10-K

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

x Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Year Ended December 31, 2003

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from              to             

Commission File Number 1-6563

Safeco Corporation

State of Incorporation: Washington

I.R.S. Employer I.D. No.: 91-0742146

Address of Principal Executive Offices: Safeco Plaza, Seattle, Washington 98185

Telephone: 206-545-5000

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, No Par Value: 139,028,980 shares were outstanding at February 27, 2004.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES  x     NO  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES  x    NO  ¨

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2003, was $4,900,000,000.

Documents incorporated by reference: Portions of the registrant’s definitive Proxy Statement for the 2004 annual shareholders meeting are incorporated by reference into Part III.

Safeco Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits

Item	Description	Page
Part I
Item 1	Business	3
	Our Vision and Strategy	3
	Our P&C Products	4
	Our L&I Products	17
	Corporate	22
	Regulation	23
	Executive Officers of the Registrant	24
Item 2	Properties	25
Item 3	Legal Proceedings	25
Item 4	Submission of Matters to a Vote of Security Holders	25
Part II
Item 5	Market for Registrant’s Common Equity and Related Shareholder Matters	26
Item 6	Selected Financial Data	27
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 7A	Quantitative and Qualitative Disclosures About Market Risk	82
Item 8	Financial Statements and Supplementary Data	83
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	83
Item 9A	Controls and Procedures	83
Part III
Item 10	Directors and Executive Officers of the Registrant	84
Item 11	Executive Compensation	84
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	84
Item 13	Certain Relationships and Related Transactions	85
Item 14	Principal Accountant’s Fees and Services	85
Part IV
Item 15	Exhibits, Financial Statement Schedules and Reports on Form 8-K	85
	Signatures	86
	Index to Financial Statements, Schedules and Exhibits

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Part I

(Dollar amounts in millions except for ratios and per share data unless noted otherwise)

Item 1: OUR BUSINESS:

We are a Washington State corporation with headquarters in Seattle. We had 11,200 employees at February 27, 2004. We sell insurance and investment products through a national network of independent agents, brokers and financial advisors. Our businesses help people protect what they value and deal with the unexpected.

We started our business in 1923. Even though we’ve been in the insurance business for more than 80 years, we’re still working hard to simplify (hence our marketing brand “Uncomplicate”) the process of buying, selling and owning insurance for our distribution partners and customers.

We have two major businesses:

• Property & Casualty (P&C) – provides auto and homeowners insurance to individuals, commercial insurance for small- and medium-sized businesses and surety bonds.

• Life & Investments (L&I) – provides individual life and group medical insurance, retirement services, annuities, mutual funds and investment advisory services.

In September 2003, however, we announced our decision to focus on our P&C operations and to sell our L&I businesses. More information about our decision can be found on pages 16-17.

The earned premiums of our P&C business in 2003 were as follows:

2003 P&C EARNED PREMIUMS
Personal Auto	46	%
Homeowners & Specialty	20
Small Business	22
Other Commercial	9
Surety	3
Total	100	%

The premiums, net investment income and other revenues for our L&I business in 2003 were as follows:

2003 L&I PREMIUMS, NET INVESTMENT INCOME AND OTHER REVENUES
Group	27	%
Income Annuities	25
Retirement Services	19
Individual	18
Asset Management	1
L&I Other	10
Total	100	%

Our Vision and Strategy

In light of our planned divestiture of the L&I businesses, in this section we discuss our forward-looking vision and strategy for our P&C business. Our vision is to be one of the top-performing property and casualty companies in the industry. We’ll measure our success by tracking our performance against these three financial goals:

• Earnings Per Share – average annual growth of 15%, with a goal of doubling our earnings over the next five years.

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• Return on Equity – performance that ranks us among the top 10% of our peer group. In today’s market conditions, this would mean delivering a 15% return on equity.

• Revenue Growth – double-digit growth, when we can grow profitably.

To achieve our vision, we must be distinctly good at motivating our independent distributors to sell our products. We will do this by continuing to develop and service P&C insurance products in ways that:

• Meet the needs of our shared customers at a fair price

• Lower our distributors’ operating costs

• Increase our distributors’ margins

• Increase our profitability

Our P&C distributors are the 7,300 independent agents and brokers who sell our insurance products throughout the United States.

Our strategy focuses on:

• Standardized Products – Developing products that serve insurance needs for a broad range of customers, and that work with our unified, automated sales-and-service platform.

• Independent Distribution – Distributing our products through independent agents and brokers who provide customers with choice and advice. We motivate our distributors to sell Safeco products by giving them more to sell, making it easier for them to sell and helping our distributors make more money selling our products.

• Multiple Product Lines – Building “shelf space” in our distributors’ offices by offering a variety of P&C products that have the broadest customer reach -personal auto, homeowners, small commercial insurance and surety.

Our P&C Products

We are the 18th largest property and casualty insurance company in the United States based on 2002 total direct written premiums as reported by A.M. Best, an insurance rating and information agency. A.M. Best ranks companies based on written premiums, which are premiums charged for policies issued. However, premiums are earned and recorded as revenues over the policy term. As a result, the charts below use the net earned premiums measure, which is equivalent to our premium revenues. We use “net” because some of our premiums are ceded to reinsurers, which protect our capital just as insurers protect their customers.

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The 10 states with the largest amount of net earned premiums in 2003 were as follows:

YEAR ENDED DECEMBER 31	2003				2002				2001
	Amount		% of Total		Amount		% of Total		Amount		% of Total
California	$	833.1	17	%	$	762.5	17	%	$	743.4	17	%
Washington		606.7	12			574.2	13			568.2	13
Texas		476.0	10			356.7	8			326.2	7
Oregon		265.0	6			238.2	5			234.8	5
Illinois		207.2	4			220.9	5			251.2	6
Connecticut		192.9	4			134.4	3			113.1	2
Missouri		190.8	4			190.5	4			196.1	4
Florida		190.7	4			176.6	4			157.9	3
Colorado		145.3	3			135.9	3			114.8	3
Michigan		107.1	2			109.2	2			120.9	3
Total 10 largest states		3,214.8	66			2,899.1	64			2,826.6	63
All others		1,687.0	34			1,622.2	36			1,646.2	37
Total	$	4,901.8	100	%	$	4,521.3	100	%	$	4,472.8	100	%

Our P&C business has four business segments:

• Safeco Personal Insurance – offers personal auto, homeowners and other specialty insurance products for individuals.

• Safeco Business Insurance – offers business owner policies, commercial multi-peril packages, workers compensation, property, general liability and commercial auto policies to small- and medium-sized businesses.

• Surety – offers bonds that provide payment and performance guarantees primarily for construction businesses and for corporations.

• P&C Other – includes property and casualty business that is in runoff or business that we have exited.

Net earned premiums for our P&C business segments are as follows:

YEAR ENDED DECEMBER 31	2003				2002				2001
	Amount		% of Total		Amount		% of Total		Amount		% of Total
Safeco Personal Insurance	$	3,239.0	66	%	$	2,907.6	64	%	$	2,709.6	61	%
Safeco Business Insurance		1,479.3	30			1,461.0	32			1,643.4	37
Surety		153.6	3			126.3	3			95.6	2
P&C Other		29.9	1			26.4	1			24.2	—
Total	$	4,901.8	100	%	$	4,521.3	100	%	$	4,472.8	100	%

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Safeco Personal Insurance

Net earned premiums for our Safeco Personal Insurance business segment are as follows:

YEAR ENDED DECEMBER 31	2003		2002		2001
Net Earned Premiums
Personal Auto	$	2,269.1	$	1,947.1	$	1,767.4
Homeowners		768.1		757.4		740.6
Specialty		201.8		203.1		201.6
Total	$	3,239.0	$	2,907.6	$	2,709.6

Personal Auto –We are the 14th largest writer of auto insurance in the United States, based on 2002 direct written premiums as reported by A.M. Best. We provide coverage for the liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for damage to our customers’ vehicles from collision and other hazards.

Our tiered auto product, now available in 43 of the 44 states where we write business, can cover more than 95% of all applicants in our agents’ offices. This product blends traditional underwriting methods with an automated underwriting and segmentation process that enables us to assign the price appropriate to the corresponding level of risk that we assume, driving greater competitive pricing precision and profitability. Our new point-of-sale (POS) technology, enabled by this automated underwriting process, allows distributors to quote and sell policies faster, allowing us to streamline the sales process.

Homeowners – We are the 10th largest writer of homeowners insurance in the United States, based on 2002 direct written premiums as reported by A.M. Best. We protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We protect individuals from liability for accidents that occur on their property.

Due to our focus on profitability, we have not aggressively grown our homeowners business. We have, however, taken a number of actions to improve our results in this line of business and achieve returns appropriate for the risks insured.

Like auto, we’ve rolled out our tiered pricing structure for homeowners insurance in 43 of the 44 states where we write business. Also like auto, our tiered homeowners product allows us to match rates more closely to the risks that we insure and connects to our POS technology.

Specialty – We also offer umbrella, earthquake, dwelling fire, inland marine, recreational vehicle, motorcycle and boat insurance coverage for individuals. These specialty products broaden our personal lines portfolio so we can provide products to meet the majority of our policyholders’ personal insurance needs.

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Safeco Business Insurance

Net earned premiums for our Safeco Business Insurance business segment are as follows:

YEAR ENDED DECEMBER 31	2003			2002		2001
Net Earned Premiums
SBI Regular	$	1,097.5		$	1,014.1	$	1,033.0
SBI Special Accounts Facility		383.8			276.0		128.1
SBI Runoff		(2.0	)		170.9		482.3
Total	$	1,479.3		$	1,461.0	$	1,643.4

SBI Regular – This line offers a variety of commercial insurance products designed for small- and medium-sized businesses (customers who pay annual written premiums of $100,000 or less). Our principal business insurance products include business owner policies, commercial multi-peril, workers compensation, property, general liability and commercial auto. We are one of the largest writers of small-business insurance that sells primarily through independent agents in the United States. This market is highly fragmented, however. Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we see growth potential in this segment and aim to become the top insurance writer.

We continued to roll out our automated underwriting platform, point-of-sale technology and customer service unit in 2003, enabling agents to quote, sell and service business policies more efficiently.

SBI Special Accounts Facility –We write large commercial accounts for our key agents who sell our core P&C products as well as four specialty commercial insurance programs which are lender-placed property, agents’ errors and omissions, mini-storage and warehouse properties and non-profit social service organizations.

SBI Runoff – SBI Runoff includes results for the large-commercial business accounts and specialty programs that we have exited.

Surety – We are the fifth largest writer of surety bonds in the United States, based on 2002 direct written premiums as reported by A.M Best. We provide surety bonds for construction, performance and legal matters that include appeals, probate and bankruptcies.

P&C Other – This segment includes runoff assumed reinsurance business, results from our London operations that are in runoff, and other product lines we have exited. It also includes our non-voluntary personal lines business.

Financial information on our segments can be found in Management’s Discussion and Analysis (MD&A) and Note 20 to the Consolidated Financial Statements.

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Our P&C Competition

We operate in a highly competitive property and casualty industry. We compete for independent distributors and policyholders with thousands of domestic and foreign insurance companies. Competitive factors include:

• Ease of doing business between distributors and insurers

• Price of product

• Customer service

• Claims handling

• Agent commission structure

• Insurers’ financial strength and ratings

• Reputation

• Brand recognition

Because we focus on selling through independent distributors, we compete not only for business and individual customers, but also for distributors. Our products are sold to our policyholders by others. As a result, our first sale is to our distributors, then to the policyholders. Both are customers to us. Within our distributors’ offices, we compete with:

• National monoline carriers

• Major multiline carriers

• More than 2,000 smaller regional carriers

Our competitive positioning is driven by three key ideas:

• “Shelf space”

• Standardized products

• Ease of doing business

We believe that our ability to provide multiple property and casualty products gives us a “shelf space” advantage in our distributors’ offices over monoline carriers who offer just one product. This means that we can help our distributors meet all of their customers’ needs in an efficient way.

Our standardized personal auto, homeowners and small business products serve the insurance protection needs of the majority of insurance buyers in the U.S. marketplace. Our complete focus on these products and our investment in automation so these products can be sold and serviced over a common platform provide us with a competitive advantage over multiline carriers.

Our point-of-sale (POS) technology is easy for our independent distributors to use, drives operating efficiencies in their offices and gives us a competitive advantage over smaller carriers who have not made (or cannot afford) such investments.

In 2004, we’ll make this technology even easier to use with our rollout of Safeco Now – a one-stop, unified sales-and-service platform for our major P&C products. Safeco Now initially will feature a single point of entry for personal auto, homeowners, most small-commercial products and certain surety bonds. This will allow distributors to quote and sell these products in minutes and will provide them seamless cross-sell opportunities. The full range of P&C products are scheduled to go online over the next two years.

We also want to make buying and owning our products easy for our policyholders. Our claims are handled by professionals with the appropriate technical expertise necessary to handle coverage, liability and damage issues. We recognize the importance of the specialized and extensive training required for efficient claims handling so our policyholders have issues resolved quickly and receive prompt attention.

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P&C Sales and Distribution

We are committed to distributing our products through independent distributors because they provide expertise to match the best product to a customer’s specific needs and build close, long-term advisory relationships with customers.

Our mission is to make our insurance products easy for our distributors to sell and easy for our policyholders to buy and service. We strive to motivate our distributors in this way and to lower their cost of selling our products so that they will sell our products more often.

P&C Service and Claims Administration

SERVICE

Like our customers, our independent distribution partners value choice, too. And we give them a choice when it comes to customer service support. If distributors prefer to handle service transactions on their own, we offer extensive online training to maximize efficiency. Through free e-school lessons, our partners learn how to inquire about claims status, account billings and premium payments. We also offer online and phone support if they need help completing a service transaction.

For distributors who want to focus on sales and growth and leave customer service transactions to us, we offer fee-based, Gold Service programs for both personal and business insurance. With Gold Service, we provide full-service customer support on behalf of our distribution partners through our regional service centers. Either way, we measure ourselves against a “zero-defect” standard in all our service transactions.

CLAIMS

In selling insurance policies for drivers, homeowners and small businesses, our most visible product is the personalized service and support we provide when customers experience a loss and file a claim. In our business, it is the moment of truth and the ultimate value of the product. We have a team of nearly 3,000 claims professionals across the country. They handled approximately 97% of our claims in 2003, including those from the devastating tornadoes and hailstorms in the South and Midwest, and the wildfires in California.

When disasters strike, our National Catastrophe Team immediately mobilizes to assess the damage, write checks to cover temporary living expenses and emergency repairs, and provide comfort and support to customers. In most cases, we issue payments to customers on the spot following a disaster. Within 14 days, we make payments on 73% of all catastrophe-related claims. This percentage increases to nearly 90% within 21 days of the event. Our job is to help our customers put their lives back together as quickly as possible.

We also contract with independent adjusters in remote locations where it’s impractical to have our own employees. Independent adjusters are also available to help us in extreme catastrophes when and where additional adjusters are needed.

Our claims processing combines the efficiency of centralized claims handling and customer service centers with the flexibility of field representatives. Our client service system supports a paperless claims environment, so our field representatives are not restricted to a specific physical location. We have also established distinct claims handling functions to address complex claims such as surety, workers compensation, asbestos, environmental and construction defects.

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P&C Loss and Loss Adjustment Expense Reserves

Before we turn to an overview of our L&I operations, we first will address two major areas that could affect the viability and strength of our P&C business:

• P&C Loss and Loss Adjustment Expense (LAE) Reserves

• P&C Reinsurance

We’ll start with loss and LAE reserves, which are management’s estimates of losses from claims and related settlement expenses that we have not yet paid and that we include on our Consolidated Balance Sheets.

We record two kinds of loss and LAE reserves:

• Case basis

• Incurred but not reported (IBNR)

Case basis reserves are estimates established by claims adjusters of the amount we will have to pay for losses that have already been reported to us. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

In addition, at the end of every reporting period, IBNR reserves are established to estimate the amount we will have to pay for:

• Losses that have occurred, but have not yet been reported to us including related expenses

• Losses including related expenses that have been reported to us that may ultimately be paid out differently than expected by case basis reserves

• Losses including related expenses that have been paid and closed but may reopen and require future payment

We use actuarial methods and management judgment to estimate IBNR reserves.

ESTIMATING LOSS AND LAE RESERVES

Estimating loss and LAE reserves is complex. It requires us to make significant judgments and assumptions about a number of internal variables and external factors. Examples of internal variables that affect estimating these reserves include changes in our claims handling practices and changes in our business mix. Examples of external factors that affect estimating these reserves include:

• Trends in loss costs

• Economic inflation

• Judicial changes

• Legislative changes

In addition, certain claims may be paid out over a number of years, and there may be a significant lag between the time a loss that is insured by us occurs and the time it is reported to us.

These variables and factors affect in a variety of ways the amounts we have to pay for losses and related expenses. As a result, it’s not always possible to quantify their impact on our future payments. Our management arrives at its best estimate by examining actuarial estimates, holding discussions with claims and underwriting management, and considering changes in the internal and external environment. Because estimating reserves requires us to use assumptions and judgment, our actual future losses will differ from our estimates.

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Some actuarial techniques rely on our past losses and LAE to estimate our future payments. The changes we’ve made in our business in recent years, however, will affect our future payments. For instance, we have introduced new products, tightened our underwriting criteria and improved our claims handling practices. As a result, we also consider these changes when estimating future payments.

In our most volatile lines of business, we use multiple actuarial techniques to help management evaluate results and trends. In some cases, using multiple actuarial techniques produces estimates within a relatively small range. This gives us added confidence in our reserve estimate. In other cases, however, using multiple actuarial techniques produces conflicting estimates. For these, we review the assumptions used in the techniques and management determines the best estimate to use for our loss and LAE reserves within the actuarial range.

REVISING LOSS AND LAE RESERVES

Reviewing and refining our loss and LAE reserve estimates is an ongoing process. We record any adjustments to these reserves in the periods in which we change the estimates. We record changes to these reserves in our results of operations.

We do not discount any of our reserves to present value.

We reduce our reserves by the amounts we expect to recover from salvage – the amount we recover from property that becomes ours after we pay for a total loss – and subrogation – our right to recover payments from third parties. We accrue salvage and subrogation recoveries on an individual case basis for large claims. We use actuarial techniques to estimate the amount for small claims.

We purchase reinsurance to limit our exposure to potential large losses. We record the amounts that we expect to recover from reinsurers as reinsurance recoverable assets on our Consolidated Balance Sheets. For more discussion on reinsurance, see P&C Reinsurance on page 14.

ANALYSIS OF LOSSES AND LAE RESERVE DEVELOPMENT

The Analysis of Losses and LAE Reserve Development table on page 13 shows the development of our loss and LAE reserves from 1993 through 2003. For 1997 to 2003, the table includes amounts for American States Financial Corporation, which we acquired in 1997.

In the table on page 13:

• Section A shows the unpaid loss and LAE reserves we recorded at December 31, 1993-2003. It breaks out these reserves as:

• Gross of Reinsurance – our total amount of loss and LAE reserves

• Reinsurance – the amount that we expect to be reimbursed by our reinsurers

• Net of Reinsurance – the amount of our loss and LAE reserves after reinsurance

• Section B shows the cumulative amount we have actually paid through the years. For example:

• As shown in Section A, our loss and LAE reserves net of reinsurance at year-end 1993 were $1,995.1.

• After 10 years we’ve actually paid $1,504.6.

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• Section C shows our revised loss and LAE reserve estimates through the years. For example:

• As shown in Section A, our reserves net of reinsurance at year-end 1993 were $1,995.1.

• Section C shows the annual reestimation of those reserves, and after 10 years our revised reserves were $1,651.4.

• Section D shows the cumulative redundancy or deficiency developed through the years. A redundancy occurs when our reserves exceed our actual loss experience, and a deficiency occurs when our reserves are less than our actual experience. For example:

• As shown in Section A, our loss and LAE reserves net of reinsurance at year-end 1993 were $1,995.1.

• After one year those reserves developed an $81.3 redundancy and after 10 years the redundancy grew to $343.7. This is the difference between the reserves shown in Section A net of reinsurance, and the reestimated amounts in Section C.

Our Analysis of Losses and LAE Reserve Development table shows two trends:

• Favorable development in reserve estimates from 1993 through 1996

• Unfavorable development in reserve estimates from 1997 through 2003

The favorable trend from 1993 through 1996 was due to:

• Loss and LAE reserves that were ultimately conservative

• Benefits from establishing specialized claims units for construction defects, asbestos and environmental exposures and fraud investigations

• Favorable workers compensation legislation in the early 1990s

• Moderation in medical costs and inflation in that period

The unfavorable trend from 1997 through 2003 was due to:

• Significant increases in workers compensation medical costs

• Legislative and regulatory developments

• Higher than expected number of construction defect, asbestos and environmental losses

In the Analysis of Losses and LAE Reserve Development table, all amounts include the effects of changes in amounts for prior periods.

Conditions and trends that affected our loss and LAE reserves in the past may not occur in the future. For example, substantial reduction in our large commercial insurance and program business in 2001 will distort trends in these tables. As a result, our Analysis of Losses and LAE Reserve Development table is not a basis for estimating future redundancies or deficiencies.

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P&C - Analysis of Losses and LAE Reserve Development

DECEMBER 31	1993		1994		1995		1996		1997			1998			1999			2000			2001			2002			2003
A. Reserve for Unpaid Losses and LAE
Gross of Reinsurance	$	2,095.2	$	2,236.8	$	2,180.8	$	2,059.1	$	4,310.5		$	4,219.9		$	4,378.6		$	4,612.7		$	5,053.7		$	4,998.5		$	5,044.6
Reinsurance		100.1		143.9		110.7		103.4		228.6			253.6			309.5			343.6			415.9			411.6			344.4
Net of Reinsurance	$	1,995.1	$	2,092.9	$	2,070.1	$	1,955.7	$	4,081.9		$	3,966.3		$	4,069.1		$	4,269.1		$	4,637.8		$	4,586.9		$	4,700.2
B. Cumulative Net Amount Paid As Of
One Year Later	$	620.5	$	693.0	$	755.4	$	772.9	$	1,345.5		$	1,389.2		$	1,510.7		$	1,618.7		$	1,672.1		$	1,581.3
Two Years Later		947.6		1,068.3		1,095.0		1,101.4		2,049.3			2,165.5			2,336.2			2,537.8			2,575.1
Three Years Later		1,147.6		1,252.9		1,267.6		1,287.9		2,516.3			2,638.0			2,895.0			3,106.6
Four Years Later		1,252.5		1,341.5		1,370.0		1,404.3		2,821.0			2,981.9			3,245.1
Five Years Later		1,300.2		1,403.5		1,440.5		1,485.3		3,059.1			3,201.3
Six Years Later		1,342.9		1,449.6		1,493.1		1,600.9		3,223.9
Seven Years Later		1,377.0		1,488.9		1,591.4		1,639.9
Eight Years Later		1,406.1		1,576.5		1,623.7
Nine Years Later		1,482.1		1,603.8
Ten Years Later		1,504.6
C. Net Reserve Re-estimated As Of
One Year Later	$	1,913.8	$	2,033.2	$	1,992.4	$	1,947.7	$	3,981.9		$	4,045.1		$	4,217.4		$	4,614.2		$	4,763.6		$	4,836.8
Two Years Later		1,818.3		1,902.3		1,889.9		1,861.4		3,989.0			4,070.3			4,447.8			4,709.7			5,004.2
Three Years Later		1,716.1		1,801.9		1,804.7		1,806.6		3,986.0			4,209.9			4,506.0			4,960.1
Four Years Later		1,643.6		1,733.8		1,757.1		1,799.6		4,097.1			4,252.4			4,708.5
Five Years Later		1,599.8		1,702.8		1,757.3		1,849.6		4,147.2			4,397.6
Six Years Later		1,568.3		1,691.2		1,803.3		1,872.4		4,281.0
Seven Years Later		1,578.3		1,733.2		1,830.8		1,901.6
Eight Years Later		1,616.3		1,763.1		1,848.2
Nine Years Later		1,645.4		1,783.3
Ten Years Later		1,651.4
D. Cumulative Net Redundancy (Deficiency) As Of
One Year Later	$	81.3	$	59.7	$	77.7	$	8.0	$	100.0		$	(78.8	)	$	(148.3	)	$	(345.1	)	$	(125.8	)	$	(249.9	)
Two Years Later		176.8		190.6		180.2		94.3		92.9			(104.0	)		(378.7	)		(440.6	)		(366.4	)
Three Years Later		279.0		291.0		265.4		149.1		95.9			(243.6	)		(436.9	)		(691.0	)
Four Years Later		351.5		359.1		313.0		156.1		(15.2	)		(286.1	)		(639.4	)
Five Years Later		395.3		390.1		312.8		106.1		(65.3	)		(431.3	)
Six Years Later		426.8		401.7		266.8		83.3		(199.1	)
Seven Years Later		416.8		359.7		239.3		54.1
Eight Years Later		378.8		329.8		221.9
Nine Years Later		349.7		309.6
Ten Years Later		343.7

For further discussion of loss and LAE reserve development, see MD&A Section “P&C – Loss and Loss Adjustment Expense Reserves” on page 59 and Note 5 on page 118.

Gross loss and LAE reserve development approximates the net loss and LAE reserve development disclosed above.

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P&C Reinsurance

Our policyholders buy insurance from us to reduce the financial impact of the losses they may suffer. In turn, Safeco then buys reinsurance to limit the financial impact of losses that may affect our results in covering the losses of our policyholders.

The reinsurance we buy limits our losses on certain individual risks or reduces our exposure to catastrophic events. We buy reinsurance from several providers and are not dependent upon any single reinsurer. Reinsurance does not affect our liability to our policyholders. We remain primarily liable to policyholders for the risks we insure.

We collect money from reinsurers for any losses we have that are covered by reinsurance. We had $372.0 of P&C reinsurance recoverables at December 31, 2003, net of an allowance of $16.3 that we have estimated as uncollectible. We had $419.9 of P&C reinsurance recoverables at December 31, 2002, net of an allowance of $12.5 that we estimated as uncollectible.

We analyze our reinsurance recoverables according to the credit ratings and types of reinsurers. At year-end 2003:

• 23.2% of our reinsurance recoverables were due from mandatory reinsurance pools.

• Approximately 73.4% of the remaining amounts due from our reinsurers outside the mandatory pools were due from reinsurers rated A- or higher by A.M. Best.

To help reduce the financial impact of losses in our P&C business, our primary purchases of reinsurance cover:

• Property catastrophes

• Workers compensation

• Commercial property

• Commercial umbrella

• Commercial basket retention

• Surety

The availability of terrorism reinsurance is limited in the commercial market. Our current reinsurance program provides limited terrorism coverage. All reinsurance treaties with the exception of commercial and personal umbrella exclude certified terrorist acts. Additionally, all terrorist acts involving nuclear, chemical, biological or radioactive materials are excluded from all reinsurance contracts.

Property Catastrophe Reinsurance - Our property catastrophe reinsurance reduces the financial impact a catastrophe could have on our personal property and commercial insurance lines. Catastrophes involve multiple claims and policyholders. We cannot accurately predict catastrophes, and the number and type of catastrophes can vary widely. The resulting losses could significantly exceed our prior experience. Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather, fires and acts of terrorism.

Our property catastrophe reinsurance is excess of loss reinsurance, which provides us with reinsurance coverage over an agreed-upon amount. The terms of our 2004 property catastrophe reinsurance are:

• The first $100.0 of any property catastrophe loss is entirely ours. This is our retention – the amount of losses we absorb before the reinsurers reimburse us.

• Our reinsurers reimburse us 90% for the next $400.0 of the loss. We absorb the other 10%.

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• The entire amount of any loss above $500.0, is ours, except we have additional reinsurance for earthquake events.

• For earthquake events, we purchase an additional level of coverage. Our reinsurers reimburse us for 90% of $260.0 in excess of $500.0. The entire amount of any earthquake loss above $760.0 is ours.

Should we make a catastrophe claim to our reinsurers, we can reinstate this reinsurance coverage once with payment of an additional premium.

Workers Compensation Reinsurance – Our workers compensation reinsurance reduces the financial impact a single-event or catastrophe loss may have on our results. It is excess of loss coverage.

In 2003, the terms were:

• The first $3.0 of any workers compensation loss was our retention.

• Our reinsurer reimbursed us for the next $17.0 of the loss.

• Our reinsurer reimbursed us 90% of the next $30.0.

In 2004, the terms are:

• The first $5.0 of any workers compensation loss is our retention.

• Our reinsurer reimburses us for the next $15.0 of the loss.

• Our reinsurer reimburses us 90% of the next $30.0.

We can reinstate once with payment of an additional premium.

Commercial Property Reinsurance – Our commercial property reinsurance reduces the financial impact that any single loss can have on us. It is excess of loss reinsurance.

For 2003, the terms were:

• The first $2.5 of any loss for each commercial property risk was our retention.

• Our reinsurer reimbursed us for the rest of the loss up to $7.5 for each commercial property risk.

• Risks above $10.0 were reinsured individually (facultative reinsurance).

For 2004, the terms are:

• The first $5.0 of any loss for each commercial property risk is our retention.

• Our reinsurer reimburses us for the rest of the loss up to $15.0 for each commercial property risk.

• Risks above $20.0 are reinsured individually (facultative reinsurance).

Commercial Umbrella Reinsurance – Our commercial umbrella reinsurance reduces the financial impact of losses in this line of our business. We provide our customers with umbrella insurance to cover losses that exceed the amounts covered by other insurance policies they own. For our commercial umbrella business, we have excess of loss reinsurance.

In 2003, the terms were:

• The first $1.0 of any commercial umbrella loss on each policy was our retention.

• Our reinsurer reimbursed us for the rest of the loss up to $19.0 for each commercial umbrella loss on each policy.

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In 2004, the terms are:

• The first $4.0 of any commercial umbrella loss on each policy is our retention.

• Our reinsurer reimburses us for the rest of the loss up to $16.0 for each commercial umbrella loss on each policy.

Commercial Basket Retention Reinsurance – Beginning in 2004, we purchased a basket retention coverage, that reduces the financial loss to us when two or more lines of business are involved in the same loss event. The lines of business that are covered by this reinsurance are workers compensation, commercial property and commercial umbrella. If two or more of these lines are impacted by the same loss events:

• The first $5.0 of the loss is our retention.

• Our reinsurer reimburses us for the rest of the loss up to $9.0.

Surety Reinsurance – For our surety business, we have excess of loss reinsurance.

In 2003, the terms were:

• The first $15.0 of any surety loss is our retention.

• Our reinsurers reimbursed us 88% of the next $85.0 of the loss under three layers as follows: 100% of the next $20.0, 90% of the next $30.0 and 80% of the next $35.0.

• For an additional premium, we can reinstate the first layer twice and the second layer once.

In 2004, the terms are:

• The first $20.0 of any surety loss is our retention.

• Our reinsurers reimburse us 90% of the next $80.0 of the loss under each of the three layers of coverage.

• For an additional premium, we can reinstate the first layer twice and the second layer once.

Our Decision to Sell Our L&I Businesses

On September 29, 2003, we announced our decision to put our L&I operations up for sale. This was by far the most difficult and important decision of 2003. We have been building our life insurance business since 1957, and the 1,550 people who work there are capable and dedicated.

Four critical ideas led us to pursue a sale of L&I:

• Our view of the relative future earnings power of the P&C business versus the earnings power of L&I

• The value we place on focus

• The cost of complexity to the corporation

• What we could observe about our L&I competitors

EARNINGS POWER

Pretax operating earnings in our L&I businesses declined in 2003 after hitting a high in 2002 (see MD&A page 61). We also strengthened capital by $100.0 in 2002. With declining earnings and increasing capital, L&I’s return on equity was falling. The opposite was taking place in our P&C lines. From the poor results of the late 1990s, the P&C business returned to profitability in 2002, befitting, we think, its historic strength. By the end of 2003, our P&C return on equity was approaching our targets.

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THE VALUE OF FOCUS

Because of these results, we believe that concentrating our efforts and our capital on the P&C business is right for our shareholders. The risk, of course, is that tough times will likely return someday in the P&C cycle, which will not be offset by L&I earnings (as was the case in 2000 and 2001). In our view, the antidote to this risk is focus. Many companies in the P&C sector made it through the last difficult P&C pricing cycle with results far better than ours. The difference was focus and discipline. We believe companies with these attributes are not necessarily immune to the effects of P&C cycles, but they have historically outperformed the sector throughout the cycle. This is what we seek to do for our shareholders.

THE COST OF COMPLEXITY

We know that competing in diverse businesses adds to the costs (at least in our existing structure) of overseeing these businesses and expense management is critical to our success.

OBSERVING OUR L&I COMPETITORS

Despite difficult market conditions affecting all life and investments companies, we observed that competitors of L&I deliver better results.

Given our P&C strength and prospects, given the importance of focus, given the sensitivity of our products to expense levels and the cost of complexity, and given the advantages of our L&I competitors, we came to the conclusion that we should sell the L&I operations.

As of December 31, 2003, we did not classify L&I as a discontinued operation because we had not met all of the “held for sale” criteria under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” at this date. Accordingly, these operations will continue to be treated as part of our ongoing operations until we meet such criteria.

Our L&I Products

Our L&I businesses provide a broad range of products and services, including individual and group insurance, annuities, mutual funds and investment advisory services.

Our L&I business has six reportable segments:

• Group

• Income Annuities

• Retirement Services

• Individual

• Asset Management

• L&I Other

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Revenues for L&I’s reportable segments include Premiums, Net Investment Income and Other Revenues and are as follows:

Year Ended December 31	2003		2002		2001
Group	$	552.9	$	477.4	$	336.2
Income Annuities		514.2		529.2		530.0
Retirement Services		388.2		379.5		367.1
Individual		383.5		379.7		367.8
Asset Management		26.9		29.9		35.9
L&I Other		214.3		189.2		180.3
Total Premiums, Net Investment Income and Other Revenues	$	2,080.0	$	1,984.9	$	1,817.3

GROUP

Our principal group product is stop-loss medical insurance for employers. We sell this product to companies with self-insured medical plans. Stop-loss medical insurance limits an employer’s risk. It provides coverage to protect an employer’s self-funded plan against large claims by its employees. When large claims occur, we reimburse the employer based on contract limits. Each contract sets a specific limit for each individual employee and an aggregate limit for the plan as a whole.

In July 2002, we acquired the stop-loss medical business of Swiss Re Life & Health America Holding Company (Swiss Re) to build a greater presence in the stop-loss medical market and leverage our expertise in this business line. Our other Group products are life insurance, accidental death and dismemberment insurance and disability insurance.

INCOME ANNUITIES

We provide owners of income annuities with a set monthly income for a specified period of time or until death. We sell two types of income annuities: structured settlement annuities and non-structured fixed annuities.

Structured settlement annuities fund third-party personal injury settlements, providing the injured party with a reliable income stream. High financial strength ratings are critical to an insurance company’s ability to market structured settlement annuities. Accordingly, our ratings downgrades in 2001 significantly limited our ability to sell this product.

Non-structured fixed annuities provide an immediate, regular monthly payment to the owner. Once purchased, an owner cannot cash in or change the terms of a non-structured fixed annuity with the original issuer of the annuity. We fund income annuity payments with long-term investments, primarily long-duration bonds and mortgage-backed securities.

RETIREMENT SERVICES

Our primary retirement services products are fixed deferred annuities and variable annuities. Annuities allow the owner to save for the future on a tax-deferred basis and allow payout options that meet the owner’s need for income upon maturity. This can be in the form of a lump sum, income for life or income for a period of time.

Here’s how our fixed deferred annuities work:

• The policyholder deposits funds with us and is guaranteed a fixed return on his or her deposit.

• Fixed annuities have a specified rate of interest that can be reset periodically.

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• The annuity accumulates value until the holder starts to receive regular payments.

• Upon the policyholder’s death, the stated beneficiary receives the accumulated cash value death benefit.

Here’s how our variable annuities work:

• The policyholder deposits with us an amount of funds.

• We set up a separate, individual investment account for the policyholder, and the deposits are invested in a variety of investment funds as selected by the policyholder.

• Investment funds are offered by Safeco and other investment management companies.

The profitability of our fixed deferred and variable annuities depends on our ability to price these products to earn a margin over the cost of providing benefits, the expense of acquiring customers and the cost of advertising those products. Specifically:

• Fixed deferred annuity profits depend on our returns on invested assets, net of the amounts we credit to policyholders’ accounts.

• Variable annuity profits depend on the amount of our assets under management and changes in their fair value, which affect the amount of fees we receive. The fair values of these assets are significantly influenced by the performance of the equity markets.

Profitability also depends on our persistency experience, or how long this business stays with us, as this affects our ability to recover the costs of acquiring new business over the lives of the contracts. Accordingly, if a contract owner withdraws funds during the early years of the contract – usually during the first seven or eight years – we keep a certain percentage of the withdrawal, as a surrender charge, to help recoup our acquisition costs. Some contracts allow us to pay the requested withdrawal out over five years.

In 2003, we refiled fixed annuity products with regulators in all 50 states in response to a decline in investment yields and obtained approval to lower our crediting rates in all but three states. At various times, we have suspended sales of our products pending approval of these changes.

We previously offered equity indexed annuities in 1997 and 1998 and continued to offer guaranteed investment contracts to a limited extent.

INDIVIDUAL

Our primary individual products are term life insurance, universal life insurance, variable universal life insurance and bank-owned life insurance (BOLI).

Here’s how our term life insurance works:

• A policyholder pays us a fixed premium over the term of the policy.

• We pay a specified amount – the “face” amount of the policy – to the beneficiary if the policyholder dies during the term of the policy.

Our universal life insurance provides flexible permanent coverage, while also offering an investment opportunity. Here’s how it works:

• A policyholder pays us a premium – with the flexibility of paying more than the minimum required amount. Part of the premium goes to fund the death benefit and part of the premium goes into a cash value account, which earns a return at a fixed interest rate.

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• A policyholder chooses to either allow the cash value account to grow, withdraw it or use it to pay future premiums.

• We pay the face amount of the policy to the beneficiary when the policyholder dies.

Our variable universal life insurance works the same as our universal life insurance, including the payment of a death benefit, except that it provides policyholders with more investment options. A portion of the policyholder’s premium is deposited in separate accounts that are invested in funds selected by the policyholder.

BOLI provides a universal life insurance policy covering key employees of the bank as the insured persons. High financial strength ratings are critical to an insurance company’s ability to sell BOLI. Our ratings downgrades in 2001 significantly decreased our sales of this product, and we had no new deposits in 2003.

ASSET MANAGEMENT

The assets that we manage include:

• Safeco Mutual Funds

• Investment portfolios supporting our variable annuity and variable universal life insurance products

• Institutional and trust accounts

Results in this segment are significantly influenced by the overall performance of the equity markets. The markets impact the fair value of our assets under management, which affects the amount of fees we receive.

L&I OTHER

Our L&I Other segment includes investment income on the capital and accumulated earnings of our other L&I business segments and earnings from Talbot Financial Corporation, our insurance agency that distributes property and casualty and life insurance products.

Our L&I Competition and Distribution Channels

The life and investments business is highly competitive. We compete with a large number of domestic and foreign insurers and with non-insurance financial services companies, such as banks, broker-dealers and asset managers. We compete not only for business and individual customers, but also for distributors. Some of our competitors offer a broader array of products, have more competitive pricing, have lower cost structures, have greater financial resources or, with respect to insurers, have higher financial strength ratings. We have been counteracting their strengths with opportunistic management of distribution channels combined with rapid product development.

L&I Reinsurance

We use reinsurance in managing our exposure to potential losses. We reinsure all or a portion of our risk to reinsurers for certain types of directly written business. In addition, we reinsure through pools to cover catastrophic losses.

We collect money from reinsurers for any losses we have that are covered by reinsurance. We had $179.7 of L&I reinsurance recoverables at December 31, 2003 and $158.9 of L&I reinsurance recoverables at December 31, 2002. We had no reserve for uncollectible reinsurance at December 31, 2003 and 2002.

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We analyze reinsurance recoverables according to the credit ratings and types of our reinsurers. At year-end 2003, approximately 93.7% of our L&I reinsurance recoverables was due from reinsurers rated A or higher by A.M. Best.

None of our L&I reinsurance contracts exclude certified terrorist acts.

Catastrophic loss coverage – We have catastrophic loss coverage for our group life, individual life and aggregate stop loss medical business. Catastrophic coverage for group and individual life coverage is provided through participation in pools involving several major writers that are managed by a third party.

• Group Life Reinsurance – For our group life business, we have coverage by the pool in the case of a catastrophic event resulting in at least three death claims. The coverage has a $0.5 deductible. We are reimbursed for claims above the deductible, to a maximum of $326.7 for a single catastrophic event. For catastrophes that other companies in the pool experience, we are subject to pay a 1.43% share. The maximum claim any company may submit to the pool is $326.7 and the maximum claim for all companies in the pool from a single event is $816.8. Therefore, for a catastrophic event that reaches the maximum for the pool, our share of that catastrophe would be $11.7.

• Individual Life Reinsurance – For our individual life business, we have coverage by the pool in the case of a catastrophic event resulting in at least three death claims. This coverage has a $0.7 deductible. With the entrant of a new major writer effective January 1, 2004, the terms will change. We are reimbursed for claims above the the deductible, to a maximum of $92.9 for a single catastrophic event (this increased to $157.7 in 2004). For catastrophes that other companies in the pool experience, we are subject to pay a 1.57% share (this decreased to .93% in 2004). the maximum claim any company may submit to the pool is $92.9 (this increased to $157.7 in 2004) and the maximum claim for all companies in the pool from a single event is $371.7 (this increased to $630.7 in 2004). Therefore, for a catastrophic event that reaches the maximum for the pool, our share of that catastrophe would be $5.8.

• Aggregate Stop-Loss Medical Reinsurance – We have reinsurance coverage for the portion of aggregate losses above $1.0 and up to $5.0.

Individual Life Reinsurance – For our individual life business, we have coinsurance agreements where the reinsurer reimburses us based on the percentage in the contract that range from 50% to 80%, based upon the year that the policy was written. For policies written prior to 2000, we recover 50% of the death benefit that we pay on covered claims from the reinsurer. This percentage was increased in 2000 to 80% for a majority of the policies written, and was increased in 2002 to cover 80% of all policies written.

L&I Funds Held Under Deposit Contracts

Premiums from Income Annuities, Retirement Services and Universal Life Insurance contracts (known as universal life and investment-type contracts) are reported in our financial statements as Funds Held Under Deposit Contracts. We earn an investment return on these deposits, net of amounts we credit to policyholders, plus any mortality charges, policy administration charges and surrender charges that we earn on these contracts.

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The table below summarizes the components of our funds held under deposit contracts at December 31, 2003 and describes the applicable surrender charges and surrender experience over the last 12 months ended December 31, 2003:

Funds held under deposit contracts at December 31, 2003

Product	Outstanding Balance		Expected Maturities of Liabilities (at Issue Date)	Range of Credited or Assumed Interest Rates as of 12/31/03	Surrender Charges	Approximate Surrender Experience
Universal Individual Life	$	3,589.5	Approximately 10–25 years	5.00% to 7.67%	Varies by issue age, sex, and duration from $1 to $58 per $1,000 of insurance	Less than 2% per annum
Structured Settlement Immediate Annuities		6,334.7	Over 25 years	3.50% to 11.78%	Cannot surrender	Cannot surrender
Other Annuities and Deposits		6,420.3	Approximately 3–20 years	2.50% to 7.75%	Highest surrender charges range from 10% to 3%, graded down to 0% within 3 to 10 years. Safeco has the option to defer payout over 5 years for 16% of these contracts	10.5% per annum
Guaranteed Investment Contracts		66.1	Approximately 2–5 years	5.21% to 7.64%	Market value adjustment or cannot surrender in first year	Less than 1% per annum
Equity Indexed Annuities (EIA)		164.8	Approximately 6 years	Equity return credited based on S&P 500 performance with a minimum guarantee of 0%. Floor return based on a portion (typically 90%) of the original deposit amount	Typically 8% in year 1 graded to 0% after year 6	14.8% per annum
Total	$	16,575.4

Corporate

In our Corporate segment, we include:

• Interest expense we pay on our debt

• Safeco Financial Products, Inc. (SFP)

• Our intercompany eliminations

• Other corporate activities

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ACTIONS WITHIN CORPORATE

In 2001, SFP began to sell single-name credit default swaps, write and hedge S&P 500 index options, and invest in and hedge convertible bonds. Because of our strategic decision to focus on our P&C businesses, we wound down SFP’s operations in 2003. More information about this can be found in the Corporate section of our MD&A on page 67.

We sold Safeco Credit Company, Inc. to General Electric Capital Corporation on August 15, 2001. Our net proceeds from the sale were $250.0, with an after-tax gain of $54.0 that we reported in our Consolidated Statements of Income (Loss) for 2001.

Regulation

Our insurance subsidiaries do business in and operate under the regulations of all 50 states and the District of Columbia. States regulate the insurance industry primarily to protect the interests of policyholders. The regulations cover:

• Capital and surplus requirements

• Licensing of insurers and their agents

• Investment and dividend limitations

• Authorization for lines of business

• Insurance premium rates

• Insurance policy forms

• Market conduct, including underwriting and claims practices

• Adequacy of reserves for losses

• Transactions with affiliates

• Changes in control

• Guaranty fund assessments

State insurance departments periodically examine the conduct and financial condition of insurance companies. They require insurance companies to file annual and quarterly financial and other reports.

STATUTORY ACCOUNTING

The accounting basis required by the state authorities is known as statutory accounting practices, or SAP. These practices differ in some respects from accounting principles generally accepted in the United States, or GAAP. For example, in reporting loss and LAE reserves on our Consolidated Balance Sheets:

• SAP requires us to reduce our loss and LAE reserves for reinsurance recoverables.

• GAAP requires us to report our loss and LAE reserves without reduction for our reinsurance recoverables, which are separately reflected as an asset.

As a result, our loss and LAE reserves at December 31, 2003, were:

• $4,649.2 in our annual financial statements filed with state regulatory authorities, in accordance with SAP, net of reinsurance

• $5,044.6 in our Consolidated GAAP Financial Statements

More information about state regulation can be found in the Regulatory Issues section of our MD&A on page 80.

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EXECUTIVE OFFICERS OF THE REGISTRANT

Here are our executive officers as of March 12, 2004. No family relationships exist among our executive officers.

Officer Name	Age	Positions with Safeco and Business Experience
Michael S. McGavick	46	Chairman of the Board of Directors since January 2003. President, Chief Executive Officer and Director since January 2001. President and Chief Operating Officer of CNA Agency Market Operations from October 1997 until January 2001. President of CNA’s Commercial Lines group from January until October 1997. Held a series of executive positions with CNA’s commercial insurance operations from 1995 through October 1997.
Christine B. Mead	48	Senior Vice President, Chief Financial Officer and Secretary since January 2002. Senior Vice President and Chief Financial Officer for Travelers Insurance Group from 2000 to January 2002. Senior Vice President and Chief Financial Officer for Travelers Property Casualty Corp – Personal Lines from 1996 to 2000.
Michael E. LaRocco	47	President and Chief Operating Officer, Safeco Personal Insurance since July 2001. Regional Vice President, Northeast Region for GEICO Corporation from 1998 to July 2001. Vice President of Underwriting and Product Management for GEICO from 1996 through 1998. Vice President of GEICO Casualty from 1994 to 1996.
Dale E. Lauer	57	President and Chief Operating Officer, Safeco Business Insurance since July 2001. Senior Vice President of Safeco Business Insurance from 1997 to July 2001. Vice President of Commercial Lines Underwriting for the Safeco P&C insurance companies from 1992 to 1997.
Allie R. Mysliwy	49	Senior Vice President, Human Resources since July 2001. Vice President of Human Resources from July 1999 to July 2001. Vice President of Human Resources for Safeco Life Insurance Company from 1994 to 1999.
James W. Ruddy	54	Senior Vice President and General Counsel since 1992. Vice President and General Counsel from 1989 to 1992. Associate General Counsel from 1985 to 1989.
Yomtov Senegor	45	Senior Vice President, Corporate Strategy and Chief Information Officer since October 2001. Central Region Insurance Managing Partner with Accenture (formerly Andersen Consulting), a management and technology consulting company, from November 1997 to October 2001, and partner from 1992 to 1997.
Randall H. Talbot	50	President and Chief Operating Officer, Safeco Life Insurance companies since February 1998. Chief Executive Officer and President of Talbot Financial Corporation from 1988 to 1998.

We make our periodic and current financial reports and related amendments available on our Web site at www.safeco.com/ir at the same time as they are electronically filed with the Securities and Exchange Commission.

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Item 2: PROPERTIES

Our home offices are in Seattle and Redmond, Washington. Our Corporate and P&C operations occupy 803,000 square feet of owned property in Seattle and 1,240,000 square feet of owned property in Redmond. Our L&I operations occupy 312,000 square feet of owned property in Redmond.

We also own and occupy a total of 246,000 square feet in Pleasant Hill, California; Portland, Oregon; and Spokane, Washington. We also occupy 2.4 million square feet of leased space throughout the United States. Our leased and owned space totals approximately 5.0 million square feet.

Item 3: LEGAL PROCEEDINGS

Because of the nature of our businesses, we are subject to legal actions filed or threatened in the ordinary course of our operations. Generally, our involvement in legal action involves defending third-party claims brought against our insureds (in our role as liability insurer) and defending policy coverage claims brought against us. We do not believe that such litigation will materially and adversely affect our financial condition, future operating results or liquidity.

Our property and casualty insurance subsidiaries are parties to a number of lawsuits for liability coverages related to environmental claims. Estimation of reserves for environmental claims is difficult. However, we do not expect these lawsuits to materially affect our financial condition. (See further information on environmental claims on page 39).

Our P&C companies are being sued in the U.S. District Court for Connecticut pursuant to a suit filed January 14, 2003 and in California state court pursuant to a suit filed August 10, 2001 by plaintiffs who seek back overtime pay for claims adjusters who they claim should have been considered non-exempt employees under the labor laws. In each of these suits, we have denied any suggestion of wrongdoing, and are actively defending against these allegations. Summary judgment in our favor was entered in the California case in January 2004.

Item 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 2003.

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Part II

Item 5: MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Market Information

Our common stock is quoted and traded on the NASDAQ Stock Market under the symbol SAFC. Quarterly high and low bid prices for Safeco common shares for the last two years were:

MARKET PRICE RANGES	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		ANNUAL
2003–High	$	39.39	$	39.75	$	38.87	$	38.94	$	39.75
–Low		31.78		33.85		33.25		32.50		31.78
2002–High		34.64		35.93		34.89		37.98		37.98
–Low		28.87		29.52		23.49		30.75		23.49

There were approximately 3,000 holders of record of our common stock at February 27, 2004. This number excludes the beneficial owners of shares (approximately 64,500) held by brokers and other institutions on behalf of shareholders.

Dividends

We have paid cash dividends continuously since 1933. We paid common stock dividends to shareholders of $0.74 per share in 2003 and 2002.

We fund dividends paid to shareholders with the dividends paid to our parent company from our operating subsidiaries.

DIVIDENDS DECLARED	FIRST QUARTER		SECOND QUARTER		THIRD QUARTER		FOURTH QUARTER		TOTAL
2003	$	.185	$	.185	$	.185	$	.185	$	.740
2002	$	.185	$	.185	$	.185	$	.185	$	.740

We expect to continue paying dividends in the foreseeable future. However, payment of future dividends depends on the discretion of our Board of Directors. Our Board of Directors makes dividend decisions based on factors that include:

• Our financial condition and earnings

• Capital requirements of our operating subsidiaries

• Legal requirements

• Regulatory constraints

• Other relevant considerations

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Item 6: SELECTED FINANCIAL DATA

This selected consolidated financial data comes from our Consolidated Financial Statements. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes.

Summary of Operations (unaudited)

YEAR ENDED DECEMBER 31 (In millions except per share values, dividends and ratios)	2003			2002			2001			2000			1999
REVENUES
P&C Earned Premiums	$	4,901.8		$	4,521.3		$	4,472.8		$	4,563.4		$	4,382.9
L&I Premiums and Other Revenues		868.1			778.3			637.0			618.2			473.9
Net Investment Income		1,680.3			1,674.4			1,651.4			1,635.6			1,590.4
Net Realized Investment Gains (Losses)		(101.9	)		82.5			93.0			139.5			117.7
Other		9.8			10.7			10.4			20.5			39.2
Total Revenues	$	7,358.1		$	7,067.2		$	6,864.6		$	6,977.2		$	6,604.1
INCOME SUMMARY
Income (Loss) from Continuing Operations before Change in Accounting Principle	$	339.2		$	301.1		$	(1,045.3	)	$	101.9		$	237.7
Net Income (Loss)		339.2			301.1			(989.2	)		114.6			252.2
INCOME (LOSS) PER DILUTED SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations before Change in Accounting Principle	$	2.44		$	2.33		$	(8.18	)	$	0.80		$	1.79
Net Income (Loss)		2.44			2.33			(7.75	)		0.90			1.90
Average Number of Diluted Shares (in millions)		138.9			129.3			127.7			127.8			132.8
Dividends Declared	$	0.74		$	0.74		$	0.74		$	1.48		$	1.46
P&C UNDERWRITING RATIOS
Loss Ratio		55.6	%		61.2	%		74.5	%		70.4	%		66.4	%
LAE Ratio		14.8			13.1			14.1			12.2			12.0
Expense Ratio		29.7			31.0			30.1			28.8			30.0
Combined Ratio *		100.1	%		105.3	%		118.7	%		111.4	%		108.4	%
AT DECEMBER 31
TOTAL ASSETS	$	35,845.1		$	34,689.3		$	31,762.6		$	30,774.5		$	29,258.4
DEBT
Current		4.9			531.4			347.8			356.3			514.5
Long-Term		1,960.6			1,468.7			1,625.1			1,650.5			1,354.8
Total		1,965.5			2,000.1			1,972.9			2,006.8			1,869.3
SHAREHOLDERS’ EQUITY		5,023.3			4,431.6			3,634.6			4,695.8			4,294.1
BOOK VALUE PER SHARE	$	36.24		$	32.07		$	28.45		$	36.79		$	33.31

* Combined ratios are calculated on a GAAP basis. Expressed as a percentage, combined ratios equal losses and expenses divided by net earned premiums.

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Item 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in millions unless noted otherwise)

This discussion should be read with the Consolidated Financial Statements and related footnotes included elsewhere in this report. Certain reclassifications have been made to prior-year amounts to conform to the current-year presentation.

Forward-Looking Information

Forward-looking information contained in this report is subject to risk and uncertainty.

Information contained in this report that relates to anticipated financial performance, business prospects and plans, regulatory developments and similar matters are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Statements in this report that are not historical information are forward-looking. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. The risks and uncertainties include, but are not limited to:

• Risks related to the pricing and underwriting of our products, and the subsequent establishment of reserves, such as:

• Successful implementation of a new-business entry model for personal and commercial lines

• Ability to appropriately price and reserve for changes in the mix of our book of business

• Ability to establish pricing for any changes in driving patterns

• Inflationary pressures on medical care costs, auto parts and repair, construction costs and other economic factors that increase the severity of claims

• The availability and pricing of our reinsurance, including coverage for loss from terrorism and our ability to collect from our reinsurers

• The ability to price for or exclude the risk of loss from terrorism on our policies

• Risks related to our P&C insurance strategy, such as:

• Our ability to successfully divest the L&I businesses

• Our ability to achieve premium targets and profitability, including realization of growth and business retention estimates

• Our ability to achieve overall expense goals

• Our ability to run off our London business and other businesses that we have exited, or intend to exit in the future, without incurring material unexpected charges

• Regulatory, judicial and legislative risks, such as:

• Our ability to freely enter and exit lines of business

• Our ability to successfully obtain regulatory approval of rates and underwriting guidelines, including price-tiered products and the use of insurance scores that include credit information as a component

• Interpretation of insurance policy provisions by courts or tax authorities, court decisions regarding coverage and theories of liability, trends in litigation and changes in claims settlement practices

• The outcome of any litigation against us

• Legislative and regulatory developments affecting the actions of insurers, including requirements regarding rates, taxes and availability of coverage

• The competitive pricing environment, initiatives by competitors and changes in the competition

• Unusual loss activity, such as:

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• Weather conditions, including the severity and frequency of storms, hurricanes, hail, snowfall and winter conditions

• The occurrence of significant natural disasters, including earthquakes

• The occurrence of significant man-made disasters, such as the terrorist attacks on September 11, 2001, or war

• The occurrence of bankruptcies that result in losses under surety bonds, investment losses or lower investment income

• Financial and economic conditions, such as:

• Performance of financial markets

• Availability of bank credit facilities

• Fluctuations in interest rates

• General economic conditions

• Operational risks, such as:

• Damage to our infrastructure resulting in a disruption of our operations

• Internal or external fraud perpetrated against us

Summary

Our Form 10-K was written this year to be as reader-friendly as possible. The following section builds upon earlier discussion and provides more information about our company and our financial performance.

We are an insurance and investment company with headquarters in Seattle, Washington. We sell insurance and investment products through a national network of independent agents, brokers and financial advisors. Our business helps people protect what they value and deal with the unexpected. We started our business in 1923. We earn revenue from:

• Insurance policy premiums

• Fees for investment management and advisory services performed

• Policy fees and charges on life insurance and investment-type contracts

• Income on our invested assets

We have two major businesses:

• Property & Casualty (P&C) – provides auto and homeowners insurance to individuals, commercial insurance for small- and medium-sized businesses and surety bonds.

• Life & Investments (L&I) – provides individual life and group medical insurance, retirement services, annuities, mutual funds and investment advisory services.

In our ongoing effort to position our company for future profitability and growth, we announced a strategic decision in September 2003 to focus more fully on our P&C businesses and pursue the sale of our L&I operations. More information about our decision can be found on pages 16 to 17 in Part I, Item 1.

Reviewing Our Results of Operations

Our financial results for the last three years have been impacted by the major strategic actions we have taken to turn our company around, reshape our P&C business and become a more focused and successful competitor.

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2003

In 2003, our major strategic initiatives included:

• Focusing on P&C operations

• Reducing expenses

• Partnering with independent distributors

• Marketing standardized products

• Providing multiple P&C product lines

Focusing on P&C– On September 29, 2003, we announced our decision to focus on P&C operations and put our L&I businesses up for sale. We intend to use a portion of the proceeds to reduce our debt to a level appropriate for our new size following the sale and then assess whether to retain any amount to support our business growth. We will return the balance of the proceeds to shareholders in the form of a special dividend, a stock repurchase, or a combination of both.

Reducing Expenses – We have identified expense reductions across the company that will enable us to better compete in the property and casualty insurance markets. We plan to eliminate approximately 500 positions in our corporate departments. The majority of these positions were eliminated by year-end 2003. This initiative will reduce our 2004 operating expenses by approximately $75. This excludes any reduction due to the sale of our L&I businesses.

Partnering with Distributors – Our strategy focuses on providing more products for our distributors to sell that more accurately match price to customer risk characteristics. In addition, we are focusing on making it easier for distributors to use our new point-of-sale technology, providing greater operating efficiencies in their offices. Our distributors can be more profitable selling our products through use of this technology, and our commission programs are structured to incent profitable growth. In short, we offer our distribution partners more products to sell, make it easier for them to sell and service these products, helping our distributors make more money selling our products.

Marketing Standardized Products – Our standardized personal auto, homeowners and small-business products have been designed to serve the insurance needs of the majority of the individuals and small to medium-sized businesses in the U.S. marketplace. These products are delivered over a common sales-and-service platform using point-of-sale technology that can process and service transactions quickly and easily.

Providing Multiple Product Lines – We believe that our ability to provide multiple property and casualty product lines gives us a “shelf space” advantage in our distributors’ offices. Our auto, homeowners and small-commercial insurance products represent the products our distribution partners sell most, and generally represent more than 95% of the insurance revenues sold from an agent’s office.

2002

In 2002, we reshaped our P&C business to improve profitability and position our company for growth. Our major strategic actions included:

• Improving sales growth through independent agents

• Driving execution through enhanced metrics

• Improving service and claims handling

• Strengthening our financial position

• Continuing to invest in our employees

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Improving Sales Growth through Independent Agents – We began the rollout of our automated underwriting platform. This technology made it easier for agents to sell all our primary lines – personal auto, homeowners and small commercial.

Driving Execution Through Enhanced Metrics – We established financial metrics for the company and each business unit. We developed individual goals that aligned the performance of the workforce with the company and business unit metrics. We also shifted to a monthly financial close to better understand and act on results.

Improving Service and Claims Handling – We launched a multi-year training effort to drive out errors from our processes involving customers. We initiated projects to eliminate mistakes that degrade service and waste money.

Strengthening Our Financial Position – We took a number of actions including replacing our short-term commercial paper borrowings with long-term senior notes and developing a plan to refinance $500.0 of long-term debt; issuing common stock and strengthening the capital base of our P&C and L&I operations; and repositioning our investment portfolio, reducing risk and volatility.

Continuing to Invest in Our Employees – We implemented a total performance-management system that encompasses goal setting, employee development, and compensation tied to individual and team performance. We also completed work and began implementation of our diversity strategy, tied to our workforce, distributors, suppliers and customer base.

2001

In 2001, we focused on turning around our company, which had poor profitability, particularly in our P&C businesses. Our major strategic actions included:

• Executing a successful recovery plan to return our P&C operations to profitability

• Reducing expenses

• Strengthening our financial position

• Investing in our employees

Executing a Successful Recovery Plan – We refocused on our core strengths in personal auto, small- to medium-sized commercial insurance, and life insurance and asset management. Our recovery plan focused on pricing each of our insurance products to achieve an appropriate profit level. We increased rates across all lines of our business. We began reunderwriting across all lines of business. In addition, we terminated relationships with underperforming agents who were writing unprofitable business with us. We also exited lines of business that were not core to our strategy and expertise.

Reducing Expenses – We restructured our P&C and Corporate operations and consolidated regional offices.

Strengthening our Financial Position – To strengthen our financial position, we sold our Safeco Credit subsidiary, reduced our quarterly dividend by 50% and wrote down goodwill by $1,214.1 pretax.

Investing in our Employees – We introduced a new performance-based compensation system, linking employee pay directly to achievement of specific goals that support our business plans. In addition, we started developing a diversity strategy to accelerate our ability to compete in today’s business world.

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Overall Results

We view our results on an overall basis by three primary measures of performance:

• Earnings per share (EPS) growth

• Return on equity (ROE)

• Revenue growth

The following tables show the trends in these three primary measures of performance:

Net Income Per Diluted Share
2001	$	(7.75	)
2002	$	2.33
2003	$	2.44
Net Return on Equity
2001		(25.1	)%
2002		7.8	%
2003		7.0	%
Revenues
2001	$	6,864.6
2002	$	7,067.2
2003	$	7,358.1

Segment Results

To understand the difference between business and reportable segments, see also Note 20 in our Notes to the Consolidated Financial Statements on page 140.

HOW WE REPORT OUR RESULTS

We manage our P&C businesses in four business and eight reportable segments:

• Safeco Personal Insurance (SPI)

• Personal Auto

• Homeowners

• Specialty

• Safeco Business Insurance (SBI)

• SBI Regular

• SBI Special Accounts Facility

• SBI Runoff

• Surety

• P&C Other

We manage our L&I businesses in six reportable segments:

• Group

• Income Annuities

• Retirement Services

• Individual

• Asset Management

• L&I Other

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In addition to these segments, certain activities such as interest expense and intercompany eliminations are reported in Corporate and not allocated to individual segments.

HOW WE MEASURE PROFITABILITY

Property & Casualty – We use two measures of our underwriting results to assess the profitability of our P&C businesses. These measures are underwriting profit or loss and combined ratio.

Underwriting profit or loss is our net earned premiums less our losses from claims, loss adjustment expenses (LAE) and underwriting expenses.

Combined ratio is our losses, LAE and underwriting expenses divided by our net earned premiums. We report combined ratio as a percentage. For example, a combined ratio of 95% means that our losses, LAE and underwriting expenses equal 95% of our net earned premiums and result in a 5% underwriting profit. A lower combined ratio reflects better underwriting results than a higher combined ratio.

We don’t include our investment portfolio results when measuring the profitability of our P&C businesses. That’s because we manage the investment portfolio separately from our underwriting activities.

Life & Investments – We measure our L&I results using pretax operating earnings. This measure excludes from earnings net realized investment gains and losses. We believe that looking at pretax operating earnings enhances the understanding of our L&I results of operations. Net realized investment gains and losses can fluctuate significantly and distort the comparison of our results.

Investment Results

Investment activities are an important part of our business. We invest insurance premiums received in a diversified portfolio until they’re needed to pay claims. Income from our investments is a significant part of our total revenues.

Our investment philosophy is to:

• Emphasize investment yield, balanced with investment quality and risk

• Provide for liquidity when needed

• Diversify our portfolio

• Match the duration of the invested asset portfolio with the expected policyholder liability durations

We measure our investment results in two parts – the net investment income that we earn on our invested assets and the net realized investment gains and losses we recognize when we sell or impair investments.

Application of Critical Accounting Estimates

We have identified the accounting estimates listed below as critical to understanding our results of operations and financial condition. The application of these accounting estimates requires our management to use judgments involving assumptions and estimates about future results, trends or other developments that could significantly influence our results if actual experience differs from those assumptions and estimates. We review these judgments frequently. An understanding of them may help readers understand our Consolidated Financial Statements and MD&A. We consider our most critical accounting estimates to be:

• P&C Loss and Loss Adjustment Expense Reserves

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• P&C Reinsurance

• Valuation of Investments

P&C LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Estimating our loss and LAE reserves requires us to make significant judgments and use many assumptions.

At year-end 2003 and 2002, our loss and LAE reserves by business segment before reinsurance were:

DECEMBER 31	2003			2002
Safeco Personal Insurance	$	1,742.7		$	1,664.8
Safeco Business Insurance		2,705.9			2,618.2
P&C Other		608.2			655.3
Surety		(12.2	)		60.2
Total	$	5,044.6		$	4,998.5

Safeco Personal Insurance (SPI) - - SPI loss and LAE reserves are estimated using standard actuarial methods. These methods involve analyzing past claims experience for recent changes in business claim practices and the environment. Emphasis is placed on evaluating claims reporting and closing patterns as well as the size of loss payments and case basis reserves. SPI losses and related expenses are analyzed by line of business, product, coverage and geographic area.

Personal Auto policies provide coverage for bodily injury, uninsured motorists, personal injury protection, medical payments, property damage, comprehensive and collision losses.

Bodily injury (BI) coverage represents the largest portion (59%) of our loss and LAE reserves held for Personal Auto. We estimate the growth in BI loss costs will be moderate, with the frequency of losses increasing and the severity of claims declining.

In arriving at these assumptions we considered:

• Our changing mix of business - As our business grows, we write more policies in markets where we have not written significant business previously. We expect to write more standard and non-standard risks which have, on average, higher frequencies than preferred risks.

• Our increase in new business, which generally has higher claim frequencies than business that has been on the books for longer than one year

• General inflation and medical cost trends

Our Homeowners and Specialty lines are generally short-tailed, which means most claims are reported and settled within 12 months. We use standard actuarial techniques to estimate reserves for those lines. Reserve estimates for the Homeowners line continue to be favorably impacted by double-digit declines in frequency of claims.

Safeco Business Insurance (SBI) – SBI primarily writes commercial multi-peril, property, workers compensation, automobile and general liability insurance for small- to medium-sized businesses. SBI has exposure to asbestos, environmental and other toxic tort and construction defect losses and related expenses through the general liability, commercial multi-peril and umbrella coverages it provides. These exposures and the risks they present to us are discussed in the P&C Other segment below, where the majority of the reserves reside. The remainder of the SBI reserve discussion excludes these exposures.

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Workers Compensation –Estimating reserves for workers compensation involves a high degree of uncertainty and judgment. That’s because:

• Many claims have long-term payout periods that increase the impact of inflation trends over time, particularly medical cost inflation.

• Legislative actions and judicial interpretations can unpredictably affect benefits.

• Some claims are not made immediately; as a result, we remain exposed to workers compensation losses arising from policies written years ago.

The following table shows our loss and allocated LAE reserves for voluntary and non-voluntary workers compensation and other relevant data.

The table excludes unallocated LAE reserves – reserves not assigned to specific claims. At year-end 2003, our unallocated LAE reserves were $43.8.

DECEMBER 31	2003		2002		2001
Losses and Allocated LAE Payments	$	202.8	$	278.7	$	291.5
Reserves at End of Year, Before Reinsurance	$	904.9	$	809.4	$	934.2
Earned Premiums	$	145.6	$	179.8	$	323.7
Claims (Number of Claims)
Reported Claims in the Year		6,716		12,107		31,858
Open Claims at the End of the Year		12,029		14,914		21,670

The decreases in premiums since 2001 result primarily from our strategy to limit our workers compensation writings in states where rate levels fall below our profitability targets. In particular, we significantly restricted writing new workers compensation business in California beginning in the third quarter of 2002.

Factors in Estimating Loss Reserves for Workers Compensation – Workers compensation claims are mostly composed of medical costs and salary/wage payments while claimants are out of work (indemnity payments). The main factors in estimating loss and LAE reserves for workers compensation are:

• Medical cost inflation trends

• Changes in state workers compensation statutes that are applied retroactively

• Changes in our business

• Workers compensation claims reporting and payout periods

Payout periods for workers compensation claims can be 50 years or more. However, because we focus on low-hazard risks, our average payout period is generally shorter than the industry average.

Since 2001, changes in our business have included:

• Improving our claims handling practices, putting greater emphasis on early recognition of exposure potential in case reserves

• Focusing on the settlement of long term claims, increasing the number that we settle

• Focusing our writings on small- to medium-sized businesses

• Limiting our workers compensation writings in states where rate levels fall below our profitability targets

While we expect these business practice changes to reduce our ultimate losses, they have decreased the

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predictive value of our past data in estimating future losses. With this in mind, in the second quarter of 2003, we began performing additional actuarial analysis primarily focused on medical inflation trends and changes in Safeco claim practices and mix of business. This produced divergent indications. As a consequence, in the third quarter of 2003, we took additional steps to evaluate medical inflation trends, reviewing:

• Safeco and industry data

• Our claim files

• Loss reserve trends by state

• Case reserving patterns and practices

Our analysis showed:

• Higher medical payouts than previously expected

• Longer payout periods than previously expected

• Relatively stable indemnity payouts

Based on our analysis, we increased our loss and LAE reserves for workers compensation losses occurring in prior years by $205.0 pretax during the third quarter of 2003. Of this increase, $180.0 was related to loss and allocated LAE reserves. This increase included $130.0 in SBI Runoff, $48.0 in SBI Regular and $2.0 in SBI Special Accounts Facility. The largest amount of reserve development relates to California, particularly the large account business that we began exiting in 2001. We also increased unallocated LAE reserves by $25.0 pretax. This increase included $14.9 in SBI Runoff, $9.6 in SBI Regular and $0.5 in SBI Special Accounts Facility. This increase reflects our estimate of the ongoing expense of servicing workers compensation claims. As claims remain open for longer periods of time, our costs to handle those claims rise.

In determining management’s best estimate for workers compensation reserves, long-term medical cost inflation trends over the average claim payout period represent our most significant assumption. We have assumed that double-digit medical cost inflation will continue in the near-term, moderating over time to historic levels, resulting in a 5%-6% medical loss severity trend over the life of the reserves. Our best estimate of workers compensation reserves presents risk of unfavorable reserve development should medical trends not abate.

Other SBI – We also maintain loss and LAE reserves for our other SBI products. These include (other than asbestos, environmental, other toxic tort and construction defects claims, which are discussed separately below):

• Commercial multi-peril

• Monoline property

• Monoline general liability

• Commercial automobile

• Commercial umbrella

Commercial umbrella insurance provides protection to our customers beyond the limits of their primary liability policies. As a consequence, this product tends to result in fewer claims with higher average costs than most other commercial coverages. These claims are also reported to us more slowly than most other commercial coverages. For this line our actuarial techniques produce a wider range of results. Management considers these results together with any changes in the product or the customer profile when establishing reserve estimates.

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Generally, the payout periods for our other SBI products are relatively short. As a result, our estimated loss reserves for these products are subject to less variability than our workers compensation reserves. We use standard actuarial techniques to estimate these loss reserves.

P&C Other – This section combines the loss reserves information from our SBI and P&C Other business segments for:

• Asbestos

• Environmental and other toxic tort claims

• Construction defects

Asbestos – This table shows our loss and allocated LAE reserves for asbestos-related claims.

The table excludes unallocated LAE reserves. At year-end 2003, our unallocated LAE reserves for asbestos were $4.0.

DECEMBER 31	2003		2002		2001
Losses and Allocated LAE Payments, Before Reinsurance	$	25.9	$	21.3	$	13.0
Loss and Allocated LAE Payments, Net of Reinsurance	$	15.8	$	11.0	$	11.9
Reserves at End of Year, Before Reinsurance	$	142.0	$	150.8	$	141.2
Reserves at End of Year, Net of Reinsurance	$	125.9	$	133.9	$	132.3
Three-Year Survival Ratio, Gross		7.1		11.1		15.8
Three-Year Survival Ratio, Net		9.8		13.8		16.3
Claims and Average Costs *
Open Claims at End of Year		2,717		2,224		1,970
Average Paid per Closed Claim	$	25,596	$	28,465	$	19,166
Average Case Reserve per Open Claim	$	28,452	$	28,348	$	21,109

*    Number of claims and whole dollars, net of reinsurance.

On this table, the three-year survival ratio represents the number of years that our current loss reserves would last if future payments are made at the same average annual rate experienced over the last three years. The three-year survival ratio is equal to our loss reserves divided by our average annual payment over the last three years.

Due to volatility and sparseness of data, estimating loss reserves for asbestos claims requires more than standard actuarial techniques. As a result, we analyze and consider claims statistics and trends, directional trends in survival ratios, and applicable law and coverage litigation.

Our Asbestos Liability Exposure – Here’s the breakout of our asbestos loss reserves:

• 70% relates to the runoff assumed reinsurance operations of American States, which we acquired in 1997, and our exposure to syndicates and pools.

• 30% relates to our direct exposure, included in SBI Regular.

Accordingly, we’ve established two separate, special claims handling functions, one that specializes in asbestos claims related to our runoff assumed reinsurance operations and one that specializes in asbestos claims related to our direct exposure.

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Our exposure through our runoff assumed reinsurance operations is primarily reinsurance of excess coverage. This business also exposes us to syndicates and pools, which resulted in increased asbestos payments in 2002. Pools are groups of insurers that enter into agreements to share exposure related to specific insureds. Our loss reserve estimates for pools reflect the loss reserve estimates provided by the pools’ independent actuaries. The loss experience of our runoff assumed reinsurance operations follows the general industry trend. Our direct exposure is primarily due to smaller and more peripheral entities becoming defendants in asbestos claims.

Our exposure to the major high-profile asbestos defendants is limited. That’s because our business strategy resulted in us not writing direct coverages for larger companies. In addition, we do not have direct exposure to businesses or claims that are the subject of settlement agreements.

At year-end 2003, our unassigned IBNR was 38.6% of our loss reserves for asbestos claims.

We categorize our policyholders with active asbestos claims in two groups according to their exposure, consisting of:

• Large Asbestos Accounts – our policyholders with cumulative loss payments exceeding $100,000 as of December 31, 2003

• Small Asbestos Accounts – our policyholders with cumulative loss payments of less than $100,000 as of December 31, 2003

This table provides details about our policyholders and losses paid related to asbestos loss reserves for 2003:

	NUMBER OF POLICYHOLDERS	2003 NET PAID		NET ASBESTOS RESERVES		% OF ASBESTOS RESERVES
Assumed Reinsurance and Pools	—	$	6.6	$	50.6	40.2	%
Policyholders with Active Claims
Large Asbestos Accounts	10		6.7		16.5	13.1
Small Asbestos Accounts	124		2.5		10.2	8.1
Total	134		9.2		26.7	21.2
Policyholders with Settlement Agreements	—		—		—	—
Unassigned IBNR	—		—		48.6	38.6
Total	134	$	15.8	$	125.9	100.0	%

Estimating Loss Reserves for Asbestos – Estimating loss reserves for asbestos claims requires more judgment than our other lines of business. That’s primarily because past claim experience may not be representative of future claims.

Several factors make it difficult to predict future asbestos claim payments. They include:

• Insufficient data

• Inherent risk of major litigation

• Diverging legal interpretations

• Regulatory actions

• Legislative actions

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• Increases in bankruptcy proceedings

• Non-impaired claimants being allowed to make claims

• Efforts by insureds to obtain coverage not subject to aggregate limits

Changes in these factors could result in future asbestos claims payments that are significantly different from those currently predicted.

In estimating our loss reserves for asbestos claims, we:

• Consider applicable law and coverage litigation

• Review our ground up analysis completed in 2001

• Perform actuarial analysis for smaller accounts using industry information and Safeco information

• Make no judgments regarding ongoing congressional reform efforts

Some asbestos-related claims are subject to non-product liability coverage rather than product liability coverage. Non-product liability coverage might not be subject to policy aggregate limits. That could result in higher asbestos claims payments and related expenses.

Our loss reserve estimates assume that emerging unfavorable industry trends will increase our level of asbestos payments in our runoff assumed reinsurance operations within the next two years.

Our loss reserve estimates assume that the payments for our direct asbestos exposure in 2003 will return to 2002 and prior levels in the future. This assumption is based on:

• The small number of accounts generating the 2003 payments. Ten accounts represent $6.7 or two-thirds of the 2003 payments.

• The limited number of accounts we wrote of the nature that generated the 2003 payments.

• Year-to-year volatility in claim and payment activity.

Our loss reserve estimates also assume that the severities of future claims will remain relatively unchanged.

Environmental and Other Toxic Tort Claims – This table shows our loss and allocated LAE reserves for our liability coverages related to environmental and other toxic tort claims.

The table excludes unallocated LAE reserves. At year-end 2003, our unallocated LAE reserves were $9.8.

DECEMBER 31	2003		2002		2001
Losses and Allocated LAE Payments, Before Reinsurance	$	34.6	$	12.5	$	13.5
Loss and Allocated LAE Payments, Net of Reinsurance	$	33.2	$	11.3	$	12.3
Reserves at End of Year, Before Reinsurance	$	160.0	$	198.4	$	199.5
Reserves at End of Year, Net of Reinsurance	$	152.2	$	183.2	$	188.6
Three-Year Survival Ratio, Gross		7.9		13.0		12.4
Three-Year Survival Ratio, Net		8.0		13.1		12.5
Claims and Average Costs *
Open Claims at End of Year		1,393		3,098		2,867
Average Paid per Closed Claim	$	23,642	$	18,312	$	10,185
Average Case Reserve per Open Claim	$	31,726	$	17,756	$	19,295

* Number of claims and whole dollars, net of reinsurance.

Our Environmental and Other Toxic Tort Claims Exposure – Our environmental and other toxic tort

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claims result from our runoff assumed reinsurance operations and our commercial general liability line that we write on a direct basis. We generally have avoided writing coverages for large companies with substantial exposures to environmental and other toxic tort claims. As a result, our average environmental claim tends to be small. At year-end 2003, our unassigned IBNR was 71.0% of our loss reserves for environmental and other toxic tort claims.

In 2003, we reached a settlement related to a large number of environmental claims related to coverage on general liability policies written for individual gasoline stations. Under these policies, there was a petrochemical company named as an “additional insured”. We have settled all claims with the additional insured. This $11.0 global settlement and future indemnification agreement is included in our 2003 payment activity. We have no other reported claims of this nature. Other payments in 2003 reflect year-to-year volatility in claim and payment activity.

Estimating Loss Reserves for Environmental and Other Toxic Tort Claims – The volatility of actuarial estimates of liabilities for environmental and other toxic tort claims is often greater than that of other exposures. That’s due to factors including:

• Insufficient data

• Changes in the number and types of defendants involved with these claims

• Unresolved legal issues including existence of coverage, definition of ultimate damages and final allocation of damages due from the financially responsible parties

Due to the volatility and sparseness of data, estimating loss reserves for environmental and other toxic tort claims requires more than standard actuarial techniques. As a result, we analyze and consider:

• Claim statistics and trends

• Directional trends in survival ratios

• Applicable law and coverage litigation

Construction Defects – This table shows our loss and allocated LAE reserves for construction defect claims. The table excludes unallocated LAE reserves. At year-end 2003, our unallocated LAE reserves were $8.2.

DECEMBER 31	2003		2002		2001
Losses and Allocated LAE Payments, Before Reinsurance	$	63.1	$	73.2	$	79.9
Loss and Allocated LAE Payments, Net of Reinsurance	$	62.2	$	73.1	$	78.0
Reserves at End of Year, Before Reinsurance	$	431.2	$	397.9	$	400.2
Reserves at End of Year, Net of Reinsurance	$	431.2	$	397.8	$	399.7
Claims and Average Costs *
Open Claims at End of Year		1,533		1,716		2,155
Average Settlement Cost, including Legal Expenses	$	50,989	$	44,603	$	48,514

* Number of claims and whole dollars, net of reinsurance.

Note: Certain reclassifications have been made to the prior-year amounts to conform to the current-year presentation.

Our Construction Defect Claims Exposure – Our exposure to construction defect claims comes from general liability and commercial multi-peril coverages we have provided to contractors. Construction defect claims result from alleged defective work performed in the construction of large habitation structures that include apartments, condominiums and large developments of single-family dwellings or other housing.

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Construction defect claims often seek payment for damages resulting directly from the alleged defective construction work and diminished economic value of the structure – meaning that the structure has less market value because of the alleged defective construction work. Construction defect claims are complex, with an inherent difficulty in determining fault. Most of our claims are concentrated in a small number of states, including California.

We have taken a number of actions to mitigate our exposure to construction defect claims and enable us to vigorously defend our coverage position. They include:

• Stricter underwriting standards

• A separate claims handling function and internal legal counsel specializing in construction defect claims

• Relationships with external legal counsel specializing in construction defect claims

Estimating Loss Reserves for Construction Defect Claims – The main factors in estimating loss reserves for construction defect claims are:

• Changing legal and regulatory environments

• Statutes of limitations and statutes of repose in filing these claims

• Diminished value claims

• Involvement of multiple plaintiffs, defendants and insurers

• Long periods of time between the actual construction work and the date the claim is reported

The uncertainty created by these factors requires more judgment in estimating loss reserves for construction defect claims than for our other lines of business.

We use techniques developed specifically for estimating loss reserves for construction defect claims. With these techniques, we estimate the number of future claims and the average value of every claim and make adjustments for anticipated changes in coverage interpretations, regulations, judicial rulings, plaintiff attorney involvement and changes in our book of business.

Over the last three years, our number of open construction defect claims has decreased steadily – an average drop of 13% per year. Our loss reserve estimates assume that the number of open claims will continue to decrease, but at a slower rate. The slowing will come from increases in construction defect claims outside of California and extended or exempted statutes of limitations for loss reporting in certain jurisdictions. Our loss reserve estimates also assume that our claims handling function modestly reduces loss severity.

Surety – Our Surety contracts insure construction performance, as well as legal matters that include probate and bankruptcies. By their nature, Surety claims result in lower loss frequency and higher loss severity than most of our P&C businesses. In addition, Surety claims provide us with substantial opportunity for subrogation and salvage, the nature and extent of which vary from case to case.

To estimate loss reserves for Surety, we examine:

• Actuarial analysis

• Large claim analysis

• Reinsurance terms and conditions

• Individual insured exposure analysis

• Analysis of subrogation and salvage potential

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Our expected salvage and subrogation recoveries exceeded our loss reserves by $12.2 at December 31, 2003. Surety reserves fluctuate from period to period due to the lag between the time when payments are made on a claim and the time when we receive salvage and subrogation amounts.

P&C REINSURANCE

On page 14, we began our discussion with a look at the various types of reinsurance and policy terms. Here, we focus on estimation of reinsurance recoverables.

The reinsurance we buy limits our losses on certain individual risks or reduces our exposure to catastrophic events. We buy it from several reinsurers and are not dependent upon any single reinsurer. Reinsurance recoverables are the amounts our reinsurers owe us related to the losses we have incurred. We reported $372.0 at December 31, 2003 and $419.9 at December 31, 2002 in P&C reinsurance recoverables as assets on our Consolidated Balance Sheets.

Recording reinsurance recoverables requires us to make estimates because we do not know the exact amount due from the reinsurer until all our underlying losses are settled. The amount of reinsurance recoverables varies depending on the size of individual losses and the aggregate amount of losses in particular lines of business.

To estimate reinsurance recoverables, we:

• Review estimates of large losses that are covered under reinsurance agreements

• Review reinsurance recoverable amounts for specific claims as well as for lines of business

• Compare our estimates with past reinsurance recoverables

• Perform actuarial analyses of loss development above and below our retention levels – the amounts we absorb before the reinsurers reimburse us – specified under the reinsurance agreements

• Examine actuarial data with and without reinsurance recoverables

Estimating an Allowance for Uncollectible Reinsurance Recoverables – We regularly review our reinsurance recoverables to determine the collectibility of what is owed to us. In doing that, we review:

• Historical collection experience

• Reinsurance recoverables associated with individual reinsurers, including large exposures and those with lower rated reinsurers

• Reinsurance recoverables concentrated with a particular event or issue (for example, a large loss, a catastrophe or an emerging claim issue)

• Trends in default rates by credit rating

Our estimated allowance for uncollectible reinsurance was $16.3 at December 31, 2003 and $12.5 at December 31, 2002. The increase in 2003 reflects the impact on our recoverables of the industry-wide decline in creditworthiness of reinsurers since 2001.

VALUATION OF INVESTMENTS

Our investments include fixed maturities and equity securities, which we report at fair value as Available–for–Sale Securities on our Consolidated Balance Sheets.

The fixed maturities we invest in include bonds, mortgage-backed securities and redeemable preferred stock. The equity securities we invest in include common stock and non-redeemable preferred stock.

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How We Determine Other-than-Temporary Declines in the Value of Our Investments – We regularly review the fair value of our investments. If the fair value of any of our investments falls below our cost basis in the investment, we analyze the decrease to determine whether it is an other-than-temporary decline in value. To make this determination for each security, we consider:

• How long and by how much the fair value of the security has been below its cost

• The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential

• Our intent and ability to keep the security long enough for it to recover its value

• Any downgrades of the security by a rating agency

• Any reduction or elimination of dividends or non-payment of scheduled interest payments

Based on our analysis, we make a judgment as to whether the loss is other-than-temporary. Sometimes, an investment loss that we consider temporary in one quarter can become other-than-temporary in a future quarter. If the loss is other-than-temporary, we record an impairment charge within Net Realized Investment Gains (Losses) in our Consolidated Statements of Income (Loss) in the period we make that determination.

We recorded $292.3 of these impairment charges in 2003 and $258.5 in 2002. The impairment charges in 2003 included $146.5 that was incurred because of our intent to sell our L&I businesses, together with their investment portfolio. This charge related to all L&I securities with unrealized losses at September 30, 2003 and at December 31, 2003 and our expectation that these securities will not recover in value before the completion of a sale.

Determining the Fair Value of Our Investments – In most cases, we use public market price information to determine the fair value of our investments when such information is available. When third-party market information is not available, as in the case of securities that are not publicly traded, we use other valuation techniques. Such techniques include:

• Using independent pricing sources

• Evaluating discounted cash flows

• Identifying comparable securities with quoted market prices based on industry sector, credit quality and maturity

• Using internally prepared valuations based on certain modeling and pricing methods

We used these other valuation techniques to estimate the fair value of:

• $293.3 in fixed maturities and $21.9 in equity securities on our Consolidated Balance Sheets as of December 31, 2003. These amounts represented 1.1% of our total investment portfolio.

• $314.8 in fixed maturities and $21.1 in equity securities on our Consolidated Balance Sheets as of December 31, 2002. These amounts represented 1.3% of our total investment portfolio.

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Consolidated Results of Operations

The following table presents summary consolidated financial information for the years indicated:

YEAR ENDED DECEMBER 31	2003			2002		2001
P&C Earned Premiums	$	4,901.8		$	4,521.3	$	4,472.8
L&I Premiums and Other Revenues		868.1			778.3		637.0
Net Investment Income		1,680.3			1,674.4		1,651.4
Net Realized Investment Gains (Losses)		(101.9	)		82.5		93.0
Other Revenues		9.8			10.7		10.4
Total Revenues		7,358.1			7,067.2		6,864.6
Losses, LAE and Policy Benefits		4,808.0			4,685.5		5,199.1
Underwriting, Acquisition and Operating Expenses		1,972.7			1,834.5		1,752.6
Interest Expense		127.1			132.0		136.9
Goodwill Write-off		—			—		1,214.1
Restructuring Charges		9.2			21.8		44.3
Total Expenses		6,917.0			6,673.8		8,347.0
Income (Loss) from Continuing Operations Before Income Taxes and Change in Accounting Principle		441.1			393.4		(1,482.4	)
Provision (Benefit) for Income Taxes		101.9			92.3		(437.1	)
Income from Discontinued Credit Operations, Net of Taxes		—			—		4.2
Gain from Sale of Credit Operations, Net of Taxes		—			—		54.0
Cumulative Effect of Change in Accounting Principle, Net of Taxes		—			—		(2.1	)
Net Income (Loss)	$	339.2		$	301.1	$	(989.2	)

Net Income (Loss) – Consolidated net income increased in 2003, driven primarily by growth and improved results within the P&C operations, offset by a decrease in net realized investment gains (losses).

The increase in consolidated net income in 2002 over our loss in 2001 was driven by improved results in the P&C operations and increased L&I earnings. Our results in 2001 included a goodwill write-off of $925.5 ($1,214.1 pretax), as a result of a change in accounting policy for assessing goodwill from undiscounted cash flows to a market value method and a gain from the sale of our Credit Operations of $54.0.

Consolidated Revenues – The increases in 2003 and in 2002 consolidated revenues reflected overall growth in P&C earned premiums and L&I premiums and other revenues. Declines in our net realized investment gains (losses) offset some of that increase.

Increases in our P&C earned premiums resulted from growth in policies-in-force in our personal auto segment and premium rate increases across all our lines of business.

Increases in our L&I revenues resulted primarily from our acquisition of the Swiss Re Life & Health America Holding Company (Swiss Re) stop-loss medical business in July 2002.

Our net realized investment losses in 2003 primarily resulted from our impairment losses. The losses reflect $292.3 of impairments, including $146.5 related to our intent to sell L&I. Specific industries that contributed to impairments in 2003 included airline and air transportation.

The net realized investment gains included impairments of $258.5 in 2002 and $126.8 in 2001, reflecting the impact of credit deterioration and corporate failures particularly in airline and telecommunication sectors. In 2002, these impairments were offset by gains realized on repositioning our P&C investment portfolio.

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Net investment income increased slightly in 2003 due to improved P&C cash flows from better underwriting results, partially offset by lower interest rates on our investments.

Losses, LAE and Policy Benefits – The increase in 2003 losses and LAE resulted from a $205.0 increase to our workers compensation reserves for prior year losses, and an increase in catastrophe losses of $68.3 in 2003 over 2002.

Improvement in our loss ratio for our personal insurance operations however, offset some of that increase in 2003. Similarly, tighter underwriting standards resulted in lower losses and LAE in 2002 compared with 2001. Our loss ratios in Personal Auto were:

• 60.4% in 2003

• 65.9% in 2002

• 68.8% in 2001

Our loss ratios in Homeowners were:

• 51.7% in 2003

• 66.5% in 2002

• 89.4% in 2001

The improving ratios resulted from price increases, segmented underwriting that better matched rate and risk and favorable loss experience, particularly from lower claims frequency in Homeowners.

Also contributing to the decrease in our losses and LAE in 2002 compared with 2001 were lower catastrophe losses of $85.4 in 2002 compared with catastrophe losses of $268.1 in 2001, and a third quarter 2001 reserve strengthening of $240.0.

Underwriting, Acquisition and Operating Expenses – The increases in underwriting, acquisition and operating expenses primarily resulted from growth in our businesses in 2003.

The increase in 2002 was due to higher commissions we paid on new auto policies, higher training costs for our claims handlers and costs related to the rollout of our automated underwriting platform.

Restructuring Charges – The restructuring charges in 2003 include the elimination of approximately 500 positions related to corporate expense reductions. We expect this initiative to reduce our 2004 operating expenses by approximately $75.

The 2002 and 2001 restructuring charges relate to the elimination of approximately 1,200 positions to reorganize our P&C and Corporate operations and consolidate regional offices.

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Reconciling Segment Results

The following table assists in reconciling our GAAP results, specifically the “Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle” line from our Consolidated Statements of Income (Loss) to our segment performance measures:

YEAR ENDED DECEMBER 31	2003			2002			2001
P&C	$	479.6		$	485.8		$	(1,461.5	)
L&I		195.6			93.9			126.1
Corporate		(234.1	)		(186.3	)		(147.0	)
Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle	$	441.1		$	393.4		$	(1,482.4	)

These GAAP results are further detailed into segment underwriting results and pretax operating earnings. Underwriting results and pretax operating earnings provide a helpful picture of how our company is doing. However, using them to measure profitability – while fairly common in our industry – is not consistent with GAAP.

Our P&C Operating Results

The primary measures of our operating results include our underwriting profits or losses, net earned premiums and combined ratios. The next three tables report those key items – by our reportable segments – for the last three years. More information about the results – also by reportable segment – follows the tables.

First, underwriting profits (losses) are our measure of each segment’s performance:

YEAR ENDED DECEMBER 31	UNDERWRITING PROFITS (LOSSES)
	2003			2002			2001
Personal Auto	$	65.1		$	(44.4	)	$	(80.5	)
Homeowners		82.2			(37.2	)		(205.6	)
Specialty		44.5			28.9			3.9
SPI Total		191.8			(52.7	)		(282.2	)
SBI Regular		(28.6	)		(51.7	)		(163.2	)
SBI Special Accounts Facility		23.5			17.8			3.9
SBI Runoff		(192.8	)		(107.5	)		(279.6	)
SBI Total		(197.9	)		(141.4	)		(438.9	)
Surety		27.6			17.6			2.4
P&C Other		(27.4	)		(63.1	)		(118.8	)
Total Underwriting Losses		(5.9	)		(239.6	)		(837.5	)
Net Investment Income		453.0			460.0			457.7
Goodwill Amortization		—			—			(11.0	)
Goodwill Write-off		—			—			(1,165.2	)
Restructuring Charges		(8.3	)		(21.8	)		(44.3	)
Net Realized Investment Gains		40.8			287.2			138.8
Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle	$	479.6		$	485.8		$	(1,461.5	)

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Next, net earned premiums are the primary driver of our revenues, along with net investment income:

YEAR ENDED DECEMBER 31	NET EARNED PREMIUMS
	2003			2002		2001
Personal Auto	$	2,269.1		$	1,947.1	$	1,767.4
Homeowners		768.1			757.4		740.6
Specialty		201.8			203.1		201.6
SPI Total		3,239.0			2,907.6		2,709.6
SBI Regular		1,097.5			1,014.1		1,033.0
SBI Special Accounts Facility		383.8			276.0		128.1
SBI Runoff		(2.0	)		170.9		482.3
SBI Total		1,479.3			1,461.0		1,643.4
Surety		153.6			126.3		95.6
P&C Other		29.9			26.4		24.2
Total P&C Operations	$	4,901.8		$	4,521.3	$	4,472.8

Finally, combined ratios show the relationship between underwriting profit (loss) and net earned premiums. Using ratios helps us see our operating trends without the effect of changes in net earned premiums:

	COMBINED RATIOS +
YEAR ENDED DECEMBER 31	2003		2002		2001
Personal Auto	97.1	%	102.3	%	104.6	%
Homeowners	89.3		104.9		127.8
Specialty	77.9		85.8		98.0
SPI Total	94.1		102.3		110.3
SBI Regular	102.6		105.1		115.8
SBI Special Accounts Facility	93.9		93.5		96.9
SBI Runoff	*		*		*
SBI Total	113.4		109.7		126.7
Surety	82.0		86.0		97.5
P&C Other	*		*		*
Total P&C Operations	100.1	%	105.3	%	118.7	%

+ Combined ratios are GAAP basis. Expressed as a percentage, they are equal to losses and expenses divided by net earned premiums.

* Not meaningful because this is a runoff business with minimal premium.

Personal Auto

YEAR ENDED DECEMBER 31	2003		2002			2001
Net Earned Premiums	$	2,269.1	$	1,947.1		$	1,767.4
Underwriting Profit (Loss)	$	65.1	$	(44.4	)	$	(80.5	)

NET EARNED PREMIUMS

Net earned premiums increased by 16.5% in 2003 and 10.2% in 2002. The increases in net earned premiums were driven by:

• Increases in filed rates: We file rate changes on a state-by-state basis. Overall, we received approval for average rate increases in the mid-single digits in 2003 and 2002.

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• Premium trend: Premiums are impacted by the increases in the portion of our policies that insure

newer and more expensive cars, or premium trend. Personal auto premium trend increased average rates in the low single-digits in 2003 and 2002.

• Growth of policies-in-force (PIF): PIF grew by 9% in 2003 and by 8% in 2002, reflecting the introduction of our new business entry model using point-of-sale (POS) underwriting technology and stable retention rates. Our new auto policies grew 9.7% in 2003 over 2002, and 5.3% in 2002 over 2001.

UNDERWRITING RESULTS AND COMBINED RATIO

In 2003, we achieved an underwriting profit - our first since 1998. Our loss ratio has steadily improved to 60.4% in 2003 from 65.9% in 2002 and 68.8% in 2001. These lower loss ratios were primarily driven by:

• Improved rate adequacy: As discussed above, rates increased in 2003 and 2002, while loss costs, adjusted for the growth in standard and non-standard business, increased only slightly during that period.

• Disciplined underwriting through our automated underwriting platform that provides more segmentation and better matching of rates to risk characteristics.

These reductions in loss ratios were the primary contributors to the improvements in our combined ratios:

• 97.1% in 2003

• 102.3% in 2002

• 104.6% in 2001

DRIVING OUR RESULTS

We’re achieving our growth and improved results through four strategic initiatives in our personal auto line:

• Offering a new auto insurance product

• Introducing our new-business entry model using point-of-sale (POS) technology

• Paying commissions that incent profitable growth

• Improving the claims management process

Offering a New Auto Insurance Product – Our new auto insurance product offers up to 15 underwriting tiers. These additional tiers provide a more accurate price for a wider range of risks. We’re better able to assign the right price to the corresponding level of risk, producing greater precision and greater profitability. Also, tiers expand the risks that we can underwrite and price, so that we have an auto product available for about 95% of all applicants quoted by our agents. Our new auto insurance product is now available in 43 of the 44 states where we sell auto insurance.

Introducing Our New-Business Entry Model – In early 2002, we introduced our new-business entry model using POS underwriting technology. This model makes it easier for our distributors to sell our new auto insurance product. Accessing the system from their offices, our distributors follow a series of easy-to-use screens to complete the sale. This helps our agents to be more efficient in processing auto business.

Paying Commissions to Incent Profitable Growth – In early 2002, we introduced some changes to our commission structure that have contributed to higher sales during 2002 and 2003. We increased commissions from 10% to 17% on new auto policies. The increase applies to the first six-month policy period. In addition, we revised the bonus commission structure for our agents in 2002. The new structure aligns their incentives with our growth and profitability goals.

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Improving the Claims Management Process – Better claims handling processes also contributed to our improved performance. We’ve made investments in training for our claims handlers and we now have more efficient processes and better metrics to measure key performance drivers. Our claims processing combines the efficiency of centralized claims handling, customer service centers and the flexibility of field representatives. Using our paperless claims environment, our field representatives are not restricted to a specific office or physical location. This flexibility adds significant savings and efficiencies to the claims handling process and increases customer service.

WHERE WE’RE HEADED

We anticipate the following factors will impact growth and profitability in the near future:

Rates – We plan to file for rate increases to at least keep pace with the rate of underlying loss cost growth. We anticipate loss cost growth to be in the 3%-5% range in 2004. Actual rate changes obtained may vary, based on the rate needed in a given state combined with regulatory review and approval, and developments in loss cost trends.

Business Growth – As our business grows, we will write more policies in markets where we have not written significant business previously. We expect to write more standard and non-standard risks which have, on average, higher frequencies than preferred risks.

Product Pricing and Segmentation – We will continue to refine our pricing structure to more precisely match rate to risk.

Expenses – We expect to continue the improvement in our expense ratio for Personal Auto, as a result of the savings from our corporate restructuring.

Overall – Barring extraordinary catastrophes and other unusual events, we expect our Personal Auto segment to grow, while operating at our target combined ratio of 96%, in 2004.

Homeowners

YEAR ENDED DECEMBER 31	2003		2002			2001
Net Earned Premiums	$	768.1	$	757.4		$	740.6
Underwriting Profit (Loss)	$	82.2	$	(37.2	)	$	(205.6	)

NET EARNED PREMIUMS

Net earned premiums increased by 1.4% in 2003 and 2.3% in 2002. The increases in net earned premiums were impacted by:

• Increases in filed rates: We file rate changes on a state-by-state basis. Overall we received approval for average rate changes in the high single-digits in 2003 and the low-to-mid teens in 2002. Additionally, premiums are impacted by automatic increases in the amount of insurance coverage to adjust for inflation in building costs. This was in the low single-digits in 2003 and 2002.

• Decline in PIF: The number of policies that did not renew in 2003 and 2002 exceeded the number of new policies written in each year, leading to a net reduction in PIF of 9.1% in 2003 and 8.2% in 2002. Lower new business due to moratoriums in certain unprofitable states also resulted in our PIF declining during 2003. Currently, we have moratoriums in only two states, down from 10 states at December 31, 2002.

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UNDERWRITING RESULTS AND COMBINED RATIO

In 2003, we achieved an underwriting profit in our Homeowners line, our first underwriting profit in more than a decade. Our loss ratio steadily improved to 51.7% in 2003 from 66.5% in 2002 and 89.4% in 2001. These lower loss ratios were primarily driven by:

• Improved rate adequacy: As discussed above, rates increased in 2002 and 2003, while loss costs declined during that period.

• Loss frequency: The decrease in loss costs was driven by double-digit decreases in claims frequency - the average number of claims filed that are not catastrophe-related. This was only partially offset by increases in claims severity – the average cost per claim.

Loss frequency in 2003 was lower in all areas – fire, theft and other perils. Our frequency fell by 28% in 2003 and 19% in 2002.

The trend toward higher deductibles – with many homeowners increasing their deductibles from $250 to $500 – has significantly reduced the number of frequent, maintenance-type claims. Improvements in frequency outpaced severity increases, resulting in improving loss costs. Severity increases reflect inflationary trends in repair material and labor costs.

The reductions in loss costs were the primary contributor to the improvements in our combined ratios which were:

• 89.3% in 2003

• 104.9% in 2002

• 127.8% in 2001

Catastrophe Losses – Catastrophes involve multiple claims and policyholders. We cannot accurately predict catastrophes, and the number and type of catastrophes can vary widely. The losses they could cause might significantly exceed our prior experience.

Catastrophes include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather, fires and acts of terrorism.

Our catastrophe losses returned to historical averages in 2003. Catastrophe losses were unusually low in 2002 and unusually high in 2001. Our pretax catastrophe losses after reinsurance for the last three years were:

• $95.4 in 2003

• $54.3 in 2002

• $145.0 in 2001

Catastrophe losses for 2003 included $11.8 pretax for the wildfires in California. The catastrophes in 2001 included $60.0 pretax for a single wind and hailstorm in St. Louis.

DRIVING OUR RESULTS

We’re achieving improved profitability in Homeowners through five strategic initiatives:

• Offering a new homeowners insurance pricing structure

• Introducing our new-business entry model using point-of-sale (POS) technology

• Reunderwriting our homeowners business in selected states

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• Changing policy language

• Improving the claims management process

Offering a New Homeowners Insurance Product - Our new homeowners product generally offers nine underwriting tiers. This increased segmentation means we are better able to align rate with risk, and to offer coverage to more homeowners. We have obtained approval to sell our new product in 43 of the 44 states in which we are licensed to sell business.

Introducing Our New-Business Entry Model – In early 2002, we introduced our new-business entry model using point-of-sale (POS) underwriting technology. This model makes it easier for our distributors to sell our new homeowners insurance product.

Reunderwriting our Homeowners Business in Selected States - During 2003, we reviewed and updated our data for current policyholders in several states to make sure we had accurate information concerning their property. This helped us ensure that we are charging the appropriate premium for the risk insured.

Changing Policy Language - We placed a cap on the maximum amount payable in a total loss of 125% of the home’s insured value. In some cases, we have taken steps to restrict coverage, primarily on mold damages. These restrictions generally cap mold damages at $10 thousand, including remediation costs.

Improving the Claims Management Process – Better claims handling processes also contributed to our improved performance. We’ve made investments in training for our claims handlers and we now have more efficient processes, and better metrics to measure key performance drivers. Our claims processing combines the efficiency of centralized claims handling, customer service centers and the flexibility of field representatives. Using our paperless claims environment, our field representatives are not restricted to a specific office or physical location. This flexibility adds significant savings and efficiencies to the claims handling process and increases customer service.

WHERE WE’RE HEADED

We anticipate the following factors will impact growth and profitability in our Homeowners segment in the near future:

Rates - We plan to file for rate increases to at least keep pace with the rate of underlying loss cost growth. We anticipate this loss cost growth to be in the 2%-4% range in 2004. Actual rate changes obtained may vary from this based on regulatory review and approval and development in loss cost trends.

Business Growth - As our business grows, we will write more policies in markets where we have not written significant business previously. We expect to write more standard risks which have, on average, higher frequencies than preferred risks.

Product Pricing and Segmentation - We will continue to refine our pricing structure and matching of rate to risk.

PIF - We expect to see further reduction in PIF in 2004, but at a slower rate of decline than the past two years, and in the second half of 2004 we expect PIF levels to stabilize.

Overall – We do not expect to experience the same favorable frequency trends. This will cause our margins in this business to move closer to our target 92% combined ratio than the extraordinary results we experienced in the last half of 2003.

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Specialty

YEAR ENDED DECEMBER 31	2003		2002		2001
Net Earned Premiums	$	201.8	$	203.1	$	201.6
Underwriting Profit	$	44.5	$	28.9	$	3.9

Our Specialty operation provides individuals with umbrella, earthquake, dwelling fire, inland marine, motorcycle and boat insurance. These products serve to round out our personal lines offerings.

NET EARNED PREMIUMS

We experienced a small net decrease in PIF in 2003 and 2002, which was largely offset by our rate increases.

UNDERWRITING RESULTS AND COMBINED RATIO

The combined ratio improved to 77.9% in 2003, compared with 85.8% in 2002 and 98.0% in 2001. The increases in underwriting profit and decreases in combined ratio reflect lower claims experience in these lines.

WHERE WE’RE HEADED

We anticipate stable results in 2004. We have not yet introduced our point-of-sale (POS) technology in Specialty. We expect growth in this line when those advancements in technology are introduced in 2005.

SBI Regular

YEAR ENDED DECEMBER 31	2003			2002			2001
Net Earned Premiums	$	1,097.5		$	1,014.1		$	1,033.0
Underwriting Loss	$	(28.6	)	$	(51.7	)	$	(163.2	)

Our SBI Regular segment provides insurance for small- to medium-sized businesses (those with annual written premiums of $100,000 or less). This is our core commercial lines business. Its main products include:

• Business owner policies (BOP)

• Commercial auto

• Commercial property

• Commercial multi-peril

• General liability

• Workers compensation

NET EARNED PREMIUMS

The fluctuations in net earned premiums are a result of the efforts we began in 2001 to restore profitability to this segment. This included:

• Raising our average insurance prices

• Tightening our underwriting standards

• Not renewing unprofitable business

• Introducing a redesigned business model for our distributors

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Our average prices in SBI Regular increased:

• 10% in 2003

• 15% in 2002

• 12% in 2001

The price increases and stricter underwriting practices caused decreases in our retention rate and new business. With the continued rollout of our redesigned business model in 2003, however, we recently have seen the trend of declining PIF reverse as our retention stabilized and our new business growth strengthened. Over the last six months of 2003, our PIF increased slightly. Year over year, our PIF decreased 3.7% in 2003 and 8.9% in 2002.

UNDERWRITING RESULTS AND COMBINED RATIO

Underwriting results in 2003 improved $23.1 over 2002, and 2002 improved $111.5 over 2001, reflecting our effort to restore profitability to this segment. This effort included price increases, reunderwriting business and implementing our automated underwriting platform. Our automated underwriting platform provides a better matching of price to risk.

As a result, our combined ratios were:

• 102.6% in 2003

• 105.1% in 2002

• 115.8% in 2001

Our underwriting results include the changes in our workers compensation reserves. The estimation of workers compensation reserves involves a high degree of judgment and uncertainty. We have reacted to increasing medical cost inflation trends, elongating payout periods and delayed claims reporting and have increased our reserves in the period such information becomes available and trends are known. Workers compensation reserves in SBI Regular were increased:

• $57.6 in 2003 as part of the $205.0 reserve strengthening in the third quarter

• $33.3 in 2002

• $65.0 in 2001 as part of the $240.0 reserve strengthening in the third quarter

More information about our workers compensation reserves is in the P&C Loss and LAE Reserves section on page 35.

Catastrophe losses increased in 2003. Our catastrophe losses before tax and after reinsurance were $19.0 in 2003, $11.7 in 2002 and $31.7 in 2001.

DRIVING OUR RESULTS

Our effort to restore growth and profitability to this segment centers on our redesigned business model. Our redesigned business model includes:

• Automated underwriting platform

• Introducing our new-business entry model using point-of-sale (POS) technology

• Business service center

Automated Underwriting Platform – Our automated underwriting platform provides improved matching of price to risk that allows us to offer policies to a wider range of small businesses.

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We are seeing improvement in matching price to risk using our automated underwriting model. This is a key competitive advantage as we can better segment our business and provide the best rate to our best customers, while higher risks are charged higher rates. This has also allowed us to improve retention of our best customers.

Introducing our Point-Of-Sale Technology - The point-of-sale technology is an easy-to-use, web-based interface that helps agents provide real-time quotes to their customers quickly and efficiently.

In 2003, this platform enabled us to profitably increase the number of new policies we sell. We consistently closed more than 30% of quotes with this point-of-sale technology. Sales of BOP increased by 49.4% over our 2002 levels, and in 2003 we began the launch of our commercial auto product and saw a 20.5% increase in new business over 2002. Our workers compensation product launched in November 2003 and will be phased in over the first few months of 2004. The final component to our automated platform will be the addition of commercial package policies and we will begin this implementation in late 2004.

Business Service Center – We provide agents with an option to have us service the policies of their customers for a fee. This allows the agent to focus on profitably growing their business and shifts the policy servicing activities to us. Early indications show that this service increases the retention of policyholders, benefiting both us and the agent.

WHERE WE’RE HEADED

Growth – Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we see growth potential in this segment and aim to become the top insurance writer. As we continue to roll out our automated underwriting platform and point-of-sale technology, we will grow our business by focusing on small business policies.

In 2004, we will launch our online sales-and-service platform called Safeco Now. While we have automated many of our major P&C product lines over the last two years, Safeco Now will bring them all together on a unified platform featuring a single entry point and seamless cross-sell capabilities.

The centerpiece of Safeco Now is a new-business hub where distributors can quote and bind personal auto, homeowners and most small-business products in just minutes. Additional P&C products will go online over the next two years.

Safeco Now addresses our distributors’ three primary online needs:

• To quote and issue new business

• To service an existing account

• To inquire about a claim

We believe that Safeco Now will be a powerful tool to drive growth and greater efficiencies for our distributors and for us.

Product Pricing and Segmentation – We will continue to appropriately match rate with risk through segmentation and disciplined underwriting. We will charge prices at acceptable profit levels and decline business when pricing or risk does not allow us to earn acceptable returns.

Expenses – We expect improvement in our expense ratio for SBI Regular, as the savings from our corporate restructuring and the leveraging of our existing infrastructure with our automated underwriting platform and new-business interface will impact 2004 financial results.

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Loss Costs – We anticipate that medical costs, auto repair and building material costs will continue to rise. We strive to effectively manage these costs through efficient claims handling to help offset this loss cost inflation.

Overall – We expect good growth in PIF and continued ability to maintain our target margins (95% combined ratio).

SBI Special Accounts Facility

YEAR ENDED DECEMBER 31	2003		2002		2001
Net Earned Premiums	$	383.8	$	276.0	$	128.1
Underwriting Profit	$	23.5	$	17.8	$	3.9

Our SBI Special Accounts Facility (SAF) segment provides insurance for large commercial accounts (customers who pay annual written premiums of more than $100,000).

While our main focus is the small- to medium-sized commercial market, we continue to serve some large commercial accounts on behalf of key agents and brokers who sell our core property and casualty products. Sixty percent of new small-commercial business comes from distributors who also sell to large commercial accounts.

SAF also provides insurance for the following specialty commercial insurance programs:

• Lender-placed property

• Agents’ errors and omissions (predominantly for our agents)

• Mini-storage and warehouse properties

• Non-profit social service organizations

NET EARNED PREMIUMS

The increase in net earned premiums for SAF in 2003 and 2002 was due to the consolidation of our business insurance products in 2002. As each existing large commercial policy was renewed (reported in SBI Runoff) a decision was made by SAF to renew or not. If it was renewed, it became part of SAF; otherwise the policy remained in SBI Runoff. Net earned premiums increased in 2002 due to the acquisition of a lender-placed property business from ACE Limited in September 2001. This acquisition increased net earned premiums by $57.7 in 2002.

UNDERWRITING RESULTS AND COMBINED RATIO

Our combined ratio was 93.9% in 2003, compared with 93.5% in 2002 and 96.9% in 2001. The improvement in the combined ratios is a result of improved underwriting results in our large-commercial business.

DRIVING OUR RESULTS

The changes in our net earned premiums, underwriting results and combined ratios over the last two years mainly resulted from the consolidation of our business insurance products. As discussed above, this consolidation reflects the decisions we made as the large account policies came up for renewal. We renewed only those that we could underwrite profitably within our redesigned business model.

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We also took aggressive actions in 2001 to reunderwrite existing SAF business, applying stricter underwriting standards and increasing rates. These actions improved our underwriting results in 2003 and 2002.

WHERE WE’RE HEADED

Our goal is to provide a limited large-commercial resource for those distributors who are also writing auto, homeowners or small- to medium-sized commercial insurance with us.

SBI Runoff

YEAR ENDED DECEMBER 31	2003			2002			2001
Net Earned Premiums	$	(2.0	)	$	170.9		$	482.3
Underwriting Loss	$	(192.8	)	$	(107.5	)	$	(279.6	)

Our SBI Runoff segment consists of large commercial business accounts and specialty programs that we have exited.

Those accounts that do not fit with our focus on SBI Regular or that cannot be effectively served within SAF continue to be managed and reported in this segment.

NET EARNED PREMIUMS

Net earned premiums were minimal in 2003 as we completed the runoff and included return premiums on retrospectively rated policies. We determine ultimate premiums for retrospectively rated policies based on actual loss experience for the policy term. This sometimes results in a return of premium to the policyholder at the end of the policy term. Net earned premiums in 2002 decreased by 64.6% from 2001, due to actions taken to exit this unprofitable business and renew certain policies into SAF.

UNDERWRITING RESULTS AND COMBINED RATIO

The 2003 and 2001 underwriting losses include $144.9 and $90.0 of prior-year workers compensation reserve strengthening. More information about our workers compensation reserves is in the P&C Loss and LAE Reserves section on page 35.

We analyze our results in SBI Runoff using underwriting profit (loss). That’s due to the decreasing earned premiums associated with accounts in runoff which means combined ratio is less meaningful in assessing underwriting performance.

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Surety

YEAR ENDED DECEMBER 31	2003		2002		2001
Net Earned Premiums	$	153.6	$	126.3	$	95.6
Underwriting Profit	$	27.6	$	17.6	$	2.4

Our Surety segment provides surety bonds for construction and commercial businesses.

NET EARNED PREMIUMS

Our net earned premiums increased 21.6% in 2003 and 32.1% in 2002 as a result of average rate increases of 10% to 15% beginning in 2002 and new business. In 2003, the increased new business was primarily driven by the opening of new offices in Glendale, California and Syracuse, New York.

UNDERWRITING RESULTS AND COMBINED RATIO

Our combined ratios were 82.0% in 2003, 86.0% in 2002 and 97.5% in 2001. The improved combined ratio in 2003 reflects disciplined underwriting and rate increases combined with decreases in commission expense. Our 2001 underwriting results include a $59.5 loss before reinsurance related to the bankruptcy of Enron, ($18.0 net of reinsurance). On January 2, 2003, we entered into a settlement agreement to end litigation involving the Enron bankruptcy and related bond defaults.

DRIVING OUR RESULTS

The growth in our 2003 and 2002 premiums and underwriting profits resulted from:

• Disciplined underwriting resulting in lower loss ratios

• Rate increases

• New business production

WHERE WE’RE HEADED

We are benefiting from the disarray in the surety market because we are a stable, long-term provider of surety bonds. Some providers in the industry have experienced significant underwriting losses in recent years. While 2003 was favorable for us in terms of obtaining increased rates, we expect 2004 to bring more modest rate increases. We will maintain our disciplined underwriting approach as a priority while we grow this business.

P&C Other

YEAR ENDED DECEMBER 31	2003			2002			2001
Net Earned Premiums	$	29.9		$	26.4		$	24.2
Underwriting Loss	$	(27.4	)	$	(63.1	)	$	(118.8	)

Our P&C Other segment includes our:

• Runoff assumed reinsurance business acquired as part of the American States acquisition

• Non-voluntary personal lines business

• London operations that have been in runoff since the third quarter of 2002

Charges affecting our results included:

• $5.6 increase to reserves for our London operations in 2003 and $26.3 in 2002 in charges related to our decision to put the London operations into runoff

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• $85.0 to strengthen our reserves for construction defect and asbestos and environmental losses in 2001

• $30.0 in losses after reinsurance from the September 11, 2001 terrorist attacks

P&C Impact of Terrorism

The Terrorism Risk Insurance Act of 2002 (TRIA), enacted by the federal government on November 26, 2002, requires insurance companies to offer terrorism coverage to all commercial policyholders. That includes workers compensation and surety policyholders.

TRIA does not apply to life insurance or personal lines policyholders.

U.S. GOVERNMENT FUNDING

Under TRIA, the U.S. government will provide funding to the insurance industry if a terrorist attack on behalf of a foreign interest causes losses of $5 billion or more. The funding will be provided on an aggregate basis of 90% of covered losses in excess of individual insurance company deductibles of up to $100 billion. TRIA determines the deductibles for insurance companies as a percentage of their direct earned premiums. Our estimated deductible for 2004 is $153.1.

TERRORISM EXCLUSIONS

Prior to the enactment of TRIA, our policies excluded losses due to foreign terrorism in states that had approved the exclusions. With TRIA, we can no longer exclude losses due to foreign terrorism unless the policyholder rejects our mandatory offer of terrorism coverage. The Insurance Services Office (ISO) created coverage and pricing tools to help insurers respond to the TRIA requirements.

If the policyholder does reject our mandatory offer of terrorism coverage, we can then exclude coverage for losses due to foreign terrorism. The ISO has filed exclusions for acts of terrorism as defined by TRIA, and we have adopted those filings.

However, some states limit the use of terrorism exclusions.

NOTIFYING POLICYHOLDERS

TRIA required insurance companies to send notices to commercial policyholders by February 24, 2003. The notices had to include the offer of terrorism coverage and the cost for that coverage. We sent out the required notices by that date.

REINSURANCE OPTIONS

The availability of terrorism reinsurance is limited in the commercial market. Our current reinsurance program provides limited terrorism coverage. All reinsurance treaties exclude certified terrorist acts and also non-certified terrorist acts involving nuclear, chemical, biological or radioactive materials. The following treaties provide non-certified terrorism coverage – property catastrophe reinsurance covering 90% of $400.0 in excess of $100.0 layer, workers compensation reinsurance covering $15.0 in excess of $5.0 layer, and our commercial and personal umbrella reinsurance.

OUR EXPOSURE IS MODEST

We believe our exposure to potential terrorism losses is relatively modest across all our product lines.

With commercial insurance, our focus is on small- to medium-sized businesses – generally not viewed as likely potential terrorism targets.

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With workers compensation policies, the number of employees covered is a key consideration. We decline to provide coverage in cases where we believe the exposure is potentially severe.

With our personal lines of insurance, we believe that losses due to terrorism would likely be relatively modest. We believe that exposure and risk to individuals are small.

We estimated our pretax losses net of reinsurance resulting from the September 11, 2001 terrorist attacks at $51.7, of which $30.0 was reinsurance written through our London operation, $20.7 for our business insurance accounts and $1.0 for L&I.

P&C Loss and Loss Adjustment Expense Reserves

On pages 10 and 34 we described the Critical Accounting Estimates involved in determining these reserves. In this section, we provide the actual reserve estimates for the last three years and discuss changes in those estimates.

This table shows the changes in our P&C loss and LAE reserves for 2003, 2002 and 2001. We record changes in estimated reserves in our Consolidated Statements of Income (Loss) the same year we make the change.

DECEMBER 31	2003		2002		2001
Loss and LAE Reserves at Beginning of Year	$	4,998.5	$	5,053.7	$	4,612.7
Less Reinsurance Recoverables		411.6		415.9		343.6
Net Balance at Beginning of Year		4,586.9		4,637.8		4,269.1
Incurred Loss and LAE for Claims Occurring During
Current Year		3,202.3		3,237.4		3,619.1
Prior Years		249.9		125.8		345.1
Total Incurred Loss and LAE		3,452.2		3,363.2		3,964.2
Loss and LAE Payments for Claims Occurring During
Current Year		1,757.5		1,742.0		1,976.8
Prior Years		1,581.4		1,672.1		1,618.7
Total Loss and LAE Payments		3,338.9		3,414.1		3,595.5
Net Balance at End of Year		4,700.2		4,586.9		4,637.8
Plus Reinsurance Recoverables		344.4		411.6		415.9
Loss and LAE Reserves at End of Year	$	5,044.6	$	4,998.5	$	5,053.7

2003

In 2003, we increased our estimates for P&C prior years’ loss and LAE reserves by $249.9. The total increase includes:

• $205.0 during the third quarter as a result of higher medical cost trends for workers compensation than previously expected.

• $44.9 in a number of lines at various times during the year due to emerging claim trends and related loss data.

Payout periods for workers compensation claims can be 50 years or more. However, because we focus on low-hazard risks, our average payout period is generally shorter than the industry average.

Since 2001, changes in our business have included:

• Improving our claims handling practices, putting greater emphasis on early recognition of exposure potential in case reserves

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• Focusing on the settlement of long-term claims, increasing the number that we settle

• Focusing our writings on small- to medium-sized businesses

• Limiting our workers compensation writings in states where rate levels fall below our profitability targets

While we expect these business changes to reduce our ultimate losses, they have decreased the predictive value of our past data in estimating future loss reserves. With this in mind, in the second quarter of 2003, we began performing additional actuarial analysis primarily focused on medical inflation trends and changes in Safeco claim practices and mix of business. This produced divergent indications. As a consequence, in the third quarter of 2003, we took additional steps to evaluate medical inflation trends, reviewing:

• Safeco and industry data

• Our claim files

• Loss reserve trends by state

• Case reserving patterns and practices

Our analysis showed:

• Higher medical payouts than previously expected

• Longer payout periods than previously expected

• Relatively stable indemnity payouts

Based on our analysis, we increased our loss and LAE reserves for workers compensation losses occurring in prior years by $205.0 pretax during the third quarter of 2003. Of this increase, $180.0 was related to loss and allocated LAE reserves. This increase included $130.0 in SBI Runoff, $48.0 in SBI Regular and $2.0 in SBI Special Accounts Facility. The largest amount of reserve development relates to California, particularly the large account business that we began exiting in 2001. We also increased unallocated LAE reserves by $25.0 pretax. This increase included $14.9 in SBI Runoff, $9.6 in SBI Regular and $0.5 in SBI Special Accounts Facility. This increase reflects our estimate of the ongoing expense of servicing workers compensation claims. As claims remain open for longer periods of time, our costs to handle these claims rise.

2002

In 2002, we increased our estimates for P&C prior years’ loss and LAE reserves by $125.8. We made increases throughout the year as part of our quarterly evaluations, based on emerging claim trends and related loss data.

The increase of $125.8 included:

• $37.0 for construction defect claims

• $33.3 for workers compensation losses

• $24.4 for asbestos claims

• $31.1 for other loss reserves

The major factors driving our increases in loss reserves were:

• Construction defect claims – legal costs were higher than estimated. Efforts to mitigate the severity levels of construction defect losses led to higher legal costs.

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• Workers compensation losses – the rate of medical cost inflation was higher than anticipated.

• Asbestos claims – losses related to our participation in pools and syndicates were higher than estimated.

• Other reserves – primarily higher than anticipated losses for our London operations that were put in runoff. The losses are due to some high layer excess coverages and the long reporting lag of these operations.

2001

In 2001, we increased our estimates for prior years’ loss and LAE reserves by $345.1. We made that increase in two ways:

• $240.0 during the third quarter as a result of a review of our P&C loss reserve adequacy

• $105.1 at various times during the year due primarily to continued rising medical costs that affected our workers compensation losses

The review of our P&C loss reserve adequacy included an independent actuarial study. The $240.0 loss reserve increase by operating segment included:

• $65.0 for SBI Regular

• $90.0 for SBI Runoff

• $85.0 for P&C Other

The P&C Other segment includes the runoff assumed reinsurance business that we acquired when we purchased American States in 1997.

The $240.0 loss reserve increase by coverage included:

• $90.0 for construction defect claims

• $80.0 for workers compensation losses

• $70.0 for other coverages, primarily asbestos

The major factors driving our increases in loss reserves were:

• Construction defect claims – newly reported claims increased significantly during the first half of 2001. The increase was due primarily to increased litigation in California and more claim activity in other states. This occurred after claims appeared to have peaked in early 2000 and were trending down.

• Workers compensation losses – unexpected prior year loss development and increases in medical costs at levels higher than previously anticipated

• Asbestos claims – in 2001, the insurance industry was experiencing an expansion of asbestos claims to include smaller and more peripheral firms as defendants. In the first half of 2001, we experienced more claims than in prior years. This led us to expect a larger number of asbestos claims affecting our runoff assumed reinsurance operations.

Our L&I Operating Results

The primary measures of our L&I operating results include revenues and pretax operating earnings. The next two tables summarize revenues and pretax operating earnings by our reportable L&I segments for the last three years. More information about the results – also by reportable segment – follows the tables.

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First, revenues include premiums, net investment income and fees. Revenues do not include our net realized investment gains and losses:

	REVENUES
YEAR ENDED DECEMBER 31	2003		2002		2001
Group	$	552.9	$	477.4	$	336.2
Income Annuities		514.2		529.2		530.0
Retirement Services		388.2		379.5		367.1
Individual		383.5		379.7		367.8
Asset Management		26.9		29.9		35.9
L&I Other		214.3		189.2		180.3
Total L&I Revenues	$	2,080.0	$	1,984.9	$	1,817.3

Next, pretax operating earnings are our measure of each segment’s profitability:

	PRETAX OPERATING EARNINGS
YEAR ENDED DECEMBER 31	2003			2002			2001
Group	$	89.0		$	69.2		$	26.6
Income Annuities		25.3			41.5			47.8
Retirement Services		18.0			21.6			15.6
Individual		6.3			21.6			22.8
Asset Management		1.8			5.2			8.0
L&I Other		80.7			77.9			76.7
Pretax Operating Earnings		221.1			237.0			197.5
Net Realized Investment Losses		(25.5	)		(143.1	)		(22.5	)
Goodwill Write-off		—			—			(48.9	)
Income from Continuing Operations before Income Taxes and Change in Accounting Principle	$	195.6		$	93.9		$	126.1

Group

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	552.9	$	477.4	$	336.2
Pretax Operating Earnings	$	89.0	$	69.2	$	26.6

Group’s principal product is stop-loss medical insurance sold to employers with self-insured medical plans.

REVENUES

Our revenue increases in 2003 and 2002 were primarily due to our acquisition of Swiss Re’s stop-loss medical business in July 2002 and overall rate increases we implemented over the last two years.

PRETAX OPERATING EARNINGS

The increases in our pretax operating earnings were primarily due to growth in revenues and earnings that resulted from the acquisition of Swiss Re’s stop-loss medical business and improved loss ratios.

Our loss ratio improved to 57% in 2003, compared with 60% in 2002 and 64% in 2001. Our rate increases were the primary drivers of the improved trend in our loss ratios. A $10.5 benefit from favorable loss reserve development related to policies obtained in the Swiss Re acquisition also contributed to our improved loss ratio in 2003.

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DRIVING OUR RESULTS

We continue to price for profitability and to grow our revenues only when we can do so profitably. Our loss experience has been unusually favorable in 2003 and 2002 due to both rate increases and lower claim experience. The acquisition of Swiss Re’s stop-loss medical business contributed to both revenue and earnings growth in 2003 and 2002.

Income Annuities

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	514.2	$	529.2	$	530.0
Pretax Operating Earnings	$	25.3	$	41.5	$	47.8

Income Annuities’ main product is structured settlement annuities, sold to fund third-party personal injury settlements and long-term claim settlements of our P&C affiliates. This product is extremely sensitive to financial strength ratings and our ratings downgrades in 2001 decreased our ability to sell this product. Income Annuities also sells non-structured fixed annuities, which provide an immediate payment stream.

REVENUES

The decrease in 2003 revenues resulted mainly from the impact of lower favorable prepayment adjustments on our mortgage-backed securities investment portfolio. These prepayment adjustments totaled $5.4 in 2003 compared with $13.9 in 2002. Favorable prepayment adjustments on these securities occur when interest rates decline and the underlying mortgage prepayments happen sooner than we estimated. These prepayments, however, could also be unfavorable in the future if actual prepayments occur at a slower rate than anticipated.

Despite ratings downgrades in 2001, revenues remained flat in 2002 as a result of growth in our sales of non-structured annuity products and the income from prepayment adjustments.

PRETAX OPERATING EARNINGS

The decreases in pretax operating earnings in 2003 resulted from:

• Lower prepayment adjustments on our mortgage-backed securities discussed above

• Lower market interest rates on our new and reinvested assets

DRIVING OUR RESULTS

High financial strength ratings are critical to our ability to market structured settlement annuities. Accordingly, our ratings downgrades in 2001 significantly limited our ability to sell them. The majority of annuities are long term, 25 years or longer, and are priced based upon investment return projections at the time of sale. While we invest in longer-term fixed maturities to match the duration of the annuities, when these investments are prepaid or are called the proceeds are generally reinvested at the then prevailing rate.

Retirement Services

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	388.2	$	379.5	$	367.1
Pretax Operating Earnings	$	18.0	$	21.6	$	15.6

Retirement Services’ principal products are fixed deferred annuities and variable annuities.

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REVENUES

We earn revenues relative to the amount of assets under management and the rate of return on these investments during the year. The increase in revenues in 2003 was primarily due to higher investment income on our general account liabilities. Higher fee income on separate account liabilities, due to the improved performance of the equity markets in 2003, also contributed to our increase in revenues. These increases were partially offset by the impact of lower average interest rates on new and reinvested assets.

General account liabilities are amounts we owe to contract holders for products where we bear the investment risk, and include fixed deferred annuities and guaranteed investment contracts.

Our general account liabilities have grown significantly. They were:

• $6,667.8 at year-end 2003

• $5,978.1 at year-end 2002

• $5,191.3 at year-end 2001

That growth resulted principally from the launch of Safeco Secure fixed deferred annuity in 2002 and Safeco Select fixed deferred annuity in 2001.

Separate account liabilities are amounts we owe to contract holders for products where the contract holder bears the investment risk and has the right to allocate funds among various sub-accounts. They principally include variable annuities for which we hold matching separate account assets. Our separate account liabilities have fluctuated in a manner consistent with equity markets increases in 2003 and declines in 2002. They were:

• $1,032.3 at year-end 2003

• $811.6 at year-end 2002

• $1,096.9 at year-end 2001

PRETAX OPERATING EARNINGS

Our pretax operating earnings declined slightly in 2003 despite our increased assets under management, due principally to an increase in certain operating expenses.

Our pretax operating earnings increased in 2002 compared with 2001 due to growth in general account assets under management and lower losses from our Equity Indexed Annuity product.

DRIVING OUR RESULTS

The profitability of our fixed and variable annuities depends on pricing our products at a margin over the cost of providing benefits and the expense of acquiring customers. Specifically:

• Fixed annuity profits depend on our returns on invested assets, net of the amounts we credit to policyholders’ accounts.

• Variable annuity profits depend on the amount of our assets under management and changes in their fair value, which affect the amount of fees we receive.

Profitability for these products also depends on our persistency experience (how long this business stays with us). This affects our ability to recover the costs of acquiring new business over the lives of the contracts. Accordingly, if a contract owner withdraws funds during the early years of the contract – usually during the first seven or eight years – we keep a certain percentage of the withdrawal as a surrender charge, to recoup our acquisition costs. Some contracts allow us to pay the requested withdrawal out over five years.

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In 2003, we refiled fixed annuity products with our regulators in all 50 states and obtained approval to lower our crediting rates in response to a decline in investment yields in all but three states. At various times, we suspended sales of our products pending approval of these changes.

Individual

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	383.5	$	379.7	$	367.8
Pretax Operating Earnings	$	6.3	$	21.6	$	22.8

Individual’s products include term, universal and variable universal life and bank-owned life insurance (BOLI). Our ratings downgrades in 2001 have significantly curtailed BOLI sales.

REVENUES

The increases in revenues in 2003 and 2002 were due to our new web-based sales tool and our updated term and universal life insurance products.

PRETAX OPERATING EARNINGS

The decrease in pretax operating earnings in 2003 was primarily due to higher claims resulting from unfavorable mortality experience and lower margins on our BOLI products.

2002 pretax operating earnings were down slightly compared with 2001 due primarily to less favorable mortality experience and decreased BOLI deposits. There were no new BOLI deposits in 2003, down from $50.0 in 2002 and $120.0 in 2001.

DRIVING OUR RESULTS

We price our products based on mortality risk assumptions. When our mortality experience differs from those assumptions, the claims experience affects our profitability. For our BOLI products, financial strength ratings impact our ability to sell the product. Also, we can only change the interest credited on the policy anniversary date and are therefore susceptible to market fluctuations, which impact the margins on our BOLI products.

Asset Management

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	26.9	$	29.9	$	35.9
Pretax Operating Earnings	$	1.8	$	5.2	$	8.0

Asset Management serves as an investment advisor for Safeco Mutual Funds, variable insurance portfolios and institutional and trust accounts.

REVENUES

The decreases in revenues in both 2003 and 2002 were due to lower investment advisory fee revenue on lower average assets under management during both years.

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Our average assets under management were:

• $3,940.0 in 2003

• $4,402.0 in 2002

• $5,141.0 in 2001

Average assets under management have declined over the past two years reflecting the overall decline in equity markets until the second half of 2003.

PRETAX OPERATING EARNINGS

The decreases in our pretax operating earnings for both 2003 and 2002 mainly reflect the lower investment advisory fees from our assets under management as discussed above.

DRIVING OUR RESULTS

Results are highly dependent on the overall performance of equity markets.

L&I Other

YEAR ENDED DECEMBER 31	2003		2002		2001
Revenues	$	214.3	$	189.2	$	180.3
Pretax Operating Earnings	$	80.7	$	77.9	$	76.7

L&I Other is composed mainly of investment income on capital and accumulated earnings of other L&I segments and Talbot Financial Services (Talbot) - our insurance agency that distributes property and casualty, life insurance and investment products.

REVENUES

The increases in revenues for 2003 and 2002 were due to increases in net investment income, reflecting higher retained capital and increases in commission revenues at Talbot.

PRETAX OPERATING EARNINGS

Earnings were higher in 2003 due to income on the retained capital of the other L&I segments and $100.0 contributed to L&I in December 2002 from the proceeds of our common stock offering. Earnings in 2003 were reduced by $9.2 for expenses associated with the planned sale of the L&I operations.

Earnings increased in 2002 compared with 2001 due to an increase in retained capital from other L&I segments.

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Our Corporate Results

YEAR ENDED DECEMBER 31	2003			2002			2001
Total Corporate Results	$	(116.9	)	$	(124.7	)	$	(123.7	)
Net Realized Investment Losses before Taxes		(117.2	)		(61.6	)		(23.3	)
Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle	$	(234.1	)	$	(186.3	)	$	(147.0	)

In our Corporate segment, we include:

• Interest expense on our debt

• Safeco Financial Products, Inc. (SFP)

• Our intercompany eliminations

• Other corporate activities

Our Corporate segment’s primary expense is interest we pay on our debt. Our interest expense on borrowings totaled:

• $127.1 in 2003

• $132.0 in 2002

• $136.9 in 2001

The decreases in interest expense reflected our refinancing of debt in 2003 and 2002 at lower rates.

Because of our strategic decision to focus on P&C products, we wound down SFP’s operations as of December 31, 2003. We set up SFP in 2000 mainly to write S&P 500 index options that reduce the risk associated with our Equity Indexed Annuity product. Other SFP activities – done for its own account – included selling single-name credit default swaps, writing and hedging S&P 500 index options and investing in and hedging convertible bonds.

SFP’s net investment income included fee income on our credit default swaps and earnings from our S&P 500 index options and convertible bonds.

SFP’s investment and derivative portfolio, including credit default swaps, was completely liquidated at December 31, 2003. SFP had credit default swaps with a notional amount outstanding of $835.0 at December 31, 2002.

SFP pretax income (loss) included in the Corporate results was $(0.5) in 2003, $3.6 in 2002 and $6.7 in 2001.

Our Investment Results

Investment returns are an important part of our overall profitability. Fluctuations in the fixed income or equity markets could affect the timing and the amount of our net investment income. Defaults by third parties in the payment or performance of their obligations – primarily on our investments in corporate bonds – could reduce our investment income or create realized investment losses.

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NET INVESTMENT INCOME

This table summarizes our pretax net investment income by portfolio:

YEAR ENDED DECEMBER 31	2003		2002		2001
P&C	$	453.0	$	460.0	$	457.7
L&I		1,211.9		1,206.6		1,180.3
Corporate		15.4		7.8		13.4
Total Net Investment Income	$	1,680.3	$	1,674.4	$	1,651.4

Note: Certain reclassifications have been made to the prior year amounts to conform to current year presentation.

PRETAX INVESTMENT INCOME YIELDS

This table summarizes our pretax investment yields for the last three years:

YEAR ENDED DECEMBER 31	2003		2002		2001
P&C	5.4	%	5.9	%	6.3	%
L&I	6.7	%	7.4	%	7.5	%

The declines in our pretax investment yields in our portfolios reflected the low interest rate environment in 2003 and 2002.

P&C PORTFOLIO REPOSITIONING

During 2002, we repositioned our P&C investment portfolio to better match expected asset and liability durations and to reduce risk and volatility. In doing this, we reduced the average duration of the bonds we hold, primarily by shifting from long-term tax exempt bonds to shorter-term taxable bonds. In addition, we shifted our asset allocation mix to reduce the amount of equity securities we hold.

At year-end 2003, our P&C fixed maturities portfolio’s duration was 4.5, down from 5.3 at year-end 2002 and 7.1 at year-end 2001. Equity securities were approximately 12% of our investment portfolio at year-end 2003 and 11% at year-end 2002, down from 18% at year-end 2001. Our goal is to keep equity securities at or near 10% of our total P&C investment portfolio.

Our after-tax yields for our P&C portfolio have decreased due to our shift to shorter-term taxable bonds and declining interest rates. The yields were:

• 3.7% in 2003

• 4.0% in 2002

• 4.3% in 2001

NET REALIZED INVESTMENT GAINS AND LOSSES

Pretax net realized investment gains and losses for 2003, 2002 and 2001 by portfolio were:

YEAR ENDED DECEMBER 31	2003			2002			2001
P&C	$	40.8		$	287.2		$	138.8
L&I		(25.5	)		(143.1	)		(22.5	)
Corporate		(117.2	)		(61.6	)		(23.3	)
Total Pretax Net Realized Investment Gains (Losses)	$	(101.9	)	$	82.5		$	93.0

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Pretax net realized investment gains and losses by component for the last three years were:

YEAR ENDED DECEMBER 31	2003			2002			2001
Net Gains on Securities Transactions	$	150.3		$	351.2		$	225.1
Impairments on Fixed Maturities		(128.1	)		(220.1	)		(98.4	)
Impairments on Equity Securities		(17.7	)		(38.4	)		(28.4	)
Impairments related to intent to sell L&I		(146.5	)		—			—
SFP Credit Default Swaps Mark-to-Market		24.4			(28.3	)		(7.8	)
Other, Net		15.7			18.1			2.5
Total Pretax Net Realized Investment Gains (Losses)	$	(101.9	)	$	82.5		$	93.0

NET GAINS ON SECURITIES TRANSACTIONS

Net gains on securities transactions in 2003 resulted primarily from calls as well as fixed maturity sales initiated to manage our call risk and improve the yield of the underlying portfolio. These calls – issuers redeeming bonds in which we’ve invested before the final maturity date – are an expected part of our investment activity, particularly when interest rates are low.

Net gains on securities transactions in 2002 resulted primarily from the repositioning of our portfolio.

IMPAIRMENTS

We closely monitor every investment that has declined in fair value to below our cost. If we determine that the decline is other-than-temporary, we write down the security to its fair value and record the charge as an impairment in Net Realized Investment Gains (Losses) in the Consolidated Statements of Income (Loss) in the period that we make this determination. More information about our process of estimating investment impairments can be found in the Critical Accounting Estimates section on page 43.

We continually monitor our investment portfolio and markets for opportunities to:

• Improve credit quality

• Reduce our exposure to companies and industries with credit problems

• Manage call risk

In our impairment determination process, we consider our intent and ability to hold investments long enough for them to recover in value. However, our intent to hold the investment can change due to:

• Financial market fluctuations

• Changes in the financial condition and near-term prospects of the issuer

• Strategic decisions to reposition our investment portfolio’s duration or asset allocation

• Strategic decisions to sell businesses

Pretax investment impairments for 2003, 2002 and 2001 by portfolio were:

YEAR ENDED DECEMBER 31	2003		2002		2001
P&C	$	46.9	$	49.8	$	36.2
L&I		98.0		194.1		66.5
Corporate		147.4		14.6		24.1
Total Pretax Investment Impairments	$	292.3	$	258.5	$	126.8

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The increase in impairments in 2003 and 2002 primarily resulted from:

• Credit problems of some of the companies in which we’ve invested

• Credit deterioration in the airline and air transportation sectors

• Our decision to sell our L&I businesses

Our Corporate segment recorded $119.6 in the third quarter of 2003 and $26.9 in the fourth quarter of 2003 in impairment charges for securities held by L&I which are not expected to recover in value before the sale of our L&I businesses. These impairments were not recorded in L&I since the ability and intent to hold securities at the L&I operating level has not changed as a result of our intent to sell the L&I businesses. Additional impairments are possible in 2004, depending on the fair value of these investments.

In 2003, the fair value of fixed maturities and equity securities that we sold at a loss was $348.5. Our total net realized investment loss on these sales was $44.6. In 2002, the fair value of fixed maturities and equity securities that we sold at a loss was $707.9. Our total net realized investment loss on these sales was $246.3. We sold investments in 2002 and 2003 for the reasons discussed above.

SFP CREDIT DEFAULT SWAPS MARK-TO-MARKET

As discussed earlier on page 67, we have wound down our SFP operations and have liquidated its derivative portfolio at December 31, 2003. The derivative portfolio consisted mainly of credit default swaps which had notional amounts outstanding of $835.0 at December 31, 2002.

SFP’s total net realized investment gains (losses), which consisted of credit default swaps that were marked-to-market and payments made for coverage of certain credit events were:

• $24.3 gain in 2003 – including a $3.4 gain related to liquidating the credit default swap portfolio

• $28.3 loss in 2002 – including an $8.6 loss resulting from the WorldCom bankruptcy

• $18.2 loss in 2001 – including a $7.8 loss resulting from the Enron bankruptcy

Credit swap mark-to-market gains in 2003 resulted from the tightening of credit spreads. The losses in 2002 resulted from credit spreads widening.

OTHER ITEMS

Our other items for 2003 included $15.2 in gains related to fair value hedges, representing hedges on forecasted transactions that are no longer considered probable of occurring.

Also included in other items in 2002 was a reclassification from accumulated other comprehensive income to net realized investment loss of $18.7 related to cash flow hedges that were discontinued in connection with the retirement of the underlying commercial paper borrowings.

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Investment Portfolio

This table summarizes our investment portfolio at December 31, 2003:

DECEMBER 31, 2003	COST OR AMORTIZED COST		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	5,534.3	$	5,828.2
Fixed Maturities – Non-taxable		2,007.5		2,156.5
Equity Securities		650.5		1,115.5
L&I
Fixed Maturities – Taxable		16,706.2		18,039.6
Fixed Maturities –Non-taxable		7.6		7.7
Equity Securities		96.9		112.8
CORPORATE
Fixed Maturities – Taxable		34.6		174.5
Equity Securities		34.3		50.7
Total Fixed Maturities and Equity Securities		25,071.9		27,485.5
Mortgage Loans		936.1		936.1
Other Invested Assets		115.9		115.9
Short-Term Investments		269.9		269.9
Total Investment Portfolio	$	26,393.8	$	28,807.4

Our fixed maturities, carried at $26,206.5, included:

• Gross unrealized gains of $2,034.4

• Gross unrealized losses of $118.1

Our equity securities, carried at $1,279.0, included:

• Gross unrealized gains of $504.6

• Gross unrealized losses of $7.3

Unrealized gains and losses are recorded as realized when the securities are sold or impairments are recognized.

Seventeen percent of our total gross unrealized loss at year-end 2003 came from our investments the Diversified Financial Services sector.

We reviewed all our investments with unrealized losses at the end of 2003. Our evaluation determined that all other declines in fair value were temporary. We have impaired all securities held by L&I with unrealized losses at December 31, 2003 because we do not expect them to recover in value before the sale of our L&I businesses.

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This table shows by maturity the total amount of gross unrealized losses on fixed maturities and equity securities at December 31, 2003:

DECEMBER 31, 2003	COST OR AMORTIZED COST		FAIR VALUE		COST IN EXCESS OF FAIR VALUE
Fixed Maturities:
1 Year or Less	$	19.7	$	19.6	$	0.1
Over 1 Year Through 5 Years		696.4		685.9		10.5
Over 5 Years Through 10 Years		733.0		719.0		14.0
Over 10 Years		1,009.9		957.0		52.9
Mortgage-Backed Securities		1,485.4		1,444.8		40.6
Total Fixed Maturities		3,944.4		3,826.3		118.1
Total Equity Securities		74.6		67.3		7.3
Total	$	4,019.0	$	3,893.6	$	125.4

Unrealized losses on our investments that have been in a loss position for more than a year at December 31, 2003 were:

• $0.6 on equity securities, down from $20.4 at December 31, 2002

• $16.4 on fixed maturities, down from $207.5 at December 31, 2002

These unrealized losses were less than 1% of our total portfolio value.

We continue to monitor these securities as part of our overall portfolio evaluation. If we determine an unrealized loss to be other-than-temporary, we record an impairment loss. We record impairment losses in the same period that we make the determination.

DIVERSIFICATION

Our investment portfolio is well diversified by issuer and industry type with no single issuer exceeding 1% of our consolidated investment portfolio.

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Here is a summary of our investments showing investment types and industries of our fixed maturities and equity securities that exceed 3% of our portfolio at year-end 2003:

	Carrying Value		Percent of Total
State and Political Subdivisions	$	3,026.5	10	%
U.S Government and Agencies		2,082.9	7
Electric Utilities		2,061.9	7
Banks		1,077.3	4
Diversified Financial Services		880.5	3
Mortgage-Backed Securities		5,482.1	19
Other		12,874.3	45
Total Fixed Maturities and Equity Securities		27,485.5	95
Mortgage Loans		936.1	3
Other Invested Assets		115.9	1
Short-Term Investments		269.9	1
Total Investment Portfolio	$	28,807.4	100	%

INVESTMENT PORTFOLIO QUALITY

The quality ratings of our P&C fixed maturities portfolio were:

RATING	PERCENT AT DECEMBER 31, 2003
AAA	41	%
AA	11
A	24
BBB	20
BB or lower	3
Not Rated	1
Total	100	%

The quality ratings of our L&I fixed maturities portfolio were:

RATING	PERCENT AT DECEMBER 31, 2003
AAA	32	%
AA	4
A	24
BBB	32
BB or lower	6
Not Rated	2
Total	100	%

Below Investment Grade and Other Securities - A security is considered below investment grade if it has a rating below BBB. Our consolidated investment portfolio includes below investment grade securities with a fair value of:

• $1,300.1 at year-end 2003

• $1,099.4 at year-end 2002

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At December 31, 2003, these securities represented 5.0% of our total fixed maturities at fair value. At December 31, 2002, these securities represented 4.5% of our total fixed maturities at fair value.

The related amortized cost of the below investment grade securities at year-end 2003 was $1,172.3 and $1,218.5 at year-end 2002.

Our below investment grade securities had a net unrealized investment gain of $127.8 at year-end 2003. That gain comprised:

• Gross unrealized investment gains of $146.8

• Gross unrealized investment losses of $19.0

Our below investment grade securities had a net unrealized investment loss of $119.1 at year-end 2002. The loss comprised:

• Gross unrealized investment gains of $31.5

• Gross unrealized investment losses of $150.6

At year-end 2003, our investment portfolio also included:

• $315.2 of non-publicly traded fixed maturities and equity securities – representing 1.1% of our total portfolio

• $517.0 of not-rated securities – securities not rated by a national rating service – representing 1.8% of our total portfolio

At year-end 2002, our investment portfolio also included:

• $335.9 of non-publicly traded fixed maturities and equity securities – representing 1.3% of our total portfolio

• $465.2 of not-rated securities – representing 1.7% of our total portfolio

OUR MORTGAGE LOAN PORTFOLIO

We held $936.1 of mortgage loans at December 31, 2003. That represents 3% of our investment portfolio. Substantially all of the mortgage loans are held by our L&I business as of December 31, 2003.

Our mortgage loans are on completed, income-producing commercial real estate, primarily in the retail, industrial and office building sectors.

The majority of the properties on which we hold mortgages are in three states:

• 29% in Washington

• 24% in California

• 11% in Oregon

We hold mortgages in no other state that represents greater than 10% of the mortgage loan balance.

Our mortgage loans follow these guidelines:

• No loan when issued shall exceed 75% of the property’s appraised value

• Individual loans generally do not exceed $10.0

• First mortgage liens secure the loans

Our mortgage portfolio has historically performed well, with a low loan charge-off rate. Our loan charge-off rate was less than 1% in 2003, 2002 and 2001.

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Less than 1% of our mortgage loans were non-performing – those loans in default of principal or interest or both – at the end of each of the last two years. As a result, our allowance for mortgage loan losses has remained relatively unchanged at $10.2 at December 31, 2003, compared with $10.5 at December 31, 2002.

MORTGAGE-BACKED SECURITIES

Our mortgage-backed securities consist mainly of residential collateralized mortgage obligations (CMOs), pass-throughs and commercial mortgage-backed securities (CMBSs).

This table summarizes our consolidated holdings of mortgage-backed securities at year-end 2003:

DECEMBER 31, 2003	AMORTIZED COST		CARRYING VALUE		PERCENT
RESIDENTIAL
Planned and Targeted Amortization Class and Sequential Pay CMOs	$	2,480.5	$	2,548.7	47	%
Accrual Coupon (Z-Tranche) CMOs		432.5		470.7	9
Floating Rate CMOs		116.2		120.0	2
Companion/Support, Principal Only, Interest Only CMOs		9.4		9.8	—
Subordinates		19.6		19.8	—
Residential Mortgage-Backed Pass-Throughs (Non-CMOs)		396.4		405.5	7
Total Residential		3,454.6		3,574.5	65
SECURITIZED COMMERCIAL REAL ESTATE
Government /Agency-Backed		468.3		493.1	9
CMOs and Pass-Throughs (Non-agency)		1,030.5		1,107.3	20
Total Securitized Commercial Real Estate		1,498.8		1,600.4	29
Other CMOs		296.8		307.2	6
Total	$	5,250.2	$	5,482.1	100	%

Our L&I portfolio holds 79% of our mortgage-backed securities. Our P&C investment portfolio holds the remaining 21%.

Quality of Our Mortgage-Backed Securities – At year-end 2003, 93% of our mortgage-backed securities were either government/agency-backed or AAA rated. We’ve limited our investment in riskier, more volatile CMOs and CMBSs to $29.6. That amount represents 0.5% of our total mortgage-backed securities.

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Here are the quality ratings of our mortgage-backed securities portfolio at year-end 2003:

RATING	PERCENT AT DECEMBER 31, 2003
Government/Agency Backed	66	%
AAA	27
AA	4
A	2
BBB	1
BB or lower	—
Total	100	%

Capital Resources and Liquidity

OUR LIQUIDITY NEEDS

Our liquidity needs vary according to our principal products. P&C liabilities are somewhat unpredictable and generally short in duration. The payments we make to policyholders depend upon losses they suffer from accidents or other unpredictable events. While we can estimate fairly well how much cash we’ll need and when we’ll need it, we cannot predict all future events, particularly catastrophes. So we use investments with greater liquidity – investments that can quickly be turned into cash – to support our P&C businesses’ need for funds. Life insurance, retirement services and other annuity-product reserves are primarily longer-duration liabilities that are typically predictable in nature and are matched with investments that are generally longer duration and less liquid.

SOURCES OF OUR FUNDS

We get cash from insurance premiums, funds received under deposit contracts, dividends, interest and asset management fees, sales or maturity of investments and debt and equity offerings.

We have not engaged in the sale of investments or other assets by securitization.

The cash flow from our operating activities for the past three years was:

• $1,565.2 in 2003

• $916.4 in 2002

• $528.8 in 2001

The main reason for the increase in 2003 operating cash flows was improved underwriting results in Personal Auto, Homeowners and SBI Regular. The main reasons for the improved operating cash flow in 2002 compared with 2001 were lower P&C claims payments, resulting from lower catastrophe and weather losses, as well as the effect of our reunderwriting efforts and rate increases that began in 2001.

The higher level of proceeds from the sale of fixed maturities and equity securities, and the higher level of purchases of fixed maturities in 2002 compared with 2001, arose from our portfolio repositioning discussed above. In addition, the relatively high level of proceeds from the maturity of fixed maturities in all three years reflects the high number of calls of fixed maturities and prepayments of mortgage-backed securities. These calls and prepayments were triggered by the low interest rate environment during the past three years and issuer-driven actions.

We believe that cash flow from our operations, investment portfolio and bank credit facility are sufficient to meet our future liquidity needs.

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HOW WE USE OUR FUNDS

We use funds to support operations, make interest and principal payments on debt, pay dividends to our shareholders and grow our investment portfolio.

We use cash from insurance operations primarily to pay claims and claim adjustment expenses. We require insurance premiums to be paid in advance. As a result, cash flows into our business before or at the time premium revenues are recognized. Cash flows out of our business in subsequent months or years as claims are paid.

OUR CAPITAL STRUCTURE

$500.0 Long-Term Debt Refinancing – On January 27, 2003, we issued $500.0 of senior notes, including:

• $200.0 of senior notes at an interest rate of 4.200% that mature in 2008

• $300.0 of senior notes at an interest rate of 4.875% that mature in 2010

We used the proceeds as follows:

• $300.0 to pay off notes that had a 7.875% interest rate and were due March 15, 2003

• $200.0 to pay off notes that had a 7.875% interest rate and were due in 2005, but had a call date at par of April 1, 2003

$328.7 Common Stock Offering – On November 20, 2002, we raised $328.7 by selling 10,465,000 shares of our common stock at $33.00 per share.

We used the proceeds as follows:

• $150.0 to support our P&C operations

• $100.0 to support our L&I operations

• The balance for general corporate purposes

In our business operations, the proceeds were used to support future growth in our core product lines and to strengthen the capital base of these operations.

$375.0 Long-Term Debt Issuance – On August 23, 2002, we issued $375.0 of senior notes at an interest rate of 7.250%. The notes mature in 2012.

We used the proceeds as follows:

• $299.0 to pay off our commercial paper borrowings

• $18.7 to terminate related interest rate swaps

• $28.4 to repay our medium-term notes

• The balance for general corporate purposes

At the same time, we entered into a $375.0 notional interest rate swap. This converted our 7.250% fixed rate into a LIBOR-based floating rate obligation. We marked-to-market the fair value of the interest rate swap and we included the fair value of the interest rate swap on the Other Invested Assets line of our Consolidated Balance Sheets.

Our Bank Credit Facility – We maintain a bank credit facility with $500.0 available. The terms of the bank credit facility – which runs through September 2005 – require us to:

• Pay a fee to have these funds available

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• Maintain a specified minimum level of shareholders’ equity

• Keep our debt-to-capitalization ratio below a specified maximum

The bank credit facility does not require us to maintain any deposits as compensating balances. At the end of 2003 and throughout 2003, we had no borrowings under the bank credit facility and we were in compliance with all its covenants.

After the sale of L&I, we may lower the bank credit facility and we would seek a reset of the requirement to maintain minimum shareholders’ equity. We would continue to keep our debt-to-capitalization ratio below the maximum requirement using proceeds from the sale of L&I to reduce debt to a level consistent with our ratios prior to the sale.

OUR CONTRACTUAL OBLIGATIONS

Our contractual obligations at the end of 2003 were:

	Payment by
CONTRACTUAL OBLIGATIONS	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Long-Term Debt Including Interest	$	4,729.8	$	139.5	$	273.8	$	648.1	$	3,668.4
Operating Leases		325.4		52.0		92.5		77.9		103.0
Pension Obligations		341.5		21.1		29.4		29.7		261.3
Purchase Obligations		162.1		44.9		56.3		11.8		49.1
Total Contractual Obligations	$	5,558.8	$	257.5	$	452.0	$	767.5	$	4,081.8

More information about our contractual obligations is in Notes 8 and 12 to our Consolidated Financial Statements on pages 125 and 133.

We excluded Loss and LAE Reserves and Funds Held Under Deposit Contracts from the above table. The Loss and LAE Reserves amounted to $5,044.6 and the Funds Held Under Deposit Contracts amounted to $16,575.4 on our Consolidated Balance Sheet at December 31, 2003. The timing of actual claims and benefit payments related to these reserves varies based on catastrophes, mortality and morbidity rates, surrender and lapse rates, as well as market conditions. The ultimate amount of claims and benefit payments could also differ from our estimated reserves.

OFF-BALANCE SHEET ARRANGEMENTS

Our off-balance sheet arrangements are as follows:

In April 2003, Safeco Corporation issued a letter of credit to Citibank on behalf of Safeco UK, Ltd. (Safeco UK), our wholly owned subsidiary. Safeco UK conducted our London operations that were put into runoff in the third quarter of 2002. The letter of credit guarantees payment of Safeco UK’s share of potential losses up to $19.6 arising from prior participation in a London reinsurance syndicate. Prior to April 2003, this guarantee was provided by Safeco Insurance Company of America (SICA), a wholly owned subsidiary of Safeco Corporation.

In June 2000, Safeco Life Insurance Company (Safeco Life), our wholly owned subsidiary, issued a guarantee to General America Corporation (GAC), our wholly owned subsidiary. Under the guarantee, Safeco Life guarantees repayment of a loan made by GAC to Investar Holdings, an insurance agency. The loan was made in June 2000 and matures in June 2017. The principal balance of $15.9 is included with Other Notes and Accounts Receivable on the Consolidated Balance Sheets.

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In 1993, SICA issued a guarantee to the Bank of New York on behalf of Market Square Real Estate, Inc. (Market Square) a limited liability company in which SICA was an investor. The guarantee covers the repayment of $10.0 of municipal bonds issued by the City of Minneapolis. The proceeds from the 1993 bond issuance were then loaned to Market Square. In 1997, SICA sold its interest in Market Square but remained a guarantor for the repayment of the bonds. As a condition to the sale, Market Square granted SICA a first mortgage on its assets, as security, for any payments SICA may make pursuant to the guarantee. The repayment of the loan made to Market Square by the City of Minneapolis will fund the scheduled repayment of the bonds in 2006. SICA has not made any payments pursuant to the guarantee.

FINANCIAL STRENGTH RATINGS

Financial strength ratings provide a benchmark for comparing insurers. Higher ratings generally indicate greater financial strength and a stronger ability to pay claims. Claims paying ratings are important for the marketing of insurance products, particularly structured settlement annuities and BOLI products in our L&I operations.

Here are our current ratings:

	A.M. BEST	FITCH	MOODY’S	STANDARD & POOR’S
Safeco Corporation:
Senior Debt	bbb+	A-	Baa1	BBB+
Financial Strength:
P&C Subsidiaries	A	AA-	A1	A+
Life Subsidiaries	A	AA-	A2	A-

We believe our financial position is sound. As we have continued to execute our plans to improve P&C operating results, our financial position has strengthened. Our debt service coverage has improved over the last two years, and we expect that to continue.

Factors That Determine Financial Strength Ratings – In determining financial strength ratings, the rating agencies focus on:

• Results of operations

• Capital resources

• Debt-to-capital ratio

• Management expertise

• Marketing

• Investment operations

• Minimum policyholders’ surplus requirements

• Capital sufficiency to meet projected growth

• Access to capital

Impact of Financial Strength Ratings – Lower financial strength ratings could materially and adversely affect our company and its performance and could:

• Increase the number of customers who terminate their policies

• Inhibit our distributors’ willingness and ability to sell our products, particularly L&I products

• Decrease new sales

• Increase our borrowing costs

• Limit our access to capital

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• Restrict our ability to compete

Due to our poor P&C results in 2000 and 2001, our financial strength and corporate credit ratings were lowered in the first half of 2001. The lower results in 2000 and 2001, combined with increased operating leverage in P&C, contributed to lowering our debt service coverage. In addition, the interest rate on our short-term borrowings increased due to the ratings downgrades.

On August 13, 2002, Standard & Poor’s (S&P) affirmed its ratings on Safeco Corporation and our P&C subsidiaries. At the same time, S&P lowered its ratings on our life insurance subsidiaries because of a change in S&P group methodology criteria, which modified the rating available to subsidiaries. The new criteria generally limit the rating given to a subsidiary that S&P deems “strategically important” to the parent to within one notch of the rating on the parent’s core group. On December 4, 2002, A.M. Best reaffirmed our ratings and revised its outlook for our Corporate and P&C ratings from negative to stable.

OUR L&I BUSINESSES

On September 29, 2003, we announced our intent to sell our L&I businesses. Until a buyer is announced, the rating agencies cannot fully evaluate the effect – if any – on the factors they will consider in determining financial strength ratings.

As a result, the rating agencies took these actions concerning our L&I businesses:

• A.M. Best and Fitch placed the financial strength ratings of our life insurance subsidiaries under review with developing implications.

• Moody’s downgraded the financial strength rating of Safeco Life Insurance Company with direction uncertain.

• S&P’s lowered its ratings on our life insurance subsidiaries with developing implications.

A.M. Best and Fitch commented that our debt ratings, as well as the financial strength ratings of our P&C subsidiaries, are unaffected. S&P’s and Moody’s affirmed their ratings of Safeco Corporation and our P&C subsidiaries, with a stable outlook.

REGULATORY ISSUES

There are no recently passed or recommendations calling for regulations that would materially affect liquidity, capital resources or results of operations.

A number of state legislatures and insurance regulatory agencies have enacted laws and regulations that limit the use of credit information in the underwriting process. Additional states are considering doing so. Our P&C businesses use insurance scoring which is partially based on credit information in making risk selection and pricing decisions. Limitations or prohibitions on the use of credit information could negatively affect our P&C business plans.

Dividend Payments from Our Subsidiaries - Our insurance subsidiaries pay dividends to Safeco Corporation. We then use those funds to pay dividends to our shareholders, as well as to make principal and interest payments on our debt. Individual states limit the amount of dividends that our subsidiaries domiciled in those states can pay us. Exceeding such limits would require prior regulatory approval. In 2004, our P&C insurance subsidiaries can pay up to $314.6 in dividends and our L&I insurance subsidiaries can pay up to $166.6 in dividends without obtaining prior regulatory approval. These amounts are according to the limits states had in place at the end of 2003.

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Risk-Based Capital - The National Association of Insurance Commissioners (NAIC) uses risk-based capital (RBC) formulas for both property and casualty insurers and life insurers. The RBC formulas are used by the NAIC and state regulators to identify companies that are undercapitalized and that may merit further regulatory attention or action. Our insurance subsidiaries have more than sufficient capital to meet RBC requirements.

Income Taxes

At December 31, 2003, we had approximately $1,091.0 of gross deferred income tax assets. Gross deferred income tax assets are composed of temporary differences created as a result of amounts deductible for taxes in future periods. These deferred income tax assets included net operating loss carryforwards of $23.5 that will expire in 2020 and 2021. A net operating loss carryforward is a tax loss that may be carried forward into future years. It reduces taxable income, and as a result, tax liability.

REALIZATION OF GROSS DEFERRED INCOME TAX ASSETS

We believe it is more likely than not that our gross deferred income tax assets will be realized through our future earnings. As a result, we have not recorded a valuation allowance.

We used the same assumptions and projections as in our internal financial projections to estimate our future taxable income. These projections are subject to uncertainties primarily related to the variability of our P&C underwriting results.

If our results are not as profitable as expected, we may have to record a valuation allowance for our gross deferred income tax assets. Doing that would reduce our earnings.

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Item 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Disclosures for Financial Instruments

The following table shows the fair values of certain of our financial instruments on our Consolidated Balance Sheets at December 31, 2003 and 2002. To analyze the sensitivity of our financial instruments to changes in interest rates and equity prices, we show in the second column in the table for each year the effect a 100 basis point increase in market interest rates would have on the fair values. In the third column for each year we show the effect a 10% decline in equity prices would have on fair values:

DECEMBER 31	2003									2002
	Increase (Decrease) in Asset or Liability									Increase (Decrease) in Asset or Liability
	Fair Value			Change in Interest Rates			Change in Equity Prices			Fair Value		Change in Interest Rates			Change in Equity Prices
FINANCIAL ASSETS
Fixed Maturities	$	26,206.5		$	(1,591.1	)	$	—		$	24,278.0	$	(1,536.4	)	$	—
Marketable Equity Securities		1,279.0			—			(125.3	)		1,108.8		—			(110.0	)
Mortgage Loans		993.0			(56.8	)		—			1,006.1		(58.0	)		—
Cash and Cash Equivalents		197.4			—			—			188.5		—			—
Short-Term Investments		269.9			—			—			311.0		—			—
Other Notes and Accounts Receivable		180.3			—			—			162.3		—			—
Separate Account Assets		1,137.4			—			—			899.2		—			—
Derivative Financial Instruments:
Interest Rate Swaps		39.6			(48.4	)		—			69.7		(54.3	)		—
Options/Futures		5.6			—			(3.9	)		—		—			—
FINANCIAL LIABILITIES
Funds Held Under Deposit Contracts		17,536.3			(689.4	)		—			16,718.4		(730.5	)		—
7.875% Medium-Term Notes Due 2003		—			—			—			302.0		(0.6	)		—
7.875% Notes Due 2005		—			—			—			201.7		(0.5	)		—
6.875% Notes Due 2007		221.1			(6.9	)		—			206.9		(7.7	)		—
4.200% Notes Due 2008		200.6			(7.3	)		—			—		—			—
4.875% Notes Due 2010		301.3			(15.2	)		—			—		—			—
7.250% Notes Due 2012		432.9			(27.4	)		—			394.6		(26.3	)		—
8.072% Debentures Due 2037		960.7			(29.2	)		—			876.2		(102.5	)		—
Other Debt		14.2			—			—			48.8		—			—
Separate Account Liabilities		1,137.4			—			—			899.2		—			—
Derivative Financial Instruments:
SFP Credit Default Swaps		—			—			—			20.0		(0.4	)		—
Interest Rate Swaps		(16.3	)		9.4			—			21.8		(18.4	)		—
Options/Futures		—			—			—			26.7		(0.3	)		2.3

Market risk is our potential loss from adverse changes in market prices and interest rates. In addition to market risk, we are exposed to other risks, including:

• Credit risk related to our financial instruments

• Underlying insurance risk related to our core businesses

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The sensitivity analysis used for the table summarizes only the market risk related to our recorded financial assets and liabilities. We manage market risk by matching the projected cash inflows of our assets with the projected cash outflows of our liabilities for our investment and financial products (including annuities and other retirement services products). We seek to maintain reasonable average durations for all of our financial assets and liabilities. We try to maximize income without sacrificing investment quality while providing for liquidity and diversification.

We use certain derivative financial instruments to increase our matching of cash flows. For example, we buy S&P 500 call option contracts and futures to economically hedge the liability of our L&I Equity Indexed Annuity (EIA) product.

We calculate the estimated fair values at the adjusted market rates by using discounted cash flow analysis and duration modeling, where appropriate. The adjusted market rates assume a 100 basis point increase in market interest rates. The estimated values do not consider the effect that changing interest rates could have on prepayment activity of products like CMOs and annuities.

This sensitivity analysis provides only a limited, point-in-time view of the market risk of the financial instruments discussed above. The actual impact of market interest rate and price changes on the financial instruments may differ significantly from those shown in this sensitivity analysis. The sensitivity analysis is further limited because it does not consider any actions we could take in response to actual and/or anticipated changes in interest rates and equity prices. Also, guidance for these disclosures does not require certain financial instruments like policy loans to be included in the sensitivity analysis.

In addition, the sensitivity analysis excludes certain non-financial instruments such as insurance liabilities. Accordingly, any aggregation of the estimated fair value amounts or adjusted fair value amounts does not equal the underlying fair value of net equity.

Item 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and schedules listed in the Index to Financial Statements, Schedules and Exhibits on page 88 are filed as part of this report.

Item 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A: CONTROLS AND PROCEDURES

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision and with the participation of management, including our Chief Executive Officer, Chief Financial Officer and our disclosure committee.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of December 31, 2003 to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

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There have been no changes in our internal controls over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, our controls over financial reporting.

Part III

Item 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2003 and is incorporated herein by reference, except for the portion about executive directors, which is included in Part I.

Item 11: EXECUTIVE COMPENSATION

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2003 and is incorporated herein by reference.

Item 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2003 and is incorporated herein by reference, except for the required disclosure about equity compensation plans, which is included below.

This table provides information as of December 31, 2003 about the number of shares of Safeco common stock that may be issued upon the exercise of outstanding stock awards under our existing equity compensation plans. It also includes the number of shares that remain available for future issuance.

Our shareholder-approved, equity-compensation plans are our 1987 Long-Term Incentive Plan and our 1997 Long-Term Incentive Plan. Our shareholders have approved all our equity-compensation plans.

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Column (a) sets forth the number of shares of our common stock that may be issued upon exercise of outstanding awards, but does not include outstanding performance stock rights. Column (b) states the weighted average exercise price for the outstanding options under our shareholder-approved plans. Column (c) includes the aggregate number of shares available for future issuance only under our 1997 Long-Term Incentive Plan. No shares remain available for issuance under our 1987 Long-Term Incentive Plan.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)	Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans, (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders	7,351,409	$	34.24	4,254,354
Equity compensation plans not approved by security holders	—		—	—
Total	7,351,409	$	34.24	4,254,354

Certain of the securities remaining available for issuance are subject to an automatic grant program for our non-management directors under our 1997 Plan. The program provides automatic grants of restricted stock rights for 2,500 shares annually to each of our non-management directors. This amount also includes 333,100 shares that may be issued upon settlement of performance stock rights and restricted stock rights.

Item 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2003 and is incorporated herein by reference.

Item 14: PRINCIPAL ACCOUNTANT’S FEES AND SERVICES

This information will be contained in the definitive proxy statement to be filed 120 days after December 31, 2003 and is incorporated herein by reference.

Part IV

Item 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

(a)(2) Financial Statement Schedules

(a)(3) Exhibits

The financial statements, financial statement schedules and exhibits listed in the Index to Financial Statements, Schedules and Exhibits on page 88 are filed as a part of this report.

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(b) Reports on Form 8-K

This table lists the reports on Form 8-K we filed during the quarter ended December 31, 2003 and for the period up to the filing date of this Form 10-K.

Filing dated	Under	Filing related to
October 6, 2003	Item 9 (Regulation FD Disclosure)	Appointment of Corporate Controller.
October 27, 2003	Item 12 (Results of Operations and Financial Condition)	Earnings Release for the quarter ended September 30, 2003.
November 17, 2003	Item 9 (Regulation FD Disclosure)	Estimated losses stemming from California wildfires.
December 3, 2003	Item 9 (Regulation FD Disclosure)	Announcement naming G. Thompson Hutton as Director, effective January 1, 2004.
January 26, 2004	Item 12 (Results of Operations and Financial Condition)	Earnings release for the quarter ended December 31, 2003.

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 12, 2004.

- 86 -

Safeco Corporation

Registrant

/s/ MICHAEL S. MCGAVICK

Michael S. McGavick, Chairman, President

and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on March 12, 2004.

Name	Title
/s/ MICHAEL S. MCGAVICK	Chairman, President and Chief Executive Officer
Michael S. McGavick
/s/ CHRISTINE B. MEAD	Senior Vice President, Chief Financial Officer and Secretary
Christine B. Mead
/s/ MAURICE S. HEBERT	Vice President, Controller and Chief Accounting Officer
Maurice S. Hebert
/s/ JOSEPH W. BROWN	Director
Joseph W. Brown
/s/ PHYLLIS J. CAMPBELL	Director
Phyllis J. Campbell
/s/ ROBERT S. CLINE	Director
Robert S. Cline
/s/ JOSHUA GREEN III	Director
Joshua Green III
/s/ G. THOMPSON HUTTON	Director
G. Thompson Hutton
/s/ WILLIAM W. KRIPPAEHNE, JR.	Director
William W. Krippaehne, Jr.
/s/ WILLIAM G. REED, JR.	Lead Director
William G. Reed, Jr.
/s/ NORMAN B. RICE	Director
Norman B. Rice
/s/ JUDITH M. RUNSTAD	Director
Judith M. Runstad

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Safeco Corporation and Subsidiaries

Index to Financial Statements, Schedules and Exhibits

		Page
Audited Consolidated Financial Statements
Report of Independent Auditors		89
	Consolidated Statements of Income (Loss)	90
	Consolidated Balance Sheets	91
	Consolidated Statements of Cash Flows	93
	Consolidated Statements of Cash Flows – Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities	94
	Consolidated Statements of Shareholders’ Equity	95
	Consolidated Statements of Comprehensive Income (Loss)	95
	Notes to Consolidated Financial Statements	96
Financial Statement Schedules
I	Summary of Investments - Other Than Investments in Related Parties	146
II	Condensed Financial Information of the Registrant (Parent Company)	147
	Condensed Statements of Income (Loss)	147
	Condensed Balance Sheets	148
	Condensed Statements of Cash Flows	149
	Condensed Statements of Cash Flows – Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities	150
III	Supplemental Insurance Information	151
VI	Supplemental Information Concerning Consolidated Property & Casualty Insurance Operations	157
Exhibits
	Index to Exhibits
12	Computation of Ratio of Earnings (Loss) to Fixed Charges
21	Subsidiaries of the Registrant

We exclude other schedules from this list – and from this Form 10-K – because either they are not applicable or the information is included in our Consolidated Financial Statements.

88

Safeco Corporation and Subsidiaries

Report of Ernst & Young, LLP, Independent Auditors

Board of Directors and Shareholders of Safeco Corporation:

We have audited the accompanying consolidated balance sheets of Safeco Corporation and its subsidiaries as of December 31, 2003 and 2002, and the related consolidated statements of income (loss), comprehensive income (loss), shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Safeco Corporation and its subsidiaries at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As described in Note 1 to the consolidated financial statements, Safeco Corporation and its subsidiaries changed their method of accounting for stock-based compensation and their method of accounting for their capital securities in 2003, their method of accounting for goodwill in 2002 and 2001 and their method of accounting for derivative financial instruments in 2001.

Seattle, Washington

January 26, 2004

89

Consolidated Statements of Income (Loss)

YEAR ENDED DECEMBER 31 (In Millions, Except Per Share Amounts)	2003			2002		2001
REVENUES
Property & Casualty Earned Premiums	$	4,901.8		$	4,521.3	$	4,472.8
Life & Investments Premiums and Other Revenues		868.1			778.3		637.0
Net Investment Income		1,680.3			1,674.4		1,651.4
Net Realized Investment Gains (Losses)		(101.9	)		82.5		93.0
Other		9.8			10.7		10.4
Total		7,358.1			7,067.2		6,864.6
EXPENSES
Losses, Loss Adjustment Expenses and Policy Benefits		4,808.0			4,685.5		5,199.1
Other Underwriting and Operating Expenses		1,058.5			956.9		894.6
Amortization of Deferred Policy Acquisition Costs		897.6			859.6		824.5
Interest Expense		127.1			132.0		136.9
Intangibles and Goodwill Amortization		16.6			18.0		33.5
Goodwill Write-off		—			—		1,214.1
Restructuring Charges		9.2			21.8		44.3
Total		6,917.0			6,673.8		8,347.0
Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle		441.1			393.4		(1,482.4	)
Provision (Benefit) for Income Taxes		101.9			92.3		(437.1	)
Income (Loss) from Continuing Operations before Change in Accounting Principle		339.2			301.1		(1,045.3	)
Income from Discontinued Credit Operations, Net of Taxes		—			—		4.2
Gain from Sale of Credit Operations, Net of Taxes		—			—		54.0
Income (Loss) before Cumulative Effect of Change in Accounting Principle		339.2			301.1		(987.1	)
Cumulative Effect of Change in Accounting Principle, Net of Taxes		—			—		(2.1	)
Net Income (Loss)	$	339.2		$	301.1	$	(989.2	)
INCOME (LOSS) PER SHARE OF COMMON STOCK
Income (Loss) from Continuing Operations before Change in Accounting Principle	$	2.44		$	2.33	$	(8.18	)
Income from Discontinued Credit Operations, Net of Taxes		—			—		0.03
Gain from Sale of Credit Operations, Net of Taxes		—			—		0.42
Income (Loss) before Cumulative Effect of Change in Accounting Principle		2.44			2.33		(7.73	)
Cumulative Effect of Change in Accounting Principle, Net of Taxes		—			—		(0.02	)
Net Income (Loss) Per Share of Common Stock – Diluted	$	2.44		$	2.33	$	(7.75	)
Net Income (Loss) Per Share of Common Stock – Basic	$	2.45		$	2.33	$	(7.75	)

See Notes to Consolidated Financial Statements.

90

Consolidated Balance Sheets

DECEMBER 31 (In Millions)	2003		2002
ASSETS
Investments:
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $24,290.2; $22,646.1)	$	26,206.5	$	24,278.0
Marketable Equity Securities, at Fair Value (Cost: $781.7; $803.5)		1,279.0		1,108.8
Mortgage Loans		936.1		925.9
Other Invested Assets		115.9		173.8
Short-Term Investments		269.9		311.0
Total Investments		28,807.4		26,797.5
Cash and Cash Equivalents		197.4		188.5
Accrued Investment Income		352.4		337.3
Premiums and Service Fees Receivable		1,088.5		1,042.1
Other Notes and Accounts Receivable		180.3		162.3
Current Income Taxes Recoverable		—		26.2
Deferred Income Taxes Recoverable		—		124.6
Reinsurance Recoverables		551.7		578.8
Deferred Policy Acquisition Costs		639.1		626.3
Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $337.8; $319.7)		440.0		488.7
Intangibles and Goodwill		183.6		190.0
Other Assets		260.9		270.8
Securities Lending Collateral		2,006.4		2,957.0
Separate Account Assets		1,137.4		899.2
Total Assets	$	35,845.1	$	34,689.3

See Notes to Consolidated Financial Statements.

91

Consolidated Balance Sheets

DECEMBER 31 (In Millions)	2003			2002
LIABILITIES AND SHAREHOLDERS’ EQUITY
Property & Casualty Loss and Loss Adjustment Expense Reserves	$	5,044.6		$	4,998.5
Accident and Health Reserves		139.1			170.0
Life Policy Liabilities		331.8			339.9
Unearned Premiums		2,063.5			1,847.5
Funds Held Under Deposit Contracts		16,575.4			15,655.4
Debt		1,965.5			2,000.1
Current Income Taxes Payable		6.2			—
Deferred Income Taxes Payable		92.4			—
Other Liabilities		1,459.5			1,390.1
Securities Lending Payable		2,006.4			2,957.0
Separate Account Liabilities		1,137.4			899.2
Total Liabilities		30,821.8			30,257.7
Commitments and Contingencies		—			—
Preferred Stock, No Par Value
Shares Authorized: 10 Shares Issued and Outstanding: None		—			—
Common Stock, No Par Value
Shares Authorized: 300 Shares Reserved for Options: 11.6; 12.0 Shares Issued and Outstanding: 138.6; 138.2		1,197.3			1,178.1
Retained Earnings		2,308.7			2,072.2
Accumulated Other Comprehensive Income, Net of Taxes:
Unrealized Gains and Losses on Available-for-Sale Securities and Derivative Financial Instruments		1,589.0			1,241.2
Unrealized Foreign Currency Translation Adjustments		(8.8	)		(15.7	)
Deferred Policy Acquisition Costs Valuation Allowance		(57.2	)		(35.4	)
Minimum Pension Liability Adjustment		(5.7	)		(8.8	)
Total Accumulated Other Comprehensive Income		1,517.3			1,181.3
Total Shareholders’ Equity		5,023.3			4,431.6
Total Liabilities and Shareholders’ Equity	$	35,845.1		$	34,689.3

See Notes to Consolidated Financial Statements.

92

Consolidated Statements of Cash Flows

YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
OPERATING ACTIVITIES
Insurance Premiums Received	$	5,662.9		$	5,027.9		$	4,873.8
Dividends and Interest Received		1,611.0			1,570.0			1,547.1
Other Operating Receipts		203.2			251.4			190.2
Insurance Claims and Policy Benefits Paid		(3,885.2	)		(3,872.7	)		(4,074.5	)
Underwriting, Acquisition, Insurance and Other Operating Costs Paid		(1,865.1	)		(1,810.2	)		(1,839.4	)
Interest Paid		(127.8	)		(135.2	)		(127.1	)
Income Taxes Paid		(33.8	)		(114.8	)		(41.3	)
Net Cash Provided by Operating Activities		1,565.2			916.4			528.8
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(6,923.5	)		(6,798.6	)		(3,988.5	)
Equity Securities Available-for-Sale		(186.8	)		(241.3	)		(364.6	)
Other Invested Assets		(17.6	)		(204.4	)		(110.0	)
Issuance of Mortgage Loans		(117.8	)		(95.6	)		(164.4	)
Issuance of Policy Loans		(22.2	)		(24.6	)		(26.8	)
Maturities and Calls of Fixed Maturities Available-for-Sale		3,141.8			1,899.4			1,443.7
Sales of:
Fixed Maturities Available-for-Sale		2,178.5			2,894.0			2,418.0
Equity Securities Available-for-Sale		229.5			534.8			437.6
Other Invested Assets		8.6			57.4			172.7
Repayment of Mortgage Loans		113.9			99.4			58.8
Repayment of Policy Loans		23.3			26.6			26.1
Net Decrease (Increase) in Short-Term Investments		41.1			361.9			(490.6	)
Proceeds from Sale of Safeco Credit		—			—			250.0
Other, Net		(4.3	)		(7.7	)		(21.0	)
Net Cash Used in Investing Activities		(1,535.5	)		(1,498.7	)		(359.0	)
FINANCING ACTIVITIES
Funds Received Under Deposit Contracts		1,219.3			1,352.7			1,051.1
Return of Funds Held Under Deposit Contracts		(1,124.4	)		(1,116.4	)		(1,301.1	)
Proceeds from Notes		495.9			371.8			—
Proceeds from Common Stock Offering		—			329.2			—
Repayment of Notes		(519.5	)		(40.4	)		(6.2	)
Net Repayment of Commercial Paper		—			(299.0	)		(46.6	)
Common Stock Reacquired		—			(9.9	)		(8.1	)
Dividends Paid to Shareholders		(102.4	)		(94.6	)		(118.1	)
Other, Net		10.3			8.1			14.0
Net Cash Provided by (Used in) Financing Activities		(20.8	)		501.5			(415.0	)
Cash Provided by Discontinued Credit Operations		—			—			328.2
Net Increase (Decrease) in Cash		8.9			(80.8	)		83.0
Cash and Cash Equivalents at Beginning of Year		188.5			269.3			186.3
Cash and Cash Equivalents at End of Year	$	197.4		$	188.5		$	269.3

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Cash Flows –

Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities

YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
Net Income (Loss)	$	339.2		$	301.1		$	(989.2	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Goodwill Write-Off		—			—			1,214.1
Income from Discontinued Credit Operations, Net of Taxes		—			—			(4.2	)
Gain from Sale of Credit Operations, Net of Taxes		—			—			(54.0	)
Cumulative Effect of Change in Accounting Principle, Net of Taxes		—			—			2.1
Net Realized Investment (Gains) Losses		101.9			(82.5	)		(93.0	)
Amortization of Fixed Maturities		(53.7	)		(109.8	)		(104.8	)
Amortization and Depreciation		77.9			93.6			102.1
Deferred Income Tax Provision (Benefit)		35.3			53.3			(405.2	)
Interest Expense on Deposit Contracts		905.7			910.6			810.7
Other, Net		(87.0	)		(159.5	)		(173.6	)
Changes in:
Accrued Investment Income		(15.1	)		(12.5	)		4.0
Deferred Policy Acquisition Costs		(12.8	)		0.5			(21.4	)
Property & Casualty Loss and Loss Adjustment Expense Reserves		46.1			(55.2	)		422.1
Accident and Health Reserves		(30.9	)		3.4			9.4
Life Policy Liabilities		(8.1	)		10.1			(15.0	)
Unearned Premiums		216.0			64.3			(54.3	)
Accrued Income Taxes		32.4			(74.6	)		9.1
Other Assets and Liabilities		18.3			(26.4	)		(130.1	)
Total Adjustments		1,226.0			615.3			1,518.0
Net Cash Provided by Operating Activities	$	1,565.2		$	916.4		$	528.8

There were no significant non-cash financing or investing activities for the years ended December 31, 2003, 2002 or 2001.

See Notes to Consolidated Financial Statements.

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Consolidated Statements of Shareholders’ Equity

YEAR ENDED DECEMBER 31 (In Millions Except Share Amounts)	2003			2002			2001
COMMON STOCK
Balance at Beginning of Year	$	1,178.1		$	841.9		$	834.5
Common Stock Offering		—			329.2			—
Stock Issued for Options and Rights		11.9			9.0			9.1
Stock Option Expense		7.3			—			—
Common Stock Reacquired		—			(2.0	)		(1.7	)
Balance at End of Year		1,197.3			1,178.1			841.9
RETAINED EARNINGS
Balance at Beginning of Year		2,072.2			1,875.9			2,966.4
Net Income (Loss)		339.2			301.1			(989.2	)
Dividends Declared		(102.4	)		(96.5	)		(94.5	)
Common Stock Reacquired and Other		(0.3	)		(8.3	)		(6.8	)
Balance at End of Year		2,308.7			2,072.2			1,875.9
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Year		1,181.3			916.8			894.9
Other Comprehensive Income		336.0			264.5			21.9
Balance at End of Year		1,517.3			1,181.3			916.8
Shareholders’ Equity	$	5,023.3		$	4,431.6		$	3,634.6
YEAR ENDED DECEMBER 31	2003			2002			2001
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Year		138,195,596			127,733,251			127,649,087
Common Stock Offering		—			10,465,000			—
Shares Issued for Stock Options and Rights		409,244			299,763			352,250
Shares Reacquired		—			(302,418	)		(268,086	)
Number of Shares Outstanding at End of Year		138,604,840			138,195,596			127,733,251
Consolidated Statements of Comprehensive Income (Loss)
YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
Net Income (Loss)	$	339.2		$	301.1		$	(989.2	)
Other Comprehensive Income, Net of Taxes:
Change in Unrealized Gains and Losses on Available-for-Sale Securities		283.6			361.6			78.7
Reclassification Adjustment for Net Realized Investment (Gains) Losses Included in Net Income (Loss)		65.8			(53.5	)		(61.5	)
Foreign Currency Translation Adjustments		6.9			(7.1	)		(1.3	)
Derivatives Qualifying as Cash Flow Hedges - Net Change in Fair Value		(1.6	)		1.6			12.0
Adjustment for Deferred Policy Acquisition Costs Valuation Allowance		(21.8	)		(29.3	)		(6.0	)
Minimum Pension Liability		3.1			(8.8	)		—
Other Comprehensive Income		336.0			264.5			21.9
Comprehensive Income (Loss)	$	675.2		$	565.6		$	(967.3	)

See Notes to Consolidated Financial Statements.

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Notes to Consolidated Financial Statements

(Dollar amounts in millions except per share data, unless noted otherwise)

Note 1: Summary of Significant Accounting Policies

NATURE OF OPERATIONS

Safeco Corporation is a Washington State corporation operating across the United States, with insignificant non-U.S. activities. Our subsidiaries sell property and casualty insurance including surety; and life insurance and asset management products to individuals and corporations. We generated virtually all of our revenues in 2003 from these activities.

Throughout our Consolidated Financial Statements, Safeco Corporation and its subsidiaries are referred to as “Safeco,” “we” and “our.” The property and casualty businesses including surety are referred to as “Property & Casualty” and “P&C.” The life insurance and asset management businesses are referred to as “Life & Investments” and “L&I.” All other activities, primarily the financing of our business activities, are collectively referred to as “Corporate.”

On September 29, 2003, we announced our intent to sell our L&I businesses. We have presented L&I as a continuing operation in the Consolidated Financial Statements because as of December 31, 2003, we have not met all of the “held-for-sale” criteria under Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”

BASIS OF CONSOLIDATION AND REPORTING AND USE OF ESTIMATES

We prepared the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that may affect the amounts reported in these Consolidated Financial Statements and accompanying notes. Actual results could differ from those estimates.

The Consolidated Financial Statements include Safeco Corporation and its subsidiaries. All significant intercompany transactions and balances have been eliminated in the Consolidated Financial Statements.

We have made certain reclassifications to the prior-year amounts to conform to the current-year presentation.

REVENUE RECOGNITION

We include property and casualty insurance premiums in revenue as earned over the terms of the respective policies. We determine the earned portion on a daily pro rata basis, except for certain commercial insurance lines, for which we determine the earned portion using a mid-month convention. We report the unearned premium as a liability on the Consolidated Balance Sheets, before the effect of reinsurance.

We report life insurance premiums for traditional individual life policies as income when due from the policyholder. These policies, which include whole life and guaranteed renewable term policies, are long-duration contracts.

We recognize premiums from group life and health policies in income as earned over the life of the policy. We report the portion of premiums unearned as a liability on the Consolidated Balance Sheets.

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We report premiums from universal life and investment-type contracts as deposits to policyholders’ account balances and reflect these amounts as liabilities rather than as premium income when received. Funds received under these contracts were $1,219.3, $1,352.7 and $1,051.1 in 2003, 2002 and 2001. Revenues from these contracts consist of investment income on these funds; and amounts assessed during the period against policyholders’ account balances for mortality charges, policy administration charges and surrender charges. We include these amounts in L&I Premiums and Other Revenues on our Consolidated Statements of Income (Loss).

We recognize investment management and advisory fee revenues as Other Revenues on our Consolidated Statements of Income (Loss) when we perform the related services.

EARNINGS PER SHARE

We calculate basic earnings per share by dividing net income (loss) by the weighted-average number of common shares outstanding during the year. Diluted earnings per share reflect the potential dilution that could occur if options or other dilutive instruments granted under our stock-based compensation plans were exercised.

The computation of net income (loss) per share is presented below, based upon weighted-average common and dilutive shares outstanding:

YEAR ENDED DECEMBER 31 (In Millions except per Share Amounts)	2003		2002		2001
Net Income (Loss)	$	339.2	$	301.1	$	(989.2	)
Average Number of Common Shares Outstanding		138.4		129.0		127.7
Basic Net Income (Loss) Per Share	$	2.45	$	2.33	$	(7.75	)
Net Income (Loss)	$	339.2	$	301.1	$	(989.2	)
Average Number of Common Shares Outstanding		138.4		129.0		127.7
Additional Common Shares Assumed Issued Under Treasury Stock Method		0.5		0.3		—
Average Number of Common Shares Outstanding - Diluted		138.9		129.3		127.7
Diluted Net Income (Loss) Per Share	$	2.44	$	2.33	$	(7.75	)

Due to the net loss in 2001, we used basic weighted-average shares outstanding to calculate diluted net income (loss) per share of common stock. Using diluted weighted-average shares outstanding would have resulted in a lower net loss per share of common stock.

STOCK COMPENSATION EXPENSE

Prior to 2003, we applied Accounting Principles Board Opinion 25 (APB 25) in accounting for our stock options, as allowed under SFAS 123, “Accounting for Stock-Based Compensation,” as amended. Under APB 25, we recognized no compensation expense related to options because the exercise price of our employee stock options equaled the fair market value of the underlying stock on the date of grant.

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In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” amending SFAS 123, to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS 123. Effective January 1, 2003, we adopted the fair value method for accounting for stock options as defined in SFAS 123, using the prospective basis transition method. Under this method, we have recognized stock-based compensation expense for options granted, modified or settled after January 1, 2003. We typically grant options to employees in the second quarter of each year. Stock-based compensation expense was $7.3 ($5.7 after tax) for 2003.

The following table illustrates the pro forma effect on net income and net income per share as if the fair value method had been applied to all outstanding and unvested awards in each period:

YEAR ENDED DECEMBER 31 (In Millions, Except Per Share Amounts)	2003			2002			2001
Net Income (Loss), as Reported	$	339.2		$	301.1		$	(989.2	)
Add: Stock-based Compensation Expense Included in Reported Net Income (Loss), After Tax		5.7			—			—
Deduct: Pro Forma Stock-based Compensation Expense *		(13.5	)		(14.0	)		(4.4	)
Pro Forma Net Income (Loss)	$	331.4		$	287.1		$	(993.6	)
Net Income (Loss) Per Share
Basic - as Reported	$	2.45		$	2.33		$	(7.75	)
Diluted - as Reported		2.44			2.33			(7.75	)
Basic - Pro Forma		2.39			2.22			(7.78	)
Diluted - Pro Forma		2.39			2.22			(7.78	)

* Determined under fair value based method for all awards, net of related tax effects.

We used the Black-Scholes method to estimate the fair value of the options at grant date based on the following factors:

YEAR ENDED DECEMBER 31	2003			2002			2001
Dividend Yield		2.5	%		2.5	%		2.5	%
Expected Volatility		35.0	%		35.0	%		35.0	%
Risk-Free Interest Rate		3.0	%		2.6	%		4.5	%
Expected Life		5 yrs			4 yrs			4 yrs
Weighted-Average Fair Value at Grant Date	$	11		$	8		$	7

INVESTMENTS

In accordance with the provisions of SFAS 115, “Accounting for Certain Investments in Debt and Equity Securities,” we classify our investments into one of three categories: held-to-maturity, available-for-sale or trading. We determine the appropriate classification of both fixed maturities and equity securities at the time of purchase and re-evaluate such designation as of each balance sheet date. Fixed maturities include bonds, mortgage-backed securities and redeemable preferred stocks. We classify all fixed maturities as available-for-sale and carry them at fair value. We report net unrealized investment gains and losses related to available-for-sale securities in accumulated other comprehensive income (OCI) in Shareholders’ Equity, net of related deferred policy acquisition costs and deferred income taxes.

For the mortgage-backed securities, we recognize income using a constant effective yield based on anticipated prepayments and the estimated economic life of the securities. Quarterly, we compare actual prepayments to anticipated prepayments and recalculate the effective yield to reflect actual payments-to-date plus anticipated future payments. We include any resulting adjustment in net investment income.

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Marketable equity securities include common stocks and non-redeemable preferred stocks. We classify marketable equity securities as available-for-sale and carry them at fair value, with changes in net unrealized investment gains and losses recorded directly to OCI, net of related deferred policy acquisition costs and deferred income taxes.

When the collectibility of interest income for fixed maturities is considered doubtful, any accrued but uncollectible interest income is reversed against investment income in the current period. We then place the securities on non-accrual status and they are not restored to accrual status until all delinquent interest and principal are paid.

We regularly review the value of our investments. If the value of any of our investments falls below our cost basis in the investment, we analyze the decrease to determine whether it is an other-than-temporary decline in value. To make this determination for each security, we consider:

• How long and by how much the fair value has been below its cost

• The financial condition and near-term prospects of the issuer of the security, including any specific events that may affect its operations or earnings potential

• Our intent and ability to keep the security long enough for it to recover its value

• Any downgrades of the security by a rating agency

• Any reduction or elimination of dividends, or non-payment of scheduled interest payments

Based on our analysis, we make a judgment as to whether the loss is other-than-temporary. If the loss is other-than-temporary, we record an impairment charge within Net Realized Investment Gains (Losses) in our Consolidated Statements of Income (Loss) in the period that we make the determination.

We use public market pricing information to determine the fair value of our investments when such information is available. When such information is not available for investments, as in the case of securities that are not publicly traded, we use other valuation techniques. Such techniques include using independent pricing sources, evaluating discounted cash flows, identifying comparable securities with quoted market prices and using internally prepared valuations based on certain modeling and pricing methods. Our investment portfolio at December 31, 2003 included $293.3 of fixed maturities and $21.9 of equity securities that were not publicly traded, and values for these securities were determined using these other valuation techniques.

The cost of securities sold is determined by the “identified cost” method.

We carry mortgage loans at outstanding principal balances, less an allowance for mortgage loan losses. We consider a mortgage loan impaired when it is probable that we will be unable to collect principal and interest amounts due according to the contractual terms of the mortgage loan agreement. For mortgage loans that we determine to be impaired, we charge the difference between the amortized cost and fair value of the underlying collateral to the reserve.

Cash and cash equivalents consist of short-term highly liquid investments with original maturities of less than three months at the time of purchase. Short-term investments consist of highly liquid debt instruments with maturities of greater than three months and less than twelve months when purchased. We carry cash and cash equivalents and short-term investments at cost, which approximates fair value.

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We engage in securities lending whereby we loan certain securities from our portfolio to other institutions for short periods of time. We require initial collateral at 102% of the market value of a loaned security. The borrower deposits the collateral with a lending agent. The lending agent invests the collateral to generate additional income according to our guidelines. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities fluctuates to maintain a collateral value of 102%. We maintain full ownership rights to the securities loaned and accordingly the loaned securities are classified as investments. We report the securities lending collateral and the corresponding securities lending payable on our Consolidated Balance Sheets as assets and liabilities.

DERIVATIVE FINANCIAL INSTRUMENTS

The FASB issued SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” in June 1998. SFAS 133 amends or supersedes several previous FASB statements relating to derivatives and requires us to recognize all derivatives as either assets or liabilities in the Consolidated Balance Sheets at fair value. In June 2000, the FASB issued SFAS 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” an amendment of SFAS 133 which addressed a limited number of implementation issues arising from the original statement (collectively SFAS 133). We adopted SFAS 133, as amended, effective January 1, 2001 and recorded a loss of $2.1 after tax, which is reported as a Cumulative Effect of Change in Accounting Principle in the Consolidated Statements of Income (Loss). In addition, we recorded a loss of $3.0 ($1.9 after tax) in OCI, as a result of the adoption of SFAS 133.

Our financial statement recognition of the change in fair value of a derivative depends on the intended use of the derivative and the extent to which it is effective as part of a hedging transaction. Derivatives that are highly effective and designated as either fair value or cash flow hedges receive hedge accounting treatment under SFAS 133.

Derivatives that hedge the change in fair value of recognized assets or liabilities are designated as fair value hedges. For derivatives designated as fair value hedges, we recognize the changes in the fair value of both the derivative and the hedged items in Net Realized Investment Gains (Losses) in the Consolidated Statements of Income (Loss).

Derivatives that hedge variable rate assets or liabilities or forecasted transactions are designated as cash flow hedges. For derivatives designated as cash flow hedges, we recognize the changes in fair value of the derivative as a component of OCI, net of deferred income taxes, until the hedged items affect current earnings. At the time current earnings are affected by the variability of cash flows, the related portion of deferred gains or losses on cash flow hedge derivatives are reclassified from OCI and recorded in the Consolidated Statements of Income (Loss).

When the changes in fair value of such derivatives do not perfectly offset the changes in fair value of the hedged transaction, we recognize the ineffective portion in the Consolidated Statements of Income (Loss). For derivatives that do not qualify for hedge accounting treatment under SFAS 133, we record the changes in fair value of these derivatives in Net Realized Investment Gains (Losses) in the Consolidated Statements of Income (Loss).

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We formally document all relationships between the hedging instruments and hedged items, as well as risk-management objectives and strategies for undertaking various hedge transactions. We link all hedges that are designated as fair value hedges to specific assets or liabilities on the Consolidated Balance Sheets. We link all hedges that are designated as cash flow hedges to specific variable rate assets or liabilities or to forecasted transactions. We also assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, we discontinue hedge accounting on a prospective basis.

INCOME TAXES

We file a consolidated life/non-life U.S. income tax return that includes all of our qualifying subsidiaries. Income taxes have been provided using the liability method in accordance with SFAS 109, “Accounting for Income Taxes.” The provision for income taxes has two components: amounts currently payable or receivable and deferred income taxes. Deferred income taxes are recognized when assets and liabilities have different values for financial statement and tax reporting purposes. A valuation allowance is recorded to reduce a deferred tax asset to the amount expected to be recoverable. Although realization of deferred income tax assets is not assured, we believe it is more likely than not the deferred income tax assets will be realized through future earnings, including but not limited to the generation of future operating income, reversal of existing temporary differences and available tax planning strategies. Accordingly, we have not recorded a valuation allowance.

REINSURANCE

We use reinsurance to limit our losses on certain individual risks or reduce our exposure to catastrophic events. We buy reinsurance from several reinsurers and are not dependent upon any single reinsurer. Reinsurance does not affect our liability to our policyholders. We remain primarily liable to policyholders for the risks we insure. Accordingly, our loss and loss adjustment expenses (LAE) and other reserves are reported gross of any related reinsurance recoverables.

P&C

Reinsurance recoverables are the amounts we estimate our reinsurers owe us related to losses incurred and are reported separately on our Consolidated Balance Sheets. At December 31, 2003 and 2002, we reported P&C reinsurance recoverables of $372.0 and $419.9.

Recording reinsurance recoverables requires us to make estimates because we do not know the exact amount due from the reinsurer until all our underlying losses are settled. The amount of reinsurance recoverables varies depending on the size of individual losses and the aggregate amount of losses in a particular line of business.

To estimate reinsurance recoverables, we:

• Review estimates of large losses that are covered under reinsurance agreements

• Estimate reinsurance recoverable amounts for specific claims as well as for lines of business

• Compare our estimates with past reinsurance recoverables

• Perform actuarial analyses of loss development above and below our retention levels – the amounts we absorb before the reinsurers reimburse us – specified under the reinsurance agreements

• Examine actuarial data with and without reinsurance recoverables

We regularly review our reinsurance recoverables to determine the collectibility of what is owed to us. In doing that, we review:

• Historical collection experience

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• Reinsurance recoverables associated with individual reinsurers, including large exposures and those with lower rated reinsurers

• Reinsurance recoverables concentrated with a particular issue (for example, a large loss, a catastrophe or an emerging claim issue)

• Trends in default rates by credit rating

We have estimated an allowance for uncollectible P&C reinsurance of $16.3 at December 31, 2003 and $12.5 at December 31, 2002.

L&I

At December 31, 2003 and 2002, we reported L&I reinsurance recoverables of $179.7 and $158.9. We had no allowance for uncollectible L&I reinsurance in 2003 and 2002.

DEFERRED POLICY ACQUISITION COSTS

P&C

We defer as assets certain costs, including commissions, premium taxes, underwriting and policy issuance costs that vary with and are related primarily to the acquisition of P&C insurance business. These deferred policy acquisition costs (DAC) are amortized over the period the related premiums are earned. We record DAC net of acquisition costs ceded to reinsurers. Every quarter, we evaluate DAC for recoverability by comparing the unearned premium to the total expected claim costs and related expenses. Adjustments, if necessary, would be recorded in current operations. We perform the assessment of recoverability at the following levels–total personal lines, total commercial lines and surety–this is consistent with our approach to acquiring and servicing the underlying policies. We include anticipated investment income, as permitted under SFAS 60, “Accounting and Reporting by Insurance Enterprises,” in the determination of the recoverability of DAC. Our DAC asset for P&C at December 31, 2003 and 2002 was $356.8 and $332.9.

L&I

We defer L&I product acquisition costs, principally commissions and other underwriting costs that vary with and are primarily related to the production of business. We amortize DAC for deferred annuity contracts, retirement services deposit contracts and universal life insurance policies over the lives of the contracts or policies in proportion to the present value of estimated future gross profits of each of these product lines. In this estimation process we make assumptions as to surrender rates, mortality experience and investment performance. Actual profits can vary from our estimates and can thereby result in increases or decreases to DAC amortization rates. We regularly evaluate our assumptions and, when necessary, revise the estimated gross profits of these contracts resulting in adjustments to DAC amortization that are recorded in earnings when such estimates are revised. We adjust the unamortized balance of DAC for the impact on estimated future gross profits as if net unrealized investment gains and losses had been realized as of the balance sheet date. We include the impact of this adjustment, net of tax, in OCI . We conduct regular DAC recoverability analyses for deferred annuity contract, retirement services contract, universal life contract and traditional life contract DAC balances. We do a separate recoverability analysis for the DAC balances in each L&I business segment. We compare the current DAC balance with the estimated present value of future profitability of the underlying business. The DAC balances are considered recoverable if the present value of future profits is greater than the current DAC balance. All of the L&I DAC balances are recoverable at December 31, 2003 and 2002.

We amortize acquisition costs for traditional life insurance policies over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit liabilities. We amortize acquisition costs for group life and medical policies over a one-year period. Our DAC asset for L&I at December 31, 2003 and 2002 was $282.3 and $293.4.

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LAND, BUILDINGS AND EQUIPMENT

We capitalize land, buildings and equipment used in operations, including certain costs incurred to develop or purchase computer software for internal use, and carry them at cost less accumulated depreciation.

We provide depreciation and amortization on buildings for company use, equipment and capitalized software at various rates based on estimated useful lives using the straight-line method. Depreciation and amortization expense was $65.6, $75.6 and $68.6 for 2003, 2002 and 2001.

INTANGIBLES AND GOODWILL

Goodwill represents the excess of the cost of businesses acquired over the fair value of their net assets, separate from other identifiable intangibles. Other identifiable intangibles for business acquired consist mainly of the value of existing blocks of business. Effective with our January 1, 2002 adoption of SFAS 141, “Business Combinations,” and SFAS 142, “Goodwill and Other Intangible Assets,” we no longer amortize goodwill, but we review it annually for impairment or more frequently if impairment indicators arise. We amortize other purchased intangible assets over their estimated useful lives.

Effective March 31, 2001, we elected to change our accounting policy for assessing goodwill from one based on undiscounted cash flows to one based on a market-value method. We determined the market-value method to be a more appropriate way to assess the current value of goodwill. As a result, we recorded a goodwill write-off of $1,201.0 ($916.9 after tax) in the first quarter of 2001.

In the fourth quarter of 2001, we determined that goodwill related to our London operations was impaired, resulting in an additional write-down of $13.1 ($8.5 after tax).

SEPARATE ACCOUNTS

Separate account assets and liabilities reported on the accompanying Consolidated Balance Sheets consist principally of variable annuities representing funds that we administer and invest to meet specific investment objectives of the contract holders. The assets of each separate account are legally segregated and are not subject to claims that arise out of our other business activities. Net investment income and net realized and unrealized investment gains and losses generally accrue directly to such contract holders who bear the investment risk, subject in some cases to minimum guaranteed rates. Accordingly, we do not include these investment results in our revenues. We report separate account assets at fair value. Fees charged to contract holders include mortality, policy administration and surrender charges and are included in L&I Premiums and Other Revenues in our Consolidated Statements of Income (Loss).

P&C LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES

Loss and Loss Adjustment Expense Reserves are management’s estimates of losses from claims and related settlement expenses that we have not yet paid. We include these amounts in our reserves shown on our Consolidated Balance Sheets.

We record two kinds of loss and LAE reserves:

• Case basis

• Incurred but not reported (IBNR)

Case basis reserves are our estimates established by claims adjusters of the amount we will have to pay for losses that have already been reported to us. These amounts include related legal expenses and other costs associated with resolving and settling a particular claim.

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In addition, at the end of every reporting period, IBNR reserves are established to estimate the amount we will have to pay for:

• Losses that have occurred, but have not yet been reported to us including related expenses

• Losses including related expenses that have been reported to us that may ultimately be paid out differently than expected by case basis reserves

• Losses including related expenses that have been paid and closed but may reopen and require future payment

We use actuarial methods and management judgment to estimate IBNR reserves.

ESTIMATING LOSS AND LAE RESERVES

Estimating loss and LAE reserves is complex. It requires us to make significant judgments and assumptions about a number of internal variables and external factors. Examples of internal variables that affect estimating loss reserves include changes in our claims handling practices and changes in our business mix. Examples of external factors that affect estimating loss reserves include:

• Trends in loss costs

• Economic inflation

• Judicial changes

• Legislative changes

In addition, certain claims may be paid out over a number of years, and there may be a significant lag between the time a loss that is insured by us occurs and the time it is reported to us.

These variables and factors affect in a variety of ways the amounts we have to pay for losses and related expenses. As a result, it’s not always possible to quantify their impact on our future payments. Our management arrives at its best estimate by examining actuarial estimates, holding discussions with claims and underwriting management, and considering changes in the internal and external environment. Because estimating reserves requires us to use assumptions and judgments, our actual future losses will differ from our estimates.

Some actuarial techniques rely on our past losses and LAE to estimate our future payments. The changes we’ve made in our business in recent years, however, will affect our future payments. For instance, we have introduced new products, tightened our underwriting criteria and improved our claims handling practices. As a result, we also consider these changes when estimating future payments.

In our most volatile lines of business, we use multiple actuarial techniques to help management evaluate results and trends. In some cases, using multiple actuarial techniques produces estimates within a relatively small range. This gives us added confidence in our reserve estimates. In other cases, however, using multiple actuarial techniques produces conflicting estimates. For these, we review the assumptions used in the techniques and management determines the best estimate to use for our loss and LAE reserves within the actuarial range.

REVISING LOSS AND LAE RESERVES

Reviewing and refining our loss and LAE reserve estimates is an ongoing process. We record any adjustments to these reserves in the periods in which we change the estimates. We record changes to our loss reserves in our results of operations.

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We do not discount any of our reserves to present value.

We reduce our reserves by the amounts we expect to recover from salvage – the amount we recover from property that becomes ours after we pay for a total loss – and subrogation – our right to recover payments from third parties. We accrue salvage and subrogation recoveries on an individual case basis for large claims. We use actuarial techniques to estimate the amount of recoveries for small claims.

We purchase reinsurance to limit our exposure to potential large losses. We record the amounts that we expect to recover from reinsurers as reinsurance recoverable assets on our Consolidated Balance Sheets.

LIFE POLICY LIABILITIES

Liabilities for fixed deferred annuity contracts and guaranteed investment contracts are equal to the accumulated account value of such policies or contracts as of the valuation date. Liabilities for universal life insurance policies are equal to the accumulated account value plus a mortality reserve as of the valuation date. For structured settlement annuities, future benefits are either fully guaranteed or are contingent on the survivorship of the annuitant. Liabilities for fully guaranteed benefits are based on discounted amounts of estimated future benefits. Contingent future benefits are discounted with best-estimate mortality assumptions, which include provisions for longer life spans over time. The interest rate pattern used to calculate the reserve for a structured settlement policy is set at issue. The pattern varies over time starting with interest rates that prevailed at issue and grading to a future level. On average, the current reserve has near-term benefits discounted at 7.89% and long-term benefits discounted at 7.15%.

We compute liabilities for future policy benefits under traditional individual life and group life insurance policies on the level premium method, which uses a level premium assumption to fund reserves. We select the level premiums so that the actuarial present value of future benefits equals the actuarial present value of future premiums. We set the interest and mortality assumptions in the year of issue. These liabilities are contingent upon the death of the insured while the policy is in force. We derive mortality assumptions from both company-specific and industry statistics. We discount future benefits at interest rates that vary by year of policy issue and average 4.55%.

ACCIDENT AND HEALTH RESERVES

Accident and health reserves primarily represent liabilities for claims under group medical coverages and are established on the basis of reported losses (“case basis” method). We also provide for IBNR claims, based on historical experience. We continually review estimates for reported but unpaid claims and IBNR. Any adjustments are reflected in current operating results.

COMMON STOCK

The Washington Business Corporation Act provides that reacquired shares of a Washington State corporation revert to the status of authorized but unissued shares. Accordingly, we have reduced capital stock and retained earnings to reflect the repurchase of shares and do not show treasury stock as a separate reduction to Shareholders’ Equity.

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NEW ACCOUNTING STANDARDS

New accounting pronouncements that we have recently adopted, or will adopt in the near future, are as follows:

SFAS 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits”(Revised 2003)

The FASB issued SFAS 132 as amended in December 2003. This statement revises employers’ disclosures about pension plans and other postretirement benefit plans, but it does not change the measurement or recognition of those plans. We have adopted the required disclosures which include targeted and actual plan asset allocation percentages, our investment strategy and bases used to determine our expected rate of return and estimated employer contributions for 2004.

SFAS 141, “Business Combinations”

The FASB issued SFAS 141 in July 2001. This statement changed the approach companies use to account for a business combination by eliminating the pooling-of-interests method of accounting for business combinations and further clarifies the criteria for recognizing intangible assets separately from goodwill. We adopted this statement effective July 1, 2001, with no impact on our Consolidated Financial Statements.

SFAS 142, “Goodwill and Other Intangible Assets”

The FASB issued SFAS 142 in July 2001. Under SFAS 142, we no longer amortize goodwill and indefinite-lived intangible assets, but we review them annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets will continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. We adopted SFAS 142 effective January 1, 2002, with no material impact on our Consolidated Financial Statements.

SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”

The FASB issued SFAS 144 in October 2001. These rules supersede SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and provide a single accounting model for long-lived assets to be disposed of. SFAS 144 also outlines criteria to determine held-for-sale status of long-lived assets to be disposed of. We adopted SFAS 144 effective January 1, 2002, with no impact on our Consolidated Financial Statements.

SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities”

The FASB issued SFAS 146 in June 2002. The standard requires companies to recognize costs associated with exit and disposal activities when they are incurred rather than the date of a commitment to an exit or disposal plan. It also expands disclosure requirements to include costs by reportable segment. The standard is effective for exit or disposal activities that were initiated after December 31, 2002. As discussed in Note 16, we announced a restructuring initiative in our Corporate departments in September 2003. Charges associated with the restructuring totaling $9.2 pretax ($6.0 after tax) in 2003 have been recognized in accordance with SFAS 146.

SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”

The FASB issued SFAS 148 in December 2002. SFAS 148 amends SFAS 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition to the fair value method of accounting for stock-based employee compensation under SFAS 123. Effective January 1, 2003, we adopted the fair value method as defined in SFAS 123 on the prospective basis transition method. As discussed in Note 11, stock-based compensation expense was $7.3 ($5.7 after tax) for 2003.

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SFAS 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”

The FASB issued SFAS 149 in April 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. We adopted SFAS 149 with no impact on our Consolidated Financial Statements.

SFAS 150, “Accounting for Financial Instruments with Characteristics of Liabilities, Equity or Both”

The FASB issued SFAS 150 in May 2003. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, or otherwise effective July 1, 2003. We adopted SFAS 150 with no impact on our Consolidated Financial Statements.

FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”

FASB Interpretation Number (FIN) 45 was issued in November 2002. FIN 45 elaborates on the disclosures required to be made by a guarantor in its financial statements and clarifies that a guarantor is required to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition provisions are effective prospectively for guarantees issued or modified after December 15, 2002. The disclosure requirements are effective for periods ending after December 15, 2002 and are presented in Note 12. We do not have any guarantees subject to the recognition provisions of FIN 45.

FIN 46R, “Consolidation of Variable Interest Entities”

The FASB issued FIN 46R in December 2003. FIN 46R changes the method of determining whether certain entities should be consolidated in our Consolidated Financial Statements. Except for entities considered as special purpose entities, FIN 46R is effective in the first period ending after March 15, 2004. We adopted FIN 46R effective December 31, 2003.

An entity is subject to FIN 46R and is called a Variable Interest Entity (VIE) if it has:

• Equity that is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties

• Equity investors that cannot make significant decisions about the entity’s operations, or do not absorb the expected losses or receive the expected returns of the entity

All other entities are evaluated for consolidation under existing guidance. FIN 46R requires VIEs to be consolidated by their primary beneficiary, which is the party that has a majority of the expected losses or a majority of the expected residual returns of the VIE, or both.

We have identified certain interests in VIEs as defined by FIN 46R. Based on our analysis of these interests, we do not meet the FIN 46R definition of “primary beneficiary” of any of these entities and therefore have not consolidated the entities. Even though consolidation is not required, FIN 46R requires disclosure of the nature of any significant interests in a VIE, a description of the VIEs’ activities and the maximum exposure to potential losses due to our involvement.

In June 2000, we extended a loan to Investar Holdings (Investar), an insurance agency, whose equity at risk was not sufficient to finance its activities and is therefore considered a VIE under FIN 46R. The loan is secured by the assets of Investar and personally guaranteed by its equity holders. Based on our analysis of Investar’s expected losses and expected residual returns, we are not the primary beneficiary. Our potential exposure to losses due to our interest in Investar is limited to our senior debt holding, which was $15.9 as of December 31, 2003, excluding the value of our rights to the assets of the agency and guarantees provided by the equity holders.

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In June 1997, Safeco Corporation formed Safeco Capital Trust (the Trust) for the sole purpose of issuing $850.0 in Trust Preferred Securities (Capital Securities) to the public. The proceeds from the sale of the Capital Securities were used by the Trust to purchase $876.3 of Junior Subordinated Debentures (Debentures) from Safeco Corporation. The Debentures are the sole assets of the Trust, and payments under the Debentures are the sole revenues of the Trust. It is anticipated that, until the liquidation, if any, of the Trust, each Debenture will be held for the benefit of the holders of the Capital Securities.

Prior to our adoption of FIN 46R, we consolidated the assets and liabilities of the Trust based on Safeco Corporation’s equity stake in the Trust. Based on FIN 46R, we concluded that Safeco’s equity investment in the Trust is not at risk since the Debentures issued by Safeco represented the Trust’s sole assets. Accordingly, the Trust meets the definition of a VIE. Further, the holders of the Capital Securities represent the variable interests in the Trust, with none holding a significant interest, which means there is no primary beneficiary of the Trust. As a result, we have deconsolidated the Trust at December 31, 2003, increasing Debt and Marketable Equity Securities by $26.3 on our Consolidated Balance Sheets. In our Consolidated Statements of Income (Loss), we have increased Interest Expense and Net Investment Income by $2.1, and have reclassified $69.1 of annual distributions on Capital Securities to Interest Expense. Prior-period amounts have been reclassified to conform to the current-year presentation.

American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts”

The provisions of SOP 03-1 are effective for fiscal years beginning after December 15, 2003. SOP 03-1 provides guidance in three areas: separate account presentation and valuation; the accounting recognition given sales inducements; and the classification and valuation of long-duration contract liabilities. We do not anticipate a material impact on our Consolidated Financial Statements upon adoption.

Emerging Issues Task Force (EITF) 03-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”

The provisions of EITF 03-1 are effective for fiscal years ending after December 15, 2003. EITF 03-1 provides disclosure requirements for investments in debt and marketable equity securities that are accounted for under SFAS 115. We have included the required disclosures within this report.

EITF 03-4 “Determining the Classification and Benefit Attribution Method for a ‘Cash Balance’ Pension Plan”

EITF 03-4 was issued in May 2003 and provides guidance in the accounting for cash balance pension plans. The EITF defines cash balance plans as defined benefit plans for purposes of applying SFAS 87, “Employers’ Accounting for Pensions.” It also prescribes the use of the traditional unit credit method rather than the projected unit credit method for purposes of measuring the benefit obligation. Based on this guidance, we changed our attribution method to the traditional unit credit method as of December 31, 2003. As a result, our projected benefit obligation and accumulated benefit obligation were equal at December 31, 2003. This change increased the actuarial gain by $6.4 as of December 31, 2003 and will be amortized into expense over the average remaining service period of all active participants in accordance with SFAS 87.

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Note 2: Investments

FIXED MATURITIES AND MARKETABLE EQUITY SECURITIES

The following tables summarize our fixed maturities and marketable equity securities:

DECEMBER 31, 2003	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gains		Fair Value
Fixed Maturities:
U.S. Government and Agencies	$	1,826.7	$	240.7	$	(1.8	)	$	238.9	$	2,065.6
State and Political Subdivisions		2,801.2		232.5		(7.2	)		225.3		3,026.5
Foreign Governments		278.7		79.0		—			79.0		357.7
Corporate Securities		14,133.4		1,209.7		(68.5	)		1,141.2		15,274.6
Mortgage-Backed Securities		5,250.2		272.5		(40.6	)		231.9		5,482.1
Total Fixed Maturities		24,290.2		2,034.4		(118.1	)		1,916.3		26,206.5
Marketable Equity Securities		781.7		504.6		(7.3	)		497.3		1,279.0
Total	$	25,071.9	$	2,539.0	$	(125.4	)	$	2,413.6	$	27,485.5

DECEMBER 31, 2002	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Net Unrealized Gains		Fair Value
Fixed Maturities:
U.S. Government and Agencies	$	1,801.1	$	277.0	$	(2.1	)	$	274.9	$	2,076.0
State and Political Subdivisions		2,386.2		259.3		(5.5	)		253.8		2,640.0
Foreign Governments		284.6		92.4		—			92.4		377.0
Corporate Securities		13,003.0		982.8		(296.8	)		686.0		13,689.0
Mortgage-Backed Securities		5,171.2		358.0		(33.2	)		324.8		5,496.0
Total Fixed Maturities		22,646.1		1,969.5		(337.6	)		1,631.9		24,278.0
Marketable Equity Securities		803.5		371.8		(66.5	)		305.3		1,108.8
Total	$	23,449.6	$	2,341.3	$	(404.1	)	$	1,937.2	$	25,386.8

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The following table shows our investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2003:

	LESS THAN 12 MONTHS					12 MONTHS OR MORE					TOTAL
DESCRIPTION OF SECURITIES	FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES
Fixed Maturities:
U.S. Government and Agencies	$	217.7	$	(1.8	)	$	—	$	—		$	217.7	$	(1.8	)
State and Political Subdivisions		273.5		(5.8	)		9.1		(1.4	)		282.6		(7.2	)
Foreign Governments		—		—			—		—			—		—
Corporate Securities		1,723.5		(54.9	)		157.7		(13.6	)		1,881.2		(68.5	)
Mortgaged-Backed Securities		1,387.9		(39.2	)		56.9		(1.4	)		1,444.8		(40.6	)
Total Fixed Maturities		3,602.6		(101.7	)		223.7		(16.4	)		3,826.3		(118.1	)
Marketable Equity Securities		62.0		(6.7	)		5.3		(0.6	)		67.3		(7.3	)
Total	$	3,664.6	$	(108.4	)	$	229.0	$	(17.0	)	$	3,893.6	$	(125.4	)

We reviewed all our investments with unrealized losses at the end of 2003 in accordance with our impairment policy described in Note 1. After considering the number of investment positions that were in unrealized loss positions, none of which were individually significant, and other evidence, such as volatility of each security’s market price, our evaluation determined that these declines in fair value were temporary.

FIXED MATURITIES BY MATURITY DATE

The following table summarizes the cost or amortized cost and fair value of fixed maturities at December 31, 2003, by contractual years-to-maturity. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without prepayment penalties:

DECEMBER 31, 2003	COST OR AMORTIZED COST		FAIR VALUE
One Year or Less	$	1,145.5	$	1,167.8
Over One Year through Five Years		5,853.3		6,186.4
Over Five Years through Ten Years		3,898.2		4,161.5
Over Ten Years		8,143.0		9,208.7
Mortgage-Backed Securities		5,250.2		5,482.1
Total Fixed Maturities	$	24,290.2	$	26,206.5

The carrying value of securities on deposit with state regulatory authorities was $436.3 at December 31, 2003 and $427.9 at December 31, 2002.

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NET INVESTMENT INCOME

The following table summarizes our consolidated net investment income:

YEAR ENDED DECEMBER 31	2003			2002			2001
Interest:
Fixed Maturities	$	1,524.0		$	1,514.8		$	1,450.6
Mortgage Loans		78.2			76.1			68.3
Short-Term Investments		5.6			10.9			43.4
Dividends:
Marketable Equity Securities		33.6			41.5			40.3
Redeemable Preferred Stock		18.3			16.5			24.1
Other		32.7			25.6			36.6
Total Investment Income		1,692.4			1,685.4			1,663.3
Investment Expenses		(12.1	)		(11.0	)		(11.9	)
Net Investment Income	$	1,680.3		$	1,674.4		$	1,651.4

The carrying value of investments in fixed maturities and mortgage loans that have not produced income for the last twelve months was $38.5 at December 31, 2003 and $48.3 at December 31, 2002.

NET REALIZED INVESTMENT GAINS (LOSSES)

The following table summarizes our consolidated net realized investment gains (losses):

YEAR ENDED DECEMBER 31	2003			2002			2001
Net Realized Investment Gains (Losses)
Fixed Maturities	$	(128.1	)	$	(12.5	)	$	(36.7	)
Marketable Equity Securities		18.5			125.9			142.2
Other Financial Instruments		7.7			(30.9	)		(12.5	)
Net Realized Investment Gains (Losses)	$	(101.9	)	$	82.5		$	93.0

The following tables summarize the proceeds from sales of investment securities and related gains (losses) before taxes for 2003, 2002 and 2001:

YEAR ENDED DECEMBER 31, 2003	Fixed Maturities Available-For-Sale			Marketable Equity Securities			Other Financial Instruments			Total
Proceeds from Sales	$	2,178.5		$	229.5		$	4.2		$	2,412.2
Gross Realized Investment Gains	$	133.5		$	62.5		$	9.9		$	205.9
Gross Realized Investment Losses		(19.8	)		(25.9	)		(9.9	)		(55.6	)
Net Realized Investment Gains		113.7			36.6			—			150.3
Impairments including Impairment related to Intent to Sell L&I		(271.5	)		(20.8	)		—			(292.3	)
Other, Including Gains on Calls and Redemptions		29.7			2.7			7.7			40.1
Net Realized Investment Gains (Losses)	$	(128.1	)	$	18.5		$	7.7		$	(101.9	)

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YEAR ENDED DECEMBER 31, 2002	Fixed Maturities Available-For-Sale			Marketable Equity Securities			Other Financial Instruments			Total
Proceeds from Sales	$	2,894.0		$	534.8		$	—		$	3,428.8
Gross Realized Investment Gains	$	261.4		$	232.0		$	0.4		$	493.8
Gross Realized Investment Losses		(72.6	)		(69.6	)		(37.1	)		(179.3	)
Net Realized Investment Gains (Losses)		188.8			162.4			(36.7	)		314.5
Impairments		(220.1	)		(38.4	)		—			(258.5	)
Other, Including Gains on Calls and Redemptions		18.8			1.9			5.8			26.5
Net Realized Investment Gains (Losses)	$	(12.5	)	$	125.9		$	(30.9	)	$	82.5

YEAR ENDED DECEMBER 31, 2001	Fixed Maturities Available-For-Sale			Marketable Equity Securities			Other Financial Instruments			Total
Proceeds from Sales	$	2,418.0		$	437.6		$	—		$	2,855.6
Gross Realized Investment Gains	$	86.5		$	194.7		$	—		$	281.2
Gross Realized Investment Losses		(31.9	)		(24.2	)		(7.8	)		(63.9	)
Net Realized Investment Gains (Losses)		54.6			170.5			(7.8	)		217.3
Impairments		(98.4	)		(28.4	)		—			(126.8	)
Other, Including Gains (Losses) on Calls and Redemptions		7.1			0.1			(4.7	)		2.5
Net Realized Investment Gains (Losses)	$	(36.7	)	$	142.2		$	(12.5	)	$	93.0

The following table summarizes our allowance for mortgage loan losses:

DECEMBER 31	2003			2002		2001
Allowance at Beginning of Year	$	10.5		$	10.5	$	10.8
Loans Charged off as Uncollectible		(0.3	)		—		(0.3	)
Allowance at End of Year	$	10.2		$	10.5	$	10.5

This allowance relates to mortgage loan investments of $946.3 and $936.4 at December 31, 2003 and 2002.

Note 3: Derivative Financial Instruments

Derivatives are instruments whose values are derived from underlying instruments, indices or rates, have notional amounts and can be net settled. This may include derivatives that are “embedded” in other derivative instruments or in certain existing assets or liabilities. We use derivative financial instruments, including interest rate swaps, options and financial futures, as a means of hedging exposure to equity price changes and/or interest rate risk on anticipated transactions or on existing assets and liabilities.

Interest rate risk is the risk of economic losses due to changes in the level of interest rates. We manage interest rate risk through active portfolio management and selective use of interest rate swaps as hedges to change the characteristics of certain assets and liabilities. With interest rate swap agreements, we exchange with a counterparty, at specified intervals, interest rate payments of differing character (for example, fixed-rate payments exchanged for variable-rate payments), based on an underlying principal balance (notional amount). No cash is exchanged at the outset of the contract and no principal payments are made by either party. The net interest accrued and the net interest payments made at each interest payment due date are recorded to interest income or expense, depending on the hedged item.

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FAIR VALUE HEDGES

We use interest rate swaps to hedge the change in fair value of certain fixed-rate assets and fixed-rate debt. At December 31, 2003 we had $892.1 of notional amounts outstanding relating to such hedges. As discussed in Note 1, these derivatives have been designated as fair value hedges and, because they have been determined to be highly effective, changes in their fair value and the related portions of the assets and debt that they hedge are recognized on a net basis in Net Realized Investment Gains (Losses) in the Consolidated Statements of Income (Loss). In January 2003, we discontinued $300.0 notional of interest rate swaps as the underlying medium-term notes were repaid. There were no significant fair value hedges discontinued during 2002.

Differences between the changes in fair value of these derivatives and the hedged items represent hedge ineffectiveness. In 2003, no amounts were recognized in earnings due to hedge ineffectiveness. In 2002 and 2001, we recognized a pretax loss of $1.3 and a pretax gain of $4.0 in Net Realized Investment Gains (Losses) in our Consolidated Statements of Income (Loss) due to hedge ineffectiveness.

CASH FLOW HEDGES

We also use interest rate swaps to hedge the variability of future cash flows arising from changes in interest rates associated with certain variable rate assets and forecasted transactions. At December 31, 2003 we had $414.4 of notional amounts outstanding relating to such hedges. As discussed in Note 1, these derivatives have been designated as cash flow hedges and, because they have been determined to be highly effective, we recognize the changes in fair value of the derivatives as a component of OCI, net of deferred income taxes, until the hedged transaction affects current earnings. At the time current earnings are affected by the variability of cash flows due to interest rate changes, the related portion of deferred gains or losses on cash flow hedge derivatives are reclassified from OCI and recorded in the Consolidated Statements of Income (Loss). Amounts recorded in OCI related to derivatives qualifying as cash flow hedges resulted in a decrease of $1.6 after tax for 2003 and an increase of $1.6 after tax for 2002. The change in OCI for 2003 included an after tax decrease of $11.3 related to the changes in fair value of the derivatives and an after tax increase of $9.7 related to amounts reclassified into the Consolidated Statements of Income (Loss). The change in OCI for 2002 included an after tax increase of $9.8 related to the change in fair value of derivatives and an after tax decrease of $8.2 related to amounts reclassified into the Consolidated Statements of Income (Loss).

An estimated $4.7 pretax of derivative instruments and hedging activity gains included in OCI will be reclassified into the Consolidated Statements of Income (Loss) during 2004 to offset the estimated amount of earnings that will be affected by the variability of cash flows due to interest rate changes.

The interest rate swaps related to forecasted transactions that are considered probable of occurring are considered to be highly effective and qualify for hedge treatment under SFAS 133. SFAS 133 requires that amounts deferred in OCI be reclassified into earnings either when the forecasted transaction occurs, or when it is considered not probable of occurring – whichever happens sooner. In 2003 and 2002, $9.9 and $7.0 after tax was reclassified from OCI to Net Realized Investment Gains (Losses) relating to forecasted transactions that were considered no longer probable of occurring. There were no such amounts reclassified in 2001.

At December 31, 2003, the maximum length of time over which we were hedging our exposure to future cash flows for forecasted transactions was approximately 30 months.

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Differences between the changes in fair value of cash flow hedges and the hedged items represent hedge ineffectiveness and are recognized in interest expense. In 2003, no amounts were recognized in earnings due to hedge ineffectiveness. In 2002 and 2001, we recognized a decrease of $0.5 and $0.3 pretax in interest expense due to hedge ineffectiveness.

In 2002, an after tax loss of $12.1 ($18.6 pretax) was released from OCI into Net Realized Investment Gains (Losses) related to cash flow hedges that were discontinued in connection with the retirement of the underlying commercial paper borrowings. There were no cash flow hedges discontinued during 2001 or 2003.

OTHER DERIVATIVES

In 1997, L&I introduced an equity indexed annuity (EIA) product that credits the policyholder based on a percentage of the gain in the S&P 500 Index. Sales of the EIA product were suspended in the fourth quarter of 1998. In connection with this product, Safeco has a hedging program with the objective to hedge the exposure to changes in the S&P 500 Index. The program consists of buying and writing S&P 500 index options, buying Treasury interest rate futures and trading S&P 500 futures and swaps. As permitted under a grandfathering clause in SFAS 133, we elected not to apply the fair value adjustment requirement of this statement to the embedded derivatives contained in the liability related to EIA products sold prior to January 1, 1999. The change in fair value of the options, futures and swaps used to economically hedge the EIA liability is recognized as an adjustment to Losses, LAE and Policy Benefits in the Consolidated Statements of Income (Loss). We recognized pretax gains of $17.0 in 2003 and pretax losses of $11.9 and $20.9 for 2002 and 2001 on these options, futures and swaps.

Our wholly owned subsidiary, Safeco Financial Products, Inc. (SFP) was incorporated in 2000 to write S&P 500 index options to mitigate the risk associated with the EIA product. Since 2001, SFP also engaged in limited derivatives activity for its own account by selling single-name credit default swaps, writing and hedging S&P 500 index options and investing in and hedging convertible bonds. These SFP activities were not designated for hedge accounting treatment under SFAS 133. Changes in the fair values of these instruments were recognized in Net Realized Investment Gains (Losses) in the Consolidated Statements of Income (Loss). The fee income on the credit default swaps and the earnings and fair value adjustments for the S&P 500 index options and the convertible bonds were included in Net Investment Income in the Consolidated Statements of Income (Loss). Pretax income (loss) for SFP was $(0.5), $3.6 and $6.7 in 2003, 2002 and 2001. Net realized investment gains (losses) before tax for SFP were $24.4 for 2003, $(28.3) for 2002 and $(18.2) for 2001. SFP’s operations were wound down as of December 31, 2003 and all of its derivative positions were terminated. Net realized investment gains and losses for 2003 include $3.4 pretax from the impact of terminating the derivative positions.

Our investments in mortgage-backed securities (see Note 2) principally includes collateralized mortgage obligations, pass-through and commercial loan-backed mortgage obligations, which are technically defined as derivative instruments. However, they are exempt from derivative disclosure and accounting requirements under SFAS 133.

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Counterparty credit risk is the risk that a counterparty to a derivative contract will be unable to perform its obligations. We manage counterparty credit risk on an individual counterparty basis and gains and losses are netted by counterparty. We mitigate counterparty credit risk through credit reviews, approval controls and by only entering into agreements with credit-worthy counterparties. We perform ongoing monitoring of counterparty credit exposure risk against credit limits. The contract or notional amounts of these instruments reflect the extent of involvement we have in a particular class of derivative financial instrument. However, the maximum loss of cash flow associated with these instruments can be less than these amounts. For interest rate swaps, forward contracts and financial futures, credit risk is limited to the amount that it would cost us to replace the contract. We are the writer of option contracts and as such have no credit risk on these contracts since the counterparty has no performance obligation after it has paid a premium.

Note 4: Fair Value of Financial Instruments

The aggregate fair value amounts disclosed here do not represent the underlying value of Safeco and, accordingly, care should be exercised in drawing conclusions about our business or financial condition based on the fair value information disclosed below.

We determine fair value amounts for financial instruments using available third-party market information. When such information is not available, we determine the fair value amounts using appropriate valuation methodologies including discounted cash flows and market prices of comparable instruments. Significant judgment is required in developing certain of these estimates of fair value and the estimates may not represent amounts at December 31, 2003 that would be realized in a current market exchange.

FIXED MATURITIES

Estimated fair values for fixed maturities, other than non-publicly traded fixed maturities, are based on quoted market prices or prices obtained from independent pricing services.

MARKETABLE EQUITY SECURITIES

Fair values for marketable equity securities, other than non-publicly traded equity securities, were based on quoted market prices.

Our investment portfolio included $315.2 and $335.9 of non-publicly traded fixed maturities and equity securities at December 31, 2003 and 2002. For these securities, fair value was determined through the use of other valuation techniques including independent pricing sources, using discounted cash flow methods, comparisons with quoted market prices of similar securities and using internally prepared valuations based on certain modeling and pricing methods.

MORTGAGE LOANS

We estimate the fair values for mortgage loans by discounting the projected cash flows using the current rate at which loans would be made to borrowers with similar credit ratings and for the same maturities.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

For cash, cash equivalents and short-term investments, carrying value is a reasonable estimate of fair value.

OTHER NOTES AND ACCOUNTS RECEIVABLE

For other notes and accounts receivable, carrying value is a reasonable estimate of fair value.

SEPARATE ACCOUNT ASSETS AND LIABILITIES

Separate Account assets and the related liabilities are reported at fair value.

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DERIVATIVE FINANCIAL INSTRUMENTS

In accordance with SFAS 133, all derivatives are carried at fair value on the Consolidated Balance Sheets. The fair values of the derivative financial instruments generally represent the estimated amounts that we would expect to receive or pay upon termination of the contracts as of the reporting date. Quoted fair values are available for certain derivatives. For derivative financial instruments not actively traded, we estimate fair values using values obtained from independent pricing services, internal modeling or quoted market prices of comparable instruments.

FUNDS HELD UNDER DEPOSIT CONTRACTS

We estimate the fair values of investment contracts (Funds Held Under Deposit Contracts) with defined maturities by discounting projected cash flows using rates that would be offered for similar contracts with the same remaining maturities. For investment contracts with no defined maturities, we estimate fair values to be the present surrender values.

DEBT

The carrying values of our debt that have variable interest rates are reasonable estimates of fair value. The fair values of our fixed-rated debt are estimated based on quotes from broker/dealers who market similar debt instruments.

Other insurance-related financial instruments are exempt from fair value disclosure requirements.

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The following table summarizes the carrying or reported values and corresponding fair values of financial instruments:

DECEMBER 31	2003						2002
	Carrying Amount			Fair Value			Carrying Amount		Fair Value
FINANCIAL ASSETS
Fixed Maturities	$	26,206.5		$	26,206.5		$	24,278.0	$	24,278.0
Marketable Equity Securities		1,279.0			1,279.0			1,108.8		1,108.8
Mortgage Loans		936.1			993.0			925.9		1,006.1
Cash and Cash Equivalents		197.4			197.4			188.5		188.5
Short-Term Investments		269.9			269.9			311.0		311.0
Other Notes and Accounts Receivable		180.3			180.3			162.3		162.3
Separate Account Assets		1,137.4			1,137.4			899.2		899.2
Derivative Financial Instruments:
Interest Rate Swaps		39.6			39.6			69.7		69.7
Options/Futures		5.6			5.6			—		—
FINANCIAL LIABILITIES
Funds Held Under Deposit Contracts		16,575.4			17,536.3			15,655.4		16,718.4
7.875% Medium Term Notes Due 2003		—			—			300.0		302.0
7.875% Notes Due 2005		—			—			200.0		201.7
6.875% Notes Due 2007		200.0			221.1			200.0		206.9
4.200% Notes Due 2008		200.0			200.6			—		—
4.875% Notes Due 2010		300.0			301.3			—		—
7.250% Notes Due 2012		375.0			432.9			375.0		394.6
8.072% Debentures Due 2037		876.3			960.7			876.3		876.2
Other Debt		14.2			14.2			48.8		48.8
Separate Account Liabilities		1,137.4			1,137.4			899.2		899.2
Derivative Financial Instruments:
SFP Credit Default Swaps		—			—			20.0		20.0
Interest Rate Swaps		(16.3	)		(16.3	)		21.8		21.8
Options/Futures		—			—			26.7		26.7

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Note 5: P&C Loss and LAE Reserves

The following table analyzes the changes in P&C loss and LAE reserves for 2003, 2002 and 2001. We record changes in estimated reserves in the Consolidated Statements of Income (Loss) in the year we make the change:

YEAR ENDED DECEMBER 31	2003		2002		2001
Loss and LAE Reserves at Beginning of Year	$	4,998.5	$	5,053.7	$	4,612.7
Less Reinsurance Recoverables on Unpaid Losses		411.6		415.9		343.6
Net Balance at Beginning of Year		4,586.9		4,637.8		4,269.1
Incurred Loss and LAE for Claims Occurring During:
Current Year		3,202.3		3,237.4		3,619.1
Prior Years		249.9		125.8		345.1
Total Incurred Loss and LAE		3,452.2		3,363.2		3,964.2
Loss and LAE Payments for Claims Occurring During:
Current Year		1,757.5		1,742.0		1,976.8
Prior Years		1,581.4		1,672.1		1,618.7
Total Loss and LAE Payments		3,338.9		3,414.1		3,595.5
Net Balance at End of Year		4,700.2		4,586.9		4,637.8
Plus Reinsurance Recoverables on Unpaid Losses		344.4		411.6		415.9
Loss and LAE Reserves at End of Year	$	5,044.6	$	4,998.5	$	5,053.7

2003

In 2003, we increased our estimates for P&C prior years’ loss and LAE reserves by $249.9. The total increase includes:

• $205.0 during the third quarter as a result of higher medical cost trends for workers compensation than previously expected.

• $44.9 in a number of lines at various times during the year due to emerging claim trends and related loss data.

Payout periods for workers compensation claims can be 50 years or more. However, because we focus on low-hazard risks, our average payout period is generally shorter than the industry average.

Since 2001, changes in our business have included:

• Improving our claims handling practices, putting greater emphasis on early recognition of exposure potential in case reserves

• Focusing on the settlement of long-term claims, increasing the number that we settle

• Focusing our writings on small- to medium-sized businesses

• Limiting our workers compensation writings in states where rate levels fall below our profitability targets

While we expect these business changes to reduce our ultimate losses, they have decreased the predictive value of our past data in estimating future loss reserves. With this in mind, in the second quarter of 2003, we began performing additional actuarial analysis primarily focused on medical inflation trends and changes in Safeco claim practices and mix of business. This produced divergent indications. As a consequence, in the third quarter of 2003, we took additional steps to evaluate medical inflation trends, reviewing Safeco and industry data, our claim files, loss reserve trends by state and case reserving patterns and practices.

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Our analysis showed higher medical payouts than previously expected, longer payout periods than previously expected and relatively stable indemnity payouts. Based on our analysis, we increased our loss and LAE reserves for workers compensation losses occurring in prior years by $205.0 pretax during the third quarter of 2003. Of this increase, $180.0 was related to loss and allocated LAE reserves. This increase included $130.0 in SBI Runoff, $48.0 in SBI Regular and $2.0 in SBI Special Accounts Facility. The largest amount of reserve development relates to California, particularly the large account business that we began in exiting in 2001. We also increased unallocated LAE reserves by $25.0 pretax. This increase included $14.9 in SBI Runoff, $9.6 in SBI Regular and $0.5 in SBI Special Accounts Facility. This increase reflects our estimate of the ongoing expense of servicing workers compensation claims. As claims remain open for longer periods of time, our costs to handle these claims rise.

2002

In 2002, we increased our estimates for P&C prior years’ loss and LAE reserves by $125.8. We made increases throughout the year as part of our quarterly evaluations based on emerging claim trends and related loss data. The increase of $125.8 included:

• $37.0 for construction defect claims

• $33.3 for workers compensation losses

• $24.4 for asbestos claims

• $31.1 for other loss reserves

The major factors driving our increases in loss reserves were:

• Construction defect claims – legal costs were higher than estimated. Efforts to mitigate the severity levels of construction defect losses led to higher legal costs.

• Workers compensation losses – the rate of medical cost inflation was higher than anticipated.

• Asbestos claims – losses related to our participation in pools and syndicates were higher than estimated.

• Other reserves – primarily higher than anticipated losses for our London operations that were put in runoff. The losses are due to some high layer excess coverages and the long reporting lag of these operations.

2001

In 2001, we increased our estimates for prior years’ loss and LAE by $345.1. The increase included:

• $240.0 during the third quarter as a result of a review of our P&C loss reserve adequacy

• $105.1 at various times during the year due primarily to continued rising medical costs that affected our workers compensation losses

The review of our P&C loss reserve adequacy included an independent actuarial study. The $240.0 loss reserve increase by operating segment included $65.0 for SBI Regular, $90.0 for SBI Runoff and $85.0 for P&C Other.

The P&C Other segment includes the runoff assumed reinsurance business that we acquired when we purchased American States in 1997.

The $240.0 loss reserve increase by coverage included $90.0 for construction defect claims, $80.0 for workers compensation losses and $70.0 for other coverages, primarily asbestos.

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The major factors driving our increases in loss reserves were:

• Construction defect claims – newly reported claims increased significantly during the first half of 2001. The increase was due primarily to increased litigation in California and more claim activity in other states. This occurred after claims appeared to have peaked in early 2000 and were trending down.

• Workers compensation losses – unexpected prior year loss development and increases in medical costs at levels higher than previously anticipated

• Asbestos claims – in 2001, the insurance industry was experiencing an expansion of asbestos claims to include smaller and more peripheral firms as defendants. In the first half of 2001, we were receiving more claims than in prior years. This led us to expect a larger number of asbestos claims affecting our reinsurance operations.

Note 6: Reinsurance

Our insurance subsidiaries use treaty and facultative reinsurance to manage exposure to potential losses for the property and casualty, surety and life insurance operations. The availability and cost of reinsurance are subject to prevailing market conditions, both in terms of price and available capacity. Although the reinsurer is liable to us to the extent of the reinsurance ceded, we remain primarily liable to the policyholders as the direct insurer on all risks reinsured.

Because the amount of reinsurance recoverables can vary depending on the size of an individual loss or, in some cases, the aggregate amount of all losses in a particular line of business, the exact amount of reinsurance recoverables is not known until all losses are settled. As a result, we estimate the amount of reinsurance recoverables we anticipate receiving based on the terms of our reinsurance contracts and historical experience.

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Reinsurance recoverables are composed of the following amounts at December 31:

DECEMBER 31	2003			2002
P&C INSURANCE
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves	$	344.4		$	411.6
Paid Losses and LAE		43.9			20.8
Allowance for Uncollectible Reinsurance		(16.3	)		(12.5	)
Total P&C Insurance		372.0			419.9
LIFE INSURANCE
Reinsurance Recoverables on:
Policy and Contract Claim Reserves		3.7			1.6
Paid Claims		1.8			0.9
Life Policy Liabilities		90.6			86.1
Total Life Insurance		96.1			88.6
ACCIDENT AND HEALTH INSURANCE
Reinsurance Recoverables on:
Policy and Contract Claim Reserves		83.4			70.3
Paid Claims		0.2			—
Total Accident and Health Insurance		83.6			70.3
Total Reinsurance Recoverables	$	551.7		$	578.8

Of the total P&C reinsurance recoverables balance at December 31, 2003, 23.2% was with mandatory reinsurance pools. Approximately 73.4% of the remaining amounts due from reinsurers outside the mandatory pools were rated A- or higher by A.M. Best; including 59.5% with the following four reinsurers: American Reinsurance Corporation, Swiss Reinsurance America Corporation, Employers Reinsurance Corporation and General/Cologne Reinsurance Corporation, all of which are rated A or higher by A.M. Best. Of the total L&I amounts due from reinsurers at December 31, 2003, 93.7% was from reinsurers rated A or higher by A.M. Best.

We evaluate the financial condition of our reinsurers to minimize our exposure to losses from reinsurer insolvencies. To our knowledge, none of our major reinsurers is currently experiencing material financial difficulties. Our estimated allowance for uncollectible reinsurance was $16.3 and $12.5 at December 31, 2003 and 2002. Our business is not substantially dependent upon any single reinsurer.

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The effects of reinsurance on life insurance in force and earned premiums are as follows:

DECEMBER 31	Direct		Ceded			Assumed			Net		Assumed to Net
2003
Life Insurance in force at year-end	$	66,495.4	$	(15,684.0	)	$	242.4		$	51,053.8	0.5	%
Earned Premiums
P&C Insurance		4,953.1		(144.1	)		92.8			4,901.8	1.9	%
Life Insurance		164.7		(29.9	)		0.6			135.4	0.4
Accident and Health Insurance		465.7		(18.6	)		98.0			545.1	18.0
Total	$	5,583.5	$	(192.6	)	$	191.4		$	5,582.3	3.4	%
2002
Life Insurance in force at year-end	$	63,354.6	$	(11,906.8	)	$	3,646.4		$	55,094.2	6.6	%
Earned Premiums
P&C Insurance		4,553.3		(124.4	)		92.4			4,521.3	2.0	%
Life Insurance		155.8		(25.4	)		6.9			137.3	5.0
Accident and Health Insurance		340.5		(15.6	)		137.4			462.3	29.7
Total	$	5,049.6	$	(165.4	)	$	236.7		$	5,120.9	4.6	%
2001
Life Insurance in force at year-end	$	57,330.1	$	(9,846.3	)	$	181.3		$	47,665.1	0.4	%
Earned Premiums
P&C Insurance		4,597.3		(151.5	)		27.0			4,472.8	0.6	%
Life Insurance		150.5		(21.0	)		(18.7	)		110.8	(16.9	)
Accident and Health Insurance		345.4		(13.6	)		18.9			350.7	5.4
Total	$	5,093.2	$	(186.1	)	$	27.2		$	4,934.3	0.6	%

Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above.

We present unearned premiums before the effects of reinsurance. We include the reinsurance amounts related to the unearned premium liability with Other Assets on the Consolidated Balance Sheets. These amounts totaled $45.2 and $42.1 at December 31, 2003 and 2002.

Ceded reinsurance reduced our incurred losses as follows:

YEAR ENDED DECEMBER 31	2003		2002		2001
P&C Insurance	$	13.9	$	45.2	$	130.5
Life Insurance		22.2		23.8		2.0
Accident and Health Insurance		10.8		4.1		10.3
Total Ceded Incurred Losses	$	46.9	$	73.1	$	142.8

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Note 7: Income Taxes

We use the liability method of accounting for income taxes in accordance with SFAS 109, “Accounting for Income Taxes,” under which deferred income tax assets and liabilities are determined based on the differences between their financial reporting and their tax bases and are measured using the enacted tax rates.

Differences between income taxes computed by applying the U.S. federal income tax rate of 35% to Income (Loss) from Continuing Operations before Income Taxes and the consolidated provision (benefit) for income taxes were as follows:

YEAR ENDED DECEMBER 31	2003					2002					2001
	Amount			% of Pretax Income		Amount			% of Pretax Income		Amount			% of Pretax Income
Income (Loss) from Continuing Operations before Income Taxes	$	441.1		100.0	%	$	393.4		100.0	%	$	(1,482.4	)	100.0	%
Computed “Expected” Tax Expense (Benefit)		154.4		35.0			137.6		35.0			(518.8	)	(35.0	)
Goodwill Write-off		—		—			—		—			137.7		9.3
Tax-Exempt Municipal Bond Income		(37.2	)	(8.4	)		(43.4	)	(11.0	)		(54.1	)	(3.7	)
Dividends Received Deduction		(24.5	)	(5.6	)		(13.0	)	(3.3	)		(10.1	)	(0.7	)
Other		9.2		2.1			11.1		2.8			8.2		0.6
Consolidated Provision (Benefit) for Income Taxes	$	101.9		23.1	%	$	92.3		23.5	%	$	(437.1	)	(29.5	)%
Current Provision (Benefit) for Income Taxes		66.6					39.0					(31.9	)
Deferred Provision (Benefit) for Income Taxes		35.3					53.3					(405.2	)
Consolidated Provision (Benefit) for Income Taxes	$	101.9				$	92.3				$	(437.1	)

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The tax effects of temporary differences that give rise to the deferred income tax assets and deferred income tax liabilities at December 31, 2003 and 2002 were as follows:

DECEMBER 31	2003			2002
Deferred Tax Assets
Goodwill	$	200.8		$	221.7
Discounting of Loss and LAE Reserves for Tax Purposes		215.0			218.0
Unearned Premium Liability		159.0			140.1
Net Operating Loss Carryforwards		23.5			110.0
Investment Impairments		125.6			94.1
Adjustment to Life Policy Liabilities		93.1			83.2
Capitalization of Life Policy Acquisition Costs		76.1			81.4
Postretirement Benefits		46.1			47.6
Alternative Minimum Tax Carryforwards		62.4			34.3
Other		89.4			96.8
Total Deferred Income Tax Assets		1,091.0			1,127.2
Deferred Tax Liabilities
Unrealized Appreciation of Investment Securities, Derivative Financial Instruments, Deferred Policy Acquisition Cost Valuation Allowance, Minimum Pension Liability and Foreign Currency Adjustment		811.4			629.8
Deferred Policy Acquisition Costs		254.5			240.3
Bond Discount Accrual		48.9			39.6
Other		68.6			92.9
Total Deferred Income Tax Liabilities		1,183.4			1,002.6
Net Deferred Income Tax Asset (Liability)	$	(92.4	)	$	124.6

As of December 31, 2003, we had $1,091.0 of gross deferred income tax assets, including total net operating loss carryforwards of $23.5 that expire from 2020 to 2021. Although realization of deferred income tax assets is not assured, we believe it is more likely than not the deferred income tax assets will be realized through future earnings, including but not limited to the generation of future operating income, reversal of existing temporary differences and available tax planning strategies. Accordingly, we have not recorded a valuation allowance for these assets.

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NOTE 8: Debt

The following table shows the total principal amount, current and long-term portions, interest rates and maturities of debt at December 31:

DECEMBER 31	2003						2002
	Total		Current		Long-Term		Total		Current		Long-Term
6.875% Notes Due 2007	$	200.0	$	—	$	200.0	$	200.0	$	—	$	200.0
4.200% Notes Due 2008		200.0		—		200.0		—		—		—
4.875% Notes Due 2010		300.0		—		300.0		—		—		—
7.250% Notes Due 2012		375.0		—		375.0		375.0		—		375.0
8.072% Debentures Due 2037		876.3		—		876.3		876.3		—		876.3
7.875% Medium-Term Notes Due 2003		—		—		—		300.0		300.0		—
7.875% Notes Due 2005		—		—		—		200.0		200.0		—
Other Notes and Loans Payable Due Through 2008, Weighted Average Interest Rates at December 31; 5.9% in 2003; 7.3% in 2002		14.2		4.9		9.3		48.8		31.4		17.4
Total Debt	$	1,965.5	$	4.9	$	1,960.6	$	2,000.1	$	531.4	$	1,468.7

At December 31, 2003, the aggregate annual principal installments payable under these obligations in each of the next five years and thereafter were as follows:

YEAR PAYABLE	AMOUNT DUE
2004	$	4.9
2005		2.7
2006		2.6
2007		196.8
2008		201.2
2009 and Thereafter		1,557.3
Total	$	1,965.5

On January 27, 2003, we issued $200.0 of senior notes with a coupon of 4.200% that mature in 2008 and $300.0 of senior notes with a coupon of 4.875% that mature in 2010. The notes are unsecured and rank equally with all other unsecured senior indebtedness of Safeco Corporation. The proceeds from the notes were used to repay the $300.0 principal amount of 7.875% medium-term notes due in March 2003 and to call and repay the $200.0 principal amount of 7.875% notes maturing in 2005 that were callable at par on April 1, 2003.

In March 2000, we issued $300.0 of medium-term notes at 7.875% that matured in March 2003. We used interest rate swap agreements, with notional amounts totaling $300.0 that converted these fixed rate medium-term note obligations into variable rates at 65.03 basis points over the 90-day LIBOR rate. These swaps were terminated to coincide with the maturity of this debt in March 2003.

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In August 2002, we issued $375.0 of senior notes with a coupon of 7.250% that mature in 2012. The notes are unsecured and rank equally with all other unsecured senior indebtedness of Safeco Corporation. The proceeds from the notes were used for the repayment of $299.0 of commercial paper borrowings, $18.7 for the termination of related interest rate swaps and $28.4 for repayment of medium-term notes. The balance was used for general corporate purposes. We simultaneously entered into a $375.0 notional interest rate swap to effectively convert the fixed rate senior note obligation into variable rates at 238.75 basis points over the 90-day LIBOR rate. As discussed in Note 3, the interest rate swap has been designated as a fair value hedge pursuant to SFAS 133 and is recorded at fair value on the Consolidated Balance Sheets to offset the corresponding changes in fair value of the debt.

In July 1997, we issued $200.0 of noncallable senior notes with a coupon of 6.875% that mature in 2007. We simultaneously entered into two interest rate swaps each at $100.0 notional amounts to effectively convert the fixed rate senior note obligation into variable rate at 457.25 and 458.60 basis points over the 90-day LIBOR rate. The interest rate swaps have been designated as fair value hedges pursuant to SFAS 133 and recorded at fair value on the Consolidated Balance Sheets.

We maintain a bank credit facility with $500.0 available through September 2005. We pay a fee to have the facility available and do not maintain deposits as compensating balances. The facility carries certain covenants that require us to maintain a specified minimum level of shareholders’ equity and a maximum debt-to-capitalization ratio. At December 31, 2003 and throughout 2003, we had no borrowings under the facility and we were in compliance with all its covenants.

In connection with the Trust’s issuance of the Capital Securities and the related purchase by Safeco of all of the Trust’s common securities (Common Securities), Safeco issued to the Trust the principal amount of $876.3 of its Debentures. We have the right, at any time, to defer payments of interest on the Debentures for up to five years. Consequently, the distributions on the Capital Securities and the Common Securities would be deferred (though such distributions would continue to accrue with interest since interest would accrue on the Debentures during any such extended interest payment period). In no case may the deferral of payments and distributions extend beyond the stated maturity dates of the respective securities. We cannot pay dividends on our common stock during such deferments. See Note 1 – FIN 46R, “Consolidation of Variable Interest Entities.”

NOTE 9: Comprehensive Income

Comprehensive income is defined as all changes in Shareholders’ Equity, except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income, which for us consists of changes in unrealized gains or losses on investments carried at market value, changes in foreign currency translation gains or losses, deferred policy acquisition costs valuation allowance, derivatives and minimum pension liability.

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The components of other comprehensive income or loss were as follows:

	Net Unrealized Gains (Losses) on Available- for-Sale Securities			Deferred Policy Acquisition Costs Valuation Allowance			Net Unrealized Gains on Derivative Instruments			Foreign Currency Translation Adjustment			Minimum Pension Liability			Deferred Taxes			Accumulated Other Comprehensive Income (Loss)
Balances at January 1, 2001	$	1,381.6		$	—		$	—		$	(11.2	)	$	—		$	(475.5	)	$	894.9
Gross Unrealized Gains (Losses) on Investment Securities		119.5			—			—			—			—			(40.8	)		78.7
Reclassification Adjustment for Net Realized Investment Gains Included in Net Loss		(93.0	)		—			—			—			—			31.5			(61.5	)
Derivative Instruments and Hedging Activities – Net Change		—			—			18.5			—			—			(6.5	)		12.0
Deferred Policy Acquisition Costs Valuation Allowance		—			(9.3	)		—			—			—			3.3			(6.0	)
Foreign Currency Translation		—			—			—			(1.9	)		—			0.6			(1.3	)
Balances at December 31, 2001		1,408.1			(9.3	)		18.5			(13.1	)		—			(487.4	)		916.8
Gross Unrealized Gains (Losses) on Investment Securities		556.6			—			—			—			—			(195.0	)		361.6
Reclassification Adjustment for Net Realized Investment Gains Included in Net Income		(82.5	)		—			—			—			—			29.0			(53.5	)
Derivative Instruments and Hedging Activities – Net Change		—			—			2.4			—			—			(0.8	)		1.6
Deferred Policy Acquisition Costs Valuation Allowance		—			(45.1	)		—			—			—			15.8			(29.3	)
Minimum Pension Liability		—			—			—			—			(13.5	)		4.7			(8.8	)
Foreign Currency Translation		—			—			—			(11.0	)		—			3.9			(7.1	)
Balances at December 31, 2002		1,882.2			(54.4	)		20.9			(24.1	)		(13.5	)		(629.8	)		1,181.3
Gross Unrealized Gains (Losses) on Investment Securities		436.3			—			—			—			—			(152.7	)		283.6
Reclassification Adjustment for Net Realized Investment Losses Included in Net Income		101.9			—			—			—			—			(36.1	)		65.8
Derivative Instruments and Hedging Activities – Net Change		—			—			(2.2	)		—			—			0.6			(1.6	)
Deferred Policy Acquisition Costs Valuation Allowance		—			(33.6	)		—			—			—			11.8			(21.8	)
Minimum Pension Liability		—			—			—			—			4.7			(1.6	)		3.1
Foreign Currency Translation		—			—			—			10.5			—			(3.6	)		6.9
Balances at December 31, 2003	$	2,420.4		$	(88.0	)	$	18.7		$	(13.6	)	$	(8.8	)	$	(811.4	)	$	1,517.3

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Note 10: Employee Benefit Plans

OVERVIEW

We sponsor defined contribution and defined benefit plans covering substantially all employees and provide a postretirement benefit program for certain retired employees. Eligibility for participation in the various plans is generally based on completion of a specified period of continuous service or date of hire. Employer contributions to these plans are made in cash.

401(K) PROFIT SHARING RETIREMENT PLAN

The Safeco 401(k)/Profit Sharing Retirement Plan is a defined contribution plan. It includes a minimum contribution of 3% of each eligible participant’s compensation, a matching contribution of 66.6% of a participant’s contributions up to 6% of eligible compensation and a profit-sharing component based on our income. No profit-sharing contributions were made in 2003, 2002 or 2001.

The following table summarizes defined contribution costs charged to income:

YEAR ENDED DECEMBER 31	2003		2002		2001
Minimum Contributions	$	15.6	$	16.2	$	14.5
401(k) Matching Contributions		15.7		15.5		16.0
Total	$	31.3	$	31.7	$	30.5

CASH BALANCE PLAN

The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan that provides benefits for each year of service after 1988, based on each eligible participant’s compensation plus a stipulated rate of return on their benefit balance. We make contributions to the CBP based on funding requirements set by the Employee Retirement Income Security Act (ERISA). We expect to contribute $12.9 to the CBP in 2004.

OTHER POSTRETIREMENT BENEFITS

We also provide certain healthcare and life insurance benefits, Other Postretirement Benefits (OPRB), for certain retired employees, their beneficiaries and eligible dependents. We expect to contribute $5.2 to the OPRB program in 2004.

During 2003, our OPRB program was amended. For current retirees and employees who are age 50 and over with sufficient service time by December 31, 2004, we will continue to subsidize a portion of the cost of retiree healthcare benefits, but at a reduced rate. The rate of increase in our subsidy for these healthcare benefits will be capped in future years. We will also continue to provide a capped amount of retiree life insurance benefits to current retirees and employees age 50 and over with sufficient service time. For current employees age 36 or older who do not otherwise meet the above requirements, we will provide access to our group healthcare plan at retirement, but participants will pay the entire cost of coverage. Retiree life insurance benefits will no longer be offered to this employee group. For current employees age 35 and under, and any employee hired after December 31, 2003 (regardless of age), retiree healthcare and life insurance benefits will no longer be provided. In addition, our OPRB benefit obligation was revalued to reflect the reduction in staff that is a part of our restructuring plan. These actions resulted in OPRB curtailment gains totaling $15.2 pretax in 2003.

Early in 2004, the FASB issued a staff position paper that permits sponsors of retiree benefit programs subject to SFAS 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions” to make an election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) until further authoritative guidance is issued. We have elected to make this deferral and, accordingly, have not reflected the effects of the Act on the obligation or annual costs of the OPRB program.

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OBLIGATIONS AND FUNDED STATUS OF CBP AND OPRB

We use December 31 as the measurement date for calculating the obligations related to the CBP and OPRB programs. The following tables summarize the obligations and assets related to these programs:

	CBP
DECEMBER 31	2003			2002
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year	$	129.5		$	146.8
Service Cost		9.7			4.7
Interest Cost		8.5			10.3
Actuarial (Gain) Loss		2.2			(11.3	)
Benefits Paid		(12.0	)		(21.0	)
Benefit Obligation at End of Year		137.9			129.5
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		96.3			125.0
Actual Return on Plan Assets		19.3			(15.3	)
Employer Contributions		8.4			7.6
Benefits Paid		(12.0	)		(21.0	)
Fair Value of Plan Assets at End of Year		112.0			96.3
Underfunded Status of Plan		(25.9	)		(33.2	)
Unrecognized Net Actuarial Loss		8.8			19.5
Unrecognized Prior Service Cost		0.9			1.1
Net Amount Recognized		(16.2	)		(12.6	)
Amounts Recognized in Consolidated Balance Sheets
Accrued Benefit Liability		(25.9	)		(27.2	)
Intangible Asset		0.9			1.1
Other Comprehensive Income – Minimum Pension Liability		8.8			13.5
Net Amount Recognized	$	(16.2	)	$	(12.6	)

We changed to the traditional unit credit method from the projected unit credit method to measure our projected benefit obligation at December 31, 2003, in accordance with EITF 03-4. As a result, our projected benefit obligation and accumulated benefit obligation were equal at December 31, 2003. This change increased the actuarial gain by $6.4 as of December 31, 2003 and will be amortized into expense over the average remaining service period of all active participants, in accordance with SFAS 87.

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	OPRB
DECEMBER 31	2003			2002
CHANGE IN BENEFIT OBLIGATION
Benefit Obligation at Beginning of Year	$	175.3		$	133.5
Service Cost		5.3			4.9
Interest Cost		9.8			9.4
Actuarial Loss		9.8			34.0
Amendments		(67.4	)		—
Participant Contributions		3.7			2.5
Curtailments		(51.5	)		—
Benefits Paid		(9.9	)		(9.0	)
Benefit Obligation at End of Year		75.1			175.3
CHANGE IN PLAN ASSETS
Fair Value of Plan Assets at Beginning of Year		2.0			2.9
Actual Return on Plan Assets		—			0.1
Employer Contributions		5.4			5.5
Participant Contributions		3.7			2.5
Benefits Paid		(9.9	)		(9.0	)
Fair Value of Plan Assets at End of Year		1.2			2.0
Underfunded Status of Plan		(73.9	)		(173.3	)
Unrecognized Net Actuarial Loss		1.5			31.4
Unrecognized Prior Service Cost		(59.1	)		5.8
Net Amount Recognized	$	(131.5	)	$	(136.1	)

The accumulated benefit obligation for the CBP was $137.9 and $123.5 at December 31, 2003 and 2002.

The following actuarial assumptions were used in the computation of the obligation associated with the CBP and OPRB:

DECEMBER 31	2003		2002
Pension Benefits
Discount Rate	6.25	%	6.75	%
Rate of Compensation Increases	5.00		5.00
Other Postretirement Benefits
Discount Rate	6.25	%	6.75	%

In addition, the accumulated postretirement benefit obligation at December 31, 2003 was determined using a healthcare cost trend rate of 14% for 2004, gradually decreasing to 5% in 2013 and remaining at that level thereafter. A 1% increase (decrease) in the assumed healthcare cost trend rate for each year would not have a material impact on the OPRB obligation or net periodic OPRB cost.

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CBP assets are invested in fixed maturities and equity securities using a strategy that manages investment risk through diversification among asset classes, investment styles, industry weightings and issuer weightings. The following table displays target allocations for 2004, as well as the distribution of plan assets at year-end:

	Target Allocation		Percentage of Plan Assets At December 31
ASSET ALLOCATION	2004		2003		2002
PENSION (CBP) ASSETS
Equity Securities	60	%	67.0	%	59.9	%
Fixed Maturities	40	%	32.8	%	37.8	%
Cash Equivalents	Up to 20	%	0.2	%	2.3	%

The following tables summarize CBP and OPRB costs charged (credited) to income:

	CBP
YEAR ENDED DECEMBER 31	2003			2002			2001
Service Cost	$	9.7		$	4.7		$	6.3
Interest Cost		8.5			10.3			10.6
Expected Return on Plan Assets		(7.7	)		(10.4	)		(11.5	)
Settlement Loss		—			3.1			—
Amortization of Prior Service Cost and Unrecognized Net Actuarial Loss		1.5			0.2			—
Total	$	12.0		$	7.9		$	5.4
	OPRB
YEAR ENDED DECEMBER 31	2003			2002			2001
Service Cost	$	5.3		$	4.9		$	5.1
Interest Cost		9.8			9.4			10.5
Expected Return on Plan Assets		(0.1	)		(0.1	)		(0.2	)
Curtailment Gain		(15.2	)		—			—
Amortization of Prior Service Cost and Unrecognized Net Actuarial (Gain) Loss		(1.2	)		0.7			1.3
Total	$	(1.4	)	$	14.9		$	16.7

We estimate that benefit payments related to CBP and OPRB over the next 10 years will be as follows:

	Estimated Benefit Payment
Year of Payment	CBP		OPRB
2004	$	21.1	$	5.1
2005		14.6		5.4
2006		14.8		5.5
2007		14.8		5.7
2008		14.9		5.8
2009-2013		71.1		27.9

The 2004 estimate reflects the impact of the staff reduction in our corporate operations in 2003.

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Charges to income for the CBP and OPRB are calculated using the following actuarial assumptions:

DECEMBER 31	2003		2002		2001
Pension Benefits
Discount Rate	6.75	%	7.25	%	7.50	%
Expected Rate of Return on Plan Assets	8.00		8.50		9.00
Rate of Compensation Increases	5.00		5.00		6.00
Other Postretirement Benefits
Discount Rate	6.75	%	7.25	%	7.50	%

We determine the expected rate of return assumption for the CBP based on the expected allocation of plan assets, the historical and anticipated long-term future performance of various asset sectors in which CBP expects to invest and other relevant factors.

Note 11: Stock Incentive Plans

The Safeco Long-Term Incentive Plan of 1997 (the Plan), as amended, provides for the issuance of up to 12,000,000 shares of our common stock. Incentive stock options, non-qualified stock options, restricted stock rights (RSR), performance stock rights (PSR) and stock appreciation rights are authorized under the Plan. We grant stock options at exercise prices not less than the fair market value of the stock on the date of the grant. The terms and conditions upon which options become exercisable may vary among grants, however, option rights expire no later than 10 years from the date of grant. We grant options and rights to key employees. Options generally vest on a straight-line basis over four years. In May 2002, a one-time grant of 1,018,000 non-qualified stock options was made to our employees not otherwise eligible for option grants. These newly issued options vest over two years and expire five years from the date of grant.

At December 31, 2003, there were 7,351,409 stock options outstanding (vested and unvested), 333,100 RSR and PSR share rights awarded but not yet matured, and 3,921,254 shares of common stock reserved for future options and rights. Stock-based compensation expense was $7.3 ($5.7 after tax) for 2003.

Changes in stock options for the three years ended December 31, 2003 are as follows:

	Options Outstanding
	Shares		Weighted- Average Price Per Share
Balance January 1, 2001	2,917,679		$	31.69
Granted	894,750			26.45
Exercised	(317,293	)		23.74
Canceled	(710,902	)		32.33
Balance December 31, 2001	2,784,234			30.75
Granted	3,293,300			33.20
Exercised	(253,392	)		26.50
Canceled	(192,835	)		35.95
Balance December 31, 2002	5,631,307			32.20
Granted	2,422,470			38.11
Exercised	(353,143	)		27.16
Canceled	(349,225	)		39.17
Balance December 31, 2003	7,351,409		$	34.24

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Information about stock options outstanding and exercisable at December 31, 2003 is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted- Average Price Per Share		Remaining Contractual Life (Years)	Shares	Weighted- Average Price Per Share
$20.00 – $26.00	649,835	$	22.25	6.20	258,885	$	20.52
$26.01 – $31.75	703,721		27.88	6.83	361,821		27.85
$31.76 – $36.00	2,975,792		33.30	6.87	1,036,520		33.26
$36.01 – $52.00	3,022,061		39.22	8.29	700,841		42.71
Total	7,351,409	$	34.24	7.39	2,358,067	$	33.84

RSRs provide for the holder to receive a stated number of share rights if the holder remains employed for a stated number of years. PSRs provide for the holder to receive a stated number of share rights if the holder attains certain specified performance goals within a stated performance cycle.

Matured RSRs and earned PSRs are issued in stock or in some instances, paid in cash based on the fair market value of our stock on the issue/payment date. We charged to operations $5.0, $3.8 and $1.4 during 2003, 2002 and 2001 for the compensation element of restricted and performance stock rights. These expense amounts are determined based on variable plan accounting under SFAS 123. RSRs compensation expense is charged to operations over the vesting period and PSRs compensation expense is charged to operations when it is probable the performance goals will be achieved.

Changes in RSRs and PSRs for the three years ended December 31, 2003 are as follows:

	Share Rights
Balance January 1, 2001	266,477
Awarded	174,592
Matured/Earned	(29,929	)
Canceled	(167,494	)
Balance December 31, 2001	243,646
Awarded	148,532
Matured/Earned	(54,820	)
Canceled	(38,921	)
Balance December 31, 2002	298,437
Awarded	147,739
Matured/Earned	(82,130	)
Canceled	(30,946	)
Balance December 31, 2003	333,100

The Safeco Agency Stock Purchase Plan of 2000 (Agency Plan) provides for the issuance of up to 1,000,000 shares of our common stock to agents that meet certain eligibility requirements. Agents meeting the eligibility requirements can purchase our common stock at a discount from the closing market price on the purchase day.

Common stock issued under the Agency Plan is held in a custodial account and restricted from sale, transfer or assignment during the two-year restriction period. As of December 31, 2003, a total of 75,181 cumulative shares had been purchased, all of which were held in the custodial account.

Note 12: Commitments and Contingencies

LEASES

We lease office space, commercial real estate and certain equipment under leases that expire at various dates through 2018. We account for these leases as operating leases. We do not have any capitalized leases.

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Minimum rental commitments for the next five years and thereafter, including cost escalation clauses, for leases in effect at December 31, 2003 are as follows:

Year Payable	Minimum Rentals
2004	$	52.0
2005		48.1
2006		44.4
2007		40.8
2008		37.1
2009 and Thereafter		103.0
Total	$	325.4

The amount of rent expense, net of sublease rental income, charged to operations was $53.7, $49.6 and $45.0 for 2003, 2002 and 2001.

INSURANCE ASSESSMENTS

Under state insolvency and guaranty laws, insurers licensed to do business in the state can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Liabilities for guaranty funds are not discounted or recorded net of premium taxes and are included in Other Liabilities on the Consolidated Balance Sheets. At December 31, 2003 and 2002 we had liabilities of $18.0 and $17.5 for estimated guaranty fund assessments.

Because of the nature of their businesses, our insurance and other subsidiaries are subject to legal actions filed or threatened in the ordinary course of their business operations, generally as liability insurers defending third-party claims brought against their insureds or as insurers defending policy coverage claims brought against them. We do not believe that such litigation will have a material adverse effect on our financial condition, future operating results or liquidity.

GUARANTEES

The following guarantees were in effect at December 31, 2003:

In April 2003, Safeco Corporation issued a letter of credit to Citibank on behalf of Safeco UK, Ltd. (Safeco UK), a wholly owned subsidiary. Safeco UK conducted our London operations that were put into runoff in the third quarter of 2002. The letter of credit guarantees payment of Safeco UK’s share of potential losses up to $19.6, arising from prior participation in a London reinsurance syndicate. Prior to April 2003, this guarantee was provided by Safeco Insurance Company of America (SICA), a wholly owned subsidiary of Safeco Corporation.

In June 2000, Safeco Life Insurance Company (Safeco Life), a wholly owned subsidiary, issued a guarantee to General America Corporation (GAC), a wholly owned subsidiary. Under the guarantee, Safeco Life guarantees repayment of a loan made by GAC to Investar. The loan was made in June 2000 and matures in June 2017. The principal balance of $15.9 is included with Other Notes and Accounts Receivable on the Consolidated Balance Sheets.

In 1993, SICA issued a guarantee to the Bank of New York on behalf of Market Square Real Estate, Inc. (Market Square), a limited liability company in which SICA was an investor. The guarantee covers the repayment of $10.0 of municipal bonds issued by the City of Minneapolis. The proceeds from the 1993 bond issuance were then loaned to Market Square. In 1997, SICA sold its interest in Market Square but remained a guarantor for the repayment of the bonds. As a condition to the sale, Market Square granted SICA a first mortgage on its assets, as security, for any payments SICA may make pursuant to the guarantee. The repayment of the loan made to Market Square by the City of Minneapolis will fund the scheduled repayment of the bonds in 2006. SICA has not made any payments pursuant to the guarantee.

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Note 13: Acquisitions

In July 2002, we acquired the group stop-loss medical business of Swiss Re Life & Health America Holding Company (Swiss Re). The primary purpose of the acquisition was to build a greater presence in the stop-loss medical business market and leverage our expertise in this line of business. The transaction was in the form of an indemnity coinsurance agreement, with total assets acquired of $137.0 including the acquisition of Fort Wayne Risk Management Services, and resulted in the recognition of $26.0 of other intangible assets and $26.2 of goodwill. Nearly all of the other intangible assets are composed of the value of the reinsurance contracts (and the related customer relationships) and are being amortized over a useful life of 20 years in proportion to estimated future gross profits. The assets and liabilities acquired from Swiss Re are included on the Consolidated Balance Sheets for 2002 and, beginning in July 2002, the results of these operations were included in the Consolidated Statements of Income (Loss). The acquired business generated earned premiums of $116.0 from the acquisition date through December 31, 2002. For segment reporting purposes, these operations are included with the results of L&I’s Group segment.

In September 2001, we acquired the lender-placed insurance business of ACE Limited. With $80.0 of premiums, the purpose of the acquisition was to build a greater presence as a provider of lender-placed hazard insurance. For segment reporting purposes, these operations are included with P&C in the SBI Special Accounts Facility segment.

Note 14: Runoff of London Operations

In the third quarter of 2002, we decided to put our London operations into runoff, resulting in a charge of $26.3 pretax in the quarter. This charge primarily reflected reserve strengthening to provide for emerging losses as the business is run off.

Note 15: Discontinued Operations

In August 2001, we completed the sale of Safeco Credit Company, Inc. (Safeco Credit). The sale resulted in net proceeds of $250.0 and a pretax gain of $97.0. The $54.0 after tax gain on the sale is reported in the Consolidated Statements of Income (Loss). Safeco Credit generated after tax profits of $4.2 for the seven months ended July 31, 2001.

Note 16: Restructuring Charges

2003 RESTRUCTURING

We have identified expense reductions across the company that will enable us to better compete in property and casualty markets. In September 2003, we announced that we would eliminate approximately 500 positions. We expect this initiative to reduce our 2004 operating expenses by approximately $75. As of December 31, 2003, approximately 400 of these positions had been eliminated. Positions being eliminated are primarily in our corporate departments. We have incurred $9.2 ($6.0 after tax) in 2003 for accrued expenses for restructuring, primarily for one-time termination benefits and contract termination costs. As of December 31, 2003, $8.3 of such costs had been paid with $0.9 remaining unpaid and accrued.

Charges have been recognized and accrued as a restructuring charge and allocated to our reportable segments in accordance with SFAS 146, which is effective for restructuring activities initiated after December 2002. Other charges that do not meet the criteria for accrual will be expensed as restructuring charges when incurred. We expect to incur $3.7 of additional expenses in 2004 associated with these actions.

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Costs accrued in 2003 and total estimated costs expected to be incurred associated with the restructuring are as follows:

	Total Expected Costs		2003
One-Time Termination Costs	$	9.7	$	8.2
Lease Termination and Other Costs		3.2		1.0
Total	$	12.9	$	9.2

Costs accrued in 2003 and total estimated costs expected to be incurred associated with the restructuring by reportable segments are as follows:

	Total Expected Costs		2003
Safeco Personal Insurance (SPI)
Personal Auto	$	5.5	$	3.8
Homeowners		1.9		1.3
Specialty		0.5		0.3
Total SPI		7.9		5.4
Safeco Business Insurance (SBI)
SBI Regular		2.7		1.9
SBI Special Accounts Facility		0.9		0.6
SBI Runoff		—		—
Total SBI		3.6		2.5
Surety		0.4		0.3
P&C Other		0.1		0.1
Total P&C		12.0		8.3
Corporate		0.9		0.9
Total	$	12.9	$	9.2

The activity related to the accrued restructuring charges as of December 31, 2003 was as follows:

	Balance December 31, 2002		Costs Accrued		Amounts Paid		Balance at December 31, 2003
One-Time Termination Costs	$	—	$	8.2	$	8.0	$	0.2
Lease Terminations and Other Costs		—		1.0		0.3		0.7
Total	$	—	$	9.2	$	8.3	$	0.9

2001/2002 RESTRUCTURING

In July 2001, we announced that we would eliminate approximately 1,200 jobs by the end of 2003. From the beginning of 2001 through the end of 2002, our total employment decreased by approximately 1,200, excluding the reduction due to the sale of Safeco Credit and the increase associated with the acquisition of Swiss Re’s stop-loss medical business. Positions eliminated were in the corporate headquarters and regional P&C operations.

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Total restructuring charges and period costs associated with these changes were $66.1 through December 31, 2002. Exit costs totaled $18.0 and were accrued in the third quarter of 2001. Period costs totaled $48.1: $26.3 in 2001 and $21.8 in 2002. The accrued exit costs of $18.0 included severance costs and lease termination and other costs. Other charges not meeting the definition of exit costs have been expensed as restructuring charges in the periods incurred. These period costs include various one-time termination costs, related consulting fees and lease termination costs.

The activity related to the accrued restructuring charges as of December 31, 2002 was as follows:

	Balance December 31, 2001		Costs Accrued			Amounts Paid 2002			Balance December 31, 2002
One-Time Termination Costs	$	13.0	$	(8.0	)	$	(5.0	)	$	—
Lease Terminations and Other Costs		5.0		(1.5	)		(3.5	)		—
Total	$	18.0	$	(9.5	)	$	(8.5	)	$	—

Note 17: Intangibles and Goodwill

Effective March 31, 2001, we elected to change our accounting policy for assessing goodwill from one based on undiscounted cash flows to one based on a market value method. We determined the market value method to be a preferable way to assess the current value of goodwill. As a result, we recorded a goodwill write-off of $1,201.0 ($916.9 after tax) in the first quarter of 2001.

The market value method used to assess the recoverability of goodwill compared our market capitalization (stock price multiplied by shares outstanding) to our reported book value (total shareholders’ equity). Given the extent of the shortfall of market capitalization compared to the reported book value as of March 31, 2001 and the fact that a similar shortfall had existed for almost two years, we concluded that under the new method the entire goodwill asset was impaired and a write-off of the full amount was necessary. The majority of this goodwill (97%) resulted from the 1997 acquisition of American States Financial Corporation whose operations have been fully integrated into our other P&C operations.

In the fourth quarter of 2001, after completion of a study, we determined that the goodwill in our London operations was impaired, resulting in a write-down of $13.1 ($8.5 after tax).

We adopted SFAS 142 on January 1, 2002. Under SFAS 142, we no longer amortize goodwill and indefinite-lived intangible assets but we review them annually (or more frequently if impairment indicators arise) for impairment. We amortize separable intangible assets over their useful lives unless we deem them to have an indefinite life. As a result of adopting SFAS 142, we reclassified $28.0 of other intangibles (net of $5.0 accumulated amortization) to goodwill in 2002. The adoption had minimal impact on the Consolidated Statements of Income (Loss).

The following table presents our intangibles and goodwill at December 31, 2003 and 2002. The purchase of Swiss Re’s stop-loss medical business in 2002 increased intangible assets by $26.0 and goodwill assets by $26.2. We are amortizing the acquired intangibles over an average estimated useful life of 20 years:

DECEMBER 31, 2003	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill	$	59.8	$	—		$	59.8
Present Value of Future Profits		82.3		(37.1	)		45.2
Insurance Policy Expirations		69.0		(46.0	)		23.0
Distribution Agreement		35.0		(11.9	)		23.1
Non-compete Agreements		15.3		(11.2	)		4.1
Other		34.8		(6.4	)		28.4
Total	$	296.2	$	(112.6	)	$	183.6

137

DECEMBER 31, 2002	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Goodwill	$	58.5	$	—		$	58.5
Present Value of Future Profits		82.3		(33.0	)		49.3
Insurance Policy Expirations		64.5		(42.3	)		22.2
Distribution Agreement		35.0		(10.6	)		24.4
Non-compete Agreements		12.0		(8.9	)		3.1
Other		36.6		(4.1	)		32.5
Total	$	288.9	$	(98.9	)	$	190.0

Pretax amortization expense was $16.6, $18.0 and $33.5 for 2003, 2002 and 2001.

The estimated future amortization of our intangibles for the next five years and thereafter is as follows:

Pretax	Estimated Future Amortization
2004	$	14.2
2005		13.1
2006		11.8
2007		8.9
2008		6.0
2009 and Thereafter		69.8
Total	$	123.8

138

The changes in the carrying value of goodwill for each reportable segment are presented in the following tables. For description of segments see Note 20 – Segment Information:

REPORTABLE SEGMENTS	January 1, 2003		Additions		Write-off			December 31, 2003
Property & Casualty
SBI – Special Accounts Facility	$	2.8	$	—	$	—		$	2.8
Life & Investments
Group		26.2		—		—			26.2
L&I Other		29.5		1.8		(0.5	)		30.8
Total	$	58.5	$	1.8	$	(0.5	)	$	59.8
REPORTABLE SEGMENTS	January 1, 2002		Additions		Reclassification			December 31, 2002
Property & Casualty
SBI – Special Accounts Facility	$	2.8	$	—	$	—		$	2.8
Life & Investments
Group		—		26.2		—			26.2
L&I Other		0.1		1.4		28.0			29.5
Total	$	2.9	$	27.6	$	28.0		$	58.5

The following table reverses the effect of the intangibles and goodwill amortization in 2001 as if SFAS 142 had been adopted in those years to show the comparability of our reported net income (loss) in the periods presented:

YEAR ENDED DECEMBER 31	2003		2002		2001
Reported Net Income (Loss)	$	339.2	$	301.1	$	(989.2	)
Add back: Intangibles and Goodwill Amortization		—		—		11.1
Adjusted Net Income (Loss)	$	339.2	$	301.1	$	(978.1	)
INCOME (LOSS) PER SHARE– DILUTED
Reported Net Income (Loss)	$	2.44	$	2.33	$	(7.75	)
Add back: Intangibles and Goodwill Amortization		—		—		0.09
Adjusted Net Income (Loss)	$	2.44	$	2.33	$	(7.66	)
INCOME (LOSS) PER SHARE – BASIC
Reported Net Income (Loss)	$	2.45	$	2.33	$	(7.75	)
Add back: Intangibles and Goodwill Amortization		—		—		0.09
Adjusted Net Income (Loss)	$	2.45	$	2.33	$	(7.66	)

Note 18: Dividend Restrictions

Our insurance subsidiaries are restricted by state regulations as to the aggregate amount of dividends they may pay in any consecutive twelve-month period without regulatory approval. Generally, our insurance subsidiaries may pay dividends out of earned surplus without approval with 30 days prior written notice within certain limits. The limits are generally based on the greater of 10% of the prior year statutory surplus or prior year statutory net gain from operations. Dividends in excess of the prescribed limits or the subsidiary’s earned surplus require formal state insurance commission approval. Based on statutory limits as of December 31, 2003, we are able to receive approximately $314.6 in dividends from our P&C insurance subsidiaries and $166.6 in dividends from our L&I insurance subsidiaries in 2004 without obtaining prior regulatory approval.

139

Note 19: Statutory Financial Information

State insurance regulatory authorities require our insurance subsidiaries to file annual statements prepared on an accounting basis prescribed by the National Association of Insurance Commissioners’ (NAIC) revised Accounting Practices and Procedures Manual or permitted by their respective state of domicile (that is, on a statutory basis). Prescribed statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. Permitted statutory accounting practices encompass all accounting practices not so prescribed.

Statutory net income differs from net income reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, life insurance reserves are based on different assumptions and income tax expense reflects only taxes paid or currently payable.

The following tables summarize statutory net income (loss) and statutory capital and surplus:

STATUTORY NET INCOME (LOSS)

YEAR ENDED DECEMBER 31	2003		2002		2001
Property & Casualty	$	382.3	$	464.5	$	(218.2	)
Life		171.3		30.1		132.0

STATUTORY CAPITAL AND SURPLUS

DECEMBER 31	2003		2002
Property & Casualty	$	2,789.7	$	2,509.5
Life		1,059.6		903.4

Prior to 2003, under Washington State’s insurance code, investments in foreign securities were not considered admitted assets for statutory accounting purposes. However, statutory accounting practices prescribed by the NAIC allowed insurance companies to account for foreign investments as admitted assets. The Washington State Insurance Commissioner has the express authority to permit an insurer to make investments not otherwise eligible under the state’s insurance code and exercised this authority by permitting our insurance subsidiaries to account for our foreign investments as admitted assets. The P&C insurance subsidiaries held investments in foreign corporations and municipalities of $114.9 at December 31, 2002. The L&I insurance subsidiaries held investments in foreign corporations and municipalities of $162.9 at December 31, 2002. These amounts increased the surplus of our insurance subsidiaries accordingly.

In 2003, Washington State’s insurance code was revised to allow foreign investments to be treated as admitted assets subject to certain limitations. At December 31, 2003, our insurance subsidiaries were in compliance with these regulations.

Note 20: Segment Information

We operate on a nationwide basis in two principal businesses: (1) property and casualty insurance including surety (P&C) and (2) life insurance and asset management (L&I).

P&C

Our P&C insurance operations are organized around our four business segments: Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI), Surety and P&C Other. These business segments are a combination of reportable segments that have similar products and services and are managed separately as described below.

140

SAFECO PERSONAL INSURANCE

SPI offers personal auto, homeowners and other specialty insurance products for individuals, and the SPI operations are organized around three reportable segments–Personal Auto, Homeowners and Specialty, which are managed separately by these product groupings.

The Personal Auto segment provides coverage for liability of our customers to others for both bodily injury and property damage, for injuries sustained by our customers and for physical damage to our customers’ vehicles from collision and other hazards.

The Homeowners segment protects homes, condominiums and rental property contents against losses from a wide variety of hazards. We protect individuals from liability for accidents that occur on their property.

The Specialty segment provides umbrella, earthquake, dwelling fire, inland marine, recreational vehicle, motorcycle and boat insurance coverage for individuals.

SAFECO BUSINESS INSURANCE

SBI offers business owner policies, commercial multi-peril packages, workers compensation, property, general liability and commercial auto. SBI’s operations are organized around three segments: SBI Regular, SBI Special Accounts Facility and SBI Runoff, which are managed separately based on the nature of the underlying insured.

SBI Regular is our core commercial segment writing a variety of commercial insurance products for small- to medium-sized businesses (customers who pay annual written premiums of $100,000 or less). Our principal business insurance products include business owner policies, commercial multi-peril, workers compensation, property, general liability and commercial auto.

SBI Special Accounts Facility writes large commercial accounts for our key agents who sell our core P&C products as well as our four specialty commercial insurance programs which are lender-placed property, agents’ errors and omissions, mini-storage and warehouse properties and non-profit social service organizations.

SBI Runoff includes results for the large commercial business accounts and specialty programs that we have exited.

SURETY

We offer surety bonds primarily for construction, performance and legal matters that include appeals, probate and bankruptcies.

P&C OTHER

P&C Other includes runoff assumed reinsurance business, results from our London operations that are in runoff and certain other product lines we have exited. It also includes our non-voluntary personal lines business.

L&I

On September 29, 2003, we announced our intent to sell our L&I businesses. As of December 31, 2003, we have not met all of the “held-for-sale” criteria under SFAS 144 and therefore we have presented L&I as a continuing operation in the Consolidated Financial Statements.

141

L&I provides a broad range of products and services that include individual and group insurance products, annuity products, mutual funds and investment advisory services. These operations are managed separately as six reportable segments: Group, Income Annuities, Retirement Services, Individual, Asset Management and L&I Other based on product groupings.

Group’s principal product is stop-loss medical insurance sold to employers. We sell this product to companies with self-insured medical plans. Also included in this segment are life, accidental death and dismemberment insurance and disability products.

Income Annuities’ principal product is the structured settlement annuity that is sold to fund third party personal injury settlements, providing a reliable income stream to the injured party.

Retirement Services products are primarily fixed and variable deferred annuities (both qualified and non-qualified), tax-sheltered annuities (marketed to teachers and not-for-profit organizations), guaranteed investment contracts and corporate retirement funds.

Individual’s products include term, universal and variable universal life and bank-owned life insurance (BOLI).

Asset Management provides investment advisory services for our mutual funds, variable insurance portfolios, institutional and trust accounts.

L&I Other is composed mainly of investment income resulting from the investment of capital and accumulated earnings of the reportable segments. L&I Other also includes the results of a wholly owned subsidiary, Talbot Financial Corporation (Talbot), our insurance agency that distributes property and casualty and life insurance products.

CORPORATE

In addition to these reportable segments, certain activities are reported in the Corporate segment and not allocated to individual segments. The Corporate segment includes operating results for the parent company, which includes interest expense for our debt; SFP, which was engaged in limited derivative activities until it was wound down at December 31, 2003; intercompany eliminations and other corporate activities.

Our management measures segment profit or loss for P&C based upon underwriting results. Underwriting results (profit or loss) represent the net amount of earned premiums less underwriting losses and expenses on a pretax basis. Management views underwriting results as a critical measure to assess the effectiveness of the underwriting of the P&C operations.

L&I results are evaluated based on pretax operating earnings, which excludes net realized investment gains and losses. Management believes the presentation of segment pretax operating earnings enhances the understanding of our results of operations. Net realized investment gains and losses can fluctuate significantly and distort the comparison of our results.

Underwriting results and segment pretax operating earnings are not a substitute for net income determined in accordance with GAAP.

142

The following tables present selected financial information by segment and reconcile segment revenues, underwriting results and pretax operating earnings to amounts reported in the Consolidated Statements of Income (Loss):

REVENUES

YEAR ENDED DECEMBER 31	2003			2002		2001
Property & Casualty Earned Premiums
Safeco Personal Insurance (SPI)
Personal Auto	$	2,269.1		$	1,947.1	$	1,767.4
Homeowners		768.1			757.4		740.6
Specialty		201.8			203.1		201.6
Total SPI		3,239.0			2,907.6		2,709.6
Safeco Business Insurance (SBI)
SBI Regular		1,097.5			1,014.1		1,033.0
SBI Special Accounts Facility		383.8			276.0		128.1
SBI Runoff		(2.0	)		170.9		482.3
Total SBI		1,479.3			1,461.0		1,643.4
Surety		153.6			126.3		95.6
P&C Other		29.9			26.4		24.2
Total Earned Premiums		4,901.8			4,521.3		4,472.8
Net Investment Income		453.0			460.0		457.7
Total P&C Revenues		5,354.8			4,981.3		4,930.5
L&I Premiums, Net Investment Income and Other Revenues
Group		552.9			477.4		336.2
Income Annuities		514.2			529.2		530.0
Retirement Services		388.2			379.5		367.1
Individual		383.5			379.7		367.8
Asset Management		26.9			29.9		35.9
L&I Other		214.3			189.2		180.3
Total Premiums, Net Investment Income and Other Revenues		2,080.0			1,984.9		1,817.3
Corporate		25.2			18.5		23.8
Consolidated Net Realized Investment Gains (Losses)		(101.9	)		82.5		93.0
Total Revenues	$	7,358.1		$	7,067.2	$	6,864.6

143

PRETAX UNDERWRITING PROFITS (LOSSES), PRETAX OPERATING EARNINGS AND NET INCOME (LOSS)

YEAR ENDED DECEMBER 31	2003			2002			2001
Property & Casualty
Underwriting Profits (Losses)
Safeco Personal Insurance (SPI)
Personal Auto	$	65.1		$	(44.4	)	$	(80.5	)
Homeowners		82.2			(37.2	)		(205.6	)
Specialty		44.5			28.9			3.9
Total SPI		191.8			(52.7	)		(282.2	)
Safeco Business Insurance (SBI)
SBI Regular		(28.6	)		(51.7	)		(163.2	)
SBI Special Accounts Facility		23.5			17.8			3.9
SBI Runoff		(192.8	)		(107.5	)		(279.6	)
Total SBI		(197.9	)		(141.4	)		(438.9	)
Surety		27.6			17.6			2.4
P&C Other		(27.4	)		(63.1	)		(118.8	)
Total Underwriting Losses		(5.9	)		(239.6	)		(837.5	)
Net Investment Income		453.0			460.0			457.7
Goodwill Amortization		—			—			(11.0	)
Goodwill Write-off		—			—			(1,165.2	)
Restructuring Charges		(8.3	)		(21.8	)		(44.3	)
Total		438.8			198.6			(1,600.3	)
Life & Investments
Pretax Operating Earnings
Group		89.0			69.2			26.6
Income Annuities		25.3			41.5			47.8
Retirement Services		18.0			21.6			15.6
Individual		6.3			21.6			22.8
Asset Management		1.8			5.2			8.0
L&I Other		80.7			77.9			76.7
Pretax Operating Earnings		221.1			237.0			197.5
Goodwill Write-off		—			—			(48.9	)
Total		221.1			237.0			148.6
Corporate		(116.9	)		(124.7	)		(123.7	)
Net Realized Investment Gains (Losses)		(101.9	)		82.5			93.0
Income (Loss) from Continuing Operations before Income Taxes and Change in Accounting Principle		441.1			393.4			(1,482.4	)
Provision (Benefit) for Income Taxes		101.9			92.3			(437.1	)
Income (Loss) from Continuing Operations before Change in Accounting Principle		339.2			301.1			(1,045.3	)
Income from Discontinued Credit Operations, Net of Taxes		—			—			4.2
Gain from Sale of Credit Operations, Net of Taxes		—			—			54.0
Cumulative Effect of Change in Accounting Principle, Net of Taxes		—			—			(2.1	)
Net Income (Loss)	$	339.2		$	301.1		$	(989.2	)

144

ASSETS

DECEMBER 31	2003		2002		2001
Property & Casualty
Safeco Personal Insurance (SPI)
Personal Auto	$	3,702.3	$	3,495.0	$	2,953.3
Homeowners		1,722.6		1,868.0		1,668.2
Specialty		628.2		695.1		617.5
Total SPI		6,053.1		6,058.1		5,239.0
Safeco Business Insurance (SBI)
SBI Regular		3,232.3		3,165.7		2,947.2
SBI Special Accounts Facility		720.5		546.0		239.4
SBI Runoff		1,523.7		1,709.6		2,182.1
Total SBI		5,476.5		5,421.3		5,368.7
Surety		384.8		415.6		312.2
P&C Other		991.0		1,040.0		1,143.2
Total		12,905.4		12,935.0		12,063.1
Life & Investments
Group		343.4		353.4		172.5
Income Annuities		7,544.3		7,386.6		6,978.7
Retirement Services		8,037.0		7,298.3		6,403.9
Individual		4,485.1		4,347.1		3,989.2
Asset Management		83.7		60.4		73.6
L&I Other		2,100.2		2,074.4		1,604.7
Total		22,593.7		21,520.2		19,222.6
Corporate		346.0		234.1		476.9
Total Assets	$	35,845.1	$	34,689.3	$	31,762.6

Note 21: Quarterly Results of Operations (Unaudited)

	First Quarter		Second Quarter		Third Quarter			Fourth Quarter		Annual
Revenues
2003	$	1,762.8	$	1,871.5	$	1,780.6		$	1,943.2	$	7,358.1
2002		1,713.1		1,798.8		1,795.2			1,760.1		7,067.2
Net Income (Loss)
2003	$	90.0	$	111.9	$	(28.9	)	$	166.2	$	339.2
2002		63.6		105.2		75.2			57.1		301.1
Net Income (Loss) Per Share – Diluted
2003	$	0.65	$	0.81	$	(0.21	)	$	1.19	$	2.44
2002		0.50		0.82		0.59			0.42		2.33

Revenue amounts differ from amounts previously reported due to our adoption of FIN 46R and the deconsolidation of Safeco Capital Trust. See Note 1.

145

FINANCIAL SCHEDULES
Summary of Investments – Other Than Investments in Related Parties	Schedule I
Type Of Investments

DECEMBER 31, 2003 (In Millions)	Cost or Amortized Cost		Fair Value		Balance Sheet
Fixed Maturities
Bonds
U.S. Government and Agencies	$	1,826.7	$	2,065.6	$	2,065.6
States and Political Subdivisions		2,801.2		3,026.5		3,026.5
Foreign Governments		278.7		357.7		357.7
Public Utilities		2,750.5		2,958.5		2,958.5
Convertible Bonds		24.6		25.3		25.3
Mortgage-Backed Securities		5,250.2		5,482.1		5,482.1
All Other Corporate Bonds		11,205.7		12,128.2		12,128.2
Redeemable Preferred Stocks		152.6		162.6		162.6
Total Fixed Maturities (1)		24,290.2		26,206.5		26,206.5
Equity Securities
Common Stocks
Public Utilities		20.8		27.9		27.9
Banks, Trust and Insurance Companies		60.0		121.3		121.3
Industrial, Miscellaneous and All Other		542.1		949.2		949.2
Non-Redeemable Preferred Stocks		158.8		180.6		180.6
Total Equity Securities		781.7	$	1,279.0		1,279.0
Other
Mortgage Loans (1)		936.1				936.1
Policy Loans		85.6				85.6
Other Invested Assets (2)		30.3				30.3
Short-Term Investments		269.9				269.9
Total Other		1,321.9				1,321.9
Total Investments	$	26,393.8			$	28,807.4

(1) The carrying value of investments in fixed maturities and mortgage loans that have not produced income for the last twelve months was $38.5 at December 31, 2003.

(2) Other Invested Assets includes real estate, limited partnerships and derivative financial instruments.

146

Condensed Statements of Income (Loss)	Schedule II
Condensed Financial Information of the Registrant (Parent Company)

YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
REVENUES
Dividends - Non-affiliates	$	1.2		$	4.0		$	1.5
Interest      - Affiliates		11.8			7.1			16.8
- Non-affiliates		2.0			0.1			1.1
Net Realized Investment Gains (Losses)		2.1			(22.4	)		(13.0	)
Total		17.1			(11.2	)		6.4
EXPENSES
Interest		129.4			133.3			147.8
Other		2.7			6.7			5.4
Total		132.1			140.0			153.2
Loss from Continuing Operations before Income Taxes		(115.0	)		(151.2	)		(146.8	)
Benefit from Income Taxes		(40.4	)		(52.6	)		(52.0	)
Loss from Continuing Operations		(74.6	)		(98.6	)		(94.8	)
Income from Discontinued Credit Operations, Net of Taxes		—			—			4.2
Gain from Sale of Credit Operations, Net of Taxes		—			—			54.0
Loss before Equity in Net Income (Loss) of Subsidiaries		(74.6	)		(98.6	)		(36.6	)
Equity in Net Income (Loss) of Subsidiaries		413.8			399.7			(952.6	)
Consolidated Net Income (Loss)	$	339.2		$	301.1		$	(989.2	)

147

Condensed Balance Sheets	Schedule II
Condensed Financial Information of the Registrant (Parent Company)

DECEMBER 31 (In Millions)	2003		2002
ASSETS
Investments
Stock of Subsidiaries, at Cost Plus Equity in Undistributed Earnings	$	6,511.8	$	6,055.0
Fixed Maturities Available-for-Sale, at Fair Value (Amortized cost: $157.8; $78.2)		158.1		78.5
Marketable Equity Securities Available-for-Sale, at Fair Value (Cost: $8.4; $10.4)		24.4		20.9
Other Invested Assets		1.9		21.3
Short-Term Investments		79.5		6.4
Total Investments		6,775.7		6,182.1
Receivables from Affiliated Companies		304.8		258.0
Accrued Investment Income		12.8		15.7
Current Income Taxes Recoverable		22.4		14.4
Deferred Income Taxes Recoverable		8.7		43.6
Other Assets		38.9		69.3
Securities Lending Collateral		86.8		92.5
Total Assets	$	7,250.1	$	6,675.6
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest Payable	$	57.5	$	58.2
Payables to Affiliated Companies		70.3		43.8
Dividends Payable to Shareholders		25.6		25.6
Debt		1,951.7		1,977.6
Other Liabilities		34.9		46.3
Securities Lending Payable		86.8		92.5
Total Liabilities		2,226.8		2,244.0
Preferred Stock, No Par Value
Shares Authorized: 10 Shares Issued and Outstanding: None
Common Stock, No Par Value
Shares Authorized: 300 Shares Reserved for Options: 11.6; 12.0 Shares Issued and Outstanding: 138.6; 138.2		1,197.3		1,178.1
Retained Earnings		2,308.7		2,072.2
Accumulated Other Comprehensive Income, Net of Taxes		1,517.3		1,181.3
Total Shareholders’ Equity		5,023.3		4,431.6
Total Liabilities and Shareholders’ Equity	$	7,250.1	$	6,675.6

148

Condensed Statements of Cash Flows	Schedule II
Condensed Financial Information of the Registrant (Parent Company)

YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
OPERATING ACTIVITIES
Dividends and Interest Received - Affiliates	$	314.3		$	208.4		$	220.3
- Non-affiliates		5.1			5.3			10.1
Interest Paid		(127.8	)		(138.7	)		(147.5	)
Income Taxes Refunded (Paid)		63.3			28.8			(13.4	)
Other, Net		(43.3	)		5.5			6.0
Net Cash Provided by Operating Activities		211.6			109.3			75.5
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(106.8	)		(326.5	)		(4.1	)
Equity Securities Available-for-Sale		(1.0	)		(5.5	)		(13.6	)
Other Invested Assets		—			(58.0	)		—
Sales of:
Fixed Maturities Available-for-Sale		80.7			3.5			58.3
Equity Securities Available-for-Sale		2.6			12.2			27.5
Other Invested Assets		0.3			—			—
Net (Increase) Decrease in Short-Term Investments		(73.1	)		(0.9	)		13.6
Proceeds from Sale of Credit Operations		—			—			250.0
Funds Repaid by Affiliate		—			—			86.4
Net Capital Contributions to Subsidiaries		(4.5	)		3.1			(324.1	)
Net Cash Provided by (Used in) Investing Activities		(101.8	)		(372.1	)		94.0
FINANCING ACTIVITIES
Proceeds from Notes		495.9			371.8			—
Proceeds from Common Stock Offering		—			329.2			—
Repayment of Notes		(507.2	)		(42.8	)		—
Net Repayment of Commercial Paper		—			(299.0	)		(50.8	)
Common Stock Reacquired		—			(9.9	)		(8.1	)
Dividends Paid to Shareholders		(102.4	)		(94.6	)		(118.1	)
Other, Net		3.9			8.1			7.4
Net Cash Provided by (Used in) Financing Activities		(109.8	)		262.8			(169.6	)
Net Decrease in Cash		—			—			(0.1	)
Cash and Cash Equivalents at Beginning of Year		—			—			0.1
Cash and Cash Equivalents at End of Year	$	—		$	—		$	—

149

Condensed Statements of Cash Flows Schedule II

Reconciliation of Net Income (Loss) to Net Cash Provided by Operating Activities

Condensed Financial Information of the Registrant (Parent Company)

YEAR ENDED DECEMBER 31 (In Millions)	2003			2002			2001
Net Income (Loss)	$	339.2		$	301.1		$	(989.2	)
Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:
Equity in Net (Income) Loss of Consolidated Subsidiaries		(413.8	)		(399.7	)		952.6
Dividends Received from Consolidated Subsidiaries		302.5			199.4			207.6
Net Realized Investment (Gains) Losses		(2.1	)		22.4			13.0
Deferred Income Tax Provision (Benefit)		30.1			10.7			(10.2	)
Other		—			(1.3	)		(0.3	)
Gain from Sale of Credit Operations, Net of Taxes		—			—			(54.0	)
Changes in:
Accrued Investment Income		2.9			(14.4	)		—
Interest Payable		—			9.5			—
Income Taxes Recoverable		(8.0	)		(37.2	)		25.7
Other Assets and Liabilities		(39.2	)		18.8			(69.7	)
Total Adjustments		(127.6	)		(191.8	)		1,064.7
Net Cash Provided by Operating Activities	$	211.6		$	109.3		$	75.5

There were no significant non-cash financing or investing activities for the years ended December 31, 2003 or 2001. In December 2002, the parent company contributed $150.0 to P&C and $100.0 to L&I, consisting of $249.3 of fixed maturities and $0.7 of cash.

150

Supplemental Insurance Information Schedule III

DECEMBER 31, 2003

(In Millions)

	YEAR ENDED DECEMBER 31, 2003
Segment	Deferred Policy Acquisition Costs		Reserve for Future Policy Benefits, Losses, Claims and Loss Expenses			Unearned Premiums		Other Policy Claims and Benefits Payable
Property & Casualty
SPI
Personal Auto	$	87.3	$	1,348.1		$	644.1	$	—
Homeowners		76.3		288.5			423.8		—
Specialty		22.7		106.1			117.8		—
SBI
SBI Regular		102.0		1,549.0			590.0		—
SBI Special Accounts Facility		22.8		233.9			131.0		—
SBI Runoff		—		923.1			—		—
Surety		45.3		(12.2	)		124.9		—
P&C Other		0.4		608.1			22.0		—
Restructuring		—		—			—		—
Total		356.8		5,044.6			2,053.6		—
Life & Investments
Group		16.2		228.0			2.1		—
Income Annuities		—		—			—		6,334.7
Retirement Services		122.8		13.4			—		6,659.4
Individual		143.3		229.5			7.8		3,581.3
Asset Management		—		—			—		—
L&I Other		—		—			—		—
Total		282.3		470.9			9.9		16,575.4
Corporate		—		—			—		—
Consolidated Totals	$	639.1	$	5,515.5		$	2,063.5	$	16,575.4

151

	YEAR ENDED DECEMBER 31, 2003
Segment	Premiums and Service Fee Revenues			Net Investment Income		Benefits, Claims, Losses and Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
Property & Casualty
SPI
Personal Auto	$	2,269.1		$	127.3	$	1,680.4	$	307.3	$	216.3	$	2,368.1
Homeowners		768.1			63.0		467.1		140.3		78.5		775.1
Specialty		201.8			22.6		98.5		42.8		16.0		200.3
SBI
SBI Regular		1,097.5			111.8		720.9		192.7		212.5		1,156.9
SBI Special Accounts Facility		383.8			19.8		214.9		96.6		48.8		405.8
SBI Runoff		(2.0	)		60.6		185.5		0.2		5.1		(2.4	)
Surety		153.6			10.4		40.3		65.0		20.7		178.8
P&C Other		29.9			37.5		44.5		1.4		11.4		31.7
Restructuring		—			—		—		—		8.3		—
Total		4,901.8			453.0		3,452.1		846.3		617.6	$	5,114.3
Life & Investments
Group		546.3			6.6		310.9		12.8		140.2
Income Annuities		0.4			513.8		468.6		—		20.3
Retirement Services		23.5			364.7		283.1		26.6		60.5
Individual		149.3			234.2		293.3		11.9		72.0
Asset Management		25.8			1.1		—		—		25.1
L&I Other		122.8			91.5		—		—		133.6
Total		868.1			1,211.9		1,355.9		51.3		451.7
Corporate		—			15.4		—		—		142.1
Consolidated Totals	$	5,769.9		$	1,680.3	$	4,808.0	$	897.6	$	1,211.4

152

Supplemental Insurance Information (continued) Schedule III

DECEMBER 31, 2002

(In Millions)

	YEAR ENDED DECEMBER 31, 2002
Segment	Deferred Policy Acquisition Costs		Reserve for Future Policy Benefits, Losses, Claims and Loss Expenses		Unearned Premiums		Other Policy Claims and Benefits Payable
Property & Casualty
SPI
Personal Auto	$	77.7	$	1,256.9	$	544.6	$	—
Homeowners		77.8		301.7		416.5		—
Specialty		23.7		106.2		119.3		—
SBI
SBI Regular		96.2		1,467.4		530.9		—
SBI Special Accounts Facility		19.5		143.2		107.2		—
SBI Runoff		0.2		1,007.6		0.8		—
Surety		37.6		60.2		97.1		—
P&C Other		0.2		655.3		21.6		—
Restructuring Charges		—		—		—		—
Total		332.9		4,998.5		1,838.0		—
Life & Investments
Group		14.7		249.9		2.5		—
Income Annuities		—		—		—		6,308.4
Retirement Services		129.1		43.8		—		5,930.5
Individual		149.6		216.2		7.0		3,416.5
Asset Management		—		—		—		—
L&I Other		—		—		—		—
Total		293.4		509.9		9.5		15,655.4
Corporate		—		—		—		—
Consolidated Totals	$	626.3	$	5,508.4	$	1,847.5	$	15,655.4

153

	YEAR ENDED DECEMBER 31, 2002
Segment	Premiums and Service Fee Revenues		Net Investment Income		Benefits, Claims, Losses and Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
Property & Casualty
SPI
Personal Auto	$	1,947.1	$	120.1	$	1,533.0	$	272.1	$	186.4	$	2,025.7
Homeowners		757.4		65.5		574.3		150.0		70.3		767.6
Specialty		203.1		23.6		110.5		46.7		17.0		202.7
SBI
SBI Regular		1,014.1		111.3		697.6		184.7		183.5		1,055.2
SBI Special Accounts Facility		276.0		10.5		142.1		71.5		44.6		349.0
SBI Runoff		170.9		79.2		209.2		30.7		38.5		25.0
Surety		126.3		9.1		29.6		60.9		18.2		133.6
P&C Other		26.4		40.7		66.9		2.2		20.4		25.8
Restructuring Charges		—		—		—		—		21.8		—
Total		4,521.3		460.0		3,363.2		818.8		600.7	$	4,584.6
Life & Investments
Group		472.1		5.3		277.0		6.2		125.0
Income Annuities		0.2		529.0		470.2		—		17.5
Retirement Services		24.0		355.5		288.5		22.2		47.2
Individual		142.6		237.1		286.6		12.4		59.1
Asset Management		28.7		1.2		—		—		24.7
L&I Other		110.7		78.5		—		—		111.3
Total		778.3		1,206.6		1,322.3		40.8		384.8
Corporate		—		7.8		—		—		143.2
Consolidated Totals	$	5,299.6	$	1,674.4	$	4,685.5	$	859.6	$	1,128.7

154

Supplemental Insurance Information (continued) Schedule III

DECEMBER 31, 2001

(In Millions)

	YEAR ENDED DECEMBER 31, 2001
Segment	Deferred Policy Acquisition Costs		Reserve for Future Policy Benefits, Losses, Claims and Loss Expenses		Unearned Premiums		Other Policy Claims and Benefits Payable
Property & Casualty
SPI
Personal Auto	$	64.4	$	1,172.5	$	465.4	$	—
Homeowners		79.8		298.5		406.0		—
Specialty		24.6		98.3		119.8		—
SBI
SBI Regular		87.0		1,439.1		484.5		—
SBI Special Accounts Facility		7.6		87.7		33.7		—
SBI Runoff		25.0		1,206.4		153.7		—
Surety		33.7		57.1		87.6		—
P&C Other		0.6		694.1		22.2		—
Goodwill Amortization		—		—		—		—
Goodwill Write-off		—		—		—		—
Restructuring Charges		—		—		—		—
Total		322.7		5,053.7		1,772.9		—
Life & Investments
Group		16.5		142.0		2.3		—
Income Annuities		—		—		—		6,245.3
Retirement Services		120.2		14.7		—		5,174.7
Individual		167.4		235.1		7.0		3,204.2
Asset Management		—		—		—		—
L&I Other		—		—		—		—
Goodwill Write-off		—		—		—		—
Total		304.1		391.8		9.3		14,624.2
Corporate		—		—		—		—
Consolidated Totals	$	626.8	$	5,445.5	$	1,782.2	$	14,624.2

155

	YEAR ENDED DECEMBER 31, 2001
Segment	Premiums and Service Fee Revenues		Net Investment Income		Benefits, Claims, Losses and Adjustment Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Costs		Net Written Premiums
Property & Casualty
SPI
Personal Auto	$	1,767.4	$	112.9	$	1,429.2	$	295.0	$	123.7	$	1,795.2
Homeowners		740.6		63.7		724.1		114.0		108.1		743.0
Specialty		201.6		22.8		130.1		36.1		31.5		204.2
SBI
SBI Regular		1,033.0		109.3		845.0		185.8		165.4		983.3
SBI Special Accounts Facility		128.1		7.0		72.3		39.9		12.0		133.9
SBI Runoff		482.3		87.6		596.4		75.1		90.4		424.3
Surety		95.6		7.6		30.3		42.6		20.3		131.5
P&C Other		24.2		46.8		136.8		3.7		2.5		23.8
Goodwill Amortization		—		—		—		—		11.0		—
Goodwill Write-off		—		—		—		—		1,165.2		—
Restructuring Charges		—		—		—		—		44.3		—
Total		4,472.8		457.7		3,964.2		792.2		1,774.4	$	4,439.2
Life & Investments
Group		332.5		3.7		212.2		5.7		91.7
Income Annuities		0.4		529.6		463.9		—		18.3
Retirement Services		27.9		339.2		284.5		17.0		50.0
Individual		141.1		226.7		274.3		9.6		61.1
Asset Management		33.6		2.3		—		—		27.9
L&I Other		101.5		78.8		—		—		103.6
Goodwill Write-off		—		—		—		—		48.9
Total		637.0		1,180.3		1,234.9		32.3		401.5
Corporate		—		13.4		—		—		147.5
Consolidated Totals	$	5,109.8	$	1,651.4	$	5,199.1	$	824.5	$	2,323.4

156

Supplemental Information Concerning Schedule VI

Consolidated Property & Casualty Insurance Operations

Affiliation with Registrant: Property & Casualty Subsidiaries

DECEMBER 31 (In Millions)	2003		2002		2001
Deferred Policy Acquisition Costs	$	356.8	$	332.9	$	322.7
Loss and Loss Adjustment Expense Reserves		5,044.6		4,998.5		5,053.7
Unearned Premiums	$	2,053.6	$	1,838.0	$	1,772.9
YEAR ENDED DECEMBER 31 (In Millions)	2003		2002		2001
Earned Premiums	$	4,901.8	$	4,521.3	$	4,472.8
Net Investment Income		453.0		460.0		457.7
Losses and Loss Adjustment Expenses Incurred Related to:
Current Year		3,202.3		3,237.4		3,619.1
Prior Year		249.9		125.8		345.1
Amortization of Deferred Policy Acquisition Expenses		846.3		818.8		792.2
Paid Losses and Loss Adjustment Expenses		3,338.9		3,414.1		3,595.5
Net Written Premiums	$	5,114.3	$	4,584.6	$	4,439.2

157

Index to Exhibits

3.1	Bylaws (as last amended November 4, 2003).
3.2	Restated Articles of Incorporation (as amended May 7, 1997), filed as Exhibit 3.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), are incorporated herein by this reference.
4.1	Indenture, dated as of July 15, 1997, between Safeco and The Chase Manhattan Bank N.A., as Trustee, filed as Exhibit 4.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.2	Form of Certificate of Exchange Junior Subordinated Debenture filed as Exhibit 4.2 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.3	Certificate of Trust of Safeco Capital Trust I dated June 18, 1997, filed as Exhibit 4.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.4	Amended and Restated Declaration of Trust of Safeco Capital Trust I dated as of July 15, 1997, filed as Exhibit 4.5 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (File No. 1-6563), is incorporated herein by this reference.
4.5	Form of Exchange Capital Security Certificate for Safeco Capital Trust I filed as Exhibit 4.5 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.6	Form of Exchange Guarantee of Safeco relating to the Exchange Capital Securities, filed as Exhibit 4.6 to Safeco’s Registration Statement on Form S-4 (No. 333-38205) dated October 17, 1997, is incorporated herein by this reference.
4.7	Indenture, dated as of February 15, 2000, among Safeco and The Chase Manhattan Bank, N.A., as Trustee, filed as Exhibit 4.8 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (File No. 1-6563), is incorporated herein by this reference.
4.8	Form of Safeco Agency Stock Purchase Plan Terms and Conditions as Agreed to by the Agency, filed as Exhibit 4.1 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-6563), is incorporated herein by this reference.
4.9	Indenture for Debt Securities between J.P. Morgan Trust Company, National Association and Safeco, dated as of August 23, 2002, filed as Exhibit 4.11 to Safeco’s Current Report on Form 8-K dated January 28, 2003 (File No. 1-6563), is incorporated herein by this reference.
4.10	Form of 4.200% Senior Notes due 2008, filed as Exhibit 4.12 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
4.11	Form of 4.875% Senior Notes due 2010, filed as Exhibit 4.13 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563) is incorporated herein by this reference.
10.1	First Amendment to Employment Agreement between Safeco Corporation and Michael S. McGavick, dated as of December 12, 2002, filed as Exhibit 10.1 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.2	Safeco Corporation Deferred Compensation Plan for Directors, as Amended and Restated on August 2, 2000, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference.
10.3	Safeco Deferred Compensation Plan for Executives, as Amended and Restated November 5, 2002, filed as Exhibit 10.3 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 (File No. 1-6563), is incorporated herein by this reference.

10.4	Amended and Restated Stock Purchase Agreement among General Electric Capital Corporation, Safeco Corporation and Safeco Credit Company, Inc., dated as of July 23, 2001, filed as Exhibit 2 to Safeco’s Current Report on Form 8-K on August 15, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.5	Form of Change in Control Severance Agreements between Safeco and each of Bruce M. Allenbaugh, Michael E. LaRocco, Dale E. Lauer, Michael S. McGavick, Allie R. Mysliwy, James W. Ruddy, Yomtov Senegor and Randall H. Talbot, in each case dated as of November 7, 2001, filed as Exhibit 10.5 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.6	Safeco Long-Term Incentive Plan of 1997 as Amended and Restated February 7, 2001, filed as Exhibit 10.6 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.7	Form of Stock Option Contract granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.6 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.
10.8	Form of Non-Qualified Stock Option Award Agreement - Non-Employee Director granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (File No. 1-6563), is incorporated herein by this reference.
10.9	Form of Restricted Stock Rights Award Agreement granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.7 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.
10.10	Form of Performance Stock Rights Award Agreement granted under the Safeco Long-Term Incentive Plan of 1997, filed as Exhibit 10.8 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (File No. 1-6563), is incorporated herein by this reference.
10.11	Safeco Incentive Plan of 1987 contained in the Prospectus dated November 10, 1989, as amended January 31, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1989 (File No. 1-6563), and the Supplement to such Prospectus dated November 8, 1990, filed as Exhibit 10 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 1990 (File No. 1-6563), are incorporated herein by this reference.
10.12	Separation Agreement between Safeco Insurance Company of America and W. Randall Stoddard dated August 2, 2000, filed as Exhibit 10.3 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (File No. 1-6563), is incorporated herein by this reference.
10.13	Separation Agreement between Safeco Corporation and Roger H. Eigsti dated October 3, 2000, filed as Exhibit 10.13 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File No. 1-6563), is incorporated herein by this reference.
10.14	Retirement Agreement between Safeco Corporation and Boh A. Dickey dated as of January 29, 2001, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.15	Retirement Agreement between Safeco Corporation and Rod A. Pierson dated October 15, 2001, filed as Exhibit 10.15 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.16	Employment Agreement between Safeco Corporation and Michael S. McGavick dated as of January 26, 2001, filed as Exhibit 10.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.17	Incentive Compensation Plan for President/Chief Executive Officer 2001, filed as Exhibit 10.3 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.

2

10.18	Non-Qualified Stock Option Contract between Safeco and Michael S. McGavick dated January 26, 2001, filed as Exhibit 10.4 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.19	Restricted Stock Rights Award Agreement issued under the Safeco Long-Term Incentive Plan of 1997 between Safeco and Michael S. McGavick dated January 26, 2001, filed as Exhibit 10.5 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.20	Performance Stock Rights Award Agreement issued under the Safeco Long-Term Incentive Plan of 1997 between Safeco and Michael S. McGavick dated March 27, 2001, filed as Exhibit 10.7 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.21	Description of the Safeco Corporation Interim Leadership Performance Program, filed as Exhibit 10 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.22	Form of Promissory Note in favor of General America Corporation by each of Michael S. McGavick, Michael E. LaRocco and Yomtov Senegor (in the case of Mr. McGavick in the principal amount of $1,275,000 and dated June 28, 2001; in the case of Mr. LaRocco in the principal amount of $780,000 and dated October 8, 2001; and in the case of Mr. Senegor in the principal amount of $1,000,000 and dated October 11, 2001), filed as Exhibit 10.22 to Safeco’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
10.23	Safeco Leadership Performance Plan, as Amended and Restated effective September 14, 2003.
10.24	Form of Change in Control Severance Agreement between Safeco Corporation and Christine B. Mead dated as of January 24, 2002, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.25	Form of Promissory Note in favor of General America Corporation by Christine B. Mead in the principal amount of $900,000 dated April 3, 2002, filed as Exhibit 10.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.26	Separation Agreement between Safeco Corporation and H. Paul Lowber dated July 31, 2002, filed as Exhibit 10.1 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.27	Credit Agreement dated as of September 18, 2002 among Safeco Corporation, as the Borrower, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank and US Bank, as Co-Syndication Agents, Keybank National Association, as Documentation Agent, and the other lenders party thereto, filed as Exhibit 10.2 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (File No. 1-6563), is incorporated herein by this reference.
10.28	Safeco 401(k)/Profit Sharing Retirement Plan as Amended and Restated effective January 1, 2004.
10.29	Safeco Flexible Benefits Program as Amended and Restated effective January 1, 2004.
11	Computation of Income (Loss) per Share of Common Stock (See Note 1 to the Notes to Consolidated Financial Statements).
12	Computation of Ratio of Earnings (Loss) to Fixed Charges.
18	Letter from Ernst & Young LLP dated May 11, 2001 regarding change in accounting principles, filed as Exhibit 18 to Safeco’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (File No. 1-6563), is incorporated herein by this reference.
21	Subsidiaries of the Registrant

3

23.1	Consent of Ernst & Young LLP, Independent Auditors.
31.1	Certification of Chief Executive Officer of Safeco Corporation dated March 12, 2004, in accordance with Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of Safeco Corporation dated March 12, 2004, in accordance with Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer of Safeco Corporation dated March 12, 2004, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer of Safeco Corporation dated March 12, 2004, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

4

EX-3.1

Exhibit 3.1

BYLAWS

OF

SAFECO CORPORATION

(As last amended effective November 5, 2003)

ARTICLE I

STOCKHOLDERS’ MEETINGS

1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation for the election of Directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held at 11 o’clock in the morning on the first Wednesday in May or, if such day is a legal holiday, then on the following business day or on such other day as may be designated by the Chairman of the Board of Directors, the President, or the Board of Directors (“Board of Directors”). The meeting shall be held at the principal executive office of the corporation or at such other place as may be designated in the notice of the meeting.

(b) For business to be properly brought before the annual meeting in accordance with these Bylaws, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must file a written notice of intention to bring such business (“Business Notice”) with the Secretary of the corporation not less than 90 days before the date specified in Section 1(a) of this Article I, or if the meeting is not held within 14 days of the date specified in Section 1(a) of this Article I, then 90 days before the date of the meeting. The Business Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to bring such business before the meeting; and, as to each matter the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest of the stockholder in such business.

(c) No business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1; provided, however, that nothing in this Section 1 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The presiding officer of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

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2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Board of Directors. Such special meetings may be for any purpose or purposes, which shall be described in the notice of such special meeting, and shall be at the date, time and place prescribed in the notice of the meeting.

3. NOTICE OF MEETING. (a) Written notice of each annual and special stockholders’ meeting shall be given to all stockholders of record entitled to notice of such meeting no fewer than 10 nor more than 60 days before the meeting date, except that notice of a stockholders’ meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If such written notice is placed in the United States mail, postage prepaid, and correctly addressed to the stockholder’s address shown in the corporation’s current record of stockholders, then the notice is effective when mailed.

(b) Notice of any stockholders’ meeting may be waived in writing by any stockholder at any time, either before or after the meeting. In addition, notice of the date, time, place and purpose of the meeting shall be deemed waived by any stockholder who attends a stockholders’ meeting in person or by proxy, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.

4. ORGANIZATION OF MEETING – QUORUM. A stockholders’ meeting, duly called, can be organized for the transaction of business whenever a quorum is present. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting shall constitute a quorum. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.

5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an adjourned meeting, an adjournment or adjournments of any stockholders’ meeting may be taken to the date, time and place announced by the presiding officer at the meeting, without new notice being given; but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors are elected.

6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote for each share of common stock then of record in the holder’s name on the books of the corporation. Each holder of a share of capital stock other than common stock shall have the right to vote on those matters prescribed by the Board of Directors in establishing the preferences, limitations and relative rights for that class of capital stock. Every stockholder shall have the right to vote either in person or by proxy. All voting at stockholders’ meetings shall be viva voce, unless any qualified voter shall demand a vote by ballot. In the case of voting by ballot, each ballot shall state the name of the stockholder voting, the number of shares owned by the stockholder, and, in addition, if such vote be cast by proxy it shall also state the name of the proxy.

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ARTICLE II

BOARD OF DIRECTORS

1. NUMBER AND QUALIFICATION. The business and affairs of the corporation shall be managed under the direction of a Board of Directors of from 10 to 18 directors, as set from time to time by resolution of the Board of Directors, which directors need not be stockholders of the corporation.

2. ELECTION – TERM OF OFFICE. The directors shall be divided into three classes, designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each annual meeting of stockholders successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, but in no case will a decrease in the number of Directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director’s term expires and until the director’s successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. In the event of a failure to hold an election of Directors at any annual stockholders’ meeting, election of Directors may be held at a special meeting of the stockholders called for that purpose; provided, that notice thereof be given all stockholders entitled to vote at such meeting at least 30 days prior to the date set for such special meeting.

3. VACANCIES. Any vacancy on the Board of Directors shall be filled by the Board of Directors or, if the directors in office constitute fewer than a quorum of the Board of Directors, then by the affirmative vote of the majority of all directors in office.

4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a committee of the Board of Directors shall nominate individuals for election as directors at the annual meeting of stockholders and at any special meeting of stockholders called for the purpose of electing directors. Nominations may also be made by any stockholder entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 4.

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(b) A nomination for election as director, other than nominations made by or at the direction of the Board of Directors, may be made only if a written notice of intention to nominate (“Nomination Notice”) has been received by the secretary to the Board of Directors not less than 90 days before the date specified in Section 1(a) of Article I above, or if the meeting is not held within 14 days of the date specified in Section 1(a) of Article I above, then 90 days before the date of the meeting. The Nomination Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to make a nomination; the name, age, address and telephone number of each nominee; a description of each nominee’s business experience for the past five years; a statement whether the nominee has ever been prosecuted for any crime or been a party to any proceeding in which it was alleged the nominee or any affiliate of the nominee violated any law or regulation and, if so, a complete description of such prosecution or proceeding; and any other information relating to each nominee that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended. The corporation may require any proposed nominee to furnish such additional information as may reasonably be required to determine the eligibility of such proposed nominee. In order to be considered valid the Nomination Notice must be accompanied by the written consent of each nominee to be nominated and a statement of each nominee’s intention to serve as a director if elected.

(c) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. The presiding officer at the stockholders’ meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded.

5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof.

6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held quarterly, on the first Wednesday in February, May, August and November of each year, at such time and place as designated in the notice of the meeting.

7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place at any time when called by the Chairman of the Board of Directors or the President, or when called by the Secretary or an Assistant Secretary on request of three directors, or when called by any director during a national emergency of the kind that would make emergency bylaws operative for domestic insurers under the provisions of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington.

8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board of Directors and of meetings of committees of the Board of Directors shall be given by the secretary to the Board of Directors, or by the person calling the meeting, in writing or orally at least two days prior to the day upon which the meeting is to be held. Notice may be given by mail, private carrier, personal delivery, telegraph or teletype, telephone, electronic transmission or by wire or wireless equipment which transmits a facsimile of the notice.

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(b) A director may waive notice of any meeting of the Board of Directors or any committee of the Board of Directors in writing before or after the date and time of the meeting and such waiver shall be deemed the equivalent of giving notice of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee of the Board of Directors need be specified in the waiver of notice of such meeting.

(c) A director’s attendance at or participation in a Board of Directors or committee meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting, or promptly upon the director’s arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

9. QUORUM. A majority of the total number of Directors fixed by or in the manner provided in these Bylaws or, if vacancies exist on the Board of Directors, a majority of the total number of Directors then serving on the Board of Directors shall constitute a quorum for the transaction of business at any Board of Directors’ meeting; provided, however, that a quorum may not be less than one-third of the total number of Directors fixed by or in the manner provided by these Bylaws. When a quorum is present, a majority of the directors in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time-to-time without further notice.

10. CHAIRMAN OF THE BOARD OF DIRECTORS. The Directors shall appoint one member of the Board of Directors to serve as Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and Directors and shall have such other duties and responsibilities as the Board of Directors may assign from time-to-time.

ARTICLE III

EXECUTIVE COMMITTEE

1. MEMBERSHIP. The Executive Committee shall consist of no fewer than three members and shall include (i) the lead director of the Board of Directors, (ii) the chairs of each of the Audit, Compensation, Finance and Nominating/Governance Committees, and (iii) any other director of the corporation appointed by the Board of Directors. The lead director shall be the chair of the Executive Committee, unless the Board of Directors designates some other member of the Executive Committee as chair.

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2. POWERS AND DUTIES. Other than those powers specifically denied to a committee of a Board of Directors under Washington law, the Executive Committee may exercise all the powers of the Board of Directors in the management of the business of the corporation when the Board of Directors is not in session. All such actions of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration.

3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Executive Committee may be called at any time by the chair of the Executive Committee or any two members. At all meetings of the Executive Committee, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business.

ARTICLE IV

FINANCE COMMITTEE

1. MEMBERSHIP. The Finance Committee shall consist of no fewer than five members appointed by the Board of Directors, one of whom shall be designated as its chair by the Board of Directors. Each member of the Finance Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Finance Committee shall be governed under a Finance Committee Charter, which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Finance Committee shall, consistent with its Charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or the Board of Directors. Special meetings of the Committee may be called at any time by the chair of the Finance Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business.

ARTICLE V

AUDIT COMMITTEE

1. MEMBERSHIP. The Audit Committee shall consist of no fewer than three members who meet the qualifications described in the Audit Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Audit Committee as its chair. Each member of the Audit Committee shall continue as a member at the pleasure of the Board of Directors.

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2. CHARTER. The Audit Committee shall be governed under an Audit Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Audit Committee shall, consistent with its Charter, fix its own rules of procedure and meet where and as provided by its Charter, its rules of procedure or the Board of Directors. Special meetings of the Audit Committee may be called at any time by the chair of the Audit Committee or by any two members. At all meetings the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business.

ARTICLE VI

NOMINATING/GOVERNANCE COMMITTEE

1. MEMBERSHIP. The Nominating Committee shall consist of no fewer than three members who meet the qualifications described in the Nominating/Governance Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Nominating/Governance Committee as its chair. Each member of the Nominating/Governance Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Nominating/Governance Committee shall be governed under a Nominating/Governance Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Nominating/Governance Committee shall, consistent with its Charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or by resolution of the Board of Directors. Special meetings of the Nominating/Governance Committee may be called at any time by the chair of the Nominating/Governance Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business.

ARTICLE VII

COMPENSATION COMMITTEE

1. MEMBERSHIP. The Compensation Committee shall consist of no fewer than three members who meet the qualifications described in the Compensation Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Compensation Committee as its chair. Each member of the Compensation Committee shall continue as a member at the pleasure of the Board of Directors.

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2. CHARTER. The Compensation Committee shall be governed under a Compensation Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Compensation Committee shall, consistent with its charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or by resolution of the Board of Directors. Special meetings of the Compensation Committee may be called at any time by the chair of the Compensation Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum, and the affirmative vote of a majority of the quorum shall be necessary and sufficient to transact business.

ARTICLE VIII

OTHER COMMITTEES

The Board of Directors shall have authority to establish by resolution such other committees as the Board of Directors may from time to time deem necessary or advisable. The membership, duties and authority of such committees shall be as the Board of Directors may from time to time establish.

ARTICLE IX

OFFICERS

1. OFFICERS ENUMERATED – APPOINTMENT. The officers of the corporation shall be a President, one or more Vice Presidents, one or more Assistant Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers, all of whom shall be appointed by the Board of Directors at the annual meeting thereof, to hold office for the term of one year and until their successors are appointed and qualified.

2. QUALIFICATIONS. None of the officers of the corporation need be a director. Any two or more corporate offices may be combined in one person.

3. PRESIDENT. The President shall be the chief executive officer of the corporation and shall have general charge, supervision and control over the business and affairs of the corporation and of its subsidiaries, subject to the ultimate authority of the Board of Directors. In the absence of the Chairman of the Board of Directors the President shall act in the place of the Chairman of the Board of Directors with the authority to exercise all of the Chairman’s powers and perform the Chairman’s duties.

4. VICE PRESIDENTS. In the absence or disability of the President, one of the Vice Presidents, in the order determined by seniority of responsibility and then order of their appointment, shall act as President until such time as the Board of Directors acts to appoint an

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individual to the office of President. One or more of the vice presidents may be designated by the Board of Directors as executive vice president, senior vice president or such other title as the Board of Directors deems appropriate for the position and duties.

6. SECRETARY. The Secretary shall be the custodian of the records, books of account, and seal of the corporation, and, in general, shall perform all duties usually incident to the office of Secretary, and make such reports and perform such other duties as may from time to time be requested of or assigned by the Board of Directors, the Executive Committee or the chief executive officer of the corporation.

7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as may be assigned to them by the Secretary of the corporation, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation.

8. TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer shall deposit all such funds in the name of the corporation in such depositories or invest them in such investments as may be designated or approved by the Finance Committee or the Board of Directors, and shall authorize disbursement of the funds of the corporation in payment of just demands against the corporation, or as may be ordered by the Board of Directors, the Executive Committee, or the Finance Committee on securing proper vouchers for such disbursements. The Treasurer shall render to the Board of Directors from time to time as may be required an account of all transactions as Treasurer, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Finance Committee, or the chief executive officer of the corporation.

9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as may be assigned to them by the Treasurer, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation.

10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it shall deem necessary to exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

11. REMOVAL. Any officer of the corporation may be removed by the affirmative vote of a majority of the whole Board of Directors; such removal, however, shall be without prejudice to the contract rights of the person so removed.

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ARTICLE X

CORPORATION PROXIES

Unless otherwise ordered by the Board of Directors, any and all shares of stock owned or held by the corporation in any other corporation shall be represented and voted at any meeting of the stockholders of such other corporation by any one of the following officers of the corporation in the following order who may attend such meeting; i.e., the President, a Vice President, or the Treasurer, and such representation by any one of the officers above named shall be deemed and considered a representation in person by the corporation at such meeting. Any one of the officers above named may execute a proxy appointing any other person as attorney and proxy to represent the corporation at such stockholders’ meeting and to vote all stock of such corporation owned or held by the corporation with all power and authority in the premises that any of the officers above named would possess if personally present. The Board of Directors by resolution may from time to time confer like powers upon any other person or persons.

ARTICLE XI

STOCK

1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be issued in such form in accordance with the corporation law of the State of Washington as may be approved by the Board of Directors, and may be signed by the chief executive officer or any Vice President, and by the Secretary or any Assistant Secretary.

2. TRANSFERS. Shares of stock may be transferred by delivery of the certificates therefor accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same by the record holder of the certificate. No transfer shall be valid except as between the parties thereto until such transfer shall have been made on the books of the corporation. Except as specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation.

3. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact thereof for all purposes, including the payment of dividends on such stock and the right to vote such stock.

4. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction, and upon the giving of a satisfactory bond or indemnity to the corporation. A new certificate may be issued without requiring any bond when in the judgment of the Treasurer it is proper to do so.

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5. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the State of Washington.

ARTICLE XII

INDEMNIFICATION

1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether brought by or in the right of the corporation or otherwise) by reason of the fact that he or she is or was a director of the corporation, or, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan (an “Indemnitee”), whether the basis of a proceeding is an alleged action in an official capacity as such a director, officer, partner, trustee, employee, or agent or in any other capacity while serving as such a director, officer, partner, trustee, employee, or agent, shall be indemnified and held harmless by the corporation against all judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the Indemnitee in connection with such proceeding. Except as provided in paragraph (d) of this Section 1 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify any Indemnitee only if the proceeding (or part thereof) was authorized or ratified by the Board of Directors.

(b) No indemnification shall be provided to any Indemnitee for acts or omissions of the Indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the Indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision is hereafter amended, the restrictions on indemnification set forth in this paragraph (b) shall be as set forth in such amended statutory provision.

(c) The right to indemnification conferred under this Article XII shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition. An advancement of expenses shall be made upon delivery to the corporation of an undertaking, by or on behalf of an Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Article XII.

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(d) If a claim under this Section 1 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. An Indemnitee shall be presumed to be entitled to indemnification under this Article XII upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation), and the corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled.

2. OFFICERS. The corporation shall extend rights to indemnification and advancement of expenses in the same manner and to the same extent provided to directors under Section 1 of this Article to any person, not a director of the corporation, who is or was an officer of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan.

3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (i) with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors; (ii) pursuant to rights provided by the Washington Business Corporation Act; or (iii) as are otherwise consistent with law.

4. DEFINITIONS. For purposes of this Article XII, the terms “director,” “corporation,” “expenses,” “party” and “proceeding” have those meanings assigned to them in Section 23B.08.500 of the Washington Business Corporation Act.

5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another corporation of which a majority of the shares entitled to vote is held by the corporation or (b) as a partner, trustee or otherwise in a management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly-owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation.

6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act.

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7. NOT EXCLUSIVE – CONTINUING. The indemnification provided by this Article shall not be deemed exclusive of other rights to which the director, officer, employee or agent may be entitled as a matter of law or by contract, and shall continue as to a person who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

8. INSURANCE. The corporation may maintain insurance at its expense to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act.

ARTICLE XIII

SEAL

The seal of this corporation shall consist of a flat-faced, circular die which shall include: “SAFECO CORPORATION,” “Corporate Seal, 1929” and the corporation’s logo design.

ARTICLE XIV

COPIES OF RESOLUTIONS

Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the stockholders, the Board of Directors, and any committees of or established by the Board of Directors, when certified by the chief executive officer, a Vice President, Secretary, or an Assistant Secretary.

ARTICLE XV

AMENDMENT OF BYLAWS

1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any meeting of the stockholders, if notice of the proposed alteration or amendment is contained in the notice of the meeting.

2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting if notice of the proposed alteration or amendment is contained in the notice of such special meeting; provided, however, that the Board of Directors shall not amend, alter or repeal any Bylaw in such a manner as to affect in any way the qualification, classification, or term of office of the directors. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the stockholders.

EX-10.23

Exhibit 10.23

SAFECO LEADERSHIP PERFORMANCE PLAN

Effective January 1, 2002

(As amended September 4, 2003)

TABLE OF CONTENTS

SECTION 1: PURPOSE		3
SECTION 2: DEFINITIONS		4
2.1	Business Unit	4
2.2	Change in Control	4
2.3	Committee	4
2.4	Company	4
2.5	Corporate	4
2.6	Corporation	4
2.7	Disability	4
2.8	Effective Date	4
2.9	Eligible Employee	4
2.10	Employee	5
2.11	Incentive Award	5
2.12	Minimum Financial Requirement	5
2.13	Participant	5
2.14	Performance Period	5
2.15	Plan	5
2.16	Retirement	5
2.17	Salary	5
2.18	Senior Leadership	6
2.19	Target Award	6
SECTION 3: PARTICIPATION		7
3.1	Eligible Employees	7
3.2	Participation Date	7
3.3	Rehired Eligible Employees	7
SECTION 4: INCENTIVE POOL		8
4.1	Funding Performance Measures	8
4.2	Incentive Pool Calculation	8
SECTION 5: INCENTIVE AWARDS		10
5.1	Calculation of Incentive Award	10
5.2	Condition Precedent to Payment of Incentive Award	10
5.3	Payment of Incentive Award	11
5.4	Termination of Employment	11
5.5	Partial Year Participation	12
SECTION 6: ADMINISTRATION		13
6.1	Activities, Duties and Responsibilities of the Committee	13
6.2	Notices	13
SECTION 7: AMENDMENT AND TERMINATION		14

7.1	Amendment and Termination of the Plan	14
SECTION 8: MISCELLANEOUS		15
8.1	Tax Withholding	15
8.2	Continuation of Employment	15
8.3	Products and Underwriting	15
8.4	No Trust or Fund	15
8.5	Governing Law; Severability	15
8.6	Spendthrift Clause	16
8.7	Entire Plan	16
8.8	Effective Date and Term	16

2

SECTION 1: PURPOSE

The purpose of the SAFECO Leadership Performance Plan (the “Plan”) is to provide certain managers and other salaried employees of the Company with the opportunity to earn an incentive bonus based on achievement of specified performance goals during a Performance Period, thereby motivating participating employees to achieve company financial and operational objectives.

3

SECTION 2: DEFINITIONS

2.1 Business Unit

“Business Unit” means the following operating organizations of SAFECO Corporation’s subsidiaries: Life & Investments, Property & Casualty, SAFECO Business Insurance, SAFECO Personal Insurance, and Surety.

2.2 Change in Control

“Change in Control” has the meaning set forth in the SAFECO Long-Term Incentive Plan of 1997, or any successor plan thereto.

2.3 Committee

“Committee” means the Compensation Committee of the SAFECO Corporation Board of Directors.

2.4 Company

“Company” means collectively SAFECO Corporation and its subsidiaries.

2.5 Corporate

“Corporate” means the overall administrative organization for the Corporation, which organization supports and is distinct from the Business Units.

2.6 Corporation

“Corporation” means the SAFECO Corporation.

2.7 Disability

“Disability” has the meaning set forth in the SAFECO 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.8 Effective Date

“Effective Date” has the meaning set forth in Section 8.8.

2.9 Eligible Employee

“Eligible Employee” means an Employee who has satisfied the eligibility criteria of Section 3.1.

4

2.10 Employee

“Employee” means any person who is employed on a salaried basis other than someone who is (a) a non-union hourly Employee, (b) included in a unit of persons covered by a collective bargaining agreement, or (c) is a leased employee within the meaning of Internal Revenue Code section 414(n)(2).

2.11 Incentive Award

“Incentive Award” means the annual amount awarded to an Eligible Employee under the Plan pursuant to Section 5.1.

2.12 Minimum Financial Requirement

“Minimum Financial Requirement” means an overall financial result established for the Corporation by the Committee below which no Incentive Awards are made under the Plan, unless at the discretion of the Committee.

2.13 Participant

“Participant” means an Eligible Employee who qualifies for participation as provided in Section 3.2.

2.14 Performance Period

“Performance Period” means the calendar year period during which performance goals are established and an Eligible Employee’s performance is measured in order to determine whether the Eligible Employee is eligible for an Incentive Award.

2.15 Plan

“Plan” means this SAFECO Leadership Performance Plan.

2.16 Retirement

“Retirement” has the meaning set forth in the SAFECO 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.17 Salary

“Salary” means for each Performance Period the total of all amounts the Employer paid to an Employee for personal services, including:

(a) Base salary;

5

(b) Amounts paid to an Employee while on an Authorized Leave of Absence or short term disability; and

(c) Any pre-tax Employee contributions made by the Employer on behalf of the Employee for the Plan Year to the SAFECO Flexible Benefits Program or the SAFECO 401(k)/Profit Sharing Retirement Plan;

but excluding:

(d) Amounts paid for overtime;

(e) All Employer contributions to deferred compensation or other fringe benefit plans;

(f) Cash incentives and bonuses paid, accrued or earned under any incentive compensation plan;

(g) Long-term disability benefits;

(h) Severance pay; and

(i) Any other payments or benefits.

2.18 Senior Leadership Team

“Senior Leadership Team” means the Senior Leadership Team appointed from time to time by the Corporation’s Chief Executive Officer.

2.19 Target Award

“Target Award” means the value, stated as a percentage of Salary or as a dollar amount, which represents the Participant’s expected payment when Corporate, Business Unit and personal goals are achieved.

The initial Target Award is the percentage of Salary or dollar amount established for the Participant’s position. In the event of an Employee’s position change during a Performance Period (e.g. promotion, reclassification, or transfer), the initial Target Award for that Performance Period may be adjusted according to any reasonable methodology chosen by the Committee.

6

SECTION 3: PARTICIPATION

3.1 Eligible Employees

An Employee of the Company shall be eligible to participate in the Plan if he or she:

(a) is a key management employee, or a non-management employee holding a key leadership position with the Company as determined at the discretion of the Corporation’s Chief Executive Officer or a Business Unit President;

(b) occupies a position that is assigned to a leadership job band within the Corporation’s compensation structure; and

(c) is not eligible to participate concurrently in the SAFECO Success Sharing Plan or any other Company-sponsored variable pay or incentive bonus plan. Provided however, that the Committee may extend participation in the Plan to any Employee in its sole discretion.

3.2 Participation Date

An Eligible Employee shall commence participation on the later of:

(a) the Effective Date;

(b) the date when transferred or promoted from an ineligible position into a Plan-eligible position;

(c) if hired by the Company after September 30 in a Performance Period, January 1 of the next following Performance Period.

3.3 Rehired Eligible Employees

An individual who terminates employment and is rehired during the same Performance Period and who satisfies the eligibility criteria of Section 3.1 shall be eligible to participate in the Plan for such Performance Period only if he or she has been employed for at least 90 consecutive days during such Performance Period.

7

SECTION 4: INCENTIVE POOL

4.1 Funding Performance Measures

(a) The Committee shall establish Corporate and Business Unit funding performance measures (“Funding Performance Measures”) and a Corporation Minimum Financial Requirement for each Performance Period on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Funding Performance Measures may include performance criteria for the Corporation, a subsidiary, a Business Unit, an operating group, or a division of the Company or a subsidiary.

(b) During any Performance Period, the Committee may adjust the Funding Performance Measures for such Performance Period 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.

(c) The Funding Performance Measures 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 Funding Performance Measures 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.

(d) The Committee will establish Funding Performance Measures and the Minimum Financial Requirement not later than 90 days after the beginning of the Performance Period.

4.2 Incentive Pool Calculation

For each Performance Period, the Committee shall establish a target incentive pool based on the sum of Target Awards for all Corporate Participants. The Committee shall further establish Business Unit target incentive pools based on the sum of Target Awards for all Business Unit Participants. The target incentive pools shall then be adjusted as follows:

(a) for Corporate, the target incentive pool shall be adjusted based on Corporate performance results relative to Corporate Funding Performance Measures established under Section 4.1; and

8

(b) for Business Units, the target incentive pool shall be adjusted based on a combination of Corporate and relevant Business Unit results relative to Funding Performance Measures established under Section 4.1.

After such adjustments, the incentive pools shall be allocated among Corporate and the Business Units in order to calculate Incentive Awards to Participants.

9

SECTION 5: INCENTIVE AWARDS

5.1 Calculation of Incentive Award

(a) The Participant’s Incentive Award for a Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment, (2) the Participant’s paid Salary during the Performance Period, (3) the Participant’s Target Award, and (4) individual performance measures.

As soon as practical after the end of a Performance Period, the Participant’s management shall assess individual performance by measuring results attributable to performance goals established for the Performance Period. Such performance goals may represent any combination and weighting of Business Unit, operating group, division, unit or individual objectives. Assessment of results shall occur through application of Company-approved performance evaluation tools.

(b) In the event that the performance of Corporate or a Business Unit does not meet the threshold level of performance to result in the funding of an incentive pool under Section 4.2, an Incentive Award may nonetheless be paid to a Participant in the discretion of the Committee or the Corporation’s Chief Executive Officer; provided, however, that the Incentive Award shall not exceed 25% of the Participant’s Target Award. No Incentive Awards may be granted under the Plan unless the Corporation’s Minimum Financial Requirement has been satisfied.

(c) In no event may the Participant’s Incentive Award exceed 200% of his or her Target Award.

5.2 Condition Precedent to Payment of Incentive Award

To receive an Incentive Award under Section 5.1, a written performance evaluation must have first been completed for the Participant and, except as stated in Section 5.4 and 5.5, the Employee must have been a Participant as of the last day of the Performance Period and remain continuously employed with the Company through the date of the payment of the Incentive Award.

10

5.3 Payment of Incentive Award

Subject to the conditions set forth below, Incentive Awards shall be paid to Participants in a lump sum as soon as administratively feasible after the close of the Performance Period. Such payment shall consist of 100% cash; provided, however:

(a) The Committee may direct that Participants who are also members of the Senior Leadership Team receive all or a portion of their respective Incentive Awards in the form of restricted stock rights (“RSRs”) under the SAFECO Long-Term Incentive Plan of 1997 or any successor plan thereto. The actual amount of such RSRs will be determined pursuant to any reasonable methodology chosen by the Committee. The Committee, in accordance with the SAFECO Long-Term Incentive Plan of 1997, shall have full and final authority to establish the terms, conditions and definitions that govern such RSRs.

(b) The Committee may permit deferral of some or all of a Participant’s Incentive Award to the SAFECO Deferred Compensation Plan for Executives in accordance with such plan’s terms.

5.4 Termination of Employment

If an employee’s employment with the Company terminates prior to the date of the payment of an Incentive Award, he or she shall not be entitled to an Incentive Award; provided however,

(a) in the event the Participant’s employment with the Company terminates on account of Retirement, death or Disability, the Participant (or his or her estate) will be entitled to receive an Incentive Award based on his/her Salary for the portion of the Performance Periods(s) in which the Participant was actively employed with the Company, calculated pursuant to any reasonable methodology chosen by the Committee.

(b) in the event the Participant’s employment with the Company is involuntarily terminated by the Company due to a reduction in force, office closure or other organizational change, and the Participant is entitled to severance under the Safeco Employees’ Severance Plan and meets the criteria for participation under that plan, the Participant will be entitled to receive an Incentive Award based on his/her Salary for the portion of the Performance Period in which the Participant was actively employed with the Company, calculated pursuant to any reasonable methodology chosen by the Committee.

(c) in the event the employment of a Participant who has executed a Change in Control Severance Agreement is terminated without cause (as determined in the sole discretion of the Committee) during the Performance Period by the Company (or an acquirer corporation or affiliate thereof) following a Change in Control, the Participant shall be eligible to receive an Incentive Award for the entire Performance Period, calculated and paid in accordance with Section 5.1, notwithstanding the Participant’s termination of employment. If the extent to which the Funding Performance Measures are achieved following the

11

Change in Control cannot be determined because the Company or its operations are merged into or otherwise combined with those of the acquirer corporation, then the amount of the Incentive Award payable to the Participant shall be determined by analyzing the performance results of the calendar quarters completed prior to such merger or combination.

5.5 Partial Year Participation

If any employee that was an Eligible Employee and Participant in the Plan for any portion of the Performance Period, terminates from the Plan and remains continuously employed with the company through the date of the payment of the Incentive Award, such employee shall be entitled to a pro-rated Incentive Award for such Performance Period, calculated pursuant to any reasonable methodology chosen by the Committee.

12

SECTION 6: ADMINISTRATION

6.1 Activities, Duties and Responsibilities of the Committee

This Plan shall be administered by the Committee. The Committee shall have exclusive authority, in its discretion, to determine all matters relating to Incentive Awards under the Plan. The Committee shall also have exclusive authority to interpret the Plan and may from time to time adopt and change rules and regulations of general application for the Plan’s administration. The Committee’s interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Committee pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Committee may delegate administrative duties to the Company’s officers or managers.

6.2 Notices

All notices and communications to the Committee in connection with this Plan shall be in writing, shall be delivered by first class mail, by courier or by hand, shall be addressed to the Committee at the following address: SAFECO Leadership Performance Plan, Attn: Corporate Compensation and Benefits, SAFECO Corporation, SAFECO Plaza, 4333 Brooklyn N.E., Seattle, WA 98185, and shall be deemed to have been given and delivered only upon actual receipt by the Committee. All notices and communications to an Eligible Employee shall be in writing and shall be delivered via paper or electronic media as determined by the Company.

13

SECTION 7: AMENDMENT AND TERMINATION

7.1 Amendment and Termination of the Plan

The Committee shall each have the right to amend or terminate the Plan at any time and to discontinue (either temporarily or permanently) the distribution of Incentive Awards; provided, however, that no amendment or termination of the Plan shall adversely affect an Eligible Employee’s right to payment of an Incentive Award that was earned and awarded prior to the date of the amendment or termination.

14

SECTION 8: MISCELLANEOUS

8.1 Tax Withholding

The Company shall withhold from Incentive Awards all amounts necessary to satisfy applicable federal, state and local withholding tax requirements.

8.2 Continuation of Employment

The existence of the Plan does not create any employment contract, any guarantee of continued employment, or any right or assurance as to any minimum length of employment. An Eligible Employee’s employment may be terminated at any time, with or without reason and with or without prior notice, at the option of the Company or the Eligible Employee.

8.3 Products and Underwriting

The Company reserves the right to withdraw existing products from distribution, reassign distribution of specific products, make new products available, adjust production credit, revise its business plans and strategies and modify its underwriting, reserves, claims, employment and other practices and policies without the Eligible Employee’s consent and without adjusting the performance measures.

8.4 No Trust or Fund

The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or to create any trusts, and no Eligible Employee shall have any rights that are greater than those of a general unsecured creditor of the Company.

8.5 Governing Law; Severability

The Plan shall be governed by the laws of the State of Washington, without regard to its choice of law or conflict of law provisions. The federal and state courts in King County, Washington, shall have exclusive jurisdiction and venue to resolve issues that may arise out of or relate to the Plan. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision.

15

8.6 Spendthrift Clause

Except as may be otherwise provided by law, no benefit, payment or distribution under the Plan, or right to receive such a benefit, payment or distribution, shall be subject either to the claim of any creditor of an Eligible Employee or to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of such person. No Eligible Employee shall have any right to alienate, commute, anticipate or assign (either in law or equity) all or any portion of any benefit, payment or distribution under the Plan.

8.7 Entire Plan

The Plan contains the entire understanding and undertaking of the Company with respect to the provision of an incentive plan for Eligible Employees and, as to that subject, supersedes any and all prior and contemporaneous undertakings, agreements, understandings, practices, policies, inducements or conditions, whether express or implied, oral or written, except as herein contained.

8.8 Effective Date and Term

The effective date of the Plan is January 1, 2002. The Plan shall continue from year to year until terminated in accordance with Section 7.

16

EX-10.28

Exhibit 10.28

SAFECO 401(K)/PROFIT SHARING

RETIREMENT PLAN

AS AMENDED AND RESTATED

EFFECTIVE

JANUARY 1, 2004

CONTENTS

ARTICLE 1: INTRODUCTION			1-1
	1.1	Restatement of the Plan	1-1
	1.2	Purpose of the Plan	1-1
	1.3	Applicability of the Restated Plan	1-1
ARTICLE 2: DEFINITIONS			2-1
	2.1	Account	2-1
	2.2	Administrative Committee	2-1
	2.3	Affiliate	2-1
	2.4	After-Tax Contribution Account	2-1
	2.5	Allocable Income	2-2
	2.6	American States Plan	2-2
	2.7	Annuity Starting Date	2-2
	2.8	Authorized Leave of Absence	2-2
	2.9	Beneficiary	2-2
	2.10	Board	2-3
	2.11	Bonus	2-3
	2.12	Break-in-Service	2-3
	2.13	Code	2-3
	2.14	Company	2-3
	2.15	Company Stock	2-3
	2.16	Compensation	2-4
	2.17	Dependent Child	2-4
	2.18	Disabled	2-4
	2.19	Dividend Account	2-5
	2.20	Dividends	2-5
	2.21	Domestic Partner	2-5
	2.22	Early Retirement Date	2-5
	2.23	Earnings	2-6
	2.24	Eligible Employee	2-6
	2.25	Employee	2-7
	2.26	Employer	2-7
	2.27	Employer Matching Contribution Account	2-7
	2.28	ERISA	2-7
	2.29	Guaranteed Contribution Account	2-7
	2.30	Highly Compensated Employee	2-8
	2.31	Hour of Service	2-8
	2.32	Investment Committee	2-9
	2.33	Normal Retirement Date	2-9
	2.34	Participant	2-9
	2.35	Plan	2-9
	2.36	Plan Administrator	2-9
	2.37	Plan Year	2-9
	2.38	Pre-tax Contribution Account	2-9
	2.39	Profit Sharing Contribution Account	2-10
	2.40	Required Beginning Date	2-10
	2.41	Rollover Account	2-10
	2.42	Safeco Stock Ownership Fund	2-10
	2.43	Section 415 Compensation	2-10
	2.44	Trust Agreement	2-11

i

	2.45	Trust or Trust Fund	2-11
	2.46	Trustee	2-11
	2.47	Valuation Date	2-12
	2.48	Year of Participation	2-12
	2.49	Year of Service	2-12
	2.50	Additional Definitions in Plan	2-13
ARTICLE 3: PARTICIPATION			3-1
	3.1	Eligibility for Participation	3-1
	3.2	Inactive Participant	3-2
	3.3	Reemployment After Termination	3-2
ARTICLE 4: SALARY DEFERRAL			4-1
	4.1	Payroll Deduction Agreement	4-1
	4.2	Participant Modification of Payroll Deduction Agreement	4-2
	4.3	Procedure for Making and Revoking Payroll Deduction Agreement	4-3
	4.4	Nondiscrimination Test for Deferrals (“ADP Test”)	4-3
ARTICLE 5: PLAN CONTRIBUTIONS			5-1
	5.1	Participant and Employer Contributions	5-1
	5.2	Contribution of Stock	5-4
	5.3	Nondiscrimination Test for Employer Matching Contributions (“ACP Test”)	5-4
	5.4	Nondiscrimination Test for After-Tax Contributions (ACP Test)	5-5
	5.5	Corrective Procedures to Satisfy Discrimination Tests	5-6
	5.6	Return of Contributions	5-9
	5.7	Recharacterization of Excess Pre-Tax Contributions	5-10
	5.8	Allocation of Forfeitures	5-10
	5.9	Maximum Annual Additions to Accounts	5-10
ARTICLE 6: ACCOUNT ADMINISTRATION			6-1
	6.1	Types of Accounts	6-1
	6.2	Investment	6-1
	6.3	Minimum Diversification Requirements	6-4
	6.4	Establishment of Rules and Procedures	6-5
	6.5	Investment Manager	6-5
	6.6	Dividends	6-6
	6.7	Voting Company Stock	6-7
	6.8	Valuation of the Trust Fund	6-9
	6.9	Allocation of Trust Fund Earnings and Losses to Participant Accounts	6-9
	6.10	Account Statements	6-10
ARTICLE 7: VESTING			7-1
	7.1	Vesting	7-1
	7.2	Forfeitures	7-3
	7.3	Reemployment	7-3
ARTICLE 8: WITHDRAWALS AND LOANS			8-1
	8.1	Withdrawals Prior to Termination	8-1
	8.2	Hardship Withdrawals	8-2
	8.3	Loans	8-4

ii

ARTICLE 9: BENEFITS AND FORMS OF PAYMENT			9-1
	9.1	Eligibility for Benefits	9-1
	9.2	Benefit Commencement	9-1
	9.3	Form of Payment	9-3
	9.4	Benefits for Terminated Participants	9-8
	9.5	Direct Rollovers	9-9
	9.6	Minimum Distribution Requirements	9-10
ARTICLE 10: TOP-HEAVY PROVISIONS			10-1
	10.1	Scope	10-1
	10.2	Top-Heavy Status	10-1
	10.3	Minimum Contribution	10-3
ARTICLE 11: ADMINISTRATION			11-1
	11.1	Administrative Committee	11-1
	11.2	Activities, Duties and Responsibilities of the Administrative Committee	11-1
	11.3	Allocation of Fiduciary Responsibility	11-4
	11.4	Fidelity Bonds	11-4
	11.5	Data	11-4
	11.6	Missing Persons	11-5
	11.7	Claims Procedure	11-5
	11.8	Effect of a Mistake	11-9
	11.9	No Enlargement of Employee Rights	11-10
	11.10	Notice of Address	11-10
	11.11	Incompetency	11-10
	11.12	Non-Alienation and Domestic Relations Orders	11-11
	11.13	Applicable Law	11-12
	11.14	Expenses	11-13
	11.15	Masculine and Feminine, Singular and Plural	11-13
	11.16	Disclosure to Participants	11-13
	11.17	Income Tax Withholding Requirements	11-13
	11.18	Severability	11-13
	11.19	Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”)	11-13
	11.20	Plan Qualification	11-14
	11.21	Beneficiary Disputes	11-14
ARTICLE 12: AMENDMENT AND TERMINATION			12-1
	12.1	Amendment - General	12-1
	12.2	Amendment - Vesting Schedule	12-1
	12.3	Amendment - Consolidation or Merger	12-2
	12.4	Termination of the Plan	12-2
	12.5	Action Upon Discontinuance of Contributions or Termination of the Plan	12-2
ARTICLE 13: FUNDING			13-1
	13.1	Contributions to the Trust	13-1
	13.2	Trust for Exclusive Benefit of Participants	13-1
	13.3	Trustee	13-1

iii

ARTICLE 1: INTRODUCTION

1.1 Restatement of the Plan

Safeco Corporation (the “Company”) maintains the SAFECO Employees’ 401(k)/Profit Sharing Retirement Plan (the “Plan”) for the benefit of its eligible employees. Effective January 1, 2004, the Plan is hereby amended and restated to include an employee stock ownership plan, within the meaning of Code Section 4975(e)(7), in addition to the profit sharing and 401(k) components of the Plan.

1.2 Purpose of the Plan

The Plan is intended to allow Participants to save all or a portion of their Earnings and Bonuses for retirement and to share in the Employer’s earnings. For tax purposes, the Plan is intended to qualify as a profit sharing plan with a qualified cash or deferred arrangement, except for the Safeco Stock Ownership Fund, which is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7). The ESOP and the non-ESOP portions of the Plan are intended to constitute a single plan.

1.3 Applicability of the Restated Plan

Except to the extent that an earlier effective date is specifically provided for in this restatement, the provisions of this restatement are effective January 1, 2004. This restatement and any amendment thereto, unless it expressly provides otherwise, shall not be applied retroactively to increase the vested percentage of a former Participant whose employment terminated before January 1, 2004 unless and until the individual again becomes a Participant.

Notwithstanding any contrary Plan provision, if any modification of the Code (or regulations or rulings thereunder) requires that a conforming Plan amendment be adopted as of a stated effective date in order for the Plan to continue to be a qualified plan, the Plan shall be operated in accordance with such requirements until the date when a conforming Plan amendment is adopted, or the date when a clear and unambiguous nonconforming Plan amendment is adopted, whichever occurs first.

Except as otherwise specifically provided in the Plan, all rights under the Plan shall be determined under the terms of the Plan as in effect at the time the determination is made.

1-1

ARTICLE 2: DEFINITIONS

The following terms when used herein shall have the following meanings, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined in this or other sections.

2.1 Account

“Account” means the aggregate of a Participant’s Pre-tax Contribution Account, Employer Matching Contribution Account, After-tax Contribution Account, Guaranteed Contribution Account, Profit Sharing Contribution Account, and Rollover Account, or each such Account individually, as the context requires.

2.2 Administrative Committee

“Administrative Committee” means the committee as from time to time constituted and appointed by the Company to administer the Plan.

2.3 Affiliate

“Affiliate” means:

(a) any corporation that is a member of a controlled group of corporations that includes an Employer (as defined in Code Section 414(b));

(b) any trade or business under common control with an Employer (as defined in Code Section 414(c));

(c) any member of an affiliated service group that includes an Employer (as defined in Code Section 414(m)); or

(d) any business or entity that is treated as a single company with an Employer under Code Section 414(o).

For purposes of the limitation on benefits in Section 5.9, the determination of whether an entity is an Affiliate will be made by modifying Code Sections 414(b) and (c) as specified in Code Section 415(h).

2.4 After-Tax Contribution Account

“After-tax Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to hold a Participant’s after-tax contributions to the Plan and including any gains or losses of the Trust attributable thereto.

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2.5 Allocable Income

“Allocable income” means net earnings or net loss. The Administrative Committee shall calculate allocable income using a uniform, nondiscriminatory method that reasonably reflects the manner used by the Plan to allocate income to the Participant’s Accounts. Allocable income shall not be determined for the period between the end of the Plan Year and the date of distribution.

2.6 American States Plan

“American States Plan” means the predecessor American States Financial Corporation Employees’ Savings and Profit Sharing Plan.

2.7 Annuity Starting Date

“Annuity Starting Date” means the first day of the first period for which a Plan benefit is payable.

2.8 Authorized Leave of Absence

“Authorized Leave of Absence” means any absence authorized by the Company or an Affiliate under its standard personnel practices, provided that all persons under similar circumstances must be treated alike in the granting of such Authorized Leaves of Absence, and provided further that the Participant returns within the period of authorized absence. Any absence due to service in the Armed Forces of the United States shall be considered an Authorized Leave of Absence, provided that the Participant returns to employment with the Company or an Affiliate within the period provided by law.

2.9 Beneficiary

“Beneficiary” means the person or persons designated by the Participant to receive the Participant’s Account in the event of the Participant’s death. Each Participant may designate a Beneficiary on a form prescribed by the Administrative Committee, and such designation shall be effective when properly filed with the Administrative Committee, and shall revoke all prior designations by the same Participant. The Administrative Committee shall require that a married Participant, who designates a Beneficiary other than the Participant’s spouse, obtain and submit to the Administrative Committee the spouse’s written consent to the designation of each such Beneficiary on a form that discloses to the spouse the potential effect of such consent. Such consent must be witnessed by a notary public or a Plan representative. No spousal consent shall be required if it is established to the satisfaction of a Plan representative that such consent cannot be

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obtained because there is no spouse, because the spouse cannot be located, because the Participant is legally separated or the Participant has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (unless a Qualified Domestic Relations Order, within the meaning of Section 11.12(b), provides otherwise), or because of such other circumstances as may be prescribed by Treasury regulations. If no designated Beneficiary survives the Participant or exists, the Participant’s Beneficiary shall be the Participant’s spouse at date of death (if such spouse survives the Participant), or, if there is no surviving spouse, the Participant’s estate.

2.10 Board

“Board” means the Board of Directors of the Company.

2.11 Bonus

“Bonus” means any bonus earned under the Employer’s incentive pay plans including the Success Sharing Plan, Leadership Performance Plan and President/CEO Incentive Compensation Plan. “Bonus” also includes amounts earned under substitute incentive pay plans for Participants who are not also participants in one of the above named plans. “Bonus” excludes recognition bonuses, retention bonuses, sign-on bonuses and other earnings.

2.12 Break-in-Service

“Break-in-Service” means any Plan Year in which an Employee is credited with less than 501 Hours of Service.

2.13 Code

“Code” means the Internal Revenue Code of 1986, as amended, and including all regulations promulgated pursuant thereto.

2.14 Company

“Company” means Safeco Corporation, a corporation organized under the laws of the State of Washington, and any successor thereto that assumes sponsorship of the Plan.

2.15 Company Stock

“Company Stock” means the common stock of the Company.

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2.16 Compensation

“Compensation,” for any Plan Year, means an Eligible Employee’s Section 415 Compensation for such Plan Year paid to an Eligible Employee while a Participant by an Employer, excluding reimbursements and other expense allowances, fringe benefits (cash and noncash), moving expenses, deferred compensation, severance pay, welfare benefits (other than short-term disability) and equity-based awards under the SAFECO Long-Term Incentive Plan of 1997. Notwithstanding the foregoing, a Participant’s Compensation for a Plan Year shall be disregarded to the extent it exceeds the maximum permissible dollar limitation in effect under Code Section 401(a)(17) for such Plan Year.

2.17 Dependent Child

“Dependent Child” means the Participant’s unmarried child who resides with the Participant or at school or in an institution, who is:

(a) less than 19 years old,

(b) at least 19 years old but less than 23 years old and who is enrolled in school as a full–time student and who is primarily supported by the Participant, or

(c) at least 19 years old and who is primarily supported by the Participant and who is incapable of self–sustaining employment by reason of mental or physical handicap.

A child includes a natural child, stepchild, foster child, a child for whom the Participant is a legal guardian, or a legally adopted child (from the date the child is placed in the Participant’s home and the Participant assumes financial responsibility for the adopted child).

Notwithstanding the foregoing, a child described above shall not be a “Dependent Child” if the Participant has joint custody of the child and the Participant has custody for less than 50% of the time.

2.18 Disabled

“Disabled” and similar terms such as “Disability” mean a physical or mental condition of a Participant occurring prior to the Participant’s Normal Retirement Date, which in the sole judgment of the Administrative Committee, based on evidence satisfactory to the Administrative Committee, presumably permanently prevents a Participant from satisfactorily performing the Participant’s usual duties for the Participant’s Employer or the duties of such other position or job for the Employer for which such Participant is qualified by reason of training, education or experience.

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2.19 Dividend Account

“Dividend Account” means an account established and maintained by the Plan Administrator or Trustee to record a Participant’s share of any Dividends and any gains or losses of the Trust attributable thereto.

2.20 Dividends

“Dividends” means cash dividends paid on shares of Company Stock held in the Safeco Stock Ownership Fund.

2.21 Domestic Partner

“Domestic Partner” means a same-sex or opposite-sex individual, age 18 or older, who, for a period of 12 months or more prior to enrolling in the Program, meets the following criteria: The individual is neither married nor related by blood or marriage to a Participant; is the Participant’s sole spousal equivalent and intends to remain so indefinitely; lives together with a Participant in the same principal residence and intends to do so indefinitely; is emotionally committed to the Participant and shares joint responsibilities for common welfare and financial obligations; and is not related to the Participant by blood closer than would prohibit marriage in the state in which the Participant resides.

2.22 Early Retirement Date

“Early Retirement Date” means the first day of the month commencing after the Participant terminates employment with the Company and its Affiliates provided the Participant has attained age 55 and the Participant’s age plus Years of Service equals or exceeds 75 on the date of such termination of employment; provided, however, that with respect to a former participant in the American States Insurance Company Retirement Plan who attained age 50 on or before January 1, 1999, “Early Retirement Date” means the first day of the month commencing after the Participant terminates employment with the Company and its Affiliates provided the Participant has attained age 55 and has at least 10 Years of Service on the date of such termination.

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2.23 Earnings

“Earnings” for each Plan Year means the total of all amounts paid to an Eligible Employee, while a Participant, by an Employer for personal services, including:

(a) base salary;

(b) amounts paid to the Participant while on an Authorized Leave of Absence, or short-term disability; and

(c) any pre–tax Employee contributions for the Plan Year made by the Employer at the direction of the Employee to this Plan, the SAFECO Flexible Benefits Program, or for qualified transportation fringe benefits pursuant to Code Section 132(f)(4);

but excluding:

(d) Bonus and incentive payments under any bonus or incentive plan or arrangement maintained by the Employer, including without limitation, Bonuses;

(e) overtime pay;

(f) cash and noncash fringe benefits;

(g) long–term disability benefits;

(h) severance pay; and

(i) any other payments or benefits.

Notwithstanding the foregoing, a Participant’s Earnings for a Plan Year shall be disregarded to the extent they exceed the maximum permissible dollar limitation in effect under Code Section 401(a)(17) for such Plan Year.

2.24 Eligible Employee

“Eligible Employee” means any Employee who is employed on a salaried basis, other than a salaried Employee who is (a) a leased Employee, (b) a nonresident alien who receives no U.S.-source earned income (within the meaning of Code Section 911(d)(2)) from an Employer, or (c) a member of a unit of Employees covered by a collective bargaining agreement that does not provide for participation in the Plan. Notwithstanding the foregoing, an individual who is not treated by an Employer as an employee for payroll tax purposes, but who is subsequently determined by a government agency, by the conclusion or settlement of threatened or pending litigation, or otherwise to be (or to have been) a common law employee of the Employer shall not be an Eligible Employee, unless and until (and only to the extent) the Administrative Committee determines otherwise.

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2.25 Employee

“Employee” means any person who is employed by an Employer as a common law employee and any leased employee within the meaning of Code Section 414(n)(2); provided, however, if leased employees constitute 20% or less of the Employer’s nonhighly compensated work force, the term “Employee” shall not include a leased employee who is covered by a plan maintained by the leasing organization that meets the requirements of Code Section 414(n)(5).

2.26 Employer

“Employer” means the Company and any Affiliate that with the consent of the Board elects to adopt the Plan. A participating Employer shall be deemed to appoint the Company as its exclusive agent with respect to all power and authority conferred by the Plan on an Employer.

2.27 Employer Matching Contribution Account

“Employer Matching Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to record a Participant’s share of Employer matching contributions to the Plan and any gains or losses of the Trust attributable thereto.

2.28 ERISA

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and including all regulations promulgated pursuant thereto.

2.29 Guaranteed Contribution Account

“Guaranteed Contribution Account” means an Account established and maintained by the Administrative Committee or Trustee to hold a Participant’s guaranteed contributions made pursuant to Section 5.1(c) and any gains or losses of the Trust (other than Dividends) attributable thereto.

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2.30 Highly Compensated Employee

“Highly Compensated Employee” means an Employee who is included in at least one of the following categories within the meaning of Code Section 414(q) and regulations thereunder:

(a) an Employee who was a 5% owner (within the meaning of Code Section 414(q)(2)) of the Employer at any time during the Plan Year or the 12 month period preceding the Plan Year; or

(b) an Employee who received aggregate Section 415 Compensation from an Employer for the 12 month period preceding the Plan Year in excess of the dollar limitation contained in Code Section 414(q)(1)(B)(i).

A former Employee shall be considered a Highly Compensated Employee if he or she was a Highly Compensated Employee (i) when he or she separated from service or (ii) at any time after attaining age 55.

2.31 Hour of Service

“Hour of Service” means:

(a) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of performance of duties;

(b) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty, or leave of absence;

(c) each hour for which an Employee is paid or entitled to payment by the Company or any Affiliate on account of an award of back pay, irrespective of mitigation of damages, agreed to by the Company or any Affiliate. However, hours credited under subsection (a) or (b) above shall not also be credited under this subsection (c);

(d) each hour credited pursuant to applicable ERISA regulations for unpaid periods of absence for service in the United States Armed Forces or Public Health Service during which the Employee’s reemployment rights are guaranteed by law, provided that the Employee is reemployed by the Company or an Affiliate within the time limits prescribed by such law; and

(e) each hour for which the Employee is on unpaid Authorized Leave of Absence or “days without pay” status.

An Employee who is not compensated on an hourly basis shall be credited with 190 Hours of Service for each month in which he or she is credited with at least one Hour of Service.

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All Hours of Service shall be determined and credited to computation periods in accordance with reasonable standards and policies consistent with Department of Labor Regulations Sections 2530.200b-2(b) and (c).

2.32 Investment Committee

“Investment Committee” means those members of the Finance Committee of the Board who are not and never have been employees of the Company or an Affiliate. A majority of the members of the Investment Committee shall constitute a quorum. The Investment Committee shall adopt such rules of procedures and regulations as it deems necessary and shall keep proper records of its proceedings and acts.

2.33 Normal Retirement Date

“Normal Retirement Date” means the first day of the month coinciding with or following the Participant’s 65th birthday.

2.34 Participant

“Participant” means any Eligible Employee who has become a Participant pursuant to Section 3.1. A Participant shall remain a Participant until the Participant’s entire vested interest under the Plan has been distributed.

2.35 Plan

“Plan” means the Safeco 401(k)/Profit Sharing Retirement Plan as set forth herein, together with any amendments hereto.

2.36 Plan Administrator

“Plan Administrator” means the person or entity designated in Section 11 to administer the Plan.

2.37 Plan Year

“Plan Year” means the calendar year.

2.38 Pre-tax Contribution Account

“Pre-tax Contribution Account” means an account established and maintained by the Plan Administrator or Trustee to reflect a Participant’s pre-tax contributions to the Plan and any gains or losses of the Trust attributable thereto.

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2.39 Profit Sharing Contribution Account

“Profit Sharing Contribution Account” means an Account established and maintained by the Administrative Committee or Trustee to hold a Participant’s account balance as of December 31, 2001 under the SAFECO Employees’ Profit Sharing Retirement Plan (which plan was merged into this Plan as of January 1, 2002) and profit-based contributions made to this Plan thereafter and any gains or losses of the Trust (other than Dividends) attributable thereto.

2.40 Required Beginning Date

Except as provided below, “Required Beginning Date” means April 1 following the later of (a) the close of the calendar year in which the Participant attains age 70 ¹/2 and (b) the close of the calendar year in which the Participant separates from service with the Company and its Affiliates or becomes Disabled; provided that clause (b) shall not apply to a Participant who is a 5% owner (as defined in Code Section 416) with respect to the calendar year in which the Participant attains age 70 ¹/2. The “Required Beginning Date” for a Participant who is not a 5% owner and who attained age 70 ¹/2 prior to January 1, 1999 and after December 31, 1995 is April 1 of the calendar year following the calendar year in which the Participant attained age 70 ¹/2 unless the Participant elected prior to such date (or, in the case of a Participant who attained age 70 ¹/2 in 1996, prior to December 31, 1997) to postpone benefit commencement until April 1 of the calendar year following the calendar year in which the Participant terminates employment.

2.41 Rollover Account

“Rollover Account” means an account established and maintained by the Plan Administrator or Trustee to reflect a Participant’s rollover contribution to the Plan and any gains or losses of the Trust attributable thereto.

2.42 Safeco Stock Ownership Fund

“Safeco Stock Ownership Fund” means an investment subfund that is designed to be invested primarily (or exclusively) in shares of Common Sock and that is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7).

2.43 Section 415 Compensation

“Section 415 Compensation,” for any Plan Year, means an Employee’s wages, salaries, commissions, professional fees, and other amounts received during such Plan Year for personal services rendered in the course of employment with the

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Company and Affiliates to the extent the amount is includable in gross income, (a) including, but not limited to, (i) commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits and reimbursements or other expense allowances under a nonaccountable plan (as described in Treasury Regulation Section 1.62-2(c)), (ii) amounts received through accident or health insurance or through an arrangement having the effect of accident or health insurance (but only to the extent includable in gross income), (iii) disability payments (but only to the extent includable in gross income), (iv) earned income from sources outside the United States (whether or not excludable or deductible from gross income under Code Section 911), (v) amounts paid or reimbursed for nondeductible moving expenses, (vi) the value of nonqualified stock options to the extent includable in gross income in the taxable year in which granted, (vii) amounts includable in gross income upon making the election described in Code Section 83(b), and (viii) any pre-tax Employee contributions made by the Company or an Affiliate on behalf of the Employee for the Plan Year to a 401(k) plan or a cafeteria plan or for qualified transportation fringe benefits pursuant to Code Section 132(f)(4), but (b) excluding (ix) distributions from a qualified plan, (x) contributions made by an Employer to a plan of deferred compensation to the extent that the contributions are not includable in the gross income of the Employee for the taxable year in which contributed, (xi) amounts realized on the exercise of nonqualified stock options or when restricted property either becomes transferable or is no longer subject to a substantial risk of forfeiture, (xii) amounts realized on the disposition of stock acquired under a qualified or incentive stock option, and (xiii) other amounts that receive special tax benefits.

2.44 Trust Agreement

“Trust Agreement” means any agreement in the nature of a trust established to form a part of the Plan and to receive, hold, invest, and dispose of the Trust Fund.

2.45 Trust or Trust Fund

“Trust” or “Trust Fund” means the trust fund or funds into which shall be paid all contributions and from which all benefits shall be paid under the Plan.

2.46 Trustee

“Trustee” means the trustee or trustees who receive, hold, invest, and disburse the assets of the Trust in accordance with the terms and provisions of the Trust Agreement by and between the Company and the Trustee. Said Trust Agreement constitutes a part of the Plan and its terms are incorporated herein by reference.

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2.47 Valuation Date

“Valuation Date” means each day on which the New York Stock Exchange is open for trading.

2.48 Year of Participation

“Year of Participation” means a Plan Year in which an Employee is eligible to receive Employer guaranteed or profit sharing contributions.

2.49 Year of Service

“Year of Service” means each Plan Year during which an Employee has 1,000 or more Hours of Service. Notwithstanding the foregoing, “Years of Service” for any Employee who was a participant in the SAFECO Employees Profit Sharing Retirement Plan as of December 31, 2001 shall not be less than the years of “Vesting Service” that the individual had under the provisions of that plan as in effect on December 31, 2001. Also, “Years of Service” as of January 1, 1999 for any Employee with vesting service credit under the American States Plan shall not be less than the Employee’s years of service for vesting purposes under the American States Plan on December 31, 1998.

Where the Company maintains the plan of a predecessor employer, service for such predecessor employer will be treated as service for the Company to the extent required by the Code.

Years of Service will also include service described in Appendix A. If a business entity becomes an Affiliate or a part of the Company or an Affiliate on or after January 1, 2002, prior service with such entity shall be credited as Years of Service hereunder for purposes of eligibility and vesting for individuals who become Eligible Employees immediately following and as a direct result of such acquisition, except to the extent that the Administrative Committee determines otherwise.

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2.50 Additional Definitions in Plan

The following terms are defined in the following Sections of the Plan:

	Section
ACP Test	5.2
ADP Test	4.4
Aggregate Account	10.2(d)
Aggregation Group	10.2(g)
Annual Additions	5.8(b)
Determination Date	10.2(b)
Distributee	9.5(a)
Eligible Retirement Plan	9.5(a)
Employer Contributions	3.1(b)
Investment Manager	6.6
Key Employee	10.2(f)
Lump Sum	9.3(a)(1)
Participant Directed Accounts	6.3
Present Value of Accrued Benefits	10.2(e)
Qualified Domestic Relations Order	11.12(b)
SAFECO Profit Sharing Balanced Retirement Portfolio	6.4(a)
Top-Heavy	10.2(a)
Valuation Date (for Top-Heavy)	10.2(c)

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ARTICLE 3: PARTICIPATION

3.1 Eligibility for Participation

(a) Payroll Deduction Contributions

Each Eligible Employee who was a participant in the Plan on December 31, 2003 for purposes of making pre-tax and after-tax payroll deduction contributions shall continue as a Participant in this Plan for such purposes. Each Eligible Employee who was not a participant in the Plan on December 31, 2003 for purposes of making pre-tax and after-tax payroll deduction contributions, shall become a Participant in the Plan for such purposes on or as soon as administratively practicable after the later to occur of (1) the date on which the Eligible Employee first completes an Hour of Service as an Eligible Employee, and (2) the date the Eligible Employee’s payroll deduction agreement is received and processed by the Administrative Committee.

(b) Employer Contributions

Each Eligible Employee who was a participant in the Plan on December 31, 2003 for purposes of receiving Employer matching contributions and in the Plan on December 31, 2003 for purposes of receiving Employer guaranteed contributions and Employer profit sharing contributions (collectively referred to as “Employer Contributions”) shall continue as a Participant in the Plan for such purposes. Each Eligible Employee who was not a participant in the Plan on December 31, 2003 for the purpose of receiving Employer Contributions shall become a Participant in the Plan for such purpose on the latest of:

(i) the first day of the month following the Eligible Employee’s completion of at least one Hour of Service during twelve different months (nonconsecutive months are aggregated),

(ii) the first day of the month following the date the individual is credited with 1,000 Hours of Service, or

(iii) the first day of the month coinciding with or next following the date the individual becomes an Eligible Employee.

Notwithstanding the foregoing, an Eligible Employee shall become a Participant for purposes of receiving Employer Contributions no later than (1) the first day of the month coinciding with or next following the first anniversary of the date on which such individual first completes an Hour of Service, provided that the individual is credited with at least 1,000

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Hours of Service during the preceding 12–month period, or (2) if the individual is not credited with at least 1,000 Hours of Service by such anniversary date, the first day of the Plan Year next following the Plan Year in which the individual is first credited with at least 1,000 Hours of Service.

3.2 Inactive Participant

Any Participant who remains employed by the Company or an Affiliate but is no longer an Eligible Employee shall become an inactive Participant. An inactive Participant shall not be eligible to make pre-tax or after-tax payroll deduction contributions, or receive Employer matching contributions, Employer guaranteed contributions or Employer profit sharing contributions for the period of time that the individual is an inactive Participant. The individual will, however, continue to earn Years of Service. The individual’s Account shall continue to be held under the Plan until the Participant becomes entitled to a distribution under the provisions of Article 8.

3.3 Reemployment After Termination

Upon the reemployment of a terminated Participant or former Participant as an Eligible Employee, the individual shall immediately resume active participation in the Plan (to the same extent as the individual was participating in the Plan prior to the individual’s termination). Payroll deduction contributions shall begin as soon as administratively practicable following the date the individual’s payroll deduction agreement is received and processed by the Administrative Committee.

An Employee who terminates prior to becoming a Participant for purposes of receiving Employer Contributions and is later reemployed shall qualify to become a Participant for such purposes upon satisfying the requirements of Section 3.1. Hours of Service credited prior to termination shall be forfeited for purposes of this Section 3 only if the Employee incurs five consecutive Breaks-in-Service.

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ARTICLE 4: SALARY DEFERRAL

4.1 Payroll Deduction Agreement

(a) Deferral of Earnings and Bonuses

An Eligible Employee may elect to make payroll deduction contributions by entering into a payroll deduction agreement with the Employer. Such agreement shall authorize the Employer to make payroll deductions, designated as pre-tax or after-tax contributions or a combination thereof, equal to a whole percentage (from 1% to 100%) of the Eligible Employee’s Earnings for each payroll period. In addition (or instead), such agreement may authorize the Employer to make payroll deductions, designated as pre-tax, equal to a whole percentage (from 1% to 100%) of any Bonuses paid to the Eligible Employee.

(b) Effective Time of Payroll Deduction Agreements

An Eligible Employee’s payroll deduction agreement shall be effective as soon as administratively practicable after it is received and processed by the Administrative Committee (but not prior to the date on which the Eligible Employee becomes a Participant for purposes of making payroll deduction contributions), and shall remain in effect until it is superseded by a subsequent agreement or revoked. Amounts shall be deducted from Participant Earnings or Bonuses, as applicable, each payroll period, after applying other applicable payroll deductions (e.g., income and social security tax withholding, wage or salary garnishments, and payroll deductions under the Employers’ cafeteria plan). In the event the amount of the Eligible Employee’s Earnings for a payroll period remaining after other payroll deductions is less than the amount of payroll deduction contributions elected by the Eligible Employee for such payroll period, then the Eligible Employee’s payroll deduction contribution for such payroll period shall equal such lesser amount.

(c) Deferral of Unused Vested Sick Leave

An Eligible Employee (other than an Eligible Employee who was a Highly Compensated Employee in 2003) who is eligible to receive a cash-out as of the first calendar quarter 2004 of the Eligible Employee’s vested, but unused sick leave under the Company’s vested sick leave policy may prospectively elect to have the entire amount of such cash-out contributed to the Plan as a pre-tax payroll deduction contribution by entering into a special payroll deduction agreement with the Employer for such purpose. Subject to the last two sentences of Section 4.1(b), such agreement shall

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authorize the Employer to make a pre-tax payroll deduction equal to 100% of the Eligible Employee’s cash-out amount; in no event may an Eligible Employee elect to contribute only a portion of the Eligible Employee’s cash-out amount to the Plan as a payroll deduction contribution.

(d) Maximum Dollar Contribution

Notwithstanding the foregoing, except to the extent permitted under Section 4.1(e) and Code Section 414(v), pre–tax contributions to the Plan (and any other plans of the Company or any Affiliate subject to Code Section 402(g)) for any calendar year shall not exceed the maximum dollar limitation on elective deferrals in effect under Code Section 402(g) for such year.

In the event a Participant has elected to make pre–tax contributions in excess of this limit, such election shall be automatically modified so that contributions in excess of this limit are designated as after-tax contributions.

(e) Catch-Up Contributions

Subject to the last two sentences of Section 4.1(b), all Employees who are eligible to make payroll deduction contributions under this Plan and who have attained age 50 before the close of the Plan Year shall be eligible to make catch-up contributions in accordance with, and subject to the limitations of, Code Section 414(v). Such catch-up contributions shall not be taken into account for purposes of the provisions of the Plan implementing the required limitations of Code Sections 402(g) and 415. The Plan shall not be treated as failing to satisfy the provisions of the Plan implementing the requirements of Code Section 401(k)(3), 401(k)(11), 401(k)(12), 410(b) or 416, as applicable, by reason of the making of such catch-up contributions. No Employer matching contributions will be made with respect to such catch-up contributions. Except as set forth above (or as specifically provided otherwise herein), catch-up contributions shall be treated as pre-tax payroll deduction contributions for all purposes of the Plan.

4.2 Participant Modification of Payroll Deduction Agreement

The payroll deduction percentage designated in the Participant’s payroll deduction agreement shall continue in effect regardless of changes in Earnings or Bonuses until the Participant changes the election. A Participant may change the percentage or suspend deductions by completing a new payroll deduction

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agreement or suspension election and submitting it to the Administrative Committee. Such change or suspension shall be effective as soon as administratively practicable after such new agreement is received and processed by the Administrative Committee. Once a Participant’s payroll deduction agreement or suspension election becomes effective, it shall automatically revoke any prior payroll deduction agreement entered into by the Participant.

4.3 Procedure for Making and Revoking Payroll Deduction Agreement

The payroll deduction agreement and any modification or revocation thereof shall be made by the Participant in such form, within such time, and in accordance with such rules and procedures as are prescribed by the Administrative Committee.

4.4 Nondiscrimination Test for Deferrals (“ADP Test”)

The Plan is intended to satisfy the alternative method of meeting the nondiscrimination requirements of Code Section 401(k)(12)(C), based on guaranteed contributions made by the Employer pursuant to Section 5.1(c). With respect to Eligible Employees who have not become Participants for purposes of receiving guaranteed contributions (pursuant to Section 3.1(b)), for each Plan Year the Plan must meet one of the average deferral percentage (hereinafter “ADP”) tests described below to satisfy this nondiscrimination requirement. For purposes of this ADP Test, Eligible Employees who have become Participants for purposes of receiving guaranteed contributions (pursuant to Section 3.1(b)) shall not be considered.

(a) The ADP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ADP for such Plan Year for all other Eligible Employees multiplied by 1.25; or

(b) The ADP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ADP for such Plan Year for all other Eligible Employees and (ii) does not exceed the ADP for such Plan Year for all other Eligible Employees multiplied by two.

The ADP for a Plan Year for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one–hundredth of one percent of the Employee’s Section 415 Compensation) of (1) the sum of the Employee’s pre–tax contributions, if any, for such Plan Year (such pre–tax contributions are sometimes referred to herein as “ADP Contributions”) to (2) the Employee’s Section 415 Compensation for such Plan Year, or while an Eligible Employee during such Plan Year (as determined by the Administrative Committee), determined in accordance with Code Section

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401(k) and regulations pursuant thereto, provided that for purposes of the ADP Tests, the definition of “Section 415 Compensation” may be modified by the Administrative Committee to mean any definition of “compensation” that complies with Code Section 414(s). In calculating the deferral percentage for an Eligible Employee for a Plan Year, such Employee’s ADP Contributions shall include any excess deferrals made by such Employee for such Plan Year, except for excess deferrals that arise solely from pre–tax contributions by Employees who are not Highly Compensated Employees under plans maintained by the Affiliates.

If for any Plan Year a Highly Compensated Employee is also eligible to participate in another plan offering ADP Contributions maintained by any Affiliate, the ADP of such Highly Compensated Employee shall be determined by aggregating all such contributions made on behalf of such Highly Compensated Employee.

Further, for purposes of the foregoing tests, all ADP Contributions made to the Plan and any other plan that is aggregated with this Plan for purposes of satisfying the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, ADP Contributions made to this Plan may be permissively aggregated with ADP Contributions made to another plan, so long as the aggregated plans (1) satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan, (2) have the same Plan Year, and (3) use the same ADP testing method.

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ARTICLE 5: PLAN CONTRIBUTIONS

5.1 Participant and Employer Contributions

(a) Participant Payroll Deduction Contributions

Plan fiduciaries shall satisfy applicable ERISA requirements if the Participants’ payroll deduction contributions for each payroll period are paid to the Trustee as of the earliest date on which such contributions can reasonably be segregated from the Employer’s general assets, but not later than the 15th business day of the month following the month in which such contributions are withheld from the Participants’ Earnings or Bonus, as applicable.

(b) Employer Matching Contributions

The Employer shall make an Employer matching contribution for each payroll period on behalf of each eligible Participant in an amount equal to:

(1) 66.67% multiplied by

(2) such Participant’s combined pre-tax and after–tax contributions (excluding catch-up contributions, contributions from Bonuses and contributions from sick leave cash-outs under Section 4.1(c)) up to 6% of Earnings during such payroll period not in excess of the limits contained in Sections 4.1(b) (Maximum Dollar Contributions) and 5.4 (Nondiscrimination Test for After-Tax Contributions). The Employer matching contribution shall be credited to the eligible Participant’s Employer Matching Contribution Account.

The Employer shall pay the Employer matching contributions for each payroll period to the Trustee by the due date (including extensions) of the Employer’s federal income tax return.

(c) Guaranteed Contributions

For each payroll period, the Employer shall make a guaranteed contribution on behalf of each Participant who was an Eligible Employee on any day during that payroll period (and who was a Participant pursuant to Section 3.1(b) for such purposes at any time during that payroll period) equal to 3% of such Participant’s Compensation during that payroll period. The Employer’s guaranteed contribution on behalf of a Participant for a payroll period shall be allocated to such Participant’s Guaranteed Contribution Account.

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The Employer shall pay the Employer guaranteed contributions for a payroll period to the Trustee by the due date (including extensions) of the Employer’s federal income tax return.

(d) Profit Sharing Contributions

For any Plan Year in which the Company has “net profits” (as determined below), it may make a profit sharing contribution on behalf of eligible Participants. The Employer’s profit sharing contribution for a Plan Year may not exceed the lesser of (1) 9% of the Participants’ Compensation for the Plan Year, and (2) the Company’s net profit (as determined below) for such year. The Board shall determine each year whether a profit sharing contribution will be made and the amount of any such contribution.

(1) Eligible Participant

A Participant will be eligible to share in the Employer profit sharing contribution for a Plan Year if he or she was a Participant (pursuant to Section 3.1(b)) for such purposes at any time during such Plan Year and he or she:

(i) completed at least 1,000 Hours of Service during such Plan Year and was actively employed by an Employer on the last day of such Plan Year;

(ii) transferred during such Plan Year from the employ of the Employer to the employ of an Affiliate that has not elected to adopt the Plan, completed at least 1,000 Hours of Service and was actively employed by the Affiliate on the last day of the Plan Year;

(iii) retired during such Plan Year on or after the Participant’s Early or Normal Retirement Date;

(iv) died during such Plan Year; or

(v) incurred a Disability during such Plan Year.

(2) Definition of “Net Profits”

Net profits shall be computed on the basis of the consolidated operations of the Company and shall include all Employers that are, directly or indirectly, at least 20% owned by the Company during the Plan Year. The determination of net profits shall be made before any deduction for contributions to (or other expenses

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related to) the Plan, the SAFECO Employees’ Cash Balance Plan or the SAFECO Deferred Compensation Plan for Executives and also before any deduction of federal, state or foreign taxes on income for the Plan Year.

The amount of net profits for the Plan Year shall be determined in accordance with United States generally accepted accounting principles for the purposes of reporting the Company’s earnings to its shareholders. Income from corporations not controlled by the Company through direct or indirect ownership of at least 20% of all voting rights shall be included only to the extent of dividends actually received by the Company from those corporations.

Notwithstanding the foregoing, in no event shall the Employer make a contribution for any Plan Year that, in the determination of the Board at the time the contribution is made, is greater than the maximum amount currently deductible from income under the applicable provisions of the Code.

The Employer profit sharing contribution for a Plan Year shall be allocated among the Profit Sharing Contribution Accounts of Participants eligible therefor in the same ratio that each such Participant’s Compensation during such Plan Year bears to the total Compensation during such Plan Year of all eligible Participants.

(e) Participant Rollovers

An Eligible Employee may request in writing on forms required by and filed with the Administrative Committee that the Administrative Committee accept a rollover amount that was distributed from another qualified plan described in Code Section 401(a) or 403(a), excluding after-tax employee contributions, or a conduit Individual Retirement Account (IRA). The Administrative Committee may accept the rollover amount subject to the following terms and conditions:

(1) The amount must be a direct rollover or must be deposited with the Trustee within 60 days after the Participant’s receipt of the distribution from another qualified plan or conduit IRA;

(2) The Administrative Committee must determine that such amount is a valid rollover contribution. The Eligible Employee shall provide the Administrative Committee with such information as the Administrative Committee deems necessary for it to make this determination; and

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(3) A rollover of any type of property other than cash will not be accepted.

A rollover amount shall be allocated to a Participant’s Rollover Account. The Rollover Account shall be a fully vested account subject to the same terms of the Plan as other amounts in a Pre–tax Contribution Account, except that the entire Rollover Account including earnings may be withdrawn pursuant to Section 9.1.

No Eligible Employee has any right to have a rollover amount transferred to the Trust, and the Administrative Committee may, in its sole and absolute discretion, approve or deny such a request for any reason that it deems sufficient.

(f) Time of Contribution

In no event shall contributions for any Plan Year be made later than the time prescribed by law (i) for the deduction of such contributions for purposes of federal income tax, as determined by the applicable provisions of the Code, or (ii) for making such contributions under a cash or deferred arrangements (within the meaning of Code Section 401(k)).

5.2 Contribution of Stock

The Company may require the Employers to pay all or any portion of the Employer guaranteed and profit sharing contributions to the Trustee in Company Stock, rather than in cash, in which case the amount of Company Stock to be contributed will be determined by dividing the value of the Employer guaranteed and profit sharing contributions to be made in shares of Company Stock by the closing price of the Company Stock on the Nasdaq for the last trading date immediately preceding the date such shares are contributed to the Plan.

5.3 Nondiscrimination Test for Employer Matching Contributions (“ACP Test”)

The Plan is intended to satisfy the alternative method of meeting the nondiscrimination requirements of Code Section 401(m)(11) with respect to Employer matching contributions, based on guaranteed contributions made by the Employer pursuant to Section 5.1(c). Notwithstanding the foregoing, the Administrative Committee may, in its sole and absolute discretion, aggregate Employer matching contributions with Participant after-tax contributions for purposes of the ACP Test pursuant to Section 5.4.

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5.4 Nondiscrimination Test for After-Tax Contributions (ACP Test)

For each Plan Year the Plan must meet one of the average contribution percentage (hereinafter “ACP”) tests described below to satisfy this nondiscrimination requirement.

(a) The ACP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ACP for such Plan Year for all other Eligible Employees multiplied by 1.25; or

(b) The ACP for such Plan Year for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ACP for such Plan Year for all other Eligible Employees and (ii) does not exceed the ACP for such Plan Year for all other Eligible Employees multiplied by two.

The ACP for a Plan Year for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee’s Section 415 Compensation) of (1) the sum of (i) the Employee’s after-tax contributions, if any, for such Plan Year and (ii) any matching contributions taken into account for such Plan Year pursuant to Section 5.3 (such after-tax contribution and matching contributions are sometimes collectively referred to herein as “ACP Contributions”) to (2) the Employee’s Section 415 Compensation for such Plan Year, or while an Eligible Employee during such Plan Year (as determined by the Administrative Committee), determined in accordance with Code Section 401(m) and regulations pursuant thereto, provided that for purposes of the ACP Tests, the definition of “Section 415 Compensation” may be modified by the Administrative Committee to mean any definition of “compensation” that complies with Code Section 414(s).

If for any Plan Year a Highly Compensated Employee is also eligible to participate in another plan offering ACP Contributions maintained by any Affiliate, the ACP of such Highly Compensated Employee shall be determined by aggregating all such contributions made on behalf of such Highly Compensated Employee.

Further, for purposes of the foregoing tests, all ACP Contributions made to the Plan and any other plan that is aggregated with the Plan for purposes of satisfying the coverage requirements of Code Section 410(b) (except the average benefits percentage test) shall be treated as made to a single plan. In addition, ACP Contributions made to the Plan may be permissively aggregated with ACP Contributions made to another plan, so long as the aggregated plans satisfy the requirements of Code Sections 401(a)(4) and 410(b) as if they were a single plan.

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In the event the Plan is restructured for purposes of meeting the coverage requirements of Code Section 410(b), each restructured group shall be considered a separate plan for purposes of ACP testing and shall be separately tested.

If the Administrative Committee elects, pursuant to Section 5.3, to aggregate Employer matching contributions with after-tax contributions for purposes of the ACP Test, then the foregoing provisions of this Section 5.4 shall be interpreted to include matching contributions.

5.5 Corrective Procedures to Satisfy Discrimination Tests

(a) Reduction of Contributions

If at any time during a Plan Year the Administrative Committee determines on a projected basis that it is necessary to reduce the Participant pre-tax contributions or after-tax contributions to satisfy the dollar limit on annual deferrals, the ADP nondiscrimination test, or the ACP nondiscrimination test, it shall have the authority to do so in such amounts and for such periods of time as it deems necessary under the circumstances.

(b) Contributions in Excess of Dollar Limitation

An excess deferral exists for a Participant if pre-tax contributions under the Plan, together with any other plans subject to the deferral limit in Code Section 402(g), exceed such dollar limitation for any calendar year.

In the event an excess deferral exists in plans maintained by the Company (and Affiliates, if applicable), such excess deferral, adjusted for Allocable Income, shall be distributed no later than April 15 following the calendar year in which the excess deferral occurred.

In the event an excess deferral exists in plans maintained by the Company and any unrelated employers, and a Participant submits a written request for a return of excess deferrals by March 1 following the calendar year in which an excess deferral occurs, the Administrative Committee shall distribute such excess deferral, adjusted for Allocable Income, no later than April 15 following the calendar year in which the excess deferral occurred. Such written request shall contain such information as the Administrative Committee may require.

(c) ADP Excess Contributions

ADP excess contributions exist with respect to a Plan Year if contributions under the Plan on behalf of Highly Compensated Employees fail to meet

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the ADP Test described in Section 4.4 for such Plan Year. The Administrative Committee shall determine the amount of the excess contributions for a Plan Year in accordance with paragraph (1) below and will then allocate the excess contributions to Highly Compensated Employees on the basis of the dollar amount of their pre–tax contributions for the Plan Year in accordance with paragraph (2) below. Such excess contributions shall be distributed to affected Highly Compensated Employees (to the extent they have not been distributed previously), together with Allocable Income thereon, within 12 months after the end of the Plan Year in which the excess contributions occurred; provided, however, that the amount of excess contributions to be distributed to any Highly Compensated Employee with respect to any Plan Year shall be reduced by the amount of excess deferrals previously distributed to such Employee with respect to such Plan Year.

(1) Determination of Total Excess Contributions

The deferral percentage of the Highly Compensated Employee with the highest deferral percentage will be reduced to the extent necessary to (i) enable the Plan to satisfy Section 4.4, or (ii) cause such Employee’s deferral percentage to equal the deferral percentage of the Highly Compensated Employee with the next highest deferral percentage. This procedure shall be repeated until the Plan satisfies Section 4.4. The total excess contributions for the Plan Year shall equal the sum of the dollar amounts attributable to the various percentage reductions for the Highly Compensated Employees.

(2) Allocation of Total Excess Contributions

The total excess contributions for a Plan Year shall be allocated among the Highly Compensated Employees according to the dollar amount of their pre-tax contributions for such Plan Year. Excess contributions shall be allocated first to the Highly Compensated Employee with the highest amount of pre-tax contributions for the Plan Year. Excess contributions shall be allocated to that Highly Compensated Employee until the dollar amount of that individual’s pre-tax contributions has been reduced to equal that of the Highly Compensated Employee with the next highest dollar amount. This process shall be repeated until the total dollar amount of excess contributions has been allocated.

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(d) ACP Excess Aggregate Contributions

ACP excess aggregate contributions exist with respect to a Plan Year if contributions under the Plan on behalf of Highly Compensated Employees fail to meet the ACP Test described in Section 5.4 for such Plan Year. The Administrative Committee shall determine the amount of the excess aggregate contributions for a Plan Year in accordance with paragraph (1) below and then allocate the excess aggregate contributions to Highly Compensated Employees on the basis of the dollar amount of their after-tax contributions and matching contributions (if taken into account under Section 5.4) for the Plan Year in accordance with paragraph (2) below. Such excess aggregate contributions shall be distributed to affected Highly Compensated Employees (to the extent the affected Highly Compensated Employees are vested in them and they have not been distributed previously) or forfeited by affected Highly Compensated Employees (to the extent the affected Highly Compensated Employees are not vested in them and they have not been forfeited previously), together with Allocable Income thereon, within 12 months after the end of the Plan Year in which the excess aggregate contributions occurred. Distributions and forfeitures of the excess aggregate contributions allocable to a Highly Compensated Employee shall first be made from the Highly Compensated Employee’s unmatched after-tax contributions, then from the Highly Compensated Employee’s matched after-tax contributions and the related matching contributions and lastly from matching contributions on the Highly Compensated Employee’s pre-tax contributions. If matching contributions are not taken into account under Section 5.4, then any matching contributions related to returned after-tax contributions shall be forfeited (even if otherwise vested). Matching contributions shall be deemed to be attributable to pre-tax contributions to the maximum extent possible under Section 5.1(b) prior to being attributed to after-tax contributions. The Administrative Committee shall determine ACP excess aggregate contributions after determining excess deferrals.

(1) Determination of Total Excess Aggregate Contributions

The contribution percentage of the Highly Compensated Employee with the highest contribution percentage will be reduced to the extent necessary to (i) enable the Plan to satisfy Section 5.4, or (ii) cause such Employee’s contribution percentage to equal the contribution percentage of the Highly Compensated Employee with the next highest contribution percentage. This procedure shall be repeated until the Plan satisfies Section 5.4. The total excess aggregate contributions for the Plan Year shall equal the sum of the dollar amounts attributable to the various percentage reductions for the Highly Compensated Employees.

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(2) Allocation of Total Excess Aggregate Contributions

The total excess aggregate contributions for a Plan Year shall be allocated among the Highly Compensated Employees according to the dollar amount of their after-tax contributions and matching contributions (if taken into account under Section 5.4) for such Plan Year. Excess aggregate contributions shall be allocated first to the Highly Compensated Employee with the highest amount of after-tax contributions and matching contributions (if taken into account under Section 5.4) for the Plan Year. Excess aggregate contributions shall be allocated to that Highly Compensated Employee until the dollar amount of that individual’s after-tax contributions and matching contributions (if taken into account under Section 5.4) has been reduced to equal that of the Highly Compensated Employee with the next highest dollar amount. This process shall be repeated until the total dollar amount of excess aggregate contributions has been allocated.

5.6 Return of Contributions

(a) Nondeductible Contributions

Notwithstanding anything herein to the contrary, all contributions by the Employer to the Trust Fund are conditioned on the deductibility of such contributions under the Code. To the extent that any such deduction is disallowed, the Employer may within one year following a final determination of the disallowance, demand repayment of such disallowed contribution and the Trustee shall return such contribution less any losses attributable thereto to the Employer.

(b) Mistake of Fact

If the amount of contribution made to the Plan by an Employer for any Plan Year is in excess of the amount required under Section 5.1, and such excess payment is due to mistake of fact, the Employer shall have the right to recover such excess contribution within one year after the date the contribution is made to the Trustee. The return of a contribution shall be permitted hereunder only if the amount so returned (i) is the excess of the amount actually contributed over the amount that would have otherwise been contributed, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution.

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5.7 Recharacterization of Excess Pre-Tax Contributions

Pre-tax contributions made to the Plan that exceed the limitations of Section 4.1(b) (dollar limitation) at the election of the Employee at commencement of participation shall be recharacterized as after-tax contributions.

Income related to a recharacterized excess shall not be treated as an amount recharacterized, but shall remain attributed to the applicable Pre-tax Contribution Account.

An amount recharacterized shall be treated as an Employer contribution for purposes of Sections 9 and 10. Amounts recharacterized will be treated as pre-tax contributions for purposes of withdrawals under Sections 8.1 and 8.2.

5.8 Allocation of Forfeitures

Any amounts forfeited by a Participant from the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account pursuant to Section 7 shall be used first to restore Accounts pursuant to Section 7.2, and then shall be used to reduce subsequent Employer matching and/or Employer profit sharing contributions.

5.9 Maximum Annual Additions to Accounts

For purposes of this Section 5.9, the Company and any Affiliate shall be considered a single employer, to the extent required by the Code.

(a) Primary Rule

Except to the extent permitted under Section 4.1(c) and Code Section 414(v), notwithstanding any other Plan provision to the contrary, the Annual Additions to a Participant’s Accounts in the Plan and any other defined contribution plan maintained by the Company or any Affiliate shall not exceed the lesser of (i) 100% of the Participant’s Section 415 Compensation, or (ii) $40,000.

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(b) Annual Additions Defined

For purposes of this Section 5.9, the term “Annual Additions” for any Participant in any Plan Year means the sum of:

(1) the amount of Employer contributions and Participant pre-tax and after-tax contributions (other than catch-up contributions made pursuant to Section 4.1(c)) allocated to the Participant’s Accounts;

(2) forfeitures allocated to the Participant’s Accounts; and

(3) with respect only to the $40,000 limitation, amounts attributable to retiree medical benefits on behalf of a Key Employee in a separate account in a welfare fund subject to Code Section 419A.

(c) Cost-of-Living Adjustment

The $40,000 limit prescribed above shall be automatically adjusted for cost-of-living increases, to the maximum permissible dollar limitation determined by the Commissioner of Internal Revenue. The dollar amount applicable in computing the maximum contribution for any Participant shall be the dollar amount in effect for the calendar year in which the contribution is made.

(d) Remedy

If for any Plan Year the Annual Additions exceed the foregoing limitations because of a reasonable error in estimating a Participant’s annual Section 415 Compensation or a reasonable error in determining the amount of a Participant’s pre-tax and after-tax contributions permitted under Code Section 415, or if under other facts and circumstances as are found by the Internal Revenue Service to justify the availability of the remedy set forth in this Section 5.9(d), then the Plan Administrator shall eliminate the excess in the following manner:

First – The Participant’s unmatched after-tax contributions for the limitation year, together with any income attributable to such contributions, will be repaid to the Participant to the extent necessary to eliminate the excess. Any amounts returned will be disregarded for purposes of the ACP Test.

Second – If, after the application of the immediately preceding paragraph, an excess still exists, then the Participant’s unmatched pre-tax contributions for the limitation year, together with any income attributable to such contributions, will be repaid to the Participant to the extent necessary to eliminate the excess. Any amounts returned will be disregarded for purposes of the ADP Test.

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Third – If, after the application of the immediately preceding paragraph, an excess still exists, then the Participant’s matched after-tax contributions for the limitation year, together with any income attributable to such contributions, will be repaid to the Participant (and any related Employer matching contribution will be forfeited) to the extent necessary to eliminate the excess. Any amounts returned (and any related forfeited Employer matching contributions) will be disregarded for purposes of the ACP Test.

Fourth – If, after the application of the immediately preceding paragraph, an excess still exists, then the Participant’s matched pre-tax contributions for the limitation year, together with any income attributable to such contributions, will be repaid to the Participant (and any related Employer matching contribution will be forfeited) to the extent necessary to eliminate the excess. Any amounts returned (and any related forfeited Employer matching contributions) will be disregarded for purposes of the ADP Test.

Fifth – If, after the application of the immediately preceding paragraph, an excess still exists, then Employer profit sharing contributions, together with any income attributable to such contributions, will be held in a suspense account and treated as described below to the extent necessary to eliminate the excess.

Sixth – If, after the application of the immediately preceding paragraph, an excess still exists, then Employer guaranteed contributions, together with any income attributable to such contributions, will be held in a suspense account and treated as described below to the extent necessary to eliminate the excess.

Any suspense account shall be credited with investment earnings and losses as of each Valuation Date in the same manner as Participant Accounts pursuant to Section 6.9. Such suspense account is for accounting purposes only and shall remain in the Trust Fund to be reallocated as provided below. Contents of the suspense account shall be allocated to the affected Participant’s Account in subsequent years when that can be done without exceeding the limitations of this Section 5.9. So long as any amount remains in the suspense account, the Company shall not contribute to the Plan any amount that would cause an additional allocation to the suspense account. In the event the Participant ceases to be a Participant when any amount remains in a suspense account, such amount shall be reallocated to active Participants as of the end of the Plan

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Year following the calendar year in which the Participant ceases to be a Participant. In the event the Plan terminates before any amount remaining in the suspense account has been fully allocated to Participant Accounts, the balance of the suspense account shall be distributed to the Company.

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ARTICLE 6: ACCOUNT ADMINISTRATION

6.1 Types of Accounts

All contributions shall be made to the Trust, which will have the following types of Accounts for each Participant:

(a) Pre-tax Contribution Account

(b) After-tax Contribution Account

(c) Employer Matching Contribution Account

(d) Guaranteed Contribution Account

(e) Profit Sharing Contribution Account

(f) Rollover Account

(g) Dividend Account

6.2 Investment

(a) Investment Options

(1) The Trust shall be divided into such investment subfunds as the Investment Committee, in its sole discretion, may determine. Any subfund may hold for investment any assets permitted by the terms of the Trust agreement, including, without limitation, cash or other types of short-term investments. The Investment Committee may add, eliminate, or modify the available subfunds at any time and for any reason and may limit the availability of specific investment subfunds to amounts held in specific Accounts.

(2) Subject to Section 6.2(d), one investment fund shall be the Safeco Stock Ownership Fund, which is intended to constitute an employee stock ownership plan, within the meaning of Code Section 4975(e)(7). The Safeco Stock Ownership Fund shall be invested primarily (or exclusively) in Company Stock in accordance with the directions of the Investment Committee. The Investment Committee may direct the Trustee to invest up to 100% of the Safeco Stock Ownership Fund in Company Stock. To the extent directed by the Investment Committee, the Trustee may also invest the Safeco Stock Ownership Fund in such other prudent investments (or hold such assets temporarily in cash) as the Investment Committee deems appropriate.

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(b) Investment of Participant Accounts

Subject to Section 6.2(d), each Participant shall direct the investment of the Participant’s Accounts among the available investment subfunds. An investment request shall remain effective with regard to all subsequent amounts credited to a Participant’s Accounts, until changed in accordance with the provisions of this Section 6.2. The Plan is intended to constitute a plan described in Section 404(c) of ERISA with respect to Participant Accounts.

(1) When Participation Commences

When participation commences, a Participant shall allocate future contributions to the Participant’s Accounts among the available investment subfunds in any whole percentage increments in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. If a Participant fails to direct the investment of any portion of the future contributions to the Participant’s Pre-Tax Contribution, After-Tax Contribution, Employer Matching Contribution or Rollover Contribution Account, then the Participant will be deemed to have directed that such contributions be invested in a money market (or equivalent) fund. If a Participant fails to direct the investment of any portion of the future contributions to the Participant’s Guaranteed Contribution or Profit Sharing Contribution Account, then the Participant will be deemed to have directed that such contributions be invested 90% in the Safeco Balanced Portfolio and 10% in the Safeco Stock Ownership Fund.

(2) Changing Future Contributions

A Participant may change the Participant’s investment election with respect to future contributions to the Participant’s Accounts in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. Any such change shall be effective as soon as administratively feasible after the Administrative Committee receives the Participant’s proper change election. Future contributions must be allocated among the investment subfunds in whole percentage increments.

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(3) Changing Existing Account Balances

A Participant may reallocate the existing balances in the Participant’s Accounts among the investment subfunds then available for such purposes in accordance with and subject to such rules and procedures as the Administrative Committee shall establish. Existing balances in a Participant’s Accounts may be reallocated among the various investment subfunds so that (i) the amount invested in each particular subfund as of the Valuation Date on which the reallocation occurs represents any whole percentage of the total value of the Participant’s Accounts as of that Valuation Date or (ii) a percentage of the amount invested in a particular subfund is transferred to another subfund. Assets shall be moved among investment subfunds to effect this reallocation as soon as administratively feasible after the Administrative Committee receives the Participant’s proper reallocation election.

Notwithstanding the foregoing, if a Participant elects to transfer all or a portion of the Participant’s interest in the Safeco Stock Ownership Fund to another investment subfund after the ex-dividend date for a Dividend, but before the payment date for such Dividend, then the portion of the Dividend paid with respect to the transferred interest shall be reinvested in the Safeco Stock Ownership Fund or distributed in accordance with the Participant’s prior election under Section 6.6(a)(2), as applicable.

(d) Restrictions on Investment in Certain Investment Funds

Notwithstanding the foregoing:

(1) New contributions may not be allocated to the LNC Common Stock Fund, which is invested in common stock of Lincoln National Corporation, and existing balances may not be moved into the LNC Common Stock Fund. Amounts currently invested in the LNC Common Stock Fund may be moved to other investment subfunds; and

(2) Participants may not invest any portion of the existing balances in their Pre-Tax Contribution, After-Tax Contribution, Employer Matching Contribution or Rollover Contribution Accounts, or any of the future contributions to such Accounts, in the Safeco Stock Ownership Fund or Safeco Balanced Portfolio.

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6.3 Minimum Diversification Requirements

(a) In General

This Section 6.3 sets forth the minimum diversification requirements that apply to investments in the Safeco Stock Ownership Fund. The Investment Committee, in its sole discretion, may provide for additional diversification opportunities.

(b) Diversification

A Participant who has attained age 55 and completed at least ten Years of Participation may elect to “diversify” a part of that portion of the balance in the Participant’s Accounts that is invested in the Safeco Stock Ownership Fund in accordance with such rules as the Investment Committee shall establish. The rules established by the Investment Committee shall, at a minimum, permit a qualifying Participant to diversify such portion of the Participant’s Accounts in accordance with the following provisions:

(1) Such Participant shall be permitted to elect to diversify such portion of the Participant’s Accounts during the 90-day period immediately following the close of each Plan Year during the election period. For purposes of this Section 6.3, “election period” means the period of six consecutive Plan Years beginning with the Plan Year immediately following the Plan Year in which the Participant attains age 55 or completes ten Years of Participation, whichever occurs later.

(2) For each of the first five Plan Years in the election period, such Participant shall be permitted to diversify not less than 25% of the portion of the balance in the Participant’s Accounts invested in the Safeco Stock Ownership Fund (less any amounts that such Participant diversified previously under this Section 6.3(b)). For the sixth Plan Year in the election period, such Participant shall be allowed to diversify 50% of the portion of the balance in the Participant’s Accounts invested in the Safeco Stock Ownership Fund (less any amounts that such Participant diversified previously under this Section 6.3(b)). Notwithstanding the foregoing, no “diversification” election need be permitted if the fair market value of the portion of the Participant’s Accounts invested in the Safeco Stock Ownership Fund (as of the last day of the first Plan Year in the election period) is $500 or less, unless and until the fair market value of such portion of the Participant’s Accounts, as of the last day of a subsequent Plan Year in the election period, exceeds such amount.

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(c) “Diversification” shall be accomplished by allowing the Participant to direct the investment of such amounts among at least three of the other investment subfunds available under the Plan, in accordance with and subject to such rules as the Administrative Committee shall establish.

(d) Any transfer under this Section 6.3 shall occur no later than 90 days after the end of the 90-day period during which the Participant made the Participant’s diversification election.

6.4 Establishment of Rules and Procedures

The Administrative Committee shall prescribe uniform and nondiscriminatory rules and procedures for making elections under Sections 6.2 and 6.3, including, without limitation, the deadlines for making such elections, the frequency with which such elections may be made, and the date as of which such elections shall take effect. The Administrative Committee shall provide such forms as may be necessary or appropriate to implement the investment elections described in Sections 6.2 and 6.3. Elections shall remain in effect until a new election is timely and properly received by the Administrative Committee.

6.5 Investment Manager

The Investment Committee has the power to appoint, remove or change from time to time an Investment Manager to direct the investment of all or a portion of the Trust Fund held by a Trustee. For purposes of this Article 6, “Investment Manager” shall mean any fiduciary (other than a Trustee) who:

(a) has the power to manage, acquire, or dispose of any asset of the Plan;

(b) is (1) registered as an investment adviser under the Investment Advisers Act of 1940, (2) a bank, or (3) an insurance company qualified under the laws of more than one state to perform the services described in subparagraph (a); and

(c) has acknowledged in writing that he, she or it is a fiduciary with respect to the Plan.

In the event the Investment Committee appoints any Investment Manager, the Trustee shall not be liable for the acts or omissions of the Investment Manager or have any responsibility to invest or otherwise manage any portion of the Trust Fund subject to the management and control of the Investment Manager.

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6.6 Dividends

(a) Allocation of Dividends

(1) Subject to Section 6.6(e), all Dividends paid with respect to Company Stock deemed to be allocated to the Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund shall initially be allocated to the Participant’s Dividend Account.

(2) A Participant may elect that all of the Dividends paid with respect to Company Stock deemed to be allocated to the Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund be handled under either (1) or (2) below:

(i) Dividends may be paid to the Trustee and reinvested in the Safeco Stock Ownership Fund; or

(ii) Dividends may be paid to the Trustee and distributed to the Participant. In general, Dividends will be distributed on a quarterly basis, but no later than 90 after the close of the Plan Year in which the Dividends are paid to the Trustee.

(b) Participant Elections

All Participant elections under Section 6.6(a)(2) must be made in accordance with and subject to the rules and procedures as the Administrative Committee shall establish. To be effective for a Dividend, an election with respect to such Dividend must be made by a Participant prior to the date such Dividend is paid to the Plan. An election made by a Participant (including a deemed election described in Section 6.6(c)) will generally remain in effect for all Dividends paid, until changed by the Participant in accordance with and subject to such rules and procedures as the Administrative Committee shall establish.

(c) Deemed Elections

(1) General

In general, a Participant shall be deemed to elect automatic reinvestment under Section 6.6(a)(2)(i), absent a timely election to the contrary in accordance with and subject to such rules and procedures as the Administrative Committee shall establish.

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(2) Exception for Withdrawals

Notwithstanding the foregoing, a Participant will be deemed to have elected Dividend distribution under Section 6.6(a)(2)(ii) for the applicable Dividend if the Participant requests a withdrawal under Section 8.1 from the portion of the Participant’s Guaranteed Contribution, Profit Sharing Contribution or Dividend Account that is invested in the Safeco Stock Ownership Fund, which withdrawal is approved between the ex-dividend date for such Dividend and the payment date for such Dividend.

For subsequent Dividends, this deemed election will lapse, and the Participant’s prior election under Section 6.6(b) will be restored. If the Participant made no prior election, then a deemed election described in Section 6.6(c)(1) will apply.

(d) Determination of Non-Deductibility

Distribution of Dividends under Section 6.6(a)(2)(ii) will not be made if the Administrative Committee determines that the distributed Dividends will not be deductible for federal income tax purposes by the Company under the provisions of the Code, including, without limitation, Code Section 404(k) or any successor provision.

(e) Direct Payment of Dividends

The Company may, in its sole discretion, distribute Dividends directly to Participants in accordance with Section 6.6(a)(2)(ii), rather than paying them to the Trustee for distribution to Participants.

6.7 Voting Company Stock

(a) Voting

Each Participant (or Beneficiary, as applicable) shall have the right, with respect to the shares of Company Stock deemed to be allocated to the Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund, to direct the Trustee as to the manner in which to vote such Company Stock in any matter put to a shareholder vote. Upon receipt of timely and proper directions from a Participant (or Beneficiary), the Trustee shall vote such shares of Company Stock accordance

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therewith. The Trustee shall vote any allocated shares of Company Stock with respect to which the Trustee does not receive timely and proper direction and any shares of Company Stock that are not deemed to be allocated to Participant Guaranteed Contribution, Profit Sharing Contribution or Dividend Accounts in the same proportion on each matter as it votes the allocated shares for which it has received timely and proper direction on such matter.

(b) Tender Offer

Each Participant (or Beneficiary, if applicable) shall have the right, with respect to the shares of Company Stock deemed to be allocated to the Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund, to direct the Trustee as to whether to tender such shares in any tender (or other purchase or exchange) offer made with respect to such shares. Upon receipt of timely and proper directions from a Participant (or Beneficiary), the Trustee will tender or not tender such shares of Company Stock in accordance therewith. The Trustee will not tender any shares of Company Stock held in the Safeco Stock Ownership Fund with respect to which the Trustee does not receive timely and proper directions from the Participant (or Beneficiary) to whose Guaranteed Contribution, Profit Sharing Contribution or Dividend Account such shares are deemed to be allocated. The Trustee will tender or not tender any shares of Company Stock held in the Safeco Stock Ownership Fund that are not deemed to be allocated to Participant Guaranteed Contribution, Profit Sharing Contribution or Dividend Accounts in the same proportion as it tenders or does not tender, as applicable, the allocated shares for which it has received timely and proper direction.

(c) Participants as Named Fiduciaries

Each Participant shall be a “named fiduciary,” as defined in ERISA Section 402(a), with respect to the shares of Company Stock deemed to be allocated to his or her Guaranteed Contribution and Profit Sharing Contribution Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund and to a proportionate number of any shares of Common Stock held in the Safeco Stock Ownership Fund that are not deemed to be allocated to any Participant’s Account.

(d) Determination of Shares Allocated to Participant Accounts

For purposes of this Section 6.7, the number of shares deemed to be allocated to a Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’

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investment in the Safeco Stock Ownership Fund shall be determined by multiplying (1) the number of shares of Company Stock held in the Safeco Stock Ownership Fund on the record date for such vote or other action by (2) a fraction, the numerator of which is the value of the Participant’s interest in the Safeco Stock Ownership Fund on such date and the denominator of which is the total value of the Safeco Stock Ownership Fund on such date.

(e) Distribution of Information

On any matter in which a Participant (or Beneficiary) is entitled to direct the Trustee under Section 6.7(a) or (b), the Trustee will solicit such directions by distributing to each Participant and Beneficiary to whose Guaranteed Contribution, Profit Sharing Contribution or Dividend Account Company Stock has been deemed to be allocated, such information as shall be distributed to shareholders of Company Stock generally in connection with a shareholder vote or other shareholder action, together with such additional information as the Trustee deems appropriate for each Participant (or Beneficiary) to give proper directions to the Trustee. The directions received from any Participant will be held in confidence by the Trustee, and will not be individually divulged or released to the Employer, the Administrative Committee, the Investment Committee or any other person, except to the extent required by law or as may be unavoidable in complying with Section 6.7(a) or (b).

6.8 Valuation of the Trust Fund

The fair market value of the Trust Fund shall be determined as of each Valuation Date.

6.9 Allocation of Trust Fund Earnings and Losses to Participant Accounts

As of each Valuation Date, any increase or decrease in the fair market value (including interest, dividends, realized and unrealized gains and losses) of any subfund shall be allocated among the Participant Accounts on the basis of the interests in the particular subfund held in the Accounts as of the immediately preceding Valuation Date, adjusted for contributions, distributions and transfers made since the immediately preceding Valuation Date. For purposes of the preceding sentence, amounts forfeited from Participant Accounts pursuant to Section 7.2 shall share in Trust Fund earnings and losses until such time as they are applied pursuant to Section 5.8 or 7.2(a) to reduce Employer contributions or restore Participant Accounts, as applicable

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6.10 Account Statements

Each Participant shall be provided with a statement of the Participant’s Accounts under the Plan showing the Account values as of the last Valuation Date in each calendar quarter. If within 90 days after the statement is mailed the Participant makes no objection to the statement, it shall become binding and conclusive on the Participant and any Beneficiary.

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ARTICLE 7: VESTING

7.1 Vesting

(a) Participant Pre-tax Contribution, After-tax Contribution, Guaranteed Contribution, Rollover and Dividend Accounts

Each Participant shall at all times have a 100% vested, nonforfeitable right to the Participant’s Pre-tax Contribution Account, After-tax Contribution Account, Guaranteed Contribution Account; Rollover Account and Dividend Account.

(b) Employer Matching Contribution and Profit Sharing Contribution Accounts

(1) General

Each Participant shall earn a vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account and Profit Sharing Contribution Account in accordance with the following table, based on the Participant’s Years of Service:

Years of Service	Percent Vested
Less than 2	0	%
2	25	%
3	50	%
4	75	%
5 or more	100	%

In addition, each Participant shall have a 100% vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account and Profit Sharing Contribution Account on the date the Participant dies, becomes Disabled, or attains age 65, provided the Participant is an Employee on such date.

(2) Former Employees of American States

Notwithstanding the foregoing, each Participant who (i) was an employee of American States Financial Corporation or its subsidiaries on December 31, 1998, (ii) is a terminated employee of American States Financial Corporation or its subsidiaries and at December 31, 1998 had a vested benefit under the American States Plan, or (iii) is eligible to have an Employer Matching Contribution benefit restored under the provisions of Section 7.2 of the Plan with respect to contributions made under the American

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States Plan on or before December 31, 1998, shall earn a vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account in accordance with the following table, based on the Participant’s Years of Service:

Years of Service	Percent Vested
Less than 2	0
2	50	%
3 or more	100	%

In addition to the vesting provisions of Section 7.1(b)(1), such Participant shall have a 100% vested, nonforfeitable right to the Participant’s Employer Matching Contribution Account upon attainment of age 55, provided the Participant is an Employee on such date.

(3) Vesting of Terminated Employees of SAFECO Properties

Notwithstanding the foregoing, a Participant (i) who, as of February 1, 1998, was employed by SAFECO Properties, Inc. in its home office located in Seattle, Washington, and (ii) whose employment with SAFECO Properties, Inc. is terminated by the Employer solely as a result of or in anticipation of the sale of substantially all of the assets or stock of SAFECO Properties, Inc. to a third party shall be 100% vested in the Participant’s Account balance at the time of the Participant’s termination.

(4) Adjustment for Prior Distribution

In the event the Participant has received a prior distribution from the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account, the vested portion of the relevant Account balance (including the amount that may yet be restored pursuant to Section 7.2) following the distribution shall be determined by application of the following formula:

X = P(AB+D) – D; where X equals the vested amount; P equals the Employee’s vested interest in the Employer Matching Contribution Account and Profit Sharing Contribution Account at the time of subsequent distribution; AB equals the balance of the Account at the time of subsequent distribution; and D equals the amount previously distributed from the Employer Matching Contribution Account and the Profit Sharing Contribution Account.

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7.2 Forfeitures

(a) General

In the event a Participant terminates employment prior to becoming 100% vested in the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account, the non–vested portion shall be forfeited upon the earlier of:

(1) the last day of the Plan Year in which the Participant incurs the Participant’s fifth consecutive Break-in-Service; or

(2) the date the Participant receives a distribution of the Participant’s total vested benefit from the Plan following termination.

If such Participant returns to service after forfeiting a portion of the Participant’s Employer Matching Contribution Account or Profit Sharing Contribution Account but before incurring five consecutive Breaks-in-Service, the amount forfeited shall be restored as of the date on which the Participant returns to service. Assets to restore amounts forfeited shall be taken first from current forfeitures. In the event that current year forfeitures are insufficient to fully reinstate the Account, the Employer shall make a contribution in addition to the contributions required under Section 5.1 equal to the additional amount necessary to fully reinstate the Account.

If a terminated Participant is reemployed after sustaining five consecutive Breaks-in-Service, the amount forfeited shall not be restored.

(b) Deemed Cash-Out

If a Participant terminates when the Participant’s vested Account balance is zero, the Participant shall be deemed to have received a distribution of such Account balance upon termination for purposes of Section 7.2(a)(2) and to be cashed out from the Plan.

7.3 Reemployment

If a terminated Employee subsequently becomes a Participant following reemployment, all Years of Service before and after the Break-in-Service shall be taken into account in determining the Participant’s vested interest in the Employer Matching Contribution Account and Profit Sharing Contribution Account established upon reemployment.

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ARTICLE 8: WITHDRAWALS AND LOANS

8.1 Withdrawals Prior to Termination

A Participant may apply to the Administrative Committee for withdrawal of all or a portion of the following Accounts, paid in cash, at the following times prior to termination of employment with the Company and all Affiliates. Each withdrawal request must be at least equal to $100. The amount available for withdrawal in any Account is reduced by the Participant’s outstanding loan balance, if any, under Section 8.3.

Participant pre-tax and after-tax contributions shall be suspended for the time periods specified following the withdrawal. In the event contributions are suspended, a Participant must complete a new payroll deduction election following the period of suspension to reinstate Participant contributions.

Account	Time of Withdrawal	Suspension
After-Tax Contribution Account	Anytime	Six (6) months
Pre-Tax Contribution Account	After age 59 1/2	Six (6) months
Vested Employer Matching Contribution Account	Two (2) years after matching contributions were made, or anytime after Employee has been a Participant for five (5) years	Six (6) months
Vested Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts	After age 65	None
Rollover Account	Anytime	None

A withdrawal shall be paid within a reasonable time following the day the Administrative Committee receives the request. In-service withdrawals from a Participant’s After-Tax Contribution Account shall be deducted first from the after-tax contributions made by the Participant prior to January 1, 1987.

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8.2 Hardship Withdrawals

(a) Amount

A Participant may apply to the Administrative Committee for a hardship withdrawal prior to termination of employment with the Company and its Affiliates of the Participant’s:

(1) Pre-tax Contribution Account balance as of December 31, 1988, and

(2) Pre-tax contributions after December 31, 1988, excluding earnings thereon;

provided, however, that a Participant may withdraw only up to the amount necessary to meet the expense that causes hardship (including any penalties and taxes incurred as a result of the hardship distribution) and in the event a loan is outstanding under Section 8.3, the Participant may not withdraw any amounts that are pledged as collateral for the loan.

(b) Availability

All hardship withdrawals are subject to Administrative Committee approval. A hardship withdrawal shall be approved only if it is for a type of expense specified in Section 8.2(c) and if it is necessary to satisfy such expense.

(c) Hardship Expenses

Hardship withdrawals are available only to pay for the following expenses:

(1) expenses for medical care described in Code Section 213(d) incurred by the Participant or the Participant’s spouse or dependents (as defined in Code Section 152) or amounts necessary for such persons to obtain such medical care;

(2) purchase (excluding mortgage payments) of a principal residence for the Participant;

(3) tuition and related educational fees for the next 12 months of post–secondary education for the Participant, or the Participant’s spouse, children, or dependents;

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(4) preventing eviction of the Participant from the Participant’s principal residence or foreclosure on the mortgage of the Participant’s principal residence; or

(5) any need prescribed by the Internal Revenue Service in a revenue ruling, notice, regulation or other document of general applicability that satisfies a safe harbor definition of hardship.

(d) Determination of Necessity

A distribution shall be deemed to be necessary to satisfy an expense described in Section 8.2(c) if all of the following requirements are satisfied:

(1) the distribution is not in excess of the amount of such expense (including any excise tax or income tax liability arising from the distribution);

(2) the Participant has obtained all distributions (other than hardship distributions), and all nontaxable loans currently available under all plans maintained by the Company;

(3) the Participant has elected to have Dividends paid under Section 6.6(a)(2)(ii) to the extent Dividends are currently available to the Participant); and

(4) Participant pre-tax and after-tax contributions to this or any other qualified retirement plan or non-qualified deferred compensation plan, including stock option, stock purchase and similar plans, maintained by the Company shall be suspended for six months after a hardship withdrawal, provided that for hardship withdrawals made in calendar year 2001, such contributions shall be suspended for six months after receipt of the withdrawal or until January 1, 2002, if later.

Notwithstanding the foregoing, a Participant whose contributions have been suspended under Section 8.2(d)(3) shall be deemed to be an Eligible Employee for purposes of the ACP Test in Section 5.4. Following such suspension, the Participant may resume contributions pursuant to Section 4.2.

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8.3 Loans

(a) General

A Participant who is a “party-in-interest” pursuant to ERISA may apply to the Administrative Committee for a loan from the Participant’s vested Pre-tax Contribution Account, After-tax Contribution Account, Employer Matching Contribution Account or Rollover Account. The Administrative Committee has authority to administer all loans, and shall administer loans in a manner that does not discriminate in favor of Highly Compensated Employees, officers, or shareholders. The Administrative Committee shall approve all loans that meet the requirements set forth in this Section 8.3 or in any loan policy or procedures adopted by the Administrative Committee.

For record-keeping purposes, loan amounts shall be deducted from a Participant’s Accounts in the following order: first from the Pre–tax Contribution Account, then the Employer Matching Contribution Account, then the Rollover Account, and finally the After-Tax Contribution Account. In the event the amount in one of these Accounts exceeds the amount needed to fund the loan, the loan amount shall be deducted from the investment subfunds in which the Account is invested in the same proportion that the Account is invested in each subfund.

A Participant must request a loan in the manner specified by the Administrative Committee. Such request must include the total amount of the loan requested. Only one loan may be outstanding at any time.

A loan application fee of $50 will be deducted from the Participant’s Account balance. All loan fees shall be used to pay Plan expenses.

(b) Minimum and Maximum Loan Amount

The minimum amount that may be borrowed is $1,000. In no event shall a loan at the time it is made, when added to the outstanding balance of all other loans from any Company-sponsored qualified plans, exceed the lesser of:

(1) 50% of the Participant’s total vested Account balance as of the date the loan is made or

(2) $50,000, reduced by the excess (if any) of (A) the highest outstanding loan balance during the one-year period ending on the day before the date on which the current loan is made, over (B) the outstanding loan balance on the date on which the current loan is made.

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(c) Repayments

The Participant may elect to repay the loan over any number of months that do not exceed 60; provided, however, that the term for a loan used to purchase a primary residence for the Participant may not be longer than 240 months. Notwithstanding the repayment period elected, the remaining outstanding loan balance plus accrued interest shall be immediately due and payable upon termination of employment.

Once the loan is made, the repayment term may not be changed; provided, however, that the Participant may elect to prepay the full outstanding loan balance at any time during the repayment term. Loans shall be repaid in level payments made through payroll deduction each payroll period until the loan is repaid. Payroll deductions shall commence as soon as administratively feasible following the loan distribution.

The Administrative Committee may suspend loan repayments for a Participant who is on an approved unpaid leave of absence, provided that suspension does not exceed one year and does not result in exceeding the maximum repayment period stated above. Upon return from leave, the outstanding loan balance, including accrued interest, will be reamortized over the remaining term of the loan. Notwithstanding the foregoing, in the event a Participant takes an approved leave of absence pursuant to the Uniformed Services Employment and Reemployment Rights Act of 1994, the Administrative Committee may suspend loan repayments to the extent permitted under Code Section 414(u)(4).

Each repayment shall be credited to each Account of a Participant in accordance with the administrative procedures established by the Administrative Committee.

(d) Interest Rate

A fixed reasonable rate of interest shall be charged for the term of the loan. The interest rate shall be the prime corporate lending rate offered by the Trustee plus one; provided that if the Administrative Committee determines that such rate is not reasonable, the interest rate shall be another rate that the Administrative Committee determines is reasonable considering the prevailing interest rate charged on similar commercial loans by persons in the business of lending money, current economic conditions and the facts and circumstances of the loan application. The interest rate for all loans made during a calendar month shall be determined on the first business day of such month.

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In the event the reasonable interest rate determined by the Administrative Committee under the preceding paragraph would violate applicable state usury laws, the Administrative Committee shall deny the loan application.

(e) Default

A loan shall be in default if a payment remains unpaid for 90 days after the due date for the payment. Payments are considered made when received by the Plan. The defaulted loan balance shall be reported as taxable income to the Participant for the year in which the default occurs. If a loan is in default, the Plan shall foreclose on the Participant’s Account balance to the extent of the unpaid balance of the loan as of the earliest date on which the Participant is eligible for a distribution.

(f) Outstanding Loans as of January 1, 1999

Loans to Participants that were originated under the American States Plan and that are outstanding on January 1, 1999, shall be reamortized to reflect the change in payroll periods from biweekly payroll periods to semimonthly payroll periods. Notwithstanding any other Plan provisions, loans that were originated under the American States Plan prior to January 1, 1999, (i) shall not be due and payable upon termination of employment, unless provided otherwise by their terms, and (ii) shall be deemed to be in default only to the extent they would be in default under the terms of the American States Plan as in effect on December 31, 1998.

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ARTICLE 9: BENEFITS AND FORMS OF PAYMENT

9.1 Eligibility for Benefits

A Participant shall be eligible to receive a distribution of the Participant’s Accounts, to the extent vested, upon becoming Disabled or terminating employment with the Company and any Affiliates. Notwithstanding the foregoing, if a Participant terminates employment and then is rehired as an Employee prior to attaining age 65 and prior to receiving a distribution, the Participant shall not be entitled to a distribution due to such termination of employment.

If the Participant dies before the Participant’s entire vested Account balance is distributed, the Participant’s Beneficiary shall be eligible to receive a distribution of the remaining balance of the Participant’s vested Accounts upon the death of the Participant.

9.2 Benefit Commencement

(a) Time of Benefit Commencement

Except as provided below, benefits shall be paid (or commence to be paid) as soon as administratively practicable following the later of (i) the Participant’s termination of employment, death or Disability, or (ii) the Administrative Committee’s receipt of a properly completed request for benefit commencement, together with such other information as the Administrative Committee deems necessary for the proper administration of the Plan.

Participants and Beneficiaries may request benefit commencement as described below.

(1) Participant

A Participant who is eligible for benefits may request benefit commencement by notice to the Administrative Committee in such form as the Administrative Committee requires. Benefits may commence at any time following termination of employment or Disability and on or before the Participant’s Required Beginning Date. If such a Participant fails to request benefit commencement or fails to elect to defer benefit commencement, the Participant shall be deemed to have elected to defer benefit commencement to the Participant’s Required Beginning Date. A Participant’s benefits must commence to be distributed to the Participant by such Participant’s Required Beginning Date.

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(2) Spouse Beneficiary

A spouse Beneficiary who is eligible for benefits may request benefit commencement by notice to the Administrative Committee in such form as the Administrative Committee requires. Subject to Section 9.6, benefits may commence at any time following the Participant’s death and on or before the later of (i) the end of the calendar year immediately following the calendar year in which the Participant died, or (ii) the end of the calendar year in which the Participant would have attained age 70 ¹/2. If such a spouse Beneficiary fails to request benefit commencement or fails to elect to defer benefit commencement, the spouse Beneficiary shall be deemed to have elected to defer benefit commencement to the later of (i) the end of the calendar year immediately following the calendar year in which the Participant died, or (ii) the end of the calendar year in which the Participant would have attained age 70 ¹/2.

(3) Domestic Partner or Dependent Child

Benefits shall be paid or commence to be paid to a Beneficiary who is the Participant’s Domestic Partner or Dependent Child (and who is eligible for benefits) as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death, but in any event on or before December 31 of the calendar year following the calendar year in which the Participant dies, unless such Domestic Partner or Dependent Child elects on or before such date to receive the distribution by December 31 of the calendar year containing the 5th anniversary of the Participant’s death.

(4) Other Beneficiary

Benefits shall be paid to a Beneficiary who is not the Participant’s spouse, Domestic Partner or Dependent Child (but who is eligible for benefits) as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death, but in any event on or before December 31 of the calendar year following the calendar year in which the Participant dies.

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(b) Amount of Payment

Except as provided otherwise herein, the amount distributed shall be based on the Account balance determined as of the Valuation Date on which the distribution is processed.

(c) Small Benefits

Notwithstanding any provision of the Plan to the contrary, if a Participant’s vested Account balance does not exceed the maximum permissible amount under the Code which may be distributed without the consent of the Participant or the Participant’s spouse at the time benefits commence, such vested Account balance shall be paid in a Lump Sum distribution without the Participant’s or spouse’s consent as soon as administratively practicable following the date on which the Participant terminates employment, dies or becomes Disabled.

(d) Earliest Distribution Date

Notwithstanding the foregoing and except for in-service withdrawals permitted under Article 8, a Participant’s vested Account balance may not be distributed prior to the earliest of:

(1) the Participant’s severance from employment, death or Disability;

(2) the termination of the Plan without the establishment or maintenance of another defined contribution plan, other than an employee stock ownership plan (within the meaning of Code Section 4975(e)(7)); and

(3) the Participant’s attainment of age 59 ¹/2.

9.3 Form of Payment

Subject to Section 9.6, a Participant or Beneficiary may elect one of the following payment options. If benefits are required to commence and the Participant or Beneficiary fails to elect a form of payment, benefits shall be paid in the form of a Lump Sum.

(a) Participant or Spouse Beneficiary

A Participant or spouse Beneficiary may elect one of the following forms of payment under the Plan:

(1) Lump Sum

A lump sum distribution of the Participant’s entire vested interest in the Plan. Unless the context clearly indicates otherwise, the term “Lump Sum” shall mean a distribution of the Participant’s entire vested interest in the Plan.

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A Participant or spouse Beneficiary may also elect to receive a partial Lump Sum payment from the Participant’s remaining Account, equal to $100 or more, after benefits commence and regardless of the form of payment previously elected. A Participant or spouse Beneficiary may request up to four such partial Lump Sum payments each calendar year.

(2) Installments

(A) Fixed Term

Installment payments payable quarterly over a specified number of years commencing on the date of the first installment payment, not to exceed the lesser of the applicable life expectancy determined under Treasury Regulation Section 1.72-9 or 20 years. Each installment payment shall be determined by dividing the total value of the Participant’s Accounts immediately before the installment is paid by the number of such remaining installments (including that installment) provided that the first installment payment shall not be less than $150. The Participant’s Accounts that are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.9.

For purposes of determining the maximum fixed term allowable under this Section 9.3(a)(2)(A), the Participant’s life expectancy shall be used for installments elected by the Participant and the surviving spouse’s life expectancy shall be used for installments elected by the surviving spouse.

(B) Over Life Expectancy, Recalculated Annually

Installment payments payable quarterly over the applicable life expectancy determined at the time benefits commence and recalculated annually, with remaining installments adjusted accordingly, provided that the first installment payment shall not be less than $150. The Participant’s

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Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.9.

The life expectancy tables in Treasury Regulations Section 1.72-9 will be used to determine life expectancy, unless the Participant or spouse elects, prior to January 1, 2001, to have life expectancy determined under the table in Treasury Regulations Section 20.2031-7(d)(6).

For purposes of determining life expectancy under this Section 9.3(a)(2)(B), the Participant’s life expectancy shall be used for installments elected by the Participant and the surviving spouse’s life expectancy shall be used for installments elected by the surviving spouse.

(C) Annual Minimum Required Distributions

Annual installment payments commencing no later than the Participant’s Required Beginning Date and payable by December 31 of each subsequent distribution year equal to the minimum required distribution amount calculated under Code Section 401(a)(9) and regulations issued thereunder. The Participant’s Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.9.

(D) Death Following Required Beginning Date

In the event a Participant who is receiving installment payments dies on or after the Participant’s Required Beginning Date, a spouse Beneficiary may elect to receive any remaining installments over the remainder of the installment period elected by the Participant (or over any shorter period elected by the spouse Beneficiary); provided, however, that if the Participant had elected installments under the life expectancy recalculated installment option (Section 9.3(a)(2)(B)), then, except to the extent that a shorter period is required by law or the terms of the Plan or is otherwise elected by the spouse Beneficiary, the remaining installment period shall equal the Participant’s life expectancy immediately prior to the Participant’s death. In no event, however, shall the remaining installments be paid over a period that extends beyond the Beneficiary’s life expectancy as determined under Prop. Treas. Reg. Section 401(a)-9. A spouse Beneficiary may also elect to receive a Lump Sum.

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(E) Suspension

A Participant or spouse Beneficiary may elect to suspend installment payments (other than those that are required to be paid on or after the Participant’s Required Beginning Date) after they have commenced. Such an election will remain in effect until the Participant or spouse Beneficiary elects to recommence benefit payments under an alternate payment option.

(3) Combination of Lump Sum and Installments

A Lump Sum distribution of an elected dollar amount or percentage of the Participant’s vested Account balance shall be paid according to the Participant’s or spouse Beneficiary’s election, with the remaining value of the vested Account balance paid in the form of the installment option elected from those available under Section 9.3(a)(2). The Participant’s Accounts which are not yet distributed shall continue to be credited with investment earnings and losses pursuant to Section 6.9.

(4) Distribution of Lincoln National Corporation Common Stock

A distribution of a Participant’s Account balance invested in the LNC Common Stock Fund shall be made in whole shares of the Lincoln National Corporation common stock credited to the Participant’s Account with cash for any fractional share of such stock credited to the Participant’s Account, unless the Participant (or the Participant’s spouse Beneficiary) elects to receive cash in lieu of all such shares, or the value of the Participant’s vested Account balance is not greater than $5,000. The amount of cash distributed to a Participant (or the Participant’s spouse Beneficiary) for the whole shares (or fractional share) of Lincoln National Corporation common stock credited to the Participant’s Account balance invested in the LNC Common Stock Fund shall be equal to the fair market value of the shares (or the fractional share) of Lincoln National Corporation common stock on the date the Trustee liquidates the Participant’s interest in the shares (or the fractional share).

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(b) Domestic Partner or Dependent Child Beneficiary

Subject to Section 9.6, a Beneficiary who is the Participant’s Domestic Partner or Dependent Child may elect one of the following forms of payment:

(1) A Lump Sum payment of the Participant’s remaining vested Account balance.

(2) If the Participant dies on or after the Participant’s Required Beginning Date, remaining installments over the remainder of the installment period elected by the Participant (or over any shorter period elected by the Domestic Partner or Dependent Child Beneficiary); provided, however, that if the Participant had elected installments under the life expectancy recalculated installment option (Section 9.3(a)(2)(B)), then, except to the extent that a shorter period is required by law or the terms of the Plan or is otherwise elected by the Beneficiary, the remaining installment period shall equal the Participant’s life expectancy immediately prior to the Participant’s death.

(3) If the Participant dies prior to the Participant’s Required Beginning Date, the Domestic Partner or Dependent Child may elect quarterly fixed term installments (under Section 9.3(a)(2)(A)) commencing as soon as administratively practicable following the Administrative Committee’s receipt of notice of the Participant’s death and not later than December 31 of the calendar year following the calendar year in which the Participant died, and payable over any period not exceeding the lesser of 15 years or the period permitted under Prop. Treas. Reg. Section 1.401(a)-9.

(4) A Lump Sum distribution of an elected dollar amount or percentage of the Participant’s vested Account balance according to the Beneficiary’s election, with the remaining value of the vested Account balance paid in the form of an installment under Section 9.3(b)(2) or (3).

(5) A partial Lump Sum payment from the Participant’s remaining Account, equal to $100 or more, after benefits commence and regardless of the form of payment previously elected. A Beneficiary may request up to four such partial Lump Sum payments each calendar year.

(6) A distribution of a Participant’s Account balance invested in the LNC Common Stock Fund shall be made in whole shares of

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Lincoln National Corporation common stock credited to the Participant’s Account with cash for any fractional share of such stock credited to the Participant’s Account, unless the Beneficiary elects to receive cash in lieu of all such shares or the value of the Participant’s vested Account balance is not greater than $5,000. The amount of cash distributed to a Beneficiary for the whole shares (or the fractional share) of Lincoln National Corporation common stock credited to the Participant’s Account balance invested in the LNC Common Stock Fund shall be equal to the fair market value of shares (or the fractional share) of Lincoln National Corporation common stock on the date the Trustee liquidates the Participant’s interest in those shares (or the fractional share).

(c) Other Beneficiaries

Notwithstanding any other Plan provision, a Beneficiary who is not the Participant’s spouse, Domestic Partner or Dependent Child shall receive a Lump Sum payment of the Participant’s remaining vested Account balance.

(d) In-Kind Distribution

Notwithstanding the foregoing, a Participant or Beneficiary may elect to receive that portion of the vested balance in the Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts that is deemed to be invested in the Safeco Stock Ownership Fund in whole shares of Company Stock (with cash for any fractional share), rather than in cash. For purposes of this subsection (d), the number of shares deemed to be allocated to a Participant’s Guaranteed Contribution, Profit Sharing Contribution and Dividend Accounts by virtue of such Accounts’ investment in the Safeco Stock Ownership Fund shall be determined by multiplying the number of shares of Company Stock held in the Safeco Stock Ownership Fund on the Valuation Date on which the Participant’s (or Beneficiary’s) distribution is processed by a fraction, the numerator of which is the value of the Participant’s interest in the Safeco Stock Ownership Fund on such date and the denominator of which is the total value of the Safeco Stock Ownership Fund on such date.

9.4 Benefits for Terminated Participants

Except as specifically provided otherwise herein, benefits under the Plan shall be determined and paid in accordance with the provisions of the Plan in effect on the Participant’s most recent date of termination of employment with the Company and all Affiliates.

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9.5 Direct Rollovers

(a) General Rule

A Participant, spouse Beneficiary or spouse or former spouse alternate payee under a “Qualified Domestic Relations Order,” as defined in Section 11.12(b) (each referred to as a “Distributee”), who is entitled to or elects a Lump Sum distribution, a partial Lump Sum distribution, installment payments over a period of less than ten years or an in-service nonhardship withdrawal may direct the Administrative Committee to pay part or all of the benefit to a trustee or custodian of an Eligible Retirement Plan that accepts such direct rollovers, subject to the following provisions:

(1) a Distributee may not request a direct rollover of an amount distributed due to the minimum required distribution provision under Section 9.6;

(2) the rollover of a distribution may be directed to only one Eligible Retirement Plan;

(3) a Distributee may not elect a direct rollover of an outstanding loan balance that is treated as distributed upon termination of the Participant’s employment, or in the event of default;

(4) a rollover direction regarding installments shall apply to all installments, unless the direction is changed by the Distributee;

(5) a spouse Beneficiary or former spouse alternate payee may direct a rollover under the same terms and conditions as a Participant;

(6) a Distributee must provide the information or documentation reasonably requested by the Administrative Committee;

(7) a Distributee may not elect a direct rollover of a hardship withdrawal;

(8) a Distributee may not elect a direct rollover of after-tax contributions except to an individual retirement account or annuity described in Code Section 408(a) or (b), or to a qualified defined contribution plan described in Code Section 401(a) or 403(a) that agrees to separately account for amounts so transferred including separately accounting for the portion of such distribution that is includable in gross income and the portion of such distribution that is not so includable; and

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(9) a Distributee may not elect a direct rollover of any Dividends distributed pursuant to an election under Section 6.6(a)(2)(ii).

An “Eligible Retirement Plan” for purposes of this Section 9.5 means any of the following plans that accept the eligible rollover distribution: an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), a qualified trust described in Code Section 401(a), an annuity contract described in Code Section 403(b) and an eligible plan under Code Section 457(b) that is maintained by a state, political subdivision of a state, or any agency or instrumentality of a state or political subdivision of a state and that agrees to separately account for amounts transferred into such plan from the Plan.

(b) Notice to Participants

The Administrative Committee shall furnish each Participant, Beneficiary and alternate payee eligible for a direct rollover under this Section 9.5 with a written explanation of the direct rollover opportunity and related withholding consequences of not choosing a direct rollover within a reasonable period (at least 30 but not more than 90 days) prior to the Participant’s, Beneficiary’s or alternate payee’s Annuity Starting Date. The explanation shall clearly indicate that the Participant, Beneficiary or alternate payee has a right to a 30 day waiting period to consider the election. A Participant, Beneficiary or alternate payee may waive the 30 day period by an affirmative written election on form(s) provided by the Administrative Committee to make or not make a direct rollover.

9.6 Minimum Distribution Requirements

(a) General Rules

(1) Effective Date.

The provisions of this Section 9.6 will apply for purposes of determining required minimum distributions for calendar years beginning with the 2003 calendar year.

(2) Precedence.

The requirements of this Section 9.6 will take precedence over any inconsistent provisions of the Plan.

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(3) Requirements of Treasury Regulations Incorporated.

All distributions required under this Section 9.6 will be determined and made in accordance with the Treasury regulations under Code Section 401(a)(9).

(b) Time and Manner of Distribution.

(1) Required Beginning Date.

The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.

(2) Death of Participant Before Distributions Begin.

If the Participant dies before distributions begin, the Participant’s entire interest will be distributed, or begin to be distributed, no later than as follows:

(A) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, then distributions to the surviving spouse will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70½, if later.

(B) If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, then, except as provided in Section 9.2(a)(3), distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(C) If there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, the Participant’s entire interest will be distributed by December 31 of the calendar year immediately following the calendar year in which the Participant died.

(D) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary and the surviving spouse dies after the Participant but before distributions to the surviving spouse begin, this Section 9.6(b)(2), other than Section 9.6(b)(2)(A), will apply as if the surviving spouse were the Participant.

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For purposes of this Section 9.6(b)(2) and Section 9.6(d), unless Section 9.6(b)(2)(D) applies, distributions are considered to begin on the Participant’s Required Beginning Date. If Section 9.6(b)(2)(D) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A). If distributions under an annuity purchased from an insurance company irrevocably commence to the Participant before the Participant’s Required Beginning Date (or to the Participant’s surviving spouse before the date distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A)), the date distributions are considered to begin is the date distributions actually commence.

(3) Forms of Distribution.

Unless the Participant’s interest is distributed in the form of an annuity purchased from an insurance company or in a single sum on or before the Required Beginning Date, as of the first Distribution Calendar Year distributions will be made in accordance with Sections 9.6(c) and (d). If the Participant’s interest is distributed in the form of an annuity purchased from an insurance company, distributions thereunder will be made in accordance with the requirements of Code Section 401(a)(9) and the Treasury regulations.

(c) Required Minimum Distributions During Participant’s Lifetime.

(1) Amount of Required Minimum Distribution For Each Distribution Calendar Year.

During the Participant’s lifetime, the minimum amount that will be distributed for each Distribution Calendar Year is the lesser of:

(A) the quotient obtained by dividing the Participant’s Account Balance by the distribution period in the Uniform Lifetime Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant’s age as of the Participant’s birthday in the Distribution Calendar Year; or

(B) if the Participant’s sole Designated Beneficiary for the Distribution Calendar Year is the Participant’s spouse, the quotient obtained by dividing the Participant’s Account

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Balance by the number in the Joint and Last Survivor Table set forth in Treasury Regulation Section 1.401(a)(9)-9, using the Participant’s and spouse’s attained ages as of the Participant’s and spouse’s birthdays in the Distribution Calendar Year.

(2) Lifetime Required Minimum Distributions Continue Through Year of Participant’s Death.

Required minimum distributions will be determined under this Section 9.6(c) beginning with the first Distribution Calendar Year and up to and including the Distribution Calendar Year that includes the Participant’s date of death.

(d) Required Minimum Distributions After Participant’s Death.

(1) Death On or After Date Distributions Begin.

(A) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the longer of the remaining Life Expectancy of the Participant or the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as follows:

(i) The Participant’s remaining Life Expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(ii) If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, the remaining Life Expectancy of the surviving spouse is calculated for each Distribution Calendar Year after the year of the Participant’s death using the surviving spouse’s age as of the spouse’s birthday in that year. For Distribution Calendar Years after the year of the surviving spouse’s death, the remaining Life Expectancy of the surviving spouse is calculated using the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.

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(iii) If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, the Designated Beneficiary’s remaining Life Expectancy is calculated using the age of the Beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.

(B) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no Designated Beneficiary as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the Participant’s remaining Life Expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.

(2) Death Before Date Distributions Begin.

(A) Participant Survived by Designated Beneficiary. Except as provided in Section 9.2(a)(3) of the Plan, if the Participant dies before the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as provided in Section 9.6(d)(1).

(B) No Designated Beneficiary. If the Participant dies before the date distributions begin and there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year following the calendar year of the Participant’s death.

(C) Death of Surviving Spouse Before Distributions to Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s

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surviving spouse is the Participant’s sole Designated Beneficiary, and the surviving spouse dies before distributions are required to begin to the surviving spouse under Section 9.6(b)(2)(A), this Section 9.6(d)(2) will apply as if the surviving spouse were the Participant.

(e) Definitions.

(1) Designated Beneficiary. The individual who is designated as the Beneficiary under Section 2.9 of the Plan and is the designated beneficiary under Code Section 401(a)(9) and Treasury Regulation Section 1.401(a)(9)-4, Q&A-1.

(2) Distribution Calendar Year. A calendar year for which a minimum distribution is required. For distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant’s Required Beginning Date. For distributions beginning after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin under Section 9.6(b)(2). The required minimum distribution for the Participant’s first Distribution Calendar Year will be made on or before the Participant’s Required Beginning Date. The required minimum distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar Year in which the Participant’s Required Beginning Date occurs, will be made on or before December 31 of that Distribution Calendar Year.

(3) Life Expectancy. Life expectancy as computed by use of the Single Life Table in Treasury Regulation Section 1.401(a)(9)-9.

(4) Participant’s Account Balance. The account balance as of the last valuation date in the calendar year immediately preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions made and allocated or forfeitures allocated to the account balance as of dates in the valuation calendar year after the valuation date and decreased by distributions made in the valuation calendar year after the valuation date. The account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the Distribution Calendar Year if distributed or transferred in the valuation calendar year.

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ARTICLE 10: TOP-HEAVY PROVISIONS

10.1 Scope

Notwithstanding any Plan provision to the contrary, for any Plan Year in which the Plan is “Top-Heavy” within the meaning of Code Section 416(g), the provisions of this Section 10 shall govern to the extent they conflict with or specify additional requirements to the Plan provisions governing Plan Years that are not Top-Heavy.

10.2 Top-Heavy Status

(a) Top-Heavy

The Plan shall be “Top-Heavy” if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, and/or (2) the sum of the Aggregate Accounts of Key Employees under the Plan and any plan of an Aggregation Group, exceeds 60% of the Present Value of Accrued Benefits or the Aggregate Accounts of all Participants under the Plan and any plan of an Aggregation Group, determined in accordance with Code Section 416(g) and regulations thereunder.

The Present Value of Accrued Benefits and/or Aggregate Account balance of a Participant who was previously a Key Employee but is no longer a Key Employee (or the Participant’s Beneficiary) shall not be taken into account for purposes of determining Top-Heavy status. Further, a Participant’s Present Value of Accrued Benefits and/or Aggregate Account balance shall not be taken into account if he or she has not performed services for the Company or any Affiliate at any time during the one year period ending on the Determination Date.

(b) Determination Date

Whether the Plan is Top-Heavy for any Plan Year shall be determined as of the Determination Date. “Determination Date” means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year.

(c) Valuation Date

“Valuation Date” means, for purposes of determining Top Heaviness, the Determination Date instead of the meaning set forth in Section 2.46.

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(d) Aggregate Account

“Aggregate Account” means, with respect to a Participant, the sum of:

(1) the Participant’s Account balances as of the Valuation Date;

(2) contributions after the Valuation Date due as of the Determination Date; and

(3) distributions made during the one year period ending on the Determination Date, including distributions under a terminated plan that, had it not been terminated, would have been aggregated with the Plan under Code Section 416(g)(2)(A)(i). In the case of a distribution made for a reason other than separation from service, death or Disability, this provision shall be applied by substituting the words “five year period” for the words “one year period.”

(e) Present Value of Accrued Benefits

The “Present Value of Accrued Benefits” with respect to a defined benefit plan shall be based on the Participant’s accrued benefits and the actuarial assumptions as determined under the provisions of the applicable defined benefit plan.

(f) Key Employee

“Key Employee” means an Employee or former Employee (including any deceased employee) who, at any time during the Plan Year that includes the Determination Date, was:

(1) an officer of an Employer with annual Section 415 Compensation from the Employer or any Affiliate that exceeds $130,000 (as adjusted under Code Section 416(i)(1) for Plan Years beginning after December 31, 2002);

(2) an Employee who owns more than 5% of an Employer; or

(3) an Employee who owns more than 1% of an Employer with annual aggregate Section 415 Compensation from the Employer and any Affiliate that exceeds $150,000.

The determination of who is a Key Employee will be made in accordance with Code Section 416(i)(1) and the applicable regulations and other guidance of general applicability issued thereunder.

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(g) Aggregation Group

“Aggregation Group” means the group of plans that must be considered as a single plan for purposes of determining whether the plans within the group are Top–Heavy (“Required Aggregation Group”), or the group of plans that may be aggregated for purposes of Top–Heavy testing (“Permissive Aggregation Group”). The Determination Date for each plan must fall within the same calendar year in order to aggregate the plans.

(1) The Required Aggregation Group includes each plan of the Affiliates in which a Key Employee is a participant in the Plan Year containing the Determination Date, and each other plan of the Affiliates that, during this period, enables any plan in which a Key Employee participates to meet the minimum participation standards or nondiscriminatory contribution requirements of Code Sections 401(a)(4) and 410.

(2) A Permissive Aggregation Group may include any plan sponsored by an Affiliate, provided the group as a whole continues to satisfy the minimum participation standards and nondiscriminatory contribution requirements of Code Sections 401(a)(4) and 410.

Each plan belonging to a Required Aggregation Group shall be deemed Top–Heavy or non–Top–Heavy in accordance with the group’s status. In a Permissive Aggregation Group that is determined to be Top–Heavy, only those plans that are required to be aggregated shall be Top–Heavy. In a Permissive Aggregation Group that is not Top–Heavy, no plan in the group shall be Top–Heavy.

10.3 Minimum Contribution

(a) General Rule

For any Plan Year in which the Plan is Top–Heavy, the total Employer contributions under Article 5 (other than Participant contributions under Section 5.1(a)) shall not be less than 3% of such non-Key Employee Participant’s Section 415 Compensation. However, in the event the Employer contributions and forfeitures allocated to each Key Employee’s Account do not exceed 3% of the Key Employee’s Section 415 Compensation, such Employer contributions and forfeitures for non–Key Employee Participants are required to equal only the highest percentage of Section 415 Compensation allocated to any Key Employee’s Accounts for that Plan Year under any defined contribution plans sponsored by the Company or any Affiliate.

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The minimum contribution must be made on behalf of all non–Key Employee Participants who are employed on the last day of the Plan Year including non–Key Employee Participants who (1) failed to complete a Year of Service, or (2) declined to make any mandatory contributions to the Plan or enter a payroll deduction agreement.

Employer matching contributions shall be taken into account for purposes of satisfying the minimum contribution requirement of this Section 10.3 and Code Section 416(c)(2). Employer matching contributions that are used to satisfy the minimum contribution requirements shall be treated as matching contributions for purposes of the actual contribution percentage test, if applicable, and all other requirements of Code Section 401(m).

(b) Special Two (2) Plan Rule

Where the Plan and a defined benefit plan belong to an Aggregation Group that is determined to be Top–Heavy, the minimum contribution required under subsection (a) above shall be increased to 5%.

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ARTICLE 11: ADMINISTRATION

11.1 Administrative Committee

The Board shall appoint an Administrative Committee of three or more members, who may but need not be Employees. The members of the Administrative Committee shall serve without compensation for their services, but shall receive reimbursement from the Trust Fund for expenses properly incurred to the extent not paid by the Company. All members of the Administrative Committee shall serve at the pleasure of the Board and may resign by giving ten days advance written notice to the Board. Vacancies shall be filled by the Board.

11.2 Activities, Duties and Responsibilities of the Administrative Committee

(a) Plan Administrator

The Administrative Committee is the “named fiduciary” and “plan administrator” in accordance with the provisions of ERISA. Notwithstanding the foregoing, the Investment Committee shall be the “named fiduciary” with respect to the determination of the investment subfunds to be offered under the Plan, the appointment of any Investment Manager with respect to any portion of the Trust Fund and the exercise of the authority granted to the Investment Committee under Section 6.7. Except as otherwise provided, the Administrative Committee shall have the authority to control and manage the operation and administration of the Plan and to take such actions as are necessary or appropriate to facilitate the management and control of the Trust Fund. The Company may allocate to the Administrative Committee additional responsibility for administration of the Plan.

(b) Administrative Committee Action

The Administrative Committee may take action with or without a meeting upon the vote of a majority of its members qualified to vote with respect to such action. In the event the Administrative Committee members qualified to vote on any question are unable to reach a decision of the majority, the question shall be determined by the Board or its authorized delegate. A member of the Administrative Committee who is a Participant shall not vote on any question relating specifically to that member.

(c) Organizational Records

The Administrative Committee shall keep proper records of its proceedings and acts. Each member of the Administrative Committee is authorized to execute or deliver any instrument or instruments on behalf of the Administrative Committee.

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(d) Powers and Duties

The Administrative Committee shall administer the Plan in a nondiscriminatory manner for the exclusive benefit of Participants and their Beneficiaries. The Administrative Committee shall have such powers and duties as may be necessary or appropriate to discharge its functions, including, but not limited to, the following:

(1) To construe and interpret the Plan, to receive certification by the Company of any Employee’s satisfaction of the eligibility requirements of the Plan, to decide all questions of eligibility, and to determine the amount, manner and time of payment of any benefit;

(2) To make a determination as to the right of any person to a benefit;

(3) To provide for and receive forms necessary or appropriate for administration of the Plan and to obtain from Employees such information as may be necessary or appropriate for the proper administration of the Plan and, when appropriate, to furnish such information promptly to the Trustee or other persons entitled thereto;

(4) To prepare and distribute to Participants and Beneficiaries, in such manner as the Company determines to be appropriate, information explaining the Plan;

(5) To keep such records and accounts as the Administrative Committee deems necessary to administer the Plan, using such books and methods of accounting as the Administrative Committee shall determine;

(6) To instruct the Trustee with respect to the payment of benefits and expenses;

(7) To prepare and file any reports or other documents required by the Code or ERISA; and

(8) To engage an independent public accountant to conduct such examinations and to render such opinions as may be required by ERISA.

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(e) Delegation of Duties

The Administrative Committee may utilize and rely on the services of agents and such clerical, legal, actuarial, accounting, and other means of assistance (including services of persons employed by or rendering services to the Company or any Affiliate) as it shall from time to time deem necessary or desirable. An opinion of legal counsel, independent public accountant or other expert or advisor shall be full and complete authorization and protection with respect to any action taken, omitted or suffered by the Administrative Committee in good faith and in accordance with such opinion. Payment for such services or assistance shall be made from the Trust Fund to the extent not paid by the Company.

(f) Plan Interpretation

The Administrative Committee shall have all powers necessary or appropriate to carry out its duties, including the discretionary authority to interpret the provisions of the Plan and the facts and circumstances of claims for benefits. The Administrative Committee may from time to time establish rules and procedures for administration of the Plan not inconsistent with its provisions, and administer the Plan in accordance with its provisions and such rules and procedures. The Administrative Committee shall have the exclusive right to interpret the terms and provisions of the Plan and to resolve all questions arising thereunder, including, without limitation, the right to resolve and remedy ambiguities, inconsistencies, or omissions in the Plan. The Administrative Committee shall endeavor to act in such a way as not to discriminate in favor of any class of Employees, Participants or other persons. All interpretations, determinations and decisions of the Administrative Committee in respect of any matter or question arising under the Plan shall be final, conclusive, and binding upon all persons, including, without limitation, Employees, Participants, and any and all other persons having or claiming to have any interest in or under the Plan.

The Plan shall be interpreted by the Administrative Committee in accordance with its terms and their intended meaning. If, due to errors in drafting, a provision does not accurately reflect its intended meaning, as demonstrated by consistent interpretations by the Administrative Committee or other evidence of intention, the provision shall be considered ambiguous and shall be interpreted by the Administrative Committee in a fashion consistent with its intent. This subsection (f) may not be invoked by a Participant, Beneficiary or any other person to require the Plan to be interpreted in a manner that is inconsistent with its interpretation by the Administrative Committee.

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(g) Electronic and Telephonic Directions

Notwithstanding any provision in the Plan to the contrary, to the extent permitted by the Administrative Committee, payroll deduction agreements and modifications and revocations thereof, investment elections, changes or transfers, loans, withdrawal decisions, and any other decision or election by a Participant (or Beneficiary) under the Plan may be accomplished by electronic or telephonic means that are not otherwise prohibited by law and that are in accordance with procedures and/or systems approved or arranged by the Administrative Committee or its delegates.

11.3 Allocation of Fiduciary Responsibility

The Administrative Committee may allocate its fiduciary responsibilities among its members and may delegate to other persons or organizations any of its rights, powers, responsibilities and duties to the fullest extent permitted by ERISA. Any such allocation or delegation shall be made in writing and shall be terminable upon such notice as the Administrative Committee deems reasonable under the circumstances.

11.4 Fidelity Bonds

Every person who handles funds or other property of the Plan shall be bonded in amounts at least meeting the minimum requirements of ERISA Section 412. Trust Funds may be used to purchase such fidelity bonds.

11.5 Data

All persons entitled to benefits from the Plan must furnish to the Administrative Committee such documents, evidence or information as the Administrative Committee considers necessary or appropriate for the purpose of administering the Plan, including information concerning marital status; and it shall be a condition of the Plan that each such person must furnish such information and sign such documents as the Administrative Committee may require before any benefits become payable from the Plan. The Administrative Committee shall be entitled to pay benefits to a nonspouse Beneficiary in reliance on the signed statement of a Participant that he or she is unmarried without any further liability to a spouse if such statement is false.

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11.6 Missing Persons

If the Administrative Committee shall be unable within two years after any amount becomes due and payable from the Plan to a Participant, spouse or Beneficiary to make payment because the identity or whereabouts of such person cannot be ascertained after using a government or commercial locator service, the Administrative Committee may mail a notice by registered mail to the last known address of such person stating that unless such person makes written reply to the Administrative Committee within 60 days from the mailing of such notice, the Administrative Committee will direct that such amount and all further benefits with respect to such person shall be forfeited and such forfeited amount shall be applied in the same manner as a forfeiture under Section 7.2; provided, however, that in the event of the subsequent reappearance of the Participant, spouse or Beneficiary prior to termination of the Plan, the benefits that were due and payable and that such person missed shall be paid, without interest, in a single sum, and any future benefits due such person shall be reinstated in full.

11.7 Claims Procedure

(a) Filing Claim

A Participant or a Beneficiary, or the authorized representative of either (the “Claimant”), who believes that the Participant or Beneficiary, as applicable has been denied a benefit to which the Participant or Beneficiary is entitled under the Plan may file a written claim for such benefits with the Company’s Director, Corporate Compensation/Benefits, or his or her delegate (or such other person as may be appointed by the Administrative Committee for such purpose) (the “Initial Claim Reviewer”). The Initial Claim Reviewer may prescribe a form for filing such claims, and, if he or she does so, a claim will not be deemed properly filed unless such form is used, but the Initial Claim Reviewer shall provide a copy of such form to any person whose claim for benefits is improper solely for this reason.

(b) Claim Review

Claims that are properly filed will be reviewed by the Initial Claim Reviewer, which will make his or her decision with respect to such claim and notify the Claimant in writing of such decision within 90 days (45 days in the case of a claim related to the Participant’s Disability) after the Initial Claim Reviewer’s receipt of the written claim; provided that the 90-day period (45-day period in the case of a claim related to the Participant’s Disability) can be extended for up to an additional 90 days (30 days, or such longer period permitted under 29 C.F.R. § 2560.503-1(f)(3), in the

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case of a claim related to the Participant’s Disability) if the Initial Claim Reviewer determines that special circumstances require an extension of time to process the claim and the Claimant is notified in writing of the extension, the special circumstances requiring the extension and the date by which the Initial Claim Reviewer expects to render a decision, prior to the commencement of the extension. Claims related to the Participant’s Disability shall be subject to such additional procedures as are specified in 29 C.F.R. § 2560.503-1 for disability claims.

If the claim is wholly or partially denied, the written response to the Claimant shall include:

(1) The specific reason or reasons for the denial;

(2) Reference to the specific Plan provisions on which the denial is based;

(3) A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation why such material or information is necessary;

(4) A description of the Plan’s claim appeal procedure (and the time limits applicable thereto), as set forth in subsection (c) immediately below, including a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination on appeal; and

(5) In the case of an adverse benefit determination related to the Participant’s Disability:

(i) if an internal rule, guideline, protocol or other similar criterion was relied upon in making the adverse determination, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request; or

(ii) if the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request.

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(c) Appeal

If the claim is denied in whole or in part, the Claimant may appeal such denial by filing a written appeal with the Secretary of the Administrative Committee (the “Secretary”) within 60 days (180 days in the case of a claim related to the Participant’s Disability) of receiving written notice that the claim has been denied. Such written appeal should include:

(1) A statement of the grounds on which the appeal is based;

(2) Reference to the specific Plan provisions that support the claim;

(3) The reason(s) or argument(s) why the Claimant believes the claim should be granted and evidence supporting each reason or argument; and

(4) Any other comments, documents, records or information relating to the claim that the Claimant wishes to include.

The Claimant will be provided, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (within the meaning of 29 C.F.R. § 2560.503-1(m)(8)) to his claim.

Except as set forth in the next paragraph, appeals will be considered (and decided) by the Administrative Committee no later than the date of its first meeting following the Secretary’s receipt of the written appeal, unless the written appeal is received by the Secretary within 30 days of such meeting, in which case the appeal will be considered (and decided) by the Administrative Committee no later than the date of its second meeting following the Secretary’s receipt of the written appeal. If the Administrative Committee determines that special circumstances require an extension of time to process the appeal, then the appeal will be considered (and decided) by the Administrative Committee no later than the date of its third meeting following the Secretary’s receipt of the written appeal. If such an extension of time is required because of special circumstances, then the Administrative Committee shall provide the Claimant with written notice of the extension, the special circumstances requiring the extension, and the date by which the Administrative Committee expects to render its decision, prior to the commencement of the extension. The Administrative Committee shall notify the Claimant of its decision on the appeal as soon as possible, but not later than five days after the decision is made.

11-7

Appeals of claims related to the Participant’s Disability will be considered (and decided) by the Administrative Committee, and the Claimant will be notified in writing of the Administrative Committee’s decision, within 45 days after the Secretary’s receipt of the written appeal; provided that the 45-day period can be extended for up to an additional 45 days if the Administrative Committee determines that special circumstances require an extension of time to process the appeal and the Claimant is notified in writing of the extension, the special circumstances requiring the extension, and the date by which the Administrative Committee expects to render its decision, prior to the commencement of the extension. Appeals related to the Participant’s Disability shall be subject to such additional procedures as are specified in 29 C.F.R. § 2560.503-1 for the review of disability claim denials.

In considering any appeal, the Administrative Committee (1) will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial determination, and (2) will not afford deference to the Initial Claim Reviewer’s initial denial.

In the event the claim is denied on appeal, the written denial will include:

(1) The specific reason or reasons for the denial;

(2) Reference to the specific Plan provisions on which the denial is based;

(3) A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents records, and other information relevant (within the meaning of 29 C.F.R. § 2560.503-1(m)(8)) to his claim;

(4) A statement of the Claimant’s right to bring an action under Section 502(a) of ERISA; and

(5) in the case of an adverse benefit determination related to the Participant’s Disability:

(i) if an internal rule, guideline, protocol or other similar criterion was relied upon in making the adverse

11-8

determination, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in making the adverse determination and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request;

(ii) if the adverse benefit determination is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request; and

(iii) the following statement: “You and your Plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office or your State insurance regulatory agency.”

(d) Statute of Limitations and Standard of Review

A Claimant may not bring an action under Section 502(a) of ERISA or otherwise with respect to his claim until he has exhausted the foregoing procedure. Any such action must be filed in a court of competent jurisdiction within 180 days after the date on which the Claimant receives the Administrative Committee’s written denial of the Claimant’s claim on appeal or it shall be forever barred. Any further review, judicial or otherwise, of the Administrative Committee’s decision on the Claimant’s claim will be limited to whether, in the particular instance, the Administrative Committee abused its discretion. In no event will such further review, judicial or otherwise, be on a de novo basis, because the Administrative Committee has discretionary authority to determine eligibility for benefits and to construe and interpret the terms of the Plan.

11.8 Effect of a Mistake

In the event of a mistake or misstatement as to the eligibility, participation, or service of any Participant, or the amount of payments made or to be made to a Participant, spouse or Beneficiary, the Administrative Committee shall, if possible, cause to be withheld or accelerated or otherwise make adjustment of the amounts of payments as will in its sole judgment result in the Participant, spouse or Beneficiary receiving the proper amount of payments under the Plan.

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11.9 No Enlargement of Employee Rights

The Plan is strictly a voluntary undertaking on the part of the Company and shall not be deemed to constitute a contract between the Company (or any Affiliate) and any Employee or Participant, or to be considered for, or an inducement to, or a condition of, the employment of any Employee. Nothing contained in the Plan shall be deemed to give any Employee the right to be retained in the service of the Company or any Affiliate or to interfere with the right of the Company or any Affiliate to discharge or retire any person at any time. No Participant, prior to the Participant’s retirement under conditions of eligibility for retirement benefits, or prior to the Participant’s satisfying the vesting requirements, shall have any right or interest in or to any portion of the Trust Fund. No one shall have any right to retirement benefits, except to the extent provided herein.

11.10 Notice of Address

Each person entitled to benefits from the Trust Fund must file with the Administrative Committee, in writing, notice of that person’s post office address and each change of post office address. Any communication, statement, or notice addressed to such a person at the latest reported post office address will be binding on such person for all purposes of the Plan and the Company, the Administrative Committee, and the Trustee shall not be obliged to search for or ascertain that person’s whereabouts, except to the extent required by ERISA.

11.11 Incompetency

Every person receiving or claiming benefits under the Plan shall be conclusively presumed to be mentally competent and of legal age until the date on which the Administrative Committee receives a written notice, in a form and manner acceptable to the Administrative Committee, that such person is incompetent or a minor, for whom a guardian or other person legally vested with the care of the person or estate has been appointed; provided, however, that if the Administrative Committee shall find that any person to whom a benefit is payable under the Plan is unable to care for his or her affairs because of incompetency, or is a minor, any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent or a brother or sister, or to any person or institution deemed by the Administrative Committee to have incurred expense for such person otherwise entitled to payment. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under the Plan.

In the event a guardian of the estate of any person receiving or claiming benefits under the Plan shall be appointed by a court of competent jurisdiction, benefit payments may be made to such guardian provided that proper proof of

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appointment and continuing qualification is furnished in a form and manner acceptable to the Administrative Committee. To the extent permitted by law, any such payment so made shall be a complete discharge of any liability therefor under the Plan.

11.12 Non-Alienation and Domestic Relations Orders

(a) General

Except as permitted by the Plan in accordance with Code Section 401(a)(13) and ERISA Section 206(d) with respect to assignments to alternate payees under “Qualified Domestic Relations Orders” or as provided in a judgment, order, decree or settlement agreement described in Code Section 401(a)(13), no benefit payable at any time under the Plan shall be subject to the debts or liabilities of a Participant or the Participant’s Beneficiary, and any attempt to alienate, sell, transfer, assign, pledge, or otherwise encumber any such benefit, whether presently or thereafter payable, shall be void. Subject to the foregoing exception, no benefit under the Plan shall be subject in any manner to attachment, garnishment, or encumbrance of any kind.

(b) Domestic Relations Orders

In accordance with procedures consistent with Code Section 414(p) that are established by the Administrative Committee (including procedures requiring prompt notification of the affected Participant and each alternate payee of the Plan’s receipt of a domestic relations order and its procedures for determining the qualified status of such order), a domestic relations order shall be honored by the Plan if the Administrative Committee determines that it constitutes a “Qualified Domestic Relations Order.”

A “Qualified Domestic Relations Order” is a judgment, decree, or order (including approval of a property settlement agreement) that in accordance with Code Section 414(p):

(1) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant;

(2) is made pursuant to a state domestic relations law (including a community property law);

(3) creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable to a Participant under the Plan;

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(4) specifies the name and last known address of the Participant and each alternate payee;

(5) specifies the amount or method of determining the amount of benefit payable to an alternate payee;

(6) specifies the number of payments or period during which payments are to be made;

(7) names each plan to which the order applies;

(8) does not require any form, type or amount of benefit not otherwise provided under the Plan; and

(9) does not conflict with a prior domestic relations order that meets the requirements of this Section 11.12(b).

Except as may otherwise be required by regulations of the Secretary of Labor, such orders may not require a retroactive transfer of all or part of a Participant’s Account to or from the benefit of an alternate payee without permitting an appropriate adjustment for earnings and investment gains or losses that have occurred in the interim, nor shall such orders require the Plan to provide loans, self-directed investment elections, or other rights to alternate payees that are not available to Beneficiaries generally.

To the full extent permitted by Code Section 414(p)(10) and by the terms of a Qualified Domestic Relations Order, amounts assigned to an alternate payee may be paid as soon as possible in a lump sum, notwithstanding the age, financial hardship, employment status, or other factors affecting the ability of the Participant to make a withdrawal or otherwise receive a distribution of balances to the Participant’s credit under the Plan. In cases where such full and prompt payment of amounts assigned to an alternate payee will not be made, the assigned amounts shall be maintained in a separate Account, for the benefit of the alternate payee. Such alternate payee shall have the same investment options set forth in Section 5 as a Participant. An alternate payee may elect to commence benefits at any time a spouse Beneficiary would be entitled to commence benefits and may only elect a Lump Sum (full or partial) form of payment.

11.13 Applicable Law

Except to the extent superseded by ERISA, the Plan and all rights hereunder shall be governed, construed, and administered in accordance with the laws of the State of Washington with the exception that any Trust Agreement that may constitute a part of the Plan shall be construed and enforced in all respects under and by the laws of the state specified in the Trust Agreement.

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11.14 Expenses

All reasonable expenses that are necessary to operate and administer the Plan shall be deducted from the Trust Fund, to the extent not paid directly by the Company.

11.15 Masculine and Feminine, Singular and Plural

Whenever used herein, pronouns shall include the opposite gender, and the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require.

11.16 Disclosure to Participants

Each Participant shall be advised of the general provisions of the Plan and, upon written request addressed to the Administrative Committee, shall be furnished any information requested regarding the Participant’s status, rights and privileges under the Plan as may be required by law.

11.17 Income Tax Withholding Requirements

Any retirement benefit payment made under the Plan will be subject to any applicable income tax withholding requirements. For this purpose, the Administrative Committee shall provide the Trustee with any information the Trustee reasonably needs to satisfy such withholding obligations and with any other information that may be required by regulations promulgated under the Code.

11.18 Severability

If any provision of the Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions as if said illegal or invalid provision had never been included.

11.19 Uniformed Services Employment and Reemployment Rights Act of 1994 (“USERRA”)

Effective December 12, 1994, notwithstanding any provision of the Plan to the contrary, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u).

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A Participant who was on a USERRA leave may elect to makeup pre-tax and after-tax contributions to the Plan that the Participant could not make as a result of such leave, subject to the limits of the Plan and Code Section 414(u). The Participant shall have up to at least three times the length of the Participant’s USERRA leave to make up contributions. If such Participant contributions are made timely, the Employer shall contribute all Employer matching contributions that would have been required under the Plan, as if the make-up contributions had actually been made during the USERRA leave.

If a Participant returns from a USERRA leave that is 15 or fewer working days, the Participant shall be deemed to have elected to makeup pre-tax and after-tax contributions to the Plan that would have been made had the Participant not been on USERRA leave. The amount of the make-up contributions shall be determined with regard to the Participant’s payroll deduction agreement in place at the commencement of the leave, if any. The contributions shall be based on the amount of the Earnings and/or Bonuses, as applicable, the Participant would have received had the Participant not taken the USERRA leave and such make-up contributions shall be deducted over a specified number of payroll periods, as follows:

Length of Absence	Number of Payroll Periods
1 -4 days	1
5 -9 days	2
10 -14 days	3
15 days	4

In the event a Participant does not wish to make up contributions as described above, the Participant may elect to change the amount of, or suspend, the contributions as provided in Section 4.2.

11.20 Plan Qualification

Any modification or amendment of the Plan may be made retroactive, as necessary or appropriate, to establish and maintain a “qualified plan” pursuant to Code Section 401 and regulations thereunder and exempt status of the Trust Fund under Code Section 501 or to satisfy the requirements of ERISA, any regulation thereunder or other applicable law.

11.21 Beneficiary Disputes

If at any time there is doubt as to the right of any Beneficiary to receive any amount, the Administrative Committee may direct the Trustee to retain such amount, without liability for any interest thereon, until the rights thereto are

11-14

determined, or may direct the Trustee to pay such amount into any court of competent jurisdiction, in which case none of the Administrative Committee, the Trustee, the Company, the Board or any Employer will have (or be under) any further liability to anyone.

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ARTICLE 12: AMENDMENT AND TERMINATION

12.1 Amendment - General

It is the Company’s intention that the Plan will continue indefinitely. However, the Company shall have the right to amend, terminate, or partially terminate the Plan at any time, in any way and for any reason subject to any advance notice or other requirements of ERISA and the Code.

Any amendment or termination shall be made in writing, adopted by (i) the Compensation Committee of the Board, if such Compensation Committee finds that the amendment will not significantly increase or decrease costs or benefits, or (ii) by the Board at any time. Adoption of any amendment will be evidenced by a certified copy of the Compensation Committee or Board resolution authorizing such action.

12.2 Amendment - Vesting Schedule

The Company reserves the right to amend the vesting schedule at any time pursuant to Section 12.1; however, no such amendment shall reduce the nonforfeitable percentage of a Participant’s Account balance, determined as of the date immediately preceding the later of the date on which such amendment is adopted or effective, to a percentage that is less than the Participant’s nonforfeitable percentage as computed under the Plan without regard to the amendment.

In the event the Company amends the vesting schedule, each Participant having at least three Years of Service with the Company or any Affiliate may elect to have the Participant’s nonforfeitable Account balance computed under the Plan without regard to the amendment. The Participant must file such an election with the Administrative Committee within 60 days of the latest of: (a) the Company’s adoption of the amendment; (b) the effective date of the amendment; or (c) the Participant’s receipt of written notice of the amendment. Notwithstanding the above, a Participant is not entitled to make the election if the Participant’s nonforfeitable percentage determined under the Plan, as amended, is at all times at least as great as the Participant’s nonforfeitable percentage determined under the Plan without regard to the amendment. For purposes of this Section 12.2, an amendment to the vesting schedule includes any Plan amendment that directly or indirectly affects the nonforfeitable percentage of a Participant’s right to the Participant’s Account balance.

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12.3 Amendment - Consolidation or Merger

In the event the Plan’s assets and liabilities are merged into, transferred to or otherwise consolidated with any other retirement plan, then such must be accomplished so as to ensure that each Participant would (if the other retirement plan then terminated) receive a benefit immediately after the merger, transfer or consolidation, that is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, transfer or consolidation (as if the Plan had then terminated). This provision shall not be construed as limiting the powers of the Company to appoint a successor Trustee.

12.4 Termination of the Plan

The termination of the Plan shall not cause or permit any part of the Trust Fund to be diverted to purposes other than for the exclusive benefit of the Participants or to defray reasonable expenses of administering the Plan and Trust, or cause or permit any portion of the Trust Fund to revert to or become the property of the Company or any Employer at any time prior to the satisfaction of all liabilities with respect to the Participants.

Upon termination of the Plan, the Administrative Committee shall continue to act for the purpose of complying with the preceding paragraph and shall have all power necessary or convenient to the winding up and dissolution of the Plan as herein provided. While so acting, the Administrative Committee shall be in the same status and position with respect to other persons as if the Plan remained in existence.

12.5 Action Upon Discontinuance of Contributions or Termination of the Plan

(a) If the Company determines in its sole discretion that the Plan has been terminated partially or completely, within the meaning of regulations under Code Section 411, the Company shall determine the date of such termination and the Participants affected by the termination. The Accounts of all Participants affected by the termination who were Employees on the date thereof shall be fully vested to the extent then funded. In addition, the Company in its sole discretion may vest the Accounts of a group of Participants because they are affected by a business divestiture, layoff or other similar transaction (even when a true “partial termination” has not occurred). The Company or its delegate shall document in writing any decision to vest under this Section 12.5 and Section 7.1 certain Participants in their Accounts and the reason therefor. The Company’s action in any one event shall not be considered as establishing a precedent or requiring a similar action in another event. The discontinuance of contributions by any participating employer shall not, in the absence of a

12-2

determination by the Company under this Section 12.5, terminate the Plan or operate to accelerate any vesting, payments or distributions to or for the benefit of Participants.

(b) Upon a complete termination of the Plan, the Accounts of Participants vested by such termination shall be distributed, as directed by the Administrative Committee, in accordance with the provisions of the Plan and applicable law.

12-3

ARTICLE 13: FUNDING

13.1 Contributions to the Trust

As a part of the Plan the Company shall maintain a Trust. Employers shall make such contributions to the Trust Fund as are required by the Plan, subject to the right of the Company to discontinue the Plan. All benefits under the Plan shall be payable only from the Trust Fund, and no liability for the payment of benefits under the Plan shall be imposed on the Company or any Affiliate (or any officers, directors, or shareholders of such an entity). Nothing in the Plan shall be construed as a guarantee by the Company, any Employer or the Trustee of the value of any security in the Trust Fund, or as an indemnity against any investment losses.

13.2 Trust for Exclusive Benefit of Participants

The Trust is for the exclusive benefit of Participants and for defraying reasonable expenses of administering the Plan and Trust. Except as provided in Sections 5.6 (Return of Contributions) and 11.12(b) (Domestic Relations Orders), no portion of the Trust shall be diverted to purposes other than this or revert to or become the property of the Company or any Employer at any time prior to the satisfaction of all liabilities with respect to the Participants.

13.3 Trustee

As a part of the Plan, the Company has entered into a Trust Agreement with the Trustee. The Company has the power and duty to appoint a Trustee and it shall have the power to remove a Trustee and appoint successors at any time. As a condition to exercising its power to remove any Trustee hereunder, the Company must first enter into an agreement with a successor Trustee with respect to assets held by the outgoing Trustee. By entering into such Trust Agreements, the Company shall vest in the Trustee, or in one or more Investment Managers appointed under the terms of any Trust Agreement by action of the Investment Committee, responsibility for the management and control of the Trust Fund.

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SAFECO 401(k)/PROFIT SHARING RETIREMENT PLAN

APPENDIX A

Predecessor Employer Service

Service for eligibility and vesting also includes the following service:

(a) For Employees who became employed by the Company or any Affiliate effective January 1, 2000, as a result of that certain Purchase Agreement dated as of October 14, 1999, by and among SAFECO Life Insurance Company, as purchaser, and ING America Insurance Holdings, Inc., Southland Life Insurance Company, Security Life of Denver Insurance Company and Life Insurance Company of Georgia, as “Selling Parties, prior service with any of the Selling Parties or with Medical Risk Managers, Inc. shall be credited under the Plan for eligibility and vesting purposes.

(b) For Employees who became employed by the Company or any Affiliate effective January 1, 1998, as a result of that certain Stock Purchase Agreement dated as of September 2, 1997, by and among SAFECO Life Insurance Company, as purchaser, and Washington Mutual, Inc., WM Life Insurance Company and Empire Life Insurance Company, as “Selling Parties,” prior service with WM Life Insurance Company or Empire Life Insurance Company shall be credited under the Plan for eligibility and vesting purposes.

(c) For Employees who became employed by the Company or any Affiliate effective September 6, 2001, or within 45 days thereafter, as a result of that certain Asset Purchase Agreement dated as of September 6, 2001, by and among SAFECO Select Insurance Services, Inc., as purchaser, and Bankers Standard Insurance Company, ACE American Insurance Company, ACE Property and Casualty Insurance Company, Insurance Company of North America, Indemnity Insurance Company of North America, Illinois Union Insurance Company, ACE INA Financial Institutions Solutions, Inc., and Recovery Services International, Inc., as “Selling Parties,” prior service with any of the Selling Parties shall be credited under the Plan for eligibility and vesting purposes.

1

EX-10.29

Exhibit 10.29-1

SAFECO

FLEXIBLE BENEFITS

PROGRAM

AS AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2004

TABLE OF CONTENTS

		Page
Preamble -		3
SECTION 1 - DEFINITIONS		4
	1.1 Affiliate	4
	1.2 Annual Enrollment Form	4
	1.3 Change in Status	4
	1.4 COBRA Continuation Coverage	5
	1.5 Code	5
	1.6 Company	5
	1.7 Compensation	5
	1.8 Component Plan	5
	1.9 Contract Administrator	5
	1.10 Coverage Period	5
	1.11 Dependent	5
	1.12 Domestic Partner	6
	1.13 Domestic Partnership	6
	1.14 Effective Date	6
	1.15 Election Period	6
	1.16 Eligible Employee	6
	1.17 Eligible Expense	7
	1.18 Employee	7
	1.19 Employer	7
	1.20 ERISA	7
	1.21 FMLA	7
	1.22 Participant	7
	1.23 Plan Administrator	7
	1.24 Plan Year	7
	1.25 Premium Expense	7
	1.26 Program	7
	1.27 Request for Reimbursement	8
	1.28 Salary Redirection	8
	1.29 Salary Redirection Agreement	8
	1.30 USERRA	8
SECTION 2 - PARTICIPATION		9
	2.1 Annual Enrollment	9
	2.2 New Eligible Employees	9
	2.3 Special Enrollment	9
	2.4 Suspension or Termination of Employment	10
	2.5 Leased Employees	15
SECTION 3 - CONTRIBUTIONS		13
	3.1 Salary Redirection	13
	3.2 Employer Contributions	13
	3.3 Application of Contributions	13
	3.4 Correction Procedures to Satisfy Discrimination Tests	13

1

SECTION 4 - BENEFITS		14
	4.1 Benefit Options	14
	4.2 Benefits Election	16
	4.3 Change of Election	16
	4.4 Payment of Premiums	20
	4.5 Maximum Disbursement	21
SECTION 5 - ADMINISTRATION		22
	5.1 Plan Administration	22
	5.2 Duties and Authority of Plan Administrator	22
	5.3 Forms	22
	5.4 Examination of Documents	23
	5.5 Participant Accounts	23
	5.6 No Assets	23
	5.7 Reports	23
	5.8 Expenses	23
	5.9 Claim Procedure	23
	5.10 Bonding and Insurance	26
SECTION 6 - AMENDMENT OR TERMINATION		27
	6.1 Amendment or Termination	27
	6.2 Program for Exclusive Purpose of Providing Benefits to Participants	27
SECTION 7 - GENERAL PROVISIONS		28
	7.1 Plan Interpretation	28
	7.2 No Additional Rights	28
	7.3 Other Salary–Related Plans	28
	7.4 Representations	28
	7.5 Notice	28
	7.6 Masculine and Feminine, Singular and Plural	28
	7.7 Severability	28
	7.8 Governing Law	28
	7.9 Disclosure to Participants	28
	7.10 Accounting Period	29
	7.11 Facility of Payment	29
	7.12 Correction of Errors	29
	7.13 Non-alienation of Benefits	29
	7.14 Counting of Days	29

2

PREAMBLE

THIS CAFETERIA PLAN (hereinafter referred to as the “Program” and known as the Safeco Flexible Benefits Program) is originally adopted effective January 1, 1999, by Safeco Corporation (hereinafter the “Company”).

WHEREAS, the purpose of the Program is to enable Employees who become covered under the Program to elect payment of premiums for various coverages and reimbursement of certain expenses incurred by the Employee in lieu of cash compensation, as provided herein; and

WHEREAS, with respect to benefit coverages, the Program concerns only Premium Expenses and has no effect on benefits or claim payments made under each benefit coverage; and

WHEREAS, the Program contains definitions and general administrative provisions that govern the Program and Component Plans under the Program, except to the extent that a Component Plan provides otherwise; and

WHEREAS, the Program is maintained for the exclusive purpose of providing benefits to covered Employees and is intended to qualify as a “cafeteria plan” within the meaning of Section 125 of the Internal Revenue Code of 1986, as amended (hereinafter the “Code”), and comply with any other applicable provisions of law, including, without limitation, Code sections 79, 105, 106, and 129, and the Employee Retirement Income Security Act of 1974; and

WHEREAS, the Company wishes to amend the Program to reflect certain regulatory and administrative changes,

NOW, THEREFORE, the Company hereby amends the Program as set forth in the following pages, effective January 1, 2004.

3

SECTION 1

DEFINITIONS

The following terms, when used herein, shall have the following meanings, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Program text for terms defined by this and other sections.

1.1 Affiliate. “Affiliate” means a corporation or other business organization while it is controlled by or under common control with the Company, within the meaning of Code sections 414 and 1563. The determination of control shall be made without reference to paragraph (a)(4) and (e)(3)(C) of Code section 1563. “Affiliate” also means any member of an affiliated service group (within the meaning of Code section 414(m)) of which the Company or any Affiliate is a member and any leasing organization (as defined in Code section 414(n)) to the extent its employees constitute leased employees with respect to the Company or any Affiliate. Notwithstanding the foregoing, “Affiliate” also means any entity that, pursuant to Code section 414(o) and the regulations thereunder, must be aggregated with the Company or any other Affiliate.

1.2 Annual Enrollment Election. “Annual Enrollment Election” means the election made by an Eligible Employee, at the commencement of each Plan Year or upon becoming an Eligible Employee, to participate in the Program by electing Salary Redirection under Section 3 and benefits described in Section 4.1, including various benefit coverages and reimbursements under a Component Plan, subject to the limitations stated herein. The Annual Enrollment Election (telephonic, written, and/or electronic versions) will be made by an Eligible Employee in the form and time prescribed by the Plan Administrator.

1.3 Change in Status. “Change in Status” means any of the events described below, as well as any other events included under subsequent changes to Code section 125 or regulations issued under Code section 125 that the Plan Administrator (in its sole discretion) decides to recognize on a uniform and consistent basis:

• Legal Marital Status: A change in a Participant’s legal marital status, including marriage, death of a spouse, divorce, legal separation, or annulment.

• Number of Dependents: Events that change a Participant’s number of tax Dependents, including birth, death, adoption, and placement for adoption.

• Change in Employment Status: Any change in employment status of the Participant or the Participant’s Dependents that affects the benefit eligibility under a cafeteria plan (including the Program) or other employee benefit plan (including the benefit plan(s) or policy(ies)) of the employer of the Participant or Dependents, including termination or commencement of employment, a strike or lockout, a commencement of or return from an unpaid leave of absence, a change in work site, switching from salaried to hourly paid, union to nonunion or vice versa, incurring a reduction or increase in hours of employment (e.g., going from part-time to full-time) or any other similar change that makes the individual become (or cease to be) eligible for a particular employee benefit.

4

• Dependent Eligibility Requirements: An event that causes a Participant’s Dependent to satisfy or cease to satisfy the Dependent eligibility requirements for a particular benefit, such as attaining a specified age, getting married, or ceasing to be a student.

• Change in Residence: A change in the place of residence of the Participant or the Participant’s Dependent that affects the benefit eligibility under a cafeteria plan (including the Program) or other employee benefit plan (including the benefit plan(s) or policy(ies)) of the employer of the Participant or Dependents.

See Section 4 for requirements that must be met for a Participant to change his or her election during the Plan Year on account of a Change in Status.

1.4 COBRA Continuation Coverage. “COBRA Continuation Coverage” means continued medical, dental, vision, and/or medical reimbursement account coverage, which is available in certain situations where such coverage would otherwise cease, in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985. For purposes of Section 4.3, “COBRA Continuation Coverage” includes coverage under a similar state law.

1.5 Code. “Code” means the Internal Revenue Code of 1986, as amended, and including all regulations promulgated pursuant thereto.

1.6 Company. “Company” means Safeco Corporation, a corporation organized under the laws of the state of Washington.

1.7 Compensation. “Compensation” means the total cash remuneration received by the Participant from an Employer during a Coverage Period (as reported in Box 1 of Form W-2) prior to any reductions pursuant to a Salary Redirection Agreement authorized under the Program.

1.8 Component Plan. “Component Plan” means the Safeco Dependent Care Reimbursement Plan, the Safeco Medical Expense Reimbursement Plan, and any other plan designated as a “Component Plan” that may be established from time to time by the Company as part of the Program.

1.9 Contract Administrator. “Contract Administrator” means a person or entity with which the Company has contracted to provide administrative services with respect to the Program or any Component Plan.

1.10 Coverage Period. “Coverage Period” means the Plan Year; provided that, (a) for any Employee who first becomes an Eligible Employee after the start of a Plan Year, the initial Coverage Period shall mean the period commencing on the date such Eligible

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Employee’s participation in the Program is first effective and extending through the remainder of the Plan Year, and (b) for any Employee who ceases to be an Eligible Employee before the end of the Plan Year, the final Coverage Period shall mean the period beginning on the first day of the Plan Year (or, if later, the Effective Date of the Eligible Employee’s participation in the Program) and extending through the date(s) participation terminates pursuant to Section 2.4.

1.11 Dependent. “Dependent” means the spouse or Domestic Partner and unmarried children of an Eligible Employee, as defined in each benefit contract. Unmarried children must be under the maximum eligibility age as defined in each contract or be incapable of self-support because of a mental or physical incapacity.

1.12 Domestic Partner. “Domestic Partner” means a same-sex or opposite-sex individual, age 18 or older, who, for a period of 12 months or more prior to enrolling in the Program, meets the following criteria: The individual is neither married nor related by blood or marriage to a Participant; is the Participant’s sole spousal equivalent and intends to remain so indefinitely; lives together with a Participant in the same principal residence and intends to do so indefinitely; is emotionally committed to the Participant and shares joint responsibilities for common welfare and financial obligations; and is not related to the Participant by blood closer than would prohibit marriage in the state in which the Participant resides.

1.13 Domestic Partnership. “Domestic Partnership” means a relationship between an Eligible Employee and a Domestic Partner.

1.14 Effective Date. “Effective Date” of the Program means January 1, 1999.

1.15 Election Period. “Election Period” means the period immediately preceding each Coverage Period that is designated by the Plan Administrator for the election of benefits described in Section 4.1; provided, however, that the Election Period for an Eligible Employee who first becomes eligible to participate during a Coverage Period shall be as described in Section 2.2.

1.16 Eligible Employee. “Eligible Employee” means a salaried Employee who is eligible to receive benefits pursuant to a group benefits plan sponsored by the Company that is a benefit described in Section 4.1, except those individuals indicated below. For the first Plan Year, “Eligible Employee” means salaried Employees who are regularly scheduled to work at least 20 hours per week and 5 months or more per period of 12 consecutive months. Employees on an approved paid leave of absence or unpaid FMLA leave of absence who were Eligible Employees when such leave commenced remain Eligible Employees during the period of leave.

The term “Eligible Employee” does not include nonresident aliens, leased Employees, Employees covered by a collective bargaining agreement where welfare benefits were the subject of good faith bargaining that does not provide for participation in the Program, or individuals determined by the Company (in its sole discretion) to be contract Employees, independent contractors, or any other nonregular Employee.

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Notwithstanding the foregoing, an individual who is not treated by the Employer as an employee for payroll tax purposes, but who is subsequently determined by a government agency, by the conclusion or settlement of threatened or pending litigation, or otherwise, to be (or to have been) a common law employee of the Employer shall not be an Eligible Employee, unless and until (and only to the extent) the Plan Administrator provides otherwise.

1.17 Eligible Expense. “Eligible Expense” means an expense that is incurred during a Coverage Period (but not prior to the date benefits commence under the Program), which is eligible for reimbursement under the terms of the Program and any Component Plan and not otherwise reimbursed to the Participant by any means whatsoever.

1.18 Employee. “Employee” means any person who is employed by an Employer as a common law employee and any leased employee within the meaning of Code section 414(n)(2). The term “Employee” shall not mean an independent contractor.

1.19 Employer. “Employer” means the Company and any Affiliate that by resolution of the Company’s Board of Directors and with the approval of such Affiliate has elected or elects to adopt the Program. Each Employer agrees to be bound by such terms and conditions relating to the Program as the Board may reasonably require.

1.20 ERISA. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated pursuant thereto.

1.21 FMLA. “FMLA” means the Family and Medical Leave Act of 1993, as amended, and all regulations promulgated pursuant thereto.

1.22 Participant. “Participant” means any Eligible Employee who becomes enrolled in the Program pursuant to Section 2.

1.23 Plan Administrator. “Plan Administrator” means the person or entity authorized to administer the Program pursuant to Section 5.1.

1.24 Plan Year. “Plan Year” means the calendar year.

1.25 Premium Expense. “Premium Expense” means the Participant’s cost for benefits described in Section 4.1, as determined from time to time by the Company. The Premium Expense for a particular benefit is normally set for a Plan Year. However, the Premium Expense for health coverage provided by an independent third party shall be automatically adjusted to reflect a mid-Plan Year benefit cost increase or decrease.

1.26 Program. “Program” means the SAFECO Flexible Benefits Program as amended from time to time.

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1.27 Request for Reimbursement. “Request for Reimbursement” means the form provided by the Plan Administrator for Participants to claim reimbursement under a Component Plan.

1.28 Salary Redirection. “Salary Redirection” means the amount by which a Participant’s Compensation shall be reduced pursuant to Section 3.1 and an Annual Enrollment Election, with the understanding that the Employer will contribute such amount to the Program on behalf of the Participant for the purchase of benefits.

1.29 Salary Redirection Agreement. “Salary Redirection Agreement” means an agreement between a Participant and an Employer under which the Participant agrees to reduce his or her Compensation or to forgo increases in such Compensation and to have such amounts contributed by the Employer to the Program on the Participant’s behalf. The agreement shall apply only to Compensation that has not been actually or constructively received by the Participant as of the date of the agreement (after taking the Program and Code section 125 into account) and subsequently does not become currently available to the Participant.

1.30 USERRA. “USERRA” means the Uniformed Services Employment and Reemployment Rights Act of 1994, as amended, and all regulations promulgated pursuant thereto.

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SECTION 2

PARTICIPATION

2.1 Annual Enrollment. Each Eligible Employee may enroll in the Program by completing an Annual Enrollment Election provided by the Plan Administrator during the Election Period, effective for the next Coverage Period commencing after the Election Period. An Eligible Employee must complete a new Annual Enrollment Election during the Election Period preceding each Plan Year during which he or she wishes to participate in the Program.

The Annual Enrollment Election shall include a Salary Redirection Agreement and shall designate the benefits elected. The election made shall be irrevocable until the end of the applicable Coverage Period unless the Participant is entitled to change his or her election pursuant to Section 4.3, the Participant is entitled to a special enrollment period under Section 2.3, or all or part of the election is automatically terminated due to a change of employment status under Section 2.4.

Except with respect to coverage under a Component Plan, after the expiration of the first Coverage Period of participation, a Participant shall be deemed to have completed a new Annual Enrollment Election and entered into a new Salary Redirection Agreement containing the same terms as the Participant’s most recently executed Annual Enrollment Election for each succeeding Coverage Period, unless the Participant completes a new Annual Enrollment Election during an Election Period that changes the benefits elected. Coverage under a Component Plan shall be only available if the Participant completes an Annual Enrollment Election and affirmatively elects such coverage.

2.2 Newly Eligible Employees. An individual who becomes an Eligible Employee during a Plan Year may elect to participate in the Program.

The Annual Enrollment Election must be completed within 30 days of the date on which the individual becomes an Eligible Employee. Such an Employee shall commence participation on the first day of the month following the date he or she becomes an Eligible Employee for all group benefits coverage described in Section 4.1.

2.3 Special Enrollment.

(a) Loss of Other Coverage. An Eligible Employee who declined to participate or to enroll an eligible Dependent in a health coverage option described in Section 4.1(a) during the Election Period due to other health insurance coverage may elect to enroll in a health coverage option described in Section 4.1(a) upon loss of the other health coverage. If the other coverage was COBRA Continuation Coverage, the loss must result from exhaustion of that COBRA coverage, or if the other coverage was not COBRA Continuation Coverage, either the coverage must be terminated as a result of loss of eligibility for the coverage or employer contributions toward the coverage must be terminated. The term “loss of eligibility” includes a loss of coverage as a result of legal separation, divorce, termination of employment, or reduction in hours of employment, but does not include any loss due to failure to pay premiums in a timely basis or termination of coverage for cause. Application for enrollment must be made within 30 days after loss of the other coverage.

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Enrollment is effective as of the date of the loss of coverage.

(b) New Dependents. An Eligible Employee who declined to enroll in a health coverage group benefit option described in Section 4.1(a) during a previous enrollment period may enroll in a health coverage option described in Section 4.1(a) if he or she acquires a Dependent, as defined in the applicable plan, through marriage, birth, adoption, or placement for adoption and submits a completed Annual Enrollment Form to the Plan Administrator within (30) days of the (i) the Participant’s marriage to the enrolling spouse or (ii) the birth, adoption, or placement of a child.

A Participant may enroll an eligible Dependent in a health coverage option described in Section 4.1(a) by submitting an Annual Enrollment Election within 30 days of acquiring the Dependent through marriage, birth, adoption, or placement for adoption.

In the case of marriage, birth, adoption, or placement for adoption, health coverage enrollment is effective the date of such marriage, birth, adoption, or placement for adoption.

2.4 Suspension or Termination of Employment.

(a) Termination of Employment. With the exception of retirement, in the event a Participant terminates employment during a Plan Year, participation in the Program shall terminate on the date on which the Participant terminates employment. All contributions shall cease upon termination of employment. If the Participant meets retirement eligibility, participation in the Program shall terminate on the date on which the Participant terminates employment; however, benefits under a particular coverage available under Section 4.1(a), (b) or (c) may continue until the last day of the month in which the Participant terminates as provided in the plan documents applicable to that coverage.

A Participant who is rehired within 30 days of termination and becomes an Eligible Employee during the same Plan Year will have his or her participation in the Program resume on the first day of the month following the date he or she becomes an Eligible Employee. The elections that were in place on the Participant’s employment termination date shall be automatically reinstated. A reinstated Participant shall not be permitted to change benefit elections until the next Election Period, unless he or she experiences a qualified status change under Section 4.3. A Participant who is rehired later than 30 days following termination or who becomes an Eligible Employee in a different Plan Year shall be treated as a newly Eligible Employee and Section 2.2 shall apply.

(b) Suspension of Participation. In the event a Participant ceases to be an Eligible Employee, or ceases to have enough Compensation to cover the agreed-upon Salary Redirection, but does not terminate employment or take a leave of absence,

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his or her participation in the Program shall be suspended and shall terminate at the end of the Plan Year, if active participation is not reinstated earlier. If the Employee again becomes an Eligible Employee, or has adequate Compensation before the end of the Plan Year, his or her active participation in the Program shall be reinstated and the most recent Annual Enrollment Election shall again become effective, subject to any changes permitted pursuant to Section 4.3.

If such an Employee again becomes an Eligible Employee, or has adequate Compensation, after the end of the Plan Year, he or she may enroll in the Program pursuant to Section 2.2.

During periods of suspended participation, no Salary Redirection contributions shall be made pursuant to Section 3.1, and no benefits elected pursuant to Section 4 shall be provided through the Program; however, benefits under a particular coverage available under Section 4.1(a), (b) or (c) may continue for a period of time as provided in the plan documents applicable to that coverage.

(c) Leave of Absence.

(1) Paid Leave. In the event a Participant takes a paid leave of absence, including paid leave pursuant to FMLA or USERRA, but does not terminate employment with an Employer, participation in the Program, including, without limitation, Participant and Employer contributions pursuant to Sections 3.1 and 3.2 and benefits elected pursuant to Section 4, shall continue during such leave of absence.

(2) Unpaid Leave

• Other Than FMLA or USERRA Leave. In the event a Participant takes an approved, unpaid leave of absence that is not FMLA or USERRA leave, each elected benefit shall continue during the unpaid leave and the Employer shall continue to contribute to the Program in accordance with Section 3.2, provided the Premium Expense (if any) for such benefits is paid by the Participant on an post-tax basis on the same schedule as payments would be made if the Participant were not on leave.

• FMLA Leave. In the event a Participant takes an unpaid FMLA leave of absence, each elected benefit shall continue during the unpaid leave to the extent required by FMLA, and the Employer shall continue to contribute to the Program in accordance with Section 3.2, provided the Premium Expense (if any) for such benefits is paid by the Participant on an post-tax basis (or on a pre-tax basis to the extent that payments are made from taxable Compensation such as vacation days) on the same schedule as payments would be made if the Participant were not on leave or under any other payment schedule permitted by Labor Regulations 29 C.F.R. 825.210(c).

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• USERRA Leave. In the event a Participant takes an unpaid USERRA leave, elected benefit shall continue during the unpaid leave to the full extent required by USERRA, and the Employer shall continue to contribute to the Program in accordance with Section 3.2, provided the Premium Expense (if any) for such benefits is paid by the Participant in a timely manner. The Participant on unpaid USERRA leave shall pay the Premium Expense (if any) on the same schedule as payments would be made if the Participant were not on leave. The Premium Expense shall be paid on an after-tax basis during the unpaid USERRA leave. Notwithstanding the foregoing, in the event the Participant takes USERRA leave but does not terminate employment with the Employer, the Employer will pay all Premium Expenses associated with elected health benefits outlined in sections 4.1(a)(1), (a)(2) and (a)(3) during the first six months of such leave provided, however, that the Employer will not pay any amounts which represent Employee contributions to the Medical Expense Reimbursement Plan outlined in section 4.1(b).

(3) Return From Leave. Upon return from an unpaid leave of absence before the end of the Plan Year in which the leave commenced, active participation in the Program shall be reinstated and Salary Redirection contributions and benefits shall resume according to the Participant’s most recent Annual Enrollment Election, including any changes pursuant to Section 4.3. If a Participant returns from an unpaid leave of absence after the end of the Plan Year in which the leave began, the Participant shall be treated as a newly Eligible Employee and Section 2.2 shall apply.

If the Participant does not immediately resume active employment at the conclusion of a paid or unpaid leave of absence, the Participant shall no longer be considered an Eligible Employee and the provisions of Section 2.4(a) shall apply.

2.5 Leased Employees. A leased employee shall not be eligible to participate in the Program.

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SECTION 3

CONTRIBUTIONS

3.1 Salary Redirection. If a Participant elects a benefit described in Section 4.1 pursuant to the applicable election procedure in Section 2, his or her Compensation shall be reduced in an amount equal to his or her Salary Redirection. Such amount shall be deducted ratably each pay period from the Participant’s Compensation and applied to the Premium Expense and the Participant’s cost for Component Plan benefits elected.

In the event the Premium Expense for health coverage provided by an independent third party changes during a Plan Year, the Salary Redirection amount shall be automatically adjusted to reflect the change in the Premium Expense.

A Participant’s Salary Redirection amount for any Plan Year shall not exceed the maximum cost to the Participant for all benefits that may be elected under the Program.

3.2 Employer Contributions. Prior to commencement of the Plan Year, the Company shall determine the monthly amount, if any, to be contributed to the Program by an Employer on behalf of each Participant, in addition to the Salary Redirection amounts, during such Plan Year.

Employer contributions shall be made on behalf of all active Participants and Participants on a paid leave of absence. No Employer contribution shall be made on behalf of a Participant on an unpaid leave of absence unless the unpaid leave of absence is a USERRA leave of less than six months. If the Participant is on FMLA leave or another unpaid leave and pays his/her Premium Expense for their coverage, then Employer contributions shall also be made for such benefits.

3.3 Application of Contributions. The Company shall credit Salary Redirection amounts and Employer contributions, if any, to a bookkeeping account on behalf of each Participant to pay for benefits elected under the Program. Salary Redirection amounts shall be credited as soon as reasonably practical after each payroll period.

3.4 Correction Procedures to Satisfy Discrimination Tests. If at any time during a Plan Year the Plan Administrator determines that it is necessary to prospectively reduce a Participant’s Salary Redirection or Employer contribution or to treat an otherwise nontaxable benefit under the Program as a taxable benefit to satisfy any nondiscrimination requirement or limitation on contributions or benefits imposed by the Code, it shall have the authority to reduce such contributions in such amounts and for the remainder of the Plan Year or any lesser period of time, or report benefits as taxable benefits, to the extent it deems necessary under the circumstances. In the event contributions are reduced, the Plan Administrator shall reduce the Salary Redirection amounts for each affected Participant in the order of the Salary Redirection amounts elected beginning with the highest, and then shall reduce the Employer contribution on behalf of each affected Participant in an equal amount. If necessary to correct discrimination under a Component Plan, the Company may first prospectively cease all contributions on behalf of affected Participants to the Component Plan as of a specified date.

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SECTION 4

BENEFITS

4.1 Benefit Options. Each Participant shall elect to have the amount of his or her Salary Redirection applied to coverage of the Participant and Participant’s Dependents, if any, under the Company-sponsored group benefits plans set forth below.

Amounts designated for a particular coverage shall be available only for that coverage, and, if not paid for such coverage during the Plan Year, shall be forfeited on the last day of the Plan Year.

The terms and conditions of the coverages offered are set forth in separate documents. The insurer, contract number, or funding method of providing the following group coverages may change from time to time. The group coverage and contract as modified from time to time shall be incorporated herein by this reference. However, the terms and conditions of any such group coverage shall be determined solely from the plan documents applicable to the coverage and are not affected by the terms of the Program. Such group coverages are affected by the terms of the Program only to the extent of electing the coverages provided to a Participant.

Cash pursuant to Section 4.1(d), group term life insurance coverage in excess of $50,000 pursuant to Section 4.1(a)(4), optional and Dependent group term life coverage, and coverage elected for a Domestic Partner who is not a Code Section 152 dependent of the Participant shall be reported as a taxable benefit. All other benefits shall be reported as nontaxable benefits, subject to the provisions of any Component Plan and any adjustment made pursuant to Section 3.4.

(a) Group Benefits Plans. Each Participant may elect to have his or her Salary Redirection Agreement applied to pay Premium Expenses for coverage of the Participant and Participant’s Dependents, if any, under the Company-sponsored group plans set forth below:

(1) Medical Coverage. Each Participant may choose Employee only, Employee plus spouse, Employee plus child(ren) or Employee plus family medical coverage under one of the following options on a pre-tax basis, or may waive medical coverage altogether:

(A) the HMO plan(s) currently available through Safeco at the Participant’s location; or

(B) the self-insured PPO plan(s) currently available through Safeco at the Participant’s location.

(2) Dental Coverage. Each Participant may choose Employee only, Employee plus spouse, Employee plus child(ren) or Employee plus family dental coverage under the self-insured plan(s) currently available through Safeco at the Participant’s location on a pre-tax basis, or may waive coverage altogether.

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(3) Vision Coverage. Each Participant may choose Employee only, Employee plus spouse, Employee plus child(ren) or Employee plus family vision coverage under the self-insured plan(s) currently available through Safeco at the Participant’s location on a pre-tax basis, or may waive coverage altogether.

(4) Group Term Life Insurance. Each Participant will automatically receive employee group term life insurance coverage equal to the amount set forth in the plan documents applicable to the coverage, without Premium Expense. Each Participant may choose additional optional Employee group term life insurance coverage on a post-tax basis. Each Participant may also choose optional Dependent group term life coverage on a post-tax basis.

(5) Accidental Death and Dismemberment. Each Participant may choose optional accidental death and dismemberment coverage on a post-tax basis for either themselves or themselves and their Dependents.

(6) Long-Term Disability. Each Participant may choose optional long-term disability coverage equal to the amount set forth in the plan documents applicable to the coverage on a post-tax basis.

(b) Medical Expense Reimbursement Plan. Each Participant may choose reimbursement of eligible medical expenses as provided under a Component Plan.

(c) Dependent Care Reimbursement Plan. Each Participant may choose reimbursement of dependent care expenses as provided under a Component Plan.

(d) Cash Benefit. If a Participant chooses to waive coverage altogether under (a)(1) or (a)(2) above, he or she will receive cash each pay period in approximately equal installments throughout the Coverage Period equal to the amount determined by the Plan Administrator prior to the beginning of each Plan Year.

(e) Vacation Benefit. Each Participant with less than 20 years of service as of December 31, 2004 may choose to purchase additional vacation hours in units equal to 7.75 hours on a pre-tax basis. The maximum annual purchase is 2 units or 15.5 hours. The price of each Vacation Benefit unit is based on the Participant’s base annual salary at the time of his or her Annual Enrollment Election. Vacation Benefits may not be paid from the Plan until all regular vacation accruals outside of the Plan have been used. Requests for Vacation Benefits must be made through the Employer’s FOCUS system.

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4.2 Benefits Election. Subject to the conditions and limitations of the Program and any Component Plan, a Participant shall make an Annual Enrollment Election that consists of a combination of options having a value equal to the total Salary Redirection made on his or her behalf during the Plan Year. Options specified in Section 4.1 shall be assigned individual premiums. The reimbursement plan options pursuant to Section 4.1(b) and (c) shall have a value equal to the dollar amount elected by a Participant.

A Participant shall specify the portion of his or her account for a Plan Year that shall be designated for each option, subject to any mandatory coverages. Amounts designated for a particular option shall be available only for that option and if not spent for such option during the Plan Year shall be forfeited. Any forfeited amount shall be used to pay administrative expenses, and any balance remaining thereafter shall be used in any manner permitted by Code section 125. Notwithstanding the provisions of this paragraph to the contrary, in the event of a Participant’s termination of employment, any credited but unused Vacation Benefits must be cashed out and paid to the Participant to the extent required by applicable law.

Reimbursement of an Eligible Expense pursuant to a Component Plan shall be deemed a benefit for a particular Coverage Period if the Eligible Expense is incurred during such Coverage Period and a Request for Reimbursement of the Eligible Expense is submitted within the required time.

4.3 Change of Election.

(a) A Participant may change his or her actual or deemed election under the Program upon the occurrence of a Change in Status, but only if such change or termination is made on account of and corresponds with a Change in Status that affects eligibility for coverage under a plan of the Employer or a plan of the spouse’s or Dependent’s employer (referred to as the general consistency requirement). A Change in Status that affects eligibility for coverage under a plan of the Employer or a plan of the spouse’s or Dependent’s employer includes a Change in Status that results in an increase or decrease in the number of an Employee’s family members (i.e., a spouse and/or Dependents) who may benefit from the coverage.

The Plan Administrator (in its sole discretion), on a uniform and nondiscriminatory basis, shall determine, based on prevailing IRS guidance, whether a requested change is on account of and corresponds with a Change in Status. Assuming that the general consistency requirement is satisfied, a requested change must also satisfy one of the following specific consistency requirements for a Participant to be able to alter his or her election based on the specified Change in Status:

(1) Loss of Dependent Eligibility. For a Change in Status involving a Participant’s divorce, annulment, or legal separation from a spouse, the death of a Dependent, or a Dependent ceasing to satisfy the eligibility requirements for coverage, a Participant may only elect to cancel health

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insurance coverage for the spouse involved in the divorce, annulment, or legal separation, the deceased Dependent, or the Dependent that ceased to satisfy the eligibility requirements. Canceling coverage for any other individual under these circumstances would fail to correspond with that Change in Status. Notwithstanding the foregoing, if the Participant or the Participant’s Dependent (but not ex-spouse) becomes eligible for COBRA (or similar health plan continuation coverage under state law) under the Program, the Participant may increase his or her election to pay for such coverage.

(2) Gain of Coverage Eligibility Under Another Employer’s Plan. For a Change in Status in which a Participant or a Participant’s Dependent gains eligibility for coverage under another employer’s cafeteria plan (or another employer’s qualified benefit plan) as a result of a change in marital status or a change in employment status, a Participant may elect to cease or decrease coverage for that individual only if coverage for that individual becomes effective or is increased under the other employer’s plan.

(3) Dependent Care Expense Reimbursement Benefits. With respect to the Dependent Care Reimbursement Plan, a Participant may change or terminate his or her election if such change or termination is made on account of and corresponds with a Change in Status that affects eligibility for coverage under an employer’s plan or when due to a change in the cost of dependent care or change in the provider of dependent care services.

(4) Group Term Life, Disability and Accidental Death and Dismemberment. For a Change in Status involving a Participant’s legal marital status or the employment status of a Participant’s Dependent (disregarding the requirement that the event cause a loss or gain of eligibility), a Participant may elect either to increase or to decrease group term life insurance, disability income and accidental death and dismemberment coverage offered under the Program.

(b) HIPAA Special Enrollment Rights (Applies Only to Medical Coverage). If a Participant or a Participant’s Dependent is entitled to special enrollment rights under a group health plan, as required by Code section 9801(f), then the Participant may revoke a prior election for health or accident coverage and make a new election (including salary redirection election), provided that the election corresponds with such special enrollment right. A special enrollment right may arise if medical coverage was declined for the Employee or Dependent under the group health plan because of outside medical coverage and eligibility for such coverage is subsequently lost due to legal separation, divorce, death, termination of employment, reduction in hours, or exhaustion of the maximum COBRA period, or if a new Dependent is acquired as a result of marriage, birth, adoption, or placement for adoption. For purposes of this provision, (1) an election to add previously eligible Dependents as a result of the acquisition of a new spouse or dependent child shall be considered to be consistent with the special enrollment right; and (2) a HIPAA special enrollment election attributable to the birth or adoption of a new dependent child may, subject to the provisions of the underlying group health plan, be effective retroactively (up to thirty (30) days).

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(c) Certain Judgments, Decrees, and Orders (Applies Only to Premium Expense Benefits That Provide Accident or Health Coverage and to Medical Expense Reimbursement Plan Benefits). A Participant may change an election to provide or cancel health coverage for the Participant’s child in accordance with a judgment, decree, court order, or change in legal custody (“Order”) resulting from a divorce, annulment, or legal separation from a spouse. If so, the Participant may: (1) change his or her election to provide coverage for the dependent child (provided that the Order requires the Participant to provide coverage); or (2) change his or her election to revoke coverage for the dependent child if the Order requires that another individual (including the Participant’s spouse or former spouse) provide coverage under that individual’s plan. A Participant may cancel coverage only to the extent the Participant’s child is actually enrolled in a benefit plan or policy(ies) elsewhere.

(d) Medicare and Medicaid (Applied Only to Premium Expense Benefits That Provide Accident or Health Coverage and to medical Expense Reimbursement Plan Benefits). A Participant may elect to prospectively reduce or cancel health coverage for the Participant or Dependent who becomes entitled to coverage under Medicare or under Medicaid although coverage under the Medical Expense Reimbursement Plan may only be canceled. A Participant may elect to enroll in health coverage, and/or enroll his or her Dependent in health coverage, due to a loss of eligibility for Medicare or Medicaid by such individual or individuals.

(e) Change in Cost (Applies Only to Premium Expense Benefits That Provide Accident or Health Coverage and to Dependent Care Reimbursement Plan Benefits, as Limited Below).

(1) Automatic Increase or Decrease for Insignificant Cost Changes. If the cost of a benefit plan or policy increases or decreases during a Plan Year by an insignificant amount, then the Premium Expense under each affected Participant’s election shall be prospectively increased or decreased to reflect such change. The Plan Administrator, on a reasonable and consistent basis, will automatically effectuate this prospective increase or decrease in affected employees’ elective contributions in accordance with such cost changes.

(2) Significant Cost Increase or Decrease. If a Participant elects Premium Expenses for a health coverage and the Plan Administrator determines that the insurer significantly increased or decreased the cost of coverage during the Coverage Period, or that the premiums charged to a Participant are significantly increased or decreased, the Participant may make a corresponding prospective increase or decrease in his or her contributions, or revoke his or her election, and, in lieu thereof, receive coverage under another Program option that provides similar coverage.

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(3) Limitation on Change in Cost Provisions for Dependent Care Reimbursement Plan. The above “Change in Cost” provisions apply to the Dependent Care Reimbursement Plan only if the cost change is imposed by a dependent care provider who is not a “relative” of the employee by blood or marriage (as that term is defined in IRS Reg. Section 1.125-4(f)(2)(iii) or other IRS guidance).

(f) Change in Coverage (Applies Only to Premium Expense Benefits That Provide Accident or Health Coverage and to Dependent Care Reimbursement Plan Benefits).

(1) Significant Curtailment. If the Plan Administrator determines that a Participant’s Company-sponsored coverage under the Program is significantly curtailed, the Participant may revoke his or her election under the Program. In that case, each affected Participant may prospectively elect coverage under another benefit plan or policy option that provides similar coverage. Coverage under a health plan is deemed “significantly curtailed” only if there is an overall reduction in coverage provided to Participants under the Program so as to constitute a loss in coverage. A “loss in coverage” means a complete loss of coverage under the benefits package option or other coverage option. If there is a significant curtailment that is not a loss of coverage, the Participant may elect similar coverage under another benefit option but cannot cancel coverage even if no similar coverage option is available.

(2) Significant Addition or Elimination of Benefits Package Option Providing Similar Coverage. If during a Plan Year the Program adds or eliminates a benefit plan or policy, an affected Participant may elect a newly added option or elect another benefit plan or policy (where a Program option has been eliminated), and may do so prospectively on a pre-tax basis by making corresponding election changes with respect to coverage under another benefit plan or policy option that provides “similar coverage.” Any additional option must constitute a “significant improvement” in coverage under prevailing IRS guidance.

(3) Change in Coverage of Dependent Under Plan of Dependent’s or Former Spouse’s Employer. A Participant may make a prospective election change that is on account of and corresponds with a change made under a plan (including the Program, a different employer’s plan, or an educational or governmental plan) of the Dependent’s or former spouse’s employer, so long as (a) the cafeteria plan or qualified benefits plan of the Dependent’s or former spouse’s employer permits its participants to make an election change that would be permitted under the proposed or final IRS regulations (as reflected in this Section 4.3); or (b) the Program permits Participants to make an election for a Plan Year period of coverage that is different from the plan year period of coverage under the other cafeteria plan or qualified benefits plan. The Plan Administrator shall determine, based on prevailing IRS guidance, whether a requested change is on account of and corresponds with a change made under the plan of the Dependent’s or former spouse’s employer.

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(g) FMLA. A participant may change his or her election under the Program upon an FMLA leave in accordance with Section 2.4(c)(2)

(h) Election Period. For election changes other than changes in health coverage, the election change shall become effective for the first of the month following receipt and processing of the election change request by the Plan Administrator. An election change request must be submitted to the Plan Administrator within (30) days after the applicable event allowing the change occurs.

For changes in health coverage, the change shall be effective as of the date described in the plan documents applicable to the elected health coverage. An election change request must be submitted to the Plan Administrator within 30 days after the applicable event allowing the change occurs.

Notwithstanding the foregoing, in the event a Participant acquires a Dependent child due to birth, adoption, or placement for adoption pursuant to a HIPAA special enrollment right, and the Participant is covered under either: (1) an insured medical coverage available through Section 4.1(a)(1) where the contract has been written for delivery in Washington State or (2) one of the self-insured medical coverages currently available through Safeco, and the Participant desires to add the newborn, newly adopted, or newly placed for adoption child to such coverage, an election change may be submitted within 30 days of the birth, adoption, or placement for adoption. Coverage shall be retroactive to the date of birth, adoption, or placement for adoption.

4.4 Payment of Premiums. The Company shall forward premiums as soon as administratively feasible to the appropriate Plan Administrator, insurance carrier, health maintenance organization, or funding vehicle for elected coverages.

Eligible Expenses shall be reimbursed as soon as practical following receipt of a Request for Reimbursement, subject to the terms of the Component Plan. An Eligible Expense shall be reimbursable pursuant to the terms of the Program and a Component Plan only during the Coverage Period in which it is incurred; provided that an Eligible Expense incurred during a Coverage Period may be reimbursed if a Request for Reimbursement of the expense is submitted within the following time periods:

(a) for reimbursements from the Dependent Care Reimbursement Plan, on or before the March 31 following the end of the Plan Year; and

(b) for reimbursements from the Medical Expense Reimbursement Plan, on or before the March 31 following the end of the Coverage Period.

If the Plan Administrator denies (in whole or in part) a Participant’s Request for Reimbursement, the Participant may appeal such denial as provided in Section 5.9.

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4.5 Maximum Disbursement. Except as otherwise provided in a Component Plan, disbursements for an option under Section 4.1 shall never exceed the portion of the Participant’s account balance that is designated for such option.

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SECTION 5

ADMINISTRATION

5.1 Plan Administration. The Company shall be the Plan Administrator of the Program. The Company can delegate plan administration to an outside service provider. The Corporate Compensation and Benefits Department of the Company shall supervise the operation of the Program. It is intended that the Plan satisfy all applicable requirements of the Code and ERISA (ERISA applies to the Medical Expense Reimbursement Plan component only). The Program shall be construed and administered accordingly.

5.2 Duties and Authority of Plan Administrator.

(a) Administrative Duties. The Plan Administrator shall administer the Program in a nondiscriminatory manner for the exclusive benefit of Participants and their beneficiaries. The Plan Administrator shall perform all such duties as are necessary to supervise the administration of the Program and to control its operation in accordance with the terms thereof, including, but not limited to, the following:

(1) make and enforce such rules and regulations as the Plan Administrator deems necessary or proper for the efficient administration of the Program;

(2) interpret the provisions of the Program and determine any question arising under the Program, or in connection with the administration or operation thereof;

(3) determine all considerations affecting the eligibility of any Employee to be or become a Participant;

(4) determine eligibility for and amount of benefits for any Participant;

(5) authorize and direct all disbursements of benefits under the Program;

(6) employ and engage such persons, counsel, and agents and obtain such administrative, clerical, medical, legal, audit, and actuarial services as it may deem necessary in carrying out the provisions of the Program; and

(7) delegate and allocate specific responsibilities, obligations, and duties imposed by the Program, to one or more Employees, officers, or such other persons as the Plan Administrator deems appropriate.

(b) General Authority. The Plan Administrator shall have all powers necessary or appropriate to carry out its duties, including the discretionary authority to interpret the provisions of the Program and the facts and circumstances of claims for benefits. Any interpretation or construction of or action by the Plan Administrator with respect to the Program and its administration shall be conclusive and binding on any and all parties and persons affected hereby.

5.3 Forms. All elections and other communications (including telephonic, written, and/or electronic versions) from any Participant or other person to the Plan Administrator required or permitted under the Program shall be in the form prescribed from time to time by the Plan Administrator, shall be mailed by first-class mail or delivered (including delivery by facsimile transmission, telex, telegram, inter-office mail, or online) to the location specified by the Plan Administrator, and shall be deemed to have been given and delivered only upon actual receipt thereof. Each Participant shall file via an Annual Enrollment Election such pertinent information as the Plan Administrator may specify.

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5.4 Examination of Documents. The Plan Administrator shall make available to each Participant such documents and records as pertain to the Participant, for examination at reasonable times during normal business hours.

5.5 Participant Accounts. The Plan Administrator shall maintain a Company bookkeeping account or accounts on behalf of each Participant showing the fiscal transactions of the Program, with respect to each Participant.

5.6 No Assets. Except as specifically required to the contrary pursuant to the terms and conditions of one or more Company-sponsored trusts, no assets shall be segregated for the purpose of providing benefits under the Program, and all benefits shall be payable solely from the Company’s general assets. A Participant has only an unsecured contract right to receive payments under the terms of the Program.

Any contributions pursuant to Section 3 are held by the Company and remain available to the Company’s general creditors. Participant accounts are a recordkeeping device, and any funds in such accounts are general assets of the Company. No interest shall be credited to any Participant’s account.

5.7 Reports. The Plan Administrator shall file or cause to be filed all annual reports, returns, and financial or other statements required by any federal or state statute, agency, or authority within the time prescribed by law or regulation for filing said documents; and to furnish such reports, statements, or other documents to such Participants and beneficiaries as required by federal or state statute or regulation, within the time prescribed for furnishing such documents.

5.8 Expenses. All expenses incurred in connection with administration of the Program shall be paid by the Company, except to the extent provided otherwise by any applicable trust agreement.

5.9 Claim Procedure.

(a) Claim Submission and Review. Claims for benefits under Component Plans must be made in writing to the Contract Administrator. The Contract Administrator may prescribe a form or forms for filing claims under a Component Plan, and if it does so, a claim will not be deemed properly filed unless such form is used, but the Contract Administrator shall provide a copy of such form to any person whose claim for benefits is improper solely for this reason. Claims that are properly filed will be reviewed by the Contract Administrator, which will make its decision with respect to such claim and notify the claimant (the “Claimant”) in writing of the decision within 90 days (30 days in the case of a claim related to medical expense reimbursement benefits) after the Contract Administrator’s receipt of the claim, provided that the 90-day period (30-day period in the case of a claim related to medical expense reimbursement benefits) can be extended for up to an additional 90 days (15 days in the case of a claim related to medical expense reimbursement benefits) if the Contract Administrator (1) determines that the extension is

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necessary due to matters beyond the control of the Program or Component Plan, and (2) notifies the Claimant in writing, prior to the expiration of the original 90-day period (30-day period in the case of a claim related to medical expense reimbursement benefits), of the extension, the reasons therefor, and the date by which the Contract Administrator expects to make a decision. If an extension is necessary due to a failure by the Claimant to submit the information necessary to decide the claim, the notice of extension shall specifically describe the required information, and the Claimant shall be afforded at least 45 days from receipt of the notice within which to provide the specified information. Claims related to medical expense reimbursement benefits shall be subject to such additional procedures as are specified in 29 C.F.R. 2560.503-1 for post-service claims under group health plans.

(b) Notice of Denial. Anytime a claim for benefits is wholly or partially denied, the written response to the Claimant shall include:

• The specific reasons for the denial;

• Reference to the specific Program or Component Plan provisions on which the denial is based;

• A description of any additional material or information necessary for the Claimant to perfect his or her claim and an explanation why such material or information is necessary;

• A description of the Program’s claim appeal procedure (and the time limits applicable thereto), as set forth in subsection (c) immediately below, including, in the case of a claim for medical reimbursement benefits, a statement of the Claimant’s right to bring a civil action under Section 502(a) of ERISA following an adverse determination (i.e., a denial) on appeal; and

• In the case of a denial related to medical expense reimbursement benefits:

(1) if an internal rule, guideline, protocol or other similar criterion was relied upon in deciding to deny the claim, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in deciding to deny the claim and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request; or

(2) if the denial is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment supporting the denial, applying the terms of the Program or Component Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request.

(c) Appealing Denied Claims. If a claim related to medical expense reimbursement benefits or dependent care expense reimbursement benefits is denied in whole or in part, the Claimant may appeal such denial by filing a written appeal with the Senior Vice President, Corporate Human Resources (the “Vice President”) within 60 days (180 days in the case of a claim related to medical expense reimbursement benefits) of receiving written notice that the claim has been denied. Such written request for appeal should include:

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• A statement of the grounds on which the appeal is based;

• Reference to the specific provisions in the Program or Component Plan document which support the claim;

• The reason or argument why the Claimant believes the claim should be granted and evidence supporting each reason or argument; and

• Any other relevant documents, comments, records or other information that the Claimant wishes to include.

The Claimant will be provided, upon request and free of charge, reasonable access to, and copies of documents, records and other information relevant (within the meaning of 20 C.F.R. 2560.503-1(m)(8)) to his or her claim.

(d) Review of Appealed Claim. Any appeal will be considered by the Vice President, who will make his or her decision with respect thereto, and notify the Claimant in writing of the decision, within 60 days after the Vice President’s receipt of the written appeal; provided that with respect to appeals related to dependent care expense reimbursement benefits, the 60-day period can be extended for up to an additional 60 days if the Vice President determines that special circumstances require an extension of time to process the appeal and the Claimant is notified in writing of the extension, and the reasons therefore, prior to the commencement of the extension. Appeals related to medical expense reimbursement benefits shall be subject to such additional procedures as are specified in 29 C.F.R. 2560.503-1 for the review of post-service claim denials under group health plans.

In considering any appeal, the Vice President (1) will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim, without regard to whether such information was submitted or considered in the initial determination, and (2) will not afford deference to the Contract Administrator’s initial denial.

(e) Denial of Appeal. In the event the claim is denied on appeal, the written denial will include:

• The specific reason or reasons for the denial;

• Reference to the specific Program or Component Plan provisions on which the denial is based;

• In the case of a denial related to medical expense reimbursement benefits, a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant (within the meaning of 29 C.F.R. 2560.503-1(m)(8)) to his or her claim;

• In the case of a denial related to medical expense reimbursement benefits, a statement of the Claimant’s right to bring an action under Section 502(a) of ERISA; and

• In the case of a denial related to medical expense reimbursement benefits:

26

(1) if an internal rule, guideline, protocol or other similar criterion was relied upon in deciding to deny the claim, either the specific rule, guideline, protocol or other similar criterion; or a statement that such a rule, guideline, protocol or similar criterion was relied upon in deciding to deny the claim and that a copy of such rule, guideline, protocol or other criterion will be provided free of charge to the Claimant upon request;

(2) if the denial is based on a medical necessity or experimental treatment or similar exclusion or limit, either an explanation of the scientific or clinical judgment supporting the denial, applying the terms of the Program or Component Plan to the Claimant’s medical circumstances, or a statement that such explanation will be provided free of charge upon request; and

(3) the following statement: “You and your Plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office or your State insurance regulatory agency.”

(f) Statute of Limitation and Standard of Review. A Claimant may not bring an action under Section 502(a) of ERISA or otherwise with respect to his or her claim until he or she has exhausted the foregoing procedure. Any such action must be filed in a court of competent jurisdiction within 180 days after the date on which the Claimant receives the Vice President’s written denial of the Claimant’s claim on appeal or it shall be forever barred. Any further review, judicial or otherwise, of the Vice President’s decision on the Claimant’s claim will be limited to whether, in the particular instance, the Vice President abused his or her discretion. In no event will such further review, judicial or otherwise, be on a de novo basis, as the Vice President has discretionary authority to determine eligibility for benefits and to construe and interpret the terms of the Program and any Component Plan to the extent necessary to make benefit determinations.

(g) Claim Procedures for Group Benefits. Claims and reimbursements for benefits described in Section 4.1(a) shall be administered in accordance with the claims procedures for such benefits as set forth in the plan documents or summary plan description for such benefits.

5.10 Bonding and Insurance. To the extent required by law with respect to benefits subject to ERISA, every fiduciary of the Program or Component Plan and every person handling funds of the Program or Component Plan shall be bonded. The Plan Administrator shall take such steps as are necessary to ensure compliance with applicable bonding requirements. The Plan Administrator may apply for and obtain fiduciary liability insurance insuring the Program and Component Plans against damages by reason of breach of fiduciary responsibility at the Program’s expense and insuring each fiduciary against liability to the extent permissible by law at the Company’s expense.

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SECTION 6

AMENDMENT OR TERMINATION

6.1 Amendment or Termination. The Company establishes the Program with the intention that it will be maintained indefinitely. However, the Company reserves the right at any time and from time to time to amend any or all provisions of the Program and Component Plans or terminate the Program or any Component Plan and/or any contributions thereunder, in whole or in part, for any reason and without the consent of any person and without any liability to any person for such amendment or termination of the Program, provided that the payment of claims that are incurred prior to the time of such amendment or termination of the Program shall not be adversely affected. Any amendment or termination shall be made in writing, adopted by (a) the Compensation Committee of the Board, if it finds that the amendment will not significantly increase or decrease costs or benefits, or (b) the Board at any time. Adoption of any amendment will be evidenced by a certified copy of the Compensation Committee or Board resolution authorizing such action. Nothing in the Program or any Component Plan shall be construed to require continuation of the Program or any Component Plan with respect to existing or future Participants or beneficiaries.

In the event the Program or a Component Plan is terminated, no further Employer contributions or Salary Redirection with respect to the Program or the Component Plan, whichever applies, shall be made.

Amounts designated for Premium Expenses shall be applied to pay Premium Expenses for the remainder of the Plan Year in which termination of the Program occurs, or until such amount is reduced to zero if earlier.

Amounts designated for the Dependent Care Reimbursement Plan shall be used to reimburse Eligible Expenses under that plan that are incurred during the remainder of the Plan Year in which termination of the Program occurs or until the balance is reduced to zero if earlier. Eligible Expenses shall be reimbursed under the Dependent Care Reimbursement Plan following termination of the Program, provided the claim was incurred while the Participant was actively participating in the Dependent Care Reimbursement Plan and that a Request for Reimbursement is submitted on or before the March 31 after the end of the Plan Year in which termination of the Program occurs.

Medical Expense Reimbursement Plan coverage shall provide reimbursement of Eligible Expenses that are incurred prior to the date of termination of the Program. Eligible Expenses shall be reimbursed under the Medical Expense Reimbursement Plan following termination of the Program, provided the claim was incurred while the Participant was actively participating in the Medical Expense Reimbursement Plan and that a Request for Reimbursement is submitted on or before the March 31 after the end of the Plan Year in which termination of the Program occurs.

Amounts credited as Vacation Benefits shall be applied to pay a Participant for vacation hours in accordance with Section 4.1(e) and for the remainder of the Plan Year in which termination of the Program occurs, or until such amount is reduced to zero if earlier.

6.2 Program for Exclusive Purpose of Providing Benefits to Participants. The Program has been established and shall be administered solely in the interests of Participants and for the exclusive purpose of providing benefits to Participants and other covered individuals and defraying the reasonable expense of administering the Program.

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SECTION 7

GENERAL PROVISIONS

7.1 Plan Interpretation. This document and all appendices and amendments, including the Component Plan documents, set forth the provisions of the Program. The Program shall be read in its entirety and not severed except as provided in Section 7.7.

7.2 No Additional Rights. No person shall have any rights under the Program, except as and only to the extent expressly provided for in the Program. Neither the establishment nor amendment of the Program, nor the creation of any fund or account, nor the payment of benefits, nor any action of an Employer or the Plan Administrator shall be held or construed to confer on any person any right to be continued as an Employee, nor, upon dismissal, any right or interest in any account or fund other than as herein provided. Each Employer expressly reserves the right to discharge any Employee at any time.

7.3 Other Salary-Related Plans. It is intended that any other salary-related Employee benefit plans that are maintained or sponsored by the Employer shall not be affected by the Program. Any contributions or benefits under such other plans with respect to a Participant shall, to the extent permitted by law and applicable plan documents, be based on his or her Compensation from the Employer.

7.4 Representations. The Employer does not represent or guarantee that any particular federal or state income, payroll, personal property, Social Security, or other tax consequences will result from participation in the Program. A Participant should consult with professional tax advisors to determine the tax consequences of his or her participation.

7.5 Notice. All notices, statements, reports, and other communications from the Company to any Employee or other person required or permitted under the Program and Component Plans shall be deemed to have been duly given when delivered to (including delivery by facsimile transmission, telex, telegram, inter-office mail, or online), or when mailed by first-class mail, postage prepaid, and addressed to, such Employee or other person at his or her address last appearing on the Employer’s records.

7.6 Masculine and Feminine, Singular and Plural. Whenever used herein, a pronoun shall include the opposite gender, the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require.

7.7 Severability. If any provision of the Program is held illegal or invalid for any reason, such determination shall not affect the remaining provisions of the Program, which shall be construed as if the illegal or invalid provisions had never been included.

7.8 Governing Law. The Program shall be construed in accordance with applicable federal law and the laws of the State of Washington.

7.9 Disclosure to Participants. Each Participant shall be advised of the general provisions of the Program and, upon written request addressed to the Plan Administrator, shall be furnished any information requested regarding the Participant’s status, rights, and privileges under the Program as may be required by law.

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7.10 Accounting Period. The accounting period for the Program shall be the Plan Year.

7.11 Facility of Payment. In the event any benefit under the Program shall be payable to a person who is under legal disability or is in any way incapacitated so as to be unable to manage his or her financial affairs, the Plan Administrator may direct payment of such benefit to a duly appointed guardian or other legal representative of such person, or in the absence of a guardian or legal representative, to a custodian for such person under the Uniform Gifts to Minors Act or to any relative of such person by blood or marriage, for such person’s benefit. Any payment made in good faith pursuant to this provision shall fully discharge the Employer and the Program of any liability to the extent of such payment.

7.12 Correction of Errors. In the event an incorrect amount is paid to or on behalf of a Participant or beneficiary, any remaining payments may be adjusted to correct the error. The Plan Administrator may take such other action it deems necessary and equitable to correct any such error.

7.13 Non-alienation of Benefits. No benefit, right, or interest of any person hereunder shall be subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance charge, seizure, or attachment by legal, equitable, or other process, or be liable for or subject to the debts, liabilities, or other obligations of such person, except as otherwise required by law.

7.14 Counting of Days. Any period of time described in the Program as a number of days shall mean the corresponding number of consecutive days, unless the context specifically indicates otherwise.

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Exhibit 10.29-2

SAFECO

DEPENDENT CARE

REIMBURSEMENT PLAN

(A Component Plan of the

Safeco

Flexible Benefits Program)

AS AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2004

TABLE OF CONTENTS

	Page
PREAMBLE	1
SECTION 1 - DEFINITIONS	2
1.1 Dependent	2
1.2 Dependent Care Expense	2
1.3 Earned Income	2
1.4 Household Services	3
1.5 Plan	3
1.6 Program	3
SECTION 2 - BENEFITS	4
2.1 Reimbursement Options	4
2.2 Election of Reimbursement	4
2.3 Payment of Reimbursements	4
2.4 Maximum Reimbursements	5
2.5 Annual Statement of Benefits	5
SECTION 3 - DEPENDENT CARE EXPENSES	6
3.1 In General	6
3.2 Exclusions	6

i

PREAMBLE

THIS DEPENDENT CARE REIMBURSEMENT PLAN (hereinafter the “Plan” and known as the Safeco Dependent Care Reimbursement Plan) was originally adopted effective January 1, 1999 by Safeco Corporation (hereinafter the “Company”).

WHEREAS, the purpose of the Plan is to allow Employees who become covered under the Plan to elect to receive reimbursement of dependent care expenses which are excluded from gross income under Section 129 of the Internal Revenue Code of 1986, as amended (hereinafter the “Code”), as provided herein and in the terms of the Safeco Flexible Benefits Program (hereinafter the “Program”); and

WHEREAS, the Plan is a Component Plan of the Program and, except to the extent otherwise expressly provided herein, is governed by the terms of that Program, and

WHEREAS, the Plan shall be maintained for the exclusive purpose of providing benefits to covered Employees and is intended to qualify as a dependent care assistance plan within the meaning of Code Section 129 and comply with any other applicable provisions of law;

WHEREAS, the Company wishes to amend the Plan to reflect certain regulatory and administrative changes;

NOW, THEREFORE, the Company hereby adopts the Amendment of the Plan as set forth in the following pages, effective January 1, 2004.

1

SECTION 1

DEFINITIONS

The terms used herein which are defined in Section 1 of the Program shall have the same meaning as therein defined and the following additional terms shall have the following meanings, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined by this and other sections.

1.1 Dependent. “Dependent” means:

(a) a child who is under the age of thirteen (13) and with respect to whom a Participant or his or her spouse is entitled to a dependent exemption under Code Section 151(c); or

(b) a relative or household member of a Participant over one-half (1/2) of whose support is received from the Participant and who is physically or mentally incapable of caring for himself or herself and who regularly spends at least eight (8) hours per day in the Participant’s household; or

(c) the spouse of a Participant who is physically or mentally incapable of caring for himself or herself and who regularly spends at least eight (8) hours per day in the Participant’s household.

1.2 Dependent Care Expense. “Dependent Care Expense” means an Eligible Expense for which documentation approved by the Plan Administrator has been provided, which is incurred prior to the date participation in the Plan terminates, and which meets the requirements of Section 3. A Dependent Care Expense is incurred at the time the service which gave rise to the expense is performed.

1.3 Earned Income. “Earned Income” means wages, salaries, tips and other Employee Compensation, plus net earnings from self-employment, computed without regard to any community property laws and excluding any amounts received as a pension or annuity, or paid or incurred by an employer for dependent care assistance including reimbursement of Eligible Expenses. A Participant’s spouse who is either a student or incapable of caring for himself or herself shall be deemed, for each month during which such spouse is either a full-time student at an educational institution or a Dependent, to be gainfully employed and to have Earned Income of not less than:

(a) $200 per month, if the Participant has only one (1) Dependent for the Plan Year, or

(b) $400 per month, if the Participant has two (2) or more Dependents for the Plan Year.

2

1.4 Household Services. “Household Services” means ordinary and usual services done in and around a home that are necessary to run the home and which are at least partially for the well-being and protection of a Dependent.

1.5 Plan. “Plan” means the Safeco Dependent Care Reimbursement Plan as amended from time to time.

1.6 Program. “Program” means the Safeco Flexible Benefits Program as amended from time to time.

3

SECTION 2

BENEFITS

2.1 Reimbursement Options. Subject to the conditions and limitations set forth in the Plan and the Program, each Participant who elects to participate in the Plan may designate any amount from a minimum of $50 annually to a maximum of $5,000 annually during the Plan Year for reimbursement of Dependent Care Expenses. The total amount designated for reimbursement per Plan Year, combined with any other dependent care assistance expected to be received through an employment-related plan by the Participant or his or her spouse, may not exceed the least of:

(a) $5,000 for single Participants and married Participants who file a joint federal income tax return, or $2,500 for married Participants who file separate returns;

(b) the Participant’s anticipated Earned Income for the Plan Year; and

(c) if the Participant is married on the last day of the Plan Year, the spouse’s anticipated Earned Income for the Plan Year.

Dependent Care Expenses may be incurred and reimbursed at any time during the Coverage Period, subject to the other provisions of the Plan and the Program.

2.2 Election of Reimbursement. A Participant may elect to participate in the Plan by submitting an Annual Enrollment Election to the Plan Administrator and may claim reimbursement by submitting the incurred expenses in a form (including online submission or paper form submission) prescribed by the Plan Administrator. All claims must be submitted on or before the end of the claims runout period (as communicated by the Plan Administrator) following the Plan Year. In the event a Participant does not claim or qualify for reimbursement of the amount elected during the Plan Year, the difference between the amount elected and actual reimbursement shall be forfeited. Any forfeited amount shall be used to offset the Plan’s administrative expenses and any balance remaining thereafter shall be used in any manner permitted by Code Section 125.

In the event of a Participant’s death, the surviving spouse or the administrator or executor of a deceased Participant’s estate may claim reimbursement of Dependent Care Expenses incurred, provided the expense was incurred while the Participant was actively participating in the Dependent Care Reimbursement Plan and the claim is submitted on or before the March 31 after the end of the Plan Year.

2.3 Payment of Reimbursements. The Plan Administrator shall reimburse Dependent Care Expenses which are properly documented only to the extent that the Dependent Care Expenses do not exceed a Participant’s account balance. The Plan Administrator shall reimburse a Participant who is entitled to a reimbursement as soon as practical after the Participant submits the claim. No Participant shall have any rights or be entitled to any such reimbursements under the Plan unless the claim is submitted as required by the

4

Plan Administrator. The Plan Administrator will review each claim for reimbursement submitted to determine whether (i) the expenses for which reimbursement is sought are reimbursable Dependent Care Expenses and (ii) the claim is accompanied by the required documentation.

Each claim for reimbursement must include the following, and any other information which may be required by the Plan Administrator:

(a) a written statement from an independent third party that the expense has been incurred, the date it was incurred, and the amount of the expense,

(b) a written statement from the Participant that the expense has not been reimbursed and is not reimbursable under any other dependent care assistance plan, and

(c) either:

(1) the name, address and taxpayer identification number of the person performing the services to which the Request for Reimbursement relates, or

(2) if such person is an organization described in Code Section 501(c)(3) and exempt from tax under Code Section 501(a), the name and address of the person performing the services to which the Request for Reimbursement relates.

2.4 Maximum Reimbursements. Reimbursements during a Plan Year shall not exceed the least of:

(a) the total annual amount designated via the Annual Enrollment Election for Dependent Care Expenses for such Plan Year,

(b) the Participant’s account balance designated for benefits under the Plan, or

(c) the amount of Dependent Care Expenses for which reimbursement is properly requested.

Prior to the end of each Plan Year, a Participant shall notify the Plan Administrator if the amount of reimbursement under the Plan exceeds the lesser of the Participant’s or his or her spouse’s actual or deemed Earned Income for the Plan Year. The Company shall report such excess reimbursements as taxable benefits on the Participant’s Form W-2.

2.5 Annual Statement of Benefits. On or before January 31 of each calendar year, the Plan Administrator shall furnish to each Participant a statement of all dependent care benefits paid to or on behalf of such Participant during the preceding calendar year.

5

SECTION 3

DEPENDENT CARE EXPENSES

3.1 In General. Dependent Care Expenses are amounts paid by a Participant for Household Services and for the care of a Dependent which are incurred to enable the Participant (and, if married, spouse) to be gainfully employed for any period for which he or she has one or more Dependents, provided that:

(a) if such expenses are incurred for services outside a Participant’s household, they are incurred for the care of a child as defined in Section 1.1(a), or of any other Dependent defined in Section 1.1(b) or (c) who regularly spends at least eight (8) hours each day in the Participant’s household, and

(b) if such outside services are provided by a dependent care center, which is a facility that (i) provides care for more than six (6) individuals (other than individuals who reside at the facility), and (ii) receives a fee, payment or grant for providing services for any of the individuals (regardless of whether such facility is operated for profit), then such center must comply with the applicable state and local government laws and regulations.

3.2 Exclusions. Notwithstanding any Plan or Program provision to the contrary, Dependent Care Expenses shall in no event include amounts paid by a Participant to an individual:

(a) with respect to whom a deduction is allowable to the Participant or the spouse under Code Section 151(c) (relating to personal exemptions for dependents),

(b) who is a child (within the meaning of Code Section 151(c)(3)) of either the Participant or the Participant’s spouse (if filing jointly) under the age of nineteen (19) at the close of the Plan Year in which such amounts are paid, or

(c) to reimburse expenses incurred for overnight camp.

6

Exhibit 10.29-3

SAFECO

MEDICAL EXPENSE

REIMBURSEMENT PLAN

(A Component Plan of the

Safeco

Flexible Benefits Program)

AS AMENDED AND RESTATED

EFFECTIVE JANUARY 1, 2004

TABLE OF CONTENTS

		Page
PREAMBLE		1
SECTION 1 - DEFINITIONS		2
1.1	Dependent	2
1.2	Medical Expense	2
1.3	Plan	3
1.4	Program	3
SECTION 2 - BENEFITS		4
2.1	Reimbursement Options	4
2.2	Election of Reimbursement	4
2.3	Payment of Reimbursements	4
2.4	Maximum Reimbursements	5
SECTION 3 - CONTINUATION OF COVERAGE		6
Appendix I

i

PREAMBLE

THIS MEDICAL EXPENSE REIMBURSEMENT PLAN (hereinafter the “Plan” and known as the Safeco Medical Expense Reimbursement Plan) was originally adopted effective January 1, 1999, by SAFECO Corporation (hereinafter the “Company”).

WHEREAS, the purpose of the Plan is to allow Employees who become covered under the Plan to elect to receive reimbursement of medical expenses that are excluded from gross income under Section 105 of the Internal Revenue Code of 1986, as amended (hereinafter the “Code”), as provided herein and under the terms of the Safeco Flexible Benefits Program (hereinafter the “Program”); and

WHEREAS, the Plan is a Component Plan of the Program and, except to the extent otherwise expressly provided herein, is governed by the terms of the Program; and

WHEREAS, the Plan shall be maintained for the exclusive purpose of providing benefits to covered Employees and is intended to qualify as a self-insured medical expense reimbursement plan within the meaning of Code Section 105(h) and comply with any other applicable provisions of law, including, without limitation, the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); and

WHEREAS, certain Plan information required by ERISA is set forth in Appendix I; and

WHEREAS, the Company wishes to amend the Plan to reflect certain regulatory and administrative changes,

NOW, THEREFORE, the Company hereby adopts the amendment of the Plan as set forth in the following pages, effective January 1, 2004.

1

SECTION 1

DEFINITIONS

The terms used herein that are defined in Section 1 of the Program shall have the same meaning as therein defined, and the following additional terms shall have the following meanings unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined by this and other sections.

1.1 Dependent. “Dependent” means with respect to any Participant, such Participant’s (1) spouse or (2) child who receives over half of his or her support from the Participant (or the Participant and spouse combined) for the tax year in which Medical Expenses are incurred (or in the case of a divorced or legally separated Participant, the child receives over half of his or her support from either or both parents combined) and who meets one of the following descriptions:

(a) child under nineteen (19) years of age,

(b) child under twenty-three (23) years of age who is a full-time student, or

(c) child who is physically or mentally incapable of self-support due to a physical or mental disability that arose prior to attaining age twenty-three (23).

A child adopted by a Participant, or placed for adoption with a Participant, shall be regarded as a child of the Participant for all purposes herein. A stepchild of a Participant shall be regarded as a child of the Participant if the Plan Administrator determines, with sole discretion, that such stepchild is in good faith treated by the Participant as a child and such stepchild lives with the Participant or would live with the Participant but for such stepchild’s resident attendance at an accredited educational institution.

Notwithstanding the foregoing, a Dependent shall also include a child of the Participant for whom the Participant is required to provide group health plan coverage pursuant to a qualified judgment, decree, order or administrative notice issued by a court or pursuant to a state administrative process that has the force and effect of law.

A Participant’s Domestic Partner shall be treated as a Dependent for purposes of the Plan if the Domestic Partner meets the definition of “dependent” under Code Section 152.

1.2 Medical Expense. “Medical Expense” means an Eligible Expense for which documentation approved by the Plan Administrator has been provided and that is incurred during a Coverage Period, and prior to the date participation in the Plan terminates, by a Participant on behalf of himself or herself, or a Dependent:

(a) that would have been paid directly or reimbursed pursuant to another employer-sponsored health policy, plan or program, but for the application of a deductible or copayment, dollar or other specific limitation on the amount of coverage, or

2

(b) that is paid for the diagnosis, cure, mitigation, treatment or prevention of disease or for the purpose of affecting any structure or function of the body, or for transportation for or essential to any of the foregoing, as these terms are used in Code Section 213(d) and amplified or explained by regulations and rulings promulgated under Code Section 213.

Notwithstanding the foregoing, a “Medical Expense” shall not include premium payments for long-term care coverage, expense payments for long-term care services, premium payments for other health care coverage, or expenses that have been reimbursed or are reimbursable under any other health care coverage. A Medical Expense is incurred at the time that the service giving rise to the expense is performed.

1.3 Plan. “Plan” means the Safeco Medical Expense Reimbursement Plan as amended from time to time.

1.4 Program. “Program” means the Safeco Flexible Benefits Program as amended from time to time.

3

SECTION 2

BENEFITS

2.1 Reimbursement Options. Subject to the conditions and limitations set forth in the Plan and the Program, each Participant who elects to participate in the Plan may designate any amount from a minimum of $50 annually to a maximum of $5,000 annually during the Plan Year for reimbursement of Medical Expenses; provided, however, that a Participant may elect zero contributions to the Plan.

2.2 Election of Reimbursement. A Participant elects to participate in the Plan by submitting an Annual Enrollment Election to the Plan Administrator and may claim reimbursement by submitting the incurred claims to the Plan Administrator. A Participant may submit incurred claims in the form (including debit card, online submission, paper claim form transmission, or from health plan vendor feeds) prescribed by the Plan Administrator. All claims must be submitted on or before the end of the claims runout period (as communicated by the Plan Administrator) applicable to the Plan Year. In the event that a Participant does not qualify for reimbursement of the amount elected during the Plan Year, the difference between the amount elected and actual reimbursement shall be forfeited. Any forfeited amount shall be used to offset the Plan’s administrative expenses and any balance remaining thereafter shall be used in any manner permitted by Code Section 125.

In the event of a Participant’s death, the surviving spouse or the administrator or executor of a deceased Participant’s estate may claim reimbursement of Medical Expenses incurred, provided the expense was incurred while the Patricipant was actively participating in the Medical Expense Reimbursment Plan and that the claim is submitted on or before the March 31 after the end of the Plan Year.

2.3 Payment of Reimbursements. The Plan Administrator shall reimburse Medical Expenses that are properly documented to the extent that the Medical Expenses do not exceed the total annual amount of reimbursement elected by the Participant.

Notwithstanding Section 4.5 of the Program, a Medical Expense may be reimbursed at any time during the Coverage Period even if the portion of the Participant’s account balance that is designated for such reimbursement is, at the time of reimbursement, less than the requested reimbursement; provided, however, that the total Plan reimbursements for the Coverage Period shall not exceed the total amount of Plan coverage elected by the Participant for such Coverage Period.

The Plan Administrator shall reimburse a Participant who is entitled to a reimbursement as soon as practical after the Participant submits the claim. No Participant shall have any rights or be entitled to any benefits under the Plan unless the claim is submitted as required by the Plan Administrator. The Plan Administrator will review each claim for reimbursement submitted to determine whether (i) the expenses for which reimbursement is sought are Eligible Expenses and (ii) the Request for Reimbursement

4

is accompanied by the required documentation. Each claim for reimbursement must include the following, and any other information that may be required by the Plan Administrator:

(a) a written statement from an independent third party that the expense has been incurred, the date it was incurred and the amount of the expense and

(b) a written statement from the Participant that the expense has not been reimbursed and is not reimbursable under any other health plan.

2.4 Maximum Reimbursements. Reimbursements during a Plan Year shall not exceed the lesser of:

(a) the total annual amount designated on an Annual Enrollment Form for Medical Expenses for such Plan Year or

(b) the amount of Medical Expenses for which reimbursement is properly requested.

5

SECTION 3

CONTINUATION OF COVERAGE

Notwithstanding any other Plan provision regarding termination of coverage, in the event that participation would terminate due to a COBRA qualifying events, a Participant and any covered Dependents may elect to continue coverage on an after-tax, self-pay basis as provided in this Section 3. The terms and conditions of this continuation coverage shall be the minimum necessary to satisfy the health care continuation of coverage requirements known as “COBRA” at Code Section 4980B and Part 6 of subtitle B of Title I of ERISA. With respect to a Participant or covered Dependent, if participation would terminate due to a “qualifying event” (as defined by COBRA), such individual may continue coverage for up to the remainder of the calendar year, but only if the Participant has a positive account balance at the time of any such COBRA qualifying event (taking into account all claims submitted before such COBRA qualifying event). The Participant or covered Dependent will be notified if he or she is eligible for COBRA continuation coverage.

6

APPENDIX I

	Administrative Facts
Plan Name	Safeco Medical Expense Reimbursement Plan
Plan Number	501
Type of Plan	Medical Expense Reimbursement Plan
Plan Year	January 1 through December 31
Plan Sponsor	Safeco Corporation
Employer Identification Number	91-0742146
Participating Companies	Each subsidiary of the Company listed below (unless such subsidiary’s board elects to the contrary) shall be included as an “Employer” under the Plan: American Economy Insurance Company American States Financial Corporation American States Insurance Company American States Insurance Company of Texas American States Life Insurance Company American States Preferred Insurance Company F.B. Beattie & Co., Inc. F.B. Beattie Insurance Services, Inc. First National Insurance Company of America First SAFECO National Life Insurance Company of New York General America Corporation General Insurance Company of America Insurance Company of Illinois SAFECO Asset Management Company SAFECO Assigned Benefits Service Company SAFECO Credit Company, Inc. SAFECO eCommerce, Inc. SAFECO Insurance Company of America SAFECO Insurance Company of Illinois SAFECO Insurance Company of Pennsylvania SAFECO Investment Services, Inc.

A-1

	SAFECO Life Insurance Company SAFECO National Life Insurance Company SAFECO National Insurance Company SAFECO Select Insurance Services, Inc. SAFECO Securities, Inc. SAFECO Services Corporation SAFECO Surplus Lines Insurance Company SAFECO Trust Company The above list may be changed, in accordance with the Plan and the Program.
Funding	Pretax contributions by Participants in accordance with Code Section 125.
Type of Administration	Plan Administrator in accordance with Plan documents.
Agent for Legal Process	Service of legal process may be made on the Plan Administrator.

A-2

EX-12

Computation of Ratio of Earnings (Loss) to Fixed Charges Exhibit 12

YEAR ENDED DECEMBER 31 (In Millions Except For Ratios)	2003		2002		2001			2000			1999
EARNINGS (LOSS)
Income (Loss) before Income Taxes	$	441.1	$	393.4	$	(1,482.4	)	$	70.3		$	240.5
Total Fixed Charges		1,118.9		1,130.3		1,121.6			1,125.7			1,027.1
Less Interest Capitalized		—		—		(8.3	)		(6.1	)		—
Total Earnings (Loss)		1,560.0		1,523.7		(369.1	)		1,189.9			1,267.6
FIXED CHARGES
Interest		127.1		132.0		136.9			144.4			141.8
Interest on Deposit Contracts		973.8		980.6		960.2			959.9			872.2
Interest Capitalized		—		—		8.3			6.1			—
Interest Portion of Rental Expense		17.6		16.4		15.0			14.3			12.0
Amortization of Deferred Debt Expense		0.4		1.3		1.2			1.0			1.1
Total Fixed Charges	$	1,118.9	$	1,130.3	$	1,121.6		$	1,125.7		$	1,027.1
RATIO OF EARNINGS (LOSS) TO FIXED CHARGES		1.4		1.3		—			1.1			1.2
Dollar Amount of Deficiency in Earnings (Loss) to Fixed Charges		N/A		N/A	$	1,490.7			N/A			N/A

EX-21

Subsidiaries of the Registrant Exhibit 21

The listing below includes the significant subsidiaries of the Corporation. All subsidiaries are wholly owned by Safeco Corporation.

1. Safeco Insurance Company of America (WA)

2. General Insurance Company of America (WA)

3. Safeco Life Insurance Company (WA)

4. American States Insurance Company (IN)

5. American Economy Insurance Company (IN)

EX-23.1

Exhibit 23.1

Safeco Corporation and Subsidiaries

Consent of Ernst & Young LLP – Independent Auditors

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-26393) of Safeco Corporation pertaining to the Safeco Long-Term Incentive Plan of 1997, in the Registration Statement (Form S-3 No. 333-102298) and related Prospectus pertaining to the $775,000,000 in Safeco securities, and in the Registration Statement (Form S-3 No. 333-33444) pertaining to the Safeco Agency Stock Purchase Plan, of our report dated January 26, 2004, with respect to the consolidated financial statements and schedules of Safeco Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 2003.

/s/ ERNST & YOUNG LLP

Seattle, Washington

March 11, 2004

EX-31.1

Exhibit 31.1

Safeco Corporation and Subsidiaries

Certification of Chief Executive Officer

I, Michael S. McGavick, certify that:

1. I have reviewed this Annual Report on Form 10-K of Safeco Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2004	/s/ MICHAEL S. MCGAVICK
	Michael S. McGavick
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

Safeco Corporation and Subsidiaries

Certification of Chief Financial Officer

I, Christine B. Mead, certify that:

1. I have reviewed this Annual Report on Form 10-K of Safeco Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: March 12, 2004	/s/ CHRISTINE B. MEAD
	Christine B. Mead
	Chief Financial Officer and Secretary

EX-32.1

Exhibit 32.1

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Michael S. McGavick, Chairman, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 12, 2004

/s/ MICHAEL S. MCGAVICK

Michael S. McGavick

Chairman, President and Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

Certification Pursuant to 18 U.S.C. Section 1350,

As Adopted Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Safeco Corporation (the “Company”) on Form 10-K for the year ended December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-K”), I, Christine B. Mead, Chief Financial Officer and Secretary of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and

(2) The information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March 12, 2004

/s/ CHRISTINE B. MEAD

Christine B. Mead

Chief Financial Officer and Secretary

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Safeco Corporation and will be retained by Safeco Corporation and furnished to the Securities and Exchange Commission or its staff upon request.