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PROSPECTUS OCTOBER 10, 1995
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SAFECO SEPARATE ACCOUNT C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
sold by
SAFECO LIFE INSURANCE COMPANY
15411 N.E. 51st Street
Redmond, Washington 98052
Telephone 1-800-426-7649
This Prospectus offers individual Variable Annuity contracts that are designed
(i) to fund benefits under individual retirement accounts and annuities
qualified for special tax treatment under Section 408 of the Internal Revenue
Code of 1986 and (ii) for sale to individuals where no special tax treatment is
available (the "Contract(s)"). The Contracts are offered on a flexible payment
basis.
Under the Contracts, annuity payments may commence on a preselected future date
(presumably at retirement) under one of the annuity options provided in the
Contracts. Prior to the time annuity payments begin, the Contracts are partially
or totally redeemable based on their current value and subject to applicable
Contingent Deferred Sales Charges.
SAFECO Life Insurance Company ("SAFECO") provides for variable accumulations and
variable benefits under the Contracts by crediting net Purchase Payments to one
or more Sub-Accounts ("Sub-Accounts") within SAFECO Separate Account C
("Separate Account") as directed by the owner of the Contract ("Owner"). Net
Purchase Payments to Contracts may be invested in any combination of the 12
Sub-Accounts available under the Contracts or in the Fixed Account. The
Sub-Accounts invest in corresponding investment portfolios of separate mutual
funds ("Available Funds"). Five of the Available Funds currently are investment
portfolios of the SAFECO Resource Series Trust: SAFECO Resource Bond Portfolio;
SAFECO Resource Equity Portfolio; SAFECO Resource Growth Portfolio; SAFECO
Resource Money Market Portfolio; and SAFECO Resource Northwest Portfolio (each a
"SAFECO Fund"). The Other Available Funds currently are: Insurance Management
Series: Corporate Bond Fund ("Federated Corporate Bond Fund"); and Utility Fund
("Federated Utility Fund"); Lexington Emerging Markets Fund, Inc. ("Lexington
Emerging Markets Fund"); Lexington Natural Resources Trust ("Lexington Natural
Resources Fund"); TCI Portfolios, Inc.: TCI Balanced Fund ("TCI Balanced Fund");
and TCI International Fund ("TCI International Fund"); and Wanger Advisors
Trust: U.S. Small Cap Advisor ("Wanger U.S. Small Cap Fund").
Generally, within ten (10) days after the Contract is received, an Owner may
cancel it by returning it to the Home Office or the representative that sold it.
Free look provisions may vary based on the state of issue. The state of issue is
based on the address of the Payor.
A prospectus for each of the Available Funds may be obtained from SAFECO, P.O.
Box 34690, Seattle, Washington 98124-1690. An investor should read those
prospectuses carefully before buying a Contract described in this Prospectus or
investing in any Sub-Account.
This Prospectus sets forth concisely the information about the Contracts and the
Separate Account that a prospective investor should know before investing and
should be retained for future reference. Additional information about the
Contracts and the Separate Account is contained in a Statement of Additional
Information dated October 10, 1995 which is incorporated herein by reference.
The Statement of Additional Information is available upon written or oral
request and without charge from SAFECO, P.O. Box 34690, Seattle, Washington
98124-1690, Telephone Number (800) 426-7649. The table of contents for the
Statement of Additional Information is shown on page 33 of this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
MAINSAIL IS NOT INSURED BY THE FDIC. IT IS NOT A DEPOSIT OR OTHER OBLIGATION OF,
OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION THROUGH WHICH IT MAY BE SOLD.
MAINSAIL IS SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE
PRINCIPAL AMOUNT INVESTED.
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THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF EACH
OF THE FOLLOWING MUTUAL FUNDS: SAFECO Resource Bond Fund; SAFECO Resource Equity
Fund; SAFECO Resource Growth Fund; SAFECO Resource Money Market Fund; SAFECO
Resource Northwest Fund; Federated Corporate Bond Fund; Federated Utility Fund;
Lexington Emerging Markets Fund, Inc.; Lexington Natural Resources Trust; TCI
Balanced Fund; TCI International Fund; and Wanger U.S. Small Cap Fund.
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SAFECO
PROSPECTUS
TABLE OF CONTENTS
<TABLE>
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Page
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Definitions........................................................................... 4
Summary of Contract Expenses.......................................................... 6
Summary............................................................................... 10
The Insurance Company................................................................. 11
SAFECO Separate Account C............................................................. 11
Sub-Accounts of the Separate Account and the Available Funds.......................... 12
Investment Objectives of the Available Funds.......................................... 12
The SAFECO Funds................................................................. 12
The Other Available Funds........................................................ 13
Deductions Under the Contracts........................................................ 16
Contingent Deferred Sales Charge................................................. 16
Premium Tax...................................................................... 16
Contract Administration Charges.................................................. 16
Deduction for Assuming Mortality and Expense Risks............................... 17
Available Fund Expenses.......................................................... 18
Transfers Between Sub-Accounts........................................................ 18
Redemptions........................................................................... 18
Other Services........................................................................ 19
The Programs..................................................................... 19
Dollar Cost Averaging Program.................................................... 19
Automatic Transfer Program....................................................... 20
Appreciation or Interest Sweep................................................... 20
Sub-Account Rebalancing Program.................................................. 20
Systematic Investment Program.................................................... 21
Periodic Withdrawal Program...................................................... 21
Fixed Account......................................................................... 21
General Description.............................................................. 21
Fixed Account Contract Value..................................................... 22
Annual Administration Maintenance Charge......................................... 22
Fixed Account Transfers and Partial Withdrawals.................................. 22
</TABLE>
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<TABLE>
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Page
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Contract Benefits..................................................................... 23
General............................................................................... 23
Certain Minimum Amounts............................................................... 23
The Accumulation Period............................................................... 24
The Contract Value and Accumulation Units............................................. 24
Accumulation Unit Values.............................................................. 24
Valuation Date and Valuation Period................................................... 24
Net Investment Factor................................................................. 24
Example of Calculation of Accumulation Unit Value..................................... 25
The Annuity Period.................................................................... 25
Annuity Date.......................................................................... 25
Payment Provisions.................................................................... 25
Settlement Options.................................................................... 26
Annuity Purchase Rates................................................................ 27
Annuity Unit Values................................................................... 27
Number of Annuity Units............................................................... 27
Time of Payment....................................................................... 27
Amount of Payment..................................................................... 27
Payment on or After Death of Owner.................................................... 27
The Distribution of the Contracts..................................................... 29
Voting Privileges..................................................................... 29
Federal Tax Status.................................................................... 29
Federal Tax Status of the Separate Account............................................ 30
Federal Tax Status of Qualified Contracts............................................. 30
Federal Tax Status of Non-Qualified Contracts......................................... 31
Federal Tax Penalties and Withholding................................................. 31
Legal Matters......................................................................... 32
Special Considerations................................................................ 32
Restrictions Upon Transfer of Ownership and Assignment................................ 32
Available Information................................................................. 32
State Regulation...................................................................... 32
Experts............................................................................... 33
Financial Statements.................................................................. 33
Table of Contents -- Statement of Additional Information.............................. 33
</TABLE>
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DEFINITIONS
Some of the technical expressions and names frequently used in this Prospectus
are defined below for ready reference:
1. ACCUMULATION UNIT - The measure used to calculate the value of a Sub-Account
prior to the Annuity Date.
2. ANNUITANT - The natural person upon whose life annuity payments are payable
in accordance with the Contract.
3. ANNUITY - Any series of payments starting on the Annuity Date, payable in
accordance with the Contract, under the Settlement Options.
4. ANNUITY DATE - The date selected by the Owner for commencing annuity
payments under the Contract. The day of the month on which the payments are
made will be determined by SAFECO. The Annuity Date cannot be later than the
date the Annuitant attains age 90.
5. ANNUITY UNIT - The measure used to calculate annuity payments after the
Annuity Date.
6. AVAILABLE FUNDS - The SAFECO Funds and the Other Available Funds under the
Contract.
7. BENEFICIARY (OR BENEFICIARIES) - The person (or persons) entitled to receive
benefits under the Contract upon the death of the Owner.
8. CODE - The Internal Revenue Code of 1986, as amended.
9. CONTRACT - The Individual Variable Annuity Contract by and between SAFECO
and the Owner.
10. CONTRACT ANNIVERSARY - Any anniversary of the Contract Date.
11. CONTRACT DATE - The earlier of the date on which the initial Net Purchase
Payment is allocated to the Separate Account or the initial Net Purchase
Payment is allocated to the Fixed Account.
12. CONTRACT VALUE - The sum of the Owner's interest in the Sub-Accounts and the
Fixed Account, including all Purchase Payments made, investment experience,
and less any previous withdrawals, and related Contingent Deferred Sales
Charges, and less all other applicable charges or fees.
13. CONTRACT YEAR - The twelve month period which commences on the Contract Date
and each succeeding twelve month period thereafter.
14. ELIGIBLE INVESTMENTS - An investment entity under the Contract, including
the Fixed Account.
15. FIXED ANNUITY - An annuity with payments which do not vary in accordance
with the net investment results of the Separate Account.
16. FIXED ACCOUNT - Contract Value allocated to SAFECO's General Account under
the Contract.
17. FUND SHARE - A share of the capital stock or a share of beneficial interest
in any of the Available Funds.
18. GENERAL ACCOUNT - The General Account of SAFECO in which are held all the
assets other than those held in the Separate Account or in any other
separate account established or maintained by SAFECO.
19. HOME OFFICE - The principal office of SAFECO at 15411 N.E. 51st Street,
Redmond, Washington.
20. NET INVESTMENT FACTOR - A factor which reflects the net investment
experience of each Sub-Account less certain charges for the mortality and
expense risk expenses, administrative charges and taxes, if applicable,
during a Valuation Period.
21. NET PURCHASE PAYMENT - Purchase Payment less any premium taxes.
22. 1940 ACT - The Investment Company Act of 1940, as amended.
23. NON-QUALIFIED CONTRACT - A Contract which does not receive favorable tax
treatment under Sections 401, 403, and 408 of the Code.
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24. OTHER AVAILABLE FUNDS - The underlying mutual funds or portfolios that are
available under a Contract, in addition to the SAFECO Funds: Federated
Corporate Bond Fund; Federated Utility Fund; Lexington Emerging Markets
Fund; Lexington Natural Resources Fund; TCI Balanced Fund; TCI International
Fund; and Wanger U.S. Small Cap Fund.
25. OWNER - The person(s) (or entity) named in the Application for the Contract
who has all rights under the Contract. Joint Owners are allowed only if the
joint Owners are spouses. Each joint Owner shall have equal ownership rights
and must jointly exercise those rights.
26. PAYOR - The person(s) (or entity) that makes the initial Purchase Payment
and any subsequent payments under the Contract.
27. PROGRAM(S) - Certain investment related services offered by SAFECO under the
Contract to allow for (a) automatic transfers of Contract Value among
Sub-Accounts and the Fixed Account, and/or (b) automatic investment in the
Separate Account, and/or (c) automatic periodic withdrawals of Contract
Value.
28. PURCHASE PAYMENTS - Payments made to purchase Accumulation Units or
allocated to the Fixed Account.
29. QUALIFIED CONTRACT - A Variable Annuity Contract that has been issued to
fund benefits under an Individual Retirement Account or Annuity qualifying,
or intended to qualify, for tax deferment under Section 408 of the Code.
30. SAFECO FUNDS - The five separate portfolios of the SAFECO Resource Series
Trust which are available under a Contract: SAFECO Resource Bond Fund,
SAFECO Resource Equity Fund, SAFECO Resource Growth Fund, SAFECO Resource
Money Market Fund, and SAFECO Resource Northwest Fund.
31. SEPARATE ACCOUNT - The separate investment account designated as SAFECO
Separate Account C.
32. SUB-ACCOUNT(S) - A sub-account of the Separate Account investing in shares
of one of the Available Funds.
33. VALUATION DATE - Each day the New York Stock Exchange is open for business,
as well as each day otherwise required.
34. VALUATION PERIOD - The period commencing at the close of business for the
Separate Account which is usually 4:00 p.m. (EST) on each Valuation Date and
ending at the close of business for the next succeeding Valuation Date.
35. VARIABLE ANNUITY - An annuity with payments varying in accordance with the
net investment results of the Separate Account.
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SUMMARY OF CONTRACT EXPENSES
OWNER TRANSACTION EXPENSES
<TABLE>
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Sales Charge Imposed on Purchases None
Contingent Deferred Sales Charge* 7.00%
(as a percentage of the amount withdrawn
at the time of surrender or partial surrender)
Surrender Fees** $25
Transfer Fee*** $10
</TABLE>
*The Contingent Deferred Sales Charge declines over time and is 0% beginning in
the seventh Contract Year. (See "Contingent Deferred Sales Charge" on page 16.)
In each Contract Year, an Owner generally may withdraw up to 10% of the Contract
Value without payment of the Contingent Deferred Sales Charge.
**A maximum charge of $25 is assessed for each withdrawal (surrender) after the
first taken in any Contract Year, except under the Periodic Withdrawal Program
where the charge is $25 per year if withdrawals are in excess of one per year.
(See "Deductions under the Contracts" on page 16 and "Periodic Withdrawal
Program" on page 21.)
***A charge of $10 per transfer between Sub-Accounts of the Separate Account or
the Fixed Account may be charged for transfers in excess of twelve (12)
transfers, which may be made each Contract Year without charge. (See "Transfers
Between Sub-Accounts" on page 18.)
<TABLE>
<S> <C>
ANNUAL ADMINISTRATION MAINTENANCE CHARGE**** $30
</TABLE>
**** The Annual Administration Maintenance Charge is assessed only if the
Contract Value is less than $100,000. (See "Annual Administration Maintenance
Charge" on page 17 and 22.)
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE)
<TABLE>
<S> <C>
Mortality and Expense Risk Fees 1.25%
Asset Related Administration Charge 0.15%
Account Fees and Expenses None
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Total Separate Account Annual Expenses 1.40%
</TABLE>
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AVAILABLE FUND ANNUAL EXPENSES
(as a percentage of average net assets of each)
<TABLE>
<CAPTION>
SAFECO SAFECO SAFECO SAFECO
Resource Bond Resource Equity Resource Resource Money
Fund Fund Growth Fund Market Fund
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<S> <C> <C> <C> <C>
Management
Fees*............ .74% .74% .74% .65%
Other Expenses 0 .04% .16% 0
Total Fund
Annual
Expenses*........ .74% .78% .90% .65%
SAFECO Federated Federated Lexington
Resource Corporate Bond Utility Fund* Emerging
Northwest Fund Fund* Markets Fund*
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Management
Fees*............ .74% 0 0 .85%
Other Expenses 0 .80% .85% .45%
Total Fund
Annual
Expenses*........ .74% .80% .85% 1.30%
Lexington TCI Balanced TCI Wanger U.S.
Natural Fund International Small Cap Fund*
Resources Trust Fund
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Management
Fees*............ 1.00% 1.00% 1.50% .98%
Other Expenses .55% 0 0 .17%
Total Fund
Annual
Expenses*........ 1.55% 1.00% 1.50% 1.15%
</TABLE>
*After reimbursement, if applicable. From time to time, the Available Funds'
investment advisers in their sole discretion may waive all or part of their fees
and/or voluntarily assume certain Available Fund expenses. For the six months
ended June 30, 1995, the Funds voluntarily waived or reimbursed expenses, as
follows: Federated Corporate Bond Fund $116,027, absent reimbursement $127,025;
Federated Utility Fund $123,561, absent reimbursement $144,557; Lexington
Emerging Markets Fund $70,426, absent reimbursement $105,813; Wanger U.S. Small
Cap Fund $18,089, absent reimbursement $22,608. For a more complete description
of the Available Funds' fees and expenses, see the Available Funds'
prospectuses.
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<TABLE>
<S> <C> <C> <C> <C>
EXAMPLES:
If the Contract is surrendered, the following expenses on a $1,000
investment, assuming 5% annual return on assets, would be
incurred:
SAFECO SAFECO
SAFECO SAFECO Resource Resource Money
Resource Bond Resource Equity Growth Market
Sub-Account Sub-Account Sub-Account Sub-Account
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1 year...... $94 $94 $95 $93
3 years..... $138 $139 $142 $135
5 years..... $183 $185 $191 $179
SAFECO Lexington
Resource Federated Federated Emerging
Northwest Corporate Bond Utility Markets
Sub-Account Sub-Account Sub-Account Sub-Account
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1 year...... $94 $94 $95 $99
3 years..... $138 $140 $141 $154
5 years..... $183 $186 $188 $209
Lexington
Natural TCI Wanger U.S.
Resources TCI Balanced International Small Cap
Sub-Account Sub- Account Sub-Account Sub-Account
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1 year...... $101 $96 $101 $98
3 years..... $161 $145 $159 $149
5 years..... $221 $195 $219 $202
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
If the Contract is not annuitized or surrendered, the following
expenses on a $1,000 investment, assuming 5% annual return on
assets, would be incurred:
SAFECO SAFECO
SAFECO SAFECO Resource Resource Money
Resource Bond Resource Equity Growth Market
Sub-Account Sub-Account Sub-Account Sub-Account
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1 year...... $29 $30 $31 $29
3 years..... $90 $91 $95 $87
5 years..... $153 $155 $161 $149
SAFECO Lexington
Resourse Federated Federated Emerging
Northwest Corporate Bond Utility Markets
Sub-Account Sub-Account Sub-Account Sub-Account
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1 year...... $29 $30 $31 $35
3 years..... $90 $92 $93 $107
5 years..... $153 $156 $159 $180
Lexington
Natural TCI Wanger U.S.
Resources TCI Balanced International Small Cap
Sub-Account Sub-Account Sub-Account Sub-Account
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1 year...... $37 $32 $37 $33
3 years..... $114 $98 $112 $102
5 years..... $192 $166 $190 $173
</TABLE>
The purpose of the preceding table is to assist an Owner or prospective Owner in
understanding the various costs and expenses an Owner will bear directly or
indirectly. The above table reflects expenses of the Separate Account as well as
the Available Funds. The above examples reflect the $30 Annual Administration
Maintenance Charge as an annual charge of .77% of assets based on an average
expected Contract Value of $30,000.
THE EXAMPLES SET FORTH ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN. The example assumes a 5% annual rate of return pursuant to requirements
of the Securities and Exchange Commission ("Commission"). This hypothetical rate
of return is not intended to be representative of past or future performance of
any Sub-Account. (See "Deductions under the Contracts" on page 16.) The examples
assume that Purchase Payments are allocated to each Available Fund which may
have different expenses.
The Contingent Deferred Sales Charge shown in the table is the maximum sales
load. (See "Contingent Deferred Sales Charge" on page 16 of this Prospectus
which describes the range of the Contingent Deferred Sales Charge over time and
limits on the Contingent Deferred Sales Charge as a percentage of total gross
Purchase Payments.) The table does not reflect premium taxes which are levied by
some states. (See "Premium Tax" on page 16.) Any premium taxes or other taxes
levied by any governmental entity which SAFECO, in its sole discretion,
determines have resulted from the establishment or maintenance of the
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Contract or any portion the Contract, the receipt by SAFECO of Purchase
Payments, or the commencement of annuity payments will be deducted from the
Contract. Currently, with respect to Qualified Contracts, SAFECO intends to
assume responsibility for all premium taxes, provided that SAFECO reserves the
right, in the future, to pass the responsibility for all premium taxes to the
Owner of the Contract and assess a charge for such taxes to the Contract.
The table reflects Owner transaction expenses, administrative fees, and other
Separate Account charges during the Accumulation Period. (See the descriptions
beginning on page 24 of this Prospectus). The Annual Administration Maintenance
Charge and the Contingent Deferred Sales Charge are not applicable during the
Annuity Period; the other charges and expenses, including those of the Available
Funds, do apply during the Annuity Period. The information in the Expense Table
and Examples is based in part on information provided by the Funds and SAFECO
and the Separate Account do not assume responsibility for the accuracy of such
information. (See the prospectuses of the Available Funds for a fuller
description of their expenses.)
SUMMARY
The minimum initial Purchase Payment under the Contract is $2,000 for a
Qualified Contract and $5,000 for a Non-Qualified Contract. The minimum
additional Purchase Payment is $250 for both a Qualified Contract and a
Non-Qualified Contract, except for additional Purchase Payments made through a
Systematic Investing Program, described below, in which case the minimum for
both a Qualified Contract and Non-Qualified Contract is $100.
If the Contract Value available for annuity payments after the Annuity Date is
less than $5,000, the Contract Value may be distributed in one lump sum in lieu
of annuity payments. If any Annuity payment under the Contract would be less
than $250, SAFECO shall have the right to change the frequency of payments to
such intervals as will result in payments of at least $250. (See "The Annuity
Period" on page 25.)
SAFECO does not deduct a sales charge from Purchase Payments. However, if any
part of the value of the Contracts is surrendered SAFECO will, with certain
exceptions, deduct from the value of the Contract, a Contingent Deferred Sales
Charge equal to the maximum of 7% of the amount withdrawn, but in no event more
than 9% of gross Purchase Payments. This charge is imposed to permit SAFECO
Securities, Inc. ("SAFECO Securities"), the distributor, or SAFECO to recover
sales expenses which they have advanced. (See "Contingent Deferred Sales Charge"
on page 16.)
In addition, on the last day of each Contract Year or upon full surrender,
SAFECO currently will deduct an Annual Administration Maintenance Charge of $30
from the Contract Value of those Contracts with a Contract Value less than
$100,000. An Asset Related Administration Charge equivalent to an annual rate of
.15% of the average daily net asset value of the Separate Account is charged
both during the Accumulation Period and the Annuity Period and is guaranteed to
not increase for the duration of the Contract. These charges are to reimburse
SAFECO for administrative expenses related to the issue, maintenance and
administration of the Contracts. SAFECO does not expect to recover from these
charges an amount in excess of the actual costs associated with administering
the Contracts. (See "Contract Administrative Charges" on page 16.)
SAFECO deducts a mortality and expense risk charge from the assets of the
Separate Account, as a daily asset charge equivalent to an annual rate of 1.25%
of the average daily net asset value of the Separate Account during the
Accumulation Period and the Annuity Period. SAFECO imposes the mortality and
expense risk charge as compensation for assuming several mortality risks and
expense risks for the duration of the Contract. SAFECO assumes a mortality risk
by its contractual obligation to pay (i) a death benefit to the Beneficiary if
the Owner dies prior to the Annuity Date, (ii) the minimum guaranteed death
benefit, which reflects increases in Contract Value; and (iii) annuity payments
for a longer period than anticipated. SAFECO assumes the expense risk that (i)
the deductions for sales and administration charges may prove to be insufficient
to cover the actual expenses incurred and (ii) no surrender or similar charge on
the death benefit or upon annuitization is imposed. (See "Deduction for Assuming
Mortality and Expense Risks" on page 17.)
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<PAGE> 11
As set forth in the Contract, any premium taxes payable to any governmental
entity, which SAFECO determines to be properly chargeable against the Contract,
will be charged against the Contract. (See "Premium Tax" on page 16.)
The Owner generally may, within ten (10) days after the date on which the
Contract is issued, revoke the Contract, in which event the Owner will be paid
the Contract Value, which may be more or less than the Purchase Payments. In
states where required, SAFECO will refund the Purchase Payments rather than the
Contract Value. SAFECO reserves the right to allocate all payments to the SAFECO
Resource Money Market Sub-Account until the expiration of fifteen (15) days from
the date the first Purchase Payment is received. If SAFECO so allocates
payments, SAFECO will refund the greater of Purchase Payments or the Contract
Value. Free look provisions may vary based on the Owner's state of residence.
An individual for whom a Contract is purchased under an individual retirement
account may revoke the Contract by giving written notice of revocation to the
Home Office at any time within seven (7) days after the later of the date on
which (i) the account is established, or (ii) the individual receives a
disclosure statement notifying him of his right of revocation. Upon such
revocation, SAFECO will refund the full initial Purchase Payment made.
This Prospectus describes how a Contract may be purchased and redeemed. (See
"Distribution of Contracts" on page 29 and "Redemptions" on page 18.)
Premature payments of benefits under a Contract may cause a penalty tax to be
incurred. (See "Federal Tax Status" on page 29.)
THE INSURANCE COMPANY
SAFECO is a stock life insurance company organized under the insurance laws of
the state of Washington on January 23, 1957. SAFECO is primarily engaged in the
writing of individual and group life, accident and health insurance and annuity
policies. SAFECO is authorized to write insurance and annuities in the District
of Columbia and all states, except New York. Its Home Office is located at 15411
N.E. 51st Street, Redmond, Washington 98052. SAFECO is a wholly-owned subsidiary
of the SAFECO Corporation, which is a holding company whose subsidiaries are
engaged primarily in insurance and financial service businesses.
SAFECO SEPARATE ACCOUNT C
The Separate Account was established pursuant to a resolution of the Board of
Directors of SAFECO dated February 6, 1986. The Separate Account was established
under the laws of the state of Washington and is registered as a unit investment
trust under the 1940 Act. Such registration does not involve supervision of the
investments or investment policies of the Separate Account and does not imply
that the Contract has been approved or disapproved by the Commission.
The income, gains or losses of the Separate Account are credited to or charged
against the assets of the Separate Account without regard to the other income,
gains or losses of SAFECO. These assets are held with relation to the Contracts
described in this Prospectus and such other Variable Annuity contracts as may be
issued by SAFECO and designated by it as participating in the Separate Account.
Although the assets maintained in the Separate Account will not be charged with
any liabilities arising out of any other business conducted by SAFECO, all
obligations arising under the Contracts, including the promise to make annuity
payments, are general corporate obligations of SAFECO. Accordingly, all of
SAFECO's assets are available to meet its contractual obligations and expenses
under the Contracts participating in the Separate Account.
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<PAGE> 12
SUB-ACCOUNTS OF THE SEPARATE ACCOUNT
AND THE AVAILABLE FUNDS
Twelve Sub-Accounts, each of which reflects the investment performance of a
specific underlying mutual fund in which the Sub-Account invests, are available
under the Contracts. Subject to certain limitations and any restrictions by an
applicable retirement plan, the Owner may elect to have Net Purchase Payments
credited to any of the available Sub-Accounts.
Five of the Sub-Accounts invest in shares of the corresponding portfolio of the
SAFECO Resource Series Trust, an open-end diversified management investment
company (the "SAFECO Funds"). Seven of the Sub-Accounts invest in shares of the
Other Available Funds.
The SAFECO Funds were formed specifically to serve as an investment medium for
the Separate Account or other segregated asset accounts established by SAFECO or
an affiliate of SAFECO ("Other Separate Accounts"). Only the Separate Account
and the Other Separate Accounts are eligible at this time to purchase shares of
the SAFECO Funds. The SAFECO Funds reserve the right to offer their shares to
Separate or other segregated asset accounts established by other insurance
companies. SAFECO Asset Management Company ("SAFECO Management"), SAFECO Plaza,
Seattle, Washington 98185, a wholly-owned subsidiary of SAFECO Corporation, is
the investment adviser to the SAFECO Funds and also performs certain
administrative functions for each SAFECO Fund. SAFECO provides certain personnel
and facilities utilized by SAFECO Management in performing its investment
advisory and administrative functions.
The Other Available Funds are open-end diversified management investment
companies. The Other Available Funds are designed to serve as investment
vehicles for variable annuity and variable life insurance contracts of various
insurance companies and currently are available to the separate accounts of a
number of insurance companies including SAFECO. The investment adviser for each
of the Other Available Funds is: Federated Advisers; Lexington Management
Corporation; Investors Research Corporation and Wanger Asset Management, L.P.
The Boards of Directors or Trustees of the Other Available Funds are responsible
for monitoring the Other Available Funds for the existence of any material
irreconcilable conflict between the interests of the owners of all separate
accounts investing in the Other Available Funds and determining what action, if
any, should be taken if a material irreconcilable conflict should occur. (See
the prospectuses of the Other Available Funds for further discussion of the
risks associated with the offering of Other Available Fund shares to the
Separate Account and the separate accounts of other insurance companies. Also
see the Statement of Additional Information regarding the terms of the
Participation Agreements relating to the Separate Account's investment in the
Other Available Funds.)
INVESTMENT OBJECTIVES OF THE AVAILABLE FUNDS
Set forth below is a summary of the investment objectives of the Available
Funds. There can be no assurance that these objectives will be achieved. The
Available Funds' prospectuses accompany this Prospectus; investors should read
them carefully before investing.
THE SAFECO FUNDS
SAFECO RESOURCE BOND FUND (SAFECO RESOURCE BOND SUB-ACCOUNT)
The investment objective of the SAFECO Resource Bond Sub-Account is to seek as
high a level of current income as is consistent with the relative stability of
capital. The SAFECO Resource Bond Sub-Account invests in the SAFECO Resource
Bond Fund. To pursue its investment objective, the SAFECO Resource Bond Fund
invests primarily in medium-term debt securities. Although the SAFECO Resource
Bond Fund does not intend to purchase below investment grade bonds during the
coming year, it may hold up to 20% of total assets in bonds which are downgraded
after purchase to below investment grade quality by Standard & Poor's
Corporation or Moody's Investors Services, Inc. Below investment grade bonds are
commonly referred
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to as high-yield or "junk" bonds and have special risks associated with them.
(See the SAFECO Funds' prospectus and statement of additional information for
more information.)
SAFECO RESOURCE EQUITY FUND (SAFECO RESOURCE EQUITY SUB-ACCOUNT)
The investment objective of the SAFECO Resource Equity Sub-Account is to seek
long-term growth of capital and reasonable current income. The SAFECO Resource
Equity Sub-Account invests in the SAFECO Resource Equity Fund. To pursue its
investment objective, the SAFECO Resource Equity Fund ordinarily invests
principally in common stocks or securities convertible into common stocks.
Fixed-income securities may be purchased in accordance with business and
financial conditions.
SAFECO RESOURCE GROWTH FUND (SAFECO RESOURCE GROWTH SUB-ACCOUNT)
The investment objective of the SAFECO Resource Growth Sub-Account is to seek
growth of capital and the increased income that ordinarily follows from such
growth. The SAFECO Resource Growth Sub-Account invests in the SAFECO Resource
Growth Fund. To pursue its investment objective, the SAFECO Resource Growth Fund
ordinarily invests a preponderance of its assets in common stocks selected
primarily for potential appreciation. To determine those common stocks which
have the potential for long-term growth, SAFECO Management evaluates the
issuer's financial strength, quality of management and earning power. Because
the SAFECO Resource Growth Fund invests primarily in common stock selected for
potential appreciation, its share price may be more volatile than the other
equity funds.
SAFECO RESOURCE MONEY MARKET FUND (SAFECO RESOURCE MONEY MARKET SUB-ACCOUNT)
The investment objective of the SAFECO Resource Money Market Sub-Account is to
seek as high a level of current income as is consistent with the preservation of
capital and liquidity through investments in high-quality money market
investment maturing in thirteen months or less. The SAFECO Resource Money Market
Sub-Account invests in the SAFECO Resource Money Market Fund which seeks to
maintain a net asset value per share of $1.00. SHARES OF THE SAFECO RESOURCE
MONEY MARKET FUND ARE NEITHER INSURED, NOR GUARANTEED, BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE SAFECO RESOURCE MONEY MARKET FUND WILL MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
SAFECO RESOURCE NORTHWEST FUND (SAFECO RESOURCE NORTHWEST SUB-ACCOUNT)
The investment objective of the SAFECO Resource Northwest Sub-Account is to seek
long-term growth of capital through investing primarily in Northwest companies.
The SAFECO Resource Northwest Sub-Account invests in the SAFECO Resource
Northwest Fund. To pursue its investment objective, the SAFECO Resource
Northwest Fund invests at least 65% of its total assets in securities issued by
companies with their principal executive offices located in Washington, Alaska,
Idaho, Oregon or Montana. The SAFECO Resource Northwest Fund ordinarily invests
its assets in shares of common stock selected primarily for potential long-term
appreciation. The SAFECO Resource Northwest Fund also may occasionally invest in
securities convertible into common stock.
THE OTHER AVAILABLE FUNDS
FEDERATED CORPORATE BOND FUND (FEDERATED CORPORATE BOND SUB-ACCOUNT)
The investment objective of the Federated Corporate Bond Sub-Account is to seek
high current income. The Federated Corporate Bond Sub-Account invests in the
Federated Corporate Bond Fund. To pursue its investment objective, the Federated
Corporate Bond Fund invests primarily in a diversified portfolio of
professionally managed fixed-income securities. The fixed-income securities in
which the Federated Corporate Bond Fund intends to invest are lower-rated
corporate debt obligations, which are commonly referred to as "junk bonds." Some
of these fixed-income securities may involve equity features. Capital growth
will be considered, but only when consistent with the investment objective of
high current income.
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FEDERATED UTILITY FUND (FEDERATED UTILITY SUB-ACCOUNT)
The investment objective of the Federated Utility Sub-Account is to seek high
current income and moderate capital appreciation. The Federated Utility
Sub-Account invests in the Federated Utility Fund. To pursue its investment
objective, the Federated Utility Fund invests primarily in a professionally
managed and diversified portfolio of equity and debt securities of utility
companies that produce, transmit, or distribute gas and electric energy as well
as those companies that provide communications facilities, such as telephone and
telegraph companies. Under normal market conditions, the Federated Utility Fund
invests at least 65% of its total assets in securities of utility companies.
LEXINGTON EMERGING MARKETS FUND (LEXINGTON EMERGING MARKETS SUB-ACCOUNT)
The investment objective of the Lexington Emerging Markets Sub-Account is to
seek long-term growth of capital primarily through investment in equity
securities and equivalents of companies domiciled in, or doing business in,
emerging countries and emerging markets. The Lexington Emerging Markets
Sub-Account invests in the Lexington Emerging Markets Fund. To pursue its
investment objective, the Lexington Emerging Markets Fund invests primarily in
emerging country and emerging market equity securities of all types of common
stocks and equivalents (the following constitute equivalents: convertible debt
securities and warrants), although the Fund also may invest in preferred stocks,
bonds, and money market instruments of foreign and domestic companies, the U.S.
government, and its agencies. The Lexington Emerging Markets Fund, under normal
conditions, will invest at least 65% of its total assets in emerging country and
emerging market equity securities in at least three countries outside of the
U.S. and at all times will invest in a minimum of three countries outside of the
U.S. Investments in emerging country equity securities are not subject to a
maximum limit, and it is the intention of the Lexington Emerging Markets Fund's
adviser to invest substantially all of the Fund's assets in such securities. For
purposes of its investment objective, the Lexington Emerging Markets Fund
considers emerging country equity securities to be any country whose economy and
market the World Bank or United Nations considers to be emerging or developing,
and the Fund also may invest in equity securities and equivalents, traded in any
market, of companies that derive 50% or more of their total revenue from either
goods or services produced in such emerging countries and emerging markets or
sales made in such countries.
LEXINGTON NATURAL RESOURCES FUND (LEXINGTON NATURAL RESOURCES SUB-ACCOUNT)
The investment objective of the Lexington Natural Resources Sub-Account is to
seek long-term growth of capital through investing primarily in common stocks of
companies that own or develop natural resources and other basic commodities, or
supply goods and services to such companies. The Lexington Natural Resources
Sub-Account invests in the Lexington Natural Resources Fund. To pursue its
investment objective, the Lexington Natural Resources Fund seeks to identify
securities of companies that, in its management's opinion, are undervalued
relative to the value of natural resource holdings of such companies in light of
current and anticipated economic or financial conditions. The Lexington Natural
Resources Fund will consider a company to have substantial natural resource
assets when, in its management's opinion, the company's holdings of the assets
are of such magnitude, when compared to the capitalization, revenues or
operating profits of the company, that changes in the economic value of the
assets will affect the market price of the equity securities of such company,
which, generally, is when at least 50% of the non-current assets,
capitalization, gross revenues or operating profits of the company in the most
recent or current fiscal year are involved in or result from, directly or
indirectly through subsidiaries, exploring, mining, refining, processing,
fabricating, dealing in or owning natural resource assets. Up to 25% of the
Lexington Natural Resources Fund's total assets may be invested in securities
principally traded in markets outside the U.S.
TCI BALANCED FUND (TCI BALANCED SUB-ACCOUNT)
The investment objective of the TCI Balanced Sub-Account is capital growth and
current income. The TCI Balanced Sub-Account invests in the TCI Balanced Fund.
To pursue its investment objective with regard to the equity portion of the
portfolio, the TCI Balanced Fund invests primarily in common stocks, including
securities convertible into common stocks and other equity equivalents and other
securities that meet certain
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<PAGE> 15
standards, and have better-than-average potential for appreciation. Management
of the TCI Balanced Fund intends to maintain approximately 60% of its assets in
such securities, regardless of the movement of stock prices. Management intends
to maintain approximately 40% of its assets in fixed income securities, with a
minimum of 25% of that amount in fixed income senior securities. The fixed
income securities will be chosen based on their level of income production and
price stability.
The TCI Balanced Fund may invest in a diversified portfolio of debt and other
fixed-rate securities payable in U.S. currency. These may include obligations of
the U.S. Government, i.e., Treasury Bills, Treasury notes, and U.S. Government
Bonds supported by the full faith and credit of the United States, its agencies
and instrumentalities, corporate securities, i.e., bonds, notes, preferred and
convertible issues, and sovereign government, municipal, mortgage-related and
other asset-backed securities.
TCI INTERNATIONAL FUND (TCI INTERNATIONAL SUB-ACCOUNT)
The investment objective of the TCI International Sub-Account is capital growth.
The TCI International Sub-Account invests in the TCI International Fund. To
pursue its investment objective, the TCI International Fund invests primarily in
securities of foreign companies that meet certain standards that have potential
for appreciation. The TCI International Fund will invest primarily in common
stocks of such companies, including depositary receipts for common stocks and
other equity equivalents. The TCI International Fund tries to stay fully
invested in such securities, regardless of the movement of stock prices
generally. Under normal conditions, the TCI International Fund will invest at
least 65% of its assets in common stocks or other equity equivalents from at
least three countries outside the United States. When management believes that
the total capital growth potential or other securities equals or exceeds the
potential return of common stocks, it may invest up to 35% of its assets in such
other securities.
In order to achieve maximum investment flexibility, the TCI International Fund
has not established geographic limits on asset distribution on either a
country-by-country or region-by-region basis. Management expects to invest both
in issuers whose principal place of business is located in countries with
developed economies and in countries with less developed economies. The
principal criterion for inclusion of a security in the fund's portfolio is its
ability to meet the fundamental and technical standards of selection and, in the
opinion of the fund's investment manager, to achieve better-than-average
appreciation.
The other securities in which the TCI International Fund may invest are
convertible securities, preferred stocks, bonds, notes and debt securities of
companies, obligations of domestic and foreign governments and their agencies.
WANGER U.S. SMALL CAP FUND (WANGER U.S. SMALL CAP SUB-ACCOUNT)
The investment objective of the Wanger U.S. Small Cap Sub-Account is to seek
long-term capital growth. The Wanger U.S. Small Cap Sub-Account invests in the
Wanger U.S. Small Cap Fund. To pursue its investment objective, the Wanger U.S.
Small Cap Fund invests mostly in stocks of small and medium-size companies,
concentrating on companies with a total market capitalization of less than $1
billion. The Wanger U.S. Small Cap Fund invests mostly in U.S. companies, but
also may invest up to one-third of its total assets in foreign securities.
------------------------
The values of the investments held in the Available Funds fluctuate daily and
are subject to the risk of changing economic conditions as well as the risks
inherent in the ability of management to anticipate changes in such investments
necessary to meet changes in economic conditions. Additional information
concerning the Available Funds, including information as to the expenses paid by
the Available Funds, is given in the Available Funds' prospectuses which
accompany and should be read in conjunction with this Prospectus.
SUBSTITUTION OF OTHER SECURITIES OR AVAILABLE FUNDS
If the shares of any Available Funds should no longer be available for
investment by the Separate Account or, if in the judgment of SAFECO further
investment in such Funds' shares should become inappropriate, SAFECO may
substitute shares of some other investment company for Fund shares already
purchased or to
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<PAGE> 16
be purchased in the future under the Contract. Any substitution will be made
pursuant to any prior approval of the Commission and compliance with all
applicable rules and regulations. In the event of any substitution or change,
SAFECO will endorse the Contract if necessary to reflect the substitution or
change.
DEDUCTIONS UNDER THE CONTRACTS
CONTINGENT DEFERRED SALES CHARGE
SAFECO makes no deduction from Purchase Payments for sales expenses, but does
impose a Contingent Deferred Sales Charge. SAFECO incurs sales expenses upon the
issuance of the Contracts. Such expenses include commissions, costs of
advertising and sales promotion, costs associated with this Prospectus allocable
to new sales, and sales administration and related costs. Because the Contracts
are normally purchased for the long term, SAFECO expects to recover these costs
over time. If, however, a Contract is totally or partially surrendered, a
Contingent Deferred Sales Charge is imposed at that time as a means for SAFECO
to recover sales expenses.
The Contingent Deferred Sales Charge is assessed on withdrawals during the first
six Contract Years. The charge is 7% of the amount withdrawn during the first
Contract Year. The percentage scales downward by one percent each Contract Year
so that during the second Contract Year the charge is 6% and during the sixth
Contract Year is 2%. Beginning in the seventh Contract Year there will be no
charge.
Each Contract Year, an Owner generally may withdraw up to 10% of the Contract
Value without payment of the Contingent Deferred Sales Charge. Thus, if there is
more than one withdrawal per Contract Year, the free withdrawal amount will be
recalculated at the time of each withdrawal. Further, a maximum charge of $25 is
assessed for each withdrawal after the first taken in any Contract Year. SAFECO
has represented in documents filed with the SEC that this charge for withdrawals
in excess of one withdrawal per Contract Year is consistent with the expenses
assumed by SAFECO based on its review of its requirements and likely costs over
the duration of the Contracts.
No Contingent Deferred Sales Charge will be deducted from the Contract Value due
to: Transfers between Sub-Accounts (see "Transfers Between Sub-Accounts" and
"Other Services"); withdrawals made pursuant to a Settlement Option (see
"Settlement Options"); annual required minimum distributions; the death of the
Owner; or withdrawals for payment of the Annual Administration Maintenance
Charge.
PREMIUM TAX
Deduction for premium taxes will be made only in those instances and at such
time as the laws and regulations of the various states (or other jurisdictions)
assess such a tax and where SAFECO determines that such premium taxes have
resulted from the establishment or maintenance of the Contract or any portion of
the Contract, the receipt by SAFECO of Purchase Payments, or the commencement of
annuity payments. Premium tax assessments are based on the address of record of
the Payor at the time a premium tax may be payable. It is SAFECO's current
practice not to assess the applicable deduction for premium taxes to Qualified
Contracts, although SAFECO reserves the right to assess such deduction to
Qualified Contracts in the future. SAFECO currently assesses the applicable
deduction for premium taxes to Non-Qualified Contracts. Premium taxes presently
range from 0% to 3.5% of Purchase Payments or the amount applied to a Settlement
Option, as the case may be.
CONTRACT ADMINISTRATION CHARGES
SAFECO performs or delegates all administrative functions relative to the
Contracts. Except as noted below, deductions are made under each Contract for
the expenses associated with such functions. Such expenses may include salaries,
rent, office equipment, communications, postage, legal, actuarial, and auditing
fees. SAFECO may receive compensation from the investment advisers or
administrators of the Available Funds consistent with the administrative
services rendered to such entities.
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<PAGE> 17
ANNUAL ADMINISTRATION MAINTENANCE CHARGE
If the Contract Value is below $100,000 an Annual Administration Maintenance
Charge of $30 will be deducted from the Contract Value. There is no charge if
the Contract Value is $100,000 or above. SAFECO may change the amount of the
Annual Administration Maintenance Charge but in no event will the Annual
Administration Maintenance Charge exceed the lesser of $40 per Contract Year or
the anticipated costs.
The entire Annual Administration Maintenance Charge is deducted from the
Contract Value in one Sub-Account or the Fixed Account, which is determined
according to the following order: the SAFECO Resource Money Market Sub-Account;
SAFECO Resource Bond Sub-Account; the TCI Balanced Sub-Account; the TCI
International Sub-Account; the Wanger U.S. Small Cap Sub-Account; the Federated
Utility Sub-Account; the Federated Corporate Bond Sub-Account; the Lexington
Natural Resources Sub-Account; the Lexington Emerging Markets Sub-Account; the
SAFECO Resource Equity Sub-Account; the SAFECO Resource Northwest Sub-Account;
the SAFECO Resource Growth Sub-Account; and the Fixed Account.
For example, if there is Contract Value only in the SAFECO Resource Money Market
Sub-Account, TCI Balanced Sub-Account and the Wanger U.S. Small Cap Sub-Account,
then the Annual Administration Maintenance Charge of $30 is deducted from the
SAFECO Resource Money Market Sub-Account, while if there is Contract Value only
in the TCI Balanced Sub-Account, TCI International Sub-Account and the Wanger
U.S. Small Cap Sub-Account, then the Annual Administration Maintenance Charge of
$30 is deducted from the TCI Balanced Sub-Account. The Annual Administration
Maintenance Charge is deducted by redeeming the number of Accumulation Units in
the applicable Sub-Account equal in value to the Annual Administration
Maintenance Charge or by deducting the amount of the Annual Administration
Maintenance Charge from the Fixed Account. (See "Fixed Account".) The deduction
is made on the last day of each Contract Year and upon a complete withdrawal of
all Contract Value from all Sub-Accounts and the Fixed Account.
ASSET RELATED ADMINISTRATION CHARGE
To further defray administrative costs, SAFECO deducts a charge of .000411% of
the average daily net asset value of the Sub-Account(s) of the Separate Account
per day, which is approximately equal to an annual rate of .15% for a 365 day
year. SAFECO guarantees that the Asset Related Administration Charge will never
be increased.
DEDUCTION FOR ASSUMING MORTALITY AND EXPENSE RISKS
SAFECO assumes a mortality risk by its contractual obligation to pay a death
benefit to the Beneficiary if the Owner dies prior to the Annuity Date.
Moreover, the minimum guaranteed death benefit, which reflects increases in
Contract Value, imparts a significant mortality risk on SAFECO. SAFECO also
assumes the risk that annuity payments will continue for a longer period than
anticipated. SAFECO assumes the expense risk that the deductions for sales and
administration charges may prove to be insufficient to cover the actual expenses
incurred. Further, SAFECO assumes an expense risk from the fact that the
Contract does not impose any surrender or similar charge on the death benefit or
upon election of a Settlement Option. SAFECO assumes these risks for the
duration of the Contract. As compensation for assuming these risks, SAFECO
imposes a charge based on assets, during the Accumulation Period and the Annuity
Period.
The charge is .002466% per day of the average daily net asset value of the
Sub-Accounts for assuming mortality risks, including the minimum guaranteed
death benefit, and .000959% for assuming expense risks. These charges, when
combined, are approximately equal to 1.25% on an annual basis for a 365 day
year. The charge, together with the Administrative charge, is applied at the end
of each Valuation Period through a factor used in the determination of the net
investment results of the Sub-Accounts. (See "Net Investment Factor".)
Revenue received from the mortality and expense risk and administrative charges
is added to the General Account of SAFECO and is not specifically earmarked for
any other purpose. SAFECO utilizes the assets in its General Account to meet
administration, mortality and general expenses, as well as any shortfall in the
recovery of distribution costs related to the Contracts. Charges under other
contracts SAFECO issues also
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<PAGE> 18
provide a source of revenue to meet these expenses. Based upon SAFECO's
actuarial projections, it is possible that the Contingent Deferred Sales Charge
described above may, at least initially, be insufficient to recover all of the
distribution costs and related expenses incurred in connection with the
Contracts. In such event, some portion of the mortality and expense risk charges
(to the extent such charges comprise surplus in the General Account) may be
utilized by SAFECO to meet such excess sales expenses.
AVAILABLE FUND EXPENSES
There are deductions from and expenses paid out of the assets of the Available
Funds that are described in the prospectuses for those Funds. These deductions
and expenses and the investment performance of the Available Funds affect the
value of Accumulation Units. (See "The Accumulation Period".)
TRANSFERS BETWEEN SUB-ACCOUNTS
At any time, the Owner may elect by written notice to the Home Office or by
properly executed telephone instructions to transfer amounts between the
Sub-Accounts. The number of Accumulation Units equal to the amount to be
transferred from a Sub-Account will be deducted from that Sub-Account and the
number of Accumulation Units equal to the amount transferred will be credited to
the other Sub-Account(s). Each such transfer must involve a minimum of $500,
except for transfers made pursuant to certain Programs. (See "Other Services".)
If the remaining balance of any Sub-Account after a transfer would be less than
$500, the remaining balance also will be transferred. The minimum amount that
may be transferred into a Sub-Account is $50.
An Owner may make up to twelve transfers each Contract Year at no charge. A
charge of $10 per transfer may be charged for transfers in excess of these
limitations. Transfers effected pursuant to certain Programs will not be counted
towards these limitations. (See "Other Services"). However, unscheduled
transfers are limited by the terms of certain Programs. Further, there are
certain limitations upon an Owner's ability to transfer from and to the Fixed
Account. (See "Fixed Account".) Transfer requests may be deferred or suspended,
as permitted under the 1940 Act.
REDEMPTIONS
Subject to certain requirements in the Contracts, an Owner may, at or prior to
the Annuity Date, redeem all or part of the Contract Value, except that, if the
value of the Sub-Account being partially redeemed would be less than $500 after
such redemption, the remaining balance will also be redeemed. The minimum amount
that may be redeemed is $500, or the Contract Value, if less. The redemption
will be effected by canceling the number of Accumulation Units equal in value to
the amount of the redemption request. Accumulation Units will be canceled at the
Accumulation Unit value as of the end of the Valuation Period in which the
request for redemption is received at the Home Office.
Any applicable Contingent Deferred Sales Charge will be deducted from the
redemption value determined as described above and below. (See "Deductions Under
the Contracts".) The annuitant has no redemption right under the Contracts
subsequent to the commencement of annuity payments.
Payment of a redemption request will be made within seven (7) days of receipt of
such request in proper and complete form, except that payment of a redemption
request, like a transfer request, may be deferred as permitted under provisions
of the 1940 Act, for any period when: (i) the New York Stock Exchange
("Exchange") is closed (other than customary weekend and holiday closings); (ii)
trading on the Exchange is restricted as determined by the Commission or the
Exchange is closed for other than weekends and holidays; (iii) an emergency
exists as determined by the Commission as a result of which disposal by an
Available Fund of securities held by it is not reasonably practicable, or it is
not reasonably practicable for an Available Fund fairly to determine the value
of its net assets; or (iv) the Commission by order so permits for the protection
of security holders.
The tax consequences, including the tax withholding requirements, of a
redemption should be carefully considered. (See "Federal Tax Status".)
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<PAGE> 19
OTHER SERVICES
THE PROGRAMS
SAFECO offers several investment related programs which are available only
during the Accumulation Period: Dollar Cost Averaging; Automatic Transfers;
Appreciation or Interest Sweeps; Sub-Account Rebalancing; Systematic Investment;
and Periodic Withdrawal Programs. Certain of the Programs are alternatives with
respect to any one Sub-Account; other Programs may be combined. Thus, the Dollar
Cost Averaging Program, the Automatic Transfer Program and the Appreciation or
Interest Sweep Program are alternatives with respect to the selected
Sub-Account, and in all cases with respect to the Fixed Account. However, the
Sub-Account Rebalancing Program may be combined with each of the other Programs,
but it is not available with respect to the Fixed Account. Under each Program,
the related transfers between and among Sub-Accounts and the Fixed Account are
not counted as one of the twelve free transfers. However, if an Owner executes
an unrelated voluntary transfer from the Sub-Account participating in a Program,
other than the Sub-Account Rebalancing Program, the Program will be terminated
for the remainder of the Contract Year. In addition, if a Program is terminated
before six Program transfers have occurred, the six Program transfers are
counted as part of the twelve free transfers. If the balance in a Sub-Account
would be less than $500 as a result of a transfer pursuant to one of these
Programs, other than the Appreciation or Interest Sweep and Sub-Account
Rebalancing Programs, then the entire balance in that Sub-Account will also be
transferred. Each of the Programs has its own requirements, as discussed below.
If the Owner has submitted the required telephone authorization form, certain
changes may be made by telephone. For those programs involving transfers, Owners
may change instructions by telephone with regard to which Sub-Accounts or the
Fixed Account Contract Value may be transferred. SAFECO will not be responsible
for the authenticity of telephone instructions nor for any loss, damage, cost or
expense arising out of any telephone instructions that SAFECO reasonably
believes to be authentic based on its verification procedures. Such procedures
may include requiring certain personal identification information prior to
acting on telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
SAFECO does not employ reasonable verification procedures to confirm that
instructions communicated by telephone are genuine, it may be liable for any
losses arising out of any action on its part or any failure or omission to act
as a result of its own negligence, lack of good faith, or willful misconduct.
DOLLAR COST AVERAGING PROGRAM
SAFECO offers a Dollar Cost Averaging Program during the Accumulation Period
whereby an Owner may predesignate a portion of any Sub-Account's Contract Value
or the Fixed Account's Contract Value to be automatically transferred on a
monthly or quarterly basis to one or more of the other Sub-Accounts or to the
Fixed Account. The amount to be transferred may be expressed as a set dollar
amount or as a percentage of the Contract Value in the selected Sub-Account or
the Fixed Account. Transfers from the Fixed Account are subject to a maximum of
1.33% monthly or 4% quarterly of the Contract Value in the Fixed Account at the
time of the initial transfer. Upon election of the Dollar Cost Averaging Program
the limitations on transfers from the Fixed Account will be calculated. The
resultant limitations will apply for the entire duration of participation in
this Program. Each Dollar Cost Averaging transfer is subject to a minimum
transfer of fifty dollars ($50).
The Dollar Cost Averaging Program is available for Purchase Payments and for
Contract Value transferred into any Sub-Account. An Owner may enroll in this
Program at the time the Contract is issued or anytime thereafter by properly
completing the Dollar Cost Averaging enrollment form and returning it to SAFECO
at its Home Office at least ten (10) business days prior to the first business
day of the month, which is the date that all Program transfers will be made
("Transfer Date"). This Program must be elected for at least a six (6) month
period.
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<PAGE> 20
If the Contract Value in the participating Sub-Account or the Fixed Account does
not equal or exceed the amount designated to be transferred on each Transfer
Date, Dollar Cost Averaging will cease automatically and the remaining amount
will be transferred.
Dollar Cost Averaging will terminate when (i) the designated monthly or
quarterly amounts of transfers have been completed, (ii) the Owner requests
termination in writing and such writing is received at the Home Office at least
ten (10) business days prior to the next Transfer Date in order to cancel the
transfer scheduled to take effect on such date, (iii) the Owner effects any
other transfer from the participating Sub-Account or the Fixed Account while the
Dollar Cost Averaging Program is in effect, or (iv) the Contract is surrendered.
In addition, if any transfer or withdrawal has been made from the Fixed Account
during the Contract Year, the Dollar Cost Averaging Program may not be
established through the Fixed Account for that Contract Year.
An Owner may initiate, reinstate or change the Dollar Cost Averaging terms by
properly completing a new enrollment form and returning it to the Home Office at
least ten (10) business days prior to the next Transfer Date such transfer is to
be made.
When utilizing Dollar Cost Averaging an Owner may be invested in either a
Sub-Account or the Fixed Account and may be invested in any other Sub-Accounts
or the Fixed Account at any given time.
AUTOMATIC TRANSFER PROGRAM
The Automatic Transfer Program is identical to the Dollar Cost Averaging Program
in all respects other than with regard to the limitations on transfers from the
Fixed Account. The limitations on transfers from the Fixed Account are
recalculated annually. Transfers from the Fixed Account are limited to 1.5%
monthly and 4.5% quarterly.
APPRECIATION OR INTEREST SWEEP PROGRAM
An Owner may enroll in the Appreciation or Interest Sweep Program through either
or both the SAFECO Resource Money Market Sub-Account or the Fixed Account.
Enrollment is limited to Owners whose total Contract Value is greater than
$10,000. Under the Program, if appreciation on Contract Value in the SAFECO
Resource Money Market Sub-Account or credited interest earned on Contract Value
in the Fixed Account ("Earnings") is greater than 10%, the Earnings up to 10% of
the Contract Value in the Fixed Account or the SAFECO Resource Money Market
Sub-Account, respectively, will be transferred to any of the Sub-Accounts, other
than the SAFECO Resource Money Market Sub-Account. Earnings in the SAFECO
Resource Money Market Sub-Account may not be transferred to the Fixed Account.
In no event may the total Contract Value transferred from the Fixed Account in
each Contract Year exceed a total of 10% of the Contract Value for each such
Contract Year in the Fixed Account computed at the time of the transfer.
Moreover, the Program may not be instituted for the Fixed Account in any
Contract Year during which transfers or withdrawals have been made from the
Fixed Account. Transfers under this Program will be processed monthly or
quarterly on the Transfer Date.
SUB-ACCOUNT REBALANCING PROGRAM
In accordance with the Owner's election of the relative purchase payments
percentage allocations, SAFECO will automatically rebalance the Contract Value
of each Sub-Account either quarterly, semi-annually, or annually. SAFECO will
automatically rebalance the Contract Value in each of the Sub-Accounts to match
the current purchase payments percentage allocations as of the first Transfer
Date during the period selected. Enrollment is limited to Owners whose total
Contract Value is greater than $10,000 at the time the Program is selected. The
Program may be terminated at any time and the percentages may be altered by
written authorization. The requested change must be received at the Home Office
ten (10) days prior to the Transfer Date. If the Owner terminates the Program, a
new Program may not be instituted until the next Contract Year.
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SYSTEMATIC INVESTMENT PROGRAM
Purchase Payments may be made by monthly draft against the bank account of any
Owner that has completed and returned to SAFECO a Systematic Investment Program
application and authorization form. The application and authorization form may
be obtained from SAFECO or from the sales representative. Each Systematic
Investment Program Purchase Payment is subject to a minimum of one hundred
dollars ($100).
PERIODIC WITHDRAWAL PROGRAM
SAFECO will make monthly, quarterly or annual distributions of a predetermined
dollar amount to an Owner that has enrolled in the Periodic Withdrawal Program.
Under the Program, all distributions will be made directly to the Owner and will
be treated for federal tax purposes as any other withdrawal or distribution of
Contract Value. (See "Federal Tax Status".) An Owner may specify the amount of
each withdrawal, subject to a minimum of $250. In each Contract Year, up to 10%
of Contract Value may be withdrawn without the imposition of any Contingent
Deferred Sales Charge. If withdrawals pursuant to the Program are greater than
10% of Contract Value in any Contract Year, the amount of the withdrawals
greater than 10% will be subject to the applicable Contingent Deferred Sales
Charge. Any ad hoc withdrawals an Owner makes during a Contract Year will be
aggregated with withdrawals pursuant to the Program to determine the
applicability of any Contingent Deferred Sales Charge. If the frequency of
withdrawals under the Program is greater than annually, SAFECO will charge an
annual fee of $25 to compensate it for the added administrative costs.
Unless the Owner specifies the Sub-Account or Sub-Accounts or the Fixed Account
from which withdrawals of Contract Value shall be made or if the amount in a
specified Sub-Account is less than the predetermined amount, SAFECO will make
withdrawals under the Program from the Sub-Accounts and the Fixed Account in
amounts proportionate to the amounts in the Sub-Accounts and the Fixed Account.
Withdrawals are subject to the applicable minimum Sub-Account balances. All
withdrawals under the Program will be effected by canceling the number of
Accumulation Units equal in value to the amount to be distributed to the Owner
and any applicable Contingent Deferred Sales Charge.
The Program may be combined with all other Programs except those entailing
transfers or withdrawals from the Fixed Account. However, the Owner may
terminate such other program and may begin participation in the Program on the
first day of the next Contract Year.
It may not be advisable to participate in the Program and incur a Contingent
Deferred Sales Charge when making additional Purchase Payments under the
Contract.
FIXED ACCOUNT
Owners may allocate Purchase Payments to the Fixed Account. In addition, Owners
may transfer amounts in or out of the Fixed Account. Such fixed amounts are held
in the General Account of SAFECO. Because of exemptive and exclusionary
provisions, amounts in the Fixed Account have not been registered under the
Securities Act of 1933 and the Fixed Account has not been registered as an
investment company under the 1940 Act. Accordingly, neither the Fixed Account
nor any interests therein are subject to the provisions of these acts and, as a
result, the staff of the Commission has not reviewed the disclosures in this
Prospectus relating to the Fixed Account. Disclosures regarding the Fixed
Account may, however, be subject to certain generally applicable provisions of
the Federal securities laws relating to the accuracy and completeness of
statements made in prospectuses. This Prospectus is generally intended to serve
as a disclosure document only for the aspects of the Contract involving the
Separate Account and contains only selected information regarding the Fixed
Account. More information regarding the Fixed Account may be obtained from the
Home Office or from the sales representative.
GENERAL DESCRIPTION
SAFECO's obligations with respect to the Fixed Account are supported by SAFECO's
General Account. Subject to applicable law, SAFECO has sole discretion over the
investment of the assets in the General Account.
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SAFECO guarantees that Fixed Account Contract Value will accrue interest at an
annual effective rate of at least 3%, independent of the actual investment
experience of the General Account. SAFECO may, in its sole discretion, credit
higher rates of interest, although SAFECO is not obligated to credit interest in
excess of the guaranteed rate. SAFECO will credit interest to the amount
allocated to the Fixed Account at a rate determined according to SAFECO's
investment year method of assigning interest credits. Interest credits will be
based on the original period of receipt of amounts allocated to the Fixed
Account. Each amount allocated to the Fixed Account will be credited with the
Guaranteed Interest Rate determined for that period during which the allocation
to the Fixed Account is received by SAFECO.
SAFECO will credit the Guaranteed Interest Rate for a period of no less of than
twelve months (the "Interest Guarantee Period"). The Initial Interest Guarantee
Period begins with the date Purchase Payments are first allocated to the Fixed
Account. For the next subsequent Interest Guarantee Period, the Guaranteed
Interest Rate will be determined as soon as practicable prior to the end of the
current Interest Guarantee Period. Currently, SAFECO establishes subsequent
Guaranteed Interest Rates twice annually (April 1 and October 1). Under the
Contracts, SAFECO has reserved the right to establish subsequent Guaranteed
Interest Rates more frequently than twice annually, but in all cases the rates
will be guaranteed for no less than twelve months. Any higher rate of interest
will be quoted at an annual effective rate.
The Settlement Options that are available on a variable basis also are available
on a fixed basis through the Fixed Account. (See "Settlement Options".) If, as
of the Annuity Date, a Settlement Option has not been selected, SAFECO will make
annuity payments under Option 3.
FIXED ACCOUNT CONTRACT VALUE
The Fixed Account Contract Value on any Valuation Date is the sum of the
Purchase Payments allocated to the Fixed Account, plus any transfers from a
Sub-Account, plus interest credited to the Fixed Account, less any previous
withdrawals, related withdrawal charges, or Annual Administration Maintenance
Charge allocated to the Fixed Account, or transfers to a Sub-Account or transfer
charges allocated to the Fixed Account.
ANNUAL ADMINISTRATION MAINTENANCE CHARGE
The entire Annual Administration Maintenance Charge may be deducted from the
Contract Value in the Fixed Account, according to the order described above
under "Deductions under the Contract." The Annual Administration Maintenance
Charge is deducted from the Fixed Account by deducting the amount of the Annual
Administration Maintenance Charge from the Contract Value in the Fixed Account.
The deduction is made on the last day of each Contract Year and upon a complete
withdrawal of all Contract Value. (See "Contract Administration Charges".)
Furthermore, if the Annual Administration Maintenance Charge is to be deducted
from the Fixed Account, the Annual Administration Maintenance Charge will be
reduced if (i) it is greater than the Purchase Payments received for the current
Contract Year and (ii) the excess charge over those Purchase Payments would
reduce the net interest on the Fixed Account to below the Guaranteed Interest
Rate on the Fixed Account. In that case, the Annual Administration Maintenance
Charge will be limited to the amount of Purchase Payments received during the
Contract Year plus the amount of interest credited in excess of the guaranteed
interest rate on the Fixed Account.
FIXED ACCOUNT TRANSFERS AND PARTIAL WITHDRAWALS
Amounts in the Fixed Account are generally subject to the same rights and
limitations and will be subject to the same charges as are amounts allocated to
the Sub-Accounts with respect to total and partial withdrawals. (See "Transfers
Between Sub-Accounts" and "Redemptions".) Transfers out of the Fixed Account are
limited to a minimum of at least $500 (or, if less, the entire amount in the
Fixed Account) and a maximum of 10% of the Contract Value in the Fixed Account
in each Contract Year. Transfers into the Fixed Account must be at least $50. In
the alternative, an Owner may elect, once per Contract Year, to have
pre-established automatic monthly or quarterly transfers made from the Fixed
Account. (See "Other Services".)
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CONTRACT BENEFITS
GENERAL
The objective of the Contracts is to provide Contract Value and Settlement
Options which will tend to reflect changes in the cost of living subsequent to
the date of issue of the Contract. There is no assurance that this objective
will be met. SAFECO seeks to accomplish this objective by allocating Net
Purchase Payments, as directed by the Owner, to one or more of the Sub-Accounts.
Each Contract is issued to the Owner. If consistent with applicable tax laws, a
Contract may be owned jointly by spouses ("joint Owners"). Unless the Owner
names an Annuitant in the application for, or amendment to, the Contract, the
Owner will be considered the Annuitant. The Annuitant will become the Owner on
commencement of a Settlement Option. Unless joint Owners name an Annuitant in
the application for, or amendment to, the Contract, the older of the two joint
Owners will be considered the Annuitant, for purposes of determining the
limitations on selection of an Annuity Date. In addition, under Settlement
Option 3, joint Owners may become "joint Annuitants." (See "Settlement
Options".)
Subject to the minimum initial and subsequent Purchase Payment limitations, an
Owner may continue to make Purchase Payments prior to the commencement of
annuity payments. The Contracts provide for a variable monthly life annuity to
begin at some future selected date, called the Annuity Date, with a provision
that unless another Settlement Option is selected Variable Annuity payments will
be made pursuant to Settlement Option 3, unless the Beneficiary is a non-natural
person, in which case Variable Annuity payments will be made under Settlement
Option 1. The Owner may elect one of the other Settlement Options provided by
the Contracts. (See "Settlement Options").
Each Contract contains a minimum guaranteed death benefit if the Owner dies
prior to the Annuity Date, generally equal to the greater of (i) the Contract
Value at the time of death or (ii) the last determined minimum guaranteed death
benefit. Different death benefits may apply under special circumstances. For
example, a different death benefit applies if the Beneficiary does not provide
due proof of death and elect a Settlement Option or lump sum payment within six
months of the Owner's death. The death benefits, surrender value, and Settlement
Options under the Contract will not be less than the minimum benefits required
by any statute of the state in which the Contract is delivered. (See "Payment on
or after Death of Owner".)
The Owner may select a different form of Variable Annuity (see "Settlement
Options") or change the Annuity Date (see "Payment Provisions"), by written
notice to SAFECO received prior to any previously selected Annuity Date, except
that any Annuity Date selected cannot be later than the date the Annuitant
attains age 90. Once a Settlement Option has begun it is irrevocable. The Owner
may elect that all or a portion of the Contract Value be applied to effect a
fixed annuity. (See "Settlement Options".) An Owner also may, subject to certain
restrictions, elect to redeem all or a portion of the Contract Value, less
applicable charges. (See "Redemptions".) However, certain tax consequences may
result from any such election. (See "Federal Tax Status".)
CERTAIN MINIMUM AMOUNTS
The minimum initial Purchase Payment under the Contract is $2,000 for a
Qualified Contract and $5,000 for a Non-Qualified Contract. The minimum
additional Purchase Payment is $250 under both a Qualified Contract and a
Non-Qualified Contract. If a Systematic Investing Program is utilized the
minimum additional Purchase Payment is $100.
If the amount available to be applied under a Settlement Option is $5,000, or
less, SAFECO reserves the right to pay such amount in a lump sum cash
distribution. If annuity payments would be or become less than $250, SAFECO has
the right to change the frequency of payments to such intervals as will result
in payment of at least $250. (See "The Annuity Period".)
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<PAGE> 24
Contracts may be redeemed in full or in part at any time prior to the Annuity
Date, except that a partial redemption of less than $500 from any Sub-Account is
not permitted, and the value of any Sub-Account after such partial redemption
must be at least $500 or the entire value of the Sub-Account will be redeemed.
(See "Redemptions".) The minimum amount that may be transferred from a
Sub-Account is $500 and the minimum amount that may be transferred to a
Sub-Account is $50. (See "Transfers".)
THE ACCUMULATION PERIOD
THE CONTRACT VALUE AND ACCUMULATION UNITS
During the period prior to the commencement of annuity payments, referred to
herein as the Accumulation Period, a separate accumulation account is maintained
under the Contracts for each Sub-Account into which Purchase Payments are
directed. Each Net Purchase Payment is credited to each Sub-Account, or
allocated among the Sub-Accounts, as directed by the Owner, in the form of
Accumulation Units. Accumulation Units are credited separately to each
Sub-Account. The number of Accumulation Units of each type credited to the
Contract is determined by dividing each Net Purchase Payment by the value of an
Accumulation Unit for that Sub-Account. The initial Purchase Payment will be
credited to the Contract not later than two (2) business days following the date
the properly completed application which accompanies the Purchase Payment is
received at the Home Office. If an application is incomplete or incorrect, the
applicant will be informed of the reasons for the delay, and the Purchase
Payment will be returned to the applicant within five (5) business days of
receipt unless the applicant specifically authorizes SAFECO to retain the
Purchase Payment until the application is completed or corrected. Purchase
Payments allocated to the Sub-Accounts must be received by 1:00 p.m., Pacific
Time, to receive that day's Accumulation Unit value.
The value of any Sub-Account at any time is equal to the total number of
Accumulation Units credited to that Sub-Account multiplied by the then
applicable current value of an Accumulation Unit for that Sub-Account.
ACCUMULATION UNIT VALUES
The value of an Accumulation Unit, for each Sub-Account, will vary depending
upon the investment experience of, and the charges and expenses deducted from,
that Sub-Account. The Accumulation Unit value for any Valuation Period is
determined by multiplying the Accumulation Unit value for the Sub-Account, as of
the immediately preceding Valuation Period, by the Net Investment Factor for the
current Valuation Period. The Accumulation Unit value for a Valuation Period is
the value determined at the end of such period.
VALUATION DATE AND VALUATION PERIOD
Each date on which the assets of the Sub-Accounts are valued is a Valuation
Date. The assets of the Sub-Accounts are valued as of 4:00 p.m., Eastern
Standard Time, on each Valuation Date. The period from the time the Accumulation
Unit value is determined as of one Valuation Date to the time such value is
determined as of the next Valuation Date is called a Valuation Period.
NET INVESTMENT FACTOR
The net investment factor is a formula for measuring the change in Accumulation
Unit value over a Valuation Period. It is determined for any Valuation Period:
by dividing (a) the net asset value per share of the Available Fund as of the
current Valuation Period, plus the per share amount of any dividend or
capital-gains distributions made by the Available Fund, plus or minus the charge
for taxes, if any, by (b) the net asset value per share of the Available Fund
determined as of the end of the immediately preceding Valuation Period, and then
subtracting from this result, (c) a the daily equivalent of the mortality and
expense risk charge, and (d) a the daily equivalent of the Asset Related
Administration Charge.
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EXAMPLE OF CALCULATION OF ACCUMULATION UNIT VALUE
Suppose (a) the accumulation unit value for the preceding Valuation Period was
$10.00; (b) the net asset value of a Fund share as of the end of the current
Valuation Period is $10.50; (c) the per-share amount of a distribution from the
Available Fund during such Valuation Period was $.15; (d) the per-share amount
of a tax liability was $00.00; (e) the net asset value of a Fund share as of the
end of the previous Valuation Period was $10.40; (f) the per-share amount of a
tax liability was $00.00; (g) the number of days in the current Valuation Period
is one; (h) the daily deduction for assuming mortality and expense risks is
.00003425; and (i) the daily deduction for the Asset Related Administrative
Charge is .00000411. The net investment factor for the current Valuation Period
is calculated as follows:
$ (b) + (c) - (d) - (1 x (h)) - (1 x (i)) = Net Investment Factor
- --------------------------
$ (e) - (f)
then,
$10.50 + $.15 - $0.00 - (1 x .00003425) - (1 x .00000411) = 1.02400
- ------------------------------
$10.40 - $0.00
The accumulation unit value for the preceding Valuation Period ($10.00) is then
multiplied by the net investment factor for the current Valuation Period
(1.02400), which produces an accumulation unit value of $10.2020 for the current
Valuation Period.
THE ANNUITY PERIOD
ANNUITY DATE
The Annuity Period begins after the Annuity Date chosen by the Owner, which must
be a date prior to the time the Annuitant reaches Age 90. Annuity payments under
one of the Settlement Options begin after the Annuity Date. An Owner may choose
to have either the variable portion of the Contract or the fixed portion of the
Contract or both annuitized on the Annuity Date. If an Owner chooses to have
Annuity payments begin only for the variable portion or the fixed portion of the
Contract, subsequent Net Purchase Payments will continue to be credited only to
the portion of the Contract not yet annuitized. In addition if an Owner chooses
to have only the variable portion or fixed portion of the Contract annuitized,
the Owner must chose a second Annuity Date for the other portion of the Contract
which is prior to the Annuitant's 90th birthday.
PAYMENT PROVISIONS
The Variable Annuity payments under the Contracts will vary in amount, either up
or down, to reflect the investment performance of the Available Funds, as
elected by the Owner. Each of the Sub-Accounts and corresponding Available Funds
is available during the Annuity Period. The Owner should carefully consider the
volatility and general risk characteristics of each Sub-Account. The
Sub-Accounts that experience greater volatility and risks may be unsuitable for
the Owner during the Annuity Period, as they could entail a complete loss of
Variable Annuity payments.
Variable Annuity payments will commence on the Annuity Date selected by the
Owner. The Annuity Date may be changed provided written election to change is
received at the Home Office prior to any previous Annuity Date, the commencement
of any Settlement Option, and the Annuitant's 90th birthday. (See "Federal Tax
Status" for limitations of the Annuity Date under certain Qualified Contracts.)
SAFECO will determine the day of the month that Variable Annuity payments will
be made.
At the time of election, the Owner should consider the question of allocation of
Contract Value between the available Sub-Accounts or the Fixed Account for the
purchase of a fixed-dollar annuity. Allocation between the Fixed Account and the
Sub-Accounts may be altered by the Owner immediately prior to the Annuity Date.
If the Owner does not elect otherwise, Sub-Account Accumulation Units, after
reduction for any
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<PAGE> 26
applicable premium tax, will be applied to provide annuity payments that reflect
the investment experience of such applicable Sub-Accounts.
The election of a Settlement Option must be made by the Beneficiary during the
sixty (60) day period commencing with the date SAFECO receives notification of
the Owner's death. If no election is made within the sixty (60) day period, then
a single sum payment will be made to the Beneficiary. Any one of the Settlement
Options described below may be elected by filing a written notice prior to the
Annuity Date. (See "Settlement Options" for limitations under Qualified
Contracts.) Once commenced the Settlement Options are irrevocable. If the
Annuitant dies before the Annuity Date, the Owner must designate a new Annuitant
within thirty (30) days of notice to SAFECO of the Annuitant's death or the
Owner becomes the new Annuitant.
Upon annuitization, the Contract Value may be allocated among the available
Sub-Accounts for the purchase of variable Settlement Options or fixed Settlement
Options. Transfers immediately prior to annuitization will not be subject to a
transfer charge. Moreover, assuming the Annuitant has not attained age 90, the
Owner may elect to commence annuitization of either the Sub-Account Contract
Value or the Fixed Account Contract Value and continue the Accumulation Period
for the portion of the Contract not annuitized. If the amount to be applied
under a Settlement Option is less than $5,000, SAFECO reserves the right to pay
such amount in one sum instead. Also, if the annuity payments would be or become
less than $250, SAFECO has the right to change the frequency of payments to such
intervals as will result in payment of at least $250.
During the Annuity Period, SAFECO continues to deduct the mortality and expense
risk charge (1.25%) and the Asset Related Administration Charge (0.15%), which
are assessed during the Accumulation Period. The Annual Administration
Maintenance Charge will not be deducted during the Annuity Period.
SETTLEMENT OPTIONS
OPTION 1 -- Variable Life Annuity -- This is a Variable Annuity which provides
monthly payments during the lifetime of the Annuitant with no monthly payments
or other benefits payable after the date of his or her death. This Option offers
a slightly higher level of monthly payments than Options 2 or 3, because no
further payments are payable after the death of the Annuitant. It would be
possible under this Option for only one annuity payment to be made if the
Annuitant died before the due date of the second annuity payment, two if he or
she died before the third annuity payment, etc.
OPTION 2 -- Variable Life Annuity with 120 or 240 Monthly Payments
Guaranteed -- This is a Variable Annuity which provides monthly payments during
the lifetime of the Annuitant and further provides that if, at the death of the
Annuitant, payments have been made for less than the elected period guaranteed,
which may be 120 or 240 months, the annuity payments will be continued during
the remainder of the guaranteed period to the named Beneficiary. The Beneficiary
may elect to have the present value of the guaranteed Annuity remaining as of
the date the notice of death is received by SAFECO commuted at the assumed
investment rate of 4% and paid in a single lump sum payment.
OPTION 3 -- Variable Joint and Survivor Life Annuity -- This is a Variable
Annuity that provides monthly payments during the joint lifetime of the
Annuitant and their spouse, and thereafter during the lifetime of the survivor
with no monthly payments or other benefits payable after the death of the
survivor. It would be possible under this Option for only one annuity payment to
be made if the Annuitant and their spouse died before the due date of the second
annuity payment, two if they died before the third annuity payment, etc.
If, as of the Annuity Date, a Settlement Option has not been selected, SAFECO
will make payments under Option 3, if the Beneficiary is a natural person. If,
as of the Annuity Date, a Settlement Option has not been selected, SAFECO will
make payments under Option 1, if the Beneficiary is a non-natural person.
In lieu of variable payments, an election may be made to apply a portion, or
all, of the proceeds of the Contract to purchase a fixed dollar Annuity. Fixed
dollar Annuities are not described in this Prospectus. Information concerning a
fixed dollar Annuity can be obtained from SAFECO or any of its sales
representatives.
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Under Qualified Contracts, Option 2 with 240 monthly payments guaranteed, and
any other option that would impair the Qualified tax status of the Contract, may
not be available.
ANNUITY PURCHASE RATES
The Contracts contain a schedule of annuity rates based upon an assumed
investment return of 4% for the Settlement Options. The annuity rates show how
much the first monthly Variable Annuity payment will be for each $1,000 applied
to effect the annuity. Except as noted below, the rates vary with the form of
annuity, the date of birth and sex of the Annuitant, and the date on which the
annuity is effected.
The annuity rates for the Contracts are based on, among other things, an annual
interest rate, referred to as the assumed investment return of 4%. The assumed
investment return affects both the amount of the first annuity payment and the
pattern of subsequent payments. If the actual investment return should exceed
the assumed investment return, the Variable Annuity payments would increase and,
conversely, if the actual investment return should be less than the assumed
investment return the payments would decrease. A higher assumed investment
return would produce a higher initial payment but more slowly rising subsequent
payments (or more rapidly falling subsequent payments) than the selection of a
lower assumed investment return.
ANNUITY UNIT VALUES
The value of an Annuity Unit, for each Sub-Account, will vary depending upon the
investment experience of, and the charges and expenses deducted from, that
Sub-Account. For any Valuation Period the value of an Annuity Unit is determined
by multiplying the value of an Annuity Unit in each Sub-Account, as of the
immediately preceding Valuation Period by the Net Investment Factor for the
Value Period for which the value is being calculated, and dividing the result by
a factor to adjust for the assumed investment return described under "Annuity
Purchase Rates" above. (See "Net Investment Factor".)
NUMBER OF ANNUITY UNITS
The number of Annuity Units to be credited to the Annuitant will be determined
by dividing the first monthly payment due under the selected Settlement Option
by the value of the Annuity Unit calculated as of the 15th day of the preceding
month, or the first subsequent Valuation Date if the 15th of the preceding month
is not a Valuation Date. The resulting number of Annuity Units remains fixed
during the Annuity payment period and is used to compute each Annuity payment.
TIME OF PAYMENT
The first Annuity payment is made on the Annuity Date.
AMOUNT OF PAYMENT
The dollar amount of the first monthly Variable Annuity payment under the
Settlement Options is determined by applying the Contract Value, after deduction
for premium taxes, if applicable, as of the 15th day of the preceding month, to
the Variable Annuity tables contained in the Contract (which are guaranteed for
the duration of the Contract). Thereafter, the dollar amount of each Variable
Annuity payment is determined by multiplying the number of Annuity Units
credited to the Annuitant by the value of the Annuity Unit, computed as
described above, as of the 15th day of the preceding month.
PAYMENT ON OR AFTER DEATH OF OWNER
The Contract provides for a minimum guaranteed death benefit, provided that
SAFECO receives due proof of death in a satisfactory form and election of a
Settlement Option prior to six months from the date of the Owner's death. If the
due proof of death or the election of a Settlement Option is received later than
six months after the date of death of the Owner, SAFECO provides a death benefit
that is subject to change based upon investment experience, as discussed below.
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On the Valuation Date following receipt at the Home Office of the due proof of
death and election of a Settlement Option before the Annuity Date and while the
Contract was in force, SAFECO generally will pay to the designated Beneficiary a
minimum guaranteed death benefit that is the greater of: (i) the Contract Value
on the later of the date of due proof of death or the election of a Settlement
Option; or (ii) the last determined minimum guaranteed death benefit.
The initial minimum guaranteed death benefit is equal to the initial Net
Purchase Payment. The minimum guaranteed death benefit is reset at each sixth
Contract Anniversary ("Six Year Contract Anniversary") to equal the greater of
(i) the then current Contract Value or (ii) the current minimum guaranteed death
benefit. The greater of the two values becomes the new minimum guaranteed death
benefit. The minimum guaranteed death benefit is fixed for the remaining
duration of the Contract as of the last Six Year Contract Anniversary preceding
the Owner's 76th birthday.
If the Contract is owned by joint Owners, the minimum guaranteed death benefit,
or any other applicable death benefit, is payable only on the death of the elder
Owner. Moreover, following the death of the elder Owner, if the joint Owner
elects to continue the Contract, there is no minimum guaranteed death benefit.
The death benefit will be the Contract Value, which reflects Net Purchase
Payments and withdrawals. Contract Value is subject to change as a result of
investment experience.
Each form of minimum guaranteed death benefit is adjusted to reflect Net
Purchase Payments and withdrawals. If an Owner makes withdrawals, the minimum
guaranteed death benefit is reset to equal the previous minimum guaranteed death
benefit multiplied by the ratio of the Contract Value after the withdrawal to
the Contract Value before the withdrawal. The recomputed minimum guaranteed
death benefit will be used in determining the new minimum guaranteed death
benefit at the next Six Year Contract Anniversary. After the Owner's death, the
minimum guaranteed death benefit will be reduced dollar for dollar by any
withdrawals by the Beneficiary. The Beneficiary may only make withdrawals at the
time of or prior to the election of a Settlement Option.
If due proof of death or the election of a payment option (a Settlement Option
or lump sum payment) are made later than six months following the date of the
Owner's death, the value as of the six month anniversary of the date of death
will apply. Thus, for example, if notification of death is not received until
nine (9) months after the date of death, the death benefit under (i) will be
calculated as follows:
Upon notification of death, SAFECO will determine what the Contract Value was on
the six-month anniversary of the date of death. Assuming that Contract Value was
$90,000 on that date and the last determined minimum guaranteed death benefit
was $100,000, SAFECO will contribute $10,000 to Contract Value as of that date
and will guarantee the portion of the Contract Value attributable to SAFECO's
contribution and pay interest thereon at the then prevailing money market rate
until the date of election of a payment option. SAFECO will then calculate the
effects of investment experience on the portion of the Contract Value existing
on the six-month anniversary of the date of death, and hence, the death benefit
will consist of the combined value of the guaranteed and nonguaranteed portions
of the Contract Value from that six-month anniversary date to the date of
election of a payment option. If on the six-month anniversary of the date of
death the Contract Value exceeds the last determined minimum guaranteed death
benefit, the entire Contract Value will be subject to market risk from that date
to the date of election of a payment option and no portion of the Contract Value
will be guaranteed. Any withdrawals made by the Beneficiary prior to electing a
payment option will be deducted from the death benefit. The Beneficiary bears
the risk and enjoys the rewards of negative or positive investment experience on
any nonguaranteed portion of the Contract Value during the period from the
six-month anniversary of the date of death and the date of election of a payment
option. Beneficiaries should be encouraged to promptly notify SAFECO of the
Owner's death.
In all cases, SAFECO will pay the Beneficiary a lump sum payment of the death
benefit if the election of the Settlement Option is not made within sixty (60)
days of the receipt of due proof of death.
In the event of the Annuitant's death prior to the Annuity Date, the Owner must
designate a new Annuitant. If no designation is made within thirty (30) days of
notification to SAFECO of the death of the Annuitant, the Owner will become the
Annuitant. The election of a Settlement Option must be made by the Beneficiary
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during the sixty (60) day period commencing with the date of SAFECO's receipt of
notice of the Owner's death. If no election is made within the sixty (60) day
period, then a single lump sum payment will be made to the Beneficiary. In the
event that the Beneficiary is a surviving spouse, the Contract can be continued.
Upon the death of a co-Owner, the surviving Owner becomes the designated
Beneficiary. Any other named Beneficiary will be a contingent Beneficiary.
With respect to non-qualified Contracts if the Owner dies on or after the
Annuity Date and before the entire value of the Contract has been distributed,
any remaining value must be distributed at least as rapidly as the method of
distribution in effect at the time of the Owner's death. If the Owner dies
before the Annuity Date, generally the entire value under the Contract must be
distributed within five years after the date of the Owner's death or must be
distributed over the designated Beneficiary's life or over a period not
extending beyond the Beneficiary's life expectancy, in equal or substantially
equal payments, with payments beginning within one year of the Owner's death.
THE DISTRIBUTION OF THE CONTRACTS
Contracts will be sold through broker-dealers who have entered into selling
agreements with SAFECO Securities. Such broker-dealers are registered under the
Securities Exchange Act of 1934, as amended, and are members of the National
Association of Securities Dealers, Inc. and have representatives authorized by
applicable law to sell variable annuities. Such broker-dealers will be allowed a
maximum commission of 6% of Purchase Payments on the Contract. Under certain
circumstances, broker-dealers may elect a smaller commission based on Purchase
Payments with continuing payments based on Contract Value.
VOTING PRIVILEGES
SAFECO, as the sponsor of the Separate Account, will vote Fund shares held in
the Separate Account at regular and special meetings of shareholders of the
Available Funds, but will follow voting instructions received from the person
authorized to give such instruction.
The number of Fund shares for which a person is authorized to give instructions
will be determined as of a date to be chosen by SAFECO not more than ninety (90)
days prior to any meeting, and voting instructions will be solicited by written
communication at least ten (10) days prior to such meeting.
Except as specified below, the Owner may instruct the voting of Fund shares
prior to the Annuity Date. Under Contracts issued in connection with plans
qualified under Section 408 of the Code, the Annuitant may instruct the voting
of shares prior to the Annuity Date.
The number of shares attributable to a Contract prior to the Annuity Date is
determined by dividing the value of the Contract Value for such Contract by the
net asset value of one share of the respective Available Funds. The number of
shares attributable to a Contract on and after the Annuity Date is determined by
dividing the reserve (which generally will decrease) held by SAFECO in the
Separate Account for such Contract by the net asset value of one share.
All Available Fund proxy material, together with an appropriate form to be used
to give voting instructions, will be mailed to each person having such voting
instruction privileges. Neither the Available Funds nor SAFECO is under a duty
to inquire as to the instructions received or the authority of Owners or others
to instruct the voting of shares. Shares for which no instructions are received,
including shares owned by SAFECO, will be voted in the same proportion as the
shares for which instructions are received from persons entitled to give such
instructions by reason of all contracts participating in the Separate Account.
FEDERAL TAX STATUS
It should be recognized that the rules governing the tax treatment of annuity
contracts are very complex, and cannot be easily summarized. The following
discussion is not intended to be exhaustive, and it does not cover
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numerous special rules for annuities issued or contributions paid in past years
if such annuities are exchanged for the Contract. A qualified tax advisor should
be consulted for complete information.
FEDERAL TAX STATUS OF THE SEPARATE ACCOUNT
SAFECO is taxed as a life insurance company under the Code. The operations of
the Separate Account are part of the total operations of SAFECO and are not
taxed separately, although the operations of the Separate Account are treated
separately for accounting and financial statement purposes and must be
considered separately in computing SAFECO's tax liability. No taxes are payable
by the Separate Account on the investment income and capital gains of the
Separate Account. SAFECO reserves the right to deduct a charge from Separate
Account assets if such tax treatment should change.
The Contracts will be taxed as an annuity as long as the diversification
requirements of Section 817(h) of the Code and the Treasury Regulations
thereunder are complied with. SAFECO intends to comply with such requirements.
If the diversification requirements are not satisfied, there will be tax
consequences for Owners. The Secretary of the Treasury may issue a regulation or
a ruling which will prescribe the circumstances in which an Owner's control of
the investments of a segregated asset account may cause the Owner, rather than
the insurance company, to be treated as the owner of the assets of the account.
The regulation or ruling could impose requirements that are not reflected in the
Contract, relating, for example, to such elements of Owner control as Purchase
Payment allocation, investment selection, transfer privileges and investments in
a Sub-Account focusing on a particular investment sector. It has also been
suggested that, in certain circumstances, control over the investment adviser
might constitute prohibited Owner control. SAFECO believes that Owner control
will not exist under the Contract. Because failure to comply with any such
regulation or ruling presumably would cause earnings on an Owner's interest in
the Separate Account to be includible in the Owner's gross income in the year
earned, SAFECO has reserved certain rights to alter the Contract and investment
alternatives so as to comply with such regulation or ruling. SAFECO believes
that any such regulation or ruling would apply prospectively. Since the
regulation or ruling has not been issued, there can be no assurance as to the
content of such regulation or ruling or even whether application of the
regulation or ruling will be prospective.
FEDERAL TAX STATUS OF QUALIFIED CONTRACTS
The comments in this section apply only to Contracts described in this
Prospectus which are Qualified Contracts. Qualified Contracts include Individual
Retirement Annuities issued pursuant to Section 408 of the Code, including
rollovers from other Qualified Contracts and simplified employee pensions.
Benefits received from a Qualified Contract will often be paid from
contributions that have never been included in the gross income of the
participant. Benefits received from such a plan will be taxable as ordinary
income whether received upon surrender, withdrawal, or death or disability of
the annuitant. If the participant made contributions to the Qualified Contract
with funds that have previously been included in gross income, special rules
provide for the return of the contributions over the period that payments are
received. Under certain circumstances, a 10 percent penalty tax may be imposed
on distributions. The rules governing the imposition of this penalty are
discussed in a later part of this section.
The rules governing the eligibility to participate, limitations on permissible
contributions, and the treatment of distributions from Qualified Contracts are
extremely complex. New Internal Revenue Service ("IRS") rules require that
Federal income taxes be withheld, at a 20% rate, from any "eligible rollover
distribution" which is not transferred directly to another qualified plan. All
qualified plans are required to notify participants of the IRS rules before an
"eligible rollover distribution" is made. The Separate Account has adopted
procedures that will enable it to make or receive trustee to trustee transfers,
which will exempt eligible distributions from the withholding requirements.
Purchasers should also be aware that the Code generally requires that certain
minimum distributions from Qualified Contracts be made in the year following the
date when the purchaser reaches age 70 1/2, or following the death of the
purchaser (a special rule applies for surviving spouses). The minimum
distribution rules generally require that the purchaser of a Qualified Contract
receive distributions at least annually over his or her life expectancy, or the
joint life expectancy of the purchaser and his or her
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spouse. Purchasers of Qualified Contracts should seek competent tax advice on
the tax rules governing their eligibility to participate, the limitations on
contributions, and the treatment of distributions.
FEDERAL TAX STATUS OF NON-QUALIFIED CONTRACTS
The comments in this section apply only to Non-Qualified Contracts. The Federal
income tax treatment of the Owner, Annuitant, or Beneficiary of a Variable
Annuity contract is determined under the rules of Section 72 of the Internal
Revenue Code. Under the existing provisions of the Code, an increase in the
Accumulation Value is not taxable to an individual Owner until received by him,
either as a cash redemption or as annuity payments. Under the rules explained
below, any taxable gain on payments or redemption from the Contract are taxable
as ordinary income. No payments by SAFECO under the Contracts are eligible for
capital gains treatment.
In applying the rules explained below, an individual's investment in the
Contract is equal to the sum of the Purchase Payments made by the individual on
the Contract, reduced by that portion of any previous partial redemption(s) that
were not treated as taxable income.
The Federal income taxation of distributions or payments from annuity contracts
may vary depending upon the type of distribution received. If the distributions
are received as a series of substantially equal payments, the gain on the
Contract is spread out over the payment period. Under the "exclusion ratio" of
Section 72 of the Code, a portion of each payment is excluded from income as a
return of the investment in the Contract. The portion of each payment to be
excluded is determined by dividing the investment in the Contract by the
expected return in the case of fixed payments, and by the payment period in the
case of variable payments. The total excludable amount is limited to the
individual's investment in the Contract. Once the individual's investment in the
Contract is returned under the exclusion ratio, all subsequent payments will be
included in income. If payments end by reason of the death of the annuitant
before the investment in the Contract has been returned under the exclusion
ratio, the amount of the unrecovered investment in the Contract is a deduction
on the return of the last taxable year of the annuitant. In the event of a
complete redemption prior to the Annuity Date, any gain on the termination of
the Contract will be taxed as ordinary income and the Owner may be subject to
the 10 percent penalty tax provisions of the Code. The rules governing the
imposition of this penalty are explained in a later paragraph of this section.
If amounts are received from partial redemption of the Contract prior to the
annuity starting date, any partial redemption will be taxable to the Owner to
the extent that the Contract's value at the time of the redemption exceeds the
Owner's investment in the Contract and the Owner may be subject to the 10
percent penalty provisions of the Code. The rules governing the imposition of
this penalty are explained in a later section.
If the Owner dies on or after the Annuity Date, the remaining portion of the
Contract's value must be distributed at least as rapidly as under the method of
distribution in effect at the Owner's death. If the Owner dies prior to the
Annuity Date, the entire Contract Value must (a) be distributed within five
years of the Owner's death, or (b) be distributed as annuity payments that do
not extend beyond the life or life expectancy of the Owner's Beneficiary and
that begin within one year of the Owner's death. If the Owner's spouse is the
Beneficiary, the Contract may be continued in the name of the spouse as the
Owner.
In determining the amount of taxable income in a distribution from an annuity
contract, all annuity contracts issued by SAFECO to an individual during any
calendar year are treated as a single contract.
FEDERAL TAX PENALTIES AND WITHHOLDING
A 10 percent penalty tax may be imposed on certain partial or complete
redemptions of a Contract. The 10 percent penalty tax will not be imposed in
certain instances, including those in which the redemption amount is received
after the Annuitant reaches age 59 1/2, if the redemption amount is one of a
series of substantially equal periodic payments made over the Annuitant's life,
and is received following the death of the Owner, or is attributable to the
Owner becoming disabled. For distributions from Qualified Contracts, the penalty
does not apply for the reasons stated above.
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Under a Qualified or Non-Qualified Contract SAFECO is required to withhold
Federal income taxes from any income payments to the Owner unless the owner
elects, for any reason, to have no withholding made from the payments. This
withholding requirement also applies to Qualified Contracts which are
hereinafter discussed. The Owner can change his election at any time by written
notice to the Home Office.
LEGAL MATTERS
Legal matters with respect to the organization of SAFECO, its authority to issue
annuity contracts and the validity of the Contract, have been passed upon by its
legal counsel. Katten Muchin & Zavis have advised SAFECO with regard to federal
securities law matters.
There are no legal proceedings to which the Separate Account or SAFECO
Securities is a party. On January 9, 1995 a class action seeking actual and
punitive damages was brought by an owner of a qualified pension annuity
contract. DeVoy v. SAFECO Life Insurance Company, Case No. 684407 pending in the
Superior Court of California, County of San Diego. With respect to such
contracts plaintiffs challenge both the representations as to interest rates and
the calculation of interest. The Company is defending against the action. SAFECO
is also engaged in various kinds of litigation which, in the opinion of SAFECO,
is not of material importance in relation to the total capital and surplus of
SAFECO.
SPECIAL CONSIDERATIONS
The terms of any Contract may vary based upon the requirements of state
insurance law in the jurisdiction in which the Contract is sold. Moreover,
SAFECO reserves the right to amend the Contract to meet the requirements of any
applicable federal or state laws or regulations. SAFECO will notify the Owner in
writing of any such amendments.
RESTRICTIONS UPON TRANSFER OF OWNERSHIP AND ASSIGNMENT
An Owner's rights under a Contract may not be assigned or transferred to the
extent such restriction is permitted by applicable law. A Contract, however, may
be assigned for purposes of an exchange pursuant to Section 1035 of the Code.
Any permissible assignment will not be binding upon SAFECO until it receives a
written copy of the assignment and has determined that such assignment is
legally required.
Ownership of a Contract issued to qualify under Section 408 of the Code may not
be transferred, assigned or pledged.
AVAILABLE INFORMATION
SAFECO has filed a registration statement (the "Registration Statement") with
the Commission under the Securities Act of 1933 relating to the Contracts
offered by this Prospectus. This Prospectus has been filed as a part of the
Registration Statement and does not contain all of the information set forth in
the Registration Statement, and reference is hereby made to such Registration
Statement for further information relating to SAFECO and the Contracts. The
Registration Statement may be inspected and copied, and copies can be obtained
at prescribed rates from the Commission.
STATE REGULATION
SAFECO is subject to the laws of the State of Washington governing insurance
companies and to regulation by the Washington Commissioner of Insurance. An
annual statement in a prescribed form must be filed with that Commissioner on or
before March 1 in each year covering the operations of SAFECO for the preceding
year and its financial condition on December 31 of such year. Its books and
assets are subject to review or examination by the Commissioner or his agents at
all times, and a full examination of its operations is conducted by the National
Association of Insurance Commissioners at least once in every five years.
Washington law also prescribes permissible investments, but does not involve
supervision of the investment
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<PAGE> 33
management or policy of SAFECO. The last such examination was conducted for the
five year period ended December 31, 1990.
EXPERTS
The financial statements of the Separate Account and SAFECO appearing in the
Statement of Additional Information have been audited by Ernst & Young LLP,
independent auditors, as set forth to the extent indicated in their reports
thereon also appearing in the Statement of Additional Information. Such
financial statements have been included therein in reliance on their reports
given on their authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
Financial statements for SAFECO and the Separate Account may be found in the
Statement of Additional Information. The financial statements of SAFECO that are
included in the Statement of Additional Information should be considered
primarily as bearing on the ability of SAFECO to meet its obligations under the
Contracts. The Contracts are not entitled to participate in earnings, dividends
or surplus of SAFECO. As no Contracts have yet been offered through the Separate
Account, the financial statements for the Separate Account only reflect other
variable annuity contracts already issued through the Separate Account.
TABLE OF CONTENTS
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
DISTRIBUTION OF THE CONTRACTS......................................................... 3
DETERMINATION OF ANNUITY PAYMENTS..................................................... 3
STANDARDIZED COMPUTATION OF PERFORMANCE............................................... 4
PERFORMANCE INFORMATION............................................................... 4
TAX COMPARISON........................................................................ 6
VALUATION OF ASSETS OF THE SEPARATE ACCOUNT........................................... 6
CONTINGENT DEFERRED SALES CHARGE...................................................... 6
PARTICIPATION AGREEMENTS.............................................................. 7
GENERAL INFORMATION................................................................... 7
TAX SUMMARY........................................................................... 7
FINANCIAL STATEMENTS.................................................................. 9
</TABLE>
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<PAGE> 34
STATEMENT OF ADDITIONAL INFORMATION
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(for Tax-Qualified and Non-Qualified Plans)
SAFECO SEPARATE ACCOUNT C
(the "Separate Account"), a separate account of
SAFECO Life Insurance Company ("SAFECO")
This Statement of Additional Information is not a prospectus but supplements and
should be read in conjunction with the Prospectus for the Contracts. A copy of
the Prospectus may be obtained from SAFECO, P.O. Box 34690, Seattle, Washington
98124-1690, Telephone Number 1-800-426-7649.
The Date of the Prospectus to which this Statement of Additional Information
relates is October 10, 1995.
The Date of this Statement of Additional Information is October 10, 1995.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Distribution of the Contracts......................................................... 3
Determination of Annuity Payments..................................................... 3
Standardized Computation of Performance............................................... 4
Performance Information............................................................... 4
Tax Comparison........................................................................ 6
Valuation of Assets of the Separate Account........................................... 6
Contingent Deferred Sales Charge...................................................... 6
Participation Agreements.............................................................. 7
General Information................................................................... 7
Tax Summary........................................................................... 7
Financial Statements.................................................................. 9
</TABLE>
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DISTRIBUTION OF THE CONTRACTS
The Contracts are offered on a continuous basis exclusively through
broker-dealers who have entered into selling agreements with SAFECO Securities,
Inc. ("SAFECO Securities"), a wholly-owned subsidiary of SAFECO Corporation, a
publicly-owned insurance holding company. SAFECO is a wholly-owned subsidiary of
SAFECO Corporation.
DETERMINATION OF ANNUITY PAYMENTS
The following discussion of the method for determining the amount of monthly
annuity payments under a variable payment plan is intended to be read in
conjunction with these sections of the Prospectus for the Contracts: "Deductions
under the Contracts"; "Divisions of the Separate Account and the Available
Funds"; "The Accumulation Period"; and "The Annuity Period". This discussion
assumes there is no Contingent Deferred Sales Charge or premium tax payable.
Amount of Annuity Payments. The amount of the first annuity payment under a
Contract will be determined on the basis of the Settlement Option selected, the
annuity purchase rate, the date of birth and sex of the annuitant, and the date
on which the Annuity is effected. The amount of the first payment is the sum of
the payments from each Sub-Account determined by applying the Contract Value,
after deduction for premium taxes, if applicable, as of the 15th day of the
preceding month, to the Variable Annuity tables contained in the Contract (which
are guaranteed for the duration of the Contract). The tables are based on the
1983a Mortality Table Projected 20 Years with Projection Scale G; 50% Male and
50% Female, and, for variable annuity options, assumed investment rate of 4.00%.
SAFECO guarantees these annuity tables for the duration of the Contracts.
The dollar amount of the Variable Annuity payments after the first payment will
vary from month to month and will depend upon the number and value of Annuity
Units credited to the Annuitant, which is dependent upon the Settlement Option
selected. A Contract will not share in the divisible surplus of SAFECO.
The number of Annuity Units in each Sub-Account to be credited to the Annuitant
is determined by dividing the amount of the first annuity payment from that
Sub-Account by the value of an Annuity Unit as of the 15th day of the month
preceding the Annuity Date. The number of Annuity Units thus credited each month
to the Annuitant in each Sub-Account remains constant throughout the Annuity
Period. However, the value of Annuity Units in each Sub-Account will fluctuate
with the investment experience of the Sub-Account.
The dollar amount of each Variable Annuity payment after the first is the sum of
the payments from each Sub-Account, which are determined by multiplying the
fixed number of Annuity Units per Sub-Account by the value of an Annuity Unit
(for that Sub-Account) as of the 15th day of the preceding month.
Annuity Unit Value. The value of an Annuity Unit for each Sub-Account on any
date varies to reflect the investment experience of the Sub-Account, the assumed
investment rate of 4% on which the annuity tables are based, and the deduction
for charges assessed and imposed by SAFECO, including a mortality and expense
risk charge, Asset Related Administration Charge, and, if applicable, a charge
for premium taxes.
For any Valuation Period the value of an Annuity Unit is determined by
multiplying the value of an Annuity Unit in each Sub-Account, as of the
immediately preceding Valuation Period by the Net Investment Factor for the
Value Period for which the value is being calculated, and dividing the result by
a factor to adjust for the assumed investment return of 4% used in calculating
the annuity rate tables.
Illustrations of Variable Annuity Payments. To illustrate the manner in which
Variable Annuity payments are determined consider this example. Item (4) in the
example shows the applicable monthly payment rate for a male, adjusted age 63,
who has elected a life variable annuity payment plan with a guarantee period of
10 years with the assumed investment rate of 4%. (Option 2, as described in the
Prospectus).
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<PAGE> 37
<TABLE>
<C> <S> <C>
(1) Assumed number of accumulation units in a Sub-Account on maturity date... 25,000
(2) Assumed Value of an accumulation unit in a Sub-Account at maturity....... $ 12.5000
(3) Cash value of Contract at maturity, (1) x (2)............................ $ 312,500
(4) Consideration required to purchase $1 of monthly annuity from annuity
rate table............................................................... $ 183.53
(5) Amount of first payment from a Sub-Account, (3) divided by (4)........... $1,702.72
(6) Assumed value of Annuity Unit in a Sub-Account at maturity............... $ 13.0000
(7) Number of Annuity Units credited in a Sub-Account, (5) divided by (6).... 130.9785
</TABLE>
The $312,500 value at maturity provides a first payment from the Sub-Account of
$1,702.72, and payments thereafter of the varying dollar value of 130.9785
Annuity Units. The amount of subsequent payments from the Sub-Account is
determined by multiplying 130.9785 units by the value of an Annuity Unit in the
Sub-Account on the applicable valuation date. For example, if that unit value is
$13.2500, the monthly payment from the Sub-Account will be 130.9785 multiplied
by $13.2500, or $1,735.46.
However, the value of the Annuity Unit depends entirely on the investment
experience of the Sub-Account. Thus in the example above, if the net investment
rate for the following month was less than the assumed investment rate of 4%,
the Annuity Unit would decline in value. If the Annuity Unit value declined to
$12.7500 the succeeding monthly payment would then be 130.9785 x $12.7500, or
$1,669.98.
For the sake of simplicity the foregoing example assumes that all of the Annuity
Units are in one Sub-Account. If there are Annuity Units in two or more
Sub-Accounts, the annuity payment from each Sub-Account is calculated
separately, in the manner illustrated, and the total monthly payment is the sum
of the payments from the Sub-Accounts.
STANDARDIZED COMPUTATION OF PERFORMANCE
PERFORMANCE COMPARISONS. Performance Information for a Sub-Account may be
compared, in reports and advertising, to: (i) Standard & Poor's Stock Index, Dow
Jones Industrial Averages, Donahue Money Market Institutional Averages, or other
unmanaged indices generally regarded as representative of the securities
markets; (ii) other Variable Annuity separate accounts or other investment
products traced by Lipper Analytical Services, Inc., the Variable Annuity
Research and Data Service, or Morningstar, Inc., which are widely used
independent research firms that rank mutual funds and other investment companies
by overall performance, investment objectives and assets; and (iii) the Consumer
Price Index (a measure of inflation) to assess the real rate of return from an
investment in a Contract. Unmanaged indices may assume the reinvestment of
dividends but generally do not reflect deductions for annuity charges,
investment management costs, brokerage costs and other transaction costs that
are normally paid when directly investing in securities.
Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Reports and
advertising also may contain other information, including the ranking of any
Sub-Account derived from rankings of Variable Annuity separate accounts or other
investment products traced by Lipper Analytical Services, Inc. or by rating
services, companies, publications, or other persons which rank separate accounts
or other investment products on overall performance or other criteria.
PERFORMANCE INFORMATION
Yields. Some Sub-Accounts may advertise yields. Yields quoted in advertising
reflect the change in value of a hypothetical investment in the Sub-Account over
a stated period of time, not taking in to account capital gains or losses or the
imposition of any Contingent Deferred Sales Charge. Yields are annualized and
stated as a percentage.
Current yield and effective yield are calculated for the SAFECO Resource Money
Market Sub-Account. Current Yield is based on the change in the value of a
hypothetical investment (exclusive of capital changes) over a particular seven
(7) day period, less a hypothetical charge reflecting deductions from values
during the period (the base period), and stated as a percentage of the
investment at the start of the base period (the base period return). The base
period return is then annualized by multiplying by 365/7, with the resulting
yield
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<PAGE> 38
figure carried to at least the nearest hundredth of one percent. Effective yield
assumes that all dividends received during an annual period have been
reinvested. This compounding effect causes effective yield to be higher than
current yield. Calculation of effective yield begins with the same base period
return used in the calculation of current yield, which is then annualized to
reflect weekly compounding pursuant to the following formula:
365/7
Effective Yield = [(Base Period Return) + 1) ] - 1
Yield for the SAFECO Resource Bond Sub-Account and Federated Corporate Bond
Sub-Account is based on all investment income (including dividends and interest)
per accumulation unit earned during a particular thirty (30) day period, less
expenses accrued during the period (net investment income). Yield is computed by
dividing net investment income by the value of an accumulation unit on the last
day of the period, according to the following formula:
6
Yield = 2[(a-b/cd + 1) - 1]
where a = net investment income earned during the period by the corresponding
Available Fund portfolio, b = expenses accrued for the period (net of any
reimbursements), c = the average daily number of accumulation units outstanding
during the period, and d = the value (maximum offering price) per accumulation
unit on the last day of the period.
Total Returns. Total return reflects all aspects of a Sub-Account's return,
including the automatic reinvestment by the Sub-Account of all distributions and
the deduction of all applicable charges to the Sub-Account on an annual basis,
including mortality and expense risk charges, the Annual Administration
Maintenance Charge, the Asset Related Administration Charge, and any other
charges against Contract Value. Quotations also will assume a termination
(surrender) at the end of the particular period and reflect the deduction of the
Contingent Deferred Sales Charge, if applicable. Additional quotations may be
given that do not assume a termination (surrender) and do not take into account
deduction of the Contingent Deferred Sales Charge, since the Contracts are
intended as long-term products.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical investment in the Sub-Account over certain periods,
including 1, 5, and 10 years (up to the life of the Sub-Account), and then
calculating the annually compounded percentage rate that would have produced the
same result if the rate of growth or decline in value had been constant over the
period. Investors should realize that the Sub-Account's experience is not
constant over time, but changes from year to year, and that the average annual
returns represent averaged figures as opposed to the year-to-year performance of
a Sub-Account. Average annual returns are calculated pursuant to the following
formula: P(1 + T)n = ERV, where P is a hypothetical initial payment of $1,000, T
is the average annual total return, n is the number of years, and ERV is the
withdrawal value at the end of the period.
Cumulative total returns are unaveraged and reflect the simple change in value
of a hypothetical investment in the Sub-Account over a state period of time.
TABLE OF HISTORICAL HYPOTHETICAL PERFORMANCE INFORMATION
THE HISTORICAL VALUES ARE FOR THE RESPECTIVE LIVES OF THE AVAILABLE FUNDS AND
REFLECT THE CHARGES APPLICABLE TO THE CONTRACT. NEITHER THE SEPARATE ACCOUNT NOR
THE CONTRACT EXISTED FOR ALL PERIODS SHOWN.
The performance of the various Sub-Accounts will vary and the hypothetical
results shown are not necessarily representative of future results. Performance
for periods ending after those shown may vary substantially from the examples
shown below. The performance of the various Sub-Accounts is calculated for a
specified period of time by assuming an initial Purchase Payment of $1,000
allocated to each of the Sub-Accounts and a deduction of all charges and
deductions. For those Sub-Accounts that commenced operations in 1994, the Annual
Administration Maintenance Charge is not reflected, and it is deducted at the
end of each Contract Year. (See "Charges and Deductions" for more information.)
No withdrawals are assumed and therefore no CDSC applies. The percentage
increases are determined by subtracting the initial Purchase Payment from the
ending value and dividing the remainder by the beginning value.
-5-
<PAGE> 39
Assuming an initial $1,000 allocated to each of the Sub-Accounts and deduction
of all changes and deductions.
<TABLE>
<CAPTION>
PERCENT
SUB-ACCOUNT PERIOD VALUE INCREASE
- ------------------------------------- -------------------------------------- ------ --------
<S> <C> <C> <C>
SAFECO Resource Money Market July 21, 1987 - December 31, 1994 $1,118 11.84%
SAFECO Resource Bond July 21, 1987 - December 31, 1994 $1,273 27.27%
SAFECO Resource Equity July 21, 1987 - December 31, 1994 $1,675 67.46%
SAFECO Resource Growth January 7, 1993 - December 31, 1994 $1,450 45.05%
SAFECO Resource Northwest January 7, 1993 - December 31, 1994 $ 980 -1.95%
Federated Corporate Bond February 2, 1994 - December 31, 1994 $ 878 -12.24%
Federated Utility February 10, 1994 - December 31, 1994 $ 920 -7.99%
Lexington Emerging Markets March 3, 1994 - December 31, 1994 $ 979 -2.09%
Lexington Natural Resources October 14, 1991 - December 31, 1994 $1,014 -1.39%
TCI Balanced May 1, 1991 - December 31, 1994 $1,092 9.15%
TCI International May 1, 1991 - December 31, 1994 $ 944 5.58%
</TABLE>
From time to time, additional quotations of total return based on the historical
performance of the Available Funds also may be presented.
TAX COMPARISON
Reports and advertising also may show the effect of tax deferred compounding on
a Sub-Account's investment returns, or returns in general, illustrated by
graphs, charts, or otherwise, which may include a comparison, at various points
in time, of the return from an investment in a Contract (giving effect to all
fees and charges), or returns in general, on a tax-deferred basis (assuming one
or more tax rates) with the return on a taxable basis, and which will disclose
the tax characteristics of the investments shown, including the impact of
withdrawals and surrenders.
VALUATION OF ASSETS OF THE SEPARATE ACCOUNT
The value of Fund shares held in each Sub-Account at the time of each valuation
is the redemption value of such shares at such time.
CONTINGENT DEFERRED SALES CHARGE
The charge is made as a percentage of the amount withdrawn. For example, if an
Owner subject to a 6% Contingent Deferred Sales Charge wishes to net $100 on the
partial redemption of a Contract, he must make a total withdrawal of $106.38, of
which $6.38 will be deducted as a Contingent Deferred Sales Charge. An Owner
need only indicate the net amount he wishes to net on a partial redemption and
SAFECO will determine the total or gross amount necessary to withdraw to net the
desired amount.
To the extent that the Contingent Deferred Sales Charge is insufficient to cover
all the distribution costs and related expenses, some portion of the proceeds
from the mortality and expense risk charge may be utilized by SAFECO to meet
such excess distribution expenses. SAFECO has represented in documents filed
with the Securities and Exchange Commission that the mortality and expense risk
charge is consistent with the mortality and expense risks assumed by SAFECO and
is within the range of industry practice, based on its review of its
requirements and industry practice. Moreover, SAFECO has represented that use of
any proceeds from such charge to defray distribution expenses has a reasonable
likelihood of benefiting the Separate Account and Owners.
-6-
<PAGE> 40
PARTICIPATION AGREEMENTS
Shares of the other Available Funds are made available to the Separate Account
under substantially similar Participation Agreements ("Participation
Agreements"). Each Participation Agreement is among the applicable Other
Available Fund, and its Distributor, which is the principal underwriter for
Other Available Fund shares, and SAFECO on behalf of the Separate Account. If
state or federal law precludes the sale of any Other Available Fund's shares to
the Separate Account, or in certain other circumstances, sales of shares to the
Separate Account may be suspended and/or the Participation Agreement may be
terminated as to the applicable Other Available Fund. Also, each Participation
Agreement may be terminated by any party thereto on proper written notice.
Notwithstanding termination of the Participation Agreement, the Other Available
Funds and their Distributors generally are obligated to continue to make such
Funds' shares available for Contracts outstanding on the date the Participation
Agreement terminates, unless the Participation Agreement was terminated due to
an irreconcilable conflict among contract owners of different separate accounts.
If for any reason the shares of any Other Available Fund are no longer available
for purchase by the Separate Account for outstanding Contracts, the parties to
each Participation Agreement have agreed to cooperate to comply with the
Investment Company Act of 1940, as amended, in arranging for the substitution of
another funding medium as soon as reasonably practicable and without disruption
of sales of shares to the Separate Account or any Sub-Account. Each of the
Participation Agreements has been filed as an exhibit to the registration
statement for the Contracts and differences between the terms of the various
Participation Agreements are reflected in such agreements.
GENERAL INFORMATION
The financial statements of the Separate Account and of SAFECO Life Insurance
Company included in this Statement of Additional Information have been audited
by Ernst & Young LLP, independent auditors, as set forth to the extent indicated
in their reports thereon also appearing in this Statement of Additional
Information. Such financial statements have been included herein in reliance on
their reports given on their authority as experts in accounting and auditing.
The address of Ernst & Young LLP is 999 Third Avenue, Suite 3500, Seattle,
Washington 98104.
SAFECO Corporation, directly or through its ownership of SAFECO and SAFECO Asset
Management Company ("SAFECO Management"), a wholly owned subsidiary of SAFECO
Corporation, owns beneficially 26.5%, 4.5%, 12.4%, 33.1% and 41.4% of the
outstanding shares of SAFECO Resource Bond Fund, SAFECO Resource Equity Fund,
SAFECO Resource Growth Fund, SAFECO Resource Money Market Fund, and SAFECO
Resource Northwest Fund, respectively, each a separate portfolio of the SAFECO
Resource Series Trust. SAFECO Management is the investment adviser to the each
portfolio of the SAFECO Resource Series Trust.
TAX SUMMARY
TRANSFERS BETWEEN NON-QUALIFIED ANNUITIES. Under section 1035 of the Internal
Revenue Code of 1986, as amended ("Code"), an Owner may exchange one annuity
contract for another annuity contract in a tax-free exchange. To avoid
recognizing income on the surrender of the annuity contract, the Owner must
absolutely assign the old contract to SAFECO. SAFECO will surrender the old
annuity contract and apply the proceeds to the Contract.
INDIVIDUAL RETIREMENT ANNUITIES (IRAS). The Code permits deductible and
non-deductible contributions to be made under a Contract that qualifies as an
IRA. The Contract (accompanied by the appropriate IRA rider) is designed to
qualify as an IRA. The Code also allows a tax-free transfer (rollover) of
certain distributions from qualified plans and Tax Sheltered Annuity
arrangements ("TSAs") which are used to purchase an IRA.
If the Owner and the Owner's spouse are not currently covered by a retirement
plan (including a Qualified Plan, TSA, or SEP-IRA), then each working spouse may
make a deductible contribution of 100% of compensation up to $2,000 regardless
of their adjusted gross income ("AGI"). In the case of spousal IRAs, an IRA
certificate is issued for each spouse and the working spouse may contribute a
total of $2,250 to both
-7-
<PAGE> 41
certificates (but no more than $2,000 to one certificate). For these purposes, a
working spouse can make an election to be treated as having no compensation,
thereby allowing the other working spouse to make a contribution to a spousal
IRA.
No contributions are allowed for the tax year in which an individual becomes age
70 1/2 or any tax year after that year. A working spouse age 70 1/2 or over,
however, can contribute 100% or compensation up to $2,000 to a spousal IRA until
the year the non-working spouse reaches age 70 1/2.
If either the Owner or, if married, the Owner's spouse is covered by another
retirement plan, the IRA deduction phases out between $25,000 and $35,000 of AGI
for single person and $40,000 and $50,000 of AGI for married persons filing
jointly. If the Owner is married, filing separately and covered by a retirement
plan, the IRS deduction phases out between $0 to $10,000 of AGI.
If the Owner is not eligible to deduct part or all of the IRA contribution, he
may still make non-deductible contributions. However, the deductible and
non-deductible contributions combined cannot exceed the $2,000 limit (or the
$2,250 spousal limit).
Deductible and non-deductible IRA contributions in excess of the lesser of (i)
100% of compensation or earned income, or (ii) $2,000 are subject to a 6% excise
tax for the year in which made and for each year thereafter until withdrawn.
An individual may elect for each IRA certificate or account to make a tax-free
rollover once a year among individual retirement arrangements (including
rollovers from individual retirement bonds purchased before 1983). An individual
also may make a rollover contribution into an IRA with the proceeds from a TSA
or qualified plan.
Distributions from an IRA must commence by April 1 of the calendar year
following the calendar year in which the Owner reaches age 70 1/2. Distributions
must be made at least annually over the life or life expectancy of the Owner (or
the joint lives or life expectancies of the Owner and a Beneficiary). The amount
required to be distributed each year under this rule is referred to as the
minimum distribution amount.
An Owner who does not receive the minimum distribution amount will be subject to
a 50% excise tax on the difference between the minimum distribution amount and
the amount actually distributed.
An Owner can revoke a Contract issued as an IRA by following the directions on
the cover of the Contract. Because revocation may have adverse tax consequences,
the Owner should consult with a tax expert. If the Contract is revoked, an Owner
may contribute to a new IRA, provided that the eligibility requirements for IRA
contributions are met at that time.
SIMPLIFIED EMPLOYEE PENSION PROGRAM (SEP-IRA). An employer can establish a
SEP-IRA for its employees. Under an employer's SEP-IRA, contributions for each
eligible employee can be made under a Contract issued as an IRA.
INCOME TAX WITHHOLDING. An Owner receiving periodic payments which total $9,120
or more per year will generally be subject to wage-bracket type withholding (as
if such payments were payments of wages by an employer to an employee) unless
the Owner elects no withholding. When a Owner makes no withholding election
whatsoever, withholding will be made as if the Owner is married and claiming
three withholding exemptions.
An Owner receiving a non-periodic distribution (whether a total or partial
distribution) will generally be subject to withholding at a flat 10% rate. In
certain cases, if the distribution is a qualified total distribution (as defined
in the Code), a special withholding table will apply. In both cases the Owner
will be permitted to elect not to have tax withheld.
All Owners receiving periodic and non-periodic payments will be further notified
of the withholding requirements and of their right to make withholding elections
affecting such payments. Special withholding rules apply to United States
citizens residing outside the United States.
Recently enacted mandatory withholding provisions apply to distributions made
from qualified plans after December 31, 1992. Mandatory withholding of 20% will
apply to any distribution eligible for a tax-free rollover if the distribution
is not transferred directly to an IRA.
-8-
<PAGE> 42
FINANCIAL STATEMENTS
SAFECO SEPARATE ACCOUNT C
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Reports of Ernst & Young LLP, Independent Auditors 10
Statement of Assets and Liabilities 11
Statement of Operations 12
Statement of Changes in Net Assets 13
Notes to Financial Statements 14
</TABLE>
-9-
<PAGE> 43
December 31, 1994
- -------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors of SAFECO Life Insurance Company and
Participants of SAFECO Separate Account C:
We have audited the accompanying statement of assets and liabilities of SAFECO
Separate Account C (comprising, respectively, the Equity, Growth, Northwest,
Bond, Money Market, International, and Balanced Sub-Accounts), as of December
31, 1994, and the related statement of operations, statement of changes in net
assets and accumulation unit data for the period from February 11, 1994
(commencement of operations) to December 31, 1994. These financial statements
and accumulation unit data are the responsibility of the SAFECO Separate
Account C's management. Our responsibility is to express an opinion on these
financial statements and accumulation unit data based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
accumulation unit data are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1994, by correspondence with the SAFECO Resource
Series Trust and Scudder Variable Life Investment Fund. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and accumulation unit data referred to
above present fairly, in all material respects, the financial position of each
of the respective Sub-Accounts constituting SAFECO Separate Account C at
December 31, 1994, the results of their operations, the changes in their net
assets, and the accumulation unit data for the period referred to above, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Seattle, Washington
January 27, 1995
-10-
<PAGE> 44
December 31, 1994
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
SUB-ACCOUNTS
------------------------------------------------------------------------
As of December 31, 1994 EQUITY GROWTH NW BOND MMKT INT'L BAL
- --------------------------------------------------------------------------------------------------------------
-- (In Thousands, Except Per-Unit Amounts) --
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments, at value:
SAFECO Resource Series Trust -
Equity Portfolio
217,779 shares at net asset
value of $16.83 per share
(identified cost $3,944) $ 3,665
SAFECO Resource Series Trust -
Growth Portfolio
176,723 shares at net asset
value of $12.98 per share
(identified cost $2,320) $ 2,293
SAFECO Resource Series Trust -
Northwest Portfolio
21,878 shares at net asset
value of $10.24 per share
(identified cost $225) $ 224
SAFECO Resource Series Trust -
Bond Portfolio
21,496 shares at net asset
value of $10.20 per share
(identified cost $230) $ 219
SAFECO Resource Series Trust -
Money Market Portfolio
1,721,216 shares at net
asset value of $1.00 per share
(identified cost $1,721) $ 1,721
Scudder Variable Life Investment
Fund - International Portfolio
135,256 shares at net asset
value of $10.69 per share
(identified cost $1,497) $ 1,446
Scudder Variable Life Investment
Fund - Balanced Portfolio
55,259 shares at net asset
value of $8.97 per share
(identified cost $500) $ 496
------- ------- ------- ------- ------- ------- ------
Total assets 3,665 2,293 224 219 1,721 1,446 496
LIABILITIES:
Mortality and expense risk
charge payable 4 2 -- -- 1 2 1
------- ------- ------- ------- ------- ------- ------
NET ASSETS $ 3,661 $ 2,291 $ 224 $ 219 $ 1,720 $ 1,444 $ 495
======= ======= ======= ======= ======= ======= ======
Accumulation units
outstanding (Note 4) 144 154 22 14 125 138 50
======= ======= ======= ======= ======= ======= ======
Accumulation unit value and
redemption price per unit
(Note 2)
(Net assets divided by
accumulation units outstanding) $25.373 $14.864 $10.134 $15.521 $13.811 $10.498 $9.988
======= ======= ======= ======= ======= ======= ======
</TABLE>
See Notes to Financial Statements
-11-
<PAGE> 45
SAFECO SEPARATE ACCOUNT C
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SUB-ACCOUNTS
---------------------------------------------------------------------
For the Period Ended December 31, 1994
EQUITY* GROWTH* NW* BOND* MMKT* INT'L* BAL*
---------------------------------------------------------------------
-- ($ in Thousands) --
<S> <C> <C> <C> <C> <C> <C> <C>
Investment income:
Income dividends and
capital gain
distributions $ 335 $ 104 $ 1 $ 12 $ 13 $ -- $ 4
Expenses:
Mortality and expense
risk charge (Note 3) 14 7 1 2 4 7 2
------- ------ ------ ------- ------ ------ -------
Net investment income (loss) 321 97 -- 10 9 (7) 2
------- ------ ------ ------- ------ ------ -------
Net realized and unrealized
gain (loss) on investments:
Net realized gain on
investment transactions 7 3 1 -- -- 1 --
Net change in unrealized
appreciation (279) (27) (1) (11) -- (51) (4)
------- ----- ------ ------ ------ ------ -------
Net loss on investments (272) (24) -- (11) -- (50) (4)
------- ----- ------ ------ ------ ------ -------
Net change in net assets
resulting from operations $ 49 $ 73 $ -- $ (1) $ 9 $ (57) $ (2)
======= ====== ====== ======= ====== ====== =======
</TABLE>
*Commencement of Operations was February 11, 1994.
See Notes to Financial Statements
-12-
<PAGE> 46
December 31, 1994
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SUB-ACCOUNTS
-------------------------------------------------------------------
For the Period Ended December 31, 1994
EQUITY* GROWTH* NW* BOND* MMKT* INT'L* BAL*
-------------------------------------------------------------------
-- ($ in Thousands) --
<S> <C> <C> <C> <C> <C> <C> <C>
Operations:
Net investment income (loss) $ 321 $ 97 $ -- $ 10 $ 9 $ (7) $ 2
Net realized gain on
investment transactions 7 3 1 -- -- 1 --
Net change in unrealized
appreciation (279) (27) (1) (11) -- (51) (4)
------- ------ ---- ------ ------ ------ ------
Net change in net assets
resulting from operations 49 73 -- (1) 9 (57) (2)
Net accumulation unit
transactions (Note 4) 3,612 2,218 224 220 1,711 1,501 497
------- ------ ---- ------ ------ ------ ------
Total change in net assets 3,661 2,291 224 219 1,720 1,444 495
Net assets at beginning
of period -- -- -- -- -- -- --
------- ----- ---- ------ ------ ------ ------
Net assets at end of period $ 3,661 $2,291 $224 $ 219 $1,720 $1,444 $ 495
======= ====== ==== ====== ====== ====== ======
</TABLE>
*Commencement of Operations was February 11, 1994.
See Notes to Financial Statements
-13-
<PAGE> 47
SAFECO SEPARATE ACCOUNT C
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SAFECO Separate Account C is registered under the Investment Company Act of
1940, as amended, as a segregated unit investment account of SAFECO Life
Insurance Company (SAFECO), a wholly-owned subsidiary of SAFECO Corporation.
Separate Account C is divided into sub-accounts which are invested in shares of
a designated portfolio of either the SAFECO Resource Series Trust or the
Scudder Variable Life Investment Fund. Separate Account C became available to
unitholders on February 11, 1994 (commencement of operations).
The five portfolios of the SAFECO Resource Series Trust are available to
unitholders -- the Equity, Growth, Northwest (NW), Bond, and Money Market
(MMKT) portfolios. Two portfolios of the Scudder Variable Life Investment Fund
are also available to unitholders - the International (INTL) and Balanced
(BAL) portfolios.
The assets of Separate Account C are the property of SAFECO and are not
commingled with liabilities arising out of any other business of SAFECO.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION -- Investments in mutual fund shares are carried in the
statement of assets and liabilities at net asset value as reported by the Fund.
Security transactions are recorded on the trade date. Realized gains or losses
on securities transactions are determined using the First-In First-Out (FIFO)
cost method.
DISTRIBUTIONS -- The net investment income and realized capital gains of
Separate Account C are not distributed, but are retained and reinvested for the
benefit of accumulation unit owners.
FEDERAL INCOME TAX -- Operations of Separate Account C are included in the
federal income tax return of SAFECO, which is taxed as a "life insurance
company" under the Internal Revenue Code. Under current federal income tax
law, no income taxes are payable with respect to operations of Separate Account
C.
UNIT VALUE CALCULATION -- For financial reporting purposes, amounts have been
rounded to the nearest thousand dollars, except for per unit amounts, which may
result in minor rounding differences. Per unit amounts are calculated based on
precise amounts.
3. EXPENSES
A mortality and expense risk charge is deducted by SAFECO from Separate Account
C on a daily basis which is equal, on an annual basis, to 1.25% of the average
daily net asset value of Separate Account C. The mortality risks assumed by
SAFECO arise from its contractual obligation to make annuity payments after the
annuity date for the life of the participant and to waive withdrawal charges in
the event of the death of a participant. The expense risk assumed by SAFECO is
that the costs of administering the contracts and Separate Account C will
exceed the amount received from the administration charge. The mortality and
expense risk charge is guaranteed by SAFECO and cannot be increased.
SAFECO deducts on each Valuation Date an amount which is equal on an annual
basis to .15% of the average daily net asset value of the Separate Account for
costs associated with the administration of the Sub-Accounts. Since this
charge is an asset-based charge, the amount of the charge attributable to a
particular contract may have no relationship to the administrative costs
actually incurred by that contract. SAFECO does not intend to profit from this
charge. This charge will be reduced to the extent that the amount of this
charge is in excess of that necessary to reimburse SAFECO for its
administrative expenses.
-14-
<PAGE> 48
December 31, 1994
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. EXPENSES - Continued
The following expenses are deducted from a contractholder's contract value by
SAFECO and not directly from Separate Account C. As a fee for expenses
associated with the administration of the contract owner's contract value, an
annual charge of $30 is deducted by SAFECO from the accumulated value of each
contract value on the last day of each Contract Year and in the event of a
complete withdrawal, this charge is only deducted from contracts where the
contract value is less than $50,000. SAFECO has the right to increase this fee
to $35. In the event that an owner withdraws all or a portion of the contract
value, a contingent deferred sales charge is imposed on the amount withdrawn in
the first eight certificate years. Any premium tax levied by a state or
government entity with respect to the Separate Account C contract will be
charged against the contract. See the Prospectus "Expense Table" for further
information.
4. ACCUMULATION UNITS
<TABLE>
<CAPTION>
SUB-ACCOUNTS
------------------------------------------------------------------------------------
For the Period Ended December 31, 1994
EQUITY* GROWTH* NW* BOND* MMKT* INT'L* BAL*
------------------------------------------------------------------------------------
-- (In Thousands) --
<S> <C> <C> <C> <C> <C> <C> <C>
Units:
Sales 146 156 22 14 452 140 50
Redemptions (2) (2) -- -- (327) (2) --
------ ------ ---- ---- ------- ------ ----
Net change 144 154 22 14 125 138 50
====== ====== ==== ==== ======= ====== ====
Amounts:
Sales $3,674 $2,247 $225 $223 $ 6,195 $1,525 $497
Redemptions (62) (29) (1) (3) (4,484) (24) --
------ ------ ---- ---- ------- ------ ----
Net change $3,612 $2,218 $224 $220 $ 1,711 $1,501 $497
====== ====== ==== ==== ======= ====== ====
December 31, 1994:
Paid in capital $3,612 $2,218 $224 $220 $ 1,711 $1,501 $497
Par value per unit None None None None None None None
Accumulation units authorized Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited Unlimited
</TABLE>
*Commencement of Operations was February 11, 1994.
-15-
<PAGE> 49
SAFECO SEPARATE ACCOUNT C
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. INVESTMENT TRANSACTIONS
<TABLE>
<CAPTION>
SUB-ACCOUNTS
--------------------------------------------------------------------
EQUITY GROWTH NW BOND MMKT INT'L BAL
- -----------------------------------------------------------------------------------------------------------
-- ($ in Thousands) --
<S> <C> <C> <C> <C> <C> <C> <C>
Purchases for the period ended
December 31, 1994 $4,080 $2,363 $240 $245 $6,448 $1,541 $502
====== ====== ==== ==== ====== ====== ====
Sales for the period ended
December 31, 1994 $ 143 $ 46 $ 16 $ 15 $4,727 $ 45 $ 2
====== ====== ==== ==== ====== ====== ====
</TABLE>
6. ACCUMULATION UNIT DATA
<TABLE>
<CAPTION>
SUB-ACCOUNTS
--------------------------------------------------------------------
EQUITY GROWTH NW BOND MMKT INT'L BAL
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
February 11, 1994 $24.528 $13.910 $10.073 $16.217 $13.526 $10.948 $10.435
December 31, 1994 25.373 14.864 10.134 15.521 13.811 10.498 9.988
</TABLE>
-16-
<PAGE> 50
Audited Consolidated Financial Statements
SAFECO Life Insurance Company
and Subsidiaries
For the Year Ended December 31, 1994
<PAGE> 51
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Financial Statements
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . 2
Statement of Consolidated Income . . . . . . . . . . . . . . . . . . 3
Statement of Changes in Stockholder's Equity . . . . . . . . . . . . 4
Statement of Consolidated Cash Flows . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 52
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
SAFECO Life Insurance Company
We have audited the accompanying consolidated balance sheet of SAFECO Life
Insurance Company and subsidiaries as of December 31, 1994 and 1993, and the
related statements of consolidated income, changes in stockholder's equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SAFECO Life
Insurance Company and subsidiaries at December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As described in Note 1 to the Consolidated Financial Statements, SAFECO Life
Insurance Company and subsidiaries adopted certain new accounting standards in
1994 and 1993 as required by the Financial Accounting Standards Board.
/s/ ERNST & YOUNG LLP
Seattle, Washington
February 10, 1995
<PAGE> 53
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(In Thousands Except Share Amounts)
<TABLE>
<Caption)
December 31
--------------------------
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Investments (Note 2):
Fixed Maturities Available-for-Sale, at Market Value
(Amortized Cost: 1994--$6,116,932) ............................................. $5,915,662 $ --
Fixed Maturities Held-to-Maturity, at Amortized Cost
(Market Value: 1994--$1,948,309; 1993--$8,112,537) ............................. 2,053,132 7,422,664
Marketable Equity Securities, at Market Value
(Cost: 1994--$15,846; 1993--$14,833) ........................................... 22,747 25,166
First Mortgage Loans on Real Estate:
Nonaffiliates (Less allowance for losses: 1994--$9,511; 1993--$7,000) .......... 418,440 400,219
Affiliates ..................................................................... 134,157 86,871
Real Estate (At cost, less accumulated depreciation:
1994--$412; 1993--$331) ........................................................ 5,149 6,453
Policy Loans ..................................................................... 53,329 50,488
Short-Term Investments (At cost which approximates market) ....................... 62,789 74,573
Investment in Limited Partnerships ............................................... 1,219 1,039
---------- ----------
Total investments ............................................................ 8,666,624 8,067,473
Cash ............................................................................. 26,710 19,210
Accured investment income ........................................................ 141,907 128,212
Accounts and Notes Receivable (Less allowance for doubtful accounts:
1994--$160; 1993--$68) ......................................................... 21,189 27,703
Reinsurance Recoverables ......................................................... 15,517 15,166
Deferred Policy Acquisition Costs ................................................ 247,190 234,200
Other Assets ..................................................................... 6,494 7,100
Deferred Income Tax Recoverable (Includes tax on unrealized
depreciation of investment securities: 1994--$68,028) (Note 9) ................. 30,229 --
Assets Held in Separate Accounts ................................................. 158,266 95,321
---------- ----------
Total Assets ................................................................. $9,314,126 $8,594,385
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy and Contract Liabilities (Note 5):
Future Policy Benefits ......................................................... $ 155,322 $ 151,488
Policy and Contract Claims ..................................................... 29,050 33,186
Premiums Paid in Advance ....................................................... 8,783 9,957
Funds Held Under Deposit Contracts ............................................. 7,988,456 7,229,439
Other Policyholders' Funds ..................................................... 74,308 71,857
---------- ----------
Total Policy and Contract Liabilities ........................................ 8,255,919 7,495,927
Other Liabilities ................................................................ 89,239 87,797
Federal Income Taxes (Note 9):
Current ........................................................................ 12,464 15,665
Deferred (Includes tax on unrealized appreciation of
investment securities: 1993--$3,617) ......................................... -- 51,570
Liabilities Related to Separate Accounts ......................................... 158,266 95,321
---------- ----------
Total Liabilities ............................................................ 8,515,888 7,746,280
---------- ----------
Stockholder's Equity:
Common Stock, $250 Par Value:
20,000 Shares Authorized, Issued and Outstanding ............................. 5,000 5,000
Additional Paid-In Capital ..................................................... 85,000 85,000
Retained Earnings (Note 7) ..................................................... 834,467 751,277
Unrealized (Depreciation) Appreciation of Investment Securities,
Net of Tax (Note 2) .......................................................... (126,229) 6,828
---------- ----------
Total Stockholder's Equity ................................................. 798,238 848,105
---------- ----------
Total Liabilities and Stockholder's Equity ............................... $9,314,126 $8,594,385
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE> 54
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1994 1993 1992
-------- ---------- --------
(In Thousands)
<S> <C> <C> <C>
Revenues:
Premiums............................................................ $252,929 $ 279,628 $303,288
Investment income:
Interest on Fixed Maturities....................................... 648,296 612,805 567,458
Interest on Mortgage Loans......................................... 51,135 48,207 48,883
Interest on Short-Term Investments................................. 3,351 3,334 3,112
Dividends from Marketable Equity Securities........................ 1,446 1,817 2,258
Dividends from Redeemable Preferred Stock.......................... 618 -- --
Other Investment Income............................................ 4,375 4,862 4,534
-------- ---------- --------
Total............................................................ 709,221 671,025 626,245
Less Investment Expenses........................................... 3,551 3,303 2,992
-------- ---------- --------
Net Investment Income.............................................. 705,670 667,722 623,253
-------- ---------- --------
Other Revenue...................................................... 9,795 11,850 13,363
Realized Investment Gain........................................... 5,639 53,544 3,377
-------- ---------- --------
Total............................................................ 974,033 1,012,744 943,281
-------- ---------- --------
Benefits and Expenses:
Policy Benefits..................................................... 674,215 675,479 674,139
Commissions......................................................... 84,760 82,262 81,113
Personnel Costs..................................................... 42,439 43,244 42,036
Taxes Other Than Payroll and Income Taxes........................... 7,652 8,477 9,209
Other Operating Expenses............................................ 44,519 40,430 38,447
Amortization of Deferred Policy Acquisition Costs................... 29,407 26,350 18,861
Deferral of Policy Acquisition Costs................................ (43,360) (38,925) (45,257)
-------- ---------- --------
Total............................................................ 839,632 837,317 818,548
-------- ---------- --------
Income before Federal Income Taxes................................... 134,401 175,427 124,733
-------- ---------- --------
Provision (Benefit) for Federal Income Taxes (Note 9):
Current............................................................. 57,365 91,597 71,314
Deferred............................................................ (10,154) (26,135) (22,973)
-------- ---------- --------
Total............................................................ 47,211 65,462 48,341
-------- ---------- --------
Income Before Cumulative Effect of Accounting Changes................ 87,190 109,965 76,392
Cumulative Effect of Accounting Changes (Notes 8 and 9):
Postretirement Benefits (Net of Tax)................................ -- (2,493) --
Income Taxes........................................................ -- 9,092 --
-------- ---------- --------
Net Income........................................................... $ 87,190 $ 116,564 $ 76,392
======== ========== ========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE> 55
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1994 1993 1992
--------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Common Stock............................... $ 5,000 $ 5,000 $ 5,000
--------- -------- --------
Additional Paid-In Capital................. 85,000 85,000 85,000
--------- -------- --------
Retained Earnings:
Balance at the Beginning of Year......... 751,277 638,713 566,321
Net Income............................... 87,190 116,564 76,392
Dividends to Parent...................... (4,000) (4,000) (4,000)
--------- -------- --------
Balance at the End of Year............... 834,467 751,277 638,713
--------- -------- --------
Unrealized Appreciation (Depreciation)
of Investment Securities, Net of Tax
(Note 2):
Balance at the Beginning of Year....... 6,828 5,968 6,124
Net Effect of Adoption of FASB
Statement 115........................ 279,957 - -
Change in Unrealized Appreciation
(Depreciation)....................... (413,014) 860 (156)
--------- -------- --------
Balance at the End of Year............. (126,229) 6,828 5,968
--------- -------- --------
Stockholder's Equity................. $ 798,238 $848,105 $734,681
========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 56
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1994 1993 1992
----------- ------------ -----------
(In Thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Insurance Premiums Received........................................ $ 233,129 $ 264,254 $ 289,049
Dividends and Interest Received.................................... 641,234 589,916 538,512
Other Operating Receipts........................................... 11,419 11,814 11,535
Insurance Claims and Policy Benefits Paid.......................... (242,523) (270,702) (283,062)
Underwriting, Acquisition and Insurance Operating Costs Paid....... (177,188) (168,809) (167,400)
Income Taxes Paid.................................................. (60,566) (94,169) (58,082)
----------- ----------- -----------
Net Cash Provided by Operating Activities...................... 405,505 332,304 330,552
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchase of:
Fixed Maturities Available-for-Sale.............................. (1,110,154) - -
Fixed Maturities Held-to-Maturity................................ (358,297) (2,106,558) (2,088,419)
Marketable Equity Securities..................................... (407) (132) (239)
Other Investments................................................ (24,381) (53) (73)
Real Estate...................................................... - - (101)
Policy and Nonaffiliated Mortgage Loans.......................... (68,710) (62,156) (70,176)
Affiliated Mortgage Loans........................................ (54,000) - -
Maturities of Fixed Maturities Available-for-Sale.................. 476,410 - -
Maturities of Fixed Maturities Held-to-Maturity.................... 54,564 644,532 573,602
Sale of:
Fixed Maturities Available-for-Sale.............................. 250,227 - -
Fixed Maturities Held-to-Maturity................................ - 675,044 776,352
Marketable Equity Securities..................................... 65 6,323 2,841
Other Investments................................................ 23,992 - 9,499
Real Estate...................................................... 1,885 115 485
Policy and Nonaffiliated Mortgage Loans.......................... 42,038 43,107 30,008
Affiliated Mortgage Loans........................................ 6,714 2,324 36,375
Net (increase) Decrease in Short-Term Investments.................. 11,793 10,343 (40,174)
Other.............................................................. 947 (1,190) (1,963)
----------- ----------- -----------
Net Cash Used in Investing Activities......................... (747,314) (788,301) (771,983)
----------- ----------- -----------
FINANCING ACTIVITIES:
Funds Received Under Deposit Contracts............................. 1,012,164 1,001,880 954,813
Return of Funds Held Under Deposit Contracts....................... (659,697) (555,429) (506,090)
Dividends to Parent................................................ (4,000) (4,000) (3,000)
Net Proceeds from Short-Term Borrowings............................ 842 15,569 -
----------- ----------- -----------
Net Cash Provided by Financing Activities..................... 349,309 458,020 445,723
----------- ----------- -----------
Net Increase in Cash................................................. 7,500 2,023 4,292
Cash at Beginning of Year............................................ 19,210 17,187 12,895
----------- ----------- -----------
Cash at End of Year.................................................. $ 26,710 $ 19,210 $ 17,187
=========== =========== ===========
</TABLE>
For purposes of reporting cash flows, cash consists of balances on hand
and on deposit in banks and financial institutions.
See Notes to Consolidated Financial Statements
5
<PAGE> 57
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS-
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1994 1993 1992
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Net Income.................................................... $ 87,190 $116,564 $ 76,392
-------- -------- --------
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Realized Investment Gain.................................. (5,639) (53,544) (3,377)
Amortization of Fixed Maturity Investments................ (12,247) (10,476) (7,036)
Deferred Federal Income Tax Benefit....................... (10,154) (26,135) (22,973)
Interest Expense on Deposit Contracts..................... 405,536 400,122 375,305
Cumulative Effect of Accounting Changes................... - (6,599) -
Other..................................................... (440) 205 171
Changes in:
Future Policy Benefits.................................. 3,834 1,322 3,521
Policy and Contract Claims.............................. (4,136) (5,577) (4,925)
Premiums Paid in Advance................................ (1,174) (476) (1,510)
Deferred Policy Acquisition Costs....................... (12,990) (12,575) (26,396)
Accrued Investment Income............................... (13,695) (9,185) (9,443)
Accrued Interest on Accrual Bonds....................... (41,285) (56,712) (68,509)
Other Receivables....................................... 5,064 (3,937) 1,244
Current Federal Income Taxes............................ (3,201) (2,572) 13,232
Other Assets and Liabilities............................ 1,820 22,966) 3,762
Other Policyholders' Funds.............................. 7,022 (5,518) 1,094
-------- -------- --------
Total Adjustments..................................... 318,315 231,309 254,160
-------- -------- --------
Net Cash Provided by Operating Activities..................... $405,505 $347,873 $330,552
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 58
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF REPORTING. The consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and
include the accounts of SAFECO Life Insurance Company (the Company) and its
wholly-owned subsidiaries, SAFECO National Life Insurance Company and First
SAFECO National Life Insurance Company of New York. The Company is a
wholly-owned subsidiary of SAFECO Corporation.
All significant intercompany transactions have been eliminated in the
consolidated financial statements. Certain reclassifications have been
made in the 1993 and 1992 financial statements to conform to current
classifications.
ACCOUNTING FOR PREMIUMS. Life and health insurance premiums are reported
as income when collected for traditional individual life policies and when
earned for group and individual health policies. Funds received under
pension deposit contracts, annuities and universal life policies are
recorded as liabilities rather than premium income when received. Revenues
for universal life products consist of front-end loads, mortality charges
and expense charges assessed against individual policyholder account
balances. These loads and charges are recognized as income when earned.
INVESTMENTS. The Company adopted Financial Accounting Standards Board
(FASB) Statement 115, "Accounting for Certain Investments in Debt and
Equity Securities," on January 1, 1994, applying the provisions of the
Statement to Investments held as of, or acquired after that date. See
discussion of new accounting standards on page 9.
Fixed maturity investments (bonds and redeemable preferred stocks) which
the Company has the positive intent and ability to hold to maturity are
classified as held-to-maturity and carried at amortized cost in the balance
sheet. Fixed maturities classified as available-for-sale are carried at
market value, with changes in unrealized gains and losses recorded directly
to stockholder's equity, net of applicable income taxes and deferred policy
acquisition costs valuation allowance. The Company has no fixed maturities
classified as trading.
All marketable equity securities are classified as available-for-sale and
carried at market value, with changes in unrealized gains and losses
recorded directly to stockholder's equity, net of applicable income taxes.
When the collectibility of income on certain investments is considered
doubtful, they are placed on non-accrual status and thereafter interest
income is recognized only when payment is received. Investments that have
declined in market value below cost and for which the decline is judged to
be other than temporary are written down to fair value. Writedowns are
made directly on an individual security basis and are included in realized
investment losses in the Statement of Consolidated Income.
The cost of security investments sold is determined by the "identified
cost" method.
Mortgage loans are carried at outstanding principal balances, less an
allowance for loan losses.
REAL ESTATE AND DEPRECIATION. Income-producing real estate is classified
as an investment. The Company provides straight-line depreciation on its
buildings based upon their estimated useful lives.
Investment real estate that has declined in market value below cost and for
which the decline is judged to be other than temporary is written down to
estimated realizable value. The writedowns are included in realized
investment losses in the Statement of Consolidated Income.
7
<PAGE> 59
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
DEFERRED POLICY ACQUISITION COSTS. 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 annuities and universal life policies are amortized
over the lives of the 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. There were no significant revisions made in
1994, 1993 or 1992.
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.
FUTURE POLICY BENEFITS. Liabilities for universal life insurance policies,
deferred annuity and pension deposit contracts are equal to the accumulated
account value of such policies or contracts as of the valuation date.
Liabilities for structured settlement annuities are based on interest rate
assumptions using market rates at issue, graded downward over 40 years to a
range of 5-1/2% to 8-3/4%.
Liabilities for future policy benefits under traditional individual life
insurance policies have been computed on the level premium method using
interest, mortality and persistency assumptions based on Company experience
modified to provide for adverse deviation. Interest assumptions range from
8-1/2% graded to 3-1/4%.
POLICY AND CONTRACT CLAIMS. The liability for policy and contract claims
is established on the basis of reported losses ("case basis" method).
Provision is also made for claims incurred but not reported, based on
historical experience. The estimates for claims incurred but not reported
are continually reviewed and any necessary adjustments are reflected in
current operations.
SEPARATE ACCOUNTS. The Company administers segregated asset accounts for
pension and other clients. The assets of these Separate Accounts, which
consist of common stocks, are the property of the Company. The liabilities
of these Separate Accounts represent reserves established to meet
withdrawal and future benefit payment provisions of contracts with these
pension and other clients. The assets of the Separate Accounts, equal to
the reserves and other contract liabilities of the Separate Accounts, are
not chargeable with liabilities arising out of any other business the
Company may conduct. Investment risks associated with market value changes
are borne by the clients. Deposits, withdrawals, net investment income and
realized and unrealized capital gains and losses on the assets of the
Separate Account are not reflected in the Statement of Consolidated Income.
Management fees and other charges assessed against the contracts are
included in other revenue.
FEDERAL INCOME TAXES. The Company and its subsidiaries file a consolidated
federal income tax return with SAFECO Corporation. Tax payments (credits)
are made to or received from SAFECO Corporation on a separate tax return
filing basis. The Company provides for federal income taxes based on
financial reporting income and deferred federal income taxes on temporary
differences between financial reporting and taxable income.
8
<PAGE> 60
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 (continued)
NEW ACCOUNTING STANDARDS. The Company adopted Financial Accounting
Standards Board (FASB) Statements 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and 109, "Accounting for
Income Taxes," in the first quarter of 1993. See the Statement of
Consolidated Income for the effect on income of adoption of Statements 106
and 109. For additional disclosure relating to Statements 106 and 109, see
Note 8 and Note 9, respectively.
The Company adopted FASB Statement 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1994. Adoption had no
effect on net income.
The Company adopted FASB Statement 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," in the first
quarter of 1993. Adoption had no effect on net income. See Note 5 for
disclosures relating to reinsurance.
In May of 1993, the FASB issued Statement 114, "Accounting by Creditors for
Impairment of a Loan," which provides guidance on valuing impaired loans.
The FASB also issued Statement 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures," in October of 1994, which
amends Statement 114. Both Statements are effective for 1995. Based on
current analysis, the impact on the Company's net income and financial
condition of adopting these Statements is not expected to be significant.
In May of 1993, the FASB issued Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities," which expands the use of fair
value accounting for debt and equity securities. As of January 1, 1994,
the Company adopted the provisions of this Statement for investments held
as of, or acquired after that date. Statement 115 requires that debt and
equity securities be classified as trading, available-for-sale, or
held-to-maturity. Fixed maturity securities that the Company has the
positive intent and ability to hold to maturity (as narrowly defined by
Statement 115) are classified as held-to-maturity and are reported at
amortized cost. Fixed maturity securities classified as available-for-sale
are carried at market value, with changes in unrealized gains and losses
recorded directly to stockholder's equity, net of applicable income taxes
and deferred policy acquisition costs valuation allowance. Under Statement
115, trading securities are carried at market value with immediate
recognition in income of changes in market value. Since the Company does
not have any securities held for trading, the adoption of this Statement
had no effect on net income. All marketable equity securities are
classified as available-for-sale and continue to be carried at market
value, with changes in unrealized gains and losses recorded directly to
stockholder's equity, net of applicable income taxes. As required by
Statement 115, no restatement of prior period amounts has been made. See
Note 2 for details of the effect on stockholder's equity of the adoption of
Statement 115.
The FASB issued Statement 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments," in October of 1994.
Statement 119 requires the presentation of certain disclosures about
derivative financial instruments and is effective for 1994. The Company
has made the additional required disclosures for 1994 in Note 4.
9
<PAGE> 61
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. INVESTMENT SUMMARY
A summary of fixed maturities and marketable equity securities classified
as available-for-sale at December 31, 1994 follows:
<TABLE>
<CAPTION>
Gross Gross Net Estimated
Amortized Unrealized Unrealized Unrealized Market
Cost Gains Losses Gain (Loss) Value
---------- ---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
United States government and
government agencies and authorities .................. $ 664,605 $ 704 $ (28,960) $ (28,276) $ 636,529
States, municipalities and political subdivisions ...... 139,415 4,392 (1,723) 2,669 142,084
Foreign governments .................................... 71,599 1,019 (2,522) (1,503) 70,096
Public utilities ....................................... 1,347,080 21,223 (66,446) (45,223) 1,301,857
All other corporate bonds .............................. 2,133,189 26,027 (97,641) (71,614) 2,061,575
Mortgage-backed securities ............................. 1,745,427 30,508 (87,962) (57,454) 1,687,973
Other fixed maturities ................................. 15,417 208 (77) 131 15,548
---------- ------- --------- --------- ----------
Total fixed maturities classified as
available-for-sale ................................... 6,116,932 84,081 (285,351) (201,270) 5,915,662
Marketable equity securities ........................... 15,846 7,577 (676) 6,901 22,747
---------- ------- --------- --------- ----------
Total investment securities classified as
available-for-sale ................................... $6,132,778 $91,658 $(286,027) (194,369) $5,938,409
========== ======= ========= ==========
Deferred policy acquisition costs valuation allowance ....................................... -
Applicable federal income tax ............................................................... 68,140
---------
Unrealized depreciation of investment securities,
net of tax, included in stockholder's equity .............................................. $(126,229)
=========
</TABLE>
A summary of fixed maturities classified as held-to-maturity at December
31, 1994 follows:
<TABLE>
<CAPTION>
Gross Gross Net Estimated
Amortized Unrealized Unrealized Unrealized Market
Cost Gains Losses Gain (Loss) Value
---------- ---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
United States government and
government agencies and authorities .................. $ 124,266 $ 649 $ (10,953) $ (10,304) $ 113,962
States, municipalities and political subdivisions ...... 36,517 2,260 (527) 1,733 38,250
Foreign governments .................................... 139,951 2,651 (2,434) 217 140,168
Public utilities ....................................... 436,145 14,090 (19,454) (5,364) 430,781
All other corporate bonds .............................. 794,824 10,401 (56,808) (46,407) 748,417
Mortgage-backed securities ............................. 521,429 8,374 (53,072) (44,698) 476,731
---------- ------- --------- --------- ----------
Total fixed maturities classified as
held-to-maturity ..................................... $2,053,132 $38,425 $(143,248) $(104,823) $1,948,309
========== ======= ========= ========= ==========
</TABLE>
A summary of all fixed maturities at December 31, 1993 follows:
<TABLE>
<CAPTION>
Gross Gross Net Estimated
Amortized Unrealized Unrealized Unrealized Market
Cost Gains Losses Gain Value
---------- ---------- ---------- ----------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
United States government and
government agencies and authorities .................. $ 684,679 $ 66,049 $ (210) $ 65,839 $ 750,518
States, municipalities and political subdivisions ...... 162,344 25,749 (39) 25,710 188,054
Foreign governments .................................... 219,355 31,586 (157) 31,429 250,784
Public utilities ....................................... 1,625,212 192,918 (2,548) 190,370 1,815,582
All other corporate bonds .............................. 2,532,550 236,054 (14,595) 221,459 2,754,009
Mortgage-backed securities ............................. 2,198,155 169,045 (13,997) 155,048 2,353,203
Other fixed maturities ................................. 369 35 (17) 18 387
---------- -------- -------- -------- ----------
Total fixed maturities ............................... $7,422,664 $721,436 $(31,563) $689,873 $8,112,537
========== ======== ======== ======== ==========
</TABLE>
10
<PAGE> 62
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 (continued)
As discussed in Note 1, the Company adopted the provisions of FASB
Statement 115 as of January 1, 1994. The net effect on stockholder's
equity of the adoption of Statement 115 was an increase of $279,957,000 as
of January 1, 1994. The net increase was comprised of the following
amounts: aggregate market value in excess of amortized cost of fixed
maturities classified as available-for-sale of $458,471,000, less deferred
policy acquisition costs valuation allowance of $27,768,000 and deferred
income taxes at 35% of $150,746,000.
The aggregate market value of marketable equity securities was in excess
of cost by $10,333,000 at December 31, 1993. This amount included gross
unrealized gains of $10,354,000 and gross unrealized losses of $21,000.
The amortized cost and estimated market value of fixed maturities at
December 31, 1994, by contractual maturity, are presented below. Expected
maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Fixed Maturities Classified as Available-for-Sale Cost Value
---------- ----------
(In Thousands)
<S> <C> <C>
Due in one year or less............................. $ 98,510 $ 98,700
Due after one year through five years............... 1,116,030 1,088,664
Due after five years through ten years.............. 1,601,463 1,534,146
Due after ten years................................. 1,555,502 1,506,179
Mortgage-backed securities.......................... 1,745,427 1,687,973
---------- ----------
Total..................................... $6,116,932 $5,915,662
========== ==========
Estimated
Amortized Market
Fixed Maturities Classified as Held-to-Maturity Cost Value
---------- ----------
(In Thousands)
<S> <C> <C>
Due in one year or less............................. $ 113 $ 113
Due after one year through five years............... 5,000 4,600
Due after five years through ten years.............. 3 4
Due after ten years................................. 1,526,587 1,466,861
Mortgage-backed securities.......................... 521,429 476,731
---------- ----------
Total..................................... $2,053,132 $1,948,309
========== ==========
</TABLE>
At December 31, 1994 and 1993, the Company held below investment grade
fixed maturities of $174 million and $152 million at amortized cost,
respectively. The respective market values of these investments were
approximately $156 million and $152 million. These holdings amounted to
2.0% of the Company's investments in fixed maturities at December 31, 1994
and 1993.
The carrying value of investments in fixed maturities and mortgage loans
that did not produce income during the year ended December 31, 1994 is
less than one percent of the total of such investments.
11
<PAGE> 63
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 (continued)
Certain bonds amounting to $4,161,000 and $4,066,000 at December 31, 1994
and 1993, respectively, were on deposit with various regulatory
authorities to meet requirements of insurance and financial codes.
At December 31, 1994 and 1993, mortgage loans constituted approximately
5.9% and 5.7% of total assets, respectively, and are secured by first
mortgage liens on income-producing commercial real estate, primarily in
the retail, industrial and office building sectors. The majority of the
properties are located in the western United States, with 43.7% of the
total in California. Individual loans generally do not exceed $5 million.
For each of these years, less than 2% of the loans were non-performing.
The proceeds from sales of investment securities and related gains and
losses for 1994 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1994
---------------------------------------------------------
Fixed Maturities Fixed Maturities Marketable
Available-for-Sale Held-to-Maturity Equity Securities
------------------ ---------------- -----------------
(In Thousands)
<S> <C> <C> <C>
Proceeds from sales........................................... $250,227 $ - $ 65
======== ============ =====
Gross realized gains on sales................................. $ 12,994 $ - $ 115
Gross realized losses on sales................................ (1,533) - (224)
-------- ------------ -----
Realized gains (losses) on sales.................... 11,461 - (109)
Other (including net gain on calls and redemptions)........... 2,475 - -
Writedowns (including writedowns on
securities subsequently sold)............................... (4,804) - -
-------- ------------ -----
Total realized gain (loss).................................... $ 9,132 $ - $(109)
======== ============ =====
</TABLE>
The proceeds from sales of investments in fixed maturities and related
gains and losses for 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------
1993 1992
--------- --------
(In Thousands)
<S> <C> <C>
Proceeds from sales................................................................. $675,044 $776,352
======== ========
Gross realized gains on sales....................................................... $ 75,895 $ 40,456
Gross realized losses on sales...................................................... (20,653) (23,189)
-------- --------
Realized gains on sales........................................................ 55,242 17,267
Other (including net gain on calls and redemptions)................................. 12,749 6,593
Writedowns (including writedowns on securities subsequently sold)................... (11,665) (16,592)
-------- --------
Total realized gain................................................................. $ 56,326 $ 7,268
======== ========
</TABLE>
12
<PAGE> 64
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 (continued)
The following summarizes the realized gains and losses, the changes in
unrealized gains and losses, and applicable income taxes on all
investments:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1994 1993 1992
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Realized gains (losses):
Fixed maturities........................................ $ 9,132 $56,326 $ 7,268
Marketable equity securities............................ (109) 2,063 175
First mortgage loans on real estate..................... (3,000) (4,336) (3,555)
Real estate............................................. (184) (509) (511)
Short-term investments.................................. (200) - -
------- ------- -------
Realized gain before federal income taxes....... $ 5,639 $53,544 $ 3,377
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1994 1993 1992
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Increase (decrease) in unrealized appreciation of:
Fixed maturities classified as available-for-sale...... $(201,270) $ - $ -
Marketable equity securities........................... (3,432) 1,291 (236)
Applicable federal income tax (expense) benefit........ 71,645 (431) 80
--------- ------ -----
Net change in unrealized appreciation
(depreciation)............................... $(133,057) $ 860 $(156)
========= ====== =====
</TABLE>
3. COMMITMENTS AND CONTINGENCIES
The Company is obligated under a real estate lease with an affiliate,
General America Corporation, which expires in 2010. The minimum annual
rental commitments under this obligation are $2,211,000. At December 31,
1994, unfunded mortgage loan commitments approximated $9,360,000. The
Company had no other material commitments at December 31, 1994.
In January 1995, a class action seeking actual and punitive damages, DeVoy
v. SAFECO Life Insurance Company, Case No. 684407 in the Superior Court of
California, County of San Diego, was brought against the Company by an
owner of a qualified pension annuity contract. With respect to such
contracts, the plaintiffs have challenged both the representations as to
interest rates and the calculation of interest. The Company is defending
against the action.
13
<PAGE> 65
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FINANCIAL INSTRUMENTS
ESTIMATED FAIR VALUES. Fair value amounts have been determined using
available market information and appropriate valuation methodologies.
However, considerable judgment is required in developing the estimates of
fair value. Accordingly, these estimates are not necessarily indicative of
the amount that could be realized in a current market exchange. The use of
different market assumptions and/or estimating methodologies may have a
material effect on the estimated fair value amounts.
Carrying value is a reasonable estimate of fair value for cash, policy
loans, short-term investments, accounts receivable and other liabilities.
Fair value amounts for investments in fixed maturities and marketable
equity securities are the same as market value. Market value generally
represents quoted market prices for securities traded in the public market
place or analytically determined values for securities not publicly traded.
The fair values of mortgage loans have been estimated by discounting the
projected cash flows using the current rate at which loans would be made to
borrowers with similar credit ratings and for the same maturities.
The fair value of investment contracts with defined maturities is estimated
by discounting projected cash flows using rates that would be offered for
similar contracts with the same remaining maturities. For investment
contracts with no defined maturity, fair value is estimated to be the
present surrender value. These investment contracts are included in Funds
Held Under Deposit Contracts.
Other insurance-related financial instruments are exempt from fair value
disclosure requirements.
Estimated fair values of financial instruments at December 31 are as
follows:
<TABLE>
<CAPTION> 1994 1993
-------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Fixed maturities available-for-sale.............. $5,915,662 $5,915,662 $ - $ -
Fixed maturities held-to-maturity................ 2,053,132 1,948,309 7,422,664 8,112,537
Marketable equity securities..................... 22,747 22,747 25,166 25,166
Mortgage loans................................... 552,597 540,000 487,090 529,000
Financial liabilities:
Funds held under deposit contracts............... 7,988,456 7,678,000 7,229,439 7,531,000
</TABLE>
DERIVATIVE FINANCIAL INSTRUMENTS. The Company's investments in
mortgage-backed securities of $2.2 billion are primarily residential
collateralized mortgage obligations and pass-throughs ("CMOs") . CMOs,
while technically defined as derivative instruments, are exempt from FAS
119 disclosure requirements. The Company's investment in CMOs comprised of
the riskier, highly-volatile type (e.g., interest only, inverse floaters,
etc.) has been intentionally limited to only a small amount (i.e., less
than 1% of total CMOs at December 31, 1994).
The Company's involvement in other investment-type derivatives is also,
intentionally, of a very limited nature. Such derivatives include
currency-linked bonds and fixed-rate loan commitments. Individually, and
in the aggregate, these derivatives are not material and thus no additional
disclosures are warranted.
14
<PAGE> 66
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. POLICY AND CONTRACT LIABILITIES
REINSURANCE. The Company protects itself from excessive losses by ceding
reinsurance to other companies, using automatic and facultative treaties.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. A continuing liability exists in the event a reinsurance
company is unable to meet its obligations to the Company. The financial
condition of its reinsurers is evaluated by the Company to minimize its
exposure to losses from reinsurer insolvencies.
The balance sheet caption "Reinsurance Recoverables" is comprised of the
following amounts:
<TABLE>
<CAPTION>
December 31
-------------------
1994 1993
------- -------
(In Thousands)
<S> <C> <C>
Unpaid losses and adjustment expense............. $ 646 $ 132
Paid claims...................................... 506 1,037
Life policy liabilities.......................... 14,033 13,821
Other reinsurance recoverable.................... 332 176
------- -------
Total reinsurance recoverables............. $15,517 $15,166
======= =======
</TABLE>
The effects of reinsurance on the premium and policy benefit amounts in the
Statement of Consolidated Income are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------
1994 1993 1992
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Reinsurance Ceded:
Premiums................................ $(9,060) $(9,576) $(9,192)
======= ======= =======
Policy benefits......................... $(5,588) $(7,441) $(6,463)
======= ======= =======
Reinsurance Assumed:
Premiums................................ $ 327 $ 544 $ 1,936
======= ======= =======
Policy benefits......................... $ 3,421 $ 3,474 $ 4,920
======= ======= =======
</TABLE>
POLICY AND CONTRACT CLAIMS. Loss reserves and health claims, which are
generally incurred and paid in full within a one-year period, amount to
less than 1% of total policy and contract liabilities. Therefore, no
additional disclosures are warranted.
15
<PAGE> 67
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. STATUTORY BASIS INFORMATION
The Company and its subsidiaries are required to file annual statements
with state regulatory authorities prepared on an accounting basis as
prescribed or permitted by such authorities (statutory basis). Prescribed
statutory accounting practices include state laws, regulations, and general
administrative rules, as well as a variety of publications of the National
Association of Insurance Commissioners (NAIC). Permitted statutory
accounting practices encompass all accounting practices that are not
prescribed.
Statutory net income differs from income reported in accordance with
generally accepted accounting principles primarily because policy
acquisition costs are expensed when incurred, reserves are based on
different assumptions and income tax expense reflects only taxes paid or
currently payable.
Statutory net income and stockholder's equity, by company, are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1994 1993 1992
-------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Statutory Net income:
SAFECO Life Insurance Company....................... $47,280 $17,724 $29,115
SAFECO National Life Insurance Company.............. 1,242 1,192 1,370
First SAFECO National Life Insurance Company
of New York....................................... 108 225 144
------- ------- -------
Total........................................... $48,630 $19,141 $30,629
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31
------------------------------
1994 1993 1992
-------- -------- --------
(In Thousands)
<S> <C> <C> <C>
Statutory Stockholder's Equity:
SAFECO Life Insurance Company........................ $391,328 $357,081 $339,119
SAFECO National Life Insurance Company............... 15,849 16,228 16,651
First SAFECO National Life Insurance Company
of New York........................................ 9,644 9,569 9,354
-------- -------- --------
Total............................................ $416,821 $382,878 $365,124
======== ======== ========
</TABLE>
The Company has received written approval from the Washington State
Insurance Department to treat certain loans (all made at market rates) to
related SAFECO Corporation subsidiaries as admitted assets. The allowance
of such loans has not materially enhanced surplus at December 31, 1994.
7. DIVIDEND RESTRICTIONS
Insurance companies are restricted by certain states as to the amount of
dividends they may pay within a given calendar year to their parent without
regulatory consent. That restriction is the greater of statutory net gain
from operations for the previous year or 10% of policyholder surplus at the
close of the previous year, subject to a maximum limit equal to statutory
earned surplus. The amount of retained earnings available for the payment
of dividends to SAFECO Corporation without prior regulatory approval was
$51,033,000 at December 31, 1994.
16
<PAGE> 68
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EMPLOYEE BENEFIT PLANS
SAFECO Corporation and subsidiary companies (the Companies) administer
defined contribution, defined benefit and profit sharing bonus plans
covering substantially all employees. The defined contribution plans
include profit sharing retirement plans and a savings plan. Benefits are
earned under the defined benefit plan for each year of service after 1988,
based on the employee's compensation level plus a stipulated rate of return
on the benefit balance. It is SAFECO Corporation's policy to fund the
defined benefit plan on a current basis to the full extent deductible under
federal income tax regulations. The cost of these plans to the Company was
$6,329,000, $7,962,000 and $6,519,000 for the years ended December 31,
1994, 1993 and 1992, respectively.
The Companies also provide certain healthcare and life insurance benefits
("other postretirement benefits") for retired employees. Substantially all
employees may become eligible for these benefits if they reach retirement
age while working for the Companies. The cost of these benefits is shared
with the retiree.
Effective January 1, 1993, the Company adopted FASB Statement 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
Under Statement 106, the Company now accrues for other postretirement
benefits during the years that employees provide services. Prior to
adoption of Statement 106, other postretirement benefits were accounted for
on a pay-as-you-go (cash) basis. The transition obligation (i.e., the
accumulated postretirement benefit obligation) of $3,777,000 was recorded
as a cumulative effect adjustment in the first quarter of 1993 which, net
of tax, resulted in a reduction of net income of $2,493,000.
Components of the net periodic other postretirement benefit cost are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1994 1993
--------- --------
(in Thousands)
<S> <C> <C>
Service cost-benefits earned during the period.................... $153 $151
Interest cost on accumulated postretirement benefit
obligation...................................................... 283 318
Actual return on plan assets...................................... 3 (4)
Net amortization and deferral..................................... (7) 4
---- ----
Total....................................................... $432 $469
==== ====
</TABLE>
Under the cash basis of accounting for these other postretirement benefits,
the expense for the year ended December 31, 1992 was $109,000.
17
<PAGE> 69
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8 (continued)
The following table summarizes the funded status of the plan:
<TABLE>
<CAPTION>
December 31
--------------------
1994 1993
------ ------
(In Thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees................................................................. $1,332 $1,578
Fully eligible active plan participants.................................. 496 725
Other active plan participants........................................... 1,245 1,555
------ ------
Total APBO........................................................... 3,073 3,858
Less: plan assets at fair value............................................ 91 66
------ ------
Funded status.............................................................. 2,982 3,792
Unrecognized gain.......................................................... 1,424 301
------ ------
Accrued postretirement benefit cost recorded on the balance sheet.......... $4,406 $4,093
====== ======
</TABLE>
Other postretirement benefit cost is determined using actuarial assumptions
at the beginning of the year. The funded status is determined using
assumptions at the end of the year. The discount rate used was 8-1/2%,
7-1/2% and 8% at December 31, 1994, December 31, 1993 and January 1, 1993,
respectively. The accumulated postretirement benefit obligation at
December 31, 1994 was determined using a healthcare cost trend rate of 12%
for 1995, declining by 1% per year to 6% and remaining at that level
thereafter. The ultimate trend rate of 6% represents a 1% reduction from
the 7% rate used for the prior year's valuation. A one percentage point
increase in the assumed healthcare cost trend rate for each year would
increase the accumulated other postretirement benefit obligation as of
December 31, 1994 by $341,000 and the annual net periodic other
postretirement benefit cost for the year then ended by $71,000.
18
<PAGE> 70
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
As of January 1, 1993, the Company adopted the liability method of
accounting for income taxes pursuant to FASB Statement 109, "Accounting for
Income Taxes." This accounting change was implemented through a cumulative
effect adjustment which reduced the net deferred tax liability (and
increased net income in the first quarter of 1993) by $9,092,000. Prior
year financial statements and related disclosures which follow the
guidelines provided in APB 11 were not restated. Under the liability
method, deferred tax assets and liabilities are determined based on the
differences between their financial reporting and their tax bases and are
measured using the enacted tax rates.
Differences between income tax computed by applying the U.S. federal income
tax rate of 35% in 1994 and 1993 and 34% in 1992 to income before income
taxes and the provision for federal income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
1994 1993 1992
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Computed "expected" tax expense ................................ $47,040 $61,399 $42,409
Dividends received deduction ................................... (64) (52) (58)
Tax exempt interest ............................................ (8) (9) (11)
Provision for settlement of prior years' tax obligation ........ - 2,000 6,000
Federal tax rate change ........................................ - 2,040 -
Other .......................................................... 243 84 1
------- ------- -------
Income tax expense ......................................... $47,211 $65,462 $48,341
======= ======= =======
Percent of income tax expense to income before tax ............. 35.1% 37.3% 38.8%
======= ======= =======
</TABLE>
The tax effect of temporary differences which give rise to the deferred tax
assets and deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31
-----------------------
1994 1993
-------- -------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Discounted loss and adjustment expense reserves .............. $ 1,679 $ 1,026
Unearned premium reserves .................................... 2,012 1,699
Adjustment to life policy liabilities ........................ 20,444 7,838
Capitalization of policy acquisition costs -- 1990 Tax Act ... 18,263 14,105
Postretirement benefits ...................................... 1,542 1,435
Realized capital gains ....................................... 5,422 6,310
Guarantee fund assessment .................................... 3,250 2,282
Unrealized depreciation of investment securities ............. 68,028 -
Other ........................................................ 1,343 1,569
-------- -------
Total deferred tax assets .................................. 121,983 36,264
-------- -------
Deferred tax liabilities:
Deferred policy acquisition costs ............................ 86,798 82,048
Bond discount accrual ........................................ 4,133 2,164
Unrealized appreciation of marketable equity securities ...... - 3,617
Other ........................................................ 823 5
-------- -------
Total deferred tax liabilities ........................... 91,754 87,834
-------- -------
Net deferred tax (asset) liability ....................... $(30,229) $51,570
======== =======
</TABLE>
19
<PAGE> 71
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 (continued)
The deferred tax benefit of $10,154,000 for 1994 represents the decrease in
the net deferred tax liability of $81,799,000 excluding a decrease of
$71,645,000 related to unrealized depreciation of investment securities.
The deferred federal income tax benefit of $26,135,000 for 1993 represents
a decrease in the net deferred federal income tax liability of $25,704,000
excluding an increase of $431,000 related to unrealized appreciation of
marketable equity securities. The tax related to the increase in
appreciation of marketable equity securities approximated $543,000 during
1993. Of that amount, $112,000, which related to the 1% increase in the
federal income tax rate, was charged directly to income with the remainder
charged directly to stockholder's equity.
Deferred federal income taxes for 1992 were provided on the difference
between the Company's taxable income and income for financial reporting
purposes according to the guidelines provided in APB 11. The components of
the deferred federal income tax benefit using these guidelines are as
follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
1992
------------
(In Thousands)
<S> <C>
Increase in deferred policy acquisition costs................ $ 8,975
Capitalization of policy acquisition costs - 1990 Tax Act.... (4,162)
Basis difference on capital gains............................ (280)
Adjustment to policy reserves................................ (27,393)
Accrual of market discount................................... 1,179
Other........................................................ (1,292)
--------
Deferred federal income tax benefit..................... $(22,973)
========
</TABLE>
20
<PAGE> 72
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SEGMENT DATA
<TABLE>
<CAPTION>
Year Ended December 31, 1994
------------------------------------
Financial Employee
Services Benefits Total
--------- -------- --------
(in Thousands)
<S> <C> <C> <C>
Revenue:
Premiums and Other (Including $27,955 of financial
services revenue received from affiliates)............... $ 42,805 $219,919 $262,724
Identifiable Investment Income.............................. 395,127 245,909 641,036
Investment Income Allocated................................. 39,909 24,725 64,634
Identifiable Realized Gain from Investments................. 6,744 1,267 8,011
Realized Loss from Investments Allocated.................... (1,463) (909) (2,372)
-------- -------- --------
Total Revenue........................................... $483,122 $490,911 $974,033
======== ======== ========
Income Before Income Taxes.................................... $ 70,200 $ 64,201 $134,401
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994
--------------------------------------
FinanciaL Employee
Services Benefits Total
--------- -------- ----------
(in Thousands)
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Costs........................... $ 151,614 $ 95,576 $ 247,190
Policy Loans................................................ 28,467 24,862 53,329
Invested Assets............................................. 4,859,921 2,874,141 7,734,062
Other....................................................... 153,120 248,641 401,761
Invested Assets Allocated..................................... 542,890 336,343 879,233
Other Assets Allocated........................................ (880) (569) (1,449)
---------- ---------- ----------
Total Assets............................................ $5,735,132 $3,578,994 $9,314,126
========== ========== ==========
Amortization of Deferred Policy Acquisition Costs............. $ 9,914 $ 19,493 $ 29,407
========== ========== ==========
</TABLE>
A major portion of investment income, realized gains or losses and
assets is specifically identifiable with an industry segment. The
remainder of these amounts has been allocated in proportion to the
investment income identified with each segment.
21
<PAGE> 73
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1993
-------------------------------------
Financial Employee
Services Benefits Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Revenue:
Premiums and Other (including $23,195 of financial services revenue
received from affiliates)................................................ $ 40,000 $ 251,478 $ 291,478
Identifiable Investment Income............................................. 352,076 251,740 603,816
Investment Income Allocated................................................ 38,408 25,498 63,906
Identifiable Realized Gain (Loss) from Investments......................... 64,442 (6,567) 57,875
Realized Loss from Investments Allocated................................... (2,956) (1,375) (4,331)
---------- ---------- ----------
Total Revenue............................................... $ 491,970 $ 520,774 $1,012,744
========== ========== ==========
Income Before Income Taxes................................................. $ 117,287 $ 58,140 $ 175,427
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
-------------------------------------
Financial Employee
Services Benefits Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Cost........................................... $ 137,479 $ 96,721 $ 234,200
Policy Loans............................................................... 26,181 24,307 50,488
Invested Assets............................................................ 4,253,688 2,906,514 7,160,202
Other...................................................................... 98,972 159,396 258,368
Invested Assets Allocated...................................................... 513,921 342,861 856,782
Other Assets Allocated......................................................... 21,160 13,185 34,345
---------- ---------- ----------
Total Assets................................................... $5,051,401 $3,542,984 $8,594,385
========== ========== ==========
Amortization of Deferred Policy Acquisition Costs.............................. $ 7,395 $ 18,955 $ 26,350
========== ========== ==========
</TABLE>
A major portion of investment income, realized gains or losses and
assets is specifically identifiable with an industry segment. The
remainder of these amounts has been allocated in proportion to the
investment income identified with each segment.
22
<PAGE> 74
SAFECO LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1992
------------------------------------
Financial Employee
Services Benefits Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Revenue:
Premiums and Other (including $20,517 of financial
services revenue received from affiliates)................ $ 39,010 $ 277,641 $ 316,651
Identifiable Investment Income................................. 304,764 250,969 555,733
Investment Income Allocated.................................... 40,158 27,362 67,520
Identifiable Realized Gain (Loss) from Investments............. 11,518 (8,659) 2,859
Realized Gain (Loss) from Investments Allocated................ (237) 755 518
---------- ---------- ----------
Total Revenue............................................ $ 395,213 $ 548,068 $ 943,281
========== ========== ==========
Income Before Income Taxes......................................... $ 66,030 $ 58,703 $ 124,733
========== ========== ==========
December 31, 1992
------------------------------------
Financial Employee
Services Benefits Total
---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C>
Identifiable Assets:
Deferred Policy Acquisition Cost............................... $ 124,459 $ 97,166 $ 221,625
Policy Loans................................................... 26,245 24,210 50,455
Invested Assets................................................ 3,524,626 2,751,097 6,275,723
Other.......................................................... 78,986 118,172 197,158
Invested Assets Allocated.......................................... 481,718 341,961 823,679
Other Assets Allocated............................................. 20,920 12,623 33,543
---------- ---------- ----------
Total Assets............................................ $4,256,954 $3,345,229 $7,602,183
========== ========== ==========
Amortization of Deferred Policy Acquisition Costs.................. $ 4,940 $ 13,921 $ 18,861
========== ========== ==========
</TABLE>
A major portion of investment income, realized gains or losses and assets
is specifically identifiable with an industry segment. The remainder of
these amounts has been allocated in proportion to the investment income
identified with each segment.
23
