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REGISTRATION NO. 33-10248
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
POST EFFECTIVE AMENDMENT NO. 15
TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUST
REGISTERED ON FORM N-8B-2
A. Exact name of Trust: Separate Account SL
B. Name of depositor: SAFECO Life Insurance Company
C. Complete address of depositor's principal executive offices:
15411 N.E. 51st St., Redmond, Washington 98052
D. Name and address of agent for service:
William E. Crawford, Esq.
SAFECO Life Insurance Company
15411 N.E. 51st Street
Redmond, Washington 98052
Copies to:
Leslie A. Harrison
SAFECO Corporation
SAFECO Plaza
Seattle, WA 98185
E. Title and amount of securities being registered:
Individual Flexible Premium Variable Life Insurance Policies
Approximate Date of Proposed Public Offering:
As soon as is practicable after Effective Date.
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485.
[X] on April 30, 1998 pursuant to paragraph (b) of Rule 485.
[ ] 60 days after filing pursuant to paragraph (a)(i) of Rule 485.
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485.
[ ] 75 days after filing pursuant to paragraph (a)(i)
[ ] on (date) pursuant to paragraph (a)(i) of Rule 485.
If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Registrant has registered an indefinite amount of securities under the
Securities Act of 1933 pursuant to Rule 24f-2. Registrant filed the Rule 24f-2
Notice for the most recent fiscal year on or about March 28, 1998.
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CROSS REFERENCE TO ITEMS REQUIRED
BY FORM N-8B-2
N-8B-2 ITEMS CAPTION IN PROSPECTUS
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1. SAFECO, The Separate Account
2. SAFECO
3. Not Applicable
4. Distribution of the Policies
5. The Separate Account
6.(a) Not Applicable
6.(b) Not Applicable
9. Legal Proceedings
10. The Policy
11. Variable Insurance Products Funds
12. Variable Insurance Products Funds
13. Charges and Deductions
14. The Policy
15. The Separate Account
16. Variable Insurance Products Funds
17. Policy Benefits and Rights
18. The Policy
19. Not Applicable
20. Not Applicable
21. Not Applicable
22. Not Applicable
23. Not Applicable
24. Not Applicable
25. SAFECO
26. SAFECO
27. SAFECO
28. SAFECO
29. SAFECO
30. SAFECO
31. Not Applicable
32. Not Applicable
33. Not Applicable
34. Not Applicable
35. Not Applicable
36. SAFECO
37. Not Applicable
38. Distribution of the Policies
39. Distribution of the Policies
40. Not Applicable
41.(a) Distribution of the Policies
42. Not Applicable
43. Not Applicable
44. The Policy
45. Not Applicable
46. Policy Benefits and Rights
47. Not Applicable
48. Not Applicable
49. Not Applicable
50. Not Applicable
51. SAFECO, The Policy
52. Variable Insurance Products Funds
53. Tax Status
54. Financial Statements
55. Not Applicable
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INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICY
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This Prospectus describes an individual flexible premium variable life insurance
policy ("Policy"). The Policy is designed for the maximum flexibility in meeting
the insurance needs of individuals. The Policy provides death protection until
the Policy Anniversary following the Primary Insured's 95th birthday, at which
time SAFECO will pay the value of the Policy Account, less any outstanding
indebtedness.
Net premiums will be placed in the Owner's Policy Account, which are then
allocated to one or more Investment Divisions of SAFECO Life Insurance Company's
("SAFECO") Separate Account SL ("Separate Account") and/or to SAFECO's
Guaranteed Interest Division.
The Separate Account has Investment Divisions, each of which invests in shares
of a corresponding portfolio of Fidelity's Variable Insurance Products Fund,
Fidelity's Variable Insurance Products Fund II, Lexington Natural Resources
Trust, Lexington Emerging Markets Fund, Inc., and SAFECO Resource Series Trust,
collectively, the "Funds." The shares of Fidelity's Variable Insurance Products
Fund III are not available in connection with the policies described in this
prospectus. (See "The Separate Account" on Page 5 for further information.)
Fidelity's Variable Insurance Products Fund ("VIP") is a mutual fund comprised
of five portfolios, each of which is currently available in connection with the
Policies. The five portfolios are: VIP Money Market, VIP High Income, VIP
Equity-Income, VIP Growth and VIP Overseas.
Fidelity's Variable Insurance Products Fund II ("VIPII") is a mutual fund
comprised of five portfolios, each of which is currently available in connection
with the Policies. The five portfolios are: VIPII Investment Grade Bond, VIPII
Asset Manager, VIPII Index 500, VIPII Asset Manager: Growth, and VIPII
Contrafund.
Lexington Natural Resources Trust and the Lexington Emerging Markets Fund, Inc.
("Lexington Emerging Markets Fund") each consist of only one portfolio which are
offered hereunder; the Lexington Natural Resources Portfolio and the Lexington
Emerging Markets Portfolio, respectively.
SAFECO Resource Series Trust ("SAFECO RST") currently consists of six
portfolios, four of which are currently available in connection with the
Policies. The four portfolios are: Equity, Growth, Northwest and Bond.
The Guaranteed Interest Division is part of SAFECO's general account.
The portion of the Policy Account that is in an Investment Division of the
Separate Account will vary depending on the value of such Investment Division,
which in turn depends on the investment performance of the corresponding
portfolio of the Funds. There are no minimum guarantees as to the value of such
portion of the Policy Account. The portion of the Policy Account that is in the
Guaranteed Interest Division will accumulate, after deductions, at a rate of
interest determined by SAFECO. Such rate will not be less than 4% per year.
It may not be advantageous to purchase the Policy as a replacement for another
type of life insurance. It also may not be advantageous to purchase flexible
premium variable life insurance to obtain additional insurance protection if the
purchaser already owns another flexible premium life insurance policy.
The amount of death benefit, or the duration of insurance coverage, or both, may
be variable or fixed as elected by the Owner.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
THIS PROSPECTUS MUST BE ACCOMPANIED BY OR PRECEDED BY CURRENT PROSPECTUSES FOR
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND, FIDELITY'S VARIABLE INSURANCE
PRODUCTS FUND II, LEXINGTON NATURAL RESOURCES TRUST, LEXINGTON EMERGING MARKETS
FUND, INC., AND SAFECO RESOURCE SERIES TRUST.
THE DATE OF THIS PROSPECTUS IS MAY 1, 1998.
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GLOSSARY
ADMINISTRATIVE OFFICE
Refers to the office where all requests should be addressed. The address of the
Administrative Office is P.O. Box 290752, Wethersfield, Connecticut 06129-0752.
The phone number is 1-800-982-3656.
ATTAINED AGE
Age of insured on most recent Policy Anniversary.
BENEFICIARY
The Beneficiary is as named in the application, unless later changed. The
Beneficiary is entitled to the insurance benefits of the Policy.
CASH SURRENDER VALUE
The Cash Surrender Value on any date is equal to the amount in the Policy
Account on that date minus any applicable surrender charge.
EFFECTIVE DATE
The Effective Date is the date when insurance coverage begins under the Policy.
FACE AMOUNT OF INSURANCE
The amount chosen by the Owner used to determine the death benefit.
FINAL POLICY DATE
The date on which SAFECO will pay the value of the Policy Account less any
outstanding indebtedness if the Policy is in effect on such date.
GUARANTEED INTEREST DIVISION
The Guaranteed Interest Division is part of SAFECO's general account and
guarantees the principal and interest rate paid.
INVESTMENT DIVISION
A Division of the Separate Account invested wholly in shares of one of the
portfolios of the Funds.
MAXIMUM PREMIUM
The annual premium for the Face Amount of Insurance at issue that would be
payable in equal amounts through the Final Policy Date and which is based on:
the guaranteed cost of insurance using the 1980 Commissioner's Standard Ordinary
Mortality Table, the other charges made in accordance with the Policy, and the
net investment earnings at an effective annual rate of 5%.
NET CASH SURRENDER VALUE
The Net Cash Surrender Value is equal to the Cash Surrender Value minus any loan
and loan interest.
OWNER
The Owner is the Primary Insured unless named otherwise in the application or
later changed.
POLICY ACCOUNT
The sum of the value of Policy assets both in the Guaranteed Interest Division
and the Separate Account.
POLICY ANNIVERSARY
The same day and month as the Effective Date, day and month, for each year the
Policy remains in effect.
POLICY MONTH
A period of time commencing on the same day of the month as the Effective Date
and ending on the day preceding the same day of the next month.
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POLICY YEAR
The first Policy Year starts on the Effective Date. Future Policy Years start on
the same day and month in each subsequent year, i.e., the Policy Anniversary.
PRIMARY INSURED
The insured person whose death benefit includes the Policy Account.
SEPARATE ACCOUNT
A segregated asset account named SAFECO Separate Account SL, maintained by
SAFECO into which a portion of its assets has been allocated for the
Accumulation Life Policies and certain other policies.
UNIT VALUE
The unit of measure used to determine the value of the Investment Divisions in
the Separate Account.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SUMMARY....................................................................................... 1
SAFECO........................................................................................ 5
Advertising and Performance........................................................... 5
THE SEPARATE ACCOUNT.......................................................................... 5
SEPARATE ACCOUNT INVESTMENT DIVISIONS......................................................... 6
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS.......................................... 6
Fidelity's Variable Insurance Products Fund Investment Objectives and Policies of the
Portfolios............................................................................ 6
Fidelity's Variable Insurance Products Fund II Investment Objectives and Policies of
the Portfolios........................................................................ 7
Lexington Natural Resources Trust Investment Objectives and Policies of the
Portfolio............................................................................. 8
Lexington Emerging Markets Fund Investment Objectives and Policies of the Portfolio... 9
SAFECO Resource Series Trust Investment Objectives and Policies of the Portfolios..... 9
Substitution of Securities............................................................ 9
ALLOCATIONS................................................................................... 9
PREMIUMS...................................................................................... 10
The Initial Premium................................................................... 10
Subsequent Premiums................................................................... 10
Limits................................................................................ 10
Grace Period.......................................................................... 10
Reinstatement......................................................................... 11
CHARGES AND DEDUCTIONS........................................................................ 11
Deductions From Premium Payments...................................................... 11
Premium Tax Charge................................................................ 11
Sales Loads....................................................................... 11
Deductions from Policy Account........................................................ 11
First Year Administrative Charge................................................ 11
Monthly Charges................................................................. 11
The Monthly Administrative Charge............................................. 11
The Monthly Cost of Insurance for Primary Insured............................. 11
The Monthly Cost of Any Benefits Provided by Riders........................... 12
Deductions from Separate Account...................................................... 12
Mortality and Expense Risk Charge................................................. 12
Income Tax Charge................................................................. 12
Deductions for Other Transactions..................................................... 12
Transfers Among Investment Options................................................ 12
Increases in Face Amount of Insurance............................................. 12
Partial Withdrawals............................................................... 12
Surrender Charges..................................................................... 12
Full Surrenders................................................................... 12
Decreases in Face Amount of Insurance............................................. 13
Fund Expenses......................................................................... 13
Fidelity's VIP Fund and VIPII Fund................................................ 13
Lexington Natural Resources Trust and Lexington Emerging Markets Fund............. 14
SAFECO Resource Series Trust...................................................... 14
POLICY BENEFITS AND RIGHTS.................................................................... 15
Insurance Benefits.................................................................... 15
Death Benefit......................................................................... 15
Guaranteed Death Benefit Endorsement.................................................. 15
</TABLE>
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<TABLE>
<S> <C>
Changing Face Amount of Insurance or Death Benefit Option............................. 16
Transfers Among Investment Options.................................................... 16
Policy Loans.......................................................................... 17
Loan Interest......................................................................... 17
Loan Repayment........................................................................ 18
Full Cash Surrender................................................................... 18
Partial Cash Withdrawal............................................................... 18
VALUATION..................................................................................... 18
OTHER PROVISIONS.............................................................................. 19
Owner................................................................................. 19
Beneficiary........................................................................... 19
Changing Owner or Beneficiary......................................................... 19
Assignment............................................................................ 19
ADMINISTRATION OF THE POLICIES................................................................ 19
DELAY OF PAYMENTS............................................................................. 20
MANAGEMENT OF THE COMPANY..................................................................... 20
TAX STATUS.................................................................................... 21
Introduction.......................................................................... 21
Diversification....................................................................... 21
Tax Treatment of the Policy........................................................... 22
Policy Proceeds....................................................................... 22
Tax Treatment of Loans and Surrenders................................................. 22
Multiple Policies..................................................................... 23
Tax Treatment of Assignments.......................................................... 23
Qualified Plans....................................................................... 23
SEPARATE ACCOUNT VOTING RIGHTS................................................................ 23
Disregard of Voting Instructions...................................................... 24
DISTRIBUTION OF THE POLICIES.................................................................. 24
REPORTS TO POLICY OWNERS...................................................................... 24
LEGAL PROCEEDINGS............................................................................. 25
EXPERTS....................................................................................... 25
FINANCIAL STATEMENTS.......................................................................... 25
YEAR 2000..................................................................................... 25
APPENDIX A -- FINANCIAL STATEMENTS............................................................ A-1
APPENDIX B -- HYPOTHETICAL ILLUSTRATIONS
Of Death Benefits, Policy Account and Net Cash Surrender Values, and Accumulated
Premiums.............................................................................. B-1
APPENDIX C -- ILLUSTRATIONS
Of Variation in Death Benefit, Policy Account and Cash Surrender Values in Relation to
the Funds' Investment Experience...................................................... C-1
APPENDIX D -- STANDARD AND POOR'S 500......................................................... D-1
APPENDIX E -- LONG TERM MARKET TRENDS......................................................... E-1
</TABLE>
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SUMMARY
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The following summary of Prospectus information and diagram of the Policy should
be read in conjunction with the detailed information appearing elsewhere in this
Prospectus. Unless otherwise indicated, the description of the Policy contained
in this Prospectus assumes that the Policy is in force and that there is no
outstanding indebtedness.
DIAGRAM OF POLICY
PREMIUM PAYMENTS
- You can vary amount and frequency.
/
DEDUCTIONS FROM PREMIUMS
- Sales load and distribution expense is 3%.
- Premium tax that varies by state or subdivision.
/
NET PREMIUM
- You direct the net premium to be invested in the Guaranteed Interest
Division (GID) or to the Separate Account which offers sixteen different
Investment Divisions. Each Investment Division invests in a separate
portfolio of Fidelity's Variable Insurance Products Fund, Fidelity's
Variable Insurance Products Fund II, Lexington Natural Resources Trust,
Lexington Emerging Markets Fund or SAFECO Resource Series Trust.
/
DEDUCTIONS FROM POLICY ACCOUNT
- Monthly charge for cost of insurance and cost of any riders.
- Monthly charge for administrative expenses of $24.00 per month the first
year, $4.00 per month thereafter.
/
DEDUCTIONS FROM SEPARATE ACCOUNT
- Daily charge, at an annual rate of 0.90% from the Investment Divisions for
mortality and expense risks. This charge is not deducted from the GID.
- Investment advisory fees and fund expenses are deducted from each
portfolio.
/
BENEFITS
LIVING BENEFITS:
- Loans may be taken at a zero net interest rate after twelve years.
- The Policy may be surrendered at any time for its Net Cash Surrender
Value.
- Partial withdrawals can be made after the first Policy Year (subject to
certain restrictions). The death benefit will be reduced by the amount of
the partial withdrawal.
- Accelerated payment of a portion of the lowest scheduled death benefit is
available under certain conditions to insureds suffering from terminal
illnesses.
RETIREMENT BENEFITS:
- Loans may be taken at a zero net interest rate after twelve years.
- Partial withdrawals of Cash Surrender Values may be taken.
DEATH BENEFITS:
- Death benefits are income tax free to the Beneficiary.
- Lifetime income to the Beneficiary is available in a variety of settlement
options.
- For certain Policies issued on or after April 29, 1994, a Guaranteed Death
Benefit Endorsement may be added to the Policy.
1
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THE POLICY
The Policy described in this Prospectus is a flexible premium variable life
insurance policy. The Policy is "flexible" because unlike the fixed premium and
benefits of an ordinary whole life insurance policy, the frequency and amount of
premium payments can vary, the Owner can choose between death benefit options
and increase or decrease the amount of insurance coverage, all within the same
policy of insurance.
After SAFECO accepts the Primary Insured, receives at least the minimum initial
premium and deducts certain charges, the Policy Account is established. For the
first 25 days after the Effective Date, the Policy Account will be allocated to
the Money Market Investment Division of the Separate Account. At the end of this
25 day period, the Policy Account will be allocated to the Investment Divisions
of the Separate Account and to the unloaned portion of the Guaranteed Interest
Division in accordance with the Owner's instructions. The Policy Account
reflects the amount and frequency of premium payments, deductions for the cost
of insurance and expenses, the investment experience of amounts allocated to the
Separate Account, interest earned on amounts allocated to the Guaranteed
Interest Division, loans and partial withdrawals. There is no minimum guaranteed
value with respect to any amounts allocated to the Separate Account.
The Guaranteed Interest Division guarantees the principal and interest credited
and paid. The declared interest rate will vary and is guaranteed to never be
less than 4% per year.
The Policy is "variable" because the Policy Account, and under certain
circumstances the death benefit under the Policy, may increase or decrease
depending upon the investment results of the selected Investment Divisions of
the Separate Account.
There are two death benefit options: Option A and Option B. If death benefit
Option A is in effect, the death benefit is the greater of the Face Amount of
Insurance or a percentage of the amount in the Policy Account. Under this
option, the amount of the death benefit is fixed, except when it is determined
by such a percentage. If death benefit Option B is in effect, the death benefit
is the greater of the Face Amount of Insurance plus the amount in the Policy
Account, or a percentage of the amount in the Policy Account. Under this option,
the amount of the death benefit is variable. The Owner can change the selection
of death benefit option.
SAFECO makes monthly deductions from the Policy Account (i) to cover the cost of
the benefits provided by the Policy, (ii) to cover the cost of any benefits
provided by riders to the Policy and (iii) for the cost of administering the
Policy. If the Net Cash Surrender Value of the Policy is not sufficient to cover
the monthly deduction when due, a grace period of 61 days will be allowed for
the payment of a premium or a loan repayment. If a premium or a loan repayment
sufficient to cover three monthly deductions of cost of insurance plus other
charges made in accordance with the Policy is still unpaid at the end of the
grace period, the Policy will lapse and all coverage under the Policy will
terminate. If the Guaranteed Death Benefit Endorsement has been added to the
Policy, then as long as required premiums are paid, the Policy will not
terminate prior to the Primary Insured's 80th birthday and a death benefit will
be payable upon the death of the Primary Insured regardless of the investment
performance of the Investment Divisions selected. (See "Guaranteed Death Benefit
Endorsement" on page 15.)
The Policy has been designed to comply with the definition of life insurance
contained in Section 7702 of the Internal Revenue Code of 1986, as amended.
However, the law in this regard is very complex and unclear. While every attempt
has been made to comply, there is the risk that the Internal Revenue Service
will not concur with SAFECO's interpretations of Section 7702 that were made in
determining such compliance. For a further discussion, see "Tax Status -- Tax
Treatment of the Policy" on Page 22.
THE SEPARATE ACCOUNT
The Separate Account has been established by SAFECO pursuant to the insurance
laws of the State of Washington and is organized as a unit investment trust
under the Investment Company Act of 1940, as amended. Net premiums are placed in
the Owner's Policy Account, which are then allocated to one or more Investment
Divisions of the Separate Account and/or to the Guaranteed Interest Division.
The Separate Account is divided into Investment Divisions. Each Investment
Division invests in portfolio(s) of the Funds. The owner can choose to allocate
net premiums or cash value in up to nine of the available sixteen Investment
Divisions at any one time.
2
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Fidelity's Variable Insurance Products Fund ("VIP") is a mutual fund comprised
of five portfolios, each of which is currently available in connection with the
Policies. The five portfolios are: VIP Money Market, VIP High Income, VIP
Equity-Income, VIP Growth and VIP Overseas. Some Portfolios are composed of
Initial Class shares and Service Class shares sharing the same investment
objective. Only Initial Class shares are available in connection with the
Policies.
Fidelity's Variable Insurance Products Fund II ("VIPII") is a mutual fund
comprised of five portfolios, each of which is currently available in connection
with the Policies. The five portfolios are: VIPII Investment Grade Bond, VIPII
Asset Manager, VIPII Index 500, VIPII Asset Manager: Growth and VIPII
Contrafund. Some Portfolios are composed of Initial Class shares and Service
Class shares sharing the same investment objective. Only Initial Class shares
are available in connection with the Policies.
Lexington Natural Resources Trust and the Lexington Emerging Markets Fund, Inc.
("Lexington Emerging Markets Fund") each consist of only one portfolio which are
offered hereunder; the Lexington Natural Resources Portfolio and the Lexington
Emerging Markets Portfolio, respectively.
SAFECO Resource Series Trust ("SAFECO RST") currently consists of six
portfolios, four of which are currently available in connection with the
Policies. The four portfolios are: Equity, Growth, Northwest and Bond.
RIGHT TO EXAMINE THE POLICY
The Owner may examine the Policy and if for any reason is not satisfied, may
cancel the Policy by returning it with a written request for cancellation to
SAFECO's Administrative Office by the later of: (a) the 10th day after receipt;
or (b) the 45th day after Part I of the application was signed. If the Owner
cancels the Policy, SAFECO will refund an amount equal to the premium payments
made under the Policy.
CHARGES AND DEDUCTIONS
FROM THE PREMIUM PAYMENTS
PREMIUM TAX CHARGE. State and/or local premium taxes are assessed based on the
Owner's residence. Premium taxes currently range up to 4%.
SALES LOADS. There is a sales charge equal to 3% of each premium payment. There
is also a surrender charge of up to 47% of the Maximum Premium assessed in the
event the Policy Account is surrendered for its Net Cash Surrender Value. (See
"Surrender Charges" on Page 12.)
FROM THE POLICY ACCOUNT
FIRST YEAR ADMINISTRATIVE CHARGE. During the first Policy Year, a charge of
$20.00 is deducted from the Policy Account at the beginning of each Policy
Month.
MONTHLY DEDUCTION. Deductions from the Policy Account at the beginning of each
Policy Month consist of:
1. THE MONTHLY ADMINISTRATIVE CHARGE is currently $4.00 per Policy Month.
SAFECO has reserved the right to change this charge, but it will never be
more than $8.00 per Policy Month;
2. THE MONTHLY COST OF INSURANCE for the Primary Insured; and
3. THE MONTHLY COST OF ANY BENEFITS provided by riders to the Policy.
FROM THE SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. This charge is equal on an annual basis to
0.90% of the daily net asset value of the Separate Account. SAFECO estimates
that, of the Mortality and Expense Risk Charge, approximately 0.55% is for the
assumption of mortality risks and approximately 0.35% is for the assumption of
expense risks.
INCOME TAX CHARGE. SAFECO has reserved the right to make a provision for
federal, state and local income taxes which have resulted from the operation of
any Investment Division of the Separate Account.
3
<PAGE>
FOR OTHER TRANSACTIONS
FOR TRANSFERS AMONG INVESTMENT OPTIONS. The first twelve transfers of amounts
in a Policy Year will be made without charge. A charge of up to $25.00 may be
deducted from the Policy Account for each additional transfer in that Policy
Year. However, under certain systematic investing programs this charge will not
be applicable.
FOR INCREASES IN FACE AMOUNT OF INSURANCE. $2.00 for each $1,000 of increase is
deducted from the Policy Account up to a maximum charge of $300.00 per increase.
FOR PARTIAL WITHDRAWALS. A charge equal to $25.00 or 2% of the amount
withdrawn, if less, is deducted from the Policy Account whenever there is a
partial withdrawal of Net Cash Surrender Value.
SURRENDER CHARGES
FOR FULL SURRENDERS. A surrender charge of up to 47% of the Maximum Premium
will be deducted from the Policy Account if the Policy is surrendered in the
first ten Policy Years. An Owner can minimize the amount of Surrender Charge by
limiting the amount of premiums paid in the first year. (See "Charges and
Deductions -- Surrender Charges" on Page 12.)
FOR DECREASES IN FACE AMOUNT OF INSURANCE. A decrease in the Face Amount of
Insurance is a partial surrender, for which a portion of the Surrender Charge
will be deducted from the Policy Account. (See "Charges and Deductions --
Surrender Charges" on Page 12.)
There are no Surrender Charges after the tenth Policy Year.
FUND EXPENSES
Each portfolio of the Funds pays an investment advisory fee. The Funds have also
assumed responsibility for paying certain operating expenses. (See "Charges and
Deductions -- Fund Expenses" on Page 13.)
For a complete discussion of all the charges and deductions, see "Charges and
Deductions" on Page 11.
POLICY LOANS
The Owner may obtain a Policy loan, using the Policy Cash Surrender Value as
security. (See "Policy Benefits and Rights -- Policy Loans" on Page 17.)
TAX STATUS
MODIFIED ENDOWMENT CONTRACTS
The Technical and Miscellaneous Revenue Act of 1988 (the "1988 Act") alters the
tax treatment accorded to loans and certain distributions from life insurance
policies which are deemed to be "modified endowment contracts."
A Policy will be a modified endowment contract if it is issued or materially
changed on or after June 21, 1988, and if the cumulative amount paid under it at
any time during the first seven Policy Years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums (the "7-pay test"). A material change to the Policy at any time results
in the commencement of a new 7-pay test period. An increase in a death benefit
not as a result of investment performance is a material change. A Policy that
was entered into prior to June 21, 1988, may be deemed to be a modified
endowment contract if it is materially changed and fails to meet the 7-pay test.
If the Policy is acquired through an exchange of another life insurance policy,
the 7-pay test is applicable even though the original policy was entered into
prior to June 21, 1988. Due to the flexible premium nature of the Policy, the
determination of whether it qualifies for treatment as a modified endowment
contract depends on the individual circumstances of each Policy. SAFECO will
make every effort to provide Owners with information necessary to determine the
applicability of the 7-pay test. However, Owners should consult with a tax
advisor as to its applicability to their own circumstances.
4
<PAGE>
If a Policy is a modified endowment contract, partial or full surrenders and/or
loan proceeds are taxable to the extent of income in the Policy and will also be
subject to an additional 10% federal income tax penalty applied to the income.
However, the penalty does not apply to any distribution: (1) made on or after
the date on which the taxpayer reaches age 59 1/2; (2) which is attributable to
the taxpayer becoming disabled (within the meaning of Section 72(m)(7) of the
Internal Revenue Code); or (3) which is part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or life
expectancy) of the taxpayer or the joint lives (or joint life expectancies) of
such taxpayer and his or her beneficiary. These distributions are taxed using an
"income-first" method rather than a "basis-first" method. Owners should consult
a tax adviser regarding the possible tax consequences of loans from and/or
surrenders of the Policy.
The 1988 Act further provides that multiple contracts that are issued during any
calendar year to the same Owner by one company or its affiliates are treated as
one contract for purposes of determining the taxable portion of any loans or
distributions. Such treatment may result in adverse tax consequences including
more rapid taxation of the loans or distributed amounts from such combination of
contracts. Owners should consult a tax adviser prior to purchasing more than one
modified endowment contract during any calendar year.
For more details, see "Tax Status-Policy Proceeds" on Page 22 and "Tax
Status-Tax Treatment of Loans and Surrenders on Page 22.
SAFECO
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SAFECO Life Insurance Company ("SAFECO") is a stock life insurance company which
was organized under the laws of the State of Washington on January 23, 1957.
SAFECO writes individual and group life, accident and health insurance and
annuities. SAFECO is licensed to do business in the District of Columbia and all
states except New York. SAFECO is a wholly-owned subsidiary of SAFECO
Corporation, which is a holding company whose subsidiaries are engaged primarily
in insurance and financial service businesses. The home office address of SAFECO
is P.O. Box 34690, Seattle, Washington 98124-1690. The address of the
Administrative Office is P.O. Box 290752, Wethersfield, Connecticut 06129-0752.
The phone number is 1-800-982-3656. All requests should be directed to the
Administrative Office. All premium payments should be directed to the Address,
P.O. Box 30349, Hartford, CT 06150.
ADVERTISING AND PERFORMANCE
Total returns for the Funds may be quoted in advertising and marketing materials
when accompanied by policy performance at the Separate Account level.
Comparative performance information may also be used from time to time,
including Lipper Analytical Services, Inc., Morningstar, Inc. and The VARDS
Report by Financial Planning Resources, Inc., or major market indices such as
the Dow Jones Industrial Average Index, Standard & Poor's 500 Composite Stock
Price Index, Morgan Stanley Capital International World Index, Morgan Stanley
Emerging Markets Free Index, Morgan Stanley Capital International, Europe,
Australiasia, Far East (EAFE) Index and other circular services and
publications. Such comparative performance information will be stated in the
same terms in which the comparative data and indices are stated. The services
utilize industry standard measurements some of which are described below:
Relative volatility measures the variability of a return from its mean, in terms
of a standard measurement. Beta is a measure of a portfolio's market risk. The
beta of the market is 1.00 as measured with the S&P 500 Index. Accordingly, a
portfolio with a beta of 1.10 is expected to perform 10% better than the market
in up markets and 10% worse than the market in down markets. Conversely, a beta
of .85 indicates that the portfolio is expected to perform 15% worse than the
market in up markets and 15% better than the market in down markets. R(2) is a
measure of correlation between the portfolio and a benchmark index, such as the
S&P 500 Index, calculated over three years. R(2) is a proportion that ranges
between 0.00 and 1.00. As R(2) decreases, so does the validity of the benchmark
comparison.
THE SEPARATE ACCOUNT
- ------------------------------------------------------------------------
The Board of Directors of SAFECO adopted a resolution to establish a segregated
asset account pursuant to Washington insurance law on November 6, 1986. This
segregated asset account has been designated Separate Account SL. SAFECO has
caused the Separate Account to be registered with the Securities and Exchange
5
<PAGE>
Commission as a unit investment trust pursuant to the provisions of the
Investment Company Act of 1940, as amended (the "1940 Act"). The Separate
Account meets the definition of a "separate account" under the federal
securities laws.
The assets of the Separate Account are the property of SAFECO. However, the
assets of the Separate Account, equal to the reserves and other contract
liabilities with respect to the Separate Account, are not chargeable with
liabilities arising out of any other business SAFECO may conduct. Income, gains
and losses, whether or not realized, are, in accordance with the Policies,
credited to or charged against the Separate Account without regard to other
income, gains or losses of SAFECO. SAFECO's obligations arising under the
Policies are general corporate obligations.
The Separate Account is divided into Investment Divisions. Each Investment
Division invests in shares of a corresponding portfolio of the Funds. This
Prospectus describes Policies under which net premiums are allocable to
portfolios of the Funds through Investment Divisions of the Separate Account.
Some of the Investment Divisions listed in this prospectus may not be available
in some contracts.
SEPARATE ACCOUNT INVESTMENT DIVISIONS
- ------------------------------------------------------------------------
Each Investment Division of the Separate Account is invested solely in the
shares of one portfolio of the Funds. Each of the Funds, except Lexington
Natural Resources Trust, is an open-end, diversified management investment
company registered under the 1940 Act. Lexington Natural Resources Trust is an
open-ended, non-diversified management investment company registered under the
1940 Act. While a brief summary of the investment objectives and policies of the
portfolios of the Funds is set forth below, more comprehensive information,
including a discussion of potential risks, is found in the Prospectuses for the
Funds which are included with this Prospectus. Each of the Funds is intended for
use in connection with variable annuity contracts and variable life insurance
policies offered by various life insurance companies. For a further discussion,
see the Funds' Prospectuses. Each of the Funds has entered into an investment
advisory agreement with the respective Funds' investment advisor.
Shares of the Funds are issued and redeemed in connection with variable life
policies issued through the Separate Account, other SAFECO Separate Accounts
issuing variable contracts and variable annuity and/or variable life insurance
policies issued through separate accounts of life insurance companies not
affiliated with SAFECO. Shares of the SAFECO RST may also be made directly
available to qualified plans. The Funds do not foresee any disadvantage to
Owners arising out of the fact that the Funds have been made available to
separate accounts of companies not affiliated with SAFECO. Nevertheless, the
Funds intend to monitor events in order to identify any material irreconcilable
conflicts which may possibly arise and to determine what action, if any, should
be taken in response thereto. If such a conflict were to occur, one of the
separate accounts might withdraw its investment in the Fund(s). This might force
the Fund(s) to sell portfolio securities at disadvantageous prices.
INVESTMENT OBJECTIVES AND POLICIES OF THE PORTFOLIOS
- ------------------------------------------------------------------------
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND ("VIP")
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
VIP MONEY MARKET High-quality, U.S. dollar denominated Seeks to obtain as high a level of
money market securities of domestic and current income as is consistent with
foreign issuers, such as certificates of preserving capital and providing
deposit, obligations of governments and liquidity.
their agencies and commercial paper and
notes.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
VIP HIGH INCOME At least 65% in income-producing debt Seeks to obtain a high level of current
securities and preferred stocks, income by investing primarily in high-
including convertible securities; up to yielding, lower- rated, fixed-income
20% in common stocks and other equity securities, while also considering
securities; and up to 15% in securities growth of capital. High-yielding lower
that are illiquid by virtue of grade corporate debt securities are
restrictions on resale and all other commonly known as junk bonds and involve
illiquid securities. a significant degree of risk. See
Securities and Investment Practices in
the accompanying Variable Insurance
Products Fund Prospectus.
VIP EQUITY-INCOME At least 65% in income-producing equity Seeks reasonable income by investing
securities, and the flexibility to primarily in income-producing equity
invest the balance in all types of securities, with the potential for
domestic and foreign securities, capital appreciation as a consideration.
including bonds.
VIP GROWTH Portfolio will normally purchase common Seeks to achieve capital appreciation.
stocks, although investments are not
restricted to any one type of security.
Capital appreciation may also be found
in other types of securities, including
bonds and preferred stocks.
VIP OVERSEAS Normally invests at least 65% of its Seeks long-term growth of capital
assets in securities of issuers whose primarily through investments in foreign
principal activities are located outside securities.
the United States.
Funds focused on international investing
involve additional risks compared to
funds invested in primarily domestic
securities. International funds have
increased economic and political risks
as they are exposed to events and
factors in various world markets that
are beyond our control.
</TABLE>
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II ("VIPII")
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
VIPII INVESTMENT GRADE The Portfolio will maintain a dollar- Seeks as high a level of current income
BOND weighted average portfolio maturity of as is consistent with the preservation
ten years or less. Under normal of capital by investing in a broad range
conditions, at least 65% of the of investment- grade, fixed-income
Portfolio's total assets will be securities.
invested in investment-grade fixed-
income securities such as bonds, notes
and debentures. Investment- grade
securities are those rated Baa or better
by Moody's Investors Service, Inc. or
BBB or better by Standard & Poor's
Corporation, and unrated securities
judged by Fidelity Management to be of
equivalent quality.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
VIPII ASSET MANAGER The Portfolio allocates its assets among Seeks high total return with reduced
domestic and foreign stocks, bonds and risk over the long-term.
short-term money market instruments.
VIPII INDEX 500 The Portfolio's assets will be invested Seeks investment results that correspond
in equity securities of companies which to the total return (i.e., the
compose the S&P 500*. combination of capital changes and
income) of common stocks publicly traded
in the United States, as represented by
the Standard & Poor's Composite Index of
500 Stocks, while keeping transaction
costs and other expenses low.
VIPII ASSET MANAGER:
GROWTH The Portfolio's assets will be Seeks maximum total return over the long
diversified across domestic and foreign term.
stocks, bonds and short term instruments
while maintaining a neutral mix which
will vary over short term periods
gradually adjusting the Portfolio's
holdings within defined ranges.
VIPII CONTRAFUND The Portfolio's assets will be invested Seeks long-term capital appreciation.
mainly in securities of companies whose
value FMR believes is not fully
recognized by the public. This strategy
can lead to investments in stocks of
small companies which may not be well-
known.
</TABLE>
LEXINGTON NATURAL RESOURCES TRUST
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
LEXINGTON NATURAL Natural resource assets are materials Seeks long-term growth of capital
RESOURCES derived from natural sources which have through investing primarily in common
economic value. The Portfolio seeks to stocks of companies that own or develop
identify securities of companies that, natural resources and other basic
in its management's opinion, are commodities, or supply goods and
undervalued relative to the value of services to such companies.
natural resource holdings of such
companies in light of current and
anticipated economic or financial
conditions. Examples of natural resource
assets include companies that specialize
in energy sources, forest products,
environmental technology, agriculture
products, chemical products, metals
(ferrous and non-ferrous, strategic,
precious) and other basic commodities.
</TABLE>
* "Standard & Poor's-Registered Trademark-", "S&P-Registered Trademark-", "S&P
500-Registered Trademark-", "Standard & Poor's 500" and "500" are trademarks
of Standard & Poor's Corporation ("S&P") and have been licensed for use by
SAFECO. The Index 500 Portfolio is not sponsored, endorsed, sold or promoted
by S&P and S&P makes no representation regarding the advisability of investing
in the Index 500 Portfolio.
8
<PAGE>
LEXINGTON EMERGING MARKETS FUND
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
LEXINGTON EMERGING The Portfolio invests primarily in Seeks long-term growth of capital
MARKETS, INC. ("LEXINGTON emerging country and emerging market primarily through investment in equity
EMERGING MARKETS FUND") equity securities. For purposes of its securities and equivalents of companies
objective, the Portfolio considers domiciled in, or doing business in
emerging country equity securities to be emerging countries and emerging markets.
any country whose economy and market the
World Bank or United Nations considers
to be emerging or developing. Examples
of these countries include Malaysia,
Thailand, Philippines, Brazil, Chile and
Poland.
</TABLE>
SAFECO RESOURCE SERIES TRUST ("SAFECO RST")
<TABLE>
<CAPTION>
PORTFOLIO INVESTMENT POLICY OBJECTIVES
- -------------------------- ---------------------------------------- ----------------------------------------
<S> <C> <C>
SAFECO RST EQUITY The Portfolio ordinarily invests Seeks long-term growth of capital and
principally in common stocks or reasonable current income.
securities convertible into common
stocks.
SAFECO RST GROWTH The Portfolio ordinarily invests a Seeks growth of capital and the
preponderance of its assets in common increased income that ordinarily follows
stock selected for potential from such growth.
appreciation.
SAFECO RST NORTHWEST The Portfolio invests at least 65% of Seeks long-term growth of capital
its total assets in securities issued by through investing primarily in Northwest
companies with their principal executive companies.
offices located in, Alaska, Idaho,
Montana, Oregon or Washington.
SAFECO RST BOND The Portfolio invests primarily in Seeks as high a level of current income
medium-term debt securities. as is consistent with the relative
stability of capital.
</TABLE>
There is no assurance that the investment objective of any of the portfolios
will be met. Owners bear the complete investment risk for Policy Account values
allocated to an Investment Division.
Additional portfolios and/or additional funds may from time to time be made
available as investments to underlie the Policy. However, the right to make such
selections will be limited by the terms and conditions imposed on such
transactions by SAFECO.
SUBSTITUTION OF SECURITIES
If the shares of the Funds or any portfolio within the Funds become unavailable
for investment by the Separate Account or, if in the judgment of SAFECO, further
investment in such shares becomes inappropriate in view of the purposes of the
Policy, SAFECO may substitute shares of another mutual fund (or portfolio within
the Fund(s)). No substitution of securities may take place without prior
approval of the Securities and Exchange Commission and under the requirements it
may impose.
ALLOCATIONS
The Policy provides investment options for the amount in the Policy Account. The
Owner specifies the original premium allocation and deduction allocation
percentages in the application for the Policy. Unless changed, such percentages
also apply to subsequent premium and deduction allocations. The Owner can
maintain balances in a maximum of nine Investment Divisions at any one time.
Allocation percentages must be zero or a whole number not greater than 100. The
sum of the premium allocation percentages and of the deduction allocation
percentages
9
<PAGE>
must each equal 100. After SAFECO accepts the Primary Insured, receives at least
the minimum initial premium and deducts certain charges, the Policy Account is
established for the Owner. For the first 25 days after the Effective Date, the
Policy Account will be allocated to the Money Market Investment Division of the
Separate Account. At the end of this 25 day period, the Policy Account may be
allocated to one or more Investment Divisions up to a maximum of nine and to the
unloaned portion of the Guaranteed Interest Division in accordance with the
Owner's instructions. Additional premiums and deductions will be allocated to
the Investment Divisions of the Separate Account and to the unloaned portion of
the Guaranteed Interest Division as specified by the Owner.
If SAFECO cannot make a monthly deduction on the basis of the allocation
percentages, the deduction will be based on the proportion that the unloaned
value in the Guaranteed Interest Division and the values in the Investment
Divisions bear to the total unloaned value in the Policy Account.
PREMIUMS
- ------------------------------------------------------------------------
THE INITIAL PREMIUM
The initial premium payment is due on or before delivery of the Policy. The
minimum initial premium required is that premium sufficient to cover three
monthly deductions for cost of insurance plus other charges made in accordance
with the Policy. The agent selling the Policy will provide a prospective
purchaser with this information. No insurance will take effect before the
initial premium payment is paid.
SUBSEQUENT PREMIUMS
Additional premiums may be paid at any time at P.O. Box 30349, Hartford,
Connecticut, 06150, while the Policy is in force and before the Final Policy
Date. These premiums must be in the form of a check or money order payable to
SAFECO Life. Such premiums may be in any amount subject to the limits described
below.
If the Owner elects to pay premiums on a planned periodic premium basis, SAFECO
will send premium reminder notices. Instead of receiving premium reminder
notices, an Owner can elect to have premiums automatically deducted from the
Owner's bank account. The Owner may skip planned premium payments or change
their frequency and amount.
For certain Policies issued on or after April 29, 1994, a Guaranteed Death
Benefit Endorsement may be added to the Policy. In order to maintain this
Endorsement in force, the Monthly Guaranteed Death Benefit Premium must be paid.
When the Endorsement is issued or other changes in the Policy are requested,
SAFECO will send the Owner a new Policy Information section which will show the
Monthly Guaranteed Death Benefit Premium. (See "Guaranteed Death Benefit
Endorsement" on Page 15.)
LIMITS
Each premium payment must be at least $50.00. SAFECO may increase this minimum
limit 90 days after sending the Owner a written notice of such increase.
SAFECO reserves the right not to accept premium payments in any Policy Year that
it determines would cause the Policy to fail to qualify as life insurance under
applicable tax law as currently interpreted by SAFECO. For a further
explanation, see "Tax Status -- Policy Proceeds" on Page 22.
GRACE PERIOD
The duration of insurance coverage depends on whether the Net Cash Surrender
Value is sufficient to cover the monthly deductions described below. If the Net
Cash Surrender Value at the beginning of any Policy Month is less than such
deductions for that month, SAFECO will send a written notice to the Owner and
any assignee of record at the last known address stating that a grace period of
61 days has begun, starting on the date the notice was sent. The notice will
also state the amount of the payment (either a loan repayment or a premium
payment) sufficient to cover three monthly deductions of cost of insurance plus
other charges made in accordance with the Policy.
10
<PAGE>
If SAFECO does not receive such amount at P.O. Box 30349, Hartford, Connecticut,
06150, before the end of the grace period, SAFECO will send a written notice to
the Owner and any assignee of record stating that the Policy has ended without
value. If the insured dies during the grace period, SAFECO will pay the
insurance benefits. The grace period provisions are not applicable while the
Guaranteed Death Benefit Endorsement is in effect.
REINSTATEMENT
If the Policy has ended without value, it may be reinstated while the Primary
Insured is alive if:
1. a request for reinstatement is made within five years after the end of the
grace period;
2. evidence of insurability satisfactory to SAFECO is provided; and
3. a premium payment is made in an amount sufficient, after the date of
reinstatement, to cover three monthly deductions of cost of insurance plus
other charges made in accordance with the Policy.
The coverage will become effective on the beginning of the Policy Month which
coincides with or next follows the date the reinstatement application is
approved.
CHARGES AND DEDUCTIONS
- ------------------------------------------------------------------------
DEDUCTIONS FROM PREMIUM PAYMENTS
PREMIUM TAX CHARGE. All states and certain jurisdictions, such as cities and
counties, tax premium payments and some levy other charges. Taxes currently
range up to 4%. SAFECO deducts the applicable tax which it has been charged from
each premium payment based on the Owner's residence.
SALES LOADS. SAFECO deducts a Sales Charge (Sales Load) of 3% of each premium
payment. The sales charge reimburses SAFECO, in part, for expenses incurred in
the distribution of the Policy. There is also a Surrender Charge assessed in the
event the Policy is surrendered for its Net Cash Surrender Value. (See "Charges
and Deductions -- Surrender Charges" on Page 12.)
DEDUCTIONS FROM POLICY ACCOUNT
FIRST YEAR ADMINISTRATIVE CHARGE. At the beginning of each Policy Month during
the first Policy Year, a deduction of $20.00 is made from the Policy Account. It
covers the cost of application processing, establishing Policy records and
underwriting costs. Underwriting is the process of assigning the insured to an
appropriate risk class. SAFECO does not make a profit from this charge.
MONTHLY CHARGES. At the beginning of each Policy Month, a deduction is made
from the Policy Account to cover monthly administrative charges and to provide
insurance coverage, subject to the Grace Period provision described above. Such
deduction for any Policy Month is the sum of the following amounts determined as
of the beginning of that month:
1. The monthly administrative charge is currently $4.00 per Policy Month.
However, SAFECO reserves the right to change this charge, but it will never
be more than $8.00 per Policy Month. This charge compensates SAFECO for the
ongoing administration of the Policy and the Separate Account. Such
administration includes the costs associated with maintenance of Policy
records, Policy Owner service, reports to Owners and all accounting, reserve
calculation, regulatory and reporting requirements and auditing of the
Separate Account. SAFECO does not expect to profit from this charge.
2. The monthly cost of insurance for the Primary Insured. The monthly cost of
insurance is the current monthly "cost of insurance rate" times the "net
amount at risk" (current death benefit minus the amount in the Policy
Account) at the beginning of the Policy Month, plus any flat extra-rated
charge times the Face Amount of Insurance at the beginning of the Policy
Month. For this purpose the amount in the Policy Account is determined
before the monthly cost of insurance deduction, but after all other
deductions due on that date have been made. The cost of insurance rate is
based on the Attained Age and rating class of the Primary Insured. For
certain Policies issued on or after April 29, 1994, the cost of insurance is
based on issue age, coverage duration and rating class of the Primary
Insured and a preferred underwriting category is available to insureds who
are determined to have better than average nonsmoker mortality (preferred
nonsmoker) and smoker mortality (preferred smoker). As of the date hereof,
the current rates which SAFECO is charging are
11
<PAGE>
less than or equal to the guaranteed rates. SAFECO may change the current
rate no more frequently than once per Policy Year. The Guaranteed Maximum
Insurance Cost Rates for standard risks are based on the 1980 Commissioner's
Standard Ordinary Mortality Table, Age Last Birthday.
3. The monthly cost of any benefits provided by riders to the Policy.
DEDUCTIONS FROM SEPARATE ACCOUNT
MORTALITY AND EXPENSE RISK CHARGE. SAFECO deducts a risk charge from the
Separate Account as part of the calculation of the Unit Value (see "Valuation"
on Page 18). This risk charge is equal on an annual basis to .90% of the daily
net asset value of the Separate Account. SAFECO estimates that, of the Mortality
and Expense Risk Charge, approximately 0.55% is for the assumption of mortality
risks and approximately 0.35% is for the assumption of expense risks. This risk
charge compensates SAFECO for assuming the mortality and expense risks under the
Policy. The mortality risk assumed by SAFECO is that the Primary Insureds, as a
group, may not live as long as expected. The expense risk assumed by SAFECO is
that actual expenses may be greater than those assumed. SAFECO is responsible
for all administration of the Policy and the Separate Account. If this charge is
not needed to cover mortality and expenses under the Policy, any excess may be
used for distribution costs not covered by the sales load. SAFECO will realize a
gain from this charge to the extent that it is not needed to provide benefits
and pay expenses under the Policy.
INCOME TAX CHARGE. SAFECO does not currently assess any charge for income taxes
incurred by SAFECO as a result of the operations of the Investment Divisions of
the Separate Account. SAFECO reserves the right to assess a charge for such
taxes against the Investment Divisions if SAFECO determines that such taxes will
be incurred.
DEDUCTIONS FOR OTHER TRANSACTIONS
TRANSFERS AMONG INVESTMENT OPTIONS. The first twelve transfers of amounts in a
Policy Year will be made without charge. Transfers can be made from one
Investment Division to another, or to or from the Guaranteed Interest Division.
(See "Transfers Among Investment Options" on page 16.) SAFECO may charge up to
$25.00 for each additional transfer in the Policy Year. The current charge is
$25.00. However, under certain systematic investing programs this charge will
not be applicable.
INCREASES IN FACE AMOUNT OF INSURANCE. There is a $2.00 charge for each $1,000
of increase in Face Amount of Insurance up to a maximum charge of $300.00 per
increase. This charge is deducted from the Policy Account and reimburses SAFECO
for its costs in implementing the increase.
PARTIAL WITHDRAWALS. When the Owner makes a partial withdrawal of Net Cash
Surrender Value, a charge of $25.00, or 2% of the amount withdrawn if less, is
deducted from the Policy Account. This charge reimburses SAFECO for the expenses
incurred in processing the transaction.
SURRENDER CHARGES
FULL SURRENDERS. The Policy provides that a Surrender Charge, which is graded
down 20% per year starting in the seventh year, is deducted from the Policy
Account if the Policy is given up for its Net Cash Surrender Value in the first
ten Policy Years. The Surrender Charge at any time in a Policy Year is equal to
the lesser of (1) a percentage of the Maximum Premium for the Policy as follows:
47% for Policy Years 1 through 6, 37.6% for Policy Year 7, 28.2% for Policy Year
8, 18.8% for Policy Year 9, and 9.4% for Policy Year 10; or (2) an amount equal
to (A) minus (B), where (A) is 27% of the premium payments received during the
first Policy Year up to the Maximum Premium for the Policy, plus 6% of all other
premium payments received to the time of surrender; and (B) is the amount of any
pro rata Surrender Charge previously made under the Policy.
The Maximum Premium is used solely to calculate the Surrender Charge; it does
not impose a limit on the amount of premium that an Owner can pay. There is a
limitation imposed by the Internal Revenue Code and the regulations thereunder.
(See "Premiums -- Limits" on Page 10.) While an Owner can minimize the amount of
Surrender Charge by limiting the amount of premium paid in the first year, this
would adversely effect contract performance in every aspect other than the
contemplation of a total cash surrender.
12
<PAGE>
EXAMPLE
- --------------------------------------------------------------------------------
Assume a $100,000 Policy for a male preferred non-smoker, age 45. For this
Policy the Maximum Premium is $1,716.00. The Table of Surrender Charges that
appears in the Policy Information section would be determined as follows:
TABLE OF SURRENDER CHARGES
<TABLE>
<CAPTION>
POLICY MAXIMUM MAXIMUM SURRENDER
YEAR PERCENTAGE PREMIUM CHARGE
- ------ ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
1 47.0% x $1,716 = $807
2 47.0% x $1,716 = $807
3 47.0% x $1,716 = $807
4 47.0% x $1,716 = $807
5 47.0% x $1,716 = $807
6 47.0% x $1,716 = $807
7 37.6% x $1,716 = $645
8 28.2% x $1,716 = $484
9 18.8% x $1,716 = $323
10 9.4% x $1,716 = $161
</TABLE>
The Surrender Charges reimburse SAFECO in part for expenses incurred in the
distribution of the Policy.
DECREASES IN FACE AMOUNT OF INSURANCE. A request for a decrease in the Face
Amount of Insurance is treated as a partial surrender. If there is a requested
decrease in the Face Amount of Insurance during the first ten Policy Years,
SAFECO will deduct a portion of the Surrender Charge from the Policy Account. If
the Owner increases the Face Amount of Insurance and later asks for a decrease,
a Surrender Charge will apply only to a decrease below the original Face Amount
of Insurance. A decrease in the Face Amount of Insurance that follows a prior
increase will be applied against the most recent increase. The pro rata
Surrender Charge for a partial surrender will be determined by dividing the
amount of decrease in the Face Amount of Insurance (below the initial Face
Amount of Insurance) by the initial Face Amount of Insurance and multiplying
that fraction by the Surrender Charge which would apply if the Policy were fully
surrendered.
The pro rata Surrender Charge will be deducted from the Policy Account for a
requested decrease in the Face Amount of Insurance of this Policy. The maximum
Surrender Charge payable in the future will be reduced proportionately. SAFECO
will send a new Policy Information section that shows the new maximum Surrender
Charges.
FUND EXPENSES
FIDELITY'S VIP FUND AND VIPII FUND
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
FEES EXPENSES EXPENSES
---------- -------- --------
<S> <C> <C> <C>
VIP Money Market 0.21 0.10% 0.31%
VIP High Income 0.59 0.12% 0.71%
VIP Equity-Income 0.50 0.08% 0.58%(1)
VIP Growth 0.60 0.09% 0.69%(1)
VIP Overseas 0.75 0.17% 0.92%(1)
VIPII Investment Grade Bond 0.44 0.14% 0.58%
VIPII Asset Manager 0.55 0.10% 0.65%(1)
VIPII Index 500 0.24 0.04% 0.28%(2)
VIPII Contrafund 0.60 0.11% 0.71%(1)
VIPII Asset Manager: Growth 0.60 0.17% 0.77%(1)
</TABLE>
(1) A portion of the brokerage commission that 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 .57% for VIP Equity-Income Portfolio, .67% for VIP Growth
Portfolio, .90% for VIP Overseas Portfolio, .64% for VIPII Asset Manager
Portfolio .68% for VIPII Contrafund Portfolio and .76% for VIPII Asset
Manager: Growth Portfolio.
13
<PAGE>
(2) FMR agreed to reimburse a portion of VIPII Index 500 Portfolio's expenses
during the period. Without this reimbursement, the fund's management fee,
other expenses and total expenses would have been .27%, .13% and .40%
respectively.
Each portfolio of the Funds pays all its expenses, without limitation, that are
not assumed by the investment advisor or its affiliates. Each portfolio pays for
the typesetting and printing of its Prospectuses, Statements of Additional
Information, reports and proxy material to existing shareholders, legal expenses
and the fees of the custodian, auditor and non-interested Trustees. Other
charges paid by each portfolio include interest, taxes, brokerage commissions,
each portfolio's proportionate share of insurance premiums and Investment
Company Institute dues, and the costs of registering shares under federal and
state securities laws. Each portfolio is also liable for such nonrecurring
expenses as may arise, including costs of litigation to which each portfolio is
a party and any obligation they may have to indemnify the officers and Trustees
of the Fund(s) with respect to litigation.
LEXINGTON NATURAL RESOURCES TRUST AND LEXINGTON EMERGING MARKETS FUND
Lexington Management Corporation ("LMC") is the investment advisor for
Lexington Natural Resources Trust and Lexington Emerging Markets Fund. For its
investment management services to the Funds, under its investment advisory
agreement, LMC will receive a monthly fee at the annual rate of 1.00% for
Lexington Natural Resources Trust and 0.85% for Lexington Emerging Markets Fund
of the respective Fund's average daily net assets.
Each Fund pays all its expenses, without limitation, that are not assumed by
Lexington Management Corporation. These expenses include, but are not limited
to, accounting, printing and mailing expenses; custodian, directors',
professional, registration and computer processing fees; and other operating
expenses.
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL
PORTFOLIO FEES EXPENSES EXPENSES
- -------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Lexington Natural Resources Trust 1.00% .25% 1.25%
Lexington Emerging Markets Fund .85% .99% 1.84%*
</TABLE>
* Lexington Emerging Markets Fund -- For the period May 1, 1996 through April
30, 1997, the advisor voluntarily limited management and operating expenses
to a maximum of 1.75%. Beginning May 1, 1997 the advisor no longer
reimburses the Fund to the extent that management and operating expenses
exceed 1.75%. The ratio to Average Net Assets of the Expenses for the one
year period ending December 31, 1997 was 1.91% before reimbursements or
waivers and 1.84% after reimbursements or waivers.
SAFECO RESOURCE SERIES TRUST
EXPENSES OF THE PORTFOLIO AS A PERCENTAGE OF NET ASSETS:
<TABLE>
<CAPTION>
TOTAL
EXPENSES
MANAGEMENT OTHER AFTER
FEES EXPENSES REIMBURSEMENT
------------- ------------- -------------
<S> <C> <C> <C>
SAFECO RST Equity Portfolio 0.73% 0.02% 0.75%
SAFECO RST Growth Portfolio 0.74% 0.03% 0.77%
SAFECO RST Northwest Portfolio 0.73% 0.00%** 0.73%
SAFECO RST Bond Portfolio 0.74% 0.00%** 0.74%
</TABLE>
** SAFECO pays all Other Expenses of each portfolio until a portfolio's assets
reach $20 million. Once a portfolio's assets exceed $20 million, the Other
Expenses of the portfolio will be paid by such portfolio. Because the assets
of the Northwest Portfolio exceeded $20 Million in February, 1998, SAFECO
does not expect to reimburse the other expenses of the Portfolio going
forward.
During the year ended December 31, 1997, SAFECO paid for or reimbursed all
of the Other Expenses of the Northwest and Bond Portfolios. Expenses before
such reimbursement as a percentage of net assets were as follows:
<TABLE>
<S> <C>
SAFECO RST Northwest Portfolio 0.94%
SAFECO RST Bond Portfolio 0.90%
</TABLE>
14
<PAGE>
POLICY BENEFITS AND RIGHTS
- ------------------------------------------------------------------------
INSURANCE BENEFITS
SAFECO will pay the insurance benefits of the Policy to the Beneficiary when it
receives at its Administrative Office (1) proof that the insured died before the
Final Policy Date; and (2) all other requirements deemed necessary before such
payment may be made. The insurance benefits of the Policy include the following
amounts for the Primary Insured, which are determined as of the date of the
Primary Insured's death:
(a) the death benefit described below;
(b) plus any other benefits then due from riders to the Policy;
(c) minus any loan (and loan interest) on the Policy; and
(d) minus any overdue deductions if the Primary Insured dies during the Grace
Period.
DEATH BENEFIT
The death benefit will be determined at any time under either Option A or Option
B (as described below), whichever the Owner has chosen and is in effect at such
time.
Under Option A, the death benefit is the greater of the Face Amount of
Insurance, or a percentage (see the following table) of the amount in the Policy
Account. Under this option, the amount of the death benefit is fixed, except
when it is determined by such a percentage.
Under Option B, the death benefit is the greater of the Face Amount of Insurance
plus the amount in the Policy Account, or a percentage (see the following table)
of the amount in the Policy Account. Under this option, the amount of death
benefit is variable.
Under either option, the duration of insurance coverage depends upon the amount
in the Policy Account.
The percentage referred to above is the applicable percentage from the following
table for the Primary Insured's age (last birthday) at the beginning of the
Policy Year of determination.
TABLE OF APPLICABLE PERCENTAGES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRIMARY PRIMARY
INSURED'S AGE PERCENTAGE INSURED'S AGE PERCENTAGE
- -------------- ----------- -------------- -----------
<S> <C> <C> <C>
40 and under 250% 65 120%
45 215% 70 115%
50 185% 75 through 90 105%
55 150% 95 100%
60 130%
</TABLE>
For ages not shown, the applicable percentages shall decrease by a ratable
portion for each full year.
GUARANTEED DEATH BENEFIT ENDORSEMENT
In those states where approved, a Guaranteed Death Benefit Endorsement may be
added to the Policy. The Endorsement provides that prior to the Policy
Anniversary following the Primary Insured's 80th birthday, the Policy will not
terminate and a death benefit will be payable upon the death of the Primary
Insured regardless of the investment performance of the Investment Divisions
selected, provided the required premiums have been paid.
In order to keep the Endorsement in force, at the beginning of each Policy
Month, the Adjusted Guaranteed Death Benefit Premium must equal or exceed the
Accumulated Monthly Death Benefit Premium.
The Adjusted Guaranteed Death Benefit Premium is an amount equal to: (1) the sum
of the premiums received since issue; minus (2) any partial surrender; minus (3)
any loans and loan interest. The Accumulated Monthly Death Benefit Premium is an
amount equal to the sum of the Monthly Guaranteed Death Benefit Premiums for
each month
15
<PAGE>
since issue. The Monthly Guaranteed Death Benefit Premium is shown in the Policy
Information section of the Policy.
The Guaranteed Death Benefit Endorsement is not available on policies that
include an additional term rider either on the Primary Insured or another
person.
CHANGING FACE AMOUNT OF INSURANCE OR DEATH BENEFIT OPTION
During the first Policy Year, the death benefit option and the Face Amount of
Insurance will be as selected on the application for the Policy. The minimum
Face Amount of Insurance is $50,000. At any time after the first Policy Year
while the Policy is in force, the Owner may change the death benefit option or
the Face Amount of Insurance by written request to SAFECO at its Administrative
Office, subject to the following:
1. The Owner may ask SAFECO to increase the Face Amount of Insurance if the
Owner provides satisfactory evidence of the insurability of the Primary
Insured. Any increase must be at least $10,000. There is a charge for such
increase. (See "Charges and Deductions -- Increases in Face Amount of
Insurance" on Page 12.) The charge is deducted from the Policy Account as of
the date the increase takes effect.
The Owner may reconsider this Face Amount of Insurance increase after requesting
it. The Owner must mail a notice to SAFECO at its Administrative Office
canceling the increase within a ten day period after receipt of new Policy
Information pages. At such time the Policy Account will be credited with the
amount charged for the increase.
2. The Owner may ask SAFECO to reduce the Face Amount of Insurance, but not to
less than the minimum amount for which SAFECO would then issue the Policy
under its then existing administrative rules. If such a reduction occurs in
the first ten Policy Years, SAFECO will deduct from the Policy Account a pro
rata share of the applicable Surrender Charge. (See "Charges and Deductions
-- Decreases in Face Amount of Insurance" on Page 13.)
3. The Owner may change the death benefit option. If the change is from Option
A to Option B, the Face Amount of Insurance will be decreased by the amount
in the Policy Account on the date of change. SAFECO has reserved the right
to decline to make such change if it would reduce the Face Amount of
Insurance below the minimum amount for which SAFECO would then issue the
Policy under its then existing administrative rules. If the change is from
Option B to Option A, the Face Amount of Insurance will be increased by the
amount in the Policy Account on the date of change. Such decreases and
increases in the Face Amount of Insurance are made so that the death benefit
remains the same on the date of change. There is no charge for this change.
Any changes will take effect at the beginning of the Policy Month that coincides
with or next follows the date SAFECO approves the request. SAFECO has reserved
the right to decline to make any change that is determined would cause the
Policy to fail to qualify as life insurance under applicable tax law as
interpreted by SAFECO. An Owner may ask for a change by completing an
application for change and sending it to the Administrative Office.
TRANSFERS AMONG INVESTMENT OPTIONS
At the request of the Owner and subject to allocation limits and any conditions
or requirements that SAFECO may impose, SAFECO will transfer amounts from the
Policy Account value in any Investment Division to one or more other Investment
Divisions of the Separate Account or to the Guaranteed Interest Division. The
owner can maintain balances in a maximum of nine investment divisions at any one
time. The minimum amount that SAFECO will transfer from the Policy Account value
in an Investment Division on any date is the lesser of $200.00 or the Policy
Account value in that Investment Division on that date.
The Owner is permitted to transfer, on any Policy Anniversary, the Policy
Account value from the unloaned value in the Guaranteed Interest Division to one
or more Investment Divisions of the Separate Account. However, SAFECO will make
such a transfer only if (1) SAFECO receives the request for transfer at least 30
days before that Policy Anniversary; and (2) the amount requested is not more
than the greater of 25% of the unloaned value in the Guaranteed Interest
Division on that Anniversary or $200.00. In no event will more than such
unloaned value be transferred. The minimum amount that SAFECO will transfer from
the Policy Account value in the Guaranteed Interest Division on any Policy
Anniversary is the lesser of $200.00 or the unloaned value in the Guaranteed
Interest Division on that date.
16
<PAGE>
Twelve transfers may be made in a Policy Year without charge. After the first
twelve transfers in a Policy Year, SAFECO may charge up to $25.00 for each
additional transfer in that Policy Year. The current transfer fee is $25.00. The
transfer charge will be allocated equally between the investment options from
which the requested amounts were transferred. However, under certain systematic
investing programs this charge will not be applicable.
All such requests must be in writing (or by telephone request, if authorized) to
the Administrative Office. A transfer will take effect on the date SAFECO
receives it at its Administrative Office, except that a transfer requested from
the Guaranteed Interest Division will be made as of the Policy Anniversary
following the date the request is received by SAFECO.
POLICY LOANS
The Owner may obtain a loan on the Policy while it has a loan value. The Policy
will be the only security for the loan. The initial loan and each subsequent
addition to the loan must be for at least $200.00. Any amount on loan is part of
the Policy Account. The loan value on any date is the Cash Surrender Value on
that date, less interest at the loan interest rate to the next Policy
Anniversary. The amount of the loan may not be more than the loan value.
A request for a Policy loan must be in writing to the Administrative Office. The
Owner can elect how much of the loan is to be allocated to the unloaned value in
the Guaranteed Interest Division and to the value in each Investment Division.
Such values will be determined on the date the request is received.
If a portion of the loan is allocated to an Investment Division of the Separate
Account, SAFECO will redeem Units sufficient to cover that part of the loan and
transfer the amount to the loaned portion of the Guaranteed Interest Division.
SAFECO will credit interest on amounts securing loans at a rate 2% below the
rate charged as loan interest during the first 12 Policy Years and at a rate
equal to the rate charged thereafter. This results in a 2% net loan cost for
Policy Years 1-12 and a zero net loan cost thereafter.
If the Owner does not elect an allocation, the loan will be allocated on the
basis of the monthly deduction allocation percentages then in effect. If the
loan cannot be allocated on the basis of the Owner's direction or those
percentages, the loan will be based on the proportion that the unloaned value in
the Guaranteed Interest Division and the values in the Investment Divisions of
the Separate Account bear to the total unloaned value in the Policy Account.
Any amount that secures a loan remains part of the Policy Account, but is
maintained in the loaned portions of the Guaranteed Interest Division.
LOAN INTEREST
Interest, payable in advance, will be charged on any Policy loan from the date
of the loan and shall be due and payable on each Policy Anniversary. The rate is
determined at the beginning of each Policy Year and applies to any new or
existing loan under the Policy during the Policy Year next following the date of
determination.
The maximum loan interest rate for a Policy Year is the greater of: (1) the
"Published Monthly Average," as defined below, for the calendar month that ends
two months before the date of determination; or (2) 5%. "Published Monthly
Average" means the Monthly Average Corporate Yield shown in Moody's Corporate
Bond Yield Averages published by Moody's Investors Service, Inc., or any
successor thereto. If such averages are no longer published, SAFECO will use
such other averages as may be established by regulation by the insurance
supervisory official of the jurisdiction in which the Policy is delivered. In no
event will the loan interest rate for a Policy Year be greater than the maximum
rate permitted by applicable law.
No change in the rate shall be less than 1/2 of 1% a year. SAFECO may increase
the rate whenever the maximum rate as determined by clause (1) of the preceding
paragraph increases by 1/2 of 1% or more. SAFECO will reduce the rate to or
below the maximum rate as determined by clause (1) if such maximum is lower than
the rate to be charged by 1/2 of 1% or more.
SAFECO will notify the Owner of the initial loan interest rate when a loan is
made. SAFECO will also give the Owner advance written notice of any increase in
the interest rate of any outstanding loan. Loan interest is due on each Policy
Anniversary. If the interest is not paid when due, it will be added to the
outstanding loan and allocated on the basis of the deduction allocation
percentages then in effect. If the allocation cannot be made on the basis of
these percentages, the allocation will be based on the proportion that the
unloaned value in the Guaranteed Interest
17
<PAGE>
Division and the values in the Investment Divisions bear to the total unloaned
value in the Policy Account. The unpaid interest will then be treated as part of
the loaned amount and will bear interest at the loan rate.
LOAN REPAYMENT
All or part of a Policy loan may be repaid at any time while the Primary Insured
is alive and the Policy is in force. SAFECO will assume that any payment made,
while a loan is outstanding, is a loan repayment, unless SAFECO is notified in
writing that it is a premium payment. Repayments will be allocated among the
Guaranteed Interest Division and the Investment Divisions on the basis of the
premium allocation percentages then in effect. This does not apply to automatic
bank withdrawal payments, as they will always be considered premium. Each loan
repayment must be at least $50.00 with an exception for the final loan repayment
which may be less.
Failure to repay a Policy loan or to pay loan interest will not terminate the
Policy unless the Net Cash Surrender Value is less than the monthly deduction
due on a Monthly Policy Anniversary, in which case the Grace Period Provision
would apply. (See "Premiums -- Grace Period" on Page 10.)
A Policy loan will have a permanent effect on the benefits under the Policy even
if it is repaid, because the investment results of the Investment Divisions will
apply only to the amount remaining in such Investment Divisions. The longer the
loan is outstanding, the greater the effect is likely to be. Depending on the
investment results of the Investment Divisions while the loan is outstanding,
the effect could be favorable or unfavorable.
FULL CASH SURRENDER
The Owner may give up the Policy for its Net Cash Surrender Value at any time
while the Primary Insured is living. All insurance coverage will then cease.
Upon a full cash surrender of the Policy, Surrender Charges may be incurred.
(See "Charges and Deductions -- Full Surrenders" on Page 12.)
PARTIAL CASH WITHDRAWAL
After the first Policy Year, an Owner may ask for a partial withdrawal of the
Net Cash Surrender Value. Such partial withdrawal must be at least $400.00. A
partial withdrawal will result in reductions in the death benefit, the Net Cash
Surrender Value and the Policy Account. Such reductions are equal to the amount
requested plus the partial withdrawal charge. (See "Charges and Deductions --
Partial Withdrawals" on Page 12.)
Any request for a partial withdrawal must be in writing to the Administrative
Office. The Owner may inform SAFECO of the amount of each partial withdrawal
that is to come from the unloaned value in the Guaranteed Division and the
amount that is to come from values in each Investment Division. If the Owner
does not so inform SAFECO, the partial withdrawal will be made on the basis of
the monthly allocation percentages then in effect. If SAFECO cannot make the
partial withdrawal on the basis of the direction of the Owner or those
percentages, the partial withdrawal will be based on the proportion that the
unloaned value in the Guaranteed Interest Division and the values in the
Investment Division bear to the total unloaned value in the Policy Account. The
partial withdrawal charges will be allocated equally between the investment
options from which the requested amounts were withdrawn.
SAFECO reserves the right to decline a request for a partial withdrawal if (a)
the death benefit would be reduced below the minimum amount for which SAFECO
would then issue a Policy; or (b) SAFECO determines that the partial withdrawal
would cause the Policy to fail to qualify as life insurance under applicable tax
law.
VALUATION
The amount in the Policy Account in an Investment Division at any time is equal
to the number of units attributable to the Policy Account in that Investment
Division multiplied by the Division Unit Value at that time. Amounts allocated,
transferred or added to an Investment Division are used to purchase units of
that Division. Units are redeemed when amounts are deducted, transferred or
withdrawn.
Unit Values for the Investment Divisions will be determined at the close of
business on each day in which the degree of trading in the portfolio of the
Fund(s) might materially affect the net asset value of such portfolio. Normally,
this would be each day that the New York Stock Exchange is open. The Unit Value
of an Investment Division on any business day is equal to the Unit Value for
that Division on the immediately preceding business day multiplied by the net
investment factor for that Division on that business day.
18
<PAGE>
The net investment factor for an Investment Division on any business day is (a)
divided by (b), minus (c), where:
(a) is the net asset value of the shares of the designated portfolio at the
close of business on each business day before any Policy transactions are
made on that day, plus the per share amount of any dividend or capital gain
distribution paid by the portfolio;
(b) is the value of the assets in that Investment Division at the close of
business on the immediately preceding business day after all Policy
transactions were made for that day; and
(c) is a charge for the mortality and expense risks, plus any charge for that
day for taxes or amounts set aside as a reserve for taxes.
A Unit Value may increase or decrease in value from business day to business
day.
OTHER PROVISIONS
- ------------------------------------------------------------------------
OWNER
If the Primary Insured is living on the Final Policy Date, the Owner will
receive the amount in the Policy Account on that date minus any outstanding loan
and loan interest. The Policy will then end.
The Owner is entitled to exercise all the rights of the Policy while the Primary
Insured is living. To exercise a right the Owner does not need the consent of
anyone who has only a conditional or future ownership interest in the Policy.
BENEFICIARY
If two or more persons are named as Beneficiary, those who survive the insured
will share the insurance benefits equally, unless other arrangements have been
made. If there is no designated Beneficiary living at the death of the insured,
the benefits will be paid to the Owner or Owner's estate.
If any Beneficiary dies within 60 days after the insured, and before payment of
any proceeds, payment will be made as though the Beneficiary had died before the
insured. The Beneficiary designation may include provisions that replace the
ones described here.
CHANGING OWNER OR BENEFICIARY
While the insured is living, the Owner or Beneficiary may be changed by
providing written notice from the Policy Owner to the Administrative Office.
Such a change will be effective when written notice is received and recorded and
will control payment of proceeds made after that time.
ASSIGNMENT
The Policy may be assigned, but SAFECO will not be bound by an assignment unless
it has received such assignment in writing. The Owner's rights and those of any
other person under the Policy will be subject to the assignment. SAFECO assumes
no responsibility for the validity of an assignment. A collateral assignment
will not change ownership. An absolute assignment will be considered as a change
of ownership to the assignee.
ADMINISTRATION OF THE POLICIES
SAFECO has primary responsibility for all administration of the Policies and the
Separate Account. SAFECO has, however, retained Financial Administrative
Services, Inc. ("FAS") pursuant to a servicing agreement to provide certain
administrative services to SAFECO and its policyholders. On December 31, 1993,
PM Holdings, Inc., a holding company owned by Phoenix Home Life Mutual Insurance
Company, bought Fleet Administrative Services, Inc., and renamed the company
Financial Administrative Services, Inc., Prior to December 31, 1993, FAS was
owned by Fleet Financial Group. The address of the Administrative Office
referenced in this Prospectus is P.O. Box 290752, Wethersfield, Connecticut
06129-0752. This office has been established and is managed by FAS on behalf of
SAFECO and other life insurance companies which enter into similar servicing
agreements with FAS.
19
<PAGE>
FAS provides to SAFECO administration, electronic data processing and
policyholder services that are normally required for the Policies. All such
services are performed in accordance with the guidelines and standards
established by SAFECO.
DELAY OF PAYMENTS
- ------------------------------------------------------------------------
SAFECO will generally pay Policy proceeds within seven business days of receipt
of a completed request for such payment. However, SAFECO reserves the right to
postpone surrender payments and loans from the Guaranteed Interest Division for
up to six months. SAFECO reserves the right to postpone any type of payment from
the Separate Account for any period when:
1. the New York Stock Exchange is closed other than customary weekend and
holiday closings;
2. trading on the Exchange is restricted;
3. an emergency exists as a result of which it is not reasonably practicable to
dispose of securities held in the Separate Account or determine their value;
or
4. the Securities and Exchange Commission so permits delay for the protection
of security holders.
The applicable rules of the Securities and Exchange Commission shall govern as
to whether the conditions in 2 and 3 exist.
MANAGEMENT OF THE COMPANY
- ------------------------------------------------------------------------
The following are the Officers and Directors of SAFECO:
OFFICERS
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS* WITH SAFECO
- ------------------------------ --------------------------------------------------
<S> <C>
Roger H. Eigsti Chairman of the Board
Randall H. Talbot President
John P. Fenlason Senior Vice President
James T. Flynn Vice President, Controller and Assistant Secretary
Roger F. Harbin Senior Vice President and Actuary
Michael J. Kinzer Vice President and Chief Actuary
Rod A. Pierson Senior Vice President and Secretary
</TABLE>
DIRECTORS
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES
BUSINESS ADDRESS* WITH SAFECO
- ------------------------------ --------------------------------------------------
<S> <C>
Donald S. Chapman Director
Boh A. Dickey Director
Roger H. Eigsti Director
Rod A. Pierson Director
James W. Ruddy Director
Robert L. Spaulding Director
Randall H. Talbot Director
Robert W. Swegle Director
Richard E. Zunker Director
</TABLE>
* The business address for Messrs. Talbot, Zunker, Fenlason, Flynn, Harbin,
and Kinzer is 15411 N.E. 51st Street, Redmond, Washington 98052. The
business address for all other individuals listed is SAFECO Plaza, Seattle,
Washington 98185.
20
<PAGE>
TAX STATUS
- ------------------------------------------------------------------------
NOTE: THE FOLLOWING DESCRIPTION IS BASED UPON SAFECO'S UNDERSTANDING OF CURRENT
FEDERAL INCOME TAX LAW APPLICABLE TO LIFE INSURANCE IN GENERAL. SAFECO CANNOT
PREDICT THE PROBABILITY THAT ANY CHANGES IN SUCH LAWS WILL BE MADE. PURCHASERS
ARE CAUTIONED TO SEEK COMPETENT TAX ADVICE REGARDING THE POSSIBILITY OF SUCH
CHANGES. SECTION 7702 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"), DEFINES THE TERM "LIFE INSURANCE CONTRACT" FOR PURPOSES OF THE CODE.
SAFECO BELIEVES THAT THE POLICIES TO BE ISSUED WILL QUALIFY AS "LIFE INSURANCE
CONTRACTS" UNDER SECTION 7702. SAFECO DOES NOT GUARANTEE THE TAX STATUS OF THE
POLICIES. PURCHASERS BEAR THE COMPLETE RISK THAT THE POLICIES MAY NOT BE TREATED
AS "LIFE INSURANCE" UNDER FEDERAL INCOME TAX LAWS. PURCHASERS SHOULD CONSULT
THEIR OWN TAX ADVISERS. IT SHOULD BE FURTHER UNDERSTOOD THAT THE FOLLOWING
DISCUSSION IS NOT EXHAUSTIVE AND THAT SPECIAL RULES NOT DESCRIBED IN THIS
PROSPECTUS MAY BE APPLICABLE IN CERTAIN SITUATIONS.
INTRODUCTION
The discussion contained herein is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax adviser. No attempt
is made to consider any applicable state or other tax laws. Moreover, the
discussion herein is based upon SAFECO's understanding of current federal income
tax laws as they are currently interpreted. No representation is made regarding
the likelihood of continuation of those current federal income tax laws or of
the current interpretations by the Internal Revenue Service.
SAFECO is taxed as a life insurance company under the Code. For federal income
tax purposes, the Separate Account is not a separate entity from SAFECO and its
operations form a part of SAFECO.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on the
underlying assets of variable life insurance policies. The Code provides that a
variable life insurance policy will not be treated as life insurance 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 Policy
as a life insurance contract would result in imposition of federal income tax on
the Owner with respect to earnings allocable to the Policy prior to the receipt
of payments under the Policy. The Code contains a safe harbor provision which
provides that life insurance policies such as the Policies meet the
diversification requirements if, as of the close of each quarter, the underlying
assets meet the diversification standards for a regulated investment company and
no more than fifty-five (55%) percent of the total assets consist of cash, cash
items, U.S. Government securities and securities of other regulated investment
companies. There is an exception for securities issued by the U.S. Treasury in
connection with variable life insurance policies.
On March 2, 1989, the Treasury Department issued Regulations (Treas. Reg.
Section 1.817-5), which establish diversification requirements for the
investment portfolios underlying variable contracts such as the Policies. 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: (i) no more than 55% of the value of the total assets
of the portfolio is represented by any one investment; (ii) no more than 70% of
the value of the total assets of the portfolio is represented by any two
investments; (iii) no more than 80% of the value of the total assets of the
portfolio is represented by any three investments; and (iv) no more than 90% of
the value of the total assets of the portfolio is represented by any four
investments. For purposes of these Regulations, all securities of the same
issuer are treated as a single investment.
The Technical and Miscellaneous Revenue Act of 1988 ("TAMRA") 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."
SAFECO intends that each portfolio of the Funds underlying the Policies will be
managed by Fidelity Management & Research Company, Lexington Management
Corporation and SAFECO Asset Management Company 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 Owner to be
21
<PAGE>
treated as the owner of the assets of the Separate Account, thereby resulting in
the loss of favorable tax treatment for the Policy. 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 Policy 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 policy owner was not
the owner of the assets of the separate account. It is unknown whether these
differences, such as the Owner's ability to transfer among investment choices or
the number and type of investment choices available, would cause the Owner to be
considered as the owner of the assets of the Separate Account.
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 Owner being
retroactively determined to be the owner of the assets of the Separate Account.
Due to the uncertainty in this area, SAFECO reserves the right to modify the
Policy in an attempt to maintain favorable tax treatment.
TAX TREATMENT OF THE POLICY
The Policy has been designed to comply with the definition of life insurance
contained in Section 7702 of the Code. Although some interim guidance has been
provided and proposed regulations have been issued, final regulations have not
been adopted. Section 7702 of the Code requires the use of reasonable mortality
and other expense charges. In establishing these charges, SAFECO has relied on
the interim guidance provided in IRS Notice 88-128 and proposed regulations
issued on July 5, 1991. Currently, there is even less guidance as to a Policy
issued on a substandard risk basis and thus it is even less clear whether a
Policy issued on such basis would meet the requirements of Section 7702 of the
Code.
While SAFECO has attempted to comply with Section 7702, the law in this area is
very complex and unclear. There is a risk, therefore, that the Internal Revenue
Service will not concur with SAFECO's interpretations of Section 7702 that were
made in determining such compliance. In the event the Policy is determined not
to so comply, it would not qualify for the favorable tax treatment usually
accorded life insurance policies. Owners should consult their tax advisers with
respect to the tax consequences of purchasing the Policy.
POLICY PROCEEDS
The tax treatment accorded to loan proceeds and/or surrender payments from the
Policies will depend on whether the Policy is considered to be a modified
endowment contract. (See "Tax Treatment of Loans and Surrenders" on Page 22.)
Otherwise, SAFECO believes that the Policy should receive the same federal
income tax treatment as any other type of life insurance. As such, the death
benefit thereunder is excludable from the gross income of the Beneficiary under
Section 101(a) of the Code. Also, the Owner is not deemed to be in constructive
receipt of the Policy Account or Cash Surrender Value, including increments
thereon, under a Policy until there is a distribution of such amounts.
Federal, state and local estate, inheritance and other tax consequences of
ownership, or receipt of Policy proceeds, depend on the circumstances of each
Owner or Beneficiary.
TAX TREATMENT OF LOANS AND SURRENDERS
Section 7702A of the Code sets forth the rules for determining when a life
insurance policy will be deemed to be a modified endowment contract. A modified
endowment contract is a contract which is entered into or materially changed on
or after June 21, 1988 and fails to meet the 7-pay test. A Policy fails to meet
the 7-pay test when the cumulative amount paid under the Policy at any time
during the first seven Policy Years exceeds the sum of the net level premiums
which would have been paid on or before such time if the Policy provided for
paid-up future benefits after the payment of seven level annual premiums. A
material change would include any increase in the future benefits or addition of
qualified additional benefits provided under a Policy unless the increase is
attributable to: (1) the payment of premiums necessary to fund the lowest death
benefit and qualified additional benefits payable in the first seven Policy
years; or (2) the crediting of interest or other earnings (including
policyholder dividends) with respect to such premiums.
22
<PAGE>
Furthermore, any Policy received in exchange for a Policy classified as a
modified endowment contract will be treated as a modified endowment contract
regardless of whether it meets the 7-pay test. The status of an exchange of a
contract issued before June 21, 1988 is unclear; however, the Internal Revenue
Service has taken the position in a Private Letter Ruling that a contract
received in an exchange on or after June 21, 1988 will be considered as entered
into as of the date of the exchange and therefore subject to Section 7702A.
Due to the flexible premium nature of the Policy, the determination of whether
it qualifies for treatment as a modified endowment contract depends on the
individual circumstances of each Policy.
If the Policy is classified as a modified endowment contract, then surrenders
and/or loan proceeds are taxable to the extent of income in the Policy. Such
distributions are deemed to be on a last-in, first-out basis, which means the
taxable income is distributed first. Loan proceeds and/or surrender payments may
also be subject to an additional 10% federal income tax penalty applied to the
income portion of such distribution. The penalty shall not apply, however, to
any distributions: (1) made on or after the date on which the taxpayer reaches
age 59 1/2; (2) which is attributable to the taxpayer becoming disabled (within
the meaning of Section 72(m)(7) of the Code); or (3) which is part of a series
of substantially equal periodic payments made not less frequently than annually
for the life (or life expectancy) of the taxpayer or the joint lives (or joint
life expectancies) of such taxpayer and his beneficiary.
If a Policy is not classified as a modified endowment contract, then any
surrenders will be treated first as a recovery of the investment in the Policy
which would not be received as taxable income. However, if a distribution is the
result of a reduction in benefits under the Policy within the first fifteen
years after the Policy is issued in order to comply with Section 7702, such
distribution will, under rules set forth in Section 7702, be taxed as ordinary
income to the extent of income in the Policy.
Any loans from a Policy which is not classified as a modified endowment
contract, will be treated as indebtedness of the Owner and not a distribution.
Personal interest payable on a loan under a Policy owned by an individual is
generally not deductible. Furthermore, no deduction will be allowed for interest
on loans under Policies covering the life of any employee or officer of the
taxpayer or any person financially interested in the business carried on by the
taxpayer to the extent the indebtedness for such employee, officer or
financially interested person exceeds $50,000. The deductibility of interest
payable on Policy loans may be subject to further rules and limitations under
Sections 163 and 264 of the Code.
Policy Owners should seek competent tax advice on the tax consequences of taking
loans, distributions or surrendering any Policy.
MULTIPLE POLICIES
TAMRA further provides that multiple contracts that are issued within a calendar
year period to the same owner by one company or its affiliates are treated as
one contract for purposes of determining the taxable portion of any loans or
distributions. Such treatment may result in adverse tax consequences including
more rapid taxation of the loans or distributed amounts from such combination of
contracts. Policy Owners should consult a tax adviser prior to purchasing more
than one Modified Endowment Contract in any calendar year period.
TAX TREATMENTS OF ASSIGNMENTS
An assignment of a Policy may be a taxable event. Policy Owners should therefore
consult competent tax advisers should they wish to assign their Policies.
QUALIFIED PLANS
The Policies may be used in conjunction with certain qualified plans. Because
the rules governing such use are complex, a purchaser should not do so until he
has consulted a competent qualified plans consultant.
SEPARATE ACCOUNT VOTING RIGHTS
- ------------------------------------------------------------------------
In accordance with its view of present applicable law, SAFECO will vote the
shares with respect to each Fund portfolio held in the Separate Account at
regular and special meetings of the shareholders of the Fund in accordance with
instructions received from persons having the voting interest in the Separate
Account. SAFECO will vote
23
<PAGE>
shares with respect to each Fund portfolio, for which it has not received
instructions, in the same proportion as it votes shares for which it has
received instructions. SAFECO will vote shares of the Fund portfolios which it
owns in the same proportion as it votes shares for which it has received
instructions.
However, if the 1940 Act or any regulation thereunder should be amended or if
the present interpretation thereof should change, and as a result SAFECO
determines that it is permitted to vote the shares of the Funds in its own
right, it may elect to do so.
The voting interests of the Owner (or the Beneficiary) in the Funds will be one
vote for each share. The number of shares will be determined as follows: The
Policy Account allocated to the Investment Division will be divided by the net
asset value of one share of the corresponding Fund portfolio as of the record
date for the shareholder meeting of the Fund. Fractional votes are counted.
Policy Account values in the Guaranteed Interest Division will not be considered
in determining the voting interests of the Owner.
The number of shares which a person has a right to vote will be determined as of
the record date set by the Fund's Board which must be at least 14 days and not
more than 90 days prior to the meeting of the Fund.
Each person having the voting interest in the Separate Account will receive
periodic reports relating to the Fund(s) in which he or she has an interest,
proxy material and a form with which to give such voting instructions with
respect to the proportion of the shares held in the Separate Account
corresponding to his or her interest in the Separate Account.
DISREGARD OF VOTING INSTRUCTIONS
SAFECO may, when required to do so by state insurance authorities, vote shares
of the Fund without regard to instructions from Owners if voting in accordance
with such instructions would require such shares to be voted to cause any
portfolio of the Funds to make (or refrain from making) investments which would
result in changes in the sub-classification or investment objectives of the
Funds or a portfolio. SAFECO may also disapprove changes in the investment
policy initiated by the Owners or Trustees of the Funds, if such disapproval is
reasonable and is based on a good faith determination by SAFECO that the change
would violate state law or the change would not be consistent with the
investment objective of the Funds or portfolio or which varies from the general
quality and nature of investments and investment techniques used by other funds
with similar investment objectives underlying other separate accounts of SAFECO
or of an affiliated life insurance company. In the event that SAFECO does
disregard voting instructions, a summary of that action and the reasons for such
action will be included in the next semi-annual report to Owners.
DISTRIBUTION OF THE POLICIES
- ------------------------------------------------------------------------
The Policy is sold by licensed insurance agents, where the Policy may be
lawfully sold, who are registered representatives of broker-dealers which are
registered under the Securities Exchange Act of 1934 and are members of the
National Association of Securities Dealers, Inc.
The Policy will be distributed through the principal underwriter for the
Separate Account, SAFECO Securities, Inc., P.O. Box 34890, Seattle, Washington
98124-1890, a wholly-owned subsidiary of SAFECO Corporation. Prior to April 29,
1994, PNMR Securities, Inc., an affiliate of SAFECO Securities, acted as
principal underwriter for the Separate Account. SAFECO pays commissions to the
selling broker-dealers which may vary.
The commissions paid to registered representatives on the sale of the Policies
are not more than 60% of the premiums paid in the first year nor more than 3%
during renewal years. In addition, commissions, overrides and bonuses may be
paid to the distributors of the Policies. There are no separate deductions,
other than previously described, to pay sales commissions or sales expenses.
REPORTS TO POLICY OWNERS
- ------------------------------------------------------------------------
Within 30 days after every third Policy Month, a quarterly statement will be
sent to each Owner. Taken together every four Quarterly Statements make up an
annual statement providing a complete year to date policy history for the
preceding Policy Year. These statements will show the current amount of death
benefits payable under the Policy,
24
<PAGE>
the current value of the Policy Account, the current Cash Surrender Value and
any loan, including loan interest. These statements will also show premiums
paid, investment returns and all charges deducted during the Policy Year.
LEGAL PROCEEDINGS
- ------------------------------------------------------------------------
There are no legal proceedings to which the Separate Account or the Principal
Underwriter is a party. SAFECO is engaged in various kinds of routine litigation
which, in the opinion of SAFECO, is not of material importance in relation to
the total capital and surplus of SAFECO.
EXPERTS
- ------------------------------------------------------------------------
The financial statements of the Separate Account and SAFECO appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their reports thereon appearing
elsewhere herein and in the Registration Statement. Such financial statements
have been included herein in reliance on their reports given on the authority of
such firm as experts in accounting and auditing.
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
The financial statements of SAFECO that are included herein should be considered
only as bearing upon the ability of the Company to meet its obligations under
the Policy. They should not be considered as bearing upon the investment
experience of the Investment Divisions of the Separate Account.
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 advisors or other
companies that provide services to the Separate Account do not properly process
and calculate date related information from and after January 1, 2000. This is
commonly called the "Year 2000 problem." SAFECO Life is taking steps it believes
are reasonably designed to address the Year 2000 problem with respect to the
computer systems that each of them uses and to obtain satisfactory assurances
that comparable steps are being taken by each of SAFECO Life's other, major
service providers. It is not anticipated that the Separate Account will incur
any charges or that there will be any difficulties in accurate and timely
reporting resulting from the change in year from 1999 to 2000."
25
<PAGE>
SAFECO LIFE
SEPARATE ACCOUNT SL
AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
A-1
<PAGE>
SEPARATE ACCOUNT SL
DECEMBER 31, 1997
TABLE OF CONTENTS
Statement of Assets and Liabilities....................................... A-4
Statements of Operations and Changes in Net Assets........................ A-6
Notes to Financial Statements............................................. A-16
A-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of SAFECO Life Insurance Company and
Unitholders of SAFECO Life Separate Account SL
We have audited the accompanying statement of assets and liabilities of the
Investment Divisions of SAFECO Life Separate Account SL (comprising,
respectively, the Fidelity VIP Growth, Fidelity VIP Money Market, Fidelity VIP
Equity Income, Fidelity VIP Overseas, Fidelity VIP High Income, Fidelity VIP II
Investment Grade Bond, Fidelity VIP II Asset Manager, Fidelity VIP II Index 500,
Fidelity VIP II Contrafund, Fidelity VIP II Asset Manager: Growth, Fidelity VIP
III Growth Opportunities, Fidelity VIP III Growth & Income, Fidelity VIP III
Balanced, Lexington Natural Resources, Lexington Emerging Markets, SAFECO RST
Equity, SAFECO RST Growth, SAFECO RST Northwest, SAFECO RST Bond, SAFECO RST
Small Company Stock, Wanger U.S. Small Cap Advisor, American Century VP
International, and American Century VP Balanced Investment Divisions) as of
December 31, 1997, and the related statements of operations and changes in net
assets, and the historical unit values for each of the periods indicated
therein. These financial statements and historical unit values are the
responsibility of SAFECO Life Separate Account SL's management. Our
responsibility is to express an opinion on these financial statements and
historical 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 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
the historical unit values. Our procedures included confirmation of portfolio
shares owned as of December 31, 1997, by correspondence with the underlying
portfolio of each Investment Division. 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 unit values referred to
above present fairly, in all material respects, the financial position of each
of the respective Investment Divisions of SAFECO Life Separate Account SL as
listed above at December 31, 1997, the results of their operations, the changes
in their net assets, and their historical unit values for each of the periods
indicated therein, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
February 6, 1998
A-3
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
SHARES COST MARKET VALUE
----------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Investments in Variable Insurance Products Fund ("VIP"):
Fidelity VIP Growth Portfolio 481,729 $ 14,246,974 $ 17,872,159
Fidelity VIP Money Market Portfolio 2,155,090 2,155,090 2,155,090
Fidelity VIP Equity Income Portfolio 410,297 7,929,444 9,962,002
Fidelity VIP Overseas Portfolio 270,450 4,783,501 5,192,639
Fidelity VIP High Income Portfolio 124,382 1,571,235 1,689,105
Investments in Variable Insurance Products Fund II ("VIP II"):
Fidelity VIP II Investment Grade Bond Portfolio 69,245 818,372 869,715
Fidelity VIP II Asset Manager Portfolio 527,583 7,972,973 9,501,768
Fidelity VIP II Index 500 Portfolio 50,122 4,537,759 5,733,444
Fidelity VIP II Contrafund Portfolio 265,163 4,344,910 5,287,355
Fidelity VIP II Asset Manager: Growth Portfolio 93,052 1,334,963 1,522,327
Investments in Variable Insurance Products Fund III ("VIP III"):
Fidelity VIP III Growth Opportunities Portfolio 11 200 215
Fidelity VIP III Growth & Income Portfolio 17 206 216
Fidelity VIP III Balanced Portfolio 14 200 210
Investments in Lexington Natural Resources Trust:
Lexington Natural Resources Portfolio 68,652 1,004,350 1,023,599
Investments in Lexington Emerging Markets Fund, Inc.:
Lexington Emerging Markets Portfolio 69,538 745,585 619,582
Investments in SAFECO Resource Series Trust ("SAFECO RST"):
SAFECO RST Equity Portfolio 99,572 2,555,545 2,507,230
SAFECO RST Growth Portfolio 204,690 4,759,508 4,779,504
SAFECO RST Northwest Portfolio 11,366 177,870 172,765
SAFECO RST Bond Portfolio 16,894 191,150 186,511
SAFECO RST Small Company Stock Portfolio 230 2,905 2,834
Investments in Wanger Advisors Trust:
Wanger U.S. Small Cap Advisor Portfolio 132 2,801 2,834
Investments in American Century Variable Portfolios, Inc.:
American Century VP International Portfolio 733 5,001 5,016
American Century VP Balanced Portfolio 25 200 205
-------------- --------------
TOTAL ASSETS $ 59,140,742 69,086,325
-------------- --------------
--------------
LIABILITIES
Payable (To) From SAFECO Life (10,937)
--------------
TOTAL LIABILITIES (10,937)
--------------
--------------
NET ASSETS $ 69,075,388
--------------
--------------
</TABLE>
See Notes To Financial Statements
A-4
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNITS UNIT VALUE NET ASSETS
------------- ----------- --------------
<S> <C> <C> <C>
Net Assets represented in units:
Accumulation Life:
Fidelity VIP Growth Division 68,969.046 $ 258.785 $ 17,848,160
Fidelity VIP Money Market Division 16,480.691 124.936 2,059,034
Fidelity VIP Equity Income Division 33,565.935 296.489 9,951,921
Fidelity VIP Overseas Division 31,128.490 166.539 5,184,093
Fidelity VIP High Income Division 10,155.335 166.098 1,686,784
Fidelity VIP II Investment Grade Bond Division 6,121.270 142.369 871,479
Fidelity VIP II Asset Manager Division 46,953.948 202.303 9,498,945
Fidelity VIP II Index 500 Division 24,797.596 229.037 5,679,555
Fidelity VIP II Contrafund Division 29,894.414 176.648 5,280,776
Fidelity VIP II Asset Manager: Growth Division 8,939.899 170.101 1,520,688
Lexington Natural Resources Division 8,345.503 122.254 1,020,272
Lexington Emerging Markets Division 7,395.103 82.854 612,716
SAFECO RST Equity Division 16,971.864 145.745 2,473,560
SAFECO RST Growth Division 28,815.751 165.079 4,756,876
SAFECO RST Northwest Division 1,268.243 128.860 163,426
SAFECO RST Bond Division 1,722.889 108.135 186,304
Premier Accumulation Life:
Fidelity VIP Growth Division* 376.315 10.474 3,942
Fidelity VIP Money Market Division* 9,979.358 10.083 100,617
Fidelity VIP Equity Income Division* 828.604 10.688 8,856
Fidelity VIP Overseas Division* 807.155 10.049 8,111
Fidelity VIP High Income Division* 201.866 10.191 2,057
Fidelity VIP II Investment Grade Bond Division* 20.000 10.129 203
Fidelity VIP II Asset Manager Division* 243.092 10.443 2,539
Fidelity VIP II Index 500 Division* 4,944.463 10.764 53,224
Fidelity VIP II Contrafund Division* 370.892 10.274 3,810
Fidelity VIP II Asset Manager: Growth Division* 134.461 10.554 1,419
Fidelity VIP III Growth Opportunities Division* 20.000 10.765 215
Fidelity VIP III Growth & Income Division* 20.000 10.494 210
Fidelity VIP III Balanced Division* 20.000 10.512 210
Lexington Natural Resources Division* 355.341 9.316 3,311
Lexington Emerging Markets Division* 706.832 9.820 6,941
SAFECO RST Equity Division* 3,160.043 10.643 33,631
SAFECO RST Growth Division* 2,955.562 10.693 31,605
SAFECO RST Northwest Division* 838.553 10.504 8,808
SAFECO RST Bond Division* 20.000 10.134 203
SAFECO RST Small Company Stock Division* 282.490 10.031 2,834
Wanger U.S. Small Cap Advisor Division* 280.917 10.089 2,834
American Century VP International Division* 481.844 10.406 5,014
American Century VP Balanced Division* 20.000 10.236 205
--------------
Total $ 69,075,388
--------------
--------------
</TABLE>
- ------------
* SAFECO Life owns twenty units in this investment division at December 31,
1997.
See Notes To Financial Statements
A-5
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 4,111,948 $ 1,861,626
Mortality and Expense Charge (Note 3) (530,007) (342,650)
------------ ------------
Net Investment Income (Loss) 3,581,941 1,518,976
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) on Investments 2,916,978 1,219,403
Net Change in Unrealized Appreciation (Depreciation) of
Investments 4,556,931 2,104,550
------------ ------------
Net Realized and Unrealized Gain (Loss) on Investments 7,473,909 3,323,953
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 11,055,850 4,842,929
------------ ------------
CHANGES IN NET ASSETS FROM POLICY RELATED TRANSACTIONS:
Transfers in from Net Premiums 18,502,688 17,165,491
Transfers out for Policy Related Transactions (7,729,946) (5,337,120)
Transfers between Separate Account SL's Divisions and (to)
from Guaranteed Interest Division, Net 14,439 2,039,756
Transfers in (out) - Operational Seed Money 4,600 0
Gain (Loss) Attributable to SAFECO Life (368) (2,777)
------------ ------------
NET CHANGE IN NET ASSETS FROM POLICY TRANSACTIONS 10,791,413 13,865,350
------------ ------------
NET CHANGE IN NET ASSETS 21,847,263 18,708,279
NET ASSETS, BEGINNING OF PERIOD 47,228,125 28,519,846
------------ ------------
NET ASSETS, END OF PERIOD $ 69,075,388 $ 47,228,125
------------ ------------
------------ ------------
</TABLE>
See Notes To Financial Statements
A-6
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------------
TOTAL FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP
SEPARATE GROWTH MONEY MARKET EQUITY INCOME OVERSEAS
ACCOUNT DIVISION DIVISION DIVISION DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 4,111,948 $ 516,357 $ 123,914 $ 730,426 $ 374,033
Mortality and Expense Charge (Note 3) (530,007) (142,564) (20,204) (78,115) (44,562)
------------- ------------- ------------- ------------- -------------
Net Investment Income (Loss) 3,581,941 373,793 103,710 652,311 329,471
------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on Investments 2,916,978 827,060 0 370,199 184,852
Net Change in Unrealized Appreciation
(Depreciation) of Investments 4,556,931 1,838,335 0 1,005,276 (59,527)
------------- ------------- ------------- ------------- -------------
Net Realized and Unrealized Gain (Loss) on
Investments 7,473,909 2,665,395 0 1,375,475 125,325
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS 11,055,850 3,039,188 103,710 2,027,786 454,796
------------- ------------- ------------- ------------- -------------
CHANGES IN NET ASSETS FROM POLICY RELATED
TRANSACTIONS:
Transfers in from Net Premiums 18,502,688 3,258,766 3,453,897 2,034,589 1,054,250
Transfers out for Policy Related Transactions (7,729,946) (1,806,612) (304,339) (1,045,252) (621,451)
Transfers between Separate Account SL's
Divisions and (to) from Guaranteed Interest
Division, Net 14,439 (447,640) (3,046,340) 38,834 79,895
Transfers in (out) - Operational Seed Money 4,600 200 200 200 200
Gain (Loss) Attributable to SAFECO Life (368) (4,554) 4,200 (555) (47)
------------- ------------- ------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM POLICY TRANSACTIONS 10,791,413 1,000,160 107,618 1,027,816 512,847
------------- ------------- ------------- ------------- -------------
NET CHANGE IN NET ASSETS 21,847,263 4,039,348 211,328 3,055,602 967,643
NET ASSETS, BEGINNING OF PERIOD 47,228,125 13,812,754 1,948,323 6,905,175 4,224,561
------------- ------------- ------------- ------------- -------------
NET ASSETS, END OF PERIOD $ 69,075,388 $ 17,852,102 $ 2,159,651 $ 9,960,777 $ 5,192,204
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes To Financial Statements
A-7
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
FIDELITY VIP
II FIDELITY VIP FIDELITY VIP FIDELITY VIP
FIDELITY VIP INVESTMENT II II II
HIGH INCOME GRADE BOND ASSET MANAGER INDEX 500 CONTRAFUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 118,089 $ 41,932 $ 990,660 $ 112,819 $ 104,398
Mortality and Expense Charge (Note 3) (14,472) (6,857) (80,822) (38,183) (38,914)
-------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) 103,617 35,075 909,838 74,636 65,484
-------------- -------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on Investments 106,691 (2,286) 264,306 212,725 264,916
Net Change in Unrealized Appreciation
(Depreciation) of Investments 37,852 26,567 415,386 805,228 553,496
-------------- -------------- -------------- -------------- --------------
Net Realized and Unrealized Gain (Loss) on
Investments 144,543 24,281 679,692 1,017,953 818,412
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 248,160 59,356 1,589,530 1,092,589 883,896
-------------- -------------- -------------- -------------- --------------
CHANGES IN NET ASSETS FROM POLICY RELATED
TRANSACTIONS:
Transfers in from Net Premiums 515,592 154,794 1,536,942 1,624,150 1,401,808
Transfers out for Policy Related
Transactions (211,691) (105,048) (1,463,169) (516,224) (551,232)
Transfers between Separate Account SL's
Divisions and (to) from Guaranteed
Interest Division, Net (308,488) 42,724 (246,774) 400,922 359,783
Transfers in (out) - Operational Seed Money 200 200 200 200 200
Gain (Loss) Attributable to SAFECO Life (104) 134 1,610 (318) (3,460)
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS (4,491) 92,804 (171,191) 1,508,730 1,207,099
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS 243,669 152,160 1,418,339 2,601,319 2,090,995
NET ASSETS, BEGINNING OF PERIOD 1,445,172 719,522 8,083,145 3,131,460 3,193,591
-------------- -------------- -------------- -------------- --------------
NET ASSETS, END OF PERIOD $ 1,688,841 $ 871,682 $ 9,501,484 $ 5,732,779 $ 5,284,586
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Notes To Financial Statements
A-8
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------------
FIDELITY VIP FIDELITY VIP
FIDELITY VIP II III III FIDELITY VIP LEXINGTON
ASSET MANAGER: GROWTH GROWTH & III NATURAL
GROWTH OPPORTUNITIES INCOME BALANCED RESOURCES
DIVISION DIVISION* DIVISION* DIVISION* DIVISION
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 1,396 $ 0 $ 6 $ 0 $ 28,016
Mortality and Expense Charge (Note 3) (11,707) 0 0 0 (8,036)
--------------- --------------- --------------- --------------- ---------------
Net Investment Income (Loss) (10,311) 0 6 0 19,980
--------------- --------------- --------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on
Investments 136,339 0 0 0 67,477
Net Change in Unrealized Appreciation
(Depreciation) of Investments 146,598 15 10 10 (39,627)
--------------- --------------- --------------- --------------- ---------------
Net Realized and Unrealized Gain
(Loss) on Investments 282,937 15 10 10 27,850
--------------- --------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 272,626 15 16 10 47,830
--------------- --------------- --------------- --------------- ---------------
CHANGES IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS:
Transfers in from Net Premiums 403,875 0 0 0 311,597
Transfers out for Policy Related
Transactions (309,588) 0 0 0 (116,998)
Transfers between Separate Account
SL's Divisions and (to) from
Guaranteed Interest Division, Net 345,415 0 0 0 98,814
Transfers in (out) - Operational Seed
Money 200 200 200 200 200
Gain (Loss) Attributable to SAFECO
Life 699 0 (6) 0 (1,273)
--------------- --------------- --------------- --------------- ---------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS 440,601 200 194 200 292,340
--------------- --------------- --------------- --------------- ---------------
NET CHANGE IN NET ASSETS 713,227 215 210 210 340,170
NET ASSETS, BEGINNING OF PERIOD 808,880 0 0 0 683,413
--------------- --------------- --------------- --------------- ---------------
NET ASSETS, END OF PERIOD $ 1,522,107 $ 215 $ 210 $ 210 $ 1,023,583
--------------- --------------- --------------- --------------- ---------------
--------------- --------------- --------------- --------------- ---------------
</TABLE>
- ------------
* For the period from October 30, 1997 (date of inception) to December 31,
1997.
See Notes To Financial Statements
A-9
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------
LEXINGTON
EMERGING SAFECO RST SAFECO RST SAFECO RST SAFECO RST
MARKETS EQUITY GROWTH NORTHWEST BOND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 403 $ 181,882 $ 770,267 $ 7,403 $ 9,834
Mortality and Expense Charge (Note 3) (6,227) (11,138) (26,851) (695) (658)
-------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) (5,824) 170,744 743,416 6,708 9,176
-------------- -------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on
Investments 41,428 59,430 370,229 11,705 1,907
Net Change in Unrealized Appreciation
(Depreciation) of Investments (122,637) (36,494) (4,000) (5,253) (4,286)
-------------- -------------- -------------- -------------- --------------
Net Realized and Unrealized Gain
(Loss) on Investments (81,209) 22,936 366,229 6,452 (2,379)
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS (87,033) 193,680 1,109,645 13,160 6,797
-------------- -------------- -------------- -------------- --------------
CHANGES IN NET ASSETS FROM POLICY
RELATED TRANSACTIONS:
Transfers in from Net Premiums 276,890 974,116 1,424,172 61,727 15,523
Transfers out for Policy Related
Transactions (70,244) (179,705) (413,515) (8,104) (6,724)
Transfers between Separate Account
SL's Divisions and (to) from
Guaranteed Interest Division, Net (13,442) 1,198,913 1,242,542 96,599 162,638
Transfers in (out) - Operational Seed
Money 200 200 200 200 200
Gain (Loss) Attributable to SAFECO
Life 536 (216) 3,115 (164) 35
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS 193,940 1,993,308 2,256,514 150,258 171,672
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS 106,907 2,186,988 3,366,159 163,418 178,469
NET ASSETS, BEGINNING OF PERIOD 512,750 320,203 1,422,322 8,816 8,038
-------------- -------------- -------------- -------------- --------------
NET ASSETS, END OF PERIOD $ 619,657 $ 2,507,191 $ 4,788,481 $ 172,234 $ 186,507
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Notes To Financial Statements
A-10
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------
AMERICAN
WANGER U.S. CENTURY AMERICAN
SAFECO RST SMALL CAP VP CENTURY
SMALL COMPANY ADVISOR INTERNATIONAL VP BALANCED
STOCK DIVISION* DIVISION* DIVISION* DIVISION*
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 113 $ 0 $ 0 $ 0
Mortality and Expense Charge (Note 3) 0 0 (2) 0
--------------- --------------- --------------- ---------------
Net Investment Income (Loss) 113 0 (2) 0
--------------- --------------- --------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) on Investments 0 0 0 0
Net Change in Unrealized Appreciation (Depreciation)
of Investments (71) 34 15 4
--------------- --------------- --------------- ---------------
Net Realized and Unrealized Gain (Loss) on Investments (71) 34 15 4
--------------- --------------- --------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 42 34 13 4
--------------- --------------- --------------- ---------------
CHANGES IN NET ASSETS FROM POLICY RELATED TRANSACTIONS:
Transfers in from Net Premiums 0 0 0 0
Transfers out for Policy Related Transactions 0 0 (50) 0
Transfers between Separate Account SL's Divisions and
(to) from Guaranteed Interest Division, Net 2,592 2,601 4,851 0
Transfers in (out) - Operational Seed Money 200 200 200 200
Gain (Loss) Attributable to SAFECO Life 0 (1) 0 1
--------------- --------------- --------------- ---------------
NET CHANGE IN NET ASSETS FROM POLICY TRANSACTIONS 2,792 2,800 5,001 201
--------------- --------------- --------------- ---------------
NET CHANGE IN NET ASSETS 2,834 2,834 5,014 205
NET ASSETS, BEGINNING OF PERIOD 0 0 0 0
--------------- --------------- --------------- ---------------
NET ASSETS, END OF PERIOD $ 2,834 $ 2,834 $ 5,014 $ 205
--------------- --------------- --------------- ---------------
--------------- --------------- --------------- ---------------
</TABLE>
- ------------
* For the period from October 30, 1997 (date of inception) to December 31,
1997.
See Notes To Financial Statements
A-11
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------
TOTAL FIDELITY VIP FIDELITY VIP FIDELITY VIP FIDELITY VIP
SEPARATE GROWTH MONEY MARKET EQUITY INCOME OVERSEAS
ACCOUNT DIVISION DIVISION DIVISION DIVISION
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 1,861,626 $ 652,496 $ 106,904 $ 220,067 $ 73,902
Mortality and Expense Charge (Note 3) (342,650) (106,992) (18,880) (52,471) (33,173)
------------- ------------- ------------- ------------- -------------
Net Investment Income (Loss) 1,518,976 545,504 88,024 167,596 40,729
------------- ------------- ------------- ------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on Investments 1,219,403 666,095 0 261,564 84,017
Net Change in Unrealized Appreciation
(Depreciation) of Investments 2,104,550 189,972 0 308,534 292,888
------------- ------------- ------------- ------------- -------------
Net Realized and Unrealized Gain (Loss) on
Investments 3,323,953 856,067 0 570,098 376,905
------------- ------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 4,842,929 1,401,571 88,024 737,694 417,634
------------- ------------- ------------- ------------- -------------
CHANGES IN NET ASSETS FROM POLICY RELATED
TRANSACTIONS:
Transfers in from Net Premiums 17,165,491 4,124,943 3,446,186 2,357,488 1,166,002
Transfers out for Policy Related
Transactions (5,337,120) (1,568,735) (130,228) (902,544) (538,631)
Transfers between Separate Account SL's
Divisions and (to) from Guaranteed
Interest Division, Net 2,039,756 1,043,497 (2,712,658) 20,519 269,996
Transfers in (out) - Operational Seed Money 0 0 0 0 0
Gain (Loss) Attributable to SAFECO Life (2,777) (3,620) (10,424) (1,691) (673)
------------- ------------- ------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS 13,865,350 3,596,085 592,876 1,473,772 896,694
------------- ------------- ------------- ------------- -------------
NET CHANGE IN NET ASSETS 18,708,279 4,997,656 680,900 2,211,466 1,314,328
NET ASSETS, BEGINNING OF PERIOD 28,519,846 8,815,098 1,267,423 4,693,709 2,910,233
------------- ------------- ------------- ------------- -------------
NET ASSETS, END OF PERIOD $ 47,228,125 $ 13,812,754 $ 1,948,323 $ 6,905,175 $ 4,224,561
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>
See Notes To Financial Statements
A-12
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------------------------------
FIDELITY VIP
II FIDELITY VIP FIDELITY VIP FIDELITY VIP
FIDELITY VIP INVESTMENT II II II
HIGH INCOME GRADE BOND ASSET MANAGER INDEX 500 CONTRAFUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 62,691 $ 50,447 $ 440,128 $ 54,385 $ 11,263
Mortality and Expense Charge (Note 3) (9,849) (7,083) (66,690) (17,435) (18,320)
-------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) 52,842 43,364 373,438 36,950 (7,057)
-------------- -------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on Investments 14,163 7,591 67,740 68,068 36,577
Net Change in Unrealized Appreciation
(Depreciation) of Investments 61,598 (36,058) 502,688 290,744 383,171
-------------- -------------- -------------- -------------- --------------
Net Realized and Unrealized Gain (Loss) on
Investments 75,761 (28,467) 570,428 358,812 419,748
-------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 128,603 14,897 943,866 395,762 412,691
-------------- -------------- -------------- -------------- --------------
CHANGES IN NET ASSETS FROM POLICY RELATED
TRANSACTIONS:
Transfers in from Net Premiums 489,342 271,528 2,044,200 1,192,914 1,223,954
Transfers out for Policy Related
Transactions (192,518) (144,121) (1,211,057) (284,721) (250,013)
Transfers between Separate Account SL's
Divisions and (to) from Guaranteed
Interest Division, Net 326,333 (412,302) (422,044) 670,973 744,280
Transfers in (out) - Operational Seed Money 0 0 0 0 0
Gain (Loss) Attributable to SAFECO Life (37) 64 (2,344) (159) (4,087)
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS 623,120 (284,831) 408,755 1,579,007 1,714,134
-------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS 751,723 (269,934) 1,352,621 1,974,769 2,126,825
NET ASSETS, BEGINNING OF PERIOD 693,449 989,456 6,730,524 1,156,691 1,066,766
-------------- -------------- -------------- -------------- --------------
NET ASSETS, END OF PERIOD $ 1,445,172 $ 719,522 $ 8,083,145 $ 3,131,460 $ 3,193,591
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
</TABLE>
See Notes To Financial Statements
A-13
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------------
FIDELITY VIP II LEXINGTON LEXINGTON
ASSET MANAGER: NATURAL EMERGING SAFECO RST SAFECO RST
GROWTH RESOURCES MARKETS EQUITY GROWTH
DIVISION DIVISION* DIVISION* DIVISION* DIVISION*
---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 41,438 $ 2,151 $ 0 $ 30,039 $ 115,216
Mortality and Expense Charge (Note 3) (4,651) (1,331) (1,451) (675) (3,614)
---------------- -------------- -------------- -------------- --------------
Net Investment Income (Loss) 36,787 820 (1,451) 29,364 111,602
---------------- -------------- -------------- -------------- --------------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net Realized Gain (Loss) on Investments 12,549 5,839 (3,540) 2,283 (3,530)
Net Change in Unrealized Appreciation
(Depreciation) of Investments 43,534 58,877 (3,366) (11,822) 23,996
---------------- -------------- -------------- -------------- --------------
Net Realized and Unrealized Gain (Loss) on
Investments 56,083 64,716 (6,906) (9,539) 20,466
---------------- -------------- -------------- -------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 92,870 65,536 (8,357) 19,825 132,068
---------------- -------------- -------------- -------------- --------------
CHANGES IN NET ASSETS FROM POLICY RELATED
TRANSACTIONS:
Transfers in from Net Premiums 247,373 136,380 132,526 56,058 265,857
Transfers out for Policy Related
Transactions (47,071) (9,309) (14,320) (7,234) (36,206)
Transfers between Separate Account SL's
Divisions and (to) from Guaranteed
Interest Division, Net 315,334 480,695 402,781 251,559 1,054,115
Transfers in (out) - Operational Seed Money 0 0 0 0 0
Gain (Loss) Attributable to SAFECO Life 3,877 10,111 120 (5) 6,488
---------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS FROM POLICY
TRANSACTIONS 519,513 617,877 521,107 300,378 1,290,254
---------------- -------------- -------------- -------------- --------------
NET CHANGE IN NET ASSETS 612,383 683,413 512,750 320,203 1,422,322
NET ASSETS, BEGINNING OF PERIOD 196,497 0 0 0 0
---------------- -------------- -------------- -------------- --------------
NET ASSETS, END OF PERIOD $ 808,880 $ 683,413 $ 512,750 $ 320,203 $ 1,422,322
---------------- -------------- -------------- -------------- --------------
---------------- -------------- -------------- -------------- --------------
</TABLE>
- ------------
* For the period from April 30, 1996 (date of inception) to December 31, 1996.
See Notes To Financial Statements
A-14
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------
SAFECO RST SAFECO RST
NORTHWEST BOND
DIVISION* DIVISION*
--------------- ---------------
<S> <C> <C>
INVESTMENT INCOME (LOSS):
Dividends $ 60 $ 439
Mortality and Expense Charge (Note 3) (18) (17)
--------------- ---------------
Net Investment Income (Loss) 42 422
--------------- ---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net Realized Gain (Loss) on Investments (13) 0
Net Change in Unrealized Appreciation (Depreciation) of
Investments 147 (353)
--------------- ---------------
Net Realized and Unrealized Gain (Loss) on Investments 134 (353)
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS 176 69
--------------- ---------------
CHANGES IN NET ASSETS FROM POLICY RELATED TRANSACTIONS:
Transfers in from Net Premiums 3,602 7,138
Transfers out for Policy Related Transactions (371) (41)
Transfers between Separate Account SL's Divisions and (to)
from Guaranteed Interest Division, Net 5,808 870
Transfers in (out) - Operational Seed Money 0 0
Gain (Loss) Attributable to SAFECO Life (399) 2
--------------- ---------------
NET CHANGE IN NET ASSETS FROM POLICY TRANSACTIONS 8,640 7,969
--------------- ---------------
NET CHANGE IN NET ASSETS 8,816 8,038
NET ASSETS, BEGINNING OF PERIOD 0 0
--------------- ---------------
NET ASSETS, END OF PERIOD $ 8,816 $ 8,038
--------------- ---------------
--------------- ---------------
</TABLE>
- ------------
* For the period from April 30, 1996 (date of inception) to December 31, 1996.
See Notes To Financial Statements
A-15
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
NOTES TO FINANCIAL STATEMENTS
1) ORGANIZATION
SAFECO Life Separate Account SL (Account SL) is a separate account of SAFECO
Life Insurance Company (SAFECO), a wholly-owned subsidiary of SAFECO
Corporation, and is registered as a unit investment trust under the
Investment Company Act of 1940, as amended.
Account SL was formed by SAFECO to support the operations of its variable
life insurance policies. SAFECO Securities, Inc., a wholly-owned subsidiary
of SAFECO Corporation, is the principal underwriter of the Policies issued
through Account SL. The assets of Account SL are the property of SAFECO and
such assets associated with the Policies will not be chargeable with
liabilities arising out of any other business SAFECO may conduct.
On January 3, 1996, SAFECO was granted approval in an order by the SEC to
transfer Policy Account Values from Investment Divisions invested in
portfolios of Hudson River Trust to certain Investment Divisions invested in
portfolios of Variable Insurance Products (VIP) and Variable Insurance
Products II (VIP II). On February 20, 1996, SAFECO transferred the Policy
Account Values specified in the order. From February 20, 1996 to April 29,
1996, Account SL consisted solely of ten Investment Divisions invested in
portfolios of VIP and VIP II.
On April 30, 1996, six new Investment Divisions were made available to
policyholders. These divisions invest in the Equity, Growth, Northwest, and
Bond Portfolios of SAFECO Resource Series Trust, the Lexington Natural
Resources Portfolio of Lexington Natural Resources Trust, and the Lexington
Emerging Markets Portfolio of the Lexington Emerging Markets Fund, Inc.
On October 30, 1997, a new policy type was introduced with an additional
seven Investment Divisions to the sixteen Investment Divisions mentioned
above. These divisions invest in the Growth Opportunities, Growth and
Income, and Balanced Portfolios of Fidelity Variable Insurance Products Fund
III, the Small Company Stock Portfolio of SAFECO Resource Series Trust, the
Wanger U.S. Small Cap Advisor Portfolio of Wanger Advisors Trust, and the
American Century VP International and American Century VP Balanced
Portfolios of American Century Variable Portfolios, Inc.
Policyholders are permitted to transfer their funds among Investment
Divisions in Account SL available under their policy, and to the Guaranteed
Interest Division, which is not part of Account SL. Available Investment
Divisions vary by policy type.
2) SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION. Investments in portfolio shares are valued at the net
asset value of the respective portfolio.
SECURITY TRANSACTIONS. Investment transactions are recorded on the trade
date. Realized gains (losses) on sales of portfolio shares are determined on
the basis of identified cost. Net investment income and net realized and
unrealized gain (loss) on investments are allocated to the policies on a pro
rata basis.
ESTIMATES. The financial statements of Account SL are prepared in
conformity with generally accepted accounting principles, which permit
management to make certain estimates and assumptions at the date of the
financial statements.
FEDERAL INCOME TAXES. The operations of Account SL are included in the
Federal Income Tax return of SAFECO. Under the provisions of the policies,
SAFECO has the right to charge Account SL. No charge is currently being made
against Account SL for such tax since, under current tax law, SAFECO pays no
tax on investment income and capital gains reflected in variable life
insurance policy reserves.
A-16
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3) EXPENSES
SAFECO assumes mortality and expense risks related to the operations of
Account SL and deducts a charge from the assets of Account SL to cover these
risks. The daily charge varies by policy type and is equal to an annual rate
of .70% to .90% of net assets of Account SL.
SAFECO also deducts state premium taxes and administrative expenses from
premiums before they are allocated to Account SL. These charges vary by
policy type.
4) INVESTMENT TRANSACTIONS
Purchase and sales activity in underlying portfolio shares for the year
ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
PURCHASES SALES
------------ -------------
<S> <C> <C>
Fidelity VIP Growth Portfolio $ 3,744,964 $ (2,371,033)
Fidelity VIP Money Market Portfolio 6,233,772 (6,026,509)
Fidelity VIP Equity Income Portfolio 2,891,341 (1,210,961)
Fidelity VIP Overseas Portfolio 1,817,335 (976,368)
Fidelity VIP High Income Portfolio 1,880,969 (1,781,744)
Fidelity VIP II Investment Grade Bond Portfolio 279,248 (152,707)
Fidelity VIP II Asset Manager Portfolio 2,296,856 (1,568,421)
Fidelity VIP II Index 500 Portfolio 2,288,690 (706,098)
Fidelity VIP II Contrafund Portfolio 2,280,812 (1,004,311)
Fidelity VIP II Asset Manager: Growth Portfolio 1,149,281 (718,943)
Fidelity VIP III Growth Opportunities Portfolio* 200 0
Fidelity VIP III Growth & Income Portfolio* 206 0
Fidelity VIP III Balanced Portfolio* 200 0
Lexington Natural Resources Portfolio 699,000 (385,849)
Lexington Emerging Markets Portfolio 669,805 (481,784)
SAFECO RST Equity Portfolio 2,716,816 (552,738)
SAFECO RST Growth Portfolio 4,966,543 (1,970,897)
SAFECO RST Northwest Portfolio 254,255 (97,122)
SAFECO RST Bond Portfolio 257,004 (76,189)
SAFECO RST Small Company Stock Portfolio* 2,905 0
Wanger U.S. Small Cap Advisor Portfolio* 2,801 0
American Century VP International Portfolio* 5,051 (50)
American Century VP Balanced Portfolio* 200 0
------------ -------------
Total $ 34,438,254 $ (20,081,724)
------------ -------------
------------ -------------
</TABLE>
* For the period from October 30, 1997 (date of inception) to December
31, 1997.
A-17
<PAGE>
SAFECO LIFE SEPARATE ACCOUNT SL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5) HISTORICAL UNIT VALUES
The following are unit values attributable to unitholders as of the date
indicated:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Accumulation Life:
Fidelity VIP Growth Division $ 258.785 $ 211.469 $ 186.039 $ 138.673 $ 139.950
Fidelity VIP Money Market Division 124.936 119.360 114.270 108.907 105.409
Fidelity VIP Equity Income Division 296.489 233.528 206.203 154.013 145.146
Fidelity VIP Overseas Division 166.539 150.638 134.264 123.521 122.522
Fidelity VIP High Income Division 166.098 142.436 126.046 105.455 108.076
Fidelity VIP II Investment Grade Bond
Division 142.369 131.721 128.816 110.786 116.148
Fidelity VIP II Asset Manager Division 202.303 169.192 148.977 128.527 138.097
Fidelity VIP II Index 500 Division 229.037 174.160 143.089 105.239 105.094
Fidelity VIP II Contrafund Division 176.648 143.581 119.439 N/A N/A
Fidelity VIP II Asset Manager: Growth
Division 170.101 137.235 115.467 N/A N/A
Lexington Natural Resources Division 122.254 115.129 N/A N/A N/A
Lexington Emerging Markets Division 82.854 94.523 N/A N/A N/A
SAFECO RST Equity Division 145.745 117.794 N/A N/A N/A
SAFECO RST Growth Division 165.079 115.231 N/A N/A N/A
SAFECO RST Northwest Division 128.860 99.237 N/A N/A N/A
SAFECO RST Bond Division 108.135 100.648 N/A N/A N/A
<CAPTION>
DECEMBER 31
---------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Premier Accumulation Life:
Fidelity VIP Growth Division $ 10.474 $ N/A $ N/A $ N/A $ N/A
Fidelity VIP Money Market Division 10.083 N/A N/A N/A N/A
Fidelity VIP Equity Income Division 10.688 N/A N/A N/A N/A
Fidelity VIP Overseas Division 10.049 N/A N/A N/A N/A
Fidelity VIP High Income Division 10.191 N/A N/A N/A N/A
Fidelity VIP II Investment Grade Bond
Division 10.129 N/A N/A N/A N/A
Fidelity VIP II Asset Manager Division 10.443 N/A N/A N/A N/A
Fidelity VIP II Index 500 Division 10.764 N/A N/A N/A N/A
Fidelity VIP II Contrafund Division 10.274 N/A N/A N/A N/A
Fidelity VIP II Asset Manager: Growth
Division 10.554 N/A N/A N/A N/A
Fidelity VIP III Growth Opportunities
Division 10.765 N/A N/A N/A N/A
Fidelity VIP III Growth & Income
Division 10.494 N/A N/A N/A N/A
Fidelity VIP III Balanced Division 10.512 N/A N/A N/A N/A
Lexington Natural Resources Division 9.316 N/A N/A N/A N/A
Lexington Emerging Markets Division 9.820 N/A N/A N/A N/A
SAFECO RST Equity Division 10.643 N/A N/A N/A N/A
SAFECO RST Growth Division 10.693 N/A N/A N/A N/A
SAFECO RST Northwest Division 10.504 N/A N/A N/A N/A
SAFECO RST Bond Division 10.134 N/A N/A N/A N/A
SAFECO RST Small Company Stock
Division 10.031 N/A N/A N/A N/A
Wanger U.S. Small Cap Advisor Division 10.089 N/A N/A N/A N/A
American Century VP International
Division 10.406 N/A N/A N/A N/A
American Century VP Balanced Division 10.236 N/A N/A N/A N/A
</TABLE>
- ------------
N/A indicates the Investment Division was not yet available.
A-18
<PAGE>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
SAFECO LIFE INSURANCE COMPANY
AND SUBSIDIARIES
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
A-19
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Auditors................................................................ A-21
Consolidated Financial Statements
Consolidated Balance Sheet................................................................ A-22
Statement of Consolidated Income.......................................................... A-23
Statement of Changes in Shareholder's Equity.............................................. A-24
Statement of Consolidated Cash Flows...................................................... A-25
Notes to Consolidated Financial Statements................................................ A-27
</TABLE>
A-20
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
SAFECO Life Insurance Company
We have audited the accompanying consolidated balance sheet of SAFECO Life
Insurance Company and subsidiaries as of December 31, 1997 and 1996, and the
related statements of consolidated income, changes in shareholder's equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SAFECO Life
Insurance Company and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
As described in Note 1 to the Consolidated Financial Statements, SAFECO Life
Insurance Company and subsidiaries adopted certain new accounting standards in
1995 as required by the Financial Accounting Standards Board.
/s/ Ernst & Young LLP
Seattle, Washington
February 13, 1998
A-21
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized Cost: 1997-$8,901,583; 1996-$7,597,733)...................... $ 9,401,886 $ 7,853,553
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market Value: 1997-$3,159,888; 1996-$2,670,004)........................ 2,708,558 2,488,324
Marketable Equity Securities, at Market Value
(Cost: 1997-$10,651; 1996-$9,629)....................................... 15,552 18,902
First Mortgage Loans on Real Estate:
Nonaffiliates (At cost, less allowance for losses:
1997-$11,609; 1996-$10,943)........................................... 475,975 447,596
Affiliates.............................................................. 175,183 140,743
Real Estate............................................................... 3,399 4,134
Policy Loans.............................................................. 60,249 58,153
Short-Term Investments (At cost which approximates market)................ 56,374 69,878
Investment in Limited Partnerships........................................ 250 250
----------- -----------
Total Investments....................................................... 12,897,426 11,081,533
Cash........................................................................ 244,512 19,136
Accrued Investment Income................................................... 181,757 159,790
Accounts and Notes Receivable (At cost, less allowance
for doubtful accounts: 1997-$78; 1996-$85)................................ 48,204 23,582
Reinsurance Recoverables (Note 6)........................................... 28,515 25,204
Deferred Policy Acquisition Costs (Net of valuation
allowance: 1997-$35,349; 1996-$19,040).................................... 239,843 240,464
Present Value of Future Profits............................................. 13,239 --
Other Assets................................................................ 63,544 5,497
Current Income Taxes Recoverable (Note 10).................................. -- 792
Assets Held in Separate Accounts............................................ 905,417 491,212
----------- -----------
Total Assets........................................................ $14,622,457 $12,047,210
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy and Contract Liabilities (Note 6):
Future Policy Benefits.................................................. $ 151,675 $ 149,624
Policy and Contract Claims.............................................. 37,688 29,155
Premiums Paid in Advance................................................ 9,145 8,846
Funds Held Under Deposit Contracts...................................... 11,539,473 9,792,730
Other Policyholders' Funds.............................................. 166,759 134,422
----------- -----------
Total Policy and Contract Liabilities................................. 11,904,740 10,114,777
Other Liabilities......................................................... 125,247 76,089
Federal Income Taxes (Note 10):
Current................................................................. 19,192 --
Deferred (Includes tax on unrealized appreciation of investment
securities: 1997-$164,449; 1996-$86,120)............................... 179,296 103,648
Liabilities Related to Separate Accounts.................................. 905,417 491,212
----------- -----------
Total Liabilities..................................................... 13,133,892 10,785,726
----------- -----------
Shareholder's Equity:
Common Stock, $250 Par Value;
20,000 Shares Authorized, Issued and Outstanding........................ 5,000 5,000
Additional Paid-In Capital................................................ 85,000 85,000
Retained Earnings (Note 8)................................................ 1,093,048 1,011,439
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3)..... 305,517 160,045
----------- -----------
Total Shareholder's Equity............................................ 1,488,565 1,261,484
----------- -----------
Total Liabilities and Shareholder's Equity.......................... $14,622,457 $12,047,210
----------- -----------
----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements
A-22
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums...................................................... $ 240,595 $ 240,100 $ 237,025
Investment Income:
Interest on Fixed Maturities................................ 830,837 767,309 716,510
Interest on Mortgage Loans.................................. 56,232 52,127 51,912
Interest on Short-Term Investments.......................... 3,419 2,935 4,017
Dividends from Marketable Equity Securities................. 1,044 843 1,387
Dividends from Redeemable Preferred Stock................... 16,026 12,654 3,065
Other Investment Income..................................... 3,843 3,879 4,155
---------- ---------- ----------
Total................................................... 911,401 839,747 781,046
Less Investment Expenses.................................... 3,485 3,709 3,546
---------- ---------- ----------
Net Investment Income......................................... 907,916 836,038 777,500
---------- ---------- ----------
Other Revenue................................................. 21,751 12,933 11,608
Realized Investment Gain (Note 3)............................. 6,807 10,439 5,676
---------- ---------- ----------
Total................................................... 1,177,069 1,099,510 1,031,809
---------- ---------- ----------
Benefits and Expenses:
Policy Benefits............................................... 844,926 782,213 723,466
Commissions................................................... 93,681 74,724 79,163
Personnel Costs............................................... 48,503 43,609 42,314
Taxes Other Than Payroll and Income Taxes..................... 11,817 15,512 7,913
Other Operating Expenses...................................... 46,639 45,224 42,978
Amortization of Deferred Policy Acquisition Costs............. 36,946 35,652 32,376
Deferral of Policy Acquisition Costs.......................... (53,068) (42,426) (35,347)
---------- ---------- ----------
Total................................................... 1,029,444 954,508 892,863
---------- ---------- ----------
Income before Federal Income Taxes.............................. 147,625 145,002 138,946
---------- ---------- ----------
Provision (Benefit) for Federal Income Taxes (Note 10):
Current....................................................... 54,705 57,417 61,830
Deferred...................................................... (4,689) (6,471) (13,800)
---------- ---------- ----------
Total................................................... 50,016 50,946 48,030
---------- ---------- ----------
Net Income...................................................... $ 97,609 $ 94,056 $ 90,916
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
A-23
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Common Stock.................................................... $ 5,000 $ 5,000 $ 5,000
---------- ---------- ----------
Additional Paid-In Capital...................................... 85,000 85,000 85,000
---------- ---------- ----------
Retained Earnings:
Balance at the Beginning of Year.......................... 1,011,439 921,383 834,467
Net Income................................................ 97,609 94,056 90,916
Dividends to Parent....................................... (16,000) (4,000) (4,000)
---------- ---------- ----------
Balance at the End of Year................................ 1,093,048 1,011,439 921,383
---------- ---------- ----------
Unrealized Appreciation of Investment Securities, Net of Tax
(Note 3):
Balance at the Beginning of Year.......................... 160,045 320,452 (126,229)
Change in Unrealized Appreciation......................... 156,073 (175,861) 474,511
Change in Deferred Policy Acquisition Costs Valuation
Allowance............................................... (10,601) 15,454 (27,830)
---------- ---------- ----------
Balance at the End of Year................................ 305,517 160,045 320,452
---------- ---------- ----------
Shareholder's Equity.................................... $1,488,565 $1,261,484 $1,331,835
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements
A-24
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Insurance Premiums Received................................. $ 216,089 $ 216,801 $ 216,269
Dividends and Interest Received............................. 819,433 754,878 703,053
Other Operating Receipts.................................... 19,299 12,948 10,607
Insurance Claims and Policy Benefits Paid................... (353,227) (302,955) (272,206)
Underwriting, Acquisition and Insurance Operating Costs
Paid...................................................... (202,077) (172,251) (169,904)
Income Taxes Paid........................................... (36,140) (71,255) (61,247)
----------- ----------- -----------
Net Cash Provided by Operating Activities............... 463,377 438,166 426,572
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of:
Fixed Maturities Available-for-Sale....................... (1,891,778) (1,544,998) (1,424,510)
Fixed Maturities Held-to-Maturity......................... (199,589) (473,206) (291,965)
Purchase of Subsidiary, Net of Cash Acquired.............. 116,122 -- --
Marketable Equity Securities.............................. (5,773) (272) (260)
Other Investments......................................... (15) (15) (14)
Policy and Nonaffiliated Mortgage Loans................... (96,019) (85,485) (55,302)
Affiliated Mortgage Loans................................. (40,000) (34,650) (12,643)
Maturities of Fixed Maturities Available-for-Sale........... 435,788 466,509 375,291
Maturities of Fixed Maturities Held-to-Maturity............. 8,907 21,694 17,878
Sales of:
Fixed Maturities Available-for-Sale....................... 869,091 721,229 327,160
Fixed Maturities Held-to-Maturity......................... -- 13,316 --
Marketable Equity Securities.............................. 11,185 10,394 2,172
Other Investments......................................... 2,000 1,100 180
Real Estate............................................... 639 1,086 876
Policy and Nonaffiliated Mortgage Loans................... 61,159 48,341 50,734
Affiliated Mortgage Loans................................. 5,560 31,730 8,977
Net (Increase) Decrease in Short-Term Investments........... 11,519 (1,250) (5,811)
Other....................................................... (50,141) (747) (122)
----------- ----------- -----------
Net Cash Used in Investing Activities................... (761,345) (825,224) (1,007,359)
----------- ----------- -----------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts...................... 1,392,517 1,148,590 1,304,665
Return of Funds Held Under Deposit Contracts................ (861,221) (765,480) (720,845)
Dividends to Parent......................................... (13,000) (4,000) (4,000)
Net Proceeds from (Repayment of) Short-Term Borrowings...... 5,048 (7,802) 9,143
----------- ----------- -----------
Net Cash Provided by Financing Activities............... 523,344 371,308 588,963
----------- ----------- -----------
Net Increase (Decrease) in Cash............................... 225,376 (15,750) 8,176
Cash at Beginning of Year..................................... 19,136 34,886 26,710
----------- ----------- -----------
Cash at End of Year........................................... $ 244,512 $ 19,136 $ 34,886
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
For purposes of reporting cash flows, cash consists of balances on hand and on
deposit in banks and financial institutions.
See Notes to Consolidated Financial Statements
A-25
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS --
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
(In Thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net Income........................................................... $ 97,609 $ 94,056 $ 90,916
--------- --------- ---------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain......................................... (6,807) (10,439) (5,676)
Amortization of Fixed Maturity Investments....................... (24,929) (26,811) (26,050)
Deferred Federal Income Tax Benefit.............................. (4,689) (6,471) (13,800)
Interest Expense on Deposit Contracts............................ 473,851 460,594 432,327
Other............................................................ (7,877) 574 3,140
Changes in:
Future Policy Benefits......................................... 1,855 (4,466) (1,232)
Policy and Contract Claims..................................... 2,830 2,748 (2,643)
Premiums Paid in Advance....................................... 299 637 (574)
Deferred Policy Acquisition Costs.............................. (15,688) (6,198) (6,116)
Accrued Investment Income...................................... (11,451) (8,893) (8,990)
Accrued Interest on Accrual Bonds.............................. (48,354) (44,015) (36,908)
Other Receivables.............................................. (5,467) (8,639) (2,353)
Current Federal Income Taxes................................... 18,565 (13,839) 583
Other Assets and Liabilities................................... (2,350) 4,668 449
Other Policyholders' Funds..................................... (4,020) 4,660 3,499
--------- --------- ---------
Total Adjustments............................................ 365,768 344,110 335,656
--------- --------- ---------
Net Cash Provided by Operating Activities............................ $ 463,377 $ 438,166 $ 426,572
--------- --------- ---------
--------- --------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
A-26
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All dollar amounts in thousands, unless otherwise stated)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS. SAFECO Life Insurance Company (the Company) is a stock
life insurance company organized under the laws of the state of Washington.
The Company offers individual and group insurance products, pension plans and
annuity products, marketed through professional agents in all states and the
District of Columbia. The Company directly owns three subsidiaries, SAFECO
National Life Insurance Company, First SAFECO National Life Insurance Company
of New York, and WM Life Insurance Company, and indirectly owns Empire Life
Insurance Company. The Company acquired WM Life Insurance Company and Empire
Life Insurance Company in 1997 (see Note 2). The Company is a wholly-owned
subsidiary of SAFECO Corporation which is a Washington corporation whose
subsidiaries engage primarily in insurance and financial service businesses.
BASIS OF REPORTING. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles appropriate in
the circumstances and include amounts based on the best estimates and
judgments of management. The financial statements include SAFECO Life
Insurance Company and its subsidiaries.
All significant intercompany transactions have been eliminated in the
consolidated financial statements. Certain reclassifications have been made
to prior year financial information to conform to the 1997 classifications.
ACCOUNTING FOR PREMIUMS. Life and health insurance premiums are reported as
income when collected for traditional individual life policies and when
earned for group life and health policies. Funds received under pension
deposit contracts, annuity contracts and universal life policies are recorded
as liabilities rather than premium income when received. Revenues for
universal life products consist of front-end loads, mortality charges and
expense charges assessed against individual policyholder account balances.
These loads and charges are recognized as income when earned.
INVESTMENTS. Fixed maturity investments (i.e., bonds and redeemable
preferred stocks) which the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity and carried at amortized
cost in the balance sheet. Fixed maturities classified as available-for-sale
are carried at market value, with changes in unrealized gains and losses
recorded directly to shareholder's equity, net of applicable income taxes and
deferred policy acquisition costs valuation allowance. The Company has no
fixed maturities classified as trading.
All marketable equity securities are classified as available-for-sale and
carried at market value, with changes in unrealized gains and losses recorded
directly to shareholder's equity, net of applicable income taxes.
When the collectibility of income on certain investments is considered
doubtful, they are placed on non-accrual status and thereafter interest
income is recognized only when payment is received. Investments that have
declined in market value below cost and for which the decline is judged to be
other than temporary are written down to fair value. Writedowns are made
directly on an individual security basis and reduce realized investment gains
in the Statement of Consolidated Income.
The cost of security investments sold is determined by the "identified cost"
method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for loan losses.
REAL ESTATE AND DEPRECIATION. Income-producing real estate is classified as
an investment. The Company provides straight-line depreciation on its
buildings based upon their estimated useful lives.
Investment real estate that has declined in market value below cost and for
which the decline is judged to be other than temporary is written down to
estimated realizable value. Writedowns reduce realized investment gains in
the Statement of Consolidated Income.
A-27
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
DEFERRED POLICY ACQUISITION COSTS. Life and health acquisition costs,
consisting of commissions and certain other underwriting expenses, which vary
with and are primarily related to the production of new business, are
deferred.
Acquisition costs for pension deposit contracts, deferred annuity contracts
and universal life policies are amortized over the lives of the contracts or
policies in proportion to the present value of estimated future gross
profits. To the extent actual experience differs from assumptions, and to the
extent estimates of future gross profits require revision, the unamortized
balance of deferred policy acquisition costs is adjusted accordingly; such
adjustments would be included in current operations. There were no
significant revisions made in 1997, 1996 or 1995.
Acquisition costs for traditional individual life insurance policies are
amortized over the premium payment period of the related policies using
assumptions consistent with those used in computing policy benefit
liabilities. Acquisition costs for group life and health policies are
amortized over the lives of the policies in proportion to premium received.
PRESENT VALUE OF FUTURE PROFITS. The present value of future profits
represents the actuarially determined present value of anticipated profits to
be realized from annuity and life insurance business purchased. The present
value was determined using a discount rate of 12.5%. For annuity contracts,
amortization of the present value of future profits is in relation to the
present value of the expected gross profits on the contracts, discounted
using the interest rate credited to the underlying policies. The present
value of future profits is reviewed periodically to determine that the
unamortized portion does not exceed expected recoverable amounts. No
impairment adjustments were recorded in 1997.
OTHER ASSETS. Call options on the S&P 500 index are purchased by the Company
to hedge the growth in interest credited on equity indexed annuities sold.
Premiums paid to purchase these call options are capitalized and included in
other assets. Call option premiums are amortized as an expense over the term
of the option on a straight-line basis. Gains and losses on these instruments
are recorded in income when realized. The balance in other assets for call
option premiums at December 31, 1997 is $21,232.
The Financial Accounting Standards Board (FASB) has issued an exposure draft
addressing accounting and disclosure requirements for derivative financial
instruments. The Company's accounting treatment for options may change in the
future based on the issuance of definitive guidance from the FASB.
On December 31, 1997, the Company acquired Washington Mutual, Inc.' s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company, and Washington Mutual, Inc. agreed to distribute the Company's
annuity products through the Washington Mutual, Inc. multi-state banking
network. The portion of this transaction relating to the distribution
agreement is valued at $35 million and will be amortized on a straight-line
basis over 15 years. The unamortized balance of $35 million is included in
other assets.
FUTURE POLICY BENEFITS. Liabilities for universal life insurance policies,
deferred annuity and pension deposit contracts are equal to the accumulated
account value of such policies or contracts as of the valuation date.
Liabilities for structured settlement annuities are based on interest rate
assumptions using market rates at issue, graded downward over 40 years to a
range of 5.5% to 8.75%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method using
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions range from
8.5% graded to 3.25%.
POLICY AND CONTRACT CLAIMS. The liability for policy and contract claims is
established on the basis of reported losses ("case basis" method). Provision
is also made for claims incurred but not reported, based on historical
experience. The estimates for claims incurred but not reported are
continually reviewed and any necessary adjustments are reflected in current
operations.
A-28
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
SEPARATE ACCOUNTS. The Company administers segregated asset accounts for
variable annuity and variable universal life clients. The assets of these
Separate Accounts, which consist of common stocks, are the property of the
Company. The liabilities of these Separate Accounts represent reserves
established to meet withdrawal and future benefit payment provisions of
contracts with these clients. The assets of the Separate Accounts, equal to
the reserves and other contract liabilities of the Separate Accounts, are not
chargeable with liabilities arising out of any other business the Company may
conduct. Investment risks associated with market value changes are borne by
the clients. Deposits, withdrawals, net investment income and realized and
unrealized capital gains and losses on the assets of the Separate Account are
not reflected in the Statement of Consolidated Income. Management fees and
other charges assessed against the contracts are included in other revenue.
FEDERAL INCOME TAXES. The Company and its subsidiaries, except for WM Life
Insurance Company and Empire Life Insurance Company, are included in a
consolidated federal income tax return filed by SAFECO Corporation. Tax
payments (credits) are made to or received from SAFECO Corporation on a
separate tax return filing basis. The Company provides for federal income
taxes based on financial reporting income and deferred federal income taxes
on temporary differences between financial reporting and taxable income.
NEW ACCOUNTING STANDARDS. In 1993, the FASB adopted Statement 114,
"Accounting by Creditors for Impairment of a Loan," which provides guidance
on valuing impaired loans. The FASB also issued Statement 118, "Accounting by
Creditors for Impairment of a Loan -- Income Recognition and Disclosures," in
1994, which amends Statement 114. Both statements were effective for 1995 and
adopted by the Company on January 1, 1995. Adoption did not affect net
income. For additional disclosure relating to these two statements, see Note
3.
In June of 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for fiscal years beginning after December
15, 1997 and the Company will adopt it in the first quarter of 1998. Adoption
will have no effect on net income but will require the reporting of
"comprehensive income," which will include net income and certain items
currently reported in shareholder's equity.
The FASB issued Statement 131, "Disclosures about Segments of an Enterprise
and Related Information," in June of 1997. Statement 131 changes the way
information about business segments is reported in annual financial
statements and requires the reporting of selected segment information in
interim reports. This statement is effective for financial statements for
periods beginning after December 15, 1997, and the Company plans on providing
the required segment information in its 1998 consolidated financial
statements. This statement has no effect on net income.
2. ACQUISITION
On December 31, 1997, the Company acquired Washington Mutual, Inc.'s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company for $105.8 million. The fair value of assets acquired, excluding
cash, was $766,921, and the fair value of liabilities assumed was $882,226.
The acquisition is being treated as a purchase for accounting purposes, and
allocation of purchase price resulted in no goodwill. The transaction was
financed through internal sources.
The unaudited pro forma condensed results of operations presented below
assume the acquisition of WM Life Insurance Company and Empire Life Insurance
Company occurred at the beginning of 1996, and give effects to actual
operating results prior to the acquisition. These pro forma results are not
necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of 1996 nor are they
necessarily indicative of future consolidated results.
A-29
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 (continued)
PRO FORMA INFORMATION -- UNAUDITED
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Revenues................................ $ 1,244,530 $ 1,162,614
Net income.............................. 103,474 97,654
</TABLE>
3. INVESTMENT SUMMARY
A summary of fixed maturities and marketable equity securities classified as
available-for-sale at December 31, 1997 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities.............. $ 604,305 $ 61,328 $ (47) $ 61,281 $ 665,586
States, municipalities and political
subdivisions.......................... 134,160 13,439 (720) 12,719 146,879
Foreign governments..................... 102,053 6,674 (7) 6,667 108,720
Public utilities........................ 1,467,168 100,208 (1,175) 99,033 1,566,201
All other corporate bonds............... 3,803,982 186,502 (1,174) 185,328 3,989,310
Mortgage-backed securities.............. 2,789,915 139,056 (3,781) 135,275 2,925,190
----------- ----------- ------------ ------------ -----------
Total fixed maturities classified as
available-for-sale.................... 8,901,583 507,207 (6,904) 500,303 9,401,886
Marketable equity securities............ 10,651 4,906 (5) 4,901 15,552
----------- ----------- ------------ ------------ -----------
Total investment securities classified
as available-for-sale................. $ 8,912,234 $ 512,113 $ (6,909) 505,204 $ 9,417,438
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Deferred policy acquisition costs
valuation allowance........................................................... (35,349)
Applicable federal income tax................................................... (164,338)
------------
Unrealized appreciation of investment
securities, net of tax, included in
shareholder's equity.......................................................... $ 305,517
------------
------------
</TABLE>
A summary of fixed maturities classified as held-to-maturity at December 31,
1997 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities.............. $ 257,881 $ 74,238 $ -- $ 74,238 $ 332,119
States, municipalities and political
subdivisions.......................... 120,345 14,917 -- 14,917 135,262
Foreign governments..................... 148,903 40,306 -- 40,306 189,209
Public utilities........................ 417,519 78,330 -- 78,330 495,849
All other corporate bonds............... 1,462,968 208,201 (142) 208,059 1,671,027
Mortgage-backed securities.............. 300,942 35,574 (94) 35,480 336,422
----------- ----------- ------ ------------ -----------
Total fixed maturities classified as
held-to-maturity...................... $ 2,708,558 $ 451,566 $ (236) $ 451,330 $ 3,159,888
----------- ----------- ------ ------------ -----------
----------- ----------- ------ ------------ -----------
</TABLE>
A-30
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
A summary of fixed maturities and marketable equity securities classified as
available-for-sale at December 31, 1996 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities.............. $ 746,401 $ 38,689 $ (1,915) $ 36,774 $ 783,175
States, municipalities and political
subdivisions.......................... 131,538 11,192 (1,009) 10,183 141,721
Foreign governments..................... 74,427 4,575 (7) 4,568 78,995
Public utilities........................ 1,428,912 72,384 (7,220) 65,164 1,494,076
All other corporate bonds............... 2,707,297 100,673 (15,464) 85,209 2,792,506
Mortgage-backed securities.............. 2,509,158 72,485 (18,563) 53,922 2,563,080
----------- ----------- ------------ ------------ -----------
Total fixed maturities classified as
available-for-sale.................... 7,597,733 299,998 (44,178) 255,820 7,853,553
Marketable equity securities............ 9,629 9,518 (245) 9,273 18,902
----------- ----------- ------------ ------------ -----------
Total investment securities classified
as available-for-sale................. $ 7,607,362 $ 309,516 $ (44,423) 265,093 $ 7,872,455
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Deferred policy acquisition costs
valuation allowance........................................................... (19,040)
Applicable federal income tax................................................... (86,008)
------------
Unrealized appreciation of investment
securities, net of tax, included in
shareholder's equity.......................................................... $ 160,045
------------
------------
</TABLE>
A summary of fixed maturities classified as held-to-maturity at December 31,
1996 follows:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
United States government and government
agencies and authorities................. $ 244,686 $ 29,559 $ (396) $ 29,163 $ 273,849
States, municipalities and political
subdivisions............................. 103,075 3,797 (664) 3,133 106,208
Foreign governments........................ 148,300 24,403 -- 24,403 172,703
Public utilities........................... 545,249 48,130 (4,279) 43,851 589,100
All other corporate bonds.................. 1,155,146 82,922 (9,495) 73,427 1,228,573
Mortgage-backed securities................. 291,868 13,110 (5,407) 7,703 299,571
----------- ----------- ----------- ----------- -----------
Total fixed maturities classified as
held-to-maturity......................... $ 2,488,324 $ 201,921 $ (20,241) $ 181,680 $ 2,670,004
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
A-31
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
The amortized cost and estimated market value of fixed maturities at December
31, 1997, by contractual maturity, are presented below. Expected maturities
may differ from contractual maturities because certain borrowers have the
right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ ------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less............................... $ 243,954 $ 245,140 $ -- $ --
Due after one year through five years................. 1,886,758 1,959,986 3 4
Due after five years through ten years................ 1,268,615 1,320,613 49,128 56,715
Due after ten years................................... 2,712,341 2,950,957 2,358,485 2,766,747
Mortgage-backed securities............................ 2,789,915 2,925,190 300,942 336,422
----------- ----------- ----------- -----------
Total............................................. $ 8,901,583 $ 9,401,886 $ 2,708,558 $ 3,159,888
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
At December 31, 1997 and 1996, the Company held below investment grade fixed
maturities of $316 million and $242 million at amortized cost, respectively.
The respective market values of these investments were approximately $329
million and $239 million. These holdings amounted to 2.6% and 2.3% of the
Company's investments in fixed maturities at market value at December 31,
1997 and 1996, respectively.
Certain fixed maturity securities with an amortized cost of $7,543 and $4,648
at December 31, 1997 and 1996, respectively, were on deposit with various
regulatory authorities to meet requirements of insurance and financial codes.
At December 31, 1997 and 1996, mortgage loans constituted approximately 4.5%
and 4.9% of total assets, respectively, and are secured by first mortgage
liens on income-producing commercial real estate, primarily in the retail,
industrial and office building sectors. The majority of the properties are
located in the western United States, with 39% of the total in California.
Individual loans generally do not exceed $5 million.
The carrying value of investments in fixed maturities and mortgage loans that
did not produce income during the year ended December 31, 1997 is less than
one percent of the total of such investments.
The proceeds from sales of investment securities and related gains and losses
for 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
FIXED MATURITIES FIXED MATURITIES MARKETABLE
AVAILABLE-FOR-SALE HELD-TO-MATURITY EQUITY SECURITIES
----------------- ---------------- -----------------
<S> <C> <C> <C>
Proceeds from sales................................. $ 869,091 $ -- $ 11,185
----------------- -------- --------
----------------- -------- --------
Gross realized gains on sales....................... $ 5,805 $ -- $ 6,832
Gross realized losses on sales...................... (9,410) -- (397)
----------------- -------- --------
Realized gains (losses) on sales................ (3,605) -- 6,435
Other (Including net gain on calls and
redemptions)...................................... 5,074 -- --
Writedowns (Including writedowns on securities
subsequently sold)................................ (197) -- --
----------------- -------- --------
Total realized gain................................. $ 1,272 $ -- $ 6,435
----------------- -------- --------
----------------- -------- --------
</TABLE>
A-32
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
The proceeds from sales of investment securities and related gains and losses
for 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
FIXED MATURITIES FIXED MATURITIES MARKETABLE
AVAILABLE-FOR-SALE HELD-TO-MATURITY EQUITY SECURITIES
----------------- ---------------- -----------------
<S> <C> <C> <C>
Proceeds from sales................................. $ 721,229 $ 13,316 $ 10,394
----------------- -------- --------
----------------- -------- --------
Gross realized gains on sales....................... $ 19,779 $ -- $ 4,847
Gross realized losses on sales...................... (18,837) (1,328) --
----------------- -------- --------
Realized gains (losses) on sales................ 942 (1,328) 4,847
Other (Including net gain or loss on calls and
redemptions)...................................... 13,687 (141) --
Writedowns (Including writedowns on securities
subsequently sold)................................ (5,465) -- --
----------------- -------- --------
Total realized gain (loss).......................... $ 9,164 $ (1,469) $ 4,847
----------------- -------- --------
----------------- -------- --------
</TABLE>
Two fixed maturities classified as held-to-maturity were sold during 1996 due
to evidence of a significant deterioration in credit quality. The amortized
cost of these securities was $14,644, and the losses realized on these sales
were $1,328.
The proceeds from sales of investment securities and related gains and losses
for 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
FIXED MATURITIES FIXED MATURITIES MARKETABLE
AVAILABLE-FOR-SALE HELD-TO-MATURITY EQUITY SECURITIES
----------------- ---------------- -----------------
<S> <C> <C> <C>
Proceeds from sales................................. $ 327,160 $ -- $ 2,172
----------------- -------- -------
----------------- -------- -------
Gross realized gains on sales....................... $ 16,366 $ -- $ 1,253
Gross realized losses on sales...................... (4,336) -- (282)
----------------- -------- -------
Realized gains on sales......................... 12,030 -- 971
Other (Including net gain on calls and
redemptions)...................................... 7,833 -- --
Writedowns (Including writedowns on securities
subsequently sold)................................ (13,628) -- --
----------------- -------- -------
Total realized gain................................. $ 6,235 $ -- $ 971
----------------- -------- -------
----------------- -------- -------
</TABLE>
A-33
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 (continued)
The following summarizes the realized gain before federal income taxes and
the net change in unrealized appreciation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities..................................................... $ 1,272 $ 7,695 $ 6,235
Marketable equity securities......................................... 6,435 4,847 971
First mortgage loans on real estate.................................. (900) (2,050) (1,600)
Real estate.......................................................... -- (114) 70
Investment in limited partnerships................................... -- 61 --
---------- ---------- ----------
Realized gain before federal income taxes.......................... $ 6,807 $ 10,439 $ 5,676
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (decrease) in unrealized appreciation of:
Fixed maturities classified as available-for-sale.................... $ 244,483 $ (268,956) $ 726,046
Marketable equity securities......................................... (4,372) (1,599) 3,971
Deferred policy acquisition costs valuation allowance................ (16,309) 23,775 (42,815)
Applicable federal income tax........................................ (78,330) 86,373 (240,521)
---------- ---------- ----------
Net change in unrealized appreciation................................ $ 145,472 $ (160,407) $ 446,681
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The following table summarizes the Company's allowance for credit losses on
non-affiliated mortgage loans:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Allowance at beginning of year......................................................... $ 10,943 $ 9,633
Provision for credit losses............................................................ 900 2,050
Loans charged off as uncollectible..................................................... (234) (740)
--------- ---------
Allowance at end of year............................................................... $ 11,609 $ 10,943
--------- ---------
--------- ---------
</TABLE>
The allowance includes amounts determined under FAS 114 and FAS 118 (specific
reserves), as well as general reserve amounts. The total investment in
impaired loans, as defined under FAS 114 and 118 and before any reserve for
losses, is $3.3 and $3.2 million at December 31, 1997 and 1996, respectively.
A specific loan loss reserve has been established for each impaired loan, the
total of which is $550 and $835 and is included in the overall allowance of
$11.6 and $10.9 million at December 31, 1997 and 1996, respectively.
4. COMMITMENTS AND CONTINGENCIES
The Company is obligated under a real estate lease with an affiliate, General
America Corporation, which expires in 2010. The minimum annual rental
commitments under this obligation were $2,401 at December 31, 1997. At
December 31, 1997, unfunded mortgage loan commitments approximated $5,785.
The Company had no other material commitments or contingencies at December
31, 1997.
A-34
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUES. Fair value amounts have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in developing the estimates of
fair value. Accordingly, these estimates are not necessarily indicative of
the amount that could be realized in a current market exchange. The use of
different market assumptions and/or estimating methodologies may have a
material effect on the estimated fair value amounts.
Carrying value is a reasonable estimate of fair value for cash, policy loans,
short-term investments, accounts receivable and other liabilities.
Fair value amounts for investments in fixed maturities and marketable equity
securities are the same as market value. Market value generally represents
quoted market prices for securities traded in the public market place or
analytically determined values for securities not publicly traded.
The fair values of mortgage loans have been estimated by discounting the
projected cash flows using the current rate at which loans would be made to
borrowers with similar credit ratings and for the same maturities.
The fair value of investment contracts with defined maturities is estimated
by discounting projected cash flows using rates that would be offered for
similar contracts with the same remaining maturities. For investment
contracts with no defined maturity, fair value is estimated to be the present
surrender value. These investment contracts are included in Funds Held Under
Deposit Contracts.
Estimated fair values of financial instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available-for-sale.............. $ 9,401,886 $ 9,401,886 $ 7,853,553 $ 7,853,553
Fixed maturities held-to-maturity................ 2,708,558 3,159,888 2,488,324 2,670,004
Marketable equity securities..................... 15,552 15,552 18,902 18,902
Mortgage loans................................... 651,158 677,000 588,339 596,000
Financial liabilities:
Funds held under deposit contracts............... 11,539,473 12,021,000 9,792,730 9,935,000
</TABLE>
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company's investments in
mortgage-backed securities of $3.3 billion and $2.9 billion, at market
values, at December 31, 1997 and 1996, respectively, are primarily
residential collateralized mortgage obligations and pass-throughs ("CMOs").
CMOs, while technically defined as derivative instruments, are exempt from
derivative disclosure requirements. The Company's investment in CMOs
comprised of the riskier, more volatile type (e.g., interest only, inverse
floaters, etc.) has been intentionally limited to only a small amount (i.e.,
less than 1.5% and 1% of total CMOs at December 31, 1997 and 1996,
respectively).
The Company does not enter into financial instruments for trading or
speculative purposes. The Company's involvement in other investment-type
derivatives is also, intentionally, of a very limited nature. Such
derivatives include call options, interest rate swaps on bond investments,
currency-linked bonds and fixed-rate loan commitments. Individually, and in
the aggregate, the notional amounts and fair values of these derivatives are
not material and thus no additional disclosures are warranted.
A-35
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. POLICY AND CONTRACT LIABILITIES
REINSURANCE. The Company protects itself from excessive losses by ceding
reinsurance to other companies, using automatic and facultative treaties.
Reinsurance contracts do not relieve the Company of its obligations to
policyholders. A continuing liability exists in the event a reinsurance
company is unable to meet its obligations to the Company. The financial
condition of its reinsurers is evaluated by the Company to minimize its
exposure to losses from reinsurer insolvencies.
The balance sheet caption "Reinsurance Recoverables" is comprised of the
following amounts:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Unpaid losses and adjustment expense................................................... $ 906 $ 136
Paid claims............................................................................ 770 957
Life policy liabilities................................................................ 26,756 23,784
Other reinsurance recoverables......................................................... 83 327
--------- ---------
Total reinsurance recoverables................................................. $ 28,515 $ 25,204
--------- ---------
--------- ---------
</TABLE>
The effects of reinsurance on the premium and policy benefit amounts in the
Statement of Consolidated Income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Reinsurance Ceded:
Premiums................................................................ $ (13,305) $ (13,679) $ (10,385)
--------- --------- ---------
--------- --------- ---------
Policy benefits......................................................... $ (7,853) $ (4,039) $ (6,344)
--------- --------- ---------
--------- --------- ---------
Reinsurance Assumed:
Premiums................................................................ $ 180 $ 175 $ (5,456)
--------- --------- ---------
--------- --------- ---------
Policy benefits......................................................... $ 2,902 $ 2,500 $ (2,503)
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1995, the Company sold a reinsurance assumed block of group disabled
lives, involving disability income coverage, back to the ceding reinsurance
pool. The ceding pool acquired the Company's $5.7 million disabled life claim
reserve for a return-of-premium payment of $5.7 million. The reinsurance
assumed premiums and policy benefits shown above reflect this transaction.
POLICY AND CONTRACT CLAIMS. Accident and health claim reserves, the majority
of which are incurred and paid in full within a one-year period, amount to
less than 1% of total policy and contract liabilities. Therefore, no
additional disclosures are warranted.
7. STATUTORY BASIS INFORMATION
The Company and its subsidiaries are required to file annual statements with
state regulatory authorities prepared on an accounting basis as prescribed or
permitted by such authorities (statutory basis). Prescribed statutory
accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory accounting
practices encompass all accounting practices not so prescribed.
A-36
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 (continued)
Statutory net income differs from income reported in accordance with
generally accepted accounting principles primarily because policy acquisition
costs are expensed when incurred, reserves are based on different assumptions
and income tax expense reflects only taxes paid or currently payable. The net
income reported in the Statement of Consolidated Income does not include the
net income of either WM Life Insurance Company or Empire Life Insurance
Company, as their acquisition was effective December 31, 1997.
Statutory net income and shareholder's equity, by company, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Net Income:
SAFECO Life Insurance Company.......................................... $ 95,012 $ 95,676 $ 101,456
SAFECO National Life Insurance Company................................. 1,322 1,249 1,187
First SAFECO National Life Insurance Company
of New York.......................................................... 314 318 404
---------- ---------- ----------
Total............................................................ $ 96,648 $ 97,243 $ 103,047
---------- ---------- ----------
---------- ---------- ----------
<CAPTION>
DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory Stockholder's Equity:
SAFECO Life Insurance Company and Subsidiaries......................... $ 672,230 $ 587,658 $ 504,683
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The Company has received written approval from the Washington State Insurance
Department to treat certain loans (all made at market rates) to related
SAFECO Corporation subsidiaries as admitted assets. The allowance of such
loans has not materially enhanced surplus at December 31, 1997.
8. DIVIDEND RESTRICTIONS
Insurance companies are restricted by certain states as to the amount of
dividends they may pay within a given calendar year to their parent without
regulatory consent. Under insurance regulations of the state of Washington,
the restriction is the greater of statutory net gain from operations for the
previous year or 10% of policyholder surplus at the close of the previous
year, subject to a maximum limit equal to statutory earned surplus. The
amount of retained earnings available for the payment of dividends to SAFECO
Corporation without prior regulatory approval was $94,672 at December 31,
1997.
9. EMPLOYEE BENEFIT PLANS
SAFECO Corporation and subsidiary companies (the Companies) administer
defined contribution, defined benefit and profit sharing bonus plans covering
substantially all employees. The defined contribution plans include profit
sharing retirement plans and a savings plan. Benefits are earned under the
defined benefit plan for each year of service after 1988, based on the
employee's compensation level plus a stipulated rate of return on the benefit
balance. It is SAFECO Corporation's policy to fund the defined benefit plan
on a current basis to the full extent deductible under federal income tax
regulations. The cost of these plans to the Company was $7,531, $7,901 and
$7,599 for the years ended December 31, 1997, 1996 and 1995, respectively.
A-37
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 (continued)
The Companies also provide certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees may become eligible for these benefits if they reach retirement
age while working for the Companies. The cost of these benefits is shared
with the retiree. The Company accrues for these costs during the years that
employees provide services, pursuant to FASB Statement 106. Net periodic
other postretirement benefit costs for the Company were $392, $474 and $282
in 1997, 1996 and 1995, respectively.
The following table summarizes the Company's allocated share of the funded
status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Total accumulated postretirement benefit obligation (APBO)..................... $ 4,709 $ 3,765
Less: plan assets at fair value................................................ 172 133
--------- ---------
APBO in excess of plan assets.................................................. 4,537 3,632
Unrecognized gain.............................................................. 631 1,283
--------- ---------
Accrued postretirement benefit cost recorded on the balance sheet.............. $ 5,168 $ 4,915
--------- ---------
--------- ---------
</TABLE>
Discount rate assumptions of 7.375%, 7.75% and 7.5% were used at December
31, 1997, 1996 and 1995, respectively. The accumulated postretirement
benefit obligation at December 31, 1997 was determined using a healthcare
cost trend rate of 10% for 1998, declining by 1% per year, starting in 1999,
to 6% and remaining at that level thereafter. A one percentage point
increase in the assumed healthcare cost trend rate for each year would
increase the accumulated other postretirement benefit obligation as of
December 31, 1997 by $626 and the annual net periodic other postretirement
benefit cost for the year then ended by $68.
10. INCOME TAXES
The Company uses the liability method of accounting for income taxes pursuant
to FASB Statement 109, "Accounting for Income Taxes." Under the liability
method, deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using the enacted tax rates.
Differences between income tax computed by applying the U.S. federal income
tax rate of 35% to income before income taxes and the provision for federal
income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Computed "expected" tax expense...................................... $ 51,669 $ 50,751 $ 48,631
Dividends received deduction......................................... (49) (24) (44)
Tax exempt interest.................................................. (4) (6) (7)
Other................................................................ (1,600) 225 (550)
--------- --------- ---------
Income tax expense........................................... $ 50,016 $ 50,946 $ 48,030
--------- --------- ---------
--------- --------- ---------
Percent of income tax expense to income before tax................... 33.9% 35.1% 34.6%
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-38
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 (continued)
The tax effect of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Discounted loss and adjustment expense reserves........................... $ 77 $ 1,359
Uncollected premium adjustment............................................ 2,607 2,270
Adjustment to life policy liabilities..................................... 51,176 34,773
Capitalization of policy acquisition costs................................ 40,354 33,393
Postretirement benefits................................................... 1,809 1,720
Realized capital losses................................................... 3,534 5,887
Guarantee fund assessments................................................ 4,163 3,518
Other..................................................................... 2,031 1,630
--------- ---------
Total deferred tax assets........................................... 105,751 84,550
--------- ---------
Deferred tax liabilities:
Deferred policy acquisition costs......................................... 96,317 90,826
Present value of future profits........................................... 3,084 --
Bond discount accrual..................................................... 19,631 9,525
Unrealized appreciation of investment securities (Net of deferred policy
acquisition costs valuation allowance: 1997-$12,372; 1996-$6,664)....... 164,449 86,120
Other..................................................................... 1,566 1,727
--------- ---------
Total deferred tax liabilities...................................... 285,047 188,198
--------- ---------
Net deferred tax liability.......................................... $ 179,296 $ 103,648
--------- ---------
--------- ---------
</TABLE>
The following table reconciles the deferred tax benefit in the Statement of
Income to the change in the deferred tax liability in the balance sheet for
the year ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Deferred tax benefit............................................... $ (4,689) $ (6,471) $ (13,800)
Net deferred tax liability acquired in acquisitions................ 2,008 -- --
Deferred tax changes reported in shareholder's equity:
Increase (decrease) in liability related to unrealized
appreciation or depreciation of investment securities.......... 84,037 (94,694) 255,506
Increase (decrease) in liability related to deferred policy
acquisition costs valuation allowance.......................... (5,708) 8,321 (14,985)
--------- --------- ---------
Increase (decrease) in net deferred tax liability.................. $ 75,648 $ (92,844) $ 226,721
--------- --------- ---------
--------- --------- ---------
</TABLE>
A-39
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SEGMENT DATA
A major portion of investment income, realized gains or losses and assets is
specifically identifiable with an industry segment. The remainder of these
amounts has been allocated in proportion to the investment income identified
with each segment.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Revenue:
Premiums and Other (Including $29,169 of financial services
revenue received from affiliates)............................. $ 56,649 $ 205,697 $ 262,346
Identifiable Investment Income.................................. 564,917 263,240 828,157
Investment Income Allocated..................................... 54,188 25,571 79,759
Identifiable Realized Gain (Loss) from Investments.............. (789) 1,400 611
Realized Gain from Investments Allocated........................ 4,213 1,983 6,196
----------- ----------- -------------
Total Revenue............................................. $ 679,178 $ 497,891 $ 1,177,069
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 16,249 $ 20,697 $ 36,946
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 80,110 $ 67,515 $ 147,625
----------- ----------- -------------
----------- ----------- -------------
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Costs............................... $ 166,447 $ 73,396 $ 239,843
Policy Loans.................................................... 32,091 28,158 60,249
Invested Assets................................................. 8,378,819 3,412,049 11,790,868
Other........................................................... 627,490 834,628 1,462,118
Invested Assets Allocated......................................... 710,485 335,825 1,046,310
Other Assets Allocated............................................ 15,543 7,526 23,069
----------- ----------- -------------
Total Assets.............................................. $ 9,930,875 $ 4,691,582 $ 14,622,457
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Revenue:
Premiums and Other (Including $35,477 of financial services
revenue received from affiliates)............................. $ 48,964 $ 204,069 $ 253,033
Identifiable Investment Income.................................. 506,628 256,939 763,567
Investment Income Allocated..................................... 48,157 24,314 72,471
Identifiable Realized Gain from Investments..................... 2,636 2,884 5,520
Realized Gain from Investments Allocated........................ 3,271 1,648 4,919
----------- ----------- -------------
Total Revenue............................................. $ 609,656 $ 489,854 $ 1,099,510
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 13,756 $ 21,896 $ 35,652
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 81,849 $ 63,153 $ 145,002
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
A-40
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 (continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
Identifiable Assets:
<S> <C> <C> <C>
Deferred Policy Acquisition Costs............................... $ 163,802 $ 76,662 $ 240,464
Policy Loans.................................................... 30,774 27,379 58,153
Invested Assets................................................. 6,660,938 3,298,105 9,959,043
Other........................................................... 163,855 533,823 697,678
Invested Assets Allocated......................................... 707,269 357,068 1,064,337
Other Assets Allocated............................................ 18,288 9,247 27,535
----------- ----------- -------------
Total Assets.............................................. $ 7,744,926 $ 4,302,284 $ 12,047,210
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Revenue:
Premiums and Other (Including $29,029 of financial services
revenue received from affiliates)............................. $ 45,284 $ 203,349 $ 248,633
Identifiable Investment Income.................................. 450,655 256,570 707,225
Investment Income Allocated..................................... 44,043 26,232 70,275
Identifiable Realized Gain (Loss) from Investments.............. 16,020 (8,586) 7,434
Realized Loss from Investments Allocated........................ (1,112) (646) (1,758)
----------- ----------- -------------
Total Revenue............................................. $ 554,890 $ 476,919 $ 1,031,809
----------- ----------- -------------
----------- ----------- -------------
Amortization of Deferred Policy Acquisition Costs................. $ 12,222 $ 20,154 $ 32,376
----------- ----------- -------------
----------- ----------- -------------
Income Before Income Taxes........................................ $ 84,956 $ 53,990 $ 138,946
----------- ----------- -------------
----------- ----------- -------------
<CAPTION>
DECEMBER 31, 1995
---------------------------------------
FINANCIAL EMPLOYEE
SERVICES BENEFITS TOTAL
----------- ----------- -------------
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Costs............................... $ 143,228 $ 67,263 $ 210,491
Policy Loans.................................................... 29,109 26,816 55,925
Invested Assets................................................. 6,086,143 3,261,042 9,347,185
Other........................................................... 155,358 327,863 483,221
Invested Assets Allocated......................................... 671,864 400,160 1,072,024
Other Assets Allocated............................................ 18,179 11,148 29,327
----------- ----------- -------------
Total Assets.................................................... $ 7,103,881 $ 4,094,292 $ 11,198,173
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
A-41
<PAGE>
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. IMPACT OF YEAR 2000 (UNAUDITED)
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This is commonly called the "Year 2000
problem." The Company has completed its assessment and has been modifying and
replacing portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and thereafter. The Year 2000
compliance cost for the Company is estimated at approximately $1,050, and as
of December 31, 1997, the Company has incurred and expensed approximately
$570. Based on the current progress and continuing modifications, the Company
believes that it will be Year 2000 compliant and that the Year 2000 problem
will not pose significant operational problems for its computer systems.
A-42
<PAGE>
HYPOTHETICAL ILLUSTRATIONS
- -------------------------------------------------------------------
OF DEATH BENEFITS, POLICY ACCOUNT, CASH SURRENDER VALUES, AND
ACCUMULATED PREMIUMS
The following tables have been prepared to show how the key financial elements
of the Policy work. The tables show how death benefits, Policy Account and Cash
Surrender Values (policy benefits) could vary over an extended period of time if
the Investment Division of the Separate Account had constant hypothetical gross
annual investment returns of 0%, 6% or 12% over the years covered by each table.
The policy benefits will differ from those shown in the tables if the annual
investment returns are not absolutely constant. That is, the figures will be
different if the returns averaged 0%, 6% or 12% over a period of years, but went
above or below those figures in individual Policy Years. The Policy benefits
will also differ, depending on the premium allocations to each Investment
Division, if the overall actual rates of return averaged 0%, 6% or 12%, but went
above or below those figures for the individual Investment Divisions. The tables
are for preferred and standard risk male non-smokers. Planned premium payments
are assumed to be paid at the beginning of each Policy Year. The difference
between the Policy Account and the Cash Surrender Value in the first ten years
is the surrender charge. The Policy Account amounts reflect the front-end
charges.
The tables illustrates cost of insurance and expense charges (Policy cost
factors) at both the current rates and the maximum rates guaranteed in the
Policies. The amounts shown at the end of each Policy Year reflect a daily
charge against the Investment Divisions. This charge includes a .90% charge
against the Separate Account for mortality and expense risks; the effect on each
Division's investment experience of the charge to Funds' assets for investment
management (0.62%, an average of the 1997 actual investment management fees
charged to the various Portfolios of the Funds); and 0.15% direct Funds'
operating expenses. The effect of these adjustments is that on a 0% gross rate
of return the net rate of return would be -1.67%, on 6% it would be 4.33%, and
on 12% it would be 10.33%.
The tables assume deduction of an applicable premium tax rate based on 2.1% of
premiums and 3% of premium sales load. There are tables for both male preferred
non-smoker age 45 and male standard non-smoker age 45 and each class is
illustrated using CURRENT and GUARANTEED Policy cost factors. The current tables
assume that the monthly charge remains constant at $4.00. The guaranteed tables
assume that the monthly charge remains constant at $8.00. The tables reflect the
fact that SAFECO does not currently make any charge for federal taxes.
If SAFECO charged for those taxes in the future, it will take a higher rate of
return to produce after-tax returns of 0%, 6% or 12%.
The second column of each table shows what would happen if an amount equal to
the premiums was invested to earn interest, after taxes, of 5% compounded
annually. These tables show that if a policy is returned in its very early years
for payment of its Cash Surrender Value, that Cash Surrender Value will be low
in comparison to the amount of the premiums accumulated with interest. Thus, the
cost of holding a Policy for a relatively short time will be high.
INDIVIDUAL ILLUSTRATIONS. If requested, SAFECO will furnish a comparable
illustration based on the age, sex and underwriting classification of the
proposed Primary Insured, and an initial Face Amount of Insurance and planned
premiums as selected. If a Policy is purchased, SAFECO will deliver an
individualized illustration reflecting the planned premium chosen and the
Primary Insured's actual risk class.
B-1
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C>
Initial Face Amount: $100,000
Death Benefit Option: A
Death Benefits Payable to
Age: 95
Annual Planned Premium(1): $2,000.00
Issue Age: 45
Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS ASSUMING CURRENT CHARGES(2)
Assuming Hypothetical Gross Annual Investment Return of:
<TABLE>
<CAPTION>
0.00% 6.00%
--------------------------------------- ---------------------------------------
ACCUM POLICY CASH POLICY CASH
END OF PREMIUM (5% DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER
POLICY YEAR INT) BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,100 100,000 1,379 899 100,000 1,477 997
2 4,305 100,000 2,936 2,335 100,000 3,226 2,625
3 6,620 100,000 4,435 3,715 100,000 5,019 4,298
4 9,051 100,000 5,886 5,079 100,000 6,866 6,060
5 11,604 100,000 7,294 6,488 100,000 8,776 7,970
6 14,284 100,000 8,661 8,016 100,000 10,753 10,107
7 17,098 100,000 9,976 9,492 100,000 12,788 12,305
8 20,053 100,000 11,239 10,916 100,000 14,886 14,563
9 23,156 100,000 12,449 12,288 100,000 17,048 16,886
10 26,414 100,000 13,604 13,604 100,000 19,274 19,274
11 29,834 100,000 14,699 14,699 100,000 21,564 21,564
12 33,426 100,000 15,725 15,725 100,000 23,914 23,914
13 37,197 100,000 16,681 16,681 100,000 26,327 26,327
14 41,157 100,000 17,560 17,560 100,000 28,802 28,802
15 45,315 100,000 18,356 18,356 100,000 31,338 31,338
16 49,681 100,000 19,063 19,063 100,000 33,938 33,938
17 54,265 100,000 19,679 19,679 100,000 36,607 36,607
18 59,078 100,000 20,201 20,201 100,000 39,351 39,351
19 64,132 100,000 20,621 20,621 100,000 42,172 42,172
20 69,439 100,000 20,931 20,931 100,000 45,076 45,076
Age 75 139,522 100,000 11,199 11,199 100,000 84,990 84,990
<CAPTION>
12.00%
---------------------------------------
POLICY CASH
END OF DEATH ACCOUNT SURRENDER
POLICY YEAR BENEFIT VALUE VALUE
<S> <C> <C> <C>
1 100,000 1,576 1,095
2 100,000 3,528 2,928
3 100,000 5,651 4,931
4 100,000 7,970 7,164
5 100,000 10,514 9,707
6 100,000 13,307 12,662
7 100,000 16,366 15,882
8 100,000 19,720 19,397
9 100,000 23,401 23,240
10 100,000 27,446 27,446
11 100,000 31,891 31,891
12 100,000 36,778 36,778
13 100,000 42,159 42,159
14 100,000 48,091 48,091
15 100,000 54,643 54,643
16 100,000 61,892 61,892
17 100,000 69,933 69,933
18 100,000 78,874 78,874
19 110,080 88,774 88,774
20 121,582 99,658 99,658
Age 75 301,291 286,943 286,943
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loans or withdrawals have been made. Zero values
indicate lapse in the absence of an additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY THE OWNER AND DIFFERENT INVESTMENT RATES
OF RETURN FOR THE FUNDS' PORTFOLIOS. THE DEATH BENEFIT AND CASH VALUE FOR A
POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF
RETURN AVERAGED THE RATE SHOWN ABOVE OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN
BE MADE BY SAFECO OR THE FUNDS THAT THIS ASSUMED INVESTMENT RATE OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
B-2
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C>
Initial Face Amount: $100,000
Death Benefit Option: A
Death Benefits Payable to
Age: 95
Annual Planned Premium(1): $2,000.00
Issue Age: 45
Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS ASSUMING GUARANTEED CHARGES(2)
Assuming Hypothetical Gross Annual Investment Return of:
<TABLE>
<CAPTION>
0.00% 6.00%
--------------------------------------- ---------------------------------------
END OF ACCUM POLICY CASH POLICY CASH
POLICY PREMIUM (5% DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER
YEAR INT) BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,100 100,000 1,196 715 100,000 1,288 808
2 4,305 100,000 2,588 1,988 100,000 2,856 2,255
3 6,620 100,000 3,933 3,213 100,000 4,468 3,747
4 9,051 100,000 5,230 4,423 100,000 6,124 5,317
5 11,604 100,000 6,477 5,670 100,000 7,825 7,019
6 14,284 100,000 7,671 7,025 100,000 9,570 8,925
7 17,098 100,000 8,808 8,324 100,000 11,357 10,873
8 20,053 100,000 9,885 9,562 100,000 13,183 12,861
9 23,156 100,000 10,895 10,734 100,000 15,047 14,886
10 26,414 100,000 11,835 11,835 100,000 16,945 16,945
11 29,834 100,000 12,698 12,698 100,000 18,874 18,874
12 33,426 100,000 13,483 13,483 100,000 20,836 20,836
13 37,197 100,000 14,185 14,185 100,000 22,830 22,830
14 41,157 100,000 14,798 14,798 100,000 24,854 24,854
15 45,315 100,000 15,314 15,314 100,000 26,905 26,905
16 49,681 100,000 15,724 15,724 100,000 28,978 28,978
17 54,265 100,000 16,016 16,016 100,000 31,072 31,072
18 59,078 100,000 16,174 16,174 100,000 33,177 33,177
19 64,132 100,000 16,180 16,180 100,000 35,286 35,286
20 69,439 100,000 16,019 16,019 100,000 37,397 37,397
Age 75 139,522 100,000 59,341 59,341
<CAPTION>
12.00%
---------------------------------------
END OF POLICY CASH
POLICY DEATH ACCOUNT SURRENDER
YEAR BENEFIT VALUE VALUE
<S> <C> <C> <C>
1 100,000 1,380 900
2 100,000 3,135 2,535
3 100,000 5,048 4,327
4 100,000 7,133 6,327
5 100,000 9,410 8,603
6 100,000 11,894 11,249
7 100,000 14,606 14,122
8 100,000 17,568 17,245
9 100,000 20,804 20,642
10 100,000 24,341 24,341
11 100,000 28,213 28,213
12 100,000 32,459 32,459
13 100,000 37,125 37,125
14 100,000 42,262 42,262
15 100,000 47,928 47,928
16 100,000 54,191 54,191
17 100,000 61,131 61,131
18 100,000 68,844 68,844
19 100,000 77,443 77,443
20 106,178 87,031 87,031
Age 75 293,897 279,902 279,902
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loans or withdrawals have been made. Zero values
indicate lapse in the absence of an additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY THE OWNER AND DIFFERENT INVESTMENT RATES
OF RETURN FOR THE FUNDS' PORTFOLIOS. THE DEATH BENEFIT AND CASH VALUE FOR A
POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF
RETURN AVERAGED THE RATE SHOWN ABOVE OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN
BE MADE BY SAFECO OR THE FUNDS THAT THIS ASSUMED INVESTMENT RATE OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
B-3
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
STANDARD NON-SMOKER
<TABLE>
<S> <C>
Initial Face Amount: $100,000
Death Benefit Option: A
Death Benefits Payable to
Age: 95
Annual Planned Premium(1): $2,000.00
Issue Age: 45
Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS ASSUMING CURRENT CHARGES(2)
Assuming Hypothetical Gross Annual Investment Return of:
<TABLE>
<CAPTION>
0.00% 6.00%
--------------------------------------- ---------------------------------------
ACCUM POLICY CASH POLICY CASH
END OF PREMIUM (5% DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER
POLICY YEAR INT) BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,100 100,000 1,324 844 100,000 1,421 940
2 4,305 100,000 2,828 2,228 100,000 3,111 2,511
3 6,620 100,000 4,276 3,556 100,000 4,844 4,124
4 9,051 100,000 5,677 4,870 100,000 6,630 5,824
5 11,604 100,000 7,036 6,229 100,000 8,476 7,670
6 14,284 100,000 8,355 7,710 100,000 10,388 9,742
7 17,098 100,000 9,624 9,140 100,000 12,356 11,872
8 20,053 100,000 10,842 10,519 100,000 14,383 14,061
9 23,156 100,000 12,008 11,847 100,000 16,472 16,311
10 26,414 100,000 13,119 13,119 100,000 18,623 18,623
11 29,834 100,000 14,172 14,172 100,000 20,835 20,835
12 33,426 100,000 15,150 15,150 100,000 23,098 23,098
13 37,197 100,000 16,051 16,051 100,000 25,414 25,414
14 41,157 100,000 16,871 16,871 100,000 27,782 27,782
15 45,315 100,000 17,602 17,602 100,000 30,204 30,204
16 49,681 100,000 18,238 18,238 100,000 32,677 32,677
17 54,265 100,000 18,779 18,779 100,000 35,209 35,209
18 59,078 100,000 19,217 19,217 100,000 37,803 37,803
19 64,132 100,000 19,547 19,547 100,000 40,462 40,462
20 69,439 100,000 19,761 19,761 100,000 43,193 43,193
Age 75 139,522 100,000 8,294 8,294 100,000 79,767 79,767
<CAPTION>
12.00%
---------------------------------------
POLICY CASH
END OF DEATH ACCOUNT SURRENDER
POLICY YEAR BENEFIT VALUE VALUE
<S> <C> <C> <C>
1 100,000 1,517 1,037
2 100,000 3,407 2,806
3 100,000 5,461 4,740
4 100,000 7,705 6,899
5 100,000 10,167 9,360
6 100,000 12,870 12,225
7 100,000 15,832 15,348
8 100,000 19,080 18,757
9 100,000 22,646 22,485
10 100,000 26,563 26,563
11 100,000 30,869 30,869
12 100,000 35,599 35,599
13 100,000 40,801 40,801
14 100,000 46,535 46,495
15 100,000 52,865 52,815
16 100,000 59,868 59,807
17 100,000 67,636 67,562
18 100,000 76,276 76,186
19 106,495 85,883 85,775
20 117,672 96,452 96,325
Age 75 325,878 310,360 310,360
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loans or withdrawals have been made. Zero values
indicate lapse in the absence of an additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY THE OWNER AND DIFFERENT INVESTMENT RATES
OF RETURN FOR THE FUNDS' PORTFOLIOS. THE DEATH BENEFIT AND CASH VALUE FOR A
POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF
RETURN AVERAGED THE RATE SHOWN ABOVE OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN
BE MADE BY SAFECO OR THE FUNDS THAT THIS ASSUMED INVESTMENT RATE OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
B-4
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
STANDARD NON-SMOKER
<TABLE>
<S> <C>
Initial Face Amount: $100,000
Death Benefit Option: A
Death Benefits Payable to
Age: 95
Annual Planned Premium(1): $2,000.00
Issue Age: 45
Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
RESULTS ASSUMING GUARANTEED CHARGES(2)
Assuming Hypothetical Gross Annual Investment Return of:
<TABLE>
<CAPTION>
0.00% 6.00%
--------------------------------------- ---------------------------------------
END OF ACCUM POLICY CASH POLICY CASH
POLICY PREMIUM (5% DEATH ACCOUNT SURRENDER DEATH ACCOUNT SURRENDER
YEAR INT) BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C> <C>
1 2,100 100,000 1,196 715 100,000 1,288 808
2 4,305 100,000 2,588 1,988 100,000 2,856 2,255
3 6,620 100,000 3,933 3,213 100,000 4,468 3,747
4 9,051 100,000 5,230 4,423 100,000 6,124 5,317
5 11,604 100,000 6,477 5,670 100,000 7,825 7,019
6 14,284 100,000 7,671 7,025 100,000 9,570 8,925
7 17,098 100,000 8,808 8,324 100,000 11,357 10,873
8 20,053 100,000 9,885 9,562 100,000 13,183 12,861
9 23,156 100,000 10,895 10,734 100,000 15,047 14,886
10 26,414 100,000 11,835 11,835 100,000 16,945 16,945
11 29,834 100,000 12,698 12,698 100,000 18,874 18,874
12 33,426 100,000 13,483 13,483 100,000 20,836 20,836
13 37,197 100,000 14,185 14,185 100,000 22,830 22,830
14 41,157 100,000 14,798 14,798 100,000 24,854 24,854
15 45,315 100,000 15,314 15,314 100,000 26,905 26,905
16 49,681 100,000 15,724 15,724 100,000 28,978 28,978
17 54,265 100,000 16,016 16,016 100,000 31,072 31,072
18 59,078 100,000 16,174 16,174 100,000 33,177 33,177
19 64,132 100,000 16,180 16,180 100,000 35,286 35,286
20 69,439 100,000 16,019 16,019 100,000 37,397 37,397
Age 75 139,522 100,000 59,341 59,341
<CAPTION>
12.00%
---------------------------------------
END OF POLICY CASH
POLICY DEATH ACCOUNT SURRENDER
YEAR BENEFIT VALUE VALUE
<S> <C> <C> <C>
1 100,000 1,380 900
2 100,000 3,135 2,535
3 100,000 5,048 4,327
4 100,000 7,133 6,327
5 100,000 9,410 8,603
6 100,000 11,894 11,249
7 100,000 14,606 14,122
8 100,000 17,568 17,245
9 100,000 20,804 20,642
10 100,000 24,341 24,341
11 100,000 28,213 28,213
12 100,000 32,459 32,459
13 100,000 37,125 37,125
14 100,000 42,262 42,262
15 100,000 47,928 47,928
16 100,000 54,191 54,191
17 100,000 61,131 61,131
18 100,000 68,844 68,844
19 100,000 77,443 77,443
20 106,178 87,031 87,031
Age 75 293,897 279,902 279,902
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency or
in different amounts.
(2) Assumes that no policy loans or withdrawals have been made. Zero values
indicate lapse in the absence of an additional premium payment.
THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS
PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF
PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL INVESTMENT RATES OF RETURN MAY
BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS,
INCLUDING THE INVESTMENT ALLOCATIONS BY THE OWNER AND DIFFERENT INVESTMENT RATES
OF RETURN FOR THE FUNDS' PORTFOLIOS. THE DEATH BENEFIT AND CASH VALUE FOR A
POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL INVESTMENT RATES OF
RETURN AVERAGED THE RATE SHOWN ABOVE OVER A PERIOD OF YEARS, BUT FLUCTUATED
ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATION CAN
BE MADE BY SAFECO OR THE FUNDS THAT THIS ASSUMED INVESTMENT RATE OF RETURN CAN
BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME.
B-5
<PAGE>
ILLUSTRATIONS
- -------------------------------------------------------------------
OF VARIATION IN DEATH BENEFIT, POLICY ACCOUNT AND CASH SURRENDER
VALUES IN RELATION TO THE FUNDS' INVESTMENT EXPERIENCE
In order to demonstrate how actual investment experience of the Funds affected
the Death Benefits, Policy Account and Cash Surrender Values (policy benefits)
of a Policy, the following hypothetical illustrations were developed and are
based upon the actual experience of the Portfolios of the Funds. These
illustrations assume that the Separate Account acquired an interest in the
Portfolios at their inception.
These tables illustrate cost of insurance and expense charges (Policy cost
factors) at both the current rates and the maximum rates guaranteed in the
Policies. The amounts shown at the end of each Policy Year reflect a daily
charge against the Investment Divisions. This charge includes a .90% charge
against the Separate Account for mortality and expense risks, the effect on each
Division's actual investment experience of the investment management fees and
direct operating expenses. These tables also assume deduction of a premium tax
rate based on 2.1% of premiums and 3% of premium sales load. The tables are for
preferred risk male non-smoker age 45. Planned premium payments are assumed to
be paid at the beginning of each Policy Year.
C-1
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIDELITY'S VIP MONEY MARKET DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1983 100,000 1,542 1,061 100,000 1,349 868
1984 100,000 3,464 2,864 100,000 3,075 2,475
1985 100,000 5,418 4,698 100,000 4,834 4,114
1986 100,000 7,389 6,582 100,000 6,603 5,797
1987 100,000 9,434 8,627 100,000 8,427 7,621
1988 100,000 11,682 11,037 100,000 10,418 9,773
1989 100,000 14,283 13,799 100,000 12,715 12,231
1990 100,000 16,902 16,579 100,000 15,012 14,689
1991 100,000 19,321 19,159 100,000 17,110 16,949
1992 100,000 21,379 21,379 100,000 18,865 18,865
1993 100,000 23,311 23,311 100,000 20,486 20,486
1994 100,000 25,505 25,505 100,000 22,316 22,316
1995 100,000 28,172 28,172 100,000 24,542 24,542
1996 100,000 30,796 30,796 100,000 26,708 26,708
1997 100,000 33,530 33,530 100,000 28,941 28,941
</TABLE>
- --------------------------------------------------------------------------------
FIDELITY'S VIP HIGH INCOME DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1986 100,000 1,682 1,201 100,000 1,480 1,000
1987 100,000 3,302 2,702 100,000 2,931 2,331
1988 100,000 5,421 4,701 100,000 4,841 4,120
1989 100,000 6,616 5,809 100,000 5,906 5,099
1990 100,000 7,893 7,086 100,000 7,035 6,228
1991 100,000 12,697 12,052 100,000 11,327 10,682
1992 100,000 17,412 16,928 100,000 15,525 15,041
1993 100,000 22,634 22,312 100,000 20,161 19,838
1994 100,000 23,497 23,336 100,000 20,879 20,718
1995 100,000 29,946 29,946 100,000 26,561 26,561
1996 100,000 35,553 35,553 100,000 31,472 31,472
1997 100,000 43,249 43,249 100,000 38,223 38,223
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-2
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIDELITY'S VIP EQUITY-INCOME DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1987 100,000 1,373 893 100,000 1,190 710
1988 100,000 3,663 3,063 100,000 3,252 2,652
1989 100,000 6,130 5,410 100,000 5,478 4,757
1990 100,000 6,418 5,612 100,000 5,723 4,916
1991 100,000 10,442 9,635 100,000 9,334 8,528
1992 100,000 13,915 13,270 100,000 12,431 11,786
1993 100,000 18,144 17,660 100,000 16,195 15,711
1994 100,000 20,864 20,541 100,000 18,591 18,268
1995 100,000 30,062 29,901 100,000 26,767 26,605
1996 100,000 35,805 35,805 100,000 31,837 31,837
1997 100,000 47,514 47,514 100,000 42,213 42,213
</TABLE>
- --------------------------------------------------------------------------------
FIDELITY'S VIP GROWTH DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1987 100,000 1,452 971 100,000 1,264 783
1988 100,000 3,530 2,930 100,000 3,133 2,533
1989 100,000 6,723 6,002 100,000 6,018 5,298
1990 100,000 7,217 6,410 100,000 6,450 5,643
1991 100,000 12,747 11,940 100,000 11,428 10,622
1992 100,000 15,503 14,858 100,000 13,883 13,238
1993 100,000 20,201 19,717 100,000 18,077 17,593
1994 100,000 21,503 21,180 100,000 19,203 18,880
1995 100,000 30,986 30,825 100,000 27,650 27,489
1996 100,000 36,999 36,999 100,000 32,972 32,972
1997 100,000 47,246 47,296 100,000 42,063 42,063
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-3
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIDELITY'S VIP OVERSEAS DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1988 100,000 1,525 1,044 100,000 1,333 852
1989 100,000 3,965 3,365 100,000 3,533 2,933
1990 100,000 5,399 4,679 100,000 4,820 4,100
1991 100,000 7,462 6,655 100,000 6,672 5,866
1992 100,000 7,936 7,129 100,000 7,077 6,270
1993 100,000 12,974 12,329 100,000 11,581 10,936
1994 100,000 14,600 14,116 100,000 13,004 12,520
1995 100,000 17,510 17,188 100,000 15,563 15,240
1996 100,000 21,321 21,160 100,000 18,906 18,745
1997 100,000 25,214 25,214 100,000 22,299 22,299
</TABLE>
- --------------------------------------------------------------------------------
FIDELITY'S VIP II INVESTMENT GRADE BOND DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1989 100,000 1,560 1,079 100,000 1,365 885
1990 100,000 3,344 2,744 100,000 2,966 2,366
1991 100,000 5,709 4,989 100,000 5,099 4,379
1992 100,000 7,695 6,888 100,000 6,881 6,075
1993 100,000 10,183 9,377 100,000 9,107 8,301
1994 100,000 11,156 10,511 100,000 9,950 9,304
1995 100,000 14,767 14,283 100,000 13,154 12,670
1996 100,000 16,623 16,301 100,000 14,769 14,446
1997 100,000 19,571 19,409 100,000 17,339 17,177
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-4
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIDELITY'S VIP II ASSET MANAGER DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1990 100,000 1,502 1,021 100,000 1,311 831
1991 100,000 3,815 3,215 100,000 3,395 2,795
1992 100,000 5,995 5,275 100,000 5,360 4,640
1993 100,000 9,124 8,318 100,000 8,181 7,374
1994 100,000 9,912 9,106 100,000 8,870 8,064
1995 100,000 13,307 12,662 100,000 11,898 11,252
1996 100,000 16,872 16,388 100,000 15,066 14,582
1997 100,000 22,033 21,710 100,000 19,652 19,329
</TABLE>
- --------------------------------------------------------------------------------
FIDELITY'S VIP II INDEX 500 DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1993 100,000 1,551 1,071 100,000 1,357 877
1994 100,000 3,165 2,565 100,000 2,802 2,202
1995 100,000 6,523 5,803 100,000 5,838 5,117
1996 100,000 9,893 9,086 100,000 8,877 8,071
1997 100,000 15,141 14,335 100,000 13,606 12,800
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-5
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FIDELITY'S VIP II ASSET MANAGER: GROWTH DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
POLICY ------------------------------------------- -------------------------------------------
YEAR END DEATH POLICY CASH SURRENDER DEATH POLICY CASH SURRENDER
DECEMBER 31ST BENEFIT ACCOUNT VALUE VALUE BENEFIT ACCOUNT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1995 100,000 1,771 1,291 100,000 1,565 1,085
1996 100,000 4,055 3,455 100,000 3,624 3,024
1997 100,000 7,036 6,316 100,000 6,321 5,601
</TABLE>
- --------------------------------------------------------------------------------
FIDELITY'S VIP II CONTRAFUND DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
POLICY ------------------------------------------- -------------------------------------------
YEAR END DEATH POLICY CASH SURRENDER DEATH POLICY CASH SURRENDER
DECEMBER 31ST BENEFIT ACCOUNT VALUE VALUE BENEFIT ACCOUNT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1995 100,000 2,044 1,564 100,000 1,823 1,342
1996 100,000 4,426 3,825 100,000 3,973 3,373
1997 100,000 7,440 6,720 100,000 6,704 5,984
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-6
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to
Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LEXINGTON NATURAL RESOURCES DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1992 100,000 1,444 964 100,000 1,257 777
1993 100,000 3,373 2,772 100,000 2,989 2,388
1994 100,000 4,631 3,910 100,000 4,115 3,395
1995 100,000 7,200 6,393 100,000 6,425 5,618
1996 100,000 11,059 10,253 100,000 9,888 9,082
1997 100,000 13,389 12,743 100,000 11,954 11,309
</TABLE>
- --------------------------------------------------------------------------------
LEXINGTON EMERGING MARKETS DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
POLICY ------------------------------------------- -------------------------------------------
YEAR END DEATH POLICY CASH SURRENDER DEATH POLICY CASH SURRENDER
DECEMBER 31ST BENEFIT ACCOUNT VALUE VALUE BENEFIT ACCOUNT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1995 100,000 1,328 847 100,000 1,147 667
1996 100,000 3,138 2,538 100,000 2,771 2,171
1997 100,000 4,110 3,390 100,000 3,639 2,918
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-7
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO RST BOND DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1988 100,000 1,507 1,026 100,000 1,316 835
1989 100,000 3,454 2,854 100,000 3,065 2,465
1990 100,000 5,327 4,607 100,000 4,751 4,030
1991 100,000 7,806 7,000 100,000 6,980 6,173
1992 100,000 9,912 9,105 100,000 8,860 8,053
1993 100,000 12,561 11,916 100,000 11,213 10,567
1994 100,000 13,518 13,034 100,000 12,034 11,550
1995 100,000 17,575 17,253 100,000 15,618 15,296
1996 100,000 18,963 18,801 100,000 16,797 16,636
1997 100,000 21,940 21,940 100,000 19,369 19,369
</TABLE>
- --------------------------------------------------------------------------------
SAFECO RST EQUITY DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1988 100,000 1,818 1,338 100,000 1,609 1,129
1989 100,000 4,364 3,764 100,000 3,909 3,309
1990 100,000 5,573 4,853 100,000 4,991 4,271
1991 100,000 9,026 8,219 100,000 8,108 7,302
1992 100,000 11,341 10,535 100,000 10,181 9,375
1993 100,000 16,405 15,759 100,000 14,723 14,078
1994 100,000 19,382 18,898 100,000 17,371 16,887
1995 100,000 26,737 26,415 100,000 23,946 23,624
1996 100,000 35,046 34,885 100,000 31,363 31,201
1997 100,000 45,380 45,380 100,000 40,583 40,583
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-8
<PAGE>
VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
MALE
PREFERRED NON-SMOKER
<TABLE>
<S> <C> <C> <C>
Initial Face Amount: $100,000 Annual Planned Premium(1): $2,000.00
Death Benefit Option: A Issue Age: 45
Death Benefits Payable to Age: 95 Premiums Payable to Age: 95
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SAFECO RST GROWTH DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1994 100,000 1,587 1,107 100,000 1,391 911
1995 100,000 4,536 3,936 100,000 4,059 3,458
1996 100,000 8,074 7,354 100,000 7,263 6,543
1997 100,000 13,924 13,118 100,000 12,564 11,758
</TABLE>
- --------------------------------------------------------------------------------
SAFECO RST NORTHWEST DIVISION
<TABLE>
<CAPTION>
BASED UPON CURRENT CHARGES BASED UPON GUARANTEED CHARGES
----------------------------------------- -----------------------------------------
POLICY POLICY POLICY
YEAR END DEATH ACCOUNT CASH SURRENDER DEATH ACCOUNT CASH SURRENDER
DECEMBER 31ST BENEFIT VALUE VALUE BENEFIT VALUE VALUE
<S> <C> <C> <C> <C> <C> <C>
1994 100,000 1,451 971 100,000 1,264 783
1995 100,000 3,269 2,669 100,000 2,894 2,294
1996 100,000 5,425 4,704 100,000 4,836 4,116
1997 100,000 9,137 8,330 100,000 8,183 7,376
</TABLE>
- --------------------------------------------------------------------------------
(1) Assumes the premium shown is paid at the beginning of each policy year.
Values would be different if premiums are paid with a different frequency
or in different amounts.
THESE ILLUSTRATIONS ARE BASED UPON PAST PERFORMANCE AND ARE NOT INDICATIVE OF
FUTURE RESULTS. FUTURE POLICY BENEFITS WILL FLUCTUATE BASED UPON ACTUAL
INVESTMENT RESULTS WHICH MAY BE MORE OR LESS THAN THOSE ACHIEVED IN THE PAST AND
WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS BY THE
OWNER. NO REPRESENTATION CAN BE MADE BY SAFECO OR THE FUNDS THAT THESE RESULTS
CAN BE ACHIEVED IN THE FUTURE.
C-9
<PAGE>
RATES OF RETURN
The previous VIP and VIP II Division tables are based on the investment
performance, after actual expenses, of the corresponding VIP and VIP II
Portfolios. The average annual total return used in calculating the death
benefit, policy account value and cash surrender value for the respective
Portfolios are listed below. These annual total returns do not account for
insurance and administrative charges, or the mortality and expense risk charge
of 0.90%; and, they are not an estimate or a guarantee of future investment
performance.
CALENDAR YEAR AVERAGE ANNUAL TOTAL RETURN (%) FOR THE VIP PORTFOLIOS
<TABLE>
<CAPTION>
VIP VIP VIP
MONEY HIGH EQUITY- VIP VIP
YEAR MARKET INCOME INCOME GROWTH OVERSEAS
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1983 9.16
1984 10.43
1985 8.11
1986 6.70 17.68
1987 6.44 1.22 -1.13 3.66
1988 7.39 11.64 22.71 15.58 8.13
1989 9.12 -4.17 17.34 31.51 26.28
1990 8.04 -2.23 -15.29 -11.73 -1.67
1991 6.09 35.08 31.44 45.51 8.00
1992 3.90 23.17 16.89 9.32 -10.72
1993 3.23 20.40 18.29 19.37 37.35
1994 4.25 -1.64 7.07 -0.02 1.72
1995 5.87 20.72 35.09 35.36 9.68
1996 5.41 14.03 14.28 14.71 13.15
1997 5.51 17.67 28.11 23.48 11.56
</TABLE>
CALENDAR YEAR AVERAGE ANNUAL TOTAL RETURN (%) FOR THE VIP II PORTFOLIOS
<TABLE>
<CAPTION>
VIP II
INVESTMENT VIP II VIP II VIP II VIP II
GRADE ASSET INDEX ASSET MGR: CONTRA-
YEAR BOND MANAGER 500 GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1989 10.26
1990 6.21 6.72
1991 16.38 22.56
1992 6.65 11.71
1993 10.96 21.23 9.74
1994 -3.76 -6.09 1.04
1995 17.32 16.96 37.19 23.13 39.62
1996 3.19 14.60 22.71 20.04 21.22
1997 9.06 20.65 32.82 25.07 24.14
</TABLE>
C-10
<PAGE>
The previous Lexington Natural Resources Trust and Lexington Emerging Markets
Fund ("Lexington") Division tables are based on the investment performance,
after actual expenses, of the corresponding Lexington Portfolios. The average
annual total return used in calculating the death benefit, policy account value
and cash surrender value for the respective Portfolios are listed below. These
annual total returns do not account for insurance and administrative charges, or
the mortality and expense risk charge of 0.90%; and, they are not an estimate or
a guarantee of future investment performance.
CALENDAR YEAR AVERAGE ANNUAL TOTAL RETURN (%) FOR THE LEXINGTON PORTFOLIOS
<TABLE>
<CAPTION>
LEXINGTON LEXINGTON
NATURAL EMERGING
YEAR RESOURCES MARKETS
- -------------------------------------------------------
<S> <C> <C>
1992 3.22
1993 10.90
1994 -5.38
1995 16.87 -3.93
1996 26.89 7.46
1997 7.15 -11.55
</TABLE>
The previous SAFECO RST Division tables are based on the investment performance,
after actual expenses, of the corresponding SAFECO RST Portfolios. The average
annual total return used in calculating the death benefit, policy account value
and cash surrender value for the respective Portfolios are listed below. These
annual total returns do not account for insurance and administrative charges, or
the mortality and expense risk charge of 0.90%; and, they are not an estimate or
a guarantee of future investment performance.
CALENDAR YEAR AVERAGE ANNUAL TOTAL RETURN (%) FOR THE SAFECO RST PORTFOLIOS
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
RST RST RST RST
YEAR BOND EQUITY GROWTH NORTHWEST
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1988 7.03 25.98
1989 11.30 27.11
1990 6.57 -5.21
1991 13.98 26.85
1992 6.82 8.06
1993 10.55 27.92
1994 -2.93 8.94 11.92 3.65
1995 17.87 28.63 41.00 7.42
1996 0.54 24.79 32.06 12.44
1997 8.41 24.85 44.55 31.02
</TABLE>
C-11
<PAGE>
STANDARD AND POOR'S 500
- -------------------------------------------------------------------
The Standard and Poor's (S&P 500) is a weighted index of 500 widely held stocks:
400 Industrials, 40 Financial Company Stocks, 40 Public Utilities, and 20
Transportation stocks, most of which are traded on the New York Stock Exchange.
The S&P 500 is generally regarded as an accurate composite of the overall stock
market.
STANDARD AND POOR'S 500
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1983 164.93
1984 167.24
1985 211.28
1986 242.17
1987 247.08
1988 277.72
1989 353.40
1990 330.22
1991 417.09
1992 435.71
1993 466.45
1994 459.27
1995 615.93
1996 740.74
1997 970.43
</TABLE>
ILLUSTRATION OF POLICY VALUES--
VARIABLE UNIVERSAL LIFE
Policy accumulation values are calculated assuming the Standard and Poor's 500
Index annual rates of return on a $100,000 policy, death benefit option A, which
was purchased in 1983 by a 45 year old, male, preferred non-smoker. The current
schedule of cost of insurance rates were used.
<TABLE>
<CAPTION>
S&P 500 POLICY CASH
ANNUAL ACCOUNT SURRENDER DEATH
YEAR RETURN VALUE VALUE BENEFIT
- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
1983 22.43% 1,760 1,279 100,000
1984 6.10% 3,552 2,952 100,000
1985 31.57% 6,764 6,034 100,000
1986 18.21% 9,784 8,977 100,000
1987 5.17% 11,824 11,017 100,000
1988 16.50% 15,472 14,826 100,000
1989 31.43% 22,240 21,756 100,000
1990 -3.19% 22,771 22,449 100,000
1991 30.55% 31,521 31,360 100,000
1992 7.68% 35,270 35,270 100,000
1993 10.00% 40,119 40,119 100,000
1994 1.32% 41,762 41,762 100,000
1995 37.51% 59,151 59,151 100,000
1996 23.25% 74,336 74,336 102,584
1997 33.35% 100,605 100,605 134,811
</TABLE>
1) Assumes an annual $2000 premium is paid at the beginning of each policy
year. Values would be different if premiums are paid with a different
frequency or in different amounts.
2) Assumes that no policy loan has been made. Excessive loans or withdrawals
may cause this policy to lapse because of insufficient cash value.
THE STANDARD AND POOR'S INDEX RATES SHOWN ABOVE FOR THE LAST 15 YEARS IS A
DEMONSTRATION OF A WEIGHTED AVERAGE OF 500 WIDELY HELD STOCKS. IT SHOULD NOT BE
DEEMED A REPRESENTATION OF FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF
RETURN WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS
MADE BY THE OWNER, THE SIZE OF THE POLICY, ACTUAL PREMIUMS PAID, AND COST OF
INSURANCE. THE INFORMATION IN THE CHART IS NOT NECESSARILY INDICATIVE OF FUTURE
PERFORMANCE.
D-1
<PAGE>
LONG TERM MARKET TRENDS
- -------------------------------------------------------------------
The information below covering the period of 1926-1997 an examination of the
basic relationship between risk and return among the different asset classes,
and between nominal and real (inflation-adjusted) returns. The information is
provided because the policyowners have varied investment portfolios available
which have different investment objectives and policies. The chart generally
demonstrates how different classes of investments have performed during the
period. The study of asset returns provides a period long enough to include most
of the major types of events that investors have experienced in the past and may
experience in the future. This is a historical record and is not intended as a
projection of future performance.
The graph depicts the growth of a dollar invested in large company stocks, small
company stocks, long-term government bonds, Treasury bills, and a hypothetical
asset returning the inflation rate over the period from the end of 1925 to the
end of 1997. All results assume reinvestment of dividends on stocks or coupons
on bonds and no taxes. Transaction costs are not included, except in the small
company stock index starting in 1982. Charges associated with a variable
insurance policy are not reflected in the chart.
Each of the cumulative index values is initiated at $1.00 at year-end 1925. The
graph illustrates that large company stocks and small company stocks gained the
most over the entire period. This growth, however, was earned by taking
substantial risk. In contrast, long-term government bonds (with approximately
20-year maturity), which exposed the holder to less risk, grew less.
The lowest risk strategy over the entire period was to buy U.S. Treasury bills.
Since Treasury bills tended to track inflation, the resulting real
(inflation-adjusted) returns were near zero for the entire 1926-1997 period.
[Graph appears here showing the growth of a dollar invested in large company
stocks, long-term government bonds, Treasury bills, and a hypothetical asset
returning the inflation rate over the period from the end of 1925 to the end of
1997.]
Year End 1925 = $1.00
Source: Stocks, Bonds, Bills and Inflation 1998 Yearbook-TM-
Ibbotson Associates, Chicago (annually updates work by
Roger G. Ibbotson and Rex A. Sinquefield). Used with permission.
All rights reserved.
E-1
<PAGE>
REPRESENTATIONS
1. Registrant represents that Section (b)(13)(iii)(F) of Rule 6e-3(T) is being
relied on.
2. Registrant represents that the level of the risk charge is reasonable in
relation to the risks assumed by the life insurer under the Policies.
3. Registrant represents that it has analyzed the risk charge taking into
consideration such facts as current charge levels, potential adverse
mortality, the manner in which charges are imposed, the markets in which
the Policy will be offered and anticipated sales and lapse rates.
Registrant also represents that a memorandum has been prepared in
connection with the analysis of the risk charge as set forth above.
Registrant undertakes to keep and make available to the Commission on
request the memorandum.
4. Registrant represents that the Company has concluded that there is a
reasonable likelihood that the distribution financing arrangement of the
Separate Account will benefit the Separate Account and policyholders and
will keep and make available to the Commission on request a memorandum
setting forth the basis for this representation.
5. Registrant represents that the Separate Account will invest only in
management investment companies which have undertaken to have a Board of
Directors, a majority of whom are not interested persons of the Company,
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
<PAGE>
PART II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15 (d) of the Securities Exchange
Act of 1934. The undersigned Registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission theretofore or hereafter duly adopted pursuant to authority conferred
in that section.
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 or 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 if 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 Policies 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.
<PAGE>
SAFECO Life Insurance Company ("SAFECO") established the 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 SAFECO Asset Management Company (SAM),
SAFECO Services Corporation (SAFECO Services) and SAFECO Securities, Inc.
(SAFECO Securities), each a Washington corporation. SAM is the investment
advisor, SAFECO Services is the transfer agent and SAFECO Securities is the
principal underwriter for each of the SAFECO Mutual Funds. The SAFECO Mutual
Funds consist of six Delaware business trusts: SAFECO Common Stock Trust, SAFECO
Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust, SAFECO Money Market Trust,
SAFECO Managed Bond Trust (formerly SAFECO Institutional Series Trust) and
SAFECO Resource Series Trust. The SAFECO Common Stock Trust consists of seven
mutual funds: SAFECO Growth Fund, SAFECO Equity Fund, SAFECO Income Fund, SAFECO
Northwest Fund, SAFECO International Stock Fund, SAFECO Balanced Fund, SAFECO
Small Company Stock Fund and SAFECO U.S. Value Fund. The SAFECO Taxable Bond
Trust consists of three mutual funds: SAFECO Intermediate-Term U.S. Treasury
Fund, SAFECO GNMA Fund and SAFECO High-Yield Bond Fund. The SAFECO Tax-Exempt
Bond Trust consists of five mutual funds: SAFECO Intermediate-Term Municipal
Bond Fund, SAFECO Insured Municipal Bond Fund, SAFECO Municipal Bond Fund,
SAFECO California Tax-Free Income Fund and SAFECO Washington State Municipal
Bond Fund. The SAFECO Money Market Fund consists of two mutual funds: SAFECO
Money Market Fund and SAFECO Tax-Free Money Market Fund. The SAFECO Managed Bond
Trust consists of one mutual fund: Managed Bond Fund (formerly Fixed-Income
Portfolio). The SAFECO Resources Series Trust consists of six mutual funds:
Equity Portfolio, Growth Portfolio, Northwest Portfolio, Bond Portfolio, Money
Market Portfolio and Small Company Portfolio.
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, SAFECO Insurance Company of Illinois, an
Illinois corporation and SAFECO Insurance Company of Pennsylvania, a
Pennsylvania corporation. SAFECO Insurance Company of America owns 100% of
SAFECO Surplus Lines Insurance Company, a Washington corporation, and Market
Square Holding, Inc., a Minnesota 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, Goldware
& Taylor Insurance Service, a California corporation and SAFECO Select
Insurance Services, Inc., a California 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, a Texas corporation. Talbot Financial Corporation owns 100%
of Talbot Agency, Inc., a New Mexico corporation. Talbot Agency, Inc. owns
100% of PNMR Securities, 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., S.C. Everett, Inc.,
S.C. Everett/Lynn, S.C. Lynden, Inc., S.C. Lynden/Lynn, S.C. Marysville,
Inc., S.C. Northgate, Inc., S.C. Northgate/LR1, L.L.C., S.C. Vancouver, Inc.,
S.C. Vancouver/Lynn (Joint Venture), SAFECARE S.C. Bakersfield, Inc. and
SAFECARE S.C. Bakersfield/Lynn Limited Partnership. 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: C-W Properties, Inc., Gem State Investors, Inc., Kitsap
Mall, Inc., WNY Development, 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, SAFECO Properties of Boise, Inc., an Idaho corporation, SCIT,
Inc., a Massachusetts corporation, Valley Fair Shopping Centers, Inc., a
Delaware corporation, WDI Golf Club, Inc., a California 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 the following, each a Washington
corporation: Washington Square, Inc. and Winmar Pacific, Inc.
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>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises:
I. The following papers and documents:
The facing sheet.
The Prospectus consisting of __ pages.
The undertaking to file reports.
The signatures. Written consents of the following persons:
(1) Ernst & Young LLP, Independent Auditors
(2) James Mankin, Actuary
II. The following exhibits:
A. Copies of all exhibits required by paragraph A of instructions
for Exhibits in Form N-8B-2.
(1) Resolution of Board of Directors of the Company
authorizing the Separate Account *
(2) Not Applicable
(3) (a) Principal Underwriter's Agreement *
(b) Broker-Dealer Selling Agreement *
(c) Commission Schedule *
(4) Not Applicable
(5) Individual Flexible Premium Variable
Life Insurance Policy *
(6) (a) Articles of Incorporation of the Company
Revised as of 11/90 *
(b) Bylaws of the Company
Revised as of 11/91 *
(7) Not Applicable
(8) Not Applicable
(9) (a) Reinsurance Agreement *
(b) Servicing Agreement *
(c) Form of Participation Agreement (Fidelity)
Form of Sub-Licensing Agreement *
(d) Participation Agreement by and among SAFECO
Life Insurance Company, Lexington
Natural Resources Trust, and
Lexington Management Corporation **
(10) (a) Application Form (revised 4/91) *
(b) Part IV of Application Form
(revised 7/97)
(13) Power Of Attorney ***
99.C1 Consent of Independent Auditors
99.2 Opinion and Consent of Counsel
(SAFECO Life Ins. Co.)
99.C6 Consent of Actuary (James Mankin)
* Incorporated by reference to Post-Effective
Amendment of SAFECO Separate Account SL filed with
the SEC on April 30, 1997 (File No. 33-10248)
** Incorporated by reference to Post-Effective
Amendment of SAFECO Separate Account C filed with
the SEC on April 29, 1996 (File No. 33-69712)
*** Incorporated by reference to Post-Effective
Amendment of SAFECO Resource Variable Account
B filed with the SEC on December 29, 1995
(File No. 33-69600)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Registration Statement pursuant to Rule
486(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf thereto duly authorized, in the City of
Seattle and State of Washington on the 27th day of April, 1998.
SAFECO Separate Account SL
By: SAFECO Life Insurance Company
(Depositor)
By: /s/ Randall H. Talbot
Randall H. Talbot, President
ATTEST: /s/ Rod Pierson
Rod Pierson, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Post Effective
Amendment No. 15 to the Registration Statement on Form S-6 has been signed by
the following persons in the capacities and on the dates indicated. Those
signatures with an asterisk indicate the signature was supplied by a duly
appointed attorney-in-fact under a valid Power of Attorney.
NAME TITLE 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 and
James T. Flynn Controller (Principal
Accounting Officer)
Rod Pierson* Director, Senior Vice
Rod Pierson President and Secretary
James W. Ruddy* Director
James W. Ruddy
Robert L. Spaulding* Director
Robert L. Spaulding
Robert Swegle* Director
Robert Swegle
/s/ Richard E. Zunker Director
Richard E. Zunker
*By /s/ Boh A. Dickey
Boh A. Dickey
Attorney-in-Fact
*By /s/ Randall H. Talbot
Randall H. Talbot
Attorney-in-Fact
<PAGE>
EXHIBITS TO
POST-EFFECTIVE AMENDMENT NO. 15
TO
FORM S-6
FOR
SEPARATE ACCOUNT SL
<PAGE>
EXHIBITS
(10) b Part IV of Application Form (revised 7/97)
99.C1 Consent of Independent Auditors
99.2 Opinion and Consent of Counsel
99.C6 Consent of Actuary
<PAGE>
[LOGO] SAFECO SUPPLEMENTAL LIFE APPLICATION SAFECO LIFE
LIFE INSURANCE PART IV INSURANCE COMPANY
P.O. BOX 84068
SEATTLE, WASHINGTON 98124-8468
- --------------------------------------------------------------------------------
1. Print name of proposed insured (as on Life App. Part I)
- --------------------------------------------------------------------------------
2. Initial Allocation Percentages (whole numbers only)
Select up to 9 investment divisions, 17 for Premier Variable Life policies.
<TABLE>
<CAPTION>
INVESTMENT DIVISIONS (AVAILABLE ON ALL VUL POLICIES) Premiums Deductions
- ---------------------------------------------------- -------- ----------
<S> <C> <C>
[Fidelity VIP Money Market]. . . . . . . . . _________% _________%
[Fidelity VIP High Income] . . . . . . . . . _________% _________%
[Fidelity VIP Equity-Income] . . . . . . . . _________% _________%
[Fidelity VIP Growth]. . . . . . . . . . . . _________% _________%
[Fidelity VIP Overseas]. . . . . . . . . . . _________% _________%
[Fidelity VIPII Investment Grade Bond] . . . _________% _________%
[Fidelity VIPII Asset Manager] . . . . . . . _________% _________%
[Fidelity VIPII Index 500] . . . . . . . . . _________% _________%
[Fidelity VIPII Contrafund]. . . . . . . . . _________% _________%
[Fidelity VIPII Asset Manager Growth]. . . . _________% _________%
[Lexington Natural Resources]. . . . . . . . _________% _________%
[Lexington Emerging Markets] . . . . . . . . _________% _________%
[SAFECO RST Northwest] . . . . . . . . . . . _________% _________%
[SAFECO RST Growth]. . . . . . . . . . . . . _________% _________%
[SAFECO RST Equity]. . . . . . . . . . . . . _________% _________%
[SAFECO RST Bond]. . . . . . . . . . . . . . _________% _________%
SAFECO Life Guaranteed Interest Division . . _________% _________%
INVESTMENT DIVISIONS (PREMIER VUL ONLY)
- ---------------------------------------
[Fidelity VIPIII Growth & Income]. . . . . . _________% _________%
[Fidelity VIPIII Growth Opportunities] . . . _________% _________%
[Fidelity VIPIII Balanced] . . . . . . . . . _________% _________%
[SAFECO RST Small Cap] . . . . . . . . . . . _________% _________%
[American Century VP International]. . . . . _________% _________%
[American Century VP Balanced] . . . . . . . _________% _________%
[Wanger US Small Cap]. . . . . . . . . . . . _________% _________%
_______________________________________. . . _________% _________%
_______________________________________. . . _________% _________%
________________________________________________________________%______________%
TOTAL (Must equal 100%) ___100___% ___100___%
</TABLE>
Allocations for deductions will be the same as premiums unless otherwise noted.
- --------------------------------------------------------------------------------
3. Telephone Exchange Option
/ / Yes / / No
Policyowners and individuals listed below (if any) are authorized to transact
telephone requests for (1) the transfer of funds among divisions or (2) to
change allocation percentages.
Social Security Number of policyowner will be verified when exercising the
telephone exchange option.
________________________________________
Name of Authorized Individual
________________________________________
Name of Authorized Individual
________________________________________
Name of Authorized Individual
- --------------------------------------------------------------------------------
REMARKS
- --------------------------------------------------------------------------------
I/We represent that the statements and answers recorded on this application are
true and complete to the best of my/our knowledge and belief; and, I/we agree
that they shall form a part of any insurance policy issued hereon.
I UNDERSTAND THAT UNDER THE POLICY APPLIED FOR: (A) THE AMOUNT AND DURATION
OF THE DEATH BENEFIT MAY VARY UNDER SPECIFIED CONDITIONS; (B) POLICY VALUES
MAY INCREASE OR DECREASE IN ACCORDANCE WITH THE INVESTMENT EXPERIENCE OF
INVESTMENT DIVISIONS IN A SEPARATE ACCOUNT; (C) THE AMOUNT PAYABLE AT THE
FINAL POLICY DATE IS NOT GUARANTEED BUT IS DEPENDENT ON THE AMOUNT THEN IN
THE POLICY ACCOUNT; (D) ILLUSTRATIONS OF BENEFITS, INCLUDING THE DEATH
BENEFITS, POLICY BENEFITS AND CASH SURRENDER VALUES ARE AVAILABLE UPON
REQUEST; AND, (E) THIS POLICY MEETS MY INVESTMENT OBJECTIVES AND ANTICIPATED
FINANCIAL NEEDS.
<TABLE>
<CAPTION>
I hereby acknowledge receipt of the Prospectus for this policy and accompanying funds, dated________________.
Signed this __________________ ____________________, __________ at _______________________ __________________
Day Month Year City State
<S> <C>
I certify that I have asked and recorded X_____________________________________________________
completely and accurately the answers to Signature of Proposed Insured*
all questions on the application and I know (Age 15 or older - 16 in California)
of nothing affecting the risk that has not X_____________________________________________________
been recorded. Signature of Applicant/Owner.**
If other than the Proposed Insured
__________________________________________ * In Pennsylvania, if Proposed Insured is less than the age 18,
Signature of Sales Representative signature of Parent/Guardian 18 years or older required.
** If applicant/owner is corporation or partnership, a corporate
officer or partner other than Proposed Insured must sign and
and state title.
</TABLE>
HOME OFFICE COPY
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Prospectus and to the use of our report on the financial statements of SAFECO
Life Separate Account SL, dated February 6, 1998, and our report on the
consolidated financial statements of SAFECO Life Insurance Company and
Subsidiaries, dated February 13, 1998, in Post-Effective Amendment Number 15
to the Registration Statement (Form S-6, No. 33-10248) and related Prospectus
of SAFECO Life Separate Account SL.
/s/ ERNST & YOUNG LLP
Seattle, Washington
April 27, 1998
<PAGE>
April 29, 1998
Board of Directors
SAFECO Life Insurance Company
SAFECO Plaza
Seattle, WA 98185
Gentlemen:
I have acted as counsel in connection with the filing with the Securities and
Exchange Commission of Post-Effective Amendment No. 15 to a Registration
Statement on Form S-6 for the Individual Flexible Premium Life Insurance Policy
(the "Policy") to be issued by SAFECO Life Insurance Company and its separate
account, Separate Account SL.
I have made such examination of the law and have examined such records and
documents as in my opinion are necessary or appropriate to enable me to render
the following opinion:
1. SAFECO Life Insurance Company is a valid and existing stock life insurance
company of the state of Washington.
2. Separate Account SL is a separate investment account of SAFECO Life
Insurance Company created and validly existing pursuant to the insurance
laws and regulations of the state of Washington.
3. All of the prescribed corporate procedures for the issuance of the Policies
have been followed, and, when such Policies are issued in accordance with
the Prospectus contained in the Registration Statement, all state
requirements relating to such Policies will have been complied with.
4. Upon the acceptance of Premium Payments made by a Policyowner pursuant to a
Policy issued in accordance with the prospectus contained in the
Registration Statement and upon compliance with acceptable law, such a
Policyowner will have legally-issued, fully paid, non-assessable
contractual interest under such Policy.
You may use this opinion letter, or a copy hereof, as an exhibit to the
Registration Statement.
Very truly yours,
William E. Crawford
Counsel
<PAGE>
March 31, 1998
Board of Directors
SAFECO Life Insurance Company
SAFECO Plaza
Seattle, WA 98185
The "Illustrations of Death Benefits, Policy Account, Cash Surrender Values and
Accumulated Premiums" ("Hypothetical Illustrations") and the "Illustrations of
Variation in Death Benefit, Policy Account and Cash Surrender Values in Relation
to the Funds' Investment Experience" ("Illustrations") contained in
Post-Effective Amendment No. 15 to the Registration Statement on Form S-6 of
Separate Account SL, which issues flexible premium variable life insurance
policies, have been prepared in accordance with standard actuarial principles.
Both the Hypothetical Illustrations and Illustrations reflect the operation of
the Policy by taking into account all charges under the Policy and in the
underlying Fund. The Hypothetical Illustrations are shown for males in two
underwriting classifications. The Illustrations are shown for a male preferred
non-smoker.
I hereby consent to the inclusion and use of the Hypothetical Illustrations and
Illustrations in Post-Effective Amendment No. 15.
Sincerely,
James A. Mankin, F.S.A., M.A.A.A.
Actuary
