Liabilities for universal life insurance policies,
deferred annuity and pension deposit contracts are equal to the accumulated
account value of such policies or contracts as of the valuation date.
Liabilities for structured settlement annuities are based on interest rate
assumptions using market rates at issue, graded downward over 40 years to a
range of 5.5% to 8.75%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method using
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions range from
8.5% graded to 3.25%.
POLICY AND CONTRACT CLAIMS. The liability for policy and contract claims
is established on the basis of reported losses ("case basis" method).
Provision is also made for claims incurred but not reported, based on
historical experience. The estimates for claims incurred but not reported
are continually reviewed and any necessary adjustments are reflected in
current operations.
SEPARATE ACCOUNTS. The Company administers segregated asset accounts for
variable annuity and variable universal life clients. The assets of these
Separate Accounts, which consist of common stocks, are the property of the
Company. The liabilities of these Separate Accounts represent reserves
established to meet withdrawal and future benefit payment provisions of
contracts with these clients. The assets of the Separate Accounts, equal
to the reserves and other contract liabilities of the Separate Accounts,
are not chargeable with liabilities arising out of any other business the
Company may conduct. Investment risks associated with market value changes
are borne by the clients. Deposits, withdrawals, net investment income and
realized and unrealized capital gains and losses on the assets of the
Separate Account are not reflected in the Statement of Consolidated Income.
Management fees and other charges assessed against the contracts are
included in other revenue.
FEDERAL INCOME TAXES. The Company and its subsidiaries, except for 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 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 adopted it in the
first quarter of 1998. The Statement has no effect on net income but
requires the reporting of "comprehensive income," which includes net income
and certain items currently reported in shareholder's equity. See the
Statement of Consolidated Comprehensive Income on page 5 of this report.
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 financial statements.
This Statement is effective for financial statements for periods beginning
after December 15, 1997. The required segment information is presented in
Note 11. This Statement has no effect on net income.
10
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 1 (continued)
The FASB issued Statement 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in February 1998. Statement 132 revises
employers' disclosures about pension and other postretirement benefit
plans. This Statement is effective for financial statements for periods
beginning after December 15, 1997. This Statement has no effect on net
income.
The FASB issued Statement 133, "Accounting for Derivative Instruments and
Hedging Activities," in June 1998. The Statement is effective for fiscal
years beginning after June 15, 1999. It may also be adopted early, as of
the beginning of any fiscal quarter that begins after June 1998. The
Company will adopt the new Statement no later than the first quarter of
2000. The Statement amends or supercedes several previous FASB statements
and requires recognizing all derivatives as either assets or liabilities in
the statement of financial position and measuring those instruments at fair
value. The impact of the Statement is currently being studied, and the
effect of the new Statement on the financial statements has not yet been
determined.
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 $105,800. The fair value of assets acquired, excluding cash of
$221,122, was $766,921, and the fair value of liabilities assumed was
$882,226. The acquisition has been treated as a purchase for accounting
purposes, and allocation of purchase price resulted in no goodwill. The
transaction was financed through internal sources.
11
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
3. INVESTMENT SUMMARY
A summary of fixed maturities and marketable equity securities classified
as available-for-sale at December 31, 1998 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 . . . . . $ 592,137 $ 85,453 $ (6) $ 85,447 $ 677,584
States, municipalities and political
subdivisions. . . . . . . . . . . . . . . . . 126,136 16,784 (3,191) 13,593 139,729
Foreign governments . . . . . . . . . . . . . . 101,106 9,730 -- 9,730 110,836
Public utilities. . . . . . . . . . . . . . . . 1,509,636 113,446 (1,957) 111,489 1,621,125
All other corporate bonds . . . . . . . . . . . 4,504,120 225,765 (21,633) 204,132 4,708,252
Mortgage-backed securities. . . . . . . . . . . 2,885,492 142,633 (3,940) 138,693 3,024,185
----------- ----------- ---------- ----------- -----------
Total fixed maturities classified as
available-for-sale. . . . . . . . . . . . . . 9,718,627 593,811 (30,727) 563,084 10,281,711
Marketable equity securities. . . . . . . . . . 14,665 4,166 (94) 4,072 18,737
----------- ----------- ---------- ----------- -----------
Total investment securities classified as
available-for-sale. . . . . . . . . . . . . . $ 9,733,292 $ 597,977 $ (30,821) 567,156 $10,300,448
----------- ----------- ---------- -----------
----------- ----------- ---------- -----------
Deferred policy acquisition costs valuation allowance . . . . . . . . . . . . . . . . . . . . (45,108)
Applicable federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (182,606)
-----------
Unrealized appreciation of investment securities,
net of tax, included in shareholder's equity (accumulated other comprehensive income) . . . $ 339,442
-----------
-----------
</TABLE>
A summary of fixed maturities classified as held-to-maturity at
December 31, 1998 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 . . . . . $ 272,104 $ 102,409 $ -- $ 102,409 $ 374,513
States, municipalities and political
subdivisions. . . . . . . . . . . . . . . . . 127,180 26,403 -- 26,403 153,583
Foreign governments . . . . . . . . . . . . . . 149,558 48,523 -- 48,523 198,081
Public utilities. . . . . . . . . . . . . . . . 416,495 81,036 (239) 80,797 497,292
All other corporate bonds . . . . . . . . . . . 1,447,436 243,657 (4,159) 239,498 1,686,934
Mortgage-backed securities. . . . . . . . . . . 308,110 40,682 (1) 40,681 348,791
----------- ----------- ---------- ----------- -----------
Total fixed maturities classified as
held-to-maturity. . . . . . . . . . . . . . . $ 2,720,883 $ 542,710 $ (4,399) $ 538,311 $ 3,259,194
----------- ----------- ---------- ----------- -----------
----------- ----------- ---------- ----------- -----------
</TABLE>
12
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 3 (continued)
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 (accumulated other comprehensive income) . . . . $ 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>
13
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 3 (continued)
The amortized cost and estimated market value of fixed maturities at December
31, 1998, 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 . . . . . . . . . . . . . . . . $ 323,572 $ 327,416 $ -- $ --
Due after one year through five years . . . . . . . . . 2,275,991 2,364,579 3 4
Due after five years through ten years. . . . . . . . . 1,223,284 1,281,865 48,691 57,164
Due after ten years . . . . . . . . . . . . . . . . . . 3,010,288 3,283,666 2,364,079 2,853,235
Mortgage-backed securities. . . . . . . . . . . . . . . 2,885,492 3,024,185 308,110 348,791
----------- ----------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . $ 9,718,627 $10,281,711 $ 2,720,883 $ 3,259,194
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At December 31, 1998 and 1997, the Company held below investment grade
fixed maturities of $438 million and $316 million at amortized cost,
respectively. The respective market values of these investments were
approximately $444 million and $329 million. These holdings amounted to
3.3% and 2.6% of the Company's investments in fixed maturities at market
value at December 31, 1998 and 1997, respectively.
Certain fixed maturity securities with an amortized cost of $7,596 and
$7,543 at December 31, 1998 and 1997, respectively, were on deposit with
various regulatory authorities to meet requirements of insurance and
financial codes.
At December 31, 1998 and 1997, mortgage loans constituted approximately
4.2% and 4.5% 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 $10 million.
The carrying value of investments in fixed maturities and mortgage loans
that did not produce income during the year ended December 31, 1998 is less
than one percent of the total of such investments.
14
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 3 (continued)
The proceeds from sales of investment securities and related gains and
losses for 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1998
------------------------------------------------------------------------------
Fixed Maturities Fixed Maturities Marketable
Available-for-Sale Held-to-Maturity Equity Securiities
------------------ ---------------- ------------------
<S> <C> <C> <C>
Proceeds from sales . . . . . . . . . . . $ 643,539 $ 18,235 $ 665
------------------ ---------------- ------------------
------------------ ---------------- ------------------
Gross realized gains on sales . . . . . . $ 12,350 $ 3,384 $ 335
Gross realized losses on sales. . . . . . (480) -- (3)
------------------ ---------------- ------------------
Realized gains on sales. . . . . . . 11,870 3,384 332
Other (Including net gain on calls
and redemptions). . . . . . . . . . . . (1,557) -- --
Writedowns (Including writedowns
on securities subsequently sold). . . . (433) -- --
------------------ ---------------- ------------------
Total realized gain .. . . . . . . . . . $ 9,880 $ 3,384 $ 332
------------------ ---------------- ------------------
------------------ ---------------- ------------------
</TABLE>
One fixed maturity security, classified as held-to-maturity, was sold
during 1998 due to restructuring by the bond issuer and the expected
significant downgrade resulting from it. This transaction meets the
"allowable sale" criteria of FASB Statement 115. The amortized cost of
this security was $14,851, and the gain realized on this sale was $3,384.
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 Securiities
------------------ ---------------- ------------------
<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>
15
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
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 Securiities
------------------ ---------------- ------------------
<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 maturity securities 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 following summarizes the realized gain before federal income taxes and
the net change in unrealized appreciation:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . $ 13,264 $ 1,272 $ 7,695
Marketable equity securities . . . . . . . . . . . . . . . . . 332 6,435 4,847
First mortgage loans on real estate. . . . . . . . . . . . . . -- (900) (2,050)
Real estate. . . . . . . . . . . . . . . . . . . . . . . . . . 16 -- (114)
Other invested assets. . . . . . . . . . . . . . . . . . . . . -- -- 61
------------ ------------ ------------
Realized gain before federal income taxes . . . . . . . . . $ 13,612 $ 6,807 $ 10,439
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Increase (decrease) in unrealized appreciation of:
Fixed maturities classified as available-for-sale. . . . . . . $ 62,781 $ 244,483 $ (268,956)
Marketable equity securities . . . . . . . . . . . . . . . . . (829) (4,372) (1,599)
Deferred policy acquisition costs valuation allowance. . . . . (9,759) (16,309) 23,775
Applicable federal income tax. . . . . . . . . . . . . . . . . (18,268) (78,330) 86,373
------------ ------------ ------------
Net change in unrealized appreciation. . . . . . . . . . . . . $ 33,925 $ 145,472 $ (160,407)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
16
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 3 (continued)
The following table summarizes the Company's allowance for credit losses on
non-affiliated mortgage loans:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Allowance at beginning of year. . . . . . . . . . . . . . . $ 11,609 $ 10,943 $ 9,633
Provision for credit losses . . . . . . . . . . . . . . . . -- 900 2,050
Loans charged off as uncollectible. . . . . . . . . . . . . (436) (234) (740)
------------ ------------ ------------
Allowance at end of year. . . . . . . . . . . . . . . . . . $ 11,173 $ 11,609 $ 10,943
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The allowance includes specific reserves, as well as general reserve
amounts. The total investment in impaired loans before any reserve for
losses is $2.5 million and $3.3 million at December 31, 1998 and 1997,
respectively. A specific loan loss reserve has been established for each
impaired loan, the total of which is $250 and $550 and is included in the
overall allowance of $11.2 million and $11.6 million at December 31, 1998
and 1997, 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 $2,443 at December 31, 1998.
At December 31, 1998, unfunded mortgage loan commitments approximated
$77,266. The Company had no other material commitments or contingencies at
December 31, 1998.
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.
17
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 5 (continued)
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>
1998 1997
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available-for-sale. . . $ 10,281,711 $ 10,281,711 $ 9,401,886 $ 9,401,886
Fixed maturities held-to-maturity. . . . 2,720,883 3,259,194 2,708,558 3,159,888
Marketable equity securities . . . . . . 18,737 18,737 15,552 15,552
Mortgage loans . . . . . . . . . . . . . 664,427 692,000 651,158 677,000
Financial liabilities:
Funds held under deposit contracts . . . 12,364,937 12,874,000 11,539,473 12,021,000
</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 $3.4 billion and $3.3 billion, at market
values, at December 31, 1998 and 1997, 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., principal only, inverse
floaters, etc.) has been intentionally limited to only a small amount,
approximately 1% of total CMOs at both December 31, 1998 and 1997.
In 1997, the Company introduced an equity-indexed annuity product that
credits the policyholder based on a percentage of the gain in the S&P 500
index. S&P 500 call options are purchased to hedge the growth in interest
credited to the customers. Premiums paid to purchase the S&P 500 call
options are capitalized and included in other assets on the balance sheet
and expensed over the term of the option on a straight line basis. Any
gain or loss on the call options purchased is included in income when
realized. On December 31, 1998, futures contracts were entered into
requiring an initial margin deposit of $4,961. Futures combined with call
options will be used to hedge the Company's 1999 exposure to changes in the
S&P 500 index.
The balance in other assets for call options purchased was $23,985 and
$21,232 at December 31, 1998 and 1997, respectively. The balance in other
invested assets for futures contracts at December 31, 1998 was $4,961. The
estimated fair value of call options purchased and futures contracts is the
same as their carrying value at December 31, 1998 or 1997.
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 interest rate swaps on bond investments,
currency-linked bonds and fixed-rate loan commitments. Individually, and
in the aggregate, these derivatives are not material and thus no additional
disclosures are warranted.
18
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
6. POLICY AND CONTRACT LIABILITIES
REINSURANCE. The Company protects itself from excessive losses by ceding
reinsurance to other companies, using automatic and facultative treaties.
The availability and cost of reinsurance are subject to prevailing market
conditions, both in terms of price and available capacity. Although the
reinsurer is liable to the Company to the extent of the reinsurance ceded,
the Company remains primarily liable to the policyholder as the direct
insurer on all risks reinsured. The Company evaluates the financial
condition of its reinsurers to minimize its exposure to losses from
reinsurer insolvencies. To the Company's knowledge, none of its reinsurers
is experiencing financial difficulties.
The balance sheet caption "Reinsurance Recoverables" is comprised of the
following amounts:
<TABLE>
<CAPTION>
December 31
-------------------------------
1998 1997
----------- -----------
<S> <C> <C>
Unpaid losses and adjustment expense. . . . . . . . . . . . $ 248 $ 906
Paid claims . . . . . . . . . . . . . . . . . . . . . . . . 1,347 770
Life policy liabilities . . . . . . . . . . . . . . . . . . 30,677 26,756
Other reinsurance recoverables. . . . . . . . . . . . . . . 82 83
----------- -----------
Total reinsurance recoverables . . . . . . . . . . . . . . $ 32,354 $ 28,515
----------- -----------
----------- -----------
</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
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Reinsurance Ceded:
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . $ (16,479) $ (13,305) $ (13,679)
------------ ------------ ------------
------------ ------------ ------------
Policy benefits. . . . . . . . . . . . . . . . . . . . . . $ (7,162) $ (7,853) $ (4,039)
------------ ------------ ------------
------------ ------------ ------------
Reinsurance Assumed:
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . $ 876 $ 180 $ 175
------------ ------------ ------------
------------ ------------ ------------
Policy benefits. . . . . . . . . . . . . . . . . . . . . . $ 3,487 $ 2,902 $ 2,500
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
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.
19
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
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.
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 for the year ended December 31, 1997, 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
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory Net Income:
SAFECO Life Insurance Company. . . . . . . . . . . . . . . $ 64,599 $ 95,012 $ 95,676
SAFECO National Life Insurance Company . . . . . . . . . . 1,012 1,322 1,249
First SAFECO National Life Insurance Company of New York . 576 314 318
Empire Life Insurance Company. . . . . . . . . . . . . . . 1,799 -- --
------------ ------------ ------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . $ 67,986 $ 96,648 $ 97,243
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory Shareholder's Equity:
SAFECO Life Insurance Company and Subsidiaries . . . . . . . $ 576,791 $ 672,230 $ 587,658
------------ ------------ ------------
------------ ------------ ------------
</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, 1998.
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
$57,679 at December 31, 1998.
20
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
9. EMPLOYEE BENEFIT PLANS
SAFECO Corporation and subsidiary companies (the Companies) sponsor 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. A cash balance defined
benefit plan covering substantially all employees provides benefits 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 $6,070, $7,531 and $7,901 for the years
ended December 31, 1998, 1997 and 1996, respectively.
The Companies also provide certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees may become eligible for these benefits if they reach retirement
age while working for the Companies. The cost of these benefits is shared
with the retiree. Net periodic other postretirement benefit costs for the
Company were $510, $392 and $474 in 1998, 1997 and 1996, respectively. The
accrued postretirement benefit cost recorded in the balance sheet was
$5,544 and $5,168 at December 1998 and 1997, respectively.
10. INCOME TAXES
The Company uses the liability method of accounting for income taxes under
which 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 not material.
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
-----------------------
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Discounting of loss and adjustment expense reserves. . . . . . . . . . . . $ 340 $ 77
Uncollected premium adjustment . . . . . . . . . . . . . . . . . . . . . . 2,963 2,607
Adjustment to life policy liabilities. . . . . . . . . . . . . . . . . . . 37,821 51,176
Capitalization of policy acquisition costs . . . . . . . . . . . . . . . . 46,046 40,354
Postretirement benefits. . . . . . . . . . . . . . . . . . . . . . . . . . 1,940 1,809
Realized capital losses. . . . . . . . . . . . . . . . . . . . . . . . . . 3,461 3,534
Guarantee fund assessments . . . . . . . . . . . . . . . . . . . . . . . . 2,696 4,163
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,105 2,031
--------- ---------
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . 98,372 105,751
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . 90,346 96,317
Present value of future profits . . . . . . . . . . . . . . . . . . . . . . 4,327 3,084
Bond discount accrual . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,587 19,631
Unrealized appreciation of investment securities (Net of deferred policy
acquisition costs valuation allowance: 1998-$15,788; 1997-$12,372) . . 182,717 164,449
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,139 1,566
--------- ---------
Total deferred tax liabilities. . . . . . . . . . . . . . . . . . . . 298,116 285,047
--------- ---------
Net deferred tax liability. . . . . . . . . . . . . . . . . . . . . . $ 199,744 $ 179,296
--------- ---------
--------- ---------
</TABLE>
21
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 10 (continued)
The following table reconciles the deferred tax benefit in the Statement of
Income to the change in the deferred tax liability in the balance sheet for the
year ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax benefit . . . . . . . . . . . . . . . . . . . . . . $ (1,359) $ (4,689) $ (6,471)
Net deferred tax liability acquired in acquisitions. . . . . . . 3,539 2,008 --
Deferred tax changes reported in shareholder's equity:
Increase (decrease) in liability related to unrealized
appreciation or depreciation of investment securities. . . . 21,684 84,037 (94,694)
(Increase) decrease in liability related to deferred
policy acquisition costs valuation allowance . . . . . . . . (3,416) (5,708) 8,321
------------ ------------ ------------
Increase (decrease) in net deferred tax liability. . . . . . . . $ 20,448 $ 75,648 $ (92,844)
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
22
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
11. SEGMENT DATA
The Company's reportable business segments are strategic business units that
offer distinctive products marketed through independent agents in four
distribution channels.
The Company has five reportable segments: Individual, Retirement Services,
Settlement Annuities, Group and Corporate. Individual issues traditional,
term and universal life insurance policies. Retirement Services issues fixed
and variable deferred annuity products. Settlement Annuities issues immediate
annuities for structured pay out situations. Group issues excess loss health
insurance to companies that have self-insured medical plans. The Corporate
segment is used to retain profits from the four product lines and pay
dividends to the parent company, SAFECO Corporation.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Company management evaluates
performance based on operating profit or loss before income taxes.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Premiums. . . . . . . . . . . . . . $ 50,563 $ 698 $ - $ 203,149 $ - $ 254,410
Net Investment Income . . . . . . . 69,267 411,661 449,313 2,695 72,525 1,005,461
Other Revenue . . . . . . . . . . . 3,509 24,483 77 - - 28,069
---------- ---------- ---------- ---------- ---------- ----------
Total Revenue . . . . . . . . . 123,339 436,642 449,390 205,844 72,525 1,287,940
Expenses
Policy Benefits . . . . . . . . . . 84,004 349,834 399,130 161,113 - 994,081
Commissions . . . . . . . . . . . . 10,864 46,236 12,211 25,639 300 95,250
Amortization of Deferred
Policy Acquisition Costs
and Present Value of
Future Profits. . . . . . . . . . 8,438 30,576 - 3,852 - 42,866
Deferral of Policy Acquisition
Costs . . . . . . . . . . . . . . (18,610) (42,788) - (4,546) - (65,944)
Other Expenses. . . . . . . . . . . 37,782 40,177 7,398 33,919 2,333 121,609
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses and
Policy Benefit. . . . . . . . 122,476 424,035 418,739 219,977 2,633 1,187,862
---------- ---------- ---------- ---------- ---------- ----------
Write-off of Deferred Policy
Acquisition Costs and
Other Write-offs. . . . . . . . . 11,500 32,300 - - 3,000 46,800
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) From
Insurance Operations . . . . . . . . (10,639) (19,493) 30,651 (14,133) 66,892 53,278
Realized Investment Gain . . . . . . . 828 4,304 - - 8,480 13,612
---------- ---------- ---------- ---------- ---------- ----------
Income (Loss) before
Federal Income Tax . . . . . . . . . $ (9,811) $ (15,189) $ 30,651 $ (14,133) $ 75,372 $ 66,890
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
December 31, 1998
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Total Investments . . . . . . . . . $ 1,075,256 $ 5,761,722 $ 5,877,496 $ 39,918 $ 1,056,042 $13,810,434
Assets Held in
Separate Accounts . . . . . . . . 98,715 1,102,420 - - - 1,201,135
Total Assets. . . . . . . . . . . . 1,307,561 7,195,140 5,971,534 90,125 1,093,684 15,658,044
</TABLE>
23
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 11 (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Premiums. . . . . . . . . . . . . . $ 46,873 $ - $ - $ 193,722 $ - $ 240,595
Net Investment Income . . . . . . . 55,431 355,550 420,095 2,737 74,103 907,916
Other Revenue . . . . . . . . . . . 3,531 18,102 117 1 - 21,751
---------- ---------- ---------- ---------- ---------- ----------
Total Revenue . . . . . . . . . 105,835 373,652 420,212 196,460 74,103 1,170,262
Expenses
Policy Benefits . . . . . . . . . . 69,611 278,525 368,854 127,936 - 844,926
Commissions . . . . . . . . . . . . 9,979 38,337 20,060 24,855 450 93,681
Amortization of Deferred
Policy Acquisition Costs
and Present Value of
Future Profits. . . . . . . . . . 6,615 26,613 - 3,718 - 36,946
Deferral of Policy Acquisition
Costs . . . . . . . . . . . . . . (15,275) (33,452) - (4,341) - (53,068)
Other Expenses. . . . . . . . . . . 32,494 36,677 5,803 31,985 - 106,959
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses and
Policy Benefit. . . . . . . . 103,424 346,700 394,717 184,153 450 1,029,444
---------- ---------- ---------- ---------- ---------- ----------
Income From
Insurance Operations . . . . . . . . 2,411 26,952 25,495 12,307 73,653 140,818
Realized Investment Gain (Loss). . . . (472) 1,601 - - 5,678 6,807
---------- ---------- ---------- ---------- ---------- ----------
Income before Federal
Income Tax . . . . . . . . . . . . . $ 1,939 $ 28,553 $ 25,495 $ 12,307 $ 79,331 $ 147,625
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Total Investments . . . . . . . . . $ 903,487 $ 5,503,066 $ 5,516,799 $ 38,107 $ 935,967 $12,897,426
Assets Held in
Separate Accounts . . . . . . . . 69,071 836,346 - - - 905,417
Total Assets. . . . . . . . . . . . 1,110,541 6,833,146 5,610,901 83,293 984,576 14,622,457
</TABLE>
24
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
Note 11 (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Premiums. . . . . . . . . . . . . . $ 41,322 $ - $ - $ 198,778 $ - $ 240,100
Net Investment Income . . . . . . . 38,797 341,375 386,884 2,840 66,142 836,038
Other Revenue . . . . . . . . . . . 3,273 9,515 143 2 - 12,933
---------- ---------- ---------- ---------- ---------- ----------
Total Revenue . . . . . . . . . 83,392 350,890 387,027 201,620 66,142 1,089,071
Expenses
Policy Benefits . . . . . . . . . . 53,104 258,500 339,580 131,029 - 782,213
Commissions . . . . . . . . . . . . 8,308 24,384 18,276 23,756 - 74,724
Amortization of Deferred
Policy Acquisition Costs
and Present Value of
Future Profits. . . . . . . . . . 5,080 26,539 - 4,033 - 35,652
Deferral of Policy Acquisition
Costs . . . . . . . . . . . . . . (19,132) (19,323) - (3,971) - (42,426)
Other Expenses. . . . . . . . . . . 31,859 32,148 6,171 34,167 - 104,345
---------- ---------- ---------- ---------- ---------- ----------
Total Expenses and
Policy Benefit. . . . . . . . 79,219 322,248 364,027 189,014 - 954,508
---------- ---------- ---------- ---------- ---------- ----------
Income From
Insurance Operations . . . . . . . . 4,173 28,642 23,000 12,606 66,142 134,563
Realized Investment Gain (Loss). . . . (2,360) 3,002 4,615 - 5,182 10,439
---------- ---------- ---------- ---------- ---------- ----------
Income before Federal
Income Tax . . . . . . . . . . . . . $ 1,813 $ 31,644 $ 27,615 $ 12,606 $ 71,324 $ 145,002
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
December 31, 1996
-------------------------------------------------------------------------------------
Retirement Settlement
Individual Services Annuities Group Corporate Total
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets
Total Investments . . . . . . . . . $ 654,339 $ 4,542,976 $ 4,894,996 $ 42,016 $ 947,206 $11,081,533
Assets Held in
Separate Accounts . . . . . . . . 47,236 443,976 - - - 491,212
Total Assets. . . . . . . . . . . . 839,134 5,179,574 4,978,972 85,693 963,837 12,047,210
</TABLE>
25
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
12. IMPACT OF YEAR 2000 (UNAUDITED)
SAFECO Corporation (SAFECO), like most other companies, is faced with the
fact that some of its computer programs have time sensitive logic that
typically recognizes a date using "00" as the year 1900 rather than the year
2000. SAFECO is highly dependent on automated systems and systems
applications that use computer programs to conduct ongoing operations. Such
systems are used to process claims, bill and collect premiums from customers,
manage investments and many other activities. If these systems were unable
to process data accurately because of Year 2000-related failures, these
activities would be interrupted and could have a material adverse effect on
SAFECO's results of operations.
SAFECO has completed an assessment of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses.
SAFECO has been modifying and replacing portions of its software since 1995
so that its systems will function properly with respect to dates in the year
2000 and thereafter. In addition, SAFECO is engaged in a regular program of
testing and running the systems once Year 2000 programming changes have been
made. This testing includes trials at SAFECO's hot site, a location provided
and maintained by a third party separate from any SAFECO facility. SAFECO
believes that its program to address Year 2000 issues is comprehensive and on
schedule.
The total Year 2000 compliance cost for SAFECO is currently estimated at
approximately $17 million and as of December 31, 1998 SAFECO has incurred
approximately $16 million of that amount. These estimated amounts include
both modification costs, which are expensed as incurred, and certain
replacement systems costs, some of which are capitalized and amortized.
Approximately 90% of SAFECO's existing systems have been internally verified
as being Year 2000 ready at January 31, 1999. SAFECO's objective is to have
substantially all of its systems Year 2000 ready by March 31, 1999, with the
last mission-critical system expected to be Year 2000 ready in August 1999.
The program of testing and running the systems after Year 2000 programming
changes have been made is currently in process and expected to continue
through 1999. SAFECO also intends to bring all of its mainframe systems down
on December 31, 1999 and bring them back up on January 1, 2000. This will
preserve information contained in those systems at December 31, 1999 and
permit SAFECO to retrieve and use that information should an unanticipated
Year 2000 problem occur. In addition, as a contingency against unanticipated
problems on and after January 1, 2000, SAFECO's Information Systems
department will be prepared to address on an expedited basis any problems
that should arise. Although absolute assurance is not possible, based on our
current progress and continuing modifications, SAFECO believes that by
January 1, 2000 it will be Year 2000 ready and that Year 2000 issues will not
pose significant operational problems for its computer systems.
SAFECO is also working with its third-party partners and vendors, e.g., its
independent insurance agents, local and long distance telephone companies,
banks and securities trading firms, to assure that they are on schedule to
detect and fix any Year 2000 problems which might affect SAFECO's systems or
business processes. SAFECO will assess and attempt to mitigate risks with
respect to the failure of any mission-critical third-party partners and
vendors to be Year 2000 ready. Failure of such parties to be Year 2000 ready
could have a material adverse effect on SAFECO's results of operations.
26
<PAGE>
SAFECO RESOURCE VARIABLE ACCOUNT B
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. FINANCIAL STATEMENTS The following audited financial statements of SAFECO
Resource Variable Account B and of SAFECO Life Insurance Company are
included in the Statement of Additional Information of this Registration
Statement:
REGISTRANT:
Statement of Assets and Liabilities as of December 31, 1998.
Statements of Operations and Changes in Net Assets for the Year or
Period Ended December 31, 1998 and December 31, 1997.
Notes to Financial Statements.
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES:
Consolidated Balance Sheet as of December 31, 1998 and 1997.
Statement of Consolidated Income for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statement of Changes in Shareholder's Equity for the
years ended December 31, 1998, 1997 and 1996.
Statement of Consolidated Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996.
Statement of Consolidated Cash Flows for the years ended December 31,
1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
b. EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF DOCUMENT
1. Resolution of Board of Directors of SAFECO authorizing the
establishment of the Separate Account. 1/
2. Not Applicable.
3. (i) Form of Principal Underwriter's Agreement. 2/
(ii) Selling Agreement. 3/
4. (i) Individual Single Purchase Payment Deferred Variable Annuity
Contract. 2/
(ii) Riders and Endorsements. 2/
5. Application for Annuity Contract. 3/
6. (i) Copy of Articles of Incorporation of SAFECO. 1/
(ii) Copy of the Bylaws of SAFECO. 1/
7. Not Applicable.
8.a.(i) Fund Participation Agreement (Scudder). 3/
<PAGE>
(ii) Reimbursement Agreement (Scudder). 3/
(iii) Participating Contract and Policy Agreement (Scudder). 3/
(iv) Services Agreement (Scudder). 7/
8.b. Participation Agreement by and among SAFECO Life Insurance
Company, Federated Insurance Series,
on behalf of the Federated High Income Bond Fund II,
Federated Securities Corp. and Federated Advisers. 4/
8.c. Participation Agreement by and among SAFECO Life Insurance
Company, Federated Insurance Series, on
behalf of the Federated Utility Fund II, Federated Securities
Corp. and Federated Advisers. 4/
8.d. Participation Agreement by and among SAFECO Life Insurance
Company, Federated Insurance Series, on
behalf of the Federated International Equity Fund II, Federated
Securities Corp. and Federated Advisers. 4/
8.e. Participation Agreement by and among SAFECO Life Insurance
Company, Lexington Natural Resources Trust, and Lexington
Management Corporation. 4/
8.f. Participation Agreement by and among SAFECO Life Insurance
Company, Lexington Emerging Markets Fund, Inc., and Lexington
Management Corporation. 4/
8.g. Participation Agreement by and among SAFECO Life Insurance
Company, TCI Portfolios, Inc. and/or Adviser for TCI Balanced
Fund and TCI International Fund. (TCI has since changed its name
to American Century). 6/
8.h. Form of Participation Agreement (Fidelity). 8/
8. i. Participation Agreement by and among INVESCO Variable Investment
Funds, Inc., INVESCO Funds Group, Inc. and SAFECO Life Insurance
Company. 7/
9. Opinion and Consent of Counsel.
10. Consent of Independent Auditors.
11. Not Applicable.
12. Agreement Governing Contribution. 5/
13. Calculation of Performance Information. 4/
14. Power of Attorney. 9/
15. Representation of Counsel.
1/ Incorporated by reference to Registration Statement of SAFECO
Separate Account C filed with the SEC on June 16, 1995 (File No.
33-60331).
2/ Incorporated by reference to Registrant's Post-Effective
Amendment filed with the SEC on December 29, 1995.
3/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account C filed with the SEC on December 29, 1995 (File
No. 33-69712).
<PAGE>
4/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account C filed with the SEC on April 29, 1996 (File No.
33-69712).
5/ Incorporated by reference to Post-Effective Amendment of SAFECO
Resource Variable Account B filed with the SEC on April 29, 1996
(File No. 33-06546 ).
6/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account C filed with the SEC on April 29, 1996 (File No.
33-60331).
7/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account C filed with the SEC on May 1, 1998 (File No.
33-69712).
8/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account SL filed with the SEC on April 30, 1997 (File
No. 33-10248).
9/ Incorporated by reference to Post-Effective Amendment of SAFECO
Separate Account C filed with the SEC on April 30, 1999 (File No.
33-69712).
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
Set forth below is a list of each director and officer of SAFECO Life Insurance
Company ("SAFECO") who is engaged in activities relating to SAFECO Resource
Variable Account B or the variable annuity contracts offered through SAFECO
Resource Variable Account B. Unless otherwise indicated the principal business
address of all officers or directors listed is 15411 N. E. 51st Street, Redmond,
Washington 98052.
NAME POSITION WITH SAFECO
*Roger H. Eigsti Director, Chairman of the Board
Randall H. Talbot Director and President
*Boh A. Dickey Director
Roger F. Harbin Executive Vice President, Actuary
*Rod A. Pierson Director, Senior Vice President and Secretary
*Donald S. Chapman Director
*James W. Ruddy Director
**Dale E. Lauer Director
*W. Randall Stoddard Director
James T. Flynn Vice President, Controller and Assistant
Secretary
Michael J. Kinzer Vice President and Chief Actuary
***Ronald L. Spaulding Director, Vice President and Treasurer
Jean Liebmann Actuary
George C. Pagos Associate General Counsel, Vice President and
Assistant Secretary
* The principal business address of these officers and directors is SAFECO
Plaza, Seattle, WA 98185.
** The principal business address of Dale E. Lauer is 500 N. Meridian Street,
Indianapolis, IN 46204.
*** The principal business address of Ronald L. Spaulding is 601 Union Street,
Suite 2500, Seattle, WA 98101-4074.
<PAGE>
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
SAFECO Life Insurance Company ("SAFECO") established SAFECO Resource Variable
Account B ("Registrant") by resolution of its Board of Directors pursuant to
Washington law. SAFECO is a wholly-owned subsidiary of SAFECO Corporation,
which is a publicly-owned company. Both companies were organized under
Washington law. SAFECO Corporation, a Washington Corporation, owns 100% of the
following Washington corporations: SAFECO Insurance Company of America, General
Insurance Company of America, First National Insurance Company of America,
SAFECO Life Insurance Company, SAFECO Assigned Benefits Service Company, SAFECO
Administrative Services, Inc., SAFECO Properties Inc., SAFECO Credit Company,
Inc., SAFECO Asset Management Company, SAFECO Securities, Inc., SAFECO Services
Corporation, SAFECO Trust Company and General America Corporation. SAFECO
Corporation owns 100% of SAFECO National Insurance Company, a Missouri
corporation, and SAFECO Insurance Company of Illinois, an Illinois corporation.
General Insurance Company of America owns 100% of SAFECO Insurance Company of
Pennsylvania, a Pennsylvania corporation and SAFECO U.K. Limited, a corporation
organized under the laws of the United Kingdom. SAFECO Insurance Company of
America owns 100% of SAFECO Surplus Lines Insurance Company, a Washington
corporation, and SAFECO Management Company, a New York Corporation. SAFECO Life
Insurance Company owns 100% of SAFECO National Life Insurance Company, a
Washington corporation, First SAFECO National Life Insurance Company of New
York, a New York corporation, and WM Life Insurance Company, an Arizona
corporation. WM Life Insurance Company owns 100% of Empire Life Insurance
Company, a Washington corporation. SAFECO Administrative Services, Inc. owns
100% of Employee Benefit Claims of Wisconsin, Inc. and Wisconsin Pension and
Group Services, Inc., each a Wisconsin corporation. General America Corporation
owns 100% of COMAV Managers, Inc., an Illinois corporation, F.B. Beattie & Co.,
Inc., a Washington corporation, General America Corp. of Texas, a Texas
corporation, Talbot Financial Corporation, a Washington corporation, SAFECO
Select Insurance Services, Inc., a California corporation and R.F. Bailey
Holdings Limited, a U.K. corporation. F.B. Beattie & Co., Inc. owns 100% of
F.B. Beattie Insurance Services, Inc., a California corporation. General
America Corp. of Texas is Attorney-in-fact for SAFECO Lloyds Insurance Company
and American States Lloyds Insurance Company, both Texas corporations. R.F.
Bailey Holdings Limited owns 100% of R.F. Bailey (underwriting agencies)
Limited, a U.K. corporation. Talbot Financial Corporation owns 100% of Talbot
Agency, Inc., a New Mexico corporation. Talbot Agency, Inc. owns 100% of SAFECO
Investment Services, Inc., a Washington corporation. SAFECO Properties Inc.
owns 100% of the following, each a Washington corporation: SAFECARE Company,
Inc. and Winmar Company, Inc. SAFECARE Company, Inc. owns 100% of the
following, each a Washington corporation: RIA Development, Inc., S.C. Arkansas,
Inc., S.C. Bellevue/Lynn, S.C. Bellevue, Inc., and S.C. Marysville, Inc
SAFECARE Company, Inc. owns 50% of Lifeguard Ventures, Inc., a California
corporation, and S.C. River Oaks, Inc., a Washington corporation. Winmar
Company, Inc. owns 100% of the following: Kitsap Mall, Inc., Winmar Cascade,
Inc., Winmar Metro, Inc., Winmar Northwest, Inc., Winmar Redmond, Inc. and
Winmar of Kitsap, Inc., each a Washington corporation, and Capitol Court Corp.,
a Wisconsin corporation, SCIT, Inc., a Massachusetts corporation, Winmar Oregon,
Inc., an Oregon corporation, Winmar of Texas, Inc., a Texas corporation, and
Winmar of the Desert, Inc., a California corporation. Winmar Oregon, Inc. owns
100% of the following, each an Oregon corporation: North Coast Management, Inc.,
Pacific Surfside Corp., Winmar of Jantzen Beach, Inc. and W-P Development, Inc.,
and 100% of Washington Square, Inc., a Washington corporation.
SAFECO Corporation, a Washington corporation, owns 100% of American States
Financial Corporation, an Indiana corporation. American States Financial
Corporation owns 100% of American States Insurance Company, an Indiana
corporation. American States Insurance Company owns 100% of the following
Indiana corporations: American Economy Insurance Company, American States
Preferred Insurance Company, American States Life Insurance Company, and City
Insurance Agency, Inc. American States Insurance Company owns 100% of Insurance
Company of Illinois, an Illinois corporation, and American States Lloyds
Insurance Company, a Texas corporation. American Economy Insurance Company owns
100% of American States Insurance Company of Texas, a Texas corporation.
<PAGE>
No person is directly or indirectly controlled by Registrant.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1999, there were 2,379 Contract Owners and 12,056
Certificate-Holders of the Registrant.
ITEM 28. INDEMNIFICATION
Under its Bylaws, SAFECO, to the full extent permitted by the Washington
Business Corporation Act, shall indemnify any person who was or is a party to
any proceeding (whether brought by or in the right of SAFECO or otherwise) by
reason of the fact that he or she is or was a director of SAFECO, or, while a
director of SAFECO, is or was serving at the request of SAFECO as a director,
officer, partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, other enterprise, or employee
benefit plan, against judgments, penalties, fines, settlements and reasonable
expenses actually incurred by him or her in connection with such proceeding.
SAFECO shall extend such indemnification as is provided to directors above to
any person, not a director of SAFECO, who is or was an officer of SAFECO or is
or was serving at the request of SAFECO as a director, officer, partner,
trustee, or agent of another foreign or domestic corporation, partnership, joint
venture, trust, other enterprise, or employee benefit plan. In addition, the
Board of Directors of SAFECO may, by resolution, extend such further
indemnification to an officer or such other person as may to it seem fair and
reasonable in view of all relevant circumstances.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of SAFECO
pursuant to such provisions of the bylaws or statutes or otherwise, SAFECO has
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in said Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by SAFECO of expenses incurred or paid
by a director, officer or controlling person of SAFECO in the successful defense
of any such action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the Contracts issued by the Separate
Account, SAFECO will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in said Act and will be governed by the final adjudication of such
issue.
ITEM 29. PRINCIPAL UNDERWRITERS
a. SAFECO Securities, Inc., the principal underwriter for the Contracts,
also acts as the principal underwriter for SAFECO's Individual
Flexible Premium Variable Life Insurance Policies and Group Variable
Annuity Contracts.
<PAGE>
b. The following information is provided for each principal officer and
director of the principal underwriter:
NAME AND PRINCIPAL POSITIONS AND OFFICES
BUSINESS ADDRESS WITH UNDERWRITER
*Rod A. Pierson Director
**Ronald Spaulding Director
***David F. Hill Director, President and Secretary
***Neal A. Fuller Vice President, Controller, Treasurer,
Financial Principal and
Assistant Secretary
* The principal business address for Rod A. Pierson is SAFECO Plaza, Seattle,
WA 98185.
** The principal business address for Ronald Spaulding is 601 Union Street,
Suite 2500, Seattle, WA 98101-4074.
*** The principal business address for David F. Hill and Neal A. Fuller is
10865 Willows Road NE, Redmond, WA 98052.
c. During the fiscal year ended December 31, 1998, SAFECO Investment
Services, Inc., through SAFECO Securities, Inc., received $2,859,241
in commissions for the distribution of certain annuity contracts sold
in connection with Registrant of which no payments were retained.
SAFECO Investment Services, Inc. did not receive any other
compensation in connection with the sale of Registrant's contracts.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
SAFECO Life Insurance Company at 15411 N.E. 51st Street, Redmond, Washington
98052 and/or SAFECO Asset Management Company at 10865 Willows Road N.E., E-2,
Redmond, Washington 98052, maintain physical possession of the accounts, books
or documents of the Separate Account required to be maintained by Section 31(a)
of the Investment Company Act of 1940 and the rules promulgated thereunder.
ITEM 31. MANAGEMENT SERVICES
Not Applicable
ITEM 32. UNDERTAKINGS
1. Registrant hereby represents that it is relying upon a No-Action Letter
issued to the American Council of Life Insurance dated November 28, 1988
(Commission ref. IP-6-88) and that the following provisions have been
complied with:
a. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in each registration statement,
including the prospectus, used in connection with the offer of the
contract;
b. Include appropriate disclosure regarding the redemption restrictions
imposed by Section 403(b)(11) in any sales literature used in
connection with the offer of the contract;
c. Instruct sales representatives who solicit participants to purchase
the contract specifically to bring the redemption restrictions imposed
by Section 403(b)(11) to the attention of the potential participants;
d. Obtain from each plan participant who purchases a Section 403(b)
annuity contract, prior to or at the time of such purchase, a signed
statement acknowledging the participant's understanding of (1) the
restrictions on redemption imposed by Section 403(b)(11), and (2)
other investment alternatives
<PAGE>
available under the employer's Section 403(b) arrangement to which the
participant may elect to transfer his contract value;
e. Pursuant to Section 26(e) of the Investment Company Act of 1940,
Depositor represents that the fees and charges deducted under the
contract, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed
by the insurance company.
2. In connection with the offer of Registrant's Contracts to Participants in
the Texas Optional Retirement Program, Registrant represents it is relying
upon Rule 6c-7 under the Investment Company Act of 1940 and that
subparagraphs (a)-(d) of Rule 6c-7 have been complied with as of the
effective date of Registrant's Post-Effective Amendment No. 7.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this Registration Statement and has caused this
Registration Statement to be signed on its behalf, in the City of Seattle, and
State of Washington on this 30th day of April, 1999.
SAFECO Resource Variable Account B
------------------------------------
Registrant
By: SAFECO Life Insurance Company
------------------------------------
By: /S/ RANDALL H. TALBOT
------------------------------------
Randall H. Talbot, President
SAFECO Life Insurance Company
------------------------------------
Depositor
By: /S/ RANDALL H. TALBOT
------------------------------------
Randall H. Talbot, President
As required by the Securities Act of 1933, this Registration Statement has been
signed by the following persons in the capacities and on the date indicated.
NAME TITLE DATE
DONALD S. CHAPMAN* Director
- ---------------------
Donald S. Chapman
/S/ BOH A. DICKEY Director
- --------------------
Boh A. Dickey
R. H. EIGSTI* Director and Chairman
- --------------------
R. H. Eigsti
JAMES T. FLYNN* Vice President, Controller and
- --------------------- Assistant Secretary (Principal
James T. Flynn Accounting Officer)
<PAGE>
RONALD SPAULDING* Director, Vice
- -------------------- President and Treasurer
Ronald Spaulding
ROD A. PIERSON* Director, Senior Vice
- ------------------ President and Secretary
Rod Pierson
JAMES W. RUDDY* Director
- ------------------
James W. Ruddy
W. RANDALL STODDARD* Director
- ---------------------
W. Randall Stoddard
DALE E. LAUER* Director
- --------------------
Dale E. Lauer
/S/RANDALL H. TALBOT Director and President (Principal Executive
- --------------------- Officer)
Randall H. Talbot
*By: /S/ BOH A. DICKEY
-----------------
Boh A. Dickey
Attorney-in-Fact
*By: /S/ RANDALL H. TALBOT
---------------------
Randall H. Talbot
Attorney-in-Fact
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
99.9 Opinion and Consent of Counsel.
99.10 Consent of Independent Auditors.
99.15 Representation of Counsel.
<PAGE>
EXHIBIT 99.9
April 30, 1999
Board of Directors
SAFECO Life Insurance Company
SAFECO Plaza
Seattle, WA 98185
Gentlemen:
I have acted as counsel to the Company in connection with the filing with the
Securities and Exchange Commission of the Registration Statement on Form N-4 for
the Individual Single Purchase Payment Deferred Variable Annuity Contracts (the
"Contracts") to be issued by the Company and its separate account, SAFECO
Resource Variable Account B. I have made such examination of the law and have
examined such records and documents as in my judgment are necessary or
appropriate to enable me to render the following opinion:
1. SAFECO Life Insurance Company is a validly existing stock life
insurance company of the state of Washington.
2. SAFECO Resource Variable Account B is a separate investment account of
SAFECO Life Insurance Company created and validly existing pursuant to
the Washington insurance laws and regulations thereunder.
3. All of the prescribed corporate procedures for the issuance of the
Contracts have been followed, and, when such Contracts are issued in
accordance with the prospectus contained in the Registration
Statement, all state requirements relating to such Contracts will have
been complied with.
4. Upon the acceptance of the purchase payments made by a prospective
Contract Owner pursuant to a Contract issued in accordance with the
Prospectus contained in the Registration Statement and upon compliance
with applicable law, such Owner will have a legally-issued, fully
paid, non-assessable contractual interest in such Contract.
You may use this letter, or a copy hereof, as an exhibit to the Registration
Statement.
Very truly yours,
/s/ William E. Crawford
William E. Crawford
Counsel
<PAGE>
EXHIBIT 99.10
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Statement of Additional Information and to the use of our report on the
financial statements of SAFECO Resource Variable Account B, dated February 26,
1999, and our report on the consolidated financial statements of SAFECO Life
Insurance Company and Subsidiaries, dated February 12, 1999, in Post-Effective
Amendment Number 7 to the Registration Statement (Form N-4, No. 33-69600) and
related Prospectus of SAFECO Resource Variable Account B.
/s/ Ernst & Young LLP
Seattle, Washington
April 27, 1999
<PAGE>
EXHIBIT 99.15
April 30, 1999
VIA EDGAR
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: REPRESENTATION OF COUNSEL FOR SAFECO LIFE INSURANCE COMPANY ("SAFECO LIFE")
AND ITS SAFECO RESOURCE VARIABLE ACCOUNT B ("SEPARATE ACCOUNT") POST-EFFECTIVE
AMENDMENT NO. 7, FORM N-4
FILE NOS. 33-69600 AND 811-4716
Commissioners:
SAFECO and its Separate Account believe that the filing of Post-Effective
Amendment No. 7, is consistent with the purposes and requirements for filing
under Rule 485(b) under the Securities Act of 1933 ("1933 Act"). This
representation is based on the fact that the changes included in this
Post-Effective Amendment No. 7, are consistent with the purposes and
requirements described in the adopting release for the changes to Rule 485
(IC-Rel. 20486).
Based on the above, the filing of Post-Effective Amendment No. 7, is made
pursuant to Rule 485(b) of the 1933 Act to become automatically effective on
April 30, 1999. The undersigned has prepared and reviewed Post-Effective
Amendment No. 7, and it is his opinion that Post-Effective Amendment No. 7 does
not contain disclosures which would render it ineligible to become effective
pursuant to paragraph (b) of Rule 485.
Sincerely,
/s/ William E. Crawford
William E. Crawford
Counsel
