10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2005

¨ 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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):  Yes  ¨.    No  x.

123,537,417 shares of common stock of Safeco Corporation, no par value, were outstanding at October 31, 2005.

Safeco Corporation and Subsidiaries

CONTENTS

Item	Description	Page
Part I	Financial Information
1	Financial Statements
	Consolidated Statements of Income (Loss) for the three and nine months ended September 30, 2005 and 2004	3
	Consolidated Balance Sheets September 30, 2005 and December 31, 2004	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004	5
	Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2005 and 2004	7
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2005 and 2004	8
	Condensed Notes to Consolidated Financial Statements	9
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
3	Quantitative and Qualitative Disclosures about Market Risk	43
4	Controls and Procedures	44
Part II	Other Information
1	Legal Proceedings	45
2	Unregistered Sales of Equity Securities and Use of Proceeds	46
6	Exhibits	46
Signatures		47

2

Safeco Corporation and Subsidiaries

Consolidated Statements of Income (Loss)

	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
	2005		2004			2005		2004
(In Millions, except per share amounts)	(Unaudited)					(Unaudited)
REVENUES
Net Earned Premiums	$	1,460.2	$	1,400.7		$	4,345.5	$	4,092.6
Net Investment Income		121.4		115.5			359.9		349.6
Net Realized Investment Gains		3.9		50.5			51.2		178.2
Other Revenues		0.1		0.2			0.2		0.6
Total Revenues		1,585.6		1,566.9			4,756.8		4,621.0
EXPENSES
Losses and Loss Adjustment Expenses		1,012.1		1,029.9			2,760.3		2,632.2
Amortization of Deferred Policy Acquisition Costs		244.5		232.5			727.7		681.9
Other Underwriting and Operating Expenses		164.7		162.8			487.8		475.7
Interest Expense		22.7		25.3			66.1		87.3
Loss on Debt Repurchases		4.0		121.0			4.0		121.0
Restructuring Charges		1.5		—			2.5		1.4
Total Expenses		1,449.5		1,571.5			4,048.4		3,999.5
Income (Loss) from Continuing Operations before Income Taxes		136.1		(4.6	)		708.4		621.5
Provision (Benefit) for Income Taxes		35.0		(10.5	)		208.0		181.1
Income from Continuing Operations		101.1		5.9			500.4		440.4
Results from Discontinued Operations (Net of Taxes of ($52.3) and ($39.1) in 2004)		—		(107.0	)		—		(57.8	)
Net Income (Loss)	$	101.1	$	(101.1	)	$	500.4	$	382.6
INCOME (LOSS) PER SHARE OF COMMON STOCK – DILUTED
Income from Continuing Operations	$	0.80	$	0.04		$	3.91	$	3.20
Results from Discontinued Operations, Net of Taxes		—		(0.80	)		—		(0.42	)
Net Income (Loss) Per Share of Common Stock - Diluted	$	0.80	$	(0.76	)	$	3.91	$	2.78
INCOME (LOSS) PER SHARE OF COMMON STOCK – BASIC
Income from Continuing Operations	$	0.81	$	0.04		$	3.95	$	3.23
Results from Discontinued Operations, Net of Taxes		—		(0.81	)		—		(0.43	)
Net Income (Loss) Per Share of Common Stock - Basic	$	0.81	$	(0.77	)	$	3.95	$	2.80
Dividends Declared per Share	$	0.25	$	0.22		$	0.72	$	0.59
Average Number of Shares Outstanding During the Period:
Diluted		126.6		132.5			127.9		137.5
Basic		125.5		131.5			126.7		136.5

See Condensed Notes to Consolidated Financial Statements.

3

Safeco Corporation and Subsidiaries

Consolidated Balance Sheets

	SEPTEMBER 30 2005		DECEMBER 31 2004
(In Millions)	(Unaudited)
ASSETS
Investments
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $9,188.0; $8,958.0)	$	9,377.5	$	9,294.3
Marketable Equity Securities, at Fair Value (Cost: $731.5; $640.3)		1,126.7		1,101.4
Other Invested Assets		9.6		8.5
Total Investments		10,513.8		10,404.2
Cash and Cash Equivalents		343.3		251.9
Accrued Investment Income		117.0		129.7
Premiums and Service Fees Receivable		1,141.8		1,147.6
Deferred Policy Acquisition Costs		393.7		382.2
Reinsurance Recoverables		411.5		355.4
Land, Buildings and Equipment for Company Use (At cost less accumulated depreciation: $344.2; $312.9)		358.6		380.9
Current Income Taxes Recoverable		124.2		54.7
Net Deferred Income Tax Assets		269.5		292.6
Other Assets		209.6		256.1
Securities Lending Collateral		769.8		931.9
Total Assets	$	14,652.8	$	14,587.2
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and Loss Adjustment Expense Reserves	$	5,383.3	$	5,209.3
Unearned Premiums		2,219.9		2,151.0
Debt		1,307.0		1,332.9
Other Liabilities		965.2		1,041.2
Securities Lending Payable		769.8		931.9
Total Liabilities		10,645.2		10,666.3
Commitments and Contingencies		—		—
Preferred Stock, No Par Value
Shares Authorized: 10.0
Shares Issued and Outstanding: None		—		—
Common Stock, No Par Value
Shares Authorized: 300.0
Shares Reserved for Stock Awards: 7.6; 9.1
Shares Issued and Outstanding: 124.0; 127.0		453.7		641.8
Retained Earnings		3,173.1		2,763.8
Accumulated Other Comprehensive Income, Net of Taxes		380.8		515.3
Total Shareholders’ Equity		4,007.6		3,920.9
Total Liabilities and Shareholders’ Equity	$	14,652.8	$	14,587.2

See Condensed Notes to Consolidated Financial Statements.

4

Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows

NINE MONTHS ENDED SEPTEMBER 30	2005			2004
(In Millions)	(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received	$	4,405.3		$	4,186.3
Dividends and Interest Received		410.3			405.9
Insurance Claims Paid		(2,622.9	)		(2,441.4	)
Underwriting, Acquisition, Insurance and Other Operating Costs Paid		(1,175.6	)		(1,190.8	)
Interest Paid		(85.6	)		(123.5	)
Income Taxes Paid		(191.0	)		(103.2	)
Net Cash Provided by Operating Activities		740.5			733.3
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(1,706.9	)		(2,281.0	)
Marketable Equity Securities Available-for-Sale		(280.0	)		(390.3	)
Maturities and Calls of Fixed Maturities Available-for-Sale		735.6			710.7
Sales of:
Fixed Maturities Available-for-Sale		695.5			479.4
Marketable Equity Securities Available-for-Sale		240.7			643.1
Proceeds from Sales of Subsidiaries		—			1,510.0
Other, Net		(14.8	)		0.8
Net Cash Provided by (Used in) Investing Activities		(329.9	)		672.7
FINANCING ACTIVITIES
Repurchase of Notes		(29.8	)		(735.2	)
Dividends Paid to Shareholders		(87.8	)		(77.1	)
Accelerated Stock Repurchase/Buyback		(166.4	)		(625.0	)
Common Stock Reacquired		(64.7	)		(38.0	)
Stock Options Exercised		29.5			77.9
Net Cash Used in Financing Activities		(319.2	)		(1,397.4	)
Net Increase in Cash and Cash Equivalents		91.4			8.6
Cash and Cash Equivalents at Beginning of Period		251.9			319.0
Cash and Cash Equivalents at End of Period	$	343.3		$	327.6

See Condensed Notes to Consolidated Financial Statements.

5

Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows –

Reconciliation of Net Income to Net Cash Provided by Operating Activities

NINE MONTHS ENDED SEPTEMBER 30	2005			2004
(In Millions)	(Unaudited)
Net Income	$	500.4		$	382.6
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Results from Discontinued Operations, Net of Taxes		—			(73.2	)
Loss on Sale of Discontinued Operations, Net of Taxes		—			131.0
Net Realized Investment Gains		(51.2	)		(178.2	)
Amortization of Fixed Maturities		36.7			33.9
Amortization and Depreciation		37.9			44.2
Deferred Income Tax Provision		91.0			53.0
Other, Net		16.6			11.4
Changes in:
Accrued Investment Income		12.7			4.5
Premiums and Service Fees Receivable		5.8			(112.1	)
Current Income Taxes Recoverable		(69.5	)		69.9
Deferred Policy Acquisition Costs		(11.5	)		(34.8	)
Loss and Loss Adjustment Expense Reserves		174.0			215.3
Unearned Premiums		68.9			180.6
Other Assets and Liabilities		(71.3	)		5.2
Total Adjustments		240.1			350.7
Net Cash Provided by Operating Activities	$	740.5		$	733.3

There were no significant non-cash financing or investing activities for the nine months ended September 30, 2005 or 2004.

See Condensed Notes to Consolidated Financial Statements.

6

Safeco Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In Millions, except share amounts)

NINE MONTHS ENDED SEPTEMBER 30	2005			2004
	(Unaudited)
COMMON STOCK
Balance at Beginning of Period	$	641.8		$	1,197.3
Shares Issued for Options and Rights (including taxes of $3.7; $7.0)		33.2			84.9
Stock Compensation		9.8			11.4
Accelerated Share Repurchase		(150.3	)		—
Accelerated Stock Buyback (Settlement in 2005)		(16.1	)		(625.0	)
Shares Reacquired		(64.7	)		(38.0	)
Balance at End of Period		453.7			630.6
RETAINED EARNINGS
Balance at Beginning of Period		2,763.8			2,308.7
Net Income		500.4			382.6
Dividends Declared		(91.1	)		(79.4	)
Balance at End of Period		3,173.1			2,611.9
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Period		515.3			1,517.3
Other Comprehensive Loss		(134.5	)		(1,035.6	)
Balance at End of Period		380.8			481.7
Shareholders’ Equity	$	4,007.6		$	3,724.2
NINE MONTHS ENDED SEPTEMBER 30	2005			2004
	(Unaudited)
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Period		126,958,493			138,604,840
Shares Issued for Stock Options and Rights		1,045,225			2,300,396
Accelerated Share Repurchase		(2,752,300	)		—
Accelerated Stock Buyback		—			(13,247,863	)
Shares Reacquired		(1,218,340	)		(885,000	)
Number of Shares Outstanding at End of Period		124,033,078			126,772,373

See Condensed Notes to Consolidated Financial Statements.

7

Safeco Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
(In Millions)	2005			2004			2005			2004
	(Unaudited)						(Unaudited)
Net Income (Loss)	$	101.1		$	(101.1	)	$	500.4		$	382.6
Other Comprehensive Loss, Net of Taxes:
Change in Unrealized Gains on Available-for-Sale Securities		(87.6	)		104.6			(104.2	)		6.2
Reclassification Adjustment for Net Realized Investment Gains Included in Income from Continuing Operations		(5.9	)		(32.8	)		(37.1	)		(115.8	)
Foreign Currency Translation Adjustments		7.0			1.6			6.8			(2.4	)
Change in Discontinued Operations		—			(694.7	)		—			(923.6	)
Other Comprehensive Loss		(86.5	)		(621.3	)		(134.5	)		(1,035.6	)
Comprehensive Income (Loss)	$	14.6		$	(722.4	)	$	365.9		$	(653.0	)

See Condensed Notes to Consolidated Financial Statements.

8

Safeco Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements (unaudited)

(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. We sell property and casualty insurance. We generated virtually all of our revenues from continuing operations for the periods presented in this report from these activities.

Throughout our unaudited Consolidated Financial Statements, we refer to Safeco Corporation and its subsidiaries as “Safeco,” “we” and “our.” We refer to the property and casualty businesses as “Property & Casualty” and “P&C”. We refer to all other continuing activities, primarily the financing of our business activities, collectively as “Corporate.” We refer to the discontinued life insurance, group stop-loss medical insurance, trust, asset management and brokerage operations as “Discontinued Operations,” “Life & Investments” and “L&I.”

Basis of Consolidation and Reporting and Use of Estimates

We have prepared the unaudited Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. Certain financial information, which is required in the annual financial statements prepared in conformity with GAAP, may not be required for interim financial reporting purposes and has been condensed or omitted. In the opinion of management, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation of results for the interim periods have been included. Results for the nine-month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

These unaudited Consolidated Financial Statements and Condensed Notes to the Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Preparing these interim Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions that may affect amounts reported in these Consolidated Financial Statements and accompanying Condensed Notes to the Consolidated Financial Statements. Actual results could differ from those estimates.

The unaudited Consolidated Financial Statements include Safeco Corporation and its subsidiaries. We have eliminated all significant intercompany transactions and balances in the Consolidated Financial Statements.

We made certain reclassifications to the prior-period amounts for consistency with our current-period presentation.

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 quarter. Diluted earnings per share include the additional common shares assumed issued under the treasury stock method – this reflects the potential dilution that could occur if options were exercised and restricted stock rights were vested.

9

We present the computation of net income (loss) per share below, based upon weighted-average and diluted common shares outstanding:

	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
(In Millions, except per share amounts)	2005		2004			2005		2004
Net Income (Loss)	$	101.1	$	(101.1	)	$	500.4	$	382.6
Average Number of Common Shares Outstanding		125.5		131.5			126.7		136.5
Basic Net Income (Loss) Per Share	$	0.81	$	(0.77	)	$	3.95	$	2.80
Net Income (Loss)	$	101.1	$	(101.1	)	$	500.4	$	382.6
Average Number of Common Shares Outstanding		125.5		131.5			126.7		136.5
Additional Common Shares Assumed Issued Under Treasury Stock Method		1.1		1.0			1.2		1.0
Average Number of Common Shares Outstanding - Diluted		126.6		132.5			127.9		137.5
Diluted Net Income (Loss) Per Share	$	0.80	$	(0.76	)	$	3.91	$	2.78

Stock-Based Compensation Expense

Prior to 2003, we applied Accounting Principles Board (APB) Opinion 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. In May 2004, we replaced our annual stock option program to key employees with a restricted stock rights program.

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 expense for awards granted, modified or settled after January 1, 2003. Stock-based compensation expense was $7.5 ($4.9 after tax) for the three months ended September 30, 2005 and $21.7 ($14.4 after tax) for the nine months ended September 30, 2005. Stock-based compensation expense was $7.6 ($5.5 after tax) for the three months ended September 30, 2004 and $17.9 ($12.8 after tax) for the nine months ended September 30, 2004.

The following table illustrates, on a pro forma basis, the effect on our net income (loss) and net income (loss) per share as if we applied the fair value method to all outstanding and unvested awards in each period:

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
(In Millions, except per share amounts)	2005			2004			2005			2004
Net Income (Loss), as reported	$	101.1		$	(101.1	)	$	500.4		$	382.6
Add Back: After-Tax Stock-based Compensation Expense Included in Reported Net Income (Loss)		4.9			5.5			14.4			12.8
Deduct: Pro Forma Stock-based Compensation Expense*		(5.6	)		(6.6	)		(15.4	)		(16.0	)
Pro Forma Net Income (Loss)	$	100.4		$	(102.2	)	$	499.4		$	379.4
Net Income (Loss) Per Share
Basic – as Reported	$	0.81		$	(0.77	)	$	3.95		$	2.80
Diluted – as Reported	$	0.80		$	(0.76	)	$	3.91		$	2.78
Basic – Pro Forma	$	0.80		$	(0.78	)	$	3.94		$	2.78
Diluted – Pro Forma	$	0.79		$	(0.77	)	$	3.90		$	2.76

* Determined under fair value based method for all awards, net of related tax effects.

10

Common Stock

When we repurchase any of our common shares, we reduce our capital stock and retained earnings to reflect the repurchase on our Consolidated Balance Sheets. In accordance with the Washington Business Corporation Act, we do not show treasury stock as a separate reduction to Shareholders’ Equity on our Consolidated Balance Sheets.

During the third quarter of 2005, we repurchased 3,959,978 shares, or 3.1%, of our outstanding common stock at a total cost of $214.4 under stock buyback programs as described below.

On July 25, 2005, we repurchased 2,752,300 shares, or 2.2%, of our outstanding common stock through an accelerated share repurchase program. We purchased the shares from a dealer at a price of $54.50 per share, for a total cost of $150.3, including transaction costs. Through the repurchase program we returned excess capital to shareholders and immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and then purchased shares in the market over time to repay the borrowed shares. We completed the repurchase program in November 2005, receiving a price adjustment of $4.4 based on the average price of shares repurchased. The price adjustment will be reported as an increase to Shareholders’ Equity on our Consolidated Balance Sheet as of December 31, 2005.

During the third quarter of 2005, we also executed a Rule 10b5-1 trading plan to purchase up to an additional $100.0 of our outstanding common stock. This plan allows us to repurchase our shares during periods when we would normally not be active in the market because of our own internal trading windows. Under this program, during the third quarter of 2005, we repurchased 1,207,678 shares at an average price of $53.06 per share for a total cost of $64.1. During the fourth quarter of 2005, we repurchased an additional 548,600 shares at an average price of $53.28 per share for a total cost of $29.2. This completed our Rule 10b5-1 trading plan on November 1, 2005, under which we repurchased a total of 1,756,278 shares at an average price of $53.13 for a total cost of $93.3.

On August 2, 2004, using our proceeds from the sale of L&I, we repurchased 13,247,863 shares, or 9.5% of our then outstanding common stock, under an accelerated stock buyback program. We purchased the shares from a dealer at a price of $46.80 per share, for a total cost of $625.0, including transaction costs. The effect of the repurchase program was to return excess capital from the L&I sale to our shareholders, and it immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and the dealer purchased shares in the market over a nine month period, to repay the borrowed shares. The program included $200.0 that was subject to a collar, a contract that sets a minimum and maximum price for us for the shares repurchased under the collar. We completed the program in April 2005, paying a price adjustment of $16.1 to the dealer based on the volume weighted average price of our common stock during the period of the repurchases. We reported this price adjustment as a reduction to Shareholders’ Equity on our Consolidated Balance Sheet as of June 30, 2005.

On July 25, 2005, we paid a quarterly dividend of $0.25 per share. This was a 13.6% increase per share over the previous quarterly dividend of $0.22 per share.

Employee Benefit Plans

401(k)/Profit Sharing Retirement Plan – The Safeco 401(k)/Profit Sharing Retirement Plan is a defined contribution plan. In a defined contribution plan, the benefits a participant could receive from the plan result from regular contributions by the participant and the company. Our plan includes a minimum company contribution of 3% of each eligible participant’s compensation and a matching contribution of 66.6% of a participant’s contributions up to 6% of eligible compensation.

An additional profit-sharing amount may also be contributed when Safeco meets certain criteria defined in the plan. We have recorded $12.1 for the nine months ended September 30, 2005.

11

Cash Balance Plan – The Safeco Cash Balance Plan (CBP) is a noncontributory defined benefit plan that provides benefits for each year of service by an employee after 1988. The CBP specifies the benefit amount each participant will receive based on eligible compensation plus a stipulated rate of return on the benefit balance. We make contributions to the CBP that are deductible for federal income tax purposes and that at least meet the minimum funding requirements set by the Employee Retirement Income Security Act (ERISA). In 2004, we contributed $39.9, which was in excess of the minimum funding requirement for 2004, which resulted in a prepaid asset of $22.4 at December 31, 2004. Consequently, we do not expect to make a contribution to the CBP in 2005.

Other Postretirement Benefits – We also provide certain healthcare and life insurance benefits, which we refer to as Other Postretirement Benefits (OPRB), for certain retired employees, their beneficiaries and eligible dependents. We do not fund this program. We contributed $1.3 in the third quarter of 2005 and $3.9 in the first nine months of 2005 and expect to contribute a total of $5.3 to the OPRB program in 2005.

We amended our OPRB program in 2003. The amendments resulted in negative prior service cost that is being amortized over the average service period of all active participants. The related amortization resulted in a pretax credit to OPRB expense of $2.3 for the three months ended September 30, 2005 and $7.1 for the nine months ended September 30, 2005. The related amortization resulted in a pretax credit to OPRB expense of $1.7 for the three months ended September 30, 2004 and $7.2 for the nine months ended September 30, 2004.

The following tables summarize CBP and OPRB costs charged (credited) to Income (Loss) from Continuing Operations for the three and nine months ended September 30, 2005 and 2004:

	CBP						OPRB
THREE MONTHS ENDED SEPTEMBER 30	2005			2004			2005			2004
Service Cost	$	2.9		$	2.7		$	—		$	0.2
Interest Cost		1.9			2.0			1.0			0.9
Expected Return on Plan Assets		(2.7	)		(2.1	)		—			—
Amortization of Prior Service Cost and Unrecognized Net Actuarial (Gain) Loss		0.1			0.1			(2.3	)		(1.7	)
Total	$	2.2		$	2.7		$	(1.3	)	$	(0.6	)
	CBP						OPRB
NINE MONTHS ENDED SEPTEMBER 30	2005			2004			2005			2004
Service Cost	$	8.9		$	8.3		$	0.1		$	0.5
Interest Cost		5.6			6.0			2.9			3.2
Expected Return on Plan Assets		(8.3	)		(6.5	)		—			—
Amortization of Prior Service Cost and Unrecognized Net Actuarial (Gain) Loss		0.4			0.2			(7.1	)		(7.2	)
Total	$	6.6		$	8.0		$	(4.1	)	$	(3.5	)

Income Taxes

Our provision for income taxes included a tax benefit of $10.6 for the nine months ended September 30, 2005, stemming primarily from the favorable resolution of a state tax-related issue. We also realized a $10.3 federal tax benefit for the nine months ended September 30, 2004.

Reinsurance

Our reinsurance recoverable balance at September 30, 2005 was $411.5, compared with $355.4 at December 31, 2004. The increase in our reinsurance recoverable is a result of estimated reinsurance recoveries related to Hurricane Katrina losses.

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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 123(R), “Share-Based Payment” – As previously discussed, we recognize stock-based compensation expense in accordance with SFAS 123, as amended by SFAS 148. In December 2004, the FASB issued SFAS 123(R), “Share-Based Payment,” a revision of SFAS 123.

SFAS 123(R) requires all share-based compensation awards granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting. Under the modified prospective application, compensation cost is recognized for the outstanding, nonvested awards based on the grant-date fair value of those awards as calculated under SFAS 123. On April 14, 2005, the Securities and Exchange Commission announced that it would provide for a phased-in implementation process, requiring registrants that are not small business issuers to adopt SFAS 123(R) no later than the commencement of the first fiscal year beginning after June 15, 2005. We will adopt SFAS 123(R) on January 1, 2006. We do not expect our adoption of the statement to have a material impact on our financial condition or results of operations.

FASB Staff Position (FSP) 03-1-1, Effective Date of Paragraphs 10-20 of Emerging Issues Task Force (EITF) 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” – In September 2004, the FASB issued FSP 03-1-1, delaying the effective date for applying paragraphs 10-20 of EITF 03-1. Paragraphs 10-20 provide guidance for evaluating whether impairments of debt and equity holdings are “other-than-temporary” and require immediate recognition of such impairments in earnings. At its June 29, 2005 meeting, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment and directed the staff to issue proposed FSP EITF 03-1a, “Implementation Guidance for the Application of Paragraph 16 of EITF 03-1,” as final. Paragraph 16 applies to the other-than-temporary evaluation for certain debt securities. We do not anticipate that our adoption of EITF 03-1a will have a material impact on our financial condition or results of operations. The FASB is expected to issue an FSP to replace the guidance in paragraphs 10-18 of EITF 03-1. We have previously adopted the disclosure requirements of EITF 03-1, which were unchanged by FSP 03-1-1 and were effective for fiscal periods ending after December 15, 2003.

EITF 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” – This guidance creates stricter standards for aggregating operating segments that do not meet the quantitative thresholds provided within SFAS 131, “Disclosures About Segments of an Enterprise and Related Information.” The guidance is effective for fiscal years ending after September 15, 2005. We do not anticipate that adoption of this guidance will impact the presentation of our reportable segments.

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NOTE 2 – RESTRUCTURING CHARGES

2004/2005 RESTRUCTURING

Following the sale of L&I, we identified expense reductions that enable us to operate more efficiently. Charges have been recognized and accrued as a restructuring charge and allocated to our reportable segments in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Other costs that do not meet the criteria for accrual are expensed as restructuring charges when we incur them.

Costs incurred in 2004 and in the three and nine months ended September 30, 2005 and total estimated costs we expect to incur associated with the restructuring are as follows:

			COSTS INCURRED TO DATE
	TOTAL EXPECTED COSTS		2004		THREE MONTHS ENDED SEPTEMBER 30, 2005		NINE MONTHS ENDED SEPTEMBER 30, 2005
Employee Termination Benefits	$	5.3	$	0.4	$	0.1	$	0.4
Lease Termination Costs and Other Costs		9.6		3.6		1.4		2.1
Total	$	14.9	$	4.0	$	1.5	$	2.5

These costs are allocated to reportable segments as follows:

			COSTS INCURRED TO DATE
	TOTAL EXPECTED COSTS		2004		THREE MONTHS ENDED SEPTEMBER 30, 2005		NINE MONTHS ENDED SEPTEMBER 30, 2005
Safeco Personal Insurance (SPI)
Auto	$	7.1	$	1.9	$	0.7	$	1.2
Property		2.5		0.7		0.2		0.4
Specialty		0.3		0.1		0.1		0.1
Total SPI		9.9		2.7		1.0		1.7
Safeco Business Insurance (SBI)
SBI Regular		3.3		0.9		0.3		0.5
SBI Special Accounts Facility		1.2		0.3		0.1		0.2
Total SBI		4.5		1.2		0.4		0.7
Surety		0.5		0.1		0.1		0.1
Total	$	14.9	$	4.0	$	1.5	$	2.5

Activity related to previously accrued restructuring charges as of September 30, 2005 was as follows:

	BALANCE AT DECEMBER 31, 2004		COSTS INCURRED		AMOUNTS PAID		BALANCE AT SEPTEMBER 30, 2005
Employee Termination Costs	$	0.1	$	0.4	$	0.5	$	—
Lease Terminations and Other Costs		—		2.1		2.1		—
Total	$	0.1	$	2.5	$	2.6	$	—

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NOTE 3 – DEBT

The following table shows the total principal amount, interest rates and maturities of our debt. No debt was due within one year at September 30, 2005 or December 31, 2004.

	SEPTEMBER 30 2005		DECEMBER 31 2004
6.875% Notes Due 2007	$	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		204.1		230.0
8.072% Debentures Due 2037		402.9		402.9
Total Debt	$	1,307.0	$	1,332.9

In August 2005, we repurchased $25.9 in principal amount of 7.25% senior notes for $29.8, including transaction costs. We reported a pretax loss on debt repurchase of $4.0 ($2.6 after tax) in the Consolidated Statements of Income (Loss).

On August 13, 2004 we repurchased $473.4 in principal amount of 8.072% capital securities for $562.7, and on September 1, 2004 we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 ($78.7 after tax) in the Consolidated Statements of Income (Loss).

As of September 30, 2005, we maintained a $300.0 bank credit facility expiring March 2010, upon which nothing was drawn.

NOTE 4 – DERIVATIVES

FAIR VALUE HEDGES

We use interest rate swaps to hedge the change in fair value of certain of the fixed-rate debt we have outstanding. At September 30, 2005 we had $404.1 of notional amounts outstanding relating to such hedges compared with $430.0 for the prior year. 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 debt that they hedge are recognized on a net basis in Net Realized Investment Gains in the Consolidated Statements of Income (Loss).

Differences between the changes in fair value of these derivatives and the hedged items represent hedge ineffectiveness. In the three and nine months ended September 30, 2005 and 2004, no amounts were recognized in earnings due to hedge ineffectiveness.

In conjunction with the August 2005 repurchase of some of the 7.25% senior notes outstanding, we unwound a portion of the interest rate swap totaling $25.9 of notional amount. We reported a pretax gain of $0.3 on the unwinding of this fair value hedge in Net Realized Investment Gains in the Consolidated Statements of Income (Loss).

In conjunction with the September 1, 2004 repurchase of the 7.25% senior notes, we unwound a portion of the interest rate swap totaling $145.0 of notional amount. We reported a pretax gain of $2.0 on the unwinding of this fair value hedge in Net Realized Investment Gains in the Consolidated Statements of Income (Loss).

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NOTE 5 – COMPREHENSIVE INCOME

Comprehensive income is defined as all changes in shareholders’ equity, except those arising from transactions with shareholders. Comprehensive income includes net income (loss) and other comprehensive income (loss), which for us consists of changes in unrealized gains or losses on investment securities and changes in foreign currency translation gains or losses. In 2004, comprehensive income included similar items for Discontinued Operations prior to the sale of L&I, along with deferred policy acquisition costs valuation allowance.

The components of other comprehensive income or losses were as follows:

	2005									2004
NINE MONTHS ENDED SEPTEMBER 30	PRETAX			TAXES			AFTER TAX			PRETAX			TAXES			AFTER TAX
Change in Unrealized Gains on Investment Securities	$	(160.5	)	$	56.3		$	(104.2	)	$	9.6		$	(3.4	)	$	6.2
Reclassification Adjustment for Net Realized Investment Gains Included in Income from Continuing Operations		(51.2	)		14.1			(37.1	)		(178.2	)		62.4			(115.8	)
Foreign Currency Translation Adjustments		10.5			(3.7	)		6.8			(3.7	)		1.3			(2.4	)
Change in Discontinued Operations		—			—			—			(1,420.9	)		497.3			(923.6	)
Other Comprehensive Loss	$	(201.2	)	$	66.7		$	(134.5	)	$	(1,593.2	)	$	557.6		$	(1,035.6	)

NOTE 6 – SALE OF LONDON OPERATIONS

On July 25, 2005, we completed the sale of our London operations, eliminating any further liabilities associated with those operations. The London operations were sold for a nominal amount, resulting in an after-tax loss of $1.4. Safeco Corporation retained a liability on our Consolidated Balance Sheet in the amount of $6.9 to cover future cash calls. We retained no other liabilities or commitments.

NOTE 7 – SEGMENT INFORMATION

P&C

Our P&C Insurance operations are organized around our four businesses: Safeco Personal Insurance (SPI), Safeco Business Insurance (SBI), Surety and P&C Other. These businesses are a combination of reportable segments that have similar products and services and are managed separately, as described below.

SPI

SPI offers auto, homeowners and other property and specialty insurance products for individuals. The SPI operations are organized around three reportable segments – Auto, Property and Specialty.

The Auto segment provides voluntary and non-voluntary 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 Property segment provides homeowners, earthquake, dwelling fire and inland marine coverages for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We also protect individuals from liability for accidents that occur on their property.

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The Specialty segment provides individuals with umbrella, recreational vehicle, motorcycle and boat owners insurance. These products serve to round-out our personal lines insurance product offerings for our customers’ insurance needs.

SBI

SBI offers business owner policies, commercial multi-peril packages, workers compensation, commercial property, general liability and commercial auto policies. SBI’s operations are organized around two segments: SBI Regular and SBI Special Accounts Facility.

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 $200,000 or less). Our principal business insurance products include business owner policies, commercial auto, commercial multi-peril, workers compensation, commercial property and general liability.

SBI Special Accounts Facility writes larger commercial accounts for our key agents and brokers who sell our core P&C products as well as our four commercial programs, which provide lender-placed property insurance, agents’ errors and omissions insurance (predominantly for our agents and brokers), property and liability insurance for mini-storage and warehouse properties, and professional and general liability insurance for non-profit social service organizations.

SURETY

We offer surety bonds for construction and commercial businesses.

P&C OTHER

P&C Other includes runoff of assumed reinsurance, London operations that we sold in July 2005, large-commercial business accounts in runoff, and specialty programs that we exited.

CORPORATE

In addition to the activities of these operating segments, certain transactions such as interest expense we pay on our debt, debt repurchases, intercompany eliminations and miscellaneous corporate investment and other activities are reported in the Corporate segment and not allocated to individual operating segments.

OUR RESULTS

Our management measures P&C segment profit or loss based on underwriting results and combined ratios. Underwriting results (profit or loss) represent the net amount of earned premiums less underwriting losses and expenses, on a pretax basis. Combined ratios show the relationship between underwriting profit or loss and net earned premiums. Using ratios helps us to see our operating trends without the effect of changes in net earned premiums. Management views underwriting results and combined ratios as critical measures to assess the effectiveness of the underwriting activities of the P&C operations.

Underwriting results and combined ratios are not a substitute for net income determined in accordance with GAAP.

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The following tables present selected financial information by segment and reconcile segment revenues, underwriting and operating results to amounts reported in the Consolidated Statements of Income (Loss).

REVENUES

	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
	2005			2004		2005		2004
NET EARNED PREMIUMS
Safeco Personal Insurance (SPI)
Auto	$	715.0		$	670.4	$	2,119.1	$	1,934.0
Property		226.5			232.1		682.0		687.8
Specialty		25.3			23.4		72.5		66.7
Total SPI		966.8			925.9		2,873.6		2,688.5
Safeco Business Insurance (SBI)
SBI Regular		321.3			307.0		954.2		908.9
SBI Special Accounts Facility		105.2			110.5		320.1		335.2
Total SBI		426.5			417.5		1,274.3		1,244.1
Surety		67.0			53.7		189.8		146.7
P&C Other		(0.1	)		3.6		7.8		13.3
Total Earned Premiums		1,460.2			1,400.7		4,345.5		4,092.6
P&C Net Investment Income		115.3			111.0		341.6		338.5
Total P&C Revenues		1,575.5			1,511.7		4,687.1		4,431.1
CORPORATE		6.2			4.7		18.5		11.7
Net Realized Investment Gains		3.9			50.5		51.2		178.2
TOTAL REVENUES	$	1,585.6		$	1,566.9	$	4,756.8	$	4,621.0

PRETAX UNDERWRITING PROFIT (LOSS) AND NET INCOME (LOSS)

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
UNDERWRITING PROFIT (LOSS)
Safeco Personal Insurance (SPI)
Auto	$	51.3		$	51.0		$	121.0		$	135.1
Property		17.2			14.2			145.7			154.9
Specialty		(8.1	)		(4.3	)		7.7			8.8
Total SPI		60.4			60.9			274.4			298.8
Safeco Business Insurance (SBI)
SBI Regular		0.9			(59.7	)		91.0			(4.0	)
SBI Special Accounts Facility		(20.4	)		(21.1	)		(3.4	)		14.9
Total SBI		(19.5	)		(80.8	)		87.6			10.9
Surety		13.7			10.0			36.4			30.8
P&C Other		(18.6	)		(12.6	)		(38.7	)		(29.9	)
Total Underwriting Profit (Loss)		36.0			(22.5	)		359.7			310.6
P&C Net Investment Income		115.3			111.0			341.6			338.5
Restructuring Charges		(1.5	)		—			(2.5	)		(1.4	)
Total P&C		149.8			88.5			698.8			647.7
CORPORATE		(13.6	)		(22.6	)		(37.6	)		(83.4	)
Loss on Debt Repurchases		(4.0	)		(121.0	)		(4.0	)		(121.0	)
Net Realized Investment Gains		3.9			50.5			51.2			178.2
Income (Loss) from Continuing Operations before Income Taxes		136.1			(4.6	)		708.4			621.5
Provision (Benefit) for Income Taxes		35.0			(10.5	)		208.0			181.1
Income from Continuing Operations		101.1			5.9			500.4			440.4
Results from Discontinued Operations, Net of Taxes		—			(107.0	)		—			(57.8	)
NET INCOME (LOSS)	$	101.1		$	(101.1	)	$	500.4		$	382.6

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COMBINED RATIOS +

	THREE MONTHS ENDED SEPTEMBER 30				NINE MONTHS ENDED SEPTEMBER 30
	2005		2004		2005		2004
Safeco Personal Insurance (SPI)
Auto	92.8	%	92.4	%	94.3	%	93.0	%
Property	92.4		93.9		78.6		77.5
Specialty	132.0		118.3		89.3		86.7
Total SPI	93.8		93.4		90.4		88.9
Safeco Business Insurance (SBI)
SBI Regular	99.7		119.5		90.5		100.4
SBI Special Accounts Facility	119.4		119.1		101.1		95.5
Total SBI	104.6		119.4		93.1		99.1
Surety	79.5		81.3		80.8		79.0
P&C Other	*		*		*		*
Total P&C Operations	97.5	%	101.6	%	91.7	%	92.4	%

+ 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.

The following table presents asset information, reported on our Consolidated Balance Sheets, by segment:

ASSETS

	SEPTEMBER 30 2005		DECEMBER 31 2004
Safeco Personal Insurance (SPI)
Auto	$	4,502.7	$	4,225.1
Property		2,160.9		2,134.6
Specialty		229.5		210.9
Total SPI		6,893.1		6,570.6
Safeco Business Insurance (SBI)
SBI Regular		3,603.1		3,475.8
SBI Special Accounts Facility		938.9		853.8
Total SBI		4,542.0		4,329.6
Surety		607.7		531.2
P&C Other		1,799.8		2,043.9
Total		13,842.6		13,475.3
Corporate		810.2		1,111.9
TOTAL ASSETS	$	14,652.8	$	14,587.2

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

This discussion should be read with the Consolidated Financial Statements and Condensed Notes to the Consolidated Financial Statements included elsewhere in this report.

Forward-Looking Information

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

Statements contained in this report that relate 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 the new-business entry model for personal and commercial lines

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

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

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

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

• Risks related to our Property & Casualty (P&C) insurance strategy such as:

• 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 businesses that we have exited, or intend to exit in the future, without incurring material unexpected charges

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

• 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, agent and broker commissions and availability of coverage

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• Unusual loss activity, such as:

• 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 terrorist attacks or war

• The occurrence of bankruptcies that result in losses on insurance products or investments

• 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 or harm to our workforce resulting in a disruption of our operations

• Internal or external fraud perpetrated against us

Summary

We are a property and casualty (P&C) insurance company with headquarters in Seattle, Washington. We sell insurance to drivers, home owners and owners of small- and medium-sized businesses through a national network of independent agents and brokers. Our business helps people protect what they value and deal with the unexpected. We earn revenue primarily from insurance policy premiums and income on our invested assets.

Reviewing Our Results of Operations

HOW WE REPORT OUR RESULTS

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

• Safeco Personal Insurance (SPI)

• Auto

• Property

• Specialty

• Safeco Business Insurance (SBI)

• SBI Regular

• SBI Special Accounts Facility

• Surety

• P&C Other

In addition to the activities of these segments, certain other transactions such as interest expense, debt repurchases and intercompany eliminations are reported in Corporate and not allocated to individual operating segments.

HOW WE MEASURE PROFITABILITY

P&C — We use three measures of our underwriting results to assess the profitability of our P&C businesses. These measures are underwriting profit or loss, combined ratio and net earned premiums.

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

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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, or a 5% underwriting profit. A lower combined ratio reflects better underwriting results than a higher combined ratio.

We include insurance premiums in revenue as they are earned over the terms of the respective policies.

Although investment activities are an important part of our business and comprise a significant part of our total revenues, we don’t include our investment portfolio results when measuring the profitability of our individual segments. That’s because we manage the investment portfolio separately from our underwriting activities. We invest the insurance premiums we receive in a diversified portfolio until they’re needed to pay claims. Our first priority is to protect our policyholders, so we invest in a diversified portfolio composed primarily of government securities and high-grade fixed maturities. This strategy generally provides protection for our policyholders and steady income for our shareholders.

Our investment philosophy is to:

• Emphasize investment yield, balanced with investment quality and risk

• Provide for liquidity when needed

• Diversify our portfolio

We measure our investment results in two parts – by the net investment income we earn on our invested assets, and the net realized investment gains or losses we recognize when we sell or impair investments. More information on our investment results can be found on page 38.

Application of Critical Accounting Estimates

We have identified Loss and LAE Reserves, Reinsurance and Valuation of Investments as accounting estimates 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.

Please see additional discussion of critical accounting estimates in the MD&A section of our 2004 Annual Report on Form 10-K.

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Consolidated Results of Operations

The following table presents consolidated financial information for the periods indicated.

	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
	2005		2004			2005		2004
REVENUES
Net Earned Premiums	$	1,460.2	$	1,400.7		$	4,345.5	$	4,092.6
Net Investment Income		121.4		115.5			359.9		349.6
Net Realized Investment Gains		3.9		50.5			51.2		178.2
Other Revenues		0.1		0.2			0.2		0.6
Total Revenues		1,585.6		1,566.9			4,756.8		4,621.0
EXPENSES
Losses and Loss Adjustment Expenses		1,012.1		1,029.9			2,760.3		2,632.2
Amortization of Deferred Policy Acquisition Costs		244.5		232.5			727.7		681.9
Other Underwriting and Operating Expenses		164.7		162.8			487.8		475.7
Interest Expense		22.7		25.3			66.1		87.3
Loss on Debt Repurchases		4.0		121.0			4.0		121.0
Restructuring Charges		1.5		—			2.5		1.4
Total Expenses		1,449.5		1,571.5			4,048.4		3,999.5
Income (Loss) from Continuing Operations before Income Taxes		136.1		(4.6	)		708.4		621.5
Provision (Benefit) for Income Taxes		35.0		(10.5	)		208.0		181.1
Income from Continuing Operations		101.1		5.9			500.4		440.4
Results from Discontinued Operations (Net of Taxes of ($52.3) and ($39.1) in 2004)		—		(107.0	)		—		(57.8	)
Net Income (Loss)	$	101.1	$	(101.1	)	$	500.4	$	382.6

Total revenues increased 1.2% in the three months ended September 30, 2005 and 2.9% in the nine months ended September 30, 2005, compared with the same periods in 2004. This increase was driven by an increase in net earned premiums, which grew 4.2% in the three months ended September 30, 2005 and 6.2% in the nine months ended September 30, 2005, compared with the same periods in 2004. This primarily reflected growth in policies-in-force (PIF) in our Auto segment. Growth has slowed in the face of increased competitive pressures as auto insurers increase advertising and lower prices to attract new business. Our overall growth rates for net earned premiums have declined from 12.0% in the third quarter of 2004 and 11.7% in the fourth quarter of 2004 to 4.2% in the third quarter of 2005. The increases in net earned premiums were partially offset by decreases in net realized investment gains of $46.6 in the three months ended September 30, 2005 and $127.0 in the nine months ended September 30, 2005, compared with the same periods in 2004.

Net income increased $202.2 in the three months ended September 30, 2005 and $117.8 in the nine months ended September 30, 2005, compared with the same periods in 2004, reflecting:

• Underwriting profit: Underwriting profit increased $58.5 in the three months ended September 30, 2005 and $49.1 in the nine months ended September 30, 2005, compared with the same periods in 2004 primarily due to improved results in SBI Regular. The change in underwriting profit was driven by after-tax, net of reinsurance catastrophe losses, which were $115.8 ($178.1 pretax) in the three months ended September 30, 2005, compared with $126.6 ($194.8 pretax) in the same period last year. After-tax, net of reinsurance catastrophe losses were $140.4 ($216.0 pretax) in the nine months ended September 30, 2005, compared with $153.0 ($235.4 pretax) in the same period last year. Catastrophe losses in 2005 were primarily from Hurricanes Katrina and Rita in the Gulf States. We estimate hurricane losses using our knowledge of severity and reporting patterns as well as data and assumptions specific to each catastrophe. Given the difficulty in accessing some areas and other uncertainties affecting the estimation of losses, we expect to refine our estimates and assumptions related to both Hurricanes Katrina and Rita as these uncertainties are resolved. Catastrophe losses in the third quarter of 2004 were from the four hurricanes in Florida and the surrounding states.

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• Loss on debt repurchases: During the third quarter of 2005, we repurchased $25.9 in principal amount of debt securities. Including transaction costs, this resulted in a loss on debt repurchases of $2.6 after tax ($4.0 pretax). Last year, we used $735.2 of the proceeds from the sale of L&I to repurchase $618.4 in principal amount of debt and capital securities. Including transaction costs, this resulted in a loss on debt repurchases of $78.7 after tax ($121.0 pretax ) in the third quarter of 2004.

• Net realized investment gains: After-tax net realized investment gains from continuing operations for the third quarter of 2005 were $5.9, compared with $32.8 in the same period of 2004, and $37.1 for the first nine months of 2005, compared with $115.8 in the same period of 2004. Last year’s gains included sales of equity securities of $9.6 after tax for the three months ended September 30, 2004 and $59.2 after tax for nine months ended September 30, 2004 to reduce our equity holdings to target levels.

• Discontinued operations: Last year’s net income included an after-tax loss on the sale of our discontinued life and investments operations of $134.8 for the three months ended September 30, 2004 and $131.0 for the nine months ended September 30, 2004, partially offset by income from discontinued operations of $27.8 for the three months ended September 30, 2004 and $73.2 for the nine months ended September 30, 2004.

Reconciling Segment Results

The following table assists in reconciling our GAAP results, specifically the “Income (Loss) from Continuing Operations before Income Taxes” line from our Consolidated Statements of Income (Loss) to our operating results:

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
P&C	$	156.4		$	130.3		$	752.1		$	810.1
Corporate		(20.3	)		(134.9	)		(43.7	)		(188.6	)
Income (Loss) from Continuing Operations before Income Taxes	$	136.1		$	(4.6	)	$	708.4		$	621.5

The GAAP results are further explained below using our P&C operating results which provide a helpful picture of how our company is doing. However, using them to measure profitability – while a normal practice in our industry – does not follow GAAP.

Our P&C Operating Results

The primary measures of our operating results include our underwriting profit or loss, net earned premiums and combined ratios. The next three tables report those key items – by our reportable segments – for the three and nine months ended September 30, 2005 and 2004. More information about the results – also by segment – follows the tables.

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First, net earned premiums are the primary driver of our revenues, along with net investment income and net realized investment gains:

NET EARNED PREMIUMS	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
	2005			2004		2005		2004
Safeco Personal Insurance (SPI)
Auto	$	715.0		$	670.4	$	2,119.1	$	1,934.0
Property		226.5			232.1		682.0		687.8
Specialty		25.3			23.4		72.5		66.7
Total SPI		966.8			925.9		2,873.6		2,688.5
Safeco Business Insurance (SBI)
SBI Regular		321.3			307.0		954.2		908.9
SBI Special Accounts Facility		105.2			110.5		320.1		335.2
Total SBI		426.5			417.5		1,274.3		1,244.1
Surety		67.0			53.7		189.8		146.7
P&C Other		(0.1	)		3.6		7.8		13.3
Total Net Earned Premiums	$	1,460.2		$	1,400.7	$	4,345.5	$	4,092.6

Next, underwriting profit (loss) is our measure of each segment’s performance:

UNDERWRITING PROFIT (LOSS)	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Safeco Personal Insurance (SPI)
Auto	$	51.3		$	51.0		$	121.0		$	135.1
Property		17.2			14.2			145.7			154.9
Specialty		(8.1	)		(4.3	)		7.7			8.8
Total SPI		60.4			60.9			274.4			298.8
Safeco Business Insurance (SBI)
SBI Regular		0.9			(59.7	)		91.0			(4.0	)
SBI Special Accounts Facility		(20.4	)		(21.1	)		(3.4	)		14.9
Total SBI		(19.5	)		(80.8	)		87.6			10.9
Surety		13.7			10.0			36.4			30.8
P&C Other		(18.6	)		(12.6	)		(38.7	)		(29.9	)
Total Underwriting Profit (Loss)		36.0			(22.5	)		359.7			310.6
P&C Net Investment Income		115.3			111.0			341.6			338.5
Restructuring Charges		(1.5	)		—			(2.5	)		(1.4	)
Net Realized Investment Gains before Income Taxes		6.6			41.8			53.3			162.4
P&C Income from Continuing Operations before Income Taxes	$	156.4		$	130.3		$	752.1		$	810.1

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

COMBINED RATIOS+	THREE MONTHS ENDED SEPTEMBER 30				NINE MONTHS ENDED SEPTEMBER 30
	2005		2004		2005		2004
Safeco Personal Insurance (SPI)
Auto	92.8	%	92.4	%	94.3	%	93.0	%
Property	92.4		93.9		78.6		77.5
Specialty	132.0		118.3		89.3		86.7
Total SPI	93.8		93.4		90.4		88.9
Safeco Business Insurance (SBI)
SBI Regular	99.7		119.5		90.5		100.4
SBI Special Accounts Facility	119.4		119.1		101.1		95.5
Total SBI	104.6		119.4		93.1		99.1
Surety	79.5		81.3		80.8		79.0
P&C Other	*		*		*		*
Total P&C Operations	97.5	%	101.6	%	91.7	%	92.4	%

+ 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 in runoff with minimal premium.

Auto

The Auto segment provides voluntary and non-voluntary 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.

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	715.0		$	670.4		$	2,119.1		$	1,934.0
Underwriting Profit		51.3			51.0			121.0			135.1
Loss and LAE Ratio		70.5	%		69.1	%		71.6	%		70.1	%
Expense Ratio		22.3			23.3			22.7			22.9
Combined Ratio		92.8	%		92.4	%		94.3	%		93.0	%

NET EARNED PREMIUMS

Net earned premiums increased $44.6 or 6.7% in the three months ended September 30, 2005 and $185.1 or 9.6% in the nine months ended September 30, 2005, compared with the same periods in 2004. The increase in net earned premiums was driven by:

• Growth in policies-in-force (PIF): PIF grew 2.9% as of September 30, 2005, compared with a year ago. This reflected slightly lower retention of policies (79.7% in the third quarter of 2005 and 80.1% in the third quarter of 2004) and was offset by strong new-business growth throughout 2004. PIF growth contributed $41 to the increase in net earned premiums in the third quarter of 2005 and $142 in the first nine months of 2005, compared with a year ago. This growth was driven by the launch of our updated underwriting model in early 2005 and the introduction of Safeco Now_TM, our Web-based sales-and-service platform in early 2004.

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• Changes in filed rates: We file rate changes on a state-by-state basis. Rate changes are reflected on existing policies at renewal and are earned in our revenues over the six-month policy term. Rate changes resulted in an increase to net earned premiums of $9 in the third quarter of 2005 and $36 in the first nine months of 2005, compared with the same periods of 2004. Overall, we received approval for average rate increases of 1.3% in 2004, and rates were flat in the first nine months of 2005.

• Premium trend: Net earned premiums are also impacted by the increased premiums for those policies that insure newer and more expensive cars, which we refer to as premium trend. Premiums are also impacted by shifts in the mix of our business. Personal auto premium trend decreased net earned premiums by $6 in the third quarter of 2005 and increased net earned premiums by $13 in the first nine months of 2005, compared with the same periods of 2004.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Auto increased $0.3 and our combined ratio increased 0.4 points in the three months ended September 30, 2005, compared with the same period of 2004. Our underwriting profit decreased $14.1 and our combined ratio increased 1.3 points in the nine months ended September 30, 2005, compared with the same period of 2004. Our underwriting results and combined ratio were primarily driven by:

• Rate changes: Our earned rate changes combined with premium trend improved our Auto combined ratio by approximately 0.2 points in the third quarter of 2005 and 1.4 points in the first nine months of 2005, compared with the same periods last year.

• Loss costs: In the third quarter and first nine months of 2005, we experienced a mid-single-digit increase in severity – the average cost of a claim. This is in part due to the impact of medical costs inflation on bodily injury claims and a slight shift in business mix to states with higher bodily injury severity claims over the past 18 months. In addition, our average deductible has increased, and this has eliminated some low-severity losses that are not reported because they are less than the higher deductible amount. The impact of the increase in severity was partially offset by the effect of a low-single-digit decrease in frequency – the average number of claims filed. These factors, net of reinsurance, increased our combined ratio by approximately 4.0 points in the third quarter of 2005 and 3.2 points in the first nine months of 2005, compared with the same periods of 2004.

• Prior-year reserve development: Our underwriting results in the third quarter of 2005 included favorable prior-year reserve development of $24.7, primarily due to favorable development in bodily injury severity, compared with favorable prior-year reserve development of $10.0 in the same period of 2004. Our underwriting results in the first nine months of 2005 included favorable prior-year reserve development of $28.8, compared with $19.0 in the same period of 2004. The difference in the prior-year reserve development improved our combined ratio by approximately 2.2 points in the third quarter of 2005 and 0.5 points in the first nine months of 2005, compared with the same periods of 2004.

• Catastrophe losses: Pretax, after reinsurance catastrophe losses were $12.9 in the third quarter of 2005, compared with $8.2 in the third quarter of 2004. Pretax, after reinsurance catastrophe losses were $19.4 in the first nine months of 2005, compared with $17.7 in the first nine months of 2004. The increase in catastrophe losses increased our combined ratio by approximately 0.5 points in the third quarter of 2005 and had nominal impact on the combined ratio in the first nine months of 2005, compared with the same periods of 2004.

• Expenses: Lower bonus commission expenses, driven by a decrease in new business, decreased our combined ratio by approximately 1.2 points in the third quarter of 2005 and 1.0 point in the first nine months of 2005, compared with the same periods of 2004.

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WHERE WE’RE HEADED

In Auto, we are experiencing a more competitive marketplace as many insurers are achieving strong underwriting results. Competitors have increased marketing and advertising for new auto insurance customers. We have also seen modest and selective rate decreases by competitors in some states. We believe that the combination of our ongoing product development through underwriting segmentation, improvement in our ease of doing business through our Safeco Now platform and targeted expansion into eastern states will allow us to continue to build profitable growth in the face of increasing competition. We expect loss cost increases to be in the mid-single digits for 2005 and we expect to be at or below our long-term combined ratio target of 96% for the full year.

Last quarter we began to launch an updated underwriting and pricing model for our Auto product. This is now in place in 25 of the 44 states where we write business and, in many of these states, we are seeing an increase in new business in the months following the launch. The launch will continue in the fourth quarter as state insurance departments approve our program changes. This model will further increase the sophistication and accuracy in our underwriting and pricing, giving us even greater precision in matching rate for each risk. One of the primary changes is using our own vehicle groupings (known as rating symbols) based on our experience and data rather than using industry vehicle rating symbols. We have also enhanced the policy change capabilities of our Safeco Now platform, so that our agents can now efficiently handle most auto endorsements online.

Property

Our Property segment provides homeowners, earthquake, dwelling fire and inland marine coverage for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards. We also protect individuals from liability for accidents that occur on their property.

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	226.5		$	232.1		$	682.0		$	687.8
Underwriting Profit		17.2			14.2			145.7			154.9
Loss and LAE Ratio		63.9	%		67.5	%		50.8	%		50.4	%
Expense Ratio		28.5			26.4			27.8			27.1
Combined Ratio		92.4	%		93.9	%		78.6	%		77.5	%

NET EARNED PREMIUMS

Net earned premiums were relatively flat in the three and nine months ended September 30, 2005, compared with the same periods in 2004. This reflected:

• Decline in PIF: During 2004, we launched our homeowners and dwelling fire products on Safeco Now. This has contributed to an increase in new Property policies written of 36.4% in the third quarter of 2005 and 45.4% in the first nine months of 2005, compared with the same periods of 2004. We saw new business increases in 38 states in the third quarter, with a decline at the same time in new business in catastrophe-prone states. Our homeowners retention improved to 84.9% in the third quarter of 2005, compared with 82.9% in the same period of 2004. However, the number of policies that did not renew with us in 2004 exceeded the number of new policies sold during that period, and PIF declined throughout 2004 and into 2005, resulting in a decrease in PIF of 1.6% as of September 30, 2005, compared with a year ago. The reduction in PIF reduced net earned premiums by $10 in the third quarter of 2005 and $33 in the first nine months of 2005, compared with a year ago.

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• Changes in filed rates: We file rate changes on a state-by-state basis. Rate changes are reflected on existing policies at renewal and are earned in our revenues over the twelve-month policy term. Rate changes resulted in an increase to net earned premiums of $1 in the third quarter of 2005 and $17 in the first nine months of 2005, compared with the same periods of 2004. Overall we received approval for average rate increases in our homeowners business of 1.3% in 2004 and decreases of 1.1% in the first nine months of 2005.

• Premium trend: Net earned premiums are also impacted by automatic increases in the amount of insurance coverage to adjust for inflation in building costs, which we refer to as premium trend. They are also impacted by shifts in the mix of our Property business. Property premium trend increased net earned premiums by $6 in the third quarter of 2005 and $10 in the first nine months of 2005, compared with the same periods last year.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Property increased $3.0 and our combined ratio decreased 1.5 points in the three months ended September 30, 2005, compared with the same period in 2004. Our underwriting profit decreased $9.2 and our combined ratio increased 1.1 points in the nine months ended September 30, 2005, compared with the same period in 2004. Our underwriting results and combined ratio were primarily driven by:

• Rate increases: Our homeowners rate changes, combined with premium trend, improved our Property combined ratio by approximately 1.6 points in the third quarter of 2005 and 2.2 points in the first nine months of 2005, compared with the same periods of 2004.

• Loss costs: During the third quarter of 2005, our homeowners frequency increased in the low-single digits, following three years of double-digit frequency declines. This change in frequency increased our Property combined ratio, net of reinsurance, by approximately 4.2 points in the third quarter of 2005, and 1.5 points in the first nine months of 2005, compared with the same periods of 2004.

• Prior-year reserve development: Decreases in favorable prior-year reserve development increased our combined ratio by approximately 1.5 points in the third quarter of 2005 and 4.7 points in the first nine months of 2005, compared with the same periods of 2004. Our underwriting results in the first nine months of 2005 included unfavorable prior-year reserve development of $11.8 in our estimates of the 2004 hurricanes in Florida and surrounding states during the first quarter of 2005.

• Catastrophe losses: Our pretax, after reinsurance catastrophe losses were $61.3 in the third quarter of 2005, compared with $71.3 in the same period of 2004. Our pretax, after reinsurance catastrophe losses were $86.5 in the first nine months of 2005, including the increase in reserves for the 2004 hurricanes described above, compared with $94.2 in the same period of 2004. The lower catastrophe losses improved our combined ratio by approximately 5.9 points in the third quarter of 2005 and 3.6 points in the first nine months of 2005 (excluding the reserve increase for the 2004 hurricanes), compared with the same periods of 2004. Catastrophe losses in 2005 were primarily from Hurricanes Katrina and Rita in the Gulf States. Catastrophe losses in 2004 were primarily from the four hurricanes in Florida and surrounding states.

• Expenses: Higher bonus commission expenses, driven by increased dwelling fire new business, increased our combined ratio by approximately 1.5 points in the three months ended September 30, 2005 and 0.6 points in the nine months ended September 30, 2005, compared with the same periods in 2004.

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WHERE WE’RE HEADED

During the first quarter of 2005, we completed the launch of our new segmented dwelling fire product on our Safeco Now platform. Our dwelling fire product insures dwellings and personal property against covered losses such as fire, wind, explosion, smoke and vandalism.

In July 2005, we announced we would withdraw from personal property business in Florida. We will stop renewing policies of existing personal property policyholders beginning in early 2006 as policies come up for renewal. As of September 30, 2005, we had 28,929 in-force property policies in Florida.

Specialty

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	25.3		$	23.4		$	72.5		$	66.7
Underwriting Profit (Loss)		(8.1	)		(4.3	)		7.7			8.8
Loss and LAE Ratio		103.9	%		93.3	%		61.2	%		61.6	%
Expense Ratio		28.1			25.0			28.1			25.1
Combined Ratio		132.0	%		118.3	%		89.3	%		86.7	%

Our Specialty operation provides individuals with umbrella, recreational vehicle, motorcycle and boat owners insurance. These products serve to round out our personal lines insurance product offerings for our customers’ insurance needs.

NET EARNED PREMIUMS

Net earned premiums increased $1.9 or 8.1% in the three months ended September 30, 2005, and $5.8 or 8.7% in the nine months ended September 30, 2005, compared with the same periods in 2004, driven by an increase in PIF, primarily in our umbrella and boat owners lines.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting loss increased $3.8 and our combined ratio increased 13.7 points in the three months ended September 30, 2005, compared with the same period of 2004. Our underwriting profit decreased $1.1 and our combined ratio increased 2.6 points in the nine months ended September 30, 2005, compared with the same period of 2004. Our underwriting results and combined ratio were primarily driven by:

• Loss costs: In the third quarter and first nine months of 2005, we experienced increased losses in our umbrella business as a result of an increased number of claims reported. Higher umbrella losses increased our combined ratio by approximately 34.2 points in the third quarter of 2005 and 10.8 points in the first nine months of 2005, compared with the same periods of 2004. Umbrella loss costs can be volatile from quarter to quarter.

• Catastrophe losses: Pretax, after reinsurance catastrophe losses were $3.8 in the three months ended September 30, 2005, compared with $6.3 in the same period of 2004. The catastrophe losses were primarily due to hurricanes Katrina and Rita in the Gulf States in 2005 and four hurricanes in Florida and surrounding states in 2004. Pretax, after reinsurance catastrophe losses were $4.1 in the first nine months of 2005, compared with $6.3 in the same period of 2004. The decrease in catastrophe losses improved our combined ratio by approximately 12.4 points in the third quarter of 2005 and 4.2 points in the first nine months of 2005, compared with the same periods of 2004.

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SBI Regular

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	321.3		$	307.0		$	954.2		$	908.9
Underwriting Profit (Loss)		0.9			(59.7	)		91.0			(4.0	)
Loss and LAE Ratio		67.1	%		86.6	%		57.1	%		67.0	%
Expense Ratio		32.6			32.9			33.4			33.4
Combined Ratio		99.7	%		119.5	%		90.5	%		100.4	%

Our SBI Regular segment provides insurance for small-to-medium-sized businesses (customers who pay annual written premiums of $200,000 or less). This is our core commercial lines business. Our main products include:

• Business owner policies (BOP)

• Commercial auto

• Workers compensation

• Commercial multi-peril (CMP)

• General liability

• Commercial property

NET EARNED PREMIUMS

Net earned premiums increased $14.3 or 4.7% in the three months ended September 30, 2005 and $45.3 or 5.0% in the nine months ended September 30, 2005, compared with the same periods a year ago. The increase in net earned premiums was driven by:

• Price changes: We file rate changes on a state-by-state basis. Our average prices, which include filed rate changes and exposure growth, were down slightly in the third quarter of 2005, after increasing 3% in 2004. Price changes are reflected on existing policies at renewal and are earned in our revenues over the policy term. Premiums are also affected by growth in the exposures we cover due to factors such as changes in payroll, the number of employees, sales receipts and building values for the businesses we insure. Price changes had nominal impact on net earned premiums in the three months ended September 30, 2005 and increased net earned premiums by $11 in the nine months ended September 30, 2005, compared with the same periods of 2004, as we earned the rate increases filed in 2004.

• Mix of business: In addition to price changes, net earned premiums are impacted by changes in average policy size. This factor increased net earned premiums by $15 for the third quarter and $35 for the first nine months of 2005, compared with the same periods of 2004.

• Decline in PIF: PIF decreased slightly as of September 30, 2005, compared with a year ago. This reflected improving retention rates of policies (80.2% in 2005 and 79.8% in 2004) offset by decreases in new policies sold of 5.4% in the three months ended September 30, 2005 and 7.0% in the nine months ended September 30, 2005, compared with the same periods of 2004. However, as of September 30, 2005, PIF for our automated products available on our Safeco Now platform (BOP, commercial auto and workers compensation) was higher than a year ago by 4.7%, while PIF was down 4.8% for our non-automated products.

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UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in SBI Regular improved $60.6 and our combined ratio improved 19.8 points in the three months ended September 30, 2005, compared with the same period of 2004. Our underwriting profit improved $95.0 and our combined ratio improved 9.9 points in the nine months ended September 30, 2005, compared with the same period of 2004. The improvement in our results primarily reflected:

• Loss costs: Loss costs decreased slightly in the first nine months of 2005 reflecting increased claims severity in the mid-single digits due in part to higher labor and material costs, which was more than offset by decreased claims frequency. This improved our combined ratio by approximately 1.3 points in the three months ended September 30, 2005 and 0.6 points in the nine months ended September 30, 2005, compared with the same periods of 2004.

• Prior-year reserve development: Changes in prior-year reserve development improved our combined ratio by approximately 6.6 points in the three months ended September 30, 2005, and 4.3 points in the nine months ended September 30, 2005 over the same periods a year ago.

• Catastrophe losses: Our pretax, after reinsurance catastrophe losses were $56.2 in the three months ended September 30, 2005, compared with $79.9 in the same period of 2004. Our pretax, after reinsurance catastrophe losses were $58.6 in the nine months ended September 30, 2005, compared with $85.8 in the same period of 2004. The lower catastrophe losses improved our combined ratio by approximately 9.5 points in the third quarter of 2005 and 3.6 points in the first nine months of 2005, compared with the same periods of 2004.

WHERE WE’RE HEADED

During the first quarter of 2005, we began to further expand our BOP product by adding 62 additional classes of business, increasing eligibility limits and expanding coverages in additional states. The expanded product is currently available in 45 of the 48 states where we write business. We expect to complete this launch by year end. In July 2005, we expanded our commercial auto automated underwriting model on our Safeco Now platform to include up to 15 vehicles per policy. During the fourth quarter of 2005, we plan to enhance our CMP product by introducing it on Safeco Now for such policies up to $20,000 in premium. This allows agents to quote and sell policies faster, enabling us to streamline the sales process.

We are experiencing increased competition in our mid-market business (customers who pay annual written premiums from $25,000 to $200,000). Historically, this business is more price-competitive as industry profit margins expand, and this is occurring currently. We remain committed to disciplined pricing of our business based on loss cost trends and meeting our profit margin targets. Our current pricing anticipates annual loss cost increases in the mid-single digits.

SBI Special Accounts Facility

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	105.2		$	110.5		$	320.1		$	335.2
Underwriting Profit (Loss)		(20.4	)		(21.1	)		(3.4	)		14.9
Loss and LAE Ratio		84.0	%		80.1	%		64.4	%		58.1	%
Expense Ratio		35.4			39.0			36.7			37.4
Combined Ratio		119.4	%		119.1	%		101.1	%		95.5	%

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Our SBI Special Accounts Facility (SAF) segment includes insurance for large commercial accounts (customers who pay annual written premiums of more than $200,000) and four commercial programs.

While our main focus is the small- to medium-sized market, we continue to serve some large commercial accounts on behalf of key agents and brokers who sell our core P&C products. Agents who have placed large commercial accounts with us also produce 55% of our new business in SBI Regular.

SAF also provides insurance for the following commercial programs:

• Lender-placed property

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

• Property and liability insurance for mini-storage and warehouse properties

• Professional and general liability insurance for non-profit social service organizations

NET EARNED PREMIUMS

Net earned premiums decreased $5.3 or 4.8% in the three months ended September 30, 2005 and decreased $15.1 or 4.5% in the nine months ended September 30, 2005, compared with the same periods of 2004. The decrease in the third quarter of 2005 compared with the same period a year ago was due to a reduction in earned premiums in our non-profit social services program due to an increasingly competitive market. The decrease in the first nine months of 2005 compared with the same period a year ago was due to the non-renewal of a large account in our lender-placed property program and the reduction in earned premiums in our non-profit social services program.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting loss decreased $0.7 and our combined ratio increased 0.3 points in the three months ended September 30, 2005, compared with the same period of 2004. Our underwriting loss increased $18.3 and our combined ratio increased 5.6 points in the nine months ended September 30, 2005, compared with the same period of 2004.

Our underwriting results and combined ratio were affected by higher loss experience in 2005 in our lender-placed property insurance program and our mini-storage and warehouse properties program primarily due to hurricanes Katrina and Rita. Our pretax, after reinsurance, catastrophe losses were $43.9 in the three months ended September 30, 2005, compared with $29.1 in the same period of 2004. Our pretax, after reinsurance, catastrophe losses were $47.5 in the nine months ended September 30, 2005, compared with $31.4 in the same period of 2004. The higher catastrophe losses increased our combined ratio by approximately 11.5 points in the third quarter of 2005 and 4.0 points in the first nine months of 2005, compared with the same periods of 2004.

Surety

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	67.0		$	53.7		$	189.8		$	146.7
Underwriting Profit		13.7			10.0			36.4			30.8
Loss and LAE Ratio		35.7	%		32.1	%		35.0	%		27.5	%
Expense Ratio		43.8			49.2			45.8			51.5
Combined Ratio		79.5	%		81.3	%		80.8	%		79.0	%

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

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NET EARNED PREMIUMS

Net earned premiums increased $13.3 or 24.8% in the three months ended September 30, 2005 and $43.1 or 29.4% for the nine months ended September 30, 2005, compared with the same periods in 2004 due to large contract new business. The favorable market conditions for construction and economic expansion have fueled the growth in large contract business. New business increased net earned premiums by $10 in the third quarter of 2005 and $34 in the first nine months of 2005, compared with the same periods of 2004.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit increased $3.7 and our combined ratio decreased 1.8 points in the three months ended September 30, 2005, compared with the same period in 2004. Our underwriting profit increased $5.6 and our combined ratio increased 1.8 points in the nine months ended September 30, 2005, compared with the same period in 2004.

P&C Other

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Earned Premiums	$	(0.1	)	$	3.6		$	7.8		$	13.3
Underwriting Loss	$	(18.6	)	$	(12.6	)	$	(38.7	)	$	(29.9	)

Our P&C Other segment includes our:

• Runoff of assumed reinsurance business

• Runoff London operations, which we sold in the third quarter of 2005

• Large commercial business accounts in runoff and specialty programs that we exited

The underwriting losses in both years reflect unfavorable prior-year reserve development, the results of our London operations and the costs of administering this runoff business. The sale of our London operations eliminated any further liabilities associated with this business.

Our Corporate Results

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Corporate Segment Results	$	(13.6	)	$	(22.6	)	$	(37.6	)	$	(83.4	)
Loss on Debt Repurchases		(4.0	)		(121.0	)		(4.0	)		(121.0	)
Net Realized Investment Gains (Losses) before Income Taxes		(2.7	)		8.7			(2.1	)		15.8
Corporate Loss from Continuing Operations before Income Taxes	$	(20.3	)	$	(134.9	)	$	(43.7	)	$	(188.6	)

In our Corporate segment, we include:

• Interest expense we pay on our debt

• Our intercompany eliminations

• Miscellaneous corporate, investment and other activities

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In the third quarter of 2005, we repurchased $25.9 in principal amount of 7.25% senior notes for $29.8. Including transaction costs, we reported a pretax loss on debt repurchase of $4.0 ($2.6 after tax) in the Consolidated Statements of Income (Loss). In the third quarter of 2004, we repurchased $473.4 in principal amount of 8.072% debentures for $562.7, and we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 ($78.7 after tax) in the Consolidated Statements of Income (Loss). The lower loss in our Corporate segment results for the three and nine months ended September 30, 2005, compared with the same periods in 2004 principally reflected lower interest expense as a result of these debt repurchases.

Our interest expense was:

• $22.7 in the three months ended September 30, 2005

• $66.1 in the nine months ended September 30, 2005

• $25.3 in the three months ended September 30, 2004

• $87.3 in the nine months ended September 30, 2004

Capital Resources and Liquidity

OUR LIQUIDITY NEEDS

Liquidity is a measure of our ability to generate sufficient cash flows to meet the short- and long-term cash requirements of our insurance operations.

P&C insurance liabilities are somewhat unpredictable and largely short in duration. The payments we make to policyholders depend upon losses they suffer from accidents or other unpredictable events that are covered by insurance. While we estimate how much cash we’ll need and when we’ll need it based on prior experience and the mix of business we write, we cannot predict all future events, particularly catastrophes. So we invest a substantial portion of our funds in high-quality liquid securities – investments that can quickly be turned into cash – to support our projected or potential need for funds.

SOURCES OF OUR FUNDS

We get cash primarily from insurance premiums, dividends, interest, sales or maturity of investments and debt and equity offerings.

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

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

The cash flows from our operating activities were:

• $740.5 of cash flow generated in the first nine months of 2005

• $733.3 of cash flow generated in the first nine months of 2004

The increase for the first nine months of 2005 was due to higher cash received from premium growth of $219.0 over a year ago, offset by higher insurance claims paid of $181.5 and income taxes paid that were higher by $87.8 in 2005.

Net cash flows from our investing activities were:

• $329.9 of cash flow used in the first nine months of 2005

• $672.7 of cash flow generated in the first nine months of 2004

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Our funds are predominantly invested in fixed maturities.

In 2004, we received $1,510.0 of proceeds from the sale of L&I.

HOW WE USE OUR FUNDS

We use funds to support our 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, underwriting expenses 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.

During the third quarter of 2005, we repurchased 3,959,978 shares, or 3.1%, of our outstanding common stock at a total cost of $214.4 under stock buyback programs as described below.

On July 25, 2005, we repurchased 2,752,300 shares, or 2.2%, of our outstanding common stock, through an accelerated share repurchase program. We purchased the shares from a dealer at a price of $54.50 per share, for a total cost of $150.3, including transaction costs. Through the repurchase program we returned excess capital to shareholders and immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and then purchased shares in the market over time to repay the borrowed shares. We completed the repurchase program in November 2005, receiving a price adjustment of $4.4 based on the average price of shares purchased. The price adjustment will be reported as an increase to Shareholders’ Equity on our Consolidated Balance Sheet as of December 31, 2005.

During the third quarter of 2005, we also executed a Rule 10b5-1 trading plan to purchase up to an additional $100.0 of our outstanding common stock. This plan allows us to repurchase our shares during periods when we would normally not be active in the market because of our own internal trading windows. Under this program, during the third quarter of 2005, we repurchased 1,207,678 shares at an average price of $53.06 per share for a total cost of $64.1. During the fourth quarter of 2005, we repurchased an additional 548,600 shares at an average price of $53.28 per share for a total cost of $29.2. This completed our Rule 10b5-1 trading plan on November 1, 2005, under which we repurchased a total of 1,756,278 shares at an average price of $53.13 for a total cost of $93.3.

In the third quarter of 2005, we repurchased $25.9 in principal amount of 7.25% senior notes for $29.8. Including transaction costs, we reported a pretax loss on debt repurchase of $4.0 ($2.6 after tax) in the Consolidated Statements of Income (Loss).

In the third quarter of 2004, we repurchased $473.4 in principal amount of 8.072% debentures for $562.7, and we repurchased $145.0 in principal amount of 7.25% senior notes for $170.9. Including transaction costs, we reported a pretax loss on debt repurchases of $121.0 ($78.7 after tax) in the Consolidated Statements of Income (Loss).

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On August 2, 2004, using our proceeds from the sale of L&I, we repurchased 13,247,863 shares, or 9.5% of our then outstanding common stock, under an accelerated stock buyback program. We purchased the shares from a dealer at a price of $46.80 per share, for a total cost of $625.0, including transaction costs. The effect of the repurchase program was to return excess capital resulting from the L&I sale to our shareholders, and it immediately reduced the number of our common shares outstanding. The dealer obtained the shares that we repurchased by borrowing them in the open market, and the dealer purchased shares in the market over a nine month period, to repay the borrowed shares. The program included $200.0 that was subject to a collar, a contract that set a minimum and maximum price for us for the shares repurchased under the collar. We completed the program in April 2005, paying a price adjustment of $16.1 to the dealer, based on the volume weighted average price of our common stock during the period of the repurchases. We reported the price adjustment as a reduction to Shareholders’ Equity on our Consolidated Balance Sheet as of June 30, 2005.

On July 25, 2005, we paid a quarterly dividend of $0.25 per share. This was a 13.6% increase per share over the previous quarterly dividend of $0.22 per share.

Our Bank Credit Facility — On March 31, 2005, we executed a $300.0 five-year revolving credit facility, which may be used for working capital and general corporate purposes. This facility replaced our $300.0 three-year facility, which expired in September 2005. The terms of the bank credit facility – which runs through March 2010 – require us to, among other covenants:

• Pay an annual fee to have these funds available

• 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 September 30, 2005 and December 31, 2004 we had no borrowings under the bank credit facility. In addition, we were in compliance with all the terms of this credit facility.

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.

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 Insurance Subsidiaries	A	AA-	A1	A+

On May 3, 2005, A.M. Best affirmed our debt ratings and the financial strength ratings of our insurance subsidiaries and revised the outlook to positive from stable. On May 26, 2005, Standard & Poor’s also affirmed our financial strength ratings and revised its outlook to positive from stable. On July 21, 2005, Moody’s revised the outlook of our debt and financial strength ratings to positive from stable. Fitch rating agency has a stable outlook on ratings for Safeco. 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 at our current level.

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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

• Decrease new sales

• Increase our borrowing costs

• Limit our access to capital

• Restrict our ability to compete

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 net investment income or result in net realized investment losses.

NET INVESTMENT INCOME

This table summarizes our pretax net investment income by portfolio:

	THREE MONTHS ENDED SEPTEMBER 30				NINE MONTHS ENDED SEPTEMBER 30
	2005		2004		2005		2004
P&C	$	115.3	$	111.0	$	341.6	$	338.5
Corporate		6.1		4.5		18.3		11.1
Total Net Investment Income	$	121.4	$	115.5	$	359.9	$	349.6

The increase in net investment income was due to a slight increase in average invested assets, reflecting positive operating cash flows. Investment income from the increase in average invested assets was partially offset by lower yields due to lower interest rates on new investments, compared with yields on maturing, called or prepaid investments.

Our investment income yields were:

	THREE MONTHS ENDED SEPTEMBER 30				NINE MONTHS ENDED SEPTEMBER 30
	2005		2004		2005		2004
Pretax	4.8	%	5.0	%	4.9	%	5.2	%
After-tax	3.5	%	3.6	%	3.6	%	3.8	%

NET REALIZED INVESTMENT GAINS AND LOSSES

Pretax net realized investment gains and losses for the three and nine months ended September 30, 2005 and 2004 by portfolio were:

	THREE MONTHS ENDED SEPTEMBER 30					NINE MONTHS ENDED SEPTEMBER 30
	2005			2004		2005			2004
P&C	$	6.6		$	41.8	$	53.3		$	162.4
Corporate		(2.7	)		8.7		(2.1	)		15.8
Total Pretax Net Realized Investment Gains	$	3.9		$	50.5	$	51.2		$	178.2

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Pretax net realized investment gains and losses for the three and nine months ended September 30, 2005 and 2004 by component were:

	THREE MONTHS ENDED SEPTEMBER 30						NINE MONTHS ENDED SEPTEMBER 30
	2005			2004			2005			2004
Net Gains on Securities Transactions	$	11.6		$	53.8		$	61.1		$	187.3
Impairments on Fixed Maturities		(3.6	)		(3.3	)		(5.1	)		(8.8	)
Impairments on Marketable Equity Securities		(1.9	)		(0.2	)		(2.8	)		(0.3	)
Other, Net		(2.2	)		0.2			(2.0	)		—
Total Pretax Net Realized Investment Gains	$	3.9		$	50.5		$	51.2		$	178.2

Net Gains on Securities Transactions – The decrease in net gains on securities transactions in the third quarter and first nine months of 2005, compared with the same period of 2004 was due to sales of marketable equity securities in 2004. Significant appreciation in our equity holdings increased the weight of the marketable equity securities within our portfolio and we sold marketable equity securities during 2004 to reduce our holdings to our target of 10% of the total investment portfolio. The sale of marketable equity securities resulted in net realized investment gains of $14.7 in the third quarter of 2004 and $91.0 in the first nine months of 2004.

Impairments – We closely monitor every investment that has declined in fair value to below our amortized 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 loss in Net Realized Investment Gains in the Consolidated Statements of Income (Loss) in the period that we make that determination.

In our impairment determination process, we consider the financial condition and future prospects of the issuer as well as our intent and ability to hold investments with declines in value long enough for them to recover in value. However, our intent to hold the investment could change if we observe further credit deterioration in the issuer.

Pretax investment impairments for the three and nine months ended September 30, 2005 and 2004 by portfolio were:

	THREE MONTHS ENDED SEPTEMBER 30				NINE MONTHS ENDED SEPTEMBER 30
	2005		2004		2005		2004
P&C	$	5.5	$	3.5	$	7.4	$	9.1
Corporate		—		—		0.5		—
Total Pretax Investment Impairments	$	5.5	$	3.5	$	7.9	$	9.1

For the three months ended September 30, 2005, the fair value of fixed maturities and marketable equity securities that we sold at a loss was $504.3, compared with $48.5 in the same period last year. For the nine months ended September 30, 2005, the fair value of fixed maturities and marketable equity securities that we sold at a loss was $594.6, compared with $221.2 in the same period last year. Our total net realized investment loss on these sales for the three months ended September 30, 2005 was $9.9, compared with $2.3 in the same period last year. Our total net realized investment loss on these sales for the nine months ended September 30, 2005 was $14.3, compared with $16.7 for the same period in 2004. The increase in securities sold at a loss during 2005 was due to sales of fixed maturities to fund our accelerated share repurchase program and the sale of lower-yielding taxable bonds to purchase tax-exempt securities as we grow our municipal portfolio.

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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

Investment Portfolio

This table summarizes our investment portfolio at September 30, 2005 and December 31, 2004:

SEPTEMBER 30, 2005	COST OR AMORTIZED COST		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	6,287.1	$	6,344.2
Fixed Maturities – Non-taxable		2,509.2		2,647.9
CORPORATE
Fixed Maturities – Taxable		391.7		385.4
Total Fixed Maturities		9,188.0		9,377.5
Marketable Equity Securities		731.5		1,126.7
Other Invested Assets		9.6		9.6
Total Investment Portfolio	$	9,929.1	$	10,513.8

DECEMBER 31, 2004	COST OR AMORTIZED COST		CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	6,488.5	$	6,674.4
Fixed Maturities – Non-taxable		2,058.4		2,209.5
CORPORATE
Fixed Maturities – Taxable		411.1		410.4
Total Fixed Maturities		8,958.0		9,294.3
Marketable Equity Securities		640.3		1,101.4
Other Invested Assets		8.5		8.5
Total Investment Portfolio	$	9,606.8	$	10,404.2

As of September 30, 2005, our fixed maturities, carried at $9,377.5 included:

• Gross unrealized gains of $270.5

• Gross unrealized losses of $81.0

As of September 30, 2005, our marketable equity securities, carried at $1,126.7 included:

• Gross unrealized gains of $405.2

• Gross unrealized losses of $10.0

As of December 31, 2004, our fixed maturities, carried at $9,294.3 included:

• Gross unrealized gains of $358.1

• Gross unrealized losses of $21.8

As of December 31, 2004, our marketable equity securities, carried at $1,101.4 included:

• Gross unrealized gains of $463.3

• Gross unrealized losses of $2.2

Investments in the banking industry accounted for 14.5% of the total gross unrealized losses at September 30, 2005 and 14.7% of the total gross unrealized losses at December 31, 2004.

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We reviewed all our investments with unrealized losses as of September 30, 2005. Our evaluation determined that for all investments, other than those for which we recognized an impairment charge, their declines in fair value were temporary.

This table shows by maturity the total amount of gross unrealized losses on fixed maturities and marketable equity securities at September 30, 2005:

SEPTEMBER 30, 2005	COST OR AMORTIZED COST		FAIR VALUE		COST OR AMORTIZED COST IN EXCESS OF FAIR VALUE
Fixed Maturities:
One Year or Less	$	128.1	$	127.2	$	(0.9	)
Over One Year through Five Years		2,553.0		2,507.3		(45.7	)
Over Five Years through Ten Years		634.4		622.5		(11.9	)
Over Ten Years		506.2		498.9		(7.3	)
Mortgage-Backed Securities		962.0		946.8		(15.2	)
Total Fixed Maturities		4,783.7		4,702.7		(81.0	)
Total Marketable Equity Securities		225.9		215.9		(10.0	)
Total	$	5,009.6	$	4,918.6	$	(91.0	)

Unrealized losses on our fixed maturities that have been in a loss position for more than a year at September 30, 2005 were $17.3, compared with $2.6 at December 31, 2004, reflecting changes in interest rates. Unrealized losses on our marketable equity securities that have been in a loss position for more than a year at September 30, 2005 were $1.4. There were no unrealized losses on our marketable equity securities that had been in a loss position for more than a year at December 31, 2004.

These unrealized losses were less than 1% of our total portfolio at September 30, 2005 and December 31, 2004.

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 report an impairment loss. We report 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, except U.S. government fixed maturities, exceeding 1% of our consolidated investment portfolio.

These tables show our investment types and industries of our fixed maturities and marketable equity securities that exceed 3% of our portfolio at September 30, 2005 and December 31, 2004:

SEPTEMBER 30, 2005	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	3,020.7	28.7	%
Banks		1,134.9	10.8
U.S. Government and Agencies		1,039.8	9.9
Diversified Financial Services		437.1	4.2
Electric Utilities		434.6	4.1
Mortgage-Backed Securities		1,289.8	12.3
Other		3,147.3	29.9
Total Fixed Maturities and Marketable Equity Securities		10,504.2	99.9
Other Invested Assets		9.6	0.1
Total Investment Portfolio	$	10,513.8	100.0	%

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DECEMBER 31, 2004	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	2,547.7	24.5	%
U.S. Government and Agencies		1,160.3	11.2
Banks		1,053.1	10.1
Diversified Financial Services		483.3	4.6
Electric Utilities		451.7	4.3
Mortgage-Backed Securities		1,283.1	12.3
Other		3,416.5	32.9
Total Fixed Maturities and Marketable Equity Securities		10,395.7	99.9
Other Invested Assets		8.5	0.1
Total Investment Portfolio	$	10,404.2	100.0	%

The quality ratings of our fixed maturities portfolio were:

RATING	PERCENT AT SEPTEMBER 30 2005		PERCENT AT DECEMBER 31 2004
AAA	44.9	%	43.0	%
AA	12.1		11.0
A	27.6		29.4
BBB	13.2		13.8
BB and lower	1.3		1.8
Not Rated	0.9		1.0
Total	100.0	%	100.0	%

BELOW INVESTMENT GRADE AND OTHER SECURITIES

A security is considered below investment grade if it has a rating below BBB. Our consolidated investment portfolio included below investment grade fixed maturities with a fair value of:

• $125.8 at September 30, 2005

• $166.2 at December 31, 2004

At September 30, 2005, these securities represented 1.3% of our total fixed maturities at fair value. At December 31, 2004, these securities represented 1.8% of our total fixed maturities at fair value. The related amortized cost of the below investment grade fixed maturities at September 30, 2005 was $120.8, compared with $155.4 at December 31, 2004.

As of September 30, 2005, our below investment grade securities included:

• Gross unrealized gains of $5.6

• Gross unrealized losses of $0.6

As of December 31, 2004, our below investment grade securities had gross unrealized gains of $10.8 and no gross unrealized losses.

At September 30, 2005, our investment portfolio also included:

• $128.1 of non-publicly traded fixed maturities and marketable equity securities – representing 1.2% of our total portfolio

• $85.5 of not-rated fixed maturities – securities not rated by a national rating service – representing 0.8% of our total portfolio

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At December 31, 2004, our investment portfolio included:

• $122.8 of non-publicly traded fixed maturities and marketable equity securities – representing 1.2% of our total portfolio

• $89.1 of not-rated fixed maturities – representing 0.9% of our total portfolio

MORTGAGE-BACKED SECURITIES

This table summarizes our holdings of mortgage-backed securities at September 30, 2005.

SEPTEMBER 30, 2005	COST OR AMORTIZED COST		CARRYING VALUE
			AMOUNT		PERCENT
RESIDENTIAL
Planned and Targeted Amortization Class and Sequential Pay CMOs	$	649.3	$	640.8	49.7	%
Subordinates		57.5		57.8	4.5
Accrual Coupon (Z-Tranche) CMOs		9.6		10.1	0.8
Residential Mortgage-Backed Pass-Throughs (Non-CMOs)		6.6		6.6	0.5
Total Residential		723.0		715.3	55.5
SECURITIZED COMMERCIAL REAL ESTATE
CMBS Seniors		346.9		349.0	27.0
CMBS Subordinates		94.3		98.1	7.6
Government/Agency-Backed		63.0		64.3	5.0
Total Securitized Commercial Real Estate		504.2		511.4	39.6
Asset-Backed Seniors and Subordinates		63.5		63.1	4.9
Total	$	1,290.7	$	1,289.8	100.0	%

Here are the quality ratings of our mortgage-backed securities portfolio.

RATING	PERCENT AT SEPTEMBER 30, 2005
Government/Agency-Backed	35.9	%
AAA	51.4
AA	5.1
A	3.0
BBB	4.5
BB or lower	0.1
Total	100.0	%

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risk arising from changes in interest rates and the market values of our investments. Our exposure to these market risks relates primarily to our investment portfolio and our long-term debt. In addition to market risk, we are exposed to other risks, including credit risk related to our investments and underlying insurance risk related to our core businesses.

Additional information relating to quantitative and qualitative market risks is set forth in Item 2 of Part I, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Our Investment Results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Investment Portfolio.”

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ITEM 4 – CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, management has determined that there has been no such change during the third quarter.

44

Safeco Corporation and Subsidiaries

PART II – OTHER INFORMATION

ITEM 1 – 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) or principals of surety bonds and defending policy coverage claims brought against us.

In July 2004, the Roman Catholic Archdiocese of Portland filed for bankruptcy protection in the U.S. Bankruptcy Court for the District of Portland. In connection with this bankruptcy, the Archdiocese has listed insurance policies allegedly issued by Safeco Insurance entities as assets in such bankruptcy, and has filed a lawsuit alleging that Safeco entities wrongfully denied coverage for claims alleging sexual misconduct by clergy and misconduct by the Archdiocese. Safeco denies that any insurance coverage is owed the Portland Archdiocese and will vigorously defend itself in the lawsuit against it.

On July 19, 2005, Safeco received a letter from counsel to one of our shareholders asserting that Safeco’s directors and certain former officers breached their duty of care and loyalty in approving an agreement for the sale of Talbot Financial Corporation in July 2004. The asserted breach relates to certain contingent payments to three former officers of Talbot Financial Corporation to be paid by the purchaser. The letter: (a) demands that Safeco commence an action against the directors who approved the transaction and against the former officers to recover the amount of the contingent payments, alleged to be between $44.4-$49.4, and (b) threatens to pursue a derivative action in the name of Safeco if we fail to remedy the damages alleged by the shareholder. Safeco’s board of directors has formed a special committee of directors who were not involved in approving the sale of Talbot Financial Corporation to review this matter and that review is underway.

We do not believe that any such litigation will materially and adversely affect our financial condition, 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.

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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchase of Equity Securities

			Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
Period	Total Number of Shares Purchased	Average Price Paid Per Share
July 1-31	2,882,962	54.53	2,872,300	5,366,925
August 1-31	558,000	53.23	558,000	4,808,925
September 1-30	529,678	52.41	529,678	4,279,247
Total	3,970,640	54.06	3,959,978

(1) We announced in July 2005 that we intended to repurchase $150.0 to $250.0 of our common stock before the end of the year. In this regard, we repurchased 1,207,678 shares of our common stock at a price of $53.06 per share under a Rule 10b5-1 trading program in the third quarter. In addition, on July 25, 2005, we announced the repurchase of 2,752,300 shares, or 2.2%, of our outstanding common stock through an accelerated share repurchase program. We purchased the shares from a dealer at a price of $54.50 per share for a total of $150.3, including transaction costs.

On June 16, 2005, we entered into a share repurchase agreement with James W. Ruddy, who retired on that date after thirty years of service, having served as our general counsel since 1989. On July 28, 2005, we repurchased 10,662 shares from Mr. Ruddy pursuant to this agreement.

ITEM 6 – EXHIBITS

10.1	Executive Transition Services Agreement between Safeco Corporation and Christine B. Mead, dated August 11, 2005.
10.2	Employment Agreement between Safeco Corporation and Arthur Chong dated October 14, 2005.
31.1	Certification of Chief Executive Officer of Safeco Corporation, dated November 4, 2005, in accordance with Securities Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of Safeco Corporation, dated November 4, 2005, in accordance with Securities Exchange Act Rule 13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer of Safeco Corporation, dated November 4, 2005, 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 November 4, 2005, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

46

Safeco Corporation and Subsidiaries

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on November 4, 2005.

Safeco Corporation

Registrant

/s/ Charles F. Horne, Jr.

Charles F. Horne, Jr.

Sr. Vice President and Controller

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EX-10.1

Exhibit 10.1

EXECUTIVE TRANSITION SERVICES AGREEMENT

SAFECO CORPORATION

and

CHRISTINE B. MEAD

Dated as of August 11, 2005

EXECUTIVE TRANSITION SERVICES AGREEMENT

This Executive Transition Services Agreement (this “Agreement”), dated as of August 11, 2005 (“Effective Date”), is made between Safeco Corporation, a Washington corporation (“Safeco”), and Christine B. Mead (“Executive”).

Recitals

A. Executive has been and is currently employed as Safeco’s Executive Vice President and Chief Financial Officer and is Co-President of the Safeco insurance companies. Executive has notified Safeco of her desire to voluntarily resign from her positions effective December 31, 2005.

B. Executive and Safeco have voluntarily agreed to enter into this Agreement, which sets forth the complete understanding between Executive and Safeco regarding Executive’s voluntary resignation effective December 31, 2005 and the commitments and obligations arising out of the termination of the employment relationship between Executive and Safeco.

Agreement

In consideration of the foregoing premises and for other good and valuable consideration, the sufficiency and receipt of which are acknowledged, Safeco and Executive agree as follows:

1. EMPLOYMENT TRANSITION

Executive and Safeco agree that Executive shall serve in her existing role as Chief Financial Officer until the earlier of December 31, 2005 or a replacement is named and shall serve in her position as Co-President of the Safeco insurance subsidiaries until December 31, 2005.

2. SERVICES

Until the earlier of December 31, 2005 or a successor is appointed, Executive will serve as the Chief Financial Officer of Safeco and will perform the duties and have the responsibilities customarily performed by the Chief Financial Officer of a corporation that is, in all respects, similar to Safeco. Furthermore, until December 31, 2005, Executive will perform the duties and have the responsibilities customarily performed by a president of a corporation that is, in all respects, similar to Safeco and such other duties as may be assigned from time to time by the Board of Directors of Safeco, which relate to the business of Safeco, its subsidiaries, or any business ventures in which Safeco or its subsidiaries may participate.

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3. COMPENSATION

Until December 31, 2005, Safeco agrees to pay or cause to be paid to Executive, and Executive agrees to accept in exchange for the services rendered by her, the following compensation:

3.1 Base Salary

Executive’s annual base salary will remain unchanged at the current rate of $600,000 before all customary payroll deductions. Such annual base salary will be paid in substantially equal installments and at the same intervals as other officers of Safeco are paid.

3.2 Bonus

Executive will also be eligible to receive, in addition to the base salary described above, an annual bonus in an amount to be determined by the Board of Directors of Safeco or under the Board’s delegated authority by the Compensation Committee of the Board (the “Committee”), in its or their sole discretion. Executive’s bonus will be based on (i) a smooth and orderly transition of the responsibilities of the Chief Financial Officer, (ii) the Executive’s commitment to remain employed with Safeco until December 31, 2005, (iii) the performance of Executive’s duties as described in Section 2 above, and (iv) Safeco’s financial and operating performance for fiscal year 2005.

3.3 Equity Grants

(a) Vested Options. Executive shall be considered an “employee” of Safeco through December 31, 2005 for compensation purposes and under all employee benefit plans, programs, and arrangements, including without limitation the Safeco Long-Term Incentive Plan of 1997, as amended (the “LTIP”). All stock options granted to Executive under the LTIP, which are fully vested and non-forfeitable as of December 31, 2005, will be exercisable for three (3) months from December 31, 2005.

(b) Unvested Equity Awards. To the extent Executive remains employed by Safeco and performs the duties described in Section 2 above, Safeco shall accelerate and fully vest, on December 31, 2005, the following equity awards (the “Awards”):

Type	No. of Shares	Grant Date
ISO	2,743	1/24/02
NQ	8,397	1/24/02
NQ	22,000	5/1/02
ISO	2,094	5/7/03
NQ	38,906	5/7/03
RSR	1,116	1/24/02
RSR	1,022	2/6/02
RSR	1,630	5/7/03
RSR	19,294	5/5/04
RSR	19,571	3/11/05

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The terms and conditions of the LTIP and Executive’s award agreements, pursuant to which the Awards were granted, will continue to govern such Awards. Except for the Awards, all equity awards that are granted to Executive that are not fully vested on December 31, 2005 shall be deemed to have expired without vesting.

Executive acknowledges that accelerated stock options may not qualify for preferential income tax treatment as an incentive stock option under the Internal Revenue Code.

4. BENEFITS

4.1 Retirement and Savings Plans

Until December 31, 2005, Executive shall be entitled to continue to participate in all defined contribution plans and defined benefit plans, including excess benefit or supplemental retirement plans or agreements, maintained by Safeco, as now or hereinafter in effect, that are applicable to Safeco’s employees generally or to its executive officers, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements. Benefits payable under such plans shall commence pursuant to the terms of such plans.

4.2 Other Benefit Programs

Until December 31, 2005, Executive will be entitled to continue to participate, subject to and in accordance with applicable eligibility requirements, in all other employee benefit plans, programs and arrangements of Safeco, as now or hereinafter in effect, that are applicable to Safeco’s employees generally or to its executive officers, as the case may be, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements, and subject to Section 4.1.

4.3 Housing Loan

In connection with Executive’s relocation to Seattle in 2002 Safeco provided Executive with a home purchase loan in an amount of $900,000. The principal amount will be due one (1) year after December 31, 2005. This is consistent with the original loan terms and nothing contained in this Agreement or otherwise amends this loan in any manner.

4.4 Vacation and Other Leaves

Executive shall be entitled to use any accrued but unused vacation and other paid absences during this calendar year and for unused vacation carried over from the previous calendar year, whether for holidays, illness, or any similar purposes, in accordance with policies applicable generally to executive officers of Safeco. Earned but unused vacation will be paid upon termination of Executive’s employment. After December 31, 2005, no vacation or other paid absences shall accrue.

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4.5 Expenses

Executive shall be entitled to receive reimbursement for all reasonable and customary expenses incurred by her in performing services under this Agreement, including all expenses of travel and accommodations while away from her residence on business or at the request of and in the service of Safeco; provided, however, that such expenses are incurred, accounted for and approved in accordance with the policies and procedures established from time-to-time by Safeco.

5. TERMINATION UPON DEATH OR DISABILITY

This Agreement and Executive’s employment hereunder shall terminate automatically upon the death or total disability of Executive. The term “total disability” as used herein shall mean Executive’s inability to perform the duties set forth in Section 2 hereof for a period of sixty (60) consecutive days as a result of physical or mental illness, loss of legal capacity or any other cause beyond Executive’s control. Executive and Safeco acknowledge that Executive’s ability to perform the duties specified in Section 2 is of the essence of this Agreement. Termination hereunder shall be deemed to be effective (a) on the day Executive’s death occurs or (b) immediately upon a determination by the Board of Directors of Safeco of Executive’s total disability, as defined herein. At December 31, 2005, all compensation and benefits set forth in this Agreement shall cease.

6. RELEASE

In consideration of the acceleration of the Awards pursuant to Section 3.3(b) and other consideration and benefits provided to Executive under this Agreement, Executive agrees to sign a general release and settlement agreement on December 31, 2005 in a form that is satisfactory to Safeco.

7. NONCOMPETITION AND NONSOLICITATION

7.1 Applicability

This Section 7 shall survive the termination of Executive’s employment with Safeco.

7.2 Scope of Competition

Executive agrees that she will not, directly or indirectly, during her employment and for a period of two (2) years from December 31, 2005, be employed by, consult with or otherwise perform services for, own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected with, in any manner, any Competitor. A “Competitor” shall include any entity which, directly or indirectly, competes with Safeco or produces, markets, distributes or otherwise derives benefit from the production, marketing or distribution of products or services which compete with products then produced or services then being provided or marketed, by Safeco or the feasibility for production of which Safeco is then actually studying, or which is preparing to market or is developing products or services that will be in competition with the products or services then produced or being studied or developed by

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Safeco, in each case within the geographical area of the United States, unless released from such obligation in writing by Safeco’s Board of Directors. Executive shall be deemed to be related to or connected with a Competitor if such Competitor is (a) a partnership in which she is a general or limited partner or employee, (b) a corporation or association of which she is a shareholder, officer, employee, or (c) a partnership, corporation or association of which she is a member, consultant or agent; provided, however, that nothing in this Agreement shall prevent the purchase or ownership by Executive of shares that constitute less than one percent of the outstanding equity securities of a publicly or privately held corporation, if Executive had no other relationship with such corporation.

7.3 Scope of Nonsolicitation

Executive shall not directly or indirectly solicit, influence or entice, or attempt to solicit, influence or entice, any employee or consultant of Safeco to cease his or her relationship with Safeco or solicit, influence, entice or in any way divert any customer, distributor, partner, joint venturer or supplier of Safeco to do business or in any way become associated with any Competitor. This Section 7.3 shall apply during the time period and geographical area described in Section 7.2.

7.4 Assignment of Intellectual Property

All concepts, designs, machines, devices, uses, processes, technology, trade secrets, works of authorship, customer lists, plans, embodiments, inventions, improvements or related work product (collectively “Intellectual Property”) that Executive has developed or develops, has conceived or conceives or first reduces to practice during the term of her employment with Safeco or within one year after the termination of her employment with Safeco or the expiration of this Agreement, whether working alone or with others, shall be the sole and exclusive property of Safeco (and to the fullest extent permitted by law shall be deemed “works made for hire” under federal copyright law), together with any and all Intellectual Property rights, including, without limitation, patent or copyright rights, related thereto, and Executive hereby assigns to Safeco all of such Intellectual Property. “Intellectual Property” shall include only such concepts, designs, machines, devices, uses, processes, technology, trade secrets, customer lists, plans, embodiments, inventions, improvements and work product which (a) relate to Executive’s performance of services under this Agreement, to Safeco’s field of business or to Safeco’s actual or demonstrably anticipated research or development, whether or not developed, conceived or first reduced to practice during normal business hours or with the use of any equipment, supplies, facilities or trade secret information or other resource of Safeco or (b) are developed in whole or in part on Safeco’s time or developed using Safeco’s equipment, supplies, facilities or trade secret information, or other resources of Safeco, whether or not the work product relates to Safeco’s field of business or Safeco’s actual or demonstrably anticipated research. The provisions of this Section 7.4 do not apply to any inventions for which no Safeco equipment, supplies, facilities, or trade secret information was used and that were developed entirely on Executive’s own time, unless: (i) the invention relates directly to Safeco’s business; (ii) the invention relates directly to Safeco’s actual or demonstrably anticipated research or development; or (iii) the invention results from any work Executive performed for Safeco. This constitutes notice pursuant to Revised Code of Washington Section 49.44.140.

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7.5 Disclosure and Protection of Inventions

Executive hereby represents that she has previously disclosed or shall disclose in writing before December 31, 2005 all concepts, designs, processes, technology, plans, embodiments, inventions or improvements constituting Intellectual Property to Safeco promptly after its or their development. At Safeco’s request and at Safeco’s expense, Executive will assist Safeco or its designee in efforts to protect all rights relating to such Intellectual Property. Such assistance may include, without limitation, the following: (a) making application in the United States and in foreign countries for a patent or copyright on any work products specified by Safeco; (b) executing documents of assignment to Safeco or its designee of all of Executive’s right, title and interest in and to any work product and related intellectual property rights; and (c) taking such additional action (including, without limitation, the execution and delivery of documents) to perfect, evidence or vest in Safeco or its designee all right, title and interest in and to any Intellectual Property and any rights related thereto.

7.6 Nondisclosure; Return of Materials

During the term and following termination of Executive’s employment with Safeco, Executive will not disclose (except as required by her duties to Safeco) any concept, design, process, technology, trade secret, customer list, plan, embodiment, or invention, any other Intellectual Property or any other confidential information, whether patentable or not, of Safeco of which Executive becomes informed or aware during her employment, whether or not developed by Executive. On or before December 31, 2005, Executive will return all documents, data and other materials of whatever nature, including, without limitation, drawings, specifications, research, reports, embodiments, software and manuals to Safeco which pertain to her employment with Safeco or to any Intellectual Property and shall not retain or cause or allow any third party to retain photocopies or other reproductions of the foregoing.

7.7 Equitable Relief

Executive acknowledges that the provisions of this Section 7 are essential to Safeco, that Safeco would not enter into this Agreement if it did not include this Section 7 and that damages sustained by Safeco as a result of a breach of this Section 7 cannot be adequately remedied by damages, and Executive agrees that Safeco, notwithstanding any other provision of this Agreement, including, without limitation, Section 13 hereof, and in addition to any other remedy it may have under this Agreement or at law, shall be entitled to injunctive and other equitable relief to prevent or curtail any breach of any provision of this Agreement, including, without limitation, this Section 7.

7.8 Effect of Violation

Executive and Safeco acknowledge and agree that additional consideration has been given for Executive entering into this Section 7, such additional consideration including, without limitation, certain provisions for acceleration of the Awards pursuant to Section 3.3(b) of this Agreement. Violation by Executive of this Section 7 shall result in the forfeiture of any gain

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realized by Executive from exercising all or any portion of the Awards, which shall be immediately payable to Safeco; provided however Executive shall not be relieved of her obligations, as required hereunder.

7.9 Non-Disparagement.

Executive agrees that she shall not intentionally make any public statement that is intended to criticize or disparage Safeco, its affiliates, or any of its or their directors, officers or employees. Safeco agrees it shall use its best efforts to cause its senior officers (senior vice presidents and above) and directors not to make any public statement that is intended to criticize or disparage the Executive. This Section 7.9 shall not be construed to prohibit either party from responding publicly to incorrect public statements or from making truthful statements when required by law or order of a court or other person or body having jurisdiction.

7.10 Definition of Safeco

For purposes of subsection 7.2 and subsection 7.3 hereof, “Safeco” shall include all subsidiaries of Safeco and any business ventures in which Safeco or its subsidiaries may participate.

8. REPRESENTATIONS AND WARRANTIES

In order to induce Safeco to enter into this Agreement, Executive represents and warrants to Safeco as follows:

8.1 No Violation of Other Agreements

Neither the execution nor the performance of this Agreement by Executive will violate or conflict in any way with any other agreement by which Executive may be bound, or with any other duties imposed upon Executive by corporate or other statutory or common law.

8.2 Patents, Etc.

Executive has prepared and attached hereto as Schedule 1 a list of all inventions, patent applications and patents made or conceived by Executive prior to the date hereof, which are subject to prior agreement or which Executive desires to exclude from this Agreement, or, if no such list is attached, Executive hereby represents and warrants to Safeco that there are no such inventions, patent applications or patents.

9. INDEMNIFICATION

Executive shall be indemnified by Safeco to the extent permitted by applicable law and as provided by Article XII of Safeco’s Bylaws.

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10. FORM OF NOTICE

All notices given hereunder shall be given in writing, shall specifically refer to this Agreement and shall be personally delivered or sent by telecopy or other electronic facsimile transmission or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof:

If to Executive:	Christine B. Mead [such address as may appear in the personnel records of Safeco or such other address as Executive may specify in writing]
If to Safeco:	Secretary Safeco Corporation Safeco Plaza Seattle, WA 98185
Copy to:	General Counsel Safeco Corporation Safeco Plaza Seattle, Washington 98185

If notice is mailed, such notice shall be effective upon mailing, or if notice is personally delivered or sent by telecopy or other electronic facsimile transmission, it shall be effective upon receipt.

11. ASSIGNMENT

This Agreement is personal to Executive and shall not be assignable by Executive. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns.

12. WAIVERS

No delay or failure by either party in exercising, protecting or enforcing any of its or her rights, titles, interests or remedies under this Agreement, and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or circumstance. All rights and remedies shall be cumulative and not exclusive of any other rights or remedies.

13. ARBITRATION

Subject to the provisions of Section 7.7 of this Agreement, any controversies or claims arising out of or relating to this Agreement shall be fully and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then

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in effect (the “AAA Rules”), conducted by one arbitrator either mutually agreed upon by Safeco and Executive or chosen in accordance with the AAA Rules, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure for a period of 90 days following the commencement of such arbitration and the arbitrator thereof shall resolve any dispute which arises in connection with such discovery. The prevailing party shall be entitled to costs, expenses and reasonable attorneys’ fees, and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

14. AMENDMENTS IN WRITING

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by Safeco and Executive, and each such amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by Safeco and Executive.

15. APPLICABLE LAW

This Agreement shall in all respects, including all matters of construction, validity and performance, be governed by, and construed and enforced in accordance with, the laws of the state of Washington, without regard to any rules governing conflicts of laws.

16. SEVERABILITY

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including, without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intent of the parties hereto as nearly as may be possible, (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision hereof, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

17. HEADINGS

All headings used are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement.

18. COUNTERPARTS

This Agreement, and any amendment or modification entered into pursuant to Section 14 hereof, may be executed in any number of counterparts, each of which counterparts, when so

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executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same instrument.

19. ENTIRE AGREEMENT

This Agreement on and as of the date hereof constitutes the entire agreement between Safeco and Executive with respect to the subject matter hereof and all prior or contemporaneous oral or written communications, understandings or agreements between Safeco and Executive with respect to such subject matter are superseded and nullified in their entireties.

IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on the date set forth above.

/s/ Christine B. Mead

Christine B. Mead

Safeco Corporation
By	/s/ Michael S. McGavick
	Michael S. McGavick
	Chief Executive Officer

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SCHEDULE 1

None.

EX-10.2

Exhibit 10.2

EMPLOYMENT AGREEMENT

SAFECO CORPORATION

and

ARTHUR CHONG

Dated as of October 14, 2005

EMPLOYMENT AGREEMENT

This Employment Agreement (this “Agreement”), dated as of October 14, 2005 (“Effective Date”), between Safeco Corporation, a Washington corporation (“Safeco”), and Arthur Chong (“Employee”);

WHEREAS, Safeco desires to provide for the services and employment of Employee upon the terms and conditions stated in this Agreement; and

WHEREAS, Employee desires to perform services for Safeco upon the terms and conditions stated in this Agreement;

NOW, THEREFORE, for and in consideration of the foregoing premises and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, Safeco and Employee agree as follows:

1. EMPLOYMENT

Safeco will employ Employee and Employee will accept employment by Safeco as its Executive Vice President and General Counsel, reporting to Safeco’s Chief Executive Officer. Employee shall be an executive officer and will have the authority, subject to Safeco’s Articles of Incorporation and Bylaws, as may be granted from time to time by Safeco’s Chief Executive Officer and/or the Board of Directors of Safeco. Employee will perform the duties customarily performed by the general counsel of a corporation which is, in all respects, similar to Safeco and such other duties as may be assigned from time to time by Safeco’s Chief Executive Officer and/or the Board of Directors of Safeco, which relate to the business of Safeco, its subsidiaries, or any business ventures in which Safeco or its subsidiaries may participate.

2. ATTENTION AND EFFORT

Employee will devote all of his entire productive time, ability, attention and effort to Safeco’s business and will skillfully serve its interests during the term of this Agreement; provided, however, that Employee may devote reasonable periods of time to (a) serving on the Board of Directors of other corporations, if such service would not otherwise be prohibited by Section 7 of this Agreement and is approved by the Chief Executive Officer and pursuant to Safeco’s Policy on Outside Directorships, and (b) engaging in charitable or community service activities, so long as none of the foregoing additional activities materially interfere with Employee’s duties under this Agreement and are approved or reported pursuant to Safeco’s Policy on Outside Directorships.

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3. COMPENSATION

During the term of this Agreement, Safeco agrees to pay or cause to be paid to Employee, and Employee agrees to accept in exchange for the services rendered hereunder by him, the following compensation:

3.1 Base Salary

Employee’s compensation shall consist, in part, of an annual base salary at a rate of at least Four Hundred Thousand Dollars ($400,000.00) before all customary payroll deductions. Such annual base salary shall be paid in substantially equal installments and at the same intervals as other officers of Safeco are paid. This salary may be, but is not required to be, increased from time-to-time, subject to and in accordance with the annual compensation review procedures of Safeco’s Compensation Committee.

3.2 Bonuses

(a) Employee will be eligible to receive, in addition to the base salary described above, an annual bonus in an amount to be determined by Safeco’s Chief Executive Officer. The goals on which Employee’s discretionary bonus for 2005 will be based shall be discussed and agreed upon by and between Employee and Safeco’s Chief Executive Officer. Employee’s target bonus shall be equal to seventy per cent (70%) of annual base salary, and his maximum bonus shall be equal to one hundred forty per cent (140%) of annual base salary. Because it is anticipated that Employee will be required to forfeit a calendar year 2005 bonus from his previous employer Employee shall be guaranteed at least the full year target bonus for 2005. If Safeco terminates Employee’s employment without Cause (as defined below in Section 6.6) or if Employee terminates his employment for any reason, each within the timeframe set forth in Section 6.1, Employee shall receive a pro rated bonus in an amount equal to the target bonus for the year of termination multiplied by a fraction with a numerator equal to the number of days during the calendar year during which he was employed and a denominator of 365.

(b) Employee will also receive a one-time bonus of $250,000 to be paid on January 1, 2006.

3.3 Restricted Stock Rights

Because it is anticipated that Employee will be required to forfeit certain benefits from his previous employer, Employee shall be entitled to receive a grant of 16,000 Restricted Stock Rights (the “RSR Award”) effective on date of hire. The RSR Award shall vest and no longer be subject to forfeiture in four equal annual

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installments beginning one year after the date of grant with unvested portions of the RSR Award subject to forfeiture upon termination of Employee’s employment. Notwithstanding the foregoing, the unvested portion of the RSR Award shall become 100% vested upon termination of Employee’s employment by Safeco without Cause (as defined below) or by Employee for any reason, each within the timeframe set forth in Section 6.1, or by reason of Employee’s death or disability, or upon a Change in Control (as defined in the Change in Control Severance Agreement referred to in Section 6.5). The RSR Award shall be granted under and otherwise subject to all the terms and conditions of the Safeco Long-term Incentive Plan of 1997, as amended, and the agreement evidencing the award.

3.4 Other Equity Grants

Under Safeco’s current Long Term Incentive Plan, Employee will be eligible for an annual equity grant, with a target economic value equal to 195% of salary, with a maximum economic value of 260% of salary. Employee shall also be entitled to participate in any future equity compensation programs of Safeco on the same basis as other executives; provided that awards to Employee, if any, under such programs, will be made in the sole discretion of Safeco’s Chief Executive Officer.

4. BENEFITS

4.1 Retirement and Savings Plans

During Employee’s employment with Safeco, Employee shall be entitled to participate in all defined contribution plans and defined benefit plans, including excess benefit or supplemental retirement plans or agreements, maintained by Safeco, as now or hereinafter in effect, that are applicable to Safeco’s employees generally or to its executive officers, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements. Benefits payable under such plans shall commence pursuant to the terms of such plans.

4.2 Other Benefit Programs

During Employee’s employment with Safeco, Employee will be entitled to participate, subject to and in accordance with applicable eligibility requirements, in all other employee benefit plans, programs and arrangements of Safeco, as now or hereinafter in effect, that are applicable to the Safeco’s employees generally or to its executive officers (including, but not limited to, all Safeco relocation policies), as the case may be, subject to and on a basis consistent with the terms, conditions and overall administration of such plans, programs and arrangements, and subject to Section 4.1. Except as otherwise provided in Section 4.1, to the extent that there is a period of

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employment required for purposes of eligibility or participation with respect to full benefit coverage under any employee benefit program other than referred to in Section 4.1, Employee shall be deemed to have met such requirement as of the Effective Date of this Agreement.

4.3 Vacation and Other Leaves

Employee shall be entitled to paid vacation of no less than 20 days per calendar year and other paid absences, whether for holidays, illness, or any similar purposes, in accordance with policies applicable generally to executive officers of Safeco.

4.4 Expenses

Employee shall be entitled to receive reimbursement for all reasonable and customary expenses incurred by him in performing services under this Agreement, including all expenses of travel and accommodations while away from his residence on business or at the request of and in the service of Safeco; provided, however, that such expenses are incurred, accounted for and approved in accordance with the policies and procedures established from time-to-time by Safeco.

4.5 Legal Fees

Safeco shall pay directly or reimburse Employee for reasonable legal fees and expenses not to exceed $10,000 00 incurred by Employee in connection with the negotiation and preparation of this Agreement and review of the benefits to be granted hereunder.

5. TERMINATION

Employment of Employee pursuant to this Agreement may be terminated as follows, but in any case, the provisions of Sections 3.2, 3.3, 6.1 and 7 hereof shall survive the termination of this Agreement and the termination of Employee’s employment hereunder:

5.1 By Safeco

With or without Cause (as defined below), Safeco may terminate the employment of Employee at any time during the term of employment upon giving Notice of Termination (as defined below in Section 5.4).

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5.2 By Employee

Employee may terminate his employment at any time, for any reason, upon giving Notice of Termination.

5.3 Automatic Termination

This Agreement and Employee’s employment hereunder shall terminate automatically upon the death or total disability of Employee. The term “total disability” as used herein shall mean Employee’s inability to perform the duties set forth in Section 1 hereof for a period of sixty (60) consecutive days or periods aggregating one hundred five (105) calendar days in any 12-month period as a result of physical or mental illness, loss of legal capacity or any other cause beyond Employee’s control, unless Employee is granted a leave of absence. Employee and Safeco hereby acknowledge that Employee’s ability to perform the duties specified in Section 1 is of the essence of this Agreement. Termination hereunder shall be deemed to be effective (a) at the end of the calendar month in which Employee’s death occurs or (b) immediately upon a determination by the Board of Directors of Safeco of Employee’s total disability, as defined herein.

5.4 Notice

The term “Notice of Termination” shall mean at least sixty (60) days’ written notice of termination of Employee’s employment, during which period Employee’s employment and performance of services will continue; provided, however, that Safeco may, upon notice to Employee and without reducing Employee’s compensation during such period, excuse Employee from any or all of his duties during such period. The effective date of the termination of Employee’s employment hereunder shall be the date on which such 60 -day period expires.

6. TERMINATION PAYMENTS

In the event of termination of the employment of Employee, all compensation and benefits set forth in this Agreement shall terminate except as specifically provided in this Sections 3.2, 3.3 and 6:

6.1 Termination by Safeco without Cause or by Employee for any reason within Defined Period

If Safeco gives notice of termination of Employee’s employment without Cause or if Employee gives notice of termination of his employment for any reason within 180 days after the first day of employment of the successor to Chief Executive Officer Michael S. McGavick, Employee shall be entitled to receive (a) termination

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payments equal to eighteen months’ annual base salary and pro rated target bonus as described in Section 3.2(a) hereof, (b) any unpaid annual base salary which has accrued for services already performed as of the date termination of Employee’s employment becomes effective and any accrued but unpaid bonus for the calendar year preceding his termination, (c) full vesting of the unvested portion of the RSR Award granted pursuant to Section 3.3, vesting to occur notwithstanding any terms to the contrary contained in the plan under which the RSR Award was granted or subsequent amendments or changes in policy, and (d) relocation to the San Francisco area under Safeco’s standard relocation policy for executive officers including, without limitation, the purchase by Safeco of his house in Seattle and, in the event Employee sustains loss on sale of his home in Seattle, payment by Safeco of the difference between the purchase and sale price of the house; and (e) payment by Safeco of Employee’s COBRA premiums if Employee applies under COBRA to continue group medical coverage for himself and his dependents, or, if Employee obtains other medical insurance coverage for himself and his dependents, payment by Safeco of the premiums for said insurance in an amount not to exceed the amount of COBRA premiums, for the lesser of twelve months following the effective date of separation from Safeco or until Employee becomes eligible for substantially similar coverage from a subsequent employer. If Employee is terminated by Safeco for Cause, Employee shall not be entitled to receive any of the foregoing benefits, other than those set forth in clause (b) above.

6.2 Termination by Employee

In the case of the termination of Employee’s employment by Employee subsequent to 180 days after the first day of employment of the successor to Chief Executive Officer Michael S. McGavick, Employee shall not be entitled to any payments hereunder, other than those set forth in clause (b) of subsection 6.1 hereof.

6.3 Limitation on Termination Payments

Except as expressly provided in this Agreement, Employee’s rights upon termination of employment will be governed by Safeco’s standard policy and practice, or as determined by Safeco’s Chief Executive Officer, provided that such determination provides Employee with benefits no less favorable than those under Safeco’s standard policy and practice. Termination payments, if any, are payable contingent upon Employee’s execution of a waiver and release (other than exclusions for indemnification pursuant to any policies of insurance and or the provisions of Safeco’s By-Laws or Articles of Incorporation) of claims arising out of his employment and/or the termination of his employment with Safeco, in return for which Safeco agrees to execute a mutual waiver and release of claims against Employee arising out of his employment.

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6.4 Payment Schedule

All payments of base pay under this Section 6 shall be made to Employee at the same interval as payments of salary were made to Employee immediately prior to termination, and bonus payments will be paid in a lump sum at the time that annual bonuses are generally paid to other executives of Safeco but in no event later than April 15 of the following year.

6.5 Termination in Connection With a Change in Control

Contemporaneously with the execution of this Agreement, Safeco and Employee shall execute a Change in Control Severance Agreement (the “Change in Control Agreement”), a true and correct copy of which is attached hereto as Exhibit A. In circumstances constituting a Change in Control, as defined in the Change in Control Agreement, Employee’s rights upon termination of employment will be governed by the terms of the Change in Control Agreement; provided however, if the Change in Control occurs within 180 days of the first day of employment of the successor to Chief Executive Officer Michael S. McGavick, Employee shall receive any benefits provided by Section 6.1 if not otherwise provided pursuant to the Change in Control Agreement. The parties acknowledge that the Change in Control Agreement may need to be modified in the future to comply with new Section 409(A) of the Internal Revenue Code (added to the Code pursuant to the Jobs Creation Act of 2004) but such modifications will not diminish the benefits to which Employee is entitled unless Employee receives substantially comparable benefits in substitution.

6.6 Cause

Wherever reference is made in this Agreement to termination being with or without Cause, “Cause” shall mean the occurrence of one or more of the following events:

(a) Failure or refusal to carry out the lawful duties of Employee described in Section 1 of this Agreement or any directions of the Chief Executive Officer or the Board of Directors of Safeco or any committee of the Board, which directions are reasonably consistent with the duties herein set forth to be performed by Employee (other than as a result of illness, accident, or other physical or mental incapacity); provided that if Employee’s failure or refusal of performance is susceptible of cure within a 30 day period and, if cured within that period will not cause material harm to Safeco, Employee will, before termination for Cause, be provided with written notice of his failure or refusal of performance and given a

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period of 30 days to cure, following which his employment will be terminated for Cause only if Employee has thereafter failed to remedy such failure to perform;

(b) Conviction of Employee of a state or federal criminal law involving the commission of a crime against Safeco or a felony involving moral turpitude or a violation of 18 U.S.C. § 1033, including the entry of a guilty or nolo contendere plea;

(c) Conduct by Employee that constitutes willful gross neglect or willful gross misconduct in carrying out his duties, resulting, in either case, in material harm to Safeco, monetarily or otherwise, unless Employee reasonably believed in good faith that such act or non-act was in or not opposed to the best interests of Safeco; or

(d) Current use by Employee of illegal substances; fraud or misrepresentation by Employee; any incident materially compromising Employee’s reputation or ability to represent Safeco with the public.

7. NONCOMPETITION AND NONSOLICITATION

7.1 Applicability

This Section 7 shall survive the termination of Employee’s employment with Safeco.

7.2 Scope of Competition

Employee agrees that he will not, directly or indirectly, during his employment and for a period of one year from the date on which his employment with Safeco terminates for any reason, or this Agreement expires, be employed by, consult with, be a director of or otherwise perform services for, own, manage, operate, join, control or participate in the ownership, management, operation or control of or be connected with, in any manner, any Competitor. A “Competitor” shall include any entity which, directly or indirectly, competes with Safeco or produces, markets, distributes or otherwise derives benefit from the production, marketing or distribution of products or services which compete with products then produced or services then being provided or marketed, by Safeco or which Safeco is then actually preparing to market, in each case within the geographical area of the United States, unless released from such obligation in writing by Safeco’s Board of Directors. Employee shall be deemed to be related to or connected with a Competitor if such Competitor is (a) a partnership in

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which he is a general or limited partner or employee, (b) a corporation or association of which he is a shareholder, officer, employee or director, or (c) a partnership, corporation or association of which he is a member, consultant or agent; provided, however, that nothing in this Agreement shall prevent the purchase or ownership by Employee of shares which constitute less than one percent of the outstanding equity securities of a publicly or privately held corporation, if Employee had no other relationship with such corporation; and further provided however, that in the event Employee’s employment is terminated by Safeco or Employee, each for any reason and within the timeframe set forth in Section 6.1, Sections 7.1 and 7.2 will not apply to Employee or his employment subsequent to Safeco.

7.3 Scope of Nonsolicitation

Employee shall not directly or indirectly solicit, influence or entice, or attempt to solicit, influence or entice, any employee or consultant of Safeco to cease his relationship with Safeco or solicit, influence, entice or in any way divert any customer, distributor, partner, joint venturer or supplier of Safeco to do business or in any way become associated with any Competitor. This Section 7.3 shall apply during the time period and geographical area described in Section 7.2.

7.4 Assignment of Intellectual Property

Except for professional lectures, writings, speeches prepared by Employee that do not disclose any proprietary information of Safeco, all concepts, designs, machines, devices, uses, processes, technology, trade secrets, works of authorship, customer lists, plans, embodiments, inventions, improvements or related work product (collectively “Intellectual Property”) which Employee develops, conceives or first reduces to practice during the term of his employment hereunder or within one year after the termination of his employment hereunder or the expiration of this Agreement, whether working alone or with others, shall be the sole and exclusive property of Safeco, together with any and all Intellectual Property rights, including, without limitation, patent or copyright rights, related thereto, and Employee hereby assigns to Safeco all of such Intellectual Property. “Intellectual Property” shall include only such concepts, designs, machines, devices, uses, processes, technology, trade secrets, customer lists, plans, embodiments, inventions, improvements and work product which (a) relate to Employee’s performance of services under this Agreement, to Safeco’s field of business or to Safeco’s actual or demonstrably anticipated research or development, whether or not developed, conceived or first reduced to practice during normal business hours or with the use of any equipment, supplies, facilities or trade secret information or other resource of Safeco or (b) are developed in whole or in part on Safeco’s time or developed using Safeco’s equipment, supplies, facilities or trade secret information, or other resources of Safeco, whether or not the work product

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relates to Safeco’s field of business or Safeco’s actual or demonstrably anticipated research.

7.5 Disclosure and Protection of Inventions

Employee shall disclose in writing all concepts, designs, processes, technology, plans, embodiments, inventions or improvements constituting Intellectual Property to Safeco promptly after its or their development. At Safeco’s request and at Safeco’s expense, Employee will assist Safeco or its designee in efforts to protect all rights relating to such Intellectual Property. Such assistance may include, without limitation, the following: (a) making application in the United States and in foreign countries for a patent or copyright on any work products specified by Safeco; (b) executing documents of assignment to Safeco or its designee of all of Employee’s right, title and interest in and to any work product and related intellectual property rights; and (c) taking such additional action (including, without limitation, the execution and delivery of documents) to perfect, evidence or vest in Safeco or its designee all right, title and interest in and to any Intellectual Property and any rights related thereto.

7.6 Nondisclosure; Return of Materials

During the term of his employment with Safeco and following termination of Employee’s employment with Safeco, Employee will not disclose (except as required by his duties to Safeco) any concept, design, process, technology, trade secret, customer list, plan, embodiment, or invention, any other Intellectual Property or any other confidential information, whether patentable or not, of Safeco of which Employee becomes informed or aware during his employment, whether or not developed by Employee. In the event of the termination of his employment with Safeco, Employee will return all documents, data and other materials of whatever nature, including, without limitation, drawings, specifications, research, reports, embodiments, software and manuals to Safeco which pertain to his employment with Safeco or to any Intellectual Property and shall not retain or cause or allow any third party to retain photocopies or other reproductions of the foregoing.

7.7 Equitable Relief

Employee acknowledges that the provisions of this Section 7 are essential to Safeco, that Safeco would not enter into this Agreement if it did not include this Section 7 and that damages sustained by Safeco as a result of a breach of this Section 7 cannot be adequately remedied by damages, and Employee agrees that Safeco, notwithstanding any other provision of this Agreement, including, without limitation, Section 13 hereof, and in addition to any other remedy it may have under this Agreement or at law, shall be entitled to injunctive and other equitable relief to

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prevent or curtail any breach of any provision of this Agreement, including, without limitation, this Section 7.

7.8 Effect of Violation

Employee and Safeco acknowledge and agree that additional consideration has been given for Employee entering into this Section 7, such additional consideration including, without limitation, certain provisions for termination payments pursuant to Section 6 of this Agreement. Violation by Employee of this Section 7 shall relieve Safeco of any obligation it may have to make such termination payments, but shall not relieve Employee of his obligations, as required hereunder, not to compete.

7.9 Definition of Safeco

For purposes of subsection 7.2 and subsection 7.3 hereof, “Safeco” shall include all subsidiaries of Safeco, Safeco’s and any business ventures in which Safeco, its subsidiaries may participate.

8. REPRESENTATIONS AND WARRANTIES

In order to induce Safeco to enter into this Agreement, Employee represents and warrants to Safeco as follows:

8.1 No Violation of Other Agreements

Neither the execution nor the performance of this Agreement by Employee will violate or conflict in any way with any other agreement by which Employee may be bound, or with any other duties imposed upon Employee by corporate or other statutory or common law.

8.2 Patents, Etc.

Employee has prepared and attached hereto as Schedule 1 a list of all inventions, patent applications and patents made or conceived by Executive prior to the date hereof, which are subject to prior agreement or which Employee desires to exclude from this Agreement, or, if no such list is attached, Employee hereby represents and warrants to Safeco that there are no such inventions, patent applications or patents.

9. INDEMNIFICATION

Employee shall be indemnified by Safeco to the extent permitted by applicable law and as provided by Article XII of Safeco’s Bylaws.

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10. FORM OF NOTICE

All notices given hereunder shall be given in writing, shall specifically refer to this Agreement and shall be personally delivered or sent by telecopy or other electronic facsimile transmission or by registered or certified mail, return receipt requested, at the address set forth below or at such other address as may hereafter be designated by notice given in compliance with the terms hereof:

If to Employee:	Arthur Chong
	[such address as may appear in the personnel records of Safeco or such other address as Employee may specify in writing]
If to Safeco:	Secretary Safeco Corporation Safeco Plaza Seattle, WA 98185

If notice is mailed, or if notice is personally delivered or sent by telecopy or other electronic facsimile transmission, it shall be effective upon receipt.

11. ASSIGNMENT

(a) This Agreement is personal to Employee and shall not be assignable by Employee. Subject to the provisions of this Agreement, Safeco may assign its rights hereunder to (a) any corporation resulting from any merger, consolidation or other reorganization to which Safeco is a party or (b) any corporation, partnership, association or other person to which Safeco may transfer all or substantially all of the assets and business of Safeco existing at such time. All of the terms and provisions of this Agreement shall be binding upon and shall inure to the benefit of and be enforceable by the parties hereto and their respective successors and permitted assigns.

12. WAIVERS

No delay or failure by either party in exercising, protecting or enforcing any of its or his rights, titles, interests or remedies under this Agreement, and no course of dealing or performance with respect thereto, shall constitute a waiver. The express waiver by a party of any right, title, interest or remedy in a particular instance or circumstance shall not constitute a waiver thereof in any other instance or

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circumstance. All rights and remedies shall be cumulative and not exclusive of any other rights or remedies.

13. ARBITRATION

In the event a dispute arises in connection with this Agreement, Safeco and Employee agree to submit the dispute to non-binding mediation by a mediator selected and paid for by Safeco. Should such mediation not result in resolution of the dispute, subject to the provisions of Section 7.7 of this Agreement, any controversies or claims arising out of or relating to this Agreement shall be fully and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect (the “AAA Rules”), conducted by one arbitrator either mutually agreed upon by Safeco and Employee or chosen in accordance with the AAA Rules, except that the parties thereto shall have any right to discovery as would be permitted by the Federal Rules of Civil Procedure for a period of 90 days following the commencement of such arbitration and the arbitrator thereof shall resolve any dispute which arises in connection with such discovery. Safeco and Employee shall share equally the arbitration fees and be responsible for the costs, expenses and attorneys’ fees incurred on their own behalf.

14. AMENDMENTS IN WRITING

No amendment, modification, waiver, termination or discharge of any provision of this Agreement, nor consent to any departure therefrom by either party, shall in any event be effective unless the same shall be in writing, specifically identifying this Agreement and the provision intended to be amended, modified, waived, terminated or discharged and signed by Safeco and Employee, and each such amendment, modification, waiver, termination or discharge shall be effective only in the specific instance and for the specific purpose for which given. No provision of this Agreement shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or any other matter not set forth in an agreement in writing and signed by Safeco and Employee.

15. APPLICABLE LAW

This Agreement shall in all respects, including all matters of construction, validity and performance, be governed by, and construed and enforced in accordance with, the laws of the state of Washington, without regard to any rules governing conflicts of laws.

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16. SEVERABILITY

If any provision of this Agreement shall be held invalid, illegal or unenforceable in any jurisdiction, for any reason, including, without limitation, the duration of such provision, its geographical scope or the extent of the activities prohibited or required by it, then, to the full extent permitted by law (a) all other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in order to carry out the intent of the parties hereto as nearly as may be possible, (b) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision hereof, and (c) any court or arbitrator having jurisdiction thereover shall have the power to reform such provision to the extent necessary for such provision to be enforceable under applicable law.

17. HEADINGS

All headings used are for convenience only and shall not in any way affect the construction of, or be taken into consideration in interpreting, this Agreement.

18. COUNTERPARTS

This Agreement, and any amendment or modification entered into pursuant to Section 14 hereof, may be executed in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute one and the same instrument.

19. ENTIRE AGREEMENT

This Agreement on and as of the date hereof together with the Change in Control Agreement attached hereto as Exhibit A constitute the entire agreement between Safeco and Employee with respect to the subject matter hereof and all prior or contemporaneous oral or written communications, understandings or agreements between Safeco and Employee with respect to such subject matter are hereby superseded and nullified in their entireties.

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IN WITNESS WHEREOF, the parties have executed and entered into this Agreement on the date set forth above.

/s/ Arthur Chong

Arthur Chong

Safeco Corporation
By	/s/ Michael S. McGavick
	Michael S. McGavick
	Chief Executive Officer

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SCHEDULE 1

[None]

Exhibit A

Change in Control Agreement

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EX-31.1

Safeco Corporation and Subsidiaries	Exhibit 31.1
Certification of Chief Executive Officer

I, Michael S. McGavick, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 the 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: November 4, 2005

/S/    MICHAEL S. MCGAVICK

Michael S. McGavick

Chairman, President and Chief Executive Officer

EX-31.2

Safeco Corporation and Subsidiaries	Exhibit 31.2
Certification of Chief Financial Officer

I, Christine B. Mead, certify that:

1) I have reviewed this Quarterly Report on Form 10-Q 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)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) 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

(d) 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 the 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: November 4, 2005

/S/    CHRISTINE B. MEAD

Christine B. Mead

Executive Vice President and Chief Financial Officer

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 Quarterly Report of Safeco Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), 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-Q 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2005

/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 Quarterly Report of Safeco Corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Christine B. Mead, Executive Vice President and Chief Financial 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-Q 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2005

/S/    CHRISTINE B. MEAD

Christine B. Mead

Executive Vice President and

Chief Financial 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.