-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CpSZKgUsTeCdoX+7xmMaor1IH9V80dVMB4fJRUXCwNNBpJBqfgGFwiia/whay1sn NQzBRDpYQpWKQ1BtE/okPg== 0000891020-96-001411.txt : 19961210 0000891020-96-001411.hdr.sgml : 19961210 ACCESSION NUMBER: 0000891020-96-001411 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06563 FILM NUMBER: 96662550 BUSINESS ADDRESS: STREET 1: SAFECO PLZ CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 10-Q 1 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1996. [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____. Commission File Number 1-6563. SAFECO CORPORATION (Exact name of registrant as specified in its charter) WASHINGTON 91-0742146 (State of Incorporation) (I.R.S. Employer I.D. No.) SAFECO PLAZA, SEATTLE, WASHINGTON 98185 (Address of principal executive offices) (206) 545-5000 (Registrant's telephone number, including area code) 126,055,213 shares of no par value common stock were outstanding at September 30, 1996 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES[X] NO [ ]. 2 SAFECO CORPORATION - - -------------------------------------------------------------------------------- TABLE OF CONTENTS AND SIGNATURES
Part I - Financial Information * Page ------------ Item 1. Financial Statements: Consolidated Balance Sheet, 3 September 30, 1996 and December 31, 1995 Statement of Consolidated Income and Retained Earnings 5 for the Quarters and Nine Months Ended September 30, 1996 and 1995 Statement of Consolidated Cash Flows 6 for the Nine Months Ended September 30, 1996 and 1995 Item 2. Management's Discussion and Analysis 8 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K 12
*The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q. In the opinion of management, they include all adjustments (none of which were other than normal and recurring adjustments) which are necessary for a fair presentation of results for the interim periods. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Form 10-K for the year ended December 31, 1995 which has previously been filed with the Commission. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SAFECO CORPORATION ----------------------------- Registrant ROD A. PIERSON ----------------------------- Rod A. Pierson Senior Vice President Dated November 13, 1996 and Chief Financial Officer -2- 3 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands) - - --------------------------------------------------------------------------------
September 30 December 31 ASSETS 1996 1995 ------------ ----------- Investments: Fixed Maturities Available-for-Sale, at Market Value (Amortized cost: 1996 - $11,047,129; 1995 -$10,853,590) $11,560,458 $11,928,144 Fixed Maturities Held-to-Maturity, at Amortized Cost (Market value: 1996 - $2,531,552; 1995 - $2,388,514) 2,438,330 2,044,517 Marketable Equity Securities, at Market Value (Cost: 1996 - $620,613; 1995 - $598,130) 1,213,647 1,119,408 Mortgage Loans 444,063 416,489 Real Estate (At cost less accumulated depreciation) 547,257 498,958 Policy Loans 57,958 55,925 Short-Term Investments 39,522 68,808 ----------- ----------- Total Investments 16,301,235 16,132,249 Cash 57,253 65,477 Accrued Investment Income 242,107 234,253 Finance Receivables 812,354 741,177 Premiums and Other Service Fees Receivable 465,640 444,618 Other Notes and Accounts Receivable 55,183 42,139 Federal Income Taxes Recoverable 363 - Reinsurance Recoverables 161,461 137,284 Deferred Policy Acquisition Costs 404,967 356,359 Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation) 171,560 170,016 Other Assets 186,383 167,872 Separate Account Assets 425,193 276,399 ----------- ----------- TOTAL $19,283,699 $18,767,843 =========== ===========
(continued) -3- 4 SAFECO CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (In Thousands Except Share Amounts) (continued) - - --------------------------------------------------------------------------------
September 30 December 31 LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995* ------------ ------------ Losses and Adjustment Expense $ 2,108,384 $ 2,207,230 Unearned Premiums 971,121 910,762 Life Policy Liabilities 150,105 154,090 Funds Held Under Deposit Contracts 9,556,795 8,756,384 Notes and Mortgages Payable: Credit Company Borrowings ($711,850 maturing within one year) 756,750 614,270 7.875% Notes Due 2005 200,000 200,000 Other Notes and Mortgages ($26,126 maturing within one year) 235,239 253,275 Other Liabilities 625,261 895,853 Federal and Canadian Income Taxes: Current -- 18,000 Deferred (Includes tax on unrealized appreciation of investment securities: 1996 - $382,934; 1995 -$543,556) 344,892 498,934 Separate Account Liabilities 425,193 276,399 ------------ ------------ Total Liabilities 15,373,740 14,785,197 ------------ ------------ Preferred Stock, No Par Value: Shares Authorized: 10,000,000 Shares Issued and Outstanding: None -- -- Common Stock, No Par Value: Shares Authorized: 300,000,000 Shares Reserved for Options: 1996 - 3,423,397; 1995 - 3,699,983 Shares Issued and Outstanding: 1996 - 126,055,213; 1995 - 125,978,742 222,919 217,447 Retained Earnings 2,975,589 2,755,537 Unrealized Appreciation of Investment Securities, Net of Tax 715,197 1,013,494 Unrealized Loss from Foreign Currency Translation, Net of Tax (3,746) (3,832) ------------ ------------ Total Stockholders' Equity 3,909,959 3,982,646 ------------ ------------ TOTAL $ 19,283,699 $ 18,767,843 ============ ============
*Certain amounts have been reclassified to conform to the 1996 presentation. -4- 5 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (In Thousands Except Per Share Amounts) - - --------------------------------------------------------------------------------
Nine Months Ended Three Months Ended September 30 September 30 ---------------------------- ---------------------------- 1996 1995* 1996 1995* ----------- ----------- ----------- ----------- REVENUES: Insurance: Property and Casualty Earned Premiums $ 1,688,952 $ 1,605,580 $ 576,570 $ 544,479 Life and Health Premiums and Other Revenues 198,972 200,610 66,692 65,929 ----------- ----------- ----------- ----------- Total 1,887,924 1,806,190 643,262 610,408 Real Estate 57,088 57,127 17,493 18,298 Finance 55,900 47,939 19,325 16,962 Asset Management 16,545 13,320 5,155 4,588 Other 28,517 24,657 9,804 7,494 Net Investment Income 830,584 799,792 280,742 271,521 Realized Investment Gain 69,564 43,238 16,718 22,512 ----------- ----------- ----------- ----------- Total 2,946,122 2,792,263 992,499 951,783 ----------- ----------- ----------- ----------- EXPENSES: Losses, Adjustment Expense and Policy Benefits 1,748,841 1,689,749 581,133 546,929 Commissions 312,561 302,731 111,194 101,649 Personnel Costs 202,514 186,275 69,195 65,188 Interest 53,907 68,041 18,499 23,324 Dividends to Policyholders 12,246 11,996 3,979 3,431 Other 195,309 185,382 62,790 62,420 Amortization of Deferred Policy Acquisition Costs 316,294 305,293 109,474 102,857 Deferral of Policy Acquisition Costs (334,566) (319,029) (117,959) (107,021) ----------- ----------- ----------- ----------- Total 2,507,106 2,430,438 838,305 798,777 ----------- ----------- ----------- ----------- Income before Income Taxes 439,016 361,825 154,194 153,006 ----------- ----------- ----------- ----------- Provision for Federal and Canadian Income Taxes: Current 99,590 78,051 29,235 31,157 Deferred 6,754 1,008 8,973 6,992 ----------- ----------- ----------- ----------- Total 106,344 79,059 38,208 38,149 ----------- ----------- ----------- ----------- Net Income 332,672 282,766 115,986 114,857 Retained Earnings, Beginning of Period 2,755,537 2,495,800 2,896,872 2,595,172 Dividends Declared (106,511) (97,631) (36,556) (33,384) Common Stock Reacquired (6,109) (5,944) (713) (1,654) ----------- ----------- ----------- ----------- Retained Earnings, End of Period $ 2,975,589 $ 2,674,991 $ 2,975,589 $ 2,674,991 =========== =========== =========== =========== Net Income Per Share of Common Stock $ 2.64 $ 2.25 $ 0.92 $ 0.91 =========== =========== =========== =========== Average Number of Shares Outstanding During the Period (In Thousands) 126,035 125,958 126,052 125,974 =========== =========== =========== =========== Cash Dividends Paid to Common Stockholders $ 0.82 $ 0.755 $ 0.29 $ 0.265 =========== =========== =========== ===========
Income per share of common stock is based on the average number of common shares outstanding. Stock options do not have a significant dilutive effect on income per share. *Certain amounts have been reclassified to conform to the 1996 presentation. 1995 share amounts are adjusted to reflect the December 1995 2-for-1 stock split. -5- 6 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Thousands) - - --------------------------------------------------------------------------------
Nine Months Ended September 30 ----------- ----------- 1996 1995 ----------- ----------- OPERATING ACTIVITIES: Insurance Premiums Received $ 1,891,584 $ 1,806,409 Dividends and Interest Received 818,357 793,156 Other Operating Receipts 131,147 127,819 Insurance Claims and Policy Benefits Paid (1,516,853) (1,366,578) Underwriting, Acquisition and Insurance Operating Costs Paid (625,606) (611,644) Interest Paid (45,142) (62,249) Other Operating Costs Paid (65,607) (66,467) Income Taxes Paid (118,213) (64,766) ----------- ----------- Net Cash Provided by Operating Activities 469,667 555,680 ----------- ----------- INVESTING ACTIVITIES: Purchases of: Fixed Maturities Available-for-Sale (1,475,640) (1,440,097) Fixed Maturities Held-to-Maturity (402,807) (161,483) Equities (114,599) (151,437) Other Investments (132,845) (270,636) Maturities of Fixed Maturities Available-for-Sale 571,634 521,397 Maturities of Fixed Maturities Held-to-Maturity 14,233 10,493 Sales of: Fixed Maturities Available-for-Sale 744,479 372,383 Fixed Maturities Held-to-Maturity -- -- Equities 136,008 124,955 Other Investments 42,634 278,448 Net Decrease in Short-Term Investments 29,298 22,084 Finance Receivables Originated or Acquired (274,860) (251,667) Principal Payments Received on Finance Receivables 197,680 175,166 Other (44,851) (46,709) ----------- ----------- Net Cash Used in Investing Activities (709,636) (817,103) ----------- ----------- FINANCING ACTIVITIES: Funds Received Under Deposit Contracts 821,897 772,396 Return of Funds Held Under Deposit Contracts (575,773) (528,136) Proceeds from Notes and Mortgage Borrowings 15,003 199,001 Repayment of Notes and Mortgage Borrowings (76,858) (219,896) Net Proceeds from Short-Term Borrowings 153,772 127,617 Common Stock Reacquired (6,404) (6,312) Dividends Paid to Stockholders (103,343) (95,095) Other 3,451 3,684 ----------- ----------- Net Cash Provided by Financing Activities 231,745 253,259 ----------- ----------- Net Decrease in Cash (8,224) (8,164) Cash at the Beginning of Period 65,477 63,504 ----------- ----------- Cash at the End of Period $ 57,253 $ 55,340 =========== ===========
(continued) -6- 7 SAFECO CORPORATION AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (In Thousands) (continued) - - --------------------------------------------------------------------------------
Nine Months Ended September 30 ------------------------ 1996 1995 --------- --------- Net Income $ 332,672 $ 282,766 --------- --------- Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Realized Investment Gain (69,564) (43,238) Depreciation and Amortization 46,226 37,772 Amortization of Fixed Maturity Investments (28,281) (26,388) Deferred Income Tax Expense 6,754 1,008 Interest Expense on Deposit Contracts 340,519 326,083 Other Adjustments 2,014 6,431 Changes in: Losses and Adjustment Expense (98,846) (47,943) Unearned Premiums 60,359 63,989 Life Policy Liabilities (3,985) 3,105 Accrued Income Taxes (18,363) 13,088 Accrued Interest on Accrual Bonds (31,532) (25,163) Accrued Investment Income (7,854) (642) Deferred Policy Acquisition Costs (18,059) (16,985) Other Assets and Liabilities (42,393) (18,203) --------- --------- Total Adjustments 136,995 272,914 --------- --------- Net Cash Provided by Operating Activities $ 469,667 $ 555,680 ========= =========
-7- 8 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS - - -------------------------------------------------------------------------------- SAFECO Corporation Our net income for the first nine months of 1996 was $333 million or $2.64 per share, compared with $2.25 per share for 1995. If we exclude realized gain from investments, our income was $2.28 per share, compared with $2.03 per share in 1995. The following summarized financial information sets forth the contributions of each business segment to our consolidated income.
NINE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1996 1995 1996 1995 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS) - - ------------------------------------------------------------------------------------------------------- Income (Loss) before Realized Gain and Income Taxes: Property and Casualty Insurance: Underwriting Gain (Loss) ....... $ 31,877 $ (6,762) $ 25,395 $ 23,676 Net Investment Income .......... 211,179 218,320 70,402 72,786 --------- --------- --------- --------- Total Property and Casualty 243,056 211,558 95,797 96,462 Life and Health Insurance ........... 103,627 98,708 34,316 31,970 Real Estate ......................... 9,693 5,907 3,184 2,152 Credit .............................. 14,011 8,976 5,243 3,512 Asset Management .................... 5,175 4,951 1,391 1,744 Corporate ........................... (6,110) (11,513) (2,455) (5,346) --------- --------- --------- --------- Total ..................... 369,452 318,587 137,476 130,494 --------- --------- --------- --------- Realized Gain (Loss), before Tax, from: Security Investments ............... 69,622 42,477 16,734 22,228 Real Estate Investments ............ (58) 761 (16) 284 --------- --------- --------- --------- Total ..................... 69,564 43,238 16,718 22,512 --------- --------- --------- --------- Income before Income Taxes ............ 439,016 361,825 154,194 153,006 --------- --------- --------- --------- Provision for Income Taxes on: Income before Realized Gain ........ 82,166 63,729 32,274 29,658 Realized Gain ....................... 24,178 15,330 5,934 8,491 --------- --------- --------- --------- Total ..................... 106,344 79,059 38,208 38,149 --------- --------- --------- --------- Net Income ............................. $ 332,672 $ 282,766 $ 115,986 $ 114,857 ========= ========= ========= ========= Net Income Per Share of Common Stock ... $ 2.64 $ 2.25 $ .92 $ .91
Note: Amounts per share are adjusted to reflect the December 1995 2-for-1 stock split. -8- 9 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Property and Casualty Insurance Property and casualty operations for the first nine months of 1996 produced pretax income of $243.1 million before realized gain from investments, compared with $211.6 million for the first nine months last year. The company had an underwriting profit of $31.9 million for the first nine months, compared with a loss of $6.8 million for the first nine months a year ago. In the third quarter the underwriting profit was $25.4 million. This compares with profits of $4.4 million last quarter and $23.7 million for the third quarter last year. Catastrophe losses were $57 million for the first nine months, compared with $111 million for the first nine months of 1995. The prior year catastrophe losses include $42 million for increases in the estimated cost of the January 1994 Northridge earthquake and $28 million from two Dallas hailstorms. In the Statement of Consolidated Cash Flows, Net Cash Provided by Operating Activities is lower in the first nine months of 1996 compared with the first nine months of 1995 primarily due to higher claims payments in 1996. These higher claims payments reflect castastrophe losses incurred in 1994 and 1995 and paid in the first half of 1996, and higher payments of 1996 losses on short-tail lines. The combined loss and expense ratio was 98.1 for the first nine months, compared with 100.4 last year. Investment income was $211.2 million, down 3% from a year ago as a result of the relatively low interest rate environment and the effect of reduced cash flow earlier this year. Personal auto, our largest line, produced an underwriting profit of $46.1 million for the first nine months, compared with $68.8 million for the first nine months last year. The profit for the third quarter was $18.2 million. Average loss costs increased slightly during the first nine months. Homeowners had an underwriting loss of $57.3 million for the first nine months, compared with a loss of $38.7 million for the first nine months of 1995. Weather-related losses, including catastrophe losses, were $96 million for this line, compared with $76 million during the first nine months last year. Nonweather-related claims, particularly fire and water damage claims, have also increased this year. We continue to pursue additional premiums for this coverage through a combination of higher prices and proper insurance to value. Other personal lines, which provide coverage for earthquake, dwelling fire, inland marine and boats, produced an underwriting profit of $13.7 million for the first nine months. This compares with a $32.6 million loss for the first nine months last year which included the increases in the estimated cost of the Northridge earthquake. Commercial lines continues to produce results that compare very favorably with the industry. For the first nine months, commercial lines had an underwriting profit of $10.3 million, operating at a combined ratio of 97.6. This compares with an underwriting loss of $17.7 million for the first nine months last year and a combined ratio of 104.3. The surety line continues to experience excellent results for both contract and commercial bond business. The profit for this line was $18.3 million for the first nine months compared with a profit of $16.9 million for the first nine months last year. Property and casualty premiums written for the first nine months increased 4% over a year ago with personal lines up 5% and commercial lines up 1%. -9- 10 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Life and Health Insurance Our life and health companies produced a pretax profit, before realized gain from investments, of $103.6 million for the first nine months of 1996, compared with $98.7 million for the same period last year. The third quarter profit was $34.3 million, compared with $32.0 million for the third quarter of 1995. The annuity and retirement services lines' combined nine months earnings were $38.7 million, down from $43.4 million reported for the same period last year. The competitive market and lower interest rates have resulted in reduced profit margins in these operations. Group insurance profit was $10.4 million for the first nine months, up from $7.8 million reported for the same period last year. Individual life insurance earnings for the nine months were $3.6 million, compared to a loss of $0.5 million for the first nine months of 1995. Recently introduced products combined with a new multi-line marketing strategy continue to have a positive effect on our individual life operation. Real Estate SAFECO Properties produced record pretax income of $9.7 million for the first nine months of 1996, compared with $5.9 million for 1995 as our retail properties continue to produce solid operating results. As previously reported, construction and leasing for our 1.4 million square-foot, mixed-use project in Redmond, Washington, is progressing well as we near a spring 1997 opening date. In addition, we recently commenced development on two existing properties that will be transformed from a traditional regional shopping center format to an alternative retail format, with an emphasis in value retailing. Credit SAFECO Credit Company produced a record pretax profit of $14.0 million for the first nine months of 1996, compared with $9.0 million in the first nine months of 1995 and $13.3 million for all of 1995. Income in the third quarter was also a record $5.2 million, compared to $3.5 million in the third quarter of 1995 and $4.7 million in the second quarter of 1996. Continuing higher loan and lease outstandings, reduced operating expense ratios, favorable write-off experience and relatively stable short-term interest rates were contributing elements to these results. Non-affiliate receivables and operating leases reached $881 million at September 30, 1996, a 13% annualized increase from December 1995. Total net receivables surpassed $1 billion during the third quarter. SAFECO Credit's summarized financial information is as follows (in thousands):
SEPTEMBER 30 DECEMBER 31 1996 1995 ---------- ---------- Finance Receivables ..... $ 812,354 $ 741,177 Others Assets ........... 210,719 141,873 ---------- ---------- Total Assets ........ $1,023,073 $ 883,050 ========== ========== Credit Company Borrowings $ 756,750 $ 614,270 Other Liabilities ....... 162,414 172,155 ---------- ---------- Total Liabilities ... $ 919,164 $ 786,425 ========== ==========
NINE MONTHS ENDED SEPTEMBER 30 1996 1995 ------- ------- Revenues ................. $61,983 $52,466 Expenses ................. 47,972 43,490 ------- ------- Income before Income Taxes 14,011 8,976 Provision for Income Taxes 5,064 2,985 ------- ------- Net Income ........... $ 8,947 $ 5,991 ======= =======
-10- 11 SAFECO CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued) - - -------------------------------------------------------------------------------- Asset Management The pretax income from our asset management activities for the first nine months of 1996 was $5.2 million, compared with $5.0 million last year. Assets under management continue to increase and total $3.2 billion, an increase of 10% over September 30, 1995. Investment Portfolio The market value of our consolidated bond portfolio was $607 million in excess of amortized cost at September 30, 1996 compared with $533 million at June 30, 1996 and $1.4 billion at December 31, 1995. The market value of our equity securities was $593 million in excess of cost at September 30, 1996. Executive Promotions Boh A. Dickey has been promoted to President and Chief Operating Officer of SAFECO Corporation and Rod A. Pierson has been appointed Chief Financial Officer of SAFECO Corporation effective August 7, 1996. Roger Eigsti continues as Chairman and Chief Executive Officer. As president and chief operating officer, Dickey has overall responsibility for SAFECO's life insurance subsidiaries and financial operations, including the mutual fund, credit company, real estate, surety, investment and Talbot Financial operations. Dickey, 52, joined SAFECO in 1982 as vice president and controller, becoming chief financial officer in 1989. He was appointed executive vice president in 1992 and elected a director of the corporation in 1993. Pierson, 48, has been with SAFECO since 1974. In addition to now serving as chief financial officer, he also remains senior vice president, secretary and controller of the corporation. Pierson served as controller of SAFECO's property and casualty subsidiaries from 1984 to 1990 and was appointed senior vice president in 1994. Other-- Footnotes The following additional footnote disclosure relates to new accounting standards. Nature of Operations and Summary of Significant Accounting Policies -- New Accounting Standards In March of 1995, the Financial Accounting Standards Board (FASB) issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement 121 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying value. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Statement 121 is effective for financial statements for fiscal years beginning after December 15, 1995 and SAFECO adopted it in the first quarter of 1996. Adoption did not affect net income. In June of 1996, the FASB issued Statement 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." Statement 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and SAFECO will adopt it in the first quarter of 1997. The FASB is currently considering a one year deferral of the effective date of certain provisions of Statement 125. Statement 125 provides guidance in determining whether a transfer of a financial asset represents a sale or a secured borrowing, as well as the continuing accounting for any servicing assets retained. The Statement also provides guidance relating to extinguishment of liabilities by debtors. Although the impact of the Statement is currently being studied, it is not expected to have a material effect on SAFECO's financial position or results of operations. -11- 12 SAFECO CORPORATION Part II - Other Information - - -------------------------------------------------------------------------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 3 - Bylaws (as last amended August 7, 1996.) Exhibit 10 - Form of Executive Severance Agreements with Richard E. Zunker and James W. Ruddy dated August 30, 1996. Exhibit 27 - Financial Data Schedule. (This exhibit is included only in the electronic EDGAR filing version on this 10-Q. The Financial Data Schedule is not a separate financial statement but a schedule that summarizes certain standard financial information extracted directly from the financial statements in this filing.) (b) Reports on Form 8-K No Forms 8-K were filed or required to be filed for any event during the quarter ended September 30, 1996. -12- EX-3 2 BYLAWS (AS AMENDED AUGUST 7,1996.) 1 Exhibit 3 BYLAWS OF SAFECO CORPORATION (As last amended August 7, 1996) ARTICLE I STOCKHOLDERS' MEETINGS 1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation for the election of Directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held at 11:00 o'clock in the morning on the first Wednesday in May or, if such day is a legal holiday, then on the following business day or on such other day as may be designated by the Chairman, the President, or the Board of Directors ("Board of Directors"). The meeting shall be held at the principal executive office of the corporation or at such other place as may be designated in the notice of the meeting. (b) For business to be properly brought before the annual meeting in accordance with these Bylaws, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must file a written notice of intention to bring such business ("Business Notice") with the Secretary of the corporation not less than 60 days nor more than 90 days before the date of the stockholders' meeting at which such business will be brought; provided, however, that, in the event that the date of the meeting is other than the date specified in Section 1(a) of this Article I and less than 70 days' notice or initial prior public disclosure of the date of the meeting is given or made to stockholders, such Business Notice shall be timely if received not later than 10 days after the day on which such notice of the date of the meeting was mailed or such initial public disclosure of the date of the meeting was made, whichever first occurs. The Business Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to bring such business before the meeting; and, as to each matter the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest of the stockholder in such business. (c) No business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1; provided, however, that nothing in this Section 1 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The presiding officer of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the foregoing 2 SAFECO Corporation Bylaws At August 7, 1996 Page 2 procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Board of Directors. Such special meetings may be for any purpose or purposes, which shall be described in the notice of such special meeting, and shall be at the date, time and place prescribed in the notice of the meeting. 3. NOTICE OF MEETING. (a) Written notice of each annual and special stockholders' meeting shall be given to all stockholders of record entitled to notice of such meeting no fewer than 10 nor more than 60 days before the meeting date, except that notice of a stockholders' meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If such written notice is placed in the United States mail, postage prepaid, and correctly addressed to the stockholder's address shown in the corporation's current record of stockholders, then the notice is effective when mailed. (b) Notice of any stockholders' meeting may be waived in writing by any stockholder at any time, either before or after the meeting. In addition, notice of the date, time, place and purpose of the meeting shall be deemed waived by any stockholder who attends a stockholders' meeting in person or by proxy, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting. 4. ORGANIZATION OF MEETING - QUORUM. A stockholders' meeting, duly called, can be organized for the transaction of business whenever a quorum is present. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting shall constitute a quorum. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting. 5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an adjourned meeting, an adjournment or adjournments of any stockholders' meeting may be taken to the date, time and place announced by the presiding officer at the meeting, without new notice being given; but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors are elected. 3 SAFECO Corporation Bylaws At August 7, 1996 Page 3 6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote for each share of common stock then of record in the holder's name on the books of the corporation. Each holder of a share of capital stock other than common stock shall have the right to vote on those matters prescribed by the Board of Directors in establishing the preferences, limitations and relative rights for that class of capital stock. Every stockholder shall have the right to vote either in person or by proxy. All voting at stockholders' meetings shall be viva voce, unless any qualified voter shall demand a vote by ballot. In the case of voting by ballot, each ballot shall state the name of the stockholder voting, the number of shares owned by the stockholder, and, in addition, if such vote be cast by proxy it shall also state the name of the proxy. ARTICLE II BOARD OF DIRECTORS 1. NUMBER AND QUALIFICATIONS. The business and affairs of the corporation shall be managed under the direction of a Board of Directors of from 12 to 18 directors, as set from time to time by resolution of the Executive Committee, which directors need not be stockholders of the corporation. 2. ELECTION - TERM OF OFFICE. The directors shall be divided into three classes, designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each annual meeting of stockholders successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, but in no case will a decrease in the number of Directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director's term expires and until the director's successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. In the event of a failure to hold an election of Directors at any annual stockholders' meeting, election of Directors may be held at a special meeting of the stockholders called for that purpose; provided, that notice thereof be given all stockholders entitled to vote at such meeting at least 30 days prior to the date set for such special meeting. 3. VACANCIES. Any vacancy on the Board of Directors may be filled by the stockholders, the Board of Directors or, if the directors in office constitute fewer than a quorum of the Board of Directors, then by the affirmative vote of the majority of all directors in office. 4 SAFECO Corporation Bylaws At August 7, 1996 Page 4 4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a committee of the Board of Directors shall nominate individuals for election as directors at the annual meeting of stockholders and at any special meeting of stockholders called for the purpose of electing directors. Nominations may also be made by any stockholder entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 4. (b) A nomination for election as director, other than nominations made by or at the direction of the Board of Directors, may be made only if a written notice of intention to nominate ("Nomination Notice") has been received by the secretary to the Board of Directors not less than 60 days nor more than 90 days before the date of the stockholders' meeting at which such election will occur; provided, however, that, in the event that the date of the meeting is other than the date specified in Section 1(a) of Article I above and less than 70 days' notice or initial prior public disclosure of the date of the meeting is given or made to stockholders, such Nomination Notice shall be timely if received not later than 10 days after the day on which such notice of the date of the meeting was mailed or such initial public disclosure of the date of the meeting was made, whichever first occurs. The Nomination Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to make a nomination; the name, age, address and telephone number of each nominee; a description of each nominee's business experience for the past five years; a statement whether the nominee has ever been prosecuted for any crime or been a party to any proceeding in which it was alleged the nominee or any affiliate of the nominee violated any law or regulation and, if so, a complete description of such prosecution or proceeding; and any other information relating to each nominee that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended. The corporation may require any proposed nominee to furnish such additional information as may reasonably be required to determine the eligibility of such proposed nominee. In order to be considered valid the Nomination Notice must be accompanied by the written consent of each nominee to be nominated and a statement of each nominee's intention to serve as a director if elected. (c) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. The presiding officer at the stockholders' meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. 5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof. 5 SAFECO Corporation Bylaws At August 7, 1996 Page 5 6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held quarterly, on the first Wednesday in February, May, August and November of each year, at such time and place as designated in the notice of the meeting. 7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place at any time when called by the Chairman or the President, or when called by the Secretary or an Assistant Secretary on request of three directors, or when called by any director during a national emergency of the kind that would make emergency bylaws operative for domestic insurers under the provisions of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington. 8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board of Directors and of meetings of committees of the Board of Directors shall be given by the secretary to the Board of Directors, or by the person calling the meeting, in writing or orally at least two days prior to the day upon which the meeting is to be held. Notice may be given by mail, private carrier, personal delivery, telegraph or teletype, telephone, or by wire or wireless equipment which transmits a facsimile of the notice. (b) A director may waive notice of any meeting of the Board of Directors or any committee of the Board of Directors in writing before or after the date and time of the meeting and such waiver shall be deemed the equivalent of giving notice of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee of the Board of Directors need be specified in the waiver of notice of such meeting. (c) A director's attendance at or participation in a Board of Directors or committee meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting, or promptly upon the director's arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. 9. QUORUM. A majority of the total number of Directors fixed by or in the manner provided in these Bylaws or, if vacancies exist on the Board of Directors, a majority of the total number of Directors then serving on the Board of Directors shall constitute a quorum for the transaction of business at any Board of Directors' meeting; provided, however, that a quorum may not be less than one-third of the total number of Directors fixed by or in the manner provided by these Bylaws. When a quorum is present, a majority of the directors in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time-to-time without further notice. 6 SAFECO Corporation Bylaws At August 7, 1996 Page 6 ARTICLE III EXECUTIVE COMMITTEE 1. MEMBERSHIP. The Executive Committee shall consist of not less than two members and shall include (i) the chief executive officer of the corporation, (ii) the chairs of each of the Audit, Compensation, Finance and Nominating Committees, and (iii) any other director of the corporation appointed by the Board of Directors. The chief executive officer shall be the chair of the Executive Committee, unless the Board of Directors designates some other member of the Executive Committee as chair. 2. POWERS AND DUTIES. (a) Other than those powers specifically denied to a committee of a Board of Directors under Washington law, the Executive Committee may exercise all the powers of the Board of Directors in the management of the business of the corporation when the Board of Directors is not in session. All such actions of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration. (b) The Executive Committee shall determine the corporation's policy regarding charitable contributions and shall review and make recommendations to the Board of Directors as appropriate on fundamental matters, including election of Directors, succession planning, appointment of officers of the corporation and its principal subsidiaries, capital allocation among the corporation's operations, issuance and repurchase or redemption of securities, dividends to shareholders, formation of subsidiaries, and material acquisitions or dispositions of subsidiaries or assets. 3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Executive Committee may be called at any time by the chair of the Executive Committee or any two members. At all meetings of the Executive Committee, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. 7 SAFECO Corporation Bylaws At August 7, 1996 Page 7 ARTICLE IV FINANCE COMMITTEE 1. MEMBERSHIP. The Finance Committee shall consist of not less than five members appointed by the Board of Directors, one of whom shall be designated as its chair by the Board of Directors. Each member of the Finance Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. The Finance Committee shall have general supervision of the finances and investments of the corporation. It shall designate or approve the designation of depositories for the funds of the corporation and shall have authority over all matters related to bank and custodial accounts; it shall have authority to buy and sell securities and to make loans of such character as is permitted by law; and, it may direct any action necessary to collect amounts due the corporation. All actions of the Finance Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. Such actions shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration. 3. RULES OF PROCEDURE. The Finance Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Committee may be called at any time by the chair of the Finance Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE V AUDIT COMMITTEE 1. MEMBERSHIP. The Audit Committee shall consist of not less than three members appointed by the Board of Directors, none of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Audit Committee as its chair. Each member of the Audit Committee shall continue as a member at the pleasure of the Board of Directors. 8 SAFECO Corporation Bylaws At August 7, 1996 Page 8 2. POWERS AND DUTIES. (a) The Audit Committee shall: (1) Recommend the independent public accountants for selection as auditors by the Board of Directors; (2) Review the scope and, upon completion, the results of the audit with the corporation's independent public accountants; (3) Review management letters received from the independent public accountants in connection with audits; (4) Review the corporation's internal accounting controls; (5) Review the planning and results of internal audit examinations; (6) Review with management any accounting changes affecting the corporation or its affiliates; (7) Meet in alternative and separate executive sessions with the independent public accountants and management; (8) Review the scope of and fees for consulting services provided by the independent public accountants; and (9) Review any interested party conflict-of-interest situation brought to its attention. (b) All actions of the Audit Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Audit Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Audit Committee may be called at any time by the chair of the Audit Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. 9 SAFECO Corporation Bylaws At August 7, 1996 Page 9 ARTICLE VI NOMINATING COMMITTEE 1. MEMBERSHIP. The Nominating Committee shall consist of not less than three members appointed by the Board of Directors, not more than one of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Nominating Committee as its chair. Each member of the Nominating Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Nominating Committee shall: (1) Review qualifications of candidates for Board of Directors membership from whatever source received; (2) Recommend to the Executive Committee the slate of director candidates to be proposed for election by stockholders at the annual meeting; (3) Recommend to the Executive Committee candidates to fill director vacancies which occur between annual meetings of stockholders; (4) Recommend to the Board of Directors criteria regarding personal qualifications for nomination as director, including experience, skills, affiliations and characteristics; (5) Recommend to the Board of Directors criteria regarding the composition of the Board of Directors, including total size and number of employee-directors; (6) Recommend to the Board of Directors criteria relating to tenure as a director, including retirement age and continuation of a director in an honorary or similar capacity; and (7) Recommend to the Board of Directors the fees to be paid to directors, including retainer, meeting and committee meeting fees, and any additional fees to be paid to a director for particular service, e.g., to the chairman of the Board of Directors or chair of any committee. The Committee shall not recommend that any such fees be paid to any director who is also an employee of the corporation or its subsidiaries. 10 SAFECO Corporation Bylaws At August 7, 1996 Page 10 (b) All actions of the Nominating Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Nominating Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Nominating Committee may be called at any time by the chair of the Nominating Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VII COMPENSATION COMMITTEE 1. MEMBERSHIP. The Compensation Committee shall consist of not less than three members appointed by the Board of Directors, none of whom shall be an employee of the corporation or any of its subsidiaries. The Board of Directors shall designate one member of the Compensation Committee as its chair. Each member of the Compensation Committee shall continue as a member at the pleasure of the Board of Directors. 2. POWERS AND DUTIES. (a) The Compensation Committee shall: (1) Review and approve in advance salary increases for officers of the corporation and employees of its subsidiaries where the proposed salary exceeds an amount set from time-to-time by the Board of Directors; (2) Report to the Board of Directors remuneration information concerning the chief executive officer and through the chief executive officer make such information as to any employee available to any director upon request; (3) Review and recommend to the Board of Directors any additional employee benefit program of a substantial nature and material changes to existing programs; (4) Review and approve changes required by law to be made to existing employee benefit programs and non-material changes to existing programs; and (5) Administer the corporation's stock option program. 11 SAFECO Corporation Bylaws At August 7, 1996 Page 11 (b) All actions of the Compensation Committee shall be recorded in minutes of its meetings and reported to the Board of Directors. 3. RULES OF PROCEDURE. The Compensation Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Compensation Committee may be called at any time by the chair of the Compensation Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business. ARTICLE VIII OTHER COMMITTEES The Board of Directors shall have authority to establish by resolution such other committees as the Board of Directors may from time to time deem necessary or advisable. The membership, duties and authority of such committees shall be as the Board of Directors may from time to time establish. ARTICLE IX OFFICERS 1. OFFICERS ENUMERATED - APPOINTMENT. The officers of the corporation shall be a Chairman, a President, one or more Vice Presidents, one or more Assistant Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers, all of whom shall be appointed by the Board of Directors at the annual meeting thereof, to hold office for the term of one year and until their successors are appointed and qualified. 2. QUALIFICATIONS. None of the officers of the corporation, except the Chairman and President, need be a director. Any two or more corporate offices may be combined in one person. 3. CHAIRMAN. The Chairman shall preside at all meetings of the stockholders and directors, shall be the chief executive officer of the corporation, and, subject to the Board of Directors and Executive Committee, shall have general supervisory power and ultimate authority over and responsibility for the business and affairs of the corporation. 12 SAFECO Corporation Bylaws At August 7, 1996 Page 12 4. PRESIDENT. The President shall be the chief operating officer of the corporation, and, subject to the ultimate authority of the Board of Directors, Executive Committee and Chairman, shall have general charge, supervision and control over the business and affairs of the corporation and of such of its subsidiaries as have been designated by the Chairman, and shall be responsible for the management thereof. In the absence of the Chairman the President shall act in the place of the Chairman with the authority to exercise all of the Chairman's powers and perform the Chairman's duties. 5. VICE PRESIDENTS. In the absence or disability of both the Chairman and President, one of the Vice Presidents, in the order determined by seniority of responsibility and then order of their appointment, shall act as Chairman and President until such time as the Board of Directors acts to appoint an individual or individuals to the offices of Chairman and President. One or more of the vice presidents may be designated by the Board of Directors as executive vice president, senior vice president or such other title as the Board of Directors deems appropriate for the position and duties. 6. SECRETARY. The Secretary shall be the custodian of the records, books of account, and seal of the corporation, and, in general, shall perform all duties usually incident to the office of Secretary, and make such reports and perform such other duties as may from time to time be requested of or assigned by the Board of Directors, the Executive Committee, the chief executive officer or chief operating officer of the corporation. 7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as may be assigned to them by the Secretary of the corporation, the Board of Directors, the Executive Committee, the chief executive officer or the chief operating officer of the corporation. 8. TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer shall deposit all such funds in the name of the corporation in such depositories or invest them in such investments as may be designated or approved by the Finance Committee or the Board of Directors, and shall authorize disbursement of the funds of the corporation in payment of just demands against the corporation, or as may be ordered by the Board of Directors, the Executive Committee, or the Finance Committee on securing proper vouchers for such disbursements. The Treasurer shall render to the Board of Directors from time to time as may be required an account of all transactions as Treasurer, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Finance Committee, or the chief executive officer of the corporation. 13 SAFECO Corporation Bylaws At August 7, 1996 Page 13 9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as may be assigned to them by the Treasurer, the Board of Directors, the Executive Committee, the chief executive officer or the chief operating officer of the corporation. 10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it shall deem necessary to exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors. 11. REMOVAL. Any officer of the corporation may be removed by the affirmative vote of a majority of the whole Board of Directors; such removal, however, shall be without prejudice to the contract rights of the person so removed. ARTICLE X CORPORATION PROXIES Unless otherwise ordered by the Board of Directors, any and all shares of stock owned or held by the corporation in any other corporation shall be represented and voted at any meeting of the stockholders of such other corporation by any one of the following officers of the corporation in the following order who may attend such meeting; i.e., the Chairman, the President, a Vice President, or the Treasurer, and such representation by any one of the officers above named shall be deemed and considered a representation in person by the corporation at such meeting. Any one of the officers above named may execute a proxy appointing any other person as attorney and proxy to represent the corporation at such stockholders' meeting and to vote all stock of such corporation owned or held by the corporation with all power and authority in the premises that any of the officers above named would possess if personally present. The Board of Directors by resolution may from time to time confer like powers upon any other person or persons. ARTICLE XI STOCK 1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be issued in such form in accordance with the corporation law of the State of Washington as may be approved by the Board of Directors, and may be signed by the chief executive officer, the chief operating officer, or any Vice President, and by the Secretary or any Assistant Secretary. 2. TRANSFERS. Shares of stock may be transferred by delivery of the certificates therefor accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same by the record holder of the certificate. No 14 SAFECO Corporation Bylaws At August 7, 1996 Page 14 transfer shall be valid except as between the parties thereto until such transfer shall have been made on the books of the corporation. Except as specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation. 3. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact thereof for all purposes, including the payment of dividends on such stock and the right to vote such stock. 4. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction, and upon the giving of a satisfactory bond or indemnity to the corporation. A new certificate may be issued without requiring any bond when in the judgment of the Treasurer it is proper to do so. 5. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the State of Washington. ARTICLE XII INDEMNIFICATION 1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether brought by or in the right of the corporation or otherwise) by reason of the fact that he or she is or was a director of the corporation, or, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan (an "Indemnitee"), whether the basis of a proceeding is an alleged action in an official capacity as such a director, officer, partner, trustee, employee, or agent or in any other capacity while serving as such a director, officer, partner, trustee, employee, or agent, shall be indemnified and held harmless by the corporation against all judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the Indemnitee in connection with such proceeding. Except as provided in paragraph (d) of this Section 1 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any Indemnitee only if the proceeding (or part thereof) was authorized or ratified by the Board of Directors. 15 SAFECO Corporation Bylaws At August 7, 1996 Page 15 (b) No indemnification shall be provided to any Indemnitee for acts or omissions of the Indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the Indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision is hereafter amended, the restrictions on indemnification set forth in this paragraph (b) shall be as set forth in such amended statutory provision. (c) The right to indemnification conferred under this Article XII shall included the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition. An advancement of expenses shall be made upon delivery to the corporation of an undertaking, by or on behalf of an Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Article XII. (d) If a claim under this Section 1 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. An Indemnitee shall be presumed to be entitled to indemnification under this Article XII upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation), and the corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled. 2. OFFICERS. The corporation shall extend rights to indemnification and advancement of expenses in the same manner and to the same extent provided to directors under Section 1 of this Article to any person, not a director of the corporation, who is or was an officer of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan. 3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (I) with the same 16 SAFECO Corporation Bylaws At August 7, 1996 Page 16 scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors; (ii) pursuant to rights provided by the Washington Business Corporation Act; or (iii) as are otherwise consistent with law. 4. DEFINITIONS. For purposes of this Article XII, the terms "director," "corporation," "expenses," "party" and "proceeding" have those meanings assigned to them in Section 23B.08.500 of the Washington Business Corporation Act. 5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another corporation of which a majority of the shares entitled to vote is held by the corporation or (b) as a partner, trustee or otherwise in a management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly-owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation. 6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act. 7. NOT EXCLUSIVE -- CONTINUING. The indemnification provided by this Article shall not be deemed exclusive of other rights to which the director, officer, employee or agent may be entitled as a matter of law or by contract, and shall continue as to a person who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. 8. INSURANCE. The corporation may maintain insurance at its expense to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act. ARTICLE XIII SEAL The seal of this corporation shall consist of a flat-faced, circular die with the words "SAFECO CORPORATION" and with the words and figures "Corporate Seal, 1929" in the center surrounding the trademarked chevron and stylized "S." 17 SAFECO Corporation Bylaws At August 7, 1996 Page 17 ARTICLE XIV COPIES OF RESOLUTIONS Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the stockholders, the Board of Directors, and any committees of or established by the Board of Directors, when certified by the chief executive officer, the chief operating officer, a Vice President, Secretary, or an Assistant Secretary. ARTICLE XV AMENDMENT OF BYLAWS 1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any meeting of the stockholders, if notice of the proposed alteration or amendment is contained in the notice of the meeting. 2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting if notice of the proposed alteration or amendment is contained in the notice of such special meeting; provided, however, that the Board of Directors shall not amend, alter or repeal any Bylaw in such a manner as to affect in any way the qualification, classification, or term of office of the directors. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the stockholders. EX-10 3 FORM OF EXECUTIVE SEVERANCE AGREEMENTS 1 Exhibit 10 SEVERANCE AGREEMENT BETWEEN SAFECO CORPORATION AND Dated August 30, 1996 2 TABLE OF CONTENTS Defined Terms...............................................................1 Term of Agreement...........................................................l Company's Covenants Summarized..............................................l The Executive's Covenants...................................................2 Compensation Other Than Severance Payments..................................2 Severance Payments..........................................................5 Termination Procedures and Compensation During Dispute.....................10 Notice of Termination......................................................10 Date of Termination........................................................10 Dispute Concerning Termination ............................................11 Compensation During Dispute................................................11 No Mitigation..............................................................12 Successors; Binding Agreement..............................................12 Notices....................................................................13 Miscellaneous..............................................................13 Validity...................................................................14 Counterparts...............................................................14 Settlement of Disputes; Arbitration .......................................14 Definitions................................................................14 3 SEVERANCE AGREEMENT THIS AGREEMENT, dated August 30, 1996, is made by and between SAFECO Corporation, a Washington corporation ("Safeco"), and (the "Executive"). WHEREAS, Safeco (together with its subsidiaries, collectively, the "Company"), considers it essential to the best interests of its stockholders to foster the continued employment of key management personnel; and WHEREAS, Safeco recognizes that, as is the case with many publicly held corporations, the possibility of a Change ill Control exists and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; and WHEREAS, Safeco has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including the Executive, to their assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control; WHEREAS, the Executive is a party to an Executive Severance Agreement with the Company dated (the "Prior Agreement"); NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows: 1. Defined Terms. The definitions of capitalized terms used in this Agreement are provided in the last Section hereof. 2. Term of Agreement. The Term of this Agreement shall commence on the date hereof and shall continue in effect until the earlier of (i) the date it is terminated by written agreement between the Company and the Executive and (ii) seventh anniversary of a Change in Control. The Prior Agreement shall terminate on the date hereof. 3. Company's Covenants Summarized. In order to induce the Executive-to remain in the employ of the Company and in consideration of the Executive's covenants 4 set forth in Section 4 hereof, the Company agrees, under the conditions described herein, to pay the Executive the Severance Payments and the other payments and benefits described herein. Except as provided in the first sentence of Section 6.2(A), Section 5.4 and Section 9.1, no amount or benefit shall be payable under this Agreement unless there shall have been a termination of the Executive's employment with the Company following a Change in Control and during the Term. This Agreement shall not be construed as creating an express or implied contract of employment and, except as otherwise agreed in writing between the Executive and the Company, the Executive shall not have any right to be retained in the employ of the Company. 4. The Executive's Covenants. The Executive agrees that, subject to the terms and conditions of this Agreement, in the event of a Potential Change in Control during the Term, the Executive will remain in the employ of the Company until the earliest of (i) a date which is six (6) months from the date of such Potential Change of Control, (ii) the date of a Change in Control, (iii)*the date of termination by the Executive of the Executive's employment for Good Reason or by reason of death, Disability or Retirement, or (iv) the termination by the Company of the Executive's employment for any reason. 5. Compensation Other Than Severance Payments. 5.1 Following a Change in Control and during the Term, during any period that the Executive fails to perform the Executive's full-time duties with the Company as a result of incapacity due to physical or mental illness, the Company shall pay the Executive's full salary to the Executive at the rate in effect at the commencement of any such period, together with all compensation and benefits payable to the Executive under the terms of any applicable compensation or benefit plan, program or arrangement maintained by the Company during such period, until the Executive's employment is terminated by the Company for Disability. 5.2 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay the Executive's full salary to the Executive through the Date of Termination at the rate in effect at the time the 2 5 Notice of Termination is given, together with all compensation and benefits payable to the Executive through the Date of Termination under the terms of the Company's applicable compensation and benefit plans, programs or arrangements. 5.3 If the Executive's employment shall be terminated for any reason following a Change in Control and during the Term, the Company shall pay to the Executive the Executive's normal post-termination compensation and benefits as such payments become due. Such post-termination compensation and benefits shall be determined under, and paid in accordance with, the Company's applicable retirement, insurance and other compensation or benefit plans, programs and arrangements. 5.4. Immediately prior to the Change in Control, all awards of nonqualified stock options, stock appreciation rights granted in connection with nonqualified stock options, restricted stock rights and performance stock rights previously granted to the Executive shall become fully vested and, with respect to options and stock appreciation rights, exercisable. The phrase "immediately prior to the Change in Control" shall be understood to mean sufficiently in advance of a Change in Control to permit the Executive to take all steps reasonably necessary to exercise all options and stock appreciation rights and deal with the shares of stock underlying the awards of stock options, stock appreciation rights, restricted stock rights and performance stock rights so that such shares may be treated in the same manner as the shares of stock of other shareholders in connection with the Change in Control. 5.5 Executive may elect to defer all or a portion of the payments that are to be made to Executive under subsection (A) of Section 6.1 hereof and Section 6.2 hereof. Executive may exercise such election by delivering a notice (in accordance with Section 10 hereof) of election prior to the occurrence of Change in Control, which notice shall state the portion of such payments that is to be deferred (expressed as a dollar amount or as a percentage ("the Deferred Benefit")), the date the payment of the Deferred Benefit shall commence ("the Deferred Benefit Commencement Date"), and the number of equal consecutive monthly installments (not to exceed 120) that the Deferred Benefit is to be paid in. 3 6 In no event shall the Deferred Benefit Commencement Date be subsequent to the first day of January of the year immediately following the Executive's sixty-fifth birthday. In the event such an election is made: (A) The amount that would have otherwise been paid under the provisions of subsection (A) of Section 6.1 hereof and Section 6.2 hereof shall be reduced by an amount equal to the Deferred Benefit. (B) The Deferred Benefit, together with simple interest calculated at an annual rate of ten percent (10%) on the unpaid balance of the Deferred Benefit from the date that payment of the Deferred Benefit would have otherwise been made, shall be paid in the number of equal consecutive monthly installments selected by Executive, with the first such installment being made on the Deferred Benefit Commencement Date and a subsequent payment being made on the first day of each month thereafter. (C) If Executive dies prior to receiving the full amount of the Deferred Benefit, the Company shall continue to pay the Deferred Benefit to the estate of Executive in the same manner as the Deferred Benefit would have been paid to Executive if he had not died. (D) The Deferred Benefit shall in no event be set aside or deposited to a separate account or fund, and the rights of Executive to the Deferred Benefit shall not be greater than the rights of any other general, unsecured creditor of the Company. (E) Executive, his spouse, and any other person or entity claiming through or under Executive shall not have any power or authority to commute, encumber, or dispose of any right to receive payment of the Deferred Benefit, all of which payments are expressly declared to be nonassignable. In the event of any attempt at assignment or other disposition, the Company shall have no further liability to 4 7 pay the Deferred Benefit. The Deferred Benefit provided for in this Agreement shall not be subject to seizure for the payment of any debts, judgments, alimony, separate maintenance or child support, or be reached or transferred by operation of law, or in the event of bankruptcy, insolvency or otherwise. 6. Severance Payments. 6.1 The Company shall pay the Executive the payments described in this Section 6.1 (the "Severance Payments") upon the termination of the Executive's employment following a Change in Control and during the Term, in addition to any payments and benefits to which the Executive is then entitled under Section 5 hereof, unless such termination is (i) by the Company for Cause, (ii) by reason of death, Disability or Retirement, or (iii) by the Executive without Good Reason. Additionally, during the one-month period beginning with the first day of the month immediately following the first anniversary of the Change in Control, the Executive may voluntarily terminate his employment for any reason and, upon such termination, the Company shall pay the Executive the Severance Payments and the Gross-Up Payment, in addition to any payments and benefits to which the Executive is then entitled under Section 5 hereof. For purposes of this Agreement, the Executive's employment shall be deemed to have been terminated following a Change in Control by the Company without Cause or by the Executive with Good Reason, if (i) the Executive's employment is terminated by the Company without Cause prior to a Change in Control and such termination was at the request or direction of a Person who has entered into an agreement with the Company the consummation of which would constitute a Change in Control, (ii) the Executive terminates his employment with Good Reason prior to a Change in Control and the circumstance or event which constitutes Good Reason occurs at the request or direction of such Person, or (iii) the Executive's employment is terminated by the Company without Cause prior to a Change in Control and the Executive reasonably demonstrates that such termination is otherwise in connection with or in anticipation of a Change in Control. (A) In lieu of any further salary payments to the Executive for periods subsequent to 5 8 the Date of Termination and in lieu of any severance benefit otherwise payable to the Executive, the Company shall pay to the Executive a lump sum severance payment, in cash, equal to three (or, if less, the number of years, rounded to the nearest hundredth of a year, remaining until December 31 of the year in which the Executive attains age 65) times the higher of Executive's annual base salary in effect immediately prior to the occurrence of the event or circumstance upon which the Notice of Termination is based and Executive's base salary in effect immediately prior to Date of Termination. (B) For the thirty-six (36) month period immediately following the Date of Termination or, if shorter, for the period commencing immediately following the Date of Termination and ending on December 31 of the year in which the Executive attains age 65 (such applicable period, the "Severance Period"), the Company shall arrange to provide the Executive with life, disability, accident and health insurance benefits substantially similar to those which the Executive is receiving immediately prior to the Date of Termination; provided, however, that, unless the Executive consents to a different method (after taking into account the effect of such method on the calculation of "parachute payments" pursuant to Section 6.2 hereof), such health insurance benefits shall be provided through a third-party insurer Benefits otherwise receivable by the Executive pursuant to this Section 6.1 (B) shall be reduced to the extent comparable benefits are actually received by or made available to the Executive during the Severance Period (and any such benefits actually received by or made available to the Executive shall be reported to the Company by the Executive). (C) Notwithstanding any provision of any annual or long-term incentive plan to the contrary, the Company shall pay to the Executive a lump sum amount, in cash, equal to the-sum of (i) any incentive compensation which has been allocated or awarded to the Executive for a completed year or other measuring period preceding the Date of Termination under any such plan and which, as of the Date of Termination, is contingent only upon the contin- 6 9 ued employment of the Executive to a subsequent date, and (ii) a pro rata portion to the Date of Termination of the aggregate value of all contingent incentive compensation awards to the Executive for all then uncompleted periods under any such plan, calculated as to each such award by multiplying the award that the Executive would have earned on the last day of the performance award period, assuming the achievement, at the level that would produce the maximum award, of the individual and corporate performance goals established with respect to such award, by the fraction obtained by dividing the number of full months and any fractional portion of a month during such performance award period through the Date of Termination by the total number of months contained in such performance award period. 6.2 (A) Whether or not the Executive becomes entitled to the Severance Payments, if any of the payments or benefits received or to be received by the Executive in connection with a Change in Control or the Executive's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company, any Person whose actions result in a Change in Control or ANY Person affiliated with the Company or such Person) (such payments or benefits, excluding the Gross-Up Payment, being hereinafter referred to as the Total Payments") will be subject to the Excise Tax, the Company shall pay to the Executive an additional amount (the "Gross-Up Payment") such that the net amount retained by the Executive, after deduction of any Excise Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up payment, shall be equal to the Total Payments. (B) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as Parachute payments" (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of tax counsel selected by the accounting firm which was, immediately prior to the Change in Control, the Company's independent accountant (the "Accountant") and which tax counsel is reasonably acceptable to the Executive ("Tax Counsel"), such payments or benefits (in whole or in part) do not constitute 7 10 parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the Base Amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Accountant in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive's residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6.2), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. (C) In the event that the Excise Tax is finally determined to be less than the amount taken into account hereunder in calculating the Gross-Up Payment, the Executive shall repay to the Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income and employment taxes imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income or employment tax deduction) plus interest on the amount of such repayment at 120% of the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder in calculating the Gross-Up Payment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional 8 11 Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. The Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments. 6.3 The payments provided in subsections (A) and (C) of Section 6.1 hereof and in Section 6.2 hereof shall be made not later than the fifth day following the Date of Termination; provided, however, that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to the Executive on such day an estimate, as determined in good faith by the Executive or, in the case of payments under Section 6.2 hereof, in accordance with Section 6.2 hereof, of the minimum amount of such payments to which the Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder (or on all such payments to the extent the Company fails to make such payments when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the Date of Termination. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by the Company to the Executive, payable on the fifth (5th) business day after demand by the Company (together with interest at 120% of the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Section, the Company shall provide the Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Accountant or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 6.4 The Company also shall pay to the Executive all legal fees and expenses incurred by the Executive in disputing in good faith any issue hereunder relating to the termination of the Executive's employment, in seeking in good faith to obtain or enforce any 9 12 benefit or right provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of section 4999 of the Code to any payment or benefit provided hereunder. Such payments shall be made within five (5) business days after delivery of the Executive's written requests for payment accompanied with such evidence of fees and expenses incurred as the Company reasonably may require. 7. Termination Procedures and Compensation During Dispute. 7.1 Notice of Termination. After a Change in Control and during the Term, any purported termination of the Executive's employment (other than by reason of death) shall be communicated by written Notice of Termination from one party hereto to the other party hereto in accordance with Section 10 hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. Further, a Notice of Termination for Cause is required to include a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Board at a meeting of the Board which was called and held for the purpose of considering such termination (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive was guilty of conduct set forth in clause (i) or (ii) of the definition of Cause herein, and specifying the particulars thereof in detail. 7.2 Date of Termination. "Date of Termination," with respect to any purported termination of the Executive's employment after a Change in Control and during the Term, shall mean (i) if the Executive's employment is terminated for Disability, thirty (30) days after Notice of Termination is given (provided that the Executive shall not have returned to the full-time performance of the Executive's duties during such thirty (30) day period), and (ii) if the Executive's employment is terminated for any other reason, the date specified in 10 13 the Notice of Termination (which, in the case of a termination by the Company, shall not be less than thirty (30) days (except in the case of a termination for Cause) and, in the case of a termination by the Executive, shall not be less than fifteen (15) days nor more than sixty (60) days, respectively, from the date such Notice of Termination is given). 7.3 Dispute Concerning Termination. If within fifteen (15) days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this Section 7.3), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be extended until the earlier of (i) the date on which the Term ends or (ii) the date on which the dispute is finally resolved, either by mutual written agreement of the parties or by a final judgment, order or decree of an arbitrator or a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); provided, however, that the Date of Termination shall be extended by a notice of dispute given by the Executive only if such notice is given in good faith and the Executive pursues the resolution of such dispute with reasonable diligence. 7.4 Compensation During Dispute. If a purported termination occurs following a Change in Control and during the Term and the Date of Termination is extended in accordance with Section 7.3 hereof, the Company shall continue to pay the Executive the full compensation in effect when the notice giving rise to the dispute was given (including, but not limited to, salary) and continue the Executive as a participant in all compensation, benefit and insurance plans in which the Executive was participating when the notice giving rise to the dispute was given, until the Date of Termination, as.determined in accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in addition to all other amounts due under this Agreement (other than those due under Section 5.2 hereof) and shall not be offset against or reduce any other amounts due under this Agreement. 8. No Mitigation. The Company agrees that, if the Executive's employment with the Company terminates during the Term, the Executive is not required to seek 11 14 other employment or to attempt in any way to reduce any amounts payable to the Executive by the Company pursuant to Section 6 hereof or Section 7.4 hereof. Further, the amount of any payment or benefit provided for in this Agreement (other than Section 6.1(B) hereof) shall not be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by the Executive to the Company, or otherwise. 9. Successors; Binding Agreement. 9.1 In addition to any obligations imposed by law upon any successor to Safeco, Safeco will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of Safeco to expressly assume and agree to perform this Agreement in the same manner and to the same extent that Safeco would be required to perform it if no such succession had taken place. Failure of Safeco to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation from the Company in the same amount and on the same terms as the Executive would be entitled to hereunder if the Executive were to terminate the Executive's employment for Good Reason after a Change in Control, except that, for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. 9.2 This Agreement shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive shall die while any amount would still be payable to the Executive hereunder (other than amounts which, by their terms, terminate upon the death of the Executive) if the Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of the Executive's estate. 10. Notices. For the purpose of this Agreement, notices and all other communications provided for 12 15 in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed, if to the Executive, to the address inserted below the Executive's signature on the final page hereof and, if to the Company, to the address set forth below, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon actual receipt: To the Company: SAFECO Corporation SAFECO Plaza Seattle, WA 98185 Attention: Chief Executive Officer 11. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Executive and an officer of Safeco. No waiver by either party hereto at any time of any breach by the other party hereto of, or of any lack of compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. This Agreement supersedes any other agreements (including the Prior Agreement) or representations, oral or otherwise, express or implied, with respect to the subject matter hereof which have been made by either party. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Washington. All references to sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law and any additional withholding to which the Executive has agreed. The obligations of the Company and the Executive under this Agreement which by their nature may require either partial or total performance after the expiration of the Term (including, without limitation, those under Sections 6 and 7 hereof) shall survive such expiration. 13 16 12. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 13. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 14. Settlement of Disputes; Arbitration. (a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Committee and shall be in writing. Any denial by the Committee of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Committee shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Committee a decision of the Committee within sixty (60) days after notification by the Committee that the Executive's claim has been denied. (b) Any further dispute or controversy arising under or on connection with this Agreement shall be settled exclusively by arbitration in Seattle, Washington in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction. Notwithstanding any provision of this Agreement to the contrary, the Executive shall be entitled to seek specific performance of the Executive's right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 15. Definitions. For purposes of this Agreement, the following terms shall have the meanings indicated below: (A) "Accountant" shall have the meaning set forth in Section 6.2 hereof. 14 17 (B) "Affiliate" shall have the meaning set forth in Rule 12b-2 promulgated under Section 12 of the Exchange Act. (C) "Base Amount" shall have the meaning set forth in section 280G(b)(3) of the Code. (D) "Beneficial Owner" shall have the meaning set forth in Rule 13d-3 under the Exchange Act. (E) "Board" shall mean the Board of Directors of Safeco. (F) "Cause" for termination by the Company of the Executive's employment shall mean (i) the willful and continued failure by the Executive to substantially perform the Executive's duties with the Company (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof) after a written demand for substantial performance is delivered to the Executive by the Board, which demand specifically identifies the manner in which the Board believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Company or its subsidiaries, monetarily or otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act, or failure to.act, on the Executive's part shall be deemed Willful unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's act, or failure to act, was in the best interest of the Company and (y) in the event of a dispute concerning the application of this provision, no claim by the Company that Cause exists shall be given effect unless the Company establishes to the Committee by clear and convincing evidence that Cause exists. (G) A "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) any Person is or becomes the Beneficial Owner, directly or indirectly, of 15 18 securities of Safeco (not including in the securities beneficially owned by such Person any securities acquired directly from Safeco or its affiliates) representing 25% or more of the combined voting power of Safeco's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (i) of paragraph (III) below; or (II) the following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of Safeco) whose appointment or election by the Board or nomination for election by Safeco's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (III) there is consummated a merger or consolidation of Safeco or any direct or indirect subsidiary of Safeco with any other corporation, other than (i) a merger or consolidation which would result in the voting securities of Safeco outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of Safeco or any subsidiary of Safeco, at least 75% of the combined voting power of the securities of Safeco or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (ii) a merger or consolidation effected to implement a recapitalization of 16 19 Safeco (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of Safeco (not including in the securities Beneficially Owned by such Person any securities acquired directly from Safeco or its Affiliates) representing 25% or more of the combined voting power of Safeco's then outstanding securities; or (IV) the stockholders of Safeco approve a plan of complete liquidation or dissolution of Safeco or there is consummated an agreement for the sale or disposition by Safeco of all or substantially all of Safeco's assets, other than a sale or disposition by Safeco of all or substantially all of Safeco's assets to an entity, at least 75k of the combined voting power of the voting securities of which are owned by stockholders of Safeco in substantially the same proportions as their ownership of Safeco immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the common stock of Safeco immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the assets of Safeco immediately following such transaction or series of transactions. (H) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (I) "Committee" shall mean (i) the individuals (not fewer than three in number) who, on the date six months before a Change in Control, constitute the Compensation Committee of the Board, plus (ii) in the event that fewer than three individuals are available from the group specified in clause (i) above for any reason, such individuals as may be appointed by the individual or individuals so available (including for this purpose any individual or individuals previously so appointed under this clause (ii)). 17 20 (J) "Company" shall mean Safeco and its subsidiaries, collectively. (K) "Date of Termination" shall have the meaning set forth in Section 7.2 hereof. (L) "Deferred Benefit" shall have the meaning set forth in Section 5.4 hereof. (M) "Deferred Benefit Commencement Date" shall have the meaning set forth in Section 5.4 hereof. (N) "Disability" shall be deemed the reason for the termination by the Company of the Executive's employment, if, as a result of the Executive's incapacity due to physical or mental illness, the Executive shall have been absent from the full-time performance of the Executive's duties with the Company for a period of one hundred and thirty (130) consecutive business days, the Company shall have given the Executive a Notice of Termination for Disability, and, within thirty (30) days after such Notice of Termination is given, the Executive shall not have returned to the full-time performance of the Executive's duties. (O) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (P) "Excise Tax" shall mean any excise tax imposed under section 4999 of the Code. (Q) "Executive" shall mean the individual named in the first paragraph of this Agreement. (R) "Good Reason" for termination by the Executive of the Executive's employment shall mean the occurrence (without the Executive's express written consent) after any Change in Control, or prior to a Change in Control under the circumstances described in clause (ii) of the second sentence of Section 6.1 hereof (treating all references in paragraphs (I) through (VII) below to a exchange in Control" as references to a "Potential Change in Control"), of any one of the following acts by the Company, or failures by the Company to act, unless, in the case of any act or failure to act described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act 18 21 is corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (I) the assignment to the Executive of any duties inconsistent with the Executive's status as a senior executive officer of the Company or a substantial adverse alteration in the nature or status of the Executive's responsibilities from those in effect immediately prior to the Change in Control; (II) a reduction by the Company in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time; (III) the relocation of the Executive's principal place of employment to a location outside of King County, Washington (or, if different, the county in which such principal place of employment is located immediately prior to the Change in Control) or the Company's requiring the Executive to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with the Executive's present business travel obligations; (IV) the failure by the Company to pay to the Executive any portion of the Executive's current compensation, or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Company, within seven (7) days of the date such compensation is due; (V) the failure by the Company to continue in effect any compensation plan (including stock option, restricted stock, stock appreciation right, incentive compensation and bonus plans) in which the Executive participates immediately prior to the Change in Control which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the 19 22 failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount or timing of payment of benefits provided and the level of the Executive's participation relative to other participants, as existed immediately prior to the Change in Control; (VI) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by the Executive under any of the Company's profit sharing, pension, savings, life insurance, medical, health and accident, or disability plans in which the Executive was participating immediate]y prior to the Change in Control, the taking of any action by the Company which would directly or indirectly materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy in effect at the time of the Change in Control; or (VII) any purported termination of the Executive's employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 7.1 hereof; for purposes of this Agreement, no such purported termination shall be effective. The Executive's right to terminate the Executive's employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. For purposes of any determination regarding the existence of Good Reason, any claim by the Executive that Good Reason exists shall be presumed to be correct unless 20 23 the Company establishes to the Committee by clear and convincing evidence that Good Reason does not exist. (S) "Gross-Up Payment" shall have the meaning set forth in Section 6.2 hereof. (T) "Notice of Termination" shall have the meaning set forth in Section 7.1 hereof. (U) "Person" shall have the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof, except that such term shall not include (i) Safeco or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of Safeco or any of its Affiliates, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by the stockholders of Safeco in substantially the same proportions as their ownership of stock of Safeco. (V) "Potential Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs shall have occurred: (I) Safeco enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (II) Safeco or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (III) any Person becomes the Beneficial Owner, directly or indirectly, of securities of Safeco representing 10% or more of either the then outstanding shares of common stock of Safeco or the combined voting power of the Safeco's then outstanding securities (not including in the securities beneficially owned by such Person any securities acquired directly from Safeco or its affiliates); or (IV) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. 21 24 (W) "Retirement" shall be deemed the reason for the termination by the Company or the Executive of the Executive's employment if such employment is terminated on or after the date Executive attains age 65. (X) "Safeco" shall mean Safeco Corporation and, except in determining under Section 15(G) hereof whether or not any Change in Control has occurred, shall include any successor to its business and/or assets which assumes and agrees to perform this Agreement by operation of laws or otherwise. (Y) "Severance Payments" shall mean those payments so described in Section 6.1 hereof. (Z) "Severance Period" shall have the meaning set forth in Section 6.1 (B) . (AA) "Tax Counsel" shall have the meaning set forth in Section 6.2 hereof. (AB) "Term" shall mean the period of time described in Section 2 hereof (including any extension, continuation or termination described therein). (AC) "Total Payments" shall mean those payments so described in Section 6.2 hereof. SAFECO Corporation By:_________________________________________ Name: Title: ____________________________________________ Address: ____________________________________________ ____________________________________________ ____________________________________________ (Please print carefully) 22 EX-27 4 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND THE STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 11,560,458 2,438,330 2,531,552 1,213,647 444,063 547,257 16,301,235 57,253 161,461 404,967 19,283,699 2,108,384 971,121 150,105 9,556,795 1,191,989 0 0 222,919 3,687,040 19,283,699 1,887,924 830,584 69,564 158,050 1,748,841 316,294 0 439,016 106,344 332,672 0 0 0 332,672 2.64 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----