<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 1999.
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)
136,327,641 shares of no par value common stock
were outstanding at March 31, 1999.
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter
period that the registrant was required to file such
reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ].
<PAGE> 2
SAFECO CORPORATION
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TABLE OF CONTENTS AND SIGNATURES
<TABLE>
<CAPTION>
Part I - Financial Information * Page
--------
<S> <C> <C>
Item 1.Financial Statements:
Consolidated Balance Sheet, 3
March 31, 1999 and December 31, 1998
Statement of Consolidated Income and Retained Earnings 5
for the Three Months Ended March 31, 1999 and 1998
Statement of Consolidated Cash Flows 6
for the Three Months Ended March 31, 1999 and 1998
Statement of Consolidated Comprehensive Income 7
for the Three Months Ended March 31, 1999 and 1998
Item 2.Management's Discussion and Analysis 8
Part II - Other Information
Item 6.Exhibits and Reports on Form 8-K 15
</TABLE>
*The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal and
recurring adjustments) considered necessary for a fair presentation
of results for the interim periods have been included. It is
suggested that these condensed consolidated financial statements be
read in conjunction with the financial statements and the notes
thereto included in the Corporation's Form 10-K for the year ended
December 31, 1998 which has been previously filed with the
Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SAFECO CORPORATION
-------------------------------------
Registrant
ROD A. PIERSON
-------------------------------------
Rod A. Pierson
Senior Vice President
Dated May 12, 1999 and Chief Financial Officer
H. PAUL LOWBER
-------------------------------------
H. Paul Lowber
Vice President, Controller and
Dated May 12, 1999 and Chief Accounting Officer
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<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1999 1998
--------- -----------
<S> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: 1999 - $17,371.6; 1998 -$16,679.7) $18,217.4 $17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: 1999 - $3,106.7; 1998 - $3,259.2) 2,729.6 2,720.9
Marketable Equity Securities, at Market Value
(Cost: 1999 - $949.0; 1998 - $952.8) 2,011.1 2,036.6
Mortgage Loans 670.2 541.5
Real Estate (At cost less accumulated depreciation) 235.9 601.2
Policy Loans 89.0 88.3
Short-Term Investments 159.2 315.9
--------- ---------
Total Investments 24,112.4 24,160.0
Cash 136.6 74.9
Accrued Investment Income 340.1 323.2
Finance Receivables
(Less unearned finance charges and allowance for doubtful accounts) 1,212.9 1,207.7
Premiums and Other Service Fees Receivable 1,020.6 978.3
Other Notes and Accounts Receivable 90.0 155.2
Reinsurance Recoverables 392.2 317.4
Deferred Policy Acquisition Costs 549.4 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 309.1 280.2
Goodwill 1,348.2 1,359.0
Other Assets 330.5 313.6
Separate Account Assets 1,225.3 1,201.1
--------- ---------
TOTAL $31,067.3 $30,891.7
========= =========
</TABLE>
(continued)
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<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Millions) (continued)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31 December 31
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ --------- -----------
<S> <C> <C>
Losses and Adjustment Expense $ 4,279.4 $ 4,262.7
Life Policy Liabilities 280.1 276.8
Unearned Premiums 1,783.4 1,750.9
Funds Held Under Deposit Contracts 12,824.5 12,718.1
Debt:
Commercial Paper 712.3 732.7
Credit Company Borrowings ($1,119.1 maturing within one year) 1,143.7 1,255.2
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other ($11.6 maturing within one year) 101.9 227.7
Other Liabilities 1,633.2 1,153.5
Income Taxes:
Current 30.1 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities: 1999 - $654.2; 1998 - $769.9) 377.9 492.6
Separate Account Liabilities 1,225.3 1,201.1
--------- ---------
Total Liabilities 24,791.8 24,473.8
--------- ---------
Corporation-Obligated, Mandatorily Redeemable Capital Securities of
Subsidiary Trust Holding Solely Junior Subordinated Debentures
of the Corporation ("Capital Securities") 842.2 842.1
--------- ---------
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: (1999 - 7.4; 1998 - 7.5)
Shares Issued and Outstanding: (1999 - 136.3; 1998 - 136.3) 887.7 885.0
Retained Earnings 3,326.6 3,257.2
Total Accumulated Other Comprehensive Income -
Unrealized Appreciation of Investment Securities, Net of Tax 1,219.0 1,433.6
--------- ---------
Total Shareholders' Equity 5,433.3 5,575.8
--------- ---------
TOTAL $31,067.3 $30,891.7
========= =========
</TABLE>
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<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS
(In Millions Except Per Share Amounts)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
---------------------------
1999 1998
--------- ---------
<S> <C> <C>
REVENUES:
Insurance:
Property and Casualty Earned Premiums $ 1,064.4 $ 1,029.4
Life Premiums and Other Revenues 86.6 86.8
--------- ---------
Total 1,151.0 1,116.2
Real Estate -- 20.5
Credit 27.0 23.4
Asset Management 10.2 8.4
Other 32.2 14.8
Net Investment Income 389.6 374.5
Realized Investment Gain 56.3 27.9
--------- ---------
Total 1,666.3 1,585.7
--------- ---------
EXPENSES:
Losses, Adjustment Expense and Policy Benefits 1,043.4 987.7
Commissions 192.9 185.4
Personnel Costs 123.6 107.2
Interest 33.8 39.0
Goodwill Amortization 13.5 13.2
Other 100.9 109.7
Amortization of Deferred Policy Acquisition Costs 201.6 201.1
Deferral of Policy Acquisition Costs (206.3) (210.3)
--------- ---------
Total 1,503.4 1,433.0
--------- ---------
Income before Income Taxes 162.9 152.7
--------- ---------
Provision for Income Taxes:
Current 33.1 29.7
Deferred 0.1 0.2
--------- ---------
Total 33.2 29.9
--------- ---------
Income before Distributions on Capital Securities 129.7 122.8
Distributions on Capital Securities, Net of Tax (11.2) (11.2)
--------- ---------
Net Income 118.5 111.6
Retained Earnings, Beginning of Period 3,257.2 3,299.1
Amortization of Underwriting Compensation on Capital Securities (0.1) (0.1)
Dividends Declared (47.7) (45.2)
Common Stock Reacquired (1.3) (4.1)
--------- ---------
Retained Earnings, End of Period $ 3,326.6 $ 3,361.3
========= =========
Net Income Per Share of Common Stock:
Diluted $ 0.87 $ 0.79
========= =========
Basic $ 0.87 $ 0.79
========= =========
Dividends Paid to Common Shareholders $ 0.35 $ 0.32
========= =========
Average Number of Shares Outstanding During the Period:
Diluted 136.6 141.8
========= =========
Basic 136.3 141.2
========= =========
</TABLE>
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<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-------------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $1,106.5 $1,079.0
Dividends and Interest Received 376.0 359.7
Other Operating Receipts 70.8 53.7
Insurance Claims and Policy Benefits Paid (890.8) (773.0)
Underwriting, Acquisition and Insurance Operating Costs Paid (463.6) (466.1)
Interest Paid and Distributions on Capital Securities (70.7) (67.9)
Other Operating Costs Paid (51.1) (26.3)
Income Taxes Paid (0.3) (3.6)
-------- --------
Net Cash Provided by Operating Activities 76.8 155.5
-------- --------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (1,279.3) (1,450.3)
Fixed Maturities Held-to-Maturity -- (0.3)
Equities (44.6) (50.8)
Other Investments (128.9) (46.1)
Maturities of Fixed Maturities Available-for-Sale 285.2 218.9
Maturities of Fixed Maturities Held-to-Maturity 0.2 0.6
Sales of:
Fixed Maturities Available-for-Sale 330.9 816.6
Fixed Maturities Held-to-Maturity -- --
Equities 67.4 62.9
Other Investments 468.2 34.4
Net Decrease (Increase) in Short-Term Investments 193.6 (72.0)
Finance Receivables Originated or Acquired (115.4) (98.6)
Principal Payments Received on Finance Receivables 102.4 105.2
Other (15.7) (18.9)
-------- --------
Net Cash Used in Investing Activities (136.0) (498.4)
-------- --------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 792.1 310.1
Return of Funds Held Under Deposit Contracts (267.6) (264.5)
Proceeds from Notes and Mortgage Borrowings -- 20.0
Repayment of Notes and Mortgage Borrowings (132.2) (10.5)
Net (Repayment of) Proceeds from Short-Term Borrowings (119.3) 89.9
Common Stock Reacquired (1.6) (4.8)
Dividends Paid to Shareholders (47.7) (45.2)
Other (102.8) (21.2)
-------- --------
Net Cash Provided by Financing Activities 120.9 73.8
-------- --------
Net Increase (Decrease) in Cash 61.7 (269.1)
Cash at the Beginning of Period 74.9 391.4
-------- --------
Cash at the End of Period $ 136.6 $ 122.3
======== ========
</TABLE>
(continued)
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<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(In Millions) (continued)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
------- -------
<S> <C> <C>
Net Income $ 118.5 $ 111.6
------- -------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Realized Investment Gain (56.3) (27.9)
Amortization and Depreciation 35.1 39.3
Amortization of Fixed Maturity Investments (10.6) (7.3)
Deferred Income Tax Expense 0.1 0.2
Interest Expense on Deposit Contracts 149.5 147.4
Other Adjustments (3.7) 6.5
Changes in:
Losses and Adjustment Expense 16.7 14.9
Life Policy Liabilities 3.3 5.3
Unearned Premiums 32.5 11.5
Accrued Income Taxes 27.6 19.5
Accrued Interest on Accrual Bonds (11.8) (14.9)
Accrued Investment Income (16.9) (7.1)
Deferred Policy Acquisition Costs (4.7) (8.9)
Other Assets and Liabilities (202.5) (134.6)
------- -------
Total Adjustments (41.7) 43.9
------- -------
Net Cash Provided by Operating Activities $ 76.8 $ 155.5
======= =======
</TABLE>
SAFECO CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
(In Millions)
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------
1999 1998
------- -------
<S> <C> <C>
Net Income $ 118.5 $ 111.6
Other Comprehensive Income (Loss), Net of Taxes:
Change in Unrealized Appreciation
of Investment Securities (214.6) 87.6
------- -------
Comprehensive Income (Loss) $ (96.1) $ 199.2
======= =======
</TABLE>
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<PAGE> 8
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
- - - - --------------------------------------------------------------------------------
SAFECO Corporation
Our net income for the first quarter was $119 million or $0.87 per diluted
share, compared with $0.79 per share for the first quarter of 1998. If we
exclude realized gain from investments, our income was $0.60 per diluted share,
compared with $0.66 in 1998.
The following summarized financial information sets forth the contributions of
each business segment to our consolidated income.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
1999 1998
- - - - --------------------------------------------------------------------------------------
(In Millions Except Per
Share Amounts)
<S> <C> <C>
Income (Loss) before Realized Gain
and Income Taxes:
Property and Casualty Insurance:
Underwriting Loss ................................ $ (36.3) $ (10.9)
Net Investment Income ............................ 114.3 118.1
Goodwill Amortization ............................ (10.8) (10.7)
------- -------
Total Property and Casualty .................... 67.2 96.5
Life ............................................... 44.7 36.4
Credit ............................................. 5.3 5.5
Asset Management ................................... 2.5 2.0
Corporate .......................................... (13.1) (15.6)
------- -------
Total .......................................... 106.6 124.8
Realized Investment Gain before Tax ................... 56.3 27.9
------- -------
Income before Income Taxes ............................ 162.9 152.7
------- -------
Provision for Income Taxes on:
Income before Realized Gain ........................ 13.2 20.4
Realized Investment Gain ........................... 20.0 9.5
------- -------
Total .......................................... 33.2 29.9
------- -------
Income before Distributions on
Capital Securities ................................. 129.7 122.8
Distributions on Capital Securities, Net of Tax ....... (11.2) (11.2)
------- -------
Net Income ............................................ $ 118.5 $ 111.6
======= =======
Net Income Per Diluted Share of Common Stock:
Income before Realized Gain ........................ $ .60 $ .66
Realized Gain ...................................... .27 .13
------- -------
Net Income ............................................ $ .87 $ .79
======= =======
</TABLE>
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<PAGE> 9
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Property and Casualty Insurance
Property and casualty operations for the first quarter of 1999 produced pretax
income of $67.2 million before realized gain from investments, compared with
$96.5 million a year ago. These operations had a $36.3 million underwriting loss
during the first quarter of 1999. This compares with a $13.7 million loss last
quarter, and a loss of $10.9 million for the first quarter a year ago. Adverse
weather experience affected first quarter results as catastrophe losses were $39
million, compared with $31 million last quarter and $25 million for the first
quarter a year ago. Underwriting results by major business line for the first
quarter of 1999 and the first quarter of 1998 are stated in the chart below. The
combined loss and expense ratio was 103.4 for the quarter, compared with 101.3
last quarter and 101.1 for the first quarter last year. Investment income was
$114 million, down 3% from a year ago primarily due to reduced cash flow.
Underwriting Results (In Millions)
<TABLE>
<CAPTION>
First Qtr. First Qtr.
1999 1998
---------- ----------
<S> <C> <C>
Personal Lines:
Personal auto $ 6.0 $ 2.8
Homeowners (18.7) 2.4
Other personal lines 4.3 2.2
Commercial Lines:
American States Business Insurance (30.9) (16.5)
SAFECO Commercial (1.9) (9.9)
Surety 6.0 6.9
Other (1.1) 1.2
------ ------
Total $(36.3) $(10.9)
====== ======
</TABLE>
Personal auto, our largest line, reported an underwriting profit of $6.0 million
for the first quarter, compared with a profit of $2.8 million for the same
quarter a year ago. Average loss costs increased modestly during the quarter.
The number of automobile policies in force at the end of March was 1% higher
than a year ago.
Homeowners had an underwriting loss of $18.7 million for the first quarter,
compared with a profit of $2.4 million for the first quarter of 1998.
Catastrophe losses for this line were $20 million, compared with $13 million for
the first quarter a year ago. In addition, non-weather related losses were $5
million higher than a year ago.
Other personal lines, which provide coverage for earthquake, dwelling fire,
inland marine and boats, produced an underwriting profit of $4.3 million for the
quarter, compared with a profit of $2.2 million for the same quarter last year.
American States Business Insurance, which focuses on small-to-medium sized
businesses, produced an underwriting loss of $30.9 million in the first quarter
(combined ratio of 113.2), compared with a loss of $16.5 million for the same
quarter last year (combined ratio of 107.3). Adverse weather experience in the
property line and weak commercial auto results continue to affect this business.
The underwriting loss for the quarter from these two lines was $14.9 million and
$10.9 respectively, compared with $7.9 million and $5.4 million for the same
quarter a year ago.
SAFECO Commercial, which delivers insurance products and services to
medium-to-large complex commercial clients, reported an underwriting loss of
$1.9 million for the first quarter operating at a combined ratio of 101.2. This
compares favorably with a loss of $9.9 million for the same quarter last year
and a combined ratio of 106.4.
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<PAGE> 10
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Surety produced a profit of $6.0 million, compared with a profit of $6.9 million
in the first quarter last year.
Premiums written during the quarter increased 4% over a year ago with personal
lines up less than 1%, American States Business Insurance up 10%, and SAFECO
Commercial up 8%.
During 1999, we will complete the process of cross-licensing and training agents
in both SAFECO and American States products. In addition, we will be using
SAFECO personal lines products for substantially all personal lines business,
and we will be using American States Business Insurance products for our agents'
small-to-medium sized commercial customers. To date, the transition of customers
is on schedule, and retention of business has exceeded expectations. Looking
beyond completion of these transition activities, we are well positioned for
strong future growth.
Life Insurance
Our life insurance operations produced a record pretax profit, before realized
gain from investments, of $44.7 million for the first quarter of 1999. This
compares with $36.4 million for the same period last year.
Earnings for the annuity lines were $22.2 million, compared with $16.3 million
reported for the first quarter of 1998. These results include losses from the
equity indexed annuity line of $2.6 million for the first quarter of 1999,
compared with $4.2 million a year ago. Growth in our variable annuity products
and overall expense reductions are also major contributing factors for the
higher earnings. Annuity assets now total $12.6 billion, up from $11.9 billion
at the end of first quarter 1998.
Group insurance experienced a loss of $2.9 million for the quarter, compared
with a loss of $1.4 million for the first quarter of last year, and $5.4 million
for the fourth quarter of 1998. Although we are noting some improving trends,
adverse experience in medical aggregate stop loss coverages continued to be the
main contributor to the loss during the quarter.
Benefiting from decreased mortality and expense reductions, individual life
earnings were $6.6 million, compared with $2.5 million for the same period last
year.
Credit
SAFECO Credit Company produced a first quarter pretax profit of $5.3 million for
1999, compared with $5.5 million for the first quarter of 1998. New business
loans and leases funded during the first quarter were $105.7 million versus
$97.3 million in the first quarter of 1998, reflecting a 9% increase.
Non-affiliated receivables and operating leases were $1.3 billion at March 31,
1999. The profit for the quarter was modestly impacted by the sale of SAFECO
Properties and the resulting reduction in affiliate loans. Our delinquency
experience and write-offs continue to be at satisfactorily low rates.
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<PAGE> 11
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
SAFECO Credit's summarized financial information is as follows (in millions):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
-------- -----------
<S> <C> <C>
Finance Receivables $1,212.9 $1,207.7
Other Assets 156.9 320.6
-------- --------
Total Assets $1,369.8 $1,528.3
======== ========
Credit Company Borrowings $1,143.7 $1,255.2
Other Liabilities 95.1 144.6
-------- --------
Total Liabilities $1,238.8 $1,399.8
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1999 1998
------- -------
<S> <C> <C>
Revenues $ 29.0 $ 26.0
Expenses 23.7 20.5
------- -------
Income before Income Taxes 5.3 5.5
Provision for Income Taxes 1.9 2.0
------- -------
Net Income $ 3.4 $ 3.5
======= =======
</TABLE>
Asset Management
The pretax profit from asset management activities for the first quarter of 1999
was $2.5 million, up from $2.0 million in 1998, an increase of 22%. Our
operating profit (excluding gains and interest income) was $2.0 million,
compared with $1.3 million last year, a 49% increase. Increased assets under
management and a reduction of one-time costs were the main reasons for the
improved earnings. Assets under management totaled $6.9 billion at March 31,
1999, compared with $6.5 billion one year ago.
Realized Investment Gain - SAFECO Properties Sale
The realized investment gain for the first quarter of $56 million includes $30
million of gains from the sale of real estate. This primarily relates to the
sale of the majority of SAFECO Properties' assets to The Macerich Partnership,
L.P. and the Ontario Teachers' Pension Plan Board, of which the largest portion
closed in February 1999. Additional closings of real estate sales are expected
in the second quarter and also in the following months.
The sales are the reason for the decline in Investment Real Estate and Other
Debt in the Consolidated Balance Sheet and the increase in Sales of Other
Investments and the increases in Repayment of Notes and Mortgage Borrowings and
Repayment of Short-Term Borrowings in the Statement of Consolidated Cash Flows.
In the Statement of Consolidated Income and Retained Earnings, revenues for
SAFECO Properties have been included in Other Revenues from January 1, 1999
forward and related expenses have all been included in Other Expenses. For the
three months ended March 31, 1999 these revenues totaled $14.7 million and
expenses totaled $13.1 million. In the summary of income on page 8 of this
report, SAFECO Properties' pretax income amounts of $1.6 million and $1.2
million for the three months ended March 31, 1999 and 1998 respectively, are
included in the Corporate line.
Investment Portfolios
The market value of our consolidated bond portfolio was $1.2 billion in excess
of amortized cost at March 31, 1999, down from $1.7 billion at December 31, 1998
as a result of higher interest rates. The market value of our equity securities
portfolio was $1.1 billion in excess of cost at March 31, 1999.
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<PAGE> 12
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
Subsequent Event - Storms
During early May various parts of the country experienced significant adverse
weather events, particularly the states of Oklahoma and Kansas. We will quantify
our expected losses from these events as soon as more information becomes
available. The losses will be recorded in the second quarter.
Stock Repurchase Program
In May 1999 the Board of Directors approved the purchase of up to 8
million shares of SAFECO Corporation common stock through open market and
negotiated purchases, as part of its ongoing capital management plan. This
authorization follows the $200 million purchase authorization of August 1998 and
the 2 million share authorization of February 1996. Under these two
authorizations, in 1998 we acquired 5.2 million shares at a total cost of $236
million for an average price of $45.66 and in 1999 we acquired 0.8 million
shares at a total cost of $33 million for an average price of $40.36. As a
result, no amounts remain available under the August 1998 or February 1996
authorizations. For the year 1998 and the period through May 5, 1999, share
purchase activity has reduced SAFECO's shares outstanding to 135.5 million or 4%
since December 31, 1997.
Year 2000 Readiness Disclosure
SAFECO, like most other companies, is faced with the fact that some of its
computer programs have time sensitive logic that typically recognizes a date
using "00" as the year 1900 rather than the year 2000. SAFECO is highly
dependent on automated systems and systems applications that use computer
programs to conduct ongoing operations. Such systems are used to process claims,
bill and collect premiums from customers, manage investments and many other
activities. If these systems were unable to process data accurately because of
Year 2000-related failures, these activities would be interrupted and could have
a material adverse effect on SAFECO's results of operations.
SAFECO has completed an assessment of Year 2000 issues in connection with its
computer systems and the technology embedded in the equipment it uses. SAFECO
has been modifying and replacing portions of its systems since 1995 so that the
system modified or replaced will be suitable for use before, during and after
the year 2000 with no significant operational problems related to its ability to
process dates correctly ("Year 2000 Ready"). In addition, SAFECO is engaged in a
regular program of testing and running the systems once Year 2000 programming
changes have been made. This testing includes trials at SAFECO's hot site, a
location provided and maintained by a third party separate from any SAFECO
facility. SAFECO believes that its program to address Year 2000 issues is
comprehensive and on schedule.
The total Year 2000 readiness cost for SAFECO is currently estimated at
approximately $17 million and as of March 31, 1999 SAFECO has incurred
approximately $16 million of that amount. These estimated amounts include both
modification costs, which are expensed as incurred, and certain replacement
systems costs, some of which are capitalized and amortized. Approximately 95% of
SAFECO's existing systems have been internally verified as being Year 2000 ready
as of March 31, 1999. SAFECO's last mission-critical system is scheduled to be
Year 2000 ready in August 1999. The program of testing and running the systems
after Year 2000 programming changes have been made is currently in process and
expected to continue through 1999. SAFECO also intends to bring all of its
mainframe systems down on December 31, 1999 and bring them back up on January 1,
2000. This will preserve information contained in those systems at December 31,
1999 and permit SAFECO to retrieve and use that information should an
unanticipated Year 2000 problem occur. In addition, as a contingency against
unanticipated problems on and after January 1, 2000, SAFECO's Information
Systems department will be prepared to address on an expedited basis any
problems that should arise. Although absolute assurance is not possible, based
on our current progress and continuing modifications, SAFECO believes that by
January 1, 2000 it will be Year 2000 ready and that Year 2000 issues will not
pose significant operational problems for its computer systems.
-12-
<PAGE> 13
SAFECO CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- - - - --------------------------------------------------------------------------------
SAFECO is also working with its third-party partners and vendors, e.g., its
independent insurance agents, local and long distance telephone companies, banks
and securities trading firms, to assure that they are on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO will assess and attempt to mitigate risks with respect to the
failure of any mission critical third-party partners and vendors to be Year 2000
ready. Failure of such parties to be Year 2000 ready could have a material
adverse effect on SAFECO's results of operations.
SAFECO may be exposed to Year 2000 claims stemming from coverage under insurance
policies its property and casualty subsidiaries have sold to customers. Although
SAFECO has not written any specific Year 2000 coverage, customers may allege
coverage exists under current commercial policies, including commercial general
liability, directors and officers liability, errors and omissions liability and
product policies. The effect of such coverage issues on SAFECO's results of
operations is not reasonably estimable at this time. However, SAFECO expects
that any potential exposures will be limited because its commercial lines
business has historically not included significant numbers of the types of risks
that have the greatest Year 2000 exposure, such as financial institutions and
software and computer chip companies. In addition, SAFECO's directors and
officers liability and errors and omissions books of insurance business are not
large, together comprising approximately 1% of total property and casualty
premiums over the last three years. SAFECO continues to assess its potential
exposure to insurance claims arising from property and casualty insurance
policies written and is taking a number of actions to limit that exposure. Such
actions, in states where permitted, include the use of endorsements on
commercial property policies clarifying that there is no coverage for Year 2000
occurrences, as well as using policy language that excludes Year 2000 coverage
on certain commercial liability policies.
-13-
<PAGE> 14
SAFECO CORPORATION
Other -- Footnotes
SEGMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 1999 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 430.4 $ 6.0
Homeowners 173.7 (18.7)
Other 43.6 4.3
Commercial Lines:
ASBI 234.6 (30.9)
SAFECO Commercial 165.4 (1.9)
Surety 14.4 6.0
Other 2.3 (1.1)
-------- --------
Total 1,064.4 $ (36.3) $ 67.2 $ 84.4 $12,492.9
-------- ======== --------
Life:
Retirement Services 7.7 12.6
Settlement Annuities 0.3 9.6
Group 48.0 (2.9)
Individual 27.0 6.6
Other 3.6 18.8
-------- --------
Total 86.6 44.7 29.9 16,861.2
-------- --------
Credit 27.0 5.3 3.4 1,369.8
Asset Management 10.2 2.5 1.6 67.8
Other and Eliminations 32.2 (13.1) (0.8) 275.6
-------- -------- -------- ---------
Consolidated Totals $1,220.4 $ 106.6 $ 118.5 $31,067.3
======== ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Underwriting Pretax Income Net Income Total
March 31, 1998 Revenues Gain (Loss) (Loss)* (Loss) Assets
- - - - -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property and Casualty:
Personal Lines:
Personal Auto $ 422.7 $ 2.8
Homeowners 168.0 2.4
Other 39.2 2.2
Commercial Lines:
ASBI 227.5 (16.5)
SAFECO Commercial 154.3 (9.9)
Surety 14.2 6.9
Other 3.5 1.2
--------- ---------
Total 1,029.4 $ (10.9) $ 96.5 $ 100.5 $12,849.2
--------- ========= ---------
Life:
Retirement Services 5.5 9.1
Settlement Annuities 0.4 7.2
Group 49.7 (1.4)
Individual 27.7 2.5
Other 3.5 19.0
--------- ---------
Total 86.8 36.4 27.1 15,666.2
--------- ---------
Real Estate 20.5 1.2 0.9 632.5
Credit 23.4 5.5 3.5 1,237.4
Asset Management 8.4 2.0 1.3 75.4
Other and Eliminations 14.8 (16.8) (21.7) (117.9)
--------- --------- --------- ---------
Consolidated Totals $ 1,183.3 $ 124.8 $ 111.6 $30,342.8
========= ========= ========= =========
*Earnings before realized gains (losses), distributions on capital
securities and income taxes.
</TABLE>
-14-
<PAGE> 15
SAFECO CORPORATION
Part II - Other Information
- - - - --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 10.1(*) - Form of Executive Severance Agreements between
SAFECO Corporation and Rod A. Pierson, James W.
Ruddy, and W. Randall Stoddard, in each case dated
March 11, 1999, and between SAFECO Corporation and
Boh A. Dickey and Roger H. Eigsti, in both cases
dated May 5, 1999.
Exhibit 10.2(*) - Executive Severance Agreement between SAFECO
Corporation, SAFECO Life Insurance Company and
Randall H. Talbot dated March 11, 1999.
Exhibit 10.3(*) - SAFECO Long-Term Incentive Plan of 1997 as Amended
and Restated May 5,1999.
Exhibit 10.4(*) - Form of Nonqualified Stock Option Award Agreement
-- Non-Employee Director granted under the SAFECO
Long-Term Incentive Plan of 1997 as Amended and
Restated May 5, 1999.
Exhibit 27 - Financial Data Schedule. (This exhibit is included
only in the electronic EDGAR filing version of
this 10-Q. The Financial Data Schedule is not a
separate financial statement but a schedule that
summarizes certain standard financial information
extracted directly from the financial statements
in this filing.)
(b) Reports on Form 8-K
No Forms 8-K were filed or required to be filed
for any event during the quarter ended March 31,
1999. The Registrant filed an 8-K dated May 6,
1999 under Item 5 (Other Items), announcing a
stock repurchase program approved by its Board of
Directors on May 5, 1999.
* A copy of this exhibit is available without charge by making a written
request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
-15-
<PAGE> 1
EXHIBIT 10.1
SEVERANCE AGREEMENT
BETWEEN
SAFECO CORPORATION
AND
NAME
Dated __________________
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Defined Terms............................................................... 1
2. Term of Agreement........................................................... 1
3. Company's Covenants Summarized.............................................. 1
4. The Executive's Covenants................................................... 1
5. Compensation Other Than Severance Payments.................................. 2
5.1 Salary During Incapacity or Illness
5.2 Salary During Term
5.3 Post-Termination Compensation and Benefits
5.4 Incentive Awards
5.5 Deferral Election
6. Severance Payments.......................................................... 4
6.1 Severance Payments Enumerated
6.2 Gross-Up Payment
6.3 Severance Payments Pay Date
6.4 Executive's Legal Fees
7. Termination Procedures and Compensation During Dispute....................... 7
7.1 Notice of Termination
7.2 Date of Termination
7.3 Dispute Concerning Termination
7.4 Compensation During Dispute
8. No Mitigation................................................................ 8
9. Successors; Binding Agreement................................................ 8
9.1 SAFECO Successors
9.2 Executive's Successors
10. Notices...................................................................... 9
11. Miscellaneous................................................................ 9
12. Validity.....................................................................10
13. Counterparts.................................................................10
14. Settlement of Disputes; Arbitration..........................................10
14.1 Claims Procedures
14.2 Arbitration
15. Definitions..................................................................10
</TABLE>
<PAGE> 3
SEVERANCE AGREEMENT
THIS AGREEMENT, dated [DATE], is made by and between SAFECO Corporation, a
Washington corporation ("SAFECO"), and [NAME] (the "Executive").
WHEREAS, SAFECO (together with its subsidiaries, collectively, the "Company"),
considers it essential to the best interests of its stockholders to foster the
continued employment of key management personnel; and
WHEREAS, SAFECO recognizes that, as is the case with many publicly held
corporations, the possibility of a Change in Control exists and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of management personnel
to the detriment of the Company and its stockholders; and
WHEREAS, SAFECO has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, the Company and the Executive agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this Agreement
are provided in Section 15.
2. Term of Agreement. The Term of this Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (i) the date it is
terminated by written agreement between the Company and the Executive and (ii)
the seventh anniversary of a Change in Control.
3. Company's Covenants Summarized. In order to induce the Executive to remain in
the employ of the Company and in consideration of the Executive's covenants
stated in Section 4, the Company agrees, under the conditions described herein,
to pay the Executive the Severance Payments and the other payments and benefits
described herein. Except as provided in Section 5.1, Section 5.4, Section
6.2(A), and Section 9.1, no amount or benefit shall be payable under this
Agreement unless there shall have been a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.
4. The Executive's Covenants. The Executive agrees that, subject to the terms
and conditions of this Agreement, in the event of a Potential Change in Control
during the Term, the Executive will remain in the employ of the Company until
the earliest of (i) a date which is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason.
<PAGE> 4
5. Compensation Other Than Severance Payments.
5.1 Salary During Incapacity or Illness. Following a Change in
Control and during the Term, during any period that the Executive fails to
perform the Executive's fulltime duties with the Company as a result of
incapacity due to physical or mental illness, the Company shall pay the
Executive's full salary to the Executive at the rate in effect at the
commencement of any such period, together with all compensation and benefits
payable to the Executive under the terms of any applicable compensation or
benefit plan, program or arrangement maintained by the Company during such
period, until the Executive's employment is terminated by the Company for
Disability.
5.2 Salary During Term. If the Executive's employment shall be
terminated for any reason following a Change in Control and during the Term, the
Company shall pay the Executive's full salary to the Executive through the Date
of Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Company's applicable
compensation and benefit plans, programs or arrangements.
5.3 Post-Termination Compensation and Benefits. If the Executive's
employment shall be terminated for any reason following a Change in Control and
during the Term, the Company shall pay to the Executive the normal
post-termination compensation and benefits as such payments become due. Such
post-termination compensation and benefits shall be determined under, and paid
in accordance with, the Company's applicable retirement, insurance and other
compensation or benefit plans, programs and arrangements.
5.4 Incentive Awards.
(A) Stock Options and SARs. Immediately prior to the Change in
Control, all awards of stock options and stock appreciation rights ("SARs")
previously granted to the Executive shall become fully vested and exercisable.
The phrase "immediately prior to the Change in Control" shall be understood to
mean sufficiently in advance of a Change in Control to permit the Executive to
take all steps reasonably necessary to exercise all options and SARs and to deal
with the shares of stock underlying the awards of stock options and SARs so that
such shares may be treated in the same manner as the shares of stock of other
shareholders in connection with the Change in Control.
(B) Performance Stock Rights. To the extent deemed earned, each
outstanding performance stock right ("PSR") previously granted to the Executive
shall become immediately payable in cash upon a Change in Control, and the
remainder of each outstanding PSR shall be canceled for no value. All
outstanding PSRs shall be deemed to have been earned to the extent of the
greater of:
(i) the number of shares determined by the Committee based
on the extent to which the performance goals specified in the PSR award
agreement have been achieved during the portion of the performance period ending
on the last day of the last fiscal quarter of the Company ending on or before
the date of the Change of Control, and
2
<PAGE> 5
(ii) the number of shares equal to the product of the
target shares identified in the PSR award agreement multiplied by a fraction
with a numerator equal to the whole number of calendar months beginning with the
month in which the PSR was granted and ending on the date of the Change in
Control and a denominator equal to the whole number of calendar months in the
entire performance period covered by the PSR award agreement, less any shares
previously issued under the PSR award agreement.
(C) Restricted Stock Rights. All restrictions with respect to
restricted stock rights ("RSRs") shall lapse upon a Change in Control, and all
outstanding RSRs of the Executive shall be immediately settled by a cash
payment.
(D) Other Incentive Awards. All other restrictions with respect
to outstanding incentive awards of the Executive not described in subsections
(A) through (C) of this Section 5.4 shall lapse upon a Change in Control, and
such awards shall be fully vested and nonforfeitable.
(E) Fair Market Value. For purposes of this Section 5.4, with
respect to determining the cash equivalent value of an RSR or PSR or the spread
payable upon exercise of an SAR, the fair market value of a share of the
Company's stock shall be deemed to equal the greater of (i) the fair market
value of a share of stock as of the date on which a Change in Control occurs and
(ii) the highest price of a share of stock which is paid or offered to be paid,
by any person or entity, in connection with any transaction which constitutes a
Change in Control.
5.5 Deferral Election. The Executive may elect to defer all or a
portion of the payments that are to be made to the Executive under Section
6.1(A) and Section 6.2. The Executive may exercise such election by delivering a
notice of election (in accordance with Section 10) prior to the occurrence of
Change in Control, which notice shall state the portion of such payments that is
to be deferred (expressed as a dollar amount or as a percentage (the "Deferred
Benefit")), the date the payment of the Deferred Benefit shall commence (the
"Deferred Benefit Commencement Date"), and the number of equal consecutive
monthly installments (not to exceed 120) that the Deferred Benefit is to be paid
in. In no event shall the Deferred Benefit Commencement Date be subsequent to
the first day of January of the year immediately following the Executive's
sixty-fifth birthday. In the event such an election is made:
(A) The amount that would have otherwise been paid under the
provisions of Section 6.1(A) and Section 6.2 shall be reduced by an amount equal
to the Deferred Benefit.
(B) The Deferred Benefit, together with simple interest
calculated at an annual rate of ten percent (10%) on the unpaid balance of the
Deferred Benefit from the date that payment of the Deferred Benefit would have
otherwise been made, shall be paid in the number of equal consecutive monthly
installments selected by the Executive, with the first such installment being
made on the Deferred Benefit Commencement Date and a subsequent payment being
made on the first day of each month thereafter.
(C) If the Executive dies prior to receiving the full amount of
the Deferred Benefit, the Company shall continue to pay the Deferred Benefit to
the estate of the Executive in
3
<PAGE> 6
the same manner as the Deferred Benefit would have been paid to the Executive if
the Executive had not died.
(D) The Deferred Benefit shall in no event be set aside or
deposited to a separate account or fund, and the rights of the Executive to the
Deferred Benefit shall not be greater than the rights of any other general,
unsecured creditor of the Company.
(E) The Executive, the Executive's spouse, and any other person
or entity claiming through or under the Executive shall not have any power or
authority to commute, encumber, or dispose of any right to receive payment of
the Deferred Benefit, all of which payments are expressly declared to be
non-assignable. In the event of any attempt at assignment or other disposition,
the Company shall have no further liability to pay the Deferred Benefit. The
Deferred Benefit provided for in this Agreement shall not be subject to seizure
for the payment of any debts, judgments, alimony, separate maintenance or child
support, or be reached or transferred by operation of law, or in the event of
bankruptcy, insolvency or otherwise.
6. Severance Payments.
6.1 Severance Payments Enumerated. The Company shall pay the Executive
the payments described in this Section 6.1 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the Term, in addition to any payments and benefits to which the Executive
is then entitled under Section 5, unless such termination is (i) by the Company
for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the
Executive without Good Reason. Additionally, during the one-month period
beginning with the first day of the month immediately following the first
anniversary of the Change in Control, the Executive may voluntarily terminate
his employment for any reason and, upon such termination, the Company shall pay
the Executive the Severance Payments and the Gross-Up Payment, in addition to
any payments and benefits to which the Executive is then entitled under Section
5. For purposes of this Agreement, the Executive's employment shall be deemed to
have been terminated following a Change in Control by the Company without Cause
or by the Executive with Good Reason, if (i) the Executive's employment is
terminated by the Company without Cause prior to a Change in Control and such
termination was at the request or direction of a Person who has entered into an
agreement with the Company the consummation of which would constitute a Change
in Control, (ii) the Executive terminates his employment with Good Reason prior
to a Change in Control and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person, or (iii) the
Executive's employment is terminated by the Company without Cause prior to a
Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a Change in
Control.
(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any severance
benefit otherwise payable to the Executive, the Company shall pay to the
Executive a lump sum severance payment, in cash, equal to three (or, if less,
the number of years, rounded to the nearest hundredth of a year, remaining until
December 31 of the year in which the Executive attains age 65) times the higher
of the Executive's annual base salary in effect immediately prior to the
occurrence of the event or
4
<PAGE> 7
circumstance upon which the Notice of Termination is based and the Executive's
base salary in effect immediately prior to Date of Termination.
(B) For the thirty-six (36) month period immediately following
the Date of Termination or, if shorter, for the period commencing immediately
following the Date of Termination and ending on December 31 of the year in which
the Executive attains age 65 (such applicable period, the "Severance Period"),
the Company shall arrange to provide the Executive with life, disability,
accident and health insurance benefits substantially similar to those which the
Executive is receiving immediately prior to the Date of Termination; provided,
however, that, unless the Executive consents to a different method (after taking
into account the effect of such method on the calculation of "parachute
payments" pursuant to Section 6.2), such health insurance benefits shall be
provided through a third-party insurer Benefits otherwise receivable by the
Executive pursuant to this Section 6.1 (B) shall be reduced to the extent
comparable benefits are actually received by or made available to the Executive
during the Severance Period (and any such benefits actually received by or made
available to the Executive shall be reported to the Company by the Executive).
(C) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Company shall pay to the Executive a lump
sum amount, in cash, equal to the sum of (i) any incentive compensation which
has been allocated or awarded to the Executive for a completed year or other
measuring period preceding the Date of Termination under any such plan and
which, as of the Date of Termination, is contingent only upon the continued
employment of the Executive to a subsequent date, and (ii) a pro rata portion to
the Date of Termination of the aggregate value of all contingent incentive
compensation awards to the Executive for all then uncompleted periods under any
such plan, calculated as to each such award by multiplying the award that the
Executive would have earned on the last day of the performance award period,
assuming the achievement, at the level that would produce the maximum award, of
the individual and corporate performance goals established with respect to such
award, by the fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period through the
Date of Termination by the total number of months contained in such performance
award period.
6.2 Gross-Up Payment.
(A) Whether or not the Executive becomes entitled to the
Severance Payments, if any of the payments or benefits received or to be
received by the Executive in connection with a Change in Control or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (such payments or benefits, excluding the Gross-Up
Payment, being hereinafter referred to as the "Total Payments") will be subject
to the Excise Tax, the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment") such that the net amount retained by the Executive,
after deduction of any Excise Tax on the Total Payments and any federal, state
and local income and employment taxes and Excise Tax upon the Gross-Up payment,
shall be equal to the Total Payments.
5
<PAGE> 8
(B) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" (within the meaning
of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel
selected by the accounting firm which was, immediately prior to the Change in
Control, the Company's independent accountant (the "Accountant") and which tax
counsel is reasonably acceptable to the Executive ("Tax Counsel"), such payments
or benefits (in whole or in part) do not constitute parachute payments,
including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess
parachute payments" within the meaning of Section 280G(b)(1) of the Code shall
be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel,
such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax, and
(iii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Accountant in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount
of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-Up Payment is calculated for purposes of this
Section 6.2), net of the maximum reduction in federal income taxes which could
be obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally determined to be
less than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Company, at the time that the amount
of such reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income and employment taxes imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income or employment tax deduction) plus
interest on the amount of such repayment at 120% of the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the Gross-Up
Payment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Company shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Company shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
6.3 Severance Payments Pay Date. The payments provided in subsections
(A) and (C) of Section 6.1 and in Section 6.2 shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day, the
Company shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section
6
<PAGE> 9
6.2, in accordance with Section 6.2, of the minimum amount of such payments to
which the Executive is clearly entitled and shall pay the remainder of such
payments (together with interest on the unpaid remainder (or on all such
payments to the extent the Company fails to make such payments when due) at 120%
of the rate provided in Section 1274(b)(2)(B) of the Code) as soon as the amount
thereof can be determined but in no event later than the thirtieth (30th) day
after the Date of Termination. In the event that the amount of the estimated
payments exceeds the amount subsequently determined to have been due, such
excess shall constitute a loan by the Company to the Executive, payable on the
fifth (5th) business day after demand by the Company (together with interest at
120% of the rate provided in Section 1274(b)(2)(B) of the Code). At the time
that payments are made under this Section 6.3, the Company shall provide the
Executive with a written statement setting forth the manner in which such
payments were calculated and the basis for such calculations including, without
limitation, any opinions or other advice the Company has received from Tax
Counsel, the Accountant or other advisors or consultants (and any such opinions
or advice which are in writing shall be attached to the statement).
6.4 Executive's Legal Fees. The Company also shall pay to the Executive
all legal fees and expenses incurred by the Executive in disputing in good faith
any issue hereunder relating to the termination of the Executive's employment,
in seeking in good faith to obtain or enforce any benefit or right provided by
this Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Company reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall state in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct stated in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time
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<PAGE> 10
performance of the Executive's duties during such thirty (30) day period), and
(ii) if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3, the Company shall continue to pay the
Executive the full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3. Amounts paid under this Section 7.4 are in addition to all other
amounts due under this Agreement (other than those due under Section 5.2) and
shall not be offset against or reduce any other amounts due under this
Agreement.
8. No Mitigation. The Company agrees that, if the Executive's employment with
the Company terminates during the Term, the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts payable to the
Executive by the Company pursuant to Section 6 or Section 7.4. Further, the
amount of any payment or benefit provided for in this Agreement (other than
Section 6.1(B)) shall not be reduced by any compensation earned by the Executive
as the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by the Executive to the Company, or
otherwise.
9. Successors; Binding Agreement.
9.1 SAFECO Successors. In addition to any obligations imposed by law
upon any successor to SAFECO, SAFECO will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of SAFECO to expressly assume
and agree to perform this Agreement in the same manner and to the same extent
that SAFECO would be required to perform it if no such succession had taken
place. Failure of SAFECO to obtain such assumption and agreement prior to the
8
<PAGE> 11
effectiveness of any such succession shall be a breach of this Agreement and
shall entitle the Executive to compensation from the Company in the same amount
and on the same terms as the Executive would be entitled to hereunder if the
Executive were to terminate the Executive's employment for Good Reason after a
Change in Control, except that, for purposes of implementing the foregoing, the
date on which any such succession becomes effective shall be deemed the Date of
Termination.
9.2 Executive's Successors. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms, terminate
upon the death of the Executive) if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the executors, personal representatives or
administrators of the Executive's estate.
10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page and, if to the Company, to the address stated below, or to such other
address as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
actual receipt:
To the Company:
SAFECO Corporation
SAFECO Plaza
Seattle, WA 98185
Attention: Chief Executive Officer
11. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and an officer of SAFECO. No waiver by either party
hereto at any time of any breach by the other party hereto of, or of any lack of
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. This Agreement
supersedes any other agreements or representations, oral or otherwise, express
or implied, which have been made by either party with respect to the subject
matter of this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
Washington. All references to sections of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such sections. Any payments
provided for hereunder shall be paid net of any applicable withholding required
under federal, state or local law and any additional withholding to which the
Executive has agreed. The obligations of the Company and the Executive under
this Agreement which by their nature may require either partial or total
performance after the expiration of the Term (including, without limitation,
those under Sections 6 and 7) shall survive such expiration.
9
<PAGE> 12
12. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
14. Settlement of Disputes; Arbitration.
14.1 Claims Procedures. All claims by the Executive for benefits under
this Agreement shall be directed to and determined by the Committee and shall be
in writing. Any denial by the Committee of a claim for benefits under this
Agreement shall be delivered to the Executive in writing and shall state the
specific reasons for the denial and the specific provisions of this Agreement
relied upon. The Committee shall afford a reasonable opportunity to the
Executive for a review of the decision denying a claim and shall further allow
the Executive to appeal to the Committee a decision of the Committee within
sixty (60) days after notification by the Committee that the Executive's claim
has been denied.
14.2 Arbitration. Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Seattle, Washington in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. Notwithstanding any provision of this Agreement
to the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
(A) "Accountant" shall have the meaning stated in Section 6.2.
(B) "Affiliate" shall have the meaning stated in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(C) "Base Amount" shall have the meaning stated in Section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning stated in Rule
13d-3 under the Exchange Act.
(E) "Board" shall mean the Board of Directors of SAFECO.
(F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the
10
<PAGE> 13
Executive's duties with the Company (other than any such failure resulting from
the Executive's incapacity due to physical or mental illness or any such actual
or anticipated failure after the issuance of a Notice of Termination for Good
Reason by the Executive pursuant to Section 7.1) after a written demand for
substantial performance is delivered to the Executive by the Board, which demand
specifically identifies the manner in which the Board believes that the
Executive has not substantially performed the Executive's duties, or (ii) the
willful engaging by the Executive in conduct which is demonstrably and
materially injurious to the Company or its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act,
or failure to act, on the Executive's part shall be deemed "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's act, or failure to act, was in the best
interest of the Company and (y) in the event of a dispute concerning the
application of this provision, no claim by the Company that Cause exists shall
be given effect unless the Company establishes to the Committee by clear and
convincing evidence that Cause exists.
(G) A "Change in Control" shall be deemed to have occurred if the
event stated in any one of the following paragraphs shall have occurred:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of SAFECO (not including in the securities
beneficially owned by such Person any securities acquired directly from SAFECO
or its affiliates) representing 25% or more of the combined voting power of
SAFECO's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (a) of
paragraph (iii) below; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of SAFECO) whose appointment
or election by the Board or nomination for election by SAFECO's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or consolidation of
SAFECO or any direct or indirect subsidiary of SAFECO with any other
corporation, other than (a) a merger or consolidation which would result in the
voting securities of SAFECO outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of SAFECO or any subsidiary of
SAFECO, at least 75% of the combined voting power of the securities of SAFECO or
such surviving entity or any parent thereof outstanding immediately after such
merger or consolidation, or (b) a merger or consolidation effected to implement
a recapitalization of SAFECO (or similar transaction) in which no Person is or
becomes the Beneficial Owner, directly or indirectly, of securities of
11
<PAGE> 14
SAFECO (not including in the securities Beneficially Owned by such Person any
securities acquired directly from SAFECO or its Affiliates) representing 25% or
more of the combined voting power of SAFECO's then outstanding securities; or
(iv) the stockholders of SAFECO approve a plan of complete
liquidation or dissolution of SAFECO or there is consummated an agreement for
the sale or disposition by SAFECO of all or substantially all of SAFECO's
assets, other than a sale or disposition by SAFECO of all or substantially all
of SAFECO's assets to an entity, at least 75% of the combined voting power of
the voting securities of which are owned by stockholders of SAFECO in
substantially the same proportions as their ownership of SAFECO immediately
prior to such sale.
Notwithstanding the foregoing, a "Change in Control" shall not be
deemed to have occurred by virtue of the consummation of any transaction or
series of integrated transactions immediately following which the record holders
of the common stock of SAFECO immediately prior to such transaction or series of
transactions continue to have substantially the same proportionate ownership in
an entity which owns all or substantially all of the assets of SAFECO
immediately following such transaction or series of transactions.
(H) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(I) "Committee" shall mean (i) the individuals (not fewer than
three in number) who, on the date six months before a Change in Control,
constitute the Compensation Committee of the Board, plus (ii) in the event that
fewer than three individuals are available from the group specified in clause
(i) above for any reason, such individuals as may be appointed by the individual
or individuals so available (including for this purpose any individual or
individuals previously so appointed under this clause (ii)).
(J) "Company" shall mean SAFECO and its subsidiaries,
collectively.
(K) "Date of Termination" shall have the meaning stated in
Section 7.2.
(L) "Deferred Benefit" shall have the meaning stated in Section
5.4.
(M) "Deferred Benefit Commencement Date" shall have the meaning
stated in Section 5.4.
(N) "Disability" shall be deemed the reason for the termination
by the Company of the Executive's employment, if, as a result of the Executive's
incapacity due to physical or mental illness, the Executive shall have been
absent from the full-time performance of the Executive's duties with the Company
for a period of one hundred and thirty (130) consecutive business days, the
Company shall have given the Executive a Notice of Termination for Disability,
and, within thirty (30) days after such Notice of Termination is given, the
Executive shall not have returned to the full-time performance of the
Executive's duties.
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<PAGE> 15
(O) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(P) "Excise Tax" shall mean any excise tax imposed under Section
4999 of the Code.
(Q) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(R) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clause (ii) of the second sentence
of Section 6.1 (treating all references in paragraphs (i) through (vii) below to
a "Change in Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Company, or failures by the Company to act,
unless, in the case of any act or failure to act described in paragraph (i),
(v), (vi) or (vii) below, such act or failure to act is corrected prior to the
Date of Termination specified in the Notice of Termination given in respect
thereof:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer of the
Company or a substantial adverse alteration in the nature or status of the
Executive's responsibilities from those in effect immediately prior to the
Change in Control;
(ii) a reduction by the Company in the Executive's annual
base salary as in effect on the date hereof or as the same may be increased from
time to time;
(iii) the relocation of the Executive's principal place
of employment to a location outside of King County, Washington (or, if
different, the county in which such principal place of employment is located
immediately prior to the Change in Control) or the Company's requiring the
Executive to be based anywhere other than such principal place of employment (or
permitted relocation thereof) except for required travel on the Company's
business to an extent substantially consistent with the Executive's present
business travel obligations;
(iv) the failure by the Company to pay to the Executive
any portion of the Executive's current compensation, or to pay to the Executive
any portion of an installment of deferred compensation under any deferred
compensation program of the Company, within seven (7) days of the date such
compensation is due;
(v) the failure by the Company to continue in effect any
compensation plan (including stock option, restricted stock, stock appreciation
right, incentive compensation and bonus plans) in which the Executive
participates immediately prior to the Change in Control which is material to the
Executive's total compensation, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan,
or the failure by the Company to continue the Executive's participation therein
(or in such
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<PAGE> 16
substitute or alternative plan) on a basis not materially less favorable, both
in terms of the amount or timing of payment of benefits provided and the level
of the Executive's participation relative to other participants, as existed
immediately prior to the Change in Control;
(vi) the failure by the Company to continue to provide
the Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Company's profit sharing, pension, savings, life
insurance, medical, health and accident, or disability plans in which the
Executive was participating immediately prior to the Change in Control, the
taking of any action by the Company which would directly or indirectly
materially reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of the Change in Control, or
the failure by the Company to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of years of
service with the Company in accordance with the Company's normal vacation policy
in effect at the time of the Change in Control; or
(vii) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.1; for purposes of this Agreement, no such
purported termination shall be effective.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Company establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(S) "Gross-Up Payment" shall have the meaning set forth in
Section 6.2.
(T) "Notice of Termination" shall have the meaning set forth in
Section 7.1.
(U) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) SAFECO or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of SAFECO or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of SAFECO in
substantially the same proportions as their ownership of stock of SAFECO.
(V) "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:
(i) SAFECO enters into an agreement, the consummation of
which would result in the occurrence of a Change in Control;
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<PAGE> 17
(ii) SAFECO or any Person publicly announces an intention
to take or to consider taking actions which, if consummated, would constitute a
Change in Control;
(iii) any Person becomes the Beneficial Owner, directly
or indirectly, of securities of SAFECO representing 10% or more of either the
then outstanding shares of common stock of SAFECO or the combined voting power
of the SAFECO's then outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired directly from SAFECO
or its affiliates); or
(iv) the Board adopts a resolution to the effect that,
for purposes of this Agreement, a Potential Change in Control has occurred.
(W) "Retirement" shall be deemed the reason for the termination
by the Company or the Executive of the Executive's employment if such employment
is terminated on or after the date the Executive attains age 65.
(X) "SAFECO" shall mean SAFECO Corporation and, except in
determining under Section 15(G) whether or not any Change in Control has
occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement by operation of law, or otherwise.
(Y) "Severance Payments" shall mean those payments so described
in Section 6.1.
(Z) "Severance Period" shall have the meaning set forth in
Section 6.1(B).
(AA) "Tax Counsel" shall have the meaning set forth in Section
6.2.
(BB) "Term" shall mean the period of time described in Section 2
(including any extension, continuation or termination described therein).
(CC) "Total Payments" shall mean those payments so described in
Section 6.2.
SAFECO Corporation _____________________________________
[NAME]
By: _________________________________ Address: ____________________________
R.H. Eigsti ____________________________
Chairman and Chief Executive Officer ____________________________
15
<PAGE> 1
SEVERANCE AGREEMENT
BETWEEN
SAFECO CORPORATION
SAFECO LIFE INSURANCE COMPANY
AND
RANDALL H. TALBOT
MARCH 11, 1999
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Defined Terms....................................................... 1
2. Term of Agreement................................................... 1
3. Company's Covenants Summarized...................................... 1
4. The Executive's Covenants........................................... 1
5. Compensation Other Than Severance Payments.......................... 2
5.1 Salary During Incapacity or Illness
5.2 Salary During Term
5.3 Post-Termination Compensation and Benefits
5.4 Incentive Awards
5.5 Deferral Election
6. Severance Payments.................................................. 4
6.1 Severance Payments Enumerated
6.2 Gross-Up Payment
6.3 Severance Payments Pay Date
6.4 Executive's Legal Fees
7. Termination Procedures and Compensation During Dispute.............. 7
7.1 Notice of Termination
7.2 Date of Termination
7.3 Dispute Concerning Termination
7.4 Compensation During Dispute
8. No Mitigation....................................................... 8
9. Successors; Binding Agreement....................................... 8
9.1 SAFECO Successors
9.2 Executive's Successors
10. Notices............................................................. 9
11. Miscellaneous....................................................... 9
12. Validity............................................................ 10
13. Counterparts........................................................ 10
14. Settlement of Disputes; Arbitration................................. 10
14.1 Claims Procedures
14.2 Arbitration
15. Definitions......................................................... 10
</TABLE>
<PAGE> 3
SEVERANCE AGREEMENT
THIS AGREEMENT, dated March 11, 1999, is made by and between SAFECO Corporation,
a Washington corporation ("SAFECO"), SAFECO Life Insurance Company ("SAFECO
Life") and Randall H. Talbot (the "Executive").
WHEREAS, SAFECO (together with its subsidiaries, including SAFECO Life,
collectively, the "Company"), considers it essential to the best interests of
its stockholders to foster the continued employment of key management personnel;
and
WHEREAS, SAFECO recognizes that the possibility of a Change in Control exists
and that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its stockholders; and
WHEREAS, SAFECO has determined that appropriate steps should be taken to
reinforce and encourage the continued attention and dedication of members of the
Company's management, including the Executive, to their assigned duties without
distraction in the face of potentially disturbing circumstances arising from the
possibility of a Change in Control;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein
contained, SAFECO, SAFECO Life and the Executive agree as follows:
1. Defined Terms. The definitions of capitalized terms used in this Agreement
are provided in Section 15.
2. Term of Agreement. The Term of this Agreement shall commence on the date
hereof and shall continue in effect until the earlier of (i) the date it is
terminated by written agreement between the parties and (ii) the seventh
anniversary of a Change in Control.
3. Company's Covenants Summarized. In order to induce the Executive to remain in
the employ of the Employer (as defined in paragraph (Q) of Section 15) and in
consideration of the Executive's covenants stated in Section 4, the Employer
agrees, under the conditions described herein, to pay the Executive the
Severance Payments and the other payments and benefits described herein. Except
as provided in Section 5.1, Section 5.4, Section 6.2(A), and Section 9.1, no
amount or benefit shall be payable under this Agreement unless there shall have
been a termination of the Executive's employment with the Employer following a
Change in Control and during the Term. This Agreement shall not be construed as
creating an express or implied contract of employment and, except as otherwise
agreed in writing between the Executive and the Employer, the Executive shall
not have any right to be retained in the employ of the Employer.
4. The Executive's Covenants. The Executive agrees that, subject to the terms
and conditions of this Agreement, in the event of a Potential Change in Control
during the Term, the Executive will remain in the employ of the Employer until
the earliest of (i) a date which is six (6) months from the date of such
Potential Change of Control, (ii) the date of a Change in Control, (iii) the
date of termination by the Executive of the Executive's employment for Good
<PAGE> 4
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Employer of the Executive's employment for any reason.
5. Compensation Other Than Severance Payments.
5.1 Salary During Incapacity or Illness. Following a Change in
Control and during the Term, during any period that the Executive fails to
perform the Executive's fulltime duties with the Employer as a result of
incapacity due to physical or mental illness, the Employer shall pay the
Executive's full salary to the Executive at the rate in effect at the
commencement of any such period, together with all compensation and benefits
payable to the Executive under the terms of any applicable compensation or
benefit plan, program or arrangement maintained by the Employer during such
period, until the Executive's employment is terminated by the Employer for
Disability.
5.2 Salary During Term. If the Executive's employment shall be
terminated for any reason following a Change in Control and during the Term, the
Employer shall pay the Executive's full salary to the Executive through the Date
of Termination at the rate in effect at the time the Notice of Termination is
given, together with all compensation and benefits payable to the Executive
through the Date of Termination under the terms of the Employer's applicable
compensation and benefit plans, programs or arrangements.
5.3 Post-Termination Compensation and Benefits. If the Executive's
employment shall be terminated for any reason following a Change in Control and
during the Term, the Employer shall pay to the Executive the normal
post-termination compensation and benefits as such payments become due. Such
post-termination compensation and benefits shall be determined under, and paid
in accordance with, the Employer's applicable retirement, insurance and other
compensation or benefit plans, programs and arrangements.
5.4 Incentive Awards.
(A) Stock Options and SARs. Immediately prior to the Change in
Control, all awards of stock options and stock appreciation rights ("SARs")
previously granted to the Executive shall become fully vested and exercisable.
The phrase "immediately prior to the Change in Control" shall be understood to
mean sufficiently in advance of a Change in Control to permit the Executive to
take all steps reasonably necessary to exercise all options and SARs and to deal
with the shares of stock underlying the awards of stock options and SARs so that
such shares may be treated in the same manner as the shares of stock of other
shareholders in connection with the Change in Control.
(B) Performance Stock Rights. To the extent deemed earned, each
outstanding performance stock right ("PSR") previously granted to the Executive
shall become immediately payable in cash upon a Change in Control, and the
remainder of each outstanding PSR shall be canceled for no value. All
outstanding PSRs shall be deemed to have been earned to the extent of the
greater of:
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<PAGE> 5
(i) the number of shares determined by the Committee based
on the extent to which the performance goals specified in the PSR award
agreement have been achieved during the portion of the performance period ending
on the last day of the last fiscal quarter ending on or before the date of the
Change of Control, and
(ii) the number of shares equal to the product of the
target shares identified in the PSR award agreement multiplied by a fraction
with a numerator equal to the whole number of calendar months beginning with the
month in which the PSR was granted and ending on the date of the Change in
Control and a denominator equal to the whole number of calendar months in the
entire performance period covered by the PSR award agreement, less any shares
previously issued under the PSR award agreement.
(C) Restricted Stock Rights. All restrictions with respect to
restricted stock rights ("RSRs") shall lapse upon a Change in Control, and all
outstanding RSRs of the Executive shall be immediately settled by a cash
payment.
(D) Other Incentive Awards. All other restrictions with respect
to outstanding incentive awards of the Executive not described in subsections
(A) through (C) of this Section 5.4 shall lapse upon a Change in Control, and
such awards shall be fully vested and nonforfeitable.
(E) Fair Market Value. For purposes of this Section 5.4, with
respect to determining the cash equivalent value of an RSR or PSR or the spread
payable upon exercise of an SAR, the fair market value of a share of SAFECO
common stock shall be deemed to equal the greater of (i) the fair market value
of a share of the stock as of the date on which a Change in Control occurs and
(ii) the highest price which is paid or offered to be paid, by any person or
entity, for a share of SAFECO common stock in connection with any transaction
which constitutes a Change in Control.
5.5 Deferral Election. The Executive may elect to defer all or a
portion of the payments that are to be made to the Executive under Section
6.1(A) and Section 6.2. The Executive may exercise such election by delivering a
notice of election (in accordance with Section 10) prior to the occurrence of
Change in Control, which notice shall state the portion of such payments that is
to be deferred (expressed as a dollar amount or as a percentage (the "Deferred
Benefit")), the date the payment of the Deferred Benefit shall commence (the
"Deferred Benefit Commencement Date"), and the number of equal consecutive
monthly installments (not to exceed 120) that the Deferred Benefit is to be paid
in. In no event shall the Deferred Benefit Commencement Date be subsequent to
the first day of January of the year immediately following the Executive's
sixty-fifth birthday. In the event such an election is made:
(A) The amount that would have otherwise been paid under the
provisions of Section 6.1(A) and Section 6.2 shall be reduced by an amount equal
to the Deferred Benefit.
(B) The Deferred Benefit, together with simple interest
calculated at an annual rate of ten percent (10%) on the unpaid balance of the
Deferred Benefit from the date that payment of the Deferred Benefit would have
otherwise been made, shall be paid in the number of
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equal consecutive monthly installments selected by the Executive, with the
first such installment being made on the Deferred Benefit Commencement Date and
a subsequent payment being made on the first day of each month thereafter.
(C) If the Executive dies prior to receiving the full amount of
the Deferred Benefit, the Employer shall continue to pay the Deferred Benefit to
the estate of the Executive in the same manner as the Deferred Benefit would
have been paid to the Executive if the Executive had not died.
(D) The Deferred Benefit shall in no event be set aside or
deposited to a separate account or fund, and the rights of the Executive to the
Deferred Benefit shall not be greater than the rights of any other general,
unsecured creditor of the Employer.
(E) The Executive, the Executive's spouse, and any other person
or entity claiming through or under the Executive shall not have any power or
authority to commute, encumber, or dispose of any right to receive payment of
the Deferred Benefit, all of which payments are expressly declared to be
non-assignable. In the event of any attempt at assignment or other disposition,
the Employer shall have no further liability to pay the Deferred Benefit. The
Deferred Benefit provided for in this Agreement shall not be subject to seizure
for the payment of any debts, judgments, alimony, separate maintenance or child
support, or be reached or transferred by operation of law, or in the event of
bankruptcy, insolvency or otherwise.
6. Severance Payments.
6.1 Severance Payments Enumerated. The Employer shall pay the Executive
the payments described in this Section 6.1 (the "Severance Payments") upon the
termination of the Executive's employment following a Change in Control and
during the Term, in addition to any payments and benefits to which the Executive
is then entitled under Section 5, unless such termination is (i) by the Employer
for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the
Executive without Good Reason. Additionally, during the one-month period
beginning with the first day of the month immediately following the first
anniversary of the Change in Control, the Executive may voluntarily terminate
his employment for any reason and, upon such termination, the Employer shall pay
the Executive the Severance Payments and the Gross-Up Payment, in addition to
any payments and benefits to which the Executive is then entitled under Section
5. For purposes of this Agreement, the Executive's employment shall be deemed to
have been terminated following a Change in Control by the Employer without Cause
or by the Executive with Good Reason, if (i) the Executive's employment is
terminated by the Employer without Cause prior to a Change in Control and such
termination was at the request or direction of a Person who has entered into an
agreement with the Employer the consummation of which would constitute a Change
in Control, (ii) the Executive terminates his employment with Good Reason prior
to a Change in Control and the circumstance or event which constitutes Good
Reason occurs at the request or direction of such Person, or (iii) the
Executive's employment is terminated by the Employer without Cause prior to a
Change in Control and the Executive reasonably demonstrates that such
termination is otherwise in connection with or in anticipation of a Change in
Control.
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(A) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination and in lieu of any severance
benefit otherwise payable to the Executive, the Employer shall pay to the
Executive a lump sum severance payment, in cash, equal to three (or, if less,
the number of years, rounded to the nearest hundredth of a year, remaining until
December 31 of the year in which the Executive attains age 65) times the higher
of the Executive's annual base salary in effect immediately prior to the
occurrence of the event or circumstance upon which the Notice of Termination is
based and the Executive's base salary in effect immediately prior to Date of
Termination.
(B) For the thirty-six (36) month period immediately following
the Date of Termination or, if shorter, for the period commencing immediately
following the Date of Termination and ending on December 31 of the year in which
the Executive attains age 65 (such applicable period, the "Severance Period"),
the Employer shall arrange to provide the Executive with life, disability,
accident and health insurance benefits substantially similar to those which the
Executive is receiving immediately prior to the Date of Termination; provided,
however, that, unless the Executive consents to a different method (after taking
into account the effect of such method on the calculation of "parachute
payments" pursuant to Section 6.2), such health insurance benefits shall be
provided through a third-party insurer Benefits otherwise receivable by the
Executive pursuant to this Section 6.1(B) shall be reduced to the extent
comparable benefits are actually received by or made available to the Executive
during the Severance Period (and any such benefits actually received by or made
available to the Executive shall be reported to the Employer by the Executive).
(C) Notwithstanding any provision of any annual or long-term
incentive plan to the contrary, the Employer shall pay to the Executive a lump
sum amount, in cash, equal to the sum of (i) any incentive compensation which
has been allocated or awarded to the Executive for a completed year or other
measuring period preceding the Date of Termination under any such plan and
which, as of the Date of Termination, is contingent only upon the continued
employment of the Executive to a subsequent date, and (ii) a pro rata portion to
the Date of Termination of the aggregate value of all contingent incentive
compensation awards to the Executive for all then uncompleted periods under any
such plan, calculated as to each such award by multiplying the award that the
Executive would have earned on the last day of the performance award period,
assuming the achievement, at the level that would produce the maximum award, of
the individual and corporate performance goals established with respect to such
award, by the fraction obtained by dividing the number of full months and any
fractional portion of a month during such performance award period through the
Date of Termination by the total number of months contained in such performance
award period.
6.2 Gross-Up Payment.
(A) Whether or not the Executive becomes entitled to the
Severance Payments, if any of the payments or benefits received or to be
received by the Executive in connection with a Change in Control or the
Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
Person whose actions result in a Change in Control or any Person affiliated with
the Company or such Person) (such payments or benefits, excluding the Gross-Up
Payment, being hereinafter
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referred to as the "Total Payments") will be subject to the Excise Tax, the
Employer shall pay to the Executive an additional amount (the "Gross-Up
Payment") such that the net amount retained by the Executive, after deduction of
any Excise Tax on the Total Payments and any federal, state and local income and
employment taxes and Excise Tax upon the Gross-Up payment, shall be equal to the
Total Payments.
(B) For purposes of determining whether any of the Total Payments
will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of
the Total Payments shall be treated as "parachute payments" (within the meaning
of Section 280G(b)(2) of the Code) unless, in the opinion of tax counsel
selected by the accounting firm which was, immediately prior to the Change in
Control, the Company's independent accountant (the "Accountant") and which tax
counsel is reasonably acceptable to the Executive ("Tax Counsel"), such payments
or benefits (in whole or in part) do not constitute parachute payments,
including by reason of Section 280G(b)(4)(A) of the Code, (ii) all "excess
parachute payments" within the meaning of Section 280G(b)(1) of the Code shall
be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel,
such excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered (within the meaning of Section
280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such
reasonable compensation, or are otherwise not subject to the Excise Tax, and
(iii) the value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Accountant in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount
of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax
at the highest marginal rate of federal income taxation in the calendar year in
which the Gross-Up Payment is to be made and state and local income taxes at the
highest marginal rate of taxation in the state and locality of the Executive's
residence on the Date of Termination (or if there is no Date of Termination,
then the date on which the Gross-Up Payment is calculated for purposes of this
Section 6.2), net of the maximum reduction in federal income taxes which could
be obtained from deduction of such state and local taxes.
(C) In the event that the Excise Tax is finally determined to be
less than the amount taken into account hereunder in calculating the Gross-Up
Payment, the Executive shall repay to the Employer, at the time that the amount
of such reduction in Excise Tax is finally determined, the portion of the
Gross-Up Payment attributable to such reduction (plus that portion of the
Gross-Up Payment attributable to the Excise Tax and federal, state and local
income and employment taxes imposed on the Gross-Up Payment being repaid by the
Executive to the extent that such repayment results in a reduction in Excise Tax
and/or a federal, state or local income or employment tax deduction) plus
interest on the amount of such repayment at 120% of the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to
exceed the amount taken into account hereunder in calculating the Gross-Up
Payment (including by reason of any payment the existence or amount of which
cannot be determined at the time of the Gross-Up Payment), the Employer shall
make an additional Gross-Up Payment in respect of such excess (plus any
interest, penalties or additions payable by the Executive with respect to such
excess) at the time that the amount of such excess is finally determined. The
Executive and the Employer shall each reasonably cooperate with the other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Total
Payments.
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6.3 Severance Payments Pay Date. The payments provided in subsections
(A) and (C) of Section 6.1 and in Section 6.2 shall be made not later than the
fifth day following the Date of Termination; provided, however, that if the
amounts of such payments cannot be finally determined on or before such day, the
Employer shall pay to the Executive on such day an estimate, as determined in
good faith by the Executive or, in the case of payments under Section 6.2, in
accordance with Section 6.2, of the minimum amount of such payments to which the
Executive is clearly entitled and shall pay the remainder of such payments
(together with interest on the unpaid remainder (or on all such payments to the
extent the Employer fails to make such payments when due) at 120% of the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount thereof can
be determined but in no event later than the thirtieth (30th) day after the Date
of Termination. In the event that the amount of the estimated payments exceeds
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Employer to the Executive, payable on the fifth (5th)
business day after demand by the Employer (together with interest at 120% of the
rate provided in Section 1274(b)(2)(B) of the Code). At the time that payments
are made under this Section 6.3, the Employer shall provide the Executive with a
written statement setting forth the manner in which such payments were
calculated and the basis for such calculations including, without limitation,
any opinions or other advice the Employer has received from Tax Counsel, the
Accountant or other advisors or consultants (and any such opinions or advice
which are in writing shall be attached to the statement).
6.4 Executive's Legal Fees. The Employer also shall pay to the Executive
all legal fees and expenses incurred by the Executive in disputing in good faith
any issue hereunder relating to the termination of the Executive's employment,
in seeking in good faith to obtain or enforce any benefit or right provided by
this Agreement or in connection with any tax audit or proceeding to the extent
attributable to the application of Section 4999 of the Code to any payment or
benefit provided hereunder. Such payments shall be made within five (5) business
days after delivery of the Executive's written requests for payment accompanied
with such evidence of fees and expenses incurred as the Employer reasonably may
require.
7. Termination Procedures and Compensation During Dispute.
7.1 Notice of Termination. After a Change in Control and during the
Term, any purported termination of the Executive's employment (other than by
reason of death) shall be communicated by written Notice of Termination from one
party hereto to the other party hereto in accordance with Section 10. For
purposes of this Agreement, a "Notice of Termination" shall mean a notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall state in reasonable detail the facts and circumstances claimed to
provide a basis for termination of the Executive's employment under the
provision so indicated. Further, a Notice of Termination for Cause is required
to include a copy of a resolution duly adopted by the affirmative vote of not
less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct stated in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.
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7.2 Date of Termination. "Date of Termination," with respect to any
purported termination of the Executive's employment after a Change in Control
and during the Term, shall mean (i) if the Executive's employment is terminated
for Disability, thirty (30) days after Notice of Termination is given (provided
that the Executive shall not have returned to the full-time performance of the
Executive's duties during such thirty (30) day period), and (ii) if the
Executive's employment is terminated for any other reason, the date specified in
the Notice of Termination (which, in the case of a termination by the Employer,
shall not be less than thirty (30) days (except in the case of a termination for
Cause) and, in the case of a termination by the Executive, shall not be less
than fifteen (15) days nor more than sixty (60) days, respectively, from the
date such Notice of Termination is given).
7.3 Dispute Concerning Termination. If within fifteen (15) days after
any Notice of Termination is given, or, if later, prior to the Date of
Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.
7.4 Compensation During Dispute. If a purported termination occurs
following a Change in Control and during the Term and the Date of Termination is
extended in accordance with Section 7.3, the Employer shall continue to pay the
Executive the full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, salary) and continue the
Executive as a participant in all compensation, benefit and insurance plans in
which the Executive was participating when the notice giving rise to the dispute
was given, until the Date of Termination, as determined in accordance with
Section 7.3. Amounts paid under this Section 7.4 are in addition to all other
amounts due under this Agreement (other than those due under Section 5.2) and
shall not be offset against or reduce any other amounts due under this
Agreement.
8. No Mitigation. The Employer agrees that, if the Executive's employment with
the Employer terminates during the Term, the Executive is not required to seek
other employment or to attempt in any way to reduce any amounts payable to the
Executive by the Employer pursuant to Section 6 or Section 7.4. Further, the
amount of any payment or benefit provided for in this Agreement (other than
Section 6.1(B)) shall not be reduced by any compensation earned by the Executive
as the result of employment by another employer, by retirement benefits, by
offset against any amount claimed to be owed by the Executive to the Employer,
or otherwise.
9. Successors; Binding Agreement.
9.1 SAFECO Successors. In addition to any obligations imposed by law
upon any successor to SAFECO or SAFECO Life, SAFECO and SAFECO Life will each
require any
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successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of SAFECO
or SAFECO Life to expressly assume and agree to perform this Agreement in the
same manner and to the same extent that SAFECO or SAFECO Life would be required
to perform it if no such succession had taken place. Failure of SAFECO or SAFECO
Life to obtain such assumption and agreement prior to the effectiveness of any
such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Employer in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive were to
terminate the Executive's employment for Good Reason after a Change in Control,
except that, for purposes of implementing the foregoing, the date on which any
such succession becomes effective shall be deemed the Date of Termination.
9.2 Executive's Successors. This Agreement shall inure to the benefit of
and be enforceable by the Executive's personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive shall die while any amount would still be payable to
the Executive hereunder (other than amounts which, by their terms, terminate
upon the death of the Executive) if the Executive had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the executors, personal representatives or
administrators of the Executive's estate.
10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed, if to the
Executive, to the address inserted below the Executive's signature on the final
page and, if to SAFECO or SAFECO Life, to the address stated below, or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon actual receipt:
To SAFECO:
SAFECO Corporation
SAFECO Plaza
Seattle, WA 98185
Attention: Chief Executive Officer
To SAFECO Life:
SAFECO Life Insurance Company
P.O. Box 34690
Seattle, WA 98124-1690
Attention: Corporate Secretary
11. Miscellaneous. No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in writing
and signed by the Executive and an officer of the Employer. No waiver by either
party hereto at any time of any breach by the other party hereto of, or of any
lack of compliance with, any condition or provision of this
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Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. This Agreement supersedes any other agreements or
representations, oral or otherwise, express or implied, which have been made by
either party with respect to the subject matter of this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Washington. All references to sections of the
Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be paid
net of any applicable withholding required under federal, state or local law and
any additional withholding to which the Executive has agreed. The obligations of
the Employer and the Executive under this Agreement which by their nature may
require either partial or total performance after the expiration of the Term
(including, without limitation, those under Sections 6 and 7) shall survive such
expiration.
12. Validity. The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
13. Counterparts. This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
14. Settlement of Disputes; Arbitration.
14.1 Claims Procedures. All claims by the Executive for benefits under
this Agreement shall be directed to and determined by the Committee and shall be
in writing. Any denial by the Committee of a claim for benefits under this
Agreement shall be delivered to the Executive in writing and shall state the
specific reasons for the denial and the specific provisions of this Agreement
relied upon. The Committee shall afford a reasonable opportunity to the
Executive for a review of the decision denying a claim and shall further allow
the Executive to appeal to the Committee a decision of the Committee within
sixty (60) days after notification by the Committee that the Executive's claim
has been denied.
14.2 Arbitration. Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Seattle, Washington in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award in
any court having jurisdiction. Notwithstanding any provision of this Agreement
to the contrary, the Executive shall be entitled to seek specific performance of
the Executive's right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
15. Definitions. For purposes of this Agreement, the following terms shall have
the meanings indicated below:
(A) "Accountant" shall have the meaning stated in Section 6.2.
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(B) "Affiliate" shall have the meaning stated in Rule 12b-2
promulgated under Section 12 of the Exchange Act.
(C) "Base Amount" shall have the meaning stated in Section
280G(b)(3) of the Code.
(D) "Beneficial Owner" shall have the meaning stated in Rule
13d-3 under the Exchange Act.
(E) "Board" shall mean the Board of Directors of SAFECO prior to
a Change in Control and the Board of Directors of the Employer following a
change in control.
(F) "Cause" for termination by the Employer of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Employer (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1) after a
written demand for substantial performance is delivered to the Executive by the
Board, which demand specifically identifies the manner in which the Board
believes that the Executive has not substantially performed the Executive's
duties, or (ii) the willful engaging by the Executive in conduct which is
demonstrably and materially injurious to the Employer or its subsidiaries,
monetarily or otherwise. For purposes of clauses (i) and (ii) of this
definition, (x) no act, or failure to act, on the Executive's part shall be
deemed "willful" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that the Executive's act, or failure to
act, was in the best interest of the Employer and (y) in the event of a dispute
concerning the application of this provision, no claim by the Employer that
Cause exists shall be given effect unless the Employer establishes to the
Committee by clear and convincing evidence that Cause exists.
(G) A "Change in Control" shall mean the first to occur of a
Change in Control of SAFECO and a Change in Control of SAFECO Life:
(H) A "Change in Control of SAFECO" shall be deemed to have
occurred if the event stated in any one of the following paragraphs shall have
occurred:
(i) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of SAFECO (not including in the securities
beneficially owned by such Person any securities acquired directly from SAFECO
or its affiliates) representing 25% or more of the combined voting power of
SAFECO's then outstanding securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction described in clause (a) of
paragraph (iii) below; or
(ii) the following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
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solicitation, relating to the election of directors of SAFECO) whose appointment
or election by the Board or nomination for election by SAFECO's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(iii) there is consummated a merger or consolidation of
SAFECO or any direct or indirect subsidiary of SAFECO with any other
corporation, other than (a) a merger or consolidation which would result in the
voting securities of SAFECO outstanding immediately prior to such merger or
consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity or any parent
thereof), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of SAFECO or any subsidiary of
SAFECO, at least 75% of the combined voting power of the securities of SAFECO or
such surviving entity or any parent thereof outstanding immediately after such
merger or consolidation, or (b) a merger or consolidation effected to implement
a recapitalization of SAFECO (or similar transaction) in which no Person is or
becomes the Beneficial Owner, directly or indirectly, of securities of SAFECO
(not including in the securities Beneficially Owned by such Person any
securities acquired directly from SAFECO or its Affiliates) representing 25% or
more of the combined voting power of SAFECO's then outstanding securities; or
(iv) the stockholders of SAFECO approve a plan of complete
liquidation or dissolution of SAFECO or there is consummated an agreement for
the sale or disposition by SAFECO of all or substantially all of SAFECO's
assets, other than a sale or disposition by SAFECO of all or substantially all
of SAFECO's assets to an entity, at least 75% of the combined voting power of
the voting securities of which are owned by stockholders of SAFECO in
substantially the same proportions as their ownership of SAFECO immediately
prior to such sale.
Notwithstanding the foregoing, a "Change in Control of SAFECO"
shall not be deemed to have occurred by virtue of the consummation of any
transaction or series of integrated transactions immediately following which the
record holders of the common stock of SAFECO immediately prior to such
transaction or series of transactions continue to have substantially the same
proportionate ownership in an entity which owns all or substantially all of the
assets of SAFECO immediately following such transaction or series of
transactions.
(I) A "Change in Control of SAFECO Life" shall be deemed to have
occurred if the event set forth in either of the following paragraphs shall have
occurred:
(i) SAFECO Life or the stockholder(s) of SAFECO Life
approve a plan of complete liquidation or dissolution of SAFECO Life or there is
consummated an agreement for the sale or disposition by SAFECO Life or the
stockholder(s) of SAFECO Life of all or substantially all of SAFECO Life's
assets; or
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(ii) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of SAFECO Life representing 50% or more of
the combined voting power of SAFECO Life's then outstanding securities.
Notwithstanding the foregoing, if, within thirty (30) days
following a Change in Control of SAFECO Life, the Executive is offered
employment with SAFECO or a subsidiary or Affiliate of SAFECO on terms
substantially similar to the terms of the Executive's employment with the
Employer immediately prior to such Change in Control of SAFECO Life, then, for
purposes of this Agreement, a Change in Control of SAFECO Life shall not be
deemed to have occurred and this Agreement shall continue in full force and
effect, except that all references to "Change in Control of SAFECO Life" in this
Agreement shall be deemed deleted, and the "Employer" shall mean the "Company"
for the remainder of the Term. Failure of the Executive to accept employment
described in this paragraph shall be deemed a termination of employment by the
Executive without Good Reason.
(J) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(K) "Committee" shall mean (i) the individuals (not fewer than
three in number) who, on the date six months before a Change in Control,
constitute the Compensation Committee of the Board, plus (ii) in the event that
fewer than three individuals are available from the group specified in clause
(i) above for any reason, such individuals as may be appointed by the individual
or individuals so available (including for this purpose any individual or
individuals previously so appointed under this clause (ii)).
(L) "Company" shall mean SAFECO and its subsidiaries,
collectively.
(M) "Date of Termination" shall have the meaning stated in
Section 7.2.
(N) "Deferred Benefit" shall have the meaning stated in Section
5.4.
(O) "Deferred Benefit Commencement Date" shall have the meaning
stated in Section 5.4.
(P) "Disability" shall be deemed the reason for the termination
by the Employer of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive shall
have been absent from the full-time performance of the Executive's duties with
the Employer for a period of one hundred and thirty (130) consecutive business
days, the Employer shall have given the Executive a Notice of Termination for
Disability, and, within thirty (30) days after such Notice of Termination is
given, the Executive shall not have returned to the full-time performance of the
Executive's duties.
(Q) "Employer" shall mean, (x) prior to a Change in Control, the
Company and (y) following a Change in Control, (i) if the Change in Control was
a Change in Control of SAFECO, the Company and (ii) if the Change in Control was
a Change in Control of SAFECO Life, SAFECO Life.
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<PAGE> 16
(R) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.
(S) "Excise Tax" shall mean any excise tax imposed under Section
4999 of the Code.
(T) "Executive" shall mean the individual named in the first
paragraph of this Agreement.
(U) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clause (ii) of the second sentence
of Section 6.1 (treating all references in paragraphs (i) through (vii) below to
a "Change in Control" as references to a "Potential Change in Control"), of any
one of the following acts by the Employer, or failures by the Employer to act,
unless, in the case of any act or failure to act described in paragraph (i),
(v), (vi) or (vii) below, such act or failure to act is corrected prior to the
Date of Termination specified in the Notice of Termination given in respect
thereof:
(i) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer of the
Employer or a substantial adverse alteration in the nature or status of the
Executive's responsibilities from those in effect immediately prior to the
Change in Control;
(ii) a reduction by the Employer in the Executive's annual
base salary as in effect on the date hereof or as the same may be increased from
time to time;
(iii) the relocation of the Executive's principal place of
employment to a location outside of King County, Washington (or, if different,
the county in which such principal place of employment is located immediately
prior to the Change in Control) or the Employer's requiring the Executive to be
based anywhere other than such principal place of employment (or permitted
relocation thereof) except for required travel on the Employer's business to an
extent substantially consistent with the Executive's present business travel
obligations;
(iv) the failure by the Employer to pay to the Executive
any portion of the Executive's current compensation, or to pay to the Executive
any portion of an installment of deferred compensation under any deferred
compensation program of the Employer, within seven (7) days of the date such
compensation is due;
(v) the failure by the Employer to continue in effect any
compensation plan (including stock option, restricted stock, stock appreciation
right, incentive compensation and bonus plans) in which the Executive
participates immediately prior to the Change in Control which is material to the
Executive's total compensation, unless an equitable arrangement (embodied in an
ongoing substitute or alternative plan) has been made with respect to such plan,
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<PAGE> 17
or the failure by the Employer to continue the Executive's participation therein
(or in such substitute or alternative plan) on a basis not materially less
favorable, both in terms of the amount or timing of payment of benefits provided
and the level of the Executive's participation relative to other participants,
as existed immediately prior to the Change in Control;
(vi) the failure by the Employer to continue to provide
the Executive with benefits substantially similar to those enjoyed by the
Executive under any of the Employer's profit sharing, pension, savings, life
insurance, medical, health and accident, or disability plans in which the
Executive was participating immediately prior to the Change in Control, the
taking of any action by the Employer which would directly or indirectly
materially reduce any of such benefits or deprive the Executive of any material
fringe benefit enjoyed by the Executive at the time of the Change in Control, or
the failure by the Employer to provide the Executive with the number of paid
vacation days to which the Executive is entitled on the basis of years of
service with the Employer in accordance with the Employer's normal vacation
policy in effect at the time of the Change in Control; or
(vii) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.1; for purposes of this Agreement, no such
purported termination shall be effective.
The Executive's right to terminate the Executive's employment for
Good Reason shall not be affected by the Executive's incapacity due to physical
or mental illness. The Executive's continued employment shall not constitute
consent to, or a waiver of rights with respect to, any act or failure to act
constituting Good Reason hereunder.
For purposes of any determination regarding the existence of Good
Reason, any claim by the Executive that Good Reason exists shall be presumed to
be correct unless the Employer establishes to the Committee by clear and
convincing evidence that Good Reason does not exist.
(V) "Gross-Up Payment" shall have the meaning set forth in
Section 6.2.
(W) "Notice of Termination" shall have the meaning set forth in
Section 7.1.
(X) "Person" shall have the meaning given in Section 3(a)(9) of
the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) SAFECO or any of its subsidiaries,
(ii) a trustee or other fiduciary holding securities under an employee benefit
plan of SAFECO or any of its Affiliates, (iii) an underwriter temporarily
holding securities pursuant to an offering of such securities, or (iv) a
corporation owned, directly or indirectly, by the stockholders of SAFECO in
substantially the same proportions as their ownership of stock of SAFECO.
(Y) "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:
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<PAGE> 18
(i) SAFECO or SAFECO Life enters into an agreement, the
consummation of which would result in the occurrence of a Change in Control;
(ii) SAFECO, SAFECO Life or any Person publicly announces
an intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control;
(iii) any Person becomes the Beneficial Owner, directly or
indirectly, of securities of SAFECO representing 10% or more of either the then
outstanding shares of common stock of SAFECO or the combined voting power of the
SAFECO's then outstanding securities (not including in the securities
beneficially owned by such Person any securities acquired directly from SAFECO
or its affiliates); or
(iv) the Board adopts a resolution to the effect that, for
purposes of this Agreement, a Potential Change in Control has occurred.
(Z) "Retirement" shall be deemed the reason for the termination
by the Employer or the Executive of the Executive's employment if such
employment is terminated on or after the date the Executive attains age 65.
(AA) "SAFECO" shall mean SAFECO Corporation and, except in
determining under Section 15(H) whether or not any Change in Control of SAFECO
has occurred, shall include any successor to its business and/or assets which
assumes and agrees to perform this Agreement, by operation of law or otherwise.
(BB) "SAFECO Life" shall mean SAFECO Life Insurance Company, a
wholly owned subsidiary of SAFECO, and except in determining under Section 15(I)
whether or not any Change in Control of SAFECO Life has occurred, shall include
any successor to its business and/or assets which assumes and agrees to perform
this Agreement, by operation of law or otherwise.
(CC) "Severance Payments" shall mean those payments so described
in Section 6.1.
(DD) "Severance Period" shall have the meaning set forth in
Section 6.1(B).
(CC) "Tax Counsel" shall have the meaning set forth in Section
6.2.
(DD) "Term" shall mean the period of time described in Section 2
(including any extension, continuation or termination described therein).
(EE) "Total Payments" shall mean those payments so described in
Section 6.2.
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<PAGE> 19
SAFECO Corporation ___________________________________
Randall H. Talbot
By: ____________________________________ Address: __________________________
R.H. Eigsti __________________________
Chairman and Chief Executive Officer __________________________
SAFECO Life Insurance Company
By: ____________________________________
R.H. Eigsti
Chairman
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<PAGE> 1
EXHIBIT 10.3
SAFECO LONG-TERM INCENTIVE PLAN OF 1997
AS AMENDED AND RESTATED MAY 5, 1999
1. PURPOSE
The purpose of the SAFECO Long-Term Incentive Plan of 1997 (the "Plan") is to
enhance the long-term profitability and shareholder value of SAFECO Corporation
(the "Company") by offering incentives and rewards to non-employee directors of
the Company and selected eligible employees of the Company and its Subsidiaries
(as defined in Section 2) who are key to the Company's growth and success as an
inducement to them to remain in the service of the Company and to acquire and
maintain stock ownership in the Company.
2. DEFINITIONS
(a) "Affiliate" means a person controlling, controlled by or under
common control with the Company.
(b) "Award" shall mean any award or grant made pursuant to the Plan,
including, without limitation, awards or grants of stock options,
stock appreciation rights, restricted stock rights, performance
stock rights or any combination of the foregoing. Awards may be
granted singly, in combination, or in tandem so that the
settlement or payment of one automatically reduces or cancels the
other.
(c) "Award Agreement" means a written agreement between the Company
and a Plan participant evidencing an Award.
(d) "Beneficial Owner" has the meaning set forth in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(e) "Change in Control" shall be deemed to have occurred if the event
set forth in any one of the following paragraphs has occurred:
(i) Any Person is or becomes the Beneficial Owner, directly
or indirectly, of securities of the Company (not
including in the securities beneficially owned by such
Person any securities acquired directly from the Company
or its Affiliates) representing 25% or more of the
combined voting power of the Company's then outstanding
securities, excluding any Person who becomes such a
Beneficial Owner in connection with a transaction
described in clause (x) of paragraph (iii) of this
Section 2(e); or
(ii) The following individuals cease for any reason to
constitute a majority of the number of directors then
serving: individuals who, on the date the Plan is
adopted by the Company's shareholders, constitute the
Board of Directors of the Company and any new director
(other than a director whose initial assumption of
office is in connection with an actual or threatened
election contest, including but not limited to a consent
solicitation, relating to the
<PAGE> 2
election of directors of the Company) whose appointment
or election by the Board of Directors or nomination for
election by the Company's shareholders was approved by a
vote of at least two-thirds of the directors then still
in office who either were directors on the date hereof
or whose appointment, election or nomination for
election was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the
Company or any Subsidiary with any other corporation,
other than (x) a merger or consolidation which would
result in the voting securities of the Company
outstanding immediately prior to such merger or
consolidation continuing to represent (either by
remaining outstanding or by being converted into voting
securities of the surviving entity or any parent
thereof), in combination with the ownership of any
trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any Subsidiary
at least 75% of the combined voting power of the
securities of the Company or such surviving entity or
any parent thereof outstanding immediately after such
merger or consolidation, or (y) a merger or
consolidation effected to implement a recapitalization
of the Company (or similar transaction) in which no
Person is or becomes the Beneficial Owner, directly or
indirectly, of securities of the Company (not including
in the securities beneficially owned by such Person any
securities acquired directly from the Company or its
Affiliates other than in connection with the acquisition
by the Company or its Affiliates of a business)
representing 25% or more of the combined voting power of
the Company's then outstanding securities; or
(iv) The shareholders of the Company approve a plan of
complete liquidation or dissolution of the Company or
there is consummated an agreement for the sale or
disposition by the Company of all or substantially all
of the Company's assets, other than a sale or
disposition by the Company of all or substantially all
of the Company's assets to an entity, at least 75% of
the combined voting power of the voting securities of
which are owned by shareholders of the Company in
substantially the same proportions as their ownership of
the Company immediately prior to such sale.
Notwithstanding the foregoing, a "Change in Control"
shall not be deemed to have occurred by virtue of the
consummation of any transaction or series of integrated
transactions immediately following which the record
holders of the Company's common stock immediately prior
to such transaction or series of transactions continue
to have substantially the same proportionate ownership
in an entity which owns all or substantially all of the
Company's assets immediately following such transaction
or series of transactions.
(f) "Committee" shall mean the Company's Board of Directors or a
committee or sub-committee described in Section 3 selected by the
Company's Board of Directors to administer the Plan.
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<PAGE> 3
(g) "Fair Market Value" shall mean, with respect to the Company's
common stock, the price at which the last trade of the Company's
common stock was made prior to 1:00 p.m. West Coast time on the
Nasdaq National Market on the date in question.
(h) "Person" for purposes of Section 2(e) means any person (as
defined in Section 2(a)(9) of the Exchange Act, as such term is
modified in Section 13(d) and 14(d) of the Exchange Act) other
than (i) any employee plan established by the Company, (ii) the
Company or any of its affiliates (as defined in Rule 12b-2
promulgated under the Exchange Act), (iii) an underwriter
temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly,
by shareholders of the Company in substantially the same
proportions as their ownership of the Company.
(i) "Retirement" shall mean a termination of employment with the
Company or a Subsidiary occurring on or after an individual
attains age 65, or such other termination of employment as the
Committee may approve as a retirement from time to time for
purposes of the Plan.
(j) "Subsidiary" shall mean any corporation of which more than 50% of
the total combined voting power of all classes of stock entitled
to vote is directly or indirectly owned by the Company.
3. ADMINISTRATION
(a) The Plan shall be administered by a Committee to be appointed
from time to time by the Company's Board of Directors and shall
consist of at least two members of the Board, each of whom is an
"outside director" as defined in regulations promulgated under
Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). In addition, if the Committee does not also consist
solely of "non-employee directors" as defined in Rule 16b-3 under
the Exchange Act, the Plan shall be administered with respect to
officers subject to Section 16 of the Exchange Act by a
sub-committee of the Committee to be appointed from time to time
by the Company's Board of Directors and consisting of at least
two members of the Board, each of whom is a "non-employee
director."
(b) Except for the terms and conditions explicitly set forth in the
Plan, the Committee shall have the exclusive authority to
determine, in its sole discretion, all matters relating to Awards
under the Plan, including the selection of individuals to be
granted Awards; the type of Awards; the number of shares of
common stock subject to an Award; all terms, conditions,
restrictions and limitations, if any, of an Award; and the terms
of any instrument that evidences the Award. The Committee may, in
its discretion, accelerate the exercisability of or waive any or
all of the restrictions and conditions applicable to any Award
and may, with the consent of the holder, modify any agreement
governing an Award. The Committee may permit or require the
deferral of any Award payment, subject to such rules and
procedures as it may establish, which may include provisions for
the payment or crediting of interest or dividend equivalents on
the deferred payment. Any deferred payment
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<PAGE> 4
may require the payment to be forfeited under certain
circumstances in accordance with Section 15. The Committee shall
also have exclusive authority to interpret the Plan and may
adopt, amend and rescind rules and procedures relating to the
Plan. The Committee may delegate administrative duties to such
of the Company's officers as it so determines; provided,
however, that decisions concerning the terms and conditions of
an Award and the selection of recipients of Awards shall not be
delegated.
(c) The Board of Directors shall designate one member of the
Committee as its Chair, and the Committee shall hold its meetings
at such times and places as it shall deem advisable. At least
one-half of its members shall constitute a quorum for the conduct
of business, and any decision or determination approved by a
majority of members present at any meeting in which a quorum
exists shall be deemed to have been made by the Committee. In
addition, any decision or determination reduced to writing and
signed by all of the members shall be deemed to have been made by
the Committee. The Committee may appoint a secretary, shall keep
minutes of its meetings, and may make such rules and regulations
for the conduct of its business and for the carrying out of the
Plan as it deems appropriate.
(d) The interpretation and construction by the Committee of any
provisions of the Plan and of Awards thereunder and all actions
taken and determinations made by the Committee pursuant to the
Plan shall be final and conclusive on all persons having any
interest therein.
(e) Notwithstanding anything in the Plan to the contrary, the
Committee, in its absolute discretion, may bifurcate the Plan so
as to restrict, limit or condition the use of any provision of
the Plan to participants who are subject to Section 16 of the
Exchange Act without so restricting, limiting or conditioning the
Plan with respect to other participants in the Plan.
4. SHARES SUBJECT TO PLAN
(a) Subject to the provisions of Section 21 (relating to adjustments
due to changes in capital structure), a maximum of 6,000,000
shares of the Company's common stock shall be available for
issuance pursuant to Awards under the Plan. No more than
3,000,000 shares may be issued in connection with restricted
stock rights and performance stock rights granted under the
provisions of Sections 12 and 13.
(b) Any shares of the Company's common stock that have been made
subject to an Award and that subsequently cease to be subject to
the Award (other than by reason of exercise or payment of the
Award to the extent it is exercised for or settled in shares of
common stock) shall again be available for issuance in connection
with future grants of Awards under the Plan; provided, however,
that for purposes of Section 4(c), any such shares shall be
counted in accordance with the requirements of Section 162(m) of
the Code.
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<PAGE> 5
(c) Subject to the provisions of Section 21 (relating to adjustments
due to changes in capital structure), the maximum number of
shares with respect to which options may be granted under the
Plan to any individual during any calendar year is 300,000, and
the maximum number of shares payable under a performance stock
right for any Performance Cycle (as defined in Section 13(a)) is
300,000 shares, or in the event the performance stock right is
paid in cash, the equivalent cash value on the date the
performance stock right would otherwise be settled in shares,
such limitations to be applied in a manner consistent with the
requirements of, and only to the extent required for compliance
with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code.
5. ELIGIBILITY
Awards may be granted only to non-employee directors of the Company and salaried
key management employees of the Company or a Subsidiary (including salaried
employees who are also directors) who, in the judgment of the Committee, will
perform services of special importance in the management, operation and
development of the business of the Company or the businesses of one or more of
its Subsidiaries, provided the grant date for options and performance stock
rights for an employee shall not occur during or after the calendar year in
which the employee reaches the age of 65.
6. PRICE AND TERM OF OPTIONS
(a) The exercise price for shares purchased under each option will be
determined by the Committee but shall not be less than 100% of
the Fair Market Value of the shares of stock covered by the
option on the date of grant of the option.
(b) The term of each option shall be as determined by the Committee,
but not in excess of ten years from the date it is granted. An
option granted for an initial term of less than ten years may be
extended by amendment for a period of up to ten years from the
date of the initial grant, provided that no such amendment of an
incentive stock option shall be made without the prior consent of
the optionee.
7. LIMITATIONS ON EXERCISE OF OPTIONS
(a) Any minimum period during which an optionee must provide services
or be continuously employed prior to an option becoming
exercisable and the increments in which an option will become
exercisable shall be set forth in the Award Agreement evidencing
the option. Such provisions may be waived or modified by the
Committee at any time. Absence on leave shall not be deemed an
interruption of employment or services for purposes of the Plan,
except that with respect to incentive stock options a leave of
absence shall be subject to any requirements of Section 422 of
the Code.
(b) Incentive stock options shall be granted to employees only. To
the extent the aggregate Fair Market Value (determined at the
time the options are granted) of the stock with respect to which
any individual employee's incentive stock options are
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<PAGE> 6
exercisable for the first time during any calendar year exceeds
$100,000, the portion in excess of $100,000 shall be treated as
a nonqualified stock option. For purposes of this determination,
incentive stock options granted under the Plan shall be
aggregated with those granted under any other stock option plan
of the Company.
8. METHOD OF EXERCISE
Each exercise of an option granted hereunder, whether in whole or in part, shall
be by written notice to the Chief Executive Officer of the Company designating
the number of shares as to which the option is exercised, and shall be
accompanied by payment in full for the number of shares so designated. Stock to
be purchased under an option may be paid for in cash, in shares of the Company's
common stock (either through physical delivery or by attestation) at their Fair
Market Value on the date of exercise, or in a combination thereof, or in such
other consideration as the Committee in its discretion may permit. Fractional
shares may not be purchased under an option, and fractional shares may not be
delivered to the Company for payment of the option price.
9. FORM OF OPTION AGREEMENT
Each Award Agreement evidencing an option shall contain the essential terms of
the option and such other provisions as the Committee shall from time to time
determine, but such Award Agreements need not be identical. If the option is an
incentive stock option, the Award Agreement shall contain such terms and
provisions relating to exercise and otherwise as may be necessary to render it
an incentive stock option under the applicable provisions of the Code (presently
Section 422 thereof), and the regulations thereunder.
10. FINANCING OF OPTIONS
The Company declares its belief that the purposes of the Plan can be fully
achieved only if those employees to whom options are granted hereunder are able
financially to purchase the stock covered by their options should they wish to
do so. Thus, within the limits of and in compliance with applicable statutes and
regulations, the Company and its Subsidiaries may extend credit, arrange credit,
guarantee obligations, and otherwise aid such employees in needed financing of
their purchases of stock pursuant to options.
11. STOCK APPRECIATION RIGHTS
(a) In connection with the grant of any stock option, the Committee
may grant a stock appreciation right ("SAR") pursuant to which
the optionee shall have the right to surrender all or part of
such stock option and to exercise the SAR and thereby obtain
payment of an amount equal to the difference between the
aggregate option price of the shares so surrendered and the Fair
Market Value of such shares on the date of surrender. In all
other respects, a SAR will have the same terms and provisions as
the related option.
(b) The exercise of a SAR shall be by written notice to the Chief
Executive Officer of the Company designating the number of shares
as to which the SAR is exercised
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<PAGE> 7
and shall be subject to such limitations as the Committee may
deem appropriate. Payment to the holder upon the call of a SAR
may be made in shares of the Company's common stock (at their
Fair Market Value on the date of exercise), in cash, or partly
in shares and partly in cash, at the discretion of the
Committee.
12. RESTRICTED STOCK RIGHTS
(a) The Committee may grant any eligible employee restricted stock
rights ("RSRs") which entitle such employee to receive a stated
number of shares of the Company's common stock if the employee
for a stated period remains continuously employed by the Company
or a Subsidiary or, following the employee's Retirement, serves
on the Board of Directors of the Company or in another capacity
approved by the Committee (the "Restricted Period"). At the time
an RSR is issued, the Committee shall designate the length of the
Restricted Period and the service that will qualify under the
Restricted Period; provided, however, in no event may the
Restricted Period extend beyond the fifth anniversary date of the
employee's termination of employment. The Committee shall also
have full and final authority to select the employees who receive
RSRs, to specify the number of shares of stock subject to each
RSR, and to establish the other terms, conditions and definitions
that govern RSRs.
(b) The Company shall pay to each holder of an unexpired RSR during
the Restricted Period, as additional compensation, an amount of
cash equal to the dividends that would have been payable to the
holder of the RSR during the Restricted Period if the holder had
owned the stock subject to the RSR. Such amount shall be paid as
near in time as reasonably practical to the applicable dividend
payment dates.
(c) At the expiration of each Restricted Period and provided all
conditions relating to an RSR have been met, the Company shall
issue to the holder the shares of stock which relate to such
Restricted Period or, at the request of the holder, make a
payment of an amount equal to the Fair Market Value of such
shares (or any portion thereof) determined as of the settlement
date or, alternatively, over such period as may be established by
the Committee at the time of grant.
(d) Upon grant of an RSR, the Company shall deliver to the recipient
an Award Agreement which sets forth the terms and conditions of
the RSR.
13. PERFORMANCE STOCK RIGHTS
(a) The Committee may grant to an eligible employee performance stock
rights ("PSRs") which entitle such employee to receive a stated
number of shares of the Company's common stock if the employee
attains certain specified performance goals ("Performance Goals")
within a stated three-year performance period ( the "Performance
Cycle"). The Committee shall have full and final authority to
select the employees who receive PSRs, to specify the number of
shares of stock subject to each such right, to establish the
Performance Goals, to establish the Performance Cycle and to
establish the terms, conditions and definitions that govern such
rights.
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<PAGE> 8
(b) The Committee shall establish Performance Goals for each
Performance Cycle on the basis of such criteria and to accomplish
such objectives as the Committee may from time to time select.
Performance Goals selected by the Committee may include
performance criteria for the Company, a Subsidiary, or an
operating group, division, or unit of the Company or a
Subsidiary. During any Performance Cycle, the Committee may
adjust the Performance Goals for such Performance Cycle as it
deems equitable in recognition of unusual or nonrecurring events
affecting the Company, changes in applicable tax laws or
accounting principles, or such other factors as the Committee may
determine; provided, however, that the Committee may not adjust
Performance Goals for any participant who is a covered employee
for purposes of Section 162(m) of the Code for the year in which
such PSR (or any portion thereof) is settled in such a manner as
would increase the amount of compensation otherwise payable to
such covered employee.
(c) As soon as practical after the end of a Performance Cycle (or any
interim measurement period within the Performance Cycle), the
Committee shall determine the extent to which a PSR has been
earned on the basis of performance in relation to the established
Performance Goals. To the extent that the Performance Goals of a
PSR are satisfied, the Company shall settle the earned portion of
the PSR by the issuance and delivery of unrestricted shares equal
to the number of earned shares, by the payment of cash equal to
the Fair Market Value of the earned shares on the date the PSR
would otherwise be settled in shares, or by a combination of cash
and shares, as requested by the holder. If the Performance Goals
are not met by the expiration of the Performance Cycle, the PSR
shall expire and the holder thereof shall have no further rights
thereunder.
(d) Upon granting a PSR, the Company shall issue to the recipient an
Award Agreement which sets forth the terms and conditions of the
PSR.
(e) The Performance Goals shall be any one or a combination of net
income, earnings per share, return on equity, return on assets,
stock price appreciation, total shareholder return, cash flow,
revenues, item count, market share, assets, assets under
management, any profit-related ratio or calculation, or any
growth, concentration-of-business or market-share ratio or
calculation. Such Performance Goals may be measured on an
absolute basis or relative to a group of peer companies selected
by the Committee, relative to internal goals, or relative to
levels attained in prior years. The Committee will establish
specific Performance Goals for each PSR not later than 90 days
after the beginning of the Performance Cycle for the Award.
(f) The Company shall not make dividend equivalent payments with
respect to shares subject to PSRs.
14. TERMINATION OF EMPLOYMENT, RETIREMENT, DISABILITY AND DEATH
(a) In the event the employment of a Plan participant by the Company
or a Subsidiary terminates, then unless otherwise provided in the
Award Agreement, any
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<PAGE> 9
unexercised option or SAR granted to such participant 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 participant's termination of employment is on
account of Retirement, then the option or SAR, 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 participant's
termination of employment.
(ii) If the participant's termination of employment is on
account of a permanent and total disability within the
meaning of Section 22(e)(3) of the Code, then the option
or SAR, 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 participant's termination of employment is caused
by the death of the participant, then the option or SAR
may be exercised at any time prior to the expiration of
the term stated in the Award Agreement by the person(s) to
whom the participant'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 participant dies following termination of
employment and during the period in which the option or
SAR is exercisable under paragraph (i) or (ii) of this
Section 14(a), then, to the extent the option or SAR was
vested at the date of the participant's termination of
employment, the option or SAR may be exercised at any time
prior to the expiration of the term stated in the Award
Agreement by the person(s) to whom the participant's
rights pass by will or by operation of law.
(b) Any portion of an option or SAR that is not exercisable on the
date of termination of the participant's employment shall
terminate on such date, unless the Committee determines
otherwise.
(c) To the extent that the option or SAR of any deceased or disabled
participant or of any participant whose employment has terminated
shall not have been exercised within the time periods provided
above, all further rights to exercise such option or SAR shall
terminate at the expiration of the applicable period.
(d) In the event a holder of an RSR issued under the provisions of
Section 12 fails to satisfy the employment or service
requirements of the RSR, such holder shall lose the right to
receive stock or cash under the provisions of the RSR, except
that in the event a holder of an RSR is unable to satisfy such
requirements because of death or disability within the meaning of
Section 22(e)(3) of the Code, then as soon as practical following
the date of death or the date of determination of disability (the
"Disability Determination Date"), the holder or the personal
representative of the
9
<PAGE> 10
holder's estate, as the case may be, shall be issued shares of
the Company's common stock equal in number to the total number
of unissued shares covered by such RSR or, in lieu thereof, at
the request of such holder or personal representative, receive a
cash payment equal to the Fair Market Value of such shares (or
any portion thereof) at the date of death or the Disability
Determination Date, as the case may be. Such shares shall be
issued or payment made without regard to any employment or other
service requirement stated in the RSR.
(e) Except as provided in Section 22, in the event the employment of
an employee who holds a PSR granted under the provisions of
Section 13 terminates for any reason prior to the expiration of
the Performance Cycle specified in the PSR, then, except to the
extent the Committee may decide otherwise in select situations,
such employee shall lose all rights to thereafter receive any
stock or payment under such PSR.
(f) If a corporation ceases to be a Subsidiary of the Company, then,
except to the extent the Committee determines otherwise,
employees of such corporation shall be deemed to have terminated
their employment with the Company or a Subsidiary of the Company
for purposes of this Section 14 as of the date such corporation's
status as a Subsidiary terminates.
15. FORFEITURE
Subject to the Committee's discretion, the grant of any Award under the Plan may
be conditioned on the participant's agreement to forfeit unexercised Awards and
pay the value of previously exercised or settled Awards to the Company in the
event that the participant engages in any activity in competition with the
Company or otherwise contrary to the Company's interests while employed by the
Company or a Subsidiary or within a specified period following termination of
employment or exercise or settlement of an Award.
16. TRANSFERABILITY
Except as otherwise provided in this Section 16, Awards shall not be
transferable other than by will or the laws of descent and distribution and
shall be exercisable during the lifetime of a participant only by the
participant or, in the event the participant becomes legally incompetent, by the
participant's guardian or legal representative. Notwithstanding the foregoing,
and to the extent permitted by Section 422 of the Code, the Committee, in its
discretion, may provide in any Award Agreement or otherwise that the Award is
transferable, without payment of consideration, (i) to immediate family members
(including grandchildren) of the participant or (ii) to a trust or trusts for
the benefit of such family members or (iii) to a partnership or similar
organization composed of such family members ("Permitted Family Transferees").
Any Award assigned or transferred to Permitted Family Transferees shall be
subject to all the same terms and conditions contained in the Award Agreement,
and the events of termination of employment stated in Section 14 shall continue
to be applied with respect to the original Award recipient, following which
termination the Award shall be exercisable by the transferee only to the extent
and for the periods specified in Section 14.
10
<PAGE> 11
17. WITHHOLDING
The Company may require the holder of an Award to pay to the Company the amount
of any taxes that the Company is required to withhold with respect to the grant,
exercise, payment or settlement of an Award. The Company shall have the right to
withhold from any Award or any shares of stock issuable pursuant to an Award an
amount equal to such taxes.
18. RIGHTS AS SHAREHOLDER
Neither a person to whom an Award is granted, nor such person's legal
representative, heir, legatee, distributee or Permitted Family Transferee shall
be deemed to be the holder of, or to have any rights of a holder with respect
to, any shares subject to such Award until after the shares are issued.
19. AMENDMENTS TO THE PLAN
The Company's Board of Directors may from time to time make such amendments to
the Plan as it may deem proper and in the best interests of the Company or a
Subsidiary, provided that:
(a) No amendment shall be made which would impair, without the
consent of the applicable participant, any Award previously
granted under the Plan or deprive any participant of any shares
of stock of the Company which the participant may have acquired
through or as a result of the Plan.
(b) Any such amendment which would (i) increase the number of
securities which may be issued under the Plan or (ii) materially
modify the requirements as to eligibility for participation in
the Plan shall be submitted to the shareholders of the Company
for their approval at the next annual or special meeting after
adoption by the Board of Directors, and if such shareholder
approval is not obtained, the amendment, together with any
actions taken under the Plan on the necessary authority of such
amendment, shall be null and void.
20. TERMINATION OF THE PLAN
The Plan shall remain in effect until Awards have been granted covering all the
shares of the Company's common stock authorized under Section 4(a) or until the
Plan is otherwise terminated by the Company's Board of Directors; provided,
however, that no incentive stock option shall be granted more than ten years
after the date on which the Plan is approved by the shareholders of the Company,
i.e., the effective date of the Plan. Termination of the Plan shall not affect
outstanding Awards.
21. CHANGES IN CAPITAL STRUCTURE
Except as otherwise provided in Section 22, in the event the outstanding shares
of common stock of the Company are hereafter increased or decreased or changed
into or exchanged for a different number or kind of shares or other securities
of the Company or of another corporation by reason of any reorganization,
merger, consolidation, recapitalization, reclassification, stock split,
spin-off, combination of shares, dividend payable in shares, rights offering,
change in the corporate structure
11
<PAGE> 12
of the Company, or otherwise, then the Committee shall make proportional
adjustments to the maximum number and class of shares subject to the Plan and to
the maximum number and class of shares with respect to which Awards may be
granted or paid to any individual participant as set forth in Sections 4(a) and
(c). In addition, the Committee shall make an appropriate adjustment to the
number and class of shares as to which outstanding Awards, or portions thereof
then unexercised, shall be exercisable or settled and the per share price of
such shares, to the end that the participant's proportionate interest shall be
maintained as before the occurrence of such event, without any change in the
total price applicable to the unexercised portion of any Award. Any such
adjustment made by the Committee shall be conclusive.
22. CHANGE IN CONTROL
(a) Notwithstanding any other provision of the Plan to the contrary,
if, while any Awards remain outstanding under the Plan, a Change
in Control of the Company shall occur, then:
(i) All options and SARs granted under the Plan that are
outstanding at the time of such Change in Control shall
become exercisable in full immediately prior to the Change
in Control;
(ii) To the extent deemed earned, each outstanding PSR shall
become immediately payable in cash, and the remainder of
each outstanding PSR shall be canceled for no value. All
outstanding PSRs shall be deemed to have been earned to
the extent of the greater of:
(1) The number of shares of the Company's common stock
determined by the Committee based on the extent to
which the Performance Goals specified in the Award
Agreement have been achieved during the portion of
the Performance Cycle ending on the last day of the
last fiscal quarter of the Company ending on or
before the date of the Change in Control; or
(2) The number of shares of the Company's common stock
equal to the product of the target shares
identified in the Award Agreement multiplied by a
fraction with a numerator equal to the whole number
of calendar months beginning with the month in
which the Award was granted and ending on the date
of the Change in Control and a denominator equal to
the whole number of calendar months in the entire
Performance Cycle specified in the Award Agreement,
less any shares previously issued under the Award
Agreement.
(iii) All restrictions with respect to RSRs shall lapse and all
outstanding RSRs shall be settled by a payment in cash to
each holder of such Award; and
(iv) All other restrictions with respect to outstanding Awards
not described in paragraphs (i) through (iii) of this
Section 22(a) shall lapse, and such Awards shall be fully
vested and nonforfeitable.
12
<PAGE> 13
(b) For purposes of this Section 22, with respect to determining the
cash equivalent value of an RSR or PSR or the spread payable upon
exercise of a SAR, the Fair Market Value of a share of the
Company's stock shall be deemed to equal the greater of (i) the
Fair Market Value of a share of stock as of the date on which a
Change in Control occurs and (ii) the highest price of a share of
stock which is paid or offered to be paid, by any Person or
entity, in connection with any transaction which constitutes a
Change in Control.
(c) The phrase "immediately prior to the Change in Control" shall be
understood to mean sufficiently in advance of a Change in Control
to permit the holder of an Award to take all steps reasonably
necessary to exercise all options and SARs and take any actions
with respect to the shares of stock underlying Awards of any
nature so that such shares may be treated in the same manner as
the shares of stock of other shareholders in connection with the
Change in Control.
23. APPROVALS
The obligations of the Company under the Plan shall be subject to the approval
of such state or federal authorities or agencies, if any, as may have
jurisdiction in the matter. Shares shall not be issued with respect to an Award
unless the exercise and the issuance and delivery of the shares comply with all
relevant provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
Code, the respective rules and regulations promulgated thereunder, and the
requirements of any stock exchange or market on which the shares may then be
listed or traded, and shall be further subject to the approval of counsel for
the Company with respect to such compliance. Inability of the Company to obtain
from any regulatory body having jurisdiction the authority deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
hereunder shall relieve the Company of any liability for the nonissuance or sale
of such shares. The Board of Directors may require any action or agreement by a
holder of an Award as may from time to time be necessary to comply with the
federal and state securities laws. The Company shall not be obliged to register
stock issued under the Plan or options or any other rights to acquire stock
granted under the Plan.
24. EMPLOYMENT RIGHTS
Nothing in this Plan or any Award granted pursuant hereto shall confer upon any
employee any right to be continued in the employment of the Company or any
Subsidiary of the Company or to interfere in any way with the right of the
Company, in its sole discretion, to terminate such employee's employment at any
time.
25. EFFECTIVE DATE OF THE PLAN
The effective date of this Plan is May 7, 1997.
13
<PAGE> 1
EXHIBIT 10.4
SAFECO CORPORATION
NONQUALIFIED STOCK OPTION AWARD AGREEMENT
NON-EMPLOYEE DIRECTOR
SAFECO Corporation ("SAFECO") hereby grants to _________________ ("Optionee") a
nonqualified option to purchase 2,000 shares of SAFECO Common Stock, subject to
the Terms of the Stock Option Grant Program for Non-Employee Directors under the
SAFECO Long-Term Incentive Plan of 1997 ("Plan") adopted by the Board of
Directors on November 4, 1998 ("Director Grant Program") and the following terms
and conditions:
1. TERM. This Award Agreement is effective from the date stated below until
the earlier of (i) the close of business on _______________, _____, and
(ii) such other date as may apply pursuant to the provisions of the
Director Grant Program governing retirement, death, disability or other
termination of service as a director of SAFECO.
2. PURCHASE PRICE. Optionee may purchase the shares covered by this Award
Agreement at a price of $______ per share.
3. VESTING. The option shall vest and become fully exercisable on
__________, ____ [date of next shareholders' meeting].
4. EXERCISE OF OPTIONS. After the option vests, Optionee may exercise up to
the total number of shares covered by this option contract, subject to a
minimum purchase of 10 shares at any one time, at any time prior to
expiration of the term stated in Section 1.
5. METHOD OF EXERCISE. To exercise the option, in whole or in part,
Optionee shall deliver a written notice to the Company's Chief Executive
Officer, stating the number of shares as to which the option is being
exercised, accompanied by payment in full for that number of shares. The
option exercise price may be paid (i) in cash and/or (ii) in shares of
the Company's common stock (either through physical delivery of
certificates or by attestation of existing stock ownership), or (iii) by
delivering a properly executed cashless exercise notice containing an
irrevocable request to the Company to withhold the number of shares
necessary to pay the exercise price.
6. EXERCISE OF RIGHTS FOLLOWING CHANGE IN CONTROL. Notwithstanding the
limitations on exercise stated in Section 3, in the event of 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 before
expiration of the term stated in Section 1.
7. RIGHTS AS STOCKHOLDER. Neither Optionee nor 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 the option until after the stock is issued.
8. INCORPORATED PROVISIONS. Each provision stated in the attached Program
is incorporated by reference into this Award Agreement.
DATED: ___________, ______.
SAFECO CORPORATION OPTIONEE
<PAGE> 2
By ________________________ ________________________
Roger H. Eigsti, Chairman
TERMS OF STOCK OPTION GRANT PROGRAM
FOR NON-EMPLOYEE DIRECTORS
UNDER THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997
ADOPTED BY THE SAFECO CORPORATION BOARD OF DIRECTORS
NOVEMBER 4, 1998
The following provisions set forth the terms of the stock option grant program
(the "Program") for non-employee directors of SAFECO Corporation ("Company")
under the SAFECO Long-Term Incentive Plan of 1997 (the "Plan"). The following
terms are intended to supplement, not alter or change, the provisions of the
Plan, and in the event of any inconsistency between these terms and those in the
Plan, the Plan shall govern. All capitalized terms that are not defined in this
Program shall be as defined in the Plan.
1. ELIGIBILITY
Each director of the Company who is not an employee of the Company or any
Subsidiary (an "Eligible Director") shall be eligible to receive annual grants
under the Plan, as described below.
2. ANNUAL GRANT
Commencing with the 1999 annual meeting of the Company's shareholders, a
nonqualified stock option to purchase 2,000 shares of the Company's common stock
shall automatically be granted to each Eligible Director in office immediately
after the annual shareholders' meeting. The terms of the option shall be set
forth in an Award Agreement.
3. PRICE
The exercise price for shares purchased under each option shall be the Fair
Market Value of the Company's common stock on the date of grant.
4. VESTING
Options granted to directors shall vest and become fully exercisable on the date
of the first annual meeting of shareholders after the grant.
5. METHOD OF EXERCISE
Each exercise of an option granted under this Program shall be by written notice
to the Company's Chief Executive Officer, stating the number of shares as to
which the option is being exercised and accompanied by payment in full for that
number of shares. The option exercise price may be paid in cash and/or in shares
of the Company's common stock (either through physical delivery or by
attestation) at their Fair Market Value on the date of exercise, or by
delivering a properly executed cashless exercise notice containing an
irrevocable request to the Company to withhold the number of shares necessary to
pay the exercise price.
<PAGE> 3
6. TERM
The term of each option shall be ten years from the date it is granted;
provided, however, that in the case of options granted to any Eligible Director
who has less than ten years remaining until his or her scheduled retirement date
under the Company's retirement policy for directors, the options shall expire on
the third anniversary of the Eligible Director's retirement from the Company's
Board of Directors.
7. TERMINATION OF SERVICE AS A DIRECTOR
a. Retirement. If an Eligible Director retires from the Company's
Board of Directors in accordance with the Company's retirement
policy for directors or terminates service as a director under
any other circumstances deemed by the Committee to be a
"retirement" for purposes of this paragraph, then the Eligible
Director's options, to the extent exercisable on the Eligible
Director's retirement date, may be exercised at any time prior to
the expiration of the term stated in the Award Agreement.
b. Death or Disability. If an Eligible Director ceases to serve on
the Company's Board of Directors because of the Eligible
Director's death or a permanent and total disability within the
meaning of Section 22(e)(3) of the Code, the Eligible Director's
options may be exercised at any time, without regard to any
vesting requirements, prior to the expiration of the term set
forth in each Award Agreement, by the disabled Eligible Director
or, in the case of a decedent's options, by the personal
representative of the Eligible Director's estate or the person(s)
to whom the Eligible Director's rights under the options have
passed by will or the applicable laws of descent and
distribution.
c. Resignation or Other Termination. If an Eligible Director ceases
to be a director of the Company for any reason other than the
Eligible Director's death, disability or retirement, then to the
extent the Eligible Director's options are vested on the Eligible
Director's last day of service as a director, the options may be
exercised at any time within one year after that date or until
the expiration of the term stated in the applicable Award
Agreement, whichever is earlier.
8. NON-TRANSFERABLE
Options granted to Eligible Directors shall not be transferable
other than by will or the laws of descent and distribution and
during the lifetime of a director shall be exercisable only by
the director or, in the event the director becomes legally
incompetent, by the Eligible Director's guardian.
9. DEFERRAL OF GAINS
An Eligible Director may elect to defer the gain realized on exercise of any or
all options granted to the Eligible Director under this Program, provided the
exercise price is paid in shares of the Company's common stock already owned by
the Eligible Director, subject to the terms and conditions set forth in the
SAFECO Corporation Deferred Compensation Plan for Directors, as it may be
amended from time to time, or any other plan or arrangement under which the gain
is permitted to be deferred.
<PAGE> 4
10. CORPORATE TRANSACTIONS
In the event of a Change in Control of the Company, each option outstanding at
the time of the Change in Control shall become fully vested and exercisable
immediately prior to the Change in Control.
11. OTHER PROVISIONS
Except for certain provisions of the SAFECO Long-Term Incentive Plan whose
application is clearly limited to employee participants, the provisions of the
Plan, as it may be amended from time to time, shall apply to stock options
granted to Eligible Directors under this Program.
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<ARTICLE> 7
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 18,217
<DEBT-CARRYING-VALUE> 2,730
<DEBT-MARKET-VALUE> 3,107
<EQUITIES> 2,011
<MORTGAGE> 670
<REAL-ESTATE> 236
<TOTAL-INVEST> 24,112
<CASH> 137
<RECOVER-REINSURE> 392
<DEFERRED-ACQUISITION> 549
<TOTAL-ASSETS> 31,067
<POLICY-LOSSES> 4,279
<UNEARNED-PREMIUMS> 1,783
<POLICY-OTHER> 280
<POLICY-HOLDER-FUNDS> 12,825
<NOTES-PAYABLE> 2,358
842
0
<COMMON> 888
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<TOTAL-LIABILITY-AND-EQUITY> 31,067
1,157
<INVESTMENT-INCOME> 390
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