<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(128,739,419 shares were outstanding at January 31, 2000)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X]. NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of January 31, 2000, was $3,200,000,000.
Documents incorporated by reference:
Portions of the registrant's 1999 Annual Report to Shareholders are
incorporated by reference into Parts I and II. Portions of the registrant's
definitive Proxy Statement for the 2000 annual shareholders meeting to be
held May 3, 2000, are incorporated by reference into Part III.
<PAGE> 2
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS
- - --------------------------------------------------------------------------------
PART I ITEM 1 - BUSINESS
GENERAL
SAFECO Corporation (the Corporation), a Washington corporation,
owns operating subsidiaries in segments of insurance and other
financially related businesses. (The Corporation and its subsidiaries
are collectively referred to as "SAFECO".) SAFECO's businesses
operate on a nationwide basis. Non-U.S. operations are insignificant.
The insurance subsidiaries engage in property and casualty insurance,
surety and life insurance, and generated approximately 95% of
SAFECO's total 1999 revenues. The home offices of the Corporation and
its principal subsidiaries are in Seattle and Redmond, Washington. As
of December 31, 1999, SAFECO had approximately 13,000 employees.
SAFECO acquired Medical Risk Managers, Inc. on December 31, 1999,
WM Life Insurance Company on December 31, 1997 and American States
Financial Corporation ("American States") on October 1, 1997. These
acquisitions have been treated as purchases for accounting purposes.
In February 1998 the Corporation announced its decision to sell
its real estate subsidiary, SAFECO Properties, to focus on SAFECO's
core insurance and financial services businesses. See page 14 of this
report for additional information.
On March 16, 2000, SAFECO Corporation issued $300 million of
medium-term notes at 7.875% which mature on March 15, 2003. The
proceeds of the notes were subsequently loaned to our subsidiary
SAFECO Credit to primarily repay its commercial paper debt.
SAFECO's insurance subsidiaries engage in two principal lines:
property and casualty (including surety), and life insurance.
SAFECO's property and casualty insurance operations is one of the
largest in the United States. All areas of the insurance business are
highly competitive and no one insurance company or group of insurers
dominates the market.
The Corporation and its insurance subsidiaries are subject to
extensive regulation and supervision. This regulation is generally
designed to protect the interests of policyholders rather than
shareholders and other investors. Such regulation, generally
administered by a department of insurance in each state in which the
insurance subsidiaries do business, relates to, among other things,
the standards of solvency that must be met and maintained; the
licensing of insurers and their agents; the nature of and limitations
on investments; the ability to withdraw from the state; the approval
of premium rates; restrictions on the size of risks that may be
insured under a single policy; reserves and provisions for unearned
premiums, losses and other purposes; deposits of securities for the
benefit of policyholders; approval of policy forms; and the
regulation of market conduct, including underwriting and claims
practices. State insurance departments also conduct periodic
examinations of the affairs of insurance companies and require the
filing of annual and other reports relating to the financial
condition of insurance companies, holding company issues and other
matters. The Corporation's insurance subsidiaries are collectively
licensed to transact insurance business in all 50 states and the
District of Columbia. See page 25 of the 1999 Annual Report to
Shareholders for more information on regulatory matters.
2
<PAGE> 3
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
PROPERTY AND CASUALTY -- OPERATIONS
The Corporation's property and casualty subsidiaries include:
SAFECO Insurance Company of America, General Insurance Company of
America, First National Insurance Company of America, SAFECO
National Insurance Company, SAFECO Insurance Company of Illinois,
SAFECO Lloyds Insurance Company, SAFECO Surplus Lines Insurance
Company, American States Insurance Company, American Economy
Insurance Company, American States Preferred Insurance Company,
Insurance Company of Illinois, American States Insurance Company of
Texas, American States Lloyds Insurance Company, F. B. Beattie &
Company, Inc., SAFECO Select Insurance Services, Inc., SAFECO UK,
Ltd. and R.F. Bailey (Underwriting Agencies), Ltd.
Through independent agents, SAFECO's property and casualty
subsidiaries write personal, commercial and surety lines of
insurance. Coverages include automobile, homeowners, fire and allied
lines, workers' compensation, commercial multi-peril, miscellaneous
casualty, surety and fidelity. Products are sold in all states and
the District of Columbia.
SAFECO's purchase of American States on October 1, 1997
broadened the product mix available to the combined companies'
agency force, particularly in introducing American States' small
commercial line products into existing SAFECO agencies.
Consolidated property and casualty gross premiums written for
SAFECO's ten largest states are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------------------------------------------------------------------------
(Amounts In Millions)
% of % of % of
State Amount Total Amount Total Amount Total
---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
California $ 688.4 15% $ 669.1 15% $ 584.0 20%
Washington 594.5 13 587.6 13 444.0 15
Texas 323.4 7 314.3 7 225.0 8
Illinois 286.7 6 273.6 6 151.6 5
Oregon 239.5 5 238.6 5 181.0 6
Missouri 221.6 5 219.3 5 118.4 4
Florida 174.2 4 166.9 4 118.8 4
Indiana 160.7 3 167.2 4 50.3 2
Michigan 144.3 3 131.7 3 58.7 2
Tennessee 119.3 3 106.7 2 81.7 3
-------- -------- -------- -------- -------- --------
2,952.6 64 2,875.0 64 2,013.5 69
All Others 1,692.4 36 1,566.8 36 973.9 31
-------- -------- -------- -------- -------- --------
Total $4,645.0 100% $4,441.8 100% $2,987.4 100%
======== ======== ======== ======== ======== ========
</TABLE>
The 1997 gross premiums written above include American States
from the October 1, 1997 acquisition date forward. Based on
annualized American States premiums for 1997, the adjusted
concentrations are 16% for California, 13% for Washington, 7% for
Texas, 6% for Illinois and 5% for Oregon.
Personal lines, American States Business Insurance, SAFECO
Commercial and surety lines comprised approximately 58%, 25%, 15% and
2%, respectively, of the 1999 gross premiums written of $4.6 billion.
3
<PAGE> 4
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
Additional financial information about SAFECO's business segments
appears in Note 14 on page 72 of the 1999 Annual Report to
Shareholders.
PROPERTY AND CASUALTY -- LOSS RESERVES
The consolidated financial statements include the estimated
liability (reserves) for unpaid losses and loss adjustment expense
("LAE") of the Corporation's property and casualty insurance
subsidiaries. The liability is presented net of amounts from salvage
and subrogation recoveries and gross of amounts recoverable from
reinsurance.
Reserves for losses that have been reported to SAFECO and certain
legal expenses are established on the "case basis" method. Claims
incurred but not reported (IBNR) and other adjustment expenses are
estimated using statistical procedures. Salvage and subrogation
recoveries are accrued using the "case basis" method for large claims
and statistical procedures for smaller claims.
SAFECO's objective is to set reserves that are adequate; that is,
the amounts originally recorded as reserves should at least equal the
amounts ultimately required to settle losses. SAFECO's reserves
aggregate its best estimates of the total ultimate cost of claims
that have been incurred but have not yet been paid. The estimates are
based on past claims experience and consider current claim trends as
well as social, legal and economic conditions, including inflation.
The reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular basis
to determine that the reserving assumptions and methods are
appropriate. Reserves initially determined are compared to the
amounts ultimately paid. A statistical estimate of the projected
amounts necessary to settle outstanding claims is made regularly and
compared to the recorded reserves and adjusted as necessary; such
adjustments are included in current operations.
Analysis indicates that SAFECO's reserves are adequate and
probably slightly redundant at December 31, 1999, 1998 and 1997. The
table on page 5 provides an analysis of changes in losses and LAE
reserves for 1999, 1998, and 1997 (net of reinsurance amounts).
Changes in the reserves are reflected in the income statement for the
year when the changes are made.
Operations in 1999 were charged $78.8 million from increases in
estimated loss and LAE for claims occurring in prior years. Property
and casualty lines of business with significant contributions to the
increase include construction defect ($28.6 million), workers'
compensation ($35.6 million) and asbestos and environmental ($24.8
million). For both construction defect and asbestos and
environmental, increased reserve estimates resulted from higher than
expected reported claims in 1999. The increased reserve estimates for
workers' compensation resulted from SAFECO's re-evaluation of loss
exposures on claims related to larger commercial insureds.
Operations in 1998 benefited $100.0 million from a decrease in
estimate loss and LAE for claims occurring in prior years. This
decrease related primarily to American States' operations. The claims
departments of the two companies were combined in 1998. The unified
claims department implemented training and reserving procedures
resulting in lower claims settlements and reduced reserves on prior
years' American States losses. The reductions were in both personal
and commercial auto, workers' compensation and general liability.
The 1997 charge to prior years included a nonrecurring $40.0
million reserve increase related to the American States acquisition.
This reserve increase related to American States' assumed reinsurance
operations, which had been discontinued by American States prior to
SAFECO's acquisition. Excluding this nonrecurring charge, the 1997
loss and LAE development on claims occurring in prior years benefited
operations $9.5 million.
4
<PAGE> 5
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
ANALYSIS OF CHANGES IN LOSS AND LAE EXPENSE RESERVES (NET OF
REINSURANCE):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In Millions)
<S> <C> <C> <C>
Loss and LAE Reserves at Beginning of Year $ 3,966.3 $ 4,081.9 $ 1,955.7
--------- --------- ---------
American States Loss and LAE Reserves at Acquisition - - 2,204.6
--------- --------- ---------
Incurred Loss and LAE for Claims
Occurring in the Current Year 3,353.0 3,163.2 1,969.5
Increase (Decrease) in Estimated Loss and LAE
for Claims Occurring in Prior Years 78.8 (100.0) 30.5
--------- --------- ---------
Total Incurred Loss and LAE 3,431.8 3,063.2 2,000.0
--------- --------- ---------
Loss and LAE Payments for Claims
Occurring During:
Current Year 1,926.4 1,836.2 1,172.1
Prior Years 1,402.6 1,342.6 906.3
--------- --------- ---------
Total Loss and LAE Payments 3,329.0 3,178.8 2,078.4
--------- --------- ---------
Loss and LAE Reserves
At End of Year $ 4,069.1 $ 3,966.3 $ 4,081.9
========= ========= =========
Reconciliation:
Loss and LAE Reserves,
Net of Reinsurance $ 4,069.1 $ 3,966.3 $ 4,081.9
Add: Reinsurance Recoverables on Unpaid Losses 309.5 253.6 228.6
--------- --------- ---------
Loss and LAE Reserves,
Gross of Reinsurance $ 4,378.6 $ 4,219.9 $4,310.50
========= ========= =========
</TABLE>
5
<PAGE> 6
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
The table on page 7 presents the development of the loss and LAE
reserves for 1989 through 1999. The amounts reported in the table for
the 1996 and prior year end balances are for SAFECO only (i.e., do
not include any amounts for American States.) The top lines of the
table presents the estimated reserve for unpaid loss and LAE at
December 31 for each of the indicated years, both gross and net of
related reinsurance amounts. The upper portion of the table displays
the cumulative amount paid with respect to the previously recorded
reserve as of the end of each succeeding year. The next section
reports the re-estimated amount of the previously recorded reserve
based on experience as of each succeeding year. The estimate is
increased or decreased as more information becomes known about
individual claims and as changes in conditions and claim trends
become apparent. The lower section of the table presents the
cumulative redundancy developed with respect to the previously
recorded liability as of the end of each succeeding year. For
example, the 1989 reserve of $1,627.2 million developed a $5.3
million redundancy after one year which grew over ten years to a
redundancy of $111.1 million.
For 1989 and through 1997, SAFECO's reserve development has been
favorable. This trend reflects several factors: conservative
reserving previously undertaken to correct deficiencies in years
prior to 1988, favorable workers' compensation legislation,
moderation of medical costs and inflation, and claims department
changes. The favorable legislation in workers' compensation, which
relates primarily to the states of Oregon and California in the early
1990's, helped reduce fraud, allowed for faster claim settlements and
made it more difficult to reopen claims--all of which reduced
SAFECO's ultimate loss costs. The cost of claim settlements in
several lines of business has benefited from changes in the
organization of SAFECO's claims department which has established
separate specialized units for workers' compensation, environmental
exposures and fraud investigations. In addition, increased focus on
adjustment expenses helped reduce these costs. As discussed on page
4, the development for 1998 was unfavorable resulting primarily from
construction defect, asbestos and environmental and workers
compensation.
In evaluating the reserve development table on page 7, note that
each amount includes the effects of all changes in amounts for prior
periods. For example, the amount of the redundancy shown for the
December 31, 1998 reserves that relates to losses incurred in 1989 is
also included in the cumulative redundancy amount for the years 1989
through 1997. Conditions and trends that have affected development of
the liability in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
6
<PAGE> 7
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANALYSIS OF LOSSES AND ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
Year Ended December 31 1989 1990 1991 1992 1993 1994 1995 1996
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(In Millions)
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $1,702.5 $1,872.1 $2,017.3 $2,052.3 $2,095.2 $2,236.8 $2,180.8 $2,059.1
Reinsurance 75.3 80.7 152.0 89.2 100.1 143.9 110.7 103.4
-------- -------- -------- -------- -------- -------- -------- --------
Net of Reinsurance $1,627.2 $1,791.4 $1,865.3 $1,963.1 $1,995.1 $2,092.9 $2,070.1 $1,955.7
======== ======== ======== ======== ======== ======== ======== ========
Cumulative Net Amount Paid as of:
One Year Later $ 540.2 $ 603.0 $ 584.9 $ 598.9 $ 620.5 $ 693.0 $ 755.4 $ 772.9
Two Years Later 849.6 914.5 905.7 913.4 947.6 1,068.3 1,095.0 1,101.4
Three Years Later 1,035.0 1,109.4 1,086.5 1,106.0 1,147.6 1,252.9 1,267.6 1,287.9
Four Years Later 1,149.5 1,221.6 1,207.2 1,230.6 1,252.5 1,341.5 1,370.0
Five Years Later 1,222.1 1,301.1 1,294.4 1,295.7 1,300.2 1,403.5
Six Years Later 1,276.4 1,368.9 1,336.7 1,326.1 1,342.9
Seven Years Later 1,323.0 1,403.5 1,356.9 1,357.8
Eight Years Later 1,344.0 1.419.0 1,381.4
Nine Years Later 1,359.4 1,439.3
Ten Years Later 1,375.6
Net Reserve Re-estimated as of:
One Year Later 1,621.9 1,767.4 1,820.7 1,866.2 1,913.8 2,033.2 1,992.4 1,947.7
Two Years Later 1,593.6 1,705.8 1,732.8 1,782.1 1,818.3 1,902.3 1,889.9 1,861.4
Three Years Later 1,541.4 1,666.1 1,686.0 1,712.2 1,716.1 1,801.9 1,804.7 1,806.6
Four Years Later 1,544.8 1,657.2 1,650.7 1,642.3 1,643.6 1,733.8 1,757.1
Five Years Later 1,549.9 1,637.5 1,594.9 1,600.9 1,599.8 1,702.8
Six Years Later 1,546.9 1,608.5 1,569.5 1,554.7 1,568.3
Seven Years Later 1,525.4 1,595.4 1,548.7 1,549.8
Eight Years Later 1,515.4 1,586.7 1,551.0
Nine Years Later 1,510.0 1,592.1
Ten Years Later 1,516.1
Cumulative Net Redundancy (Deficiency) as of:
One Year Later 5.3 24.0 44.6 96.9 81.3 59.7 77.7 8.0
Two Years Later 33.6 85.6 132.5 181.0 176.8 190.6 180.2 94.3
Three Years Later 85.8 125.3 179.3 250.9 279.0 291.0 265.4 149.1
Four Years Later 82.4 134.2 214.6 320.8 351.5 359.1 313.0
Five Years Later 77.3 153.9 270.4 362.2 395.3 390.1
Six Years Later 80.3 182.9 295.8 408.4 426.8
Seven Years Later 101.8 196.0 316.6 413.3
Eight Years Later 111.8 204.7 314.3
Nine Years Later 117.2 199.3
Ten Years Later 111.1
<CAPTION>
Year Ended December 31 1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
(In Millions)
Reserve for Unpaid
Losses and Adjustment
Expenses:
Gross of Reinsurance $4,310.5 $4,219.9 $4,378.6
Reinsurance 228.6 253.6 309.5
-------- -------- --------
Net of Reinsurance $4,081.9 $3,966.3 $4,069.1
======== ======== ========
Cumulative Net Amount Paid as of:
One Year Later $1,345.5 $1,389.2
Two Years Later 2,049.3
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Reserve Re-estimated as of:
One Year Later 3,981.9 4,045.1
Two Years Later 3,989.0
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Cumulative Net Redundancy (Deficiency) as of:
One Year Later 100.0 (78.8)
Two Years Later 92.9
Three Years Later
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
</TABLE>
7
<PAGE> 8
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
The following table summarizes reserve development, gross of
reinsurance, for the last three years. The 1996 reserve amounts are
for SAFECO only (i.e., does not include any amounts for American
States). The gross and ceded amounts for 1997 and 1998 reflect
development for Michigan auto claims for personal injury protection.
The reserves on these claims were increased $57.7 million, gross of
reinsurance, to reflect the expected lifetime payout. This gross
development was ceded to the Michigan Catastrophic Claims
Association. The net of reinsurance development was unaffected.
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
(In Millions)
<S> <C> <C> <C>
Gross Reserves $2,059.1 $4,310.5 $4,219.9
======== ======== ========
Cumulative Development
Net of Reinsurance $ 149.1 $ 92.9 $ (78.8)
Cumulative Development
Of Reinsurance Ceded (10.3) (106.2) (70.8)
-------- -------- --------
Cumulative Development
Gross of Reinsurance $ 138.8 $ (13.3) $ (149.6)
======== ======== ========
</TABLE>
ENVIRONMENTAL AND ASBESTOS CLAIMS
The property and casualty companies' reserves for losses and LAE
for liability coverages related to environmental, asbestos and other
toxic claims totaled $332.3 million at December 31, 1999 compared
with $329.8 million at December 31, 1998. These amounts are before
the effect of reinsurance, which totaled $30.1 million and $30.9
million at December 31, 1999 and 1998. These reserves are
approximately 8% of total property and casualty reserves for losses
and LAE at both December 31, 1999 and December 31, 1998. The reserves
include estimates for both reported and IBNR losses and related legal
expenses.
The vast majority of SAFECO's property and casualty insurance
companies' environmental, asbestos and other toxic claims result from
the commercial general liability line of business and the
discontinued assumed reinsurance operations of American States. A few
of these losses occur in other coverages such as umbrella, small
commercial package policies and personal lines. Approximately 5,600
of these claims were pending at December 31, 1999, computed on an
occurrence basis. Most of these pending environmental claims involve
some type of environmental-related coverage dispute. The average
settlement cost of each environmental, asbestos and other toxic claim
for 1999 was $10,600 including legal expenses.
The following table summarizes the components of SAFECO's
reserves for environmental, asbestos and other toxic claims at
December 31, 1999, before the effect of reinsurance:
<TABLE>
<CAPTION>
Loss LAE Total
---------- --------- ------------
<S> <C> <C> <C>
(In Millions)
Case $ 115.3 $ 23.0 $ 138.3
IBNR 147.0 47.0 194.0
---------- --------- ------------
Total $ 262.3 $ 70.0 $ 332.3
========== ========= ============
</TABLE>
8
<PAGE> 9
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
The table below displays the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other
toxic claims, before the effect of reinsurance.
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
(In Millions)
Reserves at Beginning of Year $ 329.8 $ 346.9 $ 102.8
American States Reserves at Acquisition - - 264.4
Incurred Losses and LAE 24.8 1.6 (9.9)
Losses and LAE Payments (22.3) (18.7) (10.4)
------- ------- -------
Reserves at End of Year $ 332.3 $ 329.8 $ 346.9
======= ======= =======
</TABLE>
Although estimation of environmental claims is difficult, the
reserves established for these claims at December 31, 1999 are
believed to be adequate based on the known facts and current law.
SAFECO has generally avoided writing coverages for larger companies
with substantial exposure in these areas. The process of estimating
loss reserves for environmental, asbestos and other toxic claims
results in imprecise estimates due to changes in environmental
regulations and evolving case law which affect the development of
loss reserves. Quantitative loss reserving techniques in this area
need to be supplemented by subjective considerations and managerial
judgment. Because of these conditions, trends that have affected
development of these liabilities in the past may not necessarily
occur in the future.
CONSTRUCTION DEFECT CLAIMS
Prior to its acquisition by SAFECO, American States had
experienced adverse loss development on construction defect claims.
Construction defect claims are a subset of claims that arise from
coverage provided by general property damage liability insurance.
Construction defect claims are claims arising from the alleged
defective work performed in the construction of large habitation
structures, such as apartments, condominiums and large developments
of single family dwellings or other housing. In addition to damages
arising directly from the alleged defective work, construction defect
claims also allege that the economic value of the structure has been
diminished. The vast majority of construction defect claims arise
from past contractor business written in California. SAFECO
Commercial, which does not include American States Business
Insurance, has avoided writing the construction class of business in
California since 1989 and has limited exposure to these types of
claims. Because of this SAFECO has not historically separated these
claims for the purpose of reserve analysis. However, American States,
prior to the acquisition by SAFECO, was a major writer of California
contractor business until 1994 when it implemented significant
restrictions in this line. The total American States reserves for
construction defect claims totaled $306.1 million at December 31,
1999 and $328.6 million at December 31, 1998, representing
approximately 8% of total property and casualty reserves for losses
and LAE at both December 31, 1999 and 1998. Claims payments including
LAE totaled $50.6 million in 1999 and $67.1 million in 1998.
9
<PAGE> 10
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
The following table presents the loss reserve activity analysis
for American States construction defect claims after the effect of
reinsurance for 1999 and 1998 respectively (the first two full years
following the acquisition):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
(In Millions)
Reserves at Beginning of Year $ 328.6 $ 340.3
Incurred Losses and LAE 28.1 55.4
Losses and LAE Payments (50.6) (67.1)
------- -------
Reserves at End of Year $ 306.1 $ 328.6
======= =======
</TABLE>
GAAP VS. STATUTORY
State regulatory authorities require SAFECO's property and
casualty insurance subsidiaries to file annual statements prepared on
an accounting basis prescribed or permitted by their respective state
of domicile (that is, on a statutory basis). The difference between
the $4,378.6 million reserve at December 31, 1999, for the losses and
LAE disclosed in the consolidated financial statements in accordance
with generally accepted accounting principles (GAAP), and the
$4,069.1 million reported in the annual statements filed with state
regulatory authorities relates to reinsurance recoverables. Under
Statement of Financial Accounting Standards No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," the GAAP-basis liability for losses and LAE is reported
gross of amounts recoverable from reinsurance. Statutory-basis
financial statements report the liability net of reinsurance.
REINSURANCE
SAFECO's property and casualty companies use treaty and
facultative reinsurance to help manage exposure to loss. As noted on
page 5, the liability for unpaid losses and LAE is reported gross of
reinsurance recoverables of $309.5 million at December 31, 1999 and
$253.6 million at December 31, 1998. The availability and cost of
reinsurance are subject to prevailing market conditions, both in
terms of price and available capacity. Although the reinsurer is
liable to SAFECO to the extent of the reinsurance ceded, SAFECO
remains primarily liable to the policyholder as the direct insurer on
all risks insured. To SAFECO's knowledge none of its reinsurers is
experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 2000 is
unchanged from 1999 and covers 90% of $400 million of single-event
losses in excess of $100 million retention. In a large catastrophe,
SAFECO would, therefore, retain the first $100 million of losses, 10%
of the next $400 million and all losses in excess of $500 million. In
addition to this nationwide coverage, for all states other than
California SAFECO has a supplemental earthquake-only reinsurance
contract that would cover 90% of $350 million of single-event
earthquake losses in excess of $500 million. Both of these 2000
catastrophe property reinsurance contracts include provisions for one
reinstatement for a second catastrophe event in 2000 at current
rates.
SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and do not participate in any unusual or
nonrecurring reinsurance transactions such as "swaps" of reserves or
loss portfolio transfers. SAFECO does not use "funding covers" and
does not
10
<PAGE> 11
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
participate in any surplus relief transactions. For additional
information on reinsurance, see Note 6 on page 65 of the 1999 Annual
Report to Shareholders.
LIFE -- OPERATIONS
The Corporation's subsidiaries engaged in the life insurance
business are SAFECO Life Insurance Company, SAFECO National Life
Insurance Company, First SAFECO National Life Insurance Company of
New York, American States Life Insurance Company, SAFECO
Administrative Services, Inc. and SAFECO Investment Services, Inc.
(collectively referred to as "SAFECO Life"). SAFECO Life offers
individual and group insurance products, retirement services
(pension) and annuity products. These products are marketed through
professional agents in all states and the District of Columbia. The
most significant product lines in terms of premium/deposit volume
include: single premium immediate and deferred annuities,
business-owned life insurance, indexed and variable annuities,
tax-sheltered annuities for the education and nonprofit markets,
corporate retirement plans, excess loss group medical insurance and
individual life insurance.
SAFECO Life acquired Medical Risk Managers, Inc. on December 31,
1999, American States Life on October 1, 1997 and WM Life Insurance
Company on December 31, 1997. These acquisitions have been treated as
purchases for accounting purposes.
SAFECO Life reinsures portions of its individual and group life,
accident and health insurance through commercial reinsurance
treaties, thus providing protection against large risks and
catastrophe situations.
Funds received under deposit contracts relate primarily to the
annuity and retirement services products of SAFECO's life insurance
subsidiaries. The table on page 12 summarizes the components of funds
held under deposit contracts at December 31, 1999, and describes the
applicable surrender charges and surrender experience.
11
<PAGE> 12
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
DETAIL OF SAFECO LIFE INSURANCE COMPANIES' FUNDS HELD UNDER DEPOSIT CONTRACTS
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Expected Range of
Maturities Credited or
Outstanding of Assumed
at Liabilities Interest Rates Approximate
12/31/99 (at issue at Surrender
Product (In Millions) date) 12/31/99 Surrender Charges Experience
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Universal $2,157.2 Approximately 5.25% to 6.00% Varies by issue age, 7% per annum
Individual 10-20 years sex and duration from
Life $1 to $58 per $1,000
of insurance
Annuities:
Structured 5,823.4 Over 25 years 3.5% to 12.38% Cannot surrender Cannot
Settlement surrender
Immediate
Retirement
Services:
Guaranteed 741.9 Typically 5.63% to 8.44% Market value Less than 1%
Investment 2-5 years adjustment or cannot per annum
Contracts surrender in first year
Other 4,276.7 Approximately 4.00% to 7.95% Highest surrender 13% per annum
Annuities & 5-20 years charges range from 10%
Deposits to 5%, graded down to
0% within 5 to 10
years. SAFECO has
the option to
defer payout over
5 years for
approximately 13%
of these
contracts.
763.7 Approximately Equity return Typically 8% in year 1 2% to 3% per
Equity 6 years at credited is graded to 0% after annum
Indexed original based on S&P year 6.
Annuities issuance, 500 performance
remaining with a minimum
expected guarantee of
maturity 0%. Floor
approximately return based on
5 years a minimum fixed
return on a
portion
(typically 90%)
of the original
deposit amount.
----------
Total $13,762.9
==========
</TABLE>
12
<PAGE> 13
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
INVESTMENTS
A description of SAFECO's investment portfolio appears on pages
35-37 of the 1999 Annual Report to Shareholders. The remainder of
this section provides additional information about SAFECO's
mortgage-backed securities and investment income yields.
SAFECO's consolidated investment in mortgage-backed securities of
$3.9 billion at market value at December 31, 1999, consists mainly of
residential collateralized mortgage obligations (CMOs), pass-throughs
and commercial loan-backed mortgage obligations (CMBS). The SAFECO
Life portfolio contains virtually all of these securities.
Approximately 86% of the mortgage-backed securities are
government/agency-backed or AAA rated at December 31, 1999. SAFECO
has intentionally limited its investment in riskier, more volatile
CMOs and CMBS (e.g., principal only, inverse floaters, etc.) to less
than 1% of total mortgage-backed securities at December 31, 1999.
SAFECO Consolidated Holdings of Mortgage-Backed Securities at
December 31, 1999:
<TABLE>
<CAPTION>
GAAP Market Value
------------------
Amortized
Cost Amount %
---------- --------- --------
(Amounts In Millions)
<S> <C> <C> <C>
Residential CMOs:
Planned Amortization Class
(PAC) and
Targeted Amortization Class
(TAC) (Fixed Coupon) $ 580.4 $ 573.7 14.8%
Sequential Pay (SEQ) 1,004.5 984.9 25.4
Accrual Coupon (Z-Tranche) 689.8 701.2 18.1
Floating Rate 48.4 48.0 1.2
Companion/Support, Principal Only,
Inverse Floaters 28.3 27.4 0.7
-------- -------- --------
Subtotal 2,351.4 2,335.2 60.2
-------- -------- --------
Residential Mortgage-Backed
Pass-Throughs (Non-CMOs): 48.0 47.0 1.2
-------- -------- --------
Securitized Commercial
Real Estate:
Government/Agency-Backed 401.0 393.3 10.2
Pass-Throughs (Non-agency) 48.8 45.2 1.2
CMOs (Non-agency) 693.7 669.4 17.3
-------- -------- --------
Subtotal 1,143.5 1,107.9 28.7
-------- -------- --------
Asset-Backed Securities
(Non-Real Estate): 391.9 381.6 9.9
-------- -------- --------
Total Mortgaged-Backed Securities $3,934.8 $3,871.7 100.0%
======== ======== ========
</TABLE>
13
<PAGE> 14
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
This table displays the quality distribution of SAFECO's
mortgage-backed security portfolio (GAAP market values):
<TABLE>
<CAPTION>
Percent at
Rating December 31, 1999
-----------------
<S> <C> <C>
Government/Agency Backed 44%
AAA 42
AA 7
A 3
BBB 4
BB or lower --
-----------
Total 100%
===========
</TABLE>
The table below summarizes pretax investment income yields for
SAFECO's property and casualty and life insurance subsidiaries
(calculations are based on GAAP amortized cost):
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Property and Casualty 6.2% 6.3% 6.6%
Life 7.7% 7.8% 7.9%
</TABLE>
OTHER OPERATIONS
SAFECO's other operations include subsidiaries involved in
commercial lending and leasing, investment management and insurance
agency and financial services distribution operations.
In February 1998, SAFECO announced its decision to sell its real
estate subsidiary, SAFECO Properties, Inc., to focus on its core
insurance and financial services businesses. The majority of SAFECO
Properties' assets were sold for $570 million in a series of closings
during the first half of 1999. Realized gains of $35 million have
been recognized in 1999. At December 31, 1999, investment real estate
held by SAFECO Properties totaled $105 million , less than 1% of
SAFECO's consolidated investments. Since SAFECO Properties'
operations are not material to the consolidated financial statements,
they have not been reclassified as discontinued operations. See Note
2 on page 56 of the 1999 Annual Report to Shareholders, incorporated
herein by reference (Exhibit 13), for additional information.
14
<PAGE> 15
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - BUSINESS (CONTINUED)
- - --------------------------------------------------------------------------------
SAFECO Credit Company, Inc., organized in 1969, provides loans
and equipment financing and leasing to commercial businesses,
insurance agents and affiliated companies. At December 31, 1999, 4%
of the Credit Company's outstanding loans and leases consisted of
loans to affiliated SAFECO companies.
SAFECO Asset Management Company, acquired in 1973, is the
investment advisor for the SAFECO mutual funds, variable annuity
portfolios and a growing number of outside pension and trust
accounts.
SAFECO Securities, Inc., organized in 1967, is the principal
underwriter of the SAFECO Mutual Funds, comprising the SAFECO Common
Stock Trust, SAFECO Taxable Bond Trust, SAFECO Tax-Exempt Bond Trust,
SAFECO Money Market Trust, and SAFECO Managed Bond Trust. These five
trusts are made up of nineteen separate investment portfolios, all of
which are sold on a "no-load" basis directly to the public. Fifteen
of these portfolios have two additional classes of stock which are
sold to the public through broker/dealers.
In addition, SAFECO Securities, Inc. is the principal underwriter
for the SAFECO Resource Series Trust, a registered investment company
with six separate investment portfolios. SAFECO Securities is also
the principal underwriter for the variable insurance products issued
by SAFECO Resource Variable Account B, SAFECO Separate Account SL and
SAFECO Separate Account C, all of which are separate accounts of
SAFECO Life Insurance Company and for First SAFECO Separate Account
S, which is a separate account of First SAFECO National Life
Insurance Company of New York.
SAFECO Services Corporation, organized in 1972, is the transfer
agent for SAFECO's mutual funds.
SAFECO Trust Company, organized in 1994, provides asset
management and trust administrative services to high net worth
individuals and unrelated organizations.
SAFECO Investment Services, Inc., organized in 1986, is a
broker/dealer and registered investment advisor that primarily
distributes affiliated and nonaffiliated mutual funds and variable
insurance products through its registered representatives.
Talbot Financial Corporation, acquired in 1993, is a broad-based
insurance broker with a concentrated emphasis on the distribution of
qualified and nonqualified annuity products and mutual funds through
the banking and brokerage arenas.
15
<PAGE> 16
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 1 - PROPERTIES
ITEM 3 - LEGAL PROCEEDINGS
- - --------------------------------------------------------------------------------
ITEM 2 - PROPERTIES
SAFECO's property and casualty insurance companies lease their
home office complex located in Seattle, Washington from General
America Corporation (a wholly-owned subsidiary of SAFECO
Corporation). This complex totals 567,000 gross square feet. A
700-car parking garage is connected to the complex. SAFECO's life
insurance companies lease their headquarters building located in
Redmond, Washington from General America Corporation. This complex
totals 232,000 gross square feet.
SAFECO is currently developing approximately 650,000 gross square
feet of additional office space for its use on land near the life
insurance companies' Redmond, Washington headquarters.
Other buildings owned and occupied include service facilities in
Redmond, Washington and Indianapolis, Indiana, as well as regional
and branch offices in Fountain Valley and Pleasant Hill, CA; Denver,
CO; Carol Stream, IL; St. Louis, MO; Cincinnati, OH; Portland, OR;
Mountlake Terrace, Redmond, and Spokane, WA. These buildings comprise
approximately 1,800,000 gross square feet. All other branch and
service offices occupy leased premises comprising approximately
2,400,000 square feet, generally for periods of five years or less.
SAFECO Properties' remaining real estate investments are
primarily retail centers. See Item 1 on page 14 of this report.
ITEM 3 - LEGAL PROCEEDINGS
Because of the nature of their businesses, the Corporation's
insurance and other subsidiaries are subject to certain legal actions
filed or threatened in the ordinary course of their business
operations, generally as liability insurers defending third-party
claims brought against their insureds or as insurers defending policy
coverage claims brought against them. The Corporation does not
believe that such litigation will have a material adverse effect on
its financial condition, future operating results or liquidity.
The property and casualty insurance subsidiaries of the
Corporation are parties to a number of lawsuits for liability
coverages related to environmental claims. Although estimation of
environmental claims loss reserves is difficult, the Corporation
believes that reserves established for these claims are adequate
based on the known facts and current law. The loss and loss
adjustment expense with respect to any such lawsuit, or all lawsuits
related to a single incident combined, are not expected to be
material to the financial condition of SAFECO. See page 8 of Item 1
for more information regarding the liability of such subsidiaries for
environmental claims and the process of estimating environmental loss
reserves.
Four of the Corporation's property and casualty insurance
subsidiaries were among 23 underwriters of real property insurance
named as defendants in a case brought in February 1996 in the United
States District Court for the Western District of Missouri alleging
that their underwriting, sales and marketing practices violated the
Fair Housing Act and certain other civil rights laws. The trial court
refused to certify the plaintiff class and dismissed the lawsuit in
June 1997. The plaintiffs appealed. In February 1998 the Eighth
Circuit Court of Appeals upheld the dismissal, and in January 1999
the United States Supreme Court refused to grant
16
<PAGE> 17
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
ITEM 3 - LEGAL PROCEEDINGS (CONTINUED)
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - --------------------------------------------------------------------------------
certiori to hear the case. Meanwhile, in January 1999, a group of
plaintiffs filed separate lawsuits in Missouri state court against
the SAFECO property and casualty insurance companies named in the
federal court action. The state court actions against the SAFECO
defendants have been removed to federal district court and assigned
to the same judge who had ordered dismissal of the original federal
court action. The actions have been stayed while a related action
that has been dismissed against other insurers is on appeal before
the Eighth Circuit Court of Appeals. Based on current information,
management expects that the remaining lawsuits against the SAFECO
subsidiaries will be dismissed just as the original federal court
action was and intends to vigorously pursue such dismissal.
One of SAFECO's property and casualty insurance subsidiaries,
General Insurance Company of America ("General"), has been named a
defendant along with six other property and casualty insurance groups
in a putative class-action lawsuit filed in Illinois state court,
Hobbs v. State Farm Mutual Automobile Insurance Co., et al. SAFECO
Corporation originally was named as a defendant but has since been
dismissed for lack of personal jurisdiction. The plaintiffs allege
that the defendants violated their insurance contracts with
policyholders by using non-original equipment manufacturer
("non-OEM") parts in the repair of vehicles made pursuant to those
contracts. The plaintiffs also allege that the practices of the
defendants in adjusting claims when non-OEM parts were used
constituted a violation of the Illinois unfair business practices
act. The plaintiffs further allege that the fact that the defendants
support the Certified Auto Parts Association ("CAPA"), an independent
organization that certifies the quality of non-OEM parts for
vehicles, constituted a conspiracy to further the improper use of
those parts. The plaintiffs seek actual as well as punitive damages.
General will vigorously defend against these claims.
In March 2000 California voters by over a 2-to-1 margin
overturned a 1999 law that would have given third-party claimants the
right to sue insurance companies for bad faith in connection with the
adjustment of claims. Since the law will not go into effect, such
third-party bad faith claims remain prohibited in California.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders,
through the solicitation of proxies or otherwise, during the fourth
quarter of 1999.
17
<PAGE> 18
SAFECO CORPORATION AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
EXECUTIVE OFFICERS OF THE REGISTRANT
- - --------------------------------------------------------------------------------
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 24, 2000, these are the names, ages and positions of
the executive officers of the Registrant as required by Item 10. No
family relationships exist.
<TABLE>
<CAPTION>
<S> <C> <C>
Roger H. Eigsti 57 Chairman since May 1993. Chief Executive Officer since
January 1992. President from May 1989 to August 1996.
Chief Operating Officer from 1989 to 1991. Executive
Vice President and Chief Financial Officer from 1985
to 1989. Director since 1988.
Boh A. Dickey 55 President and Chief Operating Officer since August
1996. Executive Vice President from January 1992 to
August 1996. Chief Financial Officer from May 1989 to
August 1996. Senior Vice President from 1989 to 1991.
Secretary from 1985 to 1991. Vice President and
Controller from 1982 to 1989. Director since 1993.
Rodney A. Pierson 52 Chief Financial Officer since August 1996. Senior Vice
President since February 1994. Secretary since 1991.
Controller from 1990 to 1997. Vice President from 1990
to 1994. Vice President of SAFECO Property and
Casualty Insurance Companies from 1987 to 1990.
Controller of SAFECO Property and Casualty Insurance
Companies from 1984 to 1990.
James W. Ruddy 50 Senior Vice President since 1992. General Counsel
since 1989. Vice President from 1989 to 1992.
Associate General Counsel from 1985 to 1989.
W. Randall Stoddard 52 President of SAFECO Property and Casualty Insurance
Companies since July 1997. Chief Operating Officer of
SAFECO Property and Casualty Insurance Companies from
1996 to July 1997. Senior Vice President of Field
Operations from 1994 to 1996.
Randall H. Talbot 45 President of SAFECO Life Insurance Companies since
February 1998. Chief Executive Officer and President
of Talbot Financial Corporation from 1988 to 1998.
</TABLE>
18
<PAGE> 19
SAFECO CORPORATION AND SUBSIDIARIES
PART II - FINANCIAL INFORMATION, ITEM 5-9
PART III - FINANCIAL INFORMATION, ITEM 10-13
- - --------------------------------------------------------------------------------
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Pages 40 and 75 of the 1999 Annual Report to
Shareholders are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
Pages 76 through 79 of the 1999 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Pages 22 through 40 of the 1999 Annual
Report to Shareholders are incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Pages 38 and 39 of the 1999 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pages 43 through 75 of the 1999 Annual Report to Shareholders are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III The definitive proxy statement to be filed within 120 days after
December 31, 1999, excluding the Annual Report of the Compensation
Committee on Executive Compensation appearing on Pages 6 through 11,
is incorporated herein by reference to fulfill the requirements of
ITEM 10, "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT"
(except for that portion of Item 10 relating to executive officers
which appears in Part I of this 10-K), and to fulfill the
requirements of ITEM 11, "EXECUTIVE COMPENSATION," ITEM 12,
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT,"
and ITEM 13, "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
19
<PAGE> 20
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------------
PART IV (a) (1) Financial Statements
F-1 Consent of Independent Auditors
SAFECO Corporation and Subsidiaries:
The following consolidated financial statements of SAFECO
Corporation and its subsidiaries, included in the 1999 Annual
Report to Shareholders (pages 42 through 75), are incorporated
herein by reference:
Report of Independent Auditors
Statement of Consolidated Income
Years Ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheet
December 31, 1999 and 1998
Statement of Consolidated Cash Flows
Years Ended December 31, 1999, 1998 and 1997
Statement of Consolidated Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
Notes to Financial Statements
December 31, 1999
SAFECO Corporation and Subsidiaries Supplemental Consolidating
Information:
F-2 Balance Sheet
December 31, 1999 and 1998
F-3 Statement of Income
Year Ended December 31, 1999
F-4 Statement of Cash Flows
Year Ended December 31, 1999
20
<PAGE> 21
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
- - --------------------------------------------------------------------------------
(a) (2) Financial Statement Schedules
F-5 Schedule I Summary of Investments Other Than Investments in
Related Parties December 31, 1999
Schedule II Condensed Financial Information of the Registrant
(Parent Company Only):
F-6 Balance Sheet
December 31, 1999 and 1998
F-7 Statement of Income
Years Ended December 31, 1999, 1998 and 1997
F-8 Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
Statement of Consolidated Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997.
(See page 48 of the 1999 Annual Report to
Shareholders which is incorporated herein by
reference.)
F-9 Schedule III Supplementary Insurance
Information Years Ended December 31, 1999,
1998 and 1997
F-10 Schedule IV Reinsurance
Years Ended December 31, 1999, 1998 and 1997
F-11 Schedule VI Supplemental Information Concerning Property/
Casualty Insurance Operations
Years Ended December 31, 1999, 1998 and 1997
The following Article 7 schedules are omitted because the
information is provided elsewhere in the Annual Report (Form
10-K) or because of the absence of conditions under which they
are required:
Schedule V
21
<PAGE> 22
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
- - --------------------------------------------------------------------------------
(a) (3) Exhibits
F-12 Exhibit Index
Exhibit 3.1 Bylaws (as last amended August 5, 1998),
filed as Exhibit 3 to SAFECO's Quarterly
Report on Form 10-Q for the quarter ended
June 30, 1998.
Exhibit 3.2 Restated Articles of Incorporation (as
amended May 7, 1997), filed as Exhibit 3.2
to SAFECO's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
Exhibit 4.1 SAFECO agrees to furnish the Securities
and Exchange Commission, upon request, with
copies of all instruments defining rights of
holders of long-term debt of SAFECO and its
consolidated subsidiaries.
Exhibit 4.2 Indenture, dated as of July 15, 1997,
between SAFECO and The Chase Manhattan Bank,
as Trustee, filed as Exhibit 4.2 to SAFECO's
Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
Exhibit 4.3 Form of Certificate of Exchange Junior
Subordinated Debenture filed as Exhibit 4.2
to SAFECO's Registration Statement on Form
S-4 (No. 333-38205) dated October 17, 1997.
Exhibit 4.4 Certificate of Trust of SAFECO Capital
Trust I dated June 18, 1997, filed as
Exhibit 4.4 to SAFECO's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1997.
Exhibit 4.5 Amended and Restated Declaration of
Trust of SAFECO Capital Trust I dated as of
July 15, 1997, filed as Exhibit 4.5 to
SAFECO's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997.
Exhibit 4.6 Form of Exchange Capital Security
Certificate for SAFECO Capital Trust I filed
as Exhibit 4.5 to SAFECO's Registration
Statement on Form S-4 (No. 333-38205) dated
October 17, 1997.
Exhibit 4.7 Form of Exchange Guarantee of SAFECO
Corporation relating to the Exchange Capital
Securities filed as Exhibit 4.6 to SAFECO's
Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997.
Exhibit 4.8 Indenture, dated as of February 15,
2000, among SAFECO and The Chase Manhattan
Bank, N.A., as Trustee.
Exhibit 4.9 Form of 7.875% Notes due 2003.
22
<PAGE> 23
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
(CONTINUED)
- - --------------------------------------------------------------------------------
Exhibit 10.1 Purchase and Sale Agreement by and between
Washington Square, Inc., Kitsap Associates
Limited Partnership, Winmar Cascade, Inc.,
Winmar Oregon, Inc., Winmar of Kitsap, Inc.,
SCIT, Inc., Town Center Associates, and
Winmar Company, Inc., as sellers; and The
Macerich Partnership, L.P., and Ontario
Teachers' Pension Plan Board, as purchaser,
dated December 11, 1998, filed as Exhibit
10.1 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998.
SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with
copies of all omitted schedules to the
foregoing Purchase and Sale Agreement.
Exhibit 10.2 Five-Year Credit Agreement dated as of
September 24, 1997, among SAFECO; Bank of
America National Trust and Savings
Association, as Agent; Mellon Bank, N.A., as
Documentation Agent; The Chase Manhattan
Bank, as Syndication Agent; and the various
co-agents, lead managers, and financial
institutions identified in said Credit
Agreement as parties thereto, filed as
Exhibit 10.1 to SAFECO's Annual Report on
Form 10-K for the fiscal year ended December
31, 1997.
The following management contracts and compensatory plan
arrangements:
Exhibit 10.3 SAFECO Corporation Deferred Compensation
Plan for Directors, As Amended and Restated
on November 4, 1998, filed as Exhibit 10.2
to SAFECO's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998.
Exhibit 10.4 SAFECO Deferred Compensation Plan for
Executives, As Amended and Restated on
November 4, 1998, filed as Exhibit 10.3 to
SAFECO's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998.
Exhibit 10.5 Form of Executive Severance Agreements
between SAFECO and each of Rod A. Pierson,
James W. Ruddy, and W. Randall Stoddard, in
each case dated March 11, 1999, and between
SAFECO and each of Boh A. Dickey and Roger
H. Eigsti, in both cases dated May 5, 1999,
filed as Exhibit 10.1 to SAFECO's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1999; and Executive Severance
Agreement between SAFECO, SAFECO Life
Insurance Company and Randall H. Talbot
dated March 11, 1999, filed as Exhibit 10.2
to SAFECO's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
23
<PAGE> 24
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
(CONTINUED)
- - --------------------------------------------------------------------------------
Exhibit 10.6 SAFECO Long-Term Incentive Plan of 1997
as Amended and Restated May 5, 1999, filed
as Exhibit 10.3 to SAFECO's Quarterly Report
on Form 10-Q for the quarter ended March 31,
1999.
Exhibit 10.7 Form of Stock Option Contract granted
under the SAFECO Long-Term Incentive Plan of
1997, filed as Exhibit 10.6 to SAFECO's
Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
Exhibit 10.8 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,
filed as Exhibit 10.4 to SAFECO's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1999.
Exhibit 10.9 Form of Restricted Stock Rights Award
Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997, filed as Exhibit
10.7 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
Exhibit 10.10 Form of Performance Stock Rights Award
Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997, filed as Exhibit
10.8 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
Exhibit 10.11 SAFECO Incentive Plan of 1987 contained in
the Prospectus dated November 10, 1989, as
amended January 31, 1990, filed as Exhibit
10 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1989,
and the Supplement to such Prospectus dated
November 8, 1990, filed as Exhibit 10 to
Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1990.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13 1999 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule
(This exhibit is included only in the
electronic EDGAR filing version of this
10-K. The Financial Data Schedule is not a
separate financial statement but a schedule
that summarizes certain standard financial
information extracted directly from the
financial statements in this filing.)
24
<PAGE> 25
SAFECO CORPORATION AND SUBSIDIARIES
PART IV - FINANCIAL INFORMATION
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)
- - --------------------------------------------------------------------------------
(b) Reports on Form 8-K
No Forms 8-K were filed or required to be filed for any event
during the quarter ended December 31, 1999. The Registrant filed an
8-K dated January 26, 2000 under Item 5 (Other Items), relating to
its quarterly earnings release.
25
<PAGE> 26
SAFECO CORPORATION AND SUBSIDIARIES
SIGNATURES
- - --------------------------------------------------------------------------------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on this 24th day of March
2000.
SAFECO CORPORATION
----------------------------------
Registrant
/s/ ROGER H. EIGSTI
----------------------------------
Roger H. Eigsti, Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on March 24, 2000.
<TABLE>
<CAPTION>
Name Title
- - ----------------------------------------------------------------------------
<S> <C>
/s/ ROGER H. EIGSTI Chairman and
- - ------------------------------------- Chief Executive Officer
Roger H. Eigsti
/s/ BOH A. DICKEY President,
- - ------------------------------------- Chief Operating Officer
Boh A. Dickey and Director
/s/ ROD A. PIERSON Senior Vice President,
- - ------------------------------------- Chief Financial Officer
Rod A. Pierson and Secretary
/s/ H. PAUL LOWBER Vice President, Controller
- - ------------------------------------- and Chief Accounting Officer
H. Paul Lowber
/s/ PHYLLIS J. CAMPBELL Director
- - -------------------------------------
Phyllis J. Campbell
/s/ ROBERT S. CLINE Director
- - -------------------------------------
Robert S. Cline
/s/ JOHN W. ELLIS Director
- - -------------------------------------
John W. Ellis
</TABLE>
26
<PAGE> 27
SAFECO CORPORATION AND SUBSIDIARIES
SIGNATURES
- - ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Name Title
- - ------------------------------------------------------------------------------
<S> <C>
/s/ WILLIAM P. GERBERDING Director
- - -------------------------------------
William P. Gerberding
/s/ JOSHUA GREEN III Director
- - -------------------------------------
Joshua Green III
/s/ WILLIAM W. KRIPPAEHNE, JR. Director
- - -------------------------------------
William W. Krippaehne, Jr.
/s/ WILLIAM G. REED, JR. Director
- - -------------------------------------
William G. Reed, Jr.
Director
- - -------------------------------------
Norman B. Rice
/s/ JUDITH M. RUNSTAD Director
- - -------------------------------------
Judith M. Runstad
/s/ PAUL W. SKINNER Director
- - -------------------------------------
Paul W. Skinner
</TABLE>
27
<PAGE> 28
F-1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
SAFECO Corporation:
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of SAFECO Corporation of our report dated February 11, 2000, included in the
1999 Annual Report to Shareholders of SAFECO Corporation.
Our audits also included the financial statement schedules of SAFECO Corporation
listed in the Index at Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
schedules based on our audits. In our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-26393) pertaining to the SAFECO Long-Term Incentive Plan of
1997 and the incorporation by reference in the Registration Statement (Form S-3
No. 333-30346) pertaining to the $800,000,000 in SAFECO debt securities of our
report dated February 11, 2000, with respect to the consolidated financial
statements of SAFECO Corporation incorporated by reference, and our report
included in the preceding paragraph with respect to the financial statement
schedules included in this Annual Report (Form 10-K) for the year ended December
31, 1999 of SAFECO Corporation.
/s/ Ernst & Young LLP
Seattle, Washington
March 23, 2000
<PAGE> 29
SAFECO CORPORATION AND SUBSIDIARIES F-2
Balance Sheet - Supplemental Consolidating Information
December 31, 1999
- - --------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property & Credit Other and
ASSETS Casualty Life Company Eliminations Consolidated
--------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 5,950.8 $10,789.2 $ -- $ 90.7 $ 16,830.7
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,733.3 -- -- 2,733.3
Marketable Equity Securities, at Market Value 1,897.5 33.6 -- 73.6 2,004.7
Mortgage Loans 57.5 830.4 -- (117.5) 770.4
Real Estate (At cost less accumulated depreciation) -- 3.8 -- 102.7 106.5
Policy Loans -- 91.4 -- -- 91.4
Other Invested Assets 17.8 0.2 -- -- 18.0
Short-Term Investments 287.8 382.8 -- (294.6) 376.0
--------- --------- --------- ------------ ------------
Total Investments 8,211.4 14,864.7 -- (145.1) 22,931.0
Cash 61.9 23.2 9.2 18.0 112.3
Accrued Investment Income 104.2 218.4 4.0 1.5 328.1
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- 1,460.6 -- 1,460.6
Loans to Affiliates -- -- 58.3 (58.3) --
Premiums and Other Service Fees Receivable 1,034.9 13.3 -- 10.1 1,058.3
Other Notes and Accounts Receivable 22.9 65.6 2.0 56.7 147.2
Deferred Income Tax Recoverable
(Includes tax on unrealized appreciation of securities) 5.4 123.0 (51.5) 28.4 105.3
Reinsurance Recoverables 332.3 52.5 -- -- 384.8
Deferred Policy Acquisition Costs 325.4 273.4 -- -- 598.8
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 261.4 1.5 0.3 81.6 344.8
Goodwill 1,209.0 95.7 -- 50.2 1,354.9
Other Assets 134.6 75.1 101.5 32.2 343.4
Separate Account Assets -- 1,403.2 -- -- 1,403.2
--------- --------- --------- ------------ ------------
Total $11,703.4 $17,209.6 $ 1,584.4 $ 75.3 $ 30,572.7
========= ========= ========= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,378.6 $ 37.8 $ -- $ -- $ 4,416.4
Life Policy Liabilities -- 281.5 -- -- 281.5
Unearned Premiums 1,844.3 8.8 -- -- 1,853.1
Funds Held Under Deposit Contracts -- 13,762.9 -- -- 13,762.9
Debt:
Commercial Paper -- -- -- 508.8 508.8
Credit Company Borrowings - Nonaffiliates -- -- 1,323.1 -- 1,323.1
Credit Company Borrowings - Affiliates -- -- 92.8 (92.8) --
7.875% Notes Due 2005 -- -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- -- 200.0 200.0
Other Notes and Mortgages - Nonaffiliates -- -- -- 84.2 84.2
Other Liabilities 1,052.8 499.2 26.3 (181.5) 1,396.8
Current Income Taxes (10.1) 15.1 2.8 (1.7) 6.1
Separate Account Liabilities -- 1,403.2 -- -- 1,403.2
--------- --------- --------- ------------ ------------
Total Liabilities 7,265.6 16,008.5 1,445.0 717.0 25,436.1
--------- --------- --------- ------------ ------------
Capital Securities -- -- -- 842.5 842.5
--------- --------- --------- ------------ ------------
Common Stock 25.9 17.0 1.0 797.8 841.7
Additional Paid-In Capital 3,010.8 266.3 27.0 (3,304.1) --
Retained Earnings 815.9 1,130.9 111.4 1,004.5 3,062.7
Total Accumulated Other Comprehensive Income 585.2 (213.1) -- 17.6 389.7
--------- --------- --------- ------------ ------------
Total Shareholders' Equity 4,437.8 1,201.1 139.4 (1,484.2) 4,294.1
--------- --------- --------- ------------ ------------
Total $11,703.4 $17,209.6 $ 1,584.4 $ 75.3 $ 30,572.7
========= ========= ========= ============ ============
</TABLE>
<PAGE> 30
SAFECO CORPORATION AND SUBSIDIARIES F-2
Balance Sheet - Supplemental Consolidating Information
December 31, 1998 Continued
- - --------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property & Credit Other and
ASSETS Casualty Life Company Eliminations Consolidated
-------- --------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Investments:
Fixed Maturities Available-for-Sale, at Market Value $ 6,954.0 $10,785.2 $ -- $ 116.4 $ 17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost -- 2,720.9 -- -- 2,720.9
Marketable Equity Securities, at Market Value 1,910.5 37.9 -- 88.2 2,036.6
Mortgage Loans 66.6 675.6 -- (200.7) 541.5
Real Estate (At cost less accumulated depreciation) -- 3.0 -- 593.0 596.0
Policy Loans -- 88.3 -- -- 88.3
Other Invested Assets 18.3 5.2 -- -- 23.5
Short-Term Investments 291.1 63.2 1.0 (39.4) 315.9
-------- --------- --------- ------------ ------------
Total Investments 9,240.5 14,379.3 1.0 557.5 24,178.3
Cash 46.4 10.1 4.6 13.8 74.9
Accrued Investment Income 119.2 199.2 3.2 1.6 323.2
Finance Receivables (Less unearned finance charges
and allowance for doubtful accounts) -- -- 1,207.7 -- 1,207.7
Loans to Affiliates -- -- 206.1 (206.1) --
Premiums and Other Service Fees Receivable 948.3 12.5 -- 17.5 978.3
Other Notes and Accounts Receivable 51.4 106.4 5.4 (8.0) 155.2
Reinsurance Recoverables 270.4 47.0 -- -- 317.4
Deferred Policy Acquisition Costs 308.0 213.1 -- -- 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation) 236.9 1.5 0.3 41.5 280.2
Goodwill 1,252.9 67.2 -- 38.9 1,359.0
Other Assets 95.5 100.1 100.0 (0.3) 295.3
Separate Account Assets -- 1,201.1 -- -- 1,201.1
-------- --------- --------- ------------ ------------
Total $12,569.5 $16,337.5 $ 1,528.3 $ 456.4 $ 30,891.7
========= ========= ========= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense $ 4,219.9 $ 42.8 $ -- $ -- $ 4,262.7
Life Policy Liabilities -- 276.8 -- -- 276.8
Unearned Premiums 1,742.2 8.7 -- -- 1,750.9
Funds Held Under Deposit Contracts -- 12,718.1 -- -- 12,718.1
Debt:
Commercial Paper -- -- -- 732.7 732.7
Credit Company Borrowings - Nonaffiliates -- -- 1,255.2 -- 1,255.2
Credit Company Borrowings - Affiliates -- -- 61.0 (61.0) --
7.875% Notes Due 2005 -- -- -- 200.0 200.0
6.875% Notes Due 2007 -- -- -- 200.0 200.0
Other Notes and Mortgages - Nonaffiliates -- -- -- 227.7 227.7
Other Liabilities 913.3 251.9 36.5 (48.2) 1,153.5
Income Taxes:
Current 26.3 (16.2) (0.2) (7.4) 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities) 227.1 194.2 47.3 24.0 492.6
Separate Account Liabilities -- 1,201.1 -- -- 1,201.1
-------- --------- --------- ------------ ------------
Total Liabilities 7,128.8 14,677.4 1,399.8 1,267.8 24,473.8
-------- --------- --------- ------------ ------------
Capital Securities -- -- -- 842.1 842.1
-------- --------- --------- ------------ ------------
Common Stock 25.0 11.0 1.0 848.0 885.0
Additional Paid-In Capital 3,011.7 266.3 27.0 (3,305.0) --
Retained Earnings 1,343.4 1,036.8 100.5 776.5 3,257.2
Total Accumulated Other Comprehensive Income 1,060.6 346.0 -- 27.0 1,433.6
-------- --------- --------- ------------ ------------
Total Shareholders' Equity 5,440.7 1,660.1 128.5 (1,653.5) 5,575.8
-------- --------- --------- ------------ ------------
Total $12,569.5 $16,337.5 $ 1,528.3 $ 456.4 $ 30,891.7
========= ========= ========= ============ ============
</TABLE>
<PAGE> 31
SAFECO CORPORATION AND SUBSIDIARIES F-3
Statement of Income - Supplemental Consolidating Information
Year Ended December 31, 1999
- - --------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property & Other and
Casualty Life Eliminations Consolidated
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $4,382.9 $ -- $ -- $ 4,382.9
Life Premiums and Other Revenues -- 360.9 -- 360.9
-------- -------- ------------ ------------
Total 4,382.9 360.9 -- 4,743.8
Credit -- -- 115.1 115.1
Asset Management -- -- 44.3 44.3
Other -- -- 111.1 111.1
Net Investment Income 462.3 1,120.1 2.7 1,585.1
Realized Investment Gain (Loss) 87.3 (6.9) 37.3 117.7
-------- -------- ------------ ------------
Total 4,932.5 1,474.1 310.5 6,717.1
-------- -------- ------------ ------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 3,431.8 1,072.2 -- 4,504.0
Commissions 714.1 80.8 -- 794.9
Personnel Costs 322.6 72.2 68.8 463.6
Interest -- -- 141.0 141.0
Goodwill Amortization 43.8 3.7 8.3 55.8
Other 298.4 82.9 70.9 452.2
Amortization of Deferred Policy Acquisition Costs 793.0 47.1 -- 840.1
Deferral of Policy Acquisition Costs (810.3) (56.5) -- (866.8)
-------- -------- ------------ ------------
Total 4,793.4 1,302.4 289.0 6,384.8
-------- -------- ------------ ------------
Income Before Income Taxes 139.1 171.7 21.5 332.3
-------- -------- ------------ ------------
Provision (Benefit) for Income Taxes:
Current (56.6) 75.8 51.8 71.0
Deferred 23.6 (16.2) (43.1) (35.7)
-------- -------- ------------ ------------
Total (33.0) 59.6 8.7 35.3
-------- -------- ------------ ------------
Income Before Distributions on Capital Securities 172.1 112.1 12.8 297.0
Distributions on Capital Securities, Net of Tax -- -- (44.8) (44.8)
-------- -------- ------------ ------------
Net Income (Loss) $ 172.1 $ 112.1 $ (32.0) $ 252.2
======== ======== ============ ============
</TABLE>
<PAGE> 32
SAFECO CORPORATION AND SUBSIDIARIES F-4
Statement of Cash Flows - Supplemental Consolidating Information
Year Ended December 31, 1999
- - --------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Property & Other and
Casualty Life Eliminations Consolidated
---------- -------- ------------ ------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $4,391.3 $ 245.5 $ -- $ 4,636.8
Dividends and Interest Received 466.3 1,020.0 84.9 1,571.2
Other Operating Receipts -- 58.6 188.6 247.2
Insurance Claims and Policy Benefits Paid (3,296.6) (409.6) -- (3,706.2)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,377.5) (232.6) 5.3 (1,604.8)
Interest Paid and Distributions on Capital Securities -- -- (210.6) (210.6)
Other Operating Costs Paid -- -- (128.6) (128.6)
Income Taxes Recovered (Paid) 21.9 (44.5) (19.4) (42.0)
-------- -------- ------------ ------------
Net Cash Provided by (Used in) Operating Activities 205.4 637.4 (79.8) 763.0
-------- -------- ------------ ------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (2,501.7) (2,912.6) (7.8) (5,422.1)
Fixed Maturities Held-to-Maturity -- (0.9) -- (0.9)
Equities (221.5) (10.3) (0.1) (231.9)
Other Investments -- (430.6) (30.0) (460.6)
Maturities of Fixed Maturities Available-for-Sale 185.0 956.2 32.8 1,174.0
Maturities of Fixed Maturities Held-to-Maturity -- 13.3 -- 13.3
Sales of:
Fixed Maturities Available-for-Sale 2,656.9 1,056.0 2.5 3,715.4
Fixed Maturities Held-to-Maturity -- 6.3 -- 6.3
Equities 271.9 15.6 10.6 298.1
Other Investments 9.1 284.8 536.6 830.5
Net Increase in Short-Term Investments (124.7) (26.0) (13.0) (163.7)
Finance Receivables Originated or Acquired -- -- (916.8) (916.8)
Principal Payments Received on Finance Receivables -- -- 644.6 644.6
Other 252.6 (323.1) (30.5) (101.0)
-------- -------- ------------ ------------
Net Cash Provided by (Used in) Investing Activities 527.6 (1,371.3) 228.9 (614.8)
-------- -------- ------------ ------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts -- 1,849.5 -- 1,849.5
Return of Funds Held Under Deposit Contracts -- (1,077.3) -- (1,077.3)
Repayment of Notes and Mortgage Borrowings -- -- (138.1) (138.1)
Net Proceeds (Repayment of) from Short-Term Borrowings -- 3.8 (188.6) (184.8)
Common Stock Reacquired -- -- (303.2) (303.2)
Dividends Paid to Shareholders (717.5) (29.0) 554.3 (192.2)
Other -- -- (64.7) (64.7)
-------- -------- ------------ ------------
Net Cash Provided by (Used in) Financing Activities (717.5) 747.0 (140.3) (110.8)
-------- -------- ------------ ------------
Net Increase in Cash 15.5 13.1 8.8 37.4
Cash at the Beginning of Year 46.4 10.1 18.4 74.9
-------- -------- ------------ ------------
Cash at the End of the Year $ 61.9 $ 23.2 $ 27.2 $ 112.3
======== ======== ============ ============
</TABLE>
<PAGE> 33
SAFECO CORPORATION AND SUBSIDIARIES F-5
Summary of Investments Other Than Investments in Related Parties Schedule I
December 31, 1999
- - --------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Amount at
Which Shown In
the Balance
Type of Investment Cost Market Value Sheet
- - ------------------ --------- ------------ ---------
<S> <C> <C> <C>
Fixed Maturities Available-for-Sale
Bonds:
United States Government and Government
Agencies and Authorities $ 1,352.2 $ 1,357.9 $ 1,357.9
States, Municipalities and Political Subdivisions 3,160.0 3,153.5 3,153.5
Mortgage-Backed Securities 3,614.3 3,546.5 3,546.5
Foreign Governments 183.3 195.3 195.3
Public Utilities 1,657.3 1,613.9 1,613.9
All Other Corporate Bonds 7,011.2 6,719.9 6,719.9
Redeemable Preferred Stocks 280.6 243.7 243.7
--------- ------------ ---------
Total Fixed Maturities Classified as Available-for-Sale(1) 17,258.9 $ 16,830.7 16,830.7
--------- ============ ---------
Fixed Maturities Held-to-Maturity
Bonds:
United States Government and Government
Agencies and Authorities 282.5 $ 309.4 282.5
States, Municipalities and Political Subdivisions 140.3 136.0 140.3
Mortgage-Backed Securities 320.5 325.2 320.5
Foreign Governments 150.3 169.3 150.3
Public Utilities 415.7 419.9 415.7
All Other Corporate Bonds 1,424.0 1,412.3 1,424.0
--------- ------------ ---------
Total Fixed Maturities Classified as Held-to-Maturity(1) 2,733.3 $ 2,772.1 2,733.3
--------- ============ ---------
Equity Securities
Common Stocks:
Public Utilities 40.2 $ 105.9 105.9
Banks, Trust and Insurance Companies 53.1 126.8 126.8
Industrial, Miscellaneous and All Other 738.7 1,619.7 1,619.7
Non-Redeemable Preferred Stocks 140.5 152.3 152.3
--------- ------------ ---------
Total Equity Securities 972.5 $ 2,004.7 2,004.7
--------- ============ ---------
Other
Mortgage Loans on Real Estate(1) 770.4 770.4
Real Estate (Net of depreciation)(1) 106.5 106.5
Policy Loans 91.4 91.4
Other Invested Assets 18.0 18.0
Short-Term Investments 376.0 376.0
--------- ---------
Total Other 1,362.3 1,362.3
--------- ---------
Total Investments $22,327.0 $22,931.0
========= =========
</TABLE>
(1) The carrying value of investments in fixed maturities, mortgage loans and
real estate that have not produced income for the last twelve months is
less than one percent of the total of such investments at December 31,
1999.
<PAGE> 34
<TABLE>
<CAPTION>
SAFECO CORPORATION F-6
Balance Sheet Schedule II
(Parent Company Only)
December 31 1999 1998
- - ----------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Stock of Subsidiaries - At Cost Plus Equity in
Undistributed Earnings Since Acquisition
(Includes unrealized appreciation of investment
securities, net of tax, held by subsidiaries) $5,981.2 $7,443.3
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $77.4; $90.1) 76.1 92.9
Marketable Equity Securities, at Market Value
(Cost: $22.4; $30.4) 43.9 62.5
Short-Term Investments 62.8 82.3
-------- --------
Total Investments 6,164.0 7,681.0
Cash 0.1 0.3
Dividends Receivable from Affiliated Companies -- 14.3
Accounts Receivable from Affiliated Companies 2.8 3.7
Income Taxes - Current 11.5 14.1
Other Assets 21.7 19.0
-------- --------
Total Assets $6,200.1 $7,732.4
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts and Interest Payable $ 50.0 $ 45.6
Income Taxes:
Deferred 7.0 12.1
Dividends Payable to Shareholders 47.7 47.7
Debt:
Commercial Paper 508.8 732.8
Medium-Term Notes Due 2002 50.0 50.0
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
8.072% Junior Subordinated Debentures (Capital Securities) 842.5 868.4
-------- --------
Total Liabilities 1,906.0 2,156.6
-------- --------
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: 7.3; 7.5
Shares Issued and Outstanding: 128.9; 136.3 841.7 885.0
Retained Earnings 3,062.7 3,257.2
Total Accumulated Other Comprehensive Income 389.7 1,433.6
-------- --------
Total Shareholders' Equity 4,294.1 5,575.8
-------- --------
Total Liabilities and Shareholders' Equity $6,200.1 $7,732.4
======== ========
</TABLE>
<PAGE> 35
<TABLE>
<CAPTION>
SAFECO CORPORATION F-7
Statement of Income Schedule II
(Parent Company Only)
Year Ended December 31 1999 1998 1997
- - ---------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Dividends -Nonaffiliates $ 2.3 $ 2.5 $ 2.8
Interest -Affiliates 0.9 0.2 0.9
-Others 7.0 6.6 20.0
Realized Gain (Loss) from Security Investments (0.5) 5.8 7.9
------ ------ ------
Total 9.7 15.1 31.6
------ ------ ------
EXPENSES
Interest 140.9 152.7 74.3
Other 1.1 1.9 0.8
------ ------ ------
Total 142.0 154.6 75.1
------ ------ ------
Loss Before Income Taxes (132.3) (139.5) (43.5)
Benefit for Income Taxes
(Includes provision (benefit) on realized gain (loss):
$(0.2); $2.0; $2.8) (47.0) (48.9) (16.0)
------ ------ ------
Loss Before Equity in Earnings
of Subsidiaries (85.3) (90.6) (27.5)
Equity in Earnings of Subsidiaries
(Includes dividends accrued and received) 337.5 442.5 457.5
------ ------ ------
Consolidated Net Income $252.2 $351.9 $430.0
====== ====== ======
Dividends Accrued and Received From Subsidiaries (Cash):
SAFECO Insurance Company of America $168.0 $144.5 $383.0
General Insurance Company of America 174.0 106.0 316.5
First National Insurance Company of America 8.0 9.0 29.5
SAFECO National Insurance Company 7.0 5.5 4.5
SAFECO Insurance Company of Illinois 12.0 12.0 12.0
American States Financial Corporation 346.0 233.0 --
SAFECO Life Insurance Company -- 90.0 16.0
SAFECO Administrative Services, Inc. -- 14.5 0.5
SAFECO Properties, Inc. 25.7 0.2 1.2
SAFECO Credit Company, Inc. 3.6 3.5 3.0
SAFECO Asset Management Company 1.8 5.6 --
SAFECO Capital Trust -- 2.1 1.0
------ ------ ------
Total $746.1 $625.9 $767.2
====== ====== ======
</TABLE>
<PAGE> 36
<TABLE>
<CAPTION>
SAFECO CORPORATION F-8
Statement of Cash Flows Schedule II
(Parent Company Only)
Year Ended December 31 1999 1998 1997
- - ------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Dividends and Interest Received -Affiliates $ 761.3 $ 657.3 $ 760.1
-Others 10.4 9.2 23.8
Interest Paid (143.4) (150.0) (34.6)
Other Operating Costs Paid (6.8) (1.2) (0.3)
Income Taxes Received 50.0 23.1 31.6
-------- -------- ---------
Net Cash Provided by Operating Activities 671.5 538.4 780.6
-------- -------- ---------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale -- (25.7) --
Equities (0.1) (7.2) --
Maturities of Fixed Maturities Available-for-Sale 19.4 25.0 10.6
Acquisitions, Net of Cash Acquired -- -- (3,157.2)
Sales of:
Fixed Maturities Available-for-Sale -- 3.2 4.3
Equities 9.7 19.3 10.3
Net Decrease (Increase) in Short-Term Investments 19.5 (77.3) 18.9
Other -- (0.4) --
-------- -------- ---------
Net Cash Provided by (Used in) Investing Activities 48.5 (63.1) (3,113.1)
-------- -------- ---------
FINANCING ACTIVITIES
Proceeds from Notes and Mortgage Borrowings -- -- 196.1
Net (Repayment of) Proceeds from Short-Term Borrowings (229.9) (80.0) 811.2
Proceeds from Junior Subordinated Debentures (Capital Securities) -- -- 832.2
Proceeds from Common Stock Secondary Offering -- -- 677.2
Common Stock Reacquired (303.1) (236.8) (10.7)
Dividends Paid to Shareholders (192.2) (187.5) (154.1)
Other 5.0 3.8 5.9
-------- -------- ---------
Net Cash Provided by (Used in) Financing Activities (720.2) (500.5) 2,357.8
-------- -------- ---------
Net (Decrease) Increase in Cash (0.2) (25.2) 25.3
Cash at the Beginning of Year 0.3 25.5 0.2
-------- -------- ---------
Cash at the End of Year $ 0.1 $ 0.3 $ 25.5
======== ======== =========
</TABLE>
<PAGE> 37
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES F-9
Supplementary Insurance Information Schedule III
December 31 Year Ended December 31
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions) (In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits Benefits
Deferred Losses, Payable Premiums
Policy Claims and (Funds Held and Service
Acquisition Loss Unearned Under Deposit Fee
Segment Costs Expenses Premiums Contracts) Revenues
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Property and Casualty:
Personal Lines:
Personal Auto $ 65.6 $ 1,125.2 $ 435.6 $ 1,725.6
Homeowners 82.5 223.1 394.9 708.3
Other 22.8 79.9 118.6 177.7
Commercial Lines:
American States Business Insurance 102.5 1,561.1 561.1 1,017.6
SAFECO Commercial 40.1 1,119.6 255.0 686.4
Surety 11.6 (58.8) 62.9 59.4
Other 0.3 328.5 16.2 7.9
--------- --------- --------- ---------
Total 325.4 4,378.6 1,844.3 4,382.9
--------- --------- --------- ---------
Life:
Retirement Services 103.4 12.7 -- $ 5,782.3 32.9
Settlement Annuities -- -- -- 5,823.4 1.1
Group 13.7 80.9 2.2 -- 193.9
Individual 156.3 225.7 6.6 2,157.2 119.8
Other -- -- -- -- 13.2
--------- --------- --------- --------- ---------
Total 273.4 319.3 8.8 13,762.9 360.9
--------- --------- --------- --------- ---------
Credit -- -- -- -- --
Asset Management -- -- -- -- --
Other and Eliminations -- -- -- -- --
--------- --------- --------- --------- ---------
Consolidated Totals $ 598.8 $ 4,697.9 $ 1,853.1 $13,762.9 $ 4,743.8
========= ========= ========= ========= =========
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
(In Millions) Other
Operating
Costs
Benefits, (Including
Claims, Amortization of Dividends to
Net Losses and Deferred Policy Policyholders Net
Investment Adjustment Acquisition and Goodwill Premiums
Segment Income Expenses Costs Amortization) Written
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Property and Casualty:
Personal Lines:
Personal Auto $ 131.0 $ 1,382.7 $ 211.0 $ 102.0 $ 1,722.5
Homeowners 51.9 544.5 190.5 92.0 722.5
Other 15.8 97.8 57.2 27.7 182.2
Commercial Lines:
American States Business Insurance 141.7 830.8 190.8 179.5 1,115.7
SAFECO Commercial 97.2 553.8 124.8 115.2 676.0
Surety 3.0 17.9 17.9 8.4 59.8
Other 21.7 4.3 0.8 43.8 5.1
--------- --------- --------- --------- ---------
Total 462.3 3,431.8 793.0 568.6 $ 4,483.8
--------- --------- --------- --------- =========
Life:
Retirement Services 410.9 310.5 37.2 43.6
Settlement Annuities 486.6 423.0 -- 22.6
Group 1.9 157.1 4.4 53.6
Individual 144.7 181.6 5.5 47.3
Other 76.0 -- -- 16.0
--------- --------- --------- ---------
Total 1,120.1 1,072.2 47.1 183.1
--------- --------- --------- ---------
Credit -- -- -- 97.2
Asset Management -- -- -- 30.7
Other and Eliminations 2.7 -- -- 161.1
--------- --------- --------- ---------
Consolidated Totals $ 1,585.1 $ 4,504.0 $ 840.1 $ 1,040.7
========= ========= ========= =========
</TABLE>
(1) Real Estate operations reported separately in 1998 and 1997 are combined
with Other and Eliminations in 1999. The real estate operations are
currently being disposed of; its operations are not material to the
consolidated financial statements.
<PAGE> 38
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES F-9
Supplementary Insurance Information Schedule III
December 31 Year Ended December 31 Continued
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions) (In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits, Benefits
Deferred Losses, Payable Premiums
Policy Claims and (Funds Held and Service
Acquisition Loss Unearned Under Deposit Fee
Segment Costs Expenses Premiums Contracts) Revenues
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Property and Casualty:
Personal Lines:
Personal Auto $ 67.6 $ 1,046.9 $ 438.7 $ 1,729.7
Homeowners 78.8 215.2 380.3 686.7
Other 22.8 91.6 117.8 165.2
Commercial Lines:
American States Business Insurance 87.3 1,504.8 463.0 911.6
SAFECO Commercial 42.6 1,072.0 268.7 640.9
Surety 8.2 (59.3) 62.3 58.5
Other 0.7 348.7 11.4 15.7
--------- --------- --------- ---------
Total 308.0 4,219.9 1,742.2 4,208.3
--------- --------- --------- ---------
Life:
Retirement Services 92.6 12.8 $ 5,819.0 25.2
Settlement Annuities -- -- -- 5,531.6 1.5
Group 9.8 83.3 2.3 -- 203.1
Individual 110.7 223.5 6.4 1,367.5 110.2
Other -- -- -- -- 13.4
--------- --------- --------- --------- ---------
Total 213.1 319.6 8.7 12,718.1 353.4
--------- --------- --------- --------- ---------
Real Estate -- -- -- -- --
Credit -- -- -- -- --
Asset Management -- -- -- -- --
Other and Eliminations -- -- -- -- --
--------- --------- --------- --------- ---------
Consolidated Totals $ 521.1 $ 4,539.5 $ 1,750.9 $12,718.1 $ 4,561.7
========= ========= ========= ========= =========
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
(In Millions) Other
Operating
Costs
Benefits, (Including
Claims, Amortization of Dividends to
Net Losses and Deferred Policy Policyholders Net
Investment Adjustment Acquisition and Goodwill Premiums
Segment Income Expenses Costs Amortization) Written
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Personal Lines:
Personal Auto $ 139.5 $ 1,302.0 $ 210.8 $ 114.3 $ 1,740.5
Homeowners 54.3 532.9 182.4 98.9 701.4
Other 16.0 95.6 51.7 28.0 178.0
Commercial Lines:
American States Business Insurance 144.2 670.1 175.6 140.7 927.6
SAFECO Commercial 98.9 438.7 110.7 119.3 648.8
Surety 3.4 16.8 14.1 8.4 58.8
Other 23.9 7.1 (0.4) 43.0 1.5
--------- --------- --------- --------- ---------
Total 480.2 3,063.2 744.9 552.6 $ 4,256.6
--------- --------- --------- --------- =========
Life:
Retirement Services 411.7 349.8 26.8 79.7
Settlement Annuities 449.4 399.1 -- 21.1
Group 2.7 161.1 3.8 55.0
Individual 98.4 135.5 8.6 62.2
Other 78.8 -- -- 19.4
--------- --------- --------- ---------
Total 1,041.0 1,045.5 39.2 237.4 (1)
--------- --------- --------- ---------
Real Estate -- -- -- 72.6
Credit -- -- -- 87.2
Asset Management -- -- -- 31.2
Other and Eliminations (2.3) -- -- 115.5
--------- --------- --------- ---------
Consolidated Totals $ 1,518.9 $ 4,108.7 $ 784.1 $ 1,096.5
========= ========= ========= =========
</TABLE>
(1) Life other operating costs for 1998 include the $46.8 million
write-off of deferred acquisition costs.
<PAGE> 39
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES F-9
Supplementary Insurance Information Schedule III
December 31 Year Ended December 31 Continued
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions) (In Millions)
Reserve for Other Policy
Future Policy Claims and
Benefits, Benefits
Deferred Losses, Payable Premiums
Policy Claims and (Funds Held and Service
Acquisition Loss Unearned Under Deposit Fee
Segment Costs Expenses Premiums Contracts) Revenues
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Property and Casualty:
Personal Lines:
Personal Auto $ 66.0 $ 1,061.1 $ 427.8 $ 1,268.1
Homeowners 77.1 202.2 365.4 512.0
Other 23.0 89.6 115.0 139.0
Commercial Lines:
American States Business Insurance 93.4 1,582.0 447.0 227.3
SAFECO Commercial 38.3 1,068.0 266.0 603.6
Surety 7.7 (65.3) 61.4 54.4
Other -- 372.9 18.9 12.2
--------- --------- --------- ---------
Total 305.5 4,310.5 1,701.5 2,816.6
--------- --------- --------- ---------
Life:
Retirement Services 115.1 6.0 -- $ 5,666.7 18.1
Settlement Annuities -- -- -- 5,108.5 2.1
Group 9.1 72.5 2.4 -- 193.7
Individual 115.1 239.0 9.8 1,102.7 64.7
Other -- -- -- -- 11.6
--------- --------- --------- --------- ---------
Total 239.3 317.5 12.2 11,877.9 290.2
--------- --------- --------- --------- ---------
Real Estate -- -- -- -- --
Credit -- -- -- -- --
Asset Management -- -- -- -- --
Other and Eliminations -- -- -- -- --
--------- --------- --------- --------- ---------
Consolidated Totals $ 544.8 $ 4,628.0 $ 1,713.7 $11,877.9 $ 3,106.8
========= ========= ========= ========= =========
<CAPTION>
Year Ended December 31
----------------------------------------------------------------------
(In Millions) Other
Operating
Costs
Benefits, (Including
Claims, Amortization of Dividends to
Net Losses and Deferred Policy Policyholders Net
Investment Adjustment Acquisition and Goodwill Premiums
Segment Income Expenses Costs Amortization) Written
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Property and Casualty:
Personal Lines:
Personal Auto $ 113.9 $ 935.2 $ 124.7 $ 99.4 $ 1,292.2
Homeowners 44.7 351.2 106.5 84.9 533.0
Other 20.5 75.5 33.5 26.7 148.0
Commercial Lines:
American States Business Insurance 38.1 142.4 130.3 104.0 200.4
SAFECO Commercial 99.3 417.3 77.5 61.8 602.6
Surety 5.2 27.0 17.9 14.3 51.3
Other 5.3 11.4 5.5 4.4 0.7
--------- --------- --------- --------- ---------
Total 327.0 1,960.0 495.9 395.5 (1) $ 2,828.2
--------- --------- --------- --------- =========
Life:
Retirement Services 355.6 278.5 26.6 41.6
Settlement Annuities 420.1 368.9 -- 27.8
Group 2.7 127.9 3.8 52.5
Individual 63.1 80.9 6.6 33.7
Other 74.8 -- -- 9.8
--------- --------- --------- --------
Total 916.3 856.2 37.0 165.4
--------- --------- --------- --------
Real Estate -- -- -- 65.5
Credit -- -- -- 74.7
Asset Management -- -- -- 18.7
Other and Eliminations 1.4 -- -- 67.8
--------- --------- --------- --------
Consolidated Totals $ 1,244.7 $ 2,816.2 $ 532.9 $ 787.6
========= ========= ========= ========
</TABLE>
(1) Property and casualty other operating costs for 1997 include $60.0
million of nonrecurring acquisition charges related to SAFECO's
October 1, 1997 acquisition of American States.
<PAGE> 40
SAFECO CORPORATION AND SUBSIDIARIES F-10
Reinsurance Schedule IV
Year Ended December 31
- - -------------------------------------------------------------------------------
(In Millions)
<TABLE>
<CAPTION>
Percentage
Ceded to Assumed of Amount
Gross Other from Other Assumed to
Amount Companies Companies Net Amount Net
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Life Insurance In Force at Year End $48,021.0 $(6,168.8) $ 153.8 $ 42,006.0 0.4%
========= ========= =========== ===========
Premiums earned:
Life Insurance $ 215.2 $ (14.2) $ 0.7 $ 201.7 0.3%
Accident/Health Insurance 171.9 (12.7) -- 159.2 0.0%
Property/Casualty Insurance 4,539.4 (164.4) 7.9 4,382.9 0.2%
--------- --------- ----------- -----------
Total $ 4,926.5 $ (191.3) $ 8.6 $ 4,743.8 0.2%
========= ========= =========== ===========
1998
Life Insurance In Force at Year End $45,009.4 $(5,378.4) $ 192.2 $ 39,823.2 0.5%
========= ========= =========== ===========
Premiums earned:
Life Insurance $ 198.8 $ (13.1) $ 0.9 $ 186.6 0.5%
Accident/Health Insurance 174.8 (9.6) 1.6 166.8 1.0%
Property/Casualty Insurance 4,378.5 (188.5) 18.3 4,208.3 0.4%
--------- --------- ----------- -----------
Total $ 4,752.1 $ (211.2) $ 20.8 $ 4,561.7 0.5%
========= ========= =========== ===========
1997
Life Insurance In Force at Year End $43,499.7 $(3,788.5) $ 210.3 $ 39,921.5 0.5%
========= ========= =========== ===========
Premiums earned:
Life Insurance $ 146.9 $ (10.1) $ 0.2 $ 137.0 0.1%
Accident/Health Insurance 160.3 (9.5) 2.4 153.2 1.6%
Property/Casualty Insurance 2,945.3 (155.8) 27.1 2,816.6 1.0%
--------- --------- ----------- -----------
Total $ 3,252.5 $ (175.4) $ 29.7 $ 3,106.8 1.0%
========= ========= =========== ===========
</TABLE>
<PAGE> 41
<TABLE>
<CAPTION>
SAFECO CORPORATION F-11
Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations Schedule VI
- - -------------------------------------------------------------------------------------------------------------------
(In Millions)
Affiliation with Registrant : Property/Casualty Subsidiaries:
December 31 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Policy Acquisition Costs $ 325.4 $ 308.0 $ 305.5
Reserve for Losses and Adjustment Expenses $ 4,378.6 $ 4,219.9 $ 4,310.5
Discount Deducted from Loss Reserves $ -- $ -- $ --
Unearned Premiums $ 1,844.3 $ 1,742.2 $ 1,701.5
Year Ended December 31 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
Earned Premiums $ 4,382.9 $ 4,208.3 $ 2,816.6
Net Investment Income $ 462.3 $ 480.2 $ 327.0
Loss and Adjustment Expenses Incurred Related to:
Current Year $ 3,353.0 $ 3,163.2 $ 1,969.5
Prior Year $ 78.8 $ (100.0) $ 30.5 (1)
Amortization of Deferred Policy Acquisition Expenses $ 793.0 $ 744.9 $ 495.9
Paid Losses and Adjustment Expenses $ 3,329.0 $ 3,178.8 $ 2,078.4
Net Premiums Written $ 4,483.8 $ 4,256.6 $ 2,828.2
</TABLE>
(1) The 1997 increase in losses and adjustment expense incurred related to
prior years of $30.5 million includes a nonrecurring $40.0 million
reserve increase related to the American States acquisition.
<PAGE> 42
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index
- - --------------------------------------------------------------------------------
Exhibit 3.1* Bylaws (as last amended August 5, 1998), filed
as Exhibit 3 to SAFECO's Quarterly Report on Form
10-Q for the quarter ended June 30,1998 (File No.
1-6563), are incorporated herein by this reference.
Exhibit 3.2* Restated Articles of Incorporation (as amended
May 7,1997), filed as Exhibit 3.2 to SAFECO's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-6563), are incorporated
herein by this reference.
Exhibit 4.1 SAFECO agrees to furnish the Securities and
Exchange Commission, upon request, with copies of all
instruments defining rights of holders of long-term
debt of SAFECO and its consolidated subsidiaries.
Exhibit 4.2* Indenture, dated as of July 15, 1997, between
SAFECO and The Chase Manhattan Bank, as Trustee,
filed as Exhibit 4.2 to SAFECO's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File
No. 1-6563), is incorporated herein by this
reference.
Exhibit 4.3* Form of Certificate of Exchange Junior
Subordinated Debenture filed as Exhibit 4.2 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17,1997, is incorporated
herein by this reference.
Exhibit 4.4* Certificate of Trust of SAFECO Capital Trust I
dated June 18, 1997, filed as Exhibit 4.4 to SAFECO's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 (File No. 1-6563), is incorporated
herein by this reference.
Exhibit 4.5* Amended and Restated Declaration of Trust of
SAFECO Capital Trust I dated as of July 15, 1997,
filed as Exhibit 4.5 to SAFECO's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997 (File
No. 1-6563), is incorporated herein by this
reference.
Exhibit 4.6* Form of Exchange Capital Security Certificate
for SAFECO Capital Trust I filed as Exhibit 4.5 to
SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is incorporated
herein by this reference.
Exhibit 4.7* Form of Exchange Guarantee of SAFECO relating to
the Exchange Capital Securities, filed as Exhibit 4.6
to SAFECO's Registration Statement on Form S-4 (No.
333-38205) dated October 17, 1997, is incorporated
herein by this reference.
Exhibit 4.8 Indenture, dated as of February 15, 2000, among
SAFECO and The Chase Manhattan Bank, N.A., as
Trustee.
Exhibit 4.9 Form of 7.875% Notes due 2003.
Exhibit 10.1* Purchase and Sale Agreement by and between Washington
Square, Inc., Kitsap Associates Limited Partnership,
Winmar Cascade, Inc., Winmar Oregon, Inc., Winmar of
Kitsap, Inc., SCIT, Inc., Town Center Associates, and
Winmar Company, Inc., as sellers; and The Macerich
Partnership, L.P., and Ontario Teachers' Pension Plan
Board, as purchaser, dated December 11, 1998, filed
as Exhibit 10.1 to SAFECO's Annual Report on Form
10-K for the fiscal year ended December 31, 1998
(File No. 1-6563), is incorporated herein by this
reference. SAFECO agrees to furnish the Securities
and Exchange Commission, upon request, with copies of
all omitted schedules to the foregoing Purchase and
Sale Agreement.
Exhibit 10.2* Five-Year Credit Agreement dated as of September 24,
1997, among SAFECO; Bank of America National Trust
and Savings Association, as Agent; Mellon Bank, N.A.,
as Documentation Agent; The Chase Manhattan Bank, as
Syndication Agent; and the various co-agents, lead
managers, and financial institutions identified in
said Credit Agreement as a party thereto, filed as
Exhibit 10.1 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (File No.
1-6563), is incorporated herein by this reference.
Exhibit 10.3* SAFECO Corporation Deferred Compensation Plan
for Directors, As Amended and Restated on November 4,
1998, filed as Exhibit 10.2 to SAFECO's Annual Report
on Form 10-K for the fiscal year ended December 31,
1998 (File No. 1-6563), is incorporated herein by the
reference.
<PAGE> 43
SAFECO CORPORATION AND SUBSIDIARIES F-12
Exhibit Index Continued
- - --------------------------------------------------------------------------------
Exhibit 10.4* SAFECO Deferred Compensation Plan for
Executives, As Amended and Restated on November 4,
1998, filed as Exhibit 10.3 to SAFECO's Annual Report
on Form 10-K for the fiscal year ended December 31,
1998 (File No. 1-6563), is incorporated herein by the
reference.
Exhibit 10.5* The following documents are incorporated herein by
this reference: Form of Executive Severance
Agreements between SAFECO and each of Rod A. Pierson,
James W. Ruddy, and W. Randall Stoddard, in each case
dated March 11, 1999, and between SAFECO and each of
Boh A. Dickey and Roger H. Eigsti, in both cases
dated May 5, 1999, filed as Exhibit 10.1 to SAFECO's
Quarterly Report on Form 10-Q for quarter ended March
31, 1999 (File No. 1-6563); and Executive Severance
Agreement between SAFECO, SAFECO Life Insurance
Company and Randall H. Talbot dated March 11, 1999,
filed as Exhibit 10.2 to SAFECO's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1999 (File
No. 1-6563).
Exhibit 10.6* SAFECO Long-Term Incentive Plan of 1997 as
Amended and Restated May 5, 1999, filed as Exhibit
10.3 to SAFECO's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1999 (File No. 1-6563),
is incorporated herein by this reference.
Exhibit 10.7* Form of Stock Option Contract granted under the
SAFECO Long-Term Incentive Plan of 1997, filed as
Exhibit 10.6 to SAFECO's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 (File No.
1-6563), is incorporated herein by this reference.
Exhibit 10.8* 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, filed as Exhibit 10.4 to
SAFECO's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 (File No. 1-6563), is
incorporated herein by this reference.
Exhibit 10.9* Form of Restricted Stock Rights Award Agreement
granted under the SAFECO Long-Term Incentive Plan of
1997, filed as Exhibit 10.7 to SAFECO's Annual Report
on Form 10-K for the fiscal year ended December 31,
1997 (File No. 1-6563), is incorporated herein by
this reference.
Exhibit 10.10* Form of Performance Stock Rights Award
Agreement granted under the SAFECO Long-Term
Incentive Plan of 1997, filed as Exhibit 10.8 to
SAFECO's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997 (File No. 1-6563), is
incorporated herein by this reference.
Exhibit 10.11* SAFECO Incentive Plan of 1987 contained in the
Prospectus dated November 10, 1989, as amended
January 31, 1990, filed as Exhibit 10 to SAFECO's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1989 (File No. 1-6563), and the
Supplement to such Prospectus dated November 8, 1990,
filed as Exhibit 10 to SAFECO's Annual Report on Form
10-K for the fiscal year ended December 31, 1990
(File No. 1-6563), are incorporated herein by this
reference.
F-13 Exhibit 11 Computation of Income Per Share
F-14 Exhibit 12 Computation of Ratios
F-15 Exhibit 21 Subsidiaries of the Registrant
Exhibit 13* 1999 Annual Report to Shareholders
Exhibit 27 Financial Data Schedule (This exhibit is included
only in the electronic EDGAR filing version of this
10-K. The Financial Data Schedule is not a separate
financial statement but a schedule that summarizes
certain standard financial information extracted
directly from the financial statements in this
filing.)
* Copies of these exhibits are available without charge by making a written
request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza, Seattle, Washington 98185
<PAGE> 1
EXHIBIT 4.8
SAFECO CORPORATION,
ISSUER
TO
THE CHASE MANHATTAN BANK,
TRUSTEE
---------------
INDENTURE
---------------
DATED AS OF FEBRUARY 15, 2000
<PAGE> 2
Reconciliation and tie between
Trust Indenture Act of 1939 (the "Trust Indenture Act")
and Indenture
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
<S> <C>
Section 310(a)(1)................................................................................................6.8
(a)(2)..........................................................................................................6.8
(b).............................................................................................................6.9
Section 312(a)...................................................................................................7.1
(b).............................................................................................................7.2
(c).............................................................................................................7.2
Section 313(a)...................................................................................................7.3
(b)(2)..........................................................................................................7.3
(c).............................................................................................................7.3
(d).............................................................................................................7.3
Section 314(a)...................................................................................................7.4
(c)(1)..........................................................................................................1.2
(c)(2)..........................................................................................................1.2
(e).............................................................................................................1.2
(f).............................................................................................................1.2
Section 316(a) (last sentence)...................................................................................1.1
(a)(1)(A).................................................................................................5.2, 5.12
(a)(1)(B)......................................................................................................5.13
(b).............................................................................................................5.8
Section 317(a)(1)................................................................................................5.3
(a)(2)..........................................................................................................5.4
(b)............................................................................................................10.3
Section 318(a)..................................................................................................10.8
Note: This reconciliation and tie shall not, for any purpose, be deemed to be part of the Indenture.
</TABLE>
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION................................................1
SECTION 1.1. DEFINITIONS......................................................................................1
SECTION 1.2. COMPLIANCE CERTIFICATES AND OPINIONS............................................................11
SECTION 1.3. FORM OF DOCUMENTS DELIVERED TO TRUSTEE..........................................................11
SECTION 1.4. ACTS OF HOLDERS.................................................................................12
SECTION 1.5. NOTICES, ETC. TO THE TRUSTEE AND THE COMPANY....................................................14
SECTION 1.6. NOTICE TO HOLDERS OF SECURITIES; WAIVER.........................................................14
SECTION 1.7. LANGUAGE OF NOTICES.............................................................................15
SECTION 1.8. CONFLICT WITH TRUST INDENTURE ACT...............................................................16
SECTION 1.9. EFFECT OF HEADINGS AND TABLE OF CONTENTS........................................................16
SECTION 1.10. SUCCESSORS AND ASSIGNS.........................................................................16
SECTION 1.11. SEPARABILITY CLAUSE............................................................................16
SECTION 1.12. BENEFITS OF INDENTURE..........................................................................16
SECTION 1.13. GOVERNING LAW..................................................................................16
SECTION 1.14. LEGAL HOLIDAYS.................................................................................16
SECTION 1.15. COUNTERPARTS...................................................................................17
SECTION 1.16. JUDGMENT CURRENCY..............................................................................17
SECTION 1.17. NO SECURITY INTEREST CREATED...................................................................17
SECTION 1.18. LIMITATION ON INDIVIDUAL LIABILITY.............................................................17
ARTICLE 2 SECURITIES FORMS......................................................................................18
SECTION 2.1. FORMS GENERALLY.................................................................................18
SECTION 2.2. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.................................................18
SECTION 2.3. SECURITIES IN GLOBAL FORM.......................................................................19
ARTICLE 3 THE SECURITIES........................................................................................20
SECTION 3.1. AMOUNT UNLIMITED; ISSUABLE IN SERIES............................................................20
SECTION 3.2. CURRENCY; DENOMINATIONS.........................................................................24
SECTION 3.3. EXECUTION, AUTHENTICATION, DELIVERY AND DATING..................................................24
SECTION 3.4. TEMPORARY SECURITIES............................................................................26
SECTION 3.5. REGISTRATION, TRANSFER AND EXCHANGE.............................................................27
SECTION 3.6. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES................................................30
SECTION 3.7. PAYMENT OF INTEREST AND CERTAIN ADDITIONAL AMOUNTS; RIGHTS TO INTEREST AND CERTAIN ADDITIONAL
AMOUNTS PRESERVED...........................................................................31
SECTION 3.8. PERSONS DEEMED OWNERS...........................................................................33
SECTION 3.9. CANCELLATION....................................................................................34
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SECTION 3.10. COMPUTATION OF INTEREST........................................................................34
ARTICLE 4 SATISFACTION AND DISCHARGE OF INDENTURE...............................................................34
SECTION 4.1. SATISFACTION AND DISCHARGE......................................................................34
SECTION 4.2. DEFEASANCE AND COVENANT DEFEASANCE..............................................................36
SECTION 4.3. APPLICATION OF TRUST MONEY......................................................................40
ARTICLE 5 REMEDIES..............................................................................................40
SECTION 5.1. EVENTS OF DEFAULT...............................................................................40
SECTION 5.2. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT..............................................42
SECTION 5.3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE.................................43
SECTION 5.4. TRUSTEE MAY FILE PROOFS OF CLAIM................................................................44
SECTION 5.5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES OR COUPONS..........................45
SECTION 5.6. APPLICATION OF MONEY COLLECTED..................................................................45
SECTION 5.7. LIMITATIONS ON SUITS............................................................................46
SECTION 5.8. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND ANY PREMIUM, INTEREST AND ADDITIONAL
AMOUNTS.....................................................................................47
SECTION 5.9. RESTORATION OF RIGHTS AND REMEDIES..............................................................47
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.................................................................47
SECTION 5.11. DELAY OR OMISSION NOT WAIVER...................................................................47
SECTION 5.12. CONTROL BY HOLDERS OF SECURITIES...............................................................48
SECTION 5.13. WAIVER OF PAST DEFAULTS........................................................................48
SECTION 5.14. WAIVER OF USURY, STAY OR EXTENSION LAWS........................................................48
SECTION 5.15. UNDERTAKING FOR COSTS..........................................................................49
ARTICLE 6 THE TRUSTEE...........................................................................................49
SECTION 6.1. CERTAIN DUTIES AND RESPONSIBILITIES.............................................................49
SECTION 6.2. RIGHTS OF TRUSTEE...............................................................................51
SECTION 6.3. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES..........................................53
SECTION 6.4. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES..........................................53
SECTION 6.5. MAY HOLD SECURITIES.............................................................................53
SECTION 6.6. MONEY HELD IN TRUST.............................................................................53
SECTION 6.7. COMPENSATION AND REIMBURSEMENT..................................................................54
SECTION 6.8. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.........................................................55
SECTION 6.9. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR...............................................55
SECTION 6.10. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.........................................................56
SECTION 6.11. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS....................................58
SECTION 6.12. APPOINTMENT OF AUTHENTICATING AGENT............................................................58
ARTICLE 7 HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY......................................................60
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SECTION 7.1. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.......................................60
SECTION 7.2. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS..........................................60
SECTION 7.3. REPORTS BY TRUSTEE..............................................................................61
SECTION 7.4. REPORTS BY COMPANY..............................................................................61
ARTICLE 8 CONSOLIDATION, MERGER AND SALES.......................................................................62
SECTION 8.1. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS............................................62
SECTION 8.2. SUCCESSOR PERSON SUBSTITUTED FOR COMPANY........................................................63
ARTICLE 9 SUPPLEMENTAL INDENTURES...............................................................................63
SECTION 9.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS..............................................63
SECTION 9.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.................................................64
SECTION 9.3. EXECUTION OF SUPPLEMENTAL INDENTURES............................................................66
SECTION 9.4. EFFECT OF SUPPLEMENTAL INDENTURES...............................................................66
SECTION 9.5. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES..............................................66
SECTION 9.6. CONFORMITY WITH TRUST INDENTURE ACT.............................................................66
SECTION 9.7. NOTICE OF SUPPLEMENTAL INDENTURE................................................................66
ARTICLE 10 COVENANTS............................................................................................67
SECTION 10.1. PAYMENT OF PRINCIPAL, ANY PREMIUM, INTEREST AND ADDITIONAL AMOUNTS.............................67
SECTION 10.2. MAINTENANCE OF OFFICE OR AGENCY................................................................67
SECTION 10.3. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN TRUST..............................................68
SECTION 10.4. ADDITIONAL AMOUNTS.............................................................................70
SECTION 10.5. LIMITATION ON MORTGAGES AND LIENS..............................................................70
SECTION 10.6. LIMITATION UPON SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES..............................72
SECTION 10.7. CORPORATE EXISTENCE............................................................................72
SECTION 10.8. WAIVER OF CERTAIN COVENANTS....................................................................73
SECTION 10.9. COMPANY STATEMENT AS TO COMPLIANCE; NOTICE OF CERTAIN DEFAULTS.................................73
ARTICLE 11 REDEMPTION OF SECURITIES.............................................................................74
SECTION 11.1. APPLICABILITY OF ARTICLE.......................................................................74
SECTION 11.2. ELECTION TO REDEEM; NOTICE TO TRUSTEE..........................................................74
SECTION 11.3. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED..............................................74
SECTION 11.4. NOTICE OF REDEMPTION...........................................................................75
SECTION 11.5. DEPOSIT OF REDEMPTION PRICE....................................................................76
SECTION 11.6. SECURITIES PAYABLE ON REDEMPTION DATE..........................................................76
SECTION 11.7. SECURITIES REDEEMED IN PART....................................................................77
ARTICLE 12 SINKING FUNDS........................................................................................78
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SECTION 12.1. APPLICABILITY OF ARTICLE.......................................................................78
SECTION 12.2. SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES..........................................78
SECTION 12.3. REDEMPTION OF SECURITIES FOR SINKING FUND......................................................79
ARTICLE 13 REPAYMENT AT THE OPTION OF HOLDERS...................................................................79
SECTION 13.1. APPLICABILITY OF ARTICLE.......................................................................79
ARTICLE 14 SECURITIES IN FOREIGN CURRENCIES.....................................................................80
SECTION 14.1. APPLICABILITY OF ARTICLE.......................................................................80
ARTICLE 15 MEETINGS OF HOLDERS OF SECURITIES....................................................................80
SECTION 15.1. PURPOSES FOR WHICH MEETINGS MAY BE CALLED......................................................80
SECTION 15.2. CALL, NOTICE AND PLACE OF MEETINGS.............................................................80
SECTION 15.3. PERSONS ENTITLED TO VOTE AT MEETINGS...........................................................81
SECTION 15.4. QUORUM; ACTION.................................................................................81
SECTION 15.5. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT OF MEETINGS............................82
SECTION 15.6. COUNTING VOTES AND RECORDING ACTION OF MEETINGS................................................83
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INDENTURE, dated as of February 15, 2000 (the "Indenture"), among
SAFECO CORPORATION, a corporation duly organized and existing under the laws of
the State of Washington (hereinafter called the "Company"), having its principal
executive office located at SAFECO Plaza, 4333 Brooklyn Avenue, N.E., Seattle,
Washington 98185, and THE CHASE MANHATTAN BANK, a New York banking corporation,
as trustee (hereinafter called the "Trustee"), having its Corporate Trust Office
located at 270 Park Avenue, New York, New York.
RECITALS
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured,
unsubordinated debentures, notes or other evidences of indebtedness (hereinafter
called the "Securities"), unlimited as to principal amount, to bear such rates
of interest, to mature at such time or times, to be issued in one or more series
and to have such other provisions as shall be fixed as hereinafter provided.
The Company has duly authorized the execution and delivery of this
Indenture. All things necessary to make this Indenture a valid agreement of the
Company, in accordance with its terms, have been done.
This Indenture is subject to the provisions of the Trust Indenture Act
of 1939, as amended, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder that are required to be part of this
Indenture and, to the extent applicable, shall be governed by such provisions.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Securities by the Holders (as herein defined) thereof, it is mutually covenanted
and agreed, for the equal and proportionate benefit of all Holders of the
Securities or of any series thereof and any Coupons (as herein defined) as
follows:
ARTICLE 1
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION 1.1. DEFINITIONS.
Except as otherwise expressly provided in or pursuant to this Indenture
or unless the context otherwise requires, for all purposes of this Indenture:
(1) the terms defined in this Article have the meanings
assigned to them in this Article, and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
<PAGE> 8
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles in the United States of America and, except as
otherwise herein expressly provided, the terms "generally accepted
accounting principles" or "GAAP" with respect to any computation
required or permitted hereunder shall mean such accounting principles
as are generally accepted in the United States of America at the date
or time of such computation;
(4) the words "herein," "hereof," "hereto" and "hereunder" and
other words of similar import refer to this Indenture as a whole and
not to any particular Article, Section or other subdivision; and
(5) the word "or" is always used inclusively (for example, the
phrase "A or B" means "A or B or both," not "either A or B but not
both").
Certain terms used principally in certain Articles hereof are defined
in those Articles.
"Act," when used with respect to any Holders, has the meaning specified
in Section 1.4.
"Additional Amounts" means any additional amounts which are required
hereby or by any Security, under circumstances specified herein or therein, to
be paid by the Company in respect of certain taxes, assessments or other
governmental charges imposed on Holders specified therein and which are owing to
such Holders.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have the meanings correlative to
the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 6.12 to act on behalf of the Trustee to authenticate
Securities of one or more series.
"Authorized Newspaper" means a newspaper, in an official language of
the place of publication or in the English language, customarily published on
each day that is a Business Day in the place of publication, whether or not
published on days that are Legal Holidays in the place of publication, and of
general circulation in each place in connection with which the term is used or
in the financial community of each such place. Where successive publications are
required to be made in Authorized Newspapers, the successive publications may be
made in the same or in different newspapers in the same city meeting the
foregoing requirements and in each case on any day that is a Business Day in the
place of publication.
"Authorized Officer" means, when used with respect to the Company, the
Chairman of the Board of Directors, the President, any Vice President, the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary, of
the Company.
2
<PAGE> 9
"Bearer Security" means any Security in the form established pursuant
to Section 2.1 which is payable to bearer.
"Board of Directors" means the board of directors of the Company or any
committee of that board duly authorized to act generally or in any particular
respect for the Company hereunder.
"Board Resolution" means a copy of one or more resolutions, certified
by the Secretary or an Assistant Secretary of the Company to have been duly
adopted by the Board of Directors and to be in full force and effect on the date
of such certification, delivered to the Trustee.
"Business Day," with respect to any Place of Payment or other location,
means, unless otherwise specified with respect to any Securities pursuant to
Section 3.1, any day other than a Saturday, Sunday or other day on which banking
institutions in such Place of Payment or other location are authorized or
obligated by law, regulation or executive order to close.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligation" means an obligation under a lease that
is required to be capitalized for financial reporting purposes in accordance
with generally accepted accounting principles, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with such principles.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Securities Exchange Act of 1934, as
amended, or, if at any time after the execution of this Indenture such
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties at such time.
"Common Stock" in respect of any Corporation means Capital Stock of any
class or classes (however designated) which has no preference as to the payment
of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Corporation, and which is not
subject to redemption by such Corporation.
"Company" means the Person named as the "Company" in the first
paragraph of this instrument until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person, and any other obligor upon the
Securities.
"Company Request" and "Company Order" mean, respectively, a written
request or order, as the case may be, signed in the name of the Company by an
Authorized Officer, and delivered to the Trustee.
3
<PAGE> 10
"Conversion Event" means the cessation of use of (i) a Foreign
Currency both by the government of the country or the confederation which issued
such Foreign Currency and for the settlement of transactions by a central bank
or other public institutions of or within the international banking community or
(ii) any currency unit or composite currency for the purposes for which it was
established.
"Corporate Trust Office" means the principal corporate trust office of
the Trustee at which at any particular time its corporate trust business shall
be administered, which office at the date of original execution of this
Indenture is located at 270 Park Avenue, New York, New York.
"Corporation" includes corporations and limited liability companies
and, except for purposes of Article 8, associations, companies and business
trusts.
"Coupon" means any interest coupon appertaining to a Bearer Security.
"Currency," with respect to any payment, deposit or other transfer in
respect of the principal of or any premium or interest on or any Additional
Amounts with respect to any Security, means Dollars or the Foreign Currency, as
the case may be, in which such payment, deposit or other transfer is required to
be made by or pursuant to the terms hereof or such Security and, with respect to
any other payment, deposit or transfer pursuant to or contemplated by the terms
hereof or such Security, means Dollars.
"CUSIP number" means the alphanumeric designation assigned to a
Security by Standard & Poor's Ratings Service, CUSIP Service Bureau.
"Defaulted Interest" has the meaning specified in Section 3.7.
"Dollars" or "$" means a dollar or other equivalent unit of legal
tender for payment of public or private debts in the United States of America.
"Event of Default" has the meaning specified in Section 5.1.
"Foreign Currency" means any currency, currency unit or composite
currency, including, without limitation, the euro, issued by the government of
one or more countries other than the United States of America or by any
recognized confederation or association of such governments.
"Government Obligations" means securities which are (i) direct
obligations of the United States of America or the other government or
governments which issued the Foreign Currency in which the principal of or any
premium or interest on such Security or any Additional Amounts in respect
thereof shall be payable, in each case where the payment or payments thereunder
are supported by the full faith and credit of such government or governments or
(ii) obligations of a Person controlled or supervised by and acting as an agency
or instrumentality of the United States of America or such other government or
governments, in each case where the timely payment or payments thereunder are
unconditionally guaranteed as a full faith and credit
4
<PAGE> 11
obligation by the United States of America or such other government or
governments, and which, in the case of (i) or (ii), are not callable or
redeemable at the option of the issuer or issuers thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian with
respect to any such Government Obligation or a specific payment of interest on
or principal of or other amount with respect to any such Government Obligation
held by such custodian for the account of the holder of a depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of or other
amount with respect to the Government Obligation evidenced by such depository
receipt.
"Holder," in the case of any Registered Security, means the Person in
whose name such Security is registered in the Security Register and, in the case
of any Bearer Security, means the bearer thereof and, in the case of any Coupon,
means the bearer thereof.
"Indebtedness" means, with respect to any Person, (i) the principal of
and any premium and interest on (a) indebtedness of such Person for money
borrowed and (b) indebtedness evidenced by notes, debentures, bonds or other
similar instruments for the payment of which such Person is responsible or
liable; (ii) all Capitalized Lease Obligations of such Person; (iii) all
obligations of such Person issued or assumed as the deferred purchase price of
property, all conditional sale obligations and all obligations under any title
retention agreement (but excluding trade accounts payable arising in the
ordinary course of business); (iv) all obligations of such Person for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the extent
drawn upon, such drawing is reimbursed no later than the third Business Day
following receipt by such Person of a demand for reimbursement following payment
on the letter of credit); (v) all obligations of the type referred to in clauses
(i) through (iv) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable as
obligor, guarantor or otherwise; and (vi) all obligations of the type referred
to in clauses (i) through (v) of other Persons secured by any Lien on any
property or asset of such Person (whether or not such obligation is assumed by
such Person), the amount of such obligation being deemed to be the lesser of the
value of such property or assets or the amount of the obligation so secured; and
(vii) any amendments, modifications, refundings, renewals or extensions of any
indebtedness or obligation described as Indebtedness in clauses (i) through (vi)
above.
"Indenture" means this instrument as it may from time to time be
supplemented or amended by one or more indentures supplemental hereto entered
into pursuant to the applicable provisions hereof and, with respect to any
Security, by the terms and provisions of such Security and any Coupon
appertaining thereto established pursuant to Section 3.1 (as such terms and
provisions may be amended pursuant to the applicable provisions hereof).
5
<PAGE> 12
"Independent Public Accountants" means accountants or a firm of
accountants that, with respect to the Company and any other obligor under the
Securities or the Coupons, are independent public accountants within the meaning
of the Securities Act of 1933, as amended, and the rules and regulations
promulgated by the Commission thereunder, who may be the independent public
accountants regularly retained by the Company or who may be other independent
public accountants. Such accountants or firm shall be entitled to rely upon any
Opinion of Counsel as to the interpretation of any legal matters relating to
this Indenture or certificates required to be provided hereunder.
"Indexed Security" means a Security the terms of which provide that the
principal amount thereof payable at Stated Maturity may be more or less than the
principal face amount thereof at original issuance.
"Interest," with respect to any Original Issue Discount Security which
by its terms bears interest only after Maturity, means interest payable after
Maturity and, when used with respect to a Security which provides for the
payment of Additional Amounts pursuant to Section 10.4, includes such Additional
Amounts.
"Interest Payment Date," with respect to any Security, means the Stated
Maturity of an installment of interest on such Security.
"Judgment Currency" has the meaning specified in Section 1.16.
"Legal Holidays" has the meaning specified in Section 1.14.
"Lien" has the meaning specified in Section 10.5.
"Maturity," with respect to any Security, means the date on which the
principal of such Security or an installment of principal becomes due and
payable as provided in or pursuant to this Indenture, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption or repurchase,
notice of option to elect repayment or otherwise, and includes the Redemption
Date.
"New York Banking Day" has the meaning specified in Section 1.16.
"Office" or "Agency," with respect to any Securities, means an office
or agency of the Company maintained or designated in a Place of Payment for such
Securities pursuant to Section 10.2 or any other office or agency of the Company
maintained or designated for such Securities pursuant to Section 10.2 or, to the
extent designated or required by Section 10.2 in lieu of such office or agency,
the Corporate Trust Office of the Trustee.
"Officer's Certificate" means a certificate signed by an Authorized
Officer that complies with the requirements of Section 314(e) of the Trust
Indenture Act and is delivered to the Trustee.
6
<PAGE> 13
"Opinion of Counsel" means a written opinion of counsel, who may be an
employee of or counsel for the Company, or other counsel who shall be reasonably
acceptable to the Trustee, that, if required by the Trust Indenture Act,
complies with the requirements of Section 314(e) of the Trust Indenture Act.
"Original Issue Discount Security" means a Security issued pursuant to
this Indenture which provides for declaration of an amount less than the
principal face amount thereof to be due and payable upon acceleration pursuant
to Section 5.2.
"Outstanding," when used with respect to any Securities, means, as of
the date of determination, all such Securities theretofore authenticated and
delivered under this Indenture, except:
(a) any such Security theretofore cancelled by the
Trustee or the Security Registrar or delivered to the
Trustee or the Security Registrar for cancellation;
(b) any such Security for whose payment at the Maturity
thereof money in the necessary amount has been
theretofore deposited pursuant hereto (other than
pursuant to Section 4.2) with the Trustee or any
Paying Agent (other than the Company) in trust or set
aside and segregated in trust by the Company (if the
Company shall act as its own Paying Agent) for the
Holders of such Securities and any Coupons
appertaining thereto, provided that, if such
Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this
Indenture or provision therefor satisfactory to the
Trustee has been made;
(c) any such Security with respect to which the Company
has effected defeasance pursuant to the terms hereof,
except to the extent provided in Section 4.2;
(d) any such Security which has been paid pursuant to
Section 3.6 or in exchange for or in lieu of which
other Securities have been authenticated and
delivered pursuant to this Indenture, unless there
shall have been presented to the Trustee proof
satisfactory to it that such Security is held by a
bona fide purchaser in whose hands such Security is a
valid obligation of the Company; and
(e) any such Security converted or exchanged as
contemplated by this Indenture into securities of the
Company or another issuer, if the terms of such
Security provide for such conversion or exchange
pursuant to Section 3.1;
provided, however, that in determining whether the Holders of the requisite
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent
7
<PAGE> 14
or waiver hereunder or are present at a meeting of Holders of Securities for
quorum purposes, (i) the principal amount of an Original Issue Discount Security
that may be counted in making such determination and that shall be deemed to be
Outstanding for such purposes shall be equal to the amount of the principal
thereof that pursuant to the terms of such Original Issue Discount Security
would be declared (or shall have been declared to be) due and payable upon a
declaration of acceleration thereof pursuant to Section 5.2 at the time of such
determination, and (ii) the principal amount of any Indexed Security that may be
counted in making such determination and that shall be deemed Outstanding for
such purposes shall be equal to the principal face amount of such Indexed
Security at original issuance, unless otherwise provided in or pursuant to this
Indenture, and (iii) the principal amount of a Security denominated in a Foreign
Currency shall be the Dollar equivalent, determined on the date of original
issuance of such Security, of the principal amount (or, in the case of an
Original Issue Discount Security, the Dollar equivalent on the date of original
issuance of such Security of the amount determined as provided in (i) above) of
such Security, and (iv) Securities owned by the Company or any other obligor
upon the Securities or any Affiliate of the Company or such other obligor shall
be disregarded and deemed not to be Outstanding, except that, in determining
whether the Trustee shall be protected in making any such determination or
relying upon any such request, demand, authorization, direction, notice, consent
or waiver, only Securities which a Responsible Officer of the Trustee actually
knows to be so owned shall be so disregarded. Securities so owned which shall
have been pledged in good faith may be regarded as Outstanding if the pledgee
establishes to the satisfaction of the Trustee (A) the pledgee's right so to act
with respect to such Securities and (B) that the pledgee is not the Company or
any other obligor upon the Securities or any Coupons appertaining thereto or an
Affiliate of the Company or such other obligor.
"Paying Agent" means any Person authorized by the Company to pay the
principal of, or any premium or interest on, or any Additional Amounts with
respect to, any Security or any Coupon on behalf of the Company.
"Person" means any individual, Corporation, partnership, joint venture,
joint-stock company, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Place of Payment," with respect to any Security, means the place or
places where the principal of, or any premium or interest on, or any Additional
Amounts with respect to such Security are payable as provided in or pursuant to
this Indenture or such Security.
"Predecessor Security" of any particular Security means every previous
Security evidencing all or a portion of the same Indebtedness as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 3.6 in exchange for or in
lieu of a lost, destroyed, mutilated or stolen Security or any Security to which
a mutilated, destroyed, lost or stolen Coupon appertains shall be deemed to
evidence the same Indebtedness as the lost, destroyed, mutilated or stolen
Security or the Security to which a mutilated, destroyed, lost or stolen Coupon
appertains.
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"Preferred Stock" in respect of any Corporation means Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends, or as to the distribution of assets upon any voluntary or
involuntary liquidation or dissolution of such Corporation, over shares of
Capital Stock of any other class of such Corporation.
"Redemption Date," with respect to any Security or portion thereof to
be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture or such Security.
"Redemption Price," with respect to any Security or portion thereof to
be redeemed, means the price at which it is to be redeemed as determined by or
pursuant to this Indenture or such Security.
"Registered Security" means any Security established pursuant to
Section 2.1 which is registered in a Security Register.
"Regular Record Date" for the interest payable on any Registered
Security on any Interest Payment Date therefor means the date, if any, specified
in or pursuant to this Indenture or such Security as the "Regular Record Date".
"Required Currency" has the meaning specified in Section 1.16.
"Responsible Officer" means any vice president, any assistant vice
president, the secretary, any assistant secretary, the treasurer, any assistant
treasurer, or any trust officer or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above designated
officers and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his or her
knowledge of and familiarity with the particular subject.
"Restricted Subsidiary" has the meaning specified in Section 10.6.
"Security" or "Securities" means any note or notes, bond or bonds,
debenture or debentures, or any other evidences of Indebtedness, as the case may
be, authenticated and delivered under this Indenture; provided, however, that,
if at any time there is more than one Person acting as Trustee under this
Indenture, "Securities," with respect to any such Person, shall mean Securities
authenticated and delivered under this Indenture, exclusive, however, of
Securities of any series as to which such Person is not Trustee.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 3.5.
"Special Record Date" for the payment of any Defaulted Interest on any
Registered Security means a date fixed by the Company pursuant to Section 3.7.
"Stated Maturity," with respect to any Security or any installment of
principal thereof or interest thereon, or any Additional Amounts with respect
thereto, means the date established by
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or pursuant to this Indenture or such Security as the fixed date on which the
principal of such Security or such installment of principal or interest is, or
such Additional Amounts are, due and payable.
"Subsidiary" means, in respect of any Person, any Corporation, limited
or general partnership or other business entity of which at the time of
determination more than 50% of the voting power of the shares of its Capital
Stock or other interests (including partnership interests) entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is owned or controlled, directly or
indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of
such Person or (iii) one or more Subsidiaries of such Person.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as
amended, and any reference herein to the Trust Indenture Act or a particular
provision thereof shall mean such Act or provision, as the case may be, as
amended or replaced from time to time or as supplemented from time to time by
rules or regulations adopted by the Commission under or in furtherance of the
purposes of such Act or provision, as the case may be.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this instrument until a successor Trustee shall have become such
with respect to one or more series of Securities pursuant to the applicable
provisions of this Indenture, and thereafter "Trustee" shall mean each Person
who is then a Trustee hereunder; provided, however, that if at any time there is
more than one such Person, "Trustee" shall mean each such Person and as used
with respect to the Securities of any series shall mean the Trustee with respect
to the Securities of such series.
"United States," except as otherwise provided in or pursuant to this
Indenture or any Security, means the United States of America (including the
states thereof and the District of Columbia), its territories and possessions
and other areas subject to its jurisdiction.
"United States Alien," except as otherwise provided in or pursuant to
this Indenture or any Security, means any Person who, for United States Federal
income tax purposes, is a foreign corporation, a non-resident alien individual,
a non-resident alien fiduciary of a foreign estate or trust, or a foreign
partnership one or more of the members of which is, for United States Federal
income tax purposes, a foreign corporation, a non-resident alien individual or a
non-resident alien fiduciary of a foreign estate or trust.
"U.S. Depository" or "Depository" means, with respect to any Security
issuable or issued in the form of one or more global Securities, the Person
designated as U.S. Depository or Depository by the Company in or pursuant to
this Indenture, which Person must be, to the extent required by applicable law
or regulation, a clearing agency registered under the Securities Exchange Act of
1934, as amended, and, if so provided with respect to any Security, any
successor to such Person. If at any time there is more than one such Person,
"U.S. Depository" or "Depository" shall mean, with respect to any Securities,
the qualifying entity which has been appointed with respect to such Securities.
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"Vice President," when used with respect to the Company or the Trustee,
means any vice president, whether or not designated by a number or a word or
words added before or after the title "Vice President".
SECTION 1.2. COMPLIANCE CERTIFICATES AND OPINIONS.
Except as otherwise expressly provided in this Indenture, upon any
application or request by the Company to the Trustee to take any action under
any provision of this Indenture, the Company shall furnish to the Trustee an
Officer's Certificate stating that all conditions precedent, if any, provided
for in this Indenture relating to the proposed action have been complied with
and an Opinion of Counsel stating that, in the opinion of such counsel, all such
conditions precedent, if any, have been complied with, except that in the case
of any such application or request as to which the furnishing of such documents
or any of them is specifically required by any provision of this Indenture
relating to such particular application or request, no additional certificate or
opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:
(1) a statement that the individual signing such certificate
or opinion has read such condition or covenant and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such condition
or covenant has been complied with; and
(4) a statement as to whether, in the opinion of such
individual, such condition or covenant has been complied with.
SECTION 1.3. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon an Opinion of Counsel, provided
that such officer, after reasonable inquiry, has no reason to believe and does
not believe that the Opinion of Counsel with respect to
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the matters upon which his certificate or opinion is based is erroneous. Any
such Opinion of Counsel may be based, insofar as it relates to factual matters,
upon a certificate or opinion of, or representations by, an officer or officers
of the Company stating that the information with respect to such factual matters
is in the possession of the Company, provided that such counsel, after
reasonable inquiry, has no reason to believe and does not believe that the
certificate or opinion or representations with respect to such matters are
erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture or any Security, they may, but need not, be
consolidated and form one instrument.
SECTION 1.4. ACTS OF HOLDERS.
(1) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by or pursuant to this
Indenture to be given or taken by Holders may be embodied in and
evidenced by one or more instruments of substantially similar tenor
signed by such Holders in person or by an agent duly appointed in
writing. If, but only if, Securities of a series are issuable as Bearer
Securities, any request, demand, authorization, direction, notice,
consent, waiver or other action provided in or pursuant to this
Indenture to be given or taken by Holders of Securities of such series
may, alternatively, be embodied in and evidenced by the record of
Holders of Securities of such series voting in favor thereof, either in
person or by proxies duly appointed in writing, at any meeting of
Holders of Securities of such series duly called and held in accordance
with the provisions of Article 15, or a combination of such instruments
and any such record. Except as herein otherwise expressly provided,
such action shall become effective when such instrument or instruments
or record or both are delivered to the Trustee and, where it is hereby
expressly required, to the Company. Such instrument or instruments and
any such record (and the action embodied therein and evidenced thereby)
are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments or so voting at any such meeting. Proof
of execution of any such instrument or of a writing appointing any such
agent, or of the holding by any Person of a Security, shall be
sufficient for any purpose of this Indenture and (subject to Section
315 of the Trust Indenture Act) conclusive in favor of the Trustee and
the Company and any agent of the Trustee and the Company, if made in
the manner provided in this Section. The record of any meeting of
Holders of Securities shall be proved in the manner provided in Section
15.6.
Without limiting the generality of this Section 1.4, unless
otherwise provided in or pursuant to this Indenture, a Holder,
including a U.S. Depository that is a Holder of a global Security, may
make, give or take, by a proxy or proxies, duly appointed in writing,
any request, demand, authorization, direction, notice, consent, waiver
or other Act provided in or pursuant to this Indenture to be made,
given or taken by Holders, and a U.S. Depository that is a Holder of a
global Security may provide its proxy or proxies to
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the beneficial owners of interests in any such global Security through
such U.S. Depository's standing instructions and customary practices.
The Company shall fix a record date for the purpose of
determining the Persons who are beneficial owners of interest in any
permanent global Security held by a U.S. Depository entitled under the
procedures of such U.S. Depository to make, give or take, by a proxy or
proxies duly appointed in writing, any request, demand, authorization,
direction, notice, consent, waiver or other Act provided in or pursuant
to this Indenture to be made, given or taken by Holders. If such a
record date is fixed, the Holders on such record date or their duly
appointed proxy or proxies, and only such Persons, shall be entitled to
make, give or take such request, demand, authorization, direction,
notice, consent, waiver or other Act, whether or not such Holders
remain Holders after such record date. No such request, demand,
authorization, direction, notice, consent, waiver or other Act shall be
valid or effective if made, given or taken more than 90 days after such
record date.
(2) The fact and date of the execution by any Person of any
such instrument or writing referred to in this Section 1.4 may be
proved in any reasonable manner; and the Trustee may in any instance
require further proof with respect to any of the matters referred to in
this Section.
(3) The ownership, principal amount and serial numbers of
Registered Securities held by any Person, and the date of the
commencement and the date of the termination of holding the same, shall
be proved by the Security Register.
(4) The ownership, principal amount and serial numbers of
Bearer Securities held by any Person, and the date of the commencement
and the date of the termination of holding the same, may be proved by
the production of such Bearer Securities or by a certificate executed,
as depositary, by any trust company, bank, banker or other depositary
reasonably acceptable to the Company, wherever situated, if such
certificate shall be deemed by the Company and the Trustee to be
satisfactory, showing that at the date therein mentioned such Person
had on deposit with such depositary, or exhibited to it, the Bearer
Securities therein described; or such facts may be proved by the
certificate or affidavit of the Person holding such Bearer Securities,
if such certificate or affidavit is deemed by the Trustee to be
satisfactory. The Trustee and the Company may assume that such
ownership of any Bearer Security continues until (i) another
certificate or affidavit bearing a later date issued in respect of the
same Bearer Security is produced, or (ii) such Bearer Security is
produced to the Trustee by some other Person, or (iii) such Bearer
Security is surrendered in exchange for a Registered Security, or (iv)
such Bearer Security is no longer Outstanding. The ownership, principal
amount and serial numbers of Bearer Securities held by the Person so
executing such instrument or writing and the date of the commencement
and the date of the termination of holding the same may also be proved
in any other manner which the Company and the Trustee deem sufficient.
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(5) If the Company shall solicit from the Holders of any
Registered Securities any request, demand, authorization, direction,
notice, consent, waiver or other Act, the Company may at its option
(but is not obligated to), by Board Resolution, fix in advance a record
date for the determination of Holders of Registered Securities entitled
to give such request, demand, authorization, direction, notice,
consent, waiver or other Act. If such a record date is fixed, such
request, demand, authorization, direction, notice, consent, waiver or
other Act may be given before or after such record date, but only the
Holders of Registered Securities of record at the close of business on
such record date shall be deemed to be Holders for the purpose of
determining whether Holders of the requisite proportion of Outstanding
Securities have authorized or agreed or consented to such request,
demand, authorization, direction, notice, consent, waiver or other Act,
and for that purpose the Outstanding Securities shall be computed as of
such record date; provided that no such authorization, agreement or
consent by the Holders of Registered Securities shall be deemed
effective unless it shall become effective pursuant to the provisions
of this Indenture not later than six months after the record date.
(6) Any request, demand, authorization, direction, notice,
consent, waiver or other Act by the Holder of any Security shall bind
every future Holder of the same Security and the Holder of every
Security issued upon the registration of transfer thereof or in
exchange therefor or in lieu thereof in respect of anything done or
suffered to be done by the Trustee, any Security Registrar, any Paying
Agent or the Company in reliance thereon, whether or not notation of
such Act is made upon such Security.
SECTION 1.5. NOTICES, ETC. TO THE TRUSTEE AND THE COMPANY.
Any request, demand, authorization, direction, notice, consent, waiver
or other Act of Holders or other document provided or permitted by this
Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
or
(2) the Company by the Trustee or any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company addressed to the attention of its Chief
Financial Officer, Controller or Secretary, at the address of its
principal office specified in the first paragraph of this instrument or
at any other address previously furnished in writing to the Trustee by
the Company.
SECTION 1.6. NOTICE TO HOLDERS OF SECURITIES; WAIVER.
Except as otherwise expressly provided in or pursuant to this
Indenture, where this Indenture provides for notice to Holders of Securities of
any event,
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(1) such notice shall be sufficiently given to Holders of
Registered Securities if in writing and mailed, first-class postage
prepaid, to each Holder of a Registered Security affected by such
event, at his address as it appears in the Security Register, not later
than the latest date, and not earlier than the earliest date,
prescribed for the giving of such notice; and
(2) such notice shall be sufficiently given to Holders of
Bearer Securities, if any, if published in an Authorized Newspaper in
The City of New York and, if such Securities are then listed on any
stock exchange outside the United States, in an Authorized Newspaper in
such city as the Company shall advise the Trustee that such stock
exchange so requires, on a Business Day at least twice, the first such
publication to be not earlier than the earliest date and the second
such publication not later than the latest date prescribed for the
giving of such notice.
In any case where notice to Holders of Registered Securities is given
by mail, neither the failure to mail such notice, nor any defect in any notice
so mailed, to any particular Holder of a Registered Security shall affect the
sufficiency of such notice with respect to other Holders of Registered
Securities or the sufficiency of any notice to Holders of Bearer Securities
given as provided herein. Any notice which is mailed in the manner herein
provided shall be conclusively presumed to have been duly given or provided. In
the case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give such notice by mail, then such
notification as shall be made with the approval of the Trustee shall constitute
a sufficient notification for every purpose hereunder.
In case by reason of the suspension of publication of any Authorized
Newspaper or Authorized Newspapers or by reason of any other cause it shall be
impracticable to publish any notice to Holders of Bearers Securities as provided
above, then such notification to Holders of Bearer Securities as shall be given
with the approval of the Trustee shall constitute sufficient notice to such
Holders for every purpose hereunder. Neither failure to give notice by
publication to Holders of Bearer Securities as provided above, nor any defect in
any notice so published, shall affect the sufficiency of any notice mailed to
Holders of Registered Securities as provided above.
Where this Indenture provides for notice in any manner, such notice may
be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders of Securities shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
SECTION 1.7. LANGUAGE OF NOTICES.
Any request, demand, authorization, direction, notice, consent,
election or waiver required or permitted under this Indenture shall be in the
English language, except that, if the Company so elects, any published notice
may be in an official language of the country of publication.
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SECTION 1.8. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with any duties
under any required provision of the Trust Indenture Act imposed hereon by
Section 318(c) thereof, such required provision shall control.
SECTION 1.9. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of Contents are
for convenience only and shall not affect the construction hereof.
SECTION 1.10. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the Company shall
bind its successors and assigns, whether so expressed or not.
SECTION 1.11. SEPARABILITY CLAUSE.
In case any provision in this Indenture, any Security or any Coupon
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 1.12. BENEFITS OF INDENTURE.
Nothing in this Indenture, any Security or any Coupon, express or
implied, shall give to any Person, other than the parties hereto, any Security
Registrar, any Paying Agent, any Authenticating Agent and their successors
hereunder and the Holders of Securities or Coupons, any benefit or any legal or
equitable right, remedy or claim under this Indenture.
SECTION 1.13. GOVERNING LAW.
This Indenture, the Securities and any Coupons shall be governed by and
construed in accordance with the laws of the State of New York applicable to
agreements made or instruments entered into and, in each case, performed in said
state.
SECTION 1.14. LEGAL HOLIDAYS.
Unless otherwise specified in or pursuant to this Indenture or any
Securities, in any case where any Interest Payment Date, Stated Maturity or
Maturity of any Security, or the last date on which a Holder has the right to
convert or exchange Securities of a series that are convertible or exchangeable,
shall be a Legal Holiday at any Place of Payment, then (notwithstanding any
other provision of this Indenture, any Security or any Coupon other than a
provision in any Security or Coupon that specifically states that such provision
shall apply in lieu hereof) payment need not be made at such Place of Payment on
such date, and such Securities need not be converted or exchanged on such date
but such payment may be made, and such Securities may be converted or exchanged,
on the next succeeding day that is a Business Day at such Place of Payment with
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the same force and effect as if made on the Interest Payment Date or at the
Stated Maturity or Maturity or on such last day for conversion or exchange, and
no interest shall accrue on the amount payable on such date or at such time for
the period from and after such Interest Payment Date, Stated Maturity, Maturity
or last day for conversion or exchange, as the case may be, to such next
succeeding Business Day.
SECTION 1.15. COUNTERPARTS.
This Indenture may be executed in several counterparts, each of which
shall be an original and all of which shall constitute but one and the same
instrument.
SECTION 1.16. JUDGMENT CURRENCY.
The Company agrees, to the fullest extent that it may effectively do so
under applicable law, that (a) if for the purpose of obtaining judgment in any
court it is necessary to convert the sum due in respect of the principal of, or
premium or interest, if any, or Additional Amounts on the Securities of any
series (the "Required Currency") into a currency in which a judgment will be
rendered (the "Judgment Currency"), the rate of exchange used shall be the rate
at which in accordance with normal banking procedures the Trustee could purchase
in The City of New York the requisite amount of the Required Currency with the
Judgment Currency on the New York Banking Day preceding the day on which a final
unappealable judgment is given and (b) its obligations under this Indenture to
make payments in the Required Currency (i) shall not be discharged or satisfied
by any tender, or any recovery pursuant to any judgment (whether or not entered
in accordance with clause (a)), in any currency other than the Required
Currency, except to the extent that such tender or recovery shall result in the
actual receipt, by the payee, of the full amount of the Required Currency
expressed to be payable in respect of such payments, (ii) shall be enforceable
as an alternative or additional cause of action for the purpose of recovering in
the Required Currency the amount, if any, by which such actual receipt shall
fall short of the full amount of the Required Currency so expressed to be
payable and (iii) shall not be affected by judgment being obtained for any other
sum due under this Indenture. For purposes of the foregoing, "New York Banking
Day" means any day except a Saturday, Sunday or a legal holiday in The City of
New York or a day on which banking institutions in The City of New York are
authorized or obligated by law, regulation or executive order to be closed.
SECTION 1.17. NO SECURITY INTEREST CREATED.
Subject to the provisions of Section 10.5, nothing in this Indenture or
in any Security, express or implied, shall be construed to constitute a security
interest under the Uniform Commercial Code or similar legislation, as now or
hereafter enacted and in effect in any jurisdiction where property of the
Company or its Subsidiaries is or may be located.
SECTION 1.18. LIMITATION ON INDIVIDUAL LIABILITY.
No recourse under or upon any obligation, covenant or agreement
contained in this Indenture or in any Security, or for any claim based thereon
or otherwise in respect thereof, shall
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be had against any incorporator, officer or director, as such, past, present or
future, of the Company, either directly or through the Company, whether by
virtue of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise; it being expressly understood that this
Indenture and the obligations issued hereunder are solely corporate obligations,
and that no such personal liability whatever shall attach to, or is or shall be
incurred by, the incorporators, shareholders, officers or directors, as such, of
the Company, or any of them, because of the creation of the indebtedness hereby
authorized, or under or by reason of the obligations, covenants or agreements
contained in this Indenture or in any Security or implied therefrom; and that
any and all such personal liability of every name and nature, either at common
law or in equity or by constitution or statute, of, and any and all such rights
and claims against, every such incorporator, shareholder, officer or director,
as such, because of the creation of the indebtedness hereby authorized, or under
or by reason of the obligations, covenants or agreements contained in this
Indenture or in any Security or implied therefrom, are hereby expressly waived
and released as a condition of, and as a consideration for, the execution of
this Indenture and the issuance of such Security.
ARTICLE 2
SECURITIES FORMS
SECTION 2.1. FORMS GENERALLY.
Each Registered Security, Bearer Security, Coupon and temporary or
permanent global Security issued pursuant to this Indenture shall be in the form
established by or pursuant to a Board Resolution or in one or more indentures
supplemental hereto, shall have such appropriate insertions, omissions,
substitutions and other variations as are required or permitted by or pursuant
to this Indenture or any indenture supplemental hereto and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may, consistently herewith, be determined by the
officers executing such Security or Coupon as evidenced by their execution of
such Security or Coupon.
Unless otherwise provided in or pursuant to this Indenture or any
Securities, the Securities shall be issuable in registered form without Coupons
and shall not be issuable upon the exercise of warrants.
Definitive Securities and definitive Coupons shall be printed,
lithographed or engraved or produced by any combination of these methods on a
steel engraved border or steel engraved borders or may be produced in any other
manner, all as determined by the officers of the Company executing such
Securities or Coupons, as evidenced by their execution of such Securities or
Coupons.
SECTION 2.2. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
Subject to Section 6.12, the Trustee's certificate of authentication
shall be in substantially the following form:
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This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
By____________________________________
Authorized Officer
SECTION 2.3. SECURITIES IN GLOBAL FORM.
Unless otherwise provided in or pursuant to this Indenture or any
Securities, the Securities shall not be issuable in temporary or permanent
global form. If Securities of a series shall be issuable in global form, any
such Security may provide that it or any number of such Securities shall
represent the aggregate amount of all Outstanding Securities of such series (or
such lesser amount as is permitted by the terms thereof) from time to time
endorsed thereon and may also provide that the aggregate amount of Outstanding
Securities represented thereby may from time to time be increased or reduced to
reflect exchanges. Any endorsement of any Security in global form to reflect the
amount, or any increase or decrease in the amount, or changes in the rights of
Holders, of Outstanding Securities represented thereby shall be made in such
manner and by such Person or Persons as shall be specified therein or in the
Company Order to be delivered pursuant to Section 3.3 or 3.4 with respect
thereto. Subject to the provisions of Section 3.3 and, if applicable, Section
3.4, the Trustee shall deliver and redeliver, in each case at the Company's
expense, any Security in permanent global form in the manner and upon
instructions given by the Person or Persons specified therein or in the
applicable Company Order. If a Company Order pursuant to Section 3.3 or 3.4 has
been, or simultaneously is, delivered, any instructions by the Company with
respect to a Security in global form shall be in writing but need not be
accompanied by or contained in an Officer's Certificate and need not be
accompanied by an Opinion of Counsel.
Notwithstanding the provisions of Section 3.7, unless otherwise
specified in or pursuant to this Indenture or any Security, payment of principal
of, any premium and interest on, and any Additional Amounts in respect of, any
Security in temporary or permanent global form shall be made to the Person or
Persons specified therein.
Notwithstanding the provisions of Section 3.8 and except as provided in
the preceding paragraph, the Company, the Trustee and any agent of the Company
or the Trustee shall treat as the Holder of such principal amount of Outstanding
Securities represented by a global Security (i) in the case of a global Security
in registered form, the Holder of such global Security in registered form, or
(ii) in the case of a global Security in bearer form, the Person or Persons
specified pursuant to Section 3.1.
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ARTICLE 3
THE SECURITIES
SECTION 3.1. AMOUNT UNLIMITED; ISSUABLE IN SERIES.
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is unlimited. The Securities may be issued in
one or more series.
With respect to any Securities to be authenticated and delivered
hereunder, there shall be established in or pursuant to a Board Resolution and
set forth in an Officer's Certificate, or established in one or more indentures
supplemental hereto,
(1) the title of such Securities and the series in which such
Securities shall be included;
(2) any limit upon the aggregate principal amount of the
Securities of such title or the Securities of such series which may be
authenticated and delivered under this Indenture (except for Securities
authenticated and delivered upon registration of transfer of, or in
exchange for, or in lieu of, other Securities of such series pursuant
to Section 3.4, 3.5, 3.6, 9.5 or 11.7, upon repayment in part of any
Registered Security of such series pursuant to Article 13, upon
surrender in part of any Registered Security for conversion into other
securities of the Company or exchange for securities of another issuer
pursuant to its terms, or pursuant to or as contemplated by the terms
of such Securities);
(3) if such Securities are to be issuable as Registered
Securities, as Bearer Securities or alternatively as Bearer Securities
and Registered Securities, and whether the Bearer Securities are to be
issuable with Coupons, without Coupons or both, and any restrictions
applicable to the offer, sale or delivery of the Bearer Securities and
the terms, if any, upon which Bearer Securities may be exchanged for
Registered Securities and vice versa;
(4) if any of such Securities are to be issuable in global
form, when any of such Securities are to be issuable in global form and
(i) whether such Securities are to be issued in temporary or permanent
global form or both, (ii) whether beneficial owners of interests in any
such global Security may exchange such interests for Securities of the
same series and of like tenor and of any authorized form and
denomination, and the circumstances under which any such exchanges may
occur, if other than in the manner specified in Section 3.5, and (iii)
the name of the Depository or the U.S. Depository, as the case may be,
with respect to any such global Security;
(5) if any of such Securities are to be issuable as Bearer
Securities or in global form, the date as of which any such Bearer
Security or global Security shall be dated (if other than the date of
original issuance of the first of such Securities to be issued);
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(6) if any of such Securities are to be issuable as Bearer
Securities, whether interest in respect of any portion of a temporary
Bearer Security in global form payable in respect of an Interest
Payment Date therefor prior to the exchange, if any, of such temporary
Bearer Security for definitive Securities shall be paid to any clearing
organization with respect to the portion of such temporary Bearer
Security held for its account and, in such event, the terms and
conditions (including any certification requirements) upon which any
such interest payment received by a clearing organization will be
credited to the Persons entitled to interest payable on such Interest
Payment Date;
(7) the date or dates, or the method or methods, if any, by
which such date or dates shall be determined, on which the principal of
such Securities is payable;
(8) the rate or rates at which such Securities shall bear
interest, if any, or the method or methods, if any, by which such rate
or rates are to be determined, the date or dates, if any, from which
such interest shall accrue or the method or methods, if any, by which
such date or dates are to be determined, the Interest Payment Dates, if
any, on which such interest shall be payable and the Regular Record
Date, if any, for the interest payable on Registered Securities on any
Interest Payment Date, whether and under what circumstances Additional
Amounts on such Securities or any of them shall be payable, the notice,
if any, to Holders regarding the determination of interest on a
floating rate Security and the manner of giving such notice, and the
basis upon which interest shall be calculated if other than that of a
360-day year of twelve 30-day months;
(9) if in addition to or other than the Borough of Manhattan,
The City of New York, the place or places where the principal of, any
premium and interest on or any Additional Amounts with respect to such
Securities shall be payable, any of such Securities that are Registered
Securities may be surrendered for registration of transfer or exchange,
any of such Securities may be surrendered for conversion or exchange
and notices or demands to or upon the Company in respect of such
Securities and this Indenture may be served, the extent to which, or
the manner in which, any interest payment or Additional Amounts on a
global Security on an Interest Payment Date, will be paid and the
manner in which any principal of or premium, if any, on any global
Security will be paid;
(10) whether any of such Securities are to be redeemable at
the option of the Company and, if so, the date or dates on which, the
period or periods within which, the price or prices at which and the
other terms and conditions upon which such Securities may be redeemed,
in whole or in part, at the option of the Company;
(11) whether the Company is obligated to redeem or purchase
any of such Securities pursuant to any sinking fund or analogous
provision or at the option of any Holder thereof and, if so, the date
or dates on which, the period or periods within which, the price or
prices at which and the other terms and conditions upon which such
Securities shall be redeemed or purchased, in whole or in part,
pursuant to such
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obligation, and any provisions for the remarketing of such Securities
so redeemed or purchased;
(12) the denominations in which any of such Securities that
are Registered Securities shall be issuable if other than denominations
of $1,000 and any integral multiple thereof, and the denominations in
which any of such Securities that are Bearer Securities shall be
issuable if other than the denomination of $5,000;
(13) whether the Securities of the series will be convertible
into other securities of the Company and/or exchangeable for securities
of another issuer, and if so, the terms and conditions upon which such
Securities will be so convertible or exchangeable, and any deletions
from or modifications or additions to this Indenture to permit or to
facilitate the issuance of such convertible or exchangeable Securities
or the administration thereof;
(14) if other than the principal amount thereof, the portion
of the principal amount of any of such Securities that shall be payable
upon declaration of acceleration of the Maturity thereof pursuant to
Section 5.2 or the method by which such portion is to be determined;
(15) if other than Dollars, the Foreign Currency in which
payment of the principal of, any premium or interest on or any
Additional Amounts with respect to any of such Securities shall be
payable;
(16) if the principal of, any premium or interest on or any
Additional Amounts with respect to any of such Securities are to be
payable, at the election of the Company or a Holder thereof or
otherwise, in Dollars or in a Foreign Currency other than that in which
such Securities are stated to be payable, the date or dates on which,
the period or periods within which, and the other terms and conditions
upon which, such election may be made, and the time and manner of
determining the exchange rate between the Currency in which such
Securities are stated to be payable and the Currency in which such
Securities or any of them are to be paid pursuant to such election, and
any deletions from or modifications of or additions to the terms of
this Indenture to provide for or to facilitate the issuance of
Securities denominated or payable, at the election of the Company or a
Holder thereof or otherwise, in a Foreign Currency;
(17) whether the amount of payments of principal of, any
premium or interest on or any Additional Amounts with respect to such
Securities may be determined with reference to an index, formula or
other method or methods (which index, formula or method or methods may
be based, without limitation, on one or more Currencies, commodities,
equity securities, equity indices or other indices), and, if so, the
terms and conditions upon which and the manner in which such amounts
shall be determined and paid or payable;
(18) any deletions from, modifications of or additions to the
Events of Default or covenants of the Company with respect to any of
such Securities, whether or not such
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Events of Default or covenants are consistent with the Events of
Default or covenants set forth herein;
(19) whether either or both of Section 4.2(2) relating to
defeasance or Section 4.2(3) relating to covenant defeasance shall not
be applicable to the Securities of such series, or any covenants in
addition to those specified in Section 4.2(3) relating to the
Securities of such series which shall be subject to covenant
defeasance, and any deletions from, or modifications or additions to,
the provisions of Article 4 in respect of the Securities of such
series;
(20) whether any of such Securities are to be issuable upon
the exercise of warrants, and the time, manner and place for such
Securities to be authenticated and delivered;
(21) if any of such Securities are to be issuable in global
form and are to be issuable in definitive form (whether upon original
issue or upon exchange of a temporary Security) only upon receipt of
certain certificates or other documents or satisfaction of other
conditions, then the form and terms of such certificates, documents or
conditions;
(22) if there is more than one Trustee, the identity of the
Trustee and, if not the Trustee, the identity of each Security
Registrar, Paying Agent or Authenticating Agent with respect to such
Securities; and
(23) any other terms of such Securities and any other
deletions from or modifications or additions to this Indenture in
respect of such Securities.
All Securities of any one series and all Coupons, if any, appertaining
to Bearer Securities of such series shall be substantially identical except as
to Currency of payments due thereunder, denomination and the rate of interest
thereon, or method of determining the rate of interest, if any, Maturity, and
the date from which interest, if any, shall accrue and except as may otherwise
be provided by the Company in or pursuant to the Board Resolution and set forth
in the Officer's Certificate or in any indenture or indentures supplemental
hereto pertaining to such series of Securities. The terms of the Securities of
any series may provide, without limitation, that the Securities shall be
authenticated and delivered by the Trustee on original issue from time to time
upon written order of persons designated in the Officer's Certificate or
supplemental indenture and that such persons are authorized to determine,
consistent with such Officer's Certificate or any applicable supplemental
indenture, such terms and conditions of the Securities of such series as are
specified in such Officer's Certificate or supplemental indenture. All
Securities of any one series need not be issued at the same time and, unless
otherwise so provided, a series may be reopened for issuances of additional
Securities of such series or to establish additional terms of such series of
Securities.
If any of the terms of the Securities of any series shall be
established by action taken by or pursuant to a Board Resolution, the Board
Resolution shall be delivered to the Trustee at or prior to the delivery of the
Officer's Certificate setting forth the terms of such series.
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SECTION 3.2. CURRENCY; DENOMINATIONS.
Unless otherwise provided in or pursuant to this Indenture, the
principal of, any premium and interest on and any Additional Amounts with
respect to the Securities shall be payable in Dollars. Unless otherwise provided
in or pursuant to this Indenture, Registered Securities denominated in Dollars
shall be issuable in registered form without Coupons in denominations of $1,000
and any integral multiple thereof, and the Bearer Securities denominated in
Dollars shall be issuable in the denomination of $5,000. Securities not
denominated in Dollars shall be issuable in such denominations as are
established with respect to such Securities in or pursuant to this Indenture.
SECTION 3.3. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
Securities shall be executed on behalf of the Company by its Chairman
of the Board, its President, its Chief Financial Officer, its Controller or a
Vice President under its corporate seal reproduced thereon and attested by its
Secretary or one of its Assistant Secretaries. Coupons shall be executed on
behalf of the Company by the President, Chief Financial Officer, Controller or
Treasurer of the Company. The signature of any of these officers on the
Securities or any Coupons appertaining thereto may be manual or facsimile.
Securities and any Coupons appertaining thereto bearing the manual or
facsimile signatures of individuals who were at any time the proper officers of
the Company shall bind the Company, notwithstanding that such individuals or any
of them have ceased to hold such offices prior to the authentication and
delivery of such Securities and Coupons or did not hold such offices at the date
of original issuance of such Securities or Coupons.
At any time and from time to time after the execution and delivery of
this Indenture, the Company may deliver Securities, together with any Coupons
appertaining thereto, executed by the Company, to the Trustee for authentication
and, provided that the Board Resolution and Officer's Certificate or
supplemental indenture or indentures with respect to such Securities referred to
in Section 3.1 and a Company Order for the authentication and delivery of such
Securities have been delivered to the Trustee, the Trustee in accordance with
the Company Order and subject to the provisions hereof and of such Securities
shall authenticate and deliver such Securities. In authenticating such
Securities, and accepting the additional responsibilities under this Indenture
in relation to such Securities and any Coupons appertaining thereto, the Trustee
shall be entitled to receive, and (subject to Sections 315(a) through 315(d) of
the Trust Indenture Act) shall be fully protected in relying upon,
(1) an Opinion of Counsel to the effect that:
(a) the form or forms and terms of such Securities
and Coupons, if any, have been established in conformity with
the provisions of this Indenture;
(b) all conditions precedent to the authentication
and delivery of such Securities and Coupons, if any,
appertaining thereto, have been complied with and
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that such Securities and Coupons, when completed by
appropriate insertions, executed under the Company's corporate
seal and attested by duly authorized officers of the Company,
delivered by duly authorized officers of the Company to the
Trustee for authentication pursuant to this Indenture, and
authenticated and delivered by the Trustee and issued by the
Company in the manner and subject to any conditions specified
in such Opinion of Counsel, will constitute legally valid and
binding obligations of the Company, enforceable against the
Company in accordance with their terms, except as enforcement
thereof may be subject to or limited by bankruptcy,
insolvency, reorganization, moratorium, arrangement,
fraudulent conveyance, fraudulent transfer or other similar
laws relating to or affecting creditors' rights generally, and
subject to general principles of equity (regardless of whether
enforcement is sought in a proceeding in equity or at law) and
will entitle the Holders thereof to the benefits of this
Indenture; such Opinion of Counsel need express no opinion as
to the availability of equitable remedies;
(c) all laws and requirements in respect of the
execution and delivery by the Company of such Securities and
Coupons, if any, have been complied with; and
(d) this Indenture has been qualified under the Trust
Indenture Act; and
(2) an Officer's Certificate stating that, to the best
knowledge of the Persons executing such certificate, all conditions
precedent to the execution, authentication and delivery of such
Securities and Coupons, if any, appertaining thereto, have been
complied with, and no event which is, or after notice or lapse of time
would become, an Event of Default with respect to any of the Securities
shall have occurred and be continuing.
If all the Securities of any series are not to be issued at one time,
it shall not be necessary to deliver an Opinion of Counsel and an Officer's
Certificate at the time of issuance of each Security, but such opinion and
certificate, with appropriate modifications, shall be delivered at or before the
time of issuance of the first Security of such series. After any such first
delivery, any separate written request by an Authorized Officer of the Company
or any person designated in writing by an Authorized Officer that the Trustee
authenticate and deliver Securities of such series for original issue will be
deemed to be a certification by the Company that all conditions precedent
provided for in this Indenture relating to authentication and delivery of such
Securities continue to have been complied with and that no Event of Default with
respect to any of the Securities has occurred or is continuing.
The Trustee shall not be required to authenticate or to cause an
Authenticating Agent to authenticate any Securities if the issue of such
Securities pursuant to this Indenture will affect the Trustee's own rights,
duties or immunities under the Securities and this Indenture or otherwise in a
manner which is not reasonably acceptable to the Trustee or if the Trustee,
being advised by counsel, determines that such action may not lawfully be taken.
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Each Registered Security shall be dated the date of its authentication.
Each Bearer Security and any Bearer Security in global form shall be dated as of
the date specified in or pursuant to this Indenture.
No Security or Coupon appertaining thereto shall be entitled to any
benefit under this Indenture or be valid or obligatory for any purpose, unless
there appears on such Security a certificate of authentication substantially in
the form provided for in Section 2.2 or 6.12 executed by or on behalf of the
Trustee or by the Authenticating Agent by the manual signature of one of its
authorized officers. Such certificate upon any Security shall be conclusive
evidence, and the only evidence, that such Security has been duly authenticated
and delivered hereunder. Except as permitted by Section 3.6 or 3.7, the Trustee
shall not authenticate and deliver any Bearer Security unless all Coupons
appertaining thereto then matured have been detached and cancelled.
SECTION 3.4. TEMPORARY SECURITIES.
Pending the preparation of definitive Securities, the Company may
execute and deliver to the Trustee and, upon Company Order, the Trustee shall
authenticate and deliver, in the manner provided in Section 3.3, temporary
Securities in lieu thereof which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued, in registered form or, if authorized in or pursuant to this
Indenture, in bearer form with one or more Coupons or without Coupons and with
such appropriate insertions, omissions, substitutions and other variations as
the officers of the Company executing such Securities may determine, as
conclusively evidenced by their execution of such Securities. Such temporary
Securities may be in global form.
Except in the case of temporary Securities in global form, which shall
be exchanged in accordance with the provisions thereof, if temporary Securities
are issued, the Company shall cause definitive Securities to be prepared without
unreasonable delay. After the preparation of definitive Securities of the same
series and containing terms and provisions that are identical to those of any
temporary Securities, such temporary Securities shall be exchangeable for such
definitive Securities upon surrender of such temporary Securities at an Office
or Agency for such Securities, without charge to any Holder thereof. Upon
surrender for cancellation of any one or more temporary Securities (accompanied
by any unmatured Coupons appertaining thereto), the Company shall execute and
the Trustee shall authenticate and deliver in exchange therefor a like principal
amount of definitive Securities of authorized denominations of the same series
and containing identical terms and provisions; provided, however, that no
definitive Bearer Security, except as provided in or pursuant to this Indenture,
shall be delivered in exchange for a temporary Registered Security; and
provided, further, that a definitive Bearer Security shall be delivered in
exchange for a temporary Bearer Security only in compliance with the conditions
set forth in or pursuant to this Indenture. Unless otherwise provided in or
pursuant to this Indenture with respect to a temporary global Security, until so
exchanged the temporary Securities of any series shall in all respects be
entitled to the same benefits under this Indenture as definitive Securities of
such series.
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SECTION 3.5. REGISTRATION, TRANSFER AND EXCHANGE.
With respect to the Registered Securities of each series, if any, the
Company shall cause to be kept a register (each such register being herein
sometimes referred to as the "Security Register") at an Office or Agency for
such series in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of the Registered
Securities of such series and of transfers of the Registered Securities of such
series. Such Office or Agency shall be the "Security Registrar" for that series
of Securities. Unless otherwise specified in or pursuant to this Indenture or
the Securities, the Trustee shall be the initial Security Registrar for each
series of Securities. The Company shall have the right to remove and replace
from time to time the Security Registrar for any series of Securities; provided
that no such removal or replacement shall be effective until a successor
Security Registrar with respect to such series of Securities shall have been
appointed by the Company and shall have accepted such appointment by the
Company. In the event that the Trustee shall not be or shall cease to be
Security Registrar with respect to a series of Securities, it shall have the
right to examine the Security Register for such series at all reasonable times.
There shall be only one Security Register for each series of Securities.
Upon surrender for registration of transfer of any Registered Security
of any series at any Office or Agency for such series, the Company shall
execute, and the Trustee shall authenticate and deliver, in the name of the
designated transferee or transferees, one or more new Registered Securities of
the same series denominated as authorized in or pursuant to this Indenture, of a
like aggregate principal amount bearing a number not contemporaneously
outstanding and containing identical terms and provisions.
At the option of the Holder, Registered Securities of any series may be
exchanged for other Registered Securities of the same series containing
identical terms and provisions, in any authorized denominations, and of a like
aggregate principal amount, upon surrender of the Securities to be exchanged at
any Office or Agency for such series. Whenever any Registered Securities are so
surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Registered Securities which the Holder making the
exchange is entitled to receive.
If provided in or pursuant to this Indenture, with respect to
Securities of any series, at the option of the Holder, Bearer Securities of such
series may be exchanged for Registered Securities of such series containing
identical terms, denominated as authorized in or pursuant to this Indenture and
in the same aggregate principal amount, upon surrender of the Bearer Securities
to be exchanged at any Office or Agency for such series, with all unmatured
Coupons and all matured Coupons in default thereto appertaining. If the Holder
of a Bearer Security is unable to produce any such unmatured Coupon or Coupons
or matured Coupon or Coupons in default, such exchange may be effected if the
Bearer Securities are accompanied by payment in funds acceptable to the Company
and the Trustee in an amount equal to the face amount of such missing Coupon or
Coupons, or the surrender of such missing Coupon or Coupons may be waived by the
Company and the Trustee if there is furnished to them such security or indemnity
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as they may require to save each of them and any Paying Agent harmless. If
thereafter the Holder of such Bearer Security shall surrender to any Paying
Agent any such missing Coupon in respect of which such a payment shall have been
made, such Holder shall be entitled to receive the amount of such payment;
provided, however, that, except as otherwise provided in Section 10.2, interest
represented by Coupons shall be payable only upon presentation and surrender of
those Coupons at an Office or Agency for such series located outside the United
States. Notwithstanding the foregoing, in case a Bearer Security of any series
is surrendered at any such Office or Agency for such series in exchange for a
Registered Security of such series and like tenor after the close of business at
such Office or Agency on (i) any Regular Record Date and before the opening of
business at such Office or Agency on the next succeeding Interest Payment Date,
or (ii) any Special Record Date and before the opening of business at such
Office or Agency on the related date for payment of Defaulted Interest, such
Bearer Security shall be surrendered without the Coupon relating to such
Interest Payment Date or proposed date of payment, as the case may be (or, if
such Coupon is so surrendered with such Bearer Security, such Coupon shall be
returned to the Person so surrendering the Bearer Security), and interest or
Defaulted Interest, as the case may be, shall not be payable on such Interest
Payment Date or proposed date for payment, as the case may be, in respect of the
Registered Security issued in exchange for such Bearer Security, but shall be
payable only to the Holder of such Coupon when due in accordance with the
provisions of this Indenture.
If provided in or pursuant to this Indenture with respect to Securities
of any series, at the option of the Holder, Registered Securities of such series
may be exchanged for Bearer Securities upon such terms and conditions as may be
provided in or pursuant to this Indenture with respect to such series.
Whenever any Securities are surrendered for exchange as contemplated by
the immediately preceding two paragraphs, the Company shall execute, and the
Trustee shall authenticate and deliver, the Securities which the Holder making
the exchange is entitled to receive.
Notwithstanding the foregoing, except as otherwise provided in or
pursuant to this Indenture, any global Security shall be exchangeable for
definitive Securities only if (i) the Depository is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is not
appointed by the Company within 90 days of the date the Company is so informed
in writing, (ii) the Company executes and delivers to the Trustee a Company
Order to the effect that such global Security shall be so exchangeable, or (iii)
an Event of Default has occurred and is continuing with respect to the
Securities. If the beneficial owners of interests in a global Security are
entitled to exchange such interests for definitive Securities as the result of
an event described in clause (i), (ii) or (iii) of the preceding sentence, then
without unnecessary delay but in any event not later than the earliest date on
which such interests may be so exchanged, the Company shall deliver to the
Trustee definitive Securities in such form and denominations as are required by
or pursuant to this Indenture, and of the same series, containing identical
terms and in aggregate principal amount equal to the principal amount of such
global Security, executed by the Company. On or after the earliest date on which
such interests may be
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so exchanged, such global Security shall be surrendered from time to time by the
U.S. Depository or such other Depository as shall be specified in the Company
Order with respect thereto, and in accordance with instructions given to the
Trustee and the U.S. Depository or such other Depository, as the case may be
(which instructions shall be in writing but need not be contained in or
accompanied by an Officer's Certificate or be accompanied by an Opinion of
Counsel), as shall be specified in the Company Order with respect thereto to the
Trustee, as the Company's agent for such purpose, to be exchanged, in whole or
in part, for definitive Securities as described above without charge. The
Trustee shall authenticate and make available for delivery, in exchange for each
portion of such surrendered global Security, a like aggregate principal amount
of definitive Securities of the same series of authorized denominations and of
like tenor as the portion of such global Security to be exchanged, which (unless
such Securities are not issuable both as Bearer Securities and as Registered
Securities, in which case the definitive Securities exchanged for the global
Security shall be issuable only in the form in which the Securities are
issuable, as provided in or pursuant to this Indenture) shall be in the form of
Bearer Securities or Registered Securities, or any combination thereof, as shall
be specified by the beneficial owner thereof, but subject to the satisfaction of
any certification or other requirements to the issuance of Bearer Securities;
provided, however, that no such exchanges may occur during a period beginning at
the opening of business 15 days before any selection of Securities of the same
series to be redeemed and ending on the relevant Redemption Date; and provided,
further, that (unless otherwise provided in or pursuant to this Indenture) no
Bearer Security delivered in exchange for a portion of a global Security shall
be mailed or otherwise delivered to any location in the United States. Promptly
following any such exchange in part, such global Security shall be returned by
the Trustee to such Depository or the U.S. Depository, as the case may be, or
such other Depository or U.S. Depository referred to above in accordance with
the instructions of the Company referred to above. If a Registered Security is
issued in exchange for any portion of a global Security after the close of
business at the Office or Agency for such Security where such exchange occurs on
or after (i) any Regular Record Date for such Security and before the opening of
business at such Office or Agency on the next succeeding Interest Payment Date,
or (ii) any Special Record Date for such Security and before the opening of
business at such Office or Agency on the related proposed date for payment of
interest or Defaulted Interest, as the case may be, interest shall not be
payable on such Interest Payment Date or proposed date for payment, as the case
may be, in respect of such Registered Security, but shall be payable on such
Interest Payment Date or proposed date for payment, as the case may be, only to
the Person to whom interest in respect of such portion of such global Security
shall be payable in accordance with the provisions of this Indenture.
All Securities issued upon any registration of transfer or exchange of
Securities shall be the valid obligations of the Company evidencing the same
debt and entitling the Holders thereof to the same benefits under this Indenture
as the Securities surrendered upon such registration of transfer or exchange.
Every Registered Security presented or surrendered for registration of
transfer or for exchange or redemption shall (if so required by the Company or
the Security Registrar for such Security) be duly endorsed, or be accompanied by
a written instrument of transfer in form
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satisfactory to the Company and the Security Registrar for such Security duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of transfer or
exchange, or redemption of Securities, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge and any other
expenses (including fees and expenses of the Trustee) that may be imposed in
connection with any registration of transfer or exchange of Securities, other
than exchanges pursuant to Section 3.4, 9.5 or 11.7 not involving any transfer.
Except as otherwise provided in or pursuant to this Indenture, the
Company shall not be required (i) to issue, register the transfer of or exchange
any Securities during a period beginning at the opening of business 15 days
before the day of mailing of a notice of redemption of Securities of like tenor
and the same series under Section 11.3 and ending at the close of business on
the day of such mailing, or (ii) to register the transfer of or exchange any
Registered Security selected for redemption in whole or in part, except in the
case of any Security to be redeemed in part, the portion thereof not to be
redeemed, or (iii) to exchange any Bearer Security selected for redemption
except, to the extent provided with respect to such Bearer Security, that such
Bearer Security may be exchanged for a Registered Security of like tenor and the
same series, provided that such Registered Security shall be immediately
surrendered for redemption with written instruction for payment consistent with
the provisions of this Indenture or (iv) to issue, register the transfer of or
exchange any Security which, in accordance with its terms, has been surrendered
for repayment at the option of the Holder, except the portion, if any, of such
Security not to be so repaid.
SECTION 3.6. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES.
If any mutilated Security or a Security with a mutilated Coupon
appertaining to it is surrendered to the Trustee, subject to the provisions of
this Section 3.6, the Company shall execute and the Trustee shall authenticate
and deliver in exchange therefor a new Security of the same series containing
identical terms and of like principal amount and bearing a number not
contemporaneously outstanding, with Coupons appertaining thereto corresponding
to the Coupons, if any, appertaining to the surrendered Security.
If there be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Security or Coupon,
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security or Coupon has been acquired by a
bona fide purchaser, the Company shall execute and, upon the Company's request
the Trustee shall authenticate and deliver, in exchange for or in lieu of any
such mutilated, destroyed, lost or stolen Security or in exchange for the
Security to which a destroyed, lost or stolen Coupon appertains with all
appurtenant Coupons not destroyed, lost or stolen, a new Security of the same
series containing identical terms and of like principal amount and bearing a
number not contemporaneously outstanding, with Coupons appertaining thereto
corresponding to the Coupons, if any, appertaining to such destroyed, lost or
stolen Security or to the Security to which such destroyed, lost or stolen
Coupon appertains.
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Notwithstanding the foregoing provisions of this Section 3.6, in case
any mutilated, destroyed, lost or stolen Security or Coupon has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Security, pay such Security or Coupon; provided, however, that
payment of principal of, any premium or interest on or any Additional Amounts
with respect to any Bearer Securities shall, except as otherwise provided in
Section 10.2, be payable only at an Office or Agency for such Securities located
outside the United States and, unless otherwise provided in or pursuant to this
Indenture, any interest on Bearer Securities and any Additional Amounts with
respect to such interest shall be payable only upon presentation and surrender
of the Coupons appertaining thereto.
Upon the issuance of any new Security under this Section 3.6, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security, with any Coupons appertaining thereto issued
pursuant to this Section 3.6 in lieu of any destroyed, lost or stolen Security,
or in exchange for a Security to which a destroyed, lost or stolen Coupon
appertains shall constitute a separate obligation of the Company, whether or not
the destroyed, lost or stolen Security and Coupons appertaining thereto or the
destroyed, lost or stolen Coupon shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of such series and any
Coupons, if any, duly issued hereunder.
The provisions of this Section 3.6, as amended or supplemented pursuant
to this Indenture with respect to particular Securities or generally, shall be
exclusive and shall preclude (to the extent lawful) all other rights and
remedies with respect to the replacement or payment of mutilated, destroyed,
lost or stolen Securities or Coupons.
SECTION 3.7. PAYMENT OF INTEREST AND CERTAIN ADDITIONAL AMOUNTS; RIGHTS
TO INTEREST AND CERTAIN ADDITIONAL AMOUNTS PRESERVED.
Unless otherwise provided in or pursuant to this Indenture, any
interest on and any Additional Amounts with respect to any Registered Security
which shall be payable, and are punctually paid or duly provided for, on any
Interest Payment Date shall be paid to the Person in whose name such Security
(or one or more Predecessor Securities) is registered as of the close of
business on the Regular Record Date for such interest.
Unless otherwise provided in or pursuant to this Indenture, any
interest on and any Additional Amounts with respect to any Registered Security
which shall be payable, but shall not be punctually paid or duly provided for,
on any Interest Payment Date for such Registered Security (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder thereof
on the relevant Regular Record Date by virtue of having been such Holder; and
such Defaulted Interest may be paid by the Company, at its election, as provided
in Clause (1) or (2) below:
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(1) The Company may elect to make payment of any Defaulted
Interest to the Person in whose name such Registered Security (or a
Predecessor Security thereof) shall be registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed by the Company in the following manner.
The Company shall notify the Trustee in writing of the amount of
Defaulted Interest proposed to be paid on such Registered Security, the
Special Record Date therefor and the date of the proposed payment, and
at the same time the Company shall deposit with the Trustee an amount
of money equal to the aggregate amount proposed to be paid in respect
of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit on or prior to the date of the proposed
payment, such money when so deposited to be held in trust for the
benefit of the Person entitled to such Defaulted Interest as provided
in this clause (1). The Special Record Date for the payment of such
Defaulted Interest shall be not more than 15 days and not less than 10
days prior to the date of the proposed payment and not less than 10
days after notification to the Trustee of the proposed payment. The
Trustee shall, in the name and at the expense of the Company, cause
notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be mailed, first-class postage prepaid,
to the Holder of such Registered Security (or a Predecessor Security
thereof) at his address as it appears in the Security Register not less
than 10 days prior to such Special Record Date. The Trustee may, in its
discretion, in the name and at the expense of the Company, cause a
similar notice to be published at least once in an Authorized Newspaper
of general circulation in the Borough of Manhattan, The City of New
York, but such publication shall not be a condition precedent to the
establishment of such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been mailed as aforesaid, such Defaulted Interest shall be paid
to the Person in whose name such Registered Security (or a Predecessor
Security thereof) shall be registered at the close of business on such
Special Record Date and shall no longer be payable pursuant to the
following clause (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange on which such Security may be listed, and upon such
notice as may be required by such exchange, if, after notice given by
the Company to the Trustee of the proposed payment pursuant to this
clause (2), such payment shall be deemed practicable by the Trustee.
Unless otherwise provided in or pursuant to this Indenture or the
Securities of any particular series pursuant to the provisions of this
Indenture, at the option of the Company, interest on Registered Securities that
bear interest may be paid by mailing a check to the address of the Person
entitled thereto as such address shall appear in the Security Register or by
transfer to an account maintained by the payee with a bank located in the United
States.
Subject to the foregoing provisions of this Section and Section 3.5,
each Security delivered under this Indenture upon registration of transfer of or
in exchange for or in lieu of any
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other Security shall carry the rights to interest accrued and unpaid, and to
accrue, which were carried by such other Security.
In the case of any Registered Security of any series that is
convertible into other securities of the Company or exchangeable for securities
of another issuer, which Registered Security is converted or exchanged after any
Regular Record Date and on or prior to the next succeeding Interest Payment Date
(other than any Registered Security with respect to which the Stated Maturity is
prior to such Interest Payment Date), interest with respect to which the Stated
Maturity is on such Interest Payment Date shall be payable on such Interest
Payment Date notwithstanding such conversion or exchange, and such interest
(whether or not punctually paid or duly provided for) shall be paid to the
Person in whose name that Registered Security (or one or more predecessor
Registered Securities) is registered at the close of business on such Regular
Record Date. Except as otherwise expressly provided in the immediately preceding
sentence, in the case of any Registered Security which is converted or
exchanged, interest with respect to which the Stated Maturity is after the date
of conversion or exchange of such Registered Security shall not be payable.
SECTION 3.8. PERSONS DEEMED OWNERS.
Prior to due presentment of a Registered Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Registered Security is registered in the
Security Register as the owner of such Registered Security for the purpose of
receiving payment of principal of, any premium and (subject to Sections 3.5 and
3.7) interest on and any Additional Amounts with respect to such Registered
Security and for all other purposes whatsoever, whether or not any payment with
respect to such Registered Security shall be overdue, and none of the Company,
the Trustee or any agent of the Company or the Trustee shall be affected by
notice to the contrary.
The Company, the Trustee and any agent of the Company or the Trustee
may treat the bearer of any Bearer Security or the bearer of any Coupon as the
absolute owner of such Security or Coupon for the purpose of receiving payment
thereof or on account thereof and for all other purposes whatsoever, whether or
not any payment with respect to such Security or Coupon shall be overdue, and
none of the Company, the Trustee or any agent of the Company or the Trustee
shall be affected by notice to the contrary.
No Holder of any beneficial interest in any global Security held on its
behalf by a Depository shall have any rights under this Indenture with respect
to such global Security, and such Depository may be treated by the Company, the
Trustee and any agent of the Company or the Trustee as the owner of such global
Security for all purposes whatsoever. None of the Company, the Trustee, any
Paying Agent or the Security Registrar will have any responsibility or liability
for any aspect of the records relating to or payments made on account of
beneficial ownership interests of a global Security or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
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SECTION 3.9. CANCELLATION.
All Securities and Coupons surrendered for payment, redemption,
registration of transfer, exchange or conversion or for credit against any
sinking fund payment shall, if surrendered to any Person other than the Trustee,
be delivered to the Trustee, and any such Securities and Coupons, as well as
Securities and Coupons surrendered directly to the Trustee for any such purpose,
shall be cancelled promptly by the Trustee. The Company may at any time deliver
to the Trustee for cancellation any Securities previously authenticated and
delivered hereunder which the Company may have acquired in any manner
whatsoever, and all Securities so delivered shall be cancelled promptly by the
Trustee. No Securities shall be authenticated in lieu of or in exchange for any
Securities cancelled as provided in this Section, except as expressly permitted
by or pursuant to this Indenture. All cancelled Securities and Coupons held by
the Trustee shall be destroyed by the Trustee, unless by a Company Order the
Company directs their return to it.
SECTION 3.10. COMPUTATION OF INTEREST.
Except as otherwise provided in or pursuant to this Indenture or in any
Security, interest on the Securities shall be computed on the basis of a 360-day
year of twelve 30-day months.
ARTICLE 4
SATISFACTION AND DISCHARGE OF INDENTURE
SECTION 4.1. SATISFACTION AND DISCHARGE.
Upon the direction of the Company by a Company Order, this Indenture
shall cease to be of further effect with respect to any series of Securities
specified in such Company Order and any Coupons appertaining thereto, and the
Trustee, on receipt of a Company Order, at the expense of the Company, shall
execute proper instruments acknowledging satisfaction and discharge of this
Indenture as to such series, when
(1) either
(a) all Securities of such series theretofore
authenticated and delivered and all Coupons appertaining
thereto (other than (i) Coupons appertaining to Bearer
Securities of such series surrendered in exchange for
Registered Securities of such series and maturing after such
exchange whose surrender is not required or has been waived as
provided in Section 3.5, (ii) Securities and Coupons of such
series which have been destroyed, lost or stolen and which
have been replaced or paid as provided in Section 3.6, (iii)
Coupons appertaining to Securities of such series called for
redemption and maturing after the relevant Redemption Date
whose surrender has been waived as provided in Section 11.7,
and (iv) Securities and Coupons of such series for whose
payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter
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repaid to the Company or discharged from such trust, as
provided in Section 10.3) have been delivered to the Trustee
for cancellation; or
(b) all Securities of such series and, in the case of
(i) or (ii) below, any Coupons appertaining thereto not
theretofore delivered to the Trustee for cancellation, (i)
have become due and payable, or (ii) will become due and
payable at their Stated Maturity within one year, or (iii) if
redeemable at the option of the Company, are to be called for
redemption within one year under arrangements satisfactory to
the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company, and
the Company, in the case of (i), (ii) or (iii) above, has
deposited or caused to be deposited with the Trustee as trust
funds in trust for such purpose, money in the Currency in
which such Securities are payable in an amount sufficient to
pay and discharge the entire indebtedness on such Securities
and any Coupons appertaining thereto not theretofore delivered
to the Trustee for cancellation, including the principal of,
any premium and interest on, and any Additional Amounts with
respect to such Securities and any Coupons appertaining
thereto, to the date of such deposit (in the case of
Securities which have become due and payable) or to the
Maturity thereof, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company with respect to the Outstanding
Securities of such series and any Coupons appertaining thereto; and
(3) the Company has delivered to the Trustee an Officer's
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture as to such series have been complied with.
In the event there are Securities of two or more series hereunder, the
Trustee shall be required to execute an instrument acknowledging satisfaction
and discharge of this Indenture only if requested to do so with respect to
Securities of such series as to which it is Trustee and if the other conditions
thereto are met.
Notwithstanding the satisfaction and discharge of this Indenture with
respect to any series of Securities, the obligations of the Company to the
Trustee under Section 6.7 and, if money shall have been deposited with the
Trustee pursuant to subclause (b) of clause (1) of this Section, the obligations
of the Company and the Trustee with respect to the Securities of such series
under Sections 3.5, 3.6, 4.3, 10.2 and 10.3, with respect to the payment of
Additional Amounts, if any, with respect to such Securities as contemplated by
Section 10.4 (but only to the extent that the Additional Amounts payable with
respect to such Securities exceed the amount deposited in respect of such
Additional Amounts pursuant to Section 4.1(1)(b)), and with respect to any
rights to convert or exchange such Securities into securities of the Company or
another issuer shall survive.
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SECTION 4.2. DEFEASANCE AND COVENANT DEFEASANCE.
(1) Unless pursuant to Section 3.1, either or both of (i)
defeasance of the Securities of or within a series under clause (2) of
this Section 4.2 shall not be applicable with respect to the Securities
of such series or (ii) covenant defeasance of the Securities of or
within a series under clause (3) of this Section 4.2 shall not be
applicable with respect to the Securities of such series, then such
provisions, together with the other provisions of this Section 4.2
(with such modifications thereto as may be specified pursuant to
Section 3.1 with respect to any Securities), shall be applicable to
such Securities and any Coupons appertaining thereto, and the Company
may at its option by Board Resolution, at any time, with respect to
such Securities and any Coupons appertaining thereto, elect to have
Section 4.2(2) or Section 4.2(3) be applied to such Outstanding
Securities and any Coupons appertaining thereto upon compliance with
the conditions set forth below in this Section 4.2.
(2) Upon the Company's exercise of the above option applicable
to this Section 4.2(2) with respect to any Securities of or within a
series, the Company shall be deemed to have been discharged from its
obligations with respect to such Outstanding Securities and any Coupons
appertaining thereto on the date the conditions set forth in clause (4)
of this Section 4.2 are satisfied (hereinafter, "defeasance"). For this
purpose, such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by such
Outstanding Securities and any Coupons appertaining thereto, which
shall thereafter be deemed to be "Outstanding" only for the purposes of
clause (5) of this Section 4.2 and the other Sections of this Indenture
referred to in clauses (i) and (ii) below, and to have satisfied all of
its other obligations under such Securities and any Coupons
appertaining thereto, and this Indenture insofar as such Securities and
any Coupons appertaining thereto are concerned (and the Trustee, at the
expense of the Company, shall execute proper instruments acknowledging
the same), except for the following which shall survive until otherwise
terminated or discharged hereunder: (i) the rights of Holders of such
Outstanding Securities and any Coupons appertaining thereto to receive,
solely from the trust fund described in clause (4) of this Section 4.2
and as more fully set forth in such clause, payments in respect of the
principal of (and premium, if any) and interest, if any, on, and
Additional Amounts, if any, with respect to, such Securities and any
Coupons appertaining thereto when such payments are due, and any rights
of such Holder to convert such Securities into other securities of the
Company or exchange such Securities for securities of another issuer,
(ii) the obligations of the Company and the Trustee with respect to
such Securities under Sections 3.5, 3.6, 10.2 and 10.3 and with respect
to the payment of Additional Amounts, if any, on such Securities as
contemplated by Section 10.4 (but only to the extent that the
Additional Amounts payable with respect to such Securities exceed the
amount deposited in respect of such Additional Amounts pursuant to
Section 4.2(4)(a) below), and with respect to any rights to convert
such Securities into other securities of the Company or exchange such
Securities for securities of another issuer, (iii) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and (iv) this
Section 4.2. The Company may
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exercise its option under this Section 4.2(2) notwithstanding the prior
exercise of its option under clause (3) of this Section 4.2 with
respect to such Securities and any Coupons appertaining thereto.
(3) Upon the Company's exercise of the option to have this
Section 4.2(3) apply with respect to any Securities of or within a
series, the Company shall be released from its obligations under
Sections 10.5 and 10.6, and, to the extent specified pursuant to
Section 3.1(19), any other covenant applicable to such Securities, with
respect to such Outstanding Securities and any Coupons appertaining
thereto, on and after the date the conditions set forth in clause (4)
of this Section 4.2 are satisfied (hereinafter, "covenant defeasance"),
and such Securities and any Coupons appertaining thereto shall
thereafter be deemed to be not "Outstanding" for the purposes of any
direction, waiver, consent or declaration or Act of Holders (and the
consequences of any thereof) in connection with any such covenant, but
shall continue to be deemed "Outstanding" for all other purposes
hereunder. For this purpose, such covenant defeasance means that, with
respect to such Outstanding Securities and any Coupons appertaining
thereto, the Company may omit to comply with, and shall have no
liability in respect of, any term, condition or limitation set forth in
any such Section or such other covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such
Section or such other covenant or by reason of reference in any such
Section or such other covenant to any other provision herein or in any
other document and such omission to comply shall not constitute a
default or an Event of Default under Section 5.1(4) or 5.1(8) or
otherwise, as the case may be, but, except as specified above, the
remainder of this Indenture and such Securities and Coupons
appertaining thereto shall be unaffected thereby.
(4) The following shall be the conditions to application of
clause (2) or (3) of this Section 4.2 to any Outstanding Securities of
or within a series and any Coupons appertaining thereto:
(a) The Company shall irrevocably have deposited or
caused to be deposited with the Trustee (or another trustee
satisfying the requirements of Section 6.8 who shall agree to
comply with the provisions of this Section 4.2 applicable to
it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such
Securities and any Coupons appertaining thereto, (1) an amount
in Dollars or in such Foreign Currency in which such
Securities and any Coupons appertaining thereto are then
specified as payable at Stated Maturity, or (2) Government
Obligations applicable to such Securities and Coupons
appertaining thereto (determined on the basis of the Currency
in which such Securities and Coupons appertaining thereto are
then specified as payable at Stated Maturity) which through
the scheduled payment of principal and interest in respect
thereof in accordance with their terms will provide, not later
than one day before the due date of any payment of principal
of (and premium, if any) and interest, if any, on such
Securities and any Coupons appertaining thereto, money
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in an amount, or (3) a combination thereof, in any case, in an
amount, sufficient, without consideration of any reinvestment
of such principal and interest, in the opinion of a nationally
recognized firm of independent public accountants expressed in
a written certification thereof delivered to the Trustee, to
pay and discharge, and which shall be applied by the Trustee
(or other qualifying trustee) to pay and discharge, (y) the
principal of (and premium, if any) and interest, if any, on
such Outstanding Securities and any Coupons appertaining
thereto at the Stated Maturity of such principal or
installment of principal or premium or interest and (z) any
mandatory sinking fund payments or analogous payments
applicable to such Outstanding Securities and any Coupons
appertaining thereto on the days on which such payments are
due and payable in accordance with the terms of this Indenture
and of such Securities and any Coupons appertaining thereto.
(b) Such defeasance or covenant defeasance shall not
result in a breach or violation of, or constitute a default
under, this Indenture or any other material agreement or
instrument to which the Company is a party or by which it is
bound.
(c) No Event of Default or event which with notice or
lapse of time or both would become an Event of Default with
respect to such Securities and any Coupons appertaining
thereto shall have occurred and be continuing on the date of
such deposit and, with respect to defeasance only, at any time
during the period ending on the 123rd day after the date of
such deposit (it being understood that this condition shall
not be deemed satisfied until the expiration of such period).
(d) In the case of an election under clause (2) of
this Section 4.2, the Company shall have delivered to the
Trustee an Opinion of Counsel stating that (i) the Company has
received from the Internal Revenue Service a letter ruling, or
there has been published by the Internal Revenue Service a
Revenue Ruling, or (ii) since the date of execution of this
Indenture, there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based
thereon such opinion shall confirm that, the Holders of such
Outstanding Securities and any Coupons appertaining thereto
will not recognize income, gain or loss for Federal income tax
purposes as a result of such defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such
defeasance had not occurred.
(e) In the case of an election under clause (3) of
this Section 4.2, the Company shall have delivered to the
Trustee an Opinion of Counsel to the effect that the Holders
of such Outstanding Securities and any Coupons appertaining
thereto will not recognize income, gain or loss for Federal
income tax purposes as a result of such covenant defeasance
and will be subject to Federal income tax on the same amounts,
in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred.
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(f) The Company shall have delivered to the Trustee
an Opinion of Counsel to the effect that, after the 123rd day
after the date of deposit, all money and Government
Obligations (or other property as may be provided pursuant to
Section 3.1) (including the proceeds thereof) deposited or
caused to be deposited with the Trustee (or other qualifying
trustee) pursuant to this clause (4) to be held in trust will
not be subject to any case or proceeding (whether voluntary or
involuntary) in respect of the Company under any Federal or
State bankruptcy, insolvency, reorganization or other similar
law, or any decree or order for relief in respect of the
Company issued in connection therewith.
(g) The Company shall have delivered to the Trustee
an Officer's Certificate and the Company shall have delivered
to the Trustee an Opinion of Counsel, each stating that all
conditions precedent to the defeasance or covenant defeasance
under clause (2) or (3) of this Section 4.2 (as the case may
be) have been complied with.
(h) Notwithstanding any other provisions of this
Section 4.2(4), such defeasance or covenant defeasance shall
be effected in compliance with any additional or substitute
terms, conditions or limitations which may be imposed on the
Company in connection therewith pursuant to Section 3.1.
(5) Unless otherwise specified in or pursuant to this
Indenture or any Security, if, after a deposit referred to in Section
4.2(4)(a) has been made, (a) the Holder of a Security in respect of
which such deposit was made is entitled to, and does, elect pursuant to
Section 3.1 or the terms of such Security to receive payment in a
Currency other than that in which the deposit pursuant to Section
4.2(4)(a) has been made in respect of such Security, or (b) a
Conversion Event occurs in respect of the Foreign Currency in which the
deposit pursuant to Section 4.2(4)(a) has been made, the indebtedness
represented by such Security and any Coupons appertaining thereto shall
be deemed to have been, and will be, fully discharged and satisfied
through the payment of the principal of (and premium, if any), and
interest, if any, on, and Additional Amounts, if any, with respect to,
such Security as the same becomes due out of the proceeds yielded by
converting (from time to time as specified below in the case of any
such election) the amount or other property deposited in respect of
such Security into the Currency in which such Security becomes payable
as a result of such election or Conversion Event based on (x) in the
case of payments made pursuant to clause (a) above, the applicable
market exchange rate for such Currency in effect on the second Business
Day prior to each payment date, or (y) with respect to a Conversion
Event, the applicable market exchange rate for such Foreign Currency in
effect (as nearly as feasible) at the time of the Conversion Event.
The Company shall pay and indemnify the Trustee (or other qualifying
trustee, collectively for purposes of this Section 4.2(5) and Section 4.3, the
"Trustee") against any tax, fee or other charge, imposed on or assessed against
the Government Obligations deposited
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pursuant to this Section 4.2 or the principal or interest received in respect
thereof other than any such tax, fee or other charge which by law is for the
account of the Holders of such Outstanding Securities and any Coupons
appertaining thereto.
Anything in this Section 4.2 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon Company
Request, any money or Government Obligations (or other property and any proceeds
therefrom) held by it as provided in clause (4) of this Section 4.2 which, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof which would then be required to be deposited to
effect a defeasance or covenant defeasance, as applicable, in accordance with
this Section 4.2.
SECTION 4.3. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section 10.3, all
money and Government Obligations (or other property as may be provided pursuant
to Section 3.1) (including the proceeds thereof) deposited with the Trustee
pursuant to Section 4.1 or 4.2 in respect of any Outstanding Securities of any
series and any Coupons appertaining thereto shall be held in trust and applied
by the Trustee, in accordance with the provisions of such Securities and any
Coupons appertaining thereto and this Indenture, to the payment, either directly
or through any Paying Agent (including the Company acting as its own Paying
Agent) as the Trustee may determine, to the Holders of such Securities and any
Coupons appertaining thereto of all sums due and to become due thereon in
respect of principal (and premium, if any) and interest and Additional Amounts,
if any; but such money and Government Obligations need not be segregated from
other funds except to the extent required by law.
ARTICLE 5
REMEDIES
SECTION 5.1. EVENTS OF DEFAULT.
"Event of Default," wherever used herein with respect to Securities of
any series, means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body),
unless such event is specifically deleted or modified in or pursuant to the
supplemental indenture, Board Resolution or Officer's Certificate establishing
the terms of such Series pursuant to this Indenture:
(1) default in the payment of any interest on any Security of
such series, or any Additional Amounts payable with respect thereto,
when such interest becomes or such Additional Amounts become due and
payable, and continuance of such default for a period of 30 days; or
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(2) default in the payment of the principal of or any premium
on any Security of such series, or any Additional Amounts payable with
respect thereto, when such principal or premium becomes or such
Additional Amounts become due and payable at their Maturity; or
(3) default in the deposit of any sinking fund payment when
and as due by the terms of a Security of such series; or
(4) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture or the Securities (other than
a covenant or warranty a default in the performance or the breach of
which is elsewhere in this Section specifically dealt with or which has
been expressly included in this Indenture solely for the benefit of a
series of Securities other than such series), and continuance of such
default or breach for a period of 60 days after there has been given,
by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of such series, a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "Notice of Default" hereunder; or
(5) if any event of default as defined in any mortgage,
indenture or instrument under which there may be issued, or by which
there may be secured or evidenced, any Indebtedness of the Company or
any Restricted Subsidiary (including, in each case, an Event of Default
under any other series of Securities), whether such Indebtedness now
exists or shall hereafter be created or incurred, shall happen and
shall consist, in the aggregate, of the default in the payment of
$25,000,000 or more in principal amount of such Indebtedness at the
maturity thereof (after giving effect to any applicable grace period)
or shall, in the aggregate, result in such Indebtedness in principal
amount of $25,000,000 or more becoming or being declared due and
payable prior to the date on which it would otherwise become due and
payable, and such default shall not be cured or such acceleration shall
not be rescinded, stayed or annulled or, in the case of Indebtedness
contested in good faith by the Company, a bond, letter of credit,
escrow deposit or other cash equivalent in an amount sufficient to
discharge such Indebtedness having been set aside by the Company, in
each case within a period of 10 days after there shall have been given,
by registered or certified mail, to the Company by the Trustee or to
the Company and the Trustee by the Holders of at least 25% in principal
amount of the Outstanding Securities of such series, a written notice
specifying such event of default and requiring the Company to cause
such acceleration to be rescinded or annulled or to cause such
Indebtedness to be discharged and stating that such notice is a "Notice
of Default" hereunder; or
(6) the entry by a court having competent jurisdiction of:
(a) a decree or order for relief in respect of the
Company in an involuntary proceeding under any applicable
bankruptcy, insolvency, reorganization or other
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similar law and such decree or order shall remain unstayed and
in effect for a period of 60 consecutive days; or
(b) a decree or order adjudging the Company to be
insolvent, or approving a petition seeking reorganization,
arrangement, adjustment or composition of the Company and such
decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; or
(c) a final and non-appealable order appointing a
custodian, receiver, liquidator, assignee, trustee or other
similar official of the Company of any substantial part of the
property of the Company or ordering the winding up or
liquidation of the affairs of the Company; or
(7) the commencement by the Company of a voluntary proceeding
under any applicable bankruptcy, insolvency, reorganization or other
similar law or of a voluntary proceeding seeking to be adjudicated
insolvent or the consent by the Company to the entry of a decree or
order for relief in an involuntary proceeding under any applicable
bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any insolvency proceedings against it, or the filing by
the Company of a petition or answer or consent seeking reorganization,
arrangement, adjustment or composition of the Company or relief under
any applicable law, or the consent by the Company to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee or similar official of the
Company or any substantial part of the property of the Company or the
making by the Company of an assignment for the benefit of creditors, or
the taking of corporate action by the Company in furtherance of any
such action; or
(8) any other Event of Default provided in or pursuant to this
Indenture with respect to Securities of such series.
SECTION 5.2. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT.
If an Event of Default with respect to Securities of any series at the
time Outstanding (other than an Event of Default specified in clause (6) or (7)
of Section 5.1) occurs and is continuing, then the Trustee or the Holders of not
less than 25% in principal amount of the Outstanding Securities of such series
may declare the principal of all the Securities of such series, or such lesser
amount as may be provided for in the Securities of such series, to be due and
payable immediately, by a notice in writing to the Company (and to the Trustee
if given by the Holders), and upon any such declaration such principal or such
lesser amount shall become immediately due and payable.
If an Event of Default specified in clause (6) or (7) of Section 5.1
occurs, all unpaid principal of and accrued interest on the Outstanding
Securities of that series (or such lesser amount as may be provided for in the
Securities of such series) shall ipso facto become and be
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immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder of any Security of that series.
At any time after a declaration of acceleration with respect to the
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as hereinafter in this
Article provided, the Holders of not less than a majority in principal amount of
the Outstanding Securities of such series, by written notice to the Company and
the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
of money sufficient to pay
(a) all overdue installments of any interest on and
Additional Amounts with respect to all Securities of such
series and any Coupon appertaining thereto,
(b) the principal of and any premium on any
Securities of such series which have become due otherwise than
by such declaration of acceleration and interest thereon and
any Additional Amounts with respect thereto at the rate or
rates borne by or provided for in such Securities,
(c) to the extent that payment of such interest or
Additional Amounts is lawful, interest upon overdue
installments of any interest and Additional Amounts at the
rate or rates borne by or provided for in such Securities, and
(d) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and
counsel and all other amounts due the Trustee under Section
6.7; and
(2) all Events of Default with respect to Securities of such
series, other than the non-payment of the principal of, any premium and
interest on, and any Additional Amounts with respect to Securities of
such series which shall have become due solely by such declaration of
acceleration, shall have been cured or waived as provided in Section
5.13.
No such rescission shall affect any subsequent default or impair any
right consequent thereon.
SECTION 5.3. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY
TRUSTEE.
The Company covenants that if
(1) default is made in the payment of any installment of
interest on or any Additional Amounts with respect to any Security or
any Coupon appertaining thereto
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when such interest or Additional Amounts shall have become due and
payable and such default continues for a period of 30 days, or
(2) default is made in the payment of the principal of or any
premium on any Security or any Additional Amounts with respect thereto
at their Maturity,
the Company shall, upon demand of the Trustee, pay to the Trustee, for the
benefit of the Holders of such Securities and any Coupons appertaining thereto,
the whole amount of money then due and payable with respect to such Securities
and any Coupons appertaining thereto, with interest upon the overdue principal,
any premium and, to the extent that payment of such interest shall be legally
enforceable, upon any overdue installments of interest and Additional Amounts at
the rate or rates borne by or provided for in such Securities, and, in addition
thereto, such further amount of money as shall be sufficient to cover the costs
and expenses of collection, including the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and all other
amounts due to the Trustee under Section 6.7.
If the Company fails to pay the money it is required to pay the Trustee
pursuant to the preceding paragraph forthwith upon the demand of the Trustee,
the Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the money so due and unpaid, and may
prosecute such proceeding to judgment or final decree, and may enforce the same
against the Company or any other obligor upon such Securities and any Coupons
appertaining thereto and collect the monies adjudged or decreed to be payable in
the manner provided by law out of the property of the Company or any other
obligor upon such Securities and any Coupons appertaining thereto, wherever
situated.
If an Event of Default with respect to Securities of any series occurs
and is continuing, the Trustee may in its discretion proceed to protect and
enforce its rights and the rights of the Holders of Securities of such series
and any Coupons appertaining thereto by such appropriate judicial proceedings as
the Trustee shall deem most effectual to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or such Securities or in aid of the exercise of any power granted
herein or therein, or to enforce any other proper remedy.
SECTION 5.4. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities of any series or the property of the Company or such other obligor or
their creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Trustee shall have made any demand
on the Company for the payment of any overdue principal, premium, interest or
Additional Amounts) shall be entitled and empowered, by intervention in such
proceeding or otherwise,
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(1) to file and prove a claim for the whole amount, or such
lesser amount as may be provided for in the Securities of any
applicable series, of the principal and any premium, interest and
Additional Amounts owing and unpaid in respect of the Securities and
any Coupons appertaining thereto and to file such other papers or
documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents or
counsel) and of the Holders of Securities or any Coupons appertaining
thereto allowed in such judicial proceeding, and
(2) to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder of Securities or any Coupons to make such payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders of Securities or any Coupons, to pay to the Trustee any
amount due to it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel and any other amounts due the
Trustee under Section 6.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder of a Security
or any Coupon any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or Coupons or the rights of any Holder thereof, or to
authorize the Trustee to vote in respect of the claim of any Holder of a
Security or any Coupon in any such proceeding.
SECTION 5.5. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
SECURITIES OR COUPONS.
All rights of action and claims under this Indenture or any of the
Securities or Coupons may be prosecuted and enforced by the Trustee without the
possession of any of the Securities or Coupons or the production thereof in any
proceeding relating thereto, and any such proceeding instituted by the Trustee
shall be brought in its own name as trustee of an express trust, and any
recovery or judgment, after provision for the payment of the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, shall be for the ratable benefit of each and every Holder of the
Securities or Coupons in respect of which such judgment has been recovered.
SECTION 5.6. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal, or any
premium, interest or Additional Amounts, upon presentation of the Securities or
Coupons, or both, as the case may be, and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
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FIRST: To the payment of all amounts due the Trustee and any
predecessor Trustee under Section 6.7;
SECOND: To the payment of the amounts then due and unpaid upon
the Securities and any Coupons for principal and any premium, interest
and Additional Amounts in respect of which or for the benefit of which
such money has been collected, ratably, without preference or priority
of any kind, according to the aggregate amounts due and payable on such
Securities and Coupons for principal and any premium, interest and
Additional Amounts, respectively;
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
SECTION 5.7. LIMITATIONS ON SUITS.
No Holder of any Security of any series or any Coupons appertaining
thereto shall have any right to institute any proceeding, judicial or otherwise,
with respect to this Indenture, or for the appointment of a receiver or trustee,
or for any other remedy hereunder, unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Securities
of such series;
(2) the Holders of not less than 25% in principal amount of
the Outstanding Securities of such series shall have made written
request to the Trustee to institute proceedings in respect of such
Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee such
indemnity as is reasonably satisfactory to it against the costs,
expenses and liabilities to be incurred in compliance with such
request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of such
series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture or any Security to affect, disturb or prejudice the rights of
any other such Holders or Holders of Securities of any other series, or to
obtain or to seek to obtain priority or preference over any other Holders or to
enforce any right under this Indenture, except in the manner herein provided and
for the equal and ratable benefit of all such Holders.
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SECTION 5.8. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL AND
ANY PREMIUM, INTEREST AND ADDITIONAL AMOUNTS.
Notwithstanding any other provision in this Indenture, the Holder of
any Security or Coupon shall have the right, which is absolute and
unconditional, to receive payment of the principal of, any premium and (subject
to Sections 3.5 and 3.7) interest on, and any Additional Amounts with respect
to, such Security or payment of such Coupon, as the case may be, on the
respective Stated Maturity or Maturities therefor specified in such Security or
Coupon (or, in the case of redemption, on the Redemption Date or, in the case of
repayment at the option of such Holder if provided in or pursuant to this
Indenture, on the date such repayment is due) and to institute suit for the
enforcement of any such payment, and such right shall not be impaired without
the consent of such Holder.
SECTION 5.9. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder of a Security or a Coupon has instituted
any proceeding to enforce any right or remedy under this Indenture and such
proceeding has been discontinued or abandoned for any reason, or has been
determined adversely to the Trustee or to such Holder, then and in every such
case the Company, the Trustee and each such Holder shall, subject to any
determination in such proceeding, be restored severally and respectively to
their former positions hereunder, and thereafter all rights and remedies of the
Trustee and each such Holder shall continue as though no such proceeding had
been instituted.
SECTION 5.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities or Coupons in the last
paragraph of Section 3.6, no right or remedy herein conferred upon or reserved
to the Trustee or to each and every Holder of a Security or a Coupon is intended
to be exclusive of any other right or remedy, and every right and remedy, to the
extent permitted by law, shall be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not, to the extent permitted by law, prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 5.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any Security or
Coupon to exercise any right or remedy accruing upon any Event of Default shall
impair any such right or remedy or constitute a waiver of any such Event of
Default or an acquiescence therein. Every right and remedy given by this Article
or by law to the Trustee or to any Holder of a Security or a Coupon may be
exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by such Holder, as the case may be.
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SECTION 5.12. CONTROL BY HOLDERS OF SECURITIES.
The Holders of a majority in principal amount of the Outstanding
Securities of any series shall have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or
exercising any trust or power conferred on the Trustee with respect to the
Securities of such series and any Coupons appertaining thereto, provided that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture or with the Securities of such series,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) such direction is not unduly prejudicial to the rights of
the other Holders of Securities of such series not joining in such
action.
SECTION 5.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series on behalf of the Holders of all the
Securities of such series and any Coupons appertaining thereto may waive any
past default hereunder with respect to such series and its consequences, except
a default
(1) in the payment of the principal of, any premium or
interest on, or any Additional Amounts with respect to, any Security of
such series or any Coupons appertaining thereto, or
(2) in respect of a covenant or provision hereof which under
Article 9 cannot be modified or amended without the consent of the
Holder of each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and any Event
of Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture; but no such waiver shall extend to any subsequent or
other default or impair any right consequent thereon.
SECTION 5.14. WAIVER OF USURY, STAY OR EXTENSION LAWS.
The Company covenants that (to the extent that it may lawfully do so)
it will not at any time insist upon, or plead, or in any manner whatsoever claim
or take the benefit or advantage of, any usury, stay or extension law wherever
enacted, now or at any time hereafter in force, which may affect the covenants
or the performance of this Indenture; and the Company expressly waives (to the
extent that it may lawfully do so) all benefit or advantage of any such law and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of every
such power as though no such law had been enacted.
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SECTION 5.15. UNDERTAKING FOR COSTS.
All parties to this Indenture agree, and each Holder of any Security by
his acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken or
omitted by it as Trustee, the filing by any party litigant in such suit of any
undertaking to pay the costs of such suit, and that such court may in its
discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit having due regard to the merits and good
faith of the claims or defenses made by such party litigant; but the provisions
of this Section 5.15 shall not apply to any suit instituted by the Trustee, to
any suit instituted by any Holder, or group of Holders, holding in the aggregate
more than 10% in principal amount of Outstanding Securities of any series, or to
any suit instituted by any Holder for the enforcement of the payment of the
principal of (or premium, if any) or interest, if any, on or Additional Amounts,
if any, with respect to any Security on or after the respective Stated
Maturities expressed in such Security (or, in the case of redemption, on or
after the Redemption Date, and, in the case of repayment, on or after the date
for repayment) or for the enforcement of the right, if any, to convert or
exchange any Security into other securities in accordance with its terms.
ARTICLE 6
THE TRUSTEE
SECTION 6.1. CERTAIN DUTIES AND RESPONSIBILITIES
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but in the case of any such certificates or opinions
that by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this
Indenture but not to verify or confirm the contents thereof.
(b) In case an Event of Default actually known to a Responsible Office
of the Trustee has occurred and is continuing, the Trustee shall exercise such
of the rights and powers vested in it by this Indenture, and use the same degree
of care and skill in their exercise, as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
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(c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that
(1) this paragraph (c) shall not be construed to limit the
effect of paragraph (a) of this Section 6.1;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
Outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture.
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SECTION 6.2. CERTAIN RIGHTS OF TRUSTEE.
(1) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, coupon or other paper
or document reasonably believed by it to be genuine and to have been
signed or presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or a Company Order
(in each case, other than delivery of any Security, together with any
Coupons appertaining thereto, to the Trustee for authentication and
delivery pursuant to Section 3.3 which shall be sufficiently evidenced
as provided therein) and any resolution of the Board of Directors may
be sufficiently evidenced by a Board Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence shall be herein specifically prescribed)
may, in the absence of bad faith on its part, request and rely upon an
Officer's Certificate;
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(4) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by or pursuant to this Indenture
at the request or direction of any of the Holders of Securities of any
series or any Coupons appertaining thereto pursuant to this Indenture,
unless such Holders shall have offered to the Trustee such security or
indemnity as is reasonably satisfactory to it against the costs,
expenses and liabilities which might be incurred by it in compliance
with such request or direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, coupon or other paper or document, but
the Trustee, in its discretion, may, but shall not be obligated to make
such further inquiry or investigation into such facts or matters as it
may see fit, and, if the Trustee shall determine to make such further
inquiry or investigation, it shall be entitled to examine, during
business hours and upon reasonable notice, the books, records and
premises of the Company, personally or by agent or attorney;
(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder;
(8) the Authenticating Agent, Paying Agent, and Security
Registrar shall have the same protections as the Trustee set forth
hereunder;
(9) no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers;
(10) whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the
liability of or affording protection to the Trustee shall be subject
to the provisions of this Article 6;
(11) the Trustee shall not be liable for any action taken or
omitted to be taken by it in good faith that is believed to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture, unless the Trustee's conduct constitutes
negligence;
(12) the permissive rights of the Trustee to do things
enumerated in this Indenture shall not be construed as a duty unless
so specified herein; and
(13) the Trustee shall not be deemed to have notice or actual
knowledge of any Event of Default unless a Responsible Officer of the
Trustee has actual knowledge thereof or unless written notice of any
Event of Default is received by the Trustee pursuant to Section 1.5
hereof. Except as otherwise expressly provided herein, the Trustee
shall not be bound to ascertain or inquire as to the performance or
observance of any of the terms, conditions, covenants or agreements
herein or in any series of Securities.
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SECTION 6.3. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
Within 90 days after the occurrence of any default hereunder with
respect to the Securities of any series, the Trustee shall transmit by mail to
all Holders of Securities of such series entitled to receive reports pursuant to
Section 7.3(3), notice of such default hereunder actually known to a Responsible
Officer of the Trustee, unless such default shall have been cured or waived;
provided, however, that, except in the case of a default in the payment of the
principal of (or premium, if any), or interest, if any, on, or Additional
Amounts or any sinking fund or purchase fund installment with respect to, any
Security of such series, the Trustee shall be protected in withholding such
notice if and so long as the board of directors, the executive committee or a
trust committee of directors and/or Responsible Officers of the Trustee in good
faith determine that the withholding of such notice is in the best interest of
the Holders of Securities and Coupons of such series; and provided, further,
that in the case of any default of the character specified in Section 5.1(5)
with respect to Securities of such series, no such notice to Holders shall be
given until at least 30 days after the occurrence thereof. For the purpose of
this Section, the term "default" means any event which is, or after notice or
lapse of time or both would become, an Event of Default with respect to
Securities of such series.
SECTION 6.4. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES.
The recitals contained herein and in the Securities, except the
Trustee's certificate of authentication, and in any Coupons shall be taken as
the statements of the Company and neither the Trustee nor any Authenticating
Agent assumes any responsibility for their correctness. The Trustee makes no
representations as to the validity or sufficiency of this Indenture or of the
Securities or the Coupons, except that the Trustee represents that it is duly
authorized to execute and deliver this Indenture, authenticate the Securities
and perform its obligations hereunder and that the statements made by it in a
Statement of Eligibility on Form T-1 supplied to the Company are true and
accurate, subject to the qualifications set forth therein. Neither the Trustee
nor any Authenticating Agent shall be accountable for the use or application by
the Company of the Securities or the proceeds thereof.
SECTION 6.5. MAY HOLD SECURITIES.
The Trustee, any Authenticating Agent, any Paying Agent, any Security
Registrar or any other Person that may be an agent of the Trustee or the
Company, in its individual or any other capacity, may become the owner or
pledgee of Securities or Coupons and, subject to Sections 310(b) and 311 of the
Trust Indenture Act, may otherwise deal with the Company with the same rights it
would have if it were not the Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other Person.
SECTION 6.6. MONEY HELD IN TRUST.
Except as provided in Section 4.3 and Section 10.3, money held by the
Trustee in trust hereunder need not be segregated from other funds except to the
extent required by law and shall
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be held uninvested. The Trustee shall be under no liability for interest on any
money received by it hereunder except as otherwise agreed to in writing with the
Company.
SECTION 6.7. COMPENSATION AND REIMBURSEMENT.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by the Trustee hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture or arising out of or in
connection with the acceptance or administration of the trust or trusts
hereunder (including the reasonable compensation and the expenses and
disbursements of its agents and counsel), except any such expense,
disbursement or advance as may be attributable to the Trustee's
negligence or bad faith; and
(3) to indemnify the Trustee and its agents, officers,
directors and employees for, and to hold them harmless against, any
loss, liability or expense incurred without negligence or bad faith on
their part, arising out of or in connection with the acceptance or
administration of the trust or trusts hereunder, including the costs
and expenses of defending themselves against any claim or liability in
connection with the exercise or performance of any of their powers or
duties hereunder, except to the extent that any such loss, liability or
expense was due to the Trustee's negligence or bad faith.
As security for the performance of the obligations of the Company under
this Section, the Trustee shall have a lien prior to the Securities of any
series upon all property and funds held or collected by the Trustee as such,
except funds held in trust for the payment of principal of, and premium or
interest on or any Additional Amounts with respect to Securities or any Coupons
appertaining thereto.
To the extent permitted by law, any compensation or expense incurred by
the Trustee after a default specified in or pursuant to Section 5.1 is intended
to constitute an expense of administration under any then applicable bankruptcy
or insolvency law. "Trustee" for purposes of this Section 6.7 shall include any
predecessor Trustee but the negligence or bad faith of any Trustee shall not
affect the rights of any other Trustee under this Section 6.7.
The provisions of this Section 6.7 shall survive the satisfaction and
discharge of this Indenture or the earlier resignation or removal of the Trustee
and shall apply with equal force and effect to the Trustee in its capacity as
Authenticating Agent, Paying Agent or Security Registrar.
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SECTION 6.8. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be a Trustee hereunder that is a Corporation
organized and doing business under the laws of the United States of America, any
state thereof or the District of Columbia, that is eligible under Section
310(a)(1) of the Trust Indenture Act to act as trustee under an indenture
qualified under the Trust Indenture Act and that has a combined capital and
surplus (computed in accordance with Section 310(a)(2) of the Trust Indenture
Act) of at least $50,000,000, and that is subject to supervision or examination
by Federal or state authority. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.
SECTION 6.9. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR.
(1) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall
become effective until the acceptance of appointment by the successor
Trustee pursuant to Section 6.10.
(2) The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to
the Company. If the instrument of acceptance by a successor Trustee
required by Section 6.10 shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the
resigning Trustee may petition any court of competent jurisdiction for
the appointment of a successor Trustee with respect to such series.
(3) The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in
principal amount of the Outstanding Securities of such series,
delivered to the Trustee and the Company.
(4) If at any time:
(a) the Trustee shall fail to comply with the
obligations imposed upon it under Section 310(b) of the Trust
Indenture Act with respect to Securities of any series after
written request therefor by the Company or any Holder of a
Security of such series who has been a bona fide Holder of a
Security of such series for at least six months, or
(b) the Trustee shall cease to be eligible under
Section 6.8 and shall fail to resign after written request
therefor by the Company or any such Holder, or
(c) the Trustee shall become incapable of acting or
shall be adjudged a bankrupt or insolvent or a receiver of the
Trustee or of its property shall be appointed or any public
officer shall take charge or control of the Trustee or of its
property or affairs for the purpose of rehabilitation,
conservation or liquidation, then, in any such case, (i) the
Company, by or pursuant to a Board Resolution, may remove the
Trustee with respect to all Securities or the Securities of
such
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series, or (ii) subject to Section 315(e) of the Trust
Indenture Act, any Holder of a Security who has been a bona
fide Holder of a Security of such series for at least six
months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the
removal of the Trustee with respect to all Securities of such
series and the appointment of a successor Trustee or Trustees.
(5) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of
Trustee for any cause, with respect to the Securities of one or more
series, the Company, by or pursuant to a Board Resolution, shall
promptly appoint a successor Trustee or Trustees with respect to the
Securities of such series (it being understood that any such successor
Trustee may be appointed with respect to the Securities of one or more
or all of such series and that at any time there shall be only one
Trustee with respect to the Securities of any particular series) and
shall comply with the applicable requirements of Section 6.10. If,
within one year after such resignation, removal or incapacity, or the
occurrence of such vacancy, a successor Trustee with respect to the
Securities of any series shall be appointed by Act of the Holders of a
majority in principal amount of the Outstanding Securities of such
series delivered to the Company and the retiring Trustee, the successor
Trustee so appointed shall, forthwith upon its acceptance of such
appointment in accordance with the applicable requirements of Section
6.10, become the successor Trustee with respect to the Securities of
such series and to that extent supersede the successor Trustee
appointed by the Company. If no successor Trustee with respect to the
Securities of any series shall have been so appointed by the Company or
the Holders of Securities and accepted appointment in the manner
required by Section 6.10, any Holder of a Security who has been a bona
fide Holder of a Security of such series for at least six months may,
on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor
Trustee with respect to the Securities of such series.
(6) The Company shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and
each appointment of a successor Trustee with respect to the Securities
of any series by mailing written notice of such event by first-class
mail, postage prepaid, to the Holders of Registered Securities, if any,
of such series as their names and addresses appear in the Security
Register and, if Securities of such series are issued as Bearer
Securities, by publishing notice of such event once in an Authorized
Newspaper in each Place of Payment located outside the United States.
Each notice shall include the name of the successor Trustee with
respect to the Securities of such series and the address of its
Corporate Trust Office.
(7) In no event shall any retiring Trustee be liable for the
acts or omissions of any successor Trustee hereunder.
SECTION 6.10. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
(1) Upon the appointment hereunder of any successor Trustee
with respect to all Securities, such successor Trustee so appointed
shall execute, acknowledge and
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deliver to the Company and the retiring Trustee an instrument accepting
such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with
all the rights, powers, trusts and duties hereunder of the retiring
Trustee; but, on the request of the Company or such successor Trustee,
such retiring Trustee, upon payment of its charges, shall execute and
deliver an instrument transferring to such successor Trustee all the
rights, powers and trusts of the retiring Trustee and, subject to
Section 10.3, shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder,
subject nevertheless to its claim, if any, provided for in Section 6.7.
(2) Upon the appointment hereunder of any successor Trustee
with respect to the Securities of one or more (but not all) series, the
Company, the retiring Trustee and such successor Trustee shall execute
and deliver an indenture supplemental hereto wherein each successor
Trustee shall accept such appointment and which (1) shall contain such
provisions as shall be necessary or desirable to transfer and confirm
to, and to vest in, such successor Trustee all the rights, powers,
trusts and duties of the retiring Trustee with respect to the
Securities of that or those series to which the appointment of such
successor Trustee relates, (2) if the retiring Trustee is not retiring
with respect to all Securities, shall contain such provisions as shall
be deemed necessary or desirable to confirm that all the rights,
powers, trusts and duties of the retiring Trustee with respect to the
Securities of that or those series as to which the retiring Trustee is
not retiring shall continue to be vested in the retiring Trustee, and
(3) shall add to or change any of the provisions of this Indenture as
shall be necessary to provide for or facilitate the administration of
the trusts hereunder by more than one Trustee, it being understood that
nothing herein or in such supplemental indenture shall constitute such
Trustees co-trustees of the same trust, that each such Trustee shall be
trustee of a trust or trusts hereunder separate and apart from any
trust or trusts hereunder administered by any other such Trustee and
that no Trustee shall be responsible for any notice given to, or
received by, or any act or failure to act on the part of any other
Trustee hereunder, and, upon the execution and delivery of such
supplemental indenture, the resignation or removal of the retiring
Trustee shall become effective to the extent provided therein, such
retiring Trustee shall have no further responsibility for the exercise
of rights and powers or for the performance of the duties and
obligations vested in the Trustee under this Indenture with respect to
the Securities of that or those series to which the appointment of such
successor Trustee relates other than as hereinafter expressly set
forth, and such successor Trustee, without any further act, deed or
conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee with respect to the Securities of that
or those series to which the appointment of such successor Trustee
relates; but, on request of the Company or such successor Trustee, such
retiring Trustee, upon payment of its charges with respect to the
Securities of that or those series to which the appointment of such
successor Trustee relates and subject to Section 10.3 shall duly
assign, transfer and deliver to such successor Trustee, to the extent
contemplated by such supplemental indenture, the property and money
held by such retiring Trustee hereunder
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with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates, subject to its claim, if
any, provided for in Section 6.7.
(3) Upon request of any Person appointed hereunder as a
successor Trustee, the Company shall execute any and all instruments
for more fully and certainly vesting in and confirming to such
successor Trustee all such rights, powers and trusts referred to in
paragraph (1) or (2) of this Section, as the case may be.
(4) No Person shall accept its appointment hereunder as a
successor Trustee unless at the time of such acceptance such successor
Person shall be qualified and eligible under this Article.
SECTION 6.11. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO
BUSINESS.
Any Corporation into which the Trustee may be merged or converted or
with which it may be consolidated, or any Corporation resulting from any merger,
conversion or consolidation to which the Trustee shall be a party, or any
Corporation succeeding by sale or otherwise to all or substantially all of the
corporate trust business of the Trustee shall be the successor of the Trustee
hereunder, without the execution or filing of any paper or any further act on
the part of any of the parties hereto. In case any Securities shall have been
authenticated but not delivered by the Trustee then in office, any successor by
merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
SECTION 6.12. APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint one or more Authenticating Agents acceptable to
the Company with respect to one or more series of Securities which shall be
authorized to act on behalf of the Trustee to authenticate Securities of that or
those series issued upon original issue, exchange, registration of transfer,
partial redemption or partial repayment or pursuant to Section 3.6, and
Securities so authenticated shall be entitled to the benefits of this Indenture
and shall be valid and obligatory for all purposes as if authenticated by the
Trustee hereunder. Wherever reference is made in this Indenture to the
authentication and delivery of Securities by the Trustee or the Trustee's
certificate of authentication, such reference shall be deemed to include
authentication and delivery on behalf of the Trustee by an Authenticating Agent
and a certificate of authentication executed on behalf of the Trustee by an
Authenticating Agent.
Each Authenticating Agent must be acceptable to the Company and, except
as provided in or pursuant to this Indenture, shall at all times be a
Corporation that would be permitted by the Trust Indenture Act to act as trustee
under an indenture qualified under the Trust Indenture Act, is authorized under
applicable law and by its charter to act as an Authenticating Agent and has a
combined capital and surplus (computed in accordance with Section 310(a)(2) of
the Trust Indenture Act) of at least $50,000,000. If at any time an
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, it shall resign immediately in the manner and with
the effect specified in this Section.
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Any Corporation into which an Authenticating Agent may be merged or
converted or with which it may be consolidated, or any Corporation resulting
from any merger, conversion or consolidation to which such Authenticating Agent
shall be a party, or any Corporation succeeding by sale or otherwise to all or
substantially all of the corporate agency or corporate trust business of an
Authenticating Agent, shall be the successor of such Authenticating Agent
hereunder, provided such Corporation shall be otherwise eligible under this
Section, without the execution or filing of any paper or any further act on the
part of the Trustee or the Authenticating Agent.
An Authenticating Agent may resign at any time by giving written notice
thereof to the Trustee and the Company. The Trustee may at any time terminate
the agency of an Authenticating Agent by giving written notice thereof to such
Authenticating Agent and the Company. Upon receiving such a notice of
resignation or upon such a termination, or in case at any time such
Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent which shall be acceptable to the Company and shall (i) mail written notice
of such appointment by first-class mail, postage prepaid, to all Holders of
Registered Securities, if any, of the series with respect to which such
Authenticating Agent shall serve, as their names and addresses appear in the
Security Register, and (ii) if Securities of the series are issued as Bearer
Securities, publish notice of such appointment at least once in an Authorized
Newspaper in the place where such successor Authenticating Agent has its
principal office if such office is located outside the United States. Any
successor Authenticating Agent, upon acceptance of its appointment hereunder,
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Company agrees to pay each Authenticating Agent from time to time
reasonable compensation for its services under this Section. If the Trustee
makes such payments, it shall be entitled to be reimbursed for such payments,
subject to the provisions of Section 6.7.
The provisions of Sections 3.8, 6.4 and 6.5 shall be applicable to each
Authenticating Agent.
If an Authenticating Agent is appointed with respect to one or more
series of Securities pursuant to this Section, the Securities of such series may
have endorsed thereon, in addition to or in lieu of the Trustee's certificate of
authentication, an alternate certificate of authentication in substantially the
following form:
This is one of the Securities of the series designated herein referred
to in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
By___________________________________________
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as Authenticating Agent
By___________________________________________
Authorized Officer
If all of the Securities of any series may not be originally issued at
one time, and if the Trustee does not have an office capable of authenticating
Securities upon original issuance located in a Place of Payment where the
Company wishes to have Securities of such series authenticated upon original
issuance, the Trustee, if so requested in writing (which writing need not be
accompanied by or contained in an Officer's Certificate by the Company), shall
appoint in accordance with this Section an Authenticating Agent having an office
in a Place of Payment designated by the Company with respect to such series of
Securities.
ARTICLE 7
HOLDERS LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 7.1. COMPANY TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS.
In accordance with Section 312(a) of the Trust Indenture Act, the
Company shall furnish or cause to be furnished to the Trustee
(1) semi-annually with respect to Securities of each series
not later than May 1 and November 1 of the year or upon such other
dates as are set forth in or pursuant to the Board Resolution or
indenture supplemental hereto authorizing such series, a list, in each
case in such form as the Trustee may reasonably require, of the names
and addresses of Holders as of the applicable date, and
(2) at such other times as the Trustee may request in writing,
within 30 days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished,
provided, however, that so long as the Trustee is the Security Registrar no such
list shall be required to be furnished.
SECTION 7.2. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS.
The Trustee shall comply with the obligations imposed upon it pursuant
to Section 312 of the Trust Indenture Act.
Every Holder of Securities or Coupons, by receiving and holding the
same, agrees with the Company and the Trustee that none of the Company, the
Trustee, any Paying Agent or any Security Registrar shall be held accountable by
reason of the disclosure of any such information as to the names and addresses
of the Holders of Securities in accordance with Section 312(c) of
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the Trust Indenture Act, regardless of the source from which such information
was derived, and that the Trustee shall not be held accountable by reason of
mailing any material pursuant to a request made under Section 312(b) of the
Trust Indenture Act.
SECTION 7.3. REPORTS BY TRUSTEE.
(1) Within 60 days after September 15 of each year commencing
with the first September 15 following the first issuance of Securities
pursuant to Section 3.1, if required by Section 313(a) of the Trust
Indenture Act, the Trustee shall transmit, pursuant to Section 313(c)
of the Trust Indenture Act, a brief report dated as of such September
15 with respect to any of the events specified in said Section 313(a)
which may have occurred since the later of the immediately preceding
September 15 and the date of this Indenture.
(2) The Trustee shall transmit the reports required by Section
313(a) of the Trust Indenture Act at the times specified therein.
(3) Reports pursuant to this Section shall be transmitted in
the manner and to the Persons required by Sections 313(c) and 313(d) of
the Trust Indenture Act.
SECTION 7.4. REPORTS BY COMPANY.
The Company, pursuant to Section 314(a) of the Trust Indenture Act,
shall:
(1) file with the Trustee, within 15 days after the Company is
required to file the same with the Commission, copies of the annual
reports and of the information, documents and other reports (or copies
of such portions of any of the foregoing as the Commission may from
time to time by rules and regulations prescribe) which the Company may
be required to file with the Commission pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934, as amended; or,
if the Company is not required to file information, documents or
reports pursuant to either of said Sections, then it shall file with
the Trustee and the Commission, in accordance with rules and
regulations prescribed from time to time by the Commission, such of the
supplementary and periodic information, documents and reports which may
be required pursuant to Section 13 of the Securities Exchange Act of
1934, as amended, in respect of a security listed and registered on a
national securities exchange as may be prescribed from time to time in
such rules and regulations;
(2) file with the Trustee and the Commission, in accordance
with rules and regulations prescribed from time to time by the
Commission, such additional information, documents and reports with
respect to compliance by the Company with the conditions and covenants
of this Indenture as may be required from time to time by such rules
and regulations; and
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(3) transmit within 30 days after the filing thereof with the
Trustee, in the manner and to the extent provided in Section 313(c) of
the Trust Indenture Act, such summaries of any information, documents
and reports required to be filed by the Company pursuant to paragraphs
(1) and (2) of this Section as may be required by rules and regulations
prescribed from time to time by the Commission.
ARTICLE 8
CONSOLIDATION, MERGER AND SALES
SECTION 8.1. COMPANY MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS.
The Company shall not consolidate with or merge into any other Person
(whether or not affiliated with the Company), or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to any
other Person (whether or not affiliated with the Company), and the Company shall
not permit any other Person (whether or not affiliated with the Company) to
consolidate with or merge into the Company or convey, transfer or lease its
properties and assets as an entirety or substantially as an entirety to the
Company; unless:
(1) in case the Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
as an entirety or substantially as an entirety to any Person, the
Person formed by such consolidation or into which the Company is merged
or the Person which acquires by conveyance or transfer, or which
leases, the properties and assets of the Company as an entirety or
substantially as an entirety shall be a Corporation organized and
existing under the laws of the United States of America or any state
thereof or the District of Columbia and shall expressly assume, by an
indenture (or indentures, if at such time there is more than one
Trustee) supplemental hereto, executed by the successor Person and
delivered to the Trustee the due and punctual payment of the principal
of, any premium and interest on and any Additional Amounts with respect
to all the Securities and the performance of every obligation in this
Indenture and the Outstanding Securities on the part of the Company to
be performed or observed and shall provide for conversion or exchange
rights in accordance with the provisions of the Securities of any
series that are convertible or exchangeable into Common Stock or other
securities;
(2) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of the Company or
a Subsidiary as a result of such transaction as having been incurred by
the Company or such Subsidiary at the time of such transaction, no
Event of Default or event which, after notice or lapse of time, or
both, would become an Event of Default, shall have occurred and be
continuing; and
(3) either the Company or the successor Person shall have
delivered to the Trustee an Officer's Certificate and an Opinion of
Counsel, each stating that such consolidation, merger, conveyance,
transfer or lease and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply
with
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this Article and that all conditions precedent herein provided for
relating to such transaction have been complied with.
SECTION 8.2. SUCCESSOR PERSON SUBSTITUTED FOR COMPANY.
Upon any consolidation by the Company with or merger of the Company
into any other Person or any conveyance, transfer or lease of the properties and
assets of the Company substantially as an entirety to any Person in accordance
with Section 8.1, the successor Person formed by such consolidation or into
which the Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein; and thereafter, except in
the case of a lease, the predecessor Person shall be released from all
obligations and covenants under this Indenture, the Securities and the Coupons.
ARTICLE 9
SUPPLEMENTAL INDENTURES
SECTION 9.1. SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders of Securities or Coupons, the
Company (when authorized by or pursuant to a Board Resolution) and the Trustee,
at any time and from time to time, may enter into one or more indentures
supplemental hereto, for any of the following purposes:
(1) to evidence the succession of another Person to the
Company, and the assumption by any such successor of the covenants of
the Company, contained herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of
the Holders of all or any series of Securities (as shall be specified
in such supplemental indenture or indentures) or to surrender any right
or power herein conferred upon the Company; or
(3) to add to or change any of the provisions of this
Indenture to provide that Bearer Securities may be registrable as to
principal, to change or eliminate any restrictions on the payment of
principal of, any premium or interest on or any Additional Amounts with
respect to Securities, to permit Bearer Securities to be issued in
exchange for Registered Securities, to permit Bearer Securities to be
exchanged for Bearer Securities of other authorized denominations or to
permit or facilitate the issuance of Securities in uncertificated form,
provided any such action shall not adversely affect the interests of
the Holders of Outstanding Securities of any series or any Coupons
appertaining thereto in any material respect; or
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(4) to establish the form or terms of Securities of any series
and any Coupons appertaining thereto as permitted by Sections 2.1 and
3.1; or
(5) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee with respect to the Securities of one
or more series and to add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the
administration of the trusts hereunder by more than one Trustee,
pursuant to the requirements of Section 6.10; or
(6) to cure any ambiguity or to correct or supplement any
provision herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions with respect to
matters or questions arising under this Indenture which shall not
adversely affect the interests of the Holders of Securities of any
series then Outstanding or any Coupons appertaining thereto in any
material respect; or
(7) to add to, delete from or revise the conditions,
limitations and restrictions on the authorized amount, terms or
purposes of issue, authentication and delivery of Securities, as herein
set forth; or
(8) to add any additional Events of Default with respect to
all or any series of Securities (as shall be specified in such
supplemental indenture); or
(9) to supplement any of the provisions of this Indenture to
such extent as shall be necessary to permit or facilitate the
defeasance and discharge of any series of Securities pursuant to
Article 4, provided that any such action shall not adversely affect the
interests of any Holder of an Outstanding Security of such series and
any Coupons appertaining thereto or any other Outstanding Security or
Coupon in any material respect; or
(10) to secure the Securities pursuant to Section 10.5 or
otherwise; or
(11) to make provisions with respect to conversion or exchange
rights of Holders of Securities of any series; or
(12) to amend or supplement any provision contained herein or
in any supplemental indenture, provided that no such amendment or
supplement shall materially adversely affect the interests of the
Holders of any Securities then Outstanding.
SECTION 9.2. SUPPLEMENTAL INDENTURES WITH CONSENT OF HOLDERS.
With the consent of the Holders of not less than a majority in
principal amount of the Outstanding Securities of each series affected by such
supplemental indenture, by Act of said Holders delivered to the Company and the
Trustee, the Company (when authorized by or pursuant to a Company's Board
Resolution) and the Trustee may enter into an indenture or indentures
supplemental hereto for the purpose of adding any provisions to or changing in
any
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manner or eliminating any of the provisions of this Indenture or of
modifying in any manner the rights of the Holders of Securities of such series
under this Indenture or of the Securities of such series; provided, however,
that no such supplemental indenture, without the consent of the Holder of each
Outstanding Security affected thereby, shall
(1) change the Stated Maturity of the principal of, or any
premium or installment of interest on or any Additional Amounts with
respect to, any Security, or reduce the principal amount thereof or the
rate (or modify the calculation of such rate) of interest thereon or
any Additional Amounts with respect thereto, or any premium payable
upon the redemption thereof or otherwise, or change the obligation of
the Company to pay Additional Amounts pursuant to the terms hereof
(except as contemplated by Section 8.1(1) and permitted by Section
9.1(1)), or reduce the amount of the principal of an Original Issue
Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof pursuant to Section 5.2 or the
amount thereof provable in bankruptcy pursuant to Section 5.4, change
the redemption provisions or adversely affect the right of repayment at
the option of any Holder as contemplated by Article 13, or change the
Place of Payment, Currency in which the principal of, any premium or
interest on, or any Additional Amounts with respect to any Security is
payable, or impair the right to institute suit for the enforcement of
any such payment on or after the Stated Maturity thereof (or, in the
case of redemption, on or after the Redemption Date or, in the case of
repayment at the option of the Holder, on or after the date for
repayment), or
(2) reduce the percentage in principal amount of the
Outstanding Securities of any series, the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture, or reduce the
requirements of Section 15.4 for quorum or voting, or
(3) modify any of the provisions of this Section, Section 5.13
or Section 10.8, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived without the consent of the Holder of each Outstanding Security
affected thereby, or
(4) make any change that adversely affects the right to
convert or exchange any Security into or for securities of the Company
or other securities, (whether or not issued by the Company) cash or
property in accordance with its terms.
A supplemental indenture which changes or eliminates any covenant or
other provision of this Indenture which shall have been included expressly and
solely for the benefit of one or more particular series of Securities, or which
modifies the rights of the Holders of Securities of such series with respect to
such covenant or other provision, shall be deemed not to affect the rights under
this Indenture of the Holders of Securities of any other series.
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It shall not be necessary for any Act of Holders of Securities under
this Section to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
SECTION 9.3. EXECUTION OF SUPPLEMENTAL INDENTURES.
As a condition to executing, or accepting the additional trusts created
by, any supplemental indenture permitted by this Article or the modifications
thereby of the trust created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 315 of the Trust Indenture Act) shall be fully
protected in relying upon, an Opinion of Counsel stating that the execution of
such supplemental indenture is authorized or permitted by this Indenture and an
Officer's Certificate stating that all conditions precedent to the execution of
such supplemental indenture have been fulfilled. The Trustee may, but shall not
be obligated to, enter into any such supplemental indenture which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.4. EFFECT OF SUPPLEMENTAL INDENTURES.
Upon the execution of any supplemental indenture under this Article,
this Indenture shall be modified in accordance therewith, and such supplemental
indenture shall form a part of this Indenture for all purposes; and every Holder
of a Security theretofore or thereafter authenticated and delivered hereunder
and of any Coupon appertaining thereto shall be bound thereby.
SECTION 9.5. REFERENCE IN SECURITIES TO SUPPLEMENTAL INDENTURES.
Securities of any series authenticated and delivered after the
execution of any supplemental indenture pursuant to this Article may, and shall
if required by the Trustee, bear a notation in form approved by the Trustee as
to any matter provided for in such supplemental indenture. If the Company shall
so determine, new Securities of any series so modified as to conform, in the
opinion of the Trustee and the Company, to any such supplemental indenture may
be prepared and executed by the Company and authenticated and delivered by the
Trustee in exchange for Outstanding Securities of such series.
SECTION 9.6. CONFORMITY WITH TRUST INDENTURE ACT.
Every supplemental indenture executed pursuant to this Article shall
conform to the requirements of the Trust Indenture Act as then in effect.
SECTION 9.7. NOTICE OF SUPPLEMENTAL INDENTURE.
Promptly after the execution by the Company and the Trustee of any
supplemental indenture pursuant to Section 9.2, the Company shall transmit to
the Holders of Outstanding Securities of any series affected thereby a notice
setting forth the substance of such supplemental indenture.
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ARTICLE 10
COVENANTS
SECTION 10.1. PAYMENT OF PRINCIPAL, ANY PREMIUM, INTEREST AND
ADDITIONAL AMOUNTS.
The Company covenants and agrees for the benefit of the Holders of the
Securities of each series that it will duly and punctually pay the principal of,
any premium and interest on and any Additional Amounts with respect to the
Securities of such series in accordance with the terms thereof, any Coupons
appertaining thereto and this Indenture. Any interest due on any Bearer Security
on or before the Maturity thereof, and any Additional Amounts payable with
respect to such interest, shall be payable only upon presentation and surrender
of the Coupons appertaining thereto for such interest as they severally mature.
SECTION 10.2. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in each Place of Payment for any series of
Securities an Office or Agency where Securities of such series (but not Bearer
Securities, except as otherwise provided below, unless such Place of Payment is
located outside the United States) may be presented or surrendered for payment,
where Securities of such series may be surrendered for registration of transfer
or exchange, where Securities of such series that are convertible or
exchangeable may be surrendered for conversion or exchange, and where notices
and demands to or upon the Company in respect of the Securities of such series
relating thereto and this Indenture may be served. If Securities of a series are
issuable as Bearer Securities, the Company shall maintain, subject to any laws
or regulations applicable thereto, an Office or Agency in a Place of Payment for
such series which is located outside the United States where Securities of such
series and any Coupons appertaining thereto may be presented and surrendered for
payment; provided, however, that if the Securities of such series are listed on
The Stock Exchange of the United Kingdom and the Republic of Ireland or the
Luxembourg Stock Exchange or any other stock exchange located outside the United
States and such stock exchange shall so require, the Company shall maintain a
Paying Agent in London, Luxembourg or any other required city located outside
the United States, as the case may be, so long as the Securities of such series
are listed on such exchange. The Company will give prompt written notice to the
Trustee of the location, and any change in the location, of such Office or
Agency. If at any time the Company shall fail to maintain any such required
Office or Agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, except that Bearer Securities of such
series and any Coupons appertaining thereto may be presented and surrendered for
payment at the place specified for the purpose with respect to such Securities
as provided in or pursuant to this Indenture, and the Company hereby appoints
the Trustee as its agent to receive all such presentations, surrenders, notices
and demands.
Except as otherwise provided in or pursuant to this Indenture, no
payment of principal, premium, interest or Additional Amounts with respect to
Bearer Securities shall be made at any Office or Agency in the United States or
by check mailed to any address in the United States or
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by transfer to an account maintained with a bank located in the United States;
provided, however, if amounts owing with respect to any Bearer Securities shall
be payable in Dollars, payment of principal of, any premium or interest on and
any Additional Amounts with respect to any such Security may be made at the
Corporate Trust Office of the Trustee or any Office or Agency designated by the
Company in the Borough of Manhattan, The City of New York, if (but only if)
payment of the full amount of such principal, premium, interest or Additional
Amounts at all offices outside the United States maintained for such purpose by
the Company in accordance with this Indenture is illegal or effectively
precluded by exchange controls or other similar restrictions.
The Company may also from time to time designate one or more other
Offices or Agencies where the Securities of one or more series may be presented
or surrendered for any or all such purposes and may from time to time rescind
such designations; provided, however, that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an Office
or Agency in each Place of Payment for Securities of any series for such
purposes. The Company shall give prompt written notice to the Trustee of any
such designation or rescission and of any change in the location of any such
other Office or Agency. Unless otherwise provided in or pursuant to this
Indenture, the Company hereby designates as the Place of Payment for each series
of Securities the Borough of Manhattan, The City of New York, and initially
appoints the Corporate Trust Office of the Trustee as the Office or Agency of
the Company in the Borough of Manhattan, The City of New York for such purpose.
The Company may subsequently appoint a different Office or Agency in the Borough
of Manhattan, The City of New York for the Securities of any series.
Unless otherwise specified with respect to any Securities pursuant to
Section 3.1, if and so long as the Securities of any series (i) are denominated
in a Foreign Currency or (ii) may be payable in a Foreign Currency, or so long
as it is required under any other provision of this Indenture, then the Company
will maintain with respect to each such series of Securities, or as so required,
at least one exchange rate agent.
SECTION 10.3. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent with
respect to any series of Securities, it shall, on or before each due date of the
principal of, any premium or interest on or Additional Amounts with respect to
any of the Securities of such series, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum in the currency or currencies,
currency unit or units or composite currency or currencies in which the
Securities of such series are payable (except as otherwise specified pursuant to
Section 3.1 for the Securities of such series) sufficient to pay the principal
or any premium, interest or Additional Amounts so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided, and
shall promptly notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents for any
series of Securities, it shall, on or prior to each due date of the principal
of, any premium or interest on or any Additional Amounts with respect to any
Securities of such series, deposit with any Paying
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Agent a sum (in the currency or currencies, currency unit or units or composite
currency or currencies described in the preceding paragraph) sufficient to pay
the principal or any premium, interest or Additional Amounts so becoming due,
such sum to be held in trust for the benefit of the Persons entitled thereto,
and (unless such Paying Agent is the Trustee) the Company will promptly notify
the Trustee of its action or failure so to act.
The Company shall cause each Paying Agent for any series of Securities
other than the Trustee to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this Section, that such Paying Agent shall:
(1) hold all sums held by it for the payment of the principal
of, any premium or interest on or any Additional Amounts with respect
to Securities of such series in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as provided in or pursuant to this Indenture;
(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Securities of such series) in the making of
any payment of principal, any premium or interest on or any Additional
Amounts with respect to the Securities of such series; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same terms as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Except as otherwise provided herein or pursuant hereto, any money
deposited with the Trustee or any Paying Agent, or then held by the Company, in
trust for the payment of the principal of, any premium or interest on or any
Additional Amounts with respect to any Security of any series or any Coupon
appertaining thereto and remaining unclaimed for two years after such principal
or any such premium or interest or any such Additional Amounts shall have become
due and payable shall be paid to the Company on Company Request, or (if then
held by the Company) shall be discharged from such trust; and the Holder of such
Security or any Coupon appertaining thereto shall thereafter, as an unsecured
general creditor, look only to the Company for payment thereof, and all
liability of the Trustee or such Paying Agent with respect to such trust money,
and all liability of the Company as trustee thereof, shall thereupon cease;
provided, however, that the Trustee or such Paying Agent, before being required
to make any such repayment, may at the expense of the Company cause to be
published once, in an Authorized Newspaper in each Place of Payment for such
series or to be mailed to Holders of Registered Securities of such series, or
both, notice that such money remains unclaimed and that,
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after a date specified therein, which shall not be less than 30 days from the
date of such publication or mailing nor shall it be later than two years after
such principal and any premium or interest or Additional Amounts shall have
become due and payable, any unclaimed balance of such money then remaining will
be repaid to the Company.
SECTION 10.4. ADDITIONAL AMOUNTS.
If any Securities of a series provide for the payment of Additional
Amounts, the Company agrees to pay to the Holder of any such Security or any
Coupon appertaining thereto Additional Amounts as provided in or pursuant to
this Indenture or such Securities. Whenever in this Indenture there is
mentioned, in any context, the payment of the principal of or any premium or
interest on, or in respect of, any Security of any series or any Coupon or the
net proceeds received on the sale or exchange of any Security of any series,
such mention shall be deemed to include mention of the payment of Additional
Amounts provided by the terms of such series established hereby or pursuant
hereto to the extent that, in such context, Additional Amounts are, were or
would be payable in respect thereof pursuant to such terms, and express mention
of the payment of Additional Amounts (if applicable) in any provision hereof
shall not be construed as excluding Additional Amounts in those provisions
hereof where such express mention is not made.
Except as otherwise provided in or pursuant to this Indenture or the
Securities of the applicable series, if the Securities of a series provide for
the payment of Additional Amounts, at least 10 days prior to the first Interest
Payment Date with respect to such series of Securities (or if the Securities of
such series shall not bear interest prior to Maturity, the first day on which a
payment of principal is made), and at least 10 days prior to each date of
payment of principal or interest if there has been any change with respect to
the matters set forth in the below-mentioned Officer's Certificate, the Company
shall furnish to the Trustee and the principal Paying Agent or Paying Agents, if
other than the Trustee, an Officer's Certificate instructing the Trustee and
such Paying Agent or Paying Agents whether such payment of principal of and
premium, if any, or interest on the Securities of such series shall be made to
Holders of Securities of such series or the Coupons appertaining thereto who are
United States Aliens without withholding for or on account of any tax,
assessment or other governmental charge described in the Securities of such
series. If any such withholding shall be required, then such Officer's
Certificate shall specify by country the amount, if any, required to be withheld
on such payments to such Holders of Securities or Coupons, and the Company
agrees to pay to the Trustee or such Paying Agent the Additional Amounts
required by the terms of such Securities. The Company covenants to indemnify the
Trustee and any Paying Agent for, and to hold them harmless against, any loss,
liability or expense reasonably incurred without negligence or bad faith on
their part arising out of or in connection with actions taken or omitted by any
of them in reliance on any Officer's Certificate furnished pursuant to this
Section 10.4.
SECTION 10.5. LIMITATION ON MORTGAGES AND LIENS.
The Company will not at any time directly or indirectly issue, assume,
guarantee or permit to exist any indebtedness secured by a mortgage, pledge,
lien or other encumbrance (any
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mortgage, pledge, lien or other encumbrance being hereinafter in this Section
referred to as a "lien") on any of its property or assets or any property or
assets of a Restricted Subsidiary, whether now owned or hereafter acquired,
without making effective provisions whereby the Securities then outstanding
(and, if the Company so elects, any other indebtedness ranking on a parity with
the Securities) shall be equally and ratably secured with any such secured
indebtedness, so long as any such other indebtedness shall be secured; provided,
however, that the foregoing covenant shall not be applicable to the following:
(1) liens in existence on the date of this Indenture; or
(2) liens on real estate (including liens existing in respect
of such real estate at the time of acquisition thereof) securing
indebtedness in an amount not in excess of 100% of the fair value of
the real estate at the time of creation of such indebtedness (as
determined by the Board of Directors); or
(3) liens arising from the acquisition of a business as a
going concern (whether by merger, acquisition of a controlling stock
interest, acquisition of assets or otherwise) or to which assets
acquired by the Company or a Restricted Subsidiary in partial or
complete satisfaction of secured indebtedness are subject; or
(4) liens to secure the extension, renewal or replacement of
any indebtedness secured by any of the liens referred to in (1), (2) or
(3) above, provided that there shall not be an increase in the amount
of indebtedness secured by such extension, renewal or replacement; or
(5) liens of taxes or assessments or governmental charges or
levies not then due and delinquent or the validity of which is being
contested in good faith or which are less than $10,000,000 in amount;
pledges or deposits to secure public or statutory obligations including
liens and deposits required or provided for under state insurance laws
and similar regulatory statutes; materialmen's, mechanics', carrier's,
workmen's, repairmen's or other like liens, and pledges or deposits
made in the ordinary course of business to obtain the release of such
liens; liens created by or resulting from any litigation or legal
proceeding which is being contested in good faith by appropriate
proceedings or which involve claims of less than $10,000,000; deposits
to secure (or in lieu of) surety, stay, appeal or customs bonds;
deposits to secure the payment of taxes, assessments, customs duties or
other similar charges; landlords liens on property held under lease;
and any other liens similar to those described in this clause (5), the
existence of which does not, in the opinion of the Company, materially
impair the use by the Company or the Restricted Subsidiary of the
affected property in the operation of its business, or the value of
such property for the purpose of such business.
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SECTION 10.6. LIMITATION UPON SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES.
The Company will not sell, transfer or otherwise dispose of (except to
a Restricted Subsidiary), and it will not permit any Restricted Subsidiary to
sell, transfer or otherwise dispose of (except to the Company or to a Restricted
Subsidiary), any shares of Capital Stock of a Restricted Subsidiary, unless the
entire Capital Stock of such Restricted Subsidiary at the time owned by the
Company and its Restricted Subsidiaries shall be disposed of at the same time
for a consideration consisting of cash or other property, which, in the opinion
of the Board of Directors, is at least equal to the fair value thereof.
For the purposes of this Indenture, "Restricted Subsidiary" shall mean
a Subsidiary including Subsidiaries of any Subsidiary, which meets any of the
following conditions:
(1) the Company's and its other Subsidiaries' investments in
and advances to the Subsidiary exceed 10% of the total assets of the
Company and its Subsidiaries consolidated as of the end of the most
recently completed fiscal year; or
(2) the Company's and its other Subsidiaries' proportionate
share of the total assets (after inter-company eliminations) of the
Subsidiary exceeds 10% of the total assets of the Company and its
Subsidiaries consolidated as of the end of the most recently completed
fiscal year; or
(3) the Company's and its other Subsidiaries' equity in the
income from continuing operations before income taxes, extraordinary
items and cumulative effect of a change in accounting principle of the
Subsidiary exceeds 10% of such income of the Company and its
Subsidiaries consolidated for the most recently completed fiscal year.
For purposes of making the prescribed income test in clause (3) of the
preceding sentence, when a loss has been incurred by either the Company and its
Subsidiaries consolidated or the tested Subsidiary, but not both, the equity in
the income or loss of the tested subsidiary shall be excluded from the income of
the Company and its Subsidiaries consolidated for purposes of the computation
and if income of the Company and its Subsidiaries consolidated for the most
recent fiscal year is at least 10% lower than the average of the income for the
last five years, such average income shall be substituted for purposes of the
computation and any loss years shall be omitted for purposes of computing
average income.
SECTION 10.7. CORPORATE EXISTENCE.
Subject to Article 8, the Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence and that of each of its Restricted Subsidiaries and their respective
rights (charter and statutory) and franchises; provided, however, that the
foregoing shall not obligate the Company or any of its Restricted Subsidiaries
to preserve any such right or franchise if the Company or any such Restricted
Subsidiary shall determine that the preservation thereof is no longer desirable
in the conduct of its business or the
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business of such Restricted Subsidiary and that the loss thereof is not
disadvantageous in any material respect to any Holder.
SECTION 10.8. WAIVER OF CERTAIN COVENANTS.
The Company may omit in any particular instance to comply with any
term, provision or condition set forth in Section 10.5, 10.6 or 10.7 with
respect to the Securities of any series if before the time for such compliance
the Holders of at least a majority in principal amount of the Outstanding
Securities of such series, by Act of such Holders, either shall waive such
compliance in such instance or generally shall have waived compliance with such
term, provision or condition, but no such waiver shall extend to or affect such
term, provision or condition except to the extent so expressly waived, and,
until such waiver shall become effective, the obligations of the Company and the
duties of the Trustee in respect of any such term, provision or condition shall
remain in full force and effect.
SECTION 10.9. COMPANY STATEMENT AS TO COMPLIANCE; NOTICE OF CERTAIN
DEFAULTS.
(1) The Company shall deliver to the Trustee, within 120 days
after the end of each fiscal year, a written statement (which need not
be contained in or accompanied by an Officer's Certificate) signed by
the principal executive officer, the principal financial officer or the
principal accounting officer of the Company, stating that
(a) a review of the activities of the Company during
such year and of its performance under this Indenture has been
made under his or her supervision, and
(b) to the best of his or her knowledge, based on
such review, (a) the Company has complied with all the
conditions and covenants imposed on it under this Indenture
throughout such year, or, if there has been a default in the
fulfillment of any such condition or covenant, specifying each
such default known to him or her and the nature and status
thereof, and (b) no event has occurred and is continuing which
is, or after notice or lapse of time or both would become, an
Event of Default, or, if such an event has occurred and is
continuing, specifying each such event known to him and the
nature and status thereof.
(2) The Company shall deliver to the Trustee, within five days
after the occurrence thereof, written notice of any Event of Default or
any event which after notice or lapse of time or both would become an
Event of Default pursuant to clause (4) of Section 5.1.
(3) The Trustee shall have no duty to monitor the Company's
compliance with the covenants contained in this Article 10 other than
as specifically set forth in this Section 10.9.
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ARTICLE 11
REDEMPTION OF SECURITIES
SECTION 11.1. APPLICABILITY OF ARTICLE.
Redemption of Securities of any series at the option of the Company as
permitted or required by the terms of such Securities shall be made in
accordance with the terms of such Securities and (except as otherwise provided
herein or pursuant hereto) this Article.
SECTION 11.2. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Company to redeem any Securities shall be evidenced
by or pursuant to a Board Resolution. In case of any redemption at the election
of the Company of (a) less than all of the Securities of any series or (b) all
of the Securities of any series, with the same issue date, interest rate or
formula, Stated Maturity and other terms, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice shall
be satisfactory to the Trustee), notify the Trustee of such Redemption Date and
of the principal amount of Securities of such series to be redeemed.
SECTION 11.3. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED.
If less than all of the Securities of any series with the same issue
date, interest rate or formula, Stated Maturity and other terms are to be
redeemed, the particular Securities to be redeemed shall be selected not more
than 60 days prior to the Redemption Date by the Trustee from the Outstanding
Securities of such series not previously called for redemption, by such method
as the Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions of the principal amount of Registered
Securities of such series; provided, however, that no such partial redemption
shall reduce the portion of the principal amount of a Registered Security of
such series not redeemed to less than the minimum denomination for a Security of
such series established herein or pursuant hereto.
The Trustee shall promptly notify the Company and the Security
Registrar (if other than itself) in writing of the Securities selected for
redemption and, in the case of any Securities selected for partial redemption,
the principal amount thereof to be redeemed.
For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Securities shall relate,
in the case of any Securities redeemed or to be redeemed only in part, to the
portion of the principal of such Securities which has been or is to be redeemed.
Unless otherwise specified in or pursuant to this Indenture or the
Securities of any series, if any Security selected for partial redemption is
converted into other securities of the Company or exchanged for securities of
another issuer in part before termination of the conversion or exchange right
with respect to the portion of the Security so selected, the converted portion
of
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such Security shall be deemed (so far as may be) to be the portion selected for
redemption. Securities which have been converted or exchanged during a selection
of Securities to be redeemed shall be treated by the Trustee as Outstanding for
the purpose of such selection.
SECTION 11.4. NOTICE OF REDEMPTION.
Notice of redemption shall be given in the manner provided in Section
1.6, not less than 30 nor more than 60 days prior to the Redemption Date, unless
a shorter period is specified in the Securities to be redeemed, to the Holders
of Securities to be redeemed. Failure to give notice by mailing in the manner
herein provided to the Holder of any Registered Securities designated for
redemption as a whole or in part, or any defect in the notice to any such
Holder, shall not affect the validity of the proceedings for the redemption of
any other Securities or portion thereof.
Any notice that is mailed to the Holder of any Registered Securities in
the manner herein provided shall be conclusively presumed to have been duly
given, whether or not such Holder receives the notice.
All notices of redemption shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all Outstanding Securities of any series are
to be redeemed, the identification (and, in the case of partial
redemption, the principal amount) of the particular Security or
Securities to be redeemed,
(4) in case any Security is to be redeemed in part only, the
notice which relates to such Security shall state that on and after the
Redemption Date, upon surrender of such Security, the Holder of such
Security will receive, without charge, a new Security or Securities of
authorized denominations for the principal amount thereof remaining
unredeemed,
(5) that, on the Redemption Date, the Redemption Price shall
become due and payable upon each such Security or portion thereof to be
redeemed, and, if applicable, that interest thereon shall cease to
accrue on and after said date,
(6) the place or places where such Securities, together (in
the case of Bearer Securities) with all Coupons appertaining thereto,
if any, maturing after the Redemption Date, are to be surrendered for
payment of the Redemption Price and any accrued interest and Additional
Amounts pertaining thereto,
(7) that the redemption is for a sinking fund, if such is the
case,
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(8) that, unless otherwise specified in such notice, Bearer
Securities of any series, if any, surrendered for redemption must be
accompanied by all Coupons maturing subsequent to the date fixed for
redemption or the amount of any such missing Coupon or Coupons will be
deducted from the Redemption Price, unless security or indemnity
satisfactory to the Company, the Trustee and any Paying Agent is
furnished,
(9) if Bearer Securities of any series are to be redeemed and
no Registered Securities of such series are to be redeemed, and if such
Bearer Securities may be exchanged for Registered Securities not
subject to redemption on the Redemption Date pursuant to Section 3.5 or
otherwise, the last date, as determined by the Company, on which such
exchanges may be made,
(10) in the case of Securities of any series that are
convertible into Common Stock of the Company or exchangeable for other
securities, the conversion or exchange price or rate, the date or dates
on which the right to convert or exchange the principal of the
Securities of such series to be redeemed will commence or terminate and
the place or places where such Securities may be surrendered for
conversion or exchange, and
(11) the CUSIP number or the Euroclear or the Cedel reference
numbers of such Securities, if any (or any other numbers used by a
Depository to identify such Securities).
A notice of redemption published as contemplated by Section 1.6 need
not identify particular Registered Securities to be redeemed.
Notice of redemption of Securities to be redeemed at the election of
the Company shall be given by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company.
SECTION 11.5. DEPOSIT OF REDEMPTION PRICE.
On or prior to any Redemption Date, the Company shall deposit, with
respect to the Securities of any series called for redemption pursuant to
Section 11.4, with the Trustee or with a Paying Agent (or, if the Company is
acting as its own Paying Agent, segregate and hold in trust as provided in
Section 10.3) an amount of money in the applicable Currency sufficient to pay
the Redemption Price of, and (except if the Redemption Date shall be an Interest
Payment Date, unless otherwise specified pursuant to Section 3.1 or in the
Securities of such series) any accrued interest on and Additional Amounts with
respect thereto, all such Securities or portions thereof which are to be
redeemed on that date.
SECTION 11.6. SECURITIES PAYABLE ON REDEMPTION DATE.
Notice of redemption having been given as aforesaid, the Securities so
to be redeemed shall, on the Redemption Date, become due and payable at the
Redemption Price therein specified, and from and after such date (unless the
Company shall default in the payment of the
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Redemption Price and accrued interest) such Securities shall cease to bear
interest and the Coupons for such interest appertaining to any Bearer Securities
so to be redeemed, except to the extent provided below, shall be void. Upon
surrender of any such Security for redemption in accordance with said notice,
together with all Coupons, if any, appertaining thereto maturing after the
Redemption Date, such Security shall be paid by the Company at the Redemption
Price, together with any accrued interest and Additional Amounts to the
Redemption Date; provided, however, that, except as otherwise provided in or
pursuant to this Indenture or the Bearer Securities of such series, installments
of interest on Bearer Securities whose Stated Maturity is on or prior to the
Redemption Date shall be payable only upon presentation and surrender of Coupons
for such interest (at an Office or Agency located outside the United States
except as otherwise provided in Section 10.2), and provided, further, that,
except as otherwise specified in or pursuant to this Indenture or the Registered
Securities of such series, installments of interest on Registered Securities
whose Stated Maturity is on or prior to the Redemption Date shall be payable to
the Holders of such Securities, or one or more Predecessor Securities,
registered as such at the close of business on the Regular Record Dates therefor
according to their terms and the provisions of Section 3.7.
If any Bearer Security surrendered for redemption shall not be
accompanied by all appurtenant Coupons maturing after the Redemption Date, such
Security may be paid after deducting from the Redemption Price an amount equal
to the face amount of all such missing Coupons, or the surrender of such missing
Coupon or Coupons may be waived by the Company and the Trustee if there be
furnished to them such security or indemnity as they may require to save each of
them and any Paying Agent harmless. If thereafter the Holder of such Security
shall surrender to the Trustee or any Paying Agent any such missing Coupon in
respect of which a deduction shall have been made from the Redemption Price,
such Holder shall be entitled to receive the amount so deducted; provided,
however, that any interest or Additional Amounts represented by Coupons shall be
payable only upon presentation and surrender of those Coupons at an Office or
Agency for such Security located outside of the United States except as
otherwise provided in Section 10.2.
If any Security called for redemption shall not be so paid upon
surrender thereof for redemption, the principal and any premium, until paid,
shall bear interest from the Redemption Date at the rate prescribed therefor in
the Security.
SECTION 11.7. SECURITIES REDEEMED IN PART.
Any Registered Security which is to be redeemed only in part shall be
surrendered at any Office or Agency for such Security (with, if the Company or
the Trustee so requires, due endorsement by, or a written instrument of transfer
in form satisfactory to the Company and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing) and the Company shall
execute and the Trustee shall authenticate and deliver to the Holder of such
Security without service charge, a new Registered Security or Securities of the
same series, containing identical terms and provisions, of any authorized
denomination as requested by such Holder in aggregate principal amount equal to
and in exchange for the unredeemed portion of the
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principal of the Security so surrendered. If a Security in global form is so
surrendered, the Company shall execute, and the Trustee shall authenticate and
deliver to the U.S. Depository or other Depository for such Security in global
form as shall be specified in the Company Order with respect thereto to the
Trustee, without service charge, a new Security in global form in a denomination
equal to and in exchange for the unredeemed portion of the principal of the
Security in global form so surrendered.
ARTICLE 12
SINKING FUNDS
SECTION 12.1. APPLICABILITY OF ARTICLE.
The provisions of this Article shall be applicable to any sinking fund
for the retirement of Securities of a series, except as otherwise permitted or
required in or pursuant to this Indenture or any Security of such series issued
pursuant to this Indenture.
The minimum amount of any sinking fund payment provided for by the
terms of Securities of any series is herein referred to as a "mandatory sinking
fund payment," and any payment in excess of such minimum amount provided for by
the terms of Securities of such series is herein referred to as an "optional
sinking fund payment". If provided for by the terms of Securities of any series,
the cash amount of any sinking fund payment may be subject to reduction as
provided in Section 12.2. Each sinking fund payment shall be applied to the
redemption of Securities of any series as provided for by the terms of
Securities of such series and this Indenture.
SECTION 12.2. SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES.
The Company may, in satisfaction of all or any part of any sinking fund
payment with respect to the Securities of any series to be made pursuant to the
terms of such Securities (1) deliver Outstanding Securities of such series
(other than any of such Securities previously called for redemption or any of
such Securities in respect of which cash shall have been released to the
Company), together in the case of any Bearer Securities of such series with all
unmatured Coupons appertaining thereto, and (2) apply as a credit Securities of
such series which have been redeemed either at the election of the Company
pursuant to the terms of such series of Securities or through the application of
permitted optional sinking fund payments pursuant to the terms of such
Securities, provided that such series of Securities have not been previously so
credited. Such Securities shall be received and credited for such purpose by the
Trustee at the Redemption Price specified in such Securities for redemption
through operation of the sinking fund and the amount of such sinking fund
payment shall be reduced accordingly. If, as a result of the delivery or credit
of Securities of any series in lieu of cash payments pursuant to this Section
12.2, the principal amount of Securities of such series to be redeemed in order
to satisfy the remaining sinking fund payment shall be less than $100,000, the
Trustee need not call Securities of such series for redemption, except upon
Company Request, and such cash payment shall be held by the Trustee or a Paying
Agent and applied to the next succeeding sinking fund payment,
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provided, however, that the Trustee or such Paying Agent shall at the request of
the Company from time to time pay over and deliver to the Company any cash
payment so being held by the Trustee or such Paying Agent upon delivery by the
Company to the Trustee of Securities of that series purchased by the Company
having an unpaid principal amount equal to the cash payment requested to be
released to the Company.
SECTION 12.3. REDEMPTION OF SECURITIES FOR SINKING FUND.
Not less than 75 days prior to each sinking fund payment date for any
series of Securities, the Company shall deliver to the Trustee an Officer's
Certificate specifying the amount of the next ensuing mandatory sinking fund
payment for that series pursuant to the terms of that series, the portion
thereof, if any, which is to be satisfied by payment of cash and the portion
thereof, if any, which is to be satisfied by delivering and crediting of
Securities of that series pursuant to Section 12.2, and the optional amount, if
any, to be added in cash to the next ensuing mandatory sinking fund payment, and
will also deliver to the Trustee any Securities to be so credited and not
theretofore delivered. If such Officer's Certificate shall specify an optional
amount to be added in cash to the next ensuing mandatory sinking fund payment,
the Company shall thereupon be obligated to pay the amount therein specified.
Not less than 60 days before each such sinking fund payment date the Trustee
shall select the Securities to be redeemed upon such sinking fund payment date
in the manner specified in Section 11.3 and cause notice of the redemption
thereof to be given in the name of and at the expense of the Company in the
manner provided in Section 11.4. Such notice having been duly given, the
redemption of such Securities shall be made upon the terms and in the manner
stated in Sections 11.6 and 11.7.
ARTICLE 13
REPAYMENT AT THE OPTION OF HOLDERS
SECTION 13.1. APPLICABILITY OF ARTICLE.
Securities of any series which are repayable at the option of the
Holders thereof before their Stated Maturity shall be repaid in accordance with
the terms of the Securities of such series. The repayment of any principal
amount of Securities pursuant to such option of the Holder to require repayment
of Securities before their Stated Maturity, for purposes of Section 3.9, shall
not operate as a payment, redemption or satisfaction of the Indebtedness
represented by such Securities unless and until the Company, at its option,
shall deliver or surrender the same to the Trustee with a directive that such
Securities be cancelled. Notwithstanding anything to the contrary contained in
this Section 13.1, in connection with any repayment of Securities, the Company
may arrange for the purchase of any Securities by an agreement with one or more
investment bankers or other purchasers to purchase such Securities by paying to
the Holders of such Securities on or before the close of business on the
repayment date an amount not less than the repayment price payable by the
Company on repayment of such Securities, and the obligation of the Company to
pay the repayment price of such Securities shall be satisfied and discharged to
the extent such payment is so paid by such purchasers.
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ARTICLE 14
SECURITIES IN FOREIGN CURRENCIES
SECTION 14.1. APPLICABILITY OF ARTICLE.
Whenever this Indenture provides for (i) any action by, or the
determination of any of the rights of, Holders of Securities of any series in
which not all of such Securities are denominated in the same Currency, or (ii)
any distribution to Holders of Securities, in the absence of any provision to
the contrary in the form of Security of any particular series or pursuant to
this Indenture or the Securities, any amount in respect of any Security
denominated in a Currency other than Dollars shall be treated for any such
action or distribution as that amount of Dollars that could be obtained for such
amount on such reasonable basis of exchange and as of the record date with
respect to Registered Securities of such series (if any) for such action,
determination of rights or distribution (or, if there shall be no applicable
record date, such other date reasonably proximate to the date of such action,
determination of rights or distribution) as the Company may specify in a written
notice to the Trustee.
ARTICLE 15
MEETINGS OF HOLDERS OF SECURITIES
SECTION 15.1. PURPOSES FOR WHICH MEETINGS MAY BE CALLED.
A meeting of Holders of Securities of any series may be called at any
time and from time to time pursuant to this Article to make, give or take any
request, demand, authorization, direction, notice, consent, waiver or other Act
provided by this Indenture to be made, given or taken by Holders of Securities
of such series.
SECTION 15.2. CALL, NOTICE AND PLACE OF MEETINGS.
(1) The Trustee may at any time call a meeting of Holders of
Securities of any series for any purpose specified in Section 15.1, to
be held at such time and at such place in the Borough of Manhattan, The
City of New York, or, if Securities of such series have been issued in
whole or in part as Bearer Securities, in London or in such place
outside the United States as the Trustee shall determine. Notice of
every meeting of Holders of Securities of any series, setting forth the
time and the place of such meeting and in general terms the action
proposed to be taken at such meeting, shall be given, in the manner
provided in Section 1.6, not less than 21 nor more than 180 days prior
to the date fixed for the meeting.
(2) In case at any time the Company (by or pursuant to a Board
Resolution) or the Holders of at least 10% in principal amount of the
Outstanding Securities of any series shall have requested the Trustee
to call a meeting of the Holders of Securities of such series for any
purpose specified in Section 15.1, by written request setting forth in
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reasonable detail the action proposed to be taken at the meeting, and
the Trustee shall not have mailed notice of or made the first
publication of the notice of such meeting within 21 days after receipt
of such request (whichever shall be required pursuant to Section 1.6)
or shall not thereafter proceed to cause the meeting to be held as
provided herein, then the Company or the Holders of Securities of such
series in the amount above specified, as the case may be, may determine
the time and the place in the Borough of Manhattan, The City of New
York, or, if Securities of such series are to be issued as Bearer
Securities, in London for such meeting and may call such meeting for
such purposes by giving notice thereof as provided in clause (1) of
this Section.
SECTION 15.3. PERSONS ENTITLED TO VOTE AT MEETINGS.
To be entitled to vote at any meeting of Holders of Securities of any
series, a Person shall be (1) a Holder of one or more Outstanding Securities of
such series, or (2) a Person appointed by an instrument in writing as proxy for
a Holder or Holders of one or more Outstanding Securities of such series by such
Holder or Holders. The only Persons who shall be entitled to be present or to
speak at any meeting of Holders of Securities of any series shall be the Persons
entitled to vote at such meeting and their counsel, any representatives of the
Trustee and its counsel and any representatives of the Company and its counsel.
SECTION 15.4. QUORUM; ACTION.
The Persons entitled to vote a majority in principal amount of the
Outstanding Securities of a series shall constitute a quorum for any meeting of
Holders of Securities of such series. In the absence of a quorum within 30
minutes after the time appointed for any such meeting, the meeting shall, if
convened at the request of Holders of Securities of such series, be dissolved.
In any other case the meeting may be adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such meeting. In the absence of a quorum at any reconvened meeting, such
reconvened meeting may be further adjourned for a period of not less than 10
days as determined by the chairman of the meeting prior to the adjournment of
such reconvened meeting. Notice of the reconvening of any adjourned meeting
shall be given as provided in Section 15.2(1), except that such notice need be
given only once not less than five days prior to the date on which the meeting
is scheduled to be reconvened. Notice of the reconvening of an adjourned meeting
shall state expressly the percentage, as provided above, of the principal amount
of the Outstanding Securities of such series which shall constitute a quorum.
Except as limited by the proviso to Section 9.2, any resolution
presented to a meeting or adjourned meeting duly reconvened at which a quorum is
present as aforesaid may be adopted only by the affirmative vote of the Holders
of a majority in principal amount of the Outstanding Securities of that series;
provided, however, that, except as limited by the proviso to Section 9.2, any
resolution with respect to any request, demand, authorization, direction,
notice, consent, waiver or other Act which this Indenture expressly provides may
be made, given or taken by the Holders of a specified percentage, which is less
than a majority, in principal amount of the Outstanding Securities of a series
may be adopted at a meeting or an adjourned meeting duly
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reconvened and at which a quorum is present as aforesaid by the affirmative vote
of the Holders of such specified percentage in principal amount of the
Outstanding Securities of such series.
Any resolution passed or decision taken at any meeting of Holders of
Securities of any series duly held in accordance with this Section shall be
binding on all the Holders of Securities of such series and the Coupons
appertaining thereto, whether or not such Holders were present or represented at
the meeting.
SECTION 15.5. DETERMINATION OF VOTING RIGHTS; CONDUCT AND ADJOURNMENT
OF MEETINGS.
(1) Notwithstanding any other provisions of this Indenture,
the Trustee may make such reasonable regulations as it may deem
advisable for any meeting of Holders of Securities of such series in
regard to proof of the holding of Securities of such series and of the
appointment of proxies and in regard to the appointment and duties of
inspectors of votes, the submission and examination of proxies,
certificates and other evidence of the right to vote, and such other
matters concerning the conduct of the meeting as it shall deem
appropriate. Except as otherwise permitted or required by any such
regulations, the holding of Securities shall be proved in the manner
specified in Section 1.4 and the appointment of any proxy shall be
proved in the manner specified in Section 1.4 or by having the
signature of the person executing the proxy witnessed or guaranteed by
any trust company, bank or banker authorized by Section 1.4 to certify
to the holding of Bearer Securities. Such regulations may provide that
written instruments appointing proxies, regular on their face, may be
presumed valid and genuine without the proof specified in Section 1.4
or other proof.
(2) The Trustee shall, by an instrument in writing, appoint a
temporary chairman of the meeting, unless the meeting shall have been
called by the Company or by Holders of Securities as provided in
Section 15.2(2), in which case the Company or the Holders of Securities
of the series calling the meeting, as the case may be, shall in like
manner appoint a temporary chairman. A permanent chairman and a
permanent secretary of the meeting shall be elected by vote of the
Persons entitled to vote a majority in principal amount of the
Outstanding Securities of such series represented at the meeting.
(3) At any meeting, each Holder of a Security of such series
or proxy shall be entitled to one vote for each $1,000 principal amount
of Securities of such series held or represented by him; provided,
however, that no vote shall be cast or counted at any meeting in
respect of any Security challenged as not Outstanding and ruled by the
chairman of the meeting to be not Outstanding. The chairman of the
meeting shall have no right to vote, except as a Holder of a Security
of such series or proxy.
(4) Any meeting of Holders of Securities of any series duly
called pursuant to Section 15.2 at which a quorum is present may be
adjourned from time to time by Persons entitled to vote a majority in
principal amount of the Outstanding Securities of such series
represented at the meeting; and the meeting may be held as so adjourned
without further notice.
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SECTION 15.6. COUNTING VOTES AND RECORDING ACTION OF MEETINGS.
The vote upon any resolution submitted to any meeting of Holders of
Securities of any series shall be by written ballots on which shall be
subscribed the signatures of the Holders of Securities of such series or of
their representatives by proxy and the principal amounts and serial numbers of
the Outstanding Securities of such series held or represented by them. The
permanent chairman of the meeting shall appoint two inspectors of votes who
shall count all votes cast at the meeting for or against any resolution and who
shall make and file with the secretary of the meeting their verified written
reports in triplicate of all votes cast at the meeting. A record, at least in
triplicate, of the proceedings of each meeting of Holders of Securities of any
series shall be prepared by the secretary of the meeting and there shall be
attached to said record the original reports of the inspectors of votes on any
vote by ballot taken thereat and affidavits by one or more persons having
knowledge of the facts setting forth a copy of the notice of the meeting and
showing that said notice was given as provided in Section 15.2 and, if
applicable, Section 15.4. Each copy shall be signed and verified by the
affidavits of the permanent chairman and secretary of the meeting and one such
copy shall be delivered to the Company and another to the Trustee to be
preserved by the Trustee, the latter to have attached thereto the ballots voted
at the meeting. Any record so signed and verified shall be conclusive evidence
of the matters therein stated.
[Intentionally left blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed, all
as of the day and year first above written.
[SEAL] SAFECO CORPORATION
Attest:
By
---------------------------------
Name:
Title:
[SEAL] THE CHASE MANHATTAN BANK,
as Trustee
By
---------------------------------
Name:
Title:
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EXHIBIT 4.9
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE
HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY (AS
DEFINED IN THE INDENTURE) OR A NOMINEE THEREOF. THIS GLOBAL SECURITY IS
EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE
DEPOSITORY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE AND, UNLESS AND UNTIL IT IS EXCHANGE IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THIS GLOBAL SECURITY MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY, OR BY A
NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY, OR BY THE DEPOSITORY OR ANY SUCH NOMINEE TO A SUCCESSOR DEPOSITORY
OR A NOMINEE OF SUCH SUCCESSOR DEPOSITORY.
UNLESS THE SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY (AS
DEFINED BELOW) OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT,
AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
NO. 001 $300,000,000
CUSIP NO. 786429 AM 2
SAFECO CORPORATION
7.875% NOTES DUE 2003
SAFECO Corporation, a Washington corporation (hereinafter called the
"Company", which term includes any successor corporation under the Indenture
referred to below), for value received, hereby promises to pay to Cede & Co., or
registered assigns, the principal sum of Three Hundred Million Dollars
($300,000,000) on March 15, 2003, and to pay interest thereon from March 21,
2000 or from the most recent interest payment date to which interest has been
paid or duly provided for, payable semiannually on March 15 and September 15 in
each year (each, an "Interest Payment Date"), commencing September 15, 2000, at
the rate of 7.875% per annum, until the principal hereof is paid or duly made
available for payment. Interest on this Note shall be computed on the basis of a
360-day year of twelve 30-day months. If any Interest Payment Date or the
maturity date falls on a day that is not a Business Day, the required payment
shall be made on the next Business Day as if it were made on the date such
payment was due and no interest shall accrue on the amount so payable for the
period from and after such Interest Payment Date or the maturity date, as the
case may be, to such next Business Day. The interest so payable and punctually
paid or duly provided for on any Interest Payment Date will, as provided in such
Indenture, be paid to the Person in whose name this Note (or one or more
Predecessor Securities) is registered at the close of business on the regular
record date for such interest, which shall be March 1 or September 1 (whether or
not a Business Day), as the case may be, next preceding such Interest Payment
Date. Any such interest which is payable but not punctually paid or duly
provided for on any Interest Payment Date shall
<PAGE> 2
forthwith cease to be payable to the registered Holder hereof on the relevant
regular record date by virtue or having been such holder, and may be paid to the
Person in whose name this Note (or one or more Predecessor Securities) is
registered at the close of business on a subsequent special record date (which
shall be at least 10 days before the payment date) for the payment of such
defaulted interest to be fixed by the Company, notice whereof shall be given to
the Holders of Notes of this series not less than 10 days prior to such Special
Record Date, or may be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the Notes
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in such Indenture.
Payment of the principal of and the interest on this Note will be made
at the office or agency of the Company maintained for that purpose in The
Borough of Manhattan, The City of New York, in such coin or currency of the
United States of America as at the time of payment is legal tender for payment
of public and private debts; provided, however, that, at the option of the
Company, interest may be paid by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register;
provided, further, that payment to DTC or any successor Depository may be made
by wire transfer to the account designated by DTC or such successor depository
in writing.
This Note is one of a duly authorized issue of securities of the
Company (herein called the "Notes"), issued and to be issued in one or more
series under an Indenture, dated as of February 15, 2000 (herein called,
together with all indentures supplemental thereto, the "Indenture"), between the
Company and The Chase Manhattan Bank, as Trustee (herein called the "Trustee",
which term includes any successor trustee under the Indenture), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
statement of the respective rights, limitations of rights, duties and immunities
thereunder of the Company, the Trustee and the Holders of the Notes, and of the
terms upon which the Notes are, and are to be, authenticated and delivered. This
Note is one of the series designated on the face hereof, initially limited
(subject to exceptions provided in the Indenture) to the aggregate principal
amount specified in the Officer's Certificate dated March 21, 2000 establishing
the terms of the Notes pursuant to the Indenture.
If an Event of Default with respect to the Notes shall occur and be
continuing, the principal of the Notes may be declared due and payable in the
manner and with the effect provided in the Indenture.
The Indenture contains provisions permitting, with certain exceptions
as therein provided, the amendment thereof and the modification of the rights
and obligations of the Company and the rights of the Holders of the Securities
of each series issued under the Indenture at any time by the Company and the
Trustee with the written consent of the Holders of not less than a majority in
aggregate principal amount of the Securities at the time Outstanding of each
series affected thereby. The Indenture also contains provisions permitting the
Holders of specified percentages in aggregate principal amount of the Securities
of any series at the time Outstanding, on behalf of the Holders of all
Securities of such series, to waive compliance by the Company with certain
provisions of the
2
<PAGE> 3
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by the Holder of this Note shall be conclusive and
binding upon such Holder and upon all future Holders of this Note and of any
Notes issued upon the registration of transfer hereof or in exchange herefor or
in lieu hereof, whether or not notation of such consent or waiver is made upon
this Note.
This Note is not redeemable by the Company prior to maturity and is not
subject to any sinking fund.
No reference herein to the Indenture and no provision of this Note or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and interest on this Note,
at the times, place and rate, and in the coin or currency, herein and in the
Indenture prescribed.
As provided in the Indenture and subject to certain limitations set
forth therein and in this Note, the transfer of this Note may be registered on
the Security Register upon surrender of this Note for registration of transfer
at the office or agency of the Company maintained for that purpose in any place
where the principal of and interest on this Note are payable, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to the
Company and the Security Registrar duly executed by, the Holder hereof or by his
attorney duly authorized in writing, and thereupon one or more new Notes of this
series and of like tenor, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in the
denominations specified in the Officer's Certificate dated March 21, 2000
establishing the terms of the Notes, all as more fully provided in the Indenture
and such Officer's Certificate. As provided in the Indenture and in such
Officer's Certificate, and subject to certain limitations set forth in the
Indenture, in such Officer's Certificate and in this Note, the Notes are
exchangeable for a like aggregate principal amount of Notes of this series in
different authorized denominations, as requested by the Holders surrendering the
same.
No service charge shall be made for any such registration of transfer
or exchange, but the Company may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith, other than
in certain cases provided in the Indenture.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Indenture contains provisions whereby (i) the Company may be
discharged from its obligations with respect to the Notes (subject to certain
exceptions) or (ii) the Company may be released from its obligations under
specified covenants and agreements in the Indenture, in each case
3
<PAGE> 4
if the Company irrevocably deposits with the Trustee money or Government
Obligations, or a combination thereof, in an amount sufficient, without
consideration of any reinvestment, to pay and discharge the entire indebtedness
on all Notes of this series, and satisfies certain other conditions, all as more
fully provided in the Indenture.
This Note shall be governed by and construed in accordance with the
laws of the State of New York applicable to agreements and instruments made and
to be performed wholly within such State.
All terms used in this Note without definition that are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
[Remainder of Page Intentionally Left Blank]
4
<PAGE> 5
Unless the Certificate of Authentication hereon has been executed by or
on behalf of the Trustee under the Indenture by the manual signature of one of
its authorized officers, this Note shall not be entitled to any benefits under
the Indenture or be valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
SAFECO CORPORATION
[SEAL]
By: /s/ Rod A. Pierson
---------------------------------------
Name: Rod A. Pierson
Title: Senior Vice President,
Chief Financial Officer and
Secretary
Attest:
/s/ H. Paul Lowber
- - ------------------------------------------
Name: H. Paul Lowber
Title: Vice President, Controller and
Assistant Secretary
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein referred
to in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK,
as Trustee
Dated: March 21, 2000 By:
---------------------------------
Authorized Officer
<PAGE> 6
ABBREVIATIONS
The following abbreviations, when used in the inscription of the face
of this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT --
-----------------------
(Minor)
Custodian
-----------------------
(Cust)
Under the Uniform Gifts to Minors Act
--------------------
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE> 7
FOR VALUE RECEIVED, the undersigned registered holder hereby sell(s), assign(s)
and transfer(s)
unto
- - ----------------------------------------
- - ----------------------------------------
- - ----------------------------------------------------------
- - ----------------------------------------------------------
- - ----------------------------------------------------------
[PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE]
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing _____________________________________________________________________
to transfer said Note on the books of the Company with full power of
substitution in the premises.
Date:
----------------------
Signature:
----------------------------------------------------------------------
Notice: The signature to this assignment must correspond with the name as it
appears upon the face of the within Note in every particular, without
alteration or enlargement or any change whatsoever.
Signature Guaranty:
-------------------------------------------------------------
Signatures must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Trustee, which
requirements include membership or participation in the
Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by
the Trustee in addition to, or in substitution for, STAMP,
all in accordance with the Securities Exchange Act of 1934,
as amended.
<PAGE> 1
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES F-13
Computation of Income Per Share Exhibit 11
Year Ended December 31 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE OF COMMON STOCK
1. Net Income $ 252.2 $ 351.9 $ 430.0
------- ------- -------
2. Average Number of Common
Shares Outstanding 132.7 139.4 129.2
------- ------- -------
3. Basic Net Income Per Share
of Common Stock (L.1/L.2) $ 1.90 $ 2.52 $ 3.33
======= ======= =======
DILUTED NET INCOME PER SHARE OF COMMON STOCK
1. Net Income $ 252.2 $ 351.9 $ 430.0
------- ------- -------
2. Average Number of Common
Shares Outstanding 132.7 139.4 129.2
3. Additional Common Shares Assumed
Issued Under Treasury Stock Method
(All due to employee stock options) 0.1 0.5 0.6
------- ------- -------
4. Diluted Average Number of Common
Shares Outstanding 132.8 139.9 129.8
------- ------- -------
5. Diluted Net Income Per Share
of Common Stock (L.1/L.4) $ 1.90 $ 2.51 $ 3.31
======= ======= =======
</TABLE>
<PAGE> 1
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES F-14
Computation of Ratio of Earnings to Fixed Charges Exhibit 12
Year Ended December 31
- - -----------------------------------------------------------------------------------------------------------------------------------
(In Millions, except ratios)
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes and
Distributions on Capital Securities $ 332.3 $ 462.8 $ 572.6 $ 578.5 $ 513.8
Total Fixed Charges Below 150.4 168.1 109.3 76.3 89.7
Less Interest Capitalized -- (0.5) (2.0) (0.1) (0.3)
Less Undistributed Loss from
Unconsolidated Subsidiary -- -- -- 0.9 1.0
------- ------- ------- ------- -------
Total Earnings $ 482.7 $ 630.4 $ 679.9 $ 655.6 $ 604.2
======= ======= ======= ======= =======
Fixed Charges:
Interest $ 141.0 $ 159.5 $ 101.8 $ 72.4 $ 85.4
Interest Capitalized -- 0.5 2.0 0.1 0.3
Interest Portion of Rental Expense 8.3 6.7 4.8 3.3 3.2
Amortization of Deferred Debt Expense 1.1 1.4 0.7 0.5 0.8
------- ------- ------- ------- -------
Total Fixed Charges $ 150.4 $ 168.1 $ 109.3 $ 76.3 $ 89.7
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges
Excluding Distributions on Capital Securities 3.2 3.8 6.2 8.6 6.7
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SAFECO CORPORATION AND SUBSIDIARIES
(Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities)
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes $ 263.3 $ 393.7 $ 549.8 $ 578.5 $ 513.8
Total Fixed Charges Below 219.4 237.2 132.1 76.3 89.7
Less Interest Capitalized -- (0.5) (2.0) (0.1) (0.3)
Less Undistributed Loss from
Unconsolidated Subsidiary -- -- -- 0.9 1.0
------- ------- ------- ------- -------
Total Earnings $ 482.7 $ 630.4 $ 679.9 $ 655.6 $ 604.2
======= ======= ======= ======= =======
Fixed Charges:
Interest $ 141.0 $ 159.5 $ 101.8 $ 72.4 $ 85.4
Distributions on Capital Securities 69.0 69.1 22.8 -- --
Interest Capitalized -- 0.5 2.0 0.1 0.3
Interest Portion of Rental Expense 8.3 6.7 4.8 3.3 3.2
Amortization of Deferred Debt Expense 1.1 1.4 0.7 0.5 0.8
------- ------- ------- ------- -------
Total Fixed Charges $ 219.4 $ 237.2 $ 132.1 $ 76.3 $ 89.7
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges
and Distributions on Capital Securities 2.2 2.7 5.1 8.6 6.7
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
SAFECO CREDIT
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earnings:
Income Before Income Taxes $ 22.6 $ 22.7 $ 21.5 $ 19.1 $ 13.3
Total Fixed Charges Below 74.7 67.1 56.4 47.5 41.9
------- ------- ------- ------- -------
Total Earnings $ 97.3 $ 89.8 $ 77.9 $ 66.6 $ 55.2
======= ======= ======= ======= =======
Fixed Charges:
Interest $ 74.6 $ 67.0 $ 56.3 $ 47.4 $ 41.8
Interest Portion of Rental Expense 0.1 0.1 0.1 0.1 0.1
------- ------- ------- ------- -------
Total Fixed Charges $ 74.7 $ 67.1 $ 56.4 $ 47.5 $ 41.9
======= ======= ======= ======= =======
Ratio of Earnings to Fixed Charges 1.3 1.3 1.4 1.4 1.3
======= ======= ======= ======= =======
</TABLE>
<PAGE> 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SAFECO Corporation (the Corporation), a Washington corporation, owns operating
subsidiaries in segments of insurance and other financially related businesses.
(The Corporation and its subsidiaries are collectively referred to as "SAFECO".)
The insurance subsidiaries engage in property and casualty insurance, surety and
life insurance, and generated approximately 95% of SAFECO's total 1999 revenues.
On October 1, 1997 the Corporation acquired American States Financial
Corporation ("American States"), an Indianapolis, Indiana-based insurance
holding company with 1996 revenues of $2.0 billion. See Note 2 on page 56 for
additional information on significant acquisitions and dispositions.
SAFECO Credit Company provides loans and equipment financing and leasing
to commercial businesses, insurance agents and affiliated companies. SAFECO
Asset Management Company provides asset management services to the SAFECO family
of mutual funds, SAFECO Trust Company and outside managed accounts. Talbot
Financial Corporation provides insurance brokerage and financial services
distribution. In February 1998 the Corporation announced its decision to sell
its real estate subsidiary, SAFECO Properties, to focus on SAFECO's core
insurance and financial services businesses. The majority of SAFECO Properties'
assets were sold in the first half of 1999 and realized gains of $35 million
have been recognized in 1999. As SAFECO Properties' operations are not material
to the consolidated financial statements they have not been reclassified as
discontinued operations. See further discussion on page 34.
CAPITAL RESOURCES AND LIQUIDITY
SOURCES AND USES OF FUNDS
SAFECO's liquidity requirements are met primarily by funds generated from
operations, the sale and maturity of invested assets, bank borrowings and
issuances of commercial paper and other securities. The primary sources of cash
from operations are insurance premiums, funds received under deposit contracts,
dividends, interest, and asset management fees.
SAFECO's primary uses of funds are to fund operations, service and pay
down debt, pay dividends to SAFECO shareholders, fund acquisitions and stock
repurchases and to expand the investment portfolio. Cash from insurance
operations is used primarily to pay claims and claim adjustment expenses. Most
insurance premiums are received before or at the time premium revenues are
recognized, while related claims are incurred and paid in subsequent months or
years. Catastrophe claims, the timing and amount of which are inherently
unpredictable, may create increased liquidity requirements.
Total cash provided by operating activities for the years ended December
31, 1999, 1998 and 1997 was $763.0 million, $657.6 million and $710.9 million,
respectively (see Statement of Consolidated Cash Flows on page 46). The
increases in property and casualty insurance premiums received in 1999 and 1998
resulted primarily from a higher numbers of policies in force, as well as the
acquisition of American States in 1997. The increases in dividends and interest
received in both 1999 and 1998 were due mainly to the increasing invested asset
base of the life insurance companies as well as the acquisition of American
States. Although cash flow from property and casualty operations was positive in
all three years, weakening underwriting results, combined with the relatively
low interest rate environment, dividends paid to SAFECO Corporation and bond
call activity has dampened the growth of investment income. It is anticipated
that the property and casualty subsidiaries will pay dividends to SAFECO
Corporation in 2000 at the maximum statutory levels in order to fund shareholder
dividends, service and pay down debt and fund other capital management
activities including additional repurchases of SAFECO stock. Property and
casualty after-tax investment income in 2000 will likely be lower than 1999
because of the impact of these dividend payments and the higher concentration of
taxable bonds in the investment portfolio.
Funds received under deposit contracts relate primarily to the annuity
and retirement services products of SAFECO's life insurance subsidiaries.
(SAFECO's life insurance subsidiaries are collectively referred to as "SAFECO
Life.") Of the total of $13.8 billion in deposit contracts at December 31, 1999,
approximately 42% are structured settlement immediate annuity products. These
annuities have an average expected maturity of over 25 years at issuance and
cannot be surrendered by
SAFECO 1999 ANNUAL REPORT
p. 22
<PAGE> 2
policyholders. Equity-indexed annuities, comprising approximately 6% of total
deposit contracts, have remaining expected maturities of approximately 5 years
and associated surrender charges graded from 8% in year one to zero after year
six. Other annuity and retirement services products comprise approximately 32%
of total deposit contracts. These products generally have expected maturities of
5 to 20 years at issuance and associated surrender charges graded from a range
of 10% to 5% in year one to zero within 5 to 10 years, and SAFECO Life retains
the option to defer payouts over five years on approximately 13% of these
contracts. SAFECO Life's guaranteed investment contracts (GICs) within its
retirement services area comprise approximately 5% of total deposit contracts.
Universal life products comprise the remaining 15% of total deposit contracts
and have expected maturities of 10 to 20 years at issuance with surrender
charges varying according to policy type.
The high level of proceeds from the maturity of fixed maturities in
1999, 1998 and 1997 was due primarily to the high number of calls of fixed
maturities and prepayments of mortgage-backed securities. These calls and
prepayments were primarily due to the declining interest rate environment in
1998 and 1997. The high level of purchase and sale activity related to fixed
maturities available for sale in 1999 was due in part to shifting a portion of
the property and casualty subsidiaries' bond holdings from tax-exempt to taxable
bonds, to maximize the portfolio's after tax return in view of the alternative
minimum tax and the higher level of underwriting losses in 1999. Much of the
purchase and sale activity related to fixed maturities available-for-sale in
1998 was due to the realignment of the American States property and casualty
investment portfolio. Changes in interest rates have also caused fluctuations in
the market value of fixed maturity investments. This has affected SAFECO's
reported book value (shareholders' equity) and comprehensive income because the
difference between market value and the amortized cost of fixed maturities
classified as available-for-sale is included in shareholders' equity and
comprehensive income, net of related income tax.
SAFECO Credit Company has ongoing needs for outside capital to fund its
lending and leasing activity. Its borrowings are of short to medium-term
duration and are obtained primarily by the issuing of commercial paper and
entering into interest rate swaps to convert variable rate interest payments to
fixed rates, as discussed further below. At December 31, 1999 SAFECO Credit had
$24.6 million of medium-term notes outstanding, which were issued in 1991 and
1993 and mature in 2000 and 2001. These debt securities are guaranteed by SAFECO
Corporation. Including these medium-term notes and commercial paper, SAFECO
Credit had unaffiliated borrowings at December 31, 1999 totaling $1,323.1
million, of which $1,311.9 million was due within one year. Nearly all of this
current portion is comprised of short-term commercial paper borrowings. It is
anticipated that the majority of these commercial paper borrowings will be
rolled over in 2000. The Corporation expects to replace some of these borrowings
with medium-term debt in 2000 and 2001 in order to reduce refinancing risk.
SAFECO Credit enters into interest rate swap agreements to reduce the
impact of changes in interest rates on its variable rate debt by converting
variable rate interest payments to fixed rates. The interest rate swap
agreements provide only for the exchange of interest on the notional amounts at
the stated rates, with no multipliers or leverage. At December 31, 1999,
interest rate swap agreements were outstanding with notional amounts of $457.0
million, replacing variable rates with fixed rates with a weighted average
interest rate of 5.9%. Maturities of these agreements range from May 2000 to
June 2007. At December 31, 1998, interest rate swap agreements were outstanding
with notional amounts of $499.0 million, replacing variable rates with fixed
rates with a weighted average interest rate of 5.9%.
To pay for its October 1997, $2,824 million cash acquisition of American
States and the related $300 million debt repayment, the Corporation issued
commercial paper, senior notes, capital securities and common stock in 1997. In
September 1997 the Corporation issued $1,482.0 million of commercial paper. As
of December 31, 1999, $508.8 million of this commercial paper remained
outstanding, with a weighted average interest rate of 6.3%. Commercial paper
maturing in 1997 was paid off in part with proceeds from the issuance of common
stock. The Corporation entered into two interest rate swap agree-
SAFECO 1999 ANNUAL REPORT
p. 23
<PAGE> 3
ments in December 1997 to fix the interest rates on a portion of the outstanding
commercial paper. The swaps are for notional amounts of $150.0 million each and
replace variable rates with fixed rates of 5.9%. The two swap agreements mature
in December 2002 and December 2007.
The Corporation has a bank credit facility available for $1,050.0
million. It is a five-year facility originated in 1997 that extends to 2002 and
is available for general corporate purposes, including repurchases of the
Corporation's common stock as well as support of the commercial paper programs
of the Corporation and SAFECO Credit. The Corporation plans to roll over its
$508.8 million of commercial paper borrowings outstanding at December 31, 1999
in 2000. Over the next three years, the Corporation expects to retire a size-
able portion of this commercial paper primarily through property and casualty
and life subsidiary dividends.
In July 1997 the Corporation issued $200.0 million of noncallable
10-year 6.875% senior notes. Also in July 1997 the Corporation issued $841.5
million (net of underwriting compensation) of 40-year 8.072% capital securities
through a subsidiary trust. These capital securities are callable by the
Corporation after 10 years at a price of 104% of their principal amount, with
the call premium graded down to zero after 20 years. See Note 4 on page 62 for
more information on SAFECO's borrowings.
In the fourth quarter of 1997, in a secondary offering, the Corporation
issued 14.8 million shares of common stock at $47.50 per share, receiving net
proceeds of $678 million. The proceeds were used to pay off the Corporation's
commercial paper debt maturing in 1997.
As part of its active capital management strategy, the Corporation
periodically repurchases its common stock through open market and negotiated
purchases. In May 1999 the Corporation's board of directors approved the
repurchase of 8.0 million shares of common stock. Previous repurchase
authorizations were in August 1998 for a total of $200 million and in February
1996 for a total of 2.0 million shares. For the year ended December 31, 1999,
the Corporation repurchased 7.5 million shares at a total cost of $302.1 million
for an average price of $40.14. For the year ended December 31, 1998 the
Corporation repurchased 5.2 million shares at a total cost of $235.6 million for
an average price of $45.66. Repurchases combined for 1999 and 1998 totaled 9.0%
of the Corporation's outstanding common shares at the beginning of 1998. SAFECO
Corporation received additional dividends from its property and casualty and
life insurance subsidiaries to fund the stock repurchases in 1999 and 1998.
Approximately 1.3 million shares remain available for repurchase under the May
1999 authorization. In addition, on February 2, 2000, the Corporation's Board of
Directors authorized the repurchase of an additional 3.0 million shares to bring
the total authorization to 4.3 million shares.
RATINGS
The claims paying abilities of insurers are rated to provide both insurance
consumers and industry participants with comparative information on specific
insurance companies. Higher ratings generally indicate greater financial
strength and a stronger ability to pay claims and are important in marketing
certain insurance products. Ratings focus on factors such as capital resources,
financial strength, demonstrated management expertise in the insurance business,
marketing, investment operations, minimum policyholders' surplus requirements
and capital sufficiency to meet projected growth, as well as access to such
traditional capital as may be necessary to continue to meet standards for
capital adequacy. Coincident with the 1997 acquisition of American States and
the related financings which increased SAFECO's balance sheet leverage, A.M.
Best, Moody's and Standard & Poor's issued revised ratings for the Corporation's
senior debt and for the insurance subsidiaries' financial strength/claims-paying
ability. In 1999 Standard & Poor's lowered its ratings for the Corporation and
its subsidiaries due primarily to the decline in profitability of SAFECO's
property and casualty operations. The lower Standard & Poor's commercial paper
rating has increased the interest cost of the company's commercial paper.
Although SAFECO's ratings are lower currently than in the recent past, they
remain strong, reflecting SAFECO's ongoing profitability and solid balance
sheet.
SAFECO 1999 ANNUAL REPORT
p. 24
<PAGE> 4
The following table summarizes SAFECO's current ratings:
<TABLE>
<CAPTION>
A.M. DUFF & STANDARD
BEST PHELPS MOODY'S & POOR'S
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAFECO Corporation:
Senior Debt a+ -- A3 A-
Capital Securities a+ -- a3 BBB
Commercial Paper - D-1 P-2 A-2
Financial Strength/Claims Paying Ability:
Property and
Casualty Subsidiaries A+ -- A1 AA-
Life Subsidiaries A+ AA A1 AA-
</TABLE>
REGULATORY ISSUES
SAFECO is not aware of any recently passed or current recommendations by
regulatory authorities, which have or would have, if passed, a material effect
on its liquidity, capital resources or results of operations.
Those states in which SAFECO's insurance subsidiaries are domiciled or
deemed to be commercially domiciled limit the amount of dividend payments that
can be made by those subsidiaries without prior regulatory approval. Three of
SAFECO's insurance subsidiaries received approval in July 1997 to pay
extraordinary dividends totaling $600 million to fund a portion of the American
States purchase price. It is expected that these state limits will not restrict
SAFECO's insurance subsidiaries from paying dividends to the Corporation (parent
company) in amounts similar to those presently being paid and those paid in the
past (exclusive of the $600 million extraordinary dividends in 1997).
The National Association of Insurance Commissioners (NAIC) uses
risk-based capital (RBC) formulas for both life insurers and property and
casualty insurers which serve as an early warning tool by the NAIC and state
regulators to identify companies that are undercapitalized and which merit
further regulatory attention or the initiation of regulatory action. SAFECO's
life and property and casualty companies have more than sufficient capital to
meet the RBC requirements.
Similarly, the NAIC's proposed Model Investment Law, if adopted by
certain states in which SAFECO operates, should not significantly impact SAFECO,
as its assets are, and historically have been, conservatively invested.
The NAIC has recently completed a major project to codify statutory
accounting principles. The guidance will be effective beginning January 1, 2001.
The impact of these proposals is currently being studied, and the effect on the
statutory surplus of SAFECO's insurance subsidiaries has not yet been
determined.
YEAR 2000 READINESS DISCLOSURE
SAFECO believes that its program to address Year 2000 issues is comprehensive
and on schedule, and as of February 11, 2000, SAFECO has not experienced any
material Year 2000 complications. SAFECO, like most other companies, has been
concerned that some of its computer programs have or had 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 completed various assessments of Year 2000 issues in connection
with its computer systems and the technology embedded in the equipment it uses,
prior to December 31, 1999. SAFECO began modifying and replacing portions of its
systems in 1995 so that the system modified or replaced would 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 engaged in a regular program of testing and running the
systems once Year 2000 programming changes were made. This testing included
trials at SAFECO's hot site, a location provided and maintained by a third party
separate from any SAFECO facility.
The total Year 2000 readiness cost for SAFECO approximated $18 million
and as of February 11, 2000 SAFECO had incurred all of this amount. These
amounts have included both modification costs, which were expensed as incurred,
and certain replacement systems costs, some of which were capitalized and
amortized. All of SAFECO's existing systems were internally verified as being
Year 2000 ready as of December 31, 1999, and the program of testing and running
the systems after Year 2000 programming changes have been made has been
completed.
SAFECO 1999 ANNUAL REPORT
p. 25
<PAGE> 5
SAFECO has worked 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 were on schedule to detect and
fix any Year 2000 problems which might affect SAFECO's systems or business
processes. SAFECO has assessed and attempted to mitigate risks with respect to
the failure of any mission critical third-party partners and vendors to be Year
2000 ready. Where applicable, this effort included physically testing our common
interfaces. Failure of such parties to be Year 2000 ready could have a material
adverse effect on SAFECO's results of operations. As of February 11, 2000 SAFECO
is not aware of any of its third party partners or vendors experiencing any Year
2000 problems that would materially impact SAFECO's systems or business
processes.
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, product policies, and assumed reinsurance. The effect
of such coverage issues on SAFECO's results of operations is not reasonably
estimable at this time. SAFECO expects, however, 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. As of February 11, 2000 SAFECO is not aware of any Year 2000-related
claims made under its property and casualty insurance policies.
SAFECO 1999 ANNUAL REPORT
p. 26
<PAGE> 6
SUMMARY OF FINANCIAL INFORMATION
The following summarized financial information sets forth the contributions of
each primary business segment to the consolidated net income of SAFECO
Corporation. The information should be read in conjunction with the related
statements of income on pages 49 through 52 of this report.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 1999 1998 1997
- - ----------------------- ---------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty $ 114.8 $ 310.2 $ 260.2(***)
Life 116.7 46.4(**) 97.0
Real Estate(*) - 3.4 6.2
Credit 14.5 14.4 14.1
Asset Management 8.9 5.5 4.9
Corporate (34.4) (45.0) (16.3)
---------------------------------------------
Total 220.5 334.9 366.1
Realized Gain, Net of Income Taxes 76.5 61.9 78.7
---------------------------------------------
Income Before Distributions on Capital Securities 297.0 396.8 444.8
Distributions on Capital Securities, Net of Tax (44.8) (44.9) (14.8)
---------------------------------------------
Net Income $ 252.2 $ 351.9 $ 430.0
=============================================
Net Income Per Diluted Share of Common Stock:
Income Before Realized Gain $ 1.32 $ 2.07(**) $ 2.71(***)
Realized Gain .58 .44 .60
---------------------------------------------
Net Income $ 1.90 $ 2.51 $ 3.31
=============================================
</TABLE>
(*) 1999 Real Estate income of $4.3 included in Corporate.
(**) 1998 Life Income includes a write-off of deferred acquisition costs of
$46.8 ($30.4 after tax, $0.22 per share).
(***) 1997 Property and Casualty Income includes nonrecurring acquisition
charges of $60.0 ($39.0 after tax, $0.30 per share) related to SAFECO's
October 1997 acquisition of American States.
PROPERTY AND CASUALTY--OPERATIONS
Through independent agents, SAFECO's property and casualty subsidiaries write
personal, commercial and surety lines of insurance. Coverages include
automobile, homeowners, fire and allied lines, workers' compensation, commercial
multi-peril, miscellaneous casualty, surety and fidelity. Products are sold in
all states and the District of Columbia.
As described in more detail in Note 2 on page 56, SAFECO purchased
American States on October 1, 1997. The acquisition has been treated as a
purchase for accounting purposes, thus the revenue and profit amounts reported
include American States amounts from the October 1, 1997 acquisition date
forward. Because of this, in the following discussion of operations the revenue
and profit amounts will not be comparable for all three years, as American
States amounts are included for all of 1999 and 1998, and only the fourth
quarter of 1997.
SAFECO's purchase of American States broadened the product mix available to the
combined companies' agency force, particularly in introducing American States'
small commercial line products into existing SAFECO agencies. The combination
added approximately 4,000 agents to SAFECO's agency force and geographically
diversified SAFECO's revenue and earnings base and its catastrophe risk
exposure.
SAFECO 1999 ANNUAL REPORT
p. 27
<PAGE> 7
PROPERTY AND CASUALTY OPERATING STATISTICS
<TABLE>
<CAPTION>
1999 1998 1997(*)
- - ------------------------------------------------------------------------------------------------------------------
PERCENTAGE
INCREASE PERCENTAGE PERCENTAGE
(DECREASE) INCREASE INCREASE
OVER PRIOR OVER PRIOR OVER PRIOR
YEAR YEAR YEAR
- - ------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Written $ 4,645.0 4.6% $ 4,441.8 48.7% $ 2,987.4 21.3%
========== ========== ==========
Underwriting Profit (Loss) $ (366.7) $ (109.4) $ 36.2
Nonrecurring Acquisition Charges -- -- (60.0)
Net Investment Income 462.3 (3.7) 480.2 46.9 327.0 16.1
Goodwill Amortization (43.8) (43.0) (11.0)
---------- ---------- ----------
Income Before Realized Gain and
Income Taxes $ 51.8 $ 327.8 $ 292.2
========== ========== ==========
</TABLE>
(*) 1997 amounts include American States from the October 1, 1997
acquisition date forward.
Approximately 15% of SAFECO's property and casualty premiums are written
in California and approximately 33% of premiums are written in the three West
Coast states of California, Washington and Oregon. SAFECO's writing of new
property business continues to be restricted in California to reduce its
exposure to large single-event catastrophes (see discussion on page 29).
The following tables summarize SAFECO's combined property and casualty
operating ratios and underwriting profit (loss) by line of business for the last
three years:
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------
OPERATING RATIOS AS A PERCENTAGE
OF EARNED PREMIUMS(*)
- - -----------------------------------------------------------------
<S> <C> <C> <C>
Loss Ratio 66.4% 61.3% 58.4%
Adjustment Expense Ratio 12.0 11.5 11.2
Expense Ratio 29.8 29.5 28.4
Dividends to Policyholders .2 .3 .7
----------------------------
Combined Ratio 108.4% 102.6% 98.7%
============================
</TABLE>
(*) Ratios exclude goodwill amortization and nonrecurring 1997 acquisition
charges.
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------------------
UNDERWRITING PROFIT (LOSS)
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Personal Lines:
Personal Auto $ (63.3) $ 11.5 $ 30.7
Homeowners (48.2) (56.4) (2.0)
Other Personal Lines 20.6 14.8 20.6
Commercial Lines:
American States Business Insurance (183.4) (72.7) 8.5
SAFECO Commercial (107.6) (27.9) (34.9)
Surety 15.2 19.2 12.8
Other - 2.1 0.5
---------------------------------
Total $ (366.7) $ (109.4) $ 36.2
=================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 28
<PAGE> 8
Income from property and casualty operations, before realized gains and
income taxes, totaled $51.8 million in 1999, compared with $327.8 million in
1998 and $292.2 million in 1997. Excluding the $60.0 million of nonrecurring
1997 acquisition charges, income for 1997 was $352.2 million. The $60.0 million
charge included $40.0 million to strengthen American States' loss reserves and
$20.0 million for incentive payments to agents. The unsatisfactory earnings in
1998 and particularly in 1999 are primarily the result of underwriting losses in
SAFECO's primary property and casualty lines of business as noted in the
underwriting results table on page 28. The combined effect of these losses can
be seen in the increase in the loss ratio from 58.4% in 1997 to 66.4% in 1999,
in the middle table on page 28. More details on these results by line for the
three years and corrective actions to improve these underwriting results are
explained further below.
Since acquiring American States in October 1997, SAFECO has devoted
significant resources to cross-licensing and training agents in both SAFECO and
American States product lines on a state-by-state process. During this now
completed transition SAFECO did not significantly increase prices and in fact in
some states and lines, prices were decreased to facilitate a smooth transition
and retain the business acquired. In addition, competitive industry pricing
conditions existed across all lines of business. SAFECO is now pursuing price
increases in the product lines that are producing the underwriting losses. The
price increases, combined with significant attention to exposures and risk
selection and aggressive expense management are expected to improve SAFECO's
results over time.
SAFECO believes its strategy of being the "go to" company for
independent agents is sound. SAFECO has seen significant cross-selling benefits
from the complete product line created by the acquisition and believes that this
synergy will continue and be enhanced.
Personal lines, American States Business Insurance (ASBI), SAFECO
Commercial and surety lines comprised approximately 58%, 25%, 15% and 2%,
respectively, of the 1999 gross premiums written of $4.6 billion.
Losses caused by catastrophes have had a significant impact on SAFECO's
results. Catastrophe losses for all lines, net of reinsurance, totaled $103
million, $159 million and $40 million in 1999, 1998 and 1997, respectively. The
1999 and 1998 catastrophe losses were mainly due to adverse weather in the
Midwest, which caused property losses in SAFECO's homeowners and ASBI lines.
SAFECO's strategy to reduce the impact of future catastrophe losses
includes continuing to maintain a strong catastrophe reinsurance program (see
discussion on page 32) and reducing its exposure by modifying coverages and
obtaining higher deductibles on earthquake coverages and using separate
earthquake policies in some states. SAFECO suspended writing new homeowners,
dwelling fire and condominium policies in California in 1994 because California
requires insurers to offer earthquake coverage in connection with homeowners and
other residential policies. SAFECO received approval for a new earthquake
mini-policy in California in September 1996 and as its existing homeowner's
policies reach their annual renewal dates began to convert them to the more
limited coverage provided by the mini-policy. In April 1997, SAFECO began to
reopen its California market for new homeowners and fire business in a modest
fashion in response to the reducing earthquake exposure resulting from the new
mini-policy. In Washington State, SAFECO's second largest homeowners market, a
separate earthquake policy has been introduced which lowers its exposure to
earthquakes in that state. SAFECO has also modified its earthquake policies in
several other states to increase the deductible. SAFECO has restricted the
writing of new property business in catastrophe-prone states and has implemented
spread-of-risk strategies in certain states such as Colorado, Texas and Florida
to help mitigate the effects of hailstorm, wind storm and hurricane losses. In
addition, SAFECO has invested in earthquake and wind modeling technologies to
allow it to better monitor exposures. SAFECO believes federal legislation is
necessary to create a permanent, long-term solution for the losses that arise
from natural disasters such as earthquakes.
Voluntary personal auto produced a pretax underwriting loss of $63.3
million in 1999, and underwriting profits of $11.5 million and $30.7 million for
1998 and 1997 respectively. Average auto rates decreased 2% in 1999, after
increases of 1% in 1998 and 2% in 1997. The rate decreases in 1999 were taken to
respond to increased competition in this line and to facilitate the transition
of American States business to SAFECO. Average loss costs (which include the
severity or cost of settling claims and the frequency of accidents) increased
SAFECO 1999 ANNUAL REPORT
p. 29
<PAGE> 9
by one percent in both 1999 and 1998. SAFECO plans to increase personal auto
rates on average by 5% in 2000. This may negatively affect premium growth but
should help return this line to profitability. The number of auto policies
inforce increased 2% in 1999 and 1% in 1998.
The homeowners' line produced pretax underwriting losses of $48.2
million, $56.4 million and $2.0 million in 1999, 1998 and 1997, respectively.
Losses due to catastrophes continue to affect this line, totaling $52 million,
$83 million and $33 million for 1999, 1998 and 1997, respectively. Average
homeowners rates were increased 1%, 3% and 7% in 1999, 1998 and 1997,
respectively. The number of homeowners' policies in force increased 4% in 1999
and 2% in 1998. Continuing rate increases and insurance-to-value efforts,
combined with restricted writings, higher deductibles and spread-of-risk
strategies in catastrophe-prone areas are all continuing to be pursued to
improve future results in the homeowners line. A continuing increase in premium
per policy is expected in 2000 as a result of planned rate increases and the
ongoing insurance-to-value effort. Excluding the impact of catastrophes, these
measures are expected to improve homeowners' results in 2000.
Other personal lines produced underwriting profits of $20.6 million,
$14.8 million and $20.6 million in 1999, 1998 and 1997, respectively. Coverages
in these lines include earthquake, dwelling fire, inland marine and boats.
ASBI, which focuses on small- to medium-sized businesses, produced
underwriting losses of $183.4 million for 1999 and $72.7 million for 1998.
Premiums written increased 14% in 1999. These poor underwriting results in both
years were due to several factors. Chief among them was SAFECO's focus on
retaining business during the transition period, which was achieved, but at the
cost of inadequate pricing and weaker underwriting standards. Other factors were
the overall competitive market (particularly in workers' compensation), high
weather-related losses and a higher number of large losses in certain lines.
SAFECO is implementing initiatives to aggressively increase rates particularly
in workers' compensation and commercial auto, strengthen underwriting selection,
and reduce costs, to improve results in this line.
SAFECO Commercial, which services medium-to-large complex commercial
clients, produced pretax underwriting losses of $107.6 million, $27.9 million,
and $34.9 million in 1999, 1998 and 1997 respectively. The workers' compensation
line's underwriting loss worsened by $44 million in 1999 compared to 1998, due
to increased loss costs and continuing rate competition. Rising medical costs
and the erosion of positive effects from tort reforms have increased loss costs.
The underwriting results for the general liability line worsened by $35 million
due partly to a significant number of large losses during 1999. SAFECO has
increased commercial prices broadly in 2000 and believes the market will accept
these increases, which should have a positive impact on results.
The surety line produced pretax underwriting profits of $15.2 million,
$19.2 million and $12.8 million for 1999, 1998 and 1997, respectively.
Other insurance product lines broke even in 1999 and produced
underwriting gains of $2.1 million and $0.5 million in 1998 and 1997,
respectively. These lines include assumed reinsurance and other business in run-
off and assigned risk plans.
PROPERTY AND CASUALTY--LOSS RESERVES
The liability (reserves) for losses and loss adjustment expense (LAE) for the
property and casualty companies was $4,378.6 million at December 31, 1999,
compared to $4,219.9 million at December 31, 1998. The increase in the liability
at December 31, 1999 compared with December 31, 1998 reflects both increased
loss exposure due to premium growth and adverse development in certain lines of
business. The liability is presented net of amounts recoverable from salvage and
subrogation recoveries (see Note 1 on page 55) and gross of amounts recoverable
from reinsurance (see Note 6 on page 65). The amount of reinsurance recoverables
related to the above gross liabilities was $309.5 million at December 31, 1999
and $253.6 million at December 31, 1998.
Reserves for losses that have been reported to SAFECO and certain legal
expenses are established on the "case basis" method. Claims incurred but not
reported (IBNR) and other adjustment expense are estimated using statistical
procedures. Salvage and subrogation recoveries are accrued using the "case
basis" method for large claims and statistical procedures for smaller claims.
SAFECO 1999 ANNUAL REPORT
p. 30
<PAGE> 10
SAFECO's objective is to set reserves that are adequate; that is, the
amounts originally recorded as reserves should at least equal the amounts
ultimately required to settle losses. SAFECO's reserves aggregate its best
estimates of the total ultimate cost of claims that have been incurred but have
not yet been paid. The estimates are based on past claims experience and
consider current claim trends as well as social, legal and economic conditions,
including inflation. The reserves are not discounted.
Loss and LAE reserve development is reviewed on a regular basis to
determine that the reserving assumptions and methods are appropriate. Reserves
initially determined are compared to the amounts ultimately paid. A statistical
estimate of the projected amounts necessary to settle outstanding claims is made
regularly and compared to the recorded reserves and adjusted as necessary; such
adjustments are included in current operations.
Analysis indicates that SAFECO's reserves are adequate and probably
slightly redundant at December 31,1999, 1998 and 1997. Operations were charged
$78.8 million in 1999 due to increased exposure in certain lines of business:
construction defect, asbestos and environmental and workers' compensation.
Operations benefited $100.0 million in 1998 for a decrease in estimated loss and
LAE from claims occurring in years 1997 and prior due primarily to improved
claims handling changes implemented in 1998, related primarily to the American
States operation. Operations were charged $30.5 million in 1997 due primarily to
a nonrecurring $40.0 million reserve increase related to the American States
acquisition. This 1997 reserve increase related to American States previously
discontinued assumed reinsurance operations. Excluding this nonrecurring
charge, the 1997 loss and LAE development on claims occurring in prior years
benefited operations $9.5 million.
ENVIRONMENTAL AND ASBESTOS CLAIMS
The property and casualty companies' reserves for losses and LAE for liability
coverages related to environmental, asbestos and other toxic claims totaled
$332.3 million at December 31, 1999 compared with $329.8 million at December 31,
1998. These amounts are before the effect of reinsurance, which totaled $30.1
million and $30.9 million at December 31, 1999 and 1998. These reserves are
approximately 8% of total property and casualty reserves for losses and LAE at
both December 31, 1999 and 1998. The reserves include estimates for both
reported and IBNR losses and related legal expenses.
The vast majority of SAFECO's property and casualty insurance companies'
environmental, asbestos and other toxic claims result from the commercial
general liability line of business and the discontinued assumed reinsurance
operations of American States. A few of these losses occur in other coverages
such as umbrella, small commercial package policies and personal lines.
The following table presents the loss reserve activity analysis for
liability coverages related to environmental, asbestos and other toxic claims,
before the effect of reinsurance:
<TABLE>
<CAPTION>
1999 1998 1997
- - ------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Reserves at Beginning of Year $ 329.8 $ 346.9 $ 102.8
American States Reserves
at Acquisition -- -- 264.4
Incurred Losses and LAE 24.8 1.6 (9.9)
Losses and LAE Payments (22.3) (18.7) (10.4)
-------------------------------------
Reserves at End of Year $ 332.3 $ 329.8 $ 346.9
=====================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 31
<PAGE> 11
Although estimation of environmental claims is difficult, the reserves
established for these claims at December 31, 1999 are believed to be adequate
based on the known facts and current law. SAFECO has generally avoided writing
coverages for larger companies with substantial exposure in these areas. In view
of changes in environmental regulations and evolving case law, which affect the
development of loss reserves, the process of estimating loss reserves for
environmental, asbestos and other toxic claims results in imprecise estimates.
Quantitative loss reserving techniques have to be supplemented by subjective
considerations and managerial judgment. Because of these conditions, trends that
have affected development of these liabilities in the past may not necessarily
occur in the future.
CONSTRUCTION DEFECT CLAIMS
Prior to its acquisition by SAFECO, American States had experienced adverse loss
development on construction defect claims. Construction defect claims are a
subset of claims that arise from coverage provided by general property damage
liability insurance. Construction defect claims are claims arising from the
alleged defective work performed in the construction of large habitation
structures, such as apartments, condominiums and large developments of single
family dwellings or other housing. In addition to damages arising directly from
the alleged defective work, construction defect claims also allege that the
economic value of the structure has been diminished. The vast majority of
construction defect claims arise from past contractor business written in
California. SAFECO commercial, which does not include American States business
insurance, has avoided writing the construction class of business in California
since 1989 and has limited exposure to these types of claims. Because of this
SAFECO has not historically separated these claims for the purpose of reserve
analysis. However, American States, prior to the acquisition by SAFECO, was a
major writer of California contractor business until 1994 when it implemented
significant restrictions in this line. The total American States reserves for
construction defect claims totaled $306.1 million at December 31, 1999 and
$328.6 million at December 31, 1998, representing approximately 8% of total
property and casualty reserves for losses and LAE at both December 31, 1999 and
1998. Claims payments including LAE totaled $50.6 million in 1999 and $67.1
million in 1998.
REINSURANCE
SAFECO's property and casualty companies use treaty and facultative reinsurance
to help manage exposure to loss. As noted above, the liability for unpaid losses
and LAE is reported gross of reinsurance recoverables of $309.5 million at
December 31, 1999 and $253.6 million at December 31, 1998. The availability and
cost of reinsurance are subject to prevailing market conditions, both in terms
of price and available capacity. Although the reinsurer is liable to SAFECO to
the extent of the reinsurance ceded, SAFECO remains primarily liable to the
policyholder as the direct insurer on all risks insured. To SAFECO's knowledge
none of its reinsurers is experiencing financial difficulties.
SAFECO's catastrophe property reinsurance program for 2000 is unchanged
from 1999 and covers 90% of $400 million of single-event losses in excess of
$100 million retention. In a large catastrophe, SAFECO would, therefore, retain
the first $100 million of losses, 10% of the next $400 million and all losses in
excess of $500 million. In addition to this nationwide coverage, for all states
other than California SAFECO has a supplemental earthquake-only reinsurance
contract that would cover 90% of $350 million of single-event earthquake losses
in excess of $500 million. Both of these 2000 catastrophe property reinsurance
contracts include provisions for one reinstatement for a second catastrophe
event in 2000 at current rates.
SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and do not participate in any unusual or nonrecurring
reinsurance transactions such as "swaps" of reserves or loss portfolio
transfers. SAFECO does not use "funding covers" and does not participate in any
surplus relief transactions. Additional information on reinsurance can be found
in Note 6 on page 65.
LIFE
The life companies offer individual and group insurance products, retirement
services (pension) and annuity products. These products are marketed through
professional agents in all states and the District of Columbia. The most
significant product lines in terms of premium/deposit volume include: single
premium immediate and deferred annuities, business-owned life insurance (BOLI),
indexed and variable annuities, tax-sheltered annuities for the education and
nonprofit
SAFECO 1999 ANNUAL REPORT
p. 32
<PAGE> 12
markets, corporate retirement plans, excess loss group medical insurance and
individual life insurance.
SAFECO acquired Medical Risk Managers, Inc. on December 31, 1999,
American States Life on October 1, 1997 and WM Life Insurance Company on
December 31, 1997. These acquisitions have been treated as purchases for
accounting purposes.
Earnings before investment transactions and income taxes ("pretax
income") for all lines combined were $178.6 million in 1999, compared with $72.3
million in 1998 and $147.9 million in 1997. The 1998 results include the
write-off of deferred acquisition costs of $46.8 million, discussed further
below. The following table summarizes the pretax income amounts of the life
companies' major product lines, excluding the $46.8 million write-off of
deferred acquisition costs in 1998:
<TABLE>
<CAPTION>
1999 1998 1997
- - ---------------------------------------------------------------
<S> <C> <C> <C>
(In Millions)
Retirement Services $ 52.6 $ 12.8 $ 27.0
Settlement Annuities 42.3 30.6 25.5
Group (19.5) (14.1) 12.3
Individual 30.1 13.9 6.6
Corporate and Other 73.1 75.9 76.5
-------------------------------------
Pretax Income $ 178.6 $ 119.1 $ 147.9
=====================================
</TABLE>
As noted in the table above, nearly all major lines showed improvement
in 1999 compared with 1998. In particular, retirement services benefited from
much lower losses in the equity-indexed annuity line.
The $46.8 million pretax write-off taken in the third quarter of 1998
was primarily tied to two blocks of annuity business, the equity-indexed annuity
and a declared rate fixed annuity product, and to the life subsidiaries'
universal life business. Of the total $46.8 million write-off, $41.8 million
related to deferred acquisition costs on the three lines of business noted
above. SAFECO's equity-indexed annuity (EIA) product, which was first sold in
1997, produced a substantial operating loss in 1998 which adversely affected the
projected recoverability of its deferred acquisition costs (primarily
commissions). Losses on this product were $2.9 million, $38.2 million and $8.4
million in 1999, 1998 and 1997, respectively. The main reason for the losses was
the higher cost of S&P 500 call options which SAFECO purchased to hedge its
obligation under the EIA product. Consequently, $28.3 million of deferred
acquisition costs was written off on this product line. Steps taken to improve
the results of this product have included using new hedging strategies such as
the purchase of equity futures contracts. SAFECO has also suspended the writing
of new EIA business. The remaining $13.5 million related to the write-off of
deferred acquisition costs on a block of single premium deferred annuities which
experienced higher-than-anticipated withdrawal experience, and to the write-off
of deferred acquisition costs on SAFECO's universal life line of business which
experienced higher-than-expected operating costs. Of the total $46.8 million
amount, the remaining $5.0 million related to the estimated cost of
consolidating certain life operations to a central location and the associated
employee severance and relocation costs.
On December 31, 1997 SAFECO closed its acquisition of WM Life Insurance
Company, the insurance subsidiary of Washington Mutual, Inc. and the related
strategic alliance to distribute SAFECO Life annuities through Washington Mutual
Inc.'s multi-state banking network. This $140 million cash acquisition was
funded from internal sources.
SAFECO's retirement services operations produced pretax income of $52.6
million, $12.8 million and $27.0 million in 1999, 1998 and 1997, respectively.
Retirement services products are primarily tax-sheltered annuities, which are
marketed to teachers and employees of hospitals and charitable organizations,
guaranteed investment contracts (GICs), fixed and variable deferred annuities
(both qualified and non-qualified) and corporate retirement funds. SAFECO Life
has protection against early policy surrenders or withdrawals of most of these
products in the form of surrender charges during the initial years of each
policy or the option to defer payouts over 5 years. Retirement services had $7.1
billion of assets on deposit at December 31, 1999 compared with $6.9 billion at
December 31, 1998. New deposits from fixed return products (including EIA)
declined to approximately $354 million in 1999 from $560 million in 1998, due
mainly to the suspension of new EIA business in late 1998. Excluding EIA
deposits in both years, deposits were $350 million in 1999 and $182 million in
1998. New deposits from variable return products were approximately $265 million
in 1999 compared with $270 million in 1998.
SAFECO 1999 ANNUAL REPORT
p. 33
<PAGE> 13
The 1998 retirement services pretax income amount of $12.8 million does
not include the $28.3 million write-off of deferred acquisition costs on the EIA
product noted above. In addition to the $28.3 million write-off, the EIA product
produced a pretax loss in 1998 of $38.2 million, compared with a loss of $2.9
million in 1999 and $8.4 million in 1997. As noted above, the cost of S&P 500
call options purchased to hedge the obligation associated with the EIA product
increased dramatically throughout 1998. SAFECO has taken steps to improve the
profitability of this product, using new hedging strategies including the
purchase of equity futures contracts. SAFECO suspended the writing of new
business in this line in the fourth quarter of 1998 and is planning on
introducing a new EIA product in 2000 with a different product design. New
deposits from EIA products totaled $4 million in 1999, $378 million in 1998, and
$243 million in 1997.
The settlement annuities operations produced pretax income of $42.3
million, $30.6 million and $25.5 million in 1999, 1998 and 1997, respectively.
Settlement annuities' products are single premium immediate annuities (SPIAs)
sold to fund third-party personal injury settlements and are nonsurrenderable
contracts. The invested assets supporting SPIAs are primarily long-maturity
bonds. New SPIA deposits were $313 million in 1999 compared with $424 million in
1998 and $507 million in 1997. Deposits in 1998 included $118 million related to
the funding of a block of American States' retirees converting from their
existing defined benefit plan to SAFECO's. Competitive pressures and SAFECO
Life's lowered ratings dampened the growth of new deposit volume in 1999 and
1998. Total annuity assets amounted to $5.8 billion at December 31, 1999
compared with $5.6 billion at December 31, 1998. The increase in these
operations' income in 1999 and 1998 is due in part to the increase in assets, as
well as increased investment income resulting from early payoffs of
collateralized mortgage obligations.
SAFECO's group insurance operations produced losses of $19.5 million and
$14.1 million in 1999 and 1998, compared with income of $12.3 million in 1997.
The strategic focus of the group operation is excess loss medical insurance sold
to self-insured employers for their employee medical plans. Excess loss medical
produced losses of $26.7 million and $18.7 million in 1999 and 1998 and profits
of $7.5 million in 1997. Total group premiums decreased 4% during 1999, compared
with an increase of 5% in 1998 and a decrease of 2% in 1997. Competitive
pressures have made rate increases difficult and the negative impact of this
competition has been compounded by accelerating medical inflation, particularly
for prescription drug costs. Because of these trends SAFECO Life continues to
increase rates in the excess loss medical line and take corrective underwriting
actions.
SAFECO Life purchased the medical excess loss and group life business of
ING Medical Risks Solutions, as well as ING's wholly-owned underwriting
subsidiary, Medical Risk Managers, on December 31, 1999 for $34 million.
SAFECO Life's individual life operations produced pretax gains of $30.1
million, $13.9 million and $6.6 million in 1999, 1998 and 1997, respectively.
Results in 1999 and 1998 benefited from decreased death claims compared with
1997, expense reduction efforts and the American States Life acquisition. In
addition, profits from a new business-owned life insurance program (BOLI) have
benefited results in all three years. New BOLI deposits issued were $705 million
in 1999.
The corporate and other line is primarily comprised of investment income
resulting from the investment of capital and prior years' earnings of the
operating lines of business. It is a major component of SAFECO's life earnings,
contributing pretax income of $73.1 million in 1999, $75.9 million in 1998 and
$76.5 million in 1997. Due in part to a desire to improve SAFECO Life's return
on equity, in December 1998 SAFECO Life paid a $78 million dividend to SAFECO
Corporation. This dividend decreased the invested assets in this line causing
investment income to fall in 1999.
SAFECO's life insurance subsidiaries have not participated as a ceding
company in any assumptive reinsurance transactions. See Note 6 on page 65 for
additional information regarding reinsurance.
REAL ESTATE
In February 1998 SAFECO announced its decision to sell its real estate
investment and management operations (SAFECO Properties, Inc.), to focus on
SAFECO's core insurance and financial services businesses. The majority of
SAFECO Properties' assets were sold for $570 million in a series of closings in
the first half of 1999. Realized gains of $35 million have been recognized in
1999. As SAFECO Properties' operations are not material to the consolidated
financial statements they have not been reclassified as discontinued operations.
At December 31, 1999, investment real estate held by SAFECO Properties
SAFECO 1999 ANNUAL REPORT
p. 34
<PAGE> 14
totaled $105 million, less than one percent of SAFECO's consolidated
investments. The real estate subsidiaries produced pretax income before
investment transactions of $7.2 million, $5.3 million and $9.6 million in 1999,
1998 and 1997, respectively. In the summary of income on page 27, these amounts
are included in the Corporate line. In the Statement of Consolidated Income on
page 43, revenues for SAFECO Properties have been included in Other Revenues
from January 1, 1999 forward and related expenses have been included in Other
Expenses. For the year 1999 these revenues and expenses totaled $39.3 million
and $32.1 million, respectively.
CREDIT
SAFECO Credit Company, Inc. provides loans and equipment financing and leasing
to commercial businesses, insurance agents and affiliated companies. Credit
operations produced pretax income of $22.6 million in 1999, compared with $22.7
million in 1998 and $21.5 million in 1997. Loan and lease receivables from
nonaffiliates grew 19% in both 1999 and 1998. Continued growth in receivables is
expected although the strong growth rate of the last few years may be difficult
to achieve in 2000, due to the competitive rate environment and SAFECO Credit's
desire to maintain acceptable interest rate spreads on its new business. Loans
and leases to insurance agents, agency premium financing and agent referral
business are a valuable source of new business. The strong earnings in all three
years are primarily attributable to the continuing increase in loan and lease
production, combined with favorable collection experience and low delinquencies.
Approximately 70% of nonaffiliate loan and lease receivables outstanding
at December 31, 1999 are from commercial businesses involved in construction,
transportation and manufacturing. Most of these businesses are located in the
West Coast and Rocky Mountain regions of the United States. Loans and leases are
fully secured by liens on the collateral financed. Less than 1% of the
receivables were nonperforming at both December 31, 1999 and 1998.
ASSET MANAGEMENT
SAFECO Asset Management Company is the investment advisor for the SAFECO mutual
funds, variable annuity portfolios and a growing number of outside pension and
trust accounts. These investment management activities produced pretax income of
$13.6 million in 1999, $8.5 million in 1998 and $7.5 million in 1997. Income
increased in 1999 compared to 1998 due to two factors: a higher fund fee
schedule implemented in early 1999 and lower expenses. Assets under management
totaled $6.7 billion at December 31, 1999.
INVESTMENT SUMMARY
SAFECO's consolidated pretax investment income increased to $1,585.1 million
during 1999 from $1,518.9 million in 1998 and $1,244.7 million in 1997.
Substantially all of this investment income is produced by the investment
portfolios of SAFECO's property and casualty and life insurance subsidiaries.
The property and casualty companies' pretax investment income was $462.3
million in 1999, $480.2 million in 1998 and $327.0 million in 1997. The increase
in 1998 was due to the acquisition of American States. Although property and
casualty cash flow was positive in all three years, the high level of claims
payments combined with the relatively low interest rate environment and bond
call activity dampened the growth of investment income. The sale of
approximately $600 million of securities in 1997 to raise funds for a portion of
the American States acquisition reduced the investment base and consequently
investment income from the sale date forward. Growth in investment income in
2000 is expected to be slowed by increased claims payments and the high level of
dividends paid to the Corporation to fund shareholder dividends, service and pay
down debt and to fund other capital management activities including additional
repurchases of SAFECO stock.
The life companies' pretax investment income was $1,120.1 million in
1999, $1,041.0 million in 1998 and $916.3 million in 1997. The growth in all
years was due primarily to the increasing amount of retirement services and
annuity assets under management.
Consolidated pretax realized gains from security investments totaled
$82.6 million in 1999, compared with $94.2 million in 1998 and $147.7 million in
1997. The 1997 amount includes approximately $78 million of gains due to the
property and casualty companies' sale of securities to raise funds for a portion
of the purchase price of American States, as discussed above. The relatively
high levels of gains in 1997 and in 1998 were due in part to falling interest
rates that produced calls and redemptions of debt securities and to the strong
stock market.
Consolidated realized gains from security investments are recorded net
of losses on the sale or writedown of investments. Each investment that has
SAFECO 1999 ANNUAL REPORT
p. 35
<PAGE> 15
declined in market value below cost is monitored closely. If the decline is
judged to be other than temporary the security is written down to fair value.
The amounts of such writedowns in 1999, 1998 and 1997 were $0.6 million, $0.4
million and $0.2 million, respectively. The low amount of writedowns in all
three years reflects the high quality of SAFECO's investment portfolios.
SAFECO's property and casualty investment portfolio totaled $8.2 billion
at market value at December 31, 1999, compared with $9.2 billion at December 31,
1998. The primary reason for this decline in market value was the rise in
interest rates, which caused the market value of fixed income securities to
decline. The investment philosophy for the property and casualty portfolio is to
emphasize investment yield without sacrificing investment quality, and to
provide for liquidity and diversification. Fixed income securities comprised 76%
of this portfolio while equity securities comprised 24% (see table on page 37).
The property and casualty fixed income portfolio, which totaled $6.0
billion at market value at December 31, 1999, is currently comprised of 51%
tax-exempt and 49% taxable investments. The portfolio composition was 75%
tax-exempt and 25% taxable at December 31, 1998. The property and casualty
companies have been investing new money primarily in taxable bonds and shifting
holdings from tax-exempts to taxables to maximize the portfolio's after-tax
return in view of the alternative minimum tax and the higher level of
underwriting losses in 1999. The effective tax rate on investment income for
1999 was 16%, compared with 14% in 1998 and 13% in 1997, reflecting the shift to
a higher level of holdings of taxable bonds. The effective tax rate is expected
to increase further in 2000.
The quality of the property and casualty companies' fixed income
portfolio is detailed in the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1999
- - ----------------------------------------------------------
<S> <C>
AAA 52%
AA 17
A 20
BBB 8
BB or lower 3
---
Total 100%
===
</TABLE>
SAFECO's life investment portfolio totaled $14.9 billion at market value
at December 31, 1999. Fixed income securities, all of which are taxable,
comprised 91% of this investment portfolio at December 31, 1999. The investment
philosophy for this portfolio is to emphasize investment yield without
sacrificing investment quality, and to provide for liquidity and
diversification. SAFECO also matches the projected cash inflows of this
portfolio with the projected cash outflows of the liabilities of the various
product lines within the life operations.
The quality of the life companies' fixed income portfolio is detailed in
the following table:
<TABLE>
<CAPTION>
PERCENT AT
RATING DECEMBER 31, 1999
- - ------------------------------------------------------
<S> <C>
AAA 30%
AA 10
A 32
BBB 24
BB or lower 4
---
Total 100%
===
</TABLE>
This portfolio contains $531.4 million (at market value) of securities
below investment grade quality. This was approximately 4% of the total $13.6
billion life fixed income portfolio at market value at December 31, 1999. On a
consolidated basis, below investment grade securities with a market value of
$696.0 million were held at December 31, 1999. This was approximately 3% of
total consolidated securities investments at market value of SAFECO Corporation
and subsidiaries at December 31, 1999.
SAFECO's consolidated investment in "exotic" securities and high-risk
derivatives was less than 1% of SAFECO's total investments at both December 31,
1999 and 1998. SAFECO has intentionally avoided investing in these types of
securities. In addition, SAFECO does not enter into financial instruments for
speculative purposes.
SAFECO's consolidated investment in mortgage-backed securities of $3.9
billion at market value at December 31, 1999 consists mainly of residential
collateralized mortgage obligations (CMOs), pass-throughs and commercial
loan-backed mortgage obligations (CMBS.) The life portfolio contains virtually
all of these securities. Approximately 86% of the mortgage-backed securities are
government/agency-backed or AAA rated at December 31, 1999. SAFECO has
intentionally limited its investment in riskier, more volatile CMOs and CMBS
SAFECO 1999 ANNUAL REPORT
p. 36
<PAGE> 16
(principal only, inverse floaters, etc.) to less than 1% of total
mortgage-backed securities at December 31, 1999.
The Corporation, as a holding company, has an investment portfolio of
securities at market value that totaled $123.5 million at December 31, 1999,
compared with $158.7 million at December 31, 1998. The majority of these
securities are high-quality, preferred stocks and U.S. Treasuries.
SAFECO's consolidated investment portfolio also includes $770.4 million
of mortgage loan investments at December 31, 1999, approximately 3% of total
investments. Nearly all of these loans are held by the life companies and are
secured by first mortgage liens on completed, income-producing commercial real
estate, primarily in the retail, industrial and office building sectors. The
majority of the properties are located in the western United States, with
approximately 50% of the total in California. Individual loans generally do not
exceed $10 million. Less than 2% of the loans were non-performing at both
December 31, 1999 and 1998. The allowance for mortgage loan losses was $10.8
million at December 31, 1999 and $11.6 million at December 31, 1998.
The table below provides a summary of SAFECO's consolidated securities
investment portfolio at December 31, 1999. The excess of market value over cost
of the consolidated fixed income and equity security portfolios was $0.6 billion
at December 31, 1999 and $2.8 billion at December 31, 1998. This decrease in the
excess of market over cost was due to the increase in interest rates in 1999,
which decreased the market value of SAFECO's fixed income securities.
<TABLE>
<CAPTION>
AMORTIZED CARRYING MARKET
DECEMBER 31, 1999 COST VALUE VALUE
- - -------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Property and Casualty:
Fixed Income - Taxable (available-for-sale) $ 3,019.2 $ 2,937.6 $ 2,937.6
Fixed Income - Non-taxable (available-for-sale) 3,021.6 3,013.2 3,013.2
Equity Securities 902.5 1,897.5 1,897.5
Life:
Fixed Income - Taxable (available-for-sale) 11,122.9 10,789.2 10,789.2
Fixed Income - Taxable (held-to-maturity) 2,733.3 2,733.3 2,772.1
Equity Securities 27.7 33.6 33.6
SAFECO Corporation:
Fixed Income - Taxable (available-for-sale) 77.4 76.1 76.1
Equity Securities 22.4 43.9 43.9
Miscellaneous 37.7 44.3 44.3
Short-Term Investments 375.9 375.9 375.9
-----------------------------------------
Total $ 21,340.6 $ 21,944.6 $ 21,983.4
=========================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 37
<PAGE> 17
MARKET RISK DISCLOSURES FOR FINANCIAL INSTRUMENTS
The first two columns of the following table under each year show the financial
statement carrying values and related current estimated fair values of certain
of SAFECO's financial instruments as of December 31, 1999 and 1998. The third
column shows the effect on current estimated fair values assuming a 100 basis
point increase in market interest rates and a 10% decline in equity prices
("sensitivity analysis"). This sensitivity analysis is required by Securities
and Exchange Commission (SEC) rules issued in 1997.
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- - ----------------------------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
ESTIMATED FAIR VALUE ESTIMATED FAIR VALUE
FAIR VALUE AT AT ADJUSTED FAIR VALUE AT AT ADJUSTED
CURRENT MARKET CURRENT MARKET
CARRYING MARKET RATES/PRICES AS CARRYING MARKET RATES/PRICES AS
VALUE RATES/PRICES INDICATED BELOW VALUE RATES/PRICES INDICATED BELOW
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In Millions)
Interest Rate Risk:(*)
Financial Assets:
Fixed Maturities
Available-for-Sale $ 16,830.7 $ 16,830.7 $ 15,740.0 $ 17,855.6 $ 17,855.6 $ 16,695.0
Fixed Maturities
Held-to-Maturity 2,733.3 2,772.1 2,528.0 2,720.9 3,259.2 2,969.0
Mortgage Loans 770.4 742.0 704.0 541.5 562.0 540.0
Commercial Loans 978.3 907.0 886.0 776.8 782.0 764.0
Financial Liabilities:
Funds Held under
Deposit Contracts 13,762.9 13,495.0 13,021.0 12,718.1 13,031.0 12,511.0
Commercial Paper 508.8 508.8 508.8 732.7 732.7 732.7
Credit Company Borrowings 1,323.1 1,323.0 1,323.0 1,255.2 1,256.0 1,256.0
7.875% Notes Due 2005 200.0 201.0 193.0 200.0 217.0 210.0
6.875% Notes Due 2007 200.0 191.0 180.0 200.0 214.0 201.0
Other Debt 84.2 85.0 84.0 227.7 235.0 229.0
Capital Securities 842.5 843.0 761.0 842.1 912.0 832.0
Equity Price Risk:(**)
Marketable Equity Securities 2,004.7 2,004.7 1,804.0 2,036.6 2,036.6 1,833.0
</TABLE>
(*) Adjusted interest rates assume a 100 basis point increase in market
rates at December 31, 1999 and 1998.
(**) Adjusted equity prices assume a 10 percent decline in values at
December 31, 1999 and 1998.
SAFECO 1999 ANNUAL REPORT
p. 38
<PAGE> 18
Market risk means the potential loss from adverse changes in market
prices and interest rates. In addition to market risk, SAFECO is exposed to
other risks, including the credit risk related to its financial instruments and
the underlying insurance risk related to its core business. The sensitivity
analysis above summarizes only the exposure to market risk.
SAFECO manages its market risk by matching the projected cash inflows of
assets with the projected cash outflows of liabilities of its investment and
financial products (e.g., annuities, retirement services products, commercial
lending). For all its financial assets and liabilities, SAFECO seeks to maintain
reasonable average durations, consistent with the maximization of income without
sacrificing investment quality and providing for liquidity and diversification.
SAFECO uses certain derivative financial instruments to increase its matching of
cash flows. For example, interest rate swaps are used to convert debt
liabilities with variable rates to fixed rates to better match the fixed rate
assets they support. In addition, S&P 500 call option contracts and futures are
purchased to hedge the liability of SAFECO Life's equity-indexed annuity
product. Derivatives are used for hedging purposes rather than speculation.
The estimated fair values at current market rates for financial
instruments subject to interest rate risk in the table above are the same as
those disclosed in Note 8 (Financial Instruments) to the financial statements.
The estimated fair values at the adjusted market rates (assuming a 100 basis
point increase in market interest rates) are calculated using discounted cash
flow analysis and duration modeling, where appropriate. The estimated values do
not consider the effect that changing interest rates could have on prepayment
activity (e.g., CMOs and annuities). Estimated fair values for derivatives are
not presented, as the amounts are not material.
This sensitivity analysis provides only a limited, point-in-time view
of the market risk sensitivity of certain of SAFECO's financial instruments. The
actual impact of market interest rate and price changes on the financial
instruments may differ significantly from those shown in the sensitivity
analysis. The sensitivity analysis is further limited as it does not consider
any actions SAFECO could take in response to actual and/or anticipated changes
in interest rates and equity prices. As allowed under the SEC requirements,
certain financial instruments (e.g., lease receivables) are not required to be
included in the sensitivity analysis. In addition, certain non-financial
instruments (e.g., insurance liabilities, and real estate) are excluded from the
sensitivity analysis. Accordingly, any aggregation of the estimated fair value
amounts or adjusted fair value amounts would not represent the underlying fair
value of net equity.
FORWARD-LOOKING STATEMENTS
Statements in this Management's Discussion and Analysis that relate to
anticipated financial performance, business prospects and plans, regulatory
developments and similar matters may be considered "forward-looking statements,"
as defined in the Private Securities Litigation Reform Act of 1995. The
statements that are not historical information are forward-looking. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor under the
federal securities laws for forward-looking statements. Such statements are
subject to certain risks and uncertainties that may cause the operations,
performance, development and results of SAFECO's business to differ materially
from those
SAFECO 1999 ANNUAL REPORT
p. 39
<PAGE> 19
suggested by the forward-looking statements. The risks and uncertainties include
the following: SAFECO's ability to obtain rate increases and non-renew
underpriced insurance accounts; realization of growth and business retention
estimates; achievement of SAFECO's premium targets and profitability; changes in
competition and pricing environments; achievement of SAFECO's expense reduction
goals; the occurrence of significant natural disasters, including earthquakes;
weather conditions (including the severity and frequency of storms, hurricanes,
snowfalls, hail and winter conditions); driving patterns; fluctuations in
interest rates; performance of the financial markets; court decisions and trends
in litigation; legislative and regulatory developments; the adequacy of loss
reserves; the availability and pricing of reinsurance; the development of major
Year 2000 liabilities; and general economic and market conditions. In
particular, because insurance rates in some jurisdictions are subject to
regulatory review and approval, achieving rate increases may occur in amounts
and on a time schedule different than planned, which may affect SAFECO's efforts
to restore earnings in its property and casualty lines.
NEW ACCOUNTING STANDARDS
See discussion of new accounting standards in Note 1 on page 55.
DIVIDENDS
The Corporation has paid cash dividends continuously since 1933. Common stock
dividends paid to shareholders were $1.44 per share in 1999 compared with $1.34
in 1998 and $1.22 in 1997. These dividends are funded with dividends to the
Corporation from its subsidiaries. The Corporation expects to continue paying
dividends in the foreseeable future. However, payment of future dividends is
subject to the Board of Directors' approval and is dependent upon earnings and
the financial condition of the Corporation.
NUMBER OF SHAREHOLDERS
There were approximately 3,900 common shareholders of record at December 31,
1999.
ANNUAL REPORT ON FORM 10-K
SAFECO files an annual report on Form 10-K with the SEC in compliance with the
regulations of the SEC. Any SAFECO shareholder may obtain Form 10-K for the year
ended December 31, 1999, without charge, by making a written request to:
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO Corporation
SAFECO Plaza
Seattle, Washington 98185
SAFECO 1999 ANNUAL REPORT
p. 40
<PAGE> 20
MANAGEMENT'S REPORT
The management of SAFECO is responsible for the financial statements, related
notes and all other information presented in this annual report. The financial
statements have been prepared in conformity with generally accepted accounting
principles appropriate in the circumstances and include amounts based on the
best estimates and judgments of management.
In order to safeguard assets and to maintain the integrity and
objectivity of data in these financial statements, SAFECO maintains a
comprehensive system of internal accounting controls. These controls are
supported by the careful selection and training of qualified personnel, by the
appropriate division of duties and responsibilities and by written policies and
procedures. In addition, an integral part of the comprehensive system of
internal control is an effective internal audit department. SAFECO's internal
audit department systematically evaluates the adequacy and effectiveness of
internal accounting controls and measures adherence to established policies and
procedures.
The financial statements for the years ended December 31, 1999, 1998 and
1997 have been audited by Ernst & Young LLP, independent auditors. Their audits
were made in accordance with auditing standards generally accepted in the United
States and included a review of the system of internal accounting controls to
the extent necessary to express an opinion on the financial statements.
The Audit Committee of the Board of Directors, comprised solely of
outside directors, meets regularly with the independent auditors, management and
internal auditors to review the scope and results of the audit work performed.
The independent auditors have unrestricted access to the audit committee,
without the presence of management, to discuss the results of their audit, the
adequacy of internal accounting controls and the quality of accounting policies
and financial reporting.
The management of SAFECO believes that as of December 31, 1999, its
system of internal control is adequate to accomplish the objectives discussed
herein.
/s/ BOH A. DICKEY
Boh A. Dickey
President and Chief Operating Officer
/s/ ROD A. PIERSON
Rod A. Pierson
Senior Vice President and Chief Financial Officer
SAFECO 1999 ANNUAL REPORT
p. 41
<PAGE> 21
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors and Shareholders of SAFECO Corporation:
We have audited the financial statements of SAFECO Corporation and its
subsidiaries for the years ended December 31, 1999, 1998 and 1997 (pages 43 to
75 inclusive). These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of SAFECO Corporation
and its subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
As described in Note 1 to the financial statements, SAFECO Corporation
and its subsidiaries adopted certain new accounting standards as required by the
Financial Accounting Standards Board.
Seattle, Washington
February 11, 2000 /s/ ERNST & YOUNG LLP
SAFECO 1999 ANNUAL REPORT
p. 42
<PAGE> 22
STATEMENT OF CONSOLIDATED INCOME
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
Insurance:
Property and Casualty Earned Premiums $ 4,382.9 $ 4,208.3 $ 2,816.6
Life Premiums and Other Revenues 360.9 353.4 290.2
----------------------------------------------
Total 4,743.8 4,561.7 3,106.8
Real Estate (Note 2) - 77.9 75.1
Credit 115.1 98.6 86.5
Asset Management 44.3 39.7 26.2
Other 111.1 60.7 50.6
Net Investment Income (Note 3) 1,585.1 1,518.9 1,244.7
Realized Investment Gain (Note 3) 117.7 94.6 119.4
----------------------------------------------
Total 6,717.1 6,452.1 4,709.3
----------------------------------------------
EXPENSES
Losses, Adjustment Expense and Policy Benefits 4,504.0 4,108.7 2,816.2
Commissions 794.9 784.7 524.3
Nonrecurring Acquisition Charges (Note 2) - - 60.0
Personnel Costs 463.6 438.7 329.7
Interest 141.0 159.5 101.8
Goodwill Amortization 55.8 53.5 17.7
Other 452.2 448.8 314.4
Write-Off of Deferred Acquisition Costs (Note 1) - 46.8 -
Amortization of Deferred Policy Acquisition Costs 840.1 784.1 532.9
Deferral of Policy Acquisition Costs (866.8) (835.5) (560.3)
----------------------------------------------
Total 6,384.8 5,989.3 4,136.7
----------------------------------------------
Income Before Income Taxes 332.3 462.8 572.6
----------------------------------------------
Provision (Benefit) for Income Taxes (Note 15):
Current 71.0 104.6 107.1
Deferred (35.7) (38.6) 20.7
----------------------------------------------
Total 35.3 66.0 127.8
----------------------------------------------
Income Before Distributions on Capital Securities 297.0 396.8 444.8
Distributions on Capital Securities, Net of Tax (Note 4) (44.8) (44.9) (14.8)
----------------------------------------------
Net Income $ 252.2 $ 351.9 $ 430.0
==============================================
Net Income Per Share of Common Stock (Note 9):
Diluted $ 1.90 $ 2.51 $ 3.31
==============================================
Basic $ 1.90 $ 2.52 $ 3.33
==============================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
P. 43
<PAGE> 23
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- - --------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
ASSETS
Investments (Note 3):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized cost: $17,258.9; $16,679.7) $ 16,830.7 $ 17,855.6
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market value: $2,772.1; $3,259.2) 2,733.3 2,720.9
Marketable Equity Securities, at Market Value
(Cost: $972.5; $952.8) 2,004.7 2,036.6
Mortgage Loans 770.4 541.5
Real Estate (Note 2) 106.5 596.0
Policy Loans 91.4 88.3
Other Invested Assets 18.0 23.5
Short-Term Investments 376.0 315.9
---------------------------
Total Investments 22,931.0 24,178.3
Cash 112.3 74.9
Accrued Investment Income 328.1 323.2
Finance Receivables (Less unearned finance charges and allowance
for doubtful accounts: $118.2; $101.7) 1,460.6 1,207.7
Premiums and Other Service Fees Receivable 1,058.3 978.3
Other Notes and Accounts Receivable 147.2 155.2
Deferred Income Tax Recoverable 105.3 -
Reinsurance Recoverables (Note 6) 384.8 317.4
Deferred Policy Acquisition Costs 598.8 521.1
Land, Buildings and Equipment for Company Use
(At cost less accumulated depreciation: $235.7; $217.5) 344.8 280.2
Goodwill (At cost less accumulated amortization:$142.5; $86.5) 1,354.9 1,359.0
Other Assets 343.4 295.3
Separate Account Assets 1,403.2 1,201.1
---------------------------
Total $ 30,572.7 $ 30,891.7
===========================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
p. 44
<PAGE> 24
CONSOLIDATED BALANCE SHEET
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- - ----------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and Adjustment Expense (Note 5) $ 4,416.4 $ 4,262.7
Life Policy Liabilities 281.5 276.8
Unearned Premiums 1,853.1 1,750.9
Funds Held Under Deposit Contracts 13,762.9 12,718.1
Debt (Note 4):
Commercial Paper 508.8 732.7
Credit Company Borrowings 1,323.1 1,255.2
7.875% Notes Due 2005 200.0 200.0
6.875% Notes Due 2007 200.0 200.0
Other 84.2 227.7
Other Liabilities 1,396.8 1,153.5
Income Taxes (Note 15):
Current 6.1 2.5
Deferred (Includes tax on unrealized appreciation
of investment securities: $207.7; $769.9) -- 492.6
Separate Account Liabilities 1,403.2 1,201.1
---------------------------
Total Liabilities 25,436.1 24,473.8
---------------------------
Commitments and Contingencies (Note 7)
Corporation-Obligated, Mandatorily Redeemable Capital Securities
of Subsidiary Trust Holding Solely Junior Subordinated
Debentures of the Corporation ("Capital Securities") (Note 4) 842.5 842.1
---------------------------
Preferred Stock, No Par Value:
Shares Authorized: 10
Shares Issued and Outstanding: None
Common Stock, No Par Value (Notes 9 and 10):
Shares Authorized: 300
Shares Reserved for Options: 7.3; 7.5
Shares Issued and Outstanding: 128.9; 136.3 841.7 885.0
Retained Earnings (Note 12) 3,062.7 3,257.2
Total Accumulated Other Comprehensive Income:
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3) 389.7 1,433.6
---------------------------
Total Shareholders' Equity 4,294.1 5,575.8
---------------------------
Total $ 30,572.7 $ 30,891.7
===========================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
p. 45
<PAGE> 25
STATEMENT OF CONSOLIDATED CASH FLOWS
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Insurance Premiums Received $4,636.8 $4,488.2 $3,063.3
Dividends and Interest Received 1,571.2 1,506.0 1,249.6
Other Operating Receipts 247.2 251.1 195.5
Insurance Claims and Policy Benefits Paid (3,706.2) (3,596.1) (2,423.4)
Underwriting, Acquisition and Insurance Operating Costs Paid (1,604.8) (1,530.1) (1,091.2)
Interest Paid and Distributions on Capital Securities (210.6) (237.5) (94.7)
Other Operating Costs Paid (128.6) (138.2) (92.6)
Income Taxes Paid (42.0) (85.8) (95.6)
----------------------------------------
Net Cash Provided by Operating Activities 763.0 657.6 710.9
----------------------------------------
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale (5,422.1) (3,602.2) (2,578.8)
Fixed Maturities Held-to-Maturity (0.9) (1.7) (199.6)
Equities (231.9) (169.7) (261.2)
Other Investments (460.6) (218.9) (241.6)
Purchase of Subsidiaries, Net of Cash Acquired (Note 2) -- -- (3,014.3)
Maturities of Fixed Maturities Available-for-Sale 1,174.0 1,110.9 693.4
Maturities of Fixed Maturities Held-to-Maturity 13.3 7.3 8.9
Sales of:
Fixed Maturities Available-for-Sale 3,715.4 2,021.6 1,712.6
Fixed Maturities Held-to-Maturity (Note 3) 6.3 18.2 --
Equities 298.1 233.1 510.6
Other Investments 830.5 159.2 128.3
Net (Increase) Decrease in Short-Term Investments (163.7) (92.9) 137.7
Finance Receivables Originated or Acquired (916.8) (629.2) (489.6)
Principal Payments Received on Finance Receivables 644.6 420.3 317.3
Other (101.0) (221.7) (146.7)
----------------------------------------
Net Cash Used in Investing Activities (614.8) (965.7) (3,423.0)
----------------------------------------
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts 1,849.5 1,241.9 1,403.5
Return of Funds Held Under Deposit Contracts (1,077.3) (1,116.0) (866.6)
Proceeds from Notes and Mortgage Borrowings -- 20.0 211.0
Repayment of Notes and Mortgage Borrowings (138.1) (61.8) (9.2)
Net Proceeds from (Repayment of) Short-Term Borrowings (184.8) 386.4 942.9
Proceeds from Capital Securities -- -- 832.2
Proceeds from Common Stock Secondary Offering -- -- 677.2
Common Stock Reacquired (303.2) (236.8) (10.7)
Dividends Paid to Shareholders (192.2) (187.5) (154.1)
Other (64.7) (54.6) 21.8
----------------------------------------
Net Cash Provided by (Used in) Financing Activities (110.8) (8.4) 3,048.0
----------------------------------------
Net Increase (Decrease) in Cash 37.4 (316.5) 335.9
Cash at the Beginning of Year 74.9 391.4 55.5
----------------------------------------
Cash at the End of Year $ 112.3 $ 74.9 $ 391.4
========================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
p. 46
<PAGE> 26
STATEMENT OF CONSOLIDATED CASH FLOWS--
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - -------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Net Income $ 252.2 $ 351.9 $ 430.0
-------------------------------------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain (117.7) (94.6) (119.4)
Amortization and Depreciation 149.9 156.9 89.7
Amortization of Fixed Maturity Investments (46.3) (41.6) (32.2)
Deferred Income Tax (Benefit) Expense (35.7) (38.6) 20.7
Interest Expense on Deposit Contracts 583.3 584.9 478.9
Nonrecurring Acquisition Charges -- -- 60.0
Other Adjustments (2.9) 0.1 (18.2)
Changes in:
Losses and Adjustment Expense 153.7 (89.5) (110.3)
Life Policy Liabilities 4.7 1.0 2.3
Unearned Premiums 102.2 37.2 19.9
Accrued Income Taxes 3.6 (6.8) 26.7
Accrued Interest on Accrual Bonds (45.4) (50.4) (48.4)
Accrued Investment Income (4.9) 13.8 (7.0)
Deferred Policy Acquisition Costs (28.9) 11.1 (27.0)
Other Assets and Liabilities (204.8) (177.8) (54.8)
-------------------------------------
Total Adjustments 510.8 305.7 280.9
-------------------------------------
Net Cash Provided by Operating Activities $ 763.0 $ 657.6 $ 710.9
=====================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
p. 47
<PAGE> 27
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
SAFECO CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Common Stock (Notes 9 and 10):
Balance at the Beginning of Year $ 885.0 $ 909.3 $ 225.3
Secondary Offering -- -- 677.2
Stock Issued for Options and Rights 5.2 7.8 6.0
Common Stock Reacquired (49.1) (33.4) (0.4)
Other 0.6 1.3 1.2
-----------------------------------------
Balance at the End of Year 841.7 885.0 909.3
-----------------------------------------
Retained Earnings (Note 12):
Balance at the Beginning of Year 3,257.2 3,299.1 3,042.2
Net Income 252.2 351.9 430.0
Amortization of Underwriting Compensation on Capital Securities (0.4) (0.4) (0.2)
Dividends Declared (192.2) (190.0) (162.7)
Common Stock Reacquired (254.1) (203.4) (10.2)
-----------------------------------------
Balance at the End of Year 3,062.7 3,257.2 3,299.1
-----------------------------------------
Unrealized Appreciation of Investment Securities, Net of Tax (Note 3):
Balance at the Beginning of Year 1,433.6 1,253.3 847.8
Change in Unrealized Appreciation (1,043.9) 180.3 405.5
-----------------------------------------
Balance at the End of Year 389.7 1,433.6 1,253.3
-----------------------------------------
Shareholders' Equity $4,294.1 $5,575.8 $5,461.7
=========================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS)
SAFECO Corporation and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - --------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Net Income $ 252.2 $ 351.9 $ 430.0
---------------------------------------
Other Comprehensive Income, Net of Tax (Note 3):
Unrealized Appreciation (Depreciation) of Investment
Securities Arising During the Period * (985.6) 239.7 502.5
Less: Reclassification Adjustment for Realized Gain
Included in Net Income ** (58.3) (59.4) (97.0)
---------------------------------------
Other Comprehensive Income (Loss) (1,043.9) 180.3 405.5
---------------------------------------
Comprehensive Income (Loss) $ (791.7) $ 532.2 $ 835.5
=======================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75
* Net of related tax of ($531.8), $129.2 and $270.2 respectively.
** Net of related tax of $30.6, $31.3 and $50.7 respectively.
SAFECO 1999 ANNUAL REPORT
p. 48
<PAGE> 28
STATEMENT OF COMBINED INCOME
Property and Casualty Insurance Companies(*)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - -----------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Net Premiums Written $4,483.8 $4,256.6 $2,828.2
Increase in Unearned Premiums (100.9) (48.3) (11.6)
----------------------------------------
Earned Premiums 4,382.9 4,208.3 2,816.6
----------------------------------------
Losses and Expenses:
Losses and Adjustment Expense 3,431.8 3,063.2 1,960.0
Commissions 714.1 683.4 429.1
Personnel Costs 322.6 303.7 210.2
Taxes Other than Payroll and Income Taxes 123.2 115.0 78.0
Dividends to Policyholders 10.5 12.3 18.5
Other Operating Expenses 164.7 161.2 95.3
Amortization of Deferred Policy Acquisition Costs 793.0 744.9 495.9
Deferral of Policy Acquisition Costs (810.3) (766.0) (506.6)
----------------------------------------
Total 4,749.6 4,317.7 2,780.4
----------------------------------------
Underwriting Profit (Loss) (366.7) (109.4) 36.2
Nonrecurring Acquisition Charges -- -- (60.0)
Net Investment Income (Excluding realized gain) 462.3 480.2 327.0
Goodwill Amortization (43.8) (43.0) (11.0)
----------------------------------------
Income Before Realized Gain and Income Taxes 51.8 327.8 292.2
Realized Gain from Security Investments
and Company-Owned Real Estate Before Income Taxes 87.3 94.6 132.8
----------------------------------------
Income Before Income Taxes 139.1 422.4 425.0
Provision (Benefit)for Income Taxes
(Including tax provision on realized gain: $30.0; $32.4; $46.0) (33.0) 50.0 78.0
----------------------------------------
Net Income $ 172.1 $ 372.4 $ 347.0
========================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
(*) SAFECO Insurance Company of America/General Insurance Company of
America/First National Insurance Company of America
SAFECO National Insurance Company/SAFECO Insurance Company of
Illinois/SAFECO Lloyds Insurance Company
SAFECO Surplus Lines Insurance Company/American States Insurance
Company/American Economy Insurance Company
American States Preferred Insurance Company/Insurance Company of
Illinois/American States Insurance Company of Texas
American States Lloyds Insurance Company/ F.B. Beattie & Company,
Inc./SAFECO Select Insurance Services, Inc.
SAFECO UK, Ltd./R.F. Bailey, (Underwriting Agencies), Ltd.
SAFECO 1999 ANNUAL REPORT
p. 49
<PAGE> 29
STATEMENT OF COMBINED INCOME
Life Companies(*)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Premiums and Other Revenue $ 360.9 $ 353.4 $ 290.2
Net Investment Income (Excluding realized gain (loss)) 1,120.1 1,041.0 916.3
----------------------------------------
Total 1,481.0 1,394.4 1,206.5
----------------------------------------
Benefits and Expenses:
Policy Benefits 1,072.2 1,045.5 856.2
Commissions 80.8 101.3 95.2
Personnel Costs 72.2 64.5 56.2
Taxes Other than Payroll and Income Taxes 25.2 14.7 12.4
Other Operating Expenses 61.4 79.6 55.3
Amortization of Deferred Policy Acquisition Costs 47.1 39.2 37.0
Deferral of Policy Acquisition Costs (56.5) (69.5) (53.7)
----------------------------------------
Total 1,302.4 1,275.3 1,058.6
----------------------------------------
Income Before Realized Gain (Loss), Income Taxes and
Write-Off of Deferred Acquisition Costs 178.6 119.1 147.9
Write-Off of Deferred Acquisition Costs -- (46.8) -
----------------------------------------
Income Before Realized Investment Gain (Loss) and Income Taxes 178.6 72.3 147.9
Realized Gain (Loss) from Security Investments
Before Income Taxes (6.9) 18.3 6.8
----------------------------------------
Income Before Income Taxes 171.7 90.6 154.7
Provision for Income Taxes (Including tax provision
(benefit) on realized gain (loss): $(2.3); $6.6; $1.8) 59.6 32.5 52.7
----------------------------------------
Net Income $ 112.1 $ 58.1 $ 102.0
========================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
(*) SAFECO Life Insurance Company/SAFECO National Life Insurance Company/
First SAFECO National Life Insurance Company of New York
American States Life Insurance Company/SAFECO Administrative Services,
Inc./SAFECO Investment Services, Inc.
SAFECO 1999 ANNUAL REPORT
p. 50
<PAGE> 30
STATEMENT OF INCOME
SAFECO Credit Company, Inc.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - ----------------------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
Interest and Finance Charge Revenues:
Finance Receivables $ 101.6 $ 87.0 $ 77.2
Affiliates 4.7 11.3 9.7
-----------------------------------
Total Revenues 106.3 98.3 86.9
Interest Expense 74.6 67.0 56.3
-----------------------------------
Net Investment Income 31.7 31.3 30.6
Provision for Credit Losses 2.4 2.4 2.4
-----------------------------------
Net Investment Income After Provision for Credit Losses 29.3 28.9 28.2
Other Revenue 13.5 11.6 9.3
-----------------------------------
Total 42.8 40.5 37.5
-----------------------------------
Operating Expenses:
Personnel Costs 10.6 9.1 8.4
General and Administrative 9.6 8.7 7.6
-----------------------------------
Total 20.2 17.8 16.0
-----------------------------------
Income Before Income Taxes 22.6 22.7 21.5
Provision for Income Taxes 8.1 8.3 7.4
-----------------------------------
Net Income $ 14.5 $ 14.4 $ 14.1
===================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
SAFECO 1999 ANNUAL REPORT
p. 51
<PAGE> 31
STATEMENT OF COMBINED INCOME
Asset Management Companies(*)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1999 1998 1997
- - ------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C>
REVENUES
Management and Advisory Fees $ 30.9 $ 27.8 $ 18.3
Transfer Agent Fees 7.0 5.6 3.8
Other 6.4 6.3 4.1
-----------------------------------
Total 44.3 39.7 26.2
-----------------------------------
EXPENSES
Personnel Costs 15.5 15.5 10.6
Marketing and Shareholder Communication 3.2 5.0 3.1
Other 12.0 10.7 5.0
-----------------------------------
Total 30.7 31.2 18.7
-----------------------------------
Income Before Income Taxes 13.6 8.5 7.5
Provision for Income Taxes 4.7 3.0 2.6
-----------------------------------
Net Income $ 8.9 $ 5.5 $ 4.9
===================================
</TABLE>
See Notes to Financial Statements on pages 53 through 75.
(*) SAFECO Asset Management Company/SAFECO Securities, Inc./SAFECO
Services Corporation/SAFECO Trust Company
SAFECO 1999 ANNUAL REPORT
p. 52
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
(All dollar amounts are in millions, except share data, unless otherwise
stated.)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SAFECO Corporation (the Corporation) is a Washington corporation that owns
operating subsidiaries in various segments of insurance and other financially
related businesses. (The Corporation and its subsidiaries are collectively
referred to as "SAFECO.") SAFECO's businesses operate on a nationwide basis.
Non-U.S. operations are insignificant. The insurance subsidiaries engage in
property and casualty, surety and life and health insurance. Products are
marketed primarily through independent agents. Approximately 33% of SAFECO's
property and casualty premiums are written in the three West Coast states of
California, Washington and Oregon.
SAFECO's other operations include subsidiaries involved in commercial
lending and leasing (SAFECO Credit), investment management and insurance agency
and financial services distribution operations.
See Note 2 for information on significant acquisitions and the
disposition of the real estate operations.
BASIS OF REPORTING
The financial statements have been prepared in conformity with generally
accepted accounting principles appropriate in the circumstances and include
amounts based on the best estimates and judgments of management. The financial
statements include SAFECO Corporation and its subsidiaries.
All significant intercompany transactions and accounts have been
eliminated in the consolidated financial statements. Certain reclassifications
have been made to prior year financial information to conform to the 1999
classifications.
ACCOUNTING FOR PREMIUMS
Property and casualty insurance premiums are included in income as earned over
the terms of the respective policies. The unearned portion is included in the
balance sheet as a liability for unearned premiums, before the effect of
reinsurance. See Note 6 for more information on reinsurance.
Life and health insurance premiums are reported as income when collected
for traditional individual life policies and when earned for group life and
health policies. Funds received under retirement services deposit contracts,
annuity contracts and universal life policies were $1,849.5, $1,241.9 and
$1,403.5 in 1999, 1998 and 1997, respectively. These amounts are recorded as
liabilities rather than premium income when received. Revenues for universal
life products consist of front-end loads, mortality charges and expense charges
assessed against individual policyholder account balances. These loads and
charges are recognized as income when earned.
INVESTMENTS
Fixed maturity investments which SAFECO has the intent and ability to hold to
maturity are classified as held-to-maturity and carried at amortized cost in
the balance sheet. Fixed maturities classified as available-for-sale are carried
at market value, with changes in unrealized gains and losses recorded directly
to shareholders' equity (comprehensive income), net of applicable income taxes
and deferred policy acquisition costs valuation allowance. SAFECO has no fixed
maturities classified as trading.
SAFECO 1999 ANNUAL REPORT
p. 53
<PAGE> 33
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
All marketable equity securities are classified as available-for-sale
and are carried at market value, with changes in unrealized gains and losses
recorded directly to shareholders' equity (comprehensive income), net of
applicable income taxes.
When the collectibility of income for certain investments is considered
doubtful, they are placed on nonaccrual status and thereafter interest income is
recognized only when payment is received. Investments that have declined in
market value below cost and for which the decline is judged to be other than
temporary are written down to fair value. Writedowns are made directly on an
individual security basis and reduce realized investment gains in the statement
of income.
The cost of security investments sold is determined by the "identified
cost" method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for mortgage loan losses. The allowance for mortgage loan losses at
December 31, 1999 and 1998 was $10.8 and $11.2, respectively.
Short-term investments are carried at cost, which approximates market
value.
SAFECO engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral is required at a rate of 102% of the market value of a loaned
security. The collateral is deposited by the borrower with a lending agent and
retained and invested by the lending agent according to SAFECO's guidelines to
generate additional income. The market value of the loaned securities is
monitored on a daily basis, with additional collateral obtained or refunded as
the market value of the loaned securities fluctuates.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are classified as investment real estate or as land,
buildings and equipment for company use, and are carried at cost less
accumulated depreciation.
SAFECO provides depreciation on buildings for company use, furniture and
automobiles at various rates based on estimated useful lives using straight-line
and accelerated methods.
See Note 2 for information regarding the sale of investment real estate
held by SAFECO Properties, Inc.
DEFERRED POLICY ACQUISITION COSTS
Property and casualty insurance acquisition costs, consisting of commissions and
certain other underwriting expenses, which vary with and are primarily related
to the production of business, are deferred and amortized over the effective
period of the related insurance policies. Investment income is considered in
determining whether a premium deficiency exists. No deficiencies have been
indicated in the periods presented.
Life insurance acquisition costs, consisting of commissions and certain
other underwriting expenses, which vary with and are primarily related to the
production of new business, are deferred. Acquisition costs for deferred annuity
contracts, retirement services deposit contracts and universal life insurance
policies are amortized over the lives of the contracts or policies in proportion
to the present value of estimated future gross profits. To the extent actual
experience differs from assumptions, and to the extent estimates of future gross
profits require revision, the unamortized balance of deferred policy acquisition
costs is adjusted accordingly; such adjustments are included in current
operations. A $46.8 write-off was taken in the third quarter of 1998 related to
two blocks of annuity business, the equity-indexed annuity and a declared rate
fixed annuity product, and to universal life business. These three lines were
adversely impacted by market conditions which negatively affected the projected
recoverability of deferred acquisition costs. Acquisition costs for traditional
individual life insurance policies are amortized over the premium payment period
of the related policies using assumptions consistent with those used in
computing policy benefit liabilities.
SAFECO 1999 ANNUAL REPORT
p. 54
<PAGE> 34
GOODWILL
Goodwill represents the excess of the cost of businesses acquired over the fair
value of their net assets. Goodwill is amortized on systematic bases over
periods, not exceeding 30 years, that correspond with the benefits estimated to
be derived from the acquisitions. SAFECO evaluates the carrying amount of
goodwill using various analyses, including undiscounted cash flow. If impairment
is indicated goodwill is written down. The amount of impairment is typically
determined using discounted cash flow analysis. Amortization periods are revised
if it is estimated that the remaining period of benefit of the goodwill has
changed. See Note 2 for information on significant acquisitions.
LOSSES AND ADJUSTMENT EXPENSE
Unpaid losses and adjustment expense (LAE) represent the estimated liability for
claims reported plus losses incurred but not yet reported and the related
estimated LAE. The liability for losses and LAE is determined using "case basis"
evaluations and statistical analyses and represents an estimate of the ultimate
net cost of all losses incurred but not paid through December 31 of each year.
Although considerable variability is inherent in such estimates, management
believes that the liability for unpaid losses and LAE is adequate. These
estimates are continually reviewed and adjusted as necessary; such adjustments
are reflected in current operations. See Note 5 for more information on loss
reserves.
Salvage and subrogation recoverables are accrued using the "case basis"
method for large recoverables and statistical estimates based on historical
experience for smaller recoverables. Estimated recoverable amounts deducted from
the liability for losses and LAE net of reinsurance were $222.3 and $208.6 at
December 31, 1999 and 1998, respectively.
The property and casualty insurance companies' liability for unpaid
losses and LAE is presented gross of amounts recoverable from reinsurers. See
Note 6 for more information on reinsurance.
LIFE POLICY LIABILITIES
Liabilities for universal life insurance policies, deferred annuity contracts
and retirement services deposit contracts are equal to the accumulated account
value of such policies or contracts as of the valuation date. Liabilities for
structured settlement annuities are based on interest rate assumptions using
market rates at issue, graded downward over 40 years to a range of 8.75% to
4.5%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method and reflect
interest, mortality and persistency assumptions based on actual experience
modified to provide for adverse deviation. Interest assumptions generally range
from 8.0% graded to 3.25%.
NET INCOME PER DILUTED SHARE OF COMMON STOCK
Net income per diluted share of common stock is based on the weighted average
number of diluted common shares outstanding during each year. SAFECO's only
potentially dilutive instruments are stock options outstanding, and dilution
from these is not significant.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
130, "Reporting Comprehensive Income." Statement 130 was effective for fiscal
years beginning after December 15, 1997, and SAFECO adopted it in the first
quarter of 1998. The Statement has no effect on net income but requires the
reporting of "comprehensive income," which includes net income and certain items
reported in shareholders' equity. See the Statement of Consolidated
Comprehensive Income on page 48 of this report.
SAFECO 1999 ANNUAL REPORT
p. 55
<PAGE> 35
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The FASB issued Statement 131, "Disclosures about Segments of an
Enterprise and Related Information," in June 1997. Statement 131 changes the way
information about business segments is reported in annual financial statements
and requires the reporting of selected segment information in interim reports.
This statement was effective for financial statements for periods beginning
after December 15, 1997. SAFECO provided the disclosures beginning with its 1998
annual report and, as allowed under Statement 131, for its interim financial
statements beginning in 1999. See Note 14 for additional information. The
statement has no effect on net income.
The FASB issued Statement 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," in February 1998. Statement 132 revises
employers' disclosures about pension and other post-retirement benefit plans.
This statement was effective for financial statements for periods beginning
after December 15, 1997. SAFECO provided the disclosures beginning with its 1998
annual report. See Note 13 for additional information. This statement has no
effect on net income.
The FASB issued Statement 133, "Accounting for Derivative Instruments
and Hedging Activities," in June 1998. The Statement amends or supersedes
several previous FASB statements and requires recognizing all derivatives as
either assets or liabilities in the statement of financial position and
measuring those instruments at fair value. The FASB also issued Statement 137 in
June 1999 which allows entities to defer adoption of Statement 133 to fiscal
years beginning after June 15, 2000. Statement 133 may still be adopted early,
as of the beginning of any fiscal quarter that begins after June 1998. SAFECO
will adopt the new statement no later than the first quarter of 2001. The impact
of the Statement is currently being studied. Because of continuing emerging
implementation guidance from the FASB, the effect of the new statement on the
financial statements has not yet been determined.
NOTE 2: SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
On October 1, 1997, SAFECO acquired all of the outstanding shares of common
stock of American States Financial Corporation ("American States") for $2,824 in
cash. SAFECO also repaid $300 of American States outstanding debt obligations.
The acquisition has been treated as a purchase for accounting purposes;
therefore, American States' operations are included in SAFECO's consolidated
financial statements since October 1, 1997. The excess of the purchase price
over the fair value of net assets acquired of $1,300 was recorded as goodwill
and is being amortized on a straight-line basis over 30 years. The fair value of
assets acquired excluding cash was $7,035 and the fair value of liabilities
assumed was $4,205. American States is an Indianapolis, Indiana-based insurer
that writes commercial and personal insurance, as well as life insurance,
throughout the United States.
SAFECO financed the purchase of American States and related debt
repayment from the following sources: $600 of internal funds, $804 of commercial
paper debt, $200 of 10-year senior notes, $842 of capital securities and $678 of
SAFECO common stock issued in a secondary offering.
SAFECO 1999 ANNUAL REPORT
p. 56
<PAGE> 36
The $600 of internal funds came from dividends to SAFECO Corporation
from SAFECO's property and casualty insurance subsidiaries on September 30,
1997. SAFECO received prior approval from the Washington State Insurance
Department for these dividends.
In the fourth quarter of 1997, SAFECO recognized $60 of nonrecurring
charges related to its acquisition of American States. These nonrecurring
charges included $40 to strengthen American States' loss reserves and $20 for
incentive payments to agents.
The unaudited pro forma condensed results of operations as follows
assume the acquisition of American States occurred at the beginning of 1996, and
give effect to actual operating results prior to the acquisition adjusted for
acquisition financing costs and goodwill amortization. These pro forma results
are not necessarily indicative of what actually would have occurred if the
acquisition had been completed as of the beginning of 1996, nor are they
necessarily indicative of future consolidated results.
<TABLE>
<CAPTION>
PRO FORMA INFORMATION-UNAUDITED
YEAR ENDED DECEMBER 31 1997
- - -----------------------------------------------
<S> <C>
Revenues $ 6,221.0
Net Income $ 485.0
Net Income Per Share $ 3.44
</TABLE>
On December 31, 1997, SAFECO acquired Washington Mutual, Inc.'s life
insurance subsidiaries, WM Life Insurance Company and Empire Life Insurance
Company. In conjunction with the acquisition, Washington Mutual, Inc. agreed to
distribute SAFECO annuity products through the Washington Mutual, Inc.
multi-state banking network. The transaction was valued at $140 and the
acquisition of the two insurance subsidiaries has been treated as a purchase for
accounting purposes. The financing of this transaction was through internal
sources. Pro forma results of operations showing the effects of the acquisition
on SAFECO's operations for 1997 have not been presented due to immateriality.
No significant acquisitions were made in 1999 or 1998.
In February 1998, SAFECO announced its decision to sell its real estate
subsidiary, SAFECO Properties, Inc., to focus on its core insurance and
financial services businesses. The majority of SAFECO's Properties' assets were
sold for $570 in a series of closings during the first half of 1999. Realized
gains of $35 have been recognized in 1999. At December 31, 1999, investment real
estate held by SAFECO Properties totaled $105, less than 1% of SAFECO's
consolidated investments. Since SAFECO Properties operations are not material to
the consolidated financial statements, they have not been reclassified as
discontinued operations. In the Statement of Consolidated Income, 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 1999
these revenues totaled $39.3 and expenses totaled $32.1 with income before
realized gain and income taxes of $7.2.
SAFECO 1999 ANNUAL REPORT
P. 57
<PAGE> 37
NOTE 3: INVESTMENTS
Investment income is comprised of:
<TABLE>
<CAPTION>
1999 1998 1997
- - ----------------------------------------------------------------------------
<S> <C> <C> <C>
Interest:
Fixed Maturities $1,429.3 $1,385.2 $1,133.6
Mortgage Loans 57.6 46.2 43.2
Short-Term Investments 17.6 16.2 14.0
Dividends:
Marketable Equity Securities 52.0 48.8 40.0
Redeemable Preferred Stock 21.1 20.7 20.0
Other Investment Income 14.5 9.0 6.2
--------------------------------------
Total Investment Income 1,592.1 1,526.1 1,257.0
Investment Expenses 7.0 7.2 12.3
--------------------------------------
Net Investment Income $1,585.1 $1,518.9 $1,244.7
======================================
</TABLE>
The carrying value of investments in fixed maturities and mortgage loans
that have not produced income for the last twelve months is less than 1% of the
total of such investments at December 31, 1999.
The following analysis summarizes realized gains and losses on investments:
<TABLE>
<CAPTION>
1999 1998 1997
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized Investment Gains (Losses):
Fixed Maturities $ (0.2) $ 45.8 $ 50.2
Marketable Equity Securities 82.8 48.3 97.5
Investment Real Estate 35.1 0.5 (28.3)
-------------------------------------
Realized Investment Gain Before Income Taxes 117.7 94.6 119.4
Applicable Income Taxes (41.2) (32.7) (40.7)
-------------------------------------
Realized Investment Gain $ 76.5 $ 61.9 $ 78.7
=====================================
</TABLE>
The proceeds from sales of investment securities and related gains and losses
for 1999 are as follows:
<TABLE>
<CAPTION>
- - ---------------------------------------------------------------------------------------------
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from Sales $3,715.4 $ 6.3 $ 298.1
=======================================
Gross Realized Gains on Sales $ 90.0 $ -- $ 111.0
Gross Realized Losses on Sales (85.8) (6.3) (28.2)
---------------------------------------
Realized Gains (Losses) on Sale 4.2 (6.3) 82.8
Writedowns (0.6) -- --
Other, Including Gains on Calls and Redemptions 2.5 -- --
---------------------------------------
Total Realized Gain (Loss) $ 6.1 $ (6.3) $ 82.8
=======================================
</TABLE>
The 1999 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
SAFECO 1999 ANNUAL REPORT
p. 58
<PAGE> 38
The proceeds from sales of investment securities and related gains and losses
for 1998 are as follows:
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from Sales $2,021.6 $ 18.2 $ 233.1
====================================
Gross Realized Gains on Sales $ 42.9 $ 3.4 $ 58.8
Gross Realized Losses on Sales (5.2) -- (10.5)
------------------------------------
Realized Gains on Sale 37.7 3.4 48.3
Writedowns (0.4) -- --
Other, Including Gains on Calls and Redemptions 5.1 -- --
------------------------------------
Total Realized Gain $ 42.4 $ 3.4 $ 48.3
====================================
</TABLE>
The 1998 sales of fixed maturities held-to-maturity were made due to
evidence of significant deterioration in the bond issuer's creditworthiness.
The proceeds from sales of investment securities and related gains and losses
for 1997 are as follows:
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------
FIXED FIXED
MATURITIES MATURITIES MARKETABLE
AVAILABLE- HELD-TO- EQUITY
FOR-SALE MATURITY SECURITIES
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from Sales $1,712.6 $ -- $ 510.6
=========================================
Gross Realized Gains on Sales $ 46.9 $ -- $ 107.6
Gross Realized Losses on Sales (14.8) -- (10.1)
-----------------------------------------
Realized Gains on Sale 32.1 -- 97.5
Writedowns (0.2) -- -
Other, Including Gains on Calls and Redemptions 18.3 -- -
-----------------------------------------
Total Realized Gain $ 50.2 $ -- $ 97.5
=========================================
</TABLE>
The following analysis summarizes the changes in unrealized gains and losses on
investment securities (includes fixed maturities held-to-maturity and
available-for-sale):
<TABLE>
<CAPTION>
1999 1998 1997
- - ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (Decrease) in Unrealized Appreciation
of Investment Securities:
Fixed Maturities $ (2,103.6) $ 206.5 $ 660.2
Marketable Equity Securities (51.6) 173.2 253.7
Applicable Income Taxes 754.3 (132.9) (319.9)
----------------------------------------
Net Change in Unrealized Appreciation $ (1,400.9) $ 246.8 $ 594.0
========================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 59
<PAGE> 39
NOTE 3: INVESTMENTS (CONTINUED)
The following is a summary of fixed maturities and marketable equity securities
classified as available-for-sale at December 31, 1999:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 1,352.2 $ 33.3 $ (27.6) $ 5.7 $ 1,357.9
Obligations of States and Political Subdivisions 3,160.0 153.7 (160.2) (6.5) 3,153.5
Debt Securities Issued by Foreign Governments 183.3 15.3 (3.3) 12.0 195.3
Corporate Securities 8,949.1 54.6 (426.2) (371.6) 8,577.5
Mortgage-Backed Securities 3,614.3 34.0 (101.8) (67.8) 3,546.5
-------------------------------------------------------------------------
Total Fixed Maturities Classified as
Available-for-Sale 17,258.9 290.9 (719.1) (428.2) 16,830.7
Marketable Equity Securities 972.5 1,100.9 (68.7) 1,032.2 2,004.7
-------------------------------------------------------------------------
Total $ 18,231.4 $ 1,391.8 $ (787.8) 604.0 $ 18,835.4
========================================= ===========
Deferred Policy Acquisition Costs
Valuation Allowance and Other (10.6)
Applicable Income Taxes (203.7)
-----------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity
(Total Accumulated Other Comprehensive Income) $ 389.7
===========
</TABLE>
The following is a summary of fixed maturities classified as held-to-maturity at
December 31, 1999:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 282.5 $ 27.6 $ (0.7) $ 26.9 $ 309.4
Obligations of States and Political Subdivisions 140.3 1.7 (6.0) (4.3) 136.0
Debt Securities Issued by Foreign Governments 150.3 19.0 -- 19.0 169.3
Corporate Securities 1,839.7 61.9 (69.4) (7.5) 1,832.2
Mortgage-Backed Securities 320.5 10.9 (6.2) 4.7 325.2
--------------------------------------------------------------
Total Fixed Maturities Classified as
Held-to-Maturity $2,733.3 $ 121.1 $ (82.3) $ 38.8 $2,772.1
==============================================================
</TABLE>
The following is a summary of fixed maturities and marketable equity securities
classified as available-for-sale at December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN (LOSS) VALUE
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 1,351.0 $ 134.2 $ (2.1) $ 132.1 $ 1,483.1
Obligations of States and Political Subdivisions 4,835.1 509.3 (4.0) 505.3 5,340.4
Debt Securities Issued by Foreign Governments 208.3 36.9 (0.7) 36.2 244.5
Corporate Securities 7,033.7 389.5 (33.2) 356.3 7,390.0
Mortgage-Backed Securities 3,251.6 154.2 (8.2) 146.0 3,397.6
-----------------------------------------------------------------------
Total Fixed Maturities Classified as
Available-for-Sale 16,679.7 1,224.1 (48.2) 1,175.9 17,855.6
Marketable Equity Securities 952.8 1,107.0 (23.2) 1,083.8 2,036.6
-----------------------------------------------------------------------
Total $ 17,632.5 $ 2,331.1 $ (71.4) 2,259.7 $ 19,892.2
======================================= ===========
Deferred Policy Acquisition Costs
Valuation Allowance and Other (60.5)
Applicable Income Taxes (765.6)
-----------
Unrealized Appreciation of Investment Securities,
Net of Tax, Included in Shareholders' Equity
(Total Accumulated Other Comprehensive Income) $ 1,433.6
===========
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 60
<PAGE> 40
The following is a summary of fixed maturities classified as held-to-maturity at
December 31, 1998:
<TABLE>
<CAPTION>
GROSS GROSS NET ESTIMATED
AMORTIZED UNREALIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES GAIN VALUE
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Securities and Obligations of U.S.
Government Corporations and Agencies $ 272.1 $ 102.4 $ -- $ 102.4 $ 374.5
Obligations of States and Political Subdivisions 127.2 26.4 -- 26.4 153.6
Debt Securities Issued by Foreign Governments 149.6 48.5 -- 48.5 198.1
Corporate Securities 1,863.9 324.7 (4.4) 320.3 2,184.2
Mortgage-Backed Securities 308.1 40.7 -- 40.7 348.8
-------------------------------------------------------------
Total Fixed Maturities Classified as
Held-to-Maturity $2,720.9 $ 542.7 $ (4.4) $ 538.3 $3,259.2
=============================================================
</TABLE>
The amortized cost and estimated market value of fixed maturities at
December 31, 1999, by contractual maturity, are presented below. Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without prepayment penalties.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
- - -----------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in One Year or Less $ 475.7 $ 478.3 $ -- $ --
Due After One Year Through Five Years 3,405.3 3,378.0 -- --
Due After Five Years Through Ten Years 2,583.9 2,526.5 54.5 57.6
Due After Ten Years 7,179.7 6,901.4 2,358.3 2,389.3
Mortgage-Backed Securities 3,614.3 3,546.5 320.5 325.2
--------------------------------------------------------
Total $17,258.9 $16,830.7 $ 2,733.3 $ 2,772.1
========================================================
</TABLE>
The following table summarizes SAFECO's consolidated allowance for credit losses
related to its mortgage loan investments and finance receivables:
<TABLE>
<CAPTION>
1999 1998 1997
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance at Beginning of Year $ 33.0 $ 32.5 $ 30.4
Provision for Credit Losses 2.4 2.4 3.3
Loans Charged Off as Uncollectible (1.3) (2.3) (1.5)
Recoveries 0.3 0.4 0.3
---------------------------------------
Allowance at End of Year $ 34.4 $ 33.0 $ 32.5
=======================================
</TABLE>
These allowances relate to SAFECO Credit's finance receivables ($1,460.6
at December 31, 1999) and to mortgage loan investments ($770.4 at December 31,
1999), nearly all of which are held by SAFECO Life Insurance Company. The
allowances include specific reserves, as well as general reserve amounts. The
total investment in impaired loans before any reserve for losses is $0.9 at
December 31, 1999. A specific loan loss reserve has been established for each
impaired loan, the total of which is $0.1 and is included in the overall
allowance of $34.4 at December 31, 1999.
SAFECO 1999 ANNUAL REPORT
p. 61
<PAGE> 41
NOTE 4: DEBT AND CAPITAL SECURITIES
DEBT
At December 31, 1999, SAFECO Corporation had commercial paper borrowings
outstanding of $508.8. The majority of this commercial paper relates to funding
for SAFECO's 1997 acquisition of American States, described in Note 2.
At December 31, 1999, SAFECO Credit had short-term borrowings of
$1,298.5 through commercial paper and $24.6 of medium-term notes. The repayment
of each of these borrowings is guaranteed by SAFECO Corporation. The weighted
average interest rates on the short-term borrowings were 6.4% and 5.3% at
December 31, 1999 and 1998, respectively. The medium-term notes have maturities
from January 2000 to December 2001 and a weighted average interest rate of 7.5%
at December 31, 1999.
SAFECO Corporation has a bank credit facility available for $1,050.0. It
is a five-year facility originated in 1997 that extends to 2002 and is available
for general corporate purposes, including support of SAFECO Corporation's and
SAFECO Credit's commercial paper debt. There are currently no borrowings
outstanding under this facility, nor were there any borrowings outstanding as of
December 31, 1999 or 1998. SAFECO Corporation pays a fee to have this line of
credit available and does not maintain deposits as compensating balances. The
facility has certain covenants that include requiring SAFECO to maintain a
specified minimum level of shareholders' equity and a maximum
debt-to-capitalization ratio. As of December 31, 1999, SAFECO was in compliance
with all such covenants.
The Corporation and SAFECO Credit have entered into interest rate swap
agreements with outside parties to reduce the impact of changes in interest
rates on their variable rate debt by converting variable rate interest payments
to fixed rates. The interest rate swap agreements provide only for the exchange
of interest on the notional amounts at the stated rates, with no multipliers or
leverage. There were no swap terminations in 1999, 1998, or 1997. The net
interest accrued under these agreements is recorded as an adjustment to interest
expense. At December 31, 1999, SAFECO Credit interest rate swap agreements were
outstanding with notional amounts of $457.0, replacing variable rates with fixed
rates with a weighted average of 5.9%. Maturities of these agreements range from
May 2000 to June 2007. At December 31, 1998, SAFECO Credit interest rate swap
agreements were outstanding with notional amounts of $499.0, replacing variable
rates with fixed rates with a weighted average of 5.9%. SAFECO Corporation
entered into two interest rate swap agreements in December 1997. The swaps are
for notional amounts of $150.0 each and replace variable rates with fixed rates
of 5.9%. The two swaps mature in December 2002 and December 2007.
Real estate mortgages are collateralized by the related investment real
estate buildings and property.
SAFECO 1999 ANNUAL REPORT
p. 62
<PAGE> 42
The total amount, current portions, interest rates and maturities of debt at
December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
- - ----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT TOTAL CURRENT
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SAFECO Corporation Commercial Paper Payable in 2000;
Weighted Average Interest
Rates at December 31:
6.3%; 5.2% $ 508.8 $ 508.8 $ 732.7 $ 732.7
SAFECO Credit Borrowings Payable Through 2001;
Weighted Average Interest Rates at December 31:
6.4%; 5.3% 1,323.1 1,311.9 1,255.2 1,230.6
SAFECO Corporation, 7.875% Notes Due 2005 200.0 -- 200.0 --
SAFECO Corporation, 6.875% Notes Due 2007 200.0 -- 200.0 --
Other Debt:
Unsecured Notes and Loans Payable in Installments
in 2000; Weighted Average Interest Rates
at December 31: 6.8%; 6.4% 22.1 5.4 45.8 34.9
SAFECO Corporation, Medium-Term Notes
Due 2002 and 2003; Weighted Average Interest
Rate at December 31: 7.1% 50.0 -- 50.0 --
Real Estate Mortgages Payable in Installments
Through 2014; Weighted Average Interest Rates
at December 31: 8.3%; 7.9% 12.1 0.3 131.9 3.3
-----------------------------------------------------
Total Other Debt 84.2 5.7 227.7 38.2
-----------------------------------------------------
Total Debt (Excluding Capital Securities) $2,316.1 $1,826.4 $2,615.6 $2,001.5
=====================================================
</TABLE>
Aggregate annual principal installments payable under these obligations for each
of the five years subsequent to 1999 are as follows: 2000 - $1,826.4; 2001 -
$17.5; 2002 - $47.6; 2003 - $10.5; 2004 - $5.1.
CAPITAL SECURITIES
On July 15, 1997, SAFECO Capital Trust I ("Capital Trust"), a consolidated
wholly owned subsidiary of SAFECO Corporation, issued $850.0 of 8.072%
Corporation-Obligated, Mandatorily Redeemable Capital Securities (the "Capital
Securities"). In connection with Capital Trust's issuance of the Capital
Securities and the related purchase by SAFECO Corporation of all of Capital
Trust's common securities (the "Common Securities"), SAFECO Corporation issued
to Capital Trust $876.3 principal amount of its 8.072% Junior Subordinated
Deferrable Interest Debentures, due July 15, 2037 (the "Subordinated
Debentures"). The sole assets of Capital Trust are and will be the Subordinated
Debentures and any interest due thereon. The interest and other payment dates on
the Subordinated Debentures correspond to the distribution and other payment
dates on the Capital Securities and the Common Securities. Distributions on the
Capital Securities and Common Securities are cumulative and payable
semi-annually in arrears. The Subordinated Debentures and the related income
effects are eliminated in SAFECO's financial statements.
For federal income tax purposes, the Subordinated Debentures are
classified as indebtedness. Accordingly, interest on the Subordinated Debentures
is deductible at the federal statutory rate of 35%.
The Capital Securities are mandatorily redeemable on July 15, 2037, the
same date the Subordinated Debentures are due. The Capital Securities may be
redeemed, contemporaneously with the Subordinated Debentures, beginning in 2007
at a price of 104% of principal, with the call premium graded down to zero in
2017. SAFECO Corporation's obligations under the Subordinated Debentures and
related agreements, taken together, constitute a full and unconditional
guarantee of payments due on the Capital Securities.
SAFECO Corporation has the right, at any time, to defer payments of
interest on the Subordinated Debentures for up to five years. Consequently, the
distributions on the Capital Securities and Common Securities would be deferred
(though such distributions would continue to accrue with interest thereon since
interest would accrue on the Subordinated Debentures during any such extended
interest payment period). In no case may the deferral of payments and
distributions extend beyond the stated maturity dates of the respective
securities. SAFECO Corporation cannot pay dividends on its common stock during
such deferments.
SAFECO 1999 ANNUAL REPORT
p. 63
<PAGE> 43
NOTE 5: PROPERTY AND CASUALTY LOSS RESERVES
Unpaid losses and loss adjustment expense (LAE) represent the estimated
liability (reserves) for claims reported plus losses incurred but not reported
and the related LAE. Although considerable variability is inherent in such
estimates, management believes that the liability for unpaid losses and LAE is
adequate. These estimates are continually reviewed and adjusted as necessary;
such adjustments are included in current operations.
The following is a summary of the activity related to the SAFECO's property and
casualty insurance companies' reserves for losses and LAE (net of reinsurance
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loss and LAE Reserves at Beginning of Year $3,966.3 $4,081.9 $1,955.7
---------------------------------------
American States Loss and LAE Reserves at Acquisition -- -- 2,204.6
---------------------------------------
Incurred Loss and LAE for Claims
Occurring in the Current Year 3,353.0 3,163.2 1,969.5
Increase (Decrease) in Estimated Loss and LAE for Claims
Occurring in Prior Years 78.8 (100.0) 30.5
---------------------------------------
Total Incurred Loss and LAE 3,431.8 3,063.2 2,000.0
---------------------------------------
Loss and LAE Payments for Claims Occurring During:
Current Year 1,926.4 1,836.2 1,172.1
Prior Years 1,402.6 1,342.6 906.3
---------------------------------------
Total Loss and LAE Payments 3,329.0 3,178.8 2,078.4
---------------------------------------
Loss and LAE Reserves at End of Year $4,069.1 $3,966.3 $4,081.9
=======================================
</TABLE>
The year-end reserve amounts above are net of related reinsurance
recoverables of $309.5, $253.6 and $228.6 for 1999, 1998 and 1997, respectively.
The amounts above do not include SAFECO's life subsidiaries' loss
reserves for accident and health claims as these amounts are not material in
relation to consolidated loss and LAE reserves. In addition, the majority of
these claims are incurred and paid in full within a one-year period.
Operations in 1999 were charged $78.8 from increases in estimated loss
and LAE for claims occurring in prior years. Property and casualty lines of
business with significant contributions to the increase include construction
defect ($28.6), workers' compensation ($35.6) and asbestos and environmental
($24.8). For both construction defect and asbestos and environmental, increased
reserve estimates resulted from higher than expected reported claims in 1999.
The increased reserve estimates for workers' compensation resulted from SAFECO's
re-evaluation of loss exposures on claims related to larger commercial insureds.
Operations in 1998 benefited $100.0 from a decrease in estimated loss
and LAE for claims occurring in prior years. This decrease related primarily to
American States' operations. The claims departments of the two companies were
combined in 1998. The unified claims department implemented training and
reserving procedures resulting in lower claims settlements and reduced reserves
on prior years' American States losses. The reductions were in both personal and
commercial auto, workers' compensation and general liability.
The 1997 charge to prior years included a nonrecurring $40.0 reserve
increase related to the American States acquisition as described in Note 2. This
reserve increase related to American States' assumed reinsurance operations,
which had been discontinued by American States prior to SAFECO's acquisition.
Excluding this nonrecurring charge, the 1997 loss and LAE development on claims
occurring in prior years benefited operations $9.5.
The property and casualty insurance companies' loss and LAE reserves
include reserves for environmental, asbestos and other toxic claims. These
reserves are approximately 8% of total property and casualty reserves for losses
and LAE at both December 31, 1999 and December 31, 1998. The reserves include
estimates for both reported and incurred but not reported losses and related
adjustment expense, including legal costs. In view of changes in environmental
regulations and evolving case law which affect the development of loss reserves,
the process of estimating loss reserves for environmental, asbestos and other
toxic claims results in imprecise estimates. Quantitative techniques have to be
supplemented by subjective considerations and managerial judgment. Because of
these conditions, trends that have affected development of these liabilities in
the past may not necessarily occur in the future. Although estimation of
environmental claims is difficult, the reserves established for these claims at
December 31, 1999 are believed to be adequate based on the known facts and
current law.
SAFECO 1999 ANNUAL REPORT
p. 64
<PAGE> 44
NOTE 6: REINSURANCE
SAFECO's insurance subsidiaries protect themselves from excessive losses by
reinsuring on treaty and facultative bases. The availability and cost of
reinsurance are subject to prevailing market conditions, both in terms of price
and available capacity. Although the reinsurer is liable to SAFECO to the extent
of the reinsurance ceded, SAFECO remains primarily liable to the policyholder as
the direct insurer on all risks reinsured. SAFECO evaluates the financial
condition of its reinsurers to minimize its exposure to losses from reinsurer
insolvencies. To SAFECO's knowledge, none of its reinsurers is experiencing
financial difficulties.
SAFECO's insurance subsidiaries do not enter into retrospective
reinsurance contracts and do not participate in any unusual or nonrecurring
reinsurance transactions such as "swaps" of reserves or loss portfolio
transfers. SAFECO does not use funding covers and does not participate in any
surplus relief transactions.
Reinsurance recoverables are comprised of the following amounts at December 31:
<TABLE>
<CAPTION>
1999 1998
- - -------------------------------------------------------------------
<S> <C> <C>
Property and Casualty Insurance:
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves $ 309.5 $ 253.6
Paid Losses and LAE 22.8 16.8
Life Insurance:
Reinsurance Recoverables on:
Policy and Contract Claim Reserves 0.9 0.8
Paid Claims 2.3 1.4
Life Policy Liabilities 49.3 44.8
---------------------
Reinsurance Recoverables $ 384.8 $ 317.4
=====================
</TABLE>
The unearned premium liability is presented before the effect of
reinsurance. The reinsurance amounts related to the unearned premium liability
are included with other assets in the balance sheet and totaled $54.5 and $53.3
at December 31, 1999 and 1998, respectively.
The effects of reinsurance are netted against the insurance revenue and loss
amounts in the Statement of Income. These amounts are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty Insurance Ceded Earned Premiums $ 164.4 $ 188.5 $ 155.8
Life Insurance Ceded Earned Premiums 25.8 21.3 14.5
-----------------------------------
Total Ceded Earned Premiums $ 190.2 $ 209.8 $ 170.3
===================================
Property and Casualty Insurance Ceded Losses and LAE $ 147.3 $ 98.4 $ 46.1
Life Insurance Ceded Policy Benefits 11.8 12.2 8.3
-----------------------------------
Total Ceded Losses, LAE and Policy Benefits $ 159.1 $ 110.6 $ 54.4
===================================
</TABLE>
Reinsurance premiums ceded on a written basis are approximately equal to
the ceded earned premiums disclosed above. Reinsurance premiums assumed are
insignificant.
SAFECO 1999 ANNUAL REPORT
p. 65
<PAGE> 45
NOTE 7: COMMITMENTS AND CONTINGENCIES
SAFECO leases office space, commercial real estate and certain equipment under
leases which expire at various dates through 2023. These leases are accounted
for as operating leases. Minimum rental commitments for leases in effect at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEAR PAYABLE MINIMUM RENTALS
- - ------------------------------------------------------------
<S> <C>
2000 $ 42.7
2001 36.9
2002 32.9
2003 28.0
2004 22.0
2005 and Thereafter 90.0
-------
Total $ 252.5
=======
</TABLE>
In addition, SAFECO has commitments under real estate construction and
development contracts that total approximately $190 at December 31, 1999. These
commitments are estimated to be paid as follows: $110 in 2000; $40 in 2001; $10
in 2002; $10 in 2003; $20 in 2004.
The amount of rent charged to operations was $25.0, $20.1 and $14.4 for
1999, 1998 and 1997, respectively.
For information on environmental, asbestos and other toxic claim
liabilities, see Note 5.
See Note 6 for discussion relating to reinsurance.
NOTE 8: FINANCIAL INSTRUMENTS
Estimated fair value amounts of financial instruments have been determined using
available market information and appropriate valuation methodologies. However,
considerable judgment is required in developing the estimates of fair value.
Accordingly, these estimates are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions and/or estimating methodologies may have a material effect on the
estimated fair value amounts.
For cash, short-term investments, accounts receivable, policy loans and
other liabilities, carrying value is a reasonable estimate of fair value.
Fair value amounts for fixed maturities and marketable equity securities
were determined using market prices for securities traded in the public
marketplace or analytically determined values for securities not publicly
traded.
The fair values for mortgage and commercial loans have been estimated by
discounting the projected cash flows using the current rate at which loans would
be made to borrowers with similar credit ratings and for the same maturities.
Commercial loans are a component of finance receivables in the balance sheet.
Finance receivables also include lease receivables, which are exempt from fair
value disclosure requirements.
The fair values of investment contracts (funds held under deposit
contracts) with defined maturities are estimated by discounting projected cash
flows using rates that would be offered for similar contracts with the same
remaining maturities. For investment contracts with no defined maturities, fair
values are estimated to be the present surrender value.
The carrying values of SAFECO Corporation's and SAFECO Credit's
commercial paper, as well as other debt that have variable interest rates, are
reasonable estimates of fair value. For SAFECO Credit and other debt that have
fixed interest rates, fair values are estimated by discounting the projected
cash flows using the rate at which similar borrowings could currently be made.
The fair values of the 7.875% notes, the 6.875% notes and the Capital Securities
are estimated based on quotes from broker/dealers who make markets in similar
securities.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
SAFECO 1999 ANNUAL REPORT
p. 66
<PAGE> 46
Estimated fair values of financial instruments at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
- - ------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Fixed Maturities Available-for-Sale $16,830.7 $16,830.7 $17,855.6 $17,855.6
Fixed Maturities Held-to-Maturity 2,733.3 2,772.1 2,720.9 3,259.2
Marketable Equity Securities 2,004.7 2,004.7 2,036.6 2,036.6
Mortgage Loans 770.4 742.0 541.5 562.0
Commercial Loans 978.3 907.0 776.8 782.0
Financial Liabilities:
Funds Held Under Deposit Contracts 13,762.9 13,495.0 12,718.1 13,031.0
Commercial Paper 508.8 508.8 732.7 732.7
Credit Company Borrowings 1,323.1 1,323.0 1,255.2 1,256.0
7.875% Notes Due 2005 200.0 201.0 200.0 217.0
6.875% Notes Due 2007 200.0 191.0 200.0 214.0
Other Debt 84.2 85.0 227.7 235.0
Capital Securities 842.5 843.0 842.1 912.0
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS
SAFECO's consolidated investments in mortgage-backed securities of $3,871.7 at
market value at December 31, 1999 ($3,746.4 at December 31, 1998) are primarily
residential collateralized mortgage obligations (CMOs), pass-throughs and
commercial loan-backed mortgage obligations (CMBS). CMOs and CMBS, while
technically defined as derivative instruments, are exempt from derivative
disclosure requirements. SAFECO's investment in CMOs and CMBS comprised of the
riskier, more volatile type (e.g., interest only, inverse floaters, etc.) has
been intentionally limited to only a small amount--less than 1% of total
mortgage-backed securities at both December 31, 1999 and 1998.
SAFECO Credit provides loan and lease commitments at both variable and
fixed rates of interest. Fixed rate loan and lease commitments outstanding were
approximately $170 and $50 at December 31, 1999 and 1998, respectively or less
than 1% of consolidated investments. The majority of these commitments have
original terms of up to 90 days and contracted fixed interest rates with a
weighted average rate of 8% at December 31, 1999. Exposure to credit risk
relating to these commitments (i.e., risk that the borrower will be unable to
perform its obligations) is mitigated through credit review and approval
controls. Because the majority of the fixed rate commitments have terms of 90
days or less, the estimated fair values of these commitments are not material.
In 1997 SAFECO Life Insurance Company introduced an equity-indexed
annuity product that credits the policyholder based on a percentage of the gain
in the S&P 500 Index. Sales of this product were suspended in the fourth quarter
of 1998. A hedging program with the objective to hedge the exposure to changes
in the S&P 500 market risk has been established. The program consists of buying
and writing S&P 500 options, buying Treasury interest rate futures and trading
S&P 500 futures.
Realized gains and losses on both options and futures are recognized
upon termination of the options and future contracts. SAFECO records futures and
options at market value with unrealized gains and losses recorded in current
income.
The balance in assets for call options purchased was $2.0 and $24.0 at
December 31, 1999 and 1998, respectively. The balance in other invested assets
for futures contracts at December 31, 1999 and 1998 was $8.3 and $4.9,
respectively. At December 31, 1999, SAFECO had a $5.8 liability for written S&P
500 call options.
SAFECO does not enter into derivative financial instruments for
speculative purposes. SAFECO's involvement in other investment-type derivatives
is intentionally of a limited nature. Such derivatives include currency-linked
bonds and equity-linked bonds. Individually, and in the aggregate, these
derivatives are not material and have not been disclosed.
SAFECO 1999 ANNUAL REPORT
p. 67
<PAGE> 47
NOTE 8: FINANCIAL INSTRUMENTS (CONTINUED)
Interest rate swap agreements are entered into by SAFECO Corporation and SAFECO
Credit to reduce the impact of changes in interest rates on their variable rate
debt by converting variable rate interest payments to fixed rates. The interest
rate swap agreements provide only for the exchange of interest on the notional
amounts at the stated rates, with no multipliers or leverage. At December 31,
1999, interest rate swap agreements were outstanding with notional amounts of
$757.0, replacing variable rates with fixed rates with a weighted average of
5.9%. Maturities of these agreements range from May 2000 to December 2007. At
December 31, 1998, interest rate swap agreements were outstanding with notional
amounts of $799.0, replacing variable rates with fixed rates with a weighted
average of 5.9%. There were no swap terminations in 1999, 1998 or 1997. The net
interest accrued under these agreements is recorded as an adjustment to interest
expense. Exposure to credit risk relating to interest rate swaps is the risk
that the counterparty will be unable to perform its obligations. This risk is
mitigated through credit review, approval controls and by entering into
agreements with only highly rated counterparties. The estimated fair value of
interest rate swaps was not material at December 31, 1999 or 1998; thus, no
additional disclosures have been made.
NOTE 9: COMMON STOCK
Changes in common stock outstanding for the last three years are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- - ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Number of Shares Outstanding at the Beginning of Year 136,262,170 141,151,093 126,308,237
Shares Reacquired (7,549,610) (5,184,360) (233,542)
Shares Issued for Stock Options and Rights 212,440 295,437 276,398
Secondary Offering -- -- 14,800,000
---------------------------------------------------
Number of Shares Outstanding at the End of Year 128,925,000 136,262,170 141,151,093
===================================================
</TABLE>
The secondary offering in 1997 relates to SAFECO's cash acquisition of
American States in October 1997 (see Note 2). The 14,800,000 total shares issued
under the offering include 1,800,000 shares issued under the underwriters'
over-allotment option.
SAFECO 1999 ANNUAL REPORT
p. 68
<PAGE> 48
NOTE 10: STOCK INCENTIVE PLAN
The SAFECO Long-Term Incentive Plan of 1997 provides for the issuance of up to
6,000,000 shares of SAFECO Corporation common stock. Stock options, restricted
stock rights, performance stock rights and stock appreciation rights are
authorized under the Plan.
Stock options are granted at exercise prices not less than the fair
market value of the stock on the date of the grant. The terms and conditions
upon which options become exercisable may vary among grants; however, option
rights expire no later than ten years from the date of grant.
SAFECO continues to apply Accounting Principles Board (APB) Opinion 25
in accounting for its stock options, as allowed under FASB Statement 123. Under
APB 25, because the exercise price of SAFECO's employee stock options equals the
fair market value of the underlying stock on the date of grant, no compensation
expense is recognized.
If compensation expense had been recorded applying Statement 123,
SAFECO's net income would have been reduced by $3.5, $2.9 and $2.0 in 1999,
1998, and 1997, respectively. Basic and diluted earnings per share would also
have been reduced by $0.03, $0.02 and $0.02, respectively. The weighted average
fair value (at grant date) of options granted in 1999 was $9 per share and was
estimated using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 6.0%, dividend yield of 3.5%, volatility
factor of 26% and expected life of six years.
Changes in stock options for the three years ended December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- - ----------------------------------------------------------
WEIGHTED
AVERAGE PRICE
SHARES PER SHARE
- - ----------------------------------------------------------
<S> <C> <C>
Balance December 31, 1996 1,858,443 $26.67
Granted 339,900 42.05
Exercised (270,939) 21.67
Canceled (21,950) 31.87
-------------------------
Balance December 31, 1997 1,905,454 30.07
Granted 365,400 47.85
Exercised (289,387) 26.05
Canceled (34,150) 38.96
-------------------------
Balance December 31, 1998 1,947,317 33.85
Granted 697,200 34.72
Exercised (208,954) 23.43
Canceled (37,625) 41.73
-------------------------
Balance December 31, 1999 2,397,938 $34.89
=========================
Exercisable at
December 31, 1999 1,212,398 $31.79
=========================
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 range
from $14.38 to $51.38 per share.
Restricted stock rights provide for the holder to receive a stated
number of share rights if the holder remains employed for the stated number of
years. Performance stock rights provide for the holder to receive a stated
number of share rights if the holder attains certain specified performance goals
within a stated performance cycle. Performance goals may include net income,
return on equity, stock price appreciation and/or other criteria.
Matured restricted stock rights and earned performance stock rights are
issued in stock and/or paid in cash at the option of the holder. During 1999,
1998 and 1997, $0.8, $2.9 and $2.8, respectively, were charged to operations for
the compensation element of restricted and performance stock rights and stock
appreciation rights.
SAFECO 1999 ANNUAL REPORT
p. 69
<PAGE> 49
NOTE 10: STOCK INCENTIVE PLAN (CONTINUED)
Changes in restricted and performance stock rights for the three years ended
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
SHARE RIGHTS
- - -----------------------------------------------------
<S> <C>
Balance December 31, 1996 102,734
Awarded 97,000
Matured (45,091)
Canceled --
-------
Balance December 31, 1997 154,643
Awarded 89,990
Matured (43,891)
Canceled (12,359)
-------
Balance December 31, 1998 188,383
Awarded 114,725
Matured (39,534)
Canceled (1,250)
-------
Balance December 31, 1999 262,324
=======
</TABLE>
At December 31, 1999 there were 4,624,835 shares of common stock
reserved for future options and rights.
NOTE 11: STATUTORY INFORMATION
The Corporation's insurance subsidiaries are required to file annual statements
with state regulatory authorities prepared on an accounting basis prescribed or
permitted by such authorities (i.e., statutory basis). Prescribed statutory
accounting practices include state laws, regulations and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners. Permitted statutory accounting practices encompass all
accounting practices not so prescribed.
Statutory net income differs from the net income reported in accordance
with generally accepted accounting principles primarily because policy
acquisition costs are expensed when incurred, life insurance reserves are based
on different assumptions and income tax expense reflects only taxes paid or
currently payable. Statutory net income and equity are as follows:
<TABLE>
<CAPTION>
STATUTORY NET INCOME 1999 1998 1997
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Property and Casualty
Insurance $ 276.6 $ 497.4 $ 580.0
Life Insurance 114.0 92.5 115.7
</TABLE>
<TABLE>
<CAPTION>
STATUTORY SHAREHOLDER'S EQUITY
DECEMBER 31 1999 1998
- - ---------------------------------------------------------------
<S> <C> <C>
Property and Casualty Insurance $ 2,726.4 $ 3,294.4
Life Insurance 709.4 646.5
</TABLE>
The statutory net income amounts for 1997 reported above include
American States for the entire calendar year.
SAFECO's insurance subsidiaries have received written approval from the
Washington State Insurance Department to treat certain loans to related SAFECO
subsidiaries (all made at market rates) as admitted assets. The allowance of
such loans has not materially enhanced surplus at December 31, 1999.
NOTE 12: DIVIDEND RESTRICTIONS
SAFECO's insurance subsidiaries are restricted as to the amount of dividends
they may pay to their parent without regulatory consent. The amount of
subsidiary retained earnings available for the payment of dividends to SAFECO
Corporation without prior regulatory approval approximated $647.1 at December
31, 1999.
NOTE 13: EMPLOYEE BENEFIT PLANS
The Corporation sponsors profit-sharing bonus, defined contribution, and defined
benefit plans covering substantially all employees. The defined contribution
plans include profit-sharing retirement plans and a 401(k) savings plan.
SAFECO's Cash Balance Plan is a defined benefit plan covering substantially all
employees and provides benefits for each year of service after 1988, based on
the employee's compensation level plus a stipulated rate of return on the
benefit balance. The American States defined benefit plan was merged with the
Cash Balance Plan effective January 1, 1999. It is SAFECO's policy to fund the
Cash Balance Plan on a current basis to the full extent deductible under federal
income tax regulations. The following table summarizes the funded status of the
defined benefit plans:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- - -----------------------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit Obligation at Beginning
of Year $ 148.5 $ 254.2
Service and Interest Cost 16.4 34.5
Amendments and Experience (7.6) (31.4)
Benefits Paid and Annuities Purchased (13.4) (108.8)
----------------------
Benefit Obligation at End of Year 143.9 148.5
----------------------
Change in Plan Assets:
Fair Value of Plan Assets
at Beginning of Year 166.5 257.5
Actual Return on Plan Assets (0.2) 29.9
Company Contributions 7.3 6.9
Benefits Paid and Annuities Purchased (32.4) (127.8)
----------------------
Fair Value of Plan Assets at End of Year 141.2 166.5
----------------------
Funded Status of Plan (Underfunded) (2.7) 18.0
Unrecognized Net Actuarial Gain (11.6) (36.9)
----------------------
Accrued Benefit Cost $ (14.3) $ (18.9)
======================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 70
<PAGE> 50
Plan assumptions include a discount rate of 7.5%, an expected rate of
return on plan assets of 9.0% and a rate of increase in compensation of 6.0% at
December 31, 1999. Plan assets consist primarily of listed equity securities,
corporate bonds and U.S. government bonds.
The annuity purchased in 1998 to settle the accrued benefits for certain
American States retirees and former employees was purchased from SAFECO Life
Insurance Company, a wholly-owned subsidiary of SAFECO. The cost of the annuity
was $117.9 and reduced the benefit obligation by $98.9.
The cost of the plans discussed above charged to income is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- - --------------------------------------------------------------
<S> <C> <C> <C>
Profit-Sharing Bonus $ 0.6 $ 22.7 $ 23.8
Defined Contribution 29.0 27.1 31.3
Defined Benefit 2.7 11.9 7.9
-----------------------------------
Total $ 32.3 $ 61.7 $ 63.0
===================================
</TABLE>
In addition, SAFECO provides certain healthcare and life insurance
benefits ("other postretirement benefits") for retired employees. Substantially
all employees become eligible for these benefits if they reach retirement age
while working for SAFECO. The cost of these benefits is shared by SAFECO and the
retiree.
Net periodic other postretirement benefit costs were $13.5, $9.1 and
$3.9 in 1999, 1998 and 1997, respectively. The following table summarizes the
funded status of the plan:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- - -----------------------------------------------------------------
<S> <C> <C>
Change in Benefit Obligation:
Benefit Obligation at
Beginning of Year $ 116.3 $ 87.4
Service and Interest Cost 12.7 9.2
Amendments and Experience 10.3 23.4
Net Benefits Paid (4.3) (3.7)
----------------------
Benefit Obligation at End of Year 135.0 116.3
Fair Value of Plan Assets at
End of Year 2.4 1.6
----------------------
Funded Status of Plan (Underfunded) (132.6) (114.7)
Unrecognized Net Actuarial Loss 22.1 11.8
Unrecognized Prior Service Cost 8.4 9.3
----------------------
Accrued Benefit Cost $(102.1) $ (93.6)
======================
</TABLE>
Discount rate assumptions of 7.5% and 7.0% were used at December 31,
1999 and 1998, respectively.
The accumulated postretirement benefit obligation at December 31, 1999,
was determined using a health-care cost trend rate of 9.0% for 2000, gradually
decreasing to 6.0% in 2003 and remaining at that level thereafter. A
one-percentage-point increase (or decrease) in the assumed healthcare cost trend
rate for each year would increase (or decrease)the accumulated other
postretirement benefit obligation as of December 31, 1999, by $17.5 (or $14.3)
and the annual net periodic other postretirement benefit cost for the year then
ended by $2.2 (or $1.7).
SAFECO 1999 ANNUAL REPORT
p. 71
<PAGE> 51
NOTE 14: SEGMENT DATA
<TABLE>
<CAPTION>
PRETAX
UNDERWRITING INVESTMENT INCOME REALIZED NET INCOME
REVENUES* GAIN (LOSS) INCOME (LOSS)** GAIN (LOSS) (LOSS) ASSETS
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,725.6 $ (63.3) $ 131.0 $ 54.0 $ 27.2 $ 3,238.9
Homeowners 708.3 (48.2) 51.9 (2.6) 12.4 1,345.6
Other 177.7 20.6 15.8 34.1 4.6 402.0
Commercial Lines:
ASBI*** 1,017.6 (183.4) 141.7 (53.0) 22.4 3,705.8
SAFECO Commercial 686.4 (107.6) 97.2 (18.3) 15.7 2,434.6
Surety 59.4 15.2 3.0 17.0 2.4 99.8
Other 7.9 - 21.7 20.6 2.6 486.7
------- --------- ------------------------------------- --------
Total 4,382.9 $ (366.7) 462.3 51.8 87.3 $ 172.1 11,713.4
------- ========= ------------------------------------- --------
Life Insurance:
Retirement Services 32.9 410.9 52.6 (1.0) 7,204.8
Settlement Annuities 1.1 486.6 42.2 (5.9) 6,011.3
Group 193.9 1.9 (19.4) 0.3 104.8
Individual 119.8 144.7 30.1 (1.9) 2,959.7
Other 13.2 76.0 73.1 1.6 929.1
--------- ------------------------------------- ---------
Total 360.9 1,120.1 178.6 (6.9) 112.1 17,209.7
--------- ------------------------------------- ---------
Credit 119.8 22.6 14.5 1,635.9
Asset Management 44.3 13.6 8.9 76.7
Other and Eliminations 106.4 2.7 (52.0) 37.3 (55.4) (63.0)
--------- ---------------------------------------------------------------
Consolidated Totals $ 5,014.3 $ 1,585.1 $ 214.6 $ 117.7 $ 252.2 $30,572.7
========= ===============================================================
1998
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,729.7 $ 11.5 $ 139.5 $ 137.0 $ 30.5 $ 3,594.7
Homeowners 686.7 (56.4) 54.3 (8.2) 13.4 1,456.7
Other 165.2 14.8 16.0 28.6 4.8 430.8
Commercial Lines:
ASBI*** 911.6 (72.7) 144.2 60.8 23.6 3,838.1
SAFECO Commercial 640.9 (27.9) 98.9 63.6 16.4 2,575.5
Surety 58.5 19.2 3.4 21.3 2.7 109.3
Other 15.7 2.1 23.9 24.7 3.2 564.4
------- --------- ------------------------------------- --------
Total 4,208.3 $ (109.4) 480.2 327.8 94.6 $ 372.4 12,569.5
------- ========= ------------------------------------- --------
Life Insurance:
Retirement Services 25.2 411.7 12.8 4.3 7,195.1
Settlement Annuities 1.5 449.4 30.6 - 5,972.4
Group 203.1 2.7 (14.1) - 90.1
Individual 110.2 98.4 13.9 1.8 1,985.1
Other 13.4 78.8 75.9 12.2 1,110.9
--------- ------------------------------------- ---------
Total 353.4 1,041.0 119.1 18.3 58.1 16,353.6
--------- ------------------------------------- ---------
Real Estate 77.9 5.3 0.5 3.6 639.7
Credit 109.9 22.7 14.4 1,528.3
Asset Management 39.7 8.5 5.5 67.4
Other and Eliminations 49.4 (2.3) (115.2) (18.8) (102.1) (266.8)
--------- ---------------------------------------------------------------
Consolidated Totals $ 4,838.6 $ 1,518.9 $ 368.2 $ 94.6 $ 351.9 $30,891.7
========= ===============================================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 72
<PAGE> 52
<TABLE>
<CAPTION>
PRETAX
UNDERWRITING INVESTMENT INCOME REALIZED NET INCOME
REVENUES(*) GAIN (LOSS) INCOME (LOSS)(**) GAIN (LOSS) (LOSS) ASSETS
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Property and Casualty Insurance:
Personal Lines:
Personal Auto $ 1,268.1 $ 30.7 $ 113.9 $ 120.0 $ 45.9 $ 3,519.3
Homeowners 512.0 (2.0) 44.7 31.5 21.1 1,436.1
Other 139.0 20.6 20.5 34.1 13.2 432.5
Commercial Lines:
ASBI(***) 227.3 8.5 38.1 39.9 12.4 3,826.5
SAFECO Commercial 603.6 (34.9) 99.3 47.0 32.7 2,642.3
Surety 54.4 12.8 5.2 15.2 5.2 102.9
Other 12.2 0.5 5.3 4.5 2.3 545.9
--------- --------- --------------------------------------- --------
Total 2,816.6 $ 36.2 327.0 292.2 132.8 $ 347.0 12,505.5
--------- ========= --------------------------------------- --------
Life Insurance:
Retirement Services 18.1 355.6 27.0 1.6 6,833.1
Settlement Annuities 2.1 420.1 25.5 - 5,611.7
Group 193.7 2.7 12.3 - 83.3
Individual 64.7 63.1 6.6 (0.6) 1,765.4
Other 11.6 74.8 76.5 5.8 1,004.3
--------- --------------------------------------- ---------
Total 290.2 916.3 147.9 6.8 102.0 15,297.8
--------- --------------------------------------- ---------
Real Estate 75.1 9.6 (28.3) (12.2) 638.1
Credit 96.2 21.5 14.1 1,278.2
Asset Management 26.2 7.5 4.9 66.9
Other and Eliminations 40.9 1.4 (25.5) 8.1 (25.8) (318.7)
--------- -------------------------------------------------------------------
Consolidated Totals $ 3,345.2 $ 1,244.7 $ 453.2 $ 119.4 $ 430.0 $29,467.8
========= ===================================================================
</TABLE>
(*) Revenues combined with Investment Income and Realized Gains equal
Total Revenue on the Statement of Consolidated Income.
(**) Earnings before realized gains (losses), distributions on capital
securities and income taxes. This is viewed by management as the key
measurement of segment profit or loss. Property and Casualty Insurance
Pretax Income amounts include goodwill amortization expense of $43.8,
$43.0 and $11.0, respectively. The 1997 Property and Casualty Insurance
amount includes nonrecurring acquisition charges of $60.0 related to the
acquisition of American States. The 1998 Life Insurance amount includes
the write-off of $46.8 of deferred acquisition costs.
(***) American States Business Insurance.
SAFECO 1999 ANNUAL REPORT
p. 73
<PAGE> 53
NOTE 15: INCOME TAXES
SAFECO uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are determined based on the differences
between their financial reporting and their tax bases and are measured using the
enacted tax rates.
Differences between income tax computed by applying the U.S. Federal income tax
rate of 35% to income before income taxes and the consolidated provision for
income taxes are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- - --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "Expected" Tax Expense $ 116.3 $ 162.0 $ 200.4
Tax-Exempt Municipal Bond Income (85.6) (103.0) (73.2)
Dividends Received Deduction (13.3) (12.6) (10.5)
Proration Adjustment 12.5 14.7 10.3
Other 5.4 4.9 0.8
-------------------------------------
Consolidated Provision for Income Taxes $ 35.3 $ 66.0 $ 127.8
=====================================
</TABLE>
The tax effects of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities at December 31, 1999, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998 1997
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Assets:
Discounting of Loss and Adjustment Expense Reserves $ 263.1 $ 265.5 $ 250.0
Unearned Premium Liability 125.3 117.4 113.9
Adjustment to Life Policy Liabilities 67.8 55.9 72.1
Capitalization of Life Policy Acquisition Costs 70.4 54.6 49.2
Postretirement Benefits 35.7 32.8 30.9
Nondeductible Accruals 39.4 46.0 58.2
Alternative Minimum Tax Carryforward 49.0 33.0 --
Other 73.1 48.4 32.9
--------------------------------------
Total Deferred Tax Assets 723.8 653.6 607.2
--------------------------------------
Deferred Tax Liabilities:
Deferred Policy Acquisition Costs 209.6 199.6 203.5
Bond Discount Accrual 34.3 38.2 36.2
Accelerated Depreciation 84.2 76.1 81.4
Unrealized Appreciation of Investment Securities
(Net of Deferred Policy Acquisition Costs Valuation
Allowance: $0.1; $17.2; $12.8) 207.7 769.9 672.7
Other 82.7 62.4 60.3
--------------------------------------
Total Deferred Tax Liabilities 618.5 1,146.2 1,054.1
--------------------------------------
Net Deferred Tax Asset (Liability) $ 105.3 $ (492.6) $ (446.9)
======================================
</TABLE>
The following table reconciles the deferred tax expense (benefit) in the
Statement of Consolidated Income to the net change in the deferred tax liability
in the Consolidated Balance Sheet:
<TABLE>
<CAPTION>
1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Tax Expense (Benefit) $ (35.7) $ (38.6) $ 20.7
Net Deferred Tax Assets Acquired in Acquisitions -- (12.9) (209.9)
Deferred Tax Changes Reported in Shareholders' Equity:
Increase (Decrease) in Liability Related to Unrealized
Appreciation (Depreciation) of Investment Securities,
Net of Deferred Policy Acquisition Costs Valuation Allowance (562.2) 97.2 218.3
-------------------------------------
Increase (Decrease) in Net Deferred Tax Liability $(597.9) $ 45.7 $ 29.1
=====================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 74
<PAGE> 54
NOTE 16: INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER ANNUAL
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
1999 $ 1,666.3 $ 1,666.3 $ 1,672.2 $ 1,712.3 $ 6,717.1
1998 1,585.7 1,600.1 1,626.7 1,639.6 6,452.1
1997 1,015.0 1,031.3 1,111.9 1,551.1 4,709.3
Income Before Realized Gain:*
1999 $ 82.2 $ 53.2 $ 9.8 $ 30.5 $ 175.7
1998 93.2 58.2 63.7 74.9 290.0
1997 96.8 104.5 79.7 70.3 351.3
Realized Gain:**
1999 $ 36.3 $ 19.9 $ 6.3 $ 14.0 $ 76.5
1998 18.4 11.0 11.2 21.3 61.9
1997 14.8 12.7 42.0 9.2 78.7
Net Income:
1999 $ 118.5 $ 73.1 $ 16.1 $ 44.5 $ 252.2
1998 111.6 69.2 74.9 96.2 351.9
1997 111.6 117.2 121.7 79.5 430.0
(Per Share)
Income Before Realized Gain:*
1999 $ .60 $ .40 $ .07 $ .24 $ 1.32
1998 .66 .41 .46 .55 2.07
1997 .77 .82 .63 .50 2.71
Realized Gain:**
1999 $ .27 $ .14 $ .05 $ .10 $ .58
1998 .13 .08 .08 .15 .44
1997 .11 .10 .33 .07 .60
Net Income:
1999 $ .87 $ .54 $ .12 $ .34 $ 1.90
1998 .79 .49 .54 .70 2.51
1997 .88 .92 .96 .57 3.31
Dividends Paid:
1999 $ .35 $ .35 $ .37 $ .37 $ 1.44
1998 .32 .32 .35 .35 1.34
1997 .29 .29 .32 .32 1.22
Market Price Range:***
1999 - High $ 43.38 $ 46.44 $ 44.38 $ 30.50 $ 46.44
- Low 37.38 38.69 26.91 22.00 22.00
1998 - High 55.00 54.81 48.75 45.81 55.00
- Low 46.25 43.13 40.63 39.88 39.88
</TABLE>
* Income amounts are after distributions on capital securities and are
net of income tax.
** Amounts are net of income tax.
*** SAFECO Corporation common stock trades on The Nasdaq Stock Market
Inc. under the symbol SAFC. The price range represents the high and low
closing sales price. Third quarter 1998 income before realized gain and
net income include the write-off of Life Company deferred acquisition
costs of $46.8 ($30.4 after tax, $0.22 per share). Fourth quarter 1997
income before realized gain and net income include nonrecurring
acquisition charges of $60.0 ($39.0 after tax, $0.28 per share).
SAFECO 1999 ANNUAL REPORT
p. 75
<PAGE> 55
SUMMARY OF GROWTH
<TABLE>
<CAPTION>
1999 1998 1997
- - ---------------------------------------------------------------------------------------------------------------
(In Millions Except Per Share Amounts)
<S> <C> <C> <C>
INCOME SUMMARY
Income (Loss), Net of Income Taxes, Before Realized Gain:
Property and Casualty $ 114.8 $ 310.2 $ 260.2
Life 116.7 46.4 97.0
Real Estate -- 3.4 6.2
Credit 14.5 14.4 14.1
Asset Management 8.9 5.5 4.9
Corporate (34.4) (45.0) (16.3)
-------------------------------------------
Total 220.5 334.9 366.1
Realized Gain, Net of Income Taxes 76.5 61.9 78.7
-------------------------------------------
Income Before Distributions on Capital Securities 297.0 396.8 444.8
Distributions on Capital Securities, Net of Tax (44.8) (44.9) (14.8)
Cumulative Effect of Accounting Changes -- -- --
-------------------------------------------
Net Income $ 252.2 $ 351.9 $ 430.0
===========================================
STATISTICS PER SHARE OF COMMON STOCK(*)
Net Income - Diluted:
Income Before Realized Gain(**) $ 1.32 $ 2.07 $ 2.71
Realized Gain .58 .44 .60
Cumulative Effect of Accounting Changes -- -- --
Net Income 1.90 2.51 3.31
Average Number of Shares 132.8 139.9 129.8
Net Income - Basic:
Income Before Realized Gain(**) 1.32 2.08 2.72
Realized Gain .58 .44 .61
Cumulative Effect of Accounting Changes -- -- --
Net Income 1.90 2.52 3.33
Average Number of Shares 132.7 139.4 129.2
Dividends Paid 1.44 1.34 1.22
Market Price:
High 46.44 55.00 54.47
Low 22.00 39.88 36.75
Close 24.88 42.94 48.75
Shareholders' Equity:
Book Value 33.31 40.92 38.69
With Securities at Market Value, Net of Tax 33.50 43.49 40.77
REVENUES (EXCLUDING REALIZED GAIN)
Insurance:
Property and Casualty (Gross premiums written) $ 4,645.0 $ 4,441.8 $ 2,987.4
Life 360.9 353.4 290.2
Net Investment Income (Excluding realized gain or loss):
Property and Casualty 462.3 480.2 327.0
Life 1,120.1 1,041.0 916.3
Other 2.7 (2.3) 1.4
Real Estate (Excluding realized gain or loss) -- 77.9 75.1
Credit (Including affiliate loans) 119.8 109.9 96.2
Asset Management 44.3 39.7 26.2
Talbot Financial 71.9 57.6 49.7
Other 39.2 3.1 0.9
-------------------------------------------
Total $ 6,866.2 $ 6,602.3 $ 4,770.4
===========================================
</TABLE>
(*) Share amounts are adjusted for stock splits.
(**) Net income per share amounts are after distributions on capital
securities.
SAFECO 1999 ANNUAL REPORT
p. 76
<PAGE> 56
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 270.6 $ 256.4 $ 192.7 $ 217.2 $ 187.1 $ 145.4 $ 183.7 $ 188.9
88.8 89.0 85.0 76.9 75.6 79.7 77.6 70.9
8.4 5.9 6.6 6.1 6.0 5.9 6.1 0.7
12.2 8.9 7.4 6.4 6.1 6.4 4.5 4.0
5.1 4.7 4.1 4.3 4.3 3.4 3.0 2.5
(4.9) (7.5) (7.3) (3.9) (7.6) (3.9) (3.2) (3.3)
- - --------------------------------------------------------------------------------------------------------------------------------
380.2 357.4 288.5 307.0 271.5 236.9 271.7 263.7
58.8 41.6 25.9 118.9 39.8 22.7 6.7 36.5
- - --------------------------------------------------------------------------------------------------------------------------------
439.0 399.0 314.4 425.9 311.3 259.6 278.4 300.2
-- -- -- -- -- -- -- --
-- -- -- 2.9 -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------------
$ 439.0 $ 399.0 $ 314.4 $ 428.8 $ 311.3 $ 259.6 $ 278.4 $ 300.2
================================================================================================================================
$ 3.01 $ 2.83 $ 2.28 $ 2.43 $ 2.15 $ 1.87 $ 2.14 $ 2.07
.46 .33 .21 .94 .31 .18 .05 .29
-- -- -- .02 -- -- -- --
3.47 3.16 2.49 3.39 2.46 2.05 2.19 2.36
126.5 126.4 126.4 126.5 126.5 126.5 126.9 127.4
3.02 2.84 2.29 2.44 2.17 1.89 2.16 2.09
.46 .33 .21 .95 .31 .18 .05 .29
-- -- -- .02 -- -- -- --
3.48 3.17 2.50 3.41 2.48 2.07 2.21 2.38
126.1 126.0 125.9 125.8 125.6 125.5 126.2 126.4
1.11 1.02 .94 .86 .78 .71 .64 .57
41.63 37.63 29.81 33.25 29.56 24.38 21.06 19.63
30.88 25.25 23.69 27.00 21.19 15.63 12.69 11.63
39.44 34.50 26.00 27.50 28.63 24.38 16.44 17.81
32.58 31.61 22.47 22.04 19.49 17.70 15.75 14.63
33.52 33.39 21.93 28.47 23.92 21.92 16.57 16.57
$ 2,463.5 $ 2,366.9 $ 2,278.0 $ 2,134.5 $ 1,937.1 $ 1,830.2 $ 1,792.8 $ 1,696.9
265.9 261.6 276.8 306.0 328.5 332.7 312.0 274.3
281.6 291.5 283.5 277.6 280.8 286.1 283.3 263.4
836.7 778.2 706.2 668.2 623.6 557.4 476.2 391.9
(1.6) 5.6 1.9 6.0 (1.4) 3.2 5.3 14.7
79.9 75.0 107.3 78.3 187.2 274.4 254.7 246.2
84.3 71.8 58.2 54.0 51.3 54.4 45.2 38.7
23.2 18.5 15.1 13.2 13.1 10.8 9.0 8.3
38.5 32.1 25.5 -- -- -- -- --
-- -- -- -- -- -- -- --
- - --------------------------------------------------------------------------------------------------------------------------------
$ 4,072.0 $ 3,901.2 $ 3,752.5 $ 3,537.8 $ 3,420.2 $ 3,349.2 $ 3,178.5 $ 2,934.4
================================================================================================================================
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 77
<PAGE> 57
SUMMARY OF GROWTH (CONTINUED)
<TABLE>
<CAPTION>
1999 1998 1997
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(In Millions Except Ratios)
PREMIUMS BY MAJOR CLASSES OF
PROPERTY AND CASUALTY INSURANCE
Personal Auto $ 1,725.6 $ 1,745.8 $ 1,295.2
Homeowners 736.5 717.4 547.8
Other 225.6 217.2 182.0
------------------------------------------------
Total Personal 2,687.7 2,680.4 2,025.0
American States Business Insurance 1,138.0 952.3 195.7
SAFECO Commercial 701.5 687.2 642.1
Surety 110.7 107.2 99.5
Other 7.1 14.7 25.1
------------------------------------------------
Gross Premiums Written 4,645.0 4,441.8 2,987.4
Ceded Reinsurance Premiums 161.2 185.2 159.2
------------------------------------------------
Net Premiums Written $ 4,483.8 $ 4,256.6 $ 2,828.2
================================================
OPERATING RATIOS OF PROPERTY
AND CASUALTY INSURANCE
Ratios to Earned Premiums:(*)
Losses 66.34% 61.34% 58.40%
Adjustment Expense 11.96 11.45 11.18
Underwriting Expenses 29.82 29.52 28.47
Dividends to Policyholders .24 .29 .66
------------------------------------------------
Combined Losses and Expenses 108.36% 102.60% 98.71%
================================================
Premiums Written to Policyholders' Surplus 1.6:1 1.3:1 1.3:1
PRETAX INCOME (LOSS) BEFORE REALIZED GAIN
Property and Casualty Insurance:
Underwriting $ (366.7) $ (109.4) $ 36.2
Nonrecurring Acquisition Charges -- -- (60.0)
Investment 462.3 480.2 327.0
Goodwill Amortization (43.8) (43.0) (11.0)
Proposition 103 Settlement -- -- --
Life Insurance 178.6 119.1 147.9
Write-Off of Deferred Acquisition Costs -- (46.8) --
Real Estate -- 5.3 9.6
Credit 22.6 22.7 21.5
Asset Management 13.6 8.5 7.5
Corporate (52.0) (68.4) (25.5)
------------------------------------------------
Total $ 214.6 $ 368.2 $ 453.2
================================================
SHAREHOLDER'S EQUITY
Book Value $ 4,294.1 $ 5,575.8 $ 5,461.7
With Securities at Market Value, Net of Tax 4,319.3 5,925.7 5,755.1
Long-Term Debt from Operations (Excludes Capital Securities) 495.4 625.6 632.9
Total Assets 30,572.7 30,891.7 29,467.8
</TABLE>
(*) Ratios exclude goodwill amortization, nonrecurring acquisition charges
in 1997 and Proposition 103 settlement in 1993.
SAFECO 1999 ANNUAL REPORT
p. 78
<PAGE> 58
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,087.0 $ 1,043.6 $ 1,013.4 $ 977.1 $ 907.0 $ 864.1 $ 822.2 $ 742.3
469.1 440.2 403.7 362.4 310.8 294.2 274.5 255.4
170.0 163.1 144.6 126.4 109.1 92.6 93.0 83.3
- - ---------------------------------------------------------------------------------------------------------------------------------
1,726.1 1,646.9 1,561.7 1,465.9 1,326.9 1,250.9 1,189.7 1,081.0
- -- -- -- -- -- -- --
607.3 588.1 591.9 544.2 492.0 452.6 473.0 489.5
103.2 100.1 90.2 84.2 79.7 79.1 75.9 77.2
26.9 31.8 34.2 40.2 38.5 47.6 54.2 49.2
- - ---------------------------------------------------------------------------------------------------------------------------------
2,463.5 2,366.9 2,278.0 2,134.5 1,937.1 1,830.2 1,792.8 1,696.9
150.4 159.9 174.5 134.3 116.7 200.5 104.8 101.4
- - ---------------------------------------------------------------------------------------------------------------------------------
$ 2,313.1 $ 2,207.0 $ 2,103.5 $ 2,000.2 $ 1,820.4 $ 1,629.7 $ 1,688.0 $ 1,595.5
=================================================================================================================================
59.09% 60.04% 64.70% 60.21% 63.93% 67.81% 65.50% 63.13%
10.37 10.58 9.72 9.78 10.55 10.72 11.67 9.99
28.14 28.39 28.24 28.43 28.72 29.33 29.24 29.31
.71 .70 1.11 1.07 .91 .76 .75 .88
- - ---------------------------------------------------------------------------------------------------------------------------------
98.31% 99.71% 103.77% 99.49% 104.11% 108.62% 107.16% 103.31%
=================================================================================================================================
1.1:1 1.2:1 1.4:1 1.3:1 1.3:1 1.4:1 1.6:1 1.5:1
$ 38.4 $ 6.3 $ (77.4) $ 9.9 $ (72.0) $ (141.1) $ (119.2) $ (52.2)
-- -- -- -- -- -- -- --
281.6 291.5 283.5 277.6 280.8 286.1 283.3 263.4
-- -- -- -- -- -- -- --
-- -- -- (40.0) -- -- -- --
136.7 135.6 131.0 125.3 123.6 124.1 118.5 106.9
-- -- -- -- -- -- -- --
13.0 9.1 10.2 10.1 8.4 8.5 9.1 0.9
19.1 13.3 10.8 10.2 9.0 9.5 6.8 6.0
7.6 6.9 6.4 6.5 6.5 5.2 4.6 3.9
(8.0) (13.2) (13.8) (10.3) (13.6) (9.7) (8.8) (8.8)
- - ---------------------------------------------------------------------------------------------------------------------------------
$ 488.4 $ 449.5 $ 350.7 $ 389.3 $ 342.7 $ 282.6 $ 294.3 $ 320.1
=================================================================================================================================
$ 4,115.3 $ 3,982.6 $ 2,829.5 $ 2,774.4 $ 2,448.1 $ 2,221.1 $ 1,975.7 $ 1,850.7
4,233.4 4,206.2 2,761.3 3,583.5 3,005.4 2,750.5 2,078.7 2,096.0
453.9 503.6 534.2 600.2 504.6 523.6 451.3 512.9
19,917.7 18,767.8 15,901.7 14,807.3 13,391.1 12,113.9 10,683.5 9,415.9
</TABLE>
SAFECO 1999 ANNUAL REPORT
p. 79
<PAGE> 1
<TABLE>
<CAPTION>
SAFECO CORPORATION F-15
Organization Chart Exhibit 21
December 31, 1999
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
SAFECO Corporation (Washington)
1. SAFECO Insurance Company of America (WA) 12. SAFECO Asset Management Company (WA)
A. SAFECO Management Corporation (NY)
B. SAFECO Surplus Lines Insurance Company (WA) 13. SAFECO Securities, Inc. (WA)
2. General Insurance Company of America (WA) 14. SAFECO Services Corporation (WA)
3. First National Insurance Company of America (WA) 15. SAFECO Trust Company (WA)
4. American States Financial Corporation (IN) 16. General America Corporation (WA)
A. American States Insurance Company (IN) A. R.F. Bailey (Underwriting Agencies), LTD. (UK)
a) American Economy Insurance Company (IN) B. F.B. Beattie & Co., Inc. (WA)
i) American States Insurance a) F.B. Beattie Insurance Services, Inc. (CA)
Company of Texas (TX) C. General America Corporation of Texas (TX) -
b) American States Preferred Insurance (Attorney-in-fact) for:
Company (IN) a) American States Lloyds Insurance Company (TX)
c) American States Life Insurance Company (IN) b) SAFECO Lloyds Insurance Company (TX)
d) Insurance Company of Illinois (IL) D. Talbot Financial Corporation (WA)
e) City Insurance Agency, Inc. (IN) a) Talbot Agency, Inc. (NM)
i) ASW, Insurors, Inc. (NM)
5. SAFECO National Insurance Company (MO) ii) EBC, Inc. (NV)
iii) Integrated Financial & Insurance
6. SAFECO Insurance Company of Illinois (IL) Services, Inc. (NM)
iv) Medcomp, Inc. (NV)
7. SAFECO Life Insurance Company (WA) v) Newport Financial Corporation (IL)
A. SAFECO National Life Insurance Company (WA) vi) Talbot Agency of Texas, Inc. (TX)
B. First SAFECO National Life Insurance vii) Talbot Financial Services of Hawaii, Inc. (HI)
Company of New York (NY) viii) Talbot Financial Services, Inc. (WA)
C. Empire Life Insurance Company (WA) ix) Talbot Insurance Agency, Inc. (WA)
D. Medical Risk Managers, Inc. (CT) x) Talbot Insurance and Financial
Service of NV, Inc. (NV)
8. SAFECO Assigned Benefits Service Company (WA) xi) Talbot Insurance and Financial
Services, Inc. (CA)
9. SAFECO Administrative Services, Inc. (WA) xii) Talbot-BHJ, Inc. (WY)
A. Employee Benefit Claims of Wisconsin, Inc. (WI) xiii) Talbot-Glacier Insurance, Inc. (MT)
B. Wisconsin Pension and Group Services, Inc. (WI) xiv) Talbot-Tandy & Wood, Inc. (ID)
xv) W.C. Stapleton Insurance (CO)
10. SAFECO Credit Company, Inc. (WA) F. SAFECO Select Insurance Services, Inc. (CA)
G. SAFECO Investment Services, Inc. (WA)
11. SAFECO Properties, Inc. (WA)
A. SAFECARE Company, Inc. (WA) 17. SAFECO UK, Limited
a) S.C. Bellevue, Inc. (WA)
b) S.C. Marysville, Inc. (WA) 18. SAFECO Capital Trust I (WA)
B. Winmar Company, Inc. (WA)
a) Capitol Court Corporation (WI)
b) SCIT, Inc. (MA)
c) Winmar Metro, Inc. (WA)
d) Winmar Northwest, Inc. (WA)
e) Winmar Oregon, Inc. (OR)
i) North Coast Management, Inc. (OR)
ii) Pacific Surfside Corporation (OR)
iii) Winmar of Jantzen Beach, Inc. (OR)
iv) W-P Development, Inc. (OR)
h) Winmar Redmond, Inc. (WA)
i) Winmar of Kitsap, Inc. (WA)
j) Winmar of Texas, Inc. (TX)
k) Winmar of the Desert, Inc. (CA)
</TABLE>
Note: Certain inactive companies are not shown.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 16,830
<DEBT-CARRYING-VALUE> 2,733
<DEBT-MARKET-VALUE> 2,772
<EQUITIES> 2,005
<MORTGAGE> 770
<REAL-ESTATE> 107
<TOTAL-INVEST> 22,931
<CASH> 112
<RECOVER-REINSURE> 385
<DEFERRED-ACQUISITION> 599
<TOTAL-ASSETS> 30,573
<POLICY-LOSSES> 4,416
<UNEARNED-PREMIUMS> 1,853
<POLICY-OTHER> 282
<POLICY-HOLDER-FUNDS> 13,763
<NOTES-PAYABLE> 2,316
843
0
<COMMON> 842
<OTHER-SE> 3,452
<TOTAL-LIABILITY-AND-EQUITY> 30,573
4,744
<INVESTMENT-INCOME> 1,585
<INVESTMENT-GAINS> 118
<OTHER-INCOME> 271
<BENEFITS> 4,504
<UNDERWRITING-AMORTIZATION> 840
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 332
<INCOME-TAX> 35
<INCOME-CONTINUING> 297
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 252
<EPS-BASIC> 1.90
<EPS-DILUTED> 1.90
<RESERVE-OPEN> 3,966
<PROVISION-CURRENT> 3,353
<PROVISION-PRIOR> 79
<PAYMENTS-CURRENT> 1,926
<PAYMENTS-PRIOR> 1,403
<RESERVE-CLOSE> 4,069
<CUMULATIVE-DEFICIENCY> 79
</TABLE>
