<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997
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)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(141,180,121 shares were outstanding at January 31, 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 .
------ ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 1998, was $7,100,000,000.
Documents incorporated by reference:
Portions of the registrant's 1997 Annual Report to Shareholders are
incorporated by reference into Parts I and II. Portions of the registrant's
definitive Proxy Statement for the 1998 annual shareholders meeting to be
held May 6, 1998, are incorporated by reference into Part III.
<PAGE> 2
PART I Item 1. Business
GENERAL
SAFECO Corporation (the Corporation) is a Washington
corporation that owns operating subsidiaries in various segments
of insurance and other financially related businesses. (The
Corporation and its subsidiaries are collectively referred to as
"SAFECO".) SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries
engage in property and casualty insurance, surety and life and
health insurance, and generated approximately 95% of SAFECO's
total 1997 revenues. The home offices of the Corporation and its
principal subsidiaries are in Seattle and Redmond, Washington.
On October 1,1997 SAFECO acquired American States Financial
Corporation ("American States"), an Indianapolis, Indiana-based
insurance holding company with 1996 revenues of $2.0 billion.
SAFECO also acquired WM Life Insurance Company on December 31,
1997. Both acquisitions were treated as purchases for accounting
purposes. See Note 2 on page 59 of the 1997 Annual Report to
Shareholders, incorporated herein by reference (Exhibit 13), for
additional information. As of December 31, 1997, SAFECO had
approximately 11,000 employees.
In February 1998 SAFECO announced its decision to sell its
real estate subsidiary, SAFECO Properties, Inc. to focus on its
core insurance and financial services businesses. SAFECO has
retained an investment banker to assist in its sales efforts. As
the operations are not material to the consolidated financial
statements they have not been reclassified as discontinued
operations.
SAFECO's insurance subsidiaries engage in two principal lines:
property and casualty (including surety), and life and health
insurance. SAFECO's property and casualty operation is one of the
largest in the United States. All areas of the insurance business
are highly competitive and no one insurance company or group of
insurers dominates the market.
The Corporation and its insurance subsidiaries are subject to
extensive regulation and supervision. This regulation is generally
designed to protect the interests of policyholders rather than
shareholders and other investors. Such regulation, generally
administered by a department of insurance in each state in which
the insurance subsidiaries do business, relates to, among other
things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and
limitations on investments; the ability to withdraw from the
state; the approval of premium rates; restrictions on the size of
risks that may be insured under a single policy; reserves and
provisions for unearned premiums, losses and other purposes;
deposits of securities for the benefit of policyholders; approval
of policy forms; and the regulation of market conduct, including
underwriting and claims practices. State insurance departments
also conduct periodic examinations of the affairs of insurance
companies and require the filing of annual and other reports
relating to the financial condition of insurance companies,
holding company issues and other matters. The Corporation's
insurance subsidiaries are collectively licensed to transact
insurance business in all 50 states and the District of Columbia.
See page 32 of the 1997 Annual Report to Shareholders,
incorporated herein by reference (Exhibit 13), for more
information on regulatory matters.
2
<PAGE> 3
PART I Item 1. Business (continued)
PROPERTY AND CASUALTY -- OPERATIONS
The Corporation's property and casualty subsidiaries include:
SAFECO Insurance Company of America, General Insurance Company of
America, First National Insurance Company of America, SAFECO
National Insurance Company, SAFECO Insurance Company of Illinois,
SAFECO Lloyds Insurance Company, SAFECO Surplus Lines Insurance
Company, American States Insurance Company, American Economy
Insurance Company, American States Preferred Insurance Company,
Insurance Company of Illinois, American States Insurance Company
of Texas, American States Lloyds Insurance Company, F. B. Beattie
& Co., Inc. and SAFECO Select Insurance Services, Inc.
SAFECO's property and casualty subsidiaries write personal,
commercial and surety lines of insurance through independent
agents. Coverages include automobile, homeowners, fire and allied
lines, workers' compensation, commercial multi-peril,
miscellaneous casualty, surety and fidelity. These products are
available in nearly all states and the District of Columbia.
As discussed above, SAFECO purchased American States on
October 1, 1997. SAFECO's strategy in purchasing American States
includes broadening its product mix available to the combined
companies' agency plant, particularly in introducing American
States' small commercial lines products into existing SAFECO
agencies. The combination increases the agency force,
geographically diversifies both the revenue and earnings base and
catastrophe risk exposure, and accelerates SAFECO's growth east of
the Rocky Mountains.
Consolidated property and casualty gross premiums written for
SAFECO's ten largest states are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ------------------------------------------------------------------------------------------------------------------------
(Amounts In Millions)
% of % of % of
State Amount Total Amount Total Amount Total
----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
California $ 584.0 20% $ 549.4 22% $ 548.3 23%
Washington 444.0 15 389.2 16 388.7 16
Texas 225.0 8 183.2 7 163.7 7
Oregon 181.0 6 155.4 6 152.5 7
Illinois 151.6 5 111.4 5 106.1 5
Florida 118.8 4 91.8 4 76.1 3
Missouri 118.4 4 79.9 3 73.2 3
Tennessee 81.7 3 66.1 3 58.2 2
Georgia 77.0 2 72.6 3 70.5 3
Colorado 66.6 2 52.5 2 49.3 2
--------------------------------------------------------------------------------------
2,048.1 69 1,751.5 71 1,686.6 71
All Others 939.3 31 712.0 29 680.3 29
--------------------------------------------------------------------------------------
Total $ 2,987.4 100% $ 2,463.5 100% $ 2,366.9 100%
======================================================================================
</TABLE>
The 1997 gross premiums written above include American States
from the October 1, 1997 acquisition date forward. Consequently
the by-state concentration percentages are not representative of
current geographic exposures. Based on annualized American States
premiums for 1997, the adjusted concentrations are 16% for
California, 13% for Washington, 7% for Texas, 6% for Illinois and
5% for Oregon.
3
<PAGE> 4
PART I Item 1. Business (continued)
Voluntary personal, commercial and surety lines (which exclude
assigned risk, FAIR plans, etc.) made up approximately 62%, 35%
and 3%, respectively, of the 1997 gross premiums written (these
percentages are based on annualized American States premiums for
1997, to better reflect actual product mix). The gross premiums
written growth of 5.6% in 1997 (excluding American States)
resulted from a 7.0% increase in personal, a 3.5% increase in
commercial and a 5.4% decrease in surety lines. Premiums written
by American States are down 2% from the fourth quarter a year ago.
Gross premiums written growth of 4.1% in 1996 resulted from a 4.8%
increase in personal, a 2.3% increase for commercial and a 3.1%
increase in surety lines.
The 1997 growth in personal lines premiums resulted primarily
from an increase in policies in force and rate increases in the
homeowners line. The number of vehicles insured increased 8.0% in
1997, compared with 5.3% in 1996 and 1.8% in 1995. The increases
in 1997 and 1996 came primarily from growth in targeted states
east of the Rocky Mountains. The number of homes insured increased
4.7% in 1997, 2.4% in 1996 and 1.2% in 1995. This relatively
modest growth rate was the result of rate increases in recent
years and the moratorium on writing new homeowners policies in
California.
SAFECO's commercial lines premiums were affected in both 1997
and 1996 by increased rate competition in workers' compensation --
particularly in California with its open rating system -- and to
increased rate competition in commercial auto. The decrease in
surety premiums in 1997 was caused by increased rate competition
in both the commercial and contract lines.
SAFECO sold its Canadian property and casualty operations in
1991. See page 35 of the 1997 Annual Report to Shareholders for
more information.
Additional financial information about SAFECO's business
segments appears in Note 17 on page 74 of the 1997 Annual Report
to Shareholders.
PROPERTY AND CASUALTY -- LOSS RESERVES
The consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment expense
("LAE") of the Corporation's property and casualty insurance
subsidiaries. The liability is presented net of amounts
recoverable from salvage and subrogation recoveries and gross of
amounts recoverable from reinsurance.
Reserves for losses that have been reported to SAFECO and
certain legal expenses are established on the "case basis" method.
Claims incurred but not reported (IBNR) and other adjustment
expense are estimated using statistical procedures. Salvage and
subrogation recoveries are accrued using the "case basis" method
for large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves which are adequate; that
is, the amounts originally recorded as reserves should at least
equal the amounts ultimately required to settle losses. These
reserves aggregate SAFECO's best estimates of the total ultimate
cost of claims that have been incurred but have not yet been paid.
The estimates are based on past claims experience and consider
current claims trends as well as social, legal and economic
conditions, including inflation. The reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular
basis to determine that the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the
amounts ultimately paid. A statistical estimate of the projected
amounts necessary to settle outstanding claims is made regularly
and compared to the recorded reserves and adjusted as necessary;
such adjustments are included in current operations.
4
<PAGE> 5
PART I Item 1. Business (continued)
The table below provides an analysis of changes in losses and
LAE reserves for 1997, 1996, and 1995 (net of reinsurance
amounts). Changes in the reserves are reflected in the income
statement for the year when the changes are made. Operations were
charged for an increase in estimated loss and LAE for claims
occurring in prior years of $30.5 million in 1997. The 1997 charge
includes a nonrecurring $40.0 million reserve increase related to
the American States acquisition. This reserve increase relates to
American States' previously discontinued assumed reinsurance
operations. Excluding this nonrecurring charge, the 1997 loss and
LAE development on claims occurring in prior years benefited
operations $9.5 million ($8.0 million for SAFECO and $1.5 million
for American States). Operations were credited $77.7 million and
$59.7 million in 1996 and 1995, respectively, as a result of a
reduction in the estimated amounts needed to settle prior years'
claims.
ANALYSIS OF CHANGES IN LOSS AND LAE EXPENSE RESERVES (NET OF
REINSURANCE):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------
American
SAFECO States Combined
--------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Loss and LAE Reserves
at Beginning of Year $ 1,955.7 $- $ 1,955.7 $ 2,070.1 $ 2,092.9
--------------------------------------------------------------------
American States Loss and LAE
Reserves at Acquisition
(October 1, 1997) -- 2,204.6 2,204.6 -- --
--------------------------------------------------------------------
Incurred Loss and LAE for Claims
Occurring in the Current Year 1,678.2 291.3 1,969.5 1,658.2 1,586.7
Increase (Decrease) in
Estimated Loss and LAE
for Claims Occurring in Prior Years (8.0) 38.5 30.5 (77.7) (59.7)
--------------------------------------------------------------------
Total Incurred Loss and LAE 1,670.2 329.8 2,000.0 1,580.5 1,527.0
--------------------------------------------------------------------
Loss and LAE Payments for Claims
Occurring During:
Current Year 979.0 193.1 1,172.1 939.5 856.8
Prior Years 772.9 133.4 906.3 755.4 693.0
--------------------------------------------------------------------
Total Loss and LAE Payments 1,751.9 326.5 2,078.4 1,694.9 1,549.8
--------------------------------------------------------------------
Loss and LAE Reserves
at End of Year $ 1,874.0 $ 2,207.9 $ 4,081.9 $ 1,955.7 $ 2,070.1
====================================================================
Reconciliation:
Loss and LAE Reserves,
Net of Reinsurance $ 1,874.0 $ 2,207.9 $ 4,081.9 $ 1,955.7 $ 2,070.1
Add: Reinsurance Recoverables
on Unpaid Losses 74.2 154.4 228.6 103.4 110.7
--------------------------------------------------------------------
Loss and LAE Reserves,
Gross of Reinsurance $ 1,948.2 $ 2,362.3 $ 4,310.5 $ 2,059.1 $ 2,180.8
====================================================================
</TABLE>
5
<PAGE> 6
PART I Item 1. Business (continued)
The table on page 7 presents the development of the loss and LAE
reserves for 1987 through 1997. The amounts reported in the table
except for the 1997 year end balance are for SAFECO only (i.e.,
does not include any amounts for American States.) The top lines
of the table show the estimated reserve for unpaid loss and LAE at
December 31 for each of the indicated years, both gross and net of
related reinsurance amounts. The upper portion of the table shows
the cumulative amount paid with respect to the previously recorded
reserve as of the end of each succeeding year. The next section
shows the re-estimated amount of the previously recorded reserve
based on experience as of each succeeding year. The estimate is
increased or decreased as more information becomes known about
individual claims and as changes in conditions and claim trends
become apparent. The lower section of the table shows the
cumulative redundancy (deficiency) developed with respect to the
previously recorded liability as of the end of each succeeding
year. For example, the 1987 reserve of $1,249.5 million developed
a $4.4 million deficiency after one year which grew over ten years
to a deficiency of $74.3 million. The reserve development
deficiency indicated for 1987 was due primarily to the emergence
of liabilities for pollution, asbestos and other hazardous toxic
claims and related legal expenses. As the emergence of these
claims developed, SAFECO aggressively increased its reserves to
address these deficiencies.
For 1988 and through 1996, SAFECO's reserve development has
been favorable. This trend reflects several factors: aggressive
reserving previously undertaken to correct deficiencies in years
prior to 1988, favorable workers' compensation legislation,
moderation of medical costs and inflation, and claims department
changes. The favorable legislation in workers' compensation, which
relates primarily to the states of Oregon and California, has
helped reduce fraud, allowed for faster claim settlement and made
it more difficult to reopen claims all of which reduced SAFECO's
ultimate loss costs. The cost of claim settlements in several
lines of business has benefited from changes in the organization
of SAFECO's claims department which has established separate
specialized units for workers' compensation, environmental
exposures and fraud investigations. In addition, increased focus
on adjustment expenses has helped reduce these costs. In
recognition of the above factors, 1996 newly reported and still
open claims were reserved at lower, more accurate levels than in
prior years. This resulted in a reduced level of favorable
development in 1997.
In evaluating the reserve development table on page 7, note
that each amount includes the effects of all changes in amounts
for prior periods. For example, the amount of the deficiency shown
for the December 31, 1996 reserves that relates to losses incurred
in 1987 is included in the cumulative redundancy (deficiency)
amount for the years 1987 through 1995. Conditions and trends that
have affected development of the liability in the past may not
necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies (deficiencies)
based on this table.
6
<PAGE> 7
ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
<TABLE>
<CAPTION>
Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- - - ---------------------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $1,328.5 $1,523.6 $1,702.5 $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1 $4,310.5
Reinsurance 79.0 97.0 75.3 80.7 152.0 89.2 100.1 143.9 110.7 103.4 228.6
---------------------------------------------------------------------------------------------------
Net of Reinsurance $1,249.5 $1,426.6 $1,627.2 $1,791.4 $1,865.3 $1,963.1 $1,995.1 $2,092.9 $2,070.1 $1,955.7 $4,081.9
===================================================================================================
Cumulative Net Amount Paid as of:
One Year Later $ 419.5 $ 443.1 $ 540.2 $ 603.0 $ 548.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9
Two Years Later 677.1 725.7 849.6 914.5 905.7 913.4 947.6 1,068.3 1,095.0
Three Years Later 848.2 902.5 1,035.0 1,109.4 1,086.5 1,106.0 1,147.6 1,252.9
Four Years Later 936.4 1,010.3 1,149.5 1,221.6 1,207.2 1,230.6 1,252.5
Five Years Later 1,033.7 1,083.5 1,222.1 1,301.1 1,294.4 1,295.7
Six Years Later 1,082.8 1,129.9 1,276.4 1,368.9 1,336.7
Seven Years Later 1,119.8 1,169.9 1,323.0 1,403.5
Eight Years Later 1,151.0 1,203.4 1,344.0
Nine Years Later 1,177.6 1,220.3
Ten Years Later 1,192.4
Net Reserve Re-estimated as of:
One Year Later 1,253.9 1,397.7 1,621.9 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2 1,992.4 1,947.7
Two Years Later 1,258.2 1,368.1 1,593.6 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3 1,889.9
Three Years Later 1,258.0 1,355.8 1,541.4 1,666.1 1,686.0 1,712.2 1,716.1 1,801.9
Four Years Later 1,264.8 1,338.6 1,544.8 1,657.2 1,650.7 1,642.3 1,643.6
Five Years Later 1,266.3 1,360.5 1,549.9 1,637.5 1,594.9 1,600.9
Six Years Later 1,299.6 1,386.7 1,546.9 1,608.5 1,569.5
Seven Years Later 1,332.4 1,383.3 1,525.4 1,595.4
Eight Years Later 1,328.6 1,373.7 1,515.4
Nine Years Later 1,324.4 1,369.2
Ten Years Later 1,323.8
Cumulative Net Redundancy (Deficiency) as of:
One Year Later (4.4) 28.9 5.3 24.0 44.6 96.9 81.3 59.7 77.7 8.0
Two Years Later (8.7) 58.5 33.6 85.6 132.5 181.0 176.8 190.6 180.2
Three Years Later (8.5) 70.8 85.8 125.3 179.3 250.9 279.0 291.0
Four Years Later (15.3) 88.0 82.4 134.2 214.6 320.8 351.5
Five Years Later (16.8) 66.1 77.3 153.9 270.4 362.2
Six Years Later (50.1) 39.9 80.3 182.9 295.8
Seven Years Later (82.9) 43.3 101.8 196.0
Eight Years Later (79.1) 52.9 111.8
Nine Years Later (74.9) 57.4
Ten Years Later (74.3)
</TABLE>
7
<PAGE> 8
PART I Item 1. Business (continued)
The impact of reinsurance on the development information
presented on page 7 is not significant. The following table
summarizes reserve development, gross of reinsurance, for the last
three years (excluding American States):
<TABLE>
<CAPTION>
1994 1995 1996
- - - ----------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Gross Reserves $ 2,236.8 $ 2,180.8 $ 2,059.1
========================================
Cumulative Development
Net of Reinsurance $ 291.0 $ 180.2 $ 8.0
Cumulative Development
of Reinsurance Ceded 6.6 6.2 (5.1)
----------------------------------------
Cumulative Development
Gross of Reinsurance $ 297.6 $ 186.4 $ 2.9
========================================
</TABLE>
Analysis indicates that SAFECO's reserves are adequate and
probably slightly redundant at December 31, 1997, 1996 and 1995.
Operations were charged for an increase in estimated loss and LAE
for claims occurring in prior years of $30.5 million in 1997. The
1997 charge includes a nonrecurring $40.0 million reserve increase
related to the American States acquisition. This reserve increase
relates to American States' previously discontinued assumed
reinsurance operations. Excluding this nonrecurring charge, the
1997 loss and LAE development on claims occurring in prior years
benefited operations $9.5 million ($8.0 million for SAFECO and
$1.5 million for American States). Operations were credited $77.7
million and $59.7 million in 1996 and 1995, respectively, as a
result of a reduction in the estimated amounts needed to settle
prior years' claims.
Environmental and Asbestos Claims
The property and casualty companies' reserves for losses and
LAE for liability coverages related to environmental, asbestos and
other toxic claims totaled $346.9 million at December 31, 1997
compared with $102.8 million at December 31, 1996. The increase in
1997 is due to the acquisition of American States. These amounts
do not reflect the effect of reinsurance, which is not material.
The reserves are approximately 8% and 5% respectively, of SAFECO's
total property and casualty reserves for losses and LAE at
December 31, 1997 and 1996. The reserves include estimates for
both reported and IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance
subsidiaries' environmental, asbestos and other toxic claims
result from the commercial general liability line of business and
the discontinued assumed reinsurance operations of American
States. A few of these losses occur in other coverages such as
umbrella, small commercial package policies and personal lines.
Approximately 6,412 of these claims were pending at December 31,
1997, computed on an occurrence basis. Most of these pending
environmental claims involve some type of environmental-related
coverage dispute. The average settlement cost of each
environmental, asbestos and other toxic claim for 1997 (including
American States on an annualized basis) was $11,700 including
legal expenses.
8
<PAGE> 9
PART I Item 1. Business (continued)
The following table summarizes the components of SAFECO's
reserves for environmental, asbestos and other toxic claims at
December 31, 1997:
<TABLE>
<CAPTION>
Loss LAE Total
- - - ---------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Case $ 94.1 $ 29.6 $ 123.7
-----------------------------------
IBNR 167.1 56.1 223.2
-----------------------------------
Total $ 261.2 $ 85.7 $ 346.9
===================================
</TABLE>
This table shows the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other
toxic claims.*
<TABLE>
<CAPTION>
1997 1996 1995
- - - -----------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Reserves at Beginning of Year $ 102.8 $ 107.5 $ 108.2
American States Reserves at Acquisition 264.4 -- --
Incurred Losses and LAE (9.9) 4.6 9.3
Losses and LAE Payments (10.4) (9.3) (10.0)
------------------------------------
Reserves at End of Year $ 346.9 $ 102.8 $ 107.5
====================================
</TABLE>
*Amounts are before the effect of reinsurance, which is not
material.
Although estimation of environmental claims is difficult, the
reserves established for these claims at December 31, 1997 are
believed to be adequate based on the known facts and current law.
SAFECO has generally avoided writing coverages for larger
companies with substantial exposure in these areas. In view of
changes in environmental regulations and evolving case law which
affect the development of loss reserves, the process of estimating
loss reserves for environmental, asbestos and other toxic claims
results in imprecise estimates. Quantitative techniques have to be
supplemented by subjective considerations and managerial judgment.
Because of these conditions, trends that have affected development
of these liabilities in the past may not necessarily occur in the
future.
Construction Defect Claims
Prior to its acquisition by SAFECO, American States had
experienced adverse loss development on construction defect
claims. Construction defect claims are a subset of claims that
arise from coverage provided by general property damage liability
insurance. They are defined as those claims involving allegations
of defective work which result in claims for damages related to
the diminution of value of large construction projects, such as
condominiums, office buildings, shopping centers and housing
developments. The vast majority of American States' reported
construction defect claims involve construction activity in
California, with most of such reported claims being incurred in
accident years prior to 1994.
9
<PAGE> 10
PART I ITEM 1. BUSINESS (CONTINUED)
From an operational perspective, in late 1992, American States
established a dedicated claim unit specifically for the management
of construction defect claims. SAFECO has not historically
separated these claims for the purpose of reserve analysis.
Beginning in 1993, American States intentionally began reducing
the volume of new contractor business written in California, and
currently is not writing any new California contractor business.
American States' reserves for construction defect claims totaled
$340.3 million at December 31, 1997. The reserves established for
these claims at December 31,1997 are believed to be adequate.
GAAP vs. Statutory
State regulatory authorities require SAFECO's property and
casualty insurance subsidiaries to file annual statements prepared
on an accounting basis prescribed or permitted by their respective
state of domicile (that is, on a statutory basis). The difference
between the $4,310.5 million reserve at December 31, 1997, for the
losses and LAE disclosed in the consolidated financial statements
in accordance with generally accepted accounting principles
(GAAP), and the $4,123.8 million reported in the annual statements
filed with state regulatory authorities related to reinsurance
recoverables and salvage and subrogation reserves. Under FASB
Statement 113, the GAAP-basis liability for losses and LAE is
reported gross of amounts recoverable from reinsurance.
Statutory-basis financial statements show the liability net of
reinsurance. Additionally, American States' statutory annual
statements do not include a provision for anticipated salvage and
subrogation recovery.
Reinsurance
SAFECO's property and casualty companies use treaty and
facultative reinsurance to help manage exposure to loss. As noted
above, the liability for unpaid losses and LAE is reported gross
of reinsurance recoverables of $228.6 million at December 31, 1997
and $103.4 million at December 31, 1996. The availability and cost
of reinsurance are subject to prevailing market conditions, both
in terms of price and available capacity. Although the reinsurer
is liable to SAFECO to the extent of the reinsurance ceded, SAFECO
remains primarily liable to the policyholder as the direct insurer
on all risks insured. To SAFECO's knowledge none of its reinsurers
is experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 1998
covers 90% of $400 million of single-event losses in excess of a
$100 million retention. In a large catastrophe, SAFECO would,
therefore, retain the first $100 million of losses, 10% of the
next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than
California SAFECO has a supplemental earthquake-only reinsurance
contract for 1998 that would cover 90% of $350 million of single-
event earthquake losses in excess of $500 million. Both of these
1998 catastrophe property reinsurance contracts include provisions
for one reinstatement for a second catastrophe event in 1998 at
current rates. The aggregate coverage limit is higher for 1998
than in prior years due to the inclusion of American States in
SAFECO's catastrophe profile.
SAFECO's insurance subsidiaries do not enter into
retrospective reinsurance contracts and do not participate in any
unusual or nonrecurring reinsurance transactions such as "swaps"
of reserves or loss portfolio transfers. SAFECO does not use
"funding covers" and does not participate in any surplus relief
transactions. For additional information on reinsurance, see Note
6 on page 66 of the 1997 Annual Report to Shareholders.
10
<PAGE> 11
PART I ITEM 1. BUSINESS (CONTINUED)
LIFE AND HEALTH -- OPERATIONS
The Corporation's subsidiaries engaged in the life and health
insurance business are SAFECO Life Insurance Company, SAFECO
National Life Insurance Company, First SAFECO National Life
Insurance Company of New York, American States Life Insurance
Company, WM Life Insurance Company and SAFECO Administrative
Services, Inc. (collectively referred to as "SAFECO Life"). These
companies offer individual and group insurance products,
retirement services (pension) and annuity products. SAFECO Life
markets these products through professional agents in all states
and the District of Columbia. The most significant product lines
in terms of premium/deposit volume are single premium immediate
and deferred annuities, tax-sheltered annuities for the education
and nonprofit entities market, corporate retirement plans and
excess loss group medical insurance.
SAFECO acquired American States Life Insurance Company on
October 1, 1997, and WM Life Insurance Company on December 31,
1997. Both acquisitions have been treated as purchases for
accounting purposes.
SAFECO Life reinsures portions of its individual and group
life, accident and health insurance through commercial reinsurance
treaties, thus providing protection against large risks and
catastrophe situations.
Funds received under deposit contracts relate primarily to the
annuity and retirement services products of SAFECO's life and
health subsidiaries. The table on page 12 summarizes the
components of funds held under deposit contracts at December 31,
1997, and describes the applicable surrender charges and surrender
experience.
11
<PAGE> 12
PART I ITEM 1. BUSINESS (CONTINUED)
<TABLE>
<CAPTION>
DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
- - - ------------------------------------------------------------------------------------------------------------------------
Outstanding Expected Range of Credited
at Maturities or Assumed Interest Approximate
12/31/97 of Liabilities Rates at Surrender
Product (In Millions) (at issue date) 12/31/97 Surrender Charges Experience
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Universal $1,114.0 Approximately 5.25% to 7.15% Varies by issue age, 7% per annum
Individual 10 - 20 Years sex and duration from
Life $1 to $58 per $1,000
of insurance
Annuities:
Structured 5,151.3 Over 25 Years 3.5% to 12.69% Cannot surrender Cannot
Settlement surrender
Immediate
Deferred 2,314.1 Approximately 4.0% to 9.0% Typically 5% in year 1 14% per annum
5 - 12 Years graded to 0% in year 6
Retirement
Services:
Guaranteed 553.0 Typically 5.44% to 8.44% Market value adjustment or Less than 1%
Investment 2 - 5 Years cannot surrender in first per annum
Contracts year
Other 2,856.7 Approximately 4.55% to 7.49% Typically 9% in year 1 13% per annum
Annuities & 5 - 15 Years graded to 0% in year 9.
Deposits SAFECO has the option to
defer payout over 20
quarters for about one-
quarter of these
contracts. In addition,
approximately $241 million
of these deposits have a
market value adjustment
provision
---------
Total $11,989.1
=========
</TABLE>
12
<PAGE> 13
PART I ITEM 1. BUSINESS (CONTINUED)
INVESTMENTS
A description of SAFECO's investment portfolio appears on
pages 40 - 42 of the 1997 Annual Report to Shareholders. The rest of this
section provides additional information about SAFECO's mortgage-backed
securities and investment income yields.
SAFECO's consolidated investments in mortgage-backed
securities of $3.6 billion at market value at December 31, 1997,
consist mainly of residential collateralized mortgage obligations
(CMOs) and pass-throughs. The life and health portfolio contains
virtually all of these securities. Approximately 94% of the
mortgage-backed securities are government/agency-backed or AAA
rated at December 31, 1997. SAFECO has intentionally limited its
investment in riskier, more volatile CMOs (principal only, inverse
floaters, and so forth) to a small amount -- less than 1% of the
total.
SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1997:
<TABLE>
<CAPTION>
GAAP Market Value
----------------------
Amortized
Cost Amount %
---------- ---------- ----
(Amounts In Millions)
<S> <C> <C> <C>
Residential CMOs:
Planned Amortization Class
(PAC) and
Targeted Amortization Class
(TAC) (Fixed Coupon) $ 1,009.0 $ 1,030.7 28.3%
Sequential Pay (SEQ) 885.0 926.9 25.5
Accrual Coupon (Z-Tranche) 677.8 763.0 21.0
Floating Rate 43.8 43.8 1.2
Companion/Support, Principal Only,
Inverse Floaters 4.2 4.3 0.1
---------- ---------- ----
Subtotal 2,619.8 2,768.7 76.1
---------- ---------- ----
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs):
Government/Agency-Backed 133.6 134.3 3.7
Private Issue 23.1 23.6 0.6
---------- ---------- ----
Subtotal 156.7 157.9 4.3
---------- ---------- ----
Securitized Commercial
Real Estate:
Government/Agency-Backed 345.1 363.4 10.0
Pass-Throughs (Non-agency) 51.6 53.5 1.5
CMOs (Non-agency) 166.1 168.8 4.6
---------- ---------- ----
Subtotal 562.8 585.7 16.1
---------- ---------- ----
Asset-Backed Securities
(Non-Real Estate): 127.0 128.3 3.5
---------- ---------- ----
Total Mortgaged-Backed
Securities $ 3,466.3 $ 3,640.6 100.0%
========== ========== =====
</TABLE>
13
<PAGE> 14
PART I ITEM 1. BUSINESS (CONTINUED)
This table shows the quality distribution of SAFECO's
mortgage-backed security portfolio (GAAP market values):
<TABLE>
<CAPTION>
Percent at
Rating December 31, 1997
--------------------------------------------------------------
<S> <C>
Government/Agency Backed 61%
AAA 33
AA 4
A 1
BBB 1
BB or lower --
------
Total 100%
======
</TABLE>
The table below summarizes pretax investment income yields for
SAFECO's property and casualty and life and health insurance
subsidiaries (calculations are based on GAAP amortized cost):
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty 6.6% 6.8% 7.2%
Life and Health 7.9% 8.1% 8.3%
</TABLE>
Investment income yields declined in both portfolios mainly
because of the lower interest rate environment in all years shown.
The property and casualty decreases also reflect the higher
percentage of tax-exempt securities in this portfolio.
OTHER OPERATIONS
SAFECO's other operations include subsidiaries involved in
commercial lending and leasing (SAFECO Credit), investment
management and insurance agency and financial services
distribution operations.
In February 1998 SAFECO announced its decision to sell its
real estate investment and management operations, (SAFECO
Properties, Inc. and its subsidiaries Winmar Company, Inc. and
SAFECARE Company, Inc.) to focus on its core insurance and
financial services businesses. As the operations are not material
to the consolidated financial statements they have not been
reclassified as discontinued operations.
Winmar Company, Inc., acquired in 1967, invests in and manages
real estate properties, primarily retail shopping centers,
throughout the United States. Some of the more significant
properties are located in or near Louisville, KY; Cleveland, OH;
Albany and Tigard, OR; San Antonio, TX; Burlington, Redmond,
Silverdale and Vancouver, WA; and Milwaukee, WI. Winmar also
offers real estate services, including property management, design
and construction management and tenant leasing services.
14
<PAGE> 15
PART I ITEM 1. BUSINESS (CONTINUED)
SAFECARE Company, Inc., organized in 1968, invests in medical
real estate including skilled nursing, retirement and assisted
living facilities.
SAFECO Credit Company, Inc., organized in 1969, provides loans
and equipment financing and leasing to commercial businesses,
including affiliated companies. At December 31, 1997, 13% of the
Credit Company's outstanding loans and leases consisted of loans
to affiliated SAFECO companies.
SAFECO Asset Management Company, acquired in 1973, is the
investment advisor for SAFECO's mutual funds, variable annuity
portfolios and outside pension and trust accounts.
SAFECO Securities, Inc., organized in 1967, is the principal
underwriter of the SAFECO Mutual Funds, comprising the SAFECO
Common Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt
Bond Trust, SAFECO Money Market Trust, and the SAFECO Managed Bond
Trust. These five trusts are made up of nineteen separate
investment portfolios, all of which are sold directly to the
public. Fifteen of these portfolios have two additional classes of
stock which are sold to the public through broker/dealers.
In addition, SAFECO Securities, Inc. is the principal
underwriter for the SAFECO Resource Series Trust mutual fund, with
six separate investment portfolios. SAFECO Securities is also the
principal underwriter for the variable insurance products issued
by SAFECO Resource Variable Account B, SAFECO Separate Account SL
and SAFECO Separate Account C, all of which are separate accounts
of SAFECO Life Insurance Company and for First SAFECO Separate
Account S, which is a separate account of First SAFECO National
Life Insurance Company of New York.
SAFECO Services Corporation, organized in 1972, is the
transfer agent for SAFECO's mutual funds.
SAFECO Trust Company, organized in 1994, provides asset
management and trust administrative services to high net worth
individuals and unrelated organizations.
PNMR Securities, Inc., organized in 1986, is a broker/dealer
that distributes affiliated and nonaffiliated mutual funds and
variable insurance products through its registered
representatives.
Talbot Financial Corporation, acquired in 1993, is a
broad-based insurance brokerage with a heavy emphasis on the
distribution of qualified and nonqualified annuity products and
mutual funds through the banking and brokerage arenas.
15
<PAGE> 16
PART I ITEM 2. PROPERTIES
SAFECO's property and casualty insurance companies lease their
home office complex located in Seattle, Washington from General
America Corporation (a wholly-owned subsidiary of SAFECO
Corporation). This complex totals 567,000 gross square feet. A
700-car parking garage is connected to the complex. SAFECO's life
and health insurance companies lease their headquarters building
located in Redmond, Washington from General America Corporation.
This complex totals 232,000 gross square feet.
American States' main office complex is leased from a third
party and is located in Indianapolis, Indiana. This 408,000 gross
square foot complex is leased through 2009.
Other buildings owned and occupied include service facilities
in Redmond, Washington and Indianapolis, Indiana, as well as
regional and branch offices in Fountain Valley and Pleasant Hill,
CA; Denver, CO; Atlanta, GA; Carol Stream, IL; Fort Scott, KS; St.
Louis, MO; Cincinnati, OH; Portland, OR; Montlake Terrace,
Redmond, and Spokane, WA. These buildings comprise 1,237,000 gross
square feet. All other branch and service offices occupy leased
premises comprising 1,014,000 square feet, generally for periods
of five years or less.
SAFECO Properties, Inc., and its subsidiaries Winmar Company,
Inc. and SAFECARE Company, Inc., invest in and manage real estate
properties, primarily retail shopping centers throughout the
United States. The properties are owned by subsidiaries of Winmar
and in conjunction with other investors, and others are leased
under long-term leases. See Item 1 on page 14 of this report and
Note 15 on page 72 of the 1997 Annual Report to Shareholders for
additional information.
ITEM 3. LEGAL PROCEEDINGS
Because of the nature of their businesses, the Corporation's
insurance and other subsidiaries are subject to certain legal
actions filed or threatened in the ordinary course of their
business operations, generally as liability insurers defending
third- party claims brought against their insureds or as insurers
defending policy coverage claims brought against them. The
Corporation does not believe that such litigation will have a
material adverse effect on its financial condition, future
operating results or liquidity.
The property and casualty insurance subsidiaries of the
Corporation are parties to a number of lawsuits for liability
coverages related to environmental claims. Although estimation of
environmental claims loss reserves is difficult, the Corporation
believes that reserves established for these claims are adequate
based on the known facts and current law. The loss and loss
adjustment expense with respect to any such lawsuit, or all
lawsuits related to a single incident combined, are not expected
to be material to the financial condition of SAFECO. See page 8 of
Item 1 for more information regarding the liability of such
subsidiaries for environmental claims and the process of
estimating environmental loss reserves.
Four of the Corporation's property and casualty insurance
subsidiaries were among 23 underwriters of real property insurance
named defendants in a case brought in February 1996, in the United
States District Court for the Western District of Missouri,
alleging that their underwriting, sales and marketing practices
violated the Fair Housing Act and certain other civil rights laws.
The trial court refused to certify the plaintiff class and
dismissed the lawsuit in June 1997. The plaintiff appealed and
oral arguments on appeal were heard by the Eighth Circuit Court of
Appeals on February 9, 1998. Management believes, based on current
information, that the insurance subsidiaries' practices have
complied in all material respects with the applicable requirements
of both state and federal law and intends to vigorously defend the
appeal.
16
<PAGE> 17
PART I ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the
fourth quarter of 1997.
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 27, 1998, these are the names, ages and positions
of the executive officers of the Registrant as required by Item
10. No family relationships exist.
<TABLE>
<S> <C> <C>
Roger H. Eigsti 55 Chairman since May 1993. Chief Executive Officer since January 1992. President from
May 1989 to August 1996. Chief Operating Officer from 1989 to 1991. Executive
Vice President and Chief Financial Officer from 1985 to 1989. Director since 1988.
Boh A. Dickey 53 President and Chief Operating Officer since August 1996. Executive Vice President
from January 1992 to August 1996. Chief Financial Officer from May 1989 to August
1996. Senior Vice President from 1989 to 1991. Secretary from 1985 to 1991. Vice
President and Controller from 1982 to 1989. Director since 1993.
Rodney A. Pierson 50 Chief Financial Officer since August 1996. Senior Vice President since February 1994.
Secretary since 1991. Controller from 1990 to 1997. Vice President from 1990 to 1994.
Vice President of SAFECO Property and Casualty Insurance Companies from 1987 to 1990.
Controller of SAFECO Property and Casualty Insurance Companies from 1984 to 1990.
James W. Ruddy 48 Senior Vice President since 1992. General Counsel since 1989. Vice President from
1989 to 1992. Associate General Counsel from 1985 to 1989.
W. Randall Stoddard 50 President of SAFECO Property and Casualty Insurance Companies since July 1997. Chief
Operating Officer of SAFECO Property and Casualty Insurance Companies from 1996 to
July 1997. Senior Vice President of Field Operations from 1994 to 1996.
Randall H. Talbot 43 President of SAFECO Life and Health Insurance Companies since February 1998. Chief
Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.
</TABLE>
17
<PAGE> 18
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Pages 43 and 75 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 76 through 79 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Pages 30 through 43 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 42 and 43 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 45 through 75 of the 1997 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III The definitive proxy statement to be filed within 120 days after
December 31, 1997, excluding the Annual Report of the Compensation
Committee on Executive Compensation appearing on Pages 6 through
12, is incorporated herein by reference to fulfill the
requirements of ITEM 10, "DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT" (except for that portion of Item 10 relating to
executive officers which appears in Part I of this 10-K), and to
fulfill the requirements of ITEM 11, "EXECUTIVE COMPENSATION,"
ITEM 12, "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT," and ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
18
<PAGE> 19
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
F-1 Consent of Independent Auditors
SAFECO Corporation and Subsidiaries:
The following consolidated financial statements of SAFECO
Corporation and its subsidiaries, included in the 1997
Annual Report to Shareholders (pages 44 through 75), are
incorporated herein by reference:
Consolidated Balance Sheet
December 31, 1997 and 1996
Statement of Consolidated Income
Years Ended December 31, 1997, 1996 and 1995
Statement of Consolidated Cash Flows
Years Ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
December 31, 1997
Report of Independent Auditors
SAFECO Corporation and Subsidiaries Supplemental
Consolidating Information:
F-2 Balance Sheet
December 31, 1997 and 1996
F-3 Statement of Income
Year Ended December 31, 1997
F-4 Statement of Cash Flows
Year Ended December 31, 1997
19
<PAGE> 20
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (CONTINUED)
(a) (2) Financial Statement Schedules
F-5 Schedule I Summary of Investments Other Than
Investments in Related Parties
December 31, 1997
Schedule II Condensed Financial Information of the
Registrant (Parent Company Only):
F-6 Balance Sheet
December 31, 1997 and 1996
F-7 Statement of Income
Years Ended December 31, 1997, 1996
and 1995
F-8 Statement of Cash Flows
Years Ended December 31, 1997, 1996
and 1995
Statement of Changes in Shareholders' Equity
Years Ended December 31, 1997, 1996 and
1995. (See page 50 of the 1997 Annual
Report to Shareholders which is
incorporated herein by reference.)
F-9 Schedule III Supplementary Insurance Information
Years Ended December 31, 1997, 1996 and 1995
F-10 Schedule IV Reinsurance
Years Ended December 31, 1997, 1996 and 1995
F-11 Schedule VI Supplemental Information Concerning
Property/Casualty Insurance Operations
Years Ended December 31, 1997, 1996 and
1995
The following Article 7 schedules are omitted because the
information is provided elsewhere in the Annual Report
(Form 10- K) or because of the absence of conditions under
which they are required:
Schedule V
20
<PAGE> 21
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K (continued)
(a) (3) Exhibits
<TABLE>
<S> <C> <C>
F-12 Exhibit Index
Exhibit 2.1 Agreement and Plan of Merger dated as of June 6, 1997 by and among American States
Financial Corporation, SAFECO Corporation ("SAFECO") and ASFC Acquisition Co. filed as
Exhibit 2.1 to SAFECO's Report on Form 8-K dated June 6, 1997. SAFECO agrees to
furnish the Securities and Exchange Commission, upon request, with copies of all
omitted schedules to the foregoing Agreement and Plan of Merger.
Exhibit 3.1 Bylaws (as last amended May 7, 1997), filed as Exhibit 3.1 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
Exhibit 3.2 Restated Articles of Incorporation (as amended May 7, 1997), filed as Exhibit 3.2 to
SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
Exhibit 4.1 SAFECO agrees to furnish the Securities and Exchange Commission, upon request, with
copies of all instruments defining rights of holders of long-term debt of SAFECO and
its consolidated subsidiaries.
Exhibit 4.2 Indenture, dated as of July 15, 1997, between SAFECO and The Chase Manhattan Bank, as
Trustee, filed as Exhibit 4.2 to SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.3 Form of Certificate of Exchange Junior Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997.
Exhibit 4.4 Certificate of Trust of SAFECO Capital Trust I dated June 18, 1997, filed as
Exhibit 4.4 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
Exhibit 4.5 Amended and Restated Declaration of Trust of SAFECO Capital Trust I dated as of
July 15, 1997, filed as Exhibit 4.5 to SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.6 Form of Exchange Capital Security Certificate for SAFECO Capital Trust I filed as
Exhibit 4.5 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated
October 17, 1997.
</TABLE>
21
<PAGE> 22
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
<TABLE>
<S> <C>
Exhibit 4.7 Form of Exchange Guarantee of SAFECO relating to the Exchange Capital Securities filed
as Exhibit 4.6 to SAFECO's Registration Statement on Form S-4 (No. 333-38205) dated
October 17, 1997.
Exhibit 10.1 Five-Year Credit Agreement dated as of September 24, 1997, among SAFECO; Bank of
America National Trust and Savings Association, as Agent; Mellon Bank, N.A., as
Documentation Agent; The Chase Manhattan Bank, as Syndication Agent; and the various
co-agents, lead managers, and financial institutions identified in said Credit
Agreement as parties thereto.
The following management contracts and compensatory plan arrangements:
Exhibit 10.2 SAFECO Corporation Deferred Compensation Plan for Directors, filed as Exhibit 10 to
SAFECO's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
Exhibit 10.3 Retirement Agreement between Richard E. Zunker and SAFECO Life Insurance Company dated
November 25, 1997.
Exhibit 10.4 Executive Severance Agreements between SAFECO and each of Roger H. Eigsti and Boh A.
Dickey dated May 23, 1984, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1985; and the Form of Executive Severance
Agreements between SAFECO and each of Rod A. Pierson, James W. Ruddy, W. Randall
Stoddard, and Richard E. Zunker, in each case dated August 30, 1996, filed as Exhibit
10 to SAFECO's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996.
Exhibit 10.5 SAFECO Long-Term Incentive Plan of 1997 filed as Exhibit 99.1 to SAFECO's Registration
Statement on Form S-8 (No. 333-26393) dated May 2, 1997.
Exhibit 10.6 Form of Stock Option Contract granted under the SAFECO Long-Term Incentive Plan of 1997.
Exhibit 10.7 Form of Restricted Stock Rights Award Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997.
Exhibit 10.8 Form of Performance Stock Rights Award Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997.
Exhibit 10.9 SAFECO Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as
amended January 31, 1990, filed as Exhibit 10 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989, and the Supplement to such Prospectus
dated November 8, 1990, filed as Exhibit 10 to Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1990.
</TABLE>
22
<PAGE> 23
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K (continued)
<TABLE>
<S> <C> <C>
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1997 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included only in the electronic EDGAR filing
version of this 10-K. 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.)
</TABLE>
(b) Reports on Form 8-K
The Registrant filed three Forms 8-Ks during the quarter
ended December 31, 1997. The Registrant filed an 8-K dated October
1, 1997 under Item 2 (Acquisition and Disposition of Assets) and
Item 7 (Financial statements, Pro Forma Financial Information and
Exhibits) related to its completion of the acquisition of American
States Financial Corporation. The Registrant filed an 8-K dated
October 13, 1997 under Item 5 (Other Items), announcing its
preliminary review of earnings for the third quarter of 1997. The
Registrant filed an 8-K dated October 27, 1997 under Item 5 and
Item 7, presenting its third quarter 1997 earnings release
information.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on this 27th day of March
1998.
SAFECO CORPORATION
-------------------------------------------
Registrant
/s/ ROGER H. EIGSTI
-------------------------------------------
Roger H. Eigsti, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 27, 1998.
<TABLE>
<CAPTION>
Name Title
- - - --------------------------------------------------------------------------------
<S> <C>
/s ROGER H. EIGSTI Chairman and
- - - ---------------------------------- Chief Executive Officer
Roger H. Eigsti
/s BOH A. DICKEY President,
- - - ---------------------------------- Chief Operating Officer
Boh A. Dickey and Director
/s ROD A. PIERSON Senior Vice President,
- - - ---------------------------------- Chief Financial Officer
Rod A. Pierson and Secretary
/s H. PAUL LOWBER Vice President, Controller
- - - ---------------------------------- and Chief Accounting Officer
H. Paul Lowber
/s PHYLLIS J. CAMPBELL Director
- - - ----------------------------------
Phyllis J. Campbell
/s ROBERT S. CLINE Director
- - - ----------------------------------
Robert S. Cline
/s JOHN W. ELLIS Director
- - - ----------------------------------
John W. Ellis
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Name Title
- - - --------------------------------------------------------------------------------
<S> <C>
/s WILLIAM P. GERBERDING Director
- - - ----------------------------------
William P. Gerberding
/s JOSHUA GREEN III Director
- - - ----------------------------------
Joshua Green III
/s WILLIAM W. KRIPPAEHNE, JR. Director
- - - ----------------------------------
William W. Krippaehne, Jr.
/s WILLIAM G. REED, JR. Director
- - - ----------------------------------
William G. Reed, Jr.
/s JUDITH M. RUNSTAD Director
- - - ----------------------------------
Judith M. Runstad
/s PAUL W. SKINNER Director
- - - ----------------------------------
Paul W. Skinner
/s GEORGE H. WEYERHAEUSER Director
- - - ----------------------------------
George H. Weyerhaeuser
</TABLE>
25
<PAGE> 26
F-1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SAFECO Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SAFECO Corporation of our report dated February 13, 1998, included in the
1997 Annual Report to Shareholders of SAFECO Corporation.
Our audits also included the financial statement schedules of SAFECO
Corporation listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in Registration Statement
(Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of
1997 of our report dated February 13, 1998, with respect to the consolidated
financial statements of SAFECO Corporation incorporated by reference, and our
report included in the preceding paragraph with respect to the financial
statement schedules, in this Annual Report (Form 10-K) for the year ended
December 31, 1997 of SAFECO Corporation.
ERNST & YOUNG LLP
Seattle, Washington
March 25, 1998
<PAGE> 27
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND
SUBSIDIARIES F-2
<TABLE>
<CAPTION>
December 31, 1997
- - - ----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property & Life & Credit Other and
ASSETS Casualty Health Real Estate Company Eliminations Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 7,135.3 $ 9,875.9 $- $- $ 132.0 $17,143.2
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,708.6 -- -- -- 2,708.6
Marketable Equity Securities, at Market Value 1,742.1 39.3 -- -- 98.3 1,879.7
Mortgage Loans 12.0 663.7 -- -- (176.7) 499.0
Real Estate (At cost less accumulated depreciation) -- 3.6 587.0 -- (4.5) 586.1
Policy Loans -- 85.3 -- -- -- 85.3
Short-Term Investments 224.5 66.5 3.1 8.9 (168.3) 134.7
--------------------------------------------------------------------
Total Investments 9,113.9 13,442.9 590.1 8.9 (119.2) 23,036.6
Cash 96.1 246.3 -- 3.7 45.3 391.4
Accrued Investment Income 142.9 189.7 -- 3.5 0.9 337.0
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- -- 1,004.3 -- 1,004.3
Loans to Affiliates -- -- -- 162.7 (162.7) --
Premiums and Other Service Fees Receivable 925.3 12.4 9.4 -- 6.8 953.9
Other Notes and Accounts Receivable 18.0 37.0 17.1 0.3 (1.3) 71.1
Reinsurance Recoverables 268.3 42.7 -- -- -- 311.0
Deferred Policy Acquisition Costs 305.5 239.3 -- -- -- 544.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 207.9 1.6 2.4 0.5 25.6 238.0
Goodwill 1,261.0 35.4 0.4 -- 35.8 1,332.6
Other Assets 153.2 145.2 6.6 94.1 (57.4) 341.7
Separate Account Assets -- 905.4 -- -- -- 905.4
--------------------------------------------------------------------
Total $12,492.1 $15,297.9 $626.0 $1,278.0 $ (226.2) $29,467.8
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,310.5 $ 41.7 $ -- $ -- $ -- $ 4,352.2
Life Policy Liabilities -- 164.6 -- -- -- 164.6
Unearned Premiums 1,701.5 12.2 -- -- -- 1,713.7
Funds Held Under Deposit Contracts -- 11,989.1 -- -- -- 11,989.1
Debt:
Commercial Paper -- -- -- -- 812.8 812.8
Credit Company Borrowings - Non-Affiliates -- -- -- 892.0 -- 892.0
Credit Company Borrowings - Affiliates -- -- -- 195.0 (195.0) --
7.875% Notes Due 2005 -- -- -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- -- -- 200.0 200.0
Other Notes and Mortgages - Non-Affiliates -- -- 193.2 -- 61.9 255.1
Other Notes and Mortgages - Affiliates -- -- 289.0 -- (289.0) --
Other Liabilities 884.4 306.1 23.3 29.9 (20.4) 1,223.3
Income Taxes:
Current (13.5) 21.2 (12.1) (0.3) 14.0 9.3
Deferred (Includes tax on unrealized appreciation
of investment securities) 192.6 172.9 28.8 43.7 8.9 446.9
Separate Account Liabilities -- 905.4 -- -- -- 905.4
--------------------------------------------------------------------
Total Liabilities 7,075.5 13,613.2 522.2 1,160.3 793.2 23,164.4
--------------------------------------------------------------------
Capital Securities -- -- -- -- 841.7 841.7
--------------------------------------------------------------------
Common Stock 25.0 11.0 -- 1.0 872.3 909.3
Additional Paid-In Capital 3,012.7 266.3 42.1 27.0 (3,348.1) --
Retained Earnings 1,463.1 1,098.1 61.7 89.7 586.5 3,299.1
Unrealized Appreciation of Investment Securities, Net of Tax 921.3 309.3 -- -- 28.2 1,258.8
Unrealized Loss from Foreign Currency Translation, Net of Tax (5.5) -- -- -- -- (5.5)
--------------------------------------------------------------------
Shareholders' Equity 5,416.6 1,684.7 103.8 117.7 (1,861.1) 5,461.7
--------------------------------------------------------------------
Total $12,492.1 $15,297.9 $626.0 $1,278.0 $ (226.2) $29,467.8
====================================================================
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
Balance Sheet - Supplemental Consolidating Information, SAFECO CORPORATION AND SUBSIDIARIES F-2
December 31, 1996 Continued
- - - ----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
ASSETS Property Life & Real Credit Other and
& Casualty Health Estate Company Eliminations Consolidated
----------------------------------------------------------------------
Investments:
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities Available-for-Sale, at Market Value $3,938.3 $ 7,857.5 $ -- $ -- $140.4 $11,936.2
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,488.3 -- -- -- 2,488.3
Marketable Equity Securities, at Market Value 1,196.0 23.1 -- -- 79.7 1,298.8
Mortgage Loans 1.8 588.3 -- -- (142.1) 448.0
Real Estate (At cost less accumulated depreciation) -- 4.4 553.8 -- (4.2) 554.0
Policy Loans -- 58.2 -- -- -- 58.2
Short-Term Investments 66.2 75.4 12.4 -- (48.1) 105.9
----------------------------------------------------------------------
Total Investments 5,202.3 11,095.2 566.2 -- 25.7 16,889.4
Cash 24.0 19.8 0.9 3.2 7.6 55.5
Accrued Investment Income 76.6 159.8 -- 3.3 1.1 240.8
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- -- 829.0 -- 829.0
Loans to Affiliates -- -- -- 153.2 (153.2) --
Premiums and Other Service Fees Receivable 440.6 12.8 8.2 -- 5.6 467.2
Other Notes and Accounts Receivable 12.5 11.3 20.3 0.3 (2.0) 42.4
Reinsurance Recoverables 112.3 25.2 -- -- -- 137.5
Deferred Policy Acquisition Costs 155.6 240.5 -- -- -- 396.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 141.9 1.4 1.6 0.5 25.9 171.3
Goodwill 0.8 1.5 0.4 -- 33.1 35.8
Other Assets 72.5 5.9 3.7 76.1 3.3 161.5
Separate Account Assets -- 491.2 -- -- -- 491.2
----------------------------------------------------------------------
Total $6,239.1 $12,064.6 $601.3 $1,065.6 $(52.9) $19,917.7
======================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $2,059.1 $ 29.2 $ -- $ -- $ -- $ 2,088.3
Life Policy Liabilities -- 149.6 -- -- -- 149.6
Unearned Premiums 938.1 8.8 -- -- -- 946.9
Funds Held Under Deposit Contracts -- 9,792.7 -- -- -- 9,792.7
Debt:
Credit Company Borrowings - Non-Affiliates -- -- -- 808.8 -- 808.8
Credit Company Borrowings - Affiliates -- -- -- 93.0 (93.0) --
7.875% Notes Due 2005 -- -- -- -- 200.0 200.0
Other Notes and Mortgages - Non-Affiliates -- -- 165.1 -- 59.6 224.7
Other Notes and Mortgages - Affiliates -- -- 235.3 -- (235.3) --
Other Liabilities 386.5 210.0 54.6 21.7 6.1 678.9
Income Taxes:
Current (4.8) (0.5) 11.2 (1.9) (0.5) 3.5
Deferred (Includes tax on unrealized appreciation
of investment securities) 253.8 104.2 17.9 37.4 4.5 417.8
Separate Account Liabilities -- 491.2 -- -- -- 491.2
----------------------------------------------------------------------
Total Liabilities 3,632.7 10,785.2 484.1 959.0 (58.6) 15,802.4
----------------------------------------------------------------------
Common Stock 20.0 6.0 -- 1.0 198.3 225.3
Additional Paid-In Capital 56.9 92.3 42.1 27.0 (218.3) --
Retained Earnings 1,861.2 1,020.1 75.1 78.6 7.2 3,042.2
Unrealized Appreciation of Investment Securities, Net of Tax 671.9 161.0 -- -- 18.5 851.4
Unrealized Loss from Foreign Currency Translation, Net of Tax (3.6) -- -- -- -- (3.6)
----------------------------------------------------------------------
Shareholders' Equity 2,606.4 1,279.4 117.2 106.6 5.7 4,115.3
----------------------------------------------------------------------
Total $6,239.1 $12,064.6 $601.3 $1,065.6 $(52.9) $19,917.7
======================================================================
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
Statement of Income - Supplemental Consolidating Information F-3
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1997
- - - ---------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property & Life & Real Other and
Casualty Health Estate Eliminations Consolidated
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $ 2,816.6 $ -- $ -- $ -- $ 2,816.6
Life and Health Premiums and Other Revenues -- 290.2 -- -- 290.2
-----------------------------------------------------------------
Total 2,816.6 290.2 -- -- 3,106.8
Real Estate -- -- 75.1 -- 75.1
Finance -- -- -- 86.5 86.5
Asset Management -- -- -- 27.1 27.1
Other -- -- -- 49.7 49.7
Net Investment Income 327.0 916.3 -- 1.4 1,244.7
Realized Investment Gain (Loss) 132.8 6.8 (28.3) 8.1 119.4
-----------------------------------------------------------------
Total 3,276.4 1,213.3 46.8 172.8 4,709.3
-----------------------------------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 1,960.0 856.2 -- -- 2,816.2
Commissions 429.1 95.2 -- -- 524.3
Nonrecurring 1997 Acquisition Charges 60.0 -- -- -- 60.0
Personnel Costs 210.2 56.2 13.7 49.6 329.7
Interest -- -- 23.3 78.5 101.8
Goodwill Amortization 11.0 0.5 -- 0.7 12.2
Other 191.8 67.2 28.5 32.4 319.9
Amortization of Deferred Policy Acquisition Costs 495.9 37.0 -- -- 532.9
Deferral of Policy Acquisition Costs (506.6) (53.7) -- -- (560.3)
-----------------------------------------------------------------
Total 2,851.4 1,058.6 65.5 161.2 4,136.7
-----------------------------------------------------------------
Income (Loss) Before Income Taxes 425.0 154.7 (18.7) 11.6 572.6
-----------------------------------------------------------------
Provision (Benefit) for Income Taxes:
Current 69.7 56.7 (17.4) (1.9) 107.1
Deferred 8.3 (4.0) 10.9 5.5 20.7
-----------------------------------------------------------------
Total 78.0 52.7 (6.5) 3.6 127.8
-----------------------------------------------------------------
Income (Loss) Before Distributions on Capital Securities 347.0 102.0 (12.2) 8.0 444.8
Distributions on Capital Securities, Net of Tax -- -- -- (14.8) (14.8)
-----------------------------------------------------------------
Net Income (Loss) $ 347.0 $ 102.0 $ (12.2) $ (6.8) $ 430.0
=================================================================
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
Statement of Cash Flows - Supplemental Consolidating Information F-4
SAFECO CORPORATION AND SUBSIDIARIES
Year Ended December 31, 1997
- - - --------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Property Other and
& Casualty Life & Health Real Estate Eliminations Consolidated
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $2,839.3 $ 224.0 $ -- $ -- $3,063.3
Dividends and Interest Received 334.6 830.4 2.1 82.5 1,249.6
Other Operating Receipts -- 32.6 74.5 88.4 195.5
Insurance Claims and Policy Benefits Paid (2,064.4) (359.0) -- -- (2,423.4)
Underwriting, Acquisition and Insurance Operating
Costs Paid (772.0) (220.5) -- (98.7) (1,091.2)
Interest Paid -- -- (23.6) (71.1) (94.7)
Other Operating Costs Paid -- -- (30.0) (62.6) (92.6)
Income Taxes Paid (79.4) (37.6) (5.9) 27.3 (95.6)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Operating Activities 258.1 469.9 17.1 (34.2) 710.9
--------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (638.0) (1,923.8) -- (17.0) (2,578.8)
Fixed Maturities Held-to-Maturity -- (199.6) -- -- (199.6)
Equities (246.4) (7.8) -- (7.0) (261.2)
Other Investments -- (137.5) (161.5) 57.4 (241.6)
Purchase of Subsidiaries, Net of Cash Acquired 21.4 118.2 -- (3,153.9) (3,014.3)
Maturities of Fixed Maturities Available-for-Sale 234.5 438.8 -- 20.1 693.4
Maturities of Fixed Maturities Held-to-Maturity -- 9.0 -- (0.1) 8.9
Sales of:
Fixed Maturities Available-for-Sale 822.6 883.7 -- 6.3 1,712.6
Fixed Maturities Held-to-Maturity -- -- -- -- --
Equities 487.0 13.2 -- 10.4 510.6
Other Investments 0.2 71.5 54.6 2.0 128.3
Net Decrease (Increase) in Short-Term Investments (108.1) 21.0 9.2 215.6 137.7
Finance Receivables Originated or Acquired -- -- -- (489.6) (489.6)
Principal Payments Received on Finance Receivables -- -- -- 317.3 317.3
Other (35.4) (51.0) (1.5) (58.8) (146.7)
--------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities 537.8 (764.3) (99.2) (3,097.3) (3,423.0)
--------------------------------------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,403.5 -- -- 1,403.5
Return of Funds Held Under Deposit Contracts -- (866.6) -- -- (866.6)
Proceeds from Notes and Mortgage Borrowings -- -- 52.5 158.5 211.0
Repayment of Notes and Mortgage Borrowings -- -- (6.8) (2.4) (9.2)
Net Proceeds from Short-Term Borrowings 17.2 5.0 37.0 883.7 942.9
Proceeds from Capital Securities -- -- -- 832.2 832.2
Proceeds from Common Stock Secondary Offering -- -- -- 677.2 677.2
Common Stock Reacquired -- -- -- (10.7) (10.7)
Dividends Paid to Shareholders (741.0) (21.0) (1.6) 609.5 (154.1)
Other -- -- 0.1 21.7 21.8
--------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities (723.8) 520.9 81.2 3,169.7 3,048.0
--------------------------------------------------------------------
Net Increase (Decrease) in Cash 72.1 226.5 (0.9) 38.2 335.9
Cash at the Beginning of Year 24.0 19.8 0.9 10.8 55.5
--------------------------------------------------------------------
Cash at the End of the Year $ 96.1 $ 246.3 $ -- $ 49.0 $ 391.4
--------------------------------------------------------------------
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
Summary of Investments Other Than Investments in Related Parties F-5
SAFECO CORPORATION AND SUBSIDIARIES Schedule I
December 31, 1997
- - - ------------------------------------------------------------------------------------------------------------------
(In Millions)
Amount at Which
Shown in the
Type of Investment Cost Market Value Balance Sheet
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities Available-for-Sale
Bonds:
United States Government and Government
Agencies and Authorities $ 1,489.0 $ 1,572.7 $ 1,572.7
States, Municipalities and Political
Subdivisions 4,969.2 5,446.4 5,446.4
Mortgage-Backed Securities 3,165.4 3,304.2 3,304.2
Foreign Governments 248.8 297.1 297.1
Public Utilities 1,623.8 1,729.6 1,729.6
All Other Corporate Bonds 4,342.1 4,535.4 4,535.4
Redeemable Preferred Stocks 248.5 257.8 257.8
---------------------------------------
Total Fixed Maturities Classified as Available-for-Sale(1) 16,086.8 $17,143.2 17,143.2
---------------------------------------
Fixed Maturities Held-to-Maturity
Bonds:
United States Government and Government
Agencies and Authorities 257.9 $ 332.1 257.9
States, Municipalities and Political
Subdivisions 120.4 135.3 120.4
Mortgage-Backed Securities 300.9 336.4 300.9
Foreign Governments 148.9 189.2 148.9
Public Utilities 417.5 495.8 417.5
All Other Corporate Bonds 1,463.0 1,671.1 1,463.0
---------------------------------------
Total Fixed Maturities Classified as Held-to-Maturity(1) 2,708.6 $ 3,159.9 2,708.6
---------------------------------------
Equity Securities
Common Stocks:
Public Utilities 60.7 $ 117.4 117.4
Banks, Trust and Insurance Companies 62.1 236.1 236.1
Industrial, Miscellaneous and All Other 612.5 1,262.4 1,262.4
Non-Redeemable Preferred Stocks 233.7 263.8 263.8
---------------------------------------
Total Equity Securities 969.0 $ 1,879.7 1,879.7
---------------------------------------
Other
Mortgage Loans on Real Estate(1) 499.0 499.0
Real Estate (Net of depreciation)(1) 586.1 586.1
Policy Loans 85.3 85.3
Short-Term Investments 134.7 134.7
----------- ---------
Total Other 1,305.1 1,305.1
----------- ---------
Total Investments $21,069.5 $23,036.6
=========== =========
</TABLE>
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate that have not produced income for the last twelve months is
less than one percent of the total of such investments at December 31,
1997.
<PAGE> 32
<TABLE>
<CAPTION>
Balance Sheet
SAFECO CORPORATION
(Parent Company Only) F-6
Schedule II
December 31 1997 1996
- - - -----------------------------------------------------------------------------------
<S> <C> <C>
(In Millions)
ASSETS
Investments:
Stock of Subsidiaries - At Cost Plus Equity in
Undistributed Earnings Since Acquisition
(Includes unrealized appreciation of investment
securities, net of tax, held by subsidiaries) $7,440.1 $4,168.9
Fixed Maturities Available-for-Sale,
at Market Value
(Amortized cost: 1997 - $92.9; 1996 - $108.3) 94.5 108.6
Marketable Equity Securities, at Market Value
(Cost: 1997 - $37.1; 1996 - $41.9) 73.9 64.4
Notes Receivable - SAFECO Credit -- 15.0
Short-Term Investments 8.7 5.3
-------------------------
Total Investments 7,617.2 4,362.2
Cash 25.5 0.2
Dividends Receivable
from Affiliated Companies 45.5 37.4
Accounts Receivable
from Affiliated Companies -- 9.5
Income Taxes - Current -- 1.6
Other Assets 20.1 6.4
-------------------------
Total $7,708.3 $4,417.3
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts Payable to Affiliated Companies $ 0.8 $ 1.8
Accounts and Interest Payable 43.4 4.5
Income Taxes:
Current 12.9 --
Deferred 13.5 9.1
Dividends Payable to Shareholders 45.2 36.6
Debt:
Commercial Paper 812.8 --
Medium-Term Notes Due 2002 50.0 50.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 --
8.072% Junior Subordinated Debentures
(Capital Securities) 868.0 --
-------------------------
Total Liabilities 2,246.6 302.0
-------------------------
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:
1997 - 7.9; 1996 - 3.3
Shares Issued and Outstanding:
1997 - 141.2; 1996 - 126.3 909.3 225.3
Retained Earnings 3,299.1 3,042.2
Unrealized Appreciation of Investment
Securities, Net of Tax 1,258.8 851.4
Unrealized Loss from Foreign Currency
Translation, Net of Tax (5.5) (3.6)
-------------------------
Shareholders' Equity 5,461.7 4,115.3
-------------------------
Total $7,708.3 $4,417.3
=========================
</TABLE>
<PAGE> 33
<TABLE>
<CAPTION>
Statement of Income F-7
SAFECO CORPORATION Schedule II
(Parent Company Only)
Year Ended December 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
REVENUES
Dividends -Non-Affiliates $ 2.8 $ 3.4 $ 5.2
Interest -Affiliates 0.9 1.5 0.9
-Others 20.0 6.1 11.4
Equity in Loss of Unconsolidated Affiliate -- (1.0) (1.0)
Realized Gain from Security Investments 7.9 17.3 6.6
------------------------------------------
Total 31.6 27.3 23.1
------------------------------------------
EXPENSES
Interest 74.3 19.3 30.7
Other 0.8 0.6 0.6
------------------------------------------
Total 75.1 19.9 31.3
------------------------------------------
Income (Loss) Before Income Taxes (43.5) 7.4 (8.2)
Provision (Benefit) for Income Taxes
(Includes provision on realized gain:
1997 - $2.8; 1996 - $6.1; 1995 - $2.3) (16.0) 1.8 (4.1)
------------------------------------------
Income (Loss) Before Equity in Earnings
of Subsidiaries (27.5) 5.6 (4.1)
Equity in Earnings of Subsidiaries
(Includes dividends accrued and received) 457.5 433.4 403.1
------------------------------------------
Consolidated Net Income $ 430.0 $ 439.0 $ 399.0
==========================================
Dividends Accrued and Received From Subsidiaries (Cash):
SAFECO Insurance Company of America $ 383.0 $ 75.0 $ 69.0
General Insurance Company of America 316.5 45.5 45.0
First National Insurance Company of America 29.5 4.0 4.0
SAFECO National Insurance Company 4.5 5.0 3.5
SAFECO Insurance Company of Illinois 12.0 12.0 10.0
SAFECO Life Insurance Company 16.0 4.0 4.0
SAFECO Administrative Services, Inc. 0.5 0.6 0.6
SAFECO Properties, Inc. 1.2 1.4 1.5
SAFECO Credit Company, Inc. 3.0 2.2 1.9
SAFECO Asset Management Company -- -- 1.0
SAFECO Capital Trust 1.0 -- --
------------------------------------------
Total $ 767.2 $ 149.7 $ 140.5
==========================================
</TABLE>
<PAGE> 34
<TABLE>
<CAPTION>
Statement of Cash Flows F-8
SAFECO CORPORATION Schedule II
(Parent Company Only)
Year Ended December 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
OPERATING ACTIVITIES
Dividends and Interest Received -Affiliates $ 760.1 $ 148.6 $ 138.9
-Others 23.8 11.1 16.4
Interest Paid (34.6) (19.3) (33.0)
Other Operating Costs Paid (0.3) (0.3) (1.6)
Income Taxes Received (Paid) 31.6 (2.2) 5.5
------------------------------------------
Net Cash Provided by Operating Activities 780.6 137.9 126.2
------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale -- (45.9) --
Equities -- (5.0) (3.1)
Other Investments -- -- (211.8)
Maturities of Fixed Maturities Available-for-Sale 10.6 0.8 0.8
Acquisitions, Net of Cash Acquired (3,157.2) -- --
Sales of:
Fixed Maturities Available-for-Sale 4.3 16.2 9.2
Equities 10.3 42.9 22.7
Other Investments -- -- 196.8
Net Decrease (Increase) in Short-Term Investments 18.9 (5.8) (5.6)
Other -- 2.3 --
------------------------------------------
Net Cash Provided by (Used in) Investing Activities (3,113.1) 5.5 9.0
------------------------------------------
FINANCING ACTIVITIES
Proceeds from Notes and Mortgage Borrowings 196.1 -- 198.7
Repayment of Notes and Mortgage Borrowings -- -- (201.4)
Net Proceeds from Short-Term Borrowings 811.2 -- --
Proceeds from Junior Subordinated Debentures (Capital Securities) 832.2 -- --
Proceeds from Common Stock Secondary Offering 677.2 -- --
Common Stock Reacquired (10.7) (9.6) (8.7)
Dividends Paid to Stockholders (154.1) (139.9) (128.5)
Capital Contributions to Affiliates -- -- (1.0)
Other 5.9 6.2 5.8
------------------------------------------
Net Cash Provided by (Used in) Financing Activities 2,357.8 (143.3) (135.1)
------------------------------------------
Net Increase in Cash 25.3 0.1 0.1
Cash at the Beginning of Year 0.2 0.1 --
------------------------------------------
Cash at the End of Year $ 25.5 $ 0.2 $ 0.1
==========================================
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31
- - - ------------------------------------------------------------------------------------------------
(In Millions) Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts)
- - - ----------------------------- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Property and Casualty:
Personal $ 165.7 $ 1,414.8 $ 913.2
Commercial and Surety 139.8 2,895.7 788.3
-------------------------------------------
Total 305.5 4,310.5 1,701.5
-------------------------------------------
Life and Health:
Financial Services 165.9 133.8 9.8 $ 8,579.4
Employee Benefits 73.4 72.5 2.4 3,409.7
-------------------------------------------------------------
Total 239.3 206.3 12.2 11,989.1
-------------------------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------------------------
Consolidated Totals $ 544.8 $ 4,516.8 $ 1,713.7 $11,989.1
=============================================================
1996
Property and Casualty:
Personal $ 112.5 $ 1,022.0 $ 617.6
Commercial and Surety 43.1 1,037.1 320.5
-------------------------------------------
Total 155.6 2,059.1 938.1
-------------------------------------------
Life and Health:
Financial Services 163.8 108.6 6.4 $ 6,438.4
Employee Benefits 76.7 70.2 2.4 3,354.3
-------------------------------------------------------------
Total 240.5 178.8 8.8 9,792.7
-------------------------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------------------------
Consolidated Totals $ 396.1 $ 2,237.9 $ 946.9 $ 9,792.7
=============================================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - - -----------------------------------------------------------------------------------------------------------------------------
(In Millions)
Other Operating
Costs (Including
Benefits, Amortization of Dividends to
Premiums and Claims, Losses Deferred Policy Policyholders
Service Fee Net Investment and Adjustment Acquisition and Goodwill Net Premiums
Segment Revenues Income (1) Expenses Costs Amortization) Written
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Property and Casualty:
Personal $ 1,930.7 $ 1,361.0 $ 333.2 $ 212.8 $ 1,973.5
Commercial and Surety 885.9 599.0 162.7 182.7 854.7
-------------- --------------- -------------- ------------------------------
Total 2,816.6 $ 327.0 1,960.0 495.9 395.5 (2) $ 2,828.2
------------------------------------------------------------------------------- ============
Life and Health:
Financial Services 72.9 626.8 528.7 16.3 72.5
Employee Benefits 217.3 289.5 327.5 20.7 92.9
-------------------------------------------------------------------------------
Total 290.2 916.3 856.2 37.0 165.4
-------------------------------------------------------------------------------
Real Estate - - - - 65.5
Credit - - - - 74.7
Other and Eliminations - 1.4 - - 86.5
-------------------------------------------------------------------------------
Consolidated Totals $ 3,106.8 $ 1,244.7 $ 2,816.2 $ 532.9 $ 787.6
===============================================================================
1996
Property and Casualty:
Personal $ 1,650.7 $ 1,204.5 $ 292.9 $ 148.3 $ 1,676.3
Commercial and Surety 624.7 376.0 98.3 115.5 636.8
------------- --------------- -------------- ------------------------------
Total 2,275.4 $ 281.6 1,580.5 391.2 263.8 $ 2,313.1
------------------------------------------------------------------------------ ============
Life and Health:
Financial Services 50.7 554.8 459.2 13.7 57.4
Employee Benefits 215.2 281.9 323.0 21.9 90.7
-------------------------------------------------------------------------------
Total 265.9 836.7 782.2 35.6 148.1
-------------------------------------------------------------------------------
Real Estate - - - - 66.9
Credit - - - - 65.2
Other and Eliminations - (1.6) - - 53.4
-------------------------------------------------------------------------------
Consolidated Totals $ 2,541.3 $ 1,116.7 $ 2,362.7 $ 426.8 $ 597.4
===============================================================================
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
Supplementary Insurance Information F-9
SAFECO CORPORATION AND SUBSIDIARIES Schedule III
December 31 Continued
- - - -----------------------------------------------------------------------------------
(In Millions)
Other Policy
Reserve for Claims and
Future Policy Benefits
Deferred Benefits, Payable (Funds
Policy Losses, Claims Held Under
Acquisition and Loss Unearned Deposit
Segment Costs Expenses Premiums Contracts)
- - - ----------------------------- ----------------------------------------------------
<S> <C> <C> <C> <C>
1995
Property and Casualty:
Personal $ 106.7 $1,112.5 $ 591.1
Commercial and Surety 39.2 1,068.3 311.5
---------------------------------
Total 145.9 2,180.8 902.6
---------------------------------
Life and Health:
Financial Services 143.2 109.7 6.3 $5,515.4
Employee Benefits 67.3 70.8 1.9 3,241.0
-------------------------------------------
Total 210.5 180.5 8.2 8,756.4
-------------------------------------------
Real Estate -- -- -- --
Credit -- -- -- --
Other and Eliminations -- -- -- --
-------------------------------------------
Consolidated Totals $ 356.4 $2,361.3 $ 910.8 $8,756.4
===========================================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - - -------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Other Operating
Costs (Including
Benefits, Amortization of Dividends to
Premiums and Claims, Losses Deferred Policy Policyholders
Service Fee Net Investment and Adjustment Acquisition and Goodwill Net Premiums
Segment Revenues Income (1) Expenses Costs Amortization) Written
- - - ----------------------------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995
Property and Casualty:
Personal $ 1,562.7 $ 1,143.2 $ 281.7 $ 140.3 $ 1,599.7
Commercial and Surety 599.4 383.8 94.8 112.0 607.3
----------------- -----------------------------------------------------------
Total 2,162.1 $ 291.5 1,527.0 376.5 252.3 $ 2,207.0
--------------------------------------------------------------------------- ===============
Life and Health:
Financial Services 47.2 494.7 403.5 12.2 57.8
Employee Benefits 214.4 283.5 320.0 20.2 90.5
---------------------------------------------------------------------------
Total 261.6 778.2 723.5 32.4 148.3
---------------------------------------------------------------------------
Real Estate - - - - 65.9
Credit - - - - 58.5
Other and Eliminations - 5.6 - - 56.7
---------------------------------------------------------------------------
Consolidated Totals $ 2,423.7 $ 1,075.3 $ 2,250.5 $ 408.9 $ 581.7
===========================================================================
</TABLE>
(1) Property and casualty insurance companies' investments are available
for payment of claims and benefits for all product lines within the
segments; therefore, such investments and the related investment income
have not been identified with specific segments. In the life and health
companies, a major portion of investment income and assets is
specifically identifiable within an industry segment. The remainder of
these amounts has been allocated in proportion to the mean policy
reserves and liabilities identified with each segment.
(2) Property and casualty other operating costs for 1997 include $60.0
million of nonrecurring acquisition charges related to SAFECO's
October 1, 1997 acquisition of American States.
<PAGE> 37
<TABLE>
<CAPTION>
Reinsurance F-10
SAFECO CORPORATION AND SUBSIDIARIES Schedule IV
Year Ended December 31
- - - ------------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Percentage
Ceded to Assumed of Amount
Other from Other Assumed to
Gross Amount Companies Companies Net Amount Net
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Life Insurance In Force at Year End $ 43,499.7 $ (3,788.5) $ 210.3 $ 39,921.5 0.5%
==================================================================================
Premiums earned:
Life Insurance $ 146.9 $ (10.1) $ 0.2 $ 137.0 0.1%
Accident/Health Insurance 160.3 (9.5) 2.4 153.2 1.6%
Property/Casualty Insurance 2,945.3 (155.8) 27.1 2,816.6 1.0%
----------------------------------------------------------------------------------
Total $ 3,252.5 $ (175.4) $ 29.7 $ 3,106.8 1.0%
==================================================================================
1996
Life Insurance In Force at Year End $ 28,524.8 $ (1,791.1) $ 80.9 $ 26,814.6 0.3%
==================================================================================
Premiums earned:
Life Insurance $ 120.8 $ (5.6) $ 0.2 $ 115.4 0.2%
Accident/Health Insurance 158.6 (8.1) -- 150.5 0.0%
Property/Casualty Insurance 2,404.9 (152.6) 23.1 2,275.4 1.0%
----------------------------------------------------------------------------------
Total $ 2,684.3 $ (166.3) $ 23.3 $ 2,541.3 0.9%
==================================================================================
1995
Life Insurance In Force at Year End $ 28,171.4 $ (1,303.6) $ 15.5 $ 26,883.3 0.1%
==================================================================================
Premiums earned:
Life Insurance $ 107.5 $ (4.7) $ 0.1 $ 102.9 0.1%
Accident/Health Insurance 169.9 (5.6) (5.6) 158.7 -3.5%
Property/Casualty Insurance 2,300.9 (160.4) 21.6 2,162.1 1.0%
----------------------------------------------------------------------------------
Total $ 2,578.3 $ (170.7) $ 16.1 $ 2,423.7 0.7%
==================================================================================
</TABLE>
<PAGE> 38
<TABLE>
<CAPTION>
Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations
SAFECO CORPORATION
December 31 F-11
Schedule VI
- - - ----------------------------------------------------------------------------------------------------------------------
(In Millions)
Reserve For Discount
Deferred Unpaid Losses Deducted
Affiliation Policy and from
with Acquisition Adjustment Loss Unearned
Registrant Costs Expenses Reserves Premiums
- - - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1997 $ 305.5 $ 4,310.5 $ -- $ 1,701.5
1996 $ 155.6 $ 2,059.1 $ -- $ 938.1
1995 $ 145.9 $ 2,180.8 $ -- $ 902.6
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
- - - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions)
Losses and Adjustment Amortization
Expenses Incurred of Deferred Paid Losses
Affiliation Net Related to: Policy and
with Earned Investment Acquisition Adjustment Net Premiums
Registrant Premiums Income Current Year Prior Years Costs Expenses Written
- - - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Property/Casualty
Subsidiaries:
1997 $ 2,816.6 $ 327.0 $ 1,969.5 $ 30.5(1) $ 495.9 $ 2,078.4 $ 2,828.2
1996 $ 2,275.4 $ 281.6 $ 1,658.2 $ (77.7) $ 391.2 $ 1,694.9 $ 2,313.1
1995 $ 2,162.1 $ 291.5 $ 1,586.7 $ (59.7) $ 376.5 $ 1,549.8 $ 2,207.0
</TABLE>
(1) The 1997 increase in losses and adjustment expenses incurred related to
prior years of $30.5 million includeds a nonrecurring $40.0 million
reserve increase related to the American States acquisition.
<PAGE> 39
SAFECO CORPORATION AND SUBSIDIARIES
Exhibit Index F-12
- - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Exhibit 2.1* Agreement and Plan of Merger dated as of June 6,
1997 by and among American States Financial
Corporation, SAFECO Corporation ("SAFECO") and
ASFC Acquisition Co. (filed as Exhibit 2.1 to
SAFECO's Report on Form 8-K dated June 6, 1997),
is incorporated herein by this reference.
SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of
all omitted schedules to the foregoing Agreement
and Plan of Merger.
Exhibit 3.1* Bylaws (as last amended May 7, 1997), filed as
Exhibit 3.1 to SAFECO's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997 (File
No. 1-6563), are incorporated herein by this
reference.
Exhibit 3.2* Restated Articles of Incorporation (as amended
May 7, 1997), filed as Exhibit 3.2 to SAFECO's
Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997 (File No. 1-6563), are
incorporated herein by this referece.
Exhibit 4.1 SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of
all instruments defining rights of holders of
long-term debt of SAFECO and its consolidated
subsidiaries.
Exhibit 4.2* Indenture, dated as of July 15, 1997, between
SAFECO and The Chase Manhattan Bank, as Trustee,
filed as Exhibit 4.2 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997.
(File No. 1-6563) is incorporated herein by this
reference.
Exhibit 4.3* Form of Certificate of Exchange Junior
Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 4.4* Certificate of Trust of SAFECO Capital Trust I
dated June 18, 1997, filed as Exhibit 4.4 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (File No. 1-6563),
is incorporated herein by this reference.
Exhibit 4.5* Amended and Restated Declaration of Trust of
SAFECO Capital Trust I dated as of July 15, 1997,
filed as Exhibit 4.5 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997
(File No. 1-6563) is incorporated herein by this
reference.
Exhibit 4.6* Form of Exchange Capital Security Certificate for
SAFECO Capital Trust I filed as Exhibit 4.5 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 4.7* Form of Exchange Guarantee of SAFECO relating to
the Exchange Capital Securities filed as Exhibit
4.6 to SAFECO's Registration Statement on Form
S-4 (No. 333-38205) dated October 17, 1997, is
incorporated herein by this reference.
Exhibit 10.1* Five-Year Credit Agreement dated as of September
24, 1997, among SAFECO; Bank of America National
Trust and Savings Association, as Agent; Mellon
Bank, N.A., as Documentation Agent; The Chase
Manhattan Bank, as Syndication Agent; and the
various co-agents, lead managers, and financial
institutions identified in said Credit Agreement
as parties thereto.
</TABLE>
<PAGE> 40
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index (continued)
- - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Exhibit 10.2* SAFECO Corporation Deferred Compensation Plan for
Directors, filed as Exhibit 10 to SAFECO's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1994 (File No. 1-6563), is
incorporated herein by this reference.
Exhibit 10.3* Retirement Agreement between Richard E. Zunker
and SAFECO Life Insurance Company dated November
25, 1997.
The following documents are incorporated herein
by this reference.
Exhibit 10.4* Executive Severance Agreements between SAFECO and
each of Roger H. Eigsti and Boh A. Dickey dated
May 23, 1984, filed as Exhibit 10 to SAFECO's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1985 (File No. 1-6563); and
the Form of Executive Severance Agreements
between SAFECO and each of Rod A. Pierson,
James W. Ruddy, W. Randall Stoddard, and Richard
E. Zunker, in each case dated August 30, 1996,
filed as Exhibit 10 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended September 30,
1996.
Exhibit 10.5* SAFECO Long-Term Incentive Plan of 1997 filed as
Exhibit 99.1 to SAFECO's Registration Statement
on Form S-8 (No. 333-26393) dated May 2, 1997,
is incorporated herein by this reference.
Exhibit 10.6* Form of Stock Option Contract granted under the
SAFECO Long-Term Incentive Plan of 1997.
Exhibit 10.7* Form of Restricted Stock Rights Award Agreement
granted under the SAFECO Long-Term Incentive Plan
of 1997.
Exhibit 10.8* Form of Performance Stock Rights Award Agreement
granted under the SAFECO Long-Term Incentive Plan
of 1997.
Exhibit 10.9* SAFECO Incentive Plan of 1987 contained in the
Prospectus dated November 10, 1989, as amended
January 31, 1990, filed as Exhibit 10 to SAFECO's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1989 (File No. 1-6563), and
the Supplement to such Prospectus dated
November 8, 1990, filed as Exhibit 10 to
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1990 (File No.
1-6563) are incorporated herein by this
reference.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13* 1997 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included
only in the electronic EDGAR filing version of
this 10-K. 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.)
</TABLE>
*Copies of these exhibits are available without charge by making a written
request to:
Rod A. Pierson
Senior Vice President and Chief Finanacial Officer
SAFECO Corporation
SAFECO Plaze
Seattle, Washington 98185
<PAGE> 1
Exhibit 10.1
[EXECUTION COPY]
$1,100,000,000
FIVE-YEAR CREDIT AGREEMENT
DATED AS OF SEPTEMBER 24, 1997
AMONG
SAFECO CORPORATION,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
AS AGENT,
MELLON BANK, N.A.
AS DOCUMENTATION AGENT,
THE CHASE MANHATTAN BANK,
AS SYNDICATION AGENT,
THE CO-AGENTS AND LEAD
MANAGERS PARTY THERETO,
AND
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
ARRANGED BY
BANCAMERICA SECURITIES, INC.
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
<S> <C>
ARTICLE I
DEFINITIONS....................................................................1
1.01 Certain Defined Terms....................................................1
1.02 Other Interpretive Provisions...........................................16
1.03 Accounting Principles...................................................17
ARTICLE II
THE CREDITS...................................................................17
2.01 Amounts and Terms of Commitments........................................17
2.02 Notes; Loan Accounts....................................................17
2.03 Procedure for Borrowing.................................................18
2.04 The Swing Line Loans....................................................18
2.05 Procedure for Swing Line Loans..........................................19
2.06 Conversion and Continuation Elections for Borrowings....................20
2.07 Voluntary Termination or Reduction of Commitments.......................21
2.08 Optional Prepayments....................................................22
2.09 Repayment...............................................................22
2.10 Interest................................................................22
2.11 Fees ...................................................................23
(a) Underwriting, Agency Fees......................................23
(b) Facility Fees..................................................23
2.12 Computation of Fees and Interest........................................23
2.13 Payments by the Company.................................................24
2.14 Payments by the Banks to the Agent......................................24
2.15 Sharing of Payments, Etc................................................25
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY........................................25
3.01 Taxes...................................................................25
3.02 Illegality..............................................................26
3.03 Increased Costs and Reduction of Return.................................27
3.04 Funding Losses..........................................................27
3.05 Inability to Determine Rates............................................28
3.06 Certificates of Banks...................................................28
3.07 Substitution of Banks...................................................28
3.08 Survival................................................................29
</TABLE>
ii
<PAGE> 3
<TABLE>
<CAPTION>
Section Page
<S> <C>
ARTICLE IV
CONDITIONS PRECEDENT..........................................................29
4.01 Conditions of Loan Availability.........................................29
(a) Credit Agreement and Notes.................................29
(b) Resolutions; Incumbency....................................29
(c) Organization Documents; Good Standing......................29
(d) Legal Opinions.............................................29
(e) Payment of Fees............................................30
(f) Certificate................................................30
(g) Approvals..................................................30
(h) Other Documents............................................30
4.02 Conditions to All Loans.................................................30
(a) Notice of Borrowing........................................30
(b) Continuation of Representations and Warranties.............30
(c) No Existing Default........................................30
ARTICLE V
REPRESENTATIONS AND WARRANTIES................................................31
5.01 Corporate Existence and Power...........................................31
5.02 Corporate Authorization; No Contravention...............................31
5.03 Governmental Authorization..............................................31
5.04 Binding Effect..........................................................31
5.05 Litigation..............................................................32
5.06 No Default..............................................................32
5.07 ERISA Compliance........................................................32
5.08 Use of Proceeds; Margin Regulations.....................................33
5.09 Title to Properties.....................................................33
5.10 Taxes...................................................................33
5.11 Financial Condition.....................................................33
5.12 Environmental Matters...................................................34
5.13 Regulated Entities......................................................34
5.14 Subsidiaries............................................................34
5.15 Insurance...............................................................34
5.16 Licenses.................................................................34
5.17 Employee Matters.........................................................34
5.18 Full Disclosure.........................................................34
ARTICLE VI
AFFIRMATIVE COVENANTS.........................................................35
6.01 Financial Statements....................................................35
6.02 Certificates; Other Information.........................................35
</TABLE>
iii
<PAGE> 4
<TABLE>
<CAPTION>
Section Page
<S> <C>
6.03 Notices.................................................................36
6.04 Preservation of Corporate Existence, Etc................................37
6.05 Maintenance of Property.................................................38
6.06 Insurance...............................................................38
6.07 Payment of Obligations..................................................38
6.08 Compliance with Laws....................................................38
6.09 Compliance with ERISA...................................................38
6.10 Inspection of Property and Books and Records............................38
6.11 Use of Proceeds.........................................................39
6.12 Shareholders' Equity....................................................39
ARTICLE VII
NEGATIVE COVENANTS............................................................39
7.01 Limitation on Liens.....................................................39
7.02 Disposition of Assets...................................................40
7.03 Consolidations and Mergers..............................................41
7.04 Limitation on Indebtedness..............................................41
7.05 Use of Proceeds.........................................................41
7.06 ERISA...................................................................42
7.07 Accounting Changes......................................................42
ARTICLE VIII
EVENTS OF DEFAULT.............................................................42
8.01 Event of Default........................................................42
(a) Non-Payment................................................42
(b) Representation or Warranty.................................42
(c) Specific Defaults..........................................42
(d) Other Defaults.............................................42
(e) Cross-Default..............................................42
(f) Insolvency; Voluntary Proceedings..........................43
(g) Involuntary Proceedings....................................43
(h) ERISA......................................................43
(i) Monetary Judgments.........................................43
(j) Non-Monetary Judgments.....................................44
(k) Change of Control..........................................44
(l) Loss of Licenses...........................................44
8.02 Remedies................................................................44
8.03 Rights Not Exclusive....................................................45
</TABLE>
iv
<PAGE> 5
<TABLE>
<CAPTION>
Section Page
<S> <C>
ARTICLE IX
THE AGENT.....................................................................45
9.01 Appointment and Authorization; "Agent"..................................45
9.02 Delegation of Duties....................................................45
9.03 Liability of Agent......................................................45
9.04 Reliance by Agent.......................................................46
9.05 Notice of Default.......................................................46
9.06 Credit Decision.........................................................46
9.07 Indemnification of Agent................................................47
9.08 Agent in Individual Capacity............................................47
9.09 Successor Agent.........................................................47
9.10 Withholding Tax.........................................................48
9.11 Documentation Agent; Syndication Agent; Co-Agents; Lead Managers........49
ARTICLE X
MISCELLANEOUS.................................................................49
10.01 Amendments and Waivers.................................................49
10.02 Notices................................................................50
10.03 No Waiver; Cumulative Remedies.........................................51
10.04 Costs and Expenses.....................................................51
10.05 Company Indemnification................................................51
10.06 Payments Set Aside.....................................................52
10.07 Successors and Assigns.................................................52
10.08 Assignments, Participations, etc.......................................52
10.09 Confidentiality........................................................53
10.10 Set-off................................................................54
10.11 Notification of Addresses, Lending Offices, Etc........................54
10.12 Counterparts...........................................................54
10.13 Severability...........................................................54
10.14 No Third Parties Benefited.............................................54
10.15 Governing Law and Jurisdiction.........................................55
10.16 Waiver of Jury Trial...................................................55
10.17 Entire Agreement.......................................................55
</TABLE>
v
<PAGE> 6
<TABLE>
<CAPTION>
SCHEDULES
Schedule 2.01 Commitments
Schedule 10.02 Lending Offices; Addresses for Notices
EXHIBITS
<S> <C>
Exhibit A Form of Compliance Certificate
Exhibit B Form of Notice of Borrowing
Exhibit C Form of Notice of Conversion/Continuation
Exhibit D Form of Swing Line Note
Exhibit E Form of Promissory Note
Exhibit F Form of Assignment and Acceptance
</TABLE>
vi
<PAGE> 7
FIVE-YEAR CREDIT AGREEMENT
This FIVE-YEAR CREDIT AGREEMENT is entered into as of September 24,
1997, among SAFECO Corporation, a Washington corporation (the "Company"), the
several financial institutions from time to time party to this Agreement
(collectively, the "Banks"; individually, a "Bank"), Bank of America National
Trust and Savings Association, as agent for the Banks and as Swing Line Bank,
Mellon Bank, N.A., as documentation agent for the Banks (the "Documentation
Agent"), The Chase Manhattan Bank, as syndication agent for the Banks (the
"Syndication Agent"), and the parties identified on the signature pages hereto
as Co-Agents and Lead Managers, in such capacities.
WHEREAS, the Company intends to acquire all of the issued and
outstanding capital stock of American States Financial Corporation ("ASFC")
through the merger of ASFC Acquisition Co., a Wholly-Owned Subsidiary of the
Company ("Acquisition Sub"), with and into AFSC (the "Merger") pursuant to the
terms and conditions set forth in the Merger Agreement;
WHEREAS, in connection with the Merger, the Company will repay in full
certain Indebtedness owed by ASFC to Lincoln National Corporation;
WHEREAS, the Company will finance the Merger and the repayment of such
Indebtedness in part through the issuance of commercial paper and certain other
securities;
WHEREAS, in connection with the Merger, the Company has requested the
Banks to make certain credit facilities available to it, to provide a backup for
commercial paper issued by the Company from time to time and for other general
corporate purposes; and
WHEREAS, the Agent, the Documentation Agent, the Syndication Agent, the
Co-Agents, the Lead Managers, the Banks and the Swing Line Bank are willing to
extend the credit facility provided for herein upon the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.01 Certain Defined Terms. The following terms have the following
meanings:
"Acquisition" means any transaction or series of related
transactions for the purpose of or resulting, directly or indirectly,
in (a) the acquisition of all or substantially all of the assets of a
Person, or of any business or division of a Person, (b) the acquisition
of in excess of 50% of the capital stock, partnership interests,
membership interests or equity of any Person, or otherwise causing any
Person to become a Subsidiary, or (c) a merger or
1
<PAGE> 8
consolidation or any other combination with another Person (other than
a Person that is a Subsidiary) provided that the Company or the
Subsidiary is the surviving entity.
"Acquisition Sub" has the meaning specified in the Recitals to
this Agreement.
"Affiliate" means, as to any Person, any other Person which,
directly or indirectly, is in control of, is controlled by, or is under
common control with, such Person. A Person shall be deemed to control
another Person if the controlling Person possesses, directly or
indirectly, the power to direct or cause the direction of the
management and policies of the other Person, whether through the
ownership of voting securities, membership interests, by contract, or
otherwise.
"Agent" means BofA in its capacity as agent for the Banks
hereunder, and any successor agent appointed under Section 9.09.
"Agent-Related Persons" means BofA and any successor agent
appointed under Section 9.09, together with their respective Affiliates
(including, in the case of BofA, the Arranger), and the officers,
directors, employees, agents and attorneys-in-fact of such Persons and
Affiliates.
"Agent's Payment Office" means the address for payments set
forth on Schedule 10.02 or such other address as the Agent may from
time to time specify.
"Agreement" means this Credit Agreement.
"Annual Statement" means the annual statutory financial
statement of any Insurance Subsidiary required to be filed with the
insurance commissioner (or similar authority) of its jurisdiction of
incorporation, which statement shall be in the form required by such
Insurance Subsidiary's jurisdiction of incorporation or, if no specific
form is so required, in the form of financial statements permitted by
such insurance commissioner (or such similar authority) to be used for
filing annual statutory financial statements and shall contain the type
of information permitted by such insurance commissioner (or such
similar authority) to be disclosed therein, together with all exhibits
or schedules filed therewith.
"Applicable Facility Fee" means the applicable percentage set
forth below based upon the Level then in existence:
Level Applicable Facility Fee
I 6.0 basis points
II 6.5 basis points
III 7.0 basis points
IV 8.0 basis points
V 10.0 basis points
2
<PAGE> 9
The Applicable Facility Fee shall be adjusted, as applicable, upon each
change in the rating of the Company's senior unsecured long-term
Indebtedness, effective as of the date of such change. At any time at
which S&P's rating of the Company's senior unsecured long-term
Indebtedness differs from Moody's rating thereof by more than one level
(including each modifier as a separate level), then the Applicable
Facility Fee shall be determined by reference to the rating which is
one level below the higher of the two ratings.
"Applicable Offshore Rate Margin" means on any date the
applicable percentage set forth below based upon the Level then in
existence:
Level Applicable Offshore Rate Margin
I 12.5 basis points
II 13.5 basis points
III 15.5 basis points
IV 17.0 basis points
V 25.0 basis points
The Applicable Offshore Rate Margin shall be adjusted, as applicable,
upon each change in the rating of the Company's senior unsecured
long-term Indebtedness, effective as of the date of such change. At any
time at which S&P's rating of the Company's senior unsecured long-term
Indebtedness differs from Moody's rating thereof by more than one level
(including each modifier as a separate level), then the Applicable
Offshore Rate Margin shall be determined by reference to the rating
which is one level below the higher of the two ratings.
"Arranger" means BancAmerica Securities, Inc., a Delaware
corporation.
"ASFC" has the meaning specified in the Recitals to this
Agreement.
"Assignee" has the meaning specified in subsection 10.08(a).
"Assignment and Acceptance" has the meaning specified in
subsection 10.08(a).
"Attorney Costs" means and includes all fees and disbursements
of any law firm or other external counsel, the allocated cost of
internal legal services and all disbursements of internal counsel.
"Bank" has the meaning specified in the introductory clause
hereto.
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of
1978 (11 U.S.C. Section 101, et seq.).
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<PAGE> 10
"Base Rate" means, for any day, the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate; and (b) the rate of interest
in effect for such day as publicly announced from time to time by BofA
in San Francisco, California, as its "reference rate." (The "reference
rate" is a rate set by BofA based upon various factors including BofA's
costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans, which
may be priced at, above, or below such announced rate.)
Any change in the reference rate announced by BofA shall take
effect at the opening of business on the day specified in the public
announcement of such change.
"Base Rate Loan" means a Loan that bears interest based on the
Base Rate.
"BofA" means Bank of America National Trust and Savings
Association, a national banking association.
"Borrowing" means a borrowing hereunder consisting of Loans of
the same Type made to the Company on the same day by the Banks ratably
according to their respective Pro Rata Shares under Article II, and, in
the case of Offshore Rate Loans, having the same Interest Period. A
Swing Line Loan shall not constitute a Borrowing.
"Borrowing Date" means any date on which a Borrowing occurs
under Section 2.03.
"Business Day" means any day other than a Saturday, Sunday or
other day on which commercial banks in Chicago, New York City or San
Francisco are authorized or required by law to close and, if the
applicable Business Day relates to any Offshore Rate Loan, means such a
day on which dealings are carried on in the applicable offshore dollar
interbank market.
"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any
other law, rule or regulation, whether or not having the force of law,
in each case, regarding capital adequacy of any bank or of any
corporation controlling a bank.
"Change of Control" means (a) any acquisition by any Person,
or two or more Persons acting in concert, including without limitation
any acquisition effected by means of any transaction contemplated by
Section 7.03, of beneficial ownership (within the meaning of Rule 13d-3
of the Securities and Exchange Commission under the Exchange Act) of
20% or more of the outstanding shares of voting stock of the Company or
(b) during any period of 25 consecutive calendar months, commencing on
the date of this Agreement, the ceasing of those individuals (the
"Continuing Directors") who (i) were directors of the Company on
the first day of each such period or (ii) subsequently became directors
of the Company and whose actual election or initial nomination for
election subsequent to that date was approved by a majority of the
Continuing Directors then on the board of directors of the Company, to
constitute a majority of the board of directors of the Company.
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<PAGE> 11
"Closing Date" means the date on which all conditions
precedent set forth in Section 4.01 are satisfied or waived by all
Banks (or, in the case of subsection 4.01(e), waived by the Person
entitled to receive such payment).
"Code" means the Internal Revenue Code of 1986, and
regulations promulgated thereunder.
"Commitment", as to each Bank, has the meaning specified in
Section 2.01.
"Company" has the meaning specified in the introduction to
this Agreement.
"Compliance Certificate" means a certificate substantially in
the form of Exhibit A.
"Contractual Obligation" means, as to any Person, any
provision of any security issued by such Person or of any agreement,
undertaking, contract, indenture, mortgage, deed of trust or other
instrument, document or agreement to which such Person is a party or by
which it or any of its property is bound.
"Conversion/Continuation Date" means any date on which, under
Section 2.06, the Company (a) converts Loans of one Type to another
Type, or (b) continues as Loans of the same Type, but with a new
Interest Period, Loans having Interest Periods expiring on such date.
"Costs and Expenses" has the meaning specified in Section
10.05.
"Default" means any event or circumstance which, with the
giving of notice, the lapse of time, or both, would (if not cured or
otherwise remedied during such time) constitute an Event of Default.
"Documentation Agent" has the meaning specified in the
introduction to this Agreement.
"Dollars", "dollars" and "$" each mean lawful money of the
United States.
"Eligible Assignee" means (a) a commercial bank organized
under the laws of the United States, or any state thereof, and having a
combined capital and surplus of at least $500,000,000; (b) a commercial
bank organized under the laws of any other country which is a member of
the Organization for Economic Cooperation and Development (the "OECD"),
or a political subdivision of any such country, and having a combined
capital and surplus of at least $500,000,000, provided that such bank
is acting through a branch or agency located in the United States; and
(c) a Person that is primarily engaged in the business of commercial
banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a
Person of which a Bank is a Subsidiary, or (iii) a Person of which a
Bank is a Subsidiary.
"Environmental Laws" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes,
together with all administrative orders, directed duties, requests,
licenses, authorizations and permits of, and agreements with, any
5
<PAGE> 12
Governmental Authorities, in each case relating to environmental,
health, safety and land use matters.
"ERISA" means the Employee Retirement Income Security Act of
1974, and regulations promulgated thereunder.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) under common control with the Company within the meaning
of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of
the Code for purposes of provisions relating to Section 412 of the
Code).
"ERISA Event" means (a) a Reportable Event with respect to a
Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate
from a Pension Plan subject to Section 4063 of ERISA during a plan year
in which it was a substantial employer (as defined in Section
4001(a)(2) of ERISA) or a cessation of operations which is treated as
such a withdrawal under Section 4062(e) of ERISA; (c) a complete or
partial withdrawal by the Company or any ERISA Affiliate from a
Multiemployer Plan or notification that a Multiemployer Plan is in
reorganization; (d) the filing of a notice of intent to terminate, the
treatment of a Plan amendment as a termination under Section 4041 or
4041A of ERISA, or the commencement of proceedings by the PBGC to
terminate a Pension Plan or Multiemployer Plan; (e) an event or
condition which might reasonably be expected to constitute grounds
under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan or Multiemployer Plan; or
(f) the imposition of any liability under Title IV of ERISA, other than
PBGC premiums due but not delinquent under Section 4007 of ERISA, upon
the Company or any ERISA Affiliate.
"Eurodollar Reserve Percentage" has the meaning specified in
the definition of "Offshore Rate".
"Event of Default" means any of the events or circumstances
specified in Section 8.01.
"Exchange Act" means the Securities Exchange Act of 1934 and
the regulations promulgated thereunder.
"FDIC" means the Federal Deposit Insurance Corporation, and
any Governmental Authority succeeding to any of its principal
functions.
"Federal Funds Rate" means, for any day, the rate set forth in
the weekly statistical release designated as H.15(519), or any
successor publication, published by the Federal Reserve Bank of New
York (including any such successor, "H.15(519)") on the preceding
Business Day opposite the caption "Federal Funds (Effective)"; or, if
for any relevant day such rate is not so published on any such
preceding Business Day, the rate for such day will be the arithmetic
mean as determined by the Agent of the rates for the last transaction
in overnight Federal funds arranged prior to 9:00 a.m. (New York City
time) on that day by each of three leading brokers of Federal funds
transactions in New York City selected by the Agent.
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<PAGE> 13
"Fee Letter" has the meaning specified in subsection 2.11(a).
"FRB" means the Board of Governors of the Federal Reserve
System, and any Governmental Authority succeeding to any of its
principal functions.
"Further Taxes" means any and all present or future taxes,
levies, assessments, imposts, duties, deductions, fees, withholdings or
similar charges (including, without limitation, net income taxes and
franchise taxes), and all liabilities with respect thereto, imposed by
any jurisdiction on account of amounts payable or paid pursuant to
Section 3.01.
"GAAP" means generally accepted accounting principles set
forth from time to time in the opinions and pronouncements of the
Accounting Principles Board and the American Institute of Certified
Public Accountants and statements and pronouncements of the Financial
Accounting Standards Board (or agencies with similar functions of
comparable stature and authority within the U.S. accounting
profession), which are applicable to the circumstances as of the date
of determination.
"Governmental Authority" means any nation or government, any
state or other political subdivision thereof, any central bank (or
similar monetary or regulatory authority) thereof, any entity
exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, and any
corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing, including any
board of insurance, insurance department or insurance commissioner.
"Guaranty Obligation" means, as to any Person, any direct or
indirect liability of that Person, whether or not contingent, with or
without recourse, with respect to any Indebtedness, lease, dividend,
letter of credit or other obligation (the "primary obligations") of
another Person (the "primary obligor"), including any obligation of
that Person (a) to purchase, repurchase or otherwise acquire such
primary obligations or any security therefor, (b) to advance or provide
funds for the payment or discharge of any such primary obligation, or
to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency or any balance sheet
item, level of income or financial condition of the primary obligor,
(c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary
obligation, or (d) otherwise to assure or hold harmless the holder of
any such primary obligation against loss in respect thereof, but
excluding, in each case, any obligation of any Insurance Subsidiary to
pay any amount owing under any insurance policy or contract or Surety
Instrument issued by such Person in the ordinary course of business.
The amount of any Guaranty Obligations shall be deemed equal to the
stated or determinable amount of the primary obligation in respect of
which such Guaranty Obligation is made or, if not stated or if
indeterminable, the maximum reasonably anticipated liability in respect
thereof.
"Indebtedness" of any Person means, without duplication, (a)
all indebtedness for borrowed money; (b) all obligations issued,
undertaken or assumed as the deferred purchase price of property or
services (other than trade payables entered into in the ordinary course
of business on ordinary terms); (c) all non-contingent reimbursement or
payment obligations
7
<PAGE> 14
with respect to Surety Instruments; (d) all obligations evidenced by
notes, bonds, debentures or similar instruments, including obligations
so evidenced incurred in connection with the acquisition of property,
assets or businesses; (e) all indebtedness created or arising under any
conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to property acquired by the
Person (even though the rights and remedies of the seller or bank under
such agreement in the event of default are limited to repossession or
sale of such property); (f) all obligations with respect to capital
leases; (g) all indebtedness referred to in clauses (a) through (f)
above secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien
upon or in property (including accounts and contracts rights) owned by
such Person, even though such Person has not assumed or become liable
for the payment of such Indebtedness; and (h) all Guaranty Obligations
in respect of indebtedness or obligations of others of the kinds
referred to in clauses (a) through (g) above. "Indebtedness" shall not
include amounts owing under insurance policies or contracts or Surety
Instruments issued by Insurance Subsidiaries in the ordinary course of
business. For all purposes of this Agreement, the Indebtedness of any
Person shall include all recourse Indebtedness of any partnership or
joint venture in which such Person is a general partner or a joint
venturer.
"Indemnified Liabilities" has the meaning specified in Section
10.05.
"Indemnified Person" has the meaning specified in Section
10.05.
"Independent Auditor" has the meaning specified in subsection
6.01(a).
"Insolvency Proceeding" means, with respect to any Person, (a)
any case, action or proceeding with respect to such Person before any
court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, conservation, rehabilitation,
receivership, dissolution, winding-up or relief of debtors, or (b) any
general assignment for the benefit of creditors, composition,
marshalling of assets for creditors, or other, similar arrangement in
respect of its creditors generally or any substantial portion of its
creditors, in any case, undertaken under U.S. Federal, state or foreign
law, including the Bankruptcy Code.
"Insurance Subsidiary" means any Subsidiary which is engaged
in the business of underwriting insurance products.
"Interest Payment Date" means, as to any Offshore Rate Loan,
the last day of each Interest Period applicable to such Loan and, as to
any Base Rate Loan, the last Business Day of each calendar quarter;
provided, however, that if any Interest Period for an Offshore Rate
Loan exceeds three months, the date that falls three months after the
beginning of such Interest Period and after each Interest Payment Date
thereafter is also an Interest Payment Date.
"Interest Period" means, as to any Offshore Rate Loan, the
period commencing on the Borrowing Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into or
continued as an Offshore Rate Loan, and ending on the date one, two,
three or six months (or, if consented to by each Bank, nine or twelve
months) thereafter
8
<PAGE> 15
as selected by the Company in its Notice of Borrowing or Notice of
Conversion/Continuation;
provided, that:
(i) if any Interest Period would otherwise end on a
day that is not a Business Day, that Interest Period shall be
extended to the following Business Day unless the result of
such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period
shall end on the preceding Business Day;
(ii) any Interest Period that begins on the last
Business Day of a calendar month (or on a day for which there
is no numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such Interest
Period; and
(iii) no Interest Period for any Loan shall extend
beyond the Termination Date.
"IRS" means the Internal Revenue Service, and any Governmental
Authority succeeding to any of its principal functions under the Code.
"Lending Office" means, as to any Bank, the office or offices
of such Bank specified as its "Lending Office" or "Domestic Lending
Office" or "Offshore Lending Office", as the case may be, on Schedule
10.02, or such other office or offices as such Bank may from time to
time notify the Company and the Agent.
"Level" means, and includes, Level I, Level II, Level III,
Level IV and Level V, whichever is in effect at the relevant time.
"Level I" shall exist at any time the Company's senior
unsecured long-term Indebtedness is rated at least AA- by S&P or at
least Aa3 by Moody's.
"Level II" shall exist at any time (a) the Company's senior
unsecured long-term Indebtedness is rated at least A+ by S&P or at
least A1 by Moody's and (b) Level I does not exist.
"Level III" shall exist at any time (a) the Company's senior
unsecured long-term Indebtedness is rated at least A by S&P or at least
A2 by Moody's and (b) Levels I and II do not exist.
"Level IV" shall exist at any time (a) the Company's senior
unsecured long-term Indebtedness is rated at least A- by S&P or at
least A3 by Moody's and (b) Levels I, II and III do not exist.
"Level V" shall exist at any time (a) the Company's senior
unsecured long-term Indebtedness is unrated by both S&P and Moody's or
(b) Levels I, II, III and IV do not exist.
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<PAGE> 16
"License" means any license, certificate of authority, permit
or other authorization which is required to be obtained from any
Governmental Authority in connection with the operation, ownership or
transaction of insurance business.
"Lien" means any security interest, mortgage, deed of trust,
pledge, hypothecation, assignment, charge or deposit arrangement,
encumbrance, lien (statutory or other) or preferential arrangement of
any kind or nature whatsoever in respect of any property (including
those created by, arising under or evidenced by any conditional sale or
other title retention agreement, the interest of a lessor under a
capital lease, any financing lease having substantially the same
economic effect as any of the foregoing, or the filing of any financing
statement naming the owner of the asset to which such lien relates as
debtor, under the Uniform Commercial Code or any comparable law) and
any contingent or other agreement to provide any of the foregoing, but
not including the interest of a lessor under an operating lease.
"Loan" means an extension of credit (including a Swing Line
Loan) by a Bank to the Company under Article II, and may be a Base Rate
Loan or an Offshore Rate Loan (each, a "Type" of Loan).
"Loan Documents" means this Agreement, any Notes, the Fee
Letter and all other documents executed and delivered by the Company to
the Agent or any Bank in connection herewith.
"Margin Stock" means "margin stock" as such term is defined in
Regulation G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change
in, or a material adverse effect upon, the operations, business,
properties, condition (financial or otherwise) of the Company or the
Company and its Subsidiaries taken as a whole; (b) a material
impairment of the ability of the Company to perform under any Loan
Document and to avoid any Event of Default; or (c) a material adverse
effect upon the legality, validity, binding effect or enforceability
against the Company of any Loan Document.
"Material Insurance Subsidiary" means any Insurance Subsidiary
which is a Material Subsidiary.
"Material Subsidiary" means, at any time, any Subsidiary
having at such time either (a) total (gross) revenues for the preceding
four fiscal quarter period in excess of 10% of the total (gross)
revenues of the Company and its Subsidiaries for such period or (b) a
shareholder's equity, as of the last day of the preceding fiscal
quarter, having a book value in excess of 10% of Shareholders' Equity,
in each case, based upon the Company's most recent annual or quarterly
financial statements delivered to the Agent under Section 6.01.
"Merger" has the meaning specified in the Recitals to this
Agreement.
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<PAGE> 17
"Merger Agreement" means that certain Agreement and Plan of
Merger dated as of June 6, 1997 among ASFC, the Company and Acquisition
Sub, as amended, supplemented or modified from time to time.
"Moody's" means Moody's Investors Service, Inc., together with
any Person succeeding thereto by merger, consolidation or acquisition
of all or substantially all of its assets, including substantially all
of its business of rating securities.
"Multiemployer Plan" means a "multiemployer plan", within the
meaning of Section 4001(a)(3) of ERISA, to which the Company or any
ERISA Affiliate makes, is making, or is obligated to make contributions
or, during the preceding three calendar years, has made, or been
obligated to make, contributions.
"NAIC" means the National Association of Insurance
Commissioners or any successor thereto, or in absence of the National
Association of Insurance Commissioners or such successor, any other
association, agency or other organization performing advisory,
coordination or other like functions among insurance departments,
insurance commissioners and similar Governmental Authorities of the
various states of the United States toward the promotion of uniformity
in the practices of such Governmental Authorities.
"Net Income" means, for any computation period, with respect
to the Company on a consolidated basis with its Subsidiaries,
cumulative net income earned during such period as determined in
accordance with GAAP; provided, that "Net Income" shall exclude the
effect of any extraordinary or other nonrecurring gain outside the
ordinary course of business.
"Note" has the meaning specified in Section 2.02.
"Notice of Borrowing" means a notice in substantially the form
of Exhibit B.
"Notice of Conversion/Continuation" means a notice in
substantially the form of Exhibit C.
"Obligations" means all advances, debts, liabilities,
obligations, covenants and duties arising under any Loan Document owing
by the Company to any Bank, the Agent, or any Indemnified Person,
whether direct or indirect (including those acquired by assignment),
absolute or contingent, due or to become due, now existing or hereafter
arising.
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<PAGE> 18
"Offshore Rate" means, for any Interest Period, with respect
to Offshore Rate Loans comprising part of the same Borrowing, the rate
of interest per annum (rounded upward to the next 1/16th of 1%)
determined by the Agent as follows:
Offshore Rate = LIBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day for
any Interest Period the maximum reserve percentage (expressed
as a decimal, rounded upward to the next 1/100th of 1%) in
effect on such day (whether or not applicable to any Bank)
under regulations issued from time to time by the FRB for
determining the maximum reserve requirement (including any
emergency, supplemental or other marginal reserve requirement)
with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities"); and
"LIBOR" means the rate of interest per annum
determined by the Agent to be the arithmetic mean (rounded
upward to the next 1/16th of 1%) of the rates of interest per
annum notified to the Agent by each Reference Bank as the rate
of interest at which dollar deposits in the approximate amount
of the amount of the Loan to be made or continued as, or
converted into, an Offshore Rate Loan by such Reference Bank
and having a maturity comparable to such Interest Period would
be offered to major banks in the London interbank market at
their request at approximately 11:00 a.m. (London time) two
Business Days prior to the commencement of such Interest
Period; provided, that if each Reference Bank fails to supply
quotations of rates to the Agent as contemplated hereby, then
"LIBOR" shall mean the rate of interest per annum for a
deposit in dollars for a period having a maturity comparable
to such Interest Period which appears on Telerate Page 3750 as
of 11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
The Offshore Rate shall be adjusted automatically as
to all Offshore Rate Loans then outstanding as of the
effective date of any change in the Eurodollar Reserve
Percentage.
"Offshore Rate Loan" means any Loan that bears
interest based on the Offshore Rate.
"Organization Documents" means, for any corporation, the
certificate or articles of incorporation, the bylaws, any certificate
of determination or instrument relating to the rights of preferred
shareholders of such corporation, any shareholder rights agreement, and
all applicable resolutions of the board of directors (or any committee
thereof) of such corporation.
"Originator" has the meaning specified in subsection 10.08(d).
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<PAGE> 19
"Other Taxes" means any present or future stamp, court or
documentary taxes or any other excise or property taxes, charges or
similar levies which arise from any payment made hereunder or from the
execution, delivery, performance, enforcement or registration of, or
otherwise with respect to, this Agreement or any other Loan Documents.
"Participant" has the meaning specified in subsection
10.08(d).
"PBGC" means the Pension Benefit Guaranty Corporation, or any
Governmental Authority succeeding to any of its principal functions
under ERISA.
"Pension Plan" means a pension plan (as defined in Section
3(2) of ERISA) subject to Title IV of ERISA which the Company or any
ERISA Affiliate sponsors, maintains, or to which it makes, is making,
or is obligated to make contributions, or in the case of a multiple
employer plan (as described in Section 4064(a) of ERISA) has made
contributions at any time during the immediately preceding five (5)
plan years.
"Permitted Liens" has the meaning specified in Section 7.01.
"Person" means an individual, partnership, corporation,
limited liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section
3(3) of ERISA) which the Company sponsors or maintains or to which the
Company makes, is making, or is obligated to make contributions and
includes any Pension Plan.
"Pro Rata Share" means, as to any Bank (a) at any time at
which the Commitments remain outstanding, the percentage equivalent
(expressed as a decimal, rounded to the ninth decimal place) at such
time of such Bank's Commitment divided by the combined Commitments of
all Banks, and (b) after the termination of the Commitments, the
percentage equivalent (expressed as a decimal, rounded to the ninth
decimal place) at such time of the principal amount of such Bank's
outstanding Loans (other than Swing Line Loans) divided by the
aggregate principal amount of the outstanding Loans (other than Swing
Line Loans) of all the Banks.
"Quarterly Statement" means the quarterly statutory financial
statement of any Insurance Subsidiary required to be filed with the
insurance commissioner (or similar authority) of its jurisdiction of
incorporation or, if no specific form is so required, in the form of
financial statements permitted by such insurance commissioner (or such
similar authority) to be used for filing quarterly statutory financial
statements and shall contain the type of financial information
permitted by such insurance commissioner (or such similar authority) to
be disclosed therein, together with all exhibits or schedules filed
therewith.
"Reference Banks" means BofA, The Chase Manhattan Bank and
Mellon Bank, N.A.
"Replacement Bank" has the meaning specified in Section 3.08.
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<PAGE> 20
"Reportable Event" means any of the events set forth in
Section 4043(c) of ERISA or the regulations thereunder, other than any
such event for which the 30-day notice requirement under ERISA has been
waived in regulations issued by the PBGC.
"Required Banks" means at any time Banks then holding at least
51% of the then aggregate unpaid principal amount of the Loans, or, if
no such principal amount is then outstanding, Banks then having at
least 51% of the aggregate amount of the Commitments.
"Requirement of Law" means, as to any Person, any law
(statutory or common), treaty, rule or regulation or determination of
an arbitrator or of a Governmental Authority, in each case applicable
to or binding upon the Person or any of its property or to which the
Person or any of its property is subject.
"Responsible Officer" means the chief executive officer, chief
operating officer, chief financial officer or treasurer of the Company,
or any other officer having substantially the same authority and
responsibility.
"S&P" means Standard & Poor's Ratings Group, a division of
McGraw-Hill, Inc., together with any Person succeeding thereto by
merger, consolidation or acquisition of all or substantially all of its
assets, including substantially all of its business of rating
securities.
"SAP" means, with respect to any Insurance Subsidiary, the
statutory accounting practices prescribed or permitted by the insurance
commissioner (or other similar authority) in the jurisdiction of such
Person for the preparation of annual statements and other financial
reports by insurance companies of the same type as such Person, which
are applicable to the circumstances as of the date of determination.
"SEC" means the Securities and Exchange Commission, or any
Governmental Authority succeeding to any of its principal functions.
"Shareholders' Equity" means the aggregate shareholders'
equity of the Company determined in accordance with GAAP, but excluding
the effect of any adjustment under Statement of Financial Accounting
Standards No. 115.
"Subsidiary" of a Person means any corporation, association,
partnership, limited liability company, joint venture or other business
entity of which more than 50% of the voting stock, membership interests
or other equity interests (in the case of Persons other than
corporations), is owned or controlled directly or indirectly by the
Person, or one or more of the Subsidiaries of the Person, or a
combination thereof. Unless the context otherwise clearly requires,
references herein to a "Subsidiary" refer to a Subsidiary of the
Company.
"Surety Instruments" means all letters of credit (including
standby and commercial), banker's acceptances, bank guaranties,
shipside bonds, surety bonds and similar instruments.
"Swap Contract" means any agreement, whether or not in
writing, relating to any transaction that is a rate swap, basis swap,
forward rate transaction, commodity swap, commodity option, equity or
equity index swap or option, bond, note or bill option, interest
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<PAGE> 21
rate option, forward foreign exchange transaction, cap, collar or floor
transaction, currency swap, cross-currency rate swap, swaption,
currency option or any other, similar transaction (including any option
to enter into any of the foregoing) or any combination of the
foregoing, and, unless the context otherwise clearly requires, any
master agreement relating to or governing any or all of the foregoing.
"Swap Termination Value" means, in respect of any one or more
Swap Contracts, after taking into account the effect of any legally
enforceable netting agreement relating to such Swap Contracts, (a) for
any date on or after the date such Swap Contracts have been closed out
and termination value(s) determined in accordance therewith, such
termination value(s), and (b) for any date prior to the date referenced
in clause (a) the amount(s) determined as the mark-to-market value(s)
for such Swap Contracts, as determined by the Company based upon one or
more mid-market or other readily available quotations provided by any
recognized dealer in such Swap Contracts (which may include any Bank).
"Swing Line Commitment" means at any time, the obligation of
the Swing Line Bank to make Swing Line Loans pursuant to Section 2.04.
"Swing Line Bank" means BofA, in its capacity as provider of
the Swing Line Loans.
"Swing Line Loan" means a Loan made by the Swing Line Bank.
"Swing Line Note" means a promissory note in substantially the
form of Exhibit D.
"Swing Line Rate" means 0.50% per annum above the latest
Federal Funds Rate.
"Syndication Agent" has the meaning specified in the
introduction to this Agreement.
"Taxes" means any and all present or future taxes, levies,
assessments, imposts, duties, deductions, fees, withholdings or similar
charges, and all liabilities with respect thereto, excluding, in the
case of each Bank and the Agent, respectively, taxes imposed on or
measured by its net income by the jurisdiction (or any political
subdivision thereof) under the laws of which such Bank or the Agent, as
the case may be, is organized or maintains a lending office.
"Termination Date" means September 24, 2002.
"Type" has the meaning specified in the definition of "Loan."
"Unfunded Pension Liability" means the excess of a Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the
current value of that Plan's assets, determined in accordance with the
assumptions used for funding the Pension Plan pursuant to Section 412
of the Code for the applicable plan year.
"United States" and "U.S." each means the United States of
America.
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"Wholly-Owned Subsidiary" means any corporation in which
(other than directors' qualifying shares required by law) 100% of the
capital stock of each class having ordinary voting power, and 100% of
the capital stock of every other class, in each case (or, in the case
of Persons other than corporations, membership interests or other
equity interests), at the time as of which any determination is being
made, is owned, beneficially and of record, by the Company, or by one
or more of the other Wholly-Owned Subsidiaries, or both.
1.02 Other Interpretive Provisions. (a) The meanings of defined terms
are equally applicable to the singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar
words refer to this Agreement as a whole and not to any particular provision of
this Agreement; and subsection, Section, Schedule and Exhibit references are to
this Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other
writings, however evidenced.
(ii) The term "including" is not limiting and means
"including without limitation."
(iii) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and
including"; the words "to" and "until" each mean "to but excluding",
and the word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i) references
to agreements (including this Agreement) and other contractual instruments shall
be deemed to include all subsequent amendments and other modifications thereto,
but only to the extent such amendments and other modifications are not
prohibited by the terms of any Loan Document, and (ii) references to any statute
or regulation are to be construed as including all statutory and regulatory
provisions consolidating, amending, replacing, supplementing or interpreting the
statute or regulation.
(e) The captions and headings of this Agreement are for
convenience of reference only and shall not affect the interpretation of this
Agreement.
(f) This Agreement and other Loan Documents may use several
different limitations, tests or measurements to regulate the same or similar
matters. All such limitations, tests and measurements are cumulative and shall
each be performed in accordance with their terms. Unless otherwise expressly
provided, any reference to any action of the Agent or the Banks by way of
consent, approval or waiver shall be deemed modified by the phrase "in its/their
sole and reasonable discretion."
(g) This Agreement and the other Loan Documents are the result
of negotiations among and have been reviewed by counsel to the Agent, the
Company and the other parties, and are the products of all parties. Accordingly,
they shall not be construed against the Banks or the Agent merely because of the
Agent's or Banks' involvement in their preparation.
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1.03 Accounting Principles. (a) Unless the context otherwise clearly
requires, all accounting terms not expressly defined herein shall be construed,
and all financial computations required under this Agreement shall be made, in
accordance with GAAP, consistently applied.
(b) References herein to "fiscal year" and "fiscal quarter"
refer to such fiscal periods of the Company.
(c) References hereto in particular columns, lines or sections
of any Person's Annual Statement shall be deemed, where appropriate, to be
references to the corresponding column, line or section of such Person's
Quarterly Statement, or if no such corresponding column, line or section exists
or if any report form changes, then to the corresponding item referenced
thereby. In the event the columns, lines or sections of the Annual Statement
referenced herein are changed or renumbered, all such references shall be deemed
references to such column, line or section as so renumbered or changed.
ARTICLE II
THE CREDITS
2.01 Amounts and Terms of Commitments. Each Bank severally agrees, on
the terms and conditions set forth herein, to make loans to the Company from
time to time on any Business Day during the period from the Closing Date to the
Termination Date, in an aggregate amount not to exceed at any time outstanding
the amount set forth on Schedule 2.01 (such amount, as the same may be reduced
under Section 2.07 or as a result of one or more assignments under Section
10.08, the Bank's "Commitment"); provided, however, that, after giving effect to
any Borrowing, the aggregate principal amount of all outstanding Loans,
including Swing Line Loans, shall not at any time exceed the combined
Commitments. Within the limits of each Bank's Commitment, and subject to the
other terms and conditions hereof, the Company may borrow under this Section
2.01, prepay under Section 2.08 and reborrow under this Section 2.01.
2.02 Notes; Loan Accounts. (a) The Loans made by each Bank shall be
evidenced by one or more loan accounts or records maintained by such Bank in the
ordinary course of business. The loan accounts or records maintained by the
Agent and each Bank shall be presumptive evidence of the amount of the Loans
made by the Banks to the Company and the interest and payments thereon. Any
failure so to record or any error in doing so shall not, however, limit or
otherwise affect the obligation of the Company hereunder to pay any amount owing
with respect to the Loans.
(b) The Company shall issue to each Bank a note in the form of
Exhibit E (a "Note") to evidence such Bank's Loans (or, in the case of Swing
Line Loans, in the form of Exhibit D). Each Bank may, instead of or in addition
to maintaining a loan account, endorse on the schedules annexed to its Note the
date, amount and maturity of each Loan made by it and the amount of each payment
of principal made by the Company with respect thereto. Each such Bank is
irrevocably authorized by the Company to endorse its Note(s) or Swing Line
Notes, as applicable, and each Bank's record shall be conclusive absent manifest
error; provided, however, that the failure of a Bank to make, or an error in
making, a notation thereon with respect to any Loan shall not limit
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<PAGE> 24
or otherwise affect the obligations of the Company hereunder or under any such
Note or Swing Line Note to such Bank.
2.03 Procedure for Borrowing. (a) Each Borrowing shall be made upon the
Company's irrevocable written notice delivered to the Agent in the form of a
Notice of Borrowing (which notice must be received by the Agent prior to (i)
10:00 a.m. (Pacific time) three Business Days prior to the requested Borrowing
Date, in the case of Offshore Rate Loans, and (ii) 9:00 a.m. (Pacific time) on
the requested Borrowing Date, in the case of Base Rate Loans), signed by two
Responsible Officers and specifying:
(A) the amount of the Borrowing, which shall
be (i) in an aggregate minimum amount of $1,000,000 or any
multiple of $100,000 in excess thereof for Base Rate Loans and
(ii) in an aggregate amount of $10,000,000 or in multiples of
$1,000,000 in excess thereof for Offshore Rate Loans;
(B) the requested Borrowing Date, which
shall be a Business Day;
(C) the Type of Loans comprising the
Borrowing; and
(D) the duration of the Interest Period
applicable to such Loans included in such notice. If the
Notice of Borrowing fails to specify the duration of the
Interest Period for any Borrowing comprised of Offshore Rate
Loans, such Interest Period shall be one month.
(b) The Agent will promptly notify each Bank of its receipt of
any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that
Borrowing.
(c) Each Bank will make the amount of its Pro Rata Share of
each Borrowing available to the Agent for the account of the Company at the
Agent's Payment Office by 11:00 a.m. Pacific time) on the Borrowing Date
requested by the Company in funds immediately available to the Agent. The
proceeds of all such Loans will then be made available to the Company by the
Agent at such office by wire transfer of such proceeds to such account as the
Company may designate in writing in like funds as received by the Agent.
(d) After giving effect to any Borrowing, unless the Agent
shall otherwise consent, there may not be more than ten (10) different Interest
Periods in effect in respect of all Loans together then outstanding.
2.04 The Swing Line Loans. Subject to the terms and conditions hereof,
the Swing Line Bank agrees to make Swing Line Loans to the Company from time to
time prior to the Termination Date in an aggregate principal amount at any one
time outstanding not to exceed $25,000,000; provided that, after giving effect
to any such Swing Line Loan, the aggregate principal amount of all outstanding
Loans at such time would not exceed the combined Commitments at such time. Prior
to the Termination Date, the Company may use the Swing Line Commitment by
borrowing, prepaying the Swing Line Loans in whole or in part, and reborrowing,
all in accordance with the terms and conditions hereof. All Swing Line Loans
shall bear interest at the Swing Line Rate and shall not be entitled to be
converted into Loans that bear interest at any other rate.
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2.05 Procedure for Swing Line Loans. (a) The Company may borrow under
the Swing Line Commitment on any Business Day until the Termination Date;
provided that the Company shall give the Swing Line Bank irrevocable written
notice signed by two Responsible Officers (which notice must be received by the
Swing Line Bank prior to 11:00 a.m. (Pacific time)) with a copy to the Agent
specifying the amount of the requested Swing Line Loan, which shall be in a
minimum amount of $1,000,000 or a whole multiple of $100,000 in excess thereof.
The proceeds of the Swing Line Loan will be made available by the Swing Line
Bank to the Company in immediately available funds at the office of the Swing
Line Bank by 1:00 p.m. (Pacific time) on the date of such notice. The Company
may at any time and from time to time, prepay the Swing Line Loans, in whole or
in part, without premium or penalty, by notifying the Swing Line Bank prior to
11:00 a.m. (Pacific time) on any Business Day of the date and amount of
prepayment with a copy to the Agent. If any such notice is given, the amount
specified in such notice shall be due and payable on the date specified therein.
Partial prepayments shall be in an aggregate principal amount of $1,000,000 or a
whole multiple of $100,000 in excess thereof.
(b) If any Swing Line Loan shall remain outstanding at 11:00
a.m. (Pacific time) on the fifth Business Day following the date of such Swing
Line Loan and if by such time on such fifth Business Day the Agent shall have
received neither (i) a Notice of Borrowing delivered by the Company pursuant to
Section 2.03 requesting that Loans be made pursuant to Section 2.01 on the
immediately succeeding Business Day in an amount at least equal to the principal
amount of such Swing Line Loan nor (ii) any other notice satisfactory to the
Agent indicating the Company's intent to repay such Swing Line Loan on or before
the immediately succeeding Business Day with funds obtained from other sources,
then on such Business Day the Swing Line Bank shall (and on any Business Day the
Swing Line Bank in its sole discretion may), on behalf of the Company (which
hereby irrevocably directs the Swing Line Bank to act on its behalf) request the
Agent to notify each Bank to make a Base Rate Loan in an amount equal to such
Bank's Pro Rata Share of (A) in the case of such a request which is required to
be made, the amount of the relevant Swing Line Loan and (B) in the case of such
a discretionary request, the aggregate principal amount of the Swing Line Loans
outstanding on the date such notice is given; provided, that the Company may
request, at the end of such five Business Day period, that any outstanding Swing
Line Loan be extended for additional periods of up to five Business Days each,
so long as the conditions specified in Section 4.02 would be satisfied at the
beginning of each such additional period, treating each such extension as if it
were the making of a new Loan. Unless any of the events described in subsection
8.01(e) or (f) shall have occurred with respect to the Company (in which event
the procedures of paragraph (d) of this Section 2.05 shall apply) each Bank
shall make the proceeds of its Loan available to the Agent for the account of
the Swing Line Bank at the Agent's Payment Office in funds immediately available
prior to 9:00 a.m. (Pacific time) on the Business Day next succeeding the date
such notice is given. The proceeds of such Loans shall be immediately applied to
repay the outstanding Swing Line Loans. Effective on the day such Loans are
made, the portion of the Swing Line Loans so paid shall no longer be outstanding
as Swing Line Loans and shall no longer be due under the Swing Line Note. The
Company shall pay to the Swing Line Bank, promptly following the Swing Line
Bank's demand, the amount of its outstanding Swing Line Loans to the extent
amounts received from the Banks are not sufficient to repay in full such
outstanding Swing Line Loans.
(c) Notwithstanding anything herein to the contrary, the Swing
Line Bank (i) shall not be obligated to make any Swing Line Loan if the
conditions set forth in Article IV have not been satisfied and (ii) shall not
make any requested Swing Line Loan if, prior to 11:00 a.m. (Pacific time)
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<PAGE> 26
on the date of such requested Swing Line Loan, it has received a written notice
from the Agent or any Bank directing it not to make further Swing Line Loans
because one or more of the conditions specified in Article IV are not then
satisfied.
(d) If prior to the making of a Loan required to be made by
subsection 2.05(b) an Event of Default described in subsection 8.01(e) or
8.01(f) shall have occurred and be continuing with respect to the Company, each
Bank will, on the date such Loan was to have been made pursuant to the notice
described in subsection 2.05(b), purchase an undivided participating interest in
the outstanding Swing Line Loans in an amount equal to its Pro Rata Share of the
aggregate principal amount of Swing Line Loans then outstanding. Each Bank will
immediately transfer to the Agent for the benefit of the Swing Line Bank, in
immediately available funds, the amount of its participation.
(e) Whenever, at any time after a Bank has purchased a
participating interest in a Swing Line Loan, the Swing Line Bank receives any
payment on account thereof, the Swing Line Bank will distribute to the Agent for
delivery to each Bank its participating interest in such amount (appropriately
adjusted, in the case of interest payments, to reflect the period of time during
which such Bank's participating interest was outstanding and funded); provided,
however, that in the event that such payment received by the Swing Line Bank is
required to be returned, such Bank will return to the Agent for delivery to the
Swing Line Bank any portion thereof previously distributed by the Swing Line
Bank to it.
(f) Each Bank's obligation to make the Loans referred to in
subsection 2.05(b) and to purchase participating interests pursuant to
subsection 2.05(d) shall be absolute and unconditional and shall not be affected
by any circumstance, including, without limitation, (i) any set-off,
counterclaim, recoupment, defense or other right which such Bank or the Company
may have against the Swing Line Bank, the Company or any other Person for any
reason whatsoever, (ii) the occurrence or continuance of a Default or an Event
of Default, (iii) any adverse change in the condition (financial or otherwise)
of the Company, (iv) any breach of this Agreement or any other Loan Document by
the Company, any Subsidiary or any other Bank, or (v) any other circumstance,
happening or event whatsoever, whether or not similar to any of the foregoing.
2.06 Conversion and Continuation Elections for Borrowings. (a) The
Company may, upon irrevocable written notice to the Agent in accordance with
subsection 2.06(b):
(i) elect, as of any Business Day, in the case of
Base Rate Loans, or as of the last day of the applicable Interest
Period, in the case of Offshore Rate Loans, to convert any such Loans
(or any part thereof in an amount not less than $1,000,000, or that is
in an integral multiple of $100,000 in excess thereof) into Loans of
any other Type; or
(ii) elect, as of the last day of the applicable
Interest Period, to continue any Loans having Interest Periods expiring
on such day (or any part thereof in an amount not less than $1,000,000,
or that is in an integral multiple of $100,000 in excess thereof);
provided, that if at any time the aggregate amount of Offshore Rate Loans in
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $10,000,000, such Offshore Rate Loans may, upon
written notice by the Company delivered to the
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Agent and the Swing Line Bank concurrent with its notice of prepayment and
compliance with Section 2.05, be converted into Swing Line Loans, or, in the
absence of such a conversion, shall automatically convert into Base Rate Loans,
and on and after such date the right of the Company to continue such Loans as,
and convert such Loans into, Offshore Rate Loans shall terminate.
(b) The Company shall deliver a written Notice of
Conversion/Continuation (which notice must be received by the Agent not later
than (i) 10:00 a.m. (Pacific time) three Business Days in advance of the
Conversion/Continuation Date, if the Loans are to be converted into or continued
as Offshore Rate Loans and (ii) 9:00 a.m. (Pacific time) on the Conversion/
Continuation Date, if the Loans are to be converted into Base Rate Loans) signed
by two Responsible Officers and specifying:
(A) the proposed Conversion/Continuation
Date;
(B) the aggregate amount of Loans to be
converted or continued;
(C) the Type of Loans resulting from the
proposed conversion or continuation; and
(D) in the case of conversions into Offshore
Rate Loans, the duration of the requested Interest Period.
(c) Subject to the following sentence, if by 10:00 a.m.
(Pacific time) on the third Business Day prior to the expiration of any Interest
Period applicable to Offshore Rate Loans, then the Company has failed to select
a new Interest Period to be applicable to such Offshore Rate Loans, the Company
shall be deemed to have elected to convert such Offshore Rate Loans into
Offshore Rate Loans with an Interest Period of one month effective as of the
expiration date of such Interest Period. If upon the expiration of any Interest
Period applicable to Offshore Rate Loans, any Default or Event of Default then
exists, the Company shall be deemed to have elected to convert such Offshore
Rate Loans into Base Rate Loans effective as of the expiration date of such
Interest Period.
(d) The Agent will promptly notify each Bank of its receipt of
a Notice of Conversion/Continuation, or, if no timely notice is provided by the
Company, the Agent will promptly notify each Bank of the details of any
automatic conversion. All conversions and continuations shall be made ratably
according to the respective outstanding principal amounts of the Loans with
respect to which the notice was given held by each Bank.
(e) Unless the Required Banks otherwise consent, during the
existence of a Default or Event of Default, the Company may not elect to have a
Loan converted into or continued as an Offshore Rate Loan.
(f) After giving effect to any conversion or continuation of
Loans, unless the Agent shall otherwise consent, there may not be more than ten
(10) different Interest Periods in effect in respect of all Loans together then
outstanding.
2.07 Voluntary Termination or Reduction of Commitments. (a) The Company
may, upon not less than three (3) Business Days' prior notice to the Agent,
terminate the Commitments, or
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permanently reduce the Commitments by an aggregate minimum amount of $10,000,000
or any multiple of $1,000,000 in excess thereof; unless, after giving effect
thereto and to any prepayments of Loans made on the effective date thereof, the
then-outstanding principal amount of the Loans would exceed the amount of the
combined Commitments then in effect. Once reduced in accordance with this
Section 2.07, the Commitments may not be increased. Any reduction of the
Commitments shall be applied to each Bank according to its Pro Rata Share. All
facility fees relating to the reduced Commitments which accrued to, but not
including the effective date of any reduction or termination of Commitments,
shall be paid on the last business day of the calendar quarter in which such
reduction or termination took place.
(b) At no time shall the Swing Line Commitment exceed the
combined Commitments, and any reduction of the combined Commitments which
reduces the combined Commitments below the then-current amount of the Swing Line
Commitment shall result in an automatic corresponding reduction of the Swing
Line Commitment to the amount of the combined Commitments, as so reduced,
without any action on the part of the Swing Line Bank. At no time shall the
Swing Line Commitment exceed the Commitment of the Swing Line Bank, and any
reduction of the combined Commitments which reduces the Commitment of the Swing
Line Bank below the then-current amount of the Swing Line Commitment shall
result in an automatic corresponding reduction of the Swing Line Commitment to
the amount of the Commitment of the Swing Line Bank, as so reduced, without any
action on the part of the Swing Line Bank.
2.08 Optional Prepayments. Subject to Section 3.04, the Company may, at
any time or from time to time, upon not less than three (3) Business Days'
irrevocable notice to the Agent, in respect of Offshore Rate Loans, and in
respect of Base Rate Loans (other than Swing Line Loans), by not later than 9:00
a.m. (Pacific time) on the prepayment date, ratably prepay Loans in whole or in
part, in minimum amounts of $1,000,000 or any multiple of $100,000 in excess
thereof. Such notice of prepayment shall specify the date and amount of such
prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly
notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata
Share of such prepayment. If such notice is given by the Company, the Company
shall make such prepayment and the payment amount specified in such notice shall
be due and payable on the date specified therein, together, in the case of
Offshore Rate Loans, with accrued interest to each such date on the amount
prepaid and any amounts required pursuant to Section 2.06.
2.09 Repayment. The Company shall repay to the Banks on the Termination
Date the aggregate the principal amount of Loans outstanding on such date.
2.10 Interest. (a) Each Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Offshore Rate plus the Applicable Offshore Rate Margin or the Base
Rate, as the case may be (and subject to the Company's right to convert to other
Types of Loans under Section 2.06).
(b) Interest on each Loan shall be paid in arrears on each
Interest Payment Date. Interest shall also be paid on the date of any prepayment
of Offshore Rate Loans under Section 2.08 for the portion of the Loans so
prepaid and upon payment (including prepayment) in full thereof and, during the
existence of any Event of Default, interest shall be paid on demand of the Agent
at the request or with the consent of the Required Banks.
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(c) Notwithstanding subsection (a) of this Section 2.10, if any
amount of principal of any Loan is not paid in full when due or any amount of
interest on any Loan or any other amount payable hereunder or under any other
Loan Document is not paid in full within 5 days of the date when due, in each
case whether at stated maturity, by acceleration, demand or otherwise, the
Company agrees to pay interest on such unpaid principal or other amount, from
the date such amount becomes due until the date such amount is paid in full, and
after as well as before any entry of judgment thereon to the extent permitted by
law, payable on demand, at a fluctuating rate per annum equal to the Base Rate
plus 2.0%.
(d) Anything herein to the contrary notwithstanding, the
obligations of the Company to any Bank hereunder shall be subject to the
limitation that payments of interest shall not be required for any period for
which interest is computed hereunder, to the extent (but only to the extent)
that contracting for or receiving such payment by such Bank would be contrary to
the provisions of any law applicable to such Bank limiting the highest rate of
interest that may be lawfully contracted for, charged or received by such Bank,
and in such event the Company shall pay such Bank interest at the highest rate
permitted by applicable law.
2.11 Fees. (a) Underwriting, Agency Fees. The Company shall pay an
underwriting fee to BofA for BofA's own account, and shall pay an agency fee to
the Agent for the Agent's own account, as required by the letter agreement ("Fee
Letter") between the Company and the Arranger and Agent dated May 30, 1997.
(b) Facility Fees. The Company shall pay to the Agent for the
account of each Bank a facility fee on the amount of such Bank's Commitment,
computed on a quarterly basis in arrears on the last Business Day of each
calendar quarter, equal to the Applicable Facility Fee times the average daily
Commitments for that quarter as calculated by the Agent. Such facility fee shall
accrue from the Closing Date to the Termination Date and shall be due and
payable quarterly in arrears on the last Business Day of each calendar quarter
commencing on December 31, 1997 through the Termination Date, with the final
payment to be made on the Termination Date. The facility fees provided in this
subsection shall accrue at all times after the above-mentioned commencement
date, including at any time during which one or more conditions in Article IV
are not met.
2.12 Computation of Fees and Interest. (a) All computations of interest
for Base Rate Loans when the Base Rate is determined by BofA's "reference rate"
shall be made on the basis of a year of 365 or 366 days, as the case may be, and
actual days elapsed. All other computations of fees and interest shall be made
on the basis of a 360-day year and actual days elapsed (which results in more
interest being paid than if computed on the basis of a 365-day year). Interest
and fees shall accrue during each period during which interest or such fees are
computed from the first day thereof to the last day thereof.
(b) Each determination of an interest rate by the Agent shall be
conclusive and binding on the Company and the Banks in the absence of manifest
error. The Agent will, at the request of the Company or any Bank, deliver to the
Company or the Bank, as the case may be, a statement showing the quotations used
by the Agent in determining any interest rate and the resulting interest rate.
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(c) If any Reference Bank's Commitment terminates (other than on
termination of all the Commitments), or for any reason whatsoever the Reference
Bank ceases to be a Bank hereunder, that Reference Bank shall thereupon cease to
be a Reference Bank, and the Offshore Rate shall be determined on the basis of
the rates as notified by the remaining Reference Banks.
(d) Each Reference Bank shall use its best efforts to furnish
quotations of rates to the Agent as contemplated hereby. If any of the Reference
Banks fails to supply such rates to the Agent upon its request, the rate of
interest shall be determined on the basis of the quotations of the remaining
Reference Bank(s).
2.13 Payments by the Company. (a) All payments to be made by the Company
shall be made without set-off, recoupment or counterclaim. Except as otherwise
expressly provided herein, all payments by the Company shall be made to the
Agent for the account of the Banks at the Agent's Payment Office, and shall be
made in dollars and in immediately available funds, no later than 11:00 a.m.
(Pacific time) on the date specified herein. The Agent will promptly distribute
to each Bank its Pro Rata Share (or other applicable share as expressly provided
herein) of such payment in like funds as received. Any payment received by the
Agent later than 2:00 p.m. (Pacific time) shall be deemed to have been received
on the following Business Day and any applicable interest or fee shall continue
to accrue.
(b) Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment is due on a day other than a
Business Day, such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of interest
or fees, as the case may be.
(c) Unless the Agent receives notice from the Company prior to
the date on which any payment is due to the Banks that the Company will not make
such payment in full as and when required, the Agent may assume that the Company
has made such payment in full to the Agent on such date in immediately available
funds and the Agent may (but shall not be so required), in reliance upon such
assumption, distribute to each Bank on such due date an amount equal to the
amount then due such Bank. If and to the extent the Company has not made such
payment in full to the Agent, each Bank shall repay to the Agent on demand such
amount distributed to such Bank, together with interest thereon at the Federal
Funds Rate for each day from the date such amount is distributed to such Bank
until the date repaid.
2.14 Payments by the Banks to the Agent. (a) Unless the Agent receives
notice from a Bank on or prior to the Closing Date or, with respect to any
Borrowing after the Closing Date, at least one Business Day prior to the date of
such Borrowing, that such Bank will not make available as and when required
hereunder to the Agent for the account of the Company the amount of that Bank's
Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made
such amount available to the Agent in immediately available funds on the
Borrowing Date and the Agent may (but shall not be so required), in reliance
upon such assumption, make available to the Company on such date a corresponding
amount. If and to the extent any Bank shall not have made its full amount
available to the Agent in immediately available funds and the Agent in such
circumstances has made available to the Company such amount, that Bank shall on
the Business Day following such Borrowing Date make such amount available to the
Agent, together with interest at the Federal Funds Rate for each day during such
period. A notice of the Agent submitted to any Bank with respect to amounts
owing
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under this subsection (a) shall be conclusive, absent manifest error. If such
amount is so made available, such payment to the Agent shall constitute such
Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such
amount is not made available to the Agent on the Business Day following the
Borrowing Date, the Agent will notify the Company of such failure to fund and,
upon demand by the Agent, the Company shall pay such amount to the Agent for the
Agent's account, together with interest thereon for each day elapsed since the
date of such Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Loans comprising such Borrowing.
(b) The failure of any Bank to make any Loan on any Borrowing
Date shall not relieve any other Bank of any obligation hereunder to make a Loan
on such Borrowing Date, but no Bank shall be responsible for the failure of any
other Bank to make the Loan to be made by such other Bank on any Borrowing Date.
2.15 Sharing of Payments, Etc. If, other than as expressly provided
elsewhere herein, any Bank shall obtain on account of the Loans made by it any
payment (whether voluntary, involuntary, through the exercise of any right of
set-off, or otherwise) in excess of its ratable share (or other share
contemplated hereunder), such Bank shall immediately (a) notify the Agent of
such fact, and (b) purchase from the other Banks such participations in the
Loans made by them as shall be necessary to cause such purchasing Bank to share
the excess payment pro rata with each of them; provided, however, that if all or
any portion of such excess payment is thereafter recovered from the purchasing
Bank, such purchase shall to that extent be rescinded and each other Bank shall
repay to the purchasing Bank the purchase price paid therefor, together with an
amount equal to such paying Bank's ratable share (according to the proportion of
(i) the amount of such paying Bank's required repayment to (ii) the total amount
so recovered from the purchasing Bank) of any interest or other amount paid or
payable by the purchasing Bank in respect of the total amount so recovered. The
Company agrees that any Bank so purchasing a participation from another Bank
may, to the fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.10) with respect to
such participation as fully as if such Bank were the direct creditor of the
Company in the amount of such participation. The Agent will keep records (which
shall be conclusive and binding in the absence of manifest error) of
participations purchased under this Section 2.15 and will in each case notify
the Banks following any such purchases or repayments.
ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY
3.01 Taxes. (a) Any and all payments by the Company to any Bank or the
Agent under this Agreement and any other Loan Document shall be made free and
clear of, and without deduction or withholding for, any Taxes. In addition, the
Company shall pay all Other Taxes.
(b) If the Company shall be required by law to deduct or
withhold any Taxes, Other Taxes or Further Taxes from or in respect of any sum
payable hereunder to any Bank or the Agent, then:
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(i) the sum payable shall be increased as
necessary so that, after making all required deductions and
withholdings (including deductions and withholdings applicable to
additional sums payable under this Section 3.01), such Bank or the
Agent, as the case may be, receives and retains an amount equal to the
sum it would have received and retained had no such deductions or
withholdings been made;
(ii) the Company shall make such deductions and
withholdings;
(iii) the Company shall pay the full amount
deducted or withheld to the relevant taxing authority or other
authority in accordance with applicable law; and
(iv) the Company shall also pay to each Bank or the
Agent, at the time interest is paid, Further Taxes in the amount that
the respective Bank or the Agent specifies as necessary to preserve the
after-tax yield the Bank or the Agent would have received if such
Taxes, Other Taxes or Further Taxes had not been imposed.
(c) The Company agrees to indemnify and hold harmless each Bank
and the Agent for the full amount of Taxes, Other Taxes, and Further Taxes in
the amount that the respective Bank or the Agent specifies as necessary to
preserve the after-tax yield the Bank or the Agent would have received if such
Taxes, Other Taxes or Further Taxes had not been imposed, and any liability
(including penalties, interest, additions to tax and expenses) arising therefrom
or with respect thereto, whether or not such Taxes, Other Taxes or Further Taxes
were correctly or legally asserted. Payment under this indemnification shall be
made within 30 days after the date the Bank or the Agent makes written demand
therefor.
(d) Within 30 days after the date of any payment by the Company
of Taxes, Other Taxes or Further Taxes, the Company shall furnish to each Bank
or the Agent the original or a certified copy of a receipt evidencing payment
thereof, or other evidence of payment satisfactory to such Bank or the Agent.
(e) If the Company is required to pay any amount to any Bank
pursuant to subsection (b) or (c) of this Section 3.01, then such Bank shall use
reasonable efforts (consistent with legal and regulatory restrictions) to change
the jurisdiction of its Lending Office so as to eliminate any such additional
payment by the Company which may thereafter accrue, if such change, in the sole
judgment of such Bank, is not otherwise disadvantageous to such Bank.
3.02 Illegality. (a) If any Bank determines that the introduction of any
Requirement of Law, or any change in any Requirement of Law, or in the
interpretation or administration of any Requirement of Law, has made it
unlawful, or that any central bank or other Governmental Authority has asserted
that it is unlawful, for any Bank or its applicable Lending Office to make
Offshore Rate Loans, then, on notice thereof by the Bank to the Company through
the Agent, any obligation of that Bank to make Offshore Rate Loans shall be
suspended until the Bank notifies the Agent and the Company that the
circumstances giving rise to such determination no longer exist.
(b) If a Bank determines that it is unlawful for such Bank to
maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice
of such fact and demand from such Bank (with a copy to the Agent), prepay in
full such Offshore Rate Loans of that Bank then
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outstanding, together with interest accrued thereon and amounts required under
Section 3.04, either on the last day of the Interest Period thereof, if the Bank
may lawfully continue to maintain such Offshore Rate Loans to such day, or
immediately, if the Bank may not lawfully continue to maintain such Offshore
Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then
concurrently with such prepayment, the Company may, at its discretion, borrow
from the affected Bank, in the amount of such prepayment, a Base Rate Loan.
(c) If the obligation of any Bank to make or maintain Offshore
Rate Loans has been so terminated or suspended, the Company may elect, by giving
notice to the Bank through the Agent, that all Loans which would otherwise be
made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans.
(d) Before giving any notice to the Agent under this Section
3.02, the affected Bank shall designate a different Lending Office with respect
to its Offshore Rate Loans if such designation will avoid the need for giving
such notice or making such demand and will not, in the judgment of the Bank, be
illegal or otherwise disadvantageous to the Bank.
3.03 Increased Costs and Reduction of Return. (a) If any Bank determines
that, due to either (i) the introduction of or any change (other than any change
by way of imposition of or increase in reserve requirements included in the
calculation of the Offshore Rate or in respect of the assessment rate payable by
any Bank to the FDIC for insuring U.S. deposits) in or in the interpretation of
any law or regulation or (ii) the compliance by that Bank with any guideline or
request from any central bank or other Governmental Authority (whether or not
having the force of law), there shall be any increase in the cost to such Bank
of agreeing to make or making, funding or maintaining any Offshore Rate Loans,
then the Company shall be liable for, and shall from time to time, upon demand
(with a copy of such demand to be sent to the Agent), pay to the Agent for the
account of such Bank, additional amounts as are sufficient to compensate such
Bank for such increased costs.
(b) If any Bank shall have determined that (i) the introduction
of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its Lending Office) or any corporation controlling the Bank with
any Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and (taking into consideration such Bank's or such corporation's
policies with respect to capital adequacy and such Bank's desired return on
capital) determines that the amount of such capital is increased as a
consequence of its Commitment, loans, credits or obligations under this
Agreement, then, upon demand of such Bank to the Company through the Agent, the
Company shall pay to the Bank, from time to time as specified by the Bank,
additional amounts sufficient to compensate the Bank for such increase.
3.04 Funding Losses. The Company shall reimburse each Bank and hold each
Bank harmless from any loss or expense which the Bank may sustain or incur as a
consequence of:
(a) the failure of the Company to make on a timely
basis any payment of principal of any Offshore Rate Loan;
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(b) the failure of the Company to borrow, continue or convert a
Loan after the Company has given (or is deemed to have given) a Notice of
Borrowing or a Notice of Conversion/ Continuation;
(c) the failure of the Company to make any prepayment of any
Loan in accordance with any notice delivered under Section 2.08;
(d) the prepayment (including pursuant to Section 2.08) or other
payment (including after acceleration thereof) of an Offshore Rate Loan on a day
that is not the last day of the relevant Interest Period; or
(e) the automatic conversion under the proviso to Section
2.06(a) of any Offshore Rate Loan to a Base Rate Loan on a day that is not the
last day of the relevant Interest Period;
including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its Offshore Rate Loans or from fees payable
to terminate the deposits from which such funds were obtained. For purposes of
calculating amounts payable by the Company to the Banks under this Section 3.04
and under subsection 3.03(a), each Offshore Rate Loan made by a Bank (and each
related reserve, special deposit or similar requirement) shall be conclusively
deemed to have been funded at the LIBOR used in determining the Offshore Rate
for such Offshore Rate Loan by a matching deposit or other borrowing in the
interbank eurodollar market for a comparable amount and for a comparable period,
whether or not such Offshore Rate Loan is in fact so funded.
3.05 Inability to Determine Rates. If the Agent determines that for any
reason adequate and reasonable means do not exist for determining the Offshore
Rate for any requested Interest Period with respect to a proposed Offshore Rate
Loan, or that the Offshore Rate applicable pursuant to subsection 2.10 for any
requested Interest Period with respect to a proposed Offshore Rate Loan does not
adequately and fairly reflect the cost to the Banks of funding such Loan, the
Agent will promptly so notify the Company and each Bank. Thereafter, the
obligation of the Banks to make or maintain Offshore Rate Loans, as the case may
be, hereunder shall be suspended until the Agent revokes such notice in writing.
Upon receipt of such notice, the Company may revoke any Notice of Borrowing or
Notice of Conversion/Continuation then submitted by it. If the Company does not
revoke such Notice, the Banks shall make, convert or continue the Loans, as
proposed by the Company, in the amount specified in the applicable notice
submitted by the Company, but such Loans shall be made, converted or continued
as Base Rate Loans instead of Offshore Rate Loans.
3.06 Certificates of Banks. Any Bank claiming reimbursement or
compensation under this Article III shall deliver to the Company (with a copy to
the Agent) a certificate setting forth in reasonable detail the amount payable
to the Bank hereunder and such certificate shall be conclusive and binding on
the Company in the absence of manifest error.
3.07 Substitution of Banks. Upon the receipt by the Company from any
Bank (an "Affected Bank") of a claim for compensation under Section 3.03, of
notice that it cannot make Offshore Rate Loans under Section 3.02, or of a claim
for Taxes or Further Taxes under Section 3.01, then the Agent, at the Company's
direction, may: (i) request the Affected Bank to use its best efforts to obtain
a replacement bank or financial institution satisfactory to the Company to
acquire and assume all or a ratable part of all of such Affected Bank's Loans
and Commitment (a "Replacement Bank"); (ii) request one more of the other Banks
to acquire and assume
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all or part of such Affected Bank's Loans and Commitment; or (iii) designate a
Replacement Bank. Any such designation of a Replacement Bank under clause (i) or
(iii) shall be subject to the prior written consent of the Agent (which consent
shall not be unreasonably withheld).
3.08 Survival. The agreements and obligations of the Company in this
Article III shall survive the termination of this Agreement and the payment of
all other Obligations for a period of one year.
ARTICLE IV
CONDITIONS PRECEDENT
4.01 Conditions of Loan Availability. The obligation of each Bank to
make its initial Loan hereunder is subject to the condition that the Agent shall
have received on or before the date of this Agreement all of the following, in
form and substance satisfactory to the Agent and each Bank, and in sufficient
copies for each Bank:
(a) Credit Agreement and Notes. This Agreement, the
Notes and the Swing Line Note executed by each party thereto;
(b) Resolutions; Incumbency.
(i) Copies of the resolutions of the board of
directors of the Company authorizing the transactions contemplated
hereby, certified as of the Closing Date by the Secretary or an
Assistant Secretary of the Company; and
(ii) A certificate of the Secretary or Assistant
Secretary of the Company certifying the names and true signatures of
the officers of the Company authorized to execute, deliver and perform,
as applicable, this Agreement, and all other Loan Documents to be
delivered by it hereunder;
(c) Organization Documents; Good Standing. Each of the
following documents:
(i) the articles or certificate of incorporation
and the bylaws of the Company as in effect on the Closing Date,
certified as of the Closing Date by the Secretary or Assistant
Secretary of the Company;
(ii) a good standing certificate for the Company
from the Secretary of State (or similar, applicable Governmental
Authority) of its state of incorporation as of a recent date; and
(iii) a compliance certificate for each Material
Insurance Subsidiary from the department of insurance of its
jurisdiction of domicile.
(d) Legal Opinions. An opinion of counsel to the Company and
addressed to the Agent and the Banks, in form and substance acceptable to the
Agent.
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(e) Payment of Fees. Evidence of payment by the Company of all
accrued and unpaid fees, costs and expenses related to this Agreement to the
extent then due and payable on the Closing Date, together with reasonable
Attorney Costs of BofA to the extent invoiced prior to or on the Closing Date,
plus such additional amounts of reasonable Attorney Costs as shall constitute
BofA's reasonable estimate of Attorney Costs incurred or to be incurred by it
through the closing proceedings (provided that such estimate shall not
thereafter preclude final settling of accounts between the Company and BofA);
including any such costs, fees and expenses arising under or referenced in
Sections 2.11 and 10.04;
(f) Certificate. A certificate signed by a Responsible Officer,
dated as of the Closing Date, stating that:
(i) the representations and warranties contained
in Article V are true and correct on and as of such date, as though
made on and as of such date;
(ii) no Default or Event of Default exists or would
result from the making of any Loan hereunder; and
(iii) no event or circumstance has occurred since
December 31, 1996 that has resulted or could reasonably be expected to
result in a Material Adverse Effect.
(g) Approvals. Evidence of the receipt by the Company of all
required approvals of the transactions contemplated hereby and by the other Loan
Documents from each applicable Governmental Authority; and
(h) Other Documents. Such other approvals, opinions, documents
or materials as the Agent or any Bank may reasonably request.
4.02 Conditions to All Loans. The obligation of each Bank to make any
Loan to be made by it (including its initial Loan) is subject to the
satisfaction of the following conditions precedent on the relevant Borrowing
Date:
(a) Notice of Borrowing. The Agent shall have received (with, in
the case of the initial Loan only, a copy for each Bank) a Notice of Borrowing;
(b) Continuation of Representations and Warranties. The
representations and warranties in Article V shall be true and correct on and as
of such Borrowing Date with the same effect as if made on and as of such
Borrowing Date (except to the extent such representations and warranties
expressly refer to an earlier date, in which case they shall be true and correct
as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall
exist or shall result from such Loan or the related Borrowing.
Each Notice of Borrowing submitted by the Company hereunder shall constitute a
representation and warranty by the Company hereunder, as of the date of each
such notice and as of each Borrowing Date, that the conditions in this Section
4.02 are satisfied.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Agent and each Bank that,
both before and after giving effect to the consummation of the transactions
contemplated by the Loan Documents:
5.01 Corporate Existence and Power. The Company and each of its Material
Subsidiaries:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation;
(b) has the power and authority and all governmental licenses,
authorizations, consents and approvals to own its assets, carry on its business
and to execute, deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified as a foreign insurer or corporation, as
applicable, and is licensed and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification or license; and
(d) is in compliance with all Requirements of Law;
except, in each case referred to in clause (c) or clause (d), to the extent that
the failure to do so could not reasonably be expected to have a Material Adverse
Effect.
5.02 Corporate Authorization; No Contravention. The execution, delivery
and performance by the Company of this Agreement and each other Loan Document
have been duly authorized by all necessary corporate action, and do not and will
not:
(a) contravene the terms of any of the Company's Organization
Documents;
(b) conflict with or result in any breach or contravention of,
or the creation of any Lien under, any document evidencing any Contractual
Obligation to which the Company is a party or any order, injunction, writ or
decree of any Governmental Authority to which the Company or its property is
subject; or
(c) violate any Requirement of Law.
5.03 Governmental Authorization. No approval, consent, exemption,
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company of
this Agreement or any other Loan Document.
5.04 Binding Effect. This Agreement and the other Loan Documents to
which the Company is a party constitute the legal, valid and binding obligations
of the Company to the extent it is a party thereto, enforceable against the
Company in accordance with their respective terms, except as
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enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws affecting the enforcement of creditors' rights generally or by equitable
principles relating to enforceability.
5.05 Litigation.
(a) As of the Closing Date, there are no actions, suits,
proceedings, claims or disputes pending, or to the best knowledge of the
Company, threatened or contemplated, at law, in equity, in arbitration or before
any Governmental Authority, against the Company or its Subsidiaries or any of
their respective properties as to which there exists a substantial likelihood of
an adverse determination, which determination could reasonably be expected to
have a Material Adverse Effect.
(b) There are no actions, suits, proceedings, claims or disputes
pending, or to the best knowledge of the Company, threatened or contemplated, at
law, in equity, in arbitration or before any Governmental Authority, against the
Company or its Subsidiaries or any of their respective properties, the effect of
which could reasonably be expected to (i) materially impair the ability of the
Company to perform under this Agreement or any other Loan Document or any of the
transactions contemplated hereby or thereby, or (ii) have a material adverse
effect upon the legality, validity, binding effect or enforceability against the
Company of this Agreement or any other Loan Document. No injunction, writ,
temporary restraining order or any order of any nature has been issued by any
court or other Governmental Authority purporting to enjoin or restrain the
execution, delivery or performance of this Agreement or any other Loan Document,
or directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
5.06 No Default. No Default or Event of Default exists or would result
from the incurring of any Obligations by the Company. As of the Closing Date,
neither the Company nor any Material Subsidiary is in default under or with
respect to any Contractual Obligation in any respect which, individually or
together with all such defaults, could reasonably be expected to have a Material
Adverse Effect, or that would, if such default had occurred after the Closing
Date, create an Event of Default under subsection 8.01(e).
5.07 ERISA Compliance.
(a) Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other federal or state law. Each
Plan which is intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best knowledge of the
Company, nothing has occurred which would cause the loss of such qualification.
(b) There are no pending or, to the best knowledge of the
Company, threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan which has resulted or could reasonably be
expected to result in a Material Adverse Effect. There has been no prohibited
transaction or violation of the fiduciary responsibility rules with respect to
any Plan which has resulted or could reasonably be expected to result in a
Material Adverse Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to
occur which has resulted or could reasonably be expected to result in a Material
Adverse Effect; (ii) no Pension Plan has any Unfunded Pension Liability which
has resulted or could reasonably be expected to
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result in a Material Adverse Effect; (iii) neither the Company nor any ERISA
Affiliate has incurred, or reasonably expects to incur, any liability under
Title IV of ERISA with respect to any Pension Plan (other than premiums due and
not delinquent under Section 4007 of ERISA) which has resulted or could
reasonably be expected to result in a Material Adverse Effect; (iv) neither the
Company nor any ERISA Affiliate has incurred, or reasonably expects to incur,
any liability (and no event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such liability) under Section 4201 or
4243 of ERISA with respect to a Multiemployer Plan which has resulted or could
reasonably be expected to result in a Material Adverse Effect; and (v) neither
the Company nor any ERISA Affiliate has engaged in a transaction that could be
subject to Section 4069 or 4212(c) of ERISA which has resulted or could
reasonably be expected to result in a Material Adverse Effect.
5.08 Use of Proceeds; Margin Regulations. The proceeds of the Loans have
been used solely for the purposes set forth in and permitted by Section 6.11 and
Section 7.05.
5.09 Title to Properties. The Company and each Material Subsidiary have
good record title to, or valid leasehold interests in, all real property
necessary or used in the ordinary conduct of their respective businesses, except
for such defects in title as could not, individually or in the aggregate, have a
Material Adverse Effect. As of the Closing Date, the property of the Company and
its Material Subsidiaries is subject to no Liens, other than Permitted Liens.
5.10 Taxes. The Company and its Subsidiaries have filed all Federal and
other material tax returns and reports required to be filed, and have paid all
Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with SAP or GAAP, as applicable. There is no proposed tax assessment
against the Company or any Subsidiary that could, if made, reasonably be
expected to have a Material Adverse Effect.
5.11 Financial Condition. Each of (a) the audited consolidated financial
statements of the Company and its Subsidiaries dated December 31, 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for the fiscal year ended on that date, (b) the unaudited consolidated financial
statements of the Company and its Subsidiaries dated June 30, 1997 and the
related consolidated statements of income, shareholders' equity and cash flows
for the period ended on that date, (c) the December 31, 1996 Annual Statement of
each Material Insurance Subsidiary and (d) the June 30, 1997 Quarterly Statement
of each Material Insurance Subsidiary:
(i) were prepared in accordance with GAAP
consistently applied throughout the period covered thereby, except as
otherwise expressly noted therein, subject, in the case of such
unaudited financial statements, to ordinary, good faith year end audit
adjustments;
(ii) fairly present the financial condition of the
Company and its Subsidiaries as of the date thereof and results of
operations for the period covered thereby; and
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(iii) show all material indebtedness and other
liabilities, direct or contingent, of the Company and its consolidated
Subsidiaries as of the date thereof, including liabilities for taxes,
material commitments and Contingent Obligations.
5.12 Environmental Matters. To the Company's knowledge, the Company and
its Subsidiaries have complied with all Environmental Laws except for any
noncompliance therewith which could not reasonably be expected to have a
Material Adverse Effect.
5.13 Regulated Entities. Neither the Company nor any Person controlling
the Company is an "Investment Company" within the meaning of the Investment
Company Act of 1940. The Company is not subject to regulation under the Public
Utility Holding Company Act of 1935, the Federal Power Act, the Interstate
Commerce Act, any state public utilities code, or any other Federal or state
statute or regulation limiting its ability to incur Indebtedness.
5.14 Subsidiaries. As of the Closing Date, the Company has no Material
Subsidiaries other than SAFECO Insurance Company of America, General Insurance
Company of America and SAFECO Life Insurance Company.
5.15 Insurance. The properties of the Company and its Material
Subsidiaries are insured with financially sound and reputable insurance
companies not Affiliates of the Company, in such amounts, with such deductibles
and covering such risks as are customarily carried by companies of similar size,
engaged in similar businesses and owning similar properties in localities where
the Company or such Material Subsidiary operates.
5.16 Licenses. No License, the loss of which could reasonably be
expected to have a Material Adverse Effect, is the subject of a proceeding for
suspension or revocation. To the Company's knowledge, there is no sustainable
basis for such suspension or revocation, and no such suspension or revocation
has been threatened by any Governmental Authority.
5.17 Employee Matters. As of the Closing Date, there are no strikes,
work stoppages, election or decertification petitions or proceedings, unfair
labor charges, equal employment opportunity proceedings, wage payment or
material unemployment compensation proceedings, material workers' compensation
proceedings or other material labor/employee related controversies pending or,
to the knowledge of the Company, threatened between the Company or any of its
Subsidiaries and any of their respective employees, other than employee
grievances which could not in the aggregate reasonably be expected to have a
Material Adverse Effect.
5.18 Full Disclosure. None of the representations or warranties made by
the Company in the Loan Documents as of the date such representations and
warranties are made or deemed made, and none of the statements contained in any
exhibit, report, statement or certificate furnished by or on behalf of the
Company or any Subsidiary in connection with the Loan Documents (including the
offering and disclosure materials delivered by or on behalf of the Company to
the Banks prior to the Closing Date), contains, when taken as a whole, any
untrue statement of a material fact or omits any material fact required to be
stated therein or necessary to make the statements made therein, in light of the
circumstances under which they are made, not misleading in any material respect
as of the time when made or delivered.
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ARTICLE VI
AFFIRMATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Required Banks
waive compliance in writing:
6.01 Financial Statements. The Company shall deliver to the Agent with
sufficient copies for each Bank (except for deliveries pursuant to subsection
6.01(d) as to which only one copy shall be provided):
(a) as soon as available, but not later than 90 days after the
end of each fiscal year, a copy of the audited consolidated balance sheet of the
Company and its Subsidiaries as at the end of such year and the related
consolidated statements of income or operations, shareholders' equity and cash
flows for such year, setting forth in each case in comparative form the figures
for the previous fiscal year, and accompanied by the opinion of Ernst & Young
LLP or another nationally-recognized independent public accounting firm
("Independent Auditor") which report shall state that such consolidated
financial statements present fairly the financial position for the periods
indicated in conformity with GAAP applied on a basis consistent with prior
years. Such opinion shall not be qualified or limited because of a restricted or
limited examination by the Independent Auditor of any material portion of the
Company's or any Subsidiary's records;
(b) as soon as available, but not later than 45 days after the
end of each of the first three fiscal quarters of each fiscal year, a copy of
the unaudited consolidated balance sheet of the Company and its Subsidiaries as
of the end of such quarter and the related consolidated statements of income,
shareholders' equity and cash flows for the period commencing on the first day
and ending on the last day of such quarter, and certified by a Responsible
Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good
faith year-end audit adjustments), the financial position and the results of
operations of the Company and the Subsidiaries;
(c) Upon the earlier of (i) 15 days after the regulatory filing
date or (ii) 75 days after the close of each fiscal year of each Material
Insurance Subsidiary, copies of the unaudited Annual Statement of such Material
Insurance Subsidiary, certified by the secretary or treasurer of such Material
Insurance Subsidiary, all such statements to be prepared in accordance with SAP
consistently applied throughout the periods reflected therein and, if required
by the applicable Governmental Authority, audited and certified by independent
certified public accountants of recognized national standing; and
(d) Upon the earlier of (i) 10 days after the regulatory filing
date or (ii) 60 days after the close of each of the first three (3) fiscal
quarters of each fiscal year of each Material Insurance Subsidiary, copies of
the Quarterly Statement of each of the Material Insurance Subsidiaries,
certified by the secretary or treasurer of such Material Insurance Subsidiary,
all such statements to be prepared in accordance with SAP consistently applied
through the period reflected herein.
6.02 Certificates; Other Information. The Company shall furnish to the
Agent, with sufficient copies for each Bank:
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(a) concurrently with the delivery of the financial statements
referred to in subsections 6.01(a) and (b), a Compliance Certificate executed by
a Responsible Officer;
(b) promptly, copies of all financial statements and reports
that the Company sends to its shareholders and copies of all financial
statements and regular, periodic or special reports (including Forms 10K, 10Q
and 8K) that the Company or any Subsidiary may make to, or file with, the SEC,
other than such financial statements or reports relating to the SAFECO mutual
funds;
(c) promptly and in any event within two days after learning
thereof, notification of any changes after the date hereof in the rating given
by S&P or Moody's in respect of the Company's senior unsecured Indebtedness; and
(d) promptly, such additional information regarding the
business, financial or corporate affairs of the Company or any Subsidiary as the
Agent, at the request of any Bank, may from time to time reasonably request.
6.03 Notices. The Company shall promptly notify the Agent:
(a) (i) of the occurrence of any Default or Event of Default and
(ii) of the occurrence or existence of any event or circumstance that could
reasonably foreseeably, based on the facts and circumstances then existing and
known to the Company, become a Default or Event of Default;
(b) of any matter that has resulted or could reasonably be
expected to result in a Material Adverse Effect, including (i) any breach or
non-performance of, or any default under, a Contractual Obligation of the
Company or any Subsidiary; (ii) any dispute, litigation, investigation,
proceeding or suspension between the Company or any Subsidiary and any
Governmental Authority; or (iii) the commencement of, or any material
development in, any litigation or proceeding affecting the Company or any
Subsidiary, including pursuant to any applicable Environmental Laws, in each
case to the extent that it has resulted or could reasonably be expected to
result in a Material Adverse Effect;
(c) of the occurrence of any of the following events affecting
the Company or any ERISA Affiliate (but in no event more than 10 days after such
event) and deliver to the Agent and each Bank a copy of any notice with respect
to such event that is filed with a Governmental Authority and any notice
delivered by a Governmental Authority to the Company or any ERISA Affiliate with
respect to such event:
(i) an ERISA Event; or
(ii) an increase in the Unfunded Pension
Liabilities of any Pension Plan that would cause the Unfunded Pension
Liabilities of all Pension Plans to have increased by more than
$50,000,000 in the aggregate after the Closing Date.
(d) of any material change in accounting policies or financial
reporting practices by the Company or any of its Material Subsidiaries;
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(e) the receipt of any notice from any Governmental Authority of
the expiration without renewal, revocation or suspension of, or the institution
of any proceedings to revoke or suspend, any License now or hereafter held by
any Insurance Subsidiary which is required to conduct insurance business in
compliance with all applicable laws and regulations and the expiration,
revocation or suspension of which could reasonably be expected to have a
Material Adverse Effect;
(f) the receipt of any notice from any Governmental Authority of
the institution of any disciplinary proceedings against or in respect of any
Insurance Subsidiary, or the issuance of any order, the taking of any action or
any request for an extraordinary audit for cause by any Governmental Authority
which, if adversely determined, could reasonably be expected to have a Material
Adverse Effect; or
(g) any judicial or administrative order limiting or controlling
the insurance business of any Insurance Subsidiary (and not the insurance
industry generally) which has been issued or adopted and which has had, or which
could reasonably be expected to have, a Material Adverse Effect.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer setting forth details of the occurrence
referred to therein, and stating what action the Company or any affected
Subsidiary proposes to take with respect thereto and at what time. Each notice
under subsection 6.03(a) shall describe with particularity any and all clauses
or provisions of this Agreement or other Loan Document that have been (or
reasonably foreseeably will be) breached or violated.
6.04 Preservation of Corporate Existence, Etc. The Company shall, and
shall cause each Material Subsidiary to:
(a) preserve and maintain in full force and effect its corporate
existence and, to the extent applicable, good standing under the laws of its
state or jurisdiction of incorporation;
(b) preserve and maintain in full force and effect all
governmental rights, privileges, qualifications, permits, licenses and
franchises necessary in the normal conduct of its business except in connection
with transactions permitted by Section 7.03 and sales of assets permitted by
Section 7.02, the non-preservation of which could reasonably be expected to have
a Material Adverse Effect;
(c) use reasonable efforts, in the ordinary course of business,
to preserve its business organization and goodwill, the non-preservation of
which could reasonably be expected to have a Material Adverse Effect; and
(d) carry on and conduct its business only in substantially the
same fields of enterprise as it is presently conducted.
No Material Insurance Subsidiary shall change its state of domicile without the
prior written consent of the Required Banks, which consent shall not
unreasonably be withheld.
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6.05 Maintenance of Property. The Company shall maintain, and shall
cause each Material Subsidiary to maintain, and preserve all its property which
is used or useful in its business in good working order and condition, ordinary
wear and tear excepted, except as permitted by Section 7.02.
6.06 Insurance. The Company shall maintain, and shall cause each
Material Subsidiary to maintain, with financially sound and reputable
independent insurers, insurance with respect to its properties and business
against loss or damage of the kinds customarily insured against by Persons
engaged in the same or similar business, of such types and in such amounts as
are customarily carried under similar circumstances by such other Persons.
6.07 Payment of Obligations. The Company shall, and shall cause each
Material Subsidiary to, pay and discharge as the same shall become due and
payable, all their respective material obligations and liabilities, including:
(a) all material tax liabilities, assessments and governmental
charges or levies upon it or its material properties or assets, unless the same
are being contested in good faith by appropriate proceedings and adequate
reserves in accordance with GAAP or SAP, as applicable, are being maintained by
the Company or such Subsidiary;
(b) all lawful claims which, if unpaid, would by law become a
Lien upon its property, unless the same is being contested in good faith by
appropriate proceedings and adequate reserves in accordance with GAAP or SAP, as
applicable, are being maintained; and
(c) all material indebtedness, as and when due and payable, but
subject to any subordination provisions contained in any instrument or agreement
evidencing such Indebtedness.
6.08 Compliance with Laws. The Company shall comply, and shall cause
each Subsidiary to comply, in all material respects with all Requirements of Law
of any Governmental Authority having jurisdiction over it or its business
(including the Federal Fair Labor Standards Act and all applicable Environmental
Laws), the noncompliance with which could reasonably be expected to have a
Material Adverse Effect, except such as may be contested in good faith or as to
which a bona fide dispute may exist.
6.09 Compliance with ERISA. The Company shall, and shall cause each of
its ERISA Affiliates to: (a) maintain each Plan in compliance in all material
respects with the applicable provisions of ERISA, the Code and other federal or
state law; (b) cause each Plan which is qualified under Section 401(a) of the
Code to maintain such qualification; and (c) make all required contributions to
any Plan subject to Section 412 of the Code.
6.10 Inspection of Property and Books and Records. The Company shall
maintain and shall cause each Subsidiary to maintain proper books of record and
account, in which full, true and correct entries in conformity with GAAP or SAP,
as applicable, consistently applied shall be made of all financial transactions
and matters involving the assets and business of the Company and such
Subsidiary. The Company shall permit, and shall cause each Material Subsidiary
to permit, representatives and independent contractors of the Agent or any Bank
to visit and inspect any of their respective properties, to examine their
respective corporate, financial and operating records, and make copies thereof
or abstracts therefrom, and to discuss their respective affairs, finances and
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accounts with their respective directors, officers, and independent public
accountants, all at such reasonable times during normal business hours and as
often as may be reasonably desired, upon reasonable advance notice to the
Company, with such inspections to be conducted at the expense of the Company
while an Event of Default has occurred and is continuing.
6.11 Use of Proceeds. The Company shall use the proceeds of the Loans
for general corporate purposes not in contravention of any Requirement of Law or
of any Loan Document.
6.12 Shareholders' Equity. The Company shall at all times after the date
hereof maintain a minimum Shareholders' Equity at least equal to (a)
$3,462,500,000, plus (b) 50% of the Company's positive consolidated Net Income,
if any, for each fiscal quarter ending after December 31, 1997 and on or prior
to the date of determination, plus (c) 25% of the net cash proceeds received by
the Company from the issuance of equity securities after the date of this
Agreement. For the purposes of this Section 6.12, any debt securities issued by
the Company or any Subsidiary which are treated as equity securities by S&P (or
portion thereof) shall also be treated as such in determining Shareholders'
Equity.
ARTICLE VII
NEGATIVE COVENANTS
So long as any Bank shall have any Commitment hereunder, or any Loan or
other Obligation shall remain unpaid or unsatisfied, unless the Required Banks
waive compliance in writing:
7.01 Limitation on Liens. The Company shall not, and shall not suffer or
permit any Subsidiary to, directly or indirectly, make, create, incur, assume or
suffer to exist any Lien upon or with respect to any part of its property,
whether now owned or hereafter acquired, other than the following ("Permitted
Liens"):
(a) Liens existing on property of the Company or any Subsidiary
(other than SAFECO Properties, Inc. and SAFECO Credit Company Inc.) on the
Closing Date securing Indebtedness with an aggregate principal amount not to
exceed $10,000,000 outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental
charges which are not delinquent or remain payable without penalty, or to the
extent that non-payment thereof is permitted by Section 6.07; provided, that no
notice of lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords',
materialmen's, repairmen's or other similar Liens arising in the ordinary course
of business which are not delinquent or remain payable without penalty or which
are being contested in good faith and by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the property
subject thereto;
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(e) Liens (other than any Lien imposed by ERISA) consisting of
pledges or deposits required in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other social security
legislation;
(f) Liens on the property of the Company or any Subsidiary
securing (i) the non-delinquent performance of bids, trade contracts (other than
for borrowed money), leases, statutory obligations, (ii) contingent obligations
on surety and appeal bonds, and (iii) other non-delinquent obligations of a like
nature; in each case, incurred in the ordinary course of business, provided all
such Liens in the aggregate could not (even if enforced) reasonably be expected
to cause a Material Adverse Effect;
(g) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or interfere
with the ordinary conduct of the businesses of the Company and its Subsidiaries;
(h) Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided, that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Company in excess of those set forth by regulations promulgated by
the FRB, and (ii) such deposit account is not intended by the Company or any
Subsidiary to provide collateral to the depository institution;
(i) Liens consisting of deposits made by any Insurance
Subsidiary with the insurance regulatory authority in its jurisdiction of
domicile or other statutory Liens or Liens or claims imposed or required by
applicable insurance law or regulation against the assets of any Insurance
Subsidiary, in each case in favor of all policyholders of such Insurance
Subsidiary and in the ordinary course of such Insurance Subsidiary's business;
(j) Liens securing obligations of SAFECO Properties, Inc. and
SAFECO Credit Company Inc. and their Subsidiaries incurred in the ordinary
course of business and attaching solely to the property of such Persons;
(k) Liens securing obligations owed to the Company or owed by
any Subsidiary of the Company to any of its other Subsidiaries; and
(l) Liens securing other Obligations of the Company and its
Subsidiaries not to exceed $100,000,000 in the aggregate at any one time
outstanding.
7.02 Disposition of Assets. The Company shall not, and shall not suffer
or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise dispose of (whether in one or a series of
transactions) any property (including accounts and notes receivable, with or
without recourse) or enter into any agreement to do any of the foregoing,
except:
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(a) dispositions of used, worn-out or surplus equipment in the
ordinary course of business and other dispositions of immaterial property
(including charitable donations) made in the ordinary course of business;
(b) the sale of equipment to the extent that such equipment is
exchanged for credit against the purchase price of similar replacement
equipment, or the proceeds of such sale are reasonably promptly applied to the
purchase price of such replacement equipment;
(c) dispositions of investments by any Insurance Subsidiary;
(d) dispositions of property by SAFECO Properties, Inc. and its
Subsidiaries in the ordinary course of business so long as such proceeds are
promptly used by such Persons to purchase other property or repay Indebtedness
of such Persons;
(e) transfers of property to the Company or any of its
Subsidiaries; and
(f) dispositions not otherwise permitted hereunder which are
made for fair market value; provided, that (i) at the time of any disposition,
no Event of Default shall exist or shall result from such disposition and (ii)
the aggregate value of all assets sold pursuant to this subsection 7.02(f) by
the Company and its Subsidiaries, together, shall not exceed 25% of
Shareholders' Equity (determined as of the last day of the preceding fiscal
year) in any fiscal year.
7.03 Consolidations and Mergers. The Company shall not merge,
consolidate with or into, or convey, transfer, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its assets (whether now owned or hereafter acquired) to or in favor of
any Person, except that the Company may merge with an entity organized under the
laws of the United States so long as (a) the Company is the surviving entity in
such merger, (b) all applicable regulatory requirements have been satisfied and
(c) no Default or Event of Default has occurred and is continuing or would occur
after giving effect thereto.
7.04 Limitation on Indebtedness. The Company shall not suffer or permit
any Subsidiary to create, incur, assume, suffer to exist, or otherwise become or
remain directly or indirectly liable with respect to, any Indebtedness if, after
giving effect thereto, the ratio of (a) the aggregate Indebtedness of the
Company's Subsidiaries to (b) the sum of (i) the Company's Shareholders' Equity,
plus (ii) the Company's consolidated Indebtedness would exceed .25 to 1.0. For
the purposes of this Section 7.04, any debt securities issued by the Company or
any Subsidiary which are treated as equity securities by S&P (or portion
thereof) shall also be treated as such in determining Shareholders' Equity.
7.05 Use of Proceeds. The Company shall not, and shall not suffer or
permit any Subsidiary to, use any portion of the Loan proceeds, directly or
indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise
refinance indebtedness of the Company or others incurred to purchase or carry
Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying
any Margin Stock, or (iv) to acquire any security in any transaction that is
subject to Section 13 or 14 of the Exchange Act.
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7.06 ERISA. The Company shall not, and shall not suffer or permit any of
its ERISA Affiliates to: (a) engage in a prohibited transaction or violation of
the fiduciary responsibility rules with respect to any Plan which has resulted
or could reasonably be expected to result in liability of the Company in an
aggregate amount in excess of $50,000,000 or (b) engage in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA.
7.07 Accounting Changes. The Company shall not, and shall not suffer or
permit any Material Subsidiary to, make any significant change in accounting
treatment or reporting practices, except as required by SAP or GAAP, as
applicable, or change the fiscal year of the Company or of any Material
Subsidiary.
ARTICLE VIII
EVENTS OF DEFAULT
8.01 Event of Default. Any of the following shall constitute an "Event
of Default":
(a) Non-Payment. The Company fails to pay, (i) when and as
required to be paid herein, any amount of principal of any Loan, or (ii) within
five days after the same becomes due, any interest, fee or any other amount
payable hereunder or under any other Loan Document; or
(b) Representation or Warranty. Any representation or warranty
by the Company made or deemed made herein or in any other Loan Document, or
contained in any certificate, document or financial or other statement by the
Company, or any Responsible Officer, furnished at any time under this Agreement,
or in or under any other Loan Document, is incorrect in any material respect on
or as of the date made or deemed made; or
(c) Specific Defaults. The Company fails to perform or observe
any term, covenant or agreement contained in any of Section 6.03(a)(i), 6.09 or
6.12 or in Article VII; or
(d) Other Defaults. The Company fails to perform or observe any
other term or covenant contained in this Agreement or any other Loan Document,
and such default shall continue unremedied for a period of 30 days after the
earlier of (i) the date upon which a Responsible Officer knew or reasonably
should have known of such failure or (ii) the date upon which written notice
thereof is given to the Company by the Agent or any Bank; or
(e) Cross-Default. (i) The Company or any Subsidiary (A) fails
to make any payment in respect of any Indebtedness or Contingent Obligation
(other than in respect of Swap Contracts), having an aggregate principal amount
(including undrawn committed or available amounts and including amounts owing to
all creditors under any combined or syndicated credit arrangement) of more than
$50,000,000, when due (whether by scheduled maturity, required prepayment,
acceleration, demand, or otherwise) and such failure continues after the
applicable grace or notice period, if any, specified in the relevant document on
the date of such failure; or (B) fails to perform or observe any other condition
or covenant, or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or Contingent
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Obligation, and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such failure
if the effect of such failure, event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause such Indebtedness to be declared to be
due and payable prior to its stated maturity, or such Contingent Obligation to
become payable or cash collateral in respect thereof to be demanded; or (ii)
there occurs under any Swap Contract an Early Termination Date (as defined in
such Swap Contract) resulting from (1) any event of default under such Swap
Contract as to which the Company or any Subsidiary is the Defaulting Party (as
defined in such Swap Contract) or (2) any Termination Event (as so defined) as
to which the Company or any Subsidiary is an Affected Party (as so defined),
and, in either event, the Swap Termination Value owed by the Company or such
Subsidiary as a result thereof is greater than $50,000,000; or
(f) Insolvency; Voluntary Proceedings. The Company or any
Material Subsidiary (i) ceases or fails to be solvent, or generally fails to
pay, or admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) voluntarily ceases to conduct its business in the ordinary
course; (iii) commences any Insolvency Proceeding with respect to itself; or
(iv) takes any action to effectuate or authorize any of the foregoing; or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency
Proceeding is commenced or filed against the Company or any Material Subsidiary,
or any writ, judgment, warrant of attachment, execution or similar process, is
issued or levied against a substantial part of the Company's or any Material
Subsidiary's properties, and any such proceeding or petition shall not be
dismissed, or such writ, judgment, warrant of attachment, execution or similar
process shall not be released, vacated or fully bonded within 60 days after
commencement, filing or levy; (ii) the Company or any Material Subsidiary admits
the material allegations of a petition against it in any Insolvency Proceeding,
or an order for relief (or similar order under non-U.S. law) is ordered in any
Insolvency Proceeding; (iii) the Company or any Material Subsidiary acquiesces
in the appointment of a receiver, trustee, custodian, conservator, liquidator,
mortgagee in possession (or agent therefor), or other similar Person for itself
or a substantial portion of its property or business; or (iv) any Material
Insurance Subsidiary shall become subject to any conservation, rehabilitation or
liquidation order, directive or mandate issued by any Governmental Authority;
(h) ERISA. (i) An ERISA Event shall occur with respect to a
Pension Plan or Multiemployer Plan which has resulted or could reasonably be
expected to result in liability of the Company or any ERISA Affiliate under
Title IV of ERISA to the Pension Plan or Multiemployer Plan or to the PBGC in an
aggregate amount in excess of $50,000,000; (ii) the aggregate amount of Unfunded
Pension Liability among all Pension Plans at any time exceeds $50,000,000; or
(iii) the Company or any ERISA Affiliate shall fail to pay when due, after the
expiration of any applicable grace period, any installment payment with respect
to its withdrawal liability under Section 4201 of ERISA under a Multiemployer
Plan in an aggregate amount in excess of $50,000,000; or
(i) Monetary Judgments. One or more non-interlocutory judgments,
non-interlocutory orders, decrees or arbitration awards is entered against the
Company or any Subsidiary by any Governmental Authority involving in the
aggregate a liability (to the extent not covered by independent third-party
insurance as to which the insurer does not dispute coverage) as to any single
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or related series of transactions, incidents or conditions, of $50,000,000 or
more, and the same shall remain unsatisfied, unvacated and unstayed pending
appeal for a period of 10 days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order,
directive, mandate or decree is entered against the Company or any Subsidiary by
any Governmental Authority which does or could reasonably be expected to have a
Material Adverse Effect, and there shall be any period of 30 consecutive days
during which a stay of enforcement of such judgment or order, by reason of a
pending appeal or otherwise, shall not be in effect; or
(k) Change of Control. There occurs any Change of Control; or
(l) Loss of Licenses. Any Governmental Authority revokes, fails
to renew or suspends any license, permit or franchise of the Company or any
Material Insurance Subsidiary, which revocation, failure or suspension has had
or could reasonably be expected to have a Material Adverse Effect, or the
Company or any Material Insurance Subsidiary for any reason loses any license,
permit or franchise which loss has had or could reasonably be expected to have a
Material Adverse Effect, or the Company or any Material Insurance Subsidiary
suffers the imposition of any restraining order, escrow, suspension or impound
of funds in connection with any proceeding (judicial or administrative) with
respect to any license, permit or franchise which imposition has or could
reasonably be expected to have a Material Adverse Effect; or
(m) Adverse Order. Any Material Insurance Subsidiary shall be
the subject of a final non-appealable order imposing a fine in an amount in
excess of $10,000,000 in any single instance or other such orders imposing fines
in excess of $25,000,000 in the aggregate after the date of this Agreement by or
at the request of any state insurance regulatory agency as a result of the
violation by such Material Insurance Subsidiary of such state's applicable
insurance laws or the regulations promulgated in connection therewith.
8.02 Remedies. If any Event of Default occurs, the Agent shall, at the
request of, or may, with the consent of, the Required Banks,
(a) declare the Commitment of each Bank to make Loans to be
terminated, whereupon such Commitments shall be terminated;
(b) declare the unpaid principal amount of all outstanding
Loans, all interest accrued and unpaid thereon, and all other amounts owing or
payable hereunder or under any other Loan Document to be immediately due and
payable, without presentment, demand, protest or other notice of any kind, all
of which are hereby expressly waived by the Company; and
(c) exercise on behalf of itself and the Banks all rights and
remedies available to it and the Banks under the Loan Documents or applicable
law;
provided, however, that upon the occurrence of any event specified in subsection
(f) or (g) of Section 8.01 (in the case of clause (i) of subsection (g) upon the
expiration of the 60-day period mentioned therein), the obligation of each Bank
to make Loans shall automatically terminate and
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the unpaid principal amount of all outstanding Loans and all interest and other
amounts as aforesaid shall automatically become due and payable without further
act of the Agent or any Bank.
8.03 Rights Not Exclusive. The rights provided for in this Agreement and
the other Loan Documents are cumulative and are not exclusive of any other
rights, powers, privileges or remedies provided by law or in equity, or under
any other instrument, document or agreement now existing or hereafter arising.
ARTICLE IX
THE AGENT
9.01 Appointment and Authorization; "Agent". Each Bank hereby
irrevocably (subject to Section 9.09) appoints, designates and authorizes the
Agent to take such action on its behalf under the provisions of this Agreement
and each other Loan Document and to exercise such powers and perform such duties
as are expressly delegated to it by the terms of this Agreement or any other
Loan Document, together with such powers as are reasonably incidental thereto.
Notwithstanding any provision to the contrary contained elsewhere in this
Agreement or in any other Loan Document, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, nor shall the Agent
have or be deemed to have any fiduciary relationship with any Bank, and no
implied covenants, functions, responsibilities, duties, obligations or
liabilities shall be read into this Agreement or any other Loan Document or
otherwise exist against the Agent. Without limiting the generality of the
foregoing sentence, the use of the term "agent" in this Agreement with reference
to the Agent is not intended to connote any fiduciary or other implied (or
express) obligations arising under agency doctrine of any applicable law.
Instead, such term is used merely as a matter of market custom, and is intended
to create or reflect only an administrative relationship between independent
contracting parties.
9.02 Delegation of Duties. The Agent may execute any of its duties under
this Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
9.03 Liability of Agent. None of the Agent-Related Persons shall (a) be
liable for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (b) be responsible in any manner to any of the Banks for any recital,
statement, representation or warranty made by the Company or any Subsidiary or
Affiliate of the Company, or any officer thereof, contained in this Agreement or
in any other Loan Document, or in any certificate, report, statement or other
document referred to or provided for in, or received by the Agent under or in
connection with, this Agreement or any other Loan Document, or the validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other Loan Document, or for any failure of the Company or any other party to
any Loan Document to perform its obligations hereunder or thereunder. No
Agent-Related Person shall be under any obligation to any Bank to ascertain or
to inquire as to the observance or performance of any of the agreements
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contained in, or conditions of, this Agreement or any other Loan Document, or to
inspect the properties, books or records of the Company or any of the Company's
Subsidiaries or Affiliates.
9.04 Reliance by Agent. (a) The Agent shall be entitled to rely, and
shall be fully protected in relying, upon any writing, resolution, notice,
consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone
message, statement or other document or conversation believed by it to be
genuine and correct and to have been signed, sent or made by the proper Person
or Persons, and upon advice and statements of legal counsel (including counsel
to the Company), independent accountants and other experts selected by the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Banks as it deems appropriate
and, if it so requests, it shall first be indemnified to its satisfaction by the
Banks against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Agent shall in all
cases be fully protected in acting, or in refraining from acting, under this
Agreement or any other Loan Document in accordance with a request or consent of
the Required Banks and such request and any action taken or failure to act
pursuant thereto shall be binding upon all of the Banks.
(b) For purposes of determining compliance with the conditions
specified in Section 4.01, each Bank that has executed this Agreement shall be
deemed to have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by the Agent to such Bank for consent,
approval, acceptance or satisfaction, or required thereunder to be consented to
or approved by or acceptable or satisfactory to the Bank.
9.05 Notice of Default. The Agent shall not be deemed to have knowledge
or notice of the occurrence of any Default or Event of Default, except with
respect to defaults in the payment of principal, interest and fees required to
be paid to the Agent for the account of the Banks, unless the Agent shall have
received written notice from a Bank or the Company referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"notice of default". The Agent will notify the Banks of its receipt of any such
notice. The Agent shall take such action with respect to such Default or Event
of Default as may be requested by the Required Banks in accordance with Article
VIII; provided, however, that unless and until the Agent has received any such
request, the Agent may (but shall not be obligated to) take such action, or
refrain from taking such action, with respect to such Default or Event of
Default as it shall deem advisable or in the best interest of the Banks.
9.06 Credit Decision. Each Bank acknowledges that none of the
Agent-Related Persons has made any representation or warranty to it, and that no
act by the Agent hereinafter taken, including any review of the affairs of the
Company and its Subsidiaries, shall be deemed to constitute any representation
or warranty by any Agent-Related Person to any Bank. Each Bank represents to the
Agent that it has, independently and without reliance upon any Agent-Related
Person and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business, prospects,
operations, property, financial and other condition and creditworthiness of the
Company and its Subsidiaries, and all applicable bank regulatory laws relating
to the transactions contemplated hereby, and made its own decision to enter into
this Agreement and to extend credit to the Company hereunder. Each Bank also
represents that it will, independently and without reliance upon any
Agent-Related Person and based on such documents
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and information as it shall deem appropriate at the time, continue to make its
own credit analysis, appraisals and decisions in taking or not taking action
under this Agreement and the other Loan Documents, and to make such
investigations as it deems necessary to inform itself as to the business,
prospects, operations, property, financial and other condition and
creditworthiness of the Company. Except for notices, reports and other documents
expressly herein required to be furnished to the Banks by the Agent, the Agent
shall not have any duty or responsibility to provide any Bank with any credit or
other information concerning the business, prospects, operations, property,
financial and other condition or credit worthiness of the Company which may come
into the possession of any of the Agent-Related Persons.
9.07 Indemnification of Agent. Whether or not the transactions
contemplated hereby are consummated, the Banks shall indemnify upon demand the
Agent-Related Persons other than the Arranger (to the extent not reimbursed by
or on behalf of the Company and without limiting the obligation of the Company
to do so), pro rata, from and against any and all Indemnified Liabilities;
provided, however, that no Bank shall be liable for the payment to the
Agent-Related Persons of any portion of such Indemnified Liabilities resulting
from such Person's gross negligence or willful misconduct. Without limitation of
the foregoing, each Bank shall reimburse the Agent upon demand for its ratable
share of any costs or out-of-pocket expenses (including Attorney Costs) incurred
by the Agent in connection with the preparation, execution, delivery,
administration, modification, amendment or enforcement (whether through
negotiations, legal proceedings or otherwise) of, or legal advice in respect of
rights or responsibilities under, this Agreement, any other Loan Document, or
any document contemplated by or referred to herein, to the extent that the Agent
is not reimbursed for such expenses by or on behalf of the Company. The
undertaking in this Section shall survive the payment of all Obligations
hereunder and the resignation or replacement of the Agent.
9.08 Agent in Individual Capacity. BofA and its Affiliates may make
loans to, issue letters of credit for the account of, accept deposits from,
acquire equity interests in and generally engage in any kind of banking, trust,
financial advisory, underwriting or other business with the Company and its
Subsidiaries and Affiliates as though BofA were not the Agent hereunder and
without notice to or consent of the Banks. The Banks acknowledge that, pursuant
to such activities, BofA or its Affiliates may receive information regarding the
Company or its Affiliates (including information that may be subject to
confidentiality obligations in favor of the Company or such Subsidiary) and
acknowledge that the Agent shall be under no obligation to provide such
information to them. With respect to its Loans, BofA shall have the same rights
and powers under this Agreement as any other Bank and may exercise the same as
though it were not the Agent, and the terms "Bank" and "Banks" include BofA in
its individual capacity.
9.09 Successor Agent. The Agent may, and at the request of the Required
Banks, shall resign as Agent upon 30 days' notice to the Banks. If the Agent
resigns under this Agreement, the Required Banks shall appoint from among the
Banks a successor agent for the Banks which successor agent shall, so long as no
Event of Default has occurred and is continuing, be approved by the Company. If
no successor agent is appointed prior to the effective date of the resignation
of the Agent, the Agent may appoint, after consulting with the Banks and the
Company, a successor agent from among the Banks. Upon the acceptance of its
appointment as successor agent hereunder, such successor agent shall succeed to
all the rights, powers and duties of the retiring Agent and the term "Agent"
shall mean such successor agent and the retiring Agent's appointment, powers and
duties as Agent shall be terminated. After any retiring Agent's resignation
hereunder as Agent, the
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provisions of this Article IX and Sections 10.04 and 10.05 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was Agent
under this Agreement. If no successor agent has accepted appointment as Agent by
the date which is 30 days following a retiring Agent's notice of resignation,
the retiring Agent's resignation shall nevertheless thereupon become effective
and the Banks shall perform all of the duties of the Agent hereunder until such
time, if any, as the Required Banks appoint a successor agent as provided for
above.
9.10 Withholding Tax. (a) If any Bank is a "foreign corporation,
partnership or trust" within the meaning of the Code and such Bank claims
exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or
1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to
the Agent:
(i) if such Bank claims an exemption from, or a
reduction of, withholding tax under a United States tax treaty, two
properly completed and executed copies of IRS Form 1001 before the
payment of any interest in the first calendar year and before the
payment of any interest in each third succeeding calendar year during
which interest may be paid under this Agreement;
(ii) if such Bank claims that interest paid under
this Agreement is exempt from United States withholding tax because it
is effectively connected with a United States trade or business of such
Bank, two properly completed and executed copies of IRS Form 4224 before
the payment of any interest is due in the first taxable year of such
Bank and in each succeeding taxable year of such Bank during which
interest may be paid under this Agreement; and
(iii) such other form or forms as may be required
under the Code or other laws of the United States as a condition to
exemption from, or reduction of, United States withholding tax.
Such Bank agrees to promptly notify the Agent of any change in circumstances
which would modify or render invalid any claimed exemption or reduction.
(b) If any Bank claims exemption from, or reduction of,
withholding tax under a United States tax treaty by providing IRS Form 1001 and
such Bank sells, assigns, grants a participation in, or otherwise transfers all
or part of the Obligations of the Company to such Bank, such Bank agrees to
notify the Agent of the percentage amount in which it is no longer the
beneficial owner of Obligations of the Company to such Bank. To the extent of
such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no
longer valid.
(c) If any Bank claiming exemption from United States
withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a
participation in, or otherwise transfers all or part of the Obligations of the
Company to such Bank, such Bank agrees to undertake sole responsibility for
complying with the withholding tax requirements imposed by Sections 1441 and
1442 of the Code.
(d) If any Bank is entitled to a reduction in the applicable
withholding tax, the Agent may withhold from any interest payment to such Bank
an amount equivalent to the applicable
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withholding tax after taking into account such reduction. However, if the forms
or other documentation required by subsection (a) of this Section are not
delivered to the Agent, then the Agent may withhold from any interest payment to
such Bank not providing such forms or other documentation an amount equivalent
to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code,
without reduction.
(e) If the IRS or any other Governmental Authority of the United
States or other jurisdiction asserts a claim that the Agent did not properly
withhold tax from amounts paid to or for the account of any Bank (because the
appropriate form was not delivered or was not properly executed, or because such
Bank failed to notify the Agent of a change in circumstances which rendered the
exemption from, or reduction of, withholding tax ineffective, or for any other
reason) such Bank shall indemnify the Agent fully for all amounts paid, directly
or indirectly, by the Agent as tax or otherwise, including penalties and
interest, and including any taxes imposed by any jurisdiction on the amounts
payable to the Agent under this Section, together with all costs and expenses
(including Attorney Costs). The obligation of the Banks under this subsection
shall survive the payment of all Obligations and the resignation or replacement
of the Agent.
9.11 Documentation Agent; Syndication Agent; Co-Agents; Lead Managers.
None of the Documentation Agent, the Syndication Agent or any of the Banks
identified on the facing page or signature pages of this Agreement as a
"co-agent" or "lead manager" shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Banks as such. Without limiting the foregoing, none of the Documentation Agent,
the Syndication Agent or any of the Banks so identified as a "co-agent" or "lead
manager" shall have or be deemed to have any fiduciary relationship with any
Bank. Each Bank acknowledges that it has not relied, and will not rely, on the
Documentation Agent, the Syndication Agent or any of the Banks so identified in
deciding to enter into this Agreement or in taking or not taking action
hereunder.
ARTICLE X
MISCELLANEOUS
10.01 Amendments and Waivers. No amendment or waiver of any provision of
this Agreement or any other Loan Document, and no consent with respect to any
departure by the Company therefrom, shall be effective unless the same shall be
in writing and signed by the Required Banks (or by the Agent at the written
request of the Required Banks) and the Company and acknowledged by the Agent,
and then any such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given; provided, however, that
no such waiver, amendment, or consent shall, unless in writing and signed by all
the Banks and the Company and acknowledged by the Agent, do any of the
following:
(a) increase or extend the Commitment of any Bank (or reinstate
any Commitment terminated pursuant to Section 8.02);
(b) postpone or delay any date fixed by this Agreement or any
other Loan Document for any payment of principal, interest, fees or other
amounts due to the Banks (or any of them) hereunder or under any other Loan
Document;
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(c) reduce the principal of, or the rate of interest specified
herein on any Loan, or (subject to clause (ii) below) any fees or other amounts
payable hereunder or under any other Loan Document;
(d) change the percentage of the Commitments or of the aggregate
unpaid principal amount of the Loans which is required for the Banks or any of
them to take any action hereunder; or
(e) amend this Section 10.01, or Section 2.13, or any provision
herein providing for consent or other action by all Banks;
and, provided further, that (i) no amendment, waiver or consent shall, unless in
writing and signed by the Agent in addition to the Required Banks or all the
Banks, as the case may be, affect the rights or duties of the Agent under this
Agreement or any other Loan Document, (ii) no amendment, waiver or consent
shall, unless in writing and signed by the Swing Line Bank in addition to the
Required Banks or all the Banks, as the case may be, affect the rights or duties
of the Swing Line Bank under this Agreement or any other Loan Document, and
(iii) the Fee Letter may be amended, or rights or privileges thereunder waived,
in a writing executed by the parties thereto.
10.02 Notices. (a) All notices, requests, consents, approvals, waivers
and other communications shall be in writing (including, unless the context
expressly otherwise provides, by facsimile transmission, provided that any
matter transmitted by the Company by facsimile (i) shall be immediately
confirmed by a telephone call to the recipient at the number specified on
Schedule 10.02, and (ii) shall be followed promptly by delivery of a hard copy
original thereof) and mailed, faxed or delivered, to the address or facsimile
number specified for notices on Schedule 10.02; or, as directed to the Company
or the Agent, to such other address as shall be designated by such party in a
written notice to the other parties, and as directed to any other party, at such
other address as shall be designated by such party in a written notice to the
Company and the Agent.
(b) All such notices, requests and communications shall, when
transmitted by overnight delivery, or faxed, be effective when delivered for
overnight (next-day) delivery, or transmitted in legible form by facsimile
machine, respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery, except that
notices pursuant to Article II or IX to the Agent shall not be effective until
actually received by the Agent.
(c) Any agreement of the Agent and the Banks herein to receive
certain notices by telephone or facsimile is solely for the convenience and at
the request of the Company. The Agent and the Banks shall be entitled to rely on
the authority of any Person purporting to be a Person authorized by the Company
to give such notice and, after complying with reasonable security procedures to
verify the identity of such Person, the Agent and the Banks shall not have any
liability to the Company or other Person on account of any action taken or not
taken by the Agent or the Banks in reliance upon such telephonic or facsimile
notice. The obligation of the Company to repay the Loans shall not be affected
in any way or to any extent by any failure by the Agent and the Banks to receive
written confirmation of any telephonic or facsimile notice or the receipt by the
Agent and the Banks of a confirmation which is at variance with the terms
understood by the Agent and the Banks to be contained in the telephonic or
facsimile notice.
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10.03 No Waiver; Cumulative Remedies. No failure to exercise and no
delay in exercising, on the part of the Agent or any Bank, any right, remedy,
power or privilege hereunder, shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, remedy, power or privilege hereunder
preclude any other or further exercise thereof or the exercise of any other
right, remedy, power or privilege.
10.04 Costs and Expenses. The Company shall:
(a) whether or not the transactions contemplated hereby are
consummated, pay or reimburse BofA (including in its capacity as Agent) and the
Arranger within 30 Business Days after demand (subject to subsection 4.01(e))
for all reasonable costs and expenses incurred by BofA (including in its
capacity as Agent) and the Arranger in connection with the development,
preparation, delivery, administration, syndication and execution of, and any
amendment, supplement, waiver or modification to (in each case, whether or not
consummated), this Agreement, any Loan Document and any other documents prepared
in connection herewith or therewith, and the consummation of the transactions
contemplated hereby and thereby, including reasonable Attorney Costs incurred by
BofA (including in its capacity as Agent) and the Arranger with respect thereto;
and
(b) pay or reimburse the Agent, the Arranger and each Bank
within five Business Days after demand (subject to subsection 4.01(e)) for all
costs and expenses (including Attorney Costs) incurred by them in connection
with the enforcement, attempted enforcement, or preservation of any rights or
remedies under this Agreement or any other Loan Document during the existence of
an Event of Default or after acceleration of the Loans (including in connection
with any "workout" or restructuring regarding the Loans, and including in any
Insolvency Proceeding or appellate proceeding).
10.05 Company Indemnification. Whether or not the transactions
contemplated hereby are consummated, the Company shall indemnify, defend and
hold the Agent-Related Persons, and each Bank and each of its respective
officers, directors, employees, counsel, agents and attorneys-in-fact (each, an
"Indemnified Person") harmless from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
charges, expenses and disbursements (including Attorney Costs) of any kind or
nature whatsoever (collectively, "Costs and Expenses") which may at any time
(including at any time following repayment of the Loans and the termination,
resignation or replacement of the Agent or replacement of any Bank) be imposed
on, incurred by or asserted against any such Person in any way relating to or
arising out of this Agreement or any other Loan Document or the transactions
contemplated hereby, or any action taken or omitted by any such Person under or
in connection with any of the foregoing, including with respect to any
investigation, litigation or proceeding (including any Insolvency Proceeding or
appellate proceeding) related to or arising out of this Agreement or the Loans
or the use of the proceeds thereof, whether or not any Indemnified Person is a
party thereto (all the foregoing, collectively, the "Indemnified Liabilities");
provided, that the Company shall have no obligation hereunder to any Indemnified
Person with respect to Indemnified Liabilities to the extent resulting from the
gross negligence or willful misconduct of such Indemnified Person; provided,
further, that the Company shall not be required to pay the Costs and Expenses of
any Indemnified Person to the extent arising in connection with any action by or
on behalf of the Company against such Indemnified Person where final judgment
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is rendered against such Indemnified Person. The agreements in this Section
shall survive payment of all other Obligations.
10.06 Payments Set Aside. To the extent that the Company makes a payment
to the Agent or the Banks, or the Agent or the Banks exercise their right of
set-off, and such payment or the proceeds of such set-off or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside or required (including pursuant to any settlement entered into by the
Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any
other party, in connection with any Insolvency Proceeding or otherwise, then (a)
to the extent of such recovery the obligation or part thereof originally
intended to be satisfied shall be revived and continued in full force and effect
as if such payment had not been made or such set-off had not occurred, and (b)
each Bank severally agrees to pay to the Agent upon demand its pro rata share of
any amount so recovered from or repaid by the Agent.
10.07 Successors and Assigns. The provisions of this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Bank.
10.08 Assignments, Participations, etc. (a) Any Bank may, with the
written consent of the Company, at all times other than during the existence of
an Event of Default, the Agent and the Swing Line Bank, which consents shall not
be unreasonably withheld, at any time assign and delegate to one or more
Eligible Assignees (provided that no written consent of the Company, the Agent
or the Swing Line Bank shall be required in connection with any assignment and
delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank)
(each an "Assignee") all, or any ratable part of all, of the Loans, the
Commitments and the other rights and obligations of such Bank hereunder, in a
minimum amount which, when added to the amount of any concurrent assignment
being made by such Bank to the same assignee pursuant to Section 10.08 of the
Company's September 24, 1997 $500,000,000 364-Day Credit Agreement, as from time
to time amended, is at least equal to $25,000,000 (or, if less, the entire
amount of its Commitments and Loans); provided, however, that the Company and
the Agent may continue to deal solely and directly with such Bank in connection
with the interest so assigned to an Assignee until (i) written notice of such
assignment, together with payment instructions, addresses and related
information with respect to the Assignee, shall have been given to the Company
and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee
shall have delivered to the Company and the Agent an Assignment and Acceptance
in the form of Exhibit F ("Assignment and Acceptance") together with any Note or
Notes subject to such assignment and (iii) the assignor Bank or Assignee has
paid to the Agent a processing fee in the amount of $2,500.
(b) From and after the date that the Agent notifies the assignor
Bank that it has received (and provided its consent with respect to) an executed
Assignment and Acceptance and payment of the above-referenced processing fee,
(i) the Assignee thereunder shall be a party hereto and, to the extent that
rights and obligations hereunder have been assigned to it pursuant to such
Assignment and Acceptance, shall have the rights and obligations of a Bank under
the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights
and obligations hereunder and under the other Loan Documents have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Loan Documents.
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(c) Within five Business Days after its receipt of notice by the
Agent that it has received an executed Assignment and Acceptance and payment of
the processing fee, (and provided that it consents to such assignment in
accordance with subsection 10.08(a)), the Company shall execute and deliver to
the Agent new Notes evidencing such Assignee's assigned Loans and Commitment
and, if the assignor Bank has retained a portion of its Loans and its
Commitment, replacement Notes in the principal amount of the Loans retained by
the assignor Bank (such Notes to be in exchange for, but not in payment of, the
Notes held by such Bank). Immediately upon each Assignee's making its processing
fee payment under the Assignment and Acceptance, this Agreement shall be deemed
to be amended to the extent, but only to the extent, necessary to reflect the
addition of the Assignee and the resulting adjustment of the Commitments arising
therefrom. The Commitment allocated to each Assignee shall reduce such
Commitments of the assigning Bank pro tanto.
(d) Any Bank may at any time sell to one or more commercial
banks or other Persons not Affiliates of the Company (a "Participant")
participating interests in any Loans, the Commitment of that Bank and the other
interests of that Bank (the "Originator") hereunder and under the other Loan
Documents; provided, however, that (i) the Originator's obligations under this
Agreement shall remain unchanged, (ii) the Originator shall remain solely
responsible for the performance of such obligations, (iii) the Company and the
Agent shall continue to deal solely and directly with the Originator in
connection with the Originator's rights and obligations under this Agreement and
the other Loan Documents, and (iv) no Bank shall transfer or grant any
participating interest under which the Participant has rights to approve any
amendment to, or any consent or waiver with respect to, this Agreement or any
other Loan Document, except to the extent such amendment, consent or waiver
would require unanimous consent of the Banks as described in clause (a) (but
only in respect of any increase in the Originator's Commitment), (b) or (c) of
the first proviso to Section 10.01. In the case of any such participation, the
Participant shall be entitled to the benefit of Sections 3.01, 3.03 and 10.05 as
though it were also a Bank hereunder; provided, that the Participant shall not
receive any amount thereunder in excess of what would have been payable to the
participating Bank. If amounts outstanding under this Agreement are due and
unpaid, or shall have been declared or shall have become due and payable upon
the occurrence of an Event of Default, each Participant shall be deemed to have
the right of set-off in respect of its participating interest in amounts owing
under this Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Bank under this Agreement.
(e) Notwithstanding any other provision in this Agreement, any
Bank may at any time create a security interest in, or pledge, all or any
portion of its rights under and interest in this Agreement and the Note held by
it in favor of any Federal Reserve Bank in accordance with Regulation A of the
FRB or U.S. Treasury Regulation 31 CFR Section203.14, and such Federal Reserve
Bank may enforce such pledge or security interest in any manner permitted under
applicable law.
10.09 Confidentiality. Each Bank agrees to take and to cause its
Affiliates to take normal and reasonable precautions and exercise due care to
maintain the confidentiality of all information identified as "confidential" or
"secret" by the Company and provided to it by the Company or any Subsidiary, or
by the Agent on the Company's or such Subsidiary's behalf, under this Agreement
or any other Loan Document, and neither it nor any of its Affiliates shall use
any such information other than in connection with or in enforcement of this
Agreement and the other Loan Documents or in connection with other business now
or hereafter existing or contemplated with the Company
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or any Subsidiary; except to the extent such information (i) was or becomes
generally available to the public other than as a result of disclosure by the
Bank, or (ii) was or becomes available on a non-confidential basis from a source
other than the Company, provided that such source is not bound by a
confidentiality agreement with the Company known to the Bank; provided, however,
that any Bank may disclose such information (A) at the request or pursuant to
any requirement of any Governmental Authority to which the Bank is subject or in
connection with an examination of such Bank by any such authority; (B) pursuant
to subpoena or other court process; (C) when required to do so in accordance
with the provisions of any applicable Requirement of Law; (D) to the extent
reasonably required in connection with any litigation or proceeding to which the
Agent or any Bank or their respective Affiliates may be party; (E) to the extent
reasonably required in connection with the exercise of any remedy hereunder or
under any other Loan Document; (F) to such Bank's independent auditors and other
professional advisors; (G) to any Participant or Assignee, actual or potential,
provided that such Person agrees in writing to keep such information
confidential to the same extent required of the Banks hereunder; (H) as to any
Bank or its Affiliate, as expressly permitted under the terms of any other
document or agreement regarding confidentiality to which the Company or any
Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I)
to its Affiliates.
10.10 Set-off. In addition to any rights and remedies of the Banks
provided by law, if an Event of Default exists or the Loans have been
accelerated, each Bank is authorized at any time and from time to time, without
prior notice to the Company, any such notice being waived by the Company to the
fullest extent permitted by law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final) at any time held by,
and other indebtedness at any time owing by, such Bank to or for the credit or
the account of the Company against any and all Obligations owing to such Bank,
now or hereafter existing, irrespective of whether or not the Agent or such Bank
shall have made demand under this Agreement or any Loan Document and although
such Obligations may be contingent or unmatured. Each Bank agrees promptly to
notify the Company and the Agent after any such set-off and application made by
such Bank; provided, however, that the failure to give such notice shall not
affect the validity of such set-off and application.
10.11 Notification of Addresses, Lending Offices, Etc. Each Bank shall
notify the Agent in writing of any changes in the address to which notices to
the Bank should be directed, of addresses of any Lending Office, of payment
instructions in respect of all payments to be made to it hereunder and of such
other administrative information as the Agent shall reasonably request.
10.12 Counterparts. This Agreement may be executed in any number of
separate counterparts, each of which, when so executed, shall be deemed an
original, and all of said counterparts taken together shall be deemed to
constitute but one and the same instrument.
10.13 Severability. The illegality or unenforceability of any provision
of this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
10.14 No Third Parties Benefited. This Agreement is made and entered
into for the sole protection and legal benefit of the Company, the Banks, the
Agent and the Agent-Related Persons, and their permitted successors and assigns,
and no other Person shall be a direct or indirect legal
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beneficiary of, or have any direct or indirect cause of action or claim in
connection with, this Agreement or any of the other Loan Documents.
10.15 Governing Law and Jurisdiction. (a) THIS AGREEMENT AND THE
NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS
OF THE STATE OF ILLINOIS (WITHOUT GIVING EFFECT TO CONFLICTS OF LAWS PROVISIONS
THEREOF); PROVIDED, THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING
UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE
OF ILLINOIS OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS AND BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE
BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE
JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS
IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE
OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER
HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT
OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE
BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS,
WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY ILLINOIS LAW.
10.16 Waiver of Jury Trial. THE COMPANY, THE BANKS AND THE AGENT EACH
WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN
DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION,
PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST
ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER
WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE
BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE
TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE
PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED
BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING
WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF
THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF.
THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR
MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
10.17 Entire Agreement. This Agreement, together with the other Loan
Documents, embodies the entire agreement and understanding among the Company,
the Banks and the Agent, and supersedes all prior or contemporaneous agreements
and understandings of such Persons, verbal or written, relating to the subject
matter hereof and thereof.
[signature pages to follow]
55
<PAGE> 62
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered in Chicago, Illinois by their proper and duly
authorized officers as of the day and year first above written.
S-1
<PAGE> 63
SAFECO CORPORATION
By:
------------------------------------
Title:
----------------------------------
By:
------------------------------------
Title:
----------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
By:
------------------------------------
Title:
----------------------------------
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as a Bank and
Swing Line Bank
By:
------------------------------------
Title:
----------------------------------
MELLON BANK, N.A.,
as Documentation Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
THE CHASE MANHATTAN BANK,
as Syndication Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
58
<PAGE> 64
Title:
THE BANK OF NEW YORK,
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
THE BANK OF TOKYO-MITSUBISHI, LTD.,
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
CITIBANK, N.A.
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
THE FIRST NATIONAL BANK OF CHICAGO,
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
FLEET NATIONAL BANK,
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
UNION BANK OF CALIFORNIA, N.A.
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
59
<PAGE> 65
U.S. BANK, N.A.
as a Co-Agent and as a Bank
By:
------------------------------------
Title:
----------------------------------
DEUTSCHE BANK AG
as a Lead Manager and as a Bank
By:
------------------------------------
Title:
----------------------------------
KEYBANK NATIONAL ASSOCIATION
as a Lead Manager and as a Bank
By:
------------------------------------
Title:
----------------------------------
WELLS FARGO BANK, N.A.
as a Lead Manager and as a Bank
By:
------------------------------------
Title:
----------------------------------
CIBC INC.
By:
------------------------------------
Title:
----------------------------------
60
<PAGE> 66
DRESDNER BANK AG, NEW YORK BRANCH
AND GRAND CAYMAN BRANCH
By:
------------------------------------
Title:
----------------------------------
By:
------------------------------------
Title:
----------------------------------
FIRST HAWAIIAN BANK
By:
------------------------------------
Title:
----------------------------------
THE FUJI BANK, LIMITED, SAN FRANCISCO
AGENCY
By:
------------------------------------
Title:
----------------------------------
MERCANTILE BANK NATIONAL ASSOCIATION
By:
------------------------------------
Title:
----------------------------------
NATIONAL CITY BANK OF INDIANA
By:
------------------------------------
Title:
----------------------------------
THE NORTHERN TRUST COMPANY
By:
------------------------------------
Title:
----------------------------------
61
<PAGE> 67
ROYAL BANK OF CANADA
By:
------------------------------------
Title:
----------------------------------
STATE STREET BANK AND TRUST COMPANY
By:
------------------------------------
Title:
----------------------------------
WACHOVIA BANK, N.A.
By:
------------------------------------
Title:
----------------------------------
<PAGE> 1
Exhibit 10.3
RETIREMENT AGREEMENT
This Retirement Agreement is entered into this 25th day of November,
1997 by and between Richard E. Zunker ("Zunker") and SAFECO Life Insurance
Company (the "Company"), and is intended as a full and complete agreement
regarding the terms and conditions of Zunker's retirement from the Company.
RECITALS
A. Zunker is employed as President of the Company.
B. This Agreement sets forth the complete understanding between Zunker and the
Company regarding the commitments and obligations arising out of Zunker's
retirement from employment.
AGREEMENT
1. Continued Employment.
1.1 Employment Transition Period. Under the terms and subject to the
conditions of this Agreement: Zunker's employment with the Company shall
continue through and including August 31, 1998; Zunker shall resign as President
of the Company effective February 7, 1998; and Zunker shall be named Vice
Chairman of the Company from February 7, 1998 through August 31, 1998. From the
effective date of this Agreement through August 31, 1998, Zunker shall assist in
the completion of those projects or activities deemed essential by the President
of SAFECO Corporation, shall provide support so that the transition to his
successor is completed smoothly and with a minimum of disruption, and shall be
available to complete other duties, including representing the Company or its
parent or affiliates in community and industry activities, as may from
time-to-time be assigned by the President of SAFECO Corporation.
1.2 Compensation. Zunker shall be compensated at his current annual
salary ($300,000 per year) and paid at the Company's normal bi-monthly pay dates
through August 31, 1998. Zunker shall be paid amounts due to him under
Restricted Stock Rights granted under the SAFECO Incentive Plan of 1987 ("RSRs")
when those RSRs are settled in February 1998. Zunker shall be paid such amount,
if any, determined to be due him under that Performance Stock Rights Award
Agreement dated May 7, 1997 ("PSR Award") after such a determination has been
made by the Compensation Committee of the Board of Directors of SAFECO
Corporation in February 1998.
1.3 Group Benefits Coverage. The Company shall continue to provide
coverage under any group benefits plan under which Zunker and/or Zunker's
dependents are covered on the date hereof, through and including August 31,
1998. Zunker shall be responsible to pay any amounts chargeable as "employee
premium contribution" amounts with respect to any such coverage. The Company
will deduct such normal employee premium contributions from Zunker's salary.
From and after August 31, 1998, the Company shall provide Zunker and/or
-1-
<PAGE> 2
Zunker's dependents with such benefits continuation or conversion coverage as
may be available or required under the terms of the Company's benefits plans or
policies, or as may be required under the group health plan provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as subsequently amended
(COBRA), or other applicable federal or state law.
1.4 Eligible for Other Group Benefits. Zunker shall be eligible as an
"employee" of the Company for group benefits under the Company's employee
benefit plans as follows: for 1997 Zunker shall be eligible to participate in
and shall receive pro rata contributions to the SAFECO Employees' Profit Sharing
Retirement Plan, Savings Plan, and Cash Balance Plan, and for a Profit Sharing
Bonus, all on the basis of Zunker's service through December 31, 1997; for 1998
Zunker shall be eligible to participate in and shall receive pro rata
contributions to the SAFECO Employees' Profit Sharing Retirement Plan, Savings
Plan, and Cash Balance Plan, and for a Profit Sharing Bonus, all on the basis of
Zunker's service through August 31, 1998. Zunker shall not receive an accrual
for vacation or sick leave benefits after August 31, 1998.
1.5 Payment for Sick Leave and Vacation Units. On or after August 31,
1998, the Company shall pay Zunker for any vested sick leave units and vacation
pay accrued but unused at August 31, 1998 (to the extent compensable under the
Company's normal vacation policies and procedures).
1.6 Reimbursement for Expenses Incurred. The Company shall reimburse
Zunker for reasonable and necessary business expenses incurred by him on or
before August 31, 1998, but not submitted for reimbursement at such August 31,
1998, to the extent reimbursable under the Company's normal expense
reimbursement policies and procedures and submitted for payment within 30 days
of August 31, 1998.
1.7 RSRs and Performance Stock Rights. Zunker acknowledges and agrees
that as a consequence of his retirement on August 31, 1998, any rights he may
have under any RSR granted or under the PSR Award will expire and he will not be
entitled to any payment under any RSR or the PSR Award after August 31, 1998.
1.8 Stock Options. Zunker acknowledges and agrees that as a consequence
of his retirement on August 31, 1998, and pursuant to the terms of each stock
option for SAFECO Corporation common stock ("Stock Option") that has been
granted to him under the SAFECO Incentive Plan of 1987, he will have through
November 30, 1998 to exercise each Stock Option and after that date he will lose
all rights under each Stock Option.
2. Payments. As compensation to Zunker, and in consideration of his resignation
as an employee and officer of the Company, the Company agrees to pay an amount
equal to $400,000 plus the product of 5,225 multiplied by the greater of $50.00
or the closing price of SAFECO Corporation common stock as reported on NASDAQ on
August 31, 1998 ("Total Payment"). The Total Payment shall be allocated and paid
as follows:
-2-
<PAGE> 3
2.1 Special Retirement Payment. A payment of $250,000 shall be
allocated as a special retirement payment. This payment shall be made on August
31, 1998. This payment shall be subject to withholding and deduction for payroll
taxes and other deductions as are required by federal and state law, and as set
forth in this Agreement.
2.2 Release Payment. A payment equal to the difference between the
Total Payment and $250,000 shall be allocated as consideration for Zunker's
release of claims as set forth in section 5 of this Agreement ("Release
Payment"). Zunker and the Company agree that this Release Payment does not
constitute wages and that the Company will not make normal payroll and wage
withholding from it. Zunker assumes full responsibility for tax liability
associated with the Release Payment. The Release Payment shall be made on
January 5, 1999 in the form of two checks, one payable to Zunker in the amount
of 72% of the Release Payment and the second payable to the Internal Revenue
Service on behalf of Zunker in the amount of 28% of the Release Payment.
3. Additional Consideration. As additional consideration to Zunker for the
release granted under Section 5 of this Agreement, the Company agrees to make
the following additional benefits or services available to Zunker:
3.1 SAFECO Stock Option Accelerated Vesting. The Company will recommend
to the Compensation Committee of the Board of Directors of SAFECO Corporation at
its December 15, 1997 meeting that, contingent upon the execution of this
Agreement, each outstanding Stock Option held by Zunker be amended to accelerate
the unvested portion of such Stock Option so as to vest the later of December
15, 1997 or the expiration of the 7-day revocation period described in Section
14.3 of this Agreement.
3.2 Other Services. From February 7, 1998, through August 31, 1998, the
Company shall provide Zunker with an office and secretarial support at the
Company's home office or such other location as Zunker and the Company may
agree.
4. Retirement.
4.1 Resignation. In consideration of the payments and other
compensation described above, Zunker tenders his resignation as President of the
Company and its affiliates effective February 7, 1998; tenders his resignation
as an employee effective August 31, 1998; and agrees to resign as an employee,
officer or director of each affiliate of the Company effective August 31, 1998.
4.2 No Authority To Act. From and after February 7, 1998, other than
with respect to those duties, responsibilities and activities described or
assigned to Zunker under Section 1.1 of this Agreement, Zunker shall have no
further authority to bind the Company to any contract or agreement or to act on
behalf of the Company.
-3-
<PAGE> 4
5. Release and Settlement.
5.1 Release Payment. For the purposes of this Agreement "Release
Payment" shall mean the payment by the Company of the amounts referenced in
Section 2.2 above.
5.2.1 Release. In consideration of the Company's delivery of the
Release Payment to Zunker under the terms of this Agreement, Zunker waives any
right to personal recovery and irrevocably, unconditionally and generally
releases the Company and its employees, agents, officers, directors and
shareholders, to the fullest extent permitted by law from all claims, demands,
actions or causes of action of any kind or nature whatsoever which Zunker may
now have or may ever have had against any of them, whether such claims are known
or unknown, and including but not limited to the Claims described in Section 5.3
below.
5.2.2 Subsequent Release. In further consideration of the Company's
agreement to employ Zunker in the capacities described in this Agreement through
August 31, 1998 and the Company's delivery of the Release Payment to Zunker
under the terms of this Agreement, Zunker agrees to execute and deliver to the
Company a release dated August 31, 1998 substantially similar to the release
described in Sections 5.2.1 and 5.3 of this Agreement.
5.3 The Claims.
5.3.1 Claims Generally. For the purposes of this Agreement, "Claims"
shall mean and include claims with respect to any of the following: (i) breach
of contract; (ii) discrimination, retaliation, or constructive or wrongful
discharge; (iii) lost wages, lost employee benefits, physical and personal
injury, stress, mental distress, or impaired reputation; (iv) claims arising
under the Age Discrimination in Employment Act ("ADEA"), Title VII of the Civil
Rights Act, the Equal Pay Act, the Americans with Disabilities Act, the Family
and Medical Leave Act, or any other federal, state or local laws or regulations
prohibiting employment discrimination; (v) attorneys' fees; and (vi) any other
claim arising from or relating to Zunker's employment with the Company and/or
the Zunker's retirement from the Company.
5.3.2. Age Discrimination Claims Waived. Zunker knowingly and
voluntarily specifically waives any rights or claims arising under the Age
Discrimination in Employment Act and more specifically any right or claim under
29 U.S.C. 626. Zunker specifically states and acknowledges that:
(i) This waiver is part of an Agreement written in a manner
calculated to be understood by Zunker.
(ii) Zunker does not waive rights or claims that may arise
after the date this Agreement is executed.
(iii) Zunker is receiving consideration in addition to
anything of value to which he already would have been entitled prior to
executing this Agreement; specifically, Zunker will receive the Release
Payment only if he waives the rights and claims in this
-4-
<PAGE> 5
Section 5 by signing this Agreement and not revoking it within the
seven-day period described in Section 14.3 below.
(iv) Zunker has been and is advised in writing to consult an
attorney before executing this Agreement.
(v) Zunker further acknowledges that he has been given a
period of at least 21 days within which to consider this Agreement.
5.4 Consideration for Release. The Company represents, and Zunker
acknowledges, that the Release Payment and the further consideration described
in Section 3 exceed any amount the Company may arguably be required to pay under
any agreement or arrangement to which Zunker is a party or under which Zunker
claims some benefit, or under the standard policies and procedures of the
Company, and represents valuable consideration to Zunker for the release of his
ADEA and other claims described above.
6. Confidentiality.
6.1 Confidential Information. Zunker recognizes that by virtue of his
employment by the Company, he has acquired certain non-public information with
respect to the Company, and its operations (the "Confidential Information").
Zunker recognizes and acknowledges that the Confidential Information constitutes
valuable, special and unique assets of the Company, access to and knowledge of
which were essential to the performance of his duties during his employment.
6.2 Non-Disclosure. Zunker agrees to hold the Confidential Information
in trust and confidence. Zunker agrees not directly or indirectly to (i) make
use of the Confidential Information, (ii) reveal any Confidential Information to
any other party, or (iii) divulge or use any Confidential Information for any
purpose other than for the benefit of the Company.
6.3 Materials. Unless the Company otherwise agrees in writing, Zunker
shall not remove from the Company's premises or possession any documents,
compilations of data or other files or records of any nature, or any copy or
reproduction thereof, ("Materials") that contain Confidential Information or
that belong to the Company. By August 31, 1998 Zunker shall return to the
Company any and all Materials and equipment of the Company in his possession.
7. No Admission. Zunker understands and acknowledges that neither the Release
Payment nor the execution and delivery of this Agreement by the Company
constitutes an admission by the Company to (i) any breach of an agreement with
Zunker (ii) any violation of a federal, state or local statute, regulation or
ordinance, or (iii) any other wrongdoing, but to the contrary represent a
negotiated compromise and agreement. This Agreement shall not in any way be
interpreted to render Zunker a "prevailing party" for any purpose, including,
but not limited to, as award of attorney's fees under any statute or otherwise.
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<PAGE> 6
8. Legal Action.
8.1 No Action on Released Claims. Zunker represents that he has not
filed any complaint or any claim against the Company with any local, state or
federal court or agency. Zunker agrees not to sue or pursue any court or
administrative action against the Company, or any of its employees, agents,
officers, directors or shareholder, regarding any claims released herein or
otherwise arising from his employment with or retirement from the Company,
except with respect to any breach by the Company of its obligations under this
Agreement. Zunker agrees that if any court or agency assumes jurisdiction of any
complaint or claim against the Company, or any of its employees, agents,
officers, directors or shareholder, which claim arose before the execution of
this Agreement, Zunker will immediately request such court or agency to dismiss
the matter and take all such additional steps necessary to facilitate such
dismissal with prejudice. As a further material inducement to the Company to
enter into this Agreement, Zunker covenants and agrees not to sue or join with
others in suing the Company on any of the released Claims.
8.2 Liability for Defense Costs. If, notwithstanding this Agreement,
Zunker should file any lawsuit or other proceeding based on legal claims that
Zunker has released herein, Zunker agrees that he will pay or reimburse the
Company for all reasonable costs which it, or its employees, agents, officers,
directors or shareholder incur in defending against Zunker's claims. This
Section 8.2 shall not apply to any claimed breach by the Company of any of the
terms or conditions of this Agreement.
9. Arbitration.
9.1 Notice and Selection of Arbitrator. The parties agree that any
dispute arising under this Agreement shall be submitted to arbitration in
Seattle, Washington, before a disinterested arbitrator. Arbitration shall be
commenced by service on the other party to the dispute by a written request for
arbitration, containing a brief description of the matter at issue and the names
and addresses of three arbitrators acceptable to the petitioner. The other party
shall within thirty (30) days following receipt of such notice either select one
of the proposed arbitrators or provide the names and addresses of three other
arbitrators acceptable to the proposing party. If the parties are unable to
select an arbitrator from those proposed, or, if they are unable to select a
third arbitrator, an arbitrator shall be chosen impartially by the American
Arbitration Association.
9.2 Rules of Proceeding. Arbitration proceedings shall be conducted
under the commercial rules then prevailing of the American Arbitration
Association. The arbitrator shall not be bound to any formal rules of evidence
or procedure, and may consider such matters as a reasonable business person
would take into account in decision-making.
9.3 Decision Final and Binding. The decision of the arbitrator shall be
final and binding on the parties, and may be entered and enforced in any court
of competent jurisdiction.
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<PAGE> 7
9.4 Expenses. Each party shall share equally the expenses of the
arbitrator and other arbitration expenses. Attorney fees, witness fees and other
expenses incurred by a party in preparing for the arbitration are not
"arbitration expenses" and shall be paid by the party incurring them.
10. Confidentiality.
10.1 Terms of Agreement. Zunker and the Company agree that neither of
them shall reveal or publicize the existence of this Agreement or its terms,
including but not limited to the amount of the payments described in Section 2
above, except under compulsion of law. Further, the parties agree that they
shall not discuss with or make to the public at large or to any individual
person or persons any statements with regard to this Agreement, or matters
relating to its terms. Notwithstanding the provisions of this Section 10.1,
Zunker after obtaining the agreement of the individual to abide by the
confidentiality terms of this Agreement may discuss the existence and terms of
this Agreement with Zunker's spouse, attorney, accountant and financial advisor
to the extent necessary to obtain counsel and advice therefrom. Notwithstanding
the provisions of this Section 10.1, the Company after obtaining the agreement
of the individual to abide by the confidentiality terms of this Agreement may
discuss the existence and terms of this Agreement with the Company's attorneys,
accountants and financial advisors to the extent necessary to obtain counsel and
advice therefrom and with those employees of the Company responsible for the
Company complying with the terms of this Agreement.
10.2 Announcement Concerning Retirement. Zunker and the Company shall
discuss and coordinate with respect to any public announcement, or any internal
or private announcement, concerning his retirement from the Company.
10.3 No Introduction In Evidence. Zunker and the Company agree that
neither of them shall attempt to introduce or permit any other party to attempt
to introduce this Agreement in evidence or rely on this Agreement in any legal
proceedings, except for proceedings alleging or arising our of and seeking
redress for a breach of the terms of this Agreement.
11. Costs. Each party shall bear its own costs and expenses incurred in
connection with the negotiation of this Agreement and the preparation of this
Agreement, including but not limited to attorneys' fees.
12. Post-Termination Availability. Zunker, due to the knowledge and information
he possesses gained as a result of his employment with the Company, agrees to be
available at reasonable times to cooperate, consult, advise and testify with
respect to current and future legal actions of any sort in which the Company is
a party. The Company may pay Zunker for the reasonable value of his time with
the express understanding that any such payment is not made for or as an
inducement to the substance of any testimony.
13. No Reliance. Zunker represents and acknowledges that he is not relying and
has not relied on any representation or statements made by the Company with
respect to any of the
-7-
<PAGE> 8
matters released or with regard to his rights or asserted rights. Zunker assumes
the risk of any mistake of fact with regard to any of the matters released or
with regard to any of the facts which are now unknown to him relating to such
matters.
14. Acknowledgment.
14.1 Informed Agreement. Zunker declares that he has read and fully
understands the terms of this Agreement, and its significance and consequence.
Zunker further declares that this Agreement is the product of good faith
negotiations between him and the Company, and that he voluntarily accepts the
same for the purpose of resolving arrangements with respect to his retirement
from the Company. Zunker understands and acknowledges that, except as
specifically reserved herein, in exchange for the Release Payment he is waiving
and giving up every possible claim arising out of his employment with the
Company and/or his retirement from the Company.
14.2 Attorney. Zunker acknowledges that the Company has advised him to
review the terms of this Agreement with an attorney.
14.3 Review and Revocation Periods. Zunker acknowledges that the
Company has given him at least 21 days during which to consider this Agreement
prior to signing, and understands that he has seven days after signing in which
he may revoke this Agreement. This Agreement shall not become effective or
enforceable until such seven-day period has expired. Zunker understands that he
may revoke this Agreement by delivering a written notice to the president of
SAFECO Corporation at SAFECO Plaza, Seattle, WA 98185 no later than the close of
business on the seventh day after Zunker's execution hereof. Zunker understands
and acknowledges that if he revokes this Agreement it shall not be effective or
enforceable and he will not receive the consideration described in Sections 2
and 3 above.
15. Entire Agreement. This is the entire agreement concerning its subject matter
between Zunker and the Company. Neither the Company nor any affiliate has made
any promises to Zunker other than those included within this Agreement.
16. Governing Law. The parties acknowledge that this Agreement shall be
interpreted under and enforced by and consistent with the laws of the State of
Washington.
-8-
<PAGE> 9
/s/ RICHARD E. ZUNKER
------------------------------------
Richard E. Zunker
STATE OF Washington)
COUNTY OF King)
Sworn to and subscribed before me this the ____ day of _____________,
1997.
----------------------------------------
Notary Public in and for the State of
Washington, residing
at
-------------------------------------
My commission expires:
-----------------
SAFECO LIFE INSURANCE COMPANY
By /s/ R. H. EIGSTI
-----------------------------------
R. H. Eigsti, Chairman
STATE OF Washington)
COUNTY OF King)
Sworn to and subscribed before me this the ________ day of ___________,
1997.
----------------------------------------
Notary Public in and for the State of
Washington, residing
at
-------------------------------------
My commission expires:
-----------------
<PAGE> 1
Exhibit 10.6
SAFECO CORPORATION
[INCENTIVE] STOCK OPTION CONTRACT
SAFECO Corporation ("SAFECO") grants to ("Optionee") an [incentive] stock option
to purchase xxxxx shares of SAFECO Common Stock subject to the SAFECO Long-Term
Incentive Plan of 1997 and the following terms and conditions.
1. TERM. This option contract is effective from the date stated below until
the earlier of (i) the close of business ten years from such date or (ii)
such other date as may apply pursuant to paragraph 5 of the Standard
Provisions relating to retirement, death or other termination of
employment and paragraph 8 regarding forfeiture.
2. PURCHASE PRICE. Optionee may purchase the shares covered by this option
contract at a price of $XXXX per share.
3. LIMITATIONS ON EXERCISE (VESTING). Except as otherwise provided in the
Standard Provisions, this option may be exercised (or, as stated herein,
shall "vest") as follows:
(i) On or after XXXX, up to but not exceeding xx% of the total
number of shares covered by this option;
(ii) On or after XXXX, up to but not exceeding XX% of the total
number of shares covered by this option;
(iii) On or after XXXX, up to but not exceeding XX% of the total
number of shares covered by this option;
(iv) On and after XXXX, up to the total number of shares covered by
this option.
4. STANDARD PROVISIONS. Each provision stated in the attached SAFECO
CORPORATION STANDARD PROVISIONS APPLICABLE TO STOCK OPTIONS ("Standard
Provisions") is incorporated by reference into this option contract.
DATED: _________________, ____
SAFECO CORPORATION OPTIONEE
By_____________________ _____________________
Chief Executive Officer
<PAGE> 2
SAFECO CORPORATION
STANDARD PROVISIONS APPLICABLE TO STOCK OPTIONS
GRANTED UNDER THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997
1. EXERCISE OF OPTIONS. As an option vests pursuant to paragraph 3 of the
option contract, Optionee may exercise up to the total number of shares
that have vested, subject to a minimum purchase of 10 shares at any one
time. Shares that have vested may be purchased at any time until the
option contract terminates. All unexercised rights will terminate upon the
expiration of the option contract term.
2. METHOD OF EXERCISE. To exercise an option, in whole or in part, the
Optionee shall deposit with the chief executive officer of SAFECO
Corporation ("SAFECO") a written notice identifying the option by date and
designating the number of shares as to which Optionee is exercising the
option, accompanied by payment in full for the number of shares being
purchased.
3. EXERCISE OF RIGHTS FOLLOWING CHANGE IN CONTROL. Notwithstanding the
limitations on exercise set forth in paragraph 3 of the option contract,
in the event there is a Change in Control of SAFECO (as defined in the
Plan), the option shall become exercisable in full immediately prior to
the Change in Control and may thereafter be exercised in whole or in part
at any time prior to the expiration of the stated term of the option.
4. TRANSFERABILITY. Options shall not be subject to execution, attachment or
similar process. Except as permitted by the Plan and the Compensation
Committee, options may not be assigned, pledged or transferred in any
manner, by operation of law or otherwise, except by will or by the laws of
descent and distribution, and during the lifetime of the Optionee, only
the Optionee or the Optionee's guardian may exercise an option.
5. TERMINATION OF EMPLOYMENT, RETIREMENT, DISABILITY AND DEATH
(a) In the event the Optionee ceases to be employed by any member of the
SAFECO family of companies, the option may be exercised, but only to
the extent exercisable on the date of termination of employment, at
any time within three months following such
termination of employment, except that:
(i) If the Optionee's termination of employment is on account of
Retirement, then the option, to the extent exercisable at the
date of termination of employment, may be exercised at any
time prior to the expiration of its stated term, but in no
event later than the fifth anniversary date of the Optionee's
termination of employment.
(ii) If the Optionee's termination of employment is on account
of a permanent and total disability within the meaning of
Section 22(e)(3) of the Internal Revenue Code, then the
option, to the extent exercisable at the date of termination
of employment, may be exercised at any time within one year
after the date of termination.
(iii) If the Optionee's termination of employment is caused by
the death of the Optionee, then the option may be exercised at
any time prior to the expiration of the term stated in the
option contract by the person(s) to whom the Optionee's rights
pass by will or by operation of law without regard to any
requirements related to continued employment or installment
vesting.
(iv) If the Optionee dies following termination of employment and
during the period in which the option is exercisable under
subparagraph (i) or (ii) of this paragraph 5, then, to the
extent the option was vested at the date of termination of
employment, the option may be exercised at any time prior to
the expiration of the term stated in the option contract by
the person(s) to whom the Optionee's rights pass by will or
by operation of law.
(b) Any portion of an option that is not exercisable on the date of
termination of the Optionee's employment shall terminate on such
date, unless the Committee determines otherwise.
(c) To the extent that the option is not exercised following termination
of employment within the time periods provided above, all further
rights to exercise the option shall terminate at the expiration of
the applicable period.
6. RIGHTS AS STOCKHOLDER. Neither the Optionee nor the Optionee's legal
representative, heir, legatee or distributee shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any
shares subject to an option, until after the stock is issued.
7. PROVISIONS OF THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997. The option is
subject to all of the provisions of the SAFECO Long-Term Incentive Plan of
1997 and, to the extent provided in such Plan, to all constructions,
interpretations, rules and regulations which may from time to time be
promulgated pursuant to or in connection with the Plan. Capitalized terms
not otherwise defined in these Standard Provisions shall have the meanings
assigned to them in the Plan.
8. FORFEITURE.
(a) If, at any time within (i) one year after the exercise of any
portion of the option or (ii) one year after termination of
employment, whichever is the later (the "Restricted Period"), the
Optionee engages in any activity harmful to SAFECO's interests or
which is in competition with any of SAFECO's operations, then the
Optionee's rights under the option shall terminate effective as of
the date on which the Optionee commences
<PAGE> 3
such activity (unless terminated sooner by operation of another term
or condition of the option), and any option gain realized by the
Optionee from exercising all or any portion of the option during the
Restricted Period shall be immediately payable to SAFECO.
(b) Such harmful or competitive activities include, without limitation,
(i) engaging in conduct related to the Optionee's employment for
which either criminal or civil penalties may be sought; (ii)
accepting employment with or serving as a consultant, advisor or in
any other capacity to any party which is in competition with any
member or members of the SAFECO family of companies in any of their
lines of business; (iii) disclosing or misusing any confidential
information concerning the SAFECO companies; and (iv) participating
in a hostile attempt to acquire control of SAFECO.
(c) SAFECO shall have the right to reduce payment of any amounts owed to
the Optionee (for wages, fringe benefits, unused vacation or any
other reason except as may be prohibited by law) to the extent of
any amounts owing to SAFECO by the Optionee under the foregoing
forfeiture provisions.
<PAGE> 1
Exhibit 10.7
RESTRICTED STOCK RIGHTS
AWARD AGREEMENT
Issued under the SAFECO Long-Term Incentive Plan of 1997
SAFECO Corporation ("SAFECO") hereby grants to ("Employee") the following
restricted stock rights pursuant to, and in accordance with the provisions of,
the SAFECO Long-Term Incentive Plan of 1997 (the "Plan").
1. SHARES SUBJECT TO RIGHTS. SAFECO shall issue to Employee the respective
number of shares of SAFECO common stock (the "Shares") listed in the following
schedule of dates (the "Target Dates") or, at Employee's request, make a payment
in U.S. dollars of an amount equal to the fair market value of the Shares
attributable to the respective Target Date (or any portion thereof) if, and only
if, Employee remains continuously employed by SAFECO or a SAFECO subsidiary, as
defined in the Plan, up to and including the respective Target Date.
SHARES TO BE ISSUED
TARGET DATE ON TARGET DATE
The first Wednesday in:
February 1999
February 2000
February 2001
February 2002
Total
2. TAX WITHHOLDING. As a condition to receiving the Shares attributable to a
Target Date or payment for such Shares, as the case may be, employee must tender
to SAFECO on the respective Target Date an amount sufficient to satisfy all
applicable federal, state and local tax withholding requirements ("Tax
Requirements"). Unless Employee pays SAFECO an amount equal to the Tax
Requirements on the Target Date, SAFECO shall pay the Tax Requirements and
either withhold the amount paid from Employee's next pay check or reduce the
number of Shares issued to Employee by the number of Shares which, on the Target
Date, has a fair market value equal to the Tax Requirements.
3. TERMINATION OF EMPLOYMENT. If Employee voluntarily or involuntarily ceases to
be an employee of SAFECO or a SAFECO subsidiary for any reason other than
Employee's death or disability, Employee shall have no rights to receive any
Shares attributable to Target Dates occurring after the date of termination of
employment. A leave of absence shall constitute a termination of employment
unless the Committee that administers the Plan determines otherwise. Nothing
herein shall be construed or interpreted to confer upon Employee any rights to
continued employment by SAFECO or a SAFECO subsidiary or to interfere in any way
with the right of SAFECO, in its sole discretion, to terminate Employee at any
time.
<PAGE> 2
4. DEATH OR DISABILITY. In the event Employee's employment by SAFECO or a SAFECO
subsidiary shall terminate by reason of Employee's death or disability (as
disability is defined in Section 22(e)(3) of the Internal Revenue Code of 1986,
as amended, or any successor Code provision), then as soon as practical
following the date of death or the date of determination of disability, SAFECO
shall issue to Employee or the personal representative of Employee's estate, as
the case may be, all of the unissued Shares covered by this Award or, in lieu
thereof, at the request of Employee or the personal representative, make a cash
payment equal to the fair market value of such Shares (or any portion thereof)
at the date of death or the date of determination of disability, as the case may
be. Such Shares shall be issued or payment made without regard to any employment
or other service requirement stated in this Award Agreement.
5. ADDITIONAL COMPENSATION PAYMENTS. So long as Employee remains in the
continuous employ of SAFECO or a SAFECO subsidiary, then, with respect to the
Shares that are to be issued on each Target Date hereunder, SAFECO shall pay to
Employee during the period commencing with the date hereof and ending on such
Target Date, as additional compensation, an amount of cash equal to the
dividends that would have been payable to Employee during such period if
Employee had owned such Shares. Such amounts shall be paid as near in time as
reasonably practical to the applicable dividend payment dates. Upon termination
of employment, Employee's right to receive dividend equivalents under this
paragraph shall immediately cease; provided; however, that if the termination of
employment was due to Employee's death or disability (as defined in paragraph 4
above) and occurred after an ex-dividend date but prior to payment of the
dividend, Employee or the personal representative of Employee's estate shall be
entitled to payment under this paragraph of an amount equivalent to such
dividend.
6. RIGHTS NOT TRANSFERABLE. The rights granted to Employee hereunder shall not
be subject to execution, attachment or similar process. Except to the extent the
Plan or the Compensation Committee may permit, the rights evidenced by this
Award Agreement may not be assigned, pledged or transferred in any manner, by
operation of law or otherwise, except by will or by the laws of descent and
distribution. During Employee's lifetime, only Employee or Employee's guardian
may exercise any right granted hereunder.
7. FORFEITURE.
(a) If, at any time within (i) one year after the issuance of Shares or
the cash settlement of rights granted by this Award or (ii) one year after
termination of employment, whichever is the later (the "Restricted
Period"), Employee engages in any activity harmful to SAFECO's interests
or which is in competition with any of SAFECO's operations, then
Employee's rights under this Award Agreement shall terminate effective as
of the date that Employee commences such activity (unless terminated
sooner by operation of another term or condition of this Award), and the
value on the issuance date of the Shares issued during the Restricted
Period (or the cash equivalent paid in lieu thereof) shall be immediately
payable to SAFECO.
2
<PAGE> 3
(b) Such harmful or competitive activities include, without limitation,
(i) engaging in conduct related to Employee's job responsibilities for
which either criminal or civil penalties may be sought; (ii) accepting
employment with or serving as a consultant, advisor or in any other
capacity to any party which is in competition with any member or members
of the SAFECO group of companies in any of their lines of business; (iii)
disclosing or misusing any confidential information concerning any of the
SAFECO companies; and (iv) participating in a hostile attempt to acquire
control of SAFECO.
(c) SAFECO shall have the right to reduce payment of any amounts owed to
Employee (for wages, fringe benefits, unused vacation or any other reason
except as may be prohibited by law) to the extent any amounts are owed to
SAFECO by Employee under the foregoing forfeiture provisions.
8. RIGHTS AS STOCKHOLDER. Neither Employee, nor Employee's personal
representative, heir, legatee or distributee, shall be deemed to be a holder of,
or to have any rights with respect to, any Shares subject to the rights granted
hereunder until such Shares are issued.
9. NO SEPARATE FUND. SAFECO has not set aside or segregated any assets or
established any separate account or fund to insure payment of its obligations
hereunder.
10. PROVISIONS OF THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997. This Award is
subject to all of the provisions of the SAFECO Long-Term Incentive Plan of 1997,
as it may be amended from time to time and, to the extent provided in the Plan,
to all constructions, interpretations, rules and guidelines which the
Compensation Committee may adopt from time to time pursuant to or in connection
with the Plan. Capitalized terms not otherwise defined in these Standard
Provisions shall have the meanings assigned to them in the Plan.
11. PLAN DOCUMENT. By signing in the space provided below to acknowledge
acceptance of this Award, Employee further acknowledges that Employee has
received a plan summary which includes the text of the Plan and has been
afforded an opportunity to ask any questions that he or she may have regarding
the Plan or the rights granted hereunder.
Dated this 4th day of February, 1998.
SAFECO CORPORATION
By:
------------------------------------
Roger H. Eigsti, Chairman and CEO
Accepted:
- - - ------------------------
Employee
Date:
- - - ------------------
3
<PAGE> 1
Exhibit 10.8
PERFORMANCE STOCK RIGHTS
AWARD AGREEMENT
ISSUED UNDER THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997
SAFECO CORPORATION ("SAFECO") grants to NAME OF INDIVIDUAL ("Employee") the
following performance stock rights pursuant to, and in accordance with the
provisions of, the SAFECO Long-Term Incentive Plan of 1997 (the "Plan").
1. SHARES SUBJECT TO RIGHTS. SAFECO shall issue to Employee up to a total of
[NUMBER OF SHARES] shares of SAFECO common stock (the "Award Shares"), or,
at the Employee's request, make a payment of an amount equal to the Fair
Market Value of the Award Shares (or any portion thereof) upon the
Employee's achievement of the stated Performance Goals for each of the
Performance Cycles covered by this Award Agreement.
2. PERFORMANCE CYCLES. The period covered by this Award Agreement is January
1, [FIRST YEAR] through December 31, [THIRD YEAR] (the "Award Period"),
within which each of the following periods shall constitute a Performance
Cycle:
January 1, [FIRST YEAR] through December 31, [FIRST YEAR]; January 1,
[FIRST YEAR] through December 31, [SECOND YEAR]; and January 1, [FIRST
YEAR] through December 31, [THIRD YEAR].
3. PERFORMANCE GOALS
STATE PERFORMANCE GOALS HERE
4. SHARES EARNED. Following the end of each Performance Cycle, the number of
Award Shares earned ("Earned Shares") shall be determined based on the
Average Combined Percentage Achieved for that Performance Cycle, computed
as follows:
a. The sum of the percentages achieved for each of the Percentage Goals
during the prior calendar year shall be divided by the number of
Performance Goals to yield the Combined Percentage Achieved for that
year.
b. The Average Combined Percentage Achieved for the Performance Cycle
shall be calculated by adding the Combined Percentages Achieved for
every year in the Performance Cycle and dividing that sum by the
number of years in the Performance Cycle.
<PAGE> 2
c. The Earned Shares with respect to any Performance Cycle shall equal
the Average Combined Percentage Achieved multiplied by the number of
shares set forth below, less any Award Shares previously issued
under this Award Agreement:
Performance Cycle Number of Shares
1/1/FIRST YEAR - 12/31/FIRST YEAR 1/3 Award Shares
1/1/FIRST YEAR - 12/31/SECOND YEAR 2/3 Award Shares
1/1/FIRST YEAR - 12/31/THIRD YEAR Total Award Shares
5. ACHIEVEMENT OF PERFORMANCE GOALS; PAYMENT OF SHARES EARNED. The
determination as to whether a Performance Goal has been met, its level
of achievement, the Combined Percentage Achieved, and the Average
Combined Percentage Achieved shall be made as soon as practical after
the end of each Performance Cycle by the Committee selected by the
SAFECO Board of Directors to administer the Plan (the "Committee").
Promptly following such determination (and in any event no later than
45 days following the end of a Performance Cycle), the Earned Shares
shall be settled by the issuance and delivery of unrestricted shares of
SAFECO common stock equal to the number of Earned Shares or, at
Employee's request, by a cash payment equal to the Fair Market Value of
those shares on the date settlement would otherwise have been made in
shares (the "Settlement Date") or by a combination of cash and shares.
6. ADJUSTMENT OF PERFORMANCE GOALS. The Committee may adjust the
Performance Goals in such manner as it deems equitable in recognition
of unusual or nonrecurring events affecting SAFECO, changes in
applicable tax laws or accounting principles, or such other factors as
the Committee may determine. If, however, an Employee is a person
covered by Section 162(m) of the Code and the adjustment of any
Performance Goal or other term of this Award Agreement would cause an
increase in the number of Award Shares to be issued with respect to a
Performance Cycle, then the Committee may not make such adjustment.
7. TAX WITHHOLDING. As a condition to settlement of the Earned Shares,
Employee must tender to SAFECO on or before the Settlement Date an
amount sufficient to satisfy all applicable federal, state and local
withholding tax requirements ("Tax Requirements"). Unless Employee
pays SAFECO an amount equal to the Tax Requirements by the Settlement
Date, SAFECO shall pay the Tax Requirements and either withhold the
amount paid from Employee's next paycheck or reduce the number of Award
Shares issued to Employee (or the cash equivalent paid to Employee) by
the number of Award Shares which, as of the Settlement Date, has a Fair
Market Value equal to the Tax Requirements.
8. TERMINATION OF EMPLOYMENT. If Employee ceases to be an employee of
either SAFECO or a subsidiary of SAFECO for any reason, then, except as
provided in the Plan with respect to a Change in Control or to the
extent the Committee may decide otherwise in select situations,
Employee shall lose all rights to receive any Award Shares or their
cash equivalent with respect to any unexpired Performance Cycles
covered by this Award
2
<PAGE> 3
Agreement (including the Performance Cycle in which Employee terminates
employment).
9. FORFEITURE. In the event Employee engages in any activity deemed by
the Committee to be in competition with SAFECO or otherwise contrary to
SAFECO's interests while employed by SAFECO or one of its subsidiaries,
or within one year following Employee's termination of employment, all
of Employee's rights under this Award Agreement shall be forfeited,
including the right to receive settlement of any Earned Shares. In
addition, in such event, Employee shall surrender to SAFECO any Award
Shares issued to Employee during the 12 months prior to termination of
employment, or if such Award Shares were settled in cash or Employee no
longer owns the Award Shares, Employee shall reimburse SAFECO for the
Fair Market Value of the Award Shares on the date they were settled.
Employee agrees that SAFECO shall have the right to offset any amounts
owing to Employee by SAFECO (e.g., including, without limitation,
salary, profit-sharing bonus, payment for accrued vacation and sick
leave) by any amount that Employee owes to SAFECO under this Section 9.
10. CONTINUATION OF EMPLOYMENT. Nothing in this Award Agreement shall be
construed or interpreted to confer upon Employee any right to continued
employment by SAFECO or a SAFECO subsidiary or to interfere in any way
with the right of SAFECO, in its sole discretion, to terminate Employee at
any time.
11. NO ADDITIONAL COMPENSATION PAYMENTS. No dividend equivalent payments shall
be made with respect to the Award Shares.
12. COORDINATION WITH OTHER BENEFIT PLANS. Settlements of Award Shares shall
not be taken into account in administering other employee benefit and
bonus programs for which Employee may be eligible (e.g., the SAFECO
Employees' Profit Sharing Retirement Plan, Cash Balance Plan or Savings
Plan and the profit-sharing cash bonus).
13. RIGHTS NOT TRANSFERABLE. The rights granted to Employee under this Award
Agreement shall not be transferable except by will or by the laws of
descent and distribution. During the Employee's lifetime, only Employee or
Employee's guardian may exercise such rights.
14. NO RIGHTS AS STOCKHOLDER. Neither Employee, nor Employee's personal
representative, heir, legatee or distributee, shall be deemed to be a
holder of, or to have any rights with respect to, any Award Shares until
the Award Shares are issued.
15. NO SEPARATE FUND. SAFECO has not segregated any assets or established any
separate account or fund to insure payment of its obligations under this
Award Agreement.
16. OTHER PLAN PROVISIONS. The rights granted under this Award Agreement are
subject to all of the provisions of the Plan, as it may be amended from
time to time, and, except as otherwise expressly provided, to all
constructions, interpretations, rules and regulations
3
<PAGE> 4
which may be adopted in connection with the Plan. Capitalized terms not
otherwise defined in this Award Agreement shall have the meanings assigned
to them in the Plan.
17. PLAN DOCUMENT. By signing below to acknowledge acceptance of the rights
granted under this Award Agreement, Employee acknowledges that Employee
has received a Plan Summary which includes the text of the Plan and has
been afforded an opportunity to ask any questions that Employee may have
regarding the Plan or the rights granted under this Award Agreement.
Dated this day of , 19 .
SAFECO: SAFECO CORPORATION
By:
--------------------------------------
Chief Executive Officer
EMPLOYEE: Accepted this ___ day of _____________, 19
------------------------------------------
NAME OF EMPLOYEE
<PAGE> 1
<TABLE>
<CAPTION>
Computation of Income Per Share F-13
SAFECO CORPORATION AND SUBSIDIARIES Exhibit 11
Year Ended December 31 1997 1996 1995
- - - ---------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE OF COMMON STOCK
1 Net Income $ 430.0 $ 439.0 $ 399.0
---------------------------------------
2 Average Number of Common
Shares Outstanding 129.2 126.1 126.0
---------------------------------------
3 Basic Net Income Per Share
of Common Stock (L.1 /L.2) $ 3.33 $ 3.48 $ 3.17
=======================================
DILUTED NET INCOME PER SHARE OF COMMON STOCK
1 Net Income $ 430.0 $ 439.0 $ 399.0
---------------------------------------
2 Average Number of Common
Shares Outstanding 129.2 126.1 126.0
3 Additional Common Shares Assumed
Issued Under Treasury Stock Method
(All due to employee stock options) 0.6 0.4 0.4
---------------------------------------
4 Diluted Average Number of Common
Shares Outstanding 129.8 126.5 126.4
---------------------------------------
5 Diluted Net Income Per Share
of Common Stock (L.1 /L.4) $ 3.31 $ 3.47 $ 3.16
=======================================
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
Computation of Ratio of Earnings to Fixed Charges F-14
Year Ended December 31 Exhibit 12
- - - ---------------------------------------------------------------------------------------------------------------------------------
(In Millions, Except Ratios)
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities)
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes and
Distributions on Capital Securities $572.6 $578.5 $513.8 $389.7 $576.9
Total Fixed Charges Below 109.3 76.3 89.7 75.1 63.6
Less Interest Capitalized (2.0) (0.1) (0.3) (0.8) (1.4)
Less Undistributed Loss
from Unconsolidated Subsidiary -- 0.9 1.0 0.2 0.6
----------------------------------------------------------------------
Total Earnings $679.9 $655.6 $604.2 $464.2 $639.7
----------------------------------------------------------------------
Fixed Charges:
Interest $101.8 $ 72.4 $ 85.4 $ 70.3 $ 58.8
Interest Capitalized 2.0 0.1 0.3 0.8 1.4
Interest Portion of Rental Expense 4.8 3.3 3.2 3.1 2.8
Amortization of Deferred Debt Expense 0.7 0.5 0.8 0.9 0.6
----------------------------------------------------------------------
Total Fixed Charges $109.3 $ 76.3 $ 89.7 $ 75.1 $ 63.6
----------------------------------------------------------------------
Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities 6.2 8.6 6.7 6.2 10.1
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities)
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes $549.8 $578.5 $513.8 $389.7 $576.9
Total Fixed Charges Below 132.1 76.3 89.7 75.1 63.6
Less Interest Capitalized (2.0) (0.1) (0.3) (0.8) (1.4)
Less Undistributed Loss
from Unconsolidated Subsidiary -- 0.9 1.0 0.2 0.6
----------------------------------------------------------------------
Total Earnings $679.9 $655.6 $604.2 $464.2 $639.7
----------------------------------------------------------------------
Fixed Charges:
Interest $101.8 $ 72.4 $ 85.4 $ 70.3 $ 58.8
Distributions on Capital Securities 22.8 -- -- -- --
Interest Capitalized 2.0 0.1 0.3 0.8 1.4
Interest Portion of Rental Expense 4.8 3.3 3.2 3.1 2.8
Amortization of Deferred Debt Expense 0.7 0.5 0.8 0.9 0.6
----------------------------------------------------------------------
Total Fixed Charges $132.1 $ 76.3 $ 89.7 $ 75.1 $ 63.6
----------------------------------------------------------------------
Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities 5.1 8.6 6.7 6.2 10.1
----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SAFECO CREDIT
1997 1996 1995 1994 1993
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes $ 21.5 $ 19.1 $ 13.3 $ 10.8 $ 10.2
Total Fixed Charges Below 56.4 47.5 41.9 30.7 26.0
----------------------------------------------------------------------
Total Earnings $ 77.9 $ 66.6 $ 55.2 $ 41.5 $ 36.2
----------------------------------------------------------------------
Fixed Charges:
Interest $ 56.3 $ 47.4 $ 41.8 $ 30.6 $ 25.9
Interest Portion of Rental Expense 0.1 0.1 0.1 0.1 0.1
----------------------------------------------------------------------
Total Fixed Charges $ 56.4 $ 47.5 $ 41.9 $ 30.7 $ 26.0
----------------------------------------------------------------------
Ratio of Earnings to Fixed Charges 1.4 1.4 1.3 1.4 1.4
----------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) The insurance subsidiaries engage in property and
casualty insurance, surety and life and health insurance, and generated
approximately 95% of SAFECO's total 1997 revenues. On October 1, 1997 SAFECO
acquired American States Financial Corporation ("American States"), an
Indianapolis, Indiana-based insurance holding company with 1996 revenues of $2.0
billion. SAFECO also acquired WM Life Insurance Company on December 31, 1997.
Both acquisitions were treated as purchases for accounting purposes. See Note 2
on page 59 for additional information.
SAFECO Credit Company provides loans and equipment financing and leasing to
commercial businesses including affiliated companies. SAFECO Asset Management
Company provides asset management services to the SAFECO family of mutual funds,
SAFECO Trust Company and outside managed accounts. Talbot Financial Corporation
provides insurance brokerage and financial services distribution operations. In
February 1998 SAFECO announced its decision to sell its real estate subsidiary,
SAFECO Properties Inc., to focus on its core insurance and financial services
businesses. SAFECO has retained an investment banker to assist in its sales
efforts. As the operations are not material to the consolidated financial
statements they have not been reclassified as discontinued operations.
CAPITAL RESOURCES AND LIQUIDITY
Sources and Uses of Funds
SAFECO's liquidity requirements are met primarily by funds generated from
operations, the sale and maturity of invested assets, bank borrowings and
issuances of commercial paper and other securities. The primary sources of cash
from operations are insurance premiums, funds received under deposit contracts,
dividends, interest, rental income and asset management fees.
SAFECO's primary uses of funds are to fund operations, service outstanding
debt, pay dividends to SAFECO shareholders, fund acquisitions and to expand the
investment portfolio. Cash from insurance operations is used primarily to pay
claims and claim adjustment expenses. Most insurance premiums are received
before or at the time premium revenues are recognized, while related claims are
incurred and paid in subsequent months or years. Catastrophe claims, the timing
and amount of which are inherently unpredictable, may create increased liquidity
requirements.
Total cash provided by operating activities for the years ended December 31,
1997, 1996 and 1995 was $710.9 million, $684.3 million and $702.1 million,
respectively (see Statement of Consolidated Cash Flows on page 48). The
increases in property and casualty insurance premiums received in 1997 and 1996
resulted from a combination of rate increases and higher numbers of policies in
force, as well as the acquisition of American States in 1997. The increases in
dividends and interest received in both 1997 and 1996 were due mainly to the
increasing invested asset base of the life and health insurance companies as
well as the acquisition of American States. Although property and casualty cash
flow from operations was positive in all three years, the high level of
catastrophe losses in 1996 and 1995, combined with the relatively low interest
rate environment and bond call activity has dampened the growth of investment
income. Property and casualty investment income is expected to grow modestly in
1998.
SAFECO CORPORATION 1997 ANNUAL REPORT
30
<PAGE> 2
Funds received under deposit contracts relate primarily to the annuity and
retirement services products of SAFECO's life and health subsidiaries. Of the
total of $12.0 billion in deposit contracts at December 31, 1997, approximately
43% are structured settlement immediate annuity products. These annuities have
average expected maturities of over 25 years and cannot be surrendered by
policyholders. Other annuity products, comprising approximately 19% of total
deposit contracts, generally have expected maturities of 5 to 12 years and
associated surrender charges graded from 5% in year one to zero in year six.
Other retirement services products, comprising approximately 24% of total
deposit contracts, have expected maturities of 5 to 15 years. Surrender charges
on these products are typically 9% in year one graded to zero in year nine, and
SAFECO Life retains the option to defer payouts over five years on approximately
one-quarter of these contracts. SAFECO Life's guaranteed investment contracts
(GICs) within its retirement services area comprise approximately 5% of total
deposit contracts. Universal life products comprise the remaining 9% of total
deposit contracts, and have expected maturities of 10 to 20 years with surrender
charges varying according to policy type.
The high level of proceeds from the maturity of fixed maturities in all three
years was due to the high number of calls of fixed maturities and prepayments of
mortgage-backed securities. These calls and prepayments were primarily due to
the declining interest rate environment. Proceeds from the sale of fixed
maturities available-for-sale and equities were higher in 1997 due in part to
the sale of approximately $600 million of securities by SAFECO's property and
casualty subsidiaries to raise funds for a portion of the purchase price of
American States. Changes in interest rates have also caused fluctuations in the
market value of fixed maturity investments. This has affected SAFECO's reported
book value (shareholders' equity) because the difference between market value
and amortized cost of fixed maturities classified as available-for-sale is
included in shareholders' equity, net of tax.
The credit and real estate subsidiaries have ongoing needs for outside
capital. SAFECO Credit Company's borrowings are short to medium-term and are
obtained primarily from the issuance of commercial paper and medium-term notes.
At December 31, 1997 SAFECO Credit had $44.9 million of medium-term notes
outstanding. These debt securities are guaranteed by SAFECO Corporation.
Including these medium-term notes, SAFECO Credit had unaffiliated borrowings at
December 31, 1997 totaling $892.0 million, of which $867.5 million was due
within one year. Almost all of this current portion is comprised of short-term
commercial paper borrowings. It is anticipated that the majority of these
commercial paper borrowings will be rolled over in 1998.
SAFECO Credit enters into interest rate swap agreements to reduce the impact
of changes in interest rates on its variable rate debt by converting variable
rate interest payments to fixed rates. The interest rate swap agreements provide
only for the exchange of interest on the notional amounts at the stated rates,
with no multipliers or leverage. At December 31, 1997, interest rate swap
agreements were outstanding with notional amounts of $359.4 million, replacing
variable rates with fixed rates with a weighted average of 6.1%. Maturities of
these agreements range from February 1998 to June 2007. At December 31, 1996,
interest rate swap agreements were outstanding with notional amounts of $249.0
million, replacing variable rates with fixed rates with a weighted average of
6.0%. The notional amount of interest rate swaps outstanding is higher in 1997
compared with 1996 because SAFECO Credit has increased its use of rate swaps to
correspond with the increase in variable rate debt.
The real estate subsidiaries (SAFECO Properties, Inc.) borrow from life
insurance companies, banks, savings and loan associations and other lenders. At
December 31, 1997, the real estate subsidiaries had notes and mortgages payable
to non-affiliates of $193.2 million, of which $80.8 million was due within one
year. It is anticipated that these obligations will be met through a combination
of rollovers and replacement borrowings. As noted above, in February 1998 SAFECO
announced its plan to sell SAFECO Properties, Inc.
To pay for its October 1, 1997, $2,824 million cash acquisition of American
States and the related $300 million debt repayment, SAFECO Corporation issued
commercial paper, senior notes, capital securities and common stock in 1997. In
late September 1997 SAFECO Corporation issued $1,482.0 million of commercial
paper. As of December 31, 1997, $812.8 million of this commercial paper remained
outstanding, with a weighted average interest rate of 5.9%. Maturing commercial
paper was paid off in part with proceeds from common stock issued. SAFECO
Corporation entered into two interest rate swap agreements in December 1997 to
fix the interest rates on a portion of the outstanding commercial paper. The
swaps are for notional amounts of $150.0 million each and replace variable rates
with fixed rates of 5.9%. The two swaps mature in December 2002 and December
2007, respectively.
SAFECO Corporation has two bank credit facilities available. The first is a
364-day revolving facility that totals $475.0 million and is available for
general corporate purposes, including support of SAFECO Credit's short-term
borrowings. The second totals $1,100.0 million and is a five-year facility
extending to 2002 that is available for general corporate purposes, including
the support of SAFECO Corporation commercial paper outstanding. It is
anticipated that the majority of the $812.8 million of commercial paper
SAFECO CORPORATION 1997 ANNUAL REPORT
31
<PAGE> 3
borrowings will be rolled over in 1998. Over the next six years, it is
anticipated that a substantial portion of this commercial paper will be retired
primarily from dividends from the property and casualty subsidiaries. In
addition, proceeds from the sale of SAFECO Properties may be used to retire a
like amount of debt.
On July 15, 1997 SAFECO Corporation issued $200.0 million of noncallable
10-year 6.875% senior notes. Also on July 15, 1997 SAFECO Corporation issued
$841.5 million (net of underwriting compensation) of 40-year 8.072% capital
securities through a subsidiary trust. These capital securities are callable by
SAFECO after 10 years at a price of 104%, with the call premium graded down to
zero after 20 years. See Note 10 on page 69 for more information on these
securities.
In the fourth quarter of 1997, in a secondary offering SAFECO issued 14.8
million shares of common stock at $47.50 per share, receiving net proceeds of
$678 million. The proceeds were used to pay off SAFECO Corporation commercial
paper debt maturing in 1997.
Ratings
The claims paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Higher ratings generally indicate greater financial
strength and a stronger ability to pay claims and are important in marketing
certain insurance products. Ratings focus on factors such as capital resources,
financial strength, demonstrated management expertise in the insurance business,
marketing, investment operations, minimum policyholders' surplus requirements
and capital sufficiency to meet projected growth, as well as access to such
traditional capital as may be necessary to continue to meet standards for
capital adequacy. Coincident with the acquisition of American States and the
related financings, A.M. Best, Moody's and Standard & Poor's issued revised
ratings for SAFECO's senior debt and for the insurance subsidiaries' financial
strength/claims paying ability. The revised ratings are lower due to the
financing related to the American States acquisition, yet remain strong,
reflecting SAFECO's ongoing profitability and solid balance sheet. Also rated
were SAFECO's capital securities and commercial paper.
The following table summarizes SAFECO's current ratings:
<TABLE>
<CAPTION>
A.M. DUFF & STANDARD
BEST PHELPS MOODY'S & POOR'S
- - - ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAFECO Corporation:
Senior Debt............................... -- -- A3 A+
Capital Securities........................ -- -- a3 A
Commercial Paper.......................... -- D-1 P-2 A-1
Financial Strength/Claims Paying Ability:
SAFECO Property and
Casualty Subsidiaries................... A+ -- A1 AA+
American States Property and
Casualty Subsidiaries................... A -- A1 AA+
SAFECO Life Subsidiaries.................. A+ AA A1 AA
</TABLE>
Regulatory Issues
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities which have or would have, if passed, a material effect on
its liquidity, capital resources or results of operations.
Those states in which SAFECO's insurance subsidiaries are domiciled or deemed
to be commercially domiciled limit the amount of dividend payments that can be
made by those subsidiaries without prior regulatory approval. Three of SAFECO's
insurance subsidiaries received approval in July 1997 to pay extraordinary
dividends totaling $600 million to fund a portion of the American States
purchase price. It is expected that these state limits will not restrict
SAFECO's insurance subsidiaries from paying dividends to SAFECO Corporation
(parent company) in amounts similar to those presently being paid and those paid
in the past, including SAFECO's property and casualty and life subsidiaries and
American States' property and casualty and life subsidiaries (exclusive of the
$600 million extraordinary dividends in 1997).
The National Association of Insurance Commissioners (NAIC) has adopted
risk-based capital (RBC) formulas for both life insurers and property and
casualty insurers. The formulas are used as an early warning tool by the NAIC
and state regulators to identify companies that are undercapitalized and which
merit further regulatory attention or the initiation of regulatory action.
SAFECO's life and property and casualty companies have more than sufficient
capital to meet the RBC requirements.
Similarly, the NAIC's proposed Model Investment Law, if adopted by certain
states in which SAFECO operates, should not significantly impact SAFECO, as its
assets are, and historically have been, conservatively invested.
The NAIC has undertaken a major project to codify statutory accounting
practices. While the impact of these proposals is currently being studied, the
effect on statutory surplus is not expected to be material.
SAFECO CORPORATION 1997 ANNUAL REPORT
32
<PAGE> 4
Year 2000
Some of SAFECO's older computer programs were written using two digits rather
than four to define the applicable year. As a result, those computer programs
have time sensitive software that recognize a date using "00" as the year 1900
rather than the year 2000. This is commonly called the "Year 2000 problem."
SAFECO has completed its assessment and has been modifying and replacing
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
compliance cost for SAFECO is estimated at approximately $6 million and as of
December 31, 1997 SAFECO has incurred and expensed approximately one-half of
that amount or $3 million. It is estimated that over 80% of existing SAFECO
systems are Year 2000 compliant at December 31, 1997. SAFECO's objective is to
have the rest of the systems including the most sophisticated applications Year
2000 compliant by the end of 1998. Based on its current progress and continuing
modifications, SAFECO believes that it will be Year 2000 compliant and that the
Year 2000 problem will not pose significant operational problems for its
computer systems.
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information sets forth the contributions
of each business segment to the consolidated net income of SAFECO Corporation.
The information should be read in conjunction with the related statements of
income on pages 51 through 55 of this report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions Except Per Share Amounts)
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty ................................... $ 260.2* $ 270.6 $ 256.4
Life and Health ......................................... 97.0 88.8 89.0
Real Estate ............................................. 6.2 8.4 5.9
Credit .................................................. 14.1 12.2 8.9
Asset Management ........................................ 4.9 5.1 4.7
Corporate ............................................... (16.3) (4.9) (7.5)
------------------------------------------
Total ................................................ 366.1 380.2 357.4
Realized Gain, Net of Income Taxes ......................... 78.7 58.8 41.6
------------------------------------------
Income Before Distributions on Capital Securities .......... 444.8 439.0 399.0
Distributions on Capital Securities, Net of Tax ............ (14.8) -- --
------------------------------------------
Net Income ................................................. $ 430.0 $ 439.0 $ 399.0
==========================================
Net Income Per Share of Common Stock:
Income Before Realized Gain ............................. $ 2.72* $ 3.02 $ 2.84
Realized Gain ........................................... .61 .46 .33
------------------------------------------
Net Income .............................................. $ 3.33 $ 3.48 $ 3.17
==========================================
</TABLE>
* Property and Casualty Net Income includes nonrecurring acquisition charges of
$60.0 ($39.0 after tax, $0.30 per share) related to SAFECO's October 1, 1997
acquisition of American States.
PROPERTY AND CASUALTY--OPERATIONS
Through independent agents, SAFECO's property and casualty subsidiaries write
personal, commercial and surety lines of insurance. Coverages include
automobile, homeowners, fire and allied lines, workers' compensation, commercial
multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in
nearly all states and the District of Columbia.
As described in more detail in Note 2 on page 59, SAFECO purchased American
States on October 1, 1997. The acquisition has been treated as a purchase for
accounting purposes, thus the revenue and profit amounts reported include
American States amounts from the October 1, 1997 acquisition date forward. In
the following discussion of operations, except where otherwise indicated, the
revenue and profit amounts exclude American States for comparability purposes.
SAFECO's strategy in purchasing American States includes broadening its
product mix available to the combined companies' agency plant, particularly in
introducing American States' small commercial lines products into existing
SAFECO agencies. The combination has added an estimated 4,000 agents to SAFECO's
agency force. The combination also geographically diversifies SAFECO's revenue
and earnings base and its catastrophe risk exposure by accelerating SAFECO's
growth east of the Rocky Mountains.
SAFECO CORPORATION 1997 ANNUAL REPORT
33
<PAGE> 5
Income from property and casualty operations in 1997 including American
States, before realized gains and income taxes totaled $292.2 million in 1997,
compared with $320.0 million in 1996 and $297.8 million in 1995. Excluding the
$60.0 million of nonrecurring 1997 acquisition charges, income for 1997 was
$352.2 million. The $60.0 million charge includes $40.0 million to strengthen
American States' loss reserves and $20.0 million for incentive payments to
agents.
Approximately 16% of SAFECO's property and casualty premiums are written in
California and approximately 34% of premiums are written in the three West Coast
states of California, Washington and Oregon (these percentages are based on
annualized American States premiums for 1997, to better reflect actual
geographic exposures). SAFECO's writing of new property business continues to be
restricted in California to reduce its exposure to large single-event
catastrophes (see discussion on page 35).
The following table summarizes SAFECO's underwriting gains (losses) for the
last three years:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
SAFECO
Personal auto .................. $ 41.5 $ 57.2 $ 87.4
Homeowners ..................... (7.4) (73.1) (54.2)
Other personal lines ........... 17.4 20.1 (30.9)
Commercial lines ............... (34.6) 6.6 (13.4)
Surety ......................... 11.6 26.9 22.3
Other .......................... 3.3 0.7 (4.9)
American States
(fourth quarter only) .......... 4.4 -- --
-------------------------------------------------
Total ..................... $ 36.2 $ 38.4 $ 6.3
=================================================
</TABLE>
Voluntary personal, commercial and surety lines (which exclude assigned risk,
FAIR plans, etc.) comprised approximately 62%, 35% and 3%, respectively, of the
1997 gross premiums written (these percentages are based on annualized American
States premiums for 1997, to better reflect actual product mix). Gross premiums
written growth of 5.6% in 1997 (excluding American States) was comprised of a
7.0% increase for personal, a 3.5% increase for commercial and a 5.4% decrease
for surety lines. Premiums written by American States are down 2% from the
fourth quarter a year ago. Gross premiums written growth of 4.1% in 1996 was
comprised of a 4.8% increase for personal, a 2.3% increase for commercial and an
increase of 3.1% for surety lines.
The 1997 growth in personal lines premiums resulted primarily from an
increase in policies in force and rate increases in the homeowners line. The
number of vehicles insured increased 8.0% in 1997, compared with increases of
5.3% in 1996 and 1.8% in 1995. The increases in 1997 and 1996 came primarily
from growth in targeted states east of the Rocky Mountains. Continued growth in
the number of vehicles insured is expected in 1998, particularly in target
states. The number of homes insured increased 4.7% in 1997, 2.4% in 1996 and
1.2% in 1995. This relatively modest growth rate was due to rate increases in
recent years and to the moratorium on the writing of new homeowners policies in
California (discussed on page 35).
Commercial lines premiums were affected in both 1997 and 1996 by increased
rate competition in workers' compensation, particularly in California due to
open rating and increased rate competition in commercial auto. The decrease in
surety premiums in 1997 was caused by increased rate competition in both the
commercial and contract lines.
Losses caused by catastrophes have had a significant impact on SAFECO's
results. Catastrophe losses for all lines, net of reinsurance, totaled $40
million, $104 million and $143 million in 1997, 1996 and 1995, respectively.
These losses related primarily to homeowners and other personal lines coverages
(which include earthquake coverages), discussed in more detail below.
Catastrophe losses in 1997 were relatively low compared to the last several
years, benefiting SAFECO's property coverages, particularly the homeowners line.
For 1996, catastrophe losses included approximately $35 million in losses from a
winter storm that hit the Puget Sound area in December. The January 1994 Los
Angeles earthquake was a significant factor in the 1995 (and 1994) catastrophe
losses. SAFECO's losses from the earthquake were $132 million, net of
reinsurance. Of this net amount, $90 million was reflected in 1994 results and
$42 million was reflected in 1995 results. The 1995 losses were due to
subsequent increases in the estimated cost of claims from the earthquake.
SAFECO's strategy to reduce the impact of future catastrophe losses includes
continuing to maintain a strong catastrophe reinsurance program (see discussion
on page 37) and reducing exposures by modifying coverages and obtaining higher
deductibles on earthquake coverages in some states. SAFECO has restricted the
writing of new property business in catastrophe-prone states and has implemented
spread-of-risk strategies in certain states such as Colorado, Texas and Florida
to help mitigate the effects of hail storm, wind storm and hurricane losses. In
addition, for the last several years SAFECO has invested in earthquake and wind
modeling technologies which allow it to better monitor exposures.
Voluntary personal auto produced pretax underwriting profits of $41.5
million, $57.2 million and $87.4 million for 1997, 1996 and 1995, respectively.
Average auto rates increased 2% in 1997, after a decrease of 1% in 1996 and an
increase of 3% in 1995. These rate changes reflect the increased competition in
this line, which is expected to continue in 1998. Average loss costs (which
include the severity or cost of settling claims and the frequency of accidents)
decreased by 4% in 1997 after increasing by 3% in 1996.
SAFECO CORPORATION 1997 ANNUAL REPORT
34
<PAGE> 6
The homeowners line produced pretax underwriting losses of $7.4 million,
$73.1 million and $54.2 million in 1997, 1996 and 1995, respectively. Losses due
to catastrophes have affected results for this line but were lower in 1997
compared to the past few years. Catastrophe losses for homeowners totaled $33
million, $69 million and $70 million for 1997, 1996 and 1995, respectively.
Average homeowners rates were increased 7%, 6% and 8% in 1997, 1996 and 1995,
respectively. Total homeowners premiums increased 9%, 7% and 9% in 1997, 1996
and 1995, respectively, due to rate increases, increases in the number of homes
insured and continuing efforts to increase homeowners insurance to value. Rate
increases and insurance-to-value efforts, combined with restricted writings,
higher deductibles and spread-of-risk strategies in catastrophe-prone areas are
all continuing to be pursued to improve future results in homeowners. A
continuing increase in premiums per policy is expected in 1998 as a result of
planned rate increases and the ongoing insurance-to-value effort. Excluding the
impact of catastrophes, these measures are expected to continue to improve
homeowners' results in 1998.
Other personal lines produced underwriting gains of $17.4 million in 1997,
$20.1 million in 1996 and a loss of $30.9 million in 1995. Coverages in these
lines include earthquake, dwelling fire, inland marine and boats. The loss in
1995 was due to the January 1994 Los Angeles earthquake. SAFECO suspended
writing new homeowners, dwelling fire and condominium policies in California in
July 1994 because California requires insurers to offer earthquake coverage in
connection with homeowners and other residential policies. SAFECO received
approval of a new earthquake mini-policy in California in September of 1996 and
began to convert existing homeowners policies to the more limited coverage
provided by the mini-policy as they reach renewal date. In April of 1997, SAFECO
began to reopen the California market for new homeowners and fire business in a
modest fashion in response to the reducing earthquake exposure resulting from
the new mini-policy. SAFECO also modified its earthquake policies in several
other states to increase the deductible. SAFECO believes federal legislation is
necessary to create a permanent, long-term solution for the losses that arise
from natural disasters such as earthquakes.
Commercial operations produced a pretax underwriting loss of $34.6 million in
1997, a gain of $6.6 million in 1996 and an underwriting loss of $13.4 million
in 1995. The loss in 1997 was primarily due to several unusually large losses in
the third quarter and increased price competition in workers' compensation.
After several years of improving profitability due to workers' compensation
reforms enacted, the benefits of these reforms have largely been realized and
underwriting results deteriorated significantly in 1997 as a result of
significant price competition. Continuing price competition in workers'
compensation is expected to continue into 1998. The underwriting gain in 1996
was due mainly to improved results in the commercial auto line compared with
1995 and to the run-off of loss reserves related to certain discontinued
commercial liability coverages. This improvement was partly offset by $16
million of commercial losses caused by the December 1996 Puget Sound storm.
Overall, the commercial lines combined ratio was 105.7, 98.8 and 102.4 for 1997,
1996 and 1995, respectively. The combined ratios for all three years compare
favorably with the industry and are a result of continued disciplined risk
selection, relatively limited impact of weather-related losses on SAFECO's
commercial property risks and concentration of commercial writings in states
with the most favorable legal and regulatory climates.
The surety line produced pretax underwriting profits of $11.6 million, $26.9
million and $22.3 million for 1997, 1996 and 1995, respectively. The decline in
1997 was due mainly to two large contract bond losses in the fourth quarter.
Other insurance product lines (primarily assigned risk and FAIR plans)
produced underwriting gains of $3.3 million in 1997 and $0.7 million in 1996
compared with a loss of $4.9 million in 1995. The improvements in 1997 and 1996
were due to reduced losses in personal assigned risk business and to the
continued depopulation of these plans in many states.
American States' underwriting profit for all lines of $4.4 million in the
fourth quarter of 1997 was due mainly to favorable weather experience.
SAFECO sold its Canadian property and casualty operations in 1991 with no
significant gain or loss resulting from the transaction. Canadian underwriting
profits were $0.6 million, $4.5 million and $6.7 million for 1997, 1996 and
1995, respectively, and resulted from reductions in the estimated cost of
settling prior years' claims. Under the sales agreement SAFECO retained the
liabilities for losses incurred prior to April 1, 1991. Canadian assets were $81
million and $86 million at December 31, 1997 and 1996, respectively.
SAFECO CORPORATION 1997 ANNUAL REPORT
35
<PAGE> 7
PROPERTY AND CASUALTY OPERATING STATISTICS
<TABLE>
<CAPTION>
1997* 1996 1995
- - - --------------------------------------------------------------------------------------------------------------------------------
PERCENTAGE
PERCENTAGE INCREASE PERCENTAGE
INCREASE (DECREASE) INCREASE
OVER PRIOR OVER PRIOR OVER PRIOR
YEAR YEAR YEAR
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In Millions)
Gross Premiums Written ........................... $ 2,987.4 21.3% $ 2,463.5 4.1% $ 2,366.9 3.9%
---------- ---------- ----------
Net Premiums Written ............................. $ 2,828.2 22.3 $ 2,313.1 4.8 $ 2,207.0 4.9
---------- ---------- ----------
Earned Premiums .................................. $ 2,816.6 23.8 $ 2,275.4 5.2 $ 2,162.1 5.3
---------- ---------- ----------
Underwriting Profit .............................. $ 36.2 $ 38.4 $ 6.3
Nonrecurring 1997 Acquisition Charges ............ (60.0) -- --
Net Investment Income ............................ 327.0 16.1 281.6 (3.4) 291.5 2.8
Goodwill Amortization ............................ (11.0) -- --
---------- ---------- ----------
Income Before Realized Gain and Income Taxes ..... $ 292.2 $ 320.0 $ 297.8
========== ========== ==========
</TABLE>
* 1997 amounts include American States from the October 1, 1997 acquisition date
forward.
<TABLE>
<CAPTION>
1997* 1996 1995
- - - ------------------------------------------------------------------------------
OPERATING RATIOS AS A
PERCENTAGE OF EARNED PREMIUMS
- - - ------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss Ratio ........................ 58.40% 59.09% 60.04%
Adjustment Expense Ratio .......... 11.18 10.37 10.58
Expense Ratio ..................... 28.47 28.14 28.39
Dividends to Policyholders ........ .66 .71 .70
--------------------------------------
Combined Ratio ................. 98.71% 98.31% 99.71%
======================================
</TABLE>
* Ratios exclude goodwill amortization and nonrecurring 1997 acquisition
charges.
PROPERTY AND CASUALTY--LOSS RESERVES
The liability (reserves) for losses and loss adjustment expense ("LAE") for
the property and casualty companies was $4,310.5 million at December 31, 1997,
compared to $2,059.1 million at December 31, 1996. The increase in this
liability at December 31, 1997 compared with December 31, 1996 was due to the
acquisition of American States. The liability is presented net of amounts
recoverable from salvage and subrogation recoveries (see Note 1 on page 57) and
gross of amounts recoverable from reinsurance (see Note 6 on page 66). The
amount of reinsurance recoverables related to the above gross liabilities was
$228.6 million at December 31, 1997 and $103.4 million at December 31, 1996.
This increase is also due to the acquisition of American States.
Reserves for losses that have been reported to SAFECO and certain legal
expenses are established on the "case basis" method. Claims incurred but not
reported (IBNR) and other adjustment expense are estimated using statistical
procedures. Salvage and subrogation recoveries are accrued using the "case
basis" method for large claims and statistical procedures for smaller claims.
SAFECO's objective is to set reserves which are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. SAFECO's reserves aggregate its best
estimates of the total ultimate cost of claims that have been incurred but have
not yet been paid. The estimates are based on past claims experience and
consider current claim trends as well as social, legal and economic conditions,
including inflation. The reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular basis to determine
that the reserving assumptions and methods are appropriate. Reserves initially
determined are compared to the amounts ultimately paid. A statistical estimate
of the projected amounts necessary to settle outstanding claims is made
regularly and compared to the recorded reserves and adjusted as necessary; such
adjustments are included in current operations.
Analysis indicates that SAFECO's reserves are adequate and probably slightly
redundant at December 31, 1997, 1996 and 1995. Operations were charged for an
increase in estimated loss and LAE for claims occurring in prior years of $30.5
million in 1997. The 1997 charge includes a nonrecurring $40.0 million reserve
increase related to the American States acquisition. This reserve increase
relates to American States' previously discontinued assumed reinsurance
operations. Excluding this nonrecurring charge, the 1997 loss and LAE
development on claims occurring in
SAFECO CORPORATION 1997 ANNUAL REPORT
36
<PAGE> 8
prior years benefited operations $9.5 million. Operations were credited $77.7
million and $59.7 million in 1996 and 1995, respectively, as a result of a
reduction in the estimated amounts needed to settle prior years' claims.
Environmental and Asbestos Claims
The property and casualty companies' reserves for losses and LAE for
liability coverages related to environmental, asbestos and other toxic claims
totaled $346.9 million at December 31, 1997 compared with $102.8 million at
December 31, 1996. The increase in 1997 is due to the acquisition of American
States. These amounts are before the effect of reinsurance, which is not
material. These reserves are approximately 8% of total property and casualty
reserves for losses and LAE at December 31, 1997 and approximately 5% at
December 31, 1996. The reserves include estimates for both reported and IBNR
losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance subsidiaries'
environmental, asbestos and other toxic claims result from the commercial
general liability line of business and the discontinued assumed reinsurance
operations of American States. A few of these losses occur in other coverages
such as umbrella, small commercial package policies and personal lines.
The following table presents the loss reserve activity analysis for liability
coverages related to environmental, asbestos and other toxic claims.*
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------
<S> <C> <C> <C>
(In Millions)
Reserves at Beginning
of Year $ 102.8 $ 107.5 $ 108.2
American States Reserves
at Acquisition 264.4 -- --
Incurred Losses and LAE (9.9) 4.6 9.3
Losses and LAE
Payments (10.4) (9.3) (10.0)
------------------------------------------
Reserves at End of Year $ 346.9 $ 102.8 $ 107.5
==========================================
</TABLE>
* Amounts are before the effect of reinsurance, which is not material.
Although estimation of environmental claims is difficult, the reserves
established for these claims at December 31, 1997 are believed to be adequate
based on the known facts and current law. SAFECO has generally avoided writing
coverages for larger companies with substantial exposure in these areas. In view
of changes in environmental regulations and evolving case law which affect the
development of loss reserves, the process of estimating loss reserves for
environmental, asbestos and other toxic claims results in imprecise estimates.
Quantitative techniques have to be supplemented by subjective considerations and
managerial judgment. Because of these conditions, trends that have affected
development of these liabilities in the past may not necessarily occur in the
future.
Construction Defect Claims
Prior to its acquisition by SAFECO, American States had experienced adverse
loss development on construction defect claims. Construction defect claims are a
subset of claims that arise from coverage provided by general property damage
liability insurance. They are defined as those claims involving allegations of
defective work which result in claims for damages related to the diminution of
value of large construction projects, such as condominiums, office buildings,
shopping centers and housing developments. SAFECO has not historically separated
these claims for the purpose of reserve analysis. American States' reserves for
construction defect claims totaled $340.3 million at December 31, 1997. The
reserves established for these claims at December 31, 1997 are believed to be
adequate.
Reinsurance
SAFECO's property and casualty companies use treaty and facultative
reinsurance to help manage exposure to loss. As noted above, the liability for
unpaid losses and adjustment expense is reported gross of reinsurance
recoverables of $228.6 million at December 31, 1997 and $103.4 million at
December 31, 1996. The availability and cost of reinsurance are subject to
prevailing market conditions, both in terms of price and available capacity.
Although the reinsurer is liable to SAFECO to the extent of the reinsurance
ceded, SAFECO remains primarily liable to the policyholder as the direct insurer
on all risks insured. To SAFECO's knowledge none of its reinsurers is
experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 1998 covers 90% of $400
million of single-event losses in excess of a $100 million retention. In a large
catastrophe, SAFECO would, therefore, retain the first $100 million of losses,
10% of the next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than California
SAFECO has a supplemental earthquake-only reinsurance contract for 1998 that
would cover 90% of $350 million of single-event earthquake losses in excess of
$500 million. Both of these 1998 catastrophe property reinsurance contracts
include provisions for one reinstatement for a second catastrophe event in 1998
at current rates. The aggregate coverage limit is higher for 1998 than in prior
years due to the inclusion of American States in SAFECO's catastrophe profile.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use "funding covers" and does not participate in any surplus relief
transactions. Additional information on reinsurance can be found in Note 6 on
page 66.
SAFECO CORPORATION 1997 ANNUAL REPORT
37
<PAGE> 9
LIFE AND HEALTH
The life and health companies offer individual and group insurance products,
retirement services (pension) and annuity products. These products are marketed
through professional agents in all states and the District of Columbia. The most
significant product lines in terms of premium/deposit volume include: single
premium immediate and deferred annuities, tax-sheltered annuities for the
education and nonprofit entities market, corporate retirement plans and excess
loss group medical insurance.
SAFECO acquired American States Life on October 1, 1997, and WM Life
Insurance Company on December 31, 1997. Both acquisitions have been treated as
purchases for accounting purposes. American States' results for the fourth
quarter of 1997 are included in the total income amounts of SAFECO Life.
However, for analytical purposes the product line details presented below
exclude American States unless otherwise indicated.
Earnings before investment transactions and income taxes ("pretax income")
for all lines combined, and including American States, were $147.9 million in
1997, compared with $136.7 million in 1996 and $135.6 million in 1995.
The following table summarizes the pretax income amounts of the life and
health companies' major product lines, and American States' pretax income for
the fourth quarter:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ---------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Annuities $ 23.6 $ 27.7 $ 31.3
Retirement Services 28.8 23.9 27.3
Group 12.3 12.6 13.3
Individual 2.4 4.2 (1.3)
American States 5.5 -- --
Corporate and Other 75.3 68.3 65.0
----------------------------------------
Pretax Income $ 147.9 $ 136.7 $ 135.6
========================================
</TABLE>
The annuity operations produced pretax income of $23.6 million, $27.7 million
and $31.3 million in 1997, 1996 and 1995, respectively. Approximately 77% ($5.1
billion at December 31, 1997) of annuity assets relate to single premium
immediate annuities (SPIAs). These are sold to fund third-party personal injury
settlements and are nonsurrenderable contracts. The invested assets supporting
these annuities are primarily long-maturity bonds. New SPIA deposits were $507
million in 1997 compared with $460 million in 1996 and $488 million in 1995.
SPIA pretax income was $25.5 million, $23.0 million and $24.9 million in 1997,
1996 and 1995, respectively. The remaining 23% of annuity assets are deferred
annuities. These are fixed rate and variable annuities marketed through
financial institutions by SAFECO's subsidiary, Talbot Financial Corporation.
Deferred annuity deposits were $80 million in 1997, $164 million in 1996 and
$188 million in 1995. Nearly all of these amounts relate to fixed rate
annuities. Lower interest rates and competition from equity-linked products were
the main reasons for the decline in deposit volume in 1997. SAFECO Life
introduced a new equity-indexed annuity early in 1997 to complement its fixed
return products. Deposit volume for the new product totaled $243 million in
1997, but because of start-up costs and higher than anticipated option costs (to
hedge the equity return promised), this product produced a loss in 1997. This is
the main reason for the decline in total annuity pretax income in 1997 compared
to 1996. Expected higher deposit volumes for the equity-indexed annuity and
adjustments made to the pricing structure are expected to benefit this product's
profitability. Total annuity assets amounted to $6.6 billion at December 31,
1997 compared with $5.9 billion at December 31, 1996 and $5.4 billion at
December 31, 1995.
On September 3, 1997 SAFECO announced a strategic alliance to distribute
SAFECO Life annuities through Washington Mutual Inc.'s multi-state banking
network and the acquisition of Washington Mutual's insurance subsidiary, WM Life
Insurance Company. This $140 million cash acquisition was funded from internal
sources and closed on December 31, 1997. This acquisition is expected to
significantly strengthen SAFECO's bank distribution of annuities.
SAFECO's retirement services operations produced pre-tax income of $28.8
million, $23.9 million and $27.3 million in 1997, 1996 and 1995, respectively.
Retirement services' profits in all three years have benefited from improved
investment performance and a larger asset base. The improvement in 1997 was
caused primarily by increased profitability of variable return products.
Retirement services products are primarily tax-sheltered annuities which are
marketed to teachers and employees of hospitals and charitable organizations,
IRAs and corporate retirement funds. SAFECO Life has protection against early
policy surrenders or withdrawals of most of these products in the form of
surrender charges during the initial years of each policy or the option to defer
payouts over 20 quarters. Retirement services had $4.2 billion of assets on
deposit at December 31, 1997 compared with $3.8 billion at December 31, 1996 and
$3.5 billion at December 31, 1995. New retirement services deposit growth has
slowed in recent years as lower interest rates have hampered sales of fixed
return products. However, deposits from variable return products are growing and
SAFECO Life continues to successfully focus its efforts on these types of
products.
SAFECO CORPORATION 1997 ANNUAL REPORT
38
<PAGE> 10
SAFECO's group life and health operations contributed $12.3 million in 1997
pretax income, compared with income of $12.6 million in 1996 and $13.3 million
in 1995. The strategic focus of the group operation is excess loss medical
insurance, sold to self-insured employers for their employee medical plans.
Excess loss medical accounted for $7.5 million, $12.4 million and $14.3 million
of income in 1997, 1996 and 1995, respectively. Total medical profit, which
includes some small-case, fully insured business, declined in both 1997 and
1996. Total group premiums decreased 2% during 1997, compared with decreases of
1% in 1996 and 8% in 1995. The decline in premium in the past three years was
due primarily to greater competition in the excess loss market. Because of the
competition over the last few years, SAFECO Life avoided writing business at
unrealistic rates and, as a result, experienced some loss of in-force medical
business.
In addition to the competitive conditions noted above, the results of the
group operations were affected by adverse medical claims experience in both 1997
and 1996. Group life results improved in 1997 compared to 1996. In 1996 SAFECO
Life began reinsuring 100% of its long-term disability business, which should
benefit future earnings.
The individual life operations of SAFECO produced a pretax gain of $2.4
million in 1997, a gain of $4.2 million in 1996 and a loss of $1.3 million in
1995. Results in 1997 and 1995 were impacted by increased death claims. Profits
from a new bank-owned life insurance program have benefited results in 1997 and
1996.
American States Life produced a pretax gain of $5.5 million for the fourth
quarter of 1997. Approximately half of this gain resulted from universal life
products and the other half from the traditional line of permanent and term
products.
The corporate and other line is primarily comprised of investment income
resulting from the investment of capital and prior years' earnings of the
operating lines of business. It is a major component of SAFECO's life and health
earnings, contributing pretax income of $75.3 million in 1997, $68.3 million in
1996 and $65.0 million in 1995.
SAFECO's life insurance subsidiaries have not participated as a ceding
company in any assumptive reinsurance transactions. See Note 6 on page 66 for
additional information regarding reinsurance.
REAL ESTATE
SAFECO Properties, Inc. invests in and manages real estate properties,
primarily retail centers, and invests in medical real estate, primarily skilled
nursing facilities. In February 1998 SAFECO announced its decision to sell
SAFECO Properties, Inc., to focus on its core insurance and financial services
businesses. SAFECO has retained an investment banker to assist in its sales
efforts. As the operations are not material to the consolidated financial
statements they have not been reclassified as discontinued operations.
The real estate subsidiaries produced pretax income before investment
transactions ("pretax income") of $9.6 million, $13.0 million and $9.1 million
in 1997, 1996 and 1995, respectively. These pretax income amounts include gains
from the sale of properties held for sale of $1.1 million, $2.7 million and
$1.9 million in 1997, 1996 and 1995, respectively. The pretax income amounts
(excluding these gains) in 1997 and 1996 were positively impacted by improved
operating results on shopping center properties.
In addition to the pretax income amounts above, the real estate subsidiaries
realized pretax investment losses of $28.3 million, $2.6 million and $0.8
million in 1997, 1996 and 1995, respectively. The 1997 realized investment loss
was due to the sale of a property in Palm Desert, California. The property was
under development for several years but SAFECO decided in mid-1997 that the
property no longer fit its long-term investment criteria. The 1996 realized
investment loss was the result of a $20 million loss reserve related to SAFECO
Properties' guarantee of outstanding debt financing for a not-for-profit
hospital, offset by a $17.4 million gain on the sale of a shopping center. The
debt guarantee was discharged in 1997.
At December 31, 1997, investment real estate held by SAFECO Properties
totaled $587 million, approximately 3% of SAFECO's consolidated investments.
Major retail shopping centers (including land held for development), office and
industrial space and healthcare facilities comprised approximately 90% of the
total. Approximately 75% of total holdings are located in the states of
Washington and Oregon. Rental properties included in investment real estate are
detailed in Note 15 on page 72.
CREDIT
SAFECO Credit Company, Inc. provides loans and equipment financing and
leasing to commercial businesses, including affiliated companies. Credit
operations produced pretax income of $21.5 million in 1997, compared with $19.1
million in 1996 and $13.3 million in 1995. Loan and lease receivables from
non-affiliates grew 22% in 1997 and 14% in 1996. Continued growth in receivables
is expected although the strong growth rate of 1997 may be difficult to achieve
in 1998. The strong earnings in all three years are primarily attributable to
the continuing increase in loan and lease production, combined with favorable
collection experience and low delinquencies.
SAFECO CORPORATION 1997 ANNUAL REPORT
39
<PAGE> 11
Approximately 70% of non-affiliate loan and lease receivables outstanding at
December 31, 1997 are from commercial businesses involved in heavy construction,
transportation and manufacturing. Most of these businesses are located in the
West Coast and Rocky Mountain regions of the United States. Loans and leases are
fully secured by liens on the collateral financed. At December 31, 1997, 13% of
total outstanding loans and leases of SAFECO Credit consisted of loans to
affiliated SAFECO companies.
ASSET MANAGEMENT
SAFECO Asset Management Company is the investment advisor for the SAFECO
mutual funds, variable annuity portfolios and a growing number of outside
pension and trust accounts. These investment management activities produced
pretax income of $7.5 million in 1997, $7.6 million in 1996 and $6.9 million in
1995. Assets under management continue to grow and totaled $5.2 billion at
December 31, 1997, an increase of 53% compared with 1996. Sales were driven by
efforts to increase the number of channels through which products are sold and
excellent mutual fund performance. Continued growth in assets under management
from existing funds, new funds and from new pension accounts is expected.
INVESTMENT SUMMARY
SAFECO's consolidated pretax investment income increased to $1,244.7 million
during 1997 from $1,116.7 million in 1996 and $1,075.3 million in 1995.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life and health insurance
subsidiaries. Excluding American States, consolidated pretax investment income
was $1,185.7 million in 1997.
The property and casualty companies' pretax investment income was $327.0
million in 1997 ($275.7 million excluding American States), $281.6 million in
1996 and $291.5 million in 1995, representing decreases of 2% in 1997 (excluding
American States), 3% in 1996 and an increase of 3% in 1995. Although property
and casualty cash flow was positive in all three years, the high level of
catastrophe losses in 1996 and 1995, combined with the relatively low interest
rate environment and bond call activity has dampened the growth of investment
income. The sale of approximately $600 million of securities in 1997 to raise
funds for a portion of the American States acquisition reduced the investment
base and consequently investment income in 1997. The decline in 1996 investment
income was particularly affected by reduced cash flow in the first part of the
year caused by catastrophe and weather-related claim payments. Growth in
investment income in 1998 is expected to be slowed by the lower interest rate
environment. American States investment income will be impacted by the
amortization of premium resulting from recording the investment portfolio at
market value on October 1, 1997 under purchase accounting.
The life and health companies' pretax investment income was $916.3 million in
1997, $836.7 million in 1996 and $778.2 million in 1995. The growth in all years
was due primarily to the increasing amount of retirement services and annuity
assets under management.
Consolidated pretax realized gains from security investments totaled $147.7
million in 1997, compared with $92.7 million in 1996 and $65.1 million in 1995.
The 1997 amount includes approximately $78 million of gains due to the property
and casualty companies' sales of securities to raise funds for a portion of the
purchase price of American States, as discussed above. The relatively high level
of gains in all three years is due to falling interest rates which produced
calls, redemptions and mortgage pay-downs on debt securities and to the strong
stock market. Consolidated realized gains from security investments are recorded
net of losses on the sale or writedown of investments. Each investment that has
declined in market value below cost is monitored closely. If the decline is
judged to be other than temporary the security is written down to fair value.
The amounts of such writedowns in 1997, 1996 and 1995 were $0.2 million, $5.5
million and $13.6 million, respectively. These writedowns relate primarily to
fixed income securities which were investment grade when purchased and later
downgraded. The low amount of writedowns in all three years reflects the high
quality of SAFECO's investment portfolios.
SAFECO's property and casualty investment portfolio totaled $9.1 billion at
market value at December 31, 1997, compared with $5.2 billion at market value at
December 31, 1996. The increase is due primarily to the acquisition of American
States' investment portfolio which totaled $4.0 billion at market value at
December 31, 1997. The investment philosophy for the property and casualty
portfolio is to emphasize investment yield without sacrificing investment
quality, and to provide for liquidity and diversification. Fixed income
securities comprised 80% of this portfolio while equity securities comprised 20%
(see table on page 42).
The property and casualty fixed income portfolio, which totaled $7.1 billion
at market value at December 31, 1997, is currently comprised of 75% tax-exempt
and 25% taxable investments. The property and casualty companies are presently
investing new money primarily in long-maturity, high-quality tax-exempt bonds
and plan to continue to do so in the foreseeable future. However, SAFECO may
SAFECO CORPORATION 1997 ANNUAL REPORT
40
<PAGE> 12
periodically shift its investment of new money between taxables and tax-exempts
in the future to maximize the portfolio's after-tax return in view of the
alternative minimum tax. Although the American States property and casualty
portfolio is high quality and well structured, some realignments are planned,
primarily in shifting some of American States' tax-exempt bonds to longer
maturities and increasing the allocation to common stock. The effective tax rate
on investment income for 1997 was 13%, compared with 12% percent in 1996 and 13%
in 1995. On an after-tax basis, investment income decreased 2% in 1997
(excluding American States), 2% in 1996 and increased 3% in 1995.
The quality of the property and casualty companies' fixed income portfolio is
detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1997
- - - ----------------------------------------
<S> <C>
AAA .......................... 49 %
AA ........................... 25
A ............................ 20
BBB .......................... 5
BB or lower .................. 1
----
Total ................... 100%
====
</TABLE>
SAFECO's life and health investment portfolio totaled $13.9 billion at market
value at December 31, 1997. Fixed income securities, all of which are taxable,
comprised 94% of this investment portfolio at December 31, 1997. The investment
philosophy for this portfolio is to emphasize investment yield without
sacrificing investment quality, and to provide for liquidity and
diversification. SAFECO also matches the projected cash inflows of this
portfolio with the projected cash outflows of the liabilities of the various
product lines within the life and health operations.
The quality of the life and health companies' fixed income portfolio is
detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1997
- - - ----------------------------------------
<S> <C>
AAA .......................... 35 %
AA ........................... 10
A ............................ 31
BBB .......................... 21
BB or lower .................. 3
----
Total ................... 100%
====
</TABLE>
This portfolio contains $341.5 million (at market value) of securities below
investment grade quality. This was approximately 3% of the total $13.0 billion
life and health fixed income portfolio at market value at December 31, 1997. On
a consolidated basis, below investment grade securities with a market value of
$365.3 million were held at December 31, 1997. This was less than 2% of total
consolidated investments at market value of SAFECO Corporation and subsidiaries
at December 31, 1997.
SAFECO's consolidated investment in "exotic" securities and high-risk
derivatives was less than 1% of SAFECO's total investments at both December 31,
1997 and 1996. SAFECO has intentionally avoided investing in these types of
securities. In addition, SAFECO does not enter into financial instruments for
trading or speculative purposes.
SAFECO's consolidated investments in mortgage-backed securities of $3.6
billion at market value at December 31, 1997 consist mainly of residential
collateralized mortgage obligations (CMOs) and pass-throughs. The life and
health portfolio contains virtually all of these securities. Approximately 94%
of the mortgage-backed securities are government/agency-backed or AAA rated at
December 31, 1997. SAFECO has intentionally limited its investment in riskier,
more volatile CMOs (interest only, inverse floaters, and so forth) to a small
amount--approximately 1% of total mortgage-backed securities at December 31,
1997.
SAFECO Corporation, the parent company, holds an investment portfolio of
securities at market value that totaled $177.1 million at December 31, 1997,
compared with $187.8 million at December 31, 1996. The majority of these
securities are high quality, preferred stocks and U.S. Treasuries.
SAFECO's consolidated investment portfolio also includes $499.0 million of
mortgage loan investments at December 31, 1997, approximately 2% of total
investments. Nearly all of these loans are held by the life and health companies
and are secured by first mortgage liens on completed, income-producing
commercial real estate, primarily in the retail, industrial and office building
sectors. The majority of the properties are located in the western United
States, with approximately 53% of the total in California. Individual loans
generally do not exceed $5 million. Less than 2% of the loans were
non-performing at both December 31, 1997 and 1996. The allowance for mortgage
loan losses was $11.6 million at December 31, 1997 and $10.9 million at December
31, 1996.
For a discussion of SAFECO's investment in real estate, which is made through
SAFECO Properties, Inc., see page 39 of this report.
SAFECO CORPORATION 1997 ANNUAL REPORT
41
<PAGE> 13
The table below provides a summary of SAFECO's consolidated securities
investment portfolio at December 31, 1997. The excess of market value over cost
of the consolidated fixed income and equity security portfolios was $2.4 billion
at December 31, 1997 and $1.5 billion at December 31, 1996. This increase in the
excess of market over cost was due primarily to the decline in interest rates in
1997, which increased the market value of SAFECO's fixed income securities.
<TABLE>
<CAPTION>
AMORTIZED CARRYING MARKET
DECEMBER 31, 1997 COST VALUE VALUE
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Property and Casualty:
Fixed Income - taxable (available-for-sale) ..... $ 1,715.6 $ 1,797.2 $ 1,797.2
Fixed Income - non-taxable (available-for-sale).. 4,869.0 5,338.1 5,338.1
Equity Securities ............................... 880.8 1,742.1 1,742.1
Life and Health:
Fixed Income - taxable (available-for-sale) ..... 9,371.6 9,875.9 9,875.9
Fixed Income - taxable (held-to-maturity) ....... 2,708.6 2,708.6 3,159.9
Equity Securities ............................... 31.3 39.3 39.3
SAFECO Corporation:
Fixed Income - taxable (available-for-sale) ..... 92.9 94.5 94.5
Equity Securities ............................... 37.1 73.9 73.9
Miscellaneous ...................................... 57.5 61.9 61.9
Short-Term Investments ............................. 134.7 134.7 134.7
---------------------------------------------
Total ........................................ $ 19,899.1 $ 21,866.2 $ 22,317.5
=============================================
</TABLE>
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The first two columns of the following table show the financial statement
carrying values and related current estimated fair values of certain of SAFECO's
financial instruments as of December 31, 1997. The third column shows the effect
on current estimated fair values assuming a 100 basis point increase in market
interest rates and a 10% decline in equity prices ("sensitivity analysis"). This
sensitivity analysis is required by new Securities and Exchange Commission (SEC)
rules issued in 1997. Prior period disclosures are not required in the initial
year of disclosure.
<TABLE>
<CAPTION>
ESTIMATED
FAIR VALUE
ESTIMATED AT ADJUSTED
FAIR VALUE AT MARKET
CARRYING CURRENT MARKET RATES/PRICES AS
DECEMBER 31, 1997 VALUE RATES/PRICES INDICATED BELOW
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Interest rate risk:*
Financial assets:
Fixed maturities available-for-sale ..... $ 17,143.2 $ 17,143.2 $ 16,012.0
Fixed maturities held-to-maturity ....... 2,708.6 3,159.9 2,951.0
Mortgage loans .......................... 499.0 524.0 488.0
Commercial loans ........................ 634.9 637.0 624.0
Financial liabilities:
Funds held under deposit contracts ...... 11,989.1 12,458.0 11,906.0
Commercial paper ........................ 812.8 812.8 812.8
Credit Company borrowings ............... 892.0 893.0 892.0
7.875% notes due 2005 ................... 200.0 213.0 204.0
6.875% notes due 2007 ................... 200.0 205.0 191.0
Other debt .............................. 255.1 261.0 255.0
Capital securities ......................... 841.7 881.0 799.0
Equity price risk:**
Marketable equity securities................ 1,879.7 1,879.7 1,692.0
</TABLE>
* Adjusted interest rates assume a 100 basis point increase in market rates at
December 31, 1997.
** Adjusted equity prices assume a 10 percent decline in values at December 31,
1997.
SAFECO CORPORATION 1997 ANNUAL REPORT
42
<PAGE> 14
Market risk is the risk of loss from adverse changes in market prices and
interest rates. In addition to market risk, SAFECO is exposed to other risks,
including the credit risk related to its financial instruments and the
underlying insurance risk related to its core business. The sensitivity analysis
above summarizes only the exposure to market risk.
SAFECO manages its market risk by matching the projected cash inflows of
assets with the projected cash outflows of liabilities of its investment and
financial products (e.g., annuities, retirement services products, commercial
lending). For all its financial assets and liabilities, SAFECO seeks to maintain
reasonable average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.
SAFECO uses certain derivative financial instruments to increase its matching of
cash flows. For example, interest rate swaps are used to convert debt
liabilities with variable rates to fixed rates to better match the fixed rate
assets they support. Derivatives are used for hedging purposes rather than
speculation. SAFECO does not enter into financial instruments for trading
purposes.
The estimated fair values at current market rates for financial instruments
subject to interest rate risk in the table above are the same as those disclosed
in Note 8 (Financial Instruments) to the financial statements. The estimated
fair values at the adjusted market rates (assuming a 100 basis point increase in
market interest rates) are calculated using discounted cash flow analysis and
duration modeling, where appropriate. The estimated values do not consider the
effect that changing interest rates could have on prepayment activity (e.g.,
CMOs and annuities). Estimated fair values for derivatives are not presented as
the amounts are not material.
This sensitivity analysis provides only a limited, point-in-time view of the
market risk sensitivity of certain of SAFECO's financial instruments. The actual
impact of market interest rate and price changes on the financial instruments
may differ significantly from those shown in the sensitivity analysis. The
sensitivity analysis is further limited as it does not consider any actions
SAFECO could take in response to actual and/or anticipated changes in interest
rates and equity prices. As allowed under the SEC requirements, certain
financial instruments (e.g., lease receivables) are not required to be included
in the sensitivity analysis. In addition, certain non-financial instruments
(e.g., insurance liabilities, real estate) are excluded from the sensitivity
analysis. Accordingly, any aggregation of the estimated fair value amounts or
adjusted fair value amounts would not represent the underlying fair value of net
equity.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards on page 58.
DIVIDENDS
The Corporation has paid cash dividends continuously since 1933. Common stock
dividends paid to shareholders were $1.22 per share in 1997, compared with $1.11
in 1996 and $1.02 in 1995. These dividends are funded with dividends to the
Corporation from its subsidiaries. The Corporation expects to continue paying
dividends in the foreseeable future. However, payment of future dividends is
subject to the Board of Directors' approval and is dependent upon earnings and
the financial condition of the Corporation.
NUMBER OF SHAREHOLDERS
There were approximately 4,200 common shareholders of record at December 31,
1997.
ANNUAL REPORT ON FORM 10-K
SAFECO FILES AN ANNUAL REPORT ON FORM 10-K WITH THE SECURITIES AND EXCHANGE
COMMISSION IN COMPLIANCE WITH THE REGULATIONS OF THE SECURITIES AND EXCHANGE
COMMISSION. ANY SAFECO SHAREHOLDER MAY OBTAIN FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997, 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
SAFECO CORPORATION 1997 ANNUAL REPORT
43
<PAGE> 15
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements, related
notes and all other information presented in this annual report. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts based on the
best estimates and judgments of management.
In order to safeguard assets and to maintain the integrity and objectivity of
data in these financial statements, SAFECO maintains a comprehensive system of
internal accounting controls. These controls are supported by the careful
selection and training of qualified personnel, by the appropriate division of
duties and responsibilities, and by written policies and procedures. In
addition, an integral part of the comprehensive system of internal control is an
effective internal audit department. SAFECO's internal audit department
systematically evaluates the adequacy and effectiveness of internal accounting
controls and measures adherence to established policies and procedures.
The financial statements for the years ended December 31, 1997, 1996 and 1995
have been audited by Ernst & Young LLP, independent auditors. Their audits were
made in accordance with generally accepted auditing standards and included a
review of the system of internal accounting controls to the extent necessary to
express an opinion on the financial statements.
The Audit Committee of the Board of Directors, comprised solely of outside
directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of financial reporting.
The management of SAFECO believes that as of December 31, 1997, its system of
internal control is adequate to accomplish the objectives discussed herein.
/s/ BOH A. DICKEY
Boh A. Dickey
President and Chief Operating Officer
/s/ ROD A. PIERSON
Rod A. Pierson
Senior Vice President and Chief Financial Officer
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS
Board of Directors and Shareholders
of SAFECO Corporation
We have audited the financial statements of SAFECO Corporation and its
subsidiaries for the years ended December 31, 1997, 1996 and 1995 (pages 45 to
75 inclusive). These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SAFECO Corporation and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As described in Note 1 to the financial statements, SAFECO Corporation and
its subsidiaries adopted certain new accounting standards in 1997, 1996 and 1995
as required by the Financial Accounting Standards Board.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 13, 1998
SAFECO corporation 1997 annual report
44
<PAGE> 16
STATEMENT OF CONSOLIDATED INCOME
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions Except Per Share Amounts)
REVENUES
Insurance:
Property and Casualty Earned Premiums .......................... $ 2,816.6 $ 2,275.4 $ 2,162.1
Life and Health Premiums and Other Revenues .................... 290.2 265.9 261.6
--------------------------------------------------
Total ........................................................ 3,106.8 2,541.3 2,423.7
Real Estate ....................................................... 75.1 79.9 75.0
Finance ........................................................... 86.5 75.7 65.9
Asset Management .................................................. 27.1 23.2 18.5
Other ............................................................. 49.7 38.5 32.2
Net Investment Income (Note 3) .................................... 1,244.7 1,116.7 1,075.3
Realized Investment Gain (Note 3) ................................. 119.4 90.1 64.3
--------------------------------------------------
Total ........................................................ 4,709.3 3,965.4 3,754.9
--------------------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits .................... 2,816.2 2,362.7 2,250.4
Commissions ....................................................... 524.3 415.7 401.2
Nonrecurring 1997 Acquisition Charges (Note 2) .................... 60.0 -- --
Personnel Costs ................................................... 329.7 272.3 250.6
Interest .......................................................... 101.8 72.4 85.4
Goodwill Amortization ............................................. 12.2 -- --
Other ............................................................. 319.9 280.3 260.7
Amortization of Deferred Policy Acquisition Costs ................. 532.9 426.9 408.9
Deferral of Policy Acquisition Costs .............................. (560.3) (443.4) (416.1)
--------------------------------------------------
Total ........................................................ 4,136.7 3,386.9 3,241.1
--------------------------------------------------
Income Before Income Taxes ........................................... 572.6 578.5 513.8
--------------------------------------------------
Provision (Benefit) for Income Taxes (Note 16):
Current ........................................................... 107.1 133.5 131.4
Deferred .......................................................... 20.7 6.0 (16.6)
--------------------------------------------------
Total ........................................................ 127.8 139.5 114.8
--------------------------------------------------
Income Before Distributions on Capital Securities .................... 444.8 439.0 399.0
Distributions on Capital Securities, Net of Tax (Note 10) ............ (14.8) -- --
--------------------------------------------------
Net Income ........................................................... $ 430.0 $ 439.0 $ 399.0
==================================================
Net Income Per Share of Common Stock (Note 9):
Basic ............................................................. $ 3.33 $ 3.48 $ 3.17
==================================================
Diluted ........................................................... $ 3.31 $ 3.47 $ 3.16
==================================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
45
<PAGE> 17
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- - - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In Millions)
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1997 - $16,086.8; 1996 - $11,270.5) ..................... $ 17,143.2 $ 11,936.2
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1997 - $3,159.9; 1996 - $2,670.0) ......................... 2,708.6 2,488.3
Marketable Equity Securities, at Market Value
(Cost: 1997 - $969.0; 1996 - $641.8) ..................................... 1,879.7 1,298.8
Mortgage Loans .............................................................. 499.0 448.0
Real Estate (At cost less accumulated depreciation:
1997 - $93.2; 1996 - $82.0) (Note 4) ..................................... 586.1 554.0
Policy Loans ................................................................ 85.3 58.2
Short-Term Investments ...................................................... 134.7 105.9
-----------------------------------
Total Investments ...................................................... 23,036.6 16,889.4
Cash ........................................................................... 391.4 55.5
Accrued Investment Income ...................................................... 337.0 240.8
Finance Receivables (Less unearned finance charges and allowance
for doubtful accounts: 1997 - $89.7; 1996 - $74.1) .......................... 1,004.3 829.0
Premiums and Other Service Fees Receivable ..................................... 953.9 467.2
Other Notes and Accounts Receivable ............................................ 71.1 42.4
Reinsurance Recoverables (Note 6) .............................................. 311.0 137.5
Deferred Policy Acquisition Costs .............................................. 544.8 396.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation:
1997 - $184.7; 1996 - $171.7) ............................................ 238.0 171.3
Goodwill ....................................................................... 1,332.6 35.8
Other Assets ................................................................... 341.7 161.5
Separate Account Assets ........................................................ 905.4 491.2
-----------------------------------
Total .................................................................. $ 29,467.8 $ 19,917.7
===================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
46
<PAGE> 18
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(In Millions)
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense (Note 5) ......................................... $ 4,352.2 $ 2,088.3
Life Policy Liabilities ........................................................ 164.6 149.6
Unearned Premiums .............................................................. 1,713.7 946.9
Funds Held Under Deposit Contracts ............................................. 11,989.1 9,792.7
Debt (Note 4):
Commercial Paper ............................................................ 812.8 --
Credit Company Borrowings ................................................... 892.0 808.8
7.875% Notes Due 2005 ....................................................... 200.0 200.0
6.875% Notes Due 2007 ....................................................... 200.0 --
Other ....................................................................... 255.1 224.7
Other Liabilities .............................................................. 1,223.3 678.9
Income Taxes (Note 16):
Current ..................................................................... 9.3 3.5
Deferred (Includes tax on unrealized appreciation of investment
securities: 1997 - $675.6; 1996 - $456.3) ................................ 446.9 417.8
Separate Account Liabilities ................................................... 905.4 491.2
------------------------------------
Total Liabilities ...................................................... 23,164.4 15,802.4
------------------------------------
Commitments and Contingencies (Note 7)
Corporation-Obligated, Mandatorily Redeemable Capital Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") (Note 10) ......................... 841.7 --
------------------------------------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None
Common Stock, No Par Value (Notes 9 and 11):
Shares Authorized: 300
Shares Reserved for Options: 1997 - 7.9; 1996 - 3.3
Shares Issued and Outstanding: 1997 - 141.2; 1996 - 126.3 ................... 909.3 225.3
Retained Earnings (Note 13) .................................................... 3,299.1 3,042.2
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3) .......... 1,258.8 851.4
Unrealized Loss from Foreign Currency Translation, Net of Tax .................. (5.5) (3.6)
------------------------------------
Shareholders' Equity ................................................... 5,461.7 4,115.3
------------------------------------
Total .................................................................. $ 29,467.8 $ 19,917.7
====================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
47
<PAGE> 19
STATEMENT OF CONSOLIDATED CASH FLOWS
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
OPERATING ACTIVITIES
Insurance Premiums Received ............................................ $ 3,063.3 $ 2,514.2 $ 2,394.2
Dividends and Interest Received ........................................ 1,249.6 1,103.6 1,059.6
Other Operating Receipts ............................................... 195.5 172.9 165.9
Insurance Claims and Policy Benefits Paid .............................. (2,423.4) (1,998.4) (1,817.5)
Underwriting, Acquisition and Insurance Operating Costs Paid ........... (1,091.2) (801.7) (782.5)
Interest Paid .......................................................... (94.7) (69.6) (84.9)
Other Operating Costs Paid ............................................. (92.6) (88.6) (88.1)
Income Taxes Paid ...................................................... (95.6) (148.1) (144.6)
-----------------------------------------------
Net Cash Provided by Operating Activities ......................... 710.9 684.3 702.1
-----------------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale ................................. (2,578.8) (2,079.5) (2,079.3)
Fixed Maturities Held-to-Maturity ................................... (199.6) (473.2) (292.0)
Equities ............................................................ (261.2) (154.9) (170.2)
Other Investments ................................................... (241.6) (189.8) (297.1)
Purchase of Subsidiaries, Net of Cash Acquired (Note 2) ................ (3,014.3) -- --
Maturities of Fixed Maturities Available-for-Sale ...................... 693.4 709.6 710.5
Maturities of Fixed Maturities Held-to-Maturity ........................ 8.9 21.7 17.9
Sales of:
Fixed Maturities Available-for-Sale ................................. 1,712.6 979.9 549.9
Fixed Maturities Held-to-Maturity ................................... -- 13.3 --
Equities ............................................................ 510.6 181.7 176.8
Other Investments ................................................... 128.3 101.0 304.9
Net Decrease (Increase) in Short-Term Investments ...................... 137.7 (32.1) 23.3
Finance Receivables Originated or Acquired ............................. (489.6) (378.7) (374.7)
Principal Payments Received on Finance Receivables ..................... 317.3 292.0 244.2
Other .................................................................. (146.7) (69.2) (67.1)
-----------------------------------------------
Net Cash Used in Investing Activities ............................. (3,423.0) (1,078.2) (1,252.9)
-----------------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts ................................. 1,403.5 1,148.6 1,304.7
Return of Funds Held Under Deposit Contracts ........................... (866.6) (765.5) (720.8)
Proceeds from Notes and Mortgage Borrowings ............................ 211.0 40.2 199.0
Repayment of Notes and Mortgage Borrowings ............................. (9.2) (107.5) (241.9)
Net Proceeds from Short-Term Borrowings ................................ 942.9 213.6 143.9
Proceeds from Capital Securities ....................................... 832.2 -- --
Proceeds from Common Stock Secondary Offering .......................... 677.2 -- --
Common Stock Reacquired ................................................ (10.7) (9.6) (8.7)
Dividends Paid to Shareholders ......................................... (154.1) (139.9) (128.5)
Other .................................................................. 21.8 4.0 5.1
-----------------------------------------------
Net Cash Provided by Financing Activities ......................... 3,048.0 383.9 552.8
-----------------------------------------------
Net Increase (Decrease) in Cash ........................................... 335.9 (10.0) 2.0
Cash at the Beginning of Year ............................................. 55.5 65.5 63.5
-----------------------------------------------
Cash at the End of Year ................................................... $ 391.4 $ 55.5 $ 65.5
===============================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
48
<PAGE> 20
STATEMENT OF CONSOLIDATED CASH FLOWS -- RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Net Income ............................................... $ 430.0 $ 439.0 $ 399.0
-------------------------------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain ........................... (119.4) (90.1) (64.3)
Amortization and Depreciation ...................... 84.2 64.1 51.7
Amortization of Fixed Maturity Investments ......... (32.2) (38.6) (38.2)
Deferred Income Tax Expense (Benefit) .............. 20.7 6.0 (16.6)
Interest Expense on Deposit Contracts .............. 478.9 460.6 432.3
Nonrecurring 1997 Acquisition Charges .............. 60.0 -- --
Other Adjustments .................................. (12.7) 1.5 8.0
Changes in:
Losses and Adjustment Expense .................... (110.3) (118.9) (58.6)
Life Policy Liabilities .......................... 2.3 (4.5) (1.2)
Unearned Premiums ................................ 19.9 36.1 43.8
Accrued Income Taxes ............................. 26.7 (14.5) (4.6)
Accrued Interest on Accrual Bonds ................ (48.4) (44.0) (36.9)
Accrued Investment Income ........................ (7.0) (6.6) (4.3)
Deferred Policy Acquisition Costs ................ (27.0) (16.0) (10.3)
Other Assets and Liabilities ..................... (54.8) 10.2 2.3
-------------------------------------
Total Adjustments ................................ 280.9 245.3 303.1
-------------------------------------
Net Cash Provided by Operating Activities ................ $ 710.9 $ 684.3 $ 702.1
=====================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
49
<PAGE> 21
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Common Stock (Notes 9 and 11):
Balance at the Beginning of Year ............................................ $ 225.3 $ 217.4 $ 211.2
Secondary Offering .......................................................... 677.2 -- --
Stock Issued for Acquisition of Subsidiary .................................. -- 0.6 --
Stock Issued for Options and Rights ......................................... 6.0 6.2 5.8
Common Stock Reacquired ..................................................... (0.4) (0.5) (0.5)
Other ....................................................................... 1.2 1.6 0.9
-----------------------------------------
Balance at the End of Year .................................................. 909.3 225.3 217.4
-----------------------------------------
Retained Earnings (Note 13):
Balance at the Beginning of Year ............................................ 3,042.2 2,755.5 2,495.8
Net Income .................................................................. 430.0 439.0 399.0
Amortization of Underwriting Compensation on Capital Securities ............. (0.2) -- --
Dividends Declared .......................................................... (162.7) (143.2) (131.1)
Common Stock Reacquired ..................................................... (10.2) (9.1) (8.2)
-----------------------------------------
Balance at the End of Year .................................................. 3,299.1 3,042.2 2,755.5
-----------------------------------------
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3):
Balance at the Beginning of Year ............................................ 851.4 1,013.5 128.1
Change in Unrealized Appreciation ........................................... 407.4 (162.1) 885.4
-----------------------------------------
Balance at the End of Year .................................................. 1,258.8 851.4 1,013.5
-----------------------------------------
Unrealized Gain (Loss) from Foreign Currency Translation, Net of Tax:
Balance at the Beginning of Year ............................................ (3.6) (3.8) (5.6)
Change in Unrealized Gain (Loss) ............................................ (1.9) 0.2 1.8
-----------------------------------------
Balance at the End of Year .................................................. (5.5) (3.6) (3.8)
-----------------------------------------
Shareholders' Equity ..................................................... $ 5,461.7 $ 4,115.3 $ 3,982.6
=========================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
50
<PAGE> 22
STATEMENT OF COMBINED INCOME
Property and Casualty Insurance Companies
SAFECO Insurance Company of America / General Insurance Company of America /
First National Insurance Company of America / SAFECO National Insurance Company
SAFECO Insurance Company of Illinois / SAFECO Lloyds Insurance Company / SAFECO
Surplus Lines Insurance Company / American States Insurance Company American
Economy Insurance Company / American States Preferred Insurance Company /
Insurance Company of Illinois / American States Insurance Company of Texas
American States Lloyds Insurance Company / F.B. Beattie & Company, Inc. / SAFECO
Select Insurance Services, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Net Premiums Written ................................................. $ 2,828.2 $ 2,313.1 $ 2,207.0
Increase in Unearned Premiums ........................................ (11.6) (37.7) (44.9)
--------------------------------------------
Earned Premiums ...................................................... 2,816.6 2,275.4 2,162.1
--------------------------------------------
Losses and Expenses:
Losses and Adjustment Expense ..................................... 1,960.0 1,580.5 1,527.0
Commissions ....................................................... 429.1 342.0 322.6
Personnel Costs ................................................... 210.2 168.8 155.4
Taxes Other than Payroll and Income Taxes ......................... 78.0 62.3 59.7
Dividends to Policyholders ........................................ 18.5 16.2 15.2
Other Operating Expenses .......................................... 95.3 76.9 80.2
Amortization of Deferred Policy Acquisition Costs ................. 495.9 391.2 376.5
Deferral of Policy Acquisition Costs .............................. (506.6) (400.9) (380.8)
--------------------------------------------
Total ........................................................ 2,780.4 2,237.0 2,155.8
--------------------------------------------
Underwriting Profit .................................................. 36.2 38.4 6.3
Nonrecurring 1997 Acquisition Charges ................................ (60.0) -- --
Net Investment Income (Excluding realized gain) ...................... 327.0 281.6 291.5
Goodwill Amortization ................................................ (11.0) -- --
--------------------------------------------
Income Before Realized Gain and Income Taxes ......................... 292.2 320.0 297.8
Realized Gain from Security Investments
Before Income Taxes ............................................... 132.8 64.7 51.6
--------------------------------------------
Income Before Income Taxes ........................................... 425.0 384.7 349.4
Provision for Federal and Canadian Income Taxes
(Including tax provision on realized gain: 1997 - $46.0;
1996 - $22.0; 1995 - $17.9) .................................... 78.0 71.3 59.3
--------------------------------------------
Net Income ........................................................... $ 347.0 $ 313.4 $ 290.1
============================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
51
<PAGE> 23
STATEMENT OF COMBINED INCOME
Life and Health Insurance Companies
SAFECO Life Insurance Company / SAFECO National Life Insurance Company / First
SAFECO National Life Insurance Company of New York American States Life
Insurance Company / WM Life Insurance Company / SAFECO Administrative Services,
Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Premiums and Other Revenue ...................................... $ 290.2 $ 265.9 $ 261.6
Net Investment Income (Excluding realized gain) ................. 916.3 836.7 778.2
----------------------------------------------
Total ................................................... 1,206.5 1,102.6 1,039.8
----------------------------------------------
Benefits and Expenses:
Policy Benefits .............................................. 856.2 782.2 723.5
Commissions .................................................. 95.2 73.7 78.6
Personnel Costs .............................................. 56.2 49.4 47.5
Taxes Other than Payroll and Income Taxes .................... 12.4 15.9 8.3
Other Operating Expenses ..................................... 55.3 51.5 49.3
Amortization of Deferred Policy Acquisition Costs ............ 37.0 35.6 32.4
Deferral of Policy Acquisition Costs ......................... (53.7) (42.4) (35.4)
----------------------------------------------
Total ................................................... 1,058.6 965.9 904.2
----------------------------------------------
Income Before Realized Gain and Income Taxes .................... 147.9 136.7 135.6
Realized Gain from Security Investments
Before Income Taxes .......................................... 6.8 10.5 5.9
----------------------------------------------
Income Before Income Taxes ...................................... 154.7 147.2 141.5
Provision for Income Taxes
(Including tax provision on realized gain:
1997 - $1.8; 1996 - $3.9; 1995 - $2.4) .................... 52.7 51.8 49.0
----------------------------------------------
Net Income ...................................................... $ 102.0 $ 95.4 $ 92.5
==============================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
52
<PAGE> 24
STATEMENT OF CONSOLIDATED INCOME
Real Estate Companies
SAFECO Properties, Inc. / Winmar Company, Inc. / SAFECARE Company, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
REVENUES
Operating Property Revenue ........................ $ 63.0 $ 62.6 $ 64.9
Real Estate Sales ................................. 8.5 13.9 5.3
Interest .......................................... 2.1 1.9 2.6
Other ............................................. 1.5 1.5 2.2
---------------------------------------
Total ........................................ 75.1 79.9 75.0
---------------------------------------
EXPENSES
Operating Property Expenses ....................... 11.5 11.2 12.2
Real Estate Sales Costs ........................... 7.4 11.2 3.4
Interest .......................................... 32.8 29.0 29.1
Depreciation ...................................... 14.8 14.3 14.9
General and Administrative ........................ 13.5 13.6 12.3
---------------------------------------
Total ........................................ 80.0 79.3 71.9
Interest and Other Expenses Capitalized ........... (14.5) (12.4) (6.0)
---------------------------------------
Net Expenses ................................. 65.5 66.9 65.9
---------------------------------------
Income Before Realized Loss and Income Taxes ......... 9.6 13.0 9.1
Realized Loss from Real Estate Investments
Before Income Taxes ............................... (28.3) (2.6) (0.8)
---------------------------------------
Income (Loss) Before Income Taxes .................... (18.7) 10.4 8.3
Provision (Benefit) for Income Taxes
(Including tax benefit on realized loss:
1997 - $9.9; 1996 - $0.6; 1995 - $0.3) ......... (6.5) 4.0 2.9
---------------------------------------
Net Income (Loss) .................................... $ (12.2) $ 6.4 $ 5.4
=======================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
53
<PAGE> 25
STATEMENT OF INCOME
SAFECO Credit Company, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Investment Revenues:
Interest and Finance Charges:
Finance Receivables ............................................ $ 77.2 $ 68.1 $ 60.1
Affiliates ..................................................... 9.7 8.6 5.9
-----------------------------------
Total Investment Revenues .................................... 86.9 76.7 66.0
Interest Expense ..................................................... 56.3 47.5 41.8
-----------------------------------
Net Investment Income ............................................. 30.6 29.2 24.2
Provision for Credit Losses .......................................... 2.4 2.4 2.6
-----------------------------------
Net Investment Income After Provision for Credit Losses ........... 28.2 26.8 21.6
Other Revenue ........................................................ 9.3 7.6 5.8
-----------------------------------
Total ........................................................ 37.5 34.4 27.4
-----------------------------------
Operating Expenses:
Personnel Costs ................................................... 8.4 8.6 7.8
General and Administrative ........................................ 7.6 6.7 6.3
-----------------------------------
Total ........................................................ 16.0 15.3 14.1
-----------------------------------
Income Before Income Taxes ........................................... 21.5 19.1 13.3
Provision for Income Taxes ........................................... 7.4 6.9 4.4
-----------------------------------
Net Income ........................................................... $ 14.1 $ 12.2 $ 8.9
===================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
54
<PAGE> 26
STATEMENT OF COMBINED INCOME
Asset Management Companies
SAFECO Asset Management Company / SAFECO Securities, Inc. / SAFECO Services
Corporation / SAFECO Trust Company
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
- - - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
REVENUES
Management and Advisory Fees .................. $ 18.3 $ 14.4 $ 13.0
Transfer Agent Fees ........................... 4.7 3.5 3.1
Other ......................................... 4.1 5.3 2.4
-----------------------------------------------
Total ...................................... 27.1 23.2 18.5
-----------------------------------------------
EXPENSES
Personnel Costs ............................... 10.6 7.8 6.3
Marketing and Shareholder Communication ....... 3.1 2.7 2.2
Other ......................................... 5.9 5.1 3.1
-----------------------------------------------
Total ...................................... 19.6 15.6 11.6
-----------------------------------------------
Income Before Income Taxes ....................... 7.5 7.6 6.9
Provision for Income Taxes ....................... 2.6 2.5 2.2
-----------------------------------------------
Net Income ....................................... $ 4.9 $ 5.1 $ 4.7
===============================================
</TABLE>
See Notes to Financial Statements on pages 56 through 75.
SAFECO CORPORATION 1997 ANNUAL REPORT
55
<PAGE> 27
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts in millions, except share data, unless otherwise stated)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO".) SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries engage in
property and casualty, surety and life and health insurance. Products are
marketed primarily through independent agents. Taking into account the American
States acquisition, approximately 34% of SAFECO's property and casualty premiums
are written in the three West Coast states of California, Washington and Oregon.
SAFECO made two significant acquisitions in 1997--see Note 2.
SAFECO's other operations include subsidiaries involved in commercial lending
and leasing (SAFECO Credit), investment management and insurance agency and
financial services distribution operations. In February of 1998, SAFECO
announced its decision to sell its real estate subsidiary, SAFECO Properties
Inc., to focus on its core insurance and financial services businesses. SAFECO
has retained an investment banker to assist in its sales efforts. As the
operations are not material to the consolidated financial statements they have
not been reclassified as discontinued operations.
BASIS OF REPORTING
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and include
amounts based on the best estimates and judgments of management. The financial
statements include SAFECO Corporation and its subsidiaries and real estate joint
ventures.
All significant intercompany transactions and accounts have been eliminated
in the consolidated financial statements. Certain reclassifications have been
made to prior year financial information to conform to the 1997 classification.
ACCOUNTING FOR PREMIUMS
Property and casualty insurance premiums are included in income as earned
over the terms of the respective policies. The unearned portion is included in
the balance sheet as a liability for unearned premiums, before the effect of
reinsurance. See Note 6 for more information on reinsurance.
Life and health insurance premiums are reported as income when collected for
traditional individual life policies and when earned for group life and health
policies. Funds received under retirement services deposit contracts, annuity
contracts and universal life policies were $1,403.5, $1,148.6 and $1,304.7 in
1997, 1996 and 1995, respectively. These amounts are recorded as liabilities
rather than premium income when received. Revenues for universal life products
consist of front-end loads, mortality charges and expense charges assessed
against individual policyholder account balances. These loads and charges are
recognized as income when earned.
INVESTMENTS
Fixed maturity investments (bonds and redeemable preferred stock) which
SAFECO has the positive intent and ability to hold to maturity are classified as
held-to-maturity and carried at amortized cost in the balance sheet. Fixed
maturities classified as available-for-sale are carried at market value, with
changes in unrealized gains and losses recorded directly to shareholders'
equity, net of applicable income taxes and deferred policy acquisition costs
valuation allowance. SAFECO has no fixed maturities classified as trading.
All marketable equity securities are classified as available-for-sale and are
carried at market value, with changes in unrealized gains and losses recorded
directly to shareholders' equity, net of applicable income taxes.
When the collectibility of income for certain investments is considered
doubtful, they are placed on nonaccrual status and thereafter interest income is
recognized only when payment is received. Investments that have declined in
market value below cost and for which the decline is judged to be other than
temporary are written down to fair value. Write-downs are made directly on an
individual security basis and reduce realized investment gains in the statement
of income.
The cost of security investments sold is determined by the "identified cost"
method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for mortgage loan losses. The allowance for mortgage loan losses at
December 31, 1997 and 1996 was $11.6 and $10.9, respectively.
Short-term investments are carried at cost, which approximates market value.
56
SAFECO CORPORATION 1997 ANNUAL REPORT
<PAGE> 28
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are classified as investment real estate or as land,
buildings and equipment for company use, and are carried at cost less
accumulated depreciation.
Investment real estate that is deemed impaired is written down to estimated
fair value. Estimated fair values of real estate are obtained using independent
appraisals, outside consultants, internal analysis and judgment as appropriate
under the circumstances. Values are reviewed quarterly. The writedowns are
included in realized investment losses in the statement of income.
Real estate taxes, interest expense and certain other carrying costs related
to projects under development are capitalized as a cost of such projects until
the project is substantially complete unless the total carrying value has
reached estimated fair value. Costs in excess of estimated fair value are
charged to operations. Projects that involve construction of income-producing
property are considered to be substantially complete when available for
occupancy. Projects that involve the development of real estate to be sold are
considered substantially complete when planned improvement activity is concluded
or the property is offered for sale. After substantial completion, carrying
costs are charged to expense when incurred, and for income-producing property,
depreciation is then provided.
Interest capitalized relating to the development of real estate was $9.1,
$8.2 and $3.1, for 1997, 1996 and 1995, respectively.
SAFECO provides depreciation on buildings, furniture and automobiles at
various rates based on estimated useful lives using straight-line and
accelerated methods.
DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance acquisition costs, consisting of commissions
and certain other underwriting expenses, which vary with and are primarily
related to the production of business, are deferred and amortized over the
effective period of the related insurance policies. Investment income is
considered in determining whether a premium deficiency exists. No deficiencies
have been indicated in the periods presented.
Life and health insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, which vary with and are primarily related
to the production of new business are deferred. Acquisition costs for deferred
annuity contracts, retirement services deposit contracts and universal life
insurance policies are amortized over the lives of the contracts or policies in
proportion to the present value of estimated future gross profits. To the extent
actual experience differs from assumptions, and to the extent estimates of
future gross profits require revision, the unamortized balance of deferred
policy acquisition costs is adjusted accordingly; such adjustments are included
in current operations. Acquisition costs for traditional individual life
insurance policies are amortized over the premium payment period of the related
policies using assumptions consistent with those used in computing policy
benefit liabilities.
GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the
fair value of their net assets. Goodwill is amortized on systematic bases over
periods, not exceeding 30 years, that correspond with the benefits estimated to
be derived from the acquisitions. SAFECO evaluates the carrying amount of
goodwill by analyzing historical and estimated future income of the related
businesses. Goodwill is written down when impaired. Amortization periods are
revised if it is estimated that the remaining period of benefit of the goodwill
has changed. See Note 2 for information on acquisitions in 1997.
LOSSES AND ADJUSTMENT EXPENSE
Unpaid losses and adjustment expense ("LAE") represent the estimated
liability for claims reported plus losses incurred but not yet reported and the
related estimated LAE. The liability for losses and LAE is determined using
"case basis" evaluations and statistical analyses and represents an estimate of
the ultimate net cost of all losses incurred but not paid through December 31 of
each year. Although considerable variability is inherent in such estimates,
management believes that the liability for unpaid losses and LAE is adequate.
These estimates are continually reviewed and adjusted as necessary; such
adjustments are reflected in current operations. See Note 5 for more information
on loss reserves.
Salvage and subrogation recoverables are accrued using the "case basis"
method for large recoverables and statistical estimates based on historical
experience for smaller recoverables. Recoverable amounts deducted from the
liability for losses and adjustment expense net of reinsurance were $221.3 and
$153.6 at December 31, 1997 and 1996, respectively.
The property and casualty companies' liability for unpaid losses and
adjustment expense is presented gross of amounts recoverable from insurers. See
Note 6 for more information on reinsurance.
SAFECO CORPORATION 1997 ANNUAL REPORT
57
<PAGE> 29
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
LIFE POLICY LIABILITIES
Liabilities for universal life insurance policies, deferred annuity contracts
and retirement services deposit contracts are equal to the accumulated account
value of such policies or contracts as of the valuation date. Liabilities for
structured settlement annuities are based on interest rate assumptions using
market rates at issue, graded downward over 40 years to a range of 5.5% to
8.75%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method and reflect
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions generally range
from 8.5% graded to 3.25%.
NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is based on the weighted average number
of common shares outstanding during each year. The calculation of diluted net
income per common share is made after giving effect to potentially dilutive
instruments. SAFECO's only potentially dilutive instruments are stock options
outstanding, and dilution from these is not significant. See discussion of new
accounting standards below. Per share amounts have been adjusted to reflect the
2-for-1 stock split on December 1, 1995.
NEW ACCOUNTING STANDARDS
In 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan," which provides guidance on valuing impaired loans. The
FASB also issued Statement 118, "Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures," in 1994, which amends Statement 114.
Both statements were effective for 1995 and adopted by SAFECO on January 1,
1995. Adoption did not affect net income. For additional disclosure relating to
these two statements see Note 3 on page 63.
The FASB issued Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," in 1995. Statement 121
requires impairment losses to be recorded on long-lived assets used in
operations, when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying value. It also addresses the accounting for long-lived assets that are
expected to be disposed of. Statement 121 was effective for financial statements
for fiscal years beginning after December 15, 1995 and SAFECO adopted it in the
first quarter of 1996. Adoption did not affect net income.
In 1995, the FASB issued Statement 123, "Accounting for Stock-Based
Compensation." Statement 123 permits either expensing the fair value of
stock-based compensation or disclosing in the financial statement footnotes the
pro forma impact on net income as if the awards had been expensed. The statement
was effective for fiscal years beginning after December 15, 1995 and SAFECO
adopted it in the fourth quarter of 1996, with no effect on net income. See Note
11 for disclosures.
The FASB issued Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities," in June 1996. Statement
125 was effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1996 and SAFECO
adopted it in the first quarter of 1997. The FASB also issued Statement 127
which deferred for one year the effective date of certain provisions of
Statement 125. Statement 125 provides guidance in determining whether a transfer
of a financial asset represents a sale or a secured borrowing, as well as the
accounting for any servicing assets retained. The statement also provides
guidance relating to extinguishment of liabilities by debtors. This statement
did not have a material effect on SAFECO's financial position or results of
operations.
In February of 1997, the FASB issued Statement 128, "Earnings Per Share."
Statement 128 was effective for financial statements issued for periods ending
after December 15, 1997 and SAFECO adopted it in the fourth quarter of 1997. The
statement simplifies the calculation of earnings per share (EPS) and requires
the dual presentation of "basic" and "diluted" EPS on the face of the income
statement. SAFECO's previously reported EPS ("primary" EPS) was not affected by
Statement 128. That is, basic EPS is the same as previously reported primary
EPS. "Diluted" EPS is now shown on the face of the income statement, in addition
to "basic" EPS, but because SAFECO's stock options do not have a significant
dilutive effect (and are the only potentially dilutive instrument) the
difference between "basic" and "diluted" EPS is not material.
SAFECO CORPORATION 1997 ANNUAL REPORT
58
<PAGE> 30
In June of 1997, the FASB issued Statement 130, "Reporting Comprehensive
Income." Statement 130 is effective for fiscal years beginning after December
15, 1997 and SAFECO will adopt it in the first quarter of 1998. Adoption will
have no effect on net income but will require the reporting of "comprehensive
income," which will include net income and certain items currently reported in
shareholders' equity.
The FASB issued Statement 131, "Disclosures about Segments of an Enterprise
and Related Information" in June of 1997. Statement 131 changes the way
information about business segments is reported in annual financial statements
and requires the reporting of selected segment information in interim reports.
This statement is effective for financial statements for periods beginning after
December 15, 1997 except that providing interim information in the initial year
(1998) may be deferred until 1999. SAFECO plans on providing the required
segment information in its 1998 annual report and in its interim reports
beginning in 1999. This statement has no effect on net income.
NOTE 2: ACQUISITIONS
On October 1, 1997, SAFECO acquired all of the outstanding shares of common
stock of American States Financial Corporation ("American States") for $2,824 in
cash. SAFECO also repaid $300 of outstanding debt obligations of American
States. The acquisition has been treated as a purchase for accounting purposes;
therefore, American States' operations are included in SAFECO's consolidated
financial statements since October 1, 1997. The excess of the purchase price
over the fair value of net assets acquired of $1,300 was recorded as goodwill
and is being amortized over 30 years. The fair value of assets acquired
excluding cash was $7,035.1 and the fair value of liabilities assumed was
$4,204.7. American States is an Indianapolis, Indiana-based insurer that writes
commercial and personal insurance, as well as life insurance, throughout the
United States. Its revenues were $1,984 for 1996.
SAFECO financed the purchase of American States and related debt repayment
from the following sources: $600 of internal funds, $804 of commercial paper
debt, $200 of 10-year senior notes, $842 of capital securities and $678 of
SAFECO common stock issued in a secondary offering.
The $600 of internal funds came from dividends to SAFECO Corporation from
SAFECO's property and casualty subsidiaries on September 30, 1997. SAFECO
received prior approval from the Washington State Insurance Department for these
dividends.
In the fourth quarter of 1997 SAFECO recognized $60.0 of nonrecurring charges
related to its acquisition of American States. These nonrecurring charges
include $40.0 to strengthen American States loss reserves and $20.0 for
incentive payments to agents.
The unaudited pro forma condensed results of operations presented below
assume the acquisition of American States occurred at the beginning of 1996, and
give effect to actual operating results prior to the acquisition adjusted for
acquisition financing costs and goodwill amortization. These pro forma results
are not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of 1996 nor are they
necessarily indicative of future consolidated results.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION - UNAUDITED
YEAR ENDED DECEMBER 31 1997 1996
- - - ---------------------------------------------------------------------
<S> <C> <C>
Revenues ....................... $ 6,221.0 $ 5,917.0
Net Income ..................... $ 485.0 $ 473.0
Net Income Per Share ........... $ 3.44 $ 3.36
</TABLE>
On December 31, 1997, SAFECO acquired Washington Mutual, Inc.'s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company, and Washington Mutual, Inc. agreed to distribute SAFECO annuity
products through the Washington Mutual, Inc. multi-state banking network. The
transaction is valued at $140 and the acquisition of the two insurance
subsidiaries is being treated as a purchase for accounting purposes. The
financing of this transaction was through internal sources. Pro forma results of
operations showing the effects of the acquisition on SAFECO's operations for
1997 and 1996 have not been presented due to immateriality.
SAFECO CORPORATION 1997 ANNUAL REPORT
59
<PAGE> 31
NOTE 3: INVESTMENTS
Investment income is comprised of:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest:
Fixed maturities ........................................ $ 1,133.6 $ 1,025.0 $ 981.3
Mortgage loans .......................................... 43.2 40.9 40.9
Short-term investments .................................. 14.0 7.6 17.4
Dividends:
Marketable equity securities ............................ 40.0 39.2 41.0
Redeemable preferred stock .............................. 20.0 12.7 4.0
Other investment income .................................... 6.2 3.3 4.6
---------------------------------------------------
Total investment income ................................. 1,257.0 1,128.7 1,089.2
Investment expenses ........................................ 12.3 12.0 13.9
---------------------------------------------------
Net investment income ................................... $ 1,244.7 $ 1,116.7 $ 1,075.3
===================================================
</TABLE>
The carrying value of investments in fixed maturities and mortgage loans that
have not produced income for the last twelve months is less than 1% of the total
of such investments at December 31, 1997.
The following analysis summarizes realized gains and losses on investments:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------
<S> <C> <C> <C>
Realized investment gains (losses):
Fixed maturities ........................................ $ 50.2 $ 31.1 $ 29.3
Marketable equity securities ............................ 97.5 61.6 35.8
Investment real estate .................................. (28.3) (2.6) (0.8)
--------------------------------------------------
Realized investment gain before income taxes ......... 119.4 90.1 64.3
Applicable income taxes ................................. (40.7) (31.3) (22.7)
--------------------------------------------------
Net realized investment gain ......................... $ 78.7 $ 58.8 $ 41.6
==================================================
</TABLE>
The proceeds from sales of investment securities and related gains and losses
for 1997 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales ..................................... $ 1,712.6 $ -- $ 510.6
------------------------------------------------------
Gross realized gains on sales ........................... $ 46.9 $ -- $ 107.6
Gross realized losses on sales .......................... (14.8) -- (10.1)
------------------------------------------------------
Realized gains on sale .................................. 32.1 -- 97.5
Writedowns .............................................. (0.2) -- --
Other, including gains on calls and redemptions ......... 18.3 -- --
------------------------------------------------------
Total realized gain .................................. $ 50.2 $ -- $ 97.5
======================================================
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
60
<PAGE> 32
The proceeds from sales of investment securities and related gains and losses
for 1996 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales ........................................ $ 979.9 $ 13.3 $ 181.7
======================================================
Gross realized gains on sales .............................. $ 33.0 $ -- $ 66.2
Gross realized losses on sales ............................. (27.6) (1.3) (4.6)
------------------------------------------------------
Realized gains (losses) on sale ............................ 5.4 (1.3) 61.6
Writedowns ................................................. (5.5) -- --
Other, including gains (losses) on calls and redemptions ... 32.7 (0.2) --
------------------------------------------------------
Total realized gain (loss) .............................. $ 32.6 $ (1.5) $ 61.6
======================================================
</TABLE>
The 1996 sales of fixed maturities held-to-maturity were made due to evidence
of significant deterioration in the bond issuer's creditworthiness.
The proceeds from sales of investment securities and related gains and losses
for 1995 are as follows:
<TABLE>
<CAPTION>
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales ..................................... $ 549.9 $-- $ 176.8
===============================================
Gross realized gains on sales ........................... $ 26.9 $-- $ 46.5
Gross realized losses on sales .......................... (12.3) -- (10.7)
-----------------------------------------------
Realized gains on sale .................................. 14.6 -- 35.8
Writedowns .............................................. (13.6) -- --
Other, including gains on calls and redemptions ......... 28.3 -- --
-----------------------------------------------
Total realized gain .................................. $ 29.3 $-- $ 35.8
===============================================
</TABLE>
The following analysis summarizes the changes in unrealized gains and losses
on investment securities (includes fixed maturities held-to-maturity and
available-for-sale):
<TABLE>
<CAPTION>
1997 1996 1995
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in unrealized appreciation of investment securities:
Fixed maturities .............................................................. $ 660.2 $ (571.2) $ 1,622.5
Marketable equity securities .................................................. 253.7 135.7 231.2
Applicable income taxes ....................................................... (319.9) 152.4 (648.8)
-----------------------------------------
Net change in unrealized appreciation ...................................... $ 594.0 $ (283.1) $ 1,204.9
=========================================
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
61
<PAGE> 33
NOTE 3: INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities and marketable equity
securities classified as available-for-sale at December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... $ 1,489.0 $ 85.3 $ (1.6) $ 83.7 $ 1,572.7
Obligations of states and political
subdivisions ................................. 4,969.2 479.8 (2.6) 477.2 5,446.4
Debt securities issued by foreign governments ... 248.8 48.5 (0.2) 48.3 297.1
Corporate securities ............................ 6,214.4 312.7 (4.3) 308.4 6,522.8
Mortgage-backed securities ...................... 3,165.4 142.9 (4.1) 138.8 3,304.2
-------------------------------------------------------------------------
Total fixed maturities classified as
available-for-sale ........................ 16,086.8 1,069.2 (12.8) 1,056.4 17,143.2
Marketable equity securities .................... 969.0 914.7 (4.0) 910.7 1,879.7
-------------------------------------------------------------------------
Total ..................................... $ 17,055.8 $ 1,983.9 $ (16.8) 1,967.1 $ 19,022.9
========================================= ===========
Deferred policy acquisition costs
valuation allowance .......................... (36.5)
Applicable income taxes ......................... (671.8)
---------
Unrealized appreciation of investment securities,
net of tax, included in shareholders' equity . $ 1,258.8
=========
</TABLE>
The following is a summary of fixed maturities classified as held-to-maturity
at December 31, 1997:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ........ $ 257.9 $ 74.2 $ -- $ 74.2 $ 332.1
Obligations of states and political subdivisions 120.4 14.9 -- 14.9 135.3
Debt securities issued by foreign governments .. 148.9 40.3 -- 40.3 189.2
Corporate securities ........................... 1,880.5 286.5 (0.1) 286.4 2,166.9
Mortgage-backed securities ..................... 300.9 35.6 (0.1) 35.5 336.4
----------------------------------------------------------------------
Total fixed maturities classified as
held-to-maturity ......................... $2,708.6 $ 451.5 $ (0.2) $ 451.3 $3,159.9
======================================================================
</TABLE>
The following is a summary of fixed maturities and marketable equity
securities classified as available-for-sale at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- - - -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ......... $ 1,123.4 $ 49.9 $ (4.6) $ 45.3 $ 1,168.7
Obligations of states and political subdivisions 3,036.1 350.7 (2.9) 347.8 3,383.9
Debt securities issued by foreign governments ... 204.8 44.4 -- 44.4 249.2
Corporate securities ............................ 4,373.2 195.5 (22.9) 172.6 4,545.8
Mortgage-backed securities ...................... 2,533.0 74.2 (18.6) 55.6 2,588.6
---------------------------------------------------------------------
Total fixed maturities classified as
available-for-sale ........................ 11,270.5 714.7 (49.0) 665.7 11,936.2
Marketable equity securities .................... 641.8 660.3 (3.3) 657.0 1,298.8
---------------------------------------------------------------------
Total ..................................... $11,912.3 $ 1,375.0 $ (52.3) 1,322.7 $13,235.0
========================================== =========
Deferred policy acquisition costs
valuation allowance .......................... (19.0)
Applicable income taxes ......................... (452.3)
---------
Unrealized appreciation of investment securities,
net of tax, included in shareholders' equity . $ 851.4
=========
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
62
<PAGE> 34
The following is a summary of fixed maturities classified as held-to-maturity
at December 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- - - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ........ $ 244.7 $ 29.5 $ (0.4) $ 29.1 $ 273.8
Obligations of states and political subdivisions 103.1 3.8 (0.7) 3.1 106.2
Debt securities issued by foreign governments .. 148.3 24.4 -- 24.4 172.7
Corporate securities ........................... 1,700.4 131.1 (13.8) 117.3 1,817.7
Mortgage-backed securities ..................... 291.8 13.1 (5.3) 7.8 299.6
--------------------------------------------------------------
Total fixed maturities classified as
held-to-maturity ......................... $2,488.3 $ 201.9 $ (20.2) $ 181.7 $2,670.0
==============================================================
</TABLE>
The amortized cost and estimated market value of fixed maturities at December
31, 1997, by contractual maturity, are presented below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
- - - ------------------------------------------------------------------------------------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST MARKET VALUE COST MARKET VALUE
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less .............. $ 356.9 $ 358.3 $ -- $ --
Due after one year through five years 2,809.0 2,893.9 -- --
Due after five years through ten years 2,956.2 3,089.4 49.2 56.7
Due after ten years .................. 6,799.3 7,497.4 2,358.5 2,766.8
Mortgage-backed securities ........... 3,165.4 3,304.2 300.9 336.4
---------------------------------------------------------
Total ............................. $ 16,086.8 $ 17,143.2 $ 2,708.6 $ 3,159.9
=========================================================
</TABLE>
The following table summarizes SAFECO's consolidated allowance for credit
losses related to its mortgage loan investments and finance receivables:
<TABLE>
<CAPTION>
1997 1996 1995
- - - -------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance at beginning of year .......... $30.4 $27.5 $24.6
Provision for credit losses ............. 3.3 4.4 4.2
Loans charged off as uncollectible ...... (1.5) (1.8) (1.9)
Recoveries .............................. 0.3 0.3 0.6
-------------------------------
Allowance at end of year ............. $32.5 $30.4 $27.5
===============================
</TABLE>
These allowances relate to SAFECO Credit's finance receivables ($1,004.3 at
December 31, 1997) and to mortgage loan investments ($499.0 at December 31,
1997), nearly all of which are held by SAFECO Life Insurance Company. The
allow-ances include amounts determined under FAS 114 and FAS 118 (specific
reserves), as well as general reserve amounts (see Note 1 on page 58 for
discussion of FAS 114 and FAS 118). The total investment in impaired loans, as
defined under FAS 114 and 118 and before any reserve for losses, is $3.6 at
December 31, 1997. A specific loan loss reserve has been established for each
impaired loan, the total of which is $0.6 at December 31, 1997 and is included
in the overall allowance of $32.5 at December 31, 1997.
SAFECO CORPORATION 1997 ANNUAL REPORT
63
<PAGE> 35
NOTE 4: DEBT
At December 31, 1997, SAFECO Credit had short- term borrowings of $847.1
through commercial paper and $44.9 of medium-term notes. The repayment of each
of these borrowings is guaranteed by SAFECO Corporation. The weighted average
interest rates on the short-term borrowings were 5.9% and 5.4% at December 31,
1997 and 1996, respectively. The medium-term notes have maturities from April
1998 to December 2001 and a weighted average interest rate of 7.9% at December
31, 1997.
SAFECO Corporation has two bank credit facilities available. The first is a
364-day revolving facility that totals $475.0 and is available for general
corporate purposes, including support of SAFECO Credit's short-term borrowings.
The second totals $1,100.0 and is a five-year facility extending to 2002 that
also is available for general corporate purposes, including support of SAFECO
Corporation's commercial paper debt. There are currently no borrowings
outstanding under either of these facilities, nor were there any borrowings
outstanding as of December 31, 1997. SAFECO Corporation pays a fee to have these
lines of credit available and does not maintain deposits as compensating
balances. Both facilities have certain covenants including requiring SAFECO to
maintain a specified minimum level of shareholders' equity. As of December 31,
1997, SAFECO was in compliance with all such covenants.
SAFECO Credit and SAFECO Corporation have entered into interest rate swap
agreements with outside parties to reduce the impact of changes in interest
rates on their variable rate debt by converting variable rate interest payments
to fixed rates. The interest rate swap agreements provide only for the exchange
of interest on the notional amounts at the stated rates, with no multipliers or
leverage. There were no swap terminations in 1997, 1996, or 1995. The net
interest accrued under these agreements is recorded as an adjustment to interest
expense. At December 31, 1997, SAFECO Credit interest rate swap agreements were
outstanding with notional amounts of $359.4, replacing variable rates with fixed
rates with a weighted average of 6.1%. Maturities of these agreements range from
February 1998 to June 2007. At December 31, 1996, SAFECO Credit interest rate
swap agreements were outstanding with notional amounts of $249.0, replacing
variable rates with fixed rates with a weighted average of 6.0%. SAFECO
Corporation entered into two interest rate swap agreements in December 1997.
Both swaps are for notional amounts of $150.0 each and replace variable rates
with fixed rates of 5.9%. The two swaps mature in December 2002 and December
2007, respectively.
Real estate mortgages are collateralized by the related investment real
estate buildings and property.
See discussion of capital securities in Note 10.
The total amount, current portions, interest rates and maturities of notes
and mortgages payable at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- - - ------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT TOTAL CURRENT
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAFECO Corporation commercial paper payable
in 1998; weighted average interest rate at
December 31, 1997 - 5.9% .................................. $812.8 $812.8 $ -- $ --
=============================================
SAFECO Credit borrowings payable through 2001;
weighted average interest rates
at December 31:1997 - 6.0%; 1996 - 5.6% ................... $892.0 $867.5 $808.8 $763.9
=============================================
SAFECO Corporation, 7.875% notes due 2005 .................... $200.0 $ -- $200.0 $ --
=============================================
SAFECO Corporation, 6.875% notes due 2007 .................... $200.0 $ -- $ -- $ --
=============================================
Other debt:
Unsecured notes and loans payable in installments
in 1998; weighted average interest rates at
December 31, 1997 - 6.9%; 1996 - 6.7% .................. $ 90.4 $ 82.2 $ 64.7 $ 27.5
SAFECO Corporation, medium-term notes
due 2002 and 2003; weighted average interest rate
at December 31, 1997 and 1996 - 7.1% ................... 50.0 -- 50.0 --
Real estate mortgages payable in installments through 2014;
weighted average interest rates at December 31:
1997 - 8.0%; 1996 - 8.0% ............................... 114.7 2.3 110.0 2.0
---------------------------------------------
Total ................................................ $255.1 $ 84.5 $224.7 $ 29.5
=============================================
</TABLE>
Aggregate annual principal installments payable under these obligations for
each of the five years subsequent to 1997 are as follows: 1998 - $1,764.8; 1999
- - - - $6.3; 2000 - $55.8; 2001 - $14.8; 2002 - $45.4.
SAFECO CORPORATION 1997 ANNUAL REPORT
64
<PAGE> 36
NOTE 5: PROPERTY AND CASUALTY LOSS RESERVES
Unpaid losses and loss adjustment expense ("LAE") represent the estimated
liability (reserves) for claims reported plus losses incurred but not yet
reported and the related LAE. Although considerable variability is inherent in
such estimates, management believes that the liability for unpaid losses and LAE
is adequate. These estimates are continually reviewed and adjusted as necessary;
such adjustments are included in current operations.
The following is a summary of the activity related to SAFECO's property and
casualty companies' reserves for losses and LAE (net of reinsurance amounts):
<TABLE>
<CAPTION>
1997 1996 1995
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss and LAE reserves at beginning of year ............. $1,955.7 $2,070.1 $2,092.9
---------------------------------------
American States loss and LAE reserves at acquisition ... 2,204.6 -- --
---------------------------------------
Incurred loss and LAE for claims occurring
in the current year ................................. 1,969.5 1,658.2 1,586.7
Increase (Decrease) in estimated loss and LAE for claims
occurring in prior years ............................ 30.5 (77.7) (59.7)
---------------------------------------
Total incurred loss and LAE ............................ 2,000.0 1,580.5 1,527.0
---------------------------------------
Loss and LAE payments for claims occurring during:
Current year ........................................ 1,172.1 939.5 856.8
Prior years ......................................... 906.3 755.4 693.0
---------------------------------------
Total loss and LAE payments ............................ 2,078.4 1,694.9 1,549.8
---------------------------------------
Loss and LAE reserves at end of year ................ $4,081.9 $1,955.7 $2,070.1
=======================================
</TABLE>
The year-end reserve amounts above are net of related reinsurance
recoverables of $228.6, $103.4 and $110.7 for 1997, 1996 and 1995, respectively.
The amounts above do not include SAFECO's life subsidiaries' loss reserves
for accident and health claims as these amounts are not material in relation to
consolidated loss and LAE reserves. In addition, the majority of these claims
are incurred and paid in full within a one-year period.
Operations were charged for an increase in estimated loss and LAE for claims
occurring in prior years of $30.5 in 1997. The 1997 charge includes a
nonrecurring $40.0 reserve increase related to the American States acquisition
as described in Note 2. This reserve increase relates to American States'
previously discontinued assumed reinsurance operations. Excluding this
nonrecurring charge, the 1997 loss and LAE development on claims occurring in
prior years benefited operations $9.5. The 1996 and 1995 development benefited
operations by $77.7 and $59.7, respectively. The benefit to operations
recognized in both 1996 and 1995 resulted from several factors including:
aggressive reserving in years prior to 1995, favorable workers' compensation
legislation, fraud prevention and claims specialization. In recognition of the
above factors, 1996 newly reported and still open claims were reserved at lower,
more accurate levels than in the two prior years. This resulted in a reduced
level of favorable development in 1997 compared with 1996 and 1995.
The property and casualty companies' loss and LAE reserves include reserves
for environmental, asbestos and other toxic claims. These reserves are
approximately 8% of total property and casualty reserves for losses and LAE at
December 31, 1997 and approximately 5% at December 31, 1996 and 1995. The
increase in 1997 is due to the acquisition of American States on October 1,
1997. The reserves include estimates for both reported and incurred but not
reported (IBNR) losses and related legal expenses. In view of changes in
environmental regulations and evolving case law which affect the development of
loss reserves, the process of estimating loss reserves for environmental,
asbestos and other toxic claims results in imprecise estimates. Quantitative
techniques have to be supplemented by subjective considerations and managerial
judgment. Because of these conditions, trends that have affected development of
these liabilities in the past may not necessarily occur in the future. Although
estimation of environmental claims is difficult, the reserves established for
these claims at December 31, 1997 are believed to be adequate based on the known
facts and current law.
SAFECO CORPORATION 1997 ANNUAL REPORT
65
<PAGE> 37
NOTE 6: REINSURANCE
SAFECO's insurance subsidiaries protect themselves from excessive losses by
reinsuring on treaty and facultative bases. The availability and cost of
reinsurance are subject to prevailing market conditions, both in terms of price
and available capacity. Although the reinsurer is liable to SAFECO to the extent
of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as
the direct insurer on all risks reinsured. SAFECO evaluates the financial
condition of its reinsurers to minimize its exposure to losses from reinsurer
insolvencies. To SAFECO's knowledge, none of its reinsurers is experiencing
financial difficulties.
SAFECO's insurance subsidiaries do not enter into retrospective reinsurance
contracts and do not participate in any unusual or nonrecurring reinsurance
transactions such as "swaps" of reserves or loss portfolio transfers. SAFECO
does not use funding covers and does not participate in any surplus relief
transactions.
The balance sheet caption reinsurance recoverables is comprised of the
following amounts at December 31:
<TABLE>
<CAPTION>
1997 1996
- - - -----------------------------------------------------------------------------------------
<S> <C> <C>
Property and Casualty:
Reinsurance recoverables on:
Unpaid loss and LAE reserves ............................ $228.6 $103.4
Paid losses and LAE ..................................... 39.7 8.9
Life and Health:
Reinsurance recoverables on:
Unpaid loss and LAE reserves (policy and contract claims) 1.0 0.1
Paid claims ............................................. 0.8 1.0
Life policy liabilities ................................. 40.9 23.8
Other ................................................... -- 0.3
-------------------
Reinsurance recoverables .............................. $311.0 $137.5
===================
</TABLE>
The unearned premium liability is presented before the effect of reinsurance.
The reinsurance amounts related to the unearned premium liability are included
with other assets in the balance sheet and totaled $61.0 and $48.4 at December
31, 1997 and 1996, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the statement of income. These amounts are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty ceded earned premiums .. $155.8 $152.6 $160.3
Life and Health ceded earned premiums ........ 14.5 13.7 10.4
--------------------------------
Total ceded earned premiums ............... $170.3 $166.3 $170.7
================================
Property and Casualty ceded losses and LAE ... $ 46.1 $ 34.5 $ 46.2
Life and Health ceded policy benefits ........ 8.3 4.0 6.3
--------------------------------
Total ceded losses, LAE and policy benefits $ 54.4 $ 38.5 $ 52.5
================================
</TABLE>
Reinsurance premiums ceded on a written basis are approximately equal to the
ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
SAFECO CORPORATION 1997 ANNUAL REPORT
66
<PAGE> 38
NOTE 7: COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment
under leases which expire at various dates through 2058. These leases are
accounted for as operating leases. Minimum rental commitments for leases in
effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR PAYABLE MINIMUM RENTALS
- - - --------------------------------------------------------------------------------
<S> <C>
1998.................................................................... $ 21.4
1999.................................................................... 21.1
2000.................................................................... 20.8
2001.................................................................... 18.7
2002.................................................................... 14.8
2003 and thereafter..................................................... 130.9
------
Total.............................................................. $227.7
======
</TABLE>
The amount of rent charged to operations was $14.4, $10.0 and $9.6 for 1997,
1996 and 1995, respectively.
The property and casualty companies have written financial guaranty insurance
covering municipal revenue bond issues and residual values of certain commercial
buildings. The majority of these guaranties was written in the period 1984
through 1987. The remaining guaranties have maturities ranging from 1998 to
2000. At December 31, 1997 guaranties totaling $54.2 were outstanding.
Substantially all individual guaranties are supported by collateral (first
mortgage liens) in the underlying properties. At December 31, 1997, the
liabilities for losses and LAE and for unearned premiums related to these
guaranties totaled $8.7.
For information on environmental, asbestos and other toxic claim liabilities,
see Note 5.
See Note 6 for discussion relating to reinsurance.
NOTE 8: FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is required in developing the estimates of fair
value. Accordingly, these estimates are not necessarily indicative of the
amounts that could be realized in a current market exchange. The use of
different market assumptions and/or estimating methodologies may have a material
effect on the estimated fair value amounts.
For cash, short-term investments, accounts receivable, policy loans and other
liabilities, carrying value is a reasonable estimate of fair value.
Fair value amounts for fixed maturities and marketable equity securities are
the same as market prices for securities traded in the public marketplace or
analytically determined values for securities not publicly traded.
The fair values for mortgage and commercial loans have been estimated by
discounting the projected cash flows using the current rate at which loans would
be made to borrowers with similar credit ratings and for the same maturities.
Commercial loans are a component of finance receivables in the balance sheet.
Finance receivables also include lease receivables, which are exempt from fair
value disclosure requirements.
The fair value of investment contracts (funds held under deposit contracts)
with defined maturities is estimated by discounting projected cash flows using
rates that would be offered for similar contracts with the same remaining
maturities. For investment contracts with no defined maturities, fair value is
estimated to be the present surrender value.
The carrying values of SAFECO Corporation's and SAFECO Credit's commercial
paper as well as other debt that have variable interest rates are reasonable
estimates of fair value. For SAFECO Credit and other debt that have fixed
interest rates, fair value is estimated by discounting the projected cash flows
using the rate at which similar borrowings could currently be made. The fair
values of the 7.875% notes, the 6.875% notes and the capital securities are
estimated based on quotes from broker/dealers who make markets in similar
securities.
The estimated fair value of the property and casualty companies' financial
guaranty business (see Note 7) was not material at December 31, 1997 or 1996;
thus, no additional disclosures are warranted. Other insurance-related financial
instruments are exempt from fair value disclosure requirements.
SAFECO CORPORATION 1997 ANNUAL REPORT
67
<PAGE> 39
NOTE 8: FINANCIAL INSTRUMENTS (CONTINUED)
Estimated fair values of financial instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- - - ------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- - - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available-for-sale $17,143.2 $17,143.2 $11,936.2 $11,936.2
Fixed maturities held-to-maturity . 2,708.6 3,159.9 2,488.3 2,670.0
Marketable equity securities ...... 1,879.7 1,879.7 1,298.8 1,298.8
Mortgage loans .................... 499.0 524.0 448.0 461.0
Commercial loans .................. 634.9 637.0 536.5 531.0
Financial liabilities:
Funds held under deposit contracts 11,989.1 12,458.0 9,792.7 9,935.0
Commercial paper .................. 812.8 812.8 -- --
Credit Company borrowings ......... 892.0 893.0 808.8 810.0
7.875% notes due 2005 ............. 200.0 213.0 200.0 210.0
6.875% notes due 2007 ............. 200.0 205.0 -- --
Other debt ........................ 255.1 261.0 224.7 228.0
Capital securities ................... 841.7 881.0 -- --
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO's consolidated investments in mortgage-backed securities of $3,640.6
at market value at December 31, 1997 ($2,888.2 at December 31, 1996) are
primarily residential collateralized mortgage obligations and pass-throughs
(CMOs). CMOs, while technically defined as derivative instruments, are exempt
from derivative disclosure requirements. SAFECO's investment in CMOs comprised
of the riskier, more volatile type (e.g., interest only, inverse floaters, etc.)
has been intentionally limited to only a small amount--approximately 1% of total
CMOs at both December 31, 1997 and 1996.
SAFECO Credit provides loan and lease commitments at both variable and fixed
rates of interest. Fixed rate loan and lease commitments outstanding at December
31, 1997 were approximately $50, or less than 1% of consolidated investments.
The majority of these commitments have original terms of up to 90 days and
contracted fixed interest rates with a weighted average rate of 9% at December
31, 1997. Fixed rate commitments outstanding at December 31, 1996 were
approximately $30. Exposure to credit risk relating to these commitments (i.e.,
risk that the borrower will be unable to perform its obligations) is mitigated
through credit review and approval controls. Because the majority of the fixed
rate commitments have terms of 90 days or less, the estimated fair value of
these commitments is not material.
In 1997 SAFECO Life Insurance Company introduced an equity-indexed annuity
product that credits the policyholder based on a percentage of the gain in the
S&P 500 index. A portion of the premium is used to purchase S&P 500 call options
to hedge the growth in interest credited to the policyholder due to increases in
the S&P 500 index. Premiums paid to purchase the S&P 500 call options are
capitalized and included in other assets on the balance sheet and expensed over
the term of the option on a straight line basis. Any gain or loss on the call
options purchased is included in income when realized. The balance in other
assets for call options purchased was $21.2 at December 31, 1997. The estimated
fair value of call options purchased was not material at December 31, 1997;
thus, no additional disclosures are warranted.
SAFECO does not enter into financial instruments for trading or speculative
purposes. SAFECO's involvement in other investment-type derivatives is
intentionally of a very limited nature. Such derivatives include currency-linked
bonds and equity-linked bonds. Individually, and in the aggregate, these
derivatives are not material and thus no additional disclosures are warranted.
Interest rate swap agreements are entered into by SAFECO Corporation and
SAFECO Credit to reduce the impact of changes in interest rates on their
variable rate debt by converting variable rate interest payments to fixed rates.
The interest rate swap agreements provide only for the exchange of interest on
the notional amounts at the stated rates, with no multipliers or leverage. At
December 31, 1997, interest rate swap agreements were outstanding with notional
amounts of $659.4, replacing variable rates with fixed rates with a weighted
average of 6.0%. Maturities of these
SAFECO CORPORATION 1997 ANNUAL REPORT
68
<PAGE> 40
agreements range from February 1998 to December 2007. At December 31, 1996,
interest rate swap agreements were outstanding with notional amounts of $249.0
replacing variable rates with fixed rates with a weighted average of 6.0%. There
were no swap terminations in 1997, 1996 or 1995. The net interest accrued under
these agreements is recorded as an adjustment to interest expense. Exposure to
credit risk relating to interest rate swaps is the risk that the counterparty
will be unable to perform its obligations. This risk is mitigated through credit
review, approval controls and by entering into agreements with only highly rated
counterparties. The estimated fair value of interest rate swaps was not material
at December 31, 1997 or 1996; thus, no additional disclosures are warranted.
NOTE 9: COMMON STOCK
On December 1, 1995, the Corporation's common stock was split 2-for-1. Per
share amounts have been adjusted to reflect the stock split.
Changes in common stock outstanding for the last three years are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of shares outstanding at the beginning of year 126,308,237 125,978,742 62,951,634
Shares reacquired ................................... (233,542) (254,767) (288,805)
Shares issued for stock options and rights .......... 276,398 326,613 364,279
Secondary offering .................................. 14,800,000 -- --
Shares issued for acquisition of subsidiary ......... -- 257,649 --
Two-for-one stock split ............................. -- -- 62,951,634
---------------------------------------------------
Number of shares outstanding at the end of year .. 141,151,093 126,308,237 125,978,742
===================================================
</TABLE>
The secondary offering in 1997 relates to SAFECO's cash acquisition of
American States on October 1, 1997 (see Note 2). The 14,800,000 total shares
issued under the offering include 1,800,000 shares issued under the
underwriters' over-allotment option.
NOTE 10: CAPITAL SECURITIES
On July 15, 1997, SAFECO Capital Trust I ("Capital Trust"), a consolidated
wholly owned subsidiary of SAFECO Corporation issued $850.0 of 8.072%
Corporation-Obligated, Mandatorily Redeemable Capital Securities (the "Capital
Securities"). In connection with Capital Trust's issuance of the Capital
Securities and the related purchase by SAFECO Corporation of all of Capital
Trust's common securities (the "Common Securities"), SAFECO Corporation issued
to Capital Trust $876.3 principal amount of its 8.072% Junior Subordinated
Deferrable Interest Debentures, due July 15, 2037 (the "Subordinated
Debentures). The sole assets of Capital Trust are and will be the Subordinated
Debentures. The interest and other payment dates on the Subordinated Debentures
correspond to the distribution and other payment dates on the Capital Securities
and the Common Securities. Distributions on the Capital Securities and Common
Securities are cumulative and payable semi-annually in arrears. The Subordinated
Debentures and the related income effects are eliminated in SAFECO's financial
statements.
For federal income tax purposes, the Subordinated Debentures are classified
as indebtedness. Accordingly interest on the Subordinated Debentures is
deductible at the federal statutory rate of 35%.
The Capital Securities are mandatorily redeemable on July 15, 2037, the same
date the Subordinated Debentures are due. The Capital Securities may be
redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007
at a price of 104%, with the call premium graded down to zero in 2017. SAFECO
Corporation's obligations under the Subordinated Debentures and related
agreements, taken together, constitute a full and unconditional guarantee of
payments due on the Capital Securities.
SAFECO Corporation has the right, at any time, to defer payments of interest
on the Subordinated Debentures for up to five years. Consequently, the
distributions on the Capital Securities and Common Securities would be deferred
(though such distributions would continue to accrue with interest thereon since
interest would accrue on the Subordinated Debentures during any such extended
interest payment period). In no case may the deferral of payments and
distributions extend beyond the stated maturity dates of the respective
securities. SAFECO Corporation cannot pay dividends on its common stock during
such deferments.
SAFECO CORPORATION 1997 ANNUAL REPORT
69
<PAGE> 41
NOTE 11: STOCK INCENTIVE PLAN
The SAFECO Long-Term Incentive Plan of 1997 provides for the issuance of up
to 6,000,000 shares of SAFECO Corporation common stock. Stock options,
restricted stock rights, performance stock rights and stock appreciation rights
are authorized under the Plan.
Stock options are granted at exercise prices not less than the fair market
value of the stock on the date of the grant. The terms and conditions upon which
options become exercisable may vary among grants; however, option rights expire
no later than ten years from the date of grant.
All share amounts and prices are adjusted for the 2-for-1 stock split in
1995.
SAFECO continues to apply Accounting Principles Board (APB) Opinion 25 in
accounting for its stock options, as allowed under FASB Statement 123. Under APB
25, because the exercise price of SAFECO's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
Applying Statement 123's fair value method would have resulted in net annual
compensation expense of $2.0, $1.4 and $0.7 in 1997, 1996 and 1995,
respectively. Under Statement 123 only options granted beginning in 1995 are
required to be valued, therefore these pro forma expense amounts are not
representative of future amounts. Because of the immateriality of these expense
amounts, the pro forma effects on net income and earnings per share are not
shown. The weighted average fair value (at grant date) of options granted in
1997 was $10 per share and was estimated using the Black-Scholes option pricing
model with the following assumptions: risk free interest rate of 6.25%, dividend
yield of 3.0%, volatility factor of 22% and expected life of six years.
Changes in stock options for the three years ended December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- - - --------------------------------------------------------------------------------
WEIGHTED
AVERAGE
PRICE
SHARES PER SHARE
- - - --------------------------------------------------------------------------------
<S> <C> <C>
Balance December 31, 1994 ............. 1,869,836 $21.00
Granted ............................ 312,200 29.87
Exercised .......................... (357,203) 15.45
Canceled ........................... (21,200) 26.21
----------------------------
Balance December 31, 1995 ............. 1,803,633 23.57
Granted ............................ 372,700 33.60
Exercised .......................... (317,890) 17.19
Canceled ........................... -- --
----------------------------
Balance December 31, 1996 ............. 1,858,443 26.67
Granted ............................ 339,900 42.05
Exercised .......................... (270,939) 21.67
Canceled ........................... (21,950) 31.87
----------------------------
Balance December 31, 1997 ............. 1,905,454 $30.07
============================
Exercisable at
December 31, 1997 .................. 948,529 $25.43
============================
</TABLE>
Exercise prices for options outstanding as of December 31, 1997 range from
$12.25 to $50.25 per share.
Restricted stock rights provide for the holder to receive a stated number of
share rights if the holder remains employed for the stated number of years.
Performance stock rights provide for the holder to receive a stated number of
share rights if the holder attains certain specified performance goals within a
stated performance cycle. Performance goals may include net income, return on
equity, stock price appreciation and/or other criteria. Performance stock rights
were first awarded in 1997.
Matured restricted stock rights and earned performance stock rights are
issued in stock and/or paid in cash at the option of the holder. During 1997,
1996 and 1995, $2.8, $2.0 and $1.3, respectively, were charged to operations for
the compensation element of restricted and performance stock rights and stock
appreciation rights.
SAFECO CORPORATION 1997 ANNUAL REPORT
70
<PAGE> 42
Changes in restricted and performance stock rights for the three years ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
SHARE RIGHTS
- - - --------------------------------------------------------------------------------
<S> <C>
Balance December 31, 1994 ............................. 87,688
Awarded ............................................ 44,800
Matured ............................................ (35,762)
Canceled ........................................... (1,150)
-------
Balance December 31, 1995 ............................. 95,576
Awarded ............................................ 44,500
Matured ............................................ (37,342)
Canceled ........................................... --
-------
Balance December 31, 1996 ............................. 102,734
Awarded ............................................ 97,000
Matured ............................................ (45,091)
Canceled ........................................... --
-------
Balance December 31, 1997 ............................. 154,643
-------
</TABLE>
There were 5,846,200 shares of common stock reserved for future options and
rights at December 31, 1997.
NOTE 12: STATUTORY INFORMATION
The insurance subsidiaries are required to file annual statements with state
regulatory authorities prepared on an accounting basis prescribed or permitted
by such authorities (i.e., statutory basis). Prescribed statutory accounting
practices include state laws, regulations and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance with
generally accepted accounting principles primarily because policy acquisition
costs are expensed when incurred, life insurance reserves are based on different
assumptions and income tax expense reflects only taxes paid or currently
payable.
Statutory net income and equity are as follows:
<TABLE>
<CAPTION>
STATUTORY NET INCOME 1997 1996 1995
- - - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty .......... $ 580.0 $ 317.7 $ 299.3
Life and Health ................ 115.7 97.2 103.0
</TABLE>
<TABLE>
<CAPTION>
STATUTORY SHAREHOLDER'S EQUITY
DECEMBER 31 1997 1996
- - - ----------------------------------------------------------------------------------
<S> <C> <C>
Property and Casualty ................ $ 3,160.5 $ 2,166.2
Life and Health ...................... 739.3 587.7
</TABLE>
The statutory net income amounts for 1997 reported above include American
States for the entire calendar year.
SAFECO's insurance subsidiaries have received written approval from the
Washington State Insurance Department to treat certain loans to related SAFECO
subsidiaries (all made at market rates) as admitted assets. The allowance of
such loans has not materially enhanced surplus at December 31, 1997.
NOTE 13: DIVIDEND RESTRICTIONS
SAFECO's subsidiaries are restricted as to the amount of dividends they may
pay to their parent without regulatory or lender consent. The amount of
subsidiary retained earnings available for the payment of dividends to SAFECO
Corporation without prior regulatory or lender approval approximated $820.5 at
December 31, 1997.
NOTE 14: EMPLOYEE BENEFIT PLANS
The Corporation administers profit-sharing bonus, defined contribution, and
defined benefit plans covering substantially all employees. The defined
contribution plans include profit sharing retirement plans, a savings plan and a
401(k) plan. A defined benefit plan covering substantially all American States
employees provides benefits based on total years of service and the highest 60
months of compensation during the last 10 years of employment. A cash balance
defined benefit plan covering substantially all other employees provides
benefits for each year of service after 1988, based on the employee's
compensation level plus a stipulated rate of return on the benefit balance. It
is SAFECO's policy to fund these defined benefit plans on a current basis to the
full extent deductible under federal income tax regulations.
The following table summarizes the funded status of the defined benefit
plans:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- - - ---------------------------------------------------------------------------------
<S> <C> <C>
Total projected benefit obligation ............ $235.1 $ 30.3
Plan assets at fair value ..................... 265.4 44.0
-----------------------
Plan assets in excess of projected
benefit obligation ......................... $ 30.3 $ 13.7
-----------------------
</TABLE>
Plan assumptions include a discount rate of 7.0% at December 31, 1997, a rate
of return on plan assets of 9.0% for 1997 and a rate of increase in compensation
of 4.5% for 1997. Plan assets consist primarily of listed equity securities,
corporate bonds and U.S. government bonds.
The increases in the amounts above in 1997 are due to the American States
acquisition.
SAFECO CORPORATION 1997 ANNUAL REPORT
71
<PAGE> 43
NOTE 14: EMPLOYEE BENEFIT PLANS (CONTINUED)
The cost of the plans discussed above charged to income is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Profit-sharing bonus ........... $ 23.8 $ 21.4 $ 21.8
Defined contribution ........... 31.3 30.5 26.9
Defined benefit ................ 7.9 6.5 5.6
---------------------------------------
Total ....................... $ 63.0 $ 58.4 $ 54.3
=======================================
</TABLE>
In addition, SAFECO provides certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees become eligible for these benefits if they reach retirement age while
working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree. SAFECO accrues for these costs during the years that employees provide
services, under FASB Statement 106.
Net periodic other postretirement benefit costs were $3.9, $3.2 and $1.9 in
1997, 1996 and 1995 respectively.
The following table summarizes the funded status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- - - --------------------------------------------------------------------------------
<S> <C> <C>
Total accumulated postretirement
benefit obligation (APBO) ................... $87.4 $25.3
Less plan assets at fair value ................. 1.4 1.1
---------------------
APBO in excess of plan assets .................. 86.0 24.2
Unrecognized gain .............................. 2.3 6.6
---------------------
Accrued postretirement benefit cost
recorded in the balance sheet ............... $88.3 $30.8
---------------------
</TABLE>
Discount rate assumptions of 7.0%, 7.75% and 7.5% were used at December 31,
1997, 1996 and 1995, respectively. The accumulated postretirement benefit
obligation at December 31, 1997 was determined using a healthcare cost trend
rate of 10% for 1998, gradually decreasing to 5% in 2005 and remaining at that
level thereafter. A one-percentage point increase in the assumed healthcare cost
trend rate for each year would increase the accumulated other postretirement
benefit obligation as of December 31, 1997 by $8.1 and the annual net periodic
other postretirement benefit cost for the year then ended by $0.6. The increases
in the amounts for other postretirement benefits in 1997 are due to the American
States acquisition.
NOTE 15: REAL ESTATE COMPANIES' LEASED PROPERTIES
In February 1998, SAFECO announced its decision to sell its real estate
subsidiary, SAFECO Properties Inc. For more information see Note 1 on page 56.
The real estate companies receive rental income, principally from shopping
centers, under leases which expire at various dates through 2034. These leases
are accounted for as operating leases. Minimum future rentals from leases in
effect at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR RECEIVABLE AMOUNT
- - - --------------------------------------------------------------------------------
<S> <C>
1998 .................................................................... $ 52.2
1999 .................................................................... 49.3
2000 .................................................................... 46.6
2001 .................................................................... 44.6
2002 .................................................................... 42.1
2003 and thereafter ..................................................... 286.5
------
Total $521.3
======
</TABLE>
These amounts do not include contingent rentals that are based on a
percentage of sales in excess of stipulated minimums or increases in the
Consumer Price Index. Contingent rentals included in revenue were $4.4, $4.7 and
$4.3 in 1997, 1996 and 1995, respectively.
The real estate companies' investment in rental property and related
accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
- - - --------------------------------------------------------------------------------
<S> <C> <C>
Shopping centers ........................... $372.3 $284.7
Office and industrial space ................ 84.1 47.8
Healthcare facilities ...................... 50.9 40.0
Other ...................................... 43.1 42.6
------------------------
550.4 415.1
Less accumulated depreciation .............. 93.9 82.1
------------------------
Total ................................... $456.5 $333.0
========================
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
72
<PAGE> 44
NOTE 16: INCOME TAXES
SAFECO uses the liability method of accounting for income taxes pursuant to
FASB Statement 109, "Accounting for Income Taxes." Under the liability method,
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal income
tax rate of 35% to income before income taxes and the consolidated provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - - -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense ............. $200.4 $202.5 $179.8
Tax-exempt municipal bond income ............ (73.2) (66.2) (64.7)
Dividends received deduction ................ (10.5) (9.4) (10.2)
Proration adjustment ........................ 10.3 8.7 7.8
Other ....................................... 0.8 3.9 2.1
----------------------------------
Consolidated provision for income taxes .. $127.8 $139.5 $114.8
==================================
</TABLE>
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1997, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996 1995
- - - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Discounting of loss and adjustment expense reserves ............. $ 250.0 $ 122.7 $ 131.7
Unearned premium liability ...................................... 113.9 62.3 59.6
Adjustment to life policy liabilities ........................... 72.1 34.8 30.2
Capitalization of life policy acquisition costs ................. 49.2 33.4 21.9
Postretirement benefits ......................................... 30.9 10.8 9.9
Nondeductible accruals .......................................... 58.2 8.6 9.3
Other ........................................................... 35.8 41.7 37.4
------------------------------------
Total deferred tax assets .................................... 610.1 314.3 300.0
------------------------------------
Deferred tax liabilities:
Deferred policy acquisition costs ............................... 203.5 145.3 139.7
Bond discount accrual ........................................... 36.2 27.2 22.5
Accelerated depreciation ........................................ 81.4 75.7 65.3
Real estate development expenses capitalized .................... 11.9 11.6 12.2
Unrealized appreciation of investment securities
(Net of deferred policy acquisition costs valuation allowance:
1997 - $12.8; 1996 - $6.7; 1995 - $15.0) ..................... 675.6 456.3 543.6
Other ........................................................... 48.4 16.0 15.6
------------------------------------
Total deferred tax liabilities ............................... 1,057.0 732.1 798.9
------------------------------------
Net deferred tax liability ................................... $ 446.9 $ 417.8 $ 498.9
====================================
</TABLE>
The following table reconciles the deferred tax expense (benefit) in the
Statement of Consolidated Income to the net change in the deferred tax liability
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax expense (benefit) ................................... $ 20.7 $ 6.0 $(16.6)
Net deferred tax assets acquired in acquisitions ................. (209.9) -- --
Deferred tax changes reported in shareholders' equity:
Increase (decrease) in liability related to unrealized
appreciation (depreciation) of investment securities,
net of deferred policy acquisition costs valuation
allowance .................................................. 219.3 (87.3)
476.7
Increase (decrease) in liability related to unrealized
gain (loss) from foreign currency translation .............. (1.0) 0.2 1.0
----------------------------------
Increase (decrease) in net deferred tax liability ................ $ 29.1 $(81.1) $461.1
==================================
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
73
<PAGE> 45
NOTE 17: SEGMENT DATA
<TABLE>
<CAPTION>
UNDER-
INVESTMENT REALIZED WRITING NET INCOME IDENTIFIABLE
REVENUES INCOME GAIN (LOSS) PROFIT (LOSS) (LOSS) ASSETS
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Property and Casualty:
Personal ............. $ 1,930.7 $ 62.0 $ 415.4
Commercial and Surety 885.9 (25.8) 357.8
--------- ---------
Total ............. 2,816.6 $ 327.0 $ 132.8 $ 36.2 $ 347.0* 12,505.5
--------- --------- --------- ========= --------- -------
Life and Health:
Financial Services ... 72.9 626.8 3.3 10,586.5
Employee Benefits .... 217.3 289.5 3.5 4,711.3
--------- --------- --------- -------
Total ............. 290.2 916.3 6.8 102.0 15,297.8
--------- --------- --------- --------
Real Estate ............. 75.1 (28.3) (12.2) 638.1
Credit .................. 96.2 14.1 1,278.2
Other and Eliminations .. 67.1 1.4 8.1 (20.9) (251.8)
--------- --------- --------- --------- -------
Consolidated Totals... $ 3,345.2 $ 1,244.7 $ 119.4 $ 430.0 $29,467.8
========= ========= ========= ========= =========
1996
Property and Casualty:
Personal ............. $ 1,650.7 $ 5.0 $ 352.2
Commercial and Surety... 624.7 33.4 244.1
--------- ---------
Total ............. 2,275.4 $ 281.6 $ 64.7 $ 38.4 $ 313.4 6,244.0
--------- --------- --------- ========== -------
Life and Health:
Financial Services ... 50.7 554.8 5.9 7,745.5
Employee Benefits .... 215.2 281.9 4.6 4,319.6
--------- --------- --------- -------
Total ............. 265.9 836.7 10.5 95.4 12,065.1
--------- --------- --------- -------
Real Estate ............. 79.9 (2.6) 6.4 601.3
Credit .................. 84.3 12.2 1,067.5
Other and Eliminations .. 53.1 (1.6) 17.5 11.6 (60.2)
--------- --------- --------- --------- -------
Consolidated Totals... $ 2,758.6 $ 1,116.7 $ 90.1 $ 439.0 $19,917.7
========= ========= ========= ========= =========
1995
Property and Casualty:
Personal ............. $ 1,562.7 $ (2.5) $ 335.0
Commercial and Surety... 599.4 8.8 229.7
--------- ---------
Total ............. 2,162.1 $ 291.5 $ 51.6 $ 6.3 $ 290.1 6,174.4
--------- --------- --------- ========= -------
Life and Health:
Financial Services ... 47.2 494.7 14.9 7,104.4
Employee Benefits .... 214.4 283.5 (9.0) 4,111.2
--------- --------- --------- -------
Total ............. 261.6 778.2 5.9 92.5 11,215.6
--------- --------- --------- -------
Real Estate ............. 75.0 (0.8) 5.4 527.0
Credit .................. 71.8 8.9 883.0
Other and Eliminations .. 44.8 5.6 7.6 2.1 (32.2)
--------- --------- --------- --------- -------
Consolidated Totals... $ 2,615.3 $ 1,075.3 $ 64.3 $ 399.0 $18,767.8
========= ========= ========= ========= =========
</TABLE>
Property and casualty companies' investments are available for payments of
claims and benefits for all product lines within the segments; therefore, such
investments and the related investment income and realized gains have not been
identified with specific segments. In the life and health companies, a major
portion of investment income, realized gains and assets is specifically
identifiable within an industry segment. The remainder of these amounts has been
allocated in proportion to the mean policy reserves and liabilities identified
with each segment.
*1997 Property and Casualty Net Income includes a charge for goodwill
amortization of $11.0 ($8.4 after tax) and nonrecurring acquisition charges of
$60.0 ($39.0 after tax). Both of these charges relate to SAFECO's October 1,
1997 acquisition of American States.
SAFECO CORPORATION 1997 ANNUAL REPORT
74
<PAGE> 46
NOTE 18: INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
- - - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
1997....................... $ 1,015.0 $ 1,031.3 $ 1,111.9 $ 1,551.1 $ 4,709.3
1996....................... 977.6 976.0 992.5 1,019.3 3,965.4
1995....................... 906.4 934.1 951.8 962.6 3,754.9
Income Before Realized Gain:*
1997....................... $ 96.8 $ 104.5 $ 79.7 $ 70.3 $ 351.3
1996....................... 89.2 92.9 105.2 92.9 380.2
1995....................... 61.6 92.4 100.9 102.5 357.4
Realized Gain:**
1997....................... $ 14.8 $ 12.7 $ 42.0 $ 9.2 $ 78.7
1996....................... 21.5 13.1 10.8 13.4 58.8
1995....................... 3.6 10.3 14.0 13.7 41.6
Net Income:
1997....................... $ 111.6 $ 117.2 $ 121.7 $ 79.5 $ 430.0
1996....................... 110.7 106.0 116.0 106.3 439.0
1995....................... 65.2 102.7 114.9 116.2 399.0
(Per Share)***
Income Before Realized Gain:*
1997....................... $ .77 $ .83 $ .63 $ .51 $ 2.72
1996....................... .71 .74 .83 .74 3.02
1995....................... .49 .74 .80 .81 2.84
Realized Gain:**
1997....................... $ .11 $ .10 $ .33 $ .07 $ .61
1996....................... .17 .10 .09 .10 .46
1995....................... .03 .08 .11 .11 .33
Net Income:
1997....................... $ .88 $ .93 $ .96 $ .58 $ 3.33
1996....................... .88 .84 .92 .84 3.48
1995....................... .52 .82 .91 .92 3.17
Dividends Paid:
1997....................... $ .29 $ .29 $ .32 $ .32 $ 1.22
1996....................... .265 .265 .29 .29 1.11
1995....................... .245 .245 .265 .265 1.02
Market Price Range:****
1997-High.................... $ 43.06 $ 48.91 $ 54.25 $ 54.47 $ 54.47
-Low..................... 36.75 38.75 45.81 46.06 36.75
1996-High.................... 39.19 35.38 35.50 41.63 41.63
-Low..................... 33.13 30.88 32.00 35.19 30.88
</TABLE>
* Income amounts are after distributions on capital securities and are net
of income tax.
** Amounts are net of income tax.
*** Income per share amounts are before the effects of dilution, which are not
material.
**** SAFECO Corporation common stock trades on The Nasdaq Stock Market under
the symbol SAFC. The price range represents the high and low closing
sales price.
Fourth quarter 1997 income before realized gain and net income include
nonrecurring acquisition charges of $60.0 ($39.0 after tax, $0.28 per share).
SAFECO CORPORATION 1997 ANNUAL REPORT
75
<PAGE> 47
SUMMARY OF GROWTH
<TABLE>
<CAPTION>
1997 1996 1995
- - - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions Except Per Share Amounts)
INCOME SUMMARY
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty...................................... $ 260.2 $ 270.6 $ 256.4
Life and Health............................................ 97.0 88.8 89.0
Real Estate................................................ 6.2 8.4 5.9
Credit..................................................... 14.1 12.2 8.9
Asset Management........................................... 4.9 5.1 4.7
Corporate.................................................. (16.3) (4.9) (7.5)
-------------------------------------------
Total................................................... 366.1 380.2 357.4
Realized Gain, Net of Income Taxes............................ 78.7 58.8 41.6
-------------------------------------------
Income Before Distributions on Capital Securities............. 444.8 439.0 399.0
Distributions on Capital Securities, Net of Tax............... (14.8) -- --
Cumulative Effect of Accounting Changes -- -- --
-------------------------------------------
Net Income.................................................... $ 430.0 $ 439.0 $ 399.0
===========================================
STATISTICS PER SHARE OF COMMON STOCK*
Net Income - Basic
Income Before Realized Gain**.............................. $ 2.72 $ 3.02 $ 2.84
Realized Gain.............................................. .61 .46 .33
Cumulative Effect of Accounting Changes -- -- --
Net Income................................................. 3.33 3.48 3.17
Average Number of Shares................................... 129.2 126.1 126.0
Net Income - Diluted
Income Before Realized Gain**.............................. 2.71 3.01 2.83
Realized Gain.............................................. .60 .46 .33
Cumulative Effect of Accounting Changes -- -- --
Net Income................................................. 3.31 3.47 3.16
Average Number of Shares................................... 129.8 126.5 126.4
Dividends Paid................................................ 1.22 1.11 1.02
Market Price:
High....................................................... 54.47 41.63 37.63
Low........................................................ 36.75 30.88 25.25
Close...................................................... 48.75 39.44 34.50
Shareholders' Equity:
Book Value................................................. 38.69 32.58 31.61
With Securities at Market Value, Net of Tax................ 40.77 33.52 33.39
REVENUES (EXCLUDING REALIZED GAINS)
Insurance:
Property and Casualty (Gross premiums written)............. $ 2,987.4 $ 2,463.5 $ 2,366.9
Life and Health............................................ 290.2 265.9 261.6
Net Investment Income (Excluding realized gain or loss):
Property and Casualty...................................... 327.0 281.6 291.5
Life and Health............................................ 916.3 836.7 778.2
Other...................................................... 1.4 (1.6) 5.6
Real Estate (Excluding realized gain or loss)................. 75.1 79.9 75.0
Credit (Including affiliate loans)............................ 96.2 84.3 71.8
Asset Management.............................................. 27.1 23.2 18.5
Talbot Financial.............................................. 49.7 38.5 32.1
-------------------------------------------
Total................................................... $ 4,770.4 $ 4,072.0 $ 3,901.2
===========================================
</TABLE>
*Share amounts are adjusted for stock splits.
**Net income per share amounts are after distributions on capital securities.
SAFECO CORPORATION 1997 ANNUAL REPORT
76
<PAGE> 48
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 192.7 $ 217.2 $ 187.1 $ 145.4 $ 183.7 $ 188.9 $ 191.4 $ 175.1
85.0 76.9 75.6 79.7 77.6 70.9 44.7 33.9
6.6 6.1 6.0 5.9 6.1 0.7 (8.1) (7.4)
7.4 6.4 6.1 6.4 4.5 4.0 3.5 2.4
4.1 4.3 4.3 3.4 3.0 2.5 2.0 1.5
(7.3) (3.9) (7.6) (3.9) (3.2) (3.3) 1.3 4.8
- - - --------------------------------------------------------------------------------------------------------------------------------
288.5 307.0 271.5 236.9 271.7 263.7 234.8 210.3
25.9 118.9 39.8 22.7 6.7 36.5 33.8 42.7
- - - --------------------------------------------------------------------------------------------------------------------------------
314.4 425.9 311.3 259.6 278.4 300.2 268.6 253.0
-- -- -- -- -- -- -- --
-- 2.9 -- -- -- -- -- --
- - - --------------------------------------------------------------------------------------------------------------------------------
$ 314.4 $ 428.8 $ 311.3 $ 259.6 $ 278.4 $ 300.2 $ 268.6 $ 253.0
================================================================================================================================
$ 2.29 $ 2.44 $ 2.17 $ 1.89 $ 2.16 $ 2.09 $ 1.79 $ 1.56
.21 .95 .31 .18 .05 .29 .26 .32
-- .02 -- -- -- -- -- --
2.50 3.41 2.48 2.07 2.21 2.38 2.05 1.88
125.9 125.8 125.6 125.5 126.2 126.4 130.9 134.9
2.28 2.43 2.15 1.87 2.14 2.07 1.79 1.55
.21 .94 .31 .18 .05 .29 .25 .31
-- .02 -- -- -- -- -- --
2.49 3.39 2.46 2.05 2.19 2.36 2.04 1.86
126.4 126.5 126.5 126.5 126.9 127.4 131.5 136.0
.94 .86 .78 .71 .64 .57 .51 .45
29.81 33.25 29.56 24.38 21.06 19.63 14.75 19.00
23.69 27.00 21.19 15.63 12.69 11.63 11.50 12.31
26.00 27.50 28.63 24.38 16.44 17.81 11.81 13.88
22.47 22.04 19.49 17.70 15.75 14.63 12.44 10.69
21.93 28.47 23.92 21.92 16.57 16.57 13.54 11.44
$ 2,278.0 $ 2,134.5 $ 1,937.1 $ 1,830.2 $ 1,792.8 $ 1,696.9 $ 1,627.9 $ 1,545.9
276.8 306.0 328.5 332.7 312.0 274.3 265.0 240.4
283.5 277.6 280.8 286.1 283.3 263.4 220.5 179.8
706.2 668.2 623.6 557.4 476.2 391.9 296.2 233.9
1.9 6.0 (1.4) 3.2 5.3 14.7 20.2 22.6
107.3 78.3 187.2 274.4 254.7 246.2 223.2 195.9
58.2 54.0 51.3 54.4 45.2 38.7 34.3 30.8
15.1 13.2 13.1 10.8 9.0 8.3 7.2 6.7
25.5 -- -- -- -- -- -- --
- - - --------------------------------------------------------------------------------------------------------------------------------
$ 3,752.5 $ 3,537.8 $ 3,420.2 $ 3,349.2 $ 3,178.5 $ 2,934.4 $ 2,694.5 $ 2,456.0
================================================================================================================================
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
77
<PAGE> 49
SUMMARY OF GROWTH (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
- - - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions Except Ratios)
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
Personal Auto................................................... $ 1,295.2 $ 1,087.0 $ 1,043.6
Homeowners...................................................... 547.8 469.1 440.2
Other Personal.................................................. 182.0 170.0 163.1
------------------------------------------------
Total Personal............................................ 2,025.0 1,726.1 1,646.9
Commercial...................................................... 837.8 607.3 588.1
Surety.......................................................... 99.5 103.2 100.1
Other........................................................... 25.1 26.9 31.8
Total Canada.................................................... -- -- --
------------------------------------------------
Gross Premiums Written.......................................... 2,987.4 2,463.5 2,366.9
Ceded Reinsurance Premiums...................................... 159.2 150.4 159.9
------------------------------------------------
Net Premiums Written............................................ $ 2,828.2 $ 2,313.1 $ 2,207.0
================================================
OPERATING RATIOS OF PROPERTY AND CASUALTY INSURANCE
Ratios to Earned Premiums:*
Losses....................................................... 58.40% 59.09% 60.04%
Adjustment Expense........................................... 11.18 10.37 10.58
Underwriting Expenses........................................ 28.47 28.14 28.39
Dividends to Policyholders................................... .66 .71 .70
------------------------------------------------
Combined Losses and Expenses................................. 98.71% 98.31% 99.71%
------------------------------------------------
Premiums Written to Policyholders' Surplus...................... 1.3:1 1.1:1 1.2:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty:
Underwriting................................................. $ 36.2 $ 38.4 $ 6.3
Nonrecurring 1997 Acquisition Charges........................ (60.0) -- --
Investment................................................... 327.0 281.6 291.5
Goodwill Amortization........................................ (11.0) -- --
Proposition 103 Settlement .................................. -- -- --
Life and Health................................................. 147.9 136.7 135.6
Real Estate..................................................... 9.6 13.0 9.1
Credit.......................................................... 21.5 19.1 13.3
Asset Management................................................ 7.5 7.6 6.9
Corporate....................................................... (25.5) (8.0) (13.2)
------------------------------------------------
Total..................................................... $ 453.2 $ 488.4 $ 449.5
================================================
SHAREHOLDERS' EQUITY
Book Value...................................................... $ 5,461.7 $ 4,115.3 $ 3,982.6
With Securities at Market Value, Net of Tax..................... 5,755.1 4,233.4 4,206.2
Long-Term Debt from Operations (Excludes Capital Securities).... 632.9 453.9 503.6
Total Assets.................................................... 29,467.8 19,917.7 18,767.8
</TABLE>
*Ratios exclude goodwill amortization, nonrecurring 1997 acquisition charges and
1993 Proposition 103 settlement.
SAFECO CORPORATION 1997 ANNUAL REPORT
78
<PAGE> 50
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990 1989 1988 1987
- - - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,013.4 $ 977.1 $ 907.0 $ 805.8 $ 717.6 $ 644.8 $ 596.0 $ 549.3
403.7 362.4 310.8 271.5 239.6 222.5 219.0 214.1
144.6 126.4 109.1 92.6 82.6 74.1 71.1 68.1
- - - ------------------------------------------------------------------------------------------------------------------------
1,561.7 1,465.9 1,326.9 1,169.9 1,039.8 941.4 886.1 831.5
591.9 544.2 492.0 450.7 464.3 480.6 483.9 463.8
90.2 84.2 79.7 79.1 75.9 77.2 69.8 62.5
34.2 40.2 38.5 47.5 39.1 38.9 35.2 31.9
-- -- -- 83.0 173.7 158.8 152.9 156.2
- - - ------------------------------------------------------------------------------------------------------------------------
2,278.0 2,134.5 1,937.1 1,830.2 1,792.8 1,696.9 1,627.9 1,545.9
174.5 134.3 116.7 200.5 104.8 101.4 110.0 108.2
- - - ------------------------------------------------------------------------------------------------------------------------
$ 2,103.5 $ 2,000.2 $ 1,820.4 $ 1,629.7 $ 1,688.0 $ 1,595.5 $ 1,517.9 $ 1,437.7
========================================================================================================================
64.70% 60.21% 63.93% 67.81% 65.50% 63.13% 58.05% 56.58%
9.72 9.78 10.55 10.72 11.67 9.99 11.94 13.84
28.24 28.43 28.72 29.33 29.24 29.31 29.38 30.25
1.11 1.07 .91 .76 .75 .88 .97 .72
- - - ------------------------------------------------------------------------------------------------------------------------
103.77% 99.49% 104.11% 108.62% 107.16% 103.31% 100.34% 101.39%
- - - ------------------------------------------------------------------------------------------------------------------------
1.4:1 1.3:1 1.3:1 1.4:1 1.6:1 1.5:1 1.8:1 2.1:1
$ (77.4) $ 9.9 $ (72.0) $ (141.1) $ (119.2) $ (52.2) $ (5.1) $ (19.7)
-- -- -- -- -- -- -- --
283.5 277.6 280.8 286.1 283.3 263.4 220.5 179.8
-- -- -- -- -- -- -- --
-- (40.0) -- -- -- -- -- --
131.0 125.3 123.6 124.1 118.5 106.9 68.0 56.3
10.2 10.1 8.4 8.5 9.1 0.9 (12.5) (10.8)
10.8 10.2 9.0 9.5 6.8 6.0 5.1 3.3
6.4 6.5 6.5 5.2 4.6 3.9 3.1 2.5
(13.8) (10.3) (13.6) (9.7) (8.8) (8.8) (2.5) (0.2)
- - - ------------------------------------------------------------------------------------------------------------------------
$ 350.7 $ 389.3 $ 342.7 $ 282.6 $ 294.3 $ 320.1 $ 276.6 $ 211.2
========================================================================================================================
$ 2,829.5 $ 2,774.4 $ 2,448.1 $ 2,221.1 $ 1,975.7 $ 1,850.7 $ 1,570.4 $ 1,435.4
2,761.3 3,583.5 3,005.4 2,750.5 2,078.7 2,096.0 1,709.7 1,535.1
534.2 600.2 504.6 523.6 451.3 512.9 541.0 539.8
15,901.7 14,807.3 13,391.1 12,113.9 10,683.5 9,415.9 7,869.2 6,738.8
</TABLE>
SAFECO CORPORATION 1997 ANNUAL REPORT
79
<PAGE> 1
SAFECO CORPORATION Organization Chart F-15
December 31, 1997 Exhibit 21
- - - --------------------------------------------------------------------------------
SAFECO Corporation (Washington)
(ownership percentages are 100% except where indicated)
1.SAFECO Insurance Company of America (WA)
A. SAFECO Management Corporation (NY)
B. SAFECO Surplus Lines Insurance Company (WA)
2.General Insurance Company of America (WA)
3.First National Insurance Company of America (WA)
4.American States Financial Corporation (IN)
A. American States Insurance Company (IN)
a) American Economy Insurance Company (IN)
i) American States Insurance Company of Texas
(TX)
b) American States Preferred Insurance Company (IN)
c) American States Life Insurance Company (IN)
d) Insurance Company of Illinois (IL)
e) City Insurance Agency, Inc. (IN)
f) American States Lloyds Insurance Company (TX)
5.SAFECO National Insurance Company (MO)
6.SAFECO Insurance Company of Illinois (IL)
7.SAFECO Life Insurance Company (WA)
A. SAFECO National Life Insurance Company (WA)
B. First SAFECO National Life Insurance Company of
New York (NY)
C. WM Life Insurance Company (AZ)
a) Empire Life Insurance Company (WA)
8.SAFECO Assigned Benefits Service Company (WA)
9.SAFECO Administrative Services, Inc. (WA)
A. Employee Benefit Claims of Wisconsin, Inc. (WI)
B. Wisconsin Pension and Group Services, Inc. (WI)
10. SAFECO Credit Company, Inc. (WA)
<PAGE> 2
F-15
SAFECO Corporation Organization Chart Exhibit 21
December 31, 1997 Continued
- - - --------------------------------------------------------------------------------
11.SAFECO Properties, Inc. (WA)
A. SAFECARE Company, Inc. (WA)
a) RIA Development, Inc. (WA)
b) SAFECARE S.C. Bakersfield, Inc. (WA)
c) S.C. Bellevue, Inc. (WA)
d) S.C. Everett, Inc. (WA)
e) S.C. Lynden, Inc. (WA)
f) S.C. Marysville, Inc. (WA)
g) S.C. Northgate, Inc. (WA)
h) S.C. Vancouver, Inc. (WA)
B. Winmar Company, Inc. (WA)
a) C-W Properties, Inc. (WA)
b) Capitol Court Corporation (WI)
c) Gem State Investors, Inc. (WA)
d) Kitsap Mall, Inc. (WA)
e) SAFECO Properties of Boise, Inc. (ID)
f) SCIT, Inc. (MA)
g) Valley Fair Shopping Centers, Inc. (DE)
h) WDI Golf Club, Inc. (CA)
i) WNY Development, Inc. (WA)
j) Winmar Cascade, Inc. (WA)
k) Winmar Metro, Inc. (WA)
l) Winmar Northwest, Inc. (WA)
m) Winmar Oregon, Inc. (OR)
i) North Coast Management, Inc. (OR)
ii) Pacific Surfside Corporation (OR)
iii) Washington Square, Inc. (WA)
iv) Winmar of Jantzen Beach, Inc. (OR)
v) Winmar Pacific, Inc. (WA)
vi) W-P Development, Inc. (OR)
n) Winmar Redmond, Inc. (WA)
o) Winmar of Kitsap, Inc. (WA)
p) Winmar of Texas, Inc. (TX)
q) Winmar of the Desert, Inc. (CA)
12. SAFECO Asset Management Company (WA)
13. SAFECO Securities, Inc. (WA)
14. SAFECO Services Corporation (WA)
15. SAFECO Trust Company (WA)
<PAGE> 3
F-15
SAFECO Corporation Organization Chart Exhibit 21
December 31, 1997 Continued
- - - --------------------------------------------------------------------------------
16.General America Corporation (WA)
A. F.B. Beattie & Co., Inc. (WA)
a) F.B. Beattie Insurance Services, Inc. (CA)
B. General America Corporation of Texas (TX)-
(Attorney-in-fact) for:
a) SAFECO Lloyds Insurance Company (TX)
C. Goldware & Taylor Insurance Services (CA)
D. Talbot Financial Corporation (WA)
a) Talbot Agency, Inc. (NM)
i) BHJ, Inc. (WY)
ii) Boney Moore and Talbot, Inc. (NM)
iii) Glacier Insurance, Inc. (MT)
iv) J. Dorr Forbes, Inc. (WA)
v) Hemet Insurance Service (CA)
vi) Newport Financial Corporation (IL)
vii) PNMR Securities, Inc. (WA)
viii) Talbot Agency of California, Inc. (CA)
ix) Talbot Agency of Texas, Inc. (TX)
x) Talbot Financial Services of Hawaii, Inc.
(HI)
xi) Tandy & Wood, Inc. (ID)
E. SAFECO Select Insurance Services, Inc. (CA)
Note: Certain inactive companies are not shown.
<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 RETAINED
EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 17,143
<DEBT-CARRYING-VALUE> 2,709
<DEBT-MARKET-VALUE> 3,160
<EQUITIES> 1,880
<MORTGAGE> 499
<REAL-ESTATE> 586
<TOTAL-INVEST> 23,037
<CASH> 391
<RECOVER-REINSURE> 311
<DEFERRED-ACQUISITION> 545
<TOTAL-ASSETS> 29,468
<POLICY-LOSSES> 4,352
<UNEARNED-PREMIUMS> 1,714
<POLICY-OTHER> 165
<POLICY-HOLDER-FUNDS> 11,989
<NOTES-PAYABLE> 2,360
842
0
<COMMON> 909
<OTHER-SE> 4,553
<TOTAL-LIABILITY-AND-EQUITY> 29,468
3,107
<INVESTMENT-INCOME> 1,245
<INVESTMENT-GAINS> 119
<OTHER-INCOME> 238
<BENEFITS> 2,816
<UNDERWRITING-AMORTIZATION> 533
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 573
<INCOME-TAX> 128
<INCOME-CONTINUING> 445
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 430
<EPS-PRIMARY> 3.33
<EPS-DILUTED> 3.31
<RESERVE-OPEN> 4,160<F1>
<PROVISION-CURRENT> 1,969
<PROVISION-PRIOR> 31
<PAYMENTS-CURRENT> 1,172
<PAYMENTS-PRIOR> 906
<RESERVE-CLOSE> 4,082
<CUMULATIVE-DEFICIENCY> 31
<FN>
<F1>SAFECO RESERVES 12/31/96 OF $1,956 PLUS AMERICAN STATES RESERVES AT ACQUISITION
OF $2,204.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED (EPS ONLY) SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED
INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 JUN-30-1997 MAR-31-1997 DEC-31-1996
<DEBT-HELD-FOR-SALE> 12,154,000 12,238,159 11,825,458 11,936,243
<DEBT-CARRYING-VALUE> 2,705,000 2,698,078 2,595,729 2,488,324
<DEBT-MARKET-VALUE> 3,005,000 2,864,472 2,654,052 2,670,004
<EQUITIES> 1,404,000 1,501,093 1,311,345 1,298,809
<MORTGAGE> 470,000 460,301 445,672 447,988
<REAL-ESTATE> 609,000 614,595 581,698 554,011
<TOTAL-INVEST> 20,714,000 17,681,814 16,901,809 16,889,455
<CASH> 92,000 80,497 48,765 55,498
<RECOVER-REINSURE> 134,000 129,884 149,308 137,484
<DEFERRED-ACQUISITION> 407,000 411,590 411,062 396,107
<TOTAL-ASSETS> 24,245,000 21,051,021 20,069,349 19,917,673
<POLICY-LOSSES> 1,998,000 1,978,170 2,024,353 2,088,226
<UNEARNED-PREMIUMS> 1,011,000 981,715 947,145 946,899
<POLICY-OTHER> 151,000 150,634 151,051 149,624
<POLICY-HOLDER-FUNDS> 10,618,000 10,402,817 10,047,299 9,792,730
<NOTES-PAYABLE> 3,023,000 1,341,178 1,302,844 1,233,494
842,000 0 0 0
0 0 0 0
<COMMON> 231,000 227,920 227,231 225,276
<OTHER-SE> 4,362,000 4,142,712 3,782,425 3,890,064
<TOTAL-LIABILITY-AND-EQUITY> 24,245,000 21,051,021 20,069,349 19,917,673
1,994,000 1,311,340 648,061 2,541,288
<INVESTMENT-INCOME> 888,000 583,697 291,033 1,116,734
<INVESTMENT-GAINS> 106,000 40,761 21,704 90,050
<OTHER-INCOME> 172,000 110,508 54,188 217,297
<BENEFITS> 1,867,000 1,210,268 605,622 2,362,722
<UNDERWRITING-AMORTIZATION> 339,000 223,093 110,447 426,862
<UNDERWRITING-OTHER> 0 0 0 0
<INCOME-PRETAX> 468,000 300,121 144,636 578,461
<INCOME-TAX> 114,000 71,384 33,111 139,510
<INCOME-CONTINUING> 354,000 228,737 111,525 438,951
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 351,000 228,737 111,525 438,951
<EPS-PRIMARY> 2.77 1.81 0.88 3.48
<EPS-DILUTED> 2.76<F1> 1.80<F1> 0.88<F1> 3.47<F1>
<RESERVE-OPEN> 0 0 0 2,070,077
<PROVISION-CURRENT> 0 0 0 1,658,253
<PROVISION-PRIOR> 0 0 0 (77,744)
<PAYMENTS-CURRENT> 0 0 0 939,561
<PAYMENTS-PRIOR> 0 0 0 755,367
<RESERVE-CLOSE> 0 0 0 1,955,658
<CUMULATIVE-DEFICIENCY> 0 0 0 (77,744)
<FN>
<F1>RESTATED TO REFLECT ADOPTION OF FAS 128
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS RESTATED (EPS ONLY) SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED
INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 9-MOS 6-MOS 3-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 JUN-30-1996 MAR-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 11,560,458 11,258,490 11,344,407 11,928,144
<DEBT-CARRYING-VALUE> 2,438,330 2,326,838 2,188,065 2,044,517
<DEBT-MARKET-VALUE> 2,531,647 2,418,469 2,325,185 2,388,514
<EQUITIES> 1,213,647 1,184,790 1,168,444 1,119,408
<MORTGAGE> 444,063 431,250 425,807 416,489
<REAL-ESTATE> 547,257 522,902 508,417 498,959
<TOTAL-INVEST> 16,301,235 15,838,013 15,740,480 16,132,249
<CASH> 57,253 45,625 50,930 65,477
<RECOVER-REINSURE> 161,461 152,689 157,955 137,284
<DEFERRED-ACQUISITION> 404,967 398,759 378,091 356,359
<TOTAL-ASSETS> 19,283,699 18,727,198 18,494,887 18,767,843
<POLICY-LOSSES> 2,108,384 2,146,327 2,161,209 2,207,230
<UNEARNED-PREMIUMS> 971,121 943,196 909,024 910,762
<POLICY-OTHER> 150,105 148,846 149,805 154,090
<POLICY-HOLDER-FUNDS> 9,556,795 9,285,896 8,972,833 8,756,384
<NOTES-PAYABLE> 1,191,989 1,148,277 1,144,220 1,067,545
0 0 0 0
0 0 0 0
<COMMON> 222,919 222,321 221,916 217,447
<OTHER-SE> 3,687,040 3,548,739 3,551,989 3,765,199
<TOTAL-LIABILITY-AND-EQUITY> 19,283,699 18,727,198 18,494,887 18,767,843
1,887,924 1,244,662 618,313 2,423,711
<INVESTMENT-INCOME> 830,584 549,842 274,577 1,075,280
<INVESTMENT-GAINS> 69,564 52,846 32,723 64,271
<OTHER-INCOME> 158,050 106,273 51,989 191,594
<BENEFITS> 1,748,841 1,167,708 579,960 2,250,442
<UNDERWRITING-AMORTIZATION> 316,294 206,820 103,593 408,913
<UNDERWRITING-OTHER> 0 0 0 0
<INCOME-PRETAX> 439,016 284,822 145,534 513,800
<INCOME-TAX> 106,344 68,136 34,831 114,841
<INCOME-CONTINUING> 332,672 216,686 110,703 398,959
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 332,672 216,686 110,703 398,959
<EPS-PRIMARY> 2.64 1.72 0.88 3.17
<EPS-DILUTED> 2.63<F1> 1.71<F1> 0.87<F1> 3.16<F1>
<RESERVE-OPEN> 0 0 0 2,092,949
<PROVISION-CURRENT> 0 0 0 1,586,675
<PROVISION-PRIOR> 0 0 0 (59,699)
<PAYMENTS-CURRENT> 0 0 0 856,796
<PAYMENTS-PRIOR> 0 0 0 693,049
<RESERVE-CLOSE> 0 0 0 2,070,077
<CUMULATIVE-DEFICIENCY> 0 0 0 (59,699)
<FN>
<F1>RESTATED TO REFLECT ADOPTION OF FAS 128
</FN>
</TABLE>
