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 June 30, 2007

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

for the Transition Period from              to             .

Commission File Number: 1-6563

Safeco Corporation

State of Incorporation: Washington

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

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

Telephone: 206-545-5000

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, no par value	New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):    Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer   ¨

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

102,554,653 shares of common stock were outstanding at July 24, 2007.

Safeco Corporation and Subsidiaries

CONTENTS

Item	Description	Page
Part I	Financial Information
1	Financial Statements (Unaudited)
	Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006	3
	Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	4
	Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	5
	Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2007 and 2006	7
	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2007 and 2006	8
	Condensed Notes to Consolidated Financial Statements	9
2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
4	Controls and Procedures	50
Part II	Other Information
1	Legal Proceedings	51
2	Unregistered Sales of Equity Securities and Use of Proceeds	52
4	Submission of Matters to a Vote of Security Holders	52
6	Exhibits	53
Signatures		54

2

Safeco Corporation and Subsidiaries

Consolidated Statements of Income

(In millions, except per share amounts)

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007		2006			2007		2006
	(Unaudited)					(Unaudited)
REVENUES
Net Earned Premiums	$	1,394.0	$	1,414.8		$	2,761.0	$	2,836.7
Net Investment Income		128.2		125.5			255.4		250.2
Net Realized Investment Gains (Losses)		17.4		(37.2	)		29.8		(22.3	)
Gain on Sales of Real Estate		—		32.8			—		32.8
Total Revenues		1,539.6		1,535.9			3,046.2		3,097.4
EXPENSES
Losses and Loss Adjustment Expenses		858.0		803.5			1,706.2		1,640.8
Amortization of Deferred Policy Acquisition Costs		231.3		227.4			467.5		463.5
Other Underwriting and Operating Expenses		167.8		193.4			311.9		352.3
Interest Expense		22.0		22.9			46.2		45.7
Restructuring and Asset Impairment Charges		1.5		1.1			1.8		2.0
Losses on Debt Repurchases		—		1.5			—		2.9
Total Expenses		1,280.6		1,249.8			2,533.6		2,507.2
Income before Income Taxes		259.0		286.1			512.6		590.2
Provision for Income Taxes		72.6		86.4			143.7		182.3
Net Income	$	186.4	$	199.7		$	368.9	$	407.9
NET INCOME PER SHARE OF COMMON STOCK
Net Income Per Share of Common Stock – Diluted	$	1.75	$	1.68		$	3.46	$	3.37
Net Income Per Share of Common Stock – Basic	$	1.76	$	1.69		$	3.49	$	3.39
DIVIDENDS DECLARED PER SHARE	$	0.40	$	0.30		$	0.70	$	0.55

See Condensed Notes to Consolidated Financial Statements.

3

Safeco Corporation and Subsidiaries

Consolidated Balance Sheets

(In millions)

	JUNE 30, 2007		DECEMBER 31, 2006
	(Unaudited)
ASSETS
Investments
Available-for-Sale Securities:
Fixed Maturities, at Fair Value (Cost or amortized cost: $8,429.5; $8,901.6)	$	8,485.8	$	9,119.0
Marketable Equity Securities, at Fair Value (Cost: $1,040.9; $1,018.4)		1,615.5		1,529.7
Other Invested Assets		30.4		14.3
Total Investments		10,131.7		10,663.0
Cash and Cash Equivalents		695.5		287.6
Accrued Investment Income		125.8		126.5
Premiums and Service Fees Receivable		1,136.5		1,085.6
Deferred Policy Acquisition Costs		412.9		383.9
Reinsurance Recoverables		449.2		429.9
Property and Equipment for Company Use (At cost less accumulated depreciation: $205.7; $211.9)		170.4		144.4
Current Income Taxes Recoverable		53.3		74.8
Net Deferred Income Tax Assets		130.1		143.7
Other Assets		125.9		114.6
Securities Lending Collateral		543.1		759.0
Total Assets	$	13,974.4	$	14,213.0
LIABILITIES AND SHAREHOLDERS’ EQUITY
Loss and Loss Adjustment Expense Reserves	$	5,108.9	$	5,171.4
Unearned Premiums		2,270.3		2,175.3
Debt		1,250.0		1,250.0
Other Liabilities		772.2		913.1
Securities Lending Payable		543.1		759.0
Total Liabilities		9,944.5		10,268.8
Commitments and Contingencies		—		—
Restricted Stock Rights		14.6		16.3
Preferred Stock, No Par Value
Shares Authorized: 10
Shares Issued and Outstanding: None		—		—
Common Stock, No Par Value
Shares Authorized: 300
Shares Reserved for Stock Awards: 4.4; 4.9
Shares Issued and Outstanding: 104.1; 105.3		—		3.2
Retained Earnings		3,598.4		3,440.5
Accumulated Other Comprehensive Income, Net of Taxes		416.9		484.2
Total Shareholders’ Equity		4,015.3		3,927.9
Total Liabilities and Shareholders’ Equity	$	13,974.4	$	14,213.0

See Condensed Notes to Consolidated Financial Statements.

4

Safeco Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In millions)

SIX MONTHS ENDED JUNE 30,	2007			2006
	(Unaudited)
OPERATING ACTIVITIES
Insurance Premiums Received	$	2,792.1		$	2,858.0
Dividends and Interest Received		269.1			276.2
Losses and Loss Adjustment Expenses Paid		(1,708.1	)		(1,794.3	)
Underwriting, Acquisition and Other Operating Costs Paid		(973.1	)		(906.3	)
Interest Paid		(43.3	)		(45.1	)
Income Taxes Paid		(70.3	)		(105.6	)
Net Cash Provided by Operating Activities		266.4			282.9
INVESTING ACTIVITIES
Purchases of:
Fixed Maturities Available-for-Sale		(805.3	)		(1,080.3	)
Marketable Equity Securities Available-for-Sale		(133.8	)		(339.8	)
Property and Equipment for Company Use		(68.8	)		(25.5	)
Sales of:
Fixed Maturities Available-for-Sale		854.9			778.9
Marketable Equity Securities Available-for-Sale		122.2			244.4
Real Estate		2.1			212.6
Maturities and Calls of Fixed Maturities Available-for-Sale		377.6			470.3
Securities Lending Collateral Returned		215.9			122.0
Sale of Subsidiary, Net of Cash Sold		5.0			(42.2	)
Other, Net		(0.5	)		2.5
Net Cash Provided By Investing Activities		569.3			342.9
FINANCING ACTIVITIES
Dividends Paid to Shareholders		(63.8	)		(60.7	)
Stock Options Exercised		9.7			57.4
Securities Lending Collateral Paid		(215.9	)		(122.0	)
Common Shares Reacquired		(157.8	)		(475.7	)
Repurchase of Debt		—			(35.3	)
Net Cash Used in Financing Activities		(427.8	)		(636.3	)
Net Increase (Decrease) in Cash and Cash Equivalents		407.9			(10.5	)
Cash and Cash Equivalents at Beginning of Period		287.6			556.3
Cash and Cash Equivalents at End of Period	$	695.5		$	545.8

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

(In millions)

SIX MONTHS ENDED JUNE 30,	2007			2006
	(Unaudited)
Net Income	$	368.9		$	407.9
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Realized Investment (Gains) Losses		(29.8	)		22.3
Amortization of Discount and Accretion of Premium on Fixed Maturities		13.4			21.8
Amortization, Depreciation and Impairments		27.7			24.6
Deferred Income Tax Provision		49.6			34.7
Gain on Sales of Real Estate		—			(32.8	)
Other, Net		0.2			(4.0	)
Changes in, Net of Dispositions :
Accrued Investment Income		0.7			3.4
Premiums and Service Fees Receivable		(50.9	)		(30.8	)
Current Income Taxes Recoverable		21.5			33.2
Deferred Policy Acquisition Costs		(29.0	)		(4.7	)
Loss and Loss Adjustment Expense Reserves		(62.5	)		(159.1	)
Unearned Premiums		95.0			44.2
Other Assets and Liabilities		(138.4	)		(77.8	)
Total Adjustments		(102.5	)		(125.0	)
Net Cash Provided by Operating Activities	$	266.4		$	282.9

As described in Note 1, we issued 866,685 shares to settle our accelerated share repurchase program in the six months ended June 30, 2007.

There were no other significant non-cash financing or investing activities in the six months ended June 30, 2007 or June 30, 2006.

See Condensed Notes to Consolidated Financial Statements.

6

Safeco Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity

(In millions, except share amounts)

SIX MONTHS ENDED JUNE 30,	2007			2006
	(Unaudited)
COMMON STOCK
Balance at Beginning of Period	$	3.2		$	434.8
Shares Issued for Options and Rights (Net of Taxes $2.6; $8.7)		12.3			64.1
Share-based Compensation		6.8			1.9
Reclassification of Share-Based Payments to Liabilities		—			(5.4	)
Shares Reacquired		(22.3	)		(475.7	)
Balance at End of Period		—			19.7
RETAINED EARNINGS
Balance at Beginning of Period		3,440.5			3,333.0
Net Income		368.9			407.9
Dividends Declared		(74.8	)		(65.4	)
Shares Reacquired		(135.5	)		—
Cumulative Effect of Adoption of FIN 48		(0.7	)		—
Balance at End of Period		3,598.4			3,675.5
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXES
Balance at Beginning of Period		484.2			356.8
Other Comprehensive Loss		(67.3	)		(107.2	)
Balance at End of Period		416.9			249.6
SHAREHOLDERS’ EQUITY	$	4,015.3		$	3,944.8
SIX MONTHS ENDED JUNE 30,	2007			2006
	(Unaudited)
COMMON SHARES OUTSTANDING
Number of Shares Outstanding at Beginning of Period		105,341,791			123,584,593
Shares Issued for Accelerated Stock Repurchase Settlement		866,685			—
Shares Issued for Options and Rights		371,060			1,651,859
Shares Reacquired		(2,521,982	)		(8,892,770	)
Number of Shares Outstanding at End of Period		104,057,554			116,343,682

See Condensed Notes to Consolidated Financial Statements.

7

Safeco Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(In millions)

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
	(Unaudited)						(Unaudited)
Net Income	$	186.4		$	199.7		$	368.9		$	407.9
Other Comprehensive Loss, Net of Taxes:
Change in Unrealized Gains (Losses) on Available-for-Sale Securities		(43.8	)		(73.9	)		(44.4	)		(122.2	)
Reclassification Adjustment for Net Realized Investment (Gains) Losses Included in Net Income		(11.4	)		24.8			(19.3	)		15.0
Amortization of Pension and Other Postretirement Benefit Amounts		(1.8	)		—			(3.6	)		—
Derivative Qualifying as Cash Flow Hedge		(1.0	)		—			—			—
Other Comprehensive Loss		(58.0	)		(49.1	)		(67.3	)		(107.2	)
Comprehensive Income	$	128.4		$	150.6		$	301.6		$	300.7

See Condensed Notes to Consolidated Financial Statements.

8

Safeco Corporation and Subsidiaries

Condensed Notes to Consolidated Financial Statements (unaudited)

(Dollar amounts in millions except share data, unless noted otherwise)

Note 1: Summary of Significant Accounting Policies

NATURE OF OPERATIONS

Safeco Corporation is a Washington corporation operating across the United States. We sell property and casualty insurance to drivers, homeowners and small- and mid-sized businesses. We also sell Surety bonds to contractors and businesses. We generate virtually all of our premiums from these activities.

Throughout our 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 activities, primarily the financing of our business activities, as “Corporate.”

BASIS OF PRESENTATION

We have prepared our Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q. Certain financial information that 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 six-month period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Our Consolidated Financial Statements and Condensed Notes to Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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

Our Consolidated Financial Statements include Safeco Corporation and its subsidiaries. We have eliminated all intercompany transactions and balances in our Consolidated Financial Statements.

We made certain reclassifications to prior-period amounts for consistency with our current-period presentation. These reclassifications did not affect shareholders’ equity or net income.

EARNINGS PER SHARE

We calculate basic earnings per share by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share include the weighted-average common shares outstanding during the period plus the weighted average of potential dilutive common shares outstanding during the period. Potential dilutive common shares include restricted stock rights and performance measure restricted stock rights (collectively, RSRs) and outstanding stock options, which are calculated using the treasury stock method. Potential dilutive common shares also include any shares used to settle or assumed to be used to settle our accelerated share repurchase program, which are calculated using the if-converted method. We have included the RSRs in our diluted earnings per share calculation. We do not consider our RSRs to be participating securities in calculating basic earnings per share even though dividends are paid on those awards prior to vesting.

For the three months ended June 30, 2007, we excluded 428,000 stock options and RSRs, and for the six months ended June 30, 2007, we excluded 536,000 stock options and RSRs from the dilutive earnings per share calculation because their inclusion would have been antidilutive. For the three months ended June 30, 2006, we excluded 260,000 stock options and RSRs from the dilutive earnings per share calculation and for the six months ended June 30, 2006, we excluded 255,000 stock options and RSRs.

9

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2007		2006		2007		2006
COMPUTATION OF NET INCOME PER SHARE
Net Income	$	186.4	$	199.7	$	368.9	$	407.9
Diluted:
Average Number of Common Shares Outstanding		105.8		118.4		105.7		120.3
Additional Common Shares Assumed Issued		0.5		0.6		0.8		0.7
Average Shares Outstanding – Diluted		106.3		119.0		106.5		121.0
Net Income Per Share – Diluted	$	1.75	$	1.68	$	3.46	$	3.37
Basic:
Average Number of Common Shares Outstanding		105.8		118.4		105.7		120.3
Net Income Per Share – Basic	$	1.76	$	1.69	$	3.49	$	3.39

SHARE–BASED COMPENSATION EXPENSE

Our share-based compensation expense was $3.8 ($2.5 after tax) for the three months ended June 30, 2007, and $8.1 ($5.3 after tax) for the six months ended June 30, 2007. Share-based compensation expense was $8.6 ($5.7 after tax) for the three months ended June 30, 2006 and $13.9 ($9.2 after tax) for the six months ended June 30, 2006. Stock options and RSRs granted in or after 2007 vest on a different schedule than those granted in prior years. Previously, the awards generally vested on a pro-rata basis over four years. Beginning in 2007, stock options cliff vest after three years and RSRs cliff vest after two years. We granted 48,836 RSRs and 313 stock options in the three months ended June 30, 2007, and 255,501 RSRs and 177,289 stock options in the six months ended June 30, 2007. We granted 63,944 RSRs and 9,770 stock options in the three months ended June 30, 2006 and 401,372 RSRs and 259,770 stock options in the six months ended June 30, 2006.

SECURITIES LENDING

We lend certain securities from our investment portfolio to other institutions for short periods of time. We receive initial collateral of 102% of the market value of any security we loan. The borrower deposits this collateral with a lending agent who invests the collateral to generate additional income according to our guidelines. The market value of the loaned securities is monitored on a daily basis. Additional collateral is added or refunded as the market value of the loaned securities fluctuates, maintaining a collateral value of 102% at all times. We maintain full ownership rights to the securities that we have loaned and accordingly the loaned securities are classified as Investments in our Consolidated Balance Sheets. We report the Securities Lending Collateral and the corresponding Securities Lending Payable on our Consolidated Balance Sheets as assets and liabilities, and in our Consolidated Statements of Cash Flows as investing activities and financing activities.

We had a market value of $471.9 of fixed maturities and $63.1 of marketable equity securities loaned at June 30, 2007. We had a market value of $578.1 of fixed maturities and $159.9 of marketable equity securities loaned at December 31, 2006.

INCOME TAXES

We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007. As a result of the implementation of FIN 48, we recognized a $0.7 increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to Retained Earnings in our Consolidated Balance Sheets at January 1, 2007. As of the date of adoption, we had $5.0 of gross unrecognized tax benefits, of which $4.4 would affect our effective tax rate if recognized.

It is expected that the amount of unrecognized tax benefits will change during the next 12 months. However, we do not expect the change to have a significant impact on our results of operations or financial position. We recognize interest accrued related to unrecognized tax benefits in the Provision for Income Taxes and penalties in Other Underwriting and Operating Expenses in our Consolidated Statements of Income. We had $7.1 accrued for interest and no liability for penalties as of January 1, 2007.

10

We are currently under a routine audit by the Internal Revenue Service (IRS) for calendar years 2004 and 2005. The Joint Committee of the IRS approved the routine audit for the calendar years 2002 and 2003, in July of 2007.

SHARE REPURCHASES

When we repurchase any of our common shares, we reduce our common stock, or retained earnings if common stock is zero, 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.

We repurchase shares under Rule 10b5-1 trading plans, open market purchases, and accelerated share repurchase (ASR) programs. A Rule 10b5-1 trading 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. Through ASR programs, we return excess capital to shareholders and immediately reduce the number of our common shares outstanding. The dealer obtains the shares that we repurchase by borrowing them on the open market and then purchasing shares in the market over time to repay the borrowed shares.

On May 4, 2007, we implemented a Rule 10b5-1 trading plan to purchase up to $250.0 of our outstanding common stock, and completed this trading plan on July 24, 2007. We purchased a total of 4.0 million shares under this plan, at an average price of $62.03 for a total cost of $250.0. On May 8, 2006, we implemented a Rule 10b5-1 trading plan to purchase up to $200.0 of our outstanding common stock, and completed this trading plan on June 27, 2006. In February 2006, we implemented a Rule 10b5-1 trading plan to purchase up to $250.0 of our outstanding common stock and completed the trading plan on April 3, 2006.

In November 2006, we repurchased 10.2 million shares, or approximately 8.8%, of our then outstanding common stock, through an ASR program. The ASR program required that we pay the dealer a price adjustment equal to the difference between the share price at contract execution and the actual volume-weighted average price of our shares in the market during the program, subject to a cap on two-thirds of the shares. On March 23, 2007, we settled the price adjustment related to the capped portion of the shares and on May 11, 2007, we settled the remainder of the price adjustment relating to the uncapped portion of the shares, in both cases issuing shares to settle.

We summarize our share repurchase activity for the six months ended June 30, 2007 and 2006 below:

Program	Number of Shares Purchased (Issued)		Average Price Paid Per Share		Total Cost
2006 Repurchases
January Share Repurchases	477,800		$	53.69	$	25.7
10b5-1, February 2006 Plan	4,828,670			51.75		250.0
10b5-1, May 2006 Plan	3,586,300			55.75		200.0
Total Repurchases thru June 30, 2006	8,892,770		$	53.45	$	475.7
2007 Repurchases
10b5-1, May 2007 Plan	2,521,982		$	62.56	$	157.8
Accelerated Share Repurchase Settlement	(866,685	)		—		—
Total Repurchases thru June 30, 2007	1,655,297		$	62.56	$	157.8

DIVIDENDS

On May 2, 2007, we increased our quarterly dividend rate by 33%, for the year-to-date, to $0.40 per share, which we paid on July 23, 2007.

11

NEW ACCOUNTING STANDARDS

New accounting pronouncements that we have adopted or will adopt in the near future are as follows:

Statement of Financial Accounting Standards (SFAS) 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140” – Effective January 1, 2007, we adopted SFAS 155, which applies to certain types of hybrid financial instruments if acquired, issued, or subject to remeasurement after January 1, 2007. Adoption of this statement did not have a material impact on our financial condition or results of operations.

SFAS 157, “Fair Value Measurements” – In September 2006, the FASB issued SFAS 157, which establishes a framework for measuring fair value and requires expanded disclosure about the information used to measure fair value. The statement applies whenever other statements require, or permit, assets or liabilities to be measured at fair value. The statement does not expand the use of fair value in any new circumstances and is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We plan to adopt this statement as of January 1, 2008 and we do not expect the adoption of this statement to have a material impact on our financial condition or results of operations.

Financial Interpretation No. (FIN) 48, “Accounting for Uncertainty in Income Taxes” – In June 2006, the FASB issued an interpretation of SFAS 109, “Accounting for Income Taxes,” to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. We adopted this interpretation on January 1, 2007 and the impact on our Consolidated Balance Sheets and Statements of Shareholders’ Equity was $0.7.

SFAS 159, “Fair Value Option for Financial Assets and Financial Liabilities” – In February 2007, the FASB issued SFAS 159, which permits entities to voluntarily choose to measure eligible items at fair value at specified election dates. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the statement specifies that entities report unrealized gains and losses at each subsequent reporting date. The statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. We plan to adopt SFAS 159 on January 1, 2008. We do not expect the adoption of this statement to have a material impact on our financial condition or results of operations although we are in the process of evaluating the fair value option.

Emerging Issues Task Force (EITF) Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” – In June 2007, the EITF reached consensus on Issue No. 06-11, which requires that the tax benefit related to dividends paid on RSRs be recorded as an increase to equity, rather than a reduction in income tax expense. Issue No. 06-11 is effective for fiscal years beginning after December 15, 2007. We will adopt Issue No. 06-11 as of January 1, 2008, and the impact on our financial condition and results of operations is not expected to be material.

12

Note 2: Investments

FIXED MATURITIES AND MARKETABLE EQUITY SECURITIES

The following tables summarize our fixed maturities and marketable equity securities:

JUNE 30, 2007	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS (LOSSES)			FAIR VALUE
Fixed Maturities:
U.S. Government and Agencies	$	690.8	$	13.8	$	(4.9	)	$	8.9		$	699.7
States and Political Subdivisions		4,611.2		107.8		(54.7	)		53.1			4,664.3
Foreign Governments		29.5		5.5		(0.1	)		5.4			34.9
Corporate Securities:
Banks		435.2		4.5		(3.8	)		0.7			435.9
Utilities		194.6		1.0		(2.8	)		(1.8	)		192.8
Diversified Financial Services		189.5		2.2		(2.4	)		(0.2	)		189.3
Other		1,302.2		14.2		(16.6	)		(2.4	)		1,299.8
Total Corporate Securities		2,121.5		21.9		(25.6	)		(3.7	)		2,117.8
Mortgage-Backed Securities		976.5		4.9		(12.3	)		(7.4	)		969.1
Total Fixed Maturities		8,429.5		153.9		(97.6	)		56.3			8,485.8
Marketable Equity Securities		1,040.9		585.6		(11.0	)		574.6			1,615.5
Total	$	9,470.4	$	739.5	$	(108.6	)	$	630.9		$	10,101.3

DECEMBER 31, 2006	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS (LOSSES)			FAIR VALUE
Fixed Maturities:
U.S. Government and Agencies	$	751.6	$	23.1	$	(2.6	)	$	20.5		$	772.1
States and Political Subdivisions		4,332.2		184.2		(4.7	)		179.5			4,511.7
Foreign Governments		35.9		5.4		(0.2	)		5.2			41.1
Corporate Securities:
Banks		655.3		6.9		(3.7	)		3.2			658.5
Utilities		246.1		1.4		(2.6	)		(1.2	)		244.9
Diversified Financial Services		212.0		3.1		(1.6	)		1.5			213.5
Other		1,498.4		21.8		(12.6	)		9.2			1,507.6
Total Corporate Securities		2,611.8		33.2		(20.5	)		12.7			2,624.5
Mortgage-Backed Securities		1,170.1		10.8		(11.3	)		(0.5	)		1,169.6
Total Fixed Maturities		8,901.6		256.7		(39.3	)		217.4			9,119.0
Marketable Equity Securities		1,018.4		514.3		(3.0	)		511.3			1,529.7
Total	$	9,920.0	$	771.0	$	(42.3	)	$	728.7		$	10,648.7

The following table illustrates the gross unrealized losses and fair values for our investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2007:

	LESS THAN 12 MONTHS					12 MONTHS OR MORE					TOTAL
DESCRIPTION OF SECURITIES	FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES			FAIR VALUE		UNREALIZED LOSSES
Fixed Maturities:
U.S. Government and Agencies	$	184.6	$	(3.2	)	$	49.4	$	(1.7	)	$	234.0	$	(4.9	)
States and Political Subdivisions		2,245.3		(52.1	)		109.4		(2.6	)		2,354.7		(54.7	)
Foreign Governments		4.9		(0.1	)		—		—			4.9		(0.1	)
Corporate Securities		619.2		(8.9	)		753.9		(16.7	)		1,373.1		(25.6	)
Mortgage-Backed Securities		245.6		(3.6	)		463.0		(8.7	)		708.6		(12.3	)
Total Fixed Maturities		3,299.6		(67.9	)		1,375.7		(29.7	)		4,675.3		(97.6	)
Marketable Equity Securities		110.9		(11.0	)		—		—			110.9		(11.0	)
Total	$	3,410.5	$	(78.9	)	$	1,375.7	$	(29.7	)	$	4,786.2	$	(108.6	)

13

We reviewed all our investments with unrealized losses as of June 30, 2007. For all investments other than those for which we recognized an impairment charge, our evaluation determined that their declines in fair value were temporary, and we have the intent and ability to hold these securities until they recover in value. In our review, we considered:

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

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

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

• Any downgrades of the security by a rating agency

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

NET INVESTMENT INCOME

The following table summarizes our net investment income:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Interest on Fixed Maturities:
Taxable	$	60.4		$	73.6		$	124.7		$	149.9
Non-Taxable		53.8			40.6			106.9			76.7
Dividends:
Marketable Equity Securities		7.8			7.2			15.3			15.0
Redeemable Preferred Stock		1.5			0.6			2.9			1.5
Other		6.5			5.2			9.2			10.7
Total Investment Income		130.0			127.2			259.0			253.8
Investment Expenses		(1.8	)		(1.7	)		(3.6	)		(3.6	)
Net Investment Income	$	128.2		$	125.5		$	255.4		$	250.2

NET REALIZED INVESTMENT GAINS (LOSSES)

The following table summarizes our net realized investment gains (losses):

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007		2006			2007		2006
Net Realized Investment Gains (Losses) from:
Fixed Maturities	$	0.8	$	(36.4	)	$	2.9	$	(46.0	)
Marketable Equity Securities		6.4		5.1			10.9		29.3
Other		10.2		(5.9	)		16.0		(5.6	)
Net Realized Investment Gains (Losses)	$	17.4	$	(37.2	)	$	29.8	$	(22.3	)

In June 2007, we terminated an interest rate swap derivative which was designated as a cash flow hedge and received cash proceeds of $10.4 which represented the fair market value of the contract on the termination date. Upon termination, we recognized a $10.2 gain as the forecasted cash flows are probable of not occurring by the original dates specified or within two months of those dates.

14

The following tables summarize the proceeds from sales of our investments and components of the related gains (losses) before taxes:

THREE MONTHS ENDED JUNE 30, 2007	FIXED MATURITIES AVAILABLE- FOR-SALE			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	399.1		$	55.2		$	11.6		$	465.9
Gross Realized Investment Gains		2.0			6.4			—			8.4
Gross Realized Investment Losses		(1.4	)		—			—			(1.4	)
Net Realized Investment Gains from Sales		0.6			6.4			—			7.0
Impairments		(2.9	)		—			—			(2.9	)
Other, Including Gains on Calls and Redemptions		3.1			—			10.2			13.3
Net Realized Investment Gains	$	0.8		$	6.4		$	10.2		$	17.4
THREE MONTHS ENDED JUNE 30, 2006	FIXED MATURITIES AVAILABLE- FOR-SALE			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	443.2		$	43.2		$	11.0		$	497.4
Gross Realized Investment Gains		2.2			6.9			—			9.1
Gross Realized Investment Losses		(1.8	)		(0.3	)		—			(2.1	)
Net Realized Investment Gains from Sales		0.4			6.6			—			7.0
Impairments		(38.7	)		(1.5	)		—			(40.2	)
Other, Including Gains on Calls and Redemptions		1.9			—			(5.9	)		(4.0	)
Net Realized Investment Gains (Losses)	$	(36.4	)	$	5.1		$	(5.9	)	$	(37.2	)
SIX MONTHS ENDED JUNE 30, 2007	FIXED MATURITIES AVAILABLE- FOR-SALE			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	854.9		$	122.2		$	21.0		$	998.1
Gross Realized Investment Gains		4.1			15.0			—			19.1
Gross Realized Investment Losses		(1.9	)		(2.3	)		—			(4.2	)
Net Realized Investment Gains from Sales		2.2			12.7			—			14.9
Impairments		(3.5	)		(1.8	)		—			(5.3	)
Other, Including Gains on Calls and Redemptions		4.2			—			16.0			20.2
Net Realized Investment Gains	$	2.9		$	10.9		$	16.0		$	29.8
SIX MONTHS ENDED JUNE 30, 2006	FIXED MATURITIES AVAILABLE- FOR-SALE			MARKETABLE EQUITY SECURITIES			OTHER			TOTAL
Proceeds from Sales	$	778.9		$	244.4		$	11.3		$	1,034.6
Gross Realized Investment Gains		4.5			37.3			—			41.8
Gross Realized Investment Losses		(8.0	)		(4.8	)		—			(12.8	)
Net Realized Investment (Losses) Gains from Sales		(3.5	)		32.5			—			29.0
Impairments		(46.1	)		(3.2	)		—			(49.3	)
Other, Including Gains on Calls and Redemptions		3.6			—			(5.6	)		(2.0	)
Net Realized Investment Gains (Losses)	$	(46.0	)	$	29.3		$	(5.6	)	$	(22.3	)

15

Note 3: Loss and LAE Reserves

The following table analyzes the changes in our loss and loss adjustment expense (LAE) reserves for the six months ended June 30, 2007 and 2006. We report changes in estimated reserves in the Consolidated Statements of Income in the period we make the change:

SIX MONTHS ENDED JUNE 30,	2007			2006
Loss and LAE Reserves at Beginning of Period	$	5,171.4		$	5,358.2
Less Reinsurance Recoverables on Unpaid Losses, Net of Allowance		415.0			420.1
Net Balance at Beginning of Period		4,756.4			4,938.1
Incurred Loss and LAE for Claims Occurring During:
Current Year		1,754.2			1,719.3
Prior Years		(48.0	)		(78.5	)
Total Incurred Loss and LAE		1,706.2			1,640.8
Loss and LAE Payments for Claims Occurring During:
Current Year		763.9			820.7
Prior Years		1,007.8			978.4
Total Loss and LAE Payments		1,771.7			1,799.1
Net Balance at End of Period		4,690.9			4,779.8
Plus Reinsurance Recoverables on Unpaid Losses, Net of Allowance		418.0			419.3
Loss and LAE Reserves at End of Period	$	5,108.9		$	5,199.1

In the first six months of 2007, we reduced our estimates for prior years’ loss and LAE reserves by $48.0. This total decrease included:

• $22.8 reduction in Surety reserves due to a lower-than-expected number of claims

• $12.9 reduction in catastrophe-related personal property reserves, reflecting decreases in severity estimates primarily related to hurricanes that occurred in 2005

• $11.5 increase in asbestos reserves related to our participation in reinsurance pools

• $10.2 reduction in workers’ compensation reserves due to lower-than-expected severity

• A net reduction of $13.6 in a number of our lines due to emerging claim trends and related loss data, including unallocated LAE

In the first six months of 2006, we reduced our estimates for prior years’ loss and LAE reserves by $78.5. This total decrease included:

• $46.4 reduction in personal auto reserves, reflecting decreases in severity estimates primarily for prior accident years in our liability lines

• $26.1 reduction in commercial multi-peril reserves and general liability reserves other than asbestos, environmental and construction defects, due to lower-than-expected number of claims

• $12.9 reduction in commercial umbrella due to lower-than-expected number of claims

• A net increase of $6.9 in a number of our lines due to emerging claim trends and related loss data, including unallocated LAE

Note 4: Reinsurance

Our reinsurance recoverables are composed of the following amounts:

	JUNE 30, 2007			DECEMBER 31, 2006
Reinsurance Recoverables on:
Unpaid Loss and LAE Reserves	$	432.8		$	427.9
Paid Losses and LAE		31.2			14.9
Allowance for Uncollectible Reinsurance		(14.8	)		(12.9	)
Total	$	449.2		$	429.9

16

The effects of reinsurance on our earned premiums were as follows:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Direct	$	1,454.3		$	1,423.5		$	2,879.1		$	2,838.9
Ceded		(91.4	)		(44.1	)		(179.3	)		(73.8	)
Assumed		31.1			35.4			61.2			71.6
Net Earned Premiums	$	1,394.0		$	1,414.8		$	2,761.0		$	2,836.7
Assumed to Net		2.2	%		2.5	%		2.2	%		2.5	%

Reinsurance premiums ceded on a written basis are approximately equal to the ceded earned premiums disclosed above.

In connection with the sale of Safeco Financial Institution Solutions (SFIS) in 2006, we entered into a reinsurance agreement under which we ceded 100% of our lender-placed property insurance business. SFIS generated $58.0 of ceded premiums in the three months ended June 30, 2007 and $113.9 in the six months ended June 30, 2007. SFIS generated $16.1 of ceded premiums in the three and six months ended June 30, 2006.

Note 5: Debt

The following table shows the total principal amount, current and long-term portions, interest rates and maturities of our debt:

	JUNE 30, 2007						DECEMBER 31, 2006
	TOTAL		CURRENT		LONG-TERM		TOTAL		CURRENT		LONG-TERM
6.875% Notes due 2007	$	197.3	$	197.3	$	—	$	197.3	$	197.3	$	—
4.200% Notes due 2008		200.0		200.0		—		200.0		—		200.0
4.875% Notes due 2010		300.0		—		300.0		300.0		—		300.0
7.250% Notes due 2012		204.1		—		204.1		204.1		—		204.1
8.072% Debentures due 2037		348.6		—		348.6		348.6		—		348.6
Total Debt	$	1,250.0	$	397.3	$	852.7	$	1,250.0	$	197.3	$	1,052.7

In connection with the issuance of Capital Securities in 1997, Safeco issued $876.3 in principal amount of debentures to Safeco Capital Trust. The Capital Securities were mandatorily redeemable on July 15, 2037, the same date the debentures were due. The Capital Securities could be redeemed, contemporaneously with the debentures, beginning in July 2007, at a price of 104% of principal, with the call premium graded down to zero in 2017. Our obligations under the debentures and related agreements, taken together, constituted a full and unconditional guarantee of payments due on the Capital Securities.

In July 2007 we redeemed the $322.3 remaining balance of our Debentures for $336.4. The Debentures were redeemed at a price of 104% of principal, and we incurred a pretax expense of $14.1 for the redemption premium. We also retired our $26.3 Capital Trust equity investment, which was reported as debt on our Consolidated Balance Sheets. In addition, we paid $197.3 for our 6.875% senior notes which matured on July 15, 2007.

We maintain a bank credit facility with $300.0 available, which expires March 2010. The terms of the bank credit facility require us to pay a fee to have these funds available, maintain a specified minimum level of shareholders’ equity and keep our debt-to-capitalization ratio below a specified maximum. This facility does not require us to maintain any deposits as compensating balances. At June 30, 2007, we had no borrowings under the bank credit facility, and we were in compliance with all its covenants.

Note 6: Comprehensive Income

Comprehensive income is defined as all changes in Shareholders’ Equity except those arising from transactions with shareholders. Comprehensive income includes net income and other comprehensive income, which for us consists of changes in unrealized gains or losses on investment securities, amortization of pension and other postretirement benefit amounts, and derivative financial instruments and hedging activities.

17

Our components of other comprehensive income or loss were:

SIX MONTHS ENDED JUNE 30,	2007								2006
	PRETAX			TAXES		AFTER TAX			PRETAX			TAXES			AFTER TAX
Change in Net Unrealized Gains and Losses on Investment Securities	$	(68.0	)	$	23.6	$	(44.4	)	$	(187.2	)	$	65.0		$	(122.2	)
Reclassification Adjustment for Net Realized Investment (Gains) Losses Included in Net Income		(29.8	)		10.5		(19.3	)		22.3			(7.3	)		15.0
Amortization of Pension and Other Postretirement Benefit Amounts		(5.5	)		1.9		(3.6	)		—			—			—
Other Comprehensive Income (Loss)	$	(103.3	)	$	36.0	$	(67.3	)	$	(164.9	)	$	57.7		$	(107.2	)

Note 7: Commitments and Contingencies

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 actions 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.

On January 16, 2007, the United States Supreme Court heard oral argument in Burr v. Safeco. At issue was the Ninth Circuit Court of Appeal’s decision in the case. The underlying lawsuit, which was brought in October 2001 on behalf of a putative class of policyholders and sought statutory damages, alleged that we willfully violated the Fair Credit Reporting Act (“FCRA”) by failing to send appropriate notices to new customers whose initial rates were higher than they would have been had the customer had a more favorable credit report. The District Court for the District of Oregon granted summary judgment for us, holding that FCRA’s adverse action notice requirement did not apply to the rate first charged for an initial policy of insurance. The Ninth Circuit reversed the district court, holding that the adverse action notice requirement applies to new business and that our failure to send appropriate notices constituted a willful violation of FCRA. On June 4, 2007, the United States Supreme Court reversed the Ninth Circuit’s decision and ruled that Safeco had not acted to willfully violate FCRA.

On August 1, 2006, Emma Schwartzman, a shareholder, filed a derivative and direct complaint in federal court for the Western District of Washington, relating to the Executive Transition Services Agreement Safeco entered into with Mike McGavick, our former Chief Executive Officer. The complaint named as defendants certain current and former members of the Safeco Board and alleged the defendants breached their fiduciary duty by authorizing acts of corporate waste and ultra vires acts in the approval of that agreement. The complaint also claimed that the Board caused Safeco to make false and misleading statements about that agreement in our 2006 Proxy Statement. The complaint was in part derivative in nature and did not seek monetary damages from us. Rather, it asked that the director defendants correct the statements made in the 2006 Proxy Statement. We advanced payment of legal fees and costs incurred by the defendants. We and the director defendants filed a motion to dismiss on October 31, 2006. On April 19, 2007, the district court granted a complete dismissal of the plaintiff’s claims. Plaintiff failed to file an amended complaint within the time allowed, so the case is concluded.

On July 19, 2005, we received a shareholder demand letter asserting that our directors and certain former officers of Talbot Financial Corporation (Talbot) breached their duties owed to Safeco in connection with the sale of Talbot in July 2004. The letter demanded that we commence an action against the directors who approved the transaction and against the officers involved in the transaction. We formed a board committee comprised of directors not involved in the sale to review the matter. Following an investigation, the committee determined that the actions called for in the letter should not be undertaken. The shareholder, Nicholas Goldware, trustee of the Goldware Family Trust, subsequently filed a derivative complaint in King County Superior Court on March 14, 2006. The complaint named as defendants certain current and former members of our board of directors, unnamed members of the board of directors of our subsidiary, General America Corporation, and the Talbot officers. The complaint alleged the defendants breached fiduciary duties, that the Talbot officers were unjustly enriched, and that the director defendants participated in and facilitated a breach of fiduciary duties by the Talbot officers. The complaint was derivative in nature and did not seek monetary damages from us. However, we have advanced, and will continue advancing throughout the pendency of this action, payment of legal fees and costs incurred by the defendants. A motion to dismiss was filed by us and the director defendants on June 21, 2006. On May 14, 2007, the judge heard argument and dismissed the plaintiff’s claims finding that Goldware had not pled sufficient facts in support of his claims. The dismissal was without prejudice, so the plaintiff can pursue his claim if he is able to file a complaint with allegations that meet the legal standard.

18

We do not believe that the foregoing cases or other pending litigation will have a material adverse effect on our financial condition, operating results or liquidity.

Note 8: Restructuring and Asset Impairment Charges

In 2006, we implemented an organizational design initiative intended to make us a more nimble and efficient competitor. This initiative included reducing the number of organizational layers and increasing the average span of management control, in order to streamline decision making and give employees greater authority to take action quickly. As a result of this and other organizational design changes, approximately 250 positions were eliminated. We also incurred asset impairment charges in connection with our real estate consolidation efforts. We evaluate long-lived assets, such as furniture and equipment, for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. When net proceeds expected from the disposition of an asset are less than the carrying value of the asset, we reduce the carrying amount of the asset to its estimated fair value and recognize an impairment loss in our Consolidated Statements of Income.

Restructuring and asset impairment charges are allocated to our reportable segments in accordance with SFAS 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Costs that do not meet the criteria for accrual are expensed as restructuring charges when we incur them.

Total estimated costs we expect to incur in connection with the restructuring and asset impairment, including costs incurred in the three and six months ended June 30, 2007 and the year ended December 31, 2006, are as follows:

			COSTS INCURRED
	TOTAL EXPECTED COSTS		YEAR ENDED DECEMBER 31, 2006		THREE MONTHS ENDED JUNE 30, 2007		SIX MONTHS ENDED JUNE 30, 2007
Employee Termination Benefits	$	12.2	$	10.7	$	1.4	$	1.5
Asset Impairment		11.9		11.7		—		—
Lease Termination and Other Costs		1.9		1.2		0.1		0.3
Total	$	26.0	$	23.6	$	1.5	$	1.8

These costs are allocated to reportable segments as follows:

			COSTS INCURRED
	TOTAL EXPECTED COSTS		YEAR ENDED DECEMBER 31, 2006		THREE MONTHS ENDED JUNE 30, 2007		SIX MONTHS ENDED JUNE 30, 2007
Safeco Personal Insurance (SPI)
Auto	$	12.5	$	11.4	$	0.7	$	0.9
Property		4.2		3.8		0.3		0.3
Specialty		0.5		0.5		—		—
Total SPI		17.2		15.7		1.0		1.2
Safeco Business Insurance (SBI)
SBI Regular		5.8		5.2		0.3		0.4
SBI Special Accounts Facility		1.2		1.1		0.1		0.1
Total SBI		7.0		6.3		0.4		0.5
Surety		1.4		1.3		0.1		0.1
Other		0.4		0.3		—		—
Total	$	26.0	$	23.6	$	1.5	$	1.8

We expect these charges will be complete by December 31, 2007.

19

Activity related to restructuring and asset impairment accruals as of June 30, 2007 was as follows:

	ACCRUAL AT DECEMBER 31, 2006		COSTS INCURRED		AMOUNTS PAID		ACCRUAL AT JUNE 30, 2007
Employee Termination Benefits	$	3.8	$	1.5	$	4.3	$	1.0
Lease Termination and Other Costs		0.1		0.3		0.4		—
Total	$	3.9	$	1.8	$	4.7	$	1.0

Note 9: Segment Information

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

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.

Auto – The Auto segment provides coverage for our customers’ liability 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.

Property – The Property segment provides homeowners, dwelling fire, earthquake and inland marine coverage for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards.

Specialty – Our Specialty segment provides individuals with umbrella, motorcycle, recreational vehicle and boat owners insurance.

SBI

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

SBI Regular – SBI Regular is our core commercial segment, writing a variety of commercial insurance products for small- to mid-sized businesses (those with annual premiums of $0.2 or less). Our principal business insurance products include business owner policies, commercial auto, commercial multi-peril, workers compensation, commercial property and general liability insurance.

SBI Special Accounts Facility – SBI Special Accounts Facility writes large-commercial accounts (those with annual premiums of more than $0.2) for our key agents and brokers who sell our core commercial products. We also write three specialty commercial insurance programs, which provide agents’ errors and omissions insurance (predominantly for our agents), property and liability insurance for mini-storage and warehouse properties, and property, liability and professional insurance for non-profit social service organizations.

SURETY

We offer surety bonds primarily for construction and commercial businesses.

P&C OTHER

P&C Other includes runoff of assumed reinsurance and large-commercial business accounts in runoff, asbestos and environmental results and other business and programs that we have exited, including SFIS.

20

CORPORATE

The Corporate segment includes certain transactions such as the interest expense we pay on our debt, debt repurchases, miscellaneous corporate investment income, intercompany eliminations, real estate holdings, contributions to Safeco Insurance Foundation and other corporate activities that are not allocated to individual reportable segments.

OUR RESULTS

Our management measures P&C segment profit or loss based on underwriting profit or loss and combined ratios. Underwriting profit or loss is calculated by subtracting our losses from claims, LAE and underwriting expenses from our net earned premiums on a pretax basis. The combined ratio is calculated by dividing our losses, LAE and underwriting expenses by our net earned premiums. Management views underwriting profit or loss and combined ratios as critical measures to assess the effectiveness of our underwriting activities.

Underwriting profit or loss and combined ratios are not a substitute for net income determined in conformity with GAAP.

The following tables present selected financial information by segment and reconcile segment revenues, underwriting and operating results to amounts reported in our Consolidated Statements of Income:

REVENUES

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007		2006			2007		2006
Net Earned Premiums
SPI
Auto	$	657.0	$	684.0		$	1,307.7	$	1,370.0
Property		232.8		226.8			459.5		449.7
Specialty		28.7		25.9			55.9		50.7
Total SPI		918.5		936.7			1,823.1		1,870.4
SBI
SBI Regular		322.4		310.4			636.2		619.5
SBI Special Accounts Facility		66.0		67.2			131.3		135.3
Total SBI		388.4		377.6			767.5		754.8
Surety		85.8		70.6			169.4		142.4
P&C Other		1.3		29.9			1.0		69.1
Total Net Earned Premiums		1,394.0		1,414.8			2,761.0		2,836.7
P&C Net Investment Income		120.1		117.8			241.2		234.7
Total P&C Revenues		1,514.1		1,532.6			3,002.2		3,071.4
Corporate Net Investment Income		8.1		7.7			14.2		15.5
Gain on Sales of Real Estate		—		32.8			—		32.8
Net Realized Investment Gains (Losses)		17.4		(37.2	)		29.8		(22.3	)
Total	$	1,539.6	$	1,535.9		$	3,046.2	$	3,097.4

21

PRETAX UNDERWRITING PROFIT AND NET INCOME

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Underwriting Profit (Loss)
SPI
Auto	$	17.3		$	62.0		$	34.5		$	115.5
Property		37.1			32.3			81.9			78.5
Specialty		5.3			7.3			14.0			18.5
Total SPI		59.7			101.6			130.4			212.5
SBI
SBI Regular		31.8			58.9			67.6			97.0
SBI Special Accounts Facility		20.1			23.7			33.2			37.9
Total SBI		51.9			82.6			100.8			134.9
Surety		37.3			22.0			73.1			46.3
P&C Other		(5.2	)		(16.9	)		(21.3	)		(17.1	)
Total Underwriting Profit		143.7			189.3			283.0			376.6
P&C Net Investment Income		120.1			117.8			241.2			234.7
Restructuring and Asset Impairment Charges		(1.5	)		(1.1	)		(1.8	)		(2.0	)
P&C Net Realized Investment Gains (Losses)		7.6			(25.7	)		14.2			(8.8	)
Total P&C		269.9			280.3			536.6			600.5
Corporate		(20.7	)		(14.0	)		(39.6	)		(26.7	)
Gain on Sales of Real Estate		—			32.8			—			32.8
Losses on Debt Repurchases		—			(1.5	)		—			(2.9	)
Corporate Net Realized Investment Gains (Losses)		9.8			(11.5	)		15.6			(13.5	)
Income before Income Taxes		259.0			286.1			512.6			590.2
Provision for Income Taxes		72.6			86.4			143.7			182.3
Net Income	$	186.4		$	199.7		$	368.9		$	407.9
COMBINED RATIOS +
	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
SPI
Auto		97.4	%		90.9	%		97.4	%		91.6	%
Property		84.0			85.8			82.2			82.5
Specialty		81.6			72.1			74.9			63.6
Total SPI		93.5			89.2			92.8			88.6
SBI
SBI Regular		90.2			81.0			89.4			84.3
SBI Special Accounts Facility		69.5			64.8			74.7			72.1
Total SBI		86.6			78.1			86.9			82.1
Surety		56.4			68.8			56.8			67.5
P&C Other		*			*			*			*
Total Combined Ratio		89.7	%		86.7	%		89.8	%		86.8	%

+ 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 runoff business with declining premium.

Note 10: Subsequent Events

CONTRIBUTION TO SAFECO INSURANCE FOUNDATION

On July 11, 2007 our board of directors approved a non-recourse, non-refundable contribution to the Safeco Insurance Foundation, a separate 501(c)3 endowment fund, of appreciated equity securities with a fair value of $60.0 and a book value of $2.1. The contribution was funded on July 27, 2007. We estimate the after-tax impact to be $18.9.

22

DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION

Our insurance subsidiaries pay dividends to Safeco Corporation. We then use that money to pay dividends to our shareholders, repurchase common stock, as well as to make principal and interest payments on our debt. Individual states limit the amount of dividends that our subsidiaries domiciled in those states can pay Safeco Corporation. Exceeding such limits would require prior regulatory approval. We have requested and received approval from state regulators for special dividends totaling $700.0 to be paid by our insurance subsidiaries to Safeco Corporation on August 15, 2007.

23

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

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

This discussion should be read with the Consolidated Financial Statements and Condensed Notes to Consolidated Financial Statements in Part I, Item 1 of this Form 10-Q and our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Certain reclassifications have been made to prior-period financial information for consistency with the current-period presentation.

Forward-Looking Information

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

We have made forward-looking statements in this report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations. We have tried, wherever possible, to identify such statements by using words such as “will,” “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “target,” “forecast” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance or business plans and prospects. We believe it is important to communicate our expectations to investors. However, there may be events in the future we are not able to predict accurately or that we do not fully control, which could cause actual results to differ materially from those expressed or implied by our forward-looking statements, including changes in general economic and business conditions, changes in the insurance industry and changes in our business strategies. Investors should bear this in mind as they consider forward-looking statements. Additional information on factors that may impact our forward-looking statements is included in Item 1A “Risk Factors” of our 2006 Annual Report on Form 10-K.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission.

Summary

We are a property and casualty (P&C) insurance company with headquarters in Seattle, Washington. We sell insurance to drivers, homeowners, renters and owners and operators of small- and mid-sized businesses. We also sell Surety bonds to contractors and businesses. Our business helps people protect what they value and deal with the unexpected. Our revenues come from the premiums we earn on the insurance policies we write and the income we earn from our investment of premium dollars.

Overall Results

Our vision is to be the indispensable choice for customers and agents through excellence in the solutions we provide, the ease of doing business with us and the competitiveness of our products. We aim to achieve industry-leading profitable growth, build a sustainable competitive advantage, and create long-term shareholder value. We measure our success by tracking our operating and financial performance according to the following indicators:

• Combined ratio

• Earnings per share

• Return on equity

• Revenue, premium and policy growth

In addition, we track our operating performance with various productivity and efficiency measures; we report periodically on a subset of productivity measures, such as policies-in-force per full-time equivalent employee (PIF per FTE) and expense per policies-in-force (expense per PIF).

24

The following table shows the trends in these key measures:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Combined Ratio		89.7	%		86.7	%		89.8	%		86.8	%
Net Income per Diluted Share	$	1.75		$	1.68		$	3.46		$	3.37
Net Return on Equity		18.4	%		20.1	%		18.6	%		20.2	%
Total Revenues	$	1,539.6		$	1,535.9		$	3,046.2		$	3,097.4
PIF per FTE 1		583			497			578			490
Expense per PIF 1,2	$	237		$	257		$	238		$	257

1 Excluding impact of SFIS, which we sold on August 30, 2006

2 Expense represents annual (12 month trailing) G&A expense and paid UAE (loss handling expenses). It excludes commissions, legal defense costs, premium taxes and other expenses.

We have taken major strategic actions to reshape our business and become a more focused and successful competitor.

Our 2007 goals are to:

• Perform for our owners by growing our policies-in-force at a rate greater than the industry average, without sacrificing our profitability.

• Build continuous improvement as a mindset, improving our business processes to deliver higher quality services for our customers and agent partners at a lower cost.

• Make the customer the prism through which we build differentiated products, and satisfy a diverse public whose expectations of excellence continue to rise.

• Build tools for the future by developing our agents and employees, and investing in technology and research.

Perform for our owners by growing our policies-in-force at a rate greater than the industry average, without sacrificing our profitability – We remain committed to growing our policies without sacrificing our profitability, thereby satisfying the expectations of value-oriented investors. We intend to capitalize on our superior segmentation and platform, the opportunities afforded by our committed agency force and our inherent capability to innovate.

We have further refined our underwriting capabilities with the launch of Safeco True Pricing™, our new multivariate pricing segmentation model for auto and homeowners. This product reevaluates customers at every renewal and re-underwrites them so that they can receive the benefit of their most up-to-date policy information, such as recent claim and driving experience.

Through continued engagement with our agency force, our agents have provided feedback on enhancements that would be helpful in selling Safeco products. In response, we have rolled out more coverage options for our agents and customers, such as Safeco Optimum Package™ products, which offer customers the choice of additional coverages for auto, homeowners and small commercial policies. Another example of customer choice with some added innovation is our Identity Theft Restoration coverage for homeowners. It is competitively priced coverage that provides customers with a limited power-of-attorney option. This combination of price and coverage provides uniqueness to our policy offering. The launch of Teensurance™ in the second quarter of 2007 also highlights our push around innovation. Teensurance is a product for parents and their teen drivers that promotes safe driving habits and offers an increased sense of security. Because Teensurance offers a unique solution to an important consumer concern, we expect it to help us attract and retain preferred households with young drivers. Mindful of consumers’ preferences for service where, when and how it is most convenient to them, we are also working to launch a next-generation web presence. All of these changes have been supported with very clear and transparent communication materials by our “Re:Action Force”. In SBI, we have launched BOP Access, our newest commercial offering and several new classes of Commercial Auto business. These expansions capitalize on one of our key value propositions: ease of doing business for our agents.

We have also continued to expand our agency appointments, adding distribution partners through June 30, 2007, and we have taken steps to strengthen our relationships with our independent agents. We believe that sophisticated pricing segmentation, additional customer choices and clear communication have all contributed to our year-over-year growth in Property and SBI Regular policies-in-force and stabilization in our number of Auto policies. In addition, we have grown our Surety business at a pace well above industry averages through utilization of our highest credit quality accounts and new account growth.

25

Build continuous improvement as a mindset, improving our business processes to deliver higher quality services for our customers and agent partners at a lower cost – We will continue to relentlessly improve our business processes. We intend to measure and achieve real productivity improvements across the business, and we are holding each employee personally accountable for contributing to our productivity gains. We have established an annualized expense savings target of $50 to $75 for 2007. During the second quarter of 2007, we outsourced our investment portfolio management and accounting as part of our ongoing efforts towards process improvement and optimization of our business. We are also applying Lean Six Sigma process improvement methodology across the company to identify and implement additional opportunities to lower operating costs, increase speed and improve service to internal and external customer groups.

Make the customer the prism through which we will build differentiated products and satisfy a diverse public whose expectations of excellence continue to rise – We are working to build customer-focused differentiated products, and we expect to introduce a range of new products that address consumer needs. Recognizing that consumers’ expectations for quality continue to rise, our service will move toward defect-free delivery.

Build tools for the future by developing our agents and employees and investing in technology and research – We will continue to invest in the technology that our agents and employees rely on to stay ahead of the competition, and we will continue to invest in our research efforts and infrastructure to enable future product innovation, speed to market and ongoing service enhancement. In the first six months of 2007, for example, we tested the viability of key technologies that will ultimately drive our business strategy, including applications that pull together disparate legacy data to create a more holistic view of our customers, advanced data mining tools and modernized workplace technologies which we expect to lead to enhanced employee productivity and collaboration. We also made progress toward transitioning off of legacy systems and established a governance structure to ensure that our technology strategy remains aligned with our overall business strategy.

HOW WE REPORT OUR RESULTS

We manage our 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, we report certain transactions such as the interest expense we pay on our debt, debt repurchases, miscellaneous corporate investment income, intercompany eliminations, real estate holdings, contributions to Safeco Insurance Foundation and other corporate activities in our Corporate segment and do not allocate these to individual reportable segments.

HOW WE MEASURE OUR RESULTS

We look at three measures to assess the results of our business segments:

• Premiums

• Underwriting profit or loss

• Combined ratio

26

Written premiums are premiums charged for policies issued. We view net written premiums as a measure of business production for the period under review and a leading indicator of net earned premiums. We include insurance premiums in revenues as they are earned over the terms of the policies.

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

Our 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 for every dollar of premium earned, 95 cents are spent on losses, LAE and underwriting expenses, and 5 cents are underwriting profit. A lower combined ratio reflects better underwriting results than a higher combined ratio.

More information about our segment results can be found in Our P&C Operating Results.

Investment activities are an important part of our business. We don’t include our investment portfolio results when measuring the profitability of our individual segments because we manage them separately. Our first priority is to meet our promise to our policyholders that we will maintain resources to pay their claims. We invest the insurance premiums we receive in a diversified portfolio of primarily high-grade fixed maturities until they are needed to pay claims. This strategy is designed to provide protection for our policyholders and steady income for our shareholders.

Our investment philosophy is to:

• Emphasize after-tax investment income, balanced with investment quality and risk

• Provide for liquidity when needed

• Reduce volatility in investment performance through prudent diversification

We measure our investment results in two parts: the after-tax 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. It is our intent to hold a diversified portfolio so we will achieve consistent investment performance. More information about our investment results can be found in Our Investment Results section.

Application of Critical Accounting Estimates

We have identified the accounting estimates listed in the MD&A Section of our 2006 Annual Report on Form 10-K as critical to understanding our results of operations and financial condition. The application of these accounting estimates requires us 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 2006 Annual Report on Form 10-K.

27

Consolidated Results of Operations

The following table presents summarized consolidated financial information. A detailed discussion of our results by segment follows.

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007		2006			2007		2006
REVENUES
Net Earned Premiums	$	1,394.0	$	1,414.8		$	2,761.0	$	2,836.7
Net Investment Income		128.2		125.5			255.4		250.2
Net Realized Investment Gains (Losses)		17.4		(37.2	)		29.8		(22.3	)
Gain on Sales of Real Estate		—		32.8			—		32.8
Total Revenues		1,539.6		1,535.9			3,046.2		3,097.4
EXPENSES
Losses and Loss Adjustment Expenses		858.0		803.5			1,706.2		1,640.8
Amortization of Deferred Policy Acquisition Costs		231.3		227.4			467.5		463.5
Other Underwriting and Operating Expenses		167.8		193.4			311.9		352.3
Interest Expense		22.0		22.9			46.2		45.7
Restructuring and Asset Impairment Charges		1.5		1.1			1.8		2.0
Losses on Debt Repurchases		—		1.5			—		2.9
Total Expenses		1,280.6		1,249.8			2,533.6		2,507.2
Income before Income Taxes		259.0		286.1			512.6		590.2
Provision for Income Taxes		72.6		86.4			143.7		182.3
Net Income	$	186.4	$	199.7		$	368.9	$	407.9

REVENUES

Total revenues increased $3.7, or 0.2%, in the three months ended June 30, 2007 and decreased $51.2, or 1.7%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes were primarily driven by:

• Net earned premiums – Our net earned premiums decreased $20.8, or 1.5%, in the three months ended June 30, 2007 and $75.7, or 2.7%, in the six months ended June 30, 2007, compared with the same periods in 2006. SPI Auto decreased $27.0 in the three months ended June 30, 2007 and $62.3 in the six months ended June 30, 2007, compared with the same periods in 2006. These decreases were partially offset by increases of $12.0 in the three months ended June 30, 2007 and $16.7 in the six months ended June 30, 2007 in SBI Regular, and $15.2 in the three months ended June 30, 2007 and $27.0 in the six months ended June 30, 2007 in Surety, compared with the same periods in 2006. P&C Other decreased $28.6 in the three months ended June 30, 2007, and $68.1 in the six months ended June 30, 2007, compared with the same periods in 2006, due to the sale of Safeco Financial Institution Solutions (SFIS) in April 2006.

• Net investment income – Our net investment income increased $2.7, or 2.2%. in the three months ended June 30, 2007 and $5.2, or 2.1%, in the six months ended June 30, 2007, compared with the same periods in 2006. The increases reflected a higher average after-tax yield, resulting from a portfolio mix shift toward tax-exempt fixed maturities, partially offset by a decreased investment in taxable fixed maturities.

• Net realized investment gains – Net realized investment gains increased $54.6 in the three months ended June 30, 2007 and $52.1 in the six months ended June 30, 2007, compared with the same periods in 2006. The increases reflect losses on securities sold and higher impairments recognized in the three and six months ended June 30, 2006.

• Gain on sales of real estate – We recognized a pretax gain of $32.8, ($21.3 after tax), on the sale of our Redmond, Washington office campus in the second quarter of 2006.

NET INCOME

Net income decreased $13.3, or 6.7%, in three months ended June 30, 2007 and $39.0, or 9.6%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes were primarily driven by the revenue changes described above, as well as the following:

• Losses and Loss Adjustment Expenses (LAE) – Losses and LAE increased $54.5, or 6.8%, in the three months ended June 30, 2007, compared with the same period in 2006, due to a decrease in favorable prior-year reserve development. In the three months ended June 30, 2007, we reduced our estimates for prior years’ loss and LAE

28

reserves by $23.4, compared with a reduction of $45.6 in the same period in 2006. Losses and loss adjustment expenses increased $65.4, or 4.0%, in the six months ended June 30, 2007, compared with the same period in 2006, due to a decrease in favorable prior-year reserve development of $30.5, and an increase in current year accident loss costs, offset in part by a reduction in catastrophes of $80.7. During the six months ended June 30, 2007, we reduced our estimates for prior years’ loss and LAE reserves by $48.0, resulting in favorable prior-year reserve development in our property, workers’ compensation and surety lines, compared with $78.5 of favorable prior-year reserve development in 2006, primarily in SPI Auto.

• Catastrophe Losses – We categorize catastrophes as events resulting in losses greater than $0.5 per event and involving multiple claims and policyholders. We cannot predict when catastrophes may occur, and the number and types of catastrophes can vary widely. The losses they cause may significantly exceed our prior experience. Catastrophes can be caused by natural events, such as hurricanes, tornadoes, wildfires, earthquakes and hailstorms, or other factors such as terrorism, riots, hazardous materials releases or utility outages. Pretax after reinsurance catastrophe losses were $13.2 in the three months ended June 30, 2007, compared with $60.7 in the same period in 2006, and $16.0 in the six months ended June 30, 2007, compared with $96.7 in the same period in 2006. This decrease in pretax catastrophe losses reflects a decrease in hail and wind storms thus far in 2007.

• Net realized investment gains – After tax net realized investment gains were $11.4 in the three months ended June 30, 2007, compared with losses of $24.8 in the same period in 2006. After tax net realized investment gains were $19.3 in the six months ended June 30, 2007, compared with net realized investment losses of $15.0 in the same period in 2006.

• Provision for income taxes – Our provision for income taxes decreased $13.8 in the three months ended June 30, 2007 and decreased $38.6 in the six months ended June 30, 2007, compared with the same periods in 2006. Our effective tax rate was 28.0% in the three months ended June 30, 2007, compared with 30.2% in the same period in 2006, and 28.0% in the six months ended June 30, 2007, compared with 30.9% in the same period in 2006. The decrease in our effective tax rate in 2007 primarily reflected increased investments in tax-exempt fixed maturities.

OTHER UNDERWRITING AND OPERATING EXPENSE

The following table details the categories of our other underwriting and operating expenses:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Salaries	$	117.7		$	130.2		$	233.5		$	258.3
Employee Benefits		43.6			71.0			69.8			97.0
Rent and Depreciation		19.0			18.2			36.3			39.1
Office Expenses		25.4			25.4			49.1			51.1
Advertising		7.0			4.9			11.5			8.3
Travel and Entertainment		7.9			7.9			14.2			15.6
Risk and Cost Containment		17.0			13.4			34.3			26.2
Professional Services		15.0			15.0			30.8			25.5
Commissions (Including Bonus Commissions)		234.6			219.7			453.2			433.6
Premium Taxes		32.3			31.0			62.5			59.1
Other Taxes, Licenses and Fees		1.9			6.1			5.7			2.6
Legal Defense Costs		50.6			57.2			105.4			112.5
Changes in Deferred Policy Acquisition Costs		(21.0	)		(11.7	)		(28.9	)		(4.8	)
Other Expenses		4.2			3.8			2.5			13.0
Total	$	555.2		$	592.1		$	1,079.9		$	1,137.1
Loss Adjustment Expenses		156.1			171.3			300.5			321.3
Operating Expenses +		399.1			420.8			779.4			815.8
Total	$	555.2		$	592.1		$	1,079.9		$	1,137.1

+ Includes Amortization of Deferred Policy Acquisition Costs and Other Underwriting and Operating Expenses.

Our other underwriting and operating expense decrease reflects the implementation of our organizational design initiative and business process improvement initiatives, which have decreased our headcount and increased productivity.

29

RECONCILING SEGMENT RESULTS

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

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007			2006		2007			2006
P&C	$	269.9		$	280.3	$	536.6		$	600.5
Corporate		(10.9	)		5.8		(24.0	)		(10.3	)
Income before Income Taxes	$	259.0		$	286.1	$	512.6		$	590.2

The GAAP results are further described using our segment measures, which provide a helpful picture of how our company is doing. However, using segment measures to measure profitability – while fairly common in our industry – is not consistent with GAAP.

Our P&C Operating Results

The primary measures of our operating results include our premiums, underwriting profit or loss and combined ratios. The following tables report those key items – by our reportable segments – for the three and six months ended June 30, 2007 and 2006. More information about the results – also by reportable segment – follows the tables.

Premiums are the primary driver of our revenues, along with net investment income and net realized investment gains or losses. Net written premiums are a non-GAAP measure representing the amount of premium charged for policies issued with effective dates during the period. Premiums are included as revenue in the Consolidated Statements of Income as they are earned over the underlying policy period. Net written premiums applicable to the unexpired term of a policy are recorded as unearned premiums on our Consolidated Balance Sheets.

We view net written premiums as a measure of business production for the period under review and a leading indicator of net earned premiums. The following table reconciles net written premiums to net earned premiums by reportable segment, the most directly comparable GAAP measure on our Consolidated Statements of Income:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums
Safeco Personal Insurance (SPI)
Auto	$	643.4		$	662.4		$	1,312.1		$	1,361.3
Property		259.2			248.3			464.6			440.8
Specialty		36.6			33.6			63.1			57.5
Total SPI		939.2			944.3			1,839.8			1,859.6
Safeco Business Insurance (SBI)
SBI Regular		354.4			337.9			683.5			652.3
SBI Special Accounts Facility		64.3			63.6			128.9			134.5
Total SBI		418.7			401.5			812.4			786.8
Surety		106.9			84.5			199.6			162.7
P&C Other		0.7			29.5			3.7			68.8
Total Net Written Premiums		1,465.5			1,459.8			2,855.5			2,877.9
Change in Net Unearned Premiums		(71.5	)		(45.0	)		(94.5	)		(41.2	)
Net Earned Premiums	$	1,394.0		$	1,414.8		$	2,761.0		$	2,836.7

30

Our net earned premiums by reportable segment were:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Earned Premiums
Safeco Personal Insurance (SPI)
Auto	$	657.0		$	684.0		$	1,307.7		$	1,370.0
Property		232.8			226.8			459.5			449.7
Specialty		28.7			25.9			55.9			50.7
Total SPI		918.5			936.7			1,823.1			1,870.4
Safeco Business Insurance (SBI)
SBI Regular		322.4			310.4			636.2			619.5
SBI Special Accounts Facility		66.0			67.2			131.3			135.3
Total SBI		388.4			377.6			767.5			754.8
Surety		85.8			70.6			169.4			142.4
P&C Other		1.3			29.9			1.0			69.1
Net Earned Premiums	$	1,394.0		$	1,414.8		$	2,761.0		$	2,836.7
Underwriting profit is our measure of each segment’s performance. Underwriting profit is our net earned premiums less our losses from claims, LAE and underwriting expenses:
	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Underwriting Profit
Safeco Personal Insurance (SPI)
Auto	$	17.3		$	62.0		$	34.5		$	115.5
Property		37.1			32.3			81.9			78.5
Specialty		5.3			7.3			14.0			18.5
Total SPI		59.7			101.6			130.4			212.5
Safeco Business Insurance (SBI)
SBI Regular		31.8			58.9			67.6			97.0
SBI Special Accounts Facility		20.1			23.7			33.2			37.9
Total SBI		51.9			82.6			100.8			134.9
Surety		37.3			22.0			73.1			46.3
P&C Other		(5.2	)		(16.9	)		(21.3	)		(17.1	)
Total Underwriting Profit		143.7			189.3			283.0			376.6
P&C Net Investment Income		120.1			117.8			241.2			234.7
Restructuring and Asset Impairment Charges		(1.5	)		(1.1	)		(1.8	)		(2.0	)
Net Realized Investment Gains (Losses)		7.6			(25.7	)		14.2			(8.8	)
P&C Income before Income Taxes	$	269.9		$	280.3		$	536.6		$	600.5
Combined ratios show the relationship between underwriting profit and net earned premiums. Using ratios helps us see our operating trends without the effect of changes in the volume of net earned premiums:
	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Combined Ratios
Safeco Personal Insurance (SPI)
Auto		97.4	%		90.9	%		97.4	%		91.6	%
Property		84.0			85.8			82.2			82.5
Specialty		81.6			72.1			74.9			63.6
SPI Total		93.5			89.2			92.8			88.6
Safeco Business Insurance (SBI)
SBI Regular		90.2			81.0			89.4			84.3
SBI Special Accounts Facility		69.5			64.8			74.7			72.1
SBI Total		86.6			78.1			86.9			82.1
Surety		56.4			68.8			56.8			67.5
P&C Other		*			*			*			*
Total Combined Ratio +		89.7	%		86.7	%		89.8	%		86.8	%

+ 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 declining premium.

31

Auto

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	643.4		$	662.4		$	1,312.1		$	1,361.3
Net Earned Premiums		657.0			684.0			1,307.7			1,370.0
Underwriting Profit		17.3			62.0			34.5			115.5
Loss and LAE Ratio		73.9	%		66.8	%		73.8	%		68.1	%
Expense Ratio		23.5			24.1			23.6			23.5
Combined Ratio		97.4	%		90.9	%		97.4	%		91.6	%

Our Auto segment provides coverage for liability of our policyholders to others for both bodily injury and property damage, for injuries sustained by our policyholders and for physical damage to our customers’ vehicles from collision and other hazards.

PREMIUMS

Net written premiums decreased $19.0, or 2.9%, in the three months ended June 30, 2007 and $49.2, or 3.6%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes in net written premiums were primarily driven by:

• Policies-in-force (PIF) – PIF at June 30, 2007 decreased 2.7% compared with June 30, 2006, due to increasing competition in our nonstandard and standard auto business. This decrease was partly offset by an increase in our preferred products driven by our agent initiatives, such as increased agent compensation and improved ease of doing business, along with the impact of our Safeco Optimum Package™. Modest rate changes, an increase in average policy tenure, and a shift toward a preferred policy mix contributed to an increased policy retention rate of 80.1% as of June 30, 2007, compared with 79.0% as of June 30, 2006. New policies sold increased 7.6% in the three months ended June 30, 2007 and 2.0% in the six months ended June 30, 2007, compared with the same periods in 2006.

• Changes in average premiums – 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. Overall, we received approval for average rate increases of 1.3% in the first six months of 2007, compared with a 0.9% increase in the same period in 2006. Average premiums are also affected by changes in the risk profile of our policyholders, as well as the increased pricing for those policies that insure newer and more expensive cars, which we refer to as premium trend. Premium trend was negative in the second quarter of 2007, due to a change in our mix of business to lower average premium policies. This is primarily the result of fewer non-standard policies in our business mix during the first six months of 2007 compared with the same period last year.

Net earned premiums decreased $27.0, or 3.9%, in the three months ended June 30, 2007 and $62.3, or 4.5%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes in net earned premiums were primarily driven by:

• Policies-in-force (PIF) – Lower average PIF decreased net earned premiums by $21.7 in the three months ended June 30, 2007 and $46.9 in the first six months ended June 30, 2007, compared with the same periods in 2006.

• Changes in average premiums – Lower average premiums decreased net earned premiums by $5.3 in the three months ended June 30, 2007 and $15.5 in the six months ended June 30, 2007, compared with the same periods in 2006.

32

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Auto decreased $44.7 and our combined ratio increased 6.5 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit decreased $81.0 and our combined ratio increased 5.8 points in the six months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit and combined ratio were primarily driven by:

• Changes in average premiums – Negative premium trend, offset in part by higher premium rates, increased our Auto combined ratio by 0.7 points in the three months ended June 30, 2007 and 1.0 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Loss costs – Our loss costs increased in the mid-single digits in the three months ended June 30, 2007, compared with the same period in 2006, and in the mid-single digits in the first six months of 2007, compared with the same period in 2006. Loss cost changes over the three months ended June 30, 2007 were driven by a low-single digit percentage decrease in frequency (the average number of claims filed) and a percentage increase in the high-single digit increase in severity (the average cost of a claim) due primarily to higher costs for bodily injury and personal injury protection claims in the three months ended June 30, 2007. For the first six months of 2007, loss cost changes were driven by a low-single digit percentage decrease in frequency and a mid-single digit increase in severity. These factors, net of reinsurance, increased our combined ratio by 6.0 points in the three months ended June 30, 2007 and by 4.1 points in the six months ended June 30, 2007, compared with the same periods in 2006. Our LAE costs decreased our combined ratio by 0.8 points in the three months ended June 30, 2007 and 0.9 points in the six months ended June 30, 2007, compared with the same periods in 2006, primarily due to lower customer claims staffing.

• Prior-year reserve development – Our underwriting results included favorable prior-year reserve development of $6.2 in the three months ended June 30, 2007 and $5.5 in the six months ended June 30, 2007. Our underwriting results included favorable prior-year reserve development of $25.6 in the three months ended June 30, 2006 and $46.4 in the six months ended June 30, 2006 as a result of lower-than-expected bodily injury severity, primarily in accident years 2004 and 2005. The change in prior-year reserve development increased our combined ratio by 2.8 points in the three months ended June 30, 2007 and by 3.0 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Catastrophe losses – Pretax after reinsurance catastrophe losses were $3.3 in the three months ended June 30, 2007, compared with $12.7 in the same period in 2006, and $4.4 in the six months ended June 30, 2007, compared with $21.0 in the same period in 2006. The decrease in catastrophe losses was due to fewer high magnitude wind and hail storms in the first six months of 2007, compared with the same period in 2006. The lower catastrophe losses in the three months ended June 30, 2007 decreased the combined ratio by 1.6 points compared with the same period in 2006. The lower catastrophe losses in the six months ended June 30, 2007 decreased the combined ratio by 1.4 points, compared with the same period in 2006.

• Expenses – Our expense ratio decreased 0.6 points in the three months ended June 30, 2007 and increased 0.1 points in the six months ended June 30, 2007, compared with the same periods in 2006 due to additional agent commissions resulting from our restructured 2007 agent compensation program, offset by our ongoing process improvement efforts and expense reduction initiatives.

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

Underwriting Segmentation – During March we launched a new version of our multi-variate pricing segmentation model under a program we call Safeco True Pricing™. This product reevaluates customers at every renewal and re-underwrites them so that we can better match rate for risk. Policyholders who continue to drive well and have favorable loss experience will generally receive better premium rates and those with new driving activity and claims will receive increased premiums. We launched five states in the first half of 2007 and have plans to launch at least a dozen more states by the end of 2007.

Business Growth – We continue to study the purchasing behaviors of insurance consumers in order to design products that reflect changing demographics. We continue to develop bundled products and other enhancements to better appeal to specific market niches within the marketplace. These positive factors will be partially offset by our need to increase our rates slightly faster than the market as a whole over the next year.

33

Expense Management – We remain focused on our business process improvement effort that is examining all aspects of our operations for potential cost savings. The goal is to achieve greater efficiency by streamlining or eliminating processes, outsourcing processes where appropriate, and building our infrastructure and technological capability.

Compensation – Based on our review of the market environment, we redesigned our agent compensation package for 2007 to be more competitive with other national carriers who sell through independent agents.

Overall – Our target goal is a 96.0% combined ratio. With our current quarter result of 97.4% (due to loss costs that were slightly higher than expected) we intend to increase rates modestly in those specific states requiring adjustment. Through the first half of the year we have increased rates in 10 states.

Property

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	259.2		$	248.3		$	464.6		$	440.8
Net Earned Premiums		232.8			226.8			459.5			449.7
Underwriting Profit		37.1			32.3			81.9			78.5
Loss and LAE Ratio		54.5	%		56.4	%		53.7	%		53.7	%
Expense Ratio		29.5			29.4			28.5			28.8
Combined Ratio		84.0	%		85.8	%		82.2	%		82.5	%

Our Property segment provides homeowners, dwelling fire, earthquake and inland marine coverage for individuals. Our Property coverages protect homes, condominiums and rental property contents against losses from a wide variety of hazards.

PREMIUMS

Net written premiums increased $10.9, or 4.4%, in the three months ended June 30, 2007 and $23.8, or 5.4%, in the six months ended June 30, 2007, compared with the same periods in 2006. This reflected:

• Changes in PIF – PIF increased 6.9% as of June 30, 2007, compared with the same period in 2006. This reflected an increase in new business of 46.1% in the three months ended June 30, 2007 and 50.8% in the six months ended June 30, 2007, compared with the same periods in 2006. Our retention rate increased to 85.4% as of June 30, 2007, from 84.5% as of June 30, 2006, in part due to rate changes throughout 2006 and 2007, increased commissions and improved cross-selling with preferred auto.

• Changes in average premiums – We file rate changes on a state-by-state basis. Rate changes are reflected on existing policies on renewal and are earned in our revenues over the twelve-month policy term. Overall we received approval for average rate decreases in our property business of 6.1% in the first six months of 2007, compared with 2.2% in the same period in 2006. Average premiums are also affected by automatic increases in the amount of insurance coverage to adjust for inflation in building costs and by shifts in the mix of our business, which we refer to as premium trend. Premium trend resulted in an increase to net written premiums in the first three and six months of 2007, compared with the same periods in 2006, due in part to inflation guard increases and new business from higher premium states.

Net earned premiums increased $6.0, or 2.6%, in the three months ended June 30, 2007 and $9.8, or 2.2%, in the six months ended June 30, 2007, compared with the same periods of 2006. This reflected:

• Changes in PIF – Higher average PIF increased net earned premiums by $10.3 in the three months ended June 30, 2007 and $15.7 in the six months ended June 30, 2007, compared with the same periods in 2006.

• Changes in average premiums – Lower average premiums decreased net earned premiums by $0.8 in the three months ended June 30, 2007 and $2.1 in the six months ended June 30, 2007, compared with the same periods in 2006.

34

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Property increased $4.8 and our combined ratio decreased 1.8 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit increased $3.4 and our combined ratio decreased 0.3 points in the six months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit and combined ratios were primarily driven by:

• Changes in average premiums – Our homeowners rate changes, combined with premium trend, increased our Property combined ratio by 0.3 points in the three months ended June 30, 2007 and 0.4 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Loss costs – Our Property loss costs experienced double-digit increases in the three and six months ended June 30, 2007 compared with the same periods in 2006. For the three months ended June 30, 2007, we experienced percentage increases in frequency in the low single digits, and severity increases in the high teens, due to a number of severe losses for Homeowners and Dwelling Fire. For the first six months of 2007, loss costs increased due to percentage increases in the mid-single-digits in frequency, resulting from an increased number of non-catastrophe weather claims in the first quarter, and percentage increases in the mid teens in severity. These factors, net of reinsurance, increased our Property combined ratio by 8.8 points in the three months ended June 30, 2007 and by 9.4 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Prior-year reserve development – Our underwriting results in the three months ended June 30, 2007 included unfavorable prior-year reserve development of $4.8, compared with unfavorable prior-year development of $3.7 in the same period in 2006. The change was primarily due to a reduction of ceded reinsurance estimates for the 2005 hurricanes. Our underwriting results in the first six months of 2007 included favorable prior-year reserve development of $10.2, compared with favorable prior-year reserve development of $1.0 in the same period in 2006. The change is primarily due to lower-than-expected severity of the 2005 hurricane season and a reduction of reserve estimates for assessments on state-mandated participation pools. The change in prior-year reserve development increased our combined ratio by 0.5 points in the three months ended June 30, 2007 and decreased our combined ratio by 2.0 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Catastrophe losses – Pretax after reinsurance catastrophe losses were $12.7 in the three months ended June 30, 2007, compared with $38.3 in the same period in 2006, and $14.8 in the six months ended June 30, 2007, compared with $60.9 in the same period in 2006. The lower catastrophe losses were due to fewer high magnitude wind and hail storms in 2007, which decreased the combined ratio by 11.5 points in the three months ended June 30, 2007 and 7.8 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Expenses – Our expense ratio increased by 0.1 points in the three months ended June 30, 2007 and decreased 0.3 points in the six months ended June 30, 2007, compared with the same periods in 2006, due to increased agent compensation in our homeowners product line, offset by the results of ongoing process improvement efforts and expense reduction initiatives.

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

Business Growth – We reduced our rates in California by an average of 20% in January 2007. We expect this rate reduction to produce additional new business and policy count growth this year and capture an increase in written premium over time. We have filed additional rate changes in the range of -10% to +7% across our other states. These changes have generated a broad base of growth across the majority of the country. While we are expecting increased rate competition in non-coastal states, our new business trends remain favorable.

We are also introducing additional coverage options that enable our customers to personalize their coverage. Providing choice products at a competitive rate is having a favorable contribution on our growth numbers.

Underwriting Segmentation – In April 2007, we launched Safeco True Pricing. This evolution of our pricing model is designed to increase our pricing accuracy, improve our competitiveness and retention and broaden our market reach. Safeco True Pricing increases the number of pricing tiers from 12 to 30 for greater market segmentation. We have replaced our existing dwelling fire product with our new tiered product for that line in 36 states as of June 30, 2007 and plan to substantially complete the rollout of the new program by the end of 2007.

35

Compensation Structure – Based on our review of the market environment, we redesigned our agent compensation package effective January 1, 2007 to be competitive with programs offered by our national competitors who sell their products through independent agents.

Expense Management – We remain focused on our business process improvement effort that is examining all aspects of our operations for potential cost savings. The goal is to achieve greater efficiency by streamlining or eliminating processes, outsourcing processes where appropriate, and building our infrastructure and technological capability.

Overall – In 2007, we expect our Property segment to operate at its long-term target of 92.0%. We continue to price by product, on a state-by-state basis, and our usage of our multivariate predictive model (our automated underwriting platform) sets the course for us to price our business to target combined ratios.

Specialty

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	36.6		$	33.6		$	63.1		$	57.5
Net Earned Premiums		28.7			25.9			55.9			50.7
Underwriting Profit		5.3			7.3			14.0			18.5
Loss and LAE Ratio		52.9	%		40.4	%		46.2	%		33.3	%
Expense Ratio		28.7			31.7			28.7			30.3
Combined Ratio		81.6	%		72.1	%		74.9	%		63.6	%

Our Specialty segment provides individuals with umbrella, motorcycle, recreational vehicle, and boat owners insurance.

PREMIUMS

Net written premiums increased $3.0, or 8.9% in the three months ended June 30, 2007 and $5.6, or 9.7% in the six months ended June 30, 2007, compared with the same periods in 2006. New-business policies sold increased 15.2% in the three months ended June 30, 2007 and increased 21.6% in the six months ended June 30, 2007, compared with the same periods in 2006. Net written premium growth was primarily driven by an increase in new business in umbrella product sales. New business growth has been primarily driven by improvements in automation, rating and increased customer awareness of our umbrella product. Net earned premiums increased $2.8, or 10.8% in the three months ended June 30, 2007 and $5.2, or 10.3% in the six months ended June 30, 2007, compared with the same periods in 2006.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Specialty decreased $2.0 and our combined ratio increased 9.5 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit decreased $4.5 and our combined ratio increased 11.3 points in the six months ended June 30, 2007, compared with the same period in 2006. Our underwriting results and combined ratio were primarily driven by:

• Prior-year reserve development – Our underwriting results in the three months ended June 30, 2007 included favorable prior-year reserve development of $0.3, primarily related to boat owners and catastrophes, compared with favorable prior-year reserve development of $3.7 in the three months ended June 30, 2006. Our underwriting results in the six months ended June 30, 2007 included favorable prior-year reserve development of $1.8, primarily related to boat owners and catastrophes, compared with favorable prior-year reserve development of $8.3 in the same period in 2006 related to Hurricane Wilma. These changes in prior-year reserve development increased our combined ratio by 13.3 points in the three months ended June 30, 2007 and 13.2 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Expenses – Our expense ratio decreased 3.0 points in the three months ended June 30, 2007 and 1.6 points in the six months ended June 30, 2007, compared with the same periods in 2006, due to our ongoing process improvement efforts and expense reduction initiatives.

36

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

Expense Management – We remain focused on our business process improvement effort that is examining all aspects of our operations for potential cost savings. The goal is to achieve greater efficiency by streamlining or eliminating processes, outsourcing processes where appropriate, and building our infrastructure and technological capability.

Overall – In 2007, we expect our Specialty segment to operate at its long-term target of 92.0%. We continue to price by product, on a state-by-state basis, and our usage of our multivariate predictive model (our automated underwriting platform) sets the course for us to price our business to target combined ratios.

SBI Regular

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	354.4		$	337.9		$	683.5		$	652.3
Net Earned Premiums		322.4			310.4			636.2			619.5
Underwriting Profit		31.8			58.9			67.6			97.0
Loss and LAE Ratio		57.0	%		44.6	%		56.8	%		49.9	%
Expense Ratio		33.2			36.4			32.6			34.4
Combined Ratio		90.2	%		81.0	%		89.4	%		84.3	%

Our SBI Regular segment provides insurance for small- to mid-sized businesses (those with annual premiums of $0.2 or less). This is our core commercial lines business, featuring these main products:

• Business owner policies (BOP)

• Commercial auto

• Commercial multi-peril (CMP)

• Workers compensation

• Commercial property

• General liability

PREMIUMS

Net written premiums increased $16.5, or 4.9%, in the three months ended June 30, 2007, and $31.2, or 4.8%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes in net written premiums were primarily driven by:

• Changes in PIF – PIF increased 2.8% as of June 30, 2007 compared with a year ago. This reflected a retention rate of 81.7% as of June 30, 2007, compared with 78.7% as of June 30, 2006. Our new policies sold increased 13.2% in the three months ended June 30, 2007 and 14.1% in the six months ended June 30, 2007, compared with the same periods in 2006.

• Price changes – We file rate changes on a state-by-state basis. Our average prices, which include filed rate changes and exposure growth, increased 0.4% in the three months ended June 30, 2007, compared with the same period in 2006. Prices are affected by growth in the exposures we cover due to factors such as changes in payroll, the number of employees, sales receipts and property building values for the businesses we insure. Price changes are reflected on existing policies at renewal.

• Mix of business – In addition to price changes, premiums are affected by changes in average policy size and mix of policy lines.

37

Net earned premiums increased $12.0, or 3.9%, in the three months ended June 30, 2007 and $16.7, or 2.7%, in the six months ended June 30, 2007, compared with the same periods in 2006. The changes in net earned premiums were driven by:

• Changes in PIF – Changes in PIF increased net earned premiums by $8.7 in the three months ended June 30, 2007 and $13.7 in the six months ended June 30, 2007, compared with the same periods in 2006.

• Price changes – Price changes decreased net earned premiums by $2.3 in the three months ended June 30, 2007 and $6.1 in the six months ended June 30, 2007, compared with the same periods in 2006.

• Mix of business – Mix of business increased net earned premiums by $5.5 in the three months ended June 30, 2007 and $9.1 in the six months ended June 30, 2007, compared with the same periods in 2006.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in SBI Regular decreased $27.1 and our combined ratio increased 9.2 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit decreased $29.4 and our combined ratio increased 5.1 points in the six months ended June 30, 2007, compared with the same period in 2006. Our underwriting results and combined ratio primarily reflected:

• Price changes – Our price changes increased our combined ratio by 0.5 points in the three months ended June 30, 2007 and 0.7 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Loss costs – Loss costs had a mid-single digit increase in the first six months of 2007 due to an increase in claims severity. The change in loss costs increased the combined ratio by 5.9 points in the three months ended June 30, 2007 and 2.9 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Prior-year reserve development – Our underwriting results included favorable prior-year reserve development of $9.0 in the three months ended June 30, 2007, and $10.3 for the six months ended June 30, 2007, due to better-than-expected loss experience on workers’ compensation. Our underwriting results included favorable prior-year reserve development of $20.2 in the three months ended June 30, 2006, and $18.7 for the six months ended June 30, 2006 due to decreased frequency in our general liability product. The change in prior-year reserve development increased our combined ratio by 3.7 points in the three months ended June 30, 2007 and 1.4 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Catastrophe losses – Our pretax after reinsurance catastrophe losses were $2.4 in the three months ended June 30, 2007, compared with $10.0 in the same period in 2006, and $3.7 in the six months ended June 30, 2007, compared with $17.7 in the same period in 2006, due to loss assessments in 2006 on state-mandated participating pools. The lower catastrophe losses decreased our combined ratio by 2.4 points in the three months ended June 30, 2007 and 1.0 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Expenses –The decrease in our expense ratio of 3.2 points in the three months ended June 30, 2007 and 1.8 points in the six months ended June 30, 2007, compared with the same periods in 2006 is reflective of our ongoing focus on expense management.

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

Expense Management – We remain focused on our business process improvement effort that is examining all aspects of our operations for potential cost savings. The goal is to achieve greater efficiency by streamlining or eliminating processes, outsourcing processes where appropriate, and building our infrastructure and technological capability.

Business Growth – Given the increasing number of small businesses in the United States and the lack of a dominant market leader, we continue to see growth in this segment. In March 2007, we launched a new commercial insurance business owner policy which is now available in 48 states, and we continue to make enhancements to our existing business owner product line.

Overall – In 2007, we expect our SBI Regular segment to operate at its long-term target of 95.0%. We continue to price by product, on a state-by-state basis, and our usage of our multivariate predictive model (our automated underwriting platform) sets the course for us to price our business to target combined ratios.

38

SBI Special Accounts Facility

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	64.3		$	63.6		$	128.9		$	134.5
Net Earned Premiums		66.0			67.2			131.3			135.3
Underwriting Profit		20.1			23.7			33.2			37.9
Loss and LAE Ratio		35.6	%		29.8	%		41.5	%		40.7	%
Expense Ratio		33.9			35.0			33.2			31.4
Combined Ratio		69.5	%		64.8	%		74.7	%		72.1	%

Our SBI Special Accounts Facility segment includes insurance for large-commercial accounts (those with annual premiums greater than $0.2). While our main focus is the small- to mid-sized market, we continue to serve some large-commercial accounts on behalf of key agents and brokers who sell our core commercial products.

Special Accounts Facility also provides insurance for the following commercial programs:

• Agents’ errors and omissions insurance

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

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

PREMIUMS

Net written premiums increased by $0.7, or 1.1%, in the three months ended June 30, 2007 and net written premiums decreased $5.6, or 4.2%, in the six months ended June 30, 2007, compared with the same periods in 2006. Competitive market conditions continue to exert downward pressure on this segment.

Net earned premiums decreased $1.2, or 1.8%, in the three months ended June 30, 2007 and $4.0, or 3.0%, in the six months ended June 30, 2007, compared with the same periods in 2006.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in SBI Special Accounts Facility decreased $3.6 and our combined ratio increased 4.7 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit decreased $4.7 and our combined ratio increased 2.6 points in the six months ended June 30, 2007, compared with the same period in 2006. Our underwriting results and combined ratios were primarily driven by:

• Loss costs – Loss costs had a high-single digit decrease in the three and six months ended June 30, 2007, compared with the same period in 2006 due to unusually low loss emergence in our commercial property line. As a result, this increased to the combined ratio by 1.2 points in the three months ended June 30, 2007 and decreased 4.2 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Prior-year reserve development – Our underwriting results included favorable prior-year reserve development of $12.0 in the three months ended June 30, 2007 and $16.5 in the six months ended June 30, 2007, due to favorable loss experience on worker’s compensation and property lines. Our underwriting results included favorable prior-year reserve development of $14.8 in the three months ended June 30, 2006 and $21.5 in the six months ended June 30, 2006. The difference in prior-year reserve development increased our combined ratio by 3.8 points in the three months ended June 30, 2007 and 3.3 points in the six months ended June 30, 2007, compared with the same periods in 2006.

• Expenses – Our expense ratio decreased 1.1 points in the three months ended June 30, 2007 and increased 1.8 points in the six months ended June 30, 2007, compared with the same periods in 2006, due to our ongoing process improvement and expense reductions, partially offset by increased agent bonus commissions and general expenses.

39

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

Expense Management – We remain focused on our business process improvement effort that is examining all aspects of our operations for potential cost savings. The goal is to achieve greater efficiency by streamlining or eliminating processes, outsourcing processes where appropriate, and building our infrastructure and technological capability.

Overall – We plan to continue providing a limited large-commercial resource for those agents and brokers who are also writing auto, property or small- to mid-sized commercial insurance with us, and to continue writing specialty insurance programs to the extent market conditions provide reasonable margins.

Surety

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	106.9		$	84.5		$	199.6		$	162.7
Net Earned Premiums		85.8			70.6			169.4			142.4
Underwriting Profit		37.3			22.0			73.1			46.3
Loss and LAE Ratio		16.9	%		22.5	%		16.2	%		23.1	%
Expense Ratio		39.5			46.3			40.6			44.4
Combined Ratio		56.4	%		68.8	%		56.8	%		67.5	%

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

PREMIUMS

Net written premiums increased $22.4, or 26.5%, in the three months ended June 30, 2007 and $36.9, or 22.7%, in the six months ended June 30, 2007, compared with the same periods in 2006. The increase in net written premiums was driven by growth in large contractor business and favorable market conditions.

Net earned premiums increased $15.2, or 21.5%, in the three months ended June 30, 2007 and $27.0, or 19.0%, in the six months ended June 30, 2007, compared with the same periods in 2006. New business increased net earned premiums by $11.2 in the three months ended June 30, 2007 and $22.3 in the six months ended June 30, 2007, compared with the same periods in 2006.

UNDERWRITING RESULTS AND COMBINED RATIO

Our underwriting profit in Surety increased $15.3 and our combined ratio decreased 12.4 points in the three months ended June 30, 2007, compared with the same period in 2006. Our underwriting profit increased $26.8 and our combined ratio decreased 10.7 points in the six months ended June 30, 2007, compared with the same period in 2006. These changes reflect low current accident year losses and favorable prior-year reserve development, primarily related to better-than-expected loss experience.

We expect the surety market to continue to be more competitive as the industry was very profitable in 2006 and results remained stable in the first six months of 2007. As a result, we anticipate our growth rates will moderate in the remainder of 2007. We will continue to be disciplined in our underwriting and cost containment efforts in this line of business. We expect our loss experience in 2007 to continue at low levels. Overall, we expect our combined ratio to be comparable with 2006.

40

P&C Other

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Net Written Premiums	$	0.7		$	29.5		$	3.7		$	68.8
Net Earned Premiums		1.3			29.9			1.0			69.1
Underwriting Loss		(5.2	)		(16.9	)		(21.3	)		(17.1	)

Our P&C Other segment includes:

• Runoff assumed reinsurance business

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

• Asbestos and environmental results

• Safeco Financial Institution Solutions (SFIS), our lender-placed property insurance business, which we sold on April 30, 2006

PREMIUMS

Net written premiums decreased $28.8, or 97.6%, in the three months ended June 30, 2007 and $65.1, or 94.6%, in the six months ended June 30, 2007, compared with the same periods in 2006. Net earned premiums decreased $28.6, or 95.7%, in the three months ended June 30, 2007 and $68.1, or 98.6%, in the six months ended June 30, 2007, compared with the same periods in 2006. The decrease in the three and six months ended June 30, 2007 compared with the same periods in 2006 were due to the sale of SFIS. Net written premiums related to SFIS were $28.8 in the three months ended June 30, 2006 and $68.1 in the six months ended June 30, 2006. Net earned premiums for SFIS were $28.7 in the three months ended June 30, 2006 and $68.0 in the six months ended June 30, 2006.

UNDERWRITING RESULTS

Our underwriting loss in P&C Other decreased $11.7 in the three months ended June 30, 2007 and increased $4.2 in the six months ended June 30, 2007, compared with the same periods in 2006. Our underwriting results included $5.9 of unfavorable prior-year reserve development in the three months ended June 30, 2007 and $19.1 of unfavorable prior-year reserve development in the six months ended June 30, 2007. Our underwriting results included $13.4 of unfavorable prior-year reserve development for the three months ended June 30, 2006, and $14.0 in the six months ended June 30, 2006.

Our Corporate Results

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Corporate Segment Results	$	(20.7	)	$	(14.0	)	$	(39.6	)	$	(26.7	)
Gain on Sales of Real Estate		—			32.8			—			32.8
Losses on Debt Repurchases		—			(1.5	)		—			(2.9	)
Net Realized Investment Gains (Losses)		9.8			(11.5	)		15.6			(13.5	)
Income (Loss) before Income Taxes	$	(10.9	)	$	5.8		$	(24.0	)	$	(10.3	)

In our Corporate segment, we include:

• Interest expense on our debt

• Miscellaneous corporate investment and other activities, including real estate holdings and transactions, loss on debt repurchases and contributions to Safeco Insurance Foundation

• Our intercompany eliminations

41

Our interest expense was $22.0 in the three months ended June 30, 2007, compared with $22.9 in the three months ended June 30, 2006. Our interest expense was $46.2 in the six months ended June 30, 2007, compared with $45.7 in the six months ended June 30, 2006.

In the second quarter of 2006, we recorded a $32.8 pretax gain ($21.3 after tax) on the sale of our Redmond, Washington office campus.

In the first six months of 2006, we repurchased $32.3 in principal amount of 8.072% Capital Trust Debentures. Including transaction costs, we reported a loss on debt repurchase of $2.9 pretax ($1.9 after tax) in the Consolidated Statements of Income.

Our Investment Results

Investment Portfolio

These tables summarize our investment portfolio at June 30, 2007 and December 31, 2006:

JUNE 30, 2007	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS (LOSSES)			CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	3,746.1	$	46.9	$	(43.9	)	$	3.0		$	3,749.1
Fixed Maturities – Non-taxable		4,481.3		106.7		(52.6	)		54.1			4,535.4
Marketable Equity Securities		942.8		559.5		(10.8	)		548.7			1,491.5
Other Invested Assets		28.8		—		—			—			28.8
Total P&C		9,199.0		713.1		(107.3	)		605.8			9,804.8
Corporate
Fixed Maturities – Taxable		202.1		0.3		(1.1	)		(0.8	)		201.3
Marketable Equity Securities		98.1		26.1		(0.2	)		25.9			124.0
Other Invested Assets		1.6		—		—			—			1.6
Total Corporate		301.8		26.4		(1.3	)		25.1			326.9
Total Investment Portfolio	$	9,500.8	$	739.5	$	(108.6	)	$	630.9		$	10,131.7
DECEMBER 31, 2006	COST OR AMORTIZED COST		GROSS UNREALIZED GAINS		GROSS UNREALIZED LOSSES			NET UNREALIZED GAINS			CARRYING VALUE
P&C
Fixed Maturities – Taxable	$	4,464.6	$	72.0	$	(35.2	)	$	36.8		$	4,501.4
Fixed Maturities – Non-taxable		4,153.5		182.8		(2.8	)		180.0			4,333.5
Marketable Equity Securities		921.0		493.0		(3.0	)		490.0			1,411.0
Other Invested Assets		13.1		—		—			—			13.1
Total P&C		9,552.2		747.8		(41.0	)		706.8			10,259.0
Corporate
Fixed Maturities – Taxable		283.5		1.9		(1.3	)		0.6			284.1
Marketable Equity Securities		97.4		21.3		—			21.3			118.7
Other Invested Assets		1.2		—		—			—			1.2
Total Corporate		382.1		23.2		(1.3	)		21.9			404.0
Total Investment Portfolio	$	9,934.3	$	771.0	$	(42.3	)	$	728.7		$	10,663.0

At June 30, 2007, no investments accounted for more than 10% of our total gross unrealized losses. At December 30, 2006, investments in secured finance mortgage-backed securities accounted for 17.6% of our total gross unrealized losses.

We reviewed all our investments with unrealized losses as of June 30, 2007. For all investments other than those for which we recognized an impairment charge, our evaluation determined that their declines in fair value were temporary, and we have the intent and ability to hold these securities until they recover in value.

42

This table shows, by maturity, the total amount of gross unrealized losses on fixed maturities and marketable equity securities at June 30, 2007:

JUNE 30, 2007	COST OR AMORTIZED COST		FAIR VALUE		COST IN EXCESS OF FAIR VALUE
Fixed Maturities
One Year or Less	$	200.4	$	199.9	$	(0.5	)
Over One Year through Five Years		1,095.9		1,076.1		(19.8	)
Over Five Years through Ten Years		528.6		518.7		(9.9	)
Over Ten Years		2,227.0		2,171.9		(55.1	)
Mortgage-Backed Securities		721.0		708.7		(12.3	)
Total Fixed Maturities		4,772.9		4,675.3		(97.6	)
Total Marketable Equity Securities		121.9		110.9		(11.0	)
Total	$	4,894.8	$	4,786.2	$	(108.6	)

Unrealized losses on our fixed maturities that have been in a loss position for more than a year at June 30, 2007 were $29.7, compared with $32.3 at December 31, 2006. There were no unrealized losses on our marketable equity securities that were in a loss position for more than a year at June 30, 2007 or December 31, 2006. Total unrealized losses were less than 1% of our total portfolio value at both June 30, 2007 and December 31, 2006.

We continue to monitor these securities as part of our overall portfolio evaluation. If we determine that an unrealized loss is other-than-temporary, we report an impairment loss in the period that we make that 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 the fair value 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 June 30, 2007 and December 31, 2006:

JUNE 30, 2007	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	4,664.3	46.0	%
Banks		705.3	7.0
U.S. Government and Agencies		716.6	7.1
Mortgage-Backed Securities		969.1	9.5
Other		3,046.0	30.1
Total Fixed Maturities and Marketable Equity Securities		10,101.3	99.7
Other Invested Assets		30.4	0.3
Total Investment Portfolio	$	10,131.7	100.0	%
DECEMBER 31, 2006	CARRYING VALUE		PERCENT OF TOTAL
States and Political Subdivisions	$	4,511.7	42.3	%
Banks		954.1	8.9
U.S. Government and Agencies		787.9	7.4
Mortgage-Backed Securities		1,169.6	11.0
Other		3,225.4	30.3
Total Fixed Maturities and Marketable Equity Securities		10,648.7	99.9
Other Invested Assets		14.3	0.1
Total Investment Portfolio	$	10,663.0	100.0	%

43

Investment Portfolio Quality

The quality ratings of our fixed maturities portfolio were:

RATING	PERCENT AT JUNE 30, 2007		PERCENT AT DECEMBER 31, 2006
AAA	56	%	54	%
AA	15		15
A	16		19
BBB	10		10
Subtotal	97		98
BB or lower	2		1
Not Rated	1		1
Total	100	%	100	%

Below Investment Grade and Other Securities – A security is considered below investment grade if it has a rating below BBB. Our consolidated investment portfolio included below investment grade fixed maturities with a fair value of $127.2 at June 30, 2007 and $83.0 at December 31, 2006. The increase in fair value of these investments reflects a higher mix of tax-exempt municipal bonds in our portfolio as of June 30, 2007 compared with June 30, 2006.

As of June 30, 2007, these securities represented 1.5% of our total fixed maturities at fair value. As of December 31, 2006, these securities represented 0.9% of our total fixed maturities at fair value. The related amortized cost of the below investment grade fixed maturities was $125.1 at June 30, 2007 and $79.1 at December 31, 2006.

As of June 30, 2007, our below investment grade securities included gross unrealized investment gains of $3.8 and gross unrealized losses of $1.7. As of December 31, 2006, our below investment grade securities included gross unrealized investment gains of $4.1 and gross unrealized losses of $0.2.

Our investment portfolio as of June 30, 2007 also included $44.2 of non-publicly traded fixed maturities and marketable equity securities (representing 1.4% of our total portfolio) and $87.1 of not-rated fixed maturities (securities not rated by a national rating service) representing 0.9% of our total portfolio at June 30, 2007. Our investment portfolio as of December 31, 2006 included $144.2 of non-publicly traded fixed maturities and marketable equity securities (representing 1.4% of our total portfolio) and $87.4 of not-rated fixed maturities representing 0.8% of our total portfolio at December 31, 2006.

Investment returns are an important part of our overall profitability. Investment returns are subject to various risks, such as interest rate, market and credit risks. 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 create net realized investment losses.

Net Investment Income

This table summarizes our pretax net investment income by portfolio:

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2007		2006		2007		2006
P&C	$	120.1	$	117.8	$	241.2	$	234.7
Corporate		8.1		7.7		14.2		15.5
Total Net Investment Income	$	128.2	$	125.5	$	255.4	$	250.2

44

Our annualized investment income yields were:

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2007		2006		2007		2006
Pretax	5.3	%	4.9	%	5.2	%	4.9	%
After Tax	4.2	%	3.7	%	4.1	%	3.7	%

The increase in net investment income in the three and six months ended June 30, 2007, compared with the same periods in 2006, was due to higher interest rates on new purchases of fixed income investments.

Our after-tax yields increased in the three and six months ended June 30, 2007, compared with the same periods in 2006, due to our increased investment in tax-exempt municipal bonds.

Net Realized Investment Gains and Losses

Pretax net realized investment gains (losses) by portfolio were:

	THREE MONTHS ENDED JUNE 30,					SIX MONTHS ENDED JUNE 30,
	2007		2006			2007		2006
P&C	$	7.6	$	(25.7	)	$	14.2	$	(8.8	)
Corporate		9.8		(11.5	)		15.6		(13.5	)
Total Pretax Net Realized Investment Gains (Losses)	$	17.4	$	(37.2	)	$	29.8	$	(22.3	)

Pretax net realized investment gains and losses by component were:

	THREE MONTHS ENDED JUNE 30,						SIX MONTHS ENDED JUNE 30,
	2007			2006			2007			2006
Gross Gains on Fixed Maturities Transactions	$	5.3		$	4.6		$	8.7		$	9.4
Gross Losses on Fixed Maturities Transactions		(1.6	)		(2.3	)		(2.3	)		(9.3	)
Gross Gains on Marketable Equity Securities Transactions		6.4			6.9			15.0			37.3
Gross Losses on Marketable Equity Securities Transactions		—			(0.3	)		(2.3	)		(4.8	)
Total Net Gains on Securities Transactions		10.1			8.9			19.1			32.6
Impairments on Fixed Maturities		(2.9	)		(38.7	)		(3.5	)		(46.1	)
Impairments on Marketable Equity Securities		—			(1.5	)		(1.8	)		(3.2	)
Total Impairments		(2.9	)		(40.2	)		(5.3	)		(49.3	)
Other, Net		10.2			(5.9	)		16.0			(5.6	)
Total Pretax Net Realized Investment Gains (Losses)	$	17.4		$	(37.2	)	$	29.8		$	(22.3	)

In June 2007, we terminated an interest rate swap derivative which was designated as a cash flow hedge and received cash proceeds of $10.4 which represented the fair market value of the contract on the termination date. Upon termination, we recognized a $10.2 gain as the forecasted cash flows are probable of not occurring by the original dates specified or within two months of those dates.

Net Gains on Securities Transactions

The fair value of fixed maturities and marketable equity securities that we sold at a loss was $155.7 for the three months ended June 30, 2007, and $314.4 for the six months ended June 30, 2007, compared with the same periods in 2006.

Our total net realized investment loss on these sales for the three months ended June 30, 2007 was $1.4, compared with $2.1 in the same period in 2006, and $4.2 for the six months ended June 30, 2007, compared with $12.8 in the same period in 2006. The securities sold at a loss during 2007 were non-performing securities sold to purchase tax-exempt bonds. The net realized investment losses in 2006 were primarily related to sales of securities impaired in prior periods, securities that became impaired during the three months ended June 30, 2006, and sales of securities that had substantially recovered in value after being impaired in prior periods.

45

Impairments

We closely monitor every investment that has declined in fair value to below cost or amortized cost. If we determine that the decline is other-than-temporary, we write down the security to its fair value and report the charge as an impairment in Net Realized Investment Gains in the Consolidated Statements of Income in the period that we make this determination. More information about our process of estimating investment impairments can be found in the discussion of Application of Critical Accounting Estimates in the MD&A section of our 2006 Annual Report on Form 10-K.

In our impairment determination process, we consider our intent and ability to hold to maturity investments that decline in value. Our intent to hold an investment could change due to changes in the financial condition and near-term prospects of the issuer or significant changes in our cash needs as a result of a major catastrophe.

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

• Manage credit quality

• Reduce our exposure to companies and industries with credit problems

• Manage call risk

Pretax investment impairments by portfolio were:

	THREE MONTHS ENDED JUNE 30,				SIX MONTHS ENDED JUNE 30,
	2007		2006		2007		2006
P&C
Fixed Maturities	$	1.6	$	32.7	$	2.2	$	39.0
Marketable Equity Securities		—		1.5		1.8		3.2
Corporate
Fixed Maturities		1.3		6.0		1.3		7.1
Total Pretax Investment Impairments	$	2.9	$	40.2	$	5.3	$	49.3

The decrease in impairments in the three and six months ended June 30, 2007 compared with the same periods in 2006 was due to the 2006 impairments on previously impaired equity securities and our review of our fixed maturities, pursuant to which we determined that some securities might not be held until they recover to full value.

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. Our payments to policyholders depend upon losses they suffer from accidents or other unpredictable events that are covered by insurance. Although 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. As a result, we invest most of our money in high-quality liquid securities – investments that can quickly be turned into cash – to support our projected or potential need for liquidity.

We believe that cash flows from our operations, investment portfolio and bank credit facility are sufficient to meet our future liquidity needs. For more information about our financial abilities, see the Financial Strength Ratings section.

On July 11, 2007 our board of directors approved a non-recourse, non-refundable contribution to the Safeco Insurance Foundation, a separate 501(c)3 endowment fund, of appreciated equity securities with a fair value of $60.0 and a book value of $2.1. The contribution was funded on July 27, 2007. We estimate the after-tax impact to be $18.9.

46

Sources of Our Funds

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

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

Our cash flow for the six months ended June 30, 2007 and 2006 was:

SIX MONTHS ENDED JUNE 30,	2007			2006
Cash and Cash Equivalents – Beginning of Period	$	287.6		$	556.3
Net Cash Provided by (Used in):
Operating Activities		266.4			282.9
Investing Activities		569.3			342.9
Financing Activities		(427.8	)		(636.3	)
Cash and Cash Equivalents – End of Period	$	695.5		$	545.8

The decrease in cash provided by operating activities in the six months ended June 30, 2007 compared with the same period in 2006 was primarily due to lower premiums received of $65.9.

The change in cash from investing activities in the six months ended June 30, 2007 compared with the same period in 2006 was a result of decreased sales in marketable equity securities as well as a decrease in our securities lending program. In addition, we received proceeds of $212.6 on the sale of our Redmond, Washington office campus in the second quarter of 2006. We recognized a pretax gain of $32.8 ($21.3 after tax) on the sale.

The changes in cash from financing activities were a result of our share and debt repurchases described below.

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.

In the first six months of 2007 we used $157.8 to repurchase stock, compared with $511.0 to repurchase stock and debt in the first six months of 2006.

Our insurance subsidiaries pay dividends to Safeco Corporation. We then use that money to pay dividends to our shareholders, repurchase common stock, as well as to make principal and interest payments on our debt. Individual states limit the amount of dividends that our subsidiaries domiciled in those states can pay Safeco Corporation. Exceeding such limits would require prior regulatory approval. We have requested and received approval from state regulators for special dividends totaling $700.0 to be paid by our subsidiaries to Safeco Corporation on August 15, 2007.

47

Our Capital Structure

Capital resources protect our policyholders, provide us with financial strength and facilitate continued business growth. Our capital structure consists of debt and equity and was as follows:

	JUNE 30, 2007			DECEMBER 31, 2006
Total Debt	$	1,250.0		$	1,250.0
Equity Excluding Accumulated Other Comprehensive Income		3,598.4			3,443.7
Accumulated Other Comprehensive Income, Net of Taxes		416.9			484.2
Total Shareholders’ Equity		4,015.3			3,927.9
Total Capitalization	$	5,265.3		$	5,177.9
Ratio of Debt to Equity		31.1	%		31.8	%
Ratio of Debt to Capitalization		23.7	%		24.1	%

Repurchases of Debt – In the first six months of 2006, we repurchased $32.3 in principal amount of 8.072% Debentures. Including transaction costs, we reported a loss on debt repurchase of $2.9 pretax ($1.9 after tax) in the Consolidated Statements of Income.

In July 2007, we paid down two issues of our outstanding debt. On July 16, 2007 we redeemed $322.3 of our Debentures for $336.4. The Debentures were redeemed at a price of 104% of principal, and we incurred a pretax expense of $14.1 for the redemption premium. We also retired our $26.3 Capital Trust equity investment, which was reported as debt on our Consolidated Balance Sheets. In addition, we paid $197.3 of our 6.875% senior notes which matured on July 15, 2007.

Share Repurchases – We summarize our share repurchase activity for the six months ended June 30, 2007 and 2006 below:

Program	Number of Shares Purchased (Issued)		Average Price Paid Per Share		Total Cost
2006 Repurchases
January Share Repurchases	477,800		$	53.69	$	25.7
10b5-1, February 2006 Plan	4,828,670			51.75		250.0
10b5-1, May 2006 Plan	3,586,300			55.75		200.0
Total Repurchases thru June 30, 2006	8,892,770		$	53.45	$	475.7
2007 Repurchases
10b5-1, May 2007 Plan	2,521,982		$	62.56	$	157.8
Accelerated Share Repurchase Settlement	(866,685	)		—		—
Total Repurchases thru June 30, 2007	1,655,297		$	62.56	$	157.8

Approximately 2.3 million shares remain available for repurchase under board-approved repurchase programs.

On May 2, 2007, we increased our quarterly dividend rate by 33% for the year-to-date, to $0.40 per share which we paid on July 23, 2007.

Our Bank Credit Facility – We maintain a $300.0 revolving credit facility, which may be used for working capital and general corporate purposes. The terms of the bank credit facility – which runs through March 2010 – require us to:

• Pay a 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. As of June 30, 2007, we had no borrowings under the bank credit facility and we were in compliance with all its covenants.

48

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

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 & POORS
Safeco Corporation:
Senior Debt	bbb+	A-	Baa1	BBB+
Financial Strength:
P&C Subsidiaries	A	AA-	A1	A+

On May 30, 2007, A.M. Best affirmed our debt ratings and the financial strength ratings of our insurance subsidiaries, keeping its view of our ratings on positive outlook. On May 14, 2007, Standard & Poor’s affirmed our ratings and revised its outlook to stable from positive. On March 6, 2007, Moody’s affirmed our ratings and revised its outlook to stable from positive.

We believe our financial position is sound. Our debt service coverage has improved over the last two years, and we expect to continue at our current level in 2007.

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

New Accounting Standards

A discussion of new accounting standards can be found in Note 1 to our Consolidated Financial Statements.

49

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), under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that 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 report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As required by Rule 13a-15(d) of the Exchange Act, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated our internal control over financial reporting and determined that there were no changes that occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On May 24, 2007 we entered into an outsourcing agreement with BlackRock Financial Management, Inc. to manage our investment portfolio and provide certain investment management accounting services. The effective date of this transition was July 2, 2007. We have concluded that this arrangement will represent a material change in our internal control over financial reporting in future periods.

50

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 actions 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.

On January 16, 2007, the United States Supreme Court heard oral argument in Burr v. Safeco. At issue was the Ninth Circuit Court of Appeal’s decision in the case. The underlying lawsuit, which was brought in October 2001 on behalf of a putative class of policyholders and sought statutory damages, alleged that we willfully violated the Fair Credit Reporting Act (“FCRA”) by failing to send appropriate notices to new customers whose initial rates were higher than they would have been had the customer had a more favorable credit report. The District Court for the District of Oregon granted summary judgment for us, holding that FCRA’s adverse action notice requirement did not apply to the rate first charged for an initial policy of insurance. The Ninth Circuit reversed the district court, holding that the adverse action notice requirement applies to new business and that our failure to send appropriate notices constituted a willful violation of FCRA. On June 4, 2007, the United States Supreme Court reversed the Ninth Circuit’s decision and ruled that Safeco had not acted to willfully violate FCRA.

On August 1, 2006, Emma Schwartzman, a shareholder, filed a derivative and direct complaint in federal court for the Western District of Washington, relating to the Executive Transition Services Agreement Safeco entered into with Mike McGavick, our former Chief Executive Officer. The complaint named as defendants certain current and former members of the Safeco Board and alleged the defendants breached their fiduciary duty by authorizing acts of corporate waste and ultra vires acts in the approval of that agreement. The complaint also claimed that the Board caused Safeco to make false and misleading statements about that agreement in our 2006 Proxy Statement. The complaint was in part derivative in nature and did not seek monetary damages from us. Rather, it asked that the director defendants correct the statements made in the 2006 Proxy Statement. We advanced payment of legal fees and costs incurred by the defendants. We and the director defendants filed a motion to dismiss on October 31, 2006. On April 19, 2007, the district court granted a complete dismissal of the plaintiff’s claims. Plaintiff failed to file an amended complaint within the time allowed, so the case is concluded.

On July 19, 2005, we received a shareholder demand letter asserting that our directors and certain former officers of Talbot Financial Corporation (Talbot) breached their duties owed to Safeco in connection with the sale of Talbot in July 2004. The letter demanded that we commence an action against the directors who approved the transaction and against the officers involved in the transaction. We formed a board committee comprised of directors not involved in the sale to review the matter. Following an investigation, the committee determined that the actions called for in the letter should not be undertaken. The shareholder, Nicholas Goldware, trustee of the Goldware Family Trust, subsequently filed a derivative complaint in King County Superior Court on March 14, 2006. The complaint named as defendants certain current and former members of our board of directors, unnamed members of the board of directors of our subsidiary, General America Corporation, and the Talbot officers. The complaint alleged the defendants breached fiduciary duties, that the Talbot officers were unjustly enriched, and that the director defendants participated in and facilitated a breach of fiduciary duties by the Talbot officers. The complaint was derivative in nature and did not seek monetary damages from us. However, we have advanced, and will continue advancing throughout the pendency of this action payment of legal fees and costs incurred by the defendants. A motion to dismiss was filed by us and the director defendants on June 21, 2006. On May 14, 2007, the judge heard argument and dismissed the plaintiff’s claims finding that Goldware had not pled sufficient facts in support of his claims. The dismissal was without prejudice, so the plaintiff can pursue his claim if he is able to file a complaint with allegations that meet the legal standard.

We do not believe that the foregoing cases or other pending litigation will have a material adverse effect on our financial condition, operating results or liquidity.

51

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

Period	Total Number of Shares Purchased	Average Price Paid Per Share		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
April 1 – 30	—	$	—	—	4,787,234
May 1 – 31	888,200	$	63.34	888,200	3,899,034
June 1 – 30	1,633,782	$	62.15	1,633,782	2,265,252
Total	2,521,982	$	62.56	2,521,982

(1) On May 4, 2007, we executed a Rule 10b5-1 trading plan to purchase up to $250.0 of our common stock and completed the plan on July 24, 2007. We purchased a total of 4.0 million shares at an average price of $62.03 under this plan.

ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Safeco’s Annual Meeting of Shareholders was held on May 2, 2007. Safeco shareholders elected five nominees to the Board of Directors. The results of the voting were as follows:

Director	Term Expires	For	Withheld
Robert S. Cline	2010	94,885,404	3,227,277
Marie S. Eitel	2010	96,016,551	2,096,130
John S. Hamlin	2010	96,086,704	2,025,977
Paula Rosput Reynolds	2010	94,748,970	3,363,711
Charles R. Rinehart	2008	96,100,391	2,012,290

There were no abstentions or broker non-votes with respect to the election of directors.

Directors whose terms continued after the meeting were Joseph W. Brown, Peter L.S. Currie, Joshua Green III, Kerry Killinger, Gary F. Locke, William G. Reed, Jr. and Judith M. Runstad.

At the annual meeting, shareholders ratified the appointment of Ernst & Young LLP as our independent registered public accounting firm. The vote was 96,066,531 for the ratification, 1,442,183 against the ratification, and there were 603,967 abstentions and no broker non-votes.

Shareholders voted against a proposal regarding majority voting in the election of directors. The vote was 40,393,097 for ratification, 49,331,500 against ratification, and there were 925,207 abstentions and no broker non-votes.

ITEM 5 – OTHER INFORMATION

Consistent with our general practice of not having employment contracts with our executive officers, our employment agreement with Arthur Chong, dated October 14, 2005, was terminated on July 30, 2007, upon mutually agreed terms. Mr. Chong will continue to be employed, at-will, as our Executive Vice President and Chief Legal Officer.

52

ITEM 6 – EXHIBITS

3.1	Bylaws (as last amended May 2, 2007).
10.1	Investment Management and Accounting Services Agreement between Safeco Corporation and its subsidiary, Safeco Insurance Company of America, on behalf of themselves and each of their Affiliates, and BlackRock Financial Management, Inc., dated May 24, 2007.
10.2	Form of Director Indemnification Agreement, effective as of May 10, 2007, filed as Exhibit 10.1 to Safeco’s current report on Form 8-K, dated May 15, 2007 (File No. 1-6563), is incorporated herein by this reference.
10.3	Safeco Success Sharing Plan, as Amended May 2, 2007.
10.4	Safeco Long-Term Incentive Plan of 1997, as Amended and Restated May 2, 2007.
10.5	Safeco Leadership Performance Plan, as Amended May 2, 2007.
10.6	Stock Award Program for Non-Employee Directors under the Safeco Long-Term Incentive Plan of 1997, as Amended and Restated February 2, 2007.
10.7	Form of Restricted Stock Rights Award Agreement issued pursuant to the Stock Award Program for Non-Employee Directors under the Safeco Long-Term Incentive Plan of 1997, as Amended.
31.1	Certification of Chief Executive Officer of Safeco Corporation dated July 31, 2007, in accordance with Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer of Safeco Corporation dated July 31, 2007, in accordance with Rule 13a-14 or 15d-14 of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer of Safeco Corporation dated July 31, 2007, 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 July 31, 2007, in accordance with 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

53

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 July 31, 2007.

Safeco Corporation

Registrant

/s/ Ross J. Kari

Ross J. Kari

Executive Vice President, Chief Financial Officer and

Chief Accounting Officer

54

EX-3.1

Exhibit 3.1

BYLAWS

OF

SAFECO CORPORATION

(As last amended May 2, 2007)

ARTICLE I

STOCKHOLDERS’ MEETINGS

1. ANNUAL MEETING. (a) The annual meeting of the stockholders of the corporation for the election of Directors to succeed those whose terms expire, and for the transaction of such other business as may properly come before the meeting, shall be held at 11:00 o’clock in the morning on the first Wednesday in May or, if such day is a legal holiday, then on the following business day or on such other day as may be designated by the Chairman of the Board of Directors, the President, or the Board of Directors (“Board of Directors”). The meeting shall be held at the principal executive office of the corporation or at such other place as may be designated in the notice of the meeting.

(b) For business to be properly brought before the annual meeting in accordance with these Bylaws, business must be (i) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must file a written notice of intention to bring such business (“Business Notice”) with the Secretary of the corporation not less than 90 days before the date specified in Section 1(a) of this Article I, or if the meeting is not held within 14 days of the date specified in Section 1(a) of this Article I, then 90 days before the date of the meeting. The Business Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to bring such business before the meeting; and, as to each matter the stockholder proposes to bring before the annual meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest of the stockholder in such business.

(c) No business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 1; provided, however, that nothing in this Section 1 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The presiding officer of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the meeting in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted.

Safeco Corporation Bylaws

May 2, 2007

Page 2

2. SPECIAL MEETINGS. Special meetings of the stockholders may be called only by the Board of Directors. Such special meetings may be for any purpose or purposes, which shall be described in the notice of such special meeting, and shall be at the date, time and place prescribed in the notice of the meeting.

3. NOTICE OF MEETING. (a) Written notice of each annual and special stockholders’ meeting shall be given to all stockholders of record entitled to notice of such meeting no fewer than 10 nor more than 60 days before the meeting date, except that notice of a stockholders’ meeting to act on an amendment to the articles of incorporation, a plan of merger or share exchange, a proposed sale of assets other than in the regular course of business or the dissolution of the corporation shall be given no fewer than 20 nor more than 60 days before the meeting date. If such written notice is placed in the United States mail, postage prepaid, and correctly addressed to the stockholder’s address shown in the corporation’s current record of stockholders, then the notice is effective when mailed.

(b) Notice of any stockholders’ meeting may be waived in writing by any stockholder at any time, either before or after the meeting. In addition, notice of the date, time, place and purpose of the meeting shall be deemed waived by any stockholder who attends a stockholders” meeting in person or by proxy, unless the stockholder at the beginning of the meeting objects to holding the meeting or transacting business at the meeting.

4. ORGANIZATION OF MEETING - QUORUM. A stockholders’ meeting, duly called, can be organized for the transaction of business whenever a quorum is present. The presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting shall constitute a quorum. Once a share is represented for any purpose at a meeting, other than solely to object to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must be set for that adjourned meeting.

5. ADJOURNED MEETINGS. Unless a new record date is or must be set for an adjourned meeting, an adjournment or adjournments of any stockholders’ meeting may be taken to the date, time and place announced by the presiding officer at the meeting, without new notice being given; but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors are elected.

6. VOTING AT MEETINGS. Each holder of common stock shall be entitled to one vote for each share of common stock then of record in the holder’s name on the books of the corporation. Each holder of a share of capital stock other than common stock shall have the right to vote on those matters prescribed by the Board of Directors in establishing the preferences, limitations and relative rights for that class of capital stock. Every stockholder shall have the right to vote either in person or by proxy. All voting at stockholders’ meetings shall be viva voce, unless any qualified voter shall demand a vote by ballot. In the case of voting by ballot, each ballot shall state the name of the stockholder voting, the number of shares owned by the stockholder, and, in addition, if such vote be cast by proxy it shall also state the name of the proxy.

Safeco Corporation Bylaws

May 2, 2007

Page 3

ARTICLE II

BOARD OF DIRECTORS

1. NUMBER AND QUALIFICATION. The business and affairs of the corporation shall be managed under the direction of a Board of Directors. The number of directors shall be set from time to time by resolution of the Board of Directors and the directors need not be stockholders of the corporation.

2. ELECTION - TERM OF OFFICE. The directors shall be divided into three classes, designated Class 1, Class 2, and Class 3. Each class shall consist, as nearly as may be possible, of one-third of the total number of Directors constituting the entire Board of Directors. At each annual meeting of stockholders successors to the class of Directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of Directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of Directors in each class as nearly equal as possible, but in no case will a decrease in the number of Directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which the director’s term expires and until the director’s successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office. In the event of a failure to hold an election of Directors at any annual stockholders’ meeting, election of Directors may be held at a special meeting of the stockholders called for that purpose; provided, that notice thereof be given all stockholders entitled to vote at such meeting at least 30 days prior to the date set for such special meeting.

3. VACANCIES. Any vacancy on the Board of Directors shall be filled by the Board of Directors or, if the directors in office constitute fewer than a quorum of the Board of Directors, then by the affirmative vote of the majority of all directors in office.

4. NOMINATIONS OF DIRECTORS. (a) The Board of Directors or at its direction a committee of the Board of Directors shall nominate individuals for election as directors at the annual meeting of stockholders and at any special meeting of stockholders called for the purpose of electing directors. Nominations may also be made by any stockholder entitled to vote for the election of Directors at such meeting who complies with the notice procedures set forth in this Section 4.

(b) A nomination for election as director, other than nominations made by or at the direction of the Board of Directors, may be made only if a written notice of intention to nominate (“Nomination Notice”) has been received by the Secretary not less than 90 days before the date specified in Section 1(a) of Article I above, or if the meeting is not held within 14 days of the date specified in Section 1(a) of Article I above, then 90 days before the date of the meeting. The

Safeco Corporation Bylaws

May 2, 2007

Page 4

Nomination Notice shall state the name, address, telephone number and class and number of shares of capital stock owned by the stockholder who intends to make a nomination; the name, age, address and telephone number of each nominee; a description of each nominee’s business experience for the past five years; a statement whether the nominee has ever been prosecuted for any crime or been a party to any proceeding in which it was alleged the nominee or any affiliate of the nominee violated any law or regulation and, if so, a complete description of such prosecution or proceeding; and any other information relating to each nominee that is required to be disclosed in solicitations for proxies for election of Directors pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended. The corporation may require any proposed nominee to furnish such additional information as may reasonably be required to determine the eligibility of such proposed nominee. In order to be considered valid the Nomination Notice must be accompanied by the written consent of each nominee to be nominated and a statement of each nominee’s intention to serve as a director if elected.

(c) No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. The presiding officer at the stockholders’ meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure and, if the presiding officer should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded.

5. ANNUAL MEETING. The first meeting of each newly elected Board of Directors shall be known as the annual meeting thereof.

6. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at least quarterly, on such date and at such place as designated in the notice of the meeting.

7. SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any place at any time when called by the Chairman of the Board of Directors or the President, or when called by the Secretary or an Assistant Secretary on request of three directors, or when called by any director during a national emergency of the kind that would make emergency bylaws operative for domestic insurers under the provisions of Sections 48.07.160 through 48.07.200 of the Revised Code of Washington.

8. NOTICE OF MEETINGS. (a) Notice of the time and place of meetings of the Board of Directors and of meetings of committees of the Board of Directors shall be given by the Secretary, or by the person calling the meeting, in writing or orally at least two days prior to the day upon which the meeting is to be held. Notice may be given by mail, private carrier, personal delivery, telephone, electronic transmission or by facsimile.

(b) A director may waive notice of any meeting of the Board of Directors or any committee of the Board of Directors in writing before or after the date and time of the meeting and such waiver shall be deemed the equivalent of giving notice of the meeting. Neither the

Safeco Corporation Bylaws

May 2, 2007

Page 5

business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors or any committee of the Board of Directors need be specified in the waiver of notice of such meeting.

(c) A director’s attendance at or participation in a Board of Directors or committee meeting shall constitute a waiver of notice of such meeting, unless the director at the beginning of the meeting, or promptly upon the director’s arrival at the meeting, objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

9. QUORUM. A majority of the total number of Directors fixed by or in the manner provided in these Bylaws or, if vacancies exist on the Board of Directors, a majority of the total number of Directors then serving on the Board of Directors shall constitute a quorum for the transaction of business at any Board of Directors’ meeting; provided, however, that a quorum may not be less than one-third of the total number of Directors fixed by or in the manner provided by these Bylaws. When a quorum is present, a majority of the directors in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

10. CHAIRMAN OF THE BOARD OF DIRECTORS. The Directors shall appoint one member of the Board of Directors to serve as Chairman of the Board of Directors. The Chairman of the Board of Directors shall preside at all meetings of the stockholders and Directors and shall have such other duties and responsibilities as the Board of Directors may assign from time to time.

ARTICLE III

FINANCE COMMITTEE

1. MEMBERSHIP. The Finance Committee shall consist of no fewer than five members appointed by the Board of Directors, one of whom shall be designated as its chair by the Board of Directors. Each member of the Finance Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Finance Committee shall be governed under a Finance Committee Charter, which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Finance Committee shall, consistent with its Charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or the Board of Directors. Special meetings of the Committee may be called at any time by the chair of the Finance Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum. When a quorum is present, a majority of the committee members in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

Safeco Corporation Bylaws

May 2, 2007

Page 6

ARTICLE IV

AUDIT COMMITTEE

1. MEMBERSHIP. The Audit Committee shall consist of no fewer than three members who meet the qualifications described in the Audit Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Audit Committee as its chair. Each member of the Audit Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Audit Committee shall be governed under an Audit Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Audit Committee shall, consistent with its Charter, fix its own rules of procedure and meet where and as provided by its Charter, its rules of procedure or the Board of Directors. Special meetings of the Audit Committee may be called at any time by the chair of the Audit Committee or by any two members. At all meetings the presence of a majority of the members shall be necessary to constitute a quorum. When a quorum is present, a majority of the committee members in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

ARTICLE V

NOMINATING/GOVERNANCE COMMITTEE

1. MEMBERSHIP. The Nominating Committee shall consist of no fewer than three members who meet the qualifications described in the Nominating/Governance Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Nominating/Governance Committee as its chair. Each member of the Nominating/Governance Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Nominating/Governance Committee shall be governed under a Nominating/Governance Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Nominating/Governance Committee shall, consistent with its Charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or by resolution of the Board of Directors. Special meetings of the Nominating/Governance Committee may be called at any time by the chair of the Nominating/Governance Committee or by any two members. At all meetings, the presence of a

Safeco Corporation Bylaws

May 2, 2007

Page 7

majority of the members shall be necessary to constitute a quorum. When a quorum is present, a majority of the committee members in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

ARTICLE VI

COMPENSATION COMMITTEE

1. MEMBERSHIP. The Compensation Committee shall consist of no fewer than three members who meet the qualifications described in the Compensation Committee Charter and who are appointed by the Board of Directors. The Board of Directors shall designate one member of the Compensation Committee as its chair. Each member of the Compensation Committee shall continue as a member at the pleasure of the Board of Directors.

2. CHARTER. The Compensation Committee shall be governed under a Compensation Committee Charter which shall be adopted by the Board of Directors.

3. RULES OF PROCEDURE. The Compensation Committee shall, consistent with its charter, fix its own rules of procedure and shall meet where and as provided by its Charter, its rules or by resolution of the Board of Directors. Special meetings of the Compensation Committee may be called at any time by the chair of the Compensation Committee or by any two members. At all meetings, the presence of a majority of the members shall be necessary to constitute a quorum. When a quorum is present, a majority of the committee members in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

ARTICLE VII

EXECUTIVE COMMITTEE

1. MEMBERSHIP. The Board of Directors may also form an Executive Committee. The Executive Committee shall consist of no fewer than three members and shall include (i) the lead director of the Board of Directors, (ii) the chairs of each of the Audit, Compensation, Finance and Nominating/Governance Committees, and (iii) any other director of the corporation appointed by the Board of Directors. The lead director shall be the chair of the Executive Committee, unless the Board of Directors designates some other member of the Executive Committee as chair.

2. POWERS AND DUTIES. Other than those powers specifically denied to a committee of a Board of Directors under Washington law, the Executive Committee may exercise all the powers of the Board of Directors in the management of the business of the corporation when the Board of Directors is not in session. All such actions of the Executive Committee shall be reported to the Board of Directors at its meeting next succeeding such action and shall be subject to revision or alteration by the Board of Directors; provided, that no rights of third parties shall be affected by any such revision or alteration.

Safeco Corporation Bylaws

May 2, 2007

Page 8

3. RULES OF PROCEDURE. The Executive Committee shall fix its own rules of procedure and shall meet where and as provided by such rules or by resolution of the Board of Directors. Special meetings of the Executive Committee may be called at any time by the chair of the Executive Committee or any two members. At all meetings of the Executive Committee, the presence of a majority of the members shall be necessary to constitute a quorum. When a quorum is present, a majority of the committee members in attendance at a meeting shall be sufficient to transact business and to adjourn the meeting from time to time without further notice.

ARTICLE VIII

OTHER COMMITTEES

The Board of Directors shall have authority to establish by resolution such other committees as the Board of Directors may from time to time deem necessary or advisable. The membership, duties and authority of such committees shall be as the Board of Directors may from time to time establish.

ARTICLE IX

OFFICERS

1. OFFICERS ENUMERATED - APPOINTMENT. The officers of the corporation shall be a President, one or more Vice Presidents, one or more Assistant Vice Presidents, a Secretary, one or more Assistant Secretaries, a Treasurer, and one or more Assistant Treasurers, all of whom shall be appointed by the Board of Directors at the annual meeting thereof, to hold office for the term of one year and until their successors are appointed and qualified.

2. QUALIFICATIONS. None of the officers of the corporation need be a director. Any two or more corporate offices may be combined in one person.

3. PRESIDENT. The President shall be the chief executive officer of the corporation and shall have general charge, supervision and control over the business and affairs of the corporation and of its subsidiaries, subject to the ultimate authority of the Board of Directors. In the absence of the Chairman of the Board of Directors the President shall act in the place of the Chairman of the Board of Directors with the authority to exercise all of the Chairman’s powers and perform the Chairman’s duties.

4. VICE PRESIDENTS. In the absence or disability of the President, one of the Vice Presidents, in the order determined by seniority of responsibility and then order of their appointment, shall act as President until such time as the Board of Directors acts to appoint an

Safeco Corporation Bylaws

May 2, 2007

Page 9

individual to the office of President. One or more of the vice presidents may be designated by the Board of Directors as executive vice president, senior vice president or such other title as the Board of Directors deems appropriate for the position and duties.

6. SECRETARY. The Secretary shall be the custodian of the records, books of account, and seal of the corporation, and, in general, shall perform all duties usually incident to the office of Secretary, and make such reports and perform such other duties as may from time to time be requested of or assigned by the Board of Directors, the Executive Committee or the chief executive officer of the corporation.

7. ASSISTANT SECRETARIES. The Assistant Secretaries shall perform such duties as may be assigned to them by the Secretary of the corporation, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation.

8. TREASURER. The Treasurer shall have charge and custody of and be responsible for all funds and securities of the corporation. The Treasurer shall deposit all such funds in the name of the corporation in such depositories or invest them in such investments as may be designated or approved by the Finance Committee or the Board of Directors, and shall authorize disbursement of the funds of the corporation in payment of just demands against the corporation, or as may be ordered by the Board of Directors, the Executive Committee, or the Finance Committee on securing proper vouchers for such disbursements. The Treasurer shall render to the Board of Directors from time to time as may be required an account of all transactions as Treasurer, and shall perform such other duties as may from time to time be assigned by the Board of Directors, the Executive Committee, the Finance Committee, or the chief executive officer of the corporation.

9. ASSISTANT TREASURERS. The Assistant Treasurers shall perform such duties as may be assigned to them by the Treasurer, the Board of Directors, the Executive Committee, or the chief executive officer of the corporation.

10. OTHER OFFICERS AND AGENTS. The Board of Directors may appoint such other officers and agents as it shall deem necessary to exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.

11. REMOVAL. Any officer of the corporation may be removed by the affirmative vote of a majority of the whole Board of Directors; such removal, however, shall be without prejudice to the contract rights of the person so removed.

Safeco Corporation Bylaws

May 2, 2007

Page 10

ARTICLE X

CORPORATION PROXIES

Unless otherwise ordered by the Board of Directors, any and all shares of stock owned or held by the corporation in any other corporation shall be represented and voted at any meeting of the stockholders of such other corporation by any one of the following officers of the corporation in the following order who may attend such meeting; i.e., the President, a Vice President, or the Treasurer, and such representation by any one of the officers above named shall be deemed and considered a representation in person by the corporation at such meeting. Any one of the officers above named may execute a proxy appointing any other person as attorney and proxy to represent the corporation at such stockholders’ meeting and to vote all stock of such corporation owned or held by the corporation with all power and authority in the premises that any of the officers above named would possess if personally present. The Board of Directors by resolution may from time to time confer like powers upon any other person or persons.

ARTICLE XI

STOCK

1. CERTIFICATES OF STOCK. Certificates of stock of the corporation shall be issued in such form in accordance with the corporation law of the State of Washington as may be approved by the Board of Directors, and may be signed by the chief executive officer or any Vice President, and by the Secretary or any Assistant Secretary.

2. SHARES WITHOUT CERTIFICATES. As provided by the corporation law of the State of Washington, the Board of Directors may authorize the issue of some or all of the shares without certificates. Within a reasonable time after the issue or transfer of shares without certificates, the corporation shall send the shareholder a written statement of the information required on certificates by the state corporation law.

3. TRANSFERS. Shares of stock may be transferred by delivery of the certificates therefor accompanied either by an assignment in writing on the back of the certificate or by a written power of attorney to sell, assign and transfer the same by the record holder of the certificate. No transfer shall be valid except as between the parties thereto until such transfer shall have been made on the books of the corporation. Except as specifically provided in these Bylaws, no shares of stock shall be transferred on the books of the corporation until the outstanding certificate therefor has been surrendered to the corporation.

4. STOCKHOLDERS OF RECORD. The corporation shall be entitled to treat the holder of record on the books of the corporation of any share or shares of stock as the holder in fact thereof for all purposes, including the payment of dividends on such stock and the right to vote such stock.

Safeco Corporation Bylaws

May 2, 2007

Page 11

5. LOSS OR DESTRUCTION OF CERTIFICATES. In the case of loss or destruction of any certificate of stock, another may be issued in its place upon proof of such loss or destruction, and upon the giving of a satisfactory bond or indemnity to the corporation. A new certificate may be issued without requiring any bond when in the judgment of the Treasurer it is proper to do so.

6. The Board of Directors shall have the power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock of the corporation not inconsistent with these Bylaws, the Articles of Incorporation, or the laws of the State of Washington.

ARTICLE XII

INDEMNIFICATION

1. DIRECTORS. (a) Each person who was or is a party to any proceeding (whether brought by or in the right of the corporation or otherwise) by reason of the fact that he or she is or was a director of the corporation, or, while a director of the corporation, is or was serving at the request of the corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan (an “Indemnitee”), whether the basis of a proceeding is an alleged action in an official capacity as such a director, officer, partner, trustee, employee, or agent or in any other capacity while serving as such a director, officer, partner, trustee, employee, or agent, shall be indemnified and held harmless by the corporation against all judgments, penalties, fines, settlements, and reasonable expenses actually incurred by the Indemnitee in connection with such proceeding. Except as provided in paragraph (d) of this Section 1 with respect to proceedings seeking to enforce rights to indemnification, the corporation shall indemnify the Indemnitee in connection with a proceeding (or part of a proceeding) initiated by the Indemnitee only if a proceeding (or part thereof) was authorized or ratified by the Board of Directors.

(b) No indemnification shall be provided to any Indemnitee for acts or omissions of the Indemnitee finally adjudged to be intentional misconduct or a knowing violation of law, for conduct of the Indemnitee finally adjudged to be in violation of Section 23B.08.310 of the Washington Business Corporation Act, for any transaction with respect to which it was finally adjudged that such Indemnitee personally received a benefit in money, property or services to which the Indemnitee was not legally entitled or if the corporation is otherwise prohibited by applicable law from paying such indemnification, except that if Section 23B.08.560 or any successor provision is hereafter amended, the restrictions on indemnification set forth in this paragraph (b) shall be as set forth in such amended statutory provision.

Safeco Corporation Bylaws

May 2, 2007

Page 12

(c) The right to indemnification conferred under this Article XII shall include the right to be paid by the corporation the expenses incurred in defending any proceeding in advance of its final disposition. An advancement of expenses shall be made upon delivery to the corporation of an undertaking, by or on behalf of an Indemnitee, to repay all amounts so advanced if it is ultimately determined by final judicial decision from which there is no right to appeal that such Indemnitee is not entitled to be indemnified for such expenses under this Article XII.

(d) If a claim under this Section 1 is not paid in full by the corporation within 60 days after a written claim has been received by the corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the Indemnitee may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. An Indemnitee shall be presumed to be entitled to indemnification under this Article XII upon submission of a written claim (and, in an action brought to enforce a claim for an advancement of expenses, where the required undertaking has been tendered to the corporation), and the corporation shall have the burden of proof to overcome the presumption that the Indemnitee is so entitled.

2. OFFICERS. The corporation shall extend rights to indemnification and advancement of expenses in the same manner and to the same extent provided to directors under Section 1 of this Article to any person, not a director of the corporation, who is or was an officer of the corporation or is or was serving at the request of the corporation as a director, officer, partner, trustee, or agent of another foreign or domestic corporation, partnership, joint venture, trust, other enterprise, or employee benefit plan .

3. OTHER EMPLOYEES AND AGENTS. The corporation may, by action of the Board of Directors, grant rights to indemnification and advancement of expenses to employees and agents or any class or group of employees and agents of the corporation (i) with the same scope and effect as the provisions of this Article with respect to the indemnification and advancement of expenses of directors; (ii) pursuant to rights provided by the Washington Business Corporation Act; or (iii) as are otherwise consistent with law.

4. DEFINITIONS. For purposes of this Article XII, the terms “director,” “corporation,” “expenses,” “party” and “proceeding” have those meanings assigned to them in Section 23B.08.500 of the Washington Business Corporation Act.

5. SERVICE AT THE REQUEST OF THE CORPORATION. Any person who, while a director, officer or employee of the corporation, is or was serving (a) as a director or officer of another corporation of which a majority of the shares entitled to vote is held by the corporation or (b) as a partner, trustee or otherwise in a management capacity in a partnership, joint venture, trust or other enterprise of which the corporation or a wholly-owned subsidiary of the corporation is a general partner or has a majority ownership shall be deemed to be so serving at the request of the corporation.

Safeco Corporation Bylaws

May 2, 2007

Page 13

6. PROCEDURES EXCLUSIVE. Pursuant to Section 23B.08.560(2) or any successor provision of the Washington Business Corporation Act, the procedures for indemnification and advancement of expenses set forth in this Article are in lieu of the procedures required by Section 23B.08.550 or any successor provision of the Washington Business Corporation Act.

7. NOT EXCLUSIVE - CONTINUING. The indemnification provided by this Article shall not be deemed exclusive of other rights to which the director, officer, employee or agent may be entitled as a matter of law or by contract, and shall continue as to a person who has ceased to be a director, officer, partner, trustee, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

8. INSURANCE. The corporation may maintain insurance at its expense to protect itself and any director, officer, partner, trustee, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Washington Business Corporation Act.

ARTICLE XIII

SEAL

The seal of this corporation shall consist of a flat-faced, circular die which shall include: “SAFECO CORPORATION,” “Corporate Seal, 1929.”

ARTICLE XIV

COPIES OF RESOLUTIONS

Any person dealing with the corporation may rely upon a copy of any of the records of the proceedings, resolutions, or votes of the stockholders, the Board of Directors, and any committees of or established by the Board of Directors, when certified by the chief executive officer, a Vice President, Secretary, or an Assistant Secretary.

Safeco Corporation Bylaws

May 2, 2007

Page 14

ARTICLE XV

AMENDMENT OF BYLAWS

1. BY THE STOCKHOLDERS. These Bylaws may be amended, altered or repealed at any meeting of the stockholders, if notice of the proposed alteration or amendment is contained in the notice of the meeting.

2. BY THE BOARD OF DIRECTORS. These Bylaws may be amended, altered or repealed by the affirmative vote of a majority of the Board of Directors at any regular meeting of the Board of Directors, or at any special meeting if notice of the proposed alteration or amendment is contained in the notice of such special meeting; provided, however, that the Board of Directors shall not amend, alter or repeal any Bylaw in such a manner as to affect in any way the qualification, classification, or term of office of the directors. Any action of the Board of Directors with respect to the amendment, alteration or repeal of these Bylaws is hereby made expressly subject to change or repeal by the stockholders.

EX-10.1

Exhibit 10.1

INVESTMENT MANAGEMENT AND ACCOUNTING SERVICES AGREEMENT

among

SAFECO CORPORATION

and

SAFECO INSURANCE COMPANY OF AMERICA

and

BLACKROCK FINANCIAL MANAGEMENT, INC.

DATED: MAY 24, 2007

INVESTMENT MANAGEMENT AND ACCOUNTING SERVICES AGREEMENT

This Investment Management and Accounting Services Agreement (the “Agreement”) is made as of the 24th day of May, 2007 (the “Effective Date”) between Safeco Corporation and Safeco Insurance Company of America, on behalf of themselves and each of their Affiliates (“Safeco”), and BlackRock Financial Management, Inc. (the “Manager”), a Delaware corporation registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). Safeco and Manager may be referred to in this Agreement individually as a “Party” and collectively as “Parties”. In consideration of the mutual agreements herein contained, Safeco and Manager agree as follows:

1. Background, Objectives and Construction.

(a) Background.

Safeco is a Fortune 500 property and casualty company based in Seattle, Washington.

Safeco desires that Manager manage Safeco’s assets for its insurance holding company, property and casualty subsidiaries and one insurance foundation. Safeco desires that Manager, working with Safeco, develop and implement an asset allocation framework that will address Safeco’s investment objectives while complying with all applicable state insurance investment regulations as well as Safeco’s investment guidelines. Safeco further desires that Manager provide certain investment accounting services for Safeco’s portfolio of assets to be managed by Manager.

Manager desires to provide the foregoing services.

Based upon Manager’s (i) demonstrated ability to manage insurance company assets for multiple companies subject to regulation in multiple states; (ii) expertise in managing property and casualty company portfolios and in providing investment accounting services for such portfolios; (iii) proposed pricing for such services; and (iv) commitment to assign a team of qualified portfolio management and investment accounting professionals to perform the services, Safeco selected Manager to enter into discussions and negotiations for a definitive agreement pursuant to which Manager would provide investment management and related investment accounting services for Safeco’s portfolio of assets to be managed by Manager.

The Parties’ discussions and negotiations culminated in this Agreement.

This Agreement, including the schedules attached hereto, document the terms and conditions under which Safeco agrees to appoint Manager to provide, and Manager agrees to provide, investment management and related investment accounting services.

(b) Objectives. Safeco and Manager have agreed upon the following specific objectives for this Agreement as further described herein:

(i) Develop and implement an asset allocation framework that will address Safeco’s investment objectives while complying with all applicable state insurance investment regulations as well as Safeco’s investment guidelines; and

(ii) Leverage Manager’s experience and expertise in providing investment management and related investment accounting services.

1

(c) Construction. The provisions of this Article are intended to be a general introduction to this Agreement and are not intended to expand the scope of the Parties’ obligations under this Agreement or to alter the plain meaning of the terms and conditions of this Agreement.

2. Definitions, Interpretation and References.

(a) Definitions. As used in this Agreement, capitalized terms will have the meanings set forth in Schedule A (Definitions). Other capitalized terms used in this Agreement are defined where they are used and have the meanings there indicated.

(b) Interpretation. In the event of a conflict or inconsistency between the terms of this Agreement and the schedules, the terms of this Agreement will prevail. The article and section headings used in this Agreement are for reference and convenience only and will not enter into the interpretation of this Agreement.

(c) References.

(i) References to any Law will mean references to such Law in changed or supplemented form, or to a newly-adopted Law replacing a previous Law.

(ii) References to, and the use of, the word “including” and its derivatives (such as “include” and “includes”) will mean “including without limitation.”

(iii) References to “days” will mean calendar days, unless otherwise expressly referred to as “Business Days.”

(iv) References to “Safeco,” apply to Affiliates of Safeco in accordance with the following:

(A) References to “Safeco,” include Affiliates of Safeco unless otherwise expressly stated.

(B) References to the business, operations, methodologies, policies, procedures and the like of “Safeco,” include Affiliates of the applicable Safeco entity to the extent such Affiliates are receiving Services.

(v) References to Manager include Manager’s Affiliates, agents, contractors and subcontractors where, and to the extent, such Affiliates, agents, contractors and subcontractors are providing services related to the Services.

3. Term.

(a) Initial Term. The initial term (“Initial Term”) of this Agreement will begin on the Effective Date and will continue until 11:59 p.m. (Pacific Time) on the third anniversary of the Effective Date, unless terminated earlier in accordance with Section 25 or extended in accordance with Section 3(b).

(b) Automatic Renewal. This Agreement will be automatically renewed for an additional 12 month term on the last day of the Initial Term and on each annual anniversary thereafter (each an “Expiration Date”) unless Safeco provides written notice to Manager of its intent to terminate this Agreement no less than 90 days prior to an Expiration Date or unless Manager provides written notice to Safeco of its intent to terminate this Agreement no less than 270 days prior to an Expiration Date. The Initial Term, plus any extensions if applicable, will constitute the “Term”.

2

4. Transition.

The Parties will negotiate in good faith with the goal of developing a transition plan (the “Transition Plan”) as soon as possible following the Effective Date pursuant to which Manager will be able to commence providing the Services described in Section 5 below. Each Party’s responsibilities with respect to the Transition will include:

(i) performing the services, functions and responsibilities assigned to such Party under the Transition Plan in accordance with the schedule set forth therein;

(ii) providing for such knowledge transfer activities as are necessary or, in the Manager’s opinion, advisable to enable Manager to provide and Safeco to receive and utilize the Services in accordance with this Agreement;

(iii) paying its own costs associated with the Transition Plan;

(iv) executing the Transition Plan without causing any material disruption to the portion of Safeco’s business operations that do not involve the Services; and

(v) otherwise performing such activities as are necessary or, in the Manager’s opinion, advisable to enable Manager to provide the Services and for Safeco to receive and utilize the Services in accordance with this Agreement.

5. Services.

(a) Investment Management Services. Manager shall provide to Safeco a proposed initial asset allocation framework in respect of all investments held by or on behalf of Safeco based on the investment objectives Safeco is seeking to achieve for Safeco’s review no later than July 10, 2007 (or such other date as the Parties may mutually establish) and after discussing such proposed framework with Manager, Safeco shall, once it has accepted such proposed framework, provide its written approval thereof (as so approved by Safeco, the “Investment Strategy”). Effective as of the close of business June 30, 2007 Manager shall commence providing the other investment management services and functions and perform the related investment management responsibilities described in this Agreement and Schedule B-1 (Investment Management Services), as they may be supplemented, enhanced, modified or replaced in accordance with the terms hereof from time to time (collectively, the “Investment Management Services”) with respect to the assets in the Portfolio on such date.

(b) Accounting Services. As soon as possible after the Effective Date, Manager shall commence implementation of the investment accounting services with the goal of providing the investment accounting services and functions and the related responsibilities described in this Agreement and Schedule B-2 (Accounting Services), as they may be supplemented, enhanced, modified or replaced in accordance with the terms hereof from time to time, and such additional accounting and related services as the Parties may agree upon in writing from time to time (collectively, the “Accounting Services”) by September 1, 2007 (or such later date as the Parties may mutually establish). As used in this Agreement, the term “Services” will mean, collectively, the Investment Management Services and the Accounting Services.

3

(c) Compliance with Safeco Policies. Attached hereto as Schedule C (Investment Guidelines) are Safeco’s investment guidelines in effect as of the Effective Date. Safeco has the right to modify or waive the Investment Guidelines in writing in its sole discretion. Safeco shall also advise the Manager in writing from time to time of its state securities on deposit and reserve requirements and its policies and practices in respect of the application of accounting standards under GAAP and tax laws (collectively with the Investment Guidelines, the “Safeco Policies”). Safeco shall provide Manager with any proposed changes to the Safeco Policies with as much advance notice as is possible under the circumstances. The Manager agrees to provide the Services in accordance with the most recent Safeco Policies it has received in writing from Safeco. Promptly after the Manager becomes aware of any failure to comply with any of the Safeco Policies (whether due to a change applicable Law, a change in policy, the application of market forces outside of the Manager’s control or otherwise), Manager will inform Safeco in writing of such situation and the anticipated impact of such non-compliance. Manager and Safeco agree to thereafter confer to formulate an action plan for minimizing or eliminating the impact of such noncompliance.

(d) Compliance with Laws.

(i) Generally. Manager shall comply with all Laws applicable to Manager and, subject to the receipt of the Safeco Policies and other information to be provided by Safeco pursuant to Section 5, to the provision of the Services, and shall obtain all applicable permits and licenses required of Manager in connection with its obligations under this Agreement. Manager will perform its obligations hereunder in compliance with applicable Laws.

(ii) Compliance with State Insurance Laws. Manager agrees to perform the Services in a manner that ensures compliance by Safeco with the Laws relating to the management of insurance company assets in effect in each state in which Safeco is domiciled (the “Regulatory Requirements”), including preparing Schedule D (Investment Detail) in compliance with the National Association of Insurance Commissioners’ (“NAIC”) manuals and making all filings with the NAIC’s Security Valuation Office (the “NAIC-SVO”). Safeco agrees to provide Manager with a list, as updated from time to time, of the states in which it is domiciled. Manager also agrees to promptly notify Safeco of any changes in the Regulatory Requirements that Manager reasonably expects to impact the provision of the Investment Management Services.

(iii) Certain Securities and Exchange Commission Filings. Manager agrees to make all required filings on behalf of Safeco under Section 13 of the Securities Exchange Act of 1934 (the “Exchange Act”).

(iv) Compliance with Accounting and Tax Matters. Safeco shall comply, and shall adopt Safeco Policies that are in compliance, with any applicable accounting principles and policies and applicable tax laws, rules and regulations in connection with the Accounting Services. Safeco also agrees to promptly notify Manager of any changes in such accounting principles and policies and such tax laws, rules and regulations that Safeco reasonably expects to impact the provision of the Accounting Services.

6. Appointment and Authority of Manager.

(a) Appointment. Safeco hereby appoints Manager (i) as its attorney-in-fact to provide the Investment Management Services with respect to all of Safeco’s investment assets held in custody by the Custodian at the Effective Date, together with any additions or withdrawals made

4

therefrom by Safeco from time to time, and the income and sales proceeds from the investment of such assets (collectively, the “Portfolio”), all in accordance with the terms of this Agreement, and (ii) to provide the Accounting Services.

(b) Management of Portfolio. Subject to the Investment Strategy, the Safeco Policies, Section 5(c) and any other limitations and restrictions set out in this Agreement, Safeco hereby grants Manager full discretionary authority to buy, sell, exchange, and otherwise trade any asset in or for the Portfolio on Safeco’s behalf, including without limitation, the power to execute swap, futures, options and other agreements with counterparties on Safeco’s behalf as the Manager deems appropriate from time to time in order to provide the Investment Management Services. Safeco hereby authorizes Manager to enter into agreements and execute any documents required to effect transactions for the Portfolio in accordance with this Agreement. In making investment decisions, Manager shall only be obligated to take into account the assets it manages in the Portfolio and not any other assets owned by Safeco, but not then managed by Manager. Notwithstanding anything in this Agreement to the contrary, Safeco may direct the Manager with respect to securities transactions, and in particular may set limits on such transactions that result in realized losses or gains, in writing (including electronically, by wire or other written form of communication) from time to time and Manager will comply with such written directives. Until such time as a written directive to the contrary is provided to Manager, Manager shall not sell or otherwise dispose of any security in a transaction that would result in a realized GAAP loss (unless Safeco approves of each such proposed transaction in advance and in writing in each instance). Manager will provide monthly reporting on the reasons for each such sale at a GAAP loss.

(c) Brokerage. To carry out any transactions involving the Portfolio, Safeco authorizes Manager to issue instructions to brokers and dealers selected by Manager. Manager shall effect all purchases and sales of securities in a manner consistent with the principles of best execution, taking into account net price (including commissions), execution capability and other services which the broker may provide. To the extent permitted by applicable Law and subject always to its fiduciary obligations and the terms of this Agreement, Manager is hereby authorized to effect such transactions with or through Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch International, and any other firm that may be presumed an affiliate of the Manager (“Affiliated Broker-Dealers”). Manager shall allocate portfolio transactions to such brokers and dealers for execution on such markets at such prices and at such commission rates as in its good faith judgment Manager believes are in the best interest of the Portfolio. In making this determination, Manager may take into consideration not only the available prices and rates of brokerage commissions, but also other relevant factors (such as, without limitation, execution capabilities, research and other services provided by such brokers or dealers that are expected to enhance the general portfolio management of Manager) without having to demonstrate that such factors are of direct benefit to the Portfolio.

(d) Voting Securities. Manager shall have full discretionary authority with respect to voting any public or private securities, including proxies, or will delegate discretion with respect to voting such securities to a third party. Manager agrees to report its voting decisions with respect to securities in the Portfolio to Safeco in writing at least semi-annually.

(e) Affiliated Transactions. From time to time, when determined by Manager to be in the best interest of Safeco, Manager may, on behalf of the Portfolio, purchase securities from or sell securities to another account (including, without limitation, public or private collective investment vehicles) managed, maintained or trusteed by Manager or one of its Affiliates at prevailing market levels in accordance with applicable law and utilizing, with respect to pricing,

5

Manager’s procedures under Rule 17a-7(b) of the Investment Company Act of 1940 or such other pricing methodology determined to be fair and equitable to Safeco in Manager’s good faith judgment. Manager agrees to report any such purchases or sales to Safeco in writing at least quarterly. Manager’s authority to effect any such affiliated transactions is terminable by Safeco at will without penalty, effective upon receipt by Manager of written notice from Safeco.

Manager and any Affiliated Broker-Dealers are also hereby authorized by Safeco to execute agency cross transactions on behalf of the Portfolio in accordance with Manager’s internal policies and procedures governing such transactions. Manager and its Affiliated Broker-Dealers may receive commissions from, and therefore may have a potentially conflicting division of loyalties and responsibilities regarding, both parties to an agency cross transaction. Safeco understands that its authority to Manager to effect agency cross transactions for Safeco is terminable at will without penalty, effective upon receipt by Manager of written notice from Safeco.

If the Portfolio Account is subject to Section 11(a) of the Exchange Act and Rule 11a2-2(T) thereunder, Safeco authorizes Manager’s Affiliated Broker-Dealers that may be members of a U.S. securities exchange, or have the right to trade on such an exchange, to execute transactions on such exchange for the Portfolio in accordance with the terms of this Agreement.

7. Manager Personnel and Subcontractors.

(a) Manager Personnel. Manager agrees to assign an adequate number of Manager Personnel to perform the Services. All Manager Personnel will be, in Manager’s good faith belief, properly trained and fully qualified to perform the Services they are to perform.

(b) Manager Relationship Executives. Manager will designate an individual to serve as the “Manager Relationship Executive” for each of the Investment Management Services and the Accounting Services. Each Manager Relationship Executive will generally serve as the single point of contact for Manager for the applicable Services under this Agreement. Manager agrees to make each Manager Relationship Executive, or his or her named back-up designee, generally available to Safeco during Safeco’s normal business hours. Before assigning any new individual to serve as a Manager Relationship Executive, Manager shall notify Safeco of the proposed assignment, introduce the individual to appropriate Safeco representatives, provide such representatives upon request with an opportunity to meet the individual, and provide Safeco with biographical data regarding such person.

(c) Use of Subcontractors.

(i) Manager shall not delegate any of its Investment Management Services obligations to any person in which Manager owns less than 80% or more of the equity and voting securities of such person without Safeco’s prior written consent.

(ii) In the event Manager elects to delegate any of its Accounting Services obligations to any subcontractor (other than the specific subcontractor separately disclosed to Safeco prior to the Effective Date with respect to the general scope of service provided at the Effective Date), Manager shall notify Safeco of the delegation and promptly respond to any questions Safeco may have with respect to such subcontractor, including information about its experience, qualification, policies, procedures, controls, and the scope of the services under the proposed subcontract. Manager shall have the right to subcontract portions of the Accounting Services hereunder provided that (x) such delegation does not degrade the quality

6

or timeliness of the Accounting Services as previously provided by Manager, and (y) Manager ensures that such subcontractor is contractually bound to maintain confidentiality of Safeco’s information to at least the extent provided in this Agreement. The Manager shall also comply with Section 15(b) below as applicable.

(iii) Manager shall have the right, at its discretion, to delegate any or all of its obligations under this Agreement to any person in which Manager owns at least 80% of the equity and voting securities of such person.

(iv) Notwithstanding any provision of this Section 7(c), Manager shall remain liable and responsible for the performance of the Services in accordance with this Agreement. Manager will remain responsible for any obligations, services and functions performed by subcontractors or Affiliates (as the case may be) to the same extent as if Manager performed such obligations, services and functions itself, and for purposes of this Agreement, such work will be deemed work performed by Manager. Manager shall be responsible for all payments to its subcontractors or Affiliates.

8. Appointment of Custodian and Account.

(a) Appointment of Custodian.

(i) The assets of the Portfolio shall be held in an account (the “Account”) held by a custodian Safeco has appointed in respect of the Portfolio (the “Custodian”). Safeco shall authorize Manager to issue instructions to the Custodian as appropriate in connection with the settlement of transactions involving Portfolio assets. Safeco acknowledges that Custodian will directly charge Safeco fees for its services as are set forth separately by Custodian, the payment of which will be solely the obligation of Safeco.

(ii) Safeco agrees to instruct its Custodian to provide Manager (at Safeco’s request, on Custodian’s initiative, or at Manager’s request) with Custodian’s reports and other information that Manager requires to perform the Services hereunder. Such instructions will remain in force during the Term. Manager is hereby authorized to communicate with the Custodian regarding Safeco’s accounts and portfolios regarding reports and information provided by or pertaining to Safeco, the Custodian, or Manager. Manager is not liable for the acts or omissions of the Custodian.

(b) Composition of the Account. The Account will consist of such cash, securities, futures, options, and other financial instruments which from time to time are placed in the Account or which will become part of the Account (including dividends or interest that is not otherwise transferred out of the Account). Safeco at any time may make additions to and withdrawals from the Account, provided however, that all additions and withdrawals will be made after giving Manager timely written notice.

9. Account Statements and Reports.

(a) Manager will provide Safeco with a statement of the Portfolio as soon as reasonably possible following the close of each month during the Term. Upon request and at the expense of Safeco, Manager will send copies of statements of the Portfolio to such other persons as Safeco designates in writing.

7

(b) Manager will provide to Safeco, in electronic format and hard copy, such reports as are specified in Schedule B-2 (Accounting Services) and such reports as are standard and available in connection with providing Investment Management Services and such other reports as are agreed upon from time to time.

(c) Safeco may request that Manager (i) provide ad hoc reporting, including creating and producing non-routine reports, data queries and analyses using information on Safeco’s and / or Manager’s Systems, or (ii) assist Safeco in performing this activity. Manager will consider such request in good faith and will endeavor to provide such reporting if reasonably available within Manager’s reporting framework. Manager shall advise Safeco in writing if such additional reporting will result in an additional charge prior to undertaking any activity that may result in any additional charge. Safeco must approve of any proposed additional charge in writing. If Safeco refuses any additional, reasonable charge proposed by Manager under subsections (b) or (c) of this Section 9, Manager will not be obligated to provide the additional reports or assistance.

(d) All routine and mutually agreed ad hoc reports will be provided by Manager on a time frame agreed upon by the Parties.

(e) Manager will provide Safeco with password-protected access to a website hosted by Manager that displays end of day trading and portfolio positions data that is available on the next Business Day.

10. Valuation.

Manager shall value securities in the Portfolio in accordance with Manager’s Pricing Policy (attached as Exhibit 1 to Schedule D (Fees)) for purposes of calculating the Fees described in Section 11. Manager shall value securities in the Portfolio in accordance with GAAP and the Safeco Policies for purposes of preparing reports in connection with providing the Accounting Services.

11. Fees.

(a) Fees.

Manager shall be entitled to receive an annual fee calculated in accordance with the formula set forth in Schedule D (Fees) and payable quarterly in arrears (the “Fees”). The Fees shall commence on the date Manager first is providing the Investment Management Services for the Portfolio. As soon as practicable following the end of each calendar quarter, Manager shall provide to Safeco a statement setting forth its calculation of the Fees for such quarter. Safeco shall confirm the calculation of such Fees and, if correct, pay them by check, wire transfer or other electronic bank transfer within thirty (30) days of Safeco’s receipt of Manager’s Fee statement.

(b) Pro-ration of Fees. In the event that a fee period under this Agreement is less than one full quarter, then the Fee for the period shall be the product obtained by multiplying a full quarterly fee by a fraction, the numerator of which shall be the number of days this Agreement is in effect prior to the end of the calendar quarter and the denominator of which shall be 90.

(c) No Other Amounts Payable. Other than the fees specified in Section 11(a) and as expressly provided in Schedules B-2 and D to this Agreement and as may be agreed in writing from time to time for changed or additional services, Safeco shall not be required to pay Manager any additional amounts whatsoever for the Services, including (i) Manager’s costs and expenses

8

incurred in performing the Services for materials, supplies, services, travel, room and board, (ii) Manager’s overhead costs (or allocations thereof), administrative expenses or other markups, (iii) expenses related to buying and selling assets in the Portfolio (other than Portfolio trading costs, which shall be paid by Safeco), or (iv) Manager’s auditor’s fees and expenses.

(d) Taxes. Manager will pay all federal, state and local taxes and duties that relate to or arise out of the Services provided under this Agreement, except for (A) sales and use taxes that by Law must be added to Manager’s charges, which will be separately itemized on all invoices provided to Safeco, and (B) any fees, taxes, trading commissions or other charges (including markups) relating to or arising out of the effecting of securities transactions for the Portfolio. The Parties agree to cooperate fully with each other to enable each Party to accurately determine its own tax liability and minimize such liability to the extent legally permissible.

12. Safeco Property.

(a) Generally. As between Safeco and Manager, all right, title and interest in and to the Safeco Data and information made or provided by Safeco will remain the exclusive property of Safeco. To the extent necessary to provide the Services, Safeco hereby grants to Manager, solely to provide the Services, a non-exclusive, non-transferable, fully paid-up and royalty-free, limited right to access and use of such Safeco Data; provided, however the rights granted to Manager hereunder will automatically expire effective upon the earlier of (A) the date upon which Manager is no longer, for any reason, providing any Service to Safeco, and (B) the expiration or earlier termination of this Agreement.

(b) Safeco Marks. As between Safeco and Manager, all right, title and interest in and to the Safeco Marks will remain the exclusive property of Safeco. Manager will not use the Safeco Marks for any purpose whatsoever without the prior written consent of Safeco, which may be withheld in Safeco’s sole discretion. Manager’s use of the Safeco Marks will be at all times consistent with all of Safeco’s restrictions, requirements and directions pertaining to such use, and Safeco’s consent to Manager’s use of Safeco Marks may be withdrawn at any time and for any reason, in Safeco’s sole discretion.

13. Safeco Responsibilities and Savings Clause.

(a) Safeco Relationship Manager. Safeco will designate one individual to whom operational communications or notices under this Agreement may be addressed (the “Safeco Relationship Manager”) for each of Investment Management Services related matters and Accounting Services related matters. Each Safeco Relationship Manager or his or her designee will be the principal point of contact for obtaining decisions, information, approvals and acceptances in connection with this Agreement within their functional area. Only personnel as expressly so designated in writing by a Safeco Relationship Manager with respect to their functional area will be authorized to make commitments on the part of Safeco that commit Safeco resources or require approval under this Agreement.

(b) Additional Safeco Responsibilities. In addition to Safeco’s responsibilities as expressly set forth elsewhere in this Agreement, Safeco will cooperate with Manager by making available management, information, data, records, approvals and acceptances as reasonably requested by Manager, as well as Safeco plans that could affect the Services, so that Manager may accomplish its obligations and responsibilities under this Agreement. Safeco shall use reasonable care and diligence in reviewing the reports provided to it by Manager hereunder. The foregoing is not intended to reduce or otherwise alter any of Manager’s obligations to timely prepare or provide

9

reports or other accounting information to Safeco or to respond to any questions or issues Safeco may raise with any Manager report or data as may be otherwise required hereunder. Manager shall not be relieved of any of its obligations under this Agreement whether or not Safeco exercises reasonable care and diligence in reviewing Manager’s reports.

14. Audit Rights.

(a) Maintenance of Audit Trail and Records. Commencing on the Effective Date and continuing throughout the Term, Manager will maintain the Records and a complete audit trail of financial and non-financial transactions resulting from this Agreement consistent with the best business practices implemented by insurance companies similar to Safeco. Manager will not destroy or otherwise dispose of any Records without the prior written consent of Safeco, which consent may be withheld in Safeco’s sole discretion.

(b) Access to Records; Audit Rights.

(i) Manager will provide to Safeco and its auditors, inspectors, regulators and other representatives such reasonable assistance as they reasonably require and will cooperate with Safeco or its auditors and other representatives in connection with audit functions and with regard to examinations by regulatory authorities. As requested by Safeco, appropriate Manager personnel will meet with representatives of Safeco in order to provide such information as reasonably requested by Safeco, and to respond to questions from such representatives, so as to comply with the requirements of this Article.

(ii) Safeco may perform audits or inspections of Manager, upon reasonable prior written notice during Manager’s normal business hours and use reasonable efforts to avoid impairing Manager’s ability to provide services to its clients, to: (A) respond to audits, inspections, inquiries, subpoenas or litigation against Safeco that relate to the Services being provided by Manager; (B) verify any invoices, payments, or claims submitted by Manager; or (C) examine Manager’s performance of the Services and compliance with the terms of this Agreement, including performing audits: (1) of internal controls, practices and procedures as may be requested by Safeco’s external auditors or other third party regulators; (2) of physical and technical security practices and procedures (excluding direct access to any of Manager’s Systems); (3) of disaster recovery, back-up and business continuity practices; (4) of conformance to the Investment Strategy, Investment Guidelines and other Safeco Policies; and (5) as reasonably necessary to enable Safeco to meet, or to confirm that Manager is meeting, applicable Laws. Such audits or inspections in the case of (B) and (C) may occur not more frequently than annually (except that if the nature of the inquiry or review is to follow-up on and test any material weakness in internal controls or other material deficiency found in a previous review or audit, then to that extent access for such follow-up of an audit will be provided as often as quarterly).

(c) Audit Follow-Up. Following an audit or inspection, Safeco may conduct, or request its auditors or examiners to conduct, an exit conference with Manager to obtain factual concurrence with issues identified in such audit or inspection. Manager and Safeco will, at Safeco’s request, meet to review each audit report promptly after the issuance thereof and to mutually agree upon the appropriate manner, if any, in which to respond to the changes suggested by the audit report.

(d) Third Party Findings. Manager will provide to Safeco, promptly upon Manager’s receipt thereof, and to the extent it is legally permissible to do so, any audit or regulatory findings or reports that in any manner involve Safeco or its Account or that would if true, materially and adversely impair Manager’s ability to perform any substantial part of the Services hereunder.

10

15. SAS 70 Type 2 Compliance and Sarbanes-Oxley Requirements.

(a) Manager Obligation. Manager will obtain a SAS 70 Type 2 Report annually during the Term. Manager will bear all costs and expenses associated with obtaining and delivering each SAS 70 Type 2 Report. Manager will deliver each such SAS 70 Type 2 Report to Safeco within ten (10) Business Days of Manager’s receipt. It is the expectation of the Parties that the delivery will take place in the month of December each year.

(b) Manager Subcontractor Obligations. If any material portion of the Accounting Services (but excluding, however, any technology infrastructure-related services) is subcontracted by Manager to a subcontractor pursuant to Section 7(c) above and such subcontracting includes any key accounting control(s) included in Manager’s SAS 70 Type 2 Report with respect to the Accounting Services, Manager will use its best commercially reasonable efforts to procure a SAS 70 Type 2 Report (or substantially similar report) from the subcontractor that covers such affected key accounting control(s). In the unlikely event that such a SAS 70 Type 2 report is not available from such subcontractor, Manager must obtain Safeco’s prior written approval to utilize such subcontractor for Safeco-related work, such approval not to be unreasonably withheld or delayed. If Safeco approves of such subcontractor despite the lack of a SAS 70 Type 2 Report, Manager will work in good faith to obtain other suitable documentation concerning such subcontractor describing its policies or procedures for such affected key accounting control(s) and will agree upon reasonable audit and test procedures with respect thereto. Upon Safeco’s request, Manager will use its commercially reasonable efforts to procure such additional information as Safeco may request with respect to such subcontractor to enable Safeco to obtain reasonable comfort with such arrangement.

(c) SAS 70 Gap Period. Upon Safeco’s request, Manager shall also issue a letter to Safeco in the month following each quarter-end stating that there have been no (i) material changes in the controls covered by the annual SAS 70 Type 2 Report or (ii) changes to the manner in which the Services are provided or operated that would reasonably be expected to have any material impact on the content of the SAS 70 Type 2 Report.

(d) Sarbanes-Oxley Requirements. Manager recognizes that Safeco will be subject to Sarbanes-Oxley Requirements. From time to time, upon Safeco’s reasonable request, the Parties will meet together to discuss any new or additional Sarbanes-Oxley Requirements and related Safeco compliance measures and financial reporting related to the Services provided by Manager. The Parties will cooperate in good faith to determine in scope any reasonable documentation or assistance that may be requested of Manager and agree upon timeframes and additional costs, if any, that may be applicable with respect to any implementation of such new or additional Sarbanes-Oxley Requirements. Control objectives contained in Manager’s SAS 70 Type 2 Reports will include key controls that support (but do not replace) Safeco’s Financial Reporting Control Objectives set forth in Schedule E. Safeco acknowledges and agrees that Manager’s most recent SAS 70 Type 2 Reports delivered to Safeco prior to the Effective Date do include key controls that support such Financial Reporting Control Objectives. Manager will continue to maintain a control framework that is consistent with and comparable to those contained in its most recent SAS 70 Type 2 Reports delivered to Safeco prior to the Effective Date.

11

16. Confidentiality.

(a) Confidential Information. Each Party (a “Receiving Party”) will be furnished with, receive or otherwise have access to information of or concerning the other Party (a “Disclosing Party”) that the Disclosing Party considers to be confidential, a trade secret or otherwise restricted. As used in this Agreement, “Confidential Information” will mean all information, in any form, furnished or made available directly or indirectly by a Disclosing Party to the other that is marked confidential, restricted, or with a similar designation. In addition, the following, whether or not so marked, will be Confidential Information of Safeco: (i) Safeco Data; (ii) all information relating to or contained in the Investment Strategy, Investment Guidelines, the Portfolio and the Account; (iii) documents, correspondence, communications, data and other materials or information provided to Manager that pertain to (A) Safeco or its operations, finances, plans, affairs and businesses, or (B) the existence of the relationship between Manager and Safeco and the nature and extent of the Services. The terms and conditions of this Agreement will be Confidential Information of both parties. In addition, the following, whether or not so marked, will be Confidential Information of Manager: (i) Manager’s risk analytic reports, methodologies and any other processes or other information Manager designates as proprietary; (ii) documents, correspondence, communications, data and other materials or information provided to Safeco that pertain to Manager’s finances and plans; (iii) information provided pursuant to Section 14(d); and (iv) the SAS 70 Type 2 Reports of Manager provided hereunder.

(b) Obligations with Respect to Confidential Information. Manager will not use Safeco Confidential Information for any purpose other than to perform its obligations under this Agreement and will not disclose to any third party any Safeco Confidential Information, except as expressly permitted under this Agreement or expressly authorized in writing by Safeco. Safeco will not use Manager Confidential Information for any purpose other than to obtain the benefit of the Services under this Agreement, perform its obligations under this Agreement or to use, as contemplated, the deliverables from Manager under this Agreement and will not disclose to any third party (other than its auditors and advisors as necessary) any Manager Confidential Information, except as expressly permitted under this Agreement or expressly authorized in writing by Manager. Each Party may share Confidential Information of the other with its responsible employees who have a need to know such Confidential Information to perform their duties and may disclose Confidential Information of the other to other properly authorized third parties in the normal course of business (e.g., accountants, agents and subcontractors, lawyers and data vendors), as and to the extent necessary for performance or use of the Services, so long as such other third parties first agree or have agreed in writing to the obligations at least as protective as those set forth in this Article. Except to the extent that applicable Law requires stronger measures, each Party will use at least the same degree of care as it employs to avoid unauthorized disclosure of its own confidential or proprietary information (but in no event less than a reasonable degree of care) to prevent disclosing Confidential Information of the other Party to third parties. Each Party will cause its employees to comply with the provisions of this Section 16. The obligations set forth in this Section 16 will apply to Confidential Information provided, furnished or otherwise disclosed to the other Party prior to and following the Effective Date.

The Parties acknowledge and agree that the performance of their respective obligations under this Agreement will not include the provision or receipt of “non-public personal information” (as such information is defined in the Gramm-Leach-Bliley Act and other applicable Law, “NPPI”), about either Party’s employees, claimants, customers, prospective customers or other individuals, as applicable. Notwithstanding the foregoing, in the event of any inadvertent disclosure or receipt of such NPPI, the receiving Party will not use or disclose such NPPI for purposes other than those necessary to carry out its obligations under this Agreement (and in such case any such use or disclosure will be in accordance with the provisions of this Agreement) or as permitted by applicable Law.

12

(c) Exclusions. Confidential Information does not include, and Section 16(b) will not apply to, information that: (i) is or subsequently becomes published or available to the public through no fault of the Receiving Party or the Receiving Party’s agent; (ii) was received by the Receiving Party from a third party who the Receiving Party has no reason to believe does not have a lawful right to disclose such information without any obligation to restrict its further use or disclosure; (iii) was independently developed by the Receiving Party without reference to the Confidential Information of the Disclosing Party, as shown by prior written records; (iv) was in the Receiving Party’s possession or was known to the Receiving Party before it was disclosed to the Receiving Party by the Disclosing Party, as shown by prior written records; or (v) is authorized to be disclosed by a Disclosing Party’s prior written authorization; provided, however, that the exclusions above will not apply to any Safeco Confidential Information containing personally identifiable information or financial information of any individual, which will always be deemed Safeco Confidential Information. In addition, if a Party is required to disclose Confidential Information of the other Party to satisfy the legal requirements of a government body, such disclosure will not violate the provisions of this Section 16 provided that, promptly upon receiving any such request, the Receiving Party (A) advises the Disclosing Party of the request (to the extent that it may legally and practically in the circumstance do so), which notice generally must be sufficient to permit the Disclosing Party to seek a protective order or other appropriate remedy to curtail such disclosure, and (B) the Receiving Party thereafter discloses only that portion of the Confidential Information of the Disclosing Party that is legally required and, as far in advance as practicable, gives the Disclosing Party written notice (unless prohibited by Law and as practicable in the circumstances) of the Confidential Information to be disclosed. It is understood that Safeco expects to file this Agreement under Form 8-K as a material agreement and Safeco will work with Manager in redacting any Manager Confidential Information or other information that is permitted to be redacted under applicable rule.

(d) Return or Destruction of Confidential Information. Upon expiration or termination of this Agreement, and at any time upon a Disclosing Party’s written request, the Receiving Party will promptly return or destroy, as the Disclosing Party may in writing direct, all material in any medium that contains, refers to, or relates to Confidential Information of the Disclosing Party, and retain no copies except as required by applicable Law or the internal policies of the Receiving Party (such as for archival purposes). Notwithstanding a Party’s return or retention of Confidential Information in accordance with this paragraph, all duties and obligations of each Party under this Article with respect to Confidential Information of the other Party will remain in full force and effect.

(e) Loss or Unauthorized Access of Confidential Information. In the event of any unauthorized or impermissible disclosure or loss of, or inability to account for, or any unauthorized access to any Confidential Information of a Party, the other Party will promptly: (i) notify the Party whose Confidential Information has been disclosed, lost or accessed of the circumstances of such disclosure, loss or access and the nature and content of the Confidential Information so disclosed, lost or accessed; (ii) take such actions as may be necessary or reasonably requested by the Party whose Confidential Information has been disclosed, lost or accessed to minimize the extent of any impacts of such disclosure, loss or access; (iii) take such actions as may be required by applicable Law; (iv) maintain all records of, and all records or other information pertaining to such disclosure, loss or access, including the results of any investigation by such Party or investigation by law enforcement officials; and (v) cooperate in all reasonable respects with the Party whose Confidential Information has been disclosed, lost or accessed and take such measures as necessary to minimize the likelihood of future unauthorized disclosures.

13

(f) No Implied Rights. Confidential Information of each Party will remain its property. Nothing contained in this Article will be construed as obligating a Party to disclose its Confidential Information to the other, or as granting to or conferring to the other Party, expressly or impliedly, any rights or license to the Confidential Information of a Party, except to the extent that any such obligation or grant is provided by another provision of this Agreement.

17. Representations and Warranties of Safeco. Safeco represents and warrants that:

(a) it has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by this Agreement;

(b) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the requisite corporate action on the part of Safeco;

(c) the execution, delivery and performance of this Agreement and the consummation of this Agreement will not constitute a default under any contract by which Safeco or any of Safeco’s assets are bound; or an event that would, with notice or lapse of time, or both, constitute such a default; and

(d) it has the requisite power and authority to disclose the Safeco Data to Manager and the disclosure of such Safeco Data to Manager will not infringe the third party proprietary rights of any person.

18. Representations, Warranties and Covenants of Manager. Manager represents, warrants and covenants that:

(a) it has the requisite corporate power and authority to enter into this Agreement and to carry out the transactions contemplated by this Agreement;

(b) the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the requisite corporate action on the part of Manager;

(c) the execution, delivery and performance of this Agreement and the consummation of this Agreement will not constitute a default under any contract by which Manager or any of Manager’s assets are bound; or an event that would, with notice or lapse of time, or both, constitute such a default;

(d) it is registered as an investment advisor under the Advisers Act, and agrees that it will promptly notify Safeco of any change in this status;

(e) the Services will be rendered with promptness and diligence and will be executed by qualified personnel in accordance with the practices and professional standards used by similar investment management firms performing services similar to the Services;

(f) Manager is in compliance with all Laws applicable to it, will perform the Services in compliance with all applicable Laws (subject to the receipt of information to be provided to Manager hereunder), and has obtained and will maintain all applicable permits and licenses required of it in connection with its obligations under this Agreement;

14

(g) Manager will perform the Services in a manner that does not infringe upon the proprietary rights of any third party;

(h) there is no outstanding litigation, arbitrated matter or other dispute to which Manager is a party which, if decided unfavorably to Manager, would have a material adverse effect on Manager’s ability to perform the Services;

(i) Manager has not been, and is currently not, subject to any sanctions by the Securities and Exchange Commission or any other regulatory or administrative entity, except as disclosed in its Form ADV as of the Effective Date;

(j) Manager maintains and will continue to maintain a disaster recovery and business continuity plan that is designed to permit Manager to recover from a disaster and continue providing services to its customers including Safeco. Manager has tested and will continue to update and test its plan on a regular basis to ensure that it is operational throughout the Term; and

(k) as of the Effective Date, Manager is a wholly-owned subsidiary of BlackRock, Inc. and is the operating entity which operates as the primary fixed income manager and provider of investment accounting and risk management services in the BlackRock group. As of the Effective Date, a majority of the BlackRock Solutions business operations are conducted within the Manager entity. If the business of Manager substantially changes in a manner that may impair the ability of Manager to perform its obligations hereunder, Manager will promptly notify Safeco and provide reasonable assurances of Manager’s means of continuing to provide the Services and support its obligations hereunder.

19. Disclaimer. OTHER THAN AS PROVIDED IN THIS AGREEMENT, NEITHER PARTY PROVIDES ANY EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.

20. Insurance Requirements.

(a) Insurance Coverage. Manager will, during the Term, secure and maintain, at its sole cost and expense, the minimum insurance coverage set forth in Schedule F (Manager Insurance Requirements). Safeco’s specification or approval of the insurance in this Agreement or its amount will not relieve or decrease the liability of Manager for its negligence.

(b) Insurance Conditions.

(i) The insurance policies described in Schedule F (Manager Insurance Requirements) will be primary, and all coverage will be non-contributing with respect to any other insurance or self-insurance which may be maintained by Safeco. All coverage required by Section 20(a) will include a waiver of subrogation (except for items (ii), (vii), (viii) and (ix) on Schedule F (Manager Insurance Requirements)) and a waiver of any insured-versus-insured exclusion regarding Safeco. To the extent any coverage is written on a claims-made basis, it will have a retroactive date prior to the Effective Date and will allow for reporting of claims for at least one year after the Term.

15

(ii) Manager will cause its insurers to issue certificates of insurance evidencing that the coverage and policy endorsements required under this Agreement are maintained in force and that Manager will endeavor to give not less than 30-days’ written notice given to Safeco prior to any material, adverse modification, cancellation or non-renewal of the policies. The insurers selected by Manager will have an A.M. Best rating of A- or better and with a financial size category of at least Class VII or, if such ratings are no longer available, with a comparable rating from a recognized insurance rating agency. Manager will assure that its subcontractors, if any, used in its provision of the Services maintain insurance coverage in such amounts as are reasonable and customary in the applicable industry.

(iii) In the case of loss or damage or other event that requires notice or other action under the terms of any insurance policy specified in this Article, Manager will be solely responsible to take such action.

(c) Risk of Loss. Each Party will be responsible for risk of loss of, and damage to, any equipment, software or other materials in its possession or under its control, except to the extent the loss or damage is caused by the other Party or its agents.

21. Indemnification by Manager. Subject to Article 24 and in accordance with the procedures set out in Article 23, Manager will indemnify Safeco and its Affiliates and their respective officers, directors, employees, agents, successors and assigns from, and defend and hold Safeco harmless from and against, any Losses suffered, incurred or sustained by Safeco or to which Safeco becomes subject, resulting from, arising out of or relating to any claim:

(a) that the Services infringe upon the proprietary rights of any third party, except to the extent such claim is caused by Safeco;

(b) relating to the inaccuracy, untruthfulness or breach of any covenant, representation or warranty made by Manager under this Agreement;

(c) relating to Manager’s failure to comply with any applicable Law;

(d) relating to any amounts, including taxes, interest and penalties, assessed against Safeco that are the obligation of Manager pursuant to Section 11(d);

(e) any governmental fines, assessments or penalties (imposed on Safeco) arising from Manager’s breach (whether by act or omission) of Manager’s obligations under this Agreement;

(f) relating to personal injury (including death) or tangible personal property damage or real property loss or damage resulting from Manager’s acts or omissions constituting breach of this Agreement or from Manager’s actual misconduct, gross negligence, willful violation of any applicable Law or reckless disregard for its duties;

(g) relating to the Accounting Services, but only to the extent such Losses arise out of Manager’s gross negligence, fraud, or illegal acts and are not attributable to Safeco’s acts or omissions; and

(h) relating to a breach of Article 16.

Manager will indemnify Safeco from any costs and expenses incurred in connection with the enforcement of this Article.

16

22. Indemnification by Safeco. Subject to Article 24 and in accordance with the procedures set out in Article 23, Safeco will indemnify Manager and its Affiliates and their respective officers, directors, employees, agents, successors and assigns from, and defend and hold Manager harmless from and against, any Losses suffered, incurred or sustained by Manager or to which Manager becomes subject, resulting from, arising out of or relating to any claim:

(a) relating to the inaccuracy, untruthfulness or breach of any covenant, representation or warranty made by Safeco under this Agreement;

(b) relating to personal injury (including death) or tangible personal property damage or real property loss or damage resulting from Safeco’s acts or omissions constituting breach of this Agreement or from Safeco’s actual misconduct, gross negligence, willful violation of any applicable Law or reckless disregard for its duties;

(c) relating to Safeco’s failure to comply with applicable Law or any errors, misstatements or omissions in the Safeco Policies;

(d) relating to a breach of Article 16; and

(e) relating to the Accounting Services, except to the extent any Losses have resulted from the gross negligence, fraud, or illegal acts of Manager.

Safeco will indemnify Manager from any costs and expenses incurred in connection with the enforcement of this Article.

23. Indemnification Procedures. With respect to third party claims the following procedures will apply:

(a) Promptly after receipt by any entity entitled to indemnification under Article 21 or Article 22 of notice of the assertion or the commencement of any action, proceeding or other claim by a third party in respect of which the indemnitee will seek indemnification pursuant to any such Article, the indemnitee will notify the indemnitor of such claim in writing. No failure to so notify an indemnitor will relieve it of its obligations under this Agreement except to the extent that it can demonstrate actual prejudice attributable to such failure. Within 15 days following receipt of written notice from the indemnitee relating to any claim, but no later than 10 days before the date on which any response to a complaint or summons is due, the indemnitor will notify the indemnitee in writing if the indemnitor acknowledges its indemnification obligation and elects to assume control of the defense and settlement of that claim (a “Notice of Election”).

(b) If the indemnitor delivers a Notice of Election relating to any claim within the required notice period, the indemnitor will be entitled to have sole control over the defense and settlement of such claim provided that: (i) the indemnitee will be entitled to participate in the defense of such claim and to employ counsel at its own expense to assist in the handling of such claim; and (ii) the indemnitor will obtain the prior written approval of the indemnitee before entering into any settlement of such claim or ceasing to defend against such claim. After the indemnitor has delivered a Notice of Election relating to any claim in accordance with the preceding paragraph, the indemnitor will not be liable to the indemnitee for any legal expenses incurred by the indemnitee in connection with the defense of that claim. In addition, the indemnitor will not be required to indemnify the indemnitee for any amount paid or payable by the indemnitee in the settlement of any claim for which the indemnitor has delivered a timely Notice of Election if such amount was agreed to without the written consent of the indemnitor.

17

(c) If the indemnitor does not deliver a Notice of Election relating to a claim, or otherwise fails to acknowledge its indemnification obligation or to assume the defense of a claim, within the required notice period, the indemnitee will have the right to defend the claim in such manner as it may deem appropriate, at the cost and expense of the indemnitor, including payment of any judgment or award and the costs of settlement or compromise of the claim. The indemnitor will promptly reimburse the indemnitee for all such costs and expenses, including payment of any judgment or award and the costs of settlement or compromise of the claim.

24. Liability.

(a) Subject to the specific provisions of this Article, it is the intent of the Parties that each Party will be liable to the other Party for any actual damages incurred by the non-breaching Party as a result of the breaching Party’s failure to perform its obligations in the manner required by this Agreement.

(b) IN NO EVENT, WHETHER IN CONTRACT OR IN TORT (INCLUDING BREACH OF WARRANTY, NEGLIGENCE AND STRICT LIABILITY IN TORT), WILL A PARTY BE LIABLE FOR INDIRECT OR CONSEQUENTIAL, EXEMPLARY, PUNITIVE OR SPECIAL DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE.

(c) With respect to the Investment Management Services, Manager, its officers, directors, and employees acting in good faith shall not be liable for any Losses resulting or arising from or in connection with any action, omission, information, or recommendation in connection with this Agreement, except in the case of Manager’s or such officer’s, director’s, or employee’s actual misconduct, breach of this Agreement, negligence, violation of any applicable Law, fraud or reckless disregard for its duties; provided, however, this limitation shall not act to relieve Manager, its officers, directors or employees from any responsibility or liability for any responsibility, obligation or duty which the Manager or such officer, director or employee may have under the U.S. federal securities laws; and provided, further, however, that to the extent any limitations or restrictions contained in the Investment Guidelines and/or Investment Strategy are out of compliance as a result of changes in market value, changes in the capital structure of portfolio companies, additions to or withdrawals from the Account, portfolio rebalancing by Safeco or other non-volitional acts of the Manager, the Manager shall be liable to Safeco only if it fails to advise Safeco of any resulting noncompliance or fails to implement any proposed resolution of the noncompliance.

(d) With respect to the Accounting Services, and not withstanding any other provision of this Agreement to the contrary,

(i) Subject to the limitations set forth in this Section 24(d), Manager, its officers, directors, and employees shall not be liable for any Losses resulting or arising from or in connection with any action, omission, information, or recommendation in connection with this Agreement, except in the case of Manager’s or such officer’s, director’s, or employee’s gross negligence, fraud, or illegal acts. Other than as set forth in Section 21 and this Section 24(d), Manager shall not be liable for any Losses in connection with providing Accounting Services under this Agreement, even if arising out of its mistake in judgment, acts or omissions, or erroneous data or calculations.

(ii) Other than with respect to claims relating to a breach of Section 16 for which there shall be no liability limit, Manager’s liability for Accounting Services in any calendar year shall not exceed in aggregate 40% of the Fees payable under this Agreement in the immediately preceding calendar year (assuming for this purpose that the Fees payable in 2007 are calculated for a full year based on the value of the Portfolio on the Effective Date).

18

(iii) Manager’s entire liability to Safeco for the Accounting Services is set forth in Section 21 and this Section 24(d).

(e) Each Party will have a duty to mitigate damages for which the other Party is responsible.

25. Termination.

(a) Termination for cause by either Party. In the event that a Party:

(i) commits a material breach of this Agreement, and does not cure such breach within 30 days after written notice of breach from the non-breaching Party;

(ii) commits numerous breaches of its duties or obligations which collectively constitute a material breach of this Agreement; or

(iii) is subject to regulatory fines, penalties, or censure which may, in the other Party’s reasonable, good faith opinion, adversely and materially impact such other Party’s reputation;

then the other Party may, by giving written notice to the breaching Party and subject to the remaining provisions of this Article 25, terminate this Agreement effective as of 30 days after such notice.

(b) Termination by Manager. In the event that applicable Law changes making it impermissible for Manager to continue to provide the Services, then Manager may by giving written notice to Safeco terminate this Agreement as of a date specified in the notice of termination (which shall be no earlier than nine (9) months or such shorter time as such change in applicable Law becomes effective after the date of such notice).

(c) Termination without Cause by Safeco. Safeco may terminate this Agreement for any reason and without cause at any time by giving Manager at least two months’ prior written notice designating the termination date and paying to Manager on the effective date of termination any amounts then due for Services properly rendered, pro-rated as applicable. Except as provided in this subsection (c) below, no other amounts will be payable by Safeco to Manager to terminate this Agreement pursuant to this Section. In the event that a purported termination for cause by Safeco under Section 25(a) is determined by a competent authority not to be properly a termination for cause, then such termination by Safeco will be deemed to be a termination without cause under this Section 25(c). Notwithstanding any other provision of this Agreement to the contrary, in the event there is both a Change of Control of Safeco and Safeco terminates this Agreement within two years after the Effective Date, then Safeco shall pay Manager an additional one-time fee of $750,000 if such termination is effective within the first year following the Effective Date or of $250,000 if such termination is effective within the second year following the Effective Date. “Change of Control of Safeco” shall mean another entity, directly or indirectly, in a single transaction or series of related transactions, acquires either Control of Safeco or all or substantially all of the assets of Safeco.

(d) Extension of Termination/Expiration Effective Date. Except with respect to a termination by Manager pursuant to Article 25(a) or Article 25(b), Safeco may extend the

19

effective date of any termination/expiration with respect to this Agreement by providing prior written notice to Manager, at its discretion, for a period specified in such notice of up to 180 days following the original effective date of such termination/expiration. The Fees remain payable for Services performed during any extension period.

26. Termination Assistance.

(a) General. At Safeco’s written request during the Termination Assistance Period, Manager will provide to Safeco such assistance as may be necessary to (i) allow the Services to continue without interruption through the effective date of termination or expiration, (ii) implement the orderly transfer of the Services and Records to Safeco, and (iii) facilitate the timely and efficient conclusion of the overall relationship between Safeco and Manager (such assistance, collectively, the “Termination Assistance”). The Termination Assistance will include (A) all activities reasonably necessary to accomplish the foregoing objectives (Termination Assistance) and (B) the continued provision by Manager of the Services (the “Terminated Services”), in each case, throughout the Termination Assistance Period as so requested by Safeco. The Termination Assistance Period shall be co-extensive with (and not cumulative or not in addition to) any extension of termination pursuant to Section 25(d) above.

(b) Manager Cooperation. In the process of evaluating whether to undertake or allow termination/expiration or renewal of this Agreement, Safeco may consider obtaining, or determine to obtain, offers for performance of services similar to the Services following termination/expiration of this Agreement. As and when reasonably requested by Safeco for use in this process, Manager will provide to Safeco such information and other cooperation regarding performance of the Services as would be reasonably necessary for a third party to prepare an informed, non-qualified offer for such services (other than cost, fee structure, and other financial or economic information). The types of information and level of cooperation to be provided by Manager pursuant to this Section will be no less than those initially provided by Safeco to Manager prior to commencement of this Agreement.

(c) Fees for Termination Assistance. The Fees remain payable for Services performed during the Termination Assistance Period.

27. Force Majeure.

(a) General. No Party will be liable for any default or delay in the performance of its obligations under this Agreement (i) if and to the extent such default or delay is caused, directly or indirectly, by fire, flood, earthquake, elements of nature or acts of God, riots, civil disorders, or any other cause beyond the reasonable control of such Party (each a “Force Majeure Event”), (ii) provided the non-performing Party is without fault in causing such default or delay, and such default or delay could not have been prevented by reasonable precautions and could not reasonably be circumvented by the non-performing Party through the use of alternate sources, workaround plans or other means (including with respect to Manager by Manager meeting its obligations for performing disaster recovery services as described in this Agreement).

(b) Excused Performance due to Force Majeure. Subject to Section 27(c), in such event, the non-performing Party will be excused from further performance or observance of the obligation(s) so affected for as long as such circumstances prevail and such Party continues to use best efforts to recommence performance or observance whenever and to whatever extent possible without delay. Any Party so delayed in its performance will immediately notify the Party to whom performance is due by telephone (to be confirmed in writing within two days of the inception of such delay) and describe at a reasonable level of detail the circumstances causing such delay.

20

(c) Safeco Rights. If any Force Majeure Event under Section 27(a) substantially prevents, hinders or delays performance of the Services for more than thirty (30) consecutive days, then Safeco may terminate this Agreement without liability to Manager as of a date specified by Safeco in a written notice of termination to Manager. Manager will not have the right to any additional payments from Safeco for costs or expenses incurred by Manager as a result of any Force Majeure Event.

28. Dispute Resolution. Any dispute between the Parties arising out of or relating to this Agreement, including with respect to the interpretation of any provision of this Agreement and with respect to the performance by Manager or Safeco, will be resolved solely as provided in this Article.

(a) Informal Dispute Resolution. Prior to the initiation of arbitration, as described in this Article, the Parties will attempt to resolve their dispute informally, in accordance with the following:

(i) Either Party may initiate the informal dispute process set forth in this Section 28 by giving a written notice of a dispute (“Notice of Dispute”). Within five business days of delivery of the Notice of Dispute, the applicable Contract Executives will meet (and will continue to meet as often as the Parties reasonably deem necessary) to discuss the problem and attempt to resolve the dispute without the necessity of any formal proceeding.

(ii) If the dispute has not been resolved by the Contract Executives within ten business days of the Notice of Dispute, either Party may escalate the dispute by escalating it to the appropriate senior manager(s) within their organization, which senior managers of each Party will then meet (and continue to meet as often as the Parties reasonably deem necessary) to attempt to resolve such dispute.

(iii) During the course of discussion, all reasonable requests made by a Party to the other for non-privileged information reasonably related to this Agreement will be honored in order that a Party may be fully advised of the other’s position. All negotiations pursuant to this Article will be confidential and will be treated as compromise and settlement negotiations for purposes of applicable rules of evidence.

(iv) The specific format for the discussions will be left to the discretion of the designated representatives.

(b) Arbitration. If the dispute has not been resolved within 45 days of the Notice of Dispute, the dispute will be resolved by binding arbitration conducted in Seattle, Washington. Arbitration will be conducted by the American Arbitration Association (“AAA”) in accordance with the Commercial Arbitration Rules of the AAA (“AAA Rules”), provided that notwithstanding any contrary provision within the AAA Rules, the arbitrator must determine the rights and obligations of the Parties according to the substantive laws of the state of Washington.

(c) Selection of Arbitrators; Expenses. The Parties will select an arbitrator, who will be an attorney with at least 10 years experience in commercial and contract Law, provided that if the amount in dispute is greater than $1,000,000, the dispute will be heard by a panel of three arbitrators, with each Party selecting one arbitrator and the AAA selecting the third arbitrator. If the Parties are unable to agree on an arbitrator(s), the arbitrator(s) will be selected according to

21

AAA Rules. Claims between Manager and Safeco and any subcontractor or agent of Manager will, upon demand by Safeco, be submitted in the same arbitration. Each Party will bear its own expenses and will share equally the fees of the arbitrator(s), provided that the arbitrator(s) will have the discretion to award the prevailing Party all or part of its attorneys’ fees and costs, including the costs of the arbitrator(s), if the arbitrator(s) find that the position taken by the other Party on material issues was without substantial foundation.

(d) Limitations; Time Frame. The arbitrator(s) will not have the power to add to, subtract from or modify any of the terms or conditions of this Agreement. The arbitrator(s) rendering judgment upon disputes between the Parties will deliver a written opinion within 45 days following conclusion of the hearing, setting forth findings of fact, conclusions of Law and the rationale for the decision. Any award, which may include legal and equitable relief, will be final and binding and judgment may be enforced by any court of competent jurisdiction.

(e) Immediate Injunctive Relief. The Parties agree that the only circumstance in which disputes between them will not be subject to Section 28(a) and Section 28(b) is where a Party makes a good faith determination that a breach or threatened breach of the terms of this Agreement by the other Party is such that a temporary restraining order or other injunctive relief is the only appropriate and adequate remedy. In such a case, such Party may proceed directly to court and may obtain such relief without bond (if permitted by Law). Each Party further acknowledges and agrees that the other Party may proceed directly to court if a Party breaches or threatens to breach its obligations under Article 16. If a court finds that a Party has breached or threatened to breach its obligations under Article 16, such Party agrees that, without any additional findings of irreparable injury or other conditions to injunctive relief, such Party will not oppose the entry of an appropriate order compelling performance by such Party and restraining such Party from any further breaches or threatened breaches.

(f) Continued Performance. Each Party agrees to continue performing its obligations under this Agreement while a dispute is being resolved, except to the extent the issue in dispute precludes performance and without limiting either Party’s right to terminate this Agreement as provided in Article 25 or to not extend this Agreement pursuant to Article 3(b).

(g) Governing Law; Venue and Jurisdiction. This Agreement and performance under it will be governed by and construed in accordance with the Laws of the state of Washington without regard to its choice of law principles. For any litigation that may arise under Section 28(e) or to enforce an award in accordance with Section 28(d), the Parties irrevocably and unconditionally submit to the exclusive jurisdiction and venue (and waive any claim of forum non conveniens) of (i) the United States District Court for the Western District of Washington, or (ii), if such court does not have jurisdiction, to the Superior Court of the state of Washington, King County. The Parties further consent to the jurisdiction of any court located within a district which encompasses assets of a Party against which a judgment has been rendered for the enforcement of such judgment or award against the assets of such Party.

22

29. Disclosure Statement. Safeco acknowledges receipt of Manager’s Disclosure Statement, as required by Rule 204-3 under the Advisers Act. In the event Safeco received such Statement less than 48 hours prior to, but no later than, the Effective Date, Safeco will have the option to terminate this Agreement without penalty within five Business Days after the Effective Date.

30. General.

(a) Assignment. This Agreement will be binding on the Parties and their respective successors and assigns. Neither Party may, or will have the power to, assign (as defined in the Advisers Act as to Manager) this Agreement without the prior written consent of the other, except that Safeco may assign its rights and obligations under this Agreement without the approval of but upon notice to Manager to an entity which acquires Control of Safeco or to any Affiliate of Safeco. Subject to the foregoing, any assignment by operation of Law, order of any court, or pursuant to any plan of merger, consolidation or liquidation, will be deemed an assignment for which prior consent is required and any assignment made without any such consent will be void and of no effect as between the Parties.

(b) Entire Agreement; Amendment. This Agreement, including any schedules referred to and attached hereto, constitutes the entire agreement between the Parties with respect to the subject matter hereof and supersedes all prior agreements, whether written or oral, with respect to such subject matter. No amendment, change, waiver, or discharge hereof will be valid unless in writing and signed by an authorized representative of the Party against which such change, waiver, or discharge is sought to be enforced.

(c) Notices. All notices, requests, demands and determinations under this Agreement (other than routine operational communications) will be in writing and will be deemed duly given (i) when delivered by hand, (ii) one Business Day after being given to an express courier with a reliable system for tracking delivery, (iii) when sent by confirmed facsimile or electronic mail with a copy sent by another means specified in this Section, or (iv) six Business Days after the day of mailing, when mailed by registered or certified mail, return receipt requested, postage prepaid, and addressed as follows:

To Manager:	BlackRock Financial Management, Inc. 40 East 52nd Street New York, NY 10022 Attn: Robert P. Connolly, General Counsel Facsimile: (212) 810 3744
To Safeco:	Safeco Insurance Company of America Safeco Plaza Seattle, Washington 98185 Attention: Treasurer Fax: (206) 545-5730
Copy to:	Safeco Insurance Company of America Safeco Plaza Seattle, Washington 98185 Attention: Chief Legal Officer Fax: (206) 545-6277

23

A Party may from time to time change its address or designee for notice purposes by giving the other at least ten days’ prior written notice of the new address or designee and the date upon which it will become effective.

(d) Counterparts. This Agreement may be executed in several counterparts and by facsimile, all of which taken together will constitute one single agreement between the Parties.

(e) Relationship of the Parties. Manager, in furnishing the Services, is acting as an independent contractor, and Manager has the sole right and obligation to supervise, manage, contract, direct, procure, perform or cause to be performed, all work to be performed by Manager under this Agreement in accordance with its terms. Except as otherwise permitted hereby, Manager is not an agent of Safeco and has no authority to represent Safeco as to any matters.

(f) Severability. In the event that any provision of this Agreement conflicts with the Law under which this Agreement is to be construed or if any such provision is held invalid by a competent authority, such provision will be deemed to be restated to reflect as nearly as possible the original intentions of the Parties in accordance with applicable Law. The remainder of this Agreement will remain in full force and effect.

(g) Consents and Approvals. Except where expressly provided as being in the discretion of a Party, where agreement, approval, acceptance, consent, or similar action by either Party is required under this Agreement, such action will not be unreasonably delayed or withheld. An approval or consent given by a Party under this Agreement will not relieve the other Party from responsibility for complying with the requirements of this Agreement, nor will it be construed as a waiver of any rights under this Agreement, except as and to the extent otherwise expressly provided in such approval or consent. Each Party will, at the request of the other Party, perform those actions, including executing additional documents and instruments, reasonably necessary to give full effect to the terms of this Agreement.

(h) Waiver of Default. A delay or omission by either Party to exercise any right or power under this Agreement will not be construed to be a waiver thereof. A waiver by either of the Parties of any of the covenants to be performed by the other or any breach thereof will not be construed to be a waiver of any succeeding breach thereof or of any other covenant herein contained.

(i) Cumulative Remedies. Except as otherwise expressly provided herein, all remedies provided for in this Agreement will be cumulative and in addition to and not in lieu of any other remedies available to either Party at law or in equity.

(j) Survival. This Article, as well as any other provision of this Agreement which contemplates performance or observance subsequent to termination or expiration of this Agreement, will survive termination or expiration of this Agreement and continue in full force and effect. In particular, Manager agrees that it will use its commercially reasonable efforts to make available to Safeco any records retained by Manager after the termination or expiration of this Agreement.

(k) Publicity. All media releases, public announcements and public disclosures by either Party relating to this Agreement or the subject matter of this Agreement, including promotional or marketing material as well as disclosures to the extent required to meet legal or regulatory requirements, will be coordinated with and approved by both Parties prior to release.

24

(l) Third-Party Beneficiaries. Each Party intends that this Agreement will neither benefit, nor create any right or cause of action in or on behalf of, any person or entity other than the Parties. For the avoidance of doubt, each of Safeco Corporation, Safeco Insurance Company of America and each of their Affiliates is a Safeco Party under this Agreement.

(m) Covenant of Good Faith. Each Party agrees that, in its respective dealings with the other Party under or in connection with this Agreement, it will act in good faith.

(n) Acknowledgment. The Parties each acknowledge that the terms and conditions of this Agreement have been the subject of active and complete negotiations, and that such terms and conditions should not be construed in favor of or against any Party by reason of the extent to which any Party or its professional advisors participated in the preparation of this Agreement.

(o) Use of Futures. Pursuant to an exemption from the Commodity Futures Trading Commission (the “Commission”) in connection with accounts of qualified eligible persons, this Agreement is not required to be, and has not been, filed with the Commission. The Commission does not pass upon the merits of participating in a trading program or upon the adequacy or accuracy of commodity trading advisor disclosure. Consequently, the Commission has not reviewed or approved this Agreement.

25

IN WITNESS WHEREOF, this Agreement has been signed on behalf of the Parties on the Effective Date.

SAFECO INSURANCE COMPANY OF AMERICA		BLACKROCK FINANCIAL MANAGEMENT, INC.
By:		By:
Name:	Ross J. Kari	Name:	Ralph L. Schlosstein
Title:	Executive Vice President and Chief Financial Officer	Title:	President
SAFECO CORPORATION
By:
Name:	Ross J. Kari
Title:	Executive Vice President and Chief Financial Officer

26

EX-10.3

Exhibit 10.3

SAFECO SUCCESS SHARING PLAN

Effective January 1, 2002

(As last amended May 2, 2007)

TABLE OF CONTENTS

SECTION 1: PURPOSE			3
SECTION 2: DEFINITIONS			4
	2.1	Business Unit	4
	2.2	Committee	4
	2.3	Company	4
	2.4	Corporate	4
	2.5	Corporation	4
	2.6	Disability	4
	2.7	Effective Date	4
	2.8	Eligible Employee	4
	2.9	Employee	4
	2.10	Incentive Award	5
	2.11	Minimum Financial Requirement	5
	2.12	Participant	5
	2.13	Performance Period	5
	2.14	Plan	5
	2.15	Retirement	5
	2.16	Salary	5
	2.17	Target Award	6
SECTION 3: PARTICIPATION			7
	3.1	Eligible Employees	7
	3.2	Participation Date	7
	3.3	Rehired Eligible Employees	7
SECTION 4: INCENTIVE POOL			8
	4.1	Funding Performance Measures	8
	4.2	Incentive Pool Calculation	8
SECTION 5: INCENTIVE AWARDS			10
	5.1	Calculation of Incentive Award	10
	5.2	Condition Precedent to Payment of Incentive Award	11
	5.3	Payment of Incentive Award	11
	5.4	Termination of Employment	11
	5.5	Partial Year Participation	12
SECTION 6: ADMINISTRATION			13
	6.1	Activities, Duties and Responsibilities of the Committee	13
	6.2	Notices	13
SECTION 7: AMENDMENT AND TERMINATION			14
	7.1	Amendment and Termination of the Plan	14

SECTION 8: MISCELLANEOUS			15
	8.1	Tax Withholding	15
	8.2	Continuation of Employment	15
	8.3	Products and Underwriting	15
	8.4	No Trust or Fund	15
	8.5	Governing Law; Severability	15
	8.6	Spendthrift Clause	16
	8.7	Entire Plan	16
	8.8	Effective Date and Term	16

2

SECTION 1: PURPOSE

The purpose of the Safeco Success Sharing Plan (the “Plan”) is to provide certain salaried employees of the Company with the opportunity to earn an incentive bonus based on achievement of specified performance measures during a Performance Period, thereby motivating participating employees to achieve company financial and operational objectives.

3

SECTION 2: DEFINITIONS

2.1 Business Unit

“Business Unit” means the following operating organizations of Safeco Corporation’s subsidiaries: Property & Casualty, Safeco Business Insurance, Safeco Personal Insurance, and Surety.

2.2 Committee

“Committee” means the Compensation Committee of the Safeco Corporation Board of Directors.

2.3 Company

“Company” means collectively Safeco Corporation and its subsidiaries.

2.4 Corporate

“Corporate” means the overall administrative organization for the Corporation, which organization supports and is distinct from the Business Units.

2.5 Corporation

“Corporation” means the Safeco Corporation.

2.6 Disability

“Disability” has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.7 Effective Date

“Effective Date” has the meaning set forth in Section 8.8.

2.8 Eligible Employee

“Eligible Employee” means an Employee who has satisfied the eligibility criteria of Section 3.1.

2.9 Employee

“Employee” means any person who is employed on a salaried basis other than someone who is (a) a non-union hourly Employee, (b) included in a unit of persons covered by a collective bargaining agreement, or (c) is a leased employee within the meaning of Internal Revenue Code section 414(n)(2).

4

2.10 Incentive Award

“Incentive Award” means the annual amount awarded to an Eligible Employee under the Plan pursuant to Section 5.1.

2.11 Minimum Financial Requirement

“Minimum Financial Requirement” means an overall financial result established for the Company by the Committee below which no Incentive Awards are made under the Plan, unless at the discretion of the Committee.

2.12 Participant

“Participant” means an Eligible Employee who qualifies for participation as provided in Section 3.2 and 3.3.

2.13 Performance Period

“Performance Period” means the calendar year period during which performance goals are established and an Eligible Employee’s performance is measured in order to determine whether the Eligible Employee is eligible for an Incentive Award.

2.14 Plan

“Plan” means this Safeco Success Sharing Plan.

2.15 Retirement

“Retirement” has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.16 Salary

“Salary” means for each Performance Period the total of all amounts the Employer paid to an Employee for personal services, including:

(a) Base salary;

(b) Amounts paid to an Employee while on an Authorized Leave of Absence or short term disability; and

(c) Any pre-tax Employee contributions made by the Employer on behalf of the Employee for the Plan Year to the Safeco Flexible Benefits Program or the Safeco 401(k)/Profit Sharing Retirement Plan;

but excluding:

5

(d) Amounts paid for overtime;

(e) All Employer contributions to deferred compensation or other fringe benefit plans;

(f) Cash incentives and bonuses paid, accrued or earned under any incentive compensation plan;

(g) Long-term disability benefits;

(h) Severance pay; and

(i) Any other payments or benefits.

2.17 Target Award

“Target Award” means the value, stated as a percentage of Salary or as a dollar amount, which represents the expected payment for a position when Company, Business Unit and personal measures are achieved.

The Target Award for this Plan, when expressed as a percentage of Salary, shall equal 5%. Beginning January 1, 2004, the Target Award when expressed as a percentage of Salary shall be within a range that is no less than 5% and no greater than 7%, as established for the Participant’s position.

In the event of an Employee’s position change during a Performance Period (e.g. promotion, reclassification, or transfer), the Target Award for that Performance Period may be adjusted. If the Employee’s position change results in a move from one Target Award to another, or from another company-sponsored incentive plan to the Plan, the Employee’s Target Award will be blended (“Blended Target Award”). The Blended Target Award is based on the number of calendar days spent at each Target Award level. The Blended Target Award is applied to the Employee’s total Salary for the Performance Period. Where an incentive plan does not have a defined target award, the target award will be 0% for the purpose of the Blended Target Award calculation.

6

SECTION 3: PARTICIPATION

3.1 Eligible Employees

An Employee of the Company shall be eligible to participate in the Plan if he or she is not eligible to participate concurrently in the Safeco Leadership Performance Plan or any other Company-sponsored variable pay or incentive plan. Provided however, that the Committee may extend participation in the Plan to any Employee in its sole discretion.

3.2 Participation Date

An Eligible Employee shall commence participation on the later of:

(a) the Effective Date;

(b) the date when transferred or promoted from an ineligible position into a Plan-eligible position;

(c) if hired by the Company after September 30 in a Performance Period, January 1 of the next following Performance Period.

3.3 Rehired Eligible Employees

An individual who terminates employment and is rehired during the same Performance Period and who satisfies the eligibility criteria of Section 3.1 shall be eligible to participate in the Plan for such Performance Period only if he or she has been employed for at least 90 consecutive days during such Performance Period.

7

SECTION 4: INCENTIVE POOL

4.1 Funding Performance Measures

(a) The Committee shall establish Corporate and Business Unit funding performance measures (“Funding Performance Measures”) and a Corporation Minimum Financial Requirement for each Performance Period on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Funding Performance Measures may include performance criteria for the Corporation, a subsidiary, a Business Unit, an operating group, or a division of the Company or a subsidiary.

(b) During any Performance Period, the Committee may adjust the Funding Performance Measures for such Performance Period as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine.

(c) The Funding Performance Measures shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Funding Performance Measures may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years.

(d) The Committee will establish Funding Performance Measures and the Minimum Financial Requirement not later than 90 days after the beginning of the Performance Period.

4.2 Incentive Pool Calculation

For each Performance Period, the Committee shall establish a target incentive pool based on the sum of Target Awards and Blended Target Awards for all Corporate Participants. The Committee shall further establish Business Unit target incentive pools based on the sum of Target Awards and Blended Target Awards for all Business Unit Participants. The target incentive pools, Target Awards and Blended Target Awards shall then be adjusted as follows:

(a) for Corporate, the target incentive pool, Target Awards and Blended Target Awards shall be adjusted based on Corporate performance results relative to Corporate Funding Performance Measures established under Section 4.1; and

8

(b) for Business Units, the target incentive pool, Target Awards and Blended Target Awards shall be adjusted based on a combination of Corporate and relevant Business Unit results relative to Funding Performance Measures established under Section 4.1.

(c) Target Awards and Blended Target Awards adjusted pursuant to Section 4.2 (a) and (b) shall be defined as “Modified Target Awards.”

(d) in no event may any incentive pool be adjusted in excess of 200% of the target incentive pool.After such adjustments, the incentive pools shall be allocated among Corporate and the Business Units in order to calculate Incentive Awards to Participants.

9

SECTION 5: INCENTIVE AWARDS

5.1 Calculation of Incentive Award

(a) The Participant’s Incentive Award for a Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment, (2) the Participant’s paid Salary during the Performance Period, (3) the Participant’s Target Award, and (4) for Performance Periods commencing January 1, 2003 and later, individual performance measures.

In the event that a Participant moves from one target award to another or from another company-sponsored incentive plan to the Plan, providing that the Employee meets the definition of Participant in the Plan, the Employee’s Target Award will be blended as indicated in Section 2.17. The Participant’s Incentive Award for the Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Corporate or Business Unit assignment as of the last day as a Participant, or the last day of employment for eligible terminated employees, (2) the Participant’s total paid Salary during the Performance Period, (3) the Participant’s Blended Target Award, and (4) individual performance.

For Performance Periods commencing January 1, 2003 and later, as soon as practical after the end of a Performance Period, the Participant’s management shall assess individual performance by measuring results attributable to performance goals established for the Performance Period. Such performance goals may represent any combination and weighting of Business Unit, operating group, division, unit or individual objectives. Assessment of results shall occur through application of Company-approved performance evaluation tools.

(b) In the event that the performance of Corporate or a Business Unit does not meet the threshold level of performance to result in the funding of an incentive pool under Section 4.2, an Incentive Award may nonetheless be paid to a Participant in the discretion of the Committee or the Corporation’s Chief Executive Officer; provided, however, that the total discretionary Incentive Awards paid shall not exceed 25% of the sum of Target Awards and Blended Target Awards for all Participants within the Business Units. No Incentive Awards may be granted under the Plan unless the Corporation’s Minimum Financial Requirement has been satisfied.

(c) In no event may the Participant’s Incentive Award exceed 300% of his or her Target Award, as indicated in Section 4.2, without the approval of Chief Executive Officer, or the Committee when permitted by its charter or if required under applicable law.

10

5.2 Condition Precedent to Payment of Incentive Award

To receive an Incentive Award under Section 5.1, a written performance evaluation must have first been completed for the Participant and, except as stated in Sections 5.4 and 5.5, the Employee must have been a Participant as of the last day of the Performance Period and remain continuously employed with the Company through the date of the payment of the Incentive Award.

5.3 Payment of Incentive Award

Incentive Awards shall be paid to Participants in a lump sum as soon as administratively feasible after the close of the Performance Period. Such payment shall be made in cash.

5.4 Termination of Employment

If an employee’s employment with the Company terminates prior to the date of the payment of the Incentive Award, he or she shall not be entitled to an Incentive Award; provided, however:

(a) in the event the Participant’s employment with the Company terminates during the Performance Period, or following the end of the Performance Period but before the payment of the Incentive Award is made, on account of Retirement, death or Disability, the Participant (or his or her estate) will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) ending on the Participant’s employment termination date. Individual performance measures are not a factor.

(b) in the event the Participant’s employment with the Company is involuntarily terminated by the Company due to a reduction in force, office closure or other organizational change, and the Participant is entitled to severance under the Safeco Employees’ Severance Plan and meets the criteria for participation under that plan, the Participant will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) in which the Participant was actively employed with the Company. Individual performance measures are not a factor.

11

5.5 Partial Year Participation

If an Employee who has been a Participant in the Plan for any portion of the Performance Period terminates from the Plan and remains continuously employed with the Company through the date of the payment of the Incentive Award, such Employee shall be entitled to a pro-rated Incentive Award for such Performance Period, calculated pursuant to Sections 2.17 and 5.1, with the exception of Employees who move from the Plan to the Leadership Performance Plan (“LPP”). These employees’ incentive awards, if any, will be calculated pursuant to Safeco’s Leadership Performance Plan.

12

SECTION 6: ADMINISTRATION

6.1 Activities, Duties and Responsibilities of the Committee

This Plan shall be administered by the Committee. The Committee shall have exclusive authority, in its discretion, to determine all matters relating to Incentive Awards under the Plan. The Committee shall also have exclusive authority to interpret the Plan and may from time to time adopt and change rules and regulations of general application for the Plan’s administration. The Committee’s interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Committee pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Committee may delegate administrative duties to the Company’s officers or managers.

6.2 Notices

All notices and communications to the Committee in connection with this Plan shall be in writing, shall be delivered by first class mail, by courier or by hand, shall be addressed to the Committee at the following address: Safeco Success Sharing Plan, Attn: Corporate Compensation and Benefits, Safeco Corporation, Safeco Plaza, 4333 Brooklyn N.E., Seattle, WA 98185, and shall be deemed to have been given and delivered only upon actual receipt by the Committee. All notices and communications to an Eligible Employee shall be in writing and shall be delivered via paper or electronic media as determined by the Company.

13

SECTION 7: AMENDMENT AND TERMINATION

7.1 Amendment and Termination of the Plan

The Committee shall each have the right to amend or terminate the Plan at any time and to discontinue (either temporarily or permanently) the distribution of Incentive Awards; provided, however, that no amendment or termination of the Plan shall adversely affect an Eligible Employee’s right to payment of an Incentive Award that was earned and awarded prior to the date of the amendment or termination.

14

SECTION 8: MISCELLANEOUS

8.1 Tax Withholding

The Company shall withhold from Incentive Awards all amounts necessary to satisfy applicable federal, state and local withholding tax requirements.

8.2 Continuation of Employment

The existence of the Plan does not create any employment contract, any guarantee of continued employment, or any right or assurance as to any minimum length of employment. An Eligible Employee’s employment may be terminated at any time, with or without reason and with or without prior notice, at the option of the Company or the Eligible Employee.

8.3 Products and Underwriting

The Company reserves the right to withdraw existing products from distribution, reassign distribution of specific products, make new products available, adjust production credit, revise its business plans and strategies and modify its underwriting, reserves, claims, employment and other practices and policies without the Eligible Employee’s consent and without adjusting the performance measures.

8.4 No Trust or Fund

The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or to create any trusts, and no Eligible Employee shall have any rights that are greater than those of a general unsecured creditor of the Company.

8.5 Governing Law; Severability

The Plan shall be governed by the laws of the State of Washington, without regard to its choice of law or conflict of law provisions. The federal and state courts in King County, Washington, shall have exclusive jurisdiction and venue to resolve issues that may arise out of or relate to the Plan. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision.

15

8.6 Spendthrift Clause

Except as may be otherwise provided by law, no benefit, payment or distribution under the Plan, or right to receive such a benefit, payment or distribution, shall be subject either to the claim of any creditor of an Eligible Employee or to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of such person. No Eligible Employee shall have any right to alienate, commute, anticipate or assign (either in law or equity) all or any portion of any benefit, payment or distribution under the Plan.

8.7 Entire Plan

The Plan contains the entire understanding and undertaking of the Company with respect to the provision of an incentive plan for Eligible Employees and, as to that subject, supersedes any and all prior and contemporaneous undertakings, agreements, understandings, practices, policies, inducements or conditions, whether express or implied, oral or written, except as herein contained.

8.8 Effective Date and Term

The effective date of the Plan is January 1, 2002. The Plan shall continue from year to year until terminated in accordance with Section 7.

16

EX-10.4

Exhibit 10.4

Safeco Long-Term Incentive Plan of 1997

(As Amended and Restated May 2, 2007)

Safeco Long-Term Incentive Plan of 1997

(As Amended and Restated May 2, 2007)

TABLE OF CONTENTS

Section		Page
1.	Purpose	1
2.	Definitions	1
3.	Administration	3
4.	Shares Subject to Plan	4
5.	Eligibility	6
6.	Price and Term of Options	6
7.	Limitations on Exercise of Options	6
8.	Method of Exercise	7
9.	Form of Option Agreement	7
10.	Stock Appreciation Rights	7
11.	Restricted Stock Rights	8
12.	Performance Stock Rights	9
13.	Other Stock-Based Awards	10
14.	Termination of Employment, Retirement, Disability and Death	10
15.	Forfeiture	11
16.	Transferability	11
17.	Withholding	12
18.	Rights as Shareholder	12
19.	Amendments to the Plan	12
20.	Termination of the Plan	13
21.	Changes in Capital Structure	13
22.	Change in Control	13
23.	Approvals	14
24.	No Individual Rights	15
25.	Effect on Other Employee Benefit Plans	15
26.	No Trust or Fund	15
27.	Successors	15
28.	Choice of Law	16
29.	Severability	16
30.	Original Effective Date of Plan	16

Safeco Long-Term Incentive Plan of 1997

As Amended and Restated May 2, 2007

1. Purpose

The purpose of the Safeco Long-Term Incentive Plan of 1997 (the “Plan”) is to enhance the long-term profitability and shareholder value of Safeco Corporation (the “Company”) by offering incentives and rewards to officers, directors and employees of the Company and its Subsidiaries (as defined in Section 2) as an inducement to them to remain in the service of the Company and to acquire and maintain stock ownership in the Company.

2. Definitions

(a) “Affiliate” means a person controlling, controlled by or under common control with the Company.

(b) “Award” shall mean any award or grant made pursuant to the Plan, including, without limitation, awards or grants of stock options, stock appreciation rights, restricted stock rights, performance stock rights, stock or any combination of the foregoing. Awards may be granted singly, in combination, or in tandem so that the settlement or payment of one automatically reduces or cancels the other.

(c) “Award Agreement” means a written agreement between the Company and a Plan participant evidencing an Award.

(d) “Beneficial Owner” has the meaning set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

(e) “Change in Control” shall be deemed to have occurred if the event set forth in any one of the following paragraphs has occurred:

(i) Any Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates) representing 25% or more of the combined voting power of the Company’s then outstanding securities, excluding any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (iii) of this Section 2(e); or

(ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date the Plan is adopted by the Company’s shareholders, constitute the Board of Directors of the Company and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board of Directors or nomination for election by the Company’s shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or

(iii) There is consummated a merger or consolidation of the Company or any Subsidiary with any other corporation, other than (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary at least 75% of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Affiliates other than in connection with the acquisition by the Company or its Affiliates of a business) representing 25% or more of the combined voting power of the Company’s then outstanding securities; or

(iv) The shareholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets, other than a sale or disposition by the Company of all or substantially all of the Company’s assets to an entity, at least 75% of the combined voting power of the voting securities of which are owned by shareholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.

Notwithstanding the foregoing, a “Change in Control” shall not be deemed to have occurred by virtue of the consummation of any transaction or series of integrated transactions immediately following which the record holders of the Company’s common stock immediately prior to such transaction or series of transactions continue to have substantially the same proportionate ownership in an entity which owns all or substantially all of the Company’s assets immediately following such transaction or series of transactions.

(f) “Committee” shall mean the Company’s Board of Directors or a committee or sub-committee described in Section 3 selected by the Company’s Board of Directors to administer the Plan.

(g) “Fair Market Value” shall mean, with respect to the Company’s common stock, the closing price of the Company’s common stock on the Nasdaq National Market, a national securities exchange or other recognized national market or service reporting sales, during regular trading on the date in question, or if not trading on that date, such price on the last preceding date on which the Company’s common stock was traded, unless determined otherwise by the Committee using such methods or procedures as it may establish.

2

(h) “Person” for purposes of Section 2(e) means any person (as defined in Section 3(a)(9) of the Exchange Act, as such term is modified in Sections 13(d) and 14(d) of the Exchange Act), other than (i) any employee plan established by the Company, (ii) the Company or any of its affiliates (as defined in Rule 12b-2 promulgated under the Exchange Act), (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, or (iv) a corporation owned, directly or indirectly, by shareholders of the Company in substantially the same proportions as their ownership of the Company.

(i) “Retirement” shall mean a termination of employment with the Company or a Subsidiary occurring on or after an individual attains age 55, has ten or more years of service with the Company or a Subsidiary and whose age plus years of service add up to at least 75, or such other termination of employment as the Committee may approve as a retirement from time to time for purposes of the Plan.

(j) “Subsidiary” shall mean any corporation of which more than 50% of the total combined voting power of all classes of stock entitled to vote is directly or indirectly owned by the Company.

(k) “Substitute Awards” shall mean Awards granted or shares of the Company’s common stock issued by the Company in substitution or exchange for awards previously granted by any entity acquired by the Company or an Affiliate or with which the Company or an Affiliate merges or combines.

3. Administration

(a) The Plan shall be administered by a Committee to be appointed from time to time by the Company’s Board of Directors and shall consist of at least two members of the Board, each of whom is an “outside director” as defined in regulations promulgated under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). In addition, if the Committee does not also consist solely of “non-employee directors” as defined in Rule 16b-3 under the Exchange Act, the Plan shall be administered with respect to officers subject to Section 16 of the Exchange Act by a sub-committee of the Committee to be appointed from time to time by the Company’s Board of Directors and consisting of at least two members of the Board, each of whom is a “non-employee director.” To the extent consistent with applicable law, the Board may also authorize one or more senior executive officers to grant Awards within the limits specifically prescribed by the Committee or Board.

(b) Except for the terms and conditions explicitly set forth in the Plan, the Committee shall have the exclusive authority to determine, in its sole discretion, all matters relating to Awards under the Plan, including the selection of individuals to be granted Awards; the type of Awards; the number of shares of common stock subject to an Award; all terms, conditions, restrictions and limitations, if any, of an Award; and the terms of any instrument that evidences the Award. The Committee may, in its discretion, accelerate the exercisability of or waive any or all of the restrictions and conditions applicable to any

3

Award and may, with the consent of the holder, modify any agreement governing an Award. The Committee may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents on the deferred payment. Any deferred payment may require the payment to be forfeited under certain circumstances in accordance with Section 15. The Committee shall also have exclusive authority to interpret the Plan and may adopt, amend and rescind rules and procedures relating to the Plan. In no event, however, shall the Committee have the right to (i) without shareholder approval, cancel or amend outstanding stock options for the purpose of repricing, replacing or regranting such options with a purchase price that is less than the purchase price of the original option (except as contemplated in Section 21) or (ii) issue a stock option or amend an outstanding option to provide for the grant or issuance of a new option on exercise of the original option. The Committee may delegate administrative duties to such of the Company’s officers as it so determines. Subject to Section 7(a), the effect on the vesting of an Award of a Company-approved leave of absence or a participant’s working less than full-time shall be determined by the Company’s chief human resources officer or other person performing that function and with respect to directors or executive officers, by the Committee, whose determination shall be final.

(c) The Board of Directors shall designate one member of the Committee as its Chair, and the Committee shall hold its meetings at such times and places as it shall deem advisable. At least one-half of its members shall constitute a quorum for the conduct of business, and any decision or determination approved by a majority of members present at any meeting in which a quorum exists shall be deemed to have been made by the Committee. In addition, any decision or determination reduced to writing and signed by all of the members shall be deemed to have been made by the Committee. The Committee may appoint a secretary, shall keep minutes of its meetings, and may make such rules and regulations for the conduct of its business and for the carrying out of the Plan as it deems appropriate.

(d) The interpretation and construction by the Committee of any provisions of the Plan and of Awards thereunder and all actions taken and determinations made by the Committee pursuant to the Plan shall be final and conclusive on all persons having any interest therein.

(e) Notwithstanding anything in the Plan to the contrary, the Committee, in its absolute discretion, may bifurcate the Plan so as to restrict, limit or condition the use of any provision of the Plan to participants who are subject to Section 16 of the Exchange Act without so restricting, limiting or conditioning the Plan with respect to other participants in the Plan.

4. Shares Subject to Plan

(a) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), a maximum of 12,000,000 shares of the Company’s common stock shall be available for issuance pursuant to Awards under the Plan.

4

(b) Shares of the Company’s common stock covered by an Award shall not be counted as used unless and until they are actually issued and delivered to an individual. If any Award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if shares of the Company’s common stock are issued under the Plan to an individual and thereafter are forfeited to or otherwise reacquired by the Company, the shares subject to such Awards and the forfeited or reacquired shares shall again be available for issuance under the Plan. Any shares of the Company’s common stock (i) tendered by an individual or retained by the Company as full or partial payment to the Company for the purchase price of an Award or to satisfy tax withholding obligations in connection with an Award, or (ii) covered by an Award that is settled in cash, or in a manner such that some or all of the shares of the Company’s common stock covered by the Award are not issued, shall be available for Awards under the Plan. Any dividends or dividend equivalents that are reinvested into additional shares of the Company’s common stock or credited as additional shares of the Company’s common stock with respect to an Award shall not reduce the number of shares of the Company’s Common Stock available for issuance under the Plan.

(c) The Committee shall also, without limitation, have the authority to grant Awards as an alternative to or as the form of payment for grants or rights earned or due under other compensation plans or arrangements of the Company.

(d) Notwithstanding anything in the Plan to the contrary, the Committee may grant Substitute Awards under the Plan. Substitute Awards shall not reduce the number of shares authorized for issuance under the Plan. In the event that an entity acquired by or with which the Company or an Affiliate combines has shares available for awards or grants under one or more preexisting plans not adopted in contemplation of such acquisition or combination, then, to the extent determined by the Board or the Committee, the shares available for grant pursuant to the terms of such preexisting plan (as adjusted, to the extent appropriate, using the exchange ratio or other adjustment or valuation ratio or formula used in such acquisition or combination to determine the consideration payable to holders of common stock of the entities that are parties to such acquisition or combination) may be used for Awards under the Plan and shall not reduce the number of shares of the Company’s common stock authorized for issuance under the Plan; provided, however, that Awards using such available shares shall not be made after the date awards or grants could have been made under the terms of such preexisting plans, absent the acquisition or combination, and shall only be made to individuals who were not employees or directors of the Company or an Affiliate prior to such acquisition or combination. In the event that a written agreement between the Company and an entity pursuant to which a merger, consolidation or statutory share exchange is completed is approved by the Board and said agreement sets forth the terms and conditions of the substitution for or assumption of outstanding awards of the entity, said terms and conditions shall be deemed to be the action of the Committee without any further action by the Committee, except as may be required for compliance with Rule 16b-3 under the Exchange Act, and the persons holding such awards shall be deemed to be participants under the Plan.

5

(e) Subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), the maximum number of shares with respect to which options may be granted under the Plan to any individual during any calendar year is 750,000, and the aggregate maximum number of shares that may be issued upon the exercise of incentive stock options shall equal the aggregate share number stated in Section 4(a). With respect to performance stock rights granted prior to January 1, 2005 and subject to the provisions of Section 21 (relating to adjustments due to changes in capital structure), the maximum number of shares payable under a performance stock right for any Performance Cycle (as defined in Section 12(a)) is 500,000 shares, or in the event the performance stock right is paid in cash, the equivalent cash value on the date the performance stock right would otherwise be settled in shares. The limitations in this Section 4(e) are to be applied in a manner consistent with the requirements of, and only to the extent required for compliance with, the exclusion from the limitation on deductibility of compensation under Section 162(m) of the Code.

5. Eligibility

Awards may be granted to any officer, director or salaried employee of the Company or a Subsidiary that the Committee, or an authorized senior executive officer pursuant to Section 3(a), from time to time selects.

6. Price and Term of Options

(a) The exercise price for shares purchased under each option will be determined by the Committee but shall not be less than 100% of the Fair Market Value of the shares of stock covered by the option on the date of grant of the option.

(b) The term of each option shall be as determined by the Committee, but not in excess of ten years from the date it is granted. An option granted for an initial term of less than ten years may be extended by amendment for a period of up to ten years from the date of the initial grant, provided that no such amendment of an option shall be made without the prior consent of the optionee.

7. Limitations on Exercise of Options

(a) Any minimum period during which an optionee must provide services or be continuously employed or any performance goals that must be met prior to an option becoming exercisable and the increments in which an option will become exercisable shall be set forth in the Award Agreement evidencing the option. Such provisions may be waived or modified by the Committee at any time. Absence on leave shall not be deemed an interruption of employment or services for purposes of the Plan, except as otherwise may be determined pursuant to Section 3(b) and except that with respect to incentive stock options a leave of absence shall be subject to any requirements of Section 422 of the Code.

6

(b) Incentive stock options shall be granted to employees only. To the extent the aggregate Fair Market Value (determined at the time the options are granted) of the stock with respect to which any individual employee’s incentive stock options are exercisable for the first time during any calendar year exceeds $100,000, the portion in excess of $100,000 shall be treated as a nonqualified stock option. For purposes of this determination, incentive stock options granted under the Plan shall be aggregated with those granted under any other stock option plan of the Company. In interpreting and applying the provisions of the Plan, any option granted as an incentive stock option pursuant to the Plan shall, to the extent permitted by law and deemed appropriate by the Committee, be construed as an “incentive stock option” within the meaning of Section 422 of the Code.

8. Method of Exercise

Each exercise of an option granted hereunder, whether in whole or in part, shall be by written notice to the Chief Executive Officer of the Company, or his designee, designating the number of shares as to which the option is exercised, and shall be accompanied by payment in full for the number of shares so designated. Stock to be purchased under an option may be paid for (a) in cash, (b) in shares of the Company’s common stock (either through physical delivery or by attestation) already owned by the participant for at least six months (or any other period deemed appropriate by the Committee to avoid adverse accounting consequences to the Company) at their Fair Market Value on the date of exercise, (c) if and so long as the Company’s common stock is registered under Section 12(b) or 12(g) of the Exchange Act, through delivery of a properly executed exercise notice, together with irrevocable instructions to a brokerage firm designated or approved by the Company to deliver promptly to the Company the aggregate amount of proceeds to pay the option exercise price and any withholding tax obligations that may arise in connection with the exercise, all in accordance with the regulations of the Federal Reserve Board, (d) in a combination of the foregoing methods, or (e) in such other consideration as the Committee in its discretion may permit. Fractional shares may not be purchased under an option, and fractional shares may not be delivered to the Company for payment of the option price.

9. Form of Option Agreement

Each Award Agreement evidencing an option shall contain the essential terms of the option and such other provisions as the Committee shall from time to time determine, but such Award Agreements need not be identical. If the option is an incentive stock option, the Award Agreement shall contain such terms and provisions relating to exercise and otherwise as may be necessary to render it an incentive stock option under the applicable provisions of the Code (presently Section 422 thereof), and the regulations thereunder.

10. Stock Appreciation Rights

(a) The Committee may grant stock appreciation rights (“SARs”) to eligible individuals at any time on such terms and conditions as the Committee shall determine. A SAR may be granted in tandem with an option or alone (“freestanding”). The grant price of a

7

freestanding SAR shall not be less than 100% of the Fair Market Value of the related shares on the date of grant and the grant price of a tandem SAR shall be equal to the exercise price of the related option.

(b) The exercise of a SAR shall be by written notice to the Chief Executive Officer of the Company designating the number of shares as to which the SAR is exercised and shall be subject to such limitations as the Committee may deem appropriate. Upon exercise of the SAR, the holder may obtain payment of an amount equal to the difference between the SAR grant price and the Fair Market Value of the related shares on the date of exercise. Payment to the holder upon the exercise of a SAR may be made in shares of the Company’s common stock (at their Fair Market Value on the date of exercise), in cash, or partly in shares and partly in cash, at the discretion of the Committee.

11. Restricted Stock Rights

(a) The Committee may grant any eligible individual restricted stock rights (“RSRs”) which entitle such individual to receive a stated number of shares of the Company’s common stock if the individual for a stated period remains continuously employed by, or provides services to, the Company or a Subsidiary or, following the employee’s Retirement, serves on the Board of Directors of the Company or in another capacity approved by the Committee (the “Restricted Period”), or meets certain performance goals. At the time an RSR is issued, the Committee shall designate the length of the Restricted Period and the service that will qualify under the Restricted Period and any performance goals; provided, however, in no event may the Restricted Period extend beyond the fifth anniversary date of the individual’s termination of employment or cessation of services. The Committee shall have full and final authority to select the individuals who receive RSRs and to specify the number of shares of stock subject to each RSR in its sole discretion or on whatever basis it determines appropriate, including, without limitation, performance measures. The Committee shall also have full and final authority to establish the other terms, conditions and definitions that govern RSRs.

(b) The Company shall provide each holder of an unexpired RSR during the Restricted Period with dividend equivalents with respect to such RSRs. The Committee, in its sole discretion, may determine the form of payment of dividend equivalents, including cash, shares of the Company’s common stock or additional RSRs. Unless determined otherwise by the Committee, such dividend equivalents shall be paid as additional compensation in an amount of cash equal to the dividends that would have been payable to the holder of the RSR during the Restricted Period if the holder had owned the stock subject to the RSR and paid as near in time as reasonably practical to the applicable dividend payment dates.

(c) At the expiration of each Restricted Period or the attainment of performance goals and provided all conditions relating to an RSR have been met, the Company shall issue to the holder the shares of stock which relate to such Restricted Period or performance goal or, at the discretion of the Committee, the Company may make a cash payment to the holder in an amount equal to the Fair Market Value of such shares (or any portion thereof) determined as of the settlement date or, alternatively, over such period as may be established by the Committee at the time of grant.

8

(d) Upon grant of an RSR, the Company shall deliver to the recipient an Award Agreement which sets forth the terms and conditions of the RSR.

12. Performance Stock Rights

(a) The Committee may grant to an eligible individual performance stock rights (“PSRs”) which entitle such individual to receive a stated number of shares of the Company’s common stock if certain specified performance goals are attained (“Performance Goals”) within a stated three-year or other stated performance period (the “Performance Cycle”). The Committee shall have full and final authority to select the individuals who receive PSRs, to specify the number of shares of stock subject to each such right, to establish the Performance Goals, to establish the Performance Cycle and to establish the terms, conditions and definitions that govern such rights.

(b) The Committee shall establish Performance Goals for each Performance Cycle on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select During any Performance Cycle, the Committee may adjust the Performance Goals for such Performance Cycle as it deems appropriate in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine; provided, however, that for any Performance Cycle commencing prior to January 1, 2005, the Committee may not adjust Performance Goals for any participant who is a covered employee for purposes of Section 162(m) of the Code for the year in which such PSR (or any portion thereof) is settled in such a manner as would increase the amount of compensation otherwise payable to such covered employee.

(c) As soon as practical after the end of a Performance Cycle (or any interim measurement period within the Performance Cycle), the Committee shall determine the extent to which a PSR has been earned on the basis of performance in relation to the established Performance Goals. To the extent that the Performance Goals of a PSR are satisfied, the Company shall settle the earned portion of the PSR by the issuance and delivery of unrestricted shares equal to the number of earned shares, or, at the discretion of the Committee, by the payment of cash in an amount equal to the Fair Market Value of the earned shares on the date the PSR would otherwise be settled in shares or by a combination of cash and shares. If the Performance Goals are not met by the expiration of the Performance Cycle, the PSR shall expire and the holder thereof shall have no further rights thereunder.

(d) Upon granting a PSR, the Company shall issue to the recipient an Award Agreement which sets forth the terms and conditions of the PSR.

(e) The Company shall not make dividend equivalent payments with respect to shares subject to PSRs.

9

13. Other Stock-Based Awards

The Committee may grant any eligible individual other incentives payable in, or based upon the value of, shares of the Company’s common stock and subject to such terms and conditions as the Committee deems appropriate. Upon grant of such an Award, the Company shall deliver to the recipient an Award Agreement which sets forth the terms and conditions of such Award.

14. Termination of Employment, Retirement, Disability and Death

(a) In the event the employment of a Plan participant by the Company or a Subsidiary terminates, then, unless otherwise provided in the Award Agreement or by action of the Committee at any time, any unexercised option or SAR granted to such participant may be exercised, but only to the extent exercisable on the date of termination of employment, at any time within three months following such termination of employment, except that:

(i) If the participant’s termination of employment is on account of Retirement, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised at any time prior to the expiration of its stated term, but in no event later than the fifth anniversary date of the participant’s termination of employment.

(ii) If the participant’s termination of employment is on account of a permanent and total disability within the meaning of Section 22(e)(3) of the Code, then the option or SAR, to the extent exercisable at the date of termination of employment, may be exercised prior to the earlier of the one-year anniversary of the date of termination or the expiration of the term set forth in the Award Agreement.

(iii) If the participant’s termination of employment is caused by the death of the participant, then the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant’s rights pass by will or by operation of law without regard to any requirements related to continued employment or installment vesting.

(iv) If the participant dies following termination of employment and during the period in which the option or SAR is exercisable under paragraph (i) or (ii) of this Section 14(a), then, to the extent the option or SAR was vested at the date of the participant’s termination of employment, the option or SAR may be exercised at any time prior to the expiration of the term stated in the Award Agreement by the person(s) to whom the participant’s rights pass by will or by operation of law.

(b) Any portion of an option or SAR that is not exercisable on the date of termination of the participant’s employment shall terminate on such date, unless the Committee determines otherwise.

10

(c) To the extent that the option or SAR of any deceased or disabled participant or of any participant whose employment has terminated shall not have been exercised within the time periods provided above, all further rights to exercise such option or SAR shall terminate at the expiration of the applicable period.

(d) In the event a holder of an RSR issued under the provisions of Section 11 fails to satisfy the employment, service or performance requirements of the RSR, such holder shall lose the right to receive stock or cash under the provisions of the RSR except as otherwise provided in the Award Agreement or by action of the Committee. For example, in the event a holder of an RSR is unable to satisfy such employment or service requirements because of Retirement, death or disability within the meaning of Section 22(e)(3) of the Code, the Award Agreement may provide for the issuance of shares of the Company’s common stock equal in number to all or a portion of the number of unissued shares covered by such RSR to the extent set forth in such Award Agreement.

(e) Except as provided in Section 22, in the event the employment of an employee who holds a PSR granted under the provisions of Section 12 terminates for any reason prior to the expiration of the Performance Cycle specified in the PSR, then, except to the extent the Committee may decide otherwise in select situations, such employee shall lose all rights to thereafter receive any stock or payment under such PSR.

(f) If a corporation ceases to be a Subsidiary of the Company, then, except to the extent the Committee determines otherwise, employees of such corporation shall be deemed to have terminated their employment with the Company or a Subsidiary of the Company for purposes of this Section 14 as of the date such corporation’s status as a Subsidiary terminates.

15. Forfeiture

Subject to the Committee’s discretion, the grant of any Award under the Plan may be conditioned on the participant’s agreement to forfeit unexercised Awards and pay the value of previously exercised or settled Awards to the Company in the event that the participant engages in any activity in competition with the Company or otherwise contrary to the Company’s interests while employed by the Company or a Subsidiary or within a specified period following termination of employment or exercise or settlement of an Award.

16. Transferability

Except as otherwise provided in this Section 16, Awards shall not be transferable other than by will or the laws of descent and, except to the extent the participant designates one or more beneficiaries on the Company-approved form for the Plan who may exercise the Award or receive payment under the Award after the participant’s death. During the participant’s lifetime, an Award may be exercised only by the participant or, in the event the participant becomes legally incompetent, by the participant’s guardian or legal representative. Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Committee, in its discretion, may permit a participant to assign or transfer an Award subject to such terms and conditions as the Committee may specify.

11

17. Withholding

The Company may require the holder of an Award to pay to the Company the amount of (a) any taxes that the Company is required to withhold with respect to the grant, exercise, payment or settlement of an Award. (“tax withholding obligations”) and (b) the amounts due from the participant to the Company (“other obligations”). The Company shall not be required to issue any shares of the Company’s common stock or otherwise settle an Award under the Plan until such tax withholding obligations and other obligations are satisfied.

The Committee may permit or require a participant to satisfy all or part of the participant’s tax withholding obligations and other obligations by (a) paying cash to the Company, (b) having the Company withhold an amount from any cash amounts otherwise due or to become due from the Company to the participant, (c) having the Company withhold a number of shares of the Company’s common stock that would otherwise be issued to the participant (or become vested, in the case of RSRs or stock subject to restrictions) having a Fair Market Value equal to the tax withholding obligations and other obligations, or (d) surrendering a number of shares of the Company’s common stock the participant already owns having a value equal to the tax withholding obligations and other obligations. The value of the shares so withheld may not exceed the employer’s minimum required tax withholding rate, and the value of the shares so tendered may not exceed such rate to the extent the participant has owned the tendered shares for less than six months, if such limitations are necessary to avoid adverse accounting consequences to the Company.

18. Rights as Shareholder

Neither a person to whom an Award is granted, nor such person’s legal representative, heir, legatee, distributee or permitted transferee shall be deemed to be the holder of, or to have any rights of a holder with respect to, any shares subject to such Award until after the shares are issued.

19. Amendments to the Plan

The Company’s Board of Directors may make such amendments to the Plan at any time and in such respects as it shall deem advisable, provided that:

(a) Without the consent of the applicable participant, no amendment shall be made that would constitute a “modification” to an incentive stock option outstanding on the date of such amendment or would materially adversely affect any Award previously granted under the Plan or deprive any participant of any shares of stock of the Company that the participant may have acquired through or as a result of the Plan.

(b) To the extent required by applicable law, regulation or stock exchange rule, any such amendment shall be submitted to the shareholders of the Company for their approval at

12

the next annual or special meeting after adoption by the Board of Directors, and if such shareholder approval is not obtained, the amendment, together with any actions taken under the Plan on the necessary authority of such amendment, shall be null and void.

20. Termination of the Plan

The Plan shall remain in effect until all the shares of the Company’s common stock authorized under Section 4(a) have been issued or until the Plan is otherwise terminated by the Company’s Board of Directors; provided, however, that no incentive stock option shall be granted more than ten years after the date on which the Plan is approved by the shareholders of the Company. Termination of the Plan shall not affect outstanding Awards.

21. Changes in Capital Structure

Except as otherwise provided in Section 22, in the event the outstanding shares of common stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company or of another corporation by reason of any reorganization, merger, consolidation, recapitalization, reclassification, stock split, spin-off, combination of shares, dividend payable in shares, rights offering, change in the corporate structure of the Company, or otherwise, then the Committee shall make proportional adjustments to the maximum number and class of shares subject to the Plan and to the maximum number and class of shares with respect to which Awards may be granted or paid to any individual participant as set forth in Sections 4(a) and (c). In addition, in such circumstances the Committee shall make an appropriate adjustment to the number and class of shares as to which outstanding Awards, or portions thereof then unexercised, shall be exercisable or settled and the per share price of such shares, to the end that the participant’s proportionate interest shall be maintained as before the occurrence of such event, without any change in the total price applicable to the unexercised portion of any Award. The Committee shall make adjustments necessary to prevent accretion or to protect against dilution in the number and kind of shares authorized by the Plan and with respect to outstanding Awards in the number and kind of shares covered thereby and in the applicable exercise price of outstanding Awards. Without limitation on the foregoing, in the event of an extraordinary cash dividend or a business combination in which shareholders of the Company receive some cash, the Committee shall adjust the respective exercise prices of outstanding Awards in order to maintain the intrinsic value of outstanding Awards. Any such adjustments made by the Committee pursuant to this Section 21 shall be conclusive.

22. Change in Control

(a) Notwithstanding any other provision of the Plan to the contrary, unless otherwise provided in the Award agreement if, while any Awards remain outstanding under the Plan, a Change in Control of the Company shall occur, then:

(i) All options and SARs granted under the Plan that are outstanding at the time of such Change in Control shall become exercisable in full immediately prior to the Change in Control;

13

(ii) To the extent deemed earned, each outstanding PSR shall become immediately payable in cash, and the remainder of each outstanding PSR shall be canceled for no value. All outstanding PSRs shall be deemed to have been earned to the extent of the greater of:

(1) The number of shares of the Company’s common stock determined by the Committee based on the extent to which the Performance Goals specified in the Award Agreement have been achieved during the portion of the Performance Cycle ending on the last day of the last fiscal quarter of the Company ending on or before the date of the Change in Control; or

(2) The number of shares of the Company’s common stock equal to the product of the target shares identified in the Award Agreement multiplied by a fraction with a numerator equal to the whole number of calendar months beginning with the month in which the Award was granted and ending on the date of the Change in Control and a denominator equal to the whole number of calendar months in the entire Performance Cycle specified in the Award Agreement, less any shares previously issued under the Award Agreement.

(iii) All restrictions with respect to RSRs shall lapse and all outstanding RSRs shall be settled by a payment in cash to each holder of such Award; and

(iv) All other restrictions with respect to outstanding Awards not described in paragraphs (i) through (iii) of this Section 22(a) shall lapse, and such Awards shall be fully vested and nonforfeitable.

(b) For purposes of this Section 22, with respect to determining the cash equivalent value of an RSR or PSR or the spread payable upon exercise of a SAR, the Fair Market Value of a share of the Company’s stock shall be deemed to equal the greater of (i) the Fair Market Value of a share of stock as of the date on which a Change in Control occurs and (ii) the highest price of a share of stock which is paid or offered to be paid, by any Person or entity, in connection with any transaction which constitutes a Change in Control.

(c) The phrase “immediately prior to the Change in Control” shall be understood to mean sufficiently in advance of a Change in Control to permit the holder of an Award to take all steps reasonably necessary to exercise all options and SARs and take any actions with respect to the shares of stock underlying Awards of any nature so that such shares may be treated in the same manner as the shares of stock of other shareholders in connection with the Change in Control.

23. Approvals

The granting of Awards, the issuance of shares of Common Stock and the obligations of the Company under the Plan are subject to all applicable laws, rules and regulations and to such approvals by any governmental authorities, agencies or national securities exchanges as may

14

be required. Shares shall not be issued with respect to an Award unless the exercise and the issuance and delivery of the shares comply with all relevant provisions of law, including, without limitation, any applicable state securities laws, the Securities Act of 1933, as amended, the Exchange Act, the Code, the respective rules and regulations promulgated thereunder, and the requirements of any stock exchange or market on which the shares may then be listed or traded, and shall be further subject to the approval of counsel for the Company with respect to such compliance. Inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any shares hereunder shall relieve the Company of any liability for the nonissuance or sale of such shares. The Board of Directors may require any action or agreement by a holder of an Award as may from time to time be necessary to comply with the federal and state securities laws. The Company shall not be obliged to register stock issued under the Plan or options or any other rights to acquire stock granted under the Plan.

24. No Individual Rights

No individual or participant shall have any claim to be granted any Award under the Plan, and the Company has no obligation for uniformity of treatment of participants under the Plan.

Nothing in this Plan or any Award granted pursuant hereto shall be deemed to constitute an employment contract or confer or be deemed to confer upon any individual any right to continue in the employ of, or to continue any other relationship with, the Company or any Subsidiary of the Company or to interfere in any way with the right of the Company or any Subsidiary, in its sole discretion, to terminate such individual’s employment or other relationship at any time.

25. Effect on Other Employee Benefit Plans

The value of Awards granted under the Plan shall not be included as compensation, earnings, salaries or other similar terms used when calculating the participant’s benefits under any employee benefit plan sponsored by or contributed to by the Company or any Subsidiary except as such plan otherwise expressly provides.

26. No Trust or Fund

The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any money or other property, or shares of the Company’s common stock, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any participant, and no participant shall have any rights that are greater than those of a general unsecured creditor of the Company.

27. Successors

All obligations of the Company under the Plan with respect to Awards shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all the business and/or assets of the Company.

15

28. Choice of Law

The Plan, all Awards granted thereunder and all determinations made and actions taken pursuant hereto, to the extent not otherwise governed by the laws of the United States, shall be governed by the laws of the State of Washington without giving effect to principles of conflicts of law.

29. Severability

If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Committee’s determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.

30. Original Effective Date of the Plan

The original effective date of this Plan is May 7, 1997.

16

EX-10.5

Exhibit 10.5

SAFECO LEADERSHIP PERFORMANCE PLAN

Effective January 1, 2002

(As last amended May 2, 2007)

TABLE OF CONTENTS

SECTION 1: PURPOSE			3
SECTION 2: DEFINITIONS			4
	2.1	Business Unit	4
	2.2	Change in Control	4
	2.3	Committee	4
	2.4	Company	4
	2.5	Disability	4
	2.6	Effective Date	4
	2.7	Eligible Employee	4
	2.8	Employee	4
	2.9	Incentive Award	5
	2.10	Minimum Financial Requirement	5
	2.11	Participant	5
	2.12	Performance Period	5
	2.13	Plan	5
	2.14	Retirement	5
	2.15	Salary	5
	2.16	Target Award	6
SECTION 3: PARTICIPATION			6
	3.1	Eligible Employees	6
	3.2	Participation Date	7
	3.3	Rehired Eligible Employees	7
SECTION 4: INCENTIVE POOL			8
	4.1	Funding Performance Measures	8
	4.2	Incentive Pool Calculation	8
SECTION 5: INCENTIVE AWARDS			10
	5.1	Calculation of Incentive Award	10
	5.2	Condition Precedent to Payment of Incentive Award	11
	5.3	Payment of Incentive Award	11
	5.4	Termination of Employment	11
	5.5	Partial Year Participation	12
SECTION 6: ADMINISTRATION			13
	6.1	Activities, Duties and Responsibilities of the Committee	13
	6.2	Notices	13
SECTION 7: AMENDMENT AND TERMINATION			14
	7.1	Amendment and Termination of the Plan	14
SECTION 8: MISCELLANEOUS			15
	8.1	Tax Withholding	15

8.2	Continuation of Employment	15
8.3	Products and Underwriting	15
8.4	No Trust or Fund	15
8.5	Governing Law; Severability	15
8.6	Spendthrift Clause	16
8.7	Entire Plan	16
8.8	Effective Date and Term	16

2

SECTION 1: PURPOSE

The purpose of the Safeco Leadership Performance Plan (the “Plan”) is to provide certain managers and other salaried employees of the Company with the opportunity to earn an incentive bonus based on achievement of specified performance measures during a Performance Period, thereby motivating participating employees to achieve company financial and operational objectives.

3

SECTION 2: DEFINITIONS

2.1 Business Unit

“Business Unit” means the following operating organizations of Safeco Corporation’s subsidiaries: Property & Casualty, Safeco Business Insurance, Safeco Personal Insurance, and Surety.

2.2 Change in Control

“Change in Control” has the meaning set forth in the Safeco Long-Term Incentive Plan of 1997, or any successor plan thereto.

2.3 Committee

“Committee” means the Compensation Committee of the Safeco Corporation Board of Directors.

2.4 Company

“Company” means collectively Safeco Corporation and its subsidiaries.

2.5 Disability

“Disability” has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.6 Effective Date

“Effective Date” has the meaning set forth in Section 8.8.

2.7 Eligible Employee

“Eligible Employee” means an Employee who has satisfied the eligibility criteria of Section 3.1.

2.8 Employee

“Employee” means any person who is employed on a salaried basis other than someone who is (a) a non-union hourly Employee, (b) included in a unit of persons covered by a collective bargaining agreement, or (c) is a leased employee within the meaning of Internal Revenue Code section 414(n)(2).

4

2.9 Incentive Award

“Incentive Award” means the annual amount awarded to an Eligible Employee under the Plan pursuant to Section 5.1.

2.10 Minimum Financial Requirement

“Minimum Financial Requirement” means an overall financial result established for the Company by the Committee below which no Incentive Awards are made under the Plan, unless at the discretion of the Committee.

2.11 Participant

“Participant” means an Eligible Employee who qualifies for participation as provided in Section 3.2 and 3.3.

2.12 Performance Period

“Performance Period” means the calendar year period during which performance goals are established and an Eligible Employee’s performance is measured in order to determine whether the Eligible Employee is eligible for an Incentive Award.

2.13 Plan

“Plan” means this Safeco Leadership Performance Plan.

2.14 Retirement

“Retirement” has the meaning set forth in the Safeco 401(k)/Profit Sharing Retirement Plan or any successor plan thereto.

2.15 Salary

“Salary” means for each Performance Period the total of all amounts the Employer paid to an Employee for personal services, including:

(a) Base salary;

(b) Amounts paid to an Employee while on an Authorized Leave of Absence or short term disability; and

(c) Any pre-tax Employee contributions made by the Employer on behalf of the Employee for the Plan Year to the Safeco Flexible Benefits Program, the Safeco 401(k)/Profit Sharing Retirement Plan, or the Safeco Deferred Compensation Plan for Executives;

but excluding:

(d) Amounts paid for overtime;

5

(e) All Employer contributions to deferred compensation or other fringe benefit plans;

(f) Cash incentives and bonuses paid, accrued or earned under any incentive compensation plan;

(g) Long-term disability benefits;

(h) Severance pay; and

(i) Any other payments or benefits.

2.16 Target Award

“Target Award” means the value, stated as a percentage of Salary or as a dollar amount, which represents the expected payment for a position when Company, Business Unit and personal measures are achieved.

In the event of an Employee’s position change during a Performance Period (e.g. promotion, reclassification, or transfer), the Target Award for that Performance Period may be adjusted. If the Employee’s position change results in a move from one Target Award to another, or from another company-sponsored incentive plan to the Plan, the Employee’s Target Award will be blended (“Blended Target Award”). The Blended Target Award is based on the number of calendar days spent at each Target Award level. The Blended Target Award is applied to the Employee’s total Salary for the Performance Period. Where an incentive plan does not have a defined target award, the target award will be 0% for the purpose of the Blended Target Award calculation.

SECTION 3: PARTICIPATION

3.1 Eligible Employees

An Employee of the Company shall be eligible to participate in the Plan if he or she:

(a) is a key management employee, or a non-management employee holding a key leadership position with the Company as determined at the discretion of the Company’s Chief Executive Officer;

(b) occupies a position that is assigned to a leadership job band within the Corporation’s compensation structure; and

Effective January 1, 2006 Section 3.1(b) is amended to read as follows:

(b) occupies a position that is assigned to career level six or higher within the Company’s workforce architecture structure; and

6

(c) is not eligible to participate concurrently in the Safeco Success Sharing Plan or any other Company-sponsored variable pay or incentive bonus plan. Provided however, that the Committee may extend participation in the Plan to any Employee in its sole discretion.

3.2 Participation Date

An Eligible Employee shall commence participation on the later of:

(a) the Effective Date;

(b) the date when transferred or promoted from an ineligible position into a Plan-eligible position;

(c) if hired by the Company after September 30 in a Performance Period, January 1 of the next following Performance Period.

3.3 Rehired Eligible Employees

An individual who terminates employment and is rehired during the same Performance Period and who satisfies the eligibility criteria of Section 3.1 shall be eligible to participate in the Plan for such Performance Period only if he or she has been employed for at least 90 consecutive days during such Performance Period.

7

SECTION 4: INCENTIVE POOL

4.1 Funding Performance Measures

(a) The Committee shall establish Company and Business Unit funding performance measures (“Funding Performance Measures”) and a Minimum Financial Requirement for each Performance Period on the basis of such criteria and to accomplish such objectives as the Committee may from time to time select. Funding Performance Measures may include performance criteria for the Company, a subsidiary, a Business Unit, an operating group, or a division of the Company or a subsidiary.

(b) During any Performance Period, the Committee may adjust the Funding Performance Measures for such Performance Period as it deems equitable in recognition of unusual or nonrecurring events affecting the Company, changes in applicable tax laws or accounting principles, or such other factors as the Committee may determine.

(c) The Funding Performance Measures shall be any one or a combination of net income, earnings per share, return on equity, return on assets, stock price appreciation, total shareholder return, cash flow, revenues, item count, market share, assets, assets under management, any profit-related ratio or calculation, or any growth, concentration-of-business or market-share ratio or calculation. Such Funding Performance Measures may be measured on an absolute basis or relative to a group of peer companies selected by the Committee, relative to internal goals, or relative to levels attained in prior years.

(d) The Committee will establish Funding Performance Measures and the Minimum Financial Requirement not later than 90 days after the beginning of the Performance Period.

4.2 Incentive Pool Calculation

(a) For each Performance Period, the Committee shall establish target incentive pools based on the sum of Target Awards and Blended Target Awards for all Participants within the Business Units.

(b) Participants are assigned to Business Units according to their employing departments as identified within the Company’s human resource system. Such assignment of departments to Business Units may be amended from time-to-time by the Company.

(c) The target incentive pools, Target Awards and Blended Target Awards shall then be adjusted based on a combination of Company and relevant Business

8

Unit results relative to Funding Performance Measures established under Section 4.1. Target Awards and Blended Target Awards adjusted pursuant to Section 4.2 (a) and (b) shall be defined as “Modified Target Awards.”

in no event may any incentive pool be adjusted in excess of 200% of the target incentive pool.

(d) After such adjustments, the incentive pools shall be allocated among the Business Units in order to calculate Incentive Awards to Participants.

9

SECTION 5: INCENTIVE AWARDS

5.1 Calculation of Incentive Award

(a) The Participant’s Incentive Award for a Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Business Unit assignment, (2) the Participant’s paid Salary during the Performance Period, (3) the Participant’s Target Award, and (4) individual performance measures.

In the event that a Participant moves from one target award to another or from another company-sponsored incentive plan to the Plan, providing that the Employee meets the definition of Participant in the Plan, the Employee’s Target Award will be blended as indicated in Section 2.16. The Participant’s Incentive Award for the Performance Period shall be based on (1) the amount of the incentive pool (if any) for the relevant Business Unit assignment as of the last day as a Participant, or the last day of employment for eligible terminated employees, (2) the Participant’s total paid Salary during the Performance Period, (3) the Participant’s Blended Target Award, and (4) individual performance.

As soon as practical after the end of a Performance Period, the Participant’s management shall assess individual performance based on pre-established measures . Such performance measures may represent any combination and weighting of Business Unit, operating group, division, unit or individual measures as determined by the Company. Assessment of performance shall occur through application of Company-approved evaluation tools.

(b) In the event that the performance of the Company or a Business Unit does not meet the threshold level of performance to result in the funding of an incentive pool under Section 4.2, an Incentive Award may nonetheless be paid to a Participant in the discretion of the Committee or the Company’s Chief Executive Officer; provided, however, that the aggregate amount of such discretionary Incentive Awards paid shall not exceed 25% of the sum of Target Awards and Blended Target Awards for all Participants within the Business Units. No Incentive Awards may be granted under the Plan unless the Minimum Financial Requirement has been satisfied.

(c) In no event may the Participant’s Incentive Award exceed 300% of his or her Target Award, as indicated in Section 4.2, without the approval of the Chief Executive Officer.

10

5.2 Condition Precedent to Payment of Incentive Award

To receive an Incentive Award under Section 5.1, except as stated in Sections 5.4 and 5.5, a written performance evaluation must have first been completed for the Participant and the Employee must have been a Participant as of the last day of the Performance Period and remain continuously employed with the Company through the date the Inventive Award is processed for payment by the Company’s payroll.

5.3 Payment of Incentive Award

Subject to the conditions set forth below, Incentive Awards shall be paid to Participants in a lump sum as soon as administratively feasible after the close of the Performance Period. Such payment shall consist of 100% cash; provided, however:

(a) The Committee may direct that selected Participants receive all or a portion of their respective Incentive Awards as a grant under the Safeco Long-Term Incentive Plan of 1997 or any successor plan thereto. The actual amount of such a grant will be determined pursuant to any reasonable methodology chosen by the Committee. The Committee, in accordance with the Safeco Long-Term Incentive Plan of 1997, shall have full and final authority to establish the terms, conditions and definitions that govern such grants.

(b) The Committee may permit deferral of some or all of a Participant’s Incentive Award to a company-sponsored deferral plan, in accordance with such plan’s terms.

5.4 Termination of Employment

If an Employee’s employment with the Company terminates prior to the date of the payment of the Incentive Award, he or she shall not be entitled to an Incentive Award; provided, however:

(a) in the event the Participant’s employment with the Company terminates during the Performance Period, or following the end of the Performance Period but before the payment of the Incentive Award is made, on account of Retirement, death or Disability, the Participant (or his or her estate) will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) in which the Participant was actively employed with the Company. Determination of the Incentive Award is not further conditioned on an assessment of individual performance.

(b) In the event the Participant’s employment with the Company is involuntarily terminated by the Company due to a reduction in force, office closure or other

11

organizational change, and the Participant is entitled to severance under the Safeco Employees’ Severance Plan and meets the criteria for participation under that plan, the Participant will be entitled to receive an Incentive Award based on (1) the Modified Target Award, and (2) his/her Salary for the portion of the Performance Period(s) in which the Participant was actively employed with the Company. Determination of the Incentive Award is not further conditioned on an assessment of individual performance.

(c) In the event the employment of a Participant who has executed a Change in Control Severance Agreement is terminated without cause (as determined in the sole discretion of the Committee) during the Performance Period by the Company (or an acquirer corporation or affiliate thereof) following a Change in Control, the Participant shall be eligible to receive an Incentive Award for the entire Performance Period, calculated and paid in accordance with the Change in Control Severance Agreement.

5.5 Partial Year Participation

If an Employee who has been a Participant in the Plan for any portion of the Performance Period terminates from the Plan and remains continuously employed with the Company through the date of the payment of the Incentive Award, such Employee shall be entitled to a pro-rated Incentive Award for such Performance Period, calculated pursuant to Sections 2.19 and 5.1, with the exception of Employees who move from the Plan to the Success Sharing Plan (SSP). These Employees’ incentive award, if any, will be calculated pursuant to Safeco’s Success Sharing Plan.

12

SECTION 6: ADMINISTRATION

6.1 Activities, Duties and Responsibilities of the Committee

This Plan shall be administered by the Committee. The Committee shall have exclusive authority, in its discretion, to determine all matters relating to Incentive Awards under the Plan. The Committee shall also have exclusive authority to interpret the Plan and may from time to time adopt and change rules and regulations of general application for the Plan’s administration. The Committee’s interpretation of the Plan and its rules and regulations, and all actions taken and determinations made by the Committee pursuant to the Plan, shall be conclusive and binding on all parties involved or affected. The Committee may delegate administrative duties to the Company’s officers or managers.

6.2 Notices

All notices and communications to the Committee in connection with this Plan shall be in writing, shall be delivered by first class mail, by courier or by hand, shall be addressed to the Committee at the following address: Safeco Leadership Performance Plan, Attn: Corporate Compensation and Benefits, Safeco Corporation, Safeco Plaza, 4333 Brooklyn N.E., Seattle, WA 98185, and shall be deemed to have been given and delivered only upon actual receipt by the Committee. All notices and communications to an Eligible Employee shall be in writing and shall be delivered via paper or electronic media as determined by the Company.

13

SECTION 7: AMENDMENT AND TERMINATION

7.1 Amendment and Termination of the Plan

The Committee shall each have the right to amend or terminate the Plan at any time and to discontinue (either temporarily or permanently) the distribution of Incentive Awards; provided, however, that no amendment or termination of the Plan shall adversely affect an Eligible Employee’s right to payment of an Incentive Award that was earned and awarded prior to the date of the amendment or termination.

14

SECTION 8: MISCELLANEOUS

8.1 Tax Withholding

The Company shall withhold from Incentive Awards all amounts necessary to satisfy applicable federal, state and local withholding tax requirements.

8.2 Continuation of Employment

The existence of the Plan does not create any employment contract, any guarantee of continued employment, or any right or assurance as to any minimum length of employment. An Eligible Employee’s employment may be terminated at any time, with or without reason and with or without prior notice, at the option of the Company or the Eligible Employee.

8.3 Products and Underwriting

The Company reserves the right to withdraw existing products from distribution, reassign distribution of specific products, make new products available, adjust production credit, revise its business plans and strategies and modify its underwriting, reserves, claims, employment and other practices and policies without the Eligible Employee’s consent and without adjusting the performance measures.

8.4 No Trust or Fund

The Plan is intended to constitute an “unfunded” plan. Nothing contained herein shall require the Company to segregate any monies or other property, or to create any trusts, and no Eligible Employee shall have any rights that are greater than those of a general unsecured creditor of the Company.

8.5 Governing Law; Severability

The Plan shall be governed by the laws of the State of Washington, without regard to its choice of law or conflict of law provisions. The federal and state courts in King County, Washington, shall have exclusive jurisdiction and venue to resolve issues that may arise out of or relate to the Plan. If any provision of the Plan is held to be invalid or unenforceable, such invalidity or unenforceability shall in no way affect the validity or enforceability of any other Plan provision.

15

8.6 Spendthrift Clause

Except as may be otherwise provided by law, no benefit, payment or distribution under the Plan, or right to receive such a benefit, payment or distribution, shall be subject either to the claim of any creditor of an Eligible Employee or to attachment, garnishment, levy, execution or other legal or equitable process by any creditor of such person. No Eligible Employee shall have any right to alienate, commute, anticipate or assign (either in law or equity) all or any portion of any benefit, payment or distribution under the Plan.

8.7 Entire Plan

The Plan contains the entire understanding and undertaking of the Company with respect to the provision of an incentive plan for Eligible Employees and, as to that subject, supersedes any and all prior and contemporaneous undertakings, agreements, understandings, practices, policies, inducements or conditions, whether express or implied, oral or written, except as herein contained.

8.8 Effective Date and Term

The effective date of the Plan is January 1, 2002. The Plan shall continue from year to year until terminated in accordance with Section 7.

16

EX-10.6

Insert 10.6

STOCK AWARD PROGRAM

FOR NON-EMPLOYEE DIRECTORS

UNDER THE SAFECO LONG-TERM INCENTIVE PLAN OF 1997, AS AMENDED

Adopted by the Safeco Corporation Board of Directors

November 4, 1998

and as Amended and Restated February 7, 2007

The following provisions set forth the terms of the stock award program (the “Program”) for non-employee directors of Safeco Corporation (“Company”) under the Safeco Long-Term Incentive Plan of 1997, as amended (the “Plan”). The following terms are intended to supplement, not alter or change, the provisions of the Plan, and in the event of any inconsistency between these terms and those in the Plan, the Plan shall govern. All capitalized terms that are not defined in this Program shall be as defined in the Plan.

1. Eligibility

Each director of the Company who is not an employee of the Company or any Subsidiary (an “Eligible Director”) shall be eligible to receive annual awards under the Plan, as described below.

2. Annual Award

Commencing with the 2007 annual meeting of the Company’s shareholders, a restricted stock right (“RSR”) of the Company’s common stock with an economic value as may be determined by the Company’s Board of Directors, shall automatically be granted to each Eligible Director in office immediately after the annual shareholders’ meeting. The number of RSRs granted will be based on the same methodology and measurement period used to convert the economic value of the Company employees’ equity grants into RSRs. The terms of the award shall be set forth in an Award Agreement.

3. Restricted Period and Settlement

RSRs granted to Eligible Directors shall be settled upon termination of service as an Eligible Director as described in Section 4, the director’s period of service preceding such termination constituting the “Restricted Period.”

4. Settlement Upon Termination of Service as an Eligible Director

a. Death or Disability. If an Eligible Director ceases to serve on the Company’s Board of Directors because of the Eligible Director’s death or a permanent and total disability within the meaning of Section 22(e)(3) of the Code, all of the Eligible Director’s RSRs shall be settled in shares of the Company’s common stock, regardless of how long such RSRs have been held. Such shares shall be issued to the Eligible Director or the personal representative of the Eligible Director’s estate, as the case may be, as soon as practical following the date of death or the date of termination of service due to determination of disability (the “Disability Termination Date”).

b. Retirement, Resignation or Other Termination. If an Eligible Director ceases to be a director of the Company for any reason other than the Eligible Director’s death or disability, then the

Eligible Director’s RSRs, to the extent held through the date of the first annual shareholders’ meeting following the grant of such RSRs, shall be settled in shares of the Company’s common stock on that date.

5. Non-Transferable

RSRs granted to Eligible Directors shall not be transferable other than by will or the laws of descent and distribution.

6. Deferral of Dividends and RSR Settlement

An Eligible Director may elect to defer the dividends accrued on any or all RSRs granted to the Eligible Director under this Program and settled RSRs under this Program as provided in the Safeco Corporation Deferred Compensation Plan for Directors, as it may be amended from time to time (“DCP”), or any other plan or arrangement under which settled RSRs or dividends accrued on RSRs are permitted to be deferred. [Deferral of dividends and RSR settlements are permitted only to the extent permitted under the American Jobs Creation Act, regulations issued thereunder, and other applicable law. ]

7. Corporate Transactions

In the event of a Change in Control of the Company, all outstanding RSRs shall be settled by a payment in cash. The fair market value of each share shall be equal to the greater of (i) the fair market value of a share of the Company’s common stock as of the date on which a Change in Control occurs, and (ii) the highest price of a share of Company common stock that is paid or offered to be paid by any Person or entity in connection with any transaction that constitutes a Change in Control.

8. Other Provisions

Except for certain provisions of the Plan whose application is clearly limited to employee participants, the provisions of the Plan, as it may be amended from time to time, shall apply to Awards granted to Eligible Directors under this Program.

EX-10.7

Exhibit 10.7

SAFECO CORPORATION

RESTRICTED STOCK RIGHTS AWARD AGREEMENT

Issued pursuant to the Stock Award Program for Non-Employee Directors

under the Safeco Long-Term Incentive Plan of 1997, as Amended

1. Grant of Award. Safeco Corporation (“Safeco”) grants to «Director_» (“Director”)                      restricted stock rights pursuant to, and in accordance with the provisions of, the Stock Award Program for Non-Employee Directors under the Safeco Long-Term Incentive Plan of 1997, as amended (the “Plan”) and the terms and conditions hereunder. The following terms are intended to supplement, not alter or change, the provisions of the Plan, and in the event of any inconsistency between these terms and those in the Plan, the Plan shall govern. All capitalized terms that are not defined hereunder shall be as defined in the Plan.

2. Restricted Period and Settlement. The grant to Director of                      restricted stock rights (the “Award”) shall vest on the date of the first annual Safeco shareholders’ meeting following the date of this Award (the “Vesting Date”)]. If, prior to the Vesting Date, Director voluntarily or involuntarily ceases service as a director for any reason other than (i) a Change in Control or (ii) Director’s death or permanent and total disability, Director shall have no rights to receive any shares underlying the Award. After the Vesting Date, the Award shall be settled in shares of Safeco common stock upon the termination of Director’s service as a director (the “Termination Date”), except as otherwise provided with respect to death, permanent and total disability, or Change in Control. The period of time from the date of this Award until the Termination Date shall be the “Restricted Period.”

3. Tax Responsibility. As a condition to receiving the shares underlying the Award, Director or Director’s estate shall be responsible for and must satisfy all applicable federal, state and local tax requirements.

4. Additional Director Compensation Payments. During the Restricted Period, Safeco shall pay to Director with respect to the shares underlying the Award, as additional director compensation, an amount of cash equal to the dividends that would have been payable to Director during the Restricted Period if Director had owned such shares. Following the Termination Date, Director’s right to receive dividend equivalents under this paragraph shall immediately cease. Provided, however, that if the termination of service was due to Director’s death or permanent and total disability (as defined in Section 5 below) and occurred after an ex-dividend date but prior to payment of the dividend, Director or the personal representative of Director’s estate shall be entitled to payment under this paragraph of an amount equivalent to such dividend.

5. Death or Disability. If Director ceases to serve as a director because of Director’s death or a permanent and total disability within the meaning of Section 22(e)(3) of the Code, the Award shall be settled in shares of Safeco common stock, regardless of any vesting period. Such shares shall be issued to Director or the personal representative of Director’s estate, as the case may be, as soon as practical following the date of death or the date of termination of service due to determination of permanent and total disability (the “Disability Termination Date”).

6. Corporate Transactions. In the event of a Change in Control of Safeco, the Award shall be settled by a payment in cash. The fair market value of each share underlying the Award shall be equal to the greater of (i) the fair market value of a share of Safeco common stock as of the date on which a Change in Control occurs, and (ii) the highest price of a share of Safeco common stock that is paid or offered to be paid by any Person or entity in connection with any transaction that constitutes a Change in Control.

7. Deferral of Dividends and Award Settlement. Director may elect to defer the dividends accrued on the shares underlying the Award and the settlement of the Award as provided in the Safeco Corporation Deferred Compensation Plan for Directors, as it may be amended from time to time, or any other plan or arrangement under which settled restricted stock rights or dividends accrued on restricted stock rights are permitted to be deferred. [Deferral of dividends and RSR settlements are permitted only to the extent permitted under the American Jobs Creation Act, regulations issued thereunder, and other applicable law.]

8. Rights Not Transferable. The Award granted to Director hereunder shall not be subject to execution, attachment or similar process. The Award may not be assigned, pledged or transferred in any manner, by operation of law or otherwise, except by will or by the laws of descent and distribution. During Director’s lifetime, only Director or Director’s guardian may exercise any right granted hereunder.

9. Rights as Shareholder. Neither Director, nor Director’s personal representative, heir, legatee or distributee, shall be deemed to be a holder of, or to have any rights with respect to, any shares underlying the Award until such shares are issued.

10. No Separate Fund. Safeco has not set aside or segregated any assets or established any separate account or fund to insure payment of its obligations hereunder.

11. Incorporated Provisions. Except for certain provisions of the Plan whose application is clearly limited to employee participants, the provisions of the Plan, as it may be amended from time to time, shall apply to the Award granted hereunder.

Dated this      day of             ,         

Safeco Corporation

By:

Its:

EX-31.1

Exhibit 31.1

Safeco Corporation and Subsidiaries

Certification of Chief Executive Officer

I, Paula Rosput Reynolds, 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 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: July 31, 2007

/s/ Paula Rosput Reynolds

Paula Rosput Reynolds

President, Chief Executive Officer and Director

EX-31.2

Exhibit 31.2

Safeco Corporation and Subsidiaries

Certification of Chief Financial Officer

I, Ross J. Kari, 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 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: July 31, 2007

/s/ Ross J. Kari

Ross J. Kari

Executive Vice President, Chief Financial Officer and

Chief Accounting 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 June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Paula Rosput Reynolds, President, Chief Executive Officer and Director 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; 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: July 31, 2007

/s/ Paula Rosput Reynolds

Paula Rosput Reynolds

President, Chief Executive Officer and Director

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 June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Ross J. Kari, Executive Vice President, Chief Financial Officer and Chief Accounting 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; 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: July 31, 2007

/s/ Ross J. Kari

Ross J. Kari

Executive Vice President, Chief Financial Officer and

Chief Accounting Officer