<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 1998.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number 1-6563
SAFECO CORPORATION
(Exact name of registrant as specified in its charter)
Washington 91-0742146
(State of Incorporation) (I.R.S. Employer I.D. No.)
SAFECO PLAZA, Seattle, Washington 98185
(Address of principal executive offices)
(206) 545-5000
(Telephone)
141,225,536 shares of no par value common stock were outstanding at June 30,
1998.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES[X] NO [ ].
<PAGE> 2
SAFECO CORPORATION
- --------------------------------------------------------------------------------
TABLE OF CONTENTS AND SIGNATURES
<TABLE>
<CAPTION>
Part I - Financial Information * Page
-------
<S> <C>
Item 1. Financial Statements:
Consolidated Balance Sheet, 3
June 30, 1998 and December 31, 1997
Statement of Consolidated Income and Retained Earnings 5
for the Quarters and Six Months Ended June 30, 1998 and 1997
Statement of Consolidated Cash Flows 6
for the Six Months Ended June 30, 1998 and 1997
Statement of Consolidated Comprehensive Income 7
for the Quarters and Six Months Ended June 30, 1998 and 1997
Item 2. Management's Discussion and Analysis 8
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information - Bylaw Amendments 14
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
*The accompanying unaudited condensed financial statements have
been prepared in accordance with the instructions to Form 10-Q. In
the opinion of management, they include all adjustments (none of
which were other than normal and recurring adjustments) which are
necessary for a fair presentation of results for the interim
periods. It is suggested that these condensed financial statements
be read in conjunction with the financial statements and the notes
thereto included in the Corporation's Form 10-K for the year ended
December 31, 1997 which has previously been filed with the
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SAFECO CORPORATION
-------------------------------------
Registrant
/s/ ROD A. PIERSON
-------------------------------------
Rod A. Pierson
Senior Vice President
Dated August 14, 1998 and Chief Financial Officer
/s/ H. PAUL LOWBER
-------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated August 14, 1998 and Chief Accounting Officer
-2-
<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1998 1997
--------- ---------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1998 - $16,615.9; 1997 -$16,086.8) $17,732.9 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1998 - $3,239.7; 1997 - $3,159.9) 2,707.5 2,708.6
Marketable Equity Securities, at Market Value
(Cost: 1998 - $954.5; 1997 - $969.0) 2,000.4 1,879.7
Mortgage Loans 509.7 499.0
Real Estate (At cost less accumulated depreciation) 611.6 586.1
Policy Loans 86.2 85.3
Short-Term Investments 217.1 134.7
--------- ---------
Total Investments 23,865.4 23,036.6
Cash 56.4 391.4
Accrued Investment Income 320.3 337.0
Finance Receivables 1,042.0 1,004.3
Premiums and Other Service Fees Receivable 995.1 953.9
Other Notes and Accounts Receivable 53.2 71.1
Reinsurance Recoverables 288.8 311.0
Deferred Policy Acquisition Costs 568.4 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 255.0 238.0
Goodwill 1,345.4 1,332.6
Other Assets 353.8 341.7
Separate Account Assets 1,148.6 905.4
--------- ---------
TOTAL $30,292.4 $29,467.8
========= =========
</TABLE>
(continued)
-3-
<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions) (continued)
<TABLE>
<CAPTION>
June 30 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------- ---------
<S> <C> <C>
Losses and Adjustment Expense $ 4,341.9 $ 4,352.2
Life Policy Liabilities 279.1 262.3
Unearned Premiums 1,782.4 1,713.7
Funds Held Under Deposit Contracts 12,184.0 11,891.4
Debt:
Commercial Paper 755.8 812.8
Credit Company Borrowings ($963.5 maturing within one year) 988.0 892.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($72.3 maturing within one year) 261.6 255.1
Other Liabilities 1,153.0 1,223.3
Federal Income Taxes:
Current 12.6 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities: 1998 - $741.7; 1997 - $675.6) 474.3 446.9
Separate Account Liabilities 1,148.6 905.4
--------- ---------
Total Liabilities 23,781.3 23,164.4
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 841.9 841.7
--------- ---------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None -- --
Common Stock, No Par Value:
Shares Authorized: 300
Shares Reserved for Options: (1998 - 7.7; 1997 - 7.9)
Shares Issued and Outstanding: (1998 - 141.2; 1997 - 141.2) 913.9 909.3
Retained Earnings 3,380.5 3,299.1
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 1,374.8 1,253.3
--------- ---------
Total Shareholders' Equity 5,669.2 5,461.7
--------- ---------
TOTAL $30,292.4 $29,467.8
========= =========
</TABLE>
-4-
<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------------ ------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 2,075.9 $ 1,176.4 $ 1,046.5 $ 594.9
Life Premiums and Other Revenues 176.5 135.0 89.7 68.4
--------- --------- --------- ---------
Total 2,252.4 1,311.4 1,136.2 663.3
Real Estate 39.1 32.7 18.6 16.4
Finance 47.4 40.9 24.0 21.3
Asset Management 18.8 11.7 9.9 6.0
Other 29.0 25.1 14.7 12.5
Net Investment Income 754.2 583.7 379.7 292.7
Realized Investment Gain 44.9 40.8 17.0 19.1
--------- --------- --------- ---------
Total 3,185.8 2,046.3 1,600.1 1,031.3
--------- --------- --------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 2,054.5 1,210.3 1,066.8 604.7
Commissions 385.7 226.6 200.3 117.5
Personnel Costs 220.5 148.2 113.3 75.1
Interest 77.7 37.4 38.7 18.9
Goodwill Amortization 26.5 2.9 13.3 1.4
Other 213.6 133.7 103.9 69.8
Amortization of Deferred Policy Acquisition Costs 387.1 223.1 186.0 112.6
Deferral of Policy Acquisition Costs (418.2) (236.1) (207.9) (124.2)
--------- --------- --------- ---------
Total 2,947.4 1,746.1 1,514.4 875.8
--------- --------- --------- ---------
Income before Income Taxes 238.4 300.2 85.7 155.5
--------- --------- --------- ---------
Provision (Benefit) for Income Taxes:
Current 76.7 63.4 47.0 36.2
Deferred (41.5) 8.0 (41.7) 2.1
--------- --------- --------- ---------
Total 35.2 71.4 5.3 38.3
--------- --------- --------- ---------
Income before Distributions on Capital Securities 203.2 228.8 80.4 117.2
Distributions on Capital Securities, Net of Tax (22.4) -- (11.2) --
--------- --------- --------- ---------
Net Income 180.8 228.8 69.2 117.2
Retained Earnings, Beginning of Period 3,299.1 3,042.2 3,361.3 3,113.8
Amortization of Underwriting Compensation on Capital Securities (0.2) -- (0.1) --
Dividends Declared (94.6) (77.1) (49.4) (40.4)
Common Stock Reacquired (4.6) (3.5) (0.5) (0.2)
--------- --------- --------- ---------
Retained Earnings, End of Period $ 3,380.5 $ 3,190.4 $ 3,380.5 $ 3,190.4
========= ========= ========= =========
Net Income Per Share of Common Stock:
Basic $ 1.28 $ 1.81 $ 0.49 $ 0.93
========= ========= ========= =========
Diluted $ 1.28 $ 1.80 $ 0.49 $ 0.92
========= ========= ========= =========
Dividends Paid to Common Shareholders $ 0.64 $ 0.58 $ 0.32 $ 0.29
========= ========= ========= =========
Average Number of Shares Outstanding During the Period:
Basic 141.2 126.3 141.2 126.3
========= ========= ========= =========
Diluted 141.8 126.9 141.8 126.9
========= ========= ========= =========
</TABLE>
-5-
<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $2,218.0 $1,299.1
Dividends and Interest Received 727.3 577.3
Other Operating Receipts 121.1 93.9
Insurance Claims and Policy Benefits Paid (1,661.0) (1,075.0)
Underwriting, Acquisition and Insurance Operating Costs Paid (842.4) (502.8)
Interest Paid and Distributions on Capital Securities (109.0) (37.6)
Other Operating Costs Paid (61.4) (51.8)
Income Taxes Paid (60.0) (56.0)
-------- --------
Net Cash Provided by Operating Activities 332.6 247.1
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,702.1) (1,186.8)
Fixed Maturities Held-to-Maturity (0.9) (193.2)
Equities (86.7) (41.5)
Other Investments (100.3) (121.8)
Maturities of Fixed Maturities Available-for-Sale 548.9 235.2
Maturities of Fixed Maturities Held-to-Maturity 3.2 2.6
Sales of:
Fixed Maturities Available-for-Sale 1,673.9 670.1
Fixed Maturities Held-to-Maturity* 18.2 --
Equities 134.5 79.5
Other Investments 86.7 51.6
Net Increase in Short-Term Investments (63.1) (10.3)
Finance Receivables Originated or Acquired (252.3) (240.3)
Principal Payments Received on Finance Receivables 196.7 149.6
Other (107.2) (33.8)
-------- --------
Net Cash Used in Investing Activities (650.5) (639.1)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 628.0 763.5
Return of Funds Held Under Deposit Contracts (572.2) (405.3)
Proceeds from Notes and Mortgage Borrowings 20.0 2.0
Repayment of Notes and Mortgage Borrowings (13.9) (6.6)
Net Proceeds from Short-Term Borrowings 45.1 125.7
Common Stock Reacquired (5.3) (3.6)
Dividends Paid to Shareholders (90.4) (73.3)
Other (28.4) 14.6
-------- --------
Net Cash Provided by (Used in) Financing Activities (17.1) 417.0
-------- --------
Net Increase (Decrease) in Cash (335.0) 25.0
Cash at the Beginning of Period 391.4 55.5
-------- --------
Cash at the End of Period $ 56.4 $ 80.5
======== ========
</TABLE>
* The sales of fixed maturities held-to-maturity were made due to evidence of
significant deterioration in the bond issuer's creditworthiness.
(continued)
-6-
<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions) (continued)
<TABLE>
<CAPTION>
Six Months Ended
June 30
--------------------
1998 1997
------- -------
<S> <C> <C>
Net Income $ 180.8 $ 228.8
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (44.9) (40.8)
Amortization and Depreciation 78.0 34.5
Amortization of Fixed Maturity Investments (19.3) (18.0)
Deferred Income Tax Expense (Benefit) (41.5) 8.0
Interest Expense on Deposit Contracts 253.2 224.9
Other Adjustments 12.2 1.4
Changes in:
Losses and Adjustment Expense (10.3) (110.0)
Life Policy Liabilities 16.8 34.8
Unearned Premiums 68.7 1.0
Accrued Income Taxes 3.3 8.8
Accrued Interest on Accrual Bonds (26.1) (23.3)
Accrued Investment Income (16.7) (6.8)
Deferred Policy Acquisition Costs (30.3) (12.4)
Other Assets and Liabilities (91.3) (83.8)
------- -------
Total Adjustments 151.8 18.3
------- -------
Net Cash Provided by Operating Activities $ 332.6 $ 247.1
======= =======
</TABLE>
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME
(In Millions)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30 June 30
------------------- -------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net Income $ 180.8 $ 228.8 $ 69.2 $ 117.2
Other Comprehensive Income, Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities 121.5 104.4 33.9 283.6
------- ------- ------- -------
Comprehensive Income $ 302.3 $ 333.2 $ 103.1 $ 400.8
======= ======= ======= =======
</TABLE>
-7-
<PAGE> 8
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
SAFECO Corporation
Our net income for the first six months of 1998 was $180.8 million or $1.28 per
share, compared with $1.81 per share for the same period in 1997. If we exclude
realized gain from investments, our income was $1.07 per share, compared with
$1.60 in 1997. The 1998 amounts reflect claims from the unusual weather patterns
experienced during the second quarter and include the results of American States
Financial Corporation, which was acquired on October 1, 1997.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30 JUNE 30
1998 1997 1998 1997
------- ------- ------- -------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Gain (Loss) $ (75.3) $ 30.9 $ (64.4) $ 23.6
Net Investment Income 240.5 139.5 122.4 69.1
Goodwill Amortization (21.4) -- (10.7) --
------- ------- ------- -------
Total Property and Casualty 143.8 170.4 47.3 92.7
Life 65.4 72.8 29.0 35.6
Real Estate 2.4 5.5 1.2 2.7
Credit 11.2 9.8 5.7 5.3
Asset Management 3.1 2.4 1.1 1.4
Corporate (32.4) (1.5) (15.6) (1.3)
------- ------- ------- -------
Total 193.5 259.4 68.7 136.4
Realized Investment Gain before Tax 44.9 40.8 17.0 19.1
------- ------- ------- -------
Income before Income Taxes 238.4 300.2 85.7 155.5
------- ------- ------- -------
Provision (Benefit) for Income Taxes on:
Income before Realized Gain 19.7 58.1 (0.7) 31.9
Realized Investment Gain 15.5 13.3 6.0 6.4
------- ------- ------- -------
Total 35.2 71.4 5.3 38.3
------- ------- ------- -------
Income before Distributions on
Capital Securities 203.2 228.8 80.4 117.2
Distributions on Capital Securities,
Net of Tax (22.4) -- (11.2) --
------- ------- ------- -------
Net Income $ 180.8 $ 228.8 $ 69.2 $ 117.2
======= ======= ======= =======
Net Income Per Share of Common Stock:
Income before Realized Gain $ 1.07 $ 1.60 $ .41 $ .83
Realized Gain .21 .21 .08 .10
------- ------- ------- -------
Net Income $ 1.28 $ 1.81 $ .49 $ .93
======= ======= ======= =======
</TABLE>
-8-
<PAGE> 9
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Property and Casualty Insurance
Property and casualty operations for the first six months of 1998 produced
pretax income of $143.8 million before realized gain from investments, compared
with $170.4 million a year ago. The company had an underwriting loss of $75.3
million for the first half of 1998, compared with an underwriting profit of
$30.9 million for the same period last year. The second quarter underwriting
loss was $64.4 million as a result of $80 million in claims from catastrophe
losses caused by numerous storms throughout the country. This compares with an
underwriting loss of $10.9 million in the first quarter of 1998 and a profit of
$23.6 million for the second quarter a year ago. Catastrophe losses were 7.5
percent of premiums in the second quarter, compared with 2.5 percent last
quarter and 2 percent for the second quarter last year. The underwriting results
for the first six months and second quarter of 1998 and 1997 are detailed below.
The combined loss and expense ratio was 103.6 for the first six months and 106.1
for the second quarter only. This compares with 97.4 for the first six months
last year and 96.0 for the second quarter a year ago. Investment income was
$240.5 million for the first six months of 1998.
Underwriting Results (In Millions)
<TABLE>
<CAPTION>
Six Months Second Quarter
-------------------- --------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
SAFECO
Personal auto $ 21.5 $ 28.5 $ 15.7 $ 24.3
Homeowners (13.4) (15.6) (15.6) (4.3)
Other personal lines 5.2 9.7 4.1 6.0
Commercial (21.9) (3.3) (10.5) (9.4)
Surety 11.0 10.0 4.1 5.5
Other 2.8 1.6 2.9 1.5
American States
Business insurance (51.5) -- (36.3) --
Personal lines (29.0) -- (28.8) --
------- ------- ------- -------
Total $ (75.3) $ 30.9 $ (64.4) $ 23.6
======= ======= ======= =======
</TABLE>
SAFECO
Personal auto, our largest line, reported an underwriting profit of $21.5
million for the first six months, compared with a profit of $28.5 million for
the first six months last year. The number of vehicles insured at the end of
June was 7% higher than a year ago. Average loss costs decreased during the
second quarter primarily due to a continuing decline in the frequency of bodily
injury claims.
Homeowners had an underwriting loss of $13.4 million for the first six months,
compared with a loss of $15.6 million for the first six months of 1997.
Catastrophe losses for this line were $27 million for the first six months of
1998, compared with $22 million for the first six months last year. Adverse
catastrophe claims experience was offset by the favorable impact of higher
prices, increased deductibles and initiatives to improve insurance to value.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine, and boats, produced an underwriting profit of $5.2 million for
the first six months, compared with a profit of $9.7 million for the same period
last year.
SAFECO Commercial reported an underwriting loss of $21.9 million for the first
six months (combined ratio of 107.0), compared with a loss of $3.3 million for
the first six months last year (combined ratio of 101.1). Increased price
competition, particularly for workers' compensation, has affected results
adversely.
Surety produced a profit of $11.0 million for the first six months of 1998,
compared with a profit of $10.0 million for the first six months last year.
Premiums written during the first six months, excluding American States,
increased 8% over a year ago with personal lines up 7.5% and commercial lines up
10%.
-9-
<PAGE> 10
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
American States
American States' catastrophe losses were $63 million for the first six months of
1998 with $37 million for personal lines and $26 million for business insurance.
For the second quarter, claims from catastrophe losses totaled $46 million. The
unusual weather patterns during the quarter resulted in personal lines producing
an underwriting loss of $28.8 million for the second quarter. This compares with
an underwriting loss of $0.2 million for the first quarter.
American States Business Insurance produced an underwriting loss of $36.3
million in the second quarter (combined ratio of 115.9), compared with an
underwriting loss of $15.2 million last quarter (combined ratio of 106.7).
Weather-related losses were higher than normal. Premiums written by American
States during the first six months of 1998 were down 1.5%, compared with the
same period last year, with business insurance down 2% and personal lines down
1%.
Combined Companies
During 1998 a significant amount of resources has been and will be committed to
cross-licensing and training our agents in both SAFECO and American States
product lines on a state-by-state process. We are on schedule with this process
as well as other significant areas related to the combination of the two
operations. We have received positive feedback from our agents about their
expanded opportunities to sell products once this cross-licensing and training
has been completed.
Life Insurance
Our life insurance operations produced a pretax profit, before realized gain
from investments, of $65.4 million for the first six months of 1998. This
compares with $72.8 million reported for the first six months of 1997. The
second quarter profit of $29.0 million is down from the $35.6 million reported
for the second quarter of 1997.
Group insurance experienced a loss of $2.1 million for the first half of 1998,
compared with a profit of $6.8 million for the same period last year. The second
quarter loss of $0.7 million compares with a profit of $2.5 million reported for
the second quarter of last year. Adverse experience in medical aggregate stop
loss coverages continues to be the main contributor to the loss.
Earnings for the annuity lines were $25.3 million, compared with $26.4 million
reported for the first half of 1997. The second quarter gain of $9.0 million is
down from the $12.6 million reported in the same quarter last year. The decline
in earnings is due to the continuing high cost of options purchased to fund our
obligations related to our equity indexed annuity product line. Annuity assets
now total $12.1 billion. Individual life earnings were $4.7 million for the
first six months, compared with $2.6 million for the same period last year. The
increase is due to the acquisition of American States Life Insurance Company.
Real Estate
SAFECO Properties' pretax income was $2.4 million for the first six months of
1998, compared with $5.5 million in 1997. This decrease is primarily the result
of start-up costs and additional depreciation charges on our new Redmond Town
Center project and the expensing of carrying costs related to a regional
shopping center currently being converted to an alternative retail format. As
noted in last quarter's report, SAFECO Corporation announced in February 1998
that SAFECO Properties, Inc. would be sold and that Salomon Smith Barney has
been retained to assist in the selling process. It is anticipated that the sale
will conclude before the end of 1998.
-10-
<PAGE> 11
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Credit
SAFECO Credit Company produced a record pretax profit of $11.2 million for the
first six months of 1998, compared with $9.8 million in the first six months of
1997. Pretax income in the second quarter was $5.7 million, compared with $5.5
million in the first quarter. The results reflect continued portfolio growth,
low write-off and delinquency experience, and a decreasing operating expense
ratio. Non-affiliate receivables and operating leases total $1.2 billion,
representing a 7% annualized increase during 1998.
SAFECO Credit's summarized financial information is as follows (in millions):
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1998 1997
-------- --------
<S> <C> <C>
Finance Receivables $1,042.0 $1,004.3
Other Assets 277.4 273.9
-------- --------
Total Assets $1,319.4 $1,278.2
======== ========
Credit Company Borrowings $ 988.0 $ 892.0
Other Liabilities 208.4 268.5
-------- --------
Total Liabilities $1,196.4 $1,160.5
======== ========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1998 1997
------- -------
<S> <C> <C>
Revenues $ 52.8 $ 45.5
Expenses 41.6 35.7
------- -------
Income before Income Taxes 11.2 9.8
Provision for Income Taxes 4.1 3.4
------- -------
Net Income $ 7.1 $ 6.4
======= =======
</TABLE>
Asset Management
The pretax profit from asset management activities for the first six months of
1998 was $3.1 million, compared with $2.4 million for the same period last year.
Our operating profit (excluding gains and interest income) was $2.1 million
versus $1.7 million last year. Assets under management were $7.0 billion at June
30, 1998, compared with $4.3 billion last year, an increase of 63%.
Investment Portfolios
The market value of our consolidated bond portfolio was $1.6 billion in excess
of amortized cost at June 30, 1998, up from $1.5 billion at December 31, 1997.
The market value of our equity securities portfolio was $1.0 billion in excess
of cost at June 30, 1998.
Dividend
The second quarter of 1998 dividend paid in July to common shareholders was paid
at the rate of $0.35 per share, reflecting a 9.4% increase over the previous
payment.
-11-
<PAGE> 12
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Stock Repurchase Program
On August 5, 1998 SAFECO's board of directors approved the purchase from
time-to-time of up to $200 million worth of its common stock through open market
and negotiated purchases. SAFECO believes that its common stock represents a
good value. When added to the ongoing authorization to purchase up to 2 million
shares of common stock, of which approximately 500,000 shares had been purchased
at July 31, 1998, the combined authorization will permit an accumulation of up
to an additional 4.2% of SAFECO's outstanding shares. Commencing on the second
day following the authorization (August 7, 1998) through August 12, 1998,
Safeco has purchased approximately 1.4 million shares, at a total cost of $62.4
million.
Year 2000
SAFECO, like most other companies, is faced with the fact that our older
computer programs have time sensitive software that typically recognized a date
using "00" as the year 1900 rather than the year 2000. SAFECO is highly
dependent on automated systems and systems applications that use computer
programs to conduct ongoing operations. Such systems are used to process
claims, bill and collect premiums from customers, manage investments and many
other activities. If these systems were unable to process data accurately
because of Year 2000-related failures, these activities would be interrupted
and could have a material adverse effect on SAFECO's results of operations.
SAFECO has completed the assessment of Year 2000 issues in connection with our
computer systems and technology embedded in the equipment we use. We have been
modifying and replacing portions of our software since 1995 so that our systems
will function properly with respect to dates in the year 2000 and thereafter.
In addition, SAFECO is engaged in a regular problem of testing and running the
systems once Year 2000 changes have been made. This testing includes review by
our Internal Audit department as well as separate testing at SAFECO's hot site,
a location provided and maintained by a third party separate from any SAFECO
facility. SAFECO believes that our program to address Year 2000 issues is
comprehensive and on schedule.
The total Year 2000 compliance cost for SAFECO is estimated at
approximately $15 million and as of June 30, 1998 SAFECO has incurred
approximately $9 million of that amount. These estimated amounts include both
modification costs, which are expensed as incurred, and certain replacement
systems costs, some of which are capitalized and amortized. Over 85% of
existing SAFECO systems have been tested and verified as being Year 2000
compliant at June 30, 1998. SAFECO's objective is to have the rest of our
systems, including the most sophisticated applications, Year 2000 compliant by
the end of 1998, with testing to conclude in 1999. We also intend to bring all
of our critical systems down on December 31, 1999 and bring them back up on
January 1, 2000. This will preserve all information contained in those systems
at December 31, 1999 and permit SAFECO to retrieve and use that information
should an unanticipated Year 2000 problem occur. In addition, as a contingency
against unanticipated problems on and after January 1, 2000, SAFECO's
Information Systems department will be prepared to address on an expedited
basis any problems that should arise. Based on our current progress and
continuing modifications, SAFECO believes that by January 1, 2000 it will be
Year 2000 compliant and that Year 2000 issues will not pose significant
operational problems for our computer systems.
SAFECO is working with our third-party partners and vendors, e.g., our
independent insurance agents, local and long distance phone companies, banks
and securities trading firms, to assure that they are on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO will assess and attempt to mitigate risks with respect to the
failure of any mission critical third-party partners and vendors to be Year
2000 ready. Failure of such parties to be Year 2000 compliant could have a
material adverse effect on SAFECO's results of operations.
-12-
<PAGE> 13
SAFECO CORPORATION
(Continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other -- Footnotes
The following additional footnote disclosure relates to new accounting
standards.
Nature of Operations and Summary of Significant Accounting Policies -- New
Accounting Standards
In June of 1997, the Financial Accounting Standards Board (FASB) issued
Statement 130, "Reporting Comprehensive Income." Statement 130 is effective for
fiscal years beginning after December 15, 1997 and SAFECO adopted it in the
first quarter of 1998. The Statement has no effect on net income but requires
the reporting of "comprehensive income," which includes net income and certain
items currently reported in shareholders' equity. See the "Statement of
Consolidated Comprehensive Income" on page 7 of this report.
The FASB issued Statement 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits" in February 1998. Statement 132 revises
employers' disclosures about pension and other postretirement benefit plans.
This statement is effective for financial statements for periods beginning after
December 15, 1997, and SAFECO will provide the disclosures in its 1998 annual
report. This statement has no effect on net income.
The FASB issued Statement 133, "Accounting for Derivative Instruments and
Hedging Activities" in June 1998. The statement is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. It may also be adopted
early, as of the beginning of any fiscal quarter that begins after issuance of
the statement. SAFECO will adopt the new statement no later than the first
quarter of 2000. The statement amends several previous FASB statements and
requires recognizing all derivatives as either assets or liabilities in the
statement of financial position and measuring those instruments at fair value.
Although the impact of the statement is currently being studied, it is not
expected to have a material effect on SAFECO's financial position or results of
operations.
-13-
<PAGE> 14
SAFECO CORPORATION
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of SAFECO Corporation was held May
6, 1998. SAFECO shareholders elected four nominees to the Board of
Directors by the votes shown below. The terms of all of the nominees
elected will expire in 2001. There were no broker non-votes with
respect to any of the nominees.
<TABLE>
<CAPTION>
For Withheld
----------- --------
<S> <C> <C>
Robert S. Cline 127,383,079 772,403
Roger H. Eigsti 127,392,378 763,104
John W. Ellis 127,337,786 817,696
William W. Krippaehne, Jr. 127,380,556 774,926
</TABLE>
Continuing as directors are Phyllis J. Campbell, Boh A. Dickey, William
P. Gerberding and Paul W. Skinner, whose terms expire in 1999; and
Joshua Green III, William G. Reed, Jr., Judith M. Runstad and George H.
Weyerhaeuser, whose terms expire in 2000. Mr. Weyerhaeuser will retire
as a director in 1999.
Item 5. Other Information - Bylaw Amendments
The Board of Directors of SAFECO Corporation adopted certain amendments
to the Corporation's Bylaws on August 5, 1998. The amended Bylaws
provide that shareholders may nominate persons for election to the
Board of Directors only if a written notice of intention to nominate
has been delivered to the secretary to the SAFECO Corporation Board of
Directors at SAFECO Plaza, Seattle, Washington 98185 not less than 90
days before the scheduled date of the meeting. The notice of nomination
must contain the name, address, telephone number, and number of shares
of SAFECO Corporation common stock owned by the nominating shareholder
and the information relating to each nominee required with respect to
nominees for director under the federal proxy solicitation rules. The
notice of nomination must be accompanied by each nominee's written
consent to being a nominee and statement of intention to serve as a
director if elected.
The Corporation's Bylaws further provide that for a shareholder to
bring other business before an annual meeting of shareholders, the
shareholder desiring to bring such business must file a written notice
of intention to that effect with the Secretary of the Corporation at
SAFECO Plaza, Seattle, Washington 98185 not less than 90 days before
the scheduled date of the meeting. The notice must contain the name,
address, telephone number and number of shares of SAFECO Corporation
common stock owned by the shareholder intending to bring such business
before the meeting and a brief description of the business desired to
be brought, the reasons for conducting it at the meeting, and any
material interest of the shareholder in such business.
The 1999 annual meeting of the Corporation's shareholders will be held
on May 5, 1999. Therefore, the deadline for submitting notices of
intention to nominate persons for director and notices of intention to
bring business before the 1999 annual shareholders' meeting is February
4, 1999.
Under the federal proxy solicitation rules, proposals submitted by a
shareholder for inclusion in the Corporation's proxy materials for the
1999 annual meeting must be received by the Corporation by November 20,
1998.
-14-
<PAGE> 15
SAFECO CORPORATION
(Continued)
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 3* - Bylaws (as amended August 5, 1998.)
Exhibit 10* - SAFECO Deferred Compensation Plan for Executives
dated May 6, 1998.
Exhibit 27 - Financial Data Schedule. (This exhibit is included
only in the electronic EDGAR filing version of
this 10-Q. The Financial Data Schedule is not a
separate financial statement but a schedule that
summarizes certain standard financial information
extracted directly from the financial statements
in this filing.)
(b) Reports on Form 8-K
No Forms 8-K were filed or required to be filed for any event
during the quarter ended June 30, 1998. The Registrant filed an
8-K dated July 10, 1998, under Item 5 (Other Items) ,announcing
its preliminary review of earnings for the second quarter of 1998.
The Registrant filed an 8-K dated August 5, 1998, under Item 5,
announcing a stock repurchase program approved by its Board of
Directors on August 5, 1998.
*Copies of Exhibits are available without charge by making a written request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
-15-
<PAGE> 1
EXHIBIT 3
BYLAWS
OF
SAFECO CORPORATION
(As last amended August 5, 1998)
ARTICLE I
STOCKHOLDERS' MEETINGS
1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation
for the election of Directors to succeed those whose terms expire, and for the
transaction of such other business as may properly come before the meeting,
shall be held at 11:00 o'clock in the morning on the first Wednesday in May or,
if such day is a legal holiday, then on the following business day or on such
other day as may be designated by the Chairman, the President, or the Board of
Directors ("Board of Directors"). The meeting shall be held at the principal
executive office of the corporation or at such other place as may be designated
in the notice of the meeting.
(b) For business to be properly brought before the annual meeting in
accordance with these Bylaws, business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board of
Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (iii) otherwise properly brought before
the meeting by a stockholder. In addition to any other applicable requirements,
for business to be properly brought before the annual meeting by a stockholder,
the stockholder must file a written notice of intention to bring such business
("Business Notice") with the Secretary of the corporation not less than 90 days
before the date specified in Section 1(a) of this Article I, or if the meeting
is not held within 14 days of the date specified in Section 1(a) of this Article
I, then 90 days before the date of the meeting. The Business Notice shall state
the name, address, telephone number and class and number of shares of capital
stock owned by the stockholder who intends to bring such business before the
meeting; and, as to each matter the stockholder proposes to bring before the
annual meeting, a brief description of the business desired to be brought before
the annual meeting, the reasons for conducting such business at the annual
meeting and any material interest of the stockholder in such business.
(c) No business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Section 1; provided, however,
that nothing in this Section 1 shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual meeting. The
presiding officer of an annual meeting shall, if the facts warrant, determine
that business was not properly brought before the meeting in accordance with the
foregoing procedure and, if the presiding officer should so determine, the
presiding officer shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
<PAGE> 2
SAFECO Corporation Bylaws
At August 5, 1998
Page 2
2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by
the Board of Directors. Such special meetings may be for any purpose or
purposes, which shall be described in the notice of such special meeting, and
shall be at the date, time and place prescribed in the notice of the meeting.
3. NOTICE OF MEETING. (a) Written notice of each annual and special
stockholders' meeting shall be given to all stockholders of record entitled to
notice of such meeting no fewer than 10 nor more than 60 days before the meeting
date, except that notice of a stockholders' meeting to act on an amendment to
the articles of incorporation, a plan of merger or share exchange, a proposed
sale of assets other than in the regular course of business or the dissolution
of the corporation shall be given no fewer than 20 nor more than 60 days before
the meeting date. If such written notice is placed in the United States mail,
postage prepaid, and correctly addressed to the stockholder's address shown in
the corporation's current record of stockholders, then the notice is effective
when mailed.
(b) Notice of any stockholders' meeting may be waived in writing by any
stockholder at any time, either before or after the meeting. In addition, notice
of the date, time, place and purpose of the meeting shall be deemed waived by
any stockholder who attends a stockholders' meeting in person or by proxy,
unless the stockholder at the beginning of the meeting objects to holding the
meeting or transacting business at the meeting.
4. ORGANIZATION OF MEETING - QUORUM. A stockholders' meeting, duly called, can
be organized for the transaction of business whenever a quorum is present. The
presence, in person or by proxy, of the holders of a majority of the votes
entitled to be cast at the meeting shall constitute a quorum. Once a share is
represented for any purpose at a meeting, other than solely to object to holding
the meeting or transacting business at the meeting, it is deemed present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for that adjourned meeting.
5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an
adjourned meeting, an adjournment or adjournments of any stockholders' meeting
may be taken to the date, time and place announced by the presiding officer at
the meeting, without new notice being given; but any meeting at which directors
are to be elected shall be adjourned only from day to day until such directors
are elected.
6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote
for each share of common stock then of record in the holder's name on the books
of the corporation. Each holder of a share of capital stock other than common
stock shall have the right to vote on those matters prescribed by the Board of
Directors in establishing the preferences, limitations and relative rights for
that class of capital stock. Every stockholder shall have the right to vote
either in person or by proxy. All voting at stockholders' meetings shall be viva
voce, unless any qualified voter shall demand a vote by ballot. In the case of
voting by ballot,
<PAGE> 3
SAFECO Corporation Bylaws
At August 5, 1998
Page 3
each ballot shall state the name of the stockholder voting, the number of shares
owned by the stockholder, and, in addition, if such vote be cast by proxy it
shall also state the name of the proxy.
ARTICLE II
BOARD OF DIRECTORS
1. NUMBER AND QUALIFICATIONS. The business and affairs of the corporation shall
be managed under the direction of a Board of Directors of from 12 to 18
directors, as set from time to time by resolution of the Executive Committee,
which directors need not be stockholders of the corporation.
2. ELECTION - TERM OF OFFICE. The directors shall be divided into three classes,
designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as
may be possible, of one-third of the total number of Directors constituting the
entire Board of Directors. At each annual meeting of stockholders successors to
the class of Directors whose term expires at that annual meeting shall be
elected for a three-year term. If the number of Directors is changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of Directors in each class as nearly equal as possible, but in no
case will a decrease in the number of Directors shorten the term of any
incumbent director. A director shall hold office until the annual meeting for
the year in which the director's term expires and until the director's successor
shall be elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office. In the event
of a failure to hold an election of Directors at any annual stockholders'
meeting, election of Directors may be held at a special meeting of the
stockholders called for that purpose; provided, that notice thereof be given all
stockholders entitled to vote at such meeting at least 30 days prior to the date
set for such special meeting.
3. VACANCIES. Any vacancy on the Board of Directors shall be filled by the Board
of Directors or, if the directors in office constitute fewer than a quorum of
the Board of Directors, then by the affirmative vote of the majority of all
directors in office.
4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a
committee of the Board of Directors shall nominate individuals for election as
directors at the annual meeting of stockholders and at any special meeting of
stockholders called for the purpose of electing directors. Nominations may also
be made by any stockholder entitled to vote for the election of Directors at
such meeting who complies with the notice procedures set forth in this Section
4.
(b) A nomination for election as director, other than nominations made
by or at the direction of the Board of Directors, may be made only if a written
notice of intention to nominate ("Nomination Notice") has been received by the
secretary to the Board of Directors not less than
<PAGE> 4
SAFECO Corporation Bylaws
At August 5, 1998
Page 4
90 days before the date specified in Section 1(a) of Article I above, or if the
meeting is not held within 14 days of the date specified in Section 1(a) of
Article I above, then 90 days before the date of the meeting. The Nomination
Notice shall state the name, address, telephone number and class and number of
shares of capital stock owned by the stockholder who intends to make a
nomination; the name, age, address and telephone number of each nominee; a
description of each nominee's business experience for the past five years; a
statement whether the nominee has ever been prosecuted for any crime or been a
party to any proceeding in which it was alleged the nominee or any affiliate of
the nominee violated any law or regulation and, if so, a complete description of
such prosecution or proceeding; and any other information relating to each
nominee that is required to be disclosed in solicitations for proxies for
election of Directors pursuant to Section 14(a) of the Securities Exchange Act
of 1934, as amended. The corporation may require any proposed nominee to furnish
such additional information as may reasonably be required to determine the
eligibility of such proposed nominee. In order to be considered valid the
Nomination Notice must be accompanied by the written consent of each nominee to
be nominated and a statement of each nominee's intention to serve as a director
if elected.
(c) No person shall be eligible for election as a director unless
nominated in accordance with the procedures set forth in this Section 4. The
presiding officer at the stockholders' meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the foregoing procedure and, if the presiding officer should so
determine, the presiding officer shall so declare to the meeting and the
defective nomination shall be disregarded.
5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors
shall be known as the annual meeting thereof.
6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held
quarterly, on the first Wednesday in February, May, August and November of each
year, at such time and place as designated in the notice of the meeting.
7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at
any place at any time when called by the Chairman or the President, or when
called by the Secretary or an Assistant Secretary on request of three directors,
or when called by any director during a national emergency of the kind that
would make emergency bylaws operative for domestic insurers under the provisions
of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington.
8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board
of Directors and of meetings of committees of the Board of Directors shall be
given by the secretary to the Board of Directors, or by the person calling the
meeting, in writing or orally at least two days prior to the day upon which the
meeting is to be held. Notice may be given by mail, private
<PAGE> 5
SAFECO Corporation Bylaws
At August 5, 1998
Page 5
carrier, personal delivery, telegraph or teletype, telephone, or by wire or
wireless equipment which transmits a facsimile of the notice.
(b) A director may waive notice of any meeting of the Board of
Directors or any committee of the Board of Directors in writing before or after
the date and time of the meeting and such waiver shall be deemed the equivalent
of giving notice of the meeting. Neither the business to be transacted at, nor
the purpose of, any regular or special meeting of the Board of Directors or any
committee of the Board of Directors need be specified in the waiver of notice of
such meeting.
(c) A director's attendance at or participation in a Board of Directors
or committee meeting shall constitute a waiver of notice of such meeting, unless
the director at the beginning of the meeting, or promptly upon the director's
arrival at the meeting, objects to holding the meeting or transacting business
at the meeting and does not thereafter vote for or assent to action taken at the
meeting.
9. QUORUM. A majority of the total number of Directors fixed by or in the manner
provided in these Bylaws or, if vacancies exist on the Board of Directors, a
majority of the total number of Directors then serving on the Board of Directors
shall constitute a quorum for the transaction of business at any Board of
Directors' meeting; provided, however, that a quorum may not be less than
one-third of the total number of Directors fixed by or in the manner provided by
these Bylaws. When a quorum is present, a majority of the directors in
attendance at a meeting shall be sufficient to transact business and to adjourn
the meeting from time-to-time without further notice.
ARTICLE III
EXECUTIVE COMMITTEE
1. MEMBERSHIP. The Executive Committee shall consist of not less than two
members and shall include (i) the chief executive officer of the corporation,
(ii) the chairs of each of the Audit, Compensation, Finance and Nominating
Committees, and (iii) any other director of the corporation appointed by the
Board of Directors. The chief executive officer shall be the chair of the
Executive Committee, unless the Board of Directors designates some other member
of the Executive Committee as chair.
2. POWERS AND DUTIES. (a) Other than those powers specifically denied to a
committee of a Board of Directors under Washington law, the Executive Committee
may exercise all the powers of the Board of Directors in the management of the
business of the corporation when the Board of Directors is not in session. All
such actions of the Executive Committee shall be reported to the Board of
Directors at its meeting next succeeding such action
<PAGE> 6
SAFECO Corporation Bylaws
At August 5, 1998
Page 6
and shall be subject to revision or alteration by the Board of Directors;
provided, that no rights of third parties shall be affected by any such revision
or alteration.
(b) The Executive Committee shall determine the corporation's policy
regarding charitable contributions and shall review and make recommendations to
the Board of Directors as appropriate on fundamental matters, including election
of Directors, succession planning, appointment of officers of the corporation
and its principal subsidiaries, capital allocation among the corporation's
operations, issuance and repurchase or redemption of securities, dividends to
shareholders, formation of subsidiaries, and material acquisitions or
dispositions of subsidiaries or assets.
3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of
procedure and shall meet where and as provided by such rules or by resolution of
the Board of Directors. Special meetings of the Executive Committee may be
called at any time by the chair of the Executive Committee or any two members.
At all meetings of the Executive Committee, the presence of a majority of the
members shall be necessary to constitute a quorum, and the affirmative vote of a
majority of the quorum shall be necessary and sufficient to transact business.
ARTICLE IV
FINANCE COMMITTEE
1. MEMBERSHIP. The Finance Committee shall consist of not less than five members
appointed by the Board of Directors, one of whom shall be designated as its
chair by the Board of Directors. Each member of the Finance Committee shall
continue as a member at the pleasure of the Board of Directors.
2. POWERS AND DUTIES. The Finance Committee shall have general supervision of
the finances and investments of the corporation. It shall designate or approve
the designation of depositories for the funds of the corporation and shall have
authority over all matters related to bank and custodial accounts; it shall have
authority to buy and sell securities and to make loans of such character as is
permitted by law; and it may direct any action necessary to collect amounts due
the corporation. All actions of the Finance Committee shall be recorded in
minutes of its meetings and reported to the Board of Directors. Such actions
shall be subject to revision or alteration by the Board of Directors; provided,
that no rights of third parties shall be affected by any such revision or
alteration.
3. RULES OF PROCEDURE. The Finance Committee shall fix its own rules of
procedure and shall meet where and as provided by such rules or by resolution of
the Board of Directors. Special meetings of the Committee may be called at any
time by the chair of the Finance Committee or by any two members. At all
meetings, the presence of a majority of the members
<PAGE> 7
SAFECO Corporation Bylaws
At August 5, 1998
Page 7
shall be necessary to constitute a quorum, and the affirmative vote of a
majority of the quorum shall be necessary and sufficient to transact business.
ARTICLE V
AUDIT COMMITTEE
1. MEMBERSHIP. The Audit Committee shall consist of not less than three members
appointed by the Board of Directors, none of whom shall be an employee of the
corporation or any of its subsidiaries. The Board of Directors shall designate
one member of the Audit Committee as its chair. Each member of the Audit
Committee shall continue as a member at the pleasure of the Board of Directors.
2. POWERS AND DUTIES. (a) The Audit Committee shall:
(1) Recommend the independent public accountants for selection as
auditors by the Board of Directors;
(2) Review the scope and, upon completion, the results of the
audit with the corporation's independent public accountants;
(3) Review management letters received from the independent public
accountants in connection with audits;
(4) Review the corporation's internal accounting controls;
(5) Review the planning and results of internal audit
examinations;
(6) Review with management any accounting changes affecting the
corporation or its affiliates;
(7) Meet in alternative and separate executive sessions with the
independent public accountants and management;
(8) Review the scope of and fees for consulting services provided
by the independent public accountants; and
(9) Review any interested party conflict-of-interest situation
brought to its attention.
(b) All actions of the Audit Committee shall be recorded in minutes of
its meetings and reported to the Board of Directors.
<PAGE> 8
SAFECO Corporation Bylaws
At August 5, 1998
Page 8
3. RULES OF PROCEDURE. The Audit Committee shall fix its own rules of procedure
and shall meet where and as provided by such rules or by resolution of the Board
of Directors. Special meetings of the Audit Committee may be called at any time
by the chair of the Audit Committee or by any two members. At all meetings, the
presence of a majority of the members shall be necessary to constitute a quorum,
and the affirmative vote of a majority of the quorum shall be necessary and
sufficient to transact business.
ARTICLE VI
NOMINATING COMMITTEE
1. MEMBERSHIP. The Nominating Committee shall consist of not less than three
members appointed by the Board of Directors, not more than one of whom shall be
an employee of the corporation or any of its subsidiaries. The Board of
Directors shall designate one member of the Nominating Committee as its chair.
Each member of the Nominating Committee shall continue as a member at the
pleasure of the Board of Directors.
2. POWERS AND DUTIES. (a) The Nominating Committee shall:
(1) Review qualifications of candidates for Board of Directors
membership from whatever source received;
(2) Recommend to the Executive Committee the slate of director
candidates to be proposed for election by stockholders at the
annual meeting;
(3) Recommend to the Executive Committee candidates to fill
director vacancies which occur between annual meetings of
stockholders;
(4) Recommend to the Board of Directors criteria regarding
personal qualifications for nomination as director, including
experience, skills, affiliations and characteristics;
(5) Recommend to the Board of Directors criteria regarding the
composition of the Board of Directors, including total size
and number of employee-directors;
(6) Recommend to the Board of Directors criteria relating to
tenure as a director, including retirement age and
continuation of a director in an honorary or similar capacity;
and
(7) Recommend to the Board of Directors the fees to be paid to
directors, including retainer, meeting and committee meeting
fees, and any additional fees to be paid to a director for
particular service, e.g., to the chairman of the Board of
Directors
<PAGE> 9
SAFECO Corporation Bylaws
At August 5, 1998
Page 9
or chair of any committee. The Committee shall not recommend
that any such fees be paid to any director who is also an
employee of the corporation or its subsidiaries.
(b) All actions of the Nominating Committee shall be recorded in
minutes of its meetings and reported to the Board of Directors.
3. RULES OF PROCEDURE. The Nominating Committee shall fix its own rules of
procedure and shall meet where and as provided by such rules or by resolution of
the Board of Directors. Special meetings of the Nominating Committee may be
called at any time by the chair of the Nominating Committee or by any two
members. At all meetings, the presence of a majority of the members shall be
necessary to constitute a quorum, and the affirmative vote of a majority of the
quorum shall be necessary and sufficient to transact business.
ARTICLE VII
COMPENSATION COMMITTEE
1. MEMBERSHIP. The Compensation Committee shall consist of not less than three
members appointed by the Board of Directors, none of whom shall be an employee
of the corporation or any of its subsidiaries. The Board of Directors shall
designate one member of the Compensation Committee as its chair. Each member of
the Compensation Committee shall continue as a member at the pleasure of the
Board of Directors.
2. POWERS AND DUTIES. (a) The Compensation Committee shall:
(1) Review and approve in advance salary increases for officers of
the corporation and employees of its subsidiaries where the
proposed salary exceeds an amount set from time-to-time by the
Board of Directors;
(2) Report to the Board of Directors remuneration information
concerning the chief executive officer and through the chief
executive officer make such information as to any employee
available to any director upon request;
(3) Review and recommend to the Board of Directors any additional
employee benefit program of a substantial nature and material
changes to existing programs;
(4) Review and approve changes required by law to be made to
existing employee benefit programs and non-material changes to
existing programs; and
(5) Administer the corporation's stock option program.
<PAGE> 10
SAFECO Corporation Bylaws
At August 5, 1998
Page 10
(b) All actions of the Compensation Committee shall be recorded in
minutes of its meetings and reported to the Board of Directors.
3. RULES OF PROCEDURE. The Compensation Committee shall fix its own rules of
procedure and shall meet where and as provided by such rules or by resolution of
the Board of Directors. Special meetings of the Compensation Committee may be
called at any time by the chair of the Compensation Committee or by any two
members. At all meetings, the presence of a majority of the members shall be
necessary to constitute a quorum, and the affirmative vote of a majority of the
quorum shall be necessary and sufficient to transact business.
ARTICLE VIII
OTHER COMMITTEES
The Board of Directors shall have authority to establish by resolution such
other committees as the Board of Directors may from time to time deem necessary
or advisable. The membership, duties and authority of such committees shall be
as the Board of Directors may from time to time establish.
ARTICLE IX
OFFICERS
1. OFFICERS ENUMERATED - APPOINTMENT. The officers of the corporation shall be a
Chairman, a President, one or more Vice Presidents, one or more Assistant Vice
Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one
or more Assistant Treasurers, all of whom shall be appointed by the Board of
Directors at the annual meeting thereof, to hold office for the term of one year
and until their successors are appointed and qualified.
2. QUALIFICATIONS. None of the officers of the corporation, except the Chairman
and President, need be a director. Any two or more corporate offices may be
combined in one person.
3. CHAIRMAN. The Chairman shall preside at all meetings of the stockholders and
directors, shall be the chief executive officer of the corporation, and, subject
to the Board of Directors and Executive Committee, shall have general
supervisory power and ultimate authority over and responsibility for the
business and affairs of the corporation.
4. PRESIDENT. The President shall be the chief operating officer of the
corporation, and, subject to the ultimate authority of the Board of Directors,
Executive Committee and Chairman, shall have general charge, supervision and
control over the business and affairs of the corporation and of such of its
subsidiaries as have been designated by the Chairman, and shall be responsible
<PAGE> 11
SAFECO Corporation Bylaws
At August 5, 1998
Page 11
for the management thereof. In the absence of the Chairman the President shall
act in the place of the Chairman with the authority to exercise all of the
Chairman's powers and perform the Chairman's duties.
5. VICE PRESIDENTS. In the absence or disability of both the Chairman and
President, one of the Vice Presidents, in the order determined by seniority of
responsibility and then order of their appointment, shall act as Chairman and
President until such time as the Board of Directors acts to appoint an
individual or individuals to the offices of Chairman and President. One or more
of the vice presidents may be designated by the Board of Directors as executive
vice president, senior vice president or such other title as the Board of
Directors deems appropriate for the position and duties.
6. SECRETARY. The Secretary shall be the custodian of the records, books of
account, and seal of the corporation, and, in general, shall perform all duties
usually incident to the office of Secretary, and make such reports and perform
such other duties as may from time to time be requested of or assigned by the
Board of Directors, the Executive Committee, the chief executive officer or
chief operating officer of the corporation.
7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as
may be assigned to them by the Secretary of the corporation, the Board of
Directors, the Executive Committee, the chief executive officer or the chief
operating officer of the corporation.
8. TREASURER. The Treasurer shall have charge and custody of and be responsible
for all funds and securities of the corporation. The Treasurer shall deposit all
such funds in the name of the corporation in such depositories or invest them in
such investments as may be designated or approved by the Finance Committee or
the Board of Directors, and shall authorize disbursement of the funds of the
corporation in payment of just demands against the corporation, or as may be
ordered by the Board of Directors, the Executive Committee, or the Finance
Committee on securing proper vouchers for such disbursements. The Treasurer
shall render to the Board of Directors from time to time as may be required an
account of all transactions as Treasurer, and shall perform such other duties as
may from time to time be assigned by the Board of Directors, the Executive
Committee, the Finance Committee, or the chief executive officer of the
corporation.
9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as
may be assigned to them by the Treasurer, the Board of Directors, the Executive
Committee, the chief executive officer or the chief operating officer of the
corporation.
10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other
officers and agents as it shall deem necessary to exercise such powers and
perform such duties as shall be determined from time to time by the Board of
Directors.
<PAGE> 12
SAFECO Corporation Bylaws
At August 5, 1998
Page 12
11. REMOVAL. Any officer of the corporation may be removed by the affirmative
vote of a majority of the whole Board of Directors; such removal, however, shall
be without prejudice to the contract rights of the person so removed.
ARTICLE X
CORPORATION PROXIES
Unless otherwise ordered by the Board of Directors, any and all shares of stock
owned or held by the corporation in any other corporation shall be represented
and voted at any meeting of the stockholders of such other corporation by any
one of the following officers of the corporation in the following order who may
attend such meeting; i.e., the Chairman, the President, a Vice President, or the
Treasurer, and such representation by any one of the officers above named shall
be deemed and considered a representation in person by the corporation at such
meeting. Any one of the officers above named may execute a proxy appointing any
other person as attorney and proxy to represent the corporation at such
stockholders' meeting and to vote all stock of such corporation owned or held by
the corporation with all power and authority in the premises that any of the
officers above named would possess if personally present. The Board of Directors
by resolution may from time to time confer like powers upon any other person or
persons.
ARTICLE XI
STOCK
1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be
issued in such form in accordance with the corporation law of the State of
Washington as may be approved by the Board of Directors, and may be signed by
the chief executive officer, the chief operating officer, or any Vice President,
and by the Secretary or any Assistant Secretary.
2. TRANSFERS. Shares of stock may be transferred by delivery of the certificates
therefor accompanied either by an assignment in writing on the back of the
certificate or by a written power of attorney to sell, assign and transfer the
same by the record holder of the certificate. No transfer shall be valid except
as between the parties thereto until such transfer shall have been made on the
books of the corporation. Except as specifically provided in these Bylaws, no
shares of stock shall be transferred on the books of the corporation until the
outstanding certificate therefor has been surrendered to the corporation.
3. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder
of record on the books of the corporation of any share or shares of stock as the
holder in fact thereof for all purposes, including the payment of dividends on
such stock and the right to vote such stock.
<PAGE> 13
SAFECO Corporation Bylaws
At August 5, 1998
Page 13
4. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of
any certificate of stock, another may be issued in its place upon proof of such
loss or destruction, and upon the giving of a satisfactory bond or indemnity to
the corporation. A new certificate may be issued without requiring any bond when
in the judgment of the Treasurer it is proper to do so.
5. The Board of Directors shall have the power and authority to make all such
rules and regulations as it may deem expedient concerning the issue, transfer,
conversion and registration of certificates for shares of the stock of the
corporation not inconsistent with these Bylaws, the Articles of Incorporation,
or the laws of the State of Washington.
ARTICLE XII
INDEMNIFICATION
1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether
brought by or in the right of the corporation or otherwise) by reason of the
fact that he or she is or was a director of the corporation, or, while a
director of the corporation, is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee, or agent of another foreign
or domestic corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan (an "Indemnitee"), whether the basis of a proceeding is an
alleged action in an official capacity as such a director, officer, partner,
trustee, employee, or agent or in any other capacity while serving as such a
director, officer, partner, trustee, employee, or agent, shall be indemnified
and held harmless by the corporation against all judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by the Indemnitee in
connection with such proceeding. Except as provided in paragraph (d) of this
Section 1 with respect to proceedings seeking to enforce rights to
indemnification, the corporation shall indemnify any Indemnitee only if the
proceeding (or part thereof) was authorized or ratified by the Board of
Directors.
(b) No indemnification shall be provided to any Indemnitee for acts or
omissions of the Indemnitee finally adjudged to be intentional misconduct or a
knowing violation of law, for conduct of the Indemnitee finally adjudged to be
in violation of Section 23B.08.310 of the Washington Business Corporation Act,
for any transaction with respect to which it was finally adjudged that such
Indemnitee personally received a benefit in money, property or services to which
the Indemnitee was not legally entitled or if the corporation is otherwise
prohibited by applicable law from paying such indemnification, except that if
Section 23B.08.560 or any successor provision is hereafter amended, the
restrictions on indemnification set forth in this paragraph (b) shall be as set
forth in such amended statutory provision.
(c) The right to indemnification conferred under this Article XII shall
include the right to be paid by the corporation the expenses incurred in
defending any proceeding in advance of its
<PAGE> 14
SAFECO Corporation Bylaws
At August 5, 1998
Page 14
final disposition. An advancement of expenses shall be made upon delivery to the
corporation of an undertaking, by or on behalf of an Indemnitee, to repay all
amounts so advanced if it is ultimately determined by final judicial decision
from which there is no right to appeal that such Indemnitee is not entitled to
be indemnified for such expenses under this Article XII.
(d) If a claim under this Section 1 is not paid in full by the
corporation within 60 days after a written claim has been received by the
corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the Indemnitee may at any
time thereafter bring suit against the corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the Indemnitee shall be entitled to be paid also the
expense of prosecuting or defending such suit. An Indemnitee shall be presumed
to be entitled to indemnification under this Article XII upon submission of a
written claim (and, in an action brought to enforce a claim for an advancement
of expenses, where the required undertaking has been tendered to the
corporation), and the corporation shall have the burden of proof to overcome the
presumption that the Indemnitee is so entitled.
2. OFFICERS. The corporation shall extend rights to indemnification and
advancement of expenses in the same manner and to the same extent provided to
directors under Section 1 of this Article to any person, not a director of the
corporation, who is or was an officer of the corporation or is or was serving at
the request of the corporation as a director, officer, partner, trustee, or
agent of another foreign or domestic corporation, partnership, joint venture,
trust, other enterprise, or employee benefit plan.
3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of
Directors, grant rights to indemnification and advancement of expenses to
employees and agents or any class or group of employees and agents of the
corporation (I) with the same scope and effect as the provisions of this Article
with respect to the indemnification and advancement of expenses of directors;
(ii) pursuant to rights provided by the Washington Business Corporation Act; or
(iii) as are otherwise consistent with law.
4. DEFINITIONS. For purposes of this Article XII, the terms "director,"
"corporation," "expenses," "party" and "proceeding" have those meanings assigned
to them in Section 23B.08.500 of the Washington Business Corporation Act.
5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director,
officer or employee of the corporation, is or was serving (a) as a director or
officer of another corporation of which a majority of the shares entitled to
vote is held by the corporation or (b) as a partner, trustee or otherwise in a
management capacity in a partnership, joint venture, trust or other enterprise
of which the corporation or a wholly-owned subsidiary of the
<PAGE> 15
SAFECO Corporation Bylaws
At August 5, 1998
Page 15
corporation is a general partner or has a majority ownership shall be deemed to
be so serving at the request of the corporation.
6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor
provision of the Washington Business Corporation Act, the procedures for
indemnification and advancement of expenses set forth in this Article are in
lieu of the procedures required by Section 23B.08.550 or any successor provision
of the Washington Business Corporation Act.
7. NOT EXCLUSIVE -- CONTINUING. The indemnification provided by this Article
shall not be deemed exclusive of other rights to which the director, officer,
employee or agent may be entitled as a matter of law or by contract, and shall
continue as to a person who has ceased to be a director, officer, partner,
trustee, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
8. INSURANCE. The corporation may maintain insurance at its expense to protect
itself and any director, officer, partner, trustee, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Washington Business Corporation Act.
ARTICLE XIII
SEAL
The seal of this corporation shall consist of a flat-faced, circular die with
the words "SAFECO CORPORATION" and with the words and figures "Corporate Seal,
1929" in the center surrounding the trademarked chevron and stylized "S."
ARTICLE XIV
COPIES OF RESOLUTIONS
Any person dealing with the corporation may rely upon a copy of any of the
records of the proceedings, resolutions, or votes of the stockholders, the Board
of Directors, and any committees of or established by the Board of Directors,
when certified by the chief executive officer, the chief operating officer, a
Vice President, Secretary, or an Assistant Secretary.
<PAGE> 16
SAFECO Corporation Bylaws
At August 5, 1998
Page 16
ARTICLE XV
AMENDMENT OF BYLAWS
1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any
meeting of the stockholders, if notice of the proposed alteration or amendment
is contained in the notice of the meeting.
2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed
by the affirmative vote of a majority of the Board of Directors at any regular
meeting of the Board of Directors, or at any special meeting if notice of the
proposed alteration or amendment is contained in the notice of such special
meeting; provided, however, that the Board of Directors shall not amend, alter
or repeal any Bylaw in such a manner as to affect in any way the qualification,
classification, or term of office of the directors. Any action of the Board of
Directors with respect to the amendment, alteration or repeal of these Bylaws is
hereby made expressly subject to change or repeal by the stockholders.
<PAGE> 1
EXHIBIT 10
SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES
1. PURPOSE
The purpose of the SAFECO Deferred Compensation Plan for Executives
(the "Plan") is to provide a select group of management or highly
compensated employees of SAFECO Corporation ("SAFECO") and its
Subsidiaries with an opportunity to defer all or part of the Eligible
Compensation payable by the Corporation to such employees and all or
part of such employees' Excess Contributions to the Savings Plan.
2. DEFINITIONS
2.01 Account. The term "Account" means a separate deferred
compensation account established by the Corporation in the
name of a Participant.
2.02 Administrative Committee. The "Administrative Committee" shall
be the three-person committee, appointed by the SAFECO Board
of Directors, and which is responsible for the administration
of the Corporation's qualified retirement and savings plans.
2.03 Beneficial Owner. "Beneficial Owner" has the meaning set forth
in Rule 13d-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act").
2.04 Beneficiary. "Beneficiary" refers to an individual or
individuals designated by the Participant to receive certain
benefits described in this Plan in the event of the
Participant's death.
2.05 Board of Directors or Board. The "Board of Directors" or the
"Board" shall refer to the Board of Directors of SAFECO
Corporation.
2.06 Change in Control. A "Change in Control" shall be deemed to
have occurred if the event set forth in any one of the
following paragraphs has occurred:
(a) Any Person is or becomes the Beneficial Owner,
directly or indirectly, of SAFECO securities (not
including in the securities beneficially owned by
such Person any securities acquired directly from
SAFECO or its Affiliates) representing 25% or more of
the combined voting power of SAFECO's then
outstanding securities, excluding any Person who
becomes such a Beneficial Owner in connection with a
transaction described in clause (x) of paragraph (c)
of this Section 2.06; or
(b) The following individuals cease for any reason to
constitute a majority of the number of directors then
serving: individuals who were directors of SAFECO on
the date the Plan is adopted by the SAFECO Board of
Directors, and any
<PAGE> 2
new director (other than a director whose initial
assumption of office is in connection with an actual
or threatened election contest, including but not
limited to a consent solicitation, relating to the
election of directors of SAFECO) whose appointment or
election by the Board of Directors or nomination for
election by SAFECO's shareholders was approved by a
vote of at least two-thirds of the directors then
still in office who either were directors on the date
the Plan was adopted or whose appointment, election
or nomination for election was previously so approved
or recommended; or
(c) There is consummated a merger or consolidation of
SAFECO or any Subsidiary with any other corporation,
other than (x) a merger or consolidation which would
result in the voting securities of SAFECO outstanding
immediately prior to such merger or consolidation
continuing to represent (either by remaining
outstanding or by being converted into voting
securities of the surviving entity or any parent
thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under
an employee benefit plan of SAFECO or any Subsidiary,
at least 75% of the combined voting power of the
securities of SAFECO or such surviving entity or any
parent thereof outstanding immediately after such
merger or consolidation, or (y) a merger or
consolidation effected to implement a
recapitalization of SAFECO (or similar transaction)
in which no Person is or becomes the Beneficial
Owner, directly or indirectly, of securities of
SAFECO (not including in the securities beneficially
owned by such Person any securities acquired directly
from SAFECO or its Affiliates other than in
connection with the acquisition by SAFECO or its
Affiliates of a business) representing 25% or more of
the combined voting power of SAFECO's then
outstanding securities; or
(d) The shareholders of SAFECO approve a plan of complete
liquidation or dissolution or there is consummated an
agreement for the sale or disposition of all or
substantially all of SAFECO's assets, other than a
sale or disposition by SAFECO of all or substantially
all of its assets to an entity of which at least 75%
of the combined voting power is owned by shareholders
of SAFECO in substantially the same proportions as
their ownership of SAFECO immediately prior to such
sale.
Notwithstanding the foregoing, a "Change in Control" shall not
be deemed to have occurred by virtue of the consummation of
any transaction or series of integrated transactions
immediately following which the record holders of the Common
Stock immediately prior to such transaction or series of
transactions continue to have substantially the same
proportionate ownership in an entity which owns all or
substantially all of SAFECO's assets immediately following
such transaction or series of transactions.
-2-
<PAGE> 3
2.07 Closing Price. "Closing Price" means the price at which the
last trade of SAFECO Common Stock was made prior to 1:00 p.m.
West Coast time on the NASDAQ Stock Market.
2.08 Code. "Code" means the Internal Revenue Code of 1986, as
amended.
2.09 Common Stock. "Common Stock" means SAFECO Corporation common
stock.
2.10 Compensation Committee. "Compensation Committee" means the
Compensation Committee of the Board of Directors.
2.11 Corporation. "Corporation" means SAFECO Corporation and its
subsidiaries, collectively.
2.12 Deferrals. "Deferrals" refers to the amount of Eligible
Compensation and/or Excess Contributions that a Participant
specifies in his or her Election pursuant to the terms and
conditions of the Plan.
2.13 Disability. "Disability" means a permanent and total
disability as defined in Section 22(e) of the Code.
2.14 Election. "Election" means a written document signed by an
eligible employee stating the employee's intent to participate
in the Plan and specifying the amount or percentage of
Eligible Compensation and/or Excess Contributions which the
employee desires to have credited to his Account in the Plan.
2.15 Eligible Compensation. "Eligible Compensation" means
compensation payable to a Participant by the Corporation in
the form of salary, bonus, gain on the exercise of
non-qualified stock options, settlements of restricted stock
rights ("RSRs"), and dividend equivalents payable on RSRs.
2.16 Excess Contributions. "Excess Contributions" means the amount
of base salary (not to exceed 6%) elected by an employee to
contribute to the Savings Plan which is in excess of
applicable Code limitations on contributions to the Savings
Plan.
2.17 Hardship. "Hardship" means an unforeseeable emergency
resulting from a sudden and unexpected illness or accident of
the Participant or a Participant's dependent (as defined in
Section 152(a) of the Code), loss of the Participant's
property due to casualty, or other similar extraordinary and
unforeseeable circumstances arising from events beyond the
Participant's control.
2.18 Match. "Match" means an amount equal to two-thirds of the
amount of Excess Contributions which a Participant has elected
to defer under the Plan.
2.19 Participant. A "Participant" means an employee eligible to
participate in the Plan who has timely filed an Election to
defer compensation in accordance with Section 3.
-3-
<PAGE> 4
Any such person shall be a Participant as of the effective
date of his or her first Election and shall continue until the
date of the last payment pursuant to Section 6.
2.20 Person. "Person" for purposes of Section 2.06 means any person
(as defined in Section 2(a)(9) of the Exchange Act, and as
such term is modified in Section 13(d) and 14(d) of the
Exchange Act) other than (i) any employee plan established by
SAFECO, (ii) SAFECO or any of its affiliates (as defined in
Rule 12b-2 promulgated under the Exchange Act) ("Affiliates"),
(iii) an underwriter temporarily holding securities pursuant
to an offering of such securities, or (iv) a corporation
owned, directly or indirectly, by SAFECO shareholders in
substantially the same proportions as their ownership of
SAFECO.
2.21 Phantom Stock. "Phantom Stock" refers to an investment option
tied to the performance of the Common Stock where each unit of
Phantom Stock is the economic equivalent of one share of
Common Stock.
2.22 RSRs. "RSRs" refers to restricted stock rights issued under
the SAFECO Incentive Plan of 1987, the SAFECO Long-Term
Incentive Plan of 1997, or any successor incentive plan.
2.23 Retirement. "Retirement" means a Participant's termination of
employment with the Corporation occurring at or after age 55
(other than as a result of death or Disability), provided the
sum of the Participant's age and the Participant's years of
service with the Corporation equals or exceeds 75.
2.24 Savings Plan. "Savings Plan" means the SAFECO Employees'
Savings Plan.
2.25 Subsidiary. "Subsidiary" means any corporation of which 50% or
more of the voting stock is owned, directly or indirectly, by
SAFECO Corporation.
3. ELECTIONS TO DEFER
3.01 Filing of Election. An eligible employee who wishes to
participate in the Plan shall file an Election with the
Corporation in the form provided by the Administrative
Committee, which shall specify the timing and amount of
Deferrals, if any, to be made under the Plan by the
Participant. A Participant may elect to defer all or any
portion of the Participant's Eligible Compensation and/or
Excess Contributions.
3.02 Election Irrevocable. An Election is irrevocable as to the
amount or percentage of Eligible Compensation or Excess
Contributions to be deferred in the year to which the Election
relates. Any request to change the amount or percentage to be
deferred shall not be effective until the first day of the
next calendar year. Notwithstanding the above, if a
Participant obtains a Hardship withdrawal from the Plan under
Section 6.06, the Participant's Election shall be
automatically revoked, beginning with the first day of the
next regularly scheduled payroll period, for the remainder of
the calendar year.
-4-
<PAGE> 5
3.03 Timing of Election
(a) Elections to defer Eligible Compensation shall be
filed with the Administrative Committee no later than
December 31 and shall be effective for Eligible
Compensation earned on or after January 1 of the
following calendar year, except that Elections to
defer amounts payable in settlement of RSRs shall not
take effect until one additional year later.
(b) Elections to defer Excess Contributions shall be
filed with the Administrative Committee no later than
December 31 of the year prior to the year in which
the Excess Contributions will occur.
3.04 Special Rule Applicable in 1998. Eligible employees shall have
until May 15, 1998 to file Elections to defer Eligible
Compensation earned and/or Excess Contributions made during
the remainder of 1998 as well as settlements of RSRs payable
in February 1999.
4. DEFERRAL ACCOUNTS
4.01 Establishment of Accounts. An Account shall be established for
each Participant to which all Deferrals and Matches made on
behalf of the Participant shall be credited.
4.02 Crediting of Accounts.
(a) Deferrals of Eligible Compensation shall be credited
to a Participant's Account on the date such Deferrals
would otherwise be payable to the Participant.
(b) Deferrals of Excess Contributions and the
corresponding Match shall be credited to a
Participant's Account on the date the Excess
Contributions would have been contributed to the
Savings Plan but for applicable Code limitations.
4.03 Earnings. Each Account shall be credited with earnings
equivalent to those that would accrue if the Account were
actually invested in the investment options selected by the
Participant from among the phantom investment options offered
under the Plan from time to time.
5. INVESTMENT OPTIONS
5.01 Investment Options. The phantom investment options available
under the Plan are those set forth in Appendix A. The
Corporation is under no obligation to offer any particular
investment option and reserves the right to eliminate, change,
and add investment options at any time.
-5-
<PAGE> 6
5.02 Switching Investments. Participants may change investment
option selections from time to time under rules established by
the Administrative Committee.
6. DISTRIBUTION OF DEFERRED COMPENSATION ACCOUNT
6.01 General. Except as provided in Section 6.07 with respect to
Hardship withdrawals and Section 7 concerning Change in
Control situations, no withdrawal or payment shall be made
from a Participant's Account except following the earliest to
occur of the Participant's death, Disability, Retirement or
other termination of service with the Corporation. Payments
shall be made in accordance with Sections 6.02 and 6.03 unless
the Participant files an election pursuant to Section 6.05
requesting an alternative distribution type and/or time
period. All payments shall be made in cash, regardless of the
investment options selected by the Participant.
6.02 Retirement Distributions. The Participant's Account balance
shall be paid to the Participant (or the Participant's
Beneficiary) in 10 annual installments commencing in January
of the year following the Participant's retirement. The amount
of each annual installment payment shall equal the value of
the Participant's Account as of December 31 divided by the
remaining number of installment payments (including the
payment in question).
6.03 Distributions Following Death, Disability and Other
Non-Retirement Terminations. In the event that a Participant
dies prior to Retirement or terminates employment with the
Corporation due to Disability or for any other reason besides
Retirement, the entire balance of the Participant's Account
shall be paid out in a single lump sum in January of the year
following the year in which the death, Disability, or other
termination of employment occurred. The value of the Account
shall be determined as of December 31 of the year in which the
Participant's death, Disability, or other termination
occurred.
6.04 Designation of Beneficiary. A Participant may designate a
Beneficiary to receive amounts payable under the Plan in the
event of the Participant's death. The Participant may revoke
or change a Beneficiary designation by filing a written notice
of revocation or change of Beneficiary with the Administrative
Committee at any time. If the Participant fails to designate a
Beneficiary or if the designated Beneficiary predeceases the
Participant, then the unpaid amounts in the Account of a
deceased Participant shall be paid to the Participant's
estate.
6.05 Distribution Election. Participants shall be permitted, in
accordance with rules established by the Administrative
Committee, to specify a distribution type and/or period
different from those set forth in Sections 6.02 and 6.03
above. To be effective, a distribution election must be made
in writing and received by the Administrative Committee at
least 12 months prior to the Participant's termination of
employment with the Corporation, except that the 12-month
waiting period shall not apply if the termination of
employment was due to the Participant's death or Disability. A
Participant may revoke any such distribution election by
written notice or file a new
-6-
<PAGE> 7
distribution election with the Administrative Committee at any
time, subject to Section 6.06; provided, however, that an
election made under this Section 6.05 shall become irrevocable
once the Participant is within 12 months of termination. Any
distribution election filed by a Participant shall apply to
the entire Account, including both the amounts credited to the
Account prior to the election date and those credited
thereafter, without regard to how the Account may be allocated
among investment options.
6.06 Special Rule for First-Time Participants. In the case of
Participants making an Election to defer compensation for the
first time, a distribution election made under Section 6.05
shall be given effect even if the Participant terminates
employment within 12 months of such election, provided the
distribution election was made at the same time as the initial
Election to defer compensation. A distribution election made
by a first-time Participant at the time of his or her initial
Election shall be irrevocable for 12 months.
6.07 Hardship Withdrawals. A Participant may request that the
Corporation make an immediate, accelerated distribution from
his or her Account in the event the Participant has incurred a
severe financial Hardship. Distributions will not be made to
the extent that such Hardship can be relieved through
insurance proceeds, liquidation of the Participant's assets
(but only to the extent that such liquidation would not itself
cause a severe financial Hardship) or by cessation of
deferrals under the Plan. Payments for severe financial
Hardship under this Plan are limited to the extent necessary
to comply with Treas. Reg. Section 1.457-2. The Administrative
Committee shall determine whether the Participant has incurred
a severe financial Hardship and may, in its sole discretion,
grant the immediate, accelerated distribution of all or any
portion of the Participant's Account; provided, however, that
such distribution shall not exceed the amount determined by
the Administrative Committee to be necessary to alleviate the
severe financial Hardship.
7. CHANGE IN CONTROL
In the event of a Change in Control, the entire unpaid balance of each
Participant's Account shall be paid to the Participant (or the
Participant's Beneficiary or estate) in a single lump sum within 30
days after the Change in Control.
8. PHANTOM STOCK UNITS
8.01 Phantom Stock Units. Deferrals allocated to Phantom Stock
shall be credited in units ("Units") based on the Closing
Price of the Common Stock on the date such amounts are
credited to a Participant's Account.
8.02 Phantom Dividends. To the extent cash dividends are paid by
SAFECO on the Common Stock, Participants' Accounts shall be
credited with phantom dividends on Phantom Stock Units.
Phantom dividends shall equal the product of the dividend paid
on a share of Common Stock multiplied by the number of Units
in a
-7-
<PAGE> 8
Participant's Account on the record date for the cash
dividend. Phantom dividends shall be credited to a
Participant's account in the form of additional Phantom Stock
Units. The number of additional Units credited shall be
determined based on the Closing Price of the Common Stock on
the dividend payment date.
8.03 Distributions. In determining the amount of an installment
payment or lump sum distribution payable to a Participant
(other than a distribution under Section 7 following a Change
in Control), the value of a Phantom Stock Unit shall equal the
average of the Closing Price of the Common Stock during the
last 10 trading days of the year prior to the year in which
the lump sum distribution or installment payment is to be
made.
8.04 Distributions Resulting from a Change in Control. In
determining the amount of the lump sum distribution payable to
a Participant following a Change in Control, Phantom Stock
Units shall be valued as follows:
(a) If the Change in Control was of the type described in
paragraph (a) of Section 2.06, the value of a Phantom
Stock Unit shall equal the highest price paid for
shares of Common Stock by any Person who became a
Beneficial Owner of securities representing 25% or
more of the combined voting power of SAFECO's
outstanding securities.
(b) If the Change in Control was of any type other than
that described in paragraph (a) of Section 2.06, the
value of a Phantom Stock Unit shall equal the highest
Closing Price of the Common Stock during the last 10
trading days prior to and including the date of the
Change in Control.
8.05 No Share Issuance. No actual shares of Common Stock will be
issued directly or indirectly under the Plan in respect of
Phantom Stock Units.
8.06 Changes in Capital Structure. In the event of any change in
the Common Stock of SAFECO by reason of an issuance of
additional shares, recapitalization, reclassification, merger,
reorganization, stock split, reverse stock split, combination
of shares, stock dividend or similar transaction, the number
of Phantom Stock Units held by Participants under the Plan
shall be proportionately adjusted by the Administrative
Committee.
8.07 No Voting or Other Rights. No voting or other rights of any
kind associated with the ownership of Common Stock shall inure
to a Participant by virtue of the Participant's deemed
investment in Phantom Stock Units.
-8-
<PAGE> 9
9. TRANSFERABILITY
Interests in the Plan may not be transferred, assigned, pledged or
encumbered. Prior to the time payment of an Account is actually made to
a Participant, the Participant shall have no rights by way of
anticipation or otherwise to assign or dispose of any interest under
the Plan.
10. ADMINISTRATION
The Plan shall be administered by the Administrative Committee. The
Administrative Committee shall have the exclusive authority over all
matters involving administration of the Plan, including the selection
of employees eligible to participate. The Administrative Committee
shall also have exclusive authority to interpret the Plan and may adopt
such rules and procedures as it deems necessary or desirable from time
to time, subject to the Plan's express provisions. The Administrative
Committee may delegate administrative duties to other persons,
including officers of the Corporation, and may retain the services of
lawyers, accountants, or other outside third parties to assist with the
administration of the Plan. In cases where a decision or Plan
interpretation of the Administrative Committee relates specifically to
the benefits to which a member of the Administrative Committee may be
entitled, the decision or interpretation shall be subject to review and
approval by the Compensation Committee.
11. AMENDMENT OF THE PLAN
The Compensation Committee may from time to time make such amendments
to the Plan as it deems appropriate, including without limitation the
addition or elimination of one or more investment options; provided,
however, that (i) no amendment which cancels or reduces the benefits to
which any Participant is entitled as of the date of such amendment
shall be effective without the written consent of the Participant, and
(ii) the provisions contained in Sections 7 and 8.04 shall not be
amended following a Change in Control without the written consent of
66.67% of the Participants. The Administrative Committee shall be
authorized to make amendments to the Plan which are immaterial or
clerical in nature or which are, in the opinion of counsel, required by
local, state or federal law or regulation.
12. TERMINATION OF THE PLAN
The Corporation reserves the right to terminate the Plan at any time by
action of the Board of Directors or the Compensation Committee, subject
to the limitations on amendments set forth in Section 11. Unless the
Board or the Compensation Committee determines otherwise, in the event
the Plan is terminated, the Account of each Participant shall be valued
as of the date specified for such purpose by the Board or the
Compensation Committee (the "Valuation Date"), and the value of the
Account shall be paid in cash to the Participant within 30 days
following the Valuation Date. In valuing Accounts following a
termination of the Plan, the value of a Phantom Stock Unit shall equal
the average of the Closing Price of the Common Stock during the last 10
trading days prior to and including the Valuation Date.
-9-
<PAGE> 10
13. NO EMPLOYMENT RIGHTS.
Nothing in the Plan shall confer upon any Participant any right to be
continued in the employment of the Corporation or to interfere in any
way with the right of the Corporation, in its sole discretion, to
terminate such Participant's employment at any time.
14. NO RIGHTS TO ASSETS
Participants shall have no rights to any assets of the funds selected
as investment options. The rights of a Participant (and of his or her
Beneficiary or estate) shall be solely those of an unsecured general
creditor of the Corporation, and shall not constitute an interest in
any specific asset of the Corporation.
15. DISPUTES
By participating in the Plan, a Participant waives the right to
litigate any dispute arising in connection with the Plan in any court
of otherwise competent jurisdiction. The determination of the
Administrative Committee as to any disputed questions concerning
interpretation of the Plan shall be final, binding, and conclusive upon
all persons. The Corporation may, but is not required to, agree to
assistance in the resolution of any dispute arising under the Plan from
a mediator who shall be a disinterested party to the dispute.
16. EMPLOYMENT TAXES; WITHHOLDING; EXPENSES
The Corporation will collect applicable employment taxes from
Participants on all amounts deferred under the Plan. From
distributions under the Plan, the Corporation will deduct federal,
state, and local taxes and such other amounts as may be required by
law to be withheld with respect to such payments.
17. EQUITABLE ADJUSTMENTS
The Administrative Committee may make equitable adjustments under the
Plan from time to time, including retroactive adjustments to correct
mathematical, accounting, or factual errors made in good faith by the
Corporation or a Participant. Any such adjustments will be final and
binding on all Participants and Beneficiaries.
18. GOVERNING LAW; SEVERABILITY
This Plan shall be governed by and interpreted in accordance with the
internal laws of the State of Washington without regard to conflicts of
law principles. If any provision of the Plan is held to be invalid or
unenforceable, such invalidity or unenforceability shall in no way
affect the validity or enforceability of any other Plan provision.
-10-
<PAGE> 11
19. BINDING PROVISIONS
All of the provisions of the Plan shall be binding upon and inure to
the benefit of the Corporation, its successors and assigns, each
Participant and every Beneficiary, guardian, personal representative
and heir of a Participant.
20. EFFECTIVE DATE
The effective date of the Plan shall be May 6, 1998.
-11-
<PAGE> 12
Appendix A
INVESTMENT OPTIONS UNDER
THE SAFECO DEFERRED COMPENSATION PLAN FOR EXECUTIVES
May 1998
In the case of deferrals of Eligible Compensation or Excess Contributions, the
following investment options shall be available:
a. SAFECO Phantom Stock Units on which dividend equivalents shall
be credited.
b. Interest-Accruing Account on which interest shall be credited
at a rate equal to the applicable federal long-term rate for
purposes of Section 1274 of the Internal Revenue Code of 1986,
as amended, in effect at January 1 of each year.
c. Savings Plan Portfolios
- Common Stock - Fund A
- Fixed Income - Fund B
- Short-Term Securities - Fund C
-12-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 17,733
<DEBT-CARRYING-VALUE> 2,707
<DEBT-MARKET-VALUE> 3,240
<EQUITIES> 2,000
<MORTGAGE> 510
<REAL-ESTATE> 612
<TOTAL-INVEST> 23,865
<CASH> 56
<RECOVER-REINSURE> 289
<DEFERRED-ACQUISITION> 568
<TOTAL-ASSETS> 30,292
<POLICY-LOSSES> 4,342
<UNEARNED-PREMIUMS> 1,782
<POLICY-OTHER> 279
<POLICY-HOLDER-FUNDS> 12,184
<NOTES-PAYABLE> 2,405
842
0
<COMMON> 914
<OTHER-SE> 4,755
<TOTAL-LIABILITY-AND-EQUITY> 30,292
2,252
<INVESTMENT-INCOME> 754
<INVESTMENT-GAINS> 45
<OTHER-INCOME> 135
<BENEFITS> 2,055
<UNDERWRITING-AMORTIZATION> 387
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 238
<INCOME-TAX> 35
<INCOME-CONTINUING> 203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
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</TABLE>
