-----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, BlvxmT8uJLL6BLvDZf5oFdYp03rhdSo4WxR/dbk5tJnfnlXzuVafZNkbZSD+/uWb ICDs1N6h4BiC8VAKaykUAA== 0001047469-99-010331.txt : 19990319 0001047469-99-010331.hdr.sgml : 19990319 ACCESSION NUMBER: 0001047469-99-010331 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990505 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SAFECO CORP CENTRAL INDEX KEY: 0000086104 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 910742146 STATE OF INCORPORATION: WA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 001-06563 FILM NUMBER: 99567977 BUSINESS ADDRESS: STREET 1: 4333 BROOKLYN AVE NE STREET 2: SAFECO PLAZA CITY: SEATTLE STATE: WA ZIP: 98185 BUSINESS PHONE: 2065455000 MAIL ADDRESS: STREET 1: 4333 BROOKLYN AVE NE CITY: SEATTLE STATE: WA ZIP: 98185 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL AMERICA CORP DATE OF NAME CHANGE: 19680529 DEF 14A 1 DEF 14A SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant /X/ Filed by a Party other than the Registrant / / Check the appropriate box: / / Preliminary Proxy Statement / / Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) /X/ Definitive Proxy Statement / / Definitive Additional Materials / / Soliciting Material Pursuant to Section240.14a-11(c) or Section240.14a-12 SAFECO CORPORATION - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (Check the appropriate box): /X/ No fee required. / / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: ----------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: ----------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): ----------------------------------------------------------------------- (4) Proposed maximum aggregate value of transaction: ----------------------------------------------------------------------- (5) Total fee paid: ----------------------------------------------------------------------- / / Fee paid previously with preliminary materials. / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: ----------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: ----------------------------------------------------------------------- (3) Filing Party: ----------------------------------------------------------------------- (4) Date Filed: ----------------------------------------------------------------------- NOTICE OF 1999 ANNUAL MEETING OF SHAREHOLDERS AND PROXY STATEMENT [LOGO] SAFECO CORPORATION ---------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 5, 1999 ------------------------ Seattle, Washington March 19, 1999 To Our Shareholders: Notice is hereby given that the Annual Meeting of Shareholders of SAFECO Corporation (the "Corporation") will be held on May 5, 1999, at 11:00 a.m. in the SAFECO Auditorium, SAFECO Plaza, 4333 Brooklyn Avenue N.E., Seattle, Washington, for the following purposes, as set forth in the accompanying Proxy Statement: 1. To elect four nominees to serve as directors for three-year terms to expire in 2002 and one nominee to serve as a director for a one-year term to expire in 2000; 2. To approve the SAFECO Long-Term Incentive Plan of 1997 as amended and restated; and 3. To consider and act upon such other matters as may properly come before the Annual Meeting. The Board of Directors has established the close of business on March 1, 1999, as the record date for the determination of shareholders entitled to receive notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. YOU ARE URGED TO REVIEW CAREFULLY THE ACCOMPANYING PROXY STATEMENT AND TO COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. Your proxy may be revoked by you at any time before it has been voted. You may substitute a representative other than those named in the enclosed proxy if you desire. The individuals named in the proxy are the present members of the Executive Committee of the Board of Directors. You are cordially invited to attend the Annual Meeting in person if it is convenient for you to do so. [SIGNATURE] Roger H. Eigsti Chairman and Chief Executive Officer SAFECO CORPORATION SAFECO PLAZA, SEATTLE, WASHINGTON 98185 ------------------------ PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS--MAY 5, 1999 --------------------- This Proxy Statement is furnished in connection with the Annual Meeting of Shareholders of SAFECO Corporation (the "Corporation") to be held on May 5, 1999 (the "Annual Meeting"). Shareholders of record at the close of business on March 1, 1999, are entitled to vote at the Annual Meeting either in person or by proxy. Your proxy in the enclosed form is solicited by the Board of Directors of the Corporation. The shares represented by the proxies received will be voted at the meeting in accordance with your directions. The approximate date of the mailing of this Proxy Statement and the enclosed form of proxy is March 19, 1999. OUTSTANDING SHARES AND VOTE REQUIRED On March 1, 1999, there were 136,319,280 shares of the Common Stock of the Corporation ("Common Stock") outstanding, all of which will be entitled to vote at the Annual Meeting to be held on May 5, 1999. Each shareholder is entitled to one vote for each share of Common Stock held of record in such person's name on the record date. Under Washington law and the Corporation's Restated Articles of Incorporation, a quorum consisting of a majority of the shares entitled to vote must be represented in person or by proxy for the transaction of business at the Annual Meeting. Directors are elected by a majority of the votes cast by shares present, in person or by proxy, and entitled to vote at the Annual Meeting. Votes withheld with respect to the election of directors will not be counted either in favor of or against the election of the nominees. Under Washington law, the favorable vote of a majority of the shares present, in person or by proxy, and entitled to vote at the Annual Meeting will be required to adopt the proposal to amend and restate the SAFECO Long-Term Incentive Plan of 1997 (Proposal 2). Abstentions from voting will have the effect of voting against Proposal 2. Brokers who hold shares for the account of their clients may vote their clients' proxies in the brokers' own discretion as to the election of directors and Proposal 2 if the clients have not furnished voting instructions by 10 days prior to the Annual Meeting. Proxies solicited by the Board of Directors will be voted in favor of each of the director nominees and Proposal 2 unless shareholders direct otherwise in their proxies. SOLICITATION OF PROXIES The persons named as proxies were selected by the Board of Directors and are the present members of the Executive Committee of the Board. Your proxy may be revoked by you at any time before it has been voted by notifying the Secretary to the Board of Directors, SAFECO Corporation, SAFECO Plaza, Seattle, Washington 98185, in writing of such revocation. Georgeson & Company Inc., New York, New York, has been retained to solicit proxies personally or by mail, telephone or telegram at a cost anticipated to be $6,000 plus reasonable out-of-pocket expenses, which will be paid by the Corporation. Banks and brokers will be reimbursed for their reasonable expenses in forwarding proxy solicitation materials to shareholders. Management does not expect to solicit proxies except through the mail; however, if proxies are not promptly received, employees of the Corporation may solicit proxies personally, by telephone or fax. 1 ELECTION OF DIRECTORS (PROPOSAL 1) The Board of Directors is divided into three classes. At the 1999 Annual Meeting of Shareholders, four nominees will be elected to serve three-year terms until the 2002 Annual Meeting of Shareholders and one nominee will be elected to serve a one-year term until the 2000 Annual Meeting of Shareholders and until their successors are elected and qualified. On May 5, 1999, George H. Weyerhaeuser, having reached age 72, will retire as a director in accordance with the Corporation's retirement policy for directors. At its February 3, 1999 meeting, the Executive Committee of the SAFECO Corporation Board of Directors nominated Norman B. Rice, President and Chief Executive Officer of the Federal Home Loan Bank of Seattle, to fill the one-year unexpired term of Mr. Weyerhaeuser ending in 2000. Unless otherwise stated, each individual described below has served for at least five years in the position indicated. All nominees, other than Mr. Rice, are presently directors of the Corporation. NOMINEES FOR DIRECTOR CLASS I-- TERM EXPIRES AT THE 2002 ANNUAL MEETING OF SHAREHOLDERS PHYLLIS J. CAMPBELL, 47, is President of U.S. Bank, Washington, a division of U.S. Bancorp. Ms. Campbell has been a director of the Corporation since 1994. She is also a director of Puget Sound Energy, Inc. BOH A. DICKEY, 54, is President and Chief Operating Officer of the Corporation. Mr. Dickey has been an executive officer of the Corporation since 1982 and a director of the Corporation since 1993. He is also Chairman of the Board of Trustees for the 25 SAFECO mutual funds. WILLIAM P. GERBERDING, 69, is President Emeritus of the University of Washington, where he served as President from 1979 until his retirement in 1995. Dr. Gerberding has been a director of the Corporation since 1981. He is also a director of Washington Mutual, Inc. and Washington Mutual Bank. PAUL W. SKINNER, 51, is President of Skinner Corporation, an investment company. Mr. Skinner has been a director of the Corporation since 1988. CLASS II-- TERM EXPIRES AT THE 2000 ANNUAL MEETING OF SHAREHOLDERS NORMAN B. RICE, 55, is President and Chief Executive Officer of the Federal Home Loan Bank of Seattle. Mr. Rice joined the Federal Home Loan Bank of Seattle in March 1998 as its executive vice president. Mr. Rice served two terms as the Mayor of the City of Seattle from 1990 through 1997 and served three terms as a member of the City of Seattle Council from 1979 until 1990. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR" EACH OF THE DIRECTOR NOMINEES. CONTINUING DIRECTORS CLASS II-- TERM EXPIRES AT THE 2000 ANNUAL MEETING OF SHAREHOLDERS JOSHUA GREEN III, 62, is Chairman and Chief Executive Officer of the Joshua Green Corporation, a family investment firm, and Chairman of its wholly-owned subsidiary, Sage Manufacturing Corporation. Mr. Green has been a director of the Corporation since 1981. He is also a director of U.S. Bancorp. WILLIAM G. REED, JR., 60, was the Chairman of Simpson Investment Company, a forest products holding company, until his retirement in 1996. He continues to serve as a director of Simpson Investment Company. Mr. Reed has been a director of the Corporation since 1974. He is also a director of Microsoft Corporation, PACCAR Inc., The Seattle Times, Washington Mutual, Inc. and Washington Mutual Bank. 2 JUDITH M. RUNSTAD, 54, is of counsel to the Seattle law firm Foster Pepper & Shefelman PLLC. Mrs. Runstad has been a director of the Corporation since 1990. She is also a director of Wells Fargo & Company. She is the immediate past Chairman of the Board of the Federal Reserve Bank of San Francisco. CLASS III-- TERM EXPIRES AT THE 2001 ANNUAL MEETING OF SHAREHOLDERS ROBERT S. CLINE, 61, is Chairman and Chief Executive Officer of Airborne Freight Corporation, an air freight carrier. Mr. Cline has been a director of the Corporation since 1992. He is also a director of Metricom, Inc. ROGER H. EIGSTI, 56, is Chairman and Chief Executive Officer of the Corporation. Mr. Eigsti has been a director of the Corporation since 1988. He is also a director of Washington Mutual, Inc. and Washington Mutual Bank. JOHN W. ELLIS, 70, is Chairman and Chief Executive Officer of the corporate general partner of The Baseball Club of Seattle, L.P., the owner of the Seattle Mariners baseball team. Mr. Ellis is a director of Puget Sound Energy, Inc. and was its Chief Executive Officer from 1976 to 1992 and its Chairman from 1987 to 1993. Mr. Ellis has been a director of the Corporation since 1981. He is also a director of Washington Mutual, Inc. and Washington Mutual Bank, UTILX Corporation and Associated Electric & Gas Insurance Services, Ltd. WILLIAM W. KRIPPAEHNE, JR., 48, is President and Chief Executive Officer of Fisher Companies Inc., the primary subsidiaries of which are engaged in broadcasting, flour milling and real estate ownership and development. Mr. Krippaehne has been an executive officer of Fisher Companies since 1982 and a director of the Corporation since 1996. OWNERSHIP OF THE CORPORATION'S COMMON STOCK The following table provides information as of February 5, 1999, with regard to the ownership of the Common Stock by directors, nominees for director, the Corporation's chief executive officer and four other most highly compensated executive officers, and all directors and executive officers as a group. Total beneficial ownership of the outstanding Common Stock is less than 1% in the case of each individual listed below except as follows: 1.9% for Mr. Green, 2.2% for Mr. Krippaehne, and 4.6% for all 17 directors, nominees and executive officers as a group (including shares subject to stock options which may be exercised within 60 days). The holdings shown in the table do not include 4,515,600 shares held by The SAFECO Employees' Profit Sharing Retirement Plan, as to which the members of that plan's Investment Committee (Messrs. Cline, Ellis, Gerberding, Krippaehne, Reed and Skinner) share voting and investment power and certain members of management may be deemed to share investment power by reason of their positions. 3
NUMBER OF SHARES BENEFICIALLY OWNED AND NATURE NUMBER OF SHARES OF BENEFICIAL ACQUIRABLE WITHIN NAME OWNERSHIP 60 DAYS(1) - ------------------------------------------------------ ----------------- ----------------- Phyllis J. Campbell................................... 1,000 -- Robert S. Cline....................................... 6,000 -- Boh A. Dickey......................................... 48,944 119,700 Roger H. Eigsti....................................... 115,621 157,388 John W. Ellis......................................... 14,024 -- William P. Gerberding................................. 2,200 -- Joshua Green III...................................... 2,547,432(2) -- William W. Krippaehne, Jr............................. 3,005,462(3) -- William G. Reed, Jr................................... 157,749(4) -- Norman B. Rice........................................ 0 -- James W. Ruddy........................................ 4,500 30,000 Judith M. Runstad..................................... 3,500 -- Paul W. Skinner....................................... 279,120(5) -- W. Randall Stoddard................................... 3,200 13,875 Randall H. Talbot..................................... 13,800 19,250 George H. Weyerhaeuser................................ 55,600(6) -- All directors, nominees and executive officers as a group (17 persons).................................. 6,264,632 362,688
- ------------------------ (1) Shares which may be purchased within 60 days by exercise of options granted under the SAFECO Long-Term Incentive Plan of 1997 and the SAFECO Incentive Plan of 1987. (2) Represents 2,546,832 shares owned by the Joshua Green Corporation in which Mr. Green has a substantial interest with voting and investment power, and 600 shares owned by his spouse. (3) Includes 3,002,376 shares owned by two corporations of which Mr. Krippaehne is an officer and director and for which he thereby has shared voting and investment power, and 372 shares owned by Mr. Krippaehne's spouse. Mr. Krippaehne disclaims any beneficial interest in any of the shares referred to in this footnote, other than such indirect interest he may have as a stockholder of said corporations. (4) Includes 7,772 shares owned by Mr. Reed's spouse. (5) Includes 258,120 shares owned by Skinner Corporation in which Mr. Skinner has a substantial interest with voting and investment power and 17,000 shares owned by trusts of which Mr. Skinner is a co-trustee and for which he thereby has shared voting and investment power. Mr. Skinner disclaims any beneficial interest in the shares owned by the trusts. (6) Includes 25,200 shares owned by trusts of which Mr. Weyerhaeuser is co-trustee and for which he shares voting and investment power. In addition, AMVESCAP PLC, 11 Devonshire Square, London EC2M 4YR, England, reported in a Schedule 13G filed with the Securities and Exchange Commission ("SEC") that in the aggregate its subsidiaries had shared voting power and investment discretion with respect to 10,894,094 shares, or 7.71%, of the Common Stock, at December 31, 1998. The subsidiaries, which are investment management companies and advisers, hold the shares on behalf of their clients, none of which holds more than 5% of the Common Stock. 4 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under Section 16 of the Securities Exchange Act of 1934, as amended ("Exchange Act"), directors and officers of the Corporation are required to report their holdings of and transactions in the Corporation's Common Stock to the SEC. To the Corporation's knowledge, based solely on a review of the copies of such reports furnished to the Corporation and written representations that no other reports were required, during 1998 all persons subject to the Section 16 reporting requirements with respect to the Corporation filed the required reports on a timely basis with two exceptions. Dr. Gerberding's Form 4 for the month of July, which reported one transaction, and Mrs. Runstad's Form 4 for the month of July, which reported two transactions, were filed late. COMMITTEES OF THE BOARD The Board of Directors of the Corporation presently has these standing committees: Executive, Finance, Audit, Compensation and Nominating. Except for certain fundamental corporate acts reserved to the full Board under Washington law, the Executive Committee has broad authority, when the Board is not in session, to exercise all the powers of the Board in management of the business of the Corporation. The Finance Committee has general supervision over the investments of and all matters of financing by the Corporation. The Audit Committee recommends independent auditors for selection by the Board of Directors, reviews plans for upcoming audits with the independent auditors, reviews the results of completed audits, and regularly reviews the Corporation's approach to business ethics and compliance with the law. The Compensation Committee passes upon all salary increases where the proposed salary is $150,000 per year or more, reviews salary administration policy, administers the Corporation's stock-based incentive plan, and approves all material changes in employee benefit programs. The Nominating Committee reviews qualifications of candidates for board membership, recommends to the Executive Committee candidates for membership on the Board and the annual slate of nominees for director, and recommends to the Board criteria for board membership, composition of the Board, tenure of directors, fees to be paid to directors, and stock option grants to directors. During 1998 the Board and the Audit, Compensation and Executive Committees each held four meetings, the Finance Committee held five meetings, and the Nominating Committee held one meeting. All current directors attended at least 75% of the Board and committee meetings they were eligible to attend. The present members of each committee are:
COMMITTEE MEMBERS Audit Messrs. Gerberding, Green, Krippaehne, Skinner and Mrs. Runstad (Chair). Compensation Messrs. Cline (Chair), Ellis, Reed, Weyerhaeuser and Ms. Campbell. Executive Messrs. Eigsti (Chair), Cline, Ellis, Green, and Mrs. Runstad. Finance Messrs. Cline, Dickey, Eigsti, Ellis (Chair), Gerberding, Krippaehne, Reed and Skinner. Nominating Messrs. Ellis, Green (Chair), Reed and Ms. Campbell.
5 COMPENSATION OF DIRECTORS AND OFFICERS COMPENSATION OF DIRECTORS Directors of the Corporation, except those who are also employees, receive fees for their services as directors. The current director fees are an annual retainer of $30,000 and fees of $1,500 for attendance at any Board meeting and $1,000 for attendance at any committee meeting. The Chair of the Finance Committee receives an annual retainer of $4,000 and a $1,000 fee for attendance at any meeting of the Corporation's management investment committee. The other committee chairs receive an annual retainer, as follows: Chair of the Compensation Committee--$4,000; Chair of the Audit Committee--$3,000; and Chair of the Nominating Committee--$1,000. Directors are also reimbursed for reasonable travel expenses. At their November 4, 1998 meeting, the directors approved a proposal to amend the SAFECO Long-Term Incentive Plan of 1997 to permit participation by non-employee directors and to submit the plan as proposed to be amended to the shareholders at the Annual Meeting. The proposal is described more fully below. The directors also approved a program to annually award non-qualified stock options for 2,000 shares to each non-employee director. If the proposal is approved by the shareholders, the first stock option grants to non-employee directors will be awarded following the Annual Meeting. The exercise price for each option will be the fair market value of the Common Stock on the date of grant. The options will have a term of ten years and will vest and become fully exercisable on the date of the first annual meeting of shareholders after the grant. Directors may elect to defer their annual retainer and meeting fees under the terms of the SAFECO Corporation Deferred Compensation Plan for Directors. Amounts deferred under that plan are credited with earnings tied to the performance of designated measurement funds. ANNUAL REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION COMPENSATION COMMITTEE Five outside directors of the Corporation, none of whom has been or is an employee of the Corporation and all of whom qualify as "non-employee directors" for purposes of administering the Corporation's stock option program under Section 16 of the Exchange Act, comprise the Compensation Committee of the Board of Directors ("Committee"). The Committee is responsible for reviewing the Corporation's salary administration policy, approving salaries of $150,000 or greater, administering the Corporation's stock-based incentive plan, and approving changes to the Corporation's employee benefit plans. The members of the Committee, which met four times during 1998, are Robert S. Cline (Chair), Phyllis J. Campbell, John W. Ellis, William G. Reed, Jr. and George H. Weyerhaeuser. APPROACH TO COMPENSATION This report discusses the compensation policies applicable to the Corporation's executive officers, including the chief executive officer and four other most highly compensated executives ("Named Executive Officers"). All employees of the Corporation's property and casualty, life, credit and asset management subsidiaries, other than a few employees covered by special incentive plans and employees of the American States insurance subsidiaries (collectively, "Non-Participating Employees") participate in the same compensation and retirement plans. The Corporation's compensation policies and plans are intended to: 1. Attract and retain high-caliber personnel on a long-term basis. 2. Encourage the creation of shareholder value. 3. Link compensation to business results and shareholder returns over time. 6 4. Maintain an appropriate balance between base salary and short- and long-term incentive opportunities. ELEMENTS OF COMPENSATION The following are the basic elements of compensation for executive officers of the Corporation: SALARY: Salaries are administered on an individual, subjective basis for all employees, including executive officers. With respect to compensation paid to executive officers, the Committee regularly reviews information concerning compensation practices and levels of other companies. Salaries of executive officers are not, however, targeted for any specific level relative to salaries paid by other companies. BONUS: The Corporation's executive officers participate in a non-discretionary cash bonus plan which applies to all employees with at least one year of service (other than Non-Participating Employees). An annual bonus pool is established under a fixed formula based on weighted elements of the pre-tax results of the Corporation's major business lines and the investment income of the property and casualty subsidiaries. In years for which the bonus pool is large enough to pay the maximum bonus amounts, employees with three years or more of service receive a bonus equal to 10% of base salary. In years when the fixed formula does not provide a sufficient pool to pay the maximum bonus amounts to all eligible employees, bonus payments made to all employees are reduced proportionately. The percentage of salary paid as a bonus to all employees with three years of service, including the Named Executive Officers, was 6.2% for 1998 and 10% for both 1997 and 1996. STOCK-BASED INCENTIVE PROGRAM: A shareholder-approved stock-based incentive program has been an element of compensation since the early 1960s. The purpose of the program is to encourage selected, key employees of the Corporation and its subsidiaries to remain employed with the Corporation, to participate in ownership of the Corporation, to advance the interests of the Corporation's shareholders and to increase the value of the Common Stock. Under the shareholder-approved SAFECO Long-Term Incentive Plan of 1997 ("Plan"), the Committee in its sole discretion may grant to selected, key employees of the Corporation and its subsidiaries stock options, restricted stock rights ("RSRs") and performance stock rights ("PSRs") in amounts and on terms consistent with the Plan. Grants of stock options, RSRs and PSRs are made on an individual basis. The Committee makes a subjective judgment in connection with each grant and considers the individual's responsibilities, potential for advancement, current salary, previous grants, the current price of the Common Stock, the performance of the Common Stock over time and, for all individuals other than the chief executive officer, the recommendation of the chief executive officer. Although the Committee does not establish any set value to award under the Plan to any individual, the Committee does consider previous grants as well as the different nature of stock options, PSRs and RSRs in making awards under the Plan. Stock options are awarded at the closing market price of the Common Stock on the grant date and typically vest in 25% increments on the first, second, third and fourth anniversaries of the grant date. The Committee has never rescinded an outstanding option and reissued it at a lower exercise price. PSRs entitle the holder to receive a specific number of shares of Common Stock, or cash equal to the closing market price of such shares on the settlement date, if specified performance goals for a three-year performance period have been met. In May 1997 and February 1998, PSRs were awarded to the Named Executive Officers. These PSRs provide for annual payouts of a portion of the total award based on achievement of performance goals over each of the one-, two-, and three-year performance cycles within each three-year performance period. The performance goals are customized for each Named Executive Officer and weighted equally. Performance goals include, as appropriate, the return 7 on equity for the Corporation, its property and casualty or life and health operations; the change in the Common Stock price compared to the average change in the price of the common stock of the companies that comprise the peer index ("Stock Price Comparison"); the increase in the Corporation's operating earnings per share; the combined ratio, the net personal lines expense ratio and the annual growth in premiums for the property and casualty operations; and the increase in pretax operating income for the life and health operations. For Mr. Eigsti the three performance goals for the 1997 and 1998 grants are the Corporation's return on equity, increase in operating earnings per share and the Stock Price Comparison. For the two-year performance cycle ended December 31, 1998 under the 1997 grant and the one-year performance cycle ended December 31, 1998 under the 1998 grant, the Committee concluded that no payouts were earned based on the degree of achievement of the specified goals for any Named Executive Officer. RSRs entitle the holder to receive a specified number of shares of Common Stock or cash equal to the closing market price of such shares on the vesting date. RSRs typically vest and are settled in 25% increments on the first, second, third and fourth anniversaries of the grant date. Holders of RSRs are paid amounts equivalent to the dividends that would be paid on the same number of shares of Common Stock. RETIREMENT PROGRAM: Three basic tax-qualified plans, including a profit-sharing plan, comprise the Corporation's retirement program and are available on the same basis to all employees. In addition, the Corporation has three supplemental plans to restore benefits which cannot be included in the tax-qualified retirement plans. Since Common Stock constituted 29% of the assets of the profit-sharing plan at December 31, 1998, all participants in that plan, including the Named Executive Officers, have a significant, indirect ownership in the Corporation and an additional incentive to advance its interests and to increase the value of its Common Stock. CONSIDERATIONS IN CONNECTION WITH COMPENSATION LEVELS CORPORATE PERFORMANCE The directors regularly review the Corporation's performance and the degree to which investment returns have been generated for shareholders. This includes review of (i) customary financial measures with respect to the Corporation (E.G., the compounded annual return to shareholders, the Common Stock price and the common stock prices of comparable companies); (ii) the combined ratio of the Corporation's property and casualty subsidiaries and the combined ratios of competitors; (iii) the revenue and premium growth of the Corporation's operating subsidiaries; (iv) the Corporation's financial strength and asset management; and (v) the ratings assigned to the Corporation, its subsidiaries or securities by A.M. Best Insurance Services, Standard & Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc., and Duff & Phelps Credit Ratings Company. The directors annually review graphs that compare the cumulative total return to shareholders of the Corporation with the S&P 500. As stated in the Corporation's 1998 proxy statement, for 1997 the directors also reviewed graphs that compared the cumulative total return to shareholders of the Corporation with the returns of a self-constructed peer group comprised of companies that were in the same lines of business as the Corporation's major operating subsidiaries ("Former Peer Index"), with their returns weighted according to the component companies' respective market capitalization, on a five- and ten-year basis. During 1998 USF&G Corporation ("USF&G") was acquired by The St. Paul Companies, Inc. CIGNA Corporation ("CIGNA") has entered into an agreement to sell its property and casualty business to ACE Limited during 1999. TIG Holdings, Inc. ("TIG Holdings") has entered into an agreement to be acquired by Fairfax Financial Holdings Limited during 1999. And, previously, Aetna Inc. ("Aetna") sold its property and casualty operations to an affiliate of The Travelers Insurance Group Inc. Given these circumstances the Compensation Committee decided to revise its peer index by excluding Aetna, CIGNA, TIG Holdings 8 and USF&G and including, in addition to the remaining companies in the Former Peer Index, CNA Financial Corporation and Travelers Property and Casualty Corporation ("New Peer Index"). Set forth below are graphs that compare the cumulative total return to shareholders of the Corporation with the S&P 500, the Former Peer Index and the New Peer Index, with the returns of the companies in the Former Peer Index and the New Peer Index each weighted according to the component companies' respective market capitalization. The ten-year period graph is also included as its time period may more adequately reflect returns for the long-term shareholder and option holder. COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN AMONG SAFECO, S&P 500, FORMER PEER INDEX AND NEW PEER INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SAFECO S&P 500 FORMER PEER INDEX NEW PEER INDEX 1993 $100 $100 $100 $100 1994 $99 $102 $92 $91 1995 $134 $140 $139 $139 1996 $159 $172 $177 $170 1997 $202 $229 $250 $254 1998 $183 $294 $248 $225
Assumes $100 invested on December 31, 1993 in SAFECO Common Stock, the S&P 500, the Former Peer Index and the New Peer Index. - Total return assumes reinvestment of dividends. - Measurement dates are the last trading day of the calendar year shown. - Former Peer Index: Aetna, Allstate, Chubb, CIGNA, Cincinnati Financial, Ohio Casualty, Progressive, St. Paul, TIG Holdings and USF&G. - New Peer Index: Allstate, Chubb, Cincinnati Financial, CNA, Ohio Casualty, Progressive, St. Paul and Travelers. 9 COMPARISON OF TEN YEAR CUMULATIVE TOTAL RETURN AMONG SAFECO, S&P 500, FORMER PEER INDEX AND NEW PEER INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SAFECO S&P 500 FORMER PEER INDEX NEW PEER INDEX 1988 $100 $100 $100 $100 1989 $169 $132 $136 $158 1990 $149 $128 $118 $154 1991 $229 $166 $155 $207 1992 $277 $179 $188 $247 1993 $274 $197 $208 $237 1994 $271 $200 $191 $215 1995 $368 $275 $290 $330 1996 $435 $338 $369 $404 1997 $553 $451 $521 $603 1998 $501 $580 $516 $535
Assumes $100 invested on December 31, 1988 in SAFECO Common Stock, the S&P 500, the Former Peer Index and the New Peer Index. - Total return assumes reinvestment of dividends. - Measurement dates are the last trading day of the calendar year shown. - Former Peer Index: Aetna, Allstate, Chubb, CIGNA, Cincinnati Financial, Ohio Casualty, Progressive, St. Paul, TIG Holdings and USF&G. - New Peer Index: Allstate, Chubb, Cincinnati Financial, CNA, Ohio Casualty, Progressive, St. Paul and Travelers. 10 INDIVIDUAL PERFORMANCE In connection with compensation for individual executive officers, the Committee consulted with the chief executive officer and exercised its subjective judgment in evaluating each individual's leadership and managerial abilities, achievement of business unit and corporate objectives, potential for advancement or promotion and the relative value of the individual's performance in the overall achievement of the Corporation's objectives. In addition, in connection with the award of each stock option, PSR or RSR, the Committee considered the amount and terms of any previous awards, the current price of the Common Stock and the performance of the Common Stock over time. In connection with the Committee's consideration of compensation for the Corporation's executive officers, including Mr. Eigsti, the Committee reviewed information regarding compensation practices and levels of competitors of the Corporation and its operating subsidiaries (including the companies that comprise both the Former and New Peer Indices) as well as non-competing companies of a similar size to the Corporation or its operating subsidiaries. Detailed compensation information was obtained from the proxy statements of publicly-held companies. In addition, the Committee reviewed compensation information compiled by two independent consulting firms as well as that collected by the Corporation's Human Resources Department. The purpose of this review was to confirm that the Committee's approach to compensation continues to be appropriate given the Corporation's lines of business, size and culture and the geographic location of the Corporation's executive officers. For 1998 the Committee confirmed that its approach to compensation was suitable to the achievement of the general purposes of the Corporation's compensation policies and plans. The Committee did not engage in this review for the purpose of targeting any element of compensation, including salaries, paid to the Corporation's executive officers at, below or above the median paid by any other company or group of companies. CONSIDERATIONS IN CONNECTION WITH MR. EIGSTI'S COMPENSATION The Committee made subjective judgments with respect to an increase in Mr. Eigsti's compensation and awards of stock options, RSRs and PSRs. In connection with those awards, the Committee took into account the cumulative total return to the Corporation's shareholders and the other financial measures listed above under "Corporate Performance." Mr. Eigsti's leadership, strategic thinking and managerial abilities, as well as both historical and competitive compensation levels for his responsibilities, are considered in setting his salary and total compensation. The calculations of the annual bonus and the contributions or accruals with respect to the Corporation's retirement plans are made pursuant to the terms of those plans, which apply to all employees. Consequently, the Committee does not separately determine the amount of any such bonus, contribution or accrual for Mr. Eigsti or any other executive officer. ADDITIONAL INFORMATION The tables under "Compensation of Named Executive Officers" accompany this report and reflect the decisions covered by the foregoing discussion. Under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), the federal income tax deduction for certain types of compensation paid to the chief executive officer and four other most highly-paid officers of publicly-held companies is subject to an annual limit of $1 million per employee. The Corporation may pay compensation that exceeds this limit and did so with respect to Mr. Eigsti in 1998. This report shall not be deemed incorporated by reference by any general statement incorporating by reference the proxy statement into any filing under the Securities Act of 1933 or the Securities Exchange 11 Act of 1934, except to the extent that the Corporation specifically incorporates this information by reference, and shall not otherwise be deemed filed under these Acts. This report is submitted over the names of the members of the Compensation Committee: ROBERT S. CLINE, CHAIR PHYLLIS J. CAMPBELL JOHN W. ELLIS WILLIAM G. REED, JR. GEORGE H. WEYERHAEUSER COMPENSATION OF NAMED EXECUTIVE OFFICERS SUMMARY COMPENSATION TABLE The amount of all compensation paid to the Named Executive Officers for services in all capacities to the Corporation and its subsidiaries during the past three years is stated below. Annual compensation includes amounts deferred at the officer's election. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ------------------------- SECURITIES ANNUAL COMPENSATION UNDERLYING ---------------------- RESTRICTED OPTIONS/ ALL OTHER SALARY BONUS (3) STOCK AWARDS SARS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) (4)($) (#) ($) - ------------------------------------------------- --------- ---------- ---------- ------------ ----------- -------------- R.H. Eigsti 1998 830,000 52,163 513,750 50,000 82,348(5) Chairman and 1997 763,333 138,497 475,000 50,000 103,186 Chief Executive Officer 1996 666,667 66,667 414,719 50,000 102,036 B.A. Dickey 1998 575,000 36,137 354,488 30,000 57,048(6) President and 1997 512,500 92,710 300,200 30,000 69,279 Chief Operating Officer 1996 455,833 45,583 234,406 30,000 69,717 W.R. Stoddard (1) 1998 300,000 18,854 128,438 15,000 29,764(7) President of the Corporation's 1997 241,667 56,071 76,000 6,500 32,669 Property & Casualty Subsidiaries R.H. Talbot (2) 1998 299,431 18,854 103,672 15,000 29,741(8) President of the Corporation's Life Subsidiaries J.W. Ruddy 1998 280,000 17,597 118,163 12,000 27,780(9) Senior Vice President 1997 240,417 42,691 91,200 7,000 32,500 and General Counsel 1996 212,500 21,250 79,338 12,000 32,417
- ------------------------ (1) Mr. Stoddard became President of the Corporation's property and casualty subsidiaries on July 1, 1997. (2) Mr. Talbot became President of the Corporation's life subsidiaries on February 7, 1998. (3) The dollar amounts in this column include (i) a cash bonus and (ii) in the case of 1997, payments in settlement of PSRs awarded in 1997 for the one-year performance cycle ended December 31, 1997. A cash bonus of up to 10% of annual salary is paid to each employee of the insurance, credit and asset management operations who has at least three years of service when the pre-tax results from such 12 operations support such a bonus. The percent of salary paid as a bonus was 6.2% for 1998 and 10% for both 1997 and 1996. PSRs are three-year grants pursuant to which annual payments of a portion of the total award may be made based on achievement of specified performance goals over the elapsed portion of the performance period. Performance goals are established at the time of grant. With respect to the PSRs awarded in 1998, none of the Named Executive Officers received payments for the one-year performance cycle ended December 31, 1998. (4) RSRs entitle an employee who remains continuously employed by the Corporation or its subsidiaries for a stated number of years to receive a specified number of shares of Common Stock or cash equal to the fair market value of such shares on the settlement date. Holders of RSRs are entitled to receive an amount equivalent to the dividends which would be paid on an equivalent number of shares of Common Stock. The dollar amounts in this column are determined by multiplying the number of shares covered by an RSR by the closing market price of the Common Stock on the grant date. In 1998 the Corporation awarded RSRs to the following Named Executive Officers in these amounts: 10,000 shares for Mr. Eigsti; 6,900 for Mr. Dickey; 2,500 for Mr. Stoddard; 2,500 shares for Mr. Talbot; and 2,300 for Mr. Ruddy. Each award will vest and be settled in 25% installments on the first Wednesday in February 1999, 2000, 2001 and 2002, respectively. The following are the total number of RSRs held by the Named Executive Officers and the total value of such holding at December 31, 1998: for Mr. Eigsti, 28,025 RSRs with a value of $1,203,323; for Mr. Dickey, 17,875 RSRs with a value of $767,508; for Mr. Stoddard, 5,050 RSRs with a value of $216,834; for Mr. Talbot, 2,500 RSRs with a value of $107,344 and for Mr. Ruddy, 5,825 RSRs with a value of $250,111. (5) Includes net contributions to the Corporation's profit-sharing plan of $8,415, net contributions to the Corporation's after-tax savings plan of $6,400, and allocations to non-qualified plans of $40,733 with respect to the profit-sharing plan and $26,800 with respect to the savings plan for amounts which may not be contributed to the qualified plans because of limitations imposed by the Code ("Non-Qualified Allocations"). (6) Includes net contributions of $8,415 to the profit-sharing plan and $6,400 to the savings plan and Non-Qualified Allocations of $25,633 with respect to the profit-sharing plan and $16,600 with respect to the savings plan. (7) Includes net contributions of $8,415 to the profit-sharing plan and $6,400 to the savings plan and Non-Qualified Allocations of $9,349 with respect to the profit-sharing plan and $5,600 with respect to the savings plan. (8) Includes net contributions of $8,415 to the profit-sharing plan and $6,400 to the savings plan and Non-Qualified Allocations of $9,349 with respect to the profit-sharing plan and $5,577 with respect to the savings plan. (9) Includes net contributions of $8,415 to the profit-sharing plan and $6,400 to the savings plan and Non-Qualified Allocations of $8,165 with respect to the profit-sharing plan and $4,800 with respect to the savings plan. STOCK OPTION AWARDS Information concerning grants of stock options to the Named Executive Officers during 1998 is stated below. Under regulations of the Securities and Exchange Commission the assumed rates of appreciation of 5% and 10% are required to be used. These assumed appreciation rates are not based on the historic performance of the Common Stock or any other stock or stock index. Any appreciation in the value of the stated stock options will occur only if the Common Stock increases in value. Changes in the market price of 13 the Common Stock are dependent on the future performance of the Corporation as well as overall stock market performance. There can be no assurance that the amounts or rates of appreciation stated in the following table will be achieved. Were one to apply the assumed rates of appreciation to the Common Stock of the Corporation for the same ten-year period as required for options in the following table, market capitalization would increase from $6.6 billion to $10.8 billion at the 5% rate and to $17.2 billion at the 10% rate. In addition, a shareholder, unlike an option holder, would receive dividends paid by the Corporation during that ten-year period. OPTION GRANTS IN 1998
INDIVIDUAL GRANTS ---------------------------------------------------- POTENTIAL REALIZABLE VALUE NUMBER OF AT ASSUMED ANNUAL RATES OF SECURITIES PERCENT OF STOCK PRICE APPRECIATION UNDERLYING TOTAL OPTIONS FOR OPTION TERM OPTIONS GRANTED TO EXERCISE -------------------------- GRANTED(1) EMPLOYEES IN PRICE(2) EXPIRATION 5%(3) 10%(4) NAME (#) FISCAL YEAR ($/SH) DATE ($) ($) - ----------------------------------- ----------- --------------- --------- ----------- ------------ ------------ R.H. Eigsti........................ 50,000 13.7 $ 48.625 3/31/08 1,510,515 3,817,416 B.A. Dickey........................ 30,000 8.2 $ 48.625 5/06/08 917,400 2,324,880 W.R. Stoddard...................... 15,000 4.1 $ 48.625 5/06/08 458,700 1,162,440 R.H. Talbot........................ 15,000 4.1 $ 48.625 5/06/08 458,700 1,162,440 J.W. Ruddy......................... 12,000 3.3 $ 48.625 5/06/08 366,960 929,952
- ------------------------ (1) Options to purchase SAFECO Common Stock. The grant date for each option is May 6, 1998. For each option granted, 25% of the shares subject to the option become exercisable on the first, second, third and fourth anniversary dates of the option grant. Vesting is accelerated upon a change in control of the Corporation. (2) The exercise price, which is the fair market value of the Common Stock on the date of grant, may be paid to the Corporation in cash, in shares of Common Stock valued at fair market value on the date of exercise, or in part cash and part stock. In addition, optionees may finance the exercise price of an option through a subsidiary of the Corporation. The interest rate on such loans fluctuates quarterly and is equal to the most recently published applicable federal rate determined pursuant to Section 1274(d) of the Code. (3) This rate of appreciation produces an ending market price of $78.84 per share on March 31, 2008 and $79.21 on May 6, 2008. (4) This rate of appreciation produces an ending market price of $124.97 per share on March 31, 2008 and $126.12 on May 6, 2008. 14 STOCK OPTION EXERCISES Information concerning exercises of stock options during 1998 by the Named Executive Officers and the value of their unexercised options at December 31, 1998 is stated below: AGGREGATED OPTION EXERCISES IN 1998 AND OPTION VALUES AT DECEMBER 31, 1998
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT DECEMBER 31, 1998 DECEMBER 31, 1998(1) SHARES (#) ($) ACQUIRED ON VALUE -------------------- -------------------------- EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE - -------------------------------------- ----------- ---------- -------------------- -------------------------- R.H. Eigsti........................... 3,538 69,102 157,388 146,250 2,337,972 869,844 B.A. Dickey........................... 0 0 119,700 88,500 1,945,594 533,719 W.R. Stoddard......................... 3,300 112,609 13,875 25,875 199,414 90,430 R.H. Talbot........................... 5,000 93,750 13,750 39,250 80,438 90,375 J.W. Ruddy............................ 1,000 33,906 30,000 26,000 476,219 123,344
- ------------------------ (1) Based on $42.9375, the last sale price of the Corporation's Common Stock on December 31, 1998. LONG-TERM INCENTIVE PLAN AWARDS IN 1998 Information concerning awards of performance stock rights during 1998 to the Named Executive Officers is stated below: LONG-TERM INCENTIVE PLAN AWARDS IN 1998
ESTIMATED FUTURE PAYOUTS UNDER NUMBER OF NON-STOCK-PRICE-BASED PLANS (1) SHARES, UNITS PERFORMANCE OR OTHER OR OTHER RIGHTS PERIOD UNTIL ---------------------------------- NAME (#) MATURATION OR PAYOUT THRESHOLD (#) MAXIMUM (#) - -------------------------------------------- --------------- -------------------- ------------------- ------------- R.H. Eigsti................................. 11,351 1998-2000 0 11,351 B.A. Dickey................................. 7,863 1998-2000 0 7,863 W.R. Stoddard............................... 4,103 1998-2000 0 4,103 R.H. Talbot................................. 4,103 1998-2000 0 4,103 J.W. Ruddy.................................. 3,829 1998-2000 0 3,829
- ------------------------ (1) The performance stock rights will vest and shares will become payable only to the extent that specified performance goals (E.G., return on equity; increases in operating earnings, income and stock price; expense levels; and premium growth) are achieved. The awards cover a three-year performance period, within which there are three performance cycles. Only the shares relating to the second and third performance cycles (1998-1999 and 1998-2000, respectively) are included in this table. Any payment made for the first performance cycle is reported under the Bonus column of the Summary Compensation Table. 15 RETIREMENT PROGRAM The Corporation's retirement program is comprised of three plans which qualify for favorable tax treatment under the Code and three non-qualified supplemental plans. The three qualified plans are The SAFECO Employees' Cash Balance Plan ("Cash Balance Plan"), The SAFECO Employees' Profit Sharing Retirement Plan ("Profit-Sharing Plan") and The SAFECO 401(k) Savings Plan ("Savings Plan"). The three non-qualified plans are designed to allocate to employees amounts not eligible for contribution under the qualified plans because of limitations imposed by the Code. All employees (except Non-Participating Employees) are eligible to participate in the plans. The Profit-Sharing Plan and the Savings Plan are defined contribution plans while the Cash Balance Plan is a defined benefit plan. The Cash Balance Plan is credited with an amount equal to 3% of the annual compensation of participating employees plus 5% interest on the cumulative amount credited for prior years (together, the "Accrued Benefit"). The portion of the Accrued Benefit in excess of limitations imposed under Section 401(a)(17) of the Code is accrued in the SAFECO Employees' Supplemental Retirement Plan B ("Supplemental Plan B"). The estimated annual benefits payable upon normal retirement to the Named Executive Officers from the Cash Balance Plan and corresponding portion of Supplemental Plan B are as follows: $38,840 for Mr. Eigsti, $33,137 for Mr. Dickey, $23,852 for Mr. Stoddard, $28,431 for Mr. Talbot and $26,642 for Mr. Ruddy. CHANGE IN CONTROL AND RETIREMENT AGREEMENTS Messrs. Eigsti, Dickey, Stoddard, Talbot and Ruddy are among several officers of the Corporation or its subsidiaries who have agreements which provide for payments to them under certain circumstances following a change in control of the Corporation (as defined in the agreements). Under the agreements, if the officer in question is discharged without cause, demoted or given other good reason to resign following a change in control of the Corporation or a specified subsidiary or, in the case of the agreements with Messrs. Stoddard, Talbot and Ruddy, decides one year following a change in control to resign, then the agreements call for a lump-sum cash payment of up to three times annual salary, continuation of life and health benefits for three years, payment for accrued vacation and sick leave, payment of amounts allocated under the Corporation's bonus plan, payment of amounts payable under any incentive plan, and payment of certain retirement benefits. In addition, the agreements with Messrs. Stoddard, Talbot and Ruddy provide that vesting of awards under the Corporation's incentive plans will occur, and if any excise tax is levied on payments made under the agreements, then an additional payment will be made so that the net payments received by the officer under the agreement will equal the amount that would have been paid had the excise tax not been levied. The stock options awarded to the Named Executive Officers, as well as to other key employees, under the SAFECO Long-Term Incentive Plan of 1997 (the "Plan") and the predecessor incentive plan provide for accelerated vesting in the event of a change in control of the Corporation. Moreover, under the terms of the Plan, in such event all outstanding restricted stock right awards will become immediately vested and payable in cash and, to the extent deemed earned under the formula set forth in the Plan, all outstanding performance stock rights will become immediately payable in cash. CERTAIN TRANSACTIONS In the ordinary course of business, the Corporation and its subsidiaries enter into transactions with other business entities of which certain of the Corporation's directors and nominees for director are executive officers, partners or shareholders. The terms of all such transactions were as fair to the Corporation and its subsidiaries as could have been obtained from third parties. 16 Mrs. Runstad, a director of the Corporation, is of counsel to the Seattle law firm of Foster Pepper & Shefelman PLLC, which received fees for legal services provided to the Corporation and its subsidiaries during 1998. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Compensation Committee during 1998 were Robert S. Cline, Chair, Phyllis J. Campbell, John W. Ellis, William G. Reed, Jr and George H. Weyerhaeuser. PROPOSAL TO APPROVE THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997 AS AMENDED AND RESTATED (PROPOSAL 2) At the Annual Meeting, the shareholders are being asked to approve the SAFECO Long-Term Incentive Plan of 1997 as amended and restated (the "Amended Plan"). Approval of the Amended Plan will have the effect of (i) adding non-employee directors as eligible participants and (ii) approving the material terms of certain performance goals for purposes of Section 162(m) of the Code. The SAFECO Long-Term Incentive Plan of 1997 (the "Plan") was initially approved by the shareholders in 1997. For nearly 40 years the Corporation has had incentive plans to provide Common Stock to key employees. The Corporation has not, however, had a program for compensating non-employee directors with Common Stock. The Nominating Committee of the Board of Directors reviewed elements of director compensation at its November 2, 1998 meeting. Given the benefit of aligning the economic interests of directors with those of the Corporation's shareholders and the desirability of using stock-based remuneration to attract and retain non-employee directors, the Nominating Committee, along with the Compensation Committee, recommended to the Board of Directors that non-employee directors of the Corporation be eligible to receive such compensation. Those Committees recommended that the Board of Directors, subject to approval by the shareholders at the Annual Meeting, amend the Plan to add non-employee directors as eligible participants. Upon the recommendation of the Committees and subject to shareholder approval, the Board of Directors, at its November 4, 1998 meeting, approved the proposal to amend the Plan to permit non-employee directors to participate. The Board of Directors has approved a program to grant non-employee directors options for 2,000 shares annually following each year's annual meeting of shareholders, subject to shareholder approval of the Amended Plan. If the Amended Plan is approved by the shareholders, the first stock option grants to non-employee directors will be awarded following the Annual Meeting. Currently, ten non-employee directors serve on the Corporation's Board. Based on the present size of the Board, options covering a total of 20,000 shares would be granted each year to non-employee directors. Although the Board of Directors has adopted a formal grant program for non-employee directors, subject to shareholder approval of the Amended Plan, the Amended Plan does not limit the size or frequency of the awards that may be made to non-employee directors, and the Board may revoke or amend the terms of the grant program at any time without the approval of the Corporation's shareholders. Shareholder approval of the Amended Plan will also constitute approval for purposes of Section 162(m) of the Code of the material terms of the performance goals for performance stock rights ("PSRs"). Section 162(m) provides, with certain exceptions, that a publicly held corporation may not take a federal income tax deduction for compensation in excess of $1 million paid to a company's Chief Executive Officer and the four other most highly compensated executive officers. The $1 million limit on deductibility does not apply to compensation that meets the requirements for "qualified performance-based compensation" as defined in the applicable Treasury regulations. These requirements include, among other things, that the material terms of the performance goals be approved by the Company's shareholders. The performance goals for the PSRs are stated below. General performance criteria that do not establish specific target levels of 17 performance, such as the performance goals stated for the PSRs, must be approved by the shareholders every five years. Accordingly, it is intended that no further shareholder approval of the performance goals stated below will be required under Section 162(m) until 2004. The only effect of shareholder approval of the Amended Plan is to add non-employee directors as eligible participants under the Plan and to approve PSR performance goals for purposes of Section 162(m). No change in the number of shares authorized under the Plan is proposed. As approved by the shareholders in 1997, the Plan authorizes issuance of up to 6,000,000 shares of Common Stock (about 4.4% of the number of shares of Common Stock currently outstanding). As of February 5, 1999, 5,246,510 shares remained available for new grants under the Plan. SUMMARY OF THE LONG-TERM INCENTIVE PLAN AS AMENDED AND RESTATED The following summary of the Amended Plan is qualified in its entirety by reference to the complete text of the Amended Plan, which is attached to this Proxy Statement as Appendix A. The purpose of the Amended Plan is to enhance the long-term profitability and shareholder value of the Corporation by offering incentives and rewards to non-employee directors of the Corporation and selected eligible employees (including employees who are directors) of the Corporation and its subsidiaries who are key to the Corporation's growth and success as an inducement to them to remain in the service of the Corporation and to acquire and maintain stock ownership in the Corporation. The Amended Plan provides that a committee appointed by the Board of Directors (the "Plan Committee") will be responsible for administering the Amended Plan and will have authority to approve grants of stock options, stock appreciation rights ("SARs"), RSRs and PSRs. The maximum number of shares of Common Stock with respect to which awards may be granted under the Amended Plan is 6,000,000, and of these, no more than 3,000,000 shares may be issued in connection with RSRs and PSRs. In addition, the maximum number of shares with respect to which stock options may be granted under the Amended Plan to any individual in any calendar year is 300,000, and the maximum number of shares issuable with respect to PSRs granted to any one individual will not exceed 300,000 shares (or an equivalent cash amount) for any performance cycle. The Plan Committee has established the length of each performance cycle as three calendar years. Each of these share limitations is subject to adjustment to reflect changes in the Corporation's capital structure. Any shares of stock covered by an award under the Amended Plan which subsequently cease to be subject to the award (other than because of exercise or settlement of the award in stock) will again be available for issuance in connection with future grants of awards under the Amended Plan. The Plan Committee will consist of not less than two members of the Board, each of whom is an "outside director" as defined in regulations promulgated under Section 162(m) of the Code. In addition, if the Plan Committee does not also consist solely of "non-employee directors" as defined in Rule 16b-3 under the Exchange Act, the Amended Plan will be administered by a subcommittee to be appointed by the Board of Directors consisting of at least two such non-employee directors. The Plan Committee will have the authority to determine, in its sole discretion, all matters relating to awards under the Amended Plan, including the selection of individuals to be granted awards, the type of awards, the number of shares of Common Stock subject to an award, all terms, restrictions and limitations, if any, of an award, and the terms of any instrument that evidences an award. The Plan Committee, in its sole discretion, may accelerate the exercisability of or waive any or all of the restrictions and conditions applicable to any award and may, with the consent of the holder, modify any agreement governing an award. The Plan Committee may permit or require the deferral of any award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents. The Plan Committee has the exclusive authority to interpret the Amended Plan and may adopt, amend and rescind rules and procedures relating to the Amended Plan. The Plan Committee may delegate administrative duties to such of the Corporation's officers as it so determines, except that decisions 18 concerning the terms and conditions of an award and the selection of recipients of awards may not be so delegated. Awards under the Amended Plan may be granted only to non-employee directors of the Corporation and to salaried key management employees of the Corporation or its subsidiaries (including employees who are also directors) who, in the judgment of the Plan Committee, will perform services of special importance in the management, operation and development of the business of the Corporation or the businesses of one or more of its subsidiaries. Options and PSRs cannot be granted to employees during or after the calendar year in which the employee reaches age 65. Approximately 190 of the 12,000 employees of the Corporation and its subsidiaries currently hold awards granted under the Plan. It is not anticipated that every eligible employee will receive all the different types of awards available under the Amended Plan. Under the Amended Plan, the exercise price of stock options and SARs may not be less than 100% of the fair market value of the underlying shares of Common Stock on the date of grant. On February 5, 1999, the last sale price of the Corporation's Common Stock, as reported on the Nasdaq National Market, was $37.375 per share. Stock options may be either incentive stock options, which may be granted only to employees, or nonqualified stock options. The Plan Committee has broad discretion as to the terms and conditions upon which options are exercisable, but under no circumstances may an option have a term exceeding ten years from the date it is granted. The option price may be paid in cash, in shares of Common Stock at their fair market value on the date of exercise, in a combination of cash and shares, or in such other form of consideration as the Plan Committee in its discretion may permit. Subject to applicable statutes and regulations, the Corporation and its subsidiaries may extend credit, arrange credit, guarantee obligations, and otherwise aid optionees to obtain financing of their purchases of Common Stock pursuant to options. SARs may be granted in tandem with stock options. Upon the exercise of a tandem SAR, the holder is entitled to receive the difference between the aggregate option price of the shares that would have been received upon exercise of the related option and the fair market value of those shares on the date of exercise. The Plan Committee has the discretion to pay the value of the SAR in cash, shares of Common Stock or a combination of cash and shares. In all other respects, a SAR will have the same terms as the related option. RSRs entitle the holder to receive a stated number of shares of Common Stock if the holder remains continuously employed by the Corporation or one of its subsidiaries for a stated period of time or, following retirement, serves on the Board of Directors of the Corporation or in another capacity approved by the Plan Committee. A holder of an RSR will not be entitled to any of the rights of a shareholder prior to settlement of the RSR at the end of the restricted period. During the restricted period, however, the Corporation will pay to the holder, as additional compensation, an amount in cash equal to the dividends that would have been payable during such period on the number of shares underlying the RSR. PSRs entitle the holder to receive a stated number of shares of Common Stock if specified performance goals are met within a three-year performance period. The Plan Committee has discretion to determine the number of shares for each performance period and to establish performance goals based on one or more of the following criteria with respect to the Corporation, a subsidiary, or an operating group, division, or unit of the Corporation or a subsidiary: net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Performance goals may be measured on an absolute basis or relative to a group of peer companies selected by the Plan Committee, relative to internal goals, or relative to levels attained in prior years. The Plan Committee has authority to adjust performance goals during any performance period as it deems equitable in recognition of unusual or nonrecurring events affecting the Corporation, changes in applicable tax laws or accounting principles, or such other factors as the Plan Committee may determine; provided, 19 however, that the Plan Committee may not adjust performance goals for any participant who is a covered employee for purposes of Section 162(m) of the Code for the year in which a PSR is settled if the adjustment would increase the amount of compensation otherwise payable to the covered employee. As soon as practical after the end of a performance period, the Plan Committee will determine the extent to which a PSR has been earned. To the extent the performance goals of a PSR are satisfied, the Corporation will settle the earned portion of the PSR by the issuance and delivery of unrestricted shares equal to the number of earned shares, by the payment of cash equal to the then fair market value of the earned shares, or by a combination of cash and shares, as requested by the holder of the PSR. If the employment of a holder of a stock option or SAR is terminated, then, unless otherwise provided in the award agreement, the option or SAR may be exercised, to the extent exercisable at the date of termination, at any time within three months following the termination, subject to the following exceptions: First, if the termination is on account of retirement, then the option or SAR, to the extent exercisable at the date of termination, may be exercised at any time prior to the expiration of the award's stated term, but in no event later than the fifth anniversary of the termination date. Second, if the termination is on account of disability, then the option or SAR, to the extent exercisable at the termination date, may be exercised at any time within one year after the termination date. Third, if the termination is caused by the employee's death, then the option or SAR may be exercised at any time prior to the expiration of the term stated in the award agreement by the person(s) to whom the employee's rights pass by will or operation of law without regard to any continued employment or installment vesting requirements. Fourth, if the holder of an award dies following termination of employment and during the period in which the option or SAR is exercisable under either the first or second exception stated above, then, to the extent the option or SAR was vested at the date of the holder's termination, the option or SAR may be exercised at any time prior to expiration of the term stated in the award agreement by the person(s) to whom the holder's rights pass by will or operation of law. If a holder of an RSR fails to satisfy the employment or service requirements of the RSR, the holder loses the right to receive stock or cash under the RSR, except that in the event a holder of an RSR is unable to satisfy such requirements because of death or disability, then as soon as practical following the date of death or the date of determination of disability (the "Disability Determination Date"), the holder or the personal representative of the holder's estate will be issued shares of Common Stock equal in number to the total number of unissued shares covered by the RSR or, in lieu thereof, at the request of the holder or personal representative, receive a cash payment equal to the fair market value of such shares (or any portion thereof) at the date of death or the Disability Determination Date, as the case may be. If a PSR holder's employment terminates for any reason prior to the expiration of the performance period specified in the PSR, then, except to the extent the Plan Committee may decide otherwise in select situations, the holder will lose all rights to thereafter receive any stock or payment under the PSR. In the Plan Committee's discretion, the grant of any award under the Amended Plan may be conditioned on the holder's agreement to forfeit unexercised awards and pay the value of exercised or settled awards to the Corporation in the event the holder engages in any activity in competition with the Corporation or which is otherwise contrary to the Corporation's interests while employed by the Corporation or one of its subsidiaries or within a specified period of time following termination of employment or the exercise or settlement of an award. The awards authorized under the Amended Plan are subject to applicable tax withholding requirements and may not be assigned or transferred, except by the laws of descent and distribution, and are exercisable during the holder's lifetime only by the holder, except that the Plan Committee in its discretion may permit certain awards to be transferred for estate planning purposes. In the event the Corporation's outstanding shares of Common Stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Corporation 20 or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, spin-off, combination of shares, dividend payable in shares, rights offering, change in the Corporation's corporate structure or otherwise, the Plan Committee will make proportional adjustments to the maximum number and class of shares subject to the Amended Plan and to the maximum number and class of shares for which awards may be granted to any participant, as set forth in the Amended Plan. In addition, the Plan Committee will make an appropriate adjustment to the number and class of shares as to which outstanding awards are exercisable and the per-share price of such shares in order to maintain the participant's proportionate interest, without any change in the total price applicable to the unexercised portion of any award. If, while any award granted under the Amended Plan remains outstanding, a change in control (as defined in the Amended Plan) of the Corporation occurs, then: - All stock options and SARs outstanding at the time of the change in control will become exercisable in full immediately prior to the change in control. - All restrictions with respect to RSRs will lapse and all outstanding RSRs will be settled by a payment in cash to each holder of an RSR. - All outstanding PSRs, to the extent deemed earned, will become immediately payable in cash, with the remainder of each PSR canceled for no value. - All other restrictions on outstanding awards not described above will lapse, and such awards will be fully vested and nonforfeitable. The Amended Plan may be amended or terminated at any time by the Board of Directors, provided that any amendment that would increase the number of shares which may be issued under the Amended Plan or materially modify the requirements as to eligibility for participation in the Amended Plan must receive the approval of the Corporation's shareholders at the next annual or special meeting of shareholders after adoption of the amendment by the Board of Directors. FEDERAL INCOME TAX CONSEQUENCES INCENTIVE STOCK OPTIONS. When an optionee exercises an incentive stock option while employed by the Corporation or one of its subsidiaries or within the three-month (one year for disability) period after termination of employment, no ordinary income will be recognized by the optionee at that time. The excess (if any) of the fair market value of the shares acquired upon such exercise over the option price (the "Spread") will be an adjustment to the taxable income of the optionee for alternative minimum tax purposes. If the shares acquired upon exercise are not disposed of prior to the expiration of one year after the date of transfer and two years after the date of grant of the option, the excess (if any) of the sales proceeds over the aggregate option price of such shares will be long-term capital gain, and the Corporation will not be entitled to any tax deduction with respect to such gain. If the shares are disposed of prior to the expiration of such periods (a "disqualifying disposition"), the Spread (up to the amount of the gain on the disposition) will be ordinary income at the time of such disqualifying disposition, and the Corporation will be entitled to a tax deduction in a like amount. If an incentive stock option is exercised by the optionee more than three months (one year for disability) after termination of employment, the tax consequences are the same as described below for nonqualified stock options. NONQUALIFIED STOCK OPTIONS. When an optionee exercises a nonqualified stock option, the difference between the option price and any higher fair market value of the shares on the date of exercise will be ordinary income to the optionee and will be allowed as a deduction to the Corporation for federal income tax purposes. When an optionee disposes of shares acquired by exercise of the option, any amount received in excess of the market value of the shares on the date of exercise will be treated as long-term or short-term capital gain, depending upon the holding period of the shares. If the amount received is less than the 21 market value of the shares on the date of exercise, the loss will be treated as long-term or short-term capital loss, depending upon the holding period of the shares. STOCK-FOR-STOCK EXCHANGES. Additional special rules apply if the exercise price for an option is paid for in shares previously owned by the optionee rather than in cash. RESTRICTED STOCK RIGHTS, STOCK APPRECIATION RIGHTS AND PERFORMANCE STOCK RIGHTS. Generally, when a participant exercises a SAR or receives payment with respect to RSRs or PSRs, the amount of cash and the fair market value of the shares received will be ordinary income to the participant and will be allowed as a deduction for federal income tax purposes to the Corporation. The above discussion summarizes the federal income tax consequences of the Amended Plan based on current provisions of the Code, which are subject to change. The summary does not cover any state or local tax consequences of participation in the Amended Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE PROPOSAL TO APPROVE THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997 AS AMENDED AND RESTATED. AUDITING Ernst & Young LLP, the Corporation's independent auditors since 1987, has been selected by the Audit Committee to be the auditors for the current year, subject to the approval of the Board of Directors at its meeting on May 5, 1999. A representative of Ernst & Young LLP is expected to be present at the Annual Meeting and will have the opportunity to make a statement if he desires to do so and to respond to appropriate questions. SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING The Corporation's 2000 Annual Meeting of Shareholders will be held on May 3, 2000. Under the federal proxy solicitation rules, in connection with the preparation of proxy materials for the 2000 Annual Meeting of Shareholders, any proposal submitted by a shareholder to be considered for inclusion in the Corporation's proxy materials for such meeting must be received by the Corporation by November 19, 1999. NOTICE REQUIREMENTS FOR SHAREHOLDERS TO BRING BUSINESS AT AN ANNUAL MEETING The Corporation's Bylaws provide that shareholders may nominate persons for election to the Board of Directors only if a written notice of intention to nominate has been received by the secretary to the Board of Directors at SAFECO Plaza, Seattle, Washington 98185, not less than 90 days before the scheduled date of the Annual Meeting of Shareholders. For the 2000 Annual Meeting of Shareholders, such notice must be received by February 3, 2000. The notice must contain the name, address, telephone number, and number of shares of Common Stock owned by the nominating shareholder and the information relating to each nominee required with respect to nominees for director under the federal proxy solicitation rules. The notice of nomination must be accompanied by each nominee's written consent to being a nominee and statement of intention to serve as a director if elected. The Corporation's Bylaws further provide that for a shareholder to bring other business before an Annual Meeting of Shareholders, the shareholder must file a written notice of intention to bring such business with the Secretary of the Corporation at SAFECO Plaza, Seattle, Washington 98185, within the time frame described above. For the 2000 Annual Meeting of Shareholders, such notice must be filed by February 3, 2000. The notice must contain the name, address, telephone number and number of shares of Common Stock owned by the shareholder intending to bring such business before the meeting, a description of the business and reasons for conducting it at the meeting, and any material interest of the shareholder in such business. 22 OTHER MATTERS THE CORPORATION FILES AN ANNUAL REPORT ON FORM 10-K WITH THE SEC. A COPY OF THE CORPORATION'S MOST RECENT FORM 10-K REPORT WILL BE FURNISHED WITHOUT CHARGE TO ANY SHAREHOLDER WHO MAKES WRITTEN REQUEST TO ROD A. PIERSON, SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, SAFECO CORPORATION, SAFECO PLAZA, SEATTLE, WASHINGTON 98185. The Board is not aware of any other matters to be presented for action at the Annual Meeting. If any other matters come before the Annual Meeting, the persons named in the enclosed proxy will vote all proxies in accordance with their best judgment. All shares represented by the enclosed proxy, if returned prior to the Annual Meeting, will be voted in the manner specified by the shareholder. If neither a specific instruction is given nor authority withheld, the proxy will be voted for each of the director nominees and for the proposal to approve the SAFECO Long-Term Incentive Plan of 1997 as amended and restated. IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY AND THAT YOUR SHARES BE REPRESENTED. SHAREHOLDERS ARE URGED TO COMPLETE, SIGN, DATE AND PROMPTLY RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED ENVELOPE. [SIGNATURE] Seattle, Washington Roger H. Eigsti March 19, 1999 Chairman and Chief Executive Officer 23 APPENDIX A SAFECO LONG-TERM INCENTIVE PLAN OF 1997 AS AMENDED AND RESTATED 1. PURPOSE The purpose of the SAFECO Long-Term Incentive Plan of 1997 (the "Plan") is to enhance the long-term profitability and shareholder value of SAFECO Corporation (the "Company") by offering incentives and rewards to non-employee directors of the Company and selected eligible employees of the Company and its Subsidiaries (as defined in Section 2) who are key to the Company's growth and success as an inducement to them to remain in the service of the Company and to acquire and maintain stock ownership in the Company. 2. DEFINITIONS (a) "Affiliate" means a person controlling, controlled by or under common control with the Company. (b) "Award" shall mean any award or grant made pursuant to the Plan, including, without limitation, awards or grants of stock options, stock appreciation rights, restricted stock rights, performance stock rights or any combination of the foregoing. Awards may be granted singly, in combination, or in tandem so that the settlement or payment of one automatically reduces or cancels the other. (c) "Award Agreement" means a written agreement between the Company and a Plan participant evidencing an Award. (d) "Beneficial Owner" has the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (e) "Change in Control" shall be deemed to have occurred if the event set forth in any one of the following paragraphs has occurred: (i) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company's then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (iii) of this Section 2(e); or (ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date the Plan is adopted by the Company's shareholders, constitute the Board of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company's shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or (iii) There is consummated a merger or consolidation of the Company or any Subsidiary with any other corporation, OTHER THAN (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 25% or more of the combined voting power of the Company's then outstanding securities; or (iv) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale. Notwithstanding the foregoing, a "Change in Control" shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Company's common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the Company's assets immediately following such transaction or series of transactions. (f) "Committee" shall mean the committee or sub-committee described in Section 3 selected by the Company's Board of Directors to administer the Plan. (g) "Fair Market Value" shall mean, with respect to the Company's common stock, the price at which the last trade of the Company's common stock was made prior to 1:00 p.m. West Coast time on the Nasdaq National Market on the date in question. (h) "Person" for purposes of Section 2(e) means any person (as defined in Section 2(a)(9) of the Exchange Act, as such term is modified in Section 13(d) and 14(d) of the Exchange Act) OTHER THAN (i) any employee plan established by the Company, (ii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by shareholders of the Company in substantially the same proportions as their ownership of the Company. (i) "Retirement" shall mean a termination of employment with the Company or a Subsidiary occurring on or after an individual attains age 65, or such other termination of employment as the Committee may approve as a retirement from time to time for purposes of the Plan. (j) "Subsidiary" shall mean any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote is directly or indirectly owned by the Company. 3. ADMINISTRATION (a) The Plan shall be administered by a Committee to be appointed from time to time by the Company's Board of Directors and shall consist of at least two members of the Board, each of whom is an "outside director" as defined in regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). In addition, if the Committee does not also consist solely of "non-employee directors" as defined in Rule 16b-3 under the Exchange Act, the Plan shall be administered with respect to individuals subject to Section 16 of the A-2 Exchange Act by a sub-committee of the Committee to be appointed from time to time by the Company's Board of Directors and consisting of at least two members of the Board, each of whom is a "non-employee director." (b) Except for the terms and conditions explicitly set forth in the Plan, the Committee shall have the exclusive authority to determine, in its sole discretion, all matters relating to Awards under the Plan, including the selection of individuals to be granted Awards; the type of Awards; the number of shares of common stock subject to an Award; all terms, conditions, restrictions and limitations, if any, of an Award; and the terms of any instrument that evidences the Award. The Committee may, in its discretion, accelerate the exercisability of or waive any or all of the restrictions and conditions applicable to any Award and may, with the consent of the holder, modify any agreement governing an Award. The Committee may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents on the deferred payment. Any deferred payment may require the payment to be forfeited under certain circumstances in accordance with Section 15. The Committee shall also have exclusive authority to interpret the Plan and may adopt, amend and rescind rules and procedures relating to the Plan. The Committee may delegate administrative duties to such of the Company's officers as it so determines; provided, however, that decisions concerning the terms and conditions of an Award and the selection of recipients of Awards shall not be delegated. (c) The Board of Directors shall designate one member of the Committee as its Chair, and the Committee shall hold its meetings at such times and places as it shall deem advisable. At least one-half of its members shall constitute a quorum for the conduct of business, and any decision or determination approved by a majority of members present at any meeting in which a quorum exists shall be deemed to have been made by the Committee. In addition, any decision or determination reduced to writing and signed by all of the members shall be deemed to have been made by the Committee. The Committee may appoint a secretary, shall keep minutes of its meetings, and may make such rules and regulations for the conduct of its business and for the carrying out of the Plan as it deems appropriate. (d) The interpretation and construction by the Committee of any provisions of the Plan and of Awards thereunder and all actions taken and determinations made by the Committee pursuant to the Plan shall be final and conclusive on all persons having any interest therein. (e) Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other participants in the Plan. 4. SHARES SUBJECT TO PLAN (a) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), a maximum of 6,000,000 shares of the Company's common stock shall be available for issuance pursuant to Awards under the Plan. No more than 3,000,000 shares may be issued in connection with restricted stock rights and performance stock rights granted under the provisions of Sections 12 and 13. (b) Any shares of the Company's common stock that have been made subject to an Award and that subsequently cease to be subject to the Award (other than by reason of exercise or payment of the Award to the extent it is exercised for or settled in shares of common stock) shall again be available for issuance in connection with future grants of Awards under the Plan; provided, however, that for purposes of Section 4(c), any such shares shall be counted in accordance with the requirements of Section 162(m) of the Code. A-3 (c) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), the maximum number of shares with respect to which options may be granted under the Plan to any individual during any calendar year is 300,000, and the maximum number of shares payable under a performance stock right for any Performance Cycle (as defined in Section 13(a)) is 300,000 shares, or in the event the performance stock right is paid in cash, the equivalent cash value on the date the performance stock right would otherwise be settled in shares, such limitations to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code. 5. ELIGIBILITY Awards may be granted only to non-employee directors of the Company and salaried key management employees of the Company or a Subsidiary (including salaried employees who are also directors) who, in the judgment of the Committee, will perform services of special importance in the management, operation and development of the business of the Company or the businesses of one or more of its Subsidiaries, provided the grant date for options and performance stock rights for an employee shall not occur during or after the calendar year in which the employee reaches the age of 65. 6. PRICE AND TERM OF OPTIONS (a) The exercise price for shares purchased under each option will be determined by the Committee but shall not be less than 100% of the Fair Market Value of the shares of stock covered by the option on the date of grant of the option. (b) The term of each option shall be as determined by the Committee, but not in excess of ten years from the date it is granted. An option granted for an initial term of less than ten years may be extended by amendment for a period of up to ten years from the date of the initial grant, provided that no such amendment of an incentive stock option shall be made without the prior consent of the optionee. 7. LIMITATIONS ON EXERCISE OF OPTIONS (a) Any minimum period during which an optionee must be continuously employed prior to an option becoming exercisable and the increments in which an option will become exercisable shall be set forth in the Award Agreement evidencing the option. Such provisions may be waived or modified by the Committee at any time. Absence on leave shall not be deemed an interruption of employment for purposes of the Plan, except that with respect to incentive stock options a leave of absence shall be subject to any requirements of Section 422 of the Code. (b) With respect to incentive stock options granted to an employee under the Plan, to the extent the aggregate Fair Market Value (determined at the time the options are granted) of the stock with respect to which incentive stock options are exercisable for the first time by such employee during any calendar year (under the Plan and all other stock option plans of the Company and its Subsidiaries) exceeds $100,000, such portion in excess of $100,000 shall be treated as a nonqualified stock option. 8. METHOD OF EXERCISE Each exercise of an option granted hereunder, whether in whole or in part, shall be by written notice to the Chief Executive Officer of the Company designating the number of shares as to which the option is exercised, and shall be accompanied by payment in full for the number of shares so designated. Stock to be purchased under an option may be paid for in cash, in shares of the Company's common stock (either through physical delivery or by attestation) at their Fair Market Value on the date of exercise, or in a A-4 combination thereof, or in such other consideration as the Committee in its discretion may permit. Fractional shares may not be purchased under an option, and fractional shares may not be delivered to the Company for payment of the option price. 9. FORM OF OPTION AGREEMENT Each Award Agreement evidencing an option shall contain the essential terms of the option and such other provisions as the Committee shall from time to time determine, but such Award Agreements need not be identical. If the option is an incentive stock option, the Award Agreement shall contain such terms and provisions relating to exercise and otherwise as may be necessary to render it an incentive stock option under the applicable provisions of the Code (presently Section 422 thereof), and the regulations thereunder. 10. FINANCING OF OPTIONS The Company declares its belief that the purposes of the Plan can be fully achieved only if those employees to whom options are granted hereunder are able financially to purchase the stock covered by their options should they wish to do so. Thus, within the limits of and in compliance with applicable statutes and regulations, the Company and its Subsidiaries may extend credit, arrange credit, guarantee obligations, and otherwise aid such employees in needed financing of their purchases of stock pursuant to options. 11. STOCK APPRECIATION RIGHTS (a) In connection with the grant of any stock option, the Committee may grant a stock appreciation right ("SAR") pursuant to which the optionee shall have the right to surrender all or part of such stock option and to exercise the SAR and thereby obtain payment of an amount equal to the difference between the aggregate option price of the shares so surrendered and the Fair Market Value of such shares on the date of surrender. In all other respects, a SAR will have the same terms and provisions as the related option. (b) The exercise of a SAR shall be by written notice to the chief executive officer of the Company designating the number of shares as to which the SAR is exercised and shall be subject to such limitations as the Committee may deem appropriate. Payment to the holder upon the call of a SAR may be made in shares of the Company's common stock (at their Fair Market Value on the date of exercise), in cash, or partly in shares and partly in cash, at the discretion of the Committee. 12. RESTRICTED STOCK RIGHTS (a) The Committee may grant any eligible employee restricted stock rights ("RSRs") which entitle such employee to receive a stated number of shares of the Company's common stock if the employee for a stated period remains continuously employed by the Company or a Subsidiary or, following the employee's Retirement, serves on the Board of Directors of the Company or in another capacity approved by the Committee (the "Restricted Period"). At the time an RSR is issued, the Committee shall designate the length of the Restricted Period and the service that will qualify under the Restricted Period; provided, however, in no event may the Restricted Period extend beyond the fifth anniversary date of the employee's termination of employment. The Committee shall also have full and final authority to select the employees who receive RSRs, to specify the number of shares of stock subject to each RSR, and to establish the other terms, conditions and definitions that govern RSRs. (b) The Company shall pay to each holder of an unexpired RSR during the Restricted Period, as additional compensation, an amount of cash equal to the dividends that would have been payable to the holder of the RSR during the Restricted Period if the holder had owned the stock subject A-5 to the RSR. Such amount shall be paid as near in time as reasonably practical to the applicable dividend payment dates. (c) At the expiration of each Restricted Period and provided all conditions relating to an RSR have been met, the Company shall issue to the holder the shares of stock which relate to such Restricted Period or, at the request of the holder, make a payment of an amount equal to the Fair Market Value of such shares (or any portion thereof) determined as of the settlement date or, alternatively, over such period as may be established by the Committee at the time of grant. (d) Upon grant of an RSR, the Company shall deliver to the recipient an Award Agreement which sets forth the terms and conditions of the RSR. 13. PERFORMANCE STOCK RIGHTS (a) The Committee may grant to an eligible employee performance stock rights ("PSRs") which entitle such employee to receive a stated number of shares of the Company's common stock if the employee attains certain specified performance goals ("Performance Goals") within a stated performance period (a "Performance Cycle"). The Committee shall have full and final authority to select the employees who receive PSRs, to specify the number of shares of stock subject to each such right, to establish the Performance Goals, to establish the Performance Cycle and to establish the terms, conditions and definitions that govern such rights. (b) The Committee shall establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Performance Goals selected by the Committee may include performance criteria for the Company, a Subsidiary, or an operating group, division, or unit of the Company or a Subsidiary. During any Performance Cycle, the Committee may adjust the Performance Goals for such Performance Cycle as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine; provided, however, that the Committee may not adjust Performance Goals for any participant who is a covered employee for purposes of Section 162(m) of the Code for the year in which such Performance Award is settled in such a manner as would increase the amount of compensation otherwise payable to such covered employee. (c) As soon as practical after the end of a Performance Cycle, the Committee shall determine the extent to which a PSR has been earned on the basis of performance in relation to the established Performance Goals. To the extent that the Performance Goals of a PSR are satisfied, the Company shall settle the earned portion of the PSR by the issuance and delivery of unrestricted shares equal to the number of earned shares, by the payment of cash equal to the Fair Market Value of the earned shares on the date the PSR would otherwise be settled in shares, or by a combination of cash and shares, as requested by the holder. If the Performance Goals are not met by the expiration of the Performance Cycle, the PSR shall expire and the holder thereof shall have no further rights thereunder. (d) Upon granting a PSR, the Company shall issue to the recipient an Award Agreement which sets forth the terms and conditions of the PSR. (e) The Performance Goals shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Performance Goals may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years. The Committee will establish specific Performance Goals for each PSR not later than 90 days after the beginning of the Performance Cycle for the Award. A-6 (f) The Company shall not make dividend equivalent payments with respect to shares subject to PSRs. 14. TERMINATION OF EMPLOYMENT, RETIREMENT, DISABILITY AND DEATH (a) In the event the employment of a Plan participant by the Company or a Subsidiary terminates, then unless otherwise provided in the Award Agreement, any unexercised option or SAR granted to such participant may be exercised, BUT ONLY TO THE EXTENT EXERCISABLE ON THE DATE OF TERMINATION OF EMPLOYMENT, at any time within three months following such termination of employment, EXCEPT THAT: (i) If the participant's termination of employment is on account of RETIREMENT, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised at any time prior to the expiration of its stated term, but in no event later than the fifth anniversary date of the participant's termination of employment. (ii) If the participant's termination of employment is on account of a permanent and total DISABILITY within the meaning of Section 22(e)(3) of the Code, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised at any time within one year after the date of termination. (iii) If the participant's termination of employment is caused by the DEATH of the participant, then the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant's rights pass by will or by operation of law without regard to any requirements related to continued employment or installment vesting. (iv) If the participant DIES FOLLOWING TERMINATION of employment and during the period in which the option or SAR is exercisable under paragraph (i) or (ii) of this Section 14(a), then, to the extent the option or SAR was vested at the date of the participant's termination of employment, the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant's rights pass by will or by operation of law. (b) Any portion of an option or SAR that is not exercisable on the date of termination of the participant's employment shall terminate on such date, unless the Committee determines otherwise. (c) To the extent that the option or SAR of any deceased or disabled participant or of any participant whose employment has terminated shall not have been exercised within the time periods provided above, all further rights to exercise such option or SAR shall terminate at the expiration of the applicable period. (d) In the event a holder of an RSR issued under the provisions of Section 12 fails to satisfy the employment or service requirements of the RSR, such holder shall lose the right to receive stock or cash under the provisions of the RSR, EXCEPT THAT in the event a holder of an RSR is unable to satisfy such requirements because of death or disability within the meaning of Section 22(e)(3) of the Code, then as soon as practical following the date of death or the date of determination of disability (the "Disability Determination Date"), the holder or the personal representative of the holder's estate, as the case may be, shall be issued shares of the Company's common stock equal in number to the total number of unissued shares covered by such RSR or, in lieu thereof, at the request of such holder or personal representative, receive a cash payment equal to the Fair Market Value of such shares (or any portion thereof) at the date of death or the Disability Determination Date, as the case may be. Such shares shall be issued or payment made without regard to any employment or other service requirement stated in the RSR. A-7 (e) Except as provided in Section 22, in the event the employment of an employee who holds a PSR granted under the provisions of Section 13 terminates for any reason prior to the expiration of the Performance Cycle specified in the PSR, then, except to the extent the Committee may decide otherwise in select situations, such employee shall lose all rights to thereafter receive any stock or payment under such PSR. (f) If a corporation ceases to be a Subsidiary of the Company, then, except to the extent the Committee determines otherwise, employees of such corporation shall be deemed to have terminated their employment with the Company or a Subsidiary of the Company for purposes of this Section 14 as of the date such corporation's status as a Subsidiary terminates. 15. FORFEITURE Subject to the Committee's discretion, the grant of any Award under the Plan may be conditioned on the participant's agreement to forfeit unexercised Awards and pay the value of previously exercised or settled Awards to the Company in the event that the participant engages in any activity in competition with the Company or otherwise contrary to the Company's interests while employed by the Company or a Subsidiary or within a specified period following termination of employment or exercise or settlement of an Award. 16. TRANSFERABILITY Except as otherwise provided in this Section 16, Awards shall not be transferable other than by will or the laws of descent and distribution and shall be exercisable during the lifetime of a participant only by the participant or, in the event the participant becomes legally incompetent, by the participant's guardian or legal representative. Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Committee, in its discretion, may provide in any Award Agreement or otherwise that the Award is transferable, without payment of consideration, (i) to immediate family members (including grandchildren) of the participant or (ii) to a trust or trusts for the benefit of such family members or (iii) to a partnership or similar organization composed of such family members ("Permitted Family Transferees"). Any Award assigned or transferred to Permitted Family Transferees shall be subject to all the same terms and conditions contained in the Award Agreement, and the events of termination of employment stated in Section 14 shall continue to be applied with respect to the original Award recipient, following which termination the Award shall be exercisable by the transferee only to the extent and for the periods specified in Section 14. 17. WITHHOLDING The Company may require the holder of an Award to pay to the Company the amount of any taxes that the Company is required to withhold with respect to the grant, exercise, payment or settlement of an Award. The Company shall have the right to withhold from any Award or any shares of stock issuable pursuant to an Award an amount equal to such taxes. 18. RIGHTS AS SHAREHOLDER Neither a person to whom an Award is granted, nor such person's legal representative, heir, legatee, distributee or Permitted Family Transferee shall be deemed to be the holder of, or to have any rights of a holder with respect to, any shares subject to such Award until after the shares are issued. 19. AMENDMENTS TO THE PLAN The Company's Board of Directors may from time to time make such amendments to the Plan as it may deem proper and in the best interests of the Company or a Subsidiary, provided that: (a) No amendment shall be made which would impair, without the consent of the applicable participant, any Award previously granted under the Plan or deprive any participant of any shares A-8 of stock of the Company which the participant may have acquired through or as a result of the Plan. (b) Any such amendment which would (i) increase the number of securities which may be issued under the Plan or (ii) materially modify the requirements as to eligibility for participation in the Plan shall be submitted to the shareholders of the Company for their approval at the next annual or special meeting after adoption by the Board of Directors, and if such shareholder approval is not obtained, the amendment, together with any actions taken under the Plan on the necessary authority of such amendment, shall be null and void. 20. TERMINATION OF THE PLAN The Plan shall remain in effect until Awards have been granted covering all the shares of the Company's common stock authorized under Section 4(a) or until the Plan is otherwise terminated by the Company's Board of Directors; provided, however, that no incentive stock option shall be granted more than ten years after the date on which the Plan is approved by the shareholders of the Company, I.E., the effective date of the Plan. Termination of the Plan shall not affect outstanding Awards. 21. CHANGES IN CAPITAL STRUCTURE Except as otherwise provided in Section 22, in the event the outstanding shares of common stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, spin-off, combination of shares, dividend payable in shares, rights offering, change in the corporate structure of the Company, or otherwise, then the Committee shall make proportional adjustments to the maximum number and class of shares subject to the Plan and to the maximum number and class of shares with respect to which Awards may be granted or paid to any individual participant as set forth in Sections 4(a) and (c). In addition, the Committee shall make an appropriate adjustment to the number and class of shares as to which outstanding Awards, or portions thereof then unexercised, shall be exercisable or settled and the per share price of such shares, to the end that the participant's proportionate interest shall be maintained as before the occurrence of such event, without any change in the total price applicable to the unexercised portion of any Award. Any such adjustment made by the Committee shall be conclusive. 22. CHANGE IN CONTROL (a) Notwithstanding any other provision of the Plan to the contrary, if, while any Awards remain outstanding under the Plan, a Change in Control of the Company shall occur, then: (i) All options and SARs granted under the Plan that are outstanding at the time of such Change in Control shall become exercisable in full IMMEDIATELY PRIOR TO the Change in Control; (ii) To the extent deemed earned, each outstanding PSR shall become immediately payable in cash, and the remainder of each outstanding PSR shall be canceled for no value. All outstanding PSRs shall be deemed to have been earned to the extent of the greater of: (1) The number of shares of the Company's common stock determined by the Committee based on the extent to which the Performance Goals specified in the Award Agreement have been achieved during the portion of the Performance Cycle ending on the last day of the last fiscal quarter of the Company ending on or before the date of the Change in Control; or (2) The number of shares of the Company's common stock equal to the product of the target shares identified in the Award Agreement multiplied by a fraction with a numerator equal to the whole number of calendar months beginning with the month in A-9 which the Award was granted and ending on the date of the Change in Control and a denominator equal to the whole number of calendar months in the entire Performance Cycle specified in the Award Agreement. (iii) All restrictions with respect to RSRs shall lapse and all outstanding RSRs shall be settled by a payment in cash to each holder of such Award; and (iv) All other restrictions with respect to outstanding Awards not described in paragraphs (i) through (iii) of this Section 22(a) shall lapse, and such Awards shall be fully vested and nonforfeitable. (b) For purposes of this Section 22, with respect to determining the cash equivalent value of an RSR or PSR or the spread payable upon exercise of a SAR, the Fair Market Value of a share of the Company's stock shall be deemed to equal the greater of (i) the Fair Market Value of a share of stock as of the date on which a Change in Control occurs and (ii) the highest price of a share of stock which is paid or offered to be paid, by any Person or entity, in connection with any transaction which constitutes a Change in Control. (c) The phrase "immediately prior to the Change in Control" shall be understood to mean sufficiently in advance of a Change in Control to permit the holder of an Award to take all steps reasonably necessary to exercise all options and SARs and take any actions with respect to the shares of stock underlying Awards of any nature so that such shares may be treated in the same manner as the shares of stock of other shareholders in connection with the Change in Control. 23. APPROVALS The obligations of the Company under the Plan shall be subject to the approval of such state or federal authorities or agencies, if any, as may have jurisdiction in the matter. Shares shall not be issued with respect to an Award unless the exercise and the issuance and delivery of the shares comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the Code, the respective rules and regulations promulgated thereunder, and the requirements of any stock exchange or market on which the shares may then be listed or traded, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed by the Company's counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability for the nonissuance or sale of such shares. The Board of Directors may require any action or agreement by a holder of an Award as may from time to time be necessary to comply with the federal and state securities laws. The Company shall not be obliged to register stock issued under the Plan or options or any other rights to acquire stock granted under the Plan. 24. EMPLOYMENT RIGHTS Nothing in this Plan or any Award granted pursuant hereto shall confer upon any employee any right to be continued in the employment of the Company or any Subsidiary of the Company or to interfere in any way with the right of the Company, in its sole discretion, to terminate such employee's employment at any time. 25. EFFECTIVE DATE OF THE PLAN The effective date of this Plan is May 7, 1997. A-10 - ------------------------------------------------------------------------------- PROXY SAFECO CORPORATION PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION FOR THE ANNUAL MEETING OF SHAREHOLDERS MAY 5, 1999 The undersigned hereby appoints Roger H. Eigsti, Robert S. Cline, John W. Ellis, Joshua Green III and Judith M. Runstad, each with full power of substitution, as the true and lawful attorneys and proxies for the undersigned, to represent and vote the undersigned's shares at the Annual Meeting of Shareholders of SAFECO Corporation to be held at the SAFECO Auditorium, SAFECO Plaza, Seattle, Washington, at 11:00 a.m. on May 5, 1999, or any adjournment or postponement thereof, and to represent and vote all of the shares the undersigned would be entitled to vote if personally present in the transaction of such business as may properly come before the meeting. CHANGE OF ADDRESS - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (If you have written in the above space, please mark the corresponding box on the reverse side of this card.) YOU ARE ENCOURAGED TO SPECIFY YOUR CHOICES BY MARKING THE APPROPRIATE BOXES, SEE REVERSE SIDE, BUT YOU NEED NOT MARK ANY BOXES IF YOU WISH TO VOTE IN ACCORDANCE WITH THE BOARD OF DIRECTORS' RECOMMENDATIONS. THE PROXIES NAMED ABOVE CANNOT VOTE YOUR SHARES UNLESS YOU SIGN AND RETURN THIS CARD. SEE REVERSE SIDE - ------------------------------------------------------------------------------- FOLD AND DETACH HERE 2415 /x/ Please mark your votes as in this example. - -------------------------------------------------------------------------------- (The Board of Directors recommends a vote "FOR" proposals 1 and 2) - -------------------------------------------------------------------------------- 1. Election of FOR WITHHELD Directors / / / / For, except vote withheld from the following nominee(s): - -------------------------------------------------------- Nominees: Phyllis J. Campbell Boh A. Dickey William P. Gerberding Norman B. Rice Paul W. Skinner 2. To approve the SAFECO Long-Term Incentive Plan of 1997 as amended and restated. FOR AGAINST ABSTAIN / / / / / / Change of Address on Reverse Side / / This proxy when properly executed will be voted as directed herein. IF NO DIRECTION IS GIVEN, THE PROXIES NAMED ON THE REVERSE SIDE INTEND TO VOTE THE SHARES TO WHICH THIS PROXY RELATES "FOR" PROPOSALS 1 AND 2. THE PROXIES WILL VOTE IN THEIR DISCRETION ON ANY OTHER MATTERS PROPERLY COMING BEFORE THE MEETING. The undersigned hereby revokes all prior proxies given by the undersigned to vote at the meeting or any adjournment or postponement thereof. SIGNATURE(S) DATE --------------------------------------- ------------------- Please sign exactly as name appears hereon. If the stock is registered in the names of two or more persons, each should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. - ------------------------------------------------------------------------------- FOLD AND DETACH HERE -----END PRIVACY-ENHANCED MESSAGE-----